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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) of
the SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 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 No.)
incorporation or organization)
7733 Forsyth Boulevard, 17th Floor, St. Louis, Missouri 63105
(Address of principal executive offices and zip code)
Registrant's telephone number, including area code (314) 863-7422
Securities registered pursuant to Section
12(b) of the Act: Name of exchange on which registered:
Common Stock, par value $.01 per share New York Stock Exchange
Preferred Stock Purchase Rights New York Stock Exchange
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
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Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. (x)
The aggregate market value of voting stock held by non-affiliates of
Registrant at March 10, 2000 was $170,711,590. At March 10, 2000, the Registrant
had 7,154,067 shares of Common Stock outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Part III of this Annual Report on Form 10-K incorporates by reference
information contained in the Registrant's Proxy Statement for its annual meeting
of stockholders to be held May 10, 2000.
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PART I
ITEM 1. BUSINESS
General
RehabCare Group, Inc. (the "Company" or the "Registrant"), is a leader in
outsourcing and management of comprehensive medical rehabilitation, subacute
(skilled nursing) and outpatient therapy programs on a multi-year contract basis
and contract therapy services to hospitals and nursing homes. The Company also
is a leading provider of medical staffing to hospitals, long-term care and other
healthcare facilities on both an interim and permanent basis.
Therapy professionals employed by the Company for its rehabilitation,
skilled nursing, and outpatient therapy programs and its contract therapy
services, include licensed physical and occupational therapists and their
licensed assistants, as well as speech language pathologists. The Company
believes the locus of care in the communities where it has programs will
continue to be the acute-care hospital and, thus, it works primarily with
acute-care hospitals to deliver these programs with the goal of enhancing the
overall economic viability of the client facility. The Company's strategy is to
use its expertise and experience to provide its clients with an efficient and
cost-effective means to offer physical medicine and rehabilitation services in
whatever setting is most economically feasible while establishing long-term
relationships with its clients. Each of the product lines the Company offers is
part of a post-acute continuum directed at restoring functional independence and
returning patients to a residential setting. 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.
Traveling nurses and therapists are recruited and typically work on
assignment for 13 weeks, while supplemental staffing fills vacancies of 1 day to
13 weeks. On July 1, 1999, the Company acquired AllStaff, Inc. ("AllStaff"), a
provider of supplemental nurse staffing to healthcare providers. On December 20,
1999, the Company acquired eai Healthcare Staffing Solutions, Inc. ("eai
Healthcare Staffing"), a provider of temporary healthcare personnel to
hospitals, managed healthcare organizations, laboratories and physician offices.
Historically, the Company has sought to broaden its service offerings, both
through internal growth and acquisition. The Company believes that the
acquisition of additional therapy-based contract management companies,
established outpatient operators and other therapy providers within the
rehabilitation industry and staffing companies is an appropriate strategy for
growth. Additional related acquisition opportunities are regularly reviewed by
the Company.
Industry Overview
Many healthcare providers are increasingly seeking to outsource a broad
range of services through contracts with product line managers. Outsourcing
allows healthcare providers to take advantage of the specialized expertise of
contract managers, thereby enabling providers to concentrate on the businesses
they know best, such as facility and nurse management. Continued reimbursement
pressures under managed care and Medicare have driven healthcare providers to
look for additional sources of revenue. As overhead and operating cost
constraints have come into place and manpower has been reduced, outsourcing has
become more important in order to increase patient volumes and provide services
at a lower cost without sacrificing quality.
By outsourcing post-acute services, healthcare providers use specialty
contract managers such as the Company to:
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Utilize unused space - Post-acute services help hospitals utilize empty
wings of their facilities, which allows the hospital to recover the cost of
capital investment and overhead associated with the space.
Increased volumes - Patients needing less intensive treatment or post-acute
therapies who would have been referred to other venues for treatment can now
remain in the hospital setting, allowing hospitals to capture revenues that
would otherwise be realized by another provider. New patients are also attracted
to the hospital by new services.
Sign agreements with managed care organizations - Managed care organizations
find it more advantageous to sign a contract covering both acute and post-acute
services with one entity rather than several separate, often unrelated entities.
Contract managers may provide patient evaluation systems that collect data on
patients in each of their units showing the degree of improvement and the
related costs from the time the patient is admitted to the post-acute program
through the time of discharge. This is an important feature to managed care
organizations in controlling their costs while assuring appropriate outcomes.
Contract managers may often also have the ability to capture and analyze this
information from a large number of acute rehabilitation and subacute units,
which an individual hospital could not otherwise do on its own without a
substantial investment in specialized systems. Becoming part of a managed care
network helps the hospital attract physicians, and in turn, bring more patients
to the hospital.
Increase cost control - Because of their extensive experience in post-acute
product lines, contract managers can offer pricing structures that effectively
control a healthcare provider's financial risk related to the service provided.
Contract managers also frequently share in the financial risks with their
hospital clients of any losses the hospital incurs in connection with starting
the unit and reimbursement from payors. For hospitals using contract managers,
the result is often lower average costs per discharge than those of self-managed
programs. A hospital is able to increase its revenues without having to increase
its administrative staff or incur other fixed costs.
Obtain reimbursement advice - The contract managers may also employ
reimbursement specialists who are available to assist client hospitals in
interpreting complicated regulations. These specialists analyze current
regulations and assist the hospital in complying with them, a highly valued
service in the current changing healthcare environment.
By outsourcing medical staffing, providers are able to:
Recruit staff - A shortage of medical professionals has created
opportunities for traveling and supplemental staffing services. The nurse
staffing business is strong due to providers continuing to maintain variable
nurse staffing levels, an increase in the average age of nurses, and an
insufficient new supply of nursing graduates. Other health professionals such as
radiology and laboratory technicians, transcriptionists, insurance billers,
patient account representatives and medical clerical personnel are also in high
demand.
Manage costs - Continued reimbursement pressures have driven healthcare
providers to manage costs by maintaining flexible staffing that can increase or
decrease with patient volumes.
Services
The Company operates in four business segments for which operating results
are evaluated regularly by executive management: inpatient programs, outpatient
programs, contract therapy and staffing.
Inpatient Programs - Upon inception in 1982, the Company's core business was
the staffing and management of acute inpatient rehabilitation units within
acute-care hospitals. The Company operates these units on a fee basis that is
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computed in most cases based on patient days in the unit. The unit typically
consists of 20 beds and utilizes formerly idle space in the hospital. It treats
patients having primarily one of ten required diagnoses including stroke, head
injury or hip replacement. The Company typically provides staffing and
management of the unit including a program director, a physician, and the
clinical staff which may include a psychologist, physical and occupational
therapists, a speech pathologist, a social worker, a nurse manager, a case
manager and other appropriate supporting personnel. The unit affords the
hospital the ability to offer rehabilitation services to its patients, thus
retaining those patients who might otherwise be discharged to a setting outside
the hospital. This service line represented approximately 34% of the Company's
revenues in 1999. The Company plans to continue growing this part of its
business through the signing of new contracts while retaining a large percentage
of its current clients. Re-signings of expiring acute rehabilitation contracts
have historically ranged from 80-90 percent.
In 1994, the Company added the subacute inpatient service line in response
to client requests for management services and the Company's desire to broaden
its post-acute services. The subacute unit is located in the acute-care hospital
and is separately licensed as a skilled nursing unit, utilizing formerly idle
space in the hospital. This unit treats the patients who are at the low end of
need for medical or rehabilitative care, with greater need for nursing care.
These patients' diagnoses cover approximately 60 clinical conditions including
stroke, post-surgical conditions, pulmonary disease, burn, cancer, congestive
heart failure and wound management. The subacute unit makes it possible for the
patient to remain in a hospital setting where emergency needs can be quickly met
as opposed to being sent to a freestanding skilled nursing facility. The Company
provides administrative and nurse management. The hospital benefits, once again,
by retaining patients who would be discharged to another setting, thereby
capturing additional revenue and utilizing idle space. This service line
represented approximately 3% of the Company's revenues in 1999.
Outpatient Programs - The outpatient division furnishes primarily therapy,
program development and administrative personnel to hospital outpatient
departments, satellites and school districts. Pressure from payors to move
patients to lower cost settings has helped fuel the growth in outpatient
services. Outpatient programs help bring patients into the hospital through the
referral development efforts in the community. These programs serve a younger
population reimbursed by commercial and managed care payors and treat mainly
sports medicine and workers compensation patients. The service line helps
hospitals compete with freestanding clinics. The Company's programs are always
conducted on the client hospital's campus or in satellite locations controlled
by the hospital. In 1999, this product line represented approximately 10% of the
Company's revenues. The Company plans to increase this line of business by
signing additional contracts with hospitals, as well as acquisitions.
Contract Therapy - In 1997, the Company, through acquisitions, added
contract therapy to its product lines. Contract therapy is the management and
delivery of services, including providing therapists, in long-term care
settings. Contract therapy revenues in 1999 accounted for approximately 5% of
the Company's business. Contract therapy affords the client the opportunity to
fulfill their recurring need for therapists on a part-time basis without the
need to add full-time staff. The introduction of a prospective payment system
for skilled nursing facilities and units has created a demand for the Company's
management systems and expertise, including utilization of services and
controlling costs. The Company plans to grow this service line by signing
additional contracts.
Staffing - In 1996, the Company added the staffing line by acquiring
Healthcare Staffing Solutions, Inc. ("HSSI"), located in Lowell, Massachusetts.
HSSI originally recruited physical, occupational and speech therapists for
hospitals and long-term care facilities for typically 13-week assignments
(traveling therapists). The enactment of the Balanced Budget Act of 1997
("BBA"), which established a prospective payment system for skilled nursing
facilities and units significantly reduced the demand for traveling therapists.
In response to this decline, HSSI entered the nurse staffing business, a market
significantly larger than the therapist market. In August 1998, the Company
acquired StarMed Staffing, Inc. ("StarMed"), a provider of traveling and
supplemental nurses, subsequently merging its traveling division with HSSI's
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traveling therapy division. The supplemental staffing business provides
short-term assignments ranging from 1 day to 13 weeks to fill vacancies
typically resulting from turnover, vacation, maternity and sick leave.
Supplemental staffing is a localized market business. Growth of this business is
planned by increasing the number of supplemental offices, leveraging those
offices to furnish both nurse staffing and other healthcare professional
services, and by increasing the number of traveling nurses on assignment, as
well as by acquisitions. The staffing business accounted for approximately 48%
of the Company's 1999 revenues.
Expansion Strategy
The Company's expertise is in the management of quality acute, subacute and
outpatient rehabilitation and therapy programs and contract therapy services,
and in the staffing of quality clinical personnel for healthcare facilities.
Drawing on this expertise, the thrust of its expansion strategy will be to
develop and expand contract relationships with host facilities to establish and
manage acute, subacute and outpatient physical medicine and rehabilitation
programs, and contract therapy services as well as increasing its supplemental
staffing offices and traveling nurses. Acute-care hospitals have traditionally
been the locus of healthcare delivery in the community and, as such, have
controlled a substantial amount of the expenditures for healthcare services. As
healthcare reform evolves, the Company believes that hospitals will continue to
play a central role in the delivery of healthcare services, provided that they
can achieve cost efficiencies and offer a complete range of services required
within their communities. To this end, the Company has positioned itself to
assist hospitals in providing the full continuum of physical medicine and
rehabilitation services within acute, subacute and outpatient settings
controlled by the hospital. The economies of scale offered by the hospital's
existing plant and equipment, coupled with the Company's expertise in delivering
these services, offers the opportunity for a community hospital to be a full
service provider in the area of physical medicine and rehabilitation on a
cost-effective basis.
The supplemental staffing business is a localized and fragmented business.
The Company's expertise is in recruiting and retaining qualified healthcare
staff and providing quality staffing services to hospitals, nursing homes and
other healthcare providers. The staffing expansion strategy is to add new
staffing offices and to cross sell nurse and other allied staffing between
StarMed and eai Healthcare Staffing offices.
Business Development
The Company's program management sales force focuses on generating new
accounts and making follow-on sales. It has 18 regional development officers who
are responsible for cultivating relationships with prospective clients. In
addition, the Company's officers play an integral role in the Company's
marketing efforts. With a broad range of services, the Company has significant
opportunity to expand within its existing client base. Further, cross-selling
more than one product line strengthens the Company's relationships with its
clients.
