ITEM 1. BUSINESS.
GENERAL
The Company is a leading provider and manager of diversified education, treatment and community-based programs and services for at-risk and troubled youth in residential and non-residential settings nationwide. The Company offers its full spectrum of programs and services in Alabama, Florida, Missouri, Michigan, Nevada, North Carolina, South Carolina, Texas, Utah and the Commonwealth of Puerto Rico. The Company also provides a limited range of adult behavioral services at certain of its locations in response to community demand.
PROGRAMS AND SERVICES
The programs and services provided by the Company are designed through a comprehensive continuum that is directed to address the specific needs of each youth. The youth served by the Company include youth with special needs such as (i) mental health and substance abuse issues, (ii) sexual offense disorders, (iii) developmental disorders and (iv) emotional and behavioral disorders. The Company also serves youth with special education needs and pre-adjudicated and adjudicated youth committed to the juvenile justice system.
The primary objective of the Company's programs and services is to provide the optimal opportunity for rehabilitation and integration of at-risk and troubled youth into their communities as responsible individuals and productive citizens.
The Company offers the following programs and services:
o RESIDENTIAL TREATMENT PROGRAMS - The Company's Residential Treatment Programs provide safe, secure and highly structured environments for the evaluation and development of long-term, intensive and transitional treatment services.
- Long-term residential treatment services 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.
- Intensive treatment services provide crisis stabilization or short-term intensive services evaluation and disposition planning for severely behaviorally and emotionally disturbed youth and specialized treatment for specific behavioral problems in a highly structured therapeutic environment.
- Group home services provide shelter care for youth in a family-like setting usually in a residential neighborhood. These youth typically are transitioning from a more intensive program, such as a long-term residential treatment facility. The group home setting is a less restrictive residential environment that offers youth the opportunities for personal growth, social development and responsible behavior. The youth attend public schools or receive in-home education and receive 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 JUVENILE JUSTICE PROGRAMS - The Company's Juvenile Justice Programs provide care, custody, control and treatment of committed delinquent youth. These programs focus on solving the specialized needs of governmental agencies 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 believes that a balanced approach, which develops the social, educational, and vocational skills of the youth and holds them accountable to their victims and communities, creates responsible, contributing, pro-social individuals. This balanced approach is essential to achieving the program's objective of reducing recidivism and integrating the youth into their communities as responsible and productive individuals.
o COMMUNITY-BASED PROGRAMS - The Company's Community-Based Programs are designed to meet the special needs of youth and their families, while enabling them to remain living at home or in their community. The primary focus of this program is to provide youth with a clinically definable emotional, psychiatric or dependency disorder with therapeutic and intensive treatment services. Youth who are serviced through this program have either transitioned out of a residential treatment program, juvenile justice program, or do not require the intensive services of a residential treatment program.
o EDUCATIONAL PROGRAMS - The Company's educational programs provide specialized educational services designed to modify disruptive behavior and assist students to develop the academic and social skills necessary for them to participate successfully in society. These programs are designed to provide a positive learning environment that includes a challenging academic curriculum, computer assisted learning, behavioral counseling, vocational programming and job placement. The Company offers its educational programs at its residential treatment facilities and through the operation and/or management of schools.
The following table sets forth the programs and services offered by the Company in the various markets in which it operates:
MARKET FOR THE COMPANY'S SERVICES
The Company believes that the trend in the United States towards the expansion of privatization of at-risk youth programs and services by government agencies will continue. In addition, the Company also believes that there is a growing demand for preventative programs and services including rehabilitation, treatment and alternative education.
The markets for programs and services for at-risk and troubled youth in the United States are large and growing as evidenced by the following industry estimates:
o The $60.0 billion youth services industry is growing at a rate of 9% per annum.
o There are approximately 9.2 million children classified as at-risk.
o The juvenile population is expected to grow 21% by the year 2010.
o In 1998, there were 2.6 million arrests of individuals under the age of eighteen.
o Juvenile crime is 60% above the 1980 level. Juveniles account for about 20% of all arrests and 20% of violent crime arrests.
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 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, 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.
o SELECTED STRATEGIC ACQUISITIONS - The Company intends to pursue strategic acquisitions of other youth services providers to penetrate existing markets further and enter new geographic markets. The youth services industry is 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 at-risk youth industry is comprised largely of small providers that operate in relatively limited geographic areas and provide services to a specific type of juvenile. The Company competes with both public and private for-profit and not-for-profit companies. Competition generally is based upon program quality, range and price of services provided, operational experience and facility location. 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 favorably 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. In certain instances, competitors of the Company may initiate programs similar to the Company without substantial capital investment or experience in management of education or treatment facilities. In addition, certain not-for-profit entities may offer programs and services at a lower cost than the Company due in part to government subsidies, foundation grants, tax deductible contributions or other financial resources not available to for-profit companies.
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), Medicaid, Medicare and various state and local governmental agencies (including state judicial systems). In addition, payments are received directly from individuals, including copayments 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 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, partial hospitalization and hospital-based outpatient services on a cost-based reimbursement system. Medicare reimburses for certain other outpatient services based on an area-wide fee schedule or other blended rates. 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 noncovered charges, coinsurance and deductibles. In 1983, Congress changed the Medicare law applicable to Medicare reimbursement for medical/surgical 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. However, both Congress and the agency responsible for administering the Medicare program, the Health Care Financing Administration, have been investigating a revision to the payment system for inpatient psychiatric, partial hospitalization and hospital-based outpatient services, including certain of the services provided by the Company, which would eliminate the cost-based structure of the current system. Under current proposals, reimbursement for inpatient, partial hospitalization and outpatient psychiatric services would be transitioned to a prospective payment system in which payment for services may be unrelated to the provider's costs.
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, passed by Congress in July 1997. Under certain provisions of this Act, 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%.
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 these 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 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 per-diem, per-diagnosis or sub-capitated arrangements.
For inpatient and partial hospitalization 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 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.
REGULATION
The operations of the Company are subject to federal, state and local regulations, which are administered by a variety of regulatory authorities. Operators of residential and day facilities for juveniles are typically expected to provide education programs and, in some instances, health care services. As providers of such services, operators of at-risk youth facilities are 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.
The schools managed by the Company are subject to a variety of state and local regulations and licensing requirements. These regulations and licensing requirements vary greatly from jurisdiction to jurisdiction. Generally, the governmental agencies review the safety, fitness and adequacy of the buildings and equipment, the ratio of staff personnel to enrolled children, the dietary program, the daily curriculum, compliance with health standards and qualifications of the Company's personnel. In addition, certain jurisdictions require financial audits of the schools operated or managed by the Company. In most jurisdictions, these agencies conduct scheduled and unscheduled inspections of the schools and licenses must be renewed periodically. Repeated failures by a school to comply with applicable regulations can subject it to sanctions that might include probation, suspension, or revocation of the license to operate.
In certain states where the Company manages the provision of educational services for troubled youth, state and local regulation exists governing such areas as compensatory arrangements between for-profit service providers such as the Company and not-for-profit schools and other educational entities, conflicts of interest and standards governing the quality of educational services.
As a behavioral healthcare provider, the Company is subject to extensive and frequently changing government regulations. 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, 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.
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, 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 consistent 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 facility 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. 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 1996, Congress enacted the Mental Health Parity Act of 1996 which generally requires that group health plans which provide benefits for mental health care must treat mental health benefits on a similar basis as benefits for any other illness for purposes of imposing annual or lifetime benefit limits. The law provides that, if the plan imposes limits on medical or surgical benefits on the basis of different categories of benefits, the plan may do the same with regard to different categories of mental health benefits, in accordance with regulations to be issued by the United States Department of Labor. The impact of this legislation on employee health benefits is unknown and the Company cannot predict the effect of this legislation on its financial condition or results of operations.
The Company is currently assessing its readiness under the Health Insurance Portability and Accountability Act of 1996 (HIPAA). Pending HIPAA regulations are likely to have a significant effect on the way the Company addresses the confidentiality of patient information and implements measures to protect and secure such information. Failure to comply with such regulations may result in civil and criminal penalties.
HIPAA security requirements are likely to require:
o documented, formal procedures for choosing and implementing security mechanisms;
o proceedures outlining staff responsibilities for protecting data;
o physical safeguards to protect physical computer systems, peripherals, and buildings from environmental hazards and intrusions;
o administrative and physical measures to control access to computer systems and facilities;
o mechanisms and processes to protect, control, and monitor information access; and mechanisms and processes to prevent unauthorized access to data transmitted over telecommunications networks and devices.
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 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.
OWNERSHIP ARRANGEMENTS
One physician owns a 4% interest in the subsidiary which owns Gulf Coast Treatment Center. The Company may be required to repurchase, and the minority shareholder may be required to sell, the minority interest at a formula price dependent upon many factors, including the earnings per share of the subsidiary which owns the hospital and the price/earnings multiple of the Company, after a fixed period of time. Although the amount of the Company's repurchase obligation cannot be precisely determined, the Company does not believe that this obligation is material.
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.
EMPLOYEES
As of December 31, 1999, the Company employed approximately 1,179 full-time and 659 part-time employees, including a corporate headquarters staff of approximately 21 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.
ITEM 2. PROPERTIES.
The following table provides information concerning the Company's properties:
(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) The Company resumed operations at this facility in December 1996. For the previous four years, this facility was leased to another healthcare provider. (4) 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. (5) 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, totalled approximately $18.3 million at June 30, 1998. See "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations" and "Item 8. Financial Statements and Supplementary Data".
The Company leases office space for its corporate headquarters in Coral Gables, Florida, (through December 31, 2000) and various regional offices. These leases have terms which generally range from three to five years, with renewal options.
ITEM 3.
ITEM 3. LEGAL PROCEEDINGS.
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, 1999 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 claims his employment was wrongfully terminated by the Company and seeks 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 is 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.
Prior to the merger with the Company, Ramsay Managed Care, Inc. sold its subsidiary which, as a licensed HMO in Louisiana, Alabama and Mississippi, managed and provided prepaid healthcare services to its members. On September 29, 1997, RMCI received a demand for indemnification by the purchaser of this subsidiary in an amount totaling approximately $5.8 million. The Company intends to vigorously defend any proceedings, which may result from this matter. In addition, on September 30, 1997, the Company demanded indemnification from the purchaser for various matters in an amount exceeding $2.0 million.
During fiscal year ended June 30, 1996, the State of Louisiana requested repayment of disproportionate share payments received by two of the Company's Louisiana facilities in fiscal years ended June 30, 1995 and 1994 totaling approximately $5.5 million. The repayment requested related primarily to alleged overpayments received by a former facility of the Company. In connection with the alleged overpayment, during fiscal year ended June 30, 1998, the State of Louisiana used $5.5 million in payments owed to two of the Company's Louisiana facilities to pay off the alleged overpayment. The Company has filed an administrative appeal with the State of Louisiana Department of Health and Hospitals Bureau of Appeals claiming that the State of Louisiana improperly used the monies. The
Company believes that this matter may be settled for an amount less than Louisiana's initial request. The Company intends to vigorously contest any position by Louisiana which it considers adverse.
