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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
FOR THE FISCAL YEAR ENDED DECEMBER 31, 2002
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM ______ TO ______
COMMISSION FILE NUMBER 0-13849
RAMSAY YOUTH SERVICES, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 63-0857352
(STATE OR OTHER JURISDICTION OF INCORPORATION OR ORGANIZATION) (I.R.S. EMPLOYER IDENTIFICATION NO.)
COLUMBUS CENTER
ONE ALHAMBRA PLAZA, SUITE 750
CORAL GABLES, FLORIDA 33134
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE (305) 569-6993
SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:
TITLE OF EACH CLASS NAME OF EACH EXCHANGE ON WHICH REGISTERED
- ------------------- -----------------------------------------
NONE NONE
SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT:
COMMON STOCK, $0.01 PAR VALUE
(TITLE OF CLASS)
Indicate by a check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months, and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No. [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [X]
Indicate by check mark whether the registrant is an accelerated filer
(as defined in Exchange Act Rule 12b-2). Yes [ ] No. [X]
The aggregate market value of Common Stock held by non-affiliates on
June 30, 2002 was $14,044,730. For purposes of this computation, all executive
officers, directors and 5% beneficial owners of the common stock of the
registrant have been deemed to be affiliates. Such determination should not be
deemed to be an admission that such directors, officers or 5% beneficial owners
are, in fact, affiliates of the registrant.
The number of share of the registrant's Common Stock outstanding as of
March 14, 2003 was 9,297,831.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant's proxy statement to be filed with
the Securities Exchange Commission pursuant to Regulation 14A for the
registrant's 2003 annual meeting of stockholders are incorporated by reference
into Part III of this Form 10-K.
FORWARD-LOOKING STATEMENTS
In connection with the "safe-harbor" provisions of the Private
Securities Litigation Reform Act of 1995, Ramsay Youth Services, Inc. ("Ramsay"
or the "Company") notes that this report contains forward-looking statements
about the Company. The Company is hereby setting forth cautionary statements
identifying important factors that may cause the Company's actual results to
differ materially from those set forth in any forward-looking statements or
information made by or on behalf of or concerning the Company. Some of the most
significant factors include (i) accelerating changes occurring in the behavioral
healthcare and at-risk youth industry, including competition from consolidating
and integrated provider systems and limitations on reimbursement rates, (ii)
federal and state governmental budgetary constraints which could have the effect
of limiting the amount of funds available to support governmental programs,
(iii) statutory, regulatory and administrative changes or interpretations of
existing statutory and regulatory provisions affecting the conduct of the
Company's business and affecting current and prior reimbursement for the
Company's services, and (iv) fluctuations in the numbers of patients receiving
treatment in our health care treatment programs. There can be no assurance that
any anticipated future results will be achieved. As a result of the factors
identified above, and including any other factors, the Company's actual results
or financial condition could vary significantly from the performance or
expectation set forth in any forward-looking statements or information.
ANALYSTS' REPORTS
Investors should also be aware that while the Company does, at
various times, communicate with securities analysts, it is against the Company's
policy to disclose to them any material non-public information or other
confidential information. Accordingly, shareholders should not assume that the
Company agrees with any statement or report issued by an analyst irrespective of
the content of the statement or report. To the extent that reports issued by
securities analysts contain any projections, forecasts or opinions, such reports
are not the responsibility of the Company.
PART I
ITEM 1. BUSINESS.
General
The Company is a provider of behavioral health care treatment
programs and services focused on at-risk and special-needs youth. The Company
offers a full spectrum of treatment programs and services in residential and
non-residential settings. The programs and services are offered through a
network of Company-owned or leased facilities ("Owned Operations") and state or
government-owned facilities ("Management Contract Operations"). See Note 8 of
the Company's Consolidated Financial Statements for information regarding
revenue, profit, assets and other financial information on the Company's Owned
Operations and Managed Contract Operations segments. The Company is
head-quartered in Coral Gables, Florida and has operations in Alabama, Florida,
Georgia, Hawaii, Missouri, Michigan, Nevada, North Carolina, South Carolina,
Texas, Utah and Puerto Rico. The Company also provides a limited range of adult
behavioral healthcare services at certain of its locations in response to
community demand.
The programs and services provided by the Company are designed
through a comprehensive continuum that is directed to meet the demands for
culturally diverse and special-needs populations. The Company's programs are
tailored to service individuals with (i) mental health and
substance abuse issues, (ii) sexually reactive disorders, (iii) developmental
disabilities, and (iv) emotional and behavioral disorders. The Company's
programs cater to special populations such as juvenile offenders, adolescent
females and youth with special education needs.
The primary objective of the Company's programs and services
is to provide a safe and highly structured environment for the evaluation,
treatment, rehabilitation and integration of at-risk and special-needs youth
into their communities as responsible individuals and productive citizens.
DESCRIPTION OF PROGRAMS
Ramsay's specialized behavioral health care programs are
focused on solving the specialized needs of youth by providing effective
treatment interventions, including counseling, social interests, substance
abuse education and treatment, mental health services, cognitive and life
skills development, accredited education and vocational skills. The Company's
goal is to provide a "balanced approach" that develops the social, educational
and vocational skills of the youth and creates responsible, pro-social
individuals. This balanced approach is essential to achieve the program's
objective of integrating the youth into their communities as responsible and
productive individuals.
The following is a summary of the programs and services
offered by the Company:
- - Acute Inpatient Services - Acute inpatient services are generally
provided to individuals needing the most intensive behavioral
healthcare treatment. The most common disorders treated at the
Company's facilities on an acute inpatient basis are mood and
affective disorders (such as depression), psychosis, situational
crises and alcohol and drug dependency. The initial goal of acute
inpatient treatment is to evaluate and stabilize the patient so that
effective treatment can be continued either on an inpatient or
outpatient basis. Under the direction of a psychiatrist, the patient's
condition is assessed, diagnosis is made and prescribed treatment
follows. The treatment regimen utilizes, where appropriate,
medication, individual and group therapy, adjunctive therapy and
family therapy.
- - Residential Treatment Programs - Residential treatment programs
provide safe, secure and highly structured environments for the
evaluation and development of long-term, intensive and transitional
treatment services. The programs focus on a cognitive-behavioral model
with family, group and individual counseling, social and life skills
development and educational and recreational programs. The primary
focus of these services is to reshape antisocial behaviors by
stressing responsibility and achievement of performance and treatment
goals.
- - Community-Based Programs - Community-based programs are designed to
meet the special needs of youths and their families, while enabling
them to remain living at home or in their community. The primary focus
of this program is to provide youths who have a clinically definable
emotional, psychiatric or dependency disorder with therapeutic
services. Youths who are assisted through this program have either
transitioned out of a residential treatment program or do not require
the intensive services of a residential treatment program.
FACILITIES
As of December 31, 2002, the Company's Owned Operations
segment consisted of eleven residential facilities, nine therapeutic community
living facilities and two stand-alone non-residential facilities in which
community-based programs and services are offered. The facilities in the Owned
Operations segment are either owned or leased directly by the Company. As of
December 31, 2002, the Company's Management Contract Operations segment
consisted of eight contracts in which the Company has the right to occupy the
facility.
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The following table sets forth the programs and services
offered by the Company as of December 31, 2002 in the various markets in which
it operates:
MARKET PROGRAMS AND SERVICES
------ ---------------------
OWNED OPERATIONS
Alabama:
Dothan Facility........................ Residential Treatment Programs and
Acute Inpatient Services
Hill Crest Facility.................... Residential Treatment Programs,
Acute Inpatient Services and
Community-Based Programs
Bessemer I............................. Community Based Programs
Bessemer II ........................... Community Based Programs
Higdon Hill ........................... Community Based Programs
Piedmont............................... Community Based Programs
Florida:
Gulf Coast Treatment Center............ Residential Treatment Programs
Manatee Adolescent Treatment Services.. Residential Treatment Programs
Manatee Palms Youth Services........... Residential Treatment Programs and
Community-Based Programs
Riverdale Country School............... Community-Based Programs
Family Counseling Center............... Community-Based Programs
Hawaii:
Pearl City............................. Residential Treatment Programs
Michigan:
Havenwyck Facility..................... Residential Treatment Programs,
Acute Inpatient Services and
Community-Based Programs
Missouri:
Heartland Facility..................... Residential Treatment Programs,
Acute Inpatient Services and
Community-Based Programs
Heartland House........................ Community Based Programs
Nevada:
Briarwood Las Vegas.................... Community Based Programs
Briarwood Reno North................... Community Based Programs
Briarwood Reno South................... Community Based Programs
North Carolina:
Brynn Marr Facility.................... Residential Treatment Programs,
Acute Inpatient Services and
Community-Based Programs
South Carolina:
Coastal Harbor......................... Community Based Programs
Texas:
Mission Vista Facility................. Acute Inpatient Services
Utah:
Benchmark Regional Facility............ Residential Treatment Programs
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MARKET PROGRAMS AND SERVICES
------ ---------------------
MANAGEMENT CONTRACTS
Florida:
Everglades Youth Development Center....... Residential Treatment Programs
Florida Institute for Girls............... Residential Treatment Programs
Kingsley Center........................... Residential Treatment Programs
Okaloosa Youth Academy.................... Residential Treatment Programs
Southern Glades Youth Camp................ Residential Treatment Programs
Milton Girls Juvenile Residential Facility Residential Treatment Programs
Georgia:
McIntosh Youth Development Campus......... Residential Treatment Programs
Puerto Rico:
Bayamon Detention Center.................. Residential Treatment Programs
Market for the Company's Services
Expenditures for the youth services industry totaled $60.0
billion in 2000, and continues to grow at a rate of 9% per annum. The Company
believes that the market for behavioral healthcare and youth services in the
United States will continue to grow based on the following compelling industry
demographics:
- - At least eleven million youth have a serious diagnosable mental,
emotional or behavioral health disorder.
- - Over one million youths enter the juvenile justice system each year
and it is estimated that 60% of these youth have a mental disorder.
Approximately 50% to 75% of these youths also have substance abuse
issues and nearly 40% of them have learning disabilities.
- - Approximately three million children are reported as abused or
neglected each year, of which 90% of them fail to receive the services
they need.
