Exhibit 99.2
TLC HEALTH CARE SERVICES, INC.
Consolidated Financial Statements
December 31, 2007 and March 31, 2007 and for the Three and Nine-month
Periods ended December 31, 2007 and 2006
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TLC Health Care Services, Inc.
Condensed Consolidated Balance Sheets
December 31, 2007 and March 31, 2007
(dollars in thousands, except share data)
December 31, 2007 (unaudited) | March 31, 2007 | |||||||
Assets | ||||||||
Current assets: | ||||||||
Cash and cash equivalents | $ | 5,252 | $ | 4,590 | ||||
Accounts receivable, net | 33,123 | 29,056 | ||||||
Prepaid expenses and other current assets | 2,532 | 3,941 | ||||||
Prepaid income taxes | 11 | 71 | ||||||
Total current assets | 40,918 | 37,658 | ||||||
Fixed assets, net | 5,700 | 6,453 | ||||||
Goodwill | 137,881 | 136,350 | ||||||
Intangible assets, net | 91,528 | 93,176 | ||||||
Deferred debt issuance costs, net | 3,607 | 4,071 | ||||||
Other assets | 1,568 | 1,659 | ||||||
Total assets | $ | 281,202 | $ | 279,367 | ||||
Liabilities and Stockholders’ Equity | ||||||||
Current liabilities: | ||||||||
Accounts payable | $ | 5,053 | $ | 5,337 | ||||
Accrued expenses | 1,526 | 3,847 | ||||||
Accrued distributions to licensees | 204 | 512 | ||||||
Accrued payroll and payroll related expenses | 15,992 | 17,090 | ||||||
Current portion of long-term debt | 3,369 | 5,070 | ||||||
Medicare and Medicaid liabilities | 2,598 | 2,811 | ||||||
Total current liabilities | 28,742 | 34,667 | ||||||
Long-term debt, net of current portion | 169,666 | 169,445 | ||||||
Other long-term liabilities | 6,454 | 5,704 | ||||||
Deferred income taxes | 13,560 | 9,997 | ||||||
Total liabilities | 218,422 | 219,813 | ||||||
Commitments and contingencies (Note 8) | ||||||||
Stockholders’ equity: | ||||||||
Common stock ($0.01 par value: 1,000,000 shares authorized; 103,084 shares issued and outstanding as of December 31 and March 31, 2007) | 1 | 1 | ||||||
Additional paid-in capital | 87,469 | 86,844 | ||||||
(Accumulated deficit) retained earnings | (24,690 | ) | (27,291 | ) | ||||
Total stockholders’ equity | 62,780 | 59,554 | ||||||
Total liabilities and stockholders’ equity | $ | 281,202 | $ | 279,367 | ||||
The accompanying notes are an integral part of these condensed consolidated financial statements.
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TLC Health Care Services, Inc.
Condensed Consolidated Statements of Operations
For the Three and Nine-Month Periods Ended December 31, 2007 and 2006
(Unaudited)
(dollars in thousands)
For the three-month periods ended December 31, | For the nine-month periods ended December 31, | |||||||||||||
2007 | 2006 | 2007 | 2006 | |||||||||||
Net service revenue | $ | 76,714 | $ | 69,354 | $ | 224,652 | $ | 213,170 | ||||||
Direct service cost | 35,117 | 32,542 | 102,600 | 103,698 | ||||||||||
Gross profit | 41,597 | 36,812 | 122,052 | 109,472 | ||||||||||
General and administrative expenses | 32,128 | 31,371 | 94,701 | 94,896 | ||||||||||
Non-cash compensation | 208 | 436 | 626 | 1,357 | ||||||||||
Depreciation and amortization expense | 1,275 | 1,173 | 3,745 | 3,441 | ||||||||||
Operating income | 7,986 | 3,832 | 22,980 | 9,778 | ||||||||||
Interest expense, net | 5,203 | 4,968 | 15,835 | 19,199 | ||||||||||
Amortization of debt issuance costs | 142 | 265 | 464 | 807 | ||||||||||
Other expenses, net | 173 | 219 | 353 | 1,105 | ||||||||||
Net income (loss), before provision for income taxes | 2,468 | (1,620 | ) | 6,328 | (11,333 | ) | ||||||||
Provision (benefit) for income taxes | 1,242 | (564 | ) | 3,727 | (3,667 | ) | ||||||||
Net income (loss) | $ | 1,226 | $ | (1,056 | ) | $ | 2,601 | $ | (7,666 | ) | ||||
The accompanying notes are an integral part of these condensed consolidated financial statements.