The staffing division's ability to expand its supplemental offices, by
controlling start-up costs and reaching profitability quickly, facilitates rapid
growth. The ability to cross-sell staff from existing StarMed and eai Healthcare
Staffing offices, and to generate leads for travel nurses, allows more efficient
use of overhead.
Competition
The Company's program management division has no direct competitors offering
all the same program services although other companies may offer one or more of
the same services. The Company competes with other contract management and
therapy companies for agreements with acute-care hospitals and extended care
facilities. The Company's programs in acute-care hospitals also compete for
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patients with the programs of other acute-care hospitals, freestanding
rehabilitation, skilled nursing and outpatient facilities. Among the principal
competitive advantages the Company believes it has are a reputation for quality,
cost effectiveness, a proprietary outcomes management system, innovation and
price. The Company also competes with hospitals, nursing homes, clinics,
physicians' offices and contract therapy companies for the services of physical,
occupational and speech therapists. The Company's staffing division competes
with a number of private and public companies and believes its strategic
advantage is its diversity of staffing solutions, ranging from single shift, to
a 13-week assignment, to permanent placement, which is attractive to clients and
prospective employees.
Regulation
The healthcare industry is regulated by Federal, state and local
governmental agencies. These regulations attempt to control the number of
healthcare facilities through certificate of need laws, licensure or
certification of healthcare facilities and the reimbursement for healthcare
services.
In many states, acute-care hospitals contracting with the Company generally
are not required to obtain a certificate of need prior to opening an inpatient
unit. If a certificate of need is required, the process may take up to 12 months
or more depending upon the state involved. The application may be denied if
contested by a competitor or the state agency. Certificates of need are usually
issued for a specified maximum expenditure and require implementation of the
proposed improvement within a specified period of time.
Licensure is a state or local requirement, while Medicare certification is a
Federal requirement. Generally, licensure and Medicare certification follow
specific standards and requirements. Compliance is monitored by annual on-site
inspections by representatives of relevant government agencies. Loss of
licensure or Medicare certification by a hospital with which the Company has a
management contract would likely result in the termination of that contract.
Prior to 1983, Medicare provided for reimbursement of reasonable direct and
indirect costs of the services furnished by hospitals to patients. As a result
of the Social Security Amendments Act of 1983, Congress adopted the Prospective
Payment System ("PPS") as a means to control costs of most Medicare inpatient
hospital services. Under this system, the Secretary of the Department of Health
and Human Services established fixed payment amounts per discharge based on
Diagnosis-Related Groups ("DRG") In general, a hospital's payment for Medicare
inpatients is limited to the DRG rate, regardless of the amount of services
provided to the patient or the length of the patient's hospital stay. Under PPS,
a hospital may keep any difference between its DRG payment and its operating
costs incurred in furnishing inpatient services, but is at risk for any
operating costs that exceed its payment rate. As a result, hospitals have an
incentive to discharge Medicare patients as soon as is clinically appropriate.
Inpatient rehabilitation units, skilled nursing units and outpatient
rehabilitation services have historically been exempt from PPS. Acute
rehabilitation units within acute-care hospitals are eligible to obtain an
exemption from PPS, generally after the first year of operation, upon
satisfaction of specified Federal criteria. Such criteria include the operation
for a full 12 months under PPS and the completion of an initial exemption
survey. The exemption survey measures compliance with certain criteria
applicable to exempt units generally, including approval to participate as a
Medicare provider, admission standards, record keeping, compliance with state
licensure laws, segregation of beds, accounting standards and certain specific
standards applicable to rehabilitation units, including staffing, medical care
and patient mix. Upon successful completion of the survey, Medicare payments for
rehabilitation provided in inpatient units are made under a cost-based
reimbursement system.
In 1997, Congress enacted the BBA, which includes numerous changes to the
Medicare system. These changes include various reductions in payments under the
current cost-based reimbursement system, the implementation of a prospective
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payment system for skilled nursing facilities and units ("SNU-PPS") that is
being phased in starting July 1998 and a prospective payment system for acute
rehabilitation facilities and units ("Rehab-PPS") to be phased in over two years
starting in October 2000. By January 1, 1999, substantially all of the Company's
managed skilled nursing units were fully phased in under SNU-PPS. Although many
specifics of Rehab-PPS are not yet available, the Balance Budget Refinement Act
of 1999 directed the Secretary of Health and Human Services to design a
prospective payment system on a per case or discharge basis using a
classification system called Functional-Related Groups. Rehab-PPS will almost
certainly favor low-cost, efficient providers. The Company believes that its
strategy of administering programs on the premises of host facilities positions
it well for the changing reimbursement environment. In the event that a client
hospital experiences a material reduction in reimbursement under Rehab-PPS, in
most cases, the hospital has the contractual right to renegotiate the Company's
fees.
Various Federal and state laws regulate the relationship between providers
of healthcare services and physicians. These laws include the "fraud and abuse"
provisions of the Social Security Act, under which civil and criminal penalties
can be imposed upon persons who pay or receive remuneration in return for
referrals of patients who are eligible for reimbursement under the Medicare or
Medicaid programs. The Company does not believe its business arrangements are
out of compliance with these provisions. The provisions are broadly written and
the full extent of their application is not currently known. The Inspector
General of the Department of Health and Human Services has issued "safe harbor"
regulations specifying certain forms of relationships that will not be deemed
violations of these provisions. The Company believes that its business
arrangements are in compliance with any definitive regulations.
In recognition of the importance of achieving and maintaining regulatory
compliance, the Company has established a Corporate Compliance Program
("Program") to establish general standards of conduct and procedures that
promote compliance with business ethics, regulations, law and accreditation
standards. In its design, the Company has established compliance standards and
procedures to be followed by its employees and other agents that are reasonably
capable of reducing the prospect of criminal conduct, and has designed systems
for the reporting and auditing of potentially criminal acts. A key element of
the Program is the ongoing communication and training of employees and agents
such that it becomes a part of the day-to-day business operations. A compliance
committee consisting of representatives of both the Company's management and the
Company's Board of Directors has been established to oversee implementation and
ongoing operations of the Program, to enforce the Program through appropriate
disciplinary mechanisms, and to ensure that all reasonable steps are taken to
respond to an offense and to prevent further similar offenses. The Company is
not aware of the existence of any current activities on the part of any of its
employees that would not be materially in compliance with this Program and has
undertaken the Program in an effort to enhance the prospects of continued
compliance.
Employees
As of December 31, 1999, the Company had approximately 3,100 employees plus
approximately 4,000 full-time equivalent travel and supplemental staff employed
by the staffing division. The physicians who are the medical directors of the
contract units are independent contractors and not employees of the Company.
None of the Company's employees are subject to a collective bargaining
agreement. Management considers the relationship with its employees to be good.
ITEM 2. PROPERTIES
The Company currently leases 26,000 square feet of executive office space in
Clayton, Missouri, under a lease that expires in the year 2008, assuming all
options to renew are exercised. In addition to the monthly rental cost, the
Company is also responsible for specified increases in operating costs. Salt
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Lake leases 10,000 square feet in Salt Lake City, Utah, under a lease that
expires in 2001. HSSI leases 32,000 square feet of executive office space in
Lowell, Massachusetts, under a lease that expires in the year 2000, assuming all
options to renew are exercised, plus leases various properties throughout the
country used as temporary housing for traveling therapists and nurses. StarMed
leases 10,000 square feet of executive office space in Clearwater, Florida,
under a lease that expires in 2002, 10,000 square feet in Phoenix, Arizona,
under a lease that expires in 2003, plus leases various office space for its
supplemental staffing businesses throughout the country.
ITEM 3. LEGAL PROCEEDINGS
Not applicable.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED
STOCKHOLDER MATTERS
Information concerning the Common Stock of the Registrant is included on
page 40 in this Annual Report of the Registrant for the year ended December 31,
1999.
ITEM 6. SELECTED FINANCIAL DATA
Six-Year Financial Summary is included on page 40 in this Annual Report of
the Registrant for the year ended December 31, 1999.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
OVERVIEW
The growth in the Company's operating revenue and net earnings during 1999
was primarily the result of an increase in staffing weeks worked from 52,265 to
131,110. The increase in staffing weeks worked was the result of the acquisition
of AllStaff, new staffing office openings and increased market demand for
staffing services. Additionally, an increase in the average number of outpatient
clinics from 26 to 40, plus reduced therapy costs in managed inpatient units
contributed to the growth. The growth for 1998 was the result of an increase in
the number of acute, subacute and outpatient clinics, and growth from
acquisitions. The 1998 results reflect an increase in the average number of
inpatient units from 110 to 128, an increase in the average number of outpatient
clinics managed by the Company from 18 to 26, an increase in contract therapy
locations from 44 to 67, and increased nursing weeks worked due to the
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acquisition of StarMed. The growth for 1997 was primarily attributable to an
increase in acute and subacute programs plus increased therapy weeks worked at
HSSI.
In the normal course of business, new programs are opened and some existing
programs are closed each year. During the first year of operation, a new acute
rehabilitation program will typically be subject to limitations in reimbursement
from Medicare considerably below the hospital's operating cost. As a
consequence, during this period the Company agrees with the client hospital to
bear certain costs on the hospital's behalf and to waive a portion of its fees
until the program qualifies for an exemption from Medicare limitations. The
Company assists the hospital in qualifying the program for the exemption and in
minimizing the unreimbursed costs during this non-exempt period. The Company's
average operating losses during the qualifying period can range to as high as
$150,000 to $200,000 per program. If the Company does not obtain an exemption
for the program, the contract may be terminated and, in the event of
termination, losses would generally not be recoverable. Upon completion of the
qualifying year and obtaining the exemption, the hospital is currently eligible
to recover all of its costs related to the operation of the program, including
the Company's fees under the management contract. Once a program becomes exempt,
the program experiences accelerated growth in operating revenues and
profitability as the patient population is expanded in response to the more
favorable reimbursement terms. There is no current guidance with respect to the
impact of the implementation of Rehab-PPS on this process. Subacute programs and
outpatient clinics are not subject to the same qualifying year limitations in
reimbursement from Medicare as acute rehabilitation programs and, therefore,
should result in significantly reduced start-up losses per program or clinic.
On January 28, 1997, the Company acquired TeamRehab, Inc. and Moore
Rehabilitation Services, Inc. ("Team and Moore"), providers of contract therapy
services. On June 12, 1997, the Company acquired Rehab Unlimited, Inc. and the
assets of Cimarron Health Care, Inc., also providers of contract therapy
services, and combined them with Team and Moore. The aggregate purchase prices
for these acquisitions paid at closing was $7.0 million, consisting of $4.3
million in cash, $1.8 million in subordinated promissory notes and 54,151 shares
of the Company's common stock. In addition, $301,000 of contingent consideration
was paid in 1998 to the former owners of Team and Moore.
On January 31, 1997, the Company made a tender offer to purchase up to
1,387,500 shares of its common stock at a single purchase price, not less than
$13.33 nor in excess of $15.00 per share. The actual purchase price was
determined based on the lowest single purchase price at which stockholders
tendered shares that was sufficient to purchase 1,387,500 shares. As of February
28, 1997, the closing date, shares totaling greater than 1,387,500 were
tendered, resulting in the Company's repurchase on March 12, 1997, of a total of
1,499,932 shares at the single per share price of $15.00 per share. The
repurchase was financed by an increase in the bank term loan and revolving
credit facility.
On July 31, 1998, the Company acquired RCSA, Inc. ("RCSA"), a provider of
program outpatient therapy, for consideration consisting of cash and stock. On
August 17, 1998, the Company acquired StarMed 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 $41.2 million,
consisting of $38.0 million in cash, 130,426 shares of stock and $1.0 million in
subordinated notes. An additional $2.0 million 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. In
January 2000, the letter of credit was drawn down pursuant to the terms of the
escrow agreement and the proceeds have remained in escrow. Additional
consideration of $202,000 was paid in 1999 to the former stockholders of RCSA,
based upon the retention of clients. The cash component of the purchase price
was funded through borrowings made available by an increase in the Company's
bank credit facility to $90.0 million.