- - The general youth population is expected to grow by 21% by the year
2010.
The Company intends to grow through (i) expansion of
services, markets and products, (ii) aggressive response to requests for
proposals ("RFP's") and (iii) selected strategic acquisitions. Through these
avenues, management intends to capitalize on the behavioral healthcare and
youth services industry's size, fragmentation and multiple payor sources.
- - Expansion of Services - Management believes significant opportunities
exist to penetrate further the Company's existing geographic markets.
Management will continue to capitalize on the Company's reputation for
delivering high quality and cost-effective solutions, to expand the
breadth of service provided to existing customers, and to attract new
customers. In addition, the Company will continue to develop new
programs which respond to state and local agencies' needs to secure
appropriate placements for special needs youth.
- - Aggressive Response to RFPs - The Company is well positioned to expand
into new markets as state and local agencies increasingly seek
providers with the capability to deliver a broader continuum of
services to at-risk youth. Further, management believes this trend
will intensify as state and local governments desire to keep spending
in their respective home states and look to develop local services.
Typically, the solicitation of providers for new and broader service
offerings is accomplished by state agencies through RFPs, a process in
which the Company actively competes in markets management has targeted
for growth. Management believes the Company's history of providing
high quality, cost-effective services gives it a significant
competitive advantage in responding to RFPs. The Company
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prioritizes its target markets based on the needs of each state, the
diversification of funding sources, state and local legislation,
existing relationships and in-state competition.
- - Selected Strategic Acquisitions - The Company intends to pursue
strategic acquisitions of other behavioral healthcare and youth
services providers to penetrate existing markets further and enter new
geographic markets. The behavioral healthcare and youth services
industry are highly fragmented with what the Company estimates to be
approximately 15,000 providers. The Company continually reviews
acquisition opportunities and management believes that a number of
acquisition opportunities currently exist at reasonable valuations.
Further, management believes it can enhance the performance of
acquired facilities by selectively implementing the Company's programs
to expand services. Management believes that the Company's current
infrastructure is capable of supporting a number of acquisitions
affording the opportunity to spread certain fixed operational expenses
over a broader revenue base.
Competition
The fragmented youth-focused behavioral health care industry
is comprised largely of small providers that operate in relatively limited
geographic areas and provide services to a specific youth population. The
Company competes with both public and private for-profit and not-for-profit
organizations. Competition generally is based upon program quality, range and
price of services provided, operational experience and facility location. When
responding to an RFP, the strength and depth of a provider's relationship with
the various payors plays a significant role in the selection process. The
Company believes that its programs and services compete favorably on the basis
of, among other things, the range and quality of programs offered and the
expertise of its management team in the development and implementation of new
programs.
Sources Of Revenue
The Company receives payments from various sources, including
commercial insurance carriers (which provide coverage to insured individuals on
both an indemnity basis and through various managed care plans), state and
local governmental agencies (including state judicial systems), Medicaid and
Medicare. In addition, payments are received directly from individuals,
including co-payments and deductibles related to services covered by these
individuals' benefit plans. The Company also receives payments from school
districts either directly or through management contracts with other entities.
- - State and Local Government Payors - The Company's facilities are
reimbursed for certain services on a per-diem basis by various state
and local government agencies. The per-diem rate is generally based on
the nature and scope of services provided to residents. In addition,
some government programs pay the Company for access to a certain
number of beds.
- - Medicaid - Medicaid is the federal/state health insurance program for
low-income individuals, including welfare recipients. Subject to
certain minimum federal requirements, each state defines the extent
and duration of the services covered by its Medicaid program.
Moreover, although there are certain federal requirements governing
the payment levels for Medicaid services, each state has its own
methodology for making payment for services provided to Medicaid
patients. Various state Medicaid programs cover payment for services
provided to individuals covered under the Medicaid program by the
Company.
- - Commercial Insurance Payors - The Company's facilities are reimbursed
for certain behavioral healthcare services by health maintenance
organizations ("HMO's"), commercial insurance companies and
self-insured employers either on a fee-for-service basis or under
contractual arrangements which include reimbursement on a per-diem,
per-diagnosis basis.
For inpatient services, Blue Cross plans reimburse based on charges or
negotiated rates in all areas in which the Company presently operates
facilities, except Alabama. In certain states in which the Company
operates, Blue Cross reimbursement is approved through a rate-setting
process and,
5
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, direct reimbursement to facilities typically is lower than
the facility's charges, and patients are not responsible for the
difference between the amount reimbursed by Blue Cross and the
facility's charges.
Most commercial insurance carriers reimburse their policyholders or
reimburse the Company directly for charges at rates and limits
specified in their policies. Patients generally remain responsible for
any amounts not covered under their insurance policies. Generally,
reimbursement for psychiatric inpatient and chemical dependency care
by commercial insurance carriers is limited to a maximum number of
inpatient days per year or during the patient's lifetime, or to a
maximum dollar amount expended, for a patient, in a given period.
- - Medicare - Medicare is the federal health insurance program for the
aged and disabled. Medicare reimburses providers of psychiatric care
for inpatient and outpatient services and providers of long term acute
care services. Medicare reimburses psychiatric hospitals and long term
care hospitals on a reasonable cost basis for inpatient care. Medicare
reimburses providers of hospital outpatient psychiatric services,
including partial hospitalization programs, based on the hospital
prospective payment system. Medicare reimburses other providers of
outpatient psychiatric services on fee for service and reasonable cost
basis. Medicare reimbursement is typically less than the Company's
established charges for services provided to Medicare patients.
Patients are not responsible for the difference between the reimbursed
amount and the established charges other than for applicable
non-covered charges, coinsurance and deductibles. The Medicare program
is administered by the Centers for Medicare and Medicaid Services
("CMS"), formerly known as the Health Care Financing Administration.
Pursuant to the Balanced Budget Refinement Act of 1999, CMS is
required to implement prospective payment systems for both psychiatric
hospitals and long term care hospitals. CMS has recently issued
proposed regulations for a long term care hospital prospective payment
system but has not yet issued proposed rules for a prospective payment
system for psychiatric hospitals. CMS has indicated it intends to
issue proposed rules for the prospective payment system for
psychiatric hospitals on April 25, 2003. It is likely that these new
payment systems will impact the Company's revenues; however, the
significance and the positive or negative nature of such impact is not
yet clear as no proposed rules have yet been issued for psychiatric
hospitals.
Medicare reimbursement to exempt psychiatric and chemical dependency
facilities is currently subject to the payment limitations and
incentives established in the Tax Equity and Fiscal Responsibility Act
of 1982 ("TEFRA"). These facilities are currently paid on the basis of
each facility's historical costs trended forward, with a limit placed
on the rate of increase in per case reimbursable costs. Facilities
with costs less than their respective target rate per discharge are
currently reimbursed based on allowable Medicare costs, plus an
additional incentive payment. Medicare reimbursement under TEFRA to
facilities exempt from prospective payment, such as the Company's
facilities, have been adversely affected by the Balanced Budget Act of
1997 (the "BBA"), passed by Congress in July 1997. Under certain
provisions of the BBA, effective July 1, 1998 for the Company, target
rates per discharge were capped, the formula by which incentive
payments are calculated was modified to reduce these payments and
allowable Medicare capital costs were reduced by 15%. However,
subsequent to the passage of the BBA, Congress has passed the Balanced
Budget Refinement Act of 1999 and the Benefit Improvement and
Protection Act of 2000 (collectively the "New Acts"). Under the New
Acts, the amount of incentive payments was increased effective for
cost reporting periods beginning on or after October 1, 2001.
Regulation
As a behavioral healthcare provider, the Company is subject
to extensive and frequently changing government regulations from a variety of
federal, state and local authorities. These regulations are primarily concerned
with licensure, conduct of operations, reimbursement, financial solvency,
standards of medical care, the dispensing of drugs, patient rights (including
the confidentiality of medical records)
6
and the direct employment of psychiatrists, psychologists, and other licensed
professionals. Regulatory activities affect the Company's business directly by
controlling its operations, restricting licensure of the business entity or by
controlling the reimbursement for services provided, and indirectly by
regulating its customers. In certain cases, more than one regulatory agency may
have authority over the activities of the Company. State licensing laws and
other regulations are subject to amendment and to interpretation by regulatory
agencies with broad discretionary powers. Any new regulations or licensing
requirements, or amendments or interpretations of existing regulations or
requirements, could require the Company to modify its operations materially in
order to comply with applicable regulatory requirements and may have a material
adverse effect on the Company's business, financial condition or results of
operations.
Operators of residential treatment programs for juveniles are
typically expected to provide education programs and, in some instances,
healthcare services. As providers of such services, the Company is required to
comply with applicable state and local regulations. In addition, some programs
require accreditation from the Joint Commission on Accreditation of Healthcare
Organizations, the Commission on Accreditation of Rehabilitation Facilities or
the American Corrections Association.
Federal law contains a number of provisions designed to
ensure that services rendered by providers of healthcare services to Medicare
and Medicaid patients are medically necessary, meet professionally recognized
standards and are billed properly. These provisions include a requirement that
admissions of Medicare and Medicaid patients to a facility must be reviewed in
a timely manner to determine the medical necessity of the admissions. In
addition, the Peer Review Improvement Act of 1982 ("Peer Review Act") provides
that a facility may be required by the federal government to reimburse the
government for the cost of Medicare-paid services determined by a peer review
organization to have been medically unnecessary. Each of the Company's
facilities has developed and implemented a quality assurance program and
implemented procedures for utilization review and retrospective patient care
evaluation to meet its obligations under the Peer Review Act.
The Social Security Act imposes civil sanctions and criminal
penalties upon persons who make or receive kickbacks, bribes or rebates in
connection with federally-funded healthcare programs. The Social Security Act
also provides for exclusion from the Medicare and Medicaid programs for
violations of the anti-kickback rules. The anti-kickback rules prohibit
providers and others from soliciting, offering, receiving or paying, directly
or indirectly, overtly or covertly, any remuneration in return for either
making a referral for a federally-funded healthcare service or item or ordering
any such covered service or item. In order to provide guidance with respect to
the anti-kickback rules, the Office of the Inspector General of the U.S.
