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, 2005
-------------
Commission File Number 0-19294
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the transition period from to
REHABCARE GROUP, INC.
---------------------
(Exact name of Registrant as specified in its charter)
Delaware 51-0265872
- ------------------------------ ---------------------------------------
(State or other jurisdiction of (I.R.S. Employer Identification Number)
incorporation or organization)
7733 Forsyth Boulevard, Suite 2300, St. Louis, MO 63105
-------------------------------------------------------
(Address of principal executive offices and zip code)
314-863-7422
--------------------------------------------------
(Registrant's telephone number, including area code)
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
----- -----
Indicate by check mark whether the Registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act.) Yes X No
----- -----
Indicate the number of shares outstanding of the Registrant's common stock, as
of the latest practicable date.
Class Outstanding at August 1, 2005
- -------------------------------------- -----------------------------
Common Stock, par value $.01 per share 16,784,877
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REHABCARE GROUP, INC.
Index
Part I. - Financial Information
Item 1. - Condensed Consolidated Financial Statements
Condensed consolidated balance sheets,
June 30, 2005 (unaudited) and December 31, 2004 3
Condensed consolidated statements of earnings for the
three months and six months ended June 30, 2005 and 2004
(unaudited) 4
Condensed consolidated statements of cash flows for the
six months ended June 30, 2005 and 2004 (unaudited) 5
Notes to condensed consolidated financial statements (unaudited) 6
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 24
Item 1. - Legal Proceedings 24
Item 6. - Exhibits 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,
2005 2004
---- ----
Assets (unaudited)
------
Current assets:
Cash and cash equivalents $ 41,656 $ 50,405
Restricted cash 3,109 3,073
Accounts receivable, net of allowance for doubtful
accounts of $6,302 and $5,074, respectively 80,368 69,565
Income taxes receivable 1,138 --
Deferred tax assets 10,360 10,252
Other current assets 2,871 1,690
--------- ---------
Total current assets 139,502 134,985
Marketable securities, trading 3,933 4,076
Equipment and leasehold improvements, net 15,795 15,149
Excess of cost over net assets acquired, net 65,631 68,340
Intangible assets, net 11,114 11,884
Investment in unconsolidated affiliates 42,174 39,269
Other 4,205 3,963
--------- ---------
Total assets $ 282,354 $ 277,666
========= =========
Liabilities and Stockholders' Equity
------------------------------------
Current liabilities:
Current portion of long-term debt $ 1,830 $ 4,731
Accounts payable 640 3,521
Accrued salaries and wages 31,496 29,859
Income taxes payable -- 4,495
Accrued expenses 14,969 15,928
--------- ---------
Total current liabilities 48,935 58,534
Long-term debt, less current portion 1,612 2,142
Deferred compensation 3,944 4,088
Deferred tax liabilities 6,438 5,874
--------- ---------
Total liabilities 60,929 70,638
--------- ---------
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 20,787,775 shares and 20,553,232
shares as of June 30, 2005 and December 31,
2004, respectively 208 206
Additional paid-in capital 124,596 120,592
Retained earnings 151,325 140,934
Less common stock held in treasury at cost,
4,002,898 shares as of June 30, 2005 and
December 31, 2004 (54,704) (54,704)
Accumulated other comprehensive earnings -- --
--------- ---------
Total stockholders' equity 221,425 207,028
--------- ---------
Total liabilities and stockholders' equity $ 282,354 $ 277,666
========= =========
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,
2005 2004 2005 2004
---- ---- ---- ----
Operating revenues $108,353 $90,944 $210,784 $195,441
Costs and expenses:
Operating expenses 81,206 64,643 157,704 140,710
Selling, general & administrative:
Divisions 8,828 7,863 17,463 17,536
Corporate 6,104 6,276 12,103 12,593
Depreciation and amortization 2,408 2,010 4,701 3,778
Restructuring -- (51) -- 1,615
Gain on sale of business -- -- -- (485)
------- ------- -------- --------
Total costs and expenses 98,546 80,741 191,971 175,747
------- ------- -------- --------
Operating earnings 9,807 10,203 18,813 19,694
Interest income 219 55 415 111
Interest expense (323) (266) (561) (483)
Other income (expense), net 24 (43) 38 (50)
------- ------- -------- --------
Earnings before income taxes and
equity in net loss of affiliates 9,727 9,949 18,705 19,272
Income taxes 3,940 4,136 7,575 8,000
Equity in net loss of affiliates (298) (110) (739) (463)
------- ------- -------- --------
Net earnings $ 5,489 $ 5,703 $ 10,391 $ 10,809
======= ======= ======== ========
Net earnings per common share:
Basic $ 0.33 $ 0.35 $ 0.62 $ 0.67
======= ======= ======== ========
Diluted $ 0.32 $ 0.34 $ 0.60 $ 0.64
======= ======= ======== ========
Weighted-average number of
common shares outstanding:
Basic 16,755 16,221 16,694 16,194
======= ======= ======== ========
Diluted 17,245 16,794 17,195 16,769
======= ======= ======== ========
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,
2005 2004
---- ----
Cash flows from operating activities:
Net earnings $ 10,391 $ 10,809
Adjustments to reconcile net earnings to net cash
provided by (used in) operating activities:
Depreciation and amortization 4,701 3,778
Provision for doubtful accounts 2,074 2,116
Equity in net loss of affiliates 739 463
Income tax benefit realized on employee
stock option exercises 1,664 894
Restructuring -- 1,615
Gain on sale of business -- (485)
Changes in assets and liabilities:
Accounts receivable, net (12,877) (1,026)
Other current assets (1,181) (63)
Other assets (82) 31
Net assets held for sale -- 1,903
Accounts payable (2,881) 228
Accrued salaries and wages 1,637 2,073
Accrued expenses (291) (883)
Deferred compensation (132) 369
Income taxes (5,177) 4,245
-------- --------
Net cash provided by (used in) operating
activities (1,415) 26,067
-------- --------
Cash flows from investing activities:
Additions to equipment and leasehold improvements, net (3,937) (2,187)
Purchase of marketable securities (35,817) (1,291)
Proceeds from sale/maturities of marketable securities 35,948 10,998
Increase in restricted cash (36) (3,052)
Investment in unconsolidated affiliate (3,644) --
Disposition of business (259) (3,931)
Purchase of businesses, net of cash acquired (332) (19,557)
Other, net (624) (434)
-------- --------
Net cash used in investing activities (8,701) (19,454)
-------- --------
Cash flows from financing activities:
Principal payments on long term debt (975) (180)
Exercise of stock options 2,342 913
-------- --------
Net cash provided by financing activities 1,367 733
-------- --------
Net increase (decrease) in cash and cash equivalents (8,749) 7,346
Cash and cash equivalents at beginning of period 50,405 28,320
-------- --------
Cash and cash equivalents at end of period $ 41,656 $ 35,666
======== ========
See accompanying notes to condensed consolidated financial statements.
5 of 26
REHABCARE GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
----------------------------------------------------
Six Month Periods Ended June 30, 2005 and 2004
(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. The Company accounts for its investments in less than 50% owned
affiliates using the equity method. All significant intercompany accounts and
activity have been eliminated in consolidation. In the opinion of management,
all entries necessary for a fair presentation of such financial statements have
been included. The results of operations for the three months and six months
ended June 30, 2005, are not necessarily indicative of the results to be
expected for the fiscal year. Certain prior year amounts have been reclassified
to conform to current year presentation. On August 1, 2005, the Company acquired
substantially all of the operating assets of MeadowBrook Healthcare, Inc. and
certain of its subsidiaries ("MeadowBrook"). The Company is leasing the
MeadowBrook facilities from SunTrust Bank which acquired the facilities from
MeadowBrook and its affiliates in a separate transaction that also occurred on
August 1. The MeadowBrook assets and liabilities acquired, as well as
MeadowBrook's operations, are not reflected in the condensed financial
statements contained in this Form 10-Q. See note 14, "Subsequent Event", for
further information on the MeadowBrook transaction.
