1 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended March 31, 1998 Commission File Number 0-19294 REHABCARE GROUP, INC. (Exact name of Registrant as specified in its charter) Delaware 51-0265872 (State or other jurisdiction of (I.R.S. Employer Identification Number) incorporation or organization) 7733 Forsyth Boulevard, Suite 1700, St. Louis, MO 63105 (Address of principal executive offices and Zip Code) 314-863-7422 (Registrant's telephone number, including area code) Indicate by check mark the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No Indicate the number of shares outstanding of the Registrant's common stock, as of the latest practicable date. Class Outstanding at May 8, 1998 - -------------------------------------- -------------------------- Common Stock, par value $.01 per share 5,985,957 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- 1 of 11 2 REHABCARE GROUP, INC. Index Part I. - Financial Information Item 1. - Condensed Consolidated Financial Statements Condensed consolidated balance sheets, March 31, 1998 (unaudited) and December 31, 1997 3 Condensed consolidated statements of earnings for the three months ended March 31, 1998 and 1997 (unaudited) 4 Condensed consolidated statements of comprehensive earnings for the three months ended March 31, 1998 and 1997 (unaudited) 5 Condensed consolidated statements of cash flows for the three months ended March 31, 1998 and 1997 (unaudited) 6 Notes to condensed consolidated financial statements (unaudited) 7 Item 2. - Management's Discussion and Analysis of Financial Condition and Results of Operations 7 Part II. - Other Information Item 4. - Submission of Matters to Security Holders 9 Item 6. - Exhibits and Reports on Form 8-K 10 Signatures 11 2 of 11 3 PART 1. - FINANCIAL INFORMATION Item 1. - Condensed Consolidated Financial Statements REHABCARE GROUP, INC. Condensed Consolidated Balance Sheets (Dollar amounts in thousands) March 31, December 31, 1998 1997 -------- ------------ Assets: (unaudited) Current assets: Cash and cash equivalents $ 4,184 $ 1,975 Marketable securities, available-for-sale 4,765 4,664 Accounts receivable, net of allowance for doubtful accounts of $1,561 and $1,338, respectively 23,595 24,147 Deferred tax assets 1,681 1,773 Prepaid expenses and other current assets 724 720 ------- ------ Total current assets 34,949 33,279 ------- ------ Marketable securities, available-for-sale, non-current 1,527 1,812 ------- ------ Equipment and leasehold improvements, net 3,226 3,342 ------- ------ Other assets: Excess of cost over net assets acquired, net 54,683 52,949 Deferred contract costs, net 1,168 1,138 Pre-opening costs, net 2,982 2,908 Deferred tax assets 41 181 Other 1,607 1,632 ------- ------ Total other assets 60,481 58,808 ------- ------ $100,183 $ 97,241 ======= ====== Liabilities and Stockholders' Equity: Current liabilities: Current portion of long-term debt $ 4,770 $ 4,520 Accounts payable 2,335 1,700 Accrued salaries and wages 9,748 9,925 Accrued expenses 3,821 3,570 Income taxes payable 1,546 771 ------- ------ Total current liabilities 22,220 20,486 ------- ------ Deferred compensation 2,285 2,501 ------- ------ Long-term debt, less current portion 31,900 34,494 ------- ------ Stockholders' equity: Common stock, $.01 par value; authorized 20,000,000 shares, issued 7,152,191 shares 72 72 Additional paid-in capital 23,092 23,972 Retained earnings 37,985 35,192 Less common stock held in treasury at cost, 1,178,309 and 1,311,307 shares, respectively (18,167) (20,212) Accumulated other comprehensive earnings - unrealized gain on marketable securities, net of tax 796 736 ------- ------ Total stockholders' equity 43,778 39,760 ------- ------ $100,183 $ 97,241 ======= ====== See notes to condensed consolidated financial statements. 