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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
/X/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 [FEE REQUIRED]
For the fiscal year ended June 30, 1996
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 HEALTH CARE, INC.
(Exact name of registrant as specified in its charter)
Delaware 63-0857352
(State or other jurisdiction (I.R.S. Employer Identification No.)
of incorporation or organization)
Entergy Corporation Building
639 Loyola Avenue, Suite 1700 70113
New Orleans, Louisiana (Zip Code)
(Address of principal executive offices)
Registrant's telephone number, including area code (504) 525-2505
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. / /
The number of shares of the registrant's Common Stock outstanding as of
October 2, 1996 was 8,307,131. The aggregate market value of Common Stock held
by non-affiliates on such date was $14,952,713.
DOCUMENTS INCORPORATED BY REFERENCE
Certain sections of the registrant's definitive Proxy Statement to be filed
for the 1996 Annual Meeting of Stockholders are incorporated by reference into
Part III.
PART I
Item 1. Business.
General
Ramsay Health Care, Inc. ("RHCI" or the "Company") is one of
the leading providers of behavioral health services in the country. The Company
offers a continuum of patient care through integrated networks of mental health
delivery systems in 11 states, principally in the southeast and southwest,
organized around 15 inpatient hospitals with 1,369 licensed beds (including 77
medical subacute beds) and outpatient centers. The Company also manages the
mental health programs of certain public and private health care providers under
management contracts.
Overview
The Company currently offers a comprehensive range of
behavioral health services, including acute psychiatric inpatient treatment,
less intensive inpatient treatment (including residential), partial
hospitalization treatment and group and individual outpatient treatment
programs. Each of the Company's integrated delivery systems is centered around a
core hospital facility from which market-responsive mental health services are
arranged with and provided by physicians, psychologists and other mental health
professionals under contract or affiliated with the Company. Certain of these
systems also manage behavioral health services on behalf of other providers and
offer medical subacute services.
Recent Developments
On October 1, 1996, the Company and Ramsay Managed Care, Inc.
("RMCI") entered into an agreement and plan of merger providing for the
acquisition of RMCI by the Company. The merger has been approved by the Board of
Directors of each of the Company and RMCI following the recommendation by a
special committee of the Board of Directors of each company. Upon consummation
of the merger, (i) each share of common stock of RMCI will be converted into
one- third (1/3) of a share of common stock of the Company, and (ii) each share
of Preferred Stock, Series 1996, of RMCI (each of which is convertible into 30
shares of RMCI common stock) will be converted into one share of Class B
Preferred Stock, Series 1996, of the Company (each of which will be convertible
into 10 shares of RHCI common stock). The merger is intended to qualify for
federal income tax purposes as a tax-free reorganization within the meaning of
Section 368 (a) of the Internal Revenue Code of 1986, as amended.
The merger is subject to the approval of (i) the holders of a
majority of the shares of RHCI common stock and RHCI Class B Preferred Stock,
Series C (voting on an as converted basis into RHCI common stock and voting
together with the RHCI common stock as a single class) voting at a meeting of
shareholders at which a quorum is present, and (ii) the holders of a majority of
the issued and outstanding shares of RMCI common stock and RMCI Preferred Stock,
Series 1996 (voting on an as converted basis into RMCI common stock and voting
together with the RMCI common stock as a single class). Affiliates of Paul J.
Ramsay, the Chairman of the Board of the Company and RMCI, hold an approximate
35% voting interest in the Company and an approximate 69% voting interest in
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RMCI, and have indicated that they will vote their shares of capital stock of
each company in favor of the merger. The merger is also subject to various other
conditions, including the expiration of the applicable waiting period under the
Hart-Scott-Rodino Antitrust Improvements Act of 1976, the receipt of necessary
lender and other consents, and the declaration of effectiveness by the
Securities and Exchange Commission of a registration statement to be filed by
the Company. Subject to the satisfaction of these conditions, it is expected
that the merger will be consummated in March, 1997.
Strategy
The Company's strategy is to maintain its reputation as a
high-quality provider of behavioral health services, meeting the needs of its
patients for therapeutic care in the least restrictive setting, its payors for
cost-effective and accountable treatment programs, and its shareholders for
consistent earnings and business growth.
Additional Management Resources Strengthen Organizational Structure
In January 1996, the Company announced the appointment of Luis
Lamela as Vice Chairman of the Board, followed in August 1996 by the
appointments of Bert Cibran as President and Chief Operating Officer and Carol
Lang as Chief Financial Officer. Reynold Jennings became Executive Vice
President of the Company and President of the recently restructured Behavioral
Hospital Division, assuring his continued leadership over the core behavioral
health business. The new management team has over 40 years of healthcare
operations, management and financing experience and a demonstrated history of
success in the industry. With this leadership infrastructure, the Company
believes it has the resources to seek and execute diversification opportunities,
expand the delivery of health care, and establish a capital structure
appropriate for a long-term, high-quality health care company.
Decreasing Dependence on Revenue from Acute Psychiatric Inpatient Care
The behavioral health industry in the United States has
experienced severe cost- containment pressures imposed by managed care
organizations, governmental and other third-party payors. Under increasingly
stringent admissions guidelines, restrictive length of stay criteria, and other
treatment constraints imposed by payors, the Company's acute inpatient care
programs have generated less revenue, even though admissions to these programs
have increased.
To mitigate the revenue declines of acute inpatient treatment,
the Company is expanding its inpatient behavioral care programs which require
longer lengths of stay but less intensive treatment to accomplish effective
outcomes, including residential treatment and youth- oriented correctional
service programs. This will allow the Company to capitalize on its national
recognition as a leading provider of certain youth offender treatment programs.
To this end, the Company is seeking contracts with state agencies and judicial
systems in a number of states to provide these services.
2
Reformation and Expansion of Outpatient Programs
The Company's outpatient services consist primarily of partial
hospitalization and group and individual therapy sessions based in or nearby its
inpatient facilities. These services were originally developed as ancillary
sites to deliver patient care, without specific regard to outpatient care
protocols being developed and encouraged by managed care organizations. As the
influence of managed care organizations increased in certain of the Company's
markets, certain of the Company's outpatient programs which did not deliver care
protocols consistent with managed care requirements suffered declines in patient
volumes and, in some cases, were closed due to their unprofitability. In
recognition of the marketplace need to satisfy both patient and payor, the
Company has begun a restructuring of its outpatient product lines in markets,
including markets in which managed care is a dominant payor, to provide
screening, therapeutic protocols, and outcome reviews which are consistent with
managed care requirements. Also, in suitable markets, the Company will look to
open and/or reopen previously closed outpatient care delivery sites. This
restructuring is designed to strengthen existing relationships and foster new
relationships with managed care organizations.
Maintain Dominance in Selected Markets
The Company is the sole or primary provider of behavioral
health services in certain of its markets, particularly those markets with
populations of fewer than 200,000 people. The Company's strategy is to dominate
the provision of behavioral health care in these markets by expanding its
delivery network within a 50-mile geographic area surrounding its inpatient
hospital facility and by aggressively pursuing joint ventures, contract
arrangements and alliances to serve public and private sector behavioral health
care needs. The Company believes that recognition as the dominant provider of
behavioral health care in particular markets enhances the viability of its
facilities and increases the potential for business expansion opportunities in
these markets.
Strengthen Alliances with General Medical/Surgical Hospitals
In certain markets, the Company has initiated discussions with
significant local medical/surgical (acute-care) hospitals to explore possible
"vertical" integration with the Company's inpatient facilities. This integration
strategy is designed to appeal to managed care organizations which seek to
develop relationships with large, acute-care hospitals that provide a full
spectrum of health care services, including behavioral health care. The Company
believes that in certain markets a joint venture, partnership or other form of
alliance with the medical/surgical hospital enhances the long-term viability of
the Company's facility. To date, no such agreements of significance have been
signed.
Asset Utilization
Of the Company's 15 inpatient facilities, four currently
operate medical subacute units. These units were opened in late fiscal
1994/early fiscal 1995 after a determination was made that the demand for
inpatient behavioral health services would not be sufficient to fully utilize
the existing bed capacity of the facility. Also, two of the currently
operational subacute units are being expanded to meet increased market demand
for the subacute service.
3
Restructure Lending Relationships
The Company's capital structure currently involves two lending
groups and a real estate investment trust. A bank group consisting of three
banks currently provides letter of credit support for five variable rate demand
revenue bonds which total approximately $19 million and have been outstanding
since 1985. Also, a consortium of three life insurance companies has loans
outstanding to the Company totalling approximately $36 million. The Company has
no short-term access to a working capital facility at the present time. The
Company intends to refinance its debt during the next fiscal year to provide
funds for growth and working capital, as well as to reschedule the current level
of principal repayment required under the life insurance company debt.
In connection with the "safe-harbor" provision of the Private
Securities Litigation Reform Act of 1995, the Company notes that this Annual
Report on Form 10-K contains forward- looking statements about the Company. The
Company is hereby setting forth cautionary statements identifying important
factors that may cause the Company's actual results to differ materially from
any forward-looking statement. Some of the most significant factors include (i)
accelerating changes occurring in the health care industry, including
competition from consolidating and integrated health care provider systems, the
imposition of more stringent admission criteria by payors, increased payor
pressures to limit lengths of stay, limitations on reimbursement rates and
limitations on annual and lifetime patient health benefits, (ii) federal and
state governmental budgetary constraints which could have the effect of limiting
the amount of funds available to support governmental health care programs,
including Medicare and Medicaid, and (iii) statutory, regulatory and
administrative changes or interpretations of existing statutory and regulatory
provisions affecting the conduct of the Company's business and affecting current
and prior reimbursement for the Company's services. While the Company believes
that implementing the above-described strategies will enable the Company to
improve its operations and financial condition, there can be no assurance that
the Company will be successful in doing so.
Facility Operations
The Company's facilities specialize in the treatment of
behavioral disorders. Substance abuse treatment is provided to patients who have
a primary diagnosis of alcohol or substance abuse; however, many of these
patients have a secondary diagnosis of, and are treated for, mental illness.
Also, almost all of the Company's facilities conduct outpatient programs within
the facility and/or at clinics located in the surrounding area. In response to
the demands of payors, particularly managed care companies, the Company
anticipates expanding its outpatient network in its continued effort to provide
a less costly, yet effective level of mental health care for patients whose
illness does not require intensive inpatient care.
The initial goal of acute psychiatric hospitalization
treatment is to evaluate and stabilize the patient so that effective treatment
can be continued either on an inpatient, partial hospitalization or an
outpatient basis. Under the direction of a psychiatrist, the patient's condition
is assessed, a diagnosis is made and prescribed treatment follows. The treatment
regimen utilizes, where appropriate, medication, individual and group therapy,
adjunctive therapy and family therapy.
