- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
UNITED STATES
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, 2002
--------------
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 9, 2002
- -------------------------------------- ----------------------------
Common Stock, par value $.01 per share 17,374,513
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
1 of 16
REHABCARE GROUP, INC.
Index
Part I. - Financial Information
Item 1. - Condensed Consolidated Financial Statements
Condensed consolidated balance sheets,
March 31, 2002 (unaudited) and December 31, 2001 3
Condensed consolidated statements of earnings for the three
months ended March 31, 2002 and 2001 (unaudited) 4
Condensed consolidated statements of cash flows for the
three months ended March 31, 2002 and 2001(unaudited) 5
Notes to condensed consolidated financial statements (unaudited) 6
Item 2. - Management's Discussion and Analysis of Financial
Condition and Results of Operations 10
Part II. - Other Information
Item 1. - Legal Proceedings 13
Item 4. - Submission of Matters to Security Holders 14
Item 6. - Exhibits and Reports on Form 8-K 15
Signatures 16
2 of 16
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,
2002 2001
---- ----
Assets (unaudited)
------
Current assets:
Cash and cash equivalents $ 26,468 $ 18,534
Marketable securities, available-for-sale 25 1,025
Accounts receivable, net of allowance for doubtful
accounts of $6,429 and $5,902, respectively 88,298 91,384
Income taxes receivable -- 2,055
Deferred tax assets 9,713 7,658
Prepaid expenses and other current assets 2,633 2,390
------- -------
Total current assets 127,137 123,046
Marketable securities, trading 3,038 2,870
Equipment and leasehold improvements, net 20,056 18,373
Excess of cost over net assets acquired, net 101,685 101,685
Other 4,983 4,687
------- -------
Total assets $256,899 $250,661
======= =======
Liabilities and Stockholders' Equity
------------------------------------
Current liabilities:
Accounts payable $ 2,768 $ 3,567
Accrued salaries and wages 27,887 27,141
Accrued expenses 14,164 14,814
Income taxes payable 2,367 --
------- -------
Total current liabilities 47,186 45,522
Deferred compensation and other long-term
liabilities 3,233 3,043
Deferred tax liabilities 2,976 3,060
------- -------
Total liabilities 53,395 51,625
------- -------
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 19,641,129 shares and 19,631,789
shares as of March 31, 2002 and December 31,
2001, respectively 197 196
Additional paid-in capital 109,961 109,522
Retained earnings 111,085 107,057
Less common stock held in treasury at cost,
2,302,898 shares as of March 31, 2002 and
December 31, 2001 (17,757) (17,757)
Accumulated other comprehensive earnings 18 18
------- -------
Total stockholders' equity 203,504 199,036
------- -------
$256,899 $250,661
======= =======
See accompanying notes to condensed consolidated financial statements.
3 of 16
REHABCARE GROUP, INC.
Condensed Consolidated Statements of Earnings
(amounts in thousands, except per share data)
(Unaudited)
Three Months Ended
March 31,
2002 2001
---- ----
Operating revenues $138,229 $130,724
Costs and expenses:
Operating expenses 102,826 93,033
General and administrative 26,926 22,527
Depreciation and amortization 1,925 2,122
------- -------
Total costs and expenses 131,677 117,682
------- -------
Operating earnings 6,552 13,042
Interest income 106 62
Interest expense (165) (1,186)
Other income 3 9
------- -------
Earnings before income taxes 6,496 11,927
Income taxes 2,468 4,749
------- -------
Net earnings $ 4,028 $ 7,178
======= =======
Net earnings per common share:
Basic $ 0.23 $ 0.47
======= =======
Diluted $ 0.22 $ 0.42
======= =======
Weighted-average number of
common shares outstanding:
Basic 17,338 15,434
======= =======
Diluted 18,211 17,014
======= =======
See accompanying notes to condensed consolidated financial statements.
4 of 16
REHABCARE GROUP, INC.
