SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(MARK ONE)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 2001
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 0-13849
RAMSAY YOUTH SERVICES, INC.
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(Exact name of registrant as specified in its charter)
DELAWARE 63-0857352
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(STATE OR OTHER JURISDICTION (I.R.S. EMPLOYER IDENTIFICATION NO.)
OF INCORPORATION OR ORGANIZATION)
COLUMBUS CENTER
ONE ALHAMBRA PLAZA, SUITE 750
CORAL GABLES, FLORIDA 33134
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(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE (305) 569-6993
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
TITLE OF EACH CLASS NAME OF EACH EXCHANGE ON WHICH REGISTERED
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NONE NONE
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
COMMON STOCK, $0.01 PAR VALUE
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(TITLE OF CLASS)
Indicate by a 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, and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ].
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [X]
The number of shares of the registrant's Common Stock outstanding as of
March 14, 2002 was 9,465,995. The aggregate market value of Common Stock held by
non-affiliates on such date was $12,763,347. For purposes of this computation,
all executive officers, directors and 5% beneficial owners of the common stock
of the registrant have been deemed to be affiliates. Such determination should
not be deemed to be an admission that such directors, officers or 5% beneficial
owners are, in fact, affiliates of the registrant.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant's proxy statement to be filed with the
Securities Exchange Commission pursuant to Regulation 14A for the registrant's
2002 annual meeting of stockholders are incorporated by reference into Part III
of this Form 10-K.
FORWARD-LOOKING STATEMENTS
In connection with the "safe-harbor" provisions of the Private
Securities Litigation Reform Act of 1995, Ramsay Youth Services, Inc. ("Ramsay"
or the "Company") notes that this report contains forward-looking statements
about the Company. The Company is hereby setting forth cautionary statements
identifying important factors that may cause the Company's actual results to
differ materially from those set forth in any forward-looking statements or
information made by or on behalf of or concerning the Company. Some of the most
significant factors include (i) accelerating changes occurring in the behavioral
healthcare and at-risk youth industry, including competition from consolidating
and integrated provider systems and limitations on reimbursement rates, (ii)
federal and state governmental budgetary constraints which could have the effect
of limiting the amount of funds available to support governmental programs,
(iii) statutory, regulatory and administrative changes or interpretations of
existing statutory and regulatory provisions affecting the conduct of the
Company's business and affecting current and prior reimbursement for the
Company's services and (iv) uncertainties regarding issues in the Puerto Rico
market serviced by the Company. There can be no assurance that any anticipated
future results will be achieved. As a result of the factors identified above,
and including any other factors, the Company's actual results or financial
condition could vary significantly from the performance or expectation set forth
in any forward-looking statements or information.
ANALYSTS' REPORTS
Investors should also be aware that while the Company does, at various
times, communicate with securities analysts, it is against the Company's policy
to disclose to them any material non-public information or other confidential
information. Accordingly, shareholders should not assume that the Company agrees
with any statement or report issued by an analyst irrespective of the content of
the statement or report. To the extent that reports issued by securities
analysts contain any projections, forecasts or opinions, such reports are not
the responsibility of the Company.
PART I
ITEM 1. BUSINESS.
General
The Company is a provider of behavioral health care treatment programs
and services focused on at-risk and special-needs youth. The Company offers a
full spectrum of treatment programs and services in residential and
non-residential settings. The programs and services are offered through a
network of Company-owned or leased facilities ("Owned Operations") and state or
government-owned facilities ("Management Contract Operations"). The Company is
head-quartered in Coral Gables, Florida and has operations in Alabama, Florida,
Hawaii, Missouri, Michigan, Nevada, North Carolina, South Carolina, Texas, Utah
and Puerto Rico. The Company also provides a limited range of adult behavioral
healthcare services at certain of its locations in response to community demand.
The programs and services provided by the Company are designed through
a comprehensive continuum that is directed to meet the demands for culturally
diverse and special-needs populations. The Company's programs are tailored to
service individuals with (i) mental health and substance abuse issues, (ii)
sexually reactive disorders, (iii) developmental disabilities, and (iv)
emotional and behavioral disorders. The Company's programs cater to special
populations such as juvenile offenders, adolescent females and youth with
special education needs.
The primary objective of the Company's programs and services is to
provide a safe and highly structured environment for the evaluation, treatment,
rehabilitation and integration of at-risk and special-needs youth into their
communities as responsible individuals and productive citizens.
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DESCRIPTION OF PROGRAMS
Ramsay's specialized behavioral health care programs are focused on
solving the specialized needs of youth by providing effective treatment
interventions, including counseling, social interests, substance abuse education
and treatment, mental health services, cognitive and life skills development,
accredited education and vocational skills. The Company's goal is to provide a
"balanced approach" that develops the social, educational and vocational skills
of the youth and creates responsible, pro-social individuals. This balanced
approach is essential to achieve the program's objective of integrating the
youth into their communities as responsible and productive individuals.
The following is a summary of the programs and services offered by the
Company:
o ACUTE INPATIENT SERVICES - Acute inpatient services are generally
provided to individuals needing the most intensive behavioral
healthcare treatment. The most common disorders treated at the
Company's facilities on an acute inpatient basis are mood and affective
disorders (such as depression), psychosis, situational crises and
alcohol and drug dependency. The initial goal of acute inpatient
treatment is to evaluate and stabilize the patient so that effective
treatment can be continued either on an inpatient or outpatient basis.
Under the direction of a psychiatrist, the patient's condition is
assessed, diagnosis is made and prescribed treatment follows. The
treatment regimen utilizes, where appropriate, medication, individual
and group therapy, adjunctive therapy and family therapy.
o RESIDENTIAL TREATMENT PROGRAMS - Residential treatment programs provide
safe, secure and highly structured environments for the evaluation and
development of long-term, intensive and transitional treatment
services. The programs focus on a cognitive-behavioral model with
family, group and individual counseling, social and life skills
development and educational and recreational programs. The primary
focus of these services is to reshape antisocial behaviors by stressing
responsibility and achievement of performance and treatment goals.
o THERAPEUTIC COMMUNITY LIVING FACILITY - Therapeutic community living
facility programs provide care and treatment to youths in a community
setting, usually in a residential neighborhood. These youths typically
are transitioning from a more intensive program, such as a long-term
residential treatment facility. This facility setting is a less
restrictive residential environment that offers youths the
opportunities for personal growth, social development and responsible
behavior. The youths attend public schools or receive in-home education
and vocational and occupational training. The primary focus of these
services is to teach the youth independent living skills, decrease
their institutional dependency and gradually transition them back into
their communities.
o COMMUNITY-BASED PROGRAMS - Community-based programs are designed to
meet the special needs of youths and their families, while enabling
them to remain living at home or in their community. The primary focus
of this program is to provide youths who have a clinically definable
emotional, psychiatric or dependency disorder with therapeutic
services. Youths who are assisted through this program have either
transitioned out of a residential treatment program or do not require
the intensive services of a residential treatment program.
FACILITIES
As of December 31, 2001, the Company's Owned Operations segment
consisted of (i) eleven residential facilities in which both acute inpatient
services and/or residential treatment programs are offered, (ii) ten therapeutic
community living facilities and (iii) three stand-alone non-residential
facilities in which community-based programs and services are offered. The
facilities in the Owned Operations segment are either owned or leased directly
by the Company. As of December 31, 2001, the Company's Management Contract
Operations segment consisted of six contracts in which the Company has the right
to occupy the facility and one stand-alone contract for community-based programs
and services.
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The following table sets forth the programs and services offered by the
Company as of December 31, 2001 in the various markets in which it operates:
MARKET PROGRAMS AND SERVICES
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OWNED OPERATIONS
Alabama:
Dothan Facility........................ Residential Treatment Programs
and Acute Inpatient Services
Hill Crest Facility.................... Residential Treatment Programs,
Acute Inpatient Services and
Community-Based Programs
Bessemer I............................. Therapeutic Community Living
Facility
Higdon Hill ........................... Therapeutic Community Living
Facility
Bessemer II ........................... Therapeutic Community Living
Facility
Florida:
Gulf Coast Treatment Center............ Residential Treatment Programs
Manatee Adolescent Treatment Services.. Residential Treatment Programs
Manatee Palms Youth Services........... Residential Treatment Programs
and Community-Based Programs
Riverdale Day Treatment................ Community-Based Programs
Family Counseling Center............... Community-Based Programs
Hawaii:
Pearl City............................. Therapeutic Community Living
Facility
Michigan:
Havenwyck Facility..................... Residential Treatment Programs,
Acute Inpatient Services and
Community-Based Programs
Missouri:
Heartland Facility..................... Residential Treatment Programs,
Acute Inpatient Services and
Community-Based Programs
Heartland House........................ Therapeutic Community Living
Facility
Nevada:
Briarwood I............................ Therapeutic Community Living
Facility
Briarwood II........................... Therapeutic Community Living
Facility
North Carolina:
Brynn Marr............................. Residential Treatment Programs,
Acute Inpatient Services and
Community-Based Programs
Puerto Rico:
Institute of PsychoSocial Treatment.... Residential Treatment Programs
South Carolina:
Coastal Harbor......................... Therapeutic Community Living
Facility
Pelion................................. Therapeutic Community Living
Facility
Riverstone............................. Therapeutic Community Living
Facility
Texas:
Mission Vista Facility................. Acute Inpatient Services
Utah:
Benchmark Regional..................... Residential Treatment Programs
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MARKET PROGRAMS AND SERVICES
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MANAGEMENT CONTRACTS
Florida:
Everglades Youth Development Center.... Residential Treatment Programs
Florida Institute for Girls............ Residential Treatment Programs
Kingsley Center........................ Residential Treatment Programs
Okaloosa Youth Academy................. Residential Treatment Programs
Southern Glades Youth Camp............. Residential Treatment Programs
Puerto Rico:
Bayamon Detention Center............... Residential Treatment Programs
Specialized Education Services......... Community-Based Programs
Market for the Company's Services
Expenditures for the behavioral healthcare services market totaled
$85.3 billion in 1997, comprised of $73.4 billion for mental health services and
$11.9 billion for the treatment of substance abuse. Expenditures for the youth
services industry totaled $60.0 billion in 2000, and continues to grow at a rate
of 9% per annum. The Company believes that the market for behavioral healthcare
and youth services in the United States will continue to grow based on the
following compelling industry demographics:
o At least eleven million youth have a serious diagnosable mental, emotional
or behavioral health disorder.
o Over one million youths enter the juvenile justice system each year and it
is estimated that 60% of these youth have a mental disorder. Approximately
50% to 75% of these youths also have substance abuse issues and nearly 40%
of them have learning disabilities.
o Approximately three million children are reported as abused or neglected
each year, of which 90% of them fail to receive the services they need.
o The general youth population is expected to grow by 21% by the year 2010.
The Company intends to grow through (i) expansion of services, markets
and products, (ii) aggressive response to requests for proposals ("RFP's") and
(iii) selected strategic acquisitions. Through these avenues, management intends
to capitalize on the behavioral healthcare and youth services industry's size,
fragmentation and multiple payor sources.
o EXPANSION OF SERVICES - Management believes significant opportunities
exist to penetrate further the Company's existing geographic markets.
Management will continue to capitalize on the Company's reputation for
delivering high quality and cost-effective solutions, to expand the
breadth of service provided to existing customers, and to attract new
customers. In addition, the Company will continue to develop new programs
which respond to state and local agencies' needs to secure appropriate
placements for special needs youth.
o AGGRESSIVE RESPONSE TO RFPS - The Company is well positioned to expand
into new markets as state and local agencies increasingly seek providers
with the capability to deliver a broader continuum of services to at-risk
youth. Further, management believes this trend will intensify as state and
local governments desire to keep spending in their respective home states
and look to develop local services. Typically, the solicitation of
providers for new and broader service offerings is accomplished by state
agencies through RFPs, a process in which the Company actively competes in
markets management has targeted for growth. Management believes the
Company's history of providing high quality, cost-effective services gives
it a significant competitive advantage in responding to RFPs. The Company
prioritizes its target markets based on the needs of each state, the
diversification of funding sources, state and local legislation, existing
relationships and in-state competition.
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o SELECTED STRATEGIC ACQUISITIONS - The Company intends to pursue strategic
acquisitions of other behavioral healthcare and youth services providers
to penetrate existing markets further and enter new geographic markets.
The behavioral healthcare and youth services industry are highly
fragmented with what the Company estimates to be approximately 15,000
providers. The Company continually reviews acquisition opportunities and
management believes that a number of acquisition opportunities currently
exist at reasonable valuations. Further, management believes it can
enhance the performance of acquired facilities by selectively implementing
the Company's programs to expand services. Management believes that the
Company's current infrastructure is capable of supporting a number of
acquisitions affording the opportunity to spread certain fixed operational
expenses over a broader revenue base.
Competition
The fragmented youth-focused behavioral health care industry is
comprised largely of small providers that operate in relatively limited
geographic areas and provide services to a specific youth population. The
Company competes with both public and private for-profit and not-for-profit
organizations. Competition generally is based upon program quality, range and
price of services provided, operational experience and facility location. When
responding to an RFP, the strength and depth of a provider's relationship with
the various payors plays a significant role in the selection process. The
Company believes that its programs and services compete favorable on the basis
of, among other things, the range and quality of programs offered and the
expertise of its management team in the development and implementation of new
programs.
Sources Of Revenue
The Company receives payments from various sources, including
commercial insurance carriers (which provide coverage to insured individuals on
both an indemnity basis and through various managed care plans), state and local
governmental agencies (including state judicial systems), Medicaid and Medicare.
In addition, payments are received directly from individuals, including
co-payments and deductibles related to services covered by these individuals'
benefit plans. The Company also receives payments from school districts either
directly or through management contracts with other entities.
o STATE AND LOCAL GOVERNMENT PAYORS - The Company's facilities are
reimbursed for certain services on a per-diem basis by various state and
local government agencies. The per-diem rate is generally based on the
nature and scope of services provided to residents. In addition, some
government programs pay the Company for access to a certain number of
beds.
o COMMERCIAL INSURANCE PAYORS - The Company's facilities are reimbursed for
certain behavioral healthcare services by health maintenance organizations
("HMO's"), commercial insurance companies and self-insured employers
either on a fee-for-service basis or under contractual arrangements which
include reimbursement on a per-diem, per-diagnosis basis.
For inpatient services, Blue Cross plans reimburse based on charges or
negotiated rates in all areas in which the Company presently operates
facilities, except Alabama and Michigan. In certain states in which the
Company operates, Blue Cross reimbursement is approved through a
rate-setting process and, therefore, Blue Cross may reimburse the Company
at a rate less than billed charges. Under cost-based Blue Cross programs,
such as those in Alabama and Michigan, direct reimbursement to facilities
typically is lower than the facility's charges, and patients are not
responsible for the difference between the amount reimbursed by Blue Cross
and the facility's charges.
Most commercial insurance carriers reimburse their policyholders or
reimburse the Company directly for charges at rates and limits specified
in their policies. Patients generally remain responsible for any amounts
not covered under their insurance policies. Generally, reimbursement for
psychiatric inpatient and chemical dependency care by commercial insurance
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carriers is limited to a maximum number of inpatient days per year or
during the patient's lifetime, or to a maximum dollar amount expended, for
a patient, in a given period.
o MEDICAID - Medicaid is the federal/state health insurance program for
low-income individuals, including welfare recipients. Subject to certain
minimum federal requirements, each state defines the extent and duration
of the services covered by its Medicaid program. Moreover, although there
are certain federal requirements governing the payment levels for Medicaid
services, each state has its own methodology for making payment for
services provided to Medicaid patients. Various state Medicaid programs
cover payment for services provided to individuals covered under the
Medicaid program by the Company.
o MEDICARE - Medicare is the federal health insurance program for the aged
and disabled. Medicare reimburses providers of psychiatric care for
inpatient and outpatient services and providers of long term acute care
services. Medicare reimburses psychiatric hospitals and long term care
hospitals on a reasonable cost basis for inpatient care. Medicare
reimburses providers of hospital outpatient psychiatric services,
including partial hospitalization programs, based on the hospital
outpatient prospective payment system. Medicare reimburses other providers
of outpatient psychiatric services on fee or for service and reasonable
cost basis. Medicare reimbursement is typically less than the Company's
established charges for services provided to Medicare patients. Patients
are not responsible for the difference between the reimbursed amount and
the established charges other than for applicable non-covered charges,
coinsurance and deductibles.
In 1983, Congress changed the Medicare law applicable to Medicare
reimbursement for most inpatient hospital services from a retrospectively
determined reasonable cost system to a prospectively determined
diagnosis-related grouping ("DRG") system. Facilities providing
psychiatric care are currently exempt from the DRG reimbursement system.
More recently, Congress has required, and the Centers for Medicare and
Medicaid Services ("CMS"), formerly known as the Health Care Financing
Administration, the agency that administers Medicare, has implemented a
similar prospective payment system for most hospital outpatient services,
including partial hospitalization programs. Pursuant to the Balanced
Budget Refinement Act of 1999, CMS is required to implement prospective
payment systems for both psychiatric hospitals and long term care
hospitals. These new payment systems are currently required to be
implemented by October 2002. CMS has recently issued proposed regulations
for a long term care hospital prospective payment system, but has not yet
issued proposed rules for a prospective payment system for psychiatric
hospitals. It is likely that these new payment systems will impact the
Company's revenues; however, the significance and the positive or negative
nature of such impact is not yet clear as proposed rules were only
recently issued for long term care hospitals and no proposed rules have
yet been issued for psychiatric hospitals.
Medicare reimbursement to exempt psychiatric and chemical dependency
facilities is currently subject to the payment limitations and incentives
established in the Tax Equity and Fiscal Responsibility Act of 1982
("TEFRA"). These facilities are currently paid on the basis of each
facility's historical costs trended forward, with a limit placed on the
rate of increase in per case reimbursable costs. Facilities with costs
less than their respective target rate per discharge are currently
reimbursed based on allowable Medicare costs, plus an additional incentive
payment. Medicare reimbursement under TEFRA to facilities exempt from
prospective payment, such as the Company's facilities, have been adversely
affected by the Balanced Budget Act of 1997 (the "BBA"), passed by
Congress in July 1997. Under certain provisions of the BBA, effective July
1, 1998 for the Company, target rates per discharge were capped, the
formula by which incentive payments are calculated was modified to reduce
these payments and allowable Medicare capital costs were reduced by 15%.
However, subsequent to the passage of the BBA, Congress has passed the
Balanced Budget Refinement Act of 1999 and the Benefit Improvement and
Protection Act of 2000 (collectively the "New Acts"). Under the New Acts,
the amount of incentive payments was increased to 3% effective for cost
reporting periods beginning on or after October 1, 2001.
Regulation
As a behavioral healthcare provider, the Company is subject to
extensive and frequently changing government regulations from a variety of
federal, state and local authorities. These regulations are primarily concerned
with licensure, conduct of operations, reimbursement, financial solvency,
standards of medical care, the dispensing of drugs, patient rights (including
the confidentiality of medical records) and the direct employment of
psychiatrists, psychologists, and other licensed professionals. Regulatory
activities affect the Company's business directly by controlling its operations,
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restricting licensure of the business entity or by controlling the reimbursement
for services provided, and indirectly by regulating its customers. In certain
cases, more than one regulatory agency may have authority over the activities of
the Company. State licensing laws and other regulations are subject to amendment
and to interpretation by regulatory agencies with broad discretionary powers.
Any new regulations or licensing requirements, or amendments or interpretations
of existing regulations or requirements, could require the Company to modify its
operations materially in order to comply with applicable regulatory requirements
and may have a material adverse effect on the Company's business, financial
condition or results of operations.
Operators of residential treatment programs for juveniles are typically
expected to provide education programs and, in some instances, healthcare
services. As providers of such services, the Company is required to comply with
applicable state and local regulations. In addition, some programs require
accreditation from the Joint Commission on Accreditation of Healthcare
Organizations, the Commission on Accreditation of Rehabilitation Facilities or
the American Corrections Association.
Federal law contains a number of provisions designed to ensure that
services rendered by providers of healthcare services to Medicare and Medicaid
patients are medically necessary, meet professionally recognized standards and
are billed properly. These provisions include a requirement that admissions of
Medicare and Medicaid patients to a facility must be reviewed in a timely manner
to determine the medical necessity of the admissions. In addition, the Peer
Review Improvement Act of 1982 ("Peer Review Act") provides that a facility may
be required by the federal government to reimburse the government for the cost
of Medicare-paid services determined by a peer review organization to have been
medically unnecessary. Each of the Company's facilities has developed and
implemented a quality assurance program and implemented procedures for
utilization review and retrospective patient care evaluation to meet its
obligations under the Peer Review Act.
The Social Security Act imposes civil sanctions and criminal penalties
upon persons who make or receive kickbacks, bribes or rebates in connection with
federally-funded healthcare programs. The Social Security Act also provides for
exclusion from the Medicare and Medicaid programs for violations of the
anti-kickback rules. The anti-kickback rules prohibit providers and others from
soliciting, offering, receiving or paying, directly or indirectly, overtly or
covertly, any remuneration in return for either making a referral for a
federally-funded healthcare service or item or ordering any such covered service
or item. In order to provide guidance with respect to the anti-kickback rules,
the Office of the Inspector General of the U.S. Department of Health and Human
Service has issued regulations outlining certain "safe harbor" practices which,
although potentially capable of including prohibited referrals, would not be
prohibited if all applicable requirements were met. A relationship which fails
to satisfy a safe harbor is not necessarily illegal, but could be scrutinized on
a case-by-case basis. Since the anti-kickback rules have been broadly
interpreted, they could limit the manner in which the Company conducts its
business. The Company believes that it currently complies with the anti-kickback
rules in planning its activities, and believes that its activities, even if not
within a safe harbor, do not violate the anti-kickback rules. However, there can
be no assurance that (i) government enforcement agencies will not assert that
certain of these arrangements are in violation of the illegal remuneration
statute, (ii) the statute will ultimately be interpreted by the courts in a
manner inconsistent with the Company's practices or (iii) the federal government
or other states in which the Company operates will not enact similar or more
restrictive legislation or restrictions that could, under certain circumstances,
impact the Company's operations.
Under another federal provision, known as the "Stark" law or
"self-referral" prohibition, physicians who have an investment or compensation
relationship with an entity furnishing certain designated health services
(including inpatient and outpatient hospital services) may not, subject to
certain exceptions, refer Medicare patients for designated health services to
that entity. Similarly, facilities may not bill Medicare or any other party for
services furnished pursuant to a prohibited referral. Additionally, law
enforcement authorities, including the Office of the Inspector General, the
courts and Congress are increasing scrutiny of arrangements between healthcare
providers and potential referral sources to ensure that the arrangements are not
designed as a mechanism to exchange remuneration for patient care referrals and
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opportunities. Investigators also have demonstrated a willingness to look behind
the formalities of a business transaction to determine the underlying purposes
of payments between healthcare providers and potential referral sources.
Violation of these provisions may result in disallowance of Medicare claims for
the affected services, as well as the imposition of civil monetary penalties and
program exclusion. In addition, the Stark law prevents states from receiving
federal Medicaid matching payments for designated health services that are
provided as a result of a prohibited referral. Often as a result of this
requirement, a number of states have enacted prohibitions similar to the Stark
law covering referrals of non-Medicare business. The following states in which
the Company conducts business have passed legislation which, under certain
circumstances, either may prohibit the referral of private pay patients to
healthcare entities in which the physician has an ownership or investment
interest, or with which the physician has a compensation arrangement, or may
require the disclosure of such interest to the patient: Florida, Michigan,
Missouri, Nevada, North Carolina, South Carolina and Utah. All of these rules
are very restrictive, prohibit submission of claims for payment related to
prohibited referrals and provide for the imposition of civil monetary penalties
and criminal prosecution. The Company is unable to predict how these laws may be
applied in the future, or whether the federal government or states in which the
Company operates will enact more restrictive legislation or restrictions that
could under certain circumstances impact the Company's operations.
In addition to the regulations set forth above, the Health Insurance
Portability and Accountability Act of 1996 broadened the scope of the fraud and
abuse laws by adding several criminal provisions for healthcare fraud offenses
that apply to all health benefit programs. This act also created new enforcement
mechanisms to combat fraud and abuse including the Medicare Integrity Program
and an incentive program under which individuals can receive up to $1,000 for
providing information on Medicare fraud and abuse that leads to the recovery of
at least $100 of Medicare funds. In addition, federal enforcement officials now
have the ability to exclude from Medicare and Medicaid any investors, officers
and managing employees associated with business entities that have committed
healthcare fraud. It also establishes a new violation for the payment of
inducements to Medicare and Medicaid beneficiaries in order to influence those
beneficiaries to order or receive services from a particular provider or
practitioner.
In certain states, the employment of psychiatrists, psychologists and
certain other behavioral healthcare professionals by business corporations, such
as the Company, is a permissible practice. However, other states have
legislation or regulations or have interpreted existing medical practice
licensing laws to restrict business corporations from providing behavioral
healthcare services or from the direct employment of psychiatrists and, in a few
states, psychologists and other behavioral healthcare professionals. Management
believes that the Company is in compliance with these laws.
State certificate of need or similar statutes generally provide that
prior to the construction or acquisition of new beds or facilities or the
introduction of a new service, a state agency must determine that a need exists
for those beds, facilities or services. In most cases, certificate of need or
similar statutes do not restrict the ability of the Company or its competitors
from offering new or expanded outpatient services. Except for Utah, all of the
states in which the Company operates facilities have adopted certificate of need
or similar statutes.
The Company is also subject to state and federal laws that govern the
submission of claims for reimbursement. These laws generally prohibit an
individual or entity from knowingly and willfully presenting a claim (or causing
a claim to be presented) for payment from Medicare, Medicaid or other third
party payors that is false or fraudulent. The standard for "knowing and willful"
often includes conduct that amounts to a reckless disregard for whether accurate
information is presented by claims processors. Penalties under these statutes
include substantial civil and criminal fines, exclusion from the Medicare
program, and imprisonment. One of the most prominent of these laws is the
Federal False Claims Act, which may be enforced by the federal government
directly, or by a qui tam plaintiff on the government's behalf. Under the False
Claims Act, both the government and the private plaintiff, if successful, are
permitted to recover substantial monetary penalties, as well as an amount equal
to three times actual damages. In some cases, qui tam plaintiffs and the federal
government have taken the position that violations of the anti-kickback statute
and the Stark Law should also be prosecuted as violations of the federal False
Claims Act. Management believes that the Company has procedures in place to
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ensure the accurate completion of claims forms and requests for payment.
However, the laws and regulations defining proper Medicare or Medicaid billing
are frequently unclear and have not been subjected to extensive judicial or
agency interpretation. Billing errors can occur despite the Company's best
efforts to prevent or correct them, and we cannot assure you that the government
will regard such errors as inadvertent and not in violation of the False Claims
Act or related statutes. The Company is not currently aware of any actions
against RYS under the False Claims Act.
There are currently numerous legislative and regulatory initiatives at
the state and federal levels addressing patient privacy concerns. In particular,
on December 28, 2000, the Department of Health and Human Services ("DHHS")
released final health privacy regulations implementing portions of the
Administrative Simplification Provisions of the Health Insurance Portability and
Accountability Act of 1996. These final health privacy regulations have an
effective date of April 14, 2001, and a compliance date of April 14, 2003. As of
March 2002, proposed modifications to these rules were issued and these rules
remain subject to further changes pending finalization of these proposed
modifications. Subject to limited exceptions, these regulations restrict how
healthcare providers use and disclose medical records and other individually
identifiable health information, whether communicated electronically, on paper
or orally. The regulations also provide patients with significant new rights
related to understanding and controlling how their health information is used
and disclosed.
In addition, the Administrative Simplification Provisions require DHHS
to adopt standards to protect the security of health-related information. DHHS
proposed security regulations on August 12, 1998. As proposed, those security
regulations would require healthcare providers to implement organizational and
technical practices to protect the security of electronically maintained or
transmitted health-related information. Further, as required by the
Administrative Simplification Provisions, DHHS has adopted final regulations
establishing electronic data transmission standards that all healthcare
providers must use when submitting or receiving certain healthcare transactions
electronically. Compliance with these regulations is required by October 16,
2002. These statutes vary by state and could impose additional penalties.
Although we cannot predict the total financial or other impact of these
regulations on our business, compliance with these regulations could require us
to spend substantial sums, including but not limited to purchasing new computer
systems, which could negatively impact our financial results. Additionally, if
we fail to comply with these regulations, we could suffer civil penalties up to
$25,000 per calendar year for each violation and criminal penalties with fines
of up to $250,000 per violation. Our facilities will continue to remain subject
to any state laws that are more restrictive than the privacy regulations issued
under the Administrative Simplification Provisions. These state laws could
impose additional penalties for non-compliance.
The Company believes that it is currently in compliance in all material
respects with applicable current statutes and regulations governing its
business. The Company monitors its compliance with applicable statutes and
regulations and works with regulators concerning various compliance issues that
arise from time to time. Notwithstanding the foregoing, the regulatory approach
in the at-risk youth industry is extensive and evolving and there can be no
assurance that a regulatory agency will not take the position, under existing or
future statutes or regulations, or as a result of a change in the manner in
which existing statutes or regulations are or may be interpreted or applied,
that the conduct of all or a portion of the Company's operation within a given
jurisdiction is or will be subject to further licensure and regulation.
