Exhibit 99.1
Unaudited pro forma condensed combined financial data of Kindred and RehabCare
The following unaudited pro forma condensed combined financial data is based upon the historical audited consolidated financial data of Kindred Healthcare, Inc. and its consolidated subsidiaries (“Kindred”, “we” or “our”) and RehabCare Group, Inc. and its consolidated subsidiaries (“RehabCare”) and has been prepared to reflect our previously announced acquisition of RehabCare in which Kindred will acquire all of the outstanding common stock of RehabCare (the “RehabCare Acquisition”), the issuance of $550 million senior notes due 2019 (the “Notes”), the entry into the new credit facilities in connection with the RehabCare Acquisition (the “New Credit Facilities”) and the use of proceeds from the Notes offering and the borrowings under the New Credit Facilities are collectively referred to herein as the “Transactions.” The unaudited pro forma condensed combined balance sheet is presented as if the Transactions had occurred on March 31, 2011. The unaudited pro forma condensed combined statements of operations for the year ended December 31, 2010 and the three months ended March 31, 2010 and March 31, 2011 were prepared assuming the Transactions occurred on January 1, 2010. The historical consolidated financial data has been adjusted to give effect to estimated pro forma events that are (1) directly attributable to the Transactions, (2) factually supportable, and (3) with respect to the statement of operations, expected to have a continuing impact on the combined results of operations. The historical consolidated financial statements of RehabCare have been adjusted to reflect certain reclassifications to conform with our financial statement presentation.
The following unaudited pro forma condensed combined financial data should be read in conjunction with Kindred’s and RehabCare’s consolidated financial statements and related notes previously filed with the SEC by Kindred and RehabCare, respectively.
The following unaudited pro forma condensed combined financial data has been prepared for illustrative purposes only and is not necessarily indicative of the consolidated financial position or results of operations in future periods or the results that actually would have been realized had Kindred and RehabCare been a combined company during the periods specified.
The following unaudited pro forma condensed combined financial data has been prepared using the acquisition method of accounting under generally accepted accounting principles in the United States (“GAAP”), which is subject to change and interpretation. The acquisition accounting for certain items, including property and equipment, identifiable intangible assets, leasehold interests and noncontrolling interests, is dependent upon certain valuations and other studies that have yet to commence or progress to a stage where there is sufficient information for a definitive measurement. Accordingly, the pro forma adjustments are based upon estimates and current preliminary information and may differ materially from actual amounts. For purposes of this unaudited pro forma condensed combined financial data, the conversion of each share of RehabCare common stock outstanding immediately prior to the consummation of the RehabCare Acquisition into the right to receive 0.471 of a share of Kindred common stock and $26.00 in cash, without interest (the “Merger Consideration”) has been preliminarily allocated to the tangible and intangible assets being acquired and liabilities being assumed based upon various estimates of fair value. The Merger Consideration will be allocated among the fair values of the assets acquired and liabilities assumed based upon their estimated fair values as of the date of the RehabCare Acquisition. Any excess of the Merger Consideration over the fair value of RehabCare identifiable net assets will be recorded as goodwill. The final allocation is dependent upon the completion of the aforementioned valuations and other analyses that cannot be completed prior to the RehabCare Acquisition. The actual amounts recorded at the completion of the RehabCare Acquisition may differ materially from the information presented in the accompanying unaudited pro forma condensed combined financial data and those differences could have a material impact on the unaudited pro forma condensed combined financial data and the combined company’s future results of operations and financial performance. The unaudited pro forma condensed combined statement of operations does not include expenses and certain write-offs related to debt refinancing that we expect to incur in connection with the consummation of the RehabCare Acquisition, which, at this time, are estimated to be approximately $89 million. Additionally, the
unaudited pro forma condensed combined financial data does not reflect the cost of any integration activities or benefits from synergies that may be derived from any integration activities, nor does the unaudited pro forma condensed combined statement of operations include the effects of any other items directly attributable to the RehabCare Acquisition that are not expected to have a continuing impact on the combined results of operations.
