Exhibit 99.2
UNAUDITED PRO FORMA COMBINED CONDENSED FINANCIAL STATEMENTS
The following unaudited pro forma combined condensed financial statements as of September 30, 2006 and for the year ended December 31, 2005 and for the nine months ended September 30, 2006 are based on the historical financial statements of CRC Health Corporation (the “Company”), Aspen Education Group, Inc. (“Aspen”) and Sierra Tucson, LLC (“Sierra Tucson) acquisitions after giving effect to the following transactions:
Pro forma combined condensed balance sheet and statements of operations include acquisition of Aspen:
the Company’s acquisition of Aspen on November 17, 2006 for approximately $279.9 million in purchase consideration, the assumption of approximately $23.0 million of Aspen’s debt obligations as defined per the merger agreement, the repayment of net $28.7 million of the Company’s borrowings under its existing revolving credit facility at the closing of the Aspen acquisition and the payment of costs associated with the acquisition and related financing of approximately $11.4 million. The acquisition of Aspen and associated transactions and expenses were financed by:
¡ | the issuance of an additional $175.5 million of senior secured term loan (by amending and restating the Company’s existing $243.8 million senior secured term loan facility); |
¡ | a capital contribution of $103.9 million from the Company’s direct parent company, CRC Health Group, Inc. (the “Group”) treated as equity (“Group Contributed Equity”). The Group funded such capital contribution through issuance of a payment in kind (“PIK”) loan of $105 million issued at 1% original issue discount for net proceeds of $103.9 million (see note (a) to unaudited pro forma combined balance sheet); and |
¡ | an additional capital contribution (“New Equity Investment”) of $39.9 million from the sale of Group’s equity securities to certain of the Group’s existing equity holders. |
Pro forma combined condensed statements of operations reflect the following significant transactions:
• | the Purchase of the Company on February 6, 2006 by investment funds managed by Bain Capital, LLC (“Bain Capital”) for approximately $740.8 million in cash, the repayment of the Company’s then outstanding debt, including $4.5 million of borrowings under the Company’s revolving line of credit and $254.0 million principal amount of term loans and subordinated debt and the payment of costs associated with the acquisition of the Company and related financing of approximately $27.0 million. The acquisition of the Company and associated transactions and expenses were financed by: |
¡ | entering into a new senior secured credit facility, consisting of: |
• | a senior secured term loan of $245.0 million; and |
• | a revolving credit facility of $100.0 million; and |
¡ | the issuance of $200.0 million in aggregate principal amount of senior subordinated notes, less approximately $3.0 million of original issue discount; and |
• | the acquisition of Sierra Tucson in May 2005 for approximately $132.1 million in cash, including acquisition related expenses. The acquisition of Sierra Tucson was financed by: |
¡ | the refinancing of $75.7 million of outstanding term loans (the “Original Term Loans”) and promissory notes; and |
¡ | the issuance of a senior secured credit facility of $205.0 million (the “Restated Term Loan”) with a six-year maturity. |
The unaudited pro forma combined condensed balance sheet as of September 30, 2006 is presented giving effect to the Aspen acquisition and related financing as if they had occurred on September 30, 2006.
The unaudited pro forma combined condensed statements of operations for the year ended December 31, 2005 and the nine months ended September 30, 2006 are presented giving effect to the Aspen acquisition and related financing, the purchase of the Company in February 2006 and related financing and the acquisition of Sierra Tucson and related financing as if they had occurred on January 1, 2005. The
1
combined historical condensed consolidated statement of operations for the Company’s nine months ended September 30, 2006 represents the mathematical addition of the Company’s operating results for the one month ended January 31, 2006 (Predecessor) to the Company’s operating results of the eight months ended September 30, 2006 (Successor).
The acquisition of Aspen in November 2006 has been accounted for as purchases in accordance with Statement of Financial Accounting Standards (“SFAS”) No, 141,Business Combinations. Under the purchase method of accounting, the total purchase consideration of the acquisition was allocated to the assets acquired and liabilities assumed based on their relative fair values. The consideration remaining is then allocated to identifiable intangibles with a finite life and amortized over that life, as well as to goodwill and identifiable intangibles with an indefinite life, which will have to be evaluated prospectively on an annual basis to determine impairment and adjusted accordingly. The fair value of property and equipment and intangibles was based upon appraisals performed by independent valuation specialists and other relevant information.
The unaudited pro forma combined condensed financial statements are based on the estimates and assumptions set forth in the notes to these statements that management believes are reasonable. However, because these unaudited pro forma combined condensed financial statements have been prepared based on preliminary estimates of fair values attributable to the acquisition of Aspen, the actual amounts recorded for the acquisition of Aspen may differ materially from the information presented in these unaudited pro forma combined condensed financial statements. The allocations related to acquisition of Aspen are subject to change pending a final analysis of the fair value of the assets acquired and liabilities assumed as well as the impact of cost synergies, which could result in material changes from the information presented.
The unaudited pro forma combined condensed financial statements is for information purposes only and does not purport to represent what the Company’s actual results of operations would have been if these transactions had been completed as of the dates indicated above or that may be achieved in the future. Furthermore, the unaudited pro forma combined condensed statement of operations for the nine months ended September 30, 2006 includes certain nonrecurring charges of $41.3 million, net of tax benefit of $13.1 million that were incurred in connection with the purchase of the Company (see note (b) to unaudited pro forma combined statements of operations). The unaudited pro forma combined condensed statement of operations for the nine months ended September 30, 2006 excludes certain nonrecurring charges that will be incurred by Aspen in connection with the Aspen Acquisition: (i) stock option compensation expenses of $9.5 million, recognized upon settlement of options and (ii) various tax deductible transaction fees of $5.2 million. The tax effect of these nonrecurring items at Aspen’s historical effective tax rate of 41.6% is $6.1 million. The unaudited pro forma combined condensed financial statements, including the notes thereto, should be read in conjunction with the Company’s historical consolidated financial statements included in the Company’s quarterly report on Form 10-Q for the nine months ended September 30, 2006 filed on November 14, 2006, as well as Aspen’s historical consolidated financial statements for the year ended December 31, 2005 filed as an Exhibit 99.4 to the Company’s current report on Form 8-K filed on October 30, 2006 and the nine months ended September 30, 2006 included as an Exhibit 99.1 in this current report on Form 8-K/A.