Condensed Consolidated Statements of Cash Flows
(dollars in thousands)
(Unaudited)
Three Months Ended
March 31,
2002 2001
---- ----
Cash flows from operating activities:
Net earnings $ 4,028 $ 7,178
Adjustments to reconcile net earnings to net
cash provided by operating activities:
Depreciation and amortization 1,925 2,122
Provision for doubtful accounts 1,102 929
Income tax benefit realized on employee
stock option exercises 171 4,001
Change in assets and liabilities:
Accounts receivable, net 1,984 (5,901)
Prepaid expenses and other current assets (243) (196)
Other assets 130 (1)
Accounts payable and accrued expenses (1,449) 914
Accrued salaries and wages 746 (381)
Deferred compensation 190 491
Income taxes 2,283 3,652
------- --------
Net cash provided by operating
activities 10,867 12,808
------- --------
Cash flows from investing activities:
Additions to equipment and leasehold improvements, net (3,311) (2,668)
Purchase of marketable securities (183) (591)
Proceeds from sale/maturities of marketable securities 1,015 109
Other, net (723) (420)
------- --------
Net cash used in investing activities (3,202) (3,570)
------- --------
Cash flows from financing activities:
Proceeds from (repayments on) revolving credit
facility, net -- (60,100)
Proceeds from sale of common stock, net -- 49,581
Exercise of stock options 269 2,097
------- --------
Net cash provided by (used in)
financing activities 269 (8,422)
------- --------
Net increase in cash and cash
equivalents 7,934 816
Cash and cash equivalents at beginning of period 18,534 7,942
------- --------
Cash and cash equivalents at end of period $ 26,468 $ 8,758
======= ========
See accompanying notes to condensed consolidated financial statements.
5 of 16
REHABCARE GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
----------------------------------------------------
Three Month Periods Ended March 31, 2002 and 2001
(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. There are no other components of comprehensive income other than
the Company's consolidated net income for the three months ended March 31, 2002
and 2001. 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. These
entries consisted only of normal recurring items. The results of operations for
the three months ended March 31, 2002, are not necessarily indicative of the
results to be expected for the fiscal year. Certain prior year 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 accounting
principles generally accepted in the United States of America. Reference is made
to the Company's audited consolidated financial statements and the related notes
as of December 31, 2001 and 2000 and for each of the years in the three-year
period ended December 31, 2001, 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. - New Accounting Pronouncements
- ---------------------------------------
In July 2001, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("Statement") No. 141, "Business
Combinations," and Statement No. 142, "Goodwill and Other Intangible Assets."
Statement No. 141 requires that the purchase method of accounting be used for
all business combinations initiated and completed after June 30, 2001. Statement
No. 141 also specifies certain criteria intangible assets acquired in a purchase
method business combination must meet to be recognized and reported apart from
goodwill. Statement No. 142 requires that goodwill and intangible assets with
indefinite useful lives no longer be amortized, but instead tested for
impairment at least annually in accordance with the provisions of Statement No.
142. Statement No. 142 also requires that intangible assets with estimable
useful lives be amortized over their respective estimated useful lives to their
estimated residual values, and reviewed for impairment in accordance with
Statement No. 121, "Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to be Disposed Of." The Company adopted the provisions of
Statement No. 141 in July 2001 and Statement No. 142 on January 1, 2002.
Statement No. 141 requires that upon adoption of Statement 142, the Company
evaluate its existing intangible assets and goodwill that were acquired in prior
purchase business combinations, and to make any necessary reclassifications in
order to conform with the new criteria in Statement No. 141 for recognition
apart from goodwill. Upon adoption of Statement No. 142, the Company was
required to reassess the useful lives and residual values of all intangible
assets acquired, and make any necessary amortization period adjustments by the
end of the first quarter of 2002. In addition, to the extent an intangible asset
is identified as having an indefinite life, the Company was required to test the
intangible asset for impairment in accordance with the provisions of Statement
No. 142 within the first quarter of 2002. The Company has tested goodwill and
intangible assets for impairment under the provision of Statement No. 142. These
tests indicated that there was no impairment of goodwill or intangible assets.
