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FORM 10-K
(MARK ONE)
/X/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 [FEE REQUIRED]
FOR THE FISCAL YEAR ENDED JUNE 30, 1998 OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
FOR THE TRANSITION PERIOD FROM ______ TO ______
COMMISSION FILE NUMBER 0-13849
RAMSAY HEALTH CARE, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 63-0857352
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
COLUMBUS CENTER
ONE ALHAMBRA PLAZA, SUITE 750
CORAL GABLES, FLORIDA 33134
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE (305) 569-6993
SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:
TITLE OF EACH CLASS NAME OF EACH EXCHANGE ON WHICH REGISTERED
------------------- -----------------------------------------
NONE NONE
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
COMMON STOCK, $0.01 PAR VALUE
(TITLE OF CLASS)
Indicate by a check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months, and (2) has been subject to such
filing requirements for the past 90 days. Yes X No __.
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K./ /
The number of shares of the registrant's Common Stock outstanding as of
October 2, 1998 was 10,877,982. The aggregate market value of Common Stock held
by non-affiliates on such date was $9,232,121.
DOCUMENTS INCORPORATED BY REFERENCE
Certain sections of the registrant's definitive Proxy Statement to be
filed for the 1998 Annual Meeting of Stockholders are incorporated by reference
into Part III.
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FORWARD-LOOKING STATEMENTS
In connection with the "safe-harbor" provisions of the Private
Securities Litigation Reform Act of 1995, Ramsay Health Care, Inc. ("RHCI" 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 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, (iv) the
Company's inability to successfully implement its new strategic direction of
providing treatment and education programs for at-risk and troubled youth and
(v) the Company's inability to obtain working capital and acquisition financing
on commercially reasonable terms. There can be no assurance that any anticipated
future results will be achieved. As a result of the factors identified above and
other factors, the Company's actual results or financial or other condition
could vary significantly from the performance or financial or other condition
set forth in any forward-looking statements or information.
PART I
ITEM 1. BUSINESS.
GENERAL
The Company is a leading operator and manager of diversified
treatment and education programs for at-risk and troubled youth in residential
and non-residential settings nationwide. During the fiscal year ended June 30,
1998, the Company also operated as a provider and manager of behavioral
healthcare services. See "Recent Developments".
OVERVIEW
On February 19, 1998, the Company announced a change in
strategic direction in order to focus on becoming a leader in the at-risk youth
industry. To that end, in February 1998, management identified for divestiture
those businesses and facilities which were not essential to its strategic
objectives in the youth services field. In June 1998, the Company sold its
behavioral managed care business and in September 1998, the Company completed
the sales of non-strategic inpatient psychiatric hospitals. The net proceeds for
these divestitures were applied to reduce indebtedness and to redeem preferred
stock, all held by an unaffiliated financial institution. See "Item 7.
Management's Discussion and Analysis of Financial Condition and Results of
Operations". The remaining business represents the Company's youth service
operations and is comprised of seven youth facilities with 713 beds and six
group homes with 66 beds. The Company also provides a range of outpatient
services and day treatment programs tailored for the at-risk and troubled youth
population.
Throughout its youth facilities and group homes, the Company
offers specialized services to those adolescents affected with behavioral
disorders, psychoses, emotional disorders, as well as sexual and juvenile
offenders. Within these environments, clinical and program teams incorporate
therapeutic, educational and vocational services with cognitive, behavioral and
social rehabilitation programs. These highly structured programs assist troubled
youth in learning how to change ineffective or violent behavior and cope with
the difficulties and stresses of life. The Company's specialized services and
programs are geared toward the following populations: (i) juvenile offenders,
(ii) adolescent females, (iii) children and adolescents with emotional and
behavioral disorders, (iv) sexual offenders, (v) substance abusers and (vi)
youth with developmental disabilities. In response to state, community and
agencies' needs to secure
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appropriate placements for special needs youth, the Company offers the following
specialized programs and services:
o RESIDENTIAL TREATMENT FACILITIES - Residential Treatment Facilities provide
a safe, secure and highly structured environment for the evaluation and
development of programs for troubled youth. Certain Residential Treatment
Facilities offer specific services such as:
- Intensive Treatment Units which provide crisis stabilization for
severely behaviorally and emotionally disturbed youth.
