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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
x | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended: September 30, 2007
or
¨ | 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 333-135172
CRC HEALTH CORPORATION
(Exact name of registrant as specified in its charter)
Delaware | 73-1650429 | |
(State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) | |
20400 Stevens Creek Boulevard, Suite 600, Cupertino, California | 95014 | |
(Address of principal executive offices) | (Zip code) |
(877) 272-8668
(Registrant’s telephone number, including area code)
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. Yes x No ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act.
Large accelerated filer ¨ Accelerated filer ¨ Non-accelerated filer x
Indicate by check mark whether the registrant is a shell company (as defined by Rule 12b-2 of the Exchange Act) Yes ¨ No x
There is no market for the registrant’s equity. The total number of shares of the registrant’s common stock, par value of $0.001 per share, outstanding as of November 12, 2007 was 1,000.
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CRC HEALTH CORPORATION
Forward-Looking Statements
This Quarterly Report on Form 10-Q, including “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in Item 2 of Part I of this Quarterly Report, includes or may include “forward-looking statements.” All statements included herein, other than statements of historical fact, may constitute forward-looking statements. In some cases you can identify forward-looking statements by terminology such as “may,” “should” or “could.” Generally, the words “anticipates,” “believes,” “expects,” “intends,” “estimates,” “projects,” “plans” and similar expressions identify forward-looking statements. Although CRC Health Corporation (“CRC”) believes that the expectations reflected in such forward-looking statements are reasonable, it can give no assurance that such expectations will prove to be correct. Important factors that could cause actual results to differ materially from those expressed or implied by such forward-looking statements include, among others, the following factors: changes in government reimbursement for CRC’s services; our substantial indebtedness; changes in applicable regulations or a government investigation or assertion that CRC has violated applicable regulations; attempts by local residents to force our closure or relocation; the potentially difficult, unsuccessful or costly integration of recently acquired operations and future acquisitions; the potentially difficult, unsuccessful or costly opening and operating of new treatment programs; the possibility that commercial payors for CRC’s services may undertake future cost containment initiatives; the limited number of national suppliers of methadone used in CRC’s outpatient treatment clinics; the failure to maintain established relationships or cultivate new relationships with patient referral sources; shortages in qualified healthcare workers; natural disasters such as hurricanes, earthquakes and floods; competition that limits CRC’s ability to grow; the potentially costly implementation of new information systems to comply with federal and state initiatives relating to patient privacy, security of medical information and electronic transactions; the potentially costly implementation of accounting and other management systems and resources in response to financial reporting and other requirements; the loss of key members of CRC’s management; claims asserted against CRC or lack of adequate available insurance; and certain restrictive covenants in CRC’s debt documents and other risks that are described herein, including but not limited to the items discussed in “Risk Factors” in the Company’s Annual Report on Form 10-K for the year ended December 31, 2006 filed on April 2, 2007, and that are otherwise described from time to time in CRC’s Securities and Exchange Commission filings after this Quarterly Report. CRC assumes no obligation and does not intend to update these forward-looking statements.
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CONDENSED CONSOLIDATED BALANCE SHEETS
SEPTEMBER 30, 2007 (UNAUDITED) AND DECEMBER 31, 2006
(In thousands, except share amounts)
September 30, 2007 | December 31, 2006 | |||||
ASSETS | ||||||
CURRENT ASSETS: | ||||||
Cash and cash equivalents | $ | 3,112 | $ | 4,206 | ||
Accounts receivable, net of allowance for doubtful accounts of $8,951 in 2007 and $8,235 in 2006 | 34,487 | 33,805 | ||||
Prepaid expenses | 5,859 | 7,675 | ||||
Other current assets | 2,448 | 2,261 | ||||
Income taxes receivable | 11,692 | 6,496 | ||||
Deferred income taxes | 8,231 | 7,052 | ||||
Total current assets | 65,829 | 61,495 | ||||
PROPERTY AND EQUIPMENT—Net | 120,541 | 94,976 | ||||
GOODWILL | 720,650 | 702,425 | ||||
INTANGIBLE ASSETS—Net | 392,688 | 400,714 | ||||
OTHER ASSETS | 26,109 | 29,178 | ||||
TOTAL ASSETS | $ | 1,325,817 | $ | 1,288,788 | ||
LIABILITIES AND STOCKHOLDER’S EQUITY | ||||||
CURRENT LIABILITIES: | ||||||
Accounts payable | $ | 5,788 | $ | 6,714 | ||
Accrued liabilities | 24,955 | 34,827 | ||||
Current portion of long-term debt | 53,816 | 10,743 | ||||
Other current liabilities | 27,960 | 27,941 | ||||
Total current liabilities | 112,519 | 80,225 | ||||
LONG-TERM DEBT—Less current portion | 616,305 | 615,785 | ||||
OTHER LONG-TERM LIABILITIES | 2,526 | 5,526 | ||||
DEFERRED INCOME TAXES | 143,420 | 149,827 | ||||
Total liabilities | 874,770 | 851,363 | ||||
COMMITMENTS AND CONTINGENCIES (Note 9) | ||||||
MINORITY INTEREST | 544 | 251 | ||||
STOCKHOLDER’S EQUITY: | ||||||
Common stock, $0.001 par value—1,000 shares authorized; 1,000 shares issued and outstanding at September 30, 2007 and December 31, 2006 | ||||||
Additional paid-in capital | 437,337 | 433,652 | ||||
Retained earnings | 13,166 | 3,522 | ||||
Total stockholder’s equity | 450,503 | 437,174 | ||||
TOTAL LIABILITIES AND STOCKHOLDER’S EQUITY | $ | 1,325,817 | $ | 1,288,788 | ||
See notes to condensed consolidated financial statements.
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CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2007 (SUCCESSOR), THREE AND EIGHT MONTHS ENDED SEPTEMBER 30, 2006 (SUCCESSOR) AND ONE MONTH ENDED JANUARY 31, 2006 (PREDECESSOR)
(In thousands)
Successor | Predecessor | |||||||||||||||||||
Three Months Ended September 30, 2007 | Nine Months Ended September 30, 2007 | Three Months Ended September 30, 2006 | Eight Months Ended September 30, 2006 | One Month | ||||||||||||||||
NET REVENUE: | ||||||||||||||||||||
Net client service revenue | $ | 120,623 | $ | 341,489 | $ | 64,290 | $ | 163,071 | $ | 19,360 | ||||||||||
Other revenue | 1,746 | 4,603 | 1,210 | 3,163 | 490 | |||||||||||||||
Net revenue | 122,369 | 346,092 | 65,500 | 166,234 | 19,850 | |||||||||||||||
OPERATING EXPENSES: | ||||||||||||||||||||
Salaries and benefits | 55,443 | 167,131 | 30,397 | 77,262 | 9,265 | |||||||||||||||
Supplies, facilities and other operating costs | 36,557 | 100,677 | 17,698 | 44,413 | 4,561 | |||||||||||||||
Provision for doubtful accounts | 2,036 | 5,064 | 1,176 | 3,295 | 285 | |||||||||||||||
Depreciation and amortization | 5,397 | 16,310 | 2,320 | 6,246 | 361 | |||||||||||||||
Acquisition related costs | — | — | — | — | 43,710 | |||||||||||||||
Total operating expenses | 99,433 | 289,182 | 51,591 | 131,216 | 58,182 | |||||||||||||||
INCOME (LOSS) FROM OPERATIONS | 22,936 | 56,910 | 13,909 | 35,018 | (38,332 | ) | ||||||||||||||
INTEREST EXPENSE, NET | (15,169 | ) | (44,971 | ) | (11,184 | ) | (28,099 | ) | (2,505 | ) | ||||||||||
OTHER FINANCING COSTS | — | — | — | — | (10,655 | ) | ||||||||||||||
OTHER (EXPENSE) INCOME | (1,217 | ) | (800 | ) | (1,544 | ) | (34 | ) | 55 | |||||||||||
INCOME (LOSS) FROM OPERATIONS BEFORE INCOME TAXES | 6,550 | 11,139 | 1,181 | 6,885 | (51,437 | ) | ||||||||||||||
INCOME TAX EXPENSE (BENEFIT) | 1,502 | 3,375 | 742 | 3,694 | (12,444 | ) | ||||||||||||||
MINORITY INTEREST IN INCOME OF A SUBSIDIARY | 427 | 275 | — | — | — | |||||||||||||||
NET INCOME (LOSS) | $ | 4,621 | $ | 7,489 | $ | 439 | $ | 3,191 | $ | (38,993 | ) | |||||||||
See notes to condensed consolidated financial statements.
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CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2007 (SUCCESSOR), EIGHT MONTHS ENDED SEPTEMBER 30, 2006 (SUCCESSOR) AND ONE MONTH ENDED JANUARY 31, 2006 (PREDECESSOR)
(In thousands)
Successor | Predecessor | |||||||||||||
Nine Months Ended September 30, 2007 | Eight Months Ended September 30, 2006 | One Month Ended January 31, 2006 | ||||||||||||
CASH FLOWS FROM OPERATING ACTIVITIES: | ||||||||||||||
Net income (loss) | $ | 7,489 | $ | 3,191 | $ | (38,993 | ) | |||||||
Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities: | ||||||||||||||
Depreciation and amortization | 16,310 | 6,246 | 361 | |||||||||||
Write-off of debt discount and capitalized financing costs | — | — | 10,655 | |||||||||||
Amortization of debt discount and capitalized financing costs | 3,356 | 1,982 | 162 | |||||||||||
Loss (gain) on interest rate swap agreement | 744 | 15 | (55 | ) | ||||||||||
Gain on disposition of property | (10 | ) | (36 | ) | (1 | ) | ||||||||
Provision for doubtful accounts | 5,064 | 3,295 | 285 | |||||||||||
Stock-based compensation | 3,203 | 2,586 | 17,666 | |||||||||||
Deferred income taxes | 3,747 | (391 | ) | — | ||||||||||
Minority interest | 275 | — | — | |||||||||||
Changes in current assets and liabilities: | ||||||||||||||
Accounts receivable | (5,745 | ) | (7,962 | ) | (1,271 | ) | ||||||||
Income taxes receivable | (2,605 | ) | 3,841 | (9,041 | ) | |||||||||
Accounts payable | (926 | ) | 26 | (2,997 | ) | |||||||||
Accrued liabilities | (10,037 | ) | (24,832 | ) | 25,641 | |||||||||
Income taxes payable | — | — | (3,384 | ) | ||||||||||
Other working capital accounts | (3,578 | ) | 5,695 | 842 | ||||||||||
Other assets and liabilities | 832 | (39 | ) | 1,331 | ||||||||||
Net cash provided by (used in) operating activities | 18,119 | (6,383 | ) | 1,201 | ||||||||||
CASH FLOWS FROM INVESTING ACTIVITIES: | ||||||||||||||
Additions of property and equipment | (24,239 | ) | (7,115 | ) | (316 | ) | ||||||||
Proceeds from sale of property and equipment | 67 | 36 | 1 | |||||||||||
Acquisition of business, net of cash acquired | (33,602 | ) | (36,626 | ) | — | |||||||||
Prior period acquisition adjustments | 979 | (14 | ) | — | ||||||||||
Payment of purchase price to former shareholders | — | (429,190 | ) | — | ||||||||||
Net cash used in investing activities | (56,795 | ) | (472,909 | ) | (315 | ) | ||||||||
CASH FLOWS FROM FINANCING ACTIVITIES: | ||||||||||||||
Equity contribution from Bain Capital | — | 294,475 | — | |||||||||||
Capital contributed by parent | 500 | — | — | |||||||||||
Payment of transaction related costs | — | (5,354 | ) | — | ||||||||||
Stock options exercised | — | — | 7 | |||||||||||
Debt financing costs | (611 | ) | (22,981 | ) | (547 | ) | ||||||||
Net borrowings (repayments) under revolving line of credit | 41,900 | 27,500 | (5,000 | ) | ||||||||||
Proceeds from issuances of long-term debt | — | 442,022 | — | |||||||||||
Repayment of long-term debt | (4,207 | ) | (255,200 | ) | — | |||||||||
Net cash provided by (used in) financing activities | 37,582 | 480,462 | (5,540 | ) | ||||||||||
NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS | (1,094 | ) | 1,170 | (4,654 | ) | |||||||||
CASH AND CASH EQUIVALENTS—Beginning of period | 4,206 | 423 | 5,077 | |||||||||||
CASH AND CASH EQUIVALENTS—End of period | $ | 3,112 | $ | 1,593 | $ | 423 | ||||||||
SUPPLEMENTAL DISCLOSURE OF NONCASH INVESTING ACTIVITIES: | ||||||||||||||
Payable in conjunction with the addition of property and equipment | $ | — | $ | 225 | $ | 95 | ||||||||
Payable in conjunction with acquisition contingent consideration | $ | 4,625 | $ | 1,744 | $ | — | ||||||||
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION: | ||||||||||||||
Cash paid for interest | $ | 47,342 | $ | 22,652 | $ | 1,336 | ||||||||
Cash paid for income taxes, net of refunds | $ | 2,235 | $ | 225 | $ | — | ||||||||
See notes to condensed consolidated financial statements.
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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
1. | ORGANIZATION |
CRC Health Corporation (the “Company” or “We”) is a wholly owned subsidiary of CRC Health Group, Inc. referred to as (the “Group”) or (the “Parent”). The Company is headquartered in Cupertino, California and through its wholly owned subsidiaries provides substance abuse treatment services and youth treatment services in the United States. The Company also provides treatment services for other addiction diseases and behavioral disorders such as eating disorders. The Company delivers its substance abuse and behavioral disorder treatment services through residential and outpatient treatment facilities, which we refer to as our residential and outpatient treatment divisions. We deliver our youth treatment services through our residential schools, wilderness programs and weight loss programs, which we refer to as our youth treatment division. As of September 30, 2007, we operated 107 residential and outpatient treatment facilities in 23 states and treated approximately 26,615 patients per day. As of September 30, 2007, our youth treatment division operated programs at 38 facilities in 13 states and one in the United Kingdom.
2. | SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES |
Basis of Presentation and Principles of Consolidation—The date of the Bain Merger (see Note 3) was February 6, 2006 but for accounting purposes and to coincide with its normal financial closing, the Company has utilized February 1, 2006 as the effective date. As a result, the Company has reported operating results and financial position for all periods presented prior to February 1, 2006 as those of the Predecessor Company (“Predecessor”) and for all periods from and subsequent to February 1, 2006 as those of the Successor Company (“Successor”) due to the resulting change in the basis of accounting.
These unaudited condensed consolidated financial statements have been prepared in accordance with generally accepted accounting principles in the United States of America (“GAAP”) and pursuant to the rules and regulations of the Securities and Exchange Commission (the “SEC”) applicable for interim financial information. The Company’s unaudited condensed consolidated financial statements include the accounts of CRC Health Corporation and its consolidated subsidiaries, and, for the periods through January 31, 2006, CRC Health Group, Inc. and its consolidated subsidiaries. All significant intercompany accounts and transactions have been eliminated in consolidation.
In the opinion of management, these unaudited condensed consolidated financial statements contain all adjustments, including normal recurring adjustments, necessary to present fairly the financial position of the Company, its results of operations, and its cash flows. These unaudited condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements for the year ended December 31, 2006.
Use of Estimates—The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities as of the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
Recent Accounting Pronouncements—In February 2007, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standards No. 159,The Fair Value Option for Financial Assets and Financial Liabilities—Including an amendment to FASB Statement No. 115 (“SFAS 159”).SFAS 159 expands the use of fair value accounting but does not affect existing standards which require assets or liabilities to be carried at fair value. Under SFAS 159, a company may elect to use fair value to measure accounts and loans receivable, available-for-sale and held-to-maturity securities, equity method investments, accounts payable, guarantees and issued debt. Other eligible items include firm commitments for financial instruments that would otherwise not be recognized at inception and non-cash warranty obligations where a warrantor is permitted to pay a third party to provide the warranty goods or services. If fair value is elected, any upfront costs and fees related to the item must be recognized in earnings and cannot be deferred, e.g., debt issue costs. The fair value election is irrevocable and may generally be made on an instrument-by-instrument basis, even if a company has similar instruments that it elects not to fair value. At the adoption date, unrealized gains and losses on existing items for which fair value has been elected are reported as a cumulative adjustment to beginning retained earnings. SFAS 159 is effective for fiscal years beginning after November 15, 2007 and is required to be adopted by the Company in the first quarter 2008. The Company is currently determining whether fair value is appropriate for any of its eligible items and cannot estimate the impact, if any, which SFAS 159 will have on its consolidated results of operations and financial condition.
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In September 2006, the FASB issued Statement of Financial Accounting Standards No. 157,Fair Value Measurements (“SFAS 157”). SFAS 157 defines fair value, establishes a framework for measuring fair value in generally accepted accounting principles and expands disclosures about fair value measurements. SFAS 157 applies under other accounting pronouncements that require or permit fair value measurements, the FASB having previously concluded in those accounting pronouncements that fair value is the relevant measurement attribute; however SFAS 157 does not apply to SFAS No. 123 (revised 2004),Share-Based Payment (“SFAS 123(R)”). SFAS 157 is effective for financial statements issued for fiscal years beginning after November 15, 2007, and interim periods within those fiscal years. SFAS 157 is required to be adopted by the Company on January 1, 2008. The Company is currently evaluating the effect of the adoption of SFAS 157 will have on its financial statements.
The Company adopted FASB Interpretation No. 48,Accounting for Uncertainty in Income Taxes—an Interpretation of FASB Statement No. 109 (“FIN 48”) on January 1, 2007. FIN 48 clarifies the accounting and reporting for uncertainties in income tax law recognized in an enterprise’s financial statements in accordance with SFAS No. 109. FIN 48 prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in income tax returns. FIN 48 also provides guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosure and transition. See Note 7 for additional information, including the effects of adoption on the Company’s condensed consolidated balance sheet.
3. | ACQUISITIONS |
2007 Acquisitions
In the nine months ended September 30, 2007, the Company completed four acquisitions and paid total cash consideration of approximately $32.7 million, including acquisition related expenses. The acquisitions are intended to provide expansion of its residential and youth services into new geographic regions in the United States. The Company recorded $23.5 million of goodwill, of which $22.4 million is expected to be deductible for tax purposes. Goodwill assigned to the Residential and Youth treatment segments was $21.9 million and $1.6 million, respectively.
The acquisitions were accounted for as a purchase in accordance with SFAS No. 141,Business Combinations. Under purchase accounting the purchase price for each acquisition was allocated to the assets acquired and liabilities assumed based on their respective fair values. The purchase price was allocated using the information currently available. As a result, the Company may adjust the allocation of the purchase consideration as we obtain more information regarding the asset valuations, liabilities assumed and purchase price adjustments. The Company has included the acquired entities’ results of operations in the unaudited condensed consolidated statements of operations from the date of the acquisition. Pro forma results of operations have not been presented because the effect of the acquisitions was not material.
Prior Period Acquisitions
In connection with an acquisition which closed in October 2005, the Company is obligated to make certain additional payments of up to $2.0 million upon the achievement of certain performance milestones. As of September 30, 2007, the entity has achieved the second year performance milestones and as a result the Company recorded additional goodwill and a liability of $2.0 million. Payment was made by the Company in the fourth quarter of 2007.
Certain acquisition agreements acquired in the Aspen Acquisition (as defined below) contain contingent earnout provisions that provide for additional consideration to be paid to the sellers if the results of the acquired entity’s operations exceed negotiated benchmarks. As of September 30, 2007, four of the entities exceeded the benchmarks, the Youth treatment segment recorded additional goodwill and a liability of $4.5 million of which $1.9 million was incurred during the three months ended September 30, 2007. The additional consideration consists of a combination of cash and notes payable issued to the seller. During the three months ended September 30, 2007, the Company paid $1.8 million under the contingent earnout arrangements and expects the remaining cash payments to be made in the first quarter of 2008.
Aspen Acquisition— In November 2006, the Company acquired substantially all the outstanding capital stock of Aspen Education Group, Inc., a California corporation (“Aspen Education Group”), which is referred to as the Aspen Acquisition, for approximately $272.6 million in cash purchase price consideration, the assumption of approximately $20.6 million of indebtedness as defined per the merger agreement (includes the buy-out of minority interest of $4.2 million), and the payment of costs associated with the acquisition and the related financing of approximately $1.6 million and $10.8 million, respectively. Aspen Education Group provides educational services to youth who have demonstrated behavioral issues that have interfered with their performance in school and life. Aspen Education Group offers its programs through its residential division (boarding schools), outdoor division (outdoor education programs) and healthy living division (weight management programs for children and teenagers). Among other benefits, the Aspen Acquisition offers multiple revenue and cost synergies. The Aspen Acquisition further enhances the Company’s private pay mix and business diversification, thereby reducing business risk from any one aspect of the Company’s operations. In addition, the Company is expected to benefit from increased cross-referral opportunities.
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The acquisition was accounted for as a purchase and accordingly, the purchase consideration was allocated to the assets and liabilities based on their relative fair values. The consideration remaining was allocated to the Company’s intangible assets with finite lives and is being amortized over that life, as well as to goodwill and identifiable intangible assets with indefinite lives, which will be evaluated on at least an annual basis to determine impairment and adjusted accordingly.
Bain Merger—On February 6, 2006, investment funds managed by Bain Capital Partners, LLC (“Bain Capital”) acquired CRC Health Group for a total cash consideration of approximately $742.3 million (including acquisition and financing transactions related fees and expenses of $28.5 million). As a result of the acquisition, Bain Capital received control of the Company.
The acquisition was accounted for as a purchase and accordingly, the purchase consideration was allocated to the assets and liabilities based on their relative fair values. The consideration remaining was allocated to the Company’s intangible assets with finite lives and is being amortized over that life, as well as to goodwill and identifiable intangible assets with indefinite lives, which will be evaluated on at least an annual basis to determine impairment and adjusted accordingly.
4. | BALANCE SHEET COMPONENTS |
Balance sheet components at September 30, 2007 and December 31, 2006 consist of the following (in thousands):
September 30, 2007 | December 31, 2006 | |||||||
Other assets: | ||||||||
Capitalized financing costs—net | $ | 24,374 | $ | 26,899 | ||||
Deposits | 895 | 1,078 | ||||||
Note receivable and accrued interest | 840 | 1,201 | ||||||
Total other assets | $ | 26,109 | $ | 29,178 | ||||
Accrued liabilities: | ||||||||
Accrued payroll and related expenses | $ | 7,271 | $ | 13,227 | ||||
Accrued vacation | 5,944 | 5,376 | ||||||
Accrued interest | 4,051 | 9,288 | ||||||
Accrued expenses | 7,689 | 6,936 | ||||||
Total accrued liabilities | $ | 24,955 | $ | 34,827 | ||||
Other current liabilities: | ||||||||
Deferred revenue | $ | 17,713 | $ | 15,343 | ||||
Other liabilities | 4,258 | 5,434 | ||||||
Client deposits | 5,051 | 4,347 | ||||||
Interest rate swap liability | 635 | — | ||||||
Insurance premium financing | 303 | 2,817 | ||||||
Total other current liabilities | $ | 27,960 | $ | 27,941 | ||||
Accounts receivable: | ||||||||
Accounts receivable | $ | 43,438 | $ | 42,040 | ||||
Less allowance for doubtful accounts | (8,951 | ) | (8,235 | ) | ||||
Accounts receivable—net | $ | 34,487 | $ | 33,805 | ||||
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5. | PROPERTY AND EQUIPMENT |
Property and equipment at September 30, 2007 and December 31, 2006 consists of the following (in thousands):
September 30, 2007 | December 31, 2006 | |||||||
Land | $ | 21,323 | $ | 19,031 | ||||
Building and improvements | 47,547 | 41,886 | ||||||
Leasehold improvements | 19,026 | 12,011 | ||||||
Furniture and fixtures | 9,011 | 7,074 | ||||||
Computer equipment | 7,044 | 5,766 | ||||||
Computer software | 4,346 | 3,078 | ||||||
Motor vehicles | 4,709 | 3,687 | ||||||
Field equipment | 2,046 | 1,423 | ||||||
Construction in progress | 18,940 | 6,208 | ||||||
133,992 | 100,164 | |||||||
Less accumulated depreciation | (13,451 | ) | (5,188 | ) | ||||
Property and equipment—net | $ | 120,541 | $ | 94,976 | ||||
Depreciation expense was $2.7 million and $8.3 million for the three and nine months ended September 30, 2007, $1.2 million and $3.2 million for the three and eight months ended September 30, 2006 and $0.3 million for the one month ended January 31, 2006, respectively
6. | GOODWILL AND INTANGIBLE ASSETS |
Changes to goodwill by segment for the nine months ended September 30, 2007 are as follows (in thousands):
Residential | Outpatient | Youth | Total | |||||||||||||
Goodwill — December 31, 2006 | $ | 267,631 | $ | 208,179 | $ | 226,615 | $ | 702,425 | ||||||||
Goodwill additions (Other Acquisitions) | 21,942 | — | 1,611 | 23,553 | ||||||||||||
Goodwill additions related to earnouts | 2,000 | — | 4,471 | 6,471 | ||||||||||||
Goodwill adjustments related to purchase price allocations | (2,940 | ) | (2,678 | ) | (6,181 | ) | (11,799 | ) | ||||||||
Goodwill — September 30, 2007 | $ | 288,633 | $ | 205,501 | $ | 226,516 | $ | 720,650 | ||||||||
The goodwill additions for the Other Acquisitions relate to the acquisitions completed in the current and prior fiscal year. The goodwill adjustments are for the prior fiscal year Other Acquisitions and Aspen Acquisition and relate primarily to revisions of the original estimates.
Intangible assets at September 30, 2007 and December 31, 2006 consist of the following (in thousands):
Amortization Lives | September 30, 2007 | December 31, 2006 | ||||||||
Intangible assets subject to amortization: | ||||||||||
Referral network | 20 years | $ | 45,400 | $ | 45,400 | |||||
Accreditations | 20 years | 24,400 | 24,400 | |||||||
Curriculum | 20 years | 9,000 | 9,000 | |||||||
Government, including Medicaid, contracts | 15 years | 35,600 | 35,600 | |||||||
Managed care contracts | 10 years | 14,400 | 14,400 | |||||||
Core developed technology | 5 years | 2,704 | 2,704 | |||||||
Covenants not to compete | 3 years | 152 | 152 | |||||||
Registration rights | 2 years | 200 | 200 | |||||||
Student contracts | 1 year | 2,241 | 2,241 | |||||||
Less: accumulated amortization | (12,955 | ) | (4,929 | ) | ||||||
Total intangible assets subject to amortization | 121,142 | 129,168 | ||||||||
Intangible assets not subject to amortization: | ||||||||||
Trademarks and trade names | 183,725 | 183,725 | ||||||||
Certificates of need | 44,600 | 44,600 | ||||||||
Licenses | 43,221 | 43,221 | ||||||||
Total intangible assets not subject to amortization | 271,546 | 271,546 | ||||||||
Total intangible assets | $ | 392,688 | $ | 400,714 | ||||||
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Amortization expense of intangible assets subject to amortization was $2.7 million and $8.1 million for the three and nine months ended September 30, 2007, $1.1 million and $3.1 million for the three and eight months ended September 30, 2006 and $0.02 million for the one month ended January 31, 2006, respectively.
