UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2003
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Commission File Number 0-19294
-------
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the transition period from _______ to ________
REHABCARE GROUP, INC.
---------------------
(Exact name of Registrant as specified in its charter)
Delaware 51-0265872
- ------------------------------ ---------------------------------------
(State or other jurisdiction of (I.R.S. Employer Identification Number)
incorporation or organization)
7733 Forsyth Boulevard, Suite 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 by check mark whether the Registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act.) Yes X No
_____ _____
Indicate the number of shares outstanding of the Registrant's common stock, as
of the latest practicable date.
Class Outstanding at August 11, 2003
- -------------------------------------- ------------------------------
Common Stock, par value $.01 per share 16,068,527
1 of 26
REHABCARE GROUP, INC.
Index
Part I. - Financial Information
Item 1. - Condensed Consolidated Financial Statements
Condensed consolidated balance sheets,
June 30, 2003 (unaudited) and December 31, 2002 3
Condensed consolidated statements of earnings for the three months
and six months ended June 30, 2003 and 2002
(unaudited) 4
Condensed consolidated statements of cash flows for the
six months ended June 30, 2003 and 2002 (unaudited) 5
Condensed consolidated statements of comprehensive
earnings for three months and six months ended June 30,
2003 and 2002 (unaudited) 6
Notes to condensed consolidated financial statements (unaudited) 7
Item 2. - Management's Discussion and Analysis of Financial
Condition and Results of Operations 14
Item 3. - Quantitative and Qualitative Disclosures about Market Risks 23
Item 4. - Controls and Procedures 23
Part II. - Other Information 23
Item 1. - Legal Proceedings 23
Item 6. - Exhibits and Reports on Form 8-K 25
Signatures 26
2 of 26
PART 1. - FINANCIAL INFORMATION
Item 1. - Condensed Consolidated Financial Statements
- -----------------------------------------------------
REHABCARE GROUP, INC.
Condensed Consolidated Balance Sheets
(dollars in thousands, except share and per share data)
June 30, December 31,
2003 2002
---- ----
Assets (unaudited)
------
Current assets:
Cash and cash equivalents $ 23,521 $ 9,580
Marketable securities, available-for-sale 6 4
Accounts receivable, net of allowance for doubtful
accounts of $5,243 and $5,181, respectively 86,304 87,221
Income taxes receivable 1,907 2,497
Deferred tax assets 4,292 2,529
Other current assets 3,433 3,625
------- -------
Total current assets 119,463 105,456
Marketable securities, trading 3,159 4,252
Equipment and leasehold improvements, net 18,547 19,844
Excess cost over net assets acquired, net 101,685 101,685
Other 3,745 4,293
------- -------
Total assets $246,599 $235,530
======= =======
Liabilities and Stockholders' Equity
------------------------------------
Current liabilities:
Accounts payable $ 1,577 $ 1,959
Accrued salaries and wages 28,227 28,579
Accrued expenses 7,921 7,072
------- -------
Total current liabilities 37,725 37,610
Deferred compensation and other long-term
liabilities 3,163 4,266
Deferred tax liabilities 6,559 5,040
------- -------
Total liabilities 47,447 46,916
------- -------
Stockholders' equity:
Preferred stock, $.10 par value, authorized
10,000,000 shares, none issued and outstanding -- --
Common stock, $.01 par value; authorized 60,000,000
shares, issued 20,057,456 shares and 19,846,416
shares as of June 30, 2003 and December 31,
2002, respectively 201 198
Additional paid-in capital 113,703 111,671
Retained earnings 139,953 131,452
Less common stock held in treasury at cost,
4,002,898 shares as of June 30, 2003 and
December 31, 2002 (54,704) (54,704)
Accumulated other comprehensive earnings (1) (3)
------- -------
Total stockholders' equity 199,152 188,614
------- -------
$246,599 $235,530
======= =======
See accompanying notes to condensed consolidated financial statements.
3 of 26
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,
2003 2002 2003 2002
---- ---- ---- ----
Operating revenues $136,043 $140,836 $274,885 $279,065
Costs and expenses:
Operating expenses 102,215 103,623 206,905 206,449
Selling, general & administrative
Divisions 17,137 18,839 35,427 37,819
Corporate 6,939 6,813 13,735 14,759
Depreciation and amortization 2,106 2,035 4,345 3,960
------- ------- ------- -------
Total costs and expenses 128,397 131,310 260,412 262,987
------- ------- ------- -------
Operating earnings 7,646 9,526 14,473 16,078
Interest income 29 105 43 211
Interest expense (183) (160) (348) (325)
Other income (expense) (53) 1 (73) 4
------- ------- ------- -------
Earnings before income taxes 7,439 9,472 14,095 15,968
Income taxes 2,982 3,600 5,594 6,068
------- ------- ------- -------
Net earnings $ 4,457 $ 5,872 $ 8,501 $ 9,900
======= ======= ======= =======
Net earnings per common share:
Basic $ 0.28 $ 0.34 $ 0.53 $ 0.57
======= ======= ======= =======
Diluted $ 0.27 $ 0.32 $ 0.52 $ 0.54
======= ======= ======= =======
Weighted-average number of
common shares outstanding:
Basic 15,945 17,413 15,898 17,376
======= ======= ======= =======
Diluted 16,444 18,298 16,469 18,267
======= ======= ======= =======
See accompanying notes to condensed consolidated financial statements.
4 of 26
REHABCARE GROUP, INC.
Condensed Consolidated Statements of Cash Flows
(dollars in thousands)
(Unaudited)
Six Months Ended
June 30,
2003 2002
---- ----
Cash flows from operating activities:
Net earnings $ 8,501 $ 9,900
Adjustments to reconcile net earnings to net
cash provided by operating activities:
Depreciation and amortization 4,345 3,960
Provision for doubtful accounts 1,612 2,239
Write-down of investment 50 --
Income tax benefit realized on employee
stock option exercises 583 339
Change in assets and liabilities:
Accounts receivable, net (695) 5,148
Prepaid expenses and other current assets 192 (448)
Other assets 189 221
Accounts payable and accrued expenses 467 (4,649)
Accrued salaries and wages (352) 2,743
Deferred compensation (608) 242
Income taxes 346 1,636
------ ------
Net cash provided by operating activities 14,630 21,331
------ ------
Cash flows from investing activities:
Additions to equipment and leasehold improvements, net (2,397) (6,322)
Purchase of marketable securities (189) (269)
Proceeds from sale/maturities of marketable securities 787 1,031
Other, net (342) (1,124)
------ ------
Net cash used in investing activities (2,141) (6,684)
------ ------
Cash flows from financing activities:
Exercise of stock options 1,452 856
------ ------
Net cash provided by financing activities 1,452 856
------ ------
Net increase in cash
and cash equivalents 13,941 15,503
Cash and cash equivalents at beginning of period 9,580 18,534
------ ------
Cash and cash equivalents at end of period $ 23,521 $ 34,037
====== =======
See accompanying notes to condensed consolidated financial statements.
5 of 26
REHABCARE GROUP, INC.
Condensed Consolidated Statements of Comprehensive Earnings
(dollars in thousands)
(Unaudited)
Three Months Ended Six Months Ended
June 30, June 30,
2003 2002 2003 2002
---- ---- ---- ----
Net earnings $ 4,457 $ 5,872 $ 8,501 $ 9,900
Other comprehensive earnings:
Unrealized holding gains
(losses) arising during
period on securities 3 (12) 3 (12)
Income tax benefit (expense) (1) 3 (1) 3
------- -------- ------- --------
Comprehensive earnings $ 4,459 $ 5,863 $ 8,503 $ 9,891
======= ======= ======= ======
See accompanying notes to condensed consolidated financial statements.
6 of 26
REHABCARE GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
----------------------------------------------------
Six Month Periods Ended June 30, 2003 and 2002
(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 entries necessary
for a fair presentation of such financial statements have been included. The
results of operations for the three months and six months ended June 30, 2003
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, 2002 and 2001 and for each of the years in the three-year
period ended December 31, 2002, included in the Annual Report on Form 10-K on
file with the Securities and Exchange Commission, which provide additional
disclosures and a further description of the Company's accounting policies.
Note 2. - Critical Accounting Policies and Estimates
- ----------------------------------------------------
The Company's condensed consolidated financial statements have been
prepared in accordance with accounting principles generally accepted in the
United States of America. Preparation of these statements requires management to
make judgments and estimates. Some accounting policies have a significant impact
on amounts reported in these financial statements. A summary of significant
accounting policies and a description of accounting policies that are considered
critical may be found in our 2002 Annual Report on Form 10-K, filed on March 14,
2003, in the Critical Accounting Policies and Estimates section of "Item 7. -
Management's Discussion and Analysis of Financial Condition and Results of
Operations."
Note 3. - Goodwill and Other Identifiable Intangible Assets
- -----------------------------------------------------------
Statement of Financial Accounting Standards (Statement) No. 142 "Goodwill
and Other Intangible Assets" eliminates the requirement to amortize goodwill and
indefinite-lived intangible assets, requiring instead that those assets be
tested for impairment at least annually, and more often when events indicate
that an impairment may exist. An impairment loss must be recognized if the
carrying amount of an intangible asset is not recoverable and its carrying
amount exceeds its fair value. As required by Statement No. 144, "Accounting for
the Impairment or Disposal of Long-Lived Assets", a long-lived asset shall be
tested for recoverability whenever a significant adverse change in the business
climate occurs that could affect the value of a long-lived asset. Due to
conditions in the healthcare staffing industry, our healthcare staffing division
is experiencing declines in operating revenues and operating earnings. As a
result, the Company has performed a test for recoverability under the provisions
of Statement No. 144 and Statement No. 142 as of June 30, 2003. Based on the
tests performed, the Company has determined that long-lived assets (including
goodwill) are not impaired as of June 30, 2003. The Company will continue to
perform impairment tests on a quarterly basis until events or circumstance
indicate that testing is no longer required.
7 of 26
REHABCARE GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
----------------------------------------------------------------
Note 4. - Stock-Based Compensation
- ----------------------------------
The Company accounts for stock-based employee compensation plans using the
intrinsic value method under Accounting Principles Board Opinion No. 25 and
related interpretations. Accordingly, stock-based employee compensation cost is
not reflected in net earnings, as all stock options granted under the plans had
an exercise price equal to the market value of the underlying common stock on
the date of grant. Had compensation cost for the Company's stock-based
compensation plans been determined based on the fair value at the grant dates
for awards under those plans consistent with the method of Statement No. 123,
"Accounting for Stock-Based Compensation," the Company's net earnings and
earnings per share would have been reduced to the pro forma amounts indicated
below:
Three Months Ended Six Months Ended
June 30, June 30,
2003 2002 2003 2002
---- ---- ---- ----
(in thousands, except per share data)
Net earnings, as reported $4,457 $5,872 $8,501 $9,900
Deduct: Total stock-based employee
compensation expense determined under
fair value based method for all awards,
net of related tax effects 1,083 1,286 2,181 2,443
------ ------ ------ ------
Pro forma net earnings $3,374 $4,586 $6,320 $7,457
====== ====== ====== ======
Basic net earnings per share: As reported $0.28 $0.34 $0.53 $0.57
===== ===== ===== =====
Pro forma $0.21 $0.26 $0.40 $0.43
===== ===== ===== =====
Diluted net earnings per share: As reported $0.27 $0.32 $0.52 $0.54
===== ===== ===== =====
Pro forma $0.21 $0.25 $0.38 $0.41
===== ===== ===== =====
Note 5. - Net earnings per share
- --------------------------------
Basic net earnings per share excludes dilution and is computed by dividing
income available to common stockholders by the weighted average common shares
outstanding for the period. Diluted net earnings per share reflects the
potential dilution that could occur if securities or other contracts to issue
common stock were exercised and converted into common stock or resulted in the
issuance of common stock that then shared in the earnings of the entity (as
calculated utilizing the treasury stock method).