- Residential Treatment Centers which focus on a cognitive behavioral
model with family, group and individual counseling, social and life
skills, and educational and recreational programs.
- Assignment Centers which conduct in-depth academic, mental health,
behavioral and medical assessments with the primary purpose of placing
adjudicated juveniles in the proper residential facility within the
restrictiveness level ordered by the court.
- Day Treatment Programs which are designed to meet the special needs of
troubled youth and their families, while enabling the youth to remain
living in his or her home.
The Company also has the ability to manage and develop programs and
services for youth in facilities not owned by the Company through service
contracts.
o GROUP HOMES - Group homes provide shelter care for youth in a family-like
setting in residential neighborhoods. These adolescents typically are in
need of a step-down or transition phase back to their home environment. The
primary focus is to teach independent living skills to decrease
institutional dependency. Youth in group homes attend public education
programs or educators are brought into the home, where they receive
vocational and work training programs in order to gradually transition them
back into their communities.
o SPECIAL EDUCATION PROGRAMS - Special Education Programs are designed to
educate at-risk youth in a manner that promotes public safety by reducing
disruptive and delinquent behaviors of students. The principal components
of the special education programs include an academic curriculum, daily
computer assisted learning, behavioral counseling, job placement, family
services and community service.
o COMMUNITY-BASED SERVICES - Community-Based Services are provided in the
youth's home or in another community setting. These community-based
services provide supportive, mental health care and counseling to youth and
their families whose condition does not warrant more intensive treatment
programs.
The primary objective of the Company's programs is to provide
the optimal opportunity for habilitation and integration of at-risk and troubled
youth into their communities as responsible individuals and productive citizens.
RECENT DEVELOPMENTS
On May 4, 1998, the Company sold its Three Rivers facility,
which had been closed since June 30, 1995, for $2.0 million. Proceeds from the
sale included a $0.5 million cash payment at closing and a $1.5 million, 12%
promissory note, due and payable on May 1, 1999.
On June 2, 1998, the Company sold FPM Behavioral Health, Inc.
("FPM"), its wholly owned managed behavioral health care business for a cash
purchase price of $20.0 million, subject to certain future potential purchase
price adjustments. On June 2, 1998, the Company also sold its Greenbrier
facility for a cash purchase price of $1.6 million.
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On September 28, 1998, the Company consummated a
sale/leaseback transaction whereby the Company sold the land, building and fixed
equipment of its Havenwyck facility in Auburn Hills, Michigan for the land,
building and fixed equipment of its leased Desert Vista facility in Mesa,
Arizona and $1.3 million in cash. In connection with the sale/leaseback, the
Company agreed to lease the Havenwyck facility back over a term of approximately
12 years with current annual minimum lease payments of $1.3 million, payable
monthly.
On September 28, 1998, the Company completed the sale of its
management contract services subsidiary, and behavioral health care facilities
in Conway, South Carolina, Houma, Louisiana, Mesa, Arizona and DeSoto, Texas for
a cash purchase price of $13.5 million. In connection with the sale, the Company
agreed to sell its medical subacute and behavioral health care facility in San
Antonio, Texas to the purchaser for no additional consideration other than the
assumption of liabilities if the purchaser obtains consent for the sale from the
lessor of the facility within 90 days.
On September 30, 1998, the Company completed the sale of its
behavioral health care facility in Morgantown, West Virginia for a cash purchase
price of $14.8 million.
STRATEGY
The Company's current youth service operations are the solid
platform from which management intends to pursue growth within its current
geographic markets, as well as new geographic markets, where the Company is or
can be a dominant player in the industry. The Company intends to grow through
(i) expansion of services, markets and products, (ii) aggressive response to
requests for proposals ("RFP's") and (iii) selected strategic acquisitions.