Kindred and RehabCare
Unaudited pro forma condensed combined balance sheet
As of March 31, 2011
(in thousands)
| Historical | Pro forma adjustments | |||||||||||||||||||||||
| Kindred | RehabCare | Reclassifications | Merger and financing (h) | Allocation of Merger Consideration | Pro forma combined | |||||||||||||||||||
Assets | ||||||||||||||||||||||||
Current assets: | ||||||||||||||||||||||||
Cash and cash equivalents | $ | 18,500 | $ | 33,622 | $ | - | $ | (1,506,939 | ) | $ | - | $ | 52,122 | |||||||||||
| 1,506,939 | ||||||||||||||||||||||||
Cash–restricted | 5,456 | - | - | - | - | 5,456 | ||||||||||||||||||
Insurance subsidiary investments | 62,414 | - | - | - | - | 62,414 | ||||||||||||||||||
Accounts receivable less allowance for loss | 662,687 | 249,015 | (186 | )(a) | - | - | 911,516 | |||||||||||||||||
Inventories | 24,662 | - | 5,988 | (b) | - | - | 30,650 | |||||||||||||||||
Deferred tax assets | 12,981 | 24,094 | - | - | - | 37,075 | ||||||||||||||||||
Income taxes | 1,492 | - | (13,025 | )(c) | 21,438 | - | 9,905 | |||||||||||||||||
Other | 29,935 | 11,221 | 186 | (a) | - | - | 35,354 | |||||||||||||||||
| (5,988 | )(b) | |||||||||||||||||||||||
| 818,127 | 317,952 | (13,025 | ) | 21,438 | - | 1,144,492 | ||||||||||||||||||
Property and equipment, net | 906,102 | 117,386 | - | - | 12,979 | (i) | 1,036,467 | |||||||||||||||||
Goodwill | 242,420 | 567,863 | - | - | (567,863 | )(i) | 1,037,222 | |||||||||||||||||
| 794,802 | (i) | |||||||||||||||||||||||
Intangible assets less accumulated amortization | 92,399 | 129,576 | - | - | (129,576 | )(i) | 493,399 | |||||||||||||||||
| 401,000 | (i) | |||||||||||||||||||||||
Assets held for sale | 7,082 | - | - | - | - | 7,082 | ||||||||||||||||||
Insurance subsidiary investments | 106,501 | - | - | - | - | 106,501 | ||||||||||||||||||
Deferred tax assets | 89,713 | - | (89,713 | )(d) | - | - | - | |||||||||||||||||
Investment in RehabCare Group, Inc. | - | - | - | 955,650 | (955,650 | )(j) | - | |||||||||||||||||
Other | 71,264 | 27,563 | - |
| (15,538 (805 | ) ) | (2,295 | )(k) | 137,689 | |||||||||||||||
| 57,500 | ||||||||||||||||||||||||
Total assets | $ | 2,333,608 | $ | 1,160,340 | $ | (102,738 | ) | $ | 1,018,245 | $ | (446,603 | ) | $ | 3,962,852 | ||||||||||
Liabilities and equity | ||||||||||||||||||||||||
Current liabilities: | ||||||||||||||||||||||||
Accounts payable | $ | 161,258 | $ | 15,665 | $ | - | $ | - | $ | - | $ | 176,923 | ||||||||||||
Salaries, wages and other compensation | 289,550 | 68,478 | 9,182 | (e) | - | - | 367,210 | |||||||||||||||||
Due to third party payors | 24,093 | - | 368 | (f) | - | - | 24,461 | |||||||||||||||||
Professional liability risks | 40,145 | - | 7,494 | (g) | - | - | 47,639 | |||||||||||||||||
Income taxes | - | 13,025 | (13,025 | )(c) | - | - | - | |||||||||||||||||
Other accrued liabilities | 85,841 | 72,124 | (9,182 | )(e) | (575 | ) | (7,980 | )(l) | 128,072 | |||||||||||||||
| (368 | )(f) | (1,999 | ) | (2,295 | )(k) | |||||||||||||||||||
| (7,494 | )(g) | |||||||||||||||||||||||
Long-term debt due within one year | 92 | 7,791 | - | (4,500 | ) | - | 10,383 | |||||||||||||||||
| 7,000 | ||||||||||||||||||||||||
| 600,979 | 177,083 | (13,025 | ) | (74 | ) | (10,275 | ) | 754,688 | ||||||||||||||||
Long-term debt | 350,533 | 365,138 | - | (364,875 | ) | - | 1,507,983 | |||||||||||||||||
| (350,000 | ) | |||||||||||||||||||||||
| 1,506,939 | ||||||||||||||||||||||||
| 7,248 | ||||||||||||||||||||||||
| (7,000 | ) | |||||||||||||||||||||||
Professional liability risks | 214,791 | - | - | - | - | 214,791 | ||||||||||||||||||
Deferred tax liabilities | - | 56,571 | (89,713 | )(d) | - | 98,614 | (i) | 65,472 | ||||||||||||||||
Deferred credits and other liabilities | 111,435 | 5,479 | - | - | - | 116,914 | ||||||||||||||||||
Noncontrolling interests-redeemable | - | - | - | - | 9,508 | (m) | 9,508 | |||||||||||||||||
Equity: | ||||||||||||||||||||||||
Stockholders’ equity: | ||||||||||||||||||||||||
Common stock, par value | 9,995 | 289 | - | 2,997 | (289 | )(n) | 12,992 | |||||||||||||||||
Capital in excess of par value | 830,657 | 306,151 | - | 290,254 | (306,151 | )(n) | 1,120,911 | |||||||||||||||||
Accumulated other comprehensive income | 393 | - | - | - | - | 393 | ||||||||||||||||||
Treasury stock | - | (54,704 | ) | - | - | 54,704 | (n) | - | ||||||||||||||||
Retained earnings | 214,825 | 283,206 | - | (67,244 | ) | (283,206 | )(n) | 147,581 | ||||||||||||||||
| 1,055,870 | 534,942 | - | 226,007 | (534,942 | ) | 1,281,877 | ||||||||||||||||||
Noncontrolling interests-nonredeemable | - | 21,127 | - | - | (9,508 | )(m) | 11,619 | |||||||||||||||||
Total equity | 1,055,870 | 556,069 | - | 226,007 | (544,450 | ) | 1,293,496 | |||||||||||||||||
Total liabilities and equity | $ | 2,333,608 | $ | 1,160,340 | $ | (102,738 | ) | $ | 1,018,245 | $ | (446,603 | ) | $ | 3,962,852 | ||||||||||
See accompanying notes to unaudited pro forma condensed combined financial data.