2
CRC HEALTH CORPORATION
UNAUDITED PRO FORMA COMBINED CONDENSED BALANCE SHEET
AS OF SEPTEMBER 30, 2006
(dollars in thousands)
CRC Historical as of September 30, 2006 | Aspen Historical as of September 30, 2006 | Combined Historical as of September 30, 2006 | Adjustments for the Transaction and Financing | Pro Forma as of September 30, 2006 | ||||||||||||||
Assets | ||||||||||||||||||
Current assets: | ||||||||||||||||||
Cash and cash equivalents | $ | 1,593 | $ | 9,329 | $ | 10,922 | $ | (6,319 | ) (b) | $ | 4,603 | |||||||
Accounts receivable-net | 29,071 | 3,033 | 32,104 | — | 32,104 | |||||||||||||
Prepaid expenses | 4,160 | 2,017 | 6,177 | — | 6,177 | |||||||||||||
Other current assets | 1,389 | 1,405 | 2,794 | — | 2,794 | |||||||||||||
Income taxes receivable | 5,200 | — | 5,200 | 6,118 | (b) | 11,318 | ||||||||||||
Deferred income taxes | 4,271 | 150 | 4,421 | (150 | ) (b) | 4,271 | ||||||||||||
Total current assets | 45,684 | 15,934 | 61,618 | (351 | ) | 61,267 | ||||||||||||
Property, plant and equipment, net | 71,506 | 18,583 | 90,089 | — | 90,089 | |||||||||||||
Goodwill | 479,823 | 66,011 | 545,834 | 159,149 | (b) | 704,983 | ||||||||||||
Other Intangibles, net | 294,447 | 4,802 | 299,249 | 103,339 | (b) | 402,588 | ||||||||||||
Other assets | 22,386 | 3,927 | 26,313 | 4,644 | (a)(b) | 30,957 | ||||||||||||
Total assets | $ | 913,846 | $ | 109,257 | $ | 1,023,103 | $ | 266,781 | $ | 1,289,884 | ||||||||
Liabilities and Stockholders’ Equity | ||||||||||||||||||
Current liabilities: | ||||||||||||||||||
Accounts payable | $ | 3,012 | $ | 2,654 | $ | 5,666 | $ | — | $ | 5,666 | ||||||||
Accrued expenses | 18,684 | 9,092 | 27,776 | — | 27,776 | |||||||||||||
Income taxes payable | — | 3,858 | 3,858 | — | 3,858 | |||||||||||||
Revolving line of credit | 32,000 | — | 32,000 | (28,692 | ) (a) | 3,308 | ||||||||||||
Current portion of long-term debt | 2,450 | 2,839 | 5,289 | 1,755 | (a) | 7,044 | ||||||||||||
Other current liabilities | 6,092 | 24,449 | 30,541 | (5,136 | ) (b) | 25,405 | ||||||||||||
Total current liabilities | 62,238 | 42,892 | 105,130 | (32,072 | ) | 73,058 | ||||||||||||
Long term debt-Less current portion | 438,545 | 3,745 | 442,290 | 173,745 | (a) | 616,035 | ||||||||||||
Other long-term liabilities | 393 | 16,809 | 17,202 | (9,953 | ) (b)(c) | 7,249 | ||||||||||||
Deferred income taxes | 112,418 | — | 112,418 | 41,152 | (b) | 153,570 | ||||||||||||
Total liabilities | 613,594 | 63,446 | 677,040 | 172,872 | 849,912 | |||||||||||||
Minority Interest | — | 804 | 804 | (510 | ) (b) | 294 | ||||||||||||
Stockholders’ Equity | ||||||||||||||||||
Common stock | — | 5,907 | 5,907 | (5,907 | ) (c) | — | ||||||||||||
Series A and Series B preferred stock | — | 48,863 | 48,863 | (48,863 | ) (c) | — | ||||||||||||
Preferred stock dividend paid | — | (28,500 | ) | (28,500 | ) | 28,500 | (c) | — | ||||||||||
Deferred stock-based compensation | — | (443 | ) | (443 | ) | 443 | (c) | — | ||||||||||
Additional paid-in capital | 297,061 | 6,411 | 303,472 | 133,015 | (a)(c) | 436,487 | ||||||||||||
Retained earnings | 3,191 | 12,769 | 15,960 | (12,769 | ) (c) | 3,191 | ||||||||||||
Total stockholders’ equity | 300,252 | 45,007 | 345,259 | 94,419 | 439,678 | |||||||||||||
Total liabilities and stockholders’ equity and minority interest | $ | 913,846 | $ | 109,257 | $ | 1,023,103 | $ | 266,781 | $ | 1,289,884 | ||||||||
See notes to unaudited pro forma combined condensed balance sheet.