8 of 26
REHABCARE GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
----------------------------------------------------------------
The following table sets forth the computation of basic and diluted net earnings
per share:
Three Months Ended Six Months Ended
June 30, June 30,
2003 2002 2003 2002
---- ---- ---- ----
(in thousands, except per share data)
Numerator:
Numerator for basic/diluted net
earnings per share - net earnings
available to common stockholders $ 4,457 $ 5,872 $ 8,501 $ 9,900
====== ====== ====== ======
Denominator:
Denominator for basic net earnings
per share - weighted-average
shares outstanding 15,945 17,413 15,898 17,376
Effect of dilutive securities:
Stock options 499 885 571 891
------ ------ ------ ------
Denominator for diluted net
earnings per share - adjusted
weighted-average shares 16,444 18,298 16,469 18,267
====== ====== ====== ======
Basic net earnings per share $ 0.28 $ 0.34 $ 0.53 $ 0.57
====== ====== ====== ======
Diluted net earnings per share $ 0.27 $ 0.32 $ 0.52 $ 0.54
====== ====== ====== ======
Note 6. - Industry Segment Information
- --------------------------------------
The Company operates in two business segments that are managed separately
based on fundamental differences in operations: program management services and
healthcare staffing services. Program management includes hospital
rehabilitation services (including inpatient acute rehabilitation and skilled
nursing units and outpatient therapy programs) and contract therapy programs.
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, 2003 and 2002 in each industry segment is as follows:
9 of 26
REHABCARE GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
----------------------------------------------------------------
Three Months Ended Six Months Ended
June 30, June 30,
2003 2002 2003 2002
---- ---- ---- ----
Operating Revenues from
Unaffiliated Customers (in thousands)
- --------------------------
Program management:
Hospital
rehabilitation
services $ 46,313 $ 44,669 $ 92,472 $ 88,578
Contract therapy 32,914 25,607 63,840 49,022
-------- -------- -------- --------
Program
management total 79,227 70,276 156,312 137,600
Healthcare staffing 57,194 70,560 119,310 141,465
-------- -------- -------- --------
Subtotal 136,421 140,836 275,622 279,065
Less Intercompany
revenues* (378) -- (737) --
-------- -------- -------- --------
Total $136,043 $140,836 $274,885 $279,065
======== ======== ======== ========
*Intercompany revenues represent healthcare staffing sales made to hospital
rehabilitation services and contract therapy at market rates.
Three Months Ended Six Months Ended
June 30, June 30,
2003 2002 2003 2002
---- ---- ---- ----
Operating Earnings (in thousands)
- --------------------------
Program management:
Hospital
rehabilitation
services $ 7,943 $ 7,757 $ 15,017 $ 14,420
Contract therapy 1,812 2,095 3,551 3,655
-------- -------- -------- --------
Program
management total 9,755 9,852 18,568 18,075
Healthcare staffing (2,109) (326) (4,095) (1,997)
-------- -------- -------- --------
Total $ 7,646 $ 9,526 $ 14,473 $ 16,078
======== ======== ======== ========
Three Months Ended Six Months Ended
June 30, June 30,
2003 2002 2003 2002
---- ---- ---- ----
Depreciation and
Amortization (in thousands)
- --------------------------
Program management:
Hospital
rehabilitation
services $ 1,305 $ 1,321 $ 2,772 $ 2,546
Contract therapy 332 265 650 492
-------- -------- -------- --------
Program
management total 1,637 1,586 3,422 3,038
Healthcare staffing 469 449 923 922
-------- -------- -------- --------
Total $ 2,106 $ 2,035 $ 4,345 $ 3,960
======== ======== ======== ========
10 of 26
REHABCARE GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
----------------------------------------------------------------
Three Months Ended Six Months Ended
June 30, June 30,
2003 2002 2003 2002
---- ---- ---- ----
Capital Expenditures (in thousands)
- --------------------------
Program management:
Hospital
rehabilitation
services $ 447 $ 1,471 $ 802 $ 3,701
Contract therapy 354 1,423 630 2,327
-------- -------- -------- --------
Program
management total 801 2,894 1,432 6,028
Healthcare staffing 682 117 965 294
-------- -------- --------- --------
Total $ 1,483 $ 3,011 $ 2,397 $ 6,322
======== ======== ======== ========
Total Assets Unamortized Goodwill
------------ --------------------
June 30, June 30,
2003 2002 2003 2002
---- ---- ---- ----
(in thousands)
Program management:
Hospital
rehabilitation
services $121,677 $133,899 $ 35,739 $ 35,739
Contract therapy 38,037 30,669 12,990 12,990
-------- -------- -------- --------
Program
management total 159,714 164,568 48,729 48,729
Healthcare staffing 86,885 96,424 52,956 52,956
-------- -------- -------- --------
Total $246,599 $260,992 $101,685 $101,685
======== ======== ======== ========
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REHABCARE GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
----------------------------------------------------------------
Note 7. - Recent Accounting Pronouncements
- ------------------------------------------
In June 2002, the FASB issued Statement No. 146 "Accounting for Costs
Associated with Exit or Disposal Activities." This statement nullifies Emerging
Issues Task Force Issue No. 94-3, "Liability Recognition for Certain Employee
Termination Benefits and Other Costs to Exit an Activity (Including Certain
Costs Incurred in a Restructuring)." This statement requires that a liability
for a cost associated with an exit or disposal activity be recognized when the
liability is incurred rather than the date of an entity's commitment to an exit
plan. The Company implemented Statement No. 146 on January 1, 2003. The adoption
of Statement No. 146 did not have a material impact on the Company's
consolidated financial position or results of operations for the three months
and six months ended June 30, 2003.
In November 2002, the FASB issued Interpretation No. 45, "Guarantor's
Accounting and Disclosure Requirements for Guarantees, Including Indirect
Guarantees of Indebtedness of Others, an interpretation of FASB Statements No.
5, 57, and 107 and rescission of FASB Interpretation No. 34." This
interpretation elaborates on the disclosures to be made by a guarantor in its
interim and annual financial statements about its obligations under certain
guarantees that it has issued. It also clarifies that a guarantor is required to
recognize, at the inception of a guarantee, a liability for the fair value of
the obligation undertaken in issuing the guarantee. The initial recognition and
measurement provisions of this interpretation are applicable on a prospective
basis to guarantees issued or modified after December 31, 2002, irrespective of
the guarantor's fiscal year-end. The disclosure requirements are effective for
financial statements of interim or annual periods ending after December 15,
2002. As adopted, this interpretation does not have a material effect on the
Company's financial position or results of operations other than the additional
disclosure requirements.
In December 2002, the FASB issued Statement No. 148 "Accounting for
Stock-Based Compensation - Transition and Disclosure - an amendment of FASB
Statement No. 123." Statement No. 148 amends Statement No. 123, "Accounting for
Stock-Based Compensation," to provide alternative methods of transition for a
voluntary change to the fair value- based method of accounting for stock-based
employee compensation. In addition, Statement No. 148 amends the disclosure
requirements of Statement No. 123 to require prominent disclosures in both
annual and interim financial statements about the reported results. While the
Company has not elected to adopt fair value accounting for its stock-based
compensation, it has complied with the new disclosure requirements under
Statement No. 148. As adopted, this statement does not have a material impact on
the Company's financial position or results of operations.
In January 2003, the FASB issued Interpretation No. 46, "Consolidation of
Variable Interest Entities." This interpretation explains how to identify
variable interest entities and how an enterprise assesses its interest in a
variable interest entity to decide whether to consolidate that entity. It
applies in the first fiscal year or interim period beginning after June 15,
2003, to variable interest entities in which the variable interest was acquired
before February 1, 2003. As adopted, this interpretation does not have a
material effect on the Company's financial position or results of operations.
12 of 26
REHABCARE GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
----------------------------------------------------------------
In April 2003, the FASB issued Statement No. 149, "Amendment of Statement
133 on Derivative Instruments and Hedging Activities." Statement No. 149 amends
and clarifies the accounting for derivative instruments, including certain
derivative instruments embedded in other contracts, and for hedging activities
under Statement No. 133, "Accounting for Derivative Instruments and Hedging
Activities." Statement No. 149 is generally effective for contracts entered into
or modified after June 30, 2003 and for hedging relationships designated after
June 30, 2003. The Company does not anticipate that the adoption of Statement
No. 149 will have a material effect on the Company's consolidated financial
position or results of operations.
In May 2003, the FASB issued Statement No. 150, "Accounting for Certain
Financial Instruments with Characteristics of both Liabilities and Equity."
Statement No. 150 requires that certain financial instruments, which under
previous guidance were accounted for as equity, must now be accounted for as
liabilities. The financial instruments affected include mandatorily redeemable
stock, certain financial instruments that require or may require the issuer to
buy back some of its shares in exchange for cash or other assets and certain
obligations that can be settled with shares of stock. Statement No. 150 is
effective for all financial instruments entered into or modified after May 31,
2003 and must be applied to the Company's existing financial instruments
effective July 1, 2003, the beginning of the first fiscal period after June 15,
2003. The Company adopted Statement No. 150 on June 1, 2003. The adoption of
this statement did not have a material effect on the Company's consolidated
financial position or results of operations.
Note 8 - Related Party Transaction
- ----------------------------------
During the second quarter of 2003, the Company entered into an agreement
with Phase II Consulting, LLC ("Phase II"). Per the terms of the agreement,
Phase II will provide the Company with management, consulting and advisory
services, including having John H. Short, Ph.D., the managing director of Phase
II and a member of the Company's Board of Directors, serve as interim President
and Chief Executive Officer of the Company. The term of the agreement commenced
on June 3, 2003 and will end on the date specified by either party in a written
termination notice. A monthly consulting fee of $55,000 will be paid to Phase II
during the term of the agreement plus reimbursement of business expenses. In
addition, Phase II will be entitled to an incentive fee based on a predetermined
formula that takes into account the Company's results during the term of the
agreement and is capped at $1.3 million. The incentive fee will be paid in cash
or shares of the Company's stock at the election of Phase II and must be paid
within 30 days of the determination of the amount of incentive due.
