Lifecare took on significant debt to help finance Carlyle's 2005 acquisition, then saw Hurricane Katrina destroy its three New Orleans facilities, "causing untold human suffering to patients and staff and significant economic damage to the enterprise,” CEO Philip P. Douglas said in a declaration filed with the court.
LifeCare's 2006 10-K stated:
As a result of the losses incurred in connection with Hurricane Katrina, we recorded impairment charges on long-lived assets, identifiable intangible assets and goodwill for the twelve months ended December 31, 2005 of $74.2 million. To date we have received $13.2 million in insurance proceeds pursuant to the policies that were in force at the time of the hurricane. We currently believe that all available amounts have been received pursuant to the policy limits in connection with our Hurricane Katrina related losses.Consider higher non-Katrina expenses that year. The 2006 report identified several related to Carlyle's ownership:
$54.5 million stock compensation expense
$18.6 million increase in net interest expense
$2.9 million increase in depreciation and amortization expense
By 2011 there was no evidence of Katrina's lingering impact.
All claims raised in connection with Hurricane Katrina have been settled with no significant impact to us.
Here's what killed LifeCare, the cost of private equity ownership. Lifecare's capital structure began with 71% debt and 29% Carlyle equity. Law360 reported:
Founded in Louisiana in 1992, LifeCare had expanded to Texas, Pennsylvania, Ohio and Nevada when it agreed to be acquired by Carlyle for approximately $570 million, a transaction funded in part by a $255 million loan and $150 million in subordinated notes.Carlyle increased LifeCare's debt to $431 million from the original $405 million. With total assets falling to $512 million, LifeCare was up to 84% debt financed. Carlyle's equity comprised only 16% of the company,
Katrina gave LifeCare a hit, but Carlyle ran it off the bridge. For this LifeCare paid $500,000 a year in management fees. The Katrina story is to maintain Carlyle's image.
