<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K/A
Amendment No. 1
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 {FEE REQUIRED}
For the fiscal year ended December 31, 1999
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 {NO FEE REQUIRED}
For the transition period from ______ to ______
Commission file number 0-13849
RAMSAY YOUTH SERVICES, INC.
--------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
DELAWARE 63-0857352
------------------------------ ------------------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
Columbus Center
One Alhambra Plaza, Suite 750
Coral Gables, Florida 33134
---------------------------------------- ----------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (305) 569-6993
Securities registered pursuant to Section 12(b) of the Act:
TITLE OF EACH CLASS NAME OF EACH EXCHANGE ON WHICH REGISTERED
------------------- -----------------------------------------
None None
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
COMMON STOCK, $0.01 PAR VALUE
(Title of Class)
Indicate by a check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months, and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ].
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [X]
The number of shares of the registrant's Common Stock outstanding as of
March 13, 2000 was 9,086,191. The aggregate market value of Common Stock held by
non-affiliates on such date was $6,516,160.
DOCUMENTS INCORPORATED BY REFERENCE
<PAGE> 2
RAMSAY YOUTH SERVICES, INC. AND SUBSIDIARIES
The undersigned Registrant hereby amends the following section of its
Annual Report on Form 10-K for the year ended December 31, 1999 to provide
revised disclosures made in connection with certain material subsequent events:
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Page
Number
------
<S> <C>
Report of Independent Auditors ................................................. F-2
Report of Independent Certified Public Accountants ............................. F-3
Consolidated Balance Sheets - December 31, 1999,
December 31, 1998 and June 30, 1998 ........................................ F-4
Consolidated Statements of Operations - For the Year
Ended December 31, 1999, for the Six Months Ended
December 31, 1998 and 1997 (unaudited) and for the
Years Ended June 30, 1998 and 1997 ......................................... F-6
Consolidated Statements of Redeemable Preferred Stock and
Stockholders' Equity - For the Year Ended December 31, 1999,
for the Six Months Ended December 31, 1998 and for the
Years Ended June 30, 1998 and 1997 ......................................... F-7
Consolidated Statements of Cash Flows - For the Year Ended
December 31, 1999, for the Six Months Ended December 31, 1998
and 1997 (unaudited) and for the Years Ended June 30, 1998 and 1997 ........ F-8
Notes to Consolidated Financial Statements ..................................... F-9
</TABLE>
All schedules have been omitted because they are inapplicable or the
information is provided in the consolidated financial statements, including the
notes thereto.
F-1
<PAGE> 3
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
March 13, 2000
(May 17, 2000 as to Note 15, paragraph 2,
June 7, 2000 as to Note 19, paragraph 1,
June 19, 2000 as to Note 7, paragraphs 21 and 22 and
August 4, 2000 as to Note 19, paragraphs 2 and 3)
F-2
<PAGE> 4
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
F-3
<PAGE> 5
RAMSAY YOUTH SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
December 31,
---------------------------- June 30,
1999 1998 1998
----------- ----------- -----------
(Note 1) (Note 1)
<S> <C> <C> <C>
ASSETS
Current assets
Cash and cash equivalents .......................... $ 622,000 $ 1,478,000 $ 3,263,000
Accounts receivable, net ........................... 15,189,000 12,859,000 12,023,000
Amounts due from third-party contractual agencies .. 2,549,000 4,699,000 7,114,000
Other receivables .................................. 2,409,000 6,854,000 2,143,000
Other current assets ............................... 1,430,000 1,100,000 1,084,000
Due from affiliate ................................. -- -- 5,590,000
Net assets held for sale ........................... -- -- 25,768,000
----------- ----------- -----------
Total current assets ........................... 22,199,000 26,990,000 56,985,000
Other assets
Cash held in trust .................................. 1,893,000 1,856,000 1,964,000
Cost in excess of net asset value of purchased
businesses, net ................................. 1,426,000 1,792,000 1,318,000
Other intangible assets, net ........................ 453,000 578,000 --
Unamortized loan costs, net ......................... 987,000 1,041,000 2,397,000
Net assets held for sale ............................ 2,090,000 2,044,000 --
----------- ----------- -----------
Total other assets ............................. 6,849,000 7,311,000 5,679,000
Property and equipment
Land ................................................ 3,448,000 2,721,000 2,648,000
Buildings and improvements .......................... 30,126,000 28,456,000 29,698,000
Equipment, furniture and fixtures ................... 13,225,000 12,148,000 11,422,000
----------- ----------- -----------
46,799,000 43,325,000 43,768,000
Less accumulated depreciation ....................... 19,221,000 16,998,000 15,390,000
----------- ----------- -----------
27,578,000 26,327,000 28,378,000
----------- ----------- -----------
$56,626,000 $60,628,000 $91,042,000
=========== =========== ===========
</TABLE>
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
F-4
<PAGE> 6
RAMSAY YOUTH SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
December 31,
--------------------------------- June 30,
1999 1998 1998
------------- ------------- -------------
(Note 1) (Note 1)
<S> <C> <C> <C>
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Accounts payable ........................................... $ 7,274,000 $ 5,113,000 $ 6,040,000
Accrued salaries and wages ................................. 2,975,000 2,533,000 3,973,000
Other accrued liabilities .................................. 3,601,000 11,479,000 9,609,000
Amounts due to third-party contractual agencies ............ 5,193,000 7,565,000 13,043,000
Due to affiliate ........................................... 600,000 1,200,000 700,000
Current portion of long-term debt .......................... 1,394,000 675,000 21,219,000
------------- ------------- -------------
Total current liabilities ............................ 21,037,000 28,565,000 54,584,000
Noncurrent liabilities
Other accrued liabilities .................................. 6,934,000 10,817,000 13,071,000
Long-term debt, less current portion ....................... 11,561,000 7,332,000 14,398,000
Redeemable preferred stock .................................... -- -- 6,740,000
Commitments and contingencies
Stockholders' equity
Class B convertible preferred stock, Series C, $1 par
value - authorized 152,321 shares; none issued or
outstanding at December 31, 1999 and 1998, 142,486
shares issued and outstanding at June 30, 1998 ......... -- -- 414,000
Class B convertible preferred stock, Series 1996, $1 par
value - authorized 100,000 shares; none issued or
outstanding at December 31, 1999 and 1998, 100,000
shares issued and outstanding at June 30, 1998 ......... -- -- 3,113,000
Common stock $.01 par value - authorized 30,000,000
