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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2002
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Commission File Number 0-19294
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REHABCARE GROUP, INC.
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(Exact name of Registrant as specified in its charter)
Delaware 51-0265872
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(State or other jurisdiction of (I.R.S. Employer Identification Number)
incorporation or organization)
7733 Forsyth Boulevard, Suite 1700, St. Louis, MO 63105
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(Address of principal executive offices and zip code)
314-863-7422
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(Registrant's telephone number, including area code)
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act
of 1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days.
Yes X No
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Indicate the number of shares outstanding of the Registrant's common stock,
as of the latest practicable date.
Class Outstanding at August 8, 2002
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Common Stock, par value $.01 per share 17,103,735
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REHABCARE GROUP, INC.
Index
Part I. - Financial Information
Item 1. - Condensed Consolidated Financial Statements
Condensed consolidated balance sheets,
June 30, 2002 (unaudited) and December 31, 2001 3
Condensed consolidated statements of earnings for the three
months and six months ended June 30, 2002 and 2001 (unaudited) 4
Condensed consolidated statements of cash flows for the
six months ended June 30, 2002 and 2001(unaudited) 5
Condensed consolidated statements of comprehensive earnings
for the three months and six months ended June 30, 2002
and 2001(unaudited) 6
Notes to condensed consolidated financial statements (unaudited) 7
Item 2. - Management's Discussion and Analysis of Financial
Condition and Results of Operations 11
Part II. - Other Information
Item 1. - Legal Proceedings 17
Item 6. - Exhibits and Reports on Form 8-K 18
Signatures 19
2 of 19
PART 1. - FINANCIAL INFORMATION
Item 1. - Condensed Consolidated Financial Statements
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REHABCARE GROUP, INC.
Condensed Consolidated Balance Sheets
(dollars in thousands, except share and per share data)
June 30, December 31,
2002 2001
---- ----
Assets (unaudited)
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Current assets:
Cash and cash equivalents $ 34,037 $ 18,534
Marketable securities, available-for-sale 16 1,025
Accounts receivable, net of allowance for doubtful
accounts of $6,703 and $5,902, respectively 83,997 91,384
Income taxes receivable -- 2,055
Deferred tax assets 8,750 7,658
Prepaid expenses and other current assets 2,838 2,390
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Total current assets 129,638 123,046
Marketable securities, trading 3,344 2,870
Equipment and leasehold improvements, net 21,334 18,373
Excess cost over net assets acquired, net 101,685 101,685
Other 4,991 4,687
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Total assets $260,992 $250,661
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Liabilities and Stockholders' Equity
------------------------------------
Current liabilities:
Accounts payable $ 1,172 $ 3,567
Accrued salaries and wages 29,884 27,141
Accrued expenses 12,560 14,814
Income taxes payable 220 --
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Total current liabilities 43,836 45,522
Deferred compensation and other long-term
liabilities 3,521 3,043
Deferred tax liabilities 3,513 3,060
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Total liabilities 50,870 51,625
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Stockholders' equity:
Preferred stock, $.10 par value, authorized
10,000,000 shares, none issued and outstanding -- --
Common stock, $.01 par value; authorized 60,000,000
shares, issued 19,774,973 shares and 19,631,789
shares as of June 30, 2002 and December 31,
2001, respectively 198 196
Additional paid-in capital 110,715 109,522
Retained earnings 116,957 107,057
Less common stock held in treasury at cost,
2,302,898 shares as of June 30, 2002 and
December 31, 2001 (17,757) (17,757)
Accumulated other comprehensive earnings 9 18
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Total stockholders' equity 210,122 199,036
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$260,992 $250,661
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See accompanying notes to condensed consolidated financial statements.
3 of 19
REHABCARE GROUP, INC.
Condensed Consolidated Statements of Earnings
(amounts in thousands, except per share data)
(Unaudited)
Three Months Ended Six Months Ended
June 30, June 30,
2002 2001 2002 2001
---- ---- ---- ----
Operating revenues $140,836 $136,871 $279,065 $267,595
Costs and expenses:
Operating expenses 103,623 97,225 206,449 190,258
General and administrative 25,652 24,127 52,578 46,654
Depreciation and amortization 2,035 2,326 3,960 4,448
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Total costs and expenses 131,310 123,678 262,987 241,360
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Operating earnings 9,526 13,193 16,078 26,235
Interest income 105 75 211 137
Interest expense (160) (243) (325) (1,429)
Other income (expense) 1 (1) 4 8
------- ------- ------- -------
Earnings before income taxes 9,472 13,024 15,968 24,951
Income taxes 3,600 5,192 6,068 9,941
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Net earnings $ 5,872 $ 7,832 $ 9,900 $ 15,010
======= ======= ======= =======
Net earnings per common share:
Basic $ 0.34 $ 0.46 $ 0.57 $ 0.92
======= ======= ======= =======
Diluted $ 0.32 $ 0.43 $ 0.54 $ 0.85
======= ======= ======= =======
Weighted-average number of
common shares outstanding:
Basic 17,413 17,008 17,376 16,241
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Diluted 18,298 18,358 18,267 17,748
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See accompanying notes to condensed consolidated financial statements.
4 of 19
REHABCARE GROUP, INC.
