-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, DhOso84zUOIqbwRbBRbWj1O/vGk3tDENLzDWO8xnvBUfEifAtaCPkYpzQ8Ovu1dM ln6iQIcpXZqJZ6hR/zRvSg== 0000812191-98-000013.txt : 19981027 0000812191-98-000013.hdr.sgml : 19981027 ACCESSION NUMBER: 0000812191-98-000013 CONFORMED SUBMISSION TYPE: 8-K/A PUBLIC DOCUMENT COUNT: 1 CONFORMED PERIOD OF REPORT: 19981023 ITEM INFORMATION: FILED AS OF DATE: 19981026 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: REHABCARE GROUP INC CENTRAL INDEX KEY: 0000812191 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-HOSPITALS [8060] IRS NUMBER: 510265872 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 8-K/A SEC ACT: SEC FILE NUMBER: 000-19294 FILM NUMBER: 98730252 BUSINESS ADDRESS: STREET 1: 7733 FORSYTH BLVD 17TH FLR STREET 2: SUITE 1700 CITY: ST LOUIS STATE: MO ZIP: 63105 BUSINESS PHONE: 3148637422 FORMER COMPANY: FORMER CONFORMED NAME: REHABCARE CORP DATE OF NAME CHANGE: 19940218 8-K/A 1 REHABCARE GROUP, INC. FORM 8-K 1 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 ---------------------------------- AMENDMENT NO. 1 ON FORM 8-K/A CURRENT REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 Date of Report (Date of earliest event reported): August 14, 1998 REHABCARE GROUP, INC. (Exact name of registrant as specified in its charter) Delaware 0-19294 51-0265872 (State or other (Commission File (I.R.S. Employer jurisdiction of Number) Identification organization) Number) 7733 Forsyth Boulevard 17th Floor St. Louis, Missouri 63105 (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: (314) 863-7422 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- 2 Item 7. Financial Statements, Pro Forma Financial Information and Exhibits Historical and Pro Forma Financial Statements - The following sets forth the historical financial statements of StarMed Staffing, Inc., a Delaware corporation ("StarMed"), and the unaudited pro forma financial information of RehabCare Group, Inc. ("RehabCare"), showing the effect of the consummation of the acquisition by RehabCare through its indirect wholly-owned subsidiary, Healthcare Staffing Solutions, Inc., of 100% of the issued and outstanding shares of StarMed. The consummation of the acquisition and details with regard thereto were reported by RehabCare in its Current Report on Form 8-K dated August 14, 1998, but the audited financial statements of StarMed and the unaudited pro forma financial information were not available at such time. (a) Historical Financial Statements of Business Acquired - The following historical financial statements of StarMed are filed herewith: Report of Independent Certified Public Accountants Combined Balance Sheets, December 31, 1997 and 1996 Combined Statements of Income(Loss), Years Ended December 31, 1997 and 1996 Combined Statements of Changes in Stockholder's Equity, Years Ended December 31, 1997 and 1996 Combined Statements of Cash Flows, Years Ended December 31, 1997 and 1996 Notes to Combined Financial Statements Condensed Combined Balance Sheet, June 30, 1998 (Unaudited) Condensed Combined Statements of Earnings, Six Months Ended June 30, 1998 and 1997(Unaudited) Condensed Combined Statement of Cash Flows, Six Months Ended June 30, 1998 (Unaudited) Notes to Condensed Combined Financial Statements (Unaudited) (b) Pro Forma Financial Information - The following pro forma combined financial statements of RehabCare showing the effect of the acquisition are filed herewith: Pro Forma Condensed Combined Balance Sheet as of June 30, 1998 (Unaudited) Pro Forma Condensed Combined Statement of Earnings for the Six Months Ended June 30, 1998 (Unaudited) Pro Forma Condensed Combined Statement of Earnings for the Year Ended December 31, 1997 (Unaudited) Notes to Unaudited Pro Forma Condensed Combined Financial Statements (Unaudited) (c) Exhibits -The following exhibits are filed herewith: 23.1 Consent of Ernst & Young LLP. 2 3 REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS The Boards of Directors StarMed Staffing, Inc. and Wesley Medical Resources, Inc. We have audited the accompanying combined balance sheets of StarMed Staffing, Inc. and Affiliate (collectively, the Companies) (wholly-owned subsidiaries of Medical Resources, Inc.) as of December 31, 1997 and 1996, and the related combined statements of income (loss), changes in stockholder's equity, and cash flows for the years then ended. These financial statements are the responsibility of the Companies' management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the combined financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the combined financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the combined financial position of StarMed Staffing, Inc. and Affiliate at December 31, 1997 and 1996, and the combined results of their operations and their cash flows for the years then ended in conformity with generally accepted accounting principles. The accompanying combined financial statements have been prepared assuming that the Companies will continue as going concerns. As more fully described in Note 1, the Companies are wholly-owned subsidiaries of Medical Resources, Inc. (the Parent). On a consolidated basis, Medical Resources, Inc. reported a net loss of approximately $32,000,000 for its year ended December 31, 1997 and, has a working capital deficiency of approximately $58,000,000. In addition, the Parent has not complied with the terms and conditions of certain of its loan agreements. These conditions raise substantial doubt about the Parent's ability to continue as a going concern. Because of the aforementioned conditions relating to Medical Resources, Inc. and the uncertainties surrounding its plans to address its liquidity problems, the Parent's actions could have a substantial effect on the Companies' assets; therefore, there is also substantial doubt about whether the Companies will continue as going concerns. The accompanying combined financial statements of the Companies do not include any adjustments to reflect the possible future effects on the recoverability and classification of assets or the amounts and classification of liabilities that may result from the outcome of this uncertainty. /s/ Ernst & Young LLP Tampa, Florida March 20, 1998, except for Note 13, as to which the date is August 14, 1998 3 4 StarMed Staffing, Inc. and Affiliate (Wholly-Owned Subsidiaries of Medical Resources, Inc.) Combined Balance Sheets