As of the date of adoption, the Company had unamortized goodwill in the amount
of $101.7 million and unamortized identifiable intangible assets
6 of 16
REHABCARE GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
----------------------------------------------------------------
in the amount of $0.1 million, all of which are subject to the transition
provisions of Statement No. 141 and Statement No. 142. Under the provisions of
Statement No. 142, for fiscal years beginning after 2001, the Company is no
longer recording amortization expense on goodwill.
As of March 31, 2002, the Company had the following acquired intangible
assets recorded:
Gross Accumulated
Carrying Amount Amortization
--------------- ------------
(in thousands)
Amortized Intangible Assets:
Purchased contracts $100 $ 7
Purchased contracts are being amortized straight-line over the average life of
the contracts, which is 46 months.
The following table indicates the effect on net earnings and diluted earnings
per share if Statement No. 142 had been in effect for each of the years
presented in the Condensed Consolidated Statement of Earnings:
Three Months Ended
March 31,
2002 2001
---- ----
(in thousands, except per share data)
Reported net earnings $ 4,028 $ 7,178
Add back: goodwill amortization, net of taxes -- 697
------- -------
Adjusted net earnings $ 4,028 $ 7,875
======= =======
Basic net earnings per share:
As reported $ 0.23 $ 0.47
Add back: goodwill amortization, net of taxes -- 0.04
------- -------
Adjusted basic net earnings per share $ 0.23 $ 0.51
======= =======
Diluted net earnings per share:
As reported $ 0.22 $ 0.42
Add back: goodwill amortization, net of taxes -- 0.04
------- -------
Adjusted diluted net earnings per share $ 0.22 $ 0.46
======= =======
In October 2001, the FASB issued Statement No. 144 "Accounting for the
Impairment or Disposal of Long-Lived Assets" which supersedes Statement No. 121
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
be Disposed Of." Statement No. 144 also supersedes the accounting and reporting
provisions of APB Opinion No. 30 "Reporting the Results of Operations-Reporting
the Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual
and Infrequently Occurring Events and Transactions." Statement No. 144 is
intended to establish one accounting model for long-lived assets to be disposed
of by sale and to address significant implementation issues. The Company adopted
Statement No. 144 on January 1, 2002. The adoption had no effect on the
condensed consolidated financial statements.
7 of 16
REHABCARE GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
----------------------------------------------------------------
Note 3. - Net earnings per share
- --------------------------------
The following table sets forth the computation of basic and diluted net earnings
per share:
Three Months Ended
March 31,
2002 2001
---- ----
(in thousands, except per share data)
Numerator:
Numerator for basic/diluted net earnings
per share - net earnings available
to common stockholders after
assumed conversions $ 4,028 $ 7,178
======= ========
Denominator:
Denominator for basic net earnings per share -
weighted-average shares outstanding 17,338 15,434
Effect of dilutive securities:
Stock options 873 1,580
------- --------
Denominator for diluted net earnings per share -
adjusted weighted-average shares 18,211 17,014
======= ========
Basic net earnings per share $ 0.23 $ 0.47
======= ========
Diluted net earnings per share $ 0.22 $ 0.42
======= ========
8 of 16
REHABCARE GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
----------------------------------------------------------------
Note 4. - Industry Segment Information
- --------------------------------------
The Company operates in two business segments that are managed separately
based on fundamental differences in operations: temporary healthcare staffing
services and therapy program management. Therapy program management includes
inpatient programs (including acute rehabilitation and skilled nursing units),
contract therapy programs and outpatient therapy programs. 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, 2002 and 2001 in each
industry segment is as follows:
Three Months Ended
March 31,
2002 2001
---- ----
(dollars in thousands)
Revenues from Unaffiliated Customers
- ------------------------------------
Healthcare staffing $ 70,905 $ 74,281
Therapy program management:
Inpatient 31,769 31,057
Contract therapy 23,415 12,340
Outpatient 12,140 13,046
------- -------
Therapy program management total 67,324 56,443
------- -------
Total $138,229 $130,724
======= =======
Operating Earnings (Loss) (1)
- -----------------------------
Healthcare staffing $ (1,664) $ 3,866
Therapy program management:
Inpatient 6,032 7,302
Contract therapy 1,553 479
Outpatient 631 1,395
------- -------
Therapy program management total 8,216 9,176
------- -------
Total $ 6,552 $ 13,042
======= =======
(1) Operating earnings for the prior year have been adjusted to reflect the
corporate expense allocation methodology being utilized in the current year.
