-----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, DUsK6QUveG0CNQEMnFDT2dg6w8nRfqW2wNQFgpZLTi3AZeEaH2N08kY8eoMak72y VlLJO3zSJgi+TW7DCgYkAw== 0000812191-99-000009.txt : 19990817 0000812191-99-000009.hdr.sgml : 19990817 ACCESSION NUMBER: 0000812191-99-000009 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19990630 FILED AS OF DATE: 19990816 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: SEC FILE NUMBER: 001-14655 FILM NUMBER: 99691206 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 10Q FOR THE QUARTER ENDED JUNE 30, 1999 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- 1 SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended June 30, 1999 Commission File Number 0-19294 REHABCARE GROUP, INC. (Exact name of Registrant as specified in its charter) Delaware 51-0265872 (State or other jurisdiction of (I.R.S. Employer Identification Number) incorporation or organization) 7733 Forsyth Boulevard, Suite 1700, St. Louis, MO 63105 (Address of principal executive offices and Zip Code) 314-863-7422 (Registrant's telephone number, including area code) Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No Indicate the number of shares outstanding of the Registrant's common stock, as of the latest practicable date. Class Outstanding at August 12, 1999 - -------------------------------------- ------------------------------ Common Stock, par value $.01 per share 6,609,115 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- 1 of 16 2 REHABCARE GROUP, INC. Index Part I. - Financial Information Item 1. - Condensed Consolidated Financial Statements Condensed consolidated balance sheets, June 30, 1999 (unaudited) and December 31, 1998 3 Condensed consolidated statements of earnings for the three months and six months ended June 30, 1999 and 1998 (unaudited) 4 Condensed consolidated statements of comprehensive earnings for the three months and six months ended June 30, 1999 and 1998 (unaudited) 5 Condensed consolidated statements of cash flows for the six months ended June 30, 1999 and 1998 (unaudited) 6 Notes to condensed consolidated financial statements (unaudited) 7 Item 2. - Management's Discussion and Analysis of Financial Condition and Results of Operations 10 Part II. - Other Information Item 2. - Changes in Securities and Use Of Proceeds 15 Item 6. - Exhibits and Reports on Form 8-K 15 Signatures 16 2 of 16 3 PART 1. - FINANCIAL INFORMATION Item 1. - Condensed Consolidated Financial Statements REHABCARE GROUP, INC. Condensed Consolidated Balance Sheets (Dollar amounts in thousands)
June 30, December 31, 1999 1998 (unaudited) Assets: Current assets: Cash and cash equivalents $1,456 $5,666 Marketable securities, available-for-sale 3,017 3,017 Accounts receivable, net of allowance for doubtful accounts of $4,161 and $3,404, respectively 50,428 46,349 Deferred tax assets 3,359 3,382 Prepaid expenses and other current assets 793 938 ------- ------- Total current assets 59,053 59,352 ------- ------- Marketable securities, trading, noncurrent 1,646 1,240 ------- ------- Equipment and leasehold improvements, net 4,977 4,537 ------- ------- Other assets: Excess of cost over net assets acquired, net 90,877 86,285 Deferred contract costs, net 1,345 1,184 Investments in nonconsolidated subsidiaries 1,684 1,648 Other 2,959 2,624 ------- ------- Total other assets 96,865 91,741 ------- ------- $162,541 $156,870 ======= ======= Liabilities and Stockholders' Equity: Current liabilities: Revolving credit facility $ 2,000 $ -- Current portion of long-term debt 11,636 11,926 Accounts payable 2,614 2,179 Accrued salaries and wages 14,967 14,049 Accrued expenses 8,040 8,601 Income taxes payable 1,717 1,991 ------- ------- Total current liabilities 40,974 38,746 ------- ------- Deferred compensation and other long-term liabilities 3,523 3,084 ------- ------- Deferred tax liabilities 1,101 955 ------- ------- Long-term debt, less current portion 48,315 53,929 ------- ------- Stockholders' equity: Common stock, $.01 par value; authorized 20,000,000 shares, issued 7,765,187 and 7,657,391 shares, respectively 78 77 Additional paid-in capital 31,970 30,654 Retained earnings 54,545 47,390 Less common stock held in treasury at cost, 1,166,234 shares (17,975) (17,975) Accumulated other comprehensive earnings 10 10 ------- ------- Total stockholders' equity 68,628 60,156 ------- ------- $162,541 $156,870 ======= ======= See notes to condensed consolidated financial statements.