3
CRC HEALTH CORPORATION
NOTES TO UNAUDITED PRO FORMA COMBINED CONDENSED BALANCE SHEET
AS OF SEPTEMBER 30, 2006
(dollars in thousands)
(a) | The unaudited pro forma combined consolidated balance sheet gives effect to the following pro forma adjustments: the incurrence of debt, payment of acquisition consideration to the sellers, repayment of the Company’s existing revolver borrowings and fees and expenses incurred in connection with the Transaction. |
Amount | |||
Sources of funds: | |||
Group Contributed Equity(i) | $ | 103,950 | |
Add-on term loan facility(ii) | 175,500 | ||
Revolving credit facility(iii) | 3,308 | ||
New Equity Investment(iv) | 39,940 | ||
Total sources of funds | $ | 322,698 | |
Uses of funds: | |||
Payment to acquire Aspen(v) | $ | 271,766 | |
Purchase price adjustment(iii) | 3,308 | ||
Buyout of minority interests and other agreement(vi) | 4,189 | ||
Repayment of revolving credit facility(vii) | 32,000 | ||
Estimated fees and expenses(viii) | 11,435 | ||
Total uses of funds | $ | 322,698 | |
(i) In connection with the acquisition of Aspen, CRC Health Group, Inc. (the “Group”), the holding company of CRC Health Corporation (“CRC”), borrowed a $105 million payment in kind (“PIK”) loan issued at a 1% original issue discount, resulting in net proceeds of $103.9 million. This amount was contributed and recorded as equity in CRC pro-forma balance sheet. The interest payable per annum applicable to this PIK loan is 90 day LIBOR plus 7.0% for the first year, 90 day LIBOR plus 7.50% for the second year and 90 day LIBOR plus 8.0% for the years thereafter until the maturity date. Under the PIK loan agreement, the scheduled interest is accrued through an increase in the principal amount. The aggregate principal amount and the accrued interest matures on November 17, 2013. | |||
(ii) Represents the gross proceeds ($175.5 million) from the issuance of incremental borrowings under the Term Loan. The entire Term Loan add-on was drawn with scheduled amortization payments in annual amounts equal to 1% of the original amount drawn and the remaining principal balance on February 6, 2013. As a result $1.8 million is classified as current and the remaining $173.7 million is classified as long-term. | |||
(iii) The merger agreement contains provisions requiring that Aspen has working capital (as defined in the merger agreement) of at least $(24.5) million upon the closing of the Transaction. Based on our calculation as of September 30, 2006, working capital (as defined in the merger agreement) was $(21.2) million, resulting in additional purchase price of $3.3 million, which was funded by using the Company’s revolving credit facility. | |||
(iv) Represents an aggregate of $39.9 million invested in the common stock of Group by certain of our existing equity holders (excludes $1.9 million of equity rolled over by certain members of Aspen management). | |||
(v) Amount represents the cash portion of the Aspen purchase price paid to the former investors. Amount excludes $1.9 million of rollover equity by certain members of Aspen management, which amount is also excluded in footnote (iv) above. | |||
(vi) Represents the purchase of the minority interest of two Aspen subsidiaries: (1) a 10% interest in SUWS of the Carolinas ($3.7 million), (2) a 10% interest in the Eating Disorder Venture owned by Niton, LLC (“Niton”) ($0.2 million), plus an additional $0.3 million payment related to the termination of a consulting arrangement. | |||
(vii) Represents the pay down of our existing revolver borrowings from the proceeds of the Transaction. | |||
(viii)Reflects our fees and expenses associated with the Transaction as follows: |
Amount | |||
Fees related to the Term Loan add-on (including advisor fees) | $ | 5,519 | |
Commitment fees related to the Company’s existing Term Loan | 859 | ||
Fees incurred in connection with Group Contributed Equity (including advisor fees) | 4,464 | ||
Acquisition related fees incurred in connection with New Equity Investment | 593 | ||
$ | 11,435 | ||
4
We have capitalized the fees and expenses of $6.4 million related to our Term Loan add-on and commitment fees related to our existing Term Loan as deferred financing costs included in “other assets.” The fees of $4.5 million associated with the Group Contributed Equity have been included as a decrease in equity proceeds and acquisition related fees of $0.6 million associated with the New Equity Investment is included as part of the acquisition consideration (see note (b) below).
(b) | The Transaction was accounted for as a purchase in accordance with SFAS No. 141, “Business Combinations.” Under purchase accounting, the estimated acquisition consideration is allocated to our assets and liabilities based on their relative fair values. The consideration remaining is then allocated to identifiable intangibles with a finite life and amortized over that life, as well as to goodwill and identifiable intangibles with an infinite life, which will have to be evaluated prospectively on an annual basis to determine impairment and adjusted accordingly. The pro forma adjustments shown below have been based upon a preliminary valuation and other studies of our tangible and intangible assets. The final purchase price allocation may differ based upon a final valuation and the determination of final purchase price. |
Amount | |||
Total purchase price of the acquisition of Aspen is as follows: | |||
Cash paid to the sellers (see footnote (a) above) | $ | 271,766 | |
Purchase price adjustment (see footnote (a) above) | 3,308 | ||
Acquisition related expenses (see footnote (a) above) | 593 | ||
Buyout of minority interests and other agreement (see footnote (a) above) | 4,189 | ||
Total purchase price | $ | 279,856 | |
The preliminary allocation of purchase price based on estimated fair values and other adjustments:
Historical Aspen | Fair Value and other adjustments | Pro forma as adjusted | |||||||||
Cash(i) | $ | 9,329 | (6,319 | ) | $ | 3,010 | |||||
Accounts receivable - net | 3,033 | — | 3,033 | ||||||||
Prepaid expenses | 2,017 | 2,017 | |||||||||
Other current assets | 1,405 | 1,405 | |||||||||
Income taxes receivable(ii) | — | 6,118 | 6,118 | ||||||||
Deferred income taxes(iii) | 150 | (150 | ) | — | |||||||
Property, plant and equipment, net | 18,583 | — | 18,583 | ||||||||
Goodwill(iv) | 66,011 | 159,149 | 225,160 | ||||||||
Other Intangibles, net(v) | 4,802 | 103,339 | 108,141 | ||||||||
Other assets(iii) (vi) | 3,927 | (1,734 | ) | 2,193 | |||||||
Accounts payable | (2,654 | ) | — | (2,654 | ) | ||||||
Accrued expenses | (9,092 | ) | — | (9,092 | ) | ||||||
Income taxes payable | (3,858 | ) | (3,858 | ) | |||||||
Current portion of long-term debt | (2,839 | ) | — | (2,839 | ) | ||||||
Other current liabilities(vii) | (24,449 | ) | 5,136 | (19,313 | ) | ||||||
Long term debt - Less current portion | (3,745 | ) | — | (3,745 | ) | ||||||
Other long-term liabilities(viii) | (16,809 | ) | 9,953 | (6,856 | ) | ||||||
Deferred income taxes(ix) | — | (41,152 | ) | (41,152 | ) | ||||||
Minority Interest(x) | (804 | ) | 510 | (294 | ) | ||||||
Total purchase price | $ | 279,856 | |||||||||
(i) Reflects the payment of Aspen’s fees and expenses of $6.3 million associated with the transaction, which were paid using Aspen’s cash acquired of $9.3 million.