December 31 1997 1996 ----------------------------- Assets Current assets: Cash $ 454,642 $ 89,088 Accounts and notes receivable, net of allowance for doubtful accounts of $476,764 and $36,814 in 1997 and 1996, respectively 12,656,838 5,894,668 Prepaid expenses and other current assets 278,682 219,208 Deferred income taxes 155,882 18,288 ------------------------------ Total current assets 13,546,044 6,221,252 Accounts receivable with extended terms 181,000 - Furniture, fixtures and equipment, net 427,760 274,508 Goodwill, net of accumulated amortization of $1,551,917 and $1,043,737, respectively 10,271,358 8,008,206 Other assets 37,100 - Deferred income taxes 93,415 - ------------------------------ Total assets $24,556,677 $14,503,966 ============================== Liabilities and stockholder's equity Current liabilities: Notes payable $ 3,743,915 $ - Due to Parent 4,000,000 - Accounts payable and accrued expenses 1,464,080 931,807 Accrued payroll and related liabilities 764,734 139,221 Current portion of long-term debt 850,258 1,274,569 ------------------------------ Total current liabilities 10,822,987 2,345,597 Due to Parent 6,356,277 4,863,119 Long-term debt 2,827,318 3,635,165 Stockholder's equity: Common stock 10 10 Additional paid-in capital 3,245,301 3,245,301 Retained earnings 1,304,784 414,774 ------------------------------ Total stockholder's equity 4,550,095 3,660,085 ------------------------------ Total liabilities and stockholder's equity $24,556,677 $14,503,966 ============================== See accompanying notes.
4 5 StarMed Staffing, Inc. and Affiliate (Wholly-Owned Subsidiaries of Medical Resources, Inc.) Combined Statements of Income (Loss)
Year ended December 31 1997 1996 ------------------------------ Revenues: Revenues from services $57,974,070 $28,673,698 Interest income 7,350 19,692 ------------------------------ 57,981,420 28,693,390 Costs and expenses: Cost of services rendered 46,629,134 23,296,141 Selling and administrative expenses 8,342,560 4,708,937 Depreciation and amortization expense 601,442 519,438 Interest expense 360,772 94,185 ------------------------------ 55,933,908 28,618,701 ------------------------------ Income before income taxes 2,047,512 74,689 Provision for income taxes 1,157,502 312,988 ------------------------------ Net income (loss) $ 890,010 $ (238,299) ============================== See accompanying notes.
5 6 StarMed Staffing, Inc. and Affiliate (Wholly-Owned Subsidiaries of Medical Resources, Inc.) Combined Statements of Changes in Stockholder's Equity
Additional Common Paid-In Retained Stock Capital Earnings Total ---------------------------------------------------------------------- Balance at January 1, 1996 $10 $3,245,301 $ 653,073 $3,898,384 Net loss - - (238,299) (238,299) ---------------------------------------------------------------------- Balance at December 31, 1996 10 3,245,301 414,774 3,660,085 Net income - - 890,010 890,010 ---------------------------------------------------------------------- Balance at December 31, 1997 $10 $3,245,301 $1,304,784 $4,550,095 ====================================================================== See accompanying notes.
6 7 StarMed Staffing, Inc. and Affiliate (Wholly-Owned Subsidiaries of Medical Resources, Inc.) Combined Statements of Cash Flows
Year ended December 31 1997 1996 ------------------------------- Operating activities Net income (loss) $ 890,010 $ (238,299) Adjustments to reconcile net income (loss) to net cash used in operating activities: Depreciation and amortization 601,442 519,438 Provision for bad debts 292,000 13,839 Deferred income tax benefit (59,826) (18,288) Changes in operating assets and liabilities: Accounts receivable (6,869,092) (3,521,101) Prepaid expenses and other assets (87,399) 72,648 Accounts payable and accrued expenses 268,550 778,832 Accrued payroll and related liabilities 261,487 (133,630) ------------------------------- Net cash used in operating activities (4,702,828) (2,526,561) Investing activities Purchases of equipment (183,743) (185,572) Purchases of businesses, net of cash acquired (752,790) 169,794 ------------------------------- Net cash used in investing activities (936,533) (15,778) Financing activities Payments on long-term debt (1,232,158) (443,230) Borrowings under line of credit, net of payments 3,743,915 - Advances from Parent, net of payments 3,493,158 2,880,395 ------------------------------- Net cash provided by financing activities 6,004,915 2,437,165 Net increase (decrease) in cash 365,554 (105,174) Cash at beginning of year 89,088 194,262 ------------------------------- Cash at end of year $ 454,642 $ 89,088 =============================== Supplemental disclosure of cash flow information Cash paid for interest $ 363,979 $ 94,185 =============================== Supplemental disclosure of noncash investing activities Businesses acquired through issuance of stock of Parent (137,222 shares at $14.575 each) $ 2,000,000 $ - =============================== Notes payable issued and advances from Parent to acquire business $ - $ 4,074,000 =============================== See accompanying notes.