Expansion of the Company's businesses to cover additional geographic areas or to
different types of products or customers could also subject it to additional
licensure and regulatory requirements.
Insurance
The Company maintains self-insured retentions related to its
professional and general liability insurance program. The Company's operations
are insured for professional liability on a claims-made basis and for general
liability on an occurrence basis. The Company records the liability for
uninsured professional and general liability losses related to asserted and
unasserted claims arising from reported and unreported incidents based on
independent valuations which consider claim development factors, the specific
nature of the facts and circumstances giving rise to each reported incident and
the Company's history with respect to similar claims. The development factors
are based on a blending of the Company's actual experience with industry
standards.
9
Employees
As of December 31, 2001, the Company employed approximately 2,347
full-time and 184 part-time employees, including a corporate headquarters staff
of approximately 24 full-time employees. None of the Company's employees are
covered by collective bargaining agreements. The Company considers its
relationship with its employees to be good.
ITEM 2. PROPERTIES.
The following table provides information concerning the Company's
properties as of December 31, 2001:
<TABLE>
<CAPTION>
DATE OPENED NATURE OF
FACILITY (3) OR ACQUIRED OCCUPANCY
------------------------------------- ------------------------ ----------------
<S> <C> <C>
Riverdale Country School
Palm Bay, FL.................... August 2001 Leased
Bessemer II
Bessemer, AL.................... September 2000 Owned
Institute of PsychoSocial Treatment
Rio Piedras, PR................. September 2000 Leased
Manatee Palms Youth Services
Bradenton, FL................... August 2000 Owned
Manatee Adolescent Treatment Center
Bradenton, FL................... August 2000 Owned
Kingsley Center
Arcadia, FL(4).................. August 2000 Right to Occupy
Youth and Family Counseling Center
Palm Bay, FL.................... July 2000 Leased
Benchmark Pearl City
Pearl City, HI(4)............... June 2000 Leased
Southern Glades Youth Camp
Florida City, FL(4)............. April 2000 Right to Occupy
Everglades Youth Development Center
Florida City, FL(4)............. April 2000 Right to Occupy
Florida Institute for Girls
West Palm Beach, FL(4).......... March 2000 Right to Occupy
Okaloosa Youth Academy
Crestview, FL(4)................ October 1999 Right to Occupy
Bayamon Detention Center
Bayamon, PR(4).................. September 1999 Right to Occupy
Briarwood II
Las Vegas, NV.................... June 1999 Owned
Pelion
Pelion, SC....................... May 1999 Owned
Bessemer
Bessemer, AL..................... April 1999 Owned
Coastal Harbor
Conway, SC....................... October 1998 Owned
Heartland House West
Nevada, MO....................... June 1998 Owned
Dothan Facility
Dothan, Alabama.................. April 1998 Owned
Heartland House
Nevada, MO....................... August 1997 Owned
Riverstone
Longs, SC........................ July 1997 Leased
Gulf Coast Treatment Center
Fort Walton Beach, FL............ December 1996 Owned
Higdon Hill
Birmingham, AL................... July 1996 Owned
</TABLE>
10
<TABLE>
<CAPTION>
DATE OPENED NATURE OF
FACILITY (3) OR ACQUIRED OCCUPANCY
------------------------------------- ------------------------ ----------------
<S> <C> <C>
Briarwood I
Reno, NV......................... July 1995 Leased
Mission Vista Facility
San Antonio, TX(2)............... November 1991 Leased
Benchmark Regional Facility
Woods Cross, UT.................. August 1986 Owned
Heartland Facility
Nevada, MO....................... April 1984 Owned
Hill Crest Facility
Birmingham, AL................... January 1984 Owned
Brynn Marr Facility
Jacksonville, NC................. December 1983 Owned
Havenwyck Facility
Auburn Hills, MI(1).............. November 1983 Leased
</TABLE>
(1) In September 1998, the Company sold and immediately leased back the land,
building and fixed equipment associated with this facility. The lease has
an initial term of approximately 12 years.
(2) In April 1995, the Company sold and immediately leased back the land,
building and fixed equipment associated with this facility. The lease has
an initial term of 15 years and three successive renewal options of five
years each.
(3) Excludes the Company's Meadowlake Facility which was leased to an
independent healthcare provider in August 1997, the schools managed by the
Company through management contracts and various office leases with
remaining lease terms ranging from one to five years. The Company has
pledged substantially all of its owned real property as collateral for the
Senior Credit Facility.
(4) The Company has the right to occupy these facilities rent free for the
duration of the Company's contract to provide services.
Statement of Financial Accounting Standards (SFAS) No. 121 addresses
the accounting for the impairment of long-lived assets and long-lived assets to
be disposed of, certain identifiable intangible assets and goodwill relating to
those assets, and provides guidance for recognizing and measuring impairment
losses. The statement requires that the carrying amount of impaired assets be
reduced to fair value.
As required by SFAS No. 121, the Company periodically reviews its
long-lived assets (land, buildings, fixed equipment, cost in excess of net asset
value of purchased businesses and other intangible assets) to determine if the
carrying value of these assets is recoverable, based on the future cash flows
expected from the assets. Based on this review, the Company determined that the
carrying value of certain long-lived assets were impaired (within the meaning of
the Statement) at June 30, 1998. The amount of the impairment, calculated as (i)
the excess of carrying value of the long-lived assets over the discounted future
cash flows expected from the assets, or (ii) the excess of the carrying value of
the long-lived assets over the selling values, totaled approximately $18.3
million at June 30, 1998. See "Item 8. Financial Statements and Supplementary
Data". During the quarter ended December 31, 2001, the Company determined that
the carrying value of one of its therapeutic living facilities was impaired
within the meaning of SFAS No. 121 and recorded an asset impairment charge of
$0.1 million. The asset impairment charge was determined based on the difference
between the carrying value of the asset and expected net proceeds from the sale
of the asset.
The Company leases office space for its corporate headquarters in Coral
Gables, Florida, (through December 31, 2005) and various regional offices. These
leases have terms which generally range from three to five years, with renewal
options.
ITEM 3. LEGAL PROCEEDINGS.
The Company is party to certain claims, suits and complaints, whether
arising from the acts or omissions of its employees, providers or others, which
arise in the ordinary course of business. The Company has established reserves
at December 31, 2001 for the estimated amount, which might be recovered from the
Company as a result of all outstanding legal proceedings. In the opinion of
11
management, the ultimate resolution of these pending legal proceedings is not
expected to have a material adverse effect on the Company's financial position,
results of operations or liquidity.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
Not applicable.
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS.
The Company's Common Stock is traded in the over-the-counter market and
is quoted on the NASDAQ SmallCap Market under the symbol RYOU. On March 12,
2002, there were 283 holders of record of the Company's Common Stock. No cash
dividends have been declared on the Common Stock since the Company was
organized.
On January 25, 2000 and June 19, 2000, the Company entered into
subordinated note and warrant purchase agreements which involved the issuance to
two unrelated financial institutions of warrants to purchase up to 475,000
shares of the Company's Common Stock at $1.50 per share. These warrants are
exercisable on or before January 25, 2010 and June 19, 2010, respectively, and
contain anti-dilution provisions. On August 27, 2001, one of the financial
institutions exercised 475,000 warrants, resulting in the purchase of 294,597
shares of common stock, utilizing the cashless exercise provision contained in
the warrant purchase agreement. The warrants and the stock issued thereunder
were issued by the Company in reliance upon Section 4(2) of the Securities Act
of 1933 as a transaction not involving a public offering.
The Company changed its fiscal year end from June 30 to December 31,
effective December 1998.
On January 13, 1999, the Company's Board of Directors approved a
one-for-three reverse stock split of the Company's Common Stock which became
effective March 15, 1999. As a result, all references herein to common stock,
per share amounts and stock options and warrants data have been restated to give
retroactive recognition to such reverse stock split. Effective October 13, 2000,
the Company's Common Stock was delisted from the NASDAQ National Market System
and commenced trading on the NASDAQ Smallcap Market.
The following table sets forth the range of high and low closing sales
prices per share of the Company's Common Stock for each of the quarters during
the years ended December 31, 2001 and 2000, as reported on the NASDAQ National
Market System and NASDAQ SmallCap Market:
HIGH LOW
--------------- ---------------
Year ended December 31, 2001
First Quarter......................... $1.03 $0.69
Second Quarter........................ 2.70 0.84
Third Quarter......................... 5.05 1.95
Fourth Quarter........................ 4.50 2.76
Year ended December 31, 2000
First Quarter......................... $2.50 $1.44
Second Quarter........................ 2.63 1.25
Third Quarter......................... 1.88 1.13
Fourth Quarter........................ 1.91 0.38
On March 12, 2002, the closing sales price of the Company's Common
Stock was $3.77 per share.
12
ITEM 6. SELECTED FINANCIAL DATA.
The following table sets forth selected consolidated financial
information for the periods shown and is qualified by reference to, and should
be read in conjunction with, the Consolidated Financial Statements and Notes
thereto and "Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations" appearing elsewhere in this Report on Form 10-K. The
selected financial data presented below for the six months ended December 31,
1997 was compiled from unaudited financial statements by management of the
Company on the same basis as the audited financial statements appearing
elsewhere in this Report on Form 10-K and, in the opinion of management of the
Company, include all adjustments necessary to present fairly the information set
forth therein.
<TABLE>
<CAPTION>
YEAR ENDED SIX MONTHS ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31, JUNE 30,
------------------------------------ ---------------------- -----------------------
2001 2000 1999 1998 1997 1998 1997
----------- ----------- ----------- ---------- ---------- ----------- -----------
(in thousands, except per share data)
<S> <C> <C> <C> <C> <C> <C> <C>
Statement of Operations Data:
Total revenues...................... $134,416 $108,360 $81,474 $47,892 $77,542 $155,211 $134,919
Salaries, wages and benefits....... 83,563 68,353 49,283 28,313 39,604 82,740 67,793
Other operating expenses............ 37,715 28,310 25,024 17,470 28,712 64,255 46,826
Provision for doubtful accounts..... 2,911 2,817 1,896 1,549 2,193 6,649 5,688
Depreciation and amortization....... 2,430 2,369 2,366 1,627 3,281 5,714 5,473
Restructuring charges............... -- -- -- -- -- 2,349 --
Asset impairment charges............ 124 -- -- -- -- 18,316 --
----------- ----------- ----------- ---------- ---------- ----------- -----------
126,743 101,849 78,569 48,959 73,790 180,023 125,780
----------- ----------- ----------- ---------- ---------- ----------- -----------
Income (loss) from operations....... 7,673 6,511 2,905 (1,067) 3,752 (24,812) 9,139
Other income........................ -- -- 1,548 8,059 197 256 2,050
Gain on sale of assets.............. -- -- -- 2,039 -- -- --
Interest and other financing charges (3,299) (2,706) (1,268) (1,655) (2,791) (7,230) (5,962)
Losses related to asset sales and
closed businesses................ (130) (705) -- (947) -- (12,483) --
----------- ----------- ----------- ---------- ---------- ----------- -----------
(3,429) (3,411) 280 7,496 (2,594) (19,457) (3,912)
----------- ----------- ----------- ---------- ---------- ----------- -----------
Income (loss) before income taxes
and extraordinary item........... 4,244 3,100 3,185 6,429 1,158 (44,269) 5,227
Provision for income taxes.......... 778 248 68 1,591 -- 9,985 1,815
----------- ----------- ----------- ---------- ---------- ----------- -----------
Income (loss) before extraordinary
item............................. 3,466 2,852 3,117 4,838 1,158 (54,254) 3,412
Extraordinary item:
Loss from early extinguishment of
debt, net of income
tax benefit................... -- -- -- (2,811) (3,574) (4,322) --
----------- ----------- ----------- ---------- ---------- ----------- -----------
Net income (loss)................... $3,466 $2,852 $3,117 $2,027 $(2,416) $(58,576) $3,412
=========== =========== =========== ========== ========== =========== ===========
Income (loss) per common share:
Basic:
Before extraordinary item.... $.38 $.32 $.35 $.93 $.21 $(15.36) $1.09
Extraordinary item:
Loss from early
extinguishment of debt... -- -- -- (.63) (1.00) (1.20) --
----------- ----------- ----------- ---------- ---------- ----------- -----------
$.38 $.32 $.35 $.30 $(.79) $(16.56) $1.09
=========== =========== =========== ========== ========== =========== ===========
Diluted:
Before extraordinary item.... $.34 $.32 $.33 $.70 $.18 $(15.36) $1.00
Extraordinary item:
Loss from early
extinguishment of debt.. -- -- -- (.47) (.86) (1.20) --
----------- ----------- ----------- ---------- ---------- ----------- -----------
$.34 $.32 $.33 $.23 $(.68) $(16.56) $1.00
=========== =========== =========== ========== ========== =========== ===========
Weighted average number of common
shares outstanding:
Basic............................ 9,046 8,913 8,890 4,487 3,574 3,595 2,801
=========== =========== =========== ========== ========== =========== ===========
Diluted.......................... 10,340 8,954 9,538 5,971 4,139 3,595 3,409
=========== =========== =========== ========== ========== =========== ===========
</TABLE>
13
<TABLE>
<CAPTION>
DECEMBER 31, JUNE 30,
------------------------------------------------ -----------------------
2001 2000 1999 1998 1998 1997
----------- ----------- ----------- ---------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
Balance Sheet Data:
Working capital.......... $13,099 $8,328 $1,162 $(1,575) $2,401 11,715
Total assets............. 69,011 69,598 56,626 60,628 91,042 147,135
Long-term debt........... 23,506 24,708 11,561 7,332 14,398 47,254
Stockholders' equity..... 24,325 20,833 17,094 13,914 2,249 60,937
</TABLE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
RISK FACTORS
Risk Associated with Puerto Rico Market
The Company has experienced delays in the collection of receivables
from certain contracts in Puerto Rico. As of December 31, 2001, the Company had
approximately $4.4 million in outstanding receivables due from its contracts in
Puerto Rico, of which $1.1 million was over 120 days past due. Reserves against
outstanding Puerto Rico receivables were $1.2 million as of December 31, 2001.
As of March 15, 2002, the Company had collected approximately $1.8 million of
the December 31, 2001 outstanding receivable balance, of which the majority
related to receivables under 120 days past due. The Company and its advisors are
in active discussions with the Government of Puerto Rico with respect to the
payment of the outstanding receivables. The Company believes that it has fully
performed its obligations under the Puerto Rico contracts and is entitled to
receive payment of these receivables in full. Although the Company has been
advised by its legal counsel that the receivables due on the Puerto Rico
contracts are collectable, there can be no assurances that future transactions
or events will not result in the need for additional reserves for these accounts
receivable. If the Company were to record additional reserves, it would
adversely affect earnings in the period in which the reserves are recorded.
The Government of Puerto Rico has informed the Company that, as a
result of budgetary constraints, it will cancel various contracts with private
sector providers. In connection therewith, on December 15, 2001, the Company's
contract to provide mental health and substance abuse services to juveniles in
Puerto Rico was cancelled. In addition, the Company is in discussions with the
Government of Puerto Rico with respect to the cancellation of its contract to
provide a 20-bed specialized mental health treatment program for youth referred
by the Mental Health and Anti-Addiction Services Administration of Puerto Rico
prior to June 1, 2002. Total revenues and operating income from both of these
contracts during the year ended December 31, 2001 were $3.9 million and $0.1
million, respectively.
Risks Associated with Reimbursement Arrangements
Certain of the Company's facilities are reimbursed for various
behavioral healthcare services on a per diem, per-diagnosis basis. Accordingly,
the Company may be reimbursed for services at rates less than billed charges. To
the extent that the patients covered by such arrangements require more frequent
or extensive care than is anticipated, the Company's operating margins may be
reduced and, in certain cases, the revenue derived from such arrangements may be
insufficient to cover the costs of the services provided. In either event, the
Company's business, prospects, financial condition and results of operations may
be materially adversely affected. See "Business-Sources of Revenue."
The Company renders certain services on a fee-for-service basis and
typically bills various payors, such as governmental programs (e.g. Medicare and
Medicaid) and private insurance plans for services. The Company derived 32% of
its revenues in 2001 from payments made by Medicare and Medicaid. The Medicare
and Medicaid programs are subject to statutory and regulatory changes,
retroactive and prospective rate adjustments, administrative rulings and funding
restrictions, any of which could have the effect of limiting or reducing
reimbursement levels. Also, there can be no assurance that payments under
governmental programs or from other payors will remain at present levels.
Additionally, funds received under all health care reimbursement programs are
subject to audit with respect to the proper billing for physician services and,
accordingly, repayments and retroactive adjustments of revenue from these
programs could occur. Also, the Company's contract with certain government
payors provide for termination in the event the government does not have
adequate funding to support the program.
The Company records amounts due to or from third-party reimbursement
sources based on its best estimates of amounts to be ultimately received or paid
under cost reports filed with appropriate intermediaries. The final
14
determination of amounts earned under reimbursement programs is subject to
review and audit by these intermediaries. Differences between amounts recorded
as estimated settlements and the audited amounts are reflected as adjustments to
the Company's revenues in the period in which the final determination is made.
Risks of Financial Leverage
The Company's total indebtedness accounted for approximately 54% of its
total capitalization as of December 31, 2001. While the Company believes it will
be able to service its debt, there can be no assurance to that effect. The
degree to which the Company is leveraged could affect its ability to service its
indebtedness, make capital expenditures, respond to market conditions, take
advantage of certain business opportunities or obtain additional financing.
Unexpected declines in the Company's future business, or the inability to obtain
additional financing on terms acceptable to the Company, if required, could
impair the Company's ability to meet its debt service obligations or fund
acquisitions and therefore could have material adverse effect on the Company's
business and future prospects.
Dependence on Major Customer
For the year ended December 31, 2001, the Company generated
approximately 17% of its revenues from the Florida Department of Juvenile
Justice. The loss of our contracts with the Florida Department of Juvenile
Justice or significant reductions in reimbursement rates under our contracts
with the Florida Department of Juvenile Justice could have a material adverse
effect on the Company.
Risks Related to Government Regulation
The Company is subject to extensive and frequently changing government
regulations. See "Business--Regulation."
Risks Associated with Federal and State Regulation of the Privacy,
Security and Transmission of Health Information
The privacy, security and transmission of health information is subject
to federal and state laws and regulations, including The Health Care Insurance
Portability and Accountability Act (HIPAA). Some of the Company's operations
will be subject to HIPAA and its regulations. Because HIPAA's privacy
regulations do not generally supersede or preempt state laws, the Company will
have to comply both with the federal privacy regulations under HIPAA and with
any state privacy laws that are more stringent than HIPAA or are not preempted
by HIPAA. The Company's operations that are subject to HIPAA must be in
compliance with HIPAA's privacy regulations by April 2003. Another set of
regulations issued under HIPAA establish uniform standards relating to data
reporting, formatting, and coding that covered entities must use when conducting
certain transactions involving health information. The compliance date for these
regulations is October 2002; however, the Company may apply for an extension to
October 2003 by submitting a compliance extension plan to the Department of
Health and Human Services before October 16, 2002. A third set of regulations,
which have not yet been finalized, will establish minimum security requirements
to protect health information. The HIPAA regulations could result in significant
financial obligations for the Company and will pose increased regulatory risk.
The privacy regulations could limit the Company's use and disclosure of patient
health information and could impede the implementation of some of the Company's
business strategies. At this time, the Company is unable to determine the full
impact of the HIPAA regulations on the Company's business and the Company's
business strategies or the total cost of complying with the regulations, but the
impact and cost could be significant. Many states have enacted or indicated an
intention to enact, privacy laws similar to HIPAA. These state laws could also
restrict the Company's operations, impede the implementation of the Company's
business strategies or cause the Company to incur significant compliance costs.
In addition, failure to comply with federal or state privacy laws and
regulations could subject the Company to civil or criminal penalties.
15
Risks Related to Insurance Coverage
The Company carries general and professional liability, comprehensive
property damage, malpractice, workers' compensation, and other insurance
coverages that management considers adequate for the protection of its assets
and operations. There can be no assurance, however, that the coverage limits of
such policies will be adequate to cover losses and expenses for lawsuits brought
or which may be brought against the Company. A successful claim against the
Company in excess of our insurance coverage could have a material adverse effect
on the Company.
Control by Existing Shareholder
As of December 31, 2001, Paul J. Ramsay, our Chairman of the Board, and
entities affiliated with Mr. Ramsay, owned approximately 58% of our outstanding
common stock. Based on Mr. Ramsay's stock ownership, and the stock ownership of
his affiliates, Mr. Ramsay has the ability to control most corporate actions
requiring shareholder approval, including the election of directors.
Stockholder Rights Plan
The Company's Board of Directors has adopted a Stockholder Rights Plan,
under which the Company distributed a dividend of one common share purchase
price right for each outstanding share of the Company's Common Stock (calculated
as if all outstanding shares of Series C Preferred Stock were converted into
shares of Common Stock). Each right becomes exercisable upon the occurrence of
certain events for a number of shares of the Company's Common Stock having a
market price totaling $72 (subject to certain anti-dilution adjustments which
may occur in the future). The rights currently are not exercisable and will be
exercisable only if a new person acquires 20% or more (30% or more in the case
of certain persons, including investment companies and investment advisors) of
the Company's Common Stock or announces a tender offer resulting in ownership of
20% or more of the Company's Common Stock. The rights, which expire on August
14, 2005, are redeemable in whole or in part at the Company's option at any time
before a 20% or greater position has been acquired, for a price of $.03 per
right. These rights may have the effect of discouraging a third party from
making an acquisition proposal for the Company and may thereby inhibit a change
in control. For example, such provisions may deter tender offers for shares of
common stock, which may be attractive to shareholders, or deter purchases of
large blocks of common stock, thereby limiting the opportunity for shareholders
to receive a premium for their shares of common stock or exchangeable shares
over the then-prevailing market prices.
Potential Delisting of Shares from NASDAQ SmallCap Market
As of October 13, 2000, the Company's common stock was delisted from
the NASDAQ National Market System and commenced trading on the NASDAQ SmallCap
Market. If the Company's common stock fails to achieve a minimum bid price of
$1.00 during any 30 consecutive business day period, the Company could be
notified by the NASDAQ SmallCap Market of potential delisting of its shares. If
such notification is provided, the Company's common stock must trade at a
minimum bid price of $1.00 for a minimum period of 10 consecutive business days
during a 90 calendar day period. Otherwise, the Company's common stock could be
delisted from the NASDAQ SmallCap Market.
* * * * * * *
The Company cautions that the risk factors described above could cause
actual results or outcomes to differ materially from those expressed in any
forward-looking statements of the Company made by or on behalf of the Company.
Any forward-looking statement speaks only as of the date on which such statement
is made, and the Company undertakes no obligation to update any forward-looking
statement or statements to reflect events or circumstances after the date on
which such statement is made or to reflect the occurrences of unanticipated
events. New factors emerge from time to time and it is not possible for
management to predict all such factors. Further, management cannot assess the
impact of each such factor on the Company's business or the extent to which any
factor, or combination of factors, may cause actual results to differ materially
from those contained in any forward-looking statements.
16
OVERVIEW
The Company is a provider of behavioral health care treatment programs
and services focused on at-risk and special needs youth. The Company offers its
full spectrum of programs and services in ten states and the Commonwealth of
Puerto Rico.
On February 19, 1998, the Company announced a change in strategic
direction in order to focus on providing programs and services for at-risk and
troubled youth. The strategic plan is now focused on repositioning the Company
for growth and strengthening the Company's financial position.
In connection with the change in its strategic direction, during the
fiscal year ended June 30, 1998 and the six months ended December 31, 1998, the
Company sold its behavioral managed care business and sold or closed its
non-strategic inpatient psychiatric hospitals. The remaining business represents
the Company's behavioral health care operations which the Company manages under
its Owned and Management Contract operating segments. During the year ended
December 31, 2001, the Company refined its segment definitions to better reflect
its business operations and management responsibilities. As a result, prior year
information has been reclassified to either the Owned Operations or Management
Contract Operations business segments. Further information regarding each of
these segments, including the required disclosure of certain segment information
is included in Note 8 of the Consolidated Financial Statements.
The Company receives revenues primarily from the delivery of
diversified programs and services to at-risk and troubled youth in residential
and non-residential settings. The Company receives revenues based on per diem
rates, or flat or cost-based rate contracts. In addition, the Company also
receives revenues from management consulting contracts with other entities.
Revenues under the Company's programs are recognized as services are rendered.
Revenues of the Company's programs and services are affected by changes in the
rates the Company charges, changes in reimbursement rates by third-party payors,
the volume of individuals treated and changes in the mix of payors.
The Company records amounts due to or from third-party reimbursement
sources based on its best estimates of amounts to be ultimately received or paid
under cost reports filed with appropriate intermediaries. The final
determination of amounts earned under reimbursement programs is subject to
review and audit by these intermediaries. Differences between amounts recorded
as estimated settlements and the audited amounts are reflected as adjustments to
the Company's revenues in the period in which the final determination is made.
Salaries, wages and benefits include facility and program payrolls and
related taxes, as well as employee benefits, including insurance and workers'
compensation coverage. Employee compensation and benefits also includes general
and administrative payroll and related benefit costs, including salaries and
supplemental compensation of officers.
Other operating expenses include all expenses not otherwise presented
separately in the Company's statements of operations. Significant components of
these expenses at the operating level include items such as food,
pharmaceuticals, utilities, supplies, rent and insurance. Significant components
of these expenses at the administrative level include legal, accounting,
investor relations, marketing, consulting and travel expense.
The Company's quarterly results may fluctuate significantly as a result
of a variety of factors, including the timing of the opening of new programs.
When the Company opens a new program, the program may be unprofitable until the
program's population, and net revenues contributed by the program, approach
intended levels, primarily because the Company staffs its programs in
anticipation of achieving such levels. The Company's quarterly results may also
be impacted by seasonality, as revenues generated from behavioral healthcare
services are seasonal in nature.
17
On August 4, 2000, the Company consummated the acquisition of the
operating assets of Charter Behavioral Health System of Manatee Palms, L.P.
("Manatee Palms System") and the corresponding real estate from Charter
Behavioral Health Systems, LLC and Crescent Real Estate Funding VII, L.P. The
Manatee Palms System consists of two facilities which the Company manages under
its Owned Operations and one managed contract which the Company manages under
its Management Contract Operations. The results of operations of Manatee Palms
are included in the Company's financial statements as of the closing date of the
acquisition.
SIGNIFICANT ACCOUNTING POLICIES
The preparation of the Company's consolidated financial statements in
conformity with accounting principles generally accepted in the United States of
America requires the Company to make estimates and assumptions that affect the
reported amounts of assets and liabilities and disclosure of contingent assets
and liabilities at the date of the financial statements and the reported amounts
of revenues and expenses during the reporting period. The Company's estimates,
judgments and assumptions are continually evaluated based on available
information and experience. Because of the use of estimates inherent in the
financial reporting process, actual results could differ from those estimates.
Certain of the Company's accounting policies require higher degrees of
judgment than others in their application. These include estimating the
allowance for doubtful accounts and impairment of goodwill and other intangible
assets. In addition, Note 1 to the Consolidated Financial Statements includes
further discussion of our significant accounting policies.
Management believes the following critical accounting policies, among
others, affect its more significant judgments and estimates used in the
preparation of its consolidated financial statements.
Allowance for Doubtful Accounts
The Company carries accounts receivables at the amount it deems to be
collectable. Estimates are used in determining the Company's allowance for
doubtful accounts and are based on the Company's historical collection
experience, current trends and credit policy and on a percentage of the
Company's accounts receivables by aging category. In determining these
percentages, the Company looks at historical write-offs and current trends in
the credit quality of the Company's customer base. The Company continually
evaluates the adequacy of its allowance for doubtful accounts. The Company has
experienced delays in the collection of receivables from its contracts in Puerto
Rico. See "Liquidity and Capital Resources."
Revenue Recognition
The Company records its revenues at the time services are provided,
based on estimated reimbursable amounts from Medicare, Medicaid and other
contracted reimbursement programs. Amounts received by the Company for treatment
of individuals covered by such programs, which may be based on the cost of
services provided or predetermined rates, are generally less than the
established billing rates of the Company's facilities. Final determination of
amounts earned under contracted reimbursement programs is subject to review and
audit by the appropriate agencies. Differences between amounts recorded as
estimated settlements and the audited amounts are reflected as adjustments to
revenues in the period the final determination is made.
Self-Insurance Reserves
The Company maintains self-insured retentions for its professional and
general liability insurance program. The Company's operations are insured for
professional liability on a claims-made basis and for general liability on an
occurrence basis. The Company records the liability for uninsured professional
and general liability losses related to asserted and unasserted claims arising
from reported and unreported incidents based on independent valuations which
18
consider various factors, including claim development factors, the specific
nature of the facts and circumstances giving rise to each reported incident and
the Company's history with respect to similar claims. The development factors
are based on a blending of the Company's actual experience with industry
standards.
Goodwill and Intangible Assets
Purchase price accounting requires extensive use of accounting
estimates and judgments to allocate the purchase price to the fair market value
of the assets and liabilities purchased. The cost of acquired companies is
allocated first to their identifiable assets based on estimated fair values.
Costs allocated to the identifiable intangible assets are generally amortized on
a straight-line basis over the remaining estimated useful lives of the assets.