Kindred and RehabCare
Unaudited pro forma condensed combined statement of operations
Year ended December 31, 2010
(in thousands, except per share amounts)
| Historical | Pro forma adjustments | |||||||||||||||||||||||
| Kindred | RehabCare | Reclassifications (o) | Merger and financing | Allocation of Merger Consideration | Pro forma combined | |||||||||||||||||||
Revenues | $ | 4,359,697 | $ | 1,329,443 | $ | - | $ | - | $ | - | $ | 5,689,140 | ||||||||||||
Salaries, wages and benefits | 2,505,690 | - | 862,602 | - | - | 3,368,292 | ||||||||||||||||||
Supplies | 342,197 | - | 74,194 | - | - | 416,391 | ||||||||||||||||||
Rent | 357,372 | - | 49,208 | - | - | 406,580 | ||||||||||||||||||
Other operating expenses | 948,609 | 1,056,671 | (877,386 | ) | - | (996 | )(s) | 1,126,898 | ||||||||||||||||
Selling, general and administrative | - | 108,618 | (108,618 | ) | - | - | - | |||||||||||||||||
Other income | (11,422 | ) | (959 | ) | - | - | - | (12,381 | ) | |||||||||||||||
Depreciation and amortization | 121,552 | 30,595 | - | - | 1,018 | (t) | 157,047 | |||||||||||||||||
| (8,178 | )(u) | |||||||||||||||||||||||
| 12,060 | (u) | |||||||||||||||||||||||
Interest expense | 7,090 | 33,167 | - | (37,676 | )(p) | - | 104,308 | |||||||||||||||||
| 101,727 | (p) | |||||||||||||||||||||||
Investment income | (1,245 | ) | (98 | ) | - | - | - | (1,343 | ) | |||||||||||||||
| 4,269,843 | 1,227,994 | - | 64,051 | 3,904 | 5,565,792 | |||||||||||||||||||
Income from continuing operations before income taxes | 89,854 | 101,449 | - | (64,051 | ) | (3,904 | ) | 123,348 | ||||||||||||||||
Provision for income taxes | 33,708 | 36,559 | - | (24,660 | )(q) | 1,882 | (q) | 47,489 | ||||||||||||||||
Income from continuing operations | 56,146 | 64,890 | - | (39,391 | ) | (5,786 | ) | 75,859 | ||||||||||||||||
Earnings attributable to noncontrolling interests | - | (3,677 | ) | - | - | - | (3,677 | ) | ||||||||||||||||
Income from continuing operations attributable to Kindred | $ | 56,146 | $ | 61,213 | $ | - | $ | (39,391 | ) | $ | (5,786 | ) | $ | 72,182 | ||||||||||
Pro forma earnings from continuing operations per common share: | ||||||||||||||||||||||||
Basic | $ | 1.42 | $ | 1.40 | (v) | |||||||||||||||||||
Diluted | $ | 1.42 | $ | 1.40 | (v) | |||||||||||||||||||
Pro forma shares used in computing earnings from continuing operations per common share: | ||||||||||||||||||||||||
Basic | 38,738 | 11,989 | (r) | 50,727 | ||||||||||||||||||||
Diluted | 38,954 | 11,989 | (r) | 50,943 | ||||||||||||||||||||
See accompanying notes to unaudited pro forma condensed combined financial data.
Kindred and RehabCare
Unaudited pro forma condensed combined statement of operations
Three months ended March 31, 2010
(in thousands, except per share amounts)
| Historical | Pro forma adjustments | |||||||||||||||||||||||
| Kindred | RehabCare | Reclassifications (o) | Merger and financing | Allocation of Merger | Pro forma combined | |||||||||||||||||||
Revenues | $ | 1,089,837 | $ | 321,954 | $ | - | $ | - | $ | - | $ | 1,411,791 | ||||||||||||
Salaries, wages and benefits | 627,175 | - | 209,856 | - | - | 837,031 | ||||||||||||||||||
Supplies | 85,886 | - | 17,172 | - | - | 103,058 | ||||||||||||||||||
Rent | 88,319 | - | 12,101 | - | - | 100,420 | ||||||||||||||||||
Other operating expenses | 234,204 | 256,636 | (212,594) | - | - | 278,246 | ||||||||||||||||||
Selling, general and administrative | - | 26,535 | (26,535) | - | - | - | ||||||||||||||||||
Other income | (3,084) | (123) | - | - | - | (3,207) | ||||||||||||||||||
Depreciation and amortization | 31,121 | 7,218 | - | - | 761 | (t) | 39,989 | |||||||||||||||||
| (2,126) | (u) | |||||||||||||||||||||||
| 3,015 | (u) | |||||||||||||||||||||||
Interest expense | 1,307 | 8,500 | - | (9,132) | (p) | - | 25,716 | |||||||||||||||||
| 25,041 | (p) | |||||||||||||||||||||||
Investment income | (877) | (18) | - | - | - | (895) | ||||||||||||||||||
| 1,064,051 | 298,748 | - | 15,909 | 1,650 | 1,380,358 | |||||||||||||||||||
Income from continuing operations before income taxes | 25,786 | 23,206 | - | (15,909) | (1,650) | 31,433 | ||||||||||||||||||
Provision for income taxes | 10,631 | 8,941 | - | (6,125) | (q) | (1,345) | (q) | 12,102 | ||||||||||||||||
Income from continuing operations | 15,155 | 14,265 | - | (9,784) | (305) | 19,331 | ||||||||||||||||||
Loss attributable to noncontrolling interests | - | 164 | - | - | - | 164 | ||||||||||||||||||
Income from continuing operations attributable to Kindred | $ | 15,155 | $ | 14,429 | $ | - | $ | (9,784) | $ | (305) | $ | 19,495 | ||||||||||||
Pro forma earnings from continuing operations per common share: | ||||||||||||||||||||||||
Basic | $ | 0.38 | $ | 0.38 | (v) | |||||||||||||||||||
Diluted | $ | 0.38 | $ | 0.38 | (v) | |||||||||||||||||||
Pro forma shares used in computing earnings from continuing operations per common share: | ||||||||||||||||||||||||
Basic | 38,626 | 11,989 | (r) | 50,615 | ||||||||||||||||||||
Diluted | 38,859 | 11,989 | (r) | 50,848 | ||||||||||||||||||||
See accompanying notes to unaudited pro forma condensed combined financial data.