The condensed consolidated financial statements do not include all
information and footnotes necessary for a complete presentation of financial
position, results of operations and cash flows in conformity with U.S. generally
accepted accounting principles. Reference is made to the Company's audited
consolidated financial statements and the related notes as of December 31, 2004
and 2003 and for each of the years in the three-year period ended December 31,
2004, included in the Annual Report on Form 10-K on file with the Securities and
Exchange Commission, which provide additional disclosures and a further
description of the Company's accounting policies.
Note 2. - Critical Accounting Policies and Estimates
- ----------------------------------------------------
The Company's condensed consolidated financial statements have been
prepared in accordance with U.S. generally accepted accounting principles.
Preparation of these statements requires management to make judgments and
estimates. Some accounting policies have a significant impact on amounts
reported in these financial statements. A summary of significant accounting
policies and a description of accounting policies that are considered critical
may be found in our 2004 Annual Report on Form 10-K, filed on March 16, 2005.
Note 3. - Stock-Based Compensation
- ----------------------------------
The Company accounts for stock-based employee compensation plans using the
intrinsic value method under Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees", 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 fair value 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 (in thousands,
except per share data):
6 of 26
REHABCARE GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
----------------------------------------------------------------
Three Months Ended Six Months Ended
June 30, June 30,
2005 2004 2005 2004
---- ---- ---- ----
Net earnings, as reported $5,489 $5,703 $10,391 $10,809
Deduct: Total stock-based employee
compensation expense determined under
fair value based method for all awards,
net of related tax effects 641 1,029 1,174 1,865
------ ------ ------- -------
Pro forma net earnings $4,848 $4,674 $ 9,217 $ 8,944
====== ====== ======= =======
Basic net earnings per share: As reported $ 0.33 $ 0.35 $ 0.62 $ 0.67
====== ====== ======= =======
Pro forma $ 0.29 $ 0.29 $ 0.55 $ 0.55
====== ====== ======= =======
Diluted net earnings per share:
As reported $ 0.32 $ 0.34 $ 0.60 $ 0.64
====== ====== ======= =======
Pro forma $ 0.28 $ 0.28 $ 0.54 $ 0.53
====== ====== ======= =======
Note 4. - 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).
The following table sets forth the computation of basic and diluted net
earnings per share (in thousands, except per share data):
Three Months Ended Six Months Ended
June 30, June 30,
2005 2004 2005 2004
---- ---- ---- ----
Numerator:
Numerator for basic/diluted net
earnings per share - net earnings
available to common stockholders $ 5,489 $ 5,703 $10,391 $10,809
======= ======= ======= =======
Denominator:
Denominator for basic net earnings
per share - weighted-average
shares outstanding 16,755 16,221 16,694 16,194
Effect of dilutive securities:
Stock options 490 573 501 575
------- ------- ------- -------
Denominator for diluted net
earnings per share - adjusted
weighted-average shares 17,245 16,794 17,195 16,769
======= ======= ======= =======
Basic net earnings per share $ 0.33 $ 0.35 $ 0.62 $ 0.67
======= ======= ======= =======
Diluted net earnings per share $ 0.32 $ 0.34 $ 0.60 $ 0.64
======= ======= ======= =======
7 of 26
REHABCARE GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
----------------------------------------------------------------
Note 5. - Comprehensive Income
- ------------------------------
Comprehensive income consisted only of net income in the three months and
six months ended June 30, 2005 and 2004.
Note 6. - Investment in Unconsolidated Affiliate
- ------------------------------------------------
The Company sold its StarMed staffing business to InteliStaf Holdings, Inc.
("InteliStaf") on February 2, 2004 in exchange for a 25% interest in InteliStaf
on a fully diluted basis. The Company uses the equity method to account for its
investment in InteliStaf and recorded its initial investment at its fair value
of $40 million, as determined by a third party valuation firm. A summary of
InteliStaf's unaudited results of operations for the three months ended June 30,
2005 and 2004, the six months ended June 30, 2005 and the period from February
2, 2004 to June 30, 2004 follows (dollars in thousands):
Three Months Six Months February 2
Ended Ended to
June 30, June 30, June 30,
2005 2004 2005 2004
---- ---- ---- ----
Net operating revenues $69,657 $82,970 $138,816 $144,681
Operating earnings (loss) (425) 630 (2,227) (958)
Net loss (1,181) (305) (2,847) (1,716)
The value of the Company's investment in InteliStaf at the transaction date
exceeded its share of the book value of InteliStaf's stockholders' equity by
approximately $17.8 million. This excess has been accounted for as goodwill
(although reported as a component of investment in unconsolidated affiliate) and
is reviewed for impairment in accordance with the terms of APB Opinion No. 18,
"The Equity Method of Accounting for Investments in Common Stock." The Company
continues to monitor the valuation of its investment in InteliStaf to determine
if an other than temporary decrease in the value of its investment has occurred.
During the second quarter of 2005, InteliStaf's operating performance deviated
negatively from prior projections, and in June the Board of Directors of
InteliStaf elected to replace the CEO with AlixPartners, LLC, an experienced
restructuring firm. AlixPartners is performing its review of the operations and
financial projections of InteliStaf which is expected to be completed in the
middle of the third quarter with recommendations to InteliStaf's board shortly
thereafter. Once their review has been completed, InteliStaf will assess whether
the value of its long-lived assets may be impaired. This assessment is not
expected to be completed until the end of the third quarter. Once that
assessment is completed, the Company will evaluate whether an adjustment, if
any, to the carrying value of its investment is required.
Note 7. - Restructuring Costs
- -----------------------------
As stated in note 6, the Company sold its StarMed staffing division to
InteliStaf on February 2, 2004. In connection with this sale, the Company
initiated a series of restructuring activities to reduce the cost of corporate
overhead that had previously been absorbed by the staffing division. As a result
of these actions, the Company recorded a pre-tax restructuring charge in the
first quarter of 2004 of approximately $1.7 million.
All restructuring activities were completed by December 31, 2004 except for
the payment of lease exit costs related to the 2004 restructuring charge
described above and lease exit costs related to a 2003 restructuring charge.
Activity related to lease exit costs totaled $140,000 in the first six months of
2005. As a result, the balance remaining in the Company's restructuring reserves
decreased from $501,000 at December 31, 2004 to $361,000 at June 30, 2005.
8 of 26
REHABCARE GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
----------------------------------------------------------------
Note 8. - Business Combinations
- -------------------------------
On February 2, 2004, the Company purchased the assets of CPR Therapies,
LLC. ("CPR") for cash and $1.4 million of subordinated promissory notes. In
accordance with the terms of the purchase agreement, the seller was entitled to
additional earn-out consideration based upon the execution of new therapy
contracts as defined in the agreement. On July 31, 2004, the first of two
earn-out calculations was performed resulting in an increase to the purchase
price of approximately $159,000. On February 1, 2005, the second earn-out
calculation was performed resulting in an increase to the purchase price of
approximately $545,000. Both adjustments resulted in a corresponding increase to
the excess of cost over net assets acquired.
On March 1, 2004, the Company purchased from Health Net, Inc. all of the
outstanding common stock of American VitalCare, Inc. and its sister company,
Managed Alternative Care, Inc. (collectively "VitalCare") for cash and a
promissory note with a face value of $3 million. In the second quarter of 2005,
the purchase price was reduced by $3 million for an adjustment, as defined in
the purchase agreement, related to the retention and/or termination of customer
contracts for a period of time after the purchase date. This reduction of the
purchase price resulted in the cancellation of the $3 million promissory note
and a corresponding decrease in the excess of cost over net assets acquired. The
seller of VitalCare has provided its written consent to the cancellation of the
$3 million note.