shares; issued 9,086,191 shares at December 31,
1999, 9,079,245 shares at December 31, 1998 and
3,817,800 shares at June 30, 1998 ...................... 90,000 90,000 38,000
Additional paid-in capital ................................. 126,138,000 126,075,000 107,611,000
Accumulated deficit ........................................ (105,235,000) (108,352,000) (105,028,000)
Treasury stock - 193,850 common shares at December 31,
1999, December 31, 1998 and June 30, 1998, at cost ..... (3,899,000) (3,899,000) (3,899,000)
------------- ------------- -------------
Total stockholders' equity ......................... 17,094,000 13,914,000 2,249,000
------------- ------------- -------------
$ 56,626,000 $ 60,628,000 $ 91,042,000
============= ============= =============
</TABLE>
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
F-5
<PAGE> 7
RAMSAY YOUTH SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Year Ended Six Months Ended December 31, Year Ended June 30,
December 31, ----------------------------- ------------------------------
1999 1998 1997 1998 1997
------------ ------------- ------------ ------------- -------------
(unaudited)
<S> <C> <C> <C> <C> <C>
Revenues:
Provider-based revenue ...................... $ 81,474,000 $ 47,892,000 $ 64,334,000 $ 130,898,000 $ 132,955,000
Managed care revenue ........................ -- -- 13,208,000 24,313,000 1,964,000
------------ ------------ ------------ ------------- -------------
TOTAL REVENUES ................................. 81,474,000 47,892,000 77,542,000 155,211,000 134,919,000
------------ ------------ ------------ ------------- -------------
Operating Expenses:
Salaries, wages and benefits ................ 49,283,000 28,313,000 39,604,000 82,740,000 67,793,000
Other operating expenses .................... 25,024,000 17,470,000 23,316,000 53,489,000 45,122,000
Managed care patient costs .................. -- -- 5,396,000 10,766,000 1,704,000
Provision for doubtful accounts ............. 1,896,000 1,549,000 2,193,000 6,649,000 5,688,000
Depreciation and amortization ............... 2,366,000 1,627,000 3,281,000 5,714,000 5,473,000
Restructuring charges ....................... -- -- -- 2,349,000 --
Asset impairment charges .................... -- -- -- 18,316,000 --
------------ ------------ ------------ ------------- -------------
TOTAL OPERATING EXPENSES ....................... 78,569,000 48,959,000 73,790,000 180,023,000 125,780,000
------------ ------------ ------------ ------------- -------------
INCOME (LOSS) FROM OPERATIONS .................. 2,905,000 (1,067,000) 3,752,000 (24,812,000) 9,139,000
Non-operating income (expenses):
Other income ................................ 1,548,000 8,059,000 197,000 256,000 2,050,000
Gain on sale of assets ...................... -- 2,039,000 -- -- --
Interest and other financing charges ........ (1,268,000) (1,655,000) (2,791,000) (7,230,000) (5,962,000)
Losses related to asset sales and closed
businesses ................................ -- (947,000) -- (12,483,000) --
------------ ------------ ------------ ------------- -------------
Total non-operating income (expenses),
net ..................................... 280,000 7,496,000 (2,594,000) (19,457,000) (3,912,000)
INCOME (LOSS) BEFORE INCOME TAXES AND
EXTRAORDINARY ITEM .......................... 3,185,000 6,429,000 1,158,000 (44,269,000) 5,227,000
Provision for income taxes ..................... 68,000 1,591,000 -- 9,985,000 1,815,000
------------ ------------ ------------ ------------- -------------
INCOME (LOSS) BEFORE EXTRAORDINARY ITEM ........ 3,117,000 4,838,000 1,158,000 (54,254,000) 3,412,000
Extraordinary item:
Loss from early extinguishment of debt ...... -- (2,811,000) (3,574,000) (4,322,000) --
------------ ------------ ------------ ------------- -------------
NET INCOME (LOSS) .............................. $ 3,117,000 $ 2,027,000 $ (2,416,000) $ (58,576,000) $ 3,412,000
============ ============ ============ ============= =============
Income (loss) attributable to common
stockholders before extraordinary item ...... $ 3,117,000 $ 4,182,000 $ 754,000 $ (55,219,000) $ 3,050,000
Extraordinary item ............................. -- (2,811,000) (3,574,000) (4,322,000) --
------------ ------------ ------------ ------------- -------------
Income (loss) attributable to common
stockholders ................................ $ 3,117,000 $ 1,371,000 $ (2,820,000) $ (59,541,000) $ 3,050,000
============ ============ ============ ============= =============
Income (loss) per common share:
Basic:
Before extraordinary item ................. $ .35 $ .93 $ .21 $ (15.36) $ 1.09
Extraordinary item:
Loss from early extinguishment of debt .. -- (.63) (1.00) (1.20) --
------------ ------------ ------------ ------------- -------------
$ .35 $ .30 $ (.79) $ (16.56) $ 1.09
============ ============ ============ ============= =============
Diluted:
Before extraordinary item ................. $ .33 $ .70 $ .18 $ (15.36) $ 1.00
Extraordinary item:
Loss from early extinguishment of debt .. -- (.47) (.86) (1.20) --
------------ ------------ ------------ ------------- -------------
$ .33 $ .23 $ (.68) $ (16.56) $ 1.00
============ ============ ============ ============= =============
Weighted average number of common
shares outstanding:
Basic ....................................... 8,890,000 4,487,000 3,574,000 3,595,000 2,801,000
============ ============ ============ ============= =============
Diluted ..................................... 9,538,000 5,971,000 4,139,000 3,595,000 3,409,000
============ ============ ============ ============= =============
</TABLE>
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
F-6
<PAGE> 8
RAMSAY YOUTH SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF REDEEMABLE PREFERRED STOCK
AND STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
Convertible Class B
Redeemable Redeemable Class B Convertible
Preferred Preferred Convertible Preferred
Stock Stock Preferred Stock
Series Series Stock Series Common
1997 1997-A Series C 1996 Stock
------------- ------------- ------------- ------------- -------------
<S> <C> <C> <C> <C> <C>
BALANCE AT JULY 1, 1996 ........ $ -- $ -- $ 233,000 $ -- $ 29,000
Shares issued in connection
with employee stock purchase
plan (5,286 shares) .......... -- -- -- -- --
Shares issued in connection
with management and
directors' fees (131,282
shares) ...................... -- -- -- -- 1,000
Issuance of common stock
(711,942 shares) and Series
1996 preferred stock (100,000
shares and accrued dividends
of $121,000) in connection
with merger, net of costs .... -- -- -- 3,121,000 7,000
Issuance of warrants (83,333
shares) ...................... -- -- -- -- --
Dividends on Class B
convertible preferred stock,
Series C ..................... -- -- 271,000 -- --
Net income ..................... -- -- -- -- --
------------- ------------- ------------- ------------- -------------
BALANCE AT JUNE 30, 1997 ....... -- -- 504,000 3,121,000 37,000
Issuance of preferred stock .... 2,400,000 4,000,000 -- -- --
Dividends on Series 1997
preferred stock .............. 69,000 -- -- -- --
Dividends on Series 1997-A
preferred stock .............. -- 271,000 -- -- --
Dividends on Class B
convertible preferred stock,
Series C ..................... -- -- 362,000 -- --
Dividends on Class B
convertible preferred stock,
Series 1996 .................. -- -- -- 150,000 --
