-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, Azi0w8vKEIHYBlM6pVlrl4SJ2SMAXzulLSoSUPRbQAF4z0hUgtfx2/blyG6v6MyM jWwTmftHgacT682XNtr+sA== 0000812191-04-000044.txt : 20040806 0000812191-04-000044.hdr.sgml : 20040806 20040806131931 ACCESSION NUMBER: 0000812191-04-000044 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 1 CONFORMED PERIOD OF REPORT: 20040630 FILED AS OF DATE: 20040806 FILER: COMPANY DATA: COMPANY CONFORMED NAME: REHABCARE GROUP INC CENTRAL INDEX KEY: 0000812191 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-HOSPITALS [8060] IRS NUMBER: 510265872 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 001-14655 FILM NUMBER: 04957153 BUSINESS ADDRESS: STREET 1: 7733 FORSYTH BLVD 17TH FLR STREET 2: SUITE 1700 CITY: ST LOUIS STATE: MO ZIP: 63105 BUSINESS PHONE: 3148637422 FORMER COMPANY: FORMER CONFORMED NAME: REHABCARE CORP DATE OF NAME CHANGE: 19940218 10-Q 1 tenq8904.txt UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q (X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended June 30, 2004 ------------- Commission File Number 0-19294 OR ( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from to - REHABCARE GROUP, INC. --------------------- (Exact name of Registrant as specified in its charter) Delaware 51-0265872 - ------------------------------ --------------------------------------- (State or other jurisdiction of (I.R.S. Employer Identification Number) incorporation or organization) 7733 Forsyth Boulevard, Suite 2300, St. Louis, MO 63105 ------------------------------------------------------- (Address of principal executive offices and zip code) 314-863-7422 -------------------------------------------------- (Registrant's telephone number, including area code) Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No _____ ----- Indicate by check mark whether the Registrant is an accelerated filer (as defined in Rule 12b-2 of the Act.) Yes X No _____ ----- Indicate the number of shares outstanding of the Registrant's common stock, as of the latest practicable date. Class Outstanding at August 3, 2004 - -------------------------------------- ----------------------------- Common Stock, par value $.01 per share 16,285,468 1 of 28 REHABCARE GROUP, INC. Index Part I. - Financial Information Item 1. - Condensed Consolidated Financial Statements Condensed consolidated balance sheets, June 30, 2004 (unaudited) and December 31, 2003 3 Condensed consolidated statements of earnings for the three months and six months ended June 30, 2004 and 2003 (unaudited) 4 Condensed consolidated statements of cash flows for the six months ended June 30, 2004 and 2003 (unaudited) 5 Notes to condensed consolidated financial statements (unaudited) 6 Item 2. - Management's Discussion and Analysis of Financial Condition and Results of Operations 16 Item 3. - Quantitative and Qualitative Disclosures about Market Risks 24 Item 4. - Controls and Procedures 24 Part II. - Other Information 25 Item 1. - Legal Proceedings 25 Item 6. - Exhibits and Reports on Form 8-K 27 Signatures 28 2 of 28 PART 1. - FINANCIAL INFORMATION Item 1. - Condensed Consolidated Financial Statements - -----------------------------------------------------
REHABCARE GROUP, INC. Condensed Consolidated Balance Sheets (dollars in thousands, except share and per share data) June 30, December 31, 2004 2003 ---- ---- Assets (unaudited) ------ Current assets: Cash and cash equivalents $ 35,666 $ 28,320 Restricted cash 3,052 -- Marketable securities, available-for-sale -- 10,065 Accounts receivable, net of allowance for doubtful accounts of $4,997 and $3,422, respectively 65,954 62,744 Income taxes receivable 2,202 -- Deferred tax assets 8,308 14,706 Other current assets 1,975 1,912 ------- ------- Total current assets 117,157 117,747 Marketable securities, trading 3,887 3,665 Equipment and leasehold improvements, net 13,255 14,063 Excess of cost over net assets acquired, net 62,391 48,729 Intangible assets, net 10,208 48 Assets held for sale -- 46,171 Investment in unconsolidated affiliate 39,537 -- Other 3,225 3,203 ------- ------- Total assets $249,660 $233,626 ======= ======= Liabilities and Stockholders' Equity ------------------------------------ Current liabilities: Current portion of long-term debt $ 720 $ -- Accounts payable 1,390 763 Accrued salaries and wages 27,386 24,035 Accrued expenses 16,454 14,800 Income taxes payable -- 1,197 ------- ------- Total current liabilities 45,950 40,795 Long-term debt, less current portion 3,540 -- Deferred compensation 3,915 3,682 Deferred tax liabilities 5,571 1,423 Liabilities held for sale -- 9,771 ------- ------- Total liabilities 58,976 55,671 ------- ------- Stockholders' equity: Preferred stock, $.10 par value, authorized 10,000,000 shares, none issued and outstanding -- -- Common stock, $.01 par value; authorized 60,000,000 shares, issued 20,286,866 shares and 20,144,577 shares as of June 30, 2004 and December 31, 2003, respectively 203 201 Additional paid-in capital 116,623 114,704 Retained earnings 128,562 117,753 Less common stock held in treasury at cost, 4,002,898 shares as of June 30, 2004 and December 31, 2003 (54,704) (54,704) Accumulated other comprehensive earnings -- 1 ------- ------- Total stockholders' equity 190,684 177,955 ------- ------- Total liabilities and stockholders' equity $249,660 $233,626 ======= =======
See accompanying notes to condensed consolidated financial statements. 3 of 28
REHABCARE GROUP, INC. Condensed Consolidated Statements of Earnings (amounts in thousands, except per share data) (Unaudited) Three Months Ended Six Months Ended June 30, June 30, 2004 2003 2004 2003 ---- ---- ---- ---- Operating revenues $90,944 $136,043 $195,441 $274,885 Costs and expenses: Operating expenses 64,643 102,215 140,710 206,905 Selling, general & administrative: Divisions 7,863 17,137 17,536 35,427 Corporate 6,276 6,939 12,593 13,735 Restructuring (51) -- 1,615 -- Gain on sale of business -- -- (485) -- Depreciation and amortization 2,010 2,106 3,778 4,345 ------ ------- ------- ------- Total costs and expenses 80,741 128,397 175,747 260,412 ------ ------- ------- ------- Operating earnings 10,203 7,646 19,694 14,473 Interest income 55 29 111 43 Interest expense (266) (183) (483) (348) Other income (expense), net (43) (53) (50) (73) ------ ------- ------- ------- Earnings before income taxes and equity in net loss of affiliate 9,949 7,439 19,272 14,095 Income taxes 4,136 2,982 8,000 5,594 Equity in net loss of affiliate (110) -- (463) -- ------ ------- ------- ------- Net earnings $ 5,703 $ 4,457 $ 10,809 $ 8,501 ====== ======= ======= ======= Net earnings per common share: Basic $ 0.35 $ 0.28 $ 0.67 $ 0.53 ====== ======= ======= ======= Diluted $ 0.34 $ 0.27 $ 0.64 $ 0.52 ====== ======= ======= ======= Weighted-average number of common shares outstanding: Basic 16,221 15,945 16,194 15,898 ====== ======= ======= ======= Diluted 16,794 16,444 16,769 16,469 ====== ======= ======= =======
See accompanying notes to condensed consolidated financial statements. 4 of 28
REHABCARE GROUP, INC. Condensed Consolidated Statements of Cash Flows (dollars in thousands) (Unaudited) Six Months Ended June 30, 2004 2003 ---- ---- Cash flows from operating activities: Net earnings $ 10,809 $ 8,501 Adjustments to reconcile net earnings to net cash provided by operating activities: Depreciation and amortization 3,778 4,345 Provision for doubtful accounts 2,116 1,612 Equity in net loss of affiliates 463 Write-down of investment -- 50 Income tax benefit realized on employee stock option exercises 894 583 Restructuring 1,615 -- Gain on sale of business (485) -- Change in assets and liabilities: Accounts receivable, net (1,026) (695) Prepaid expenses and other current assets (63) 192 Other assets 31 189 Net assets held for sale 1,903 -- Accounts payable and accrued expenses (655) 467 Accrued salaries and wages 2,073 (352) Deferred compensation 369 (608) Income taxes 4,245 346 ------ ------ Net cash provided by operating activities 26,067 14,630 ------ ------ Cash flows from investing activities: Additions to equipment and leasehold improvements, net (2,187) (2,397) Purchase of marketable securities (1,291) (189) Proceeds from sale/maturities of marketable securities 10,998 787 Increase in restricted cash (3,052) -- Disposition of business (3,931) -- Purchase of businesses, net of cash acquired (19,557) Other, net (434) (342) ------ ------ Net cash used in investing activities (19,454) (2,141) ------ ------ Cash flows from financing activities: Principal payments on long term debt (180) -- Exercise of stock options 913 1,452 ------ ------ Net cash provided by financing activities 733 1,452 ------ ------ Net increase in cash and cash equivalents 7,346 13,941 Cash and cash equivalents at beginning of period 28,320 9,580 ------ ------ Cash and cash equivalents at end of period $ 35,666 $ 23,521 ====== ======
