Attached files
file | filename |
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EX-31.2 - EX-31.2 - REHABCARE GROUP INC | c64349exv31w2.htm |
EX-32.2 - EX-32.2 - REHABCARE GROUP INC | c64349exv32w2.htm |
EX-31.1 - EX-31.1 - REHABCARE GROUP INC | c64349exv31w1.htm |
EX-32.1 - EX-32.1 - REHABCARE GROUP INC | c64349exv32w1.htm |
Table of Contents
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM
10-Q
þ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended March 31, 2011
OR
o | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to
Commission file number 001-14655
RehabCare
Group, Inc.
(Exact name of Registrant as specified in its charter)
Delaware | 51-0265872 | |
(State of Incorporation) | (I.R.S. Employer Identification No.) |
7733 Forsyth Boulevard, 23rdFloor, St. Louis, Missouri 63105
(Address of principal executive offices and zip code)
(Address of principal executive offices and zip code)
(800) 677-1238
(Registrants telephone number, including area code)
(Registrants 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, and
(2) has been subject to such filing requirements for the past 90 days. Yes þ No o
Indicate by check mark whether the registrant has submitted electronically and posted on its
corporate Web site every Interactive Data File required to be submitted and posted pursuant to Rule
405 of Regulation S-T during the preceding 12 months (or for such shorter period that the
registrant was required to submit and post such files). Yes o No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer,
or a non-accelerated filer or a smaller reporting company.
Large accelerated filer o | Accelerated filer þ | Non-accelerated filer o | Smaller reporting company o | ||||
(Do not check if a smaller reporting company) |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the
Act). Yes o No þ
As of March 31, 2011, there were 25,513,799 outstanding shares of the registrants common stock.
Table of Contents
PART 1. FINANCIAL INFORMATION
Item 1. Condensed Consolidated Financial Statements
REHABCARE GROUP, INC.
Condensed Consolidated Statements of Earnings
(Unaudited; amounts in thousands, except per share data)
Three Months Ended | ||||||||
March 31, | ||||||||
2011 | 2010 | |||||||
Operating revenues |
$ | 364,599 | $ | 321,954 | ||||
Costs and expenses: |
||||||||
Operating |
284,980 | 256,636 | ||||||
Selling, general and administrative |
33,603 | 26,535 | ||||||
Depreciation and amortization |
8,223 | 7,218 | ||||||
Total costs and expenses |
326,806 | 290,389 | ||||||
Operating earnings |
37,793 | 31,565 | ||||||
Interest income |
12 | 18 | ||||||
Interest expense |
(7,468 | ) | (8,500 | ) | ||||
Other income (expense), net |
(14 | ) | 7 | |||||
Equity in net income of affiliate |
163 | 116 | ||||||
Earnings from continuing operations before income taxes |
30,486 | 23,206 | ||||||
Income taxes |
11,024 | 8,941 | ||||||
Earnings from continuing operations, net of tax |
19,462 | 14,265 | ||||||
Gain from discontinued operations, net of tax |
2,968 | 564 | ||||||
Net earnings |
22,430 | 14,829 | ||||||
Net (earnings) loss attributable to noncontrolling
interests |
(1,665 | ) | 164 | |||||
Net earnings attributable to RehabCare |
$ | 20,765 | $ | 14,993 | ||||
Amounts attributable to RehabCare stockholders: |
||||||||
Earnings from continuing operations, net of tax |
$ | 17,797 | $ | 14,429 | ||||
Gain from discontinued operations, net of tax |
2,968 | 564 | ||||||
Net earnings |
$ | 20,765 | $ | 14,993 | ||||
Weighted-average common shares outstanding: |
||||||||
Basic |
24,599 | 24,108 | ||||||
Diluted |
25,025 | 24,655 | ||||||
Basic earnings per share attributable to RehabCare: |
||||||||
Earnings from continuing operations, net of tax |
$ | 0.72 | $ | 0.60 | ||||
Gain from discontinued operations, net of tax |
0.12 | 0.02 | ||||||
Net earnings |
$ | 0.84 | $ | 0.62 | ||||
Diluted earnings per share attributable to RehabCare: |
||||||||
Earnings from continuing operations, net of tax |
$ | 0.71 | $ | 0.59 | ||||
Gain from discontinued operations, net of tax |
0.12 | 0.02 | ||||||
Net earnings |
$ | 0.83 | $ | 0.61 | ||||
See accompanying notes to condensed consolidated financial statements.
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Table of Contents
REHABCARE GROUP, INC.
Condensed Consolidated Balance Sheets
(dollars in thousands, except per share data)
March 31, | December 31, | |||||||
2011 | 2010 | |||||||
(unaudited) | ||||||||
Assets |
||||||||
Current assets: |
||||||||
Cash and cash equivalents |
$ | 33,622 | $ | 23,205 | ||||
Accounts receivable, net of
allowance for doubtful accounts
of $24,953 and $24,273,
respectively |
249,015 | 231,311 | ||||||
Deferred tax assets |
24,094 | 21,034 | ||||||
Other current assets |
11,221 | 14,559 | ||||||
Total current assets |
317,952 | 290,109 | ||||||
Marketable securities, trading |
3,977 | 3,965 | ||||||
Property and equipment, net |
117,386 | 119,591 | ||||||
Goodwill |
567,863 | 559,866 | ||||||
Intangible assets, net |
129,576 | 127,227 | ||||||
Assets held for sale |
| 10,407 | ||||||
Investment in unconsolidated affiliate |
4,924 | 4,913 | ||||||
Other |
18,662 | 19,623 | ||||||
Total assets |
$ | 1,160,340 | $ | 1,135,701 | ||||
Liabilities and Equity |
||||||||
Current liabilities: |
||||||||
Current portion of long-term debt |
$ | 7,791 | $ | 9,116 | ||||
Accounts payable |
15,665 | 16,440 | ||||||
Accrued salaries and wages |
68,478 | 78,863 | ||||||
Income taxes payable |
13,025 | 2,906 | ||||||
Accrued expenses |
72,124 | 65,171 | ||||||
Total current liabilities |
177,083 | 172,496 | ||||||
Long-term debt, less current portion |
365,138 | 381,772 | ||||||
Deferred compensation |
3,929 | 3,958 | ||||||
Deferred tax liabilities |
56,571 | 54,755 | ||||||
Other |
1,550 | 1,737 | ||||||
Total liabilities |
604,271 | 614,718 | ||||||
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 28,902,999 shares and
28,304,789 shares as of March 31,
2011 and December 31, 2010,
respectively |
289 | 283 | ||||||
Additional paid-in capital |
306,151 | 292,078 | ||||||
Retained earnings |
283,206 | 262,441 | ||||||
Less common stock held in
treasury at cost; 4,002,898
shares as of March 31, 2011 and
December 31, 2010 |
(54,704 | ) | (54,704 | ) | ||||
Total stockholders equity |
534,942 | 500,098 | ||||||
Noncontrolling interests |
21,127 | 20,885 | ||||||
Total equity |
556,069 | 520,983 | ||||||
Total liabilities and equity |
$ | 1,160,340 | $ | 1,135,701 | ||||
See accompanying notes to condensed consolidated financial statements.
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Table of Contents
REHABCARE GROUP, INC.
Condensed Consolidated Statements of Comprehensive Income
(Unaudited; amounts in thousands)
Three Months Ended | ||||||||
March 31, | ||||||||
2011 | 2010 | |||||||
Net earnings |
$ | 22,430 | $ | 14,829 | ||||
Other comprehensive income, net of tax |
| | ||||||
Comprehensive income |
22,430 | 14,829 | ||||||
Comprehensive (income) loss attributable to
noncontrolling interests |
(1,665 | ) | 164 | |||||
Comprehensive income attributable to RehabCare |
$ | 20,765 | $ | 14,993 | ||||
See accompanying notes to condensed consolidated financial statements.
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Table of Contents
REHABCARE GROUP, INC.
Condensed Consolidated Statement of Changes in Equity
(Unaudited; amounts in thousands)
Amounts Attributable to RehabCare Stockholders | ||||||||||||||||||||||||
Additional | Non- | |||||||||||||||||||||||
Common | paid-in | Retained | Treasury | controlling | Total | |||||||||||||||||||
stock | capital | earnings | stock | interests | equity | |||||||||||||||||||
Balance, December 31, 2010 |
$ | 283 | $ | 292,078 | $ | 262,441 | $ | (54,704 | ) | $ | 20,885 | $ | 520,983 | |||||||||||
Net earnings |
| | 20,765 | | 1,665 | 22,430 | ||||||||||||||||||
Stock-based compensation |
| 2,016 | | | | 2,016 | ||||||||||||||||||
Activity under stock plans |
6 | 12,057 | | | | 12,063 | ||||||||||||||||||
Distributions to
noncontrolling interests |
| | | | (1,423 | ) | (1,423 | ) | ||||||||||||||||
Balance, March 31, 2011 |
$ | 289 | $ | 306,151 | $ | 283,206 | $ | (54,704 | ) | $ | 21,127 | $ | 556,069 | |||||||||||
See accompanying notes to condensed consolidated financial statements.