Accrued dividends exchanged for
preferred stock, Series 1997-A -- -- (452,000) (158,000) --
Issuance of common stock
(83,333 shares) in connection
with merger .................. -- -- -- -- 1,000
Issuance of warrants (166,667
shares) in connection with
merger ....................... -- -- -- -- --
Issuance of common stock in
connection with employee
stock purchase plan (6,486
shares) ...................... -- -- -- -- --
Exercise of stock options
(11,100 shares) .............. -- -- -- -- --
Issuance of options to purchase
common stock ................. -- -- -- -- --
Net loss ....................... -- -- -- -- --
------------- ------------- ------------- ------------- -------------
BALANCE AT JUNE 30, 1998 ....... 2,469,000 4,271,000 414,000 3,113,000 38,000
Issuance of common stock in
connection with employment
agreement (33,333 shares) .... -- -- -- -- --
Issuance of common stock in
connection with employee
stock purchase plan (2,044
shares) ...................... -- -- -- -- --
Issuance of common stock
(1,037,037 shares) in
connection with private
placement, net of costs ...... -- -- -- -- 10,000
Dividends on Class B
convertible redeemable
preferred stock, Series 1997.. (69,000) -- -- -- --
Dividends on Class B redeemable
preferred stock, Series 1997-A -- 151,000 -- -- --
Dividends on Class B
convertible preferred stock,
Series C ..................... -- -- 166,000 -- --
Dividends on Class B
convertible preferred stock,
Series 1996 .................. -- -- -- 68,000 --
Redemption of preferred stock,
Series 1997 .................. (2,625,000) -- -- -- --
Redemption premium on preferred
stock, Series 1997 ........... 125,000 -- -- -- --
Accretion of offering costs on
preferred stock .............. 100,000 -- -- -- --
Issuance of common stock
(1,310,222 shares) in
connection with conversion of
Class B redeemable preferred
stock, Series 1997-A ......... -- (4,422,000) -- -- 13,000
Issuance of common stock
(753,285 shares) in
connection with conversion of
Class B convertible preferred
stock, Series C .............. -- -- (580,000) -- 8,000
Issuance of common stock
(445,469 shares) in
connection with conversion of
Class B convertible preferred
stock, Series 1996 ........... -- -- -- (3,181,000) 4,000
Issuance of common stock
(609,123 shares) in
connection with conversion of
Senior Subordinated Bridge
Note, including accrued
interest ..................... -- -- -- -- 6,000
Issuance of common stock
(1,071,227 shares) in
connection with conversion of
Junior Subordinated Note,
including accrued interest ... -- -- -- -- 11,000
Forgiveness of amounts due from
affiliates ................... -- -- -- -- --
Dividends ...................... -- -- -- -- --
Net income ..................... -- -- -- -- --
------------- ------------- ------------- ------------- -------------
BALANCE AT DECEMBER 31, 1998 ... -- -- -- -- 90,000
Issuance of common stock in
connection with employee
stock purchase plan (13,040
shares) ...................... -- -- -- -- --
Costs in connection with
issuance of common stock ..... -- -- -- -- --
Refunded registration costs .... -- -- -- -- --
Issuance of options to purchase
common stock ................. -- -- -- -- --
Net income ..................... -- -- -- -- --
------------- ------------- ------------- ------------- -------------
Balance at December 31, 1999 ... $ -- $ -- $ -- $ -- $ 90,000
============= ============= ============= ============= =============
</TABLE>
<TABLE>
<CAPTION>
Additional
Paid-in Accumulated Treasury
Capital Deficit Stock
------------- ------------- -------------
<S> <C> <C> <C>
BALANCE AT JULY 1, 1996 ........ $ 100,474,000 $ (49,864,000) $ (3,899,000)
Shares issued in connection
with employee stock purchase
plan (5,286 shares) .......... 40,000 -- --
Shares issued in connection
with management and
directors' fees (131,282
shares) ...................... 921,000 -- --
Issuance of common stock
(711,942 shares) and Series
1996 preferred stock (100,000
shares and accrued dividends
of $121,000) in connection
with merger, net of costs .... 5,640,000 -- --
Issuance of warrants (83,333
shares) ...................... 212,000 -- --
Dividends on Class B
convertible preferred stock,
Series C ..................... (362,000) -- --
Net income ..................... -- 3,412,000 --
------------- ------------- -------------
BALANCE AT JUNE 30, 1997 ....... 106,925,000 (46,452,000) (3,899,000)
Issuance of preferred stock .... -- -- --
Dividends on Series 1997
preferred stock .............. (181,000) -- --
Dividends on Series 1997-A
preferred stock .............. (271,000) -- --
Dividends on Class B
convertible preferred stock,
Series C ..................... (362,000) -- --
Dividends on Class B
convertible preferred stock,
Series 1996 .................. (150,000) -- --
Accrued dividends exchanged for
preferred stock, Series 1997-A -- -- --
Issuance of common stock
(83,333 shares) in connection
with merger .................. 812,000 -- --
Issuance of warrants (166,667
shares) in connection with
merger ....................... 657,000 -- --
Issuance of common stock in
connection with employee
stock purchase plan (6,486
shares) ...................... 46,000 -- --
Exercise of stock options
(11,100 shares) .............. 112,000 -- --
Issuance of options to purchase
common stock ................. 23,000 -- --
Net loss ....................... -- (58,576,000) --
------------- ------------- -------------
BALANCE AT JUNE 30, 1998 ....... 107,611,000 (105,028,000) (3,899,000)
Issuance of common stock in
connection with employment
agreement (33,333 shares) .... 175,000 -- --
Issuance of common stock in
connection with employee
stock purchase plan (2,044
shares) ...................... 10,000 -- --
Issuance of common stock
(1,037,037 shares) in
connection with private
placement, net of costs ...... 3,304,000 -- --
Dividends on Class B
convertible redeemable
preferred stock, Series 1997.. (45,000) -- --
Dividends on Class B redeemable
preferred stock, Series 1997-A (150,000) -- --
Dividends on Class B
convertible preferred stock,
Series C ..................... (166,000) -- --
Dividends on Class B
convertible preferred stock,
Series 1996 .................. (68,000) -- --
Redemption of preferred stock,
Series 1997 .................. -- -- --
Redemption premium on preferred
stock, Series 1997 ........... (125,000) -- --
Accretion of offering costs on
preferred stock .............. (100,000) -- --
Issuance of common stock
(1,310,222 shares) in
connection with conversion of
Class B redeemable preferred
stock, Series 1997-A ......... 4,409,000 -- --
Issuance of common stock
(753,285 shares) in
connection with conversion of
Class B convertible preferred
stock, Series C .............. 572,000 -- --
Issuance of common stock
(445,469 shares) in
connection with conversion of
Class B convertible preferred
stock, Series 1996 ........... 3,177,000 -- --
Issuance of common stock
(609,123 shares) in
connection with conversion of
Senior Subordinated Bridge
Note, including accrued
interest ..................... 2,577,000 -- --
Issuance of common stock
(1,071,227 shares) in
connection with conversion of
Junior Subordinated Note,
including accrued interest ... 5,412,000 -- --
Forgiveness of amounts due from
affiliates ................... (518,000) (5,051,000) --
Dividends ...................... -- (300,000) --
