Attached files
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8-K/A - FORM 8-K/A - WELLTOWER INC. | l42908e8vkza.htm |
EX-99.3 - EX-99.3 - WELLTOWER INC. | l42908exv99w3.htm |
Exhibit 99.4
FC-GEN Acquisition Holding, LLC and Subsidiaries
Condensed Consolidated Financial Statements
FC-GEN Acquisition Holding, LLC and Subsidiaries
Index to Condensed Consolidated Financial Statements
Page | ||
Condensed Consolidated Balance Sheets as of March 31, 2011 and December 31, 2010 |
2 | |
Condensed Consolidated Statements of Operations for the three months ended March 31, 2011 and 2010 |
3 | |
Condensed Consolidated Statements of Cash Flows for the three months ended March 31, 2011 and 2010 |
4 | |
Notes to Condensed Consolidated Financial Statements |
5 |
1
FC-GEN ACQUISITION HOLDING, LLC AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
March 31, 2011 | December 31, 2010 | |||||||
Unaudited | ||||||||
Assets: |
||||||||
Current assets: |
||||||||
Cash and equivalents |
$ | 84,463 | $ | 122,816 | ||||
Current portion of restricted cash and investments in marketable securities |
46,371 | 43,994 | ||||||
Accounts receivable, net of allowances for doubtful accounts of $24,020
in 2011 and $47,238 in 2010 |
336,354 | 314,086 | ||||||
Prepaid expenses and other current assets |
73,949 | 81,333 | ||||||
Current portion of deferred income taxes |
43,028 | 43,028 | ||||||
Total current assets |
584,165 | 605,257 | ||||||
Property and equipment, net of accumulated depreciation of $301,730
in 2011 and $279,722 in 2010 |
1,813,371 | 1,817,665 | ||||||
Restricted cash and investments in marketable securities |
55,820 | 54,362 | ||||||
Other long-term assets |
56,292 | 58,650 | ||||||
Identifiable intangible assets, net of accumulated amortization of $23,220
in 2011 and $21,752 in 2010 |
55,437 | 56,904 | ||||||
Goodwill |
126,914 | 126,914 | ||||||
Total assets |
$ | 2,691,999 | $ | 2,719,752 | ||||
Liabilities and Equity: |
||||||||
Current liabilities: |
||||||||
Current installments of long-term debt |
$ | 4,807 | $ | 4,671 | ||||
Accounts payable |
80,491 | 72,211 | ||||||
Other accrued expenses |
207,074 | 240,492 | ||||||
Total current liabilities |
292,372 | 317,374 | ||||||
Long-term debt |
1,937,825 | 1,938,094 | ||||||
Deferred income taxes |
252,938 | 248,214 | ||||||
Self-insurance liability reserves |
101,359 | 102,588 | ||||||
Other long-term liabilities |
96,708 | 95,299 | ||||||
Commitments and contingencies |
||||||||
FC-GEN Acquisition Holding, LLC members equity: |
||||||||
Capital stock, no par value, 1,500 shares authorized, 1,500 shares
issued and outstanding |
| | ||||||
Additional paid-in capital |
192,470 | 207,952 | ||||||
Accumulated deficit |
(188,398 | ) | (199,046 | ) | ||||
Accumulated other comprehensive income |
2,080 | 2,384 | ||||||
Total FC-GEN Acquisition Holding, LLC members equity |
6,152 | 11,290 | ||||||
Noncontrolling interests |
4,645 | 6,893 | ||||||
Total equity |
10,797 | 18,183 | ||||||
Total liabilities and equity |
$ | 2,691,999 | $ | 2,719,752 | ||||
See accompanying notes to unaudited condensed consolidated financial statements.
2
FC-GEN ACQUISITION HOLDING, LLC AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS)
UNAUDITED
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS)
UNAUDITED
Three months ended | Three months ended | |||||||
March 31, 2011 | March 31, 2010 | |||||||
Net revenues |
$ | 670,570 | $ | 609,032 | ||||
Salaries, wages and benefits |
401,958 | 378,987 | ||||||
Other operating expenses |
136,642 | 126,419 | ||||||
General and administrative costs |
33,283 | 27,731 | ||||||
Provision for losses on accounts receivable and notes receivable |
6,566 | 4,997 | ||||||
Lease expense |
5,870 | 6,159 | ||||||
Depreciation and amortization expense |
22,355 | 21,403 | ||||||
Accretion expense |
72 | 73 | ||||||
Interest expense |
38,774 | 36,125 | ||||||
Loss on early extinguishment of debt |
| 23 | ||||||
Investment income |
(1,045 | ) | (907 | ) | ||||
Other loss |
| 72 | ||||||
Transaction costs |
8,519 | 321 | ||||||
Equity in net (income) loss of unconsolidated affiliates |
(100 | ) | 155 | |||||
Income before income tax expense |
17,676 | 7,474 | ||||||
Income tax expense |
6,884 | 2,952 | ||||||
Net income |
10,792 | 4,522 | ||||||
Less net income attributable to noncontrolling interests |
(144 | ) | (187 | ) | ||||
Net income attributable to FC-GEN Acquisition Holding, LLC |
$ | 10,648 | $ | 4,335 | ||||
See accompanying notes to unaudited condensed consolidated financial statements.