Depreciation and Amortization
- -----------------------------
Healthcare staffing $ 473 $ 769
Therapy program management:
Inpatient 1,047 907
Contract therapy 227 166
Outpatient 178 280
------- -------
Therapy program management total 1,452 1,353
------- -------
Total $ 1,925 $ 2,122
======= =======
Capital Expenditures
- --------------------
Healthcare staffing $ 177 $ 444
Therapy program management:
Inpatient 1,638 960
Contract therapy 904 680
Outpatient 592 584
------- -------
Therapy program management total 3,134 2,224
------- -------
Total $ 3,311 $ 2,668
======= =======
9 of 16
REHABCARE GROUP, INC.
Note 4. - Industry Segment Information, Continued
- -------------------------------------------------
As of March 31,
2002 2001
---- ----
(dollars in thousands)
Total Assets
- ------------
Healthcare staffing $100,775 $110,483
Therapy program management:
Inpatient 95,436 64,314
Contract therapy 30,051 28,181
Outpatient 30,637 31,468
------- -------
Therapy program management total 156,124 123,963
------- -------
Total $256,899 $234,446
======= =======
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 the Company's actual results in
future periods to differ materially from forecasted results. These risks and
uncertainties may include, but are not limited to, the effect of certain
corrective actions already taken in supplemental staffing, the timing and
magnitude of volume improvements, new program openings and planned cost
controls, fluctuations in occupancy of the Company's hospital and long-term care
clients, changes in governmental reimbursement regulations or policies,
inability to attract new client relationships or to retain existing client
relationships, and the ability to attract operational and professional employees
and general economic downturn.
Results of Operations
- ---------------------
The Company provides temporary healthcare staffing and therapy program
management services for hospitals and long-term care facilities. The Company
derives its revenue from two business segments: temporary healthcare staffing
services and therapy program management. The Company's temporary healthcare
staffing segment includes both supplemental personnel and travelers who are
typically on 13 week assignments. The Company's therapy program management
segment includes inpatient programs (including acute rehabilitation and skilled
nursing units), contract therapy programs and outpatient therapy programs.
Three Months Ended
March 31,
Operating Statistics: 2002 2001
---- ----
Healthcare staffing:
Average number of staffing branch offices 112 103
Number of weeks worked (supplemental and travel) 48,392 59,370
Average revenue per week worked $ 1,465 $ 1,251
Therapy program management:
Inpatient units (acute rehabilitation and
skilled nursing):
Average number of programs 134.3 138.0
Average bed capacity 2,686 2,724
Average length of stay (days) 13.4 13.8
Patient days 185,015 188,576
Admissions 13,767 13,634
Total programs in operation at end of period 133 138
10 of 16
Contract therapy:
Average number of locations 337.1 215.0
Number of locations at end of period 351 219
Average revenue per location $ 69,458 $57,394
Outpatient programs:
Average number of programs 56.3 64.5
Patient visits 354,297 375,008
Units of service 956,949 1,072,629
Total programs in operation at end of period 55 65
Three Months Ended March 31, 2002 Compared to Three Months Ended March 31, 2001
- -------------------------------------------------------------------------------
REVENUES
Operating revenues during the first quarter of 2002 increased by $7.5
million, or 5.7%, to $138.2 million as compared to $130.7 million in operating
revenues during the first quarter of 2001. Increases in contract therapy and
inpatient were offset by declines in staffing and outpatient.