|
| ||||||||||
(ii) To record income tax benefits estimated at Aspen’s historical effective tax rate of 41.6%, arising out of the Aspen expenses related to the acquisition is as follows: |
|
Pre-tax Amount | Tax Effect | |||||
Stock option-based compensation expense related to the settlement of stock options | $ | 9,460 | $ | 3,935 | ||
Tax deductible transaction fees. | 5,248 | 2,183 | ||||
$ | 14,708 | $ | 6,118 | |||
5
(iii) To eliminate Aspen’s historical deferred tax assets, for which no fair value could be attributed. The amount consists of a current portion ($0.2 million) and a long term portion ($1.6 million) included in “other assets.” | ||||
(iv) To eliminate Aspen’s historical goodwill of $66.0 million and record the goodwill of $225.2 million resulting from the acquisition. | ||||
(v) To eliminate Aspen’s historical intangible assets of $4.8 million and to record the preliminary estimate of fair value of intangible assets acquired of $108.1 million, which consist primarily of trade name, regulatory licenses, curriculum, accreditation, referral network and student contracts. The following table presents details of the purchased intangible assets acquired as part of the acquisition: |
Intangible Assets | Estimated useful life (in years) | Amount | |||
Curriculum | 20.0 | $ | 9,000 | ||
Accreditation | 20.0 | 24,400 | |||
Referral network | 20.0 | 45,400 | |||
Student contracts | 1.0 | 2,241 | |||
Regulatory Licenses | Indefinite | 16,300 | |||
Trademarks and tradename | Indefinite | 10,800 | |||
Total | $ | 108,141 | |||
(vi) To eliminate Aspen’s historical loan fees of $ 0.1 million included in “other assets,” for which no fair value could be attributed. | ||||
(vii) To adjust Aspen’s other current liabilities as follows: |
Amount | ||||
To adjust Aspen’s deferred revenue to fair value, representing the legal performance obligations under Aspen’s existing contracts | $ | 4,339 | ||
To eliminate Aspen’s historical current portion of deferred gain on sale leaseback transactions for which no fair value could be attributed | 349 | |||
To eliminate Aspen’s historical deferred rent booked in accordance with SFAS No. 13, “Accounting for Leases” | 691 | |||
To record a restructuring liability related to pre-acquisition Aspen accounted for under EITF Issue No. 95-3, “Recognition of Liabilities in Connection with Purchase Business Combination” | (243 | ) | ||
Total | $ | 5,136 | ||
(viii)To adjust Aspen’s long term liabilities as follows: |
Amount | |||
To eliminate Aspen’s historical long term portion of deferred gain on sale leaseback transactions for which no fair value could be attributed | $ | 4,590 | |
To eliminate Aspen’s historical warrant liability related to the cancellation of Aspen’s historical equity | 5,363 | ||
Total | $ | 9,953 | |
(ix) To record the deferred tax liability related to the incremental value allocated to identifiable intangible assets at a 41.0% tax rate. | ||
(x) To eliminate Aspen’s historical minority interest of $0.5 million related to the purchase of the minority interest in two Aspen’s subsidiaries. The remaining minority interest fair value of $0.3 million is associated with the 25% minority interest holder in the joint venture. (see note (a) above). |
6
(c) | Reflects the elimination of Aspen’s historical common stock, Series A and Series B preferred stock, deferred stock-based compensation, additional paid-in capital, retained earnings and warrant liability (included in “other long-term liabilities”) pursuant to the application of purchase accounting in accordance with SFAS No. 141, “Business Combinations.” |
7
CRC HEALTH CORPORATION
UNAUDITED PRO FORMA COMBINED CONDENSED STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 2005
(dollars in thousands)
Historical | Pro forma Adjustments | |||||||||||||||||||||||||||
Predecessor Historical for the Year Ended December 31, 2005 (a) | Acquisition of Sierra Tucson (b) | Acquisition of Aspen (b) | Adjustments for Sierra Tucson Acquisition and Related Financing | Adjustments for the Purchase of the Company and Related Financing | Adjustments for Aspen Acquisition and Related Financing | Pro Forma for the Year Ended December 31, 2005 | ||||||||||||||||||||||
Net revenues: | ||||||||||||||||||||||||||||
Net client service revenue | $ | 205,833 | $ | 11,739 | $ | 121,296 | $ | — | $ | — | $ | — | $ | 338,868 | ||||||||||||||
Other revenue | 3,189 | 417 | 1,360 | — | — | — | 4,966 | |||||||||||||||||||||
Total net revenues | 209,022 | 12,156 | 122,656 | — | — | — | 343,834 | |||||||||||||||||||||
Operating expenses: | ||||||||||||||||||||||||||||
Salaries and benefits | 96,241 | 4,169 | 58,662 | — | — | — | 159,072 | |||||||||||||||||||||
Supplies, facilities and other operating costs | 57,276 | 2,354 | 46,484 | — | 847 | (i) | — | 106,961 | ||||||||||||||||||||
Provision for doubtful accounts | 3,041 | (19 | ) | 521 | — | — | — | 3,543 | ||||||||||||||||||||
Depreciation and amortization | 3,850 | 214 | 5,070 | 123 | (e) | 3,843 | (j) | 5,811 | (l) | 18,911 | ||||||||||||||||||
Acquisition related costs | — | — | — | — | — | — | — | |||||||||||||||||||||
Total operating expenses | 160,408 | 6,718 | 110,737 | 123 | 4,690 | 5,811 | 288,487 | |||||||||||||||||||||
Income (loss) from operations | 48,614 | 5,438 | 11,919 | (123 | ) | (4,690 | ) | (5,811 | ) | 55,347 | ||||||||||||||||||