Note 9. - Excess of Cost Over Net Assets Acquired and Other Intangible Assets
- -----------------------------------------------------------------------------
At June 30, 2005 and 2004, the Company had the following intangible asset
balances (in thousands of dollars):
June 30, 2005 June 30, 2004
------------- -------------
Gross Gross
Carrying Accumulated Carrying Accumulated
Amount Amortization Amount Amortization
------ ------------ ------ ------------
Amortized Intangible Assets:
Noncompete agreements $ 455 $ (148) $ 320 $ (34)
Trade names 550 (64) -- --
Contractual customer
relationships 10,300 (2,339) 8,800 (618)
------- ------- ------ ------
Total $11,305 $(2,551) $9,120 $ (652)
======= ======= ====== ======
Unamortized Intangible Assets:
Trade names $ 2,360 $1,740
======= ======
Amortization expense on intangible assets was approximately $523,000 and
$424,000 for the quarters ended June 30, 2005 and 2004, respectively, and
$999,000 and $600,000 for the six months ended June 30, 2005 and 2004,
respectively.
The changes in the carrying amount of excess of cost over net assets
acquired for the six months ended June 30, 2005 are as follows (in thousands of
dollars):
Hospital Healthcare
Contract Rehabilitation Management
Therapy Services Consulting Total
-------- -------- ---------- -------
Balance at December 31, 2004 $21,321 $42,875 $ 4,144 $68,340
Purchase price
allocation adjustments 488 (3,197) -- (2,709)
------- ------- ------- -------
Balance at June 30, 2005 $21,809 $39,678 $ 4,144 $65,631
======= ======= ======= =======
9 of 26
REHABCARE GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
----------------------------------------------------------------
Note 10. - Long-term Debt
- -------------------------
In connection with the purchase of businesses in 2004, the Company issued
long-term subordinated promissory notes to the respective selling parties.
During the first quarter of 2005, the Company issued an additional note in the
amount of $545,000 in accordance with the earn-out provisions of the agreement
to purchase CPR. The interest rate on the new earn-out note is 8% per annum.
During the second quarter of 2005, the Company's note payable related to the
acquisition of VitalCare in the amount of $3 million was canceled as a result of
a purchase price adjustment, as defined in the purchase agreement, related to
the retention and/or termination of customer contracts for a period of time
after the purchase date. On June 30, 2005, the remaining aggregate principal
balance on all subordinated promissory notes was approximately $3.4 million.
Note 11. - Industry Segment Information
- ---------------------------------------
Prior to February 2, 2004, when the Company sold its healthcare staffing
division, the Company operated in two business segments that were managed
separately based on fundamental differences in operations: program management
services and healthcare staffing services. Program management includes hospital
rehabilitation services (including inpatient acute rehabilitation and skilled
nursing units and outpatient therapy programs) and contract therapy programs. On
May 3, 2004, with the acquisition of Phase 2 Consulting, the Company added a new
segment: healthcare management consulting. Virtually all of the Company's
services are provided in the United States. Summarized information about the
Company's operations for the three months and six months ended June 30, 2005 and
2004 in each industry segment is as follows (in thousands of dollars):
Three months ended Six months ended
June 30, June 30,
2005 2004 2005 2004
---- ---- ---- ----
Operating Revenues
- ------------------
Program management:
Contract therapy $ 57,629 $ 41,028 $110,088 $ 81,782
Hospital rehabilitation
services 48,046 48,518 95,859 95,605
-------- -------- -------- --------
Program management
total 105,675 89,546 205,947 177,387
Healthcare staffing -- -- -- 16,727
Healthcare management
consulting 2,811 1,398 5,121 1,398
-------- -------- --------- --------
Subtotal 108,486 90,944 211,068 195,512
Less Intercompany
Revenues* (133) -- (284) (71)
-------- -------- -------- --------
Total $108,353 $ 90,944 $210,784 $195,441
======== ======== ======== ========
<FN>
*Intercompany revenues represent sales of services, at market rates, between the
Company's operating segments.
</FN>
10 of 26
REHABCARE GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
----------------------------------------------------------------
Three months ended Six months ended
June 30, June 30,
2005 2004 2005 2004
---- ---- ---- ----
Operating Earnings
- ------------------
Program management:
Contract therapy $ 3,165 $ 1,979 $ 5,558 $ 4,417
Hospital rehabilitation
services 6,696 8,064 13,372 16,861
------- ------- ------- -------
Program management
total 9,861 10,043 18,930 21,278
Healthcare staffing -- -- -- (78)
Healthcare management
consulting (54) 109 (117) 109
------- ------- ------- -------
Subtotal 9,807 10,152 18,813 21,309
Restructuring charge -- 51 -- (1,615)
------- ------- ------- -------
Total $ 9,807 $10,203 $18,813 $19,694
======= ======= ======= =======
Three months ended Six months ended
June 30, June 30,
2005 2004 2005 2004
---- ---- ---- ----
Depreciation and
Amortization
- ------------
Program management:
Contract therapy $ 1,022 $ 652 $ 1,981 $ 1,394
Hospital rehabilitation
services 1,377 1,355 2,704 2,381
------- ------ ------- -------
Program management
total 2,399 2,007 4,685 3,775
Healthcare management
consulting 9 3 16 3
------- ------- ------- -------
Total $ 2,408 $ 2,010 $ 4,701 $ 3,778
======= ======= ======= =======
Three months ended Six months ended
June 30, June 30,
2005 2004 2005 2004
---- ---- ---- ----
Capital Expenditures
- --------------------
Program management:
Contract therapy $ 1,215 $ 486 $ 1,842 $ 1,037
Hospital rehabilitation
services 1,009 477 2,065 1,137
------- ------ ------- -------
Program management
total 2,224 963 3,907 2,174
Healthcare management
consulting 13 13 30 13
------- ------ ------- -------
Total $ 2,237 $ 976 $ 3,937 $ 2,187
======= ====== ======= =======
11 of 26
REHABCARE GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
----------------------------------------------------------------
Total Assets Unamortized Goodwill
--------------------- --------------------
as of June 30, as of June 30,
2005 2004 2005 2004
---- ---- ---- ----
Program management:
Contract therapy $ 79,561 $ 50,913 $ 21,809 $ 15,415
Hospital rehabilitation
services 157,019 152,865 39,678 42,598
-------- -------- -------- --------
Program management
total 236,580 203,778 61,487 58,013
Healthcare management
consulting 7,217 6,345 4,144 4,378
Corporate - investment in
InteliStaf 38,557 39,537 N/A N/A
-------- -------- -------- --------
Total $282,354 $249,660 $ 65,631 $ 62,391
======== ======== ======== ========
Note 12. - Related Party Transactions
- -------------------------------------
The Company has retained a software vendor for various computer related
activities. John H. Short, President and Chief Executive Officer and a director
of the Company, is also a director of the software company and Theodore M.
Wight, a director of the Company, was also a director of the software company
until his resignation from the software company's board on April 27, 2005. Dr.
Short owns 5.5% of the fully diluted capitalization of the software company.
Until June 2004, when the United States Small Business Administration was
appointed as a receiver for Pacific Northwest Partners SBIC, L.P., Mr. Wight was
deemed to control through his affiliation with Pacific Northwest Partners SBIC,
L.P., 27.3% of the fully diluted capitalization of the software company.
Subsequent to June 2004, Mr. Wight retained personal ownership of 1.34% of the
total capitalization of the software company. The Company paid the software
vendor approximately $6,000 during the six months ended June 30, 2005. The
Company continues to utilize the software vendor for website hosting services at
an approximate annual cost of $73,000. This contract is cancelable upon 60 days
notice.
