Form 10-Q
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
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þ |
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QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934. |
For the quarterly period ended June 30, 2010.
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o |
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934. |
For the transition period from to .
Commission file number: 001-33757
THE ENSIGN GROUP, INC.
(Exact Name of Registrant as Specified in Its Charter)
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Delaware
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33-0861263 |
(State or Other Jurisdiction of
Incorporation or Organization)
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(I.R.S. Employer
Identification No.) |
27101 Puerta Real, Suite 450
Mission Viejo, CA 92691
(Address of Principal Executive Offices and Zip Code)
(949) 487-9500
(Registrants Telephone Number, Including Area Code)
N/A
(Former Name, Former Address and Former Fiscal Year, If Changed Since Last Report)
Indicate by check mark whether the registrant (1) has filed all reports required to
be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was required to file
such reports), and (2) has been subject to such filing requirements for the past 90 days.
þ Yes o No
Indicate by check mark whether the registrant has submitted electronically and
posted on its corporate Web site, if any, every Interactive Data File required to be
submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter)
during the preceding 12 months (or for such shorter period that the registrant was
required to submit and post such files). o Yes o No
Indicate by check mark whether the registrant is a large accelerated filer, an
accelerated filer, non-accelerated filer, or a smaller reporting company. See the
definitions of large accelerated filer, accelerated filer and smaller reporting
company in Rule 12b-2 of the Exchange Act. (Check one):
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Large accelerated filer o
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Accelerated filer þ
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Non-accelerated filer o
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Smaller reporting company o |
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(Do not check if a smaller reporting company) |
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Indicate by a check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act). o Yes þ No
As of July 31, 2010, 20,751,734 shares of the registrants common stock were outstanding.
THE ENSIGN GROUP, INC.
QUARTERLY REPORT ON FORM 10-Q
FOR THE SIX MONTHS ENDED JUNE 30, 2010
TABLE OF CONTENTS
2
Part I. Financial Information
Item 1. Financial Statements
THE ENSIGN GROUP, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except par values)
(Unaudited)
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June 30, |
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December 31, |
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2010 |
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2009 |
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Assets |
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Current assets: |
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Cash and cash equivalents |
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$ |
26,353 |
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$ |
38,855 |
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Accounts receivableless allowance for doubtful
accounts of $8,095 and $7,575 at June 30, 2010 and
December 31, 2009, respectively |
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72,678 |
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62,606 |
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Prepaid income taxes |
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1,245 |
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1,242 |
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Prepaid expenses and other current assets |
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6,695 |
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6,498 |
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Deferred tax assetcurrent |
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8,868 |
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8,126 |
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Total current assets |
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115,839 |
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117,327 |
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Property and equipment, net |
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251,320 |
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230,774 |
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Insurance subsidiary deposits and investments |
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15,397 |
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13,810 |
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Escrow deposits |
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7,595 |
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Deferred tax asset |
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6,659 |
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4,262 |
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Restricted and other assets |
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6,036 |
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5,650 |
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Intangible assets, net |
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4,288 |
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4,498 |
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Goodwill |
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10,524 |
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7,432 |
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Other indefinite-lived intangibles |
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672 |
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Total assets |
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$ |
410,735 |
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$ |
391,348 |
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Liabilities and stockholders equity |
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Current liabilities: |
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Accounts payable |
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$ |
16,267 |
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$ |
15,498 |
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Accrued wages and related liabilities |
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27,538 |
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28,756 |
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Accrued self-insurance liabilitiescurrent |
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10,500 |
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10,074 |
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Other accrued liabilities |
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13,442 |
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15,375 |
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Current maturities of long-term debt |
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2,125 |
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2,065 |
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Total current liabilities |
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69,872 |
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71,768 |
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Long-term debtless current maturities |
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106,363 |
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107,401 |
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Accrued self-insurance liabilitiesless current portion |
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25,059 |
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22,096 |
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Deferred rent and other long-term liabilities |
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2,897 |
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2,524 |
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Commitments and contingencies (Note 14) |
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Stockholders equity: |
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Common stock; $0.001 par value; 75,000 shares
authorized; 21,360 and 20,748 shares issued and
outstanding at June 30, 2010, respectively, and
21,280 and 20,642 shares issued and outstanding at
December 31, 2009, respectively |
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21 |
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21 |
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Additional paid-in capital |
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68,699 |
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66,765 |
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Retained earnings |
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141,802 |
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124,910 |
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Common stock in treasury, at cost, 612 and 638
shares at June 30, 2010 and December 31, 2009,
respectively |
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(3,978 |
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(4,137 |
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Total stockholders equity |
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206,544 |
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187,559 |
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Total liabilities and stockholders equity |
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$ |
410,735 |
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$ |
391,348 |
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See accompanying notes to condensed consolidated financial statements.
3
THE ENSIGN GROUP, INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(In thousands, except per share data)
(Unaudited)
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Three Months Ended |
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Six Months Ended |
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June 30, |
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June 30, |
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2010 |
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2009 |
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2010 |
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2009 |
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Revenue |
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$ |
157,948 |
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$ |
132,178 |
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$ |
312,122 |
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$ |
262,463 |
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Expense: |
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Cost of services (exclusive of facility
rent and depreciation and amortization
shown separately below) |
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125,808 |
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105,290 |
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248,991 |
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209,489 |
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Facility rentcost of services |
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3,616 |
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3,724 |
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7,191 |
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7,425 |
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General and administrative expense |
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6,407 |
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5,417 |
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12,181 |
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10,378 |
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Depreciation and amortization |
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4,023 |
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3,209 |
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7,978 |
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6,174 |
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Total expenses |
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139,854 |
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117,640 |
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276,341 |
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233,466 |
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Income from operations |
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18,094 |
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14,538 |
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35,781 |
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28,997 |
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Other income (expense): |
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Interest expense |
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(2,308 |
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(1,141 |
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(4,588 |
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(2,469 |
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Interest income |
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63 |
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69 |
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130 |
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139 |
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Other expense, net |
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(2,245 |
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(1,072 |
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(4,458 |
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(2,330 |
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Income before provision for income taxes |
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15,849 |
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13,466 |
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31,323 |
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26,667 |
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Provision for income taxes |
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6,230 |
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5,282 |
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12,356 |
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10,560 |
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Net income |
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$ |
9,619 |
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$ |
8,184 |
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$ |
18,967 |
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$ |
16,107 |
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Net income per share: |
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Basic |
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$ |
0.46 |
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$ |
0.40 |
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$ |
0.92 |
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$ |
0.78 |
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Diluted |
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$ |
0.46 |
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$ |
0.39 |
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$ |
0.90 |
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$ |
0.77 |
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Weighted average common shares outstanding: |
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Basic |
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20,741 |
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20,586 |
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20,713 |
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20,579 |
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Diluted |
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21,126 |
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20,874 |
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21,103 |
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20,883 |
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See accompanying notes to condensed consolidated financial statements.
4
THE ENSIGN GROUP, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
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Six Months Ended |
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June 30, |
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2010 |
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2009 |
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Cash flows from operating activities: |
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Net income |
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$ |
18,967 |
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16,107 |
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Adjustments to reconcile net income to net cash provided by operating activities: |
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Depreciation and amortization |
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7,978 |
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6,174 |
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Amortization of deferred financing fees and debt discount |
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327 |
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58 |
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Deferred income taxes |
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(3,140 |
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(1,242 |
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Provision for doubtful accounts |
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2,948 |
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2,030 |
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Stock-based compensation |
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1,266 |
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992 |
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Excess tax benefit from share based compensation |
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(357 |
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(65 |
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Impairment of software development costs |
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297 |
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Loss on disposition of property and equipment |
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22 |
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64 |
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Change in operating assets and liabilities |
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Accounts receivable |
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(13,020 |
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(6,386 |
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Prepaid expenses and other current assets |
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(200 |
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(1,097 |
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Insurance subsidiary deposits and investments |
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(1,587 |
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(1,052 |
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Accounts payable |
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769 |
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1,657 |
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Accrued wages and related liabilities |
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(1,218 |
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(1,758 |
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Other accrued liabilities |
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(1,641 |
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597 |
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Accrued self-insurance |
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3,389 |
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2,788 |
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Deferred rent liability |
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103 |
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(167 |
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Net cash provided by operating activities |
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14,903 |
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18,700 |
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Cash flows from investing activities: |
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Purchase of property and equipment |
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(13,753 |
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(11,671 |
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Cash payment for business acquisitions |
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(18,809 |
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(22,133 |
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Escrow deposits used to fund business acquisitions |
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7,595 |
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10,090 |
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Cash proceeds from the sale of fixed assets |
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58 |
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Restricted and other assets |
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(244 |
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(358 |
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Net cash used in investing activities |
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(25,153 |
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(24,072 |
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Cash flows from financing activities: |
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Payments on long term debt |
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(1,039 |
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(534 |
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Issuance of treasury stock upon exercise of options |
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159 |
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40 |
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Issuance of common stock upon exercise of options |
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348 |
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104 |
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Dividends paid |
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(2,069 |
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(1,852 |
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Principal payments on capital lease obligations |
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(13 |
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Excess tax benefit from share based compensation |
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357 |
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65 |
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Payments of deferred financing costs |
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(8 |
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(77 |
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Net cash used in financing activities |
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(2,252 |
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(2,267 |
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Net decrease in cash and cash equivalents |
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(12,502 |
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(7,639 |
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Cash and cash equivalents beginning of period |
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38,855 |
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41,326 |
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Cash and cash equivalents end of period |
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$ |
26,353 |
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33,687 |
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Supplemental disclosures of cash flow information: |
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Cash paid during the period for: |
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Interest |
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$ |
4,526 |
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2,557 |
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Income taxes |
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$ |
14,050 |
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12,200 |
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See accompanying notes to condensed consolidated financial statements.
5
THE ENSIGN GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Dollars and shares in thousands, except per share data)
(Unaudited)
1. DESCRIPTION OF BUSINESS
The Company The Ensign Group, Inc., through its subsidiaries (collectively, Ensign
or the Company), provides skilled nursing and rehabilitative care services through the
operation of 81 facilities and two home health and hospice operations as of June 30,
2010, located in California, Arizona, Texas, Washington, Utah, Colorado and Idaho. All of
these facilities are skilled nursing facilities, other than three stand-alone assisted
living facilities in Arizona, Texas and Colorado and five campuses that offer both
skilled nursing and assisted living services located in California, Arizona and Utah. The
Companys facilities, each of which strives to be the facility of choice in the community
it serves, provide a broad spectrum of skilled nursing and assisted living services,
physical, occupational and speech therapies, and other rehabilitative and healthcare
services, for both long-term residents and short-stay rehabilitation patients. The
Companys facilities have a collective capacity of approximately 9,300 operational
skilled nursing, assisted living and independent living beds. As of June 30, 2010, the
Company owned 51 of its 81 facilities and operated an additional 30 facilities through
long-term lease arrangements, and had options to purchase 8 of those 30 facilities.
The Ensign Group, Inc. is a holding company with no direct operating assets,
employees or revenue. All of the Companys facilities are operated by separate,
wholly-owned, independent subsidiaries, each of which has its own management, employees
and assets. One of the Companys wholly-owned subsidiaries, referred to as the Service
Center, provides centralized accounting, payroll, human resources, information
technology, legal, risk management and other centralized services to the other operating
subsidiaries through contractual relationships with such subsidiaries. The Company also
has a wholly-owned captive insurance subsidiary (the Captive) that provides some
claims-made coverage to the Companys operating subsidiaries for general and professional
liability, as well as coverage for certain workers compensation insurance liabilities.
Like the Companys facilities, the Service Center and the Captive are operated by
separate, wholly-owned, independent subsidiaries that have their own management,
employees and assets. References herein to the consolidated Company and its assets
and activities, as well as the use of the terms we, us, our and similar verbiage in
this quarterly report is not meant to imply that The Ensign Group, Inc. has direct
operating assets, employees or revenue, or that any of the facilities, the Service Center
or the Captive are operated by the same entity.
Other Information The accompanying condensed consolidated financial statements as
of June 30, 2010 and for the three and six month periods ended June 30, 2010 and 2009
(collectively, the Interim Financial Statements), are unaudited. Certain information and
footnote disclosures normally included in annual consolidated financial statements have
been condensed or omitted, as permitted under applicable rules and regulations. Readers
of the Interim Financial Statements should refer to the Companys audited consolidated
statements and notes thereto for the year ended December 31, 2009 which are included in
the Companys annual report on Form 10-K, File No. 001-33757 (the Annual Report) filed
with the Securities and Exchange Commission (the SEC). Management believes that the
Interim Financial Statements reflect all adjustments which are of a normal and recurring
nature necessary to present fairly the Companys financial position and results of
operations in all material respects. The results of operations presented in the Interim
Financial Statements are not necessarily representative of operations for the entire
year.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation The accompanying Interim Financial Statements have been
prepared in accordance with accounting principles generally accepted in the United States
of America. The Company is the sole member or shareholder of various consolidated limited
liability companies and corporations; each established to operate various acquired
skilled nursing and assisted living facilities. All intercompany transactions and
balances have been eliminated in consolidation.
Estimates and Assumptions The preparation of Interim Financial Statements in
conformity with U.S. generally accepted accounting principles (GAAP) 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
financial statements and the reported amounts of revenue and expenses during the
reporting periods. The most significant estimates in the Companys Interim Financial
Statements relate to revenue, allowance for doubtful accounts, intangible assets and
goodwill, impairment of long-lived assets, patient liability, general and professional
liability, workers compensation, and healthcare claims included in accrued
self-insurance liabilities, stock-based compensation and income taxes. Actual results
could differ from those estimates.
6
THE ENSIGN GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Business Segments The Company has a single reportable segment long-term care
services, which includes the operation of skilled nursing and assisted living facilities,
and related ancillary services. The Companys single reportable segment is made up of
several individual operating segments grouped together principally based on their
geographical locations within the United States. Based on the similar economic and other
characteristics of each of the operating segments, management believes the Company meets
the criteria for aggregating its operating segments into a single reporting segment.
Fair Value of Financial Instruments The Companys financial instruments consist
principally of cash and cash equivalents, debt security investments, accounts receivable,
insurance subsidiary deposits, accounts payable and borrowings. The Company believes all
of the financial instruments recorded values approximate fair values because of their
nature and respective short durations. The Companys fixed-rate debt instruments do not
actively trade in an established market. The fair values of this debt are estimated by
discounting the principal and interest payments at rates available to the Company for
debt with similar terms and maturities. See further discussion of debt security
investments at Note 4.
Revenue Recognition The Company recognizes revenue when the following four
conditions have been met: (i) there is persuasive evidence that an arrangement exists;
(ii) delivery has occurred or service has been rendered; (iii) the price is fixed or
determinable; and (iv) collection is reasonably assured.
Skilled Nursing Revenue
The Companys revenue is derived primarily from providing long-term healthcare
services to residents and is recognized on the date services are provided at amounts
billable to individual residents. For residents under reimbursement arrangements with
third-party payors, including Medicaid, Medicare and private insurers, revenue is
recorded based on contractually agreed-upon amounts on a per patient, daily basis. The
Company records revenue from private pay patients, at the agreed upon rate, as services
are performed.
Home Health Revenue Recognition
Medicare Revenue Net service revenue is recorded under the Medicare payment program (PPS) based on a
60-day episode payment rate. The Company makes adjustments to Medicare revenue on completed episodes to
reflect differences between estimated and actual payment amounts, an inability to obtain appropriate billing
documentation or authorizations acceptable to the payor and other reasons unrelated to credit risk. The
Company records an estimate for the impact of such payment adjustments based on its historical experience.
In addition to revenue recognized on completed episodes, the Company also recognizes a portion of revenue
associated with episodes in progress. Episodes in progress are 60-day episodes of care that begin during the
reporting period, but were not completed as of the end of the period. The Company estimates this revenue on
a monthly basis based upon historical trends. The primary factors underlying this estimate are the number of
episodes in progress at the end of the reporting period, expected Medicare revenue per episode and our
estimate of the average percentage complete based on visits performed.
Non-Medicare Revenue Episodic Based Revenue. The Company recognizes revenue in a similar manner as it
recognizes Medicare revenue for episodic-based rates that are paid by other insurance carriers, including
Medicare Advantage programs; however, these rates can vary based upon the negotiated terms.
Non-Medicare Revenue Non-episodic Based Revenue. Gross revenue is recorded on an accrual basis based
upon the date of service at amounts equal to our established or estimated per-visit rates, as applicable.
Contractual adjustments are recorded for the difference between the Companys standard rates and the
contracted rates to be realized from patients, third parties and others for services provided and are
deducted from gross revenue to determine net service revenue and are also recorded as a reduction to our
outstanding patient accounts receivable. In addition, the Company receives a minimal amount of its net
service revenue from patients who are either self-insured or are obligated for an insurance co-payment.
Hospice Revenue Recognition
Hospice Medicare Revenue Gross revenue is recorded on an accrual basis based upon the date of service
at amounts equal to the estimated payment rates. The estimated payment rates are daily or hourly rates for
each of the levels of care we deliver. The Company makes adjustments to Medicare revenue for an inability to
obtain appropriate billing documentation or authorizations acceptable to the payor and other reasons
unrelated to credit risk. The Company estimates the impact of these adjustments based on its historical
experience, which primarily includes historical collection rates on Medicare claims, and records it during
the period services are rendered as an estimated revenue adjustment and as a reduction to our outstanding
patient accounts receivable. Additionally, as Medicare hospice revenue is subject to an inpatient cap limit
and an overall payment cap, the Company monitors its provider numbers and estimate amounts due back to
Medicare if a cap has been exceeded. The Company records these adjustments as a reduction to revenue and
increases other accrued liabilities.
7
THE ENSIGN GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Hospice Non-Medicare Revenue The Company records gross revenue on an accrual basis based upon the
date of service at amounts equal to its established rates or estimated per visit rates, as applicable.
Contractual adjustments are recorded for the difference between the Companys established rates and the
amounts estimated to be realizable from patients, third parties and others for services provided and are
deducted from gross revenue to determine our net service revenue and patient accounts receivable.
Revenue from the Medicare and Medicaid programs accounted for approximately 76% of
the Companys revenue for both periods during the three and six months ended June 30,
2010 and 75% for both periods during the three and six months ended June 30, 2009. The
Company records revenue from these governmental and managed care programs as services are
performed at their expected net realizable amounts under these programs. The Companys
revenue from governmental and managed care programs is subject to audit and retroactive
adjustment by governmental and third-party agencies. Consistent with healthcare industry
accounting practices, any changes to these governmental revenue estimates are recorded in
the period the change or adjustment becomes known based on final settlements. The Company
recorded retroactive adjustments that increased (decreased) revenue by $(561) and $(241)
for the three and six months ended June 30, 2010, respectively, and $57 and $465 for the
three and six months ended June 30, 2009, respectively. The decrease in revenue from
retroactive revenue adjustments in 2010 is attributable to the item disclosed in FN 14.
Accounts Receivable Accounts receivable consist primarily of amounts due from
Medicare and Medicaid programs, other government programs, managed care health plans and
private payor sources. Estimated provisions for doubtful accounts are recorded to the
extent it is probable that a portion or all of a particular account will not be
collected.
In evaluating the collectability of accounts receivable, the Company considers a
number of factors, including the age of the accounts, changes in collection patterns, the
composition of patient accounts by payor type and the status of ongoing disputes with
third-party payors. The percentages applied to the aged receivable balances are based on
the Companys historical experience and time limits, if any, for managed care, Medicare
and Medicaid. The Company periodically refines its procedures for estimating the
allowance for doubtful accounts based on experience with the estimation process and
changes in circumstances.
Property and Equipment Property and equipment are initially recorded at their
historical cost. Repairs and maintenance are expensed as incurred. Depreciation is
computed using the straight-line method over the estimated useful lives of the
depreciable assets (ranging from three to 30 years). Leasehold improvements are amortized
on a straight-line basis over the shorter of their estimated useful lives or the
remaining lease term.
Impairment of Long-Lived Assets The Company reviews the carrying value of
long-lived assets that are held and used in the Companys operations for impairment
whenever events or changes in circumstances indicate that the carrying amount of an asset
may not be recoverable. Recoverability of these assets is determined based upon expected
undiscounted future net cash flows from the operations to which the assets relate,
utilizing managements best estimate, appropriate assumptions, and projections at the
time. If the carrying value is determined to be unrecoverable from future operating cash
flows, the asset is deemed impaired and an impairment loss would be recognized to the
extent the carrying value exceeded the estimated fair value of the asset. The Company
estimates the fair value of assets based on the estimated future discounted cash flows of
the asset. Management has evaluated its long-lived assets and has not identified any
impairment during the six months ended June 30, 2010 or 2009.
Intangible Assets and Goodwill Intangible assets consist primarily of favorable
lease, lease acquisition costs, patient base, trade names and other indefinite-lived
intangibles. Favorable leases and lease acquisition costs are amortized over the life of
the lease of the facility, typically ranging from ten to 20 years. Patient base is
amortized over a period of three to eight months, depending on the classification of the
patients and the level of occupancy in a new acquisition on the acquisition date. Trade
names at facilities are amortized over 30 years.
Goodwill represents the excess of the purchase price over the fair value of
identifiable net assets acquired in business combinations. Goodwill is subject to annual
testing for impairment. In addition, goodwill is tested for impairment if events occur or
circumstances change that would reduce the fair value of a reporting unit below its
carrying amount. The Company defines reporting units as the individual facilities. The
Company performs its annual test for impairment during the fourth quarter of each year.
The Company did not record any impairment charges during the six months ended June 30,
2010 or the year ended December 31, 2009.
8
THE ENSIGN GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Self-Insurance The Company is partially self-insured for general and professional
liability up to a base amount per claim (the self-insured retention) with an aggregate,
one time deductible above this limit. Losses beyond these amounts are insured
through third-party policies with coverage limits per occurrence, per location and
on an aggregate basis for the Company. For claims made after April 1, 2010, the combined
self-insured retention was $500 per claim with an aggregate $1,736 deductible limit. As
of April 1, 2009, for all facilities except those located in Colorado, the third-party
coverage above these limits was $1,000 per occurrence, $3,000 per facility, with a
$10,000 blanket aggregate and an additional state-specific aggregate where required by
state law. In Colorado, the third-party coverage above these limits was $1,000 per
occurrence and $3,000 per facility, which is independent of the $10,000 blanket aggregate
applicable to our other 77 facilities.
The self-insured retention and deductible limits for general and professional
liability and workers compensation are self-insured through the Captive, the related
assets and liabilities of which are included in the accompanying Interim Financial
Statements. The Captive is subject to certain statutory requirements as an insurance
provider. These requirements include, but are not limited to, maintaining statutory
capital. The Companys policy is to accrue amounts equal to the actuarially estimated
costs to settle open claims of insureds, as well as an estimate of the cost of insured
claims that have been incurred but not reported. The Company develops information about
the size of the ultimate claims based on historical experience, current industry
information and actuarial analysis, and evaluates the estimates for claim loss exposure
on a quarterly basis. Accrued general liability and professional malpractice liabilities
recorded on an undiscounted basis in the accompanying condensed consolidated balance
sheets were $24,556 and $22,279 as of June 30, 2010 and December 31, 2009, respectively.
The Companys operating subsidiaries are self-insured for workers compensation
liability in California. To protect itself against loss exposure in California with this
policy, the Company has purchased individual stop-loss insurance coverage that insures
individual claims that exceed $500 for each claim. In Texas, the operating subsidiaries
have elected non-subscriber status for workers compensation claims. The Companys
operating subsidiaries in other states have third party guaranteed cost coverage. In
California and Texas, the Company accrues amounts equal to the estimated costs to settle
open claims, as well as an estimate of the cost of claims that have been incurred but not
reported. The Company uses actuarial valuations to estimate the liability based on
historical experience and industry information. Accrued workers compensation liabilities
are recorded on an undiscounted basis in the accompanying condensed consolidated balance
sheets and were $8,575 and $7,624 as of June 30, 2010 and December 31, 2009,
respectively.
The Company provides self-insured medical (including prescription drugs) and dental
healthcare benefits to the majority of its employees. The Company is fully liable for all
financial and legal aspects of these benefit plans. To protect itself against loss
exposure with this policy, the Company has purchased individual stop-loss insurance
coverage that insures individual claims that exceed $250 for each covered person and an
aggregate individual stop loss deductible of $75, which resets every plan year or a
lifetime maximum of $5,000 per each covered persons lifetime on the PPO and EPO plans.
The aforementioned coverage only applies to claims paid during the plan year. The
Companys accrued liability under these plans recorded on an undiscounted basis in the
accompanying condensed consolidated balance sheets was $2,428 and $2,267 at June 30, 2010
and December 31, 2009, respectively.
The Company believes that adequate provision has been made in the Interim Financial
Statements for liabilities that may arise out of patient care, workers compensation,
healthcare benefits and related services provided to date. The amount of the Companys
reserves was determined based on an estimation process that uses information obtained
from both company-specific and industry data. This estimation process requires the
Company to continuously monitor and evaluate the life cycle of the claims. Using data
obtained from this monitoring and the Companys assumptions about emerging trends, the
Company, with the assistance of an independent actuary, develops information about the
size of ultimate claims based on the Companys historical experience and other available
industry information. The most significant assumptions used in the estimation process
include determining the trend in costs, the expected cost of claims incurred but not
reported and the expected costs to settle or pay damage awards with respect to unpaid
claims. It is possible, however, that the actual liabilities may exceed the Companys
estimate of loss.
The self-insured liabilities are based upon estimates, and while management believes
that the estimates of loss are reasonable, the ultimate liability may be in excess of or
less than the recorded amounts. Due to the inherent volatility of actuarially determined
loss estimates, it is reasonably possible that the Company could experience changes in
estimated losses that could be material to net income. If the Companys actual liability
exceeds its estimates of loss, its future earnings and financial condition would be
adversely affected.
Income Taxes Deferred tax assets and liabilities are established for temporary
differences between the financial reporting basis and the tax basis of the Companys
assets and liabilities at tax rates in effect when such temporary differences are
expected to reverse. The Company generally expects to fully utilize its deferred tax
assets; however, when necessary, the Company records a valuation allowance to reduce its
net deferred tax assets to the amount that is more likely than not to be realized.
9
THE ENSIGN GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The provision for income taxes is determined by applying the estimated annual
effective tax rate to pretax income, adjusted for discrete transactions occurring during
the period. In determining the annual income tax rate for financial statements for
interim periods, the Company must consider expected annual income, permanent differences
between financial reporting and tax recognition of income or expense and other factors.
When the Company takes uncertain income tax positions, it records a liability for
underpayment of income taxes and related interest and penalties, if any. In considering
the need for and magnitude of a liability for such positions, the Company must consider
the potential outcomes from a review of the positions by the taxing authorities.
In determining the need for a valuation allowance, the annual income tax rate for
interim periods, or the need for and magnitude of liabilities for uncertain tax
positions, the Company makes certain estimates and assumptions. These estimates and
assumptions are based on, among other things, knowledge of operations, markets,
historical trends and likely future changes and, when appropriate, the opinions of
advisors with knowledge and expertise in certain fields. Due to certain risks associated
with the Companys estimates and assumptions, actual results could differ.
Stock-Based Compensation The Company measures and recognizes compensation expense
for all share-based payment awards made to employees and directors including employee
stock options based on estimated fair values, ratably over the requisite service period
of the award. Net income has been reduced as a result of the recognition of the fair
value of all stock options and restricted stock awards issued on and subsequent to
January 1, 2006, the amount of which is contingent upon the number of future grants and
other variables.
Adoption of New Accounting Pronouncements In February 2010, the FASB issued
amendments to address certain implementation issues related to an entitys requirement to
perform and disclose subsequent events procedures. The amendment requires (1) SEC filers
and (2) conduit debt obligors for conduit debt securities that are traded in a public
market to evaluate subsequent events through the date the financial statements are
issued. All other entities are required to evaluate subsequent events through the date
the financial statements are available to be issued. It further exempts SEC filers from
disclosing the date through which subsequent events have been evaluated. For all entities
(except conduit debt obligors), these requirements are effective immediately for
financial statements that are (1) issued or available to be issued or (2) revised. For
conduit debt obligors, the requirements are effective for interim and annual periods
ending after June 15, 2010. The adoption of these requirements during the quarter ended
June 30, 2010, did not have an impact on the Companys Interim Financial Statements.
10
THE ENSIGN GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
3. COMPUTATION OF NET INCOME PER COMMON SHARE
Basic net income per share is computed by dividing net income attributable to common
shares by the weighted average number of outstanding common shares for the period. The
computation of diluted net income per share is similar to the computation of basic net
income per share except that the denominator is increased to include contingently
returnable shares and the number of additional common shares that would have been
outstanding if the dilutive potential common shares had been issued.
A reconciliation of the numerator and denominator used in the calculation of basic
net income per common share follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
Six Months Ended |
|
|
|
June 30, |
|
|
June 30, |
|
|
|
2010 |
|
|
2009 |
|
|
2010 |
|
|
2009 |
|
Numerator: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
$ |
9,619 |
|
|
$ |
8,184 |
|
|
$ |
18,967 |
|
|
$ |
16,107 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares outstanding for basic net income per share |
|
|
20,741 |
|
|
|
20,586 |
|
|
|
20,713 |
|
|
|
20,579 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic net income per common share |
|
$ |
0.46 |
|
|
$ |
0.40 |
|
|
$ |
0.92 |
|
|
$ |
0.78 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
A reconciliation of the numerator and denominator used in the calculation of diluted
net income per common share follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
Six Months Ended |
|
|
|
June 30, |
|
|
June 30, |
|
|
|
2010 |
|
|
2009 |
|
|
2010 |
|
|
2009 |
|
Numerator: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
$ |
9,619 |
|
|
$ |
8,184 |
|
|
$ |
18,967 |
|
|
$ |
16,107 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average common shares outstanding |
|
|
20,741 |
|
|
|
20,586 |
|
|
|
20,713 |
|
|
|
20,579 |
|
Plus: incremental shares from assumed conversion (1) |
|
|
385 |
|
|
|
288 |
|
|
|
390 |
|
|
|
304 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjusted weighted average common shares outstanding |
|
|
21,126 |
|
|
|
20,874 |
|
|
|
21,103 |
|
|
|
20,883 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted net income per common share |
|
$ |
0.46 |
|
|
$ |
0.39 |
|
|
$ |
0.90 |
|
|
$ |
0.77 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
In addition, as of June 30, 2010 and 2009, the Company had 785 and
627, respectively, options outstanding which are anti-dilutive and
therefore not factored into the weighted average common shares amount
above. |
4. INSURANCE SUBSIDIARY DEPOSITS AND INVESTMENTS
On February 10, 2009, the Company purchased three separate AAA rated debt security
investments for an aggregate purchase price of $12,183 with insurance subsidiary deposits
and cash from the Captive. The debt securities mature in December 2010, July 2011 and
December 2011 and are guaranteed by the Federal Deposit Insurance Corporation
(FDIC) under the Temporary Liquidity Guarantee Program upon maturity. The Company has the
intent and the ability to hold these debt securities to maturity.
At June 30, 2010, the Company had approximately $12,050 in debt security
investments, which are held to maturity and carried at amortized cost. The fair value of
the investments is determined based on Level 1 inputs, which consist of unadjusted
quoted prices in active markets that are accessible at the measurement date for
identical, unrestricted assets. The carrying value of the debt securities approximates
fair value.
11
THE ENSIGN GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
5. REVENUE AND ACCOUNTS RECEIVABLE
Revenue for the three and six months ended June 30, 2010 and 2009 is summarized in
the following tables:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30, |
|
|
|
2010 |
|
|
2009 |
|
|
|
|
|
|
|
% of |
|
|
|
|
|
|
% of |
|
|
|
Revenue |
|
|
Revenue |
|
|
Revenue |
|
|
Revenue |
|
Medicaid |
|
$ |
64,002 |
|
|
|
40.5 |
% |
|
$ |
53,603 |
|
|
|
40.6 |
% |
Medicare |
|
|
50,589 |
|
|
|
32.1 |
|
|
|
43,156 |
|
|
|
32.7 |
|
Medicaid skilled |
|
|
4,624 |
|
|
|
2.9 |
|
|
|
2,705 |
|
|
|
2.0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Medicaid and Medicare |
|
|
119,215 |
|
|
|
75.5 |
|
|
|
99,464 |
|
|
|
75.3 |
|
Managed care |
|
|
20,222 |
|
|
|
12.8 |
|
|
|
17,182 |
|
|
|
13.0 |
|
Private and other payors |
|
|
18,511 |
|
|
|
11.7 |
|
|
|
15,532 |
|
|
|
11.7 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue |
|
$ |
157,948 |
|
|
|
100.0 |
% |
|
$ |
132,178 |
|
|
|
100.0 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended June 30, |
|
|
|
2010 |
|
|
2009 |
|
|
|
|
|
|
|
% of |
|
|
|
|
|
|
% of |
|
|
|
Revenue |
|
|
Revenue |
|
|
Revenue |
|
|
Revenue |
|
Medicaid |
|
$ |
125,656 |
|
|
|
40.3 |
% |
|
$ |
105,839 |
|
|
|
40.3 |
% |
Medicare |
|
|
101,711 |
|
|
|
32.6 |
|
|
|
86,362 |
|
|
|
32.9 |
|
Medicaid skilled |
|
|
9,041 |
|
|
|
2.9 |
|
|
|
4,988 |
|
|
|
1.9 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Medicaid and Medicare |
|
|
236,408 |
|
|
|
75.8 |
|
|
|
197,189 |
|
|
|
75.1 |
|
Managed care |
|
|
40,791 |
|
|
|
13.0 |
|
|
|
34,679 |
|
|
|
13.2 |
|
Private and other payors |
|
|
34,923 |
|
|
|
11.2 |
|
|
|
30,595 |
|
|
|
11.7 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue |
|
$ |
312,122 |
|
|
|
100.0 |
% |
|
$ |
262,463 |
|
|
|
100.0 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts receivable as of June 30, 2010 and December 31, 2009 is summarized in the
following table:
|
|
|
|
|
|
|
|
|
|
|
June 30, |
|
|
December 31, |
|
|
|
2010 |
|
|
2009 |
|
Medicaid |
|
$ |
29,413 |
|
|
$ |
23,902 |
|
Managed care |
|
|
20,661 |
|
|
|
17,919 |
|
Medicare |
|
|
19,237 |
|
|
|
17,481 |
|
Private and other payors |
|
|
11,462 |
|
|
|
10,879 |
|
|
|
|
|
|
|
|
|
|
|
80,773 |
|
|
|
70,181 |
|
Less allowance for doubtful accounts |
|
|
(8,095 |
) |
|
|
(7,575 |
) |
|
|
|
|
|
|
|
Accounts receivable |
|
$ |
72,678 |
|
|
$ |
62,606 |
|
|
|
|
|
|
|
|
12
THE ENSIGN GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
6. ACQUISITIONS
The Companys acquisition policy is generally to purchase or lease facilities to
complement the Companys existing portfolio of long-term care facilities. The results of
all the Companys operations are included in the accompanying Interim Financial
Statements subsequent to the date of acquisition. Acquisitions are typically paid for in
cash and are accounted for using the acquisition method of accounting. Where the Company
enters into facility lease agreements, the Company typically does not pay any material
amount to the prior facility operator nor does the Company acquire any assets or assume
any liabilities, other than rights and obligations under the lease and operations
transfer agreement, as part of the transaction. Some leases include options to purchase
the facilities. As a result, from time to time, the Company will acquire facilities that
the Company has been operating under third-party leases.