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Table of Contents
REHABCARE GROUP, INC.
Condensed Consolidated Statements of Cash Flows
(Unaudited; amounts in thousands)
Three Months Ended, | ||||||||
March 31, | ||||||||
2011 | 2010 | |||||||
Cash flows from operating activities: |
||||||||
Net earnings |
$ | 22,430 | $ | 14,829 | ||||
Reconciliation to net cash provided by operating activities: |
||||||||
Depreciation and amortization |
8,223 | 7,280 | ||||||
Provision for doubtful accounts |
2,798 | 3,124 | ||||||
Equity in net income of affiliate |
(163 | ) | (116 | ) | ||||
Stock-based compensation expense |
2,016 | 596 | ||||||
Income tax benefits from share-based payments |
4,177 | 1,362 | ||||||
Excess tax benefits from share-based payments |
(1,615 | ) | (636 | ) | ||||
Gain on disposal of discontinued operation |
(4,940 | ) | | |||||
Loss (gain) on disposal of property and equipment |
14 | (7 | ) | |||||
Changes in assets and liabilities: |
||||||||
Accounts receivable, net |
(20,502 | ) | (19,149 | ) | ||||
Other current assets |
3,448 | 1,150 | ||||||
Accounts payable |
(775 | ) | (648 | ) | ||||
Accrued salaries and wages |
(10,543 | ) | (8,211 | ) | ||||
Income taxes payable and deferred taxes |
6,973 | 5,143 | ||||||
Accrued expenses |
7,257 | 2,835 | ||||||
Other assets and other liabilities |
1,045 | 959 | ||||||
Net cash provided by operating activities |
19,843 | 8,511 | ||||||
Cash flows from investing activities: |
||||||||
Additions to property and equipment |
(3,140 | ) | (5,241 | ) | ||||
Purchase of marketable securities |
(401 | ) | (395 | ) | ||||
Proceeds from sale/maturities of marketable securities |
510 | 423 | ||||||
Proceeds from disposition of business |
1,953 | | ||||||
Other, net |
71 | 62 | ||||||
Net cash used in investing activities |
(1,007 | ) | (5,151 | ) | ||||
Cash flows from financing activities: |
||||||||
Net change in revolving credit facility |
(1,400 | ) | | |||||
Principal payments on long-term debt |
(16,902 | ) | (1,828 | ) | ||||
Contributions by noncontrolling interests |
| 590 | ||||||
Distributions to noncontrolling interests |
(1,423 | ) | (120 | ) | ||||
Activity under stock plans |
9,691 | 23 | ||||||
Excess tax benefits from share-based payments |
1,615 | 636 | ||||||
Net cash used in financing activities |
(8,419 | ) | (699 | ) | ||||
Net increase in cash and cash equivalents |
10,417 | 2,661 | ||||||
Cash and cash equivalents at beginning of period |
23,205 | 24,690 | ||||||
Cash and cash equivalents at end of period |
$ | 33,622 | $ | 27,351 | ||||
See accompanying notes to condensed consolidated financial statements.
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REHABCARE GROUP, INC.
Notes to Condensed Consolidated Financial Statements
Three Month Periods Ended March 31, 2011 and 2010
(Unaudited)
(1) Basis of Presentation
The condensed consolidated financial statements contained in this Form 10-Q, which are
unaudited, include the accounts of RehabCare Group, Inc. (RehabCare or the Company) and its
wholly and majority owned affiliates. The Company accounts for its investments in less than 50%
owned affiliates using the equity method. All significant intercompany accounts and activity have
been eliminated in consolidation. The results of operations for the three months ended March 31,
2011 are not necessarily indicative of the results to be expected for the fiscal year.
Certain prior year amounts have been reclassified to conform to current year presentation.
Such reclassifications primarily relate to the sale of the Companys 60-bed inpatient
rehabilitation hospital in Miami (the Miami hospital). The Company reclassified its condensed
consolidated statement of earnings for the three months ended March 31, 2010 to show the results of
operations for the Miami hospital as a discontinued operation.
The accompanying condensed consolidated financial statements have been prepared in accordance
with U.S. generally accepted accounting principles (GAAP) for interim financial information and
with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not
include all of the information and footnotes necessary for a complete presentation of financial
position, results of operations and cash flows in conformity with GAAP. In the opinion of
management, all entries necessary for a fair presentation have been included. Reference is made to
the Companys audited consolidated financial statements and the related notes as of December 31,
2010 and 2009 and for each of the years in the three-year period ended December 31, 2010, 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 Companys accounting policies.
On February 7, 2011, the Company and Kindred Healthcare, Inc. (Kindred) entered into an
Agreement and Plan of Merger (the Merger Agreement), providing for the acquisition of the Company
by Kindred. Subject to the terms and conditions of the Merger Agreement, which has been unanimously
approved by the boards of directors of the respective parties, the Company will be merged with and
into Kindred (the Merger), with Kindred surviving the Merger. The consummation of the Merger is
subject to certain conditions, including the adoption by the Company and Kindred stockholders of
the Merger Agreement; receipt of certain licensure and regulatory approvals; Kindreds receipt of
the proceeds of the financing for the transaction; and other customary closing conditions.
The selling, general and administrative expense line in the accompanying consolidated
statement of earnings for the three months ended March 31, 2011 includes $4.8 million of charges
for investment banking, legal and accounting services associated with the Kindred transaction and
related matters.
(2) Critical Accounting Policies and Estimates
The preparation of the consolidated financial statements in conformity with GAAP requires
management to make judgments and estimates that affect the amounts reported in the consolidated
financial statements and accompanying notes. Actual results could differ from those estimates.
Some accounting policies have a significant impact on amounts reported in these financial
statements. A summary of significant accounting policies and a description of accounting policies
that are considered critical may be found in the Companys 2010 Annual Report on Form 10-K, filed
on February 28, 2011.
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Table of Contents
REHABCARE GROUP, INC.
Notes to Condensed Consolidated Financial Statements (Continued)
(3) Stock-Based Compensation
GAAP requires the recognition of compensation expense for all share-based compensation awarded
to employees, net of estimated forfeitures, using a fair-value-based method. Under GAAP, the
grant-date fair value of each award is amortized to expense over the awards vesting period.
Compensation expense associated with share-based awards is included in selling, general and
administrative expense in the accompanying consolidated statements of earnings. Total pre-tax
compensation expense and its related income tax benefit were as follows (in thousands of dollars):
Three Months Ended, | ||||||||
March 31, | ||||||||
2011 | 2010 | |||||||
Share-based compensation expense |
$ | 2,016 | $ | 596 | ||||
Income tax benefit |
759 | 225 |
The Company has various incentive plans that provide long-term incentive and retention awards.
These awards include stock options and restricted stock awards. At March 31, 2011, a total of
approximately 2.1 million shares were available for future issuance under the plans.
Stock Options
No stock options were granted during the three months ended March 31, 2011 and 2010. The
following table provides a summary of stock options outstanding as of March 31, 2011 and changes
during the three-month period then ended:
Weighted- | Weighted-Average | Aggregate | ||||||||||||||
Average | Remaining | Intrinsic | ||||||||||||||
Exercise | Contractual | Value | ||||||||||||||
Stock Options | Shares | Price | Life (yrs) | (millions) | ||||||||||||
Outstanding at January 1, 2011 |
604,868 | $ | 24.33 | |||||||||||||
Granted |
| | ||||||||||||||
Exercised |
(487,485 | ) | 22.11 | |||||||||||||
Forfeited or expired |
(22,583 | ) | 35.73 | |||||||||||||
Outstanding at March 31, 2011 |
94,800 | $ | 33.05 | 1.4 | $ | 0.5 | ||||||||||
Exercisable at March 31, 2011 |
94,800 | $ | 33.05 | 1.4 | $ | 0.5 | ||||||||||
The total intrinsic values of options exercised during the three months ended March 31, 2011
and 2010 were approximately $7.2 million and $0.3 million, respectively. As of March 31, 2011,
all options outstanding were fully vested, and therefore, there was no unrecognized compensation
cost related to nonvested options.
Restricted Stock Awards
In 2006, the Company began issuing restricted stock awards to attract and retain key Company
executives. Nearly all of the awards will vest and be transferred to the participant at the end of
a three-year restriction period provided that the participant has been an employee of the Company
continuously throughout the restriction period. In 2007, the Company also began issuing restricted
stock awards to its
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Table of Contents
REHABCARE GROUP, INC.
Notes to Condensed Consolidated Financial Statements (Continued)
nonemployee directors. Such awards generally vest each quarter over the first four quarters
following the date of grant.
The Companys restricted stock awards have been classified as equity awards under GAAP. New
shares of common stock are issued to satisfy restricted stock award vestings. The Company
generally receives a tax deduction for each restricted stock award equal to the fair market value
of the restricted stock award on the awards vesting date. Upon vesting, the Company may withhold
shares with value equivalent to the minimum statutory withholding tax obligation and then remit
cash to the appropriate taxing authorities. The shares withheld are effectively share repurchases
by the Company as they reduce the number of shares that would have otherwise been issued as a
result of the vesting.