Interest expense, net | (19,744 | ) | (621 | ) | (6,385 | ) | (3,794 | ) (f) | (19,708 | ) (k) | (13,529 | ) (m)(n) | (63,781 | ) | ||||||||||||||
Other financing costs | (2,185 | ) | — | — | 2,185 | (f) | — | — | 0 | |||||||||||||||||||
Other income (expense) | 2,232 | 33 | — | (585 | ) (g) | — | — | 1,680 | ||||||||||||||||||||
Income (loss) from continuing operations before income taxes | 28,917 | 4,850 | 5,534 | (2,317 | ) | (24,398 | ) | (19,340 | ) | (6,754 | ) | |||||||||||||||||
Income taxes | 10,916 | 1,989 | 2,277 | (950 | ) (h) | (10,003 | ) (h) | (7,929 | ) (h) | (3,700 | ) | |||||||||||||||||
Minority interest in income (loss) of subsidiaries | — | — | 222 | — | — | (273 | ) (o) | (51 | ) | |||||||||||||||||||
Net income (loss) from continuing operations | $ | 18,001 | $ | 2,861 | $ | 3,035 | $ | (1,367 | ) | $ | (14,395 | ) | $ | (11,138 | ) | $ | (3,003 | ) | ||||||||||
See notes to the unaudited pro forma combined condensed statement of operations
8
CRC HEALTH CORPORATION
UNAUDITED PRO FORMA COMBINED CONDENSED STATEMENT OF OPERATIONS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2006
(dollars in thousands)
Historical | Pro forma Adjustments | Pro Forma for | ||||||||||||||||||||||
Predecessor Historical for the One Month ended January 31, 2006 | Successor September 30, | Acquisition of Aspen (b) | Adjustments for the Purchase of the Company and Related Financing (d) | Adjustments for Aspen Acquisition and Related Financing | ||||||||||||||||||||
Net revenues: | ||||||||||||||||||||||||
Net client service revenue | $ | 19,360 | $ | 163,071 | $ | 110,089 | $ | — | $ | — | $ | 292,520 | ||||||||||||
Other revenue | 490 | 3,163 | 1,839 | — | — | 5,492 | ||||||||||||||||||
Total net revenues | 19,850 | 166,234 | 111,928 | — | — | 298,012 | ||||||||||||||||||
Operating expenses: | ||||||||||||||||||||||||
Salaries and benefits | 9,265 | 77,262 | 52,335 | — | — | 139,261 | ||||||||||||||||||
Supplies, facilities and other operating costs | 4,562 | 44,412 | 40,896 | 57 | (i) | — | 89,528 | |||||||||||||||||
Provision for doubtful accounts | 285 | 3,295 | 363 | — | — | 3,943 | ||||||||||||||||||
Depreciation and amortization | 361 | 6,246 | 3,149 | 366 | (j) | 2,681 | (l) | 12,803 | ||||||||||||||||
Acquisition related costs | 43,710 | (c) | — | — | — | — | 43,710 | |||||||||||||||||
Total operating expenses | 58,183 | 131,215 | 96,743 | 423 | 2,681 | 289,245 | ||||||||||||||||||
Income (loss) from operations | (38,333 | ) | 35,019 | 15,185 | (423 | ) | (2,681 | ) | 8,767 | |||||||||||||||
Interest expense, net | (2,509 | ) | (28,094 | ) | (3,608 | ) | (1,081 | ) (k) | (9,087 | ) (m)(n) | (44,379 | ) | ||||||||||||
Other financing costs | (10,655 | ) (c) | — | — | — | — | (10,655 | ) | ||||||||||||||||
Other income (expense) | 60 | (40 | ) | — | — | — | 20 | |||||||||||||||||
Income (loss) from continuing operations before income taxes | (51,437 | ) | 6,885 | 11,577 | (1,504 | ) | (11,768 | ) | (46,247 | ) | ||||||||||||||
Income taxes | (12,444 | ) | 3,694 | 4,644 | (617 | ) (h) | (4,825 | ) (h) | (9,548 | ) | ||||||||||||||
Minority interest in income (loss) of subsidiaries | — | — | 461 | — | (227 | ) (o) | 234 | |||||||||||||||||
Net (loss) income from continuing operations | $ | (38,993 | ) | $ | 3,191 | $ | 6,472 | $ | (887 | ) | $ | (6,716 | ) | $ | (36,933 | ) | ||||||||
See notes to the unaudited pro forma combined condensed statement of operations
9
CRC HEALTH CORPORATION
NOTES TO UNAUDITED PRO FORMA COMBINED CONDENSED STATEMENTS OF OPERATIONS
(dollars in thousands)
(a) | The following immaterial reclassifications have been made to the amounts as previously reported in the Company’s Predecessor and Successor’s historical condensed consolidated financial statements for the twelve months ended December 31, 2005 and eight months ended September 30, 2006: |
In the twelve months ended December 31, 2005 consolidated statement of operations reclasses were (i) loss on sale of fixed asset disposals of $0.1 million was reclassified from “Other income (expense)” into “Supplies, facilities and other operating costs” and (ii) interest income of $0.07 million was reclassified from “Other income (expense)” into “Interest expense, net.”
In the eight months ended September 31, 2006 condensed consolidated statement of operations reclasses were (i) gain on sale of fixed asset disposals of $0.04 million was reclassified from “Other income (expense)” into “Supplies, facilities and other operating costs” and (ii) interest income of $0.06 million was reclassified from “Other income (expense)” into “Interest expense, net.”
(b) | Sierra Tucson amounts were derived from the unaudited statement of operations for the period from January 1, 2005 through May 11, 2005, the acquisition date. Aspen Education Group, Inc. (“Aspen”) amounts were derived from the audited statement of operations for the year ended December 31, 2005 and from the unaudited statement of operations for the period from January 1, 2006 through September 30, 2006. |
The Company determined that Aspen had previously recorded a few items at fiscal year end in conjunction with their annual audit rather than recording such items during the interim period. As a result, Aspen’s unaudited financial information as previously disclosed in Exhibit 99.2 “ Proforma Revenue, Net Income and Adjusted EBITDA” in the Form 8-K filed October 30, 2006 have been revised to appropriately reflect these adjustments.