The excess of the purchase price over the fair value of identifiable assets
acquired, net of liabilities assumed, is recorded as goodwill. In our recording
of the purchase of the operating assets of Charter Behavioral Health System of
Manatee Palms in August 2000, management made a determination, based on
accounting estimates and judgments, the fair value of these assets and
liabilities. In connection with this acquisition, the Company recorded cost in
excess of net asset value of $1.9 million, which is being amortized on a
straight-line basis over a term of 20 years.
The Company annually evaluates the carrying amounts of goodwill, as
well as related amortization periods, to determine whether adjustments to these
amounts or useful lives are required based on current events and circumstances.
The evaluation is based on the Company's projection of the undiscounted future
operating cash flows of the acquired operation over the remaining useful lives
of the related goodwill. To the extent such projections indicate future
undiscounted cash flows are not sufficient to recover the carrying amounts of
related goodwill, the underlying assets are written down by charges to expense
so that the carrying amount is equal to the fair value of the asset.
Effective January 1, 2002, the Company adopted Statement of Financial
Accounting Standards No. 142, "Goodwill and Other Intangible Assets" ("SFAS No.
142"), which required non-amortization of goodwill and intangible assets that
have indefinite useful lives and annual tests of impairment of those assets.
SFAS No. 142 also provides specific guidance about how to determine and measure
goodwill and intangible asset impairment, and requires additional disclosure of
information about goodwill and other intangible assets. The Company has not
completed its initial test of existing goodwill and accordingly cannot estimate
the full impact of these rules. However, the goodwill amortization, which
totaled $141,000 for 2001, will no longer be recorded.
RESULTS OF OPERATIONS
OWNED OPERATIONS SEGMENT
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------------------------------------------
2001 2000 1999
--------------------- -------------------- --------------------
<S> <C> <C> <C> <C> <C> <C>
Revenues.......................... $106,140 100.0% $87,506 100.0% $75,840 100.0%
Expenses:
Salaries, wages and benefits.... 62,559 59.0% 51,520 58.8% 42,761 56.4%
Other operating expenses........ 28,463 26.8% 23,323 26.7% 20,684 27.3%
Provision for doubtful accounts. 2,631 2.5% 2,371 2.7% 1,813 2.4%
Depreciation and amortization... 2,156 2.0% 1,744 2.0% 1,683 2.2%
Asset impairment................ 124 0.1% --- --- --- ---
----------- --------- ---------- -------- ---------- ---------
Total operating expenses...... 95,933 90.4% 78,958 90.2% 66,941 88.3%
----------- --------- ---------- -------- ---------- ---------
Income from operations............ $10,207 9.6% $8,548 9.8% $8,899 11.7%
=========== ========= ========== ======== ========== =========
</TABLE>
Year Ended December 31, 2001 Compared to Year Ended December 31, 2000
Revenues increased by 21.3%, or $18.6 million, to $106.1 million in
2001 compared to $87.5 million in 2000. Approximately $6.8 million of the
increase in revenues was a result of the full year effect of the previously
19
mentioned Manatee Palms System acquisition on August 4, 2000. The remaining
increase in revenues of $11.8 million was primarily due to facility expansions
and new programs which increased resident days at the Company's other owned
operation facilities by 11.0% from 274,171 days in 2000 to 304,378 days in 2001.
Salaries, wages and benefits increased from $51.5 or 58.8% in 2000 to
$62.6 or 59.0% in 2001. Salaries, wages and benefits in 2001 did not fluctuate
significantly as a percentage of revenue when compared to 2000.
Other operating expenses increased from $23.3 or 26.7% in 2000 to $28.5
or 26.8% in 2001. Other operating expenses did not fluctuate significantly as a
percentage of revenue when compared to 2000.
During the year 2001, the Company closed one of its therapeutic
community living facilities in South Carolina and recorded an asset impairment
charge of $0.1 million. The asset impairment charge was determined based on the
difference between the carrying value of the asset and the expected net proceeds
from the sale.
Year Ended December 31, 2000 Compared to Year Ended December 31, 1999
Revenues increased by 15.4%, or $11.7 million, to $87.5 million in 2000
compared to $75.8 million in 1999. Approximately $4.5 million of the increase in
revenues was a result of the previously mentioned Manatee Palms System
acquisition on August 4, 2000. The remaining increase in revenues of $7.2
million was primarily due to facility expansions and new programs which
increased resident days at the Company's other owned operation facilities by
18.8% from 230,867 resident days in 2000 to 274,171 resident days in 2001. In
addition, in 2000 the Company recorded $1.0 million revenues from a positive
cost report settlement.
Salaries, wages and benefits increased from $42.8 million or 56.4% in
1999 to $51.5 million or 58.8% in 2000. The increase is primarily a result of
training and related employee expenses associated with new programs and program
expansions at the Company's facilities in Dothan, Alabama and Jacksonville,
North Carolina.
Other operating expenses increased from $20.7 million or 27.3% of
revenues in 2000 to $23.3 million or 26.7% of revenues in 2001. The decrease as
a percentage of revenues is primarily related to the Manatee Palms System
acquisition on August 4, 2000.
The provision for doubtful accounts increased from $1.8 million or 2.4%
of revenues in 2000 to $2.4 million or 2.7% of revenues in 2001. The increase is
primarily a result of reserves recorded by the Company related to financial
difficulties experienced by one of the Company's former referral sources to its
Nevada, Missouri facility.
MANAGEMENT CONTRACT OPERATIONS SEGMENT
The following table states for the period indicated our management
contract operations in dollar and percentage of revenue terms (in thousands):
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------------------------------------------
2001 2000 1999
-------------------- --------------------- ---------------------
<S> <C> <C> <C> <C> <C> <C>
Revenues.......................... $28,276 100.0% $20,854 100.0% $5,634 100.0%
Expenses:
Salaries, wages and benefits.... 18,329 64.8% 14,005 67.2% 3,986 70.8%
Other operating expenses........ 6,161 21.8% 4,736 22.7% 1,613 28.6%
Provision for doubtful accounts. 280 1.0% 446 2.1% 83 1.5%
Depreciation and amortization... 123 0.4% 140 0.7% 177 3.1%
---------- -------- ---------- --------- ----------- ---------
Total operating expenses...... 24,893 88.0% 19,327 92.7% 5,859 104.0%
---------- -------- ---------- --------- ----------- ---------
Income (loss) from operations .... $3,383 12.0% $1,527 7.3% $(225) (4.0%)
========== ======== ========== ========= =========== =========
</TABLE>
20
Year Ended December 31, 2001 Compared to Year Ended December 31, 2000
Revenues increased by 35.6% or $7.4 million, to $28.3 million in 2001
compared to $20.9 million in 2000. The increase in revenues is primarily due to
new contracts awarded to the Company in the Florida and Puerto Rico markets
which became operational in 2000 and 2001. In 2001, revenues were negatively
impacted by $0.7 million in contractual allowance reserves recorded by the
Company related to one of its Puerto Rico contracts.
Salaries, wages and benefits increased from $14.0 million or 67.2% in
2000 to $18.3 million or 64.8% in 2001. The decrease as a percentage of revenue
is primarily attributable to the leveraging of certain personnel costs in the
Florida market as a result of the previously mentioned new contracts in the
Florida market.
Other operating expenses increased from $4.7 million or 22.7% of
revenues in 2000 to $6.2 million or 21.8% of revenue. The decrease as a
percentage of revenue is primarily attributable to the increase in revenues
provided by the previously mentioned new contracts in the Florida market.
Fluctuations in the provision for doubtful accounts relate primarily to
the Company's management contracts in Puerto Rico. During 2001, the Company
recorded approximately $0.3 million in the provision for doubtful accounts
related primarily to its management contracts in Puerto Rico. Including the
aforementioned increase in the contractual allowance reserves, total reserves
for Puerto Rico management contract receivables in 2001 increased by $0.8
million. During 2000, the Company recorded approximately $0.4 million in the
provision for doubtful accounts related primarily to Puerto Rico management
contract receivables.
Year Ended December 31, 2000 Compared to Year Ended December 31, 1999
Revenues increased by 270.1% or $15.2 million to $20.9 million in 2000
compared to $5.6 million in 1999. The increase in revenues is primarily due to
the commencement of operations of several new management contracts in 2000 in
the Florida and Puerto Rico markets. In addition, a full year of operations for
two programs which began in 1999 also contributed to the increase in revenues.
Salaries, wages and benefits increased from $4.0 million or 70.8% in
1999 to $14.0 million or 67.2% in 2000. The decrease as a percentage of revenues
is primarily a result of a decrease in training and related employee expenses
associated with the commencement of operations at the Company's facility in
Bayamon, Puerto Rico in September 1999.
Other operating expenses increased from $1.6 million or 22.8% in 1999
to $4.7 million or 22.7% in 2000. The decrease as a percentage of revenue is
primarily a result of a decrease in start up of other operating expenses
associated with the commencement of operations at the Company's facility in
Bayamon, Puerto Rico in September 1999.
21
CORPORATE AND OTHER
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------------------------------------------
2001 2000 1999
--------------------- --------------------- ---------------------
<S> <C> <C> <C> <C> <C> <C>
Revenues:
Owned operations................. $106,140 $87,506 $75,840
Management contract operations... 28,276 20,854 5,634
----------- ----------- -----------
Total revenues...................... $134,416 100.0% $108,360 100.0% $81,474 100.0%
Expenses:
Salaries, wages and benefits..... 2,675 2.0% 2,828 2.6% 2,536 3.1%
Other operating expenses......... 3,091 2.3% 251 0.2% 2,727 3.3%
Depreciation and amortization.... 151 0.1% 485 0.4% 506 0.6%
Other income..................... -- -- 1,548 1.9%
Interest and other financing
charges....................... 3,299 2.5% 2,706 2.5% 1,268 1.6%
Losses related to asset sales
and closed businesses......... 130 0.1% 705 0.7% --
Provision for income taxes........ 778 0.6% 248 0.2% 68 0.1%
</TABLE>
Year Ended December 31, 2001 Compared to Year Ended December 31, 2000
Salaries, Wages and Benefits
Corporate office salaries, wages and benefits were $2.7 million or 2.0%
of total consolidated revenues in 2001, compared to $2.8 million or 2.6% of
total consolidated revenues for the same period in 2000. During 2001, the
Company restructured its corporate office and eliminated five positions.
Other Operating Expenses
Corporate office other operating expenses were $3.1 million or 2.3% of
total consolidated revenues in 2001, compared to $0.3 million or 0.2% of total
consolidated revenues for the same period in 2000. The increase of $2.8 million
in corporate office other operating expenses is primarily attributable to the
reversal of a $2.5 million litigation reserve during 2000. The reserve was
reversed because Management of the Company concluded during 2000 that the
payment of this liability was remote.
Depreciation and Amortization
Corporate office depreciation and amortization was $0.2 million or 0.1%
of total consolidated revenues in 2001, compared to $0.5 million or 0.4% of
total consolidated revenues for the same period in 2000. The decrease in
corporate office depreciation and amortization is due to certain projects which
were fully amortized during 2000.
Interest and Other Financing Charges
Interest and other financing charges was $3.3 million or 2.5% of total
consolidated revenues for the year ended December 31, 2001, compared to $2.7
million or 2.5% of total consolidated revenues for the same period in 2000. The
increase in interest and other financing charges is primarily due to an increase
in the Company's average outstanding borrowings between periods as a result of
the Manatee Palms acquisition and the subordinated note and warrant purchase
agreements entered into by the Company during 2000. The increase in interest was
partially offset by a decrease in interest rates on the Company's Senior Credit
Facility between periods.
22
Losses Related to Asset Sales and Closed Businesses
Losses related to asset sales and closed businesses was $0.1 million or
0.1% of total consolidated revenues for 2001 compared to $0.7 million or 0.7% of
total consolidated revenues for the same period in 2000. During 2001, the
Company agreed to accept a $0.1 million discount for the repayment of a
promissory note due to the Company in advance of the maturity date. This note is
expected to be repaid by April 30, 2002. On June 7, 2000, the Company sold five
of its contracts to manage charter schools and personal property with an
aggregate book value of $0.8 million for $0.4 million. Additionally, in December
2000, the Company wrote-off the unpaid balance of the purchase price and other
related assets totaling $0.3 million, increasing the total loss to $0.7 million.
Provision for Income Taxes
Provision for income taxes was $0.8 million or 0.6% of total
consolidated revenues for 2001, compared to $0.2 million or 0.2% of total
consolidated revenues for the same period in 2000. The provision for income
taxes was recorded at an effective tax rate significantly less than the
statutory tax rate due to significant net operating loss carryovers.
Year Ended December 31, 2000 Compared to Year Ended December 31, 1999
Salaries, Wages and Benefits
Corporate office salaries, wages and benefits were $2.8 million or 2.6%
of total consolidated revenues for 2000, compared to $2.5 million or 3.1% of
total consolidated revenues for the same period in 1999. The decrease as a
percentage of total consolidated revenues is primarily due to the increase in
total consolidated revenues of $26.9 million during the year.
Other Operating Expenses
Corporate office other operating expenses were $0.3 million or 0.2% of
total consolidated revenues for 2000, compared to $2.7 million or 3.3% of total
consolidated revenues for the same period in 1999. The decrease of $2.4 million
in corporate office other operating expenses is primarily attributable to the
reversal of a $2.5 million litigation reserve during 2000. The reserve was
reversed because Management of the Company concluded during 2000 that the
payment of this liability was remote.
Depreciation and Amortization
Corporate office depreciation and amortization was $0.5 million or 0.4%
of total consolidated revenues for 2000, compared to $0.5 million or 0.6% of
total consolidated revenues for the same period in 1999. The decrease in
corporate office depreciation and amortization as a percentage of total
consolidated revenues is primarily a result of the increase in total revenues of
$26.9 million between periods.
Other Income
Other income was $1.5 million or 1.9% of total consolidated revenues
for the year ended December 31, 1999. This income is primarily a result of two
non-recurring settlements recorded in 1999 in favor of the Company.
Interest and Other Financing Charges
Interest and other financing charges was $2.7 million or 2.5% of total
consolidated revenues for 2000, compared to $1.3 million or 1.6% of total
consolidated revenues for the same period in 1999. The increase in interest and
other financing charges is primarily due to an increase in the Company's average
outstanding borrowings between periods as a result of the subordinated note and
warrant purchase agreements entered into by the Company during 2000.
23
Provision for Income Taxes
Provision for income taxes was $0.2 million or 0.2% of total
consolidated revenues for the year ended December 31, 2000, compared to $0.07
million or 0.1% of total consolidated revenues for the same period in 1999. The
provision for income taxes was recorded at an effective tax rate significantly
less than the statutory tax rate due to significant net operating loss
carryovers.
Impact Of Inflation
The behavioral healthcare and at-risk youth industry is labor
intensive, and wages and related expenses increase in inflationary periods.
Additionally, suppliers generally seek to pass along rising costs to the Company
in the form of higher prices. The Company monitors the operations of its
facilities to mitigate the effect of inflation and increases in the costs of
services. To the extent possible, the Company seeks to offset increased costs
through increased rates, new programs and operating efficiencies. However,
reimbursement arrangements may hinder the Company's ability to realize the full
effect of rate increases. To date, inflation has not had a significant impact on
operations.
New Accounting Requirements
In July 2001, the Financial Accounting Standards Board ("FASB") issued
Statement No. 141, ACCOUNTING FOR BUSINESS COMBINATIONS, and Statement No. 142,
GOODWILL AND OTHER INTANGIBLE ASSETS. These Statements modify accounting for
business combinations after June 30, 2001 and will affect the Company's
treatment of goodwill and other intangible assets at the start of fiscal year
2002. The Statements require that goodwill existing at the date of adoption be
reviewed for possible impairment and that impairment tests be periodically
repeated, with impaired assets written-down to fair value. The initial test of
goodwill must be completed within six months of adoption, or by June 2002 for
the Company, with a completion of testing by the end of 2002. Additionally,
existing goodwill and intangible assets must be assessed and classified
consistent with the Statements' criteria. Intangible assets with estimated
useful lives will continue to be amortized over those periods. Amortization of
goodwill and intangible assets with indeterminate lives will cease. The Company
has not yet completed the initial test of existing goodwill and accordingly,
cannot estimate the full impact of these rules. However, goodwill amortization,
which totaled $141,000 for 2001, will no longer be recorded.
In October 2001, the FASB issued Statement No. 144, ACCOUNTING FOR THE
IMPAIRMENT OR DISPOSAL OF LONG LIVED ASSETS. This Statement supersedes Statement
No. 121 but retains many of its fundamental provisions. Additionally, this
Statement expands the scope of discontinued operations to include more disposal
transactions. The provision of this Statement are effective for the Company with
the beginning of fiscal year 2002. We do not anticipate a significant impact to
the Company's results of operations from the adoption of this Statement.
LIQUIDITY AND CAPITAL RESOURCES
The Company's primary liquidity needs are for working capital, capital
expenditures, and debt service. The Company's primary sources of liquidity are
cash flows from operations and borrowings under its revolving credit line.
At December 31, 2001 and December 31, 2000, the Company had $13.1
million and $8.3 million, respectively, in working capital and $0.8 million and
$1.5 million, respectively, in cash and cash equivalents. Working capital as of
December 31, 2001 was comprised primarily of $0.8 million in cash and cash
equivalents, $23.3 million in accounts receivable and $6.1 million in other
current assets, net of $17.1 million in current liabilities. The increase in
working capital between periods is primarily a result of: (i) an increase in
accounts receivable resulting from an increase in revenues from new programs
started during 2001, (ii) a $1.6 million note receivable due to the Company from
the sale of certain assets and (iii) a decrease in current liabilities resulting
primarily from year end timing differences in the payment of certain
liabilities.
24
Cash used by investing activities was $2.0 million for 2001 as compared
to cash used by investing activities of $9.8 million in 2000. During 2001, the
Company incurred approximately $2.5 million for property, plant and equipment
additions and received $0.5 million from the sale of certain assets. During
2000, the Company acquired the Manatee Palms System for $8.2 million and
incurred $2.5 million for property, plant and equipment additions.
Cash used in financing activities was $0.8 million in 2001 as compared
to cash provided by financing activities of $14.1 million in 2000. Cash used in
financing activities during 2001 related primarily to repayments of borrowings
under the Company's term loan offset by proceeds from borrowing under the
revolving credit facility. During 2000, cash provided by financing activities
related primarily to proceeds from an amendment increasing the Company's senior
credit facility for the aforementioned purchase of the Manatee Palms System. In
addition, during 2000, the Company also entered into subordinated note and
warrant purchase agreements with two unrelated financial institutions for an
aggregate principal amount of $5 million each.
The Company's senior credit facility (the "Senior Credit Facility")
consists of a term loan payable in monthly installments ranging from $83,000 to
$302,000 with a final installment of $3,600,000 due on October 30, 2003, and a
revolving credit facility (the "Revolver") for an amount up to the lesser of
$15,000,000 or the borrowing base of the Company's receivables (as defined in
the agreement).
The Company's Senior Credit Facility also provided for a $1,250,000
bridge loan advance under the Acquisition Loan. The bridge loan advance is
payable on the occurrence of certain events (as defined in the agreement).
In connection with the aforementioned bridge loan advance, a corporate
affiliate of Paul J. Ramsay, Chairman of the Board of the Company, entered into
a Junior Subordinated Note Purchase Agreement with the Senior Credit Facility
lender to participate in the Senior Credit Facility in an amount equal to the
bridge loan advance.
Interest on the Term Loan and the Revolver varies, and at the option of
the Company, would equal (i) a function of a base rate plus a margin ranging
from 0.5% to 2.0% (5.5% at December 31, 2001), based on the Company's ratio of
total indebtedness to EBITDA, or (ii) a function of the Eurodollar rate plus a
margin ranging from 2.0% to 3.5% (4.93% at December 31, 2001), based on the
Company's ratio of total indebtedness to EBITDA.
Interest on the Acquisition Loan varies, and at the option of the
Company, would equal (i) a function of a base rate plus a margin ranging from
0.75% to 2.25% (5.75% at December 31, 2001), based on the Company's ratio of
total indebtedness to EBITDA, or (ii) a function of the Eurodollar rate plus a
margin ranging from 2.25% to 3.75% (5.18% at December 31, 2001), based on the
Company's ratio of total indebtedness to EBITDA.
Additionally, the Company is obligated to pay to the financial
institution an amount equal to one half of 1% of the unused portion of the
Revolver and the Acquisition Loan.
The Senior Credit Facility requires that the Company meet certain
covenants, including (i) the maintenance of certain fixed charge coverage,
interest coverage and leverage ratios, (ii) the maintenance of certain proforma
availability levels (as defined in the credit agreement) and (iii) a limitation
on capital expenditures. The Senior Credit Facility also prohibits the payment
of cash dividends to common stockholders of the Company until the Company's
EBITDA (as defined in the credit agreement) exceeds $7,800,000.
The Company failed to maintain the required total debt to EBITDA ratio
and the fixed charge coverage ratio as of December 31, 2000. The Company's
lender agreed to waive the requirements as of December 31, 2000 and to amend the
definitions of EBITDA and capital expenditures in the future. As of December 31,
25
2001, the Company was in compliance with the required total debt to EBITDA and
fixed charge coverage ratios stipulated in the Senior Credit Facility.
During the twelve months ended December 31, 2001, the Company exceeded
the capital expenditure limitation in the Senior Credit Facility. On February
25, 2002, the Company's lender agreed to amend the Senior Credit Facility,
retroactive to December 31, 2001 to provide for among other items: (i) an
increase in the permitted capital expenditures, (ii) a $3.0 million increase in
the revolving credit loan commitment, and (iii) a $1.5 million additional
advance on the term loan.
The Company and its subsidiaries have pledged substantially all of
their real property, receivables and other assets as collateral for the Senior
Credit Facility.
On January 25, 2000 and June 19, 2000, the Company entered into
subordinated note and warrant purchase agreements with two unrelated financial
institutions for an aggregate principal amount of $5 million each (the
"Subordinated Notes"). The Subordinated Notes permit each of the financial
institutions to exercise, under certain conditions, up to 475,000 warrants which
are convertible into the Company's common stock. The aggregate value of the
warrants at the time of issuance was $0.8 million. On August 17, 2001, one of
the financial institutions exercised 475,000 warrants, resulting in the purchase
of 294,597 shares of common stock, utilizing the cashless exercise provision
contained in the warrant purchase agreement. Borrowings under the Subordinated
Notes bear interest at a rate of 12.5% per annum. The interest is payable
quarterly, and the principal balance and any unpaid interest is due January 24,
2007.
In connection with the Subordinated Notes, the Company incurred loan
costs of approximately $0.7 million. The loan costs are deferred and amortized
ratably over the life of the loans. The amortization is included in interest and
other financing charges in the accompanying consolidated statement of operations
and the unamortized balance is included as unamortized loan costs in the
accompanying consolidated balance sheet.
The Company has experienced delays in the collection of receivables
from its contracts in Puerto Rico. As of December 31, 2001, the Company had
approximately $4.4 million in outstanding receivables due from its contracts in
Puerto Rico, of which $1.1 million was over 120 days past due. Reserves against
outstanding Puerto Rico receivables were $1.2 million as of December 31, 2001.
As of March 15, 2002, the Company had collected approximately $1.8 million of
the December 31, 2001 outstanding receivable balance, of which the majority
related to receivables under 120 days past due. The Company and its
advisors are in active discussions with the Government of Puerto Rico with
respect to the payment of the outstanding receivables. The Company believes that
it has fully performed its obligations under the Puerto Rico contracts and is
entitled to receive payment of these receivables in full. Although the Company
has been advised by its legal counsel that the net receivables due on the Puerto
Rico contracts are collectable, there can be no assurances that future
transactions or events will not result in the need for additional reserves for
these accounts receivable. If the Company were to record additional reserves, it
would adversely affect earnings in the period in which the reserves are
recorded.
As previously mentioned, the Government of Puerto Rico has informed the
Company that, as a result of budgetary constraints, it will cancel various
contracts with private sector providers. In connection therewith, on December
15, 2001, the Company's contract to provide mental health and substance abuse
services to juveniles in Puerto Rico was cancelled. In addition, the Company is
in discussions with the Government of Puerto Rico with respect to the
cancellation of its contract to provide a 20-bed specialized mental health
treatment program for youth referred by the Mental Health and Anti-Addiction
Services Administration of Puerto Rico prior to June 1, 2002. Total revenues and
operating income from these contracts during the year ended December 31, 2001
were $3.9 million and $0.1 million, respectively.
Management of the Company believes that it can meet its current cash
requirements and future identifiable needs with internally generated funds from
operations and funds available under its Senior Credit Facility. However, in
addition to the Risk Factors discussed elsewhere in this Form 10-K, there are
several factors that could affect the Company's operating results and liquidity,
including the following:
o ABILITY TO RAISE ADDITIONAL CAPITAL. Although the Company believes that it
can obtain additional liquidity, there can be no assurances that the
Company will be able to raise debt or equity capital through other sources,
or if obtained, that it will be on terms acceptable to the Company. The
incurring or assumption by the Company of additional indebtedness could
26
result in the issuance of additional equity and/or debt which could have a
dilutive effect on current shareholders and a significant effect on the
Company's operations.
o ABILITY TO BORROW FUNDS UNDER SENIOR CREDIT FACILITY. The Company's ability
to borrow funds under its Senior Credit Facility may be terminated if the
Company fails to comply with the restrictive financial and operating
covenants contained in the Senior Credit Facility. If the Company is unable
to operate its business within the covenants specified in the Senior Credit
Facility, the Company's ability to obtain future amendments to the
covenants is not assured, and the Company's ability to make borrowings
required to operate its business could be restricted or terminated. Such a
restriction or termination would have a material adverse effect on the
Company's liquidity.
TRANSACTIONS WITH AFFILIATES
On June 30, 1999, the Company acquired all of the issued and
outstanding shares of common stock of Ramsay Hospital Corporation of Louisiana,
Inc. ("RHCL"), a holding company in liquidation whose principal asset consists
of a receivable from the State of Louisiana, in a purchase transaction between
companies under common control. The transaction was accounted for in a manner
similar to the pooling-of-interest method. The purchase price of $700,000 is
equal to the net book value of RHCL on the date of the acquisition. Accordingly,
the Company's financial statements reflect the consolidated balance sheets and
consolidated results of operations of both entities as if the merger had been in
effect for all periods presented.
In December 1999, RYS entered into an agreement with one of its
directors to serve as a senior advisor in connection with legal issues,
acquisitions, financings and other transactions involving the Company. During
the year ended December 31, 2001, the Company paid the director $66,256
(including expense reimbursements) in connection with these advisory services.
In October 1999, the Company entered into an agreement with Excel
Vocational Alternatives, Inc. ("Excel") for the provision by Excel of consulting
and advisory services in connection with the creation of a Job Corps division
for the Company. An executive officer of the Company is President and has a 50%
ownership interest in Excel. On June 1, 2001, the Company cancelled its
agreement with Excel. During the year ended December 31, 2001, the Company paid
Excel $150,000 in connection with these advisory services.
ITEM 7a. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
Quantitative and Qualitative Disclosures About Market Risk
In the normal course of business, the Company is exposed to market
risk, primarily from changes in interest rates. The Company continually monitors
exposure to market risk and develops appropriate strategies to manage this risk.
The Company is not exposed to any other significant market risks, including
commodity price risk, foreign currency exchange risk or interest rate risks from
the use of derivative financial instruments. Management does not use derivative
financial instruments for trading or to speculate on changes in interest rates
or commodity prices.
Interest Rate Exposure
The Company's exposure to changes in interest rates primarily results
from the variable interest on its Senior Credit Facility. The Company's debt
with fixed interest rates consists of the Subordinated Notes. At December 31,
2001, approximately 65% ($17.5 million outstanding under the Company's Senior
Credit Facility) of the Company's total debt was subject to variable interest
rates.
27
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
Financial statements of the Company and its consolidated subsidiaries
are set forth herein beginning on page F-1.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
The Board of Directors of the Company, with the approval of the
Company's Audit Committee, appointed Deloitte & Touche LLP as the Company's
independent accountants. Effective May 21, 1999, Deloitte & Touche replaced
Ernst & Young LLP, which previously served as the Company's auditor.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
The information required by this Item with respect to the Company's
executive officers and directors will be contained in the Company's definitive
Proxy Statement ("Proxy Statement") for its 2002 Annual Meeting of Stockholders
to be held on May 23, 2002 and is incorporated herein by reference. Such Proxy
Statement will be filed with the Securities and Exchange Commission not later
than 120 days subsequent to December 31, 2001.
ITEM 11. EXECUTIVE COMPENSATION.
The information required with respect to this Item will be contained in
the Proxy Statement, and such information is incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The information required with respect to this Item will be contained in
the Proxy Statement, and such information is incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
The information required with respect to this Item will be contained in
the Proxy Statement, and such information is incorporated herein by reference.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.
(a) DOCUMENTS FILED AS PART OF THE REPORT:
1. FINANCIAL STATEMENTS
Information with respect to this Item is contained on Pages
F-1 to F-27 of this Annual Report on Form 10-K.
2. FINANCIAL STATEMENT SCHEDULES
All schedules have been omitted because they are inapplicable
or the information is provided in the consolidated financial
statements, including the notes thereto.
28
3. EXHIBITS
Information with respect to this Item is contained in the
attached Index to Exhibits.
(b) REPORTS ON FORM 8-K:
There were no reports on Form 8-K filed during the year ended
December 31, 2001.
