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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, 2011
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 has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x No ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definitions of “large accelerated filer,” “accelerated filer,” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer | ¨ | Accelerated filer | ¨ | |||
Non-accelerated filer | x | Smaller reporting company | ¨ |
Indicate by check mark whether the registrant is a shell company (as defined by Rule 12b-2 of the Exchange Act). Yes ¨ No x
The total number of shares of the registrant’s common stock, par value of $0.001 per share, outstanding as of November 14, 2011 was 1,000.
Table of Contents
INDEX
Page No. | ||||||||
Part I. | Financial Information | |||||||
Item 1. | Financial Statements (Unaudited) | |||||||
Condensed Consolidated Balance Sheets as of September 30, 2011 and December 31, 2010 | 4 | |||||||
5 | ||||||||
6 | ||||||||
7 | ||||||||
Item 2. | Management’s Discussion and Analysis of Financial Condition and Results of Operations | 33 | ||||||
Item 3. | 45 | |||||||
Item 4. | 45 | |||||||
Part II. | Other Information | |||||||
Item 1. | 46 | |||||||
Item 1A. | 46 | |||||||
Item 6. | 46 | |||||||
47 | ||||||||
48 |
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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: effect of healthcare reform and other changes in government reimbursement for CRC’s services; reductions in the availability of governmental and private financial aid for CRC’s youth treatment programs; CRC’s substantial indebtedness; changes in applicable regulations or a government investigation or assertion that CRC has violated applicable regulations; attempts by local residents to force the closure or relocation of CRC’s facilities; the potentially difficult, unsuccessful or costly integration of acquired operations and future acquisitions; the potentially difficult, unsuccessful or costly opening and operating of new treatment programs; implementation of the strategic plan for improving performance of the Aspen business may not be successful; 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; Securities and Exchange Commission review of financial restatements; a material weakness in our internal controls over financial reporting, 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/A for the year ended December 31, 2010 filed on October 17, 2011, 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 (UNAUDITED)
SEPTEMBER 30, 2011 AND DECEMBER 31, 2010
(In thousands, except share amounts)
September 30, 2011 | December 31, 2010 | |||||||
ASSETS | ||||||||
Current assets: | ||||||||
Cash and cash equivalents | $ | 14,070 | $ | 7,111 | ||||
Restricted cash | 444 | 546 | ||||||
Accounts receivable-net | 36,194 | 31,873 | ||||||
Prepaid expenses | 5,653 | 8,530 | ||||||
Other current assets | 2,172 | 1,921 | ||||||
Income taxes receivable | — | 470 | ||||||
Deferred income taxes | 6,761 | 6,761 | ||||||
Current assets of discontinued operations | 1,557 | 1,635 | ||||||
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Total Current Assets | 66,851 | 58,847 | ||||||
PROPERTY AND EQUIPMENT - Net | 127,049 | 125,626 | ||||||
GOODWILL - Net | 521,807 | 521,807 | ||||||
OTHER INTANGIBLE ASSETS - Net | 305,831 | 314,032 | ||||||
OTHER ASSETS - Net | 21,865 | 19,411 | ||||||
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TOTAL ASSETS | $ | 1,043,403 | $ | 1,039,723 | ||||
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LIABILITIES AND STOCKHOLDERS’ EQUITY | ||||||||
Current liabilities: | ||||||||
Accounts payable | $ | 5,059 | $ | 4,937 | ||||
Accrued liabilities | 30,218 | 30,856 | ||||||
Income taxes payable | 4,631 | — | ||||||
Current portion of long-term debt | 13,784 | 11,111 | ||||||
Other current liabilities | 13,920 | 18,305 | ||||||
Current liabilities of discontinued operations | 2,746 | 3,619 | ||||||
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Total current liabilities | 70,358 | 68,828 | ||||||
LONG TERM DEBT - Less current portion | 587,837 | 598,915 | ||||||
OTHER LONG-TERM LIABILITIES | 8,398 | 8,786 | ||||||
LONG-TERM LIABILITIES OF DISCONTINUED OPERATIONS | 7,060 | 3,142 | ||||||
DEFERRED INCOME TAXES | 106,012 | 105,079 | ||||||
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Total liabilities | 779,665 | 784,750 | ||||||
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COMMITMENTS AND CONTINGENCIES (Note 12) | ||||||||
STOCKHOLDERS’ EQUITY | ||||||||
Common stock, $0.001 par value - 1,000 shares authorized, issued and outstanding at September 30, 2011 and December 31, 2010 | — | — | ||||||
Additional paid-in capital | 463,414 | 462,970 | ||||||
Accumulated deficit | (199,676 | ) | (205,891 | ) | ||||
Accumulated other comprehensive loss | — | (2,106 | ) | |||||
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Total stockholders’ equity | 263,738 | 254,973 | ||||||
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TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY | $ | 1,043,403 | $ | 1,039,723 | ||||
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See notes to unaudited condensed consolidated financial statements.
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CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2011 AND 2010
(In thousands)
Three Months Ended September 30, 2011 | Three Months Ended September 30, 2010 | Nine Months Ended September 30, 2011 | Nine Months Ended September 30, 2010 | |||||||||||||
(As Restated, See Note 2) | (As Restated, See Note 2) | |||||||||||||||
NET REVENUE: | ||||||||||||||||
Net client service revenues | $ | 119,286 | $ | 113,422 | $ | 341,644 | $ | 320,554 | ||||||||
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OPERATING EXPENSES: | ||||||||||||||||
Salaries and benefits | 52,176 | 51,669 | 155,776 | 151,346 | ||||||||||||
Supplies, facilities and other operating costs | 35,250 | 32,353 | 101,543 | 90,188 | ||||||||||||
Provision for doubtful accounts | 2,618 | 1,754 | 6,507 | 5,625 | ||||||||||||
Depreciation and amortization | 5,007 | 4,991 | 14,721 | 15,500 | ||||||||||||
Asset impairment | — | 1,696 | 1,947 | 9,209 | ||||||||||||
Goodwill impairment | — | 9,052 | — | 52,723 | ||||||||||||
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Total operating expenses | 95,051 | 101,515 | 280,494 | 324,591 | ||||||||||||
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OPERATING INCOME (LOSS) | 24,235 | 11,907 | 61,150 | (4,037 | ) | |||||||||||
INTEREST EXPENSE, NET | (10,246 | ) | (10,734 | ) | (34,168 | ) | (32,251 | ) | ||||||||
OTHER INCOME (EXPENSE) | — | — | 31 | (88 | ) | |||||||||||
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INCOME (LOSS) FROM CONTINUING OPERATIONS BEFORE INCOME TAXES | 13,989 | 1,173 | 27,013 | (36,376 | ) | |||||||||||
INCOME TAX EXPENSE | 6,731 | 2,405 | 11,988 | 296 | ||||||||||||
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INCOME (LOSS) FROM CONTINUING OPERATIONS, NET OF TAX | 7,258 | (1,232 | ) | 15,025 | (36,672 | ) | ||||||||||
LOSS FROM DISCONTINUED OPERATIONS NET OF TAX (NOTE 16) | (4,508 | ) | (3,867 | ) | (8,810 | ) | (11,747 | ) | ||||||||
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NET INCOME (LOSS) | $ | 2,750 | $ | (5,099 | ) | $ | 6,215 | $ | (48,419 | ) | ||||||
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See notes to unaudited condensed consolidated financial statements.
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CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2011 AND 2010
(In thousands)
Nine Months Ended September 30, 2011 | Nine Months Ended September 30, 2010 | |||||||
(As Restated, See Note 2) | ||||||||
CASH FLOWS FROM OPERATING ACTIVITIES: | ||||||||
Net income (loss) | $ | 6,215 | $ | (48,419 | ) | |||
Adjustments to reconcile net income (loss) to net cash provided by operating activities: | ||||||||
Depreciation and amortization | 14,753 | 15,929 | ||||||
Amortization of debt discount and capitalized financing costs | 3,043 | 3,179 | ||||||
Goodwill impairment | — | 52,723 | ||||||
Asset impairment | 4,401 | 20,504 | ||||||
Gain on interest rate swap agreement | (38 | ) | (292 | ) | ||||
Gain on sale of property and equipment | (125 | ) | 42 | |||||
Provision for doubtful accounts | 6,604 | 5,809 | ||||||
Stock-based compensation | 2,060 | 2,447 | ||||||
Deferred income taxes | — | (12,668 | ) | |||||
Changes in assets and liabilities: | ||||||||
Restricted cash | 102 | (295 | ) | |||||
Accounts receivable | (10,935 | ) | (7,751 | ) | ||||
Prepaid expenses | 2,889 | 1,761 | ||||||
Income taxes receivable and payable | 4,628 | 4,411 | ||||||
Other current assets | (246 | ) | 88 | |||||
Accounts payable | 144 | 2,385 | ||||||
Accrued liabilities | 240 | (212 | ) | |||||
Other current liabilities | (767 | ) | 899 | |||||
Other long-term assets | (2,091 | ) | (3,442 | ) | ||||
Other long-term liabilities | 3,271 | 2,509 | ||||||
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Net cash provided by operating activities | 34,148 | 39,607 | ||||||
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CASH FLOWS FROM INVESTING ACTIVITIES: | ||||||||
Additions of property and equipment | (12,356 | ) | (14,678 | ) | ||||
Proceeds from sale of property and equipment | 152 | 41 | ||||||
Acquisition of businesses, net of cash acquired | (91 | ) | (86 | ) | ||||
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Net cash used in investing activities | (12,295 | ) | (14,723 | ) | ||||
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CASH FLOWS FROM FINANCING ACTIVITIES: | ||||||||
Capital distributed (to) from Parent | (1,616 | ) | 8 | |||||
Capitalized financing costs | (3,169 | ) | — | |||||
Borrowings under revolving line of credit | 9,500 | 13,500 | ||||||
Repayments under revolving line of credit | (7,000 | ) | (30,000 | ) | ||||
Repayment of long-term debt | (12,609 | ) | (9,015 | ) | ||||
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Net cash used by financing activities | (14,894 | ) | (25,507 | ) | ||||
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NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS | 6,959 | (623 | ) | |||||
CASH AND CASH EQUIVALENTS—Beginning of year | 7,111 | 4,982 | ||||||
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CASH AND CASH EQUIVALENTS—End of period | $ | 14,070 | $ | 4,359 | ||||
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SUPPLEMENTAL DISCLOSURE OF NONCASH INVESTING AND FINANCING ACTIVITIES: | ||||||||
Payable related to acquisition | $ | 185 | $ | 309 | ||||
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SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION: | ||||||||
Cash paid for interest, net of capitalized interest | $ | 36,558 | $ | 34,250 | ||||
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Cash paid for income taxes, net of refunds | $ | 2,054 | $ | 1,147 | ||||
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See notes to unaudited condensed consolidated financial statements.
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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
1. OVERVIEW AND BASIS OF PRESENTATION
Overview
CRC Health Corporation (“the Company”) 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 treatment services related to substance abuse, troubled youth, and for other addiction diseases and behavioral disorders.
Basis of Presentation
The accompanying condensed consolidated financial statements have been prepared in accordance with generally accepted accounting principles in the United States of America (“U.S. GAAP”) for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X, without audit. Accordingly, they do not include all of the information required by accounting principles generally accepted in the United States of America for annual financial statements. The unaudited condensed consolidated balance sheet as of December 31, 2010 has been derived from our audited financial statements.
In the opinion of management, these unaudited condensed consolidated financial statements contain all adjustments, consisting of 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 financial statements and the notes thereto for the year ended December 31, 2010.
Principles of Consolidation — The Company’s condensed consolidated financial statements include the accounts of CRC Health Corporation and its consolidated subsidiaries. All significant intercompany accounts and transactions have been eliminated in consolidation.
Use of Estimates — Preparation of financial statements in accordance with U.S. GAAP requires management to make estimates and assumptions that affect the amounts reported in the Company’s condensed consolidated financial statements and accompanying notes. Actual results could differ materially from those estimates.
Reclassifications: Discontinued Operations — The condensed consolidated statements of operations have been reclassified for all periods presented to reflect the presentation of closed or sold facilities as discontinued operations (see Note 16). Unless noted otherwise, discussions in the notes to the condensed consolidated financial statements pertain to continuing operations.
Reclassifications: Segment Information — During the second quarter of 2011, the Company changed its managerial and financial reporting structure. As a result, the Company identified its new reportable segments as recovery, youth and weight management (see Note 17). The Company has retrospectively revised the segment presentation for all periods presented.
Recently Issued Accounting Guidance — In September 2011, the Financial Standards Accounting Board (“FASB”) issued an update to its authoritative guidance regarding goodwill impairment testing that allows an entity to have the option to first assess qualitative factors to determine whether the existence of events or circumstances leads to a determination that it is more likely than not that the fair value of a reporting unit is less than its carrying amount. If, after assessing the totality of events or circumstances, an entity determines it is not more likely than not that the fair value of a reporting unit is less than its carrying amount, then performing the two-step impairment test is unnecessary. The updated guidance will be effective for annual and interim goodwill impairment tests performed for fiscal years beginning after December 15, 2011. The adoption of the new guidance will not have a material impact on the Company’s consolidated financial statements.
In July 2011, the FASB issued updated authoritative guidance which requires health care entities to change the presentation of their statements of operations by reclassifying the provision for bad debts associated with patient service revenue from operating expenses to a reduction in patient service revenue. Additionally, those health care entities are required to provide enhanced disclosure about their policies for recognizing revenue and assessing bad debts. The updated guidance also requires disclosures about major payor sources of patient service revenue as well as qualitative and quantitative information about changes in the allowance for doubtful accounts. The updated guidance will be effective for annual and interim periods beginning after December 31, 2011. The Company is currently assessing the impact adoption of this guidance will have on the consolidated financial statements.
In June 2011, the FASB issued updated authoritative guidance which requires entities to present net income and other comprehensive income in either a single continuous statement or in two separate, but consecutive, statements of net income and other comprehensive income. The option to present items of other comprehensive income in the statement of changes in equity is eliminated. The updated guidance will be effective for interim and annual periods beginning after December 15, 2011. The adoption of the new guidance will not have a material impact on the Company’s consolidated financial statements.
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In May 2011, the FASB issued updated authoritative guidance on how (not when) to measure fair value and on what disclosures to provide about fair value measurements. While the updated guidance is largely consistent with existing fair value measurement principles in U.S. GAAP, it expands existing disclosure requirements for fair value measurements and makes other amendments. The updated guidance will be effective for interim and annual periods beginning after December 15, 2011. The adoption of the new guidance will not have a material impact on the Company’s consolidated financial statements.
2. RESTATEMENT OF CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
As disclosed in the Company’s Form 10-K/A for the year ended December 31, 2010, the Company’s Form 10-Q/A for the quarterly period ended March 31, 2011, and the Company’s Form 10-Q for the quarterly period ended June 30, 2011, the Company restated its previously issued consolidated financial statements for the years ended December 31, 2008, December 31, 2009 and December 31, 2010, including the quarterly data for the years 2009 and 2010, and for the fiscal quarter ended March 31, 2011. The restatements were prompted by errors in accounting for revenue, accounts receivable, bad debt expenses, and general expenses at one of the Company’s recovery residential facilities (the “Facility”).
The following table summarizes the impact of the restatement on the previously reported net loss for periods in 2010 not presented previously:
Three Months Ended September 30, 2010 | Nine Months Ended September 30, 2010 | |||||||
(in thousands) | ||||||||
Net loss, as previously reported | $ | (4,476 | ) | $ | (48,069 | ) | ||
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Adjustments related to the Facility | ||||||||
Net client service revenues | (58 | ) | 10 | |||||
Provision for doubtful accounts | (117 | ) | (285 | ) | ||||
Supplies, facilities and other operating costs | (84 | ) | (146 | ) | ||||
Income tax effects | 107 | 174 | ||||||
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Facility adjustments after tax | (152 | ) | (247 | ) | ||||
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Other adjustments: | ||||||||
Net client service revenues | — | (323 | ) | |||||
Stock compensation | (777 | ) | (269 | ) | ||||
Supplies, facilities and other operating costs | — | 423 | ||||||
Income tax effects | 306 | 66 | ||||||
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Other adjustments after tax | (471 | ) | (103 | ) | ||||
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Total adjustments | (623 | ) | (350 | ) | ||||
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Net loss, as restated | (5,099 | ) | (48,419 | ) | ||||
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The restated condensed consolidated financial statements for the three and nine months ended September 30, 2010 include adjustments to correct the following errors (in thousands):
• | $58 of revenue was improperly recognized for the three months ended September 30, 2010 and $10 of revenue should have been recognized for the nine months ended September 30, 2010. The revenue recognition issues resulted primarily from a failure by a former employee of the Facility to use correct billing rates and to accurately record services provided. |
• | $117 and $285 of provision for doubtful accounts were understated for the three and nine months ended September 30, 2010, respectively. The understatement resulted primarily from errors in the processes used by a former employee of the Facility in aging the receivables and the application of allowance percentages. |
• | $84 and $146 of operating expenses not recognized for the three and nine months ended September 30, 2010, respectively, should have been recognized. These adjustments resulted primarily from errors in accruing for expenses and properly classifying and recording prepaid assets. |
• | Income tax benefit for the tax effect of the items corrected above is $107 and $174 for the three and nine months ended September 30, 2010, respectively. |
The Company also restated the three and nine months ended September 30, 2010 to correct other previously identified immaterial adjustments that had been previously recorded so such immaterial adjustments are recorded in the proper period.