Department of Health and Human Service has issued regulations outlining certain
"safe harbor" practices which, although potentially capable of including
prohibited referrals, would not be prohibited if all applicable requirements
were met. A relationship which fails to satisfy a safe harbor is not
necessarily illegal, but could be scrutinized on a case-by-case basis. Since
the anti-kickback rules have been broadly interpreted, they could limit the
manner in which the Company conducts its business. The Company believes that it
currently complies with the anti-kickback rules in planning its activities, and
believes that its activities, even if not within a safe harbor, do not violate
the anti-kickback rules. However, there can be no assurance that (i) government
enforcement agencies will not assert that certain of these arrangements are in
violation of the illegal remuneration statute, (ii) the statute will ultimately
be interpreted by the courts in a manner inconsistent with the Company's
practices or (iii) the federal government or other states in which the Company
operates will not enact similar or more restrictive legislation or restrictions
that could, under certain circumstances, impact the Company's operations.
Under another federal provision, known as the "Stark" law or
"self-referral" prohibition, physicians who have an investment or compensation
relationship with an entity furnishing certain designated health services
(including inpatient and outpatient hospital services) may not, subject to
certain exceptions, refer Medicare patients for designated health services to
that entity. Similarly, facilities may not bill Medicare or any other party for
services furnished pursuant to a prohibited referral. Additionally, law
enforcement authorities, including the Office of the Inspector General, the
courts and Congress are increasing scrutiny of arrangements between healthcare
providers and potential referral sources to ensure that the arrangements are
not designed as a mechanism to exchange remuneration for patient care referrals
and opportunities. Investigators also have demonstrated a willingness to look
behind the formalities of a
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business transaction to determine the underlying purposes of payments between
healthcare providers and potential referral sources. Violation of these
provisions may result in disallowance of Medicare claims for the affected
services, as well as the imposition of civil monetary penalties and program
exclusion. In addition, the Stark law prevents states from receiving federal
Medicaid matching payments for designated health services that are provided as
a result of a prohibited referral. Often as a result of this requirement, a
number of states have enacted prohibitions similar to the Stark law covering
referrals of non-Medicare business. The Company conducts business in numerous
states that have passed legislation which, under certain circumstances, either
may prohibit the referral of private pay patients to healthcare entities in
which the physician has an ownership or investment interest, or with which the
physician has a compensation arrangement, or may require the disclosure of such
interest to the patient. All of these rules are very restrictive, prohibit
submission of claims for payment related to prohibited referrals and provide
for the imposition of civil monetary penalties and criminal prosecution. The
Company is unable to predict how these laws may be applied in the future, or
whether the federal government or states in which the Company operates will
enact more restrictive legislation or restrictions that could under certain
circumstances impact the Company's operations.
In addition to the regulations set forth above, the Health
Insurance Portability and Accountability Act of 1996 ("HIPAA") broadened the
scope of the fraud and abuse laws by adding several criminal provisions for
healthcare fraud offenses that apply to all health benefit programs. This act
also created new enforcement mechanisms to combat fraud and abuse including the
Medicare Integrity Program and an incentive program under which individuals can
receive up to $1,000 for providing information on Medicare fraud and abuse that
leads to the recovery of at least $100 of Medicare funds. In addition, federal
enforcement officials now have the ability to exclude from Medicare and Medicaid
any investors, officers and managing employees associated with business entities
that have committed healthcare fraud. It also establishes a new violation for
the payment of inducements to Medicare and Medicaid beneficiaries in order to
influence those beneficiaries to order or receive services from a particular
provider or practitioner. Although we do not know of any current violations of
the fraud and abuse provisions of HIPPA, if we were found to be in violation
of these provisions, the government could seek penalties against the Company
including exclusion from participation to government payer programs.
Significant fines could cause liquidity problems and adversely affect our
results of operations.
The Department of Health and Human Services (referred to as "HHS")
has enacted standards for information sharing, security and patient
confidentiality. The HHS, in its administrative simplification provisions, has
published two sets of final regulations implementing healthcare transactions
and privacy standards under HIPAA. These regulations apply to what are termed
"covered entities" and, under terms of the regulations, Ramsay is a covered
entity.
The first set of final regulations requires covered entities to use
uniform standards, including data reporting, formatting, and coding for common
healthcare transactions. The Standards for Electronic Transactions Final Rule
was published August 2000 and became effective October 2000 with a compliance
date of October 2002. This effective date has now been delayed to October 2003.
The second set of final regulations imposes new standards relating to
the privacy of individually identifiable health information. The Standards for
Privacy and Individually Identifiable Health Information Final Rule was
published December 2000 and became effective April 2001 with a compliance date
of April 2003. These standards require covered entities to comply with rules
governing the use and disclosure of protected health information. The standards
also require covered entities to enter into certain contractual provisions with
any business associate to whom individually identifiable information is
disclosed.
A third set of regulations under HIPAA, the Final Rule for Security
Standards, was published in February 2003 with a compliance date of April 2005.
The Final Rule establishes minimum security requirements for covered entities
to protect health information in electronic form. In some cases, we will also
have to comply with applicable state regulations regarding privacy and medical
information.
We are currently assessing the privacy and security standards to ensure
that we have the required systems and procedures in place to comply with the new
HIPAA regulations. While we will incur costs to become compliant with the HIPAA
regulations for electronic transaction processing, we believe this will not have
a significant overall impact on our results of operations.
In certain states, the employment of psychiatrists,
psychologists and certain other behavioral healthcare professionals by business
corporations, such as the Company, is a permissible practice. However, other
states have legislation or regulations or have interpreted existing medical
practice licensing laws to restrict business corporations from providing
behavioral healthcare services or from the direct employment of psychiatrists
and, in a few states, psychologists and other behavioral healthcare
professionals. Management believes that the Company is in compliance with these
laws.
State certificate of need or similar statutes generally
provide that prior to the construction or acquisition of new beds or facilities
or the introduction of a new service, a state agency must determine that a need
exists for those beds, facilities or services. In most cases, certificate of
need or similar statutes do not restrict the ability of the Company or its
competitors from offering new or expanded outpatient services. Except for Utah,
all of the states in which the Company operates facilities have adopted
certificate of need or similar statutes.
The Company is also subject to state and federal laws that
govern the submission of claims for reimbursement. These laws generally
prohibit an individual or entity from knowingly and willfully presenting a
claim (or causing a claim to be presented) for payment from Medicare, Medicaid
or other third party payors that is false or fraudulent. The standard for
"knowing and willful" often includes conduct that amounts to a reckless
disregard for whether accurate information is presented by claims processors.
Penalties under these statutes include substantial civil and criminal fines,
exclusion from the Medicare program, and imprisonment. One of the most
prominent of these laws is the Federal False Claims Act, which may be enforced
by the federal government directly, or by a qui tam plaintiff on the
government's behalf. Under the False Claims Act, both the government and the
private plaintiff, if successful, are permitted to recover substantial monetary
penalties, as well as an amount equal to three times actual damages. In some
cases, qui tam plaintiffs and the federal government have taken the position
that violations of the anti-kickback statute and the Stark Law should also be
prosecuted as violations of the federal False Claims Act. Management believes
that the Company has procedures in place to ensure the accurate completion of
claims forms and requests for payment. However, the laws and regulations
defining proper Medicare or Medicaid billing are frequently unclear and have
not been subjected to extensive
8
judicial or agency interpretation. Billing errors can occur despite the
Company's best efforts to prevent or correct them, and we cannot assure you
that the government will regard such errors as inadvertent and not in violation
of the False Claims Act or related statutes. The Company is not currently aware
of any actions against the Company under the False Claims Act.
There are currently numerous legislative and regulatory
initiatives at the state and federal levels addressing patient privacy
concerns. In particular, on December 28, 2000, the Department of Health and
Human Services ("DHHS") released final health privacy regulations implementing
portions of the Administrative Simplification Provisions of the Health
Insurance Portability and Accountability Act of 1996. These final health
privacy regulations have an effective date of April 14, 2001, and a compliance
date of April 14, 2003. Subject to limited exceptions, these regulations
restrict how healthcare providers use and disclose medical records and other
individually identifiable health information, whether communicated
electronically, on paper or orally. The regulations also provide patients with
significant new rights related to understanding and controlling how their
health information is used and disclosed. HIPAA is far-reaching and complex and
the government's delay in providing guidance on some aspects of the law may
affect the timeliness of our compliance efforts. Additionally, different
approaches to HIPAA's provisions and varying enforcement philosophies in the
different states may adversely affect our ability to standardize our products
and services across state lines.
The Company is also subject to regulations promulgated under
the Administrative Simplification Provisions establishing electronic data
transmission standards that all healthcare providers must use when submitting
or receiving certain healthcare transactions electronically. These statutes
vary by state and could impose additional penalties. If the Company fails to
comply with these regulations, we could suffer civil penalties up to $25,000
per calendar year for each violation and criminal penalties with fines of up to
$250,000 per violation. Our facilities will continue to remain subject to any
state laws that are more restrictive than the privacy regulations issued under
the Administrative Simplification Provisions. These state laws could impose
additional penalties for non-compliance.
The Company believes that it is currently in compliance in
all material respects with applicable current statutes and regulations
governing its business. The Company monitors its compliance with applicable
statutes and regulations and works with regulators concerning various
compliance issues that arise from time to time. Notwithstanding the foregoing,
the regulatory approach in the at-risk youth industry and behavioral healthcare
industry is extensive and evolving and there can be no assurance that a
regulatory agency will not take the position, under existing or future statutes
or regulations, or as a result of a change in the manner in which existing
statutes or regulations are or may be interpreted or applied, that the conduct
of all or a portion of the Company's operation within a given jurisdiction is
or will be subject to further licensure and regulation. Expansion of the
Company's businesses to cover additional geographic areas or to different types
of products or customers could also subject it to additional licensure and
regulatory requirements.
Insurance
The Company carries general and professional liability,
comprehensive property damage, malpractice, workers' compensation, and other
insurance coverages that management considers adequate for the protection of
its assets and operations.