On May 20, 1999, the Company acquired Salt Lake for consideration consisting
of cash, stock and subordinated notes. On July 1, 1999, the Company purchased
AllStaff for consideration consisting of cash, stock and subordinated notes. On
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December 20, 1999, the Company acquired eai Healthcare Staffing for
consideration consisting of cash and subordinated notes. The aggregate purchase
prices for these acquisitions was $16.9 million, consisting of $11.9 million in
cash, 48,433 shares of stock, and $4.2 million in subordinated notes. Additional
consideration of up to $1.9 million 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 AllStaff contingent upon the attainment of a minimum target growth in gross
profit for the twelve-month period ending June 30, 2000. The cash component of
the purchase prices was funded by the Company's working capital plus additional
borrowings on its bank credit facility.
Each of the acquisitions have been accounted for by the purchase method of
accounting, whereby the operating results of the acquired entity are included in
the Company's results of operations commencing on the respective dates of
acquisition.
RESULTS OF OPERATIONS
The following table sets forth for 1999, 1998 and 1997, the percentage that
certain items in the consolidated statements of earnings bear to operating
revenues for the years then ended:
<TABLE>
<CAPTION>
Year ended December 31,
- ---------------------------------------------------------------------------------------------
1999 1998 1997
- ---------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Operating revenues 100.0% 100.0% 100.0%
Costs and expenses:
Operating expenses 71.7 69.5 68.9
General and administrative 16.9 17.3 17.0
Depreciation and amortization 1.7 1.9 2.3
Operating earnings 9.7 11.3 11.8
Other expense, net (1.6) (.7) (.7)
Earnings before income taxes and cumulative
effect of change in accounting principle 8.1 10.6 11.1
Income taxes 3.2 4.3 4.5
Earnings before cumulative effect of change in
accounting principle 4.9 6.3 6.6
Cumulative effect of change in accounting for
start-up costs, net of tax -- (0.4) --
Net earnings 4.9% 5.9% 6.6%
- ----------------------------------------------------------------------------------------------
</TABLE>
Twelve Months Ended December 31, 1999 Compared to Twelve Months Ended
December 31, 1998
Operating revenues in 1999 increased by $102.0 million, or 49.2%, to $309.4
million as compared to 1998. Acquisitions accounted for 76.9% 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 revenue. Inpatient
program revenue increased by $4.9 million. A 2.8% increase in the average number
of inpatient programs from 128.2 to 131.8 programs, and a 3.6% increase in the
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average daily billable census per inpatient program from 14.0 to 14.5, resulted
in a 6.3% increase in billable patient days to 697,769 and a 4.3% increase in
revenue from inpatient programs to $116.5 million. The increase in billable
census per inpatient program is primarily attributable to a 4.3% increase in
admissions per program. The average billable length of stay for 1999 was
comparable to 1998. The increase in billable patient days was offset by a 1.8%
decrease in average per diem billing rates, reflecting lower per diem billing
rates for subacute programs subject to the BBA.
Outpatient revenue increased 86.1% to $30.7 million, reflecting a $1.9
million increase from the July 1998 acquisition of RCSA, a $2.9 million increase
from the May 1999 acquisition of Salt Lake, an increase in the average number of
outpatient clinics managed from 26.1 to 40.0, and an increase in units of
service per clinic. Contract therapy revenue increased 1.1% to $14.1 million
reflecting a $3.8 million increase from the acquisition of Therapeutic Systems
in September 1998, offset by a 45.0% decrease in revenue per unit to $154,899,
reflecting lower volumes and reimbursement rates under the BBA.
Staffing revenue increased 122.6% to $148.2 million, reflecting the addition
of $66.2 million in supplemental nurse staffing revenue achieved through the
August 1998 acquisition of StarMed, a $3.0 million increase from the July 1999
acquisition of AllStaff, and a $681,000 increase from the December 1999
acquisition of eai Healthcare Staffing. An increase in nurse travel staffing
revenue of $30.3 million 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 SNU-PPS.
Operating expenses for 1999 increased by $77.7 million, or 53.9%, to $221.9
million as compared to 1998. Acquisitions accounted for 76.7% of the net
increase. A $41.7 million increase in operating expenses attributable to the
increase in patient days, units of services, nurse travel staffing and
supplemental staffing was offset by a $23.6 million 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 $637,000 to $260,000, on an
increase in the average number of non-exempt units from 3.2 to 4.4. The per
program average excess of operating expenses over operating revenues decreased
from $199,000 to $60,000 reflecting an increase in the average billable census
per program from 3.8 to 4.9. The average excess of operating expenses over
operating revenues for a program during its non-exempt year can range to as high
as $150,000 to $200,000.
General and administrative expenses increased $16.4 million, or 45.6%, to
$52.3 million, reflecting increases in corporate office expenses as well as
marketing, business development, operations and professional services in support
of the increase in programs, growth in the number of supplemental staff offices,
plus the addition of general and administrative expenses of companies acquired.
Depreciation and amortization increased $1.3 million reflecting an increase
in goodwill from acquisitions.
Interest expense increased $761,000 reflecting interest on additional debt
funding the acquisitions. Other expense in 1999 primarily reflects the write-off
of the Company's investments in nonconsolidated subsidiaries. Other income in
1998 reflects the sale of approximately 50% of the Company's investment in
Intensiva HealthCare Corporation in the fourth quarter of 1998.
Earnings before income taxes and cumulative effect of change in accounting
principle increased by $3.2 million, or 14.4%, to $25.0 million. The provision
for income taxes for 1999 was $9.9 million compared to $8.9 million in 1998,
reflecting effective income tax rates of 39.7% and 40.7%, respectively. Earnings
before cumulative effect of change in accounting principle increased by $2.1
million, or 16.4%, to $15.1 million. The cumulative effect of change in
accounting principle of $776,000 in 1998 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 $2.9
million, or 23.8%, to $15.1 million. Diluted earnings per share increased 21.1%
11
<PAGE> 12
to $2.07 from $1.71 on a 2.2% increase in the weighted-average shares and
assumed conversions outstanding. The loss on write-off of investments reduced
earnings per share in 1999 by $.09, while the gain on sale of marketable
securities represented $.12 of the earnings per share in 1998. The cumulative
effect of change in accounting principle reduced earnings per share by $.11 in
1998 with no comparable reduction in 1999. Excluding gains/losses on investments
and the cumulative effect of the change in accounting principle, diluted
earnings per share increased 26.5% from $1.70 in 1998 to $2.15 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.
Twelve Months Ended December 31, 1998 Compared to Twelve Months Ended
December 31, 1997
Operating revenues in 1998 increased by $46.6 million, or 29.0%, to $207.4
million as compared to 1997. Acquisitions accounted for 89.2% of the net
increase. Inpatient program revenue increased by $14.2 million. A 16.2% increase
in the average number of inpatient programs from 110.3 to 128.2 programs, and an
increase in the average daily billable census per inpatient program of 6.1% from
13.2 to 14.0, generated a 23.3% increase in billable patient days to 656,363 and
a 14.6% increase in revenue from inpatient programs. The increase in billable
census per inpatient program is primarily attributable to a 10.4% increase in
admissions per program, offset by a 3.8% 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 programs
operational in 1998, which carry a shorter length of stay than acute
rehabilitation programs. The increase in billable patient days was offset by a
7.1% decrease in average per diem billing rates, reflecting a greater mix of
subacute programs which carry lower average per diem rates than acute programs
and lower per diem billing rates for subacute programs subject to the BBA.
Outpatient revenue increased 74.8% to $16.5 million, reflecting a $1.2
million increase from the July 1998 acquisition of RCSA, plus an increase in the
average number of outpatient clinics managed from 17.9 to 26.1 and an increase
in units of service per clinic. Contract therapy revenue increased 66.6% to
$13.9 million, reflecting a $2.6 million increase from the acquisitions of Team
and Moore and Rehab Unlimited, and a $3.9 million increase from the acquisition
of Therapeutic Systems in September 1998.
Staffing revenue increased 43.5% to $66.6 million, reflecting the addition
of $34.3 million in nurse staffing revenue achieved through the August 1998
acquisition of StarMed, offset by a $14.9 million decrease in therapy staffing
revenues. Demand for therapists declined significantly as a result of the
implementation of SNU-PPS.
Operating expenses for the twelve-month periods compared increased by $33.5
million, or 30.2%, to $144.2 million. Acquisitions accounted for 88.0% of the
net increase. The remaining increase was attributable to the increase in patient
days and units of services, offset by decreased therapy staffing costs.
The excess of operating expenses over operating revenues associated with
non-exempt programs decreased from $778,000 to $637,000, on a decrease in the
average number of non-exempt programs from 7.7 to 3.2. The per program average
excess of operating expenses over operating revenues increased from $102,000 to
$199,000 reflecting a greater percentage of programs where the Company is
obligated to provide therapy staff. The average excess of operating expenses
over operating revenues for a program during its non-exempt year can range to as
high as $150,000 to $200,000.
General and administrative expenses increased $8.6 million, or 31.6%, to
$35.9 million, reflecting increases in corporate office expenses as well as
administration, business development, operations and professional services in
support of the increase in programs, plus the addition of general and
administrative expenses of companies acquired.
12
<PAGE> 13
Depreciation and amortization increased $186,000 reflecting amortization of
goodwill from acquisitions, offset by the elimination of amortization of
start-up costs in 1998.
Interest expense increased $622,000 reflecting interest on additional debt
issued in the acquisitions of StarMed and Therapeutic Systems. Gain on sale of
marketable securities reflects the sale of the Company's investment in Intensiva
HealthCare Corporation, approximately 50% of which was sold in the first quarter
of 1997, and the remaining 50% sold in the fourth quarter of 1998.
Earnings before income taxes and cumulative effect of change in accounting
principle increased by $4.0 million, or 22.3%, to $21.9 million. The provision
for income taxes for 1998 was $8.9 million compared to $7.3 million in 1997,
reflecting effective income tax rates of 40.7% and 40.6%, respectively. Earnings
before cumulative effect of change in accounting principle increased in 1998 by
$2.4 million, or 22.2%, to $13.0 million. 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 $1.6 million, or
14.9%, to $12.2 million. Diluted earnings per share increased 16.3% to $1.71
from $1.47 on a 1.8% decrease in the weighted-average shares and assumed
conversions outstanding. The gains on sale of marketable securities represented
$.12 of the earnings per share in both 1998 and 1997. The cumulative effect of
change in accounting principle reduced earnings per share by $.11 in 1998 with
no comparable reduction in 1997. Excluding the gains on sales of marketable
securities and the cumulative effect of the change in accounting principle,
diluted earnings per share increased 25.9% from $1.35 in 1997 to $1.70 in 1998.
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 December 31, 1999, the Company had $3.8 million in cash and current
marketable securities and a current ratio of 1.4:1. Working capital as of
December 31, 1999, increased from December 31, 1998, by $1.5 million, reflecting
working capital from the acquisitions of Salt Lake, AllStaff and eai Healthcare
Staffing, and working capital generated by operations.
Net accounts receivable were $65.8 million at December 31, 1999 compared to
$46.3 million at December 31, 1998. The number of days average net revenues in
net receivable was 65.6 days and 63.8 days as of December 31, 1999 and December
31, 1998, respectively. The increase is primarily the result of acquisitions of
businesses that traditionally carry longer payment terms from clients.
During the year ended December 31, 1999, the Company incurred capital
expenditures of $3.0 million as compared to $2.1 million for the year ended
December 31, 1998. At December 31, 1999, the Company had no material commitments
for capital expenditures.
In connection with the development and implementation of additional
programs, the Company may incur capital expenditures for equipment and deferred
costs arising from payments made to hospitals for a portion of capital
improvements needed to begin a program's operation. For the year ended December
31, 1999, the Company made deferred cost payments to seven client hospitals
totaling $486,000 for capital improvements, while for the year ended December
31, 1998, payments were made to four client hospitals totaling $450,000. At
December 31, 1999, the Company had nine commitments totaling $1.3 million to
make additional capital improvement payments to client hospitals.