3 of 16 4 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, 1999 1998 1999 1998 ------------------- ------------------ Operating revenues $ 73,675 $ 42,967 $ 142,860 $ 86,531 Costs and expenses: Operating expenses 52,969 29,191 102,447 58,926 General and administrative 12,342 7,533 24,153 15,131 Depreciation and amortization 1,260 898 2,468 1,790 ------- ------- ------- ------- Total costs and expenses 66,571 37,622 129,068 75,847 ------- ------- ------- ------- Operating earnings 7,104 5,345 13,792 10,684 Interest income 49 70 114 124 Interest expense (997) (659) (2,062) (1,352) Other Income 32 52 30 94 ------- ------- ------- ------- Earnings before income taxes and cumulative effect of change in accounting principle 6,188 4,808 11,874 9,550 Income taxes 2,463 1,925 4,719 3,875 ------- ------- ------- ------- Earnings before cumulative effect of change in accounting principle 3,725 2,883 7,155 5,675 Cumulative effect of change in accounting for start-up costs, net of tax -- -- -- (776) ------- ------- ------- ------- Net earnings $ 3,725 $ 2,883 $ 7,155 $ 4,899 ======= ======= ======= ======= Net earnings per common share: Basic Earnings before cumulative effect of change in accounting principle $ .57 $ .48 $ 1.10 $ .95 Cumulative effect of change in accounting for start-up costs -- -- -- (.13) ------- ------- ------- ------- Net earnings $ .57 $ .48 $ 1.10 $ .82 ======= ======= ======= ======= Diluted Earnings before cumulative effect of change in accounting principle $ .51 $ .41 $ .99 $ .81 Cumulative effect of change in accounting for start-up costs -- -- -- (.11) ------- ------- ------- ------- Net earnings $ .51 $ .41 $ .99 $ .70 ======= ======= ======= ======= Weighted average number of common shares outstanding: Basic 6,553 6,005 6,520 5,962 ======= ======= ======= ======= Diluted 7,371 7,212 7,339 7,172 ======= ======= ======= =======
See notes to condensed consolidated financial statements. 4 of 16 5 REHABCARE GROUP, INC. Condensed Consolidated Statements of Comprehensive Earnings (Amounts in thousands) (Unaudited)
Three Months Ended Six Months Ended June 30, June 30, 1999 1998 1999 1998 ------------------ ---------------- Net earnings $ 3,725 $ 2,883 $ 7,155 $ 4,899 Other comprehensive earnings, net of tax - Unrealized holding gains (losses) arising during period on securities -- (30) -- 30 ------ ------ ------ ------ Comprehensive earnings $ 3,725 $ 2,853 $ 7,155 $ 4,929 ====== ====== ====== ====== See notes to condensed consolidated financial statements.