The effects of the correction of these other errors in the three and nine months ended September 30, 2010, respectively, are as follows (in thousands):
• | $323 of net client service revenue at two outpatient clinics previously recorded for the nine months ended September 30, 2010, has been correctly recorded in 2009. |
• | $343 increase and $105 reduction in stock-based compensation expense for Tranche 2 and Tranche 3 options that had previously been recorded in the fourth quarter of 2010 was correctly recorded for the three and nine months ended September 30, 2010, respectively. |
• | $434 and $374 of reductions in stock-based compensation expense for the three and nine months ended September 30, 2010, respectively, related to estimated forfeitures for cancelled options that had been previously recorded in the third quarter of 2010, were corrected to record such reductions in expense of $60 in the six months ended June 30, 2010 and $374 in 2009 and prior periods. |
• | $423 of management fees previously recorded for the nine months ended September 30, 2010 has been correctly recorded in 2009. |
• | Income tax benefit for the tax effect of the items corrected above is $306 and $66 for three and nine months ended September 30, 2010, respectively. |
In addition, the amounts shown in the line item “equity in income (loss) of subsidiaries, net of tax” under the CRC Health Corporation column in the condensed consolidating statements of operations for the Company and its subsidiary guarantors for the three and nine months ended September 30, 2010, included in Note 14, previously presented after income (loss) from continuing operations have been correctly presented as a component of income (loss) from continuing operations.
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The following tables summarize the effects of the restatement and reclassification of discontinued operations on the Company’s condensed consolidated statements of operations for the three and nine months ended September 30, 2010:
Three Months Ended September 30, 2010 | ||||||||||||||||
As Previously Reported (A) | Adjustments | Reclassification of Discontinuted Operations | As Restated | |||||||||||||
NET REVENUE: | ||||||||||||||||
Net client service revenues | $ | 118,953 | $ | (58 | ) | $ | (5,473 | ) | $ | 113,422 | ||||||
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OPERATING EXPENSES: | ||||||||||||||||
Salaries and benefits | 54,620 | 777 | (3,728 | ) | 51,669 | |||||||||||
Supplies, facilities and other operating costs | 34,503 | 84 | (2,234 | ) | 32,353 | |||||||||||
Provision for doubtful accounts | 1,666 | 117 | (29 | ) | 1,754 | |||||||||||
Depreciation and amortization | 5,037 | — | (46 | ) | 4,991 | |||||||||||
Asset impairment | 2,495 | — | (799 | ) | 1,696 | |||||||||||
Goodwill impairment | 9,052 | — | — | 9,052 | ||||||||||||
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Total operating expenses | 107,373 | 978 | (6,836 | ) | 101,515 | |||||||||||
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OPERATING INCOME | 11,580 | (1,036 | ) | 1,363 | 11,907 | |||||||||||
INTEREST EXPENSE, NET | (10,734 | ) | — | — | (10,734 | ) | ||||||||||
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INCOME FROM CONTINUING OPERATIONS BEFORE INCOME TAXES | 846 | (1,036 | ) | 1,363 | 1,173 | |||||||||||
INCOME TAX EXPENSE | 2,291 | (413 | ) | 527 | 2,405 | |||||||||||
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LOSS FROM CONTINUING OPERATIONS, NET OF TAX | (1,445 | ) | (623 | ) | 836 | (1,232 | ) | |||||||||
LOSS FROM DISCONTINUED OPERATIONS | (3,031 | ) | — | (836 | ) | (3,867 | ) | |||||||||
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NET LOSS | $ | (4,476 | ) | $ | (623 | ) | $ | — | $ | (5,099 | ) | |||||
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Nine months ended September 30, 2010 | ||||||||||||||||
As Previously Reported | Adjustments | Reclassification of Discontinuted Operations | As Restated | |||||||||||||
NET REVENUE: | ||||||||||||||||
Net client service revenues | $ | 336,787 | $ | (313 | ) | $ | (15,920 | ) | $ | 320,554 | ||||||
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OPERATING EXPENSES: | ||||||||||||||||
Salaries and benefits | 161,917 | 269 | (10,840 | ) | 151,346 | |||||||||||
Supplies, facilities and other operating costs | 96,992 | (277 | ) | (6,527 | ) | 90,188 | ||||||||||
Provision for doubtful accounts | 5,373 | 285 | (33 | ) | 5,625 | |||||||||||
Depreciation and amortization | 15,903 | — | (403 | ) | 15,500 | |||||||||||
Asset impairment | 20,504 | — | (11,295 | ) | 9,209 | |||||||||||
Goodwill impairment | 52,723 | — | — | 52,723 | ||||||||||||
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Total operating expenses | 353,412 | 277 | (29,098 | ) | 324,591 | |||||||||||
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OPERATING LOSS | (16,625 | ) | (590 | ) | 13,178 | (4,037 | ) | |||||||||
INTEREST EXPENSE, NET | (32,251 | ) | — | — | (32,251 | ) | ||||||||||
OTHER EXPENSE | (88 | ) | — | — | (88 | ) | ||||||||||
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LOSS FROM CONTINUING OPERATIONS BEFORE INCOME TAXES | (48,964 | ) | (590 | ) | 13,178 | (36,376 | ) | |||||||||
INCOME TAX BENEFIT | (4,559 | ) | (240 | ) | 5,095 | 296 | ||||||||||
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LOSS FROM CONTINUING OPERATIONS, NET OF TAX | (44,405 | ) | (350 | ) | 8,083 | (36,672 | ) | |||||||||
LOSS FROM DISCONTINUED OPERATIONS | (3,664 | ) | — | (8,083 | ) | (11,747 | ) | |||||||||
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NET LOSS | $ | (48,069 | ) | $ | (350 | ) | $ | — | $ | (48,419 | ) | |||||
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(A) | As previously reported in Form 10-K/A for the year ended December 31, 2010. |
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The following table summarizes the effects of the restatement on the Company’s condensed consolidated statement of cash flows for the nine months ended September 30, 2010:
Nine Months Ended September 30, 2010 | Nine Months Ended September 30, 2010 | |||||||||||
As Previously Reported | Adjustments | As Restated | ||||||||||
CASH FLOWS FROM OPERATING ACTIVITIES: | ||||||||||||
Net loss | $ | (48,069 | ) | $ | (350 | ) | $ | (48,419 | ) | |||
Adjustments to reconcile net loss to net cash provided by operating activities: | ||||||||||||
Depreciation and amortization | 15,929 | — | 15,929 | |||||||||
Amortization of debt discount and capitalized financing costs | 3,179 | — | 3,179 | |||||||||
Gain on interest rate swap agreement | (292 | ) | — | (292 | ) | |||||||
Gain on sale of property and equipment | 42 | — | 42 | |||||||||
Asset impairment | 20,504 | — | 20,504 | |||||||||
Goodwill impairment | 52,723 | — | 52,723 | |||||||||
Provision for doubtful accounts | 5,524 | 285 | 5,809 | |||||||||
Stock-based compensation | 2,178 | 269 | 2,447 | |||||||||
Deferred income taxes | (12,668 | ) | — | (12,668 | ) | |||||||
Changes in assets and liabilities: | ||||||||||||
Restricted cash | (295 | ) | — | (295 | ) | |||||||
Accounts receivable | (8,324 | ) | 573 | (7,751 | ) | |||||||
Prepaid expenses | 1,633 | 128 | 1,761 | |||||||||
Income taxes receivable and payable | 4,651 | (240 | ) | 4,411 | ||||||||
Other current assets | 88 | 88 | ||||||||||
Accounts payable | 2,407 | (22 | ) | 2,385 | ||||||||
Accrued liabilities | 172 | (384 | ) | (212 | ) | |||||||
Other current liabilities | 1,158 | (259 | ) | 899 | ||||||||
Other long-term assets | (3,442 | ) | — | (3,442 | ) | |||||||
Other long-term liabilities | 2,509 | — | 2,509 | |||||||||
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Net cash provided by operating activities | 39,607 | — | 39,607 | |||||||||
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CASH FLOWS FROM INVESTING ACTIVITIES: | ||||||||||||
Net cash used in investing activities | (14,723 | ) | — | (14,723 | ) | |||||||
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CASH FLOWS FROM FINANCING ACTIVITIES: | ||||||||||||
Net cash used in financing activities | (25,507 | ) | — | (25,507 | ) | |||||||
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3. BALANCE SHEET COMPONENTS
Balance sheet components at September 30, 2011 and December 31, 2010 consist of the following (in thousands):
September 30, 2011 | December 31, 2010 | |||||||
Accounts receivable-gross | $ | 42,224 | $ | 37,281 | ||||
Less allowance for doubtful accounts | (6,030 | ) | (5,408 | ) | ||||
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Accounts receivable-net | $ | 36,194 | $ | 31,873 | ||||
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Other assets-net: | ||||||||
Capitalized financing costs-net | $ | 11,100 | $ | 10,776 | ||||
Deposits | 516 | 662 | ||||||
Notes receivable-net | 10,249 | 7,973 | ||||||
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Total other assets-net | $ | 21,865 | $ | 19,411 | ||||
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Accrued liabilities: | ||||||||
Accrued payroll and related expenses | $ | 12,808 | $ | 10,796 | ||||
Accrued vacation | 4,316 | 4,596 | ||||||
Accrued interest | 3,375 | 8,153 | ||||||
Accrued expenses | 9,719 | 7,311 | ||||||
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Total accrued liabilities | $ | 30,218 | $ | 30,856 | ||||
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Other current liabilities: | ||||||||
Deferred revenue | $ | 11,650 | $ | 10,600 | ||||
Client deposits | 1,721 | 3,604 | ||||||
Interest rate swap liability | — | 3,535 | ||||||
Other liabilities | 549 | 566 | ||||||
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Total other current liabilities | $ | 13,920 | $ | 18,305 | ||||
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4. PROPERTY AND EQUIPMENT
Property and equipment at September 30, 2011 and December 31, 2010 consist of the following (in thousands):
September 30, 2011 | December 31, 2010 | |||||||
Land | $ | 21,373 | $ | 21,373 | ||||
Building and improvements | 86,883 | 79,860 | ||||||
Leasehold improvements | 19,208 | 19,203 | ||||||
Furniture and fixtures | 13,092 | 12,639 | ||||||
Computer equipment | 13,884 | 12,369 | ||||||
Computer software | 18,667 | 17,472 | ||||||
Motor vehicles | 5,694 | 5,660 | ||||||
Field equipment | 2,492 | 2,634 | ||||||
Construction in progress | 7,445 | 8,370 | ||||||
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188,738 | 179,580 | |||||||
Less accumulated depreciation | (61,689 | ) | (53,954 | ) | ||||
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Property and equipment-net | $ | 127,049 | $ | 125,626 | ||||
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Depreciation expense was $3.7 million and $3.5 million for the three months ended September 30, 2011 and 2010, respectively, and $10.6 million and $10.5 million for the nine months ended September 30, 2011 and 2010, respectively. The Company recognized non-cash impairment charges of $1.6 million and $3.4 million for the three and nine months ended September 30, 2010, related to property and equipment, which were included in the condensed consolidated statement of operations as asset impairment.
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5. GOODWILL AND INTANGIBLE ASSETS
Goodwill
As a result of the change in its operating segments (see Note 17), the Company reestablished its reporting units using the reporting unit determination guidelines. Prior to the change in the operating segments, the Company’s reporting units were recovery, youth and weight management. There were no changes to the reporting units for the recovery and youth operating segments. It was determined that the weight management operating segment had two reporting units: weight loss and eating disorder. The weight loss reporting unit provides treatment services for adult and adolescent weight management. The eating disorder reporting unit provides treatment services related to disorders such anorexia nervosa, bulimia nervosa, binge eating and compulsive overeating. Goodwill was reassigned to the new reporting units using their relative fair values at June 30, 2011.
There were no changes to goodwill during the nine months ended September 30, 2011. At September 30, 2011 and December 31, 2010, goodwill by reportable segments was as follows (in thousands):
Recovery | Youth | Weight Management | Total | |||||||||||||
Balance | ||||||||||||||||
Goodwill | $ | 502,671 | $ | 225,458 | $ | 19,760 | $ | 747,889 | ||||||||
Accumulated impairment losses | (624 | ) | (225,458 | ) | — | (226,082 | ) | |||||||||
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$ | 502,047 | $ | — | $ | 19,760 | $ | 521,807 | |||||||||
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The Company recognized goodwill impairment charges of $9.1 million and $52.7 million for the three and nine months ended September 30, 2010, related to its youth reporting unit.
Intangible Assets
Total intangible assets at September 30, 2011 and December 31, 2010 consist of the following (in thousands):
September 30, 2011 | December 31, 2010 | |||||||||||||||||||||||||||||||
Useful Life | Gross Carrying Amount | Accumulated Amortization | Net Carrying Amount | Useful Life | Gross Carrying Amount | Accumulated Amortization | Net Carrying Amount | |||||||||||||||||||||||||
Intangible assets subject to amortization: | ||||||||||||||||||||||||||||||||
Referral network | 20 years | $ | 19,231 | $ | (4,688 | ) | $ | 14,543 | 20 years | $ | 20,834 | $ | (4,297 | ) | $ | 16,537 | ||||||||||||||||
Accreditations | 20 years | 8,358 | (2,037 | ) | 6,321 | 20 years | 8,899 | (1,835 | ) | 7,064 | ||||||||||||||||||||||
Curriculum | 20 years | 4,915 | (1,198 | ) | 3,717 | 20 years | 5,483 | (1,131 | ) | 4,352 | ||||||||||||||||||||||
Government including Medicaid contracts | 15 years | 34,967 | (13,210 | ) | 21,757 | 15 years | 34,967 | (11,463 | ) | 23,504 | ||||||||||||||||||||||
Managed care contracts | 10 years | 14,400 | (8,160 | ) | 6,240 | 10 years | 14,400 | (7,080 | ) | 7,320 | ||||||||||||||||||||||
Managed care contracts | 5 years | 100 | (80 | ) | 20 | 5 years | 100 | (65 | ) | 35 | ||||||||||||||||||||||
Core developed technology | 5 years | 2,704 | (2,704 | ) | — | 5 years | 2,704 | (2,663 | ) | 41 | ||||||||||||||||||||||
Covenants not to compete | 3 years | 152 | (152 | ) | — | 3 years | 152 | (152 | ) | — | ||||||||||||||||||||||
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Total intangible assets subject to amortization | $ | 84,827 | $ | (32,229 | ) | $ | 52,598 | $ | 87,539 | $ | (28,686 | ) | $ | 58,853 | ||||||||||||||||||
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Intangible assets not subject to amortization: | ||||||||||||||||||||||||||||||||
Trademarks and trade names | 171,132 | 173,078 | ||||||||||||||||||||||||||||||
Certificates of need | 44,600 | 44,600 | ||||||||||||||||||||||||||||||
Regulatory licenses | 37,501 | 37,501 | ||||||||||||||||||||||||||||||
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Total intangible assets not subject to amortization | 253,233 | 255,179 | ||||||||||||||||||||||||||||||
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Total intangible assets | $ | 305,831 | $ | 314,032 | ||||||||||||||||||||||||||||
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The Company recognized a non-cash impairment charge of $1.9 million for the nine months ended September 30, 2011, related to indefinite-lived intangible assets, which were included in the condensed consolidated statement of operations as asset impairment. The Company recognized non-cash impairment charges of $0.1 million and $4.1 million for the three and nine months ended September 30, 2010, related to finite-lived intangible assets, and a non-cash impairment charge of $1.7 million for the nine months ended September 30, 2010, related to indefinite-lived intangible assets, which were included in the condensed consolidated statement of operations as asset impairment.
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Total amortization expense for intangible assets subject to amortization was $1.4 million and $1.5 million for the three months ended September 30, 2011 and 2010, respectively, and $4.1 million and $5.0 million for the nine months ended September 30, 2011 and 2010, respectively.
Estimated future amortization expense related to the amortizable intangible assets at September 30, 2011 is as follows (in thousands):
Fiscal Year | ||||
2011 (remaining three months) | $ | 1,354 | ||
2012 | 5,411 | |||
2013 | 5,396 | |||
2014 | 5,396 | |||
2015 | 5,396 | |||
Thereafter | 29,645 | |||
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Total | $ | 52,598 | ||
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6. LOAN PROGRAM
The Company’s loan program (the “Loan Program”) allows students and/or patients (the “Borrowers”) who meet certain predetermined credit and underwriting standards such as high FICO scores, full documentation, verification and certain cosigning requirements, to obtain third-party financing to pay a portion of the cost of participating in certain of the Company’s programs. The Company purchases loan notes from the third party lender on a recurring basis. The Loan Program notes receivable (net of loan loss reserves) were $10.2 million and $7.9 million at September 30, 2011 and December 31, 2010, respectively. Interest income related to the Loan Program notes was $0.2 million for the three months ended September 30, 2011 and 2010, and $0.6 million and $0.4 million for the nine months ended September 30, 2011 and 2010, respectively. Interest income is netted against interest expense in the condensed consolidated statements of operations.
The Company has established a loan loss reserve to account for non-performing notes receivable. The Company has utilized a variety of data from the consumer and education loan industry to establish its initial loan loss reserve. On a periodic basis, the Company evaluates the adequacy of the allowance based on the Company’s past loan loss experience, known and inherent risks in the loan portfolio, adverse situations that may affect the borrower’s ability to repay, the estimated value of any underlying collateral and current economic conditions. The following schedule reflects activity associated with the Company’s loan loss reserve for the three and nine months ended September 30, 2011 and 2010 (in thousands):
Three Months Ended September 30, 2011 | Three Months Ended September 30, 2010 | Nine Months Ended September 30, 2011 | Nine Months Ended September 30, 2010 | |||||||||||||
Loan Loss Reserve Account | ||||||||||||||||
Balance—beginning of the period | $ | 1,210 | $ | 551 | $ | 916 | $ | 219 | ||||||||
Loan loss expense | 170 | 196 | 464 | 528 | ||||||||||||
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Balance—end of the period | $ | 1,380 | $ | 747 | $ | 1,380 | $ | 747 | ||||||||
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7. INCOME TAXES
The Company calculates its income tax expense for interim periods by applying the full year’s estimated effective tax rate to its financial statements for interim periods.