A summary of the status of the Companys nonvested restricted stock awards as of March 31,
2011 and changes during the three-month period ended March 31, 2011 is presented below:
Weighted- | ||||||||
Average | ||||||||
Grant-Date | ||||||||
Nonvested Restricted Stock Awards | Shares | Fair Value | ||||||
Nonvested at January 1, 2011 |
615,417 | $ | 20.11 | |||||
Granted |
152,503 | 35.38 | ||||||
Vested |
(154,222 | ) | 22.04 | |||||
Forfeited |
| | ||||||
Nonvested at March 31, 2011 |
613,698 | $ | 23.42 | |||||
The weighted-average grant-date fair value of restricted stock granted during the three months
ended March 31, 2011 and 2010 was $35.38 and $33.68, respectively. The total fair value of shares
vested during the three months ended March 31, 2011 and 2010 was approximately $3.9 million and
$3.4 million, respectively. As of March 31, 2011, there was approximately $6.3 million of
unrecognized compensation cost related to nonvested restricted stock awards. Excluding the
possible impact of the merger with Kindred, such cost is expected to be recognized over a
weighted-average period of 2.1 years.
(4) Earnings per Share (EPS)
Basic earnings per share excludes dilution and is computed by dividing income available to
RehabCare common stockholders by the weighted average common shares outstanding for the period.
Diluted 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). These potential shares include dilutive stock options and unvested
restricted stock awards.
The following table sets forth the computation of basic and diluted earnings per share
attributable to RehabCare stockholders (in thousands, except per share data). The net earnings
amounts presented below exclude income and losses attributable to noncontrolling interests in
consolidated subsidiaries.
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REHABCARE GROUP, INC.
Notes to Condensed Consolidated Financial Statements (Continued)
Three Months Ended | ||||||||
March 31, | ||||||||
2011 | 2010 | |||||||
Numerator: |
||||||||
Earnings from continuing operations |
$ | 17,797 | $ | 14,429 | ||||
Gain from discontinued operations, net of tax |
2,968 | 564 | ||||||
Net earnings |
$ | 20,765 | $ | 14,993 | ||||
Denominator: |
||||||||
Basic weighted average common shares outstanding |
24,599 | 24,108 | ||||||
Effect of dilutive securities: |
||||||||
stock options and restricted stock awards |
426 | 547 | ||||||
Diluted weighted average common shares
outstanding |
25,025 | 24,655 | ||||||
Basic earnings per common share: |
||||||||
Earnings from continuing operations |
$ | 0.72 | $ | 0.60 | ||||
Gain from discontinued operations, net of tax |
0.12 | 0.02 | ||||||
Net earnings |
$ | 0.84 | $ | 0.62 | ||||
Diluted earnings per common share: |
||||||||
Earnings from continuing operations |
$ | 0.71 | $ | 0.59 | ||||
Gain from discontinued operations, net of tax |
0.12 | 0.02 | ||||||
Net earnings |
$ | 0.83 | $ | 0.61 | ||||
For the three months ended March 31, 2011 and 2010, outstanding stock options totaling
approximately 56,000 and 151,000 potential shares, respectively, were excluded from the calculation
of diluted earnings per share because their effect would have been anti-dilutive.
(5) Investment in Unconsolidated Affiliate
The Company maintains a 40% equity interest in Howard Regional Specialty Care, LLC (HRSC),
which operates a freestanding rehabilitation hospital in Kokomo, Indiana. The Company uses the
equity method to account for its investment in HRSC. The Companys initial investment in HRSC
exceeded the Companys share of the book value of HRSCs stockholders equity by approximately $3.5
million. This excess is being accounted for as equity method goodwill. The carrying value of the
Companys investment in HRSC was approximately $4.9 million at March 31, 2011 and December 31,
2010.
(6) Business Combination
Effective January 1, 2011, the Company acquired all of the outstanding capital stock of Select
Specialty Hospital Northwest Indiana, Inc. (the Northwest Indiana LTACH) from Select Medical
Corporation in exchange for the Companys 60-bed inpatient rehabilitation hospital in Miami. The
Northwest Indiana LTACH is a 70-bed long-term acute care hospital located in Hammond, Indiana. At
closing, Select also paid the Company cash consideration of approximately $2.0 million. The total
value of the transaction has been estimated at approximately $15.0 million. The assets of the
Northwest Indiana LTACH were valued using a discounted cash flows analysis under the income
approach, a Level 3 (as described in Note 12) measurement technique.
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REHABCARE GROUP, INC.
Notes to Condensed Consolidated Financial Statements (Continued)
In connection with the purchase of the Northwest Indiana LTACH, the Company recorded $12.1
million in intangible assets, consisting primarily of goodwill and Medicare provider numbers. All
of the goodwill was assigned to the Companys hospitals segment. All of the goodwill is expected
to be deductible for tax purposes. The Northwest Indiana LTACHs results of operations have been
included in the Companys financial statements prospectively beginning after the date of
acquisition. The Companys statement of earnings for the first quarter of 2011 includes operating
revenues and operating earnings of approximately $5.6 million and $0.6 million, respectively,
related to the Northwest Indiana LTACH.
(7) Intangible Assets
At March 31, 2011 and December 31, 2010, the Company had the following intangible asset
balances (in thousands):
March 31, 2011 | December 31, 2010 | |||||||||||||||
Gross | Gross | |||||||||||||||
Carrying | Accumulated | Carrying | Accumulated | |||||||||||||
Amount | Amortization | Amount | Amortization | |||||||||||||
Amortizing Intangible Assets: |
||||||||||||||||
Noncompete agreements |
$ | 5,110 | $ | (3,274 | ) | $ | 4,710 | $ | (3,078 | ) | ||||||
Customer contracts and relationships |
23,096 | (15,323 | ) | 23,096 | (14,848 | ) | ||||||||||
Trade names |
40,493 | (6,224 | ) | 40,083 | (5,529 | ) | ||||||||||
Medicare exemption |
454 | (454 | ) | 454 | (454 | ) | ||||||||||
Market access assets |
5,720 | (667 | ) | 5,720 | (596 | ) | ||||||||||
Certificates of need |
9,442 | (1,374 | ) | 9,442 | (1,130 | ) | ||||||||||
Lease arrangements |
1,305 | (648 | ) | 1,305 | (578 | ) | ||||||||||
Total |
$ | 85,620 | $ | (27,964 | ) | $ | 84,810 | $ | (26,213 | ) | ||||||
Non-amortizing Intangible Assets: |
||||||||||||||||
Medicare provider numbers |
$ | 71,920 | $ | 68,220 | ||||||||||||
Trade names |
| 410 | ||||||||||||||
$ | 71,920 | $ | 68,630 | |||||||||||||
Certain customer contracts and lease arrangements have contractual provisions that enable
renewal or extension of the assets contractual life. Costs incurred to renew or extend the term
of a recognized intangible asset are expensed in the period incurred.
Amortization expense incurred by continuing operations was approximately $1,752,000 and
$2,126,000 for the three months ended March 31, 2011 and 2010, respectively.
The changes in the carrying amount of goodwill for the three months ended March 31, 2011
follows (in thousands):
SRS (a) | HRS (b) | Hospitals | Total | |||||||||||||
Balance at December 31, 2010 |
$ | 79,419 | $ | 39,715 | $ | 440,732 | $ | 559,866 | ||||||||
Acquisitions |
| | 7,997 | 7,997 | ||||||||||||
Balance at March 31, 2011 |
$ | 79,419 | $ | 39,715 | $ | 448,729 | $ | 567,863 | ||||||||
(a) | Skilled Nursing Rehabilitation Services (SRS). | |
(b) | Hospital Rehabilitation Services (HRS). |
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REHABCARE GROUP, INC.
Notes to Condensed Consolidated Financial Statements (Continued)
(8) Disposition and Discontinued Operation
As discussed in Note 6, the Company completed its transaction with Select Medical Corporation
under which the Company exchanged its Miami hospital for Selects 70-bed long-term acute care
hospital in northwest Indiana. This transaction closed on January 1, 2011. At closing, Select
also paid the Company cash consideration of approximately $2.0 million. The total value of the
transaction has been estimated at approximately $15.0 million. This transaction was the result of
a strategic review of the markets in Miami and northwest Indiana. In connection with this
transaction, the Company recognized a pre-tax gain related to the disposal of the Miami hospital
assets of approximately $4.9 million in the first quarter of 2011.
The Miami hospital had been a component of the Hospital reporting unit since 2005. In
accordance with the requirements of GAAP, the assets and liabilities of the Miami hospital were
reported on the December 31, 2010 consolidated balance sheet as assets and liabilities held for
sale.
The Miami hospital has been classified as a discontinued operation pursuant to GAAP. The
operating results for this discontinued operation are shown in the following table (in thousands).
No interest expense has been allocated.