5 of 16 6 REHABCARE GROUP, INC. Condensed Consolidated Statements of Cash Flows (Amounts in thousands) (Unaudited)
Six Months Ended June 30, 1999 1998 ----------------------- Cash flows from operating activities: Net earnings $7,155 $4,899 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 2,468 1,790 Provision for losses on accounts receivable 1,120 380 Equity in loss (earnings) of affiliate 1 (82) Increase (decrease) in deferred compensation 472 (786) Increase in accounts receivable, net (5,016) (1,105) Decrease (increase) in prepaid expenses and other current assets 165 (243) Decrease (increase) in other assets (65) 347 Increase (decrease) in accounts payable and accrued expenses (258) 650 Increase in accrued salaries and wages 796 2,868 Decrease in income taxes payable and deferred (232) (243) ----- ----- Net cash provided by operating activities 6,606 9,251 ----- ----- Cash flows from investing activities: Additions to equipment and leasehold improvements,net (1,145) (499) Purchase of marketable securities (495) (349) Deferred contract costs (325) (150) Proceeds from sale/maturities of investments 89 1,344 Cash paid in acquisition of businesses, net of cash received (4,889) (2,404) Other (714) (773) ----- ----- Net cash used in investing activities (7,479) (2,831) ----- ----- Cash flows from financing activities: Proceeds from issuance of notes payable 750 -- Payments on long-term debt (6,654) (8,038) Proceeds from revolving credit facility, net 2,000 35 Exercise of stock options, including tax benefit 567 4,014 ----- ----- Net cash used in financing activities (3,337) (3,989) ----- ----- Net increase (decrease) in cash and cash equivalents (4,210) 2,431 Cash and cash equivalents at beginning of period 5,666 1,975 ----- ----- Cash and cash equivalents at end of period $1,456 $4,406 ===== ===== See notes to condensed consolidated financial statements.
6 of 16 7 REHABCARE GROUP, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) Note 1. - Basis of Presentation The condensed consolidated balance sheets and related condensed consolidated statements of earnings, comprehensive earnings and cash flows contained in this Form 10-Q, which are unaudited, include the accounts of the Company and its wholly owned subsidiaries. All significant intercompany accounts and activity have been eliminated in consolidation. In the opinion of management, all adjustments necessary for a fair presentation of such financial statements have been included. Adjustments consisted only of normal recurring items. The results of operations for the three months and six months ended June 30, 1999, are not necessarily indicative of the results to be expected for the fiscal year. The condensed consolidated financial statements do not include all information and footnotes necessary for a complete presentation of financial position, results of operations and cash flows in conformity with generally accepted accounting principles. Reference is made to the Company's audited consolidated financial statements and the related notes as of December 31, 1998 and 1997 and for the years ended December 31, 1998 and 1997, and for the ten months ended December 31, 1996, included in the Annual Report on Form 10-K on file with the Securities and Exchange Commission, which provide additional disclosures and a further description of accounting policies. Note 2. - Acquisitions On July 31, 1998, the Company acquired Rehabilitative Care Systems of America, Inc. ("RCSA"), a provider of program outpatient therapy, for consideration consisting of cash and stock. On August 17, 1998, the Company acquired StarMed Staffing, Inc. ("StarMed"), a provider of nurse staffing, and certain related entities for cash from Medical Resources, Inc. On September 9, 1998, the Company acquired Therapeutic Systems, Ltd. ("Therapeutic Systems"), a provider of contract therapy, for consideration consisting of cash, stock and notes. The aggregate purchase prices for these acquisitions paid at closing was $41,150,000, consisting of $37,950,000 in cash, 130,426 shares of stock and $1,000,000 in subordinated notes. An additional $2,000,000 in cash consideration in the purchase of StarMed has been deferred until certain contingencies expire and is secured by a bank letter of credit held by a third-party escrow agent. Additional consideration of up to $4,950,000 may be paid to the former stockholders of RCSA, contingent upon the retention of clients, and Therapeutic Systems, contingent upon the attainment of certain financial goals over the next three years. The cash purchase price was funded by an increase in the Company's bank credit facility to $90,000,000. Goodwill of approximately $33,000,000 related to the acquisitions is being amortized over 40 years. On May 20, 1999 the Company acquired Salt Lake Physical Therapy Associates, Inc. ("Salt Lake"), a provider of physical, occupational and speech therapy through hospital contracts, a freestanding clinic and home health agencies for $4,500,000, consisting of cash, stock and subordinated notes. Additional consideration of up to $1,900,000 may be paid to the former stockholders contingent upon the attainment of certain financial goals over the next three years. Goodwill of approximately $4,700,000 is being amortized over 40 years. 7 of 16 8 Note 3. - Earnings per Share