Note 9. - Subsequent Event
- --------------------------
On July 30, 2003, the Company announced a comprehensive multi-faceted
restructuring program to return the Company to growth and improved
profitability. Key elements of the program are:
1. An examination of the Company's service offerings, emphasizing a
continuum of services approach to redesign the value proposition of
our existing services.
2. Enhancement of client relationships to provide more comprehensive
service offerings creating long-term partnerships;
3. Acquisitions in each division; and
4. Operational restructuring, which will ensure RehabCare's competitiveness
in the marketplace.
13 of 26
REHABCARE GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
----------------------------------------------------------------
As a result of the restructuring, the Company anticipates a termination
benefits charge of approximately $0.6 million after taxes in the third quarter
related to the elimination of approximately 75 positions.
Note 10 - Commitments
- ---------------------
As part of the restructuring program, the Company is focusing its efforts
on developing longer term client relationships and reducing general and
administrative expenses in its staffing division. To accomplish these
objectives, the Company is developing the capability to integrate its
information systems with the clients it serves and eliminate contracted system
services. The integration involves upgrading the division's current operating
platform and the Company's general ledger software. The Company has future
purchase commitments under this integration program totaling approximately $2.5
million and expects the implementation of the new systems to be completed during
the first quarter of 2004.
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 cost, effect and timing
of restructuring activities that have been commenced, including our ability to
achieve the annual expense reductions anticipated; the timing and rate of the
resumed growth in the staffing division; changes in and compliance with
governmental reimbursement rates; regulations or policies affecting the hospital
rehabilitation services and contract therapy divisions, including the Company's
estimates with respect to the effect of newly promulgated regulations on the
Company's business; the Company's ability to attract new client relationships or
to retain and grow existing client relationships through the integration of our
new information system with those of our clients and the development of
alternative product offerings; our ability to identify and consummate strategic
acquisitions to accelerate growth in our divisions; the Company's ability, and
the additional costs, to attract operational and professional employees;
significant increases in health, worker's compensation and professional and
general liability insurance premiums; the adequacy and effectiveness of
operating and administrative systems; litigation risks, including the Company's
ability to predict the ultimate costs and liabilities or the disruption of the
Company's operations; competitive effects on pricing and margins; and general
economic conditions, including efforts by insurers, healthcare providers and
others to contain healthcare costs.
14 of 26
REHABCARE GROUP, INC.
Results of Operations
- ---------------------
The Company derives its revenue from two business segments: program
management services for hospitals and skilled nursing facilities and healthcare
staffing services. The Company's program management segment includes hospital
rehabilitation services (including inpatient acute rehabilitation, skilled
nursing units and outpatient therapy programs) and contract therapy programs.
The Company's healthcare staffing segment includes both supplemental personnel
and traveling personnel who are typically placed based on hourly and 13-week
assignments, respectively.
Selected Operating Statistics:
Three Months Ended Six Months Ended
June 30, June 30,
2003 2002 2003 2002
---- ---- ---- ----
Hospital Rehabilitation Services
- --------------------------------
Operating Revenues (in thousands)
Inpatient $ 33,778 $ 32,057 $ 67,915 $ 63,826
Outpatient 12,535 12,612 24,557 24,752
------- ------- ------ ------
Total $ 46,313 $ 44,669 $ 92,472 $ 88,578
Average Number of Programs
Inpatient 134 134 136 134
Outpatient 49 55 50 56
--- --- --- ---
Total 183 189 186 190
Inpatient Patient Days 179,003 186,206 364,936 371,221
Outpatient Visits 321,684 349,264 640,054 703,561
Contract Therapy
Operating Revenues (in thousands) $ 32,914 $ 25,607 $ 63,840 $ 49,022
Average Number of Locations 455 374 443 356
Average Revenue per Location $ 72,402 $ 68,488 $144,113 $137,856
15 of 26
REHABCARE GROUP, INC.
Operating Statistics: (Continued)
Three Months Ended Six Months Ended
June 30, June 30,
2003 2002 2003 2002
---- ---- ---- ----
Healthcare Staffing
- -------------------
Operating Revenues (in thousands)
Supplemental $ 32,459 $ 44,320 $ 67,895 $ 90,368
Travel 24,735 26,240 51,415 51,097
------- ------- ------- -------
Total* $ 57,194 $ 70,560 $119,310 $141,465
Gross Profit Margin
Supplemental 20.4% 23.9% 20.4% 23.2%
Travel 19.0% 21.5% 19.4% 21.4%
Total 19.8% 23.0% 20.0% 22.5%
Weeks Worked
Supplemental 23,386 33,789 48,520 69,192
Travel 12,589 13,314 26,196 26,303
------ ------ ------ ------
Total 35,975 47,103 74,716 95,495
Average Number of
Supplemental branches 76 111 79 112
* Includes intercompany revenues of $0.4 million and $0.7 million at market
rates from the Company's healthcare staffing division to the Company's hospital
rehabilitation and contract therapy divisions during the three months and six
months ended June 30, 2003.
Three Months Ended June 30, 2003 Compared to Three Months Ended June 30, 2002
- -----------------------------------------------------------------------------
Operating Revenues
Operating revenues during the second quarter of 2003 decreased by $4.8
million, or 3.4%, to $136.0 million compared to $140.8 million in the second
quarter of 2002. Revenue decreases in supplemental and travel staffing and the
outpatient segment of hospital rehabilitation services were partially offset by
revenue increases in contract therapy and the inpatient segment of hospital
rehabilitation services.
Hospital rehabilitation services revenues, consisting of hospital inpatient
and outpatient programs, increased by $1.6 million, or 3.7%, from $44.7 million
in the second quarter of 2002 to $46.3 million in the second quarter of 2003.
Inpatient revenues increased by $1.7 million, or 5.4%, from $32.1 million in the
second quarter of 2002 to $33.8 million in the second quarter of 2003 primarily
as a result of a 5.5% increase in average revenue per location. The increase in
average revenue per location primarily resulted from contract modifications to
conform with the prospective payment system for rehabilitation facilities.
Outpatient revenues decreased by $0.1 million from the second quarter of 2002 to
$12.5 million in the second quarter of 2003, reflecting an 11.3% decrease in the
average number of programs operated, offset by a 12.0% increase in the average
revenue per outpatient program.
16 of 26
REHABCARE GROUP, INC.
Three Months Ended June 30, 2003 Compared to Three Months Ended June 30, 2002
- -----------------------------------------------------------------------------
(Continued)
- -----------
Contract therapy revenues increased by 28.5% from $25.6 million in the
second quarter of 2002 to $32.9 million in the second quarter of 2003, primarily
reflecting a 21.6% increase in the average number of locations and a 5.7%
increase in the average revenue per location. The increase in the average
revenue per location is primarily the result of same store growth and a
continued focus on opening larger locations.
Healthcare staffing revenues decreased from $70.6 million in the second
quarter of 2002 to $57.2 million in the second quarter of 2003(including $0.4
million inter-company sales at market rates to the hospital rehabilitation
services and contract therapy divisions). Supplemental staffing revenues
decreased by $11.9 million, or 26.8%, to $32.5 million in the second quarter of
2003, reflecting the consolidation of branch locations in the first quarter of
2003 and a decline in the demand for staffing agency services. The average
number of branch locations decreased from 111 in the second quarter of 2002 to
76 in the second quarter of 2003. The decrease in supplemental staffing revenues
is attributable to a 30.8% decrease in weeks worked as a result of the
consolidation of branch locations and a decline in demand, offset by a 5.8%
increase in average revenue per week worked. The increase in average revenue per
week worked was a result of placing more highly credentialed staff such as
registered nurses as compared to certified nurse assistants, as well as
increased bill rates. Travel staffing revenues decreased by 5.7% from $26.2
million in the second quarter of 2002 to $24.7 million in the second quarter of
2003 as weeks worked and revenue per week worked decreased 5.4% and 0.3%,
respectively.
Cost and Expenses
Operating expenses, excluding provision for doubtful accounts, as a
percentage of operating revenues increased from 72.8% in the second quarter of
2002 to 74.4% in the second quarter of 2003, primarily reflecting the continued
migration of the skill mix in our staffing division to more highly credentialed
professionals and increased labor and benefit costs as a percentage of operating
revenues in all divisions except inpatient, where increased productivity offset
increased labor and benefit expenses. The provision for doubtful accounts as a
percentage of operating revenues was comparable for both periods. Division
selling, general and administrative expenses as a percentage of operating
revenues decreased from 13.4% in the second quarter of 2002 to 12.6% in the
second quarter of 2003 primarily due to reductions in contract therapy, the
outpatient segment of hospital rehabilitation services, and staffing. Corporate
selling, general and administrative expenses as a percentage of revenues
increased from 4.8% in the second quarter of 2002 to 5.1% in the second quarter
of 2003 primarily reflecting increased legal expenses associated with
researching and commenting on the Centers for Medicare and Medicaid Services
proposed 75 percent rule. Depreciation and amortization expense as a percent of
operating revenues increased to 1.5% from 1.4% due to depreciation expense
recorded on additional capital expenditures.
In the hospital rehabilitation services division, operating expenses
(excluding provision for doubtful accounts) increased by 3.1%, or $0.9 million,
primarily reflecting increased salary related expenses in both inpatient and
outpatient as a result of higher workers compensation, professional liability
and health insurance expenses. Lower than anticipated volumes in outpatient
during the period as a result of the decreased average number of locations
offset by increased visits per location, combined with the increased
salary-related costs as a percentage of operating revenues, resulted in lower
profitability in outpatient. Increased productivity in inpatient more than
offset the increased salary-related expenses, leading to increased profitability
in inpatient. The provision for doubtful accounts as a percentage of operating
revenues increased from 0.2% to 0.4%, primarily as a result of the normal
evaluation of the creditworthiness of the Company's clients. Selling, general
17 of 26
REHABCARE GROUP, INC.
Three Months Ended June 30, 2003 Compared to Three Months Ended June 30, 2002
- -----------------------------------------------------------------------------
(Continued)
- -----------
and administrative expenses for this division as a percentage of operating
revenues was comparable at 9.2% for each period. Corporate general and
administrative expenses, which represent allocations of corporate office
expenses based upon utilization by divisions, increased for the division as a
percentage of operating revenues from 4.3% to 4.8% primarily reflecting
increased legal fees associated with researching and commenting on the Centers
for Medicare and Medicaid Services proposed 75 percent rule. Depreciation and
amortization expense as a percentage of operating revenues decreased from 3.0%
in the second quarter of 2002 to 2.8% in the second quarter of 2003, reflecting
a change in the useful life of a software system from 3 years to 5 years.
Operating earnings (earnings before interest and income taxes) in this division
increased from $7.8 million in the second quarter of 2002 to $7.9 million in the
second quarter of 2003.