In accordance with the terms of the Transition Services Agreement between
the Company and InteliStaf, the Company provided certain accounting and
back-office services to InteliStaf until those activities were fully integrated
by InteliStaf. These services were billed to InteliStaf at cost. This agreement
was terminated on March 31, 2005. During the first quarter of 2005, the Company
performed services under this agreement with an aggregate cost of approximately
$64,000.
During the second quarter of 2005, the Company purchased air transportation
services from 55JS Limited, Co. in the amount of approximately $99,000 bringing
the total purchases for the six months ended June 30, 2005 to approximately
$269,000. 55JS Limited, Co. is owned by the Company's President and Chief
Executive Officer, John Short. The air transportation services are billed to the
Company, at cost, for hourly usage of 55JS's plane for Company business.
Note 13. - Recently Issued Pronouncements
- -----------------------------------------
In December 2004, the Financial Accounting Standards Board enacted
Statement of Financial Accounting Standards No. 123 - revised 2004, "Share-Based
Payment" ("Statement 123R"), requiring the recognition of compensation expense
for all share-based payments to employees. Adoption of the standard for the
Company is required on January 1, 2006. The Company has not yet completed its
analysis of the impact adopting Statement 123R will have on its fiscal year 2006
financial statements although the Company expects the impact will be
significant, resulting in increased compensation expense.
12 of 26
REHABCARE GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
----------------------------------------------------------------
Note 14. - Subsequent Event
- ---------------------------
On August 1, 2005, the Company acquired substantially all of the operating
assets of MeadowBrook Healthcare, Inc. and certain of its subsidiaries
("MeadowBrook") for approximately $36.5 million in cash and notes, subject to
certain working capital and other adjustments. The transaction was funded by
RehabCare through a combination of cash on hand, subordinated notes and
borrowings against its revolving credit facility. The Company is leasing the
MeadowBrook facilities from SunTrust Bank which acquired the facilities from
MeadowBrook and its affiliates in a separate transaction that also occurred on
August 1. MeadowBrook's results of operations will be included in the Company's
financial statements prospectively beginning on August 1, 2005.
13 of 26
REHABCARE GROUP, INC.
Item 2. - Management's Discussion and Analysis of Financial Condition and
- --------------------------------------------------------------------------------
Results of Operations
- ---------------------
This Quarterly Report on Form 10-Q contains forward-looking statements that
are made pursuant to the safe harbor provisions of the Private Securities
Litigation Reform Act of 1995. Forward-looking statements involve known and
unknown risks and uncertainties that may cause our actual results in future
periods to differ materially from forecasted results. These risks and
uncertainties may include, but are not limited to, our ability to consummate
acquisitions; our ability to integrate recent and pending acquisitions and
client partnering relationships within the expected timeframes and to achieve
the revenue and earnings levels from such acquisitions and relationships at or
above the levels projected; changes in governmental reimbursement rates and
other regulations or policies affecting the services provided by us to clients
and/or patients; the operational, administrative and financial effect of our
compliance with other governmental regulations and applicable licensing and
certification requirements; our ability to attract new client relationships or
to retain and grow existing client relationships through expansion of our
hospital rehabilitation and contract therapy service offerings and the
development of alternative product offerings; the ability of new management of
InteliStaf Holdings, Inc., our unconsolidated affiliate, to complete its
business assessment of InteliStaf on a timely basis and to institute a business
restructuring to improve revenues and earnings; the results of our impairment
analysis to be conducted with respect to the carrying value of our investment in
InteliStaf; the future financial results of our other unconsolidated affiliates;
the adequacy and effectiveness of our operating and administrative systems; our
ability to attract and the additional costs of attracting administrative,
operational and professional employees; significant increases in health, workers
compensation and professional and general liability costs; litigation risks of
our past and future business, including our ability to predict the ultimate
costs and liabilities or the disruption of its operations; competitive and
regulatory effects on pricing and margins; and general and economic conditions,
including efforts by governmental reimbursement programs, insurers, healthcare
providers and others to contain healthcare costs.
Results of Operations
Prior to the divestiture of our StarMed Staffing division to InteliStaf
Holdings, Inc. on February 2, 2004, we derived our revenue from two business
segments: program management services (for hospitals, freestanding outpatient
clinics and skilled nursing facilities) and healthcare staffing services. The
program management segment includes hospital rehabilitation services (including
inpatient acute rehabilitation, skilled nursing units and outpatient therapy
programs) and contract therapy programs. On May 3, 2004, with the acquisition of
Phase 2 Consulting, we added a new segment: healthcare management consulting.
Selected Operating Statistics:
Three Months Ended Six Months Ended
June 30, June 30,
2005 2004 2005 2004
---- ---- ---- ----
Program Management:
Contract Therapy:
Operating Revenues (in thousands) $57,629 $41,028 $110,088 $81,782
Average Number of Locations 745 572 730 554
Average Revenue per Location $77,363 $71,704 $150,775 $147,550
14 of 26
REHABCARE GROUP, INC.
Selected Operating Statistics (Continued):
Three Months Ended Six Months Ended
June 30, June 30,
2005 2004 2005 2004
---- ---- ---- ----
Hospital Rehabilitation Services:
Operating Revenues (in thousands)
Inpatient $35,632 $37,121 $71,264 $72,464
Outpatient 12,414 11,397 24,595 23,141
------- ------- ------- -------
Total $48,046 $48,518 $95,859 $95,605
Average Number of Programs
Inpatient 144 145 144 138
Outpatient 42 42 41 43
--- --- --- ---
Total 186 187 185 181
Average Revenue per Program
Inpatient $246,987 $255,212 $496,546 $525,811
Outpatient 297,926 271,360 598,195 542,463
Total $258,403 $258,830 $519,184 $529,747
Healthcare Management Consulting:
Operating Revenues (in thousands) $2,811 $1,398 $5,121 $1,398
Three Months Ended June 30, 2005 Compared to Three Months Ended June 30, 2004
- -----------------------------------------------------------------------------
Operating Revenues
Operating revenues during the second quarter of 2005 increased by $17.5
million, or 19.1%, to $108.4 million compared to $90.9 million in the second
quarter of 2004. The revenue increase was primarily due to the growth in our
contract therapy business resulting both from organic growth and targeted
acquisitions. Revenues for contract therapy increased $16.6 million or 40.5%
while revenues for hospital rehabilitation services decreased $0.5 million or
1.0%.
Contract therapy experienced strong revenue growth in the second quarter of
2005 versus the second quarter of 2004. A portion of this revenue increase, $3.1
million, is attributable to the acquisition of Cornerstone Rehabilitation in
December 2004. In addition to the revenues from the acquisition, continued
success of the division's sales efforts, resulting in 194 net new units at June
30, 2005 versus June 30, 2004, and same store revenue growth of 12.1% were
driving forces behind the revenue increase. However, much of the same store
growth was attributable to overall increases in the division's Medicare Part A
patient services, which generate lower than average contribution margins. The
average revenue per location increased 7.9% year-over-year due primarily to the
same store growth mentioned above.
Hospital rehabilitation services operating revenues declined slightly from
the prior year quarter as a decline in inpatient acute rehabilitation revenue
was only partially offset by a growth in revenues from our outpatient business.
The increase in outpatient revenue is primarily due to same store revenue growth
of 5.8% and increased overall average revenue per unit resulting from the larger
relative size of new openings as compared to closed units and the same store
revenue growth mentioned earlier. The decline in inpatient revenue primarily
resulted from the impact of the 75% rule. In the second quarter of 2005, the
Company took an overly conservative approach to compliance with the 75% rule
which caused us to be well ahead of required thresholds for compliance. This
negatively impacted our unit level census and reduced the growth in the number
of discharges for the second quarter of 2005 as patients with lower acuity
diagnoses are now being treated at other patient care settings.
15 of 26
REHABCARE GROUP, INC.