Kindred and RehabCare
Unaudited pro forma condensed combined statement of operations
Three months ended March 31, 2011
(in thousands, except per share amounts)
| Historical | Pro forma adjustments | |||||||||||||||||||||||
| Kindred | RehabCare | Reclassifications (o) | Merger and financing | Allocation of Merger Consideration | Pro forma combined | |||||||||||||||||||
Revenues | $ | 1,192,421 | $ | 364,599 | $ | - | $ | - | $ | - | $ | 1,557,020 | ||||||||||||
Salaries, wages and benefits | 678,695 | - | 231,672 | - | - | 910,367 | ||||||||||||||||||
Supplies | 90,022 | - | 19,918 | - | - | 109,940 | ||||||||||||||||||
Rent | 91,453 | - | 13,282 | - | - | 104,735 | ||||||||||||||||||
Other operating expenses | 259,369 | 284,980 | (231,269 | ) | - | (8,712 | )(s) | 304,368 | ||||||||||||||||
Selling, general and administrative | - | 33,603 | (33,603 | ) | - | - | - | |||||||||||||||||
Other income | (2,785 | ) | (149 | ) | - | - | - | (2,934 | ) | |||||||||||||||
Depreciation and amortization | 32,549 | 8,223 | - | - | (591 | )(t) | 41,444 | |||||||||||||||||
| (1,752 | )(u) | |||||||||||||||||||||||
| 3,015 | (u) | |||||||||||||||||||||||
Interest expense | 5,728 | 7,468 | - | (12,638 | )(p) | 25,599 | ||||||||||||||||||
| 25,041 | (p) | |||||||||||||||||||||||
Investment income | (495 | ) | (12 | ) | - | - | - | (507 | ) | |||||||||||||||
| 1,154,536 | 334,113 | - | 12,403 | (8,040 | ) | 1,493,012 | ||||||||||||||||||
Income from continuing operations before income taxes | 37,885 | 30,486 | - | (12,403 | ) | 8,040 | 64,008 | |||||||||||||||||
Provision for income taxes | 15,609 | 11,024 | - | (4,775 | )(q) | 2,785 | (q) | 24,643 | ||||||||||||||||
Income from continuing operations | 22,276 | 19,462 | - | (7,628 | ) | 5,255 | 39,365 | |||||||||||||||||
Earnings attributable to noncontrolling interests | - | (1,665 | ) | - | - | - | (1,665 | ) | ||||||||||||||||
Income from continuing operations attributable to Kindred | $ | 22,276 | $ | 17,797 | $ | - | $ | (7,628 | ) | $ | 5,255 | $ | 37,700 | |||||||||||
Pro forma earnings from continuing operations per common share: | ||||||||||||||||||||||||
Basic | $ | 0.56 | $ | 0.73 | (v) | |||||||||||||||||||
Diluted | $ | 0.55 | $ | 0.72 | (v) | |||||||||||||||||||
Pro forma shares used in computing earnings from continuing operations per common share: | ||||||||||||||||||||||||
Basic | 39,035 | 11,989 | (r) | 51,024 | ||||||||||||||||||||
Diluted | 39,543 | 11,989 | (r) | 51,532 | ||||||||||||||||||||
See accompanying notes to unaudited pro forma condensed combined financial data.
Notes to unaudited pro forma condensed combined financial data
Note 1—Basis of presentation
The accompanying unaudited pro forma condensed combined financial data was prepared in accordance with the provisions of the authoritative guidance for business combinations using the acquisition method of accounting in which Kindred acquires all of the outstanding common stock of RehabCare.
The accompanying unaudited pro forma condensed combined financial data presents the pro forma combined financial position and results of operations based upon the historical audited and unaudited financial statements of Kindred and RehabCare, after giving effect to the Transactions, which include the RehabCare Acquisition, related financing activities and other adjustments. The unaudited pro forma condensed combined financial data has been prepared for illustrative purposes only and does not reflect the cost of any integration activities or benefits from synergies that may be derived from any integration activities, nor does the unaudited pro forma condensed combined statement of operations include the effects of any other items directly attributable to the RehabCare Acquisition that are not expected to have a continuing impact on the combined results of operations.
The accompanying unaudited pro forma condensed combined balance sheet gives effect to the Transactions as if they had been consummated on March 31, 2011, and includes estimated pro forma adjustments for the preliminary valuations of assets acquired and liabilities assumed. These adjustments are subject to further revision as additional information becomes available. The unaudited pro forma condensed combined statement of operations gives effect to the Transactions as if they had been consummated on January 1, 2010.
Note 2—Preliminary allocation of Merger Consideration
On February 7, 2011, we entered into a merger agreement (the “Merger Agreement”) with RehabCare, providing for Kindred’s acquisition of all of the outstanding common stock of RehabCare. Each share of RehabCare common stock outstanding immediately prior to the effective time (subject to certain exceptions) will be converted into the right to receive 0.471 of a share of Kindred’s common stock and $26.00 in cash, without interest. No fractional shares of our common stock will be issued in the RehabCare Acquisition and RehabCare stockholders will receive cash in lieu of fractional shares. The Merger Agreement also provides for the vesting and conversion of certain RehabCare stock options and the vesting and lapse of restrictions on RehabCare restricted shares. The value of the equity consideration portion of the preliminary Merger Consideration is subject to change based upon changes in the market price of our common stock prior to closing. The total value of the transaction, including the assumption and refinancing of RehabCare long-term debt, is approximately $1.3 billion.