Three Months Ended | ||||||||
March 31, | ||||||||
2011 | 2010 | |||||||
Operating revenues |
$ | 64 | $ | 5,407 | ||||
Costs and expenses |
217 | 4,496 | ||||||
Operating (loss) gain from discontinued operations |
(153 | ) | 911 | |||||
Gain on disposal of assets of discontinued operations |
4,940 | | ||||||
Income tax expense |
(1,819 | ) | (347 | ) | ||||
Gain from discontinued operations, net of tax |
$ | 2,968 | $ | 564 | ||||
(9) Long-Term Debt
On November 24, 2009, the Company entered into an Amended and Restated Credit Agreement (the
Credit Agreement) with Bank of America, N.A., as administrative agent and collateral agent, and
Banc of America Securities LLC, RBC Capital Markets and BNP Paribas Securities Corp., as joint lead
arrangers. The Credit Agreement provides for a six-year $450 million term loan facility, a
five-year revolving credit facility of $125 million and a swingline subfacility of up to $25
million.
Borrowings under the $125 million revolving credit facility bear interest at the Companys
option at either a base rate or the London Interbank Offering Rate (LIBOR) for one, two, three or
six month interest periods, or a nine or twelve month period if available, plus an applicable
margin percentage. The base rate is the greater of the federal funds rate plus one-half of 1%,
Bank of America N.A.s prime rate or one month LIBOR plus 1%. As of March 31, 2011, there were no
borrowings outstanding under the revolving credit facility.
The term loan facility requires quarterly installments of $1,125,000 with the balance payable
upon the final maturity. In addition, the Company is required to make mandatory principal
prepayments equal to a portion of its consolidated excess cash flow (as defined in the Credit
Agreement) when its consolidated leverage ratio reaches certain levels. Borrowings under the term
loan facility bear interest at either the base rate plus 300 basis points or LIBOR plus 400 basis
points with a LIBOR floor of 200 basis points. As of
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REHABCARE GROUP, INC.
Notes to Condensed Consolidated Financial Statements (Continued)
March 31, 2011, the interest rate under the
term loan facility was 6.0% and the balance outstanding under the
term loan was $369.4 million, which excludes unamortized original issue discount of
approximately $7.2 million.
The Credit Agreement is collateralized by substantially all of the Companys assets. The
Credit Agreement contains certain restrictive covenants that, among other things, limit the
incurrence of additional indebtedness, investments, dividends, transactions with affiliates, asset
sales, acquisitions, mergers and consolidations, liens and encumbrances and other matters
customarily restricted in similar credit facilities. In addition, the Company is required to
maintain a maximum ratio of total funded debt to earnings before interest, taxes, depreciation and
amortization ((EBITDA) as defined in the Credit Agreement), a maximum ratio of senior funded debt
to EBITDA and a minimum ratio of adjusted earnings before interest, taxes, depreciation,
amortization, rent and operating leases ((Adjusted EBITDAR) as defined in the Credit Agreement)
to fixed charges. As of March 31, 2011, the Company was in compliance with all debt covenants.
As of March 31, 2011, the Company had approximately $11.2 million in letters of credit
outstanding to its insurance carriers as collateral for reimbursement of claims. The letters of
credit reduce the amount the Company may borrow under its revolving credit facility. As of March
31, 2011, after consideration of the letters of credit outstanding and the effects of restrictive
covenants, the available borrowing capacity under the revolving credit facility was approximately
$113.8 million.
Certain of the Companys leases that meet the lease capitalization criteria in accordance with
FASB ASC 840-30 have been recorded as an asset and liability at the lower of fair value or the net
present value of the aggregate future minimum lease payments at the inception of the lease.
Interest rates used in computing the net present value of the lease payments ranged from 6.5% to
10.7% and were generally based on the lessees incremental borrowing rate at the inception of the
lease. The balance outstanding for capital lease obligations was approximately $6.2 million at
March 31, 2011 including approximately $3.1 million that is payable within the next twelve months.
(10) Industry Segment Information
The Company operates in the following two reportable business segments, which are managed
separately based on fundamental differences in operations: program management services and
hospitals. Program management services include hospital rehabilitation services (including
inpatient acute and subacute rehabilitation and outpatient therapy programs) and skilled nursing
rehabilitation services (including contract therapy in skilled nursing facilities,
resident-centered management consulting services and staffing services for therapists and nurses).
The Companys hospitals segment owns and operates 30 long-term acute care hospitals and five
inpatient rehabilitation hospitals. Virtually all of the Companys services are provided in the
United States. Summarized information about the Companys operations in each industry segment is
as follows (in thousands):
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REHABCARE GROUP, INC.
Notes to Condensed Consolidated Financial Statements (Continued)
Operating Revenues | Operating Earnings | |||||||||||||||
Three Months Ended, | Three Months Ended, | |||||||||||||||
March 31, | March 31, | |||||||||||||||
2011 | 2010 | 2011 | 2010 | |||||||||||||
Program management: |
||||||||||||||||
Skilled nursing rehabilitation services |
$ | 136,871 | $ | 126,352 | $ | 7,995 | $ | 10,345 | ||||||||
Hospital rehabilitation services |
46,354 | 43,240 | 8,659 | 6,921 | ||||||||||||
Program management total |
183,225 | 169,592 | 16,654 | 17,266 | ||||||||||||
Hospitals |
181,374 | 152,362 | 25,926 | 14,299 | ||||||||||||
Unallocated corporate expenses (1) |
N/A | N/A | (4,787 | ) | | |||||||||||
Total |
$ | 364,599 | $ | 321,954 | $ | 37,793 | $ | 31,565 | ||||||||
Depreciation and | ||||||||||||||||
Amortization | Capital Expenditures | |||||||||||||||
Three Months Ended, | Three Months Ended, | |||||||||||||||
March 31, | March 31, | |||||||||||||||
2011 | 2010 | 2011 | 2010 | |||||||||||||
Program management: |
||||||||||||||||
Skilled nursing rehabilitation
services |
$ | 1,595 | $ | 1,307 | $ | 1,641 | $ | 976 | ||||||||
Hospital rehabilitation services |
576 | 537 | 14 | 55 | ||||||||||||
Program management total |
2,171 | 1,844 | 1,655 | 1,031 | ||||||||||||
Hospitals |
6,052 | 5,374 | 1,485 | 4,210 | ||||||||||||
Total |
$ | 8,223 | $ | 7,218 | $ | 3,140 | $ | 5,241 | ||||||||
Total Assets | ||||||||
March 31, | December 31, | |||||||
2011 | 2010 | |||||||
Program management: |
||||||||
Skilled nursing rehabilitation services |
$ | 201,414 | $ | 196,264 | ||||
Hospital rehabilitation services |
129,632 | 117,548 | ||||||
Program management total |
331,046 | 313,812 | ||||||
Hospitals (2) |
829,294 | 821,889 | ||||||
Total |
$ | 1,160,340 | $ | 1,135,701 | ||||
(1) | Charges for investment banking, legal and accounting services associated with the Kindred transaction and related matters. | |
(2) | Hospital total assets include the carrying value of the Companys equity investment in HRSC. |
(11) Related Party Transactions
The Company purchased air transportation services from 55JS Limited, Co. at an approximate
cost of $169,000 and $205,000 for the three months ended March 31, 2011 and 2010, respectively.
55JS Limited, Co. is owned by the Companys President and Chief Executive Officer, John Short. The
air transportation
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REHABCARE GROUP, INC.
Notes to Condensed Consolidated Financial Statements (Continued)
services are billed to the Company for hourly usage of the 55JS Limited, Co.
plane for Company business at rates which approximate market rates for similar transportation
services.
(12) Fair Value Measurements
At March 31, 2011, the Companys financial instruments consist of cash equivalents, accounts
receivable, marketable securities, accounts payable and long-term debt. The carrying values of
cash equivalents, accounts receivable and accounts payable approximate fair value due to their
relatively short-term nature. The carrying values of long-term debt were $372.9 million and $390.9
million at March 31, 2011 and December 31, 2010, respectively. The fair values of long-term debt
were $380.4 million and $398.7 million at March 31, 2011 and December 31, 2010, respectively, and
are based on the interest rates offered for borrowings with comparable maturities. The Companys
marketable securities (which had a carrying value of $4.0 million at both March 31, 2011 and
December 31, 2010) are recorded at fair value.
The Company uses a three-level fair value hierarchy that categorizes assets and liabilities
measured at fair value based on the observability of the inputs utilized in the valuation: Level 1
- inputs are quoted prices in active markets for the identical assets or liabilities; Level 2 -
inputs other than quoted prices that are directly or indirectly observable through
market-corroborated inputs; and Level 3 inputs are unobservable, or observable but cannot be
market-corroborated, requiring the Company to make assumptions about pricing by market
participants. The following tables set forth information for the Companys financial assets and
liabilities that are measured at fair value on a recurring basis (amounts in thousands):
March 31, 2011 | ||||||||||||||||
Carrying | Fair Value Measurements | |||||||||||||||
Value | Level 1 | Level 2 | Level 3 | |||||||||||||
Trading securities |
$ | 3,977 | $ | 3,977 | $ | | $ | | ||||||||
December 31, 2010 | ||||||||||||||||
Carrying | Fair Value Measurements | |||||||||||||||
Value | Level 1 | Level 2 | Level 3 | |||||||||||||
Trading securities |
$ | 3,965 | $ | 3,965 | $ | | $ | | ||||||||
The Companys nonfinancial assets and liabilities (including property and equipment, goodwill
and other intangible assets) are not measured at fair value on a recurring basis; however, they are
subject to fair value adjustments in certain circumstances, such as when there is evidence that
impairment may exist. No impairment related to these assets was identified in the three months
ended March 31, 2011.