Three Months Ended June 30, 2005 Compared to Six Months Ended June 30, 2004
- --------------------------------------------------------------------------------
(Continued)
- -----------
Costs and Expenses
Three Months Three Months
Ended Ended
June 30, % of June 30, % of
2005 Revenue 2004 Revenue
---- ------- ---- -------
(dollars in thousands)
Operating expenses $81,206 75.0% $64,643 71.1%
Division selling, general and administrative 8,828 8.1 7,863 8.7
Corporate selling, general and administrative 6,104 5.6 6,276 6.9
Depreciation and amortization 2,408 2.2 2,010 2.2
Restructuring -- -- (51) (0.1)
------- ---- ------- ----
Total costs and expenses $98,546 90.9% $80,741 88.8%
======= ==== ======= ====
Operating expenses increased as a percentage of revenues due to increased
operating costs in contract therapy and hospital rehabilitation services as
discussed in more detail below. The decrease in division selling, general and
administrative costs as a percentage of revenues resulted primarily from the
contract therapy division's higher revenues, which helped to leverage the
division's overhead costs. Corporate selling, general and administrative costs
declined significantly as a percentage of revenues primarily due to efforts to
control costs including a decrease in management incentive costs.
Three Months Three Months
Ended % of Ended % of
June 30, Unit June 30, Unit
2005 Revenue 2004 Revenue
---- ------- ---- -------
(dollars in thousands)
Program Management:
- -------------------
Contract Therapy:
Operating expenses $46,085 80.0% $31,950 77.9%
Division selling, general and administrative 4,019 7.0 3,239 7.9
Corporate selling, general and administrative 3,338 5.8 3,208 7.8
Depreciation and amortization 1,022 1.7 652 1.6
------- ---- ------- ----
Total costs and expenses $54,464 94.5% $39,049 95.2%
======= ==== ======= ====
Hospital Rehabilitation Services:
Operating expenses $32,960 68.6% $31,677 65.3%
Division selling, general and administrative 4,336 9.0 4,400 9.1
Corporate selling, general and administrative 2,677 5.6 3,022 6.2
Depreciation and amortization 1,377 2.9 1,355 2.8
------- ---- ------- ----
Total costs and expenses $41,350 86.1% $40,454 83.4%
======= ==== ======= ====
Healthcare Management Consulting:
- ---------------------------------
Operating expenses $2,294(a) 81.6% $1,016 72.7%
Division selling, general and administrative 473 16.8 224 16.0
Corporate selling, general and administrative 89 3.2 46 3.3
Depreciation and amortization 9 0.3 3 0.2
------ ----- ------ -----
Total costs and expenses $2,865 101.9% $1,289 92.2%
====== ===== ====== ====
(a) includes expenses of approximately $133 related to intercompany sales.
16 of 26
REHABCARE GROUP, INC.
Three Months Ended June 30, 2005 Compared to Six Months Ended June 30, 2004
- --------------------------------------------------------------------------------
(Continued)
- -----------
Total contract therapy costs and expenses increased in the three months
ended June 30, 2005 compared to the three months ended June 30, 2004 primarily
due to the increase in direct operating expenses associated with the increased
number of contract therapy locations being managed by the division. In addition,
the division's direct operating expenses increased as a percentage of unit
revenue from the second quarter of 2004 to the second quarter of 2005 primarily
as a result of the increase in lower-priced Medicare Part A revenues mentioned
above and substantial increases in the cost of direct labor, fueled by the
continued tight therapist labor market. These increased direct operating costs
were partially offset by a reduction in contract therapy's bad debt expense.
During the second quarter of 2004, contract therapy recorded an additional
provision for doubtful accounts in response to some of the risk associated with
a few specific accounts in the division's receivables portfolio. Contract
therapy continues to leverage its selling, general and administrative costs,
which decreased as a percentage of revenues from the second quarter of 2004 to
the second quarter of 2005. While the Cornerstone Rehabilitation acquisition
added new fixed costs associated with its corporate office and related staff in
Louisiana, contract therapy's management was able to run more programs per
manager. While remaining relatively flat as a percentage of operating revenues,
contract therapy's depreciation and amortization expense increased from the
second quarter of 2004 to the second quarter of 2005 primarily due to the
amortization of certain intangible assets associated with the acquisitions of
CPR and Cornerstone and the amortization of the division's proprietary
information system. The strong revenue growth and cost control at the selling,
general and administrative level helped increase operating earnings from $2.0
million in the second quarter of 2004 to $3.2 million in the second quarter of
2005.
Total hospital rehabilitation services costs and expenses increased from
the prior year quarter primarily due to increases in direct operating expenses
associated with increased labor costs. Both the inpatient and outpatient
businesses experienced increases in average wage rates and contract labor
expense as the market for therapists remained tight. In addition, some of the
inpatient locations did not respond to fluctuating census levels in a timely
manner resulting in higher labor expenses in the current year quarter. Division
selling, general and administrative expenses remained flat in the second quarter
of 2005. Corporate selling, general and administrative expenses declined in the
second quarter of 2005 reflecting efforts to control costs and an increased
utilization of some overhead activities by the faster growing contract therapy
division. The net effect of the revenue decline, the increased operating labor
costs and the improvement in selling, general and administrative expense was a
$1.4 million decline in hospital rehabilitation services operating earnings to
$6.7 million in the second quarter of 2005 from $8.1 million in the second
quarter of 2004.
Non-operating Items
Interest income increased in the second quarter of 2005 compared to the
second quarter of 2004 primarily due to the impact of higher average cash and
investment balances and the effect of higher interest rates.
Interest expense primarily represents interest on subordinated promissory
notes issued as partial consideration for the acquisitions of CPR Therapies,
VitalCare and Cornerstone Rehabilitation during 2004, commitment fees paid on
the unused portion of our line of credit and fees paid on outstanding letters of
credit. We had no outstanding balance on the line of credit as of June 30, 2005
or June 30, 2004.
17 of 26
REHABCARE GROUP, INC.
Three Months Ended June 30, 2005 Compared to Six Months Ended June 30, 2004
- --------------------------------------------------------------------------------
(Continued)
- -----------
Earnings before income taxes and equity in net loss of affiliates decreased
by 2.2% to $9.7 million in the second quarter of 2005 from $9.9 million in the
second quarter of 2004. The provision for income taxes was $3.9 million in the
second quarter of 2005 compared to $4.1 million in the second quarter of 2004,
reflecting effective income tax rates of 40.5% and 41.6%, respectively. The
effective tax rate decrease is primarily the result of the impact of
non-deductible goodwill associated with the sale of the staffing division on the
2004 effective rate.
Equity in net loss of affiliates represents our share of the losses of less
than majority owned equity investments, primarily our investment in InteliStaf
Holdings. Our share of InteliStaf losses was approximately $0.3 million in the
second quarter of 2005 as compared to $0.1 million in the same period last year.
InteliStaf's second quarter 2005 results reflect a 16.0% decline in revenue
compared to the same period last year, margin contraction in the travel business
brought about primarily by increased housing costs, and an increase in its
insurance reserves.
Net earnings in the second quarter of 2005 decreased 3.8% as compared to
the second quarter of 2004. Diluted net earnings per share decreased from $0.34
in the second quarter of 2004 to $0.32 in the second quarter of 2005.
Six Months Ended June 30, 2005 Compared to Six Months Ended June 30, 2004
- -------------------------------------------------------------------------
Operating Revenues
Operating revenues during the first six months of 2005 increased by $15.4
million, or 7.9%, to $210.8 million compared to $195.4 million in the first six
months of 2004. The revenue increase was primarily due to the growth in our
contract therapy business resulting both from organic growth and targeted
acquisitions partially offset by the decline in revenue resulting from the sale
of our healthcare staffing division in February 2004. Revenues for contract
therapy and hospital rehabilitation services increased 34.6% and 0.3%,
respectively.