See accompanying notes to condensed consolidated financial statements. 5 of 28 REHABCARE GROUP, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS ---------------------------------------------------- Six Month Periods Ended June 30, 2004 and 2003 (Unaudited) Note 1. - Basis of Presentation - ------------------------------- The condensed consolidated balance sheets and related condensed consolidated statements of earnings, and cash flows contained in this Form 10-Q, which are unaudited, include the accounts of RehabCare Group, Inc. and its wholly owned subsidiaries (the "Company"). The Company accounts for its investment in a less than 50% owned affiliate using the equity method. All significant intercompany accounts and activity have been eliminated in consolidation. In the opinion of management, all entries necessary for a fair presentation of such financial statements have been included. The results of operations for the three months and six months ended June 30, 2004, are not necessarily indicative of the results to be expected for the fiscal year. Certain prior year amounts have been reclassified to conform to current year presentation. The condensed consolidated financial statements do not include all information and footnotes necessary for a complete presentation of financial position, results of operations and cash flows in conformity with U.S. generally accepted accounting principles. Reference is made to the Company's audited consolidated financial statements and the related notes as of December 31, 2003 and 2002 and for each of the years in the three-year period ended December 31, 2003, included in the Annual Report on Form 10-K on file with the Securities and Exchange Commission, which provide additional disclosures and a further description of the Company's accounting policies. Note 2. - Critical Accounting Policies and Estimates - ---------------------------------------------------- The Company's condensed consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles. Preparation of these statements requires management to make judgments and estimates. Some accounting policies have a significant impact on amounts reported in these financial statements. A summary of significant accounting policies and a description of accounting policies that are considered critical may be found in our 2003 Annual Report on Form 10-K, filed on March 12, 2004, in the Critical Accounting Policies and Estimates section of "Item 7. - Management's Discussion and Analysis of Financial Condition and Results of Operations." 6 of 28 REHABCARE GROUP, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) ---------------------------------------------------------------- Note 3. - Stock-Based Compensation - ---------------------------------- The Company accounts for stock-based employee compensation plans using the intrinsic value method under Accounting Principles Board Opinion No. 25 and related interpretations. Accordingly, stock-based employee compensation cost is not reflected in net earnings, as all stock options granted under the plans had an exercise price equal to the market value of the underlying common stock on the date of grant. 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 Statement No. 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:
Three Months Ended Six Months Ended June 30, June 30, 2004 2003 2004 2003 ---- ---- ---- ---- (in thousands, except per share data) Net earnings, as reported $5,703 $4,457 $10,809 $8,501 Deduct: Total stock-based employee compensation expense determined under fair value based method for all awards, net of related tax effects 1,029 1,083 1,865 2,181 ----- ----- ------ ----- Pro forma net earnings $4,674 $3,374 $ 8,944 $6,320 ===== ===== ====== ===== Basic net earnings per share: As reported $ 0.35 $ 0.28 $ 0.67 $ 0.53 ==== ==== ==== ==== Pro forma $ 0.29 $ 0.21 $ 0.55 $ 0.40 ==== ==== ==== ==== Diluted net earnings per share:As reported $ 0.34 $ 0.27 $ 0.64 $ 0.52 ==== ==== ==== ==== Pro forma $ 0.28 $ 0.21 $ 0.53 $ 0.38 ==== ==== ==== ====
Note 4. - Restricted Cash and Other Insurance Collateral Commitments - -------------------------------------------------------------------- Under the terms of the Company's general and professional liability insurance policy, the insurance carrier requires that we provide collateral for reimbursement of claim payments. As one component of the collateral, we have entered into a trust agreement with our insurance carrier under which we have deposited $3.1 million for its benefit in an escrow account. Our access to this cash is restricted and the insurance carrier may only draw on these funds in the event of a default as defined in the trust agreement. The Company also has $10.0 million in letters of credit issued to insurance carriers as collateral for reimbursement of claims. The letters of credit reduce the amount the Company may borrow against its $125 million line of credit. Finally, the Company has a $4.2 million prommissory note issued to its workers compensation carrier as additional collateral. The prommissory note is not recorded as a liability on the balance sheet as it only becomes payable upon an event of default as defined in the workers compensation security agreement. Note 5. - Net earnings per share - -------------------------------- Basic net earnings per share excludes dilution and is computed by dividing income available to common stockholders by the weighted average common shares outstanding for the period. Diluted net earnings per share reflects the potential dilution that could occur if securities or other contracts to issue common stock were exercised and converted into common stock or resulted in the issuance of common stock that then shared in the earnings of the entity (as calculated utilizing the treasury stock method). 7 of 28 REHABCARE GROUP, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) ---------------------------------------------------------------- The following table sets forth the computation of basic and diluted net earnings per share:
Three Months Ended Six Months Ended June 30, June 30, 2004 2003 2004 2003 ---- ---- ---- ---- (in thousands, except per share data) Numerator: Numerator for basic/diluted net earnings per share - net earnings available to common stockholders $ 5,703 $ 4,457 $10,809 $ 8,501 ====== ====== ====== ====== Denominator: Denominator for basic net earnings per share - weighted-average shares outstanding 16,221 15,945 16,194 15,898 Effect of dilutive securities: Stock options 573 499 575 571 ------ ------ ------ ------ Denominator for diluted net earnings per share - adjusted weighted-average shares 16,794 16,444 16,769 16,469 ====== ====== ====== ====== Basic net earnings per share $ 0.35 $ 0.28 $ 0.67 $ 0.53 ====== ====== ====== ====== Diluted net earnings per share $ 0.34 $ 0.27 $ 0.64 $ 0.52 ====== ====== ====== ======
Note 6. - Comprehensive Income - ------------------------------ Comprehensive income for the three-month and six-month periods ended June 30, 2004 consisted only of net income. For the three-month and six-month periods ended June 30, 2003, the Company's only adjustment from net income to comprehensive income was the net of tax impact of unrealized holding gains on marketable securities in the amount of $2,000 for each period. Note 7. - Sale of Business - -------------------------- On February 2, 2004, the Company completed the sale of its StarMed staffing division to InteliStaf Holdings, Inc. ("InteliStaf") in consideration for approximately 25% of InteliStaf on a fully diluted basis. The transaction was effected as a purchase by InteliStaf of all of the outstanding common stock of StarMed Health Personnel, Inc., the operating company for our staffing business. At December 31, 2003, the assets and liabilities of StarMed were reported as assets and liabilities held for sale and were recorded at their estimated fair market value less estimated costs to sell. Upon consummating the sale on February 2, 2004, the Company recorded a gain of $485,000 as a result of adjusting the estimated costs to sell for then current information, recording a liability for the estimated fair market value of the indemnification provided to InteliStaf in accordance with the sale agreement and as a result of changes in the underlying asset and liability balances between December 31, 2003 and February 2, 2004. This gain will be subject to further refinement once the closing balance sheet has been agreed to by the parties and all costs to sell have been finalized. These adjustments are not expected to be material. 8 of 28 REHABCARE GROUP, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) ---------------------------------------------------------------- As stated above, as part of the sale agreement, the Company indemnified InteliStaf from certain obligations and liabilities, whether known or unknown, which arose out of the operation of StarMed prior to February 2, 2004. As of June 30, 2004, the Company has approximately $1.0 million accrued for this indemnification. This liability is reported in accrued expenses on the June 30, 2004 balance sheet. Note 8. - Investment in Unconsolidated Affiliate - ------------------------------------------------ As stated in note 7, the Company sold its StarMed staffing business to InteliStaf on February 2, 2004 in exchange for a 25% interest in InteliStaf on a fully diluted basis. The Company uses the equity method to account for its investment in InteliStaf and recorded its initial investment at its fair value of $40 million, as determined by a third party valuation firm. A summary of the results of operations for the three months ended June 30, 2004 and the period from February 2, 2004 to June 30, 2004 and financial position as of June 30, 2004 follows (dollars in thousands):
Period from Three Months Ended February 2, 2004 to June 30, 2004 June 30, 2004 ------------- ------------- Net operating revenues $ 82,970 $144,681 Operating earnings (loss) 630 (958) Net loss (305) (1,716) June 30, 2004 ------------- Current assets $ 69,100 Noncurrent assets 101,873 ------- Total assets $170,973 ======= Current liabilities $ 37,268 Noncurrent liabilities 46,446 ------- Total liabilities $ 83,714 =======
The value of the Company's investment in InteliStaf at the transaction date exceeded its share of the book value of InteliStaf's stockholders' equity by approximately $17.8 million. This excess has been accounted for as excess cost over net assets acquired (although reported as a component of investment in unconsolidated affiliate) and will be reviewed for impairment in accordance with the terms of APB Opinion No. 18, "The Equity Method of Accounting for Investments in Common Stock." Note 9. - Restructuring Costs - ----------------------------- On July 30, 2003, the Company announced a comprehensive multifaceted restructuring program to return the Company to growth and improved profitability. As a result of the restructuring plan, the Company recognized a pre-tax restructuring expense of $1.3 million for severance, outplacement and exit costs. As reported in note 7, the Company sold its StarMed staffing division to InteliStaf on February 2, 2004. In connection with this sale, the Company initiated a series of restructuring activities to reduce the cost of corporate overhead that had previously been absorbed by the staffing division. These activities included the elimination of approximately 40 positions, exiting a portion of leased office space at the Company's corporate headquarters and the write-off of certain abandoned leasehold improvements associated with the office space consolidation. In addition, 9 of 28 REHABCARE GROUP, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) ---------------------------------------------------------------- the Company modified the term of the stock options of certain StarMed employees to allow them additional time to exercise vested options after leaving the employment of the Company. This action triggered a new measurement date for the modified options. The corresponding expense has been included in the severance component of the restructuring charge. As a result of these actions, the Company recorded a pre-tax restructuring charge in the first quarter of 2004 of approximately $1.7 million. During the second quarter of 2004, the Company reassessed the restructuring reserve remaining related to the actions taken during the third quarter of 2003 and determined that the reserve for severance costs was in excess of the remaining estimated costs. Accordingly, approximately $51,000 of the reserve was reversed to income. Additionally, the Company determined that the reserve remaining for lease exit costs was approximately $16,000 less than the remaining expected costs. A portion of the excess severance cost reserve was reclassified to the lease exit cost reserve. The following table summarizes the year-to-date activity, through June 30, 2004, with respect to these restructuring activities:
(dollars in thousands) Leasehold Improvement Severance Exit Costs Write-off Total --------- ---------- --------- ----- Balance at December 31, 2003 $ 351 $ 145 $ -- $ 496 Restructuring charge 736 520 359 1,615 Reclassification (16) 16 -- -- Cash payments and non-cash utilization (891) (91) (359) (1,341) ---- ---- ---- ------ Balance June 30, 2004 $ 180 $ 590 $ -- $ 770 ==== ==== ==== ======
Note 10. - Business Combinations - -------------------------------- On February 2, 2004, the Company purchased the assets of CPR Therapies, Inc. ("CPR") for cash and notes. CPR, headquartered in Denver, Colorado, is a contract therapy services company for physical rehabilitation services in skilled nursing and assisted living facilities with a significant market presence in Colorado and California. CPR's annual operating revenues are approximately $9 million. The purchase price, including estimated direct acquisition costs, of CPR has been allocated as follows (in thousands of dollars):
Equipment and leasehold improvements, net $ 16 Identifiable intangibles, principally trade name, customer relationships and noncompete agreements 1,660 Excess of cost over net assets acquired 2,425 ------ $ 4,101 ======
In accordance with the terms of the purchase agreement, the seller is entitled to additional earn-out consideration up to, but not exceeding, $799,000. The payment of this earn-out is contingent upon the execution of new therapy contracts as defined in the agreement. Any contingent consideration paid as a result of this contract provision will be recorded at the time the contingency is resolved. Effective March 1, 2004, the Company purchased from Health Net, Inc. all of the outstanding common stock of American VitalCare, Inc. and its sister company, Managed Alternative Care, Inc. (collectively "VitalCare") for cash and notes. VitalCare provides management services to hospital based specialty care units in the state of California generating annual operating revenues of approximately $14 million. 10 of 28 REHABCARE GROUP, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) ---------------------------------------------------------------- The purchase price, including estimated direct acquisition costs, of VitalCare has been allocated as follows (in thousands of dollars):
Accounts receivable, net of allowance $ 2,978 Equipment and leasehold improvements, net 39 Other long-term assets 12 Identifiable intangibles, principally trade name, customer relationships, contractual customer relationships and noncompete agreements 8,790 Excess of cost over net assets acquired 6,859 Net deferred tax liabilities (2,902) Accounts payable (272) Accrued wages and salaries (514) ------ $14,990 ======
During the second quarter of 2004, the purchase price was adjusted based on the balances contained in the closing balance sheet of VitalCare as agreed to by the parties. This adjustment is reflected in the balances reported above. The final purchase price may be further increased or decreased for an adjustment, as defined in the agreement, related to the retention and/or termination of customer contracts for a period of time after the purchase date. On May 3, 2004, the Company purchased the assets of Phase 2 Consulting, Inc. ("Phase 2") for cash. Phase 2, with offices in Salt Lake City and Austin, is a management consulting firm to the healthcare industry with annual operating revenues of approximately $8 million. The purchase price, including estimated direct acquisition costs, has been allocated as follows (in thousands of dollars):
Current assets $ 1,324 Long-term assets 96 Trade name 310 Excess of cost over net assets acquired 4,378 Accounts payable and accrued expenses (657) ------ $ 5,451 ======
The purchase price is subject to modification based on a final settlement of the closing balance sheet. John Short, Ph.D., the managing director of Phase 2, is President and Chief Executive Officer of the Company and a member of the Company's Board of Directors. The following pro forma information assumes the acquisitions of CPR, VitalCare and Phase 2 occurred at the beginning of each of the three-month and six-month periods presented. This information is not necessarily indicative either of results of operations that would have occurred had the purchases actually been made at the beginning of the periods presented, or of the future results of the Company.
Three Months Ended Six Months Ended June 30, June 30, 2004 2003 2004 2003 ---- ---- ---- ---- (in thousands,except per share data) Operating revenues $91,771 $144,489 $201,355 $291,127 Net earnings $ 5,837 $ 5,341 $ 11,123 $ 10,064 Diluted net earnings per share $ 0.35 $ 0.32 $ 0.66 $ 0.61
11 of 28 REHABCARE GROUP, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) ---------------------------------------------------------------- Note 11. - Excess of Cost Over Net Assets Acquired and Other Intangible Assets - ------------------------------------------------------------------------------ At June 30, 2004 and 2003, the Company had the following excess of cost over net assets acquired and other intangible asset balances:
(dollars in thousands) June 30, 2004 June 30, 2003 ------------- ------------- Gross Gross Carrying Accumulated Carrying Accumulated Amount Amortization Amount Amortization ------ ------------ ------ ------------ Amortized Intangible Assets: Noncompete agreements $ 320 $ (34) $ -- $ -- Contractual customer relationships 8,800 (618) 100 (39) ----- ---- --- --- Total $9,120 $ (652) $ 100 $ (39) ===== ==== === === Unamortized Intangible Assets: Trade names $1,740 $ -- ===== ===
Amortization expense was approximately $424,000 and $600,000 for the quarter and six-month period ended June 30, 2004, respectively and approximately $7,000 and $13,000 for the quarter and six-month period ended June 30, 2003, respectively. Estimated annual amortization expense for the next 5 years is: 2004 - $1.5 million; 2005 - $1.7 million; 2006 - $1.7 million; 2007 - $1.0 million and 2008 - $0.8 million. The changes in the carrying amount of excess of cost over net assets acquired for the six months ended June 30, 2004 are as follows:
(dollars in thousands) Hospital Rehabilitation Contract Services Therapy Other Total -------- ------- ----- ----- Balance at December 31, 2003 $35,739 $12,990 $ -- $48,729 Acquisitions 6,859 2,425 4,378 13,662 ------ ------ ----- ------ Balance June 30, 2004 $42,598 $15,415 $4,378 $62,391 ====== ====== ===== ======
Note 12. - Long-term Debt - ------------------------- As part of the purchases of CPR and VitalCare, the Company issued long-term subordinated promissory notes to the respective selling parties. In the case of CPR, the Company issued a promissory note with a face value of $1.44 million and a stated interest rate of 8%. Principal is due in eight equal quarterly installments starting on May 1, 2004 along with accrued but unpaid interest. On June 30, 2004, the remaining principal balance on this note was $1.26 million. In the VitalCare acquisition, the Company issued a promissory note with a face value of $3 million and a stated interest rate of 7%. Interest is payable on August 31, 2004, November 30, 2004 and August 31, 2005 and the principal is payable in full on August 31, 2005. 12 of 28 REHABCARE GROUP, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) ---------------------------------------------------------------- Note 13. - Industry Segment Information - --------------------------------------- Prior to February 2, 2004, when the Company sold its healthcare staffing division, the Company operated in two business segments that were managed separately based on fundamental differences in operations: program management services and healthcare staffing services. Program management includes hospital rehabilitation services (including inpatient acute rehabilitation and skilled nursing units and outpatient therapy programs) and contract therapy programs. Virtually all of the Company's services are provided in the United States. Summarized information about the Company's operations for the three months and six months ended June 30, 2004 and 2003 in each industry segment is as follows:
Three Months Ended Six Months Ended June 30, June 30, 2004 2003 2004 2003 ---- ---- ---- ---- Operating Revenues from (in thousands) Unaffiliated Customers - -------------------------- Program management: Hospital rehabilitation services $ 48,518 $ 46,313 $ 95,605 $ 92,472 Contract therapy 41,028 32,914 81,782 63,840 ------- ------- ------- ------- Program management total 89,546 79,227 177,387 156,312 Healthcare staffing -- 57,194 16,727 119,310 Other 1,398 -- 1,398 -- ------- ------- ------- ------- Subtotal 90,944 136,421 195,512 275,622 Less Intercompany revenues* -- (378) (71) (737) ------- ------- ------- ------- Total $ 90,944 $136,043 $195,441 $274,885 ======= ======= ======= ======= *Intercompany revenues represent healthcare staffing sales made to hospital rehabilitation services and contract therapy at market rates.