During the six months ended June 30, 2010, the Company acquired four skilled nursing
facilities and one home health and hospice operation. The aggregate purchase price of the
five acquisitions was approximately $18,809, which was paid in cash. The facilities
acquired during the six months ended June 30, 2010 are as follows:
|
|
|
On January 1, 2010, the Company purchased two skilled nursing facilities in Idaho
for $7,617, which was paid in cash. These acquisitions added 158 operational skilled
nursing beds to the Companys operations. The Company also entered into a separate
operations transfer agreement with the prior owner as a part of this transaction. |
|
|
|
On May 1, 2010, the Company purchased two skilled nursing facilities in Texas
for approximately $8,491, which was paid in cash. This acquisition added
approximately 277 operational skilled nursing beds to the Companys operations.
The Company also entered into a separate operations transfer agreement with the
prior owner as part of this transaction. Approximately $1,542 was recognized in
goodwill as a part of this transaction. |
|
|
|
On May 1, 2010, the Company purchased a home health and hospice operation in
Idaho for approximately $2,701, which was paid in cash. The acquisition did not
have an impact on the Companys operational bed count. The Company also entered
into a separate operations transfer agreement with the prior owner as part of
this transaction. Approximately $1,550 and $672 was recognized as goodwill and
other indefinite lived intangibles, respectively, as a part of this transaction. |
The Company expensed $93 in acquisition related costs during the six months ended
June 30, 2010.
The table below presents the allocation of the purchase price for the facilities
acquired in business combinations during the six months ended June 30, 2010 and 2009:
|
|
|
|
|
|
|
|
|
|
|
June 30, |
|
|
June 30, |
|
|
|
2010 |
|
|
2009 |
|
Land |
|
$ |
2,709 |
|
|
$ |
3,485 |
|
Building and improvements |
|
|
11,029 |
|
|
|
13,101 |
|
Equipment, furniture, and fixtures |
|
|
1,003 |
|
|
|
675 |
|
Goodwill |
|
|
3,092 |
|
|
|
2,887 |
|
Other indefinite-lived intangible assets |
|
|
672 |
|
|
|
|
|
Other intangible assets |
|
|
304 |
|
|
|
1,985 |
|
|
|
|
|
|
|
|
|
|
$ |
18,809 |
|
|
$ |
22,133 |
|
|
|
|
|
|
|
|
The Companys acquisition strategy has been focused on identifying both
opportunistic and strategic acquisitions within its target markets that offer strong
opportunities for return on invested capital. The facilities acquired by the Company are
frequently underperforming financially and can have regulatory and clinical challenges to
overcome. Financial information, especially with underperforming facilities, is often
inadequate, inaccurate or unavailable. Consequently, the Company believes that prior
operating results are not meaningful and may be misleading as the information is not
representative of the Companys current operating results or indicative of the
integration potential of its newly acquired facilities. The five businesses acquired
during the six months ended June 30, 2010 were not material acquisitions to the Company
individually or in the aggregate. Accordingly, pro forma financial information is not
presented. These acquisitions have been included in the June 30, 2010 condensed
consolidated balance sheet of the Company, and the operating results have been included
in the condensed consolidated statement of income of the Company since the dates the
Company gained effective control.
13
THE ENSIGN GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
7. PROPERTY AND EQUIPMENT
Property and equipment consist of the following:
|
|
|
|
|
|
|
|
|
|
|
June 30, |
|
|
December 31, |
|
|
|
2010 |
|
|
2009 |
|
Land |
|
$ |
46,330 |
|
|
$ |
43,621 |
|
Buildings and improvements |
|
|
173,068 |
|
|
|
158,803 |
|
Equipment |
|
|
41,991 |
|
|
|
35,136 |
|
Furniture and fixtures |
|
|
8,426 |
|
|
|
8,301 |
|
Leasehold improvements |
|
|
20,774 |
|
|
|
17,978 |
|
Construction in progress |
|
|
4,282 |
|
|
|
3,036 |
|
|
|
|
|
|
|
|
|
|
|
294,871 |
|
|
|
266,875 |
|
Less accumulated depreciation |
|
|
(43,551 |
) |
|
|
(36,101 |
) |
|
|
|
|
|
|
|
Property and equipment, net |
|
$ |
251,320 |
|
|
$ |
230,774 |
|
|
|
|
|
|
|
|
8. INTANGIBLE ASSETS Net
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted |
|
|
June 30, 2010 |
|
|
December 31, 2009 |
|
|
|
Average |
|
|
Gross |
|
|
|
|
|
|
|
|
|
|
Gross |
|
|
|
|
|
|
|
|
|
Life |
|
|
Carrying |
|
|
Accumulated |
|
|
|
|
|
|
Carrying |
|
|
Accumulated |
|
|
|
|
Intangible Assets |
|
(Years) |
|
|
Amount |
|
|
Amortization |
|
|
Net |
|
|
Amount |
|
|
Amortization |
|
|
Net |
|
Lease acquisition costs |
|
|
15.5 |
|
|
$ |
910 |
|
|
$ |
(562 |
) |
|
$ |
348 |
|
|
$ |
1,071 |
|
|
$ |
(694 |
) |
|
$ |
377 |
|
Favorable lease |
|
|
20.0 |
|
|
|
3,573 |
|
|
|
(378 |
) |
|
|
3,195 |
|
|
|
3,573 |
|
|
|
(274 |
) |
|
|
3,299 |
|
Patient base |
|
|
0.6 |
|
|
|
738 |
|
|
|
(616 |
) |
|
|
122 |
|
|
|
1,202 |
|
|
|
(1,015 |
) |
|
|
187 |
|
Trade name |
|
|
30.0 |
|
|
|
733 |
|
|
|
(110 |
) |
|
|
623 |
|
|
|
733 |
|
|
|
(98 |
) |
|
|
635 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
|
|
|
$ |
5,954 |
|
|
$ |
(1,666 |
) |
|
$ |
4,288 |
|
|
$ |
6,579 |
|
|
$ |
(2,081 |
) |
|
$ |
4,498 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortization expense was $186 and $514 for the three and six months ended June 30,
2010 and $227 and $524 for the three and six months ended June 30, 2009, respectively. Of
the $514 in amortization expense incurred during the six months ended June 30, 2010,
approximately $369 related to the amortization of patient base intangible assets at
recently acquired facilities, which is typically amortized over a period of three to
eight months, depending on the classification of the patients and the level of occupancy
in a new acquisition on the acquisition date.
Estimated amortization expense for each of the years ending December 31 is as
follows:
|
|
|
|
|
Year |
|
Amount |
|
2010 (remainder) |
|
$ |
252 |
|
2011 |
|
|
308 |
|
2012 |
|
|
291 |
|
2013 |
|
|
291 |
|
2014 |
|
|
291 |
|
2015 |
|
|
268 |
|
Thereafter |
|
|
2,587 |
|
|
|
|
|
|
|
$ |
4,288 |
|
|
|
|
|
14
THE ENSIGN GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
9. RESTRICTED AND OTHER ASSETS
Restricted and other assets consist primarily of capital reserves and deposits.
Capital reserves are maintained as part of the mortgage agreements of the Company and
certain of its landlords with the U.S. Department of Housing and Urban Development. These
capital reserves are restricted for capital improvements and repairs to the related
facilities.
Restricted and other assets consist of the following:
|
|
|
|
|
|
|
|
|
|
|
June 30, |
|
|
December 31, |
|
|
|
2010 |
|
|
2009 |
|
Deposits with landlords |
|
$ |
732 |
|
|
$ |
725 |
|
Capital improvement reserves with landlords and lenders |
|
|
3,078 |
|
|
|
2,840 |
|
Debt issuance costs, net |
|
|
2,226 |
|
|
|
2,085 |
|
|
|
|
|
|
|
|
Restricted and other assets |
|
$ |
6,036 |
|
|
$ |
5,650 |
|
|
|
|
|
|
|
|
10. OTHER ACCRUED LIABILITIES
Other accrued liabilities consist of the following:
|
|
|
|
|
|
|
|
|
|
|
June 30, |
|
|
December 31, |
|
|
|
2010 |
|
|
2009 |
|
Quality assurance fee |
|
$ |
1,180 |
|
|
$ |
5,071 |
|
Resident refunds payable |
|
|
2,705 |
|
|
|
2,347 |
|
Deferred resident revenue |
|
|
1,161 |
|
|
|
1,073 |
|
Cash held in trust for residents |
|
|
1,492 |
|
|
|
1,748 |
|
Dividends payable |
|
|
1,040 |
|
|
|
1,032 |
|
Property taxes |
|
|
1,140 |
|
|
|
1,194 |
|
Income taxes payable |
|
|
1,203 |
|
|
|
|
|
Other |
|
|
3,521 |
|
|
|
2,910 |
|
|
|
|
|
|
|
|
Other accrued liabilities |
|
$ |
13,442 |
|
|
$ |
15,375 |
|
|
|
|
|
|
|
|
Quality assurance fee represents amounts payable to the State of California in
respect of a mandated fee based on resident days. Resident refunds payable includes
amounts due to residents for overpayments and duplicate payments. Deferred resident
revenue occurs when the Company receives payments in advance of services provided. Cash
held in trust for residents reflects monies received from, or on behalf of, residents.
Maintaining a trust account for residents is a regulatory requirement and, while the
trust assets offset the liability, the Company assumes a fiduciary responsibility for
these funds. The cash balance related to this liability is included in other current
assets in the accompanying condensed consolidated balance sheets.
15
THE ENSIGN GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
11. INCOME TAXES
The provision for income taxes for the six months ended June 30, 2010 and 2009 is
summarized as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
Six Months Ended |
|
|
|
June 30, |
|
|
June 30, |
|
|
|
2010 |
|
|
2009 |
|
|
2010 |
|
|
2009 |
|
Current: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal |
|
$ |
7,459 |
|
|
$ |
6,267 |
|
|
$ |
13,230 |
|
|
$ |
9,702 |
|
State |
|
|
1,196 |
|
|
|
1,161 |
|
|
|
2,266 |
|
|
|
2,030 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
8,655 |
|
|
|
7,428 |
|
|
|
15,496 |
|
|
|
11,732 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal |
|
|
(2,238 |
) |
|
|
(1,786 |
) |
|
|
(2,805 |
) |
|
|
(795 |
) |
State |
|
|
(187 |
) |
|
|
(430 |
) |
|
|
(335 |
) |
|
|
(447 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(2,425 |
) |
|
|
(2,216 |
) |
|
|
(3,140 |
) |
|
|
(1,242 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Expense for uncertain tax positions |
|
|
|
|
|
|
70 |
|
|
|
|
|
|
|
70 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
6,230 |
|
|
$ |
5,282 |
|
|
$ |
12,356 |
|
|
$ |
10,560 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The Companys deferred tax assets and liabilities as of June 30, 2010 and
December 31, 2009 are summarized as follows:
|
|
|
|
|
|
|
|
|
|
|
June 30, |
|
|
December 31, |
|
|
|
2010 |
|
|
2009 |
|
Deferred tax assets (liabilities): |
|
|
|
|
|
|
|
|
Accrued expenses |
|
$ |
15,723 |
|
|
$ |
12,498 |
|
Allowance for doubtful accounts |
|
|
3,383 |
|
|
|
3,166 |
|
State taxes |
|
|
|
|
|
|
324 |
|
Tax credits |
|
|
1,161 |
|
|
|
1,180 |
|
|
|
|
|
|
|
|
Total deferred tax assets |
|
|
20,267 |
|
|
|
17,168 |
|
State taxes |
|
|
(276 |
) |
|
|
|
|
Depreciation and amortization |
|
|
(2,938 |
) |
|
|
(3,293 |
) |
Prepaid expenses |
|
|
(1,525 |
) |
|
|
(1,487 |
) |
|
|
|
|
|
|
|
Total deferred tax liabilities |
|
|
(4,739 |
) |
|
|
(4,780 |
) |
|
|
|
|
|
|
|
Net deferred tax assets |
|
$ |
15,528 |
|
|
$ |
12,388 |
|
|
|
|
|
|
|
|
The Company is not currently under examination by any major income tax jurisdiction;
however, its Federal tax returns for years beginning with 2006 and many of its state tax
returns for years beginning with 2005 remain subject to potential examination. The
statutes of limitations will lapse on the Companys 2005 and 2006 income tax years for
state and Federal purposes in 2010, respectively. The Company does not believe these
lapses will significantly impact unrecognized tax benefits for any uncertain tax
positions. The Company is not aware of any other event that might significantly impact
the balance of unrecognized tax benefits in the next twelve months. The net balance of
unrecognized tax benefits was not material to the Interim Financial Statements for the
six months ended June 30, 2010 or 2009.
16
THE ENSIGN GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
12. Debt
On November 6, 2009, the Company finalized the Fourth Amended and Restated Loan
Agreement (Amended Term Loan) with General Electric Capital Corporation (the Lender)
which increased the borrowing capacity of the Amended Term Loan by $40,000, further
referred to as the Six Project Loan. The Six Project Loan (as described below) will
mature on September 30, 2014 and is secured by, among other things, a perfected first
priority mortgage/deed of trust on the fee simple interest in six of the Companys
skilled nursing facilities (the Property). The Amended Term Loan, which includes both the
Ten Project Note (as described below) and the Six Project Loan, is cross collateralized
and cross defaulted with the existing Second Amended and Restated Loan and Security
Agreement (the Revolver). The interest rate on the loan is calculated at the current five
year swap rate on the date of closing plus 585 basis points for half of the loan balance
and the three year swap rate on the date of closing plus 585 basis points and therefore
floating at 90-day LIBOR plus 575 basis points, reset monthly and subject to a LIBOR
floor of 2.0% for the remaining half of the loan balance. The Amended Term Loan did not
modify any of the existing terms of the Ten Project Note.
On October 1, 2009, four subsidiaries of The Ensign Group, Inc. entered into four
separate promissory notes with Johnson Land Enterprises, LLC (the Seller), for an
aggregate of $10,000, as a part of the Companys acquisition of three skilled nursing
facilities in Utah. The unpaid balance of principal and accrued interest from these notes
is due on September 30, 2019. The notes bear interest at a rate of 6.0% per annum. As a
part of this transaction, the Company recorded a discount to the debt balance in the form
of imputed interest of $1,218. This amount will be amortized over the term of the
promissory notes, or ten years.
In addition, on October 1, 2009, a subsidiary of The Ensign Group, Inc. in West
Jordan, Utah assumed the obligation to pay the remaining principal and interest on bonds
which were originally sold to finance the construction of the facility. These bonds were
assumed as a part of the Companys acquisition of three skilled nursing facilities in
Utah. The unpaid balance of principal and accrued interest from these bonds is due on
July 1, 2015. The bonds bear interest at an annual rate equal to sixty percent of the
rate announced from time to time by Bank of America as its prime rate (Prime Rate), which
was 2.1% on June 30, 2010.
The Company has the Revolver with the Lender under which the Company may borrow up
to the lesser of $50,000 or 85% of the eligible accounts receivable. The Revolver will
expire on February 21, 2013. At June 30, 2010 and December 31, 2009, there were no
outstanding borrowings under the Revolver. As of June 30, 2010, the amount of borrowing
capacity pledged to secure outstanding letters of credit and reserves against collateral
for actual and contingent liabilities was $2,133 and $6,000, respectively. In addition,
in the event of the Companys default under the Amended Term Loan, the Lender has the
right to take control of the Companys facilities encumbered by the loan to the extent
necessary to make such payments and perform such acts that are required under the loan.
Long-term debt consists of the following:
|
|
|
|
|
|
|
|
|
|
|
June 30, |
|
|
December 31, |
|
|
|
2010 |
|
|
2009 |
|
Ten Project Note with the Lender,
multiple-advance term loan, principal and
interest payable monthly; interest is fixed at
time of draw at 10-year treasury note rate plus
2.25% (rates in effect at June 30, 2010 range
from 6.95% to 7.50%), balance due June 2016,
collateralized by deeds of trust on real
property, assignments of rents, security
agreements and fixture financing statements. |
|
$ |
52,718 |
|
|
$ |
53,200 |
|
Six Project Loan with the Lender, principal and
interest payable monthly, interest defined above,
balance due September 30, 2014, collateralized by
deeds of trust on real property, assignments of
rents, security agreements and fixture financing
statements. |
|
|
39,733 |
|
|
|
39,970 |
|
Promissory notes, principal, and interest of $69
payable monthly and continuing through
September 2019, interest at fixed rate of 6.0%,
collateralized by deed of trust on real property,
assignment of rents and security agreement. |
|
|
9,845 |
|
|
|
9,962 |
|
Bond, principal and interest of $20 payable
monthly and continuing through July 2015,
interest at a fixed rate of 60% of the Prime Rate
(as defined by the agreement). |
|
|
1,137 |
|
|
|
1,232 |
|
Mortgage note, principal, and interest of $54
payable monthly and continuing through
February 2027, interest at fixed rate of 7.5%,
collateralized by deed of trust on real property,
assignment of rents and security agreement. |
|
|
6,182 |
|
|
|
6,290 |
|
|
|
|
|
|
|
|
|
|
|
109,615 |
|
|
|
110,654 |
|
Less current maturities |
|
|
(2,125 |
) |
|
|
(2,065 |
) |
Less debt discount |
|
|
(1,127 |
) |
|
|
(1,188 |
) |
|
|
|
|
|
|
|
|
|
$ |
106,363 |
|
|
$ |
107,401 |
|
|
|
|
|
|
|
|
17
THE ENSIGN GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The Company is subject to standard reporting requirements and other typical
covenants for loans of these types. As of June 30, 2010, the Company was in compliance
with such loan covenants.
The carrying value of the Companys long-term debt is considered to approximate the
fair value of such debt for all periods presented based upon the interest rates that the
Company believes it can currently obtain for similar debt.
13. OPTIONS AND AWARDS
Stock-based compensation expense consists of share-based payment awards made to
employees and directors, including employee stock options and restricted stock awards,
based on estimated fair values. Stock-based compensation expense recognized in the
Companys condensed consolidated statements of income for the six months ended June 30,
2010 and 2009 does not include compensation expense for share-based payment awards
granted prior to, but not yet vested as of, January 1, 2006, but does include
compensation expense for the share-based payment awards granted on or subsequent to
January 1, 2006 based on the grant date fair value. As stock-based compensation expense
recognized in the Companys condensed consolidated statements of income for the six
months ended June 30, 2010 and 2009 was based on awards ultimately expected to vest, it
has been reduced for estimated forfeitures. The Company estimates forfeitures at the time
of grant and, if necessary, revises the estimate in subsequent periods if actual
forfeitures differ.
The Company has three option plans, the 2001 Stock Option, Deferred Stock and
Restricted Stock Plan (2001 Plan), the 2005 Stock Incentive Plan (2005 Plan) and the 2007
Omnibus Incentive Plan (2007 Plan) all of which have been approved by the stockholders.
In the 2001 Plan and the 2005 Plan, options may be exercised for unvested shares of
common stock, which have full stockholder rights including voting, dividend and
liquidation rights. The Company retains the right to repurchase any or all unvested
shares at the exercise price paid per share of any or all unvested shares should the
optionee cease to remain in service while holding such unvested shares. The total number
of shares available under all of the Companys stock incentive plans was 1,351 as of June
30, 2010.
The Company uses the Black-Scholes option-pricing model to recognize the value of
stock-based compensation expense for all share-based payment awards. Determining the
appropriate fair-value model and calculating the fair value of stock-based awards at the
grant date requires considerable judgment, including estimating stock price volatility,
expected option life and forfeiture rates. The Company develops estimates based on
historical data and market information, which can change significantly over time. The
Company granted 113 options during the six month period ended June 30, 2010. The Company
used the following assumptions for stock options granted during the six months ended June
30, 2010 and 2009:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted |
|
|
|
|
|
|
|
|
|
|
Weighted |
|
|
|
|
|
|
|
|
|
|
|
Average |
|
|
|
|
|
|
Weighted |
|
|
Average |
|
|
|
|
|
|
|
Options |
|
|
Risk-Free |
|
|
Expected |
|
|
Average |
|
|
Dividend |
|
Grant Year |
|
Plan |
|
|
Granted |
|
|
Rate |
|
|
Life |
|
|
Volatility |
|
|
Yield |
|
2010 |
|
|
2007 |
|
|
|
113 |
|
|
|
2.36 2.82 |
% |
|
6.5 years |
|
|
55 |
% |
|
|
1.08 |
% |
2009 |
|
|
2007 |
|
|
|
306 |
|
|
|
2.17 2.39 |
% |
|
6.5 years |
|
|
55 |
% |
|
|
1.08 |
% |
The Company used the following assumptions for stock options granted during the three
months ended June 30, 2010 and 2009:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted |
|
|
|
|
|
|
|
|
|
|
Weighted |
|
|
|
|
|
|
|
|
|
|
|
Average |
|
|
|
|
|
|
Weighted |
|
|
Average |
|
|
|
|
|
|
|
Options |
|
|
Risk-Free |
|
|
Expected |
|
|
Average |
|
|
Dividend |
|
Grant Year |
|
Plan |
|
|
Granted |
|
|
Rate |
|
|
Life |
|
|
Volatility |
|
|
Yield |
|
2010 |
|
|
2007 |
|
|
|
7 |
|
|
|
2.36 |
% |
|
6.5 years |
|
|
55 |
% |
|
|
1.08 |
% |
2009 |
|
|
2007 |
|
|
|
137 |
|
|
|
2.36 2.39 |
% |
|
6.5 years |
|
|
55 |
% |
|
|
1.08 |
% |
In addition to the above, on May 25, 2010, the Company granted 36 restricted stock
awards at an exercise price of $0 which vest over five years. The fair value of
restricted stock awards was $18.03 at the grant date. As of June 30, 2010, no restricted
stock awards had vested or been forfeited. The Company had not previously granted
restricted stock awards.
For the six months ended June 30, 2010 and 2009, the following represents the
Companys weighted average exercise price, grant date intrinsic value and fair value
displayed at grant date:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted Average |
|
|
|
|
|
|
|
|
|
|
Exercise Price of |
|
|
Weighted Average |
|
Grant Year |
|
Granted |
|
|
Common Stock |
|
|
Fair Value of Options |
|
2010 |
|
|
113 |
|
|
$ |
17.51 |
|
|
$ |
8.87 |
|
2009 |
|
|
306 |
|
|
$ |
16.14 |
|
|
$ |
8.05 |
|
18
THE ENSIGN GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The weighted average exercise price equaled the weighted average fair value of
common stock on the grant date for all options granted during the periods ended June 30,
2010 and 2009 and therefore, the intrinsic value was $0.
The following table represents the employee stock option activity during the six
months ended June 30, 2010:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of |
|
|
Weighted |
|
|
|
|
|
|
Weighted Average |
|
|
|
Options |
|
|
Average |
|
|
Number of |
|
|
Exercise Price of |
|
|
|
Outstanding |
|
|
Exercise Price |
|
|
Options Vested |
|
|
Options Vested |
|
January 1, 2010 |
|
|
2,025 |
|
|
$ |
10.68 |
|
|
|
709 |
|
|
$ |
7.29 |
|
Granted |
|
|
113 |
|
|
|
17.51 |
|
|
|
|
|
|
|
|
|
Forfeited |
|
|
(72 |
) |
|
|
10.57 |
|
|
|
|
|
|
|
|
|
Exercised |
|
|
(100 |
) |
|
|
5.07 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2010 |
|
|
1,966 |
|
|
$ |
11.36 |
|
|
|
739 |
|
|
$ |
8.68 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The following summary information reflects stock options outstanding, vested and
related details as of June 30, 2010:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock Options |
|
|
|
Stock Options Outstanding |
|
|
Vested |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Remaining |
|
|
|
|
|
|
Exercise |
|
|
Number |
|
|
Black-Scholes Fair |
|
|
Contractual Life |
|
|
Number Vested |
|
Year of Grant |
|
Price |
|
|
Outstanding |
|
|
Value |
|
|
(Years) |
|
|
and Exercisable |
|
2003 |
|
$ |
0.67 0.81 |
|
|
|
9 |
|
|
$ |
* |
|
|
|
3 |
|
|
|
9 |
|
2004 |
|
$ |
1.96 2.46 |
|
|
|
38 |
|
|
|
* |
|
|
|
4 |
|
|
|
38 |
|
2005 |
|
$ |
4.99 5.75 |
|
|
|
199 |
|
|
|
* |
|
|
|
5 |
|
|
|
155 |
|
2006 |
|
$ |
7.05 7.50 |
|
|
|
444 |
|
|
|
4,256 |
|
|
|
6 |
|
|
|
254 |
|
2008 |
|
$ |
9.38 14.87 |
|
|
|
685 |
|
|
|
3,682 |
|
|
|
8 |
|
|
|
228 |
|
2009 |
|
$ |
14.92 16.70 |
|
|
|
478 |
|
|
|
3,779 |
|
|
|
9 |
|
|
|
55 |
|
2010 |
|
$ |
17.47 18.03 |
|
|
|
113 |
|
|
|
1,004 |
|
|
|
10 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
|
|
|
|
1,966 |
|
|
$ |
12,721 |
|
|
|
|
|
|
|
739 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
* |
|
The Company will not recognize the Black-Scholes fair value for awards granted prior to January 1, 2006 unless such awards are modified. |
Total share-based compensation expense recognized for the three and six months ended
June 30, 2010 and 2009 was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
Six Months Ended |
|
|
|
June 30, |
|
|
June 30, |
|
|
|
2010 |
|
|
2009 |
|
|
2010 |
|
|
2009 |
|
Share-based compensation expense related to stock options |
|
$ |
607 |
|
|
$ |
476 |
|
|
$ |
1,256 |
|
|
$ |
992 |
|
Share-based compensation expense related to restricted stock awards |
|
|
10 |
|
|
|
|
|
|
|
10 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
617 |
|
|
$ |
476 |
|
|
$ |
1,266 |
|
|
$ |
992 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
In future periods, the Company expects to recognize approximately $7,402 in
stock-based compensation expense over the next 3.2 weighted average years for unvested
options that were outstanding as of June 30, 2010. There were 1,227 unvested and
outstanding options at June 30, 2010, of which 1,121 are expected to vest. The weighted
average contractual life for options vested at June 30, 2010 was 7.4 years.
The aggregate intrinsic value of options outstanding, vested, expected to vest and
exercised as of June 30, 2010 and December 31, 2009 is as follows:
|
|
|
|
|
|
|
|
|
|
|
June 30, |
|
|
December 31, |
|
Options |
|
2010 |
|
|
2009 |
|
Outstanding |
|
$ |
10,273 |
|
|
$ |
9,779 |
|
Vested |
|
|
5,799 |
|
|
|
5,732 |
|
Expected to vest |
|
|
3,968 |
|
|
|
3,806 |
|
Exercised |
|
|
4,578 |
|
|
|
625 |
|
19
THE ENSIGN GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The intrinsic value is calculated as the difference between the market value of the
underlying common stock and the exercise price of the options.
14. COMMITMENTS AND CONTINGENCIES
Leases The Company leases certain facilities and its administrative offices under
non-cancelable operating leases, most of which have initial lease terms ranging from five
to 20 years. The Company also leases certain of its equipment under non-cancelable
operating leases with initial terms ranging from three to five years. Most of these
leases contain renewal options, certain of which involve rent increases. Total rent
expense, inclusive of straight-line rent adjustments, was $3,715 and $7,385 for the three
and six months ended June 30, 2010, respectively, and $3,839 and $7,656 for the three and
six months ended June 30, 2009, respectively.
Six of the Companys facilities are operated under two separate three-facility
master lease arrangements. Under these master leases, a breach at a single facility could
subject one or more of the other facilities covered by the same master lease to the same
default risk. Failure to comply with Medicare and Medicaid provider requirements is a
default under several of the Companys leases, master lease agreements and debt financing
instruments. In addition, other potential defaults related to an individual facility may
cause a default of an entire master lease portfolio and could trigger cross-default
provisions in the Companys outstanding debt arrangements and other leases. With an
indivisible lease, it is difficult to restructure the composition of the portfolio or
economic terms of the lease without the consent of the landlord.
In addition, a number of the Companys individual facility leases are held by the
same or related landlords, and some of these leases include cross-default provisions that
could cause a default at one facility to trigger a technical default with respect to
others, potentially subjecting certain leases and facilities to the various remedies
available to the landlords under separate but cross-defaulted leases. The Company is not
aware of any defaults as of June 30, 2010.
Regulatory Matters Laws and regulations governing Medicare and Medicaid programs
are complex and subject to interpretation. Compliance with such laws and regulations can
be subject to future governmental review and interpretation, as well as significant
regulatory action including fines, penalties, and exclusion from certain governmental
programs. The Company believes that it is in compliance in all material respects with all
applicable laws and regulations.
A significant portion of the Companys revenue is derived from Medicaid and
Medicare, for which reimbursement rates are subject to regulatory changes and government
funding restrictions. Although the Company is not aware of any significant future rate
changes, significant changes to the reimbursement rates could have a material effect on
the Companys operations.
Cost-Containment Measures Both government and private pay sources have instituted
cost-containment measures designed to limit payments made to providers of healthcare
services, and there can be no assurance that future measures designed to limit payments
made to providers will not adversely affect the Company.
Indemnities From time to time, the Company enters into certain types of contracts
that contingently require the Company to indemnify parties against third-party claims.
These contracts primarily include (i) certain real estate leases, under which the Company
may be required to indemnify property owners or prior facility operators for
post-transfer environmental or other liabilities and other claims arising from the
Companys use of the applicable premises, (ii) operations transfer agreements, in which
the Company agrees to indemnify past operators of facilities the Company acquires against
certain liabilities arising from the transfer of the operation and/or the operation
thereof after the transfer, (iii) certain lending agreements, under which the Company may
be required to indemnify the lender against various claims and liabilities,
(iv) agreements with certain lenders under which the Company may be required to indemnify
such lenders against various claims and liabilities, and (v) certain agreements with the
Companys officers, directors and employees, under which the Company may be required to
indemnify such persons for liabilities arising out of their employment relationships. The
terms of such obligations vary by contract and, in most instances, a specific or maximum
dollar amount is not explicitly stated therein. Generally, amounts under these contracts
cannot be reasonably estimated until a specific claim is asserted. Consequently, because
no claims have been asserted, no liabilities have been recorded for these obligations on
the Companys balance sheets for any of the periods presented.
Litigation The skilled nursing business involves a significant risk of liability
given the age and health of the Companys patients and residents and the services the
Company provides. The Company and others in the industry are subject to an increasing
number of claims and lawsuits, including professional liability claims, alleging that
services have resulted in personal injury, elder abuse, wrongful death or other related
claims. The defense of these lawsuits may result in significant legal costs, regardless
of the outcome, and can result in large settlement amounts or damage awards.
20
THE ENSIGN GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
In addition to the potential lawsuits and claims described above, the Company is
also subject to potential lawsuits under the Federal False Claims Act and comparable
state laws alleging submission of fraudulent claims for services to any healthcare
program (such as Medicare) or payor. A violation may provide the basis for exclusion from
federally-funded healthcare programs. Such exclusions could have a correlative negative
impact on the Companys financial performance. Some states, including California, Arizona
and Texas, have enacted similar whistleblower and false claims laws and regulations. In
addition, the Deficit Reduction Act of 2005 created incentives for states to enact
anti-fraud legislation modeled on the Federal False Claims Act. As such, the Company
could face increased scrutiny, potential liability and legal expenses and costs based on
claims under state false claims acts in markets in which it does business.
In May 2009, Congress passed the Fraud Enforcement and Recovery Act (FERA) of 2009
which made significant changes to the Federal False Claims Act (FCA), expanding the types
of activities subject to prosecution and whistleblower liability. Following changes by
FERA, health care providers face significant penalties for the knowing retention of
government overpayments, even if no false claim was involved. Health care providers can
now be liable for knowingly and improperly avoiding or decreasing an obligation to pay
money or property to the government. This includes the retention of any government
overpayment. The government can argue, therefore, that a FCA violation can occur without
any affirmative fraudulent action or statement, as long as it is knowingly improper. In
addition, FERA extended protections against retaliation for whistleblowers, including
protections not only for employees, but also contractors and agents. Thus, there is
generally no need for an employment relationship in order to qualify for protection
against retaliation for whistleblowing.
