UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C.  20549

 

 

FORM 8-K

 

CURRENT REPORT

Pursuant to Section 13 or 15(d) of the

Securities Exchange Act of 1934

 

Date of report (Date of earliest event reported):  July 24, 2015

 

Genesis Healthcare, Inc.

(Exact Name of Registrant Specified in Charter)

 

 

 

(610) 444-6350

(Registrant’s telephone number, including area code)

 

Not applicable

(Former Name or Former Address, if Changed Since Last Report)

 

Check the appropriate box below if the Form 8-K filing is intended to simultaneously satisfy the filing obligation of the registrant under any of the following provisions:

 

o            Written communications pursuant to Rule 425 under the Securities Act (17 CFR 230.425)

 

o            Soliciting material pursuant to Rule 14a-12 under the Exchange Act (17 CFR 240.14a-12)

 

o            Pre-commencement communications pursuant to Rule 14d-2(b) under the Exchange Act (17 CFR 240.14d-2(b))

 

o            Pre-commencement communications pursuant to Rule 13e-4(c) under the Exchange Act (17 CFR 240.13e-4(c))

 

 

 

Item 8.01.  Other Events

 

As previously reported, on February 2, 2015, Genesis Healthcare, Inc. (f/k/a Skilled Healthcare Group, Inc.) (the “Company”) and FC-GEN Operations Investment, LLC (“FC-GEN”) completed the combination of the business and operations of the Company and FC-GEN (the “Combination”) pursuant to the Purchase and Contribution Agreement, dated as of August 18, 2014, as amended.  The Combination was treated as a “reverse acquisition” for accounting purposes and, as such, the historical financial statements of the accounting acquirer, FC-GEN, became the historical financial statements of the Company.

 

Certain historical financial statements of FC-GEN as of December 31, 2014 and 2013 and for the three fiscal years period ended December 31, 2014, together with Management’s Discussion and Analysis of Financial Condition and Results of Operations, are filed hereto as Exhibit 99.1 and incorporated herein by reference.  In addition, certain historical financial statements of Sun Healthcare Group, Inc., which was acquired by FC-GEN on December 1, 2012, are filed hereto as Exhibit 99.2 and incorporated herein by reference.

 

Item 9.01.  Financial Statements and Exhibits

 

(d) Exhibits.

 

Exhibit No.		Description
23.1		Consent of KPMG LLP (as to the consolidated financial statements of FC-GEN Operations Investment, LLC).
23.2		Consent of PriceWaterhouseCoopers LLP (as to the consolidated financial statements of Sun Healthcare Group, Inc.).
99.1		Financial statements of FC-GEN Operations Investment, LLC and Management’s Discussion and Analysis of Financial Condition and Results of Operations of FC-GEN Operations Investment, LLC.
99.2		Audited consolidated financial statements of Sun Healthcare Group, Inc. as of December 31, 2011 and 2010 and for the three years ended December 31, 2011 and unaudited interim financial statements as of September 30, 2012 and for the three and nine month periods ended September 30, 2012 and 2011.

 

2

 

SIGNATURE

 

Pursuant to the requirements of the Securities Exchange Act of 1934, the Company has duly caused this current report to be signed on its behalf by the undersigned hereunto duly authorized.

 

	GENESIS HEALTHCARE, INC.
Date:  July 24, 2015	By:	/s/ Michael S. Sherman
		Michael S. Sherman
		Senior Vice President, General Counsel,
		Secretary and Assistant Treasurer

 

3

 

EXHIBIT INDEX

 

Exhibit No.		Description
23.1		Consent of KPMG LLP (as to the consolidated financial statements of FC-GEN Operations Investment, LLC).
23.2		Consent of PriceWaterhouseCoopers LLP (as to the consolidated financial statements of Sun Healthcare Group, Inc.).
99.1		Financial statements of FC-GEN Operations Investment, LLC and Management’s Discussion and Analysis of Financial Condition and Results of Operations of FC-GEN Operations Investment, LLC.
99.2		Audited consolidated financial statements of Sun Healthcare Group, Inc. as of December 31, 2011 and 2010 and for the three years ended December 31, 2011 and unaudited interim financial statements as of September 30, 2012 and for the three and nine month periods ended September 30, 2012 and 2011.

 

4

Exhibit 23.1

 

Consent of Independent Registered Public Accounting Firm

 

The Board of Directors

Genesis Healthcare, Inc.:

 

We consent to the incorporation by reference in the registration statements (No. 333-143069, 333-159026, 333-173925, 333-188485 and 333-204668) on Form S-8 of Genesis Healthcare, Inc. (formerly Skilled Healthcare Group, Inc.) of our report dated July 24, 2015, with respect to the consolidated balance sheets of FC-GEN Operations Investment, LLC as of December 31, 2014 and 2013, and the related consolidated statements of operations, comprehensive income (loss), stockholders’ equity (deficit) and cash flows for each of the years in the three-year period ended December 31, 2014, and the related financial statement schedule, which report appears in this Form 8-K of Genesis Healthcare, Inc. (formerly Skilled Healthcare Group, Inc.) dated July 24, 2015.

 

/s/ KPMG LLP

 

Philadelphia, Pennsylvania

July 24, 2015

 

Exhibit 23.2

 

CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

 

We hereby consent to the incorporation by reference in the Registration Statements on Form S-8 (Nos. 333-143069, 333-159026, 333-173925, 333-188485 and 333-204668) of Genesis Healthcare, Inc. of our report dated February 29, 2012 relating to the financial statements and financial statement schedule of Sun Healthcare Group, Inc., which appears in this Current Report on Form 8-K of Genesis Healthcare, Inc.