The Company maintains self-insured retentions related to its
professional and general liability and workers' compensation insurance
programs. The Company's operations are insured for professional liability on a
claims-made basis and for general liability and workers' compensation on an
occurrence basis. The Company records the liability for uninsured losses
related to asserted and unasserted claims arising from reported and unreported
incidents based on independent valuations which consider claim development
factors, the specific nature of the facts and circumstances giving rise to each
reported incident and the Company's history with respect to similar claims. The
development factors are based on a blending of the Company's actual experience
with industry standards.
9
The Company funds the expected losses of its workers'
compensation claims through a rent-a-captive arrangement with an offshore
entity wholly owned by a United States insurance carrier. The Company also
maintains an aggregate stop loss policy for its workers' compensation claims.
Additional Information
The Company files reports with the Securities and Exchange
Commission ("SEC"), including annual reports on Form 10-K, quarterly reports on
Form 10-Q and other reports from time to time. The public may read and copy any
materials the Company files with the SEC at the SEC's Public Reference Room at
450 Fifth Street, NW, Washington, DC 20549. The public may obtain information
on the operation of the Public Reference Room by calling the SEC at
1-800-SEC-0330. The Company is an electronic filer and the SEC maintains an
Internet site at www.sec.gov that contains the reports, proxy and information
statements, and other information filed electronically.
The Company's Internet website address is www.ramsay.com. The
Company makes available free of charge on or through its website its Annual
Reports on Form 10-K, Quarterly Reports on Form 10-Q and Current Reports on
Form 8-K, and amendments to these reports, as soon as reasonably practicable
after the Company electronically files such material with, or furnishes such
material to, the Securities and Exchange Commission. The Company also makes
available on its web site other reports filed with the SEC under the Securities
Exchange Act of 1934, as amended, including its proxy statements and reports
filed by officers and directors under Section 16(a) of that Act. These reports
may be found on the web site by selecting the option entitled "SEC REPORTS"
under the "INVESTOR RELATIONS" area of the web site. The Company does not
intend for information contained in its Web site to be part of this Form 10-K.
The Company maintains a code of ethics that is applicable to
all employees, including the Company's Chief Executive Officer and senior
financial officers. This code requires continued observance of high ethical
standards such as honesty, integrity and compliance with the law in the conduct
of the Company's business.
Employees
As of December 31, 2002, the Company employed approximately
2,362 full-time and 181 part-time employees, including a corporate headquarters
staff of approximately 24 full-time employees. None of the Company's employees
are covered by collective bargaining agreements. The Company considers its
relationship with its employees to be good.
ITEM 2. PROPERTIES.
The following table provides information concerning the
Company's properties as of December 31, 2002:
DATE OPENED NATURE OF
FACILITY (3) OR ACQUIRED OCCUPANCY
------------ ----------- ---------
McIntosh Youth Development Campus October 2002 Right to
Darien, GA(4)..................... Occupy
Macon Behavioral Health System
Macon, GA(5)...................... September 2002 Leased
Briarwood South
Reno, NV.......................... February 2002 Leased
Milton Girls Juvenile Residential
Facility Right to
Milton, FL(4)..................... February 2002 Occupy
Riverdale Country School
Palm Bay, FL...................... August 2001 Leased
Bessemer II
Bessemer, AL...................... September 2000 Owned
10
DATE OPENED NATURE OF
FACILITY (3) OR ACQUIRED OCCUPANCY
------------ ----------- ---------
Manatee Palms Youth Services August 2000 Owned
Bradenton, FL.....................
Manatee Adolescent Treatment Services
Bradenton, FL..................... August 2000 Owned
Kingsley Center Right to
Arcadia, FL(4).................... August 2000 Occupy
Family Counseling Center
Palm Bay, FL...................... July 2000 Leased
Pearl City Right to
Pearl City, HI(4)................. June 2000 Occupy
Southern Glades Youth Camp Right to
Florida City, FL(4)............... April 2000 Occupy
Everglades Youth Development Center
Florida City, FL(4)............... Right to
April 2000 Occupy
Florida Institute for Girls Right to
West Palm Beach, FL(4)............ March 2000 Occupy
Okaloosa Youth Academy Right to
Crestview, FL(4).................. October 1999 Occupy
Bayamon Detention Center Right to
Bayamon, PR(4).................... September 1999 Occupy
Briarwood Las Vegas
Las Vegas, NV...................... June 1999 Owned
Bessemer I
Bessemer, AL....................... April 1999 Owned
Coastal Harbor
Conway, SC......................... October 1998 Owned
Dothan Facility
Dothan, Alabama.................... April 1998 Owned
Heartland House
Nevada, MO......................... August 1997 Owned
Gulf Coast Treatment Center
Fort Walton Beach, FL.............. December 1996 Owned
Higdon Hill
Birmingham, AL..................... July 1996 Owned
Briarwood North
Reno, NV........................... July 1995 Leased
Mission Vista Facility
San Antonio, TX(2)................. November 1991 Leased
Benchmark Regional Facility
Woods Cross, UT.................... August 1986 Owned
Heartland Facility
Nevada, MO......................... April 1984 Owned
Hill Crest Facility
Birmingham, AL..................... January 1984 Owned
Brynn Marr Facility
Jacksonville, NC................... December 1983 Owned
Havenwyck Facility
Auburn Hills, MI(1)................ November 1983 Leased
(1) In September 1998, the Company sold and immediately leased back the
land, building and fixed equipment associated with this facility. The
lease has an initial term of approximately 12 years.
(2) In April 1995, the Company sold and immediately leased back the land,
building and fixed equipment associated with this facility. The lease
has an initial term of 15 years and three successive renewal options
of five years each.
(3) Excludes the Company's Meadowlake Facility and the Company's Pelion
therapeutic living facility which were leased to independent
healthcare providers, and various office leases with remaining lease
terms ranging from one to five years. The Company has pledged
substantially all of its owned real property as collateral for the
Senior Credit Facility.
(4) The Company has the right to occupy these facilities rent free for the
duration of the Company's contract to provide services.
11
(5) In September 2002, the Company entered into a lease agreement for this
110-bed facility in Macon, Georgia with a corporate affiliate of Mr.
Paul J. Ramsay, Chairman of the Board of the Company and beneficial
owner of approximately 60% of the Company's outstanding stock. See
"Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations" appearing elsewhere in this Form 10-K.
The Company leases office space for its corporate
headquarters in Coral Gables, Florida, (through December 31, 2005) and various
regional offices. These leases have terms which generally range from three to
five years, with renewal options.
ITEM 3. LEGAL PROCEEDINGS.
The Company is party to certain claims, suits and complaints,
whether arising from the acts or omissions of its employees, providers or
others, which arise in the ordinary course of business. The Company has
established reserves at December 31, 2002 for the estimated amount, 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.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
Not applicable.
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS.
The Company's Common Stock is traded in the over-the-counter
market and is quoted on the NASDAQ SmallCap Market under the symbol RYOU. On
March 14, 2003, there were 271 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 changed its fiscal year end from June 30 to
December 31, effective December 1998.
Effective October 13, 2000, the Company's Common Stock was
delisted from the NASDAQ National Market System and commenced trading on the
NASDAQ Smallcap Market.
12
The following table sets forth the range of high and low
closing sales prices per share of the Company's Common Stock for each of the
quarters during the years ended December 31, 2002 and 2001, as reported on the
NASDAQ SmallCap Market:
HIGH LOW
---- ---
Year ended December 31, 2002
First Quarter..................................... $4.40 $3.63
Second Quarter.................................... 4.83 3.07
Third Quarter..................................... 5.94 3.95
Fourth Quarter.................................... 4.36 3.35
Year ended December 31, 2001
First Quarter..................................... $1.03 $0.69
Second Quarter.................................... 2.70 0.84
Third Quarter..................................... 5.05 1.95
Fourth Quarter.................................... 4.50 2.76
On March 14, 2003, the closing sales price of the Company's
Common Stock was $4.11 per share.
The following table provides information as of December 31,
2002 with respect to compensation plans (including individual compensation
arrangements) under which the Company's equity securities are authorized for
issuance.
EQUITY COMPENSATION PLAN INFORMATION
--------------------------------------------------------------------------
NUMBER OF SECURITIES
NUMBER OF SECURITIES REMAINING AVAILABLE
TO BE ISSUED UPON FOR FUTURE ISSUANCE UNDER
EXERCISE OF WEIGHTED-AVERAGE EQUITY COMPENSATION PLANS
OUTSTANDING OPTIONS, EXERCISE PRICE OF (EXCLUDING SECURITIES
WARRANTS AND RIGHTS OUTSTANDING OPTIONS, REFLECTED IN COLUMN (A))
PLAN CATEGORY (IN THOUSANDS) WARRANTS AND RIGHTS (IN THOUSANDS)
------------- --------------------- ------------------- --------------------------
(a) (b) (c)
Equity compensation plans approved by
security holders .......................... 2,614 1.27 173
Equity compensation plans not approved by
security holders .......................... 488 8.81 --
----- ---- ---
Total ........................................ 3,102 2.46 173
===== ==== ===
ITEM 6. SELECTED FINANCIAL DATA.
The following table sets forth selected consolidated
financial information for the periods shown and is qualified by reference to,
and should be read in conjunction with, the Consolidated Financial Statements
and Notes thereto and "Item 7. Management's Discussion and Analysis of
Financial Condition and Results of Operations" appearing elsewhere in this
Report on Form 10-K.