Condensed Consolidated Statements of Cash Flows
(dollars in thousands)
(Unaudited)
Six Months Ended
June 30,
2002 2001
---- ----
Cash flows from operating activities:
Net earnings $ 9,900 $ 15,010
Adjustments to reconcile net earnings to net
cash provided by operating activities:
Depreciation and amortization 3,960 4,448
Provision for doubtful accounts 2,239 2,129
Income tax benefit realized on employee
stock option exercises 339 5,249
Change in assets and liabilities:
Accounts receivable, net 5,148 (11,402)
Prepaid expenses and other current assets (448) (81)
Other assets 221 (59)
Accounts payable and accrued expenses (4,649) (3,067)
Accrued salaries and wages 2,743 1,690
Deferred compensation 242 355
Income taxes 1,636 (314)
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Net cash provided by operating
activities 21,331 13,958
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Cash flows from investing activities:
Additions to equipment and leasehold improvements, net (6,322) (4,576)
Purchase of marketable securities (269) (696)
Proceeds from sale/maturities of marketable securities 1,031 401
Other, net (1,124) (829)
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Net cash used in investing activities (6,684) (5,700)
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Cash flows from financing activities:
Repayments on revolving credit facility and
other long term debt, net -- (64,050)
Proceeds from sale of common stock, net -- 49,468
Exercise of stock options 856 3,784
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Net cash provided by (used in)
financing activities 856 (10,798)
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Net increase (decrease) in cash and
cash equivalents 15,503 (2,540)
Cash and cash equivalents at beginning of period 18,534 7,942
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Cash and cash equivalents at end of period $ 34,037 $ 5,402
======= ========
See accompanying notes to condensed consolidated financial statements.
5 of 19
REHABCARE GROUP, INC.
Condensed Consolidated Statements of Comprehensive Earnings
(dollars in thousands)
(Unaudited)
Three Months Ended Six Months Ended
June 30, June 30,
2002 2001 2002 2001
---- ---- ---- ----
Net earnings $ 5,872 $ 7,832 $ 9,900 $ 15,010
Other comprehensive losses net
of tax benefit:
Unrealized holding losses arising
during period on securities
(net of $3 tax benefit) (9) -- (9) --
------- ------- ------- -------
Comprehensive earnings $ 5,863 $ 7,832 $ 9,891 $ 15,010
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See accompanying notes to condensed consolidated financial statements.
6 of 19
REHABCARE GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
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Six Month Periods Ended June 30, 2002 and 2001
(Unaudited)
Note 1. - Basis of Presentation
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The condensed consolidated balance sheets and related condensed
consolidated statements of earnings, cash flows, and comprehensive earnings
contained in this Form 10-Q, which are unaudited, include the accounts of the
Company and its wholly owned subsidiaries. All significant intercompany accounts
and activity have been eliminated in consolidation. In the opinion of
management, all entries necessary for a fair presentation of such financial
statements have been included. These entries consisted only of normal recurring
items. The results of operations for the three months and six months ended June
30, 2002, are not necessarily indicative of the results to be expected for the
fiscal year. Certain prior year amounts have been reclassified to conform with
the current year presentation.
The condensed consolidated financial statements do not include all
information and footnotes necessary for a complete presentation of financial
position, results of operations and cash flows in conformity with accounting
principles generally accepted in the United States of America. Reference is made
to the Company's audited consolidated financial statements and the related notes
as of December 31, 2001 and 2000 and for each of the years in the three-year
period ended December 31, 2001, included in the Annual Report on Form 10-K on
file with the Securities and Exchange Commission, which provide additional
disclosures and a further description of the Company's accounting policies.
Note 2. - New Accounting Pronouncements
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In July 2001, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("Statement") No. 141, "Business
Combinations," and Statement No. 142, "Goodwill and Other Intangible Assets."
Statement No. 141 requires that the purchase method of accounting be used for
all business combinations initiated and completed after June 30, 2001. Statement
No. 141 also specifies certain criteria that intangible assets acquired in a
purchase method business combination must meet to be recognized and reported
apart from goodwill. Statement No. 142 requires that goodwill and intangible
assets with indefinite useful lives no longer be amortized, but instead tested
for impairment at least annually in accordance with the provisions of Statement
No. 142. Statement No. 142 also requires that intangible assets with estimable
useful lives be amortized over their respective estimated useful lives to their
estimated residual values, and reviewed for impairment in accordance with
Statement No. 121, "Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to be Disposed Of." The Company adopted the provisions of
Statement No. 141 in July 2001 and Statement No. 142 on January 1, 2002.
Statement No. 141 requires that upon adoption of Statement No. 142, the Company
evaluate its existing intangible assets and goodwill that were acquired in prior
purchase business combinations, and to make any necessary reclassifications in
order to conform with the new criteria in Statement No. 141 for recognition
apart from goodwill. Upon adoption of Statement No. 142, the Company was
required to reassess the useful lives and residual values of all intangible
assets acquired, and make any necessary amortization period adjustments by the
end of the first quarter of 2002. In addition, to the extent an intangible asset
is identified as having an indefinite life, the Company was required to test the
intangible asset for impairment in accordance with the provisions of Statement
No. 142 within the first quarter of 2002. The Company has tested goodwill and
intangible assets for impairment under the provision of Statement No. 142. These
tests indicated that there was no impairment of goodwill or intangible assets.
As of the date of adoption, the Company had unamortized goodwill in the amount
of $101.7 million and unamortized identifiable intangible assets
7 of 19
REHABCARE GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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in the amount of $0.1 million, all of which are subject to the transition
provisions of Statement No. 141 and Statement No. 142. Under the provisions of
Statement No. 142, for fiscal years beginning after 2001, the Company is no
longer recording amortization expense on goodwill.