For the three and nine months ended September 30, 2011, the Company’s tax expense on continuing operations was $6.7 million and $12.0 million, respectively, representing an effective tax rate of 48.1% and 44.4% respectively. The effective tax rate differs from the U.S. federal statutory rate of 35% primarily because of state income taxes. For the three and nine months ended September 30, 2010, the Company’s tax expense on continuing operations was $2.4 million and $0.3 million, respectively, representing an effective tax rate of 205.0% and 0.8%, respectively, on continued operations. The effective tax rate on continuing operations differs from the U.S. federal statutory rate of 35% primarily due to other discrete items such as impairment charges, provision-to-return adjustment, tax benefit recorded on the release of tax reserve related to transaction costs and tax benefit resulting from worthless stock loss.
There is no significant change relative to uncertain tax positions at September 30, 2011. The Company files its income tax returns in various jurisdictions, including the United States, United Kingdom and Canada. The Company is currently under examination by various state jurisdictions. There are different interpretations of tax laws and regulations and significant disputes may arise with these tax authorities involving issues of timing, amount of deductions and allocations of income among various tax jurisdictions. While the Company believes its positions comply with applicable laws, it periodically evaluates exposures associated with its tax filing positions.
8. LONG-TERM DEBT
Long-term debt at September 30, 2011 and December 31, 2010 consists of the following (in thousands):
September 30, 2011 | December 31, 2010 | |||||||
Term loans | $ | 388,664 | $ | 398,305 | ||||
Revolving line of credit | 36,500 | 34,000 | ||||||
Senior subordinated notes, net of discount of $1,144 in 2011 and $1,342 in 2010 | 176,152 | 175,954 | ||||||
Seller notes | 244 | 1,680 | ||||||
Note payable, leasehold improvement | 61 | 87 | ||||||
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Total debt | 601,621 | 610,026 | ||||||
Less current portion | (13,784 | ) | (11,111 | ) | ||||
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Long-term debt-less current portion | $ | 587,837 | $ | 598,915 | ||||
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Term Loans and Revolving Line of Credit — On January 20, 2011, the Company entered into an amendment agreement which further amended and restated the Amended and Restated Credit Agreement (“Second Amended and Restated Credit Agreement”) to extend the maturity of a substantial portion of the Term Loans and revolving line of credit and provide the Company with greater flexibility to amend and refinance its Term Loans and revolving line of credit in the future. Certain financial covenants were also amended. The amendment was recognized as a modification of debts.
Term Loans— Key provisions of the Term Loans that were extended pursuant to the Second Amended and Restated Credit Agreement (“Extended Term Loans”) and those that were not (“Non-Extended Term Loans”) are summarized below.
Non-Extended Term Loans: At September 30, 2011, the amount outstanding under Non-Extended Term loans was $80.9 million and is payable on February 6, 2013. Interest is payable quarterly at (i) for LIBOR loans for any interest period, a rate per annum equal to the LIBOR rate as determined by the administrative agent, plus an applicable margin of 2.25%, subject to reduction to 2.00% contingent upon the Company achieving a corporate family rating of at least B1 (with stable or better outlook) from Moody’s and
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(ii) for base rate loans, a rate per annum equal to the greater of (x) the prime rate of the administrative agent and (y) the federal funds rate plus one-half of 1.00%, plus an applicable margin of 1.25% subject to reduction to 1.00% contingent upon the Company achieving a corporate family rating of at least B1 (with stable or better outlook) from Moody’s. At September 30, 2011, the entire amount of the Non-Extended Term Loans consisted of LIBOR loans and the interest rate thereon was 2.496%.
Extended Term Loans: At September 30, 2011, the amount outstanding under Extended Term Loans was $307.8 million and is payable in quarterly principal installments of $0.9 million over the payment period between March 31, 2013 and September 30, 2015, with the remainder due on the maturity date of November 16, 2015. Interest is payable quarterly and rates are based on (i) for LIBOR loans for any interest period, a rate per annum equal to the LIBOR rate as determined by the administrative agent, plus an applicable margin of 4.50% and (ii) for base rate loans, a rate per annum equal to the greater of (x) the prime rate of the administrative agent and (y) the federal funds rate plus one-half of 1.00%, plus an applicable margin of 3.50%. At September 30, 2011, the entire amount of the Extended Term Loans consisted of LIBOR loans and the interest rate thereon was 4.746%.
The Company is required to apply a certain portion of excess cash to the principal amount of the Term Loans. Excess cash under the Second Amended and Restated Credit Agreement is defined as net income attributable to the Company adjusted for certain cash and non-cash items. The Company made a payment of $9.6 million in April 2011 related to excess cash.
Revolving Line of Credit — Key provisions of the revolving line of credit commitments that were extended pursuant to the Second Amended and Restated Credit Agreement (“Extended Revolving Line of Credit”) and those that were not extended (“Non-Extended Revolving Line of Credit”) are summarized below.
Non-Extended Revolving Line of Credit: The aggregate commitments of $37.0 million mature on February 6, 2012. Interest is payable at (i) for LIBOR loans of any interest period, a rate per annum equal to the LIBOR rate as determined by the administrative agent, plus an applicable margin of 2.50%, 2.25%, 2.00% or 1.75%, based upon the Company’s leverage ratio being within certain defined ranges, and (ii) for base rate loans, a rate per annum equal to the greater of (x) the prime rate of the administrative agent and (y) the federal funds rate plus one-half of 1.00%, plus an applicable margin of 1.50%, 1.25%, 1.00% or 0.75%, based upon the Company’s leverage ratio being within certain defined ranges. Commitment fees are payable quarterly at a rate equal to 0.500% per annum. At September 30, 2011, the amount outstanding under the Non-Extended Revolving Line of Credit was $13.5 million and the interest rate thereon was 2.721%.
Extended Revolving Line of Credit: The aggregate commitments of $63.0 million mature on August 16, 2015 provided that if any Non-Extended Term Loans have not been repaid or refinanced in full by January 6, 2013 or have not been subsequently extended to the maturity date of the Extended Term Loans (November 16, 2015), then the maturity date of the Extended Revolving Line of Credit commitments will be January 6, 2013. Interest is payable quarterly at (i) for LIBOR loans for any interest period, a rate per annum equal to the LIBOR rate as determined by the administrative agent, plus an applicable margin of 4.00%, 3.75%, 3.50% or 3.25%, based upon the Company’s leverage ratio being within certain defined ranges, and (ii) for base rate loans, a rate per annum equal to the greater of (x) the prime rate of the administrative agent and (y) the federal funds rate plus one-half of 1.00%, plus an applicable margin of 3.00%, 2.75%, 2.50% or 2.25%, based upon the Company’s leverage ratio being within certain defined ranges. Commitment fees are payable quarterly at a rate equal to 0.625% per annum. At September 30, 2011, the amount outstanding under the Extended Revolving Line of Credit was $23.0 million and the interest rate thereon was 4.221%.
Interest expense (gross) on total debt was $10.6 million and $11.0 million for the three months ended September 30, 2011 and 2010, respectively, and $35.1 million and $32.9 million for the nine months ended September 30, 2011 and 2010, respectively.
9. DERIVATIVES
The Company uses interest rate swaps to manage risk related to fluctuations in interest rates and does not engage in speculation or trading activities with its interest rate swaps.
The effective portion of changes in the fair value of interest rate swaps designated and qualifying as cash flow hedges was recorded in accumulated other comprehensive income (loss) and was subsequently reclassified into earnings in the period that the hedged forecasted transaction affected earnings. The ineffective portion of the change in fair value of the derivatives was recognized directly in earnings.
At September 30, 2011, the Company did not have any outstanding interest rate derivatives.
Amounts reported in accumulated other comprehensive income (loss) related to derivatives were reclassified to interest expense as interest payments were made on the Company’s variable-rate debt. At September 30, 2011, there were no such amounts remaining in accumulated other comprehensive income (loss).
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The table below presents the before-tax effect of the Company’s derivative financial instruments for the three months ending September 30, 2011 and 2010 (in thousands):
Cash Flow Hedging Relationships | Amount of Gain or (Loss) Recognized in OCI on Derivative (Effective Portion) | Location of Gain or (Loss) Reclassified from Accumulated OCI into Income (Effective Portion) | Amount of Gain or (Loss) Reclassified from Accumulated OCI into Income (Effective Portion) | Location of Gain or (Loss) Recognized in Income on Derivative (Ineffective Portion and Amount Excluded from Effectiveness Testing) | Amount of Gain or (Loss) Recognized in Income on Derivative (Ineffective Portion and Amount Excluded from Effectiveness Testing) | |||||||||||||||||||||||||||
2011 | 2010 | 2011 | 2010 | 2011 | 2010 | |||||||||||||||||||||||||||
Interest Rate Swaps | $ | — | $ | (806 | ) | Interest expense | $ | — | $ | (1,859 | ) | Interest expense | $ | — | $ | — |
The table below presents the before-tax effect of the Company’s derivative financial instruments for the nine months ending September 30, 2011 and 2010 (in thousands):
Cash Flow Hedging Relationships | Amount of Gain or (Loss) Recognized in OCI on Derivative (Effective Portion) | Location of Gain or (Loss) Reclassified from Accumulated OCI into Income (Effective Portion) | Amount of Gain or (Loss) Reclassified from Accumulated OCI into Income (Effective Portion) | Location of Gain or (Loss) Recognized in Income on Derivative (Ineffective Portion and Amount Excluded from Effectiveness Testing) | Amount of Gain or (Loss) Recognized in Income on Derivative (Ineffective Portion and Amount Excluded from Effectiveness Testing) | |||||||||||||||||||||||||||
2011 | 2010 | 2011 | 2010 | 2011 | 2010 | |||||||||||||||||||||||||||
Interest Rate Swaps | $ | (152 | ) | $ | (2,881 | ) | Interest expense | $ | (3,649 | ) | $ | (5,933 | ) | Interest expense | $ | 1 | $ | (1 | ) |
10. FAIR VALUE MEASUREMENTS
The Company accounts for certain assets and liabilities at fair value. As defined in the authoritative guidance on fair value measurements, fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. The Company establishes a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value. An asset or liability’s level is based on the lowest level of input that is significant to the fair value measurement. The statement requires that assets and liabilities carried at fair value be classified and disclosed in one of the following three categories:
Level 1: | Quoted prices (unadjusted) in active markets for identical assets or liabilities; |
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Level 2: | Inputs other than quoted prices included within Level 1 that are either directly or indirectly observable; | |
Level 3: | Unobservable inputs in which little or no market activity exists, therefore requiring an entity to develop its own assumptions about the assumptions that market participants would use in pricing. |
Assets and Liabilities Measured at Fair Value on a Recurring Basis
The Company did not have any outstanding interest note derivatives at September 30, 2011. The Company valued its interest rate swaps, which were in place until June 30, 2011, using terminal values which were derived using proprietary models based upon well-recognized financial principles and reasonable estimates about relevant future market conditions. These instruments were allocated to Level 2 on the fair value hierarchy because the critical inputs into these models, including the relevant yield curves and the known contractual terms of the instrument, were readily available. Refer to Note 9 for disclosure of fair value measurements and impact of unrealized gain or loss on earnings.
Assets and Liabilities Measured at Fair Value on a Non-Recurring Basis
The Company measures, on a non-recurring basis, its long-lived assets and indefinite-lived intangible assets at fair value when performing impairment assessments under the relevant accounting guidance. Nonfinancial liabilities for facility exit activities are also measured at fair value on a non-recurring basis.
The following table presents the non-financial assets of youth division that were measured and recorded at fair value on a nonrecurring basis as of September 30, 2011 (in thousands):
Nine Months Ended September 30, 2011 | Level Used to Determine New Cost Basis | |||||||||||||||||||
Impairment Charge | New Cost Basis | Level 1 | Level 2 | Level 3 | ||||||||||||||||
Property and equipment | $ | 337 | $ | — | $ | — | $ | — | $ | — | ||||||||||
Referral network | 1,251 | — | — | — | — | |||||||||||||||
Accreditation | 422 | — | — | — | — | |||||||||||||||
Curriculum | 444 | — | — | — | — | |||||||||||||||
Trademarks and trade names | 1,947 | 5,100 | — | — | 5,100 | |||||||||||||||
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|
|
|
| |||||||||||
Total | $ | 4,401 | 5,100 | $ | — | $ | — | $ | 5,100 | |||||||||||
|
|
|
|
|
|
|
|
|
|
Fair Value of Financial Instruments
Financial instruments not measured on a recurring basis include cash, restricted cash, accounts receivable, accounts payable, loan program notes receivable (net) and long-term debt. With the exception of financial instruments noted in the following table, the fair value of the Company’s financial instruments approximate carrying value due to their short maturities.
The estimated fair value of financial instruments with long-term maturities is as follows:
September 30, 2011 | December 31, 2010 | |||||||||||||||
(in thousands) | ||||||||||||||||
Carrying Amount | Fair Value | Carrying Amount | Fair Value | |||||||||||||
Assets | ||||||||||||||||
Loan program notes receivable, net | $ | 10,242 | $ | 7,961 | $ | 7,949 | $ | 6,028 | ||||||||
Liabilities | ||||||||||||||||
Senior subordinated notes, net | $ | 176,152 | $ | 174,563 | $ | 175,954 | $ | 187,232 | ||||||||
Term loans | $ | 388,664 | $ | 367,064 | $ | 398,305 | $ | 377,778 |
Notes receivable (net of loan loss reserves), are measured at their estimated fair market value primarily based on securitization market conditions for similar loans. The Company’s senior subordinated notes (net of discount) are measured at fair value based on bond-yield data from market trading activity as well as U.S. Treasury notes with similar maturities. The Company’s Term Loans are measured at fair value based on present value methods using credit spreads derived from market data to discount the projected interest and principal payments on the Company’s Term Loans. At September 30, 2011, the estimated fair value of loan program notes receivable, net, senior subordinated notes, net, and Term Loans was determined based on Level 3 inputs.
11. COMPREHENSIVE INCOME (LOSS)
Comprehensive income (loss) includes other gains and losses affecting equity that are excluded from net income (loss).
17
Table of Contents
Comprehensive income (loss) for the three and nine months ended September 30, 2011 and 2010 was as follows (in thousands):
Three Months Ended September 30, 2011 | Three Months Ended September 30, 2010 | Nine Months Ended September 30, 2011 | Nine Months Ended September 30, 2010 | |||||||||||||
(As Restated) | (As Restated) | |||||||||||||||
Net income (loss) | $ | 2,750 | $ | (5,099 | ) | $ | 6,215 | $ | (48,419 | ) | ||||||
Other comprehensive income: | ||||||||||||||||
Net change in unrealized gain on cash flow hedges (net of tax of $419 in the three months ended September 30, 2010, and $1,391 and $1,219 in the nine months ended September 30, 2011 and 2010) | — | 634 | 2,106 | 1,832 | ||||||||||||
|
|
|
|
|
|
|
| |||||||||
Comprehensive income (loss) | $ | 2,750 | $ | (4,465 | ) | $ | 8,321 | $ | (46,587 | ) | ||||||
|
|
|
|
|
|
|
|
12. COMMITMENTS AND CONTINGENCIES
Litigation — In a complaint initially filed on July 6, 2011, and amended on August 25, 2011, in Multnomah County Circuit Court in Oregon, 17 former students of one of our previously closed therapeutic boarding school facilities allege mental and physical abuse by certain former employees or agents of the school. The Company and CRC Health Oregon, Inc. are among the defendants in the pending litigation. The plaintiffs seek a total of $26.0 million in relief. A second suit was filed in November in Multnomah County Circuit Court in Oregon by 14 former students also alleging abuse. The plaintiffs seek a total of $23 million in relief. We and the other defendants intend to defend vigorously the pending lawsuit. In consultation with counsel and based on our preliminary investigation into the facts alleged, we believe this case is without merit. However, at this time, we are unable to predict the outcome of the lawsuit, the possible loss or range of loss, if any, after consideration of the extent of insurance coverage associated with the resolution of the lawsuit or any potential effect it may have on us or our operations.
In August, September and October 2011, three actions were brought against the Company’s New Life Lodge facility. One suit alleges negligence resulting in wrongful death and seeks a total $32.0 million in compensatory and punitive damages. A second suit was filed regarding the same matter by the same plaintiff alleging medical malpractice; plaintiff seeks to join this second suit with the first suit. The third suit is a medical malpractice action for alleged wrongful death and seeks $13.0 million in compensatory and punitive damages. We intend to defend vigorously the pending lawsuits. In consultation with counsel and based on our preliminary investigation into the facts alleged, the Company believes these cases are without merit. However, at this time, we are unable to predict the outcome of the lawsuit or the possible loss or range of loss, if any, after consideration of the extent of insurance coverage associated with the resolution of the lawsuit or any potential effect it may have on us or our operations.
The Company is involved in litigation and regulatory investigations arising in the course of 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, except as discussed above.
Indemnifications — The Company provides for indemnification of directors, officers and other persons in accordance with limited liability agreements, certificates of incorporation, bylaws, articles of association or similar organizational documents, as the case may be. The Company maintains directors’ and officers’ insurance which should enable the Company to recover a portion of any future amounts paid should they occur.