The following table reflects the amounts previously reported and as revised:
Nine Months Ended September 30, 2006 | ||||||
As Reported | As Revised | |||||
Net Revenue | $ | 112,001 | $ | 111,928 | ||
Net Income from continuing operations | $ | 8,240 | $ | 6,472 |
(c) | Historical predecessor statement of operations for the one month ended January 31, 2006 includes certain material nonrecurring charges that are directly attributable to the purchase of the Company and such charges were not excluded from the nine months ended September 30, 2006 pro forma combined condensed consolidated statement of operations. The charges and their related tax effects are as follows: |
Amount | ||||
Stock option-based compensation expense related to the settlement of stock options | $ | 17,666 | ||
Fees from financial advisors | 9,635 | |||
Fees to former lead investors | 9,437 | |||
Management bonuses and related payroll taxes | 3,530 | |||
Legal, accounting and other professional fees | 3,442 | |||
Capitalized financing costs written-off | 7,164 | |||
Unamortized debt discount | 3,491 | |||
Income tax benefit(i) | (13,058 | ) | ||
$ | 41,307 | |||
(i) Income tax benefit at 41% tax rate is as follows: |
Pre-tax Amount | Tax Effect | |||||
Stock option-based compensation expense related to the settlement of stock options | $ | 17,666 | $ | 7,243 | ||
Management bonuses and related payroll taxes | 3,530 | 1,447 | ||||
Capitalized financing costs written-off | 7,164 | 2,937 | ||||
Unamortized debt discount | 3,491 | 1,431 | ||||
$ | 13,058 | |||||
(d) | As the Purchase of the Company was assumed to be consummated as of January 31, 2006, the related adjustments include only the period from January 1, 2006 to January 31, 2006. |
Pro forma Adjustments for the Acquisition of Sierra Tucson and Related Financing are as follows:
(e) | Reflects adjustments related to increase in depreciation and amortization for assets acquired in connection with Sierra Tucson. Depreciation expense relates to the increase in fair value of acquired buildings of $6.1 million and building improvements of $2.1 million with an estimated useful life of 30 years and land improvements of $0.3 million with an estimated useful life of 15 years. Amortization expense relates to purchased intangible of covenant not to compete of $0.2 million fair value with three years of estimated useful life. |
Twelve Months Ended December 31, 2005 | |||
Depreciation expense | $ | 99 | |
Amortization expense | 24 | ||
Adjustment to depreciation and amortization expense | $ | 123 | |
(f) | Reflects the net change in interest expense as a result of the $205.0 million Restated Term Loan used to fund the acquisition of the Sierra Tucson and repay the Original Term Loans. Additional interest expense is calculated as follows: |
Twelve Months Ended December 31, 2005 | ||||
Adjustments to interest expense related to financing: | ||||
Restated Term Loan(i) | $ | 5,985 | ||
Amortization of capitalized financing costs(ii) | 325 | |||
Interest expense on new debt | 6,310 | |||
Amortization of capitalized financing costs on Original term Loans | — | |||
Interest expense on Original Term Loans | (1,895 | ) | ||
Historical Sierra Tucson interest expense(iii) | (621 | ) | ||
Adjustment to interest expense | $ | 3,794 | ||
Adjustments to other financing costs(iv) | $ | 2,185 | ||
(i) Represents interest on the outstanding Restated Term Loan, which is calculated as follows: |
|
10
Twelve Months Ended December 31, 2005 | ||||
Outstanding balance on Restated term Loan | $ | 205,000 | ||
Assumed annual interest rate-3 month LIBOR at January 15, 2007, most recent practicable date plus 2.75% | 8.11 | % | ||
Portion of year not outstanding(v) | 0.36 | |||
Calculated interest | $ | 5,985 | ||
(ii) Reflects amortization of $5.4 million of capitalized financing costs on Restated Term Loan over the term of the loan of six years for the period from January 1, 2005 to May 11, 2005. |
| |||
(iii) Reflects elimination of all historical interest incurred by Sierra Tucson before acquisition by us. |
| |||
(iv) Reflects elimination of the write-off of unamortized capitalized financing costs on the Original Term Loans which were repaid in conjunction with the acquisition of Sierra Tucson. |
| |||
(v) New interest expense is calculated for the period from January 1, 2005 to May 11, 2005. |
|
(g) | Reflects elimination of gain of $0.6 million for the year ended December 31, 2005 associated with the termination of the interest rate swap arrangement on the Original Term Loans in conjunction with the financing of the Sierra Tucson acquisition. |
(h) | Reflects the income tax effect of the pro forma adjustments at a 41% tax rate. Amounts included for historical Sierra Tucson and Aspen Education Group, Inc. were determined based upon the assumption that these entities were part of our tax structure. |
Pro forma Adjustments for the Purchase of the Company and Related Financing are as follows:
(i) | Represents the additional management fees to Bain Capital for each of the respective periods. Amount is calculated as follows: |
Twelve Months Ended December 31, 2005 | One Month Ended January 31, 2006 | |||||||
Management fees to be paid to Bain Capital | $ | 2,000 | $ | 167 | ||||
Actual management fees incurred during the periods | (1,153 | ) | (110 | ) | ||||
Adjustment to management fees | $ | 847 | $ | 57 | ||||
(j) | Reflects additional depreciation and amortization expense on property and equipment and intangible assets resulting from the adjustment to the fair value in connection with the Purchase of the Company is as follows: |
Twelve Months Ended December 31, 2005 | One Month Ended January 31, 2006 | |||||
Depreciation expense(i) | $ | 109 | $ | 7 | ||
Amortization expense(ii) | 3,734 | 359 | ||||
Adjustments to depreciation and amortization | $ | 3,843 | $ | 366 | ||
(i) Fixed assets increase in value relates to land in the amount of $13.3 million with indefinite useful life (no depreciation expense recognized) and to buildings of $3.3 million with 30 years estimated useful life. | ||||||