7 8 StarMed Staffing, Inc. and Affiliate (Wholly-Owned Subsidiaries of Medical Resources, Inc.) Notes to Combined Financial Statements December 31, 1997 1. Business Operations and Significant Accounting Policies Organization and Business Operations StarMed Staffing, Inc. (StarMed) and Wesley Medical Resources, Inc. (Wesley) (collectively, the Companies) were incorporated in 1994 and 1988 in the States of Delaware and California, respectively. The Companies are wholly-owned subsidiaries of Medical Resources, Inc. (MRI or Parent). The Companies, which are under common management, provide temporary and permanent staffing to acute and subacute health care facilities and, to a lesser degree, other businesses nationwide. The Companies per diem business provides registered nurses, licensed practical nurses, nursing assistants and therapists on a daily basis through 21 offices in 10 states. The Companies' traveling nurse business provides registered nurses and operating room technicians for periods ranging from 8 to 26 weeks to hospitals nationwide from its Clearwater, Florida, headquarters. Basis of Presentation The accompanying combined financial statements include the accounts of StarMed and its subsidiaries, all of which are wholly owned, and an affiliated company that is operated and managed by StarMed, Wesley Medical Resources, Inc. Intercompany balances have been eliminated. The accompanying combined financial statements have been prepared assuming that the Companies will continue as going concerns. As described above, the Companies are wholly-owned subsidiaries of MRI, and, as a result, are included in the consolidated financial statements of MRI. As of December 31, 1997, MRI was in default of certain senior and other indebtedness, which defaults had not been cured or waived by the financial institutions by the time of issuance of the consolidated financial statements on June 1, 1998. As a result of the aforementioned defaults, the indebtedness has become callable and, accordingly, is reflected in the consolidated financial statements of MRI as currently payable. The change in classification from the original terms of the indebtedness further caused a deficiency in MRI's working capital of approximately $58,000,000 as of December 31, 1997. These conditions raise substantial doubt about the ability of MRI to continue as a going concern for a reasonable period. While the subject financial institutions have not indicated their intent to demand accelerated payment on the indebtedness, the ability of MRI to continue is dependent upon its ability to cure the defaults, in a manner that would result in classifications of the indebtedness as noncurrent and, therefore, eliminate the working capital deficiency. Because of the aforementioned conditions relating to MRI and the uncertainties surrounding its plans to address its liquidity problems, the Parent's actions could have a substantial effect on the amounts and classifications of the Companies' assets and liabilities; therefore, there is also substantial doubt about whether the Companies will continue as going concerns. The accompanying combined financial statements of the Companies do not include any adjustments to reflect the possible future effects on the recoverability and classification of assets or the amounts and classification of liabilities that may result from the outcome of this uncertainty. 8 9 StarMed Staffing, Inc. and Affiliate (Wholly-Owned Subsidiaries of Medical Resources, Inc.) Notes to Combined Financial Statements (continued) December 31, 1997 1. Business Operations and Significant Accounting Policies (continued) Estimates The preparation of financial statements in accordance with generally accepted accounting principles requires management to make certain estimates and assumptions. These estimates affect the reported amounts of assets, liabilities and disclosures of contingent liabilities at the date of the accompanying combined financial statements and the reported amounts of revenues and expenses during the periods presented. Actual amounts could differ from those estimates. Revenue Recognition Revenue from services consists of temporary and permanent placement revenues. Temporary placement revenue is recognized when service is rendered. Permanent placement revenue is recognized when the recruit begins employment with the customer. Furniture, Fixtures, Equipment and Leasehold Improvements Furniture, fixtures and equipment are stated at cost. Depreciation is calculated using the straight-line method over the estimated useful lives of the assets, ranging generally from 5 to 31 years. Goodwill Goodwill represents the excess of cost over the fair values of net assets of businesses acquired and is being amortized over estimated lives of 20 to 25 years using the straight-line method. The Companies' policy is to account for intangible assets at the lower of amortized cost or fair value as determined using future cash flows. On an ongoing basis, management reviews the amortization period and carrying value of these intangible assets. As part of its review, management also considers current events and circumstances affecting the business and industry and evaluates whether such matters will impact the recoverability of unamortized costs related to intangible assets. Amortization expense for the years ended December 31, 1997 and 1996 amounted to $508,180 and $375,466, respectively. Advertising The Companies' policy is to expense advertising as incurred. Advertising expense charged to operations for the years ended December 31, 1997 and 1996 amounted to $594,325 and $312,875, respectively. Income Taxes As wholly-owned subsidiaries, the Companies are included in the consolidated federal income tax return of the Parent. Pursuant to a tax sharing agreement between the Companies and their Parent, the Companies account for and disclose income taxes as if they were a combined separate federal taxable entity. Under this agreement, all amounts associated with federal income taxes are due to or from the Parent. For purposes of its separate company income tax accounting, the 9 10 StarMed Staffing, Inc. and Affiliate (Wholly-Owned Subsidiaries of Medical Resources, Inc.) Notes