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Exhibit 99.1

 

UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS

 

The following unaudited pro forma condensed consolidated financial statements have been derived by the application of pro forma adjustments to the historical consolidated financial information of The Providence Service Corporation (the “Company” or “Providence”), which have been presented to give effect to Providence’s loss of a controlling interest and retention of a noncontrolling interest in CCHN Group Holdings, Inc. (“Matrix”) pursuant to the stock subscription agreement, dated August 28, 2016 (such transactions, the “Subscription”), as amended on October 19, 2016, and related transactions.

 

Effective October 19, 2016, the Company completed its previously reported Matrix stock subscription transaction whereby Mercury Fortuna Buyer, LLC (“Subscriber”), Providence and Matrix entered into a stock subscription agreement (the “Subscription Agreement”), dated August 28, 2016. On October 19, 2016, the Company, Matrix and Subscriber entered into Amendment No. 1 (the “Amendment”) to the Subscription Agreement. The Amendment, among other things, implements certain changes to the Subscription Agreement (1) with respect to a new term loan facility entered into by Matrix at the closing, on October 19, 2016, of the subscription for shares contemplated by the Subscription Agreement (the “Closing” and the date on which the Closing occurred, the “Closing Date”), (2) with respect to a representations and warranties insurance policy obtained in connection with the Closing, and (3) to reflect that Subscriber subscribed for a 53.2% equity interest in Matrix and Providence retained a 46.8% equity interest in Matrix.

 

At the Closing, (i) cash consideration of approximately $180.6 million was paid by Subscriber to Matrix based upon an enterprise value of $537.5 million and (ii) Matrix borrowed approximately $198 million pursuant to a credit and guaranty agreement providing for term loans in an aggregate principal amount of $198 million and revolving loan commitments in an aggregate principal amount not to exceed $10 million, which was not drawn at the Closing. In addition, on the day that is fifteen days following the Closing Date, Providence may, to the extent payable pursuant to the terms of the Subscription Agreement, as amended, be entitled to receive from Matrix, or required to pay to Matrix, subsequent cash payments. Providence also made capital contributions to Matrix, as described in the Subscription Agreement, as amended, to fund the near-term cash needs of Matrix. Also at the Closing, separate from the Subscription, Matrix distributed $381.2 million to Providence, including interest, in full satisfaction of a promissory note between Matrix and Providence.

 

Additionally, on August 28, 2016, Providence and certain of its subsidiaries entered into the Fourth Amendment and Consent to the Amended and Restated Credit and Guaranty Agreement (“Amendment and Consent”), amending that certain Amended and Restated Credit and Guaranty Agreement dated as of August 2, 2013 (as amended to date, the “Credit Agreement”), by and among Providence, the guarantors from time to time party thereto, the lenders from time to time party thereto and Bank of America, N.A. as administrative agent. Pursuant to the Amendment and Consent, which provided for the lenders' consent to the Subscription, a portion of the net cash proceeds received by Providence at the Closing of the Subscription were used to (i) repay in full all outstanding amounts due under the term loans and (ii) reduce the outstanding balance of the revolving loans to zero. Effective following the repayment of the outstanding term loans in full, the Amendment further reduced the aggregate revolving commitments under the Credit Agreement to $200 million. The repayment of all outstanding term loans and revolving loans plus accrued interest and fees, totaling $335.1 million, occurred on October 20, 2016.

 

The unaudited pro forma condensed consolidated balance sheet as of June 30, 2016 of the Company is presented as if the Subscription and related transactions had occurred as of June 30, 2016. The unaudited pro forma condensed consolidated statements of income of the Company for the six months ended June 30, 2016 and the years ended December 31, 2015 and 2014 are presented as if the Subscription and related transactions had occurred on October 23, 2014, the date on which the Company originally acquired Matrix.

 

The Company’s historical financial information was derived from its audited consolidated financial statements for the years ended December 31, 2015 and 2014 (as filed in its Annual Report on Form 10-K with the Securities and Exchange Commission on March 11, 2016) and the Company’s unaudited condensed consolidated financial statements for the six months ended June 30, 2016 (as filed in its Quarterly Report on Form 10-Q with the Securities and Exchange Commission on August 2, 2016). The Company’s historical financial statements used in preparing the unaudited pro forma financial data are summarized and should be read in conjunction with its historical financial statements and risk factors, all of which are included in the filings with the Securities and Exchange Commission noted above.

