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Investment in and Notes Receivable from CareCentrix
9 Months Ended
Sep. 30, 2012
Note Receivable from and Investment in Entity [Abstract]  
Note Receivable from and Investment in CareCentrix
Investment in and Notes Receivable from CareCentrix
Effective September 19, 2011, the Company sold its remaining investment in CareCentrix Holdings. The Company recorded accumulated and unpaid dividends on the preferred shares of approximately $4.0 million and $8.6 million for the third quarter and first nine months of 2011, respectively, which were reflected in dividend income in the Company's consolidated comprehensive statements of income. The Company also recorded a net gain of approximately $68.3 million, including an escrow of approximately $10.6 million, which is reflected in equity in net earnings of CareCentrix, in the Company's consolidated comprehensive statements of income.
The Company holds a $25 million subordinated promissory note from CareCentrix, Inc. In connection with the sale of the Company’s ownership interest in CareCentrix Holdings on September 19, 2011, the maturity date of the note was extended to the earlier of March 19, 2017, which is five years, six months from the closing of the transaction, or a sale of CareCentrix Holdings. The note bears interest at a fixed rate of 10 percent, which is payable quarterly, provided that CareCentrix remains in compliance with its senior debt covenants. Interest on the CareCentrix promissory note, which is included in interest income in the Company’s consolidated statements of comprehensive income, amounted to $0.6 million and $1.9 million for the third quarter and first nine months of both 2012 and 2011, respectively.
Pursuant to the terms of the stock purchase agreement, approximately $10.6 million of the sale price due to the Company was placed into an escrow fund for future indemnification claims. In February and June 2012, approximately $0.7 million of the escrow fund was paid out to cover expenses related to an indemnified claim.
On August 24, 2012, the Company received notification from CareCentrix of its election to draw seller financing from the escrow fund pursuant to the terms of the stock purchase agreement. As such, the Company reclassified its escrow receivable of approximately $9.9 million from prepaid expenses and other current assets to a note receivable from CareCentrix on the Company's consolidated balance sheet as of September 30, 2012. The note receivable, which bears interest at 14 percent through 2012 and 18 percent thereafter, matures on the earlier of March 19, 2017 or upon the sale of CareCentrix Holdings. Interest on the note is payable quarterly, in kind and will accrete as additional principal on the note. On April 1 of each year, 40 percent of the accreted interest for the prior calendar year will be paid in cash. The Company expects to record interest income at the time of receipt of the interest payments.
On September 17, 2012, the Company received a formal notice of claims for indemnification from CareCentrix. In the notice, CareCentrix asserted that the total claimed amounts exceed the total amount in escrow and demanded that the entire principal amount of the seller financing note be reduced to zero. A response to the notice of claims from the Company, together with the other original sellers, is in preparation. Based on the information the Company has at this time, the Company is unable to assess the probable outcome or potential liability, if any, arising from this notice of claims on the business, financial condition, results of operations, liquidity or capital resources of the Company. The Company does not believe that an estimate of a reasonably possible loss or range of loss can be made for this matter at this time.
The Company recognized $1.0 million of equity in the net earnings of CareCentrix for both the third quarter and first nine months of 2012, as compared to $68.7 million and $69.6 million for the third quarter and first nine months of 2011, respectively.
The Company’s financing receivables consist of the previously described $25 million subordinated promissory note from CareCentrix, Inc. dated September 19, 2011 and a $9.9 million seller financing note from CareCentrix, Inc. dated August 24, 2012. The Company measures impairment based on the present value of expected cash flows after considering assumptions relating to risk factors and economic conditions. On an ongoing basis, the Company assesses the credit quality based on the Company’s review of CareCentrix, Inc.’s financial position and receipt of interest payments when due. Based on the Company’s analysis, as of September 30, 2012 and December 31, 2011, the Company had no allowances for credit losses.