to Combined Financial Statements (continued) December 31, 1997 1. Business Operations and Significant Accounting Policies (continued) Companies apply the provisions of Statement of Financial Accounting Standard No. 109, Accounting for Income Taxes. Under this standard, deferred taxes are provided for all differences between the financial statements and tax bases of assets and liabilities. Concentrations of Credit Risk Financial instruments which potentially expose the Companies to concentrations of credit risk, as defined by Statement of Financial Accounting Standard No. 105, consist of accounts receivable. The Companies' customer base consists primarily of large acute care hospitals throughout the United States. The Companies generally do not require collateral for outstanding balances with customers. Although the Companies are directly affected by the well-being of the health care industry, management does not believe significant credit risk exists as a result of this concentration. 2. Acquisitions of Business On January 12, 1996, StarMed consummated the acquisition of the common stock of NurseCare Plus, Inc. ("NurseCare"), a California corporation based in Oceanside, California, which provides supplemental healthcare staffing services for clients including hospitals, clinics and home health agencies in Southern California. The NurseCare acquisition was consummated pursuant to a Stock Purchase Agreement dated as of January 11, 1996 by and among StarMed and NurseCare. Pursuant to the NurseCare agreement, StarMed acquired from NurseCare all of the common stock of NurseCare for $2,514,000, payable in $1,264,000 cash and a note payable for $1,250,000 bearing interest at prime plus one percent due January 12, 1999. The acquisition was accounted for as a purchase, under which the purchase price was allocated to the acquired assets and assumed liabilities based upon fair values at the date of acquisition. The excess of the purchase price over the fair value of net assets amounted to $2,168,000 and is being amortized on a straight line basis over 20 years. On June 28, 1996, StarMed entered into an Asset Purchase Agreement with WeCare Allied Health Care, Inc. ("WeCare"), a healthcare staffing company. Pursuant to the agreement, the Company acquired certain assets for $1,050,000 cash and a $510,000 note payable bearing interest at prime plus one percent due July 1998. The acquisition was accounted for as a purchase, under which the purchase price was allocated to the acquired assets and assumed liabilities based upon fair values at the date of acquisition. The excess of the purchase price over the fair value of net assets acquired amounted to $1,760,000 and is being amortized on a straight line basis over 20 years. Effective January 1, 1997, StarMed acquired the net assets of National Health Care Solutions, Inc. (National) for $300,000. The acquisition was accounted for as a purchase transaction, where the purchase price was allocated to the net assets acquired at their respective fair values. The excess of purchase price over the fair values of net assets acquired amounted to $310,920 and is being amortized over 20 years using the straight-line method. 10 11 StarMed Staffing, Inc. and Affiliate (Wholly-Owned Subsidiaries of Medical Resources, Inc.) Notes to Combined Financial Statements (continued) December 31, 1997 2. Acquisitions of Business (continued) The asset purchase agreement for National provides for additional future payments during each of the three years following the transaction based upon the achievement of certain operating results. The prescribed operating results were not achieved for the year ended December 31, 1997 and, accordingly, no additional consideration is due to the sellers. If, during the next two years, the prescribed operating levels are achieved, any additional purchase price due to the seller will be treated as additional goodwill. Effective July 1, 1997, MRI acquired the outstanding common stock of Wesley Medical Resources Inc. and Wesley Management Group, Inc. (collectively, Wesley) in exchange for 137,222 shares of the MRI's common stock, valued at $2,000,000. The total purchase price amounted to $2,300,791, including transaction expenses. The transaction was accounted for as a purchase transaction, where the purchase price was allocated to the net assets acquired at their respective fair values. The excess of the purchase price over the fair values of net assets acquired amounted to approximately $2,448,000, and is being amortized over 20 years using the straight-line method. The purchase agreement underlying the Wesley transaction provides for contingent future additional issuances of Parent company common stock and/or cash payments, during each of the three 12-month periods following the transaction, based upon the achievement of certain operating results of the continuing Wesley business. The measurement of additional consideration, if any, will be determined after the first 12 months of Wesley operations. If the prescribed results are achieved, the additional purchase price due to the seller will be treated as additional goodwill. Prior to the Wesley transaction, StarMed advanced $200,000 in exchange for a note receivable to a former Wesley shareholder to pay income taxes due on the purchase. The note bears interest at prime plus 2% (10.5% at December 31, 1997) and is collateralized by common stock of the Parent. The note receivable, plus accrued interest of $7,350, is included in accounts and notes receivable. The balance is payable from the proceeds of the sale of MRI common stock, which shares are currently pending registration with the Securities and Exchange Commission. The accompanying combined financial statements include the operations and cash flows of NurseCare, WeCare, National and Wesley from the purchase dates through the end of the applicable year. 3. Furniture, Fixtures and Equipment Furniture, fixtures and equipment consists of the following: 1997 1996 -------------------------------- Office furniture and fixtures $ 359,159 $ 287,521 Electronic data processing equipment 643,955 442,270 Leasehold improvements 84,744 77,022 -------------------------------- 1,087,858 806,813 Less accumulated depreciation (660,098) (532,305) -------------------------------- $ 427,760 $ 274,508 ================================ Depreciation expense for the years ended December 31, 1997 and 1996 amounted to $93,262 and $143,972, respectively. 