 

 

/s/ PricewaterhouseCoopers LLP

 

 

Dallas, Texas

July 24, 2015

 

Exhibit 99.1

 

FC-GEN Operations Investment, LLC and Subsidiaries

 

Consolidated Financial Statements

 

December 31, 2014

 

 

Index to Consolidated Financial Statements

 

	Page
Report of Independent Registered Public Accounting Firm	2
Consolidated Balance Sheets as of December 31, 2014 and 2013	3
Consolidated Statements of Operations for the years ended December 31, 2014, 2013 and 2012	4
Consolidated Statements of Comprehensive Income (Loss) for the years ended December 31, 2014, 2013 and 2012	5
Consolidated Statements of Stockholders’ Equity (Deficit) for the years ended December 31, 2014, 2013 and 2012	6
Consolidated Statements of Cash Flows for the years ended December 31, 2014, 2013 and 2012	7
Notes to Consolidated Financial Statements	8
Quarterly Consolidated Financial Statements (Unaudited)	39
Schedule II — Valuation and Qualifying Accounts	40
Selected Financial Data	41
Management’s Discussion and Analysis of Financial Condition and Results of Operations	42

 

1

 

Report of Independent Registered Public Accounting Firm

 

The Board of Directors and Stockholders

Genesis Healthcare, Inc.:

 

We have audited the accompanying consolidated balance sheets of FC-GEN Operations Investment, LLC and subsidiaries (the Company) as of December 31, 2014 and 2013, and the related consolidated statements of operations, comprehensive income (loss), stockholders’ equity (deficit), and cash flows for each of the years in the three-year period ended December 31, 2014. In connection with our audits of the consolidated financial statements, we also have audited financial statement schedule “Schedule II. Valuation and Qualifying Accounts.” These consolidated financial statements and financial statement schedule are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements and financial statement schedule based on our audits.

 

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

 

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of FC-GEN Operations Investment, LLC and subsidiaries as of December 31, 2014 and 2013, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 2014, in conformity with U.S. generally accepted accounting principles. Also in our opinion, the related financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly, in all material respects, the information set forth therein.

 

 

	/s/ KPMG LLP
Philadelphia, Pennsylvania
July 24, 2015

 

2

 

FC-GEN OPERATIONS INVESTMENT, LLC AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)

 

		December 31, 2014			December 31, 2013
Assets:
Current assets:
Cash and equivalents		$	87,548		$	61,413
Restricted cash and investments in marketable securities		38,211			72,930
Accounts receivable, net of allowances for doubtful accounts of $133,530 in 2014 and $106,093 in 2013		605,830			659,164
Prepaid expenses		72,873			51,898
Other current assets		33,511			35,734
Deferred income taxes		58,213			45,888
Total current assets		896,186			927,027
Property and equipment, net of accumulated depreciation of $502,176 in 2014 and $325,490 in 2013		3,493,250			3,550,950
Restricted cash and investments in marketable securities		108,529			50,065
Other long-term assets		140,119			119,466
Deferred income taxes		160,531			125,303
Identifiable intangible assets, net of accumulated amortization of $42,661 in 2014 and $27,969 in 2013		173,112			194,513
Goodwill		169,681			169,681
Total assets		$	5,141,408		$	5,137,005
Liabilities and Stockholders’ Deficit:
Current liabilities:
Current installments of long-term debt		$	12,518		$	16,268
Capital lease obligations		2,875			2,857
Financing obligations		1,138			1,288
Accounts payable		195,339			188,159
Accrued expenses		125,000			156,460
Accrued compensation		192,838			185,099
Self-insurance reserves		130,874			135,552
Total current liabilities		660,582			685,683
Long-term debt		525,728			473,165
Capital lease obligations		1,002,762			972,760
Financing obligations		2,911,200			2,785,103
Deferred income taxes		19,215			29,993
Self-insurance reserves		355,344			263,455
Other long-term liabilities		124,067			110,727
Commitments and contingencies
Stockholders’ deficit:
Class A common stock (par $0.001, 175,000,000 shares authorized, issued and outstanding 49,864,878 at December 31, 2014 and December 31, 2013)		50			50
Additional paid-in capital		143,492			161,452
Accumulated deficit		(603,254		)	(349,269		)
Accumulated other comprehensive income		515			1,068
Total stockholders’ deficit before noncontrolling interests		(459,197		)	(186,699		)
Noncontrolling interests		1,707			2,818
Total stockholders’ deficit		(457,490		)	(183,881		)
Total liabilities and stockholders’ deficit		$	5,141,408		$	5,137,005

 

See accompanying notes to the consolidated financial statements.