Three Months Ended Six Months Ended June 30, June 30, 2004 2003 2004 2003 ---- ---- ---- ---- Operating Earnings (in thousands) - -------------------------- Program management: Hospital rehabilitation services $ 8,064 $ 7,943 $ 16,861 $ 15,017 Contract therapy 1,979 1,812 4,417 3,551 ------ ------ ------ ------ Program management total 10,043 9,755 21,278 18,568 Healthcare staffing -- (2,109) (78) (4,095) Other 109 -- 109 -- ------ ------ ------ ------ Subtotal 10,152 7,646 21,309 14,473 Restructuring charge 51 -- (1,615) -- ------ ------ ------ ------ Total $ 10,203 $ 7,646 $ 19,694 $ 14,473 ====== ====== ====== ======
13 of 28 REHABCARE GROUP, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) ----------------------------------------------------------------
Three Months Ended Six Months Ended June 30, June 30, 2004 2003 2004 2003 ---- ---- ---- ---- Depreciation and Amortization (in thousands) - ----------------------- Program management: Hospital rehabilitation services $ 1,355 $ 1,305 $ 2,381 $ 2,772 Contract therapy 652 332 1,394 650 ------ ------ ------ ------ Program management total 2,007 1,637 3,775 3,422 Healthcare staffing -- 469 -- 923 Other 3 -- 3 -- ------ ------ ------ ------ Total $ 2,010 $ 2,106 $ 3,778 $ 4,345 ====== ====== ====== ======
Three Months Ended Six Months Ended June 30, June 30, 2004 2003 2004 2003 ---- ---- ---- ---- Capital Expenditures (in thousands) - ------------------------ Program management: Hospital rehabilitation services $ 477 $ 447 $ 1,137 $ 802 Contract therapy 486 354 1,037 630 ------ ------ ------ ------ Program management total 963 801 2,174 1,432 Healthcare staffing -- 682 -- 965 Other 13 -- 13 -- ------ ------ ------ ------ Total $ 976 $ 1,483 $ 2,187 $ 2,397 ====== ====== ====== ======
Excess of Cost Over Net Total Assets Assets Acquired, Net ------------ ------------- June 30, June 30, 2004 2003 2004 2003 ---- ---- ---- ---- (in thousands) Program management: Hospital rehabilitation services $152,865 $121,677 $ 42,598 $ 35,739 Contract therapy 50,913 38,037 15,415 12,990 ------- ------- ------- ------- Program management total 203,778 159,714 58,013 48,729 Healthcare staffing -- 86,885 -- 52,956 Other 6,345 -- 4,378 -- Corporate - investment in unconsolidated affiliate 39,537 -- -- -- ------- ------- ------- ------- Total $249,660 $246,599 $ 62,391 $101,685 ======= ======= ======= =======
14 of 28 REHABCARE GROUP, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) ---------------------------------------------------------------- Note 14. - Related Party Transactions - ------------------------------------- During the third quarter of 2003, the Board of Directors approved and the Company entered into a contract with a software vendor to develop a new public website for the Company. John H. Short, President and Chief Executive Officer and a director of our Company, and Theodore M. Wight, a director of our Company, are also directors of the software vendor company. Messrs. Wight and Short and their affiliated entities own 27.3% and 5.5% of the fully diluted capitalization of the software company, respectively. The contract amount was for $320,000 and was later modified for additional costs of $34,500. The work on this project is complete. During the first quarter of 2004, the Company entered into an addendum to the aforementioned contract with the same software vendor to identify and document the actual costs and timeline required to complete the Company's employee portal/HR center project. The addendum to the contract was for the amount of $47,000 plus out of pocket expenses. The project was completed in the second quarter of 2004. In addition, during the second quarter of 2004, the Company engaged the software vendor in several other minor projects with a total aggregate cost of less than $10,000. During 2003, the Company entered into an agreement with Phase 2. Per the terms of the agreement, Phase 2 provided the Company with management, consulting and advisory services, including having John H. Short, Ph.D., the managing director of Phase 2 and a member of the Company's Board of Directors, serve as Interim President and Chief Executive Officer of the Company. A monthly consulting fee of $55,000 was paid to Phase 2 during the term of the agreement plus reimbursement of business expenses. In addition, Phase 2 was entitled to an incentive fee based on predetermined performance standards. On May 3, 2004, the Company acquired Phase 2 and elected Dr. Short as President and Chief Executive Officer of the Company. The advisory services agreement with Phase 2 was terminated at that time. Prior to the termination of the contract, during the first half of 2004, the Company recorded approximately $505,000 of expense under this agreement and made payments to Phase 2 of approximately $700,000. Prior to the Company's acquisition of Phase 2 on May 3, 2004, the Company engaged Phase 2 for several consulting projects for services ranging from long-term information technology strategy, staffing analysis and acquisition target analysis, separate from the agreement described above. The total cost of these projects, which were paid in full, was approximately $75,000. As a result of Dr. Short's relationship to Phase 2, the terms and conditions of the acquisition agreement between the Company and Phase 2 were negotiated on behalf of the Company by the independent members of the Board of Directors. The independent board members retained an independent financial advisor to assist them during this process. In accordance with the terms of the Transition Services Agreement between the Company and InteliStaf, the Company agreed to provide certain accounting and back-office services to InteliStaf until such time as those activities were fully integrated by InteliStaf. These services are being billed at cost. During the period from February 2, 2004, to June 30, 2004, the Company performed services under this agreement with an aggregate cost of approximately $1.4 million. These costs have been netted against reimbursements from InteliStaf in the Company's statements of earnings. During the second quarter of 2004, the Company purchased air transportation services from 55JS Limited, Co. in the amount of approximately $29,000. 55JS Limited, Co. is owned by the Company's President and Chief Executive Officer, John Short. The air transportation services are billed to the Company, at cost, for hourly usage of the plane for Company business. 15 of 28 REHABCARE GROUP, INC. Item 2. - Management's Discussion and Analysis of Financial Condition and - -------------------------------------------------------------------------------- Results of Operations - --------------------- This Quarterly Report on Form 10-Q contains forward-looking statements that are made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. Forward-looking statements involve known and unknown risks and uncertainties that may cause our actual results in future periods to differ materially from forecasted results. These risks and uncertainties may include, but are not limited to, our ability to integrate acquisitions and to implement client partnering relationships within the expected timeframes and to achieve the revenue and earnings levels from such acquisitions and relationships at or above the levels projected; the timing and financial effect of restructuring efforts with respect to our continuing businesses; changes in and compliance with governmental reimbursement rates and other regulations or policies affecting our continuing businesses; our ability to attract new client relationships or to retain and grow existing client relationships through expansion of our hospital rehabilitation and contract therapy service offerings and the development of alternative product offerings; the future operating performance of InteliStaf Holdings, Inc., and the rate of return that RehabCare will be able to achieve from its equity interest in InteliStaf; the adequacy and effectiveness of our operating and administrative systems; our ability and the additional costs of attracting administrative, operational and professional employees; significant increases in health, workers' compensation and professional and general liability costs; litigation risks of our past and future business, including our ability to predict the ultimate costs and liabilities or the disruption of our operations; competitive and regulatory effects on pricing and margins; and general economic conditions, including efforts by governmental reimbursement programs, insurers, healthcare providers and others to contain healthcare costs. Results of Operations - --------------------- Prior to the divestiture of our StarMed Staffing division to InteliStaf Holdings, Inc. on February 2, 2004, we derived our revenue from two business segments: program management services for hospitals and skilled nursing facilities and healthcare staffing services. The program management segment includes hospital rehabilitation services (including inpatient acute rehabilitation, skilled nursing units and outpatient therapy programs) and contract therapy programs. Selected Operating Statistics:
Three Months Ended Six Months Ended June 30, June 30, 2004 2003 2004 2003 ---- ---- ---- ---- Hospital Rehabilitation Services - -------------------------------- Operating Revenues (in thousands) Inpatient $ 37,121 $ 33,778 $ 72,464 $ 67,915 Outpatient 11,397 12,535 23,141 24,557 ------ ------ ------ ------ Total $ 48,518 $ 46,313 $ 95,605 $ 92,472 Average Number of Programs Inpatient 145 134 138 136 Outpatient 42 49 43 50 --- --- --- --- Total 187 183 181 186 Contract Therapy - ---------------- Operating Revenues (in thousands) $ 41,028 $ 32,914 $ 81,782 $ 63,840 Average Number of Locations 572 455 554 443 Other - ----- Operating revenues $1,398 -- $1,398 --