As of June 30, 2002, the Company had the following acquired intangible assets
recorded:
Gross Accumulated
Carrying Amount Amortization
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(in thousands)
Amortized Intangible Assets:
Purchased contracts $100 $ 13
Purchased contracts are being amortized straight-line over the average life of
the contracts, which is 46 months.
The following table indicates the effect on net earnings and diluted
earnings per share if Statement No. 142 had been in effect for each of the
periods presented in the Condensed Consolidated Statement of Earnings:
Three Months Ended Six Months Ended
June 30, June 30,
2002 2001 2002 2001
---- ---- ---- ----
(in thousands, except per share data)
Reported net earnings $ 5,872 $ 7,832 $ 9,900 $ 15,010
Add back: goodwill amortization,
net of taxes -- 714 -- 1,411
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Adjusted net earnings $ 5,872 $ 8,546 $ 9,900 $ 16,421
====== ====== ====== ======
Basic net earnings per share:
As reported $ 0.34 $ 0.46 $ 0.57 $0.92
Add back: goodwill amortization,
net of taxes -- 0.04 -- 0.09
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Adjusted basic net earnings per share $ 0.34 $ 0.50 $ 0.57 $ 1.01
====== ====== ====== ======
Diluted net earnings per share:
As reported $ 0.32 $ 0.43 $ 0.54 $ 0.85
Add back: goodwill amortization,
net of taxes -- 0.04 -- 0.08
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Adjusted diluted net earnings per share $ 0.32 $ 0.47 $ 0.54 $ 0.93
====== ====== ====== ======
In October 2001, the FASB issued Statement No. 144 "Accounting for the
Impairment or Disposal of Long-Lived Assets" which supersedes Statement No. 121
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
be Disposed Of." Statement No. 144 also supersedes the accounting and reporting
provisions of APB Opinion No. 30 "Reporting the Results of Operations-Reporting
the Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual
and Infrequently Occurring Events and Transactions." Statement No. 144 is
intended to establish one accounting model for long-lived assets to be disposed
of by sale and to address significant implementation issues. The Company adopted
Statement No. 144 on January 1, 2002. The adoption had no effect on the
condensed consolidated financial statements.
8 of 19
REHABCARE GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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Note 3. - Net earnings per share
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Basic net earnings per share excludes dilution and is computed by dividing
income available to common stockholders by the weighted average common shares
outstanding for the period. Diluted net earnings per share reflects the
potential dilution that could occur if securities or other contracts to issue
common stock were exercised and converted into common stock or resulted in the
issuance of common stock that then shared in the earnings of the entity (as
calculated utilizing the treasury stock method).
The following table sets forth the computation of basic and diluted net earnings
per share:
Three Months Ended Six Months Ended
June 30, June 30,
2002 2001 2002 2001
---- ---- ---- ----
(in thousands, except per share data)
Numerator:
Numerator for basic/diluted net earnings
per share - net earnings available
to common stockholders after
assumed conversions $ 5,872 $ 7,832 $ 9,900 $15,010
====== ====== ====== ======
Denominator:
Denominator for basic net earnings per share -
weighted-average shares outstanding 17,413 17,008 17,376 16,241
Effect of dilutive securities:
Stock options 885 1,350 891 1,507
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Denominator for diluted net earnings per share -
adjusted weighted-average shares 18,298 18,358 18,267 17,748
====== ====== ====== ======
Basic net earnings per share $ 0.34 $ 0.46 $ 0.57 $ 0.92
====== ====== ===== ======
Diluted net earnings per share $ 0.32 $ 0.43 $ 0.54 $ 0.85
====== ====== ===== ======
For the three month and six months ended June 30, 2002, stock options to
purchase 824,151 and 824,408 shares, respectively of the Company's common stock
were not included in the computation of diluted net earnings per share, as the
effect of such stock options would be anti-dilutive.
