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Table of Contents
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
x | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended June 30, 2010.
or
¨ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to .
Commission File Number 333-133319
LIFECARE HOLDINGS, INC.
(Exact name of registrant as specified in its charter)
Delaware | 51-0372090 | |
(State or other jurisdiction of incorporation or organization) |
(IRS Employer Identification Number) | |
5560 Tennyson Parkway Plano, Texas |
75024 | |
(Address of Principal Executive Offices) | (Zip Code) |
(469) 241-2100
(Registrants telephone number, including area code)
None
(Former name, former address and former fiscal year, if changes since last report)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ¨ No ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. Please see definition of accelerated and large accelerated filer in Rule 12b-2 of the Exchange Act.
Large Accelerated Filer: | ¨ | Accelerated Filer: | ¨ | |||
Non-Accelerated Filer: | x | Smaller Reporting Company: | ¨ |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes ¨ No x
As of August 13, 2010, the registrant had 100 shares of Common Stock, par value $0.01 per share, outstanding.
Table of Contents
TABLE OF CONTENTS
PART I: FINANCIAL INFORMATION | ||||
ITEM 1. | CONSOLIDATED FINANCIAL STATEMENTS | 3 | ||
CONDENSED CONSOLIDATED BALANCE SHEETS | 3 | |||
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS | 4 | |||
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS DEFICIT | 5 | |||
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS | 6 | |||
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS | 7 | |||
ITEM 2. | MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS | 20 | ||
ITEM 3. | QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK | 30 | ||
ITEM 4. | CONTROLS AND PROCEDURES | 30 | ||
PART II: OTHER INFORMATION | 31 | |||
ITEM 1. | LEGAL PROCEEDINGS | 31 | ||
ITEM 1A. | RISK FACTORS | 31 | ||
ITEM 6. | EXHIBITS | 31 | ||
SIGNATURES | 32 |
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ITEM 1: | CONSOLIDATED FINANCIAL STATEMENTS |
LIFECARE HOLDINGS, INC. AND SUBSIDIARIES
Condensed Consolidated Balance Sheets
June 30, 2010 (unaudited) and December 31, 2009
(In thousands, except share data)
June 30, 2010 |
December 31, 2009 |
|||||||
Assets | ||||||||
Current assets: |
||||||||
Cash and cash equivalents |
$ | 50,406 | $ | 46,681 | ||||
Accounts receivable, net of allowance for doubtful accounts of $13,575 and $12,018, respectively |
68,915 | 69,503 | ||||||
Income taxes |
1,457 | 1,182 | ||||||
Other current assets |
7,414 | 7,543 | ||||||
Total current assets |
128,192 | 124,909 | ||||||
Property and equipment, net |
79,414 | 82,347 | ||||||
Other assets, net |
9,781 | 10,855 | ||||||
Identifiable intangibles, net |
15,596 | 16,165 | ||||||
Goodwill |
248,341 | 245,370 | ||||||
$ | 481,324 | $ | 479,646 | |||||
Liabilities and Stockholders Deficit | ||||||||
Current liabilities: |
||||||||
Current installments of long-term debt |
$ | 2,550 | $ | 2,550 | ||||
Current installments of obligations under capital leases |
1,107 | 833 | ||||||
Current installment of lease financing obligation |
461 | 444 | ||||||
Estimated third party payor settlements |
4,827 | 9,957 | ||||||
Accounts payable |
25,817 | 25,834 | ||||||
Accrued payroll |
4,873 | 9,563 | ||||||
Accrued vacation |
5,273 | 4,368 | ||||||
Accrued insurance |
766 | 932 | ||||||
Accrued interest |
6,306 | 6,418 | ||||||
Accrued other |
3,093 | 4,090 | ||||||
Total current liabilities |
55,073 | 64,989 | ||||||
Long-term debt, excluding current installments |
394,637 | 395,912 | ||||||
Obligations under capital leases, excluding current installments |
752 | 1,010 | ||||||
Lease financing obligation, excluding current installments |
19,803 | 20,038 | ||||||
Accrued insurance |
4,439 | 4,371 | ||||||
Other noncurrent liabilities |
14,557 | 10,605 | ||||||
Total liabilities |
489,261 | 496,925 | ||||||
Commitments and contingencies |
||||||||
Stockholders deficit: |
||||||||
Common stock, $0.01 par value, 100 shares authorized, issued and outstanding |
| | ||||||
Additional paid-in capital |
175,391 | 172,273 | ||||||
Accumulated deficit |
(183,328 | ) | (189,552 | ) | ||||
Total stockholders deficit |
(7,937 | ) | (17,279 | ) | ||||
$ | 481,324 | $ | 479,646 | |||||
See accompanying notes to condensed consolidated financial statements.
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LIFECARE HOLDINGS, INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Operations
For the three and six months ended June 30, 2010 and 2009
(In thousands)
(Unaudited)
Three Months | Six Months | |||||||||||||
2010 | 2009 | 2010 | 2009 | |||||||||||
Net patient service revenue |
$ | 90,633 | $ | 91,645 | $ | 185,593 | $ | 186,669 | ||||||
Salaries, wages and benefits |
42,669 | 42,412 | 84,170 | 85,595 | ||||||||||
Supplies |
9,313 | 8,708 | 18,552 | 17,463 | ||||||||||
Rent |
6,396 | 6,378 | 12,923 | 12,881 | ||||||||||
Other operating expenses |
20,239 | 23,624 | 41,136 | 45,386 | ||||||||||
Provision for doubtful accounts |
1,829 | 1,749 | 3,418 | 3,107 | ||||||||||
Gain on early extinguishment of debt |
| | | (84 | ) | |||||||||
Depreciation and amortization |
2,537 | 2,745 | 5,086 | 5,380 | ||||||||||
Interest expense, net |
7,089 | 8,025 | 14,094 | 16,352 | ||||||||||
Total expenses |
90,072 | 93,641 | 179,379 | 186,080 | ||||||||||
Operating income (loss) |
561 | (1,996 | ) | 6,214 | 589 | |||||||||
Equity in income (loss) of joint venture |
356 | | 410 | (537 | ) | |||||||||
Income (loss) before income taxes |
917 | (1,996 | ) | 6,624 | 52 | |||||||||
Provision for income taxes |
225 | 175 | 400 | 400 | ||||||||||
Net income (loss) |
$ | 692 | $ | (2,171 | ) | $ | 6,224 | $ | (348 | ) | ||||
See accompanying notes to condensed consolidated financial statements.
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LIFECARE HOLDINGS, INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Stockholders Deficit
For the six months ended June 30, 2010
(In thousands)
(Unaudited)
Common Stock |
Additional Paid-in Capital |
Accumulated Deficit |
Total Stockholders Deficit |
|||||||||||
Balance, December 31, 2009 |
$ | | $ | 172,273 | $ | (189,552 | ) | $ | (17,279 | ) | ||||
Equity compensation amortization |
| 147 | | 147 | ||||||||||
Settlement of purchase escrow |
| 2,971 | | 2,971 | ||||||||||
Net income |
| | 6,224 | 6,224 | ||||||||||
Balance, June 30, 2010 |
$ | | $ | 175,391 | $ | (183,328 | ) | $ | (7,937 | ) | ||||
See accompanying notes to condensed consolidated financial statements.
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LIFECARE HOLDINGS, INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Cash Flows
For the six months ended June 30, 2010 and 2009
(In thousands)
(Unaudited)
2010 | 2009 | |||||||
Cash flows from operating activities: |
||||||||
Net income (loss) |
$ | 6,224 | $ | (348 | ) | |||
Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities: |
||||||||
Depreciation and amortization |
6,235 | 6,474 | ||||||
Provision for doubtful accounts |
3,418 | 3,107 | ||||||
Equity compensation amortization |
147 | 160 | ||||||
Gain on early extinguishment of debt |
| (84 | ) | |||||
Equity in (income) loss of joint venture |
(410 | ) | 537 | |||||
Changes in operating assets and liabilities: |
||||||||
Accounts receivable |
(2,830 | ) | (5,411 | ) | ||||
Income taxes |
(275 | ) | (184 | ) | ||||
Prepaid expenses and other current assets |
133 | (10 | ) | |||||
Other assets |
334 | 288 | ||||||
Estimated third party payor settlements |
(5,130 | ) | (8,773 | ) | ||||
Accounts payable and accrued expenses |
(4,710 | ) | (1,885 | ) | ||||
Other liabilities |
4,020 | (1,218 | ) | |||||
Net cash provided by (used in) operating activities |
7,156 | (7,347 | ) | |||||
Cash flows from investing activities: |
||||||||
Purchases of property and equipment |
(1,355 | ) | (2,605 | ) | ||||
Net cash used in investing activities |
(1,355 | ) | (2,605 | ) | ||||
Cash flows from financing activities: |
||||||||
Net change in borrowings under the line of credit |
| 25,000 | ||||||
Payments of long-term debt |
(1,275 | ) | (1,338 | ) | ||||
Payments on obligations under capital leases |
(583 | ) | (607 | ) | ||||
Payments on lease financing obligation |
(218 | ) | (247 | ) | ||||
Net cash provided by (used in) financing activities |
(2,076 | ) | 22,808 | |||||
Net increase in cash and cash equivalents |
3,725 | 12,856 | ||||||
Cash and cash equivalents, beginning of period |
46,681 | 25,262 | ||||||
Cash and cash equivalents, end of period |
$ | 50,406 | $ | 38,118 | ||||
Supplemental disclosure of cash flow information: |
||||||||
Cash: |
||||||||
Interest paid |
$ | 13,195 | $ | 16,378 | ||||
Net income taxes paid |
676 | 584 | ||||||
Noncash: |
||||||||
Equipment purchased through capital lease financing |
599 | |
See accompanying notes to condensed consolidated financial statements.
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LifeCare Holdings, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
(unaudited)
(1) Basis of Presentation
LifeCare Holdings, Inc. (the Company) is a wholly owned subsidiary of LCI Holdco, LLC (Holdco). Holdco is a wholly owned subsidiary of LCI Intermediate Holdco, Inc. (Intermediate Holdco). Intermediate Holdco is a wholly owned subsidiary of LCI Holding Company, Inc. (Holdings), which is owned by an investor group that includes affiliates of The Carlyle Group and members of our senior management and board of directors. The investor group acquired Holdings pursuant to a merger that occurred on August 11, 2005 (the Merger).
The accompanying unaudited condensed consolidated financial statements and financial information have been prepared in accordance with generally accepted accounting principles, and reflect all adjustments that are, in the opinion of management, necessary for a fair presentation of the results of the interim periods. The accompanying financial statements for the three and six month periods ended June 30, 2010 and 2009 are not necessarily indicative of annualized financial results.
The accompanying unaudited condensed consolidated financial statements should be read in conjunction with the consolidated audited financial statements and notes thereto for the year ended December 31, 2009 included in the Form 10-K we filed on March 31, 2010 with the Securities and Exchange Commission. Certain information and disclosures normally included in the notes to consolidated financial statements have been condensed or omitted as permitted by the rules and regulations of the Securities and Exchange Commission, although we believe the disclosure is adequate to make the information presented not misleading.