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TLC Health Care Services, Inc.
Condensed Consolidated Statements of Cash Flows
For the Nine-Month Periods Ended December 31, 2007 and 2006
(Unaudited)
(dollars in thousands)
2007 | 2006 | |||||||
Cash flows from operating activities | ||||||||
Net income (loss) | $ | 2,601 | $ | (7,666 | ) | |||
Adjustments to reconcile net income (loss) to net cash provided by operations, net of acquisitions | ||||||||
Depreciation and amortization | 3,745 | 3,441 | ||||||
Amortization of debt issuance costs | 464 | 807 | ||||||
Write off of deferred debt issuance costs | – | 2,851 | ||||||
Provision for bad debts | 1,834 | 746 | ||||||
Interest paid in kind | 863 | 72 | ||||||
Non-cash compensation | 626 | 1,357 | ||||||
Loss on disposal of assets | 2 | – | ||||||
Deferred income taxes | 3,563 | (3,667 | ) | |||||
Changes in operating assets and liabilities, net of acquisitions | ||||||||
Accounts receivable | (5,901 | ) | 463 | |||||
Prepaid expenses and other current assets | 1,470 | 1,068 | ||||||
Other assets | 90 | 33 | ||||||
Accounts payable and accrued expenses | (2,379 | ) | (368 | ) | ||||
Accrued payroll and payroll related expenses | (1,100 | ) | (6,445 | ) | ||||
Net cash provided by (used in) operating activities | 5,878 | (7,308 | ) | |||||
Cash flows from investing activities | ||||||||
Cash paid for acquisition of licensee businesses | (535 | ) | (1,153 | ) | ||||
Other acquisition costs | – | (1,021 | ) | |||||
Additions to fixed assets | (1,160 | ) | (714 | ) | ||||
Net cash (used in) investing activities | (1,695 | ) | (2,888 | ) | ||||
Cash flows from financing activities | ||||||||
Payment of Term Loan A | – | (600 | ) | |||||
Payment of first lien term loans | (900 | ) | (900 | ) | ||||
Repurchase of common stock | – | (100 | ) | |||||
Proceeds from long-term debt | – | 170,000 | ||||||
Payment of long-term debt | (92 | ) | (159,200 | ) | ||||
Proceeds from borrowings on revolving line of credit | 1,000 | 6,700 | ||||||
Payments on revolving line of credit | (2,900 | ) | (3,500 | ) | ||||
Change in restricted cash | – | 3,168 | ||||||
Debt issuance costs | – | (7,645 | ) | |||||
Payment of notes payable | (629 | ) | (248 | ) | ||||
Net cash (used in) provided by financing activities | (3,521 | ) | 7,675 | |||||
Net increase (decrease) in cash and cash equivalents | 662 | (2,521 | ) | |||||
Cash and cash equivalents | ||||||||
Beginning of year | $ | 4,590 | $ | 2,590 | ||||
End of period | $ | 5,252 | $ | 69 | ||||
Supplemental cash flow information | ||||||||
Interest paid | $ | 15,809 | $ | 18,084 | ||||
Income taxes paid | $ | 100 | $ | 199 | ||||
The accompanying notes are an integral part of these condensed consolidated financial statements.
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Notes to Consolidated Financial Statements
December 31, 2007 and March 31, 2007 and for the Three and
Nine-month Periods Ended December 31, 2007 and 2006
(Unaudited)
(dollar amounts in thousands)
1. | Organization and Nature of Operations |
TLC Health Care Services, Inc. (‘the company”), a Delaware Corporation, is a leading privately-held provider of home health care services through 93 locations in 22 states and the District of Columbia as of December 31, 2007. The Company provides a wide range of skilled nursing services including health management programs for wound care, cardiac care, diabetes, physical rehabilitation, pulmonary/respiratory, behavioral health and cancer care, as well as Hospice services for improving the quality of life of the terminally ill patients and their families. Additionally, the Company provides home health aide services to assist patients with activities of daily living.