See Note 15 to the consolidated financial statements set forth under "Item 8. Financial Statements and Supplementary Data".
ITEM 4.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
Not applicable.
PART II
ITEM 5.
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 National Market System under the symbol RYOU. On March 13, 2000, there were 621 holders of record of the Company's Common Stock. No cash dividends have been declared on the Common Stock since the Company was organized. Also, the Company's credit facilities include provisions which prohibit the payment of cash dividends to its common shareholders.
In connection with the refinancing of debt, on September 30, 1997, the Company sold to a financial institution $2.5 million of Series 1997 Preferred Stock. On September 30, 1998, the Series 1997 Preferred Stock was redeemed by the Company.
On October 30, 1998, the Company completed the private placement of an aggregate of 1,037,037 shares of Common Stock to its Chief Executive Officer, Paul Ramsay Holdings Pty. Limited ("Ramsay Holdings"), a corporate affiliate of Paul J. Ramsay, the Chairman of the Board of the Company and the principal stockholder of the Company, and other unrelated persons, all at a price per share of $3 3/8, the closing bid price of the Common Stock on The NASDAQ Stock Market on October 26, 1998 (the date of the various subscription agreements).
Registration under the Securities Act of 1933 (the "Securities Act") of the Common Stock issued in the foregoing transactions was not required because such securities were issued in transactions not involving any "public offering" within the meaning of Section 4(2) of the Securities Act.
In addition, on October 30, 1998, the Company issued 177,778 shares of Common Stock to Ramsay Holdings, in exchange for $600,000 of principal amount of junior subordinated indebtedness owed by the Company to Ramsay Holdings. As part of the Exchange Agreement (the "Exchange Agreement") entered into between the Company and Ramsay Holdings to affect the foregoing exchange, the Company agreed to issue additional shares of Common Stock to Ramsay Holdings in exchange for $4.0 million of the Company's Class B Preferred Stock, Series 1997-A (together with all accrued and unpaid dividends thereon) and an additional $400,000 of principal amount of subordinated indebtedness owed by the Company to Ramsay Holdings. This latter exchange was effected on December 1, 1998 at a price per share of $3 3/8 (the closing bid price of the Common Stock on The NASDAQ Stock Market on October 26, 1998, the date of the Exchange Agreement) after the expiration of the waiting period under the Hart-Scott-Rodino Antitrust Improvements Act of 1976. This latter exchange resulted in the issuance by the Company of 1,428,740 additional shares of Common Stock to Ramsay Holdings.
On December 16, 1998, the Company entered into an agreement (the "Agreement") with Ramsay Holdings, Ramsay Holdings HSA Limited and Paul Ramsay Hospitals Pty. Limited (collectively, the "Ramsay Affiliates") pursuant to which the Ramsay Affiliates (i) converted the Company's Class B Preferred Stock, Series C and Class B Preferred Stock, Series 1996 (together with accrued and unpaid dividends thereon) into an aggregate of 1,198,756 shares of Common Stock and (ii) exchanged $6,883,553 of principal amount of junior subordinated indebtedness owed by the Company (together with accrued and unpaid interest thereon of $123,219) for 1,384,054 shares of Common Stock. This latter exchange was
effected at a price per share of $5 1/16 (the closing bid price of the Common Stock on The NASDAQ Stock Market on December 16, 1998, the date of the Agreement).
In connection with the foregoing transactions, the Company granted limited registration rights with respect to the Common Stock issued to the stockholders participating in such transactions.
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.
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 year ended December 31, 1999, the six months ended December 31, 1998 and year ended June 30, 1998, as reported on the NASDAQ National Market System:
On March 13, 2000, the closing sales price of the Company's Common Stock was $2 1/8 per share.
ITEM 6.
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.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
RESULTS OF OPERATIONS
On February 19, 1998, the Company announced a change in strategic direction in order to focus on becoming a leader in the youth services industry. The strategic plan is now focused on repositioning the Company for growth in the at-risk youth industry 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 "Divested Assets"). See "Item 8. Financial Statements and Supplementary Data". The remaining business represents the Company's youth service operations (the "Retained Assets").
During the year ended December 31, 1999, the Company opened the following new programs:
o February 1999 - A 15-bed group home in Aiken, South Carolina
o February 1999 - A 10-bed group home in Las Vegas, Nevada
o June 1999 - A 12-bed group home in Conway, South Carolina
o June 1999 - A 10-bed group home in Bessemer, Alabama
o September 1999 - A 120-bed juvenile justice facility in Bayamon, Puerto Rico
o October 1999 - A 100-bed juvenile justice facility in Crestview, Florida
The Company receives revenues primarily from the delivery of diversified education, treatment and community based programs and services for at-risk and troubled youth in residential and non-residential settings. The Company receives revenues based on per diem rates, fixed fee contracts 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, 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 by youth education and treatment services are generally seasonal in nature.
YEAR ENDED DECEMBER 31, 1999 COMPARED TO YEAR ENDED JUNE 30, 1998
Total revenues decreased from $155.2 million in the year ended June 30, 1998 to $81.5 million in the year ended December 31, 1999. The decrease of $73.7 million in revenues is primarily attributable to a decrease of $94.5 million in revenues due to the sale and closure of the Company's Divested Assets. The Company also experienced an increase of $20.8 million in revenues from its Retained Assets primarily as a result of (i) an increase in revenues of $3.9 million from new programs started during the year and (ii) an increase in revenues of approximately $16.9 million in the Company's other Retained Assets primarily due to an increase in total resident days of 31% between periods (from 176,893 days during the year ended June 30, 1998 to 230,867 days during the year ended December 31, 1999).
Total salaries, wages and benefits decreased from $82.7 million in the year ended June 30, 1998 to $49.3 million in the year ended December 31, 1999. The decrease of $33.4 million in salaries, wages and benefits is primarily attributable to a decrease of $42.9 million due to the sale and closure of the Company's Divested Assets. The Company also experienced an increase of $9.5 million in salaries, wages and benefits from its Retained Assets primarily as a result of (i) an increase in salaries, wages and benefits of $3.5 million from new programs started during the year, (ii) a decrease in corporate office salaries, wages and benefits of $4.7 million due to the Company's restructuring efforts and (iii) an increase of $10.7 million in the Company's other Retained Assets primarily due to an increase in total resident days of 31% between periods (from 176,893 days during the year ended June 30, 1998 to 230,867 days during the year ended December 31, 1999).
Other operating expenses decreased from $64.3 million in the year ended June 30, 1998 to $25.0 million in the year ended December 31, 1999. The decrease of $39.3 million in other operating expenses is primarily attributable to a decrease of $39.1 million due to the sale and closure of the Company's Divested Assets. The Company also experienced a decrease of $0.2 million in other operating expenses from its Retained Assets primarily as a result of (i) an increase in other operating expenses of $1.3 million from new programs started during the year, (ii) a decrease in corporate office overhead of $4.2 million due to the Company's restructuring efforts and (iii) an increase in other operating expenses of $2.7 million in the Company's other Retained Assets due primarily to an increase in total resident days of 31% between periods (from 176,893 days during the year ended June 30, 1998 to 230,867 days during the year ended December 31, 1999).
The provision for doubtful accounts decreased from $6.6 million in the year ended June 30, 1998 to $1.9 million in the year ended December 31, 1999. The decrease is primarily attributable to the sale and closure of the Company's Divested Assets.
Depreciation and amortization expense decreased from $5.7 million in the year ended June 30, 1998 to $2.4 million in the year ended December 31, 1999 primarily due to the sale and closure of the Company's Divested Assets.
In connection with the Company's change in strategic direction, and in accordance with the accounting guidance available in Emerging Issues Task Force ("EITF") No. 94-3, during the year ended June 30, 1998, the Company (i) initiated a restructuring of personnel at its corporate headquarters, including the identification and communication of severance arrangements with individual personnel,
(ii) wrote-off certain assets located within its corporate headquarters which were considered to have no future economic benefit and (iii) initiated the termination of certain contractual commitments which require future payments. These amounts, which in the aggregate totaled $2.3 million, are reflected as restructuring charges in the year ended June 30, 1998.
During the year ended June 30, 1998, in connection with the Company's change in strategic direction, the Company decided to close or sell certain operations, including the operations and assets discussed above, that were identified as not compatible with the Company's future operating plans. Accordingly, the carrying values of these facilities/operations were compared to selling values or, if selling values were not available, to discounted future cash flows, resulting in an aggregate non-cash asset impairment charge of $17.6 million. The Company completed these sales in September 1998. Additionally, during the year ended June 30, 1998, the Company wrote-off cost in excess of net asset value of purchased businesses of $0.7 million due to an asset impairment resulting from the change in strategic direction.
Other income for the year ended December 31, 1999 is primarily a result of two non-recurring settlements in favor of the Company totaling approximately $1.5 million.
Interest and other financing charges decreased from $7.2 million in the year ended June 30, 1998 to $1.3 million in the year ended December 31, 1999. The decrease is primarily due to a decrease in the Company's average outstanding borrowings between periods as a result of the partial prepayment of indebtedness with proceeds from the aforementioned asset sales. In addition, during the year ended June 30, 1998, the Company incurred an expense of $1.3 million for a non-refundable fee charged by a financial institution in connection with an amendment to the Company's previous credit facility.
During the year ended June 30, 1998, the Company recorded losses of approximately $12.5 million related to the sale of its managed care operations and its Three Rivers and Greenbrier facilities. These amounts are reflected as losses related to asset sales and closed businesses in the accompanying consolidated statement of operations.
The Company recorded a $0.1 million provision for income taxes in the year ended December 31, 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. The Company recorded a provision for income taxes in the year ended June 30, 1998 of $10.0 million, which primarily represents a full valuation allowance on its previously recorded deferred tax assets. The realizability of these assets had been based on the implementation of tax planning strategies that contemplated the sales of certain appreciated property. In connection with the Company's change in strategic direction, the Company determined that its tax planning strategies would not be realized and a full valuation allowance was considered necessary.
SIX MONTHS ENDED DECEMBER 31, 1998 COMPARED TO SIX MONTHS ENDED DECEMBER 31, 1997 (UNAUDITED)
Total revenues decreased from $77.5 million in the six months ended December 31, 1997 to $47.9 million in the six months ended December 31, 1998. The decrease of $29.6 million in revenues is primarily attributable to a decrease of $34.7 million in revenues due to the sale and closure of the Company's Divested Assets. The Company also experienced an increase of $5.1 million in revenues from its Retained Assets primarily as a result of (i) an increase in revenues at the Company's Gulf Coast Treatment Center of $1.3 million due to the award of a contract to provide assignment center services for the State of Florida Department of Juvenile Justice on January 15, 1998, (ii) an increase in revenues of $1.6 million as a result of a new contract with the Juvenile Institutions Administration of the Commonwealth of Puerto Rico commencing on May 1, 1998, (iii) an increase in revenues of $0.9 million at the Company's facility located in Dothan, Alabama which began operations in June 1998, (iv) an increase in revenues of $0.2 million at the Company's South Carolina group home operations which began in July 1998 and (v) an increase in
revenues of $1.1 million in the Company's other Retained Assets due primarily to an increase in total resident days of 17% between periods (from 64,893 days during the six months ended December 31, 1997 to 76,016 days during the six months ended December 31, 1998).