Staffing revenue decreased by 4.5% from $74.3 million in the first quarter
of 2001 to $70.9 million in the first quarter of 2002. Supplemental staffing
revenues decreased 19.7% from $57.4 million in the first quarter of 2001 to
$46.0 million in the first quarter of 2002, as the Company completed the
implementation in the supplemental staffing division of new software and systems
training, database repopulation and management transition initiated in the
fourth quarter of 2001. A 28.1% decrease in weeks worked from 49,247 in the
first quarter of 2001 to 35,403 in the first quarter of 2002 was offset by an
11.7% increase in average revenue per week worked from $1,157 to $1,292. The
increase in average revenue per week worked was primarily the result of an
increased focus on placing more RN's and LPN's versus CNA's. Travel staffing
revenues increased 46.8% from $16.9 million in the first quarter of 2001 to
$24.9 million in the first quarter of 2002, reflecting a 28.3% increase in weeks
worked from 10,123 in the first quarter of 2001 to 12,989 in the first quarter
of 2002 and a 14.5% increase in average revenue per week worked from $1,672 to
$1,914.
Inpatient program revenue increased by 2.3% from $31.1 million in the first
quarter of 2001 to $31.8 million in the first quarter of 2002. A 4.3% increase
in revenue per patient day was offset by a 1.9% decrease in patient days from
188,576 to 185,015. The decrease in patient days primarily resulted from a
decrease in the average number of inpatient programs managed from 138.0 to
134.3. Average length of stay decreased to 13.4. The decrease in average length
of stay was primarily a result of the phase-in of the Medicare prospective
payment system ("PPS") which began on January 1, 2002 for inpatient
rehabilitation facilities. As the Company's clients convert to PPS, the Company
is moving to modify the reimbursement in its contracts from primarily a rate per
patient day to a rate per discharge. This will help align the Company's
incentives with its clients.
Contract therapy revenue increased by 89.7% from $12.3 million in the first
quarter of 2001 to $23.4 million in the first quarter of 2002, reflecting a
56.8% increase in the average number of contract therapy locations managed from
215.0 to 337.1, and a 21.0% increase in revenue per location from $57,394 to
$69,458. The increase in revenue per location is primarily the result of same
store growth and a continued focus on opening larger locations.
Outpatient revenue decreased by 6.9% from $13.0 million in the first
quarter of 2001 to $12.1 million in the first quarter of 2002, reflecting a
12.7% decrease in the average number of outpatient programs managed from 64.5 to
56.3, offset by a 2.3% increase in units of service per program from 16,630 to
17,006 and a 6.7% increase in the average revenue per location from $202,250 to
$215,746.
11 of 16
OPERATING EARNINGS
Consolidated operating earnings decreased by 49.8% from $13.0 million in
the first quarter of 2001 to $6.6 million in the first quarter of 2002.
Operating expenses as a percentage of revenues increased from 71.2% in the first
quarter of 2001 to 74.4% in the first quarter of 2002, primarily reflecting
narrower spreads between bill and pay rates in the staffing division and lower
productivity in the therapy program management division. General and
administrative expenses as a percentage of revenue increased from 17.2% in the
first quarter of 2001 to 19.5% in the first quarter of 2002. Depreciation and
amortization as a percentage of revenues decreased from 1.6% in the first
quarter of 2001 to 1.4% in the first quarter of 2002 as a result of the
elimination of goodwill amortization from the adoption of Statement No. 142 on
January 1, 2002. The elimination of goodwill amortization was offset by
increased depreciation expense recorded on capital expenditures. The following
discussion by division includes the effect of adjusting the first quarter of
2001 operating earnings to reflect the current overhead allocation method being
utilized in the first quarter of 2002.
Operating earnings (loss) in the staffing division decreased by $5.5
million to a loss of $1.7 million in the first quarter of 2002, reflecting
significant expenses associated with management reorganization, systems roll-out
and training, and a move toward consolidation of the supplemental staffing
division's branch administrative functions. As a result, general and
administrative expenses as a percentage of revenues increased from 18.8% in the
first quarter of 2001 to 22.8% in the first quarter of 2002. Gross profit margin
decreased from 26.0% in the first quarter of 2001 to 22.1% in first quarter of
2002 as a result of decreased productivity in the branches due to systems
training and narrower spreads between bill and pay rates. Depreciation and
amortization expense as a percentage of revenues decreased from 1.0% in the
first quarter of 2001 to 0.7% in the first quarter of 2002 as a result of the
elimination of goodwill amortization from the adoption of Statement No. 142.