(c) EXHIBITS REQUIRED BY ITEM 601 OF REGULATION S-K:
Exhibits required to be filed by the Company pursuant to Item
601 of Regulation S-K are contained in Exhibits listed in
response to Item 14(a)3, and are incorporated herein by
reference. The agreements, management contracts and
compensatory plans and arrangements required to be filed as an
Exhibit to this Form 10-K are listed in Exhibits 10.64, 10.66,
10.76, 10.77, 10.104, 10.110, 10.136, 10.137, 10.143, 10.146,
and 10.148.
29
POWER OF ATTORNEY
The Registrant, and each person whose signature appears below, hereby
appoints Luis E. Lamela and Thomas M. Haythe as attorneys-in-fact with full
power of substitution, severally, to execute in the name and on behalf of the
registrant and each such person, individually and in each capacity stated below,
one or more amendments to the annual report which amendments may make such
changes in the report as the attorney-in-fact acting deems appropriate and to
file any such amendment to the report with the Securities and Exchange
Commission.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned thereunto fully authorized.
RAMSAY YOUTH SERVICES, INC.
Dated: 3/28/02 By /s/ Luis E. Lamela
------------------ ------------------------------------------
Luis E. Lamela
President and Chief Executive Officer
Dated: 3/28/02 By /s/ Marcio C. Cabrera
------------------ ------------------------------------------
Marcio C. Cabrera
Executive Vice President and
Chief Financial Officer
Pursuant to the requirements of the Securities and Exchange Act of
1934, this report has been signed below by the following persons on behalf of
the registrant and in the capacities and on the dates indicated.
SIGNATURE/TITLE
Dated: 3/25/02 By /s/ Paul J. Ramsay
------------------ ------------------------------------------------
Paul J. Ramsay
Chairman of the Board of Directors
Dated: 3/28/02 By /s/ Luis E. Lamela
------------------ ------------------------------------------------
Luis E. Lamela
Chief Executive Officer, Executive Vice
Chairman of the Board and Director
30
SIGNATURE/TITLE
Dated: 3/28/02 By /s/ Aaron Beam, Jr.
------------------ -----------------------------------------------
Aaron Beam, Jr.
Director
Dated: 3/26/02 By /s/ Peter J. Evans
------------------ -----------------------------------------------
Peter J. Evans
Director
Dated: 3/28/02 By /s/ Thomas M. Haythe
------------------ -----------------------------------------------
Thomas M. Haythe
Director
Dated: 3/28/02 By /s/ Steven J. Shulman
------------------ -----------------------------------------------
Steven J. Shulman
Director
Dated: 3/25/02 By /s/ Michael S. Siddle
------------------ -----------------------------------------------
Michael S. Siddle
Director
31
RAMSAY YOUTH SERVICES, INC. AND SUBSIDIARIES
INDEX TO FINANCIAL STATEMENTS
The following consolidated financial statements of the Registrant and
its subsidiaries are submitted herewith in response to Item 8 and Item 14(a)(1):
PAGE
NUMBER
------
Report of Independent Auditors....................................... F-2
Consolidated Balance Sheets - December 31, 2001 and 2000............. F-3
Consolidated Statements of Operations - For the Years Ended December
31, 2001, 2000 and 1999.......................................... F-5
Consolidated Statements of Redeemable Preferred Stock and
Stockholders' Equity - For the Years Ended December 31, 2001,
2000 and 1999.................................................... F-6
Consolidated Statements of Cash Flows - For the Years Ended December
31, 2001, 2000 and 1999.......................................... F-7
Notes to Consolidated Financial Statements........................... F-8
All schedules have been omitted because they are inapplicable or the
information is provided in the consolidated financial statements, including the
notes thereto.
F-1
REPORT OF INDEPENDENT AUDITORS
Board of Directors and Stockholders
Ramsay Youth Services, Inc. and Subsidiaries
We have audited the consolidated balance sheets of Ramsay Youth
Services, Inc. and subsidiaries (the "Company") as of December 31, 2001 and
2000, and the related consolidated statements of operations, stockholders'
equity, and cash flows for each of the three years in the period ended December
31, 2001. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States of America. Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present
fairly, in all material respects, the consolidated financial position of the
Company at December 31, 2001 and 2000, and the consolidated results of
operations and cash flows for each of the three years in the period ended
December 31, 2001 in conformity with accounting principles generally accepted in
the United States of America.
DELOITTE & TOUCHE LLP
Certified Public Accountants
Miami, Florida
March 15, 2002
F-2
RAMSAY YOUTH SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------------
2001 2000
----------- -----------
<S> <C> <C>
ASSETS
Current assets
Cash and cash equivalents ................... $ 752,000 $ 1,539,000
Accounts receivable, net .................... 23,307,000 22,368,000
Other current assets ........................ 6,091,000 4,089,000
----------- -----------
Total current assets .................... 30,150,000 27,996,000
Other assets
Cash held in trust ........................... 1,021,000 1,041,000
Cost in excess of net asset value of purchased
businesses, net .......................... 2,232,000 2,548,000
Unamortized loan costs, net .................. 1,077,000 1,415,000
Net assets held for sale ..................... -- 2,129,000
----------- -----------
Total other assets ...................... 4,330,000 7,133,000
Property and equipment
Land .......................................... 4,659,000 4,666,000
Buildings and improvements .................... 37,829,000 36,351,000
Equipment, furniture and fixtures ............. 12,580,000 11,698,000
----------- -----------
55,068,000 52,715,000
Less accumulated depreciation ................. 20,537,000 18,246,000
----------- -----------
34,531,000 34,469,000
----------- -----------
$69,011,000 $69,598,000
=========== ===========
</TABLE>
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
F-3
RAMSAY YOUTH SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------------------
2001 2000
------------- -------------
<S> <C> <C>
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Accounts payable ..................................... $ 5,604,000 $ 7,606,000
Accrued wages and other accrued liabilities .......... 6,366,000 5,627,000
Amounts due to third-party contractual agencies ...... 1,709,000 3,632,000
Current portion of long-term debt .................... 3,372,000 2,803,000
------------- -------------
Total current liabilities ...................... 17,051,000 19,668,000
Noncurrent liabilities
Other accrued liabilities ............................ 4,129,000 4,389,000
Long-term debt, less current portion ................. 23,506,000 24,708,000
------------- -------------
Total liabilities .............................. 44,686,000 48,765,000
------------- -------------
Commitments and contingencies
Stockholders' equity
Common stock $.01 par value - authorized 30,000,000
shares; issued 9,445,449 shares at December 31, 2001,
and 9,121,180 shares at December 31, 2000 .......... 94,000 91,000
Additional paid-in capital .......................... 127,047,000 127,024,000
Accumulated deficit ................................. (98,917,000) (102,383,000)
Treasury stock - 193,850 common shares at December 31,
2001 and 2000 ...................................... (3,899,000) (3,899,000)
------------- -------------
Total stockholders' equity .................. 24,325,000 20,833,000
------------- -------------
$ 69,011,000 $ 69,598,000
============= =============
</TABLE>
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
F-4
RAMSAY YOUTH SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
-----------------------------------------------------
2001 2000 1999
------------- ------------- -------------
<S> <C> <C> <C>
Provider-based revenue .......................... $ 134,416,000 $ 108,360,000 $ 81,474,000
Operating Expenses:
Salaries, wages and benefits ................. 83,563,000 68,353,000 49,283,000
Other operating expenses ..................... 37,715,000 28,310,000 25,024,000
Provision for doubtful accounts .............. 2,911,000 2,817,000 1,896,000
Depreciation and amortization ................ 2,430,000 2,369,000 2,366,000
Asset impairment ............................. 124,000 -- --
------------- ------------- -------------
TOTAL OPERATING EXPENSES ........................ 126,743,000 101,849,000 78,569,000
------------- ------------- -------------
INCOME FROM OPERATIONS .......................... 7,673,000 6,511,000 2,905,000
Non-operating (expenses) income:
Other income ................................. -- -- 1,548,000
Interest and other financing charges ......... (3,299,000) (2,706,000) (1,268,000)
Losses related to asset sales and closed
businesses ................................. (130,000) (705,000) --
------------- ------------- -------------
Total non-operating (expenses) income, net . (3,429,000) (3,411,000) 280,000
INCOME BEFORE INCOME TAXES ...................... 4,244,000 3,100,000 3,185,000
Provision for income taxes ...................... 778,000 248,000 68,000
------------- ------------- -------------
NET INCOME ...................................... $ 3,466,000 $ 2,852,000 $ 3,117,000
============= ============= =============
Income per common share:
Basic: ....................................... $ .38 $ .32 $ .35
============= ============= =============
Diluted: ..................................... $ .34 $ .32 $ .33
============= ============= =============
Weighted average number of common shares
outstanding:
Basic ........................................ 9,046,000 8,913,000 8,890,000
============= ============= =============
Diluted ...................................... 10,340,000 8,954,000 9,538,000
============= ============= =============
</TABLE>
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
F-5
RAMSAY YOUTH SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
COMMON ADDITIONAL
STOCK COMMON PAID-IN ACCUMULATED TREASURY
SHARES STOCK CAPITAL DEFICIT STOCK
--------- ------- ------------- ------------- -----------
<S> <C> <C> <C> <C> <C>
BALANCE AT DECEMBER 31, 1998 .......... 9,079,245 $90,000 $ 126,075,000 $(108,352,000) $(3,899,000)
Issuance of common stock in connection
with employee stock purchase plan ... 6,946 -- 30,000 -- --
Costs in connection with issuance of
common stock ........................ -- -- (36,000) -- --
Refunded registration costs ........... -- -- 60,000 -- --
Issuance of options to purchase common
stock ............................... -- -- 9,000 -- --
Net income ............................ -- -- -- 3,117,000 --
--------- ------- ------------- ------------- -----------
Balance at December 31, 1999 .......... 9,086,191 90,000 126,138,000 (105,235,000) (3,899,000)
Issuance of common stock in connection
with employee stock purchase plan ... 34,989 1,000 42,000 -- --
Issuance of warrants in connection with
subordinated debt ................... -- -- 844,000 -- --
Net income ............................ -- -- -- 2,852,000 --
--------- ------- ------------- ------------- -----------
BALANCE AT DECEMBER 31, 2000 .......... 9,121,180 91,000 127,024,000 (102,383,000) (3,899,000)
Issuance of common stock in connection
with employee stock purchase plan ... 29,672 -- 26,000 -- --
Issuance of common stock in connection
with exercise of warrants ........... 294,597 3,000 (3,000) -- --
Net income ............................ 3,466,000 --
--------- ------- ------------- ------------- -----------
BALANCE AT DECEMBER 31, 2001 .......... 9,445,449 94,000 127,047,000 (98,917,000) (3,899,000)
========= ======= ============= ============= ===========
</TABLE>
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
F-6
RAMSAY YOUTH SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
------------------------------------------------
2001 2000 1999
----------- ------------ ------------
<S> <C> <C> <C>
Operating activities
Net income ......................................... $ 3,466,000 $ 2,852,000 $ 3,117,000
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Depreciation .................................... 2,300,000 1,945,000 1,845,000
Amortization, including loan costs .............. 682,000 756,000 761,000
Loss related to asset sales and closed businesses 130,000 705,000 --
Asset impairment ................................ 124,000 -- --
Provision for doubtful accounts ................. 2,911,000 2,817,000 1,896,000
Expenses paid with equity instruments ........... -- -- 9,000
Change in operating assets and liabilities net of
effects of business acquired
Increase in accounts receivable ................. (3,850,000) (10,026,000) (3,483,000)
(Increase) decrease in other current assets ..... (332,000) 2,331,000 6,427,000
(Decrease) increase in accounts payable ......... (1,989,000) 331,000 1,433,000
Increase (decrease) in accrued salaries, wages
and other liabilities ...................... 479,000 (3,493,000) (11,476,000)
Decrease in amounts due to third-party
contractual agencies ....................... (1,923,000) (1,561,000) (2,372,000)
----------- ------------ ------------
Total adjustments .......................... (1,468,000) (6,195,000) (4,960,000)
----------- ------------ ------------
Net cash provided by (used in) operating activities .... 1,998,000 (3,343,000) (1,843,000)
----------- ------------ ------------
Investing activities
Increase in net assets held for sale ................ -- (39,000) (46,000)
Expenditures for property and equipment ............. (2,467,000) (2,503,000) (1,864,000)
Acquisitions ........................................ -- (8,232,000) (1,195,000)
Cash held in trust .................................. 20,000 852,000 (37,000)
Proceeds from sale of assets ........................ 472,000 100,000 --
----------- ------------ ------------
Net cash used in investing activities .................. (1,975,000) (9,822,000) (3,142,000)
----------- ------------ ------------
Financing activities
Loan costs .......................................... (42,000) (761,000) (216,000)
Amounts paid to affiliate ........................... -- (600,000) (600,000)
Net proceeds from exercise of options and stock
purchases .................................. 26,000 43,000 30,000
Proceeds from issuance of debt and warrants ......... 2,007,000 16,983,000 5,598,000
Payments on debt .................................... (2,801,000) (1,566,000) (707,000)
Refunded registration costs ......................... -- -- 60,000
Registration costs .................................. -- (17,000) (36,000)
----------- ------------ ------------
Net cash (used in) provided by financing activities .... (810,000) 14,082,000 4,129,000
----------- ------------ ------------
Net (decrease) increase in cash and cash equivalents ... (787,000) 917,000 (856,000)
Cash and cash equivalents at beginning of period ....... 1,539,000 622,000 1,478,000
----------- ------------ ------------
Cash and cash equivalents at end of period ............. $ 752,000 $ 1,539,000 $ 622,000
=========== ============ ============
Cash paid during the period for:
Interest (net of amount capitalized) .............. $ 2,941,000 $ 2,137,000 $ 982,000
=========== ============ ============
Income taxes ....................................... $ 429,000 $ 1,239,000 $ 460,000
=========== ============ ============
</TABLE>
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
F-7
RAMSAY YOUTH SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
INDUSTRY
Ramsay Youth Services, Inc. is a provider of behavioral health care
treatment programs and services focused on at-risk and special-needs youth. The
Company offers a full spectrum of treatment programs and services in residential
and non-residential settings. The programs and services are offered through a
network of Company-owned or leased facilities ("Owned Operations") and state or
government-owned facilities ("Management Contract Operations"). The Company is
headquartered in Coral Gables, Florida and has operations in Alabama, Florida,
Hawaii, Missouri, Michigan, Nevada, North Carolina, South Carolina, Texas, Utah
and Puerto Rico. The Company also provides a limited range of adult behavioral
healthcare services at certain of its locations in response to community demand.
BASIS OF PRESENTATION
The consolidated financial statements include the accounts of Ramsay
Youth Services, Inc. and its majority-owned subsidiaries (the "Company"). All
significant intercompany accounts and transactions have been eliminated in
consolidation.
USE OF ESTIMATES
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America requires
management to make estimates and assumptions that affect the reported amounts of
assets and liabilities and disclosure of contingent assets and liabilities at
the date of the financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from those
estimates.
CONCENTRATIONS OF CREDIT RISK
The Company provides services to individuals without insurance and
accepts assignments of individuals' third party benefits without requiring
collateral. Exposure to losses on receivables due from these individuals is
principally dependent on each individual's financial condition. The Company
monitors its exposure for credit losses and maintains allowances for anticipated
losses. The mix of the receivables from residents and third-party payors was as
follows:
DECEMBER 31,
--------------------------
2001 2000
----------- -----------
State Agencies............. 63.4% 52.2%
Medicaid................... 17.3 18.0
Medicare................... 5.5 10.6
Commercial................. 5.7 6.0
Managed Care............... 1.9 3.8
Self-Pay................... 1.2 1.2
Other...................... 5.0 8.2
----------- -----------
100.0% 100.0%
=========== ===========
ALLOWANCE FOR DOUBTFUL ACCOUNTS
The Company carries accounts receivable at the amount it deems to be
collectable. Accordingly, the Company provides allowances for accounts it deems
to be uncollectable based on management's best estimates. Recoveries are
recognized in the period they are received. The ultimate amount of accounts
receivable that becomes uncollectable could differ from those estimated.
F-8
RAMSAY YOUTH SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
The Company has experienced delays in the collection of receivables
from its contracts in Puerto Rico. As of December 31, 2001, the Company had
approximately $4.4 million in outstanding receivables due from the Commonwealth
of Puerto Rico, of which $1.1 million was over 120 days past due. Reserves
against outstanding Puerto Rico receivables were $1.2 million as of December 31,
2001. As of March 15, 2002, the Company had collected approximately $1.8 million
of the December 31, 2001 outstanding receivable balance, of which the majority
related to receivables under 120 days past due. The Company and its advisors are
in active discussions with the Government of Puerto Rico with respect to the
payment of the outstanding receivables. The Company believes that it has fully
performed its obligations under the Puerto Rico contracts and is entitled to
receive payment of these receivables in full. Although the Company has been
advised by its legal counsel that the net receivables due on the Puerto Rico
contracts are collectable, there can be no assurances that future transactions
or events will not result in the need for additional reserves for these accounts
receivable. If the Company were to record additional reserves, it would
adversely affect earnings in the period in which the reserves are recorded.
The Government of Puerto Rico has informed the Company that, as a
result of budgetary constraints, it will cancel various contracts with private
sector providers. In connection therewith, on December 15, 2001, the Company's
contract to provide mental health and substance abuse services to juveniles in
Puerto Rico was cancelled. In addition, the Company is in discussions with the
Government of Puerto Rico with respect to the cancellation of its contract to
provide a 20-bed specialized mental health treatment program for youth referred
by the Mental Health and Anti-Addiction Services Administration of Puerto Rico
prior to June 1, 2002. Total revenues and operating income from these contracts
during the year ended December 31, 2001 were $3.9 million and $0.1 million,
respectively.
CASH AND CASH EQUIVALENTS
Cash and cash equivalents include cash on hand and short-term, highly
liquid, interest-bearing investments consisting primarily of money market mutual
funds. Deposits in banks may exceed the amount of insurance provided on such
deposits. The Company performs reviews of the credit worthiness of its
depository banks. The Company has not experienced any losses on its deposits of
cash in banks.
CASH HELD IN TRUST
Cash held in trust includes cash held in escrow from the sale of
certain assets (see Note 2) and cash and short term investments set aside for
the payment of losses in connection with the Company's self-insured retention
for professional and general liability claims.
INTANGIBLE ASSETS AND DEFERRED COSTS
Cost in excess of net asset value of purchased businesses relates to
certain acquisitions made by the Company (see Notes 4 and 5). These amounts are
being amortized on a straight-line basis over a term ranging from 3 to 40 years
with a weighted average life of approximately 20 years. As the result of a new
accounting pronouncement that becomes effective in 2002, the Company will
evaluate its intangible assets to determine whether they will continue to be
amortized or will be tested annually for impairment (see "New Accounting
Requirements" below).
The Company periodically reviews its intangible assets to assess
recoverability. The carrying value of cost in excess of net asset value of
purchased businesses is reviewed by the Company's management if the facts and
circumstances suggest that it may be impaired. The amount of impairment, if any,
would be measured based on discounted future operating cash flows using a
discount rate reflecting the Company's average cost of funds.
F-9
RAMSAY YOUTH SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
Loan costs are deferred and amortized ratably over the life of the loan
and are included in interest and other financing charges.
Accumulated amortization of the Company's cost in excess of net asset
value of purchased businesses as of December 31, 2001 and December 31, 2000 was
$1,521,000 and $1,420,000, respectively. Accumulated amortization of the
Company's loan costs as of December 31, 2001 and December 31, 2000 was
$1,136,000 and $756,000, respectively.
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost less accumulated
depreciation, except for assets considered to be impaired pursuant to Statement
of Financial Accounting Standards (SFAS) No. 121 ACCOUNTING FOR THE IMPAIRMENT
OF LONG-LIVED ASSETS AND FOR LONG-LIVED ASSETS TO BE DISPOSED OF, which are
stated at fair value of the assets as of the date the assets are determined to
be impaired. Upon the sale or retirement of property and equipment, the cost and
related accumulated depreciation are removed from the accounts and the resulting
gain or loss is included in operations.
Depreciation is computed substantially on the straight-line method for
financial reporting purposes and on accelerated methods for income tax purposes.
Depreciation is not recorded on assets determined to be impaired or during the
period they are held for sale. The general range of estimated useful lives for
financial reporting purposes is twenty to forty years for buildings and five to
ten years for equipment. For the years ended December 31, 2001, 2000 and 1999,
depreciation expense recorded on the Company's property and equipment totaled
$2,300,000, $1,945,000 and $1,845,000, respectively.
REVENUE RECOGNITION
Revenues are recognized at the time services are provided. Net revenues
include estimated reimbursable amounts from Medicare, Medicaid and other
contracted reimbursement programs. Amounts received by the Company for treatment
of individuals covered by such programs, which may be based on the cost of
services provided or predetermined rates, are generally less than the
established billing rates of the Company's facilities. Final determination of
amounts earned under contracted reimbursement programs is subject to review and
audit by the appropriate agencies. Differences between amounts recorded as
estimated settlements and the audited amounts are reflected as adjustments to
provider based revenues in the period the final determination is made (see Note
13).
MEDICAL EXPENSES
The Company records the cost of medical services when such services are
provided.
PROFESSIONAL AND GENERAL LIABILITY INSURANCE
The Company maintains self-insured retentions related to its
professional and general liability insurance program. The Company's operations
are insured for professional liability on a claims-made basis and for general
liability on an occurrence basis. The Company records the liability for
uninsured professional and general liability losses related to asserted and
unasserted claims arising from reported and unreported incidents based on
independent valuations which consider claim development factors, the specific
nature of the facts and circumstances giving rise to each reported incident and
the Company's history with respect to similar claims. The development factors
are based on a blending of the Company's actual experience with industry
standards.
F-10
RAMSAY YOUTH SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
INCOME TAXES
Income taxes are accounted for in accordance with SFAS No. 109,
ACCOUNTING FOR INCOME TAXES. SFAS No. 109 requires recognition of deferred tax
assets and liabilities for the expected future tax consequences of temporary
differences between the carrying amounts of assets and liabilities for financial
reporting purposes and the amounts used for income tax purposes. Future tax
benefits are required to be recognized to the extent that realization of such
benefits is more likely than not. A valuation allowance is established for those
benefits that do not meet the more likely than not criteria.
EARNINGS PER SHARE
For all periods presented, the Company has calculated earnings per
share in accordance with SFAS No. 128, EARNINGS PER SHARE, which became
effective for financial statements issued for periods ending after December 15,
1997.
Basic earnings per share is based on the weighted average number of
shares outstanding during each period. Diluted earnings per share further
assumes that, under the treasury stock method, dilutive stock options and
warrants are exercised.
STOCK-BASED COMPENSATION
The Company adopted SFAS No. 123, ACCOUNTING FOR STOCK BASED
COMPENSATION, during fiscal year 1997 and continues to account for stock option
grants in accordance with Accounting Principles Board Opinion No. 25, ACCOUNTING
FOR STOCK ISSUED TO EMPLOYEES.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amount of financial instruments including cash and cash
equivalents, cash held in trust, accounts receivable from services, and accounts
payable approximate fair value as of December 31, 2001 due to the short maturity
of the instruments and reserves for potential losses, as applicable. The
carrying amounts of long-term debt obligations issued pursuant to the Company's
bank credit agreements and revolving credit facility approximate fair value
because the interest rates on these instruments are subject to change with
market interest rates.
ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES
In June 1998, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 133 ("SFAS 133"), "ACCOUNTING FOR
DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES", which establishes standards for
the accounting and reporting of derivative instruments embedded in other
contracts (collectively referred to as derivatives) and hedging activities. It
requires that an entity recognize all derivatives as either assets or
liabilities in the statement of financial position and measure these instruments
at fair value. SFAS 133 was amended by SFAS 137 in June 1999 and SFAS 138 in
June 2000. This statement is now effective for years beginning after June 15,
2000. The Company has adopted these statements in the first quarter of fiscal
year 2001. The Company has determined that it does not have derivatives, and
therefore, there is no financial statement impact related to this accounting
requirement.
NEW ACCOUNTING REQUIREMENTS
In July 2001, the Financial Accounting Standards Board ("FASB") issued
Statement No. 141, ACCOUNTING FOR BUSINESS COMBINATIONS, and Statement No. 142,
GOODWILL AND OTHER INTANGIBLE ASSETS. These Statements modify accounting for
business combinations after June 30, 2001 and will affect the Company's
treatment of goodwill and other intangible assets at the start of fiscal year
2002. The Statements require that goodwill existing at the date of adoption be
reviewed for possible impairment and that impairment tests be periodically
F-11
RAMSAY YOUTH SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
repeated, with impaired assets written-down to fair value. The initial test of
goodwill must be completed within six months of adoption, or by June 2002 for
the Company, with a completion of testing by the end of 2002. Additionally,
existing goodwill and intangible assets must be assessed and classified
consistent with the Statements' criteria. Intangible assets with estimated
useful lives will continue to be amortized over those periods. Amortization of
goodwill and intangible assets with indeterminate lives will cease. The Company
has not yet completed the initial test of existing goodwill and accordingly,
cannot estimate the full impact of these rules. However, goodwill amortization,
which totaled $141,000 for 2001, will no longer be recorded.
In October 2001, the FASB issued Statement No. 144, ACCOUNTING FOR THE
IMPAIRMENT OR DISPOSAL OF LONG-LIVED ASSETS. This Statement supersedes Statement
No. 121 but retains many of its fundamental provisions. Additionally, this
Statement expands the scope of discontinued operations to include more disposal
transactions. The provision of this Statement are effective for the Company with
the beginning of fiscal year 2002. The Company does not anticipate a significant
impact to the results of operations from the adoption of this Statement.
2. ASSET SALES AND CLOSED BUSINESSES
On June 7, 2000, the Company sold five of its contracts to manage
charter schools and personal property with a book value of approximately
$800,000 (including the net book value of cost in excess of net asset value of
purchased businesses and other intangible assets) for $352,000, resulting in a
loss of $456,000. Additionally, in December 2000, the Company cancelled a long
term consulting agreement with the purchaser of the aforementioned contracts and
incurred $249,000 in cancellation fees effectively increasing the total loss to
$705,000.
As of December 31, 2000, the assets relating to the Company's facility
in Palm Bay, Florida were reflected as assets held for sale in the accompanying
balance sheets. On May 15, 2001, the Company sold the facility for $2,300,000.
Proceeds from the sale included a $500,000 cash payment at closing and a
$1,800,000, 8% promissory note, due and payable on June 30, 2003. During the
year ended December 31, 2001, the Company agreed to accept a discount of
$130,000 for the full payment of the promissory note and accrued interest. The
promissory note is expected to be repaid on or before April 30, 2002. The
discount is included as a loss on sale of assets during the year ended December
31, 2001 in the accompanying financial statements. For the year ended December
31, 2001, revenues and net income before taxes from the Palm Bay facility
operations were $65,000 and $40,000, respectively. Revenues and net loss before
taxes for the Palm Bay facility for the year ended December 31, 2000 were
$117,000 and $59,000, respectively.
3. IMPAIRMENT OF ASSETS
The Company periodically reviews its long-lived assets (land,
buildings, fixed equipment, cost in excess of net asset value of purchased
businesses and other intangible assets) to determine if the carrying value of
these assets is recoverable, based on the future cash flows expected from the
assets.
During the year ended December 31, 2001, the Company closed one of its
therapeutic community living facilities in South Carolina and recorded an asset
impairment charge of $124,000. The asset impairment charge was determined based
on the difference between the carrying value of the asset and the expected net
proceeds from the sale of the facility.
4. ACQUISITIONS
On August 4, 2000, the Company acquired the operating assets of Charter
Behavioral Health System of Manatee Palms, L.P. ("Manatee Palms") from Charter
Behavioral Health Systems, LLC and the corresponding real estate from Crescent
Real Estate Funding VII, L.P. for a cash purchase price of $7,700,000. The
F-12
RAMSAY YOUTH SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
acquisition was accounted for under the purchase method of accounting. In
connection with the acquisition, the Company recorded cost in excess of net
asset value of purchased businesses of $1,892,000. Prior to FASB Statement No.
142, this amount was being amortized on a straight-line basis over a term of 20
years (see "New Accounting Requirements"). The operations of Manatee Palms have
been included in the Company's consolidated statement of operations effective
August 4, 2000. The Company's Senior Credit Facility was amended on August 4,
2000 to provide for the approval of this acquisition (see Note 6).
5. TRANSACTIONS WITH AFFILIATES
On June 30, 1999, the Company acquired all of the issued and
outstanding shares of common stock of Ramsay Hospital Corporation of Louisiana,
Inc. ("RHCL"), a holding company in liquidation whose principal asset consists
of a receivable from the State of Louisiana, in a purchase transaction between
companies under common control. The transaction was accounted for in a manner
similar to the pooling-of-interest method. The purchase price of $700,000 is
equal to the net book value of RHCL on the date of the acquisition. Accordingly,
the Company's financial statements reflect the consolidated balance sheets and
consolidated results of operations of both entities as if the merger had been in
effect for all periods presented.
On a combined basis, the Company reversed $1,482,000 of RHCL deferred
tax liabilities. The Company does not expect these deferred tax liabilities to
be utilized as a result of the Company's significant net operating loss
carryovers.