Total salaries, wages and benefits decreased from $39.6 million in the six months ended December 31, 1997 to $28.3 million in the six months ended December 31, 1998. The decrease of $11.3 million in salaries, wages and benefits is primarily attributable to a decrease of $15.2 million due to the sale and closure of the Company's Divested Assets. The Company also experienced an increase of $3.9 million in salaries, wages and benefits from its Retained Assets primarily as a result of (i) an increase of $1.1 million in salaries, wages and benefits at the Company's facility located in Dothan, Alabama which began operations in June 1998, (ii) an increase of $0.8 million due to the start-up of the Company's Puerto Rico operations in May 1998, (iii) an increase of $0.3 million at the Company's South Carolina group home operations which began in July 1998, (iv) a decrease in corporate office salaries, wages and benefits of $0.9 million due to the Company's restructuring efforts and (v) an increase in salaries, wages and benefits of $2.6 million in the Company's other Retained Assets due primarily to an increase in total resident days of 25% between periods (from 80,088 days during the six months ended December 31, 1997 to 100,147 days during the six months ended December 31, 1998).
Other operating expenses decreased from $28.7 million in the six months ended December 31, 1997 to $17.5 million in the six months ended December 31, 1998. The decrease of $11.2 million in other operating expenses is primarily attributable to a decrease of $14.0 million due to the sale and closure of the Company's Divested Assets. The Company also experienced an increase of $2.8 million in other operating expenses from its Retained Assets primarily as a result of (i) an increase of $0.4 million in other operating expenses at the Company's facility located in Dothan, Alabama which began operations in June 1998, (ii) other operating expenses of $0.4 million related to the start-up of the Company's operations in Puerto Rico in May 1998, (iii) an increase in other operating expenses of $0.1 million attributable to the start-up of the South Carolina group home operations which began in July 1998, (iv) an increase in corporate office other operating expenses of $1.0 million attributable to an increase of $0.6 million due to reserves associated with an outstanding legal case and an increase in other operating expenses of $0.4 million due to expenses incurred in connection with the Company's change in strategic direction and (v) an increase in other operating expenses of $0.9 million in the Company's other Retained Assets, due primarily to an increase in total resident days of 31% between periods (from 50,450 days during the six months ended December 31, 1997 to 66,323 days during the six months ended December 31, 1998).
The provision for doubtful accounts decreased from $2.2 million in the six months ended December 31, 1997 to $1.5 million in the six months ended December 31, 1998. The decrease is primarily attributable to the sale and closure of the Company's Divested Assets.
Depreciation and amortization expense decreased from $3.3 million in the six months ended December 31, 1997 to $1.6 million in the six months ended December 31, 1998 primarily due to the sale and closure of the Company's Divested Assets.
During the six months ended December 31, 1998, the Company recorded approximately $7.9 million in other income primarily related to settlement of amounts due from third party contractual agencies to RHCL (see "Item 8. Financial Statements and Supplementary Data").
On September 30, 1998, the Company completed its previously announced sale of its behavioral health care facility in Morgantown, West Virginia. The Company realized a gain on this transaction of $2.0 million.
Interest and other financing charges decreased from $2.8 million in the six months ended December 31, 1997 to $1.7 million in the six months ended December 31, 1998. The decrease is primarily due to a decrease in the Company's average outstanding borrowings between periods as a result of the partial prepayment of indebtedness with proceeds from the aforementioned asset sales.
During the six months ended December 31, 1998, the Company recorded losses related to asset sales and closed businesses of $0.9 million. These losses are primarily attributable to (i) $0.8 million of estimated purchase price adjustments relating to the Company's sale of Divested Assets and (ii) $0.2 million of costs related to the closure of the Company's facility located in Midvale, Utah in December 1998.
During the six months ended December 31, 1998, the Company recorded a $1.6 million provision for income taxes in connection with the previously mentioned $7.9 million of non-operating income from RHCL.
YEAR ENDED JUNE 30, 1998 COMPARED TO YEAR ENDED JUNE 30, 1997
Total revenues increased from $134.9 million in the year ended June 30, 1997 to $155.2 million in the year ended June 30, 1998. Of this amount, revenues related to Retained Assets totalled $50.7 million in 1998 as compared to $45.4 million in 1997. Revenues related to Divested Assets totalled $104.5 million in 1998 as compared to $85.1 million in 1997. Excluded from Divested and Retained Asset revenues in 1997 are (i) a $2.9 million favorable cash judgment awarded by the courts of the State of Missouri related to one of the Company's Retained Assets and (ii) a $1.5 million benefit related to intermediary audits of prior year cost reports (approximately $1.0 million of this amount related to Divested Assets and $0.5 million related to Retained Assets).
The increase in revenues related to Retained Assets from the year ended June 30, 1997 to the year ended June 30, 1998 of $5.3 million is primarily attributable to an increase in revenues from residential treatment centers from $15.4 million in 1997 to $23.1 million in 1998, which is offset by a decrease in revenues from intensive treatment units of $1.3 million. The increase in residential treatment center revenues from fiscal 1997 to fiscal 1998 was primarily due to an increase in total resident days between years of 58% (from 65,316 days to 103,450 days).
The increase in revenues related to Divested Assets from the year ended June 30, 1997 to the year ended June 30, 1998 of $19.4 million is primarily attributable to (i) an increase in managed behavioral healthcare services revenues of $22.3 million related to RMCI, (ii) an increase in the Company's medical subacute unit revenues of $9.2 million attributable to an increase in total resident days between years, (iii) a decrease in revenues at the Company's Greenbrier facility of $2.7 million due to the closure and sale of the facility in fiscal 1998, (iv) a decrease in revenues generated from the Company's Meadowlake facility which closed in May 1997 of $2.7 million, (v) decreases in revenues in the Company's facilities located in Houma, Louisiana, Midvale, Utah and Mesa, Arizona by $2.5 million, $1.3 million and $1.5 million, respectively, due to a decrease in resident days between years, and (vi) a decrease in revenues at the Company's management contracts division of $0.9 million due to the loss of certain contracts.
Total salaries, wages and benefits increased from $67.8 million in the year ended June 30, 1997 to $82.7 million in the year ended June 30, 1998. Of this amount, salaries, wages and benefits related to Retained Assets totalled $28.0 million in fiscal 1998 as compared to $23.1 million in fiscal 1997. Salaries, wages and benefits related to Divested Assets totalled $48.9 million in fiscal 1998 as compared to $42.0 million in fiscal 1997. Corporate salaries, wages and benefits totalled $5.8 million in fiscal 1998 as compared to $2.7 million in fiscal 1997.
The increase in salaries, wages and benefits related to Retained Assets from fiscal 1997 to fiscal 1998 of $4.9 million is primarily attributable to (i) an increase in salaries, wages and benefits of $1.5 million at Gulf Coast Treatment Center due to a full year of operation in fiscal 1998, (ii) an increase of $0.5 million due to the start-up of the Dothan and Palm Bay facilities, and (iii) an increase in salaries, wages and benefits in other Retained Assets facilities of $3.0 million due to an increase in total resident days between years.
The increase in salaries, wages and benefits related to the Divested Assets from fiscal 1997 to fiscal 1998 of $6.9 million is primarily attributable to (i) an increase in salaries, wages and benefits of the Company's managed care operations of $7.0 million, (ii) an increase of $3.9 million attributable to an
increase in total resident days between years at the Company's medical subacute units, (iii) a decrease in contract management salaries, wages and benefits of $0.8 million due to the loss of contracts, (iv) a decrease in salaries, wages and benefits at the Meadowlake facility of $1.4 million, (v) a decrease in salaries, wages and benefits of the Company's facilities located in Houma, Louisiana, Mesa, Arizona and Midvale, Utah by $2.0 million due to reductions in total resident days, (vi) a decrease in the Greenbrier facility of $1.0 million due to both a reduction in resident days and its sale on June 2, 1998 and (vii) an increase in self-insurance reserves of $1.4 million due primarily to negative development of self-insured workers' compensation claims.
The increase in salaries, wages and benefits related to the corporate office from fiscal 1997 to fiscal 1998 of $3.1 million is primarily attributable to an increase of $1.2 million in incentive bonuses accruals during 1998 and an increase of $2.0 million due to the hiring of new personnel in fiscal 1998 (primarily related to the acquisition of RMCI and Summa).
Other operating expenses increased from $46.8 million in the year ended June 30, 1997 to $64.3 million in the year ended June 30, 1998. Of this amount, other operating expenses related to Retained Assets totalled $14.1 million in 1998 as compared to $11.2 million in 1997. Other operating expenses related to Divested Assets totalled $41.4 million in 1998 as compared to $31.2 million in 1997. Other operating expenses related to the Company's corporate office totalled $8.8 million in 1998 as compared to $4.4 million in 1997.
The increase in other operating expenses related to Retained Assets from fiscal 1997 to fiscal 1998 of $2.9 million is attributable to (i) an increase in other operating expenses of $0.5 million at Gulf Coast Treatment Center, (ii) other operating expenses of the new Dothan and Palm Bay facilities and start-up expenses related to a new contract in Puerto Rico of $1.0 million and (iii) an increase in other operating expenses of $1.4 million due to an increase in total resident days between years at the remainder of the Company's Retained Assets.
The increase in other operating expenses related to Divested Assets from fiscal 1997 to fiscal 1998 of $10.2 million is attributable to (i) an increase of $12.5 million in other operating expenses of the Company's managed care operations, (ii) an increase of $1.0 million attributable to an increase in resident days at the Company's medical subacute units, (iii) a decrease in other operating expenses at the Meadowlake facility of $0.9 million and (iv) a decrease of $2.4 million in other Divested Assets due to decreases in resident days between years.
The increase in corporate other operating expenses of $4.4 million from fiscal 1997 to fiscal 1998 is attributable to (i) an increase of $2.8 million in legal reserves due to the Company's outstanding litigation (see "Item 3. Legal Proceedings"), (ii) an increase of $0.6 million in self-insurance reserves due to negative development of self-insured malpractice claims and (iii) an increase in professional fees of approximately $1.0 million due primarily to the integration of the managed care operations during fiscal 1998.
The provision for doubtful accounts increased from $5.7 million in the year ended June 30, 1997 to $6.6 million in the year ended June 30, 1998. Provision for doubtful accounts as a percentage of total revenues approximated 4.2% for fiscal 1997 and fiscal 1998.