 

3

 

FC-GEN OPERATIONS INVESTMENT, LLC AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

(IN THOUSANDS, EXCEPT PER SHARE DATA)

 

		Year ended December 31,
		2014			2013			2012
Net revenues		$	4,768,080		$	4,710,341		$	3,076,298
Salaries, wages and benefits		2,904,094			2,898,860			1,946,383
Other operating expenses		1,109,732			1,007,909			634,233
General and administrative costs		147,030			152,555			107,997
Provision for losses on accounts receivable		77,670			69,939			42,003
Lease expense		131,898			131,231			35,367
Depreciation and amortization expense		193,675			188,726			146,387
Interest expense		442,724			426,975			323,641
Loss (gain) on early extinguishment of debt		1,133			63			(1,777		)
Investment income		(3,399		)	(4,150		)	(3,782		)
Other (income) loss		(138		)	450			(849		)
Transaction costs		13,353			5,878			29,755
Long-lived asset impairment		31,399			9,999			—
Equity in net loss (income) of unconsolidated affiliates		416			691			(515		)
Loss before income tax benefit		(281,507		)	(178,785		)	(182,545		)
Income tax benefit		(44,022		)	(9,179		)	(11,633		)
Loss from continuing operations		(237,485		)	(169,606		)	(170,912		)
Loss from discontinued operations, net of taxes		(14,044		)	(7,364		)	(810		)
Net loss		(251,529		)	(176,970		)	(171,722		)
Less net (income) loss attributable to noncontrolling interests		(2,456		)	(1,025		)	448
Net loss attributable to FC-GEN Operations Investment, LLC		$	(253,985	)	$	(177,995	)	$	(171,274	)
Loss per common share:
Basic and diluted:
Weighted average shares outstanding for basic and diluted loss from continuing operations per share		49,865			49,865			49,865
Basic and diluted net loss per common share:
Loss from continuing operations attributable to FC-GEN Operations Investment, LLC		$	(4.81	)	$	(3.42	)	$	(3.41	)
Loss from discontinued operations, net of taxes		(0.28		)	(0.15		)	(0.02		)
Net loss attributable to FC-GEN Operations Investment, LLC		$	(5.09	)	$	(3.57	)	$	(3.43	)

 

See accompanying notes to the consolidated financial statements.

 

4

 

FC-GEN OPERATIONS INVESTMENT, LLC AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

(IN THOUSANDS)

 

		Year ended December 31,
		2014			2013			2012
Net loss		$	(251,529	)	$	(176,970	)	$	(171,722	)
Net unrealized (loss) gain on marketable securities, net of tax		(553		)	(1,916		)	34
Comprehensive loss		(252,082		)	(178,886		)	(171,688		)
Less: comprehensive (income) loss attributable to noncontrolling interests		(2,456		)	(1,025		)	448
Comprehensive loss attributable to FC-GEN Operations Investment, LLC		$	(254,538	)	$	(179,911	)	$	(171,240	)

 

See accompanying notes to the consolidated financial statements.

 

5

 

FC-GEN OPERATIONS INVESTMENT, LLC  AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY (DEFICIT)

(IN THOUSANDS)

 

													Accumulated
													other									Total
		Class A Common Stock					Additional			Accumulated			comprehensive			Stockholders’			Noncontrolling			stockholders’
		Shares		Amount			paid-in capital			deficit			income (loss)			deficit			interests			equity (deficit)
Balance at December 31, 2011		49,865		$	50		$	177,065		$	—		$	2,950		$	180,065		$	57		$	180,122
Net loss		—		—			—			(171,274		)	—			(171,274		)	(448		)	(171,722		)
Net unrealized gain on marketable securities, net of tax		—		—			—			—			34			34			—			34
Contributions by stockholders		—		—			25,000			—			—			25,000			—			25,000
Distributions to stockholders		—		—			(35,274		)	—			—			(35,274		)	—			(35,274		)
Acquisition of noncontrolling interest		—		—			—			—			—			—			4,528			4,528
Consolidation of noncontrolling interests		—		—			—			—			—			—			15			15
Distributions to noncontrolling interests		—		—			—			—			—			—			(684		)	(684		)
Balance at December 31, 2012		49,865		$	50		$	166,791		$	(171,274	)	$	2,984		$	(1,449	)	$	3,468		$	2,019
Net loss		—		—			—			(177,995		)	—			(177,995		)	1,025			(176,970		)
Net unrealized loss on marketable securities, net of tax		—		—			—			—			(1,916		)	(1,916		)	—			(1,916		)
Distributions to stockholders		—		—			(5,339		)	—			—			(5,339		)	—			(5,339		)
Distributions to noncontrolling interests		—		—			—			—			—			—			(1,675		)	(1,675		)
Balance at December 31, 2013		49,865		$	50		$	161,452		$	(349,269	)	$	1,068		$	(186,699	)	$	2,818		$	(183,881	)
Net loss		—		—			—			(253,985		)	—			(253,985		)	2,456			(251,529		)
Net unrealized loss on marketable securities, net of tax		—		—			—			—			(553		)	(553		)	—			(553		)
Distributions to stockholders		—		—			(17,960		)	—			—			(17,960		)	—			(17,960		)
Distributions to noncontrolling interests		—		—			—			—			—			—			(3,567		)	(3,567		)
Balance at December 31, 2014		49,865		$	50		$	143,492		$	(603,254	)	$	515		$	(459,197	)	$	1,707		$	(457,490	)

 

See accompanying notes to the consolidated financial statements.