(2) Summary of Significant Accounting Policies
Use of Estimates
The preparation of the financial statements requires us to make a number of estimates and assumptions relating to the reported amount of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. Actual amounts could differ from those estimates.
Goodwill
We review our goodwill annually, or more frequently if circumstances warrant a more timely review, to determine if there has been an impairment. We review goodwill based upon one reporting unit, as our company is managed as one operating segment. In calculating the fair value of the reporting unit, we use various assumptions including projected cash flows and discount rates. If projected future cash flows decline from the current amounts projected by management, an impairment charge may be recorded.
Income Taxes
For the six months ended June 30, 2010, income tax expense recorded represents the estimated income tax liability for certain state income taxes. We believe that it is more likely than not that no benefit or expense will be realized during 2010 for federal income taxes based on the availability of net operating losses to offset current year income.
We follow the threshold of more-likely-than-not for recognition of tax benefits of uncertain tax positions taken or expected to be taken in a tax return. We record accrued interest and penalties associated with uncertain tax positions, if any, as income tax expense in the condensed consolidated statement of operations.
The federal statute of limitations remains open for original tax returns filed for 2006 through 2009. State jurisdictions generally have statutes of limitations ranging from three to five years. The state income tax impact of federal income tax changes remains subject to examination by various states for a period up to one year after formal notification to the states.
On November 6, 2009, new legislation was enacted, The Worker, Homeownership, and Business Assistance Act of 2009, whereby businesses may elect to carry back net operating losses for up to five years for losses incurred in either 2008 or 2009. Previously, the carry back period was limited to two years. We are currently evaluating the impact this new law may have on our ability to utilize our net operating losses.
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LifeCare Holdings, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements(Continued)
(unaudited)
Stock Compensation
We estimate the fair value of our equity-based compensation awards on the date of grant, or the date of award modification if applicable, using the Black-Scholes option pricing model. There were no options granted during the six months ended June 30, 2010 (see note 6).
Recent Accounting Pronouncements
Since the filing of our 2009 Form 10-K, we do not believe any recently issued, but not yet effective, accounting standards will have a material effect on our results of operations or financial position.
Reclassifications
Certain reclassifications have been made to the consolidated financial statements for prior periods to conform to the presentation of the 2010 consolidated financial statements. Such reclassifications had no impact on net income or stockholders deficit.
(3) Net Patient Service Revenue
We recognize in our consolidated financial statements the impact of adjustments, if any, to Medicare reimbursement when the amounts can be reasonably determined. Net revenues for the three and six months ended June 30, 2010 included decreases of $3.5 million and $3.6 million, respectively, related to changes in estimates and settlements on prior year cost reports filed with the Medicare program, compared to increases of $1.4 million and $1.3 million for the three and six months ended June 30, 2009, respectively.
(4) Goodwill and Impairment Charges
The Merger agreement provided for additional purchase price considerations that were contingent upon the resolution of certain specific issues. During the three months ended June 30, 2010, goodwill was increased by $3.0 million due to distributions to the prior stockholders of our company from one of the escrow accounts, as the result of the resolution of a specific matter.
(5) Long-Term Debt
Long-term debt consists of the following (in thousands):
June 30, 2010 |
December 31, 2009 |
|||||||
Senior secured credit facilityterm loan |
$ | 242,888 | $ | 244,163 | ||||
9 1/ 4% senior subordinated notes |
119,299 | 119,299 | ||||||
Revolving credit facility |
35,000 | 35,000 | ||||||
Total long-term debt |
397,187 | 398,462 | ||||||
Current installments of long-term debt |
(2,550 | ) | (2,550 | ) | ||||
Long-term debt, excluding current installments |
$ | 394,637 | $ | 395,912 | ||||
As of June 30, 2010, the senior secured credit facility consists of (i) a $60 million revolving credit facility, subject to availability, including sub-facilities for letters of credit and swingline loans and (ii) a $242.9 million term loan facility. Availability of borrowings under our revolving credit facility are generally dependent upon our ability to meet the maximum leverage ratio test included in the senior secured credit facility.
The senior secured credit facility requires us to comply on a quarterly basis with certain financial covenants, including an interest coverage ratio test and a maximum leverage ratio test. These financial covenants become more restrictive on a periodic basis throughout the remaining term of the senior secured credit facility. In addition, the senior secured credit facility includes various negative covenants, including limitations on indebtedness, liens, investments, permitted businesses and transactions and other matters, as well as certain customary representations and warranties, affirmative covenants and events of default including payment defaults, breach of representations and warranties, covenant defaults, cross defaults to certain indebtedness, certain events of bankruptcy, certain events under ERISA, material judgments, actual or asserted failure of any guaranty or security document supporting the senior secured credit facility to be in full force and effect, change of control, and certain subjective provisions. We believe we are currently in compliance with the covenants of our senior secured credit facility as amended.
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LifeCare Holdings, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements(Continued)
(unaudited)
As discussed previously, the financial covenant requirements in our senior secured credit facility become more restrictive throughout the remaining term of the facility. More specifically, the maximum leverage ratio test, which is currently at 7.00x of consolidated adjusted EBITDA (as defined in the credit agreement governing our senior secured credit facility, as amended), is scheduled to adjust to 6.00x beginning with the trailing 12-month period ended March 31, 2011 and thereafter. The minimum interest coverage ratio requirement, which is currently at 1.60x, is scheduled to increase to 1.75x beginning with the trailing 12-month period ended March 31, 2011 and then increase to 2.00x beginning with the trailing 12-month period ended March 31, 2012 and thereafter.
We may not be able to continue to satisfy the covenant requirements in subsequent periods. If we are unable to maintain compliance with the covenants contained in our senior secured credit facility, an event of default would occur. During the continuation of an event of default, the lenders under the senior secured credit facility are entitled to take various actions, including accelerating amounts due under the senior secured credit facility, terminating our access to our revolving credit facility and all other actions generally available to a secured creditor. An uncured event of default would have a material adverse effect on our financial position, results of operations and cash flow. In the event a financial covenant is not met, our senior secured credit facility provides for certain limited cure rights which provide us the ability to issue permitted cure securities in exchange for cash or otherwise receive cash that would be contributed to our capital in an amount that is necessary to satisfy the financial covenant required on a pro forma basis. The cure right amount, if exercised, continues to be considered a component of consolidated EBITDA, as defined in the senior secured credit agreement, on a trailing four quarter basis.
(6) Stock Options
At June 30, 2010, there were 2.9 million shares of common stock of Holdings available under the 2005 Equity Incentive Plan (Plan) for stock option grants and other incentive awards, including restricted stock units. Options granted generally have an exercise price equal to the fair market value of the shares on the date of grant and expire 10 years from the date of grant. A restricted stock unit is a contractual right to receive one share of Holdings common stock in the future. Options typically vest one-quarter on each of the first four anniversary dates of the grant and restricted stock units typically vest in three equal annual installments.
Income from the three months ended June 30, 2010 and 2009 and the six months ended June 30, 2010 and 2009 includes $0.1, million, $0.1 million, $0.1 million and $0.2 million, respectively, of pre-tax compensation costs related to our stock-based compensation arrangements.
The following table summarizes stock option activity during the six months ended June 30, 2010:
Number of Shares |
Weighted average exercise price | |||||
Balance at December 31, 2009 |
2,366,250 | $ | 2.50 | |||
Granted |
| | ||||
Exercised |
| | ||||
Forfeited |
| | ||||
Expired |
(1,250 | ) | 2.50 | |||
Balance at June 30, 2010 |
2,365,000 | $ | 2.50 | |||
At June 30, 2010, the weighted average remaining contractual life of outstanding options was 7.4 years. There were 1.5 million stock options exercisable at June 30, 2010. At June 30, 2010, the weighted average exercise price of the vested stock options was $2.50, the remaining weighted average contractual life was 7.2 years and they had no intrinsic value.
As of June 30, 2010, there was approximately $49,000 of total unrecognized compensation costs related to stock options. These costs are expected to be recognized over a period of less than one year.
Restricted Stock Awards
In March 2009, our chief executive officer and president were granted 400,000 and 300,000 shares, respectively, according to a restricted stock award agreement for meeting certain financial goals for the year ended December 31, 2008. The grant-date per share fair value of these awards was nominal. The shares vest in three equal annual installments, which began on March 24, 2010.
As of June 30, 2010, there was no unrecognized compensation costs related to restricted stock awards.
(7) Regulatory Matters
All healthcare providers are required to comply with a significant number of laws and regulations at the federal and state government levels. These laws are extremely complex, and in many instances, providers do not have the benefit of significant regulatory or judicial interpretation as to how to interpret and/or apply these laws and regulations. The U.S. Department of Justice and other federal and state agencies are increasing resources dedicated to regulatory investigations and compliance audits of healthcare providers. As a healthcare provider, we are subject to these regulatory efforts. Healthcare providers that do not comply with these laws and regulations may be subject to civil or criminal penalties, the loss of their licenses, or restriction in their ability to participate in various federal and state healthcare programs. We endeavor to conduct our business in compliance with applicable laws and regulations, including healthcare fraud and abuse laws.
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LifeCare Holdings, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements(Continued)
(unaudited)
As a result of our hospitals state licensures and certifications under the Medicare and various Medicaid programs, we are subject to regular reviews, surveys, audits and investigations conducted by, or on the behalf of, the federal and state agencies, including the Centers for Medicare & Medicaid Services (CMS), that are responsible for the oversight of these programs. These agencies reviews may include reviews or surveys of our compliance with required conditions of participation regulations. The purpose of these surveys is to ensure that healthcare providers are in compliance with governmental requirements, including requirements such as adequacy of medical care, equipment, personnel, operating policies and procedures, maintenance of adequate records, compliance with building codes and environmental protection and healthcare fraud and abuse. These surveys may identify deficiencies with conditions of participation which require corrective actions to be made by the hospital within a given timeline. If a hospital is not successful in addressing the deficiencies and conditions in a timely manner, then CMS reserves the right to deem the hospital to be out of compliance with Medicare conditions of participation and may terminate the hospital from participation in the Medicare program. Termination of a hospital from the Medicare program would have a material adverse effect on our results of operations and cash flows.
Additionally, these agencies may review our compliance with various payment regulations, including enhanced medical necessity reviews of long-term acute care (LTAC) hospital cases pursuant to the Medicare, Medicaid and SCHIP Extension Act of 2007, and conduct audits under CMSs Recovery Audit Contractor (RAC) program. The RAC program has been made permanent and was required to be expanded broadly to healthcare providers pursuant to the Tax Relief and Health Care Act of 2006. The results of the enhanced medical necessity reviews and the RAC program audits could have an adverse effect on our business, financial position, result of operations and liquidity. To the extent these reviews result in an adverse finding, we may contest the adverse finding vigorously; however, these matters can result in significant legal expense and consume our resources.