3
FC-GEN ACQUISITION HOLDING, LLC AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
UNAUDITED
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
UNAUDITED
Three months ended | Three months ended | |||||||
March 31, 2011 | March 31, 2010 | |||||||
Cash flows from operating activities: |
||||||||
Net cash (used in) provided by operating activities |
$ | (527 | ) | $ | 9,810 | |||
Cash flows from investing activities: |
||||||||
Capital expenditures |
(14,206 | ) | (11,938 | ) | ||||
Purchases of restricted cash and marketable securities |
(3,513 | ) | (1,403 | ) | ||||
Net change in restricted cash and equivalents |
(826 | ) | 1,109 | |||||
Purchases of inpatient assets |
(8,253 | ) | | |||||
Proceeds from sale of inpatient assets |
| 1,299 | ||||||
Investment in joint venture |
(1,000 | ) | | |||||
Other, net |
277 | 647 | ||||||
Net cash used in investing activities |
(27,521 | ) | (10,286 | ) | ||||
Cash flows from financing activities: |
||||||||
Proceeds from issuance of long-term debt |
1,107 | | ||||||
Repayment of long-term debt |
(1,235 | ) | (1,004 | ) | ||||
Distributions by noncontrolling interests |
(1,177 | ) | (1,187 | ) | ||||
Distributions to parent |
(9,000 | ) | (9,000 | ) | ||||
Net cash used in financing activities |
(10,305 | ) | (11,191 | ) | ||||
Net decrease in cash and equivalents |
(38,353 | ) | (11,667 | ) | ||||
Cash and equivalents: |
||||||||
Beginning of period |
122,816 | 109,573 | ||||||
End of period |
$ | 84,463 | $ | 97,906 | ||||
Supplemental disclosure of cash flow information: |
||||||||
Interest paid |
$ | 34,310 | $ | 46,135 | ||||
Taxes paid |
4,693 | 5,360 | ||||||
See accompanying notes to unaudited condensed consolidated financial statements.
4
FC-GEN Acquisition Holding, LLC and Subsidiaries
Notes to Unaudited Condensed Consolidated Financial Statements
Notes to Unaudited Condensed Consolidated Financial Statements
(1) General Information
Description of Business
FC-GEN Acquisition Holding, LLC, (the Company) provides inpatient services through skilled
nursing and assisted living centers primarily located in the eastern United States. The Company
has 234 owned, leased, managed and jointly owned eldercare centers as of March 31, 2011. Revenues
of the Companys owned, leased and otherwise consolidated centers constitute approximately 84% of
its revenues.
The Company provides a range of rehabilitation therapy services, including speech pathology,
physical therapy and occupational therapy. 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 Companys revenues.
The Company provides an array of other specialty medical services, including respiratory
health services, management services, physician services, hospitality services, staffing services
and other healthcare related services.
Basis of Presentation
The accompanying unaudited condensed consolidated financial statements have been prepared in
accordance with U.S. generally accepted accounting principles which require the use of managements
estimates. In the opinion of management, the condensed consolidated financial statements for the
periods presented include all necessary adjustments for a fair presentation of the financial
position and results of operations and all adjustments are of a normal recurring nature. The
information in these unaudited condensed consolidated financial statements should be read in
conjunction with the Companys audited consolidated financial statements for the year ended
December 31, 2010.
In preparing these condensed consolidated financial statements, the Company has evaluated
events and transactions for potential recognition or disclosure
through June 15, 2011, the date the
unaudited condensed consolidated financial statements were issued.
Certain prior year amounts have been reclassified to conform with current period presentation,
the effect of which was not material.