4
The most common disorders for which adult patients are
admitted to the Company's hospitals are mood and affective disorders (such as
depression), schizophrenia, situational crises and alcohol and drug dependency.
These disorders are also common in children and adolescents admitted to the
Company's facilities. The Company has evaluation and treatment programs designed
specifically for adults, adolescents and children. Specialized programs focusing
upon neuropsychiatric disorders and pain and sleep disorders have also been
developed. All programs emphasize family involvement in the evaluation and
treatment process.
Residential treatment programs are provided by nine of the
Company's facilities for low-functioning and troubled youths affected by conduct
disorders, psychiatric illness, substance abuse and sexual dysfunction. These
programs provide long-term inpatient care within a safe, therapeutic environment
for youths displaying an inability to function at home, school, with peers or in
the community in general. The highly structured programs assist the youth in
learning how to change ineffective or violent behavior and cope with the
difficulties and stresses of life. The primary objective of the program is
behavioral awareness and self-control, leading the youth to a successful return
to his/her home setting.
Each psychiatric hospital has a multidisciplinary team of
health care professionals, including psychiatrists, psychologists, social
workers, nurses, mental health and substance abuse counselors and therapists.
Generally, physician members of the professional staff maintain private
practices. In certain situations, the Company guarantees minimum incomes,
usually for one year, to psychiatrists willing to relocate to certain
facilities. All of the Company's hospitals have a medical director who acts as
liaison between the professional staff and the hospital administration staff. In
addition, each clinical program has a medical unit administrator.
Each of the Company's hospitals has a consulting board,
comprised of hospital executives, consulting physicians and other members of the
local community, which is responsible for standards of patient care. A hospital
CEO supervises and is responsible for the day-to-day operations of each
hospital. The Company emphasizes frequent communication, the setting of
operational and financial goals and the monitoring of actual results against
targeted goals. To this end, the Company collects and analyzes information on
key indicators such as admissions by treatment program and payor category, daily
census, full-time equivalent employees per patient day and average length of
stay. On the basis of this information, the administrative staff of each
hospital, together with the corporate staff of the Company, adopts new programs
and modifies existing programs to improve performance.
All of the Company's hospitals have been accredited by the
Joint Commission on Accreditation of Healthcare Organizations ("JCAHO"). The
JCAHO is a voluntary national organization which undertakes a comprehensive
review for purposes of accreditation of health care facilities. In general,
hospitals and certain other health care facilities are initially surveyed by
JCAHO within 12 months after the commencement of operations and resurveyed at
appropriate intervals thereafter. Of the Company's 15 hospitals, one was
resurveyed in fiscal 1996 and three were resurveyed in fiscal 1995 and, in each
instance, the facilities retained their JCAHO accreditation for an additional
three years.
5
The following table summarizes certain operating data related
to (i) the facilities currently operated by the Company and which were also
operated by the Company during each of the fiscal years referred to below ("same
facilities") and (ii) all facilities operated by the Company during the fiscal
years referred to below ("all facilities"). The difference between the same
facilities amounts and the all facilities amounts relates to Three Rivers
Hospital, which was closed on June 30, 1995, two facilities which were sold
during fiscal 1994, Benchmark Behavioral Hospital, which commenced operations in
May 1995, and the Company's subacute units, which commenced operations in late
fiscal 1994 and early fiscal 1995.
Same Facilities
Year Ended June 30
1996 1995 1994
Acute psychiatric admissions ......... 12,875 12,221 11,136
Residential treatment admissions ..... 537 551 471
Total inpatient admissions ........... 13,412 12,772 11,607
Acute psychiatric inpatient days ..... 130,522 139,571 153,444
Residential treatment inpatient days . 87,257 63,633 40,973
Total inpatient days ................. 217,779 203,204 194,417
Average bed days available ........... 392,352 369,380 400,770
Overall inpatient occupancy percentage 56% 55% 49%
Partial hospitalization days (1) ..... 54,041 65,280 57,414
Outpatient visits (2) ................ 37,005 44,218 30,984
All Facilities
Acute psychiatric admissions ......... 13,333 12,304 11,545
Residential treatment admissions(3) .. 588 948(3) 883(3)
Subacute admissions .................. 692 323 46
Total admissions ..................... 14,613 13,575 12,474
Acute psychiatric inpatient days ..... 135,037 140,064 159,602
Residential treatment inpatient days (3) 93,038 77,509(3) 64,729(3)
Subacute inpatient days .............. 15,378 6,548 1,061
Total inpatient days ................. 243,453 224,121 225,392
Average bed days available ........... 449,814 422,670 448,585
Overall inpatient occupancy percentage 54% 53% 50%
Partial hospitalization days (1) ..... 54,463 65,280 60,699
Outpatient visits (2) ................ 84,438 82,240 47,725
_______________________
(1) Partial hospitalization days refer to behavioral health patient services
which generally exceed three hours but do not require an overnight stay at
an inpatient facility.
(2) Outpatient visits refer to behavioral health patient services which
generally do not exceed three hours in a given day. Also, the "All
Facilities" amounts include visits related to a facility-based home health
agency.
(3) 1995 and 1994 statistics for the "All Facilities" include significant
residential treatment admissions and inpatient days related to Three Rivers
Hospital, which was closed on June 30, 1995.
6
Competition
At June 30, 1996, the Company operated 15 inpatient facilities
in 11 states. The Company's facilities are located in rural areas and in
suburban areas of large metropolitan cities. Each facility competes with other
facilities, including proprietary free-standing hospitals, not-for-profit
hospitals, governmental free-standing hospitals and psychiatric units of acute
care hospitals. The number of behavioral health service competitors located
within each of the Company's service areas varies significantly. Some of these
other facilities are larger and have greater financial resources than the
Company's hospitals. In addition, some of these competing hospitals are
substantially exempt from income and property taxation. The impact of
competition on the Company's facilities varies depending on the proximity of the
competing facility and its referral sources to the Company's facility.
The Company's outpatient centers are generally located in
areas near its inpatient facilities and compete with private practitioners,
community mental health centers, and other companies which provide outpatient
services in the markets in which the Company's outpatient centers are doing
business. Also, in certain markets, the Company treats certain patient
populations (e.g., adolescents or geriatrics) or provides services which are
different from those provided by the Company's competitors in the particular
market. The Company does not consider any of the behavioral health service
competitors in its markets as dominant providers that place the Company at a
competitive disadvantage.
The ability of a psychiatric facility to compete with other
facilities depends on the number and quality of psychiatrists and clinical
psychologists practicing at the facility, and the number, type and quality of
other psychiatric facilities in the area. Another factor affecting the
competitiveness of psychiatric facilities is the extent to which the facility's
clinical programs satisfy community needs in an effective manner from both a
clinical and an economic standpoint. The Company believes that the quality of
its professional staff as well as the quality and effectiveness of its programs
permit it to compete effectively with the other providers of psychiatric,
residential treatment, and chemical dependency care in the communities served by
the Company's facilities. In addition, the Company's facilities actively seek
relationships with managed care companies, which are increasingly responsible
for steering patients to high quality, cost-effective providers of behavioral
health services.
Industry Trends
The Company's inpatient facilities have been adversely
affected by factors influencing the entire psychiatric hospital industry.
Factors which have affected the Company's acute psychiatric inpatient business
include (i) the imposition of more stringent length of stay and admission
criteria by payors; (ii) the failure of reimbursement rate increases from
certain payors that reimburse on a per diem or other discounted basis to offset
increases in the cost of providing services; (iii) an increase in the percentage
of payors that reimburse on a per diem or other discounted basis; (iv) the trend
toward higher deductibles and co-insurance for individual patients; and (v) the
trend by self-insured employers and managed mental health organizations toward
limiting employee health benefits, including annual and lifetime limits on
7
mental health coverage. In response to these conditions, the Company has (i)
tightened its staffing levels within its facilities, particularly in the areas
which are not directly responsible for the provision of patient care, (ii)
renegotiated contracts to reduce other operating expenses within its facilities
and (iii) developed strategies to restructure its outpatient services and
partial hospitalization programs to meet the demands of the marketplace.
Further, the Company's business strategy includes reducing its dependence on
acute psychiatric inpatient services through an expansion of residential
treatment and outpatient services. See also "Strategy" above.
Sources of Revenue
The Company's facilities receive payments from third-party
reimbursement sources, including commercial insurance carriers (which provide
coverage to insureds on both an indemnity basis and through various managed care
plans), Medicare, Medicaid, the Civilian Health and Medical Program of the
Uniformed Services ("CHAMPUS"), Blue Cross and, for residential treatment
services, various state agencies (including state judicial systems). In
addition, certain payments are received directly from patients.
Third-party reimbursement programs generally reimburse
facilities either on the basis of facility charges (charge-based), on the basis
of the facility's costs as audited or projected by the third-party payor
(cost-based), or on the basis of negotiated rates (per diem-based). Generally,
charge-based programs are more profitable to the Company. The following table
sets forth, by category, the approximate percentages of the Company's inpatient
days derived from various sources for the periods indicated.
Year Ended June 30
1996 1995 1994
Charge-based programs:
Commercial Insurance .......................... 8% 10% 15%
Blue Cross .................................... 1 1 1
Private Pay ................................... 5 6 5
Sub-total ................................ 14 17 21
Cost-based and per diem-based programs:
Blue Cross .................................... 4 6 6
CHAMPUS ....................................... 3 5 7
Medicare ...................................... 24 22 21
Medicaid ...................................... 30 31 32
State, HMO and PPO ............................ 25 19 13
Sub-total ................................ 86 83 79
Total ............................... 100% 100% 100%
8
Most commercial insurance carriers reimburse their
policyholders or reimburse the Company's facilities directly for charges at
rates and limits specified in their policies. Patients generally remain
responsible to the facilities for any amounts not covered under their insurance
policies. The trend in reimbursement for psychiatric inpatient and chemical
dependency care by commercial insurance carriers is to limit inpatient days to a
maximum number per year or for the patient's lifetime, or to limit the maximum
dollar amount expended for a patient in a given period.
Most third-party payors and other commercial carriers have
also expanded benefit coverage to include partial hospitalization and other
outpatient services. Partial hospitalization is formally recognized by Medicare
and CHAMPUS as a covered service. In addition, managed care companies are
seeking to contract with providers that offer the full spectrum of psychiatric
care.
Medicare is the federal health insurance program for the aged
and disabled. Medicare reimbursement is typically less than the Company's
facilities' established charges for services provided to Medicare patients.