The Company has developed a comprehensive home care services system focusing on the needs of each patient with the integration of clinical, operational and financially sound protocols to produce successful clinical outcomes for patients and sufficient financial returns for investors. The Company operates in business as a single segment.
For the three and nine-month periods ended December 31, 2007, approximately 22% and 23% of the Company’s net service revenues were generated by six licensees, respectively, operating under a licensing agreement, under which independent companies represent the Company within a designated territory.
The Company’s caregiver personnel are assigned to service the Company’s clients using the Company’s trade names and service marks. All licensee operations’ caregiver and administrative personnel are employees of the Company. The Company pays and distributes the payroll for the personnel, administers all payroll withholdings and payments, bills the customers and receives and processes the accounts receivable. The licensees are responsible for providing an office and paying related expenses for administration including rent, utilities and costs for administrative personnel. The licenses agreements are for an initial term of ten years with five-year renewable terms. Each of the agreements contains a one-year non-compete agreement in the event of termination.
The Company owns all necessary health care related permits and licenses and, where required, certificates of need for the operation of licensee offices. The revenues generated by the licensees along with the related accounts receivable, belong to the Company. The revenues and related direct costs are included in the Company’s consolidated net service revenues and operating costs.
The Company pays a distribution to the licensees based on a defined formula of gross profit generated. Generally, the Company pays the licensees 60% of the gross profit attributable to the operations of the licensee. Such costs are included in general and administrative expenses and were as follows for the periods indicated. There are no payments to the licensees based solely on revenues.
For the three-month periods ended December 31, | For the nine-month periods ended December 31, | |||||||||||
2007 | 2006 | 2007 | 2006 | |||||||||
Distribution to licensees | $ | 1,432 | $ | 1,806 | $ | 5,353 | $ | 4,513 | ||||
Principles of Consolidation
The accompanying consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries. The consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”). Intercompany accounts and transactions have been eliminated in consolidation.
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Uses of Estimates
The preparation of financial statements in conformity with GAAP requires management to make estimates that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and reported amounts of revenue and expenses during the reporting period. Actual results could differ from those estimates.
The most significant estimates include the determination of the fair value of assets and liabilities acquired, average length of service per patient episode, the collectability of accounts receivable and related reserves, valuation of goodwill and intangible assets, obligations under health insurance programs, and Medicare and Medicaid settlement issues.
Stock Options
For the three and nine-month periods ended December 31, 2006, the Company’s stock option plan was accounted for under the recognition and measurement provisions of APB Opinion No. 25,Accounting for Stock Issued to Employeesand related interpretations (“APB 25”), as permitted by FASB Statement No 123,Accounting for Stock-Based Compensation, Transition and Disclosure. Under APB 25, compensation expense is recognized for the excess of the value of the stock options over the exercise price at the date of grant.
For the three and nine-month periods ended December 31, 2007, stock options were accounted for under the provisions of FASB Statement No. 123(R),Share-based Payment(“SFAS No. 123(R)”). SFAS 123 (R), issued in December 2004 is a revision of SFAS No. 123 and supersedes APB 25. SFAS No. 123(R) was effective beginning on April 1, 2006, the beginning of the Company’s 2007 fiscal year. The Company has adopted SAS No. 123(R) using the modified prospective method and accordingly financial statements amounts for the prior period have not been restated to reflect the fair value method of expensing share-based compensation. The resultant expense for the three and nine-month periods ended December 31, 2007 was $208 and $626, respectively.
Reclassification
Certain prior period amounts have been reclassified to conform with the current year presentation.