9 of 19
REHABCARE GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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Note 4. - Industry Segment Information
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The Company operates in two business segments that are managed separately
based on fundamental differences in operations: temporary healthcare staffing
services and therapy program management. Therapy program management includes
inpatient programs (including acute rehabilitation and skilled nursing units),
contract therapy programs and outpatient therapy programs. All of the Company's
services are provided in the United States. Summarized information about the
Company's operations for the three months and six months ended June 30, 2002 and
2001 in each industry segment is as follows:
Three Months Ended Six Months Ended
June 30, June 30,
2002 2001 2002 2001
---- ---- ---- ----
(dollars in thousands)
Revenues from Unaffiliated Customers
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Healthcare staffing $ 70,560 $ 78,067 $141,465 $152,348
Therapy program management:
Inpatient 32,057 30,759 63,826 61,816
Contract therapy 25,607 15,055 49,022 27,395
Outpatient 12,612 12,990 24,752 26,036
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Therapy program management total 70,276 58,804 137,600 115,247
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Total $140,836 $136,871 $279,065 $267,595
======= ======= ======= =======
Operating Earnings (Loss) (1)
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Healthcare staffing $ (333) $ 3,698 $ (1,997) $ 7,564
Therapy program management:
Inpatient 6,677 7,550 12,709 14,852
Contract therapy 2,102 617 3,655 1,096
Outpatient 1,080 1,328 1,711 2,723
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Therapy program management total 9,859 9,495 18,075 18,671
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Total $ 9,526 $ 13,193 $ 16,078 $ 26,235
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(1) Operating earnings for the prior year period have been adjusted to reflect
the corporate expense allocation methodology being utilized in the current
year period. The corresponding restated operating earnings (loss) for the
three months ended September 30, 2001 and December 31, 2001 are as follows:
Three Months Ended Three Months Ended
September 30, December 31,
2001 2001
---- ----
Healthcare staffing $ 4,103 $(10,171)
Therapy program management:
Inpatient 7,669 6,085
Contract therapy 874 1,000
Outpatient 873 299
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Therapy program management total 9,416 7,384
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Total $ 13,519 $ (2,787)
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10 of 19
REHABCARE GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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Note 4. - Industry Segment Information (Continued)
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Three Months Ended Six Months Ended
June 30, June 30,
2002 2001 2002 2001
---- ---- ---- ----
(dollars in thousands)
Depreciation and Amortization
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Healthcare staffing $ 449 $ 822 $ 922 $ 1,591
Therapy program management:
Inpatient 1,132 875 2,179 1,782
Contract therapy 265 255 492 421
Outpatient 189 374 367 654
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Therapy program management total 1,586 1,504 3,038 2,857
------- ------- ------- -------
Total $ 2,035 $ 2,326 $ 3,960 $ 4,448
======= ======= ======= =======
Capital Expenditures
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Healthcare staffing $ 117 $ 525 $ 294 $ 969
Therapy program management:
Inpatient 1,047 688 2,685 1,648
Contract therapy 1,423 413 2,327 1,093
Outpatient 424 282 1,016 866
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Therapy program management total 2,894 1,383 6,028 3,607
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Total $ 3,011 $ 1,908 $ 6,322 $ 4,576
======= ======= ======= =======
As of
June 30,
2002 2001
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Total Assets
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Healthcare staffing $ 96,424 $110,746
Therapy program management:
Inpatient 104,279 71,469
Contract therapy 30,669 26,823
Outpatient 29,620 28,644
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Therapy program management total 164,568 126,936
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Total $260,992 $237,682
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Note 5. - Subsequent Event
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On July 31, 2002, the Company announced that its Board of Directors has
authorized the repurchase of up to 1.7 million shares of its common stock. The
Company expects to repurchase its shares from time to time through open market
purchases or privately negotiated transactions.
Item 2. - Management's Discussion and Analysis of Financial Condition and
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Results of Operations
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This Quarterly Report on Form 10-Q contains forward-looking statements that
are made pursuant to the safe harbor provisions of the Private Securities
Litigation Reform Act of 1995. Forward-looking statements involve known and
unknown risks and uncertainties that may cause the Company's actual results in
future periods to differ materially from forecasted results. These risks and
uncertainties may include, but are not limited to, the effect of certain
corrective actions already taken in supplemental staffing, the timing and
magnitude of volume improvements, new program openings and planned cost
controls, fluctuations in occupancy of the Company's hospital and long-term care
clients, changes in and compliance with governmental reimbursement regulations
11 of 19
REHABCARE GROUP, INC.
Item 2. - Management's Discussion and Analysis of Financial Condition and
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Results of Operations (Continued)
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or policies, inability to attract new client relationships or to retain existing
client relationships, inability to attract operational and professional
employees, adequacy and effectiveness of operating and administrative systems,
litigation risks (including an inability to predict ultimate costs and
liabilities and disruptions to the Company's operations) and general economic
downturn.
Results of Operations
- ---------------------
The Company provides temporary healthcare staffing and therapy program
management services for hospitals and long-term care facilities. The Company
derives its revenue from two business segments: temporary healthcare staffing
services and therapy program management. The Company's temporary healthcare
staffing segment includes both supplemental personnel and traveling personnel
who are typically on 13 week assignments. The Company's therapy program
management segment includes inpatient programs (including acute rehabilitation
and skilled nursing units), contract therapy programs and outpatient therapy
programs.
Three Months Ended Six Months Ended
June 30, June 30,
Operating Statistics: 2002 2001 2002 2001
---- ---- ---- ----
Healthcare staffing:
Average number of staffing branch offices 110.9 108.6 111.6 106.0
Number of weeks worked (supplemental
and travel) 47,103 61,957 95,495 121,327
Average revenue per week worked $ 1,498 $ 1,260 $ 1,481 $ 1,256
Therapy program management:
Inpatient units (acute rehabilitation and
skilled nursing):
Average number of programs 134.4 136.7 134.4 137.4
Average bed capacity 2,710 2,712 2,698 2,718
Average length of stay (admissions/days) 13.4 13.7 13.4 13.8
Patient days 186,206 186,105 371,221 374,681
Admissions 13,879 13,548 27,646 27,182
Total programs in operation at end of
period 138 136 138 136
Contract therapy:
Average number of locations 373.9 230.3 355.6 222.7
Number of locations at end of period 382 240 382 240
Average revenue per location $68,488 $ 65,361 $137,856 $122,755
Outpatient programs:
Average number of programs 55.4 62.7 55.8 63.6
Patient visits 349,264 370,680 703,561 745,688
Units of service 957,880 1,065,197 1,914,829 2,137,826
Total programs in operation at end of period 55 60 55 60
Three Months Ended June 30, 2002 Compared to Three Months Ended June 30, 2001
- -----------------------------------------------------------------------------
REVENUES
Operating revenues during the second quarter of 2002 increased by $3.9
million, or 2.9%, to $140.8 million as compared to $136.9 million in operating
revenues during the second quarter of 2001. Increases in contract therapy and
inpatient were offset by declines in staffing and outpatient.