Through these avenues, management intends to capitalize on the youth services
industry's size, fragmentation and multiple payor sources.
o EXPANSION OF SERVICES - Management believes significant opportunities exist
to further penetrate the Company's existing geographic markets. Management
will continue to capitalize on the Company's reputation for delivering high
quality, cost-effective solutions to expand the breadth of service provided
to existing customers and to attract new customers. In addition, the
Company will continue to develop new programs which respond to state and
local agencies' needs to secure appropriate placements for special needs
youth.
o AGGRESSIVE RESPONSE TO RFPS - The Company is well positioned to expand into
new markets as state and local agencies increasingly seek providers with
the capability to provide 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 RFP's. The Company
prioritizes its target markets based on the needs of each state, the
diversification of funding sources, state and local legislation, existing
relationships and in-state competition.
o SELECTED STRATEGIC ACQUISITIONS - The Company intends to pursue strategic
acquisitions of other youth services providers to further penetrate
existing markets and enter new geographic markets. The youth services
industry is highly fragmented with what the Company estimates to be
approximately 10,000 to 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.
Acquisitions will depend, in
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part, on the Company obtaining acquisition financing on commercially
reasonable terms. See "Item 7. Management's Discussion and Analysis of
Financial Condition and Results of Operations".
COMPETITION
The fragmented at-risk youth industry is comprised largely of
small providers that operate in relatively limited geographic areas and provide
services to a specific type of juvenile. The Company competes with both public
and private for-profit and not-for-profit companies.
Competition generally is based upon program quality, range and
price of services provided, operational experience and facility location. The
strength and depth of a provider's relationship with the various payors plays a
significant role in the selection process. The Company believes that its
facilities 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.
MARKETING
The Company's marketing activities are directed primarily
toward local and state governmental entities responsible for juvenile justice,
social services providers, education and mental health providers, as well as
school districts and juvenile courts responsible for special programs for
at-risk and troubled youth. Marketing efforts are coordinated by the Company's
Vice President of Youth Services and other senior management personnel in
concert with field management at the local level.
REGULATION
The at-risk youth industry is subject to federal, state and
local regulations, which are administered by a variety of regulatory
authorities. Operators of residential and day facilities for juveniles are
typically expected to provide education programs and, in some instances, health
care services. As providers of such services, operators of at-risk youth
facilities are required to comply with applicable state and local regulations.
In addition, some programs require accreditation from the Joint Commission on
Accreditation of Healthcare Organizations or Commission on Accreditation of
Rehabilitation Facilities.
As a behavioral healthcare provider, the Company is subject to
extensive and frequently changing government regulations. These regulations are
primarily concerned with licensure, conduct of operations, reimbursement,
financial solvency, standards of medical care, the dispensing of drugs, patient
rights (including the confidentiality of medical records) and the direct
employment of psychiatrists, psychologists, and other licensed professionals.
Regulatory activities affect the Company's business directly by controlling its
operations, restricting licensure of the business entity or by controlling the
reimbursement for services provided, and indirectly by regulating its customers.
In certain cases, more than one regulatory agency may have authority over the
activities of the Company. State licensing laws and other regulations are
subject to amendment and to interpretation by regulatory agencies with broad
discretionary powers. Any new regulations or licensing requirements, or
amendments or interpretations of existing regulations or requirements, could
require the Company to modify its operations materially in order to comply with
applicable regulatory requirements and may have a material adverse effect on the
Company's business, financial condition or results of operations.
Federal law contains a number of provisions designed to ensure
that services rendered by providers of healthcare services to Medicare and
Medicaid patients are medically necessary, meet professionally recognized
standards and are billed properly. These provisions include a requirement that
admissions of Medicare and Medicaid patients to a facility must be reviewed in a
timely manner to determine the medical necessity of the admissions. In addition,
the Peer Review Improvement Act of 1982 ("Peer Review Act") provides that a
facility may be required by the federal government to reimburse the government
for the cost of Medicare-paid services determined by a peer review organization
to have been medically unnecessary. Each of the Company's facilities has
developed and implemented a quality assurance program and implemented procedures
for utilization review and retrospective patient care evaluation to meet its
obligations under the Peer Review Act.