2. | Business Combinations |
West Virginia Licensee Rights
Effective November 16, 2007, the Company acquired the licensee rights of its West Virginia territory. The acquisition was accounted for as a purchase of net assets. Total consideration was $1.6 million, including cash paid of $500 and a 4.83% per annum promissory note payable of $1.1 million. The note is payable over 3 years in monthly installments of $33, for which payments commenced in January 2008. The license agreement was terminated. The following assets and liabilities were acquired:
Fixed assets | $ | 7 | |
Goodwill and other intangible assets | 1,630 | ||
Fair value of net assets acquired | $ | 1,637 | |
Albert Gallatin Home Care and Hospice Licensee Rights
Effective April 1, 2006, the Company acquired the licensee rights to its Western, PA operations for aggregate consideration of $3,216, including $1,153 in cash, $1,696 in a non-interest bearing promissory note, $346 in accrued expenses, and approximately $21 of transaction costs. The note is payable in quarterly installments of $231 over two years, for which payments commenced in October 2006. The licensee agreement was terminated. The following assets and liabilities were acquired:
Fixed assets | $ | 289 | ||
Goodwill and other intangible assets | 3,725 | |||
Accrued expenses | (611 | ) | ||
Notes payable | (187 | ) | ||
Fair value of net assets acquired | $ | 3,216 | ||
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3. | Accounts Receivable, Revenue Recognition and Allowance for Doubtful Accounts |
Accounts receivable consists of the net realized amounts from third-party payors, primarily the Federal Medicare program, and patients for services rendered. The Company’s revenue was derived from the following payor sources for the periods indicated:
For the three-month periods ended December 31, | For the nine-month periods ended December 31, | |||||||||||
2007 | 2006 | 2007 | 2006 | |||||||||
Medicare | 86.66 | % | 86.56 | % | 85.54 | % | 86.09 | % | ||||
State Medicaid programs | 4.20 | 4.71 | 4.55 | 4.82 | ||||||||
Third party insurance carriers, managed care and private payors | 9.14 | 8.73 | 9.91 | 9.09 | ||||||||
100.0 | % | 100.0 | % | 100.0 | % | 100.0 | % | |||||
Revenue is recognized over the period in which it is earned, as services are rendered. Revenues are recorded net of contractual or other allowances to which customers are entitled.
Revenue adjustments result from differences between estimated and actual reimbursement amounts, an inability to obtain appropriate billing documentation or authorizations acceptable to the payor and other reasons. Revenue adjustments are deducted from gross accounts receivable. Accounts receivable are reduced by an allowance for doubtful accounts, which provides for those accounts from which payment is not expected to be received, although services were provided and revenue was earned. The Company writes off accounts receivable against the allowance when a balance is determined to be uncollectable.
Under the Medicare home health program, the Company receives payment for its services provided to each Medicare patient in accordance with the Prospective Payment System (“PPS”). PPS is a Federal government regulated payment methodology system for providers of Medicare home health services, established by the Federal Centers for Medicare and Medicaid Services (“CMS”) effective October 1, 2000. Under PPS, the Company is paid for its services provided to each Medicare patient based upon an amount determined at the beginning of each sixty-day episode of care. Such amount is calculated according to a standard formula, the Home Health Resource Group (“HHRG”), which measures three dimensions of patient care: clinical diagnosis, functionality and severity of illness. The Company recognizes revenue over the average length of service per patient episode. The Company monitors the number of days in each episode and adjusts its revenue according to changes in this measurement at least quarterly. The portion of revenue not yet earned within a sixty-day episode for which the Company has billed the full episodic revenue to Medicare is recorded as deferred revenue and reflected as a reduction of revenue and accounts receivable in the accompanying consolidated financial statements.
Medicare reimbursement rates are subject to change. The applicability of a reimbursement change depends upon the completion date of the episode and generally applies to all episodes ending after the effective date of the change. Any change in Medicare reimbursement, positive or negative, could materially impact the financial results of the Company.