13
YEAR ENDED SIX MONTHS YEAR
DECEMBER 31, ENDED ENDED
-------------------------------------------------- DECEMBER 31, JUNE 30,
2002 2001 2000 1999 1998 1998
--------- --------- --------- -------- ------------ ---------
(in thousands, except per share data)
Statement of Operations Data:
Total revenues ........................ $ 145,156 $ 134,416 $ 108,360 $ 81,474 $ 47,892 $ 155,211
Salaries, wages and benefits .......... 90,943 83,563 68,353 49,283 28,313 82,740
Other operating expenses .............. 40,365 37,715 28,310 25,024 17,470 64,255
Provision for doubtful accounts ....... 1,867 2,911 2,817 1,896 1,549 6,649
Depreciation and amortization ......... 2,577 2,430 2,369 2,366 1,627 5,714
Restructuring charges ................. -- -- -- -- -- 2,349
Asset impairment charges .............. 125 124 -- -- -- 18,316
--------- --------- --------- -------- --------- ---------
135,877 126,743 101,849 78,569 48,959 180,023
--------- --------- --------- -------- --------- ---------
Income (loss) from operations ......... 9,279 7,673 6,511 2,905 (1,067) (24,812)
Other income .......................... -- -- -- 1,548 8,059 256
Gain on sale of assets ................ -- -- -- -- 2,039 --
Interest and other financing charges .. (2,475) (3,299) (2,706) (1,268) (1,655) (7,230)
Losses related to asset sales and
closed businesses ................... -- (130) (705) -- (947) (12,483)
--------- --------- --------- -------- --------- ---------
(2,475) (3,429) (3,411) 280 7,496 (19,457)
--------- --------- --------- -------- --------- ---------
Income (loss) before income taxes and
extraordinary item .................. 6,804 4,244 3,100 3,185 6,429 (44,269)
Provision (benefit) for income taxes .. (5,864) 778 248 68 1,591 9,985
--------- --------- --------- -------- --------- ---------
Income (loss) before extraordinary item 12,668 3,466 2,852 3,117 4,838 (54,254)
Extraordinary item:
Loss from early extinguishment of
debt, net of income tax benefit .. -- -- -- -- (2,811) (4,322)
--------- --------- --------- -------- --------- ---------
Net income (loss) ..................... $ 12,668 $ 3,466 $ 2,852 $ 3,117 $ 2,027 $ (58,576)
========= ========= ========= ======== ========= =========
Income (loss) per common share:
Basic:
Before extraordinary item ...... $ 1.37 $ 0.38 $ 0.32 $ 0.35 $ 0.93 $ (15.36)
Extraordinary item:
Loss from early
extinguishment of
debt ...................... -- -- -- -- (0.63) (1.20)
--------- --------- --------- -------- --------- ---------
$ 1.37 $ 0.38 $ 0.32 $ 0.35 $ 0.30 $ (16.56)
========= ========= ========= ======== ========= =========
Diluted:
Before extraordinary item ...... $ 1.11 $ 0.34 $ 0.32 $ 0.33 $ 0.70 $ (15.36)
Extraordinary item:
Loss from early
extinguishment
of debt ................... -- -- -- -- (.47) (1.20)
--------- --------- --------- -------- --------- ---------
$ 1.11 $ 0.34 $ 0.32 $ 0.33 $ 0.23 $ (16.56)
========= ========= ========= ======== ========= =========
Weighted average number of common
shares outstanding:
Basic .............................. 9,278 9,046 8,913 8,890 4,487 3,595
========= ========= ======== ========= =========
Diluted ............................ 11,405 10,340 8,954 9,538 5,971 3,595
========= ========= ========= ======== ========= =========
DECEMBER 31,
-------------------------------------------------------------------- JUNE 30,
2002 2001 2000 1999 1998 1998
------- ------- ------- ------- -------- --------
Balance Sheet Data:
Working capital ......... $10,250 $13,099 $ 8,328 $ 1,162 $ (1,575) $ 2,401
Total assets ............ 73,297 69,011 69,598 56,626 60,628 91,042
Long-term debt, less
current portion ........ 13,865 23,506 24,708 11,561 7,332 14,398
Stockholders' equity .... 37,090 24,325 20,833 17,094 13,914 2,249
14
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
RISK FACTORS
Risks Related to Government Regulation
The Company is subject to extensive and frequently changing
government regulations. See "Business--Regulation."
Risks Associated with Reimbursement Arrangements
Certain of the Company's facilities are reimbursed for
various behavioral healthcare services on a per diem, per-diagnosis basis.
Accordingly, the Company may be reimbursed for services at rates less than
billed charges. To the extent that the patients covered by such arrangements
require more frequent or extensive care than is anticipated, the Company's
operating margins may be reduced and, in certain cases, the revenue derived
from such arrangements may be insufficient to cover the costs of the services
provided. In either event, the Company's business, prospects, financial
condition and results of operations may be materially adversely affected. See
"Business-Sources of Revenue."
The Company renders certain services on a fee-for-service
basis and typically bills various payors, such as governmental programs (e.g.
Medicare and Medicaid) and private insurance plans for services. The Company
derived 36% of its revenues in 2002 from payments made by Medicare and
Medicaid. The Medicare and Medicaid programs are subject to statutory and
regulatory changes, retroactive and prospective rate adjustments,
administrative rulings and funding restrictions, any of which could have the
effect of limiting or reducing reimbursement levels. Also, there can be no
assurance that payments under governmental programs or from other payors will
remain at present levels. Additionally, funds received under all health care
reimbursement programs are subject to audit with respect to the proper billing
for physician services and, accordingly, repayments and retroactive adjustments
of revenue from these programs could occur. Also, the Company's contract with
certain government payors provide for termination in the event the government
does not have adequate funding to support the program.
The Company records amounts due to or from third-party
reimbursement sources based on its best estimates of amounts to be ultimately
received or paid under cost reports filed with appropriate intermediaries. The
final determination of amounts earned under reimbursement programs is subject
to review and audit by these intermediaries. Differences between amounts
recorded as estimated settlements and the audited amounts are reflected as
adjustments to the Company's revenues in the period in which the final
determination is made.
Dependence on Major Customer
For the year ended December 31, 2002, the Company generated
approximately 17.4% of its revenues from the Florida Department of Juvenile
Justice. The loss of our contracts with the Florida Department of Juvenile
Justice or significant reductions in reimbursement rates under our contracts
with the Florida Department of Juvenile Justice could have a material adverse
effect on the Company.
Risk Associated with Puerto Rico Market
As a result of budgetary constraints, on December 15, 2001
the Government of Puerto Rico cancelled the Company's contract to provide
mental health and substance abuse services. In addition, on April 16, 2002 and
August 14, 2002, the Government of Puerto Rico also cancelled the Company's
contracts to provide a 20-bed specialized treatment program and an educational
program to youth in Puerto Rico, respectively. Total revenues from these three
contracts for the years ended December 31, 2002, 2001 and 2000 were
approximately $2.0 million, $6.2 million and $5.6 million, respectively. Total
operating (loss) or income from these contracts for the years ended December
31, 2002, 2001 and 2000 was approximately ($0.3 million), $0.6 million and $1.3
million, respectively. The Company's remaining
15
contract with the Government of Puerto Rico is for the management of the
120-bed Bayamon facility. Although the contract for the management of the
Bayamon facility does not expire until April 27, 2004, there can be no
assurances that the Government of Puerto Rico will not cancel the contract
prior to its expiration date. If the Bayamon contract is cancelled, the Company
may incur additional costs and charges associated with the early termination of
the contract. Total revenues and operating income generated by the Bayamon
facility contract for the year ended December 31, 2002 were approximately $5.8
million and $0.4 million, respectively.
The Company has experienced delays in the collection of
receivables from certain of its contracts in Puerto Rico. During the year ended
December 31, 2002, the Company collected approximately $1.4 million of past due
receivables from the Government of Puerto Rico. As of December 31, 2002, the
Company had approximately $2.0 million in outstanding receivables due from its
contracts in Puerto Rico, of which $1.1 million was over 120 days past due.
Reserves against outstanding Puerto Rico receivables were $1.1 million as of
December 31, 2002. As of March 14, 2003, the Company had collected
approximately $0.9 million of the December 31, 2002 outstanding receivable
balance, all of which related to receivables under 120 days past due. The
Company and its advisors are in active discussions with the Government of
Puerto Rico with respect to the payment of the outstanding receivables.
Although the Company has been advised by its legal counsel that the receivables
due on the Puerto Rico contracts are collectable, there can be no assurances
that the amounts will be collected.
Risks of Financial Leverage
The Company's total indebtedness accounted for approximately
33% of its total capitalization as of December 31, 2002. While the Company
believes it will be able to service its debt, there can be no assurance to that
effect. The degree to which the Company is leveraged could affect its ability
to service its indebtedness, make capital expenditures, respond to market
conditions, take advantage of certain business opportunities or obtain
additional financing. Unexpected declines in the Company's future business, or
the inability to obtain additional financing on terms acceptable to the
Company, if required, could impair the Company's ability to meet its debt
service obligations or fund acquisitions and therefore could have material
adverse effect on the Company's business and future prospects.
Risks Related to Insurance Coverage
The Company carries general and professional liability,
comprehensive property damage, malpractice, workers' compensation, and other
insurance coverages that management considers adequate for the protection of
its assets and operations. There can be no assurance, however, that the
coverage limits of such policies will be adequate to cover losses and expenses
for lawsuits brought or which may be brought against the Company. A successful
claim against the Company in excess of our insurance coverage could have a
material adverse effect on the Company.
Control by Existing Shareholder
As of December 31, 2002, Paul J. Ramsay, our Chairman of the
Board, and entities affiliated with Mr. Ramsay, owned approximately 58% of our
outstanding common stock. Based on Mr. Ramsay's stock ownership, and the stock
ownership of his affiliates, Mr. Ramsay has the ability to control most
corporate actions requiring shareholder approval, including the election of
directors.
Stockholder Rights Plan
The Company's Board of Directors has adopted a Stockholder
Rights Plan, under which the Company distributed a dividend of one common share
purchase price right for each outstanding share of the Company's Common Stock
(calculated as if all outstanding shares of Series C Preferred Stock were
converted into shares of Common Stock). Each right becomes exercisable upon the
occurrence of certain events for a number of shares of the Company's Common
Stock having a market price totaling $72 (subject to certain anti-dilution
adjustments which may occur in the future). The rights currently are not
exercisable and will be exercisable only if a new person acquires 20% or more
(30% or more in the case of certain
16
persons, including investment companies and investment advisors) of the
Company's Common Stock or announces a tender offer resulting in ownership of
20% or more of the Company's Common Stock. The rights, which expire on August
14, 2005, are redeemable in whole or in part at the Company's option at any
time before a 20% or greater position has been acquired, for a price of $.03
per right. These rights may have the effect of discouraging a third party from
making an acquisition proposal for the Company and may thereby inhibit a change
in control. For example, such provisions may deter tender offers for shares of
common stock, which may be attractive to shareholders, or deter purchases of
large blocks of common stock, thereby limiting the opportunity for shareholders
to receive a premium for their shares of common stock or exchangeable shares
over the then-prevailing market prices.