16 to 28 REHABCARE GROUP, INC. Three Months Ended June 30, 2004 Compared to Three Months Ended June 30, 2003 - ----------------------------------------------------------------------------- Operating Revenues Operating revenues during the second quarter of 2004 decreased by $45.1 million, or 33.2%, to $90.9 million compared to $136.0 million in the second quarter of 2003. The revenue decline was primarily due to the sale of the healthcare staffing division on February 2, 2004. Revenues for hospital rehabilitation services and contract therapy increased 4.8% and 24.7%, respectively in the second quarter of 2004 compared to the second quarter of 2003. Hospital rehabilitation services revenue increased by 4.8% from $46.3 million in the second quarter of 2003 to $48.5 million in the second quarter of 2004. The revenue increase of $2.2 million was mostly attributable to the acquisition of VitalCare on March 1, 2004 and increased average revenue per unit, partially offset by a lower number of continuing same store units. The average number of locations managed by the division during the quarter increased 2.2% from 183 in the second quarter of 2003 to 187 in the second quarter of 2004. The average revenue per location in the inpatient segment increased 1.4% year-over-year from $251,700 to $255,200 per location. The average revenue per location in the outpatient segment increased 6.5% year-over-year from $254,900 to $271,400 per location. Same store discharges in inpatient increased 6.7% as a result of more effective community education and awareness; however, same store outpatient visits decreased 3.7%. Contract therapy revenue increased by 24.7% from $32.9 million in the second quarter of 2003 to $41.0 million in the second quarter of 2004. While a portion of the revenue increase, $2.7 million, is attributable to the acquisition of CPR Therapies, LLC in the first quarter of 2004, the division's business development sales efforts were the driving factor behind the revenue increase. The average number of contract therapy locations managed by the division during the quarter increased 25.7% from 455 in the second quarter of 2003 to 572 in the second quarter of 2004. The average revenue per location decreased 1.0% year-over-year from approximately $72,400 to $71,700 per location. The division realized strong growth in its same store book of business for the periods being compared; however, the termination of several large, mature programs in the second quarter and the smaller average size of the sixty CPR Therapies, LLC facilities purchased led to a decrease in average revenue per location. Cost and Expenses The ratios of operating expenses and selling, general and administrative expenses as a percentage of revenues were significantly affected by the sale of our healthcare staffing division on February 2, 2004. Historically, the healthcare staffing division's operating and selling, general and administrative expenses as a percentage of revenues were higher than our other divisions. As a result, with the sale of that division, we experienced improvements in these ratios on a year-over-year basis with the ratio of operating expenses to revenues improving from 75.1% in the second quarter of 2003 to 71.1% in the second quarter of 2004 and the ratio of selling, general and administrative expenses as a percentage of revenues improving from 17.7% in the second quarter of 2003 to 15.5% in the second quarter of 2004. These improvements were achieved despite the fact that corporate selling, general and administrative expenses were absorbed over a smaller revenue base during the second quarter of 2004. Depreciation and amortization expense remained relatively flat at $2.0 million in the second quarter of 2004 versus $2.1 million in the year ago quarter as lower depreciation and amortization resulting from the sale of the healthcare staffing division was partially offset by increased amortization on intangible assets relating to the acquisitions of CPR Therapies and VitalCare. 17 of 28 REHABCARE GROUP, INC. Three Months Ended June 30, 2004 Compared to Three Months Ended June 30, 2003 - -------------------------------------------------------------------------------- (Continued) - ----------- Corporate selling, general and administrative expenses decreased approximately $0.6 million to $6.3 million in the second quarter of 2004 from $6.9 million in the second quarter of 2003. This reduction was the result of restructuring actions taken in the third quarter of 2003 and the first quarter of 2004 to streamline and better align our corporate support activities with our operating activities. We have not further reduced these costs as it is our intention to grow our company to a substantially larger size, and some of the remaining infrastructure will be needed to manage that growth. As these growth plans come to fruition, we expect to re-deploy some of these costs. In the interim, as a result of selling our healthcare staffing division, a number of fixed costs that had previously been allocated to our three divisions are now being allocated between just two. For the hospital rehabilitation services division, corporate selling, general and administrative expenses increased from $2.2 million to $3.0 million, or as a percentage of operating revenues from 4.8% to 6.2%. In contract therapy, these costs increased from $1.9 million to $3.2 million, or as a percentage of operating revenues from 5.9% to 7.8%. Total hospital rehabilitation services costs and expenses increased 5.4% from $38.4 million in the second quarter of 2003 to $40.5 million in the second quarter of 2004. As a percentage of net revenues, the division's direct operating expenses decreased from 66.0% of net revenues to 65.3% of net revenues year-over-year. The improvement in this ratio is primarily due to an increase in management only contracts versus full staffing agreements. Hospital rehabilitation services has continued to leverage its division selling, general and administrative costs, which decreased as a percentage of revenues from 9.2% in the second quarter of 2003 to 9.1% in the second quarter of 2004. Our increased revenue supported the investment in our business development efforts. Depreciation and amortization expense as a percentage of operating revenues remained flat year-over-year at 2.8% as increased amortization expense for certain intangible assets associated with the acquisition of VitalCare was offset by lower allocated software amortization expense. The net effect of the revenue growth, overall cost control improvements at the divisional level and the allocation of additional corporate overhead from the second quarter of 2003 to the second quarter of 2004 was a $0.2 million increase in hospital rehabilitation service's operating earnings (earnings before interest and income taxes) from $7.9 million to $8.1 million. Total contract therapy costs and expenses increased 25.6% from $31.1 million in the second quarter of 2003 to $39.0 million in the second quarter of 2004, which was due primarily to the increase in direct operating expenses resulting from the increased number of contract therapy locations being managed by the division. As a percentage of net revenues, the division's direct operating expenses decreased from 78.3% of net revenues to 77.9% of net revenues year-over-year. These decreased costs were brought about by therapist productivity improvements and a reduced utilization of higher cost contract labor; however, these improvements were partially offset by an increase in our provision for doubtful accounts in the second quarter of 2004 to mitigate some of the risk associated with a few specific accounts in our receivables portfolio. Contract therapy has continued to leverage its division selling, general and administrative costs, which decreased as a percentage of revenues from 9.2% in the second quarter of 2003 to 7.9% in the second quarter of 2004 as the division was able to continue increasing revenues at a rate faster than it has increased its selling, general and administrative expenses. Depreciation and amortization expense as a percentage of operating revenues increased year-over-year from 1.0% to 1.6%. The increased expense is due to the amortization of the division's proprietary information system implemented in the second half of 2003, and the amortization related to certain 18 of 28 REHABCARE GROUP, INC. Three Months Ended June 30, 2004 Compared to Three Months Ended June 30, 2003 - -------------------------------------------------------------------------------- (Continued) - ----------- intangible assets associated with the acquisition of CPR Therapies, LLC. The net effect of the revenue growth, overall cost control improvements at the divisional level and the allocation of additional corporate overhead from the second quarter of 2003 to the second quarter of 2004 was a $0.2 million increase in contract therapy's operating earnings (earnings before interest and income taxes) from $1.8 million to $2.0 million. Non-operating Items Interest income increased marginally in the second quarter of 2004 versus the second quarter of 2003 as a result of higher average cash and investment balances partially offset by the effect of lower interest rates. Interest expense is comprised of the commitment fees paid on the unused portion of our line of credit, letter of credit fees and interest expense on the subordinated notes issued in connection with the acquisitions of CPR Therapies and VitalCare. Interest expense in the second quarter of 2004 was $0.3 million, an increase of $0.1 million over the second quarter of 2003. This increase was primarily the result of interest related to the aforementioned subordinated notes. We had no outstanding balance against our line of credit as of June 30, 2004 or June 30, 2003. Earnings before income taxes and equity in net loss of affiliate increased $2.5 million or 33.7% to $9.9 million in the second quarter of 2004 from $7.4 million in the second quarter of 2003. The provision for income taxes was $4.1 million in the second quarter of 2004 compared to $3.0 million in the second quarter of 2003, reflecting effective income tax rates of approximately 41.6% and 40.1%, respectively. The effective tax rate increase was primarily the result of non-deductible goodwill associated with the sale of the staffing division in February 2004. In connection with the sale of the staffing division to InteliStaf Holdings, Inc., we received in return a 25% equity interest in InteliStaf. We account for this investment using the equity method. For the second quarter of 2004, our share of InteliStaf's after tax net loss was approximately $0.1 million. InteliStaf's results, particularly operating revenues, have been adversely impacted by the continuing slump in the healthcare staffing industry. In addition, their results were negatively impacted by costs to integrate and transition the acquired StarMed business activities. Net earnings in the second quarter of 2004 increased to $5.7 million compared to $4.5 million in the year ago period. Diluted net earnings per share increased by 25.9% from $0.27 in the second quarter of 2003 to $0.34 in the second quarter of 2004. Six Months Ended June 30, 2004 Compared to Six Months Ended June 30, 2003 - ------------------------------------------------------------------------- Operating Revenues Operating revenues during the first six months of 2004 decreased by $79.5 million, or 28.9%, to $195.4 million compared to $274.9 million in the first six months of 2003. The revenue decline was primarily due to the sale of the healthcare staffing division on February 2, 2004. Revenues for hospital rehabilitation services and contract therapy increased 3.4% and 28.1%, respectively for the first six months of 2004 compared to the first six months of 2003. 