Patients are not responsible for the difference between the reimbursed amount
and the facilities' established charges other than for applicable noncovered
charges, coinsurance and deductibles. In 1983, Congress changed the Medicare law
applicable to Medicare reimbursement for medical/surgical services from a
retrospectively determined reasonable cost system to a prospectively determined
diagnosis-related grouping ("DRG") system. Psychiatric and chemical dependency
hospitals and units are exempt from the DRG reimbursement system.
Medicare reimbursement to exempt psychiatric and chemical
dependency hospitals and units is currently subject to the payment limitations
and incentives established in the Tax Equity and Fiscal Responsibility Act of
1982 ("TEFRA"). These facilities are paid on the basis of each facility's
historical costs trended forward, with a limit placed on the rate of increase in
per case reimbursable costs. These TEFRA "target" rates are updated annually.
Facilities with costs less than the target rate per discharge are reimbursed
based on allowable Medicare costs plus an additional incentive payment.
Beginning in federal fiscal year 1992, providers with costs exceeding their
target rates are subject to a payment ceiling of the target amount plus the
lesser of a percentage (currently 10%) of the target amount or a percentage
(currently 50%) of the amount in excess of the target amount. Exemptions and
exceptions are available to hospitals when events beyond the hospitals' control
result in an increase in costs for a reporting period. Moreover, "new hospitals"
are eligible to be exempt from the limits until they have been in operation for
three years. At June 30, 1996, all of the Company's facilities were subject to
the TEFRA provisions.
The Health Care Financing Administration ("HCFA") has
implemented changes to Medicare covering inpatient psychiatric services which
are reimbursed under TEFRA. These changes provide for an increase to the TEFRA
payment limitations, subject to annual revision. However, since 14 of the
Company's 15 facilities which are subject to the TEFRA payment limitations are
currently operating at cost levels below their respective TEFRA payment
limitations, any increase in the TEFRA payment limitations has a minimal effect
on the Company's results of operations. In addition, each year HCFA modifies the
fee reimbursement schedules related to physician services. While these changes
affect Medicare reimbursement paid directly to physicians, they do not affect
the rate of Medicare reimbursement to the Company's facilities. These changes in
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physician reimbursement have had only a minimal effect on the Company's results
of operations since most of the physicians practicing at the Company's
facilities bill their fees directly.
Medicaid is the federal/state health insurance program for the
underprivileged. Subject to certain minimum federal requirements, each state
defines the extent and duration of the services covered by its Medicaid program.
Moreover, although there are certain federal requirements governing the payment
levels for Medicaid services, each state has its own methodology for making
payment for services provided to Medicaid patients. Various state Medicaid
programs cover payment for services provided to Medicaid patients at all of the
Company's facilities. During fiscal years 1995 and 1994, the Company received
significant payments from the Louisiana Medicaid program pursuant to enhanced
reimbursement rates under the State's "disproportionate share" program.
Disproportionate share payments from the State of Louisiana were virtually
eliminated effective July 1, 1995. Accordingly, the Company expects that any
future payments made under this program will be minimal. See "Item 3. Legal
Proceedings" and "Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations--Results of Operations."
In 1991, Congress imposed a reduction in the annual
reimbursable length of stay for patients covered under the CHAMPUS program.
Effective October 1, 1991, CHAMPUS began to limit its coverage for inpatient
psychiatric services to 30 days for adult patients, 45 days for child and
adolescent patients and 150 days for residential treatment services, subject to
waivers which are available under limited circumstances if an extension of the
length of stay can be justified. Although the lengths of stay experienced by the
Company on CHAMPUS adult, child and adolescent beneficiaries have generally been
within these limits, the volume of CHAMPUS patients treated at the Company's
facilities has declined. As set forth in the above table, the amount of the
Company's patient revenues attributable to CHAMPUS have decreased from 7% in
fiscal 1994 to 3% in fiscal 1996.
Blue Cross plans reimburse based on charges or negotiated
rates in all areas in which the Company presently operates facilities, except
Alabama and Michigan. In many states in which the Company operates, Blue Cross
charges are approved through a rate-setting process and, therefore, Blue Cross
may reimburse the Company at a rate less than billed charges. Under cost-based
Blue Cross programs, such as those in Alabama and Michigan, direct reimbursement
to hospitals typically is lower than the hospital's charges, and patients are
not responsible for the difference between the amount reimbursed by Blue Cross
and the hospital's charges.
Marketing
The Company's marketing programs are aimed at referral sources
within a selected service area rather than to the general public and are
designed to increase awareness of a facility's programs and services. Referral
sources include psychiatrists, medical practitioners, managed mental health
organizations, courts and probationary officers, law enforcement agencies,
schools and clergy. Each facility's marketing staff, together with other
facility personnel, maintains direct contact with referral sources to support
their needs. These needs may be related to a particular treatment program, the
desires of the patient's family, hospital policies or the timely receipt of
10
accurate information. Each facility establishes admission targets for each
referral source and results are monitored and evaluated at the facility and by
the corporate staff.
Regulation
Operations of psychiatric hospitals are subject to extensive
federal, state and local government regulations, including periodic inspection
and licensing requirements. These regulations are primarily concerned with the
fitness and adequacy of the facility, equipment and personnel, standards of
medical care provided, the dispensing of drugs and the adequacy of fire
prevention measures and other building standards. In addition, the admission and
treatment of patients at the Company's hospitals are subject to certain state
regulation regarding involuntary admissions, patient rights and the
confidentiality of patient medical records.
The Company believes that federal and state regulation may
become more comprehensive and restrictive in the future, particularly with
respect to reimbursement rates. In addition, numerous healthcare reform
proposals have been and are expected to continue to be introduced in Congress.
The Company cannot predict the form or timing of any prospective legislation or
regulation, nor the effect which any legislation or regulation might have on its
revenues or profitability.
Capital expenditures for the construction of new facilities,
the addition of beds or the acquisition of facilities or medical equipment are
reviewable by governmental authorities in certain states in which approximately
half the Company's facilities are located. State certificate of need or similar
statutes generally provide that prior to the construction of new beds or
facilities or the introduction of a new service, a state agency must determine
that a need exists for those beds, facilities or services. A certificate of need
is generally issued for a specific maximum amount of expenditures, number of
beds or services to be provided and the holder is generally required to
implement the approved project within a specific time period. In most cases,
state certificate of need or similar statutes do not restrict the ability of the
Company or its competitors from offering new or expanded outpatient services.
Except for Arizona, Texas, Louisiana and Utah, all of the states in which the
Company operates facilities have adopted certificate of need or similar
statutes.
Federal law contains a number of provisions designed to ensure
that services rendered by health care facilities to Medicare and Medicaid
patients are medically necessary, meet professionally recognized standards and
are billed properly. These provisions include a requirement that admissions of
Medicare and Medicaid patients to hospitals must be reviewed in a timely manner
to determine the medical necessity of the admissions. In addition, the Peer
Review Improvement Act of 1982 ("Peer Review Act") provides that a hospital may
be required by the federal government to reimburse the government for the cost
of Medicare paid services determined by a peer review organization to have been
medically unnecessary. Each of the Company's hospitals has developed and
implemented a quality assurance program and implemented procedures for
utilization review and retrospective patient care evaluation to meet its
obligations under the Peer Review Act. As a result of legislation passed in
Texas in September 1993 and as described below, Peer Review Organizations
("PRO's") in that state began applying extremely restrictive interpretations to
11
the medical necessity of admissions and other services. Consequently,
significant amounts of the Texas facilities' charges in fiscal 1994 were denied
by such organizations until the facilities gained a full understanding of the
PRO's interpretations and modified their internal systems accordingly. Charges
denied in the Company's Texas facilities in fiscal 1996 and 1995 were less than
2% of these facilities' gross charges in these years.
The Medicare and Medicaid Anti-Fraud and Abuse Amendments (the
"Amendments") to the Social Security Act prohibit individuals or entities
participating in the Medicare or Medicaid programs from knowingly and willfully
offering, paying, soliciting, or receiving remuneration in order to induce
referrals for items or services reimbursed under those programs. The policy
objective of the Amendments is to ensure that the purpose for a referral is
quality of care and not monetary gain by the referring individual. The
Amendments' prohibitions only apply to Medicare and Medicaid patients and impose
felony criminal penalties and civil sanctions, as well as exclusion from the
Medicare and Medicaid programs. In 1989, CHAMPUS adopted regulations authorizing
it to exclude from the CHAMPUS program any provider who has committed fraud or
engaged in abusive practices. The term "abusive practices" is defined broadly to
include, among other things, the provision of medically unnecessary services,
the provision of care of inferior quality, and the failure to maintain adequate
financial or medical records. The Company believes that it is in compliance with
all aspects of these regulations.
The Company has entered into various types of agreements with
physicians and other health care providers in the ordinary course of operating
its facilities, many of which provide for payments to physicians or other health
care providers by the Company as compensation for services or other
consideration by the providers. In order to provide guidance to healthcare
providers with respect to the statute that makes certain remuneration
arrangements between hospitals and physicians and other healthcare providers
illegal, the United States Department of Health and Human Services (the
"Department") issued regulations in 1991 and 1993 outlining certain "safe
harbor" practices, which, although potentially capable of inducing prohibited
referrals of business, would not be subject to enforcement action under the
illegal remuneration statute. The practices covered by the regulations include,
among others, certain investment transactions, lease of space and equipment,
personal services and management contracts, sales of physician practices,
payments to employees and waivers of beneficiary deductibles and co-payments.
Although a relationship that fails to satisfy a safe harbor is not necessarily
illegal, that relationship will not be exempt from scrutiny under the
Amendments. The Company believes that its agreements and arrangements in this
area comply with the Amendments or are otherwise protected under the safe
harbors provided. However, there can be no assurance that (i) government
enforcement agencies will not assert that certain of these arrangements are in
violation of the illegal remuneration statute, or (ii) the statute will
ultimately be interpreted by the courts in a manner consistent with the
Company's practices.
Several states and the Federal government have been
investigating whether psychiatric hospitals have engaged in fraudulent practices
such as inflating bills for medications and services, billing for services never
rendered and admitting patients, especially children, who do not require
hospitalization. In 1991, the Texas Attorney General disclosed that several of
the Company's competitors doing business in Texas were under investigation for
12
fraudulent practices and a lawsuit seeking injunctive relief was filed against
one of those competitors. This led to the passage of legislation in Texas,
effective September 1, 1993, that placed severe restrictions on the marketing of
behavioral health care services. In general, the legislation prohibits certain
advertisement and solicitation techniques. Specifically, advertisements may not
promise a cure or guarantee treatment results that cannot be substantiated, and
mental health intervention and assessment services must be available and
properly credentialed before they are advertised. The legislation also requires
disclosure of any relationship between the treatment facility and its referral
sources and prohibits a referral service from holding itself out as a qualified
mental health referral service without complying with the legislation's
definition of such (which requires, among other things, compliance with
regulations regarding confidentiality, participation in and staffing of the
referral service and payments to referral sources). Violation of the legislation
may result in injunctive relief and civil penalties of up to $25,000 per
violation. In June 1993, the Company signed an agreement with the Texas Attorney
General whereby it agreed to continue to comply with Texas statutes regarding
marketing and operating standards applicable to all psychiatric hospital
companies.