Transactions with a Real Estate Investment Trust (REIT) Subsequent Event
The Companys parent (the Parent) has entered into a definitive purchase agreement with a REIT
pursuant to which the Parent sold 100% of the equity interests of the Company to the REIT for a
purchase price of $2.4 billion (the Sale Transaction). Of the skilled nursing and assisted living
centers the Company currently operates, it indirectly owns (1) 137 senior housing and care
facilities (134 in fee simple and three pursuant to ground leases) and (2) the leasehold interests
in and option to purchase seven senior housing and care facilities which are to be included with
assets acquired under the Sale Transaction and which represents substantially all of the Companys
net property and equipment. Prior to closing, the Company (a) contributed the assets, liabilities
and equity interests relating to (i) the business of operating and managing senior housing and care
facilities, (ii) joint venture entities and (iii) other ancillary businesses to a newly formed
subsidiary of the Company (OpCo), and then (b) distributed all of the equity interests of OpCo to
the members of the Parent in a taxable spin-off. The Sale Transaction closed on April 1, 2011.
Proceeds from the Sale Transaction were used to repay the $1.3 billion senior secured term loan,
$375.0 million mezzanine term loan and $42.2 million of transaction costs.
Contemporaneously with the closing of the Sale Transaction on April 1, 2011, an indirect
subsidiary of OpCo (Tenant) entered into a master lease (the REIT Master Lease) with a subsidiary
of the REIT. Tenant operates the 137 owned or ground leased facilities under the REIT Master Lease
and an affiliate of Tenant entered into a pass through master sub-sublease under which such
affiliate
will operate the seven leased facilities. The REIT Master Lease is supported by a guaranty
from OpCo. Initial annual cash base rent of the Master Lease is $198.0 million with an annual
5
FC-GEN Acquisition Holding, LLC and Subsidiaries
Notes to Unaudited Condensed Consolidated Financial Statements
Notes to Unaudited Condensed Consolidated Financial Statements
rent escalator equal to the lesser of a consumer price index factor or 3.5% for years two
through six of the lease term and not more than 3.0% thereafter. The initial lease term is for 15
years with a renewal option that can extend the lease term through December 31, 2040.
On April 1, 2011, the OpCo declared and made $37.8 million of cash distributions to the
Parent.
The senior secured term loan of $1.3 billion, mezzanine term loan of $375.0 million and
related interest of $9.6 million and termination fees, which are mandatory interest payments that
have been accrued over the term of the mezzanine term loan, of $20.8 million accrued on the March
31, 2011 consolidated balance sheet, were repaid on April 1, 2011 and the agreements were
terminated. On April 1, 2011, the OpCo wrote off unamortized deferred financing fees of $5.7
million related to the senior secured credit facility and mezzanine term loan agreements. In
connection with the repayment, the OpCo received $10.7 million of proceeds from escrow balances
that were required to be held under the terms of the senior secured term loan and mezzanine term
loan agreements. These escrow balances were included on the consolidated balance sheet as of March
31, 2011 and December 31, 2010.
On April 1, 2011, OpCo entered into a $200.0 million revolving credit facility to provide OpCo
a source of financing to fund general working capital requirements. The revolving credit facility
expires on April 1, 2016. OpCo incurred costs of $3.0 million in connection with the financing.
The accounting for the impact of the above transactions on the historical basis of these
financial statements is not reflected in the March 31, 2011 unaudited condensed consolidated
financial statements. The Company is currently evaluating the impact the above transactions may
have on its consolidated financial statements.
Principles of Consolidation and Variable Interest Entities
The accompanying unaudited condensed consolidated financial statements include the accounts
of the Company, its wholly owned subsidiaries, its consolidated variable interest entities (VIEs)
and certain other partnerships. All significant intercompany accounts and transactions have been
eliminated in consolidation for all periods presented.
The Companys investments in VIEs in which it is the primary beneficiary are consolidated,
while the investment in other VIEs in which it is not the primary beneficiary are accounted for
under other accounting principles. Investments in and the operating results of 20% to 50% owned
companies, which are not VIEs, are included in the unaudited condensed consolidated financial
statements using the equity method of accounting.
Consolidated VIEs and Other Consolidated Partnerships
At March 31, 2011 and December 31, 2010, the Company consolidated three and four VIEs,
respectively. The total assets of the VIEs principally consist of property and equipment that
serves as collateral for the VIEs non-recourse debt and is not available to satisfy any of the
Companys other obligations. Creditors of the VIEs, including senior lenders, have no recourse
against the general credit of the Company. The consolidated VIEs at March 31, 2011 own and operate
skilled nursing and assisted living facilities. The Companys ownership interests in the
consolidated VIEs range from 0% to 50% and the Company manages the day-to-day operations of the
consolidated VIEs under management agreements. The Companys involvement with the VIEs began in
years prior to 2000.
The Company consolidates one partnership as it is the general partner in the entity and may
exercise considerable control over the business without substantive kick out rights afforded to the
limited partners. The partnership is a jointly owned and managed skilled nursing facility. The
assets of this consolidated partnership consist of property and equipment that serves as collateral
for the partnerships non-recourse debt and are not available to satisfy any of the Companys other
obligations. Creditors of this consolidated partnership, including senior lenders, have no
recourse against the general credit of the Company.