In December 1999, RYS entered into an agreement with one of its
directors to serve as a senior advisor in connection with legal issues,
acquisitions, financings and other transactions involving the Company. During
the years ended December 31, 2001 and 2000, the Company paid the director
$66,256 and $68,783, respectively (including expense reimbursements) in
connection with these advisory services.
In October 1999, the Company entered into an agreement with Excel
Vocational Alternatives, Inc. ("Excel") for the provision by Excel of consulting
and advisory services in connection with the creation of a Job Corps division
for the Company. An executive officer of the Company is President and has a 50%
ownership interest in Excel. On June 1, 2001, the Company cancelled its
agreement with Excel. During the year ended December 31, 2001, 2000 and 1999,
the Company paid Excel $150,000, $192,500 and $47,500, respectively, in
connection with these advisory services.
At December 31, 2001, three corporate affiliates of Mr. Paul J. Ramsay,
Chairman of the Board of the Company, owned an aggregate voting interest in the
Company of approximately 58.2%, as follows: (i) Ramsay Holdings HSA Limited
owned 9.8% of the outstanding Common Stock of the Company, (ii) Ramsay Holdings
owned approximately 40.3% of the outstanding Common Stock of the Company and
(iii) Paul Ramsay Hospitals Pty. Limited ("Ramsay Hospitals") owned
approximately 8.1% of the outstanding Common Stock of the Company.
F-13
RAMSAY YOUTH SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
6. BORROWINGS
The Company's long-term debt is as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------------
2001 2000
----------- -----------
<S> <C> <C>
Variable rate Term Loan, due October 30, 2003 ...... $ 8,134,000 $10,597,000
Revolver, due October 30, 2003 ..................... 7,503,000 5,586,000
Acquisition Loan, due October 30, 2003 ............. 1,849,000 2,162,000
Subordinated Note (net of discount of $340,000), due
January 24, 2007 ................................ 4,660,000 4,579,000
Subordinated Note (net of discount of $360,000), due
January 24, 2007 ................................ 4,640,000 4,560,000
Other .............................................. 92,000 27,000
----------- -----------
26,878,000 27,511,000
Less current portion ............................... 3,372,000 2,803,000
----------- -----------
$23,506,000 $24,708,000
=========== ===========
</TABLE>
On February 25, 2002, the Company's senior credit facility (the "Senior
Credit Facility") was amended to provide for a $3.0 million increase in the
revolving credit loan commitment and a $1.5 million additional advance on the
term loan. The amendment also increased permitted capital expenditures and made
certain other revisions to the Senior Credit Facility. The amended Senior Credit
Facility consists of a term loan (the "Term Loan") payable in monthly
installments ranging from $83,000 to $302,000 with a final installment of
$3,600,000 due on October 30, 2003 and a revolving credit facility (the
"Revolver") for an amount up to the lesser of $15,000,000 or the borrowing base
of the Company's receivables (as defined in the agreement).
The Company's Senior Credit Facility also provided for a $1,250,000
bridge loan advance under the Acquisition Loan. The bridge loan advance is
payable on the occurrence of certain events (as defined in the agreement).
In connection with the aforementioned bridge loan advance, a corporate
affiliate of Paul J. Ramsay entered into a Junior Subordinated Note Purchase
Agreement with the Senior Credit Facility lender to participate in the Senior
Credit Facility in an amount equal to the bridge loan advance.
Interest on the Term Loan and the Revolver varies, and at the option of
the Company, would equal (i) a function of a base rate plus a margin ranging
from 0.5% to 2.0% (5.5% at December 31, 2001), based on the Company's ratio of
total indebtedness to EBITDA or (ii) a function of the Eurodollar rate plus a
margin ranging from 2.0% to 3.5% (4.3% at December 31, 2001), based on the
Company's ratio of total indebtedness to EBITDA.
Interest on the Acquisition Loan varies, and at the option of the
Company, would equal (i) a function of a base rate plus a margin ranging from
0.75% to 2.25% (5.75% at December 31, 2001), based on the Company's ratio of
total indebtedness to EBITDA or (ii) a function of the Eurodollar rate plus a
margin ranging from 2.25% to 3.75% (5.18% at December 31, 2001), based on the
Company's ratio of total indebtedness to EBITDA.
Additionally, the Company is obligated to pay to the financial
institution an amount equal to one half of 1% of the unused portion of the
Revolver and the Acquisition Loan.
The Senior Credit Facility requires that the Company meet certain
covenants, including (i) the maintenance of certain fixed charge coverage,
interest coverage and leverage ratios, (ii) the maintenance of certain proforma
availability levels (as defined in the credit agreement) and (iii) a limitation
F-14
RAMSAY YOUTH SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
on capital expenditures. The Senior Credit Facility also prohibits the payment
of cash dividends to common stockholders of the Company until the Company's
EBITDA (as defined in the credit agreement) exceeds $7,800,000.
The Company failed to maintain the required total debt to EBITDA ratio
and the fixed charge coverage ratio as of December 31, 2000. The Company's
lender agreed to waive the requirements as of December 31, 2000 and to amend the
definitions of EBITDA and capital expenditures in the future. As of December 31,
2001, the Company was in compliance with the required total debt to EBITDA and
fixed charge coverage ratios stipulated in the Senior Credit Facility.
During the twelve months ended December 31, 2001, the Company exceeded
the capital expenditure limitation in the Senior Credit Facility. On February
25, 2002, the Company's lender agreed to amend the Senior Credit Facility,
retroactive to December 31, 2001, to provide for among other items: (i) an
increase in the permitted capital expenditures, (ii) a $3.0 million increase in
the revolving credit loan commitment, and (iii) a $1.5 million additional
advance on the term loan.
The Company and its subsidiaries have pledged substantially all of
their real property, receivables and other assets as collateral for the Senior
Credit Facility.
On January 25, 2000 and June 19, 2000, the Company entered into
subordinated note and warrant purchase agreements with two unrelated financial
institutions for an aggregate principal amount of $5 million each (the
"Subordinated Notes"). The Subordinated Notes permit each of the financial
institutions to exercise, under certain conditions, up to 475,000 warrants which
are convertible into the Company's common stock. The aggregate value of the
warrants at the time of issuance was $844,000. On August 17, 2001, one of the
financial institutions exercised its warrant purchase agreement and converted
475,000 warrants into 294,597 shares of common stock utilizing the cashless
exercise provision outlined in the warrant agreement. Borrowings under the
Subordinated Notes bear interest at a rate of 12.5% per annum. The interest is
payable quarterly, and the principal balance and any unpaid interest is due
January 24, 2007.
In connection with the Subordinated Notes, the Company incurred loan
costs of approximately $679,000. The loan costs are deferred and amortized
ratably over the life of the loans. The amortization is included in interest and
other financing charges in the accompanying consolidated statement of operations
and the unamortized balance is included as unamortized loan costs in the
accompanying consolidated balance sheet.
The aggregate scheduled maturities of long term debt during the next
five years are as follows: 2002 -- $3,372,000; 2003 -- $14,182,000; 2004 --
$7,000; 2005 -- $7,000; 2006 -- $7,000; thereafter -- $10,003,000.
7. OPERATING LEASES
In April 1995, the Company sold and leased back the land, buildings and
fixed equipment of its Mission Vista facility in San Antonio, Texas. The lease
at the Mission Vista facility has a primary term of 15 years (with three
successive renewal options of 5 years each) and at December 31, 2001 had
aggregate annual minimum rentals of approximately $604,000, payable monthly.
On September 28, 1998, the Company sold and leased back the land,
buildings and fixed equipment of its Havenwyck facility in Auburn Hills,
Michigan. The lease has a term of 12 years and currently requires annual minimum
lease payments of approximately $1,359,000, payable monthly. Effective April 1
of each year, the lease payments are subject to upward adjustments (not to
exceed 3% annually) in the consumer price index over the preceding twelve
months.
In August 1997, the Company leased its Meadowlake facility in Oklahoma
to an independent healthcare provider (the "tenant") for an initial term of
three years, with four three-year renewal options. Lease payments total $360,000
per year and at each renewal option are subject to adjustment based on the
F-15
RAMSAY YOUTH SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
change in the consumer price index during the preceding lease period. In
accordance with the terms of the lease agreement, the tenant is responsible for
all costs of ownership, including taxes, insurance, maintenance and repairs. In
addition, the tenant has the option to purchase the facility at any time for
$2,500,000. The book value of the facility was $1,982,000 on December 31, 2001.
Rent expense related to noncancellable operating leases amounted to
$3,916,000, $3,256,000 and $2,967,000 for the years ended December 31, 2001,
2000 and 1999, respectively.
Future minimum lease payments required under noncancellable operating
leases as of December 31, 2001 are as follows: 2002 -- $3,198,000; 2003 --
$2,808,000; 2004 -- $2,370,000; 2005 -- $2,257,000; 2006 -- $1,989,000 and
thereafter -- $5,969,000.
8. SEGMENT INFORMATION
The Company is a provider of behavioral health care treatment programs
focused on at-risk and special needs youth in residential and non-residential
settings in ten states and the Commonwealth of Puerto Rico. During the quarter
ended June 30, 2001, the Company refined its segment definitions to more
appropriately reflect its business operations and management responsibilities.
The primary change from the segment information presented as of December 31,
2000 consists of a change in the names of the segments and the classification of
certain items within the segments. Accordingly, the corresponding information
for earlier periods has been reclassified to reflect its new reportable business
segments, owned operations and management contract operations.
OWNED OPERATIONS
The Company offers its mental health and behavioral health programs and
services at its owned and leased facilities in residential and non-residential
settings.
The residential setting provides a safe, secure and highly structured
environment for the evaluation and development of long-term intensive treatment
services. The programs focus on a cognitive behavioral model with family, group
and individual counseling, social and life skills development, and educational
and recreational programs. The primary focus of these services is to reshape
antisocial behaviors by stressing responsibility and achievement of performance
and treatment goals.
The non-residential setting is designed to meet the special needs of
patients requiring a less structured environment than the residential setting,
but providing the necessary level of treatment, support and assistance to
transition back into society. The primary focus of this program is to provide
patients, with a clinically definable emotional, psychiatric or dependency
disorder, with therapeutic and intensive treatment services. Patients who are
assisted through this program have either transitioned out of a residential
treatment program, or do not require the intensive services of a residential
treatment program.
Many of the Company's programs are complemented with specialized
educational services designed to modify behavior and assist individuals in
developing their academic, social, living and vocational skills necessary to
participate successfully in society.
MANAGEMENT CONTRACT OPERATIONS
The Company's programs and services in its management contract
operations are similar in nature to the programs and services offered by the
Company at its owned operations; however, the programs and services are provided
at facilities owned by the contracting governmental agency. These programs and
services focus on solving the specialized needs of the respective agency by
providing effective treatment interventions, including counseling, social
F-16
RAMSAY YOUTH SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
interests, substance abuse education and treatment, mental health services,
cognitive and life skills development, accredited education and vocational
skills. The Company believes that a comprehensive approach, which develops the
social, educational, and vocational skills of the individual, creates
responsible, contributing, pro-social individuals. This comprehensive approach
is essential to achieving the program's objective of reducing recidivism and
integrating the youth into their communities as responsible and productive
individuals.
The following table sets forth, for each of the periods indicated,
certain information about segment results of operations and segment assets.
There are no inter-segment sales or transfers. Segment profit consists of
revenue less operating expenses, and does not include investment income and
other, interest and other financing charges, non-recurring items and income
taxes. Total assets are those assets used in the operations in each segment.
Corporate assets include cash and cash equivalents, property and equipment,
intangible assets and notes receivable. The accounting policies of the
reportable segments are the same as those described in the summary of
significant accounting policies.
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
----------------------------------------------------
2001 2000 1999
------------- ------------- ------------
<S> <C> <C> <C>
SEGMENT REVENUE
Owned operations .......................... $ 106,140,000 $ 87,506,000 $ 75,840,000
Management contracts ..................... 28,276,000 20,854,000 5,634,000
------------- ------------- ------------
Total consolidated revenues ................. $ 134,416,000 $ 108,360,000 $ 81,474,000
============= ============= ============
SEGMENT DEPRECIATION AND AMORTIZATION
Owned operations ......................... $ 2,156,000 $ 1,744,000 $ 1,683,000
Management contracts ..................... 123,000 140,000 177,000
------------- ------------- ------------
2,279,000 1,884,000 1,860,000
Reconciling items
Corporate depreciation and amortization .. 151,000 485,000 506,000
------------- ------------- ------------
Total consolidated revenues ................. $ 2,430,000 $ 2,369,000 $ 2,366,000
============= ============= ============
SEGMENT PROFIT
Owned operations ......................... $ 10,207,000 $ 8,548,000 $ 8,899,000
Management contracts ..................... 3,383,000 1,527,000 (225,000)
------------- ------------- ------------
13,590,000 10,075,000 8,674,000
Reconciling items:
Corporate expenses ....................... (5,917,000) (3,564,000) (5,769,000)
Other income ............................. -- -- 1,548,000
Interest and other financing charges ..... (3,299,000) (2,706,000) (1,268,000)
Losses related to asset sales and closed
businesses ................................ (130,000) (705,000) --
------------- ------------- ------------
Total consolidated income before income taxes $ 4,244,000 $ 3,100,000 $ 3,185,000
============= ============= ============
SEGMENT CAPITAL EXPENDITURES
Owned operations ......................... $ 2,053,000 $ 2,147,000 $ 917,000
Management contracts ..................... 246,000 330,000 890,000
------------- ------------- ------------
2,299,000 2,477,000 1,807,000
Reconciling items
Corporate assets ......................... 168,000 26,000 57,000
------------- ------------- ------------
Total consolidated capital expenditures ..... $ 2,467,000 $ 2,503,000 $ 1,864,000
============= ============= ============
</TABLE>
F-17
RAMSAY YOUTH SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
-------------------------------
2001 2000
----------- -----------
<S> <C> <C>
SEGMENT ASSETS
Owned operations ..... $57,893,000 $59,860,000
Management contracts . 6,729,000 6,593,000
----------- -----------
Total segment assets .... 64,622,000 66,453,000
RECONCILING ITEMS
Corporate assets ..... 4,389,000 3,145,000
----------- -----------
Total consolidated assets $69,011,000 $69,598,000
=========== ===========
</TABLE>
GEOGRAPHIC AREA DATA
The Company's revenues are derived solely from within the United States
and the Commonwealth of Puerto Rico.
MAJOR CUSTOMERS
Revenues from one payor source (Florida Department of Juvenile Justice)
represented approximately $22,433,000, $14,452,000 and $3,862,000 of
consolidated revenues for the years ended December 31, 2001, 2000 and 1999,
respectively.
9. STOCKHOLDERS' EQUITY AND REDEEMABLE PREFERRED STOCK
The Certificate of Incorporation of the Company, as amended, authorizes
the issuance of 30,000,000 shares of Common Stock, $.01 par value, 800,000
shares of Class A Preferred Stock, $1.00 par value, and 2,000,000 shares of
Class B Preferred Stock, $1.00 par value, of which 333,333 shares have been
designated as Class B Preferred Stock, Series 1987, $1.00 par value, 152,321
shares have been designated as Series C Preferred Stock, $1.00 par value,
100,000 shares have been designated as Series 1996 Preferred Stock, $1.00 par
value, 100,000 shares have been designated as Series 1997 Preferred Stock, $1.00
par value and 4,000 shares have been designated as Series 1997-A Preferred
Stock.
The Company's Board of Directors has adopted a Stockholder Rights Plan,
under which the Company distributed a dividend of one common share purchase
right for each outstanding share of the Company's Common Stock (calculated as if
all outstanding shares of Series C Preferred Stock were converted into shares of
Common Stock). Each right becomes exercisable upon the occurrence of certain
events for a number of shares of the Company's Common Stock having a market
price totaling $72 (subject to certain anti-dilution adjustments which may occur
in the future). The rights currently are not exercisable and will be exercisable
only if a new person acquires 20% or more (30% or more in the case of certain
persons, including investment companies and investment advisors) of the
Company's Common Stock or announces a tender offer resulting in ownership of 20%
or more of the Company's Common Stock. The rights, which expire on August 14,
2005, are redeemable in whole or in part at the Company's option at any time
before a 20% or greater position has been acquired, for a price of $.03 per
right.
F-18
RAMSAY YOUTH SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
10. EARNINGS PER SHARE
The following table sets forth the computation of basic and diluted
earnings per share:
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
-------------------------------------------------
2001 2000 1999
----------- ---------- ----------
<S> <C> <C> <C>
Net income, as reported ....................... $ 3,466,000 $2,852,000 $3,117,000
=========== ========== ==========
Denominator:
Denominator for basic earnings per share -
weighted-average shares .................... 9,046,000 8,913,000 8,890,000
Effect of dilutive securities:
Employee stock options and warrants ........ 1,294,000 41,000 648,000
----------- ---------- ----------
Denominator for diluted earnings per share -
adjusted weighted-average shares and
assumed conversions ..................... 10,340,000 8,954,000 9,538,000
=========== ========== ==========
Basic earnings per share ......................... $ .38 $ .32 $ .35
=========== ========== ==========
Diluted earnings per share ....................... $ .34 $ .32 $ .33
=========== ========== ==========
</TABLE>
For the years ended December 31, 2001, 2000 and 1999, respectively,
785,449, 1,698,938 and 1,309,675 options and warrants were excluded from the
above computation because their effect would have been antidilutive.
11. OPTIONS AND WARRANTS
The Company's Stock Option Plans provide for options to various key
employees, non-employee directors, consultants and other individuals providing
services to the Company, to purchase shares of Common Stock at no less than the
fair market value of the stock on the date of grant. Options granted become
exercisable in varying increments including (a) 100% one year after the date of
grant, (b) 50% each year beginning one year after the date of grant (c) 33% each
year beginning on the date of grant, (d) 33% each year beginning one year from
the date of grant and (e) 25% each year beginning one year from the date of
grant. Options issued to employees and directors are subject to anti-dilution
adjustments and generally expire the earlier of 10 years after the date of grant
or 60 days after the employee's termination date or the director's resignation.
The weighted average remaining contractual life of all outstanding options at
December 31, 2001 is approximately five years.
On October 14, 1997, the Board of Directors adopted the Ramsay Youth
Services, Inc. 1997 Long Term Incentive Plan (the "1997 Plan"). Under the 1997
Plan, 166,667 shares of Common Stock are available for issuance of awards.
Shares distributed under the 1997 Plan may be either newly issued shares or
treasury shares. Awards granted under the plan may be in the form of stock
appreciation rights, restricted stock, performance awards and other stock-based
awards. During the year ended December 31, 1999, the Company granted 91,500
options under the 1997 Plan.
On August 16, 1999, the Board of Directors adopted the Ramsay Youth
Services, Inc. 1999 Stock Option Plan. Under the 1999 Stock Option Plan,
1,250,000 shares of Common Stock were available for issuance of awards. During
the year ended December 31, 1999, the Company granted 1,250,000 options under
the 1999 Stock Option Plan and 339,000 options under various prior year plans.
F-19
RAMSAY YOUTH SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
During the year ended December 31, 2000, the Company granted 50,000
options under the RMCI Plan.
On April 4, 2001, the Board of Directors: (i) amended the 1999 Stock
Option Plan (the "1999 Amended Plan") and reduced the number of Common Stock
shares available for issuance to 250,000 and (ii) adopted the Ramsay Youth
Services, Inc. 2001 Stock Option Plan (the "2001 Plan"). Under the 2001 Plan,
1,500,000 shares of Common Stock are available for issuance of awards. Shares
distributed under the 1999 Amended Plan and the 2001 Plan may be either newly
issued shares or treasury shares.
During the year ended December 31, 2001, the Company granted 2,375,000
options under the various Company stock option plans.
In connection with a repricing opportunity authorized by the Company's
Board of Directors on November 10, 1995, approximately 500,000 options (of which
19,236 are still outstanding at December 31, 2001) were voluntarily repriced by
the option holders. Under this repricing opportunity, the exercise prices of the
holders' outstanding options were reduced to $7.50 per share, the closing price
for the Common Stock on the NASDAQ National Market System on November 10, 1995.
The Company granted 304,087 options during fiscal year ended June 30, 1997
(including former Ramsay Managed Care, Inc. ("RMCI")) options which became
options to purchase an aggregate of 104,804 shares of the Company's Common Stock
on the date of the merger). These options, along with the options repriced on
November 10, 1995, are not exercisable until the closing price of the Common
Stock, as quoted on the NASDAQ SmallCap Market System, equals or exceeds $21.00
per share for at least 15 trading days, which need not be consecutive. As of
December 31, 2001, none of these options are exercisable.
On September 10, 1996, the Company entered into an Exchange Agreement
whereby Mr. Paul J. Ramsay exchanged 158,690 options with an exercise price of
$7.50 per share (pursuant to the repricing opportunity discussed above), for
warrants to purchase an aggregate of 166,667 shares of Common Stock at $7.50 per
share. The warrants, which expire in June 2003, are not exercisable until the
closing price of the Common Stock, as quoted on the NASDAQ SmallCap Market
System, equals or exceeds $21.00 per share for at least 15 trading days, which
need not be consecutive, subsequent to September 10, 1996. Most of the options
exchanged were originally granted under the Company's 1991 Stock Option Plan.
The Company has additional warrants outstanding to purchase an
aggregate of 71,000 shares of the Company's Common Stock (44,333 of which are
owned by corporate affiliates of Mr. Ramsay). These warrants were issued in
exchange for warrants to purchase common stock of RMCI, and became warrants of
the Company as part of the merger with RMCI.
As part of the Company's senior and subordinated notes (which were
refinanced on September 30, 1997), the Company issued warrants to Aetna Life
Insurance Company and Monumental Life Insurance Company. These warrants entitled
their holders to purchase an aggregate of 67,338 shares of the Company's Common
Stock at $13.32 per share. These warrants expired on March 31, 2000.
In connection with the January 25, 2000 and June 19, 2000 subordinated
note and warrant purchase agreements, the Company issued warrants to two
unrelated financial institutions to each purchase up to 475,000 shares of the
Company's Common Stock at $1.50 per share. These issuances are exercisable on or
before January 25, 2010 and June 19, 2010, respectively, and contain
anti-dilution provisions.
On August 27, 2001, a financial institution exercised its warrant
purchase agreement. The institution converted 475,000 warrants into 294,597
shares of common stock utilizing a cashless exercise provision as outlined in
the agreement.
The Company has frozen its 1990 and 1991 Stock Option Plans, and
authorized 132,319, 166,667, 166,667, 166,667, 250,000 and 1,500,000 shares
F-20
RAMSAY YOUTH SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
under its 1993, 1995, 1996, 1997, 1999 Amended and 2001 Stock Option Plans,
respectively. At December 31, 2001, 139,536 shares were available for issuance
under these Plans.
Additionally, as previously mentioned, effective on the date of the
RMCI merger, the former RMCI options became options to purchase an aggregate of
104,804 shares of the Company's Common Stock. As of December 31, 2001, no shares
were available for issuance under this plan.
Summarized information regarding the Company's Stock Option Plans is as
follows:
Options exercisable based solely on employees rendering additional
service:
<TABLE>
<CAPTION>
WEIGHTED
NUMBER AVERAGE
OF OPTION EXERCISE
SHARES PRICE PRICE
--------------- ---------------- --------------
<S> <C> <C> <C>
Options outstanding at December 31, 1998 564,426 $4.69 - $18.93 $8.43
Granted 1,680,500 $2.69 $2.69
Canceled (90,607) $4.69 - $18.93 $9.78
---------------
Options outstanding at December 31, 1999 2,154,319 $2.69 - $18.93 $3.87
Granted (non employee) 50,000 $1.56 $1.56
Canceled (1,056,184) $2.69 - $13.30 $3.95
---------------
Options outstanding at December 31, 2000 1,148,135 $1.56 - $18.93 $3.63
Granted 2,375,000 $0.85 - $2.05 $1.04
Canceled (825,831) $2.69 - $8.25 $3.67
---------------
Options outstanding at December 31, 2001 2,697,304 $0.85 - $18.93 $1.34
===============
Exercisable at December 31, 2001 191,692 $4.30
===============
Exercisable at December 31, 2000 432,024 $5.24
===============
Exercisable at December 31, 1999 326,631 $8.16
===============
</TABLE>
F-21
RAMSAY YOUTH SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
Options not exercisable until the closing price for the Common Stock as
quoted on the NASDAQ SmallCap Market System equals or exceeds $21.00 per share
for at least 15 trading days:
<TABLE>
<CAPTION>
WEIGHTED
NUMBER AVERAGE
OF OPTION EXERCISE
SHARES PRICE PRICE
--------------- --------------- ---------------
<S> <C> <C> <C>
Options outstanding at December 31, 1998 306,240 $7.50 - $9.00 $8.46
Canceled (30,552) $7.50 - $9.38 $8.40
---------------
Options outstanding at December 31, 1999 275,688 $7.50 - $9.38 $8.33
Canceled (162,666) $7.50 - $9.38 $9.13
---------------
Options outstanding at December 31, 2000 113,022 $7.50 - $9.38 $7.70
Canceled (87,646) $7.50 - $9.00 $7.62
---------------
Options outstanding at December 31, 2001 25,376 $7.50 - $9.38 $7.93
===============
</TABLE>
Shares of common stock reserved for future issuance at December 31,
2001 are as follows:
Options..................................... 2,722,680
Warrants.................................... 962,769
------------
3,685,449
============
The following table summarizes information about options outstanding at
December 31, 2001.
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
-------------------------------------------------------------------------------- -------------------------------------
WEIGHTED
AVERAGE REMAINING WEIGHTED WEIGHTED
RANGE OF NUMBER CONTRACTUAL LIFE AVERAGE NUMBER AVERAGE
EXERCISE PRICES OUTSTANDING (IN YEARS) EXERCISE PRICE EXERCISABLE EXERCISE PRICE
------------------- ------------------ -------------------- ----------------- ------------------ -----------------
<S> <C> <C> <C> <C> <C>
$0.85 2,000,000 9.26 $0.85 -- --
$1.56 - $2.69 619,500 8.48 2.21 113,917 2.52
$4.69 42,497 6.9 4.69 42,497 4.69
$7.50 18,404 1.98 7.50 -- --
$8.25 - $18.93 42,279 4.62 9.49 35,278 9.57
------------------- ------------------ -------------------- ----------------- ------------------ -----------------
$0.85 - $18.93 2,722,680 7.09 $1.40 191,692 $4.30
=================== ================== ==================== ================= ================== =================
</TABLE>
Pro forma information regarding net income and earnings per share has
been determined as if the Company had accounted for its employee stock options
under the fair value method of SFAS No. 123. The fair value for these options
was estimated at the date of grant using a Black-Scholes option pricing model
with the following weighted-average assumptions for grants in the year ended
December 31, 2001 and 1999. The Company did not award any employee stock options
during the year ended December 31, 2000:
o expected volatility rates of 119% for the year ended December 31,
2001 and 90% for the year ended December 31, 1999.
F-22
RAMSAY YOUTH SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
o risk-free interest rates of 5% for the year ended December 31, 2001
and 5.2% for the year ended December 31, 1999.
o expected lives of ten years for all periods
o a dividend yield of zero for all periods
The Black-Scholes option valuation model was developed for use in
estimating the fair value of traded options which have no vesting restrictions
and are fully transferable. In addition, option valuation models require the
input of highly subjective assumptions including the expected stock price
volatility. Because the Company's employee stock options have characteristics
significantly different from those of traded options, and because changes in the
subjective input assumptions can materially affect the fair value estimate, in
management's opinion, the existing models do not necessarily provide a reliable
single measure of the fair value of its employee stock options.
For purposes of pro forma disclosures, the estimated fair value of the
options is amortized to expense over the options' vesting period. Because
compensation expense associated with a stock option award is recognized over the
vesting period, the initial impact of applying SFAS No. 123 may not be
indicative of compensation expense in future years, when the effect of the
amortization of multiple awards will be reflected in pro forma net income. The
Company's actual and pro forma information follows:
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
---------------------------------------------------------
2001 2000 1999
------------- ------------- -------------
<S> <C> <C> <C>
Net income as reported ................. $ 3,466,000 $ 2,852,000 $ 3,117,000
Basic net income per share as reported . $ .38 $ .32 $ .35
Diluted net income per share as reported $ .34 $ .32 $ .33
Pro forma net income ................... $ 1,948,000 $ 1,639,000 $ 1,847,000
Basic pro forma net income per share ... $ .22 $ .18 $ 0.21
Diluted pro forma net income per share . $ .19 $ .18 $ 0.19
</TABLE>
In addition to the Employee Stock Option plans, the Company also has an
Employee Stock Purchase Plan available to employees.
The Employee Stock Purchase Plan (the "ESPP") allows all eligible
employees to purchase shares of common stock on semi-annual offering dates at a
price that is the lessor of 85% if the fair market value of the shares on the
first day or the last day of the semi-annual period. Employee contributions were
$44,000 for 2001, $79,000 for 2000 and $45,000 for 1999. Through the ESPP, the
Company issued to employees 29,672 shares in 2001, 34,989 shares in 2000 and
6,946 shares in 1999. As of December 31, 2001, 35,339 shares were available for
future issuance.