Acquisitions, Sales and Lease Commitments
* Three Rivers Hospital. In November 1992, the Company purchased a 64-bed
hospital facility in Covington, Louisiana for $2,000,000. The facility, Three
Rivers Hospital, opened in January 1993. On June 30, 1995, the hospital was
closed due to reduced patient volume and projected negative operating margins,
and its operations were consolidated with the Company's facility located less
than five miles away. In May 1996, the Company signed a letter of intent to sell
Three Rivers Hospital to an independent party for approximately $2.2 million
(net of transaction costs). This sale is expected to close during October 1996.
See "Ownership Arrangements and Operating Agreements" and "Item 7. Management's
Discussion and Analysis of Financial Condition and Results of
Operations--Results of Operations."
* Harbor Oaks Hospital. In January 1993, the Company leased Harbor Oaks Hospital
in Fort Walton Beach, Florida to another health care provider for a period of
three years. The lease was extended to October 1996, at which time the Company
anticipates resuming operations at the facility.
* Cumberland Hospital. In August 1993, the Company sold its 175-bed Cumberland
Hospital in Fayetteville, North Carolina for approximately $12 million.
* Ramsay Managed Care, Inc. RHCI, through its former subsidiary RMCI, entered
the managed mental health business in October 1993 with the acquisition of
Florida Psychiatric Management, Inc. ("FPM") for a purchase price of $6.5
million. The managed care division expanded in June 1994 with the acquisition of
a Phoenix, Arizona-based managed mental health business and, in fiscal 1995,
through the award of contracts in Hawaii and West Virginia.
For a variety of reasons deemed by management to be reasonable at the time, on
April 24, 1995, the Company distributed, on a pro rata basis in the form of a
dividend, the common stock of RMCI held by the Company to the holders of record
13
on April 21, 1995 of the Company's common and preferred stock (the "RMCI
Distribution"). Subsequent to this distribution, RMCI became a separate,
publicly traded Company and ceased being a subsidiary of the Company.
On October 1, 1996, the Company and RMCI entered in a merger agreement pursuant
to which RMCI would merge into a wholly-owned subsidiary of the Company. See
"Recent Developments" above.
* Atlantic Shores Hospital. In February 1994, the Company sold its 50-bed
Atlantic Shores Hospital in Daytona Beach, Florida for approximately $4.8
million.
* Sale/Leaseback. In April 1995, the Company consummated a sale/leaseback
transaction whereby the Company sold the land, buildings and fixed equipment of
two of its inpatient facilities (Desert Vista Hospital in Mesa, Arizona and
Mission Vista Hospital in San Antonio, Texas) for $12.5 million and agreed to
lease this property back over a term of 15 years (with three successive renewal
options of five years each). The leases, which are treated as operating leases
under generally accepted accounting principles, currently require aggregate
annual minimum rentals of $1.58 million, payable monthly. Effective April 1 of
each year, the lease payments are subject to any upward adjustment (not to
exceed 3% annually) in the Consumer Price Index over the preceding 12 months.
* Sale of Land. In March and April 1995, the Company sold certain real estate
located in Flagstaff, Arizona and Houston, Texas. These properties were
initially acquired for development approximately 10 years ago and, as of the
date of sale, the properties had an aggregate book value of $1.15 million. Total
net proceeds from the sales of this real estate approximated $0.75 million.
* Benchmark Behavioral Hospital. Effective April 1995, the Company agreed to
lease an 80-bed facility near Salt Lake City, Utah from Charter Medical
Corporation for four years, with an option to renew for an additional three
years. The lease, which is treated as an operating lease under generally
accepted accounting principles, requires annual base rental payments of
$456,000, payable monthly. In addition, the lease provides for percentage rent
payments to the lessor equal to 2% of the net revenues of the facility, payable
quarterly.
Ownership Arrangements and Operating Agreements
One physician owns a 4% interest in the subsidiary which owns
the Company's Harbor Oaks Hospital. The Company may be required to repurchase,
and the minority shareholder may be required to sell, the minority interest at a
formula price dependent upon many factors, including the earnings per share of
the subsidiary which owns the subject hospital and the price/earnings multiple
of the Company, after a fixed period of time. Although the amount of the
Company's repurchase obligation cannot be precisely determined, the Company does
not believe that this obligation will require a material payment by the Company
in the foreseeable future.
In 1985, the Company and Bethany General Hospital in Bethany,
Oklahoma entered into a joint development project. The general hospital and the
Company hold a joint certificate of need by which they have converted 23
medical/surgical beds to psychiatric beds, and constructed a psychiatric
14
pavilion containing an additional 20 psychiatric beds. Pursuant to a joint
venture agreement entered into in December 1985, the Company began managing the
23 existing beds in December 1985 and completed construction of the 20-bed
pavilion in October 1986. Under the joint venture agreement, the Company is
obligated to provide working capital to operate the 43-bed psychiatric unit. The
Company may, at its option, continue to operate and manage the unit in three-
year terms through 2004. The Company is entitled to an annual management fee of
5% of the unit's gross revenues and 65% of the net profits or losses of the
unit. The agreement also provides that the Company will recover construction
costs amortized over 15 years and working capital advances from operating
revenue, unless the Company does not renew or breaches the agreement.
In November 1992, the Company formed a limited partnership to
operate Three Rivers Hospital, a 64-bed facility located in Covington,
Louisiana. Pursuant to the terms of the partnership agreement, the Company, as
general partner, had a 55% interest in the operations of the business and
limited partners maintained a 45% interest. A wholly-owned subsidiary of the
Company owns the facility and leased it to the partnership at $276,000 per
annum. Due to reduced patient volume and projected negative operating margins,
effective June 30, 1995, Three Rivers Hospital was closed. The Company has
signed a letter of intent and expects to sell Three Rivers Hospital to an
independent party in October 1996. See "Acquisitions, Sales and Lease
Commitments" above. Further, in July 1996, the Three Rivers Hospital Limited
Partnership was dissolved.
Insurance
The Company and its facilities are insured on a "claims-made"
basis for professional and general liability incidents in the aggregate amount
of $25,000,000, with a self-insured retention of $500,000 per claim. The
Company's self-insurance program also includes "tail" coverage for prior acts
retroactive to the date on which the Company could become responsible for such
acts. This prior occurrence coverage operates with the same self-insured
retention level. It is the Company's policy to record 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.
Employees
As of June 30, 1996, the Company employed approximately 1,625
full-time and 1,540 part-time employees in its facilities and contract services
operations, including approximately 400 full- time equivalent nurses. In
addition, the Company has a corporate headquarters staff of approximately 25,
which includes individuals who specialize in various areas of hospital
operations to assist facilities with particular management issues. The Company
considers its relationship with its employees to be good.
15
Executive Officers of the Registrant
Certain information with respect to the executive officers of the Company is set
forth below:
Position With the Company and Principal Occupations
Name of Executive Officer During the Past Five Years
Luis E. Lamela....... 46 Vice Chairman of the Board of the Company since
January 1996; President and CEO of CAC Medical
Centers, a division of United Health Care of
Florida, since May 1994; President and CEO of
Ramsay - HMO, Inc. from prior to 1991 to May
1994.
Bert G. Cibran....... 42 President and Chief Operating Officer of the Company
since August 1996; President, Summa Healthcare
Group, Inc. (a healthcare consulting firm) from
February 1996 through August 1996; President and
Chief Operating Officer for the Florida
operations of Physician Corporation of America
from February 1994 to February 1996; Executive
Vice President of Operations with Ramsay- HMO,
Inc. from 1991 to February 1994.
Reynold J. Jennings.. 50 Executive Vice President of the Company and
President of its Behavioral Hospital Division
since August 1996; President, President/Chief
Operating Officer or President/CEO of the Company
from September 1994 to August 1996; Executive
Vice President and Chief Operating Officer of the
Company from November 1993 until September 1994;
various management and administrative positions
with National Medical Enterprises, Inc. from
prior to 1991 to October 1993.
Carol C. Lang........ 49 Chief Financial Officer of the Company since August
1996; President of HealthLink Enterprises, Inc.
(a healthcare consulting firm) from prior to 1991
to August 1996.
Brent J. Bryson...... 47 Vice President of the Company since October 1994;
(including medical leave from January 1996
through August 1996); Senior Vice President,
Southern Region, with National Medical
Enterprises, Inc. from November 1991 to October
1994; Vice President with National Medical
Enterprises, Inc. from prior to 1991 to November
1991.
John A. Quinn........ 42 Vice President of the Company since September 1991;
various administrative and management positions
with Community Psychiatric Centers, Inc. from
prior to 1991 to September 1991.
Wallace E. Smith..... 53 Vice President of the Company since prior to 1991.
William N. Nyman..... 43 Vice President of the Company since August 1993.
Regional Controller of the Company from prior to
1991 to July 1993.
Daniel A. Sims....... 36 Corporate Controller of the Company since December
1993; Chief Financial Officer of a 175-bed
medical/surgical hospital from prior to 1991 to
December 1993.
16
Item 2. Properties.
The following table provides information concerning the 15
inpatient facilities owned and operated or leased and operated by the Company at
June 30, 1996.
Total
Date Opened Licensed
Hospital (7) or Acquired Beds
Havenwyck Hospital
Auburn Hills, MI ......................... November 1983 166
Brynn Marr Hospital
Jacksonville, NC ......................... December 1983 76
Hill Crest Hospital
Birmingham, AL ........................... January 1984 130
Heartland Hospital
Nevada, MO ............................... April 1984 152
Greenbrier Hospital
Covington, LA ............................ October 1984 67
Coastal Carolina Hospital
Conway, SC ............................... November 1984 98
Bayou Oaks Hospital
Houma, LA(1) ............................. November 1985 98
The Bethany Pavilion
Bethany, OK(2) ........................... December 1985 43
Meadowlake Hospital
Enid, OK ................................. February 1986 50
Benchmark Regional Hospital
Woods Cross, UT .......................... August 1986 76
Desert Vista Hospital
Mesa, AZ (6) ............................. February 1987 100
Chestnut Ridge Hospital
Morgantown, WV(3) ........................ November 1987 70
The Haven Hospital
DeSoto, TX ............................... April 1990 102
Mission Vista Hospital
San Antonio, TX (6) ...................... November 1991 61
Benchmark Behavioral Hospital
Midvale, UT (4) .......................... June 1995 80
Total (5) ........................... 1,369
(1) The building in which the Company's facility in Houma, Louisiana is located
is leased for an initial period ending January 31, 2005 (with an option to
renew for 20 years).