At March 31, 2011, total assets and non-recourse debt of the consolidated VIEs and other
consolidated partnerships were $41.3 million and $32.0 million, respectively. At December 31,
2010, total assets and non-recourse debt of these consolidated partnerships were $41.2 million and
$32.2 million, respectively.
6
FC-GEN Acquisition Holding, LLC and Subsidiaries
Notes to Unaudited Condensed Consolidated Financial Statements
Notes to Unaudited Condensed Consolidated Financial Statements
VIEs Not Consolidated
Separate from the VIEs previously described, at March 31, 2011 and December 31, 2010, the
Company is not the primary beneficiary of 12 and 16 additional VIEs, respectively, and, therefore,
those VIEs are not consolidated into its financial statements. The unconsolidated VIEs own and
operate skilled nursing and assisted living facilities. The Company manages the day-to-day
operations of these unconsolidated VIEs under management agreements. The Companys involvement
with 14 of the unconsolidated VIEs began in 2008 followed by another two unconsolidated VIEs in
2009. The Company ended involvement with four of the unconsolidated VIEs in the three months ended
March 31, 2011. Through a quarterly reassessment during 2010 and 2011, the Company concluded these
entities continued to be VIEs, it reaffirmed its conclusion that it is not the primary beneficiary
of these entities, and that its involvement in management activities of these VIEs were not
significant to its accompanying condensed consolidated financial statements.
(2) Significant Transactions and Events
Transaction Costs
The Company expensed $8.5 million of costs incurred related to the Sale Transaction in the
three months ended March 31, 2011. The Company expensed these costs in the period incurred. This
balance includes legal, accounting, tax and other consulting costs as well as certain internal
costs.
The Company expensed $4.5 million of transaction costs in the year ended December 31, 2010,
$0.3 million of which was expensed in the three month ended March 31, 2010.
Joint Venture Transactions
During the three months ended March 31, 2011, the Company paid $7.8 million to acquire the
remaining outside ownership interest in three West Virginia joint ventures previously consolidated
by the Company. Given that the Company has maintained control of these entities, the transaction
will be accounted for as an equity transaction with a decrease in noncontrolling interests of $1.2
million and a decrease in additional paid-in capital of $6.7 million.
On January 1, 2011, the Company acquired the remaining 50% ownership interest in a joint
venture partnership which operates an assisted living facility in Delaware through assumption of
the noncontrolling interests portion of the facilitys debt and working capital obligations. The
Company had previously owned 50% of the joint venture that was accounted for at December 31, 2010
as a consolidated VIE.
Given all entities were previously consolidated by the Company, the above acquisitions did not
have a material impact on the Companys results of operations, financial position or cash flows
from operations.
Asset Purchases
On November 30, 2010, the Company entered into agreements to lease six skilled nursing
facilities and purchase a renal dialysis business, each located in Maryland. The landlord of the
properties is a related party affiliate of the Parent. Initial rent will be $7.5 million per year
with 2.5% annual escalation. In addition to an annual lease payment, the Company paid $10.3
million in the transaction to acquire the operations of the leased facilities and the dialysis
business. The lease is accounted for as a capital lease. The transaction preliminarily added $69.9
million of property and equipment, $7.8 million of long-lived assets and $67.5 million of capital
lease obligation. Annual net revenues for these
facilities are approximately $79.0 million. The results of operations of this acquisition were
included since the acquisition date.
In May 2010, the Company completed the acquisition of the real estate of a previously leased
190 bed skilled nursing facility for $8.3 million. The real estate acquisition did not have a
material impact on the Companys results of operations, financial position or cash flows from
operations.
7
FC-GEN Acquisition Holding, LLC and Subsidiaries
Notes to Unaudited Condensed Consolidated Financial Statements
Notes to Unaudited Condensed Consolidated Financial Statements
Related Party Transactions
The Parent is wholly owned by private equity funds managed by affiliates of Formation Capital,
LLC and JER Partners (collectively the Sponsors).
During the three months ended March 31, 2011 and 2010, the Company made $9.0 million of cash
distributions to the Parent.
During the three months ended March 31, 2011, the Company made an investment of $1.0 million
to maintain its one-third interest in an unconsolidated joint venture affiliated with one of the
Companys Sponsors.
The Company is billed by an affiliate of one of the Companys Sponsors a monthly fee for the
provision of administrative services. The fee is based upon the number of licensed owned, leased
and managed beds operated by the Company. Based upon the Companys current bed count, the fee
approximates $3.0 million per annum.