In addition to the above, from time to time the Company provides standard representations and warranties to counterparties in contracts in connection with business dispositions and acquisitions and also provides indemnities that protect the counterparties to these contracts in the event they suffer damages as a result of a breach of such representations and warranties or in certain other circumstances relating to such sales or acquisitions.
While the Company’s future obligations under certain agreements may contain limitations on liability for indemnification, other agreements do not contain such limitations and under such agreements it is not possible to predict the maximum potential amount of future payments due to the conditional nature of the Company’s obligations and the unique facts and circumstances involved.
Loan Program Purchase Commitments — As of September 30, 2011, the Company has purchased approximately $15.4 million in loan program notes with a weighted average interest rate of 6.7% and a maximum remaining amortization period of 20 years. At September 30, 2011, the Company had $0.4 million of outstanding loan purchase commitments related to its Loan Program.
13. STOCK-BASED COMPENSATION
The Company incurs stock-based compensation expense related to the equity awards made by the Group to employees and consultants of the Company. For the three months ended September 30, 2011 and 2010, the Company recognized stock-based compensation expense of $0.7 million and $0.1 million (restated), respectively, and $2.1 million and $2.4 million (restated) for the nine months ended September 30, 2011 and 2010, respectively. Stock-based compensation expense is recorded within salaries and
18
Table of Contents
benefits on the condensed consolidated statements of operations. The total income tax benefit recognized in the condensed consolidated statement of operations for stock-based compensation expense for the three months ended September 30, 2011 was $0.3 million and $0.8 million (restated) and $1.0 million (restated) for the nine months ended September 30, 2011 and 2010, respectively. There was no income tax effect for the three months ended September 30, 2010.
During the nine months ended September 30, 2011, the Group granted 2,256,860 units, which represent 2,031,174 share options to purchase Class A common stock of the Group and 225,686 share options to purchase Class L common stock of the Group. At September 30, 2011 and 2010, the Company had 3,743,963 and 2,665,514 unvested option shares with per-share, weighted average grant date fair values of $3.14 and $4.72, respectively. Additionally, 265,030 option shares with a per-share weighted average grant date fair value of $4.83 vested during the nine months ended September 30, 2011.
Activity under the Group’s plans for the nine months ended September 30, 2011 is summarized below:
Option Shares | Weighted- Average Exercise Price Per Share | Weighted- Average Grant Date Fair Value | Weighted- Average Remaining Contractual Term (In Years) | |||||||||||||
Balance at December 31, 2010 | 6,002,738 | $ | 7.77 | 5.77 | ||||||||||||
Granted | 2,256,860 | $ | 8.10 | $ | 2.07 | 9.54 | ||||||||||
Exercised | (128,725 | ) | — | |||||||||||||
Forfeited/cancelled/expired | (1,260,013 | ) | $ | 9.33 | $ | 4.84 | ||||||||||
|
|
|
| |||||||||||||
Outstanding-September 30, 2011 | 6,870,860 | $ | 7.39 | 6.41 | ||||||||||||
|
|
|
| |||||||||||||
Exercisable-September 30, 2011 | 3,126,896 | $ | 6.63 | 4.62 | ||||||||||||
|
|
|
| |||||||||||||
Exercisable and expected to be exercisable | 6,527,317 | $ | 7.39 | 6.41 | ||||||||||||
|
|
|
|
14. CONDENSED CONSOLIDATING FINANCIAL INFORMATION
As of September 30, 2011, the Company had $177.3 million aggregate principal amount of the 10.75% senior subordinated notes due 2016 (“the Notes”) outstanding. The Notes are fully and unconditionally guaranteed, jointly and severally on an unsecured senior subordinated basis, by the Company’s wholly owned subsidiaries.
The following supplemental tables present condensed consolidating balance sheets for the Company and its subsidiary guarantors as of September 30, 2011 and December 31, 2010, the condensed consolidating statements of operations for the three months and nine months ended September 30, 2011 and 2010, and the condensed consolidating statements of cash flows for the nine months ended September 30, 2011 and 2010.
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Table of Contents
Condensed Consolidating Balance Sheet as of September 30, 2011
(In thousands) (Unaudited)
CRC Health Corporation | Subsidiary Guarantors | Subsidiary Non-Guarantors | Eliminations | Consolidated | ||||||||||||||||
ASSETS | ||||||||||||||||||||
CURRENT ASSETS: | ||||||||||||||||||||
Cash and cash equivalents | $ | — | $ | 12,981 | $ | 1,089 | $ | — | $ | 14,070 | ||||||||||
Restricted cash | 444 | — | — | — | 444 | |||||||||||||||
Accounts receivable-net | — | 36,005 | 189 | — | 36,194 | |||||||||||||||
Prepaid expenses | 2,200 | 3,397 | 56 | — | 5,653 | |||||||||||||||
Other current assets | 674 | 1,393 | 105 | — | 2,172 | |||||||||||||||
Deferred income taxes | 6,761 | — | — | — | 6,761 | |||||||||||||||
Current assets of discontinued operations | — | 1,557 | — | — | 1,557 | |||||||||||||||
|
|
|
|
|
|
|
|
|
| |||||||||||
Total current assets | 10,079 | 55,333 | 1,439 | — | 66,851 | |||||||||||||||
|
|
|
|
|
|
|
|
|
| |||||||||||
PROPERTY AND EQUIPMENT—Net | 9,978 | 116,119 | 952 | — | 127,049 | |||||||||||||||
GOODWILL | — | 513,840 | 7,967 | — | 521,807 | |||||||||||||||
INTANGIBLE ASSETS—Net | — | 305,831 | — | — | 305,831 | |||||||||||||||
OTHER ASSETS-Net | 21,372 | 479 | 14 | — | 21,865 | |||||||||||||||
INVESTMENT IN SUBSIDIARIES | 953,194 | — | — | (953,194 | ) | — | ||||||||||||||
|
|
|
|
|
|
|
|
|
| |||||||||||
TOTAL ASSETS | $ | 994,623 | $ | 991,602 | $ | 10,372 | $ | (953,194 | ) | $ | 1,043,403 | |||||||||
|
|
|
|
|
|
|
|
|
| |||||||||||
LIABILITIES AND EQUITY | ||||||||||||||||||||
CURRENT LIABILITIES: | ||||||||||||||||||||
Accounts payable | $ | 4,260 | $ | 729 | $ | 70 | $ | — | $ | 5,059 | ||||||||||
Accrued liabilities | 12,883 | 14,850 | 2,485 | — | 30,218 | |||||||||||||||
Income taxes payable | 4,631 | — | — | — | 4,631 | |||||||||||||||
Current portion of long-term debt | 13,505 | 279 | — | — | 13,784 | |||||||||||||||
Other current liabilities | 798 | 11,962 | 1,160 | — | 13,920 | |||||||||||||||
Current liabilities of discontinued operations | — | 2,746 | — | — | 2,746 | |||||||||||||||
|
|
|
|
|
|
|
|
|
| |||||||||||
Total current liabilities | 36,077 | 30,566 | 3,715 | — | 70,358 | |||||||||||||||
|
|
|
|
|
|
|
|
|
| |||||||||||
LONG-TERM DEBT—Less current portion | 587,811 | 26 | — | — | 587,837 | |||||||||||||||
OTHER LONG-TERM LIABILITIES | 985 | 7,345 | 68 | — | 8,398 | |||||||||||||||
LONG-TERM LIABILITIES OF DISCONTINUED OPERATIONS | — | 7,060 | — | — | 7,060 | |||||||||||||||
DEFERRED INCOME TAXES | 106,012 | — | — | — | 106,012 | |||||||||||||||
|
|
|
|
|
|
|
|
|
| |||||||||||
Total liabilities | 730,885 | 44,997 | 3,783 | — | 779,665 | |||||||||||||||
|
|
|
|
|
|
|
|
|
| |||||||||||
Total equity | 263,738 | 946,605 | 6,589 | (953,194 | ) | 263,738 | ||||||||||||||
|
|
|
|
|
|
|
|
|
| |||||||||||
TOTAL LIABILITIES AND EQUITY | $ | 994,623 | $ | 991,602 | $ | 10,372 | $ | (953,194 | ) | $ | 1,043,403 | |||||||||
|
|
|
|
|
|
|
|
|
|
20
Table of Contents
Condensed Consolidating Balance Sheet as of December 31, 2010
(In thousands) (Unaudited)
CRC Health Corporation | Subsidiary Guarantors | Subsidiary Non-Guarantors | Eliminations | Consolidated | ||||||||||||||||
ASSETS | ||||||||||||||||||||
CURRENT ASSETS: | ||||||||||||||||||||
Cash and cash equivalents | $ | — | $ | 6,826 | $ | 285 | $ | — | $ | 7,111 | ||||||||||
Restricted cash | 546 | — | — | — | 546 | |||||||||||||||
Accounts receivable-net of allowance for doubtful accounts | — | 31,641 | 232 | — | 31,873 | |||||||||||||||
Prepaid expenses | 4,488 | 3,862 | 180 | — | 8,530 | |||||||||||||||
Other current assets | 585 | 1,333 | 3 | — | 1,921 | |||||||||||||||
Income taxes receivable | 470 | — | — | — | 470 | |||||||||||||||
Deferred income taxes | 6,761 | — | — | — | 6,761 | |||||||||||||||
Current assets of discontinued operations | — | 1,635 | — | — | 1,635 | |||||||||||||||
|
|
|
|
|
|
|
|
|
| |||||||||||
Total current assets | 12,850 | 45,297 | 700 | — | 58,847 | |||||||||||||||
|
|
|
|
|
|
|
|
|
| |||||||||||
PROPERTY AND EQUIPMENT-Net | 9,515 | 115,023 | 1,088 | — | 125,626 | |||||||||||||||
GOODWILL | — | 518,310 | 3,497 | — | 521,807 | |||||||||||||||
INTANGIBLE ASSETS-Net | — | 314,032 | — | — | 314,032 | |||||||||||||||
OTHER ASSETS-Net | 18,728 | 669 | 14 | — | 19,411 | |||||||||||||||
INVESTMENT IN SUBSIDIARIES | 953,587 | — | — | (953,587 | ) | — | ||||||||||||||
|
|
|
|
|
|
|
|
|
| |||||||||||
TOTAL ASSETS | $ | 994,680 | $ | 993,331 | $ | 5,299 | $ | (953,587 | ) | $ | 1,039,723 | |||||||||
|
|
|
|
|
|
|
|
|
| |||||||||||
LIABILITIES AND EQUITY | ||||||||||||||||||||
CURRENT LIABILITIES: | ||||||||||||||||||||
Accounts payable | $ | 3,850 | $ | 1,046 | $ | 41 | $ | — | $ | 4,937 | ||||||||||
Accrued liabilities | 17,396 | 12,796 | 664 | — | 30,856 | |||||||||||||||
Current portion of long-term debt | 9,641 | 1,470 | — | — | 11,111 | |||||||||||||||
Other current liabilities | 4,127 | 13,128 | 1,050 | — | 18,305 | |||||||||||||||
Current liabilities of discontinued operations | — | 3,619 | — | — | 3,619 | |||||||||||||||
|
|
|
|
|
|
|
|
|
| |||||||||||
Total current liabilities | 35,014 | 32,059 | 1,755 | — | 68,828 | |||||||||||||||
|
|
|
|
|
|
|
|
|
| |||||||||||
LONG-TERM DEBT-Less current portion | 598,618 | 297 | — | — | 598,915 | |||||||||||||||
OTHER LONG-TERM LIABILITIES | 996 | 7,613 | 177 | — | 8,786 | |||||||||||||||
LONG-TERM LIABILITIES OF DISCONTINUED OPERATIONS | — | 3,142 | — | — | 3,142 | |||||||||||||||
DEFERRED INCOME TAXES | 105,079 | — | — | — | 105,079 | |||||||||||||||
|
|
|
|
|
|
|
|
|
| |||||||||||
Total liabilities | 739,707 | 43,111 | 1,932 | — | 784,750 | |||||||||||||||
|
|
|
|
|
|
|
|
|
| |||||||||||
Total equity | 254,973 | 950,220 | 3,367 | (953,587 | ) | 254,973 | ||||||||||||||
|
|
|
|
|
|
|
|
|
| |||||||||||
TOTAL LIABILITIES AND EQUITY | $ | 994,680 | $ | 993,331 | $ | 5,299 | $ | (953,587 | ) | $ | 1,039,723 | |||||||||
|
|
|
|
|
|
|
|
|
|
21
Table of Contents
Condensed Consolidating Statements of Operations
For the Three Months Ended September 30, 2011
(In thousands) (Unaudited)
CRC Health Corporation | Subsidiary Guarantors | Subsidiary Non-Guarantors | Eliminations | Consolidated | ||||||||||||||||
REVENUE: | ||||||||||||||||||||
Net client service revenue | $ | 33 | $ | 111,418 | $ | 7,835 | $ | — | $ | 119,286 | ||||||||||
Management fee revenue | 17,615 | — | — | (17,615 | ) | — | ||||||||||||||
|
|
|
|
|
|
|
|
|
| |||||||||||
Total net revenue | 17,648 | 111,418 | 7,835 | (17,615 | ) | 119,286 | ||||||||||||||
|
|
|
|
|
|
|
|
|
| |||||||||||
OPERATING EXPENSES: | ||||||||||||||||||||
Salaries and benefits | 3,881 | 46,107 | 2,188 | — | 52,176 | |||||||||||||||
Supplies, facilities and other operating costs | 2,148 | 29,488 | 3,614 | — | 35,250 | |||||||||||||||
Provision for doubtful accounts | — | 2,574 | 44 | — | 2,618 | |||||||||||||||
Depreciation and amortization | 1,184 | 3,709 | 114 | — | 5,007 | |||||||||||||||
Management fee expense | — | 16,332 | 1,283 | (17,615 | ) | — | ||||||||||||||
|
|
|
|
|
|
|
|
|
| |||||||||||
Total operating expenses | 7,213 | 98,210 | 7,243 | (17,615 | ) | 95,051 | ||||||||||||||
|
|
|
|
|
|
|
|
|
| |||||||||||
OPERATING INCOME | 10,435 | 13,208 | 592 | — | 24,235 | |||||||||||||||
INTEREST EXPENSE, NET | (10,229 | ) | (17 | ) | — | — | (10,246 | ) | ||||||||||||
|
|
|
|
|
|
|
|
|
| |||||||||||
(LOSS) INCOME FROM CONTINUING OPERATIONS BEFORE INCOME TAXES | 206 | 13,191 | 592 | — | 13,989 | |||||||||||||||
INCOME TAX (BENEFIT) EXPENSE | 99 | 6,347 | 285 | — | 6,731 | |||||||||||||||
EQUITY IN INCOME OF SUBSIDIARIES, NET OF TAX | 2,643 | — | — | (2,643 | ) | — | ||||||||||||||
|
|
|
|
|
|
|
|
|
| |||||||||||
INCOME FROM CONTINUING OPERATIONS | 2,750 | 6,844 | 307 | (2,643 | ) | 7,258 | ||||||||||||||
LOSS FROM DISCONTINUED OPERATIONS, NET OF TAX | — | (4,508 | ) | — | — | (4,508 | ) | |||||||||||||
|
|
|
|
|
|
|
|
|
| |||||||||||
NET INCOME (LOSS) | $ | 2,750 | $ | 2,336 | $ | 307 | $ | (2,643 | ) | $ | 2,750 | |||||||||
|
|
|
|
|
|
|
|
|
|
22
Table of Contents
Condensed Consolidating Statements of Operations
For the Three Months Ended September 30, 2010
(In thousands) (Unaudited)
CRC Health Corporation | Subsidiary Guarantors | Subsidiary Non-Guarantors | Eliminations | Consolidated | ||||||||||||||||
As Restated | As Restated | As Restated | As Restated | As Restated | ||||||||||||||||
REVENUE: | ||||||||||||||||||||
Net client service revenue | $ | 52 | $ | 105,576 | $ | 7,794 | $ | — | $ | 113,422 | ||||||||||
Management fee revenue | 19,686 | — | — | (19,686 | ) | — | ||||||||||||||
|
|
|
|
|
|
|
|
|
| |||||||||||
Total net revenue | 19,738 | 105,576 | 7,794 | (19,686 | ) | 113,422 | ||||||||||||||
|
|
|
|
|
|
|
|
|
| |||||||||||
OPERATING EXPENSES: | ||||||||||||||||||||
Salaries and benefits | 5,282 | 44,462 | 1,925 | — | 51,669 | |||||||||||||||
Supplies, facilities and other operating costs | 2,683 | 26,199 | 3,471 | — | 32,353 | |||||||||||||||
Provision for doubtful accounts | — | 1,694 | 60 | — | 1,754 | |||||||||||||||
Depreciation and amortization | 975 | 3,914 | 102 | — | 4,991 | |||||||||||||||
Asset impairments | — | 1,696 | — | — | 1,696 | |||||||||||||||
Goodwill impairment | — | 9,052 | — | — | 9,052 | |||||||||||||||