Depreciation and amortization increased from $5.5 million in the year ended June 30, 1997 to $5.7 million in the year ended June 30, 1998 primarily due to the current year amortization of intangible assets recorded in connection with the managed care acquisition in June 1997 offset by curtailing of depreciation on assets held for sale.
In connection with the Company's change in strategic direction, the Company initiated a restructuring of personnel at its corporate headquarters, including the identification and communication of severance arrangements with individual personnel. These amounts, which in the aggregate totaled $2.3 million, are reflected as restructuring charges in the accompanying statement of operations.
During fiscal 1998, the Company recorded asset impairment charges of $18.3 million relating to (i) the difference in the carrying values and the selling price of the Divested Assets held as of June 30, 1998 ($17.6 million) (See "Item 1. Business - Recent Developments") and (ii) the write-off of cost in excess of net asset value of purchased businesses due to an asset impairment resulting from the change in strategic direction ($0.7 million). See "Item 8. Financial Statements and Supplementary Data".
Other income in the year ended June 30, 1997 is primarily due to a $1.3 million derivative transaction entered into in connection with a refinancing effort. No similar such item occurred in fiscal 1998.
Interest and other financing charges increased from $6.0 million in the year ended June 30, 1997 to $7.2 million in the year ended June 30, 1998. The increase was primarily attributable to a $1.3 million non-refundable fee charged by a financial institution in connection with an amendment to the Company's credit facility. See "Item 8. Financial Statements and Supplementary Data".
During the year ended June 30, 1998, the Company recorded losses of approximately $12.5 million related to the sale of the managed care operations and the Three Rivers and Greenbrier facilities. These amounts are reflected as losses related to asset sales and closed businesses in the accompanying statement of operations. See "Item 8. Financial Statements and Supplementary Data".
The Company recorded a provision for income taxes in fiscal 1998 of $10.0 million, which primarily represents a full valuation allowance on its previously recorded deferred tax assets. The realizability of these assets had been based on the implementation of tax planning strategies that contemplated the sales of certain appreciated property. In connection with the Company's change in strategic direction, the Company determined that those tax planning strategies would not be realized and a full valuation allowance was considered necessary.
IMPACT OF INFLATION
The 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 health care. 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.
FUTURE ACCOUNTING REQUIREMENTS
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. This statement is effective for years beginning after June 15, 2000. The adoption of this new accounting standard is not expected to have a material impact on the Company's consolidated financial position or results of operations.
LIQUIDITY AND CAPITAL RESOURCES
The Company's capital requirements relate primarily to (i) the expansion of its youth service business through acquisition or development of new programs and services, (ii) routine capital improvements at its facilities and (iii) the payment of liabilities and legal settlements associated with its Divested Assets.
Cash used in operating activities for the year ended December 31, 1999 was $1.8 million on net income of $3.1 million as compared to the year ended June 30, 1998 which generated $1.6 million in operating activities on a net loss of $58.6 million. The decrease in cash from operating activities in 1999 is primarily due to the increase in accounts receivable from new programs started during the year and the decrease in other liabilities and amounts due to third-party contractual agencies as a result of payments made in connection with the Company's Divested Assets. Working capital at December 31, 1999 was $1.2 million as compared to $2.4 million at June 30, 1998.
Cash used by investing activities was $3.1 million for the year ended December 31, 1999 as compared to cash provided by investing activities of $11.4 million in the year ended June 30, 1998. During the year ended December 31, 1999, cash used by investing activities was used primarily for the acquisition of various group homes and recurring expenditures for property and equipment. The cash provided by investing activities during the year ended June 30, 1998 is primarily due to the proceeds from the sale of Divested Assets.
Cash provided by financing activities was $4.1 million for the year ended December 31, 1999 and cash used by financing activities was $11.8 million for the year ended June 30, 1998. During the year ended December 31, 1999, cash provided by financing activities was primarily attributable to an increase in borrowings under the Company's credit facility which was used to fund the acquisition of group homes and pay for the liabilities associated with the Divested Assets. During the year ended June 30, 1998, cash used in financing activities was primarily attributable to the refinancing of the Company's debt and prepayment of debt from the previously mentioned asset sales.
On September 30, 1997, the Company entered into a credit facility with a financial institution consisting of (i) a term loan of $12.5 million and a term loan of $10.0 million (the "Term Loans"), (ii) a revolving credit facility of up to the lesser of $16.5 million or the borrowing base of the Company's receivables (the "Revolving Credit Loan") and (iii) subordinated bridge notes, of which $15.0 million was purchased by the financial institution ("Series A Bridge Notes") and $2.5 million was purchased by Ramsay Holdings (the "Series B Bridge Notes") (collectively referred to as the "Bridge Facility").
In addition, on September 30, 1997, the Company entered into an agreement with Ramsay Holdings and the financial institution pursuant to which (i) Ramsay Holdings purchased $4.0 million of non-convertible, non-voting Class B Preferred Stock, Series 1997-A (the "Series 1997-A Preferred Stock") and (ii) the financial institution purchased $2.5 million of Class B Preferred Stock, Series 1997 (the "Series 1997 Preferred Stock").
In June 1998 the Company prepaid a portion of the credit facility with proceeds from the sale of assets and recorded a loss on early extinguishment of $0.9 million.
In September 1998, the Company used the net proceeds from the sales of assets to (i) repay in full the Term Loans, (ii) repay in full the Series A Bridge Notes, (iii) redeem all of the outstanding shares of the Series 1997 Preferred Stock, including accrued dividends, (iv) pay $1.5 million in previously incurred fees to the financial institution and (v) repay a portion of the Revolving Credit Loan. In connection with the aforementioned prepayment of indebtedness and refinancing, during the six months ended December 31, 1998, the Company recorded a loss from early extinguishment of debt of approximately $2.8 million.
On October 30, 1998, the Company refinanced the existing credit facility with proceeds from a credit facility consisting of term and revolving credit debt totaling $22.0 million (the "Senior Credit Facility").
Under the terms of the Senior Credit Facility, the Company was provided with (i) a term loan of $8.0 million (the "Term Loan"), payable in 54 monthly installments ranging from $0.1 million to $0.2 million, beginning May 1, 1999, with a final installment of $1.0 million due on October 30, 2003, (ii) a revolving credit facility (the "Revolver") for an amount up to the lesser of $8.0 million or the borrowing
base of the Company's receivables (as defined in the agreement) and (iii) an acquisition loan (the "Acquisition Loan") commitment of up to $6.0 million, beginning March 1, 1999. As of March 13, 2000, no amounts had been drawn under the Revolver and $2,429,000 had been drawn under the Acquisition Loan.
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% (9.0% at December 31, 1999), based on the Company's ratio of total indebtedness to EBITDA (as defined in the Senior Credit Facility) or (ii) a function of the Eurodollar rate plus a margin ranging from 2.0% to 3.5%, 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% (9.25% at December 31, 1999), 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%, 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 Senior Credit Facility) 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 exceeds $7.8 million.
The Company failed to maintain the required fixed charge coverage, interest coverage and leverage ratio as of December 31, 1998. The Company's lender agreed to waive the requirements as of December 31, 1998 and amend the definition of EBITDA for calculating the covenants in the future. As of December 31, 1999, the Company is in compliance with these ratios.
On June 30, 1999, the Company's Senior Credit Facility was amended and restated to provide for the approval of the RHCL purchase (the "Second Amendment"). The Second Amendment prohibits the payment of the RHCL purchase price until the earlier to occur of certain events (as defined in the agreement) or September 1, 1999. The Second Amendment also provides for a $3.0 million reserve on the Revolver borrowing base until the occurrence of certain events (as defined in the Second Amendment).
On November 28, 1999, the Company's Senior Credit Facility was amended and restated (the "Third Amendment"). The Third Amendment provides for, among other things, (i) up to $3.0 million in bridge loan advances under the Acquisition Loan for certain purposes (the "Bridge Loan Advances"), (ii) a release of the $3.0 million reserve on the Revolver borrowing base in an amount equal to the Bridge Loan Advances actually made and (iii) a change to the definitions for purposes of calculating the Pro Forma Availability covenant.
Proceeds from any borrowings under the Bridge Loan Advances are restricted, and may be used by the Company solely to satisfy certain liabilities (as defined in the agreement). The Bridge Loan Advances will be mandatorily payable on the occurrence of certain events (as defined in the Third Amendment). The interest rate on the Bridge Loan Advances is equal to the interest rate on the Acquisition Loan.
In connection with the Third Amendment, 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 Facility lender to participate in the Senior Credit Facility in an amount equal to the Bridge Loan Advances.
On January 25, 2000, the Company entered into a subordinated note and warrant purchase agreement, with an unrelated financial institution for an aggregate principal amount of
$5.0 million (the "Subordinated Note"). The Subordinated Note permits the financial institution to purchase, under certain conditions, up to 475,000 warrants which are convertible into the Company's common stock. Borrowings under the Subordinated Note 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 25, 2007. The Company's Senior Credit Facility was amended on January 25, 2000 to provide for the approval of the Subordinated Note.
The Company has pledged substantially all of its real property, receivables and other assets as collateral for the Senior Credit Facility.
Management of the Company believes that it can meet its current cash requirements and future identifiable needs with (i) internally generated funds from operations, (ii) the Senior Credit Facility and (iii) its ability to obtain debt or equity capital through other sources.
There can, however, be no assurance that additional financing will be available on acceptable terms. In addition, the Company's Senior Credit Facility places restrictions on the Company's ability to incur additional indebtedness which could adversely affect its ability to raise additional capital through debt financing.
ITEM 7A.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
While the Company is exposed to changes in interest rates as a result of its outstanding variable rate debt, the Company does not currently utilize any derivative financial instruments related to its interest rate exposure. The Company believes that its exposure to market risk will not result in a material adverse effect on the Company's consolidated financial condition, results of operations or liquidity.
ITEM 8.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
Financial statements of the Company and its consolidated subsidiaries are set forth herein beginning on page.
ITEM 9.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE.
Not applicable.
PART III
ITEM 10.
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 2000 Annual Meeting of Stockholders to be held on May 31, 2000 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, 1999.
ITEM 11.
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.
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.
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.
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 to 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.
3. EXHIBITS
Information with respect to this Item is contained in the attached Index to Exhibits.
(b) REPORTS ON FORM 8-K:
On May 21, 1999, the Company filed with the Commission a Current Report on Form 8-K related to a change in Registrant's Certifying Accountants.
(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, 10.69, 10.71, 10.72, 10.76, 10.77, 10.79, 10.91, 10.97, 10.99, 10.101, 10.102, 10.104, 10.105, 10.110, 10.136, 10.137 and 10.143.