(13) Allowance for Doubtful Accounts
Accounts receivable is reported net of the allowance for doubtful accounts. Activity in the
allowance for doubtful accounts is as follows for the three months ended March 31, 2011 (in
thousands):
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REHABCARE GROUP, INC.
Notes to Condensed Consolidated Financial Statements (Continued)
Balance at January 1, 2011 |
$ | 24,273 | ||
Provisions for doubtful accounts |
2,798 | |||
Accounts written off, net of recoveries |
(2,118 | ) | ||
Balance at March 31, 2011 |
$ | 24,953 | ||
(14) Recently Issued Pronouncements
In October 2009, the FASB issued ASU 2009-13, Multiple-Deliverable Revenue Arrangements.
ASU 2009-13 requires entities to allocate revenue in an arrangement using estimated selling prices
of the delivered goods and services based on a selling price hierarchy. The amendments eliminate
the residual method of revenue allocation and require revenue to be allocated using the relative
selling price method. ASU 2009-13 should be applied on a prospective basis for revenue
arrangements entered into or materially modified in fiscal years beginning on or after June 15,
2010, with early adoption permitted. The Company adopted ASU 2009-13 effective January 1, 2011.
The Companys adoption of ASU 2009-13 did not have a material impact on the Companys consolidated
financial position or results of operations.
In August 2010, the FASB issued ASU 2010-24, Presentation of Insurance Claims and Related
Insurance Recoveries, which addresses the current diversity in practice related to the accounting
by health care entities for medical malpractice claims and similar liabilities and their related
anticipated insurance recoveries. Many health care entities, including the Company, have netted
anticipated insurance recoveries against the related accrued liability. ASU 2010-24 clarifies that
a health care entity should not net insurance recoveries against the related claim liability and
the amount of the claim liability should be determined without consideration of insurance
recoveries. ASU 2010-24 is effective for fiscal years, and interim periods within those years,
beginning after December 15, 2010. The Company adopted ASU 2010-24 effective January 1, 2011. The
Companys adoption of ASU 2010-24 did not have a material impact on the Companys consolidated
financial position or results of operations.
In December 2010, the FASB issued ASU 2010-29, Disclosure of Supplementary Pro Forma
Information for Business Combinations, which addresses the current diversity in practice related
to the disclosure of pro forma information for business combinations. In practice, some preparers,
including the Company, have presented the pro forma information in their comparative financial
statements as if the business combination that occurred in the current reporting period had
occurred as of the beginning of each of the current and prior annual reporting periods. ASU
2010-29 clarifies that an entity should disclose revenue and earnings of the combined entity as
though the business combination that occurred during the current year had occurred as of the
beginning of the comparable prior annual reporting period only. The amendments in ASU 2010-29 are
effective prospectively for business combinations which occur on or after the beginning of the
first fiscal year which begins on or after December 15, 2010. The Company adopted ASU 2010-29
effective January 1, 2011. The Companys adoption of ASU 2010-29 had no impact on the Companys
consolidated financial position or results of operations.
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REHABCARE GROUP, INC.
Item 2. Managements Discussion and Analysis of Financial Condition and Results of
Operations
This Quarterly Report on Form 10-Q contains forward-looking statements that are made pursuant
to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995.
Forward-looking statements involve known and unknown risks and uncertainties that may cause our
actual results in future periods to differ materially from forecasted results. These risks and
uncertainties may include but are not limited to the following items, many of which are described
in Item 1A of our Annual Report on Form 10-K for the year ended December 31, 2010:
| the proposed merger with Kindred Healthcare, Inc. may not be consummated as currently anticipated or at all; | ||
| our ability to attract and the additional costs of attracting and retaining administrative, operational and professional employees; | ||
| shortages of qualified therapists, nurses and other healthcare personnel; | ||
| unionization activities among our employees; | ||
| our ability to effectively respond to fluctuations in our census levels and number of patient visits; | ||
| changes in governmental reimbursement rates and other regulations or policies affecting reimbursement for the services provided by us to clients and/or patients; | ||
| competitive and regulatory effects on pricing and margins; | ||
| our ability to control operating costs and maintain operating margins; | ||
| general and economic conditions impacting us and our clients, including efforts by governmental reimbursement programs, insurers, healthcare providers and others to contain healthcare costs; | ||
| violations of healthcare regulations, including the 60% Rule in inpatient rehabilitation facilities and the 25% Rule and the 25 day average length of stay requirement in long-term acute care hospitals (LTACHs); | ||
| the operational, administrative and financial effect of our compliance with other governmental regulations and applicable licensing and certification requirements; | ||
| our ability to attract new client relationships or to retain and grow existing client relationships through expansion of our service offerings and the development of alternative product offerings; | ||
| our ability to integrate acquisitions and partnering relationships within the expected timeframes and to achieve the revenue, cost savings and earnings levels from such acquisitions and relationships at or above the levels projected; | ||
| our ability to consummate acquisitions and other partnering relationships at reasonable valuations; | ||
| litigation risks of our past and future business, including our ability to predict the ultimate costs and liabilities or the disruption of our operations; | ||
| significant increases in health, workers compensation and professional and general liability costs and our ability to predict the ultimate liability for such costs; | ||
| uncertainty in the financial markets that limits the availability and impacts the terms and conditions of financing, which could impact our ability to consummate acquisitions and meet obligations to third parties; | ||
| our ability to comply with the terms of our borrowing agreements; | ||
| the adequacy and effectiveness of our information systems; | ||
| natural disasters, pandemics and other unexpected events which could severely damage or interrupt our systems and operations; and | ||
| changes in federal and state income tax laws and regulations, the effectiveness of our tax planning strategies and the sustainability of our tax positions. |
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REHABCARE GROUP, INC.
Many of these risks and uncertainties are beyond our control. We undertake no duty to update
these forward-looking statements, even though our situation may change in the future.
Results of Operations
We operate in the following two business segments, which are managed separately based on
fundamental differences in operations: program management services and hospitals. Program
management services include hospital rehabilitation services (including inpatient acute and
subacute rehabilitation and outpatient therapy programs) and skilled nursing rehabilitation
services (including contract therapy in skilled nursing facilities, resident-centered management
consulting services and staffing services for therapists and nurses). Our hospitals segment owns
and operates 30 long-term acute care hospitals (LTACHs) and five inpatient rehabilitation
hospitals (IRFs).
On February 7, 2011, we and Kindred Healthcare, Inc. (Kindred) entered into an Agreement and
Plan of Merger (the Merger Agreement), providing for the acquisition of us by Kindred. Subject to
the terms and conditions of the Merger Agreement, which has been unanimously approved by the boards
of directors of the respective parties, we will be merged with and into Kindred (the Merger),
with Kindred surviving the Merger. The consummation of the Merger is subject to certain
conditions, including the adoption by our and Kindred stockholders of the Merger Agreement; receipt
of certain licensure and regulatory approvals; Kindreds receipt of the proceeds of the financing
for the transaction; and other customary closing conditions.
Effective January 1, 2011, we completed the sale of our 60-bed inpatient rehabilitation
hospital in Miami (the Miami hospital) to Select Medical Corporation in exchange for Selects
70-bed long-term acute care hospital in northwest Indiana. At closing, Select also paid us cash
consideration of approximately $2.0 million. The total value of the transaction has been estimated
at approximately $15.0 million. In connection with this transaction, we recognized a pre-tax gain
related to the disposal of the Miami hospital assets of approximately $4.9 million in the first
quarter of 2011. This transaction was the result of a strategic review of the markets in Miami and
northwest Indiana. The Miami hospital has been classified as a discontinued operation.
Prior year comparative amounts throughout Managements Discussion and Analysis of Financial
Condition and Results of Operations have been adjusted to reflect the treatment of the Miami
hospital as a discontinued operation.
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REHABCARE GROUP, INC.