The Company's operating cash flows constitute its primary source of
liquidity and historically have been sufficient to fund its working capital
requirements. The Company expects to meet its future working capital, capital
expenditure, business expansion and debt service requirements from a combination
13
<PAGE> 14
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 $60.0 million. The term loan requires quarterly repayments of principal
of approximately $3.0 million. The amount that may be borrowed under the
revolving credit facility was increased to the lesser of $30.0 million or 85% of
eligible accounts receivable, reduced by amounts outstanding under the Company's
bank letter of credit. As of December 31, 1999, the Company's borrowings under
the term loan and revolving credit facility totaled $46.0 million and $12.0
million, respectively, and a letter of credit was outstanding in the amount of
$2.0 million.
On January 10, 1997, the Company sold 165,000 shares of its investment in
Intensiva HealthCare Corporation in a market transaction for $1.5 million. The
remaining 161,287 shares were sold on December 18, 1998 for $1.6 million.
On March 12, 1997, the Company repurchased 1.5 million shares of its common
stock. To finance the repurchase, the Company issued $45.0 million in senior
secured debt, which was restructured in 1998 as described above.
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 after January 1, 2000.
The Company developed and presented to the Board of Directors its action
plan for Year 2000 compliance. The major phases of the action plan were
awareness, assessment, renovation, validation and implementation.
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
could have been impacted by Year 2000 issues. Systems were then prioritized from
critical to noncritical 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 were purchased from industry-known vendors and
were generally used in their standard configuration. Other systems were replaced
by or converted to Year 2000 compatible systems. The Company closely reviewed
the Year 2000 progress as reported by each vendor. The Company was assured by
certain of these vendors that new Year 2000 compliant systems had been
installed. In all other cases, compliant systems were delivered in time for
installation and testing prior to year-end 1999.
The final phase of the action plan was the implementation of remediated and
other systems into the operating environment of the Company. Concurrent with the
development and execution of the plan was the evolution of a contingency plan
that included procedures to be followed if the system failed.
The Company also completed an assessment of Year 2000 risks relating to its
lines of business separate from its dependence on data processing. The
assessment included corresponding with customers to ascertain their overall
preparedness regarding Year 2000 risks. The plan also provided for the
identification and communication with significant non-data processing
third-party vendors regarding their preparedness for Year 2000 risks. The
failure of a customer to prepare adequately for Year 2000 could have had a
significant adverse effect on such customer's operations and profitability,
14
<PAGE> 15
which, in turn, could have inhibited 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 had a significant adverse effect on the
vendor's operations, which, in turn, could have inhibited the vendor's ability
to deliver purchased goods and services to the Company in a timely manner. The
Company also recognized the importance of Year 2000 compliance by customers,
payment sources, and vendors to the Company's customers and vendors. The Company
necessarily relied upon the compliance programs of these third parties.
The Company has not experienced and does not anticipate any material
disruption in operations as the result of any failure by the Company or its
subsidiaries.
INFLATION
Although inflation has abated during the last several years, the rate of
inflation in healthcare related services continues to exceed the rate
experienced by the economy as a whole. The Company's management contracts
typically provide for an annual increase in the fees paid to the Company by its
client hospitals based upon increases in various inflation indices. These
increases generally offset increases in costs incurred by the Company.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not applicable.
15
<PAGE> 16
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Independent Auditors' Report
The Board of Directors
RehabCare Group, Inc.:
We have audited the accompanying consolidated balance sheets of RehabCare Group,
Inc. and subsidiaries (the "Company") as of December 31, 1999 and 1998, and the
related consolidated statements of earnings, stockholders' equity, cash flows
and comprehensive earnings for each of the years in the three-year period ended
December 31, 1999. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of RehabCare Group,
Inc. and subsidiaries as of December 31, 1999 and 1998, and the results of their
operations and their cash flows for each of the years in the three-year period
ended December 31, 1999 in conformity with generally accepted accounting
principles.
As discussed in note 1 to the consolidated financial statements, the Company
changed its method of accounting for start-up costs on January 1, 1998.
St. Louis, Missouri
February 4, 2000
/s/KPMG LLP
16
<PAGE> 17
<TABLE>
REHABCARE GROUP, INC.
Consolidated Balance Sheets
(dollars in thousands, except per share data)
<CAPTION>
December 31,
Assets 1999 1998
------ ---- ----
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 738 5,666
Marketable securities, available-for-sale 3,019 3,017
Accounts receivable, net of allowance for doubtful
accounts of $4,577 and $3,404, respectively 65,777 46,349
Deferred tax assets 4,898 3,382
Prepaid expenses and other current assets 1,100 938
------- -------
Total current assets 75,532 59,352
Marketable securities, trading 1,777 1,240
Equipment and leasehold improvements, net 6,728 4,537
Excess of cost over net assets acquired, net 99,020 86,285
Other 4,207 5,456
------- -------
$ 187,264 156,870
======= =======
Liabilities and Stockholders' Equity
------------------------------------
Current liabilities:
Revolving credit facility $ 5,000 --
Current portion of long-term debt 13,345 11,926
Accounts payable 3,359 2,179
Accrued salaries and wages 16,265 14,049
Accrued expenses 12,211 8,601
Income taxes payable 3,283 1,991
------- ------
Total current liabilities 53,463 38,746
Deferred compensation and other long-term liabilities 3,623 3,084
Deferred tax liabilities 1,345 955
Long-term debt, less current portion 51,050 53,929
------- ------
Total liabilities 109,481 96,714
------- ------
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 7,850,283 shares and 7,657,391 shares as of
December 31, 1999 and 1998, respectively 79 77
Additional paid-in capital 33,179 30,654
Retained earnings 62,488 47,390
Less common stock held in treasury at cost,
1,165,597 shares as of December 31, 1999 and 1998 (17,975) (17,975)
Accumulated other comprehensive earnings 12 10
------- ------
Total stockholders' equity 77,783 60,156
------- -------
$ 187,264 156,870
======= =======
See accompanying notes to consolidated financial statements.
</TABLE>
17
<PAGE> 18
<TABLE>
REHABCARE GROUP, INC.
Consolidated Statements of Earnings
(dollars in thousands, except per share data)
<CAPTION>
Year Ended December 31,
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Operating revenues $ 309,425 207,416 160,780
Costs and expenses:
Operating expenses 221,892 144,187 110,726
General and administrative 52,315 35,932 27,294
Depreciation and amortization 5,296 3,966 3,780
------- ------- -------
Total costs and expenses 279,503 184,085 141,800
------- ------- -------
Operating earnings 29,922 23,331 18,980
Interest income 233 258 186
Interest expense (4,142) (3,381) (2,759)
Other income (expense), net (986) 1,667 1,475
------- ------- -------
Earnings before income taxes and cumulative
effect of change in accounting principle 25,027 21,875 17,882
Income taxes 9,929 8,901 7,267
------- ------- -------
Earnings before cumulative effect of
change in accounting principle 15,098 12,974 10,615
Cumulative effect of change in accounting for
start-up costs, net of tax -- (776) --
------- ------- -------
Net earnings $ 15,098 12,198 10,615
======= ======= =======
Net earnings per common share:
Basic
Earnings before cumulative effect of change in
accounting principle $ 2.30 2.10 1.77
Cumulative effect of change in accounting for
start-up costs -- (.13) --
---- ---- ----
Net earnings $ 2.30 1.97 1.77
==== ==== ====
Diluted
Earnings before cumulative effect of change in
accounting principle $ 2.07 1.82 1.47
Cumulative effect of change in accounting for
start-up costs -- (.11) --
---- ---- ----
Net earnings $ 2.07 1.71 1.47
==== ==== ====
See accompanying notes to consolidated financial statements.
</TABLE>
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<PAGE> 19
<TABLE>
REHABCARE GROUP, INC.
Consolidated Statements of Stockholders' Equity
(amounts in thousands)
<CAPTION>
Common Stock
----------------------- Accumulated
Additional other compre- Total
Issued Treasury paid-in Retained Treasury hensive stockholders'
shares stock Amount capital earnings stock earnings equity
------ -------- ------ ---------- -------- -------- ----------- ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1996 7,040 -- $ 70 22,793 24,577 -- 2,230 49,670
Net earnings -- -- -- -- 10,615 -- -- 10,615
Purchase of treasury stock -- 1,500 -- -- -- (23,131) -- (23,131)
Issuance of common stock
in connection with acquisitions 38 (41) 1 639 -- 644 -- 1,284
Exercise of stock options
(including tax benefit) 74 (148) 1 540 -- 2,275 -- 2,816
Change in unrealized gain on
marketable securities, net of tax -- -- -- -- -- -- (1,494) (1,494)
----- ----- --- ------ ------ ------ ----- ------
Balance, December 31, 1997 7,152 1,311 72 23,972 35,192 (20,212) 736 39,760
Net earnings -- -- -- -- 12,198 -- -- 12,198
Issuance of common stock
in connection with acquisitions 130 -- 1 2,199 -- -- -- 2,200
Exercise of stock options
(including tax benefit) 375 (145) 4 4,483 -- 2,237 -- 6,724
Change in unrealized gain on
marketable securities, net of tax -- -- -- -- -- -- (726) (726)
----- ----- --- ------ ------ ------ ----- ------
Balance, December 31, 1998 7,657 1,166 77 30,654 47,390 (17,975) 10 60,156
Net earnings -- -- -- -- 15,098 -- -- 15,098
Issuance of common stock
in connection with acquisitions 48 -- 1 840 -- -- -- 841
Exercise of stock options
(including tax benefit) 145 -- 1 1,685 -- -- -- 1,686
Change in unrealized gain on
marketable securities, net of tax -- -- -- -- -- -- 2 2
----- ---- --- ------ ------ ------ ----- ------
Balance, December 31, 1999 7,850 1,166 $ 79 33,179 62,488 (17,975) 12 77,783
===== ===== === ====== ====== ====== ===== ======
See accompanying notes to consolidated financial statements.
</TABLE>
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<PAGE> 20
<TABLE>
REHABCARE GROUP, INC.
Consolidated Statements of Cash Flows
(dollars in thousands)
<CAPTION>
Year Ended December 31,
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Cash flows from operating activities:
Net earnings $15,098 12,198 10,615
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 5,296 3,966 3,780
Provision for losses on accounts receivable 2,743 1,093 717
Gain on sale of marketable securities -- (1,516) (1,448)
Increase (decrease) in deferred compensation 598 (598) 545
Increase in accounts receivable, net (18,703) (6,666) (7,755)
Decrease (increase) in prepaid expenses and
other current assets (3) 43 (155)
Decrease in other assets 921 161 15
Increase in accounts payable and accrued expenses 3,630 1,059 1,759
Increase in accrued salaries and wages 1,507 1,990 2,386
Increase (decrease) in income taxes payable
and deferred (386) 1,049 (642)
------ ------ ------
Net cash provided by operating activities 10,701 13,555 9,817
------ ------ ------
Cash flows from investing activities:
Additions to equipment and leasehold improvements, net (3,002) (1,868) (1,343)
Purchase of marketable securities (671) (1,838) (1,473)
Proceeds from sale/maturities of marketable securities 134 4,363 2,080
Cash paid in acquisition of businesses, net of cash received (16,273) (42,449) (6,629)
Deferred contract costs, net (177) (450) (368)
Other, net (736) (1,187) (2,113)
------ ------ ------
Net cash used in investing activities (20,725) (43,429) (9,846)
------ ------ ------
Cash flows from financing activities:
Proceeds from (payments on) revolving credit facility 12,000 -- (500)
Payments on long-term debt (12,740) (10,559) (3,603)
Proceeds from issuance of long-term debt -- 36,400 23,500
Proceeds from issuance of notes payable 4,150 1,000 2,150
Purchase of treasury stock -- -- (23,131)
Exercise of stock options (including tax benefit) 1,686 6,724 2,816
------ ------ ------
Net cash provided by financing activities 5,096 33,565 1,232
------ ------ ------
Net increase (decrease) in cash and cash
equivalents (4,928) 3,691 1,203
Cash and cash equivalents at beginning of period 5,666 1,975 772
------ ------ ------
Cash and cash equivalents at end of period $ 738 5,666 1,975
====== ====== ======
See accompanying notes to consolidated financial statements.
</TABLE>
20
<PAGE> 21
<TABLE>
REHABCARE GROUP, INC.