F-23
RAMSAY YOUTH SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
12. INCOME TAXES
The following table summarizes tax effects comprising the Company's net
deferred tax assets and liabilities:
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------------------
2001 2000
------------ ------------
<S> <C> <C>
Deferred tax liabilities:
Book basis of fixed assets over tax basis ....... $ 57,000 $ 298,000
Prepaid maintenance ............................. 396,000 217,000
Other ........................................... 248,000 248,000
------------ ------------
Total deferred tax liabilities ............ 701,000 763,000
Deferred tax assets:
Allowance for doubtful accounts ................. 735,000 1,183,000
General and professional liability insurance .... 1,806,000 1,730,000
Accrued employee benefits ....................... 816,000 515,000
Capital loss carryovers ......................... 445,000 445,000
Tax basis of intangible assets over book basis . -- 187,000
Other accrued liabilities ....................... 2,568,000 3,554,000
Other ........................................... 2,000 2,000
Net operating loss carryovers ................... 15,899,000 16,189,000
Alternative minimum tax credit carryovers ....... 1,150,000 1,109,000
------------ ------------
Total deferred tax assets ................. 23,421,000 24,914,000
Valuation allowance for deferred tax assets ........ (22,720,000) (24,151,000)
------------ ------------
Deferred tax assets, net of valuation
allowance ............................... 701,000 763,000
------------ ------------
Net deferred tax assets ................... $ -- $ --
============ ============
</TABLE>
The provision for income taxes consists of the following:
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
---------------------------------------------
2001 2000 1999
-------------- -------------- --------------
<S> <C> <C> <C>
Income taxes currently payable:
Federal.................... $185,000 $ -- $ --
State...................... 593,000 248,000 68,000
-------------- -------------- --------------
Total $778,000 $248,000 $68,000
============== ============== ==============
</TABLE>
A reconciliation from the U.S. statutory federal income tax rate to the
effective income tax rate follows:
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
------------------------------------------
2001 2000 1999
------------- ------------ -------------
<S> <C> <C> <C>
U.S. Federal statutory rate................. 34.0% 34.0% 34.0%
(Decrease) increase in valuation allowance.. (26.5) (20.1) (16.1)
Non-deductible intangible assets............ 4.9 -- --
State income taxes, net of federal benefit.. 9.2 5.3 --
Benefit of net operating loss recognized.... (6.8) (14.2) (17.1)
Other....................................... 3.5 3.0 1.3
------------- ------------ -------------
Effective income tax rate................... 18.3% 8.0% 2.1%
============= ============ =============
</TABLE>
F-24
RAMSAY YOUTH SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
The Company has no net deferred tax assets at December 31, 2001 and
December 31, 2000. The Company's valuation allowance related to deferred tax
assets was decreased by $1,431,000 in 2001. The Company's valuation allowance
related to deferred tax assets was decreased by $1,063,000 during the year ended
December 31, 2000 and decreased by $574,000 during the year ended December 31,
1999.
Current accounting standards require that deferred income taxes reflect
the tax consequences on future years of differences between the tax bases of
assets and liabilities and their carrying values for financial reporting
purposes. In addition, future tax benefits, such as net operating loss ("NOL")
carryforwards, are required to be recognized to the extent that realization of
such benefits is more likely than not. A valuation allowance is established for
those benefits that do not meet the more likely than not criteria. A valuation
allowance has been established for the entire balance of the net deferred tax
assets at December 31, 2001 due to the uncertainty regarding the Company's
ability to generate future taxable income sufficient to utilize the net
operating loss carryforwards.
At December 31, 2001, the Company had federal net operating loss
carryovers of approximately $39,964,000, and alternative minimum tax credit
carryovers of approximately $1,150,000 available to reduce future federal income
taxes, subject to certain annual limitations. The net operating loss carryovers
expire as follows:
YEAR OF
AMOUNT EXPIRATION
------------------- -----------------
$7,000,000 2002
32,964,000 2010-18
-------------------
$39,964,000
===================
13. REIMBURSEMENT FROM THIRD-PARTY CONTRACTUAL AGENCIES
The Company records amounts due to or from third-party contractual
agencies based on its best estimates of amounts to be ultimately received or
paid under cost reports filed with the appropriate intermediaries. Final
determination of amounts earned under contractual reimbursement programs is
subject to review and audit by these intermediaries. Differences between amounts
recorded as estimated settlements and the audited amounts are reflected as
adjustments to provider based revenues in the period the final determination is
made.
Laws and regulations governing the Medicare and Medicaid programs are
complex and subject to interpretation. The Company believes that it is in
compliance with all applicable laws and regulations. Management believes that
adequate provision has been made for any adjustments that may result from future
intermediary reviews and audits and is not aware of any claims, disputes or
unsettled matters concerning third-party reimbursement that would have a
material adverse effect on the Company's financial statements.
The Company derived approximately 87%, 85% and 81% of its revenues from
services provided to individuals covered by various federal and state
governmental programs in the years ended December 31, 2001, 2000 and 1999,
respectively.
14. SAVINGS PLAN
The Company has a 401(k) tax deferred savings plan, administered by an
independent trustee, covering substantially all employees over age twenty-one
meeting a one-year minimum service requirement. The plan was adopted for the
purpose of supplementing employees' retirement, death and disability benefits.
The Company may, at its option, contribute to the plan through an Employer
Matching Account, but is under no obligation to do so. An employee becomes
vested in his Employer Matching Account over a four-year period.
F-25
RAMSAY YOUTH SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
The Company did not contribute to the plan during the years ended
December 31, 2001, 2000 and 1999.
15. COMMITMENTS AND CONTINGENCIES
The Company is party to certain claims, suits and complaints, including
those matters described below, whether arising from the acts or omissions of its
employees, providers or others, which arise in the ordinary course of business.
The Company has established reserves at December 31, 2001 and 2000 for the
estimated amounts, which might be recovered from the Company as a result of all
outstanding legal proceedings. In the opinion of management, the ultimate
resolution of these pending legal proceedings is not expected to have a material
adverse effect on the Company's financial position, results of operations or
liquidity.
In March 1997, a former executive vice president of the Company
commenced arbitration and court proceedings against the Company in which he
claimed his employment was wrongfully terminated by the Company and sought
damages of approximately $2.3 million. On June 28, 1999, the arbitrator awarded
the former executive vice president $0.7 million in damages and interest.
Additionally, the Company was responsible for all fees and expenses incurred by
the former executive vice president in connection with the claim. The Company
had fully reserved for this contingency as of December 31, 1998. The Company
settled this case for $1.1 million on May 17, 2000.
Management has evaluated the probability surrounding a litigation claim
sought by the purchaser of one of the Company's former subsidiaries as being
remote. Accordingly, in December 2000, the Company reversed its $2,500,000
litigation reserve.
16. VALUATION AND QUALIFYING ACCOUNTS
Activity in the Company's Valuation and Qualifying Accounts consists of
the following:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------------
2001 2000
----------- -----------
<S> <C> <C>
Allowance for Doubtful Accounts:
Balance at beginning of period ............... $ 2,807,000 $ 2,615,000
Provision for doubtful accounts ............... 2,911,000 2,817,000
Write-offs of uncollectable accounts receivable (3,784,000) (2,625,000)
----------- -----------
Balance at end of period ...................... $ 1,934,000 $ 2,807,000
=========== ===========
Valuation Allowance on Property and Equipment: $ 954,000 $ 954,000
=========== ===========
Tax Valuation Allowance for Deferred Tax Assets:
Balance at beginning of period..................... $24,151,000 $25,214,000
Deductions......................................... (1,431,000) (1,063,000)
------------- ------------
Balance at end of period........................... $22,720,000 $24,151,000
============= =============
</TABLE>
F-26
RAMSAY YOUTH SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
17. SUPPLEMENTAL CASH FLOW INFORMATION
The Company's non-cash investing and financing activities were as
follows:
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
------------------------------------------
2001 2000 1999
---------- -------- -------
<S> <C> <C> <C>
Cancellation of consulting agreement ......... $ -- $249,000 $ --
Issuance of warrants in connection with
subordinated debt ......................... -- 844,000 --
Financed acquisition of property and equipment 86,000 -- 37,000
Note received in connection with sale of
property and equipment .................... 1,670,000 252,000 --
</TABLE>
18. QUARTERLY RESULTS OF OPERATIONS AND OTHER SUPPLEMENTAL INFORMATION
(UNAUDITED)
Following is a summary of the Company's quarterly results of operations
for the years ended December 31, 2001 and 2000.
<TABLE>
<CAPTION>
QUARTER ENDED
---------------------------------------------------------------
2001 (b) MARCH 31 JUNE 30 SEPTEMBER 30 DECEMBER 31
-------------------------------------------- -------------- --------------- --------------- --------------
<S> <C> <C> <C> <C>
Net revenues............................. $31,789,000 $33,840,000 $33,638,000 $35,149,000
Income from operations................... 1,545,000 1,787,000 1,995,000 2,470,000
Income before income taxes............... 560,000 921,000 1,249,000 1,514,000
Net income............................... 384,000 796,000 1,078,000 1,208,000
INCOME PER COMMON SHARE (a)
Basic.................................... $.04 $.09 $.12 $.13
Diluted.................................. $.04 $.08 $.10 $.11
2000 (c)
--------------------------------------------
Net revenues............................. $23,457,000 $25,257,000 $27,865,000 $31,781,000
Income from operations................... 668,000 1,134,000 1,020,000 3,689,000
Income before income taxes............... 202,000 149,000 200,000 2,549,000
Net income............................... 160,000 107,000 138,000 2,447,000
INCOME PER COMMON SHARE (a)
Basic.................................... $.02 $.01 $.02 $.27
Diluted.................................. $.02 $.01 $.02 $.27
</TABLE>
(a) The quarterly earnings per share amounts may not equal the annual amounts
due to changes in the average common and dilutive common equivalent shares
outstanding during the year.
(b) During the quarter ended December 31, 2001, the Company recorded an asset
impairment charge of $0.1 million relating to the difference between the
carrying value of one of its closed therapeutic living facilities and the
expected net proceeds from the sale of the facility.
F-27
RAMSAY YOUTH SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
During the quarter ended December 31, 2001, the Company recorded a loss of
$0.1 million relating to a discount on the prepayment of a note receivable
owed to the Company.
(c) During the three months ended June 30, 2000, the Company recorded a $0.5
million loss on sale of assets as a result of the sale on June 7, 2000 of
five of the Company's contracts to manage charter schools.
During the three months ended December 31, 2000, the Company recorded an
additional loss on sale of assets of $0.2 million representing cancellation
fees related to a long term consulting agreement with the purchaser of
these assets.
During the three months ended December 31, 2000, the Company reduced its
litigation reserves by approximately $2.5 million because Management of the
Company concluded that the payment of this liability was remote.
F-28
INDEX OF EXHIBITS
<TABLE>
<CAPTION>
PAGE
NUMBER
------
<S> <C> <C>
2.3 Agreement of sale and purchase dated April 12, 1995 by and between RHCI San Antonio, Inc. and
Capstone Capital Corporation (incorporated by reference to Exhibit 2.8 to the Company's Annual
Report on Form 10-K for the year ended June 30, 1995). Pursuant to Reg. S-K, Item 601(b)(2), the
Company agrees to furnish a copy of the Schedules and Exhibits to such Agreement to the Commission
upon request
2.4 Agreement and Plan of Merger dated as of October 1, 1996 among Ramsay Managed Care, Inc., the
Company and RHCI Acquisition Corp. (incorporated by reference to Exhibit 2 to the Company's
Current Report on Form 8-K dated October 2, 1996). Pursuant to Reg. S-K, Item 601(b)(2), the
Company agrees to furnish a copy of the Disclosure Schedules to such Agreement to the Commission
upon request
2.5 Agreement and Plan of Merger dated as of July 1, 1997 among Summa Healthcare Group, Inc., the
Company and Ramsay Acquisition Corporation (incorporated by reference to Exhibit 2.5 to the
Company's Annual Report on Form 10-K for the year ended June 30, 1997)
2.6 Agreement of Purchase and Sale dated as of March 18, 1998 by and between Ramsay Louisiana, Inc.
and Health-One Properties, LLC (incorporated by reference to Exhibit 2.6 to the Company's
Quarterly Report on Form 10-Q for the quarter ended March 31, 1998). Pursuant to Reg. S-K, Item
601(b)(2), the Company agrees to furnish a copy of the Disclosure Schedules and attachments to
such Agreement to the Commission upon request
2.7 Stock Purchase Agreement dated as of May 1, 1998 by and among the Company, Ramsay Managed Care,
Inc. and Horizon Health Corporation (incorporated by reference to Exhibit 2.7 to the Company's
Quarterly Report on Form 10-Q for the quarter ended March 31, 1998). Pursuant to Reg. S-K, Item
601(b)(2), the Company agrees to furnish a copy of the Disclosure Schedules and attachments to
such Agreement to the Commission upon request
2.8 Asset Purchase Agreement dated as of May 15, 1998 by and among Greenbrier Hospital, Inc., the
Company and Provider Options Holdings, L.L.C (incorporated by reference to Exhibit 2.8 to the
Company's Quarterly Report on Form 10-Q for the quarter ended March 31, 1998). Pursuant to Reg. S-
K, Item 601(b)(2), the Company agrees to furnish a copy of the Disclosure Schedules and
attachments to such Agreement to the Commission upon request
2.9 Purchase Agreement dated as of June 24, 1998 among Charter Behavioral Health Systems, LLC, the
Company, Carolina Treatment Center, Inc., Houma Psychiatric Hospital, Inc., Mesa Psychiatric
Hospital, Inc., RHCI San Antonio, Inc., The Haven Hospital, Inc., Transitional Care Ventures
(Arizona), Inc., Transitional Care Ventures (North Texas), Inc. and Transitional Care Ventures
(Texas), Inc. (incorporated by reference to Exhibit 2.9 to the Company's Current Report on Form
8-K dated October 9, 1998). Pursuant to Reg. S-K, Item 601(b)(2), the Company agrees to furnish a
copy of the Disclosure Schedules and attachments to such Agreement to the Commission upon request
2.10 Purchase and Sale Contract dated as of June 25, 1998 among Charter Behavioral Health Systems, LLC,
Carolina Treatment Center, Inc. and Mesa Psychiatric Hospital, Inc. (incorporated by reference to
Exhibit 2.10 to the Company's Current Report on Form 8-K dated October 9, 1998). Pursuant to Reg.
S-K, Item 601(b)(2), the Company agrees to furnish a copy of the Disclosure Schedules and
attachments to such Agreement to the Commission upon request
</TABLE>
E-1
<TABLE>
<CAPTION>
PAGE
NUMBER
------
<S> <C> <C>
2.11 Purchase and Sale Contract dated as of June 26, 1998 among Crescent Real Estate Equities Limited
Partnership and The Haven Hospital, Inc. (incorporated by reference to Exhibit 2.11 to the
Company's Current Report on Form 8-K dated October 9, 1998). Pursuant to Reg. S-K, Item 601(b)(2),
the Company agrees to furnish a copy of the Disclosure Schedules and attachments to such Agreement
to the Commission upon request
2.12 Asset Purchase Agreement dated as of July 2, 1998 among West Virginia University Hospitals, Inc.,
Psychiatric Institute of West Virginia, Inc. and the Company (incorporated by reference to Exhibit
2.12 to the Company's Current Report on Form 8-K dated October 9, 1998). Pursuant to Reg. S-K,
Item 601(b)(2), the Company agrees to furnish a copy of the Disclosure Schedules and attachments
to such Agreement to the Commission upon request
2.13 Amendment No. 1 dated as of September 28, 1998 Purchase Agreement dated as of June 24, 1998 among
Charter Behavioral Health Systems, LLC, the Company, Carolina Treatment Center, Inc., Houma
Psychiatric Hospital, Inc., Mesa Psychiatric Hospital, Inc., RHCI San Antonio, Inc., The Haven
Hospital, Inc., Transitional Care Ventures (Arizona), Inc., Transitional Care Ventures (North
Texas), Inc. and Transitional Care Ventures (Texas), Inc. (incorporated by reference to Exhibit
2.13 to the Company's Current Report on Form 8-K dated October 9, 1998)
2.14 Agreement of Sale and Purchase dated as of September 28, 1998 by and among Havenwyck Hospital,
Inc., Michigan Psychiatric Services, Inc. and Capstone Capital Corporation (incorporated by
reference to Exhibit 2.14 to the Company's Current Report on Form 8-K dated October 9, 1998).
Pursuant to Reg. S-K, Item 601(b)(2), the Company agrees to furnish a copy of the Disclosure
Schedules and attachments to such Agreement to the Commission upon request
2.15 Stock Purchase Agreement dated as of November 19, 1998 The Rader Group, Incorporated, a Florida
corporation, The Rader Group, Incorporated, a Colorado corporation, Bill T. Rader, Ph.D. and
Ramsay Educational Services, Inc. (incorporated by reference to Exhibit 2.15 to the Company's
Transition Report on Form 10-K for the six months ended December 31, 1998)
2.16 Stock Purchase Agreement dated May 14, 1999 between the Company, Ramsay Hospital Corporation of
Louisiana, Inc. and Paul Ramsay Holdings Pty. Limited (incorporated by reference to Exhibit 2.16
to the Company's Quarterly Report on Form 10-Q for the quarter ended June 30, 1999)
2.17 Asset Purchase Agreement dated as of May 19, 2000 by and among the Company, Charter Behavioral
Health Systems, LLC, the Charter Subsidiaries, Charter Advantage, LLC and Charter Managed Care
Services, LLC (incorporated by referenced to Exhibit 2.17 to the Company's Quarterly Report on
Form 10-Q for the quarter ended June 30, 2000)
2.18 First Amendment to Asset Purchase Agreement dated as of June 28, 2000 by and among the Company,
Charter Behavioral Health Systems, LLC, Charter Behavioral Health System of Manatee Palms, LP,
Charter Behavioral Health System at Manatee Adolescent Treatment Services, LP, Charter Advantage,
LLC and Charter Managed Care Services, LLC (incorporated by referenced to Exhibit 2.18 to the
Company's Quarterly Report on Form 10-Q for the quarter ended June 30, 2000)
</TABLE>
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2.19 Second Amendment to Asset Purchase Agreement dated July 18, 2000 by and among the Company, Charter
Behavioral Health Systems, LLC, Charter Behavioral Health System of Manatee Palms, LP, Charter
Behavioral Health System at Manatee Adolescent Treatment Services, LP, Charter Advantage, LLC and
Charter Managed Care Services, LLC (incorporated by referenced to Exhibit 2.19 to the Company's
Quarterly Report on Form 10-Q for the quarter ended June 30, 2000)
2.20 Real Estate Purchase Agreement dated June 22, 2000 by and among the Company and Crescent Real
Estate Funding VII, L.P. (incorporated by referenced to Exhibit 2.20 to the Company's Quarterly
Report on Form 10-Q for the quarter ended June 30, 2000)
3.1 Restated Certificate of Incorporation of the Company, as amended (incorporated by reference to
Exhibit 3.1 to the Company's Annual Report on Form 10-K for the year ended June 30, 1990)
3.2 Certificate of Amendment of Restated Certificate of Incorporation of the Company filed on April
17, 1991 (incorporated by reference to Exhibit 3.2 to the Company's Registration Statement on Form
S-2, Registration No. 33-40762)
3.3 Certificate of Correction to Certificate of Amendment of Restated Certificate of Incorporation of
the Company filed on April 18, 1991 (incorporated by reference to Exhibit 3.3 to the Company's
Registration Statement on Form S-2, Registration No. 33 40762)
3.4 By-Laws of the Company, as amended to date (incorporated by reference to Exhibit 3.4 to the
Company's Annual Report on Form 10-K for the year ended June 30, 1994)
4.13 Amended and Restated Subscription Agreement dated October 26, 1998 between the Company and Paul
Ramsay Holdings Pty. Limited ("Holdings Pty.") (incorporated by reference to Exhibit 4.13 to the
Company's Quarterly Report on Form 10-Q for the quarter ended September 30, 1998)
4.14 Amended and Restated Subscription Agreement dated October 26, 1998 between the Company and Luis E.
Lamela (incorporated by reference to Exhibit 4.14 to the Company's Quarterly Report on Form 10-Q
for the quarter ended September 30, 1998)
4.15 Subscription Agreement dated October 26, 1998 between the Company and Haythe & Curley
(incorporated by reference to Exhibit 4.15 to the Company's Quarterly Report on Form 10-Q for the
quarter ended September 30, 1998)
4.16 Subscription Agreement dated as of October 26, 1998 between the Company and Dauphin Capital
Partners I, LP (incorporated by reference to Exhibit 4.16 to the Company's Quarterly Report on
Form 10-Q for the quarter ended September 30, 1998)
4.17 Subscription Agreement dated as of October 26, 1998 between the Company and Moises Hernandez, M.D.
(incorporated by reference to Exhibit 4.17 to the Company's Quarterly Report on Form 10-Q for the
quarter ended September 30, 1998)
4.18 Subscription Agreement dated as of October 26, 1998 between the Company and Tom Hodapp
(incorporated by reference to Exhibit 4.18 to the Company's Quarterly Report on Form 10-Q for the
quarter ended September 30, 1998)
4.19 Subscription Agreement dated as of October 26, 1998 between the Company and Aaron Beam
(incorporated by reference to Exhibit 4.19 to the Company's Quarterly Report on Form 10-Q for the
quarter ended September 30, 1998)
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4.20 Subscription Agreement dated as of October 26, 1998 between the Company and Sanford R. Robertson
(incorporated by reference to Exhibit 4.20 to the Company's Quarterly Report on Form 10-Q for the
quarter ended September 30, 1998)
4.21 Revolving Credit Note dated October 30, 1998 by the Company in the aggregate principal amount of
$8,000,000 payable to the order of Fleet Capital Corporation (incorporated by reference to Exhibit
4.21 to the Company's Quarterly Report on Form 10-Q for the quarter ended September 30, 1998)
4.22 Secured Promissory Note (Term Note) by the Company in the aggregate principal amount of $8,000,000
payable to the order of Fleet Capital Corporation (incorporated by reference to Exhibit 4.22 to
the Company's Quarterly Report on Form 10-Q for the quarter ended September 30, 1998)
4.23 Secured Promissory Note (Acquisition Note) by the Company in the aggregate principal amount of
$6,000,000 payable to the order of Fleet Capital Corporation (incorporated by reference to Exhibit
4.23 to the Company's Quarterly Report on Form 10-Q for the quarter ended September 30, 1998)
10.64 Ramsay Health Care, Inc. 1990 Stock Option Plan, as amended to date (incorporated by reference
Exhibit 4.3 to the Company's Registration Statement on Form S-8 filed on March 6, 1991)
10.66 Ramsay Health Care, Inc. Deferred Compensation and Retirement Plan (incorporated by reference to
Exhibit 10.79 to the Company's Registration Statement on Form S-2, Registration No. 33-40762)
10.68 Indemnity Agreement dated as of June 1991 between the Company and Ramsay Holdings HSA Limited
(incorporated by reference to Exhibit 10.84 to the Company's Registration Statement on Form S-2,
Registration No. 33-40762)
10.70 Ramsay Health Care, Inc. 1991 Stock Option Plan (incorporated by reference to Exhibit 10.91 to the
Company's Annual Report on Form 10-K for the year ended June 30, 1992)
10.76 Ramsay Health Care, Inc. 1993 Stock Option Plan (incorporated by reference to Exhibit 10.83 to the
Company's Quarterly Report on Form 10-Q for the quarter ended December 31, 1993)
10.77 Ramsay Health Care, Inc. 1993 Employee Stock Purchase Plan (incorporated by reference to Exhibit
10.84 to the Company's Quarterly Report on Form 10-Q for the quarter ended December 31, 1993)
10.80 Rights Agreement dated as of August 1, 1995 between the Company and First Union National Bank of
North Carolina, as Rights Agent, which includes the form of Right Certificate as Exhibit A and the
Summary Rights to Purchase Common Shares as Exhibit B (incorporated by reference to Exhibit 4.1 to
the Company's Current Report on Form 8-K dated August 1, 1995)
10.81 Amendment to Rights Agreement, dated October 3, 1995 between the Company and First Union National
Bank of North Carolina, as Rights Agent (incorporated by reference to Exhibit 10.102 to the
Company's Quarterly Report on Form 10-Q for the quarter ended September 30, 1995)
10.82 Amendment No. 2 to Rights Agreement, dated as of November 1, 1996 between the Company and First
Union National Bank of North Carolina, as Rights Agent (incorporated by reference to Exhibit
10.101 to the Company's Quarterly Report on Form 10-Q for the quarter ended September 30, 1996)
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10.85 Lease Agreement dated April 12, 1995 between Capstone Capital of San Antonio, LTD, d/b/a Cahaba of
San Antonio, LTD. and RHCI San Antonio, Inc. (incorporated by reference to Exhibit 10.89 to the
Company's Annual Report on Form 10-K for the year ended June 30, 1995)
10.90 Tax Sharing Agreement dated as of October 25, 1994 between the Company and RMCI (incorporated by
reference to Exhibit 10.5 to RMCI's Registration Statement on Form S-1 (Registration No. 33-78034)
filed with the Commission on April 24, 1995)
10.95 Amended and Restated Stock Purchase Agreement dated October 12, 1995 by and among Paul Ramsay
Holdings Pty. Limited, Ramsay Health Care, Inc. and, solely for the purpose of Section I, III and
VI of the agreement, Ramsay Health Care Pty. Limited (incorporated by reference to Exhibit 10.101
to the Company's Quarterly Report on Form 10-Q for the quarter ended September 30, 1995)
10.96 Amendment to Rights Agreement, date October 3, 1995 between Ramsay Health Care, Inc. and First
Union National Bank of North Carolina, as Rights Agent (incorporated by reference to Exhibit
10.102 to the Company's Quarterly Report on Form 10-Q for the quarter ended September 30, 1995)
10.97 Ramsay Health Care, Inc. 1995 Long Term Incentive Plan (incorporated by reference to Exhibit
10.103 to the Company's Quarterly Report on Form 10-Q for the quarter ended December 31, 1995)
10.98 Stock Purchase Agreement dated as of August 13, 1996 by and among Paul Ramsay Holdings Pty.
Limited, the Company and, solely for purposes of Sections I, III and IV thereof, Ramsay Health
Care Pty. Limited (incorporated by reference to Exhibit 10.94 to the Company's Annual Report on
Form 10-K for the year ended June 30, 1996)
10.100 Exchange Agreement dated September 10, 1996, by and among the Company, Paul Ramsay Hospitals Pty.
Limited and Paul J. Ramsay, including a related Warrant Certificate dated September 10, 1996
issued to Ramsay Hospitals Pty. Limited (incorporated by reference to Exhibit 10.96 to the
Company's Annual Report on Form 10-K for the year ended June 30, 1996)
10.103 Letter Agreement dated as of September 10, 1996 by and among the Company, Ramsay Health Care Pty.
Limited Paul Ramsay Holdings Pty. Limited, including a related Warrant Certificate dated September
10, 1996 issued to Paul Ramsay Holdings Pty. Limited (incorporated by reference to Exhibit 10.98
to the Company's Annual Report on Form 10-K for the year ended June 30, 1996)
10.104 Employment Agreement dated August 12, 1996 by and between the Company and Remberto Cibran
(incorporated by reference to Exhibit 10.99 to the Company's Quarterly Report on Form 10-Q for the
quarter ended September 30, 1996)
10.110 Employment Agreement dated as of October 1, 1997 by and between the Company and Luis E. Lamela
(incorporated by reference to Exhibit 10.110 to the Company's Quarterly Report on Form 10-Q for
the quarter ended September 30, 1997)
10.116 Lease Agreement dated as of September 28, 1998 between Capstone Capital Corporation and Havenwyck
Hospital, Inc. (incorporated by reference to Exhibit 10.116 to the Company's Current Report on
Form 8-K dated October 9, 1998)
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10.117 Guaranty of Obligations Pursuant to Lease Agreement described in Exhibit 10.116 above dated as of
September 28, 1998 by the Company in favor of Capstone Capital Corporation (incorporated by
reference to Exhibit 10.117 to the Company's Current Report on Form 8-K dated October 9, 1998)
10.126 Amendment No. 3 to Rights Agreement dated as of October 15, 1998 between the Company and First
Union National Bank of North Carolina, as Rights Agent (incorporated by reference to Exhibit
10.126 to the Company's Annual Report on Form 10-K/A for the year ended June 30, 1998)
10.127 Loan and Security Agreement dated as of October 30, 1998 by and among the Company, certain
subsidiaries of the Company on the signature pages thereto, Fleet Capital Corporation, as a Lender
and as Agent, and the Lenders from time to time party thereto (incorporated by reference to
Exhibit 10.127 to the Company's Annual Report on Form 10-K/A for the year ended June 30, 1998)
10.128 Subordination Agreement dated October 30, 1998 by and among Holdings Pty., Paul Ramsay Hospitals
Pty. Limited, Ramsay Holdings HSA Limited and Fleet Capital Corporation, as Agent, and consented
to by the Company and certain of its subsidiaries on the signature pages thereto (incorporated by
reference to Exhibit 10.128 to the Company's Annual Report on Form 10-K/A for the year ended June
30, 1998)
10.129 Junior Subordinated Loan and Exchange Agreement dated as of October 30, 1998 by and between
Holdings Pty. and the Company (incorporated by reference to Exhibit 10.129 to the Company's Annual
Report on Form 10-K/A for the year ended June 30, 1998)
10.131 First Amendment to Loan and Security Agreement dated as of March 19, 1999 by and among the
Company, certain subsidiaries of the Company on the signature pages thereto, Fleet Capital
Corporation, as a Lender and as Agent for the Lenders, and the Lenders from time to time party
thereto (incorporated by reference to the Company's Annual Report on Form 10-K for the year ended
December 31, 1999)
10.132 Guaranty dated as of March 19, 1999 by and among The Rader Group, Incorporated, Ramsay Youth
Services Puerto Rico, Inc. in favor of Fleet Capital Corporation, as Lender and Agent for the
Lenders, and the Lenders from time to time party thereto (incorporated by reference to the
Company's Transition Report on Form 10-K for the six months ended December 31, 1998)
10.133 Security Agreement dated as of March 19, 1999 by and among The Rader Group, Incorporated, Ramsay
Youth Services Puerto Rico, Inc. in favor of Fleet Capital Corporation, as Lender and Agent for
the Lenders, and the Lenders from time to time party thereto (incorporated by reference to the
Company's Transition Report on Form 10-K for the six months ended December 31, 1998)
10.134 Pledge Amendment dated as of March 19, 1999 by the Company in favor of Fleet Capital Corporation,
as Secured Party (incorporated by reference to the Company's Transition Report on Form 10-K for
the six months ended December 31, 1998)
10.135 Pledge Agreement dated as of March 19, 1999 by and between Ramsay Educational Services, Inc. in
favor of Fleet Capital Corporation, as Agent for the Lenders (incorporated by reference to the
Company's Transition Report on Form 10-K for the six months ended December 31, 1998)