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The Social Security Act imposes civil sanctions and criminal
penalties upon persons who make or receive kickbacks, bribes or rebates in
connection with federally-funded healthcare programs. The Social Security Act
also provides for exclusion from the Medicare and Medicaid programs for
violations of the anti-kickback rules. The anti-kickback rules prohibit
providers and others from soliciting, offering, receiving or paying, directly or
indirectly, any remuneration in return for either making a referral for a
federally-funded healthcare service or item or ordering any such covered service
or item. In order to provide guidance with respect to the anti-kickback rules,
the Office of the Inspector General of the U.S. Department of Health and Human
Service has issued regulations outlining certain "safe harbor" practices, which
although potentially capable of including prohibited referrals, would not be
prohibited if all applicable requirements were met. A relationship which fails
to satisfy a safe harbor is not necessarily illegal, but could be scrutinized on
a case-by-case basis. Since the anti-kickback rules have been broadly
interpreted, they could limit the manner in which the Company conducts its
business. The Company believes that it currently complies with the anti-kickback
rules in planning its activities, and believes that its activities, even if not
within a safe harbor, do not violate the anti-kickback rules. However, there can
be no assurance that (i) government enforcement agencies will not assert that
certain of these arrangements are in violation of the illegal remuneration
statute, (ii) the statute will ultimately be interpreted by the courts in a
manner consistent with the Company's practices or (iii) the federal government
or other states in which the Company operates will not enact similar or more
restrictive legislation or restrictions that could, under certain circumstances,
impact the Company's operations.
Under another federal provision, known as the "Stark" law or
"self-referral" prohibition, physicians who have an investment or compensation
relationship with an entity furnishing certain designated health services
(including inpatient and outpatient facility services) may not, subject to
certain exceptions, refer Medicare patients for designated health services to
that entity. Similarly, facilities may not bill Medicare or any other party for
services furnished pursuant to a prohibited referral. Violation of these
provisions may result in disallowance of Medicare claims for the affected
services, as well as the imposition of civil monetary penalties and program
exclusion. In addition, the Stark law prevents states from receiving federal
Medicaid matching payments for designated health services that are provided as a
result of a prohibited referral. Often as a result of this requirement, a number
of states have enacted prohibitions similar to the Stark law covering referrals
of non-Medicare business. The following states in which the Company conducts
business have passed legislation which, under certain circumstances, either may
prohibit the referral of private pay patients to healthcare entities in which
the physician has an ownership or investment interest or with which the
physician has a compensation arrangement or may require the disclosure of such
interest to the patient: Arizona, Florida, Georgia, Louisiana, Michigan,
Missouri, Nevada, North Carolina, Ohio, Oklahoma, South Carolina, Tennessee,
Utah and West Virginia. All of these rules are very restrictive, prohibit
submission of claims for payment related to prohibited referrals and provide for
the imposition of civil monetary penalties and criminal prosecution. The Company
is unable to predict how these laws may be applied in the future, or whether the
federal government or states in which the Company operates will enact more
restrictive legislation or restrictions that could under certain circumstances
impact the Company's operations.
In 1996, Congress enacted the Mental Health Parity Act of 1996
which generally requires that group health plans which provide benefits for
mental health care must treat mental health benefits on a similar basis as
benefits for any other illness for purposes of imposing annual or lifetime
benefit limits. The law provides that, if the plan imposes limits on medical or
surgical benefits on the basis of different categories of benefits, the plan may
do the same with regard to different categories of mental health benefits, in
accordance with regulations to be issued by the United States Department of
Labor. The impact of this legislation on employee health benefits is unknown and
the Company cannot predict the effect of this legislation on its financial
condition or results of operations.
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
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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.
In certain states where the Company intends to manage the
provision of educational services for troubled youth, state and local regulation
exists governing such areas as compensatory arrangements between for-profit
service providers such as the Company and not-for-profit schools and other
educational entities, conflicts of interest and standards governing the quality
of educational services.