* * * * * * *
The Company cautions that the risk factors described above
could cause actual results or outcomes to differ materially from those
expressed in any forward-looking statements of the Company made by or on behalf
of the Company. Any forward-looking statement speaks only as of the date on
which such statement is made, and the Company undertakes no obligation to
update any forward-looking statement or statements to reflect events or
circumstances after the date on which such statement is made or to reflect the
occurrences of unanticipated events. New factors emerge from time to time and
it is not possible for management to predict all such factors. Further,
management cannot assess the impact of each such factor on the Company's
business or the extent to which any factor, or combination of factors, may
cause actual results to differ materially from those contained in any
forward-looking statements.
OVERVIEW
The Company is a provider of behavioral health care treatment
programs and services focused on at-risk and special needs youth. The Company
offers its full spectrum of programs and services in eleven states and the
Commonwealth of Puerto Rico.
The programs and services are offered through a network of
Company-owned or leased facilities ("Owned Operations") and state or
government-owned facilities ("Management Contract Operations"). During the year
ended December 31, 2001, the Company refined its segment definitions to better
reflect its business operations and management responsibilities. As a result,
prior year information has been reclassified to either the Owned Operations or
Management Contract Operations business segments. Further information regarding
these segments, including the required disclosures of certain segment
information is included in Note 8 of the Consolidated Financial Statements.
The Company receives revenues primarily from the delivery of
diversified programs and services to at-risk and troubled youth in residential
and non-residential settings. The Company receives revenues based on per diem
rates, or flat or cost-based rate contracts. In addition, the Company also
receives revenues from management consulting contracts with other entities.
Revenues under the Company's programs are recognized as services are rendered.
Revenues of the Company's programs and services are affected by changes in the
rates the Company charges, changes in reimbursement rates by third-party
payors, the volume of individuals treated and changes in the mix of payors.
The Company records amounts due to or from third-party
reimbursement sources based on its best estimates of amounts to be ultimately
received or paid under cost reports filed with appropriate intermediaries. The
final determination of amounts earned under reimbursement programs is subject
to review and audit by these intermediaries. Differences between amounts
recorded as estimated settlements and the audited amounts are reflected as
adjustments to the Company's revenues in the period in which the final
determination is made.
Salaries, wages and benefits include facility and program
payrolls and related taxes, as well as employee benefits, including insurance
and workers' compensation coverage. Employee compensation and benefits also
includes general and administrative payroll and related benefit costs,
including salaries and supplemental compensation of officers.
17
Other operating expenses include all expenses not otherwise
presented separately in the Company's statements of operations. Significant
components of these expenses at the operating level include items such as food,
pharmaceuticals, utilities, supplies, rent and insurance. Significant
components of these expenses at the administrative level include legal,
accounting, investor relations, marketing, consulting and travel expense.
The Company's quarterly results may fluctuate significantly
as a result of a variety of factors, including the timing of the opening of new
programs. When the Company opens a new program, the program may be unprofitable
until the program's population, and net revenues contributed by the program,
approach intended levels, primarily because the Company staffs its programs in
anticipation of achieving such levels. The Company's quarterly results may also
be impacted by seasonality, as revenues generated from behavioral healthcare
services are seasonal in nature.
On August 4, 2000, the Company consummated the acquisition of
the operating assets of Charter Behavioral Health System of Manatee Palms, L.P.
("Manatee Palms System") and the corresponding real estate from Charter
Behavioral Health Systems, LLC and Crescent Real Estate Funding VII, L.P. The
Manatee Palms System consists of two facilities which the Company manages under
its Owned Operations and one managed contract which the Company manages under
its Management Contract Operations. The results of operations of Manatee Palms
are included in the Company's financial statements as of the closing date of
the acquisition.
CRITICAL ACCOUNTING POLICIES
The preparation of the Company's consolidated financial
statements in conformity with accounting principles generally accepted in the
United States of America requires the Company to make estimates and assumptions
that affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period. The
Company's estimates, judgments and assumptions are continually evaluated based
on available information and experience. Because of the use of estimates
inherent in the financial reporting process, actual results could differ from
those estimates.
Certain of the Company's accounting policies require higher
degrees of judgment than others in their application. These include estimating
the allowance for doubtful accounts and impairment of goodwill and other
intangible assets. In addition, Note 1 to the Consolidated Financial Statements
includes further discussion of our significant accounting policies.
Management believes the following critical accounting
policies, among others, affect its more significant judgments and estimates
used in the preparation of its consolidated financial statements.
Allowance for Doubtful Accounts
The Company carries accounts receivables at the amount it
deems to be collectable. Estimates are used in determining the Company's
allowance for doubtful accounts and are based on the Company's historical
collection experience, current trends and credit policy. Although the Company
believes its allowance is sufficient, if the financial condition of the
Company's customers were to deteriorate, resulting in an impairment of their
ability to make payments, additional allowances may be required. The Company
continually evaluates the adequacy of its allowance for doubtful accounts. See
"Liquidity and Capital Resources."
Revenue Recognition
The Company records its revenues at the time services are
provided, based on estimated reimbursable amounts from Medicare, Medicaid and
other contracted reimbursement programs. Amounts received by the Company for
treatment of individuals covered by such programs, which may be based on the
cost of services provided or predetermined rates, are generally less than the
established billing rates of
18
the Company's facilities. We also estimate the amount of uncollectible
receivables each period and record valuation allowances based on historical
collection rates, the age of unpaid amounts and information about the
creditworthiness of the customers. Final determination of amounts earned under
contracted reimbursement programs is subject to review and audit by the
appropriate agencies. Differences between amounts recorded as estimated
settlements and the audited amounts are reflected as adjustments to revenues in
the period the final determination is made.
Self-Insurance Reserves
The Company carries general and professional liability,
comprehensive property damage, malpractice, workers' compensation, and other
insurance coverages that management considers adequate for the protection of
its assets and operations.
The Company maintains self-insured retentions for its
professional and general liability and workers' compensation insurance
programs. The Company's operations are insured for professional liability on a
claims-made basis and for general liability and workers' compensation on an
occurrence basis. The Company records the liability for uninsured losses
related to asserted and unasserted claims arising from reported and unreported
incidents based on independent valuations which consider various factors,
including claim development factors, the specific nature of the facts and
circumstances giving rise to each reported incident and the Company's history
with respect to similar claims. The development factors are based on a blending
of the Company's actual experience with industry standards.
The Company funds the expected losses of its workers'
compensation claims through a rent-a-captive arrangement with an offshore
entity wholly owned by a United States insurance carrier. The Company also
maintains an aggregate stop loss policy for its workers' compensation claims.
Goodwill and Intangible Assets
Purchase price accounting requires extensive use of
accounting estimates and judgments to allocate the purchase price to the fair
market value of the assets and liabilities purchased. The cost of acquired
companies is allocated first to their identifiable assets based on estimated
fair values. Costs allocated to the identifiable intangible assets are
generally amortized on a straight-line basis over the remaining estimated
useful lives of the assets. The excess of the purchase price over the fair
value of identifiable assets acquired, net of liabilities assumed, is recorded
as goodwill.
The Company annually evaluates the carrying amounts of
goodwill, as well as related amortization periods, to determine whether
adjustments to these amounts or useful lives are required based on current
events and circumstances. The evaluation is based on the Company's projection
of the undiscounted future operating cash flows of the acquired operation over
the remaining useful lives of the related goodwill. To the extent such
projections indicate future undiscounted cash flows are not sufficient to
recover the carrying amounts of related goodwill, the underlying assets are
written down by charges to expense so that the carrying amount is equal to the
fair value of the asset.
Income Taxes
The Company evaluates the need for a deferred tax asset
valuation allowance by assessing whether it is more likely than not that it
will realize its deferred tax assets in the future. The assessment of whether
or not a valuation allowance is required often requires significant judgment
including the forecast of future taxable income and the evaluation of tax
planning initiatives. Adjustments to the deferred tax valuation allowance are
made to earnings in the period when such assessment is made.
In addition, the Company has operations in tax jurisdictions
located in several states and is subject to audit in these jurisdictions. Tax
audits by their nature are often complex and can require several years to
resolve. Accruals for tax contingencies require management to make estimates
and judgments with respect to the ultimate outcome of a tax audit. Actual
results could vary from these estimates.
19
RESULTS OF OPERATIONS
OWNED OPERATIONS SEGMENT
YEAR ENDED DECEMBER 31,
--------------------------------------------------------------------------------
2002 2001 2000
--------------------- --------------------- --------------------
Revenues .............................. $116,464 100.0% $106,140 100.0% $87,506 100.0%
Expenses:
Salaries, wages and benefits ........ 67,978 58.4% 62,559 59.0% 51,520 58.8%
Other operating expenses ............ 31,265 26.8% 28,463 26.8% 23,323 26.7%
Provision for doubtful accounts ..... 1,778 1.5% 2,631 2.5% 2,371 2.7%
Depreciation and amortization ....... 2,319 2.0% 2,156 2.0% 1,744 2.0%
Asset impairment .................... 125 0.1% 124 0.1% -- --
-------- ----- -------- ----- ------- -----
Total operating expenses .......... 103,465 88.8% 95,933 90.4% 78,958 90.2%
-------- ----- -------- ----- ------- -----
Income from operations ................ $ 12,999 11.2% $ 10,207 9.6% $ 8,548 9.8%
======== ===== ======== ===== ======= =====
Year Ended December 31, 2002 Compared to Year Ended December 31, 2001
Revenues increased by 9.7%, or $10.3 million, to $116.5
million in 2002 compared to $106.1 million in 2001. The increase in revenues
during the period is primarily a result of (i) an increase of $4.4 million due
to a 4.5% increase in resident days (from 352,771 in 2001 to 368,760 in 2002),
(ii) an increase of $5.0 million due to an increase in average rates due to
increases in per diems and a favorable per diem mix, (iii) an increase of $1.6
million due to a new contract awarded to one of the Company's facilities which
began on February 18, 2002, and (iv) a reduction in the general cost report
settlements which resulted in an increase in revenue of $0.8 million. The
aforementioned increases were partially offset by the closure of a 20-bed
facility in Puerto Rico, which decreased revenues by $1.5 million.