(8) Commitments and Contingencies
At the time of Hurricane Katrina, we operated an 82-bed facility in New Orleans located in Memorial Medical Center. We are currently defending ourselves against certain Hurricane Katrina related lawsuits and matters under review by the Louisiana Patient Compensation Fund. We are vigorously defending ourselves in these lawsuits, however, we cannot predict the ultimate resolution of these matters. We maintained $15.0 million of general and professional liability insurance during this period, subject to a $1.0 million per claim retention. We believe that under our insurance policies, only one retention was applicable to the Hurricane Katrina matters since these matters all arose from a single event, process or condition. However, our insurance carrier sent reservation of rights letters which challenged, among other things, the application of one retention to the Hurricane Katrina related matters. On June 5, 2009, we reached an agreement with our insurance carrier whereby they agreed to continue to pay all costs, indemnification and related expenses for the Hurricane Katrina claims in return for $1.0 million, payable by us in three equal installments of $0.3 million each, due July 1, 2009, March 31, 2010, and March 31, 2011.
Significant reductions in the patient service revenues earned by a hospital may occur if we are unable to maintain the certification of the hospital as a LTAC hospital in accordance with Medicare regulations. Additionally, many of our hospitals operate in space leased from general acute care hospitals (host hospitals); consequently, these hospitals within a hospital (HIH) are subject to additional specific Medicare HIH regulations in addition to the general LTAC hospital regulations. The HIH regulations are designed to ensure that the hospitals are organizationally and functionally independent of their host hospitals. If a LTAC hospital located in a host hospital fails to meet the HIH regulations, it may also lose its status as a LTAC hospital. The determinations are made on an annual basis.
A provider that loses its ability to receive Medicare payments pursuant to the LTAC Prospective Payment System (PPS) must go through the same certification process as new LTAC hospital providers must go through to obtain their initial certification to be reimbursed pursuant to LTAC PPS. During this re-certification period, which could range from six to nine months, the provider would be paid for providing services to Medicare beneficiaries at rates that are lower than rates currently paid pursuant to LTAC PPS.
We have certain other pending and threatened litigation and claims incurred in the ordinary course of business. We believe (based, in part, on the advice of legal counsel) that the probable resolution of such contingencies will not exceed our insurance coverage and will not materially affect our consolidated financial position, results of operations or liquidity.
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LifeCare Holdings, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements(Continued)
(unaudited)
(9) Fair Value of Financial Instruments
The carrying amount of cash and cash equivalents, accounts receivable, third-party payor settlements, and accounts payable and accrued expenses approximates fair value because of the short-term maturity of these instruments. The carrying amount of these obligations is a reasonable estimate of fair value.
We follow the guidance for the fair value hierarchy that requires an entity to maximize the use of observable inputs and minimize the use of subjective inputs when measuring fair value. The guidance describes three levels of inputs that may be used to measure fair value:
Level 1 Inputs are unadjusted, quoted prices in active markets for identical assets or liabilities at the measurement date.
Level 2 Inputs (other than prices included in Level 1) are either directly or indirectly observable, such as quoted prices for similar assets or liabilities, quoted prices in markets that are not active, and other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities.
Level 3 Inputs are unobservable and reflect managements best estimate of what market participants would use in pricing the asset or liability at the measurement date. Consideration is given to the risk inherent in the valuation technique and the risk inherent in the inputs to the model.
The Senior Secured Credit Facility and the Senior Subordinated Notes are traded in private institutional markets. The carrying amount of the Senior Secured Credit Facility and the Senior Subordinated Notes was $242.9 million and $119.3 million, respectively, at June 30, 2010. Using available quoted market prices, the fair values of the Senior Secured Credit Facility and the Senior Subordinated Notes were approximately $221.0 million and $89.8 million, respectively, at June 30, 2010. The carrying amount of the Senior Secured Credit Facility and the Senior Subordinated Notes was $244.2 million and $119.3 million, respectively, at December 31, 2009. Using available quoted market prices, the fair values of the Senior Secured Credit Facility and the Senior Subordinated Notes were approximately $207.5 million and $60.2 million, respectively, at December 31, 2009. The fair values are based on quoted market prices at each balance sheet date; however, these quoted market prices represent Level 2 inputs as the markets in which the Senior Secured Credit Facility and the Senior Subordinated Notes trade are not active. The revolving credit facility has a carrying value of $35.0 million at June 30, 2010 and December 31, 2009. Using available quoted market prices for the Senior Secured Credit Facility as a basis, we estimated the fair market value of the revolving credit facility at $32.9 million and $31.5 million at June 30, 2010 and December 31, 2009, respectively. These valuations are categorized as a Level 2 in the valuation hierarchy.
(10) Financial Information for Subsidiary Guarantors and Non-guarantor Subsidiaries under the Senior Subordinated Notes
The senior subordinated notes are fully and unconditionally guaranteed by substantially all of our wholly-owned subsidiaries (the Subsidiary Guarantors), however, certain of our subsidiaries did not guarantee the senior subordinated notes (the Non-Guarantor Subsidiaries).
Presented below is condensed consolidating financial information for LifeCare Holdings, Inc., the Subsidiary Guarantors, and the Non-Guarantor Subsidiaries for the three and six months ended at June 30, 2010 and 2009. The equity method has been used with respect to investments in subsidiaries. Separate financial statements of the Subsidiary Guarantors are not presented.
11
Table of Contents
LifeCare Holdings, Inc. and Subsidiaries
Condensed Consolidating Balance Sheet
June 30, 2010
(in thousands)
Parent | Guarantor Subsidiaries |
Nonguarantor Subsidiaries |
Eliminations | Consolidated Totals |
||||||||||||||||
Assets | ||||||||||||||||||||
Current assets: |
||||||||||||||||||||
Cash and cash equivalents |
$ | | $ | 50,405 | $ | 1 | $ | | $ | 50,406 | ||||||||||
Accounts receivable, net of allowance for doubtful accounts |
| 63,856 | 5,059 | | 68,915 | |||||||||||||||
Due to/from related parties |
83,001 | (76,913 | ) | (6,088 | ) | | | |||||||||||||
Income taxes |
1,784 | (327 | ) | | | 1,457 | ||||||||||||||
Other current assets |
| 6,886 | 528 | | 7,414 | |||||||||||||||
Total current assets |
84,785 | 43,907 | (500 | ) | | 128,192 | ||||||||||||||
Investment in subsidiaries |
311,305 | | | (311,305 | ) | | ||||||||||||||
Property and equipment, net |
| 57,278 | 22,136 | | 79,414 | |||||||||||||||
Other assets, net |
5,213 | 2,501 | 2,067 | | 9,781 | |||||||||||||||
Identifiable intangibles, net |
| 15,596 | | | 15,596 | |||||||||||||||
Goodwill |
| 248,341 | | | 248,341 | |||||||||||||||
Total assets |
$ | 401,303 | $ | 367,623 | $ | 23,703 | $ | (311,305 | ) | $ | 481,324 | |||||||||
Liabilities and Stockholders Equity (Deficit) | ||||||||||||||||||||
Current liabilities: |
||||||||||||||||||||
Current installments of long-term debt |
$ | 2,550 | $ | | $ | | $ | | $ | 2,550 | ||||||||||
Current installments of obligations under capital leases |
| 936 | 171 | | 1,107 | |||||||||||||||
Current installments of lease financing obligation |
| | 461 | | 461 | |||||||||||||||
Estimated third party payor settlements |
| 3,613 | 1,214 | | 4,827 | |||||||||||||||
Accounts payable |
247 | 24,884 | 686 | | 25,817 | |||||||||||||||
Accrued payroll |
| 4,631 | 242 | | 4,873 | |||||||||||||||
Accrued vacation |
| 5,046 | 227 | | 5,273 | |||||||||||||||
Accrued insurance |
| 766 | | | 766 | |||||||||||||||
Accrued interest |
6,306 | | | | 6,306 | |||||||||||||||
Accrued other |
| 2,922 | 171 | | 3,093 | |||||||||||||||
Total current liabilities |
9,103 | 42,798 | 3,172 | | 55,073 | |||||||||||||||
Long-term debt, excluding current installments |
394,637 | | | | 394,637 | |||||||||||||||
Obligations under capital leases, excluding current installments |
| 657 | 95 | | 752 | |||||||||||||||
Lease financing obligation, excluding current installments |
| | 19,803 | | 19,803 | |||||||||||||||
Accrued insurance |
| 4,439 | | | 4,439 | |||||||||||||||
Other noncurrent liabilities |
5,500 | 9,057 | | | 14,557 | |||||||||||||||
Total liabilities |
409,240 | 56,951 | 23,070 | | 489,261 | |||||||||||||||
Stockholders equity (deficit): |
||||||||||||||||||||
Common stock |
| | | | | |||||||||||||||
Additional paid-in capital |
175,391 | 63 | 12,580 | (12,643 | ) | 175,391 | ||||||||||||||
Retained earnings (accumulated deficit) |
(183,328 | ) | 310,609 | (11,947 | ) | (298,662 | ) | (183,328 | ) | |||||||||||
Total stockholders equity (deficit) |
(7,937 | ) | 310,672 | 633 | (311,305 | ) | (7,937 | ) | ||||||||||||
$ | 401,303 | $ | 367,623 | $ | 23,703 | $ | (311,305 | ) | $ | 481,324 | ||||||||||
12
Table of Contents
LifeCare Holdings, Inc. and Subsidiaries
Condensed Consolidating Balance Sheet
December 31, 2009
(in thousands)
Parent | Guarantor Subsidiaries |
Nonguarantor Subsidiaries |
Eliminations | Consolidated Totals |
||||||||||||||||
Assets | ||||||||||||||||||||
Current assets: |
||||||||||||||||||||
Cash and cash equivalents |
$ | | $ | 46,680 | $ | 1 | $ | | $ | 46,681 | ||||||||||
Patient accounts receivable, net of allowance for doubtful accounts |
| 64,402 | 5,101 | | 69,503 | |||||||||||||||
Due to/from related parties |
94,588 | (88,925 | ) | (5,663 | ) | | | |||||||||||||
Income taxes |
1,784 | (602 | ) | | | 1,182 | ||||||||||||||
Other current assets |