Management fee expense | — | 18,249 | 1,437 | (19,686 | ) | — | ||||||||||||||
|
|
|
|
|
|
|
|
|
| |||||||||||
Total operating expenses | 8,940 | 105,266 | 6,995 | (19,686 | ) | 101,515 | ||||||||||||||
|
|
|
|
|
|
|
|
|
| |||||||||||
OPERATING INCOME | 10,798 | 310 | 799 | — | 11,907 | |||||||||||||||
INTEREST EXPENSE, NET | (10,651 | ) | 512 | (595 | ) | — | (10,734 | ) | ||||||||||||
|
|
|
|
|
|
|
|
|
| |||||||||||
LOSS INCOME FROM CONTINUING OPERATIONS BEFORE INCOME TAXES | 147 | 822 | 204 | — | 1,173 | |||||||||||||||
INCOME TAX (BENEFIT) EXPENSE | 301 | 1,686 | 418 | — | 2,405 | |||||||||||||||
EQUITY IN LOSS OF SUBSIDIARIES, NET OF TAX | (4,945 | ) | — | — | 4,945 | — | ||||||||||||||
|
|
|
|
|
|
|
|
|
| |||||||||||
LOSS FROM CONTINUING OPERATIONS | (5,099 | ) | (864 | ) | (214 | ) | 4,945 | (1,232 | ) | |||||||||||
LOSS FROM DISCONTINUED OPERATIONS, NET OF TAX | — | (3,867 | ) | — | — | (3,867 | ) | |||||||||||||
|
|
|
|
|
|
|
|
|
| |||||||||||
NET LOSS | $ | (5,099 | ) | $ | (4,731 | ) | $ | (214 | ) | $ | 4,945 | $ | (5,099 | ) | ||||||
|
|
|
|
|
|
|
|
|
|
23
Table of Contents
Condensed Consolidating Statements of Operations
For the Nine Months Ended September 30, 2011
(In thousands) (Unaudited)
CRC Health Corporation | Subsidiary Guarantors | Subsidiary Non-Guarantors | Eliminations | Consolidated | ||||||||||||||||
REVENUE: | ||||||||||||||||||||
Net client service revenue | $ | 136 | $ | 327,560 | $ | 13,948 | $ | — | $ | 341,644 | ||||||||||
Management fee revenue | 59,738 | — | — | (59,738 | ) | — | ||||||||||||||
|
|
|
|
|
|
|
|
|
| |||||||||||
Total net revenue | 59,874 | 327,560 | 13,948 | (59,738 | ) | 341,644 | ||||||||||||||
|
|
|
|
|
|
|
|
|
| |||||||||||
OPERATING EXPENSES: | ||||||||||||||||||||
Salaries and benefits | 12,787 | 138,147 | 4,842 | — | 155,776 | |||||||||||||||
Supplies, facilities and other operating costs | 6,229 | 87,342 | 7,972 | — | 101,543 | |||||||||||||||
Provision for doubtful accounts | — | 6,447 | 60 | — | 6,507 | |||||||||||||||
Depreciation and amortization | 3,303 | 11,111 | 307 | — | 14,721 | |||||||||||||||
Asset impairments | — | 1,947 | — | — | 1,947 | |||||||||||||||
Management fee expense | — | 56,655 | 3,083 | (59,738 | ) | — | ||||||||||||||
|
|
|
|
|
|
|
|
|
| |||||||||||
Total operating expenses | 22,319 | 301,649 | 16,264 | (59,738 | ) | 280,494 | ||||||||||||||
|
|
|
|
|
|
|
|
|
| |||||||||||
OPERATING INCOME (LOSS) | 37,555 | 25,911 | (2,316 | ) | — | 61,150 | ||||||||||||||
INTEREST EXPENSE, NET | (33,999 | ) | (169 | ) | — | — | (34,168 | ) | ||||||||||||
OTHER INCOME | 31 | — | — | — | 31 | |||||||||||||||
|
|
|
|
|
|
|
|
|
| |||||||||||
INCOME (LOSS) FROM CONTINUING OPERATIONS BEFORE INCOME TAXES | 3,587 | 25,742 | (2,316 | ) | — | 27,013 | ||||||||||||||
INCOME TAX EXPENSE (BENEFIT) | 1,592 | 11,424 | (1,028 | ) | — | 11,988 | ||||||||||||||
EQUITY IN INCOME OF SUBSIDIARIES, NET OF TAX | 4,220 | — | — | (4,220 | ) | — | ||||||||||||||
|
|
|
|
|
|
|
|
|
| |||||||||||
INCOME (LOSS) FROM CONTINUING OPERATIONS | 6,215 | 14,318 | (1,288 | ) | (4,220 | ) | 15,025 | |||||||||||||
LOSS FROM DISCONTINUED OPERATIONS, NET OF TAX | — | (8,810 | ) | — | — | (8,810 | ) | |||||||||||||
|
|
|
|
|
|
|
|
|
| |||||||||||
NET INCOME (LOSS) | $ | 6,215 | $ | 5,508 | $ | (1,288 | ) | $ | (4,220 | ) | $ | 6,215 | ||||||||
|
|
|
|
|
|
|
|
|
|
24
Table of Contents
Condensed Consolidating Statements of Operations
For the Nine Months Ended September 30, 2010
(In thousands) (Unaudited)
CRC Health Corporation | Subsidiary Guarantors | Subsidiary Non-Guarantors | Eliminations | Consolidated | ||||||||||||||||
As Restated | As Restated | As Restated | As Restated | As Restated | ||||||||||||||||
REVENUE: | ||||||||||||||||||||
Net client service revenue | $ | 150 | $ | 307,380 | $ | 13,024 | $ | — | $ | 320,554 | ||||||||||
Management fee revenue | 56,494 | — | — | (56,494 | ) | — | ||||||||||||||
|
|
|
|
|
|
|
|
|
| |||||||||||
Total net revenue | 56,644 | 307,380 | 13,024 | (56,494 | ) | 320,554 | ||||||||||||||
|
|
|
|
|
|
|
|
|
| |||||||||||
OPERATING EXPENSES: | ||||||||||||||||||||
Salaries and benefits | 15,085 | 131,357 | 4,904 | — | 151,346 | |||||||||||||||
Supplies, facilities and other operating costs | 6,392 | 76,620 | 7,176 | — | 90,188 | |||||||||||||||
Provision for doubtful accounts | — | 5,455 | 170 | — | 5,625 | |||||||||||||||
Depreciation and amortization | 2,845 | 12,280 | 375 | — | 15,500 | |||||||||||||||
Asset impairments | — | 8,972 | 237 | — | 9,209 | |||||||||||||||
Goodwill impairment | — | 43,988 | 8,735 | — | 52,723 | |||||||||||||||
Management fee expense | — | 53,876 | 2,618 | (56,494 | ) | — | ||||||||||||||
|
|
|
|
|
|
|
|
|
| |||||||||||
Total operating expenses | 24,322 | 332,548 | 24,215 | (56,494 | ) | 324,591 | ||||||||||||||
|
|
|
|
|
|
|
|
|
| |||||||||||
OPERATING INCOME (LOSS) | 32,322 | (25,168 | ) | (11,191 | ) | — | (4,037 | ) | ||||||||||||
INTEREST EXPENSE, NET | (31,974 | ) | 777 | (1,054 | ) | — | (32,251 | ) | ||||||||||||
OTHER EXPENSE | — | (88 | ) | — | — | (88 | ) | |||||||||||||
|
|
|
|
|
|
|
|
|
| |||||||||||
INCOME (LOSS) FROM CONTINUING OPERATIONS BEFORE INCOME TAXES | 348 | (24,479 | ) | (12,245 | ) | — | (36,376 | ) | ||||||||||||
INCOME TAX EXPENSE (BENEFIT) | (3 | ) | 199 | 100 | — | 296 | ||||||||||||||
EQUITY IN LOSS OF SUBSIDIARIES, NET OF TAX | (48,770 | ) | — | — | 48,770 | — | ||||||||||||||
|
|
|
|
|
|
|
|
|
| |||||||||||
INCOME (LOSS) FROM CONTINUING OPERATIONS | (48,419 | ) | ( 24,678 | ) | (12,345 | ) | 48,770 | (36,672 | ) | |||||||||||
LOSS FROM DISCONTINUED OPERATIONS, NET OF TAX | — | (11,747 | ) | — | — | (11,747 | ) | |||||||||||||
|
|
|
|
|
|
|
|
|
| |||||||||||
NET (LOSS) INCOME | $ | (48,419 | ) | $ | (36,425 | ) | $ | (12,345 | ) | $ | 48,770 | $ | (48,419 | ) | ||||||
|
|
|
|
|
|
|
|
|
|
25
Table of Contents
Condensed Consolidating Statements of Cash Flows
For the Nine Months Ended September 30, 2011
(In thousands) (Unaudited)
CRC Health Corporation | Subsidiary Guarantors | Subsidiary Non-Guarantors | Eliminations | Consolidated | ||||||||||||||||
CASH FLOWS FROM OPERATING ACTIVITIES: | ||||||||||||||||||||
Net cash provided by operating activities | $ | 11,061 | $ | 22,512 | $ | 575 | $ | — | $ | 34,148 | ||||||||||
|
|
|
|
|
|
|
|
|
| |||||||||||
CASH FLOWS FROM INVESTING ACTIVITIES: | ||||||||||||||||||||
Additions of property and equipment | (4,432 | ) | (7,755 | ) | (169 | ) | — | (12,356 | ) | |||||||||||
Proceeds from sale of property and equipment | — | 152 | — | — | 152 | |||||||||||||||
Acquisition of business, net of cash acquired | (91 | ) | — | — | — | (91 | ) | |||||||||||||
|
|
|
|
|
|
|
|
|
| |||||||||||
Net cash used in investing activities | (4,523 | ) | (7,603 | ) | (169 | ) | — | (12,295 | ) | |||||||||||
|
|
|
|
|
|
|
|
|
| |||||||||||
CASH FLOWS FROM FINANCING ACTIVITIES: | ||||||||||||||||||||
Intercompany transfers | 5,444 | (5,842 | ) | 398 | — | — | ||||||||||||||
Capital contributed to Parent | (1,616 | ) | — | — | — | (1,616 | ) | |||||||||||||
Capitalized financing costs | (3,169 | ) | — | — | — | (3,169 | ) | |||||||||||||
Borrowings under revolving line of credit | 9,500 | — | — | — | 9,500 | |||||||||||||||
Repayments under revolving line of credit | (7,000 | ) | — | — | — | (7,000 | ) | |||||||||||||
Repayments of term loan and seller notes | (9,697 | ) | (2,912 | ) | — | — | (12,609 | ) | ||||||||||||
|
|
|
|
|
|
|
|
|
| |||||||||||
Net cash (used in) provided by financing activities | (6,538 | ) | (8,754 | ) | 398 | — | (14,894 | ) | ||||||||||||
|
|
|
|
|
|
|
|
|
| |||||||||||
INCREASE IN CASH AND CASH EQUIVALENTS | — | 6,155 | 804 | — | 6,959 | |||||||||||||||
CASH AND CASH EQUIVALENTS Beginning of period | — | 6,826 | 285 | — | 7,111 | |||||||||||||||
|
|
|
|
|
|
|
|
|
| |||||||||||
CASH AND CASH EQUIVALENTS End of period | $ | — | $ | 12,981 | $ | 1,089 | $ | — | $ | 14,070 | ||||||||||
|
|
|
|
|
|
|
|
|
|
26
Table of Contents
Condensed Consolidating Statements of Cash Flows
For the Nine Months Ended September 30, 2010
(In thousands) (Unaudited)
CRC Health Corporation | Subsidiary Guarantors | Subsidiary Non-Guarantors | Eliminations | Consolidated | ||||||||||||||||
As Restated | As Restated | As Restated | As Restated | As Restated | ||||||||||||||||
CASH FLOWS FROM OPERATING ACTIVITIES: | ||||||||||||||||||||
Net cash (used in) provided by operating activities | $ | (3,242 | ) | $ | 44,341 | $ | (1,492 | ) | $ | — | $ | 39,607 | ||||||||
|
|
|
|
|
|
|
|
|
| |||||||||||
CASH FLOWS FROM INVESTING ACTIVITIES: | ||||||||||||||||||||
Additions of property and equipment | (3,787 | ) | (10,805 | ) | (86 | ) | — | (14,678 | ) | |||||||||||
Proceeds from sale of property and equipment | — | 41 | — | — | 41 | |||||||||||||||
Acquisition of business, net of cash acquired | (86 | ) | — | — | — | (86 | ) | |||||||||||||
|
|
|
|
|
|
|
|
|
| |||||||||||
Net cash used in investing activities | (3,873 | ) | (10,764 | ) | (86 | ) | — | (14,723 | ) | |||||||||||
|
|
|
|
|
|
|
|
|
| |||||||||||
CASH FLOWS FROM FINANCING ACTIVITIES: | ||||||||||||||||||||
Intercompany transfers | 30,951 | (32,521 | ) | 1,570 | — | — | ||||||||||||||
Capital contributed from Parent | 8 | — | — | — | 8 | |||||||||||||||
Borrowings under revolving line of credit | 13,500 | — | — | — | 13,500 | |||||||||||||||
Repayments under revolving line of credit | (30,000 | ) | — | — | — | (30,000 | ) | |||||||||||||
Repayments of term loan and seller notes | (7,344 | ) | (1,671 | ) | — | — | (9,015 | ) | ||||||||||||
|
|
|
|
|
|
|
|
|
| |||||||||||
Net cash provided by (used) in financing activities | 7,115 | (34,192 | ) | 1,570 | — | (25,507 | ) | |||||||||||||
|
|
|
|
|
|
|
|
|
| |||||||||||
INCREASE IN CASH AND CASH EQUIVALENTS | — | (615 | ) | (8 | ) | — | (623 | ) | ||||||||||||
CASH AND CASH EQUIVALENTS Beginning of period | — | 4,745 | 237 | — | �� | 4,982 | ||||||||||||||
|
|
|
|
|
|
|
|
|
| |||||||||||
CASH AND CASH EQUIVALENTS End of period | $ | — | $ | 4,130 | $ | 229 | $ | — | $ | 4,359 | ||||||||||
|
|
|
|
|
|
|
|
|
|
27
Table of Contents
15. RESTRUCTURING
In the second half of fiscal 2008, management initiated a restructuring plan (the “FY08 Plan”) to align the Company’s resources with its strategic business plan by initiating facility consolidations, facility exit actions and certain workforce reductions. During the nine months ended September 30, 2011, the Company continued its activity under the FY08 plan related to employee severance payments and long-term lease commitments resulting from prior period employee terminations and facility closures. During the nine months ended September 30, 2011, the Company reached settlements on contract terminations related to rental leases at some of the facilities affected by the FY08 plan. This resulted in reversals of expenses recognized previously.
A summary of restructuring activity under the FY08 plan, including those classified as discontinued operations, is shown in the table below:
Workforce Reduction | Consolidation and Exit of Facilities | Total | ||||||||||
(in thousands) | ||||||||||||
Restructuring reserve at December 31, 2010 | ||||||||||||
Recovery | $ | 42 | $ | 2,178 | $ | 2,220 | ||||||
Youth | (8 | ) | 4,046 | 4,038 | ||||||||
Weight management | — | — | — | |||||||||
Corporate | — | — | — | |||||||||
|
|
|
|
|
| |||||||
Total restructuring reserve at December 31, 2010 | $ | 34 | $ | 6,224 | $ | 6,258 | ||||||
|
|
|
|
|
| |||||||
Expenses (Reversals) | ||||||||||||
Recovery | $ | 16 | $ | (346 | ) | $ | (330 | ) | ||||
Youth | — | 177 | 177 | |||||||||
Weight management | — | — | — | |||||||||
Corporate | — | — | — | |||||||||
|
|
|
|
|
| |||||||
Total expenses (reversals) | 16 | (169 | ) | (153 | ) | |||||||
Cash payments | ||||||||||||
Recovery | (39 | ) | (308 | ) | (347 | ) | ||||||
Youth | — | (815 | ) | (815 | ) | |||||||
Weight management | — | — | — | |||||||||
Corporate | — | — | — | |||||||||
|
|
|
|
|
| |||||||
Total cash payments | (39 | ) | (1,123 | ) | (1,162 | ) | ||||||
Restructuring reserve at September 30, 2011 | ||||||||||||
Recovery | 19 | 1,524 | 1,543 | |||||||||
Healthy living | (8 | ) | 3,408 | 3,400 | ||||||||
Weight management | — | — | — | |||||||||
Corporate | — | — | — | |||||||||
|
|
|
|
|
| |||||||
Total restructuring reserve at September 30, 2011 | $ | 11 | $ | 4,932 | $ | 4,943 | ||||||
|
|
|
|
|
|
On March 24, 2011, the Company announced a strategic plan to transition the services provided within its youth division to a more focused national network of services. This smaller network will allow the Company to apply its resources where there are the greatest needs and assure the best possible service for its students and families. Additionally, as a part of a plan to align Company’s resources with its strategic business plan, management initiated restructuring of certain of its administrative functions at its corporate headquarters and other divisions during 2011. Collectively, this plan and the Company’s strategic plan to transition the services provided within its youth division is referred to as the FY 11 plan. As part of this strategic plan, the Company terminated operations at five facilities and consolidated services at two other facilities. The plan was intended to maximize the number of affected students to complete treatment and/or graduate. As of September 30, 2011, the Company had completed the termination of operations at all of the facilities. In connection with the plan related to the youth division, the Company recognized $2.5 million and $5.8 million, respectively of contract termination and employee termination costs during the nine months ended September 30, 2011.