Consolidated Statements of Comprehensive Earnings
(dollars in thousands)
<CAPTION>
Year Ended December 31,
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Net earnings $15,098 12,198 10,615
Other comprehensive earnings, net of tax -
Unrealized gains (losses) on securities:
Unrealized holding gains (losses)
arising during period 2 184 (625)
Less: reclassification adjustment for
realized gains included in net earnings -- (910) (869)
------ ------ -----
Comprehensive earnings $15,100 11,472 9,121
====== ====== =====
See accompanying notes to consolidated financial statements.
</TABLE>
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<PAGE> 22
REHABCARE GROUP, INC.
Notes to Consolidated Financial Statements
(1) Summary of Significant Accounting Policies
Principles of Consolidation
The consolidated financial statements include the accounts of the parent
company and its wholly owned subsidiaries. All significant intercompany
balances and transactions have been eliminated in consolidation.
Accounting Change
The Company adopted the provisions of Statement of Position No. 98-5 ("SOP
98-5"), Reporting on the Costs of Start-Up Activities on January 1, 1998,
which requires that costs of start-up activities be expensed as incurred.
Start-up activities are defined in SOP 98-5 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. Previously,
the Company capitalized these costs and amortized them over the term of
the contract. The change resulted in a cumulative after-tax charge of
$776,000, $.11 per diluted share, recorded in the quarter ended March 31,
1998.
Cash Equivalents and Marketable Securities
Cash in excess of daily requirements is invested in short-term investments
with original maturities of three months or less. Such investments are
deemed to be cash equivalents for purposes of the consolidated statements
of cash flows.
The Company classifies its debt and equity securities into one of three
categories: held-to-maturity, trading, or available-for-sale. Management
determines the appropriate classification of its investments at the time
of purchase and reevaluates such determination at each balance sheet date.
Investments at December 31, 1999 consist of marketable equity securities,
variable rate municipal bonds and money market securities. All marketable
securities included in current assets are classified as available-for-sale
and as such, the difference between cost and market, net of estimated
taxes, is recorded as other comprehensive earnings. Gain (or loss) on such
securities is not recognized in the consolidated statement of earnings
until the securities are sold. All marketable securities in non-current
assets are classified as trading.
Credit Risk
The Company primarily provides services to a geographically diverse
clientele of healthcare providers throughout the United States. The
Company performs ongoing credit evaluations of its clientele and does not
require collateral. An allowance for doubtful accounts is maintained at a
level which management believes is sufficient to cover potential credit
losses.
Equipment and Leasehold Improvements
Depreciation and amortization of equipment and leasehold improvements are
computed on the straight-line method over the estimated useful lives of
the related assets, principally: equipment - five to seven years and
leasehold improvements - life of lease or life of asset, whichever is
less.
Intangible Assets
Substantially all the excess of cost over net assets acquired (goodwill)
relates to acquisitions and is amortized on a straight-line basis over 40
years. Accumulated amortization of goodwill was $10.0 million and $7.5
million as of December 31, 1999 and 1998, respectively. The Company
evaluates the realizability of goodwill based upon expectations of
undiscounted cash flows and
22
<PAGE> 23
REHABCARE GROUP, INC.
Notes to Consolidated Financial Statements
operating income. Based upon its most recent analysis, the Company
believes that no impairment of goodwill exists at December 31, 1999.
Disclosure About Fair Value of Financial Instruments
The estimated fair-market value of the revolving credit facility and
long-term debt (including current portions thereof), approximates carrying
value due to the variable rate features of the instruments. The Company
believes it is not practical to estimate a fair value different from the
carrying value of its subordinated debt as the instruments have numerous
unique features as discussed in note 6.
Revenues and Costs
The Company recognizes revenues as services are provided or when the revenue
is earned. Expenses are recorded as incurred and as services are provided.
Costs related to marketing and development are expensed as incurred.
Income Taxes
Deferred tax assets and liabilities are recognized for temporary differences
between the financial statement carrying amounts of existing assets and
liabilities and their respective tax bases and operating loss and tax
credit carryforwards. Deferred tax assets and liabilities are measured
using enacted tax rates in effect for the year in which those differences
are expected to be recovered or settled.
Treasury Stock
The purchase of the Company's common stock is recorded at cost. Upon
subsequent reissuance, the treasury stock account is reduced by the
average cost basis of such stock.
Comprehensive Earnings
On January 1, 1998, the Company adopted the provisions of Statement of
Financial Accounting Standards ("SFAS") No. 130, Reporting Comprehensive
Income, which requires reporting of comprehensive income (earnings) and
its components, in the statement of earnings and statement of
stockholders' equity, including net earnings as a component. Comprehensive
earnings is the change in equity of a business from transactions and other
events and circumstances from non-owner sources.
Segment Disclosures
On January 1, 1998, the Company adopted the provisions of SFAS No. 131
("SFAS 131"), Disclosures about Segments of an Enterprise and Related
Information. SFAS 131 establishes standards for reporting information
about operating segments and related disclosures about products and
services, geographic areas and major customers.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the
financial statements. Estimates also affect the reported amounts of
revenues and expenses during the period. Actual results may differ from
those estimates.
Reclassifications
Certain prior years' amounts have been reclassified to conform with the
current year presentation.
23
<PAGE> 24
REHABCARE GROUP, INC.
Notes to Consolidated Financial Statements
(2) Acquisitions
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 AllStaff, Inc. ("AllStaff"),
a provider of supplemental nurse staffing to health care providers for
consideration consisting of cash, stock and subordinated notes. On
December 20, 1999, the Company acquired eai Healthcare Staffing Solutions,
Inc., a provider of temporary allied healthcare personnel to hospitals,
managed healthcare organizations, laboratories, and physician offices for
consideration consisting of cash and subordinated notes. The aggregate
purchase prices for these acquisitions was $16.9 million, consisting of
$11.9 million in cash, 48,433 shares of stock, and $4.2 million in
subordinated notes. Additional consideration of up to $1.9 million 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 AllStaff
contingent upon the attainment of a minimum target growth in gross profit
for the twelve-month period ending June 30, 2000. Goodwill of
approximately $15.0 million related to the acquisitions is being amortized
over 40 years. The cash component of the purchase prices was funded by the
Company's working capital plus additional borrowings on its bank credit
facility.
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.,
a provider of contract therapy, for consideration consisting of cash,
stock and notes. The aggregate purchase prices for these acquisitions was
$41.2 million, consisting of $38.0 million in cash, 130,426 shares of
stock and $1.0 million in subordinated notes. An additional $2.0 million
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 in 1999 to the former stockholders of RCSA, based upon the
retention of clients. The cash component of the purchase price was funded
by an increase in the Company's bank credit facility to $90.0 million. See
note 6. Goodwill of approximately $33.0 million related to the
acquisitions is being amortized over 40 years.
On January 28, 1997, the Company acquired TeamRehab, Inc. and Moore
Rehabilitation Services, Inc. ("Team and Moore"), providers of contract
therapy services. On June 12, 1997, the Company acquired Rehab Unlimited,
Inc. and the assets of Cimarron Health Care, Inc., also providers of
contract therapy services, and combined them with Team and Moore. The
aggregate purchase prices for these acquisitions was $7.0 million,
consisting of $4.3 million in cash, $1.8 million in subordinated
promissory notes and 54,151 shares of the Company's common stock. In
addition, $301,000 of contingent consideration was paid in 1998 to the
former owners of Team and Moore. Goodwill related to the acquisitions
totaling $6.3 million is being amortized over 40 years.
Each of the acquisitions has been accounted for by the purchase method of
accounting, whereby the operating results of the acquired entity are
included in the Company's results of operations commencing on the
respective closing dates of acquisition.
24
<PAGE> 25
REHABCARE GROUP, INC.
Notes to Consolidated Financial Statements
The following unaudited pro forma financial information assumes the
acquisitions occurred as of January 1, 1998. 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.
(dollars in thousands, except per share data)
<TABLE>
<CAPTION>
Year Ended December 31,
1999 1998
---- ----
<S> <C> <C>
Operating revenues $336,044 293,246
Net earnings 15,329 13,906
Net earnings per common and common
equivalent share:
Basic 2.32 2.20
Diluted 2.09 1.91
</TABLE>
(3) Marketable Securities
Current marketable securities at December 31, 1999 consist primarily of
variable rate municipal bonds. Noncurrent marketable securities consist
primarily of marketable equity securities ($1.2 million and $840,000 at
December 31, 1999 and 1998, respectively) and money market securities
($554,000 and $400,000 at December 31, 1999 and 1998, respectively) held
in trust under the Company's deferred compensation plan.
(4) Allowance for Doubtful Accounts
Activity in the allowance for doubtful accounts is as follows:
(dollars in thousands)
<TABLE>
<CAPTION>
Year Ended December 31,
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Balance at beginning of period $ 3,404 1,338 1,386
Provisions for doubtful accounts 2,743 1,093 717
Allowance related to acquisitions 111 1,720 30
Accounts written off (1,681) (747) (795)
----- ----- -----
Balance at end of period $ 4,577 3,404 1,338
===== ===== =====
</TABLE>
(5) Equipment and Leasehold Improvements
Equipment and leasehold improvements, at cost, consist of the following:
(dollars in thousands)
<TABLE>
<CAPTION>
December 31,
1999 1998
---- ----
<S> <C> <C>
Equipment $ 12,298 8,227
Leasehold improvements 687 384
------ -----
12,985 8,611
Less accumulated depreciation and amortization 6,257 4,074
------ -----
$ 6,728 4,537
====== =====
</TABLE>
25
<PAGE> 26
REHABCARE GROUP, INC.
Notes to Consolidated Financial Statements
(6)Long-Term Debt
Long-term debt consists of the following:
(dollars in thousands)
<TABLE>
<CAPTION>
December 31,
1999 1998
---- ----
<S> <C> <C>
Bank Debt:
---------
Term facility - LIBOR plus 1.0% to 2.0% or Corporate Base
Rate ("CBR"), rate dependent on the ratio of indebtedness, net of cash and
marketable securities, to cash flow, maturing October 1, 2003
(weighted-average rates of 7.4% and 6.7% at December 31, 1999 and 1998,
respectively) $ 45,891 57,364
Revolving credit facility - LIBOR plus 1.0% to 2.0% or CBR, rate dependent
on the ratio of indebtedness, net of cash and marketable securities, to
cash flow, maturing October 1, 2003 (weighted-average rate of 7.8% at
December 31, 1999) 12,000 --
Subordinated Debt:
-----------------
Notes payable, 6.25% convertible, maturing March 1, 2006 6,000 6,000
Note payable, 8% -- 844
Note payable, 8%, payable in quarterly installments of $41 thousand
commencing July 1, 1999, maturing January 1, 2001 136 322
Notes payable, 7%, payable in two installments of $250 thousand
on June 30, 2000 and June 30, 2001 500 --
Notes payable, 6%, payable in two installments of $50 thousand
on July 20, 2000 and July 20, 2001 100 --
Note payable, 8%, maturing August 15, 2001 118 325
Note payable, 8%, payable in two installments of $1.45 million
on December 20, 2000 and December 20, 2001 2,900 --
Note payable, 8%, maturing September 9, 2002 1,000 1,000
Notes payable, 6.5%, maturing May 20, 2003 750 --
------ ------
69,395 65,855
Less current portion 18,345 11,926
------ ------
Total long-term debt $ 51,050 53,929
====== ======
</TABLE>
In 1998 the Company restructured and increased its bank debt. Under the
terms of the restructured loan agreement, the Company entered into a
five-year, $60.0 million term loan and a revolving line of credit which
allows the Company to borrow up to the lesser of $30.0 million or 85% of
eligible accounts receivable as defined by the agreement, reduced by
amounts outstanding under bank letters of credit. The Company pays a fee
on the unused portion of the commitment from .2% to .5% per annum, with
such rate being dependent on the ratio of the Company's indebtedness, net
of cash and marketable securities, to cash flow. Borrowings under the
agreement, including the revolving credit facility, are secured primarily
by the Company's
26
<PAGE> 27
REHABCARE GROUP, INC.
Notes to Consolidated Financial Statements
accounts receivable, equipment and leasehold improvements, and future
income and profits. The loan agreement requires the Company to meet
certain financial covenants including maintaining minimum net worth and
fixed charge coverage ratios. The loan agreement also restricts the
Company's ability to pay dividends to its stockholders. As of December 31,
1999, the Company had an outstanding bank letter of credit in the amount
of $2.0 million. The average outstanding borrowings under the revolving
credit facility for 1999, 1998 and 1997 were $1.7 million, $3.5 million
and $7.5 million at weighted-average interest rates of 7.5%, 7.0% and 7.4%
per annum, respectively.