| 7,123 | 420 | | 7,543 | |||||||||||||||
Total current assets |
96,372 | 28,678 | (141 | ) | | 124,909 | ||||||||||||||
Investment in subsidiaries |
291,080 | | | (291,080 | ) | | ||||||||||||||
Property and equipment, net |
| 59,316 | 23,031 | | 82,347 | |||||||||||||||
Other assets, net |
6,362 | 2,835 | 1,658 | | 10,855 | |||||||||||||||
Other identifiable intangibles, net |
| 16,165 | | | 16,165 | |||||||||||||||
Goodwill |
| 245,370 | | | 245,370 | |||||||||||||||
Total assets |
$ | 393,814 | $ | 352,364 | $ | 24,548 | $ | (291,080 | ) | $ | 479,646 | |||||||||
Liabilities and Stockholders Equity (Deficit) | ||||||||||||||||||||
Current liabilities: |
||||||||||||||||||||
Current installments of long-term debt |
$ | 2,550 | $ | | $ | | $ | | $ | 2,550 | ||||||||||
Current installments of obligations under capital leases |
| 646 | 187 | | 833 | |||||||||||||||
Current installments of lease financing obligation |
| | 444 | | 444 | |||||||||||||||
Estimated third party payor settlements |
| 8,999 | 958 | | 9,957 | |||||||||||||||
Accounts payable |
713 | 24,306 | 815 | | 25,834 | |||||||||||||||
Accrued payroll |
| 9,142 | 421 | | 9,563 | |||||||||||||||
Accrued vacation |
| 4,161 | 207 | | 4,368 | |||||||||||||||
Accrued insurance |
| 932 | | | 932 | |||||||||||||||
Accrued interest |
6,418 | | | | 6,418 | |||||||||||||||
Accrued other |
| 3,972 | 118 | | 4,090 | |||||||||||||||
Total current liabilities |
9,681 | 52,158 | 3,150 | | 64,989 | |||||||||||||||
Long-term debt, excluding current installments |
395,912 | | | | 395,912 | |||||||||||||||
Obligations under capital leases, excluding current installments |
| 826 | 184 | | 1,010 | |||||||||||||||
Lease financing obligation, excluding current installments |
| | 20,038 | | 20,038 | |||||||||||||||
Accrued insurance |
| 4,371 | | | 4,371 | |||||||||||||||
Deferred income taxes |
5,500 | | | | 5,500 | |||||||||||||||
Other noncurrent liabilities |
| 5,105 | | | 5,105 | |||||||||||||||
Total liabilities |
411,093 | 62,460 | 23,372 | | 496,925 | |||||||||||||||
Stockholders equity (deficit): |
||||||||||||||||||||
Common stock |
| | | | | |||||||||||||||
Additional paid-in capital |
172,273 | 63 | 12,580 | (12,643 | ) | 172,273 | ||||||||||||||
Retained earnings (accumulated deficit) |
(189,552 | ) | 289,841 | (11,404 | ) | (278,437 | ) | (189,552 | ) | |||||||||||
Total stockholders equity (deficit) |
(17,279 | ) | 289,904 | 1,176 | (291,080 | ) | (17,279 | ) | ||||||||||||
$ | 393,814 | $ | 352,364 | $ | 24,548 | $ | (291,080 | ) | $ | 479,646 | ||||||||||
13
Table of Contents
LifeCare Holdings, Inc. and Subsidiaries
Condensed Consolidating Statement of Operations
For the Three Months Ended June 30, 2010
Parent | Guarantor Subsidiaries |
Nonguarantor Subsidiaries |
Eliminations | Consolidated Totals | ||||||||||||||
Net patient service revenue |
$ | | $ | 84,770 | $ | 5,863 | $ | | $ | 90,633 | ||||||||
Salaries, wages and benefits |
76 | 40,758 | 1,835 | | 42,669 | |||||||||||||
Supplies |
| 8,983 | 330 | | 9,313 | |||||||||||||
Rent |
| 6,174 | 222 | | 6,396 | |||||||||||||
Other operating expenses |
272 | 18,726 | 1,241 | | 20,239 | |||||||||||||
Provision for doubtful accounts |
| 1,728 | 101 | | 1,829 | |||||||||||||
Depreciation and amortization |
| 2,212 | 325 | | 2,537 | |||||||||||||
Intercompany (income) expenses |
3,697 | (4,115 | ) | 418 | | | ||||||||||||
Interest expense, net |
6,512 | 179 | 398 | | 7,089 | |||||||||||||
Total expenses |
10,557 | 74,645 | 4,870 | | 90,072 | |||||||||||||
Operating income (loss) |
(10,557 | ) | 10,125 | 993 | | 561 | ||||||||||||
Earnings in investments in subsidiaries |
(11,249 | ) | | | 11,249 | | ||||||||||||
Equity in income of joint venture |
| | 356 | | 356 | |||||||||||||
Income (loss) before income taxes |
692 | 10,125 | 1,349 | (11,249 | ) | 917 | ||||||||||||
Provision for income taxes |
| 225 | | | 225 | |||||||||||||
Net income (loss) |
$ | 692 | $ | 9,900 | $ | 1,349 | $ | (11,249 | ) | $ | 692 | |||||||
14
Table of Contents
LifeCare Holdings, Inc. and Subsidiaries
Condensed Consolidating Statement of Operations
For the Six Months Ended June 30, 2010
(in thousands)
Parent | Guarantor Subsidiaries |
Nonguarantor Subsidiaries |
Eliminations | Consolidated Totals | ||||||||||||||
Net patient service revenue |
$ | | $ | 173,135 | $ | 12,458 | $ | | $ | 185,593 | ||||||||
Salaries, wages and benefits |
152 | 80,464 | 3,554 | | 84,170 | |||||||||||||
Supplies |
| 17,759 | 793 | | 18,552 | |||||||||||||
Rent |
| 12,472 | 451 | | 12,923 | |||||||||||||
Other operating expenses |
546 | 38,150 | 2,440 | | 41,136 | |||||||||||||
Provision for doubtful accounts |
| 3,205 | 213 | | 3,418 | |||||||||||||
Depreciation and amortization |
| 4,421 | 665 | | 5,086 | |||||||||||||
Intercompany (income) expenses |
3,847 | (4,759 | ) | 912 | | | ||||||||||||
Interest expense, net |
13,047 | 254 | 793 | | 14,094 | |||||||||||||
Total expenses |
17,592 | 151,966 | 9,821 | | 179,379 | |||||||||||||
Operating income (loss) |
(17,592 | ) | 21,169 | 2,637 | | 6,214 | ||||||||||||
Earnings in investments in subsidiaries |
(23,816 | ) | | | 23,816 | | ||||||||||||
Equity in income of joint venture |
| | 410 | | 410 | |||||||||||||
Income (loss) before income taxes |
6,224 | 21,169 | 3,047 | (23,816 | ) | 6,624 | ||||||||||||
Provision for income taxes |
| 400 | | | 400 | |||||||||||||
Net income (loss) |
$ | 6,224 | $ | 20,769 | $ | 3,047 | $ | (23,816 | ) | $ | 6,224 | |||||||
15
Table of Contents
LifeCare Holdings, Inc. and Subsidiaries
Condensed Consolidating Statement of Operations
For the Three Months Ended June 30, 2009
Parent | Guarantor Subsidiaries |
Nonguarantor Subsidiaries |
Eliminations | Consolidated Totals |
|||||||||||||||
Net patient service revenue |
$ | | $ | 89,949 | $ | 1,696 | $ | | $ | 91,645 | |||||||||
Salaries, wages and benefits |
80 | 40,812 | 1,520 | | 42,412 | ||||||||||||||
Supplies |
| 8,553 | 155 | | 8,708 | ||||||||||||||
Rent |
| 6,221 | 157 | | 6,378 | ||||||||||||||
Other operating expenses |
886 | 22,017 | 721 | | 23,624 | ||||||||||||||
Provision for doubtful accounts |
| 1,717 | 32 | | 1,749 | ||||||||||||||
Depreciation and amortization |
| 2,399 | 346 | | 2,745 | ||||||||||||||
Intercompany (income) expenses |
(879 | ) | 760 | 119 | | | |||||||||||||
Interest expense, net |
7,461 | 126 | 438 | | 8,025 | ||||||||||||||
Total expenses |
7,548 | 82,605 | 3,488 | | 93,641 | ||||||||||||||
Operating income (loss) |
(7,548 | ) | 7,344 | (1,792 | ) | | (1,996 | ) | |||||||||||
Earnings in investments in subsidiaries |
5,377 | | | (5,377 | ) | | |||||||||||||
Income (loss) before income taxes |
(2,171 | ) | 7,344 | (1,792 | ) | (5,377 | ) | (1,996 | ) | ||||||||||
Provision for income taxes |
| 175 | | | 175 | ||||||||||||||
Net income (loss) |
$ | (2,171 | ) | $ | 7,169 | $ | (1,792 | ) | $ | (5,377 | ) | $ | (2,171 | ) | |||||
16
Table of Contents
LifeCare Holdings, Inc. and Subsidiaries
Condensed Consolidating Statement of Operations
For the Six Months Ended June 30, 2009
Parent | Guarantor Subsidiaries |
Nonguarantor Subsidiaries |
Eliminations | Consolidated Totals |
||||||||||||||||
Net patient service revenue |
$ | | $ | 183,744 | $ | 2,925 | $ | | $ | 186,669 | ||||||||||
Salaries, wages and benefits |
165 | 82,433 | 2,997 | | 85,595 | |||||||||||||||
Supplies |
| 17,135 | 328 | | 17,463 | |||||||||||||||
Rent |
| 12,556 | 325 | | 12,881 | |||||||||||||||
Other operating expenses |
1,129 | 43,113 | 1,144 | | 45,386 | |||||||||||||||
Provision for doubtful accounts |
| 3,055 | 52 | | 3,107 | |||||||||||||||
Gain on early extinguishment of debt |
(84 | ) | | | | (84 | ) | |||||||||||||
Depreciation and amortization |
| 4,688 | 692 | | 5,380 | |||||||||||||||
Intercompany (income) expenses |
(72 | ) | (130 | ) | 202 | | | |||||||||||||
Interest expense, net |
15,267 | 270 | 815 | | 16,352 | |||||||||||||||
Total expenses |
16,405 | 163,120 | 6,555 | | 186,080 | |||||||||||||||
Operating income (loss) |
(16,405 | ) | 20,624 | (3,630 | ) | | 589 | |||||||||||||
Earnings in investments in subsidiaries |
16,057 | | | (16,057 | ) | | ||||||||||||||
Equity in loss of joint venture |
| (537 | ) | | | (537 | ) | |||||||||||||
Income (loss) before income taxes |
(348 | ) | 20,087 | (3,630 | ) | (16,057 | ) | 52 | ||||||||||||
Provision for income taxes |
| 400 | | | 400 | |||||||||||||||
Net income (loss) |
$ | (348 | ) | $ | 19,687 | $ | (3,630 | ) | $ | (16,057 | ) | $ | (348 | ) | ||||||
17
Table of Contents
LifeCare Holdings, Inc. and Subsidiaries
Condensed Consolidating Statement of Cash Flows
For the Six Months Ended June 30, 2010
(in thousands)
Parent | Guarantor Subsidiaries |
Nonguarantor Subsidiaries |
Eliminations | Consolidated | ||||||||||||||||
Cash flows from operating activities: |
||||||||||||||||||||
Net income (loss) |
$ | 6,224 | $ | 20,769 | $ | 3,047 | $ | (23,816 | ) | $ | 6,224 | |||||||||
Adjustments to reconcile net income (loss) to net cash provided by operating activities: |
||||||||||||||||||||
Depreciation and amortization |
1,149 | 4,421 | 665 | | 6,235 | |||||||||||||||
Provision for doubtful accounts |
| 3,205 | 213 | | 3,418 | |||||||||||||||
Equity compensation amortization |
146 | | | | 146 | |||||||||||||||
Equity in income of joint venture |
| | (410 | ) | | (410 | ) | |||||||||||||
Changes in operating assets and liabilities: |
||||||||||||||||||||
Accounts receivable |
| (2,659 | ) | (171 | ) | | (2,830 | ) | ||||||||||||
Income taxes |
| (276 | ) | | | (276 | ) | |||||||||||||
Prepaid expenses and other current assets |
| 241 | (108 | ) | | 133 | ||||||||||||||
Change in investments in subsidiaries |
(23,816 | ) | | | 23,816 | | ||||||||||||||
Other assets |
| 334 | | | 334 | |||||||||||||||
Due to/from related parties |
17,775 | (14,982 | ) | (2,793 | ) | | | |||||||||||||
Estimated third party payor settlements |
| (5,386 | ) | 256 | | (5,130 | ) | |||||||||||||
Accounts payable and accrued expenses |
(203 | ) | (4,268 | ) | (238 | ) | | (4,709 | ) | |||||||||||
Other liabilities |
| 4,020 | | | 4,020 | |||||||||||||||
Net cash provided by operating activities |
1,275 | 5,419 | 461 | | 7,155 | |||||||||||||||
Cash flows from investing activities: |
||||||||||||||||||||
Purchases of property and equipment |
| (1,217 | ) | (138 | ) | | (1,355 | ) | ||||||||||||
Net cash used in investing activities |
| (1,217 | ) | (138 | ) | | (1,355 | ) | ||||||||||||
Cash flows from financing activities: |
||||||||||||||||||||
Payments of long-term debt |
(1,275 | ) | | | | (1,275 | ) | |||||||||||||
Payments on obligations under capital leases |
| (477 | ) | (106 | ) | | (583 | ) | ||||||||||||