Selected Operating Statistics:
Three Months Ended | ||||||||
March 31, | ||||||||
2011 | 2010 | |||||||
Program Management: |
||||||||
Skilled Nursing Rehabilitation Services: |
||||||||
Total operating revenues (in thousands) |
$ | 136,871 | $ | 126,352 | ||||
Contract therapy revenues (in thousands) |
$ | 129,772 | $ | 119,691 | ||||
Average number of contract therapy locations |
1,158 | 1,131 | ||||||
Average revenue per contract therapy location |
$ | 112,033 | $ | 105,820 | ||||
Hospital Rehabilitation Services: |
||||||||
Operating revenues (in thousands) |
||||||||
Inpatient |
$ | 33,071 | $ | 31,110 | ||||
Outpatient |
13,283 | 12,130 | ||||||
Total |
$ | 46,354 | $ | 43,240 | ||||
Average number of programs (rounded to the
nearest whole number) |
||||||||
Inpatient |
115 | 114 | ||||||
Outpatient |
29 | 31 | ||||||
Total |
144 | 145 | ||||||
Average revenue per program |
||||||||
Inpatient |
$ | 286,579 | $ | 271,996 | ||||
Outpatient |
$ | 451,976 | $ | 397,717 | ||||
Hospitals: |
||||||||
Operating revenues (in thousands) |
$ | 181,374 | $ | 152,362 | ||||
Number of LTACHs at end of period |
30 | 28 | ||||||
Number of IRFs at end of period |
5 | 5 |
Three Months Ended March 31, 2011 Compared to Three Months Ended March 31, 2010
Operating Revenues
Consolidated operating revenues during the first quarter of 2011 increased by approximately
$42.6 million, or 13.2%, to $364.6 million compared to $322.0 million in the first quarter of
2010. The revenue increase reflects growth in each of our business units.
Skilled nursing rehabilitation services (SRS) operating revenues increased $10.5 million or
8.3% in the first quarter of 2011 compared to the first quarter of 2010. This increase is
primarily attributable to a 2.4% increase in the average number of contract therapy locations
operated and a 9.9% increase in same store contract therapy revenues in the first quarter of 2011
as compared to the first quarter of 2010. SRS operated 1,178 contract therapy programs as of
March 31, 2011 compared to 1,125 as of March 31, 2010. Medicare Part B revenues and minutes
increased by 19.9% and 10.9%, respectively, in the first quarter of 2011 as compared to the first
quarter of 2010. Medicare Part B revenues and minutes for the first quarter of 2010 were
negatively impacted by the elimination of the Part B therapy cap exception process during the
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REHABCARE GROUP, INC.
months of January and February 2010. See Regulatory and Legislative Update for the current
status of the Part B therapy cap exception process.
Hospital rehabilitation services (HRS) operating revenues increased by $3.1 million or 7.2%
in the first quarter of 2011 compared to the first quarter of 2010 as inpatient revenue increased
by 6.3% and outpatient revenue increased by 9.5%. The increase in inpatient revenue in the first
quarter of 2011 was primarily due to a 0.9% increase in the average number of inpatient programs
operated and a 5.4% increase in average revenue per program. The increase in average revenue per
program reflects same store inpatient rehabilitation facility (IRF) revenue and discharge growth
of 5.4% and 5.3%, respectively, compared to the first quarter of 2010. HRS operated 105 IRF
programs as of March 31, 2011 compared to 103 as of March 31, 2010. The increase in outpatient
revenue in the first quarter of 2011 reflects a 13.6% increase in average revenue per program due
to a 9.2% increase in outpatient same store revenues, a 6.7% increase in same store outpatient
units of service and a change in contract mix. The average number of outpatient units operated
declined by 3.6% in the first quarter of 2011 compared to the first quarter of 2010.
Hospital segment operating revenues increased by $29.0 million or 19.0% from $152.4 million
in the first quarter of 2010 to $181.4 million in the first quarter of 2011. The increase in
revenue reflects the January 2011 acquisition of an LTACH in Hammond, Indiana, the May 2010
certification of an LTACH in Peoria, Illinois and the April 2010 opening of our Houston Heights
LTACH. Same store revenues increased by $13.2 million or 8.7% in the first quarter of 2011 as
compared to the first quarter of 2010. Same store revenue growth in the first quarter of 2011
reflects a 5.1% increase in same store patient discharges and an improvement in case management.
Costs and Expenses
Three Months Ended March 31, | ||||||||||||||||
2011 | 2010 | |||||||||||||||
% of | % of | |||||||||||||||
Amount | Revenue | Amount | Revenue | |||||||||||||
(dollars in thousands) | ||||||||||||||||
Consolidated costs and expenses: |
||||||||||||||||
Operating expenses |
$ | 284,980 | 78.2 | % | $ | 256,636 | 79.7 | % | ||||||||
Selling, general and administrative |
33,603 | 9.2 | 26,535 | 8.2 | ||||||||||||
Depreciation and amortization |
8,223 | 2.2 | 7,218 | 2.3 | ||||||||||||
Total costs and expenses |
$ | 326,806 | 89.6 | % | $ | 290,389 | 90.2 | % | ||||||||
Operating expenses decreased as a percentage of revenues primarily as a result of improved
operating performance by our hospitals segment, particularly our LTACHs. This impact was
partially offset by an increase in SRSs operating expenses as explained below. Selling, general
and administrative expenses in the first quarter of 2011 include approximately $4.8 million of
charges for investment banking, legal and accounting services associated with the Kindred
transaction and related matters. These charges have not been allocated to any of our business
units.
The Companys provision for doubtful accounts is included in operating expenses. On a
consolidated basis, the provision for doubtful accounts decreased by $0.3 million from $3.1
million in the first quarter of 2010 to $2.8 million in the first quarter of 2011. Our HRS
business accounted for most of the decrease in the provision for doubtful accounts in the first
quarter of 2011.
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REHABCARE GROUP, INC.
Three Months Ended March 31, | ||||||||||||||||
2011 | 2010 | |||||||||||||||
% of Unit | % of Unit | |||||||||||||||
Amount | Revenue | Amount | Revenue | |||||||||||||
(dollars in thousands) | ||||||||||||||||
Skilled Nursing Rehabilitation Services: |
||||||||||||||||
Operating expenses |
$ | 114,500 | 83.7 | % | $ | 103,333 | 81.8 | % | ||||||||
Selling, general and administrative |
12,781 | 9.3 | 11,367 | 9.0 | ||||||||||||
Depreciation and amortization |
1,595 | 1.2 | 1,307 | 1.0 | ||||||||||||
Total costs and expenses |
$ | 128,876 | 94.2 | % | $ | 116,007 | 91.8 | % | ||||||||
Hospital Rehabilitation Services: |
||||||||||||||||
Operating expenses |
$ | 32,754 | 70.7 | % | $ | 31,155 | 72.1 | % | ||||||||
Selling, general and administrative |
4,365 | 9.4 | 4,627 | 10.7 | ||||||||||||
Depreciation and amortization |
576 | 1.2 | 537 | 1.2 | ||||||||||||
Total costs and expenses |
$ | 37,695 | 81.3 | % | $ | 36,319 | 84.0 | % | ||||||||
Hospitals: |
||||||||||||||||
Operating expenses |
$ | 137,726 | 75.9 | % | $ | 122,148 | 80.2 | % | ||||||||
Selling, general and administrative |
11,670 | 6.4 | 10,541 | 6.9 | ||||||||||||
Depreciation and amortization |
6,052 | 3.4 | 5,374 | 3.5 | ||||||||||||
Total costs and expenses |
$ | 155,448 | 85.7 | % | $ | 138,063 | 90.6 | % | ||||||||
Total SRS costs and expenses increased as a percentage of unit revenue in the first quarter
of 2011 compared to the first quarter of 2010. Direct operating expenses increased as a
percentage of unit revenue as an 8.5% increase in labor and benefit costs per minute of service
more than offset the increase in average contract therapy revenue per minute. Therapist
productivity continued to be negatively impacted by both the rollout of our new point of service
technologies to several hundred of our units and a shift away from concurrent therapy to therapy
in individual settings. This shift to therapy in individual settings began in September 2010 in
anticipation of reimbursement rule changes on concurrent therapy that went into effect on October
1, 2010. The increase in selling, general and administrative expenses reflects an increase in
stock-based compensation and incentive expenses. Depreciation and amortization expense increased
primarily due to the implementation of new point of service technologies. SRSs operating
earnings declined from $10.3 million in the first quarter of 2010 to $8.0 million in the first
quarter of 2011.
Total HRS costs and expenses declined as a percentage of unit revenue in the first quarter of
2011 compared to the first quarter of 2010. Operating expenses decreased as a percentage of unit
revenue in the current quarter reflecting a decrease in the provision for doubtful accounts, flat
fixed operating expenses and higher revenues. Labor and benefit costs remained flat as a
percentage of total HRS revenue. Selling, general and administrative expenses decreased primarily
as a result of business development restructuring activities completed in the first quarter of
2010. As a result of these factors and the increase in revenue, HRSs operating earnings
increased from $6.9 million in the first quarter of 2010 to $8.7 million in the first quarter of
2011.
Total hospital segment costs and expenses as a percentage of unit revenue decreased from the
first quarter of 2010 to the first quarter of 2011 reflecting the improved operating performance
of our LTACH hospitals, driven by higher patient census which resulted in our overall LTACH
occupancy rate increasing from 63% in the first quarter of 2010 to 69% in the first quarter of
2011, and improved leverage of selling, general and administrative expenses. Combined start-up
and ramp-up losses decreased from $1.3 million in the first quarter of 2010 to none in the first
quarter of 2011. The 2010 losses primarily relate to the start-up of our LTACH in Peoria,
Illinois. Selling, general and administrative expenses decreased as a percentage of
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REHABCARE GROUP, INC.
unit revenue largely due to synergies generated by the Triumph acquisition and from
improvements in fixed overhead leverage. Depreciation and amortization expense remained
relatively flat as a percentage of revenue. The hospital segment generated operating earnings of
$25.9 million in the first quarter of 2011 compared to operating earnings of $14.3 million in the
first quarter of 2010.