Estimated future amortization expense related to the amortizable intangible assets at September 30, 2007 is as follows (in thousands):
Fiscal Year | |||
2007 (remaining 3 months) | $ | 2,395 | |
2008 | 8,318 | ||
2009 | 8,293 | ||
2010 | 8,293 | ||
2011 | 7,798 | ||
Thereafter | 86,045 | ||
Total | $ | 121,142 | |
7. | INCOME TAXES |
The Company determines income tax expense for interim periods by applying the use of the full year’s estimated effective tax rate in financial statements for interim periods. The estimated effective annual income tax rate is 40.2%. The income tax expense for the three and nine months ended September 30, 2007 was $1.5 million and $3.4 million, reflecting an effective tax rate of 22.9% and 30.3%, respectively. The effective income tax rates for the three and nine month periods were positively affected by the release of $1.1 million of tax reserve under FIN 48 during the third quarter as further discussed below.
The income tax expense for the three and eight months ended September 30, 2006 was $0.7 million and $3.7 million, reflecting an effective tax rate of 62.8% and 53.7%, respectively. The income tax benefit for the one month ended January 31, 2006 was $12.4 million, reflecting an effective tax rate of 24.2%. The tax benefit for the one month ended January 31, 2006 was primarily the result of $31.9 million of acquisition-related expenses that are deductible for tax purposes. The effective tax rate for the three and eight months ended September 30, 2006 includes a benefit of $0.1 million due to a reversal of net deferred tax liabilities resulting from the adoption of a new Texas state law.
During the second quarter of 2007 a study of the deductibility of transaction costs incurred in connection with the Aspen Acquisition was completed. As a result of the study the Company revised its previous estimate of the amount of acquisition related expenses that are expected to be tax deductible by $1.8 million. This resulted in an increase in 2006 net operating losses (“NOL’s”) which can be carried back to offset income in prior years. An income tax receivable of $0.7 million and a corresponding decrease in goodwill associated with Aspen Acquisition was recorded in the second quarter to reflect changes in the previously estimated deductible transaction costs. During the third quarter, the Company recorded an income tax receivable of $3.3 million with an offset to goodwill based on the tax return filed associated with the preacquisition earnings of Aspen.
During the third quarter of 2007 a separate study of the deductibility of transaction costs incurred in connection with the Bain Merger was completed. As a result of the study the Company revised its previous estimate of the amount of acquisition related expenses that are expected to be tax deductible by $15.8 million, which correspondingly increased the NOL’s for 2006. The Company carried back $6.0 million of the 2006 increase in NOL’s to offset income in the prior years and recorded an income tax receivable of $1.7 million. In addition, $9.8 million of NOL’s were carried forward to future years. A deferred tax asset of $4.1 million was recognized to reflect the expected benefit of those carryforwards. The Company reduced goodwill associated with Bain Merger in the amount of $5.8 million during the third quarter to reflect the changes to previously estimated tax amounts recorded in purchase accounting.
Adoption of New Accounting Policy
The Company adopted the provisions of FIN 48 on January 1, 2007. The cumulative effect of adopting FIN 48 was a decrease in tax reserves of $1.5 million and an increase of $2.2 million to the January 1, 2007 retained earnings balance. Upon adoption, the liability for income taxes associated with uncertain tax positions at January 1, 2007 was $2.1 million. This liability can be reduced by $0.2 million of offsetting tax benefits associated with the correlative effects of potential state income taxes and other timing adjustments. The net amount of $1.9 million, if recognized, would favorably affect the Company’s effective tax rate. In addition, consistent with the provisions of FIN 48, the Company reclassified $0.7 million of income tax liabilities from current to non-current liabilities because payment of cash is not anticipated within one year of the balance sheet date. These non-current income tax liabilities are recorded in other liabilities in the unaudited condensed consolidated balance sheets.
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The Company is no longer subject to U.S. federal income tax audits by taxing authorities for years through 2003. As a result of the expiration of the statute of limitations, the Company released an income tax reserve of $1.1 million under FIN 48. During the second quarter of 2007, the Company recorded a FIN 48 liability in the amount of $0.4 million associated with transaction costs incurred in connection with the Aspen Acquisition. During the current quarter the Company considered the need for a FIN 48 reserve for transaction costs incurred during the Bain Merger and concluded none was necessary.
8. | LONG-TERM DEBT |
Long-term debt at September 30, 2007 and December 31, 2006 consists of the following (in thousands):
September 30, 2007 | December 31, 2006 | |||||||
Term loans | $ | 415,083 | $ | 418,227 | ||||
Revolving line of credit | 45,500 | 3,600 | ||||||
Senior subordinated notes, net of discount of $2,483 | 197,518 | 197,295 | ||||||
Seller notes | 11,959 | 7,145 | ||||||
Capital lease obligations | 61 | 261 | ||||||
Total long-term debt | 670,121 | 626,528 | ||||||
Less: current portion | (53,816 | ) | (10,743 | ) | ||||
Long-term debt—less current portion | $ | 616,305 | $ | 615,785 | ||||
Term Loans and Revolving Line of Credit—On November 17, 2006, the Company amended and restated the Credit Agreement (the “Amended and Restated Credit Agreement”). The Amended and Restated Credit Agreement provides for financing of $419.3 million in senior secured term loans and $100.0 million of revolving credit. Effective April 16, 2007, the Company entered into Amendment No. 2 (“Amendment”) that amends the Company’s Amended and Restated Credit Agreement. Per the Amendment, the Term Loan interest is payable quarterly at 90 day London Interbank Offered Rate (“LIBOR”) plus 2.25% per annum (previously 2.50% per annum); provided that on and after such time the Company’s corporate rating from Moody’s is at least B1 then the interest is payable quarterly at 90 day LIBOR plus 2.0% per annum.
Term Loan—Aggregate commitment of $419.3 million matures on February 6, 2013. The term loan is payable in quarterly principal installments of $1.05 million per quarter through December 31, 2012, and the remainder on February 6, 2013. Interest is payable quarterly at 90 day LIBOR plus 2.25% per annum (7.48% at September 30, 2007). The principal balance outstanding at September 30, 2007 was $415.1 million.
Revolving Line of Credit (“Revolver”)—Maximum borrowings not to exceed $100.0 million. At the Company’s option, interest is currently payable at LIBOR plus 2.50% per annum or monthly at the Base Rate (defined as the higher of (a) the prime rate or (b) the overnight federal funds rate plus 50 basis points) plus 1.50% per annum. Principal is payable at the Company’s discretion based on available operating cash balances. The revolving line of credit commitment expires on February 6, 2012. At September 30, 2007, there was $45.5 million of principal balance outstanding under the Revolver, the Company classified this on the Balance Sheets as Current portion of long-term debt. The Company had historically and currently intends to make payments to reduce borrowing under the revolver from operating cash flow. In addition, the Company expects that future financings will serve not only to partially fund acquisitions but also to repay all or part of any outstanding revolver balances then outstanding.
From time to time the Revolver may include one or more swing line loans at the Base Rate or one or more letters of credit (“LCs”). At September 30, 2007, there was no outstanding balance on the swing line loans. LCs outstanding at September 30, 2007 was $5.6 million with interest payable quarterly at 2.50% per annum. The LCs secure various liability and workers’ compensation policies in place for the Company and its subsidiaries.
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Senior Subordinated Notes—Concurrent with the Bain Merger, the Company issued $200.0 million aggregate principal amount of 10 3/4% Senior Subordinated Notes (the “Notes”) due February 1, 2016. Interest is payable semiannually beginning August 1, 2006. The Notes were issued at a price of 98.511%, resulting in $3.0 million of original issue discount. The Company may redeem some or all of the Notes on or prior to February 1, 2011 at a redemption price equal to 100% of the principal amount of the Notes redeemed plus a “make-whole” premium or at the redemption prices set forth in the indenture governing the Notes. The Company may also redeem up to 35% of the aggregate principal amount of the Notes using the proceeds of one or more equity offerings completed before February 1, 2009. If there is a change of control as specified in the indenture, the Company must offer to repurchase the Notes. The Notes are subordinated to all of the Company’s existing and future senior indebtedness, rank equally with all of the Company’s existing and future senior subordinated indebtedness and rank senior to all of the Company’s existing and future subordinated indebtedness. The Notes are guaranteed on an unsecured senior subordinated basis by all of the Company’s subsidiaries.
Seller Notes—Represents notes payable for amounts owed by Aspen Education Group arising out of achievement of certain earn out obligations per the terms of the underlying purchase agreements and to fund acquisitions made by Aspen Education Group prior to the acquisition of Aspen Education Group by the Company. Interest rates on these notes range from 6.75% to 10.25% per annum. Principal and interest are payable quarterly through January 2012.
Capital Leases—Principal and interest are payable monthly at various dates through September 2011. Interest rates range from 5.00% to 12.20% per annum.
Interest expense on total debt was $15.2 million and $45.5 million for the three and nine months ended September 30, 2007, $11.2 million and $28.2 million for the three and eight months ended September 30, 2006 and $2.5 million for the one month ended January 31, 2006, respectively.
Interest income was approximately $0.05 million and $0.5 million for the three and nine months ended September 30, 2007, $0.03 million and $0.06 million in the three and eight months ended September 30, 2006 and $0.0 million for the one month ended January 31, 2006.
9. | COMMITMENTS AND CONTINGENCIES |
Litigation—The Company is involved in litigation and regulatory investigations arising in the ordinary course of its business. After consultation with legal counsel, management estimates that these matters will be resolved without material adverse effect on the Company’s future financial position or results from operations and cash flows.
10. | STOCKHOLDER’S EQUITY |
Common Stock
The Company’s Amended and Restated Certificate of Incorporation authorizes the Company to issue 1,000 shares of $0.001 par value common stock, all of which are issued and outstanding as of December 31, 2006 and are held by the Group.
Voting—Each share of common stock is entitled, on all matters submitted for a vote or the consent of the holders of shares of common stock, to one vote.
Capital Contributed by Parent
In November, 2006, the Company received a capital contribution of $135.7 million from the Group to fund the Aspen Acquisition. The Group funded such capital contributions by a combination of $36.2 million resulting from the sale of its equity securities to certain of the Group’s equity holders and by the issuance of a PIK loan of $105.0 million issued at 1% original issue discount for net proceeds of $103.9 million. The Group incurred $4.5 million of financing costs in connection with the issuance of the PIK loan which was treated as a reduction in the capital contribution. The interest payable per annum for the PIK loan is 180 day LIBOR plus 7.0% per annum for the first year, 180 day LIBOR plus 7.5% per annum for the second year and 180 day LIBOR plus 8.0% per annum for the years thereafter until the maturity date. Per the PIK loan agreement, the interest is accrued through an increase in the principal amount. The aggregate principal amount inclusive of the accrued interest matures on November 17, 2013. This senior unsecured PIK loan is not guaranteed by the Company or any of its subsidiaries. In August 2007, the Company received a capital contribution of $0.5 million from the Group. The Group funded the capital contribution with the proceeds from the sale of equity securities.
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11. | STOCK-BASED COMPENSATION EXPENSE |
Adoption of New Accounting Policy
On January 1, 2006, the Company adopted the provisions of SFAS 123(R) using the prospective transition method, which requires the application of the accounting standard to awards granted, modified or settled subsequent to the date of adoption. Results from prior periods have not been restated.
The Company’s unaudited condensed consolidated financial statements for the three and nine months ended September 30, 2007, the three and eight months ended September 30, 2006 and the one month ended January 31, 2006 reflects the effect of SFAS 123(R). Stock option-based compensation expense related to employee stock options granted by the Group subsequent to the date of adoption recognized under SFAS 123(R) was $1.1 million and $3.2 million for the three and nine months ended September 30, 2007, $1.0 million and $2.6 million for the three and eight months ended September 30, 2006, respectively. The income tax benefit recognized in the unaudited condensed consolidated statements of operations for stock-based compensation expense was $0.4 million and $1.3 million for the three and nine months ended September 30, 2007 and $0.4 million and $1.1 million for the three and eight months ended September 30, 2006, respectively. There was no stock option-based compensation expense recognized in the unaudited condensed consolidated statements of operations for the three and nine months ended September 30, 2007, three and eight months ended September 30, 2006 and one month ended January 31, 2006 related to the options granted prior to the date of adoption of SFAS 123(R). Stock option-based compensation expense of $17.7 million and tax benefit of $7.3 million was recognized in the 2006 Predecessor Company consolidated statement of operations and is included in the acquisition related costs.
Stock Option Plans
On February 6, 2006, following the Bain Merger, Group adopted the 2006 Executive Incentive Plan and 2006 Management Incentive Plan, or the “Executive Plan” and the “Management Plan,” respectively. In September 2007, Group amended the 2006 Executive Incentive Plan to provide that any unvested Tranche 3 Options – options that vest over a 5 year period upon the Company’s EBITDA reaching certain levels – vest upon the first anniversary of an initial public offering, each six month anniversary thereafter or the date of a sale transaction if the value per unit (nine shares of Class A and one share of Class L) equals or exceeds $360 on such date. In September 2007, Group adopted the 2007 Incentive Stock Option Plan or the (“2007 Incentive Plan”) and collectively, with the Executive Plan and the Management Plan, the (“Plans.”) The 2007 Incentive Plan is mirrored after the Executive Plan. The Plans provide for the granting of stock options to the Company’s key employees, directors, consultants and advisors. Options granted under the Plans may be either incentive stock options or non-incentive stock options. Options granted under the Plans represent units. One unit consists of nine shares of class A and one share of class L common stock of the Group.
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The Company estimated the fair value of share based payments awards using a Black-Scholes valuation model for Management Plan grants and tranche 1 of the Executive Plan grants. A Monte Carlo simulation approach was used to determine the fair value of the Executive Plan tranche 2 and tranche 3 awards. The following assumptions were used to calculate the weighted average fair value of employee stock options granted during the periods presented below.