Three Months Ended Six Months Ended June 30, June 30, 1999 1998 1999 1998 ------------------------- ------------------------- Numerator: Numerator for basic earnings per share - earnings available to common stockholders (net earnings) $3,725,000 $2,883,000 $7,155,000 $4,899,000 Effect of dilutive securities - after-tax interest on convertible subordinated promissory notes 56,000 56,000 112,000 112,000 --------- --------- --------- --------- Numerator for diluted earnings per share - earnings available to common stockholders after assumed conversions $3,781,000 $2,939,000 $7,267,000 $5,011,000 ========= ========= ========= ========= Denominator: Denominator for basic earnings per share - weighted-average shares outstanding 6,553,000 6,005,000 6,520,000 5,962,000 Effect of dilutive securities: Stock options 395,000 665,000 396,000 668,000 Convertible subordinated promissory notes 423,000 423,000 423,000 423,000 Contingently issuable shares -- 119,000 -- 119,000 --------- --------- --------- --------- Denominator for diluted earnings per share - adjusted weighted-average shares and assumed conversions 7,371,000 7,212,000 7,339,000 7,172,000 ========= ========= ========= ========= Basic earnings per share $.57 $.48 $1.10 $.82 === === ==== === Diluted earnings per share $.51 $.41 $.99 $.70 === === === ===
Note 4. - Industry Segment Information The Company operates in two business segments that are managed separately based on fundamental differences in operations: program management and staffing. The program management segment includes the management of acute rehabilitation and skilled nursing units, outpatient programs and contract therapy services. The staffing segment includes staffing of nurses and therapists on a temporary and permanent basis. All of the Company's services are provided in the United States. Summarized information about the Company's operations for the three months and six months ended June 30, 1999 and 1998 in each industry segment is as follows: 8 of 16 9
Three Months Ended Six Months Ended June 30, June 30, 1999 1998 1999 1998 ----------------------------------- -------------------------------- Revenues from Unaffiliated Customers Program management $ 39,604,000 $ 33,827,000 $ 77,738,000 $ 65,973,000 Staffing $ 34,058,000 $ 9,140,000 $ 65,122,000 $ 20,558,000 ------------ ------------ ------------ ------------ Total $ 73,675,000 $ 42,967,000 $142,860,000 $ 86,531,000 ============ ============ ============ ============ Operating Earnings Program management $ 6,646,000 $ 5,561,000 $ 12,351,000 $ 10,303,000 Staffing $ 458,000 $ (216,000) $ 1,441,000 $ 381,000 ------------ ---------- ------------- ------------ Total $ 7,104,000 $ 5,345,000 $ 13,792,000 $ 10,684,000 ============ ========== ============ ============ Total Assets Program management $ 90,970,000 $ 70,608,000 $ 90,970,000 $ 70,608,000 Staffing $ 71,571,000 $ 30,611,000 $ 71,571,000 $ 30,611,000 ------------ ------------ ------------ ------------ Total $162,541,000 $101,219,000 $162,541,000 $101,219,000 ============ ============ ============ ============ Depreciation and Amortization Program management $ 828,000 $ 646,000 $ 1,607,000 $ 1,298,000 Staffing $ 432,000 $ 252,000 $ 861,000 $ 492,000 ------------ ------------ ------------ ------------ Total $ 1,260,000 $ 898,000 $ 2,468,000 $ 1,790,000 ============ ============ ============ ============ Capital Expenditures Program management $ 492,000 $ 262,000 $ 831,000 $ 362,000 Staffing $ 202,000 $ 95,000 $ 316,000 $ 159,000 ------------ ------------ ------------ ------------ Total $ 694,000 $ 357,000 $ 1,147,000 $ 521,000 ============ ============ ============ ============
Note 5. - Subsequent Event On July 1, 1999, the Company purchased 100% of the capital stock of All Staff, Inc., a provider of per diem nurse staffing to health care providers for $2,100,000 consisting of cash, stock and subordinated notes. The acquisition has been accounted for by the purchase method of accounting, whereby the operating results of All Staff, Inc. will be included in the Company's results of operations commencing on the date of acquisition. Goodwill related to the acquisition will be amortized over 40 years. 9 of 16 10 Item 2. - Management's Discussion and Analysis of Financial Condition and Results of Operations Results of Operations The Company provides physical medicine, rehabilitation and chronic care services in a variety of settings under multi-year contracts. These settings include distinct-part acute rehabilitation units that may or may not be exempt from the Medicare Prospective Payment System (PPS), depending on their stage of development; subacute units that are operated within licensed skilled nursing units; outpatient clinics, both on and off campus of the host hospital, and therapy services for long-term care facilities and school districts. The Company also is a contract provider of therapist and nurse staffing on a continuing and temporary basis to hospitals and long-term care and rehabilitation facilities.