Payments on lease financing obligation |
| | (217 | ) | | (217 | ) | |||||||||||||
Net cash used in financing activities |
(1,275 | ) | (477 | ) | (323 | ) | | (2,075 | ) | |||||||||||
Net increase in cash and cash equivalents |
| 3,725 | | | 3,725 | |||||||||||||||
Cash and cash equivalents, beginning of period |
| 46,680 | 1 | | 46,681 | |||||||||||||||
Cash and cash equivalents, end of period |
$ | | $ | 50,405 | $ | 1 | $ | | $ | 50,406 | ||||||||||
18
Table of Contents
LifeCare Holdings, Inc. and Subsidiaries
Condensed Consolidating Statement of Cash Flows
For the Six Months Ended June 30, 2009
Parent | Guarantor Subsidiaries |
Nonguarantor Subsidiaries |
Eliminations | Consolidated | ||||||||||||||||
Cash flows from operating activities: |
||||||||||||||||||||
Net income (loss) |
$ | (348 | ) | $ | 19,687 | $ | (3,630 | ) | $ | (16,057 | ) | $ | (348 | ) | ||||||
Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities: |
||||||||||||||||||||
Depreciation and amortization |
1,094 | 4,688 | 692 | | 6,474 | |||||||||||||||
Provision for doubtful accounts |
| 3,055 | 52 | | 3,107 | |||||||||||||||
Equity compensation amortization |
160 | | | | 160 | |||||||||||||||
Gain on early extinguishment of debt |
(84 | ) | | | | (84 | ) | |||||||||||||
Gain on the disposal of assets |
| (2 | ) | | | (2 | ) | |||||||||||||
Equity in loss of joint venture |
| 537 | | | 537 | |||||||||||||||
Changes in operating assets and liabilities: |
||||||||||||||||||||
Accounts receivable |
| (4,916 | ) | (495 | ) | | (5,411 | ) | ||||||||||||
Income taxes |
| (184 | ) | | | (184 | ) | |||||||||||||
Other current assets |
| 53 | (61 | ) | | (8 | ) | |||||||||||||
Change in investments in subsidiary |
(16,057 | ) | | | 16,057 | | ||||||||||||||
Other assets |
| 288 | | | 288 | |||||||||||||||
Due to from related parties |
(8,446 | ) | 4,577 | 3,869 | | | ||||||||||||||
Estimated third party payor settlements |
| (8,587 | ) | (186 | ) | | (8,773 | ) | ||||||||||||
Accounts payable and accrued expenses |
19 | (2,089 | ) | 185 | | (1,885 | ) | |||||||||||||
Other liabilities |
| (1,218 | ) | | | (1,218 | ) | |||||||||||||
Net cash provided by (used in) operating activities |
(23,662 | ) | 15,889 | 426 | | (7,347 | ) | |||||||||||||
Cash flows from investing activities: |
||||||||||||||||||||
Purchases of property and equipment |
| (2,552 | ) | (53 | ) | | (2,605 | ) | ||||||||||||
Net cash used in investing activities |
| (2,552 | ) | (53 | ) | | (2,605 | ) | ||||||||||||
Cash flows from financing activities: |
||||||||||||||||||||
Net changes in borrowings under the line of credit |
25,000 | | | | 25,000 | |||||||||||||||
Payments of long-term debt |
(1,338 | ) | | | | (1,338 | ) | |||||||||||||
Payments on obligations under capital leases |
| (481 | ) | (126 | ) | | (607 | ) | ||||||||||||
Payment on lease financing obligation |
| | (247 | ) | | (247 | ) | |||||||||||||
Net cash provided by (used in) financing activities |
23,662 | (481 | ) | (373 | ) | | 22,808 | |||||||||||||
Net increase in cash and cash equivalents |
| 12,856 | | | 12,856 | |||||||||||||||
Cash and cash equivalents, beginning of period |
| 25,261 | 1 | | 25,262 | |||||||||||||||
Cash and cash equivalents, end of period |
$ | | $ | 38,117 | $ | 1 | $ | | $ | 38,118 | ||||||||||
19
Table of Contents
ITEM 2: | MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS |
This discussion and analysis should be read in conjunction with our condensed consolidated financial statements and the accompanying notes.
Company Overview
We began operations in 1993 and have grown our business through developing and acquiring hospitals to become a leading operator of long-term acute care (LTAC) hospitals in the United States. As of June 30, 2010, we operated 19 hospitals located in nine states, consisting of eight hospital within a hospital facilities (27% of beds) and 11 freestanding facilities (73% of beds). Through these 19 long-term acute care hospitals, we operate a total of 1,057 licensed beds and employ approximately 3,200 people, the majority of whom are registered or licensed nurses and respiratory therapists. Additionally, we hold a 50% investment in a joint venture for a 51-bed LTAC hospital located in Muskegon, Michigan.
We believe we have developed a reputation for excellence in providing treatment for patients with complex medical needs requiring extended treatment. Our patients have serious medical conditions such as respiratory failure, chronic pulmonary disease, nervous system disorders, infectious diseases and severe wounds. They generally require a high level of monitoring and specialized care, yet may not require the continued services of an intensive care unit. Due to their serious medical conditions, our patients are generally not clinically appropriate for admission to a skilled nursing facility or inpatient rehabilitation facility. By combining general acute care services with a focus on long-term treatment, we believe that our hospitals provide medically complex patients with better and more cost-effective outcomes.
LifeCare Holdings, Inc. (the Company) is a wholly owned subsidiary of LCI Holdco, LLC (Holdco). Holdco is a wholly owned subsidiary of LCI Intermediate Holdco, Inc. (Intermediate Holdco). Intermediate Holdco is a wholly owned subsidiary of LCI Holding Company, Inc. (Holdings), which is owned by an investor group that includes affiliates of The Carlyle Group and members of our senior management and board of directors. The investor group acquired Holdings pursuant to a merger that occurred on August 11, 2005 (the Merger).
Recent Trends and Events
Hospital Openings and Closings
On September 1, 2009, we, along with a subsidiary of Select Medical Corporation (Select), each contributed our hospital operations, located in the Muskegon, Michigan market, and related licenses and provider numbers, along with $1.5 million in cash and net assets, into a newly formed limited liability company in exchange for each receiving a 50% ownership in the newly formed entity. The joint venture, which is currently comprised of 51 beds in two separate locations in the Muskegon market, is managed by Select. The $1.5 million cash contributions made by each party were comprised of a $0.1 million equity contribution and a $1.4 million note receivable (Subordinated Note). The 50% ownership we have in the joint venture is held by a newly formed subsidiary of our company and has been designated as a non-guarantor subsidiary pursuant to our senior secured credit facility. The Subordinated Note bears an interest rate of 10% and will mature on August 31, 2019. The joint venture may make quarterly payments with available cash flows prior to the maturity.
Regulatory Changes
Approximately 58.6% and 60.9% of our total net patient service revenue for the six months ended June 30, 2010 and 2009, respectively, came from Medicare reimbursement. Our industry is subject to extensive government regulation, including regulation of the Medicare reimbursement process. Changes in these regulations can have a material impact on the way we operate our business and on our results of operations.
The 2010 Final Rule
On July 30, 2010, the Centers for Medicare & Medicaid Services (CMS) published their annual payment update for LTAC hospitals for the 2011 rate year, which will be effective for all discharges on or after October 1, 2010 (the 2010 Final Rule). The 2010 Final Rule includes a net decrease in the standard federal rate of $195, or 0.5%, to $39,600, which is based on a market basket update of 2.5% less an adjustment of 0.5% as required by the Patient Protection and Affordable Care Act (PPACA) of 2010 and less an adjustment of 2.5% to account for changes in documentation and coding practices. The 2010 Final Rule also includes an increase in the high-cost outlier fixed-loss amount to $18,785 from $18,615. Additionally, the 2010 Final Rule includes updates to the weighting of Medicare-Severity Diagnosis Related Groups (MS-LT-DRG), which CMS indicates will be budget neutral for aggregate LTAC hospital payments. CMS has estimated that the changes for the 2011 rate year, taken as a whole, including changes to the area wage adjustments for the 2011 rate year, an increase in high-cost outlier payments and an increase in short-stay outlier payments, will result in an increase of 0.5% in Medicare reimbursement to LTAC hospitals.
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Individual hospitals, however, may see varying effects of the 2010 Final Rule depending upon their Medicare patient population and their specific base rate changes due to geographical location.
2010 Healthcare Reform Law
On March 23, 2010, the President signed into law the PPACA. This act makes dramatic changes to the Medicare and Medicaid programs by adopting numerous initiatives intended to improve the quality of healthcare, promote patient safety, reduce the cost of healthcare, increase transparency and reduce fraud and abuse of federal healthcare programs. Additionally, on March 30, 2010, the President signed the Health Care and Education Affordability Reconciliation Act of 2010, which makes certain amendments to the law signed by the President on March 23, 2010.
The PPACA, together with the Health Care and Education Affordability Reconciliation Act of 2010, also made changes to the Medicare program relevant to the LTAC industry, including the following key provisions, among other things:
| a two-year extension of the LTAC provisions originally included in the Medicare, Medicaid and SCHIP Extension Act of 2007 (the SCHIP Extension Act), |
| the implementation of quality reporting requirements for LTAC hospitals beginning in rate year 2014, |
| reductions in the annual market basket rate increases of 0.25% for rate year 2010, and ranging from 0.1% to 0.75% for rate years beginning 2011 through 2019, |
| additional reductions in the annual market basket rate increases as the result of productivity adjustments beginning in 2012, which are expected to approximate 1% annually, and |
| the development of a new hospital wage index system to replace the current system of calculating the hospital wage index based on cost report data. |
In addition, the PPACA creates an Independent Payment Advisory Board to develop and submit proposals to the President and Congress designed to reduce Medicare spending, and provides for pilot programs to explore a bundled payment system for an episode of care that includes an inpatient stay in a hospital and post-acute care provided within 30 days after discharge.