 

The unaudited pro forma adjustments give effect to events that are (i) directly attributable to the Subscription and related transactions, (ii) factually supportable and (iii) based on estimates, available information and certain assumptions that the Company believes are reasonable given the information currently available. The unaudited pro forma adjustments and primary assumptions are described in the accompanying notes. The unaudited pro forma condensed consolidated balance sheet and statements of income are being provided for illustrative purposes only and do not purport to represent what the Company’s results of operations or financial position would have been if the Subscription and related transactions had occurred on the dates indicated and are not intended to project the Company’s results of operations or financial position for any future period. Any of the factors underlying these estimates and assumptions may change or prove to be materially different and the estimates and assumptions may not be representative of facts that existed upon completion of the Subscription.

 

 
 

 

 

The Providence Service Corporation

Pro Forma Condensed Consolidated Balance Sheet - Unaudited

June 30, 2016

(in thousands)

 

   

Providence

Service

Corporation

Historical

   

 

Deconsolidation

of Matrix

   

Recognition of

Noncontrolling

Interest in

Matrix

     

Pro Forma

Adjustments

     

Pro Forma

   

Assets

                                             

Current assets:

                                             

Cash and cash equivalents

  $ 68,824     $ (7,086 )   $ -       $ 381,163  

b

         
                                (12,914 )

c

         
                                (312,150 )

d

  $ 117,837    

Accounts receivable, net

    178,295       (17,264 )     -         -         161,031    

Other current assets

    78,260       (7,080 )     -         -         71,180    

Total current assets

    325,379       (31,430 )     -         56,099         350,048    
                                               

Goodwill

    337,158       (210,071 )     -         -         127,087    

Intangible assets, net

    263,918       (203,292 )     -         -         60,626    

Other non-current assets

    109,810       (16,867 )     158,886  

a

    -         251,829    

Total assets

  $ 1,036,265     $ (461,660 )   $ 158,886       $ 56,099       $ 789,590    
                                               

Liabilities and stockholders' equity

                                             

Current liabilities:

                                             

Current portion of long-term obligations

  $ 35,250     $ -     $ -       $ (35,250 )

d

  $ -    

Accrued expenses

    107,769       (19,955 )     -         (985 )

d

         
                                2,549  

f

         
                                718  

f

    90,096    

Other current liabilities

    168,054       (2,007 )     -         -         166,047    

Total current liabilities

    311,073       (21,962 )     -         (32,968 )       256,143    
                                               

Long-term obligations, less current portion

    272,828       -       -         (274,234 )

d

    (1,406 )

d

Other non-current liabilities

    118,716       (83,232 )     -         58,533  

e

    94,017    

Total liabilities

    702,617       (105,194 )     -         (248,669 )       348,754    
                                               

Mezzanine equity

                                             

Convertible preferred stock, net

    77,565       -       -         -         77,565    
                                               

Stockholders' equity

                                             

Common stock and APIC

    295,830       -       -         -         295,830    

Other stockholders' equity

    (39,747 )     -       -         108,869  

f

         
                                (1,681 )

d

    67,441    

Total stockholders' equity

    256,083       -       -         107,188         363,271    

Total liabilities and stockholders' equity

  $ 1,036,265     $ (105,194 )   $ -       $ (141,481 )     $ 789,590    

 

The accompanying notes are an integral part of these unaudited pro forma condensed consolidated financial statements.

 

 
 

 

 

The Providence Service Corporation

Pro Forma Condensed Consolidated Statements of Income

for the six months ended June 30, 2016

Unaudited

(in thousands, except share and per share data)

 

   

Providence

Service

Corporation

Historical

   

Desconsolidation

of Matrix

   

Recognition of

Noncontrolling

Interest in

Matrix

     

Pro Forma

Adjustments

     

Pro Forma

   
                                               

Service revenue, net

  $ 883,282     $ (102,864 )   $ -       $ -       $ 780,418    
                                               

Operating expenses:

                                             