11 12 StarMed Staffing, Inc. and Affiliate (Wholly-Owned Subsidiaries of Medical Resources, Inc.) Notes to Combined Financial Statements (continued) December 31, 1997 4. Notes Payable During 1997, StarMed entered into a $6,000,000 bank line of credit under which $3,743,915 was drawn at December 31, 1997. Borrowings under the line of credit bear interest at prime rate plus 1.5% (10% at December 31, 1997), are secured by accounts receivable and are subject to a borrowing base representing 80% of such accounts receivable under 90 days outstanding. In addition to the security, the line of credit is guaranteed by the Parent. The line of credit expires on March 31, 1999. The note underlying the line of credit agreement provides for certain restrictive covenants with which StarMed is in compliance, except for providing annual financial statements of the Parent within 90 days of year end. However, the default was cured as provided in the agreement prior to the bank exercising its right to call the debt for default. Also see Note 13. 5. Long-Term Debt Long-term debt of StarMed consists of the following:
1997 1996 --------------------------------- Prime plus 2% (10.5% and 10.25% at December 31, 1997 and 1996, respectively), effective rate 2.5% and 2.25%, respectively, unsecured restructured note payable, due in annual installments of $250,753 through 1999, with a balloon payment of $2,540,850 on January 1, 2000 $3,042,356 $3,397,589 Prime plus 1% (9.5% and 9.25% at December 31, 1997 and 1996, respectively) unsecured notes payable, due $428,564 in 1998, with the balance due in 1999 464,279 1,077,134 Prime plus 1% (9.5% and 9.25% at December 31, 1997 and 1996, respectively) unsecured note payable, due in 1998 148,717 403,660 Other 22,224 31,351 --------------------------------- 3,677,576 4,909,734 Less current maturities (850,258) (1,274,569) --------------------------------- $2,827,318 $3,635,165 ================================= Maturities of long-term debt are as follows: Year ended December 31 1998 $ 850,258 1999 286,468 2000 2,540,850 ----------- $3,677,576 ===========
12 13 StarMed Staffing, Inc. and Affiliate (Wholly-Owned Subsidiaries of Medical Resources, Inc.) Notes to Combined Financial Statements (continued) December 31, 1997 5. Long-Term Debt (continued) The original note agreement related to the above prime plus 2% unsecured restructured note was restructured effective June 1, 1995 with the lender. Under the terms of the restructuring, one-half of the outstanding principal and interest were forgiven for other consideration, and a new variable rate note agreement was entered into under the above terms. At the time of the restructuring, the total future cash payments, including interest, using the effective prime rate of 6%, were substantially less than the carrying amount of the liabilities and, accordingly, an extraordinary gain was recognized. While under generally accepted account principles, all cash payments following such a restructuring are applied only to the carrying amount with no interest expense recognized, the subsequent increase in the prime rate to 8.5% is accounted for as interest expense during the periods that the debt is outstanding. The note underlying the above restructured note provides for certain restrictive covenants with which the Companies are in compliance, except for providing annual financial statements of the Parent within 90 days of year end. However, the default was cured as provided in the agreement prior to the creditor exercising its right to call the debt for default. 6. Due to Parent Balances due to Parent from StarMed are noninterest bearing and payable on demand. While due on demand, StarMed has received representation that the Parent will not require repayment in excess of $4,000,000 during 1998. As such, the amounts due to the Parent in excess of $4,000,000 have been classified as noncurrent in the accompanying combined balance sheet. Also see Note 13. 7. Income Taxes The provision for income taxes consist of the following at December 31, 1997 and 1996:
1997 ----------------------------------------------------- Taxing Jurisdiction Current Deferred Total - ------------------------------------------------------------------------------------------------- Federal income taxes $1,039,403 $(51,082) $ 988,321 State income taxes 177,925 (8,744) 169,181 ----------------------------------------------------- Income tax provision (benefit) $1,217,328 $(59,826) $1,157,502 ===================================================== 1996 ----------------------------------------------------- Taxing Jurisdiction Current Deferred Total - ------------------------------------------------------------------------------------------------- Federal income taxes $287,224 $(15,857) $271,367 State income taxes 44,052 (2,431) 41,621 ----------------------------------------------------- Income tax provision (benefit) $331,276 $(18,288) $312,988 =====================================================
13 14 StarMed Staffing, Inc. and Affiliate (Wholly-Owned Subsidiaries of Medical Resources, Inc.) Notes to Combined Financial Statements (continued) December 31, 1997 A reconciliation of the enacted federal statutory income tax rate to the Companies' recorded effective income tax rate for the years ended December 31, 1997 and 1996 is as follows: 1997 1996 -------------------------- Statutory federal income tax 34.0% 34.0% State income taxes, net of federal benefit 3.6 3.6 Meals and entertainment 12.0 266.9 Goodwill 5.0 111.2 Other 1.9 3.3 -------------------------- Effective tax rate 56.5% 419.0% ========================== Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. Significant components of the Companies' deferred tax assets and liabilities at December 31, 1997 and 1996 are as follows: 1997 1996 ---- ---- Deferred tax assets: Basis differences--net assets of business acquired $128,386 $ - Provisions for bad debts 104,917 13,842 Nondeductible accruals and other 61,917 4,446 ----------------------- 295,220 18,288 Deferred tax liabilities: Basis difference--goodwill (45,923) - ----------------------- Net deferred tax asset $249,297 $18,288 ======================= 8. Commitments The Companies lease office space for the corporate offices and its various sales offices under operating leases with remaining terms of one to three years. Future minimum annual rentals for each of the years ended December 31 are as follows: 1998 $ 831,800 1999 586,700 2000 586,700 Thereafter - ---------- $2,005,200 ========== Rent expense charged to operations for the years ended December 31, 1997 and 1996 amounted to $531,745 and $354,834, respectively. 