12 of 19
Staffing revenue decreased by 9.6% from $78.1 million in the second quarter
of 2001 to $70.6 million in the second quarter of 2002. Supplemental staffing
revenues decreased 26.0% from $59.9 million in the second quarter of 2001 to
$44.3 million in the second quarter of 2002, as the Company continued the
management transition initiated in the fourth quarter of 2001 and focused on
placing more highly credentialed staff. A 34.0% decrease in weeks worked from
51,223 in the second quarter of 2001 to 33,789 in the second quarter of 2002 was
partially offset by a 12.2% increase in average revenue per week worked from
$1,169 to $1,312. The increase in average revenue per week worked was primarily
the result of placing more highly credentialed staff such as registered nurses
and licensed practical nurses versus certified nurses assistants as well as
increased bill rates. Travel staffing revenues increased 44.1% from $18.2
million in the second quarter of 2001 to $26.2 million in the second quarter of
2002, reflecting a 24.0% increase in weeks worked from 10,734 in the second
quarter of 2001 to 13,314 in the second quarter of 2002 and a 16.2% increase in
average revenue per week worked from $1,696 to $1,971.
Inpatient program revenue increased by 4.2% from $30.8 million in the
second quarter of 2001 to $32.1 million in the second quarter of 2002. The
increase in revenue was primarily a result of a 4.2% increase in revenue per
patient day. Although admissions per program were also up 4.2% over the prior
year, a 1.7% decline in average number of programs combined with a 2.2% decline
in average length of stay caused total patient days to increase by only 0.1%.
Contract therapy revenue increased by 70.1% from $15.1 million in the
second quarter of 2001 to $25.6 million in the second quarter of 2002,
reflecting a 62.4% increase in the average number of contract therapy locations
managed from 230.3 to 373.9, and a 4.8% increase in revenue per location from
$65,361 to $68,488. The increase in revenue per location is primarily the result
of same store growth and a continued focus on opening larger locations.
Outpatient revenue decreased by 2.9% from $13.0 million in the second
quarter of 2001 to $12.6 million in the second quarter of 2002, reflecting an
11.6% decrease in the average number of outpatient programs managed from 62.7 to
55.4, partially offset by a 9.8% increase in the average revenue per location
from $207,209 to $227,591.
OPERATING EARNINGS
Consolidated operating earnings decreased by 27.8% from $13.2 million in
the second quarter of 2001 to $9.5 million in the second quarter of 2002.
Operating expenses as a percentage of revenues increased from 71.0% in the
second quarter of 2001 to 73.6% in the second quarter of 2002, primarily
reflecting narrower spreads between bill and pay rates in the staffing group and
lower productivity in the therapy program management group. General and
administrative expenses as a percentage of revenue increased from 17.6% in the
second quarter of 2001 to 18.2% in the second quarter of 2002, primarily as a
result of lower revenues in the staffing and outpatient divisions. Depreciation
and amortization as a percentage of revenues decreased from 1.7% in the second
quarter of 2001 to 1.4% in the second quarter of 2002 as a result of the
elimination of goodwill amortization from the adoption of Statement No. 142 on
January 1, 2002. The elimination of goodwill amortization was partially offset
by increased depreciation expense recorded on capital expenditures. The
following discussion by division includes the effect of adjusting the second
quarter of 2001 operating earnings to reflect the current overhead allocation
method being utilized in the second quarter of 2002.
13 of 19
Operating earnings in the staffing group decreased from $3.7 million in the
second quarter of 2001 to a loss of $0.3 million in the second quarter of 2002,
reflecting significant expenses and a decrease in weeks worked associated with
management reorganization and narrower gross profit margins. Gross profit margin
decreased from 26.3% in the second quarter of 2001 to 23.0% in second quarter of
2002, primarily as a result of placing more highly credentialed staff which
deliver greater profitability but less margin. General and administrative
expenses as a percentage of revenues increased from 19.5% in the second quarter
of 2001 to 21.9% in the second quarter of 2002. Depreciation and amortization
expense as a percentage of revenues decreased from 1.1% in the second quarter of
2001 to 0.6% in the second quarter of 2002 as a result of the elimination of
goodwill amortization from the adoption of Statement No. 142.
Inpatient operating earnings decreased 11.6% from $7.5 million in the
second quarter of 2001 to $6.7 million in the second quarter of 2002, reflecting
a decrease in contribution margin from 39.3% to 36.9%, and an increase in
general and administrative expenses as a percent of revenues from 11.7% to
12.3%. The decrease in contribution margin was primarily the result of lower
productivity related to further preparation for the implementation of a
prospective payment system and higher labor costs. Depreciation and amortization
as a percentage of revenues increased from 2.8% in 2001 to 3.5% in 2002, as
depreciation on increased capital expenditures more than offset the elimination
of goodwill amortization related to Statement No. 142.
Contract therapy operating earnings increased 240.7% from $0.6 million in
the second quarter of 2001 to $2.1 million in the second quarter of 2002,
reflecting a 70.1% increase in operating revenues, partially offset by a
decrease in contribution margin from 29.4% to 27.1% as a result of higher labor
costs. General and administrative expenses as a percentage of revenues decreased
from 21.5% to 16.3%, primarily the result of increased revenues. Depreciation
and amortization expense as a percentage of revenues decreased from 1.7% in the
second quarter of 2001 to 1.0% in the second quarter of 2002, reflecting the
elimination of goodwill amortization expense related to Statement No. 142.