Service expense

    791,538       (74,753 )     -         -         716,785    

General and administrative expense

    36,546       (1,318 )     -         (60 )

i

    35,168    

Depreciation and amortization

    29,150       (15,762 )     -         -         13,388    

Total operating expenses

    857,234       (91,833 )     -         (60 )       765,341    

Operating income

    26,048       (11,031 )     -         60         15,077    
                                               

Other expenses:

                                             

Interest expense, net

    7,071       4       -         (5,418 )

j

         
                                (757 )

k

    900    

Equity in net loss of investee

    4,176       -       35  

g

    -         4,211    

Gain on foreign currency translation

    (849 )     -       -         -         (849 )  

Income before income taxes

    15,650       (11,035 )     (35 )       6,235         10,815    

Provision for income taxes

    9,527       (4,150 )     (13 )

h

    2,282  

l

    7,646    

Net income

    6,123       (6,885 )     (22 )       3,953         3,169    

Net loss attributable to noncontrolling interests

    735       -       -         -         735    

Net income attributable to Providence

  $ 6,858     $ (6,885 )   $ (22 )     $ 3,953       $ 3,904    
                                               

Net income available to common stockholders

  $ 4,108                                 $ 1,502   m
                                               

Earnings per common share:

                                             

Basic

  $ 0.27                                 $ 0.10    

Diluted

  $ 0.27                                 $ 0.10    
                                               

Weighted-average number of common shares outstanding:

                                             

Basic

    14,975,582                                   14,975,582    

Diluted

    15,098,945                                   15,098,945    

 

The accompanying notes are an integral part of these unaudited pro forma condensed consolidated financial statements.

 

 
 

 

 

The Providence Service Corporation

Pro Forma Condensed Consolidated Statements of Income

for the twelve months ended December 31, 2015

Unaudited

(in thousands, except share and per share data)

 

   

Providence

Service

Corporation

Historical

   

Deconsolidation

of Matrix

   

Recognition of

Noncontrolling

Interest in

Matrix

     

Pro Forma

Adjustments

     

Pro Forma

   
                                               

Service revenue, net

  $ 1,695,446     $ (217,436 )   $ -       $ -       $ 1,478,010    
                                               

Operating expenses:

                                             

Service expense

    1,544,365       (163,211 )     -         -         1,381,154    

General and administrative expense

    73,616       (2,630 )     -         -         70,986    

Depreciation and amortization

    53,469       (29,472 )     -         -         23,997    

Total operating expenses

    1,671,450       (195,313 )     -         -         1,476,137    

Operating income

    23,996       (22,123 )     -         -         1,873    
                                               

Other expense:

                                             

Interest expense, net

    16,213       16       -         (12,793 )

j

         
                                (1,583 )

k

    1,853    

Equity in net loss (gain) of investee

    10,970       -       (436 )

g

    -         10,534    

Gain on foreign currency translation

    (857 )     -       -         -         (857 )  

Income (loss) from continuing operations before income taxes

    (2,330 )     (22,139 )     436         14,376         (9,657 )  

Provision for income taxes

    16,276       (7,007 )     161  

h

    5,314  

l

    14,744    

Income (loss) from continuing operations, net of tax

  $ (18,606 )   $ (15,132 )   $ 275       $ 9,062       $ (24,401 )  
                                               

Net income from continuing operations available to common stockholders

  $ (23,110 )                               $ (28,905 )

m

                                               

Loss from continuing operations per common share:

                                             

Basic

  $ (1.45 )                               $ (1.81 )  

Diluted

  $ (1.45 )                               $ (1.81 )  
                                               

Weighted-average number of common shares outstanding:

                                             

Basic

    15,960,905                                   15,960,905    

Diluted

    15,960,905                                   15,960,905    

 

The accompanying notes are an integral part of these unaudited pro forma condensed consolidated financial statements.