3 of 11 4 REHABCARE GROUP, INC. Condensed Consolidated Statements of Earnings (Amounts in thousands, except per share data) (Unaudited) Three Months Ended March 31, 1998 1997 ---------------------------- Operating revenues $43,564 $36,405 Costs and expenses: Operating expenses 29,520 25,196 General and administrative 7,695 6,021 Depreciation and amortization 1,008 878 ------ ------ Total costs and expenses 38,223 32,095 ------ ------ Operating earnings 5,341 4,310 Interest income 54 35 Interest expense (693) (450) Other income 42 -- Gain on sale of marketable securities -- 1,448 ------ ------ Earnings before income taxes 4,744 5,343 Income taxes 1,951 2,076 ------ ------ Net earnings $ 2,793 $ 3,267 ====== ====== Net earnings per common share: Basic $ .47 $ .48 ====== ====== Diluted $ .40 $ .42 ====== ====== Weighted average number of common shares outstanding: Basic 5,920 6,779 ====== ====== Diluted 7,172 7,861 ====== ====== See notes to condensed consolidated financial statements. 4 of 11 5 REHABCARE GROUP, INC. Condensed Consolidated Statements of Comprehensive Earnings (Amounts in thousands) (Unaudited) Three Months Ended March 31, 1998 1997 -------------------------- Net earnings $2,793 $3,267 Other comprehensive earnings, net of tax - Unrealized gains (losses) on securities: Unrealized holding gains (losses) arising during period 60 (720) Less: reclassification adjustment for realized gains included in net earnings -- (869) ------ ------ Comprehensive earnings $ 2,853 $ 1,678 ====== ====== See notes to condensed consolidated financial statements. 5 of 11 6 REHABCARE GROUP, INC. Condensed Consolidated Statements of Cash Flows (Amounts in thousands) (Unaudited) Three Months Ended March 31, 1998 1997 --------------------------- Cash flows from operating activities: Net earnings $ 2,793 $ 3,267 Adjustments to reconcile net earnings to net cash provided by operating activities: Depreciation and amortization 1,008 878 Provision for losses on accounts receivable 255 105 Equity in earnings of affiliate (39) -- Gain on sale of marketable securities -- (1,448) Increase (decrease) in deferred compensation (216) 95 Decrease (increase) in accounts receivable, net 297 (3,816) Increase in prepaid expenses and other current assets (4) (107) Decrease in other assets 64 33 Increase in accounts payable and accrued expenses 886 1,725 Increase (decrease) in accrued salaries and wages (177) 2,322 Increase in income taxes payable and deferred 966 916 ------ ------ Net cash provided by operating activities 5,833 3,970 ------ ------ Cash flows from investing activities: Additions to equipment and leasehold improvements, net (150) (246) Deferred contract costs (150) -- Proceeds from sale/maturities of investments 285 1,491 Pre-opening costs (326) (275) Acquisitions, net of cash received (2,104) (4,951) ------ ------ Net cash used in investing activities (2,445) (3,981) ------ ------ Cash flows from financing activities: Proceeds from revolving credit facility, net -- 7,000 Payments on long-term debt (2,344) (786) Issuance of note payable -- 1,500 Issuance of long-term debt -- 17,000 Purchase of treasury stock -- (23,131) Exercise of stock options including tax benefit 1,165 483 ------ ------ Net cash provided by (used in) financing activities (1,179) 2,066 ------- ------ Net increase in cash and cash equivalents 2,209 2,055 Cash and cash equivalents at beginning of period 1,975 772 ------ ------ Cash and cash equivalents at end of period $ 4,184 $ 2,827 ====== ====== See notes to condensed consolidated financial statements. 6 of 11 7 REHABCARE GROUP, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) Note 1. - Basis of Presentation The condensed consolidated balance sheets and related condensed consolidated statements of earnings, comprehensive earnings and statements of cash flows contained in this Form 10-Q, which are unaudited, include the accounts of the Company and its wholly owned subsidiaries. All significant intercompany accounts and activity have been eliminated in consolidation. In the opinion of management, all adjustments necessary for a fair presentation of such financial statements have been included. Adjustments consisted only of normal recurring items. The results of operations for the three months ended March 31, 1998, are not necessarily indicative of the results to be expected for the fiscal year. The condensed consolidated financial statements do not include all information and footnotes necessary for a complete presentation of financial position, results of operations and cash flows in conformity with generally accepted accounting principles. Reference is made to