9. Contingencies The Companies are involved in certain litigation related primarily to employment matters, for which the Companies believe they are adequately reserved. In addition, StarMed is currently contesting a claim 14 15 StarMed Staffing, Inc. and Affiliate (Wholly-Owned Subsidiaries of Medical Resources, Inc.) Notes to Combined Financial Statements (continued) December 31, 1997 9. Contingencies (continued) brought by the Companies' President's former employer related to an allegation of breach in a noncompetition agreement. Management does not believe that the cases, individually or in the aggregate, will have a material adverse impact on the Companies' financial position or results of operations when settled. 10. Deferred Contribution Plan The Companies sponsor a 401(k) plan covering substantially all full-time employees that have completed six months of service. Under the plan, eligible employees can contribute up to 15% of their salaries up to the legally determined amount updated annually by the Internal Revenue Service. Contributions to the plan (matching and additional) are discretionary. The Companies did not make any contributions to the plan for the years ended December 31, 1997 and 1996. 11. Common Stock At December 31, 1997 and 1996, StarMed has 1,000 shares of $.01 per value common stock authorized, issued and outstanding. At December 31, 1997, Wesley has 1,000 shares of no par value common stock authorized, issued and outstanding. 12. Year 2000 The Companies are in the process of developing a plan to modify their information technology to be ready for the year 2000 and have begun to identify critical data processing systems that will require modification or replacement to become year 2000 compliant. The Companies currently expect the project to be substantially complete by early 1999. At this time, management is unable to estimate the cost of its year 2000 efforts. The Companies do not expect this project to have a significant effect on operations. As of December 31, 1997, the Companies have yet to incur significant expenses relating to its year 2000 efforts. The Companies will continue to implement systems with strategic value, though some projects may be delayed due to resource constraints. 13. Subsequent Events Subsequent to year end, the Parent engaged an investment banking organization to solicit offers from unrelated third parties to acquire the Companies. On July 10, 1998, the Parent entered into a definitive agreement with RehabCare Group, Inc. to acquire the Companies for approximately $33 million. The transaction was consummated on August 14, 1998. The sale did not result in a loss. On May 15, 1998, the bank line of credit was increased from $6,000,000 to $9,200,000, and the Parent's guarantee was increased to a maximum of $7,200,000. The remaining terms of the line were not modified. Concurrent with the increase, StarMed drew $4,000,000 from the line to be used for paying down the amount due to Parent. 15 16
STARMED STAFFING, INC. CONDENSED COMBINED BALANCE SHEET June 30, 1998 (dollar amounts in thousands) Assets: Current assets: Cash and cash equivalents $ 1,022 Accounts receivable, net of allowance for doubtful accounts 14,934 Prepaid expenses and other current assets 613 ---------- Total current assets 16,569 ---------- Equipment and leasehold improvements, net 458 ---------- Other assets: Excess of cost over net assets acquired, net 9,993 Other 118 ---------- Total other assets 10,111 ---------- $ 27,138 ========== Liabilities and Stockholder's Equity Current liabilities: Current portion of long-term debt $ 13,784 Due to parent 6,116 Accounts payable 275 Accrued salaries and wages 737 Accrued expenses 1,042 ---------- Total current liabilities 21,954 ---------- Stockholder's equity: Common stock -- Additional paid-in capital 3,245 Retained earnings 1,939 ---------- Total stockholder's equity 5,184 ---------- $ 27,138 ========== See accompanying notes.
16 17 STARMED STAFFING, INC. CONDENSED COMBINED STATEMENTS OF EARNINGS Six months ended June 30, 1998 and 1997 (dollar amounts in thousands)
1998 1997 ---- ---- Operating Revenues: $ 40,306 $ 25,947 Costs and expenses: Operating expenses 32,196 21,068 General and administrative 5,912 3,488 Depreciation and amortization 334 263 ----------- ------------ Total costs and expenses 38,442 24,819 ----------- ------------ Operating earnings 1,864 1,128 Interest expense (406) (116) ----------- ------------ Earnings before income taxes 1,458 1,012 Income taxes 824 572 ----------- ------------ Net earnings $ 634 $ 440 =========== ============
17 18
STARMED STAFFING, INC. CONDENSED COMBINED STATEMENT OF CASH FLOWS Six months ended June 30, 1998 (dollar amounts in thousands) Operating activities Net earnings $ 634 Adjustments to reconcile net earnings to net cash used in operating activities: Depreciation and amortization 334 Provision for bad debts 149 Changes in operating assets and liabilities: Accounts receivable (2,246) Prepaid expenses and other assets (167) Accounts payable and accrued expenses (147) Accrued payroll and related liabilities (28) --------- Net cash used in operating activities (1,471) Investing activities Purchases of equipment (86) Net cash used in investing activities --------- (86) Financing activities Proceeds on long-term debt 6,365 Payments to Parent, net (4,240) --------- Net cash provided by financing activities 2,125 Net increase in cash 568 Cash at beginning of period 454 --------- Cash at end of period $ 1,022 ========= See accompanying notes.