Non-Operating Items
Interest expense decreased from $8.5 million in the first quarter of 2010 to $7.5 million in
the first quarter of 2011 primarily due to a reduction in the average total debt outstanding. The
balances outstanding on all forms of indebtedness were $380.2 million, $398.5 million and $462.3
million at March 31, 2011, December 31, 2010, and March 31, 2010, respectively. These balances
exclude unamortized original issue discounts. Interest expense includes interest incurred on all
borrowings, amortization of deferred loan origination fees, amortization of original issue
discounts, commitment fees paid on the unused portion of our line of credit and fees paid on
outstanding letters of credit.
Earnings from continuing operations before income taxes were $30.5 million in the first
quarter of 2011 compared to $23.2 million in the first quarter of 2010. The provision for income
taxes was $11.0 million in the first quarter of 2011 compared to $8.9 million in the first quarter
of 2010. The provision for income taxes as a percentage of income before taxes less net earnings
attributable to noncontrolling interests was 38.2% in the first quarter of 2011 as compared to
38.3% in the first quarter of 2010.
The Company recorded gains from discontinued operations, net of tax, of $3.0 million and $0.6
million during the three months ended March 31, 2011 and 2010, respectively. These gains relate to
the Miami hospital, which was sold in the first quarter of 2011. See Note 8 to the condensed
consolidated financial statements for additional information.
Net earnings (losses) attributable to noncontrolling interests in consolidated subsidiaries
were $1.7 million in the first quarter of 2011 and $(0.2) million in the first quarter of 2010.
The change of approximately $1.9 million reflects improved earnings at most jointly owned
hospitals, most significantly at certain LTACHs in the Houston market and our LTACHs in Peoria and
Kansas City.
Net earnings attributable to RehabCare were $20.8 million in the first quarter of 2011
compared to $15.0 million in the first quarter of 2010. Diluted earnings per share attributable
to RehabCare were $0.83 in the first quarter of 2011 and $0.61 in the first quarter of 2010.
Liquidity and Capital Resources
As of March 31, 2011, we had $33.6 million in cash and cash equivalents, and a current ratio
(the amount of current assets divided by current liabilities) of approximately 1.8 to 1. Net
working capital increased by $23.3 million to $140.9 million at March 31, 2011 as compared to
$117.6 million at December 31, 2010. Net accounts receivable were $249.0 million at March 31, 2011
compared to $231.3 million at December 31, 2010. The increase in net accounts receivable occurred
primarily in our SRS and hospital businesses. The number of days sales outstanding in net
receivables was 61.6 and 61.9 at March 31, 2011 and December 31, 2010, respectively.
We generated cash from operations of $19.8 million and $8.5 million in the three months ended
March 31, 2011 and 2010, respectively. The increase in cash from operations was primarily due to
the increase in net earnings. Capital expenditures were $3.1 million and $5.2 million in the three
months ended March 31, 2011 and 2010, respectively. Our capital expenditures primarily relate to
leasehold improvements and equipment purchases for new hospitals, investments in information
technology systems, equipment additions and replacements and various other capital improvements.
The Company expects total capital
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expenditures for the second quarter of 2011 to approximate $6.0 million. Actual amounts spent
will be dependent upon the timing of individual projects.
The Company has historically financed its operations with funds generated from operating
activities and borrowings under credit facilities and long-term debt instruments. We believe our
cash on hand, cash generated from operations and availability under our revolving credit facility
will be sufficient to meet our future working capital, capital expenditures, internal and external
business expansion, and debt service requirements.
On November 24, 2009, we entered into a Credit Agreement (as defined in Note 9 to our
accompanying consolidated financial statements). The Credit Agreement provides for a five-year
revolving credit facility of $125 million and a swingline subfacility of up to $25 million. As of
March 31, 2011, there were no borrowings outstanding under the revolving credit facility. As of
March 31, 2011, we had $11.2 million in letters of credit issued to insurance carriers as
collateral for reimbursement of claims. The letters of credit reduce the amount we may borrow
under the revolving credit facility. As of March 31, 2011, after consideration of the letters of
credit outstanding and the effects of restrictive covenants, the available borrowing capacity under
the revolving credit facility was approximately $113.8 million.
The Credit Agreement also provided for a six-year $450 million term loan facility. At March
31, 2011, the balance outstanding under the term loan was $369.4 million. The term loan facility
requires quarterly installments of approximately $1.1 million with the balance payable upon the
final maturity. In addition, we are required to make mandatory principal prepayments equal to a
portion of our consolidated excess cash flow (as defined in the Credit Agreement) when our
consolidated leverage ratio reaches certain levels.
The Credit Agreement contains certain restrictive covenants that, among other things, limit
the incurrence of additional indebtedness, investments, dividends, transactions with affiliates,
asset sales, acquisitions, mergers and consolidations, liens and encumbrances and other matters
customarily restricted in similar credit facilities. In addition, we are required to maintain on a
consolidated basis a maximum ratio of total funded debt to earnings before interest, taxes,
depreciation and amortization (EBITDA as defined in the Credit Agreement), a maximum ratio of
senior funded debt to EBITDA and a minimum ratio of adjusted earnings before interest, taxes,
depreciation, amortization, rent and operating lease expense (Adjusted EBITDAR as defined in the
Credit Agreement) to fixed charges. As of March 31, 2011, we were in compliance with all debt
covenants. If we anticipate a potential covenant violation, we would seek relief from our lenders;
however, such relief might not be granted or might be granted on terms less favorable than those in
our existing Credit Agreement.
Regulatory and Legislative Update
As of January 1, 2006, certain limits or caps on the amount of reimbursement for therapy
services provided to Medicare Part B patients came into effect. Beginning January 1, 2011, the
annual therapy caps are $1,870 for occupational therapy and a combined cap of $1,870 for physical
and speech therapy. Prior to January 1, 2010, most of our Medicare Part B patients qualified for
an automatic exception to these caps due to their clinical complexities. However, the therapy cap
exception process expired on January 1, 2010. On March 2, 2010, the President signed HR 4961, a
short term extension for a number of expiring provisions. Contained in this bill was a
retro-active extension of the Medicare Part B therapy cap exception process from January 1, 2010
through June 30, 2010. As part of the Patient Protection and Affordable Care Act (PPACA), the
therapy cap exception process was extended another six months. In December 2010, the President
signed a bill further extending the therapy cap exception process through December 31, 2011.
Unless legislation is enacted to extend the exception process, therapy caps will return beginning
on January 1, 2012.
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REHABCARE GROUP, INC.
To participate in Medicare, inpatient rehabilitation facilities (such as those operated by
our hospital division and managed in our HRS division) must satisfy what is now known as the 60%
Rule. The rule requires that 60% of patients fall within thirteen specific diagnostic categories.
We continue to monitor the regulatory environment for any new rules that could affect this
statute.
The 2007 Medicare, Medicaid and SCHIP Extension Act (MMSEA or 2007 SCHIP Extension Act)
established a three-year moratorium, which was scheduled to end on December 31, 2010, on the
establishment or classification of any new LTACH facilities, any satellite facilities and
increases in bed capacity at existing LTACHs. MMSEA also provided regulatory relief for a three
year period to LTACHs to ensure continued access to current long-term acute care hospital
services. Specifically, until after cost reporting periods beginning on or after July 1, 2010,
MMSEA prevented CMS from implementing a new payment provision for short stay outlier cases,
provided that the so-called 25% Rule would not be applied to freestanding LTACHs and grandfathered
LTACHs such as the one we operate in New Orleans and provided that the phase-in of the 25% Rule
for admissions from hospitals co-located with an LTACH or LTACH satellite would be frozen at the
50% level. The 25% Rule limits LTACH prospective payment system paid admissions from a single
referral source to 25%. Admissions beyond the 25% threshold would be paid using lower inpatient
PPS rates. PPACA further delayed implementation of the 25% Rule to no sooner than cost reporting
periods beginning July 1, 2012.
The Medicare program is administered by contractors and fiscal intermediaries. Under the
authority granted by CMS, certain fiscal intermediaries have issued local coverage determinations
that are intended to clarify the clinical criteria under which Medicare reimbursement is
available. Certain local coverage determinations attempt to require evidence of a greater level of
medical necessity for patients to receive post acute services. Those local coverage
determinations have been used by fiscal intermediaries to deny admission or reimbursement for some
patients in our hospital rehabilitation services and hospital divisions. Where appropriate, we
and our clients appeal such denials and many times are successful in overturning the original
decision of the fiscal intermediary.