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: 3/15/00 By /s/ Luis E. Lamela --------------------------------------- Luis E. Lamela President and Chief Executive Officer
Dated: 3/15/00 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: 3/15/00 By /s/ Paul J. Ramsay --------------------------------------- Paul J. Ramsay Chairman of the Board of Directors
Dated: 3/15/00 By /s/ Luis E. Lamela --------------------------------------- Luis E. Lamela Chief Executive Officer, Executive Vice Chairman of the Board and Director
SIGNATURE/TITLE
Dated: 3/15/00 By /s/ Aaron Beam, Jr. --------------------------------------- Aaron Beam, Jr. Director
Dated: 3/15/00 By /s/ Peter J. Evans --------------------------------------- Peter J. Evans Director
Dated: 3/15/00 By /s/ Thomas M. Haythe --------------------------------------- Thomas M. Haythe Director
Dated: 3/15/00 By /s/ Steven J. Shulman --------------------------------------- Steven J. Shulman Director
Dated: 3/15/00 By /s/ Michael S. Siddle --------------------------------------- Michael S. Siddle Director
RAMSAY YOUTH SERVICES, INC. AND SUBSIDIARIES
The following consolidated financial statements of the Registrant and its subsidiaries are submitted herewith in response to Item 8 and Item 14(a)(1):
All schedules have been omitted because they are inapplicable or the information is provided in the consolidated financial statements, including the notes thereto.
REPORT OF INDEPENDENT AUDITORS
Board of Directors and Stockholders Ramsay Youth Services, Inc. and Subsidiaries
We have audited the accompanying consolidated balance sheet of Ramsay Youth Services, Inc. and subsidiaries (the "Company") as of December 31, 1999 and the related consolidated statements of operations, redeemable preferred stock and stockholders' equity, and cash flows for the year then ended. 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 audit.
We conducted our audit 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 audit provides 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, 1999 and the consolidated results of operations and cash flows for the year then ended in conformity with accounting principles generally accepted in the United States of America.
The consolidated financial statements give retroactive effect to the acquisition by Ramsay Youth Services, Inc. of Ramsay Hospital Corporation of Louisiana, Inc. on June 30, 1999, which has been accounted for in a manner similar to a pooling of interests as described in Note 6 paragraph 9 to the accompanying consolidated financial statements. Other auditors previously audited and reported on the balance sheets of Ramsay Youth Services, Inc. as of December 31, 1998 and June 30, 1998 and the related statements of operations, redeemable preferred stock and stockholders' equity, and cash flows for the six months ended December 31, 1998 and the years ended June 30, 1998 and 1997, prior to their restatement to give effect to the 1999 acquisition. The pre-acquisition consolidated financial statements of Ramsay Youth Services, Inc. reflected $56,138,000 and $85,091,000 of total assets at December 31, 1998 and June 30, 1998, respectively, and $47,892,000, $155,197,000 and $134,669,000, respectively of total revenues for the six months ended December 31, 1998 and the years ended June 30, 1998 and 1997, of the respective restated totals. We audited the combination of the accompanying consolidated balance sheets of Ramsay Youth Services, Inc. and subsidiaries as of December 31, 1998 and June 30, 1998, and the related consolidated statements of operations, redeemable preferred stock and stockholders' equity, and cash flows for the six month period ended December 31, 1998 and the years ended June 30, 1998 and 1997, after restatement to give effect to the 1999 acquisition. In our opinion, such consolidated financial statements have been properly combined on the basis described in Note 6 paragraph 9 to the consolidated financial statements.
DELOITTE & TOUCHE LLP
Miami, Florida March 13, 2000
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
Board of Directors and Stockholders Ramsay Youth Services, Inc. and Subsidiaries
We have audited the accompanying consolidated balance sheets of Ramsay Youth Services, Inc. and subsidiaries (the "Company") as of December 31, 1998 and June 30, 1998, and the related consolidated statements of operations, redeemable preferred stock and stockholders' equity, and cash flows for the six month period ended December 31, 1998 and for each of the two years in the period ended June 30, 1998, prior to the transaction with Ramsay Hospital Corporation of Louisiana, Inc. described in Note 6 (which statements are not presented separately herein). 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 generally accepted auditing standards in the United States. 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 Ramsay Youth Services, Inc. and subsidiaries at December 31, 1998 and June 30, 1998, and the consolidated results of their operations and their cash flows for the six month period ended December 31, 1998 and for each of the two years in the period ended June 30, 1998, prior to the transaction with Ramsay Hospital Corporation of Louisiana, Inc. described in Note 6 (which statements are not presented separately herein) in conformity with generally accepted accounting principles in the United States.
ERNST & YOUNG LLP
Miami, Florida March 15, 1999
RAMSAY YOUTH SERVICES, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
RAMSAY YOUTH SERVICES, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
RAMSAY YOUTH SERVICES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
RAMSAY YOUTH SERVICES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF REDEEMABLE PREFERRED STOCK AND STOCKHOLDERS' EQUITY
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
RAMSAY YOUTH SERVICES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
RAMSAY YOUTH SERVICES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Information for the Six Month Period Ended December 31, 1997 is Unaudited)
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
INDUSTRY
Ramsay Youth Services, Inc. and its subsidiaries (the "Company") is a leading quality provider and manager of diversified education, treatment and community based programs and services for at-risk and troubled youth in residential and non-residential settings nationwide. The Company offers its full spectrum of education and treatment programs and services in Alabama, Florida, Missouri, Michigan, Nevada, North Carolina, South Carolina, Texas, Utah and the Commonwealth of Puerto Rico. The Company also provides a limited range of adult behavioral services at certain of its locations in response to community demand.
The Company changed its fiscal year end from June 30 to December 31, effective December 1998. The financial statements presented include the transition period consisting of the six months ended December 31, 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.
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 generally accepted accounting principles 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 receivables from residents and third-party payors at December 31, 1999 was as follows:
State Agencies 32.3% Medicaid 26.4 Medicare 9.9 Commercial 11.3 Managed Care 5.6 Self-Pay 4.9 Other 9.6 ------ 100.0% ======
ALLOWANCE FOR DOUBTFUL ACCOUNTS
The Company carries accounts receivable at the amount it deems to be collectible. Accordingly, the Company provides allowances for accounts it deems to be uncollectible based on management's best estimates. Recoveries are recognized in the period they are received. The ultimate amount of accounts receivable that becomes uncollectible could differ from those estimated.
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
RAMSAY YOUTH SERVICES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
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 5 and 6). 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. During the year ended June 30, 1998, the Company sold the operations of FPM Behavioral Health, Inc. (FPM) and, in connection with the sale, disposed of approximately $20,993,000 of cost in excess of net asset value of purchased businesses.
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.
Loan costs are deferred and amortized ratably over the life of the loan and are included in interest and other financing charges. When a loan or a portion thereof is paid in advance of scheduled maturity, a proportionate amount of deferred loan costs associated with the borrowing is written off and reported as an extraordinary loss from early extinguishment of debt in the Company's consolidated statement of operations.
Accumulated amortization of the Company's cost in excess of net asset value of purchased businesses, other intangible assets and loan costs as of December 31, 1999, December 31, 1998 and June 30, 1998 was $2,407,000, $2,621,000 and $4,560,000, 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 twenty years for equipment. For the year ended December 31, 1999, the six months ended December 31, 1998 and 1997 and the years ended June 30, 1998 and 1997, depreciation expense recorded on the Company's property and equipment totaled $1,845,000, $1,316,000, $2,299,000, $4,123,000 and $4,681,000, 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
RAMSAY YOUTH SERVICES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
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).
During the year ended June 30, 1998, the Company also received capitated amounts for behavioral healthcare services provided to individuals covered by certain managed care contracts. Capitated revenues are recognized during the period in which enrolled lives are covered for capitated payments received. Revenue received from the management of facilities not owned by the Company and for case management, utilization review and quality assurance oversight on the delivery of behavioral healthcare services by independent providers on behalf of clients is recognized at the time the services are provided.
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.
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.
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. SFAS No. 128 simplifies and replaces the standards for computing earnings per share previously required in APB Opinion No. 15, EARNINGS PER SHARE, and makes them comparable to international earnings per share standards.
STOCK-BASED COMPENSATION
The Company adopted SFAS No. 123, ACCOUNTING FOR STOCK BASED COMPENSATION, during fiscal 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, accounts receivable from services, and accounts payable approximate fair value as of December 31, 1999 due to the
RAMSAY YOUTH SERVICES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
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 is subject to change with market interest rates.
SEGMENT INFORMATION
Effective July 1, 1998, the Company adopted SFAS No. 131, "DISCLOSURE ABOUT SEGMENTS OF AN ENTERPRISE AND RELATED INFORMATION" which requires public companies to report segment information in annual financial statements and also requires these companies to report selected segment information in interim financial reports to shareholders. The Company has determined that it has only one reportable segment.
FUTURE ACCOUNTING REQUIREMENTS
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. This statement is effective for years beginning after June 15, 2000. The adoption of this new accounting standard is not expected to have a material impact on the Company's consolidated financial position or results of operations.
RECLASSIFICATIONS
Certain reclassifications have been made to the financial statements of prior periods to conform with the 1999 presentation.
2. ASSET SALES AND CLOSED BUSINESSES
During the year ended June 30, 1998, the Company changed its strategic direction from an organization which provides and manages a full range of behavioral healthcare services to an organization engaged in providing services for at-risk youth. In connection with its revised strategic initiative, the Company identified for divestiture and sold certain of its psychiatric inpatient facilities, its managed care operations and other non-youth service businesses during the year ended June 30, 1998 and the six months ended December 31, 1998.
On May 4, 1998, the Company sold its Three Rivers facility, which had been closed since June 30, 1995, for $2,000,000. Proceeds from the sale included a $500,000 cash payment at closing and a $1,500,000, 12% promissory note. The note receivable is reflected in other receivables in the accompanying balance sheets.
RAMSAY YOUTH SERVICES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
On June 2, 1998, the Company sold FPM Behavioral Health, Inc. ("FPM"), its wholly owned managed behavioral health care business, for a cash purchase price of $20,000,000, subject to certain future potential purchase price adjustments. During the year ended December 31, 1999, the Company paid $2,423,000 in purchase price adjustments relating to the FPM sale effectively reducing the FPM purchase price to $17,577,000. Management had fully reserved for this contingency as of December 31, 1998 and does not expect any future purchase price adjustments relating to the FPM sale. For the eleven-month period ended May 31, 1998, net income before taxes of the managed care business was $2,468,000 on revenues of $24,313,000.
On June 2, 1998, the Company also sold its Greenbrier facility to an unrelated third-party for a cash purchase price of $1,600,000. The Greenbrier facility had a pre-tax net loss of $1,205,000 on revenues of $5,571,000 for the eleven-month period ended May 31, 1998.
On September 28, 1998, the Company consummated a sale/leaseback transaction whereby the Company sold the land, building and fixed equipment of its Havenwyck facility in Auburn Hills, Michigan for the land, building and fixed equipment of its leased Desert Vista facility in Mesa, Arizona and $1,350,000 in cash. In connection with the sale/leaseback, the Company agreed to leaseback the Havenwyck facility over a term of approximately 12 years. The lease, which will be treated as an operating lease under generally accepted accounting principles, currently requires annual minimum lease payments of approximately $1,277,000, payable monthly.
