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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): September 9, 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
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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 Therapeutic Systems, Ltd., an Illinois
corporation ("TSL"), and the unaudited pro forma financial information of
RehabCare Group, Inc. ("RehabCare"), showing the effect of the consummation of
the acquisition by RehabCare of 100% of the issued and outstanding shares of
TSL. The consummation of the acquisition and details with regard thereto were
reported by RehabCare in its Current Report on Form 8-K dated September 9, 1998,
but the audited financial statements of TSL 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 TSL are filed herewith:
Report of Independent Auditors
Balance Sheet, December 31, 1997
Statement of Income, Year Ended December 31, 1997
Statement of Cash Flows, Year Ended December 31, 1997
Notes to Financial Statements
Condensed Balance Sheet, June 30, 1998 (Unaudited)
Condensed Statement of Earnings, Six Months Ended June 30, 1998 (Unaudited)
Condensed Statement of Cash Flows, Six Months Ended June 30, 1998
(Unaudited)
Notes to Condensed 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 Year Ended
December 31, 1997 (Unaudited)
Pro Forma Condensed Combined Statement of Earnings for the Six Months Ended
June 30, 1998 (Unaudited)
Notes to Unaudited Pro Forma Condensed Combined Financial Statements
(Unaudited)
(c) Exhibits -The following exhibits are filed herewith:
23.1 Consent of Mowery & Schoenfeld LLC.
<PAGE> 3
REPORT OF INDEPENDENT AUDITORS
TO THE BOARD OF DIRECTORS OF
THERAPEUTIC SYSTEMS, LTD.
We have audited the accompanying balance sheet of THERAPEUTIC SYSTEMS, LTD. (an
Illinois corporation), as of December 31, 1997 and the related statements of
income and cash flows for the year then ended. These financial statements are
the responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements based on our audit.
We conducted our audit in accordance with the generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of THERAPEUTIC SYSTEMS, LTD. as of
December 31, 1997, and the results of its operations and its cash flows for the
year then ended in conformity with generally accepted accounting principles.
Mowery & Schoenfeld LLC
May 15, 1998
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<TABLE>
THERAPEUTIC SYSTEMS, LTD.
BALANCE SHEET
DECEMBER 31, 1997
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<CAPTION>
ASSETS
<S>
CURRENT ASSETS <C> <C> <C>
Cash $ 119,697
Accounts receivable
Trade $ 7,057,348
Allowance for doubtful accounts (230,000) 6,827,348
-----------
Prepaid expenses 4,443
-----------
Total assets $ 6,951,488
===========
LIABILITIES AND SHAREHOLDER'S EQUITY
CURRENT LIABILITIES
Accrued payroll and payroll taxes $ 580,584
Accrued vacation 227,000
Accrued replacement taxes (Note 3) 83,000
Deferred replacement taxes (Note 3) 91,000
-----------
Total current liabilities 981,584
-----------
SHAREHOLDER'S EQUITY
Common stock - no par value, 10,000 shares authorized,
1,000 shares issued and outstanding 1,000
Retained earnings, beginning of the year $ 5,839,309
Net income $ 6,296,714
Shareholder distributions (6,167,119) 129,595 5,968,904
----------- ----------- -----------
Total shareholder's equity 5,969,904
-----------
Total liabilities and shareholder's equity $ 6,951,488
===========
See accompanying notes to financial statements.
</TABLE>
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<TABLE>
THERAPEUTIC SYSTEMS, LTD.
STATEMENT OF INCOME
FOR THE YEAR ENDED DECEMBER 31, 1997
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<CAPTION>
<S> <C> <C>
REVENUES $13,866,613
OPERATING EXPENSES
Wages $ 6,599,283
Payroll taxes 529,292
Dues and subscriptions 3,911
Employee health 616
Licenses 1,642
Continuing education 7,280
Health insurance 148,141
Dental insurance 4,901
Professional liability insurance 20,991
Workers compensation insurance 27,107
Advertising 17,371
Client relations 4,851
Office supplies 12,263
Postage and delivery 7,241
Professional fees 6,829
Bad debt expense 50,000
Rent 29,520
Therapy materials 9,307
Travel and entertainment 1,398
Telephone 15,514
Gas and electric 3,221
Miscellaneous 1,434 7,502,113
----------- -----------
Income from operations 6,364,500
OTHER INCOME
Interest income 25,214
-----------
Income before taxes 6,389,714
PROVISION FOR ILLINOIS REPLACEMENT TAXES ( NOTE 3 ) 93,000
-----------
Net income $ 6,296,714
===========
See accompanying notes to financial statements.
</TABLE>
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<TABLE>
THERAPEUTIC SYSTEMS, LTD.