The 2009 Final Rule
On July 31, 2009, CMS issued its final annual payment update for LTAC hospitals for the 2010 rate year, which became effective for all discharges on or after October 1, 2009 (the 2009 Final Rule). The 2009 Final Rule included a net increase in the standard federal rate of $783 to $39,897, or 2.0%, which was based on a market basket update of 2.5% less an adjustment of 0.5% to account for changes in documentation and coding practices. The 2009 Final Rule also included a decrease in the high-cost outlier fixed-loss amount to $18,425 from $22,960. Additionally, the 2009 Final Rule included updates to the weighting of MS-LT-DRGs, which CMS indicated will be budget neutral for aggregate LTAC hospital payments. CMS estimated that the changes for the 2010 rate year, taken as a whole, will result in an increase of 3.3% in Medicare reimbursement to LTAC hospitals. Individual hospitals, however, may see varying effects of this rule depending upon their Medicare patient population and changes to their specific standard federal rate due to geographical location.
The 2009 Final Rule also finalized the interim final rule issued on June 3, 2009 as described below, as well as the June 3, 2009 supplement to the proposed rule previously published by CMS on May 1, 2009. This rule updated the rate year 2010 Prospective Payment System (PPS) payments by revising the table of MS-LTC-DRG relative weights for the rate year 2010, which was based on the amended fiscal year 2009 weights. These changes have been taken into account in CMSs impact calculations outlined above.
2009 Interim Final Rule
On June 3, 2009, CMS published an interim final rule whereby CMS adopted a new table of MS-LT-DRGs relative weights for all discharges from LTAC hospitals on or after June 3, 2009 through the remainder of fiscal year 2009, which ended on September 30, 2009 (the 2009 Interim Final Rule). CMS indicated in the interim final rule that it misapplied its established methodology in the calculation of the budget neutrality factor in determining the relative weights for the 2009 fiscal year. Accordingly, CMS revised the MS-LT-DRG relative weights with this interim final rule to correct the misapplication. The initial budget neutrality factor used by CMS was 1.04186, which CMS states was calculated using unadjusted recalibrated relative weights rather than using the normalized relative weights. The revised calculation resulted in a budget neutrality factor of 1.0030401. The application of this revised budget neutrality factor resulted in a reduction in the relative weights of approximately 3.9% for the 2009 fiscal year (beginning October 1, 2008). There are certain regulatory restrictions that prevented a retroactive correction of this calculation adjustment; therefore, CMS only applied the corrected weights to LTAC hospital discharges occurring on or after June 3, 2009 through September 30, 2009.
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The American Recovery and Reinvestment Act of 2009
On February 17, 2009, legislation known as the American Recovery and Reinvestment Act of 2009 (2009 Act) was signed into law. This legislation included certain amendments to the Medicare, Medicaid and the SCHIP Extension Act, including the application of the moratorium granted to LTAC hospitals regarding the 25 Percent Rule as it applies to certain grandfathered LTAC satellite hospitals. Prior to the 2009 Act amendment, CMSs interpretation of the moratorium provisions was such that grandfathered satellites were excluded from the moratorium; however, the 2009 Act clarified that the provisions of the moratorium are applicable to grandfathered LTAC satellite hospitals.
The 2008 Final Rule
On May 2, 2008, CMS issued its annual regulatory update regarding Medicare reimbursement for LTAC hospitals that became effective for all discharges on or after July 1, 2008 (the 2008 Final Rule). The 2008 Final Rule included, among other things, (1) an increase in the standard federal rate to $39,114, which represented a 2.7% increase, and (2) an increase in the high-cost outlier threshold of $2,222 to $22,960. Additionally, CMS changed the timetable for annual updates to a fiscal year schedule starting on October 1 instead of July 1, which resulted in the 2009 rate year rates being in effect for 15 months beginning July 1, 2008. CMS estimated that the changes for the 2009 rate year, taken as a whole, would result in an increase of 2.5% in Medicare reimbursement to LTAC hospitals. Individual hospitals, however, were expected to see varying effects of this rule depending on their Medicare patient population and changes to their specific standard federal rate due to geographic location.
CMS Changes to MS-LT-DRG Weighting for Fiscal 2009
On July 31, 2008, CMS issued its final regulations regarding the re-weighting of MS-LT-DRGs that became effective for discharges on or after October 1, 2008. CMS indicated that these changes were made in a budget-neutral manner and that aggregate LTAC hospital payments would be unaffected by these changes. However, individual hospitals were expected to see varying effects of this rule depending upon the acuity levels of their Medicare patient populations. As discussed previously, CMS issued the 2009 Interim Final Rule, which modified the MS-LT-DRG re-weighting contained in the July 31, 2008 regulations.
Regulatory Matters
Periodically CMS will conduct surveys of hospitals and other health care providers as a condition of participation in the Medicare program. The purpose of these surveys is to ensure that healthcare providers are in compliance with various governmental requirements related to adequacy of medical care, equipment, personnel, operating policies and procedures, maintenance of adequate records, compliance with building codes and environmental protection and healthcare fraud and abuse. On July 24, 2009, we received a notice from CMS that pursuant to a routine inspection related to the physical plant of one of our hospitals, certain deficiencies and conditions were noted to exist which must be corrected. Subsequent to this notice, we implemented corrective plans to remedy the deficiencies and conditions that were cited in the CMS notification, and, in a limited number of cases, we requested and were granted time-limited waivers for certain matters that required additional time to remedy. As a result of the corrective actions, including those completed pursuant to the waivers, we were notified by CMS on July 30, 2010, that the hospital is in compliance with the Medicare conditions of participation and that the hospital is no longer subject to termination of its participation in the Medicare program as a result of the deficiencies and conditions that were identified.
Sources of Revenue
We are reimbursed for our services provided to patients by a number of sources, including the federal Medicare program and commercial payors. Payment arrangements include prospectively determined rates per discharge, reimbursed costs, discounted charges and per diem rates. Our net patient service revenue consists of the amounts that we estimate to be reimbursable from each of the applicable non-governmental payors and the Medicare and Medicaid programs. We account for the differences between the estimated reimbursement rates and our standard billing rates as contractual adjustments, which are deducted from gross revenues to arrive at net revenues. We record accounts receivable resulting from such payment arrangements net of contractual allowances. Net patient service revenues generated directly from the Medicare program approximated 58.6% and 60.9% of total net patient service revenue for the six months ended June 30, 2010 and 2009, respectively. Net patient service revenues generated from non-Medicare payors were substantially from commercial payors.
Laws and regulations governing provider reimbursement pursuant to the Medicare program are complex and subject to interpretation. The Medicare reimbursement amounts reported in our financial statements are based upon estimates and, as such, are subject to adjustment until such time as our billings and cost reports are filed and settled with the appropriate
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regulatory authorities. Federal regulations require that providers participating in the Medicare program submit annual cost reports associated with services provided to program beneficiaries. In addition, payments under LTAC hospital PPS are subject to review by the regulatory authorities, including enhanced medical necessary reviews pursuant to the SCHIP Extension Act and the Recovery Audit Contractor (RAC) program pursuant to the Tax Relief and Health Care Act of 2006. These reviews primarily focus on the accuracy of the MS-LT-DRG assigned to each discharged patient and normally occur after the completion of the billing process.
The annual cost reports are subject to review and adjustment by CMS through its fiscal intermediaries. These reviews may not occur until several years after a provider files its cost reports and often results in adjustments to amounts reported by providers in their cost reports as a result of the complexity of the regulations and the inherent judgment that is required in the application of certain provisions of provider reimbursement regulations. Since these reviews of filed cost reports occur periodically, there is a possibility that recorded estimated Medicare reimbursement reflected in our consolidated financial statements and previously filed cost reports may change by a material amount in future periods. We recognize in our consolidated financial statements the impact of adjustments, if any, to estimated Medicare reimbursement when the amounts can be reasonably determined.
Total Expenses
Total expenses consist of salaries, wages and benefits, supplies, which includes expenses related to drug and medical supplies, rent, other operating expenses, provision for doubtful accounts, depreciation and amortization and interest expense. Other operating expenses include expenses such as contract labor, legal and accounting fees, insurance and contracted services purchased from host hospitals.
Other Operating Metrics
We use certain operating metrics in the management of our facility operations. These include:
Licensed beds. Licensed beds represent beds for which a facility has been granted approval to operate from the applicable state licensing agency. These licensed beds are used in the determination of average licensed beds and occupancy rates.
Average licensed beds. We compute average licensed beds by computing a weighted average based upon the number of licensed beds in place for each month within the reporting period.
Admissions. Admissions are the total number of patients admitted to our facilities during the reporting period.
Patient days. Patient days are the cumulative number of days that licensed beds are occupied in our facilities for the entire reporting period. We also refer to patient days as our census.
Average length of stay (days). We compute average length of stay in days by dividing patient days for discharged patients by discharges.
Occupancy rates. We compute our occupancy rate by determining the percentage of average licensed beds that are occupied for a 24-hour period during a reporting period. The occupancy rate provides a measure of the utilization of inpatient rooms.
Net patient service revenue per patient day. This measure is determined by dividing our total net patient service revenue by the number of patient days in a reporting period. We use this metric to provide a measure of the net patient service revenue generated for each patient day.
Critical Accounting Matters
This discussion and analysis of our financial condition and results of operation is based on our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of those financial statements requires the use of estimates and judgments that affect the reported amounts and related disclosures. We rely on historical experience and other assumptions that we believe are reasonable at the time in forming the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual amounts may differ from these estimates.
We believe that the following critical accounting policies as more fully described in our annual financial statements as of December 31, 2009 as filed in the Form 10-K, affect the more significant judgments and estimates used in the preparation of our consolidated financial statements.
| Revenue recognition |
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| Accounts receivable and allowance for doubtful accounts |
| Insurance risks |
| Impairment of long-lived assets |
| Accounting for income taxes |
Goodwill
We review our goodwill annually, or more frequently if circumstances warrant a more timely review, to determine if there has been an impairment. We review goodwill based upon one reporting unit, as our company is managed as one operating segment. In calculating the fair value of the reporting unit, we use various assumptions including projected cash flows and discount rates. If projected future cash flows decline from the current amounts projected by management, an impairment charge may be recorded.