Outpatient operating earnings decreased 18.7% from $1.3 million in the
second quarter of 2001 to $1.1 million in the second quarter of 2002, reflecting
a decrease in contribution margin from 29.4% to 26.8% as a result of increased
labor expenses and an increase in general and administrative expenses as a
percentage of revenues from 15.8% to 16.4% due to lower revenues in the
division. Depreciation and amortization expense as a percentage of revenues
decreased from 2.9% in 2001 to 1.5% in 2002, reflecting the elimination of
goodwill amortization expense related to Statement No. 142.
NONOPERATING ITEMS
Interest income increased by $30,000 or 40.0% to $105,000 due to increased
cash balances.
Interest expense decreased by $83,000 or 34.2% from $243,000 in the second
quarter of 2001 to $160,000 in the second quarter of 2002 due to the repayment
of all subordinated debt during the fourth quarter 2001.
Earnings before income taxes decreased by $3.6 million from $13.0 million
in the second quarter of 2001 to $9.5 million in the second quarter of 2002. The
provision for income taxes in the second quarter of 2001 was $5.2 million
compared to $3.6 million in the second quarter of 2002, reflecting effective
income tax rates of 39.9% and 38.0%, respectively. Net earnings decreased by
$2.0 million, or 25.0%, to $5.9 million in the second quarter of 2002 from $7.8
million in the second quarter of 2001. Diluted net earnings per share decreased
by 25.6% from $0.43 in the second quarter of 2001 to $0.32 in the second quarter
of 2002 on a 0.3% decrease in the weighted-average shares outstanding. The
decrease in the weighted-average shares outstanding was attributable primarily
to a decrease in the dilutive effect of stock options resulting from a lower
average stock price.
14 of 19
Six Months Ended June 30, 2002 Compared to Six Months Ended June 30, 2001
- -------------------------------------------------------------------------
REVENUES
Operating revenues during the first six months of 2002 increased by $11.5
million, or 4.3%, to $279.1 million as compared to $267.6 million in operating
revenues during the first six months of 2001. Increases in contract therapy and
inpatient were offset by declines in staffing and outpatient.
Staffing revenue decreased by 7.1% from $152.3 million in the first six
months of 2001 to $141.5 million in the first six months of 2002. Supplemental
staffing revenues decreased 22.9% from $117.2 million in the first six months of
2001 to $90.4 million in the first six months of 2002, as the Company completed
the implementation in the supplemental staffing division of new software and
systems training, database repopulation and management transition initiated in
the fourth quarter of 2001 and focused on placing more highly credentialed
staff. A 31.1% decrease in weeks worked from 100,470 in the first six months of
2001 to 69,192 in the first six months of 2002 was offset by an 11.9% increase
in average revenue per week worked from $1,167 to $1,306. The increase in
average revenue per week worked was primarily the result of an increased focus
on placing more highly credentialed staff such as registered nurses and licensed
practical nurses versus certified nurses assistants and increased bill rates.
Travel staffing revenues increased 45.4% from $35.1 million in the first six
months of 2001 to $51.1 million in the first six months of 2002, reflecting a
26.1% increase in weeks worked from 20,857 in the first six months of 2001 to
26,303 in the first six months of 2002 and a 15.4% increase in average revenue
per week worked from $1,684 to $1,943.
Inpatient program revenue increased by 3.3% from $61.8 million in the first
six months of 2001 to $63.8 million in the first six months of 2002. A 4.2%
increase in revenue per patient day was offset by a 0.9% decrease in patient
days from 374,681 to 371,221. The decline in patients days compared to the prior
year reflects a 4.0% increase in admissions per program offset by the
combination of a 2.2% decline in the average number of programs and a 2.9%
decline in average length of stay.
Contract therapy revenue increased by 78.9% from $27.4 million in the first
six months of 2001 to $49.0 million in the first six months of 2002, reflecting
a 59.7% increase in the average number of contract therapy locations managed
from 222.7 to 355.6, and a 12.3% increase in revenue per location from $122,755
to $137,856. The increase in revenue per location is primarily the result of
same store growth and a continued focus on opening larger locations.
Outpatient revenue decreased by 4.9% from $26.0 million in the first six
months of 2001 to $24.8 million in the first six months of 2002, reflecting a
12.3% decrease in the average number of outpatient programs managed from 63.6 to
55.8, partially offset by an 8.3% increase in the average revenue per location
from $409,459 to $443,422.
OPERATING EARNINGS
Consolidated operating earnings decreased by 38.7% from $26.2 million in
the first six months of 2001 to $16.1 million in the first six months of 2002.
Operating expenses as a percentage of revenues increased from 71.1% in the first
six months of 2001 to 74.0% in the first six months of 2002, primarily
reflecting narrower spread between bill and pay rates in the staffing division
as a result of placing more highly credentialed staff and lower productivity in
the therapy program management division. General and administrative expenses as
a percentage of revenue increased from 17.4% in the first six months of 2001 to
18.8% in the first six months of 2002, primarily a result of lower revenues in
the staffing and outpatient divisions. Depreciation and amortization as a
percentage of revenues decreased from 1.7% in the first six months of 2001 to
1.4% in the first six months of 2002 as a result of the elimination of goodwill
amortization from the adoption of Statement No. 142 on January 1, 2002. The
elimination of goodwill amortization was partially offset by increased
depreciation expense recorded on capital expenditures. The following discussion
by division includes the effect of adjusting the first six months of 2001
operating earnings to reflect the current overhead allocation method being
utilized in the first six months of 2002.
