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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) of
the SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2000
Commission file number 0-19294
REHABCARE GROUP, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 51-0265872
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER IDENTIFICATION NO.)
INCORPORATION OR ORGANIZATION)
7733 FORSYTH BOULEVARD, 17TH FLOOR, ST. LOUIS, MISSOURI 63105
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES AND ZIP CODE)
Registrant's telephone number, including area code: (314) 863-7422
Securities registered pursuant to Section 12(b) of the Act:
COMMON STOCK, PAR VALUE $.01 PER SHARE
PREFERRED STOCK PURCHASE RIGHTS
Name of exchange on which registered:
NEW YORK STOCK EXCHANGE
NEW YORK STOCK EXCHANGE
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 if disclosure of delinquent filers pursuant
to Item 405 of Regulation S-K is not contained herein, and will not be
contained, to the best of Registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form
10-K or any amendment to this Form 10-K. ( )
The aggregate market value of voting stock held by non-affiliates of
Registrant at February 27, 2001 was 649,147,455. At February 27, 2001, the
Registrant had 15,199,034 shares of Common Stock outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Part II of this Annual Report on Form 10-K incorporates by reference
information contained in the Registrant's Annual Report to Stockholders for
the fiscal year ended December 31, 2000.
Part III of this Annual Report on Form 10-K incorporates by
reference information contained in the Registrant's definitive Proxy
Statement for its Annual Meeting of Stockholders to be held on May 3, 2001.
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PART I
ITEM 1. BUSINESS
OVERVIEW OF OUR COMPANY
RehabCare Group, Inc., a Delaware corporation, is a leading national
provider of temporary healthcare staffing services and physical
rehabilitation program management for hospitals, nursing homes and other
long-term care facilities. From the 100 healthcare staffing offices of our
StarMed Staffing Group, we provide temporary placement of nurses and other
healthcare professionals on a per diem basis using locally-based personnel.
We also provide traveling nurses from the administrative offices of our
staffing division generally on a 13-week basis. Our program management
business consists of the management of 108 hospital-based inpatient acute
rehabilitation units and 27 hospital-based inpatient skilled nursing units,
66 hospital-based and satellite outpatient therapy programs and 195 contract
therapy programs with nursing homes and long-term care facilities. For the
year ended December 31, 2000, we had net operating revenues of $452.4 million
and operating earnings of $44.2 million. During this period, we earned 57.5%
of our net operating revenues from our healthcare staffing business and 42.5%
from our program management business.
The terms "RehabCare," "our company," "we" and "our" as used herein
refer to "RehabCare Group, Inc."
INDUSTRY OVERVIEW
As a provider of temporary healthcare staffing and program
management services, our revenues and growth are affected by trends and
developments in healthcare spending. The U.S. Health Care Financing
Administration estimated that in 1999 total healthcare expenditures in the
United States grew by 6.0% to $1.2 trillion. It projected that total
healthcare spending in the United States would grow by 7.1% in 2000 and by
6.5% annually from 2001 through 2008. According to these estimates,
healthcare expenditures will increase by nearly $1.0 trillion in the next
decade and, by 2008, will account for approximately $2.2 trillion, or 16.2%
of the United States gross domestic product.
Demographic considerations also affect long-term growth projections
for healthcare spending. According to the U.S. Census Bureau, there are
approximately 35 million Americans aged 65 or older in the United States
today, who comprise approximately 12.6% of the total United States
population. By the year 2030, the number of Americans aged 65 or older is
expected to climb to 70.3 million, or 20.0%, of the total population. Due to
the increasing life expectancy of Americans, the number of people aged 85
years or older is also expected to increase from 4.4 million to 8.9 million
by the year 2030.
We believe that rising projected healthcare expenditures and longer
life expectancy of the population will place increased pressure on healthcare
providers to find innovative, efficient means of delivering healthcare
services. Continued spending pressure will encourage efficiency by directing
patients toward lower cost settings such as our inpatient units and our
outpatient therapy and contract therapy programs. We also believe that as
part of this trend the demand for temporary healthcare staffing services will
expand as healthcare providers seek to decrease their overall labor costs and
satisfy their need for qualified healthcare employees, who are in high demand.
TEMPORARY HEALTHCARE STAFFING. The temporary healthcare staffing
industry provides staffing of physicians, nurses and other allied healthcare
professionals such as physical and occupational therapists, speech/language
pathologists, respiratory therapists, radiologic technicians, advanced practice
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professionals, pharmacists, and medical and surgical specialized technicians.
The temporary healthcare staffing industry is primarily comprised of the
following three services:
- TRAVEL STAFFING. Travel staffing involves placement of healthcare
professionals on a contracted, fixed-term basis on assignments
which may run several weeks to a year, but are typically 13 weeks
long. The healthcare professional temporarily relocates to the
assignment. The staffing company is responsible for providing
arrangements for travel, housing, licensure and credentialing.
- PER DIEM STAFFING. Per diem staffing comprises the majority of
all temporary healthcare staffing and involves placement of
locally-based healthcare professionals on very short-term
assignments, often for daily shift work. Per diem staffing often
involves very short advance notice of assignments by the client.
- PLACEMENT AND SEARCH. Placement and search relates to
position-specific searches for specialized healthcare
professionals to fill open positions on a permanent basis. Search
firms offer a range of placement and search services on both a
retainer and contingency basis.
Most temporary healthcare staffing companies will specialize in one
of the three services above. We currently offer all three services.
The Staffing Industry Report, an independent staffing industry
publication, estimated that revenues in the United States for all temporary
staffing services were $76.8 billion in 1999. The temporary healthcare
staffing segment accounted for approximately $6.2 billion of revenues in
1999, and was expected to grow by approximately 16% in 2000 and 18% in 2001.
We believe that the demand for temporary healthcare staffing services will
continue to increase due to various factors including:
- CHANGES IN THE HEALTHCARE PAYMENT SYSTEM. As healthcare
expenditures in the United States have continued to increase,
healthcare providers have experienced increased cost reduction
pressures as a result of managed care and the implementation of
prospective payment systems and other changes in Medicare
reimbursement. The need to control costs has forced many
healthcare providers to re-evaluate their staffing policies and
seek more efficient labor management techniques, including the use
of temporary employees to enhance flexibility and reduce costs by
transforming a portion of their labor costs from fixed to
variable.
- SHORTAGES IN AVAILABLE HEALTHCARE PROFESSIONALS. Increasing demand
for temporary healthcare professionals and shifts in the labor
market have resulted in shortages in the availability of qualified
nurses and many allied healthcare personnel. A recent study
published in THE JOURNAL OF THE AMERICAN MEDICAL ASSOCIATION
estimates that based on current trends approximately 1,754,000
registered nurses will be needed in the United States by 2020, but
only 635,000 registered nurses will be available. The same study
found that from 1983 to 1998 the average age of working registered
nurses increased from 37 to 42 years. Within the next ten years,
the average age of registered nurses is forecasted to be 45.4
years, with more than 40% of the registered nurse workforce
expected to be 50 years old or older. Further, a recent report by
the American Association of Colleges of Nurses indicates that
enrollments in undergraduate nursing programs decreased by 4.6% in
1999, and has decreased in each of the past five years. In
addition to the shortage of available nurses, changes in
healthcare and the trend toward temporary staffing have resulted
in shortages of various allied healthcare professionals, including
radiologic and other specialized technicians, pharmacists,
physician assistants, nurse anesthetists, transcriptionists,
reimbursement specialists, patient account representatives and
medical clerical personnel.
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PROGRAM MANAGEMENT SERVICES. Hospitals and other healthcare
providers have experienced a decrease in the number of inpatient days per
admission over the past several years. The growth of managed care and its
focus on cost control has encouraged healthcare providers to provide quality
care at the lowest cost possible. While generally less aggressive than
managed care, Medicare and Medicaid incentives have also driven declines in
inpatient days per admission. In many cases, patients are treated initially
in the higher cost, acute care hospital setting; after their condition has
stabilized, they are either moved to a lower cost facility, such as a skilled
nursing unit, or are discharged to their home. Thus, while hospital inpatient
admissions have continued to grow, the number of inpatient days per admission
has declined. According to the American Hospital Association, the aggregate
number of inpatient days declined at an annual rate of 2.4%, from 215.9
million in 1993 to 191.4 million in 1998.
Many healthcare providers are increasingly seeking to outsource a
broad range of services through contracts with product line managers.
Outsourcing allows healthcare providers to take advantage of the specialized
expertise of contract managers, enabling providers to concentrate on the
businesses they know best, such as facility and nurse management. Continued
reimbursement pressures under managed care and Medicare have driven
healthcare providers to look for additional sources of revenue. As
constraints on overhead and operating costs have increased and manpower has
been reduced, outsourcing has become more important in order to increase
patient volumes and provide services at a lower cost while maintaining high
quality standards.
By outsourcing inpatient services, healthcare providers are able to:
- UTILIZE UNUSED SPACE. Inpatient services help hospitals utilize
empty wings of their facilities, which enables them to recover the
cost of capital investment and overhead associated with the space.
- INCREASE VOLUMES. Patients who are discharged from an intensive
care unit or medical/ surgical bed and need acute rehabilitation
or skilled nursing care, and who in the past would have otherwise
been referred to other venues for treatment, can now remain in the
hospital setting. This allows hospitals to capture revenues that
would otherwise be realized by another provider. By offering new
services, the hospital also attracts new patients.
- SIGN AGREEMENTS WITH MANAGED CARE ORGANIZATIONS. We believe
managed care organizations prefer to sign contracts covering both
acute rehabilitation and skilled nursing services with one entity
rather than several separate, often unrelated entities. Program
managers provide patient evaluation systems that collect data on
patients in each of their units showing the degree of improvement
and the related costs from the time the patient is admitted to the
unit through the time of discharge. This is an important feature
to managed care organizations in controlling their costs while
assuring appropriate outcomes. Program managers may often have the
ability to capture and analyze this information from a large
number of acute rehabilitation and skilled nursing units to
improve clinical care, which an individual hospital could not do
on its own without a substantial investment in specialized
systems. Becoming part of a managed care network helps the
hospital attract physicians, and in turn, attract more patients to
the hospital.
- INCREASE COST CONTROL. Because of their extensive experience in
inpatient rehabilitation product lines, program managers can offer
pricing structures that effectively control a healthcare
provider's financial risk related to the service provided. For
hospitals using program managers, the result is often lower
average cost per discharge than that of self-
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managed programs. As a result, a hospital is able to increase
its revenues without having to increase administrative staff or
incur other fixed costs.
- OBTAIN REIMBURSEMENT ADVICE. Program managers may employ
reimbursement specialists who are available to assist client
hospitals in interpreting complicated regulations, a highly
valued service in the changing healthcare environment.
Of the approximately 5,000 general acute care hospitals in the
United States, an estimated 900 hospitals operate inpatient acute
rehabilitation units, of which we estimate only approximately 150 currently
outsource acute rehabilitation program management services. We currently have
program management contracts with 108 of those hospitals that outsource acute
rehabilitation unit management services.
OVERVIEW OF OUR BUSINESS LINES
Our business is divided into two main business segments: temporary
healthcare staffing and program management. Our temporary healthcare staffing
business encompasses placement of nurses and other healthcare professionals
on either a short-term basis, ranging from one day to several weeks, a
temporary basis, generally 13 weeks, or a permanent basis. Our program
management business consists of management of hospital-based acute
rehabilitation and skilled nursing units, outpatient therapy programs and
contract therapy services. The table below summarizes the type of services we
offer and their benefits to our clients.
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BUSINESS LINE DESCRIPTION OF SERVICE BENEFITS TO CLIENT
------------- ---------------------- ------------------
TEMPORARY HEALTHCARE STAFFING Provides nurses and other allied Enables the client to manage fixed
healthcare professionals to labor costs, turnover, vacation,
hospitals and long-term care maternity and other temporary
facilities for one day to thirteen staffing needs.
week assignments or permanently.
PROGRAM MANAGEMENT
INPATIENT
ACUTE REHABILITATION UNITS: High acuity rehabilitation for Utilizes formerly idle space and
conditions such as stroke, hip affords the client the ability to
replacement and head injury. offer specialized clinical
rehabilitation services to patients
SKILLED NURSING UNITS: Lower acuity rehabilitation than who might otherwise be discharged to
acute rehabilitation units for a setting outside the client's
conditions such as stroke, cancer, facility.
heart failure, burns and wounds.
OUTPATIENT PROGRAMS Outpatient therapy programs for Helps bring patients into the
hospitals on the client's campus. client's facility and helps the
client compete with freestanding
clinics.
CONTRACT THERAPY Therapy services in nursing homes Affords the client ability to
and other long-term care facilities fulfill the recurring need for
on a contract basis. therapists on a full-time or
part-time basis, especially for
clients whose operations do not
warrant a full-time therapist.
Financial information about each of our business segments is
contained in Note 12 to the "Notes to Consolidated Financial Statements"
beginning on page 42.
We offer our portfolio of healthcare staffing and program management
services to a highly diversified customer base. We serve healthcare staffing
clients in all 50 states and our program management business currently
manages units and programs in 39 states. The following table summarizes by
geographic region the locations of our healthcare staffing branches and
program management clients as of December 31, 2000:
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PROGRAM MANAGEMENT
----------------------------------------------------
ACUTE
REHABILI-
TATION/
HEALTHCARE SKILLED OUTPATIENT CONTRACT
STAFFING NURSING THERAPY THERAPY
GEOGRAPHIC REGION OFFICES UNITS PROGRAMS PROGRAMS
- ----------------- ------- ----- -------- --------
NORTHEAST REGION .................................... 10 13/4 8 2
(CT, DE, MA, MD, ME, NH, NJ, NY, PA, RI, VT, WV)
SOUTHEAST REGION..................................... 27 13/8 25 24
(AL, FL, GA, KY, MS, NC, SC, TN, VA)
MIDWEST REGION....................................... 28 31/6 7 128
(IA, IL, IN, KS, MI, MN, MO, NE, ND, OH, SD, WI)
SOUTHWEST REGION..................................... 16 37/7 20 30
(AR, AZ, LA, NM, OK, TX)
FAR WEST REGION...................................... 19 14/2 6 11
(AK, CA, CO, HI, ID, MT, NV, OR, UT, WA, WY)
--- ------ -- ---
TOTAL........................................... 100 108/27 66 195
=== ====== == ===
TEMPORARY HEALTHCARE STAFFING SERVICES
Our StarMed Staffing Group meets a critical need of supplying
nurses, nurse assistants and other medical staff to hospitals and nursing
homes in communities across the United States, helping healthcare facilities
operate to the optimal level of staffing for their ever-changing patient
population. Additionally, we assist healthcare facilities in alleviating
pressures of the nationwide nursing shortage, as demand for nurse staffing
far exceeds supply. We introduced temporary healthcare staffing to our
portfolio of services in 1996. Initially focusing on recruiting traveling
physical and occupational therapists and speech and language pathologists for
hospitals and long-term care facilities, we added traveling and per diem
nurses in 1998 and other allied healthcare personnel in 1999.
