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 March 31, 2000 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 May 10, 2000 - -------------------------------------- --------------------------- Common Stock, par value $.01 per share 7,269,480 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- 1 of 12 2 REHABCARE GROUP, INC. Index Part I. - Financial Information Item 1. - Condensed Consolidated Financial Statements Condensed consolidated balance sheets, March 31, 2000 (unaudited) and December 31, 1999 3 Condensed consolidated statements of earnings for the three months ended March 31, 2000 and 1999 (unaudited) 4 Condensed consolidated statements of cash flows for the three months ended March 31, 2000 and 1999 (unaudited) 5 Notes to condensed consolidated financial statements (unaudited) 6 Item 2. - Management's Discussion and Analysis of Financial Condition and Results of Operations 9 Part II. - Other Information Item 4. - Submission of Matters to Security Holders 11 Item 6. - Exhibits and Reports on Form 8-K 11 Signatures 12 2 of 12 3 PART 1. - FINANCIAL INFORMATION Item 1. - Condensed Consolidated Financial Statements REHABCARE GROUP, INC. Condensed Consolidated Balance Sheets (dollars in thousands, except per share data) March 31, December 31, 2000 1999 ---- ---- (unaudited) Assets: Current assets: Cash and cash equivalents $ 963 738 Marketable securities, available-for-sale 3,019 3,019 Accounts receivable, net of allowance for doubtful accounts of $4,761 and $4,577, respectively 78,856 65,777 Deferred tax assets 5,460 4,898 Prepaid expenses and other current assets 899 1,100 ------- ------- Total current assets 89,197 75,532 Marketable securities, trading 2,133 1,777 Equipment and leasehold improvements, net 8,211 7,269 Excess of cost over net assets acquired, net 98,359 99,020 Other 4,394 3,666 ------- ------- $202,294 187,264 ======= ======= Liabilities and Stockholders' Equity: Current liabilities: Current portion of long-term debt $ 13,319 13,345 Accounts payable 4,379 3,359 Accrued salaries and wages 17,658 16,884 Accrued expenses 10,358 11,592 Income taxes payable 4,135 3,283 ------- ------- Total current liabilities 49,849 48,463 Deferred compensation and other long-term liabilities 2,560 3,623 Deferred tax liabilities 1,946 1,345 Long-term debt, less current portion 58,067 56,050 ------- ------- Total liabilities 112,422 109,481 ======= ======= Stockholders' equity: Preferred stock, $.10 per value, 10,000,000 shares, none issued and outstanding -- -- Common stock, $.01 par value; authorized 20,000,000 shares, issued 8,325,212 and 7,850,283 shares, respectively 83 79 Additional paid-in capital 39,653 33,179 Retained earnings 68,099 62,488 Less common stock held in treasury at cost, 1,165,597 shares (17,975) (17,975) Accumulated other comprehensive earnings 12 12 ------- ------- Total stockholders' equity 89,872 77,783 ------- ------- $202,294 187,264 ======= ======= See notes to condensed consolidated financial statements. 3 of 12 4 REHABCARE GROUP, INC. Condensed Consolidated Statements of Earnings (dollars in thousands, except per share data) (Unaudited) Three Months Ended March 31, 2000 1999 ---- ---- Operating revenues $ 105,933 69,185 Costs and expenses: Operating expenses 75,244 49,478 General and administrative 18,586 11,811 Depreciation and amortization 1,516 1,208 ------ ------ Total costs and expenses 95,346 62,497 ------ ------ Operating earnings 10,587 6,688 Interest income 49 65 Interest expense (1,324) (1,065) Other income (expense), net 8 (2) ------ ------ Earnings before income taxes 9,320 5,686 Income taxes 3,709 2,256 ------ ------ Net earnings $ 5,611 3,430 ====== ====== Net earnings per common share: Basic $ .81 .53 ====== ====== Diluted $ .73 .47 ====== ====== Weighted average number of common shares outstanding: Basic 6,925 6,508 ====== ====== Diluted 7,683 7,358 ====== ====== See notes to condensed consolidated financial statements. 