Three Months Ended September 30, | Three Months Ended September 30, | |||||||
Weighted-average estimated fair value of units granted | $ | 54.52 | $ | 53.50 | ||||
Expected volatility – tranche 1 and management awards | 45.3 | % | 56.6 | % | ||||
Expected volatility – tranche 2 | 54.3 | % | 56.6 | % | ||||
Expected volatility – tranche 3 | 54.3 | % | 56.6 | % | ||||
Risk-free interest rate | 4.18 | % | 4.85 | % | ||||
Expected term – tranche 1 and management awards in years | 6.33 | 5.00 | ||||||
Expected term – tranche 2 in years | 5.02 | 6.25 | ||||||
Expected term – tranche 3 in years | 6.01 | 5.00 | ||||||
Expected dividend to be paid over the option period | $ | 0.00 | $ | 0.00 | ||||
Estimated forfeiture rate over the effective vesting period | 5 | % | 5 | % | ||||
Nine Months Ended September 30, 2007 | Eight Months Ended September 30, 2006 | |||||||
Weighted-average estimated fair value of units granted | $ | 54.91 | $ | 53.30 | ||||
Expected volatility – tranche 1 management awards | 46.7 | % | 56.5 | % | ||||
Expected volatility – tranche 2 | 54.6 | % | 56.5 | % | ||||
Expected volatility – tranche 3 | 49.7 | % | 56.5 | % | ||||
Risk-free interest rate | 4.65 | % | 4.81 | % | ||||
Expected term – tranche 1 and management awards in years | 6.33 | 5.00 | ||||||
Expected term – tranche 2 in years | 5.24 | 5.84 | ||||||
Expected term – tranche 3 in years | 6.22 | 5.00 | ||||||
Expected dividend to be paid over the option period | $ | 0.00 | $ | 0.00 | ||||
Estimated forfeiture rate over the effective vesting period | 5 | % | 5 | % |
As of September 30, 2007, $18.9 million of total unrecognized compensation expense is expected to be recognized over a weighted average period of 1.9 years.
Activity under the Executive and Management Plans for the nine months ended September 30, 2007 is set forth below:
Options (in shares) | Weighted- Average Exercise Price | Weighted- Average Remaining Contractual Term (In Years) | ||||||
Options outstanding at December 31, 2006 | 6,310,558 | 9.02 | 4.81 | |||||
Activity from January 1 through September 30, 2007 | ||||||||
Granted | 1,281,023 | 7.76 | 4.30 | |||||
Exercised | — | — | — | |||||
Forfeited/cancelled/expired | (165,114 | ) | 9.93 | — | ||||
Outstanding—September 30, 2007 | 7,426,467 | $ | 7.76 | 4.30 | ||||
Exercisable—September 30, 2007 | 2,248,050 | $ | 4.24 | 4.30 | ||||
12. | RELATED PARTY TRANSACTIONS |
In connection with the Bain Merger, Bain Capital and the Company’s management entered into a stockholders agreement. The stockholders agreement contains agreements among the parties with respect to the election of the Company’s directors and the directors of the Company’s direct parent company, restrictions on the issuance or transfer of shares, including tag-along rights and drag-along rights, other special corporate governance provisions (including the right to approve various corporate actions), registration rights (including customary indemnification provisions) and call options. Three of the Company’s directors are employees of Bain Capital, the Company’s principal shareholder.
Upon the consummation of the Bain Merger, the Company entered into a management agreement with an affiliate of Bain Capital pursuant to which such entity or its affiliates will provide management services. Pursuant to such agreement, an affiliate of Bain Capital receives an aggregate annual management fee of $2.0 million and reimbursement for out-of-pocket expenses and any additional fees incurred in connection with the provision of services pursuant to the agreement. In addition, pursuant to such agreement, an affiliate of Bain Capital also received aggregate transaction fees of approximately $7.2 million in connection with services provided by such entity related to the Bain Merger. Of the $7.2 million, approximately $2.9 million were for acquisition related expenses and $4.3 million were for financing related expenses which are capitalized and recorded in other assets. The management agreement has a five year, evergreen term, however, in certain circumstances, such as an initial public offering or change of control of the Group, the Company may terminate the management agreement and buy out its remaining obligations under the agreement to Bain Capital and affiliates. In addition, the management agreement provides that an affiliate of Bain Capital may receive fees in connection with certain subsequent financing and acquisition transactions. The management agreement includes customary indemnification provisions in favor
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of Bain Capital and its affiliates. The Company under this agreement paid management fees of $0.5 million and $1.5 million during the three and nine months ended September 30, 2007, $0.5 million and $1.3 million for the three and eight months ended September 30, 2006, respectively, which is included in supplies, facilities and other operating costs.
In addition, under a separate management agreement with two of the former stockholders of the Predecessor Company, the Predecessor Company paid management fees of $0.1 million during the one month ended January 31, 2006, which is included in supplies, facilities and other operating costs. This agreement was terminated as part of the Bain Merger.
In connection with the closing of the Bain Merger on February 6, 2006, and pursuant to a rollover and subscription agreement, certain members of the Company’s management converted options to purchase stock of the Predecessor Company into options to purchase stock of the Group with an aggregate value of $9.1 million. In connection with the closing of the Aspen Acquisition and pursuant to a rollover and subscription agreement, certain employees of Aspen converted options to purchase stock of Aspen Education Group into options to purchase stock of the Group with an aggregate value of $1.8 million.
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13. | CONDENSED CONSOLIDATING FINANCIAL INFORMATION |
As of September 30, 2007, the Company had outstanding $200.0 million aggregate principal amount of Notes due 2016. The Notes are fully and unconditionally guaranteed, jointly and severally on an unsecured senior subordinated basis, by substantially all of the Company’s subsidiaries.
The following supplemental tables present unaudited condensed consolidating balance sheets for the Company and its subsidiary guarantors as of September 30, 2007 and December 31, 2006, the unaudited condensed consolidating statements of operations for the three and nine months ended September 30, 2007 (Successor), three and eight months ended September 30, 2006 (Successor) and one month ended January 31, 2006 (Predecessor), and the unaudited condensed consolidating statement of cash flows for the nine months ended September 30, 2007 (Successor), eight months ended September 30, 2006 (Successor) and one month ended January 31, 2006 (Predecessor).
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Condensed Consolidating Balance Sheet as of September 30, 2007
(In thousands)
CRC Health Corporation | Subsidiary Guarantors | Subsidiary Non- Guarantors | Eliminations | Consolidated | ||||||||||||||
ASSETS | ||||||||||||||||||
CURRENT ASSETS: | ||||||||||||||||||
Cash and cash equivalents | $ | — | $ | 2,724 | $ | 388 | $ | — | $ | 3,112 | ||||||||
Accounts receivable—net of allowance | 1 | 33,795 | 691 | 34,487 | ||||||||||||||
Prepaid expenses | 2,270 | 3,528 | 61 | 5,859 | ||||||||||||||
Other current assets | 19 | 2,413 | 16 | 2,448 | ||||||||||||||
Income taxes receivable | 11,189 | 503 | 11,692 | |||||||||||||||
Deferred income taxes | 7,052 | 1,179 | 8,231 | |||||||||||||||
Total current assets | 20,531 | 44,142 | 1,156 | — | 65,829 | |||||||||||||
PROPERTY AND EQUIPMENT—Net | 5,291 | 113,354 | 1,896 | 120,541 | ||||||||||||||
GOODWILL | 720,650 | 720,650 | ||||||||||||||||
INTANGIBLE ASSETS—Net | 392,688 | 392,688 | ||||||||||||||||
OTHER ASSETS | 24,449 | 1,645 | 15 | 26,109 | ||||||||||||||
INVESTMENT IN SUBSIDIARIES—At cost | 615,609 | (615,609 | ) | |||||||||||||||
TOTAL ASSETS | $ | 665,880 | $ | 1,272,479 | $ | 3,067 | $ | (615,609 | ) | $ | 1,325,817 | |||||||
LIABILITIES AND STOCKHOLDER’S EQUITY | ||||||||||||||||||
CURRENT LIABILITIES: | ||||||||||||||||||
Accounts payable | $ | 3,273 | $ | 2,428 | $ | 87 | $ | — | $ | 5,788 | ||||||||
Accrued liabilities | 8,266 | 15,543 | 1,146 | 24,955 | ||||||||||||||
Current portion of long-term debt | 49,693 | 4,123 | 53,816 | |||||||||||||||
Other current liabilities | 2,954 | 24,104 | 902 | 27,960 | ||||||||||||||
Total current liabilities | 64,186 | 46,198 | 2,135 | — | 112,519 | |||||||||||||
LONG-TERM DEBT—Less current portion | 608,408 | 7,897 | 616,305 | |||||||||||||||
OTHER LONG-TERM LIABILITIES | 907 | 1,619 | 2,526 | |||||||||||||||
DEFERRED INCOME TAXES | 105,193 | 38,227 | 143,420 | |||||||||||||||
Total liabilities | 778,694 | 93,941 | 2,135 | — | 874,770 | |||||||||||||
MINORITY INTEREST | 84 | 460 | 544 | |||||||||||||||
STOCKHOLDER’S EQUITY: | ||||||||||||||||||
Common stock | ||||||||||||||||||
Additional paid-in capital(1) | (93,633 | ) | 1,144,420 | 2,159 | (615,609 | ) | 437,337 | |||||||||||
(Accumulated deficit) Retained earnings | (19,181 | ) | 34,034 | (1,687 | ) | 13,166 | ||||||||||||
Total stockholder’s equity | (112,814 | ) | 1,178,454 | 472 | (615,609 | ) | 450,503 | |||||||||||
TOTAL LIABILITIES AND STOCKHOLDER’S EQUITY | $ | 665,880 | $ | 1,272,479 | $ | 3,067 | $ | (615,609 | ) | $ | 1,325,817 | |||||||
(1) | Includes intercompany balances |
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Condensed Consolidating Balance Sheet as of December 31, 2006
(In thousands)
CRC Health Corporation | Subsidiary Guarantors | Subsidiary Non- Guarantors | Eliminations | Consolidated | ||||||||||||||
ASSETS | ||||||||||||||||||
CURRENT ASSETS: | ||||||||||||||||||
Cash and cash equivalents | $ | — | $ | 4,167 | $ | 39 | $ | — | $ | 4,206 | ||||||||
Accounts receivable—net of allowance | 4 | 33,309 | 492 | 33,805 | ||||||||||||||
Prepaid expenses | 3,977 | 3,676 | 22 | 7,675 | ||||||||||||||
Other current assets | 152 | 2,096 | 13 | 2,261 | ||||||||||||||
Income taxes receivable | 6,110 | 386 | 6,496 | |||||||||||||||
Deferred income taxes | 5,873 | 1,179 | 7,052 | |||||||||||||||
Total current assets | 16,116 | 44,813 | 566 | — | 61,495 | |||||||||||||
PROPERTY AND EQUIPMENT—Net | 4,258 | 89,835 | 883 | 94,976 | ||||||||||||||
GOODWILL | 702,425 | 702,425 | ||||||||||||||||
INTANGIBLE ASSETS—Net | 43 | 400,671 | 400,714 | |||||||||||||||
OTHER ASSETS | 26,953 | 2,205 | 20 | 29,178 | ||||||||||||||
INVESTMENT IN SUBSIDIARIES—At cost | 577,739 | (577,739 | ) | |||||||||||||||
TOTAL ASSETS | $ | 625,109 | $ | 1,239,949 | $ | 1,469 | $ | (577,739 | ) | $ | 1,288,788 | |||||||
LIABILITIES AND STOCKHOLDER’S EQUITY | ||||||||||||||||||
CURRENT LIABILITIES: | ||||||||||||||||||
Accounts payable | $ | 3,990 | $ | 2,662 | $ | 62 | $ | — | $ | 6,714 | ||||||||
Accrued liabilities | 13,473 | 20,544 | 810 | 34,827 | ||||||||||||||
Current portion of long-term debt | 7,793 | 2,950 | 10,743 | |||||||||||||||
Other current liabilities | 332 | 27,215 | 394 | 27,941 | ||||||||||||||
Total current liabilities | 25,588 | 53,371 | 1,266 | — | 80,225 | |||||||||||||
LONG-TERM DEBT—Less current portion | 611,329 | 4,456 | 615,785 | |||||||||||||||
OTHER LONG-TERM LIABILITIES | 90 | 5,436 | 5,526 | |||||||||||||||
DEFERRED INCOME TAXES | 109,992 | 39,835 | 149,827 | |||||||||||||||
Total liabilities | 746,999 | 103,098 | 1,266 | — | 851,363 | |||||||||||||
MINORITY INTEREST | 66 | 185 | 251 | |||||||||||||||
STOCKHOLDER’S EQUITY: | ||||||||||||||||||
Common stock | ||||||||||||||||||
Additional paid-in capital(1) | (118,916 | ) | 1,130,185 | 122 | (577,739 | ) | 433,652 | |||||||||||
(Accumulated deficit) retained earnings | (2,974 | ) | 6,600 | (104 | ) | 3,522 | ||||||||||||
Total stockholder’s equity | (121,890 | ) | 1,136,785 | 18 | (577,739 | ) | 437,174 | |||||||||||
TOTAL LIABILITIES AND STOCKHOLDER’S EQUITY | $ | 625,109 | $ | 1,239,949 | $ | 1,469 | $ | (577,739 | ) | $ | 1,288,788 | |||||||
(1) | Includes intercompany balances |
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Condensed Consolidating Statements of Operations
For the Three Months Ended September 30, 2007 (Successor)
(In thousands)
CRC Health Corporation | Subsidiary Guarantors | Subsidiary Non- Guarantors | Eliminations | Consolidated | ||||||||||||||||
NET REVENUE: | ||||||||||||||||||||
Net client service revenue | $ | 6 | $ | 113,874 | $ | 6,743 | $ | — | $ | 120,623 | ||||||||||
Other revenue | 3 | 1,528 | 215 | 1,746 | ||||||||||||||||
Management fee revenue | 11,489 | (11,489 | ) | |||||||||||||||||
Net revenue | 11,498 | 115,402 | 6,958 | (11,489 | ) | 122,369 | ||||||||||||||
OPERATING EXPENSES: | ||||||||||||||||||||