The Company has been, and continues to be, subject to claims and legal actions that
arise in the ordinary course of business including potential claims related to care and
treatment provided at its facilities, as well as employment related claims. The Company
does not believe that the ultimate resolution of these actions will have a material
adverse effect on the Companys financial business, financial condition or results of
operations. A significant increase in the number of these claims or an increase in
amounts owing under successful claims could materially adversely affect the Companys
business, financial condition, results of operations and cash flows.
Medicare Revenue Recoupments The Company is subject to reviews relating to
Medicare services, billings and potential overpayments. The Company had two operations
subject to probe review during the six months ended June 30, 2010. The Company
anticipates that these probe reviews will increase in frequency in the future. Further,
the Company currently has no facilities on prepayment review; however, others may be
placed on prepayment review in the future. If a facility fails prepayment review, the
facility could then be subject to undergo targeted review, which is a review that targets
perceived claims deficiencies. The Company has no facilities that are currently
undergoing targeted review.
Other Matters In March 2007, the Company and certain of its officers received a
series of notices from its bank indicating that the United States Attorney for the
Central District of California had issued an authorized investigative demand, a request
for records similar to a subpoena, to the Companys bank. The U.S. Attorney subsequently
rescinded that demand. The rescinded demand requested documents from the Companys bank
related to financial transactions involving the Company, ten of its operating
subsidiaries, an outside investor group, and certain of the Companys current and former
officers. Subsequently, in June 2007, the U.S. Attorney sent a letter to one of the
Companys current employees requesting a meeting. The letter indicated that the U.S.
Attorney and the U.S. Department of Health and Human Services Office of Inspector General
were conducting an investigation of claims submitted to the Medicare program for
rehabilitation services provided at unspecified facilities. Although both the Company and
the employee offered to cooperate, the U.S. Attorney later withdrew its meeting request.
On December 17, 2007, the Company was informed by Deloitte & Touche LLP, its
independent registered public accounting firm, that the U.S. Attorney served a grand jury
subpoena on Deloitte & Touche LLP, relating to The Ensign Group, Inc., and several of its
operating subsidiaries. The subpoena confirmed the Companys previously reported belief
that the U.S. Attorney was conducting an investigation involving facilities operated by
certain of the Companys operating subsidiaries. All together, the March 2007 authorized
investigative demand and the December 2007 subpoena specifically covered information from
a total of 18 of the Companys 81 facilities. In February 2008, the U.S. Attorney
contacted two additional current employees. Based on these events, the Company believes
that the U.S. Attorney may be conducting parallel criminal, civil and administrative
investigations involving The Ensign Group, Inc. and one or more of its skilled nursing
facilities.
Pursuant to these investigations, on December 17, 2008, representatives from the
U.S. Department of Justice (DOJ) served search warrants on the Companys Service Center
and six of its Southern California skilled nursing facilities. Following the execution of
the warrants on the six facilities, a subpoena was issued covering eight additional
facilities. Among other things, the warrants covered specific patient records at the six
facilities. On May 4, 2009, the U.S. Attorney served a second subpoena requesting
additional patient records on the same patients who were covered by the original
warrants. The Company has worked
with the U.S. Attorneys office to produce information responsive to both subpoenas.
The Company and its regulatory counsel continue to actively work with the U.S. Attorneys
office and respond to requests for information as they are received relative to the
investigation.
21
THE ENSIGN GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The Company is cooperating with the U.S. Attorneys office and intends to continue
working with them to the extent they will allow the Company to help move their inquiry
forward. To the Companys knowledge, however, neither The Ensign Group, Inc. nor any of
its operating subsidiaries or employees has been formally charged with any wrongdoing.
The Company cannot predict or provide any assurance as to the possible outcome of the
investigation or any possible related proceedings, or as to the possible outcome of any
qui tam litigation that may follow, nor can the Company estimate the possible loss or
range of loss that may result from any such proceedings and, therefore, the Company has
not recorded any related accruals. To the extent the U.S. Attorneys office elects to
pursue this matter, or if the investigation has been instigated by a qui tam relator who
elects to pursue the matter, and the Company is subjected to or alleged to be liable for
claims or obligations under federal Medicare statutes, the federal False Claims Act, or
similar state and federal statutes and related regulations, the Companys business,
financial condition and results of operations could be materially and adversely affected
and its stock price could decline.
The Company initiated an internal investigation in November 2006 when it became
aware of an allegation of possible reimbursement irregularities at one or more of the
Companys facilities. This investigation focused on 12 facilities, and included all six
of the facilities which were covered by the warrants served in December 2008. The Company
retained outside counsel to assist in looking into these matters. The Company and its
outside counsel concluded this investigation in February 2008 without identifying any
systemic or patterns and practices of fraudulent or intentional misconduct. The Company
made observations at certain facilities regarding areas of potential improvement in some
of its recordkeeping and billing practices and has implemented measures, some of which
were already underway before the investigation began, that the Company believes will
strengthen its recordkeeping and billing processes. None of these additional findings or
observations appears to be rooted in fraudulent or intentional misconduct. The Company
continues to evaluate the measures it has implemented for effectiveness, and is
continuing to seek ways to improve these processes.
As a byproduct of its investigation, the Company identified a limited number of
selected Medicare claims for which adequate backup documentation could not be located or
for which other billing deficiencies existed. The Company, with the assistance of
independent consultants experienced in Medicare billing, completed a billing review on
these claims. To the extent missing documentation was not located, the Company treated
the claims as overpayments. Consistent with healthcare industry accounting practices, the
Company records any charge for refunded payments against revenue in the period in which
the claim adjustment becomes known.
From time to time our systems and controls
highlight potential compliance issues, which the Company investigates as they arise. As a result of the detection by management at
one of the Companys facilities, and its Service Center support personnel, of possible recordkeeping and related irregularities at
that facility, the Company initiated an internal inquiry in the second quarter of 2010.
The Company concluded the investigatory phase of this inquiry
in the third quarter of 2010, and commenced a billing review of potentially affected claims. The Company made observations at the facility
regarding areas of potential improvement in some of its historical recordkeeping and billing practices and have identified measures, some
of which had already been implemented before the inquiry began, that the Company believes have strengthened, and can strengthen further,
its recordkeeping and billing processes. The issues detected appear to be isolated to one facility and one department within that facility.
The Company continues to evaluate the measures it has implemented for effectiveness, and are continuing to seek ways to improve these
processes.
As a result of its billing reviews, the Company
identified a limited number of selected Medicare claims for which adequate backup documentation could not be located, or for which
other billing deficiencies existed. Where accepted procedures and necessary data for reviewing and calculating potential overpayments
were available, the Company followed such procedures and completed a billing review. Where such procedures and/or data were not available
the Company developed a methodology for making a good faith estimate of potential overpayments with the assistance of independent
consultants experienced in Medicare billing. The Company has accrued a liability for estimated overpayments resulting from insufficient
or missing documentation or other billing deficiencies. To the extent that sufficient documentation is subsequently located, the amount
the Company ultimately reimbursed will be reduced.
Consistent with healthcare industry accounting practices,
the Company records any charge for refunded payments against revenue in the period in which the claim adjustment becomes known. During
the quarter ended June 30, 2010, the Company accrued for a revenue adjustment of approximately $553, plus interest, for the estimated
overpayments described above, with a resulting impact to net income of approximately $251. At the conclusion of the Companys review it
intends to submit the potential overpayment for settlement with the Medicare Fiscal Intermediary.
Concentrations
Credit Risk The Company has significant accounts receivable balances, the
collectability of which is dependent on the availability of funds from certain
governmental programs, primarily Medicare and Medicaid. These receivables represent the
only significant concentration of credit risk for the Company. The Company does not
believe there is significant credit risks associated with these governmental programs.
The Company believes that an appropriate allowance has been recorded for the possibility
of these receivables proving uncollectible, and continually monitors and adjusts these
allowances as necessary. The Companys receivables from Medicare and Medicaid payor
programs accounted for approximately 60% and 59% of its total accounts receivable as of
June 30, 2010 and December 31, 2009, respectively. Revenue from reimbursements under the
Medicare and Medicaid programs accounted for approximately 76% of the Companys revenue
for both periods during the three and six months ended June 30, 2010 and 75% for both
periods during the three and six months ended June 30, 2009.
Cash in Excess of FDIC Limits The Company currently has bank deposits with financial
institutions in the U.S. that exceed FDIC insurance limits. FDIC insurance provides
protection for bank deposits up to $250. In addition, the Company has uninsured bank
deposits with a financial institution outside the U.S.
22
Item 2. Managements Discussion and Analysis of Financial Condition and Results of
Operations
You should read the following discussion and analysis in conjunction with our
unaudited condensed consolidated financial statements and the related notes thereto
contained in Part I, Item 1 of this Report. The information contained in this Quarterly
Report on Form 10-Q is not a complete description of our business or the risks associated
with an investment in our common stock. We urge you to carefully review and consider the
various disclosures made by us in this Report and in our other reports filed with the
Securities and Exchange Commission (SEC), including our Annual Report on Form 10-K
(Annual Report), which discusses our business and related risks in greater detail, as
well as subsequent reports we may file from time to time on Forms 10-Q and 8-K, for
additional information. The section entitled Risk Factors contained in Part II, Item 1A
of this Report, and similar discussions in our other SEC filings, also describe some of
the important risk factors that may affect our business, financial condition, results of
operations and/or liquidity. You should carefully consider those risks, in addition to
the other information in this Report and in our other filings with the SEC, before
deciding to purchase, hold or sell our common stock.
This Report contains forward-looking statements, which include, but are not limited
to the Companys expected future financial position, results of operations, cash flows,
financing plans, business strategy, budgets, capital expenditures, competitive positions,
growth opportunities and plans and objectives of management. Forward-looking statements
can often be identified by words such as anticipates, expects, intends, plans,
predicts, believes, seeks, estimates, may, will, should, would, could,
potential, continue, ongoing, similar expressions, and variations or negatives of
these words. These statements are not guarantees of future performance and are subject to
risks, uncertainties and assumptions that are difficult to predict. Therefore, our actual
results could differ materially and adversely from those expressed in any forward-looking
statements as a result of various factors, some of which are listed under the section
Risk Factors contained in Part II, Item 1A of this Report. These forward-looking
statements speak only as of the date of this Report, and are based on our current
expectations, estimates and projections about our industry and business, managements
beliefs, and certain assumptions made by us, all of which are subject to change. We
undertake no obligation to revise or update publicly any forward-looking statement for
any reason, except as otherwise required by law. As used in this Managements Discussion
and Analysis of Financial Condition and Results of Operations, the words, we, our and
us refer to The Ensign Group, Inc. and its consolidated subsidiaries. All of our
facilities, the Service Center and the Captive are operated by separate, wholly-owned,
independent subsidiaries that have their own management, employees and assets. The use of
we, us, our and similar verbiage in this quarterly report is not meant to imply
that any of our facilities, the Service Center or the Captive are operated by the same
entity. This Managements Discussion and Analysis of Financial Condition and Results of
Operations should be read in conjunction with our consolidated financial statements and
related notes included in the Annual Report.
Overview
We are a provider of skilled nursing and rehabilitative care services through the
operation of 81 facilities located in California, Arizona, Texas, Washington, Utah,
Colorado and Idaho and one home health and hospice operation located in Idaho as of June
30, 2010. All of these facilities are skilled nursing facilities, other than three
stand-alone assisted living facilities in Arizona, Texas and Colorado and five campuses
that offer both skilled nursing and assisted living services in California, Arizona and
Utah. Our facilities provide a broad spectrum of skilled nursing and assisted living
services, physical, occupational and speech therapies, and other rehabilitative and
healthcare services, for both long-term residents and short-stay rehabilitation patients.
We encourage and empower our facility leaders and staff to make their facility the
facility of choice in the community it serves. This means that our facility leaders and
staff are generally free to discern and address the unique needs and priorities of
healthcare professionals, customers and other stakeholders in the local community or
market, and then work to create a superior service offering and reputation for that
particular community or market to encourage prospective customers and referral sources to
choose or recommend the facility. As of June 30, 2010, we owned 51 of our 81 facilities
and operated an additional 30 facilities under long-term lease arrangements, and had
options to purchase 8 of those 30 facilities. The following table summarizes our
facilities and operational skilled nursing, assisted living and independent living beds
by ownership status as of June 30, 2010:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Leased |
|
|
Leased |
|
|
|
|
|
|
|
|
|
|
(with a |
|
|
(without a |
|
|
|
|
|
|
|
|
|
|
Purchase |
|
|
Purchase |
|
|
|
|
|
|
Owned |
|
|
Option) |
|
|
Option) |
|
|
Total |
|
Number of facilities |
|
|
51 |
|
|
|
8 |
|
|
|
22 |
|
|
|
81 |
|
Percent of total |
|
|
63.0 |
% |
|
|
9.9 |
% |
|
|
27.1 |
% |
|
|
100 |
% |
Operational skilled
nursing, assisted
living and
independent living
beds |
|
|
5,686 |
|
|
|
1,042 |
|
|
|
2,616 |
|
|
|
9,344 |
|
Percent of total |
|
|
60.9 |
% |
|
|
11.1 |
% |
|
|
28.0 |
% |
|
|
100 |
% |
23
The Ensign Group, Inc. is a holding company with no direct operating assets,
employees or revenues. All of our facilities are operated by separate, wholly-owned,
independent subsidiaries, which have their own management, employees and assets. In
addition, one of our wholly-owned independent subsidiaries, which we call our Service
Center, provides centralized accounting, payroll, human resources, information
technology, legal, risk management and other services to each operating subsidiary
through contractual relationships between such subsidiaries. In addition, we have
the Captive that provides some claims-made coverage to our operating subsidiaries for
general and professional liability, as well as for certain workers compensation
insurance liabilities. References herein to the consolidated Company and its assets
and activities, as well as the use of the terms we, us, our and similar verbiage in
this quarterly report is not meant to imply that The Ensign Group, Inc. has direct
operating assets, employees or revenue, or that any of the facilities, the Service Center
or the Captive are operated by the same entity.
Recent Developments
On January 1, 2010, we purchased two skilled nursing facilities in Idaho for
approximately $7.6 million, which was paid in cash. This acquisition added 158
operational beds to our operations. We also entered into a separate operations transfer
agreement with the prior owner as part of this transaction.
On May 1, 2010, we purchased two skilled nursing facilities in Texas for
approximately $8.5 million, which was paid in cash. This acquisition added approximately
277 operational beds to our operations. We also entered into a separate operations
transfer agreement with the prior owner as part of this transaction.
On May 1, 2010, we purchased a home health and hospice operation in Idaho for
approximately $2.7 million, which was paid in cash. This acquisition did not impact our
total operational bed count. We also entered into a separate operations transfer
agreement with the prior owner as part of this transaction.
See further discussion of facility acquisitions in Note 6 in Notes to Condensed
Consolidated Financial Statements.
Facility Acquisition History
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, |
|
|
June 30, |
|
|
|
2005 |
|
|
2006 |
|
|
2007 |
|
|
2008 |
|
|
2009 |
|
|
2010 |
|
Cumulative number of facilities |
|
|
46 |
|
|
|
57 |
|
|
|
61 |
|
|
|
63 |
|
|
|
77 |
|
|
|
81 |
|
Cumulative number of
operational skilled nursing,
assisted living and
independent living beds |
|
|
5,585 |
|
|
|
6,667 |
|
|
|
7,105 |
|
|
|
7,324 |
|
|
|
8,948 |
|
|
|
9,344 |
|
The following table sets forth the location of our facilities and the number of
operational beds located at our facilities as of June 30, 2010:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CA |
|
|
AZ |
|
|
TX |
|
|
UT |
|
|
CO |
|
|
WA |
|
|
ID |
|
|
Total |
|
Number of facilities |
|
|
33 |
|
|
|
12 |
|
|
|
17 |
|
|
|
9 |
|
|
|
4 |
|
|
|
3 |
|
|
|
3 |
|
|
|
81 |
|
Operational skilled
nursing, assisted
living and
independent living
beds |
|
|
3,702 |
|
|
|
1,815 |
|
|
|
2,088 |
|
|
|
967 |
|
|
|
248 |
|
|
|
278 |
|
|
|
246 |
|
|
|
9,344 |
|
Key Performance Indicators
We manage our skilled nursing business by monitoring key performance indicators that
affect our financial performance. These indicators and their definitions include the
following:
|
|
|
Routine revenue: Routine revenue is generated by the contracted daily
rate charged for all contractually inclusive services. The inclusion
of therapy and other ancillary treatments varies by payor source and
by contract. Services provided outside of the routine contractual
agreement are recorded separately as ancillary revenue, including
Medicare Part B therapy services, and are not included in the routine
revenue definition. |
|
|
|
|
Skilled revenue: The amount of routine revenue generated from patients
in our skilled nursing facilities who are receiving higher levels of
care under Medicare, managed care, Medicaid, or other skilled
reimbursement programs. The other skilled residents that are included
in this population represent very high acuity residents who are
receiving high levels of nursing and ancillary services which are
reimbursed by payors other than Medicare or managed care. Skilled
revenue excludes any revenue generated from our assisted living
services. |
|
|
|
|
Skilled mix: The amount of our skilled revenue as a percentage of our
total routine revenue. Skilled mix (in days) represents the number of
days our Medicare, managed care, or other skilled patients are
receiving services at our skilled nursing facilities divided by the
total number of days patients (less days from assisted living
services) from all payor sources are receiving services at our skilled
nursing facilities for any given period (less days from assisted
living services). |
24
|
|
|
Quality mix: The amount of routine non-Medicaid revenue as a
percentage of our total routine revenue. Quality mix (in days)
represents the number of days our non-Medicaid patients are receiving
services at our skilled nursing facilities divided by the total number
of days patients from all payor sources are receiving services at our
skilled nursing facilities for any given period (less days from
assisted living services). |
|
|
|
|
Average daily rates: The routine revenue by payor source for a period
at our skilled nursing facilities divided by actual patient days for
that revenue source for that given period. |
|
|
|
|
Occupancy percentage (operational beds): The total number of residents
occupying a bed in a skilled nursing, assisted living or independent
living facility as a percentage of the beds in a facility which are
available for occupancy during the measurement period. |
|
|
|
|
Number of facilities and operational beds: The total number of skilled
nursing, assisted living and independent living facilities that we own
or operate and the total number of operational beds associated with
these facilities. |
Skilled and Quality Mix. Like most skilled nursing providers, we measure both
patient days and revenue by payor. Medicare, managed care and other skilled patients,
whom we refer to as high acuity patients, typically require a higher level of skilled
nursing and rehabilitative care. Accordingly, Medicare and managed care reimbursement
rates are typically higher than from other payors. In most states, Medicaid reimbursement
rates are generally the lowest of all payor types. Changes in the payor mix can
significantly affect our revenue and profitability.
The following table summarizes our overall skilled mix and quality mix for the
periods indicated as a percentage of our total routine revenue (less revenue from
assisted living services) and as a percentage of total patient days (less days from
assisted living services):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
Six Months Ended |
|
|
|
June 30, |
|
|
June 30, |
|
|
|
2010 |
|
|
2009 |
|
|
2010 |
|
|
2009 |
|
Skilled Mix: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Days |
|
|
24.8 |
% |
|
|
24.3 |
% |
|
|
25.4 |
% |
|
|
24.8 |
% |
Revenue |
|
|
48.2 |
% |
|
|
48.0 |
% |
|
|
49.0 |
% |
|
|
48.3 |
% |
Quality Mix: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Days |
|
|
36.8 |
% |
|
|
36.8 |
% |
|
|
37.2 |
% |
|
|
37.4 |
% |
Revenue |
|
|
57.3 |
% |
|
|
57.5 |
% |
|
|
57.8 |
% |
|
|
57.8 |
% |
Occupancy. We define occupancy as the ratio of actual patient days (one patient day
equals one resident occupying one bed for one day) during any measurement period to the
number of beds in facilities which are available for occupancy during the measurement
period. The number of licensed and independent living beds in a skilled nursing, assisted
living or independent living facility that are actually operational and available for
occupancy may be less than the total official licensed bed capacity. This sometimes
occurs due to the permanent dedication of bed space to alternative purposes, such as
enhanced therapy treatment space or other desirable uses calculated to improve service
offerings and/or operational efficiencies in a facility. In some cases, three- and
four-bed wards have been reduced to two-bed rooms for resident comfort, and larger wards
have been reduced to conform to changes in Medicare requirements. These beds are seldom
expected to be placed back into service. We define occupancy in operational beds as the
ratio of actual patient days during any measurement period to the number of available
patient days for that period. We believe that reporting occupancy based on operational
beds is consistent with industry practices and provides a more useful measure of actual
occupancy performance from period to period.
25
The following table summarizes our overall occupancy statistics for the periods
indicated:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
Six Months Ended |
|
|
|
June 30, |
|
|
June 30, |
|
|
|
2010 |
|
|
2009 |
|
|
2010 |
|
|
2009 |
|
Occupancy: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operational beds at end of period |
|
|
9,344 |
|
|
|
7,986 |
|
|
|
9,344 |
|
|
|
7,986 |
|
Available patient days |
|
|
841,994 |
|
|
|
726,636 |
|
|
|
1,658,834 |
|
|
|
1,436,636 |
|
Actual patient days |
|
|
667,858 |
|
|
|
576,738 |
|
|
|
1,316,942 |
|
|
|
1,143,357 |
|
Occupancy percentage (based on
operational beds) |
|
|
79.3 |
% |
|
|
79.4 |
% |
|
|
79.4 |
% |
|
|
79.6 |
% |
Revenue Sources
Our total revenue represents revenue derived primarily from providing services to
patients and residents of skilled nursing facilities, and to a lesser extent from
assisted living facilities and ancillary services. We receive service revenue from
Medicaid, Medicare, private payors and other third-party payors, and managed care
sources. The sources and amounts of our revenue are determined by a number of factors,
including bed capacity and occupancy rates of our healthcare facilities, the mix of
patients at our facilities and the rates of reimbursement among payors. Payment for
ancillary services varies based upon the service provided and the type of payor. The
following table sets forth our total revenue by payor source and as a percentage of total
revenue for the periods indicated:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30, |
|
|
Six Months Ended June 30, |
|
|
|
2010 |
|
|
2009 |
|
|
2010 |
|
|
2009 |
|
|
|
$ |
|
|
% |
|
|
$ |
|
|
% |
|
|
$ |
|
|
% |
|
|
$ |
|
|
% |
|
Revenue: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Medicaid |
|
$ |
64,002 |
|
|
|
40.5 |
% |
|
$ |
53,603 |
|
|
|
40.6 |
% |
|
$ |
125,656 |
|
|
|
40.3 |
% |
|
$ |
105,839 |
|
|
|
40.3 |
% |
Medicare |
|
|
50,589 |
|
|
|
32.1 |
|
|
|
43,156 |
|
|
|
32.7 |
|
|
|
101,711 |
|
|
|
32.6 |
|
|
|
86,362 |
|
|
|
32.9 |
|
Medicaid-skilled |
|
|
4,624 |
|
|
|
2.9 |
|
|
|
2,705 |
|
|
|
2.0 |
|
|
|
9,041 |
|
|
|
2.9 |
|
|
|
4,988 |
|
|
|
1.9 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
119,215 |
|
|
|
75.5 |
|
|
|
99,464 |
|
|
|
75.3 |
|
|
|
236,408 |
|
|
|
75.8 |
|
|
|
197,189 |
|
|
|
75.1 |
|
Managed Care |
|
|
20,222 |
|
|
|
12.8 |
|
|
|
17,182 |
|
|
|
13.0 |
|
|
|
40,791 |
|
|
|
13.0 |
|
|
|
34,679 |
|
|
|
13.2 |
|
Private and Other(1) |
|
|
18,511 |
|
|
|
11.7 |
|
|
|
15,532 |
|
|
|
11.7 |
|
|
|
34,923 |
|
|
|
11.2 |
|
|
|
30,595 |
|
|
|
11.7 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenue |
|
$ |
157,948 |
|
|
|
100.0 |
% |
|
$ |
132,178 |
|
|
|
100.0 |
% |
|
$ |
312,122 |
|
|
|
100.0 |
% |
|
$ |
262,463 |
|
|
|
100.0 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Includes revenue from assisted living facilities and home health and hospice operations. |
Critical Accounting Policies Update
There have been no significant changes during the three month period ended June 30,
2010 to the items that we disclosed as our critical accounting policies and estimates in
our discussion and analysis of financial condition and results of operations in our
Annual Report on Form 10-K filed with the SEC.
Industry Trends
The skilled nursing industry has evolved to meet the growing demand for post-acute
and custodial healthcare services generated by an aging population, increasing life
expectancies and the trend toward shifting of patient care to lower cost settings. The
skilled nursing industry has evolved in recent years, which we believe has led to a
number of favorable improvements in the industry, as described below:
|
|
|
Shift of Patient Care to Lower Cost Alternatives. The growth of the
senior population in the United States continues to increase
healthcare costs, often faster than the available funding from
government-sponsored healthcare programs. In response, federal and
state governments have adopted cost-containment measures that
encourage the treatment of patients in more cost-effective settings
such as skilled nursing facilities, for which the staffing
requirements and associated costs are often significantly lower than
acute care hospitals, inpatient rehabilitation facilities and other
post-acute care settings. As a result, skilled nursing facilities are
generally serving a larger population of higher-acuity patients than
in the past. |
26
|
|
|
Significant Acquisition and Consolidation Opportunities. The skilled
nursing industry is large and highly fragmented, characterized
predominantly by numerous local and regional providers. We believe
this fragmentation provides significant acquisition and consolidation
opportunities for us. |
|
|
|
|
Improving Supply and Demand Balance. The number of skilled nursing
facilities has declined modestly over the past several years. We
expect that the supply and demand balance in the skilled nursing
industry will continue to improve due to the shift of patient care to
lower cost settings, an aging population and increasing life
expectancies. |
|
|
|
|
Increased Demand Driven by Aging Populations and Increased Life
Expectancy. As life expectancy continues to increase in the United
States and seniors account for a higher percentage of the total U.S.
population, we believe the overall demand for skilled nursing services
will increase. At present, the primary market demographic for skilled
nursing services is primarily individuals age 75 and older. According
to U.S. Census Bureau Interim Projections, there will be 46 million
people in the United States in 2010 that are over 65 years old. The
U.S. Census Bureau estimates this group is one of the fastest growing
segments of the United States population and is expected to more than
double between 2000 and 2030. |
We believe the skilled nursing industry has been and will continue to be impacted by
several other trends. The use of long-term care insurance is increasing among seniors as
a means of planning for the costs of skilled nursing services. In addition, as a result
of increased mobility in society, reduction of average family size, and the increased
number of two-wage earner couples, more seniors are looking for alternatives outside the
family for their care.
Effects of Changing Prices. Medicare reimbursement rates and procedures are subject
to change from time to time, which could materially impact our revenue. Medicare
reimburses our skilled nursing facilities under a prospective payment system (PPS) for
certain inpatient covered services. Under the PPS, facilities are paid a predetermined
amount per patient, per day, based on the anticipated costs of treating patients. The
amount to be paid is determined by classifying each patient into a resource utilization
group (RUG) category that is based upon each patients acuity level. As of January 1,
2006, the RUG categories were expanded from 44 to 53, with increased reimbursement rates
for treating higher acuity patients. Should future changes in skilled nursing facility
payments reduce rates or increase the standards for reaching certain reimbursement
levels, our Medicare revenues could be reduced, with a corresponding adverse impact on
our financial condition or results of operation.
The Deficit Reduction Act of 2005 (DRA) added Sec. 1833(g)(5) of the Social Security
Act and directed the Centers for Medicare and Medicaid Services to develop a process that
allows exceptions for Medicare beneficiaries to therapy caps when continued therapy is
deemed medically necessary. The therapy cap exception was reauthorized in a number of
subsequent laws, most recently as part of the Patient Protection and Affordable Care Act,
which extended the exception from January 1, 2010, to December 31, 2010.
On July 16, 2010, Centers for Medicare and Medicaid Services (CMS) released its
proposed rule on the fiscal year 2011 PPS reimbursement rates for skilled nursing
facilities, which would result in a net increase in payments to skilled nursing
facilities of 1.7%. This net increase includes a 2.3% market basket increase, partially
offset by a correction of a FY 2010 forecast error which would result in a 0.6% rate
reduction.
Federal Health Care Reform. On March 23, 2010, President Obama signed into law the
Patient Protection and Affordable Care Act (the Affordable Care Act), which contained
several sweeping changes to Americas health insurance system. Among other reforms
contained in the Affordable Care Act, many Medicare providers received reductions in
their market basket updates. Unlike for some other Medicare providers, the Affordable
Care Act makes no reduction to the market basket update for skilled nursing facilities in
fiscal years 2010 or 2011. However, under the Affordable Care Act, the skilled nursing
facility market basket update will be subject to a full productivity adjustment beginning
in fiscal year 2012. In addition, the Affordable Care Act enacted several reforms with
respect to skilled nursing facilities and hospice organizations, including payment
measures to realize significant savings of federal and state funds by deterring and
prosecuting fraud and abuse in both the Medicare and Medicaid programs. While many of the
provisions of the Affordable Care Act will not take effect for several years or are
subject to further refinement through the promulgation of regulations, some key
provisions of the Affordable Care Act are effective immediately or within six to twelve
months of the Affordable Care Acts enactment date.
|
|
|
Enhanced CMPs and Escrow Provisions Effective March 23, 2010, the
Affordable Care Act includes expanded civil monetary penalty
(CMP) provisions applicable to all Medicare and Medicaid providers.
The Affordable Care Act provides for the imposition of CMPs of up to
$50,000 and, in some cases, treble damages, for actions relating to
alleged false statements to the federal government. |
27
|
|
|
Nursing Home Transparency Requirements In addition to expanded CMP
provisions, the Affordable Care Act imposes substantial new
transparency requirements for Medicare-participating nursing
facilities. Existing law requires Medicare providers to disclose to
CMS: (1) any person or entity that owns directly or indirectly an
ownership interest of five percent or more in a provider; (2) officers
and directors (if a corporation) and partners (if a partnership); and
(3) holders of a mortgage, deed of trust, note or other obligation
secured by the entity or the property of the entity. The Affordable
Care Act expands the information required to be disclosed to include:
(4) the facilitys organizational structure; (5) additional
information on officers, directors, trustees, and managing employees
of the facility (including their names, titles, and start dates of
services); and (6) information on any additional disclosable party
of the facility. Beginning March 23, 2010, facilities must have this
information available for submission to the Secretary of Health &
Human Services, the OIG, the state in which the facility is located,
and the state long-term care ombudsman upon request. |
|
|
|
|
Suspension of Payments During Pending Fraud Investigations The
Affordable Care Act also provides the federal government with expanded
authority to suspend payment if a provider is investigated for
allegations or issues of fraud. The Affordable Care Act provides that
Medicare and Medicaid payments may be suspended pending a credible
investigation of fraud, unless the Secretary of Health and Human
Services determines that good cause exists not to suspend payments.
This suspension authority creates a new mechanism for the federal
government to suspend both Medicare and Medicaid payments for
allegations of fraud, independent of whether a state exercises its
authority to suspend Medicaid payments pending a fraud investigation. |
|
|
|
|
Overpayment Reporting and Repayment; Expanded False Claims Act
Liability The Affordable Care Act also enacted several important
changes that expand potential liability under the federal False Claims
Act. Effective March 23, 2010, the Affordable Care Act provides that
overpayments related to services provided to both Medicare and
Medicaid beneficiaries must be reported and returned to the applicable
payor within the later of sixty days of identification of the
overpayment, or the date the corresponding cost report (if applicable)
is due. Any overpayment retained after the deadline is considered an
obligation for purposes of the federal False Claims Act. |
The provisions of the Affordable Care Act discussed above are examples of
recently-enacted federal health reform provisions that we believe may have a material
impact on the long-term care industry and on our business. However, the foregoing
discussion is not intended to constitute, nor does it constitute, an exhaustive review
and discussion of the Affordable Care Act. It is possible that other provisions of the
Affordable Care Act may be interpreted, clarified, or applied to our facilities or
operations in a way that could have a material adverse impact on the results of
operations.
Historically, adjustments to reimbursement under Medicare have had a significant
effect on our revenue. For a discussion of historic adjustments and recent changes to the
Medicare program and related reimbursement rates see Risk Factors Risks Related to Our
Business and Industry Our revenue could be impacted by federal and state changes to
reimbursement and other aspects of Medicaid and Medicare, Our future revenue, financial
condition and results of operations could be impacted by continued cost containment
pressures on Medicaid spending, We may not be fully reimbursed for all services for
which each facility bills through consolidated billing, which could adversely affect our
revenue, financial condition and results of operations and Reforms to the U.S.
healthcare system will impose new requirements upon us and may lower our
reimbursements.The federal government and state governments continue to focus on efforts
to curb spending on healthcare programs such as Medicare and Medicaid. We are not able to
predict the outcome of the legislative process. We also cannot predict the extent to
which proposals will be adopted or, if adopted and implemented, what effect, if any, such
proposals and existing new legislation will have on us. Efforts to impose reduced
allowances, greater discounts and more stringent cost controls by government and other
payors are expected to continue and could adversely affect our business, financial
condition and results of operations.