15 of 19
Operating earnings in the staffing group decreased from $7.6 million in the
first six months of 2001 to a loss of $2.0 million in the first six months of
2002, reflecting significant expenses and a decrease in weeks worked associated
with management reorganization, system roll-out and training, and narrower gross
profit margins. Gross profit margin decreased from 26.1% in the first six months
of 2001 to 22.5% in the first six months of 2002 as a result of decreased
productivity in the branches due to systems training and placing more highly
credentialed staff which deliver greater profitability but less margin. General
and administrative expenses as a percentage of revenues increased from 19.1% in
the first six months of 2001 to 22.4% in the first six months of 2002.
Depreciation and amortization expense as a percentage of revenues decreased from
1.0% in the first six months of 2001 to 0.7% in the first six months of 2002 as
a result of the elimination of goodwill amortization from the adoption of
Statement No. 142.
Inpatient operating earnings decreased 14.4% from $14.9 million in the
first six months of 2001 to $12.7 million in the first six months of 2002,
reflecting a decrease in contribution margin from 38.6% to 36.3%, and an
increase in general and administrative expenses as a percent of revenues from
11.8% to 12.8%. The decrease in contribution margin was primarily the result of
lower productivity related to the further preparation for the implementation of
a prospective payment system and higher labor costs. Depreciation and
amortization as a percentage of revenues increased from 2.9% in 2001 to 3.4% in
2002, as depreciation on increased capital expenditures more than offset the
elimination of goodwill amortization related to Statement No. 142.
Contract therapy operating earnings increased 233.5% from $1.1 million in
the first six months of 2001 to $3.7 million in the first six months of 2002,
reflecting a 78.9% increase in operating revenues, partially offset by a
decrease in contribution margin from 30.1% to 27.1% as a result of higher labor
costs. General and administrative expenses as a percentage of revenues decreased
from 22.5% to 17.1%. Depreciation and amortization expense as a percentage of
revenues decreased from 1.5% in the first six months of 2001 to 1.0% in the
first six months of 2002, reflecting the elimination of goodwill amortization
expense related to Statement No. 142.
Outpatient operating earnings decreased 37.2% from $2.7 million in the
first six months of 2001 to $1.7 million in the first six months of 2002,
reflecting a decrease in contribution margin from 28.9% to 26.3% as a result of
increased labor expenses and an increase in general and administrative expenses
as a percentage of revenues from 15.6% to 17.6% due to lower revenues in the
division. Depreciation and amortization expense as a percentage of revenues
decreased from 2.5% in 2001 to 1.5% in 2002, reflecting the elimination of
goodwill amortization expense related to Statement No. 142.
NONOPERATING ITEMS
Interest income increased by $74,000 or 54.0% to $211,000 due to increased
cash balances.
Interest expense decreased by $1.1 million or 77.3% from $1.4 million in
the first six months of 2001 to $0.3 million in the first six months of 2002,
primarily reflecting the repayment of the line of credit debt during March 2001
and the repayment of all subordinated debt during the fourth quarter 2001.
16 of 19
Earnings before income taxes decreased by $9.0 million from $25.0 million
in the first six months of 2001 to $16.0 million in the first six months of
2002. The provision for income taxes in the first six months of 2001 was $9.9
million compared to $6.1 million in the first six months of 2002, reflecting
effective income tax rates of 39.8% and 38.0%, respectively. Net earnings
decreased by $5.1 million, or 34.0%, to $9.9 million in the first six months of
2002 from $15.0 million in the first six months of 2001. Diluted net earnings
per share decreased by 36.5% from $0.85 in the first six months of 2001 to $0.54
in the first six months of 2002 on a 2.9% increase in the weighted-average
shares outstanding. The increase in the weighted-average shares outstanding was
attributable primarily to the secondary equity offering during March 2001, and
stock option grants and exercises, offset by a decrease in the dilutive effect
of stock options resulting from a lower average stock price.
Liquidity and Capital Resources
As of June 30, 2002, the Company had $34.1 million in cash and short-term
investments and a current ratio, the amount of current assets divided by current
liabilities, of 3.0 to 1. Working capital increased by $8.3 million to $85.8
million as of June 30, 2002, compared to $77.5 million as of December 31, 2001.
The increase in working capital is primarily due to working capital generated
from operations.
Net accounts receivable were $84.0 million at June 30, 2002, compared to
$91.4 million at December 31, 2001. The number of days' average net revenue in
net receivables was 54.5 at June 30, 2002, its lowest point in almost four
years, compared to 63.8 at December 31, 2001.
The Company's operating cash flows constitute its primary source of
liquidity and historically have been sufficient to fund its working capital,
capital expenditures, internal business expansion and debt service requirements.
The Company expects to meet its future working capital, capital expenditures,
internal and external business expansion and debt service requirements from a
combination of internal sources and outside financing. The Company has a $125.0
million revolving line of credit expiring in August 2005 with no balance
outstanding as of June 30, 2002, and no other debt obligation. The Company also
has a $1.5 million letter of credit issued to the worker's compensation carrier
as collateral for reimbursement of claims. This letter of credit reduces the
amount the Company may borrow under the lines of credit.