Salaries and benefits | 3,079 | 50,453 | 1,911 | 55,443 | ||||||||||||||||
Supplies, facilities and other operating costs | 2,221 | 31,092 | 3,244 | 36,557 | ||||||||||||||||
Provision for doubtful accounts | 2,017 | 19 | 2,036 | |||||||||||||||||
Depreciation and amortization | 130 | 5,179 | 88 | 5,397 | ||||||||||||||||
Management fee expense | 9,942 | 1,547 | (11,489 | ) | ||||||||||||||||
Total operating expenses | 5,430 | 98,683 | 6,809 | (11,489 | ) | 99,433 | ||||||||||||||
INCOME (LOSS) FROM OPERATIONS | 6,068 | 16,719 | 149 | 22,936 | ||||||||||||||||
INTEREST EXPENSE, NET | (14,947 | ) | (222 | ) | (15,169 | ) | ||||||||||||||
OTHER INCOME | (1,220 | ) | 3 | (1,217 | ) | |||||||||||||||
(LOSS) INCOME FROM OPERATIONS BEFORE INCOME TAXES | (10,099 | ) | 16,497 | 152 | 6,550 | |||||||||||||||
INCOME TAX (BENEFIT) EXPENSE | (2,317 | ) | 3,784 | 35 | 1,502 | |||||||||||||||
MINORITY INTEREST IN INCOME OF A SUBSIDIARY | 427 | 427 | ||||||||||||||||||
NET (LOSS) INCOME | $ | (7,782 | ) | $ | 12,713 | $ | (310 | ) | $ | — | $ | 4,621 | ||||||||
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Condensed Consolidating Statements of Operations
For the Nine Months Ended September 30, 2007 (Successor)
(In thousands)
CRC Health Corporation | Subsidiary Guarantors | Subsidiary Non- Guarantors | Eliminations | Consolidated | ||||||||||||||||
NET REVENUE: | ||||||||||||||||||||
Net client service revenue | $ | 21 | $ | 328,756 | $ | 12,712 | $ | — | $ | 341,489 | ||||||||||
Other revenue | 8 | 4,363 | 232 | 4,603 | ||||||||||||||||
Management fee revenue | 36,343 | (36,343 | ) | |||||||||||||||||
Net revenue | 36,372 | 333,119 | 12,944 | (36,343 | ) | 346,092 | ||||||||||||||
OPERATING EXPENSES: | ||||||||||||||||||||
Salaries and benefits | 9,901 | 152,637 | 4,593 | 167,131 | ||||||||||||||||
Supplies, facilities and other operating costs | 6,466 | 87,159 | 7,052 | 100,677 | ||||||||||||||||
Provision for doubtful accounts | 5,034 | 30 | 5,064 | |||||||||||||||||
Depreciation and amortization | 1,217 | 14,891 | 202 | 16,310 | ||||||||||||||||
Management fee expense | 33,400 | 2,943 | (36,343 | ) | ||||||||||||||||
Total operating expenses | 17,584 | 293,121 | 14,820 | (36,343 | ) | 289,182 | ||||||||||||||
INCOME (LOSS) FROM OPERATIONS | 18,788 | 39,998 | (1,876 | ) | 56,910 | |||||||||||||||
INTEREST EXPENSE, NET | (44,345 | ) | (625 | ) | (1 | ) | (44,971 | ) | ||||||||||||
OTHER (LOSS) INCOME | (789 | ) | (13 | ) | 2 | (800 | ) | |||||||||||||
(LOSS) INCOME FROM OPERATIONS BEFORE INCOME TAXES | (26,346 | ) | 39,360 | (1,875 | ) | 11,139 | ||||||||||||||
INCOME TAX (BENEFIT) EXPENSE | (7,984 | ) | 11,927 | (568 | ) | 3,375 | ||||||||||||||
MINORITY INTEREST IN INCOME OF A SUBSIDIARY | 275 | 275 | ||||||||||||||||||
NET (LOSS) INCOME | $ | (18,362 | ) | $ | 27,433 | $ | (1,582 | ) | $ | — | $ | 7,489 | ||||||||
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Condensed Consolidating Statements of Operations
For the Three Months Ended September 30, 2006 (Successor)
(In thousands)
CRC Health Corporation | Subsidiary Guarantors | Eliminations | Consolidated | ||||||||||||
NET REVENUE: | |||||||||||||||
Net client service revenue | $ | 4 | $ | 64,286 | $ | — | $ | 64,290 | |||||||
Other revenue | 3 | 1,207 | 1,210 | ||||||||||||
Management fee revenue | 14,072 | (14,072 | ) | ||||||||||||
Net revenue | 14,079 | 65,493 | (14,072 | ) | 65,500 | ||||||||||
OPERATING EXPENSES: | |||||||||||||||
Salaries and benefits | 3,028 | 27,369 | 30,397 | ||||||||||||
Supplies, facilities and other operating costs | 1,606 | 16,092 | 17,698 | ||||||||||||
Provision for doubtful accounts | 1,176 | 1,176 | |||||||||||||
Depreciation and amortization | 158 | 2,162 | 2,320 | ||||||||||||
Management fee expense | 14,072 | (14,072 | ) | ||||||||||||
Total operating expenses | 4,792 | 60,871 | (14,072 | ) | 51,591 | ||||||||||
INCOME FROM OPERATIONS | 9,287 | 4,622 | 13,909 | ||||||||||||
INTEREST EXPENSE, NET | (11,189 | ) | 5 | (11,184 | ) | ||||||||||
OTHER (EXPENSE) INCOME | (1,549 | ) | 5 | (1,544 | ) | ||||||||||
(LOSS) INCOME FROM OPERATIONS BEFORE INCOME TAXES | (3,451 | ) | 4,632 | 1,181 | |||||||||||
INCOME TAX (BENEFIT) EXPENSE | (2,168 | ) | 2,910 | 742 | |||||||||||
NET (LOSS) INCOME | $ | (1,283 | ) | $ | 1,722 | $ | — | $ | 439 | ||||||
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Condensed Consolidating Statements of Operations
For the Eight Months Ended September 30, 2006 (Successor)
(In thousands)
CRC Health Corporation | Subsidiary Guarantors | Eliminations | Consolidated | ||||||||||||
NET REVENUE: | |||||||||||||||
Net client service revenue | $ | 22 | $ | 163,049 | $ | — | $ | 163,071 | |||||||
Other revenue | 8 | 3,155 | 3,163 | ||||||||||||
Management fee revenue | 36,492 | (36,492 | ) | ||||||||||||
Net revenue | 36,522 | 166,204 | (36,492 | ) | 166,234 | ||||||||||
OPERATING EXPENSES: | |||||||||||||||
Salaries and benefits | 7,822 | 69,440 | 77,262 | ||||||||||||
Supplies, facilities and other operating costs | 4,176 | 40,237 | 44,413 | ||||||||||||
Provision for doubtful accounts | 1 | 3,294 | 3,295 | ||||||||||||
Depreciation and amortization | 667 | 5,579 | 6,246 | ||||||||||||
Management fee expense | 36,492 | (36,492 | ) | ||||||||||||
Total operating expenses | 12,666 | 155,042 | (36,492 | ) | 131,216 | ||||||||||
INCOME FROM OPERATIONS | 23,856 | 11,162 | 35,018 | ||||||||||||
INTEREST EXPENSE, NET | (28,112 | ) | 13 | (28,099 | ) | ||||||||||
OTHER (EXPENSE)INCOME | (40 | ) | 6 | (34 | ) | ||||||||||
(LOSS) INCOME FROM OPERATIONS BEFORE INCOME TAXES | (4,296 | ) | 11,181 | 6,885 | |||||||||||
INCOME TAX (BENEFIT) EXPENSE | (2,305 | ) | 5,999 | 3,694 | |||||||||||
NET (LOSS) INCOME | $ | (1,991 | ) | $ | 5,182 | $ | — | $ | 3,191 | ||||||
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Condensed Consolidating Statements of Operations
For the One Month Ended January 31, 2006 (Predecessor)
(In thousands)
CRC Health Corporation | Subsidiary Guarantors | Eliminations | Consolidated | ||||||||||||
NET REVENUE: | |||||||||||||||
Net client service revenue | $ | 5 | $ | 19,355 | $ | — | $ | 19,360 | |||||||
Other revenue | 1 | 489 | 490 | ||||||||||||
Management fee revenue | 1,110 | (1,110 | ) | ||||||||||||
Net revenue | 1,116 | 19,844 | (1,110 | ) | 19,850 | ||||||||||
OPERATING EXPENSES: | |||||||||||||||
Salaries and benefits | 666 | 8,599 | 9,265 | ||||||||||||
Supplies, facilities and other operating costs | 324 | 4,237 | 4,561 | ||||||||||||
Provision for doubtful accounts | 285 | 285 | |||||||||||||
Depreciation and amortization | 40 | 321 | 361 | ||||||||||||
Acquisition related costs | 43,710 | 43,710 | |||||||||||||
Management fee expense | 1,110 | (1,110 | ) | ||||||||||||
Total operating expenses | 44,740 | 14,552 | (1,110 | ) | 58,182 | ||||||||||
(LOSS) INCOME FROM OPERATIONS | (43,624 | ) | 5,292 | (38,332 | ) | ||||||||||
INTEREST EXPENSE, NET | (2,505 | ) | (2,505 | ) | |||||||||||
OTHER FINANCING COSTS | (10,655 | ) | (10,655 | ) | |||||||||||
OTHER INCOME | 55 | 55 | |||||||||||||
(LOSS) INCOME FROM OPERATIONS BEFORE INCOME TAXES | (56,729 | ) | 5,292 | (51,437 | ) | ||||||||||
INCOME TAX (BENEFIT) EXPENSE | (13,723 | ) | 1,279 | (12,444 | ) | ||||||||||
NET (LOSS) INCOME | $ | (43,006 | ) | $ | 4,013 | $ | — | $ | (38,993 | ) | |||||
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Condensed Consolidating Statements of Cash Flows
For the Nine Months Ended September 30, 2007 (Successor)
(In thousands)
CRC Health Corporation | Subsidiary Guarantors | Subsidiary Non- Guarantors | Eliminations | Consolidated | |||||||||||||||
CASH FLOWS FROM OPERATING ACTIVITIES: | |||||||||||||||||||
Net cash (used in) provided by operating activities | $ | (11,467 | ) | $ | 29,550 | $ | 36 | $ | — | $ | 18,119 | ||||||||
CASH FLOWS FROM INVESTING ACTIVITIES: | |||||||||||||||||||
Additions of property and equipment—net | (2,247 | ) | (20,776 | ) | (1,216 | ) | (24,239 | ) | |||||||||||
Proceeds from sale of property and equipment | 67 | 67 | |||||||||||||||||
Acquisition of businesses, net of cash acquired | (33,602 | ) | (33,602 | ) | |||||||||||||||
Prior period acquisition adjustments | 979 | 979 | |||||||||||||||||
Net cash used in investing activities | (35,849 | ) | (19,730 | ) | (1,216 | ) | — | (56,795 | ) | ||||||||||
CASH FLOWS FROM FINANCING ACTIVITIES: | |||||||||||||||||||
Intercompany transfers | 9,540 | (11,069 | ) | 1,529 | |||||||||||||||
Capital contributed by parent | 500 | 500 | |||||||||||||||||
Debt financing costs | (611 | ) | (611 | ) | |||||||||||||||
Net borrowings under revolving line of credit | 41,900 | 41,900 | |||||||||||||||||
Repayments of long-term debt | (4,013 | ) | (194 | ) | (4,207 | ) | |||||||||||||
Net cash provided by (used in) financing activities | 47,316 | (11,263 | ) | 1,529 | — | 37,582 | |||||||||||||
NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS | (1,443 | ) | 349 | (1,094 | ) | ||||||||||||||
CASH AND CASH EQUIVALENTS—Beginning of period | 4,167 | 39 | 4,206 | ||||||||||||||||
CASH AND CASH EQUIVALENTS—End of period | $ | — | $ | 2,724 | $ | 388 | $ | — | $ | 3,112 | |||||||||
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Condensed Consolidating Statements of Cash Flows
For the Eight Months Ended September 30, 2006 (Successor)
(In thousands)
CRC Health Corporation | Subsidiary Guarantors | Eliminations | Consolidated | ||||||||||||
CASH FLOWS FROM OPERATING ACTIVITIES: | |||||||||||||||
Net cash (used in) provided by operating activities | $ | (12,736 | ) | $ | 6,353 | $ | — | $ | (6,383 | ) | |||||
CASH FLOWS FROM INVESTING ACTIVITIES: | |||||||||||||||
Additions of property and equipment—net | (991 | ) | (6,124 | ) | (7,115 | ) | |||||||||
Proceeds from sale of property and equipment | — | 36 | 36 | ||||||||||||
Acquisition of businesses, net of cash acquired | (36,626 | ) | (36,626 | ) | |||||||||||
Prior period acquisition adjustments | (14 | ) | (14 | ) | |||||||||||
Payment of purchase price to former shareholders | (429,190 | ) | (429,190 | ) | |||||||||||
Net cash used in investing activities | (466,821 | ) | (6,088 | ) | — | (472,909 | ) | ||||||||
CASH FLOWS FROM FINANCING ACTIVITIES: | |||||||||||||||
Equity contribution from Bain Capital | 294,475 | 294,475 | |||||||||||||
Payment of transaction related costs | (5,354 | ) | (5,354 | ) | |||||||||||
Intercompany transfers | (905 | ) | 905 | — | |||||||||||
Debt financing costs | (22,981 | ) | (22,981 | ) | |||||||||||
Net borrowings under revolving line of credit | 27,500 | 27,500 | |||||||||||||
Proceeds from issuances of long-term debt | 442,022 | 442,022 | |||||||||||||
Repayments of long-term debt | (255,200 | ) | (255,200 | ) | |||||||||||
Net cash provided by financing activities | 479,557 | 905 | — | 480,462 | |||||||||||
INCREASE IN CASH AND CASH EQUIVALENTS | 1,170 | 1,170 | |||||||||||||
CASH AND CASH EQUIVALENTS—Beginning of period | 423 | 423 | |||||||||||||
CASH AND CASH EQUIVALENTS—End of period | $ | — | $ | 1,593 | $ | — | $ | 1,593 | |||||||
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Condensed Consolidating Statements of Cash Flows
For the One Month Ended January 31, 2006 (Predecessor)
(In thousands)
CRC Health Corporation | Subsidiary Guarantors | Eliminations | Consolidated | ||||||||||||
CASH FLOWS FROM OPERATING ACTIVITIES: | |||||||||||||||
Net cash (used in) provided by operating activities | $ | (3,563 | ) | $ | 4,764 | $ | — | $ | 1,201 | ||||||
CASH FLOWS FROM INVESTING ACTIVITIES: | |||||||||||||||
Additions of property and equipment—net | (30 | ) | (286 | ) | (316 | ) | |||||||||
Proceeds from sale of property and equipment | 1 | 1 | |||||||||||||
Net cash used in investing activities | (30 | ) | (285 | ) | — | (315 | ) | ||||||||
�� | |||||||||||||||
CASH FLOWS FROM FINANCING ACTIVITIES: | |||||||||||||||
Intercompany transfers | 4,187 | (4,187 | ) | ||||||||||||
Stock options exercised | 7 | 7 | |||||||||||||
Debt financing costs | (547 | ) | (547 | ) | |||||||||||
Repayments of revolving line of credit | (5,000 | ) | (5,000 | ) | |||||||||||
Net cash used in financing activities | (1,353 | ) | (4,187 | ) | — | (5,540 | ) | ||||||||
(DECREASE) INCREASE IN CASH AND | |||||||||||||||
CASH EQUIVALENTS | (4,946 | ) | 292 | (4,654 | ) | ||||||||||
CASH AND CASH EQUIVALENTS—Beginning of period | 4,946 | 131 | 5,077 | ||||||||||||
CASH AND CASH EQUIVALENTS—End of period | $ | — | $ | 423 | $ | — | $ | 423 | |||||||
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14. | SEGMENT INFORMATION |
Pursuant to SFAS No. 131, for periods through September 30, 2007, the Company has reported in three segments: (1) residential treatment division (“Residential”), (2) outpatient treatment division (“Outpatient”) and (3) youth treatment division (“Youth”). The Company began reporting for Youth as a result of the Aspen Acquisition.
