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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): 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
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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 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
<PAGE> 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
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<TABLE>
StarMed Staffing, Inc. and Affiliate
(Wholly-Owned Subsidiaries of
Medical Resources, Inc.)
Combined Balance Sheets
<CAPTION>
December 31
1997 1996
-----------------------------
<S> <C> <C>
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.
</TABLE>
4
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<TABLE>
StarMed Staffing, Inc. and Affiliate
(Wholly-Owned Subsidiaries of
Medical Resources, Inc.)
Combined Statements of Income (Loss)
<CAPTION>
Year ended December 31
1997 1996
------------------------------
<S> <C> <C>
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.
</TABLE>
5
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<TABLE>
StarMed Staffing, Inc. and Affiliate
(Wholly-Owned Subsidiaries of
Medical Resources, Inc.)
Combined Statements of Changes in Stockholder's Equity
<CAPTION>
Additional
Common Paid-In Retained
Stock Capital Earnings Total
----------------------------------------------------------------------
<S> <C> <C> <C> <C>
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.
</TABLE>
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<TABLE>
StarMed Staffing, Inc. and Affiliate
(Wholly-Owned Subsidiaries of
Medical Resources, Inc.)
Combined Statements of Cash Flows
<CAPTION>
Year ended December 31
1997 1996
-------------------------------
<S> <C> <C>
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.
</TABLE>
7
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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.
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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
<PAGE> 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.
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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.
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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:
<TABLE>
<CAPTION>
1997 1996
---------------------------------
<S> <C> <C>
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
===========
</TABLE>
12
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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:
<TABLE>
<CAPTION>
1997
-----------------------------------------------------
Taxing Jurisdiction Current Deferred Total
- -------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
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
=====================================================
</TABLE>
13
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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
<PAGE> 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
<PAGE> 16
<TABLE>
<CAPTION>
STARMED STAFFING, INC.
CONDENSED COMBINED BALANCE SHEET
June 30, 1998
(dollar amounts in thousands)
<S> <C>
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.
</TABLE>
16
<PAGE> 17
<TABLE>
STARMED STAFFING, INC.
CONDENSED COMBINED STATEMENTS OF EARNINGS
Six months ended June 30, 1998 and 1997
(dollar amounts in thousands)
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
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
=========== ============
</TABLE>
17
<PAGE> 18
<TABLE>
<CAPTION>
STARMED STAFFING, INC.
CONDENSED COMBINED STATEMENT OF CASH FLOWS
Six months ended June 30, 1998
(dollar amounts in thousands)
<S> <C>
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.
</TABLE>
18
<PAGE> 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
<PAGE> 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
<PAGE> 21
<TABLE>
REHABCARE GROUP, INC.
UNAUDITED PRO FORMA CONDENSED COMBINED BALANCE SHEET
June 30, 1998
(dollar amounts in thousands)
<CAPTION>
Pro Forma Pro Forma
RehabCare StarMed Adjustments Combined
Assets:
<S> <C> <C> <C> <C>
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.
</TABLE>
21
<PAGE> 22
<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>
Pro Forma Pro Forma
RehabCare StarMed Adjustments Combined
<S> <C> <C> <C> <C>
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.
</TABLE>
22
<PAGE> 23
<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>
Pro Forma Pro Forma
RehabCare StarMed Adjustments Combined
<S> <C> <C> <C> <C>
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.
</TABLE>
23
<PAGE> 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
<PAGE> 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
<PAGE> 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