Net income ..................... -- 2,027,000 --
------------- ------------- -------------
BALANCE AT DECEMBER 31, 1998 ... 126,075,000 (108,352,000) (3,899,000)
Issuance of common stock in
connection with employee
stock purchase plan (13,040
shares) ...................... 30,000 -- --
Costs in connection with
issuance of common stock ..... (36,000) -- --
Refunded registration costs .... 60,000 -- --
Issuance of options to purchase
common stock ................. 9,000 -- --
Net income ..................... -- 3,117,000 --
------------- ------------- -------------
Balance at December 31, 1999 ... $ 126,138,000 $(105,235,000) $ (3,899,000)
============= ============= =============
</TABLE>
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
F-7
<PAGE> 9
RAMSAY YOUTH SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Year Ended Six Months Ended December 31, Year Ended June 30,
December 31, ---------------------------- ----------------------------
1999 1998 1997 1998 1997
------------ ------------ ------------ ------------ ------------
(unaudited)
<S> <C> <C> <C> <C> <C>
Operating activities
Net income (loss) ............................... $ 3,117,000 $ 2,027,000 $ (2,416,000) $(58,576,000) $ 3,412,000
Adjustments to reconcile net income (loss) to
net cash (used in) provided by operating
activities:
Depreciation ................................. 1,845,000 1,316,000 2,299,000 4,123,000 4,681,000
Amortization, including loan costs ........... 761,000 349,000 1,125,000 2,229,000 1,152,000
Asset impairment charges ..................... -- -- -- 18,316,000 --
Loss from early extinguishment of debt ....... -- 2,811,000 3,574,000 4,322,000 --
Write-off of development and other costs ..... -- -- -- -- 571,000
Loss related to asset sales and closed
businesses .................................. -- 947,000 -- 12,483,000 --
Gain on sale of assets ....................... -- (2,039,000) -- -- --
Provision for deferred income taxes .......... -- -- -- 9,411,000 1,222,000
Provision for doubtful accounts .............. 1,896,000 1,549,000 2,193,000 6,649,000 5,688,000
Management and director fees paid in common
stock ....................................... -- -- -- -- 922,000
Expenses paid with equity instruments ........ 9,000 -- -- 23,000 212,000
Change in operating assets and liabilities net of
effects of business acquired
Increase in accounts receivable .............. (3,483,000) (1,588,000) (3,426,000) (5,031,000) (6,992,000)
Decrease (increase) in other current assets .. 6,427,000 (2,442,000) (559,000) (863,000) 1,284,000
Increase (decrease) in accounts payable ...... 1,433,000 (960,000) (2,075,000) 1,009,000 1,503,000
(Decrease) increase in accrued salaries,
wages and other liabilities ................. (11,476,000) (3,862,000) (819,000) 5,713,000 (2,536,000)
(Decrease) increase in amounts due to
third-party contractual agencies ............ (2,372,000) (5,478,000) 63,000 1,778,000 (1,360,000)
------------ ------------ ------------ ------------ ------------
Total adjustments ....................... (4,960,000) (9,397,000) 2,375,000 60,162,000 6,347,000
------------ ------------ ------------ ------------ ------------
Net cash (used in) provided by operating
activities ........................................ (1,843,000) (7,370,000) (41,000) 1,586,000 9,759,000
------------ ------------ ------------ ------------ ------------
Investing activities
Increase in net assets held for sale ............. (46,000) (969,000) -- -- --
Proceeds from sale of subsidiary and property
and equipment .................................. -- 29,600,000 -- 21,505,000 --
Expenditures for property and equipment .......... (1,864,000) (895,000) (2,760,000) (7,777,000) (3,490,000)
Acquisitions ..................................... (1,195,000) (357,000) -- -- --
Preopening costs ................................. -- -- (35,000) -- (386,000)
Acquisition of business, net of cash acquired .... -- (969,000) (300,000) (300,000) --
Cash held in trust ............................... (37,000) 108,000 (3,000) (1,137,000) 268,000
Other noncurrent assets .......................... -- -- -- (892,000) 237,000
------------ ------------ ------------ ------------ ------------
Net cash (used in) provided by investing
activities ........................................ (3,142,000) 26,518,000 (3,098,000) 11,399,000 (3,371,000)
------------ ------------ ------------ ------------ ------------
Financing activities
Loan costs ....................................... (216,000) (1,629,000) (3,079,000) (3,231,000) (1,755,000)
Payment of costs related to acquisition .......... -- -- -- -- (365,000)
Amounts (paid to) received from affiliate ........ (600,000) 1,592,000 -- 6,429,000 1,124,000
Distributions to minority interests .............. -- -- -- -- (900,000)
Proceeds from acquisition of subsidiary .......... -- -- -- -- 1,474,000
Dividends ........................................ -- (300,000) -- -- --
Net proceeds from exercise of options and stock
purchases ...................................... 30,000 10,000 130,000 158,000 40,000
Proceeds from issuance of debt ................... 5,598,000 10,000,000 54,900,000 50,786,000 --
Payments on debt ................................. (707,000) (31,181,000) (50,851,000) (68,768,000) (10,906,000)
Payments of costs related to early
extinguishment of debt ......................... -- -- (2,229,000) (2,229,000) --
Payment of preferred stock dividends ............. -- (114,000) (57,000) (112,000) (91,000)
Proceeds from issuance of preferred stock ........ -- -- 5,284,000 5,284,000 --
Redemption of preferred stock .................... -- (2,625,000) -- -- --
Proceeds from issuance of common stock, net ...... -- 3,314,000 -- -- --
Refunded registration costs ...................... 60,000 -- -- -- --
Registration costs ............................... (36,000) -- -- -- --
Payment of costs related to issuance of stock .... -- -- (100,000) (100,000) (762,000)
------------ ------------ ------------ ------------ ------------
Net cash provided by (used in) financing activities.. 4,129,000 (20,933,000) 3,998,000 (11,783,000) (12,141,000)
------------ ------------ ------------ ------------ ------------
Net (decrease) increase in cash and cash
equivalents ....................................... (856,000) (1,785,000) 859,000 1,202,000 (5,753,000)
Cash and cash equivalents at beginning of period .... 1,478,000 3,263,000 2,061,000 2,061,000 7,814,000
------------ ------------ ------------ ------------ ------------
Cash and cash equivalents at end of period .......... $ 622,000 $ 1,478,000 $ 2,920,000 $ 3,263,000 $ 2,061,000
============ ============ ============ ============ ============
Cash paid during the period for:
Interest (net of amount capitalized) ........... $ 982,000 $ 1,343,000 $ 969,000 $ 6,276,000 $ 4,663,000
============ ============ ============ ============ ============
Income taxes .................................... $ 460,000 $ 356,000 $ 458,000 $ 773,000 $ 129,000
============ ============ ============ ============ ============
</TABLE>
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
F-8
<PAGE> 10
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
F-9
<PAGE> 11
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
F-10
<PAGE> 12
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
F-11
<PAGE> 13
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.