On September 28, 1998, the Company completed the sale of its management contract services division and behavioral health care facilities in Conway, South Carolina, Houma, Louisiana, Mesa, Arizona and DeSoto, Texas for a cash purchase price of $13,500,000, subject to certain future potential purchase price adjustments. During the year ended December 31, 1999, the Company paid $652,000 in purchase price adjustments relating to the sale, effectively reducing the purchase price to $12,848,000. The Company had fully reserved for this contingency as of December 31, 1998 and does not expect any future purchase price adjustments relating to this sale.
On November 3, 1998, the Company was released from its lease obligation at its behavioral health care facility in Salt Lake City, Utah. The Company ceased operations at this facility on December 31, 1998.
During the fourth quarter of fiscal year ended June 30, 1998, the Company recorded asset impairment charges of $17,576,000 relating to these sales (see Note 3). In addition, during the year ended June 30, 1998 and the six months ended December 31, 1998, the Company recorded losses related to the foregoing asset sales and closed businesses of $12,483,000 and $947,000, respectively.
On September 30, 1998, the Company completed the sale of its behavioral health care facility in Morgantown, West Virginia for a cash purchase price of $14,800,000, subject to certain future potential purchase price adjustments. During the year ended December 31, 1999, the Company paid $185,000 in purchase price adjustments relating to the sale, effectively reducing the purchase price to $14,615,000. The Company had fully reserved for this contingency as of December 31, 1998 and does not expect any future purchase price adjustments relating to this sale. The Company realized a gain on this transaction of approximately $2,039,000.
The assets and liabilities relating to the aforementioned sales, which were consummated on September 28 and 30, 1998, and the Company's medical subacute and behavioral healthcare facility in San Antonio, Texas are reflected in the accompanying balance sheet as net assets held for sale at June 30, 1998. The assets and liabilities relating to the Company's facilities in San Antonio, Texas and Palm Bay, Florida are reflected in the accompanying balance sheet as net assets held for sale at December 31, 1998. During the year ended December 31, 1999, the Company decided to retain its medical sub-acute and behavioral healthcare facility in San Antonio, Texas. Accordingly, as of December 31, 1999, only the assets and
RAMSAY YOUTH SERVICES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
liabilities relating to the Company's Palm Bay facility are reflected in the accompanying balance sheet as net assets held for sale. The following is a summary of these assets and liabilities:
For the year ended December 31, 1999, revenues and net loss before taxes for the aforementioned assets totalled $108,000 and $64,000, respectively. For the six months ended December 31, 1998, revenues and net loss before taxes for the net assets held for sale totalled $4,573,000 and $341,000, respectively. For the year ended June 30, 1998, revenues and net income before taxes for the net assets held for sale totalled $67,130,000 and $2,863,000, 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.
As previously mentioned in Note 2, during the year ended June 30, 1998, the Company changed its strategic direction and identified for divestiture certain of its businesses and facilities. In connection with this decision, the Company recorded asset impairment charges of $17,576,000 in connection with the assets held for sale at June 30, 1998. The asset impairment charge was determined based on the difference between the carrying value of the assets and the expected net proceeds from the sales. In addition, as a result of the change in strategic direction, during the year ended June 30, 1998, the Company abandoned certain projects acquired in the Summa Healthcare Group, Inc. ("Summa") purchase. As a result, the Company recorded an asset impairment charge of approximately $740,000 which represents the unamortized value assigned to these projects at the date of acquisition. The asset impairment charge was determined based on the difference between the carrying value of the assets and the expected discounted future cash flows (see Note 6).
4. RESTRUCTURING CHARGES
In connection with its change in strategic direction, the Company initiated a restructuring at its corporate headquarters, including the identification and communication of termination and severance arrangements to approximately 15 employees. Amounts relating to these agreements, which in the aggregate totalled $2,349,000, are reflected as restructuring charges in the accompanying statement of operations for the fiscal year ended June 30, 1998. Payments totalling approximately $1,500,000 were made against this liability during the six months ended December 31, 1998. As of December 31, 1999, this liability has been fully utilized.
RAMSAY YOUTH SERVICES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
5. ACQUISITIONS
On December 8, 1998, the Company acquired all of the issued and outstanding shares of common stock of The Rader Group, Incorporated (the "Rader Group"), an education services organization located in Fort Walton Beach, Florida, for an aggregate purchase price of $1,000,000 plus an earn-out in future years payable to the previous shareholder if certain EBITDA targets are met. These targets have not been met for the year ended December 31, 1999. Pursuant to the Stock Purchase Agreement between the Rader Group and the Company, maximum future payments on the earn-out may not exceed $2,950,000 and will be accounted for as purchase price adjustments. The 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 $651,000 and other intangible assets of $403,000. These amounts are being amortized on a straight-line basis over a term ranging from 5 to 15 years. The operations of the Rader Group have been included in the accompanying consolidated statements of operations since December 1998.
6. TRANSACTIONS WITH AFFILIATES
On October 1, 1996, the Company and Ramsay Managed Care, Inc. ("RMCI") entered into a merger agreement providing for the acquisition of RMCI by a wholly owned subsidiary of the Company. The transaction was approved by the shareholders of both companies on April 18, 1997 and became effective on June 10, 1997. The merger was structured as a tax-free exchange recorded using the purchase method of accounting and, accordingly, the purchase price has been primarily allocated to the assets purchased and the liabilities assumed based upon their fair values at the date of acquisition. The total consideration (including acquisition costs of approximately $400,000) was approximately $24,000,000. During the year ended June 30, 1998, the Company recorded additional cost in excess of net asset value of purchased businesses of $3,200,000, related to certain contingencies, in accordance with SFAS No. 38, PREACQUISITION CONTINGENCIES OF PURCHASED ENTERPRISES.
In exchange for all of the outstanding shares of RMCI common and preferred stock, the Company issued 711,942 shares of Common Stock (valued based on the closing price of the Company's Common Stock on June 10, 1997 of $9.00 per share) and 100,000 shares of Preferred Stock Series 1996, which are convertible into 333,333 shares of Common Stock (see Note 9). In addition, amounts owed by RMCI to the Company, totaling approximately $7,000,000 on June 10, 1997, were included as a portion of the consideration for the acquisition of RMCI. The Company also assumed $7,388,000 of liabilities of RMCI.
The Company recorded interest income of $440,000 during the year ended June 30, 1997 (prior to the merger), on interest-bearing amounts owed by RMCI.
The operations of RMCI have been included in the Company's consolidated operations subsequent to the effective date of the transaction of June 10, 1997.
RAMSAY YOUTH SERVICES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
The following unaudited pro forma information as of June 30, 1997 has been prepared assuming the merger had been consummated on July 1, 1996 and accounted for under the purchase method of accounting. This unaudited pro forma combined summary information may not be indicative of the actual results which may be realized in the future. Neither expected benefits nor cost reductions anticipated by the Company have been reflected in the accompanying unaudited pro forma combined financial data.
Basic and diluted pro forma net loss per share does not include common stock equivalents since their effect is anti-dilutive.
Included in liabilities assumed was a $2,750,000 obligation owed by RMCI to a corporate affiliate of Paul J. Ramsay, the Chairman of the Board of the Company, along with unpaid accrued interest and commitment fees of approximately $300,000. The loan bore interest at 15%, was due and payable on demand, and was refinanced in September 1997 (see Note 7). No amounts were paid with respect to this loan facility from June 10, 1997 to the date of the refinancing.
On October 9, 1997, pursuant to an Agreement and Plan of Merger dated as of July 1, 1997, the Company acquired Summa for $300,000 in cash, 83,333 shares of the Company's Common Stock and fully exercisable warrants to purchase 166,667 shares of the Company's Common Stock, with an exercise price of $9.75 per share and an expiration date of July 2007. The transaction was recorded under the purchase method of accounting. The Company recorded cost in excess of net asset value of the business of approximately $1,800,000. The principal assets of Summa, whose principal stockholder was Luis E. Lamela, the Vice Chairman, a director and, President and Chief Executive Officer of the Company, consist of projects in the specialty managed care and health services industry. These projects were undertaken by the Company on July 1, 1997. As previously mentioned, due to the Company's change in strategic direction, several projects were abandoned by the Company and the Company recorded an asset impairment charge of approximately $740,000 which represents the unamortized value assigned to these projects at the date of acquisition (see Note 3). The remaining cost in excess of net asset value of the business is being amortized over approximately three years. During the year ended June 30, 1997, Summa rendered consulting services to the Company, for which it was paid $237,500.
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. As of December 31, 1999, the Company has paid $100,000 of the purchase price. Payment of the remaining $600,000 is subject to the occurrence of certain events as defined in the Company's senior credit facility (see Note 7).
Condensed results of operations for RHCL are as follows:
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.
RAMSAY YOUTH SERVICES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
In August 1996, Paul Ramsay Holdings Pty. Limited ("Ramsay Holdings") acquired through a private placement 91,848 shares of Common Stock of the Company at a price of $8.25 per share. The acquired shares were issued for management fees due under the Company's management agreement with another corporate affiliate (the "Management Fee Affiliate") of Mr. Ramsay during the year ended June 30, 1997.
In October 1996, the Company issued 39,433 shares of Common Stock valued at $164,000 to its board of directors in lieu of cash payment for the year ended June 30, 1997 director fees. The Common Stock was awarded at fair market value on the date of issuance ($4.17 per share) and the amount was included in other operating expenses for the year ended June 30, 1997.
On September 10, 1996, the Company entered into a letter agreement with the Management Fee Affiliate and Ramsay Holdings which terminated the management agreement effective July 1, 1997. In consideration for this termination, the Company issued warrants to Ramsay Holdings to purchase 83,333 shares of Common Stock at an exercise price of $7.89 per share. These warrants are fully exercisable as of September 10, 1996, expire on September 10, 2006 and had a weighted average fair value on the date of issuance of $2.55 per warrant. As a result, during the year ended June 30, 1997, the Company recorded other operating expenses of $212,000 related to these warrants.
During the year ended June 30, 1997, pursuant to the management agreement, the Company incurred management fee expenses of $758,000 which are included in other operating expenses.
At December 31, 1999, three corporate affiliates of Mr. Ramsay owned an aggregate voting interest in the Company of approximately 59.4%, as follows: (a) Ramsay Holdings HSA Limited owned 10.0% of the outstanding Common Stock of the Company, (b) Ramsay Holdings owned approximately 41.1% of the outstanding Common Stock of the Company and (c) Paul Ramsay Hospitals Pty. Limited ("Ramsay Hospitals") owned approximately 8.3% of the outstanding Common Stock of the Company.