Consolidation of a VIE
In May 2010, the Company entered into a series of agreements with an unaffiliated third party
that resulted in the Company determining that it was the primary beneficiary and therefore
consolidated the VIE as of June 1, 2010. Prior to these agreements, the Company managed the
operations of the skilled nursing and assisted living facility, the VIE, as well as three other
skilled nursing facilities having the same parent organization. Through the agreements, the
Company extended to the VIE a line of credit for construction and working capital needs up to $9.0
million ($3.4 million was drawn as of March 31, 2011). In addition, the Company received an
extension of its contract to manage the VIE for 15 years, and was granted a fixed price purchase
option to acquire substantially all the assets of the VIE, exercisable at any time at a base price
of $16.9 million. The purchase option expires March 31, 2020. The effect of consolidating the VIE
was an increase to total assets of $7.0 million and an increase to debt of $8.3 million.
(3) 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 Companys inpatient services derive approximately 79% of its revenue from the
Medicare and various state Medicaid programs.
The sources and amounts of the Companys revenues are determined by a number of factors,
including licensed bed capacity and occupancy rates of its eldercare centers, the mix of patients
and the rates of reimbursement among payors. Likewise, payment for ancillary medical services,
including services provided by the Companys 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 Companys
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 Companys business and
the business of the customers served by the Companys 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 Companys 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 Companys
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.
8
FC-GEN Acquisition Holding, LLC and Subsidiaries
Notes to Unaudited Condensed Consolidated Financial Statements
Notes to Unaudited Condensed Consolidated Financial Statements
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 could subject the Company to regulatory actions
including fines, penalties, and exclusion from the Medicare and Medicaid programs.
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 unaudited condensed 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; the
valuation of derivatives, deferred tax assets, fixed assets, goodwill, intangible assets,
investments and notes receivable; and reserves for employee benefit obligations, income tax
uncertainties, asset retirement obligations and other contingencies. These estimates and
assumptions are based on managements 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, which management believes 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.
(4) Property and Equipment
Property and equipment at March 31, 2011 and December 31, 2010 consist of the following (in
thousands):
March 31, 2011 | December 31, 2010 | |||||||
Land and improvements |
$ | 258,942 | $ | 258,188 | ||||
Buildings and improvements |
1,635,984 | 1,630,053 | ||||||
Equipment, furniture and fixtures |
205,027 | 197,296 | ||||||
Construction in progress |
15,148 | 11,850 | ||||||
Gross property and equipment |
2,115,101 | 2,097,387 | ||||||
Less: accumulated depreciation |
(301,730 | ) | (279,722 | ) | ||||
Net property and equipment |
$ | 1,813,371 | $ | 1,817,665 | ||||
On April 1, 2011, substantially all of the Companys net property and equipment was sold in
the Sale Transaction.
Assets held under capital leases, which are principally carried in building and improvements
above, were $329.3 million and $329.4 million at March 31, 2011 and December 31, 2010,
respectively. Accumulated depreciation on assets held under capital leases was $35.4 million and
$32.1 million at March 31, 2011 and December 31, 2010, respectively.
9
FC-GEN Acquisition Holding, LLC and Subsidiaries
Notes to Unaudited Condensed Consolidated Financial Statements
(5) Long-Term Debt
Long-term debt at March 31, 2011 and December 31, 2010 consists of the following (in
thousands):
March 31, 2011 | December 31, 2010 | |||||||
Senior secured term loan |
$ | 1,295,563 | $ | 1,295,563 | ||||
Mezzanine term loan |
375,000 | 375,000 | ||||||
Capital lease obligations |
226,524 | 227,382 | ||||||
Mortgages and other secured debt (non recourse) |
45,183 | 44,454 | ||||||
Unamortized debt premium on mortgages and
other secured debt (non recourse) |
362 | 366 | ||||||
1,942,632 | 1,942,765 | |||||||
Less: |
||||||||
Current installments of long-term debt |
(4,807 | ) | (4,671 | ) | ||||
Long-term debt |
$ | 1,937,825 | $ | 1,938,094 | ||||
The senior secured term loan and mezzanine term loan were repaid on April 1, 2011 with
proceeds from the Sale Transaction and OpCo entered into a new revolving credit facility.
Senior Secured Credit Facility
The senior secured credit facility consists of the following subfacilities, as amended: (i) a
$1.3 billion senior secured term loan, and (ii) a $75 million revolving credit facility. The
Company pays interest monthly on the outstanding loans under the senior secured credit facility.
Borrowings bear interest at a rate equal to, at the Companys option, either a base rate or at
the one-month London Interbank Offered Rate (LIBOR) plus an applicable margin. The base rate is
determined by reference to the highest of (i) a lender-defined prime rate, (ii) the federal funds
rate plus 3.0%, and (iii) the sum of LIBOR, not to be less than 2.5%, plus an applicable margin.