PER DIEM STAFFING OPERATIONS. Our per diem staffing operations
provide nurses, nurse assistants and other allied healthcare staff to
hospitals, nursing homes and other healthcare facilities on short-term
assignments, typically ranging from one day to several weeks. As of December
31, 2000, we operated 100 per diem staffing offices throughout the United
States. A typical staffing office consists of approximately 1,000 square feet
of leased space. A branch manager and a recruiter are initially hired to
manage the office. As the office matures, measured by number of weeks worked
by the personnel the office has placed, new recruiters, marketers and
clerical staff are added to support growth. We believe that the benefits
program we provide for our temporary staff differentiates us from many other
companies in the industry, and is one of the primary reasons for the growth
rates we experience in our staffing offices. These benefits include direct
deposit, next-day pay, 401(k) plan, flexible assignments, vacation pay,
continuing education reimbursements, health insurance, sign-on bonuses,
referral bonuses and a uniform program. We believe another significant factor
in our growth has been the quality of our personnel. Our per diem staffing is
a local business, and we believe the relationships that our branch managers
and our placement and recruiting professionals have with our clients have
been a significant contributor to the continued success of our per diem
staffing operations.
Our per diem staffing growth strategy is:
- increasing the number of offices in key geographic locations;
- expanding the services our offices provide by furnishing
both nurse staffing and other allied medical staffing at
each location; and
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- continuing to evaluate acquisition opportunities and
executing acquisitions where and when appropriate.
TRAVEL STAFFING. Our travel staffing operations place nursing,
radiology and allied healthcare professionals on eight to twenty-six week
assignments throughout the United States. We employ a staff in a central
office of placement, recruiting, housing and benefits specialists to support
each traveler. The traveler is assigned a specialist who will assist the
traveler through every step of the assignment. Our staff is available 24
hours a day, 7 days a week to help with any issue the traveler may have. We
believe our placement specialists have one of the industry's largest
databases of positions available in a wide variety of specialties in all 50
states. We also believe the benefits we offer play a critical role in a
traveler's decision to choose us over our competition. Benefits include
bonuses, 401(k), guaranteed pay, assignment cancellation protection, direct
deposit, financial success planning, health and dental insurance, housing,
travel reimbursement, frequent travel program, licensing assistance, 24-hour
support and continuing education.
We plan to continue to grow our travel staffing business through a
combination of controlled internal growth and selective acquisition
opportunities.
PROGRAM MANAGEMENT
INPATIENT
ACUTE REHABILITATION. At our inception in 1982, our entire business
consisted of management of acute rehabilitation units within general acute
care hospitals. Today, our inpatient division is a market leader in operating
acute rehabilitation units in acute care hospitals on a contract basis. We
manage acute rehabilitation units in 108 hospitals for patients with
diagnoses including stroke, orthopedic conditions, arthritis, spinal cord and
traumatic brain injuries. Of the approximately 5,000 hospitals in the United
States, an estimated 900 operate inpatient acute rehabilitation units, of
which we estimate only approximately 150 currently outsource management
services. We believe that as the prospective payment system is implemented in
the inpatient rehabilitation environment, our acute rehabilitation division
will be well positioned for internal growth. Of the 4,100 acute care
hospitals that do not currently operate acute rehabilitation units, we
estimate that as many as 1,000 meet our general criteria for support of acute
rehabilitation units in their markets, Additionally, we believe that there is
an opportunity for internal growth to the extent that many of the 750
hospitals currently operating their own acute rehabilitation units reevaluate
the efficiency of their operations and consider outsourcing management
services to companies such as ours.
We establish acute rehabilitation units in hospitals that have
vacant space and unmet rehabilitation needs in their markets. We also work
with hospitals that currently operate acute rehabilitation units to determine
the projected level of cost savings we can deliver to them by implementing
our scheduling, clinical protocol and outcome systems. In the case of
hospitals that do not operate acute rehabilitation units already, we review
their historical and existing hospital population, as well as the
demographics of the geographic region, to determine the optimal size of the
proposed acute rehabilitation unit and the potential of the new unit under
our management to generate additional revenues to cover anticipated expenses.
We are generally paid by our clients on the basis of a negotiated fee per
patient day pursuant to contracts that are typically for terms of three to
five years. These contracts are generally subject to termination or
renegotiation in the event the hospital experiences a material change in its
reimbursement from government or other providers. An acute rehabilitation
unit affords the hospital the ability to offer rehabilitation services to
patients, retaining patients who might otherwise be discharged to a setting
outside the hospital. A unit typically consists of 20 beds and is staffed
with a program director, a physician-medical director and clinical staff
which may include a psychologist,
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physical and occupational therapists, a speech/language pathologist, a social
worker, a nurse manager, a case manager and other appropriate supporting
personnel.
SKILLED NURSING UNITS. In 1994, the inpatient division added the
skilled nursing service line in response to client requests for management
services and our strategic decision to broaden our inpatient services. As of
December 31, 2000, we managed 27 skilled nursing units. The unit enables
patients to remain in a hospital setting where emergency needs can be met
quickly as opposed to being sent to a freestanding skilled nursing facility.
The unit is located within the acute care hospital and is separately licensed
as a skilled nursing unit. We are generally paid by our clients on the basis
of a negotiated fee per patient day pursuant to contracts that are typically
for terms of three to five years. The hospital benefits by retaining patients
who would be discharged to another setting, capturing additional revenue and
utilizing idle space. A skilled nursing unit treats patients who require low
levels of rehabilitative care, but who have a greater need for nursing care.
Patients' diagnoses are typically long-term and medically complex covering
approximately 60 clinical conditions, including stroke, post-surgical
conditions, pulmonary disease, cancer, congestive heart failure, burns and
wounds.
We intend to achieve continued internal growth of our inpatient
services through cross-selling our services to our existing clients and
generating new client relationships.
OUTPATIENT
In 1993, we began managing outpatient therapy programs that provide
management of therapy services to patients with work-related and
sports-related illnesses and injuries, and as of December 31, 2000, we
managed a total of 66 hospital-based and satellite outpatient programs. We
realized that the same expertise we brought to hospitals in managing their
acute rehabilitation units could be modified to add value to a hospital's
outpatient therapy program. An outpatient therapy program complements the
hospital's occupational medicine initiatives and allows therapy to be
continued for patients discharged from inpatient rehabilitation programs. An
outpatient therapy program also attracts patients into the hospital and is
conducted either on the client hospital's campus or in satellite locations
controlled by the hospital. We have recently begun to market our outpatient
therapy management services to physician groups. These programs will be
located at or in close proximity to the physician group's offices.
We believe our management of outpatient therapy programs delivers
increased productivity through our scheduling, protocol and outcome systems,
as well as through productivity training for existing staff. We also provide
our clients with expertise in compliance and quality assurance. The typical
outpatient therapy program we manage provides services for 50 patient visits
per day. The program is staffed with a program manager, four to six
therapists and two to four administrative and clerical staff. We are paid by
our clients on the basis of a negotiated fee per unit of service.
As outpatient therapy programs remain underdeveloped at most
hospitals, we intend to continue to grow this line of business by signing
contracts with new clients and cross-selling our outpatient therapy programs
to existing inpatient clients. We also intend to expand the business line
into different venues, such as physician offices. In addition, we will
actively consider strategic acquisitions to accelerate the growth of this
division.
CONTRACT THERAPY
In 1997, we added contract therapy management to our service
offerings. Our contract therapy division manages therapy services for nursing
homes and long-term care facilities. This program affords the client the
opportunity to fulfill its recurring need for therapists on a full-time or
part-time basis
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without the need to hire and retain full-time staff. As of December 31, 2000,
we managed 195 contract therapy programs.
Our typical contract therapy client has 100 beds, a portion of which
are licensed as skilled nursing beds. We manage therapy services, including
physical and occupational therapy and speech/language pathology, for the
skilled nursing beds. Our broad base of staffing strategies, full-time,
part-time and on-call, can be adjusted at each location according to the
facility's and its patients' needs. We are generally paid by our clients on
the basis of a negotiated per diem rate. Our contract therapy program is led
by a full-time program coordinator who is also a therapist and two to four
full-time professionals trained in physical and occupational therapy or
speech/language pathology.
We believe the introduction of a prospective payment system for
skilled nursing facilities and units in 1998 has created demand for our
management systems and expertise, particularly with regard to controlling
costs. As a result, we will focus our growth strategy in this division on
signing new contracts.
GOVERNMENT REGULATION
OVERVIEW. The healthcare industry is required to comply with many
laws and government regulations at both the federal and state levels. Laws
and regulations in the healthcare industry are extremely complex and, in many
instances, the industry does not have the benefit of significant regulatory
or judicial interpretation. Moreover, our business is impacted not only by
those laws and regulations which are directly applicable to us, but also by
certain laws and regulations which are applicable to our hospital, skilled
nursing facility, and other clients. If we fail to comply with the laws and
regulations directly applicable to our business, we could suffer civil and/or
criminal penalties and we could be excluded from contracting with providers
participating in Medicare, Medicaid and other federal and state healthcare
programs. If our hospital, skilled nursing facility, or other clients fail to
comply with the laws and regulations applicable to their businesses, they
could suffer civil and/or criminal penalties and/or be excluded from
participating in Medicare, Medicaid and other federal and state healthcare
programs, which could, indirectly, have an adverse impact on our business.
FACILITY LICENSURE, MEDICARE CERTIFICATION, AND CERTIFICATE OF NEED.
Our clients are required to comply with state facility licensure, federal
Medicare certification, and certificate of need laws that are not generally
applicable to us.
Generally, facility licensure and Medicare certification follow
specific standards and requirements. Compliance is monitored by various
mechanisms, including periodic written reports and on-site inspections by
representatives of relevant government agencies. Loss of licensure or
Medicare certification by a healthcare facility with which we have a contract
would likely result in termination of that contract.
A few states require that health facilities obtain state permission
prior to entering into contracts for the management of their services. Some
states also require that health facilities obtain state permission in the
form of a certificate of need prior to constructing or modifying their space,
purchasing high-cost medical equipment, or adding new healthcare services. If
a certificate of need is required, the process may take up to 12 months or
more, depending on the state involved. The certificate of need application
may be denied if contested by a competitor or if the new facilities or
services are deemed unnecessary by the state reviewing agency. A certificate
of need is usually issued for a specified maximum expenditure and requires
implementation of the proposed improvement or new service within a specified
period of time.
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PROFESSIONAL LICENSURE AND CORPORATE PRACTICE. Many of the nurses,
therapists and other healthcare professionals employed by us are required to
be individually licensed or certified under applicable state law. We take
steps to ensure that our employees possess all necessary licenses and
certifications, and we believe that our employees, including nurses and
therapists, comply with all applicable state laws.
In some states, business corporations such as our company are
restricted from practicing therapy through the direct employment of
therapists. In those states, in order to comply with the restrictions
imposed, we either contract to obtain therapy services from an entity
permitted to employ therapists, or we manage the physical therapy practice
owned by licensed therapists through which the therapy services are provided.
BUSINESS LICENSES. A number of states require state licensure for
businesses that, for a fee, employ and assign personnel, including healthcare
personnel, to provide services on-site at hospitals and other healthcare
facilities to support or supplement the hospitals' or healthcare facilities'
work force. A number of states also require state licensure for businesses
that operate placement services for individuals attempting to secure
employment. Failure to obtain the necessary licenses can result in
injunctions against operating, cease and desist orders, and/or fines. We
endeavor to maintain in effect all required state licenses.
REIMBURSEMENT. Federal and state laws establishing payment
methodologies and mechanisms for healthcare services covered by Medicare,
Medicaid, and other government healthcare programs, while applicable to our
clients and not generally applicable to us, still have an indirect impact on
our business.
Prior to 1983, Medicare provided reimbursement for the reasonable
direct and indirect costs of services furnished by hospitals to Medicare
patients. As a result of the Social Security Amendments Act of 1983, Congress
adopted a prospective payment system as a means to control costs of most
Medicare inpatient hospital services. Under this system, the Secretary of the
U.S. Department of Health and Human Services established fixed payment
amounts per inpatient discharge based on patient care classifications known
as diagnosis-related groups. In general, a hospital's payment for inpatient
care provided to a Medicare patient is limited based on the diagnosis-related
group to which the patient is assigned, regardless of the amount of services
provided to the patient or the length of the patient's hospital stay. Under
the diagnosis-related group system, a hospital may keep the difference
between its diagnosis-related group payment and its operating costs incurred
in furnishing inpatient services, but is at risk for any operating costs that
exceed the applicable diagnosis-related group payment rate. As a result,
hospitals have an incentive to discharge Medicare patients as soon as it is
clinically appropriate.
Until recently, acute rehabilitation units, skilled nursing units,
and hospital-based outpatient therapy programs were generally exempt from the
above-described prospective payment system and were paid instead on the basis
of their direct and indirect costs under a "cost-based" reimbursement system.
As discussed below, this situation is expected to change for acute
rehabilitation units. It has already changed for skilled nursing units and
hospital-based outpatient therapy programs.
During 2001, the Medicare program is scheduled to phase in a
prospective payment system for acute rehabilitation facilities. The specifics
of this prospective payment system were first published by the Health Care
Financing Administration on November 3, 2000 as a proposed rule. The proposed
rule appears to establish a system for reimbursement of acute rehabilitation
units similar to the diagnosis-related group system. Under the proposal, an
acute rehabilitation unit will be paid under the diagnosis-related group
system until it qualifies for exemption from this system. To qualify for
exemption, the unit must comply with a number of operational and patient care
criteria. This process typically takes one year after unit opening. Upon
qualification for the exemption, the hospital will begin receiving per
discharge
11
payments for services provided to Medicare patients in the acute
rehabilitation unit based on patient care classifications to be called case
mix groups. Similar to the diagnosis-related group system, each patient's
condition will be assessed at an appropriate time, then the patient will be
assigned to the case mix group appropriate for his or her condition. Also
similar to the diagnosis-related group system, a hospital may keep the
difference between its case mix group payment and its operating costs
incurred in furnishing patient services, but is at risk for operating costs
that exceed the applicable case mix group payment. It is currently
anticipated that there will be ninety-seven different case mix groups.