The $6.0 million convertible subordinated notes payable may be redeemed in
whole or in part by the Company at any time after March 1, 2000 at from
100% to 104% of the principal balance. The notes are convertible into the
Company's common stock prior to March 1, 2006, subject to earlier
redemption by the Company, at the option of the former HealthCare Staffing
Solutions, Inc. shareholders, at a conversion price of $14.17 per share.
The scheduled principal payments of long-term debt at December 31, 1999 are
as follows: $18.4 million in 2000, $20.3 million in 2001, $12.5 million in
2002, $12.2 million in 2003, $0 in 2004 and $6.0 million thereafter.
Interest paid for 1999, 1998 and 1997 was $3.8 million, $3.6 million and
$2.6 million, respectively.
(7) Stockholders' Equity
On January 31, 1997, the Company made a tender offer to purchase up to
1,387,500 shares of its common stock at a single purchase price, not less
than $13.33 nor in excess of $15.00 per share. The actual purchase price
was determined based on the lowest single purchase price at which
stockholders tendered shares that was sufficient to purchase at least
1,387,500 shares. As of February 28, 1997, the closing date, shares
totaling greater than 1,387,500 were tendered, resulting in the Company's
repurchase on March 12, 1997, of a total of 1,499,932 shares at the single
purchase price of $15.00 per share. The repurchase was financed by an
increase in the bank term loan and revolving credit facility.
The Company has various long-term performance plans for the benefit of
employees and nonemployee directors. Under the plans, employees may be
granted incentive stock options or nonqualified stock options and
nonemployee directors may be granted nonqualified stock options. Certain
of the plans also provide for the granting of stock appreciation rights,
restricted stock, performance awards, or stock units. Stock options may be
granted for a term not to exceed 10 years (five years with respect to a
person receiving incentive stock options who owns more than 10% of the
capital stock of the Company) and must be granted within 10 years from the
adoption of the respective plan. The exercise price of all stock options
must be at least equal to the fair market value (110% of fair market value
for a person receiving an incentive stock option who owns more than 10% of
the capital stock of the Company) of the shares on the date of grant.
Except for options granted to nonemployee directors which become fully
exercisable after six months and options granted to management that become
exercisable after obtainment of certain stock prices, all remaining stock
options become fully exercisable after four years from date of grant.
During 1999, the Company adopted the 1999 Non-Employee Director Stock Plan
under which 100,000 shares may be granted. Also, the Company increased the
shares that may be granted employees under the 1996 Long-Term Performance
Plan to 2,050,000 shares. At December 31, 1999, 1998 and 1997, a total of
1,042,838, 276,619 and 840,921 shares, respectively, were available for
future issuance under the plans.
27
<PAGE> 28
REHABCARE GROUP, INC.
Notes to Consolidated Financial Statements
The per share weighted-average fair value of stock options granted during
1999, 1998 and 1997 was $9.76, $8.55 and $7.64 on the dates of grant using
the Black Scholes option-pricing model with the following weighted-average
assumptions: 1999 - expected dividend yield 0%, volatility of 45%, risk
free interest rate of 6.5% and an expected life of 5 to 7 years; 1998 -
expected dividend yield 0%, volatility of 40%, risk-free interest rate of
4.7% and an expected life of 4 to 7 years; 1997 - expected dividend yield
0%, volatility of 33%, risk-free interest rate of 5.6% and an expected
life of 4 to 7 years.
The Company applies Accounting Principles Board Opinion No. 25 and related
Interpretations in accounting for its Plans. Accordingly, no compensation
cost has been recognized for its long-term performance and stock option
plans. Had compensation cost for the Company's stock-based compensation
plans been determined based on the fair value at the grant dates for
awards under those plans consistent with the method of SFAS No. 123 ("SFAS
123"), Accounting for Stock Based Compensation, the Company's net earnings
and earnings per share would have been reduced to the pro forma amounts
indicated below:
(dollars in thousands, except per share data)
<TABLE>
<CAPTION>
Year Ended December 31,
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Net earnings As reported $15,098 12,198 10,615
Pro forma 13,407 10,546 9,820
Basic earnings per share As reported 2.30 1.97 1.77
Pro forma 2.04 1.71 1.64
Diluted earnings per share As reported 2.07 1.71 1.47
Pro forma 1.84 1.49 1.36
</TABLE>
In accordance with SFAS 123, the pro forma net earnings reflects only
options granted subsequent to February 1995 and does not reflect the full
impact of calculating compensation cost for stock options granted prior to
March 1995, that vested in 1999, 1998 and 1997.
A summary of the status of the Company's stock option plans as of December
31, 1999, 1998 and 1997, and changes during the years then ended is
presented below:
<TABLE>
<CAPTION>
1999 1998 1997
---- ---- ----
Weighted-Average Weighted-Average Weighted-Average
Shares Exercise Price Shares Exercise Price Shares Exercise Price
------ -------------- ------ -------------- ------ --------------
<S> <C> <C> <C> <C> <C> <C>
Outstanding at
beginning of period 1,770,149 $ 13.26 1,925,809 $ 11.00 1,863,671 $ 9.11
Granted 424,350 18.12 833,696 15.53 335,375 19.43
Exercised (144,496) 9.39 (519,848) 8.76 (221,558) 7.78
Forfeited (104,654) 13.72 (469,508) 26.16 (51,679) 11.45
--------- --------- ---------
Outstanding at
end of period 1,945,349 14.60 1,770,149 13.26 1,925,809 11.00
========= ========= =========
Options exercisable at
end of period 984,205 1,061,756 1,247,265
========= ========= =========
</TABLE>
28
<PAGE> 29
REHABCARE GROUP, INC.
Notes to Consolidated Financial Statements
The following table summarizes information about stock options outstanding at
December 31, 1999:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
------------------------------------------------ --------------------------------
Weighted-Average
Range of Number Remaining Weighted-Average Number Weighted-Average
Exercise Prices Outstanding Contractual Life Exercise Price Exercisable Exercise Price
--------------- ----------- ---------------- -------------- ----------- --------------
<S> <C> <C> <C> <C> <C>
$ 4.83 - 9.17 557,404 3.7 years $ 8.60 557,404 $ 8.60
10.67 -14.38 410,783 6.7 11.53 259,838 11.33
16.06 -20.08 713,929 9.1 18.30 99,089 18.29
20.44 -25.00 263,233 8.2 21.90 67,874 22.99
--------- -------
4.83 -25.00 1,945,349 6.9 14.60 984,205 11.30
========= =======
</TABLE>
The Board of Directors of the Company declared a dividend distribution of
one preferred stock purchase right (the "Rights") for each share of the
Company's common stock owned as of October 1, 1992, and for each share of
the Company's common stock issued until the Rights become exercisable.
Each Right, when exercisable, will entitle the registered holder to
purchase from the Company one sixty-seventh of a share of the Company's
Series A junior participating preferred stock, $.10 par value (the Series
A preferred stock), at a price of $35 per one sixty-seventh of a share.
The Rights are not exercisable and are transferable only with the
Company's common stock until the earlier of 10 days following a public
announcement that a person has acquired ownership of 15% or more of the
Company's outstanding common stock, or the commencement or announcement
of a tender offer or exchange offer, the consummation of which would
result in the ownership by a person of 15% or more of the Company's
outstanding common stock. The Series A preferred stock will be
nonredeemable and junior to any other series of preferred stock that the
Company may issue in the future. Each share of Series A preferred stock,
upon issuance, will have a preferential dividend in an amount equal to
the greater of $1.00 per share or 100 times the dividend declared per
share of the Company's common stock. In the event of the liquidation of
the Company, the Series A preferred stock will receive a preferred
liquidation payment equal to the greater of $100 or 100 times the payment
made on each share of the Company's common stock. Each one sixty-seventh
of a share of Series A preferred stock outstanding will have one vote on
all matters submitted to the stockholders of the Company and will vote
together as one class with the holders of the Company's common stock.
In the event that a person acquires beneficial ownership of 15% or more of
the Company's common stock, holders of Rights (other than the acquiring
person or group) may purchase, at the Rights' then current purchase
price, shares of the Company's common stock having a value at that time
equal to twice such exercise price. In the event that the Company merges
into or otherwise transfers 50% or more of its assets or earnings power
to any person after the Rights become exercisable, holders of Rights
(other than the acquiring person or group) may purchase, at the then
current exercise price, common stock of the acquiring entity having a
value at that time equal to twice such exercise price.
29
<PAGE> 30
REHABCARE GROUP, INC.
Notes to Consolidated Financial Statements
(8) Earnings per Share
The following table sets forth the computation of basic and diluted
earnings per share:
(dollars in thousands, except per share data)
<TABLE>
<CAPTION>
Year Ended December 31,
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Numerator:
Numerator for basic earnings per share -
earnings available to common stockholders
(net earnings) $ 15,098 12,198 10,615
Effect of dilutive securities - after-tax interest on
convertible subordinated promissory notes 225 225 225
------ ------ ------
Numerator for diluted earnings per share -
earnings available to common stockholders
after assumed conversions $ 15,323 12,423 10,840
====== ====== ======
Denominator:
Denominator for basic earnings per share -
weighted-average shares outstanding 6,572 6,184 5,999
Effect of dilutive securities:
Stock options 412 585 809
Convertible subordinated promissory notes 423 423 423
Contingently issuable shares -- 53 144
------ ------ ------
Denominator for diluted earnings per share -
adjusted weighted-average shares and assumed
conversions 7,407 7,245 7,375
====== ====== ======
Basic earnings per share $ 2.30 1.97 1.77
==== ==== ====
Diluted earnings per share $ 2.07 1.71 1.47
==== ==== ====
</TABLE>
(9) Employee Benefits
The Company has an Employee Savings Plan, which is a defined contribution
plan qualified under Section 401(k) of the Internal Revenue Code, for the
benefit of its eligible employees. Employees who attain the age of 21 and
complete twelve consecutive months of employment with a minimum of 1,000
hours worked are eligible to participate in the plan. Each participant
may contribute from 2% to 20% of his or her annual compensation to the
plan subject to limitations on the highly compensated employees to ensure
the plan is nondiscriminatory. Contributions made by the Company to the
Employee Savings Plan were at rates of up to 50% of the first 4% of
employee contributions. Expense in connection with the Employee Savings
Plan for 1999, 1998 and 1997 totaled $817,000, $681,000 and $439,000,
respectively.
The Company maintains a nonqualified deferred compensation plan for certain
employees. Under the plan, participants may defer up to 100% of their
annual compensation. The amounts deferred are held in trust but remain
the property of the Company.
30
<PAGE> 31
REHABCARE GROUP, INC.
Notes to Consolidated Financial Statements
At December 31, 1999 and 1998, $1.8 million and $1.2 million, respectively,
were payable under the nonqualified deferred compensation plan and
approximated the value of the trust assets owned by the Company.
(10) Lease Commitments
The Company leases office space and certain office equipment under
noncancellable operating leases. Future minimum lease payments under
noncancellable operating leases, as of December 31, 1999, that have
initial or remaining lease terms in excess of one year total
approximately $2.3 million for 2000, $1.8 million for 2001, $1.5 million
for 2002, $617,000 for 2003 and $8,000 for 2004 and thereafter. Rent
expense for 1999, 1998 and 1997 was approximately $2.3 million, $1.2
million and $766,000, respectively.
(11) Income Taxes
Income taxes consist of the following:
(dollars in thousands)
<TABLE>
<CAPTION>
Year Ended December 31,
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Federal - current $ 9,707 7,922 6,298
Federal - deferred (1,026) 42 (122)
State 1,248 937 1,091
----- ----- -----
$ 9,929 8,901 7,267
===== ===== =====
Deferred tax liability recorded in
stockholders' equity $ 5 4 520
===== ===== =====
</TABLE>
A reconciliation between expected income taxes, computed by applying the
statutory Federal income tax rate of 35% to earnings before income taxes,
and actual income tax is as follows:
(dollars in thousands)
<TABLE>
<CAPTION>
Year Ended December 31,
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Expected income taxes $ 8,759 7,656 6,259
Tax effect of interest income from municipal
bond obligations exempt from Federal taxation (46) (65) (54)
State income taxes, net of Federal
income tax benefit 792 609 709
Tax effect of amortization expense
not deductible for tax purposes 295 261 261
Other, net 129 440 92
----- ----- -----
$ 9,929 8,901 7,267
===== ===== =====
</TABLE>
31
<PAGE> 32
REHABCARE GROUP, INC.