Upon completion of the RehabCare Acquisition, RehabCare stockholders will own approximately 23% of our outstanding common stock.
We will fund the RehabCare Acquisition and repay existing indebtedness of Kindred and RehabCare with borrowings under the New Credit Facilities and the proceeds of the Notes offering.
An estimate of the Merger Consideration paid to RehabCare stockholders upon the consummation of the RehabCare Acquisition and a preliminary allocation of the Merger Consideration to the assets to be acquired and the liabilities to be assumed follows (in thousands, except per share cash consideration, exchange ratio and closing price, or per option weighted average value amounts):
Estimate of Merger Consideration: | ||||
Cash consideration: | ||||
RehabCare common stock and unvested restricted shares outstanding as of March 31, 2011 | 25,455 | |||
Cash consideration paid per share per the Merger Agreement | $ | 26.00 | ||
| 661,830 | ||||
RehabCare employee stock options outstanding with exercise prices below the Merger Consideration as of March 31, 2011 | 39 | |||
Weighted average value per outstanding RehabCare stock options as of May 19, 2011 | $ | 14.60 | ||
| 569 | ||||
Total cash consideration | 662,399 | |||
Kindred equity consideration: | ||||
RehabCare common stock and unvested restricted shares outstanding as of March 31, 2011 | 25,455 | |||
Exchange ratio per Merger Agreement | 0.471 | |||
Assumed Kindred common stock issued | 11,989 | |||
Kindred closing price per share as of May 19, 2011 | $ | 24.46 | ||
Total equity consideration | 293,251 | |||
Total Merger Consideration to RehabCare stockholders and stock option holders | $ | 955,650 | ||
Allocation of Merger Consideration to assets acquired and liabilities assumed (in thousands):
Historical March 31, | Reclassifications and fair value adjustments | Allocation of Merger Consideration | ||||||||||
Cash and cash equivalents | $ | 33,622 | $ | - | $ | 33,622 | ||||||
Accounts receivable | 249,015 | (186 | ) | 248,829 | ||||||||
Deferred tax assets | 24,094 | - | 24,094 | |||||||||
Other current assets (liabilities) | 11,221 | (12,839 | ) | (1,618 | ) | |||||||
Property and equipment | 117,386 | 12,979 | 130,365 | |||||||||
Identifiable intangible assets | 129,576 | 271,424 | 401,000 | |||||||||
Other assets | 27,563 | - | 27,563 | |||||||||
Current portion of long-term debt | (7,791 | ) | - | (7,791 | ) | |||||||
Accounts payable and other current liabilities | (169,292 | ) | 21,005 | (148,287 | ) | |||||||
Long-term debt, less current portion | (365,138 | ) | - | (365,138 | ) | |||||||
Deferred tax liabilities | (56,571 | ) | (98,614 | ) | (155,185 | ) | ||||||
Other liabilities | (5,479 | ) | - | (5,479 | ) | |||||||
Noncontrolling interests-nonredeemable | (21,127 | ) | 9,508 | (11,619 | ) | |||||||
Noncontrolling interests-redeemable | - | (9,508 | ) | (9,508 | ) | |||||||
Total identifiable net assets | (32,921 | ) | 160,848 | |||||||||
Goodwill | 567,863 | 794,802 | ||||||||||
Net assets | $ | 534,942 | $ | 955,650 | ||||||||
A change of $1 in the price of our common stock would increase or decrease the equity consideration, including unvested employee restricted shares and employee stock option consideration, by approximately $12 million, which would result in a corresponding adjustment to goodwill.
The final Merger Consideration allocation for certain items, including property and equipment, identifiable intangible assets, leasehold interests and noncontrolling interests, is dependent upon certain valuations and other studies that have yet to commence or progress to a stage where there is sufficient information for a definitive measurement. The actual amounts recorded at the completion of the RehabCare Acquisition may differ materially from the information presented herein.
Note 3—Pro forma adjustments
The unaudited pro forma condensed combined financial data includes the following adjustments to conform the RehabCare balance sheet and statement of operations with the Kindred presentation, to give effect to the RehabCare Acquisition and Kindred’s financing activities and to adjust historical amounts to estimated fair value in connection with the Merger Consideration allocation. See Note 2.