(2) The Bethany, Oklahoma facility is operated as a joint venture in which the
Company operates and manages the behavioral health services of Bethany
General Hospital. See "Item 1. Business --Ownership Arrangements and
Operating Agreements."
(3) The Company has entered into a 50-year ground lease for the property on
which its 70-bed facility in Morgantown, West Virginia is located.
(4) The building in which the Company's facility in Midvale, Utah is located is
leased for an initial period ending June 24, 1999 (with an option to renew
for an additional three years). See "Item 1. Business-Acquisitions, Sales
and Lease Commitments."
(5) Excludes Harbor Oaks Hospital and Three Rivers Hospital. Harbor Oaks
Hospital, a 98-bed facility in Fort Walton Beach, Florida is owned by the
Company but, as of June 30, 1996, was leased to another health care
provider. Three Rivers Hospital, a 64-bed facility located in Covington,
Louisiana, was closed on June 30, 1995. See "Item 1. Business --
Acquisitions, Sales and Lease Commitments and Ownership Arrangements and
Operating Agreements."
(6) In April 1995, the Company sold and immediately leased back the land,
buildings and fixed equipment associated with these facilities. The leases
have an initial term of 15 years and three successive renewal options of
five years each. See "Item 1. Business -- Acquisitions, Sales and Lease
Commitments."
(7) The Company believes that its facilities are well maintained and are of
adequate size for present needs.
17
In March 1995, the Financial Accounting Standards Board (FASB)
issued Statement Number 121, "Accounting for the Impairment of Long-Lived Assets
and for Long-Lived Assets to be Disposed of" (the "Statement"). As required by
the Statement, the Company periodically reviews the long-lived assets (land,
buildings, fixed equipment and related cost in excess of net asset value of
purchased businesses) of each of its inpatient facilities to determine if the
carrying value of these assets is recoverable, based on the future cash flows
expected from the assets. Based on this review, the Company determined that the
carrying value of certain long-lived assets was impaired (within the meaning of
the Statement) at June 30, 1996 and 1995. The amount of the impairment,
calculated as the excess of carrying value of the long-lived assets over the
discounted future cash flows expected from the assets, totalled approximately $4
million and $20 million at June 30, 1996 and 1995, respectively. See "Item 7.
Management's Discussion and Analysis of Financial Condition and Results of
Operations." and "Item 8. Financial Statements and Supplementary Data."
In connection with the Company's decision to relocate its
corporate headquarters from New Orleans, Louisiana to Coral Gables, Florida, the
Company has entered into an office lease in Coral Gables for a term of three
years ending in August 1999. Upon relocation, the Company's lease in New Orleans
will be terminated.
Item 3. Legal Proceedings.
The Company is subject to claims and suits arising in the
ordinary course of business. In addition, during fiscal 1996, the State of
Louisiana requested repayment of disproportionate share payments received by the
Company in fiscal years 1995 and 1994 totalling approximately $5,000,000. On the
basis of discussions to date between the Company and the State, the Company
believes that this matter may be settled for an amount significantly less than
the State's initial request. See "Item 7. Management's Discussion and Analysis
of Financial Condition and Results of Operations -- Results of Operations."
The Company has established reserves at June 30, 1996 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. See "Item 8. Financial Statements and Supplementary Data."
Item 4. Submission of Matters to a Vote of Security Holders.
Not applicable.
18
PART II
Item 5. Market For The Registrant's Common Equity and Related
Stockholder Matters.
The Company's Common Stock is traded in the over-the-counter
market and is quoted on the NASDAQ National Market System under the symbol RHCI.
On September 27, 1996, there were 660 holders of record of the Company's Common
Stock. No cash dividends have been declared on the Common Stock since the
Company was organized. The Company's credit documents governing its credit
facilities include provisions which prohibit the payment of dividends unless the
sum of (i) all dividends, redemptions and all other distributions in respect of
its capital stock and (ii) all restricted investments (as defined) during the
applicable fiscal year would not exceed an amount equal to 50% of the
consolidated net income of the Company for the immediately preceding fiscal year
and provided that, at the time of such dividend and after giving effect thereto,
certain specified financial ratio covenants would not be violated and no other
default or event of default would occur. Further, in connection with waivers
received from the Company's lenders as of June 30, 1996, the Company agreed not
to pay future cash dividends in respect of its Class B Preferred Stock, Series
C. Prior to this time, the Company's credit facilities permitted the payment of
the full amount of regular fixed dividends on the Class B Preferred Stock,
Series C, provided that such dividends did not exceed $387,200 in each 12-month
period and provided that no event of default existed or occurred as a result of
the payment.
The following table sets forth the range of high and low
closing sales prices per share of the Company's Common Stock for each of the
quarters during the years ended June 30, 1996 and 1995, as reported on the
NASDAQ National Market System:
High Low
Year ended June 30, 1996
First Quarter ...................... $4 5/8 $3 3/8
Second Quarter ..................... 3 3/4 2 1/2
Third Quarter ...................... 3 15/16 2 7/8
Fourth Quarter ..................... 4 3/8 2 7/8
Year ended June 30, 1995
First Quarter ...................... $8 1/8 $6
Second Quarter ..................... 8 1/8 6 1/4
Third Quarter ...................... 7 7/8 5 3/4
Fourth Quarter * ................... 7 1/2 3 5/8
On October 2, 1996, the closing sales price of the Company's
Common Stock was $2 3/8 per share.
* The distribution of Ramsay Managed Care, Inc. occurred
during the fourth quarter of fiscal 1995. See "Item 1. Business--Acquisitions,
Sales and Lease Commitments".
19
Item 6. Selected Financial Data.
The following table sets forth selected consolidated financial
information for the periods shown and is qualified by reference to, and should
be read in conjunction with, the Consolidated Financial Statements and Notes
thereto and "Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations" appearing elsewhere in this Annual Report on Form
10-K.
Year Ended June 30
1996 1995 1994 1993 1992
(in thousands, except per share data)
Statement of Operations
Data:
Net revenues ......... $ 117,423 $136,418 $137,002 $136,354 $136,946
Salaries, wages and
benefits .......... 66,259 72,061 64,805 63,810 60,626
Other operating
expenses .......... 42,387 44,741 42,907 40,454 40,161
Provision for
doubtful accounts . 5,805 5,086 5,846 8,148 8,628
Depreciation and
amortization ...... 5,490 7,290 6,836 6,605 5,439
Interest and other
financing charges . 6,892 8,347 8,906 9,494 10,488
Losses related to
asset sales and
closed businesses . 4,473 6,431 802 7,524 --
Asset impairment
charges ........... 5,485 21,815 -- -- --
Restructuring and
other charges ..... -- -- -- 1,367 2,283
136,791 165,771 130,102 137,402 127,625
Income (loss) before
minority interests,
income taxes,
extraordinary items
and cumulative
effect of accounting
change ............ (19,368) (29,353) 6,900 (1,048) 9,321
Minority interests ... -- 887 4,824 1,126 --
Income (loss) before
income taxes,
extraordinary items
and cumulative effect
of accounting change (19,368) (30,240) 2,076 (2,174) 9,321
Provision (benefit) for
income taxes ...... (2,887) (13,195) 599 159 3,974
Income (loss) before
extraordinary items
and cumulative effect
of accounting change (16,481) (17,045) 1,477 (2,333) 5,347
Extraordinary items:
Loss from early
extinguishment of debt,
net of income tax benefit -- (257) (155) (1,580) (366)
Income tax benefit from
net operating loss
carryovers ........ -- -- -- -- 953
Cumulative effect of change
in accounting for
income taxes ....... -- -- -- 2,353 --
Net income (loss) .... $ (16,481)$(17,302) 1,322 $(1,560) $ 5,934
Primary earnings per share:
Income (loss) per common
and dilutive common
equivalent share before
extraordinary items and
cumulative effect of
accounting change .. $ (2.12) $ (2.25) $ 0.15 $ (0.29) $ 0.68
Net income (loss) ... $ (2.12) $ (2.28) $ 0.14 $ (0.20) $ 0.75
Weighted average shares
outstanding(1) ..... 7,929 7,743 9,641 7,932 7,886
(1) Includes common and dilutive common equivalent shares outstanding.
June 30
1996 1995 1994 1993 1992
(in thousands)
Balance Sheet Data:
Working capital $ 11,715 $ 24,098 $ 21,148 $ 23,811 $ 26,718
Total assets 132,758 139,236 183,168 190,370 194,357
Long-term debt 44,664 55,568 67,707 77,429 84,879
Class B preferred
stock, Series 1987 --- --- --- --- 2,500
Stockholders' equity 46,053 61,779 80,468 79,997 76,068
20
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations.
RESULTS OF OPERATIONS
Patient revenues of the Company's inpatient facilities are
affected by changes in the rates the Company charges, changes in reimbursement
rates by third-party payors, the volume of patients treated and changes in the
mix of payors and patient types. The Company's facilities provide services to
patients requiring intensive inpatient care, less intensive residential
treatment care and outpatient treatment. Also, at four of the Company's
facilities, medical subacute services are provided. The reimbursement rates for
intensive inpatient care are generally greater than the rates paid for
residential treatment care. However, the average length of stay for patients in
residential treatment programs is significantly greater than that for patients
in intensive inpatient programs.
Generally, charges for each facility's services are reimbursed
under third-party reimbursement programs at the amount billed or at rates which
are less than the facility's charges. These lower rates can be based on a
negotiated per diem amount or based on the facility's costs as audited or
projected by the third-party payors. When operating revenues (charges) per
patient day are higher than the negotiated per diem rate or the facility's
costs, the difference is recorded as a reduction of gross revenues. Bad debts
consist primarily of commercial and self-pay accounts receivable deemed
uncollectible.