19 of 28 REHABCARE GROUP, INC. Six Months Ended June 30, 2004 Compared to Six Months Ended June 30, 2003 - -------------------------------------------------------------------------------- (Continued) - ----------- Hospital rehabilitation services revenue increased by 3.4% from $92.5 million in the six months ended June 30, 2003 to $95.6 million in the six months ended June 30, 2004. The acquisition of VitalCare in the first quarter of 2004 contributed $4.5 million to the revenue increase. This increase and an increase in average revenue per location were offset by a decline in the average number of units operated in the first half of 2004. The average number of hospital rehabilitation services locations managed by the division decreased 2.7% from 186 in the six months ended June 30, 2003 to 181 in the six months ended June 30, 2004. The average revenue per location in the inpatient segment increased 5.3% year-over-year from $499,300 to $525,800 per location. The average revenue per location in the outpatient segment increased 9.9% year-over-year from $493,600 to $542,500 per location. The increases in revenue per location were primarily due to increased discharges in inpatient as a result of more effective community education and awareness, and the closure of a number of smaller units and increases of revenue per unit and volume of units per visit in outpatient. Contract therapy revenue increased by 28.1% from $63.8 million in the six months ended June 30, 2003 to $81.8 million in the six months ended June 30, 2004. While a portion of the revenue increase, $4.3 million, is attributable to the acquisition of CPR Therapies, LLC in the first quarter of 2004, the division's business development sales efforts were the driving factor behind the revenue increase. The average number of contract therapy locations managed by the division during the period increased 25.1% from 443 in the six months ended June 30, 2003 to 554 in the six months ended June 30, 2004. The average revenue per location increased 2.4% year-over-year from $144,100 to $147,600 per location. This increase was the result of strong growth in the division's same store book of business for the periods being compared; however, some of this growth was offset by the termination of several large, mature programs in the second quarter of 2004 and the smaller average size of the sixty CPR Therapies, LLC facilities purchased in February of 2004. Cost and Expenses The ratios of operating expenses and selling, general and administrative expenses as a percentage of revenues were significantly affected by the sale of our healthcare staffing division on February 2, 2004. Historically, the healthcare staffing division's operating and selling, general and administrative expenses as a percentage of revenues were higher than our other divisions. As a result, with the sale of that division, we experienced improvements in these ratios on a year-over-year basis with the ratio of operating expenses to revenues improving from 75.3% in the first six months of 2003 to 72.0% in the first six months of 2004 and the ratio of selling, general and administrative expenses as a percentage of revenues improving from 17.9% in the first half of 2003 to 15.4% in the first half of 2004. These improvements were achieved despite the fact that corporate selling, general and administrative expenses were absorbed over a smaller revenue base during the first half of 2004. Depreciation and amortization expense decreased $0.5 million to $3.8 million in the first six months of 2004 versus $4.3 million in the year ago period as lower depreciation and amortization resulting from the sale of the healthcare staffing division was partially offset by increased amortization on intangible assets relating to the acquisitions of CPR Therapies and VitalCare. 20 of 28 REHABCARE GROUP, INC. Six Months Ended June 30, 2004 Compared to Six Months Ended June 30, 2003 - -------------------------------------------------------------------------------- (Continued) - ----------- Corporate selling, general and administrative expenses decreased approximately $1.1 million to $12.6 million in the first six months of 2004 from $13.7 million in the first six months of 2003. This reduction was the result of restructuring actions taken in the third quarter of 2003 and the first quarter of 2004 to streamline and better align our corporate support activities with our operating activities. We have not further reduced these costs as it is our intention to grow our company to a substantially larger size, and some of the remaining infrastructure will be needed to manage that growth. As these growth plans come to fruition, we expect to re-deploy some of these costs. In the interim, as a result of selling our healthcare staffing division, a number of fixed costs that had previously been allocated to our three divisions are now being allocated between just two. For the hospital rehabilitation services division, corporate selling, general and administrative expenses increased from $4.3 million to $5.5 million, or as a percentage of operating revenues from 4.7% to 5.8%. In contract therapy, these costs increased from $3.9 million to $6.1 million, or as a percentage of operating revenues from 6.2% to 7.5%. Total hospital rehabilitation services costs and expenses increased 1.7% from $77.5 million in the six months ended June 30, 2003 to $78.7 million in the six months ended June 30, 2004. As a percentage of net revenues, the division's direct operating expenses decreased from 67.0% of net revenues to 65.7% of net revenues year-over-year. The improvement in this ratio is primarily due to an increase in management only contracts versus full staffing agreements, partially offset by an increase in our provision for doubtful accounts in the first six months of 2004 as a result of our normal assessment of payment risk. Hospital rehabilitation services has continued to leverage its division selling, general and administrative costs, which decreased as a percentage of revenues from 9.1% in the six months ended June 30, 2003 to 8.4% in the six months ended June 30, 2004. The savings in selling, general and administrative expenses was primarily the result of consolidating and restructuring the inpatient and outpatient division specific overhead activities. Depreciation and amortization expense as a percentage of operating revenues declined year-over-year from 3.0% to 2.5%. The decrease was primarily due to a decrease in the allocation of software amortization to the division partially offset by an increase in amortization of certain intangible assets associated with the acquisition of VitalCare. The net effect of the revenue growth, overall cost control improvements at the divisional level and the allocation of additional corporate overhead from the six months ended June 30, 2003 to the six months ended June 30, 2004 was a $1.9 million increase in hospital rehabilitation service's operating earnings (earnings before interest and income taxes) from $15.0 million to $16.9 million. Total contract therapy costs and expenses increased 28.3% from $60.3 million in the six months ended June 30, 2003 to $77.4 million in the six months ended June 30, 2004, which was due primarily to the increase in direct operating expenses resulting from the increased number of contract therapy locations being managed by the division. As a percentage of net revenues, the division's direct operating expenses decreased from 78.0% of net revenues to 77.5% of net revenues year-over-year. These decreased costs were brought about by therapist productivity improvements and a reduced utilization of higher cost contract labor; however, these improvements were partially offset by an increase in our provision for doubtful accounts in the second quarter of 2004 to mitigate some of the risk associated with a few specific accounts in our receivables portfolio. Contract therapy has continued to leverage its division selling, general and administrative costs, which decreased as a percentage of revenues from 9.2% in the six months ended June 30, 2003 to 7.9% in the six months ended June 30, 2004 as the division was able to continue increasing revenues at a rate faster than it has increased its selling, general and administrative expenses. Depreciation and amortization expense as a percentage of operating revenues increased year-over-year from 1.0% to 1.7%. The increased expense is due to the 21 of 28 REHABCARE GROUP, INC. Six Months Ended June 30, 2004 Compared to Six Months Ended June 30, 2003 - -------------------------------------------------------------------------------- (Continued) - ----------- amortization of the division's proprietary information system implemented in the second half of 2003, and the amortization related to certain intangible assets associated with the acquisition of CPR Therapies, LLC. The net effect of the revenue growth, overall cost control improvements at the divisional level and the allocation of additional corporate overhead from the six months ended June 30, 2003 to the six months ended June 30, 2004 was a $0.8 million increase in contract therapy's operating earnings (earnings before interest and income taxes) from $3.6 million to $4.4 million. During the first quarter of 2004, in connection with the sale of the healthcare staffing division, we initiated a series of restructuring activities to reduce the cost of corporate overhead that had previously been absorbed by that division. These activities included the elimination of approximately 40 positions, the exiting of a portion of the leased office space at our corporate headquarters and the write-off of certain leasehold improvements associated with the office space consolidation. As a result of the actions, we recorded a pre-tax restructuring charge in the first quarter of 2004 in the amount of approximately $1.7 million. This charge was recorded as a separate component of operating expenses. At December 31, 2003, the assets and liabilities of our healthcare staffing division were reported as assets and liabilities held for sale and were reported at their estimated fair market value less estimated costs to sell. Upon consummating the sale of this business on February 2, 2004, we recorded a gain of $485,000 as a result of adjusting the estimated costs to sell for then current information, recording a liability for the estimated fair market value of the indemnification provided to InteliStaf in accordance with the terms of the purchase and sale agreement and changing the underlying asset and liability balances between December 31, 2003 and February 2, 2004. Non-operating Items Interest income increased marginally in the first six months of 2004 versus the first six months of 2003 as a result of higher average cash and investment balances partially offset by the effect of lower interest rates. Interest expense is comprised of the commitment fees paid on the unused portion of our line of credit, letter of credit fees and interest expense on the subordinated notes issued in connection with the acquisitions of CPR Therapies and VitalCare. Interest expense in the first half of 2004 was $0.5 million, an increase of $0.2 million over the first half of 2003. This increase was primarily the result of interest related to the aforementioned subordinated notes. We had no outstanding balance against our line of credit as of June 30, 2004 or June 30, 2003. Earnings before income taxes and equity in net loss of affiliate increased $5.2 million or 36.7% to $19.3 million in the first six months of 2004 from $14.1 million in the year ago period. The provision for income taxes was $8.0 million in the first half of 2004 compared to $5.6 million in the first half of 2003, reflecting effective income tax rates of approximately 41.5% and 39.7%, respectively. The effective tax rate increase was primarily the result of non-deductible goodwill associated with the sale of the staffing division in February 2004. 