Inpatient operating earnings decreased 17.4% from $7.3 million in the first
quarter of 2001 to $6.0 million in the first quarter of 2002, reflecting a
decrease in operating margin from 37.9% to 35.8%, and an increase in general and
administrative expenses as a percent of revenues from 11.8% to 13.3%. The
decrease in operating margin was primarily the result of lower productivity in
further preparing for the implementation of a prospective payment system.
Depreciation and amortization as a percentage of revenues increased from 2.5% in
2001 to 3.3% in 2002, as depreciation on capital expenditures more than offset
the elimination of goodwill amortization related to Statement No. 142.
Contract therapy operating earnings increased 224.2% from $0.5 million in
the first quarter of 2001 to $1.6 million in the first quarter of 2002,
reflecting an 89.7% increase in operating revenues, offset by a decrease in
operating margin from 31.0% to 27.1% as a result of a high degree of contract
labor costs associated with the large number of programs added. General and
administrative expenses as a percentage of revenues decreased from 23.7% to
18.0%. Depreciation and amortization expense as a percentage of revenues
decreased from 1.8% in the first quarter of 2001 to 1.0% in the first quarter of
2002, reflecting the elimination of goodwill amortization expense related to
Statement No. 142.
Outpatient operating earnings decreased 54.8% from $1.4 million in the
first quarter of 2001 to $0.6 million in the first quarter of 2002, reflecting a
decrease in operating margin from 28.5% to 25.8% as a result of increased labor
expenses and an increase in general and administrative expenses as a percentage
of revenues from 15.3% to 18.8%. Depreciation and amortization expense as a
percentage of revenues decreased from 2.6% in 2001 to 1.5% in 2002, reflecting
the elimination of goodwill amortization expense related to Statement No. 142.
12 of 16
NONOPERATING ITEMS
Interest income increased by $44,000 or 71.0% to $0.1 million due to
increased cash balances.
Interest expense decreased by $1.0 million or 86.1% from $1.2 million in
the first quarter of 2001 to $0.2 million in the first quarter of 2002,
primarily reflecting the repayment of the line of credit debt during March 2001
and the repayment of all subordinated debt during the fourth quarter 2001.
Earnings before income taxes decreased by $5.4 million from $11.9 million
in the first quarter of 2001 to $6.5 million in the first quarter of 2002. The
provision for income taxes in the first quarter of 2001 was $4.7 million
compared to $2.5 million in the first quarter of 2002, reflecting effective
income tax rates of 39.8% and 38.0%, respectively. Net earnings decreased by
$3.2 million, or 43.9%, to $4.0 million in the first quarter of 2002 from $7.2
million in the first quarter of 2001. Diluted net earnings per share decreased
by 47.6% from $0.42 in the first quarter of 2001 to $0.22 in the first quarter
of 2002 on a 7.0% increase in the weighted-average shares outstanding. The
increase in the weighted-average shares outstanding was attributable primarily
to the secondary equity offering during March 2001, and stock option grants and
exercises.
Liquidity and Capital Resources
- -------------------------------
As of March 31, 2002, the Company had $26.5 million in cash and short-term
investments and a current ratio, the amount of current assets divided by current
liabilities, of 2.7 to 1. Working capital increased by $2.4 million to $80.0
million as of March 31, 2002, compared to $77.5 million as of December 31, 2001.
The increase in working capital is primarily due to working capital generated
from operations.
Net accounts receivable were $88.3 million at March 31, 2002, compared to
$91.4 million at December 31, 2001. The number of days' average net revenue in
net receivables was 56.5 at March 31, 2002, it's lowest point in almost four
years, compared to 63.8 at December 31, 2001.
The Company's operating cash flows constitute its primary source of
liquidity and historically have been sufficient to fund its working capital,
capital expenditures, internal business expansion and debt service requirements.
The Company expects to meet its future working capital, capital expenditures,
internal and external business expansion and debt service requirements from a
combination of internal sources and outside financing. The Company has a $125.0
million revolving line of credit expiring in August 2005 with no balance
outstanding as of March 31, 2002, and no other debt obligation.