F-12
<PAGE> 14
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
F-13
<PAGE> 15
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:
<TABLE>
<CAPTION>
December 31, December 31, June 30,
1999 1998 1998
------------ ------------ ------------
<S> <C> <C> <C>
Accounts receivable, less allowance for
doubtful accounts of $191,000 at December 31, 1998
and $1,742,000 at June 30, 1998 $ -- $ 832,000 $ 11,005,000
Other receivables 25,000 124,000 1,264,000
Other current assets 9,000 169,000 732,000
Other noncurrent assets -- -- 2,016,000
Property and equipment 2,067,000 3,717,000 49,895,000
Accumulated depreciation -- (723,000) (17,124,000)
Valuation allowance on property and equipment -- (1,159,000) (17,576,000)
Accounts payable -- (730,000) (1,889,000)
Accrued salaries and wages -- (149,000) (1,796,000)
Other accrued liabilities (11,000) (17,000) (703,000)
Notes payable -- (20,000) (56,000)
------------ ------------ ------------
Net assets held for sale $ 2,090,000 $ 2,044,000 $ 25,768,000
============ ============ ============
</TABLE>
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.
F-14
<PAGE> 16
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.
F-15
<PAGE> 17
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.
<TABLE>
<CAPTION>
Year Ended
June 30, 1997
-------------
(unaudited)
<S> <C>
Net revenues ...................... $ 158,984,000
Net loss .......................... $ (1,237,000)
Basic and diluted loss per share .. $ (0.15)
</TABLE>
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:
<TABLE>
Six Months Ended Year Ended
Year Ended December 31, June 30,
December 31, --------------------------- --------------------------
1999 1998 1997 1998 1997
----------- ----------- ---------- ---------- ----------
(unaudited)
<S> <C> <C> <C> <C> <C>
Revenues $ -- $ -- $ 7,000 $ 14,000 $ 250,000
Other income -- 7,881,000 -- -- --
Net income -- 4,808,000 4,000 7,000 134,000
</TABLE>
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.
F-16
<PAGE> 18
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:
<TABLE>
<CAPTION>
December 31,
---------------------------- June 30,
1999 1998 1998
----------- ----------- -----------
<S> <C> <C> <C>
Variable rate Term Loan, due October 30, 2003 ........................... $ 7,332,000 $ 8,000,000 $ --
Revolver, due October 30, 2003 .......................................... 3,108,000 -- --
Acquisition Loan, due October 30, 2003 .................................. 2,475,000 -- --
Variable rate Term Loan A ............................................... -- 4,567,000
Variable rate Term Loan B ............................................... -- 3,608,000
Revolver, due September 30, 1999 ........................................ -- -- 6,000,000
Series A bridge note to financial institution ........................... -- -- 15,000,000
Bridge facility to affiliate, due September 30, 2005 .................... -- -- 2,500,000
Junior Subordinated Note Agreement to affiliate, due
September 30, 2006 ................................................... -- -- 3,929,000
Other ................................................................... 40,000 7,000 13,000
----------- ----------- -----------
12,955,000 8,007,000 35,617,000
Less current portion .................................................... 1,394,000 675,000 21,219,000
----------- ----------- -----------
$11,561,000 $ 7,332,000 $14,398,000
=========== =========== ===========
</TABLE>
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
F-17
<PAGE> 19
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
F-18
<PAGE> 20
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 and June 19, 2000, the Company entered into
subordinated note and warrant purchase agreements with two unrelated financial
institutions for an aggregate principal amount of $5 million each (the
"Subordinated Notes"). The Subordinated Notes permit each of the financial
institutions to exercise, under certain conditions, up to 475,000 warrants which
are convertible into the Company's common stock. Borrowings under the
Subordinated Notes bear interest at a rate of 12.5% per annum. The interest is
payable quarterly, and the principal balance and any unpaid interest is due
January 24, 2007. The Company's Senior Credit Facility was amended on
January 25, 2000 and again on June 19, 2000 to provide for the approval of the
Subordinated Notes.
In connection with the Subordinated Notes, the Company incurred loan
costs of approximately $592,000. The loan costs are deferred and amortized
ratably over the life of the loans. The amortization is included in interest
and other financing charges in the accompanying consolidated statement of
operations and the unamortized balance is included as unamortized loan costs in
the accompanying consolidated balance sheet.
F-19
<PAGE> 21
RAMSAY YOUTH SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
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.