28
Results of Operations
The following table sets forth details of our revenue, expenses and earnings as a
percentage of total revenue for the periods indicated:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
Six Months Ended |
|
|
|
June 30, |
|
|
June 30, |
|
|
|
2010 |
|
|
2009 |
|
|
2010 |
|
|
2009 |
|
Revenue |
|
|
100.0 |
% |
|
|
100.0 |
% |
|
|
100.0 |
% |
|
|
100.0 |
% |
Expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of services (exclusive of
facility rent and depreciation and
amortization shown separately
below) |
|
|
79.7 |
|
|
|
79.7 |
|
|
|
79.8 |
|
|
|
79.8 |
|
Facility rentcost of services |
|
|
2.3 |
|
|
|
2.8 |
|
|
|
2.3 |
|
|
|
2.8 |
|
General and administrative expense |
|
|
4.0 |
|
|
|
4.1 |
|
|
|
3.9 |
|
|
|
4.0 |
|
Depreciation and amortization |
|
|
2.5 |
|
|
|
2.4 |
|
|
|
2.5 |
|
|
|
2.4 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total expenses |
|
|
88.5 |
|
|
|
89.0 |
|
|
|
88.5 |
|
|
|
89.0 |
|
Income from operations |
|
|
11.5 |
|
|
|
11.0 |
|
|
|
11.5 |
|
|
|
11.0 |
|
Other income (expense): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense |
|
|
(1.5 |
) |
|
|
(0.9 |
) |
|
|
(1.5 |
) |
|
|
(1.0 |
) |
Interest income |
|
|
0.1 |
|
|
|
0.1 |
|
|
|
0.1 |
|
|
|
0.1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other expense, net |
|
|
(1.4 |
) |
|
|
(0.8 |
) |
|
|
(1.4 |
) |
|
|
(0.9 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before provision for income taxes |
|
|
10.1 |
|
|
|
10.2 |
|
|
|
10.1 |
|
|
|
10.1 |
|
Provision for income taxes |
|
|
4.0 |
|
|
|
4.0 |
|
|
|
4.0 |
|
|
|
4.0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
|
6.1 |
% |
|
|
6.2 |
% |
|
|
6.1 |
% |
|
|
6.1 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
The table below reconciles net income to EBITDA and EBITDAR for the periods
presented:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
Six Months Ended |
|
|
|
June 30, |
|
|
June 30, |
|
|
|
2010 |
|
|
2009 |
|
|
2010 |
|
|
2009 |
|
Consolidated Statement of Income Data: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
$ |
9,619 |
|
|
$ |
8,184 |
|
|
$ |
18,967 |
|
|
$ |
16,107 |
|
Interest expense, net |
|
|
2,245 |
|
|
|
1,072 |
|
|
|
4,458 |
|
|
|
2,330 |
|
Provision for income taxes |
|
|
6,230 |
|
|
|
5,282 |
|
|
|
12,356 |
|
|
|
10,560 |
|
Depreciation and amortization |
|
|
4,023 |
|
|
|
3,209 |
|
|
|
7,978 |
|
|
|
6,174 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
EBITDA(1) |
|
$ |
22,117 |
|
|
$ |
17,747 |
|
|
$ |
43,759 |
|
|
$ |
35,171 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Facility rentcost of services |
|
|
3,616 |
|
|
|
3,724 |
|
|
|
7,191 |
|
|
|
7,425 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
EBITDAR(1) |
|
$ |
25,733 |
|
|
$ |
21,471 |
|
|
$ |
50,950 |
|
|
$ |
42,596 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
EBITDA and EBITDAR are supplemental non-GAAP financial measures.
Regulation G, Conditions for Use of Non-GAAP Financial Measures, and
other provisions of the Securities Exchange Act of 1934, as amended,
define and prescribe the conditions for use of certain non-GAAP
financial information. We calculate EBITDA as net income before
(a) interest expense, net, (b) provision for income taxes, and
(c) depreciation and amortization. We calculate EBITDAR by adjusting
EBITDA to exclude facility rentcost of services. These non-GAAP
financial measures are used in addition to and in conjunction with
results presented in accordance with GAAP. These non-GAAP financial
measures should not be relied upon to the exclusion of GAAP financial
measures. These non-GAAP financial measures reflect an additional way
of viewing aspects of our operations that, when viewed with our GAAP
results and the accompanying reconciliations to corresponding GAAP
financial measures, provide a more complete understanding of factors
and trends affecting our business. |
29
We believe EBITDA and EBITDAR are useful to investors and other external users of
our financial statements in evaluating our operating performance because:
|
|
|
they are widely used by investors and analysts in our industry as a
supplemental measure to evaluate the overall operating performance of
companies in our industry without regard to items such as interest
expense, net and depreciation and amortization, which can vary
substantially from company to company depending on the book value of
assets, capital structure and the method by which assets were
acquired; and |
|
|
|
|
they help investors evaluate and compare the results of our operations
from period to period by removing the impact of our capital structure
and asset base from our operating results. |
We use EBITDA and EBITDAR:
|
|
|
as measurements of our operating performance to assist us in comparing our
operating performance on a consistent basis; |
|
|
|
|
to allocate resources to enhance the financial performance of our business; |
|
|
|
|
to evaluate the effectiveness of our operational strategies; and |
|
|
|
|
to compare our operating performance to that of our competitors. |
We typically use EBITDA and EBITDAR to compare the operating performance of each
skilled nursing and assisted living facility. EBITDA and EBITDAR are useful in this
regard because they do not include such costs as net interest expense, income taxes,
depreciation and amortization expense, and, with respect to EBITDAR, facility rent cost
of services, which may vary from period-to-period depending upon various factors,
including the method used to finance facilities, the amount of debt that we have
incurred, whether a facility is owned or leased, the date of acquisition of a facility or
business, or the tax law of the state in which a business unit operates. As a result, we
believe that the use of EBITDA and EBITDAR provide a meaningful and consistent comparison
of our business between periods by eliminating certain items required by GAAP.
We also establish compensation programs and bonuses for our facility level employees
that are partially based upon the achievement of EBITDAR targets.
Despite the importance of these measures in analyzing our underlying business,
designing incentive compensation and for our goal setting, EBITDA and EBITDAR are
non-GAAP financial measures that have no standardized meaning defined by GAAP. Therefore,
our EBITDA and EBITDAR measures have limitations as analytical tools, and they should not
be considered in isolation, or as a substitute for analysis of our results as reported in
accordance with GAAP. Some of these limitations are:
|
|
|
they do not reflect our current or future cash requirements for capital expenditures or contractual commitments; |
|
|
|
|
they do not reflect changes in, or cash requirements for, our working capital needs; |
|
|
|
|
they do not reflect the net interest expense, or the cash requirements necessary to service interest or
principal payments, on our debt; |
|
|
|
|
they do not reflect any income tax payments we may be required to make; |
|
|
|
|
although depreciation and amortization are non-cash charges, the assets being depreciated and amortized will
often have to be replaced in the future, and EBITDA and EBITDAR do not reflect any cash requirements for such
replacements; and |
|
|
|
|
other companies in our industry may calculate these measures differently than we do, which may limit their
usefulness as comparative measures. |
We compensate for these limitations by using them only to supplement net income on a
basis prepared in accordance with GAAP in order to provide a more complete understanding
of the factors and trends affecting our business.
Management strongly encourages investors to review our condensed consolidated
financial statements in their entirety and to not rely on any single financial measure.
Because these non-GAAP financial measures are not standardized, it may not be possible to
compare these financial measures with other companies non-GAAP financial measures having
the same or similar names. For information about our financial results as reported in
accordance with GAAP, see our condensed consolidated financial statements and related
notes included elsewhere in this document.
30
Three Months Ended June 30, 2010 Compared to Three Months Ended June 30, 2009
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
|
|
|
|
|
|
|
June 30, |
|
|
|
|
|
|
|
|
|
2010 |
|
|
2009 |
|
|
Change |
|
|
% Change |
|
|
|
(Dollars in thousands) |
|
|
|
|
|
|
|
Total Facility Results: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue |
|
$ |
157,948 |
|
|
$ |
132,178 |
|
|
$ |
25,770 |
|
|
|
19.5 |
% |
Number of facilities at period end |
|
|
81 |
|
|
|
70 |
|
|
|
11 |
|
|
|
15.7 |
% |
Actual patient days |
|
|
667,858 |
|
|
|
576,738 |
|
|
|
91,120 |
|
|
|
15.8 |
% |
Occupancy percentage Operational beds |
|
|
79.3 |
% |
|
|
79.4 |
% |
|
|
|
|
|
|
(0.1 |
)% |
Skilled mix by nursing days |
|
|
24.8 |
% |
|
|
24.3 |
% |
|
|
|
|
|
|
0.5 |
% |
Skilled mix by nursing revenue |
|
|
48.2 |
% |
|
|
48.0 |
% |
|
|
|
|
|
|
0.2 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
|
|
|
|
|
|
|
June 30, |
|
|
|
|
|
|
|
|
|
2010 |
|
|
2009 |
|
|
Change |
|
|
% Change |
|
|
|
(Dollars in thousands) |
|
|
|
|
|
|
|
Same Facility Results(1): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue |
|
$ |
120,899 |
|
|
$ |
116,296 |
|
|
$ |
4,603 |
|
|
|
4.0 |
% |
Number of facilities at period end |
|
|
56 |
|
|
|
56 |
|
|
|
|
|
|
|
|
% |
Actual patient days |
|
|
488,508 |
|
|
|
495,981 |
|
|
|
(7,473 |
) |
|
|
(1.5 |
)% |
Occupancy percentage Operational beds |
|
|
82.5 |
% |
|
|
81.6 |
% |
|
|
|
|
|
|
0.9 |
% |
Skilled mix by nursing days |
|
|
28.6 |
% |
|
|
25.9 |
% |
|
|
|
|
|
|
2.7 |
% |
Skilled mix by nursing revenue |
|
|
52.9 |
% |
|
|
50.1 |
% |
|
|
|
|
|
|
2.8 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
|
|
|
|
|
|
|
June 30, |
|
|
|
|
|
|
|
|
|
2010 |
|
|
2009 |
|
|
Change |
|
|
% Change |
|
|
|
(Dollars in thousands) |
|
|
|
|
|
|
|
Transitioning Facility Results(2): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue |
|
$ |
8,753 |
|
|
$ |
7,924 |
|
|
$ |
829 |
|
|
|
10.5 |
% |
Number of facilities at period end |
|
|
6 |
|
|
|
6 |
|
|
|
|
|
|
|
|
% |
Actual patient days |
|
|
40,901 |
|
|
|
39,249 |
|
|
|
1,652 |
|
|
|
4.2 |
% |
Occupancy percentage Operational beds |
|
|
70.6 |
% |
|
|
67.7 |
% |
|
|
|
|
|
|
2.9 |
% |
Skilled mix by nursing days |
|
|
18.5 |
% |
|
|
18.2 |
% |
|
|
|
|
|
|
0.3 |
% |
Skilled mix by nursing revenue |
|
|
39.7 |
% |
|
|
41.7 |
% |
|
|
|
|
|
|
(2.0 |
)% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
|
|
|
|
|
|
|
June 30, |
|
|
|
|
|
|
|
|
|
2010 |
|
|
2009 |
|
|
Change |
|
|
% Change |
|
|
|
(Dollars in thousands) |
|
|
|
|
|
|
|
Recently Acquired Facility Results(3): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue |
|
$ |
28,296 |
|
|
$ |
7,958 |
|
|
$ |
20,338 |
|
|
NM |
% |
Number of facilities at period end |
|
|
19 |
|
|
|
7 |
|
|
|
12 |
|
|
NM |
% |
Actual patient days |
|
|
138,449 |
|
|
|
41,508 |
|
|
|
96,941 |
|
|
NM |
% |
Occupancy percentage Operational beds |
|
|
72.2 |
% |
|
|
68.1 |
% |
|
|
|
|
|
|
4.1 |
% |
Skilled mix by nursing days |
|
|
13.5 |
% |
|
|
10.8 |
% |
|
|
|
|
|
|
2.7 |
% |
Skilled mix by nursing revenue |
|
|
29.5 |
% |
|
|
23.3 |
% |
|
|
|
|
|
|
6.2 |
% |
|
|
|
(1) |
|
Same Facility results represent all facilities purchased prior to January 1, 2007. Same Facility results for 2009 include the
results of operations through June 30, 2009 of our assisted living facility in Arizona where we decided not to exercise our
renewal option on the lease which expired on September 30, 2009. The reduction in the number of actual patient days primarily
relates to the non-renewal of this lease. |
|
(2) |
|
Transitioning Facility results represents all facilities purchased from January 1, 2007 to December 31, 2008. |
|
(3) |
|
Recently Acquired Facility (or Acquisitions) results represent all facilities purchased on or subsequent to January 1, 2009. |
31
Revenue. Revenue increased $25.7 million, or 19.5%, to $157.9 million for the three
months ended June 30, 2010 compared to $132.2 million for the three months ended June 30,
2009. Of the $25.7 million increase, Medicare and managed care revenue increased
$10.4 million, or 17.4%, Medicaid revenue increased $10.4 million, or 19.4%, other
skilled revenue increased $1.9 million, or 70.9%, and private and other revenue
increased $3.0 million, or 19.2%. Approximately $20.3 million of the total revenue
increase was due to revenue generated by Recently Acquired Facilities. Since January 1,
2009, the Company has acquired nineteen facilities and one home health and hospice
operation in six states. Each group of facilities experienced an increase in operational
occupancy. However, the overall occupancy was negatively weighted by the higher
concentration of facilities in the Recently Acquired category, operating at generally
lower occupancy percentages, causing consolidated occupancy to decrease slightly.
Revenue generated by Same Facilities increased $4.6 million, or 4.0%, for the three
months ended June 30, 2010 as compared to the three months ended June 30, 2009. This
increase was primarily due to an increase in skilled mix of 2.8% to 52.9%, which was the
result of higher acuity levels and skilled occupancy. Same Facility revenue in 2009
included approximately $0.5 million in revenue from our assisted living facility in
Arizona where the lease expired on September 30, 2009 due to our decision not to exercise
our renewal option on the lease. The reduction in the number of actual patient days
primarily relates to the non-renewal of this lease.
The following table reflects the change in the skilled nursing average daily revenue
rates by payor source, excluding services that are not covered by the daily rate:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30, |
|
|
|
Same Facility |
|
|
Transitioning |
|
|
Acquisitions |
|
|
Total |
|
|
% |
|
|
|
2010 |
|
|
2009 |
|
|
2010 |
|
|
2009 |
|
|
2010 |
|
|
2009 |
|
|
2010 |
|
|
2009 |
|
|
Change |
|
Skilled Nursing Average
Daily Revenue Rates: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Medicare |
|
$ |
551.53 |
|
|
$ |
552.06 |
|
|
$ |
473.28 |
|
|
$ |
472.55 |
|
|
$ |
429.87 |
|
|
$ |
452.51 |
|
|
$ |
527.95 |
|
|
$ |
542.05 |
|
|
|
(2.6 |
)% |
Managed care |
|
|
343.52 |
|
|
|
340.15 |
|
|
|
387.44 |
|
|
|
402.17 |
|
|
|
403.17 |
|
|
|
393.82 |
|
|
|
348.56 |
|
|
|
342.94 |
|
|
|
1.6 |
% |
Other skilled |
|
|
543.60 |
|
|
|
620.88 |
|
|
|
|
|
|
|
|
|
|
|
622.49 |
|
|
|
|
|
|
|
546.03 |
|
|
|
620.88 |
|
|
|
(12.1 |
)% |
Total skilled revenue |
|
|
469.43 |
|
|
|
470.83 |
|
|
|
443.46 |
|
|
|
457.40 |
|
|
|
428.44 |
|
|
|
440.92 |
|
|
|
463.57 |
|
|
|
469.18 |
|
|
|
(1.2 |
)% |
Medicaid |
|
|
163.44 |
|
|
|
160.44 |
|
|
|
155.73 |
|
|
|
142.87 |
|
|
|
155.92 |
|
|
|
166.29 |
|
|
|
161.22 |
|
|
|
159.60 |
|
|
|
1.0 |
% |
Private and other payors |
|
|
189.80 |
|
|
|
185.21 |
|
|
|
147.24 |
|
|
|
138.37 |
|
|
|
174.66 |
|
|
|
194.98 |
|
|
|
180.74 |
|
|
|
180.64 |
|
|
|
0.1 |
% |
Total skilled nursing revenue |
|
$ |
253.53 |
|
|
$ |
243.42 |
|
|
$ |
207.19 |
|
|
$ |
199.02 |
|
|
$ |
195.48 |
|
|
$ |
203.31 |
|
|
$ |
238.54 |
|
|
$ |
237.40 |
|
|
|
0.5 |
% |
Transitional Facility Medicare daily rates increased by 0.2%, due to increased
acuity levels. However, the overall average Medicare daily rate decreased by
approximately 2.6% in the three months ended June 30, 2010 as compared to the three
months ended June 30, 2009 as a result of the impact of lower acuity levels at Recently
Acquired Facilities. The average Medicaid rate increased 1.0% in the three months ended
June 30, 2010 relative to the same period in the prior year, primarily due to increases
in reimbursement rates in the state of Texas. In addition, we have experienced continued
growth in our managed care rates. We have and will continue to enhance our relationships
with these organizations to appropriately service resident needs in their respective
communities.
Historically, we have generally experienced lower occupancy rates, lower skilled mix
and quality mix at Recently Acquired Facilities and therefore, we anticipate generally
lower overall occupancy during years of growth. In the future, if we acquire additional
facilities into our overall portfolio, we expect this trend to continue. Accordingly, we
anticipate our overall occupancy will vary from quarter to quarter based upon the
maturity of the facilities within our portfolio.
32
Payor Sources as a Percentage of Skilled Nursing Services. We use both our skilled
mix and quality mix as measures of the quality of reimbursements we receive at our
skilled nursing facilities over various periods. The following tables set forth our
percentage of skilled nursing patient revenue and days by payor source:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30, |
|
|
|
Same Facility |
|
|
Transitioning |
|
|
Acquisitions |
|
|
Total |
|
|
|
2010 |
|
|
2009 |
|
|
2010 |
|
|
2009 |
|
|
2010 |
|
|
2009 |
|
|
2010 |
|
|
2009 |
|
Percentage of
Skilled Nursing
Revenue: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Medicare |
|
|
33.8 |
% |
|
|
33.3 |
% |
|
|
27.6 |
% |
|
|
33.8 |
% |
|
|
24.3 |
% |
|
|
19.2 |
% |
|
|
31.8 |
% |
|
|
32.5 |
% |
Managed care |
|
|
15.2 |
|
|
|
14.3 |
|
|
|
12.1 |
|
|
|
7.9 |
|
|
|
4.6 |
|
|
|
4.1 |
|
|
|
13.2 |
|
|
|
13.3 |
|
Other skilled |
|
|
3.9 |
|
|
|
2.5 |
|
|
|
|
|
|
|
|
|
|
|
0.6 |
|
|
|
|
|
|
|
3.2 |
|
|
|
2.2 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Skilled mix |
|
|
52.9 |
|
|
|
50.1 |
|
|
|
39.7 |
|
|
|
41.7 |
|
|
|
29.5 |
|
|
|
23.3 |
|
|
|
48.2 |
|
|
|
48.0 |
|
Private and other
payors |
|
|
7.6 |
|
|
|
8.1 |
|
|
|
15.5 |
|
|
|
15.0 |
|
|
|
13.7 |
|
|
|
25.0 |
|
|
|
9.1 |
|
|
|
9.5 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quality mix |
|
|
60.5 |
|
|
|
58.2 |
|
|
|
55.2 |
|
|
|
56.7 |
|
|
|
43.2 |
|
|
|
48.3 |
|
|
|
57.3 |
|
|
|
57.5 |
|
Medicaid |
|
|
39.5 |
|
|
|
41.8 |
|
|
|
44.8 |
|
|
|
43.3 |
|
|
|
56.8 |
|
|
|
51.7 |
|
|
|
42.7 |
|
|
|
42.5 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total skilled nursing |
|
|
100.0 |
% |
|
|
100.0 |
% |
|
|
100.0 |
% |
|
|
100.0 |
% |
|
|
100.0 |
% |
|
|
100.0 |
% |
|
|
100.0 |
% |
|
|
100.0 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30, |
|
|
|
Same Facility |
|
|
Transitioning |
|
|
Acquisitions |
|
|
Total |
|
|
|
2010 |
|
|
2009 |
|
|
2010 |
|
|
2009 |
|
|
2010 |
|
|
2009 |
|
|
2010 |
|
|
2009 |
|
Percentage of Skilled
Nursing Days: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Medicare |
|
|
15.5 |
% |
|
|
14.7 |
% |
|
|
12.1 |
% |
|
|
14.3 |
% |
|
|
11.1 |
% |
|
|
8.7 |
% |
|
|
14.4 |
% |
|
|
14.2 |
% |
Managed care |
|
|
11.2 |
|
|
|
10.2 |
|
|
|
6.4 |
|
|
|
3.9 |
|
|
|
2.2 |
|
|
|
2.1 |
|
|
|
9.0 |
|
|
|
9.2 |
|
Other skilled |
|
|
1.9 |
|
|
|
1.0 |
|
|
|
|
|
|
|
|
|
|
|
0.2 |
|
|
|
|
|
|
|
1.4 |
|
|
|
0.9 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Skilled mix |
|
|
28.6 |
|
|
|
25.9 |
|
|
|
18.5 |
|
|
|
18.2 |
|
|
|
13.5 |
|
|
|
10.8 |
|
|
|
24.8 |
|
|
|
24.3 |
|
Private and other payors |
|
|
10.1 |
|
|
|
10.7 |
|
|
|
21.8 |
|
|
|
21.6 |
|
|
|
15.3 |
|
|
|
26.1 |
|
|
|
12.0 |
|
|
|
12.5 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quality mix |
|
|
38.7 |
|
|
|
36.6 |
|
|
|
40.3 |
|
|
|
39.8 |
|
|
|
28.8 |
|
|
|
36.9 |
|
|
|
36.8 |
|
|
|
36.8 |
|
Medicaid |
|
|
61.3 |
|
|
|
63.4 |
|
|
|
59.7 |
|
|
|
60.2 |
|
|
|
71.2 |
|
|
|
63.1 |
|
|
|
63.2 |
|
|
|
63.2 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total skilled nursing |
|
|
100.0 |
% |
|
|
100.0 |
% |
|
|
100.0 |
% |
|
|
100.0 |
% |
|
|
100.0 |
% |
|
|
100.0 |
% |
|
|
100.0 |
% |
|
|
100.0 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of Services (exclusive of facility rent and depreciation and amortization shown
separately). Cost of services increased $20.5 million, or 19.5%, to $125.8 million for
the three months ended June 30, 2010 compared to $105.3 million for the three months
ended June 30, 2009. Cost of services remained consistent as a percent of total revenue
at 79.7% for the three months ended June 30, 2010 and 2009. Of the $20.5 million
increase, Same Facilities increased $3.8 million, or 4.2% and Recently Acquired
Facilities increased $16.4 million.
Facility Rent Cost of Services. Facility rent cost of services decreased
$0.1 million, or 2.9%, to $3.6 million for the three months ended June 30, 2010 compared
to $3.7 million for the three months ended June 30, 2009. Facility rent-cost of services
as a percent of total revenue was 2.3% for the three months ended June 30, 2010 as
compared to 2.8% for the three months ended June 30, 2009. The decrease in total facility
rent was primarily a result of the non-renewal of one leased assisted living facility in
Arizona in the third quarter of 2009.
General and Administrative Expense. General and administrative expense increased
$1.0 million, or 18.3%, to $6.4 million for the three months ended June 30, 2010 compared
to $5.4 million for the three months ended June 30, 2009. General and administrative
expense decreased as a percent of total revenue to 4.0% for the three months ended June
30, 2010 as compared to 4.1% for the three months ended June 30, 2009. The $1.0 million
increase was primarily due to increases in wages, benefits and professional fees.
33
We have, and expect to continue to experience, higher stock-based compensation
expense, which will impact cost of services and general and administrative expenses on a
go-forward basis, until 2011 when the prospective method used at the adoption date will
no longer impact the expense calculation.
Depreciation and Amortization. Depreciation and amortization expense increased
$0.8 million, or 25.4%, to $4.0 million for the three months ended June 30, 2010 compared
to $3.2 million for the three months ended June 30, 2009. Depreciation and amortization
expense increased as a percent of total revenue to 2.5% for the three months ended June
30, 2010 as compared to 2.4% for the three months ended June 30, 2009. This increase was
primarily related to the additional depreciation of Recently Acquired Facilities, as well
as an increase in Same Facility depreciation expense due to recent renovations.
Other Income (Expense). Other expense, net increased $1.1 million, or 109.4%, to
$2.2 million for the three months ended June 30, 2010 compared to $1.1 million for the
three months ended June 30, 2009. Other expense, net increased as a percent of total
revenue to 1.4% for the three months ended June 30, 2010 as compared to 0.8% for the
three months ended June 30, 2009. This increase was primarily the result of interest
expense on an additional $40.0 million added to the Term Loan in November 2009.
Provision for Income Taxes. Provision for income taxes increased $0.9 million, or
17.9%, to $6.2 million for the three months ended June 30, 2010 compared to $5.3 million
for the three months ended June 30, 2009. This increase resulted from the increase in
income before income taxes of $2.4 million, or 17.7%. Our effective tax rate was 39.3%
for the three months ended June 30, 2010 as compared to 39.2% for the three months ended
June 30, 2009.
34
Six Months Ended June 30, 2010 Compared to Six Months Ended June 30, 2009
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended |
|
|
|
|
|
|
|
|
|
June 30, |
|
|
|
|
|
|
|
|
|
2010 |
|
|
2009 |
|
|
Change |
|
|
% Change |
|
|
|
(Dollars in thousands) |
|
|
|
|
|
|
|
Total Facility Results: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue |
|
$ |
312,122 |
|
|
$ |
262,463 |
|
|
$ |
49,659 |
|
|
|
18.9 |
% |
Number of facilities at period end |
|
|
81 |
|
|
|
70 |
|
|
|
11 |
|
|
|
15.7 |
% |
Actual patient days |
|
|
1,316,942 |
|
|
|
1,143,357 |
|
|
|
173,585 |
|
|
|
15.2 |
% |
Occupancy percentage Operational beds |
|
|
79.4 |
% |
|
|
79.6 |
% |
|
|
|
|
|
|
(0.2 |
)% |
Skilled mix by nursing days |
|
|
25.4 |
% |
|
|
24.8 |
% |
|
|
|
|
|
|
0.6 |
% |
Skilled mix by nursing revenue |
|
|
49.0 |
% |
|
|
48.3 |
% |
|
|
|
|
|
|
0.7 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended |
|
|
|
|
|
|
|
|
|
June 30, |
|
|
|
|
|
|
|
|
|
2010 |
|
|
2009 |
|
|
Change |
|
|
% Change |
|
|
|
(Dollars in thousands) |
|
|
|
|
|
|
|
Same Facility Results(1): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue |
|
$ |
242,049 |
|
|
$ |
232,600 |
|
|
$ |
9,449 |
|
|
|
4.1 |
% |
Number of facilities at period end |
|
|
56 |
|
|
|
56 |
|
|
|
|
|
|
|
|
% |
Actual patient days |
|
|
974,009 |
|
|
|
992,838 |
|
|
|
(18,829 |
) |
|
|
(1.9 |
)% |
Occupancy percentage Operational beds |
|
|
82.6 |
% |
|
|
82.0 |
% |
|
|
|
|
|
|
0.6 |
% |
Skilled mix by nursing days |
|
|
29.0 |
% |
|
|
26.3 |
% |
|
|
|
|
|
|
2.7 |
% |
Skilled mix by nursing revenue |
|
|
53.5 |
% |
|
|
50.2 |
% |
|
|
|
|
|
|
3.3 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended |
|
|
|
|
|
|
|
|
|
June 30, |
|
|
|
|
|
|
|
|
|
2010 |
|
|
2009 |
|
|
Change |
|
|
% Change |
|
|
|
(Dollars in thousands) |
|
|
|
|
|
|
|
Transitioning Facility Results(2): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue |
|
$ |
16,917 |
|
|
$ |
16,164 |
|
|
$ |
753 |
|
|
|
4.7 |
% |
Number of facilities at period end |
|
|
6 |
|
|
|
6 |
|
|
|
|
|
|
|
|
% |
Actual patient days |
|
|
80,878 |
|
|
|
78,041 |
|
|
|
2,837 |
|
|
|
3.6 |
% |
Occupancy percentage Operational beds |
|
|
70.2 |
% |
|
|
67.7 |
% |
|
|
|
|
|
|
2.5 |
% |
Skilled mix by nursing days |
|
|
18.7 |
% |
|
|
18.7 |
% |
|
|
|
|
|
|
|
% |
Skilled mix by nursing revenue |
|
|
40.0 |
% |
|
|
43.2 |
% |
|
|
|
|
|
|
(3.2 |
)% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended |
|
|
|
|
|
|
|
|
|
June 30, |
|
|
|
|
|
|
|
|
|
2010 |
|
|
2009 |
|
|
Change |
|
|
% Change |
|
|
|
(Dollars in thousands) |
|
|
|
|
|
|
|
Recently Acquired Facility Results(3): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue |
|
$ |
53,156 |
|
|
$ |
13,699 |
|
|
$ |
39,457 |
|
|
NM |
% |
Number of facilities at period end |
|
|
19 |
|
|
|
7 |
|
|
|
12 |
|
|
NM |
% |
Actual patient days |
|
|
262,055 |
|
|
|
72,478 |
|
|
|
189,577 |
|
|
NM |
% |
Occupancy percentage Operational beds |
|
|
71.8 |
% |
|
|
65.9 |
% |
|
|
|
|
|
|
5.9 |
% |
Skilled mix by nursing days |
|
|
14.2 |
% |
|
|
9.6 |
% |
|
|
|
|
|
|
4.6 |
% |
Skilled mix by nursing revenue |
|
|
30.6 |
% |
|
|
20.8 |
% |
|
|
|
|
|
|
9.8 |
% |
|
|
|
(1) |
|
Same Facility results represent all facilities purchased prior to January 1, 2007. Same Facility results for 2009 include the
results of operations through June 30, 2009 of our assisted living facility in Arizona where we decided not to exercise our
renewal option on the lease which expired on September 30, 2009. The reduction in the number of actual patient days primarily
relates to the non-renewal of this lease. |
|
(2) |
|
Transitioning Facility results represents all facilities purchased from January 1, 2007 to December 31, 2008. |
|
(3) |
|
Recently Acquired Facility (or Acquisitions) results represent all facilities purchased on or subsequent to January 1, 2009. |
35
Revenue. Revenue increased $49.6 million, or 18.9%, to $312.1 million for the six
months ended June 30, 2010 compared to $262.5 million for the six months ended June 30,
2009. Of the $49.6 million increase, Medicare and managed care revenue increased
$21.4 million, or 17.7%, Medicaid revenue increased $19.8 million, or 18.7%, other
skilled revenue increased $4.0 million, or 81.3%, and private and other revenue increased
$4.3 million, or 14.1%. Approximately $39.5 million of the total revenue increase was due
to revenue generated by Recently Acquired Facilities. Since January 1, 2009, the Company
has acquired nineteen facilities and one home health and hospice operation in six states.
Each group of facilities experienced an increase in operational occupancy. However, the
overall occupancy was negatively weighted by the higher concentration of facilities in
the Recently Acquired category, operating at generally lower occupancy percentages,
causing consolidated occupancy to decrease slightly.
Revenue generated by Same Facilities increased $9.4 million, or 4.1%, for the six
months ended June 30, 2010 as compared to the six months ended June 30, 2009. This
increase was primarily due to increase in skilled mix of 3.3% to 53.5%, which was the
result of higher acuity levels. Same Facility revenue in 2009 included approximately $0.9
million in revenue from our assisted living facility in Arizona where the lease expired
on September 30, 2009, due to our decision not to exercise our renewal option on the
lease. The reduction in the number of actual patient days primarily relates to the
non-renewal of this lease.
The following table reflects the change in the skilled nursing average daily revenue
rates by payor source, excluding services that are not covered by the daily rate:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended June 30, |
|
|
|
Same Facility |
|
|
Transitioning |
|
|
Acquisitions |
|
|
Total |
|
|
% |
|
|
|
2010 |
|
|
2009 |
|
|
2010 |
|
|
2009 |
|
|
2010 |
|
|
2009 |
|
|
2010 |
|
|
2009 |
|
|
Change |
|
Skilled Nursing Average
Daily Revenue Rates: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Medicare |
|
$ |
553.30 |
|
|
$ |
543.66 |
|
|
$ |
469.03 |
|
|
$ |
475.85 |
|
|
$ |
431.42 |
|
|
$ |
438.09 |
|
|
$ |
529.91 |
|
|
$ |
535.15 |
|
|
|
(1.0 |
)% |
Managed care |
|
|
341.68 |
|
|
|
334.46 |
|
|
|
380.60 |
|
|
|
448.10 |
|
|
|
403.16 |
|
|
|
387.98 |
|
|
|
346.62 |
|
|
|
338.73 |
|
|
|
2.3 |
% |
Other skilled |
|
|
547.19 |
|
|
|
632.38 |
|
|
|
|
|
|
|
|
|
|
|
623.46 |
|
|
|
|
|
|
|
549.62 |
|
|
|
632.38 |
|
|
|
(13.1 |
)% |
Total skilled revenue |
|
|
469.74 |
|
|
|
463.42 |
|
|
|
435.11 |
|
|
|
469.71 |
|
|
|
429.84 |
|
|
|
428.99 |
|
|
|
463.68 |
|
|
|
462.96 |
|
|
|
0.2 |
% |
Medicaid |
|
|
163.86 |
|
|
|
160.95 |
|
|
|
149.65 |
|
|
|
142.82 |
|
|
|
158.35 |
|
|
|
165.56 |
|
|
|
161.75 |
|
|
|
159.95 |
|
|
|
1.1 |
% |
Private and other payors |
|
|
187.63 |
|
|
|
183.81 |
|
|
|
152.83 |
|
|
|
140.27 |
|
|
|
173.81 |
|
|
|
191.78 |
|
|
|
179.91 |
|
|
|
179.43 |
|
|
|
0.3 |
% |
Total skilled nursing revenue |
|
$ |
254.99 |
|
|
$ |
243.14 |
|
|
$ |
203.76 |
|
|
$ |
203.40 |
|
|
$ |
199.17 |
|
|
$ |
197.68 |
|
|
$ |
240.63 |
|
|
$ |
237.43 |
|
|
|
1.3 |
% |
Same Facility Medicare daily rates increased by 1.8% due to higher acuity levels.