STATEMENT OF CASH FLOWS
FOR THE YEAR ENDED DECEMBER 31, 1997
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<CAPTION>
<S> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 6,296,714
Adjustments to reconcile net income to net cash
provided by operating activities;
Deferred replacement taxes 10,000
Bad debts expense 50,000
Effect of changes in operating assets and liabilities;
Accounts receivable (774,640)
Prepaid expenses 29,172
Accrued payroll and payroll taxes 9,418
Accrued vacation 36,000
Accrued replacement taxes (12,000)
-----------
Net cash provided by operating activities 5,644,664
-----------
CASH FLOWS FROM INVESTING ACTIVITIES -
-----------
CASH FLOWS FROM FINANCING ACTIVITIES
Dividends paid (6,167,119)
-----------
Net cash used in financing activities (6,167,119)
-----------
NET DECREASE IN CASH (522,455)
Cash, beginning of year 642,152
-----------
Cash, end of year $ 119,697
===========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash paid during the year for replacement taxes $ 95,000
===========
See accompanying notes to financial statements.
</TABLE>
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THERAPEUTIC SYSTEMS, LTD.
Notes to Financial Statements
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Nature of Business
------------------
Therapeutic Systems, Ltd. ("the Company") is an Illinois corporation
operating within Chicago, Illinois and the surrounding suburbs. The
Company contracts primarily with skilled nursing or long-term care
facilities and school districts to provide comprehensive physical,
occupational and speech therapy.
Basis of Presentation and Revenue Recognition
---------------------------------------------
The financial statements are presented on the accrual basis. Revenues
are recognized as services are performed based on contracted billing
rates. Expenses are recorded as incurred and as services are provided
by therapists.
Property and Equipment
----------------------
Property and equipment are recorded at cost and are depreciated using
straight-line and accelerated methods over estimated useful lives.
Expenditures for major repairs and betterments that extend the useful
lives of property and equipment are capitalized. Expenditures for
normal maintenance and repairs are charged to expense as incurred.
Property and equipment are written off the books when they are fully
depreciated.
Use of Estimates in Preparing Financial Statements
--------------------------------------------------
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates
and assumptions that affect certain reported amounts and disclosures
at the financial statement date. Accordingly, actual amounts could
differ.
NOTE 2 - LEASE COMMITMENTS
The Company leases office facilities under an operating lease agreement that
expires December 31, 1997. The lease agreement contains an option to renew the
lease for four additional one year periods. The Company has exercised one of
four one year renewal options contained in the original lease agreement
extending the lease through December 31, 1998 with monthly rent payments of
$2,546.
Rent expense approximated $30,000 for the year ended December 31, 1997.
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NOTE 3 - INCOME TAXES
The Company has elected to be treated as an S Corporation under Section 1361 of
the Internal Revenue Code. Accordingly, there is no provision for federal and
state income taxes since such taxes are the liability of the individual
shareholder. Instead, the Company is subject to an Illinois replacement tax of
1.5%. The provision for replacement taxes for the year ended December 31, 1997
is presented below:
Replacement taxes currently payable $ 83,000
Deferred replacement taxes 10,000
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$ 93,000
================
Gross deferred replacement tax assets $ (15,000)
Gross deferred replacement tax liabilities 106,000
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Net deferred tax liability - current $ 91,000
================
The Company files its federal and state income tax returns on the cash basis.
Accordingly, deferred replacement tax assets and liabilities are recorded based
on the expected future tax consequences due to the reversal of temporary
differences between financial statement carrying amounts and the tax basis of
primarily accounts receivable and certain accruals which currently exist.
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<TABLE>
THERAPEUTIC SYSTEMS, LTD.
CONDENSED BALANCE SHEET
June 30, 1998
(Unaudited)
(dollar amounts in thousands)
<CAPTION>
Assets:
<S> <C>
Current assets:
Cash and cash equivalents $ 1,611
Accounts receivable, net of allowance for
doubtful accounts 6,786
Prepaid expenses and other current assets 20
------------
Total current assets 8,417
------------
$ 8,417
============
Liabilities and Stockholders' Equity:
Current liabilities:
Accounts payable 107
Accrued salaries and wages 857
------------
Total current liabilities 964
------------
Stockholder's equity:
Common stock 1
Additional paid-in capital --
Retained earnings 7,452
------------
Total stockholder's equity 7,453
------------
$ 8,417
============
See accompanying notes.
</TABLE>
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<TABLE>
THERAPEUTIC SYSTEMS, LTD.