The Balanced Budget Act of 1997 mandated that the federal budget for
the new case mix group system for acute rehabilitation units be two percent
less than the projected budget under the current system. While we are still
analyzing the potential impact of the case mix group system rules, we believe
that this new prospective payment system for acute rehabilitation units will
favor low-cost, efficient providers, and that our strategy of managing
programs on the premises of our hospital clients positions us well for the
changing reimbursement environment. However, in the event that a client
hospital experiences a material reduction in reimbursement under the new
system, in most cases, the client hospital will have the right to renegotiate
its contract with us, including the financial terms.
The Balanced Budget Act of 1997 also mandated the phase-in of a
prospective payment system based on resource utilization group
classifications for skilled nursing facilities and units. This was targeted
to reduce government spending on skilled nursing services by 18%.
Substantially all of the skilled nursing units to which we provide management
services are now fully phased in under the resource utilization group system
for skilled nursing facilities.
Medicare reimbursement for outpatient rehabilitation services was
also affected by the Balanced Budget Act of 1997. Since 1999, reimbursement
for such services is no longer based on a provider's costs; instead, all
reimbursement for covered outpatient rehabilitation services is currently
based on the lesser of the provider's actual charge for such services or the
applicable Medicare physician fee schedule amount established by the Health
Care Financing Administration. This reimbursement system applies regardless
of whether the therapy services are furnished in a hospital outpatient
department, a physician's office, or the office of a therapist in private
practice. Under current law, however, an outpatient therapy program that is
not designated as being provider-based is subject to annual limits on payment
for therapy services. These limits have been suspended through 2001, but may
be renewed thereafter. See discussion under "Business - Government Regulation
- -Provider-Based Rules."
FRAUD AND ABUSE. Various federal laws prohibit the knowing and
willful submission of false or fraudulent claims, including claims to obtain
payment under Medicare, Medicaid, and other government healthcare programs.
The federal anti-kickback statute also prohibits individuals and entities
from knowingly and willfully paying, offering, receiving, or soliciting money
or anything else of value in order to induce the referral of patients or to
induce a person to purchase, lease, order, arrange for, or recommend services
or goods covered by Medicare, Medicaid, or other government healthcare
programs. The anti-kickback statute is extremely broad and potentially covers
many standard business arrangements. Violations can lead to significant
criminal and civil penalties, including fines of up to $25,000 per violation,
civil monetary penalties of up to $50,000 per violation, assessments of up to
three times the amount of the prohibited remuneration, imprisonment, and/or
exclusion from participation in Medicare, Medicaid, and other government
healthcare programs. The Office of the Inspector General of the U.S.
Department of Health and Human Services has published regulations which
identify a limited number of specific business practices which fall within
safe harbors guaranteed not to violate the anti-kickback statute. While many
of our business relationships fall outside of the published safe harbors,
conformity with the safe harbors is not mandatory and failure to meet all of
the requirements of an applicable safe harbor does not by itself make conduct
illegal.
12
A number of states have in place statutes and regulations which
prohibit the same general types of conduct as that prohibited by the federal
laws described above. Some states' antifraud and antikickback laws apply only
to goods and services covered by Medicaid. Other states' antifraud and
antikickback laws apply to all healthcare goods and services, regardless of
whether the source of payment is governmental or private.
In recent years, federal and state government agencies have
increased the level of enforcement resources and activities targeted at the
healthcare industry. In addition, federal law allows individuals to bring
lawsuits on behalf of the government in what are known as QUI TAM or
"whistleblower" actions, alleging false or fraudulent Medicare or Medicaid
claims and certain other violations of federal law. The use of these private
enforcement actions against healthcare providers and their business partners
has increased dramatically in the recent past, in part because the individual
filing the initial complaint is entitled to share in a portion of any
settlement or judgment.
We endeavor to conduct our operations in compliance with the
applicable fraud and abuse statutes and to stay informed as to evolving
regulatory and judicial interpretations of these broad and complex laws.
Should we identify any of our practices as being contrary to these laws, we
will take appropriate action to address the matter, including, when
appropriate, making disclosure to the proper authorities.
ANTI-REFERRAL LAWS. The federal Stark law generally provides that,
if a physician or a member of a physician's immediate family has a financial
relationship with a healthcare entity, the physician may not make referrals
to that entity for the furnishing of designated health services covered under
Medicare, Medicaid, or other government healthcare programs, unless one of
several specific exceptions applies. For purposes of the Stark law, a
financial relationship with a healthcare entity includes an ownership or
investment interest in that entity or a compensation relationship with that
entity. Designated health services include physical and occupational therapy
services, durable medical equipment, home health services, and inpatient and
outpatient hospital services. The Stark law has limited impact on our current
operations; however, as we expand our outpatient division's business into new
venues, such as physician offices, our physician clients will have to
consider the impact of the Stark law on their practice. On January 4, 2001,
the Health Care Financing Administration published the first phase of a set
of final regulations interpreting the Stark law. The effective date of these
regulations will be January 4, 2002.
The federal government will make no payment for designated health
services provided in violation of the Stark law. In addition, sanctions for
violating the Stark law include civil monetary penalties of up to $15,000 per
prohibited service provided and exclusion from any federal, state, or other
government healthcare programs. There are no criminal penalties for violation
of the Stark law.
A number of states have in place statutes and regulations which
prohibit the same general types of conduct as that prohibited by the federal
Stark law described above. Some states' Stark laws apply only to goods and
services covered by Medicaid. Other states' Stark laws apply to certain
designated healthcare goods and services, regardless of whether the source of
payment is government or private.
PROVIDER-BASED RULES. The Health Care Financing Administration
recently promulgated new rules regarding the provider-based status of certain
facilities and organizations furnishing healthcare services to Medicare
beneficiaries. Designation as a provider-based facility or organization can,
in some cases, result in greater reimbursement from the Medicare program than
would otherwise be the case; under the new rules, such a designation also
mandates compliance with a specific set of billing and patient notification
requirements and emergency medical treatment regulations. Until October 1,
2002, any program, facility or organization treated as having provider-based
status on October 1, 2000, will retain this designation. All new programs,
facilities, and organizations established after October 1, 2000
13
desiring provider-based status must obtain an affirmative determination of
provider-based status in order to properly receive reimbursement for services
provided to Medicare beneficiaries; as of October 1, 2002, programs,
facilities and organizations that were in existence on October 1, 2000 will
also need to comply with this requirement. The new provider-based rules
stipulate that, when a hospital program is subject to a management agreement,
one requirement for eligibility as a provider-based program is that
non-management staff working in the program be employed by the hospital
rather than the management company.
The Health Care Financing Administration has stated in published
guidance that it will not make determinations of provider-based status with
respect to skilled nursing facilities since, given the reimbursement system
for skilled nursing facilities, their status (as provider-based or not
provider-based) does not affect Medicare payment levels or beneficiary
liability. The Health Care Financing Administration has also indicated that,
at least through December 31, 2001, it will not make determinations of
provider-based status with respect to outpatient therapy programs. At the
current time, it is not clear how the new provider-based rules will apply to
acute rehabilitation units, such as those managed by our company. Published
guidance provided by the Health Care Financing Administration has not
excluded acute rehabilitation units from the requirement that a program
receive a determination as provider-based. If new acute rehabilitation units
managed by us are required to qualify as provider-based, we may be required
by our clients to change our business model with respect to our employment of
the personnel who staff these programs. In addition, if existing acute
rehabilitation units managed by us are required to qualify as provider-based
as of October 1, 2002, we may be required by our clients to renegotiate their
contracts with us to change our then existing relationships with the
personnel who staff these programs. Similar changes in our business model may
be required with respect to new outpatient programs for periods after
December 31, 2001. Similar rights of renegotiation may be triggered with
respect to existing outpatient programs for periods after October 1, 2002.
Any renegotiation of a contract could also change the financial terms of the
contract.
HEALTH INFORMATION PRACTICES. Subtitle F of the Health Insurance
Portability and Accountability Act of 1996 was enacted to improve the
efficiency and effectiveness of the healthcare system through the
establishment of standards and requirements for the electronic transmission
of certain health information. To achieve that end, the act requires the
Secretary of the U.S. Department of Health and Human Services to promulgate a
set of interlocking regulations establishing standards and protections for
health information systems, including standards for the following:
- the development of electronic transactions and code sets to be
used in those transactions;
- the development of unique health identifiers for individuals,
employers, health plans, and healthcare providers;
- the security of individual health information;
- the transmission and authentication of electronic signatures; and
- the privacy of individually identifiable health information.
Final rules setting forth standards for electronic transactions and
code sets were published on August 17, 2000 and for the privacy of
individually identifiable health information on December 28, 2000, both of
which apply to health plans, healthcare clearinghouses and healthcare
providers who transmit any health information in electronic form in
connection with certain administrative and billing transactions. Compliance
with the final rules will not be required until at least the fourth quarter
of 2002. Proposed rules that include standards for unique health identifiers
for employers and healthcare providers, as well as standards related to the
security of individual health information and the
14
use of electronic signatures have been published.
We are currently evaluating the effect of the proposed and final
rules published to date and have developed a task force to address the
standards set forth in these rules and their effect on our business. Given
the fact that not all of the standards have been issued in final form, we
cannot estimate at this time the cost of compliance.
CORPORATE COMPLIANCE PROGRAM. In recognition of the importance of
achieving and maintaining regulatory compliance, we have established a
corporate compliance program which establishes general standards of conduct
and procedures that promote compliance with business ethics, regulations, law
and accreditation standards. We have established compliance standards and
procedures to be followed by our employees that are reasonably capable of
reducing the prospect of criminal conduct, and have designed systems for the
reporting and auditing of potentially criminal acts. A key element of our
compliance program is ongoing communication and training of employees so that
it becomes a part of day-to-day business operations. A compliance committee
consisting of representatives of both our senior management and our board of
directors has been established to oversee implementation and ongoing
operations of our compliance program, to enforce our compliance program
through appropriate disciplinary mechanisms and to ensure that all reasonable
steps are taken to respond to an offense and to prevent further similar
offenses. We are not aware of the existence of any current activities on the
part of any of our employees that would not be materially in compliance with
our compliance program.
COMPETITION
Our healthcare staffing business competes in national, regional and
local markets with full-service staffing companies and with specialized
staffing agencies. We believe our strategic advantages in this line of
business include our ability to match qualified employees to specific job
requirements, our ability to provide qualified employees in a timely manner,
the price of our services, monitoring of the job performance of our employees
and the diversity of our staffing solutions.
Our program management business has no direct competitors offering
all of the same program services, although other companies may offer one or
more of the same services. Our program management business competes with
hospitals, nursing homes and other long-term care facilities that do not
choose to outsource their acute rehabilitation and skilled nursing units,
outpatient therapy programs and contract therapy services. The fundamental
challenge in our program management business is convincing our potential
clients, primarily hospitals, nursing homes and other long-term care
facilities, that we can provide rehabilitation services more efficiently than
they can themselves. The inpatient units and outpatient programs that we
manage are in highly competitive markets and compete for patients with other
hospitals, nursing homes and long-term care facilities, as well as public
companies. Among our principal competitive advantages are our reputation for
quality, cost effectiveness, a proprietary outcomes management system,
innovation and price.
We rely significantly on our ability to attract, develop and retain
nurses, therapists and other healthcare personnel who possess the skills,
experience and, as required, licensure necessary to meet the specified
requirements of our healthcare staffing clients, as well as our own needs in
our program management business. We compete for healthcare staffing
personnel, including nurses and therapists, with other temporary healthcare
staffing companies, as well as actual and potential clients, some of whom
seek to fill positions with either regular or temporary employees.
15
EMPLOYEES
As of December 31, 2000, we had approximately 5,000 employees and
approximately 9,000 additional travel and per diem staff employed by our
staffing division. The physicians who are the medical directors of our acute
rehabilitation units are independent contractors and not our employees.
Nurses and therapists in our temporary healthcare staffing business may be on
our or the client's payroll. None of our employees are subject to a
collective bargaining agreement. We consider our relationship with our
employees to be good.
ITEM 2. PROPERTIES
We currently lease 58,000 square feet of executive office space in
Clayton, Missouri under a lease that expires in the year 2010, assuming all
options to renew are exercised. In addition to the monthly rental cost, we
are also responsible for specified increases in operating costs. In addition,
our subsidiaries lease 10,000 square feet in Salt Lake City, Utah under a
lease that expires in 2001, 21,000 square feet of executive office space in
Andover, Massachusetts under a lease that expires in the year 2010, 8,000
square feet of executive office space in Clearwater, Florida under a lease
that expires in 2007 and 10,000 square feet of executive office space in
Phoenix, Arizona under a lease that expires in 2003, each assuming all
options to renew are exercised.
ITEM 3. LEGAL PROCEEDINGS
We are subject to various claims and legal actions in the ordinary
course of business. These matters include, without limitation, professional
liability, employee-related matters and inquiries and investigations by
governmental agencies relating to Medicare or Medicaid reimbursement and
other issues. We are not aware of any pending or threatened litigation which
we believe would have a material adverse impact on us. In addition, our
clients may become subject to claims, governmental inquiries and
investigations and legal actions to which we may become a party relating to
services provided by us. From time to time and depending on the particular
facts and circumstances, we may be subject to indemnification obligations
under our contracts with our clients relating to these matters. We have
received one notice from a client reserving its rights to indemnification, if
any, in connection with potential liability which may result from a pending
governmental investigation. At this time, we have not been advised of the
amounts, if any, that the government may seek in this matter nor have we been
provided with the specific facts that would support the client's reservation
of rights to indemnification or the dollar amount of indemnification claimed.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED
STOCKHOLDER MATTERS
Information concerning our Common Stock is included under the
heading "Stock Data" in our Annual Report to Stockholders for the year ended
December 31, 2000 and is incorporated herein by reference.
16
ITEM 6. SELECTED FINANCIAL DATA
Our Six-Year Financial Summary is included in our Annual Report to
Stockholders for the year ended December 31, 2000 and is incorporated herein
by reference.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
OVERVIEW
We provide temporary healthcare staffing and physical rehabilitation
program management services for hospitals, nursing homes and other long-term
care facilities. We derive our revenue from two product line segments:
temporary healthcare staffing services and physical rehabilitation program
management services. Our physical rehabilitation program management services
include inpatient programs (including acute rehabilitation and skilled
nursing units), outpatient programs and contract therapy programs. Summarized
information about our revenues and earnings from operations in each segment
is provided below.