18 19 StarMed Staffing, Inc. and Affiliate (Wholly-Owned Subsidiaries of Medical Resources, Inc.) Notes to Condensed Financial Statements (Unaudited) 1. Basis of Presentation The condensed balance sheet as of June 30, 1998, and the related condensed statements of earnings for the six months ended June 30, 1998 and 1997, and cash flows for the six months ended June 30, 1998, are unaudited. In the opinion of management, all adjustments necessary for a fair presentation of such financial statements have been included. Such adjustments consisted only of normal recurring items. The results of operations for the six months ended June 30, 1998 and 1997, are not necessarily indicative of the results to be expected for the respective full years. The condensed financial statements do not include all information and footnotes necessary for a complete presentation of financial position, results of operations and cash flows in conformity with generally accepted accounting principles. Reference is made to the audited financial statements and the related notes of StarMed Staffing, Inc. ("StarMed") included in this Form 8-K which provide additional disclosures and a further description of accounting policies. 2. Acquisition On August 14, 1998, 100% of the common stock of StarMed was sold to RehabCare Group, Inc., a public company that develops, markets, and manages programs for the delivery of comprehensive medical rehabilitation services to the functionally disabled in dedicated units of acute-care hospitals and outpatient facilities. 19 20 Pro Forma Financial Data The unaudited pro forma condensed combined balance sheet as of June 30, 1998, and the pro forma condensed combined statements of earnings for the six months ended June 30, 1998, and for the year ended December 31, 1997, give effect to the acquisition based on the historical consolidated financial statements of RehabCare and the historical consolidated financial statements of StarMed, under the assumptions and adjustments set forth below. The pro forma condensed combined financial statements have been prepared based upon the respective company's historical financial statements. These pro forma condensed combined financial statements, which include results of operations as if the acquisition had been effected on the first day of the periods presented, and had been accounted for under the purchase method of accounting, may not be indicative of the results that would be recognized if the acquisition had been in effect on the dates indicated or which may be obtained in the future, including the year ended December 31, 1998. The pro forma condensed combined financial statements should be read in conjunction with the historical consolidated financial statements and notes thereto of RehabCare and StarMed. 20 21 REHABCARE GROUP, INC. UNAUDITED PRO FORMA CONDENSED COMBINED BALANCE SHEET June 30, 1998 (dollar amounts in thousands)
Pro Forma Pro Forma RehabCare StarMed Adjustments Combined Assets: Current assets: Cash and cash equivalents $ 4,406 $ 1,022 $ 5,428 Marketable securities, available-for-sale 4,314 -- 4,314 Accounts receivable, net of allowance for doubtful accounts 24,872 14,934 39,806 Deferred tax assets 1,633 -- 1,633 Prepaid expenses and other current assets 963 613 1,576 ------------ --------- ----------- ------------ Total current assets 36,188 16,569 52,757 ------------ --------- ----------- ------------ Marketable securities available-for-sale, noncurrent 1,217 -- 1,217 ------------ --------- ----------- ------------ Equipment and leasehold improvements, net 3,302 458 3,760 ------------ --------- ----------- ------------ Other assets: Excess of cost over net assets acquired, net 54,605 9,993 $ 9,116 (4) 73,714 Deferred contract costs, net 1,071 -- 1,071 Pre-opening costs, net 3,164 -- 3,164 Other 1,672 118 1,790 ------------ --------- ----------- ------------ Total other assets 60,512 10,111 9,116 79,739 ------------ --------- ----------- ------------ $ 101,219 $ 27,138 $ 9,116 $ 137,473 ============ ========= =========== ============ Liabilities and Stockholders' Equity: Current liabilities: Current portion of long-term debt $ 4,660 $ 13,784 $ (13,784)(3) $ 8,310 3,650 (1) Due to parent -- 5,354 (5,354)(3) -- Accounts payable 1,851 275 2,126 Accrued salaries and wages 12,793 737 -- 13,530 Accrued expenses 4,069 1,042 1,200 (1) 6,311 Other -- -- 2,000 (1) 2,000 ------------ --------- ----------- ------------ Total current liabilities 23,373 21,192 (12,288) 32,277 ------------ --------- ----------- ------------ Deferred tax liabilities 257 -- 257 ------------ --------- ----------- ------------ Deferred compensation 1,715 -- 1,715 ------------ --------- ----------- ------------ Long-term debt, less current portion 26,351 -- 27,350 (1) 53,701 ------------ --------- ----------- ------------ Stockholders' equity: Preferred stock -- -- -- Common stock 73 -- 73 Additional paid-in capital 25,748 3,245 (3,245)(2) 25,748 Retained earnings 40,911 2,701 (2,701)(2) 40,911 Less common stock held in treasury at cost, 1,166,234 shares (17,975) -- (17,975) Accumulated other comprehensive earnings - unrealized gain on marketable securities, net of tax 766 -- 766 ------------ --------- ----------- ------------ Total stockholders' equity 49,523 5,946 (5,946) 49,523 ------------ --------- ----------- ------------ $ 101,219 $ 27,138 $ 9,116 $ 137,473 ============ ========= =========== ============ See accompanying notes to unaudited pro forma condensed combined financial statements.