Salaries, wages and benefits increased from $62.6 million, or
59.0% in 2001 to $68.0 million, or 58.4% in 2002. Salaries, wages and benefits
in 2002 did not fluctuate significantly as a percentage of revenue when
compared to 2001.
Other operating expenses increased from $28.5 million, or
26.8% in 2001 to $31.3 million, or 26.8% in 2002. Other operating expenses did
not fluctuate significantly as a percentage of revenue when compared to 2001.
Provisions for doubtful accounts decreased from $2.6 million,
or 2.5% in 2001 to $1.8 million, or 1.5% in 2002. The decrease as a percentage
of revenues is primarily due to the increase in the Company's residential
treatment services as a percentage of total revenues. The Company's experience
has been that, due primarily to the longer lengths of stay, residential
treatment services typically have higher collection percentages than acute
inpatient services. In addition, in 2001 the Company recorded additional
reserves due to payment delays experienced by the Company from one of its payor
sources in its Jacksonville, North Carolina facility and to financial
difficulties experienced by one of the Company's former referral sources in its
Nevada, Missouri facility.
Depreciation and amortization expense increased from $2.2
million, or 2.0% from 2001 to 2.3 million, or 2.0% in 2002. Depreciation and
amortization expense did not fluctuate as a percentage of revenue when compared
to 2001.
During the years 2002 and 2001, the Company closed two of
its therapeutic community living facilities in South Carolina and recorded an
asset impairment charge of $0.1 million in each year. The asset impairment
charges for both years were determined based on the difference between the
carrying value of the asset and the expected net proceeds from the sale.
20
Year Ended December 31, 2001 Compared to Year Ended December 31, 2000
Revenues increased by 21.3%, or $18.6 million, to $106.1
million in 2001 compared to $87.5 million in 2000. The increase in revenues
during the period is primarily a result of (i) an increase of $9.8 million due
to a 12.3% increase in resident days (from 274,171 days in 2000 to 308,028 days
in 2001), (ii) an increase of $2.4 million due to an increase in average rates
due to increases in per diems and a favorable per diem mix, (iii) $0.8 million
from a new contract awarded to one of the Company's facilities in July 2001,
and (iv) an increase of $6.8 million attributed to the full year effect of the
Manatee Palms System acquisition on August 4, 2000. The aforementioned
increases were partially offset by a reduction in the general cost report
reserves as a result of favorable cost report settlements which resulted in an
increase in revenues of $1.2 million during the twelve months ended December
31, 2000.
Salaries, wages and benefits increased from $51.5 million, or
58.8% in 2000 to $62.6 million, or 59.0% in 2001. Salaries, wages and benefits
in 2001 did not fluctuate significantly as a percentage of revenue when
compared to 2000.
Other operating expenses increased from $23.3 million, or
26.7% in 2000 to $28.5 million, or 26.8% in 2001. Other operating expenses did
not fluctuate significantly as a percentage of revenue when compared to 2000.
During the year 2001, the Company closed one of its
facilities in South Carolina and recorded an asset impairment charge of $0.1
million. The asset impairment charge was determined based on the difference
between the carrying value of the asset and the expected net proceeds from the
sale.
MANAGEMENT CONTRACT OPERATIONS SEGMENT
The following table states for the period indicated our
management contract operations in dollar and percentage of revenue terms (in
thousands):
YEAR ENDED DECEMBER 31,
------------------------------------------------------------------------------
2002 2001 2000
-------------------- -------------------- --------------------
Revenues .............................. $28,692 100.0% $28,276 100.0% $20,854 100.0%
Expenses:
Salaries, wages and benefits ........ 19,623 68.4% 18,329 64.8% 14,005 67.2%
Other operating expenses ............ 6,282 21.9% 6,161 21.8% 4,736 22.7%
Provision for doubtful accounts ..... 89 0.3% 280 1.0% 446 2.1%
Depreciation and amortization ....... 148 0.5% 123 0.4% 140 0.7%
------- ----- ------- ----- ------- -----
Total operating expenses .......... 26,142 91.1% 24,893 88.0% 19,327 92.7%
------- ----- ------- ----- ------- -----
Income (loss) from operations ......... $ 2,550 8.9% $ 3,383 12.0% $ 1,527 7.3%
======= ===== ======= ===== ======= =====
Year Ended December 31, 2002 Compared to Year Ended December 31, 2001
Revenues during 2002 of $28.7 million approximated revenues
in 2001 as increases in revenues from two new contracts awarded to the Company
in Florida and Georgia were offset by decreases resulting form the termination
of two contracts in Puerto Rico.
Salaries, wages and benefits were $19.6 million, or 68.4% of
revenues in 2002 compared to $18.3 million, or 64.8% in 2001. The increase as a
percentage of revenue is primarily attributable to the termination of one of
the Company's Puerto Rico contracts in December 2001 which had a lower than
segment-average salary cost as a percentage of revenues and start-up cost
related to the Company's new management contract in the Georgia market.
Other operating expenses were $6.3 million, or 21.9% of
revenues in 2002 compared to $6.2 million, or 21.8% of revenues in 2001. Other
operating expenses did not fluctuate significantly as a percentage of revenue
when compared to the same period in the prior year.
21
Fluctuations in the provision for doubtful accounts relate
primarily to the Company's management contracts in Puerto Rico. Due to the
termination of its Puerto Rico contracts, the Company did not increase its
provision for doubtful accounts in its Puerto Rico market during the twelve
months ended December 31, 2002.
Depreciation and amortization expense was $0.1 million, or
0.5% of revenues in 2002 compared to $0.1 million, or 0.4% of revenues in 2001.
Depreciation and amortization expense did not fluctuate significantly as a
percentage of revenue when compared to 2001.
Year Ended December 31, 2001 Compared to Year Ended December 31, 2000
Revenues increased by 35.6%, or $7.4 million, to $28.3
million in 2001 compared to $20.9 million in 2000. The increase in revenues is
primarily due to the full year effect of contracts awarded to the Company in
the Florida market during 2000. The Florida contracts increased resident days
by 39.2% (from 144,779 days in 2000 to 201,552 days in 2001) and increased
revenues by $8.3 million. The aforementioned increases were partially offset by
$0.7 million in contractual allowance reserves recorded by the Company related
to one of its Puerto Rico contracts.
Salaries, wages and benefits were $18.3 million, or 64.8% of
revenues in 2001 compared to $14.0 million, or 67.2% in 2000. The decrease as a
percentage of revenue is primarily attributable to the leveraging of certain
personnel costs in the Florida market as a result of the previously mentioned
new contracts in the Florida market.
Other operating expenses were $6.2 million, or 21.8% of
revenues in 2001 compared to $4.7 million, or 22.7% of revenue. The decrease as
a percentage of revenue is primarily attributable to the increase in revenues
provided by the previously mentioned new contracts in the Florida market.
Fluctuations in the provision for doubtful accounts relate
primarily to the Company's management contracts in Puerto Rico. During 2001,
the Company recorded approximately $0.3 million in the provision for doubtful
accounts related primarily to its management contracts in Puerto Rico.
Including the aforementioned increase in the contractual allowance reserves,
total reserves for Puerto Rico management contract receivables in 2001
increased by $0.8 million. During 2000, the Company recorded approximately $0.4
million in the provision for doubtful accounts related primarily to Puerto Rico
management contract receivables.
CORPORATE AND OTHER
YEAR ENDED DECEMBER 31,
------------------------------------------------------------------------
2002 2001 2000
------------------- ----------------- -----------------
Revenues:
Owned operations ...................... $ 116,464 $106,140 $ 87,506
Management contract operations ........ 28,692 28,276 20,854
--------- -------- --------
Total revenues ........................... $ 145,156 100.0% $134,416 100.0% $108,360 100.0%
Expenses:
Salaries, wages and benefits .......... 3,342 2.3% 2,675 2.0% 2,828 2.6%
Other operating expenses .............. 2,818 1.9% 3,091 2.3% 251 0.2%
Depreciation and amortization ......... 110 0.1% 151 0.1% 485 0.4%
Interest and other financing
charges ............................. 2,475 1.7% 3,299 2.5% 2,706 2.5%
Losses related to asset sales
and closed businesses ............... -- -- 130 0.1% 705 0.7%
(Benefit) provision for income taxes ... (5,864) (4.0%) 778 0.6% 248 0.2%
22
Year Ended December 31, 2002 Compared to Year Ended December 31, 2001
Salaries, Wages and Benefits
Corporate office salaries, wages and benefits were $3.3
million, or 2.3% of total consolidated revenues in 2002, compared to $2.7
million, or 2.0% of total consolidated revenues for the same period in 2001.
The increase as a percentage of total consolidated revenues is attributable to
a $0.5 million charge for the restructuring of an employment contract for one
of the Company's executives in June 2002.
Other Operating Expenses
Corporate office other operating expenses were $2.8 million,
or 1.9% of total consolidated revenues in 2002, compared to $3.1 million, or
2.3% of total consolidated revenues for the same period in 2001. The decrease
as a percentage of total consolidated revenues is primarily attributable to the
aforementioned increase in revenues and a reduction in various corporate
expenses.
Depreciation and Amortization
Corporate office depreciation and amortization was $0.1
million, or 0.1% of total consolidated revenues in 2002, compared to $0.2
million, or 0.1% of total consolidated revenues for the same period in 2001.
Corporate office depreciation and amortization did not fluctuate as a
percentage of revenue when compared to prior periods.
Interest and Other Financing Charges
Interest and other financing charges was $2.5 million, or
1.7% of total consolidated revenues for the year ended December 31, 2002,
compared to $3.3 million, or 2.5% of total consolidated revenues for the same
period in 2001. The decrease in interest and other financing charges is
primarily due to a decrease in the Company's average outstanding borrowings
between periods.
Losses Related to Asset Sales and Closed Businesses
During 2001, the Company agreed to accept a $0.1 million
discount for the repayment of a promissory note due to the Company in advance
of the maturity date. This note is now expected to be repaid at its original
maturity date of June 30, 2003 for the undiscounted amount of $1.8 million.