Unaudited pro forma condensed combined balance sheet adjustments
| a) | To reclassify $0.2 million of RehabCare Medicare and Medicaid cost report accounts and other accounts receivable from other current assets to accounts receivable. |
| b) | To reclassify $6.0 million of RehabCare inventory from other current assets to inventory. |
| c) | To reclassify $13.0 million of RehabCare income taxes payable to offset Kindred’s income taxes receivable. |
| d) | To reclassify $89.7 million of Kindred long-term deferred tax assets to long-term deferred tax liabilities to conform to the pro forma condensed combined balance sheet presentation after adjustments. |
| e) | To reclassify $9.2 million of RehabCare workers compensation liabilities from other accrued liabilities to accrued salaries, wages and other compensation. |
| f) | To reclassify $0.4 million of RehabCare Medicare and Medicaid cost report payables from other accrued liabilities to due to third party payors. |
| g) | To reclassify $7.5 million of RehabCare professional liability risks from other current liabilities to professional liability risks classified as current. |
| h) | We will fund the RehabCare Acquisition and repay existing indebtedness of Kindred and RehabCare with borrowings under the New Credit Facilities and the proceeds of the Notes offering. The New Credit Facilities include a $650 million senior secured asset-based revolving credit facility (“the ABL Facility”) with a five-year term and a $700 million senior secured term loan facility (the “Term Loan Facility”) with a seven-year term. We expect to pay various financing costs related to executing these debt instruments that will be amortized over the terms of the loans or expensed at the consummation of the RehabCare Acquisition. |
Unaudited pro forma condensed combined balance sheet adjustments (continued)
The financing activities related to the RehabCare Acquisition, including both debt and equity financing and the related uses of funds, follows (in thousands, except per share amounts):
Financing sources: | ||||||||
New debt: | ||||||||
$650 million ABL Facility | $ | 263,939 | ||||||
$700 million Term Loan Facility (current portion—$7 million) | 700,000 | |||||||
$550 million Notes offering | 550,000 | $ | 1,513,939 | |||||
Equity exchanged: | ||||||||
Kindred common stock, $0.25 par value | 2,997 | |||||||
Capital in excess of par value | 290,254 | 293,251 | ||||||
| $ | 1,807,190 | |||||||
Financing uses: | ||||||||
Consideration to acquire RehabCare (see Note 2): | ||||||||
Cash consideration | $ | 662,399 | ||||||
Equity exchanged | 293,251 | $ | 955,650 | |||||
RehabCare long-term debt refinanced | 364,875 | |||||||
Current portion of RehabCare long-term debt refinanced | 4,500 | 369,375 | ||||||
Kindred revolving credit facility to be refinanced | 350,000 | |||||||
Accrued interest related to debt refinanced | 575 | |||||||
Financing costs paid at merger closing (deferred as long-term assets) | 57,500 | |||||||
Original issue discount on Term Loan Facility (recorded for accounting purposes as a reduction to new debt) | 7,000 | |||||||
Expenses paid at closing | 67,090 | |||||||
| $ | 1,807,190 | |||||||
Expenses related to RehabCare Acquisition closing: | ||||
Cash payments: | ||||
Legal and professional fees | $ | 33,000 | ||
Employee change in control payments and other severance agreements | 21,100 | |||
Bridge loan facility commitment fee | 8,250 | |||
Other expenses | 4,740 | |||
| 67,090 | ||||
Less amounts accrued at March 31, 2011 | (1,999 | ) | ||
| 65,091 | ||||
Non-cash write-offs: | ||||
RehabCare deferred financing costs | 15,538 | |||
RehabCare original issue discount | 7,248 | |||
Kindred deferred financing costs | 805 | |||
| 23,591 | ||||
| 88,682 | ||||
Income tax benefit(1) | (21,438 | ) | ||
Charge to retained earnings | $ | 67,244 | ||
(1) The combined company estimated statutory income tax rate of 38.5% was only applied to expenses related to the RehabCare Acquisition that are expected to be deductible for income tax purposes.
Unaudited pro forma condensed combined balance sheet adjustments (continued)
| i) | To adjust the tangible and identifiable intangible assets acquired and liabilities assumed based upon preliminary estimates of fair value and eliminate historical RehabCare goodwill and identifiable intangible asset balances. The preliminary estimates of fair value for property and equipment and identifiable intangible assets follow (dollars in thousands): |
| Historical net book value as of March 31, 2011 | Estimated fair value | Estimated fair value adjustment | ||||||||||
Property and equipment: | ||||||||||||
Land | $ | 6,043 | $ | 6,338 | $ | 295 | ||||||
Buildings | 53,089 | 58,725 | 5,636 | |||||||||
Buildings and equipment under capital lease obligations | 6,443 | 7,021 | 578 | |||||||||
Equipment | 51,474 | 57,927 | 6,453 | |||||||||
Construction in progress | 337 | 354 | 17 | |||||||||
| $ | 117,386 | $ | 130,365 | $ | 12,979 | |||||||
| Estimated fair value | ||||
Identifiable intangibles: | ||||
Indefinite lived: | ||||
RehabCare trade name | $ | 141,100 | ||
Medicare certifications | 122,200 | |||
Certificates of need | 8,000 | |||
Finite lived: | ||||
Customer relationships | 110,400 | |||
Other trade name | 16,500 | |||
Non-compete agreements | 2,800 | |||
| $ | 401,000 | |||
The excess of the Merger Consideration for RehabCare over the fair value of its identifiable net assets of $794.8 million is recorded as goodwill. See Note 2.