Part II. - Other Information
- ----------------------------
Item 1 - Legal Proceedings
- --------------------------
The Company is subject to various claims and legal actions in the ordinary
course of business. These matters include, without limitation, professional
liability, employee-related matters and inquiries and investigations by
governmental agencies relating to Medicare or Medicaid reimbursement and other
issues.
The Company recently reached a settlement agreement with the United States
Department of Labor under which the Company has conducted a self-audit of the
overtime practices for certain temporary employees of the Company's staffing
division for the period from January 1, 1998 to October 26, 2001.
13 of 16
In order to implement the agreement, the Department of Labor recently filed suit
against the Company and certain of the Company's subsidiaries in federal court
in St. Louis, Missouri and a pre-negotiated order was approved by the court on
November 2, 2001 (the "Order"). The suit serves to bar future multiple suits on
the overtime compensation issue for the time period covered by the Order with
respect to the employees covered by the Order, and the time period for the audit
has been extended by agreement to December 31, 2001. Pursuant to the Order, the
Company conducted a review of personnel records. Based upon such review, in
April 2002 the Company submitted a report to the Department of Labor indicating
whether each individual employed as a temporary employee of the Company's
staffing division during the period under audit was or was not owed any
additional overtime compensation. This report is currently being reviewed by the
Department of Labor. In the fourth quarter of 2001, the Company reported a
non-recurring charge of approximately $6 million relating to costs associated
with these overtime payments, including the associated costs of the audit. While
the Company believes the $6 million will be adequate to cover these payments and
costs, the actual total expenses incurred in this matter may be higher or lower.
The Company expects these payments to be made during the second quarter of 2002.
In addition, the Company's clients may become subject to claims,
governmental inquiries and investigations and legal actions to which the Company
may become a party relating to services provided by the Company. From time to
time and depending on the particular facts and circumstances, the Company may be
subject to indemnification obligations under the Company's contracts with the
Company's clients relating to these matters. The Company has recently received a
formal demand for indemnification by the current owner of a client facility for
liabilities, including attorneys' fees and expenses, arising out of a recent
assessment of liability communicated by the United States Department of Justice
to the Company's client for settlement purposes. The Department's claim is the
result of its investigation of alleged improper billing practices under the
Medicare program relating to an inpatient rehabilitation unit that the Company
manages at the client facility. The Company has denied any liability under the
indemnification provisions of the Company's contract with the client facility
based upon its belief that the alleged inaccuracies in the billing process for
Medicare patients were not the result of any of the Company's actions or
omissions in operating the rehabilitation unit. At no time was the Company
responsible, either contractually or otherwise, for the client facility's cost
reporting for Medicare patients, nor does the Company believe that any of the
clinical information that the Company provided to the client facility formed the
basis for the allegedly inaccurate cost reporting. The Company is not a party to
the Department of Justice's claim against the client facility and the Company
has declined its client's offer to be a party to the settlement discussions
based upon the Company's belief that the Company has no indemnification
liability on this claim.
Item 4 - Submission of Matters to Security Holders
- --------------------------------------------------
The annual Meeting of Stockholders of the Company was held on Wednesday,
May 1, 2002, at which time the stockholders voted to elect the seven 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 14,772,808 134,975
Colleen Conway-Welch 14,772,840 134,943
Alan C. Henderson 13,083,296 1,824,487
Richard E. Ragsdale 14,773,253 134,530
John H. Short 14,774,063 133,720
H. Edwin Trusheim 14,766,918 140,865
Theodore M. Wight 14,771,573 136,210
14 of 16
Item 6 - Exhibits and Reports on Form 8-K
- -----------------------------------------
(a) Exhibits
None
(b) Reports on Form 8-K
None
15 of 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.
May 10, 2002
By:/s/ Gregory J. Eisenhauer
---------------------------
Gregory J. Eisenhauer
Senior Vice President and
Chief Financial Officer
By:/s/ James M. Douthitt
--------------------------
James M. Douthitt
Senior Vice President and
Chief Accounting Officer
16 of 16