YEAR ENDED DECEMBER 31,
--------------------------------------------
1998 1999 2000
--------- --------- ---------
(IN THOUSANDS)
REVENUES FROM UNAFFILIATED CUSTOMERS:
Healthcare staffing................................... $ 65,365 $ 148,180 $ 260,100
Program management:
Inpatient units..................................... 111,645 116,497 119,963
Outpatient programs................................. 16,484 30,677 42,332
Contract therapy.................................... 13,922 14,071 29,979
--------- --------- ---------
Total............................................. $ 207,416 $ 309,425 $ 452,374
========= ========= =========
OPERATING EARNINGS:
Healthcare staffing................................... $ 2,106 $ 5,228 $ 14,822
Program management:
Inpatient units..................................... 16,763 18,123 18,296
Outpatient programs................................. 1,833 6,238 7,450
Contract therapy.................................... 2,629 333 3,621
--------- --------- ---------
Total............................................. $ 23,331 $ 29,922 $ 44,189
========= ========= =========
REVENUES
We derive substantially all of our revenues from fees paid directly
by healthcare providers rather than through payment or reimbursement by
government or other third-party payors. Our inpatient and outpatient therapy
programs are typically provided through agreements with hospital clients with
three to five-year terms. Our contract therapy and temporary healthcare
staffing services are typically provided under interim or short-term
agreements with hospitals, nursing homes and long-term care facilities.
Our healthcare staffing revenues and earnings are impacted by
changes in the level of occupancy at hospitals where we provide our staffing
services. During the first and fourth quarters of each year, hospitals
generally experience an increase in the number of patients, resulting in an
increase in the demand for our healthcare staffing services and an increase
in our revenues and earnings in this line of business. Hospitals generally
experience a decrease in the number of patients during the second and third
quarters, resulting in a decrease in our revenues and earnings for our
healthcare staffing services line.
17
As a provider of temporary healthcare staffing and program
management services, our revenues and growth are affected by trends and
developments in healthcare spending. Over the last three years, our revenues
and earnings from our program management services have been negatively
impacted by an aggregate decline in average billable lengths of stay. The
decline in average billable lengths of stay reflects the continued trend of
reduced rehabilitation lengths of stay.
Material changes in the rates or methods of government
reimbursements to our clients for services rendered in the programs that we
manage could give our clients the right to renegotiate their existing
contracts with us to include terms that are less favorable to us. For
example, outpatient therapy programs receive payment from the Medicare
program under a fee schedule. Under current law, an outpatient therapy
program that is not designated as being provider-based is subject to an
annual limit on payments for therapy services provided to Medicare
beneficiaries. See discussion under "Business-Government
Regulation-Provider-Based Rules." However, application of this limit is
subject to a moratorium through December 31, 2001. The Secretary of the U.S.
Department of Health and Human Services is required to review reimbursement
claims for outpatient therapy services while the moratorium is in effect and
to make a proposal to Congress to revise the payment system for outpatient
therapy services. Any changes adopted by Congress, which could include
reduced annual limits or a new payment system, could have an adverse effect
on the outpatient therapy business.
In addition, changes in the rates or methods of government
reimbursements could negatively impact the benefits that we are able to
provide to our clients. The enactment of the Balanced Budget Act of 1997,
which established a prospective payment system for skilled nursing facilities
and units, significantly reduced the demand for therapists generally, which
had a negative impact on our healthcare staffing business. It also resulted
in reduction of the per diem billing rates we were able to negotiate with the
skilled nursing units that we manage. The rates and other reimbursement
regulations with respect to the implementation of a prospective payment
system for acute rehabilitation services have been also recently released
and, while we are unable to predict the impact of the changes at this stage,
we may experience a decline in our revenue and earnings as a result of the
prospective payment system or from any other changes in the rates or methods
of government reimbursements.
ACQUISITIONS
Over the course of the last three years, we have completed a number
of acquisitions. These acquisitions are summarized in the table below. Each
of the acquisitions has been accounted for by the purchase method of
accounting, which means that the operating results of the acquired entity are
included in our results of operations commencing on the date of acquisition
of each entity.
We have amortized the goodwill for each of our acquisitions, the
excess of the cost of the acquisition over the book value of the net assets
acquired, on a straight-line basis over 40 years through the year ended
December 31, 2000. After discussions with the staff of the Securities and
Exchange Commission and in view of developments in the medical outsourcing
industry, we have changed the goodwill amortization periods on a prospective
basis from 40 years to 25 years on the acquisitions of Physical Therapy
Resources, Inc.; TeamRehab, Inc./Moore Rehabilitation Services, Inc.; Rehab
Unlimited, Inc./Cimarron Health Care, Inc.; Rehabilitative Care Systems of
America, Inc.; Therapeutic Systems, Inc.; Salt Lake Physical Therapy
Associates, Inc.; AllStaff, Inc.; and DiversiCare Rehab Services, Inc. We
anticipate that this change will result in a net after-tax increase of
approximately $500,000 in the annual goodwill amortization associated with
these acquisitions. This is expected to result in a decrease in diluted
earnings per share of approximately $0.03 for the year ending December 31,
2001. We have retained 40-year amortization periods for the acquisitions of
Advanced Rehabilitation Resources, Inc.; Healthcare Staffing Solutions, Inc.;
StarMed Staffing, Inc.; and eai Healthcare Staffing
18
Solutions, Inc., which had businesses that were more national in scope. The
change in the goodwill amortization periods for the named acquisitions will
commence in the first quarter of 2001.
COMPANY DATE DESCRIPTION CONSIDERATION(1)
- ------------------------------ ----------------- ----------------------------- --------------------------
1998
- ----
Rehabilitative Care Systems July 31, 1998 Outpatient therapy programs
of America, Inc.
StarMed Staffing, Inc. and August 17, 1998 Temporary healthcare staffing Aggregate of $43.4 million
Wesley Medical Resources, Inc. (nurses and nurse assistants) in cash, notes and stock
Therapeutic Systems, Ltd. September 9, 1998 Contract therapy programs
1999
- ----
Salt Lake Physical Therapy May 20, 1999 Outpatient therapy programs
Associates, Inc.
AllStaff, Inc. June 30, 1999 Temporary healthcare staffing Aggregate of $17.3 million
(nurses and nurse assistants) in cash, notes and stock
eai Healthcare Staffing December 20, 1999 Temporary healthcare staffing
Solutions, Inc. (allied healthcare personnel)
2000
- ----
DiversiCare Rehab Services, Inc. September 15, 2000 Outpatient therapy programs Aggregate of $8.5 million
in cash and notes
(1) Amounts include contingent payments made in connection with the
acquisitions listed, except for 1999 which excludes up to $1.8 million
that may be paid to the former stockholders of Salt Lake Physical
Therapy Associates, Inc., contingent upon the attainment of certain
financial goals over the next two years.
19
RESULTS OF OPERATIONS
The following table sets forth the percentage that selected items in
the consolidated statements of earnings bear to operating revenues for the
years ended December 31, 1998, 1999 and 2000:
YEAR ENDED DECEMBER 31,
-----------------------
1998 1999 2000
---- ---- ----
Operating revenues.......................................................... 100.0% 100.0% 100.0%
Cost and expenses:
Operating expenses .................................................... 69.5 71.7 71.0
General and administrative ............................................ 17.3 16.9 17.7
Depreciation and amortization.......................................... 1.9 1.7 1.5
------ ------ ------
Operating earnings.......................................................... 11.3 9.7 9.8
Other expense, net.......................................................... (0.7) (1.6) (1.2)
------ ------ ------
Earnings before income taxes and cumulative effect of
change in accounting principle......................................... 10.6 8.1 8.6
Income taxes................................................................ 4.3 3.2 3.4
------ ------ ------
Earnings before cumulative effect of change in accounting
principle.............................................................. 6.3 4.9 5.2
Cumulative effect of change in accounting for start-up costs,
net of tax............................................................. (0.4) -- --
------ ------ ------
Net earnings................................................................ 5.9% 4.9% 5.2%
====== ====== ======
TWELVE MONTHS ENDED DECEMBER 31, 2000 COMPARED TO TWELVE MONTHS ENDED
DECEMBER 31, 1999
Operating revenues in 2000 increased by $143.0 million, or 46.2%, to
$452.4 million as compared to $309.4 million in operating revenues in 1999.
Acquisitions accounted for 19.9% of the net increase. Excluding the effects
of acquisitions, increases in inpatient, outpatient, contract therapy and
nurse travel and per diem staffing revenues were offset by a decline in
therapist travel staffing revenues and a decrease in the number of skilled
nursing units.
Staffing revenue increased by 75.5% from $148.2 million in 1999 to
$260.1 million in 2000 reflecting $3.2 million from the June 30, 1999
acquisition of AllStaff, Inc., $21.5 million from the December 20, 1999
acquisition of eai Healthcare Staffing Solutions, Inc. and a 50.7% increase
in weeks worked in 2000 at existing and newly opened travel and per diem
offices from 126,816 to 191,076. Total weeks worked attributable to the 1999
acquisitions were 32,875. Operating earnings for the staffing division were
$14.8 million in 2000, a 183.5% increase over the $5.2 million earned in 1999.
Inpatient program revenue increased by 3.0% from $116.5 million in
1999 to $120.0 million in 2000. A 3.0% increase in the average number of
inpatient programs managed from 131.8 to 135.8, plus the additional revenue
from one additional day in February 2000, offset by a 0.7% decrease in the
average daily billable census per inpatient program from 14.5 in 1999 to 14.4
in 2000, resulted in a 2.8% increase in billable patient days to 716,993. The
decrease in billable census per program for inpatient programs is primarily
attributable to a 0.7% decrease in average billable length of stay from 14.3
days in 1999 to 14.2 days in 2000. Operating earnings for the inpatient
division increased by 1.0% to $18.3 million in 2000, compared to $18.1
million in 1999.
Outpatient revenue increased by 38.0% from $30.7 million in 1999 to
$42.3 million in 2000 reflecting $1.4 million from the May 20, 1999
acquisition of Salt Lake Physical Therapy Associates, Inc., $2.3 million from
the September 15, 2000 acquisition of DiversiCare Rehab Services, Inc., an
increase in the average number of outpatient programs managed from 40.0 to
53.1 and a 14.0% increase in units of
20
service per program. Operating earnings from the outpatient division were
$7.5 million in 2000, a 19.4% increase over the $6.2 million earned in 1999.
Contract therapy revenue increased by 113.1% from $14.1 million in
1999 to $30.0 million in 2000 reflecting a 71.8% increase in the average
number of contract therapy locations managed from 90.8 to 156.0 and a 24.0%
increase in revenue per location. Operating earnings for the contract therapy
division was $3.6 million in 2000, a $3.3 million increase from the $333,000
in operating earnings in 1999.
Operating expenses for 2000 increased by $99.3 million, or 44.8%, to
$321.2 million as compared to $221.9 million in 1999. The 1999 and 2000
acquisitions accounted for approximately 19.0% of the net increase. The
remaining increase in operating expenses is attributable to a 42.9% increase
in outpatient units of service, a 71.8% increase in the average number of
contract therapy locations and a 50.7% increase in the number of weeks worked
from travel and per diem staffing, offset by a 2.0% decrease in costs for
inpatient programs.
The aggregate excess of direct operating expenses over operating
revenues associated with non-exempt programs increased from $260,000 to
$315,000, on an increase in the average number of non-exempt units managed
from 4.4 to 6.3. The per program average excess of operating expenses over
operating revenues decreased from $60,000 to $50,000 reflecting an increase
in the average revenue per billable patient day from $177 to $225. The
average excess of operating expenses over operating revenues for a program
during its non-exempt year can range to as high as $150,000 to $200,000.
General and administrative expenses increased by $27.8 million, or
53.1%, from $52.3 million in 1999 to $80.1 million in 2000 reflecting
increases of $6.1 million in general and administrative expenses of companies
acquired and $2.0 million in corporate office expenses, with the remaining
increase of $19.7 million primarily attributable to marketing, business
development, operations and professional services expenses in support of the
increase in outpatient therapy programs and contract therapy locations
managed and per diem staffing offices operated.
Depreciation and amortization increased by $1.6 million, or 29.8%,
from $5.3 million in 1999 to $6.9 million in 2000 reflecting an increase in
goodwill from acquisitions and depreciation on equipment purchased.
Interest expense increased 29.1%, or $1.2 million, from $4.1 million
in 1999 to $5.3 million in 2000 reflecting interest on additional debt
funding acquisitions, borrowings under the revolving line of credit for
working capital purposes and an increase in interest rates.
Earnings before income taxes increased by $14.1 million, or 56.2%,
from $25.0 million in 1999 to $39.1 million in 2000. The provision for income
taxes for 2000 was $15.6 million compared to $9.9 million in 1999, reflecting
effective income tax rates of 39.8% and 39.7% for these periods. Net earnings
increased by $8.4 million in 2000, or 55.9%, to $23.5 million from $15.1
million in 1999. Diluted earnings per share increased by 40.8% to $1.45 from
$1.03 on a 9.8% increase in the weighted average shares and assumed
conversions outstanding. Excluding losses on the write-down of investments in
1999, diluted net earnings increased 34.3% from $1.08 in 1999 to $1.45 in
2000. The increase in weighted average shares outstanding is attributable
primarily to stock option exercises and the increase in the dilutive effect
of stock options as a result of an increase in the average market price of
our stock relative to the underlying exercise prices of outstanding options.
21
TWELVE MONTHS ENDED DECEMBER 31, 1999 COMPARED TO TWELVE MONTHS ENDED
DECEMBER 31, 1998
Operating revenues in 1999 increased by $102.0 million, or 49.2%, to
$309.4 million as compared to $207.4 million in operating revenues in 1998.
The growth in our operating revenues during 1999 was primarily the result of
a 150.9% increase in staffing weeks worked primarily from acquisitions.
Acquisitions accounted for 76.9% of the net increase in operating revenues.
Excluding the effects of acquisitions, increases in inpatient, outpatient and
nurse travel and per diem staffing revenues were offset by a decline in the
number of skilled nursing units, therapist travel staffing revenues and
contract therapy revenue.