Contract therapy achieved strong revenue growth for the first half of 2005
as compared to the first half of 2004. A portion of this revenue increase, $7.3
million, is attributable to the acquisitions of CPR Therapies and Cornerstone
Rehabilitation in 2004. In addition to the revenues from the acquisitions,
continued success of the division's sales efforts and same store revenue growth
of 8.2% were driving forces behind the overall revenue growth. However, as was
the case in the first quarter of 2005, almost all of the same store growth was
attributable to overall increases in our programs' Medicare Part A patient
services, which generate lower than average contribution margins. The average
revenue per location increased 2.2% year-over-year due primarily to the same
store growth mentioned above, which was partially offset by the smaller average
size of the program locations purchased in the acquisitions mentioned above.
Hospital rehabilitation services operating revenues for the first six
months of 2005 increased slightly from the first six months of 2004 as increases
in revenue in the outpatient business were only partially offset by declines in
inpatient revenues. In the outpatient business, revenues from new openings
greatly exceeded revenues lost to closed units. In the inpatient business,
revenues from new openings and the VitalCare acquisition have only partially
offset revenues lost to closed units. In addition, the implementation of the 75%
rule continues to impact our unit level census and has slightly lowered the
number of discharges for the first six months of 2005 as patients with lower
acuity diagnoses are now being treated at other patient care settings.
18 of 26
REHABCARE GROUP, INC.
Six Months Ended June 30, 2005 Compared to Six Months Ended June 30, 2004
- --------------------------------------------------------------------------------
(Continued)
- -----------
Costs and Expenses
Six Months Six Months
Ended Ended
June 30, % of June 30, % of
2005 Revenue 2004 Revenue
---- ------- ---- -------
(dollars in thousands)
Operating expenses $157,704 74.8% $140,710 72.0%
Division selling, general and administrative 17,463 8.3 17,536 9.0
Corporate selling, general and administrative 12,103 5.8 12,593 6.4
Depreciation and amortization 4,701 2.2 3,778 1.9
Restructuring charge -- -- 1,615 0.8
Gain on sale of business -- -- (485) (0.2)
-------- ---- ------- ----
Total costs and expenses $191,971 91.1% $175,747 89.9%
======== ==== ======== ====
Operating expenses as a percentage of revenues increased due to higher
operating costs in contract therapy and hospital rehabilitation services as
discussed in more detail below. The decrease in division selling, general and
administrative costs as a percentage of revenues resulted primarily from the
contract therapy division's higher revenues, which helped to leverage the
division's overhead costs. Corporate selling, general and administrative costs
declined as a percentage of revenues primarily due to efforts to control costs
including a decrease in management incentive costs. Depreciation and
amortization as a percentage of revenues has increased primarily as a result of
amortization of certain intangible assets related to the series of acquisitions
completed during 2004.
Six Months Six Months
Ended % of Ended % of
June 30, Unit June 30, Unit
2005 Revenue 2004 Revenue
---- ------- ---- -------
(dollars in thousands)
Program Management:
- -------------------
Contract Therapy:
Operating expenses $ 87,957 79.9% $63,362 77.5%
Division selling, general and administrative 7,974 7.3 6,497 7.9
Corporate selling, general and administrative 6,618 6.0 6,112 7.5
Depreciation and amortization 1,981 1.8 1,394 1.7
-------- ---- ------- ----
Total costs and expenses $104,530 95.0% $77,365 94.6%
======== ==== ======= ====
Hospital Rehabilitation Services:
Operating expenses $ 65,928 68.8% $62,805 65.7%
Division selling, general and administrative 8,521 8.9 8,058 8.4
Corporate selling, general and administrative 5,334 5.6 5,500 5.8
Depreciation and amortization 2,704 2.8 2,381 2.5
-------- ---- ------- ----
Total costs and expenses $ 82,487 86.1% $78,744 82.4%
======== ==== ======= ====
Healthcare Staffing:
- --------------------
Operating expenses $ -- --% $13,598(a) 81.3%
Division selling, general and administrative -- -- 2,757 16.5
Corporate selling, general and administrative -- -- 935 5.6
Gain on sale of business -- -- (485) (2.9)
-------- ---- ------- -----
Total costs and expenses $ -- --% $16,805 100.5%
======== ==== ======= =====
19 of 26
REHABCARE GROUP, INC.
Six Months Ended June 30, 2005 Compared to Six Months Ended June 30, 2004
- --------------------------------------------------------------------------------
(Continued)
- -----------
Six Months Six Months
Ended % of Ended % of
June 30, Unit June 30, Unit
2005 Revenue 2004 Revenue
---- ------- ---- -------
(dollars in thousands)
Healthcare Management Consulting:
- ---------------------------------
Operating expenses $ 4,103(b) 80.1% $ 1,016 72.7%
Division selling, general and administrative 968 18.9 224 16.0
Corporate selling, general and administrative 151 3.0 46 3.3
Depreciation and amortization 16 0.3 3 0.2
------- ----- ------- ----
Total costs and expenses $ 5,238 102.3% $ 1,289 92.2%
====== ===== ======= ====
<FN>
(a) includes expenses of approximately $71 related to intercompany sales.
(b) includes expenses of approximately $284 related to intercompany sales.
</FN>
Total contract therapy costs and expenses increased in the first six months
of 2005 compared to the first six months of 2004 primarily due to the increase
in direct operating expenses associated with the increased number of contract
therapy locations being managed by the division. In addition, the division's
direct operating expenses increased as a percentage of unit revenue from the
first six months of 2004 to the first six months of 2005 primarily as a result
of the increase in lower-priced Medicare Part A revenues mentioned above and
substantial increases in contract therapy's cost of direct labor, which is being
fueled by the continued tight therapist labor market. These increased direct
operating costs were partially offset by a reduction in contract therapy's bad
debt expense. During the first six months of 2004, contract therapy recorded an
additional provision for doubtful accounts in response to some of the risk
associated with a few specific accounts in the division's receivables portfolio.
Contract therapy continues to leverage its division selling, general and
administrative costs, which decreased as a percentage of revenues from the six
months ended June 30, 2004 to the six months ended June 30, 2005. While the
Cornerstone Rehabilitation acquisition added new fixed costs associated with its
corporate office and related staff in Louisiana, contract therapy's management
was able to run more programs per manager and increase revenues at a rate faster
than it increased its selling, general and administrative expenses. While
remaining relatively flat as a percentage of operating revenues, contract
therapy's depreciation and amortization expense increased from the first six
months of 2004 to the first six months of 2005 primarily due to the amortization
of certain intangible assets associated with the acquisitions of CPR and
Cornerstone and the amortization of the division's proprietary information
system. The strong revenue growth and cost control at the selling, general and
administrative level helped increase operating earnings from $4.4 million in the
six months ended June 30, 2004 to $5.6 million in the six months ended June 30,
2005.
Total hospital rehabilitation services costs and expenses increased from
the prior year primarily due to increases in direct operating expenses
associated with increased labor costs and the inclusion of VitalCare's
operations for a full six months in 2005. Both the inpatient and outpatient
businesses experienced increases in average wage rates and contract labor
expense as the market for therapists remains tight. Division level selling,
general and administrative expenses have increased reflecting an increased
investment in business development, partially offset by a consolidation of other
administrative activities. The division's depreciation and amortization expense
increased from the first half of 2004 to the first half of 2005 primarily due to
the amortization of certain intangible assets associated with the acquisition of
VitalCare and the amortization of the division's proprietary information system.
Total hospital rehabilitation services operating earnings decreased by $3.5
million from $16.9 million in the first six months of 2004 to $13.4 million in
the first six months of 2005 reflecting the negative impact of the 75% rule on
revenues and the increasing costs of labor.
20 of 26
REHABCARE GROUP, INC.