The Company records amounts due to or from third-party
reimbursement sources based on its best estimates of amounts to be ultimately
received or paid under cost reports filed with appropriate intermediaries. The
final determination of amounts earned under reimbursement programs is subject to
review and audit by these intermediaries. Differences between amounts recorded
as estimated settlements and the audited amounts are reflected as adjustments to
the Company's net revenues in the period in which the final determination is
made. During the years ended June 30, 1995, and 1994, the Company recorded
contractual adjustment benefits related to intermediary audits of prior year
cost reports of approximately $1,000,000 and $1,400,000, respectively. During
the year ended June 30, 1996, the Company recorded contractual adjustment
expenses related to intermediary audits of prior year cost reports of
approximately $1,900,000. As a result of this negative experience, the Company
recorded reserves totalling $3,500,000 in its June 30, 1996 financial statements
related to possible future adjustments of its cost report estimates by
intermediaries. Management believes that adequate provision has been made for
any adjustments that may result from future intermediary reviews and audits.
Several years ago, the Federal Government established a
funding mechanism, known as disproportionate share, which was meant to
adequately reimburse facilities serving a disproportionately high volume of
Medicaid patients, relative to other providers. Disproportionate share funding
was established under Title XIX of the Social Security Act, administered at the
State level and approved/overseen by the Health Care Financing Administration,
since Medicaid services are jointly funded by each State as well as the Federal
Government. In fiscal years 1995 and 1994, the Company received significant
disproportionate share payments from the Louisiana Medicaid program. Statutory
changes virtually eliminated the disproportionate share funding mechanism in
21
Louisiana and, for the year ended June 30 1996, disproportionate share payments
received by the Company's Louisiana facilities were not material.
The impact of Louisiana disproportionate share payments on net
revenues and income from continuing operations in fiscal 1995 was approximately
$5,600,000 and $3,700,000, respectively, and the impact of Louisiana
disproportionate share payments on net revenues and income from continuing
operations in fiscal 1994 was approximately $14,300,000 and $9,300,000,
respectively. The majority of Louisiana disproportionate share payments was
received at the Company's Three Rivers Hospital facility, which treated
primarily Medicaid-eligible adolescents diagnosed with various behavioral
disorders. This facility was further adversely impacted by the State of
Louisiana's application of significantly more restrictive admission criteria in
December 1994 for adolescents seeking inpatient psychiatric treatment in the
State. Due to a negative operating margin in the fourth quarter of fiscal 1995
and a significant decrease in admissions since December 1994, on June 30, 1995,
the Company closed Three Rivers Hospital and consolidated its operations with
the Company's Greenbrier Hospital facility located less than five miles away.
During fiscal 1996, the State of Louisiana requested repayment
of disproportionate share payments received by two of the Company's Louisiana
facilities in fiscal years 1995 and 1994 totalling approximately $5,000,000. The
repayment requests related to a) alleged overpayments made to Three Rivers
Hospital because the State believed Three Rivers' actual annual inpatient volume
was less than its projection of annual inpatient volume made at the beginning of
its 1994 cost reporting year and b) alleged improper teaching hospital payments
made to Three Rivers Hospital and Bayou Oaks Hospital because the State believed
these facilities were not qualifying teaching hospitals at the time these
payments were made. The Company believes that certain of the calculations which
support the State's calculation of annual inpatient volume in 1994 are in error
and that other relevant factors affecting the State's calculation have not been
considered. Further, the Company believes that, based on its understanding of
the rules and regulations in place at the time the teaching hospital payments
were made, payments received as a result of the teaching classification were
appropriate.
On the basis of discussions to date between the Company and
the State, the Company believes that this matter may be settled for an amount
significantly less than the State's initial requests. Any settlement of this
matter will be contingent upon the execution of settlement documentation, the
terms of which have not been agreed upon. Further, there can be no assurance
that the Company and the State will agree on a settlement amount or the terms
and conditions of settlement documentation. The Company intends to vigorously
contest any position by the State of Louisiana which the Company considers
adverse and believes that adequate provision has been made at June 30, 1996 for
the estimated amount which might be recovered from the Company as a result of
this matter. See "Item 8. Financial Statements and Supplementary Data."
The following table sets forth, for the periods indicated,
certain items of the Company's consolidated statements of operations as a
percentage of the Company's net revenues. For comparison purposes, the prior
year percentages exclude the operations of RMCI which, as discussed elsewhere,
was distributed in the form of a dividend to the Company's stockholders in April
1995, and the amount of Louisiana disproportionate share payments recorded as
net revenues in 1995 and 1994. The discussion following this table quantifies
the significant fluctuations in amounts reported in the Company's consolidated
statements of operations between periods.
22
As a Percentage of Net Revenues
Year Ended June 30,
1996 1995 1994
Net revenues ........................................ 100.0% 100.0% 100.0%
Salaries, wages and benefits ......................... 56.4 56.4 54.1
Other operating expenses ............................. 36.1 32.6 33.8
Provision for doubtful accounts ...................... 4.9 4.3 5.0
Depreciation and amortization ........................ 4.7 5.4 5.5
Interest and other financing charges ................. 5.9 6.9 7.5
Losses related to asset sales and closed businesses .. 3.8 5.5 0.7
Asset impairment charges ............................. 4.7 18.5 --
Loss before minority interests,
income taxes and extraordinary item ................(16.5)% (29.6)% (6.6)%
1996 Compared to 1995
The following are the significant changes in the Company's
operations between fiscal 1996 and 1995. These changes affect the comparison of
revenues and expenses of the Company between years as discussed below.
* The RMCI Distribution on April 24, 1995.
* Virtual elimination of Louisiana disproportionate share
payments to the Company, as discussed above.
* The closure of Three Rivers Hospital on June 30, 1995.
* Commencement of operations in April 1995 at an 80-bed leased
facility near Salt Lake City, Utah (Benchmark South).
* The closure of several day treatment centers and
outpatient clinics during fiscal 1996 and 1995 due to
negative operating margins.
* Significant increase in occupancy at the Company's subacute
units, as well as an expansion of the Company's contract
services division.
* Significant asset impairment charges and losses related to
asset sales and closed businesses in fiscal 1996 and 1995.
________________________
Net revenues decreased from $136.4 million in 1995 to $117.4
million in 1996 primarily because $12.9 million of revenues related to RMCI were
included in the prior year total and because same facility net inpatient
revenues decreased $7.3 million between years. During fiscal 1996, the Company
replaced approximately $6.4 million in patient revenues related to Three Rivers
Hospital and $5.5 million in disproportionate share revenues recorded in fiscal
23
1995 with a $4.7 million increase in revenues from Benchmark South, a $6.6
million increase in subacute revenues and a $1.6 million increase in contract
services revenues. Net outpatient revenues remained stable between 1996 and
1995, increasing $0.3 million, or 2%.
Same facility net inpatient revenues decreased $7.3 million
between periods primarily due to the impact of intermediary audits of prior year
cost reports, which reduced same facility net inpatient revenues by $5.4 million
in 1996 (including the establishment of a $3.5 million reserve for possible
future adjustments) and increased same facility net inpatient revenues in 1995
by $1 million. In addition, the Company's same facility net inpatient revenue
per patient day decreased 8% between years due to the growth in residential
treatment services, which are less intensive and generally reimbursed at rates
which are less than the rates received for acute psychiatric inpatient services.
During fiscal 1996, same facility residential treatment patient days comprised
40% of same facility patient days, compared to 31% in fiscal 1995. Further, in
1996 and 1995, the Company's residential treatment net revenue per patient day
was approximately $200 less than its acute psychiatric net revenue per patient
day (excluding disproportionate share revenues).
Total salaries, wages and benefits in fiscal 1996 were $66.3
million, compared to $72.1 million in fiscal 1995. The material changes in
salaries, wages and benefits included (a) a $1.1 million increase in same
facility salaries, wages and benefits, (b) a $4.8 million decrease related to
the closure of the Three Rivers facility, (c) a $2.6 million increase related to
the opening of Benchmark South, (d) an increase of $1.4 million related to
increased volume in the Company's subacute units and e) salaries, wages and
benefits of $5.5 million in fiscal 1995 related to RMCI.
Other operating expenses in fiscal 1996 were $42.4 million,
compared to $44.7 million in fiscal 1995. The material changes in other
operating expenses between periods included (a) a $3.0 million decrease related
to the closure of the Three Rivers facility, (b) a $2.5 million increase related
to the opening of Benchmark South, (c) an increase of $2.4 million related to
increased volume in the Company's subacute units, and (d) other operating
expenses in fiscal 1995 related to RMCI of $6.2 million. The Company's same
facility other operating expenses remained stable between periods, increasing
$0.3 million, or 1%. And, during 1996, the Company increased its liability for
self-insurance claims and incurred certain other expenses which were not present
in fiscal 1995.
The provision for doubtful accounts increased from $5.1
million in fiscal 1995 to $5.8 million in fiscal 1996. This increase primarily
related to the same facilities, which recorded additional provisions on per-diem
based residential treatment business in 1996. These provisions were necessary as
doubt arose with respect to the ability of certain payors to repay the Company
for services rendered in fiscal 1996.
Depreciation and amortization in fiscal 1996 totalled $5.5
million, compared to $7.3 million in fiscal 1995. Depreciation expense decreased
by $0.4 million on two facilities which were sold and leased back in April 1995.
Also, in June 1995, the book values of four facilities were considered impaired
pursuant to the provisions of FASB Statement Number 121, which reduced
depreciation expense in fiscal 1996 by an additional $0.6 million. Finally,
depreciation and amortization expense in fiscal 1995 related to RMCI totalled
$0.9 million.
24
Interest expense decreased from $8.3 million in 1995 to $6.9
million in 1996. This decrease related to debt reductions made in fiscal 1995 on
the Company's senior and subordinated secured notes (including a $7.5 million
prepayment in April 1995), which reduced interest expense in 1996 by $1.2
million. Also, interest expense in fiscal 1995 related to RMCI totalled $0.2
million.
Primarily in the fourth quarter of fiscal 1996, the Company
recorded losses totalling approximately $4.5 million related to additional asset
write-downs, cost report settlements and other adjustments related to businesses
which closed at various times prior to fiscal 1996, a reserve for
disproportionate share payments which the State of Louisiana has contended were
improperly paid to two of the Company's Louisiana facilities in fiscal 1995 and
1994 (see "Results of Operations" above) and lease commitments and other costs
incurred in connection with the Company's decision to relocate its corporate
headquarters. In fiscal 1995, the Company recorded losses totalling
approximately $6.4 million related to a sale/leaseback transaction, the sale of
real estate, the closure of Three Rivers Hospital, the closure of other
outpatient operations and the abandonment of certain development projects. See
"1995 Compared to 1994" below.
In March 1995, the Financial Accounting Standards Board (FASB)
issued Statement Number 121, "Accounting for the Impairment of Long-Lived Assets
and for Long-Lived Assets to be Disposed of " (the "Statement"). The Statement
requires companies to compare the recorded values of long-lived assets (defined
as land, buildings, fixed equipment and related cost in excess of net asset
value of purchased businesses) against the expected future cash flows to be
generated by these assets. Pursuant to the principles of measurement contained
in the Statement and the Company's expectations, the Company recorded asset
impairment charges in its 1996 and 1995 statement of operations totalling
approximately $4 million and $20 million, respectively.