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
Arizona, Texas, Louisiana and Utah, all of the states in which the Company
operates facilities have adopted certificate of need or similar statutes.
The Company believes that it is currently in compliance in all
material respects with applicable current statutes and regulations governing its
business. The Company monitors its compliance with applicable statutes and
regulations and works with regulators concerning various compliance issues that
arise from time to time. Notwithstanding the foregoing, the regulatory approach
to behavioral healthcare services 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.
INDUSTRY TRENDS
The Company believes that the at-risk youth market is highly
fragmented and experiencing rapid growth. The market is comprised of three major
segments: juvenile justice, education and child welfare. The population of
at-risk youth include youth who are abused and neglected, emotionally disturbed,
behaviorally disordered, developmentally delayed, learning disabled and/or
adjudicated. According to published industry statistics, the overall market is
expected to grow in excess of 7% per annum over the next five years and the
for-profit portion of the industry is expected to grow 30% annually over the
same time period. Contributing factors to the rapid industry growth include (i)
a substantive increase in the youth population, (ii) the proliferation of single
parent households, (iii) the increase in the number of families living at the
poverty level, (iv) the rise in drug use among juveniles and (v) an increase in
organized gang activities.
SOURCES OF REVENUE
In fiscal 1998, the Company received payments from various
sources, including commercial insurance carriers (which provide coverage to
insured patients on both an indemnity basis and through various managed care
plans), Medicaid, Medicare and various governmental agencies (including state
judicial systems). In addition, payments were received directly from
individuals, including copayments and deductibles related to services covered by
these individuals' benefit plans. The Company also received payments under
management contracts from its various clients.
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The following table sets forth the approximate percentages of
the Company's fiscal year 1998 revenues derived from these various sources.
YEAR ENDED
JUNE 30, 1998
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Medicare............................................ 33%
Other government programs........................... 22%
Medicaid............................................ 16%
Blue Cross and other commercial insurance........... 15%
Managed care organizations.......................... 10%
Contract management customers....................... 2%
Self-pay and other.................................. 2%
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100%
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o MEDICARE - Medicare is the federal health insurance program for the aged
and disabled. Medicare reimburses providers of psychiatric care for
inpatient, partial hospitalization and hospital-based outpatient services
on a cost-based reimbursement system. Medicare reimburses for certain other
outpatient services based on an area-wide fee schedule or other blended
rates. Medicare reimbursement is typically less than the Company's
established charges for services provided to Medicare patients. Patients
are not responsible for the difference between the reimbursed amount and
the established charges other than for applicable noncovered charges,
coinsurance and deductibles. In 1983, Congress changed the Medicare law
applicable to Medicare reimbursement for medical/surgical services from a
retrospectively determined reasonable cost system to a prospectively
determined diagnosis-related grouping ("DRG") system. Facilities providing
psychiatric care are currently exempt from the DRG reimbursement system.
However, both Congress and the agency responsible for administering the
Medicare program, the Health Care Financing Administration, have been
investigating a revision to the payment system for inpatient psychiatric,
partial hospitalization and hospital-based outpatient services, including
certain of the services provided by the Company, which would eliminate the
cost-based structure of the current system. Under current proposals,
reimbursement for inpatient, partial hospitalization and outpatient
psychiatric services would be transitioned to a prospective payment system
in which payment for services may be unrelated to the provider's costs.
Medicare reimbursement to exempt psychiatric and chemical dependency
facilities is currently subject to the payment limitations and incentives
established in the Tax Equity and Fiscal Responsibility Act of 1982
("TEFRA"). These facilities are currently paid on the basis of each
facility's historical costs trended forward, with a limit placed on the
rate of increase in per case reimbursable costs. Facilities with costs less
than their respective target rate per discharge are currently reimbursed
based on allowable Medicare costs, plus an additional incentive payment.