Staffing revenue increased by 126.7% from $65.4 million in 1998 to
$148.2 million in 1999 reflecting the addition of $66.2 million in nurse
staffing revenue achieved through the August 1998 acquisition of StarMed
Staffing, Inc., a $3.0 million increase from the June 1999 acquisition of
AllStaff, Inc. and a $681,000 increase from the December 1999 acquisition of
eai Healthcare Staffing Solutions, Inc. An increase in nurse travel staffing
revenue of $30.3 million was offset by a similar decrease in therapist travel
staffing revenues. The decline in demand for therapists in the long-term care
settings resulted from the implementation of Medicare's prospective payment
system for skilled nursing facilities and units. Per diem staffing revenues
increased by $12.2 million due to strong market demand and increased number
of weeks worked. The number of staffing weeks worked in 1999 was 131,110, an
increase of 150.9% from the 52,265 staffing weeks worked in 1998 with
substantially all of the increase attributable to acquisitions. These changes
resulted in a $3.1 million, or 148.2%, increase in operating earnings for the
staffing division from $2.1 million in 1998 to $5.2 million in 1999.
Inpatient program revenue increased by 4.3% from $111.6 million in
1998 to $116.5 million in 1999. A 2.8% increase in the average number of
inpatient programs managed from 128.2 to 131.8, and a 3.6% increase in the
average daily billable census per inpatient program from 14.0 to 14.5,
resulted in a 6.3% increase in billable patient days to 697,769. The increase
in billable census per inpatient program is primarily attributable to a 4.3%
increase in admissions per program. The average billable length of stay for
1999 was 14.3 days, as compared to 14.5 days in 1998. The increase in
billable patient days was offset by a 1.8% decrease in average per diem
billing rates, reflecting lower per diem billing rates for skilled nursing
units subject to the Balanced Budget Act of 1997. Operating earnings for the
inpatient division were $18.1 million, an 8.1% increase from the $16.8
million earned by the inpatient division in 1998.
Outpatient revenue increased by 86.1% from $16.5 million in 1998 to
$30.7 million in 1999 reflecting a $1.9 million increase from the July 1998
acquisition of Rehabilitative Care Systems of America, Inc., a $2.9 million
increase from the May 1999 acquisition of Salt Lake Physical Therapy
Associates, Inc., an increase in the average number of outpatient programs
managed from 26.1 to 40.0 and a 27.7% increase in units of service per
program. Operating earnings for the outpatient division increased by $4.4
million or 240.3%, from $1.8 million in 1998 to $6.2 million in 1999.
Contract therapy revenue increased by 1.1% from $13.9 million in
1998 to $14.1 million in 1999 reflecting a $3.8 million increase from the
acquisition of Therapeutic Systems, Ltd. in September 1998, offset by a 45.0%
decrease in revenue per program to $154,899 reflecting lower volumes and
reimbursement rates under the Balanced Budget Act of 1997. Despite the fact
that contract therapy revenues rose slightly on a year-to-year basis, the
introduction of the prospective payment system for skilled nursing units and
long-term care facilities substantially reduced amounts previously reimbursed
to clients based on historical costs. This had the indirect effect of
lowering significantly operating margins and operating earnings for the
contract therapy division. As a consequence, operating earnings for the
contract therapy division decreased by $2.3 million or 87.3%, from $2.6
million in 1998 to $333,000 in 1999.
22
Operating expenses for 1999 increased by $77.7 million, or 53.9%, to
$221.9 million as compared to $144.2 million in 1998. Acquisitions accounted
for 76.7% of the net increase. The remaining increase was due to increases of
$2.7 million related to increased patient days, $6.0 million due to increased
outpatient units of service, and $33.0 million due to increased nurse travel
and per diem staffing, offset by a $23.6 million decrease in therapist travel
staffing and contract therapy costs.
The aggregate excess of direct operating expenses over operating
revenues associated with non-exempt programs decreased from $637,000 to
$260,000, on an increase in the average number of non-exempt units managed
from 3.2 to 4.4. The per program average excess of operating expenses over
operating revenues decreased from $199,000 to $60,000 reflecting an increase
in the average billable census per program from 3.8 to 4.9. The average
excess of operating expenses over operating revenues for a program during its
non-exempt year can range to as high as $150,000 to $200,000.
General and administrative expenses increased by $16.4 million, or
45.6%, from $35.9 million in 1998 to $52.3 million in 1999 due mainly to
increases of $13.5 million in general and administrative expenses of
companies acquired. The remaining increase of $2.9 million was primarily
attributable to marketing, business development, operations and professional
services in support of the increase in programs managed and the number of per
diem staffing offices operated and corporate office expenses.
Depreciation and amortization increased by $1.3 million, or 33.5%,
from $4.0 million in 1998 to $5.3 million in 1999, reflecting an increase in
goodwill from acquisitions.
Interest expense increased 22.5%, or $761,000, from $3.4 million in
1998 to $4.1 million in 1999, reflecting interest on additional debt funding
the acquisitions. Other expense in 1999 primarily reflects the write-down of
$1.0 million of our investments in nonconsolidated subsidiaries. Other income
in 1998 reflects $1.5 million attributable to the sale of approximately 50%
of our investment in Intensiva HealthCare Corporation in the fourth quarter
of 1998.
Earnings before income taxes and cumulative effect of change in
accounting principle increased by $3.1 million, or 14.4%, from $21.9 million
in 1998 to $25.0 million in 1999. The provision for income taxes for 1999 was
$9.9 million compared to $8.9 million in 1998, reflecting effective income
tax rates of 39.7% and 40.7% for these years. Earnings before cumulative
effect of change in accounting principle increased by $2.1 million, or 16.4%,
to $15.1 million in 1999 from $13.0 million in 1998. The cumulative effect of
change in accounting principle of $776,000 in 1998 represented the after-tax
charge related to the adoption of Statement of Position No. 98-5 REPORTING ON
THE COSTS OF START-UP ACTIVITIES effective January 1, 1998. Net earnings
increased by $2.9 million, or 23.8%, from $12.2 million in 1998 to $15.1
million in 1999. Diluted earnings per share increased 19.8% to $1.03 from
$.86 on a 2.2% increase in the weighted average shares and assumed
conversions outstanding. The write-down of investments reduced net earnings
per share in 1999 by $.05, while the gain on sale of marketable securities
represented $.06 of net earnings per share in 1998. The cumulative effect of
change in accounting principle reduced net earnings per share by $.05 in 1998
with no comparable reduction in 1999. Excluding gains/losses on investments
and the cumulative effect of the change in accounting principle, diluted net
earnings per share increased 27.1% from $.85 in 1998 to $1.08 in 1999. The
increase in shares outstanding is attributable primarily to stock option
exercises and shares issued in acquisitions, offset by a decrease in the
dilutive effect of stock options resulting from a decrease in the average
market price of our stock relative to the underlying exercise prices of
outstanding options.
23
LIQUIDITY AND CAPITAL RESOURCES
As of December 31, 2000, we had $11.0 million in cash and current
marketable securities and a current ratio, the amount of current assets
divided by current liabilities, of 2.6 to 1. Working capital increased by
$37.1 million to $64.2 million as of December 31, 2000, compared to $27.1
million as of December 31, 1999. The increase in working capital is primarily
due to working capital from the acquisition of DiversiCare Rehab Services,
Inc., working capital generated from operations, refinancing of short-term
debt with long-term debt and proceeds received from the exercise of stock
options.
Net accounts receivable were $84.0 million at December 31, 2000,
compared to $65.8 million at December 31, 1999. The number of days average
net revenue in net receivables was 63.8 at December 31, 2000, compared to
65.6 at December 31, 1999.
Our operating cash flows constitute our primary source of liquidity
and historically have been sufficient to fund our 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 $125.0 million revolving
line of credit with a balance outstanding as of December 31, 2000 of $63.8
million.
In connection with the development and implementation of additional
programs, we may incur capital expenditures for equipment and deferred costs
arising from advances made to hospitals for a portion of capital improvements
needed to begin a program's operation.
INFLATION
Although inflation has abated during the last several years, the
rate of inflation in healthcare related services continues to exceed the rate
experienced by the economy as a whole. Our management contracts typically
provide for an annual increase in the fees paid to us by our clients based on
increases in various inflation indices. These increases generally offset
increases in costs incurred by us.
EFFECT OF RECENT ACCOUNTING PRONOUNCEMENTS
In December 1999, the Securities and Exchange Commission released
Staff Accounting Bulletin No. 101, REVENUE RECOGNITION IN FINANCIAL
STATEMENTS. This bulletin, which became effective on October 1, 2000,
summarizes the views of the staff of the Securities and Exchange Commission
on the application of generally accepted accounting principles for revenue
recognition in financial statements.
In March 2000, the Financial Accounting Standards Board released
FASB Interpretation 44, ACCOUNTING FOR CERTAIN TRANSACTIONS INVOLVING STOCK
COMPENSATION, AN INTERPRETATION OF APB OPINION NO. 25. This interpretation,
which became effective on July 1, 2000, clarifies the application of APB
Opinion No. 25 for certain issues.
These pronouncements did not have a material effect on our
consolidated financial statements in 2000.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not applicable.
24
INDEPENDENT AUDITORS' REPORT
The Board of Directors
RehabCare Group, Inc.:
We have audited the accompanying consolidated balance sheets of
RehabCare Group, Inc. and subsidiaries (the "Company") as of December 31,
2000 and 1999, and the related consolidated statements of earnings,
stockholders' equity, cash flows and comprehensive earnings for each of the
years in the three-year period ended December 31, 2000. These consolidated
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audits.
We conducted our audits in accordance with auditing standards
generally accepted in the United States of America. Those standards require
that we plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by management, as
well as evaluating the overall financial statement presentation. We believe
that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to
above present fairly, in all material respects, the financial position of
RehabCare Group, Inc. and subsidiaries as of December 31, 2000 and 1999, and
the results of their operations and their cash flows for each of the years in
the three-year period ended December 31, 2000 in conformity with accounting
principles generally accepted in the United States of America.
As discussed in note 1 to the consolidated financial statements, the
Company changed its method of accounting for start-up costs on January 1,
1998.
/s/ KPMG LLP
St. Louis, Missouri
February 6, 2001
25
REHABCARE GROUP, INC.
Consolidated Balance Sheets
(dollars in thousands, except per share data)
DECEMBER 31,
---------------------------
ASSETS 2000 1999
------ ---- ----
Current assets:
Cash and cash equivalents $ 7,942 $ 738
Marketable securities, available-for-sale 3,025 3,019
Accounts receivable, net of allowance for doubtful
accounts of $5,347 and $4,577, respectively 84,033 65,777
Income taxes receivable 3,672 -
Deferred tax assets 4,872 4,898
Prepaid expenses and other current assets 1,158 1,100
---------- ---------
Total current assets 104,702 75,532
Marketable securities, trading 2,383 1,777
Equipment and leasehold improvements, net 12,427 7,269
Excess of cost over net assets acquired, net 104,782 99,020
Other 4,799 3,666
---------- ---------
$ 229,093 $ 187,264
========== =========
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
Current liabilities:
Current portion of long-term debt $ 2,868 $ 13,345
Accounts payable 2,790 3,359
Accrued salaries and wages 24,846 16,884
Accrued expenses 10,012 11,592
Income taxes payable - 3,283
---------- ---------
Total current liabilities 40,516 48,463
Deferred compensation and other long-term liabilities 2,679 3,623
Deferred tax liabilities 2,504 1,345
Long-term debt, less current portion 65,434 56,050
---------- ---------
Total liabilities 111,133 109,481
---------- ---------
Stockholders' equity:
Preferred stock, $.10 par value; authorized 10,000,000 shares,
none issued and outstanding - -
Common stock, $.01 par value; authorized 20,000,000 shares,
issued 17,409,584 shares and 15,700,566 shares as of
December 31, 2000 and 1999, respectively 174 157
Additional paid-in capital 49,503 33,101
Retained earnings 86,022 62,488
Less common stock held in treasury at cost,
2,302,898 shares and 2,331,194 shares as of
December 31, 2000 and 1999, respectively (17,757) (17,975)
Accumulated other comprehensive earnings 18 12
---------- ---------
Total stockholders' equity 117,960 77,783
---------- ---------
$ 229,093 $ 187,264
========== =========
See accompanying notes to consolidated financial statements.
26
REHABCARE GROUP, INC.
Consolidated Statements of Earnings
(in thousands, except per share data)
YEAR ENDED DECEMBER 31,
---------------------------------------------
2000 1999 1998
---- ---- ----
Operating revenues $ 452,374 $ 309,425 $ 207,416
Costs and expenses:
Operating expenses 321,192 221,892 144,187
General and administrative 80,120 52,315 35,932
Depreciation and amortization 6,873 5,296 3,966
---------- ---------- ----------
Total costs and expenses 408,185 279,503 184,085
---------- ---------- ----------
Operating earnings 44,189 29,922 23,331
Interest income 232 233 258
Interest expense (5,348) (4,142) (3,381)
Other income (expense), net 24 (986) 1,667
---------- ---------- ----------
Earnings before income taxes and cumulative
effect of change in accounting principle 39,097 25,027 21,875
Income taxes 15,563 9,929 8,901
---------- ---------- ----------
Earnings before cumulative effect of
change in accounting principle 23,534 15,098 12,974
Cumulative effect of change in accounting for
start-up costs, net of tax - - (776)
---------- ---------- ----------
Net earnings $ 23,534 $ 15,098 $ 12,198
========== ========== ==========
Net earnings per common share:
Basic:
Earnings before cumulative effect of change in
accounting principle $ 1.62 $ 1.15 $ 1.05
Cumulative effect of change in accounting for
start-up costs, net of tax - - (.06)
--------- ---------- ----------
Net earnings per share $ 1.62 $ 1.15 $ .99
========= ========== ==========
Diluted:
Earnings before cumulative effect of change in
accounting principle $ 1.45 $ 1.03 $ .91
Cumulative effect of change in accounting for
start-up costs, net of tax - - (.05)
--------- ---------- ----------
Net earnings per share $ 1.45 $ 1.03 $ .86
========= ========== ==========
See accompanying notes to consolidated financial statements.
27
REHABCARE GROUP, INC.