Adjustments to deferred tax liabilities related to the tax effect of fair value adjustments (in thousands):
Property and equipment | $ | 4,997 | ||
Identifiable intangible assets | 104,498 | |||
Goodwill | (10,881 | ) | ||
| $ | 98,614 | |||
| j) | To allocate the total Merger Consideration paid to RehabCare stockholders to the assets acquired and liabilities assumed. See Note 2. |
| k) | To remove $2.3 million of financing costs accrued by Kindred at March 31, 2011 that will be paid upon the consummation of the RehabCare Acquisition and are reflected in pro forma adjustment (h) as financing costs paid upon the consummation of the RehabCare Acquisition. |
Unaudited pro forma condensed combined balance sheet adjustments (continued)
| l) | To eliminate $8.0 million of deferred rent liabilities related to straight-line rent accruals in accordance with the provisions of the authoritative guidance for business combinations. In subsequent periods following the date of the merger, lease payments that are not contingent will continue to be accounted for on a straight-line basis. |
| m) | To reclassify $9.5 million of RehabCare noncontrolling interests that may be redeemable under the change in control provisions of existing contracts. |
| n) | To eliminate the historical stockholders’ equity balances of RehabCare. |
Unaudited pro forma condensed combined statement of operations adjustments
| o) | To reclassify the RehabCare statement of operations presentation to conform with the Kindred presentation (in thousands): |
| For the year ended December 31, 2010 | ||||||||||||
| Other operating expenses | Selling, general and administrative | Total | ||||||||||
Salaries, wages and benefits | $ | 789,507 | $ | 73,095 | $ | 862,602 | ||||||
Supplies | 73,473 | 721 | 74,194 | |||||||||
Rent | 46,559 | 2,649 | 49,208 | |||||||||
Other operating expenses | (909,539 | ) | 32,153 | (877,386 | ) | |||||||
Selling, general and administrative | - | (108,618 | ) | (108,618 | ) | |||||||
| $ | - | $ | - | $ | - | |||||||
| For the three months ended March 31, 2010 | For the three months ended March 31, 2011 | |||||||||||||||||||||||
| Other operating expenses | Selling, general and administrative | Total | Other operating expenses | Selling, general and administrative | Total | |||||||||||||||||||
Salaries, wages and benefits | $ | 191,463 | $ | 18,393 | $ | 209,856 | $ | 212,068 | $ | 19,604 | $ | 231,672 | ||||||||||||
Supplies | 17,005 | 167 | 17,172 | 19,750 | 168 | 19,918 | ||||||||||||||||||
Rent | 10,978 | 1,123 | 12,101 | 12,600 | 682 | 13,282 | ||||||||||||||||||
Other operating expenses | (219,446 | ) | 6,852 | (212,594 | ) | (244,418 | ) | 13,149 | (231,269 | ) | ||||||||||||||
Selling, general and administrative | - | (26,535 | ) | (26,535 | ) | - | (33,603 | ) | (33,603 | ) | ||||||||||||||
| $ | - | $ | - | $ | - | $ | - | $ | - | $ | - | |||||||||||||
Pro forma stock-based compensation expense, which is included in pro forma salaries, wages and benefits, totaled $14.6 million, $4.7 million and $3.4 million for the year ended December 31, 2010, the three months ended March 31, 2011 and the three months ended March 31, 2010, respectively.
Unaudited pro forma condensed combined statement of operations adjustments (continued)
| p) | To eliminate historical interest expense and deferred financing cost amortization related to Kindred and RehabCare debt obligations that will be refinanced at the closing date of the RehabCare Acquisition and to add the new interest expense and deferred financing cost amortization related to the New Credit Facilities and the Notes offering, which are computed as follows (in thousands): |
| For the year ended December 31, 2010 | ||||||||||||
| Interest expense | Deferred cost amortization | Total decrease to interest expense | ||||||||||
Historical interest expense eliminated: | ||||||||||||
RehabCare | $ | 26,947 | $ | 4,521 | $ | 31,468 | ||||||
Kindred | 4,976 | 1,232 | 6,208 | |||||||||
| $ | 31,923 | $ | 5,753 | $ | 37,676 | |||||||
| For the three months ended March 31, 2010 | For the three months ended March 31, 2011 | |||||||||||||||||||||||
| Interest expense | Deferred cost amortization | Total decrease to interest expense | Interest expense | Deferred cost amortization | Total decrease to interest expense | |||||||||||||||||||
Historical interest expense eliminated: | ||||||||||||||||||||||||
RehabCare | $ | 6,917 | $ | 1,127 | $ | 8,044 | $ | 5,952 | $ | 1,173 | $ | 7,125 | ||||||||||||
Kindred | 860 | 228 | 1,088 | 4,853 | 660 | 5,513 | ||||||||||||||||||
| $ | 7,777 | $ | 1,355 | $ | 9,132 | $ | 10,805 | $ | 1,833 | $ | 12,638 | |||||||||||||
Debt date | Deferred financing | Interest expense | Deferred cost amortization | Other fees | Total increase to interest expense | |||||||||||||||||||
New interest expense: | ||||||||||||||||||||||||
For the year ended December 31, 2010 | $ | 1,513,939 | $ | 64,500 | $ | 89,556 | $ | 10,041 | $ | 2,130 | $ | 101,727 | ||||||||||||
For the three months ended March 31, 2010 and March 31, 2011 | $ | 1,513,939 | $ | 64,500 | $ | 21,997 | $ | 2,511 | $ | 533 | $ | 25,041 | ||||||||||||
Interest expense for each period was computed using a blended interest rate for the New Credit Facilities and the Notes offering of approximately 5.9%. The deferred cost amortization was calculated using a blended term of approximately 6.4 years.