In June 1996 and 1995, the Company recorded additional asset
impairment charges related to its investment in other healthcare enterprises of
approximately $1.5 million, based on an assessment of the future cash flows
expected to be realized by the Company from these businesses.
Minority interests in 1995 primarily reflects the limited
partners' share of net income of Three Rivers Hospital prior to its closure on
June 30, 1995.
The Company recorded a $2.9 million benefit for income taxes
in fiscal year 1996 compared to a $13.2 million benefit for income taxes in
fiscal year 1995. The income tax benefit recorded in fiscal year 1996 was
recorded at an effective tax rate significantly less than the statutory tax rate
due to a deferred tax valuation allowance of $4.4 million at June 30, 1996.
1995 Compared to 1994
The following are the significant changes in the Company's
operations between 1995 and 1994. These changes affect the comparison of
revenues and expenses of the Company between years as discussed below.
25
* In October 1993, the Company, through its subsidiary
RMCI, entered the managed mental health business
through its acquisition of FPM. This business was
expanded in June 1994 with the acquisition of an
Arizona-based managed mental health business and, in
succeeding months, with the execution of additional
contracts for the provision of managed mental health
care. The revenues and expenses of RMCI and its
subsidiaries were included in the Company's revenues
and expenses from October 1993 to April 24, 1995,
when the RMCI Distribution was effected.
* Louisiana disproportionate share payments received by
the Company during fiscal 1995 were approximately
$8.7 million less than the amount received in fiscal
1994.
* In February 1994, the Company sold its Atlantic
Shores facility in Daytona Beach, Florida. In
addition, the Company closed several day treatment
centers and outpatient clinics during 1995 and 1994
due to negative operating margins. The sale and these
closures are referred to in this section as the
"sold/closed facilities".
* The Company opened four subacute units in late fiscal
1994/early fiscal 1995.
* The Company expanded its contract services division
during fiscal 1995.
* Significant asset impairment charges and losses
related to asset sales and closed businesses in
fiscal 1995.
__________________________
Net revenues for fiscal 1995 were $136.4 million, compared to
$137.0 million in fiscal 1994. The material changes in net revenues consisted of
(a) a $12.6 million decrease (11%) in same facility net inpatient revenues, (b)
a $2.9 million increase (21%) in same facility net outpatient revenues, (c) a
$4.5 million increase in net revenues attributable to the Company's subacute
operations, (d) a $7.1 million increase (from $5.8 million to $12.9 million) in
net revenues related to RMCI, (e) a $0.6 million increase (from $0.5 million to
$1.1 million) in revenues associated with contract services and (f) a $3.1
million decrease in net patient revenues related to the sold/closed facilities
(excluding the Three Rivers facility which, for purposes of comparing 1995 to
1994, is included in the same facility totals).
Same facility net inpatient revenues decreased $12.6 million
between years. Of this amount, $8.7 million was related to a reduction in
disproportionate share payments to Three Rivers Hospital and Bayou Oaks
Hospital. Excluding the change in disproportionate share payments between
periods, same facility net inpatient revenues decreased approximately $3.9
million. Of this amount, $3.6 million is attributable to the decline in
admissions at the Three Rivers facility, which decline resulted from the State
of Louisiana's application of significantly more restrictive admission criteria
to facilities in the State treating the behavioral disorders of adolescents. The
26
inpatient census at this facility decreased from an average of 65 patients in
fiscal 1994 to 36 patients in fiscal 1995, with an average of 20 patients
subsequent to December 1, 1994 when the new admission rules became effective. As
stated earlier, on June 30, 1995, the Company closed Three Rivers Hospital and
consolidated the operations of this facility with its Greenbrier facility
located less than five miles away.
Excluding the above factors, net inpatient revenues related to
all other inpatient facilities were stable and patient days and admissions
related to these facilities increased 4.5% and 10%, respectively, between
periods. The growth rate in admissions exceeded that in patient days due to an
overall decline in the inpatient average length of stay from 17.6 days in 1994
to 15.7 days in 1995. In addition, these facilities experienced a decrease in
net inpatient revenue per patient day due to a continued shift in patient mix
from charge-based payors to cost-based and negotiated per-diem rate payors, as
well as an increase in same facility residential treatment days as a percentage
of total same facility patient days. Net revenue per patient day on cost-based
and negotiated per-diem rate payors is generally less than that for charge-based
payors.
Same facility net outpatient revenues totalled $17.0 million
in 1995 compared to $14.1 million in 1994. This increase is primarily due to an
expansion of partial hospitalization day services because of an increased market
focus by facility administrators.
Total salaries, wages and benefits in fiscal 1995 were $72.1
million, compared to $64.8 million in fiscal 1994. The material changes in this
expense item consisted of (a) a $1.7 million (or 3.0%) increase in same facility
salaries, wages and benefits, (b) an increase in salaries, wages and benefits of
$2.1 million attributable to the Company's subacute operations, (c) a $3.9
million increase (from $1.6 million to $5.5 million) in salaries, wages and
benefits related to RMCI, (d) a $0.7 million increase in salaries, wages and
benefits associated with contract services and (e) a $1.2 million decrease in
salaries, wages and benefits attributable to the sold/closed facilities.
Other operating expenses in fiscal 1995 were $44.7 million,
compared to $42.9 million in fiscal 1994. The material changes in other
operating expenses consisted of (a) a $2.3 million decrease (6%) in same
facility other operating expenses, (b) an increase in other operating expenses
of $3.4 million attributable to the subacute operations, (c) a $2.8 million
increase (from $3.4 million to $6.2 million) in other operating expenses related
to RMCI, (d) a $0.2 million increase in other operating expenses associated with
contract services and (e) a decrease of $2.2 million in other operating expenses
attributable to the sold/closed facilities. The decrease in same facility other
operating expenses was due to focused cost-cutting initiatives within these
facilities during the year.
The provision for doubtful accounts in fiscal 1995 was $5.1
million, compared to $5.8 million in fiscal 1994. A $1.2 million decrease in
same facility provision for doubtful accounts (from $5.7 million in fiscal 1994
to $4.5 million in fiscal 1995) was offset by increases in the provision for
doubtful accounts associated with subacute and contract services of $0.1 million
and $0.3 million, respectively. The decrease in same facility provision for
doubtful accounts was primarily the result of a continued shift in patient mix
and the corresponding shift from charge-based payors (which requires a larger
amount to be paid by the patient) to cost-based and negotiated commercial
insurance per-diem rate payors.
27
Depreciation and amortization in fiscal 1995 totalled $7.3
million, compared to $6.8 million in fiscal 1994. The overall change in this
expense item was primarily due to (a) a $0.5 million increase in depreciation
and amortization related to subacute operations, (b) a $0.5 million increase in
depreciation and amortization related to RMCI and (c) a $0.5 million decrease in
depreciation and amortization attributable to the sold/closed facilities.
Interest expense decreased from $8.9 million in 1994 to $8.3
million in 1995. Debt levels were reduced between periods through scheduled
principal payments of (a) $5.65 million on the Company's senior secured notes,
(b) $0.5 million on the Company's subordinated secured notes and (c) $0.8
million on the Company's variable rate demand revenue bonds. In addition, on May
1, 1995, the Company prepaid $7.5 million of principal on the senior secured
notes and, in connection with the sale of Atlantic Shores Hospital in February
1994, the variable rate demand revenue bonds associated with that facility,
totalling $4.3 million, were redeemed. The reduction in interest as a result of
these principal payments was offset by an increase in interest rates on the
variable rate demand revenue bonds, interest on a working capital facility
drawing and interest incurred in fiscal 1995 prior to the RMCI Distribution on
debt incurred in connection with RMCI acquisitions made during the second half
of fiscal 1994.
In fiscal 1995, the Company recorded losses associated with
asset sales and closed businesses of approximately $6.4 million. This amount is
comprised of the following significant items:
1. Sale/Leaseback Transaction: On April 12, 1995, the Company
consummated a sale/leaseback transaction whereby the Company sold the land,
buildings and fixed equipment of two of its inpatient facilities for $12.5
million and agreed to lease these properties back over a term of 15 years (with
three successive renewal options of five years each). The leases, which are
treated as operating leases under generally accepted accounting principles,
require aggregate annual minimum rental payments of approximately $1.5 million,
payable monthly. Each April 1, the lease payments are subject to any upward
adjustment (not to exceed 3% annually) to the Consumer Price Index over the
preceding 12 months.
Net sale proceeds associated with this transaction totalled
$12.1 million which, when compared to the net book value of assets sold of $15.7
million, resulted in a loss of $3.6 million. On May 1, 1995, the Company
utilized a portion of the proceeds from the above transaction and prepaid $7.5
million of principal due on the senior secured notes as follows: $3.5 million
due on September 30, 1995, $3.5 million due on March 31, 1996 and $0.5 million
due on September 30, 1996. In connection with this prepayment, the Company wrote
down a proportionate amount of unamortized loan costs related to the senior
secured notes, totalling $229,000, and incurred a yield maintenance charge from
the holders of the senior secured notes, totalling $234,000. These amounts are
recorded as a loss from early extinguishment of debt, net of applicable income
taxes, in the 1995 statement of operations.
2. Real Estate Sales: In March and April 1995, the Company
sold certain real estate located in Flagstaff, Arizona and Houston, Texas,
respectively. These properties were acquired for development approximately 10
28
years ago and had an aggregate book value of $1.15 million. Net proceeds from
the sale of this real estate totalled approximately $0.75 million, resulting in
a loss of $0.4 million.
3. Closure of Day Treatment and Other Outpatient Operations:
During 1995, the Company closed its remaining day treatment centers as well as
certain outpatient clinics which were producing negative operating margins. In
addition, the Company recorded cost report settlements and asset write-downs
totalling $380,000 and $190,000, respectively, which became evident in 1995
subsequent to these closures and subsequent to the closure of day treatment
centers in late fiscal 1994. Finally, the Company sold an outpatient
rehabilitation clinic in San Antonio, Texas in June 1995. The total losses
incurred related to these events was approximately $1.3 million.
4. Closure of Three Rivers Hospital: The Company recorded
certain losses, totalling approximately $0.2 million, resulting from its
decision to close Three Rivers Hospital on June 30, 1995 and consolidate the
operations of this facility with its Greenbrier facility.