The applicable margin with respect to LIBOR borrowings was 4.75% at March 31, 2011. This
applicable margin increases every anniversary beginning September 25, 2010 through year five with
the rate equal to LIBOR plus 5.75%. LIBOR borrowings have an applicable floor of 1.5% beginning
September 25, 2010 through September 25, 2012, and 2.5% thereafter. The interest rate on LIBOR
borrowings under the senior secured credit facility was 6.25% at March 31, 2011.
Principal amounts outstanding under each of the two subfacilities are due and payable in full
at maturity, September 25, 2014.
The senior secured term loan, as amended, can be voluntarily prepaid at any time. The senior
secured term loan is subject to partial mandatory prepayment under certain circumstances, including
the Companys receipt of insurance proceeds received following damage to properties or the receipt
of certain proceeds upon the sale of real property. In these circumstances, the proceeds received
must be used to prepay the senior secured term loan.
The senior secured credit agreement requires funds to be placed in escrow for property tax and
property insurance obligations. In addition, the senior secured credit agreement requires that
cash be placed in escrow on a monthly basis (approximately $7.5 million annually) to fund routine
maintenance and the replacement of property and equipment. The lender releases funds from this
escrow when the Company presents evidence that operating funds have been expended for such routine
maintenance and replacement activities. At March 31, 2011 and December 31, 2010, $1.3 million was
held in escrow for routine maintenance, which is included in prepaid expenses and other current
assets.
10
FC-GEN Acquisition Holding, LLC and Subsidiaries
Notes to Unaudited Condensed Consolidated Financial Statements
All obligations under the senior secured credit facility are secured by a security interest in
substantially all of the assets of the Company.
The senior secured credit agreement contains a number of covenants that, among other things,
restrict, subject to certain exceptions, the Companys ability to: incur additional indebtedness;
provide guarantees; create liens on assets; engage in mergers, acquisitions or consolidations; sell
assets; make distributions; make investments, loans or advances; repay indebtedness, except as
scheduled or at maturity; engage in certain transactions with affiliates; amend material agreements
governing the Companys outstanding indebtedness; and fundamentally change the Companys business.
The senior secured credit facility agreement requires the Company to meet defined financial
covenants, including a maximum consolidated leverage ratio, a minimum consolidated fixed charge
coverage ratio, a minimum consolidated project yield and certain customary affirmative covenants,
such as financial and other reporting, and certain events of default. At March 31, 2011, the
Company was in compliance with all covenants.
Senior secured term loan. The senior secured term loan has been prepaid $1.9 million from
proceeds on the sale of real property and was paid down $40.0 million in connection with a 2009
amendment. The balance at March 31, 2011 was $1,295.6 million.
Revolving credit facility. The $75 million revolving credit facility, as amended, was
established to provide the Company a source of financing to fund general working capital
requirements. Borrowings under the revolving credit facility may be in the form of revolving loans
or swing line loans. Aggregate outstanding swing line loans have a sub-limit of $10 million. The
revolving credit facility also provides a sub-limit of $35 million for letters of credit.
Borrowing levels under the revolving credit facility are limited to a borrowing base that is
computed based upon the level of Company eligible accounts receivable, as defined. In addition to
paying interest on the outstanding principal borrowed under the revolving credit facility, the
Company is required to pay a commitment fee to the lenders for any unutilized commitments. The
commitment fee rate is 0.5% per annum when the unused commitment is greater than $37.5 million and
0.75% per annum when the unused commitment is less than $37.5 million. As of March 31, 2011, the
Company had no outstanding borrowings under the revolving credit facility and had $29.3 million of
undrawn letters of credit and other encumbrances, leaving the Company with approximately $45.7
million of borrowing capacity under the revolving credit facility. The revolving credit facility
is pre-payable prior to September 25, 2013 but will be subject to a prepayment penalty. A
prepayment penalty of 1% of the commitment would apply prior to that date. Any prepayment that
occurs after September 25, 2013 is not subject to a prepayment penalty. The revolving credit
facility expires on September 25, 2014.
Mezzanine Term Loan
The mezzanine term loan of $375 million was outstanding at March 31, 2011. Borrowings bear
interest at a rate equal to LIBOR plus 7.5%. The Company borrowings under the mezzanine term loan
bore interest at approximately 7.74% at March 31, 2011. The principal amount is due and payable in
full at maturity, September 25, 2014.