In the contract therapy division, operating expenses (excluding provision
for doubtful accounts) increased by 35.4%, or $6.6 million, primarily due to
higher wage and benefits costs for therapists, a greater use of higher-cost
contract labor, and increased salary-related expenses. The provision for
doubtful accounts as a percentage of operating revenues was comparable for each
period. Division selling, general and administrative expenses as a percentage of
operating revenues decreased from 9.9% in the second quarter of 2002 to 9.2% in
the second quarter of 2003, primarily as a result of revenues increasing faster
than selling, general and administrative expenses. Corporate general and
administrative expenses, which represent allocations of corporate office
expenses based upon utilization by divisions, also decreased for the division as
a percentage of operating revenues from 6.5% to 5.9%. Depreciation and
amortization expense as a percentage of operating revenues was comparable for
the two periods. Operating earnings (earnings before interest and income taxes)
in this division decreased by $0.3 million, or 13.5%, to $1.8 million.
In the staffing division, operating expenses (excluding provision for
doubtful accounts) decreased 15.6%, or $8.5 million, primarily due to the
decrease in weeks worked. Gross profit margins in the supplemental staffing
division decreased from 23.9% in the second quarter of 2002 to 20.4% in the
second quarter of 2003, while gross profit margins in the travel division also
decreased in the second quarter of 2003 to 19.0% compared to 21.5% in the
comparable quarter last year. These decreases in gross profit margins are
primarily the result of market-driven pricing adjustments, increased
salary-related expenses and competitive efforts by healthcare clients to reduce
agency staff. The provision for doubtful accounts decreased $0.3 million in the
second quarter of 2003 compared to the second quarter of 2002, primarily as a
result of the normal evaluation of the creditworthiness of the Company's clients
showing improvement as supported by the improvement in accounts receivable
aging. Division selling, general and administrative expenses as a percentage of
operating revenues decreased from 17.3% in the second quarter of 2002 to 17.2%
in the second quarter of 2003. Corporate general and administrative expenses,
which represent allocations of corporate office expenses based upon utilization
by divisions, increased for the division as a percentage of operating revenues
from 4.6% to 4.8%. Depreciation and amortization expenses as a percentage of
operating revenues increased from 0.6% in the second quarter of 2002 to 0.8% in
the second quarter of 2003, primarily due to similar expense on less revenues.
Operating earnings (earnings before interest and income taxes) in the staffing
group decreased by $1.8 million from a loss of $0.3 million in the second
quarter of 2002 to a loss of $2.1 million in the second quarter of 2003.
18 of 26
REHABCARE GROUP, INC.
Three Months Ended June 30, 2003 Compared to Three Months Ended June 30, 2002
- -----------------------------------------------------------------------------
(Continued)
- -----------
Non-operating Items
Interest income decreased by $0.1 million when comparing the second quarter
of 2003 to the second quarter of 2002 as a result of decreased average cash
balances and interest rates.
Interest expense primarily represents commitment fees paid on the unused
portion of the line of credit and letter of credit fees and increased slightly
for the periods compared as a result of increased letters of credit. The Company
had no outstanding balance on the line of credit as of June 30, 2003 and June
30,2002.
Earnings before income taxes decreased by 21.5% to $7.4 million in the
second quarter of 2003 from $9.5 million in the second quarter of 2002. The
provision for income taxes was $3.0 million in the second quarter of 2003
compared to $3.6 million in the second quarter of 2002, reflecting effective
income tax rates of 40.1% and 38.0%, respectively. The effective tax rate
increase was primarily a result of increased non-deductible meals provided to
traveling radiologists and nurses in relation to earnings before income taxes.
Net earnings in the second quarter of 2003 decreased to $4.5 million as compared
to $5.9 million in the second quarter of 2002. Diluted net earnings per share
decreased by 15.5% from $0.32 in the second quarter of 2002 to $0.27 in the
second quarter of 2003. A 10.1% decrease in the weighted-average shares
outstanding was attributable primarily to the repurchase of 1.7 million shares
of common stock during the third quarter of 2002 and a smaller dilutive effect
of stock options resulting from a lower average stock price.
Six Months Ended June 30, 2003 Compared to Six Months Ended June 30, 2002
- -------------------------------------------------------------------------
Operating Revenues
Operating revenues during the first six months of 2003 decreased by $4.2
million, or 1.5%, to $274.9 million compared to $279.1 million in the first six
months of 2002. Revenue decreases in supplemental staffing and the outpatient
segment of hospital rehabilitation services were partially offset by revenue
increases in contract therapy, travel staffing and the inpatient segment of
hospital rehabilitation services.
Hospital rehabilitation services revenues, consisting of hospital inpatient
and outpatient programs, increased by $3.9 million, or 4.4% from $88.6 million
in the first six months of 2002 to $92.5 million in the first six months of
2003. Inpatient revenues increased by $4.1 million, or 6.4%, from $63.8 million
in the first six months of 2002 to $67.9 million in the first six months of 2003
as a result of a 1.2% increase in the average number of programs operated and a
5.1% increase in average revenue per location, primarily resulting from contract
modifications to conform with the prospective payment system for rehabilitation.
Outpatient revenues decreased by $0.2 million from the first six months of 2002
to $24.6 million in the first six months of 2003, reflecting a 10.9% decrease in
the average number of programs operated, offset by an 11.3% increase in the
average revenue per outpatient program.
Contract therapy revenues increased by 30.2% from $49.0 million in the
first six months of 2002 to $63.8 million in the first six months of 2003,
primarily reflecting a 24.6% increase in the average number of locations and a
4.5% increase in the average revenue per location. The increase in the average
revenue per location is primarily the result of same store growth and a
continued focus on opening larger locations.
19 of 26
REHABCARE GROUP, INC.
Six Months Ended June 30, 2003 Compared to Six Months Ended June 30, 2002
- -------------------------------------------------------------------------
(Continued)
- -----------
Healthcare staffing revenues decreased from $141.5 million in the first six
months of 2002 to $119.3 million in the first six months of 2003(including $0.7
million inter-company sales at market rates to the hospital rehabilitation
services and contract therapy divisions). Supplemental staffing revenues
decreased by $22.5 million, or 24.9%, to $67.9 million in the first six months
of 2003, reflecting the consolidation of branch locations in the first quarter
of 2003 and a decline in the demand for staffing agency services. The average
number of branch locations decreased from 112 in the first six months of 2002 to
79 in the first six months of 2003. The decrease in supplemental staffing
revenues is attributable to a 29.9% decrease in weeks worked as a result of the
consolidation of branch locations and a decline in demand, offset by a 7.1%
increase in average revenue per week worked. The increase in revenue per week
worked was a result of placing more highly credentialed staff such as registered
nurses as compared to certified nurse assistants, as well as increased bill
rates. Travel staffing revenues increased by 0.6% from $51.1 million in the
first six months of 2002 to $51.4 million in the first six months of 2003
primarily due to a 1.0% increase in revenue per week worked, offset by a 0.4%
decrease in weeks worked.
Cost and Expenses
Operating expenses, excluding provision for doubtful accounts, as a
percentage of operating revenues increased from 73.2% in the first six months of
2002 to 74.7% in the first six months of 2003, primarily reflecting the
continued migration of the skill mix in our staffing division to more highly
credentialed professionals and increased labor and benefit costs as a percentage
of operating revenues in all divisions except inpatient, where increased
productivity offset increased labor and benefit expenses. The provision for
doubtful accounts as a percentage of operating revenues decreased from 0.8% in
the prior year six month period to 0.6% in the current six month period due to
the improvement in the aging categories of the Company's accounts receivables.
Division selling, general and administrative expenses as a percentage of
operating revenues decreased from 13.6% in the first six months of 2002 to 12.9%
in the first six months of 2003 primarily due to reductions in contract therapy
and the outpatient segment of hospital rehabilitation services, partially offset
by increases in the inpatient segment of hospital rehabilitation services and
staffing. Corporate selling, general and administrative expenses as a percentage
of revenues decreased from 5.3% in the first six months of 2002 to 5.0% in the
first six months of 2003. Depreciation and amortization expense as a percent of
operating revenues increased to 1.6% from 1.4% due to depreciation expense
recorded on additional capital expenditures.
In the hospital rehabilitation services division, operating expenses
(excluding provision for doubtful accounts) increased by 4.8%, or $2.8 million,
primarily reflecting increased salary related expenses in both inpatient and
outpatient as a result of higher workers compensation, professional liability
and health insurance expenses. Lower volumes in outpatient as a result of the
decreased average number of locations, offset by increased visits per location,
combined with the increased salary-related costs as a percentage of operating
revenues, resulted in lower profitability in outpatient. Increased productivity
in inpatient more than offset the increased salary-related expenses, leading to
increased profitability in inpatient. The provision for doubtful accounts as a
percentage of operating revenues increased from 0.2% in the first six months of
2002 to 0.3% in the first six months of 2003, primarily as a result of the
normal evaluation of the creditworthiness of the Company's clients. Selling,
general and administrative expenses for this division decreased as a percentage
of operating revenues from 9.3% to 9.1%, largely due to synergies achieved in
integrating inpatient and outpatient into one division. Corporate general and
administrative expenses, which represent allocations of corporate office
expenses based upon utilization by divisions, decreased for the division as a
percentage of operating revenues from 4.9% to 4.7%. Depreciation and
20 of 26
REHABCARE GROUP, INC.
Six Months Ended June 30, 2003 Compared to Six Months Ended June 30, 2002
- -------------------------------------------------------------------------
(Continued)
- -----------
amortization expense as a percentage of operating revenues increased from 2.9%
in the first six months of 2002 to 3.0% in the first six months of 2003,
reflecting continued investments in software and developed software costs.
Operating earnings (earnings before interest and income taxes) in this division
increased from $14.4 million in the first six months of 2002 to $15.0 million in
the first six months of 2003.
In the contract therapy division, operating expenses (excluding provision
for doubtful accounts) increased by 36.7%, or $13.1 million, primarily due to
higher wage and benefits costs for therapists, a greater use of higher cost
contract labor, and increased salary-related expenses. The provision for
doubtful accounts as a percentage of operating revenues was comparable for each
period. Division selling, general and administrative expenses as a percentage of
operating revenues decreased from 10.4% in the first six months of 2002 to 9.2%
in the first six months of 2003, primarily as a result of revenues increasing
faster than selling, general and administrative expenses. Corporate general and
administrative expenses, which represent allocations of corporate office
expenses based upon utilization by divisions, also decreased for the division as
a percentage of operating revenues from 6.7% to 6.2%. Depreciation and
amortization expense as a percentage of operating revenues was comparable for
the two periods. Operating earnings (earnings before interest and income taxes)
in this division decreased by $0.1 million, or 2.8%, to $3.6 million.
In the staffing division, operating expenses (excluding provision for
doubtful accounts) decreased 12.9%, or $14.1 million, primarily due to the
decrease in weeks worked. Gross profit margins in the supplemental staffing
division decreased from 23.2% in the first six months of 2002 to 20.4% in the
first six months of 2003, while gross profit margins in the travel division also
decreased in the first six months of 2003 to 19.4% compared to 21.4% in the
comparable six months last year. These decreases in gross profit margins are
primarily the result of market-driven pricing adjustments, increased
salary-related expenses and competitive efforts by healthcare clients to reduce
agency staff. The provision for doubtful accounts as a percentage of operating
revenues decreased from 0.9% in the first six months of 2002 to 0.3% in the
first six months of 2003, primarily as a result of the normal evaluation of the
creditworthiness of the Company's clients showing improvement as supported by
the improvement in accounts receivable aging. Division selling, general and
administrative expenses as a percentage of operating revenues increased from
17.3% in the first six months of 2002 to 17.7% in the first six months of 2003
primarily due to the additional expenses of approximately $0.8 million incurred
in the first quarter of 2003 in the closing of less productive branches.