10.136 First Amendment to Employment Agreement dated December 1, 1998 between the Company and Luis E.
Lamela (incorporated by reference to the Company's Transition Report on Form 10-K for the six
months ended December 31, 1998)
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10.137 First Amendment to Employment Agreement dated December 1, 1998 between the Company and Remberto
Cibran (incorporated by reference to the Company's Transition Report on Form 10-K for the six
months ended December 31, 1998)
10.138 Second Amendment to Loan Agreement, Consent and Borrowing Base Change Notice dated as of June 30,
1999 by and among the Company, certain subsidiaries of the Company and Fleet Capital Corporation,
as agent and lender (incorporated by reference to Exhibit 10.138 to the Company's Quarterly Report
on Form 10-Q for the quarter ended June 30, 1999)
10.139 Third Amendment to Loan and Security Agreement dated as of November 28, 1999 by and among the
Company, the subsidiaries of the Company and Fleet Capital Corporation as agent and lender
(incorporated by reference to Exhibit 10.139 to the Company's Annual Report on Form 10-K for the
year ended December 31, 1999)
10.140 Fourth Amendment to Loan and Security Agreement dated as of January 25, 2000 by and among the
Company, the subsidiaries of the Company and Fleet Capital Corporation, as agent and lender
(incorporated by reference to Exhibit 10.140 to the Company's Annual Report on Form 10-K for the
year ended December 31, 1999)
10.141 Subordinated Note and Warrant Purchase Agreement dated as of January 25, 2000 by and among the
Company, the subsidiaries of the Company as Guarantors and SunTrust Banks, Inc. as the Purchaser
(incorporated by reference to Exhibit 10.141 to the Company's Annual Report on Form 10-K for the
year ended December 31, 1999)
10.142 Registration Rights Agreement dated as of January 25, 2000 by and between the Company and SunTrust
Banks, Inc. (incorporated by reference to Exhibit 10.142 to the Company's Annual Report on Form
10-K for the year ended December 31, 1999)
10.143 Ramsay Youth Services, Inc. 1999 Stock Option Plan (incorporated by reference to Exhibit 10.143 to
the Company's Annual Report on Form 10-K for the year ended December 31, 1999)
10.144 Fifth Amendment to Loan and Security Agreement dated as of June 19, 2000 by and among the Company,
the subsidiaries of the Company and Fleet Capital Corporation, as agent and lender. Pursuant to
Reg. S-K, Item 601(b)(2), the Company agrees to furnish a copy of the Schedules and Exhibits to
such Agreement to the Commission upon request (incorporated by reference to Exhibit 10.144 to the
Company's Quarterly Report on Form 10-Q for the quarter ended June 30, 2000)
10.145 Amended and Restated Subordinated Note and Warrant Purchase Agreement dated as of June 19, 2000 by
and among the Company, the subsidiaries of the Company as Guarantors and SunTrust Banks, Inc., and
ING (U.S.) Capital, LLC as Purchasers (incorporated by reference to Exhibit 10.145 to the
Company's Quarterly Report on Form 10-Q for the quarter ended June 30, 2000)
10.146 Sixth Amendment to Loan and Security Agreement dated as of August 4, 2000 by and among the
Company, the subsidiaries of the Company and Fleet Capital Corporation, as agent and lender
(incorporated by reference to Exhibit 10.146 to the Company's Quarterly Report on Form 10-Q for
the quarter ended June 30, 2000)
10.147 Ramsay Youth Services, Inc. 1999 Employee Stock Purchase Plan (incorporated by reference to
Exhibit 4.3 to the Company's Registration Statement on Form S-8 dated September 22, 2000)
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10.148 First Amendment to Amended and Restated Subordinated Note and Warrant Purchase Agreement and First
Amendment to Amended and Restate Subordination Agreement dated as of July 31, 2000 by and among
the Company, the subsidiaries of the Company listed on the signature pages hereto, as Guarantors,
SunTrust Banks, Inc., and ING (U.S.) Capital, LLC as Purchasers and Fleet Capital Corporation
(incorporated by reference to Exhibit 10.148 to the Company's Annual Report on Form 10-K for the
year ended December 31, 2000)
10.149 Seventh Amendment to Loan and Security Agreement dated as of March 31, 2001 by and among the
Company, the subsidiaries of the Company and Fleet Capital Corporation, as agent and lender
(incorporated by reference to Exhibit 10.149 to the Company's Quarterly Report on Form 10-Q for
the quarter ended March 31, 2001)
10.150 Second Amendment to Amended and Restated Subordinated Note and Warrant Purchase Agreement and
First Amendment to Amended and Restated Subordination Agreement dated as of April 16, 2001 by and
among the Company, the subsidiaries of the Company listed on the signature pages hereto, as
Guarantors, SunTrust Banks, Inc., and ING (U.S.) Capital, LLC as Purchasers (incorporated by
reference to Exhibit 10.150 to the Company's Quarterly Report on Form 10-Q for the quarter ended
March 31, 2001)
10.151 Third Amendment to Amended and Restated Subordinated Note and Warrant Purchase Agreement and
Second Amendment to Amended and Restated Subordination Agreement dated as of February 25, 2002 by
and among the Company, the subsidiaries of the Company listed on the signature pages hereto, as
Guarantors, SunTrust Banks, Inc., and ING (U.S.) Capital, LLC as Purchasers and Fleet Capital
Corporation
10.152 Eighth Amendment to Loan and Security Agreement dated as of February 25, 2002 by and among the
Company, the subsidiaries of the Company and Fleet Capital Corporation, as agent and lender
11 Computation of Net Income (Loss) Per Share
21 Subsidiaries of the Company
23.1 Independent Auditors' Consent
</TABLE>
Copies of exhibits filed with this Annual Report on Form 10-K or incorporated
herein by reference do not accompany copies hereof for distribution to
stockholders of the Company. The Company will furnish a copy of such exhibits to
any stockholder requesting it.
E-8
EXHIBIT 10.151
THIRD AMENDMENT TO AMENDED AND RESTATED SUBORDINATED NOTE
AND WARRANT PURCHASE AGREEMENT AND SECOND AMENDMENT TO
AMENDED AND RESTATED SUBORDINATION AGREEMENT
This Third Amendment to Amended and Restated Note and Warrant Purchase
Agreement and Second Amendment to Amended and Restated Subordination Agreement
(this "AMENDMENT") is entered into as of the 25th day of February, 2002, by and
among RAMSAY YOUTH SERVICES, INC., a Delaware corporation (the "COMPANY"), each
of the Subsidiaries of the Company listed on the signature pages hereto, as
guarantors (the "SUBSIDIARY GUARANTORS"), SUNTRUST BANKS, INC., a Georgia
corporation ("SUNTRUST"), and ING (U.S.) CAPITAL LLC, a Delaware limited
liability company ("ING"; SunTrust and ING individually, a "PURCHASER" and,
collectively, the "PURCHASERS") and FLEET CAPITAL CORPORATION, or any successor
thereto as Agent (the "AGENT") under the Senior Credit Agreement on behalf of
and for the benefit of itself and the Senior Lenders.
W I T N E S S E T H:
WHEREAS, Company, the Subsidiary Guarantors and the Purchasers are
parties to that certain Amended and Restated Subordinated Note and Warrant
Purchase Agreement, dated as of June 19, 2000, as amended by that certain First
Amendment to Amended and Restated Subordinated Note and Warrant Purchase
Agreement and First Amendment to Amended and Restated Subordination Agreement,
dated as of July 31, 2000, and as further amended by that certain Second
Amendment to Amended and Restated Subordinated Note and Warrant Purchase
Agreement, dated as of April 16, 2001 (as amended, restated, modified or
otherwise supplemented from time to time, the "PURCHASE AGREEMENT"; capitalized
terms used herein but not otherwise defined shall have the meanings given to
such terms in the Purchase Agreement);
WHEREAS, Company has requested that the Purchasers make certain
amendments to the Purchase Agreement and the Purchasers are willing to do so on
the terms and conditions set forth herein;
WHEREAS, Company, the Subsidiary Guarantors, the Purchasers and the
Agent are parties to that certain Amended and Restated Subordination Agreement,
dated as of June 19, 2000, as amended by that certain First Amendment to Amended
and Restated Subordinated Note and Warrant Purchase Agreement and First
Amendment to Amended and Restated Subordination Agreement, dated as of July 31,
2000 (as amended, restated, modified or otherwise supplemented from time to
time, the "SUBORDINATION AGREEMENT");
WHEREAS, Company has requested that the Purchasers and the Agent make
certain amendments to the Subordination Agreement and the Purchasers and the
Agent are willing to do so on the terms and conditions set forth herein;
NOW, THEREFORE, in consideration of the terms and conditions contained
herein, the parties hereto, intending to be legally bound, hereby agree as
follows:
SECTION 1.
1.1 AMENDMENT TO SECTION 8.6 OF THE PURCHASE AGREEMENT. Section 8.6 of
the Purchase Agreement is amended by replacing subsections 8.6(a), 8.6(b) and
8.6(f) thereof in their entirety with the following:
"(a) any Debt owing to any Purchaser;"
"(b) Debt outstanding on the ING Closing Date (other than the
Senior Debt);"
"(f) Senior Debt; PROVIDED, HOWEVER, that in no event shall
the principal amount of the Senior Debt exceed the sum of (i)
$25,951,962 reduced by the amounts of any repayments and
commitment reductions under the Senior Credit Agreement (after
February 25, 2002) to the extent that such payments and
reductions may not be reborrowed, plus, (ii) $5,000,000."
1.2 AMENDMENT TO SECTION 10.1 OF THE PURCHASE AGREEMENT. Section 10.1
of the Purchase Agreement is hereby amended by replacing the contact information
for SunTrust and ING, respectively, as follows:
"If to SunTrust:
SunTrust Banks, Inc.
303 Peachtree Street, Suite 2500
Atlanta, Georgia 30308
Attn: Mr. Palmer Henson
Telecopy Number: (404) 588-7501
Telephone Number:(404) 827-6531"
"If to ING:
ING (U.S.) Capital LLC
200 Galleria Parkway, N.W.
Suite 950
Atlanta, Georgia 30339
Attn: Mr. Edward Carpenter
Telecopy Number: 770-951-1005
Telephone Number:770-984-4522"
1.3 AMENDMENT TO SCHEDULES 6.1.1, 6.1.6, 6.1.20, 6.1.22, 8.4 AND 8.9.
The Purchase Agreement is amended by replacing SCHEDULE 6.1.1, SCHEDULE 6.1.6,
SCHEDULE 6.1.20, SCHEDULE 6.1.22, SCHEDULE 8.4 and SCHEDULE 8.9 with the
corresponding schedules attached hereto.
1.4 AMENDMENT TO SCHEDULE 8.6 OF THE PURCHASE AGREEMENT. The Purchase
Agreement is amended by deleting SCHEDULE 8.6 in its entirety.
2
1.5 AMENDMENT TO SECTION 1.1 OF THE SUBORDINATION AGREEMENT. Section
1.1 of the Subordination Agreement is hereby amended by replacing the definition
therein of "Senior Indebtedness" with the following new definition:
"SENIOR INDEBTEDNESS" at any time of determination
means and includes the "Obligations" (as such term is defined in the
Senior Credit Agreement) and all other indebtedness, obligations and
liabilities of any Subordinated Indebtedness Obligor under the Senior
Indebtedness Documents, including without limitation all principal,
interest, premiums and other amounts payable thereunder (including,
without limitation, any interest, fees, costs and charges accruing
subsequent to the commencement of an Insolvency Event), at the rate and
in such amounts as are specified in the Senior Credit Agreement or
other Senior Indebtedness Documents which provides for the payment of
such amounts (whether or not any such interest, fees, expenses, costs
and charges are an allowed claim in any such Insolvency Event), whether
now existing or hereafter arising, direct or indirect, primary or
secondary, joint, several or joint and several, final or contingent,
whether advanced or arising prior to or after the commencement of an
Insolvency Event, and whether incurred as maker, endorser, guarantor,
or otherwise including without limitation the aggregate amount of all
advances made by Senior Creditors for the preservation, maintenance,
insurance or protection of any Collateral (as such term is defined in
the Senior Credit Agreement) together with (a) all complete or partial
refinancings of the Obligations (as such term is defined in the Senior
Credit Agreement), and (b) any amendments, modifications, renewals or
extensions thereof; provided, however, that in no event shall the
principal amount of the Senior Indebtedness exceed the sum of (i)
$25,951,962.00 reduced by the amount of any repayments and commitment
reductions under the Senior Credit Agreement (after February 25, 2002
(as such term is defined in the Subordinated Credit Agreement)) to the
extent that such payments and reductions may not be reborrowed, plus
(ii) $5,000,000."
SECTION 2. CONDITIONS TO EFFECTIVENESS OF AMENDMENT. This Amendment
shall become effective (the "AMENDMENT EFFECTIVE DATE") when each Purchaser
shall have received a duly executed counterpart of this Amendment executed by
each party hereto.
SECTION 3. CONSENT. In accordance with Section 8.6 of the Purchase
Agreement, Purchaser hereby consents to Company's and Subsidiary Guarantors'
execution, delivery and performance of the Eighth Amendment to Loan and Security
Agreement and Waiver, in the form attached hereto as Exhibit A, and related
documents entered into by and between Company and Subsidiary Guarantors.
SECTION 4. REPRESENTATIONS AND WARRANTIES OF BORROWERS. To induce
Lenders to enter into this Amendment, the Company hereby represents and warrants
to each Lender as follows:
4.1 REAFFIRMATION OF REPRESENTATIONS AND WARRANTIES. Each
representation and warranty of the Company or any Subsidiary Guarantor contained
in the Purchase Agreement, Subordination Agreement and the other Loan Documents,
as amended hereby, is true and correct on the date hereof and will be true and
correct after giving effect to the amendments set forth in SECTION 1 hereof.
3
4.2 CORPORATE AUTHORITY; NO CONFLICTS. The execution, delivery and
performance of this Amendment (i) is within the Company's and each Subsidiary
Guarantor's respective corporate powers, (ii) has been duly authorized by all
necessary corporate and shareholder action, (iii) does not require the consent,
approval, authorization of, or registration or filing with, any Person under any
Material Contract, with any Person under the organizational documents of the
Consolidated Companies, or with any governmental authority other than such
consents, approvals, authorizations, registrations or filings which have been
made or obtained and are in full force and effect, and (iv) will not cause a
breach or default under any of the Consolidated Companies Material Contracts or
organizational documents of any of the Consolidated Companies except as could
not reasonably be expected to have a Material Adverse Effect.
4.3 ENFORCEABILITY. This Amendment has been duly executed and delivered
for the benefit of or on behalf of the Company and constitutes the legal, valid
and binding obligation of Company and each of the Subsidiary Guarantors,
enforceable against it in accordance with its terms, except as the
enforceability hereof may be limited by bankruptcy, insolvency, reorganization,
moratorium and other laws affecting creditors' rights and remedies in general,
and by general principles of equity. or similar laws affecting creditor's rights
generally, and after giving effect to this Amendment, all of the representations
and warranties set forth in Article 6 of the Purchase Agreement are true and
correct in all material respects and no Default or Event of Default has occurred
and is continuing as of the date hereof.
SECTION 5. MISCELLANEOUS.
5.1 SURVIVAL. Except as expressly provided herein, the Purchase
Agreement and the Subordination Agreement shall continue in full force and
effect, and the unamended terms and conditions of the Purchase Agreement and the
Subordination Agreement are expressly incorporated herein and ratified and
confirmed in all respects. This Amendment is not intended to be or to create,
nor shall it be construed as, a novation or an accord and satisfaction.
5.2 EFFECT OF AMENDMENT. From and after the date hereof, references to
the Purchase Agreement shall be references to the Purchase Agreement as amended
hereby and references to the Subordination Agreement shall be references to the
Subordination Agreement as amended hereby.
5.3 ENTIRE UNDERSTANDING. This Amendment constitutes the entire
agreement among the parties hereto with respect to the subject matter hereof.
Neither this Amendment nor any provision hereof may be changed, waived,
discharged, modified or terminated orally, but only by an instrument in writing
signed by the parties required to be a party thereto pursuant to Section 10.4 of
the Purchase Agreement.
5.4 LEGAL EXPENSES. The Company hereby agrees to pay promptly all
reasonable fees and expenses of counsel to each Purchaser incurred by such
Purchaser in connection with the preparation, negotiation and execution of this
Amendment and all related documents.
5.5 GOVERNING LAW. THIS AMENDMENT SHALL BE CONSTRUED IN ACCORDANCE WITH
AND BE GOVERNED BY THE LAW (WITHOUT GIVING EFFECT TO THE CONFLICT OF LAW
PRINCIPLES THEREOF) OF THE STATE OF GEORGIA.
4
5.6 COUNTERPARTS. This Amendment may be executed in any number of
counterparts and by the different parties hereto on separate counterparts, each
of which when so executed and delivered shall be an original, but all of which
together shall constitute one and the same instrument.
5.7 HEADINGS. The headings, captions and arrangements used in this
Amendment are, unless specified otherwise, for convenience only and shall not be
deemed to limit, amplify or modify the terms of this Amendment, nor affect the
meaning thereof.
5.8 MERGER AND NAME CHANGE OF SUBSIDIARIES. Ramsay Treatment Services,
Inc. is the new name of the former Ramsay Educational Services, Inc. Bethany
Psychiatric Hospital, Inc., Ramsay Louisiana, Inc. and Ramsay Hospital
Corporation have been merged into Ramsay Managed Care.
5.9 CONSENT AND REAFFIRMATION OF SUBSIDIARY GUARANTY. Each undersigned
Subsidiary Guarantor hereby (i) acknowledges receipt of a copy of the foregoing
Amendment, (ii) consents to the Company's execution and delivery thereof, (iii)
agrees to be bound thereby and (iv) affirms that nothing contained therein shall
modify in any respect whatsoever its guaranty of the obligations of the Company
to the Purchasers pursuant to the terms of its Guaranty in favor of the
Purchasers (the "GUARANTY") and reaffirms that the Guaranty is and shall
continue to remain in full force and effect. Although each Subsidiary Guarantor
has been informed of the matters set forth herein and has acknowledged and
agreed to same, each Subsidiary Guarantor understands that the Purchasers have
no obligation to inform any Subsidiary Guarantor of such matters in the future
or to seek any Subsidiary Guarantor's acknowledgment or agreement to future
amendments or waivers, and nothing herein shall create such duty.
(SIGNATURE PAGES FOLLOW)
5
IN WITNESS WHEREOF, the parties hereto have caused this Amendment to be
duly executed by their respective authorized officers on the date and year first
above written.
COMPANY:
RAMSAY YOUTH SERVICES, INC.
By:
------------------------------------------
Marcio Cabrera
Executive Vice President
SUBSIDIARY GUARANTORS:
BOUNTIFUL PSYCHIATRIC HOSPITAL, INC.
EAST CAROLINA PSYCHIATRIC HOSPITAL, INC.
GREAT PLAINS HOSPITAL, INC.
GULF COAST TREATMENT CENTER, INC.
HAVENWYCK HOSPITAL, INC.
H. C. CORPORATION
HSA HILL CREST CORPORATION
HSA OF OKLAHOMA, INC.
MICHIGAN PSYCHIATRIC SERVICES, INC.
RAMSAY TREATMENT SERVICES, INC.
RAMSAY MANAGED CARE, INC.
RAMSAY YOUTH SERVICES OF ALABAMA, INC.
RAMSAY YOUTH SERVICES OF FLORIDA, INC.
RAMSAY YOUTH SERVICES OF PUERTO RICO, INC.
RAMSAY YOUTH SERVICES OF SOUTH CAROLINA, INC.
RHCI SAN ANTONIO, INC.
TRANSITIONAL CARE VENTURES, INC.
TRANSITIONAL CARE VENTURES (TEXAS), INC.
By:
---------------------------------------------
Marcio Cabrera
Vice President
6
H. C. PARTNERSHIP
By: H.C. CORPORATION, General Partner
By: HSA HILL CREST CORPORATION, General Partner
By:
-------------------------------------------
Marcio Cabrera
Vice President
PURCHASERS:
SUNTRUST BANKS, INC.
By:
--------------------------------------------------
Name:
Title:
ING (U.S.) CAPITAL LLC
By:
--------------------------------------------------
Name:
Title:
AGENT:
FLEET CAPITAL CORPORATION
By:
--------------------------------------------------
Name:
Title:
7
SCHEDULE 6.1.1
LIST OF SUBSIDIARIES
Bountiful Psychiatric Hospital, Inc.
East Carolina Psychiatric Hospital, Inc.
Great Plains Hospital, Inc.
Gulf Coast Treatment Center, Inc.
Michigan Psychiatric Services, Inc.
Havenwyck Hospital, Inc.
H.C. Partnership
H.C. Corporation
HSA Hill Crest Corporation
HSA of Oklahoma, Inc.
Ramsay Treatment Services, Inc.
Ramsay Managed Care, Inc.
Ramsay Youth Services of Alabama, Inc.
Ramsay Youth Services of Florida, Inc.
Ramsay Youth Services of South Carolina, Inc.
Ramsay Youth Services Puerto Rico, Inc.
RHCI San Antonio, Inc.
Transitional Care Ventures, Inc.
Transitional Care Ventures (Texas), Inc.
SCHEDULE 6.1.6
LITIGATION
None.
SCHEDULE 6.1.16
LIST OF MATERIAL CONTRACTS
BOUNTIFUL PSYCHIATRIC HOSPITAL, INC.
BENCHMARK:
City of Philadelphia Department of Human Services
State of Illinois Department of Children and Family Services
EAST CAROLINA PSYCHIATRIC HOSPITAL, INC.
BRYNN MARR:
Blue Cross/Blue Shield of North Carolina
North Carolina Division of Medical Assistance (Medicaid)
RAMSAY YOUTH SERVICES OF ALABAMA, INC.
DOTHAN:
State of Alabama, Department of Human Resources
GULF COAST TREATMENT CENTER, INC.
Gulf Coast Treatment Center:
State of Florida Department of Juvenile Justice
HAVENWYCK HOSPITAL, INC.:
Blue Cross/Blue Shield of Michigan
GREAT PLAINS HOSPITAL, INC.
HEARTLAND:
Missouri Department of Social Services
HAS HILL CREST CORPORATION/H.C. PARTNERSHIP/H.C. CORPORATION/HILL CREST:
Alabama Medicaid Agency
State of Alabama, Department of Human Resources
RAMSAY YOUTH SERVICES OF FLORIDA, INC.:
MANATEE ADOLESCENT TREATMENT SERVICES:
State of Florida Department of Juvenile Justice
MANATEE PALMS YOUTH SERVICES:
State of Illinois Department of Children and Families
Florida Medicaid
RHCI SAN ANTONIO, INC.
MISSION VISTA:
Medicare
TRANSITIONAL CARE VENTURES (TEXAS), INC.
MISSION VISTA COMPASS UNIT:
Medicare
SCHEDULE 6.1.20
REGISTRATION RIGHTS AGREEMENTS
1. Registration Rights Agreement dated as of October 25, 1994 by and
between the Company and Paul Ramsay Hospitals Pty. Ltd.
2. Amended and Restated Registration Rights Agreement dated as of June 19,
2000, by and between the Company and SunTrust Banks, Inc.
SCHEDULE 6.1.22
CONTINUING BUSINESS OF COMPANY
None.
SCHEDULE 8.4
ISSUANCE OF STOCK
None.
SCHEDULE 8.9
SALE/LEASEBACK AGREEMENTS
1. Lease Agreement dated April 12, 1995 between Capstone Capital of San
Antonio, LTD, d/b/a Cahaba of San Antonio, Ltd. and RHCI San Antonio,
Inc. in favor of Capstone Capital of San Antonio, Ltd.
2. Lease Agreement dated as of September 28, 1998 between Capstone Capital
Corporation and Havenwyck Hospital, Inc. in favor of Capstone Capital
Corporation.
EXHIBIT 10.152
EIGHTH AMENDMENT TO LOAN AND SECURITY AGREEMENT AND WAIVER
This Eighth Amendment to Loan and Security Agreement and Waiver (this
"EIGHTH AMENDMENT") is entered into as of the 25th day of February, 2002,
between RAMSAY YOUTH SERVICES, INC., a Delaware corporation, f/k/a RAMSAY HEALTH
CARE, INC. ("HOLDINGS"), with its principal place of business at Columbus
Center, One Alhambra Plaza, Suite 750, Coral Gables, Florida 33134, each of the
Subsidiaries of Holdings party to this Eighth Amendment and listed in EXHIBIT B
to the Loan Agreement (the "HOLDINGS SUBSIDIARIES"), each of which is a
corporation or other legal entity as indicated in EXHIBIT B, is organized under
the laws of the jurisdiction indicated in EXHIBIT B, and has its principal place
of business at the location indicated in EXHIBIT B (Holdings, the Holdings
Subsidiaries, and each other Subsidiary of Holdings or of any Subsidiary of
Holdings from time to time party to the Loan Agreement referred to below are
hereinafter collectively referred to as "BORROWERS" and each individually as a
"BORROWER"), and FLEET CAPITAL CORPORATION, a Rhode Island corporation (in its
individual capacity, "FCC"), with offices at 5950 Sherry Lane, Suite 300,
Dallas, Texas 75225, as a Lender, and as agent for all Lenders, in such
capacity, "AGENT"), and such Persons who are or hereafter become parties to the
Loan Agreement as a Lender. Capitalized terms used but not defined in this
Eighth Amendment have the meanings assigned to them in Appendix A of that
certain Loan and Security Agreement dated October 30, 1998, among Borrowers,
Lenders and Agent, as amended (the "LOAN AGREEMENT").
W I T N E S S E T H:
WHEREAS, Ramsay Louisiana, Inc., a Delaware corporation, Ramsay
Hospital Corporation of Louisiana, Inc., a Louisiana corporation and Bethany
Psychiatric Hospital, Inc., an Oklahoma corporation merged into Ramsay Managed
Care, Inc. on June 20, 2001 (the "MANAGED CARE MERGER")
WHEREAS, Ramsay Educational Services, Inc. filed a name change and is
now doing business as Ramsay Treatment Services, Inc. (the "RAMSAY TREATMENT
NAME CHANGE");
WHEREAS, Events of Default exist pursuant to (i) SECTION 10.1.3 of the
Loan Agreement as a result of Holdings' failure, on a Consolidated basis, to
comply with the Capital Expenditures requirement for the twelve calendar month
period ending on December 31, 2001, as required pursuant to SECTION 8.2.9 of the
Loan Agreement and (ii) SECTION 7.1.4 of the Loan Agreement as a result of
Holdings' failure to notify Agent that the name of Ramsay Educational Services,
Inc. had changed to Ramsay Treatment Services, Inc. (the "EXISTING EVENTS OF
Default");
WHEREAS, the Borrowers have requested that Agent and Lenders (i) waive
the Existing Events of Default; (ii) amend the Loan Agreement to (a) increase
the Revolving Credit Loan Commitment, (b) make an additional advance on the Term
Loan, (c) increase the permitted Capital Expenditures and (d) make certain other
revisions to the terms of the Loan Agreement; and
WHEREAS, subject to the terms and conditions herein contained, Agent
and Lenders have agreed to the Borrowers' request to waive the Existing Events
of Default and amend the Loan Agreement as set forth in this Eighth Amendment.