5. Development Projects: The Company pursued several
development opportunities during 1995 including the potential acquisition of a
competitor, the development of rural health clinics and the potential
acquisition of a contract management company. These efforts were abandoned or
otherwise terminated during the year resulting in a charge against earnings of
approximately $0.8 million.
In the fourth quarter of fiscal 1994, the Company decided to
terminate its development activities related to its day treatment division and
to close certain of these centers due to the poor operating performance of this
division. In addition, the Company also decided to close four outpatient clinics
related to its Heartland Hospital facility during this quarter. Finally, certain
adjustments were made which resulted in gain recognition on the sale of Atlantic
Shores Hospital, which was sold in February 1994. The total net losses related
to these closures and sale in fiscal 1994 was $0.8 million.
In the fourth quarter of fiscal 1995, the Company elected to
adopt FASB Statement Number 121 and, after applying the principles of
measurement contained in the Statement and the Company's expectations, recorded
a charge against earnings, before taxes, of $20.3 million. This amount is
reflected as an asset impairment charge in the 1995 consolidated statement of
operations.
In June 1995, the Company recorded an additional asset
impairment charge related to its investment in a healthcare enterprise in
Germany of approximately $1.5 million, based on a reassessment of the future
expected cash flows to be realized by the Company from this business.
Minority interests primarily reflects the limited partner's
share of net income of Three Rivers Hospital prior to its closure on June 30,
1995.
29
Impact of Inflation
The psychiatric hospital industry is labor intensive, and
wages and related expenses increase in inflationary periods. Additionally,
suppliers generally seek to pass along rising costs to the Company in the form
of higher prices. The Company monitors the operations of its facilities to
mitigate the effect of inflation and increases in the costs of health care. To
the extent possible, the Company seeks to offset increased costs through
increased rates, new programs, and operating efficiencies. However,
reimbursement arrangements may hinder the Company's ability to realize the full
effect of rate increases. To date, inflation has not had a significant impact on
operations.
FINANCIAL CONDITION
The Company records amounts due to or from third-party
contractual agencies (Medicare, Medicaid and Blue Cross) based on its best
estimate, using the principles of cost reimbursement, of amounts to be
ultimately received or paid under current and prior years' cost reports filed
(or to be filed) with the appropriate intermediaries. Ultimate settlements and
other lump-sum adjustments due from and paid to these intermediaries occur at
various times during the fiscal year. At June 30, 1996, amounts due from
Medicare, Medicaid and Blue Cross totalled $3.6 million, $2.4 million and $0.5
million, respectively. Also, at June 30, 1996, amounts due to Medicare, Medicaid
and Blue Cross totalled $6.3 million, $1.0 million and $1.1 million,
respectively. See "Results of Operations" above.
At June 30, 1996, net cash advances made by the Company to or
on behalf of RMCI totalled $8.2 million. Of this amount, $6 million primarily
related to the funding of certain RMCI acquisitions and is represented by an
unsecured, interest-bearing (8%), subordinated promissory note due from RMCI and
issued on October 25, 1994. The remaining amount includes $0.36 million of
accrued interest on the promissory note since October 1, 1995 and $1.85 million
of additional amounts paid by RHCI on behalf of RMCI and charges by RHCI to RMCI
for certain administrative services (the "Additional Amount"). Of the $6 million
due on the promissory note, approximately $1.4 million is due on or before June
30, 1997 and the remainder is payable in 13 quarterly installments of
approximately $353,000, beginning September 30, 1997. RHCI has agreed that the
payment of interest on the promissory note for the period October 1, 1995
through June 30, 1996, as well as the Additional Amount will not be required
until after July 1, 1997, all on terms and conditions to be mutually agreed to
by RHCI and RMCI.
In June 1996 and 1995, the Company recorded a write-down of
fixed and intangible assets associated with certain of its inpatient facilities
totalling approximately $4 million and $20 million, respectively. In accordance
with FASB Statement Number 121, the facilities' carrying amount of cost in
excess of net asset value of purchased businesses, if applicable, was eliminated
prior to making a reduction of these facilities' carrying amounts of impaired
property and equipment. The property and equipment impairment, which totalled
approximately $4.0 million and $16.5 million, respectively, was recorded
pursuant to the Statement as a direct reduction in the cost basis of the related
property and equipment (rather than as an increase to accumulated depreciation
on these assets).
30
The Company has net deferred tax assets totalling
approximately $11.5 million, which includes a valuation allowance of $4.4
million, at June 30, 1996. Management has considered the effects of implementing
tax planning strategies, consisting of the sales of certain appreciated
property, as the primary basis for recognizing deferred tax assets at June 30,
1996. The ultimate realization of deferred tax assets may be affected by changes
in the underlying values of the properties considered in the Company's tax
planning strategies, which values are dependent upon the operating results and
cash flows of the individual properties. The Company evaluates the realizability
of its deferred tax assets on a quarterly basis by reviewing its tax planning
strategies and the adequacy of its valuation allowance.
At June 30, 1996, the current portion of long-term debt was
$10.9 million, compared to $3.8 million at June 30, 1995. This increase was due
to (a) the Company's commitment during 1996 to reduce the credit exposure of its
bank group by $3.0 million by December 31, 1996 (see "Liquidity and Capital
Resources" below) and (b) principal payments on the senior secured notes of $6.6
million which came due within one year during fiscal 1996. These increases were
offset by payments during 1996 of $1.5 million on the amount outstanding at June
30, 1995 under the Company's former working capital facility and payments of
$0.9 million on a former capital lease obligation. At June 30, 1995, no amounts
were classified as current on the senior secured notes based on a prepayment of
principal on these notes in April 1995.
Noncurrent other accrued liabilities increased from $1.3
million at June 30, 1995 to $7.2 million at June 30, 1996 due to the
establishment of reserves as discussed in "Results of Operations" above.
During 1996, amounts owed to minority interests decreased by
$0.7 million based on distributions to the minority partners in the Three Rivers
Hospital Limited Partnership. In July 1996, the Three Rivers Limited Partnership
was dissolved.
In October 1995 and August 1996, a corporate affiliate of Paul
J. Ramsay, the Chairman of the Board of the Company, acquired through private
placements 275,863 shares and 275,546 shares, respectively, of Common Stock of
the Company at a price of $3.625 and $2.75 per share, respectively. Of the total
shares acquired in October 1995, 121,363 were issued for cash and 154,500 were
issued for management fees due during the remainder of fiscal 1996 under the
Company's management agreement with another corporate affiliate of Mr. Ramsay.
The shares acquired in August 1996 were issued for management fees due under the
management agreement during fiscal 1997. With the issuance of the additional
shares, the voting the interest in the Company held by Mr. Ramsay increased from
approximately 30.9% to approximately 34.8%.
LIQUIDITY AND CAPITAL RESOURCES
The Company's credit facilities include $34.2 million in
senior secured notes, approximately $20 million in letters of credit and $1.8
million in subordinated secured notes. The senior secured notes bear interest at
11.6% and require a principal payment of approximately $3.1 million on September
30, 1996, semi-annual principal payments of approximately $3.5 million from
31
March 31, 1997 through September 30, 1998 and semi-annual principal payments of
$5.65 million from March 31, 1999 through March 31, 2000. The subordinated
secured notes bear interest at 15.6% and require semi-annual principal payments
of $0.2 million through March 31, 2000. Required annual principal payments on
the variable rate demand revenue bonds total $0.8 million through year 2000 and
$0.9 million to $1.2 million in years 2001 through 2015. In December 1995, the
Company fully paid down and terminated its working capital facility with its
bank group. In September 1995, and again in August 1996, the Company and banks
supporting the Credit Agreement agreed to terms which extended the expiration
date of the Credit Agreement from May 15, 1996 to February 15, 1997 and from
February 15, 1997 to August 15, 1997, respectively. In connection with the
initial extension, the Company agreed to reduce the banks' exposure by an
additional $3 million on or before July 1, 1996. This requirement was extended
by the bank group to December 31, 1996 as part of the August 1996 extension.
The Company's credit facilities require that the Company meet
certain convenants, including (a) the maintenance of a minimum level of
consolidated tangible net worth, (b) the maintenance of a working capital ratio
and (c) the maintenance of certain fixed charge coverage and debt service
ratios. From time to time, the lenders have agreed to waive or otherwise adjust
certain of these ratios and levels. In connection with these waivers and
adjustments, the Company pays additional fees and expenses. Further, as part of
the waivers and adjustments obtained as of June 30, 1996, the Company agreed to
provide its Hillcrest Hospital facility and related assets as additional
collateral to the lenders and agreed not to pay future cash dividends in respect
of its Class B Preferred Stock, Series C.
In connection with the Company's business strategy, the
Company is currently pursuing a transaction involving one of its facilities
which has been financed, in part, by variable rate revenue bonds, which bonds
are supported by the letter of credit from the Company's bank group. Under the
current structure of the proposed transaction, the Company would contribute the
facility and its operations to a new entity which would be jointly owned by the
Company and a medical/surgical facility in the same market area. The
medical/surgical facility would contribute cash and other consideration to the
new entity. Through economies of scale, infrastructure savings and new business
opportunities of the new entity, the Company believes its income from the new
entity could approximate the income currently realized from this facility. In
connection with this transaction, the revenue bonds outstanding on the facility
would be redeemed or a substitute letter of credit would be issued, thereby
achieving the Company's commitment to reduce the exposure of its bank group by
the required $3.0 million.
In May 1996, the Company signed a letter of intent to sell its
Three Rivers facility to an independent party. The Company expects to receive
approximately $2.2 million from the sale of this facility prior to October 31,
1996.
In response to market demands, the Company is currently
converting an additional 37 beds at its Texas facilities from psychiatric care
to subacute care. Renovation costs associated with this project, which is
expected to be completed by January 1, 1997, will approximate $1.1 million. No
other commitments to make material capital expenditures exists at this time.
The Company's current primary cash requirements relate to its
normal operating expenses, the requirement to reduce its banks' credit exposure
as discussed above, principal payments on its senior secured notes (which resume
on September 30, 1996), routine capital improvements at its facilities and the
above mentioned renovation project. Also, the State of Louisiana has taken the
position that certain disproportionate share payments were improperly paid to
two of the Company's Louisiana facilities. See "Results of Operations" above and
"Item 3. Legal Proceedings."
32
On the basis of its historical cash collection experience and
projected cash needs, the Company believes that its existing cash resources,
internally generated funds from operations, proceeds from the sale of Three
Rivers Hospital, debt reductions derived from its business strategy and a
refinancing of the Company's outstanding debt will be sufficient to meet its
current cash requirements and future identifiable needs. At this time, the
Company has not entered into a definitive agreement to sell its Three Rivers
Hospital and does not have any commitment to refinance its outstanding debt.
Further, the