22 of 28 REHABCARE GROUP, INC. Six Months Ended June 30, 2004 Compared to Six Months Ended June 30, 2003 - -------------------------------------------------------------------------------- (Continued) - ----------- In connection with the sale of the staffing division to InteliStaf on February 2, 2004, we received in return a 25% equity interest in InteliStaf. We account for this investment using the equity method. For the first six months of 2004, our share of InteliStaf's after tax net loss was approximately $0.5 million. InteliStaf's results, particularly operating revenues, have been adversely impacted by the continuing slump in the healthcare staffing industry. In addition, their results were adversely impacted by costs to integrate and transition the acquired StarMed business activities. Net earnings in the first six months of 2004 increased to $10.8 million compared to $8.5 million in the year ago period. Diluted net earnings per share increased by 23.1% from $0.52 in the first six months of 2003 to $0.64 in the first six months of 2004. Liquidity and Capital Resources As of June 30, 2004, we had $35.6 million in cash and cash equivalents and $3.1 million of restricted cash, and a current ratio, the amount of current assets divided by current liabilities, of 2.5 to 1. Working capital decreased by $5.8 million to $71.2 million as of June 30, 2004 as compared to $77.0 million as of December 31, 2003 due primarily to an increase in current liabilities of $5.2 million. The increase in current liabilities was primarily attributable to accrued indemnification expenses for the sale of the staffing division, accrued acquisition costs for CPR Therapies, VitalCare and Phase 2 and costs accrued for restructuring. Net accounts receivable were $66.0 million at June 30, 2004, compared to $62.7 million at December 31, 2003. The number of days' average net revenue in net receivables was 65.8 and 72.0 (adjusted to exclude receivables related to the staffing division) at June 30, 2004 and December 31, 2003, respectively. Deferred tax assets decreased approximately $6.4 million primarily due to the sale of the staffing division, which created a significant current income tax benefit for the tax loss on the sale. Operating cash flows constitute our primary source of liquidity and historically have been sufficient to fund working capital, capital expenditures, internal business expansion and debt service requirements. We expect to meet our future working capital, capital expenditures, internal and external business expansion and debt service requirements from a combination of internal sources and outside financing. We have a $125.0 million revolving line of credit with no balance outstanding as of June 30, 2004. We have approximately $10.0 million in letters of credit issued to insurance carriers as collateral for reimbursement of claims. The letters of credit reduce the amount we may borrow under the line of credit. We also have a $4.2 million promissory note issued to our workers compensation carrier as additional collateral. The promissory note is not recorded as a liability on the balance sheet as it only becomes payable upon an event of default as defined in the security agreement with the workers compensation carrier. Finally, as additional collateral, we have a trust agreement with our professional and general liability insurance carrier under which we have deposited $3.1 million for their benefit in an escrow account. Our access to this cash is restricted and the insurance carrier may only draw on these funds in the event of a default as defined in the trust agreement. As part of the purchases of CPR Therapies and VitalCare, we issued long-term subordinated promissory notes to the respective selling parties. These notes bear interest at rates ranging from 7%-8%. As of June 30, 2004, approximately $4.3 million of these notes remained outstanding. In addition, as part of our arrangement with Signature Healthcare Foundation, we extended a $2.0 million line of credit to Signature. At June 30, 2004, Signature had drawn approximately $0.4 million against this line of credit. 23 of 28 REHABCARE GROUP, INC. Regulatory Update On April 30, 2004, the Centers for Medicare and Medicaid Services announced a final rule revising criteria for classifying hospitals as inpatient rehabilitation facilities. We know this rule as the "modified 75% Rule." This final rule became effective for cost reporting periods beginning on or after July 1, 2004. The rule provides for a three-year transition period with increasing percentages of the total patient population that will be required to have one of the qualifying medical conditions. Commencing on July 1, 2004, the annual percentage phase-in will be 50%, 60%, 65% and finally 75% after July 1, 2007, assuming no further regulatory action is taken. We are in the process of analyzing the provisions of this new rule and the impact it will have on our long-term financial results. For 2004, we expect the rule will have a minimal impact on our financial results. Critical Accounting Policies and Estimates The preparation of our consolidated financial statements in conformity with accounting principles generally accepted in the United States of America requires us 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 and the reported amounts of revenues and expenses during the reporting period. Our significant accounting policies, including the use of estimates, were presented in the notes to consolidated financial statements included in our 2003 Annual Report on Form 10-K, filed on March 12, 2004. Critical accounting policies are those that are considered most important to the presentation of our financial condition and results of operations, require management's most difficult, subjective and complex judgments, and involve uncertainties. Our most critical accounting policies pertain to allowance for doubtful accounts, excess cost over net assets acquired and other intangible assets and health, workers compensation and professional liability insurance accruals. Each of these critical accounting policies was discussed in our 2003 Annual Report on Form 10-K in the Critical Accounting Policies and Estimates section of "Item 7. - Management's Discussion and Analysis of Financial Condition and Results of Operations." There were no significant changes in the application of critical accounting policies during the first six months of 2004. Item 3. - Quantitative and Qualitative Disclosures About Market Risks - --------------------------------------------------------------------- There have been no material changes in the reported market risks since the filing of our Annual Report on Form 10-K for the year ended December 31, 2003. Item 4. - Controls and Procedures - --------------------------------- As of June 30, 2004, our Chief Executive Officer and Chief Financial Officer have conducted an evaluation of the effectiveness of the design and operation of the Company's disclosure controls and procedures (as defined in Rule 13a-14 (c) and 15d-14 (c) under the Securities Exchange Act of 1934, as amended). Based on that evaluation, the Company's Chief Executive Officer and Chief Financial Officer have concluded that the Company's disclosure controls and procedures are effective in making known in a timely fashion material information required to be filed in this report. There have been no significant changes in internal controls or in other factors that could significantly affect these controls subsequent to the date of their evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. 24 of 28 REHABCARE GROUP, INC. Part II. - Other Information - ---------------------------- Item 1 - Legal Proceedings - -------------------------- In May 2002, a lawsuit was filed in the United States District Court for the Eastern District of Missouri against us and certain of our former and current directors and officers. The plaintiffs allege violations of the federal securities laws and the suit is certified as a class action. The class consists of persons that purchased shares of our common stock between August 10, 2000 and January 21, 2002. The case alleges weaknesses in the software systems selected by our recently sold StarMed Staffing subsidiary, and the purported negative effects of such systems on our business operations. The plaintiff filed a second amended complaint in November 2003 after the District Court Judge's ruling that the plaintiff must present its claims with more focus and "sufficient particularity" before the court can entertain a motion to dismiss. A hearing on our motion to dismiss was held on May 25, 2004 and a ruling is pending. In August 2002, a derivative lawsuit was filed in the Circuit Court of St. Louis County, Missouri against us and certain of our former and current directors. The complaint, which is based upon substantially the same facts as are alleged in the federal securities class action, was filed on behalf of the derivative plaintiff by a law firm that had earlier filed suit in the federal case. We filed a motion to dismiss based primarily on the derivative plaintiff's failure to make a pre-suit demand, which is pending. The federal court hearing the securities law class action has stayed discovery in the derivative proceeding until the federal court makes its ruling on our motion to dismiss. In July 2003, a civil action was filed under the qui tam provisions of the False Claims Act