Notes to Consolidated Financial Statements
The tax effects of temporary differences that give rise to the deferred tax
assets and liabilities are as follows:
(dollars in thousands)
<TABLE>
<CAPTION>
December 31,
1999 1998
---- ----
<S> <C> <C>
Deferred tax assets:
Net operating loss $ -- 95
Provision for doubtful accounts 926 1,112
Accrued insurance, bonus and
vacation expense 4,503 2,776
Other 1,395 740
----- -----
6,824 4,723
Deferred tax liabilities: ----- -----
Unrealized gains on marketable
securities 5 4
Goodwill amortization 2,453 1,494
Other 813 798
----- -----
3,271 2,296
----- -----
Net deferred tax asset $ 3,553 2,427
===== =====
</TABLE>
The Company is required to establish a valuation allowance for deferred tax
assets if, based on the weight of available evidence, it is more likely
than not that some portion or all of the deferred tax assets will not be
realized. The ultimate realization of deferred tax assets is dependent
upon the generation of future taxable income during the periods in which
those temporary differences become deductible. Management considers the
scheduled reversal of deferred tax liabilities, projected future taxable
income and tax planning strategies in making this assessment. Based upon
the level of historical taxable income and projections for future taxable
income in the periods which the deferred tax assets are deductible,
management believes that a valuation allowance is not required, as it is
more likely than not that the results of future operations will generate
sufficient taxable income to realize the deferred tax assets.
Income taxes paid by the Company for 1999, 1998 and 1997 were $10.5, $6.5
million and $6.4 million, respectively.
32
<PAGE> 33
REHABCARE GROUP, INC.
Notes to Consolidated Financial Statements
(12)Industry Segment Information
The Company operates in four business segments that are managed separately
based on fundamental differences in operations: inpatient programs
(including acute rehabilitation and skilled nursing units), outpatient
programs, contract therapy services and staffing. All of the Company's
services are provided in the United States. Summarized information about
the Company's operations in each industry segment is as follows:
(dollars in thousands)
<TABLE>
<CAPTION>
Revenues from
Unaffiliated Customers Operating Earnings
---------------------- ------------------
1999 1998 1997 1999 1998 1997
---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
Inpatient $ 116,497 111,645 97,420 $ 18,123 16,763 12,602
Outpatient 30,677 16,484 9,430 6,238 1,833 582
Contract Therapy 14,071 13,922 8,359 333 2,629 1,382
Staffing 148,180 65,365 45,571 5,228 2,106 4,414
------- ------- ------- ------ ------ ------
Total $ 309,425 207,416 160,780 $ 29,922 23,331 18,980
======= ======= ======= ====== ====== ======
</TABLE>
<TABLE>
<CAPTION>
Total Assets Depreciation and Amortization
------------ -----------------------------
1999 1998 1997 1999 1998 1997
---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
Inpatient $ 53,822 56,781 51,210 $ 2,460 2,279 2,537
Outpatient 20,895 11,842 7,442 498 251 195
Contract Therapy 19,752 20,763 8,909 379 228 142
Staffing 92,659 67,484 29,680 1,959 1,208 906
------- ------- ------ ----- ----- -----
Total $ 187,128 156,870 97,241 $ 5,296 3,966 3,780
======= ======= ====== ===== ===== =====
</TABLE>
<TABLE>
<CAPTION>
Capital Expenditures
--------------------
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Inpatient $ 1,217 1,398 1,118
Outpatient 51 73 5
Contract Therapy 42 20 --
Staffing 1,733 612 249
----- ----- -----
Total $ 3,043 2,103 1,372
===== ===== =====
</TABLE>
33
<PAGE> 34
REHABCARE GROUP, INC.
Notes to Consolidated Financial Statements
(13)Quarterly Financial Information (Unaudited)
-------------------------------------------
(dollars in thousands, except per share data)
<TABLE>
<CAPTION>
Quarter Ended
1999 Dec. 31 Sep. 30 June 30 Mar. 31
---- ------- ------- ------- -------
<S> <C> <C> <C> <C>
Operating revenues $ 86,902 79,663 73,675 69,185
Operating earnings 8,139 7,991 7,104 6,688
Earnings before income taxes 6,132 7,021 6,188 5,686
Net earnings 3,710 4,233 3,725 3,430
Net earnings per common share:
Basic .56 .64 .57 .53
Diluted .50 .57 .51 .47
</TABLE>
<TABLE>
<CAPTION>
Quarter Ended
1998 Dec. 31 Sep. 30 June 30 Mar. 31
---- ------- ------- ------- -------
<S> <C> <C> <C> <C>
Operating revenues $ 66,835 54,050 42,967 43,564
Operating earnings 6,712 5,935 5,345 5,339
Earnings before income taxes and cumulative
effect of change in accounting principle 7,178 5,147 4,808 4,742
Net earnings 4,227 3,072 2,883 2,016
Net earnings per common share:
Basic
Earnings before cumulative effect of
change in accounting principle .65 .49 .48 .47
Net earnings .65 .49 .48 .35
Diluted
Earnings before cumulative effect of
change in accounting principle .59 .43 .41 .40
Net earnings .59 .43 .41 .29
</TABLE>
The sum of the quarterly earnings per common share may not equal the
full year earnings per common share due to rounding and computational
differences.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
ON ACCOUNTING AND FINANCIAL DISCLOSURE
Not applicable.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Certain information regarding directors and executive officers of the
Company is contained under the caption "Item 1 - Election of Directors" and
"Compliance with Section 16(a) of the Securities Exchange Act of 1934" included
in the Proxy Statement for the 2000 Annual Meeting of Stockholders, which
information is incorporated herein by reference.
34
<PAGE> 35
The following is a list as of March 10, 2000, of the names and ages of the
executive officers of the Company and positions with the Company. The employment
history of each of the executive officers for the past five years follows the
list. There is no family relationship between any of the named persons.
<TABLE>
<CAPTION>
Name Age Position
<S> <C> <C>
Alan C. Henderson 54 President and Chief Executive Officer
Maurice Arbelaez 43 President, Staffing Division
Gregory F. Bellomy 43 President, Contract Therapy Division
Tom E. Davis 50 President, Inpatient Division
Keith L. Goding 49 Executive Vice President and Chief Development Officer
Alfred J. Howard 47 President, Outpatient Division
Hickley M. Waguespack 56 Executive Vice President, Customer Service and Retention
John R. Finkenkeller 47 Senior Vice President, Chief Financial Officer and Secretary
</TABLE>
ALAN C. HENDERSON has been President and Chief Executive Officer and a
director of the Company since May 1998 and was Executive Vice President, Chief
Financial Officer and Secretary from 1991 through May 1998.
MAURICE ARBELAEZ has been President of the Staffing Division since April
1999 and was Senior Vice President Operations from August 1994 to April 1999.
GREGORY F. BELLOMY has been President of the Company's Contract Therapy
Division since September 1998. Prior to joining the Company, Mr. Bellomy served
in various capacities, including Division President, Division Vice President and
Area General Manager, at TheraTex Incorporated from 1992 to 1997, at which time
TheraTex was acquired by Vencor Incorporated. Mr. Bellomy was National Director
of Vencare Ancillary Services for Vencor until he joined the Company.
TOM E. DAVIS has been President of the Inpatient Division of the Company
since January 1998 and joined the Company in January 1997 as Senior Vice
President of Operations. Prior to joining the Company, Mr. Davis was Group Vice
President for Quorum Health Resources from January 1990 to January 1997.
KEITH L. GODING has been Executive Vice President and Chief Development
Officer of the Company since February 1995.
ALFRED J. HOWARD has been President of the Outpatient Division of the
Company since August 1996. Prior to joining the Company he was President of the
Eastern Operations for Pacific Rehabilitation and Sports Medicine from October
1993 to August 1996.
HICKLEY M. WAGUESPACK has been Executive Vice President, Customer Service
and Retention of the Company since January 1998, was Chief Operating Officer of
the Company from March 1995 through December 1997, and was Senior Vice President
- - Operations from June 1991 until February 1995.
JOHN R. FINKENKELLER has been Senior Vice President and Chief Financial
Officer of the Company since June 1998, was elected Secretary in August 1998 and
was Senior Vice President and Treasurer since October 1991.
35
<PAGE> 36
ITEM 11. EXECUTIVE COMPENSATION
Information regarding executive compensation is contained under the caption
"Compensation of Executive Officers", included in the Proxy Statement for the
2000 Annual Meeting of Stockholders, which is incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Information regarding security ownership of certain beneficial owners and
management is contained under the captions "Voting Securities and Principal
Holders Thereof" and "Security Ownership by Management", included in the Proxy
Statement for the 2000 Annual Meeting of Stockholders, which is incorporated
herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Not applicable.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON
FORM 8-K
(a) The following documents are filed as part of this report:
(1)Financial Statements
Independent Auditors' Report
Consolidated Balance Sheets as of December 31, 1999 and 1998
Consolidated Statements of Earnings for the years ended
December 31, 1999, 1998 and 1997
Consolidated Statements of Stockholders' Equity for the years
ended December 31, 1999, 1998 and 1997
Consolidated Statements of Cash Flows for the years ended
December 31,1999, 1998 and 1997
Consolidated Statements of Comprehensive Earnings for the
years ended December 31, 1999, 1998 and 1997
Notes to Consolidated Financial Statements
(2)Financial Statement Schedules:
None
(3)Exhibits:
See Exhibit Index on page 38 of this Report.
(b) Reports on Form 8-K
No reports on Form 8-K were filed by the Registrant during the three months
ended December 31, 1999.
36
<PAGE> 37
SIGNATURES
Pursuant to the requirements of Section 13 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.
Dated: March 10, 2000
REHABCARE GROUP, INC.
(Registrant)
By: /s/ ALAN C. HENDERSON
----------------------
(Alan C. Henderson)
President and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the date indicated.
Signature Title Dated
/s/ ALAN C. HENDERSON President, Chief Executive March 10, 2000
--------------------------- Officer and Director
(Alan C. Henderson)
Principal Executive Officer
/s/ JOHN R. FINKENKELLER Senior Vice President March 10, 2000
---------------------------- and Chief Financial Officer
(John R. Finkenkeller)
Principal Financial Officer
/s/ WILLIAM G. ANDERSON Director March 10, 2000
----------------------------
(William G. Anderson)
/s/ RICHARD E. RAGSDALE Director March 10, 2000
----------------------------
(Richard E. Ragsdale)
/s/ JOHN H. SHORT Director March 10, 2000
----------------------------
(John H. Short)
/s/ H. EDWIN TRUSHEIM Director March 10, 2000
----------------------------
(H. Edwin Trusheim)
/s/ THEODORE M. WIGHT Director March 10, 2000
----------------------------
(Theodore M. Wight)
37
<PAGE> 38
EXHIBIT INDEX
3.1 Restated Certificate of Incorporation (filed as Exhibit 3.1 to the
Registrant's Registration Statement on Form S-1, dated May 9, 1991
[Registration No. 33-40467] and incorporated herein by reference)
3.2 Certificate of Amendment of Certificate of Incorporation (filed as Exhibit
3.1 to the Registrant's Report on Form 10-Q for the quarter ended May 31,
1995 and incorporated herein by reference)
3.3 Bylaws (filed as Exhibit 3.2 to the Registrant's Registration Statement
on Form S-1, dated May 9, 1991 [Registration No.33-40467] and incorporated
herein by reference)
4.1 Rights Agreement, dated September 21, 1992, by and between the Company and
Boatmen's Trust Company (filed as Exhibit 1 to the Company's Registration
Statement on Form 8-A filed September 24, 1992 and incorporated herein by
reference)
10.1 1987 Incentive Stock Option and 1987 Nonstatutory Stock Option Plans(filed
as Exhibit 10.1 to the Registrant's Registration Statement on Form S-1,
dated May 9, 1991 [Registration No. 33-40467] and incorporated herein by
reference)
10.2 Form of Stock Option Agreement (filed as Exhibit 10.2 to the Registrant's
Registration Statement on Form S-1, dated May 9, 1991 [Registration No.