Accounts receivable, net consists of the following at December 31, 2007 and March 31, 2007:
December 31, 2007 | March 31, 2007 | |||||||
Medicare | $ | 41,452 | $ | 36,819 | ||||
Non-Medicare | 11,286 | 10,094 | ||||||
Total | 52,738 | 46,913 | ||||||
Less: Allowance for doubtful accounts | (5,672 | ) | (5,233 | ) | ||||
Less: Deferred revenue | (13,943 | ) | (12,624 | ) | ||||
Accounts receivable, net | $ | 33,123 | $ | 29,056 | ||||
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4. | Details of Certain Balance Sheet Accounts |
Additional information regarding certain balance sheet accounts is presented below:
December 31, 2007 | March 31, 2007 | |||||||
Computer equipment and software | $ | 8,660 | $ | 7,758 | ||||
Office equipment, furniture and fixtures | 2,701 | 2,503 | ||||||
Leasehold improvements | 676 | 535 | ||||||
12,037 | 10,796 | |||||||
Less: Accumulated depreciation | (6,337 | ) | (4,343 | ) | ||||
$ | 5,700 | $ | 6,453 | |||||
Accrued insurance | $ | 150 | $ | 163 | ||||
Interest payable | 259 | 1,377 | ||||||
Accrued professional fees | 393 | 331 | ||||||
Accrued sales and business use taxes | 162 | 182 | ||||||
Other | 562 | 1,794 | ||||||
$ | 1,526 | $ | 3,847 | |||||
Accrued payroll and paid-time-off | $ | 9,179 | $ | 10,893 | ||||
Accrued workers’ compensation and health insurance | 4,115 | 3,530 | ||||||
Accrued incentive compensation | 833 | 667 | ||||||
Accrued payroll taxes and employee benefits | 1,865 | 2,000 | ||||||
$ | 15,992 | $ | 17,090 | |||||
5. | Goodwill and Intangible Assets |
The following table summarizes the activity related to goodwill for the periods indicated:
December 31, 2007 | March 31, 2007 | |||||
Goodwill, beginning of year | $ | 136,350 | $ | 132,996 | ||
Goodwill acquired in connection with West Virginia | 1,530 | - | ||||
Goodwill acquired in connection with Gallatin | - | 3,228 | ||||
Other | 1 | 126 | ||||
Goodwill, end of period | $ | 137,881 | $ | 136,350 | ||
Intangible assets consist of the following for the periods indicated:
December 31, 2007 | March 31, 2007 | |||||||
Trade name | $ | 89,100 | $ | 89,100 | ||||
Medicare provider numbers | 1,270 | 1,270 | ||||||
Other intangible assets | 6,997 | 6,897 | ||||||
97,367 | 97,267 | |||||||
Less: Accumulated amortization | (5,839 | ) | (4,091 | ) | ||||
$ | 91,528 | $ | 93,176 | |||||
The weighted-average amortization period of intangible assets that are amortized is 3.0 years.
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6. | Long-Term Debt |
Long-term debt consists of the following for the periods indicated:
December 31, 2007 | March 31, 2007 | |||||||
Syndicated credit facility | $ | 170,985 | $ | 172,922 | ||||
Notes payable related to acquisitions | 1,767 | 1,296 | ||||||
Other notes (interest rates ranging from 6.0% to 9.1% at | ||||||||
December 31, 2007) | 283 | 297 | ||||||
Total | 173,035 | 174,515 | ||||||
Less current portion | (3,369 | ) | (5,070 | ) | ||||
$ | 169,666 | $ | 169,445 | |||||
As of December 31, 2007, the total amount outstanding under the credit facility consisted of the following:
1st Lien debt | $ | 117,900 | |
Interest LIBOR plus 5.00% | |||
2nd Lien debt | |||
Interest at LIBOR plus 10.00%, including paid in kind of $1,029 | 51,029 | ||
Revolver | |||
Interest at LIBOR plus 5.00% | 1,000 | ||
1st Lien paid-in-kind notes | |||
Interest at 10.36%, including paid-in-kind of $68 | 692 | ||
2nd Lien paid-in-kind notes | |||
Interest at 15.36%, including paid-in-kind of $52 | 364 | ||
Total debt outstanding under the credit facility | $ | 170,985 | |
7. | Medicare and Medicaid Liabilities |
The Company’s Medicare and Medicaid liabilities consist of estimated amounts payable based upon the Company’s best estimate of liabilities using historical experience and pending matters for which the outcomes are estimable and probable.
8. | Commitments and Contingencies |
The health care industry is subject to numerous laws and regulations of Federal, state and local governments. Government activity continues with respect to investigations concerning possible violations by health care providers of fraud and abuse statutes and regulations. Compliance with such laws and regulations is subject to future government review and interpretations, as well as potential regulatory actions.
9. | Related Party Transactions |
The Company incurs an advisory fee of $1,000 per year to its majority shareholder, Arcapita. The advisory fee expense was $250 for both the three-month periods ended December 31, 2007 and 2006, and was $750 for both the nine-month periods ended December 31, 2007 and 2006. In connection with the acquisition of AccuMed, Arcapita earned an acquisition fee of $1,000. As of December 31, 2007 and 2006, the Company has an accrued balance of $3,563 and $2,563, respectively, payable to Arcapita.
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