Consolidated Statements of Stockholders' Equity
(in thousands)
COMMON STOCK Accumulated
------------------------ Additional other compre- Total
Issued Treasury paid-in Retained Treasury hensive stockholders'
shares stock Amount capital earnings stock earnings equity
------ ----- ------ ------- -------- ----- -------- ------
Balance, December 31, 1997 14,304 2,622 $ 143 $ 23,901 $ 35,192 $(20,212) $ 736 $ 39,760
Net earnings - - - - 12,198 - - 12,198
Issuance of common stock
in connection with
acquisitions 260 - 3 2,197 - - - 2,200
Exercise of stock options
(including tax benefit) 750 (291) 7 4,480 - 2,237 - 6,724
Change in unrealized gain on
marketable securities, net
of tax - - - - - - (726) (726)
------ ----- ----- -------- --------- -------- ------ ----------
Balance, December 31, 1998 15,314 2,331 153 30,578 47,390 (17,975) 10 60,156
Net earnings - - - - 15,098 - - 15,098
Issuance of common stock
in connection with
acquisitions 96 - 1 840 - - - 841
Exercise of stock options
(including tax benefit) 290 - 3 1,683 - - - 1,686
Change in unrealized gain on
marketable securities, net
of tax - - - - - - 2 2
------ ----- ----- -------- --------- -------- ------ ----------
Balance, December 31, 1999 15,700 2,331 157 33,101 62,488 (17,975) 12 77,783
Net earnings - - - - 23,534 - - 23,534
Conversion of debt 847 - 8 5,992 - - - 6,000
Exercise of stock options
(including tax benefit) 862 (28) 9 10,410 - 218 - 10,637
Change in unrealized gain on
marketable securities, net
of tax - - - - - - 6 6
------ ----- ----- -------- --------- -------- ------ ----------
Balance, December 31, 2000 17,409 2,303 $ 174 $ 49,503 $ 86,022 $(17,757) $ 18 $ 117,960
====== ===== ===== ======== ========= ======== ====== ==========
See accompanying notes to consolidated financial statements.
28
REHABCARE GROUP, INC.
Consolidated Statements of Cash Flows
(in thousands)
YEAR ENDED DECEMBER 31,
-----------------------
2000 1999 1998
---- ---- ----
Cash flows from operating activities:
Net earnings $ 23,534 $ 15,098 $ 12,198
Adjustments to reconcile net earnings to net cash
provided by operating activities:
Cumulative effect of change in accounting
for start-up costs - - 776
Depreciation and amortization 6,873 5,296 3,966
Provision for doubtful accounts 3,466 2,743 1,093
Gain on sale of marketable securities - - (1,516)
Income tax benefit realized on employee stock option exercises 5,505 630 2,168
Change in assets and liabilities:
Deferred compensation 178 598 (598)
Accounts receivable, net (20,249) (18,703) (6,666)
Prepaid expenses and other current assets (70) (3) 43
Other assets (955) 921 161
Accounts payable and accrued expenses (3,458) 3,630 1,059
Accrued salaries and wages 7,511 1,507 1,990
Income taxes (6,197) (386) 1,049
-------- -------- ---------
Net cash provided by operating activities 16,138 11,331 15,723
-------- -------- ---------
Cash flows from investing activities:
Additions to equipment and leasehold improvements, net (7,899) (3,002) (1,868)
Purchase of marketable securities (778) (671) (1,838)
Proceeds from sale/maturities of marketable securities 166 134 4,363
Cash paid in acquisition of businesses, net of cash received (8,949) (16,273) (42,449)
Deferred contract costs, net (534) (177) (450)
Other, net (979) (736) (1,187)
-------- -------- ---------
Net cash used in investing activities (18,973) (20,725) (43,429)
-------- -------- ---------
Cash flows from financing activities:
Proceeds from revolving credit facility, net 51,800 12,000 -
Payments on long-term debt (47,893) (12,740) (10,559)
Proceeds from issuance of long-term debt - - 36,400
Proceeds from issuance of notes payable 1,000 4,150 1,000
Exercise of stock options 5,132 1,056 4,556
-------- -------- ---------
Net cash provided by financing activities 10,039 4,466 31,397
-------- -------- ---------
Net increase (decrease) in cash and cash
equivalents 7,204 (4,928) 3,691
Cash and cash equivalents at beginning of year 738 5,666 1,975
-------- -------- ---------
Cash and cash equivalents at end of year $ 7,942 $ 738 $ 5,666
======== ======== =========
See accompanying notes to consolidated financial statements.
29
REHABCARE GROUP, INC.
Consolidated Statements of Comprehensive Earnings
(in thousands)
YEAR ENDED DECEMBER 31,
-----------------------
2000 1999 1998
---- ---- ----
Net earnings $23,534 $15,098 $12,198
Other comprehensive earnings, net of tax -
Unrealized gains on securities:
Unrealized holding gains arising
during period 6 2 184
Less: reclassification adjustment for
realized gains included in net earnings - - (910)
------- ------- -------
Comprehensive earnings $23,540 $15,100 $11,472
======= ======= =======
See accompanying notes to consolidated financial statements.
30
REHABCARE GROUP, INC.
Notes to Consolidated Financial Statements
December 31, 2000, 1999 and 1998
(1) OVERVIEW OF COMPANY AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
OVERVIEW OF COMPANY
RehabCare Group, Inc. is a national provider of temporary healthcare
staffing services and physical rehabilitation program management services for
hospitals, nursing homes and other long-term care facilities.
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of the
Company and its wholly owned subsidiaries. All significant intercompany
balances and transactions have been eliminated in consolidation.
ACCOUNTING CHANGE
The Company adopted the provisions of Statement of Position No. 98-5
("SOP 98-5"), REPORTING ON THE COSTS OF START-UP ACTIVITIES on January 1,
1998, which requires that costs of start-up activities be expensed as
incurred. Start-up activities are defined in SOP 98-5 as those one-time
activities related to opening a new facility, introducing a new territory,
conducting business with a new class of customer or beneficiary, initiating a
new process in an existing facility or commencing a new operation.
Previously, the Company capitalized these costs and amortized them over the
term of the contract. The change resulted in a cumulative after-tax charge of
$776,000, $.05 per diluted share, recorded in the quarter ended March 31,
1998.
COMMON STOCK SPLIT
On May 10, 2000, the Company's Board of Directors approved a
two-for-one split of the Company's common stock in the form of a stock
dividend, which was distributed on June 19, 2000, to stockholders of record
as of May 31, 2000. Share and per share amounts in the consolidated financial
statements and accompanying notes have been restated to reflect the split.
CASH EQUIVALENTS AND MARKETABLE SECURITIES
Cash in excess of daily requirements is invested in short-term
investments with original maturities of three months or less. Such
investments are deemed to be cash equivalents for purposes of the
consolidated statements of cash flows.
The Company classifies its debt and equity securities into one of
three categories: held-to-maturity, trading, or available-for-sale.
Management determines the appropriate classification of its investments at
the time of purchase and reevaluates such determination at each balance sheet
date. Investments at December 31, 2000 consist of marketable equity
securities, variable rate municipal bonds and money market securities. All
marketable securities included in current assets are classified as
available-for-sale and as such, the difference between cost and market, net
of estimated taxes, is recorded as other comprehensive earnings. Gain (or
loss) on such securities is not recognized in the consolidated statements of
earnings until the securities are sold. All marketable securities in
non-current assets are
31
classified as trading, with all investment income, including unrealized gains
(or losses) recognized in the consolidated statements of earnings.
CREDIT RISK
The Company provides services primarily to a geographically diverse
clientele of healthcare providers throughout the United States. The Company
performs ongoing credit evaluations of its clientele and does not require
collateral. An allowance for doubtful accounts is maintained at a level which
management believes is sufficient to cover anticipated credit losses.
EQUIPMENT AND LEASEHOLD IMPROVEMENTS
Depreciation and amortization of equipment and leasehold
improvements are computed on the straight-line method over the estimated
useful lives of the related assets, principally: equipment - three to seven
years and leasehold improvements - life of lease or life of asset, whichever
is less.
INTANGIBLE ASSETS
Substantially all the excess of cost over net assets acquired
(goodwill) relates to acquisitions and was amortized on a straight-line basis
over 40 years. Accumulated amortization of goodwill was $12.8 million and
$10.0 million as of December 31, 2000 and 1999, respectively.
The Company assesses the recoverability of goodwill by determining
whether the amortization of the goodwill balance over its remaining life can
be recovered through undiscounted future operating cash flows. The amount of
goodwill impairment, if any, is measured based on projected discounted future
operating cash flows using a discount rate reflecting the Company's average
cost of funds. The assessment of the recoverability of goodwill will be
impacted if estimated future operating cash flows are not achieved. Based
upon its most recent analysis, the Company believes that no impairment of
goodwill exists at December 31, 2000.
DISCLOSURE ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS
The estimated fair market value of the revolving credit facility and
long-term debt (including current portions thereof), approximates carrying
value due to the variable rate features of the instruments. The Company
believes it is not practical to estimate a fair value different from the
carrying value of its subordinated debt as the instruments have numerous
unique features as discussed in note 6.
REVENUES AND COSTS
The Company recognizes revenues and related costs from healthcare
staffing assignments and physical rehabilitation program management services
in the period in which services are performed. Costs related to marketing and
development are expensed as incurred.
INCOME TAXES
Deferred tax assets and liabilities are recognized for temporary
differences between the financial statement carrying amounts of existing
assets and liabilities and their respective tax bases and operating loss and
tax credit carryforwards. Deferred tax assets and liabilities are measured
using enacted tax rates in effect for the year in which those differences are
expected to be recovered or settled.
32
TREASURY STOCK
The purchase of the Company's common stock is recorded at cost. Upon
subsequent reissuance, the treasury stock account is reduced by the average
cost basis of such stock.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management 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. Estimates also affect the reported amounts of revenues and
expenses during the period. Actual results may differ from those estimates.
NEW ACCOUNTING PRONOUNCEMENTS
In December 1999, the Securities and Exchange Commission ("SEC")
released Staff Accounting Bulletin No. 101, REVENUE RECOGNITION IN FINANCE
STATEMENTS. This bulletin, which became effective October 1, 2000, summarized
certain views of the SEC Staff on applying generally accepted accounting
principles to revenue recognition in financial statements.
In March 2000, the Financial Accounting Standards Board ("FASB")
released FASB Interpretation 44, ACCOUNTING FOR CERTAIN TRANSACTIONS
INVOLVING STOCK COMPENSATION, AN INTERPRETATION OF APB OPINION NO. 25. This
interpretation, which became effective on July 1, 2000, clarified the
application of APB Opinion No. 25 for certain issues.
These pronouncements did not have a material effect on the
consolidated financial statements.
RECLASSIFICATIONS
Certain prior years' amounts have been reclassified to conform with
the current year presentation.
(2) ACQUISITIONS
On September 15, 2000, the Company acquired DiversiCare Rehab
Services, Inc., a provider of outpatient therapy to physician groups,
hospitals and school systems. The aggregate purchase price paid at closing
was $8.5 million consisting of $7.5 million in cash and $1.0 million in
subordinated notes. The cash component of the purchase price was funded by
borrowings on the Company's revolving credit facility. Goodwill of
approximately $8.1 million related to the acquisition was amortized over 40
years during 2000.
On May 20, 1999, the Company acquired Salt Lake Physical Therapy
Associates, Inc. ("Salt Lake"), a provider of physical and occupational
therapy and speech/language pathology through hospital contracts, a
freestanding clinic and home health agencies for consideration consisting of
cash, stock and subordinated notes. On June 30, 1999, the Company purchased
AllStaff, Inc. ("AllStaff"), a provider of supplemental nurse staffing to
healthcare providers for consideration consisting of cash, stock and
subordinated notes. On December 20, 1999, the Company acquired eai Healthcare
Staffing Solutions, Inc., a provider of temporary allied healthcare personnel
to hospitals, managed healthcare organizations, laboratories, and physician
offices for consideration consisting of cash and subordinated notes. The
33
aggregate purchase prices for these acquisitions was $16.9 million,
consisting of $11.9 million in cash, 96,866 shares of stock, and $4.2 million
in subordinated notes. Additional consideration of $105,000 was paid to the
former stockholders of Salt Lake in August 2000, based upon the attainment of
certain financial goals. Additional consideration of up to $1.8 million may
be paid to the former stockholders of Salt Lake contingent upon the
attainment of certain financial goals over the next two years. Additional
consideration of $286,000 was paid to the former stockholders of AllStaff
contingent upon the attainment of a minimum target growth in gross profit for
the twelve-month period ended June 30, 2000. The cash component of the
purchase prices was funded by the Company's working capital plus additional
borrowings on its bank credit facility. Goodwill of approximately $15.7
million related to the acquisitions was amortized over 40 years during 2000
and 1999.
On July 31, 1998, the Company acquired Rehabilitative Care Systems
of America, Inc. ("RCSA"), a provider of program outpatient therapy, for
consideration consisting of cash and stock. On August 17, 1998, the Company
acquired StarMed Staffing, Inc. ("StarMed"), a provider of nurse staffing,
and certain related entities for cash from Medical Resources, Inc. On
September 9, 1998, the Company acquired Therapeutic Systems, Ltd., a provider
of contract therapy, for consideration consisting of cash, stock and notes.
The aggregate purchase prices for these acquisitions was $41.2 million,
consisting of $38.0 million in cash, 260,852 shares of stock and $1.0 million
in subordinated notes. An additional $2.0 million in cash consideration in
the purchase of StarMed has been deferred until certain contingencies expire
and is held by a third-party escrow agent. Additional consideration of
$202,000 was paid in 1999 to the former stockholders of RCSA, based upon the
retention of clients. The cash component of the purchase price was funded by
an increase in the Company's bank credit facility. Goodwill of approximately
$32.0 million related to the acquisitions was amortized over 40 years during
2000, 1999 and 1998.
Each of the acquisitions has been accounted for by the purchase
method of accounting, whereby the operating results of the acquired entity
are included in the Company's results of operations commencing on the
respective closing dates of acquisition.
The following unaudited pro forma financial information assumes the
acquisitions occurred as of January 1, 1999. This information is not
necessarily indicative of results of operations that would have occurred had
the purchases actually been made as of January 1, 1999.
YEAR ENDED DECEMBER 31,
-----------------------
2000 1999
---- ----
(in thousands, except per share data)
Operating revenues $457,945 $342,675
Net earnings 23,955 15,638
Net earnings per common and common
equivalent share:
Basic 1.64 1.18
Diluted 1.47 1.07
(3) MARKETABLE SECURITIES
Current marketable securities at December 31, 2000 consist primarily
of variable rate municipal bonds. Noncurrent marketable securities consist
primarily of marketable equity securities ($1.7 million and $1.2 million at
December 31, 2000 and 1999, respectively) and money market securities
($686,000
34
and $554,000 at December 31, 2000 and 1999, respectively) held in trust under
the Company's deferred compensation plan.