33-40467] and incorporated herein by reference)
10.3 Employment Agreement with Alan C. Henderson, dated May 1, 1991 (filed as
Exhibit 10.4 to Amendment No. 1 to the Registrant's Registration Statement
on Form S-1, dated June 19, 1991 [Registration No. 33-40467] and incor-
porated herein by reference)
10.4 Form of Termination Compensation Agreement for Alan C. Henderson (filed
as Exhibit 10.6 to the Registrant's Registration Statement on Form S-1,
dated February 18, 1993 [Registration No. 33-58490] and incorporated
herein by reference)
10.5 Form of Termination Compensation Agreement for other executive officers
(filed as Exhibit 10.7 to the Registrant's Registration Statement on Form
S-1, dated February 18, 1993 [Registration No. 33-58490] and incorporated
herein by reference)
10.6 Supplemental Bonus Plan (filed as Exhibit 10.8 to the Registrant's
Registration Statement on Form S-1, dated February 18, 1993 [Registration
No. 33-58490] and incorporated herein by reference)
10.7 Deferred Profit Sharing Plan (filed as Exhibit 10.15 to the Registrant's
Registration Statement on Form S-1, dated February 18, 1993 [Registration
No.33-58490] and incorporated herein by reference)
10.8 RehabCare Executive Deferred Compensation Plan (filed as Exhibit 10.12 to
the Registrant's Report on Form 10-K, dated May 27, 1994 and incorporated
herein by reference)
10.9 RehabCare Directors' Stock Option Plan (filed as Appendix A to
Registrant's Proxy Statement for the 1994 Annual Meeting of Stockholders
and incorporated herein by reference)
38
<PAGE> 39
EXHIBIT INDEX (CONT'D)
10.10 Form of Subordinated Convertible Promissory Note of Registrant issued to
stockholders of Healthcare Staffing Solutions, Inc. d/b/a Health Tour
(filed as Exhibit 2.4 to the Registrant's Current Report on Form 8-K,
dated March 1, 1996 and incorporated herein by reference)
10.11 Stock Purchase Agreement, dated July 8, 1998 by and among Medical
Resources, Inc., HealthCare Staffing Solutions, Inc. and RehabCare Group,
Inc. (filed as Exhibit 2.1 to Registrant's Current Report on Form 8-K,
dated August 14, 1998 and incorporated herein by reference)
10.12 Escrow Agreement, dated as of August 14, 1998 by and among Medical
Resources Inc., RehabCare Group, Inc. and IBJ Schroder Bank & Trust
Company (filed as Exhibit 2.2 to Registrant's Current Report on Form 8-K,
dated August 14, 1998 and incorporated herein by reference)
10.13 L/C Procedures Agreement, dated as of July 8, 1998 by and between Medical
Resources, Inc. and RehabCare Group, Inc. (filed as Exhibit 2.3 to
Registrant's Current Report on Form 8-K, dated August 14, 1998 and
incorporated herein by reference)
10.14 Stock Purchase Agreement dated as of August 5, 1998 by and among RehabCare
Group Inc., Therapeutic Systems, Ltd. and Ronald C. Stauber (filed as
Exhibit 2.1 to Registrant's Current Report on Form 8-K, dated September 9,
1998 and incorporated herein by reference)
10.15 Amendment No. 1 to Stock Purchase Agreement dated as of September 9, 1998
by and among RehabCare Group, Inc., Therapeutic Systems, Ltd. and Ronald
C. Stauber (filed as Exhibit 2.2 to Registrant's Current Report on Form
8-K, dated September 9, 1998 and incorporated herein by reference)
10.16 Amended and Restated 1996 Long-Term Performance Plan (filed as Appendix A
to Registrant's Proxy Statement for the 1999 Annual Meeting of
Stockholders and incorporated herein by reference)
10.17 RehabCare Group, Inc. 1999 Non-employee Director Stock Plan (filed as
Appendix B to Registrant's Proxy statement for the 1999 Annual Meeting of
Stockholders and incorporated herein by reference)
13.1 Those portions of the Annual Report for the year ended December 31, 1999
of the Registrant included in response to Items 5 and 6 of Form 10-K 40
21.1 Subsidiaries of the Registrant 41
23 Consent of KPMG LLP 42
27 Financial Data Schedule 43
39
<PAGE> 40
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------
SIX-YEAR FINANCIAL SUMMARY
Dollars in thousands, except per share data
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
(Year ended December 31, unless noted) 1999 1998 1997 1996(1) 1996(2) 1995(2)
- ------------------------------------------------------------------------------------------------------------------
Statement of earnings data:
Operating revenues $309,425 $207,416 $160,780 $119,856 $89,377 $83,210
Operating earnings 29,922 23,331 18,980 12,717 10,276 8,531
Net earnings (3) 15,098 12,198 10,615 6,992 5,878 4,735
Net earnings per share (EPS):(3)(4)
Basic $ 2.30 $ 1.97 $ 1.77 $ 1.01 $ .87 $ .71
Diluted $ 2.07 $ 1.71 $ 1.47 $ .93 $ .84 $ .70
Weighted average shares outstanding (000s):(4)
Basic 6,572 6,184 5,999 6,955 6,725 6,614
Diluted 7,407 7,245 7,375 7,711 6,975 6,783
- ------------------------------------------------------------------------------------------------------------------
Balance sheet data:
Working capital $22,069 $20,606 $12,793 $ 9,254 $11,818 $5,460
Total assets 187,264 156,870 97,241 80,802 57,066 52,833
Total debt 69,395 65,855 39,014 17,467 7,125 10,200
Stockholders' equity 77,783 60,156 39,760 49,670 38,897 32,431
- ------------------------------------------------------------------------------------------------------------------
Financial statistics:
Operating margin 9.7% 11.3% 11.8% 10.6% 11.5% 10.2%
Net margin(5) 5.1% 5.8% 6.1% 5.8% 6.6% 5.7%
Current ratio 1.4:1 1.5:1 1.6:1 1.6:1 2.0:1 1.4:1
Diluted EPS growth rate (5) 26.5% 25.9% 45.2% 14.8% 20.0% 18.6%
Return on equity(5) (6) 22.8% 24.1% 21.8% 16.1% 16.5% 16.7%
- ------------------------------------------------------------------------------------------------------------------
Operating statistics:
Inpatient (acute rehab and skilled nursing):
Average number of programs 131.8 128.2 110.3 91.3 84.7 84.1
Average admissions per program 369 354 321 294 279 261
Average length of stay (billable) 14.3 14.5 15.0 15.9 17.3 18.4
Patient days (billable) 697,769 656,363 532,195 426,995 408,385 403,784
Outpatient:
Average number of locations 40.0 26.1 17.9 19.6 21.2 13.6
Patient visits 785,943 378,108 231,256 223,904 278,970 135,064
Therapy staffing - Number of weeks worked 131,110 52,265 29,652 21,908 -- --
Contract therapy - Average number of locations 90.8 49.5 35.6 -- -- --
-----------------------------------------------------------------------------------------------------------------
(1) For comparability purposes, reflects the twelve months ended December 31, 1996.
(2) Twelve month period ended last day of February.
(3) 1999 includes a pre-tax loss of $1.0 million ($0.6 million after tax or $0.09 per share) on write-down of
investments. 1998 and 1997 include pre-tax gains of $1.5 million ($0.9 million after tax or $0.12 per
share) and $1.4 million ($0.9 million after tax or $0.12 per share), respectively, from sales of
marketable securities. 1998 includes an $0.8 million ($0.11 per share) after-tax charge for the
cumulative effect of change in accounting for start-up costs.
(4) Share data adjusted for 3-for-2 stock split in October 1997.
(5) Excludes write-down of investments, gains from sale of marketable securities and charge for the cumulative
effect of change in accounting principle described in (3).
(6) Average of beginning and ending equity.
- -------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------
STOCK DATA
The Company's common stock is listed and traded on years and has not declared any dividends during the current
the New York Stock Exchange under the symbol "RHB". fiscal year. The Company does not anticipate paying cash
The stock prices below are the high and low sale dividends in the foreseeable future. The number of holders
prices. of the Company's common stock as of March 14, 2000 was
<S> <C> <C> <C> <C>
Calendar Quarter 1st 2nd 3rd 4th approximately 3,503 including 138 shareholders of record
- --------------------------------------------------- and an estimated 3,365 persons or entities holding common
1999: High $22.69 $22.13 $21.63 $21.38 stock in nominee name.
Low 15.06 13.81 17.50 15.00
- --------------------------------------------------- Shareholders may receive earnings news releases, which
1998: High 27.50 31.75 25.13 21.00 provide timely financial information, by notifying our
Low 20.63 21.75 11.88 11.00 investor relations department or by visiting our website.
http://www.rehabcare.com
The Company has not paid dividends on its common
stock during the two most recently completed fiscal
</TABLE>
40
<PAGE> 41
Exhibit 21.1
Subsidiaries of Registrant
Healthcare Staffing Solutions, Inc. Incorporated in the Commonwealth
d/b/a Health Tour of Massachusetts
Health Tour Management, Inc. Incorporated in the Commonwealth
of Massachusetts
RehabCare Group Therapy Services, Inc. Incorporated in the State of Delaware
RehabCare Group East, Inc. Incorporated in the State of Delaware
RehabCare Group Management Services, Inc. Incorporated in the State of Delaware
RehabCare Group of California, Inc. Incorporated in the State of Delaware
RehabCare Group of Texas Holdings, Inc. Incorporated in the State of Delaware
RehabCare Group of Texas, L.P. Organized in the State of Texas
StarMed Management, L.L.C. Incorporated in the State of Delaware
StarMed Health Personnel, Inc. Incorporated in the State of Delaware
Wesley Medical Resources, Inc. Incorporated in the State of Delaware
eai Healthcare Staffing Solutions, Inc. Incorporated in the State of Delaware
Salt Lake Physical Therapy Associates, Inc Incorporated in the State of Utah
AllStaff, Inc. Incorporated in the State of Iowa
41
<PAGE> 42
Exhibit 23
Independent Auditors' Consent
The Board of Directors
RehabCare Group, Inc.:
We consent to the incorporation by reference in the registration statement No.
33-82106 on Form S-8, registration statement No. 33-82048 on Form S-8,
registration statement No. 333-11311 on Form S-8 as amended, and registration
statement No. 333-86679 on Form S-8 of RehabCare Group, Inc. of our report dated
February 4, 2000, with respect to the consolidated balance sheets of RehabCare
Group, Inc. and subsidiaries as of December 31, 1999 and 1998, and the related
consolidated statements of earnings, stockholders' equity, cash flows and
comprehensive earnings for each o f the years in the three-year period ended
December 31, 1999, which report is included in the December 31, 1999 annual
report on Form 10-K of RehabCare Group, Inc.
As discussed in note 1 to the consolidated financial statements, the Company
changed its method of accounting for start-up costs on January 1, 1998.
/s/KPMG LLP
St. Louis, Missouri
March 27, 2000
42
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-31-1999
<PERIOD-END> DEC-31-1999
<CASH> 738,000
<SECURITIES> 3,019,000
<RECEIVABLES> 70,354,000
<ALLOWANCES> 4,577,000
<INVENTORY> 0
<CURRENT-ASSETS> 75,532,000
<PP&E> 12,985,000
<DEPRECIATION> 6,257,000
<TOTAL-ASSETS> 187,264,000
<CURRENT-LIABILITIES> 53,463,000
<BONDS> 51,050,000
0
0
<COMMON> 33,258,000
<OTHER-SE> 44,525,000
<TOTAL-LIABILITY-AND-EQUITY> 187,264,000
<SALES> 309,425,000
<TOTAL-REVENUES> 309,425,000
<CGS> 221,892,000
<TOTAL-COSTS> 279,503,000
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 4,142,000
<INCOME-PRETAX> 25,027,000
<INCOME-TAX> 9,929,000
<INCOME-CONTINUING> 15,098,000
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 15,098,000
<EPS-BASIC> 2.30
<EPS-DILUTED> 2.07
</TABLE>