(ii) Intangible assets fair value and their estimated useful lives resulting from the Purchase of the Company is as follows: |
Estimated Useful Life | Fair Value | ||||
Core developed technology | 5 years | $ | 2,600 | ||
Trademark and trade name | Indefinite | 163,700 | |||
Contractual customer relationships | 10-15 years | 50,000 | |||
Certificates of need | Indefinite | 44,600 | |||
Licenses | Indefinite | 25,200 | |||
Covenant not to compete | 3-5 years | 200 | |||
Registration rights | 2 years | 200 | |||
Total identified intangible assets | $ | 286,500 | |||
(k) | Reflects the net change in interest expense as a result of the new financing arrangements to fund the Purchase of the Company, is calculated as follows: |
Twelve Months December 31, | One Month Ended January 31, 2006 | |||||||
New interest expense | ||||||||
Senior subordinated notes(i) | $ | 21,500 | $ | 1,792 | ||||
Senior secured term loan (ii) | 18,560 | 1,485 | ||||||
Revolving loan: | ||||||||
Drawn amount(iii) | — | — | ||||||
Commitment fee on unused amount(iv) | 484 | 39 | ||||||
Fees on outstanding letters of credit(v) | 80 | 6 | ||||||
Amortization of capitalized financing costs and original issuance discount on senior subordinated notes(vi) | 3,212 | 268 | ||||||
Total pro forma interest expense on new borrowings | 43,836 | 3,590 | ||||||
Less: historical interest expense on borrowings repaid in conjunction with the Purchase of the Company(vii) | (24,128 | ) | (2,509 | ) | ||||
Adjustment to interest expense | $ | 19,708 | $ | 1,081 | ||||
(i) Represents interest on our new senior subordinated notes, which is calculated as follows: |
|
11
Twelve Months Ended December 31, 2005 | One Month Ended January 31, 2006 | |||||||
Estimated outstanding balance | $ | 200,000 | $ | 200,000 | ||||
Stated interest rate | 10.75 | % | 10.75 | % | ||||
Portion of year not outstanding | 1.00 | 0.08 | ||||||
Calculated interest | $ | 21,500 | $ | 1,792 | ||||
For each 0.125% increase (or decrease) in interest rate from the stated rates, the annual interest expense would increase (decrease) by approximately $0.3 million
(ii) | Represents interest on our new senior secured term loan, which is calculated as follows: |
Twelve Months Ended December 31, 2005 | One Month Ended January 31, 2006 | |||||||
Estimated average outstanding balance | $ | 243,877 | $ | 243,877 | ||||
Assumed interest rate-3 month LIBOR at January 15, 2007, most recent practicable date plus 2.25% | 7.61 | % | 7.61 | % | ||||
Portion of year not outstanding | 1.00 | 0.08 | ||||||
Calculated interest | $ | 18,560 | $ | 1,485 | ||||
For each 0.125% increase (or decrease) in interest rate from the stated rates, the annual interest expense would increase (decrease) by approximately $0.3 million
(iii) | Represents interest on funds drawn under our new revolving credit facility, which is calculated as follows: |
Twelve Months Ended December 31, 2005 | One Month Ended January 31, 2006 | |||||||
Estimated outstanding balance | $ | — | $ | — | ||||
Assumed interest rate-3 month LIBOR at January 15, 2007, most recent practicable date plus 2.50% | 7.86 | % | 7.86 | % | ||||
Portion of year not outstanding | 1.00 | 0.08 | ||||||
Calculated interest | $ | — | $ | — | ||||
(iv) | Represents commitment fee charged on the unused portion of our new revolving credit facility, which is calculated as follows: |
Twelve Months Ended December 31, 2005 | One Month Ended January 31, 2006 | |||||||
Estimated average unused portion of revolving credit facility | $ | 96,800 | $ | 96,800 | ||||
Commitment fees | 0.50 | % | 0.50 | % | ||||
Portion of year not outstanding | 1.00 | 0.08 | ||||||
Calculated commitment fees | $ | 484 | $ | 39 | ||||
(v) | Represents fees on outstanding letters of credit, which are calculated as follows: |
Twelve Months Ended December 31, 2005 | One Month Ended January 31, 2006 | |||||||
Outstanding letters of credit | $ | 3,200 | $ | 3,200 | ||||
Fees on letters of credit | 2.50 | % | 2.50 | % | ||||
Portion of year not outstanding | 1.00 | 0.08 | ||||||
Calculated letters of credit fees | $ | 80 | $ | 6 | ||||
(vi) | Reflects amortization of capitalized financing costs over the term of the new financing agreements, which is calculated as follows: |
Capitalized Costs | Period of Amortization | ||||
Revolving credit facility | $ | 1,750 | 6 years | ||
Senior secured term loan | 11,676 | 7 years | |||
Senior subordinated notes | 9,546 | 10 years | |||
Total capitalized financing costs | $ | 22,972 | |||
Original issuance discount on senior subordinated notes | 2,978 | 10 years |
(vii) | Adjustment to eliminate historical interest expense. |
12
Pro forma Adjustments for Aspen Acquisition and Related Financing are as follows:
(l) | Reflects additional amortization expense resulting from the adjustment to fair value in connection with the acquisition of Aspen is as follows: |
Twelve Months Ended December 31, 2005 | Nine Months Ended September 30, 2006 | |||||
Incremental amortization expense(i) | $ | 5,811 | $ | 2,681 | ||
(i) Intangible assets acquired in the Aspen transaction have estimated fair values and estimated useful lives as follows: |
Estimated Useful Life (In years) | Fair Value | ||||
Trademarks and trade names | Indefinite | $ | 10,800 | ||
Regulatory Licenses | Indefinite | 16,300 | |||
Referral Networks | 20.0 | 45,400 | |||
Accreditation | 20.0 | 24,400 | |||
Curriculum | 20.0 | 9,000 | |||
Student Contracts | 1.0 | 2,241 | |||
Total identified intangible assets | $ | 108,141 | |||
(m) | Reflects incremental interest expense that Aspen will incur as a result of earn-out obligations incurred upon achievement of certain milestones on its historic acquisitions that have been finalized in September 2006 and October 2006: |
Twelve Months Ended December 31, 2005 | Nine Months Ended September 30, 2006 | |||||
Excel Academy(i) | $ | 266 | $ | 100 | ||
Copper Canyon(ii) | 305 | 164 | ||||