(4) ALLOWANCE FOR DOUBTFUL ACCOUNTS
Activity in the allowance for doubtful accounts is as follows:
YEAR ENDED DECEMBER 31,
---------------------------------
2000 1999 1998
---- ---- ----
(in thousands)
Balance at beginning of year $4,577 $ 3,404 $1,338
Provisions for doubtful accounts 3,466 2,743 1,093
Allowance related to acquisitions 471 111 1,720
Accounts written off (3,167) (1,681) (747)
------ ------- ------
Balance at end of year $5,347 $ 4,577 $3,404
====== ======= ======
(5) EQUIPMENT AND LEASEHOLD IMPROVEMENTS
Equipment and leasehold improvements, at cost, consist of the
following:
DECEMBER 31,
------------------
2000 1999
---- -----
(in thousands)
Equipment $20,387 $12,839
Leasehold improvements 1,513 687
------- -------
21,900 13,526
Less accumulated depreciation and amortization 9,473 6,257
------- -------
$12,427 $ 7,269
======= =======
35
(6) LONG-TERM DEBT
Long-term debt consists of the following: DECEMBER 31,
----------------
2000 1999
---- ----
BANK DEBT: (in thousands)
Revolving credit facility - maturing and payable in full on
August 28, 2005 (weighted-average rate of 8.8% at
December 31, 2000) $63,800 $ -
Term facility - repaid on August 29, 2000 - 45,891
Revolving credit facility - repaid on August 29, 2000 - 12,000
SUBORDINATED DEBT:
Notes payable, 6.25% - converted on February 14, 2000 to common stock - 6,000
Note payable, 8% - repaid in full in 2000 - 136
Notes payable, 7% - maturing and payable in full on June 30, 2001 250 500
Notes payable, 6% - maturing and payable in full on July 20, 2001 50 100
Note payable, 8% - maturing and payable in full on August 15, 2001 118 118
Notes payable, 7% - maturing and payable in full on September 15, 2001 1,000 -
Note payable, 8% - maturing and payable in full on December 20, 2001 1,450 2,900
Notes payable, 8% - maturing and payable in full on September 9, 2002 1,000 1,000
Notes payable, 6.5% - maturing and payable in full on May 20, 2003 634 750
------- -------
68,302 69,395
Less current portion 2,868 13,345
------- -------
Total long-term debt $65,434 $56,050
======= =======
Effective August 29, 2000, the Company consummated a $125.0 million
five-year revolving credit facility, replacing its existing $90.0 million
term and revolving credit facility. The interest rates are set based on
either a base rate plus from 0.50% to 1.75% or a Eurodollar rate plus from
1.50% to 2.75%. The base rate is the higher of the Federal Funds Rate plus
.50% or the Prime Rate. The Eurodollar rate is defined as (a) the Interbank
Offered Rate divided by (b) 1 minus the Eurodollar Reserve Requirement. The
Company pays a fee on the unused portion of the commitment from 0.375% to
0.50%. The interest rates and commitment fees vary depending on the ratio of
the Company's indebtedness, net of cash and marketable securities, to cash
flow. Borrowings under the agreement are secured primarily by the Company's
assets and future income and profits. The loan agreement requires the Company
to meet certain financial covenants including maintaining minimum net worth
and fixed charge coverage ratios. The average outstanding borrowings under
the revolving credit facilities for 2000, 1999 and 1998 were $20.0 million,
$1.7 million and $3.5 million at weighted-average interest rates of 8.6%,
7.5% and 7.0% per annum, respectively.
On February 14, 2000, the $6.0 million convertible subordinated
notes payable to the former shareholders of Healthcare Staffing Solutions,
Inc. were converted into Company common stock. The
36
conversion price was $7.08 per share, resulting in the issuance of 847,052
shares of Company common stock. This transaction had no effect on diluted
earnings per share.
The scheduled principal payments of long-term debt at December 31,
2000 are as follows: $2.9 million in 2001, $1.0 million in 2002, $0.6 million
in 2003, $0 in 2004 and $63.8 million in 2005. Interest paid for 2000, 1999
and 1998 was $5.3 million, $3.8 million and $3.6 million, respectively.
(7) STOCKHOLDERS' EQUITY
The Company has various long-term performance plans for the benefit
of employees and nonemployee directors. Under the plans, employees may be
granted incentive stock options or nonqualified stock options and nonemployee
directors may be granted nonqualified stock options. Certain of the plans
also provide for the granting of stock appreciation rights, restricted stock,
performance awards, or stock units. Stock options may be granted for a term
not to exceed 10 years (five years with respect to a person receiving
incentive stock options who owns more than 10% of the capital stock of the
Company) and must be granted within 10 years from the adoption of the
respective plan. The exercise price of all stock options must be at least
equal to the fair market value (110% of fair market value for a person
receiving an incentive stock option who owns more than 10% of the capital
stock of the Company) of the shares on the date of grant. Except for options
granted to nonemployee directors which become fully exercisable after six
months and options granted to management that become exercisable after
achievement of certain stock prices, all remaining stock options become fully
exercisable after four years from date of grant. At December 31, 2000, 1999
and 1998, a total of 1,841,116, 2,085,676 and 553,238 shares, respectively,
were available for future issuance under the plans.
The per share weighted-average fair value of stock options granted
during 2000, 1999 and 1998 was $15.20, $4.88 and $4.28 on the dates of grant
using the Black Scholes option-pricing model with the following
weighted-average assumptions: 2000 - expected dividend yield 0%, volatility
of 55%, risk free interest rate of 5.0% and an expected life of 4 to 6 years;
1999 - expected dividend yield 0%, volatility of 45%, risk free interest rate
of 6.5% and an expected life of 5 to 7 years; 1998 - expected dividend yield
0%, volatility of 40%, risk-free interest rate of 4.7% and an expected life
of 4 to 7 years.
The Company applies Accounting Principles Board Opinion No. 25 and
related Interpretations in accounting for its plans. Accordingly, no
compensation cost has been recognized for its long-term performance and stock
option plans. Had compensation cost for the Company's stock-based
compensation plans been determined based on the fair value at the grant dates
for awards under those plans consistent with the method of Statement of
Financial Accounting Standards ("SFAS") 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:
37
Year Ended December 31,
------------------------------------------
2000 1999 1998
---- ---- ----
(in thousands, except per share data)
Net earnings: As reported $23,534 $15,098 $12,198
Pro forma 21,379 13,407 10,546
Basic earnings per share: As reported 1.62 1.15 .99
Pro forma 1.47 1.02 .85
Diluted earnings per share: As reported 1.45 1.03 .86
Pro forma 1.32 .92 .74
In accordance with SFAS 123, the pro forma net earnings reflects
only options granted subsequent to February 1995 and does not reflect the
full impact of calculating compensation cost for stock options granted prior
to March 1995 that vested in 1999 and 1998.
A summary of the status of the Company's stock option plans as of
December 31, 2000, 1999 and 1998, and changes during the years then ended is
presented below:
2000 1999 1998
---- ---- ----
Weighted-Average Weighted-Average Weighted-Average
Shares Exercise Price Shares Exercise Price Shares Exercise Price
------ -------------- ------ -------------- ------ --------------
Outstanding at
beginning of year 3,890,698 $ 7.30 3,540,298 $6.63 3,851,618 $ 5.50
Granted 457,600 28.76 848,700 9.06 1,667,392 7.77
Exercised (869,019) 5.70 (288,992) 4.70 (1,039,696) 4.38
Forfeited (216,304) 8.81 (209,308) 6.86 (939,016) 13.08
---------- ---------- -----------
Outstanding at
end of year 3,262,975 10.62 3,890,698 7.30 3,540,298 6.63
========= ========= =========
Options exercisable at
end of year 2,199,037 1,968,410 2,123,512
========= ========= =========
The following table summarizes information about stock options
outstanding at December 31, 2000:
Options Outstanding Options Exercisable
--------------------------------------------------- ---------------------------------
Weighted-Average
Range of Number Remaining Weighted-Average Number Weighted-Average
Exercise Prices Outstanding Contractual Life Exercise price Exercisable Exercise price
--------------- ----------- ---------------- -------------- ----------- --------------
$ 2.42 - 4.50 629,673 2.9 years $ 4.24 626,537 $ 4.27
5.33 - 8.97 770,529 6.1 9.22 622,404 5.90
9.22 - 12.94 1,518,173 8.0 10.14 950,096 9.38
20.16 - 42.75 344,600 9.7 34.05 - -
--------- ---------
2.42 - 42.75 3,262,975 6.7 10.62 2,199,037 7.41
========= =========
38
The Board of Directors of the Company declared a dividend
distribution of one preferred stock purchase right (the "Rights") for each
share of the Company's common stock owned as of October 1, 1992, and for each
share of the Company's common stock issued until the Rights become
exercisable. Each Right, when exercisable, will entitle the registered holder
to purchase from the Company one thirty-third of a share of the Company's
Series A junior participating preferred stock, $.10 par value (the "Series A
preferred stock"), at a price of $17.50 per one thirty-third of a share. The
Rights are not exercisable and are transferable only with the Company's
common stock until the earlier of 10 days following a public announcement
that a person has acquired ownership of 15% or more of the Company's
outstanding common stock, or the commencement or announcement of a tender
offer or exchange offer, the consummation of which would result in the
ownership by a person of 15% or more of the Company's outstanding common
stock. The Series A preferred stock will be nonredeemable and junior to any
other series of preferred stock that the Company may issue in the future.
Each share of Series A preferred stock, upon issuance, will have a
preferential dividend in an amount equal to the greater of $1.00 per share or
100 times the dividend declared per share of the Company's common stock. In
the event of the liquidation of the Company, the Series A preferred stock
will receive a preferred liquidation payment equal to the greater of $100 or
100 times the payment made on each share of the Company's common stock. Each
one thirty-third of a share of Series A preferred stock outstanding will have
one vote on all matters submitted to the stockholders of the Company and will
vote together as one class with the holders of the Company's common stock.
In the event that a person acquires beneficial ownership of 15% or
more of the Company's common stock, holders of Rights (other than the
acquiring person or group) may purchase, at the Rights' then current purchase
price, shares of the Company's common stock having a value at that time equal
to twice such exercise price. In the event that the Company merges into or
otherwise transfers 50% or more of its assets or earnings power to any person
after the Rights become exercisable, holders of Rights (other than the
acquiring person or group) may purchase, at the then current exercise price,
common stock of the acquiring entity having a value at that time equal to
twice such exercise price.
39
(8) EARNINGS PER SHARE
The following table sets forth the computation of basic and diluted
earnings per share:
Year Ended December 31,
-------------------------------------
Numerator: 2000 1999 1998
---- ---- ----
(in thousands, except per share data)
Numerator for basic earnings per share -
earnings available to common stockholders
(net earnings) $23,534 $15,098 $12,198
Effect of dilutive securities - after-tax interest on
convertible subordinated promissory notes 28 225 225
------- ------- -------
Numerator for diluted earnings per share -
earnings available to common stockholders
after assumed conversions $23,562 $15,323 $12,423
======= ======= =======
Denominator:
Denominator for basic earnings per share -
weighted-average shares outstanding 14,563 13,144 12,368
Effect of dilutive securities:
Stock options 1,705 823 1,169
Convertible subordinated promissory notes - 847 847
Contingently issuable shares - - 106
------- ------- -------
Denominator for diluted earnings per share -
adjusted weighted-average shares and assumed
conversions 16,268 14,814 14,490
======= ======= =======
Basic earnings per share $ 1.62 $ 1.15 $ .99
======= ======= =======
Diluted earnings per share $ 1.45 $ 1.03 $ .86
======= ======= =======
(9) EMPLOYEE BENEFITS
The Company has an Employee Savings Plan, which is a defined
contribution plan qualified under Section 401(k) of the Internal Revenue
Code, for the benefit of its eligible employees. Employees who attain the age
of 21 and complete twelve consecutive months of employment with a minimum of
1,000 hours worked are eligible to participate in the plan. Each participant
may contribute from 2% to 20% of his or her annual compensation to the plan
subject to limitations on the highly compensated employees to ensure the plan
is nondiscriminatory. Contributions made by the Company to the Employee
Savings Plan were at rates of up to 50% of the first 4% of employee
contributions. Expense in connection with the Employee Savings Plan for 2000,
1999 and 1998 totaled $1,078,000, $817,000 and $681,000, respectively.
The Company maintains a nonqualified deferred compensation plan for
certain employees. Under the plan, participants may defer up to 100% of their
base cash compensation. The amounts are held by a trust in designated
investments and remain the property of the Company until distribution. At
40
December 31, 2000 and 1999, $2.2 million and $1.8 million, respectively, were
payable under the nonqualified deferred compensation plan and approximated
the value of the trust assets owned by the Company.
(10) LEASE COMMITMENTS
The Company leases office space and certain office equipment under
noncancellable operating leases. Future minimum lease payments under
noncancellable operating leases, as of December 31, 2000, that have initial
or remaining lease terms in excess of one year total approximately $3.7
million for 2001, $3.1 million for 2002, $2.4 million for 2003, $2.1 million
for 2004 and $1.5 million for 2005. Rent expense for 2000, 1999 and 1998 was
approximately $3.7 million, $2.3 million and $1.2 million, respectively.
(11) INCOME TAXES
Income taxes consist of the following:
YEAR ENDED DECEMBER 31,
-----------------------------------
2000 1999 1998
---- ---- ----
(in thousands)
Federal - current $12,675 $9,707 $7,922
Federal - deferred 1,045 (1,026) 42
State 1,843 1,248 937
------- ------ ------
$15,563 $9,929 $8,901
======= ====== ======
Deferred tax liability recorded in
stockholders' equity $ 7 $ 5 $ 4
======= ====== ======
A reconciliation between expected income taxes, computed by applying
the statutory Federal income tax rate of 35% to earnings before income taxes,
and actual income tax is as follows:
YEAR ENDED DECEMBER 31,
-------------------------------------
2000 1999 1998
---- ---- ----
(in thousands)
Expected income taxes $13,684 $8,759 $7,656
Tax effect of interest income from municipal
bond obligations exempt from Federal taxation (47) (46) (65)
State income taxes, net of Federal
income tax benefit 1,198 792 609
Tax effect of amortization expense
not deductible for tax purposes 398 295 261
Other, net 330 129 440
------- ------ ------
$15,563 $9,929 $8,901
======= ====== ======
41
The tax effects of temporary differences that give rise to the
deferred tax assets and liabilities are as follows:
DECEMBER 31,
---------------------
2000 1999
---- ----
Deferred tax assets: (in thousands)
Provision for doubtful accounts $1,305 $ 926
Accrued insurance, bonus and
vacation expense 4,555 4,503
Other 1,185 1,395
------ ------
7,045 6,824
------ ------
Deferred tax liabilities:
Goodwill amortization 3,314 2,453
Other 1,363 818
------ ------
4,677 3,271
------ ------
Net deferred tax asset $2,368 $3,553
====== ======
The Company is required to establish a valuation allowance for
deferred tax assets if, based on the weight of available evidence, it is more
likely than not that some portion or all of the deferred tax assets will not
be realized. The ultimate realization of deferred tax assets is dependent
upon the generation of future taxable income during the periods in which
those temporary differences become deductible. Management considers the
scheduled reversal of deferred tax liabilities, projected future taxable
income and tax planning strategies in making this assessment. Based upon the
level of historical taxable income and projections for future taxable income
in the periods which the deferred tax assets are deductible, management
believes that a valuation allowance is not required, as it is more likely
than not that the results of future operations will generate sufficient
taxable income to realize the deferred tax assets.