Provision for Income Taxes
During the twelve months ended December 31, 2002, the Company
reversed $6.4 million of the valuation allowance placed on its deferred tax
assets relating to temporary differences that will result in deductible amounts
in future years and net operating loss carryforwards. Future realization of the
tax benefit of an existing deductible temporary difference or carryforward
ultimately depends on the existence of sufficient taxable income within the
carryforward period available under tax law. The Company has reversed a portion
of the valuation allowance because, based on a current review of available
objective and verifiable evidence, it is management's judgment that a portion
of the tax benefits associated with the Company's deferred tax assets will more
likely than not be realized. Such evidence includes updated expectations about
sufficient future years' taxable income which reflect the continuing
improvement in the Company's operating results.
The Company has available federal net operating loss
carryforwards totaling approximately $29.0 million, which expire in the years
2010 to 2017. The Company also has available alternative minimum tax credit
carryforwards of approximately $1.2 million which may be carried forward
indefinitely.
23
The net deferred tax asset represents management's best
estimate of the tax benefits that will more likely than not be realized in
future years at each reporting date. However, there can be no assurance that
the Company can generate taxable income to realize the net deferred tax asset.
In addition, under the Tax Reform Act of 1986, certain future changes in
ownership resulting from the sale of stock may limit the amount of net
operating loss carryforwards that can be utilized on an annual basis. The
Company has and continues to evaluate compliance relating to the utilization of
the net operating loss carryforwards, and believes it has complied in all
respects. A failure to meet the requirements could result in a loss or
limitation of the utilization of carryforwards, which could have a material
adverse effect on the Company's financial position and results of operations in
future periods.
Year Ended December 31, 2001 Compared to Year Ended December 31, 2000
Salaries, Wages and Benefits
Corporate office salaries, wages and benefits were $2.7
million, or 2.0% of total consolidated revenues in 2001, compared to $2.8
million, or 2.6% of total consolidated revenues for the same period in 2000.
During 2001, the Company restructured its corporate office and eliminated five
positions.
Other Operating Expenses
Corporate office other operating expenses were $3.1 million,
or 2.3% of total consolidated revenues in 2001, compared to $0.3 million, or
0.2% of total consolidated revenues for the same period in 2000. The increase
of $2.8 million in corporate office other operating expenses is primarily
attributable to the reversal of a $2.5 million litigation reserve during 2000.
The reserve was reversed because Management of the Company concluded during
2000 that the payment of this liability was remote.
Depreciation and Amortization
Corporate office depreciation and amortization was $0.2
million, or 0.1% of total consolidated revenues in 2001, compared to $0.5
million, or 0.4% of total consolidated revenues for the same period in 2000.
The decrease in corporate office depreciation and amortization is due to
certain projects which were fully amortized during 2000.
Interest and Other Financing Charges
Interest and other financing charges was $3.3 million, or
2.5% of total consolidated revenues for the year ended December 31, 2001,
compared to $2.7 million, or 2.5% of total consolidated revenues for the same
period in 2000. The increase in interest and other financing charges is
primarily due to an increase in the Company's average outstanding borrowings
between periods as a result of the Manatee Palms acquisition and the
subordinated note and warrant purchase agreements entered into by the Company
during 2000. The increase in interest was partially offset by a decrease in
interest rates on the Company's Senior Credit Facility between periods.
Losses Related to Asset Sales and Closed Businesses
Losses related to asset sales and closed businesses was $0.1
million, or 0.1% of total consolidated revenues for 2001 compared to $0.7
million, or 0.7% of total consolidated revenues for the same period in 2000.
During 2001, the Company agreed to accept a $0.1 million discount for the
repayment of a promissory note due to the Company in advance of the maturity
date. This note is now expected to be repaid at its original maturity date of
June 30, 2003 for the undiscounted amount of $1.8 million. On June 7, 2000, the
Company sold five of its contracts to manage charter schools and personal
property with an aggregate book value of $0.8 million for $0.4 million.
Additionally, in December 2000, the Company wrote-off the unpaid balance of the
purchase price and other related assets totaling $0.3 million, increasing the
total loss to $0.7 million.
24
Provision for Income Taxes
Provision for income taxes was $0.8 million, or 0.6% of total
consolidated revenues for 2001, compared to $0.2 million, or 0.2% of total
consolidated revenues for the same period in 2000. The provision for income
taxes was recorded at an effective tax rate significantly less than the
statutory tax rate due to significant net operating loss carryovers.
Impact of Inflation
The behavioral healthcare and at-risk youth industry is labor
intensive, and wages and related expenses increase in inflationary periods.
Additionally, suppliers generally seek to pass along rising costs to the
Company in the form of higher prices. The Company monitors the operations of
its facilities to mitigate the effect of inflation and increases in the costs
of services. To the extent possible, the Company seeks to offset increased
costs through increased rates, new programs and operating efficiencies.
However, reimbursement arrangements may hinder the Company's ability to realize
the full effect of rate increases. To date, inflation has not had a significant
impact on operations.
NEW ACCOUNTING REQUIREMENTS
In July 2001, the FASB issued Statement No. 143, Accounting
for Asset Retirement Obligations. This Statement requires that an asset
retirement cost should be capitalized as part of the cost of the related
long-lived asset and subsequently allocated to expense using a systematic and
rational method. This Statement is required to be adopted in fiscal years
beginning after June 15, 2002. The Company does not anticipate a significant
impact to the results of operations from the adoption of this Statement.
In April 2002, the FASB issued Statement No. 145, Rescission
of FASB Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13, and
Technical Correction. This Statement eliminates extraordinary accounting
treatment for reporting gain or loss on debt extinguishment, and amends other
existing authoritative pronouncements to make various technical corrections,
clarifies meanings, or describes their applicability under changed conditions.
The provisions of this Statement are effective for the Company with the
beginning of fiscal year 2003; however, early application of the Statement is
encouraged. Debt extinguishments reported as extraordinary items prior to
scheduled or early adoption of this Statement would be reclassified in most
cases following adoption. The Company does not anticipate a significant impact
on its results of operations from adopting this Statement.
In June 2002, the FASB issued Statement No. 146, Accounting
for Costs Associated with Exit or Disposal Activities. This Statement requires
recording costs associated with exit or disposal activities at their fair
values when a liability has been incurred. Under previous guidance, certain
exit costs were accrued upon management commitment to an exit plan. Adoption of
this Statement is required with the beginning of fiscal year 2003. The Company
has not yet completed its evaluation of the impact of adopting this Statement.
In November 2002, the FASB issued Financial Interpretation
(FIN) No. 45, Guarantor's Accounting and Disclosure Requirements for
Guarantees, Including Indirect Guarantees of Indebtedness of Others. FIN No. 45
clarifies and expands on existing disclosure requirements for guarantees,
including product warranties. FIN No. 45 also requires recognition of a
liability at fair value of a company's obligations under certain guarantee
contracts. The disclosure requirements are effective for financial statements
of interim or annual periods ending after December 15, 2002. The initial
recognition and measurement provisions of FIN No. 45 are applied only on a
prospective basis to guarantees issued after December 31, 2002, irrespective of
the guarantors' fiscal year-end. The Company does not believe that the
implementation of FIN No. 45 will have a material impact on its financial
condition, results of operations or cash flows.
In December 2002, the FASB issued Statement No. 148,
Accounting for Stock-Based Compensation--Transition and Disclosure, an
amendment of FASB Statement No. 123. This Statement
25
provides alternative methods of transition for a voluntary change to the fair
value based method of accounting for stock-based employee compensation. In
addition, this Statement amends the disclosure requirements of Statement 123 to
require prominent disclosures in both annual and interim financial statements
about the method of accounting for stock-based employee compensation and the
effect of the method used on reported results. The Company does not anticipate
a significant impact to the results of operations from the adoption of this
Statement.
In January 2003, the FASB issued FIN No. 46, Consolidation of
Variable Interest Entities. FIN No. 46 provides accounting guidance for
consolidation of off-balance sheet entities with certain characteristics
(variable interest entities). All enterprises with variable interest in
variable interest entities created after January 31, 2003, shall apply the
provisions of this interpretation immediately. A public entity with variable
interest in a variable interest entity created before February 1, 2003 shall
apply the provisions of this interpretation no later than the first interim or
annual reporting period beginning after June 15, 2003. The Company does not
believe that the implementation of FIN No. 46 will have a material impact on
its financial condition, results of operations or cash flows.
LIQUIDITY AND CAPITAL RESOURCES
The Company's primary liquidity needs are for working
capital, capital expenditures, and debt service. The Company's primary sources
of liquidity are cash flows from operations and borrowings under its revolving
credit line.
At December 31, 2002 and December 31, 2001, the Company had
$10.3 million and $13.1 million, respectively, in working capital and $0.8
million in cash and cash equivalents for both years. Working capital as of
December 31, 2002 was comprised primarily of $0.8 million in cash and cash
equivalents, $20.8 million in accounts receivable and $7.3 million in other
current assets, net of $18.6 million in current liabilities. The decrease in
working capital between periods is primarily a result of a decrease in net
accounts receivable resulting from an increase in collections, partially offset
by an increase in other current assets and current liabilities resulting
primarily from year end timing differences in the payment of certain
liabilities. The excess cash generated by the Company's decrease in accounts
receivable was used to reduce debt.
Cash used by investing activities was $2.3 million for 2002
as compared to cash used in investing activities of $2.0 million in 2001.
During 2002, the Company incurred approximately $2.5 million for property,
plant and equipment additions and received $0.2 million from the sale of
certain assets. During 2001, the Company incurred approximately $2.5 million
for property, plant and equipment additions and received $0.5 million from the
sale of certain assets. During 2000, the Company acquired the Manatee Palms
System for $8.2 million and incurred $2.5 million for property, plant and
equipment additions.
Cash used in financing activities was $9.2 million in 2002 as
compared to $0.8 million in 2001. Cash used in financing activities during 2002
and 2001 related primarily to repayments of borrowings under the Company's term
loan offset by proceeds from borrowing under the revolving credit facility.
During 2000, cash provided by financing activities related primarily to
proceeds from the Company's senior credit facility for the aforementioned
purchase of the Manatee Palms System. In addition, during 2000, the Company
also entered into subordinated note and warrant purchase agreements with two
unrelated financial instit