Three Months Ended Six Months Ended Operating Statistics June 30, June 30, -------------------- 1999 1998 1999 1998 --------------------- ------------------- Inpatient Units (Acute and Subacute) Average bed capacity 2,609 2,510 2,599 2,401 Average billable length of stay (days) 14.4 14.2 14.4 14.4 Billable patient days served 174,459 160,068 349,042 313,421 Admissions 12,083 11,260 24,300 21,799 Average daily billable census 1,917 1,759 1,928 1,732 Average occupied beds per unit 14.7 13.9 14.7 14.1 Total units in operation at end of period 132 132 132 132 Outpatient Clinics Patient visits 182,625 76,533 341,228 139,405 Units of service 500,024 233,562 927,363 429,746 Total clinics in operation at end of period 40 22 40 22 Contract Therapy Number of locations at end of period 89 40 89 40 Staffing Weeks worked 30,322 6,061 57,752 13,256
Three Months Ended June 30, 1999 Compared to Three Months Ended June 30, 1998 Operating revenues during the second quarter 1999 increased by $30,708,000, or 71.5%, to $73,675,000 as compared to the second quarter of 1998. Acquisitions accounted for 93.5% of the net increase. Other than the effects of acquisitions, increases in inpatient, outpatient and nurse travel revenues were offset by a decline in therapy staffing and contract therapy revenues. Inpatient unit revenue increased by $1,862,000. A 3.0% increase in the average number of inpatient units from 127.0 to 130.8 units, and an increase in the average daily billable census per inpatient unit of 5.8% from 13.9 to 14.7, generated a 9.0% increase in billable patient days to 174,459 and a 6.8% increase in revenue from inpatient units. The increase in billable census per unit for inpatient units is primarily attributable to a 4.2% increase in admissions per unit. The average billable length of stay was comparable. The increase in billable patient days was offset by a 2.0% decrease in average per 10 of 16 11 diem billing rates, reflecting lower per diem billing rates for subacute units subject to the Balanced Budget Act of 1997 ("BBA"). Outpatient revenue increased 96.1% to $7,153,000 reflecting $747,000 from the July 1998 acquisition of RCSA, $520,000 from the May 1999 acquisition of Salt Lake, and an increase in the average number of outpatient clinics managed from 21.3 to 37.1 (including 10.0 from RCSA and 2.0 from Salt Lake) and an increase in units of service per clinic. Contract therapy revenue increased 14.8% to $3,275,000 reflecting $1,632,000 from the acquisition of Therapeutic Systems in September 1998, offset by a 45.1% decrease in revenue per unit to $38,850, reflecting lower volumes and reimbursement rates under the BBA. Staffing revenue increased 272.6% to $34,058,000, reflecting the addition of $25,819,000 in per diem nurse staffing revenue achieved through the August 1998 acquisition of StarMed and an increase in existing travel nursing staffing revenue of $6,859,000, offset by an approximate $7,738,000 decrease in therapy staffing revenues. Demand for therapists in the long-term care setting has declined significantly as a result of the implementation of a prospective payment system ("PPS")for skilled nursing facilities and units. Operating expenses for the three months ended June 30, 1999 increased by $23,778,000, or 81.5%, to $52,969,000 as compared to the three months ended June 30, 1998. Acquisitions accounted for 91.3% of the net increase. A $2,268,000 increase in operating expenses attributable to the increase in patient days and units of services was offset by an $850,000 decrease in therapy staffing and contract therapy costs. The aggregate excess of operating expenses over operating revenues associated with non-exempt units decreased from $172,000 to $83,000, on an increase in the average number of non-exempt units from 3.3 to 4.0. The per unit average excess of operating expenses over operating revenues decreased from $52,000 to $21,000 reflecting an increase in the average billable census per unit from 3.4 to 6.1. The average excess of operating expenses over operating revenues for units during their non-exempt year can range to as high as $150,000 to $200,000. General and administrative expenses increased $4,809,000, or 63.8%, to $12,342,000, reflecting increases in corporate office expenses as well as marketing, business development, operations and professional services in support of the increase in units, plus the addition of general and administrative expenses of companies acquired. Depreciation and amortization