However, the overall average Medicare daily rate decreased by approximately 1.0% in the
six months ended June 30, 2010 as compared to the six months ended June 30, 2009, as a
result of the impact of lower acuity levels at Transitioning and Recently Acquired
Facilities. The average Medicaid rate increase of 1.1% in the six months ended June 30,
2010 relative to the same period in the prior year was primarily due to increases in
reimbursement rates in the state of Texas and retroactive revenue adjustments in the
state of Washington in the first quarter of 2010. In addition, we have experienced
continued growth in our managed care rates. We have and will continue to enhance our
relationships with these organizations to appropriately service resident needs in their
respective communities.
Historically, we have generally experienced lower occupancy rates, lower skilled mix
and quality mix at Recently Acquired Facilities and therefore, we anticipate generally
lower overall occupancy during years of growth. In the future, if we acquire additional
facilities into our overall portfolio, we expect this trend to continue. Accordingly, we
anticipate our overall occupancy will vary from quarter to quarter based upon the
maturity of the facilities within our portfolio.
36
Payor Sources as a Percentage of Skilled Nursing Services. We use both our skilled
mix and quality mix as measures of the quality of reimbursements we receive at our
skilled nursing facilities over various periods. The following tables set forth our
percentage of skilled nursing patient revenue and days by payor source:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended June 30, |
|
|
|
Same Facility |
|
|
Transitioning |
|
|
Acquisitions |
|
|
Total |
|
|
|
2010 |
|
|
2009 |
|
|
2010 |
|
|
2009 |
|
|
2010 |
|
|
2009 |
|
|
2010 |
|
|
2009 |
|
Percentage of
Skilled Nursing
Revenue: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Medicare |
|
|
34.3 |
% |
|
|
33.5 |
% |
|
|
26.6 |
% |
|
|
34.1 |
% |
|
|
25.3 |
% |
|
|
17.4 |
% |
|
|
32.5 |
% |
|
|
32.8 |
% |
Managed care |
|
|
15.3 |
|
|
|
14.4 |
|
|
|
13.4 |
|
|
|
9.1 |
|
|
|
4.6 |
|
|
|
3.4 |
|
|
|
13.4 |
|
|
|
13.5 |
|
Other skilled |
|
|
3.9 |
|
|
|
2.3 |
|
|
|
|
|
|
|
|
|
|
|
0.7 |
|
|
|
|
|
|
|
3.1 |
|
|
|
2.0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Skilled mix |
|
|
53.5 |
|
|
|
50.2 |
|
|
|
40.0 |
|
|
|
43.2 |
|
|
|
30.6 |
|
|
|
20.8 |
|
|
|
49.0 |
|
|
|
48.3 |
|
Private and other
payors |
|
|
7.4 |
|
|
|
8.3 |
|
|
|
16.5 |
|
|
|
14.6 |
|
|
|
13.1 |
|
|
|
25.4 |
|
|
|
8.8 |
|
|
|
9.5 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quality mix |
|
|
60.9 |
|
|
|
58.5 |
|
|
|
56.5 |
|
|
|
57.8 |
|
|
|
43.7 |
|
|
|
46.2 |
|
|
|
57.8 |
|
|
|
57.8 |
|
Medicaid |
|
|
39.1 |
|
|
|
41.5 |
|
|
|
43.5 |
|
|
|
42.2 |
|
|
|
56.3 |
|
|
|
53.8 |
|
|
|
42.2 |
|
|
|
42.2 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total skilled nursing |
|
|
100.0 |
% |
|
|
100.0 |
% |
|
|
100.0 |
% |
|
|
100.0 |
% |
|
|
100.0 |
% |
|
|
100.0 |
% |
|
|
100.0 |
% |
|
|
100.0 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended June 30, |
|
|
|
Same Facility |
|
|
Transitioning |
|
|
Acquisitions |
|
|
Total |
|
|
|
2010 |
|
|
2009 |
|
|
2010 |
|
|
2009 |
|
|
2010 |
|
|
2009 |
|
|
2010 |
|
|
2009 |
|
Percentage of
Skilled Nursing
Days: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Medicare |
|
|
15.8 |
% |
|
|
15.0 |
% |
|
|
11.5 |
% |
|
|
14.6 |
% |
|
|
11.7 |
% |
|
|
7.9 |
% |
|
|
14.7 |
% |
|
|
14.5 |
% |
Managed care |
|
|
11.4 |
|
|
|
10.5 |
|
|
|
7.2 |
|
|
|
4.1 |
|
|
|
2.3 |
|
|
|
1.7 |
|
|
|
9.3 |
|
|
|
9.5 |
|
Other skilled |
|
|
1.8 |
|
|
|
0.8 |
|
|
|
|
|
|
|
|
|
|
|
0.2 |
|
|
|
|
|
|
|
1.4 |
|
|
|
0.8 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Skilled mix |
|
|
29.0 |
|
|
|
26.3 |
|
|
|
18.7 |
|
|
|
18.7 |
|
|
|
14.2 |
|
|
|
9.6 |
|
|
|
25.4 |
|
|
|
24.8 |
|
Private and other
payors |
|
|
10.1 |
|
|
|
11.0 |
|
|
|
22.0 |
|
|
|
21.2 |
|
|
|
15.0 |
|
|
|
26.1 |
|
|
|
11.8 |
|
|
|
12.6 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quality mix |
|
|
39.1 |
|
|
|
37.3 |
|
|
|
40.7 |
|
|
|
39.9 |
|
|
|
29.2 |
|
|
|
35.7 |
|
|
|
37.2 |
|
|
|
37.4 |
|
Medicaid |
|
|
60.9 |
|
|
|
62.7 |
|
|
|
59.3 |
|
|
|
60.1 |
|
|
|
70.8 |
|
|
|
64.3 |
|
|
|
62.8 |
|
|
|
62.6 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total skilled nursing |
|
|
100.0 |
% |
|
|
100.0 |
% |
|
|
100.0 |
% |
|
|
100.0 |
% |
|
|
100.0 |
% |
|
|
100.0 |
% |
|
|
100.0 |
% |
|
|
100.0 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of Services (exclusive of facility rent and depreciation and amortization shown
separately). Cost of services increased $39.5 million, or 18.9%, to $249.0 million for
the six months ended June 30, 2010 compared to $209.5 million for the six months ended
June 30, 2009. Cost of services remained consistent as a percent of total revenue at 79.8% for the
six months ended June 30, 2010 and 2009. Of the $39.5 million increase, Same Facilities increased $7.7 million, or 4.2% and Recently
Acquired Facilities increased $31.7 million.
Facility Rent Cost of Services. Facility rent cost of services decreased
$0.2 million, or 3.2%, to $7.2 million for the six months ended June 30, 2010 compared to
$7.4 million for the six months ended June 30, 2009. Facility rent-cost of services as a
percent of total revenue was 2.3% for the six months ended June 30, 2010 as compared to
2.8% for the six months ended June 30, 2009. The decrease in total facility rent was
primarily a result of the non-renewal of one leased assisted living facility in Arizona
in the third quarter of 2009.
General and Administrative Expense. General and administrative expense increased
$1.8 million, or 17.4%, to $12.2 million for the six months ended June 30, 2010 compared
to $10.4 million for the six months ended June 30, 2009. General and administrative
expense decreased as a percent of total revenue to 3.9% for the six months ended June 30,
2010 as compared to 4.0% for the six months ended June 30, 2009. The $1.8 million
increase was primarily due to an increase in wages, benefits and professional fees.
We have, and expect to continue to experience, higher stock-based compensation
expense, which will impact cost of services and general and administrative expenses on a
go-forward basis, until 2011 when the prospective method used at the adoption date will
no longer impact the expense calculation.
Depreciation and Amortization. Depreciation and amortization expense increased
$1.8 million, or 29.2%, to $8.0 million for the six months ended June 30, 2010 compared
to $6.2 million for the six months ended June 30, 2009. Depreciation and amortization
expense increased as a percent of total revenue to 2.5% for the six months ended June 30,
2010 as compared to 2.4% for the six months ended June 30, 2009. This increase was
primarily related to the additional depreciation of Recently Acquired Facilities, as well
as an increase in Same Facility depreciation expense due to recent renovations.
37
Other Income (Expense). Other expense, net increased $2.1 million, or 91.4%, to
$4.4 million for the six months ended June 30, 2010 compared to $2.3 million for the six
months ended June 30, 2009. Other expense, net increased as a percent of total
revenue to 1.4% for the six months ended June 30, 2010 as compared to 0.9% for the
six months ended June 30, 2009. This increase was primarily the result of interest
expense on an additional $40.0 million added to the Term Loan in November 2009.
Provision for Income Taxes. Provision for income taxes increased $1.8 million, or
17.0%, to $12.4 million for the six months ended June 30, 2010 compared to $10.6 million
for the six months ended June 30, 2009. This increase resulted from the increase in
income before income taxes of $4.7 million, or 17.5%. Our effective tax rate was 39.4%
for the six months ended June 30, 2010 as compared to 39.6% for the six months ended June
30, 2009.
Liquidity and Capital Resources
Our primary sources of liquidity have historically been derived from our cash flow
from operations, long term debt secured by our real property and our Second Amended and
Restated Loan and Security Agreement (the Revolver) with General Electric Capital
Corporation (the Lender). As of June 30, 2010, the maximum available for borrowing under
the Revolver was approximately $50.0 million, subject to available collateral limits. As
of June 30, 2010, the amount of borrowing capacity pledged to secure outstanding letters
of credit and reserves against collateral for actual and contingent liabilities was $2.1
million and $6.0 million, respectively.
Since 2004, we have financed the majority of our facility acquisitions primarily
through refinancing of existing facilities, and cash generated from operations or
proceeds from our IPO. Cash paid for business acquisitions was $18.8 million and
$22.1 million for the six months ended June 30, 2010 and 2009, respectively. Where we
enter into a facility lease agreement, we typically do not pay any material amount to the
prior facility operator, nor do we acquire any assets or assume any liabilities, other
than our rights and obligations under the new lease and operations transfer agreement, as
part of the transaction. Leases are included in the contractual obligations section
below. Total capital expenditures for property and equipment were $13.8 million and $11.7
million for the six months ended June 30, 2010 and 2009, respectively. We currently have
a combined $16.8 million budgeted for capital expenditure projects for 2010.
We believe our current cash balances, our cash flow from operations and the Revolver
will be sufficient to cover our operating needs for at least the next 12 months. We may
in the future seek to raise additional capital to fund growth, capital renovations,
operations and other business activities, but such additional capital may not be
available on acceptable terms, on a timely basis, or at all.
Our cash and cash equivalents as of June 30, 2010 consisted of bank term deposits,
money market funds and treasury bill related investments. In addition, as of June 30,
2010, we held debt security investments of approximately $12.1 million, which are
guaranteed by the Federal Deposit Insurance Corporation (FDIC) under the Temporary
Liquidity Guarantee Program upon maturity. Our market risk exposure is interest income
sensitivity, which is affected by changes in the general level of U.S. interest rates.
The primary objective of our investment activities is to preserve principal while at the
same time maximizing the income we receive from our investments without significantly
increasing risk. Due to the low risk profile of our investment portfolio, an immediate
10% change in interest rates would not have a material effect on the fair market value of
our portfolio. Accordingly, we would not expect our operating results or cash flows to be
affected to any significant degree by the effect of a sudden change in market interest
rates on our securities portfolio.
The following table presents selected data from our condensed consolidated statement
of cash flows for the periods presented:
|
|
|
|
|
|
|
|
|
|
|
Six months ended |
|
|
|
June 30, |
|
|
|
2010 |
|
|
2009 |
|
|
|
(In thousands) |
|
Net cash provided by operating activities |
|
$ |
14,903 |
|
|
$ |
18,700 |
|
Net cash used in investing activities |
|
|
(25,153 |
) |
|
|
(24,072 |
) |
Net cash used in financing activities |
|
|
(2,252 |
) |
|
|
(2,267 |
) |
|
|
|
|
|
|
|
Net decrease in cash and cash equivalents |
|
|
(12,502 |
) |
|
|
(7,639 |
) |
Cash and cash equivalents at beginning of period |
|
|
38,855 |
|
|
|
41,326 |
|
|
|
|
|
|
|
|
Cash and cash equivalents at end of period |
|
$ |
26,353 |
|
|
$ |
33,687 |
|
|
|
|
|
|
|
|
38
Six months ended June 30, 2010 Compared to Six months ended June 30, 2009
Net cash provided by operations for the six months ended June 30, 2010 was
$14.9 million compared to $18.7 million for the six months ended June 30, 2009, a
decrease of $3.8 million. This decrease was primarily due to increases in outstanding
accounts receivable balances of $13.0 million as compared to $6.4 million for the six
month period ended June 30, 2009, an increase of $6.6 million. This increase was
partially offset by our improved operating results, which contributed $28.3 million in
2010 after adding back depreciation and amortization, deferred income taxes, provision
for doubtful accounts, stock-based compensation, excess tax benefits from share based
compensation and loss on disposition of property and equipment (non-cash charges), as
compared to $24.1 million for 2009, an increase of $4.2 million.
Net cash used in investing activities for the six months ended June 30, 2010 was
$25.2 million compared to $24.1 million for the six months ended June 30, 2009, an
increase of $1.1 million. The increase was primarily the result of $25.0 million in cash
paid for business acquisitions and purchased property and equipment in the six months
ended June 30, 2010 compared to $23.7 million in the six months ended June 30, 2009.
Net cash used in financing activities for the six months ended June 30, 2010
remained consistent at $2.3 million.
Principal Debt Obligations and Capital Expenditures
Total long-term debt obligations outstanding as of June 30, 2010 and the years ended
December 31, 2009, 2008 and 2007 were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, |
|
|
June 30, |
|
|
|
2007 |
|
|
2008 |
|
|
2009 |
|
|
2010 |
|
|
|
(in thousands) |
|
Amended Term Loan with GE Capital |
|
$ |
54,929 |
|
|
$ |
54,102 |
|
|
$ |
93,170 |
|
|
$ |
92,451 |
|
Mortgage Loan and Promissory Notes |
|
|
8,641 |
|
|
|
6,449 |
|
|
|
15,064 |
|
|
|
14,900 |
|
Bond payable |
|
|
|
|
|
|
|
|
|
|
1,232 |
|
|
|
1,137 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
63,570 |
|
|
$ |
60,551 |
|
|
$ |
109,466 |
|
|
$ |
108,488 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The following table represents the Companys cumulative facility growth from 2004 to
the present:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, |
|
|
June 30, |
|
|
|
2006 |
|
|
2007 |
|
|
2008 |
|
|
2009 |
|
|
2010 |
|
Cumulative number of facilities |
|
|
57 |
|
|
|
61 |
|
|
|
63 |
|
|
|
77 |
|
|
|
81 |
|
Term Loan with General Electric Capital Corporation
On December 29, 2006, a number of our independent real estate holding subsidiaries
jointly entered into the Third Amended and Restated Loan Agreement, with General Electric
Capital Corporation (the Lender), which consists of an approximately $55.7 million
multiple-advance term loan, further referred to as the Ten Project Note. The Ten Project
Note matures in June 2016, and is currently secured by the real and personal property
comprising the ten facilities owned by these subsidiaries.
The Ten Project Note was funded in advances, with each advance bearing interest at a
separate rate. The interest rates range from 6.95% to 7.50% per annum. The proceeds of
the advances made under the Ten Project Note have been used to refinance an existing loan
from the Lender secured by certain of the properties, and to purchase other additional
properties that we were previously leasing.
On November 6, 2009, we finalized the Fourth Amended and Restated Loan Agreement
(Amended Term Loan) with the Lender which increased the borrowing capacity of the loan by
$40.0 million, further referred to as the Six Project Loan. The Six Project Loan will
mature on September 30, 2014 and is secured by, among other things (a) a perfected first
priority mortgage/deed of trust on the fee simple interest in six of our skilled nursing
facilities (the Property), (b) an assignment of all related leases, rents, deposits,
letters of credit, income and profits, (c) an assignment and/or a perfected security
interest in all assignable licenses, permits, general intangibles, contracts, agreements
and personal property relating to the Property and (d) a perfected first priority
security interest in all reserve accounts. The Amended Term Loan, which includes both the
Ten Project Note and Six Project Loan, is cross collateralized and cross defaulted with
the existing Revolver. We paid approximately $0.8 million upon closing of the Amended
Term Loan. The interest rate on the loan is calculated at the current five year swap rate
on the date of closing plus 585 basis points for half of the loan balance and the three
year swap rate on the date of closing plus 585 basis points and thereafter floating at
90-day LIBOR plus 575 basis points, reset monthly and subject to a LIBOR floor
of 2.0% for the remaining half of the loan balance. The Amended Term Loan did not
modify any of the existing terms of the Ten Project Note.
39
In connection with the Amended Term Loan, we have guaranteed the payment and
performance of all the obligations of our real estate holding subsidiaries under the loan
documents. In the event of our default under the Amended Term Loan, all amounts owed by
our subsidiaries and guaranteed by us under the Amended Term Loan and any other loan with
the Lender, including the Revolver discussed above, would become immediately due and
payable. In addition, in the event of our default under the Amended Term Loan, the Lender
has the right to take control of our facilities encumbered by the loan to the extent
necessary to make such payments and perform such acts required under the loan.
Under the Amended Term Loan, we are subject to standard reporting requirements and
other typical covenants for a loan of this type. Effective October 1, 2006 and continuing
each calendar quarter thereafter, we are subject to restrictive financial covenants,
including average occupancy, Debt Service (as defined in the agreement) and Project Yield
(as defined in the agreement). As of June 30, 2010, we were in compliance with all loan
covenants. As of June 30, 2010, our borrowing subsidiaries had $92.5 million outstanding
on the Amended Term Loan.
Revolving Credit Facility with General Electric Capital Corporation
On February 21, 2008, we amended our existing Revolver by extending the term to
2013, increasing the available credit thereunder up to the lesser of $50.0 million or 85%
of the eligible accounts receivable, and changing the interest rate for all or any
portion of the outstanding indebtedness thereunder to any of three options, as we may
elect from time to time, (i) the 1, 2, 3 or 6 month LIBOR (at our option) plus 2.5%, or
(ii) the greater of (a) prime plus 1.0% or (b) the federal funds rate plus 1.5% or
(iii) a floating LIBOR rate plus 2.5%. In connection with the Revolver, we incurred
financing costs of approximately $0.5 million. The Revolver contains typical
representations and financial and non-financial covenants for a loan of this type, a
violation of which could result in a default under the Revolver and could possibly cause
all amounts owed by us to the Lender, including amounts due under the Third Amended and
Restated Loan Agreement (the Term Loan), to be declared immediately due and payable. In
addition, the Revolver includes provisions that allow the Lender to establish reserves
against collateral for actual and contingent liabilities, a right which the Lender
exercised with our cooperation in December 2008. This reserve restricts $6.0 million of
our borrowing capacity, and may be reduced or eliminated based upon developments with
respect to the ongoing U.S. Attorney investigation.
The proceeds of the loans under the Revolver have been and continue to be used for
working capital and other expenses arising in our ordinary course of business.
The Revolver contains affirmative and negative covenants, including limitations on:
|
|
|
certain indebtedness; |
|
|
|
|
certain investments, loans, advances and acquisitions; |
|
|
|
|
certain sales or other dispositions of our assets; |
|
|
|
|
certain liens and negative pledges; |
|
|
|
|
financial covenants; |
|
|
|
|
changes of control (as defined in the loan agreement); |
|
|
|
|
certain mergers, consolidations, liquidations and dissolutions; |
|
|
|
|
certain sale and leaseback transactions without the Lenders consent; |
|
|
|
|
dividends and distributions during the existence of an event of default; |
|
|
|
|
guarantees and other contingent liabilities; |
|
|
|
|
affiliate transactions that are not in the ordinary course of business; and |
|
|
|
|
certain changes in capital structure. |
40
A violation of these or other representations or covenants of ours could result in a
default under the Revolver and could possibly cause the entire amount outstanding under
the Revolver and a cross-default of all amounts owed by us, including amounts due under
the Term Loan, to be declared immediately due and payable.
In connection with the Revolver, the majority of our subsidiaries granted a first
priority security interest to the Lender in, among other things: (1) all accounts,
accounts receivable and rights to payment of every kind, contract rights, chattel paper,
documents and instruments with respect thereto, and all of our rights, remedies,
securities and liens in, to, and in respect of our accounts, (2) all moneys, securities,
and other property and the proceeds thereof under the control of the Lender and its
affiliates, (3) all right, title and interest in, to and in respect of all goods relating
to or resulting in accounts, (4) all deposit accounts into which our accounts are
deposited, (5) general intangibles and other property of every kind relating to our
accounts, (6) all other general intangibles, including, without limitation, proceeds from
insurance policies, intellectual property rights, and goodwill, (7) inventory, machinery,
equipment, tools, fixtures, goods, supplies, and all related attachments, accessions and
replacements, and (8) proceeds, including insurance proceeds, of all of the foregoing. In
the event of our default, the Lender has the right to take possession of the foregoing
with or without judicial process.
Promissory Notes with Johnson Land Enterprises, Inc.
On October 1, 2009, four subsidiaries of The Ensign Group, Inc. entered into four
separate promissory notes with Johnson Land Enterprises, LLC (the Seller), for an
aggregate of $10.0 million, as a part of the Companys acquisition of three skilled
nursing facilities in Utah. The unpaid balance of principal and accrued interest from
these notes is due on September 30, 2019. The notes bear interest at a rate of 6.0% per
annum. As of June 30, 2010, our subsidiaries had $9.8 million outstanding on the
Promissory Notes.
Bonds Payable to Lynn Family Partnership
On October 1, 2009, a subsidiary of The Ensign Group, Inc. located in West Jordan,
Utah assumed the obligation to pay the remaining principal and interest on bonds which
were originally sold to finance the construction of the facility. These bonds were
assumed as a part of the Companys acquisition of three skilled nursing facilities in
Utah. The unpaid balance of principal and accrued interest from these bonds is due on
July 1, 2015. The bonds bear interest at an annual rate equal to sixty percent of the
rate announced from time to time by Bank of America as its prime rate (Prime Rate), which
was 2.1% on June 30, 2010. As of June 30, 2010, the balance outstanding on these bonds
was $1.1 million.
Mortgage Loan with Continental Wingate Associates, Inc.
Ensign Southland LLC, a subsidiary of The Ensign Group, Inc., entered into a
mortgage loan on January 30, 2001 with Continental Wingate Associates, Inc. The mortgage
loan is insured with the U.S. Department of Housing and Development, or HUD, which
subjects our Southland facility to HUD oversight and periodic inspections. As of June 30,
2010, the balance outstanding on this mortgage loan was approximately $6.2 million. The
unpaid balance of principal and accrued interest from this mortgage loan is due on
February 1, 2027. The mortgage loan bears interest at the rate of 7.5% per annum.
This mortgage loan is secured by the real property comprising the Southland Care
Center facility and the rents, issues and profits thereof, as well as all personal
property used in the operation of the facility.
Contractual Obligations, Commitments and Contingencies
We lease certain facilities and our Service Center office under operating leases,
most of which have initial lease terms ranging from five to 20 years. Most of these
leases contain options to renew or extend the lease term, some of which involve rent
increases. We also lease a majority of our equipment under operating leases with initial
terms ranging from three to five years. Total rent expense, inclusive of straight-line
rent adjustments, was $3.7 million and $7.4 million for the three and six months ended
June 30, 2010, respectively and $3.8 million and $7.7 million for the three and six
months ended June 30, 2009, respectively.
In March 2007, we and certain of our officers received a series of notices from our
bank indicating that the United States Attorney for the Central District of California
had issued an authorized investigative demand, a request for records similar to a
subpoena, to our bank. The U.S. Attorney subsequently rescinded that demand. The
rescinded demand requested documents from our bank related to financial transactions
involving us, ten of our operating subsidiaries, an outside investor group, and certain
of our current and former officers. Subsequently, in June 2007, the U.S. Attorney sent a
letter to one of our current employees requesting a meeting. The letter indicated that
the U.S. Attorney and the U.S. Department of Health and Human Services Office of
Inspector General were conducting an investigation of claims submitted to the Medicare
program for rehabilitation services provided at unspecified facilities. Although both we
and the employee offered to cooperate, the U.S. Attorney later withdrew its meeting
request.
41
On December 17, 2007, we were informed by Deloitte & Touche LLP, our independent
registered public accounting firm, that the U.S. Attorney served a grand jury subpoena on
Deloitte & Touche LLP, relating to The Ensign Group, Inc., and several
of our operating subsidiaries. The subpoena confirmed our previously reported belief
that the U.S. Attorney was conducting an investigation involving facilities operated by
certain of our operating subsidiaries. All together, the March 2007 authorized
investigative demand and the December 2007 subpoena specifically covered information from
a total of 18 of our 81 facilities. In February 2008, the U.S. Attorney contacted two
additional current employees. We also continue to sporadically receive anecdotal reports
of former employees who have been contacted by investigators from the U.S. Attorneys
office. Based on these events, we believe that the U.S. Attorney may be conducting
parallel criminal, civil and administrative investigations involving The Ensign Group,
Inc. and one or more of our skilled nursing facilities.
Pursuant to these investigations, on December 17, 2008, representatives from the
U.S. Department of Justice (DOJ) served search warrants on our Service Center and six of
our Southern California skilled nursing facilities. Following the execution of the
warrants on the six facilities, a subpoena was issued covering eight additional
facilities. Among other things, the warrants covered specific patient records at the six
facilities. On May 4, 2009, the U.S. Attorney served a second subpoena requesting
additional patient records on the same patients who were covered by the original
warrants. We have worked with the U.S. Attorneys office to produce information
responsive to both subpoenas. We and our regulatory counsel continue to actively work
with the U.S. Attorneys office and respond to requests for information as they are
received relative to the investigation.
We are cooperating with the U.S. Attorneys office, and intend to continue working
with them to the extent they will allow us to help move their inquiry forward. To our
knowledge, however, neither The Ensign Group, Inc. nor any of our operating subsidiaries
or employees has been formally charged with any wrongdoing. We cannot predict or provide
any assurance as to the possible outcome of the investigation or any possible related
proceedings, or as to the possible outcome of any qui tam litigation that may follow, nor
can we estimate the possible loss or range of loss that may result from any such
proceedings and, therefore, we have not recorded any related accruals. To the extent the
U.S. Attorneys office elects to pursue this matter, or if the investigation has been
instigated by a qui tam relator who elects to pursue the matter, and we are subjected to
or alleged to be liable for claims or obligations under federal Medicare statutes, the
federal False Claims Act, or similar state and federal statutes and related regulations,
our business, financial condition, results of operations and cash flows could be
materially and adversely affected and our stock price could decline.
We initiated an internal investigation in November 2006 when we became aware of an
allegation of possible reimbursement irregularities at one or more of our facilities.
This investigation focused on 12 facilities, and included all six of the facilities which
were covered by the warrants served in December 2008. We retained outside counsel to
assist us in looking into these matters. We and our outside counsel concluded this
investigation in February 2008 without identifying any systemic or patterns and practices
of fraudulent or intentional misconduct. We made observations at certain facilities
regarding areas of potential improvement in some of our recordkeeping and billing
practices and have implemented measures, some of which were already underway before the
investigation began, that we believe will strengthen our recordkeeping and billing
processes. None of these additional findings or observations appears to be rooted in
fraudulent or intentional misconduct. We continue to evaluate the measures we have
implemented for effectiveness, and we are continuing to seek ways to improve these
processes.
As a byproduct of our investigation we identified a limited number of selected
Medicare claims for which adequate backup documentation could not be located or for which
other billing deficiencies existed. We, with the assistance of independent consultants
experienced in Medicare billing, completed a billing review on these claims. To the
extent missing documentation was not located, we treated the claims as overpayments.
Consistent with healthcare industry accounting practices, we record any charge for
refunded payments against revenue in the period in which the claim adjustment becomes
known. See additional description of our contingencies in Note 14 in Notes to Condensed
Consolidated Financial Statements.
From time to time our systems and controls highlight potential compliance issues,
which we investigate as they arise. As a result of the detection by management at
one of our facilities, and their Service Center support personnel, of possible
recordkeeping and related irregularities at that facility, we initiated an internal
inquiry in the second quarter of 2010.
We concluded the investigatory phase of this inquiry in the third quarter of 2010,
and commenced a billing review of potentially affected claims. We made observations
at the facility regarding areas of potential improvement in some of our historical
recordkeeping and billing practices and have identified measures, some of which had
already been implemented before the inquiry began, that we believe have
strengthened, and can strengthen further, our recordkeeping and billing processes.
The issues detected appear to be isolated to one facility and one department within
that facility. We continue to evaluate the measures we have implemented for
effectiveness, and we are continuing to seek ways to improve these processes.
As a result of our billing reviews, we identified a limited number of
selected Medicare claims for which adequate backup documentation could not be
located, or for which other billing deficiencies existed. Where accepted procedures
and necessary data for reviewing and calculating potential overpayments were
available, we followed such procedures and completed a billing review. Where such
procedures and/or data were not available we developed a methodology for making a
good faith estimate of potential overpayments with the assistance of independent
consultants experienced in Medicare billing. We have accrued a liability for
estimated overpayments resulting from insufficient or missing documentation or
other billing deficiencies. To the extent that sufficient documentation is
subsequently located, the amount we ultimately reimburse will be reduced.
42
Consistent with healthcare industry accounting practices, we record any charge for
refunded payments against revenue in the period in which the claim adjustment
becomes known. During the quarter ended June 30, 2010, we accrued for a revenue
adjustment of approximately $0.5 million, plus interest, for the estimated
overpayments described above, with a resulting impact to net income of
approximately $0.3 million. At the conclusion of our review we intend to submit the
potential overpayment for settlement with the Medicare Fiscal Intermediary.
Inflation
We have historically derived a substantial portion of our revenue from the Medicare
program. We also derive revenue from state Medicaid and similar reimbursement programs.
Payments under these programs generally provide for reimbursement levels that are
adjusted for inflation annually based upon the states fiscal year for the Medicaid
programs and in each October for the Medicare program. These adjustments may not continue
in the future, and even if received, such adjustments may not reflect the actual increase
in our costs for providing healthcare services.
Labor and supply expenses make up a substantial portion of our cost of services.
Those expenses can be subject to increase in periods of rising inflation and when labor
shortages occur in the marketplace. To date, we have generally been able to implement
cost control measures or obtain increases in reimbursement sufficient to offset increases
in these expenses. We may not be successful in offsetting future cost increases.
Adoption of New Accounting Pronouncements
In February 2010, the FASB issued amendments to address certain implementation
issues related to an entitys requirement to perform and disclose subsequent events
procedures. The amendment requires (1) SEC filers and (2) conduit debt obligors for
conduit debt securities that are traded in a public market to evaluate subsequent events
through the date the financial statements are issued. All other entities are required to
evaluate subsequent events through the date the financial statements are available to be
issued. It further exempts SEC filers from disclosing the date through which subsequent
events have been evaluated. For
all entities (except conduit debt obligors), these requirements are effective
immediately for financial statements that are (1) issued or available to be issued or
(2) revised. For conduit debt obligors, the requirements are effective for interim and
annual periods ending after June 15, 2010. The adoption of these requirements did not
have an impact on our condensed consolidated financial statements.
Item 3. Quantitative and Qualitative Disclosures about Market Risk
Interest Rate Risk. We are exposed to interest rate changes in connection with the
Revolver, which is available but is not regularly used to maintain liquidity and fund
capital expenditures and operations. Our interest rate risk management objective is to
limit the impact of interest rate changes on earnings and cash flows and to provide more
predictability to our overall borrowing costs. To achieve this objective, we borrow
primarily at fixed rates, although the Revolver is available and could be used for
short-term borrowing purposes. At June 30, 2010, we had no outstanding floating rate
debt.
Our cash and cash equivalents as of June 30, 2010 consisted of bank term deposits,
money market funds and treasury bill related investments. In addition, as of June 30,
2010, we held debt security investments of approximately $12.1 million which are
guaranteed by the Federal Deposit Insurance Corporation (FDIC) under the Temporary
Liquidity Guarantee Program upon maturity. Our market risk exposure is interest income
sensitivity, which is affected by changes in the general level of U.S. interest rates.
The primary objective of our investment activities is to preserve principal while at the
same time maximizing the income we receive from our investments without significantly
increasing risk. Due to the low risk profile of our investment portfolio, an immediate
10% change in interest rates would not have a material effect on the fair market value of
our portfolio. Accordingly, we would not expect our operating results or cash flows to be
affected to any significant degree by the effect of a sudden change in market interest
rates on our securities portfolio.
The above only incorporates those exposures that existed as of June 30, 2010, and
does not consider those exposures or positions which could arise after that date. If we
diversify our investment portfolio into securities and other investment alternatives, we
may face increased risk and exposures as a result of interest risk and the securities
markets in general.
Item 4. Controls and Procedures
Disclosure Controls and Procedures
Under the supervision and with the participation of our management, including the
Chief Executive Officer and Chief Financial Officer, we have evaluated the effectiveness
of our disclosure controls and procedures (as such term is defined in Rules 13a-15(e) and
15d-15(e) under the Securities Exchange Act of 1934, as amended (Exchange Act)), as of
the end of the period covered by this report. Based on that evaluation, the Chief
Executive Officer and Chief Financial Officer have concluded that these disclosure
controls and procedures are effective.
There were no changes in our internal control over financial reporting (as such term
is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) that occurred during
the three months ended June 30, 2010, that have materially affected, or are reasonably
likely to materially affect, our internal control over financial reporting.