Income taxes paid by the Company for 2000, 1999 and 1998 were $13.0
million, $10.5 million and $6.5 million, respectively.
(12) INDUSTRY SEGMENT INFORMATION
The Company operates in two product line segments that are managed
separately based on fundamental differences in operations: temporary
healthcare staffing services and physical rehabilitation program management
services. Physical rehabilitation program management services include
inpatient programs (including acute rehabilitation and skilled nursing
units), outpatient programs and contract therapy programs. All of the
Company's services are provided in the United States. Summarized information
about the Company's operations in each industry segment is as follows:
42
Revenues from
Unaffiliated Customers Operating Earnings
--------------------------------------- ------------------------------------
(in thousands) (in thousands)
2000 1999 1998 2000 1999 1998
---- ---- ---- ---- ---- ----
Healthcare staffing $260,100 $148,180 $65,365 $14,822 $ 5,228 $ 2,106
Program management:
Inpatient units 119,963 116,497 111,645 18,296 18,123 16,763
Outpatient programs 42,332 30,677 16,484 7,450 6,238 1,833
Contract therapy 29,979 14,071 13,922 3,621 333 2,629
-------- -------- -------- ------- ------- -------
Total $452,374 $309,425 $207,416 $44,189 $29,922 $23,331
======== ======== ======== ======= ======= =======
Total Assets Depreciation and Amortization
------------------------------------- ----------------------------------
(in thousands) (in thousands)
2000 1999 1998 2000 1999 1998
---- ---- ---- ---- ---- ----
Healthcare staffing $109,911 $92,795 $67,484 $2,813 $1,959 $1,208
Program management:
Inpatient units 66,194 53,822 56,781 2,861 2,460 2,279
Outpatient programs 30,064 20,895 11,842 809 498 251
Contract therapy 22,924 19,752 20,763 390 379 228
-------- -------- -------- ------ ------ ------
Total $229,093 $187,264 $156,870 $6,873 $5,296 $3,966
======== ======== ======== ====== ====== ======
Capital Expenditures
--------------------------------
(in thousands)
2000 1999 1998
---- ---- ----
Healthcare staffing $3,703 $1,733 $ 612
Program management:
Inpatient units 3,931 1,217 1,398
Outpatient programs 63 51 73
Contract therapy 202 42 20
------ ------ ------
Total $7,899 $3,043 $2,103
====== ====== ======
(13) QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
QUARTER ENDED
-----------------------------------------------------------
2000 DECEMBER 31 SEPTEMBER 30 JUNE 30 MARCH 31
---- ----------- ----------- ------- --------
(in thousands, except per share data)
Operating revenues $122,900 $115,820 $107,721 $105,933
Operating earnings 12,014 11,150 10,438 10,587
Earnings before income taxes 10,586 10,002 9,189 9,320
Net earnings 6,372 6,007 5,544 5,611
Net earnings per common share:
Basic .42 .41 .38 .41
Diluted .38 .36 .35 .37
43
QUARTER ENDED
-----------------------------------------------------------
1999 DECEMBER 31 SEPTEMBER 30 JUNE 30 MARCH 31
---- ----------- ------------ ------- --------
(in thousands, except per share data)
Operating revenues $86,902 $79,663 $73,675 $69,185
Operating earnings 8,139 7,991 7,104 6,688
Earnings before income taxes 6,132 7,021 6,188 5,686
Net earnings 3,710 4,233 3,725 3,430
Net earnings per common share:
Basic .28 .32 .28 .26
Diluted .25 .29 .26 .24
The sum of the quarterly earnings per common share may not equal the
full year earnings per common share due to rounding and computational
differences.
44
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
ON ACCOUNTING AND FINANCIAL DISCLOSURE
Not applicable.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Certain information regarding our directors and executive officers
is included in our Proxy Statement for the 2001 Annual Meeting of
Stockholders under the captions "Item 1 - Election of Directors" and
"Compliance with Section 16(a) of the Securities Exchange Act of 1934" and is
incorporated herein by reference.
The following table sets forth the name, age and position of each of
our executive officers. There is no family relationship between any of the
following individuals.
NAME AGE POSITION
- ---- --- ------------------------------------------------------------
Alan C. Henderson................... 55 President, Chief Executive Officer and Director
Maurice Arbelaez.................... 44 President, Staffing
Gregory F. Bellomy.................. 44 President, Contract Therapy
Tom E. Davis........................ 51 President, Inpatient
Gregory J. Eisenhauer............... 42 Senior Vice President, Chief Financial Officer and Secretary
Alfred J. Howard.................... 48 President, Outpatient
Hickley M. Waguespack............... 57 Executive Vice President, Customer Service and Retention
The following paragraphs contain biographical information about our
directors and executive officers.
ALAN C. HENDERSON has been President and Chief Executive Officer and
a director of our company since 1998. Prior to becoming President and Chief
Executive Officer, Mr. Henderson was Executive Vice President, Chief
Financial Officer and Secretary of our company from 1991 through May 1998.
Mr. Henderson also serves as a director of General American Capital Corp.
MAURICE ARBELAEZ has been President of our staffing division since
April 1999 and was Senior Vice President, Operations from August 1994 to
April 1999.
GREGORY F. BELLOMY has been President of our contract therapy
division since September 1998. Prior to joining our company, Mr. Bellomy
served in various capacities, including Division President, Division Vice
President and Area General Manager at TheraTx Incorporated from 1992 to 1997,
at which time TheraTx Incorporated was acquired by Vencor Incorporated. Mr.
Bellomy was National Director of Vencare Ancillary Services for Vencor
Incorporated until he joined our company.
TOM E. DAVIS has been President of our inpatient division since
January 1998. Mr. Davis joined our company in January 1997 as Senior Vice
President, Operations. Prior to joining our company, Mr. Davis was Group Vice
President for Quorum Health Resources, LLC from January 1990 to January 1997.
45
GREGORY J. EISENHAUER has been Senior Vice President, Chief
Financial Officer and Secretary of our company since September 2000. Mr.
Eisenhauer joined our company in 1993 and has served in various management
positions with our company, including Vice President, Finance; Vice
President, Outpatient Operations; Senior Vice President, Acquisitions; and
Senior Vice President, Finance.
ALFRED J. HOWARD has been President of our outpatient division since
August 1996. Prior to joining our company, he served as President of the
Eastern Operations for Pacific Rehabilitation and Sports Medicine from
October 1993 to August 1996.
HICKLEY M. WAGUESPACK has been Executive Vice President, Customer
Service and Retention of our company since January 1998. Prior to his current
position with our company, Mr. Waguespack served as Chief Operating Officer
of our company from March 1995 through December 1997 and as Senior Vice
President, Operations of our company from June 1991 until February 1995.
ITEM 11. EXECUTIVE COMPENSATION
Information regarding executive compensation is included in our
Proxy Statement for the 2001 Annual Meeting of Stockholders under the caption
"Compensation of Executive Officers" and is incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT
Information regarding security ownership of certain beneficial
owners and management is included in our Proxy Statement for the 2001 Annual
Meeting of Stockholders under the captions "Voting Securities and Principal
Holders Thereof" and "Security Ownership by Management" and is incorporated
herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Not applicable.
46
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON
FORM 8-K
(a) The following documents are filed as part of this Annual Report
on Form 10-K:
(1) Financial Statements
Independent Auditors' Report
Consolidated Balance Sheets as of December 31, 2000 and 1999
Consolidated Statements of Earnings for the years ended
December 31, 2000, 1999 and 1998
Consolidated Statements of Stockholders' Equity for the
years ended December 31, 2000, 1999 and 1998
Consolidated Statements of Cash Flows for the years ended
December 31, 2000, 1999 and 1998
Consolidated Statements of Comprehensive Earnings for the
years ended December 31, 2000, 1999 and 1998
Notes to Consolidated Financial Statements
(2) Financial Statement Schedules:
None
(3) Exhibits:
See Exhibit Index on page 50 of this Annual Report on Form
10-K.
(b) Reports on Form 8-K
No reports on Form 8-K were filed by the Registrant during the three
months ended December 31, 2000.
47
SIGNATURES
Pursuant to the requirements of Section 13 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.
Dated: February 28, 2001
REHABCARE GROUP, INC.
(Registrant)
By: /s/ ALAN C. HENDERSON
---------------------
Alan C. Henderson
President and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the date indicated.
SIGNATURE TITLE DATED
- --------- ----- -----
/s/ ALAN C. HENDERSON President, Chief Executive February 28, 2001
- -------------------------------------- Officer and Director
Alan C. Henderson
(Principal Executive Officer)
/s/ GREGORY J. EISENHAUER Senior Vice President, February 28, 2001
- -------------------------------------- Chief Financial Officer and
Gregory J. Eisenhauer Secretary
(Principal Financial Officer)
/s/ JAMES M. DOUTHITT Senior Vice President and February 28, 2001
- -------------------------------------- Chief Accounting Officer
James M. Douthitt
(Principal Accounting Officer)
/s/ WILLIAM G. ANDERSON Director February 28, 2001
- --------------------------------------
William G. Anderson
/s/ RICHARD E. RAGSDALE Director February 28, 2001
- --------------------------------------
Richard E. Ragsdale
/s/ JOHN H. SHORT Director February 28, 2001
- --------------------------------------
John H. Short
/s/ H. EDWIN TRUSHEIM Director February 28, 2001
- --------------------------------------
H. Edwin Trusheim
/s/ COLLEEN CONWAY-WELCH Director February 28, 2001
- --------------------------------------
Colleen Conway-Welch
/s/ THEODORE M. WIGHT Director February 28, 2001
- --------------------------------------
Theodore M. Wight
48
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 Bylaws (filed as Exhibit 3.2 to the Registrant's Registration Statement
on Form S-1, dated May 9, 1991 [Registration No. 33-40467], and
incorporated herein by reference)
4.1 Rights Agreement, dated September 21, 1992, by and between the
Registrant and Boatmen's Trust Company (filed as Exhibit 1 to the
Registrant's Registration Statement on Form 8-A filed September 24,
1992 and incorporated herein by reference)
10.1 1987 Incentive Stock Option and 1987 Nonstatutory Stock Option Plans
(filed as Exhibit 10.1 to the Registrant's Registration Statement on
Form S-1, dated May 9, 1991 [Registration No. 33-40467], and
incorporated herein by reference) *
10.2 Form of Stock Option Agreement (filed as Exhibit 10.2 to the
Registrant's Registration Statement on Form S-1, dated May 9, 1991
[Registration No. 33-40467], and incorporated herein by reference) *
10.3 Employment Agreement with Alan C. Henderson, dated May 1, 1991 (filed
as Exhibit 10.4 to Amendment No. 1 to the Registrant's Registration
Statement on Form S-1, dated June 19, 1991 [Registration No. 33-40467],
and incorporated herein by reference) *
10.4 Form of Termination Compensation Agreement for Alan C. Henderson (filed
as Exhibit 10.6 to the Registrant's Registration Statement on Form S-1,
dated February 18, 1993 [Registration No. 33-58490], and incorporated
herein by reference) *
10.5 Form of Termination Compensation Agreement for other executive officers
(filed as Exhibit 10.7 to the Registrant's Registration Statement on
Form S-1, dated February 18, 1993 [Registration No. 33-58490], and
incorporated herein by reference) *
10.6 Supplemental Bonus Plan (filed as Exhibit 10.8 to the Registrant's
Registration Statement on Form S-1, dated February 18, 1993
[Registration No. 33-58490], and incorporated herein by reference) *
10.7 Deferred Profit Sharing Plan (filed as Exhibit 10.15 to the Registrant's
Registration Statement on Form S-1, dated February 18, 1993
[Registration No. 33-58490], and incorporated herein by reference) *
10.8 RehabCare Executive Deferred Compensation Plan (filed as Exhibit 10.12
to the Registrant's Report on Form 10-K, dated May 27, 1994, and
incorporated herein by reference) *
49
10.9 RehabCare Directors' Stock Option Plan (filed as Appendix A to
Registrant's definitive Proxy Statement for the 1994 Annual Meeting of
Stockholders and incorporated herein by reference) *
10.10 Amended and Restated 1996 Long-Term Performance Plan (filed as
Appendix A to Registrant's definitive Proxy Statement for the 1999
Annual Meeting of Stockholders and incorporated herein by reference) *
10.11 RehabCare Group, Inc. 1999 Non-Employee Director Stock Plan (filed as
Appendix B to Registrant's definitive Proxy Statement for the 1999
Annual Meeting of Stockholders and incorporated herein by reference) *
10.12 Credit Agreement, dated as of August 29, 2000, by and among RehabCare
Group, Inc., as borrower, certain subsidiaries and affiliates of the
borrower, as guarantors, and First National Bank, Firstar Bank, N.A.,
Bank of America, N.A., First Union Securities, Inc., and Banc of
America Securities, LLC (filed as Exhibit 10.1 to Registrant's
Quarterly Report on Form 10-Q for the quarter ended September 30, 2000
and incorporated herein by reference)
10.13 Pledge Agreement, dated as of August 29, 2000, by and among RehabCare
Group, Inc. and Subsidiaries, as pledgors, and Bank of America, N.A.,
as collateral agent, for the holders of the Secured Obligations (filed
as Exhibit 10.1 to Registrant's Quarterly Report on Form 10-Q for the
quarter ended September 30, 2000 and incorporated herein by reference)
10.14 Security Agreement, dated as of August 29, 2000, by and among
RehabCare Group, Inc. and Subsidiaries, as grantors, and Bank of
America, N.A., as collateral agent, for the holders of the Secured
Obligations (filed as Exhibit 10.1 to Registrant's Quarterly Report on
Form 10-Q for the quarter ended September 30, 2000 and incorporated
herein by reference)
13.1 Those portions of the Registrant's Annual Report to Stockholders for
the year ended December 31, 2000 included in response to Items 5 and 6
of this Annual Report on Form 10-K
21.1 Subsidiaries of the Registrant
23.1 Consent of KPMG LLP
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* Management contract or compensatory plan or arrangement.
50