7. BORROWINGS
The Company's long-term debt is as follows:
On September 30, 1997, the Company entered into a credit facility with a financial institution consisting of (i) a term loan of $12,500,000 and a term loan of $10,000,000 (the "Term Loans"), (ii) a revolving credit facility of up to the lesser of $16,500,000 or the borrowing base of the Company's receivables (the "Revolving Credit Loan") and (iii) subordinated bridge notes, of which $15,000,000 was
RAMSAY YOUTH SERVICES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
purchased by the financial institution ("Series A Bridge Notes") and $2,500,000 was purchased by Ramsay Holdings (the "Series B Bridge Notes") (collectively referred to as the "Bridge Facility"). In connection with the refinancing, the Company recorded a loss from early extinguishment of debt of approximately $3.6 million during the six months ended December 31, 1997.
In addition, on September 30, 1997, the Company entered into an agreement with Ramsay Holdings and the financial institution pursuant to which (i) Ramsay Holdings purchased $4,000,000 of non-convertible, non-voting Class B Preferred Stock, Series 1997-A (the "Series 1997-A Preferred Stock") and (ii) the financial institution purchased $2,500,000 of Class B Preferred Stock, Series 1997 (the "Series 1997 Preferred Stock").
On March 25, 1998, the Company entered into a Junior Subordinated Note Purchase Agreement, with a corporate affiliate of Mr. Ramsay in an aggregate principal amount of $5,000,000 plus accrued interest. On December 16, 1998, the Company and the corporate affiliate of Mr. Ramsay agreed to convert the outstanding balance of the junior subordinated note, including accrued interest, into 1,071,227 shares of the Company's Common Stock (see Note 9).
During the six months ended December 31, 1998, the Company and the corporate affiliate of Mr. Ramsay agreed to (i) convert the outstanding balance of the Series B Bridge Note, including accrued interest, into 609,123 shares of the Company's Common Stock and (ii) convert the Series 1997-A Preferred Stock, including accrued dividends, into 1,310,222 shares of the Company's Common Stock.
During the year ended June 30, 1997, the Company contemplated a separate refinancing of its credit facilities and in connection therewith, the Company entered into a derivative transaction in March 1997 to fix the interest rate on the underlying debt instrument. As a result of the Company's decision to refinance its credit facilities as described above, during the year ended June 30, 1997, the Company recorded income on the derivative transaction of approximately $1,285,000 and wrote-off approximately $600,000 of costs directly related to this previous refinancing effort.
In June 1998, the Company prepaid a portion of the credit facility with proceeds from the sale of assets (see Note 2) and recorded a loss from early extinguishment of debt of approximately $748,000.
In September 1998, the Company used the net proceeds from the sales of assets to (i) repay in full the Term Loans, (ii) repay in full the Series A Bridge Notes, (iii) redeem all of the outstanding shares of the Series 1997 Preferred Stock, including accrued dividends, (iv) pay $1,500,000 in previously incurred fees to the financial institution and (v) repay a portion of the Revolving Credit Loan. In connection with the repayments, the Company recorded a loss from early extinguishment of debt of approximately $2,811,000.
On October 30, 1998, the Company refinanced the existing credit facility with proceeds from a credit facility consisting of term and revolving credit debt of $22,000,000 (the "Senior Credit Facility").
Under the terms of the Senior Credit Facility, the Company was provided with (i) a term loan of $8,000,000 (the "Term Loan"), payable in 54 monthly installments ranging from $83,000 to $208,000, beginning May 1, 1999, with a final installment of $1,000,000 due on October 30, 2003, (ii) a revolving credit facility (the "Revolver") for an amount up to the lesser of $8,000,000 or the borrowing base of the Company's receivables (as defined in the agreement) and (iii) an acquisition loan (the "Acquisition Loan") commitment of up to $6,000,000, beginning March 1, 1999. As of March 13, 2000, no amounts had been drawn under the Revolver and $2,429,000 had been drawn under the Acquisition Loan.
The aggregate scheduled maturities of the Senior Credit Facility during the next five years are as follows: 2000 -- $1,394,000; 2001 -- $1,644,000; 2002 - -- $2,181,000; 2003 -- $3,352,000 and 2004 -- $0.
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% (9.0% at December 31, 1999), based on the Company's ratio of total indebtedness to EBITDA (as defined in the Senior Credit Facility) or (ii) a
RAMSAY YOUTH SERVICES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
function of the Eurodollar rate plus a margin ranging from 2.0% to 3.5%, 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% (9.25% at December 31, 1999), 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%, 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 Senior Credit Facility) 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 exceeds $7,800,000.
The Company failed to maintain the required fixed charge coverage, interest coverage and leverage ratio as of December 31, 1998. The Company's lender agreed to waive the requirements as of December 31, 1998 and amend the definition of EBITDA for calculating the covenants in the future. As of December 31, 1999, the Company is in compliance with these ratios.
On June 30, 1999, the Company's Senior Credit Facility was amended and restated to provide for the approval of the RHCL purchase (the "Second Amendment"). The Second Amendment prohibits the payment of the RHCL purchase price until the earlier to occur of certain events (as defined in the agreement) or September 1, 1999. The second Amendment also provides for a $3,000,000 reserve on the Revolver borrowing base until the occurrence of certain events (as defined in the Second Amendment).
On November 28, 1999, the Company's Senior Credit Facility was amended and restated (the "Third Amendment"). The Third Amendment provides for, among other things, (i) up to $3.0 million in bridge loan advances under the Acquisition Loan for certain purposes (the "Bridge Loan Advances"), (ii) a release of the $3.0 million reserve on the Revolver borrowing base in an amount equal to the Bridge Loan Advances actually made and (iii) a change to the definitions for purposes of calculating the Pro Forma Availability covenant.
Proceeds from any borrowings under the Bridge Loan Advances are restricted, and may be used by the Company solely to satisfy certain contingent liabilities (as defined in the agreement). The Bridge Loan Advances will be mandatorily payable on the occurrence of certain events (as defined in the Third Amendment). The interest rate on the Bridge Loan Advances is equal to the interest rate on the Acquisition Loan.
In connection with the Third Amendment, a corporate affiliate of Paul J. Ramsay, Chairman of the Board of the Company, entered into a Junior Subordinated Note Purchase Agreement (the "Junior Note") with the Senior Credit Facility lender to participate in the Senior Credit Facility in an amount equal to the Bridge Loan Advances.
The Company has pledged substantially all of its real property, receivables and other assets as collateral for the Senior Credit Facility.
On January 25, 2000, the Company entered into a subordinated note and warrant purchase agreement with an unrelated financial institution for an aggregate principal amount of $5.0 million (the "Subordinated Note"). The Subordinated Note permits the financial institution to purchase, under certain conditions, up to 475,000 warrants which are convertible into the Company's common stock. Borrowings
RAMSAY YOUTH SERVICES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
under the Subordinated Note 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 25, 2007. The Company's Senior Credit Facility was amended on January 25, 2000 to provide for the approval of the Subordinated Note.
8. 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 has a primary term of 15 years (with three successive renewal options of 5 years each) and at December 31, 1999 had aggregate annual minimum rentals of approximately $558,000, payable monthly.
In April 1995, the Company agreed to lease an 80-bed facility near Salt Lake City, Utah for four years, with an option to renew for an additional three years. The lease required annual base rental payments of $456,000, payable monthly, and percentage rental payments equal to 2% of the net revenues of the facility, payable quarterly. On November 3, 1998, the Company was released from its obligations under this lease and the Company ceased operations at this facility on December 3, 1998.
In August 1997, the Company leased its Meadowlake facility in Oklahoma to an independent healthcare provider for an initial term of three years, with four three-year renewal options. Lease payments during the initial term total $360,000 per year and at each renewal option are subject to adjustment based on the 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 during the initial term for $3,000,000, less $15,417 for each month of occupancy. Subsequent to the initial term, the tenant has the option to purchase the facility at any time for $2,500,000. The book value of the facility was $2,035,000 on December 31, 1999.
On September 28, 1998, the Company sold and leased back the land, buildings and fixed equipment of its Havenwyck facility in Auburn Hills, Michigan (see Note 2). The lease has a term of 12 years and currently requires annual minimum lease payments of approximately $1,277,000, payable monthly. Effective April 1 of each year, the lease payments are subject to upward adjustments based on the change in consumer price index over the preceding twelve months (not to exceed 3% annually).
Rent expenses related to noncancellable operating leases amounted to $2,967,000, $1,375,000, $1,603,000, $2,431,000 and $2,837,000 for the year ended December 31, 1999, the six months ended December 31, 1998, the six months ended December 31, 1997 and the years ended June 30, 1998 and 1997, respectively.
Future minimum lease payments required under noncancellable operating leases as of December 31, 1999 are as follows: 2000 -- $2,676,000; 2001 -- $2,315,000; 2002 -- $2,160,000; 2003 -- $1,932,000; 2004 -- $1,864,000; and thereafter -- $9,491,000.
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.
RAMSAY YOUTH SERVICES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
On October 30, 1998, the Company completed the private placement (the "Private Placement") of an aggregate of 1,037,037 shares of Common Stock to its Chief Executive Officer, Ramsay Holdings and certain unrelated persons, all at a price per share of $3 3/8, the closing bid price of the Common Stock on The NASDAQ Stock Market on October 26, 1998 (the date of the various subscription agreements).
Registration under the Securities Act of 1933 (the "Securities Act") of the Common Stock issued in the foregoing transactions was not required because such securities were issued in transactions not involving any "public offering" within the meaning of Section 4(2) of the Securities Act.
On December 8, 1998, the Company issued 33,333 shares of Common Stock in connection with an employment agreement. The value of the issued shares is being amortized over the life of the related employment agreement.
Redeemable preferred stock at June 30, 1998 consists of (i) 4,000 shares of non-convertible, non-voting Class B Series 1997-A Preferred Stock with a $1.00 par value issued at $1,000 per share with accrued dividends of $271,000 and carrying value of $4,271,000 and (ii) 100,000 shares of convertible non-voting, Class B Series 1997 Preferred Stock with a $1.00 par value issued at $25.00 per share with accrued dividends of $69,000 and net of issuance cost of $100,000 and carrying value of $2,469,000.
On October 30, 1998, the Company issued 177,778 shares of Common Stock to Ramsay Holdings in exchange for $600,000 of principal amount of the Series B Bridge Note. As part of the Exchange Agreement (the "Exchange Agreement") entered into between the Company and Ramsay Holdings to affect the foregoing exchange, the Company agreed to issue additional shares of Common Stock to Ramsay Holdings in exchange for $4,000,000 of the Company's Class B Preferred Stock, Series 1997-A (together with all accrued and unpaid dividends thereon) and an additional $400,000 of principal amount of the Series B Bridge Note owed by the Company to Ramsay Holdings. This latter exchange was effected on December 1, 1998 at a price per share of $3 3/8 (the closing bid price of the Common Stock on The NASDAQ Stock Market on October 26, 1998, the date of the Exchange Agreement) after the expiration of the waiting period under the Hart-Scott-Rodino Antitrust Improvements Act of 1976. This latter exchange resulted in the issuance by the Company of 1,428,740 additional shares of Common Stock to Ramsay Holdings.