CONDENSED STATEMENT OF EARNINGS
Six months ended June 30, 1998
(Unaudited)
(dollar amounts in thousands)
<CAPTION>
<S> <C>
Operating Revenues: $ 6,571
Costs and expenses:
Operating expenses 3,393
General and administrative 127
Depreciation and amortization --
-------------
Total costs and expenses 3,520
-------------
Operating earnings 3,051
Income taxes --
-------------
Net earnings $ 3,051
=============
See accompanying notes.
</TABLE>
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<TABLE>
THERAPEUTIC SYSTEMS, LTD.
CONDENSED STATEMENT OF CASH FLOWS
Six months ended June 30, 1998
(Unaudited)
(dollar amounts in thousands)
<CAPTION>
<S> <C>
Operating activities
Net earnings $ 3,051
Adjustments to reconcile net earnings to net cash
provided by operating activities;
Changes in operating assets and liabilities;
Accounts receivable 41
Prepaid expenses and other assets (15)
Accounts payable and accrued expenses (17)
----------
Net cash provided by operating activities 3,060
----------
Financing activities
Dividends paid (1,568)
----------
Net cash used in financing activities (1,568)
----------
Net increase in cash 1,492
Cash at beginning of period 119
----------
Cash at end of period $ 1,611
==========
See accompanying notes.
</TABLE>
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THERAPEUTIC SYSTEMS, LTD.
Notes to Condensed Financial Statements
(Unaudited)
1. Basis of Presentation
The condensed balance sheet as of June 30, 1998, and the related condensed
statement of earnings for the six months ended June 30, 1998 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 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 Therapeutic Systems, Ltd. ("TSL") included in this Form 8-K
which provide additional disclosures and a further description of accounting
policies.
2. Acquisition
On September 8, 1998, 100% of the common stock of TSL was sold to RehabCare
Group, Inc.
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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 financial statements of TSL, 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 TSL.
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<TABLE>
REHABCARE GROUP, INC.
UNAUDITED PRO FORMA CONDENSED COMBINED BALANCE SHEET
June 30, 1998
(dollar amounts in thousands)
<CAPTION>
Therapeutic Pro Forma Pro Forma
RehabCare Systems Adjustments Combined
Assets:
<S> <C> <C> <C> <C>
Current assets:
Cash and cash equivalents $ 4,406 $ 1,611 $ (1,753)(1) $ 4,264
Marketable securities, available-for-sale 4,314 -- 4,314
Accounts receivable, net of allowance for
doubtful accounts 24,872 6,786 (4,400)(6) 27,258
Deferred tax assets 1,633 -- 1,633
Prepaid expenses and other current assets 963 20 983
------------ --------- ----------- -----------
Total current assets 36,188 8,417 (6,153) 38,452
------------ --------- ----------- -----------
Marketable securities available-for-sale,
noncurrent 1,217 -- 1,217
------------ --------- ----------- -----------
Equipment and leasehold improvements, net 3,302 -- 3,302
------------ --------- ----------- -----------
Other assets:
Excess of cost over net assets acquired, net 54,605 -- $ 7,300 (3) 61,905
Deferred contract costs, net 1,071 -- 1,071
Pre-opening costs, net 3,164 -- 3,164
Other 1,672 -- 1,672
------------ --------- ----------- -----------
Total other assets 60,512 -- 7,300 67,812
------------ --------- ----------- -----------
$ 101,219 $ 8,417 $ 1,147 $ 110,783
============ ========= =========== ===========
Liabilities and Stockholders' Equity:
Current liabilities:
Current portion of long-term debt $ 4,660 $ -- $ -- $ 4,660
Accounts payable 1,851 107 -- 1,958
Accrued salaries and wages 12,793 857 13,650
Accrued expenses 4,069 -- 300 (1) 4,369
------------ --------- ----------- -----------
Total current liabilities 23,373 964 300 24,637
------------ --------- ----------- -----------
Deferred tax liabilities 257 -- 257
------------ --------- ----------- -----------
Deferred compensation 1,715 -- 1,715
------------ --------- ----------- -----------
Long-term debt, less current portion 26,351 -- 6,400 (1) 32,751
------------ --------- ----------- -----------
Stockholders' equity:
Preferred stock -- -- --
Common stock 73 1 (1)(2) 73
Additional paid-in capital 25,748 -- 1,900 (1) 27,648
Retained earnings 40,911 7,452 (7,452)(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 7,453 (5,553) 51,423
------------ --------- ----------- -----------
$ 101,219 $ 8,417 $ 1,147 $ 110,783
============ ========= =========== ===========
See accompanying notes to unaudited pro forma condensed combined financial statements.
</TABLE>
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<TABLE>
REHABCARE GROUP, INC.
UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENT OF EARNINGS
Year ended December 31, 1997
(dollar amounts in thousands, except per share data)
<CAPTION>
Therapeutic Pro Forma Pro Forma
RehabCare Systems Adjustments Combined
<S> <C> <C> <C> <C>
Operating Revenues: $ 160,780 $ 13,866 $ (6,366)(6) $ 168,280
Costs and expenses:
Operating expenses 110,726 7,247 (3,327)(6) 114,851
205 (7)
General and administrative 27,294 254 88 (7) 27,636
Depreciation and amortization 3,780 -- 183 (3) 3,963
------------- ---------- ----------- ------------
Total costs and expenses 141,800 7,501 (2,851) 146,450
------------- ---------- ----------- ------------
Operating earnings 18,980 6,365 (3,515) 21,830
Interest income 186 25 211
Interest expense (2,759) -- (480)(4) (3,239)
Gain on sale of marketable securities 1,448 -- 1,448
Other income, net 27 -- 27
------------- ---------- ----------- ------------
Earnings before income taxes 17,882 6,390 (3,995) 20,277
Income taxes 7,267 93 751 8,111 (5)
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Net earnings $ 10,615 $ 6,297 $ (4,746) $ 12,166
============= ========== =========== ============
Net earnings per common share:
Basic $ 1.77 $ 2.03
============= ============
Diluted $ 1.47 $ 1.65
============= ============
See accompanying notes to unaudited pro forma condensed combined financial statements.
</TABLE>
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<TABLE>
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)
<CAPTION>
Therapeutic Pro Forma Pro Forma
RehabCare Systems Adjustments Combined
<S> <C> <C> <C> <C>
Operating Revenues: $ 86,531 $ 6,571 $ (3,113)(6) $ 89,989
Costs and expenses:
Operating expenses 58,621 3,393 (1,607)(6) 60,509
102 (7)
General and administrative 15,131 127 44 (7) 15,302
Depreciation and amortization 2,021 -- 91 (3) 2,112
------------- ---------- ----------- ------------
Total costs and expenses 75,773 3,520 (1,370) 77,923
------------- ---------- ----------- ------------
Operating earnings 10,758 3,051 (1,743)(7) 12,066
Interest income 124 -- 124
Interest expense (1,352) -- (229)(4) (1,581)
Gain on sale of marketable securities 94 -- 94
------------- ---------- ----------- ------------
Earnings before income taxes 9,624 3,051 (1,972) 10,703
Income taxes 3,905 -- 376 4,281 (5)
------------- ---------- ----------- ------------
Net earnings $ 5,719 $ 3,051 $ (2,348) $ 6,422
============= ========== =========== ============
Net earnings per common share:
Basic $ 0.96 $ 1.07
============= ===========
Diluted $ 0.81 $ 0.89
============= ===========
See accompanying notes to unaudited pro forma condensed combined financial statements.
</TABLE>
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Notes to Unaudited Pro Forma Condensed Combined Financial Statements
On September 9, 1998, RehabCare acquired TSL, a provider of contract therapy
services to long-term care facilities and school districts. The aggregate cash
purchase cost, excluding acquisition costs, totaled $8.3 million, consisting of
$5.4 million in cash, a subordinated promissory note in the original principal
amount of $1 million and an aggregate of 117,895 shares of common stock equal in
value to $1.9 million. Goodwill recognized as a result of the acquisition
totaled approximately $7.3 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 $5.4 million, to record cash paid
for working capital in excess of the target minimum of $1.3 million, to record
the issuance of subordinated promissory note in the principal amount of $1
million, to record an aggregate of 117,895 shares of common stock equal in value
to $1.9 million, and accrue for estimated acquisition costs totaling $300,000.
2. To eliminate the historical amounts of stockholder's equity of TSL.
3. To reflect the goodwill associated with allocation of the purchase
price. Goodwill will be amortized using the straight-line method over 40 years.
4. To reflect the interest expense related to incremental borrowings
necessary to fund the cash purchase price and the issuance of a subordinated
promissory note. 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. The interest rate on the subordinated promissory note is
8%.
5. To reflect income taxes at an estimated combined effective tax rate of
40%.
6. To reflect reductions associated with receipt by TSL of notice of
cancellation of contracts from a customer representing approximately 46% of
TSL's 1998 revenues.
7. To reflect post-acquisition salary adjustments and additional costs
associated with conforming benefit plans.
<PAGE> 18
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: November 6, 1998
REHABCARE GROUP, INC.
By:/s/ John R. Finkenkeller
-------------------------------------------------
John R. Finkenkeller
Senior Vice President and Chief Financial Officer
<PAGE> 19
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 May 15, 1998, with respect to the
audited financial statements of Therapeutic Systems, Ltd. included in the
Current Report on Form 8-K/A of RehabCare Group, Inc. dated September 9, 1998
/s/ Mowery & Schoenfeld, LLC
November 6, 1998