Six Months Ended June 30, 2005 Compared to Six Months Ended June 30, 2004
- --------------------------------------------------------------------------------
(Continued)
- -----------
During the first quarter of 2004, in connection with the sale of the
staffing division, we initiated a series of restructuring activities to reduce
the cost of corporate overhead that had previously been absorbed by the staffing
division. These activities included the elimination of approximately 40
positions, the exiting a portion of leased office space at our corporate
headquarters and the write-off of certain leasehold improvements associated with
the office space consolidation. As a result of these actions, we recorded a
pre-tax restructuring charge in the first quarter of 2004 in the amount of
approximately $1.7 million. This charge has been recorded as a separate
component of operating expenses.
Non-operating Items
Interest income increased in the first six months of 2005 compared to the
first six months of 2004 primarily due to the impact of higher average cash and
investment balances and the effect of higher interest rates.
Interest expense primarily represents interest on subordinated promissory
notes issued as partial consideration for the acquisitions of CPR Therapies,
VitalCare and Cornerstone Rehabilitation during 2004, commitment fees paid on
the unused portion of our line of credit and fees paid on outstanding letters of
credit. We had no outstanding balance on the line of credit as of June 30, 2005
or June 30, 2004.
Earnings before income taxes and equity in net loss of affiliates decreased
by 2.9% to $18.7 million in the first six months of 2005 from $19.3 million in
the first six months of 2004. The provision for income taxes was $7.6 million in
the first six months of 2005 compared to $8.0 million in the first half of 2004,
reflecting effective income tax rates of 40.5% and 41.5%, respectively. The
effective tax rate decrease is primarily the result of the impact of
non-deductible goodwill associated with the sale of the staffing division on the
2004 effective rate.
Equity in net loss of affiliates represents our share of the losses of less
than majority owned equity investments, primarily our investment in InteliStaf
Holdings. During the first half of 2005, our share of InteliStaf losses was
approximately $0.7 million. InteliStaf's first half of 2005 results were
negatively impacted by a continuing decline in revenue, margin contraction in
the travel business due to higher housing costs and costs related to an
operational restructuring and a debt re-financing completed during the first
quarter of 2005.
Net earnings in the first six months of 2005 decreased 3.9% as compared to
the first six months of 2004. Diluted net earnings per share decreased from
$0.64 in the first six months of 2004 to $0.60 in the first six months of 2005.
Liquidity and Capital Resources
As of June 30, 2005, we had $41.7 million in cash and cash equivalents and
$3.1 million of restricted cash, and a current ratio, the amount of current
assets divided by current liabilities, of 2.85 to 1. Working capital increased
by $14.1 million to $90.6 million as of June 30, 2005 as compared to $76.5
million as of December 31, 2004 primarily due to increased accounts receivable
from the growth in contract therapy revenues and decreases in accounts payable
and income taxes payable. Net accounts receivable were $80.4 million at June 30,
2005, compared to $69.6 million at December 31, 2004. The number of days'
average net revenue in net receivables was 67.1 and 66.5 at June 30, 2005 and
December 31, 2004, respectively. This increase is primarily due to the greater
mix of contract therapy receivables which tend to have a longer collection
cycle.
21 of 26
REHABCARE GROUP, INC.
Operating cash flows constitute our primary source of liquidity and
historically have been sufficient to fund working capital, capital expenditures,
internal business expansion and debt service requirements. We expect to meet our
future working capital, capital expenditures, internal and external business
expansion and debt service requirements from a combination of internal sources
and outside financing. We have a $90 million, five-year revolving credit
facility with no balance outstanding as of June 30, 2005. The credit facility is
expandable to $125 million upon our notice to the lending group, subject to our
continued compliance with the terms of the credit agreement. We have
approximately $11.3 million in letters of credit issued to insurance carriers as
collateral for reimbursement of claims. The letters of credit reduce the amount
we may borrow under the revolving credit facility. Finally, as additional
collateral, we have a trust agreement with our professional and general
liability insurance carrier under which we have deposited $3.1 million for their
benefit in an escrow account. Our access to this cash is restricted and the
insurance carrier may only draw on these funds in the event of a default as
defined in the trust agreement.
As part of the purchases of CPR Therapies, VitalCare and Cornerstone
Rehabilitation in 2004, we issued long-term subordinated promissory notes to the
respective selling parties. These notes bear interest at rates ranging from
6%-8%. As of June 30, 2005, approximately $3.4 million of these notes remained
outstanding. In addition, as part of our arrangement with Signature Healthcare
Foundation, we extended a $2.0 million line of credit to Signature. At June 30,
2005, Signature had drawn approximately $1.2 million against this line of
credit.
Regulatory Update
75% Rule
- --------
On June 21, 2005, the Centers for Medicare and Medicaid Services announced
it will proceed with implementing the final 75% rule it released on July 1,
2004. The rule provides a three year transition period during which the required
percentage of patients with a qualifying condition increases gradually from 50%
to 75%. The Centers reviewed the April 22, 2005 report issued by the Government
Accountability Office and determined it had implemented the GAO's
recommendations to improve how facilities are classified as an inpatient
rehabilitation facility.
On July 14, 2005, Congress introduced a bill calling for a freeze at the
50% threshold and the establishment of a panel to oversee further study of the
rule. We believe it is unlikely we will see any significant modification of the
rule and continue to manage toward the assigned thresholds based on cost report
year information. At June 30, 2005, the Company was averaging 60 percent
compliance, which is well ahead of the transition requirements of the rule. The
Company has experienced both a reduction in growth in the number of patients
discharged in our inpatient units and denial of approximately 680 patients that
could have been admitted while maintaining compliance with the 50% transition
threshold for compliance. To address this issue, a real-time tool is being
installed to support management, operators and clinicians in the admission
evaluation process regarding the types and numbers of patients who are qualified
for admission under either category at any given time.
Another one of the Company's ongoing mitigation strategies includes
identifying new referral sources, which has resulted in an approximate 12%
increase in the number of external hospital admissions in the first six months
of 2005 as compared to the same period last year. In addition, the Company's
recently implemented managed care strategy resulted in an increase in the number
of non-Medicare patients in the second quarter of 2005 as compared to first
quarter of 2005.
22 of 26
REHABCARE GROUP, INC.
Part B Therapy Caps
- -------------------
The moratorium for Part B therapy caps ends December 31, 2005. Currently
there are 2 bills, one each in the Senate and the House, both calling for full
repeal of the rule. While we support these bills, several House and Senate
members have voiced their concern about the lack of an alternative payment
methodology in lieu of full repeal. The current industry proposal involves two
years at one blended cap that would cover at least 90-95% of all beneficiaries.
Resource Utilization Group (RUG) Refinement
- ---------------------------------------------
On July 28, 2005, the Centers released its final rule on the prospective
payment system and consolidated billing for skilled nursing facilities. This
final rule responded to comments the Centers received to the proposed rule which
was published on May 19, 2005. The therapy industry's comments challenged four
main areas: refinements to case-mix classifications, Minimum Data Set concerns,
clarification of clinical issues and Consolidated Billing. The most significant
policy change involves the addition of 9 new RUGs, increasing the total to 53.
The refinements to the RUG case-mix classifications take effect on January 1,
2006. At this time, we are carefully reviewing the final rule for an accurate
assessment of its impact.
Critical Accounting Policies and Estimates
The preparation of our consolidated financial statements in conformity with
U.S. generally accepted accounting principles requires us to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Our significant accounting policies, including the use of
estimates, were presented in the notes to consolidated financial statements
included in our 2004 Annual Report on Form 10-K, filed on March 16, 2005.
Critical accounting policies are those that are considered most important
to the presentation of our financial condition and results of operations,
require management's most difficult, subjective and complex judgments, and
involve uncertainties. Our most critical accounting policies pertain to
allowance for doubtful accounts, goodwill and other intangible assets, health,
workers compensation and professional liability insurance accruals and
accounting for investments in unconsolidated affiliates. Each of these critical
accounting policies was discussed in our 2004 Annual Report on Form 10-K in the
Critical Accounting Policies and Estimates section of "Item 7. - Management's
Discussion and Analysis of Financial Condition and Results of Operations." There
were no significant changes in the application of critical accounting policies
during the first six months of 2005.