4 of 12 5 REHABCARE GROUP, INC. Condensed Consolidated Statements of Cash Flows (dollars in thousands) (Unaudited) Three Months Ended March 31, 2000 1999 ---- ---- Cash flows from operating activities: Net earnings $5,611 3,430 Adjustments to reconcile net earnings to net cash provided by operating activities: Depreciation and amortization 1,516 1,208 Provision for losses on accounts receivable 992 351 Increase (decrease) in deferred compensation (48) 416 Increase in accounts receivable, net (14,071) (654) Decrease (increase) in prepaid expenses and other current assets 201 (505) Increase in other assets (320) (52) Increase (decrease) in accounts payable and accrued expenses (1,229) 577 Increase (decrease) in accrued salaries and wages 774 (511) Increase in income taxes payable and deferred 891 598 ----- ----- Net cash provided by (used in) operating activities (5,683) 4,858 ----- ----- Cash flows from investing activities: Additions to equipment and leasehold improvements, net (1,516) (453) Purchase of marketable securities (489) (350) Deferred contract costs (334) (200) Proceeds from sale/maturities of investments 133 -- Other (355) (28) ----- ----- Net cash used in investing activities (2,561) (1,031) ----- ----- Cash flows from financing activities: Proceeds from revolving credit facility, net 10,900 -- Payments on long-term debt (2,909) (2,962) Exercise of stock options, including tax benefit 478 307 ----- ----- Net cash provided by (used in) financing activities 8,469 (2,655) ----- ----- Net increase in cash and cash equivalents 225 1,172 Cash and cash equivalents at beginning of period 738 5,666 ----- ----- Cash and cash equivalents at end of period $ 963 6,838 ===== ===== See notes to condensed consolidated financial statements. 5 of 12 6 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 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 ended March 31, 2000, are not necessarily indicative of the results to be expected for the fiscal year. Certain prior years' amounts have been reclassified to conform with the current year presentation. The condensed consolidated financial statements do not include all information and footnotes necessary for a complete presentation of financial position, results of operations and cash flows in conformity with generally accepted accounting principles. Reference is made to the Company's audited consolidated financial statements and the related notes as of December 31, 1999 and 1998 and for each of the years in the three year period ended December 31, 1999, 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. - Conversion of Note Payable On February 14, 2000, the $6.0 million convertible subordinated notes payable to the former Healthcare Staffing Solutions, Inc. shareholders were converted to Company Common Stock. The conversion price was $14.17 per share, resulting in the issuance of 423,526 shares of Company Common Stock. This transaction had no effect on diluted earnings per share. 6 of 12 7 Note 3. - Earnings per Share The following table sets forth the computation of basic and diluted earnings per share: (dollars in thousands, except per share data) Three Months Ended March 31, 2000 1999 ---- ---- Numerator: Numerator for basic earnings per share - earnings available to common stockholders (net earnings) $5,611 3,430 Effect of dilutive securities - after-tax interest on convertible subordinated promissory notes 28 55 ----- ----- Numerator for diluted earnings per share - earnings available to common stockholders after assumed conversions $5,639 3,485 ===== ===== Denominator: Denominator for basic earnings per share - weighted-average shares outstanding 6,925 6,508 Effect of dilutive securities: Stock options 549 427 Convertible subordinated promissory notes 209 423 ----- ----- Denominator for diluted earnings per share - adjusted weighted-average shares and assumed conversions 7,683 7,358 ===== ===== Basic earnings per share $ .81 .53 ===== ===== Diluted earnings per share $ .73 .47 ===== ===== 7 of 12 8 Note 4. - Industry Segment Information The Company operates in four business segments that are managed separately based on fundamental differences in operations: inpatient programs (including acute rehabilitation and skilled nursing units), outpatient programs, contract therapy services and staffing. All of the Company's services are provided in the United States. Summarized information about the Company's operations for the three months ended March 31, 2000 and 1999 in each industry segment is as follows: (dollars in thousands) Three Months Ended March 31, 2000 1999 ---- ---- Revenues from Unaffiliated Customers Inpatient $ 30,511 28,987 Outpatient 9,660 6,356 Contract Therapy 6,200 2,778 Staffing 59,562 31,064 ------- ------- Total $105,933 69,185 ======= ======= Operating Earnings Inpatient $ 5,278 4,969 Outpatient 1,954 1,126 Contract Therapy 676 (197) Staffing 2,679 790 ------- ------- Total $ 10,587 6,688 ======= ======= Total Assets Inpatient $ 55,826 56,668 Outpatient 20,066 12,156 Contract Therapy 21,407 18,583 Staffing 104,995 71,276 ------- ------- Total $202,294 158,683 ======= ======= Depreciation and Amortization Inpatient $ 631 599 Outpatient 165 93 Contract Therapy 96 87 Staffing 624 429 ------- ------- Total $ 1,516 1,208 ======= ======= Capital Expenditures Inpatient $ 912 343 Outpatient 39 21 Contract Therapy 9 1 Staffing 556 88 ------- ------- Total $ 1,516 453 ======= ======= 8 of 12 9 Note 5. - Current Developments in Accounting and Reporting In December 1999, the Securities and Exchange Commission ("SEC") released Staff Accounting Bulletin No. 101, "Revenue Recognition in Financial Statements." This bulletin summarizes certain views of the SEC staff on applying generally accepted accounting principles to revenue recognition in financial statements. Management is currently in the process of evaluating the impact of this bulletin, but does not expect a material effect on the consolidated financial statements. This bulletin is effective beginning the second quarter of fiscal 2000. Item 2. - Management's Discussion and Analysis of Financial Condition and Results of Operations Results of Operations The Company provides physical medicine, rehabilitation and chronic care services in a variety of settings under multi-year contracts. These settings include distinct-part acute rehabilitation programs that may or may not be exempt from the Medicare Prospective Payment System ("PPS"), depending on their stage of development; subacute programs that are operated within licensed skilled nursing units; outpatient clinics, both on and off campus of the host hospital, and therapy services for long-term care facilities and school districts. The Company also is a contract provider of nurse and other medical staffing on a continuing and temporary basis to hospitals and long-term care facilities. Three Months Ended Operating Statistics March 31, 2000 1999 ---- ---- Program Management: Inpatient Programs (Acute and Subacute) Average bed capacity 2,634 2,590 Average billable length of stay (days) 14.3 14.3 Billable patient days served 181,856 174,583 Admissions 12,681 12,217 Average daily billable census 1,998 1,940 Average occupied beds per program 14.8 14.8 Total programs in operation at end of period 132 131 Outpatient Clinics Patient visits 259,409 158,603 Units of service 717,812 427,339 Total clinics in operation at end of period 46 34 Contract Therapy Number of locations at end of period 141 77 Staffing Weeks worked 52,864 27,430 Three Months Ended March 31, 2000 Compared to Three Months Ended March 31, 1999 Operating revenues during the first quarter 2000 increased by $36.7 million, or 53.1%, to $105.9 million as compared to the first quarter of 1999. Acquisitions accounted for 23.6% of the net increase. Inpatient program revenue increased by 9 of 12 10 $1.5 million to $30.5 million. A 2.7% increase in the average number of inpatient programs from 131.3 to 134.8 programs, combined with a 0.3% increase in the average daily billable census per inpatient program to 14.8 resulted in a 4.2% increase in billable patient days to 181,856. The increase in billable patient days, combined with a 1.0% increase in average per diem billing rates, generated a 5.3% increase in revenue from inpatient programs. The increase in billable census per program for inpatient programs is primarily attributable to a 1.1% increase in admissions per program. Outpatient revenue increased 52.0% to $9.7 million, reflecting $1.3 million from the May 20, 1999 acquisition of Salt Lake Physical Therapy Associates Inc., an increase in the average number of outpatient clinics managed from 35.7 to 45.9, and an increase in units of service per clinic. Contract therapy revenue increased 123.2% to $6.2 million, reflecting an increase in the average number of contract therapy locations managed from 75.5 to 134.8, and an increase in revenue per location. Staffing revenue increased 91.7% to $59.6 million, reflecting $1.5 million from the July 1, 1999 acquisition of AllStaff, Inc., $5.9 million from the December 20, 1999 acquisition of eai Healthcare Staffing Solutions, Inc. ("eai Healthcare Staffing"), and a 58.4% increase in weeks worked at existing travel and supplemental offices from 27,420 to 43,459. Operating expenses for