Corporate general and administrative expenses, which represent allocations of
corporate office expenses based upon utilization by divisions, decreased for the
division as a percentage of operating revenues from 5.1% to 4.6%. Depreciation
and amortization expenses as a percentage of operating revenues increased from
0.7% in the first six months of 2002 to 0.8% in the first six months of 2003 as
costs remained approximately the same on a lower revenue base. Operating
earnings (earnings before interest and income taxes) in the staffing group
decreased by $2.1 million from a loss of $2.0 million in the first six months of
2002 to a loss of $4.1 million.
Non-operating Items
Interest income decreased by $0.2 million when comparing the first six
months of 2003 to the first six months of 2002 as a result of decreased average
cash balances and interest rates.
Interest expense primarily represents commitment fees paid on the unused
portion of the line of credit and letter of credit fees and for the periods
compared increased slightly as a result of increased letters of credit. The
21 of 26
REHABCARE GROUP, INC.
Six Months Ended June 30, 2003 Compared to Six Months Ended June 30, 2002
- -------------------------------------------------------------------------
(Continued)
- -----------
Company had no outstanding balance on the line of credit as of June 30, 2003 and
June 30, 2002.
Earnings before income taxes decreased by 11.7% to $14.1 million in the
first six months of 2003 from $16.0 million in the first six months of 2002. The
provision for income taxes was $5.6 million in the first six months of 2003
compared to $6.1 million in the first six months of 2002, reflecting effective
income tax rates of 39.7% and 38.0%, respectively. The effective tax rate
increase was largely the result of increased non-deductible meals provided to
traveling radiologists and nurses in relation to earnings before income taxes.
Net earnings in the first six months of 2003 decreased to $8.5 million as
compared to $9.9 million the first six months of 2003. Diluted net earnings per
share decreased by 4.6% from $0.54 in the first six months of 2002 to $0.52 in
the first six months of 2003. A 9.8% decrease in the weighted-average shares
outstanding was attributable primarily to the repurchase of 1.7 million shares
of common stock during the third quarter of 2002 and a smaller dilutive effect
of stock options resulting from a lower average stock price.
Liquidity and Capital Resources
As of June 30, 2003, the Company reported $23.5 million in cash and current
marketable securities and a current ratio, the amount of current assets divided
by current liabilities, of 3.2 to 1. Working capital increased by $13.9 million
to $81.7 million as of June 30, 2003 as compared to $67.8 million as of December
31, 2002 due to an increase in current assets of $14.0 million combined with an
increase in current liabilities of $0.1 million. The increase in current assets
was primarily due to increased cash balances as a result of cash generated from
operations and an increase in deferred tax assets. Net accounts receivable were
$86.3 million at June 30, 2003, compared to $87.2 million at December 31, 2002.
The number of days' average net revenue in net receivables was 58.0 and 57.7 at
June 30, 2003 and December 31, 2002, respectively. The increase in deferred tax
assets was primarily due to an increase in accrued vacation, accrued workers
compensation, professional liability insurance and health insurance. The
decrease in capital expenditures in the current year as compared to the prior
year was a result of the completion of major system enhancements and
implementations last year to support the clinical operations of the Company. The
increase in current liabilities was primarily the result of an increase in
health insurance accruals included in accrued salaries and wages and workers
compensation and professional liability accruals and expenses included in
accrued expenses, offset by a decrease in accounts payable and accrued salaries
and wages.
The Company's operating cash flows constitute the Company's primary source
of liquidity and historically have been sufficient to fund 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 with no balance outstanding as of June 30,
2003. The Company has $6.2 million in letters of credit issued to insurance
carriers as collateral for reimbursement of claims. The letters of credit reduce
the amount the Company may borrow under the line of credit. The Company also has
a $7.6 million promissory note issued to the Company's workers compensation
carrier as additional collateral. The promissory note is not recorded as a
liability on the balance sheet as it would only become payable upon an event of
default as defined in the security agreement with the workers compensation
carrier.
22 of 26
REHABCARE GROUP, INC.
Item 3. - Quantitative and Qualitative Disclosures About Market Risks
- ---------------------------------------------------------------------
There have been no material changes in the reported market risks since the
filing of the Company's Annual Report on Form 10-K for the year ended December
31, 2002.
Item 4. - Controls and Procedures
- ---------------------------------
As of June 30, 2003, the Company's Interim Chief Executive Officer and
Chief Financial Officer have conducted an evaluation of the effectiveness of the
design and operation of the Company's disclosure controls and procedures (as
defined in Rule 13a-15 (e) and 15d-15 (e) under the Securities Exchange Act of
1934, as amended). Based on that evaluation, the Company's Interim Chief
Executive Officer and Chief Financial Officer have concluded that the Company's
disclosure controls and procedures are effective in making known in a timely
fashion material information required to be filed in this report. There have
been no changes in internal control over financial reporting that have
materially affected, or are reasonably likely to materially affect, the
Company's internal control over financial reporting.
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 and employee-related matters and inquiries and investigations by
governmental agencies relating to Medicare or Medicaid reimbursement and other
issues.
In May 2002, the Company was named as a defendant in a suit filed in the
United States District Court for the Eastern District of Missouri alleging
violations of the federal securities laws and seeking to certify the suit as a
class action. Certain current and former officers of the Company are also
defendants in the suit and are being jointly defended with the Company. The
court has appointed a lead plaintiff and lead counsel for the action. The
proposed class consists of persons who purchased shares of the Company's common
stock between August 10, 2000 and January 21, 2002. The plaintiffs filed an
amended complaint in December 2002 that focuses primarily on alleged weaknesses
in the software system selected by the Company's Staffing Group and the
purported negative effects of such systems on the healthcare staffing services
business operations. The Company's director and officer liability insurance
carrier has preliminarily accepted coverage of the action, including the payment
of defense costs after the satisfaction of the Company's deductible, subject to
the applicable limits of the policy. The Company and other defendants recently
filed a motion to dismiss with the court. No discovery has been commenced in the
case pending the court's ruling on the motion to dismiss.
23 of 26
REHABCARE GROUP, INC.
Part II. - Other Information
- ----------------------------
Item 1 - Legal Proceedings (Continued)
- --------------------------------------
In August 2002, each of the Company's directors was named as a defendant
and the Company was named as the nominal defendant in a derivative suit filed in
the Circuit Court of St. Louis County, Missouri. The complaint, which is based
upon similar events as are alleged in the federal securities class action, was
filed on behalf of the derivative plaintiff by a law firm that had earlier filed
suit against the Company in the federal case. The Company filed a motion to
dismiss based primarily on the derivative plaintiff's failure to make a pre-suit
demand on the board, which was denied. The federal court hearing the securities
law class action stayed discovery in the derivative proceeding until discovery
commences in the federal securities law class action.
In February 2003, the Company was named as a co-defendant in a complaint
filed in the United States District Court for the Northern District of Illinois
seeking investment banking fees under a retainer agreement executed by Maurice
Echales in February 1997 on behalf of eai Healthcare Staffing Solutions ("eai"),
a company that we acquired in December 1999. Mr. Echales, the former owner of
eai, has also been named as a defendant in this suit. The complaint asserts fees
in connection with three separate financing transactions and two acquisition
transactions, which we understand were consummated by eai prior to its
acquisition by the Company. The Company is a party to the suit in the Company's
position as successor to eai. At the time of the acquisition, the Company had
identified potential fees under this retainer agreement as a possible contingent
liability of eai and the Company negotiated indemnification from Mr. Echales and
his spouse in the stock purchase agreement for any fees and costs, including
attorney's fees and expenses, arising from such retainer agreement. The Company
and Mr. Echales have agreed that Mr. Echales will indemnify the Company for all
but one count in the complaint.
In July, 2003 a civil Qui Tam action was filed against Baxter County
Regional Hospital, Inc. ("Baxter"), and the Company in the United States
District Court for the Eastern District of Arkansas, seeking treble damages,
civil penalties, back pay, and special damages. The allegations contained in the
suit, brought by a former independent contractor of the Company and a former
Baxter physical therapist, relate to the clinical diagnoses of patients treated
at the hospital's acute rehabilitation unit for Medicare reimbursement purposes.
The suit alleges that Baxter and the Company received reimbursement in excess of
$5,000,000. The original action was filed on August 21, 2000, under seal,
requiring an investigation by the United States Department of Justice. The
Company and Baxter fully cooperated with the Department's investigation and on
June 3, 2003, after completion of the investigation, the Department declined to
intervene and the seal was lifted. The Company and Baxter also initiated an
internal and external audit that concluded the allegations were unfounded and
that the Company and Baxter were in compliance with Medicare regulations. The
relators filed an amended complaint, and the Company was served and notified of
the civil allegations on July 15, 2003. The Company has recently received a
request from Baxter asserting its rights to indemnification from the Company
under a prior contract for liabilities, including attorneys' fees and expenses,
arising out of the action. The attorneys for the Company and Baxter are
currently preparing a motion to dismiss.
24 of 26
REHABCARE GROUP, INC.
Item 6 - Exhibits and Reports on Form 8-K
(a) Exhibits
See exhibit index
(b) Reports on Form 8-K
The Company has filed the following Current Reports on Form 8-K
during the period ended June 30, 2003:
Filing Date Description of Event
----------- --------------------
April 8, 2003 Item 9. Revised and additional slides incorporated
into the Investor Relations Presentation since March
20, 2003
April 14, 2003 Item 9. Letter, including the attachment
thereto, delivered on April 14, 2003 to certain
clients in which RehabCare Group, Inc. manages
acute rehabilitation units
May 6, 2003 Item 9. Press release dated May 6, 2003 announcing
our earnings for the 1st quarter
Item 9. Script for a conference call held by the
registrant on May 6, 2003
May 15, 2003 Item 9. Text of Investor Relations Presentation in
use beginning May 13, 2003
June 3, 2003 Item 5. Press release regarding the election of
John H.Short, Ph.D. as Interim President and Chief
Executive Officer and additional announcements
relating to our healthcarestaffing services division
June 4, 2003 Item 9. Conference call script, dated June 4, 2003
25 of 26
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 12, 2003
By: /s/ Vincent L. Germanese
----------------------------
Vincent L. Germanese
Senior Vice President,
Chief Financial Officer and Secretary
26 of 26
EXHIBIT INDEX
- -------------
3.1 Restated Certificate of Incorporation (filed as Exhibit 3.1 to the
Registrant's Registration Statement on Form S-1, dated May 9, 1991
[Registration No. 33-40467], and incorporated herein by reference)
3.2 Certificate of Amendment of Certificate of Incorporation (filed as Exhibit
3.1 to the Registrant's Quarterly Report on Form 10-Q for the quarter
ended May 31, 1995 and incorporated herein by reference)
3.3 Amended and Restated Bylaws (filed as Exhibit 3.3 to the Registrant;
Quarterly Report on Form 10-Q for the quarter ended September 30, 2002 and
incorporated herein by reference)
4.1 Rights Agreement, dated August 28, 2002, by and between the Registrant and
Computershare Trust Company, Inc. (filed as Exhibit 1 to the Registrant's
Registration Statement on Form 8-A filed September 5, 2002 and
incorporated herein by reference)
10.1 Consulting Arrangement with Phase II Consulting, LLC *
10.2 Consulting Agreement with Alan C. Henderson *
31.1 Certification by Interim Chief Executive Officer pursuant to
Rule 13a-14(a) under the Securities Exchange Act of 1934, as amended
31.2 Certification by Chief Financial Officer pursuant to Rule 13a-14(a) under
the Securities Exchange Act of 1934, as amended
32.1 Certification of periodic financial report pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002, U.S.C. Section 1350
32.2 Certification of periodic financial report pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002, U.S.C. Section 1350
- -------------------------
* Management contract or compensatory plan or arrangement
EXHIBIT 10.1
Phase II Consulting, LLC
2120 South 1300 East
Third Floor
Salt Lake City, Utah 84106
Attention: John H. Short, Ph.D.