On December 16, 1998, the Company entered into an agreement with Ramsay Holdings, Ramsay Holdings HSA Limited and Ramsay Hospitals (collectively, the "Ramsay Affiliates") pursuant to which the Ramsay Affiliates (i) converted the Company's Class B Preferred Stock, Series C and Class B Preferred Stock, Series 1996 (together with accrued and unpaid dividends thereon of $618,908) into an aggregate of 1,198,756 shares of Common Stock and (ii) exchanged $6,883,553 of principal amount of the junior subordinated note and the Series B Bridge Note owed by the Company (together with accrued and unpaid interest thereon of $123,219) for 1,384,054 shares of Common Stock. This latter exchange was effected at a price per share of $5 1/16 (the closing bid price of the Common Stock on The NASDAQ Stock Market on December 16, 1998, the date of the Agreement).
In connection with the foregoing transactions, the Company granted limited registration rights with respect to the Common Stock issued to the stockholders participating in such transactions.
The Company's Board of Directors has adopted a Stockholders 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
RAMSAY YOUTH SERVICES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
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.
10. EARNINGS PER SHARE
The following table sets forth the computation of basic and diluted earnings (loss) per share:
RAMSAY YOUTH SERVICES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
For the year ended December 31, 1999, 2,337,175 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 and 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, 1999 is approximately nine years.
On October 14, 1997, the Board of Directors adopted the Ramsay Health Care, Inc. 1997 Long Term Incentive Plan (the "1997 Long Term Incentive Plan"). Under the 1997 Long Term Incentive Plan, 166,667 shares of Common Stock will be available for issuance of awards. Shares distributed under the 1997 Long Term Incentive 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 six months ended December 31, 1998, the Company granted 79,500 options under the 1997 Long Term Incentive Plan. During the year ended December 31, 1999, the Company granted 91,500 options under the 1997 Long Term Incentive Plan.
On August 16, 1999, the Board of Directors adopted the Ramsay Youth Services, Inc. 1999 Stock Option Plan (the "1999 Long Term Incentive Plan"). Under the 1999 Long Term Incentive Plan, 1,250,000 shares of Common Stock will be available for issuance of awards. Shares distributed under the 1999 Long Term Incentive Plan may be either newly issued shares or treasury shares. During the year ended December 31, 1999, the Company granted 1,250,000 options under the 1999 Long Term Incentive Plan.
In connection with a repricing opportunity authorized by the Company's Board of Directors on November 10, 1995, approximately 500,000 options (of which approximately 100,866 are still outstanding at December 31, 1999) 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 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 National Market System, equals or exceeds $21.00 per share for at least 15 trading days, which need not be consecutive. As of December 31, 1999, none of these options are exercisable.
On September 10, 1996, the Company entered into an Exchange Agreement whereby Mr. 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 National 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.
RAMSAY YOUTH SERVICES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
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. As of December 31, 1999, these warrants entitle their holders to purchase an aggregate of 67,338 shares of the Company's Common Stock at $13.32 per share. These warrants are exercisable on or before March 31, 2000 and contain anti-dilution provisions.
In connection with the January 25, 2000 subordinated note and warrant purchase agreement, the Company issued warrants to a financial institution to purchase up to 475,000 shares of the Company's Common Stock at $1.50 per share. The warrants are exercisable on or before January 25, 2010 and contain anti-dilution provisions.
The Company has frozen its 1990 Stock Option Plan, and authorized 505,641, 132,319, 166,667, 166,667, 166,667 and 1,250,000 shares under its 1991, 1993, 1995, 1996, 1997 and 1999 Stock Option Plans, respectively. At December 31, 1999, 173,282 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, 1999, 23,136 shares were available for issuance under this plan.
RAMSAY YOUTH SERVICES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
Summarized information regarding the Company's Stock Option Plans is as follows:
Options exercisable based solely on employees rendering additional service:
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 National Market System equals or exceeds $21.00 per share for at least 15 trading days:
Shares of common stock reserved for future issuance at December 31, 1999 are as follows:
Options ................. 2,430,007 Warrants ................ 555,168 --------- 2,985,175 =========
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, 1999, the six months ended December 31, 1998 and 1997 and the years ended June 30, 1998 and 1997:
o expected volatility rates of 90% for the year ended December 31, 1999 and 50.6% for both the six months ended December 31, 1998 and 1997 and the years ended June 30, 1998 and 1997
o risk-free interest rates of 5.2% for the year ended December 31, 1999 and 6% for both the six months ended December 31, 1998 and 1997 and the years ended June 30, 1998 and 1997
o expected lives of ten years for all periods
o a dividend yield of zero for all periods
RAMSAY YOUTH SERVICES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
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. The effect of compensation expense from stock option awards on pro forma net income reflects only the vesting of fiscal year ended 1996 awards in 1996 and the vesting of fiscal year ended 1997 and 1996 awards in 1997, in accordance with SFAS No. 123. 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:
RAMSAY YOUTH SERVICES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
12. INCOME TAXES
Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. Significant components of the Company's deferred tax liabilities and assets are as follows:
The provision for income taxes consists of the following:
RAMSAY YOUTH SERVICES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
A reconciliation from the U.S. statutory federal income tax rate to the effective income tax rate follows:
The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and accompanying notes. Previously, the Company evaluated the realizability of its deferred tax assets and the need for a valuation allowance by considering the effects of implementing tax planning strategies that contemplated the sales of certain appreciated property. In connection with the Company's change in strategic direction, announced on February 19, 1998, the Company re-evaluated its tax planning strategies and determined that such strategies will not be realized. Consequently, the Company's net operating loss carryforwards were not considered more likely than not to be realized.
The Company has no net deferred tax assets at December 31, 1999, December 31, 1998 and June 30, 1998. The Company's valuation allowance related to deferred tax assets was decreased by $514,000 in 1999. The Company's valuation allowance related to deferred tax assets was increased by $5,350,000 during the six month period ended December 31, 1998 and $15,004,000 during the year ended June 30, 1998.
At December 31, 1999, the Company had net operating loss carryovers of approximately $46,008,000, and alternative minimum tax credit carryovers of approximately $1,109,000 available to reduce future federal income taxes, subject to certain annual limitations. The net operating loss carryovers expire as follows:
Year of Amount Expiration ----------- ----------- $6,627,000 2000 7,002,000 2001 32,379,000 2010-18 ----------- $46,008,000 ===========
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.
RAMSAY YOUTH SERVICES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
During the year ended June 30, 1997, the Company received a favorable cash judgment totaling approximately $2,900,000, net of related costs, by the courts of the State of Missouri. In this matter, the courts ruled that the Company's facility in Nevada, Missouri had received insufficient reimbursement from the Missouri Department of Social Services for the provision of behavioral healthcare to Medicaid patients from 1990 to 1996. The Company also recorded during the year ended June 30, 1997, a $1,500,000 benefit related to intermediary audits of prior year cost reports.
During the fourth quarter of fiscal year ended June 30, 1998, the Company increased its estimated reimbursement for fiscal 1998 by $1,700,000, primarily as a result of increased Corporate expenses by the Company during the year ended June 30, 1998.
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 81%, 81%, 70%, 71% and 65% of its revenues from services provided to individuals covered by various federal and state governmental programs in the year ended December 31, 1999, the six months ended December 31, 1998 and 1997, and the years ended June 30, 1998 and 1997, 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.
The Company did not contribute to the plan during the year ended December 31, 1999, the six months ended December 31, 1998 and 1997, or the years ended June 30, 1998 and 1997.
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, 1999 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 claims his employment was wrongfully terminated by the Company and seeks 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 is 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.
RAMSAY YOUTH SERVICES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
Prior to the merger with the Company, Ramsay Managed Care, Inc. sold its subsidiary which, as a licensed HMO in Louisiana, Alabama and Mississippi, managed and provided prepaid healthcare services to its members. On September 29, 1997, RMCI received a demand for indemnification by the purchaser of this subsidiary in an amount totaling approximately $5.8 million. The Company intends to vigorously defend any proceedings which may result from this matter. In addition, on September 30, 1997, the Company demanded indemnification from the purchaser for various matters in an amount exceeding $2.0 million.
During the fiscal year ended June 30, 1996, the State of Louisiana requested repayment of disproportionate share payments received by two of the Company's Louisiana facilities in fiscal years ended June 30, 1995 and 1994 totaling approximately $5.5 million. The repayment requested related primarily to alleged overpayments received by a former facility of the Company. In connection with the alleged overpayment, during fiscal year ended June 30, 1998, the State of Louisiana used $0.5 million in payments owed to one of the Company's Louisiana facilities and $5.0 million owed to RHCL to pay off the alleged overpayment. The Company has filed an administrative appeal with the State of Louisiana Department of Health and Hospitals Bureau of Appeals claiming that the State of Louisiana improperly used the monies. The Company believes that this matter may be settled for an amount less than Louisiana's initial request. The Company intends to vigorously contest any position by Louisiana which it considers adverse.
16. VALUATION AND QUALIFYING ACCOUNTS
Activity in the Company's Valuation and Qualifying Accounts consists of the following:
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:
RAMSAY YOUTH SERVICES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
As mentioned previously, on December 8, 1998, the Company acquired all of the issued and outstanding shares of common stock of The Rader Group, Incorporated for $1,000,000 plus an earn-out in future years if certain financial targets are met. In conjunction with the acquisition, liabilities were assumed as follows:
Fair value of assets acquired ..... $ 1,096,000 Cash paid for capital stock ....... (1,000,000) Transaction costs ................. (48,000) ----------- Liabilities assumed .......... $ 48,000 ===========
RAMSAY YOUTH SERVICES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
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, 1999 and 1998.
(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.
RAMSAY YOUTH SERVICES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(b) During the three months ended March 31, 1999, the Company recorded $1.5 million in other income primarily as a result of two non-recurring settlements in favor of the Company.
(c) In connection with the Company's change in strategic direction, during the quarter ended March 31, 1998, the Company (i) initiated a restructuring of personnel at its corporate headquarters and (ii) decided to close or sell certain operations that were identified as not compatible with the Company's future operating plans. As a result of the foregoing, the Company recorded restructuring and asset impairment charges of $2.3 million and $18.3 million, respectively. During the three months ended March 31, 1998, the Company also recorded a provision for income taxes of $10.0 million primarily as a result of a full valuation allowance on its previously recorded deferred tax assets.
During the three months ended June 30, 1998, the Company sold certain assets and used the proceeds from the sale to prepay a portion of the Senior Credit Facility. In connection with the sales and prepayment of debt, the Company recorded a loss on sale of assets of $12.5 million and an extraordinary loss from early extinguishment of debt of $.7 million.
During the three months ended September 30, 1998, the Company (i) sold its behavioral health care facility in Morgantown, West Virginia and recorded a gain of $2.0 million and (ii) recorded approximately $7.9 million in other income primarily related to the settlement of amounts due form third party contractual agencies.
During the three months ended December 31, 1998, the Company recorded a loss from asset sales and closed business of $.9 million and a loss from early extinguishment of debt of $2.1 million.
INDEX OF EXHIBITS
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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.
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