 

6

 

FC-GEN OPERATIONS INVESTMENT, LLC AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(IN THOUSANDS)

 

		Year ended December 31,
		2014			2013			2012
Cash flows from operating activities:
Net loss		$	(251,529	)	$	(176,970	)	$	(171,722	)
Adjustments to reconcile net loss to net cash provided by operating activities:
Non-cash interest and leasing arrangements, net		86,073			89,141			72,883
Other non-cash charges and (gains)		3,947			2,853			(575		)
Depreciation and amortization		196,192			191,479			146,113
Provision for losses on accounts receivable		78,552			71,538			42,159
Equity in net loss (income) of unconsolidated affiliates		416			691			(515		)
Provision for deferred taxes		(58,293		)	(25,693		)	(9,811		)
Long-lived asset impairment		31,399			9,999			—
Loss (gain) on early extinguishment of debt		1,133			63			(1,777		)
Changes in assets and liabilities:
Transaction costs		—			(17,203		)	(18,644		)
Accounts receivable		(33,568		)	(109,844		)	(45,290		)
Accounts payable and other accrued expenses and other		53,330			46,095			(2,849		)
Net cash provided by operating activities		107,652			82,149			9,972
Cash flows from investing activities:
Capital expenditures		(70,987		)	(77,399		)	(66,704		)
Purchases of marketable securities		(30,449		)	(39,569		)	(43,794		)
Proceeds on maturity or sale of marketable securities		30,188			26,227			36,758
Net change in restricted cash and equivalents		(24,405		)	4,235			(5,476		)
Purchase of Sun, net of cash acquired		—			—			(168,914		)
Sale of hospice subsidiary		—			—			75,306
Purchases of inpatient assets, net of cash acquired		(1,878		)	(12,200		)	(5,175		)
Sales of inpatient assets		5,227			8,354			—
Investment in joint ventures		(2,309		)	(6,182		)	(2,000		)
Other, net		(1,062		)	4,832			(2,900		)
Net cash used in investing activities		(95,675		)	(91,702		)	(182,899		)
Cash flows from financing activities:
Borrowings under revolving credit facility		603,500			866,000			799,010
Repayments under revolving credit facility		(549,000		)	(828,000		)	(714,010		)
Proceeds from issuance of long-term debt		960			15,095			317,322
Proceeds from tenant improvement draws under lease arrangements		6,087			10,498			31,024
Repayment of long-term debt		(17,947		)	(35,085		)	(226,024		)
Debt issuance costs		(7,915		)	(746		)	(21,335		)
Distributions to noncontrolling interests		(3,567		)	(1,675		)	(684		)
Contributions by stockholders		—			—			25,000
Distributions to stockholders		(17,960		)	(5,339		)	(35,274		)
Other, net		—			—			(2,800		)
Net cash provided by financing activities		14,158			20,748			172,229
Net increase (decrease) in cash and equivalents		26,135			11,195			(698		)
Cash and equivalents:
Beginning of period		61,413			50,218			50,916
End of period		$	87,548		$	61,413		$	50,218
Supplemental disclosure of cash flow information:
Interest paid		$	369,124		$	354,129		$	260,036
Taxes paid		2,408			12,584			5,317
Non-cash financing activities:
Capital leases		$	13,096		$	(54,626	)	$	680,909
Financing obligations		80,284			43,934			21,282
Assumption of long-term debt		—			—			113,340

 

See accompanying notes to the consolidated financial statements.

 

7

 

FC-GEN Operations Investment, LLC and Subsidiaries

Notes to Consolidated Financial Statements

 

(1)         General Information

 

Description of Business

 

FC-GEN Operations Investment, LLC (the Company) provides inpatient services through 414 skilled nursing, assisted living and behavioral health centers located in 28 states.  These centers are operated by wholly owned subsidiaries of the Company.  Revenues of the Company’s owned, leased and otherwise consolidated centers constitute approximately 85% of its revenues.

 

The Company also provides, through wholly owned subsidiaries, a range of rehabilitation therapy services, including speech pathology, physical therapy, occupational therapy and  respiratory health services.  These services are provided by rehabilitation therapists and assistants employed or contracted at substantially all of the centers operated by the Company, as well as by contract to healthcare facilities operated by others.  After the elimination of intercompany revenues, the rehabilitation therapy services business constitutes approximately 13% of the Company’s revenues.

 

The Company also provides, through wholly owned subsidiaries, an array of other specialty medical services, including, management services, physician services, staffing services and other healthcare related services, which comprise the balance of the Company’s revenues.

 

Skilled Merger - Purchase and Contribution Agreement

 

On August 18, 2014, Skilled Healthcare Group, Inc., a Delaware corporation (Skilled) entered into a Purchase and Contribution Agreement with the Company pursuant to which the businesses and operations of the Company and Skilled will be combined (the Combination). On February 2, 2015, the Company completed the Combination.  See note 21 — “Subsequent Events.”

 

After completion of the transaction, the combined company now operates under the name Genesis Healthcare, Inc. and the Class A common stock of Skilled continues to trade on the NYSE under the symbol “GEN”.  The current owners of the Company hold 74.25% of the economic interests in the combined entity post-transaction and the shareholders of Skilled hold the remaining 25.75% economic interest in the combined entity post-transaction. The Company obtained control over Skilled and, thus, is the accounting acquirer. Therefore, the transaction meets the definition of a reverse acquisition where the legal acquirer is the accounting acquiree. The acquisition method will be applied to the transaction based on Skilled’s stock price (level 1 valuation technique - quoted prices in active markets for identical assets or liabilities) as of the acquisition date. The consideration will be allocated to the legacy Skilled business that is being acquired on the acquisition date with any excess consideration over the fair value of the net assets acquired being recognized as goodwill. The Company’s assets and liabilities will remain at their historical costs.