in the United States District Court for the Eastern District of Arkansas, seeking treble damages, civil penalties, back pay, and special damages from us and Baxter County Regional Hospital. The allegations contained in the suit, brought by a former independent contractor of ours and a former Baxter physical therapist, relate to the proper clinical diagnoses of patients treated at the hospital's acute rehabilitation unit for Medicare reimbursement purposes, for which Baxter received reimbursement in excess of $5,000,000. The original action was filed on August 21, 2000, under seal, and an investigation by the United States Department of Justice resulted in a department determination not to intervene. We and Baxter also initiated an internal and external audit that concluded the allegations were unfounded and that we and Baxter were in compliance with Medicare regulations. We have agreed to indemnify Baxter for all fees and expenses on all counts except one, arising out of the action. The court recently denied both parties motions to dismiss and we have commenced discovery. In February 2004, Bond International Software Group, Inc. filed a suit against our former StarMed Staffing subsidiary in the United States District Court for the Eastern District of Virginia. The suit alleged breach of contract for licensed software and related development configuration, support and maintenance servicing. On June 22, 2004, the parties reached an agreement in principle pursuant to which we will pay $150,000 in cash to Bond and each party will agree to release all claims against the other party related to this matter. The definitive settlement and release is currently being negotiated and we anticipate it will be signed shortly. On May 7, 2004 we filed a civil action against The Queens Medical Center ("Queens"), in the U.S. District Court, District for Hawaii, for breach of contract, including past due service fees in the amount of approximately $300,000. On May 29, 2004, Queens filed a counterclaim against us, alleging breach of contract and seeking indemnification in the aggregate amount of approximately $1.3 million, which represents the total Queens alleges they paid back to Medicare for erroneous billings with respect to the skilled nursing unit we managed, additional management fees already paid to us and an estimate of their attorney's fees. 25 of 28 REHABCARE GROUP, INC. Item 1 - Legal Proceedings (Continued) - -------------------------------------- The Wage and Hour Division of the United States Department of Labor has been conducting an investigation of our former StarMed Staffing subsidiary. The investigation is focused on minimum wage and overtime compensation of employees who worked as on-call coordinators. Recently, the local office conducting the investigation requested payroll information concerning office and field staff employees (other than staffing coordinators and other exempt personnel) who worked on-call shifts in addition to their regular duties. We are in the process of assembling the information requested. Several federal lawsuits have been filed by certain on-call and staffing coordinators seeking overtime compensation and related damages. These individuals were employed by our former staffing division. The individuals seek to bring a collective or class action on behalf of all similarly situated persons. Two of these cases have been consolidated in the United States District Court for the Central District of California. A motion to consolidate a third case is pending. Motions to proceed as a collective or class action have been filed but have not yet been heard. In addition to the above matters, we are a party to a number of other claims and lawsuits. While these actions are being contested, the outcome of individual matters is not predictable with assurance. From time to time, and depending upon the particular facts and circumstances, we may be subject to indemnification obligations under our contracts with our hospital and healthcare facility clients relating to these matters. We do not believe that any liability resulting from any of the above matters, after taking into consideration our insurance coverage and amounts already provided for, will have a material adverse effect on our consolidated financial position, cash flows or liquidity. However, such matters could have a material effect on results of operations in a particular quarter or fiscal year as they develop or as new issues are identified. 26 of 28 REHABCARE GROUP, INC. Item 6 - Exhibits and Reports on Form 8-K - ----------------------------------------- (a) Exhibits See exhibit index (b) Reports on Form 8-K The Company has filed or provided to the Securities and Exchange Commission the following Current Reports on Form 8-K during the period ended June 30, 2004: Filing Date Description of Event ----------- -------------------- April 14, 2004 Item 5 Other Events and Regulation FD Disclosure - Filed a modification to the RehabCare Group, Inc. Second Amended and Restated 1996 Long Term Performance Plan. May 4, 2004 Item 5 Other Events and Regulation FD Disclosure - Filed a press release dated May 3, 2004 announcing the election of John H. Short, Ph.D. to President and Chief Executive Officer of the Company and the acquisition of Phase 2 Consulting, a healthcare management consulting firm. May 6, 2004 Item 9 Regulation FD Disclosure and Item 12 Results of Operations and Financial Condition - Providing a press release dated May 6, 2004 announcing first quarter 2004 results of operations and guidance for the full year 2004 and a script for the conference call with investors held on May 6, 2004. May 21, 2004 Item 9 Regulation FD Disclosure - Providing slides to be used by the Company in investor relations presentations. June 2, 2004 Item 5 Other Events and Regulation FD Disclosure - Filing a press release dated June 1, 2004 announcing the election of Joseph R. Swedish to the Board of Directors of the Company. 27 of 28 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. REHABCARE GROUP, INC. August 6, 2004 By: /s/ Vincent L. Germanese -------------------------------------- Vincent L. Germanese Senior Vice President, Chief Financial Officer and Secretary 28 of 28 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 Quarterly Report on Form 10-Q for the quarter ended May 31, 1995 and incorporated herein by reference) 3.3 Amended and Restated Bylaws (filed as Exhibit 3.3 to the Registrant; Quarterly Report on Form 10-Q for the quarter ended September 30, 2002 and incorporated herein by reference) 4.1 Rights Agreement, dated August 28, 2002, by and between the Registrant and Computershare Trust Company, Inc. (filed as Exhibit 1 to the Registrant's Registration Statement on Form 8-A filed September 5, 2002 and incorporated herein by reference) 31.1 Certification by Chief Executive Officer pursuant to Rule 13a-14(a) under the Securities Exchange Act of 1934, as amended 31.2 Certification by Chief Financial Officer pursuant to Rule 13a-14(a) under the Securities Exchange Act of 1934, as amended 32.1 Certification of periodic financial report pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, U.S.C. Section 1350 32.2 Certification of periodic financial report pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, U.S.C. Section 1350 - ------------------------- EXHIBIT 31.1 CERTIFICATION I, John H. Short, certify that: 1. I have reviewed this quarterly report on Form 10-Q of RehabCare Group, Inc.; 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; 4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have: (a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared; (b) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this quarterly report based on such evaluation; and (c) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions): (a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and (b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. Date: August 6, 2004 By: /s/ John H. Short ----------------------- John H. Short President and Chief Executive Officer RehabCare Group, Inc. EXHIBIT 31.2 CERTIFICATION I, Vincent L. Germanese, certify that: 1. I have reviewed this quarterly report on Form 10-Q of RehabCare Group, Inc.; 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; 4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have: (a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared; (b) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this quarterly report based on such evaluation; and (c) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions): (a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and (b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. Date: August 6, 2004 By: /s/ Vincent L. Germanese ------------------------- Vincent L. Germanese Senior Vice President, Chief Financial Officer and Secretary RehabCare Group, Inc. Exhibit 32.1 CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 In connection with the Quarterly Report of RehabCare Group, Inc. (the "Company") on Form 10-Q for the period ending June 30, 2004 as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, John H. Short, Chief Executive Officer of the Company, certify, pursuant to 18 U.S.C. ss. 1350, as adopted pursuant to ss. 906 of the Sarbanes-Oxley Act of 2002, that: (1) The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and (2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. By: /s/ John H. Short ----------------------- John H. Short President and Chief Executive Officer RehabCare Group, Inc. August 6, 2004 * A signed original of the written statement required by Section 906 has been provided to the Company and will be retained by the Company and furnished to the Securities and Exchange Commission or its staff upon request. Exhibit 32.2 CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 In connection with the Quarterly Report of RehabCare Group, Inc. (the "Company") on Form 10-Q for the period ending June 30, 2004 as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, Vincent L. Germanese, Senior Vice President and Chief Financial Officer of the Company, certify, pursuant to 18 U.S.C. ss. 1350, as adopted pursuant to ss. 906 of the Sarbanes-Oxley Act of 2002, that: (1) The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and (2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. By: /s/ Vincent L. Germanese ------------------------- Vincent L. Germanese Senior Vice President, Chief Financial Officer and Secretary RehabCare Group, Inc. August 6, 2004 * A signed original of the written statement required by Section 906 has been provided to the Company and will be retained by the Company and furnished to the Securities and Exchange Commission or its staff upon request. -----END PRIVACY-ENHANCED MESSAGE-----