Based on a realignment of the Company’s operations and internal organizational structure, The Company is currently reviewing its reportable segments for periods after September 30, 2007.
Reportable segments are based upon the Company’s internal organizational structure, the manner in which the operations are managed, the criteria used by the Company’s chief operating decision-maker to evaluate segment performance and the availability of separate financial information. The Company’s chief operating decision-maker is its Chief Executive Officer.
The financial information used by the Company’s chief operating decision-maker includes net revenue, operating expenses, income (loss) from operations and capital expenditures.
Residential—The Residential segment provides chemical dependency and other behavioral health disorders treatment services both on an inpatient, residential basis and on an outpatient basis. Services offered in this segment include: inpatient/residential care, partial/day treatment, intensive outpatient groups, therapeutic living/half-way house environments, aftercare centers and detoxification. As of September 30, 2007, the Residential segment provided services to patients at 46 facilities located in 12 states.
Outpatient—The Outpatient segment provides substance abuse treatment services on an outpatient basis. Substantially all of the services are provided to individuals addicted to heroin and other opiates, including prescription painkillers. Services include medication assisted treatment, counseling and physical examination. As of September 30, 2007, 46 of our 61 clinics were certified to provide at least one additional comprehensive outpatient substance abuse treatment service. Such additional services include outpatient detoxification and intensive outpatient services for individuals addicted to drugs or alcohol. As of September 30, 2007, the Outpatient segment provided services to patients at 61 facilities located in 18 states.
Youth—The Youth segment provides a wide variety of therapeutic and educational programs through settings and solutions that match individual needs with the appropriate learning and therapeutic environment. Its programs are offered in therapeutic boarding schools, experiential outdoor education programs, weight-loss residential schools and summer weight-loss camps. As of September 30, 2007, the Youth segment operated 38 educational and therapeutic facilities in 13 states and one in the United Kingdom.
Corporate/Other—In addition to the three reportable segments as described above, the Company has activities classified as Corporate/Other which represent revenue and expenses associated with eGetgoing, an online treatment service and certain corporate-level operating general and administrative costs (i.e., expenses associated with the corporate offices in Cupertino, California, which provides management, financial, human resources and information system support) and stock option-based compensation expense that are not allocated to the segments.
Major Customers—No single customer represented 10% or more of the Company’s total net revenue in any period presented.
Geographic Information—The Company’s business operations are primarily in the United States.
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Selected segment financial information for the Company’s reportable segments was as follows (in thousands):
Successor | Predecessor | |||||||||||||||||||
Three Months Ended September 30, 2007 | Nine Months Ended September 30, 2007 | Three Months Ended September 30, 2006 | Eight Months Ended September 30, 2006 | One Month Ended January 31, 2006 | ||||||||||||||||
Net revenue: | ||||||||||||||||||||
Residential | $ | 50,069 | $ | 146,184 | $ | 42,315 | $ | 106,130 | $ | 12,693 | ||||||||||
Outpatient | 26,034 | 76,466 | 23,136 | 59,803 | 7,125 | |||||||||||||||
Youth | 46,173 | 123,106 | — | — | — | |||||||||||||||
Corporate/other | 93 | 336 | 49 | 301 | 32 | |||||||||||||||
Total consolidated net revenue | $ | 122,369 | $ | 346,092 | $ | 65,500 | $ | 166,234 | $ | 19,850 | ||||||||||
Operating expenses: | ||||||||||||||||||||
Residential | $ | 36,510 | $ | 107,086 | $ | 30,912 | $ | 77,902 | $ | 9,112 | ||||||||||
Outpatient | 17,967 | 52,400 | 15,738 | 40,223 | 4,447 | |||||||||||||||
Youth | 39,490 | 112,071 | — | — | — | |||||||||||||||
Corporate/other | 5,466 | 17,625 | 4,941 | 13,091 | 44,623 | |||||||||||||||
Total consolidated operating expenses | $ | 99,433 | $ | 289,182 | $ | 51,591 | $ | 131,216 | $ | 58,182 | ||||||||||
Income (loss) from operations: | ||||||||||||||||||||
Residential | $ | 13,559 | $ | 39,098 | $ | 11,403 | $ | 28,228 | $ | 3,581 | ||||||||||
Outpatient | 8,067 | 24,066 | 7,398 | 19,580 | 2,678 | |||||||||||||||
Youth | 6,683 | 11,035 | — | — | — | |||||||||||||||
Corporate/other | (5,373 | ) | (17,289 | ) | (4,892 | ) | (12,790 | ) | (44,591 | ) | ||||||||||
Total consolidated income (loss) from operations | $ | 22,936 | $ | 56,910 | $ | 13,909 | $ | 35,018 | $ | (38,332 | ) | |||||||||
Income (loss) from operations before income taxes: | ||||||||||||||||||||
Total consolidated income (loss) from operations | $ | 22,936 | $ | 56,910 | $ | 13,909 | $ | 35,018 | $ | (38,332 | ) | |||||||||
Interest expense, net | (15,169 | ) | (44,971 | ) | (11,184 | ) | (28,099 | ) | (2,505 | ) | ||||||||||
Other financing costs | — | — | — | — | (10,655 | ) | ||||||||||||||
Other income | (1,217 | ) | (800 | ) | (1,544 | ) | (34 | ) | 55 | |||||||||||
Total consolidated income (loss) from operations before income taxes | $ | 6,550 | $ | 11,139 | $ | 1,181 | $ | 6,885 | $ | (51,437 | ) | |||||||||
Capital expenditures: | ||||||||||||||||||||
Residential | $ | 5,930 | $ | 14,606 | $ | 1,509 | $ | 4,876 | $ | 336 | ||||||||||
Outpatient | 883 | 1,581 | 471 | 1,395 | 45 | |||||||||||||||
Youth | 1,879 | 5,805 | — | — | — | |||||||||||||||
Corporate/other | 579 | 2,247 | 202 | 1,069 | 30 | |||||||||||||||
Total consolidated capital expenditures | $ | 9,271 | $ | 24,239 | $ | 2,182 | $ | 7,340 | $ | 411 | ||||||||||
September 30, 2007 | December 31, 2006 | |||||
Total assets: | ||||||
Residential | $ | 587,971 | $ | 545,110 | ||
Outpatient | 327,425 | 331,491 | ||||
Youth | 360,344 | 361,319 | ||||
Corporate/other | 50,077 | 50,868 | ||||
Total consolidated assets | $ | 1,325,817 | $ | 1,288,788 | ||
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Item 2. | Management’s Discussion and Analysis of Financial Condition and Results of Operations. |
The following discussion should be read in conjunction with the Condensed Consolidated Financial Statements and the related notes that appear elsewhere in this Quarterly Report.
Unless the context otherwise requires, in this management’s discussion and analysis of financial condition and results of operations, the terms “our company,” “we,” “us,” “the Company” and “our” refer (i) for periods prior to the consummation of the Transactions, to CRC Health Group, Inc. and its consolidated subsidiaries and (ii) for periods following the consummation of the Transactions, to CRC Health Corporation and its consolidated subsidiaries following the mergers described below under “The Transactions.”
OVERVIEW
We are a leading provider of substance abuse treatment services and youth treatment services in the United States. We also provide treatment services for other addiction diseases and behavioral disorders such as eating disorders. We deliver our substance abuse and behavioral disorder treatment services through our residential and outpatient treatment programs, which we refer to as our residential and outpatient treatment divisions. We deliver our youth treatment services through our residential schools, wilderness programs and weight loss programs, which we refer to as our youth treatment division or Aspen Education Group. We have three reporting segments: residential treatment division (“Residential”), outpatient treatment division (“Outpatient”) and youth treatment division (“Youth”). Our residential treatment division, which currently operates 31 inpatient and 15 outpatient facilities in 12 states, treats patients for addiction to alcohol and drugs and other behavioral health disorders. As of September 30, 2007, our residential treatment division treated approximately 1,475 patients per day. Our outpatient treatment division, which currently operates 61 outpatient treatment clinics in 18 states, provides services to individuals addicted to opiates, including heroin and prescription painkillers. As of September 30, 2007, our outpatient treatment programs treated approximately 25,200 patients per day. Aspen Education Group currently operates 38 education facilities in 13 states and one facility in the United Kingdom and enrolled approximately 4,300 new students during the nine months ended September 30, 2007. Activities classified as “Corporate/other” represent revenue and expenses associated with eGetgoing, an online treatment service, and general and administrative expenses (i.e., expenses associated with our corporate offices in Cupertino, California, which provides management, financial, human resource and information system support) and stock option-based compensation expense that are not allocated to the segments.
The Transactions
On February 6, 2006, investment funds managed by Bain Capital Partners, LLC (“Bain Capital”) acquired CRC Health Group, Inc. for a total cash consideration of approximately $742.3 million (including acquisition and financing transactions related fees and expenses of $28.5 million). As a result of the acquisition, Bain Capital received control of the Company. We refer to our acquisition by Bain Capital and the related financings as the “Transactions.”
Basis of Presentation
As a result of the Transactions on February 6, 2006, a new basis of accounting has begun. However, for accounting purposes and to coincide with our normal financial closing dates, we have utilized February 1, 2006 as the effective date of the Transactions. For the purpose of presenting a comparison of our 2007 operating results to 2006, we have presented the nine months ended September 30, 2006 as the mathematical addition of our operating results for the one month ended January 31, 2006 (“Predecessor Company”) to the operating results for the eight months ended September 30, 2006 (“Successor Company”). This approach is not consistent with GAAP and may yield results that are not strictly comparable on a period-to-period basis primarily due to the impact of purchase accounting entries recorded as a result of the Transactions. For purposes of this management’s discussion and analysis of financial condition and results of operations, however, management believes that it is the most meaningful way to present our results of operations for the nine months ended September 30, 2006.
Acquisitions
2007 Acquisitions
In the nine months ended September 30, 2007, we completed four acquisitions and paid approximately $32.7 million in cash, including acquisition related expenses. The acquisitions are intended to expand our range of residential and youth treatment services into new geographic regions in the United States. These acquisitions are not expected to materially impact our results of operations.
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2006 Acquisitions
In November 2006, we acquired all of the outstanding capital stock of Aspen Education Group for approximately $278.5 million in total purchase consideration, including acquisition related expenses of $1.6 million. We refer to this acquisition as the Aspen Acquisition. We believe Aspen Education Group is the largest for-profit provider of therapeutic educational programs to troubled youth and its offerings include boarding schools, experiential outdoor education programs, weight loss residential high schools and summer weight loss camps. The Aspen Acquisition is intended to diversify our business into other service offerings and geographic regions. This acquisition will further enhance our overall self payor mix revenue and offers multiple revenue and cost synergies. A new reportable segment Youth has been formed after the Aspen Acquisition.
In 2006, in addition, to the Aspen Acquisition, we completed five other acquisitions for which we paid approximately $36.6 million in cash, including acquisition related expenses. These acquisitions are intended to expand our range of treatment programs into new geographic regions in the United States. In addition, they contribute to the continued building of a nationwide network of specialized behavioral care services.