 

Basis of Presentation

 

The accompanying consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles.  In the opinion of management, the consolidated financial statements include all necessary adjustments for a fair presentation of the financial position and results of operations for the periods presented.

 

(2)  Summary of Significant Accounting Policies

 

Net Revenues and Accounts Receivable

 

The Company receives payments through reimbursement from Medicaid and Medicare programs and directly from individual residents (private pay), third-party insurers and long-term care facilities.  The Company assesses collectibility on all accounts prior to providing services.

 

8

 

FC-GEN Operations Investment, LLC and Subsidiaries

Notes to Consolidated Financial Statements

 

The Company records revenue for inpatient services and the related receivables in the accounting records at the Company’s established billing rates in the period the related services are rendered.  The provision for contractual adjustments, which represents the differences between the established billing rates and predetermined reimbursement rates, is deducted from gross revenue to determine net revenue.  Retroactive adjustments that are likely to result from future examinations by third party payors are accrued on an estimated basis in the period the related services are rendered and adjusted as necessary in future periods based upon new information or final settlements.

 

The Company records revenue for rehabilitation therapy services and other ancillary services and the related receivables at the time services or products are provided or delivered to the customer.  Upon delivery of products or services, the Company has no additional performance obligation to the customer.

 

Use of Estimates

 

The preparation of consolidated financial statements in conformity with U.S. generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period.  Actual results could differ from these estimates.  Significant items subject to such estimates and assumptions include the useful lives of fixed assets, allowances for doubtful accounts and provisions for contractual adjustments, deferred tax assets, fixed assets, goodwill, identifiable intangible assets, investments, as well as reserves for employee benefit obligations, self-insurance liabilities, income tax uncertainties, asset retirement obligations and other contingencies.  These estimates and assumptions are based on management’s best estimates and judgment.  Management evaluates its estimates and assumptions on an ongoing basis using historical experience and other factors, including the current economic environment.  Management believes its estimates to be reasonable under the circumstances.  The current economic environment has increased the degree of uncertainty inherent in these estimates and assumptions.  As future events and their effects cannot be determined with precision, actual results could differ significantly from these estimates.

 

Cash and Equivalents

 

Short-term investments that have a maturity of ninety days or less at acquisition are considered cash equivalents.  Investments in cash equivalents are carried at cost, which approximates fair value.

 

Restricted Cash and Investments in Marketable Securities

 

Restricted cash includes cash and money market funds principally held by the Company’s wholly owned captive insurance subsidiary, which is substantially restricted to securing outstanding claims losses.  The restricted cash and investments in marketable securities balances at December 31, 2014 and 2013 were $146.7 million and $123.0 million, respectively.

 

Restricted investments in marketable securities, comprised of fixed interest rate securities, are considered to be available-for-sale and accordingly are reported at fair value with unrealized gains and losses, net of related tax effects, included within accumulated other comprehensive income, a separate component of stockholders’ equity.  Fair values for fixed interest rate securities are based on quoted market prices.

 

A decline in the market value of any security below cost that is deemed other-than-temporary is charged to income, resulting in the establishment of a new cost basis for the security.  Realized gains and losses for securities classified as available for sale are derived using the specific identification method for determining the cost of securities sold.

 

Allowance for Doubtful Accounts

 

The Company evaluates the adequacy of its allowance for doubtful accounts by estimating allowance requirement percentages for each accounts receivable aging category for each type of payor.  The Company has developed estimated allowance requirement percentages by utilizing historical collection trends and its understanding of the nature and

 

9

 

FC-GEN Operations Investment, LLC and Subsidiaries

Notes to Consolidated Financial Statements

 

collectibility of receivables in the various aging categories and the various lines of the Company’s business.  The allowance percentages are developed by payor type as the accounts receivable from each payor type have unique characteristics.  The allowance for doubtful accounts also considers accounts specifically identified as uncollectible.  Accounts receivable that Company management specifically estimates to be uncollectible, based upon the age of the receivables, the results of collection efforts, or other circumstances, are reserved in the allowance for doubtful accounts until written-off.

 

Prepaid Expenses and Other Current Assets

 

Prepaid expenses and other current assets principally consist of expenses paid in advance of the provision of services, inventories of nursing center food and supplies, non-trade receivables and $9.0 million and $9.3 million of escrowed funds held by third parties at December 31, 2014 and 2013, respectively, in accordance with loan and other contractual agreements.

 

Property and Equipment

 

Property and equipment are recorded at cost.  Depreciation is calculated using the straight-line method over estimated useful lives of 20-35 years for buildings, building improvements and land improvements, and 3-15 years for equipment, furniture and fixtures and information systems.  Depreciation expense on leasehold improvements and assets held under capital leases is calculated using the straight-line method over the lesser of the lease term or the estimated useful life of the asset.  Expenditures for maintenance and repairs necessary to maintain property and equipment in efficient operating condition are charged to operations as incurred.  Costs of additions and betterments are capitalized.

 

Total depreciation expense from continuing operations for the years ended December 31, 2014, 2013 and 2012 was $184.3 million, $179.4 million, and $140.2 million, respectively.

 

Long-Lived Assets

 

The Company’s long-lived assets are reviewed for impairment whenever events or changes in circumstances indicate the carrying amount of an asset may not be recoverable.  Recoverability of assets to be held and used is measured by comparison of the carrying amount of an asset to the future cash flows expected to be generated by the asset.  If the carrying amount of an asset exceeds its estimated future undiscounted cash flows, an impairment charge is recognized to the extent the carrying amount of the asset exceeds the fair value of the asset.  Assets to be disposed of are reported at the lower of the carrying amount or the fair value less costs to sell.