Results of Operations
The following table sets forth operating results for each of the periods presented (in thousands):
Three Months Ended June 30 |
Six Months Ended June 30 |
|||||||||||||
2010 | 2009 | 2010 | 2009 | |||||||||||
Net patient service revenue |
$ | 90,633 | $ | 91,645 | $ | 185,593 | $ | 186,669 | ||||||
Salaries, wages and benefits |
42,669 | 42,412 | 84,170 | 85,595 | ||||||||||
Supplies |
9,313 | 8,708 | 18,552 | 17,463 | ||||||||||
Rent |
6,396 | 6,378 | 12,923 | 12,881 | ||||||||||
Other operating expenses |
20,239 | 23,624 | 41,136 | 45,386 | ||||||||||
Provision for doubtful accounts |
1,829 | 1,749 | 3,418 | 3,107 | ||||||||||
Gain on early extinguishment of debt |
| | | (84 | ) | |||||||||
Depreciation and amortization |
2,537 | 2,745 | 5,086 | 5,380 | ||||||||||
Interest expense, net |
7,089 | 8,025 | 14,094 | 16,352 | ||||||||||
Total expenses |
90,072 | 93,641 | 179,379 | 186,080 | ||||||||||
Operating income (loss) |
561 | (1,996 | ) | 6,214 | 589 | |||||||||
Equity in income (loss) of joint venture |
356 | | 410 | (537 | ) | |||||||||
Income (loss) before income taxes |
917 | (1,996 | ) | 6,624 | 52 | |||||||||
Provision for income taxes |
225 | 175 | 400 | 400 | ||||||||||
Net income (loss) |
$ | 692 | $ | (2,171 | ) | $ | 6,224 | $ | (348 | ) | ||||
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Operating Statistics
The following table sets forth operating statistics for each of the periods presented.
Three Months Ended June 30 |
Six Months Ended June 30 |
|||||||||||||||
2010 | 2009 | 2010 | 2009 | |||||||||||||
Number of hospitals within hospitals (end of period) |
8 | 9 | 8 | 9 | ||||||||||||
Number of freestanding hospitals (end of period) |
11 | 11 | 11 | 11 | ||||||||||||
Number of total hospitals (end of period) |
19 | 20 | 19 | 20 | ||||||||||||
Licensed beds (end of period) |
1,057 | 1,079 | 1,057 | 1,079 | ||||||||||||
Average licensed beds (1) |
1,058 | 1,079 | 1,058 | 1,079 | ||||||||||||
Admissions |
2,000 | 2,042 | 4,090 | 4,207 | ||||||||||||
Patient days |
57,996 | 57,627 | 117,248 | 116,772 | ||||||||||||
Occupancy rate |
60.2 | % | 58.7 | % | 61.2 | % | 59.8 | % | ||||||||
Percent net patient service revenue from Medicare |
56.0 | % | 60.4 | % | 58.6 | % | 60.9 | % | ||||||||
Percent net patient service revenue from commercial payors and Medicaid (2) |
44.0 | % | 39.6 | % | 41.4 | % | 39.1 | % | ||||||||
Net patient service revenue per patient day |
$ | 1,563 | $ | 1,590 | $ | 1,583 | $ | 1,599 |
(1) | The average licensed beds are only calculated on the beds at locations that were open for operations during the applicable periods. |
(2) | The percentage of net patient service revenue from Medicaid is less than two percent for each of the periods presented. |
Three Months Ended June 30, 2010 Compared to Three Months Ended June 30, 2009
Net Revenues
Our net patient service revenue of $90.6 million for the three months ended June 30, 2010, decreased $1.0 million, or 1.1%, from $91.6 million in the comparable period in 2009. Patient days in the 2010 period were 369, or 0.6%, greater than the same period in 2009, while admissions were 42, or 2.1%, less than the same period in 2009.
However, on a same store basis, which excludes the operations of our former hospital in Muskegon, MI, from the 2009 period, our net patient service revenue of $90.6 million for the 2010 period represents a $0.1 million increase from the 2009 period. Patient days in the 2010 period of 57,996 increased by 1,139, or 2.0%, while admissions of 2,000 decreased by 12, or 0.6%, on a same store basis. The increase in net patient service revenue of $0.1 million during the 2010 period was attributable to a favorable variance of $1.8 million as the result of the increase in patient days, offset by an unfavorable variance of $1.7 million attributable to a decrease in net patient service revenue on a per patient day basis. The decrease in net patient service revenue on a per patient day basis was principally attributable to unfavorable adjustments of $3.5 million recorded in the 2010 period as a result of changes in estimates and settlements on cost reports filed with the Medicare program.
Total Expenses
Total expenses decreased by $3.6 million to $90.1 million for the three months ended June 30, 2010, as compared to the same period in 2009. On a same store basis however, which excludes the operations of our former hospital in Muskegon, MI, from the 2009 period, total expenses of $90.1 million in the 2010 period decreased by $2.2 million from the 2009 period. This decrease on a same store basis was primarily attributable to a decrease of $1.1 million in insurance expense and a decrease of $0.9 million in net interest expense. The decrease in insurance expense was the result of a $1.0 million charge recorded in the 2009 period attributable to an agreement with the insurance carriers on Hurricane Katrina matters. The decrease in net interest expense was the result of lower interest rates on outstanding borrowings during the 2010 period and the decrease of $11.1 million in outstanding principal of our senior subordinated notes as a result of the repurchase of these notes during the second half of the year ended December 31, 2009.
Income Tax Expense
For the three months ended June 30, 2010, income tax expense recorded represents the estimated income tax liability for certain state income taxes. We believe that it is more likely than not that no benefit or expense will be realized during 2010 for federal income taxes based on the availability of net operating losses to offset current year income.
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Six Months Ended June 30, 2010 Compared to Six Months Ended June 30, 2009
Net Revenues
Our net patient service revenue decreased by $1.1 million, or 0.6%, for the six months ended June 30, 2010, to $185.6 million from $186.7 million for the comparable period in 2009. Patient days increased by 0.4% while admissions decreased 2.8%, for the six months ended June 30, 2010, as compared to the same period in 2009.
However, on a same store basis, which excludes the operations of our former hospital in Muskegon, MI, from the 2009 period, our net patient service revenue of $185.6 million increased by $1.5 million, or 0.8%, from $184.1 million in the 2009 period. Patient days in the 2010 period of 117,248 increased by 2,335, or 2.0%, while admissions of 4,090 decreased by 49, or 1.2%. The increase in net patient service revenue of $1.5 million during the 2010 period was attributable to a favorable variance of $3.7 million as the result of the increase in patient days, offset by an unfavorable variance of $2.2 million attributable to a decrease in net patient service revenue on a per patient day basis. The decrease in net patient service revenue on a per patient day basis was principally attributable to unfavorable adjustments of $3.6 million recorded in the 2010 period as a result of changes in estimates and settlements on cost reports filed with the Medicare program.
Total Expenses
Total expenses decreased by $6.7 million to $179.4 million for the six months ended June 30, 2010, as compared to $186.1 million for the comparable period in 2009. On a same store basis however, which excludes the operations of our former hospital in Muskegon, MI, from the 2009 period, total expenses of $179.4 million in the 2010 period decreased by $3.9 million from the 2009 period. This decrease on a same store basis was primarily attributable to a decrease in insurance expense of $1.0 million and a decrease of $2.3 million in net interest expense. The decrease in insurance expense was the result of a $1.0 million charge recorded in the 2009 period attributable to an agreement with the insurance carriers on Hurricane Katrina matters. The decrease in net interest expense was the result of lower interest rates on outstanding borrowings during the 2010 period and the decrease of $11.1 million in outstanding principal of our senior subordinated notes as a result of the repurchase of these notes during the second half of the year ended December 31, 2009.
Income Tax Expense
For the six months ended June 30, 2010, income tax expense recorded represents the estimated income tax liability for certain state income taxes. We believe that it is more likely than not that no benefit or expense will be realized during 2010 for federal income taxes based on the availability of net operating losses to offset current year income.
Liquidity and Capital Resources
Our primary sources of liquidity are cash on hand, expected cash flows generated by operations, and availability of borrowings under a revolving credit facility. Availability of borrowings under our revolving credit facility are generally dependent upon our ability to meet the maximum leverage ratio test included in the senior secured credit facility. Our primary liquidity requirements are for debt service on our senior secured credit facilities and the notes, capital expenditures and working capital.
At June 30, 2010, our debt structure consisted of $119.3 million aggregate principal amount of senior subordinated notes, a senior secured credit facility, consisting of (i) a $242.9 million term loan facility which matures on August 11, 2012, and (ii) a $60.0 million revolving credit facility, subject to availability, of which $35.0 million is outstanding, including sub-facilities for letters of credit, of which $2.3 million are outstanding, and swingline loans, which matures on August 11, 2011. We also have capital lease obligations of $1.9 million with varying maturities. The full amount available under the term loan facility was used in connection with the Merger.
The interest rates per annum applicable to loans, other than swingline loans, under our senior secured credit facility are, at our option, equal to either an alternate base rate or an adjusted LIBOR rate for a one-, two-, three- or six-month interest period, or a nine- or twelve-month period if available, in each case, plus an applicable margin. The applicable margins on the loans as amended are currently (1) 2.25% for alternate base rate revolving loans, (2) 3.25% for adjusted LIBOR revolving loans, (3) 3.25% for alternate base rate term loans and (4) 4.25% for adjusted LIBOR term loans. These margins are subject to reduction based upon the ratio of our total indebtedness to our consolidated adjusted EBITDA (as defined in the credit agreement governing our senior secured credit facility, as amended). At June 30, 2010, the interest rate applicable to the $242.9 million under our term loan facility was 4.59%, and the weighted average rate on the $35.0 million outstanding balance of the revolving credit facility was 3.66%.
The senior secured credit facility requires us to comply on a quarterly basis with certain financial covenants, including an interest coverage ratio test and a maximum leverage ratio test. These financial covenants become more restrictive on a periodic basis throughout the remaining term of the senior secured credit facility. In addition, the senior secured credit facility includes various negative covenants, including limitations on indebtedness, liens, investments, permitted businesses and transaction and other matters, as well as certain customary representations and warranties, affirmative covenants and events
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of default including payment defaults, breach of representations and warranties, covenant defaults, cross defaults to certain indebtedness, certain events of bankruptcy, certain events under ERISA, material judgments, actual or asserted failure of any guaranty or security document supporting the senior secured credit facility to be in full force and effect, change of control, and certain subjective provisions. We believe we are currently in compliance with the covenants of our senior secured credit facility as amended.
As discussed previously, the financial covenant requirements in our senior secured credit facility become more restrictive throughout the remaining term of the facility. More specifically, the maximum leverage ratio test, which is currently at 7.00x of consolidated adjusted EBITDA (as defined in the credit agreement governing our senior secured credit facility, as amended), is scheduled to adjust to 6.00x beginning with the trailing 12-month period ended March 31, 2011, and thereafter. The minimum interest coverage ratio requirement, which is currently at 1.60x, is scheduled to increase to 1.75x beginning with the trailing 12-month period ended March 31, 2011, and then increases to 2.00x beginning with the trailing 12-month period ended March 31, 2012, and thereafter. We are continuing to pursue operational and strategic objectives that we expect will result in increased profitability and lower total indebtedness in order to remain in compliance with the financial covenant requirements. These objectives include, among other items, increasing the occupancy levels of our hospitals, reducing administrative and operating expenses, and reducing days of net patient service revenue in accounts receivable.
However, we may not be able to continue to satisfy the covenant requirements in subsequent periods. If we are unable to maintain compliance with the covenants contained in our senior secured credit facility, an event of default would occur. During the continuation of an event of default, the lenders under the senior secured credit facility are entitled to take various actions, including accelerating amounts due under the senior secured credit facility, terminating our access to our revolving credit facility and all other actions generally available to a secured creditor. An uncured event of default would have a material adverse effect on our financial position, results of operations and cash flow. In the event a financial covenant is not met, our senior secured credit facility provides for certain limited cure rights which provide us the ability to issue permitted cure securities in exchange for cash or otherwise receive cash that would be contributed to our capital in an amount that is necessary to satisfy the financial covenant required on a pro forma basis. The cure right amount, if exercised, continues to be considered a component of consolidated EBITDA, as defined in the senior secured credit agreement, on a trailing four quarter basis.