28
Table of Contents
A summary of restructuring activity under the FY11 plan, including those classified as discontinued operations, is shown in the table below:
Workforce Reduction | Consolidation and Exit of Facilities | Total | ||||||||||
(in thousands) | ||||||||||||
Restructuring reserve at December 31, 2010 | ||||||||||||
Recovery | $ | — | $ | — | $ | — | ||||||
Youth | — | — | — | |||||||||
Weight management | — | — | — | |||||||||
Corporate | — | — | — | |||||||||
|
|
|
|
|
| |||||||
Total restructuring reserve at December 31, 2010 | $ | — | $ | — | $ | — | ||||||
|
|
|
|
|
| |||||||
Expenses | ||||||||||||
Recovery | $ | 58 | $ | — | $ | 58 | ||||||
Youth | 2,457 | 5,805 | 8,262 | |||||||||
Weight management | 29 | — | 29 | |||||||||
Corporate | 515 | — | 515 | |||||||||
|
|
|
|
|
| |||||||
Total expenses | 3,059 | 5,805 | 8,864 | |||||||||
Cash payments | ||||||||||||
Recovery | (58 | ) | — | (58 | ) | |||||||
Youth | (2,079 | ) | (637 | ) | (2,716 | ) | ||||||
Weight management | (29 | ) | — | (29 | ) | |||||||
Corporate | (515 | ) | — | (515 | ) | |||||||
|
|
|
|
|
| |||||||
Total cash payments | (2,681 | ) | (637 | ) | (3,318 | ) | ||||||
Restructuring reserve at September 30, 2011 | ||||||||||||
Recovery | — | — | — | |||||||||
Youth | 378 | 5,168 | 5,546 | |||||||||
Weight management | — | — | — | |||||||||
Corporate | — | — | — | |||||||||
|
|
|
|
|
| |||||||
Total restructuring reserve at September 30, 2011 | $ | 378 | $ | 5,168 | $ | 5,546 | ||||||
|
|
|
|
|
|
16. DISCONTINUED OPERATIONS
The Company closed 6 additional facilities for the three months ended September 30, 2011, and has closed or sold 7 facilities in total in the nine months ended September 30, 2011. The facilities closed in 2011 were due to the FY11 plan (see Note 15). To date, the Company has closed or sold an aggregate of 23 facilities. Activities related to discontinued operations are recognized in the Company’s condensed consolidated statements of operations under discontinued operations for all periods presented.
29
Table of Contents
The results of operations for those facilities classified as discontinued operations are summarized below (in thousands):
Three Months Ended September 30, 2011 | Three Months Ended September 30, 2010 | Nine Months Ended September 30, 2011 | Nine Months Ended September 30, 2010 | |||||||||||||
Net revenue | $ | 343 | $ | 5,788 | $ | 9,183 | $ | 17,230 | ||||||||
|
|
|
|
|
|
|
| |||||||||
Operating expenses | 7,577 | 11,294 | 20,852 | 25,083 | ||||||||||||
Asset impairment | — | 798 | 2,454 | 11,295 | ||||||||||||
Interest (expense) income | (9 | ) | 1 | (7 | ) | 5 | ||||||||||
|
|
|
|
|
|
|
| |||||||||
Loss before income taxes | (7,225 | ) | (6,305 | ) | (14,116 | ) | (19,153 | ) | ||||||||
Tax expense (benefit) | (2,717 | ) | (2,438 | ) | (5,306 | ) | (7,406 | ) | ||||||||
|
|
|
|
|
|
|
| |||||||||
Loss from discontinued operations | $ | (4,508 | ) | $ | (3,867 | ) | $ | (8,810 | ) | $ | (11,747 | ) | ||||
|
|
|
|
|
|
|
|
The Company recognized a non-cash impairment charge of $0.3 million and $2.1 million for the nine months ended September 30, 2011, related to impairment of property and equipment and finite-lived intangible assets, respectively. The Company recognized a non-cash impairment charge of $0.2 million and $0.6 million for the three months ended September 30, 2010, related to impairment of property and equipment and finite-lived intangible assets, respectively. The Company recognized a non-cash impairment charge of $2.4 million and $8.9 million for the nine months ended September 30, 2010, related to impairment of property and equipment and finite-lived intangible assets, respectively.
17. SEGMENT INFORMATION
During the second quarter of 2011, the Company changed its managerial and financial reporting structure. As a result, the Company identified its new reportable segments as recovery, youth and weight management. Prior to this change, the Company had two operating segments, which were also its reportable segments: recovery and healthy living. The weight management businesses that were previously reported under healthy living are now reported separately. The Company has retrospectively revised the segment presentation for all periods presented.
Reportable segments are based upon the Company’s organizational structure, the manner in which the operations are managed and on the level at which the Company’s chief operating decision-maker allocates resources. The Company’s chief operating decision-maker is its Chief Executive Officer.
A summary of the Company’s reportable segments are as follows:
Recovery — The recovery segment specializes in the treatment of chemical dependency and other behavioral health disorders. 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, 2011, the recovery segment operates 30 inpatient, 19 outpatient facilities, and 54 comprehensive treatment centers (“CTCs”) in 21states.
Youth — The youth segment provides a wide variety of adolescent therapeutic programs through settings and solutions that match individual needs with the appropriate learning and therapeutic environment. Services offered in this segment include boarding schools and experiential outdoor education programs. As of September 30, 2011, the youth segment operates 16 adolescent and young adult programs in 6 states.
Weight management — The weight management segment provides adult and adolescent treatment services for obesity and eating disorders, each a related behavioral disorder. Services offered in this segment include treatment plans through a combination of medical, psychological and social treatment programs. As of September 30, 2011, the weight management segment operates 17 facilities in 8 states, and one in the United Kingdom.
Corporate — In addition to the three reportable segments described above, the Company has activities classified as corporate which represent revenue and expenses associated with eGetgoing, an online internet treatment option, and general and administrative expenses (i.e., expenses associated with the corporate offices in Cupertino, California, which provides management, financial, human resources and information systems support), and stock-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.
30
Table of Contents
Geographic Information — The Company’s business operations are primarily in the United States.
Selected segment financial information for the Company’s reportable segments was as follows (in thousands):
Three Months Ended September 30, 2011 | Three Months Ended September 30, 2010 | Nine Months Ended September 30, 2011 | Nine Months Ended September 30, 2010 | |||||||||||||
As Restated | As Restated | |||||||||||||||
Net revenue: | ||||||||||||||||
Recovery | $ | 86,636 | $ | 82,963 | $ | 261,712 | $ | 244,927 | ||||||||
Youth | 20,708 | 19,104 | 54,002 | 51,767 | ||||||||||||
Weight management | 11,909 | 11,304 | 25,818 | 23,709 | ||||||||||||
Corporate | 33 | 51 | 112 | 151 | ||||||||||||
|
|
|
|
|
|
|
| |||||||||
Total net revenue | $ | 119,286 | $ | 113,422 | $ | 341,644 | $ | 320,554 | ||||||||
|
|
|
|
|
|
|
| |||||||||
Operating expenses: | ||||||||||||||||
Recovery | 60,699 | 54,765 | 176,943 | 162,054 | ||||||||||||
Youth(1) | 18,268 | 29,313 | 56,834 | 116,737 | ||||||||||||
Weight management | 8,872 | 8,495 | 21,965 | 21,478 | ||||||||||||
Corporate | 7,212 | 8,942 | 24,752 | 24,322 | ||||||||||||
|
|
|
|
|
|
|
| |||||||||
Total operating expenses | $ | 95,051 | $ | 101,515 | $ | 280,494 | $ | 324,591 | ||||||||
|
|
|
|
|
|
|
| |||||||||
Operating income (loss): | ||||||||||||||||
Recovery | 25,937 | 28,198 | 84,769 | 82,873 | ||||||||||||
Youth | 2,440 | (10,209 | ) | (2,832 | ) | (64,970 | ) | |||||||||
Weight management | 3,037 | 2,809 | 3,853 | 2,231 | ||||||||||||
Corporate | (7,179 | ) | (8,891 | ) | (24,640 | ) | (24,171 | ) | ||||||||
|
|
|
|
|
|
|
| |||||||||
Total operating income (loss) | 24,235 | 11,907 | 61,150 | (4,037 | ) | |||||||||||
Interest expense, net | (10,246 | ) | (10,734 | ) | (34,168 | ) | (32,251 | ) | ||||||||
Other income (expense) | — | — | 31 | (88 | ) | |||||||||||
|
|
|
|
|
|
|
| |||||||||
Total income (loss) from continuing operations before income taxes | $ | 13,989 | $ | 1,173 | $ | 27,013 | $ | (36,376 | ) | |||||||
|
|
|
|
|
|
|
| |||||||||
Capital expenditures(2) : | ||||||||||||||||
Recovery | $ | 2,245 | $ | 3,424 | $ | 6,104 | $ | 8,864 | ||||||||
Youth | 351 | 704 | 1,328 | 1,745 | ||||||||||||
Weight management | 130 | 92 | 492 | 282 | ||||||||||||
Corporate | 1,295 | 1,560 | 4,432 | 3,787 | ||||||||||||
|
|
|
|
|
|
|
| |||||||||
Total consolidated capital expenditures | $ | 4,021 | $ | 5,780 | $ | 12,356 | $ | 14,678 | ||||||||
|
|
|
|
|
|
|
|
31
Table of Contents
September 30, 2011 | December 31, 2010 | |||||||
Total Assets (2) | ||||||||
Recovery | $ | 902,807 | $ | 901,411 | ||||
Youth | 51,718 | 56,319 | ||||||
Weight Management | 39,097 | 38,197 | ||||||
Corporate | 49,781 | 43,796 | ||||||
|
|
|
| |||||
Total Assets | $ | 1,043,403 | $ | 1,039,723 | ||||
|
|
|
|
(1) | Youth’s operating expenses include $1.9 million of asset impairment for the nine months ended September 30, 2011. For the three and nine months ended September 30, 2010, its operating expenses include $1.7 million and $9.2 million of asset impairment. For the three and nine months ended September 30, 2010, its operating expenses include $9.1 million and $52.7 million of goodwill impairment. |
(2) | Includes amounts related to discontinued operations. |
18. SUBSEQUENT EVENTS
The Company has evaluated events occurring from the balance sheet date of September 30, 2011 through the financial statements issuance date of November 14, 2011. During the evaluation period, the Company received notice that a state agency suspended admissions to one of the Company’s Recovery residential facilities, New Life Lodge, for one hundred twenty (120) days or until the state agency determines that issues prompting suspension have been addressed and corrected. The state agency suspended admissions after finding that the facility was in violation of licensing rules.
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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 Unaudited 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 to CRC Health Corporation and its consolidated subsidiaries.
Restatement of previously issued condensed consolidated financial statements
As disclosed in our Form 10-K/A for the year ended December 31, 2010, our Form 10-Q/A for the quarterly period ended March 31, 2011, and our Form 10-Q for the quarterly period ended June 30, 2011, we restated our previously issued consolidated financial statements for the years ended December 31, 2008, December 31, 2009 and December 31, 2010, including the quarterly data for the years 2009 and 2010, and for the fiscal quarter ended March 31, 2011. The restatements were prompted by errors in accounting for revenue, accounts receivable, bad debt expenses, and general expenses at one of our recovery residential facilities (the “Facility”).
The following table summarizes the impact of the restatement to the previously reported net loss for periods in 2010 not presented previously:
Three Months Ended September 30, 2010 | Nine Months Ended September 30, 2010 | |||||||
(in thousands) | ||||||||
Net loss, as previously reported | $ | (4,476 | ) | $ | (48,069 | ) | ||
|
|
|
| |||||
Adjustments related to the Facility | ||||||||
Net client service revenues | (58 | ) | 10 | |||||
Provision for doubtful accounts | (117 | ) | (285 | ) | ||||
Supplies, facilities and other operating costs | (84 | ) | (146 | ) | ||||
Income tax effects | 107 | 174 | ||||||
|
|
|
| |||||
Facility adjustments after tax | (152 | ) | (247 | ) | ||||
|
|
|
| |||||
Other adjustments: | ||||||||
Net client service revenues | — | (323 | ) | |||||
Stock compensation | (777 | ) | (269 | ) | ||||
Supplies, facilities and other operating costs | — | 423 | ||||||
Income tax effects | 306 | 66 | ||||||
|
|
|
| |||||
Other adjustments after tax | (471 | ) | (103 | ) | ||||
|
|
|
| |||||
Total adjustments | (623 | ) | (350 | ) | ||||
|
|
|
| |||||
Net loss, as restated | (5,099 | ) | (48,419 | ) | ||||
|
|
|
|
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See Note 2 in the Notes to the condensed consolidated financial statements for additional information on the restatement.
OVERVIEW
We are a leading provider of treatment services related to substance abuse, troubled youth, and for other addiction diseases and behavioral disorders.
We deliver our services through our three divisions: recovery, youth and weight management. Our recovery division provides substance abuse and behavioral disorder treatment services through our residential treatment facilities and outpatient treatment clinics. Our youth division provides therapeutic educational programs to underachieving young people through residential schools and wilderness programs. Our weight management division provides treatment services through adolescent and adult weight management programs as well as eating disorder facilities. Our recovery, youth and weight management divisions are also our three reportable segments.
As of September 30, 2011 our recovery division, operates 30 inpatient, 19 outpatient facilities, and 54 comprehensive treatment centers (“CTCs”) in 21 states. Our youth division, operates 16 adolescent and young adult programs in 6 states. Our weight management division operates 17 facilities in 8 states, and one in the United Kingdom. Other activities classified as corporate represent revenue and expenses associated with eGetgoing, an online internet treatment option, and general and administrative expenses (i.e., expenses associated with our corporate offices in Cupertino, California, which provides management, financial, human resources and information systems support) and stock-based compensation expenses that are not allocated to the segments.
During the second quarter of 2011, we changed our managerial and financial reporting structure. As a result, we identified our new reportable segments as recovery, youth and weight management. Prior to this change, we had two operating segments, which were also our reportable segments: recovery and healthy living. The youth and weight management businesses that were previously reported under healthy living are now reported separately. We have retrospectively revised the segment presentation for all periods presented.
Revenue is recognized when rehabilitation and treatment services are provided to a client. 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 nine months. Alumni fee revenue represents non-refundable upfront fees for post-graduation services and these fees are deferred and recognized systematically over the life of the contract. During the three months ended September 30, 2011 and 2010, we generated approximately 80% of our net revenue from non-governmental sources, including approximately 58% and 62% from self payors, respectively, and approximately 22% and 18% from commercial payors, respectively. During the nine months ended September 30, 2011 and 2010, we generated approximately 79% of our net revenue from non-governmental sources, including approximately 57% and 62% from self payors, respectively, and approximately 22% and 18% from commercial payors, respectively. Substantially all of our government program net revenue was received from multiple counties and states under Medicaid and similar programs.
On March 24, 2011, we announced a strategic plan to transition the services provided within our youth division to a more focused national network of services. This smaller network will allow us to apply our resources where there are the greatest needs and assure the best possible service for our students and families. Additionally, as a part of a plan to align our resources with our strategic business plan, we initiated restructuring of certain of our administrative functions at our corporate headquarters and other divisions during 2011. Collectively, this plan and our strategic plan to transition the services provided within our youth division is referred to as the FY 11 plan. As part of this strategic plan, we terminated operations at five facilities and consolidated services at two other facilities. The plan was intended to maximize the number of affected students to complete treatment and/or graduate. As of September 30, 2011, we have completed the termination of operations at all of the facilities. In connection with the plan related to the youth division, we recognized $2.5 million and $5.8 million, respectively of contract termination and employee termination costs during the nine months ended September 30, 2011.
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During the three and nine months ended September 30, 2011, our net revenue increased by $5.9 million and $21.1 million, or 5% and 7%, respectively, when compared to the comparable periods in 2010. Our operating expenses decreased $6.5 million and $44.1 million, or 6% and 14%, during the three and nine months ended September 30, 2011, respectively. During the three and nine months ended September 30, 2011, our same-facility net revenue increased by $5.5 million and $20.7 million, or 5% and 6%, respectively, when compared to the comparable periods in 2010. Our same-facility operating expenses was relatively flat for the three months ended September 30, 2011 as compared the same period in 2010, and increased $1.8 million, or 1% during the nine months ended September 30, 2011 as compared to the same period in 2010. “Same-facility” means a comparison over the comparable period of the financial performance of a facility we have operated for at least one year. Our operating expenses include salaries and benefits, supplies, facilities and other operating costs, provision for doubtful accounts, depreciation and amortization, asset impairment, and goodwill impairment. Operating expenses for recovery, youth and weight management exclude revenue and expenses associated with eGetgoing, an online internet treatment option, and general and administrative expenses (i.e., expenses associated with our corporate offices in Cupertino, California, which provide management, financial, human resources and information systems support) and stock-based compensation expense.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
General
The accompanying discussion and analysis of our financial condition and results of operations are based on our unaudited condensed consolidated financial statements, which have been prepared in accordance with generally accepted accounting principles of the United States. The preparation of these financial statements requires us to make estimates, assumptions and judgments that affect the reported amounts of assets, liabilities, net revenue and expenses. 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. We believe that there have not been any significant changes during the three and nine months ended September 30, 2011 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, 2010 in our Annual Report on Form 10-K/A.
Recently Issued Accounting Guidance
For a summary of recently issued accounting guidance, please see Note 1 to the condensed consolidated financial statements, as included herein.
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RESULTS OF OPERATIONS
Three Months Ended September 30, 2011 Compared to Three Months Ended September 30, 2010
The following table presents our results of operations for the three months ended September 30, 2011 and 2010 (in thousands, except for percentages).