The mezzanine term loan agreement contains both voluntary and mandatory prepayment
restrictions subject to prepayment penalties set forth in the agreement. Mandatory termination
fees equal to 1% of the $375 million borrowing plus a monthly rate that increases annually from
0.088% in the initial year of the loan to 0.116% in the final year of the loan. As of March 31,
2011, the Company has accrued net termination fees of $20.9 million. The Company must maintain a
debt service reserve held by the lender without interest equal to $4.1 million. The balance is
included in prepaid expenses and other current assets.
All obligations under the mezzanine term loan are secured by a security interest in
substantially all of the assets of the Company, subject to subordination to the senior secured
credit facility.
The mezzanine term loan contains covenants similar to, and no more restrictive than, those
required under the senior secured credit agreement. At March 31, 2011, the Company was in
compliance with all covenants.
11
FC-GEN Acquisition Holding, LLC and Subsidiaries
Notes to Unaudited Condensed Consolidated Financial Statements
Notes to Unaudited Condensed Consolidated Financial Statements
Other Debt
Capital lease obligations. The capital lease obligations represent the present value of
minimum lease payments under such capital lease arrangements and bear imputed interest at rates
ranging from 7.1% to 19.4% at March 31, 2011, and mature at dates ranging primarily from 2012 to
2031.
Mortgages and other secured debt (non-recourse). Loans are carried by certain of the
Companys consolidated joint ventures. The loans consist principally of revenue bonds and secured
bank loans. Loans are secured by the underlying real and personal property of individual
facilities and have fixed or variable rates of interest ranging from 2.5% to 20.2% at March 31,
2011 with maturity dates ranging from 2014 to 2036. Loans are labeled non-recourse because
neither the Company nor a wholly owned subsidiary is obligated to perform under the respective loan
agreements.
(6) Lease Commitments
The Company leases certain facilities under capital and operating leases. Future minimum
payments for the next five years and thereafter under such leases at March 31, 2011 are as follows
(in thousands):
March 31, | Capital Leases | Operating Leases | ||||||
2012 |
$ | 25,678 | $ | 20,110 | ||||
2013 |
25,448 | 18,397 | ||||||
2014 |
25,242 | 14,714 | ||||||
2015 |
88,513 | 14,019 | ||||||
2016 |
18,757 | 10,606 | ||||||
Thereafter |
286,690 | 12,590 | ||||||
Total future minimum lease payments |
470,328 | $ | 90,436 | |||||
Less amount representing interest |
(243,804 | ) | ||||||
Present value of net minimum lease payments |
226,524 | |||||||
Less current portion |
(3,714 | ) | ||||||
Long-term capital lease obligation |
$ | 222,810 | ||||||
On April 1, 2011, OpCo entered into the REIT Master Lease with initial annual cash base rent
of $198.0 million.
The Company holds fixed price purchase options to acquire the land and buildings of 18
facilities for $119.5 million with expirations ranging from 2014 to 2025. Seven of these options
are deemed to be bargain purchases and, consequently, these leases have been classified as capital
leases contributing $73.2 million in capital lease obligations of the total $226.5 million at March
31, 2011. The Company also classifies 23 other center leases as capital leases contributing $153.3
million to the capital lease obligation at March 31, 2011.
The Company and subsidiaries of a real estate investment trust are party to a master lease
involving eleven facilities. The master lease does not impact the individual terms and conditions
of the six separate operating leases and the five separate capital leases, but establishes cross
default and cure provisions if one or more of the eleven individual facilities have an event of
default. In addition to facility / tenant level financial, reporting and other covenants contained
in the individual operating and capital leases, the master lease establishes certain Company level
financial, reporting and other covenants. Pursuant to the master lease, the Company posted $11.0 million of letters of
credit as security, principally representing 12 months rent under the six individual operating
leases and five individual capital leases.
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FC-GEN Acquisition Holding, LLC and Subsidiaries
Notes to Unaudited Condensed Consolidated Financial Statements
Notes to Unaudited Condensed Consolidated Financial Statements
(7) Income Taxes
The Companys effective tax rate approximated 38.9% and 39.5% for the three months ended March
31, 2011 and March 31, 2010, respectively.
Management believes the deferred tax assets at March 31, 2011 and December 31, 2010 are more
likely than not to be realized. As of March 31, 2011, the Company expects to have sufficient
taxable income in future periods from the reversal of existing taxable temporary differences and
expected profitability such that the remaining NOL would be utilized within the carryforward
period. A significant portion of the NOLs arose in fiscal 2007 and have a carryforward period of
20 years.
(8) Commitments and Contingencies
Financial Commitments
Requests for providing commitments to extend financial guarantees and extend credit are
reviewed and approved by senior management subject to obligational authority limitations.