the Company's audited consolidated financial statements and the related notes as of December 31, 1997 and 1996 and for the year ended December 31, 1997, for the ten months ended December 31, 1996 and for the year ended February 29, 1996, included in the Annual Report on Form 10-K on file with the Securities and Exchange Commission, which provide additional disclosures and a further description of accounting policies. Note 2. - Comprehensive Earnings The Company adopted the provisions of Statement of Financial Accounting Standards ("SFAS") No. 130, reporting comprehensive income, on January 1, 1998, which requires reporting of comprehensive income (earnings) and its components, in the statement of operations and statement of equity, including net income as a component. Comprehensive income is the change in equity of a business from transactions and other events and circumstances from non-owner sources. Item 2.- Management's Discussion and Analysis of Financial Condition and Results of Operations Results of Operations The Company provides physical medicine, rehabilitation and chronic care services in a variety of settings under multi-year contracts. These settings include distinct-part acute rehabilitation units that may or may not be exempt from the Medicare Prospective Payment System (PPS), depending on their stage of development; subacute units that are operated within licensed skilled nursing units; and outpatient clinics, both on and off campus of the host hospital. The Company also is a contract provider of therapists on a continuing and temporary basis to hospitals and long-term care and rehabilitation facilities. 7 of 11 8 Three Months Ended Operating Statistics March 31, 1998 1997 ------------------ Inpatient Units (Acute and Subacute) Average bed capacity 2,292 2,003 Average billable length of stay (days) 14.6 15.3 Billable patient days served 153,353 125,716 Admissions 10,539 8,199 Average daily billable census 1,704 1,397 Average occupied beds per unit 14.4 13.6 Total units in operation at end of period 120 106 Outpatient Clinics Patient visits 62,872 60,710 Units of service 196,184 191,450 Total clinics in operation at end of period 20 19 Therapy Staffing Weeks worked 7,195 6,792 Contract Therapy Number of locations at end of period 42 29 Three Months Ended March 31, 1998 Compared to Three Months Ended March 31, 1997 Operating revenues during the first quarter of 1998 increased by $7,159,000, or 19.7%, to $43,564,000. Acquisitions accounted for 24.1% of the net increase. A 14.4% increase in the average number of inpatient units from 103.8 to 118.7 units and an increase in the average daily billable census per inpatient unit of 5.9% from 13.6 to 14.4, generated a 22.0% increase in billable patient days to 153,353 and a 14.5% increase in revenue from inpatient units. The increase in billable census per unit for inpatient units is primarily attributable to an 11.4% increase in admissions per unit offset by a 4.6% decline in average billable length of stay. The decline in average length of stay reflects both the continued trend of reduced rehabilitation lengths of stay and the increase in subacute units operational in 1998, which carry a shorter length of stay than acute rehabilitation units. The increase in billable patient days was offset by a 6.1% decrease in average per diem billing rates, reflecting a greater mix of subacute units which carry lower average per diem rates than acute units. Inpatient unit revenue increased by $3,396,000 while outpatient revenue increased 1.8% to $2,684,000. Therapy staffing revenue increased $2,167,000 as a result of a 5.9% increase in weeks worked to 7,195 weeks. Operating expenses for the three-month periods compared increased by $4,324,000, or 17.2% to $29,520,000. Acquisitions accounted for 22.3% of the net increase. The remaining increase was attributable to the increase in patient days and therapy staffing placements. The excess of operating expenses over operating revenues associated with non-exempt units decreased from $151,000 to $129,000, on a decrease in the average number of non-exempt units from 7.0 to 3.0. The per unit average excess of operating expenses over operating revenues increased from $22,000 to $43,000 reflecting a 5% decrease in billable patients per unit to 2.8. The first quarter of 1997 also had a greater percentage of units where the Company was not obligated to provide therapy staff. The average excess of operating expenses over operating 8 of 11 9 revenues for units during their non-exempt year can range to as high as $150,000 to $200,000. General and administrative expenses increased $1,674,000, or 27.8%, to $7,695,000, reflecting increases in business development, operations in support of the increase in units, and general office, compared to the previous year, plus the addition of corporate staff from acquisitions. Interest expense increased $243,000 reflecting interest on net new debt issued in acquisitions and the repurchase of Company Common Stock during 1997. Gain on sale of marketable securities in the first quarter of 1997 reflects the sale of approximately 50% of the Company's investment in Intensiva Healthcare Corporation. Earnings before income taxes decreased by $599,000, or 11.2%, to $4,744,000. Excluding the gain on sale of marketable securities, earnings before income taxes would have increased $849,000 or 21.8%. The provision for income taxes for the first quarter of 1998 was $1,951,000, compared to $2,076,000 for 1997, reflecting effective income tax rates of 41.1% and 38.9% for the respective quarters. Net earnings decreased by $474,000, or 14.5% to $2,793,000. Diluted earnings per share decreased 4.8% to 40 cents from 42 cents on an 8.8% decrease in the weighted average shares outstanding. The gain on sale of marketable securities represented 11 cents of the earnings per share in 1997. Excluding this gain, diluted earnings per share increased 29% from 31 cents in the first quarter of 1997. The decrease in shares outstanding is attributable primarily to shares repurchased offset by an increase in the dilutive effect of outstanding stock options. Liquidity and Capital Resources As of March 31, 1998, the Company had $8,949,000 in cash and current marketable securities and a current ratio of 1.6:1. Working capital decreased by $64,000 as of March 31, 1998, compared to December 31, 1997, due to the annual payment of contingent consideration on acquisitions. Net accounts receivable were $23,595,000 at March 31, 1998, compared to $24,147,000 at December 31, 1997. The number of days average net revenue in net receivables was 48.7 at March 31, 1998 compared to 52.0 at December 31, 1997. The Company's operating cash flows constitute its primary source of liquidity and historically have been sufficient to fund its working capital and capital expansion requirements. The Company expects to meet its future working capital, capital expenditure, business expansion and debt service requirements from a combination of internal sources and outside financing. The Company has a $20,000,000 revolving line of credit and a balance outstanding as of March 31, 1998, of $6,500,000. Part II. - OTHER INFORMATION Item 4. - Submission of Matters to Security Holders The Annual Meeting of Stockholders of the Company was held on Tuesday, May 5, 1998, at which time the stockholders voted to elect the seven incumbent directors to hold office until the next annual meeting of stockholders of the Company or until their successors have been duly elected and qualified. The names of each of the directors of the Company who were reelected at the Annual Meeting 9 of 11 10 and the votes cast "FOR" or for which authority to vote was "WITHHELD" is as follows: Name For Withheld Authority William G. Anderson 5,097,298 154,812 Richard E. Ragsdale 5,097,448 154,662 John H. Short 5,097,448 154,662 Richard C. Stoddard 5,097,223 154,887 H. Edwin Trusheim 5,096,398 155,712 James M. Usdan 5,097,223 154,887 Theodore M. Wight 5,084,529 167,581 Item 6 - Exhibits and Reports on Form 8-K (a) Exhibits 27 Financial Data Schedule (b) Report on Form 8-K None 10 of 11 11 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. REHABCARE GROUP, INC. May 8, 1998 By /s/ John R. Finkenkeller ------------------------ John R. Finkenkeller Senior Vice President and Treasurer (Chief Accounting Officer) 11 of 11 12 EXHIBIT INDEX Page Number ----------- 27 Financial Data Schedule 13