A change in interest rate of one-eighth percent would increase or decrease pro forma annual interest expense by approximately $2 million.
| q) | To adjust the income tax provision to reflect the pro forma combined company estimated statutory income tax rate of 38.5%. |
Unaudited pro forma condensed combined statement of operations adjustments (continued)
| r) | The basic and diluted shares used in the computation of earnings from continuing operations per common share were increased by 12.0 million shares to reflect the additional shares issued in the equity consideration to RehabCare stockholders in the RehabCare Acquisition. |
| s) | To eliminate the direct incremental costs of the RehabCare Acquisition that are reflected in the historical statement of operations of both Kindred and RehabCare. Additional transaction costs unrelated to the RehabCare Acquisition were not eliminated. These amounts, on a pro forma basis, totaled $3.9 million, $0.3 million and $0.8 million for the year ended December 31, 2010, the three months ended March 31, 2011 and the three months ended March 31, 2010, respectively. |
| t) | To record additional depreciation expense based upon the estimated fair value of the property and equipment acquired over each asset’s estimated remaining useful life. The computation of these amounts follows (dollars in thousands): |
| Depreciation expense | ||||||||||||||||||||||||
For the year | For the | |||||||||||||||||||||||
| Historical net book value | Estimated fair value adjustment | Estimated fair value | Estimated remaining useful life | |||||||||||||||||||||
Land | $ | 6,043 | $ | 295 | $ | 6,338 | $ | - | $ | - | ||||||||||||||
Buildings | 53,089 | 5,636 | 58,725 | 9 | 6,525 | 1,631 | ||||||||||||||||||
Buildings and equipment under capital lease obligations | 6,443 | 578 | 7,021 | 4 | 1,755 | 439 | ||||||||||||||||||
Equipment | 51,474 | 6,453 | 57,927 | 4 | 14,482 | 3,621 | ||||||||||||||||||
Construction in progress | 337 | 17 | 354 | - | - | |||||||||||||||||||
| $ | 117,386 | $ | 12,979 | $ | 130,365 | 6 | 22,762 | 5,691 | ||||||||||||||||
For the year ended December 31, 2010: | ||||||||||||||||||||||||
Historical RehabCare depreciation |
| 21,744 | ||||||||||||||||||||||
Depreciation adjustment |
| $ | 1,018 | |||||||||||||||||||||
For the three months ended March 31, 2010: | ||||||||||||||||||||||||
Historical RehabCare depreciation |
| 4,930 | ||||||||||||||||||||||
Depreciation adjustment |
| $ | 761 | |||||||||||||||||||||
For the three months ended March 31, 2011: | ||||||||||||||||||||||||
Historical RehabCare depreciation |
| 6,282 | ||||||||||||||||||||||
Depreciation adjustment |
| $ | (591 | ) | ||||||||||||||||||||
Unaudited pro forma condensed combined statement of operations adjustments (continued)
| u) | To eliminate historical RehabCare intangible amortization expense and replace with new amortization amounts based upon the estimated fair value of finite lived intangible assets. The computation of the new amortization amounts follow (dollars in thousands): |
| Amortization expense | ||||||||||||||||
| Estimated fair value | Estimated weighted average useful life | For the year ended December 31, 2010 | For the three months ended March 31, 2010 and March 31, 2011 | |||||||||||||
Customer relationships | $ | 110,400 | 15 | $ | 7,360 | $ | 1,840 | |||||||||
Other trade name | 16,500 | 5 | 3,300 | 825 | ||||||||||||
Non-compete agreements | 2,800 | 2 | 1,400 | 350 | ||||||||||||
| $ | 129,700 | $ | 12,060 | $ | 3,015 | |||||||||||
Historical RehabCare amortization expense: | ||||||||||||||||
For the year ended December 31, 2010 |
| $ | 8,178 | |||||||||||||
For the three months ended March 31, 2010 |
| $ | 2,126 | |||||||||||||
For the three months ended March 31, 2011 |
| $ | 1,752 | |||||||||||||
Unaudited pro forma condensed combined statement of operations adjustments (continued)
| v) | Pro forma earnings from continuing operations per common share are based upon the weighted average number of common shares outstanding. The diluted calculation of pro forma earnings from continuing operations per common share includes the dilutive effect of our stock options and performance-based restricted shares. We follow the provisions of the authoritative guidance for determining whether instruments granted in share-based payment transactions are participating securities, which requires that unvested restricted stock that entitles the holder to receive nonforfeitable dividends before vesting be included as a participating security in the basic and diluted earnings per common share calculation pursuant to the two-class method. A computation of the pro forma earnings from continuing operations per common share follows (in thousands, except per share amounts): |
| Year ended | For the three months ended | |||||||||||||||||||||||
| December 31, 2010 | March 31, 2010 | March 31, 2011 | ||||||||||||||||||||||
| Basic | Diluted | Basic | Diluted | Basic | Diluted | |||||||||||||||||||
Pro forma earnings: | ||||||||||||||||||||||||
As reported in unaudited pro forma condensed combined statement of operations | $ | 72,182 | $ | 72,182 | $ | 19,495 | $ | 19,495 | $ | 37,700 | $ | 37,700 | ||||||||||||
Allocation to participating unvested restricted stockholders | (1,001 | ) | (996 | ) | (273 | ) | (272 | ) | (557 | ) | (551 | ) | ||||||||||||
Available to common stockholders | $ | 71,181 | $ | 71,186 | $ | 19,222 | $ | 19,223 | $ | 37,143 | $ | 37,149 | ||||||||||||
Shares used in the computation: | ||||||||||||||||||||||||
Weighted average shares outstanding—basic computation | 50,727 | 50,727 | 50,615 | 50,615 | 51,024 | 51,024 | �� | |||||||||||||||||
Dilutive effect of Kindred employee stock options | 135 | 233 | 508 | |||||||||||||||||||||
Dilutive effect of Kindred performance-based restricted shares | 81 | - | - | |||||||||||||||||||||
Adjusted weighted average shares outstanding – diluted computation | 50,943 | 50,848 | 51,532 | |||||||||||||||||||||
Pro forma earnings from continuing operations per common share | $ | 1.40 | $ | 1.40 | $ | 0.38 | $ | 0.38 | $ | 0.73 | $ | 0.72 | ||||||||||||