 

The Company performs an assessment of qualitative factors prior to the use of the two step quantitative method to determine if goodwill has been impaired.  If such qualitative assessment does not indicate that it is more likely than not the fair value of the reporting is less than its carrying value, no further analysis is required.  The Company performs its annual impairment assessment as of September 30, of each year or more frequently if adverse events or changes in circumstances indicate that the asset may be impaired.    See note 19 — “Asset Impairment Charges.”

 

Self-Insurance Risks

 

The Company provides for self-insurance risks for both general and professional liability and workers’ compensation claims based on estimates of the ultimate costs for both reported claims and claims incurred but not reported.  Estimated losses from asserted and incurred but not reported claims are accrued based on the Company’s estimates of the ultimate costs of the claims, which includes costs associated with litigating or settling claims, and the relationship of past reported incidents to eventual claims payments.  All relevant information, including the Company’s own historical experience, the nature and extent of existing asserted claims and reported incidents, and independent actuarial analyses of this information is used in estimating the expected amount of claims.  The reserves for loss for workers’ compensation risks are discounted based on actuarial estimates of claim payment patterns whereas the reserves for general and professional liability are recorded on an undiscounted basis.  The Company also considers amounts that may be recovered from excess insurance carriers in estimating the ultimate net liability for such risks.

 

10

 

FC-GEN Operations Investment, LLC and Subsidiaries

Notes to Consolidated Financial Statements

 

Income Taxes

 

The Company is treated as a partnership for federal and state income tax purposes. Therefore, the consolidated financial statements do not include any provision for federal or state income taxes, except for the subsidiaries that continued to be treated as corporations for federal and state income tax purposes and for the few jurisdictions that tax partnership income. The Company’s financial results are allocated to the Company’s members.  The Company’s members include these results on their separate tax returns.

 

For the Company’s subsidiaries treated as corporations for federal and state income tax purposes, the provision (benefit) for income taxes is based upon their annual reported income or loss for each respective accounting period. Deferred income taxes arise from the recognition of the tax consequences of temporary differences between the tax basis of assets and liabilities and their reported amounts in the consolidated financial statements.  These temporary differences will result in taxable or deductible amounts in future years when the reported amounts of the assets are recovered or liabilities are settled.  The Company also recognizes as deferred tax assets the future tax benefits from net operating loss (NOL) carryforwards.  A valuation allowance is provided for these and other deferred tax assets if it is more likely than not that some portion or all of the net deferred tax assets will not be realized.

 

The Company records accrued interest and penalties associated with uncertain tax positions as income tax expense in the consolidated statement of operations.

 

Leases

 

Leasing transactions are a material part of the Company’s business. The following discussion summarizes various aspects of the Company’s accounting for leasing transactions and the related balances.

 

Capital Leases

 

Lease arrangements are capitalized when such leases convey substantially all the risks and benefits incidental to ownership.  Capital leases are amortized over either the lease term or the life of the related assets, depending upon available purchase options and lease renewal features.  Amortization related to capital leases is included in the consolidated statements of operations within depreciation and amortization expense.

 

Operating Leases

 

For operating leases, minimum lease payments, including minimum scheduled rent increases, are recognized as lease expense on a straight-line basis over the applicable lease terms and any periods during which the Company has use of the property but is not charged rent by a landlord.  Lease terms, in most cases, provide for rent escalations and renewal options.

 

When the Company purchases businesses that have operating lease agreements, it recognizes the fair value of the lease arrangements as either favorable or unfavorable and records these amounts as other identifiable intangible assets or other long-term liabilities, respectively.  Favorable and unfavorable leases are amortized to lease expense on a straight-line basis over the remaining term of the leases.

 

Sale/Leaseback Financing Obligation

 

Prior to recognition as a sale, or profit/loss thereon, sale/leaseback transactions are evaluated to determine if their terms transfer all of the risks and rewards of ownership as demonstrated by the absence of any other continuing involvement by the seller-lessee.  A sale/leaseback transaction that does not qualify for sale/leaseback accounting because of any form of continuing involvement by the seller-lessee is accounted for as a financing transaction.  Under the financing method: (1) the assets and accumulated depreciation remain on the consolidated balance sheet and continue to be depreciated over the remaining useful lives; (2) no gain is recognized; and (3) proceeds received by the Company from these transactions are recorded as a financing obligation.

 

11

 

FC-GEN Operations Investment, LLC and Subsidiaries

Notes to Consolidated Financial Statements

 

Asset Retirement Obligations

 

The fair value of a liability for an asset retirement obligation is recognized in the period when the asset is placed in service.  The fair value of the liability is estimated using discounted cash flows.  In subsequent periods, the retirement obligation is accreted to its future value or the estimate of the obligation at the asset retirement date.  The accretion charge is reflected separately on the consolidated statement of operations.  A corresponding retirement asset equal to the fair value of the retirement obligation is also recorded as part of the carrying amount of the related long-lived asset and depreciated over the asset’s useful life.