43
Part II. Other Information
Item 1. Legal Proceedings
Certain legal proceedings in which we are involved are discussed in Part I, Item 3,
of our Annual Report on Form 10-K for the year ended December 31, 2009. In addition, for
more information regarding our legal proceedings, please see Note 14 included in Part 1,
Item 1 of this Form 10-Q.
We are party to various legal actions and administrative proceedings and are subject
to various claims arising in the ordinary course of business, including claims that our
services have resulted in injury or death to the residents of our facilities and claims
related to employment and commercial matters. Although we intend to vigorously defend
ourselves in these matters, there can be no assurance that the outcomes of these matters
will not have a material adverse effect on our results of operations and financial
condition. In most states in which we have operations, insurance coverage for the risk of
punitive damages arising from general and professional liability litigation may not be
available due to state law public policy prohibitions. As such, we do not carry insurance
coverage for punitive damages. There can be no assurance that we will not be liable for
punitive damages awarded in litigation or that such an award if rendered would not have a
material and adverse impact on our earnings or prospects.
We operate in an industry that is extremely regulated. As such, in the ordinary
course of business, we are continuously subject to state and federal regulatory scrutiny,
supervision and control. Such regulatory scrutiny often includes inquiries,
investigations, examinations, audits, site visits and surveys, some of which are
non-routine. In addition to being subject to direct regulatory oversight of state and
federal regulatory agencies, our industry is frequently subject to the regulatory
practices, which could subject us to civil, administrative or criminal fines, penalties
or restitutionary relief, and reimbursement authorities could also seek the suspension or
exclusion of the provider or individual from participation in their program. We believe
that there has been, and will continue to be, an increase in governmental investigations
of long-term care providers, particularly in the area of Medicare/Medicaid false claims,
as well as an increase in enforcement actions resulting from these investigations.
Adverse discriminations in legal proceedings or governmental investigations, whether
currently asserted or arising in the future, could have a material adverse effect on our
financial position, results of operations and cash flows.
Item 1A. Risk Factors
Our operations and financial results are subject to various risks and uncertainties,
including those described below, that could adversely affect our business, financial
condition, results of operations, cash flows, and trading price of our common stock.
Please refer also to our Annual Report on Form 10-K (File No. 001-33757) for additional
information concerning these and other uncertainties that could negatively impact the
Company.
Risks Related to Our Business and Industry
Our revenue could be impacted by federal and state changes to reimbursement and other
aspects of Medicaid and Medicare.
We derived approximately 44% and 43% of our revenue from the Medicaid program during
the three and six months ended June 30, 2010, respectively, and approximately 42% of our
revenue for both periods during the three and six months ended June 30, 2009,
respectively. We derived approximately 32% and 33% of our revenue from the Medicare
program during the three and six months ended June 30, 2010, respectively, and
approximately 33% for both periods during the three and six months ended June 30, 2009,
respectively. If reimbursement rates under these programs are reduced or fail to increase
as quickly as our costs, or if there are changes in the way these programs pay for
services, our business and results of operations would be adversely affected. The
services for which we are currently reimbursed by Medicaid and Medicare may not continue
to be reimbursed at adequate levels or at all. Further limits on the scope of services
being reimbursed, delays or reductions in reimbursement or changes in other aspects of
reimbursement could impact our revenue. For example, in the past, the enactment of the
Deficit Reduction Act of 2005 (DRA), the Medicaid Voluntary Contribution and
Provider-Specific Tax Amendments of 1991 and the Balanced Budget Act of 1997 (BBA) caused
changes in government reimbursement systems, which, in some cases, made obtaining
reimbursements more difficult and costly and lowered or restricted reimbursement rates
for some of our residents.
44
The Medicaid and Medicare programs are subject to statutory and regulatory changes
affecting base rates or basis of payment, retroactive rate adjustments, annual caps that
limit the amount that can be paid (including deductible and coinsurance amounts) for
rehabilitation therapy services rendered to Medicare beneficiaries, administrative or
executive orders and government funding restrictions, all of which may materially
adversely affect the rates and frequency at which these programs reimburse us for our
services. For example, the Medicaid Integrity Contractor (MIC) program is increasing the
scrutiny placed on Medicaid payments, and could result in recoupments of alleged
overpayments in an effort to rein in Medicaid spending. The Mid-Session Review of the
presidential budget submitted for federal fiscal year 2010 included, through federal
fiscal year 2014, $490.0 million in savings from improving Medicare and Medicaid program
integrity, and another $175.0 million in Medicaid savings through implementation of
coding edits to ensure appropriate Medicaid payments. It is uncertain what proportion
of these estimated cost savings will come from recoupments against long-term care
facilities. However, despite the savings projected from effectively reducing payments to
Medicaid providers, the Mid-Session Review of the presidential budget submitted for
federal fiscal year 2010 also included an outlay of $1.5 billion for Medicaid spending
through federal fiscal year 2010. The federal share of current law Medicaid outlays is
expected to be $248.0 billion, a $26.0 billion increase over projected fiscal year 2009
spending. Some of the projected increases in Medicaid outlays are pursuant to the
American Recovery and Reinvestment Act passed in February 2009, which contained several
temporary measures expected to increase Medicaid expenditures. In order to qualify for
increases in Medicaid matching funds from the federal government, states must refrain
from implementing eligibility standards, methodologies or procedures that are more
restrictive than those in effect as of July 1, 2008. Implementation of these and other
measures to reduce or delay reimbursement could result in substantial reductions in our
revenue and profitability. Payors may disallow our requests for reimbursement based on
determinations that certain costs are not reimbursable or reasonable because either
adequate or additional documentation was not provided or because certain services were
not covered or considered reasonably necessary. Additionally, revenue from these payors
can be retroactively adjusted after a new examination during the claims settlement
process or as a result of post-payment audits. New legislation and regulatory proposals
could impose further limitations on government payments to healthcare providers.
Our future revenue, financial condition and results of operations could be impacted by
continued cost containment pressures on Medicaid spending.
Medicaid, which is largely administered by the states, is a significant payor for
our skilled nursing services. Rapidly increasing Medicaid spending, combined with slow
state revenue growth, has led many states to institute measures aimed at controlling
spending growth. For example, in February 2009, the California legislature approved a new
budget to help relieve a $42 billion budget deficit. The budget package was signed after
months of negotiation, during which time Californias governor
declared a fiscal state of emergency in California. The new budget implements
spending cuts in several areas, including Medi-Cal spending. Some of the spending cuts
are triggered only if an inadequate amount of federal funding is received from the
American Recovery and Reinvestment Act of 2009 described above. Further, California
initially had extended its cost-based Medi-Cal long-term care reimbursement system
enacted through Assembly Bill 1629 (A.B.1629) through the 2009-2010 and 2010-2011 rate
years with a growth rate of up to five percent for both years. However, due to
Californias severe budget crisis, in July 2009, the State passed a budget-balancing
proposal that eliminated this five percent growth cap by amending the current statute to
provide that, for the 2009-2010 and 2010-2011 rate years, the weighted average Medi-Cal
reimbursement rate paid to long-term care facilities shall not exceed the weighted
average Medi-Cal reimbursement rate for the 2008-2009 rate year. In addition, the budget
proposal increased the amounts that California nursing facilities will pay to Medi-Cal in
quality assurance fees for the 2009-2010 and 2010-2011 rate years by including Medicare
revenue in the calculation of the quality assurance fee that nursing facilities pay under
A.B. 1629. Although overall reimbursement from Medi-Cal remained stable, individual
facility rates varied. Because state legislatures control the amount of state funding for
Medicaid programs, cuts or delays in approval of such funding by legislatures could
reduce the amount of, or cause a delay in, payment from Medicaid to skilled nursing
facilities. We expect continuing cost containment pressures on Medicaid outlays for
skilled nursing facilities, and any such decline could adversely affect our financial
condition and results of operations.
To generate funds to pay for the increasing costs of the Medicaid program, many
states utilize financial arrangements such as provider taxes. Under provider tax
arrangements, states collect taxes or fees from healthcare providers and then return the
revenue to these providers as Medicaid expenditures. Congress, however, has placed
restrictions on states use of provider tax and donation programs as a source of state
matching funds. Under the Medicaid Voluntary Contribution and Provider-Specific Tax
Amendments of 1991, the federal medical assistance percentage available to a state was
reduced by the total amount of healthcare related taxes that the state imposed, unless
certain requirements are met. The federal medical assistance percentage is not reduced if
the state taxes are broad-based and not applied specifically to Medicaid reimbursed
services. In addition, the healthcare providers receiving Medicaid reimbursement must be
at risk for the amount of tax assessed and must not be guaranteed to receive
reimbursement through the applicable state Medicaid program for the tax assessed. Lower
Medicaid reimbursement rates would adversely affect our revenue, financial condition and
results of operations.
Our hospice operations are subject to annual Medicare caps calculated by Medicare. If
such caps were to be exceeded by any of our hospice providers, our business and
consolidated financial condition, results of operations and cash flows could be
materially adversely affected.
With respect to our hospice operations, overall payments made by Medicare to each
provider number are subject to an inpatient cap amount and an overall payment cap, which
are calculated and published by the Medicare fiscal intermediary on an annual basis
covering the period from November 1 through October 31. If payments received by any one
of our hospice provider numbers exceeds either of these caps, we may be required to
reimburse Medicare for payments received in excess of the caps, which could have a
material adverse effect on our business and consolidated financial condition, results of
operations and cash flows.
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We may not be fully reimbursed for all services for which each facility bills through
consolidated billing, which could adversely affect our revenue, financial condition and
results of operations.
Skilled nursing facilities are required to perform consolidated billing for certain
items and services furnished to patients and residents. The consolidated billing
requirement essentially confers on the skilled nursing facility itself the Medicare
billing responsibility for the entire package of care that its residents receive in these
situations. The BBA also affected skilled nursing facility payments by requiring that
post-hospitalization skilled nursing services be bundled into the hospitals Diagnostic
Related Group (DRG) payment in certain circumstances. Where this rule applies, the
hospital and the skilled nursing facility must, in effect, divide the payment which
otherwise would have been paid to the hospital alone for the patients treatment, and no
additional funds are paid by Medicare for skilled nursing care of the patient. At
present, this provision applies to a limited number of DRGs, but already is apparently
having a negative effect on skilled nursing facility utilization and payments, either
because hospitals are finding it difficult to place patients in skilled nursing
facilities which will not be paid as before or because hospitals are reluctant to
discharge the patients to skilled nursing facilities and lose part of their payment. This
bundling requirement could be extended to more DRGs in the future, which would accentuate
the negative impact on skilled nursing facility utilization and payments. We may not be
fully reimbursed for all services for which each facility bills through consolidated
billing, which could adversely affect our revenue, financial condition and results of
operations.
Reforms to the U.S. healthcare system will impose new requirements upon us and may lower
our reimbursements.
The Patient Protection and Affordable Care Act (the Affordable Care Act) and the
Health Care and Education Reconciliation Act of 2010 (the Reconciliation Act) were
recently enacted as new laws. These new laws include sweeping changes to how health care
is paid for and furnished in the United States.
The Affordable Care Act, as modified by the Reconciliation Act, is projected to
expand access to Medicaid and thereby expand eligibility to approximately 16 million
people. However, the Affordable Care Act will also reduce the projected growth of
Medicare by $500 billion over ten years by tying payments to providers more closely to
quality outcomes. The Affordable
Care Act also imposes new obligations on skilled nursing facilities, requiring them
to disclose information regarding ownership, expenditures and certain other
accountability requirements. This information will be disclosed on a website for
comparison by members of the public.
To address fraud and abuse of federal health care programs, including Medicare and
Medicaid, the Affordable Care Act includes provider screening and enhanced oversight
periods for new providers and suppliers, as well as enhanced penalties for submitting
false claims and provide funding for enhanced anti-fraud activities. The new law imposes
enrollment moratoria in elevated risk areas by requiring providers and suppliers to
establish compliance programs.
In addition, on October 1, 2010, the next generation of the Minimum Data Set (MDS),
MDS 3.0, will be implemented, creating significant changes in the methodology for
calculating the RUG-IV category under Medicare Part A, most notably eliminating
Section T. Because therapy does not necessarily begin upon admission, MDS 2.0 and the
RUG-III system included a provision to capture therapy services that are scheduled to
occur but have not yet been provided in order to calculate a RUG level that better
reflects the intensity of care the resident would actually receive. This is eliminated
with MDS 3.0 and RUG-IV, which create a new category of assessment called the Medicare
Short Stay Assessment. This assessment provides for calculation of a rehabilitation RUG
for residents discharged on or before day eight who received less than five days of
therapy.
We cannot predict what effect these changes will have on our business, including the
demand for our services or the amount of reimbursement available for those services.
However, it is possible these new laws may lower reimbursement and adversely affect our
business.
Increased competition for, or a shortage of, nurses and other skilled personnel could
increase our staffing and labor costs and subject us to monetary fines.
Our success depends upon our ability to retain and attract nurses, Certified Nurse
Assistants (CNAs) and therapists. Our success also depends upon our ability to retain and
attract skilled management personnel who are responsible for the day-to-day operations of
each of our facilities. Each facility has a facility leader responsible for the overall
day-to-day operations of the facility, including quality of care, social services and
financial performance. Depending upon the size of the facility, each facility leader is
supported by facility staff that is directly responsible for day-to-day care of the
patients and marketing and community outreach programs. Other key positions supporting
each facility may include individuals responsible for physical, occupational and speech
therapy, food service and maintenance. We compete with various healthcare service
providers, including other skilled nursing providers, in retaining and attracting
qualified and skilled personnel.
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We operate one or more skilled nursing facilities in the states of California,
Arizona, Texas, Washington, Utah, Colorado and Idaho. With the exception of Utah, which
follows federal regulations, each of these states has established minimum staffing
requirements for facilities operating in that state. Failure to comply with these
requirements can, among other things, jeopardize a facilitys compliance with the
conditions of participation under relevant state and federal healthcare programs. In
addition, if a facility is determined to be out of compliance with these requirements, it
may be subject to a notice of deficiency, a citation, or a significant fine or litigation
risk. For example, we are aware of one company in our industry that is subject to a
substantial judgment as a result of not complying with minimum staffing laws.
Deficiencies may also result in the suspension of patient admissions and/or the
termination of Medicaid participation, or the suspension, revocation or nonrenewal of the
skilled nursing facilitys license. If the federal or state governments were to issue
regulations which materially change the way compliance with the minimum staffing standard
is calculated or enforced, our labor costs could increase and the current shortage of
healthcare workers could impact us more significantly.
Increased competition for or a shortage of nurses or other trained personnel, or general
inflationary pressures may require that we enhance our pay and benefits packages to
compete effectively for such personnel. We may not be able to offset such added costs by
increasing the rates we charge to our patients. Turnover rates and the magnitude of the
shortage of nurses or other trained personnel vary substantially from facility to
facility. An increase in costs associated with, or a shortage of, skilled nurses, could
negatively impact our business. In addition, if we fail to attract and retain qualified
and skilled personnel, our ability to conduct our business operations effectively would
be harmed.
We are subject to various government reviews, audits and investigations that could
adversely affect our business, including an obligation to refund amounts previously paid
to us, potential criminal charges, the imposition of fines, and/or the loss of our right
to participate in Medicare and Medicaid programs.
As a result of our participation in the Medicaid and Medicare programs, we are
subject to various governmental reviews, audits and investigations to verify our
compliance with these programs and applicable laws and regulations. Private pay sources
also reserve the right to conduct audits. We believe that billing and reimbursement
errors and disagreements are common in our industry. We are regularly engaged in reviews,
audits and appeals of our claims for reimbursement due to the subjectivities inherent in
the process related to patient diagnosis and care, record keeping, claims processing and
other aspects of the patient service and reimbursement processes, and the errors and
disagreements those subjectivities can produce. An adverse review, audit or investigation
could result in:
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an obligation to refund amounts previously paid to us pursuant to the
Medicare or Medicaid programs or from private payors, in amounts that
could be material to our business; |
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state or federal agencies imposing fines, penalties and other sanctions on us; |
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loss of our right to participate in the Medicare or Medicaid programs or one or more private payor networks; |
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an increase in private litigation against us; and |
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damage to our reputation in various markets. |
In 2004, one of our Medicare fiscal intermediaries began to conduct selected reviews
of claims previously submitted by and paid to some of our facilities. While we have
always been subject to post-payment audits and reviews, more intensive probe reviews
appear to be a permanent procedure with our fiscal intermediary. Although some of these
probe reviews identified patient miscoding, documentation deficiencies and other errors
in our recordkeeping and Medicare billing, these errors resulted in no Medicare revenue
recoupment, net of appeal recoveries, to the federal government and related resident
copayments during the six months ended June 30, 2010 and year ended December 31, 2009,
respectively.
If the government or court were to conclude that such errors and deficiencies
constituted criminal violations, or were to conclude that such errors and deficiencies
resulted in the submission of false claims to federal healthcare programs, or if it were
to discover other problems in addition to the ones identified by the probe reviews that
rose to actionable levels, we and certain of our officers might face potential criminal
charges and/or civil claims, administrative sanctions and penalties for amounts that
could be material to our business, results of operations and financial condition. In
addition, we and/or some of our key personnel could be temporarily or permanently
excluded from future participation in state and federal healthcare reimbursement programs
such as Medicaid and Medicare. In any event, it is likely that a governmental
investigation alone, regardless of its outcome, would divert material time, resources and
attention from our management team and our staff, and could have a materially detrimental
impact on our results of operations during and after any such investigation or
proceedings.
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In some cases, probe reviews can also result in a facility being temporarily placed
on prepayment review of reimbursement claims, requiring additional documentation and
adding steps and time to the reimbursement process for the affected facility. Failure to
meet claim filing and documentation requirements during the prepayment review could
subject a facility to an even more intensive targeted review, where a corrective action
plan addressing perceived deficiencies must be prepared by the facility and approved by
the fiscal intermediary. During a targeted review, additional claims are reviewed
pre-payment to ensure that the prescribed corrective actions are being followed. Failure
to make corrections or to otherwise meet the claim documentation and submission
requirements could eventually result in Medicare decertification. None of our operations
are currently on prepayment review, and others may be placed on prepayment review in the
future. We have no operations that are currently undergoing targeted review.
Separately, in 2006, the federal government introduced a program that utilizes
independent contractors (other than the fiscal intermediaries) known as recovery audit
contractors to identify and recoup Medicare overpayments. These recovery audit
contractors are paid a contingent fee based on recoupments. In October 2008, this program
was permanently implemented and requires the expansion of the program to all 50 states by
no later than 2010. We anticipate that the number of overpayment reviews will increase in
the future, and that the reviewers could be more aggressive in making claims for
recoupment. In 2006, one of our facilities was subjected to review under this program,
resulting in a recoupment to the federal government of approximately $12,000. If future
Medicare reviews result in significant refund payments to the federal government, it
would have an adverse effect on our financial results.
Annual caps that limit the amounts that can be paid for outpatient therapy services
rendered to any Medicare beneficiary may reduce our future revenue and profitability or
cause us to incur losses.
Some of our rehabilitation therapy revenue is paid by the Medicare Part B program
under a fee schedule. Congress has established annual caps that limit the amounts that
can be paid (including deductible and coinsurance amounts) for rehabilitation therapy
services rendered to any Medicare beneficiary under Medicare Part B. The BBA requires a
combined cap for physical therapy and speech-language pathology and a separate cap for
occupational therapy. Due to a series of moratoria enacted subsequent to the BBA, the
caps were only in effect in 1999 and for a few months in 2003. With the expiration of the
most recent moratorium, the caps were reinstated on January 1, 2006 at $1,740 for
physical therapy and speech therapy, and $1,740 for occupational therapy. Each of these
caps increased to $1,780 on January 1, 2007, $1,810 on January 1, 2008 and $1,840 on
January 1, 2009.
The DRA directs CMS to create a process to allow exceptions to therapy caps for
certain medically necessary services provided on or after January 1, 2006 for patients
with certain conditions or multiple complexities whose therapy services are reimbursed
under Medicare Part B. A significant portion of the residents in our skilled nursing
facilities and patients served by our rehabilitation therapy programs whose therapy is
reimbursed under Medicare Part B have qualified for the exceptions to these reimbursement
caps. The Deficit Reduction Act of 2005 (DRA) added Sec. 1833(g)(5) of the Social
Security Act and
directed the Centers for Medicare and Medicaid Services to develop a process that
allows exceptions for Medicare beneficiaries to therapy caps when continued therapy is
deemed medically necessary. The therapy cap exception was reauthorized in a number of
subsequent laws, most recently as part of the Affordable Care Act, which extended the
exception from January 1, 2010, to December 31, 2010.
The application of annual caps, or the discontinuation of exceptions to the annual
caps, could have an adverse effect on our rehabilitation therapy revenue. Additionally,
the exceptions to these caps may not be extended beyond December 31, 2010, which could
also have an adverse effect on our revenue after that date.
We are subject to extensive and complex federal and state government laws and regulations
which could change at any time and increase our cost of doing business and subject us to
enforcement actions.
We, along with other companies in the healthcare industry, are required to comply
with extensive and complex laws and regulations at the federal, state and local
government levels relating to, among other things:
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facility and professional licensure, certificates of need, permits and other government approvals; |
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adequacy and quality of healthcare services; |
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qualifications of healthcare and support personnel; |
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quality of medical equipment; |
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confidentiality, maintenance and security issues associated with medical records and claims processing; |
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relationships with physicians and other referral sources and recipients; |
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constraints on protective contractual provisions with patients and third-party payors; |
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operating policies and procedures; |
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certification of additional facilities by the Medicare program; and |
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payment for services. |
The laws and regulations governing our operations, along with the terms of
participation in various government programs, regulate how we do business, the services
we offer, and our interactions with patients and other healthcare providers. These laws
and regulations are subject to frequent change. We believe that such regulations may
increase in the future and we cannot predict the ultimate content, timing or impact on us
of any healthcare reform legislation. Changes in existing laws or regulations, or the
enactment of new laws or regulations, could negatively impact our business. If we fail to
comply with these applicable laws and regulations, we could suffer civil or criminal
penalties and other detrimental consequences, including denial of reimbursement,
imposition of fines, temporary suspension of admission of new patients, suspension or
decertification from the Medicaid and Medicare programs, restrictions on our ability to
acquire new facilities or expand or operate existing facilities, the loss of our licenses
to operate and the loss of our ability to participate in federal and state reimbursement
programs.
We are subject to federal and state laws, such as the Federal False Claims Act,
state false claims acts, the illegal remuneration provisions of the Social Security Act,
the federal anti-kickback laws, state anti-kickback laws, and the federal Stark laws,
that govern financial and other arrangements among healthcare providers, their owners,
vendors and referral sources, and that are intended to prevent healthcare fraud and
abuse. Among other things, these laws prohibit kickbacks, bribes and rebates, as well as
other direct and indirect payments or fee-splitting arrangements that are designed to
induce the referral of patients to a particular provider for medical products or services
payable by any federal healthcare program, and prohibit presenting a false or misleading
claim for payment under a federal or state program. They also prohibit some physician
self-referrals. Possible sanctions for violation of any of these restrictions or
prohibitions include loss of eligibility to participate in federal and state
reimbursement programs and civil and criminal penalties. Changes in these laws could
increase our cost of doing business. If we fail to comply, even inadvertently, with any
of these requirements, we could be required to alter our operations, refund payments to
the government, enter into corporate integrity, deferred prosecution or similar
agreements with state or federal government agencies, and become subject to significant
civil and criminal penalties.
In May 2009, Congress passed the Fraud Enforcement and Recovery Act (FERA) of 2009
which made significant changes to the federal False Claims Act (FCA), expanding the types
of activities subject to prosecution and whistleblower liability. Following changes by
FERA, health care providers face significant penalties for the knowing retention of
government overpayments, even if no false claim was involved. Health care providers can
now be liable for knowingly and improperly
avoiding or decreasing an obligation to pay money or property to the government.
This includes the retention of any government overpayment. The government can argue,
therefore, that a FCA violation can occur without any affirmative fraudulent action or
statement, as long as it is knowingly improper. In addition, FERA extended protections
against retaliation for whistleblowers, including protections not only for employees, but
also contractors and agents. Thus, there is no need for an employment relationship in
order to qualify for protection against retaliation for whistleblowing.
We are also required to comply with state and federal laws governing the
transmission, privacy and security of health information. The Health Insurance
Portability and Accountability Act of 1996 (HIPAA) requires us to comply with certain
standards for the use of individually identifiable health information within our company,
and the disclosure and electronic transmission of such information to third parties, such
as payors, business associates and patients. These include standards for common
electronic healthcare transactions and information, such as claim submission, plan
eligibility determination, payment information submission and the use of electronic
signatures; unique identifiers for providers, employers and health plans; and the
security and privacy of individually identifiable health information. In addition, some
states have enacted comparable or, in some cases, more stringent privacy and security
laws. If we fail to comply with these state and federal laws, we could be subject to
criminal penalties and civil sanctions and be forced to modify our policies and
procedures.
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Our failure to obtain or renew required regulatory approvals or licenses or to
comply with applicable regulatory requirements, the suspension or revocation of our
licenses or our disqualification from participation in federal and state reimbursement
programs, or the imposition of other harsh enforcement sanctions could increase our cost
of doing business and expose us to potential sanctions. Furthermore, if we were to lose
licenses or certifications for any of our facilities as a result of regulatory action or
otherwise, we could be deemed to be in default under some of our agreements, including
agreements governing outstanding indebtedness and lease obligations.
Any changes in the interpretation and enforcement of the laws or regulations governing
our business could cause us to modify our operations, increase our cost of doing business
and subject us to potential regulatory action.
The interpretation and enforcement of federal and state laws and regulations
governing our operations, including, but not limited to the laws describe above, are
subject to frequent change. Governmental authorities may interpret these laws in a manner
inconsistent with our interpretation and application. If we fail to comply, even
inadvertently, with any of these requirements, we could be required to alter our
operations and reduce, forego or refund reimbursements to the government, or incur other
significant penalties. We could also be compelled to divert personnel and other resources
to responding to an investigation or other enforcement action under these laws or
regulations, or to ongoing compliance with a corporate integrity agreement, deferred
prosecution agreement, court order or similar agreement. The diversion of these
resources, including our management team, clinical and compliance staff, and others,
would take away from the time and energy these individuals devote to routine operations.
We are unable to predict the intensity of federal and state enforcement actions or
the areas in which regulators may choose to focus their investigations at any given time.
Changes in government agency interpretation of applicable regulatory requirements, or
changes in enforcement methodologies, including increases in the scope and severity of
deficiencies determined by survey or inspection officials, could increase our cost of
doing business. Furthermore, should we lose licenses or certifications for any of our
facilities as a result of changing regulatory interpretations, enforcement actions or
otherwise, we could be deemed to be in default under some of our agreements, including
agreements governing outstanding indebtedness and lease obligations.
Increased civil and criminal enforcement efforts of government agencies against skilled
nursing facilities could harm our business, and could preclude us from participating in
federal healthcare programs.
Both federal and state government agencies have heightened and coordinated civil and
criminal enforcement efforts as part of numerous ongoing investigations of healthcare
companies and, in particular, skilled nursing facilities. The focus of these
investigations includes, among other things:
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cost reporting and billing practices; |
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quality of care; |
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financial relationships with referral sources; and |
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medical necessity of services provided. |
If any of our facilities is decertified or loses its licenses, our revenue,
financial condition or results of operations would be adversely affected. In addition,
the report of such issues at any of our facilities could harm our reputation for quality
care and lead to a reduction in our patient referrals and ultimately a reduction in
occupancy at these facilities. Also, responding to enforcement efforts would divert
material time, resources and attention from our management team and our staff, and could
have a materially detrimental impact on our results of operations during and after any
such investigation or proceedings, regardless of whether we prevail on the underlying
claim.
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Federal law provides that practitioners, providers and related persons may not
participate in most federal healthcare programs, including the Medicaid and Medicare
programs, if the individual or entity has been convicted of a criminal offense related to
the delivery of a product or service under these programs or if the individual or entity
has been convicted under state or federal law of a criminal offense relating to neglect
or abuse of patients in connection with the delivery of a healthcare product or service.
Other individuals or entities may be, but are not required to be, excluded from such
programs under certain circumstances, including, but not limited to, the following:
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conviction related to fraud; |
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conviction relating to obstruction of an investigation; |
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conviction relating to a controlled substance; |
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licensure revocation or suspension; |
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exclusion or suspension from state or other federal healthcare programs; |
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filing claims for excessive charges or unnecessary services or failure to furnish medically necessary services; |
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ownership or control of an entity by an individual who has been excluded from the Medicaid or Medicare
programs, against whom a civil monetary penalty related to the Medicaid or Medicare programs has been assessed
or who has been convicted of a criminal offense under federal healthcare programs; and |
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the transfer of ownership or control interest in an entity to an immediate family or household member in
anticipation of, or following, a conviction, assessment or exclusion from the Medicare or Medicaid programs. |
The Office of Inspector General (OIG), among other priorities, is responsible for
identifying and eliminating fraud, abuse and waste in certain federal healthcare
programs. The OIG has implemented a nationwide program of audits, inspections and
investigations and from time to time issues fraud alerts to segments of the healthcare
industry on particular practices that are vulnerable to abuse. The fraud alerts inform
healthcare providers of potentially abusive practices or transactions that are subject to
criminal activity and reportable to the OIG. An increasing level of resources has been
devoted to the investigation of allegations of fraud and abuse in the Medicaid and
Medicare programs, and federal and state regulatory authorities are taking an
increasingly strict view of the requirements imposed on healthcare providers by the
Social Security Act and Medicaid and Medicare programs. Although we have created a
corporate compliance program that we believe is consistent with the OIG guidelines, the
OIG may modify its guidelines or interpret its guidelines in a manner inconsistent with
our interpretation or the OIG may ultimately determine that our corporate compliance
program is insufficient.
In some circumstances, if one facility is convicted of abusive or fraudulent
behavior, then other facilities under common control or ownership may be decertified from
participating in Medicaid or Medicare programs. Federal regulations prohibit any
corporation or facility from participating in federal contracts if it or its principals
have been barred, suspended or declared ineligible from participating in federal
contracts. In addition, some state regulations provide that all facilities under common
control or ownership licensed within a state may be de-licensed if one or more of the
facilities are de-licensed. If any of our facilities were decertified or excluded from
participating in Medicaid or Medicare programs, our revenue would be adversely affected.
Public and governmental calls for increased survey and enforcement efforts against
long-term care facilities could result in increased scrutiny by state and federal survey
agencies.
CMS has undertaken several initiatives to increase or intensify Medicaid and
Medicare survey and enforcement activities, including federal oversight of state actions.
CMS is taking steps to focus more survey and enforcement efforts on facilities with
findings of substandard care or repeat violations of Medicaid and Medicare standards, and
to identify multi-facility providers with patterns of noncompliance. In addition, the
Department of Health and Human Services has adopted a rule that requires CMS to charge
user fees to healthcare facilities cited during regular certification, recertification or
substantiated complaint surveys for deficiencies, which require a revisit to assure that
corrections have been made. CMS is also increasing its oversight of state survey agencies
and requiring state agencies to use enforcement sanctions and remedies more promptly when
substandard care or repeat violations are identified, to investigate complaints more
promptly, and to survey facilities more consistently.
In addition, CMS has adopted, and is considering additional regulations expanding
federal and state authority to impose civil monetary penalties in instances of
noncompliance. When a facility is found to be deficient under state licensing and
Medicaid and Medicare standards, sanctions may be threatened or imposed such as
denial of payment for new Medicaid and Medicare admissions, civil monetary penalties,
focused state and federal oversight and even loss of eligibility for Medicaid and
Medicare participation or state licensure. Sanctions such as denial of payment for new
admissions often are scheduled to go into effect before surveyors return to verify
compliance. Generally, if the surveyors confirm that the facility is in compliance upon
their return, the sanctions never take effect. However, if they determine that the
facility is not in compliance, the denial of payment goes into effect retroactive to the
date given in the original notice. This possibility sometimes leaves affected operators,
including us, with the difficult task of deciding whether to continue accepting patients
after the potential denial of payment date, thus risking the retroactive denial of
revenue associated with those patients care if the operators are later found to be out
of compliance, or simply refusing admissions from the potential denial of payment date
until the facility is actually found to be in compliance.
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Facilities with otherwise acceptable regulatory histories generally are given an
opportunity to correct deficiencies and continue their participation in the Medicare and
Medicaid programs by a certain date, usually within six months, although where denial of
payment remedies are asserted, such interim remedies go into effect much sooner.
Facilities with deficiencies that immediately jeopardize patient health and safety and
those that are classified as poor performing facilities, however, are not generally given
an opportunity to correct their deficiencies prior to the imposition of remedies and
other enforcement actions. Moreover, facilities with poor regulatory histories continue
to be classified by CMS as poor performing facilities notwithstanding any intervening
change in ownership, unless the new owner obtains a new Medicare provider agreement
instead of assuming the facilitys existing agreement. However, new owners (including us,
historically) nearly always assume the existing Medicare provider agreement due to the
difficulty and time delays generally associated with obtaining new Medicare
certifications, especially in previously-certified locations with sub-par operating
histories. Accordingly, facilities that have poor regulatory histories before we acquire
them and that develop new deficiencies after we acquire them are more likely to have
sanctions imposed upon them by CMS or state regulators. In addition, CMS has increased
its focus on facilities with a history of serious quality of care problems through the
special focus facility initiative. A facilitys administrators and owners are notified
when it is identified as a special focus facility. This information is also provided to
the general public. The special focus facility designation is based in part on the
facilitys compliance history typically dating before our acquisition of the facility.