 

 
 

 

  

The Providence Service Corporation

Pro Forma Condensed Consolidated Statements of Income

for the twelve months ended December 31, 2014

Unaudited

(in thousands, except share and per share data)

 

   

Providence

Service

Corporation

Historical

   

Deconsolidation of

Matrix

   

Recognition of

Noncontrolling

Interest in

Matrix

     

Pro Forma

Adjustments

     

Pro Forma

 
                                             

Service revenue, net

  $ 1,136,211     $ (43,331 )   $ -       $ -       $ 1,092,880  
                                             

Operating expenses:

                                           

Service expense

    1,023,785       (35,185 )     -         -         988,600  

General and administrative expense

    44,501       (421 )     -         -         44,080  

Depreciation and amortization

    22,833       (5,619 )     -         -         17,214  

Total operating expenses

    1,091,119       (41,225 )     -         -         1,049,894  

Operating income

    45,092       (2,106 )     -         -         42,986  
                                             

Other expense:

                                           

Interest expense, net

    13,122       6       -         (2,602 )

j

       
                                (303 )

k

    10,223  

Equity in net loss of investee

    -       -       678  

g

    -         678  

Gain on foreign currency translation

    (37 )     -       -         -         (37 )

Income (loss) from continuing operations before income taxes

    32,007       (2,112 )     (678 )       2,905         32,122  

Provision for income taxes

    8,090       (956 )     (270 )

h

    1,154  

l

    8,018  

Income (loss) from continuing operations, net of tax

  $ 23,917     $ (1,156 )   $ (408 )     $ 1,751       $ 24,104  
                                             

Earnings from continuing operations per common share:

                                           

Basic

  $ 1.62                                 $ 1.63  

Diluted

  $ 1.59                                 $ 1.60  
                                             

Weighted-average number of common shares outstanding:

                                           

Basic

    14,765,303                                   14,765,303  

Diluted

    15,018,561                                   15,018,561  

 

The accompanying notes are an integral part of these unaudited pro forma condensed consolidated financial statements.

 

 
 

 

  

The Providence Service Corporation

Notes to Unaudited Pro Forma Condensed Consolidated Financial Statements

(in thousands)

 

1.

Basis of presentation

 

The unaudited pro forma condensed consolidated financial statements have been prepared based on the Company’s historical financial information giving effect to the Subscription and related adjustments described in these notes. Certain note disclosures normally included in the financial statements prepared in accordance with generally accepted accounting principles in the United States (“GAAP”) have been condensed or omitted as permitted by the SEC rules and regulations.

 

The ”Deconsolidation of Matrix” in the unaudited pro forma condensed consolidated financial statements represents the deconsolidation of 100% of the Company’s interest in Matrix because of the Company’s loss of control resulting from the Subscription and related transactions. The “Deconsolidation of Matrix” adjustments include deferred income tax amounts that were included on the Providence balance sheet because CCHN Group Holdings, Inc. was part of a consolidated tax group for federal and state tax purposes and thus such amounts were considered in preparing the Providence consolidated tax provision and returns. The “Recognition of Noncontrolling Interest in Matrix” in the unaudited pro forma condensed consolidated financial statements represents the Company’s retained 46.8% noncontrolling interest in Matrix, which is accounted for as an equity method investment.

 

2.

Pro forma adjustments to unaudited condensed consolidated financial statements 

 

 

a.

Adjustment to record Providence’s retained 46.8% noncontrolling interest in Matrix at fair value. The $158,886 fair value of the Company’s equity investment in Matrix is based on the gross up of the fair value of the controlling equity interest acquired by the Subscriber to a 100% value multiplied by the Company’s retained interest of 46.8% [calculated as ($180,614 subscription price divided by 53.2% controlling interest) multiplied by 46.8% retained interest equals $158,886]. The fair value of the investment in Matrix was based on a preliminary evaluation of its fair value and may change when the final valuation is completed, including the final determination of the fair value of certain identifiable intangible assets.

 

 

b.

Adjustment to reflect Providence’s cash proceeds from the repayment of a promissory note, plus accrued interest, between Matrix and Providence. Note that on the day that is fifteen days following the Closing Date, Providence may, to the extent payable pursuant to the terms of the Subscription Agreement, as amended, be entitled to receive from Matrix, or required to pay to Matrix, cash payments pursuant to the determination of the final working capital adjustment. Such adjustment amount is not reflected in the pro forma adjustments.

 

 

c.

Adjustment to reflect a pre-closing capital contribution from Providence to Matrix for the payment of transaction related expenses.

 

 

d.

Adjustment to reflect the payment in full of outstanding obligations under Providence’s Credit Agreement of $311,950, the write-off of related deferred financing fees of $2,666 (or $1,681 net of tax), and the recognition of $200 in deferred financing fees to reflect the reduction in the revolving commitment from $240,000 to $200,000. The remaining ($1,406) in long-term obligations, less current portion, represents the remaining deferred financing fees related to the revolving loans under Providence’s Credit Agreement.