increased $362,000 reflecting an increase in goodwill from acquisitions. Interest expense increased $338,000 reflecting interest on additional debt funding the 1998 acquisitions. Earnings before income taxes increased by $1,380,000, or 28.7%, to $6,188,000. The provision for income taxes for 1999 was $2,463,000 compared to $1,925,000 in 1998, reflecting effective income tax rates of 39.8% and 40.0%, respectively. Net earnings increased by $842,000, or 29.2%, to $3,725,000. Diluted earnings per share increased 24.4% to $.51 from $.41 on a 2.2% increase in the weighted-average shares and assumed conversions outstanding. The increase in shares outstanding is attributable primarily to stock option exercises and shares issued in acquisitions, 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. 11 of 16 12 Six Months Ended June 30, 1999 Compared to Six Months Ended June 30, 1998 Operating revenues during the first six months of 1999 increased by $56,329,000, or 65.1%, to $142,860,000 as compared to the first six months of 1998. Acquisitions accounted for substantially all of the net increase as increases in inpatient, outpatient and nurse travel revenues were offset by a decline in therapy staffing revenue. Inpatient unit revenue increased by $4,087,000. A 6.8% increase in the average number of inpatient units from 122.8 to 131.1 units, and an increase in the average daily billable census per inpatient unit of 4.3% from 14.1 to 14.7, generated an 11.4% increase in billable patient days to 349,042 and a 7.6% increase in revenue from inpatient units. The increase in billable census per unit for inpatient units is primarily attributable to a 4.5% increase in admissions per unit. The average billable length of stay was comparable. The increase in billable patient days was offset by a 3.4% decrease in average per diem billing rates, reflecting lower per diem billing rates for subacute units subject to the BBA. Outpatient revenue increased 113.3% to $13,509,000 reflecting $1,733,000 from the July 1998 acquisition of RCSA, $520,000 from the May 1999 acquisition of Salt Lake, and an increase in the average number of outpatient clinics managed from 19.9 to 36.4 (including 8.8 from RCSA and 2.0 from Salt Lake) and an increase in units of service per clinic. Contract therapy revenue increased 9.0% to $6,053,000 reflecting $3,161,000 from the acquisition of Therapeutic Systems in September 1998, offset by a 43.8% decrease in revenue per unit to $75,761, reflecting lower volumes and reimbursement rates under the BBA. Staffing revenue increased 216.8% to $65,121,000, reflecting the addition of $49,224,000 in per diem nurse staffing revenue achieved through the August 1998 acquisition of StarMed and an increase in existing travel nursing staffing revenue of $12,279,000, offset by an approximate $16,934,000 decrease in therapy staffing revenues. Demand for therapists in the long-term care setting has declined significantly as a result of the implementation of a PPS for skilled nursing facilities and units. Operating expenses for the first six months of 1999 increased by $43,521,000, or 73.9%, to $102,447,000 as compared to the first six months of 1998. Acquisitions accounted for 94.8% of the net increase. A $5,659,000 increase in operating expenses attributable to the increase in patient days and units of services was offset by a $4,140,000 decrease in therapy staffing and contract therapy costs. The aggregate excess of operating expenses over operating revenues associated with non-exempt units decreased from $304,000 to $183,000, on an increase in the average number of non-exempt units from 3.2 to 4.0. The per unit average excess of operating expenses over operating revenues decreased from $96,000 to $46,000 reflecting an increase in the average billable census per unit from 3.1 to 5.8. The average excess of operating expenses over operating revenues for units during their non-exempt year can range to as high as $150,000 to $200,000. General and administrative expenses increased $9,022,000, or 59.6%, to $24,153,000, reflecting increases in corporate office expenses as well as marketing, business development, operations and professional services in support of the increase in units, plus the addition of general and administrative expenses of companies acquired. Depreciation and amortization increased $678,000 reflecting an increase in goodwill from acquisitions. 