We believe that our cash on hand, expected cash flows from operations, and potential availability of borrowings under the revolving portion of our senior secured credit facilities will be sufficient to finance our operations, and meet our scheduled debt service requirements for at least the next twelve months.
We actively seek to identify and evaluate potential acquisition candidates and, from time to time, we review potential acquisitions of businesses. Any acquisitions may require us to issue additional equity or incur additional indebtedness, subject to the limitations contained in our senior secured credit facility.
We and our subsidiaries, affiliates or significant stockholders may from time to time seek to retire or purchase our outstanding debt through cash purchases and/or exchanges for equity securities, in open market purchases, privately negotiated transactions or otherwise. Such repurchases or exchanges, if any, will depend on prevailing market conditions, our liquidity requirements, contractual restrictions and other factors.
Capital Expenditures
We anticipate that we may incur capital expenditures of approximately $3.9 million during the remainder of 2010 based on our current plans of ongoing capital maintenance expenditure requirements at our existing facilities. We may enter into lease arrangements to finance a portion of these equipment expenditures.
Historical Cash Flow
The following table summarizes the net cash provided by (used in) the statement of cash flows (in thousands):
Six Months Ended June 30 |
||||||||
2010 | 2009 | |||||||
Operating activities |
$ | 7,156 | $ | (7,347 | ) | |||
Investing activities |
(1,355 | ) | (2,605 | ) | ||||
Financing activities |
(2,076 | ) | 22,808 |
For the six months ended June 30, 2010, operating activities provided $7.2 million of cash as compared to using $7.3 million in cash for the comparable period in 2009. For the six months ended June 30, 2010, we had net income of $6.2 million as compared to a net loss of $0.3 million for the same period in 2009.
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Accounts receivable increased by $2.8 million for the six months ended June 30, 2010 as compared to an increase of $5.4 million for the same period during 2009. Days of net patient service revenue in accounts receivable at June 30, 2010 had decreased to 66.9 as compared to 69.4 at December 31, 2009. Estimated third party payor settlements resulted in a net use of cash of $5.1 million as compared to a net use of cash of $8.8 million for the six months ended June 30, 2009. The use of cash during the 2010 period was principally due to the repayment to Medicare of amounts received as interim payments during 2009 in excess of revenues ultimately recognized.
Cash used in investing activities was $1.4 million for the six months ended June 30, 2010 as compared to $2.6 million in 2009. Cash used in investing activities during the 2010 and 2009 periods were principally for recurring maintenance capital expenditures.
Cash used by financing activities for the six months ended June 30, 2010 was $2.1 million as compared to cash provided of $22.8 million for the same period in 2009. The six months ended June 30, 2009 included $25.0 million in net borrowings under the revolving line of credit.
Seasonality
Our business experiences seasonality resulting in variation in census levels, with the highest census historically occurring in the first quarter of the year and the lowest census occurring in the third quarter of the year.
Inflation
We derive a substantial portion of our revenue from the Medicare program. LTAC hospital PPS payments are subject to fixed payments that generally are adjusted annually for inflation. However, there can be no assurance that these adjustments, if received, will reflect the actual increase in our costs for providing healthcare services.
Labor and supply expenses make up a substantial portion of our operating expense structure. The expenses can be subject to increase in periods of rising inflation.
Forward Looking Statements
This quarterly report contains forward-looking statements regarding, among other things, our financial condition, results of operations, plans, objectives, future performance and business. All statements contained in this document other than historical information are forward-looking statements. Forward-looking statements include, but are not limited to, statements that represent our beliefs concerning future operations, strategies, financial results or other developments, and contain words and phrases such as may, expects, believes, anticipates, estimates, should, or similar expressions. Because these forward-looking statements are based on estimates and assumptions that are subject to significant business, economic and competitive uncertainties, many of which are beyond our control or are subject to change, actual results could be materially different. Although we believe that our plans, intentions and expectations reflected in or suggested by these forward-looking statements are reasonable, we cannot assure you that we will achieve or realize these plans, intentions or expectations. Forward-looking statements are inherently subject to risks, uncertainties and assumptions. Important factors that could cause actual results to differ materially from the forward-looking statements include, but are not limited to:
| changes in government reimbursement for our services may have an adverse effect on our future revenues and profitability including, for example, the changes described under Regulatory Changes; |
| healthcare reform may have an adverse effect on our future revenues and profitability; |
| the failure to maintain compliance with our financial covenants could be costly or have a material adverse effect on us; |
| the amount of outstanding indebtedness and the restrictive covenants in the agreements governing our indebtedness may limit our operating and financial flexibility; |
| the condition of the financial markets, including volatility and deterioration in the capital and credit markets, could have a material adverse effect on the availability and terms of financing sources; |
| a government investigation or assertion that we have violated applicable regulations may result in increased costs or sanctions that reduce our revenues and profitability; |
| periodic reviews, surveys, audits and investigations by federal and state government agencies and private payors could result in adverse findings and may negatively impact our revenues and profitability; |
| private third party payors for our services may merge or undertake future cost containment initiatives that limit our future revenues and profitability; |
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| actions that may be brought by individuals on the governments behalf under the False Claims Acts qui tam or whistleblower provisions may expose us to unforeseen liabilities; |
| the failure of our long-term acute care hospitals to maintain their qualification would cause our revenues and profitability to decline; |
| the failure of our satellite facilities to qualify for provider-based status with the applicable main facilities may adversely affect our results of operations; |
| development of new facilities may prove difficult or unsuccessful, use significant resources or expose us to unforeseen liabilities; |
| an increase in uninsured and underinsured patients in our hospitals or the deterioration in the collectability of the accounts of such patients could harm our results of operations; |
| the failure to maintain established relationships with the physicians in our markets could reduce our revenues and profitability; |
| shortages in qualified nurses, therapists and other healthcare professionals or union activity may significantly increase our operating costs; |
| competition may limit our ability to grow and result in a decrease in our revenues and profitability; |
| the loss of key members of our management team could significantly disrupt our operations; |
| the geographic concentration of our facilities in Texas and Pennsylvania makes us sensitive to economic, regulatory, environmental and other developments in these states; |
| adverse changes in individual markets could significantly affect operating results; |
| the effect of legal actions or other claims associated with the circumstances arising from Hurricane Katrina could subject us to substantial liabilities; |
| the effect of legal actions asserted against us or lack of adequate available insurance could subject us to substantial uninsured liabilities; |
| an inability to ensure and maintain an effective system of internal controls over financial reporting could expose us to liability; |
| the failure to comply with the provisions of any of our Master Lease Agreements could materially adversely affect our financial position, results of operations and liquidity; and, |
| the failure to prevent damage or interruption to our systems and operations or to conform to regulatory standards for electronic health records could result in improper functioning, security breaches of our information systems, additional expenses or penalties. |
Consequently, such forward-looking statements should be regarded solely as our current plans, estimates and beliefs. We do not intend, and do not undertake, any obligation to update any forward-looking statements to reflect future events or circumstances after the date of this report.
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ITEM 3: | QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK |
At June 30, 2010, we had $242.9 million in senior term loans outstanding and a borrowing availability of $22.7 million under our revolving credit facility, each bearing interest at variable rates. Each 0.125% point change in interest rates would result in a $0.4 million annual change in interest expense on our term loans and revolving credit facility loans, assuming that our revolving credit facility is fully drawn.
ITEM 4: | CONTROLS AND PROCEDURES |
We carried out an evaluation, under the supervision and with the participation of our principal executive officer and principal financial officer, of the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rule 13a-15(e) of the Securities Exchange Act of 1934) as of the end of the period covered in this report. The disclosure controls and procedures are designed to ensure that information required to be disclosed in reports filed under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within required time periods, and include controls and disclosures designed to ensure that this information is accumulated and communicated to the companys management, including its principal executive officer and principal financial officer, as appropriate, to allow timely decisions regarding required disclosures. Based on this evaluation, our principal executive officer and principal financial officer have concluded that as of June 30, 2010 our disclosure controls and procedures were effective to provide reasonable assurance that information required to be included in our periodic Securities and Exchange Commission reports is recorded accurately, processed, summarized and reported within the time periods specified in the relevant Securities and Exchange Commission rules and forms.
In addition, we reviewed our internal controls, and there have been no changes in our internal controls over financial reporting identified in connection with an evaluation that occurred during the quarter ended June 30, 2010 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
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PART II: OTHER INFORMATION
ITEM 1: | LEGAL PROCEEDINGS |
We are a party to several legal actions that arose in the ordinary course of business. The majority of these actions are related to malpractice claims that are covered under various insurance policies; however, there may be some actions which are not insured. We are unable to predict the ultimate outcome of pending litigation and government investigations, nor can there be any guarantee that the resolution of any litigation or investigation, either individually or in the aggregate, would not have a material adverse effect on our financial position, results of operations or liquidity. However, in our opinion, the outcome of these actions will not have a material adverse effect on the financial position, results of operations or liquidity of our company.
At the time of Hurricane Katrina, we operated an 82-bed facility in New Orleans located in Memorial Medical Center. We are currently defending ourselves against certain Hurricane Katrina related lawsuits and matters under review by the Louisiana Patient Compensation Fund. We are vigorously defending ourselves in these lawsuits, however, we cannot predict the ultimate resolution of these matters. We maintained $15.0 million of general and professional liability insurance during this period, subject to a $1.0 million per claim retention. We believe that under our insurance policies, only one retention was applicable to the Hurricane Katrina matters since these matters all arose from a single event, process or condition. However, our insurance carrier sent reservation of rights letters which challenged, among other things, the application of one retention to the Hurricane Katrina related matters. On June 5, 2009, we reached an agreement with our insurance carrier whereby they agreed to continue to pay all costs, indemnification and related expenses for the Hurricane Katrina claims in return for $1.0 million, payable by us in three equal installments of $0.3 million each, due July 1, 2009, March 31, 2010, and March 31, 2011.
ITEM 1A: | RISK FACTORS |
No changes.
ITEM 6: | EXHIBITS |
The exhibits to this report are listed in the Exhibit Index.
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Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this Report to be signed on its behalf by the undersigned, thereunto duly authorized.
LifeCare Holdings, Inc | ||
By: | /S/ G. WAYNE MCALISTER | |
G. Wayne McAlister | ||
Chief Executive Officer | ||
By: | /S/ CHRIS A. WALKER | |
Chris A. Walker | ||
Chief Financial Officer |
Dated: August 13, 2010
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EXHIBIT INDEX
Exhibit |
Description | |
31.1 |
Certification of Chief Executive Officer pursuant to Rule 13a-14 of the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. | |
31.2 |
Certification of Chief Financial Officer pursuant to Rule 13a-14 of the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. | |
32.1 |
Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. | |
32.2 |
Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
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