 

Recent Accounting Pronouncements

 

In April 2014, the FASB issued ASU No. 2014-08, Reporting Discontinued Operations and Disclosures of Disposals of Components of an Entity, (ASU 2014-08).  This ASU requires an entity to report disposed components or components held-for-sale in discontinued operations if such components represent a strategic shift that has or will have a significant effect on operations and financial results. Additionally, expanded disclosure about discontinued operations and disposals of significant components that do not qualify for discontinued operations presentation will be required. The adoption of ASU 2014-08 is effective prospectively for disposals that occur within annual periods beginning on or after December 15, 2014, with early adoption permitted. The Company adopted ASU 2014-08 in the fourth quarter of 2014 and its adoption did not have a material impact on the consolidated financial statements.

 

In May 2014, the FASB issued ASU No. 2014-09, Revenue from Contracts with Customers, (ASU 2014-08).  This ASU requires an entity to recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. To achieve this core principle, the guidance provides that an entity should apply the following steps: (1) identify the contract(s) with a customer; (2) identify the performance obligations in the contract; (3) determine the transaction price; (4) allocate the transaction price to the performance obligations in the contract; and (5) recognize revenue when, or as, the entity satisfies a performance obligation. The ASU is effective beginning in the first quarter of our fiscal year 2017. Early adoption is not permitted.  The Company is currently evaluating the impact to the consolidated financial statements.

 

(3)  Significant Transactions and Events

 

Sun Merger

 

Effective December 1, 2012, the Company completed the acquisition of Sun Healthcare Group, Inc. and its subsidiaries (Sun) (the Sun Merger).  Upon consummation of the Sun Merger, each issued and outstanding share of Sun common stock and common stock equivalent was tendered for $8.50 in cash.  The purchase price totaled $228.4 million before considering cash acquired in connection with the Sun Merger.  The Company also assumed $88.8 million of long-term debt in the Sun Merger, of which $87.5 million was refinanced on December 3, 2012.  The operating results of Sun have been included in the accompanying consolidated financial statements of the Company since December 1, 2012.

 

Simultaneous with the Sun Merger, Sun’s hospice segment was sold to Life Choice Hospice, a provider of in-home hospice care, for approximately $85 million.  Net cash sale proceeds of $75 million were used to repay the Term Loan Facility.  The Company retained an approximate one-third interest in the sold hospice segment since it owned an approximate one-third interest in Life Choice Hospice’s parent company.  Life Choice Hospice has since been merged into FC PAC Holdings, LLC.  See note 15 — “Related Party Transactions.”

 

12

 

FC-GEN Operations Investment, LLC and Subsidiaries

Notes to Consolidated Financial Statements

 

Pro Forma Information

 

The acquired business contributed net revenues of $145.2 million and a net income of $0.7 million to the Company for the period from December 1, 2012 to December 31, 2012. The unaudited pro forma net effect of the Sun Merger assuming the acquisition occurred as of January 1, 2012 is as follows (in thousands, except per share amounts):

 

		Pro Forma
		Twelve months ended
		December 31, 2012
Revenues		$	4,700,479
Loss attributable to FC-GEN Operations Investment, LLC		(214,640		)
Loss per share from continuing operations attributable FC-GEN Operations Investment, LLC:
Basic		(4.30		)
Diluted		(4.30		)

 

The unaudited pro forma financial data have been derived by combining the historical financial results of the Company and the operations acquired in the Sun Merger for the periods presented.

 

(4)      Certain Significant Risks and Uncertainties

 

Revenue Sources

 

The Company receives revenues from Medicare, Medicaid, private insurance, self-pay residents, other third-party payors and long-term care facilities that utilize its rehabilitation therapy and other services.  The Company’s inpatient services derives approximately 79% of its revenue from the Medicare and various state Medicaid programs.

 

The sources and amounts of the Company’s revenues are determined by a number of factors, including licensed bed capacity and occupancy rates of its inpatient facilities, the mix of patients and the rates of reimbursement among payors.  Likewise, payment for ancillary medical services, including services provided by the Company’s rehabilitation therapy services business, vary based upon the type of payor and payment methodologies.  Changes in the case mix of the patients as well as payor mix among Medicare, Medicaid and private pay can significantly affect the Company’s profitability.

 

It is not possible to quantify fully the effect of legislative changes, the interpretation or administration of such legislation or other governmental initiatives on the Company’s business and the business of the customers served by the Company’s rehabilitation therapy business.  The potential impact of healthcare reform, which would initiate significant reforms to the United States healthcare system, including potential material changes to the delivery of healthcare services and the reimbursement paid for such services by the government or other third party payors, is uncertain at this time.  Accordingly, there can be no assurance that the impact of any future healthcare legislation or regulation will not adversely affect the Company’s business.  There can be no assurance that payments under governmental and private third-party payor programs will be timely, will remain at levels similar to present levels or will, in the future, be sufficient to cover the costs allocable to patients eligible for reimbursement pursuant to such programs.  The Company’s financial condition and results of operations will be affected by the reimbursement process, which in the healthcare industry is complex and can involve lengthy delays between the time that revenue is recognized and the time that reimbursement amounts are settled.

 

Laws and regulations governing the Medicare and Medicaid programs are complex and subject to interpretation. The Company believes that it is in material compliance with all applicable laws and regulations and is not aware of any pending or threatened investigations involving material allegations of potential wrongdoing. While no such regulatory inquiries have been made, noncompliance with such laws and regulations can be subject to regulatory actions including fines, penalties, and exclusion from the Medicare and Medicaid programs.