12 of 16 13 Interest expense increased $710,000 reflecting interest on additional debt funding the acquisitions. Earnings before income taxes and cumulative effect of change in accounting principle increased by $2,324,000, or 24.3%, to $11,874,000. The provision for income taxes for 1999 was $4,719,000 compared to $3,875,000 in 1998, reflecting effective income tax rates of 39.7% and 40.6%, respectively. Earnings before cumulative effect of change in accounting principle increased by $1,480,000, or 26.1%, to $7,155,000. The cumulative effect of change in accounting principle of $776,000 represents the after-tax charge related to the adoption, effective January 1, 1998, of Statement of Position No. 98-5 Reporting on the Costs of Start-up Activities. Net earnings increased by $2,256,000, or 46.1%, to $7,155,000. Diluted earnings per share increased 41.4% to $.99 from $.70 on a 2.3% increase in the weighted-average shares and assumed conversions outstanding. The cumulative effect of change in accounting principle reduced earnings per share by $.11 in 1998 with no comparable reduction in 1999. Excluding the cumulative effect of the change in accounting principle, diluted earnings per share increased 22.2% from $.81 in 1998 to $.99 in 1999. The increase in shares outstanding is attributable primarily to stock option exercises and shares issued in acquisitions, offset by a decrease in the dilutive effect of stock options resulting from a decrease in the average market price of the Company's stock relative to the underlying exercise prices of outstanding options. Liquidity and Capital Resources As of June 30, 1999, the Company had $4,473,000 in cash and current marketable securities and a current ratio of 1.4:1. Working capital decreased by $2,527,000 as of June 30, 1999, compared to December 31, 1998, primarily reflecting the cash paid in the acquisition of Salt Lake. Net accounts receivable were $50,428,000 at June 30, 1999, compared to $46,349,000 at December 31, 1998. The number of days average net revenue in net receivables was 62.3 at June 30, 1999 compared to 63.8 at December 31, 1998. The Company's operating cash flows constitute its primary source of liquidity and historically have been sufficient to fund its working capital and capital expansion requirements. The Company expects to meet its future working capital, capital expenditure, business expansion and debt service requirements from a combination of internal sources and outside financing. The Company has a $30,000,000 revolving line of credit with a balance outstanding as of June 30, 1999 of $2,000,000. Additionally, a letter of credit was outstanding in the amount of $2,000,000, which reduces the amount the Company could borrow under the revolving line of credit. Year 2000 The Company is subject to risks associated with "Year 2000" compliance, a term which refers to the ability of various data processing hardware and software systems to interpret dates correctly beginning January 1, 2000. The Company has developed a plan that includes five phases relating to awareness, assessment, renovation, validation and implementation. The plan establishes a time table and summarizes each major phase of the project and the estimated costs to renovate the systems in preparation for year 2000. Status of the project is regularly reported to the Board of Directors. 13 of 16 14 The awareness phase included a communication of Year 2000 compliance issues and the potential ramifications to the Company, education and identification of key systems. The assessment phase included the inventorying of systems that may be impacted by Year 2000 issues. Systems were then prioritized from critical to non critical, based upon the potential adverse effect on the financial condition of the Company in the event of loss or interruption in the use of each system. Most of the Company's systems are purchased from or outsourced to industry-known vendors. The data systems purchased by the Company and used in their standard configuration include accounting, word processing and spread sheets. These systems have been installed and tested for Year 2000 compliance. The Company's payroll/human resources is outsourced and the Company has been assured by these vendors that new Year 2000 compliant systems have been installed. Other systems such as recruiting and clinical systems have been replaced by or converted to Year 2000 compatible systems. The Company has closely reviewed the Year 2000 progress as reported by each vendor. Where possible, the Company is testing its systems in a non-operating