Re: Consulting Arrangement with RehabCare Group, Inc.
Ladies and Gentlemen:
This letter agreement (the "Agreement") sets forth the terms under which
RehabCare Group, Inc. ("RehabCare") has agreed to retain Phase II Consulting,
LLC ("Phase 2") to provide RehabCare with management, consulting and advisory
services, including, among other services, having John H. Short, Ph.D., the
Managing Director of Phase 2, serve as interim President and Chief Executive
Officer of RehabCare.
1. Term.
----
The term of this Agreement (the "Term") will commence on June 3, 2003 and
end on the date specified in the written notice given by either of the parties
to the other party indicating its intention to terminate this Agreement and the
services being provided hereunder. If no date is given in the notice of
termination, the Term will be deemed to terminate on the thirtieth (30th) day
after the notice of termination has been given by the terminating party.
2. Services to be Rendered and Relationship Between Parties.
--------------------------------------------------------
(a) Services. During the Term, Phase 2 will provide the services of John H.
--------
Short, Ph.D. to serve as RehabCare's interim President and Chief Executive
Officer and to perform all such management functions and duties as are required
of the office pursuant to applicable law and regulation, RehabCare's Amended and
Restated Bylaws and the direction of the Board of Directors of RehabCare (the
"Board"). In addition, Phase 2 will provide consulting and advisory services to
the RehabCare's senior officers and Board in developing RehabCare's potential to
maximize operational performance and shareholder value by ensuring that
RehabCare's strategic plan is refined, implemented and integrated throughout all
of RehabCare's operational units. Phase 2 may also identify opportunities to add
complementary lines of business or acquisitions with respect to existing lines
of business for the purpose of adding value to RehabCare. The management
services to be provided by Phase 2 under this Agreement will be performed solely
by Dr. Short. The consulting and advisory services under this Agreement may be
performed by such person or persons employed by Phase 2 who are assigned by
Phase 2 to render such services under this Agreement. All personnel of Phase 2
will use their respective reasonably diligent efforts to perform faithfully and
efficiently the responsibilities and duties assigned to them during the Term.
There are no regularly scheduled or minimum number of hours per week or per
month that such personnel, including Dr. Short, are required to dedicate to
RehabCare business or matters. It is expected that Dr. Short will devote such
time and attention to the business of RehabCare that is necessary in his
judgment to render the management services under this Agreement and the other
personnel assigned by Phase 2 to render services under this Agreement will
devote such time and attention to the business of RehabCare that is necessary in
their judgment to render such services under this Agreement. All personnel of
Phase 2 who are rendering services under this Agreement will also be allowed to
perform services for such other clients of Phase 2 during the Term.
(b) Relationship Between Parties. Phase 2 and all Phase 2 personnel
------------------------------
assigned by Phase 2 to render services under this Agreement (including Dr.
Short) will remain employees of Phase 2 and, as such, will be independent
contractors with respect to RehabCare for all purposes within the meaning of all
federal, state and local laws and regulations governing employment insurance,
workers' compensation, industrial accident, labor and taxes. The Phase 2
personnel who are rendering services under this Agreement (including Dr. Short)
will not by reason of performing such services for the benefit of RehabCare
acquire any benefits, privileges or rights under any executive or employee
benefit plan operated by the RehabCare or its subsidiaries or affiliates,
including without limitation any health insurance, pension, profit-sharing or
stock-based incentive plans. During the period that Dr. Short serves as
RehabCare's interim President and Chief Executive Officer, he will be the
principal executive officer of RehabCare for all purposes, despite his
non-employee status, and will continue to serve as a member of the Board,
although he will not be considered to be an independent director under the rules
and regulations of the Securities and Exchange Commission or the New York Stock
Exchange during the period that Dr. Short serves as interim President and Chief
Executive Officer. Dr. Short will be covered by RehabCare's liability insurance
coverages generally available to each director, officer or employee of RehabCare
while acting in such capacities. No other employee of Phase 2 rendering services
under this Agreement will be covered by RehabCare's liability insurance
coverages available for RehabCare's directors, officers or employees.
3. Compensation and Expense Reimbursement.
--------------------------------------
(a) Regular Monthly Fees. RehabCare will pay to Phase 2 a regular
----------------------
consulting fee equal to $55,000 per month for each full month during the Term.
The fee for a portion of a month during the Term will be determined by prorating
the full monthly fee by a fraction, the numerator of which is the number of days
during the month that the Term was in full force and effect and the denominator
of which is the actual number of days in the subject month. The payment of the
regular monthly fee commences for the month of June 2003. Thereafter, the
regular monthly fees will be paid on or before the fifth day of each month
during the Term. This payment will be the total monthly compensation for
management, consulting and advisory services rendered by Phase 2 to RehabCare
pursuant to this Agreement and Phase 2 will be solely responsible for all
compensation expenses of the Phase 2 personnel who render such services
hereunder.
(b) Cash Incentive Fee. RehabCare will pay to Phase 2 an additional
--------------------
incentive fee in the amount determined pursuant to the formula set forth in
Attachment 1 to this Agreement under the terms and conditions also set forth in
such schedule.
(c) Business Expense Reimbursement. Reasonable business expenses incurred
-------------------------------
by Dr. Short acting in his capacity as interim President and Chief Executive
Officer will be promptly reimbursed by RehabCare to Phase 2, in accordance with
RehabCare's normal and customary business expense reimbursement policies and
practices. Out-of-pocket business expenses for all other Phase 2 personnel who
render services under this Agreement will be promptly reimbursed by RehabCare to
Phase 2 upon receipt of an invoice itemizing such expenses but such
reimbursement (exclusive of airfare) will be limited to $150 per person per day
in St Louis and $250 per person per day in higher cost cities such as New York
or Boston. Airfare for Phase 2 personnel traveling on behalf of RehabCare
pursuant to this Agreement (including travel to and from RehabCare's offices in
St. Louis, Missouri and elsewhere) will be promptly reimbursed by RehabCare to
Phase 2 in full pursuant to RehabCare's normal and customary business expense
reimbursement policies and practices with respect to airfare reimbursement.
Phase 2 will be solely responsible for the reimbursement to Phase 2 personnel
for business expenses incurred by them in the performance of services under this
Agreement.
4. Indemnification.
---------------
RehabCare will indemnify Phase 2 and each of its officers and employees and
other personnel who render services under this Agreement (the "Indemnified
Parties") and will hold each of the Indemnified Parties harmless from all
claims, actions, demands, costs, expenses and fees (including reasonable
attorneys' fees) that may arise out of, or in any way relate to, the Indemnified
Parties performance of any services hereunder; provided, however, that such
indemnity will not extend to any conduct which constitutes gross negligence or
intentional wrongdoing on the part of the Indemnified Party. As a member of the
Board and as interim President and Chief Executive Officer of RehabCare, Dr.
Short will be covered by RehabCare's directors and officers liability insurance
and errors and omissions insurance to the same extent that such policies cover
other members of the Board or executive officers of RehabCare, as the case may
be.
5. Confidentiality.
---------------
Phase 2 and any of its members, partners, directors, officers and employees
will hold in a fiduciary capacity for the benefit of RehabCare all secret or
confidential information, knowledge or data relating to RehabCare or any of its
subsidiaries or affiliates and their respective businesses which will have been
obtained by any of them in rendering services under this Agreement; provided,
however, that the foregoing restriction on disclosure will not apply to any
information which becomes generally available to the public other than as a
result of (i) disclosure by Phase 2 or by one of its affiliates; (ii) the breach
by Phase 2 of its obligations under this Agreement; or (iii) disclosure by any
other person or entity in violation of such person's or entity's duty of
confidentiality to Phase 2 or one of its affiliates. If Phase 2 or one of its
affiliates becomes legally compelled to make any disclosure prohibited by this
paragraph 5(a), Phase 2 will provide RehabCare with prompt notice of such
occurrence so that RehabCare may seek an appropriate protective order, and, if
Phase 2 is thereafter still compelled to disclose, Phase 2 will disclose only
that information that it is legally compelled to disclose and will make
reasonable efforts to obtain confidential treatment for any information so
disclosed. In addition, Phase 2 agrees that it will not engage in transactions
in RehabCare securities while it is in possession of material non-public
information and, further, that it will inform each of its personnel who renders
services under this Agreement with respect to the federal and state laws and
regulations prohibiting the trading of securities of a public company such as
RehabCare while in possession of material, non-public information regarding the
company. The parties specifically acknowledge that, due to Dr. Short's position
as a member of the Board and interim President and Chief Executive Officer of
RehabCare, the material terms of this Agreement will have to be disclosed in the
public filings of RehabCare and this Agreement will be required to be filed as
an exhibit to RehabCare's next quarterly report of Form 10-Q.
6. Miscellaneous.
-------------
(a) Notices. Any notice, request, demand or other communication required or
--------
permitted under this Agreement (each a "notice" for purposes of this Agreement)
will be in writing and will be deemed to have been duly given to and received by
a person (i) on the day such notice is personally delivered to such person, (ii)
on the first business day after the day on which the notice is deposited with a
nationally recognized overnight courier service, (iii) on the third business day
after the day on which the notice is deposited in the United States mails,
registered or certified mail, first class postage prepaid, return receipt
requested, or (iv) on the first business day after the day on which the notice
is sent by facsimile if a confirmation is received from the recipient's
facsimile by the sender, provided that in the case of clauses (ii), (iii) and
(iv), the notice is addressed to such person as follows:
In the case of RehabCare:
RehabCare Group, Inc.