 

 

e.

Adjustment to record the estimated income tax impacts related to the Company’s loss of the controlling interest in Matrix.

 

 
 

 

 

 

f.

Adjustment to reflect the estimated gain, net of tax, for the Matrix stock subscription, which is calculated as follows:

 

Fair value of consideration received:

       

Share subscription price

  $ 180,614  

Matrix debt financing

    198,000  

Total consideration received

    378,614  
         

Plus: Fair value of retained noncontrolling interest, subject to adjustment

    158,886  

Less: Carrying amount of Matrix as of June 30, 2016

    (369,380 )

Less: Transaction costs

    (718 )

Estimated pre-tax gain

    167,402  

Provision for income taxes

    58,533  

Estimated gain, net of tax

  $ 108,869  

 

The provision for income taxes reflects deferred income tax expense of $58,533.

 

The $381,163 repayment of the promissory note plus accrued interest between Providence and Matrix exceeded the $378,614 fair value of the consideration received by $2,549 and, therefore, is subject to repayment from Providence to Matrix. However, payment of this amount is subject to the determination of the final working capital adjustment.

 

 

g.

Adjustment to reflect Providence’s 46.8% share of Matrix’s net income as equity in net loss (gain) of investee. The following reflects the adjustments made to Matrix’s net income to arrive at Providence’s equity in net gain of investee:

 

   

Six months ended

June 30, 2016

   

Year ended

December 31,

2015

   

Year ended

December 31,

2014

 
Matrix's net income as reported in Providence's consolidated financial statements   $ 6,885     $ 15,132     $ 1,156  
                         

Plus: Historical amortization expense of intangible assets

    13,095       26,102       5,011  

Less: Amortization expense of fair value of intangible assets assessed as of June 30, 2016

    (17,933 )     (35,867 )     (6,749 )

Less: Interest and amortization of deferred financing costs of newly acquired debt

    (6,634 )     (13,640 )     (2,590 )

Plus: Tax benefit adjustments

    4,512       9,204       1,723  

Matrix pro forma net income (loss)

  $ (75 )   $ 931     $ (1,449 )

Providence's ownership percentage

    46.8 %     46.8 %     46.8 %

Providence's equity in net gain (loss) of investee

  $ (35 )   $ 436     $ (678 )

 

The fair value of Matrix’s intangible assets was based upon a preliminary evaluation of its fair value and may change upon the completion of the final valuation, thus resulting in a change to the amortization expense presented in the table above. Interest and amortization of deferred financing costs of newly acquired debt is based upon an interest rate of 6.5% and deferred financing costs of $5,822.

 

 

h.

Adjustment to reflect Providence’s income tax expense at statutory rates related to its equity in net loss (gain) of investee.

 

 

i.

Adjustment to remove transaction expenses recognized by Providence during the six months ended June 30, 2016 relating to the Subscription and related transactions.

 

 

j.

Adjustment to remove the interest expense related to the term loans and revolving credit facility that was required by Providence’s lenders to be repaid upon completion of the Subscription.

 

 

k.

Adjustment to remove the amortization of deferred financing fees that were written off upon the full repayment of the term loans and the outstanding revolving loans under Providence’s Credit Agreement.

 

 

l.

Adjustment to record the estimated income tax impacts at statutory rates related to Pro Forma adjustments.

 

 
 

 

 

 

m.

Net income (loss) from continuing operations available to common stockholders for the six months ended June 30, 2016 and the twelve months ended December 31, 2015, respectively, are calculated as follows:

 

   

Six months ended

June 30, 2016

   

Twelve months ended

December 31, 2015

 

Income (loss) from continuing operations, net of tax

  $ 3,169     $ (24,401 )

Net loss attributable to noncontrolling interests

    735       502  

Less dividends on convertible preferred stock

    (2,197 )     (3,935 )

Less accretion of convertible preferred stock discount

    -       (1,071 )

Less income allocated to participating securities

    (205 )     -  

Net income (loss) from continuing operations available to common stockholders

  $ 1,502     $ (28,905 )