environment. The Company's costs associated with Year 2000 implementation will be reduced due to its outsourcing arrangements; however, incremental direct costs have been incurred in updating telephone and accounting systems in the amount of $100,000, and accelerated capital improvements of $40,000. Although the Company estimates that additional costs will be minimal, unforeseen circumstances could develop in implementing the plan that could result in the cost varying significantly from current estimates. The final phase of the action plan is the implementation of remediated and other systems into the operating environment of the Company. The final phase of the plan has been completed. Concurrent with the development and execution of the plan is the evolution of a contingency plan that includes procedures to be followed should a system fail. The Company is also completing an assessment of Year 2000 risks relating to its lines of business separate from its dependence on data processing. The assessment includes corresponding with customers to ascertain their overall preparedness regarding Year 2000 risks. The plan also provides for the identification and communication with significant non-data processing third-party vendors regarding their preparedness for Year 2000 risks. It is not possible to quantify the overall potential adverse effects to the Company resulting from these customers' or non-data vendors' failure to adequately prepare for Year 2000 compliance. The failure of a customer to prepare adequately for Year 2000 could have a significant adverse effect on such customer's operations and profitability, which, in turn, could inhibit its ability to pay for the Company's services in accordance with their terms. Failure of a non-data vendor to prepare adequately for Year 2000 could have a significant adverse effect on the vendor's operations, which, in turn, could inhibit the vendor's ability to deliver purchased goods and services to the Company in a timely manner. The Company also recognizes the importance of the Year 2000 compliance by customers, payment sources, and vendors to the Company's customers and vendors. The Company must necessarily rely upon the compliance programs of these third parties. The Company does not anticipate any material disruption in operations as the result of any failure by the Company or its subsidiaries. While the Company is making a substantial effort to become Year 2000 compliant, there is no assurance the failure to adequately address all issues relating to the Year 2000 issue would not have a material adverse effect on its financial condition or results of operations. 14 of 16 15 Part II. - OTHER INFORMATION Item 2. Changes in Securities and Use of Proceeds. On May 20, 1999, the Company completed the private placement under Section 4(2) of the Securities Act of 1933, as amended, of an aggregate of 43,153 shares of the Company's Common Stock to the former shareholders of Salt Lake. The Common Stock was issued as part of the consideration paid by the Company in connection with the Company's acquisition of all of the voting securities of Salt Lake. On the date of issuance, the Common Stock had a deemed value for purposes of the transaction of $750,000. On June 30, 1999, the Company completed the private placement under Section 4(2) of the Securities Act of 1933, as amended, of an aggregate of 5,280 shares of the Company's Common Stock to a former shareholder of AllStaff, Inc. The Common Stock was issued as part of the consideration paid by the Company in connection with the Company's acquisition of all of the voting securities of AllStaff, Inc. On the date of issuance, the Common Stock had a deemed value for purposes of the transaction of $100,000. Item 6 - Exhibits and Reports on Form 8-K (a) Exhibits 27 Financial Data Schedule (b) Reports on Form 8-K None 15 of 16 16 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 13, 1999 By /s/ John R. Finkenkeller ------------------------- John R. Finkenkeller Senior Vice President and Chief Financial Officer (Chief Accounting Officer) 16 of 16 17 EXHIBIT INDEX Number Page 27 Financial Data Schedule 18 EX-27 2 FDS --
5 6-MOS DEC-31-1999 JUN-30-1999 1,456,000 3,017,000 54,589,000 4,161,000 0 59,053,000 4,977,000 0 162,541,000 40,974,000 48,315,000 0 0 78,000 68,550,000 162,541,000 142,860,000 142,860,000 102,447,000 129,068,000 0 0 1,948,000 11,874,000 4,719,000 7,155,000 0 0 0 7,155,000 1.10 .99
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