F-20
<PAGE> 22
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
F-21
<PAGE> 23
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:
<TABLE>
<CAPTION>
Year Ended Six Months Ended December 31, Year Ended June 30,
December 31, ----------------------------- -----------------------------
1999 1998 1997 1998 1997
------------ ------------ ------------ ------------ ------------
(unaudited)
<S> <C> <C> <C> <C> <C>
Numerator:
Net income (loss) before extraordinary
item, as reported .......................... $ 3,117,000 $ 4,838,000 $ 1,158,000 $(54,254,000) $ 3,412,000
Dividends, Class B convertible preferred
stock, Series C ............................ -- 166,000 181,000 362,000 362,000
Dividends, Class B convertible preferred
stock, Series 1996 ......................... -- 69,000 75,000 150,000 --
Dividends, Class B convertible redeemable
preferred stock, Series 1997 ............... -- 45,000 57,000 182,000 --
Redemption premium on preferred stock and
other expenses ............................. -- 225,000 -- -- --
Dividends, Class B redeemable preferred
stock, Series 1997-A ....................... -- 151,000 91,000 271,000 --
------------ ------------ ------------ ------------ ------------
Numerator for basic earnings (loss) per
share - income (loss) attributable to
common stockholders, before
extraordinary item ..................... 3,117,000 4,182,000 754,000 (55,219,000) 3,050,000
Effect of dilutive securities:
Class B convertible preferred stock,
Series C .............................. -- -- -- -- 362,000
------------ ------------ ------------ ------------ ------------
-- -- -- -- 362,000
------------ ------------ ------------ ------------ ------------
Numerator for diluted earnings (loss)
per share - income (loss) attributable
to common stockholders after
assumed conversions ................... $ 3,117,000 $ 4,182,000 $ 754,000 $(55,219,000) $ 3,412,000
============ ============ ============ ============ ============
Denominator:
Denominator for basic earnings (loss) per
share - weighted-average shares .......... 8,890,000 4,487,000 3,574,000 3,595,000 2,801,000
Effect of dilutive securities:
Employee stock options and warrants ...... 648,000 8,000 565,000 -- 115,000
Convertible preferred stock .............. -- 1,476,000 -- -- 493,000
------------ ------------ ------------ ------------ ------------
Dilutive potential common shares ............ 648,000 1,484,000 565,000 -- 608,000
------------ ------------ ------------ ------------ ------------
Denominator for diluted earnings (loss)
per share - adjusted weighted-average
shares and assumed conversions ........ 9,538,000 5,971,000 4,139,000 3,595,000 3,409,000
============ ============ ============ ============ ============
Basic earnings (loss) per share, before
extraordinary item .......................... $ .35 $ .93 $ .21 $ (15.36) $ 1.09
Extraordinary item ............................. -- (.63) (1.00) (1.20) --
------------ ------------ ------------ ------------ ------------
Basic earnings (loss) per share ................ $ .35 $ .30 $ (.79) $ (16.56) $ 1.09
============ ============ ============ ============ ============
Diluted earnings (loss) per share before
extraordinary item .......................... $ .33 $ .70 $ .18 $ (15.36) $ 1.00
Extraordinary item ............................. -- (.47) (.86) (1.20) --
------------ ------------ ------------ ------------ ------------
Diluted earnings (loss) per share .............. $ .33 $ .23 $ (.68) $ (16.56) $ 1.00
============ ============ ============ ============ ============
</TABLE>
F-22
<PAGE> 24
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.
F-23
<PAGE> 25
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.
F-24
<PAGE> 26
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:
<TABLE>
<CAPTION>
Weighted
Number Average
of Option Exercise
Shares Price Price
------ ------ ---------
<S> <C> <C> <C> <C>
Options outstanding at June 30, 1996 207,348 $ 7.50 - $18.93 $ 11.16
Granted 403,500 $ 7.32 - $ 8.25 $ 8.16
Exercised --
Canceled (14,563) $ 7.50 - $12.75 $ 9.54
---------
Options outstanding at June 30, 1997 596,285 $ 7.32 - $18.93 $ 9.06
Granted 35,000 $13.14 $ 13.14
Exercised (6,939) $10.14 - $12.75 $ 11.49
Canceled (19,128) $ 8.25 - $18.93 $ 11.79
---------
Options outstanding at June 30, 1998 605,218 $ 7.32 - $18.93 $ 9.12
Granted 79,500 $4.69 $ 4.69
Exercised --
Canceled (120,292) $ 7.32 - $18.93 $ 9.51
---------
Options outstanding at December 31, 1998 564,426 $ 4.69 - $18.93 $ 8.43
Granted 1,680,500 $2.69 $ 2.69
Exercised --
Canceled (90,607) $ 4.69 - $18.93 $ 9.78
---------
Options outstanding at December 31, 1999 2,154,319 $ 2.69 - $18.93 $ 3.87
=========
Exercisable at December 31, 1999 326,631 $ 8.16
=========
Exercisable at December 31, 1998 267,150 $ 9.12
=========
Exercisable at June 30, 1998 247,916 $ 9.89
=========
Exercisable at June 30, 1997 161,336 $ 11.39
=========
</TABLE>
F-25
<PAGE> 27
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:
<TABLE>
<CAPTION>
Weighted
Number Average
of Option Exercise
Shares Price Price
------ ----- --------
<S> <C> <C> <C>
Options outstanding at June 30, 1996 476,860 $7.50 $7.50
Granted 199,283 $8.25 $8.25
Exchanged in connection with merger 104,804 $9.00 $9.00
Exercised -- --
Canceled (330,313) $7.50 $7.50
-------------
Options outstanding at June 30, 1997 450,634 $7.50 - $9.00 $8.16
Granted -- --
Exercised (4,161) $7.50 $7.50
Canceled (15,105) $7.50- $9.00 $8.58
-------------
Options outstanding at June 30, 1998 431,368 $7.50 - $9.00 $8.37
Granted --
Exercised --
Canceled (125,128) $7.50 - $9.00 $8.13
-------------
Options outstanding at December 31, 1998 306,240 $7.50 - $9.00 $8.46
Granted --
Exercised --
Canceled (30,552) $7.50 - $9.38 $8.40
-------------
Options outstanding at December 31, 1999 275,688 $7.50 - $9.38 $8.33
=============
</TABLE>
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
F-26
<PAGE> 28
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:
<TABLE>
<CAPTION>
Year Ended Six Months Ended December 31, Year Ended June 30,
December 31, ----------------------------- -----------------------------
1999 1998 1997 1998 1997
------------ ------------ ------------- ------------ ------------
(unaudited)
<S> <C> <C> <C> <C> <C>
Net income (loss) attributable to common
stockholders as reported $ 3,117,000 $ 1,371,000 $ (2,820,000) $(59,541,000) $ 3,050,000
Basic net income (loss) per share as
reported $ .35 $ .30 $ (.79) $ (16.56) $ 1.09
Diluted net income (loss) per share as
reported $ .33 $ .23 $ (.68) $ (16.56) $ 1.00
Pro forma net income (loss) attributable to
common stockholders $ 1,847,000 $ 1,011,000 $ (3,394,000) $(60,690,000) $ 2,847,000
Basic pro forma net income (loss) per share $ .21 $ .23 $ (.95) $ (16.88) $ .88
Diluted pro forma net income (loss) per
share $ .19 $ .17 $ (.82) $ (16.88) $ .85
</TABLE>
F-27
<PAGE> 29
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:
<TABLE>
<CAPTION>
December 31,
------------------------------ June 30,
1999 1998 1998
------------ ------------ ------------
<S> <C> <C> <C>
Deferred tax liabilities:
Book basis of fixed assets over tax basis .... $ 195,000 $ 103,000 $ 2,938,000
Economic performance ......................... 216,000 216,000 513,000
Other ........................................ 318,000 156,000 55,000
------------ ------------ ------------
Total deferred tax liabilities ......... 729,000 475,000 3,506,000
Deferred tax assets:
Allowance for doubtful accounts .............. 1,297,000 1,053,000 740,000
General and professional liability insurance . 1,474,000 1,604,000 1,074,000