Three Months Ended September 30, Total Facility | ||||||||||||||||
2011 | 2010 | 2011 vs. 2010 $ Change | 2011 vs. 2010 % Change | |||||||||||||
As Restated | ||||||||||||||||
Net revenue: | ||||||||||||||||
Recovery | $ | 86,636 | $ | 82,963 | $ | 3,673 | 4 | % | ||||||||
Youth | 20,708 | 19,104 | 1,604 | 8 | % | |||||||||||
Weight management | 11,909 | 11,304 | 605 | 5 | % | |||||||||||
Corporate | 33 | 51 | (18 | ) | (35 | )% | ||||||||||
|
|
|
|
|
| |||||||||||
Total net revenue | 119,286 | 113,422 | 5,864 | 5 | % | |||||||||||
Operating expenses: | ||||||||||||||||
Recovery | 60,699 | 54,765 | 5,934 | 11 | % | |||||||||||
Youth (1) | 18,268 | 29,313 | (11,045 | ) | (38 | )% | ||||||||||
Weight management | 8,872 | 8,495 | 377 | 4 | % | |||||||||||
Corporate | 7,212 | 8,942 | (1,730 | ) | (19 | )% | ||||||||||
|
|
|
|
|
| |||||||||||
Total operating expenses | 95,051 | 101,515 | (6,464 | ) | (6 | )% | ||||||||||
Operating income (loss): | ||||||||||||||||
Recovery | 25,937 | 28,198 | (2,261 | ) | (8 | )% | ||||||||||
Youth | 2,440 | (10,209 | ) | 12,649 | 124 | % | ||||||||||
Weight management | 3,037 | 2,809 | 228 | 8 | % | |||||||||||
Corporate | (7,179 | ) | (8,891 | ) | 1,712 | 19 | % | |||||||||
|
|
|
|
|
| |||||||||||
Operating income (loss) | 24,235 | 11,907 | 12,328 | 104 | % | |||||||||||
Interest expense, net | (10,246 | ) | (10,734 | ) | 488 | 5 | % | |||||||||
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| |||||||||||
Income (loss) from continuing operations before income taxes | 13,989 | 1,173 | 12,816 | 1,093 | % | |||||||||||
Income tax expense (benefit) | 6,731 | 2,405 | 4,326 | 180 | % | |||||||||||
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| |||||||||||
Income (loss) from continuing operations, net of tax | 7,258 | (1,232 | ) | 8,490 | 689 | % | ||||||||||
Loss from discontinued operations, net of tax | (4,508 | ) | (3,867 | ) | (641 | ) | (17 | )% | ||||||||
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|
|
|
|
| |||||||||||
Net income (loss) | $ | 2,750 | $ | (5,099 | ) | $ | 7,849 | 154 | % | |||||||
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|
|
|
(1) | Youth’s operating expenses for the three months ended September 30, 2010 include $1.7 million of asset impairment and $9.1 million of goodwill impairment. |
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The following table compares total facility statistics for the three months ended September 30, 2011 and 2010:
Three Months Ended September 30, Total Facility | ||||||||||||
2011 | 2010 | % change | ||||||||||
As Restated | ||||||||||||
Recovery | ||||||||||||
Residential facilities | ||||||||||||
Revenue (in thousands) | $ | 55,628 | $ | 52,727 | 6 | % | ||||||
Patient days | 149,317 | 148,598 | 0 | % | ||||||||
Net revenue per patient day | $ | 372.55 | $ | 354.83 | 5 | % | ||||||
CTCs | ||||||||||||
Revenue (in thousands) | $ | 31,008 | $ | 30,236 | 3 | % | ||||||
Patient days | 2,464,859 | 2,440,003 | 1 | % | ||||||||
Net revenue per patient day | $ | 12.58 | $ | 12.39 | 2 | % | ||||||
Youth | ||||||||||||
Residential facilities | ||||||||||||
Revenue (in thousands) | $ | 11,929 | $ | 11,657 | 2 | % | ||||||
Patient days | 42,047 | 42,876 | (2 | )% | ||||||||
Net revenue per patient day | $ | 283.71 | $ | 271.88 | 4 | % | ||||||
Outdoor programs | ||||||||||||
Revenue (in thousands) | $ | 8,779 | $ | 7,447 | 18 | % | ||||||
Patient days | 18,123 | 16,754 | 8 | % | ||||||||
Net revenue per patient day | $ | 484.41 | $ | 444.49 | 9 | % | ||||||
Weight Management | ||||||||||||
Revenue (in thousands) | $ | 11,909 | $ | 11,304 | 5 | % | ||||||
Patient days | 46,452 | 45,375 | 2 | % | ||||||||
Net revenue per patient day | $ | 256.37 | $ | 249.12 | 3 | % |
Net revenue increased $5.9 million, or 5%, to $119.3 million for the three months ended September 30, 2011, from $113.4 million for the three months ended September 30, 2010. The $5.9 million increase was due to a $3.7 million, or 4%, increase from recovery, a $1.6 million, or 8%, increase from youth and a $0.6 million, or 5%, increase from weight management. The $3.7 million, or 4%, increase within recovery was driven by increases of $2.9 million and $0.8 million within residential facilities and CTCs, respectively. The $1.6 million, or 8%, increase within youth was driven by increases of $0.3 million and $1.3 million within residential facilities and outdoor programs, respectively. The $0.6 million, or 5%, increase within weight management was driven primarily by the summer camps.
Operating expenses decreased $6.5 million, or 6%, to $95.1 million for the three months ended September 30, 2011 from $101.5 million for the three months ended September 30, 2010. The $6.5 million decrease in operating expenses was primarily driven by a decrease of non-cash goodwill and asset impairment charges of $10.8 million within youth. Without considering non-cash goodwill and asset impairment charges, operating expenses increased $4.3 million, or 5%, to $95.1 million from $90.8 million for the three months ended September 30, 2010. Of the $4.3 million increase, recovery increased $5.9 million, primarily offset by a $1.7 million decrease from corporate.
Our consolidated operating margin was 20% for the three months ended September 30, 2011, compared to 10% for the three months ended September 30, 2010. The increase in operating margin resulted from a decrease in non-cash goodwill and asset impairment charges. Without considering non-cash goodwill and asset impairment charges, operating margin was 20% for both the three months ended September 30, 2011 and 2010, respectively. Recovery’s operating margin decreased to 30% for the three months ended September 30, 2011, from 34% for the three months ended September 30, 2010 due primarily to investigative costs related to the Facility, increases in provision for doubtful accounts, and increases in sales and marketing costs. Youth’s operating margin increased to 12% for
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the three months ended September 30, 2011, from (53)% for the three months ended September 30, 2010. Without considering non-cash goodwill and asset impairment charges, youth’s operating margin was 12% for the three months ended September 30, 2011 compared to 3% for three months ended September 30, 2010. Weight management’s operating margin increased to 26% for the three months ended September 30, 2011, from 25% for the three months ended September 30, 2010.
Net income from continuing operations increased by $8.5 million to $7.3 million for the three months ended September 30, 2011, from a loss of $1.2 million for the three months ended September 30, 2010. The increase in income from continuing operations is primarily driven by a $5.9 million increase in revenues and a $10.8 million decrease in non-cash goodwill and asset impairment charges, primarily offset by a $4.3 million increase in operating expenses (excluding non-cash impairments) and a $4.3 million increase in income tax expense.
The following table presents our same-facility results of operations for the three months ended September 30, 2011 and 2010 (in thousands, except for percentages).
Three Months Ended September 30, Same Facility | ||||||||||||||||
2011 | 2010 | 2011 vs. 2010 $ Change | 2011 vs. 2010 % Change | |||||||||||||
As Restated | ||||||||||||||||
Net revenue: | ||||||||||||||||
Recovery | $ | 86,497 | $ | 82,963 | $ | 3,534 | 4 | % | ||||||||
Youth | 20,249 | 18,923 | 1,326 | 7 | % | |||||||||||
Weight management | 11,909 | 11,303 | 606 | 5 | % | |||||||||||
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| |||||||||||
Total net revenue | 118,655 | 113,189 | 5,466 | 5 | % | |||||||||||
Operating expenses: | ||||||||||||||||
Recovery | 55,397 | 49,627 | 5,770 | 12 | % | |||||||||||
Youth (1) | 15,457 | 21,014 | (5,557 | ) | (26 | )% | ||||||||||
Weight management | 8,081 | 8,004 | 77 | 1 | % | |||||||||||
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| |||||||||||
Total operating expenses | 78,935 | 78,645 | 290 | 0 | % | |||||||||||
Operating income (loss): | ||||||||||||||||
Recovery | 31,100 | 33,336 | (2,236 | ) | (7 | )% | ||||||||||
Youth division | 4,792 | (2,091 | ) | 6,883 | 329 | % | ||||||||||
Weight management | 3,828 | 3,299 | 529 | 16 | % | |||||||||||
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| |||||||||||
Operating income | $ | 39,720 | $ | 34,544 | $ | 5,176 | 15 | % | ||||||||
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|
(1) | Youth’s operating expenses for the three months ended September 30, 2010, include $1.7 million of asset impairment and $9.1 million of goodwill impairment. |
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The following table compares same-facility statistics for the three months ended September 30, 2011 and 2010:
Three Months Ended September 30, Same Facility | ||||||||||||
2011 | 2010 | % change | ||||||||||
As Restated | ||||||||||||
Recovery | ||||||||||||
Residential facilities | ||||||||||||
Revenue (in thousands) | $ | 55,489 | $ | 52,727 | 5 | % | ||||||
Patient days | 149,317 | 148,598 | 0 | % | ||||||||
Net revenue per patient day | $ | 371.62 | $ | 354.83 | 5 | % | ||||||
CTCs | ||||||||||||
Revenue (in thousands) | $ | 31,008 | $ | 30,236 | 3 | % | ||||||
Patient days | 2,464,859 | 2,440,003 | 1 | % | ||||||||
Net revenue per patient day | $ | 12.58 | $ | 12.39 | 2 | % | ||||||
Youth | ||||||||||||
Residential facilities | ||||||||||||
Revenue (in thousands) | $ | 11,470 | $ | 11,476 | (0 | )% | ||||||
Patient days | 40,037 | 42,043 | (5 | )% | ||||||||
Net revenue per patient day | $ | 286.49 | $ | 272.96 | 5 | % | ||||||
Outdoor programs | ||||||||||||
Revenue (in thousands) | $ | 8,779 | $ | 7,447 | 18 | % | ||||||
Patient days | 18,123 | 16,754 | 8 | % | ||||||||
Net revenue per patient day | $ | 484.41 | $ | 444.49 | 9 | % | ||||||
Weight Management | ||||||||||||
Revenue (in thousands) | $ | 11,909 | $ | 11,303 | 5 | % | ||||||
Patient days | 46,452 | 43,499 | 7 | % | ||||||||
Net revenue per patient day | $ | 256.37 | $ | 259.85 | (1 | )% |
Recovery’s same-facility revenue increased $3.5 million, or 4%, to $86.5 million for the three months ended September 30, 2011, from $83.0 million for the three months ended September 30, 2010. The $3.5 million, or 4%, increase in revenue within recovery was driven by increases of $2.8 million within residential facilities and $0.7 million within CTCs. Youth’s same-facility revenue increased $1.3 million, or 7%, to $20.2 million for the three months ended September 30, 2011, from $18.9 million for the three months ended September 30, 2010. The $1.3 million, or 7%, increase in revenue within youth was primarily driven by a $1.3 million increase within the outdoor programs. Weight management’s same-facility revenue increased by $0.6 million, or 5%, to $11.9 million for the three months ended September 30, 2011, from $11.3 million for the three months ended September 30, 2010, primarily due to an increase in patient days.
Recovery’s same-facility operating expenses increased $5.8 million, or 12%, to $55.4 million, for the three months ended September 30, 2011, from $49.6 million for the three months ended September 30, 2010. The $5.8 million increase was due to increases of $5.1 million and $0.7 million in residential facilities and CTCs, respectively. Youth’s same-facility operating expenses decreased $5.6 million, or 26%, to $15.5 million for the three months ended September 30, 2010, from $21.0 million for the three months ended September 30, 2010. The $5.6 million decrease was primarily due to due to a decrease of asset impairment and goodwill impairment charges of $0.6 million and $4.8 million, respectively.
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Nine Months Ended September 30, 2011 Compared to Nine Months Ended September 30, 2010
The following table presents our results of operations for the nine months ended September 30, 2011 and 2010 (in thousands, except for percentages).
Nine Months Ended September 30, Total Facility | ||||||||||||||||
2011 | 2010 | 2011 vs. 2010 $ Change | 2011 vs. 2010 % Change | |||||||||||||
As Restated | ||||||||||||||||
Net revenue: | ||||||||||||||||
Recovery | 261,712 | 244,927 | 16,785 | 7 | % | |||||||||||
Youth | 54,002 | 51,767 | 2,235 | 4 | % | |||||||||||
Weight management | 25,818 | 23,709 | 2,109 | 9 | % | |||||||||||
Corporate | 112 | 151 | (39 | ) | (26 | )% | ||||||||||
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| |||||||||||
Total net revenue | 341,644 | 320,554 | 21,090 | 7 | % | |||||||||||
Operating expenses: | ||||||||||||||||
Recovery | 176,943 | 162,054 | 14,889 | 9 | % | |||||||||||
Youth (1) | 56,834 | 116,737 | (59,903 | ) | (51 | )% | ||||||||||
Weight management | 21,965 | 21,478 | 487 | 2 | % | |||||||||||
Corporate | 24,752 | 24,322 | 430 | 2 | % | |||||||||||
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|
|
| |||||||||||
Total operating expenses | 280,494 | 324,591 | (44,097 | ) | (14 | )% | ||||||||||
Operating income (loss): | ||||||||||||||||
Recovery | 84,769 | 82,873 | 1,896 | 2 | % | |||||||||||
Youth | (2,832 | ) | (64,970 | ) | 62,138 | 96 | % | |||||||||
Weight management | 3,853 | 2,231 | 1,622 | 73 | % | |||||||||||
Corporate | (24,640 | ) | (24,171 | ) | (469 | ) | (2 | )% | ||||||||
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|
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|
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| |||||||||||
Operating income (loss) | 61,150 | (4,037 | ) | 65,187 | 1,615 | % | ||||||||||
Interest expense, net | (34,168 | ) | (32,251 | ) | (1,917 | ) | 6 | % | ||||||||
Other income (expense) | 31 | (88 | ) | 119 | 135 | % | ||||||||||
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| |||||||||||
Income (loss) from continuing operations before income taxes | 27,013 | (36,376 | ) | 63,389 | 174 | % | ||||||||||
Income tax expense (benefit) | 11,988 | 296 | 11,692 | 3,950 | % | |||||||||||
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| |||||||||||
Income (loss) from continuing operations, net of tax | 15,025 | (36,672 | ) | 51,697 | 141 | % | ||||||||||
Loss from discontinued operations, net of tax | (8,810 | ) | (11,747 | ) | 2,937 | 25 | % | |||||||||
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|
|
| |||||||||||
Net income (loss) | 6,215 | (48,419 | ) | 54,634 | 113 | % | ||||||||||
|
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|
|
(1) | Youth’s operating expenses for the nine months ended September 30, 2011 include $1.9 million of asset impairment, and $9.2 million of asset impairment and $52.7 million of goodwill impairment for the nine months ended September 30, 2010. |
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The following table compares total facility statistics for the nine months ended September 30, 2011 and 2010:
Nine Months Ended September 30, Total Facility | ||||||||||||
2011 | 2010 | % change | ||||||||||
As Restated | ||||||||||||
Recovery | ||||||||||||
Residential facilities | ||||||||||||
Revenue (in thousands) | $ | 170,096 | $ | 156,239 | 9 | % | ||||||
Patient days | 452,508 | 432,636 | 5 | % | ||||||||
Net revenue per patient day | $ | 375.90 | $ | 361.13 | 4 | % | ||||||
CTCs | ||||||||||||
Revenue (in thousands) | $ | 91,616 | $ | 88,688 | 3 | % | ||||||
Patient days | 7,297,287 | 7,195,258 | 1 | % | ||||||||
Net revenue per patient day | $ | 12.55 | $ | 12.33 | 2 | % | ||||||
Youth | ||||||||||||
Residential facilities | ||||||||||||
Revenue (in thousands) | $ | 33,159 | $ | 34,907 | (5 | )% | ||||||
Patient days | 116,751 | 134,041 | (13 | )% | ||||||||
Net revenue per patient day | $ | 284.01 | $ | 260.42 | 9 | % | ||||||
Outdoor programs | ||||||||||||
Revenue (in thousands) | $ | 20,843 | $ | 16,860 | 24 | % | ||||||
Patient days | 43,120 | 37,675 | 14 | % | ||||||||
Net revenue per patient day | $ | 483.37 | $ | 447.51 | 8 | % | ||||||
Weight Management | ||||||||||||
Revenue (in thousands) | $ | 25,818 | $ | 23,709 | 9 | % | ||||||
Patient days | 87,249 | 84,190 | 4 | % | ||||||||
Net revenue per patient day | $ | 295.91 | $ | 281.61 | 5 | % |
Net revenue increased $21.1 million, or 7%, to $341.6 million for the nine months ended September 30, 2011 from $320.5 million for the nine months ended September 30, 2010. The $21.1 million increase was due to a $16.8 million, or 7%, increase from recovery, a $2.2 million, or 4%, increase from youth and a $2.1 million, or 9%, increase from weight management. The $16.8 million, or 7%, increase within recovery was driven by increases of $13.9 million and $2.9 million within residential facilities and CTCs, respectively. The $2.2 million, or 4%, increase within youth was driven by an increase of $3.9 million from outdoor programs, offset by a $1.7 million decrease from residential facilities. The $2.1 million, or 9%, increase within weight management was driven primarily by the summer camps.