The Medicare Modernization Act of 2003 directed CMS to create a program using independent
recovery audit contractors (RACs) to collect improper Medicare overpayments. The RAC program,
which began with a demonstration pilot in three states, has now been expanded to all 50 states.
We will continue to challenge and appeal any claims that we believe have been inappropriately
denied.
Medicare reimbursement for outpatient rehabilitation services is based on the lesser of the
providers actual charge for such services or the applicable Medicare physician fee schedule
amount established by CMS. This reimbursement system applies regardless of whether the therapy
services are furnished in a hospital outpatient department, a skilled nursing facility, an
assisted living facility, a physicians office, or the office of a therapist in private practice.
The physician fee schedule is subject to change from year to year. In December 2010, the
President signed a bill extending the current physician fee schedule through December 31, 2011.
Failure to enact further legislation will result in a 28-30% reduction in rates beginning on
January 1, 2012.
On November 2, 2010, CMS issued its final rule on an existing payment policy called the
Multiple Procedure Payment Reduction for most Medicare Part B therapy services. This policy
addresses one of the larger components of the procedural billing code for all therapy procedures
that follow the first procedure. The final rule will result in a 25% reduction in reimbursement
of practice expenses for secondary procedures when multiple therapy services are provided on the
same day. This negative impact was partially offset by an 8-9% increase in practice expense
relative value unit reimbursement. We estimate that the final rule will have a gross negative
annual impact on operating earnings of approximately $5 to $6 million in our skilled nursing
rehabilitation services (SRS) division. After mitigation, we believe that the net impact will
be $2
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REHABCARE GROUP, INC.
to $3 million in 2011. The SRS division derives approximately one-third of its revenues from
Medicare Part B. The impact on our other divisions is not expected to be material.
On April 1, 2011, CMS released proposed rules for Accountable Care Organizations (ACOs).
While ACOs appear to be an integral part of PPACA, the rule stipulates little regarding post-acute
care, with the majority of the attention given to acute care hospitals and physicians. The company
will continue to monitor the rule and its future impact to post-acute care.
In
late April 2011, CMS issued proposed payment rules for inpatient rehabilitation facilities and
long-term acute care hospitals for federal fiscal year 2012. We are currently evaluating the
impact of these proposed rules, but we do not anticipate the impact of the rules as proposed to be
material to our business.
On April 28, 2011, CMS issued the proposed payment rule for skilled nursing facilities for federal fiscal year 2012. The proposal includes:
1) | two different options being considered for the net payment rate update: |
a. | a 2.7% market basket update less a 1.2% productivity adjustment, for a net increase of 1.5%; or | ||
b. | a net 11.3 % reduction in rates through a parity adjustment on RUGs IV; |
2) | changes in group therapy rules; and | ||
3) | technical changes to the patient assessment process including the Minimum Data Set (MDS). |
While the final rule, which we
expect to be issued in late July or early August, could differ from the proposed rule, we are evaluating the potential
impact on our business should the rule go effective as proposed. We are also developing strategies to ensure continued patient
access to clinically appropriate care and to optimize business performance.
Critical Accounting Policies and Estimates
The preparation of our consolidated financial statements in conformity with U.S. generally
accepted accounting principles requires us to make estimates and assumptions that affect the
reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at
the date of the financial statements and the reported amounts of revenues and expenses during the
reporting period. Our significant accounting policies, including the use of estimates, were
presented in the notes to consolidated financial statements included in our 2010 Annual Report on
Form 10-K, filed on February 28, 2011.
Critical accounting policies are those that are considered most important to the presentation
of our financial condition and results of operations, require managements most difficult,
subjective and complex judgments, and involve uncertainties. Our most critical accounting
policies pertain to business combinations, allowance for doubtful accounts, contractual
allowances, goodwill and other intangible assets and health, workers compensation and professional
liability insurance accruals. Each of these critical accounting policies was discussed in our
2010 Annual Report on Form 10-K in the Critical Accounting Policies and Estimates section of Item
7. Managements Discussion and Analysis of Financial Condition and Results of Operations.
There were no significant changes in the application of critical accounting policies during the
first three months of 2011.
Item 3. Quantitative and Qualitative Disclosures About Market Risks
The Companys primary market risk exposure consists of changes in interest rates on certain
borrowings that bear interest at floating rates. Interest rate changes on variable rate debt
impact our interest expense and cash flows, but do not impact the fair value of the underlying debt
instruments. Borrowings under our revolving credit facility bear interest at our option at either a
base rate or the London Interbank Offering Rate (LIBOR) for one, two, three or six month interest
periods, or a nine or twelve month period if available, plus an applicable margin percentage. The
base rate is the greater of the federal funds rate plus one-half of 1%, Bank of America N.A.s
prime rate or one month LIBOR plus 1%. The applicable margin percentage is based upon our
consolidated total leverage ratio. As of March 31, 2011, there was no balance outstanding under
the revolving credit facility.
Borrowings under our term loan facility bear interest at our option at either the base rate
plus 300 basis points or LIBOR plus 400 basis points with a LIBOR floor of 200 basis points. As
of March 31, 2011, the balance outstanding against the term loan facility was $369.4 million. At
March 31, 2011, the term loan facility was subject to a one-month LIBOR contract and the one-month
LIBOR rate was 0.25% resulting in an all-in interest rate of 6.0% due to the 2.0% LIBOR floor and
the 400 basis point margin. Based on the $369.4 million of term loan debt outstanding at March 31,
2011, a 100 basis point increase in the one-month LIBOR rate would result in no additional interest
expense (as a result of the LIBOR floor). A 200 basis point
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REHABCARE GROUP, INC.
increase in the LIBOR rate would result in additional interest expense of approximately $0.9
million on an annualized basis.
Item 4. Controls and Procedures
As of March 31, 2011, the Companys management, with the participation of the Chief Executive
Officer and Chief Financial Officer, have conducted an evaluation of the effectiveness of the
design and operation of the Companys disclosure controls and procedures (as defined in Rule
13a-14(c) and 15d-14(c) under the Securities Exchange Act of 1934, as amended). Based on that
evaluation, the Companys Chief Executive Officer and Chief Financial Officer have concluded that
the Companys disclosure controls and procedures are effective in making known in a timely fashion
material information required to be filed in this report. There have been no changes in the
Companys internal controls over financial reporting during the quarter ended March 31, 2011 that
have materially affected, or are reasonably likely to materially affect, the Companys internal
control over financial reporting.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
RehabCare is aware of five purported class actions (of which three filed in the Court of
Chancery have been consolidated into one purported class action) filed by purported stockholders
of RehabCare relating to the proposed merger of RehabCare into Kindred and against RehabCare,
RehabCares directors and Kindred. The complaints allege, among other things, that RehabCares
directors breached their fiduciary duties to the RehabCare stockholders, and that RehabCare and
Kindred aided and abetted RehabCares directors in such alledge breaches of their fiduciary
duties. The plaintiffs seek injunctive relief preventing the defendants from consummating the
transactions contemplated by the Merger Agreement, rescission of such transactions and attorneys
fees and expenses. RehabCare, Kindred and the other defendants believe that the lawsuits are
without merit and intend to defend against them.
In the ordinary course of our business, we are a party to a number of other claims and
lawsuits, as both plaintiff and defendant, which we regard as immaterial. From time to time, and
depending upon the particular facts and circumstances, we may be subject to indemnification
obligations under our various contracts. We do not believe that any liability resulting from such
matters, after taking into consideration our insurance coverage and amounts already provided for,
will have a material effect on our consolidated financial position or overall liquidity; however,
such matters, or the expense of prosecuting or defending them, could have a material effect on
cash flows and results of operations in a particular quarter or fiscal year as they develop or as
new issues are identified.
Item 1A. Risk Factors
For information regarding risk factors, please refer to the Companys 2010 Annual Report on
Form 10-K. There were no material changes in the Companys risk factors in the first three months
of 2011.
Item 6. Exhibits
See exhibit index
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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. | ||||
April 29, 2011 |
||||
By: | /s/ Jay W. Shreiner | |||
Jay W. Shreiner | ||||
Executive Vice President, Chief Financial Officer |
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EXHIBIT INDEX
3.1
|
Restated Certificate of Incorporation (filed as Exhibit 3.1 to the Registrants 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 Registrants Quarterly Report on Form 10-Q for the quarter ended May 31, 1995 and incorporated herein by reference) | |
3.3
|
Certificate of Amendment of Restated Certificate of Incorporation (filed as Exhibit 3.1 to the Registrants Current Report on Form 8-K dated November 9, 2009 and incorporated herein by reference) | |
3.4
|
Amended and Restated Bylaws, dated October 30, 2007 (filed as Exhibit 3.1 to the Registrants Current Report on Form 8-K dated October 31, 2007 and incorporated herein by reference) | |
31.1
|
Certification by Chief Executive Officer in accordance with Rule 13a-14(a) under the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 | |
31.2
|
Certification by Chief Financial Officer in accordance with Rule 13a-14(a) under the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 | |
32.1
|
Certification by Chief Executive Officer in accordance with 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 | |
32.2
|
Certification by Chief Financial Officer in accordance with 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 |
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