Accrued employee benefits .................... 288,000 478,000 1,817,000
Investment in nonconsolidated subsidiaries ... -- -- 294,000
Capital loss carryovers ...................... 1,020,000 597,000 605,000
Impairment of assets ......................... -- 440,000 6,712,000
Other accrued liabilities .................... 3,204,000 4,858,000 4,507,000
Other ........................................ 68,000 89,000 --
Net operating loss carryovers ................ 17,483,000 15,945,000 6,996,000
Alternative minimum tax credit carryovers .... 1,109,000 1,139,000 1,139,000
------------ ------------ ------------
Total deferred tax assets .............. 25,943,000 26,203,000 23,884,000
Valuation allowance for deferred tax assets ..... (25,214,000) (25,728,000) (20,378,000)
------------ ------------ ------------
Deferred tax assets, net of valuation
allowance ............................ 729,000 475,000 3,506,000
------------ ------------ ------------
Net deferred tax assets ................ $ -- $ -- --
============ ============ ============
</TABLE>
The provision for income taxes consists of the following:
<TABLE>
<CAPTION>
Six Months Ended Year Ended
Year Ended December 31, June 30,
December 31, -------------------------- --------------------------
1999 1998 1997 1998 1997
---------- ---------- ---------- ---------- ----------
(unaudited)
<S> <C> <C> <C> <C> <C>
Income taxes currently payable:
Federal ........................ $ -- $1,358,000 $ -- $ 60,000 $ 280,000
State .......................... 68,000 233,000 -- 240,000 313,000
Deferred income taxes:
Federal ........................ -- -- -- 8,680,000 1,039,000
State .......................... -- -- -- 1,005,000 183,000
---------- ---------- ---------- ---------- ----------
$ 68,000 $1,591,000 $ -- $9,985,000 $1,815,000
========== ========== ========== ========== ==========
</TABLE>
F-28
<PAGE> 30
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:
<TABLE>
<CAPTION>
Six Months Ended Year Ended
Year Ended December 31, June 30,
December 31, ------------------ ------------------
1999 1998 1997 1998 1997
----- ----- ----- ----- -----
(unaudited)
<S> <C> <C> <C> <C> <C>
U.S. Federal statutory rate .................... 34.0% 34.0% 34.0% (34.0%) 34.0%
(Decrease) increase in valuation allowance ..... (16.1) 83.2 -- 30.5 19.2
Non-deductible intangible assets ............... -- 8.8 3.5 20.4 --
State income taxes, net of federal benefit ..... -- 2.4 4.0 (4.0) (3.7)
Benefit of net operating loss recognized ....... (17.1) -- (37.7) -- (8.5)
Tax effect of loss recognition on sale of
assets ...................................... -- (104.7) -- -- --
Other .......................................... 1.3 1.0 (3.8) 9.7 (6.3%)
----- ----- ----- ----- -----
Effective income tax rate ...................... 2.1% 24.7% 0% 22.6% 34.7%
===== ===== ===== ===== =====
</TABLE>
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.
F-29
<PAGE> 31
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. The Company
settled this case for $1.1 million on May 17, 2000.
F-30
<PAGE> 32
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:
<TABLE>
<CAPTION>
December 31,
------------------------------- June 30,
1999 1998 1998
------------ ------------ ------------
<S> <C> <C> <C>
Allowance for Doubtful Accounts:
Balance at beginning of period .......................... $ 3,159,000 $ 2,395,000 $ 4,386,000
Provision for doubtful accounts .......................... 1,896,000 1,549,000 6,649,000
Write-offs of uncollectible accounts receivable .......... (2,631,000) (594,000) (6,368,000)
Allowance eliminated in connection with the sale of
FPMBH ................................................. -- -- (530,000)
Decrease (increase) in allowance related to assets
held for sale ......................................... 191,000 (191,000) (1,742,000)
------------ ------------ ------------
Balance at end of period ................................. $ 2,615,000 $ 3,159,000 $ 2,395,000
============ ============ ============
Valuation Allowance on Property and Equipment:
Balance at beginning of period ........................... $ 1,159,000 $ 17,576,000 $ --
Additions, charged to cost and expenses .................. -- -- 17,576,000
Deductions ............................................... (205,000) (16,417,000) --
------------ ------------ ------------
Balance at end of period ................................. $ 954,000 $ 1,159,000 $ 17,576,000
============ ============ ============
Tax Valuation Allowance for Deferred Tax Assets:
Balance at beginning of period ........................... $ 25,728,000 $ 20,378,000 $ 5,374,000
Additions, charged to cost and expenses .................. -- 5,350,000 15,004,000
Deductions ............................................... (514,000) -- --
------------ ------------ ------------
Balance at end of period ................................. $ 25,214,000 $ 25,728,000 $ 20,378,000
============ ============ ============
</TABLE>
F-31
<PAGE> 33
RAMSAY YOUTH SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
17. SUPPLEMENTAL CASH FLOW INFORMATION
The Company's non-cash investing and financing activities were as
follows:
<TABLE>
<CAPTION>
Six Months Ended Year Ended
Year Ended December 31, June 30,
December 31, ------------------------ ---------------------------
1999 1998 1997 1998 1997
------------ ---------- -------- ---------- -----------
(unaudited)
<S> <C> <C> <C> <C> <C>
Financed acquisition of property and
equipment ................................. $37,000 $ -- $ -- $ -- $ --
Forgiveness of amounts due from affiliates ... -- 5,569,000 -- -- --
Issuance of stock in connection with
conversion of Senior Subordinated Bridge
Note (including accrued interest) ......... -- $2,584,000 -- -- --
Issuance of common stock in connection with
conversion of Junior Subordinated Note
(including accrued interest) .............. -- 5,423,000
Issuance of stock upon conversion of
Preferred Stock, Series 1997-A ............ -- 4,422,000 -- -- --
Issuance of common stock upon conversion of
Preferred Stock, Series C ................. -- 580,000 -- -- --
Issuance of common stock upon conversion of
Preferred Stock, Series 1996 .............. -- 3,181,000 -- -- --
Issuance of Common Stock in connection with
employment agreement ...................... -- 175,000 -- -- --
Note received in connection with sale of
property and equipment .................... -- -- -- 1,500,000 --
Issuance of stock in lieu of cash payment
for accrued liabilities ................... -- -- -- 355,000 --
Issuance of warrants in connection with
Summa merger .............................. -- -- -- 657,000 --
Issuance of stock in connection with Summa
merger .................................... -- -- -- 813,000 --
Issuance of stock in lieu of debt payment .... -- -- -- 250,000 --
Issuance of stock in lieu of dividend
payments .................................. -- -- -- 610,000 --
Merger with RMCI:
Cost in excess of net asset value of
purchased businesses .................... -- -- -- -- 18,048,000
Other intangible assets ................... -- -- -- -- 4,740,000
Issuance of Common Stock .................. -- -- -- -- 6,408,000
Issuance of Series 1996 Preferred Stock ... -- -- -- -- 3,000,000
Noncurrent liabilities .................... -- -- -- -- 750,000
Issuance of stock in lieu of cash payment
for management and directors' fees ........ -- -- -- -- 922,000
</TABLE>
F-32
<PAGE> 34
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
===========
F-33
<PAGE> 35
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.