 

13

 

FC-GEN Operations Investment, LLC and Subsidiaries

Notes to Consolidated Financial Statements

 

(5)         Loss Per Share

 

The Company has a single class of common stock.  Basic net loss per share was computed by dividing net loss by the weighted-average number of outstanding common shares for the period. Diluted earnings per share is computed by dividing loss plus the effect of assumed conversions (if applicable) by the weighted-average number of outstanding shares after giving effect to all potential dilutive common stock, including options, warrants, common stock subject to repurchase and convertible preferred stock, if any.

 

The computations of basic and diluted loss per share are consistent with any potentially dilutive adjustments to the numerator or denominator being anti-dilutive and therefore excluded from the dilutive calculation.  A reconciliation of the numerator and denominator used in the calculation of basic and diluted net income per common share follows (in thousands, except per share data):

 

		Year ended December 31,
		2014			2013			2012
Numerator:
Loss from continuing operations		$	(237,485	)	$	(169,606	)	$	(170,912	)
Less: Net income (loss) attributable to noncontrolling interests		2,456			1,025			(448		)
Loss from continuing operations attributable to FC-GEN Operations Investment, LLC		(239,941		)	(170,631		)	(170,464		)
Loss from discontinued operations, net of income tax		(14,044		)	(7,364		)	(810		)
Net loss attributable to FC-GEN Operations Investment, LLC		$	(253,985	)	$	(177,995	)	$	(171,274	)
Denominator:
Weighted average shares outstanding for basic and diluted net loss per share		49,865			49,865			49,865
Basic and diluted net loss per common share:
Loss from continuing operations attributable to FC-GEN Operations Investment, LLC		$	(4.81	)	$	(3.42	)	$	(3.41	)
Loss from discontinued operations, net of income tax		(0.28		)	(0.15		)	(0.02		)
Net loss attributable to FC-GEN Operations Investment, LLC		$	(5.09	)	$	(3.57	)	$	(3.43	)

 

(6)    Segment Information

 

The Company has three reportable operating segments: (i) inpatient services; (ii) rehabilitation therapy services; and (iii) other services. For additional information on these reportable segments see note 1 — “General Information — Description of Business.”

 

14

 

FC-GEN Operations Investment, LLC and Subsidiaries

Notes to Consolidated Financial Statements

 

A summary of the Company’s segmented revenues follows:

 

		Years Ended December 31,
		2014					2013					2012
		Revenue Dollars			Revenue Percentage		Revenue Dollars			Revenue Percentage		Revenue Dollars			Revenue Percentage
		(in thousands, except percentages)
Revenues:
Inpatient services:
Skilled nursing facilities		$	3,924,571		82.3	%	$	3,847,857		81.7	%	$	2,467,427		80.2	%
Assisted living facilities		107,034			2.2	%	113,960			2.4	%	77,335			2.5	%
Administration of third party facilities		10,297			0.2	%	11,006			0.2	%	10,743			0.3	%
Elimination of administrative services		(2,089		)	0.0	%	(2,146		)	0.0	%	(1,896		)	-0.1	%
Inpatient services, net		4,039,813			84.7	%	3,970,677			84.3	%	2,553,609			83.0	%
Rehabilitation therapy services:
Total therapy services		990,081			20.8	%	993,459			21.1	%	732,805			23.8	%
Elimination intersegment rehabilitation therapy services		(385,721		)	-8.1	%	(375,175		)	-8.0	%	(248,918		)	-8.1	%
Third party rehabilitation therapy services		604,360			12.7	%	618,284			13.1	%	483,887			15.7	%
Other services:
Total other services		154,011			3.2	%	141,712			3.0	%	53,713			1.7	%
Elimination intersegment other services		(30,104		)	-0.6	%	(20,332		)	-0.4	%	(14,911		)	-0.5	%
Third party other services		123,907			2.6	%	121,380			2.6	%	38,802			1.3	%
Total revenue		$	4,768,080		100.0	%	$	4,710,341		100.0	%	$	3,076,298		100.0	%

 

A summary of the Company’s condensed consolidated statement of operations follows:

 

		Year ended December 31, 2014
		Inpatient Services			Rehabilitation Therapy Services			Other Services			Corporate			Eliminations			Consolidated
		(In thousands)
Net revenues		$	4,041,902		$	990,081		$	153,397		$	614		$	(417,914	)	$	4,768,080
Salaries, wages and benefits		1,987,550			817,144			99,400			102,820			—			3,006,914
Other operating expenses		1,472,321			78,532			54,464			44,210			(417,915		)	1,231,612
Lease expense		130,005			176			821			896			—			131,898
Depreciation and amortization expense		165,105			11,055			917			16,598			—			193,675
Interest expense		393,521			4			19			49,678			(498		)	442,724
Loss on extinguishment of debt		—			—			—			1,133			—			1,133
Investment income		(2,492		)	—			—			(1,405		)	498			(3,399		)
Other income		(47		)	—			(91		)	—			—			(138		)
Transaction costs		—			—			—			13,353			—			13,353
Long-lived asset impairment		31,399			—			—			—			—			31,399
Equity in net (income) loss of unconsolidated affiliates		(1,284		)	—			—			—			1,700			416
(Loss) income before income tax benefit		(134,176		)	83,170			(2,133		)	(226,669		)	(1,699		)	(281,507		)
Income tax benefit		—			—			—			(44,022		)	—			(44,022		)
(Loss) income from continuing operations		$	(134,176	)	$	83,170		$	(2,133	)	$	(182,647	)	$	(1,699	)	$	(237,485	)

 

15