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, 2004.
Item 4. - Controls and Procedures
- ---------------------------------
As of June 30, 2005, the Company's management, with the participation of
the Chief Executive Officer and Chief Financial Officer, have conducted an
evaluation of the effectiveness of the design and operation of the Company's
disclosure controls and procedures (as defined in Rule 13a-14 (c) and 15d-14 (c)
under the Securities Exchange Act of 1934, as amended). Based on that
evaluation, the Company's Chief Executive Officer and Chief Financial Officer
have concluded that the Company's disclosure controls and procedures are
effective in making known in a timely fashion material information required to
be filed in this report. There have been no changes in the Company's internal
controls over financial reporting during the six months ended June 30, 2005 that
has materially affected, or is reasonably likely to materially affect, the
Company's internal control over financial reporting.
23 of 26
REHABCARE GROUP, INC.
Part II. - Other Information
- ----------------------------
Item 1. - Legal Proceedings
- ---------------------------
On April 12, 2005, the Office of Inspector General, U.S. Department of
Health and Human Services issued a subpoena duces tecum which requires us to
produce certain documents to the Office of Inspector General. Many of the
documents requested relate to our provision of therapy services in our clients'
skilled nursing and long-term care facilities within the state of New Jersey. We
intend to fully cooperate with the government and are in the process of
gathering the required information in response to the subpoena.
In July 2003, the former medical director and a former physical therapist
at an acute rehabilitation unit that we operate filed a civil action against us
and our client hospital, Baxter County Regional Hospital, in the United States
District Court for the Eastern District of Arkansas. The plaintiffs seek back
pay, civil penalties, treble damages and special damages from us and Baxter
under the qui tam and whistleblower provisions of the False Claims Act. The
allegations contained in the original civil complaint related to the proper
clinical diagnoses, for Medicare reimbursement purposes, of patients treated at
the acute rehabilitation unit managed by us over a period of multiple years. We
have agreed to indemnify Baxter for all fees and expenses on all counts arising
out of the original complaint except for the whistleblower count filed by the
physical therapist. The plaintiffs had filed an initial action under seal in
August 2000 but the United States Department of Justice refused to intervene in
June 2003 after investigation at which time the seal was lifted. In June 2005,
the plaintiffs filed an amended complaint which includes an additional
allegation regarding the Centers for Medicare & Medicaid Services' reporting
requirements with respect to medical/surgical patients occupying beds located
within a distinct part acute rehabilitation unit. The plaintiffs have also filed
a motion to expand their discovery to include documents and other information
relating to our corporate practices with regard to categorizing patients'
diagnoses. We must respond to the motion by August 23, 2005.
Several federal lawsuits have been filed by certain on-call, recruiting and
staffing coordinators and other employee classifications seeking overtime
compensation and related damages under both federal and state law. These
individuals were employed by our former staffing division. Three of these cases
have been consolidated in the United States District Court for the Central
District of California. The individuals sought to bring a collective or class
action on behalf of all similarly situated persons. In January 2005, the court
granted plaintiffs' motion to send notices of collective action to present and
former staffing division employees, while denying plaintiffs' request to proceed
as a class action under the California state law claims. The notices of
collective action have been mailed to each person in the class of employees
approved by the court and August 15, 2005 has been set as the deadline for
employees receiving notices to opt-in to the collective action. Claims of an
employee who opts in to the case will date back two years (three years if a
willful violation is proven) from the date that the employee files a consent to
join the case. Plaintiffs' counsel has also filed a separate federal suit
asserting that the failure to pay overtime compensation to employees constituted
a breach of contract by us. Plaintiffs' counsel had earlier filed a separate
California state court class action reasserting the state law claims.
In addition to the above matters, we are a party to a number of other
claims and lawsuits. While these actions are being contested, the outcome of
individual matters is not predictable with assurance. From time to time, and
depending upon the particular facts and circumstances, we may be subject to
indemnification obligations under our contracts with our hospital and healthcare
facility clients relating to these matters. We do not believe that any liability
resulting from any of the above matters, after taking into consideration our
insurance coverage and amounts already provided for, will have a material
adverse effect on our consolidated financial position, cash flows or liquidity.
However, such matters could have a material effect on results of operations in a
particular quarter or fiscal year as they develop or as new issues are
identified.
24 of 26
REHABCARE GROUP, INC.
Item 6. - Exhibits
See exhibit index
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 5, 2005
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)
31.1 Certification by Chief Executive Officer pursuant to Rule 13a-14(a) under
the Securities Exchange Act of 1934, as amended
31.2 Certification by Chief Financial Officer pursuant to Rule 13a-14(a) under
the Securities Exchange Act of 1934, as amended
32.1 Certification of periodic financial report pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002, U.S.C. Section 1350
32.2 Certification of periodic financial report pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002, U.S.C. Section 1350
- -------------------------
EXHIBIT 31.1
CERTIFICATION
I, John H. Short, certify that:
1. I have reviewed this quarterly report on Form 10-Q of RehabCare Group, Inc.
(the "Registrant"):
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 officer 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)) and internal control over
financial reporting (as defined in Exchange Act Rules 13a-15(f)) for the
Registrant and we 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
report is being prepared;
b) designed such internal control over financial reporting or caused such
internal control over financial reporting to be designed under our
supervision, to provide reasonable assurance regarding the reliability
of financial reporting and the preparation of financial statements for
external purposes in accordance with generally accepted accounting
principles;
c) 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 report based on such evaluation; and
d) 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 officer 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 Registrant's board of
directors (or persons performing the equivalent function):
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 5, 2005
By: /s/ John H. Short
-----------------------
John H. Short
President and
Chief Executive Officer
RehabCare Group, Inc.
EXHIBIT 31.2
CERTIFICATION
I, Vincent L. Germanese, certify that:
1. I have reviewed this quarterly report on Form 10-Q of RehabCare Group, Inc.
(the "Registrant"):
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 officer 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)) and internal control over
financial reporting (as defined in Exchange Act Rules 13a-15(f)) for the
Registrant and we 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
report is being prepared;
b) designed such internal control over financial reporting or caused such
internal control over financial reporting to be designed under our
supervision, to provide reasonable assurance regarding the reliability
of financial reporting and the preparation of financial statements for
external purposes in accordance with generally accepted accounting
principles;
c) 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 report based on such evaluation; and
d) 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 officer 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 Registrant's board of
directors (or persons performing the equivalent function):
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 5, 2005
By: /s/ Vincent L. Germanese
-------------------------
Vincent L. Germanese
Senior Vice President,
Chief Financial Officer
and Secretary
RehabCare Group, Inc.
Exhibit 32.1
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Quarterly Report of RehabCare Group, Inc. (the "Company")
on Form 10-Q for the period ending June 30, 2005 as filed with the Securities
and Exchange Commission on the date hereof (the "Report"), I, John H. Short,
Chief Executive Officer of the Company, certify, pursuant to 18 U.S.C. ss. 1350,
as adopted pursuant to ss. 906 of the Sarbanes-Oxley Act of 2002, that:
(1) The Report fully complies with the requirements of section 13(a) or 15(d)
of the Securities Exchange Act of 1934; and
(2) The information contained in the Report fairly presents, in all material
respects, the financial condition and results of operations of the Company.
By: /s/ John H. Short
-----------------------
John H. Short
President and
Chief Executive Officer
RehabCare Group, Inc.
August 5, 2005
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, 2005 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.
By: /s/ Vincent L. Germanese
-------------------------
Vincent L. Germanese
Senior Vice President,
Chief Financial Officer
and Secretary
RehabCare Group, Inc.
August 5, 2005