Additional interest expense | $ | 571 | $ | 264 | ||
(i) Excel seller note relates to an earn-out arrangement for $2.6m which will be paid over a two year period commencing October 1, 2006 at the current prime interest rate of 8.25% plus 2.0%. Annual principal payments occur at the end of each year. | ||||||
(ii) Copper Canyon seller note relates to an earn-out arrangement for an estimated $3.8m which will be paid over a four year period commencing February 1, 2007 at a fixed interest rate of 8.00%. Annual principal payments occur at the end of each year. |
(n) | Reflects the net change in interest expense as a result of additional borrowings in Financing the Aspen Acquisition is calculated as follows: |
Twelve Months Ended December 31, 2005 | Nine Months Ended September 30, 2006 | |||||||
New interest expense | ||||||||
Term Loan add-on(i) | $ | 13,732 | $ | 10,208 | ||||
Incremental Amended and Restated Term loan interest expense at new borrowing rate and current variable rate(ii) | 609 | 683 | ||||||
Revolving loan: | ||||||||
Drawn amount(iii) | 260 | 195 | ||||||
Commitment fee on unused amount(iv) | 467 | 351 | ||||||
Fees on outstanding letters of credit(v) | 80 | 60 | ||||||
Amortization of capitalized financing costs(vi) | 1,021 | 765 | ||||||
Total pro forma interest expense on new borrowings | 16,169 | 12,262 | ||||||
Less: elimination of Aspen’s historical interest expense related to the warrant liability on mandatorily redeemable warrants that are cancelled in conjunction with the Aspen Acquisition | (2,647 | ) | (2,716 | ) | ||||
Less: pro forma interest expense and commitment fees on the revolving credit facility for the Purchase of the Company (see footnote (k) above) | (564 | ) | (45 | ) | ||||
Less: Company’s historical interest expense and commitment fees for eight months ended September 30, 2006 on revolving credit facility repaid or amended in conjunction with the acquisition of Aspen | — | (678 | ) | |||||
Adjustment to interest expense | $ | 12,958 | $ | 8,823 | ||||
(i) Represents interest on our Term Loan add-on, which is calculated as follows: |
|
Twelve Months Ended December 31, 2005 | Nine Months Ended September 30, 2006 | |||||||
Estimated average outstanding balance | $ | 174,696 | $ | 173,160 | ||||
Assumed interest rate - 3 month LIBOR at January 15, 2007, most recent practicable date plus 2.50% | 7.86 | % | 7.86 | % | ||||
Portion of year not outstanding | 1.00 | 0.75 | ||||||
Calculated interest | $ | 13,732 | $ | 10,208 | ||||
For each 0.125% increase (or decrease) in interest rate from the stated rates, the annual interest expense would increase (decrease) by approximately $0.2 million |
| |||||||
(ii) Reflects incremental interest expense on the Amended and Restated Term loan to reflect the current variable interest rates and increase in the borrowing rate from LIBOR + 2.25% to LIBOR + 2.50%, net of actual interest expense incurred for the pro forma period from January 1, 2005 through January 31, 2006 and the historic period from February 1, 2006 through September 30, 2006 on the Company’s Term loans, which is calculated as follows: |
|
Twelve Months Ended December 31, 2005 | Nine Months Ended September 30, 2006 | |||||||
Estimated average outstanding balance | $ | 243,877 | $ | 241,733 | ||||
Assumed interest rate - 3 month LIBOR at January 15, 2007, most recent practicable date plus 2.50% | 7.86 | % | 7.86 | % | ||||
Factor of time | 1.00 | 0.75 | ||||||
Pro forma interest expense at current borrowing rate | 19,169 | 14,251 | ||||||
Less: Pro forma interest expense adjustment from the Purchase of the Company (see footnote (k) above) | (18,560 | ) | (1,485 | ) | ||||
Less: Company’s Historic interest expense on the original term loan for the eight months ended September 30, 2006 | — | (12,083 | ) | |||||
$ | 609 | $ | 683 | |||||
For each 0.125% increase (or decrease) in interest rate from the stated rates, the annual interest expense would increase (decrease) by approximately $0.3 million |
| |||||||
(iii) Represents interest on funds drawn under our revolving credit facility, which is calculated as follows: |
|
13
Twelve Months Ended December 31, 2005 | Nine Months Ended September 30, 2006 | |||||||
Estimated outstanding balance | $ | 3,308 | $ | 3,308 | ||||
Assumed interest rate - 3 month LIBOR at January 15, 2007, most recent practicable date plus 2.50% | 7.86 | % | 7.86 | % | ||||
Portion of year not outstanding | 1.00 | 0.75 | ||||||
Calculated interest | $ | 260 | $ | 195 | ||||
(iv) Represents commitment fee charged on the unused portion of our new revolving credit facility, which is calculated as follows: |
|
Twelve Months Ended December 31, 2005 | Nine Months Ended September 30, 2006 | |||||||
Estimated average unused portion of revolving credit facility | $ | 93,492 | $ | 93,492 | ||||
Commitment fees | 0.50 | % | 0.50 | % | ||||
Portion of year not outstanding | 1.00 | 0.75 | ||||||
Calculated commitment fees | $ | 467 | $ | 351 | ||||
(v) Represents fees on outstanding letters of credit, which are calculated as follows: |
|
Twelve Months Ended December 31, 2005 | Nine Months Ended September 30, 2006 | |||||||
Outstanding letters of credit | $ | 3,200 | $ | 3,200 | ||||
Fees on letters of credit | 2.50 | % | 2.50 | % | ||||
Portion of year not outstanding | 1.00 | 0.75 | ||||||
Calculated letters of credit fees | $ | 80 | $ | 60 | ||||
(vi) Reflects amortization of capitalized financing costs over the term of the new financing agreements, which is calculated as follows: |
|
Capitalized Costs | Period of Amortization | ||||
Incremental Term Loan add-on | $ | 5,519 | 6.25 years | ||
Original Term Loan | 859 | 6.25 years | |||
Total capitalized financing costs | $ | 6,378 | |||
(o) | Reflects the elimination of minority interests that was acquired by the company in connection with the acquisition of Aspen. Represents minority interests associated with SUWS of the Carolinas and the Eating Disorders Division from each period presented. |
14