21 22 REHABCARE GROUP, INC. UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENT OF EARNINGS Six months ended June 30, 1998 (dollar amounts in thousands, except per share data)
Pro Forma Pro Forma RehabCare StarMed Adjustments Combined Operating Revenues: $ 86,531 $ 40,306 $ $ 126,837 Costs and expenses: Operating expenses 58,621 32,196 90,817 General and administrative 15,131 5,912 21,043 Depreciation and amortization 2,021 334 (40)(4) 2,315 ------------- ---------- ----------- ------------ Total costs and expenses 75,773 38,442 (40) 114,175 ------------- ---------- ----------- ------------ Operating earnings 10,758 1,864 40 12,662 Interest income 124 -- 124 Interest expense (1,352) (406) (679)(5) (2,437) Gain on sale of marketable securities 94 -- 94 ------------- ---------- ----------- ------------ Earnings before income taxes 9,624 1,458 (639) 10,443 Income taxes 3,905 824 (351)(6) 4,378 ------------- ---------- ----------- ------------ Net earnings $ 5,719 $ 634 $ (288) $ 6,065 ============= ========== =========== ============ Net earnings per common share: Basic $ 0.96 $ 1.01 ============= =========== Diluted $ 0.81 $ 0.86 ============= =========== See accompanying notes to unaudited pro forma condensed combined financial statements.
22 23 REHABCARE GROUP, INC. UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENT OF EARNINGS Year ended December 31, 1997 (dollar amounts in thousands, except per share data)
Pro Forma Pro Forma RehabCare StarMed Adjustments Combined Operating Revenues: $ 160,780 $ 57,974 $ $ 218,754 Costs and expenses: Operating expenses 110,726 46,629 157,355 General and administrative 27,294 8,343 35,637 Depreciation and amortization 3,780 601 (30)(4) 4,351 ------------- ---------- ----------- ------------ Total costs and expenses 141,800 55,573 (30) 197,343 ------------- ---------- ----------- ------------ Operating earnings 18,980 2,401 30 21,411 Interest income 186 8 194 Interest expense (2,759) (361) (1,933)(5) (5,053) Gain on sale of marketable securities 1,448 -- 1,448 Other income, net 27 -- 27 ------------- ---------- ----------- ------------ Earnings before income taxes 17,882 2,048 (1,903) 18,027 Income taxes 7,267 1,158 (952)(6) 7,473 ------------- ---------- ----------- ------------ Net earnings $ 10,615 $ 890 $ (951) $ 10,554 ============= ========== =========== ============ Net earnings per common share: Basic $ 1.77 $ 1.76 ============= ============ Diluted $ 1.47 $ 1.46 ============= ============ See accompanying notes to unaudited pro forma condensed combined financial statements.
23 24 Notes to Unaudited Pro Forma Condensed Combined Financial Statements On August 14, 1998, RehabCare acquired StarMed, a provider of temporary nurse and nurse assistant staffing to hospitals and long-term care facilities. The aggregate cash purchase cost, excluding acquisition costs, totaled $33.0 million. Of the purchase cost, $31.0 million was paid to the seller at closing with the remaining $2.0 million to be disbursed upon resolution of certain conditions, but in any event, no later than January 31, 2000. Goodwill recognized as a result of the acquisition totaled approximately $19.1 million. The unaudited pro forma condensed combined balance sheet as of June 30, 1998 has been prepared assuming that the acquisition had occurred as of that date. Unaudited pro forma condensed combined statements of earnings for the six months ended June 30, 1998, and the year ended December 31, 1997 have been prepared as if the acquisition had been effected on the first day of the periods presented. The unaudited pro forma condensed combined statements of earnings are not necessarily indicative of results that would have occurred had the acquisition been consummated as of the beginning of the periods presented or that might be attained in the future. Pro forma adjustments reflected in the unaudited pro forma condensed combined financial statements are as follows: 1. To record the cash consideration of $31.0 million, to record the remaining $2.0 million liability related to the balance of the $33.0 million purchase price to be disbursed upon resolution of certain conditions, and accrue for estimated acquisition costs totaling $1.2 million. 2. To eliminate the historical amounts of stockholder's equity of StarMed. 3. To eliminate the outstanding debt of StarMed which was repaid at closing or retained by the seller. 4. To reflect the goodwill associated with allocation of the purchase price. Goodwill will be amortized using the straight-line method over 40 years. 5. To reflect the interest expense related to incremental borrowings necessary to fund the cash purchase price. The interest rate on bank borrowings is assumed to be 7.00% and 7.40% for the six month period ended June 30, 1998 and the year ended December 31, 1997, respectively. 6. To reflect the change in income taxes, at an estimated combined effective tax rate of 40%, related to pro forma adjustments. 24 25 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 hereunto duly authorized. Dated: October 23, 1998 REHABCARE GROUP, INC. By:/s/ John R. Finkenkeller ------------------------------------------------- John R. Finkenkeller Senior Vice President and Chief Financial Officer 25 26 CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS We consent to the incorporation by reference in the Registration Statements (Form S-8, No. 333-11311; Form S-8, No. 33-82106; and, Form S-8, No. 33-82048)of RehabCare Group, Inc. of our report dated March 20, 1998, except for Note 13, as to which the date is August 14, 1998, with respect to the combined financial statements of StarMed Staffing, Inc. and Affiliate (collectively, the Companies--wholly owned subsidiaries of Medical Resources, Inc.) included in the Current Report (Form 8K/A) of RehabCare Group, Inc. dated August 14, 1998. /s/ Ernst & Young LLP Tampa, Florida October 21, 1998 26 -----END PRIVACY-ENHANCED MESSAGE-----