Operating expenses decreased $44.1 million, or 14%, to $280.5 million for the nine months ended September 30, 2011, from $324.6 million for the nine months ended September 30, 2010. The $44.1 million decrease in operating expenses was primarily driven by a decrease of non-cash goodwill and asset impairment charges of $59.7 million within youth. Without considering non-cash goodwill and asset impairment charges, operating expenses increased $15.9 million, or 6%, to $278.5 million from $262.6 for the nine months ended September 30, 2010. Of the $15.9 million increase, recovery increased $14.9 million, weight management increased $0.8 million, and corporate increased $0.4 million, offset by a $0.2 million decrease from youth.
Our operating margin was 18% for the nine months ended September 30, 2011 compared to (1)% for the nine months ended September 30, 2010. The increase in operating margin resulted from a decrease in non-cash goodwill and asset impairment charges. Without considering non-cash goodwill and asset impairment charges, operating margin was 18% for the nine months ended September 30, 2011 compared to 18% for the nine months ended September 30, 2010. Recovery’s operating margin decreased to 32% for the three months ended September 30, 2011, from 34% for the nine months ended September 30, 2010. Youth’s operating margin decreased to (5)% for the nine months ended September 30, 2011 from (126)% for the nine months ended September 30, 2010. Without considering non-cash goodwill and asset impairment charges, youth’s operating margin was (2)% for the nine months ended September 30, 2011 compared to (7)% for nine months ended September 30, 2010. Weight management’s operating margin increased to 15% for the nine months ended September 30, 2011 from 9% for the nine months ended September 30, 2010.
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Net income from continuing operations increased by $51.7 million to $15.0 million for the nine months ended September 30, 2011, from a loss of $36.7 million for the nine months ended September 30, 2010. The increase in income from continuing operations is primarily driven by a $21.1 million increase revenues and a $60.0 million decrease in non-cash goodwill and asset impairment charges, primarily offset by a $15.9 million increase in non-impairment operating expenses and an $11.7 million increase in income tax expense.
The following table presents our same-facility results of operations for the nine months ended September 30, 2011 and 2010 (in thousands, except for percentages).
Nine Months Ended September 30, Same Facility | ||||||||||||||||
2011 | 2010 | 2011 vs. 2010 $ Change | 2011 vs. 2010 % Change | |||||||||||||
As Restated | ||||||||||||||||
Net revenue: | ||||||||||||||||
Recovery | $ | 261,101 | $ | 244,927 | $ | 16,174 | 7 | % | ||||||||
Youth | 52,703 | 50,308 | 2,395 | 5 | % | |||||||||||
Weight management | 25,813 | 23,696 | 2,117 | 9 | % | |||||||||||
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Total net revenue | 339,617 | 318,931 | 20,686 | 6 | % | |||||||||||
Operating expenses: | ||||||||||||||||
Recovery | 160,062 | 146,355 | 13,707 | 9 | % | |||||||||||
Youth (1) | 45,250 | 56,692 | (11,442 | ) | (20 | )% | ||||||||||
Weight management | 19,101 | 19,609 | (508 | ) | (3 | )% | ||||||||||
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Total operating expenses | 224,413 | 222,656 | 1,757 | 1 | % | |||||||||||
Operating income (loss): | ||||||||||||||||
Recovery | 101,039 | 98,572 | 2,467 | 3 | % | |||||||||||
Youth division | 7,453 | (6,384 | ) | 13,837 | 217 | % | ||||||||||
Weight management | 6,712 | 4,087 | 2,625 | 64 | % | |||||||||||
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Operating income | $ | 115,204 | $ | 96,275 | $ | 18,929 | 20 | % | ||||||||
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(1) | Youth’s operating expenses for the nine months ended September 30, 2011 and 2010 include $1.9 million and $9.2 million of asset impairment, respectively. Youth operating expenses for the nine months ended September 30, 2010, include $52.7 million of goodwill impairment. |
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The following table compares same facility statistics for the nine months ended September 30, 2011 and 2010:
Nine Months Ended September 30, Same Facility | ||||||||||||
2011 | 2010 | % change | ||||||||||
As Restated | ||||||||||||
Recovery | ||||||||||||
Residential facilities | ||||||||||||
Revenue (in thousands) | $ | 169,485 | $ | 156,239 | 8 | % | ||||||
Patient days | 452,508 | 432,636 | 5 | % | ||||||||
Net revenue per patient day | $ | 374.55 | $ | 361.13 | 4 | % | ||||||
CTCs | ||||||||||||
Revenue (in thousands) | $ | 91,616 | $ | 88,688 | 3 | % | ||||||
Patient days | 7,297,287 | 7,195,258 | 1 | % | ||||||||
Net revenue per patient day | $ | 12.55 | $ | 12.33 | 2 | % | ||||||
Youth | ||||||||||||
Residential facilities | ||||||||||||
Revenue (in thousands) | $ | 31,860 | $ | 33,448 | (5 | )% | ||||||
Patient days | 110,853 | 127,530 | (13 | )% | ||||||||
Net revenue per patient day | $ | 287.41 | $ | 262.28 | 10 | % | ||||||
Outdoor programs | ||||||||||||
Revenue (in thousands) | $ | 20,843 | $ | 16,860 | 24 | % | ||||||
Patient days | 43,120 | 37,675 | 14 | % | ||||||||
Net revenue per patient day | $ | 483.37 | $ | 447.51 | 8 | % | ||||||
Weight Management | ||||||||||||
Revenue (in thousands) | $ | 25,813 | $ | 23,696 | 9 | % | ||||||
Patient days | 87,249 | 82,314 | 6 | % | ||||||||
Net revenue per patient day | $ | 295.85 | $ | 287.87 | 3 | % |
Recovery’s same-facility revenue increased $16.2 million, or 7%, to $261.1 million for the nine months ended September 30, 2011, from $244.9 million for the nine months ended September 30, 2010. The $16.2 million, or 7%, increase in revenue within recovery was driven by increases of $13.2 million within residential facilities and $3.0 million within CTCs. Youth’s same-facility revenue increased $2.4 million, or 5%, to $52.7 million for the nine months ended September 30, 2011, from $50.3 million for the nine months ended September 30, 2010. The $2.4 million, or 5%, increase in revenue within youth was primarily driven by a $4.0 million increase within the outdoor programs, offset by a $1.6 million decrease from residential facilities. Weight management’s same-facility revenue increased by $2.1 million, or 9%, to $25.8 million for the nine months ended September 30, 2011, from $23.7 million for the nine months ended September 30, 2010, primarily due to an increase in patient days.
Recovery’s same-facility operating expenses increased $13.7 million, or 9%, to $160.1 million, for the nine months ended September 30, 2011, from $146.4 million for the nine months ended September 30, 2010. The $13.7 million increase was due to increases of $11.7 million and $2.0 million in residential facilities and CTCs, respectively. Youth’s same-facility operating expenses decreased $11.4 million, or (20)%, to $45.3 million for the nine months ended September 30, 2010, from $56.7 million for the nine months ended September 30, 2010. The $11.4 million decrease was primarily due to due to a decrease of asset impairment and goodwill impairment charges of $6.3 million and $5.4 million, respectively.
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Sources and Uses of Cash
Nine Months Ended September 30, | ||||||||
2011 | 2010 | |||||||
(In thousands) | ||||||||
Net cash provided by operating activities | $ | 34,148 | $ | 39,607 | ||||
Net cash used in investing activities | (12,295 | ) | (14,723 | ) | ||||
Net cash used in financing activities | (14,894 | ) | (25,507 | ) | ||||
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Net increase in cash | $ | 6,959 | $ | (623 | ) | |||
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Cash provided by operating activities was $34.1 million for the nine months ended September 30, 2011 as compared to $39.6 million during the same period in 2010. The decrease of $5.5 million was attributable primarily to changes in accounts receivable, accounts payable, and other current liabilities. The increase in accounts receivable was driven by higher census, year over year, and changes in payor mix. The decrease in accounts payable was primarily the result of changes in the timing of payments year over year. The decrease in other current liabilities was primarily the result of changes in the interest rate swap. Additionally, cash paid for interest, net of capitalized interest, during 2011 was $2.3 million higher and cash paid for income taxes was $0.9 million higher than the same period in 2010.
Cash used in investing activities was $12.3 million for the nine months ended September 30, 2011 as compared to $14.7 million during the same period of 2010. The decrease of $2.4 million primarily relates to a decrease in the purchases of property and equipment.
Cash used in financing activities was $14.9 million for the nine months ended September 30, 2011 as compared to $25.5 million during the same period in 2010. The decrease of $10.6 million is primarily due to the decrease of $19.0 million in the net repayments of the revolving line of credit, offset by $3.2 million increase in capitalized financing costs, $3.6 million increase in repayment of the Term Loans and seller notes, and $1.6 million increase in capital distributed to Parent.
Financing and Liquidity
We 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, 2011, our senior secured credit facility was comprised of a $388.7 million senior secured Term Loan facility and a $100.0 million revolving credit facility. Of the $388.7 million of Term Loans outstanding at September 30, 2011, $307.8 million (“Extended Term Loans”) is payable in quarterly principal installments of $0.9 million between March 31, 2013 and September 30, 2015, with the remainder due on the maturity date of November 16, 2015. The remaining $80.9 million (“Non-Extended Term Loans’) of Term Loans outstanding at September 30, 2011 is payable on February 6, 2013. At September 30, 2011, the revolving credit facility had $53.8 million available for borrowing, $36.5 million outstanding and $9.7 million of letters of credit issued and outstanding.
Aggregate commitments of $37.0 million (“Non-Extended Revolving Line of Credit”) under the revolving credit facility mature on February 6, 2012. The remaining $63.0 million (“Extended Revolving Line of Credit”) mature on August 16, 2015 provided that if any of the Non-Extended Term Loans have not been repaid or refinanced in full by January 6, 2013 or have not been subsequently extended to the maturity date of the Extended Term Loans (November 16, 2015), then the maturity date of the Extended Revolving Line of Credit commitments will be January 6, 2013. Of the $36.5 million outstanding at September 30, 2011 under the revolving credit facility, $13.5 million was classified on our balance sheet as current portion of long term debt.
At September 30, 2011, we had $177.3 million in aggregate principal amount of 10.75% senior subordinated notes due 2016.
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We anticipate that cash generated by 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.
We may expand existing recovery, youth and weight management facilities and build or acquire new facilities. Management continually assesses our capital needs and may seek additional financing, including debt or equity, to fund potential acquisitions or for other corporate purposes. We have historically made and currently intend to make payments to reduce borrowing under the revolving line of credit from operating cash flow. In addition, if future financings are executed, we expect that such financings will serve not only to partially fund acquisitions but also to repay all or part of any outstanding revolving line of credit balances then outstanding. 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 treatment facilities.
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, 2011, we were in compliance with all such covenants. A breach of these could result in a default under our credit facilities and in our being unable to borrow additional amounts under our revolving credit facility. If an event of default occurs, the lenders could elect to declare all amounts borrowed under our credit facilities to be immediately due and payable and the lenders under our Term Loans and revolving credit facility could proceed against the collateral securing the indebtedness.
SUBSEQUENT EVENTS
The Company has evaluated events occurring from the balance sheet date of September 30, 2011 through the financial statements issuance date of November 14, 2011. During the evaluation period, the Company received notice that a state agency suspended admissions to one of the Company’s Recovery residential facilities, New Life Lodge, for one hundred twenty (120) days or until the state agency determines that issues prompting suspension have been addressed and corrected. The state agency suspended admissions after finding that the facility was in violation of licensing rules.
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/A for the year ended December 31, 2010. As of September 30, 2011, our exposure to market risk has not changed materially since December 31, 2010.
Item 4. | Controls and Procedures |
Background
On August 16, 2011, the Company announced that it was conducting a review of inconsistencies in the accounts at one of its recovery residential treatment facilities (the “Facility”). On October 4, 2011, the Board of Directors of the Company (the “Board”), in consultation with the Audit Committee of the Board (the “Audit Committee”) and management, adopted the conclusions of the investigation and concluded that the Company’s previously issued consolidated financial statements for the years ended December 31, 2008, 2009 and 2010, along with the accompanying independent auditors’ reports and its previously issued condensed consolidated financial statements for the fiscal quarter ended March 31, 2011 should not be relied upon because of errors identified in such financial statements.
Management initially identified certain errors upon initiating an internal investigation after noting inconsistencies in accounting for certain transactions at the Facility. Following a briefing by management on the issues, the Audit Committee hired independent counsel to conduct a review of accounting transactions at the Facility. The investigation was completed and the Audit Committee identified issues related to misconduct by a former employee as well as errors in accounting for revenue, accounts receivable, bad debt expenses and general expenses. As a result of these errors, the Company restated its previously issued consolidated financial statements for the years ended December 31, 2008, December 31, 2009 and December 31, 2010, including the quarterly data for the years 2009 and 2010, and for the fiscal quarter ended March 31, 2011.
Evaluation of Disclosure Controls and Procedures
After discovering the errors identified in our Form 10-K/A for the year ended December 31, 2010 and our Form 10-Q/A for the three months ended March 31, 2011, we, under the supervision and with the participation of our management, including our principal executive officer and principal financial officer, have evaluated 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 Exchange Act, as of the end of the period covered by this report. This evaluation identified a material weakness in our internal control over financial reporting. Based on the evaluation of this material weakness, our principal executive officer and principal financial officer have concluded that, as of the end of the period covered by this report, our disclosure controls and procedures were not effective to ensure that 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 SEC 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.
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Plan for Remediation of the Material Weaknesses in Internal Control Over Financial Reporting
Management has been actively engaged in the planning for, and implementation of, remediation efforts to address the material weakness at facilities with manual accounting procedures. These remediation efforts, outlined below, are intended both to address the identified material weakness and to enhance our overall financial control environment.
Management has already added new accounting staff at the Facility and plans to undertake the following actions to further address these issues in fiscal 2011:
• | the addition of more experienced accounting staff; |
• | training programs for accounting and finance personnel; |
• | a review of the processes and procedures, including appropriate segregation of duties, surrounding revenue recognition and accounting for accounts receivable, the allowance for doubtful accounts, accrued expenses and prepaid assets, as well as reconciliations of general ledger accounts at facilities with manual systems; and |
• | an evaluation of our relevant accounting policies and procedures to ensure that they are documented and standardized across the Company, circulated to the appropriate constituencies and reviewed and updated on a periodic basis. |
The Audit Committee has directed management to develop a detailed plan and timetable for the implementation of the foregoing remedial measures and will monitor their implementation. In addition, under the direction of the Audit Committee, management will continue to review and make necessary changes to the overall design of our internal control environment to improve the overall effectiveness of internal control over financial reporting.
Management believes the measures described above and others that will be implemented will remediate the control deficiencies that we have identified and strengthen our internal control over financial reporting. As management continues to evaluate and improve internal control over financial reporting, we may decide to take additional measures to address control deficiencies or determine to modify, or in appropriate circumstances not to complete, certain of the remediation measures described above.
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.
PART II. OTHER INFORMATION
Item 1. | Legal Proceedings |
In a complaint initially filed on July 6, 2011, and amended on August 25, 2011, in Multnomah County Circuit Court in Oregon, 17 former students of one of our previously closed therapeutic boarding school facilities allege mental and physical abuse by certain former employees or agents of the school. The Company and CRC Health Oregon, Inc. are among the defendants in the pending litigation. The plaintiffs seek a total of $26.0 million in relief. A second suit was filed in November in Multnomah County Circuit Court in Oregon by 14 former students also alleging abuse. The plaintiffs seek a total of $23 million in relief. We and the other defendants intend to defend vigorously the pending lawsuit. In consultation with counsel and based on our preliminary investigation into the facts alleged, we believe this case is without merit. However, at this time, we are unable to predict the outcome of the lawsuit, the possible loss or range of loss, if any, after consideration of the extent of insurance coverage associated with the resolution of the lawsuit or any potential effect it may have on us or our operations.
In August, September and October 2011, three actions were brought against the Company’s New Life Lodge facility. One suit alleges negligence resulting in wrongful death and seeks a total $32.0 million in compensatory and punitive damages. A second suit was filed regarding the same matter by the same plaintiff alleging medical malpractice; plaintiff seeks to join this second suit with the first suit. The third suit is a medical malpractice action for alleged wrongful death and seeks $13.0 million in compensatory and
punitive damages. We intend to defend vigorously the pending lawsuits. In consultation with counsel and based on our preliminary investigation into the facts alleged, the Company believes these cases are without merit. However, at this time, we are unable to predict the outcome of the lawsuit or the possible loss or range of loss, if any, after consideration of the extent of insurance coverage associated with the resolution of the lawsuit or any potential effect it may have on us or our operations.
The Company is involved in litigation and regulatory investigations arising in the course of 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, except as discussed above.
Item 1A. | Risk Factors |
As of September 30, 2011, there have been no material changes to the factors disclosed in Item 1A Risk Factors in our Annual Report on Form 10-K/A for the year ended December 31, 2010.
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 14, 2011
CRC HEALTH CORPORATION (Registrant) | ||
By | /S/ LEANNE M. STEWART | |
LeAnne M. Stewart, Chief Financial Officer (Principal Financial Officer and duly authorized signatory) |
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EXHIBIT INDEX
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 ‡ | |
32.1 | Section 1350 Certification of Principal Executive Officer † | |
32.2 | Section 1350 Certification of Principal Financial Officer † | |
101.INS | XBRL Instance Document † | |
101.SCH | XBRL Taxonomy Extension Schema † | |
101.CAL | XBRL Taxonomy Extension Calculation Linkbase † | |
101.LAB | XBRL Taxonomy Extension Label Linkbase † | |
101.PRE | XBRL Taxonomy Extension Presentation Linkbase † |
‡ | Filed herewith. |
† | Furnished herewith. |
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