the three months ended March 31, 2000 increased by $25.8 million, or 52.1%, to $75.2 million as compared to the three months ended March 31, 1999. Acquisitions accounted for approximately 22.3% of the net increase. The remaining increase in operating expenses is attributable to the increase in patient days, units of services, increased contract therapy locations, and increased weeks worked from travel and supplemental staffing offices. General and administrative expenses increased $6.8 million, or 57.4%, to $18.6 million, reflecting increases in corporate office expenses as well as marketing, business development, operations and professional services in support of the increase in inpatient programs, outpatient clinics, contract therapy locations and staffing offices, plus the addition of general and administrative expenses of companies acquired. Depreciation and amortization increased $308,000 reflecting an increase in goodwill from acquisitions. Interest expense increased $259,000 reflecting interest on additional debt funding the acquisitions, borrowings under the revolving loan for working capital purposes and an increase in interest rates. Earnings before income taxes increased by $3.6 million, or 63.9%, to $9.3 million. The provision for income taxes for 2000 was $3.7 million compared to $2.3 million in 1999, reflecting effective income tax rates of 39.8% and 39.7%, respectively. Net earnings increased by $2.2 million, or 63.6%, to $5.6 million. Diluted earnings per share increased 55.3% to $.73 from $.47 on a 4.4% increase in the weighted-average shares and assumed conversions outstanding. The increase in diluted shares outstanding is attributable primarily to stock option exercises and shares issued in acquisitions, and an increase in the dilutive effect of stock options resulting from an increase in the average market price of the Company's stock relative to the underlying exercise prices of outstanding options. Liquidity and Capital Resources As of March 31, 2000, the Company had $4.0 million in cash and current marketable securities and a current ratio of 1.8:1. Working capital increased by 10 of 12 11 $12.3 million as of March 31, 2000, compared to December 31, 1999, primarily reflecting working capital from the acquisition of eai Healthcare Staffing and working capital generated from operations. Net accounts receivable were $78.9 million at March 31, 2000, compared to $65.8 million at December 31, 1999. The number of day's average net revenue in net receivables was 67.7 at March 31, 2000 compared to 65.6 at December 31, 1999. The Company's operating cash flows constitute its primary source of liquidity and historically have been sufficient to fund its working capital, capital expenditure, business expansion and debt service 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 $30.0 million revolving line of credit with a balance outstanding as of March 31, 2000 of $22.9 million. The Company made additional borrowings in the first quarter of 2000 under its revolving line of credit to fund its $2.0 million letter of credit and to finance its rapid growth in revenues and accounts receivable. The Company believes it has the ability to expand its borrowing capacity, if necessary, to meet working capital and acquisition requirements. Part II. - OTHER INFORMATION Item 4. - Submission of Matters to Security Holders The Annual Meeting of Stockholders of the Company was held on Wednesday, May 10, 2000, at which time the stockholders voted to elect the six incumbent directors to hold office until the next annual meeting of stockholders of the Company or until their successors have been duly elected and qualified. The names of each of the directors of the Company who were reelected at the Annual Meeting and the votes cast "FOR" or for which authority to vote was "WITHHELD" is as follows: Name For Withheld Authority William G. Anderson 6,189,973 39,871 Alan C. Henderson 5,175,754 1,054,090 Richard E. Ragsdale 6,189,973 39,871 John H Short 6,189,973 39,871 H. Edwin Trusheim 6,188,727 41,117 Theodore M. Wight 6,188,727 41,117 Item 6 - Exhibits and Reports on Form 8-K (a) Exhibits 27 Financial Data Schedule (b) Reports on Form 8-K None 11 of 12 12 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. May 10, 2000 By /s/ John R. Finkenkeller John R. Finkenkeller Senior Vice President and Chief Financial Officer (Chief Accounting Officer) 12 of 12