Part II. - Other Information
- ----------------------------
Item 1 - Legal Proceedings
- --------------------------
The Company is subject to various claims and legal actions in the ordinary
course of business. These matters include, without limitation, professional
liability, employee-related matters and inquiries and investigations by
governmental agencies relating to Medicare or Medicaid reimbursement and other
issues.
On May 28, 2002, the Company, H. Edwin Trusheim and Alan C. Henderson were
named as defendants in a complaint filed in the United States District Court for
the Eastern District of Missouri alleging violations of federal securities laws
by the Company. Since that date, four additional suits that are similar in
substance to the first suit have been filed in the same court by different law
firms on behalf of different lead plaintiffs. The actions were brought on behalf
of a proposed class consisting of persons and entities that purchased shares of
the Company's common stock between February 7, 2001 and January 21, 2002. The
cases appear to have been precipitated by a decline in the stock's market price
that occurred after the public announcement of revised earnings expectations for
the fourth quarter of 2001. The Company expects that the initial and
subsequently filed suits will be consolidated into a single action before one
judge. The Company has notified its director and officer liability insurance
carrier of the suits and expects it to provide coverage, including the payment
of defense costs after satisfaction of the deductible by the Company. The
Company and Messrs. Trusheim and Henderson have agreed to be jointly defended in
the action.
17 of 19
In the fourth quarter 2001, the Company and the United States Department of
Labor agreed to settle a suit seeking payment by the Company of unpaid overtime
to certain temporary employees of the staffing division for the period from
January 1, 1998 to October 26, 2001. As required by the Court order implementing
the agreement, the Company completed a self-audit of its wage and hour records
during the relevant period and submitted it to the Department of Labor for its
review. The Company and the Department of Labor have a tentative agreement on
the formula to calculate overtime payments and the Department of Labor is
currently performing a spot audit of the records before approving the final
determination. The Company recorded a $6 million charge in the fourth quarter
2001 relating to the costs associated with these overtime payments and the
self-audit. The Company expects that the calculations will be finalized in the
near future and the actual costs incurred by the Company will not exceed the
reserve amounts.
In addition, the Company's clients may become subject to claims, legal
activities, or governmental inquiries and investigations which may relate to
services provided by the Company. From time to time and depending on the
particular facts and circumstances, the Company may be subject to claims that
the Company has indemnification obligations relating to these matters under the
Company's contracts with its clients. The Company has pending a formal demand
for indemnification by one of the Company's clients for liabilities, including
attorneys' fees and expenses, incurred by the client that allegedly relate to
the Company's services. The claim involves the client's Medicare billing and
cost reporting related to an inpatient rehabilitation unit that the Company
manages at the client facility. It has been reported that the client has settled
a False Claims Act lawsuit related to the indemnification claim, to which the
Company was not a party, with the United States Department of Justice in the
amount of $9,750,000. The Company has denied any indemnification liability based
upon its belief that the Company was not responsible, either contractually or
otherwise, for the alleged inaccuracies in Medicare billing and cost reporting
and that the claim does not arise from the Company's actions or omissions.
Although the Company believes that the indemnification claim lacks any merit, it
is possible that the claim could result in litigation, and the Company cannot
predict the result of the litigation.
Item 6 - Exhibits and Reports on Form 8-K
- -----------------------------------------
(a) Exhibits
See exhibit index
(b) Reports on Form 8-K
None
18 of 19
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
REHABCARE GROUP, INC.
August 12, 2002
By: /s/ James M. Douthitt
----------------------------------
James M. Douthitt
Senior Vice President of Finance and
Chief Accounting Officer
19 of 19
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)
99.1 Certification of periodic financial report pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002, U.S.C. Section 1350.
99.2 Certification of periodic financial report pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002, U.S.C. Section 1350.
_________________________
Exhibit 99.1
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Quarterly Report of RehabCare Group, Inc. (the "Company")
on Form 10-Q for the period ending June 30, 2002 as filed with the Securities
and Exchange Commission on the date hereof (the "Report"), I, Alan C. Henderson,
Chief Executive Officer of the Company, certify, pursuant to 18 U.S.C. Section
1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002,
that:
(1) The Report fully complies with the requirements of section 13(a) or 15(d)
of the Securities Exchange Act of 1934; and
(2) The information contained in the Report fairly presents, in all material
respects, the financial condition and results of operations of the Company.
/s/ Alan C. Henderson
--------------------------------
--------------------------------
Chief Executive Officer of
RehabCare Group, Inc.
August 12, 2002
Exhibit 99.2
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Quarterly Report of RehabCare Group, Inc. (the "Company")
on Form 10-Q for the period ending June 30, 2002 as filed with the Securities
and Exchange Commission on the date hereof (the "Report"), I, James M. Douthitt,
Senior Vice President of Finance and Chief Accounting Officer of the Company,
certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906
of the Sarbanes-Oxley Act of 2002, that:
(1) The Report fully complies with the requirements of section 13(a) or 15(d)
of the Securities Exchange Act of 1934; and
(2) The information contained in the Report fairly presents, in all material
respects, the financial condition and results of operations of the Company.
/s/ James M. Douthitt
------------------------------------
------------------------------------
Senior Vice President of Finance and
Chief Accounting Officer of
RehabCare Group, Inc.
August 12, 2002