7733 Forsyth Boulevard
Suite 1700
St. Louis, Missouri 63105
Attention: Vincent L. Germanese,
as Corporate Secretary on behalf of the Board
Facsimile: (314) 450-2720
In the case of Phase 2:
Phase 2 Consulting, LLC
2120 S. 1300 E.
Third Floor
Salt Lake City, Utah 84106
Attention: John H. Short, Ph.D.,
Managing Director
Facsimile: (801) 596-2127
Any person may alter the address to which notices are to be sent to such
person by giving notice of such change in address to the other party hereto in
conformity with the provisions of this paragraph 6(a) for the giving of notice.
(b) Compliance with Other Agreements. Each of the party's performance of
---------------------------------
all the terms of this Agreement does not and will not breach any agreement to
keep in confidence proprietary information, knowledge or data acquired by such
party prior to the Term, and neither party will disclose to the other party, or
induce the other party to use, any confidential or proprietary information or
material belonging to any previous employer or others. Neither party is a party
to any other agreement which will interfere with such party's full compliance
with this Agreement. Neither party will enter into any agreement, whether
written or oral, in conflict with the provisions of this Agreement.
(c) Independent Contractor. The status of Phase 2 and all personnel,
-----------------------
including Dr. Short, who render services under this Agreement will be that of
independent contractors and not that of employees of RehabCare. Neither Phase 2
nor any of its employees (other than Dr. Short, in his capacity as director and
interim President and Chief Executive Officer of RehabCare) may hold themselves
out as agents of RehabCare, or create any liability or credit obligation in the
name of or on behalf of RehabCare, except where specifically authorized to do so
in advance by RehabCare.
(d) Successors and Assigns. This Agreement will inure to the benefit of and
----------------------
be binding upon RehabCare and its successors and assigns, and Phase 2 and its
successors and assigns; provided, however, that a party to this Agreement may
not assign or transfer its rights hereunder without the prior written consent of
the other party.
(e) Governing Law. This Agreement will be governed by, and construed in
--------------
accordance with, the laws of the State of Missouri, without reference to its
choice of law rules.
(f) Entire Agreement. This Agreement and the schedules attached hereto is
----------------
the entire agreement between RehabCare and Phase 2 with regard to the
management, consulting and advisory services to be rendered by Phase 2 to
RehabCare, and supersedes and revokes any other contracts, agreements and/or
understandings between RehabCare and Phase 2 with regard to such services.
(g) Waivers and Amendments. This Agreement may be amended, modified,
------------------------
superseded, canceled, renewed or extended, and the terms and conditions hereof
may be waived, only by a written instrument signed by RehabCare and Phase 2 or,
in the case of a waiver, by the party waiving compliance. No delay on the part
of any party in exercising any right, power or privilege hereunder will operate
as a waiver thereof, nor will any waiver on the part of any party of any right,
power or privilege hereunder, or any single or partial exercise of any right,
power or privilege hereunder, preclude any other or further exercise thereof or
the exercise of any other right, power or privilege hereunder.
(h) Severability. The parties acknowledge that the laws and public policies
------------
of the various states of the United States and other jurisdictions might differ
as to the validity and enforceability of the covenants contained in this
Agreement. It is the intention of the parties that the provisions of this
Agreement will, to the fullest extent permissible under the law and public
policy, be enforced by the courts of each state and jurisdiction in which
enforcement is sought, and that the unenforceability (or the modification
necessary to conform the covenants contained in this Agreement with such law and
public policy) of any part of this Agreement will not be deemed to render
unenforceable any other part of this Agreement. The parties agree that if any
provision of this Agreement is held to be invalid or against public policy, the
remaining provisions of this Agreement are severable and will not be affected
thereby.
(i) Counterparts. This Agreement may be executed in two or more
------------
counterparts, each of which will be deemed an original and all of which together
will constitute one and the same instrument.
(j) Headings. The headings in this Agreement are for reference purposes
--------
only and will not in any way affect the meaning or interpretation of this
Agreement.
If the terms and conditions stated in this Agreement adequately describe
the material terms and conditions governing the consulting relationship between
RehabCare and Phase 2, please indicate your acceptance and approval of such
terms by executing and two copies of this Agreement in the signature blank below
and returning one of the copies to RehabCare for our records. You should retain
the other fully signed copy of the Agreement for your files.
Very truly yours,
RehabCare Group, Inc.
By /s/ H. Edwin Trusheim
- ------------------------
H. Edwin Trusheim
Chairman of the Board
ACCEPTED AND APPROVED:
Phase II Consulting, LLC
By /s/ John H. Short, Ph.D.
- ---------------------------
John H. Short, Ph.D.
Managing Director
ATTACHMENT 1
Cash Incentive Fee Terms and Conditions
* Phase 2 will be entitled to an incentive fee equal to twice the annualized
monthly fee set forth in paragraph 3(a) of this Agreement (potentially
equal to $1,300,000 in the aggregate) by the target annualized net earnings
described below for at least one of the calendar quarters during the Term
or in the two calendar quarters immediately after the termination of the
Term. The target annualized net earnings shall be determined by multiplying
the quarterly net earnings in any one of the quarters, exclusive of the
incentive fee to which Phase 2 may be entitled to for that quarter
previously described times 4.
* The incentive fee will be earned at a rate of 6% of the target annualized
net earnings in excess of $21,146,196 up to the maximum amount discussed
above as reported in the RHB quarterly 10Q. Any extraordinary one-time
charges for restructuring or prior contract period adjustments will be
excluded from the calculation.
For example, if the quarterly earnings for the fourth quarter of
2003 were to be $6,140,143, then the incentive fee would be computed
as follows:
Quarterly Net Earnings $6,140,143
Annualized 4
----------
Target Annualized Net Earnings 24,560,572
Less Base Net Earnings 21,146,196
----------
Excess 3,414,376
Incentive Fee Percent 6%
----------
Incentive Fee $ 204,863
* The earned cash incentive fee, at Phase 2's election, will be paid in cash
or shares of RehabCare stock or some combination of cash and stock within
30 days of the determination of the amount of the cash incentive fee due.
The parties understand that any part of the fee paid in RehabCare stock
will be "restricted" securities as that term is defined in the Securities
Act of 1933, as amended, and will be required to be sold pursuant to the
terms and conditions of Rule 144 or another exemption from registration, in
the absence of an effective registration statement registering the sale of
the shares. The certificate evidencing the securities will bear a
restrictive legend to this effect. Rule 144 generally prohibits the sale of
restricted securities during the first year after issuance and, thereafter,
imposes other restrictions on the sale of restricted securities.
EXHIBIT 10.2
Consulting Agreement with Alan Henderson
June 3, 2003
Alan C. Henderson
C/o RehabCare Group, Inc.
7733 Forsyth Boulevard
Suite 1700
St. Louis, Missouri 63105
Dear Alan:
On behalf of RehabCare Group, Inc. ("RehabCare"), I am writing to confirm our
mutual understandings and agreements concerning your employment with RehabCare
and your ongoing consulting arrangement with RehabCare. Our specific
understandings and agreements are set forth below.
1. You ceased to be President and Chief Executive Officer of RehabCare
effective June 3, 2003, at which time your status as an executive officer of
RehabCare, and the accompanying obligations imposed upon executive officers by
applicable law, regulation, contract and internal company policy, ceased. You
resign all other officer positions you hold with RehabCare or any of its
subsidiaries or affiliates effective that time and date. Your employment with
RehabCare and its subsidiaries shall be deemed to have terminated as of June 3,
2004 except to the extent and for the purposes specifically provided for below.
You will be paid your base salary for services rendered through June 3, 2003 at
the next regularly scheduled RehabCare payday.
2. For the period of time from June 4, 2003 through and ending the close of
business June 3, 2004, you shall serve as a consultant to RehabCare. In that
capacity, you shall provide such executive duties, services and functions,
provide such advice and counsel, and having the executive responsibilities and
authority, specifically assigned to you by the then President and Chief
Executive Officer of RehabCare or his or her designee. As an independent
consultant, you shall consult with and provide information and assistance to
RehabCare and its designated agents, representatives and legal counsel
concerning RehabCare and its businesses or operations to date. All such
services, advice and assistance will be provided by you upon reasonable notice
to you and shall occur at such locations as you and RehabCare shall mutually
agree. The provisions of this Agreement, and your obligations as a consultant
hereunder, are not intended and should not be construed, to preclude or prohibit
you from testifying truthfully in any proceeding or from providing accurate and
complete information to any governmental authority or representative.
3. You and RehabCare previously entered into that certain RehabCare Group,
Inc. Termination Compensation Agreement dated May 1, 2003 (the "Termination
Compensation Agreement"). This letter agreement (this "Agreement") supersedes
the Termination Compensation Agreement. The Termination Compensation Agreement
is terminated, and neither party will have any rights or obligations thereunder
by reason of the termination of your employment contemplated by this letter
agreement or otherwise. In lieu of the benefits and rights provided to you under
the Termination Compensation Agreement, and in consideration for your execution
and delivery of this Agreement, you will receive the following:
* You will be paid the gross sum of $582,290.00 (less applicable withholding
for taxes) in 26 equal consecutive semi-monthly installments of $22,395.77,
beginning on the first regularly scheduled pay date for RehabCare in June
2003 and continuing on each succeeding regularly scheduled RehabCare pay
date thereunder until the entire amount is paid. The total amount of
payments under this paragraph shall not exceed $582,290.00 in the
aggregate.
* You shall receive medical and health benefits equivalent to RehabCare's
current medical and health benefits for you and your family, or RehabCare
will pay the costs of equivalent medical and health benefits for you and
your family, for the period you are a consultant; provided, however, that
------------------
if you are eligible to receive primary medical and health benefits from
another employer, RehabCare can determine to discontinue the medical and
health benefits it is then providing to you and your family after the date
that you become eligible for primary medical and health benefits for you
and your family from another employer. You hereby agree that the qualifying
event for electing to continue your health and medical benefits under the
Consolidated Omnibus Budget Reconciliation Act of 1985, as amended
("COBRA") is June 3, 2004 and, if you elect to continue such benefits
thereunder, you will be responsible for the payment therefore.
* You will be paid for any unused paid days off that have accrued through
June 3, 2003 in accordance with RehabCare's policies with respect to the
same, not later than June 30, 2003.
* You will continue to receive your current vehicle allowance of $400 for the
months of June, 2003 through and ending May 2004.
The payments set forth in this paragraph 3 will be made by RehabCare
regardless of the amount of time spent by you in your consulting role and will
continue to be paid even if this Agreement and the consulting relationship
described herein terminates. The payments required to be made pursuant to this
Agreement shall not be subject to set-off, counterclaim, recoupment, defense or
other claim, right or action which RehabCare may have against you or others. In
addition, nothing contained in this Agreement shall prohibit you from accepting
full-time employment with a third-party employer but you shall not be obligated
to seek other employment or to take any other action by way of mitigation of the
amounts payable to you under any provision of this Agreement. Except for the
discontinuation of health and medical benefits in the circumstances set forth in
the first paragraph of this Section 3, no amount or benefit payable to you under
this Agreement shall be reduced upon commencement of new employment. RehabCare
agrees to pay promptly as incurred, to the full extent permitted by law, all
legal fees and expenses which you may reasonably incur as a result of any
contest (regardless of the outcome thereof) by RehabCare, you or others with
respect to the validity or enforceability of, or liability under, any provision
of this Agreement or any guarantee of performance thereof (including as a result
of any contest by you regarding the amount of any payment pursuant to this
Agreement), plus in each case, interest on any delayed payment at the applicable
Federal rate provided for in Section 7872(f)(2)(A) of the Internal Revenue Code
of 1986, as amended.