SUMMARY
We generate revenue by providing substance abuse treatment services and youth treatment services in the United States. We also generate revenue by providing treatment services for other specialized behavioral disorders. Revenue is recognized when rehabilitation and treatment services are provided to a patient. Client service revenue is reported at the estimated net realizable amounts from clients, third-party payors and others for services rendered. Revenue under third-party payor agreements is subject to audit and retroactive adjustment. Provisions for estimated third-party payor settlements are provided for in the period the related services are rendered and adjusted in future periods as final settlements are determined. Revenue for educational services provided to youth consists primarily of tuition, enrollment fees, alumni services and ancillary charges. Tuition revenue and ancillary charges are recognized based on contracted monthly/daily rates as services are rendered. The enrollment fees for service contracts that are charged upfront are deferred and recognized over the average student length of stay, approximately eleven months. Alumni fees revenue represents non-refundable upfront fees for post graduation services and these fees are deferred and recognized systematically over the contracted life, which is twelve months. During the three and nine months ended September 30, 2007, we generated 85.7% and 86.1% of our net revenue from non-governmental sources, including 71.2% each period from self payors and 14.5% and 14.9% from commercial payors, respectively. Substantially all of our government program net revenue was received from multiple counties and states under Medicaid and similar programs.
During the three and nine months ended September 30, 2007, our consolidated same-facility net revenue increased by 6.1% each period as compared to the same periods in 2006. “Same-facility” refers to the comparison of each facility owned during 2006 with the results for the comparable period in 2007.
Our operating expenses include salaries and benefits, supplies, facilities and other operating costs, provision for doubtful accounts, depreciation and amortization and acquisition related costs. Operating expenses for our residential, outpatient and youth treatment divisions exclude corporate level general and administrative costs (i.e., expenses associated with our corporate offices in Cupertino, California, which provide management, financial, human resources and information systems support), stock option-based compensation expense and expenses associated with eGetgoing.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
The accompanying discussion and analysis of our financial condition and results of operations are based on our condensed consolidated financial statements, which have been prepared in accordance with generally accepted accounting principles in the United States of America (“GAAP”). We have based our estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Our senior management has reviewed our critical accounting policies and their application in the preparation of our financial statements and related disclosures and discussed the development, selection and disclosure of significant estimates. To the extent that actual results differ from those estimates, our future results of operations may be affected. Management believes that there have not been any significant changes during the nine months ended September 30, 2007 to the items that we have previously reported in our critical accounting policies in management’s discussion and analysis of financial condition and results of operations for the year ended December 31, 2006.
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RECENT ACCOUNTING PRONOUNCEMENTS
In February 2007, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standards No. 159,The Fair Value Option for Financial Assets and Financial Liabilities—Including an amendment to FASB Statement No. 115 (“SFAS 159”).SFAS 159 expands the use of fair value accounting but does not affect existing standards which require assets or liabilities to be carried at fair value. Under SFAS 159, a company may elect to use fair value to measure accounts and loans receivable, available-for-sale and held-to-maturity securities, equity method investments, accounts payable, guarantees and issued debt. Other eligible items include firm commitments for financial instruments that would otherwise not be recognized at inception and non-cash warranty obligations where a warrantor is permitted to pay a third party to provide the warranty goods or services. If fair value is elected, any upfront costs and fees related to the item must be recognized in earnings and cannot be deferred, e.g., debt issue costs. The fair value election is irrevocable and may generally be made on an instrument-by-instrument basis, even if a company has similar instruments that it elects not to fair value. At the adoption date, unrealized gains and losses on existing items for which fair value has been elected are reported as a cumulative adjustment to beginning retained earnings. SFAS 159 is effective for fiscal years beginning after November 15, 2007. We are required to adopt SFAS 159 on January 1, 2008. We are currently evaluating the effect of the adoption of SFAS 159 will have on our condensed consolidated financial statements.
In September 2006, the FASB issued Statement of Financial Accounting Standards No. 157,Fair Value Measurements (“SFAS 157”). SFAS 157 defines fair value, establishes a framework for measuring fair value in generally accepted accounting principles and expands disclosures about fair value measurements. SFAS 157 applies under other accounting pronouncements that require or permit fair value measurements, the FASB having previously concluded in those accounting pronouncements that fair value is the relevant measurement attribute; however SFAS 157 does not apply to SFAS 123(R). SFAS 157 is effective for financial statements issued for fiscal years beginning after November 15, 2007, and interim periods within those fiscal years. We are required to adopt SFAS 157 on January 1, 2008. We are currently evaluating the effect of the adoption of SFAS 157 will have on our condensed consolidated financial statements.
We adopted FASB Interpretation No. 48,Accounting for Uncertainty in Income Taxes — an Interpretation of FASB Statement No. 109 (“FIN 48”) on January 1, 2007. FIN 48 clarifies the accounting and reporting for uncertainties in income tax law recognized in an enterprise’s financial statements in accordance with SFAS No. 109. FIN 48 prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in income tax returns. FIN 48 also provides guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosure and transition. See Note 7 to the condensed consolidated financial statements for additional information, including the effects of adoption on the Company’s condensed consolidated statement of balance sheet.
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RESULTS OF OPERATIONS
The following tables illustrate our results of operations by segment for the three and nine months ended September 30, 2007 and 2006 (dollars in thousands, except for percentages; percentages are calculated as percentage of total net revenue). Each period has a different basis of accounting and, as a result, they are not comparable. For the purpose of presenting a comparison of our 2007 results to 2006, we have presented the nine months ended September 30, 2006 as the mathematical addition of our operating results for the one month ended January 31, 2006 to the operating results of the eight months ended September 30, 2006. This approach is not consistent with U.S. GAAP and may yield results that are not strictly comparable on a period-to-period basis primarily due to the impact of purchase accounting entries recorded as a result of the Transactions. For purposes of this management’s discussion and analysis of financial condition and results of operations, however, management believes that it is the most meaningful way to present our results of operations for the nine months ended September 30, 2006.
Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||||||||||||||
2007 | % | 2006 | % | 2007 | % | 2006 | % | |||||||||||||||||||||
Net revenue: | ||||||||||||||||||||||||||||
Residential | $ | 50,069 | 40.9 | % | $ | 42,315 | 64.6 | % | $ | 146,184 | 42.2 | % | $ | 118,823 | 63.8 | % | ||||||||||||
Outpatient | 26,034 | 21.3 | % | 23,136 | 35.3 | % | 76,466 | 22.1 | % | 66,928 | 36.0 | % | ||||||||||||||||
Youth | 46,173 | 37.7 | % | — | 0.0 | % | 123,106 | 35.6 | % | — | 0.0 | % | ||||||||||||||||
Corporate / other | 93 | 0.1 | % | 49 | 0.1 | % | 336 | 0.1 | % | 333 | 0.2 | % | ||||||||||||||||
Total net revenue | 122,369 | 100.0 | % | 65,500 | 100.0 | % | 346,092 | 100.0 | % | 186,084 | 100.0 | % | ||||||||||||||||
Operating expenses: | ||||||||||||||||||||||||||||
Residential | 36,510 | 29.8 | % | 30,912 | 47.2 | % | 107,086 | 30.9 | % | 87,014 | 46.8 | % | ||||||||||||||||
Outpatient | 17,967 | 14.7 | % | 15,738 | 24.1 | % | 52,400 | 15.1 | % | 44,670 | 24.0 | % | ||||||||||||||||
Youth | 39,490 | 32.3 | % | — | 0.0 | % | 112,071 | 32.5 | % | — | 0.0 | % | ||||||||||||||||
Corporate / other | 5,466 | 4.5 | % | 4,941 | 7.5 | % | 17,625 | 5.1 | % | 57,714 | 31.0 | % | ||||||||||||||||
Total operating expenses | 99,433 | 81.3 | % | 51,591 | 78.8 | % | 289,182 | 83.6 | % | 189,398 | 101.8 | % | ||||||||||||||||
Income (loss) from operations: | ||||||||||||||||||||||||||||
Residential | 13,559 | 11.1 | % | 11,403 | 17.4 | % | 39,098 | 11.3 | % | 31,809 | 17.0 | % | ||||||||||||||||
Outpatient | 8,067 | 6.6 | % | 7,398 | 11.2 | % | 24,066 | 7.0 | % | 22,258 | 12.0 | % | ||||||||||||||||
Youth | 6,683 | 5.4 | % | — | 0.0 | % | 11,035 | 3.1 | % | — | 0.0 | % | ||||||||||||||||
Corporate / other | (5,373 | ) | -4.4 | % | (4,892 | ) | -7.4 | % | (17,289 | ) | -5.0 | % | (57,381 | ) | -30.8 | % | ||||||||||||
Income (loss) from operations | 22,936 | 18.7 | % | 13,909 | 21.2 | % | 56,910 | 16.4 | % | (3,314 | ) | -1.8 | % | |||||||||||||||
Interest expense, net | (15,169 | ) | (11,184 | ) | (44,971 | ) | (30,604 | ) | ||||||||||||||||||||
Other financing costs | — | — | — | (10,655 | ) | |||||||||||||||||||||||
Other (expense) income | (1,217 | ) | (1,544 | ) | (800 | ) | 21 | |||||||||||||||||||||
Income (loss) from operations before income taxes | 6,550 | 1,181 | 11,139 | (44,552 | ) | |||||||||||||||||||||||
Income tax expense (benefit) | 1,502 | 742 | 3,375 | (8,750 | ) | |||||||||||||||||||||||
Minority interest in income of a subsidiary | 427 | — | 275 | — | ||||||||||||||||||||||||
Net income (loss) | $ | 4,621 | 3.8 | % | $ | 439 | 0.7 | % | $ | 7,489 | 2.2 | % | $ | (35,802 | ) | -19.2 | % | |||||||||||
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Quarter Ended September 30, 2007 Compared to Quarter Ended September 30, 2006
Consolidated net revenue increased $56.9 million, or 86.8%, to $122.4 million in the quarter ended September 30, 2007 from $65.5 million in the quarter ended September 30, 2006. Of the $56.9 million increase, the youth treatment division contributed $46.2 million and the remaining net revenue growth was driven by net revenue increases of $7.8 million, or 18.5%, and $2.9 million, or 12.5%, in our residential and outpatient treatment divisions, respectively. Of the $7.8 million and $2.9 million net revenue increases in the residential and outpatient treatment divisions, respectively, $4.2 million and $0.9 million, respectively, was contributed by the 2006 and 2007 acquisitions that were not included in results of operations for the third quarter of 2006. In addition, same-facility revenue growth in residential and outpatient treatment divisions of $2.8 million, or 6.9%, and $1.0 million, or 4.5%, respectively, and start-up facilities revenue increases in residential and outpatient treatment divisions of $0.8 million and $1.0 million, respectively, contributed to the net revenue growth. Our same-facility residential growth was driven in part by a 5.5% increase in patient census and a 1.4% increase in revenue per patient day. Our same-facility outpatient growth was primarily attributable to an increase in the number of patients receiving treatment at our outpatient treatment clinics. On a same-facility basis, outpatient treatment clinic census increased 2.9% from an average daily census of 21,877 in the second quarter of 2006 to an average daily census of 22,516 in the third quarter of 2007.
Consolidated operating expenses increased $47.8 million, or 92.7%, to $99.4 million in the quarter ended September 30, 2007 from $51.6 million in the quarter ended September 30, 2006. Of the $47.8 million increase in operating expenses, the youth treatment division incurred $39.5 million in expenses that are mainly attributable to salaries and wages and other general operating expenses. The increases in our residential treatment and outpatient treatment division operating expenses before divisional administration expenses were $6.8 million, or 23.8%, and $2.3 million, or 17.3%, respectively. The increase in residential treatment operating expenses was mainly attributable to $3.3 million in expenses related to the 2006 and 2007 acquisitions and partially attributable to a $3.1 million, or 11.5%, same-facility increase in operating expenses. The increase in outpatient treatment operating expenses of $1.0 million, or 7.8%, was attributable to same-facilities, $0.8 million, or 67.7%, was attributable to start-up facilities and $0.5 million in expenses related to the 2006 acquisitions. Division administration expenses decreased $1.2 million, or 46.1%, in our residential treatment division and decreased $0.08 million, or 3.4%, in our outpatient treatment division. Corporate/other expenses increased $0.5 million, or 10.6%, and expressed as a percentage of consolidated net revenue, corporate/other expenses decreased to 4.5% in the third quarter of 2007 compared to 7.5% in the same period in 2006.
Our consolidated operating margin declined to 18.7% in the quarter ended September 30, 2007 compared to 21.2% in the quarter ended September 30, 2006 due primarily to lower operating margins associated with the Aspen acquisition. On a same-facility basis, our consolidated operating margin decreased to 35.6% in the quarter ended September 30, 2007, as compared to 38.1% in the quarter ended September 30, 2006. The decline in our same-facility operating margins was impacted by a one-time reclassification of incentive compensation expense recorded in the third quarter of 2006. This reclassification did not impact the operating margins of CRC or our individual segments for any period reported. Excluding the impact of the one-time reclassification of incentive compensation expense recorded in the third quarter of 2006, our same-facility operating margins were 36.9%. Increases in labor costs and other expenses in the third quarter of 2007 resulted in a decline in same-facility operation margins of 1.4% from the same period in 2006.
Our consolidated net income as a percentage of consolidated net revenue increased to 3.8% in the quarter ended September 30, 2007 compared to 0.7% in the quarter ended September 30, 2006. The increase in the net income percentage in the third quarter of 2007 compared to 2006 was primarily due to a reduction in interest expense as a percentage of consolidated net revenue.