Local state survey agencies recommend to CMS that facilities be placed on special focus
status. A special focus facility receives heightened scrutiny and more frequent
regulatory surveys. Failure to improve the quality of care can result in fines and
termination from participation in Medicare and Medicaid. A facility graduates from the
program once it demonstrates significant improvements in quality of care that are
continued over time. We have had several facilities placed on special focus facility
status, due largely or entirely to their respective regulatory histories prior to our
acquisition of the operations, and have successfully graduated three facilities from the
program to date. We currently have two facilities operating under special focus status,
and the state survey agency has indicated that some or all of the historical
non-compliance considered in placing one of these facilities on special focus status
predated our late 2006 acquisitions of the facility. In addition, one facility was placed
on special focus status prior to our acquisition of that facility on October 1, 2009.
State efforts to regulate or deregulate the healthcare services industry or the
construction or expansion of healthcare facilities could impair our ability to expand our
operations, or could result in increased competition.
Some states require healthcare providers, including skilled nursing facilities, to
obtain prior approval, known as a certificate of need, for:
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In addition, other states that do not require certificates of need have effectively
barred the expansion of existing facilities and the development of new ones by placing
partial or complete moratoria on the number of new Medicaid beds they will certify in
certain areas or in the entire state. Other states have established such stringent
development standards and approval procedures for constructing new healthcare facilities
that the construction of new facilities, or the expansion or renovation of existing
facilities, may become cost-prohibitive or extremely time-consuming. Our ability to
acquire or construct new facilities or expand or provide new services at existing
facilities would be adversely affected if we are unable to obtain the necessary
approvals, if there are changes in the standards applicable to those approvals, or if we
experience delays and increased expenses associated with obtaining those approvals. We
may not be able to obtain licensure, certificate of need approval, Medicaid
certification, or other necessary approvals for future expansion projects. Conversely,
the elimination or reduction of state regulations that limit the construction, expansion
or renovation of new or existing facilities could result in increased competition to us
or result in overbuilding of facilities in some of our markets. If overbuilding in the
skilled nursing industry in the markets in which we operate were to occur, it could
reduce the occupancy rates of existing facilities and, in some cases, might reduce the
private rates that we charge for our services.
52
Changes in federal and state employment-related laws and regulations could increase our
cost of doing business.
Our operations are subject to a variety of federal and state employment-related laws
and regulations, including, but not limited to, the U.S. Fair Labor Standards Act which
governs such matters as minimum wages, overtime and other working conditions, the
Americans with Disabilities Act (ADA) and similar state laws that provide civil rights
protections to individuals with disabilities in the context of employment, public
accommodations and other areas, the National Labor Relations Act, regulations of the
Equal Employment Opportunity Commission, regulations of the Office of Civil Rights,
regulations of state Attorneys General, family leave mandates and a variety of similar
laws enacted by the federal and state governments that govern these and other employment
law matters. Because labor represents such a large portion of our operating costs,
changes in federal and state employment-related laws and regulations could increase our
cost of doing business.
The compliance costs associated with these laws and evolving regulations could be
substantial. For example, all of our facilities are required to comply with the ADA. The
ADA has separate compliance requirements for public accommodations and commercial
properties, but generally requires that buildings be made accessible to people with
disabilities. Compliance with ADA requirements could require removal of access barriers
and non-compliance could result in imposition of government fines or an award of damages
to private litigants. Further legislation may impose additional burdens or restrictions
with respect to access by disabled persons. In addition, federal proposals to introduce a
system of mandated health insurance and flexible work time and other similar initiatives
could, if implemented, adversely affect our operations. We also may be subject to
employee-related claims such as wrongful discharge, discrimination or violation of equal
employment law. While we are insured for these types of claims, we could experience
damages that are not covered by our insurance policies or that exceed our insurance
limits, and we may be required to pay such damages directly, which would negatively
impact our cash flow from operations.
Compliance with federal and state fair housing, fire, safety and other regulations may
require us to make unanticipated expenditures, which could be costly to us.
We must comply with the federal Fair Housing Act and similar state laws, which
prohibit us from discriminating against individuals if it would cause such individuals to
face barriers in gaining residency in any of our facilities. Additionally, the Fair
Housing Act and other similar state laws require that we advertise our services in such a
way that we promote diversity and not limit it. We may be required, among other things,
to change our marketing techniques to comply with these requirements.
In addition, we are required to operate our facilities in compliance with applicable
fire and safety regulations, building codes and other land use regulations and food
licensing or certification requirements as they may be adopted by governmental agencies
and bodies from time to time. Like other healthcare facilities, our skilled nursing
facilities are subject to periodic surveys or inspections by governmental authorities to
assess and assure compliance with regulatory requirements. Surveys occur on a regular
(often annual or biannual) schedule, and special surveys may result from a specific
complaint filed by a patient, a family member or one of our competitors. We may be
required to make substantial capital expenditures to comply with these requirements.
We depend largely upon reimbursement from third-party payors, and our revenue, financial
condition and results of operations could be negatively impacted by any changes in the
acuity mix of patients in our facilities as well as payor mix and payment methodologies.
Our revenue is affected by the percentage of our patients who require a high level
of skilled nursing and rehabilitative care, whom we refer to as high acuity patients, and
by our mix of payment sources. Changes in the acuity level of patients we attract, as
well as our payor mix among Medicaid, Medicare, private payors and managed care
companies, significantly affect our profitability because we generally receive higher
reimbursement rates for high acuity patients and because the payors reimburse us at
different rates. For the six months ended June 30, 2010, approximately 76% of our revenue
was provided by government payors that reimburse us at predetermined rates. If our labor
or other operating costs increase, we will be unable to recover such increased costs from
government payors. Accordingly, if we fail to maintain our proportion of high acuity
patients or if there is any significant increase in the percentage of our patients for
whom we receive Medicaid reimbursement, our results of operations may be adversely
affected.
Initiatives undertaken by major insurers and managed care companies to contain
healthcare costs may adversely affect our business. These payors attempt to control
healthcare costs by contracting with healthcare providers to obtain services on a
discounted basis. We believe that this trend will continue and may limit reimbursements
for healthcare services. If insurers or managed care companies from whom we receive
substantial payments were to reduce the amounts they pay for services, we may lose
patients if we choose not to renew our contracts with these insurers at lower rates.
53
Compliance with state and federal employment, immigration, licensing and other laws could
increase our cost of doing business.
We have hired personnel, including skilled nurses and therapists, from outside the
United States. If immigration laws are changed, or if new and more restrictive government
regulations proposed by the Department of Homeland Security are enacted, our access to
qualified and skilled personnel may be limited.
We operate in at least one state that requires us to verify employment eligibility
using procedures and standards that exceed those required under federal Form I-9 and the
statutes and regulations related thereto. Proposed federal regulations would extend
similar requirements to all of the states in which our facilities operate. To the extent
that such proposed regulations or similar measures become effective, and we are required
by state or federal authorities to verify work authorization or legal residence for
current and prospective employees beyond existing Form I-9 requirements and other
statutes and regulations currently in effect, it may make it more difficult for us to
recruit, hire and/or retain qualified employees, may increase our risk of non-compliance
with state and federal employment, immigration, licensing and other laws and regulations
and could increase our cost of doing business.
We are subject to litigation that could result in significant legal costs and large
settlement amounts or damage awards.
The skilled nursing business involves a significant risk of liability given the age
and health of our patients and residents and the services we provide. We and others in
our industry are subject to a large and increasing number of claims and lawsuits,
including professional liability claims, alleging that our services have resulted in
personal injury, elder abuse, wrongful death or other related claims. The defense of
these lawsuits has in the past, and may in the future, result in significant legal costs,
regardless of the outcome, and can result in large settlement amounts or damage awards.
Plaintiffs tend to sue every healthcare provider who may have been involved in the
patients care and, accordingly, we respond to multiple lawsuits and claims every year.
In addition, plaintiffs attorneys have become increasingly more aggressive in their
pursuit of claims against healthcare providers, including skilled nursing providers and
other long-term care companies, and have employed a wide variety of advertising and
publicity strategies. Among other things, these strategies include establishing their own
Internet websites, paying for premium advertising space on other websites, paying
Internet search engines to optimize their plaintiff solicitation advertising so that it
appears in advantageous positions on Internet search results, including results from
searches for our company and facilities, using newspaper, magazine and television ads
targeted at customers of the healthcare industry generally, as well as at customers of
specific providers, including us. From time to time, law firms claiming to specialize in
long-term care litigation have named us, our facilities and other specific healthcare
providers and facilities in their advertising and solicitation materials. These
advertising and solicitation activities could result in more claims and litigation, which
could increase our liability exposure and legal expenses, divert the time and attention
of our personnel from day-to-day business operations, and materially and adversely affect
our financial condition and results of operations. Furthermore, to the extent the
frequency and/or severity of losses from such claims and suits increases, our liability
insurance premiums could increase and/or available insurance coverage levels could
decline, which could materially and adversely affect our financial condition and results
of operations.
Certain lawsuits filed on behalf of patients of long-term care facilities for
alleged negligence and/or alleged abuses have resulted in large damage awards against
other companies, both in and related to our industry. In addition, there has been an
increase in the number of class action suits filed against long-term and rehabilitative
care companies. A class action suit was previously filed against us alleging, among other
things, violations of certain California Health and Safety Code provisions and a
violation of the California Consumer Legal Remedies Act at certain of our facilities. We
settled this class action suit and this settlement was approved by the affected class and
the Court in April 2007. However, we could be subject to similar actions in the future,
which could subject us to large damage awards and settlements.
In addition, we contract with a variety of landlords, lenders, vendors, suppliers,
consultants and other individuals and businesses. These contracts typically contain
covenants and default provisions. If the other party to one or more of our contracts were
to allege that we have violated the contract terms, we could be subject to civil
liabilities which could have a material adverse effect on our financial condition and
results of operations.
Were litigation to be instituted against one or more of our subsidiaries, a
successful plaintiff might attempt to hold us or another subsidiary liable for the
alleged wrongdoing of the subsidiary principally targeted by the litigation. If a court
in such litigation decided to disregard the corporate form, the resulting judgment could
increase our liability and adversely affect our financial condition and results of
operations.
54
On February 26, 2009, Congress reintroduced the Fairness in Nursing Home Arbitration
Act of 2009. After failing to be enacted into law in the 110th Congress in 2008, the
Fairness in Nursing Home Arbitration Act of 2009 was introduced in the 111th Congress and
referred to the House and Senate judiciary committees in March 2009. If enacted, this
bill would require, among other things, that agreements to arbitrate nursing home
disputes be made after the dispute has arisen rather than before prospective residents
move in, to prevent nursing home operators and prospective residents from mutually
entering into a pre-admission pre-dispute arbitration agreement. We use arbitration
agreements, which have generally been favored by the courts, to streamline the dispute
resolution process and reduce our exposure to legal fees and excessive jury awards. If we
are not able to secure pre-admission arbitration agreements, our litigation exposure and
costs of defense in patient liability actions could increase, our liability insurance
premiums could increase, and our business may be adversely affected.
The U.S. Department of Justice is conducting an investigation into the billing and
reimbursement processes of some of our operating subsidiaries, which could adversely
affect our operations and financial condition.
In March 2007, we and certain of our officers received a series of notices from our
bank indicating that the United States Attorney for the Central District of California
had issued an authorized investigative demand, a request for records similar to a
subpoena, to our bank. The U.S. Attorney subsequently rescinded that demand. The
rescinded demand requested documents from our bank related to financial transactions
involving us, ten of our operating subsidiaries, an outside investor group, and certain
of our current and former officers. Subsequently, in June of 2007, the U.S. Attorney sent
a letter to one of our current employees requesting a meeting. The letter indicated that
the U.S. Attorney and the U.S. Department of Health and Human Services Office of
Inspector General were conducting an investigation of claims submitted to the Medicare
program for rehabilitation services provided at unspecified facilities. Although both we
and the employee offered to cooperate, the U.S. Attorney later withdrew its meeting
request.
On December 17, 2007, we were informed by Deloitte & Touche LLP, our independent
registered public accounting firm, that the U.S. Attorney served a grand jury subpoena on
Deloitte & Touche LLP, relating to The Ensign Group, Inc., and several of our operating
subsidiaries. The subpoena confirmed our previously reported belief that the U.S.
Attorney was conducting an investigation involving facilities operated by certain of our
operating subsidiaries. All together, the March 2007 authorized investigative demand and
the December 2007 subpoena specifically covered information from a total of 18 of our 81
facilities. In February 2008, the U.S. Attorney contacted two additional current
employees. We also continue to sporadically receive anecdotal reports of former employees
who have been contacted by investigators from the U.S. Attorneys office. Based on these
events, we believe that the U.S. Attorney may be conducting parallel criminal, civil and
administrative investigations involving The Ensign Group, Inc. and one or more of our
skilled nursing facilities.
Pursuant to these investigations, on December 17, 2008, representatives from the
U.S. Department of Justice (DOJ) served search warrants on our Service Center and six of
our Southern California skilled nursing facilities. Following the execution of the
warrants on the six facilities, a subpoena was issued covering eight additional
facilities. Among other things, the warrants covered specific patient records at the six
facilities. On May 4, 2009, the U.S. Attorney served a second subpoena requesting
additional patient records on the same patients who were covered by the original
warrants. We have worked with the U.S. Attorneys office to produce information
responsive to both subpoenas. We and our regulatory counsel continue to actively work
with the U.S. Attorneys office and respond to requests for information as they are
received relative to the investigation.
We are cooperating with the U.S. Attorneys office, and intend to continue working
with them to the extent they will allow us to help move their inquiry forward. To our
knowledge, however, neither The Ensign Group, Inc. nor any of its operating subsidiaries
or employees has been formally charged with any wrongdoing. We cannot predict or provide
any assurance as to the possible outcome of the investigation or any possible related
proceedings, or as to the possible outcome of any qui tam litigation that may follow, nor
can we estimate the possible loss or range of loss that may result from any such
proceedings and, therefore, we have not recorded any related accruals. To the extent the
U.S. Attorneys office elects to pursue this matter, or if the investigation has been
instigated by a qui tam relator who elects to pursue the matter, and we are subjected to
or alleged to be liable for claims or obligations under federal Medicare statutes, the
federal False Claims Act, or similar state and federal statutes and related regulations,
our business, financial condition and results of operations could be materially and
adversely affected and our stock price could decline.
We conducted an internal investigation into the billing and reimbursement processes of
some of our operating subsidiaries. Future reviews could result in additional billing and
reimbursement noncompliance, which would also decrease our revenue.
We initiated an internal investigation in November 2006 when we became aware of an
allegation of possible reimbursement irregularities at one or more of our facilities.
This investigation focused on 12 facilities, and included all six of the facilities which
were covered by the warrants served in December 2008. We retained outside counsel to
assist us in looking into these matters. We and our outside counsel concluded this
investigation in February 2008 without identifying any systemic or patterns and practices
of fraudulent or intentional misconduct. We made observations at certain facilities
regarding areas of potential improvement in some of our recordkeeping and billing
practices and have implemented measures, some of which were already underway before the
investigation began, that we believe will strengthen our recordkeeping and billing
processes. None of these additional findings or observations appears to be rooted in
fraudulent or intentional misconduct. We continue to evaluate the measures we have
implemented for effectiveness, and we are continuing to seek ways to improve these
processes.
55
As a byproduct of our investigation we identified a limited number of selected
Medicare claims for which adequate backup documentation could not be located or for which
other billing deficiencies existed. We, with the assistance of independent consultants
experienced in Medicare billing, completed a billing review on these claims. To the
extent missing documentation was not located, we treated the claims as overpayments.
Consistent with healthcare industry accounting practices, we record any charge for
refunded payments against revenue in the period in which the claim adjustment becomes
known.
From time to time our systems and controls highlight potential
compliance issues, which we investigate as they arise. As a result of the detection by management at one of our facilities,
and their Service Center support personnel, of possible recordkeeping and related irregularities at that facility, we initiated
an internal inquiry in the second quarter of 2010.
We concluded the investigatory phase of this inquiry in the
third quarter of 2010, and commenced a billing review of potentially affected claims. We made observations at the facility
regarding areas of potential improvement in some of our historical recordkeeping and billing practices and have identified
measures, some of which had already been implemented before the inquiry began, that we believe have strengthened, and can
strengthen further, our recordkeeping and billing processes. The issues detected appear to be isolated to one facility and
one department within that facility. We continue to evaluate the measures we have implemented for effectiveness, and we are
continuing to seek ways to improve these processes.
As a result of our billing reviews, we identified a
limited number of selected Medicare claims for which adequate backup documentation could not be located, or for which other
billing deficiencies existed. Where accepted procedures and necessary data for reviewing and calculating potential overpayments
were available, we followed such procedures and completed a billing review. Where such procedures and/or data were not available
we developed a methodology for making a good faith estimate of potential overpayments with the assistance of independent consultants
experienced in Medicare billing. We have accrued a liability for estimated overpayments resulting from insufficient or missing
documentation or other billing deficiencies. To the extent that sufficient documentation is subsequently located, the amount we
ultimately reimburse will be reduced.
Consistent with healthcare industry accounting practices,
we record any charge for refunded payments against revenue in the period in which the claim adjustment becomes known. During
the quarter ended June 30, 2010, we accrued for a revenue adjustment of approximately $0.5 million, plus interest, for the estimated
overpayments described above, with a resulting impact to net income of approximately $0.3 million. At the conclusion of our review we
intend to submit the potential overpayment for settlement with the Medicare Fiscal Intermediary.
If additional reviews result in identification and quantification
of additional amounts to be refunded, we would accrue additional liabilities for claim costs and interest, and repay any
amounts due in normal course. If future investigations ultimately result in findings of significant billing and reimbursement
noncompliance which could require us to record significant additional provisions or remit payments, our business, financial
condition and results of operations could be materially and adversely affected and our stock price could decline.
We may be unable to complete future facility acquisitions at attractive prices or at all,
which may adversely affect our revenue; we may also elect to dispose of underperforming
or non-strategic operations, which would also decrease our revenue.
To date, our revenue growth has been significantly driven by our acquisition of new
facilities. Subject to general market conditions and the availability of essential
resources and leadership within our company, we continue to seek both single-and
multi-facility acquisition opportunities that are consistent with our geographic,
financial and operating objectives.
We face competition for the acquisition of facilities and expect this competition to
increase. Based upon factors such as our ability to identify suitable acquisition
candidates, the purchase price of the facilities, prevailing market conditions, the
availability of leadership to manage new facilities and our own willingness to take on
new operations, the rate at which we have historically acquired facilities has fluctuated
significantly. In the future, we anticipate the rate at which we may acquire facilities
will continue to fluctuate, which may affect our revenue.
We have also historically acquired a few facilities, either because they were
included in larger, indivisible groups of facilities or under other circumstances, which
were or have proven to be non-strategic or less desirable, and we may consider disposing
of such facilities or exchanging them for facilities which are more desirable. To the
extent we dispose of such a facility without simultaneously acquiring a facility in
exchange, our revenues might decrease.
We may not be able to successfully integrate acquired facilities into our operations, and
we may not achieve the benefits we expect from any of our facility acquisitions.
We may not be able to successfully or efficiently integrate new acquisitions with
our existing operations, culture and systems. The process of integrating acquired
facilities into our existing operations may result in unforeseen operating difficulties,
divert managements attention from existing operations, or require an unexpected
commitment of staff and financial resources, and may ultimately be unsuccessful. Existing
facilities available for acquisition frequently serve or target different markets than
those that we currently serve. We also may determine that renovations of acquired
facilities and changes in staff and operating management personnel are necessary to
successfully integrate those facilities into our existing operations. We may not be able
to recover the costs incurred to reposition or renovate newly acquired facilities. The
financial benefits we expect to realize from many of our acquisitions are largely
dependent upon our ability to improve clinical performance, overcome regulatory
deficiencies, rehabilitate or improve the reputation of the facilities in the community,
increase and maintain occupancy, control costs, and in some cases change the patient
acuity mix. If we are unable to accomplish any of these objectives at facilities we
acquire, we will not realize the anticipated benefits and we may experience lower-than
anticipated profits, or even losses.
56
In the six months ended June 30, 2010, we acquired four skilled nursing facilities
and one home health and hospice operation with a total of 435 operational beds. In 2009
we acquired twelve skilled nursing facilities, one skilled nursing facility which also
offers independent living and hospice services, one skilled nursing facility which also
offers assisted living and independent living services and one assisted living facility
with a total of 1,777 operational beds. This growth has placed and will continue to place
significant demands on our current management resources. Our ability to manage our growth
effectively and to successfully integrate new acquisitions into our existing business
will require us to continue to expand our operational, financial and management
information systems and to continue to retain, attract, train, motivate and manage key
employees, including facility-level leaders and our local directors of nursing. We may
not be successful in attracting qualified individuals necessary for future acquisitions
to be successful, and our management team may expend significant time and energy working
to attract qualified personnel to manage facilities we may acquire in the future. Also,
the newly acquired facilities may require us to spend significant time improving services
that have historically been substandard, and if we are unable to improve such facilities
quickly enough, we may be subject to litigation and/or loss of licensure or
certification. If we are not able to successfully overcome these and other integration
challenges, we may not achieve the benefits we expect from any of our facility
acquisitions, and our business may suffer.
In undertaking acquisitions, we may be adversely impacted by costs, liabilities and
regulatory issues that may adversely affect our operations.
In undertaking acquisitions, we also may be adversely impacted by unforeseen
liabilities attributable to the prior providers who operated those facilities, against
whom we may have little or no recourse. Many facilities we have historically acquired
were underperforming financially and had clinical and regulatory issues prior to and at
the time of acquisition. Even where we have improved operations and patient care at
facilities that we have acquired, we still may face post-acquisition regulatory issues
related to pre-acquisition events. These may include, without limitation, payment
recoupment related to our predecessors prior noncompliance, the imposition of fines,
penalties, operational restrictions or special regulatory status. Further, we may incur
post-acquisition compliance risk due to the difficulty or impossibility of immediately or
quickly bringing non-compliant facilities into full compliance. Diligence materials
pertaining to acquisition targets, especially the underperforming facilities that often
represent the greatest opportunity for return, are often inadequate, inaccurate or
impossible to obtain, sometimes requiring us to make acquisition decisions with
incomplete information. Despite our due diligence procedures, facilities that we have
acquired or may acquire in the future may generate unexpectedly low returns, may cause us
to incur substantial losses, may require unexpected levels of management time,
expenditures or other resources, or may otherwise not meet a risk profile that our
investors find acceptable. For example, in July of 2006 we acquired a facility that had a
history of intermittent noncompliance. Although the facility had been already surveyed
once by the local state survey agency after being acquired by us, and that survey would
have met the heightened requirements of the special focus facility program, based upon
the facilitys compliance history prior to our acquisition, in January 2008, state
officials nevertheless recommended to CMS that the facility be placed on special
focus facility status. In addition, in October of 2006, we acquired a facility which
had a history of intermittent non-compliance. This facility was surveyed by the local
state survey agency during the third quarter of 2008 and passed the heightened survey
requirements of the special focus facility program. Both facilities have successfully
graduated from the Centers for Medicare and Medicaid Services Special Focus program. We
currently have two facilities remaining on special focus facility status.
In addition, we might encounter unanticipated difficulties and expenditures relating
to any of the acquired facilities, including contingent liabilities. For example, when we
acquire a facility, we generally assume the facilitys existing Medicare provider number
for purposes of billing Medicare for services. If CMS later determined that the prior
owner of the facility had received overpayments from Medicare for the period of time
during which it operated the facility, or had incurred fines in connection with the
operation of the facility, CMS could hold us liable for repayment of the overpayments or
fines. If the prior operator is defunct or otherwise unable to reimburse us, we may be
unable to recover these funds. We may be unable to improve every facility that we
acquire. In addition, operation of these facilities may divert management time and
attention from other operations and priorities, negatively impact cash flows, result in
adverse or unanticipated accounting charges, or otherwise damage other areas of our
company if they are not timely and adequately improved.
We also incur regulatory risk in acquiring certain facilities due to the licensing,
certification and other regulatory requirements affecting our right to operate the
acquired facilities. For example, in order to acquire facilities on a predictable
schedule, or to acquire declining operations quickly to prevent further pre-acquisition
declines, we frequently acquire such facilities prior to receiving license approval or
provider certification. We operate such facilities as the interim manager for the
outgoing licensee, assuming financial responsibility, among other obligations for the
facility. To the extent that we may be unable or delayed in obtaining a license, we may
need to operate the facility under a management agreement from the prior operator. Any
inability in obtaining consent from the prior operator of a target acquisition to
utilizing its license in this manner could impact our ability to acquire additional
facilities. If we were subsequently denied licensure or certification for any reason, we
might not realize the expected benefits of the acquisition and would likely incur
unanticipated costs and other challenges which could cause our business to suffer.
57
Potential sanctions and remedies based upon alleged regulatory deficiencies could
negatively affect our financial condition and results of operations.
We have received notices of potential sanctions and remedies based upon alleged
regulatory deficiencies from time to time, and such sanctions have been imposed on some
of our facilities. CMS has included two of our facilities on its recently released list
of special focus facilities, which are described above, and other facilities may be
identified for such status in the future, the sanctions for which involve increased
scrutiny in the form of more frequent inspection visits from state regulators. One of the
facilities included on the special focus facility list was acquired by us on October 1,
2009. From time to time, we have opted to voluntarily stop accepting new patients pending
completion of a new state survey, in order to avoid possible denial of payment for new
admissions during the deficiency cure period, or simply to avoid straining staff and
other resources while retraining staff, upgrading operating systems or making other
operational improvements. In the past, some of our facilities have been in denial of
payment status due to findings of continued regulatory deficiencies, resulting in an
actual loss of the revenue associated with the Medicare and Medicaid patients admitted
after the denial of payment date. Additional sanctions could ensue and, if imposed, these
sanctions, entailing various remedies up to and including decertification, would further
negatively affect our financial condition and results of operations.
The intensified and evolving enforcement environment impacts providers like us
because of the increase in the scope or number of inspections or surveys by governmental
authorities and the severity of consequent citations for alleged failure to comply with
regulatory requirements. We also divert personnel resources to respond to federal and
state investigations and other enforcement actions. The diversion of these resources,
including our management team, clinical and compliance staff, and others take away from
the time and energy that these individuals could otherwise spend on routine operations.
As noted, from time to time in the ordinary course of business, we receive deficiency
reports from state and federal regulatory bodies resulting from such inspections or
surveys. The focus of these deficiency reports tends to vary from year to year. Although
most inspection deficiencies are resolved through an agreed-upon plan of corrective
action, the reviewing agency typically has the authority to take further action against a
licensed or certified facility, which could result in the imposition of fines, imposition
of a provisional or conditional license, suspension or revocation of a license,
suspension or denial of payment for new admissions, loss of certification as a provider
under state or federal healthcare programs, or imposition of other sanctions, including
criminal penalties. In the past, we have experienced inspection deficiencies that have
resulted in the imposition of a provisional license and could experience these results in
the future. We currently have no facilities operating under provisional licenses which
were the result of inspection deficiencies.
Furthermore, in some states, citations in one facility impact other facilities in
the state. Revocation of a license at a given facility could therefore impair our ability
to obtain new licenses or to renew existing licenses at other facilities, which may also
trigger defaults or cross-defaults under our leases and our credit arrangements, or
adversely affect our ability to operate or obtain financing in the future. If state or
federal regulators were to determine, formally or otherwise, that one facilitys
regulatory history ought to impact another of our existing or prospective facilities,
this could also increase costs, result in increased scrutiny by state and federal survey
agencies, and even impact our expansion plans. Therefore, our failure to comply with
applicable legal
and regulatory requirements in any single facility could negatively impact our
financial condition and results of operations as a whole. We currently have four
facilities in Colorado whereby the provisional, or conditional, license status is not the
result of inspection deficiencies, but the states decision to issue a provisional
license to us as a new operator in the state of Colorado. The states granting of a
provisional license in Colorado was the result of the Company not having prior
operational compliance history in the state.
We may not be successful in generating internal growth at our facilities by expanding
occupancy at these facilities. We also may be unable to improve patient mix at our
facilities.
Overall operational occupancy across all of our facilities was 79.4% and 79.6% for
the six months ended June 30, 2010 and 2009, respectively, leaving opportunities for
internal growth without the acquisition or construction of new facilities. Because a
large portion of our costs are fixed, a decline in our occupancy could adversely impact
our financial performance. In addition, our profitability is impacted heavily by our
patient mix. We generally generate greater profitability from non-Medicaid patients. If
we are unable to maintain or increase the proportion of non-Medicaid patients in our
facilities, our financial performance could be adversely affected.
Termination of our patient admission agreements and the resulting vacancies in our
facilities could cause revenue at our facilities to decline.
Most state regulations governing skilled nursing and assisted living facilities
require written patient admission agreements with each patient. Several of these
regulations also require that each patient have the right to terminate the patient
agreement for any reason and without prior notice. Consistent with these regulations, all
of our skilled nursing patient agreements allow patients to terminate their agreements
without notice, and all of our assisted living resident agreements allow residents to
terminate their agreements upon thirty days notice. Patients and residents terminate
their agreements from time to time for a variety of reasons, causing some fluctuations in
our overall occupancy as patients and residents are admitted and discharged in normal
course. If an unusual number of patients or residents elected to terminate their
agreements within a short time, occupancy levels at our facilities could decline. As a
result, beds may be unoccupied for a period of time, which would have a negative impact
on our revenue, financial condition and results of operations.
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We face significant competition from other healthcare providers and may not be successful
in attracting patients and residents to our facilities.
The skilled nursing and assisted living industries are highly competitive, and we
expect that these industries may become increasingly competitive in the future. Our
skilled nursing facilities compete primarily on a local and regional basis with many
long-term care providers, from national and regional multi-facility providers that have
substantially greater financial resources to small providers who operate a single nursing
facility. We also compete with other skilled nursing and assisted living facilities, and
with inpatient rehabilitation facilities, long-term acute care hospitals, home healthcare
and other similar services and care alternatives. Increased competition could limit our
ability to attract and retain patients, attract and retain skilled personnel, maintain or
increase private pay and managed care rates or expand our business. Our ability to
compete successfully varies from location to location depending upon a number of factors,
including:
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our ability to attract and retain qualified facility leaders, nursing staff and other employees; |
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the number of competitors in the local market; |
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the types of services available; |
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our local reputation for quality care of patients; |
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the commitment and expertise of our staff; |
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our local service offerings; and |
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the cost of care in each locality and the physical appearance, location, age and condition of our facilities. |
We may not be successful in attracting patients to our facilities, particularly
Medicare, managed care, and private pay patients who generally come to us at higher
reimbursement rates. Some of our competitors have greater financial and other resources
than us, may have greater brand recognition and may be more established in their
respective communities than we are. Competing skilled nursing companies may also offer
newer facilities or different programs or services than we do and may
thereby attract current or potential patients. Other competitors may accept a lower
margin, and, therefore, present significant price competition for managed care and
private pay patients. In addition, some of our competitors operate on a not-for-profit
basis or as charitable organizations and have the ability to finance capital expenditures
on a tax-exempt basis or through the receipt of charitable contributions, neither of
which are available to us.
Competition for the acquisition of strategic assets from buyers with lower costs of
capital than us or that have lower return expectations than we do could limit our ability
to compete for strategic acquisitions and therefore to grow our business effectively.
Several real estate investment trusts (REITs), other real estate investment
companies, institutional lenders who have not traditionally taken ownership interests in
operating businesses or real estate, as well as several skilled nursing and assisted
living facility providers, have similar asset acquisition objectives as we do, along with
greater financial resources and lower costs of capital than we are able to obtain. This
may increase competition for acquisitions that would be suitable to us, making it more
difficult for us to compete and successfully implement our growth strategy. Significant
competition exists among potential acquirers in the skilled nursing and assisted living
industries, including with REITs, and we may not be able to successfully implement our
growth strategy or complete acquisitions, which could limit our ability to grow our
business effectively.
If we do not achieve and maintain competitive quality of care ratings from CMS and
private organizations engaged in similar monitoring activities, or if the frequency of
CMS surveys and enforcement sanctions increases, our business may be negatively affected.
CMS, as well as certain private organizations engaged in similar monitoring
activities, provides comparative data available to the public on its web site, rating
every skilled nursing facility operating in each state based upon quality-of-care
indicators. These quality-of-care indicators include such measures as percentages of
patients with infections, bedsores and unplanned weight loss. In addition, CMS has
undertaken an initiative to increase Medicaid and Medicare survey and enforcement
activities, to focus more survey and enforcement efforts on facilities with findings of
substandard care or repeat violations of Medicaid and Medicare standards, and to require
state agencies to use enforcement sanctions and remedies more promptly when substandard
care or repeat violations are identified. For example, two of our facilities are now
surveyed every six months instead of every 12 to 15 months as a result of historical
survey results that may date back to prior operators. We have found a correlation between
negative Medicaid and Medicare surveys and the incidence of professional liability
litigation. From time to time, we experience a higher than normal number of negative
survey findings in some of our facilities.
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In December 2008, CMS introduced the Five-Star Quality Rating System to help
consumers, their families and caregivers compare nursing homes more easily. The Five-Star
Quality Rating System gives each nursing home a rating of between one and five stars in
various categories. In cases of acquisitions, the previous operators clinical ratings
are included in our overall Five-Star Quality Rating. The prior operators results will
impact our rating until we have sufficient clinical measurements subsequent to the
acquisition date. If we are unable to achieve quality of care ratings that are comparable
or superior to those of our competitors, our ability to attract and retain patients could
be adversely affected.
In some states, the law prohibits or limits insurance coverage for the risk of
punitive damages arising from professional liability and general liability claims or
litigation. Coverage for punitive damages is also excluded under some insurance policies.
As a result, we may be liable for punitive damage awards in these states that either are
not covered or are in excess of our insurance policy limits. Claims against us,
regardless of their merit or eventual outcome, also could inhibit our ability to attract
patients or expand our business, and could require our management to devote time to
matters unrelated to the day-to-day operation of our business.
If we are unable to obtain insurance, or if insurance becomes more costly for us to
obtain, our business may be adversely affected.