4. Your employment with the Company shall not be deemed to be terminated
for purposes of (a) your outstanding options granted under RehabCare's Amended
and Restated 1996 Long-Term Performance Plan, (b) RehabCare's profit sharing
plan, or (c) RehabCare's Executive Deferred Compensation Plan. For these
purposes, your employment with RehabCare shall be deemed to terminate without
"cause" (as defined in each of the above-named plans) as a result of your
retirement, as of June 3, 2004, the last day of the term under this Agreement.
It is specifically understood and agreed that for purposes of your existing
options, your options will continue to vest during the period from June 3, 2003
through June 3, 2004, and you will have until and including June 3, 2006 to
exercise any options vested as of June 3, 2004. The Board of Directors of
RehabCare will reasonably and fairly consider any requests by you with respect
to a waiver of the non-compete provisions under your stock option agreements,
which provisions are otherwise unaffected by this Agreement.
Except for those benefits specifically set forth in this Agreement, after
June 3, 2003 you will not be eligible, and hereby waive and give up any right
to, any benefits offered or available to the employees of RehabCare or any of
RehabCare's subsidiaries, including paid vacation or personal days, profit
sharing, medical and health benefits, severance, incentive compensation and
other employee benefits.
5. In consideration of all of the benefits to be received by you under this
Agreement, you agree that the Termination Compensation Agreement is terminated
as of the date of this Agreement and is superseded in its entirety by the terms
of this Agreement in all respects.
6. Your right to indemnification to the fullest extent permitted by the
Delaware General Corporation Law for expenses (including attorneys' fees),
judgments, fines and amounts paid in settlement actually and reasonably incurred
by you in connection with any action, suit or proceeding arising by reason of
acts taken or omissions to act occurring while you were an officer of RehabCare
or any of its subsidiaries shall continue unabridged after the date of this
Agreement.
7. You represent, acknowledge and agree that (a) you are signing this
Agreement voluntarily with full knowledge of the rights and obligations
contained herein and after having had an adequate period of time to consider the
Agreement before signing it, (b) no payments or considerations have been
promised to you for signing this Agreement which are not set out herein, (c) you
have read this Agreement, understand all of its terms, and are signing this
Agreement voluntarily with full knowledge of the significance of signing.
8. You have seven (7) days from the date that you deliver a signed copy of
this Agreement to RehabCare to revoke your acceptance of this Agreement. To
revoke your acceptance you must advise the then President and Chief Executive
Officer of RehabCare orally or in writing to your decision to revoke your
acceptance within such time period. If you revoke your acceptance in the
seven-day period, the payments described in this Agreement and the benefits
provided will not be paid or provided and this Agreement shall be null and void
and neither of us will have any rights or obligations hereunder. If your status
as a consultant to RehabCare will not commence by reason of your revocation
during the seven-day period after acceptance of the Agreement, your employment
with RehabCare will be deemed to be terminated for all purposes as of June 3,
2003. In such event, you will be entitled to receive all payments and benefits
due pursuant to the Termination Compensation Agreement for a termination without
Cause prior to a change in control in lieu of the payments and benefits as
described in this Agreement.
9. This Agreement constitutes the entire agreement between RehabCare and
you regarding the subject matter of the Agreement and, except as specifically
stated in this Agreement, supersedes all prior oral or written communications
and agreements between you and RehabCare concerning the subject matter. Neither
this Agreement nor any of its terms may be changed, added to, amended or waived
except in writing signed by an authorized officer of RehabCare and you.
10. Each party will keep the existence and terms of this Agreement
confidential and will not directly or indirectly disclose or divulge any of the
same to another person, except that: (a) RehabCare shall not be prohibited from
disclosing any of the same to its officers, directors, agents or representatives
on a "need-to-know" basis, (b) you shall not be prohibited from disclosing any
of the same to your new employer or its officers or directors on a
"need-to-know" basis, (c) neither party shall be prohibited from disclosing any
of the same to any regulatory or other governmental authority in order to comply
with a legal duty, or to investors or the public to the extent that it is
necessary or advisable by reason of federal or state securities laws or the
publicly traded status of the RehabCare's securities, and (d) neither party
shall be prohibited from suing to enforce this Agreement, as necessary, or
referring to or using this Agreement in any such lawsuit or related pleading.
11. This Agreement and our respective obligations hereunder are not
assignable by either party without the written approval of the other party.
Failure of RehabCare to obtain such approval prior to the assignment of this
Agreement shall be a breach of this Agreement and shall entitle you to immediate
acceleration of all amounts and benefits payable under this Agreement. In
addition, in the event of a "Change in Control" (as that term is defined in the
Termination Compensation Agreement), all amounts and benefits payable under this
Agreement will immediately accelerate.
We are pleased to have been able to reach these understandings and agreements.
Please signify your confirmation and agreement to the terms and provisions set
forth in this Agreement by signing the Agreement in the appropriate signature
block and returning the signed Agreement to me.
REHABCARE GROUP, INC.
By /s/ H. Edwin Tursheim
- ------------------------
H. Edwin Trusheim
Chairman of the Board
ACCEPTED AND CONFIRMED:
/s/ Alan C. Henderson
- ----------------------
Alan C. Henderson
EXHIBIT 31.1
CERTIFICATION
I, John H. Short, certify that:
1. I have reviewed this quarterly report on Form 10-Q of RehabCare Group,
Inc.;
2. Based on my knowledge, this report does not contain any untrue statement of
a material fact or omit to state a material fact necessary to make the
statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this report, fairly present in all material
respects the financial condition, results of operations and cash flows of
the registrant as of, and for, the periods presented in this report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have:
(a) Designed such disclosure controls and procedures, or caused such
disclosure controls and procedures to be designed under our
supervision, to ensure that material information relating to the
registrant, including its consolidated subsidiaries, is made known to
us by others within those entities, particularly during the period in
which this quarterly report is being prepared;
(b) Evaluated the effectiveness of the registrant's disclosure controls
and procedures and presented in this report our conclusions about the
effectiveness of the disclosure controls and procedures, as of the end
of the period covered by this quarterly report based on such
evaluation; and
(c) Disclosed in this report any change in the registrant's internal
control over financial reporting that occurred during the registrant's
most recent fiscal quarter (the registrant's fourth fiscal quarter in
the case of an annual report) that has materially affected, or is
reasonably likely to materially affect, the registrant's internal
control over financial reporting; and
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation of internal control over financial reporting, to
the registrant's auditors and the audit committee of the registrant's board
of directors (or persons performing the equivalent functions):
(a) All significant deficiencies and material weaknesses in the design or
operation of internal control over financial reporting which are
reasonably likely to adversely affect the registrant's ability to
record, process, summarize and report financial information; and
(b) Any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
control over financial reporting.
Date: August 12, 2003
By: /s/ John H. Short
--------------------------
John H. Short
Interim President and
Chief Executive Officer
EXHIBIT 31.2
CERTIFICATION
I, Vincent L. Germanese, certify that:
1. I have reviewed this quarterly report on Form 10-Q of RehabCare Group,
Inc.;
2. Based on my knowledge, this report does not contain any untrue statement of
a material fact or omit to state a material fact necessary to make the
statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this report, fairly present in all material
respects the financial condition, results of operations and cash flows of
the registrant as of, and for, the periods presented in this report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have:
(a) Designed such disclosure controls and procedures, or caused such
disclosure controls and procedures to be designed under our
supervision, to ensure that material information relating to the
registrant, including its consolidated subsidiaries, is made known to
us by others within those entities, particularly during the period in
which this quarterly report is being prepared;
(b) Evaluated the effectiveness of the registrant's disclosure controls
and procedures and presented in this report our conclusions about the
effectiveness of the disclosure controls and procedures, as of the end
of the period covered by this quarterly report based on such
evaluation; and
(c) Disclosed in this report any change in the registrant's internal
control over financial reporting that occurred during the registrant's
most recent fiscal quarter (the registrant's fourth fiscal quarter in
the case of an annual report) that has materially affected, or is
reasonably likely to materially affect, the registrant's internal
control over financial reporting; and
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation of internal control over financial reporting, to
the registrant's auditors and the audit committee of the registrant's board
of directors (or persons performing the equivalent functions):
(a) All significant deficiencies and material weaknesses in the design or
operation of internal control over financial reporting which are
reasonably likely to adversely affect the registrant's ability to
record, process, summarize and report financial information; and
(b) Any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
control over financial reporting.
Date: August 12, 2003
/s/ Vincent L. Germanese
------------------------------------
Vincent L. Germanese
Senior Vice President, Chief Financial Officer
and Secretary
Exhibit 32.1
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Quarterly Report of RehabCare Group, Inc. (the "Company")
on Form 10-Q for the period ending June 30, 2003 as filed with the Securities
and Exchange Commission on the date hereof (the "Report"), I, John H. Short,
Interim Chief Executive Officer of the Company, certify, pursuant to 18 U.S.C.
ss. 1350, as adopted pursuant to ss. 906 of the Sarbanes-Oxley Act of 2002,
that:
(1) The Report fully complies with the requirements of section 13(a) or 15(d)
of the Securities Exchange Act of 1934; and
(2) The information contained in the Report fairly presents, in all material
respects, the financial condition and results of operations of the Company.
/s/ John H. Short
------------------------------
John H. Short
Interim Chief Executive Officer
RehabCare Group, Inc.
August 12, 2003
* A signed original of the written statement required by Section 906 has been
provided to the Company and will be retained by the Company and furnished
to the Securities and Exchange Commission or its staff upon request.
Exhibit 32.2
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Quarterly Report of RehabCare Group, Inc. (the "Company")
on Form 10-Q for the period ending June 30, 2003 as filed with the Securities
and Exchange Commission on the date hereof (the "Report"), I, Vincent L.
Germanese, Senior Vice President Chief Financial Officer of the Company,
certify, pursuant to 18 U.S.C. ss. 1350, as adopted pursuant to ss. 906 of the
Sarbanes-Oxley Act of 2002, that:
(1) The Report fully complies with the requirements of section 13(a) or 15(d)
of the Securities Exchange Act of 1934; and
(2) The information contained in the Report fairly presents, in all material
respects, the financial condition and results of operations of the Company.
/s/ Vincent L. Germanese
------------------------------------
Vincent L. Germanese
Chief Financial Officer
RehabCare Group, Inc.
August 12, 2003
* A signed original of the written statement required by Section 906 has been
provided to the Company and will be retained by the Company and furnished
to the Securities and Exchange Commission or its staff upon request.