Nine Months Ended September 30, 2007 Compared to Nine Months Ended September 30, 2006
Consolidated net revenue increased $160.0 million, or 86.0%, to $346.1 million in the nine months ended September 30, 2007 from $186.1 million in the nine months ended September 30, 2006. Of the $160.0 million increase, the youth treatment division contributed $123.1 million and the remaining net revenue growth was driven by net revenue increases of $27.4 million, or 23.1%, and $9.5 million, or 14.3%, in our residential and outpatient treatment divisions, respectively. Of the $27.4 million and $9.5 million net revenue increases in the residential and outpatient treatment divisions, respectively, $16.0 million and $3.7 million, respectively was contributed by the 2006 and 2007 acquisitions that were not included in results of operations in the nine months ended September 30, 2006. In addition, same-facility revenue increases in residential and outpatient treatment divisions of $8.0 million, or 6.8%, and $3.1 million, or 4.9%, respectively, and start-up facilities revenue increases in residential and outpatient treatment divisions of $2.1 million and $2.7 million, respectively, contributed to the net revenue growth. Our same-facility residential growth was driven in part by a 4.5% increase in patient census and a 2.2% increase in revenue per patient day. Our same-facility outpatient growth was primarily attributable to an increase in the number of patients receiving treatment at our outpatient treatment clinics. On a same-facility basis, outpatient treatment clinic census increased 3.3% from an average daily census of 21,438 in the nine months ended September 30, 2006 to an average daily census of 22,151 in the nine months ended September 30, 2007.
Consolidated operating expenses increased $99.8 million, or 52.7%, to $289.2 million in the nine months ended September 30, 2007 from $189.4 million in the nine months ended September 30, 2006. The increases in our residential treatment and outpatient treatment division operating expenses before divisional administration expenses were $19.2 million, or 23.5%, and $7.3 million, or 19.0%, respectively. The increase in residential treatment operating expenses was mainly
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attributable to $12.6 million in expenses related to the 2006 and 2007 acquisitions and partially attributable to a $5.5 million, or 6.9%, same-facility increase in operating expenses. The increase in outpatient treatment operating expenses of $2.8 million, or 7.8%, was attributable to same-facilities, $2.2 million in expenses related to the 2006 acquisitions and $2.4 million, or 76.6%, was attributable to start-up facilities. Division administration expenses increased $0.9 million, or 16.5%, in our residential treatment division and increased $0.4 million, or 6.9%, in our outpatient treatment division. The youth treatment operating expenses of $112.1 million are attributable mainly to salaries and wages and other general operating expenses. Corporate/other expenses decreased $40.1 million, or 69.5%, and expressed as a percentage of consolidated net revenue, corporate/other expenses decreased to 5.1% in the nine months ended September 30, 2007 compared to 31.0% in the nine months ended September 30, 2006. The corporate/other expenses in 2006 was primarily attributable to non-recurring expenses of $43.7 million related to the Transactions and the corporate/other expenses in 2007 was not impacted by such non-recurring expenses.
Our consolidated operating margin was 16.4% in the nine months ended September 30, 2007 compared to (1.8) % in the nine months ended September 30, 2006. Non-recurring expenses of $43.7 million related to the Transactions impacted the nine months ended September 30, 2006 operating margin. The nine months ended September 30, 2007 operating margin was not impacted by such non-recurring expenses but was partially impacted by lower operating margins associated with the Aspen Acquisition. On a same-facility basis, our consolidated operating margin increased to 36.3% in the nine months ended September 30 2007, as compared to 36.9% in the nine months ended September 30, 2006.
Our consolidated net income as a percentage of consolidated net revenue was 2.2% in the nine months ended September 30, 2007 compared to (19.2)% in the nine months ended September 30, 2006. The nine months ended September 30, 2006 net income percentage was mainly due to the operating margin decline as described above. The net income percentage for the nine months ended September 30, 2007, was not impacted by non-recurring expenses related to the Transactions.
LIQUIDITY AND CAPITAL RESOURCES
Our principal sources of liquidity for operating activities are payments from self pay patients, commercial payors and government programs for treatment services. We receive most of our cash from self payors in advance or upon completion of treatment. Cash payment from commercial payors and government programs is typically received upon the collection of accounts receivable, which are generated upon delivery of treatment services.
Working Capital
Working capital is defined as total current assets, including cash, less total current liabilities, including the current portion of long-term debt.
We had negative working capital of $46.7 million at September 30, 2007 and $18.7 million at December 31, 2006, respectively. The decrease in working capital of $28.0 million from December 31, 2006 to September 30, 2007 was primarily attributable to an increase in Revolving Line of Credit of $41.9 million to fund acquisitions and make interest payments partially offset by an increase in income tax receivable, a decrease in accrued liabilities, and other changes in working capital accounts.
Sources and Uses of Cash
Nine Months Ended September 30, | ||||||||
2007 | 2006 | |||||||
(In thousands) | ||||||||
Net cash provided by (used in) operating activities | $ | 18,119 | $ | (5,182 | ) | |||
Net cash used in investing activities | (56,795 | ) | (473,224 | ) | ||||
Net cash provided by financing activities | 37,582 | 474,922 | ||||||
Net (decrease) increase in cash | $ | (1,094 | ) | $ | (3,484 | ) | ||
Cash provided by operating activities was $18.1 million in the nine months ended September 30, 2007, compared to cash used in operating activities of $5.2 million in the nine months ended September 30, 2006. The cash used in operating activities for the nine months ended September 30, 2006 was primarily due to the net loss in the January 2006 Predecessor Company statement of operations resulting from the payment of non-recurring acquisition related expenses incurred in connection with the Transactions.
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Cash used in investing activities was $56.8 million in the nine months ended September 30 2007, compared to $473.2 million in the nine months ended September 30, 2006. The cash used for investing activities during the nine months ended September 30, 2006 was due primarily to acquisitions and payments to former shareholders in connection with the Bain transactions, partially offset by lower capital expenditures in 2006 compared to 2007.
Cash provided by financing activities was $37.6 million in the nine months ended September 30, 2007, compared to cash provided by financing activities of $474.9 million in the nine months ended September 30, 2006. The cash provided from financing activities in the nine months ended September 30, 2006 was due primarily to an equity contribution of $294.5 million from investment funds managed by Bain Capital and the increase in net issuances of long-term debt of $186.8 million, partially offset part by the payment of $28.8 million for debt financing and transaction costs.
Financing and Liquidity
We intend to fund our ongoing operations through cash generated by operations, funds available under the revolving portion of our senior secured credit facility and existing cash and cash equivalents. As of September 30, 2007, our senior secured credit facility is comprised of a $415.1 million senior secured term loan facility and a $100.0 million revolving credit facility. At September 30, 2007, we had $45.5 million of principal balance outstanding under the revolving credit facility. In addition, the revolving credit facility had approximately $5.6 million of letters of credit issued and outstanding at September 30, 2007. As part of the Transactions, we issued $200.0 million in aggregate principal amount of senior subordinated notes. We anticipate that cash generated by current operations, the remaining funds available under the revolving portion of our senior secured credit facility and existing cash and cash equivalents will be sufficient to meet working capital requirements, service our debt and finance capital expenditures over the next 12 months.
In addition, we may expand existing residential treatment and outpatient treatment facilities and build or acquire new facilities. Management continually assesses our capital needs and may seek additional financing, if necessary, including debt or equity, to fund potential acquisitions or for other corporate purposes. In negotiating such financing, there can be no assurance that we will be able to raise additional capital on terms satisfactory to us. Failure to obtain additional financing on reasonable terms could have a negative effect on our plans to acquire additional residential treatment facilities, outpatient treatment clinics and youth treatment facilities. We expect to spend an approximately $5.0 to $8.0 million for maintenance related expenditures and an additional $20.0 to $30.0 million over the next 12 months for expansion projects, systems upgrades and other related initiatives.
At September 30, 2007, we have borrowed $45.5 million under the revolving credit facility and have classified this on our Balance Sheets as Current portion of long-term debt. We have historically and currently intend to make payments to reduce borrowing under the revolver from operating cash flow. In addition, we expect that future financings will serve not only to partially fund acquisitions but also to repay all or part of any outstanding revolver balances then outstanding.
Under the terms of our borrowing arrangements, we are required to comply with various covenants, including the maintenance of certain financial ratios. As of September 30, 2007, we are in material compliance with all such covenants. Please reference Part II, Item 5 of this document for further discussion.
Effective April 16, 2007, we entered into an amendment to our amended and restated credit agreement dated November 17, 2006. Per the amendment, the term loan interest is payable quarterly at 90 day LIBOR plus 2.25% per annum; provided that on and after such time our corporate rating from Moody’s is at least B1 then the interest is payable quarterly at 90 day LIBOR plus 2.0% per annum.
Funding Commitments
In connection with an acquisition which closed in October 2005, we are obligated to make certain additional payments in the amount of up to $2.0 million upon the achievement of certain performance milestones for the second year period ending October 2007. As of September 30, 2007, the entity has achieved the second year performance milestones and as a result we recorded additional goodwill and a liability of $2.0 million, respectively. These additional payments earned will be paid by us in the fourth quarter of 2007.
Certain agreements acquired in the Aspen Acquisition contain contingent earnout provisions that provide for additional consideration to be paid to the sellers if the results of the entity’s operations exceed negotiated benchmarks. As a result of two of the entities exceeding the benchmark, the Youth treatment division recorded additional liability of $4.4 million, of which $1.9 million was incurred during the three months ended September 30, 2007. The additional consideration consists of a combination of cash and notes payable issued to the seller.
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Item 3. | Quantitative and Qualitative Disclosure about Market Risk |
For quantitative and qualitative disclosures about market risk affecting us, see “Quantitative and Qualitative Disclosure about Market Risk” in Item 7A of Part II, of our Annual Report on Form 10-K for the year ended December 31, 2006, which is incorporated herein by reference. Our exposure to market risk has not changed materially since December 31, 2006.
Item 4T. | Controls and Procedures |
Evaluation of Disclosure Controls and Procedures
We conducted an evaluation under the supervision and with the participation of our management, including our principal executive officer and principal financial officer, of the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”)), as of the end of the period covered by this Quarterly Report. Based upon this evaluation, our principal executive officer and principal financial officer concluded that our disclosure controls and procedures are effective to ensure that material information required to be disclosed by us in reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in Securities and Exchange Commission rules and forms and is accumulated and communicated to our management, including our principal executive officer and principal financial officer, as appropriate to allow timely decisions regarding required disclosure. No change in our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) occurred during the period covered by this Quarterly Report that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
Inherent Limitations on Effectiveness of Controls
Our management, including our chief executive officer and chief financial officer, does not expect that our disclosure controls or our internal control over financial reporting will prevent or detect all error and all fraud. A control system, no matter how well designed and operated, can provide only reasonable, not absolute, assurance that the control system’s objectives will be met. The design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Further, because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that misstatements due to error or fraud will not occur or that all control issues and instances of fraud, if any, within the company have been detected. These inherent limitations include the realities that judgments in decision-making can be faulty and that breakdowns can occur because of simple error or mistake. Controls can also be circumvented by the individual acts of some persons, by collusion of two or more people, or by management override of the controls. The design of any system of controls is based in part on certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions. Projections of any evaluation of controls effectiveness to future periods are subject to risks. Over time, controls may become inadequate because of changes in conditions or deterioration in the degree of compliance with policies or procedures.
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PART II. OTHER INFORMATION
Item 1A. | Risk Factors |
There have been no material changes to the factors disclosed in Item 1A Risk Factors in our Annual Report on Form 10-K for the year ended December 31, 2006.
Item 5. | Other Information |
On August 24th, 2007, the Company acquired substantially all of the assets of Bayside Marin LLC. and is in the process of determining whether such acquisition constitutes a significant acquisition under regulation SX. In the event this acquisition constitutes a significant acquisition under regulation SX, the Company is required to file audited financials and other information regarding the acquisition pursuant to an Form 8-K.
Item 6. | Exhibits |
The Exhibit Index beginning on page 40 of this report sets forth a list of exhibits.
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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.
Date: November 13, 2007
CRC HEALTH CORPORATION | ||
(Registrant) | ||
By | /s/ KEVIN HOGGE | |
Kevin Hogge, | ||
Chief Financial Officer | ||
(Principal Financial Officer and Principal Accounting Officer and duly authorized signatory) |
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EXHIBIT INDEX
4.1f | Form of Sixth Supplemental Indenture dated as of July 26, 2007, by and among CRC Health Corporation, the Guarantors named therein, the New Guarantors named therein and U.S. Bank National Association, as Trustee, with respect to the 10 3 / 4 % Senior Subordinated Notes due 2016 ‡ | |
10.2g | Form of SUPPLEMENT NO. 7 dated as of July 26, 2007, to the Security Agreement dated as of February 6, 2006 among CRC Health Corporation (f/k/a CRC Health Group, Inc.), CRC Health Group, Inc. (f/k/a/ CRCA Holdings, Inc.), and the Subsidiaries of the Borrower identified therein and Citibank, N.A., as collateral Agent for the Secured Parties, as defined therein. ‡ | |
10.3g | Form of SUPPLEMENT NO. 7 dated as of July 26, 2007, to the Guarantee Agreement dated as of February 6, 2006, among CRC Health Group, Inc., CRC Health Corporation, the Subsidiaries of the Borrower, as defined herein and Citibank, N.A., as Administrative Agent. ‡ | |
10.11b | Form of Amended and Restated 2007 Executive Option Certificate * | |
10.11c | Form of Amended and Restated Executive Option Certificate * | |
10.17 | CRC Health Group, Inc. 2007 Incentive Plan * | |
10.18 | Form of 2007 Incentive Plan Option Certificate * | |
10.19 | Agreement dated September 20,2007 by and between Elliot Sainer, CRC Health Group, Inc., CRC Health Corporation and Aspen Education Group, Inc. * | |
31.1 | Rule 13a-14(a)/15d-14(a) Certification of Principal Executive Officer ‡ | |
31.2 | Rule 13a-14(a)/15d-14(a) Certification of Principal Financial Officer and Principal Accounting Officer ‡ | |
32.1 | Section 1350 Certification of Principal Executive Officer † | |
32.2 | Section 1350 Certification of Principal Financial Officer and Principal Accounting Officer † |
‡ | Filed herewith. |
† | Furnished herewith. |
* | Management contract or compensatory plan or arrangement. |
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