NOW, THEREFORE, for and in consideration of the mutual covenants and
agreements herein contained and other good and valuable consideration, the
receipt and sufficiency of which are hereby acknowledged and confessed,
Borrowers, Agent and Lenders hereby agree as follows:
SECTION 1. Subject to the satisfaction of each condition precedent set
forth in SECTION 3 hereof and in reliance on the representations, warranties,
covenants and agreements contained in this Eighth Amendment, the Loan Agreement
shall be amended effective February 25, 2002 (the "EIGHTH AMENDMENT EFFECTIVE
DATE") in the manner provided in this SECTION 1:
1.1 AMENDED DEFINITION. The following definition contained in APPENDIX
A to the Loan Agreement shall be amended to read in its entirety as follows:
BORROWING BASE - AS AT ANY DATE OF DETERMINATION THEREOF, AN AMOUNT
EQUAL TO THE LESSER OF:
(1) FIFTEEN MILLION DOLLARS ($15,000,000); OR
(2) (a) PRIOR TO THE BORROWING BASE CHANGE DATE, THE
AMOUNT EQUAL TO FIFTY PERCENT (50%) OF THE AMOUNT OF NET
ACCOUNTS AS DETERMINED FROM THE MOST RECENT CONSOLIDATED
BALANCE SHEET OF BORROWERS FURNISHED TO AGENT PURSUANT TO
SECTION 8.1.3(II), OR (B) FROM AND AFTER THE BORROWING BASE
CHANGE DATE, AN AMOUNT EQUAL TO THE SUM OF (I) EIGHTY-FIVE
PERCENT (85%) OF NET ELIGIBLE ACCOUNTS; PLUS (II) THE LESSER
OF (X) $3,000,000 AND (Y) EIGHTY-FIVE PERCENT (85%) OF NET
ELIGIBLE UNBILLED ACCOUNTS; PLUS (III) THE LESSER OF (X)
$350,000 AND (Y) EIGHTY-FIVE PERCENT (85%) OF NET ELIGIBLE
SELF-PAY ACCOUNTS; MINUS (IV) ANY AMOUNTS WHICH AGENT
REASONABLY EXPECTS IT OR LENDERS MAY BE OBLIGATED TO PAY IN
THE FUTURE FOR THE ACCOUNT OF ANY BORROWER.
MINUS (SUBTRACT (3) BELOW FROM THE LESSER OF (1) OR, AS APPLICABLE,
(2)(a) OR (2)(b) ABOVE)
(3) AN AMOUNT EQUAL TO THE LC AMOUNT.
1.2 INCREASE OF REVOLVING CREDIT LOAN COMMITMENT. Section 1.1.1 of the
Loan Agreement shall be amended by deleting the words "Twelve Million Dollars
($12,000,000)" from such Section and inserting the words "Fifteen Million
Dollars ($15,000,000)" in place thereof.
1.3 INCREASE OF TERM LOAN. Section 1.2.1 of the Loan Agreement shall be
amended to read in its entirety as follows:
1.3.1 TERM LOAN. ON THE CLOSING DATE, SUBJECT TO THE
FULFILLMENT OR WAIVER OF ALL CONDITIONS PRECEDENT TO THE EFFECTIVENESS
OF THIS AGREEMENT, EACH LENDER SHALL MAKE TERM LOANS (COLLECTIVELY THE
"CLOSING DATE TERM LOAN") TO BORROWERS IN THE AGGREGATE PRINCIPAL
AMOUNT EQUAL TO THE AMOUNT SET FORTH BELOW SUCH LENDER'S NAME ON THE
SIGNATURE PAGES HEREOF (SUCH LENDER'S "TERM LOAN COMMITMENT"). ON
AUGUST 4, 2000, FCC SHALL MAKE A TERM LOAN TO BORROWERS OF $4,500,000
(THE "AUGUST 2000 TERM LOAN"). ON FEBRUARY 25, 2002, FCC SHALL MAKE A
2
TERM LOAN TO BORROWERS OF $1,500,000 (THE "FEBRUARY 2002 TERM LOAN,"
TOGETHER WITH THE CLOSING DATE TERM LOAN AND THE AUGUST 2000 TERM LOAN,
THE "TERM LOANS"). THE PERCENTAGE EQUAL TO THE QUOTIENT OF (X) EACH
LENDER'S TERM LOAN COMMITMENT, DIVIDED BY (Y) THE AGGREGATE OF ALL TERM
LOAN COMMITMENTS, IS SUCH LENDER'S "TERM LOAN PERCENTAGE." AFTER GIVING
EFFECT TO THE FEBRUARY 2002 TERM LOAN, THE AGGREGATE AMOUNT OF THE TERM
LOAN COMMITMENTS IS NINE MILLION ONE HUNDRED FIFTY FOUR THOUSAND SIX
HUNDRED EIGHTY TWO AND 00/100 DOLLARS ($9,154,682.00). THE TERM LOANS
SHALL BE EVIDENCED BY ONE OR MORE TERM NOTES TO BE EXECUTED AND
DELIVERED BY BORROWERS TO LENDERS, WHICH SHALL BEAR INTEREST AS
SPECIFIED IN SECTION 2.1 AND SHALL BE REPAYABLE IN ACCORDANCE WITH THE
TERMS OF TERM NOTES. AMOUNTS REPAID WITH RESPECT TO THE TERM LOANS MAY
NOT BE REBORROWED. THE PROCEEDS OF THE TERM LOANS SHALL BE USED BY
BORROWERS SOLELY FOR PURPOSES OF REPAYING THE REVOLVING CREDIT LOANS.
1.4 AMENDMENT TO CAPITAL EXPENDITURES COVENANT. Section 8.2.9 of the
Loan Agreement shall be amended to read in its entirety as follows:
8.2.9 CAPITAL EXPENDITURES. MAKE CAPITAL EXPENDITURES
(INCLUDING, BY WAY OF CAPITALIZED LEASE OBLIGATIONS) WHICH, IN THE
AGGREGATE, AS TO HOLDINGS AND ITS SUBSIDIARIES, ON A CONSOLIDATED
BASIS, EXCEED, IN THE AGGREGATE, (I) $2,600,000 DURING THE CALENDAR
YEAR ENDING ON DECEMBER 31, 2001, OR (II) $3,000,000.00 DURING ANY
CALENDAR YEAR ENDING ON OR AFTER DECEMBER 31, 2002.
1.5 COMMITMENTS. As of the Eighth Amendment Effective Date, each
Lender's Term Loan Commitment, Acquisition Loan Commitment, Revolving Credit
Loan Commitment, Term Loan Percentage, Acquisition Loan Percentage and Revolving
Credit Percentage shall be as set forth below such Lender's name on the
signature pages of this Eighth Amendment.
1.6 AMENDMENT TO EXHIBITS. Exhibits A, A-1, B, D, E, F, G, H, I, J, K,
L, M, N, R, S, T, U, V, W and X to the Loan Agreement shall be amended in their
entirety by substituting Exhibits A, A-1, B, D, E, F, G, H, I, J, K, L, M, N, R,
S, T, U, V, W and X each of which is attached hereto as Exhibit A, Exhibit A-1,
Exhibit B, Exhibit D, Exhibit E, Exhibit F, Exhibit G, Exhibit H, Exhibit I,
Exhibit J, Exhibit K, Exhibit L, Exhibit M, Exhibit N, Exhibit R, Exhibit S,
Exhibit T, Exhibit U, Exhibit V, Exhibit W and Exhibit X respectively.
SECTION 2. WAIVER. Effective as of the Eighth Amendment Effective Date,
Agent and Lenders hereby waive the Existing Events of Default. Borrowers
acknowledge and agree that the foregoing waiver is limited solely to the matters
expressly set forth herein and for the period of time set forth herein. Nothing
contained in the waiver set forth herein shall obligate Agent and Lenders to
grant any additional or future waiver pursuant to SECTION 8.2.9 of the Loan
Agreement or any other provision of the Loan Agreement or any other Loan
Document.
SECTION 3. CONDITIONS PRECEDENT TO EFFECTIVENESS OF AMENDMENTS. The
amendments to the Loan Agreement contained in SECTION 1 of this Eighth Amendment
shall be effective only upon the satisfaction of each of the conditions set
3
forth in this SECTION 3. If each condition set forth in this SECTION 3 has not
been satisfied by February 25, 2002, this Eighth Amendment and all obligations
of Lenders contained herein shall, at the option of Lenders, terminate.
3.1 DOCUMENTATION. Agent and Lenders shall have received, in form and
substance acceptable to Agent and Lenders and their counsel a duly executed copy
of this Eighth Amendment. Each Lender shall have received, in form and substance
acceptable to Agent and Lenders and their counsel a duly executed original of
(i) a Revolving Credit Note in favor of such Lender in the amount of such
Lender's Revolving Credit Percentage in the form of Exhibit A attached hereto,
and (ii) a Term Note in favor of such Lender in the amount of such Lender's Term
Loan Percentage in the form of Exhibit A-1 attached hereto, and any other
documents, instruments and certificates as Agent and Lenders and their counsel
shall require in connection therewith prior to the date hereof, all in form and
substance satisfactory to Agent and Lenders and their counsel.
3.2 2007 SUBORDINATED DEBT DOCUMENTS. ING and SunTrust shall have
consented to the amendments set forth in the Eighth Amendment to Loan and
Security Agreement and Waiver and amended the 2007 Subordinated Debt Documents
in a manner and on terms and conditions satisfactory to the Agent and Lenders.
3.3 CORPORATE EXISTENCE AND AUTHORITY. Agent and Lenders shall have
received such resolutions, certificates and other documents as Agent and Lenders
shall request relative to the authorization, execution and delivery by each Loan
Party of this Eighth Amendment, including, but not limited to the following:
1. Company General Certificate for Holdings and each of
Holdings Subsidiaries;
2. Copy of Resolutions of Holdings and each of Holdings
Subsidiaries, authorizing the execution of the Eighth
Amendment and the increase in the Revolving Credit
Loan Commitment and the Term Loan Commitment; and
3. Good Standing Certificates for Holdings and each of
Holdings Subsidiaries from their respective states of
incorporation; provided, however, that Borrower
shall, within 45 days hereof, provide to Agent a Good
Standing Certificate for Ramsay Youth Services Puerto
Rico, Inc.
3.4 NO DEFAULT. No Default or Event of Default (other than the Existing
Events of Default) shall exist.
3.5 NO LITIGATION. No action, proceeding, investigation, regulation or
legislation shall have been instituted, threatened or proposed before any court,
governmental agency or legislative body to enjoin, restrain or prohibit, or to
obtain damages in respect of, or which is related to or arises out of this
Eighth Amendment, the Loan Agreement or the consummation of the transactions
contemplated hereby.
4
3.6 FEE. Borrowers shall have paid to Agent an amendment fee of
$50,000.00.
SECTION 4. REPRESENTATIONS AND WARRANTIES OF BORROWERS. To induce Agent
and Lenders to enter into this Eighth Amendment, each Borrower hereby represents
and warrants to Agent and Lenders as follows:
4.1 REAFFIRMATION OF REPRESENTATIONS AND WARRANTIES. Each
representation and warranty of any Loan Party contained in the Loan Agreement
and the other Loan Documents, as amended hereby, is true and correct on the date
hereof and will be true and correct after giving effect to (i) the amendments
set forth in SECTION 1 hereof, (ii) the Managed Care Merger and (iii) the Ramsay
Treatment Name Change.
4.2 MANAGED CARE MERGER. Attached hereto as Exhibit 1 are true and
correct copies of the Certificate of Merger and the Agreement and Plan of Merger
Merging Ramsay Louisiana, Inc., Ramsay Hospital Corporation of Louisiana, Inc.
and Bethany Psychiatric Hospital, Inc. with and into Ramsay Managed Care, Inc.
4.3 RAMSAY TREATMENT NAME CHANGE. Attached hereto as Exhibit 2 are true
and correct copies of all documents evidencing the Ramsay Treatment Name Change.
4.4 NO OUTSTANDING JUNIOR SUBORDINATED DEBT OR PREFERRED STOCK. As of
the date hereof, there is no outstanding Indebtedness with respect to the Junior
Subordinated Debt Documents and no Preferred Stock is outstanding.
4.5 CORPORATE AUTHORITY; NO CONFLICTS. The execution, delivery and
performance by each Borrower of this Eighth Amendment and all documents,
instruments and agreements contemplated herein are within each Borrower's
respective corporate powers, have been duly authorized by necessary action,
require no action by or in respect of, or filing with, any court or agency of
government and do not violate or constitute a default under any provision of
applicable Law or any material agreement binding upon any Loan Party or result
in the creation or imposition of any Lien upon any of the assets of any Loan
Party except as permitted in the Loan Agreement, as amended hereby.
4.6 ENFORCEABILITY. This Eighth Amendment constitutes the valid and
binding obligation of each of the Borrowers enforceable in accordance with its
terms, except as (i) the enforceability thereof may be limited by bankruptcy,
insolvency or similar laws affecting creditors' rights generally, and (ii) the
availability of equitable remedies may be limited by equitable principles of
general application.
4.7 NO DEFENSES. No Loan Party has any defenses to payment,
counterclaims or rights of set off with respect to the Obligations.
SECTION 5. MISCELLANEOUS.
5.1 REAFFIRMATION OF LOAN DOCUMENTS; EXTENSION OF LIENS. Any and all of
the terms and provisions of the Loan Agreement and the Loan Documents shall,
except as amended and modified hereby, remain in full force and effect.
Borrowers hereby extend the Liens securing the Obligations until the Obligations
5
have been paid in full, and agree that the amendments and modifications herein
contained shall in no manner affect or impair the Obligations or the Liens
securing the payment and performance thereof.
5.2 PARTIES IN INTEREST. All of the terms and provisions of this Eighth
Amendment shall bind and inure to the benefit of the parties hereto and their
respective successors and assigns.
5.3 LEGAL EXPENSES. The Borrowers hereby agree to pay promptly
following receipt of an invoice detailing all reasonable fees and expenses of
counsel to Agent and Lenders incurred by Agent or any Lender, in connection with
the preparation, negotiation and execution of this Eighth Amendment and all
related documents.
5.4 COUNTERPARTS. This Eighth Amendment may be executed in
counterparts, and all parties need not execute the same counterpart. However, no
party shall be bound by this Eighth Amendment until all parties have executed a
counterpart. Facsimiles shall be effective as originals.
5.5 COMPLETE AGREEMENT. THIS EIGHTH AMENDMENT, THE LOAN AGREEMENT AND
THE OTHER LOAN DOCUMENTS REPRESENT THE FINAL AGREEMENT BETWEEN THE PARTIES AND
MAY NOT BE CONTRADICTED BY EVIDENCE OF PRIOR, CONTEMPORANEOUS OR ORAL AGREEMENTS
OF THE PARTIES. THERE ARE NO UNWRITTEN ORAL AGREEMENTS BETWEEN THE PARTIES.
5.6 HEADINGS. The headings, captions and arrangements used in this
Eighth Amendment are, unless specified otherwise, for convenience only and shall
not be deemed to limit, amplify or modify the terms of this Eighth Amendment,
nor affect the meaning thereof.
(SIGNATURE PAGES FOLLOW)
6
IN WITNESS WHEREOF, the parties hereto have caused this Eighth
Amendment to be duly executed by their respective authorized officers on the
date and year first above written.
BORROWERS:
RAMSAY YOUTH SERVICES, INC.
By:
--------------------------------------------------
Luis E. Lamela
President and Chief Executive Officer
BOUNTIFUL PSYCHIATRIC HOSPITAL, INC.
EAST CAROLINA PSYCHIATRIC SERVICES CORPORATION
GREAT PLAINS HOSPITAL, INC.
GULF COAST TREATMENT CENTER, INC.
HAVENWYCK HOSPITAL, INC.
H. C. CORPORATION
HSA HILL CREST CORPORATION
HSA OF OKLAHOMA, INC.
MICHIGAN PSYCHIATRIC SERVICES, INC.
RAMSAY TREATMENT SERVICES, INC. f/k/a RAMSAY EDUCATIONAL SERVICES, INC.
RAMSAY MANAGED CARE, INC.
RAMSAY YOUTH SERVICES OF ALABAMA, INC.
RAMSAY YOUTH SERVICES OF FLORIDA, INC.
RAMSAY YOUTH SERVICES OF SOUTH CAROLINA, INC.
RHCI SAN ANTONIO, INC.
TRANSITIONAL CARE VENTURES, INC.
TRANSITIONAL CARE VENTURES (TEXAS), INC.
By:
--------------------------------------------------
Luis E. Lamela
Vice President
H. C. PARTNERSHIP
By: H.C. CORPORATION, General Partner
By: HSA HILL CREST CORPORATION, General Partner
By:
-------------------------------------------
Luis E. Lamela
Vice President
7
AGENT AND LENDERS:
FLEET CAPITAL CORPORATION
("Agent" and a "Lender")
By:
--------------------------------------------------
Dennis M. Hansen
Senior Vice President
Revolving Credit Loan Commitment: $15,000,000.00
Revolving Credit Percentage: 100%
Term Loan Commitment: $9,154,682.00
Term Loan Percentage: 100%
Acquisition Loan Commitment: $1,797,279.42
Acquisition Loan Percentage: 100%
8
CONSENT AND REAFFIRMATION
The undersigned (each a "GUARANTOR") hereby (i) acknowledges receipt of a
copy of the foregoing Eighth Amendment to Loan and Security Agreement and Waiver
(the "EIGHTH AMENDMENT"); (ii) consents to Borrowers' execution and delivery
thereof; (iii) agrees to be bound thereby; and (iv) affirms that nothing
contained therein shall modify in any respect whatsoever its guaranty of the
obligations of the Borrowers to Lenders pursuant to the terms of its Guaranty in
favor of Agent and the Lenders (the "GUARANTY") and reaffirms that the Guaranty
is and shall continue to remain in full force and effect. Although Guarantor has
been informed of the matters set forth herein and has acknowledged and agreed to
same, Guarantor understands that the Lenders have no obligation to inform
Guarantor of such matters in the future or to seek Guarantor's acknowledgment or
agreement to future amendments or waivers, and nothing herein shall create such
duty.
IN WITNESS WHEREOF, the undersigned has executed this Consent and
Reaffirmation on and as of the date of the Eighth Amendment.
GUARANTOR:
RAMSAY YOUTH SERVICES PUERTO RICO, INC.
By:
--------------------------------------------------
Luis E. Lamela
Vice President
Exhibit A
REVOLVING CREDIT NOTE
$__________________ __________________
__________________
FOR VALUE RECEIVED, each of the undersigned, jointly and severally,
(hereinafter collectively referred to as "Borrowers", and each individually, a
"Borrower"), hereby PROMISES TO PAY to the order of _______________, a
_________________ corporation ("Lender"), or its registered assigns, at the
office of Fleet Capital Corporation, as agent for such Lender, or at such other
place in the United States of America as the holder of this Revolving Credit
Note (this "Note") may designate from time to time in writing, in lawful money
of the United States of America and in immediately available funds, the
principal amount of ___________ DOLLARS ($ ___), or such lesser principal amount
as may be outstanding pursuant to the Loan Agreement (as hereinafter defined)
with respect to the Revolving Credit Loans, together with interest on the unpaid
principal amount of this Note outstanding from time to time.
This Note is one of the Revolving Credit Notes referred to in, and
issued pursuant to, that certain Loan and Security Agreement dated as of October
30, 1998, by and among Borrowers, the Lender signatories thereto (including
Lender) and Fleet Capital Corporation ("FCC"), as agent for such Lender (FCC in
such capacity "Agent") (as amended from time to time, the "Loan Agreement"), and
is entitled to all of the benefits and security of the Loan Agreement. All of
the terms, covenants and conditions of the Loan Agreement and the Security
Documents are hereby made a part of this Note and are deemed incorporated herein
in full. All capitalized terms herein, unless otherwise defined, unless
otherwise specifically defined in this Note, shall have the meanings ascribed to
them in the Loan Agreement.
The principal amount of the indebtedness evidenced hereby shall be
payable in the amounts and on the dates specified in the Loan Agreement and, if
not sooner paid in full, on the Commitment Termination Date, unless the term
hereof is extended in accordance with the Loan Agreement. Interest thereon shall
be paid until such principal amount is paid in full at such interest rates and
at such times as are specified in the Loan Agreement.
Upon and after the occurrence, and during the continuation, of an Event
of Default, this Note shall or may, as provided in the Loan Agreement, become or
be declared immediately due and payable.
The right to receive principal of, and stated interest on, this Note
may only be transferred in accordance with the provisions of the Loan Agreement.
Demand, presentment, protest and notice of nonpayment and protest are
hereby waived by each Borrower.
This Note amends, modifies, increases and restates, but does not
extinguish, the indebtedness evidenced by that certain Revolving Credit Note of
Borrowers dated February 12, 2002, payable to the order of Fleet Capital
Corporation in the original principal amount of $12,000,000.00.
This Note shall be interpreted, governed by, and construed in
accordance with, the internal laws of the State of Texas.
RAMSAY YOUTH SERVICES, INC.
By:
--------------------------------------------
Name:
--------------------------------------------
Title:
--------------------------------------------
BOUNTIFUL PSYCHIATRIC HOSPITAL, INC.
EAST CAROLINA PSYCHIATRIC SERVICES CORPORATION
GREAT PLAINS HOSPITAL, INC.
GULF COAST TREATMENT CENTER, INC.
HAVENWYCK HOSPITAL, INC.
H. C. CORPORATION
HSA HILL CREST CORPORATION
HSA OF OKLAHOMA, INC.
MICHIGAN PSYCHIATRIC SERVICES, INC.
RAMSAY TREATMENT SERVICES, INC. f/k/a RAMSAY EDUCATIONAL SERVICES, INC.
RAMSAY MANAGED CARE, INC.
RAMSAY YOUTH SERVICES OF ALABAMA, INC.
RAMSAY YOUTH SERVICES OF FLORIDA, INC.
RAMSAY YOUTH SERVICES OF SOUTH CAROLINA, INC.
RHCI SAN ANTONIO, INC.
TRANSITIONAL CARE VENTURES, INC.
TRANSITIONAL CARE VENTURES (TEXAS), INC.
By:
--------------------------------------------
Name:
--------------------------------------------
Title:
--------------------------------------------
H. C. PARTNERSHIP
By: H.C. CORPORATION, General Partner
By: HSA HILL CREST CORPORATION, General Partner
By:
--------------------------------------------
Name:
--------------------------------------------
Title:
--------------------------------------------
EXHIBIT A-1
SECURED PROMISSORY NOTE
(Term Note)
$_____________ February [__], 2002
Dallas, Texas
FOR VALUE RECEIVED, each of the undersigned, jointly and severally,
(hereinafter collectively referred to as "BORROWER", and each individually, a
"BORROWER"), hereby promises to pay to the order of ________________________, a
________corporation (hereinafter "Lender"), or its registered assigns at the
office of Fleet Capital Corporation, as agent for such Lender, or at such other
place in the United States of America as the holder of this Note may designate
from time to time in writing, in lawful money of the United States, in
immediately available funds, at the time of payment, the principal sum of
_________________Dollars ($________), together with interest from and after the
date hereof on the unpaid principal balance outstanding from time to time.
This Secured Promissory Note (the "Note") is one of the Term Notes
referred to in, and is issued pursuant to, that certain Loan and Security
Agreement dated as of October 30, 1998, by and among Borrowers, the Lender
signatories thereto (including Lender) and Fleet Capital Corporation ("FCC") as
Agent for said Lender (FCC in such capacity, "Agent") (hereinafter, as amended
from time to time, the "Loan Agreement"), and is entitled to all of the benefits
and security of the Loan Agreement. All of the terms, covenants and conditions
of the Loan Agreement and the Security Documents are hereby made a part of this
Note and are deemed incorporated herein in full. All capitalized terms used
herein, unless otherwise specifically defined in this Note, shall have the
meanings ascribed to them in the Loan Agreement.
For so long as no Event of Default shall have occurred and be
continuing the principal amount and accrued interest of this Note shall be due
and payable on the dates and in the manner hereinafter set forth:
(a) Interest on the unpaid principal balance outstanding from time to
time shall be paid at such interest rates and at such times as are
specified in the Loan Agreement;
(b) Principal shall be due and payable monthly on the first day of each
month during the periods set forth below in the amounts set forth
opposite such periods:
DATE SCHEDULED INSTALLMENT
---- ---------------------
March 1, 2002 through $239,583
October 31, 2002
November 1, 2002 through $302,083
October 30, 2003
(c) The entire remaining principal amount then outstanding, together
with any and all other amounts due hereunder, shall be due and payable on
the Commitment Termination Date.
Notwithstanding the foregoing, the entire unpaid principal balance and accrued
interest on this Note shall be due and payable immediately upon any termination
of the Loan Agreement pursuant to Section 4 thereof.
This Note shall be subject to mandatory prepayment in accordance with
the provision of Section 3.3 of the Loan Agreement. Borrowers may also prepay
this Note in the manner provided in Section 4 of the Loan Agreement.
Upon the occurrence, and during the continuation, of an Event of
Default, this Note shall or may, as provided in the Loan Agreement, become or be
declared immediately due and payable.
The right to receive principal of, and stated interest on, this Note
may only be transferred in accordance with the provisions of the Loan Agreement.
Demand, presentment, protest and notice of nonpayment and protest are
hereby waived by each Borrower.
This Note amends, modifies, and restates, but does not extinguish, the
indebtedness evidenced by that certain Secured Promissory Note (Term Note) of
Borrowers dated February 12, 2002, payable to the order of Fleet Capital
Corporation in the original principal amount of $7,654,682.00.
This Note shall be governed by, and construed and enforced in accordance
with, the laws of the State of Texas.
RAMSAY YOUTH SERVICES, INC.
By:
-------------------------------------
Name:
-------------------------------------
Title:
-------------------------------------
BOUNTIFUL PSYCHIATRIC HOSPITAL, INC.
EAST CAROLINA PSYCHIATRIC SERVICES CORPORATION
GREAT PLAINS HOSPITAL, INC.
GULF COAST TREATMENT CENTER, INC.
HAVENWYCK HOSPITAL, INC.
H. C. CORPORATION
HSA HILL CREST CORPORATION
HSA OF OKLAHOMA, INC.
MICHIGAN PSYCHIATRIC SERVICES, INC.
RAMSAY TREATMENT SERVICES, INC. f/k/a RAMSAY EDUCATIONAL SERVICES, INC.
RAMSAY MANAGED CARE, INC.
RAMSAY YOUTH SERVICES OF ALABAMA, INC.
RAMSAY YOUTH SERVICES OF FLORIDA, INC.
RAMSAY YOUTH SERVICES OF SOUTH CAROLINA, INC.
RHCI SAN ANTONIO, INC.
TRANSITIONAL CARE VENTURES, INC.
TRANSITIONAL CARE VENTURES (TEXAS), INC.
By:
-------------------------------------
Name:
-------------------------------------
Title:
-------------------------------------
H. C. PARTNERSHIP
By: H.C. CORPORATION, General Partner
By: HSA HILL CREST CORPORATION, General Partner
By:
----------------------------------
Name:
----------------------------------
Title:
----------------------------------
EXHIBIT 11
RAMSAY YOUTH SERVICES, INC. AND SUBSIDIARIES
COMPUTATION OF NET INCOME (LOSS) PER SHARE
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
-------------------------------------------------
2001 2000 1999
----------- ---------- ----------
<S> <C> <C> <C>
Numerator for diluted earnings per share -
net income after assumed conversions ....... $ 3,466,000 $2,852,000 $3,117,000
=========== ========== ==========
Denominator:
Denominator for basic earnings per share -
weighted-average shares .................... 9,046,000 8,913,000 8,890,000
Effect of dilutive securities:
Employee stock options and warrants ........ 1,294,000 41,000 648,000
----------- ---------- ----------
Denominator for diluted earnings per share -
adjusted weighted-average shares and
assumed conversions .................... 10,340,000 8,954,000 9,538,000
=========== ========== ==========
Basic earnings per share ......................... $ .38 $ .32 $ .35
=========== ========== ==========
Diluted earnings per share ....................... $ .34 $ .32 $ .33
=========== ========== ==========
</TABLE>
EXHIBIT 21
SUBSIDIARIES OF RAMSAY YOUTH SERVICES, INC.
Bountiful Psychiatric Hospital, Inc., a Utah corporation
East Carolina Psychiatric Services Corporation, a North Carolina corporation
Great Plains Hospital, Inc., a Missouri corporation
Gulf Coast Treatment Center, Inc., a Florida corporation
Havenwyck Hospital, Inc., a Michigan corporation
H.C. Corporation, an Alabama corporation
H.C. Partnership, an Alabama general partnership (HSA Hill Crest Corporation
and H.C. Corporation each own a 50% partnership interest)
HSA Hill Crest Corporation, an Alabama corporation
HSA of Oklahoma, Inc., an Oklahoma corporation
Michigan Psychiatric Services, Inc., a Michigan corporation
Ramsay Treatment Services, Inc., a Delaware corporation
Ramsay Managed Care, Inc., a Delaware corporation
Ramsay Youth Services of Alabama, Inc., a Delaware corporation
Ramsay Youth Services of Florida, Inc., a Delaware corporation
Ramsay Youth Services of South Carolina, Inc., a Delaware corporation
Ramsay Youth Services Puerto Rico, Inc., a Puerto Rico corporation
RHCI San Antonio, Inc., a Delaware corporation
Transitional Care Ventures, Inc., a Delaware corporation (the Company owns
60% of the capital stock of this corporation)
Transitional Care Ventures (Texas), Inc., a Delaware corporation
EXHIBIT 23.1
INDEPENDENT AUDITORS' CONSENT
We consent to the incorporation by reference in the Registration
Statements No. 33-52991, No. 33-47997, No. 33-44697, No. 33-39260, No. 333-46400
and No. 333-68148 of Ramsay Youth Services, Inc. on Forms S-8 of our report
dated March 15, 2002, appearing in this Annual Report on Form 10-K of Ramsay
Youth Services, Inc. for the year ended December 31, 2001.
DELOITTE & TOUCHE LLP
Miami, Florida
March 28, 2002