<TABLE>
<CAPTION>
Quarter Ended
---------------------------------------------------------------------------
March 31 June 30 September 30 December 31
-------------- -------------- -------------- ------------
<S> <C> <C> <C> <C>
1999 (b)
--------------------------------------------
Net revenues ............................... $ 18,894,000 $ 19,923,000 $ 20,413,000 $ 22,244,000
Income from operations ..................... 484,000 719,000 702,000 996,000
Income before income taxes and
extraordinary item ...................... 1,752,000 412,000 396,000 625,000
Net income ................................. 1,705,000 357,000 396,000 659,000
INCOME PER COMMON SHARE (a)
Basic:
Before extraordinary item ............... $ 0.19 $ 0.04 $ 0.04 $ 0.07
Extraordinary item:
Loss from early extinguishment of
debt ................................ -- -- -- --
-------------- -------------- -------------- ------------
$ 0.19 $ 0.04 $ 0.04 $ 0.07
============== ============== ============== ============
Diluted:
Before extraordinary item ............... $ 0.19 $ 0.04 $ 0.04 $ 0.07
Extraordinary item:
Loss from early extinguishment of
debt ................................ -- -- -- --
-------------- -------------- -------------- ------------
$ 0.19 $ 0.04 $ 0.04 $ 0.07
============== ============== ============== ============
1998 (c)
--------------------------------------------
Net revenues ............................... $ 37,051,000 $ 40,678,000 $ 29,081,000 $ 18,989,000
Income (loss) from operations .............. (29,058,000) 552,000 (117,000) (772,000)
Income (loss) before income taxes and
extraordinary item ...................... (31,807,000) (13,621,000) 8,588,000 (2,159,000)
Net income (loss) .......................... (41,218,000) (14,943,000) 4,627,000 (2,600,000)
INCOME (LOSS) PER COMMON SHARE (a)
Basic:
Before extraordinary item ............... $ (11.46) $ (3.99) $ 1.44 $ (.20)
Extraordinary item:
Loss from early extinguishment of
debt ................................ -- (0.21) (0.24) (.36)
-------------- -------------- -------------- ------------
$ (11.46) $ (4.20) $ 1.20 $ (.56)
============== ============== ============== ============
Diluted:
Before extraordinary item ............... $ (11.46) $ (3.99) $ 1.18 $ (.20)
Extraordinary item:
Loss from early extinguishment of
debt ................................ -- (0.21) (0.19) (.36)
-------------- -------------- -------------- ------------
$ (11.46) $ (4.20) $ .99 $ (.56)
============== ============== ============== ============
</TABLE>
(a) The quarterly earnings per share amounts may not equal the annual amounts
due to changes in the average common and dilutive common equivalent shares
outstanding during the year.
F-34
<PAGE> 36
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.
19. SUBSEQUENT EVENTS
Ramsay Educational Services, Inc. ("RES") is a wholly owned subsidiary of
Ramsay Youth Services, Inc. ("RYS"). RES is in the business of managing and
operating educational programs and services and currently operates and
manages educational programs in Florida and the Commonwealth of Puerto
Rico. In December 1998, RES purchased all of the outstanding stock of the
Rader Group, Inc. In connection with this purchase, RES obtained, among
other assets, the rights to manage various charter schools in Florida
through certain contracts with non-for-profit entities (the "Contracts").
On June 7, 2000, the Company sold five of its Contracts to manage charter
schools and personal property with a book value of approximately $800,000
(including the net book value of goodwill and other intangible assets) for
$352,000, resulting in a loss of approximately $450,000.
On August 4, 2000, the Company acquired the operating assets of Charter
Behavioral Health System of Manatee Palms, L.P. ("Manatee Palms") from
Charter Behavioral Health Systems, LLC and the corresponding real estate
from Crescent Real Estate Funding VII, L.P. for a cash purchase price of
$7,700,000 which was determined to be the fair value of the assets
acquired. The acquisition was accounted for under the purchase method of
accounting. Accordingly, the operations of Manatee Palms will be included
in the Company's consolidated statements of operations effective August 4,
2000. The Company's Senior Credit Facility was amended on August 4, 2000 to
provide for the approval of this acquisition (the "Sixth Amendment").
The Sixth Amendment provides for, among other things, (i) an increase in
the revolving credit loan commitment from $8,000,000 to $12,000,000, (ii) a
term loan of $4,500,000 payable in 48 monthly installments, beginning
November 2000, (iii) a restriction on the repayment of the Junior
Subordinated Note and (iv) an amendment to the definitions for calculating
the Senior Credit Facility covenants in the future.
F-35
<PAGE> 37
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this Amendment to be signed
on its behalf by the undersigned, thereunto duly authorized.
RAMSAY YOUTH SERVICES, INC.
By: /s/ Marcio C. Cabrera
---------------------------
Marcio C. Cabrera
Executive Vice President and
Chief Financial Officer
Date: September 20, 2000
<PAGE> 38
INDEX TO EXHIBITS
Number Description of Exhibit
---------------- ---------------------------------------------------
23 - Consent of Ernst & Young LLP
23.1 - Consent of Deloitte & Touche LLP