It may become more difficult and costly for us to obtain coverage for resident care
liabilities and other risks, including property and casualty insurance. For example, the
following circumstances may adversely affect our ability to obtain insurance at favorable
rates:
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we experience higher-than-expected professional liability, property
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we receive survey deficiencies or citations of higher-than-normal scope or severity; |
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we acquire especially troubled operations or facilities that present
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insurers tighten underwriting standards applicable to us or our industry; or |
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insurers or reinsurers are unable or unwilling to insure us or the
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If any of these potential circumstances were to occur, our insurance carriers may
require us to significantly increase our self-insured retention levels or pay
substantially higher premiums for the same or reduced coverage for insurance, including
workers compensation, property and casualty, automobile, employment practices liability,
directors and officers liability, employee healthcare and general and professional
liability coverages.
With few exceptions, workers compensation and employee health insurance costs have
also increased markedly in recent years. To partially offset these increases, we have
increased the amounts of our self-insured retention (SIR) and deductibles in connection
with general and professional liability claims. We also have implemented a self-insurance
program for workers compensation in California, and elected non-subscriber status for
workers compensation in Texas. If we are unable to obtain insurance, or if insurance
becomes more costly for us to obtain, or if the coverage levels we can economically
obtain decline, our business may be adversely affected.
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Our self-insurance programs may expose us to significant and unexpected costs and losses.
Since 2002, we have maintained general and professional liability insurance and
workers compensation insurance since 2005 through a wholly-owned subsidiary insurance
company, Standardbearer Insurance Company, Ltd. (Standardbearer), to insure our SIR and
deductibles as part of a continually evolving overall risk management strategy. We
establish the premiums to be paid to Standardbearer, and the loss reserves set by that
subsidiary, based on an estimation process that uses information obtained from both
company-specific and industry data. The estimation process requires us to continuously
monitor and evaluate the life cycle of the claims. Using data obtained from this
monitoring and our assumptions about emerging trends, we, along with an independent
actuary, develop information about the size of ultimate claims based on our historical
experience and other available industry information. The most significant assumptions
used in the estimation process include determining the trend in costs, the expected cost
of claims incurred but not reported and the expected costs to settle or pay damages with
respect to unpaid claims. It is possible, however, that the actual liabilities may exceed
our estimates of loss. We may also experience an unexpectedly large number of successful
claims or claims that result in costs or liability significantly in excess of our
projections. For these and other reasons, our self-insurance reserves could prove to be
inadequate, resulting in liabilities in excess of our available insurance and
self-insurance. If a successful claim is made against us and it is not covered by our
insurance or exceeds the insurance policy limits, our business may be negatively and
materially impacted. Further, because our SIR under our general and professional
liability and workers compensation programs applies on a per claim basis, there is no
limit to the maximum number of claims or the total amount for which we could incur
liability in any policy period.
In May 2006, we began self-insuring our employee health benefits. With respect to
our health benefits self-insurance, we do not yet have a meaningful multi-year loss
history by which to set reserves or premiums, and have consequently relied heavily on
general industry data that is not specific to our own company to set reserves and
premiums. Even with a combination of limited company-specific loss data and general
industry data, our loss reserves are based on actuarial estimates that may not correlate
to actual loss experience in the future. Therefore, our reserves may prove to be
insufficient and we may be exposed to significant and unexpected losses.
The geographic concentration of our facilities could leave us vulnerable to an economic
downturn, regulatory changes or acts of nature in those areas.
Our facilities located in California and Arizona account for the majority of our
total revenue. As a result of this concentration, the conditions of local economies,
changes in governmental rules, regulations and reimbursement rates or criteria, changes
in demographics, state funding, acts of nature and other factors that may result in a
decrease in demand and/or reimbursement for skilled nursing services in these states
could have a disproportionately adverse effect on our revenue, costs and results of
operations. Moreover, since approximately 40% of our facilities are located in
California, we are particularly susceptible to revenue loss, cost increase or damage
caused by natural disasters such as fires, earthquakes or mudslides. In addition, to the
extent we acquire additional facilities in Texas, we become more susceptible to revenue
loss, cost increase or damage caused by hurricanes or flooding. Any significant loss due
to a natural disaster may not be covered by insurance or may exceed our insurance limits
and may also lead to an increase in the cost of insurance.
The actions of a national labor union that has pursued a negative publicity campaign
criticizing our business in the past may adversely affect our revenue and our
profitability.
We continue to maintain our right to inform our employees about our views of the
potential impact of unionization upon the workplace generally and upon individual
employees. With one exception, to our knowledge the staffs at our facilities that have
been approached to unionize have uniformly rejected union organizing efforts. If
employees decide to unionize, our cost of doing business could increase, and we could
experience contract delays, difficulty in adapting to a changing regulatory and economic
environment, cultural conflicts between unionized and non-unionized employees, strikes
and work stoppages, and we may conclude that affected facilities or operations would be
uneconomical to continue operating.
The unwillingness on the part of both our management and staff to accede to union
demands for neutrality and other concessions has resulted in a negative labor campaign
by at least one labor union, the Service Employees International Union. From 2002 to
2007, this union, and individuals and organizations allied with or sympathetic to this
union actively prosecuted a
negative retaliatory publicity action, also known as a corporate campaign, against
us and filed, promoted or participated in multiple legal actions against us. The unions
campaign asserted, among other allegations, poor treatment of patients, inferior medical
services provided by our employees, poor treatment of our employees, and health code
violations by us. In addition, the union has publicly mischaracterized actions taken by
the DHS against us and our facilities. In numerous cases, the unions allegations created
the false impression that violations and other events that occurred at facilities prior
to our acquisition of those facilities were caused by us. Since a large component of our
business involves acquiring underperforming and distressed facilities, and improving the
quality of operations at these facilities, we may have been associated with the past poor
performance of these facilities. To the extent this union or another elects to directly
or indirectly prosecute a corporate campaign against us or any of our facilities, our
business could be negatively affected.
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This union, along with individuals and organizations allied with or sympathetic to
this union, has demanded focused regulatory oversight and public boycotts of some of our
facilities. It has also attempted to pressure hospitals, doctors, insurers and other
healthcare providers and professionals to cease doing business with or referring patients
to us. If this union or another union is successful in convincing our patients, their
families or our referral sources to reduce or cease doing business with us, our revenue
may be reduced and our profitability could be adversely affected. Additionally, if we are
unable to attract and retain qualified staff due to negative public relations efforts by
this or other union organizations, our quality of service and our revenue and profits
could decline. Our strategy for responding to union allegations involves clear public
disclosure of the unions identity, activities and agenda, and rebuttals to its negative
campaign. Our ability to respond to unions, however, may be limited by some state laws,
which purport to make it illegal for any recipient of state funds to promote or deter
union organizing. For example, such a state law passed by the California Legislature was
successfully challenged on the grounds that it was preempted by the National Labor
Relations Act, only to have the challenge overturned by the Ninth Circuit in 2006 before
being ultimately upheld by the United States Supreme Court in 2008. In addition, proposed
legislation making it more difficult for employees and their supervisors to educate
co-workers and oppose unionization, such as proposed Employer Free Choice Act which would
allow organizing on a single card check and without a secret ballot, could make it more
difficult to maintain union-free workplaces in our facilities. If proponents of these and
similar laws are successful in facilitating unionization procedures or hindering employer
responses thereto, our ability to oppose unionization efforts could be hindered, and our
business could be negatively affected.
A number of our facilities are operated under master lease arrangements or leases that
contain cross-default provisions, and in some cases the breach of a single facility lease
could subject multiple facilities to the same risk.
We currently occupy approximately 7% of our facilities under agreements that are
structured as master leases. Under a master lease, we may lease a large number of
geographically dispersed properties through an indivisible lease. With an indivisible
lease, it is difficult to restructure the composition of the portfolio or economic terms
of the lease without the consent of the landlord. Failure to comply with Medicare or
Medicaid provider requirements is a default under several of our master lease and debt
financing instruments. In addition, other potential defaults related to an individual
facility may cause a default of an entire master lease portfolio and could trigger
cross-default provisions in our outstanding debt arrangements and other leases, which
would have a negative impact on our capital structure and our ability to generate future
revenue, and could interfere with our ability to pursue our growth strategy.
In addition, we occupy approximately 14% of our facilities under individual facility
leases that are held by the same or related landlords, the largest of which covers five
of our facilities. These leases typically contain cross-default provisions that could
cause a default at one facility to trigger a technical default with respect to one or
more other locations, potentially subjecting us to the various remedies available to the
landlords under each of the related leases.
Failure to generate sufficient cash flow to cover required payments or meet operating
covenants under our long-term debt, mortgages and long-term operating leases could result
in defaults under such agreements and cross-defaults under other debt, mortgage or
operating lease arrangements, which could harm our operations and cause us to lose
facilities or experience foreclosures.
At June 30, 2010, we had $109.6 million of outstanding indebtedness under our Fourth
Amended and Restated Loan Agreement (the Amended Term Loan), our Second Amended and
Restated Loan and Security Agreement (the Revolver) and mortgage notes, plus $138.6 million
of operating lease obligations. We intend to continue financing our facilities through
mortgage financing, long-term operating leases and other types of financing, including
borrowings under our lines of credit and future credit facilities we may obtain.
We may not generate sufficient cash flow from operations to cover required interest,
principal and lease payments. In addition, from time to time the financial performance of
one or more of our mortgaged facilities may not comply with the required operating
covenants under the terms of the mortgage. Any non-payment, noncompliance or other
default under our financing arrangements could, subject to cure provisions, cause the
lender to foreclose upon the facility or facilities securing such indebtedness or, in the
case of a lease, cause the lessor to terminate the lease, each with a consequent loss of
revenue and asset value to us or a loss of property. Furthermore, in many cases,
indebtedness is secured by both a mortgage on one or more facilities, and a guaranty by
us. In the event of a default under one of these scenarios, the lender could avoid
judicial procedures required to foreclose on real property by declaring all amounts
outstanding under the guaranty immediately due and payable, and
requiring us to fulfill our obligations to make such payments. If any of these
scenarios were to occur, our financial condition would be adversely affected. For tax
purposes, a foreclosure on any of our properties would be treated as a sale of the
property for a price equal to the outstanding balance of the debt secured by the
mortgage. If the outstanding balance of the debt secured by the mortgage exceeds our tax
basis in the property, we would recognize taxable income on foreclosure, but would not
receive any cash proceeds, which would negatively impact our earnings and cash position.
Further, because our mortgages and operating leases generally contain cross-default and
cross-collateralization provisions, a default by us related to one facility could affect
a significant number of other facilities and their corresponding financing arrangements
and operating leases.
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Because our Amended Term Loan, mortgage and lease obligations are fixed expenses and
secured by specific assets, and because our revolving loan obligations are secured by
virtually all of our assets, if reimbursement rates, patient acuity mix or occupancy
levels decline, or if for any reason we are unable to meet our loan or lease obligations,
we may not be able to cover our costs and some or all of our assets may become at risk.
Our ability to make payments of principal and interest on our indebtedness and to make
lease payments on our operating leases depends upon our future performance, which will be
subject to general economic conditions, industry cycles and financial, business and other
factors affecting our operations, many of which are beyond our control. If we are unable
to generate sufficient cash flow from operations in the future to service our debt or to
make lease payments on our operating leases, we may be required, among other things, to
seek additional financing in the debt or equity markets, refinance or restructure all or
a portion of our indebtedness, sell selected assets, reduce or delay planned capital
expenditures or delay or abandon desirable acquisitions. Such measures might not be
sufficient to enable us to service our debt or to make lease payments on our operating
leases. The failure to make required payments on our debt or operating leases or the
delay or abandonment of our planned growth strategy could result in an adverse effect on
our future ability to generate revenue and sustain profitability. In addition, any such
financing, refinancing or sale of assets might not be available on terms that are
economically favorable to us, or at all.
Our existing credit facilities and mortgage loans contain restrictive covenants and any
default under such facilities or loans could result in a freeze on additional advances,
the acceleration of indebtedness, the termination of leases, or cross-defaults, any of
which would negatively impact our liquidity and inhibit our ability to grow our business
and increase revenue.
Our outstanding credit facilities and mortgage loans contain restrictive covenants
and require us to maintain or satisfy specified coverage tests on a consolidated basis
and on a facility or facilities basis. These restrictions and operating covenants
include, among other things, requirements with respect to occupancy, debt service
coverage and project yield. The debt service coverage ratios are generally calculated as
revenue less operating costs, including an implied management fee and a reserve for
capital expenditures, divided by the outstanding principal and accrued interest under the
debt. These restrictions may interfere with our ability to obtain additional advances
under existing credit facilities or to obtain new financing or to engage in other
business activities, which may inhibit our ability to grow our business and increase
revenue. At times in the past we have failed to timely deliver audited financial
statements to our lender as required under our loan covenants. In each such case, we
obtained waivers from our lender. In addition, in December 2000, we were unable to make
balloon payments due under two mortgages on one of our facilities, but we were able to
negotiate extensions with both lenders, and paid off both loans in January 2001 as
required by the terms of the extensions. If we fail to comply with any of our loan
requirements, or if we experience any defaults, then the related indebtedness could
become immediately due and payable prior to its stated maturity date. We may not be able
to pay this debt if it becomes immediately due and payable.
If we decide to expand our presence in the assisted living industry, we would become
subject to risks in a market in which we have limited experience.
The majority of our facilities have historically been skilled nursing facilities. If
we decide to expand our presence in the assisted living, home health and hospice
industries or other relevant long term care service, our existing overall business model
would change and we would become subject to risks in a market in which we have limited
experience. Although assisted living operations generally have lower costs and higher
margins than skilled nursing, they typically generate lower overall revenue than skilled
nursing operations. In addition, assisted living revenue is derived primarily from
private payors as opposed to government reimbursement. In most states, skilled nursing,
assisted living, home health and hospice are regulated by different agencies, and we have
less experience with the agencies that regulate assisted living, home health and hospice.
In general, we believe that assisted living is a more competitive industry than skilled
nursing. If we decided to expand our presence in the assisted living, home health and
hospice industries, we might have to adjust part of our existing business model, which
could have an adverse affect on our business.
If our referral sources fail to view us as an attractive skilled nursing provider, or if
our referral sources otherwise refer fewer patients, our patient base may decrease.
We rely significantly on appropriate referrals from physicians, hospitals and other
healthcare providers in the communities in which we deliver our services to attract
appropriate residents and patients to our facilities. Our referral sources are not
obligated to refer business to us and may refer business to other healthcare providers.
We believe many of our referral sources refer business to us as a result of the quality
of our patient care and our efforts to establish and build a relationship with our
referral sources. If we lose, or fail to maintain, existing relationships with our
referral resources, fail to develop new relationships, or if we are perceived by our
referral sources as not providing high quality patient care, our occupancy rate and the
quality of our patient mix could suffer. In addition, if any of our referral sources
have a reduction in patients whom they can refer due to a decrease in their business, our
occupancy rate and the quality of our patient mix could suffer.
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We may need additional capital to fund our operations and finance our growth, and we may
not be able to obtain it on terms acceptable to us, or at all, which may limit our
ability to grow.
Our ability to maintain and enhance our facilities and equipment in a suitable
condition to meet regulatory standards, operate efficiently and remain competitive in our
markets requires us to commit substantial resources to continued investment in our
facilities and equipment. We are sometimes more aggressive than our competitors in
capital spending to address issues that arise in connection with aging and obsolete
facilities and equipment. In addition, continued expansion of our business through the
acquisition of existing facilities, expansion of our existing facilities and construction
of new facilities may require additional capital, particularly if we were to accelerate
our acquisition and expansion plans. Financing may not be available to us or may be
available to us only on terms that are not favorable. In addition, some of our
outstanding indebtedness and long-term leases restrict, among other things, our ability
to incur additional debt. If we are unable to raise additional funds or obtain additional
funds on terms acceptable to us, we may have to delay or abandon some or all of our
growth strategies. Further, if additional funds are raised through the issuance of
additional equity securities, the percentage ownership of our stockholders would be
diluted. Any newly issued equity securities may have rights, preferences or privileges
senior to those of our common stock.
The condition of the financial markets, including volatility and deterioration in the
capital and credit markets, could limit the availability of debt and equity financing
sources to fund the capital and liquidity requirements of our business.
Financial markets experienced significant disruptions in 2008, which continued in
2009 and 2010. These disruptions impacted liquidity in the debt markets, making financing
terms for borrowers less attractive and, in certain cases, significantly reducing the
availability of certain types of debt financing. As a result of these market conditions,
the cost and availability of credit has been and may continue to be adversely affected by
illiquid credit markets and wider credit spreads. Concern about the stability of the
markets has led many lenders and institutional investors to reduce, and in some cases,
cease to provide credit to borrowers. These factors have led to a decrease in spending by
businesses and consumers alike. Continued turbulence in the U.S. and prolonged declines
in business and consumer spending may adversely affect our liquidity and financial
condition. Though we anticipate that the cash amounts generated internally, together with
amounts available under the Revolver, will be sufficient to implement our business plan
for the foreseeable future, we may need additional capital if a substantial acquisition
or other growth opportunity becomes available or if unexpected events occur or
opportunities arise. We cannot assure you that additional capital will be available or
available on terms favorable to us. If capital is not available, we may not be able to
fund internal or external business expansion or respond to competitive pressures or other
market conditions.
Delays in reimbursement may cause liquidity problems.
If we experience problems with our information systems or if issues arise with
Medicare, Medicaid or other payors, we may encounter delays in our payment cycle. From
time to time, we have experienced such delays as a result of government payors
instituting planned reimbursement delays for budget balancing purposes or as a result of
prepayment reviews. For example, in 2008, California delayed any reimbursement subsequent
to the end of July until such time as the budget was enacted. Further, and independent to
the budget impasse, the State of California delayed all August 2008 payments until
September. We cannot predict whether similar reimbursement delays will continue in future
fiscal years. Medi-Cal had also delayed the release of the reimbursement rates which were
announced in January 2010. These rate increases were put in place on a retrospective
basis, effective August 1, 2009. In January 2009, the State of California announced
expected cash shortages in February which impacted payments to Medi-Cal providers from
late March through April. Any future timing delay may cause working capital shortages. As
a result, working capital management, including prompt and diligent billing and
collection, is an important factor in our results of operations and liquidity. Our
working capital management procedures may not successfully ameliorate the effects of any
delays in our receipt of payments or reimbursements. Accordingly, such delays could have
an adverse effect on our liquidity and financial condition.
Compliance with the regulations of the Department of Housing and Urban Development may
require us to make unanticipated expenditures which could increase our costs.
Four of our facilities are currently subject to regulatory agreements with the
Department of Housing and Urban Development (HUD) that give the Commissioner of HUD broad
authority to require us to be replaced as the operator of those facilities in the event
that the Commissioner determines there are operational deficiencies at such facilities
under HUD regulations. In 2006, one of our HUD-insured mortgaged facilities did not pass
its HUD inspection. Following an unsuccessful appeal of the decision, we requested a
re-inspection. The re-inspection occurred in the fourth quarter of 2009 and the facility
passed its HUD re-inspection. Compliance with HUDs requirements can often be difficult
because these requirements are not always consistent with the requirements of other
federal and state agencies. Appealing a failed inspection can be costly and time-consuming and, if we do not successfully remediate the failed inspection, we could
be precluded from obtaining HUD financing in the future or we may encounter limitations
or prohibitions on our operation of HUD-insured facilities.
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Failure to comply with existing environmental laws could result in increased
expenditures, litigation and potential loss to our business and in our asset value.
Our operations are subject to regulations under various federal, state and local
environmental laws, primarily those relating to the handling, storage, transportation,
treatment and disposal of medical waste; the identification and warning of the presence
of asbestos-containing materials in buildings, as well as the encapsulation or removal of
such materials; and the presence of other substances in the indoor environment.
Our facilities generate infectious or other hazardous medical waste due to the
illness or physical condition of the patients. Each of our facilities has an agreement
with a waste management company for the proper disposal of all infectious medical waste,
but the use of a waste management company does not immunize us from alleged violations of
such laws for operations for which we are responsible even if carried out by a third
party, nor does it immunize us from third-party claims for the cost to cleanup disposal
sites at which such wastes have been disposed.
Some of the facilities we lease, own or may acquire may have asbestos-containing
materials. Federal regulations require building owners and those exercising control over
a buildings management to identify and warn their employees and other employers
operating in the building of potential hazards posed by workplace exposure to installed
asbestos-containing materials and potential asbestos-containing materials in their
buildings. Significant fines can be assessed for violation of these regulations. Building
owners and those exercising control over a buildings management may be subject to an
increased risk of personal injury lawsuits. Federal, state and local laws and regulations
also govern the removal, encapsulation, disturbance, handling and disposal of
asbestos-containing materials and potential asbestos-containing materials when such
materials are in poor condition or in the event of construction, remodeling, renovation
or demolition of a building. Such laws may impose liability for improper handling or a
release into the environment of asbestos containing materials and potential
asbestos-containing materials and may provide for fines to, and for third parties to seek
recovery from, owners or operators of real properties for personal injury or improper
work exposure associated with asbestos-containing materials and potential
asbestos-containing materials. The presence of asbestos-containing materials, or the
failure to properly dispose of or remediate such materials, also may adversely affect our
ability to attract and retain patients and staff, to borrow when using such property as
collateral or to make improvements to such property.
The presence of mold, lead-based paint, underground storage tanks, contaminants in
drinking water, radon and/or other substances at any of the facilities we lease, own or
may acquire may lead to the incurrence of costs for remediation, mitigation or the
implementation of an operations and maintenance plan and may result in third party
litigation for personal injury or property damage. Furthermore, in some circumstances,
areas affected by mold may be unusable for periods of time for repairs, and even after
successful remediation, the known prior presence of extensive mold could adversely affect
the ability of a facility to retain or attract patients and staff and could adversely
affect a facilitys market value and ultimately could lead to the temporary or permanent
closure of the facility.
If we fail to comply with applicable environmental laws, we would face increased
expenditures in terms of fines and remediation of the underlying problems, potential
litigation relating to exposure to such materials, and a potential decrease in value to
our business and in the value of our underlying assets.
In addition, because environmental laws vary from state to state, expansion of our
operations to states where we do not currently operate may subject us to additional
restrictions in the manner in which we operate our facilities.
If we fail to safeguard the monies held in our patient trust funds, we will be required
to reimburse such monies, and we may be subject to citations, fines and penalties.
Each of our facilities is required by federal law to maintain a patient trust fund
to safeguard certain assets of their residents and patients. If any money held in a
patient trust fund is misappropriated, we are required to reimburse the patient trust
fund for the amount of money that was misappropriated. In 2005 we became aware of two
separate and unrelated instances of employees misappropriating an aggregate of
approximately $380,000 in patient trust funds, some of which was recovered from the
employees and some of which we were required to reimburse from our funds. If any monies
held in our patient trust funds are misappropriated in the future and are unrecoverable,
we will be required to reimburse such monies, and we may be subject to citations, fines
and penalties pursuant to federal and state laws.
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We are a holding company with no operations and rely upon our multiple independent
operating subsidiaries to provide us with the funds necessary to meet our financial
obligations. Liabilities of any one or more of our subsidiaries could be imposed upon us
or our other subsidiaries.
We are a holding company with no direct operating assets, employees or revenues.
Each of our facilities is operated through a separate, wholly-owned, independent
subsidiary, which has its own management, employees and assets. Our principal assets are
the equity interests we directly or indirectly hold in our multiple operating and real
estate holding subsidiaries. As a result, we are dependent upon distributions from our
subsidiaries to generate the funds necessary to meet our financial obligations and pay
dividends. Our subsidiaries are legally distinct from us and have no obligation to make
funds available to us. The ability of our subsidiaries to make distributions to us will
depend substantially on their respective operating results and will be subject to
restrictions under, among other things, the laws of their jurisdiction of organization,
which may limit the amount of funds available for distribution to investors or
shareholders, agreements of those subsidiaries, the terms of our financing arrangements
and the terms of any future financing arrangements of our subsidiaries.
Risks Related to Ownership of our Common Stock
We may not be able to pay or maintain dividends and the failure to do so would adversely
affect our stock price.
Our ability to pay and maintain cash dividends is based on many factors, including
our ability to make and finance acquisitions, our ability to negotiate favorable lease
and other contractual terms, anticipated operating cost levels, the level of demand for
our beds, the rates we charge and actual results that may vary substantially from
estimates. Some of the factors are beyond our control and a change in any such factor
could affect our ability to pay or maintain dividends. In addition, the Revolver with the
Lender restricts our ability to pay dividends to stockholders if we receive notice that
we are in default under this agreement.
While we do not have a formal dividend policy, we currently intend to continue to
pay regular quarterly dividends to the holders of our common stock, but future dividends
will continue to be at the discretion of our board of directors and will depend on many
factors, including our results of operations, financial condition and capital
requirements, earnings, general business conditions, restrictions imposed by financing
arrangements including pursuant to the loan and security agreement governing our
revolving line of credit, legal restrictions on the payment of dividends and other
factors the board of directors deems relevant. From 2002 through 2009, we paid aggregate
annual dividends equal to approximately 5% to 15% of our net income. We may not be able
to pay or maintain dividends, and we may at any time elect not to pay dividends but to
retain cash for other purposes. We also cannot assure you that the level of dividends
will be maintained or increase over time or that increases in demand for our beds and
monthly patient fees will increase our actual cash available for dividends to
stockholders. It is possible that we may pay dividends in a future period that may exceed
our net income for such period. The failure to pay or maintain dividends could adversely
affect our stock price.
If the ownership of our common stock continues to be highly concentrated, it may prevent
you and other stockholders from influencing significant corporate decisions and may
result in conflicts of interest that could cause our stock price to decline.
Our current executive officers, directors and their affiliates, if they act
together, will have substantial control over the outcome of corporate actions requiring
stockholder approval, including the election of directors, any merger, consolidation or
sale of all or substantially all of our assets or any other significant corporate
transactions. The significant concentration of stock ownership may adversely affect the
trading price of our common stock due to investors perception that conflicts of interest
may exist or arise.
If securities or industry analysts do not publish research or reports about our business,
if they change their recommendations regarding our stock adversely or if our operating
results do not meet their expectations, our stock price and trading volume could decline.
The trading market for our common stock is influenced by the research and reports
that industry or securities analysts publish about us or our business. If one or more of
these analysts cease coverage of our company or fail to publish reports on us regularly,
we could lose visibility in the financial markets, which in turn could cause our stock
price or trading volume to decline. Moreover, if one or more of the analysts who cover us
downgrade our stock or if our operating results do not meet their expectations, our stock
price could decline.
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The market price and trading volume of our common stock may be volatile, which could
result in rapid and substantial losses for our stockholders.
The market price of our common stock may be highly volatile and could be subject to
wide fluctuations. In addition, the trading volume in our common stock may fluctuate and
cause significant price variations to occur. We cannot assure you that the market price
of our common stock will not fluctuate or decline significantly in the future. On some
occasions in the past, when the market price of a stock has been volatile, holders of
that stock have instituted securities class action litigation against the company that
issued the stock. If any of our stockholders brought a lawsuit against us, we could incur
substantial costs defending or settling the lawsuit. Such a lawsuit could also divert the
time and attention of our management from our business.
Future offerings of debt or equity securities by us may adversely affect the market price
of our common stock.
In the future, we may attempt to increase our capital resources by offering debt or
additional equity securities, including commercial paper, medium-term notes, senior or
subordinated notes, series of preferred shares or shares of our common stock. Upon
liquidation, holders of our debt securities and preferred shares, and lenders with
respect to other borrowings, would receive a distribution of our available assets prior
to any distribution to the holders of our common stock. Additional equity offerings may
dilute the economic and voting rights of our existing stockholders or reduce the market
price of our common stock, or both. Because our decision to issue securities in any
future offering will depend on market conditions and other factors beyond our control, we
cannot predict or estimate the amount, timing or nature of our future offerings. Thus,
holders of our common stock bear the risk of our future offerings reducing the market
price of our common stock and diluting their share holdings in us. We also intend to
continue to actively pursue acquisitions of facilities and may issue shares of stock in
connection with these acquisitions.
Any shares issued in connection with our acquisitions, the exercise of outstanding
stock options or otherwise would dilute the holdings of the investors who purchase our
shares.
Failure to maintain effective internal controls in accordance with Section 404 of the
Sarbanes-Oxley Act could result in a restatement of our financial statements, cause
investors to lose confidence in our financial statements and our company and have a
material adverse effect on our business and stock price.
We produce our consolidated financial statements in accordance with the requirements
of GAAP. Effective internal controls are necessary for us to provide reliable financial
reports to help mitigate the risk of fraud and to operate successfully as a publicly
traded company. As a public company, we are required to document and test our internal
control procedures in order to satisfy the requirements of Section 404 of the
Sarbanes-Oxley Act of 2002, or Section 404, which requires annual management assessments
of the effectiveness of our internal controls over financial reporting.
Testing and maintaining internal controls can divert our managements attention from
other matters that are important to our business. We may not be able to conclude on an
ongoing basis that we have effective internal controls over financial reporting in
accordance with Section 404 or our independent registered public accounting firm may not
be able or willing to issue an unqualified report if we conclude that our internal
controls over financial reporting are not effective. If either we are unable to conclude
that we have effective internal controls over financial reporting or our independent
registered public accounting firm is unable to provide us with an unqualified report as
required by Section 404, investors could lose confidence in our reported financial
information and our company, which could result in a decline in the market price of our
common stock, and cause us to fail to meet our reporting obligations in the future, which
in turn could impact our ability to raise additional financing if needed in the future.
The requirements of being a public company, including compliance with the reporting
requirements of the Securities Exchange Act of 1934, as amended, and the requirements of
the Sarbanes-Oxley Act of 2002, may strain our resources, increase our costs and distract
management, and we may be unable to comply with these requirements in a timely or
cost-effective manner.
As a public company, we need to comply with laws, regulations and requirements,
certain corporate governance provisions of the Sarbanes-Oxley Act of 2002, related
regulations of the Securities and Exchange Commission, and requirements of NASDAQ. As a
result, we will incur significant legal, accounting and other expenses. Complying with
these statutes, regulations and requirements occupies a significant amount of the time of
our board of directors and management, requires us to have additional finance and
accounting staff, makes it difficult to attract and retain qualified officers and members
of our board of directors, particularly to serve on our audit committee, and makes some
activities difficult, time consuming and costly.
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If we are unable to fulfill the requirements related to being a public company in a
timely and effective fashion, our ability to comply with our financial reporting
requirements and other rules that apply to reporting companies could be impaired. If our
finance and accounting personnel insufficiently support us in fulfilling these
public-company compliance obligations, or if we are unable to hire adequate finance and
accounting personnel, we could face significant legal liability, which could have a
material adverse effect on our financial condition and results of operations.
Furthermore, if we identify any issues in complying with those requirements (for example,
if we or our independent registered public accountants identified a material weakness in
our internal control over financial reporting), we could incur additional costs
rectifying those issues, and the existence of those issues could adversely affect us, our
reputation or investor perceptions of us.
Our amended and restated certificate of incorporation, amended and restated bylaws and
Delaware law contain provisions that could discourage transactions resulting in a change
in control, which may negatively affect the market price of our common stock.
In addition to the effect that the concentration of ownership by our significant
stockholders may have, our amended and restated certificate of incorporation and our
amended and restated bylaws contain provisions that may enable our management to resist a
change in control. These provisions may discourage, delay or prevent a change in the
ownership of our company or a
change in our management, even if doing so might be beneficial to our stockholders.
In addition, these provisions could limit the price that investors would be willing to
pay in the future for shares of our common stock. Such provisions set forth in our
amended and restated certificate of incorporation or amended and restated bylaws include:
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our board of directors are authorized, without prior stockholder
approval, to create and issue preferred stock, commonly referred to as
blank check preferred stock, with rights senior to those of common
stock; |
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advance notice requirements for stockholders to nominate individuals
to serve on our board of directors or to submit proposals that can be
acted upon at stockholder meetings; |
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our board of directors are classified so not all members of our board
are elected at one time, which may make it more difficult for a person
who acquires control of a majority of our outstanding voting stock to
replace our directors; |
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stockholder action by written consent is limited; |
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special meetings of the stockholders are permitted to be called only
by the chairman of our board of directors, our chief executive officer
or by a majority of our board of directors; |
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stockholders are not permitted to cumulate their votes for the election of directors; |
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newly created directorships resulting from an increase in the
authorized number of directors or vacancies on our board of directors
are filled only by majority vote of the remaining directors; |
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our board of directors is expressly authorized to make, alter or repeal our bylaws; and |
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stockholders are permitted to amend our bylaws only upon receiving the
affirmative vote of at least a majority of our outstanding common
stock. |
These and other provisions in our amended and restated certificate of incorporation,
amended and restated bylaws and Delaware law could discourage acquisition proposals and
make it more difficult or expensive for stockholders or potential acquirers to obtain
control of our board of directors or initiate actions that are opposed by our
then-current board of directors, including delaying or impeding a merger, tender offer or
proxy contest involving us. Any delay or prevention of a change of control transaction or
changes in our board of directors could cause the market price of our common stock to
decline.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
None.
Item 3. Defaults Upon Senior Securities
None.
Item 4. (Removed and Reserved)
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Item 5. Other Information
None.
Item 6. Exhibits
EXHIBIT INDEX
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Exhibit |
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Description |
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31.1 |
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Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 |
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31.2 |
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Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 |
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32.1 |
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Certification of Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 |
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32.2 |
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Certification of Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 |
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant
has duly caused this report to be signed on its behalf by the undersigned thereunto duly
authorized.
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THE ENSIGN GROUP, INC.
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August 6, 2010 |
BY: |
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/s/ SUZANNE D. SNAPPER
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Suzanne D. Snapper |
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Chief Financial Officer and Duly
Authorized Officer |
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EXHIBIT INDEX
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Exhibit |
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Description |
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31.1 |
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Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 |
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31.2 |
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Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 |
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32.1 |
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Certification of Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 |
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32.2 |
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Certification of Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 |
71