Management regularly reviews outstanding commitments, letters of credit and financial guarantees,
and the results of these reviews are considered in assessing the need for any reserves for possible
credit and guarantee loss.
The Company has extended $11.0 million in working capital lines of credit to certain jointly
owned and managed companies, including certain consolidated VIEs, of which $7.0 million was unused
at March 31, 2011. Credit risk represents the accounting loss that would be recognized at the
reporting date if the affiliate companies were unable to repay any amounts utilized under the
working capital lines of credit. Commitments to extend credit to third parties are conditional
agreements generally having fixed expiration or termination dates and specific interest rates and
purposes.
Legal Proceedings
The Company is a party to litigation and regulatory investigations arising in the ordinary
course of business. Management does not believe the results of such litigation and regulatory
investigations, even if the outcome is unfavorable, would have a material adverse effect on the
results of operations, financial position or cash flows of the Company.
(9) Fair Value of Financial Instruments
The Company places its cash and equivalents and restricted investments in marketable
securities in quality financial instruments and limits the amount invested in any one institution
or in any one type of instrument. The Company has not experienced any significant losses on its
cash. The cash and investment balances are recorded at fair value based on quoted prices, which the
Company believes qualify as a Level 1 measurement as of March 31, 2011 and December 31, 2010.
Derivative Instruments and Hedging Activities
The senior secured credit facility agreement and the mezzanine term loan agreement require the
Company to enter into financial instruments to protect against fluctuations in interest rates for a
notional amount equal to the combined outstanding principal balance of the senior secured credit
facility and the mezzanine term loan such that LIBOR does not exceed 6.5%.
These contracts are not designated for hedge accounting treatment, and therefore, the Company
records the fair value (estimated unrealized gain or loss) of the agreements as an asset or
liability and the change in any period as an adjustment to interest expense in the unaudited
condensed consolidated statements of operations. Realized gains and losses associated with these
contracts are recorded as adjustments to interest expense each reporting period. The
13
FC-GEN Acquisition Holding, LLC and Subsidiaries
Notes to Unaudited Condensed Consolidated Financial Statements
Notes to Unaudited Condensed Consolidated Financial Statements
counterparties to the derivative financial instruments are major financial institutions. The
Company does not use derivative financial instruments for any trading or speculative purposes.
The Company satisfied its requirement to hedge its exposure to interest rate volatility with
an interest rate cap arrangement. The interest rate cap has a notional of approximately $1.7
billion. The Company is exposed to the impact of interest rate changes because its long-term debt
bears interest at a variable rate. Under this cap agreement, the Company receives variable
interest rate payments when the one-month LIBOR rises above 3.0%. The interest rate cap agreement
effectively limits the exposure to rising interest rates to 3% on approximately $1.7 billion of
variable rate debt at March 31, 2011. The Company paid fees of $6.2 million at the inception of
the interest rate cap agreement, which will be amortized to interest expense over the term of the
agreement. The fair value of the interest rate cap agreement at March 31, 2011 is recorded as an
asset of $0.2 million with changes in fair value recorded to interest expense. The interest rate
cap agreement expires on July 14, 2012. The counterparty to the interest rate swap agreement is a
major institutional bank.
The Company is exposed to credit loss, in the event of nonperformance by the counterparty to
the interest rate cap agreement. As of March 31, 2011, the Company does not anticipate
nonperformance by the counterparty to this agreement and no material loss would be expected from
any such nonperformance.
The Company consolidates one VIE having an interest rate cap agreement. The VIE is exposed to
the impact of interest rate changes because its long-term debt bears interest at a variable rate.
The VIEs obligation under the interest rate cap agreement is non-recourse to the Company. The
interest rate cap agreement effectively limits the exposure to rising interest rates to 7.0% on
approximately $6.2 million of variable rate mortgage debt at March 31, 2011. The fair value of the
VIEs interest rate cap agreement at March 31, 2011 is recorded as an asset of $0.1 million with
changes in fair value recorded to interest expense. The interest rate cap agreement expires in
July 2015. The counterparty to the interest rate swap agreement is a major institutional bank.
The Company classifies its interest rate cap valuations within Level 2 of the valuation
hierarchy.
(10) Subsequent Event
Lease and Purchase Transactions
Effective May 1, 2011, OpCo began to lease seven skilled nursing facilities that it previously
managed. Initial annual cash base rent will be $6.3 million with an annual rent escalator of 3%.
OpCo acquired the operations of one of these facilities for $3.0 million.
Notes Receivable Settlement
On June 10, 2011, OpCo received $8.2 million to settle an outstanding note receivable. At
March 31, 2011, $2.4 million was included in other long-term assets for the note receivable. OpCo
will record the $5.8 million gain as other income in the three months ended June 30, 2011.
14