Medicare reimbursement under TEFRA to facilities exempt from prospective
payment, such as the Company's facilities, have been adversely affected by
the Balanced Budget Act of 1997, passed by Congress in July 1997. Under
certain provisions of this Act, effective July 1, 1998 for the Company,
target rates per discharge were capped, the formula by which incentive
payments are calculated was modified to reduce these payments and allowable
Medicare capital costs were reduced by 15%.
o OTHER GOVERNMENT PROGRAMS - The Company's facilities are reimbursed for
certain services on a per-diem basis by various state agencies. The
per-diem rate is generally based on the nature and scope of services
provided to these patients.
o MEDICAID - Medicaid is the federal/state health insurance program for
low-income individuals, including welfare recipients. Subject to certain
minimum federal requirements, each state defines the extent and duration of
the services covered by its Medicaid program. Moreover, although there are
certain federal requirements governing the payment levels for Medicaid
services, each state has its own methodology for making payment for
services provided to Medicaid patients. Various state Medicaid programs
cover payment for services provided to Medicaid patients by the Company.
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o MANAGED CARE ORGANIZATIONS AND OTHER COMMERCIAL PAYORS - The Company's
facilities are reimbursed for behavioral healthcare services by health
maintenance organizations ("HMO's"), commercial insurance companies and
self-insured employers either on a fee-for-service basis or under
contractual arrangements which include per-diem, per-diagnosis or
sub-capitated arrangements.
For inpatient and partial hospitalization services, Blue Cross plans
reimburse based on charges or negotiated rates in all areas in which the
Company presently operates facilities, except Alabama and Michigan. In
certain states in which the Company operates, Blue Cross reimbursement is
approved through a rate-setting process and, therefore, Blue Cross may
reimburse the Company at a rate less than billed charges. Under cost-based
Blue Cross programs, such as those in Alabama and Michigan, direct
reimbursement to facilities typically is lower than the facility's charges,
and patients are not responsible for the difference between the amount
reimbursed by Blue Cross and the facility's charges.
Most commercial insurance carriers reimburse their policyholders or
reimburse the Company directly for charges at rates and limits specified in
their policies. Patients generally remain responsible for any amounts not
covered under their insurance policies. Generally, reimbursement for
psychiatric inpatient and chemical dependency care by commercial insurance
carriers is limited to a maximum number of inpatient days per year or
during the patient's lifetime, or to a maximum dollar amount expended for a
patient in a given period.
OWNERSHIP ARRANGEMENTS
One physician owns a 4% interest in the subsidiary which owns
Gulf Coast Treatment Center. The Company may be required to repurchase, and the
minority shareholder may be required to sell, the minority interest at a formula
price dependent upon many factors, including the earnings per share of the
subsidiary which owns the hospital and the price/earnings multiple of the
Company, after a fixed period of time. Although the amount of the Company's
repurchase obligation cannot be precisely determined, the Company does not
believe that this obligation is material.
INSURANCE
The Company maintains self-insured retentions related to its
professional and general liability insurance program. The Company's operations
are insured for professional liability on a claims-made basis and for general
liability on an occurrence basis. The Company records the liability for
uninsured professional and general liability losses related to asserted and
unasserted claims arising from reported and unreported incidents based on
independent valuations which consider claim development factors, the specific
nature of the facts and circumstances giving rise to each reported incident and
the Company's history with respect to similar claims. The development factors
are based on a blending of the Company's actual experience with industry
standards.
EMPLOYEES
As of June 30, 1998, the Company employed approximately 1,622
full-time and 1,215 part-time employees, including a corporate headquarters
staff of approximately 17 full-time employees. The Company considers its
relationship with its employees to be good. After giving effect to the
divestitures of businesses and facilities in September 1998, the Company employs
933 full-time and 773 part-time employees, including a corporate headquarters
staff of approximately 17 full-time employees.
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EXECUTIVE OFFICERS OF THE REGISTRANT
Certain information with respect to the executive officers of the
Company is set forth below:
POSITION WITH THE COMPANY AND PRINCIPAL OCCUPATION
NAME OF EXECUTIVE OFFICER AGE DURING THE PAST FIVE YEARS
- ------------------------------- --------- ---------------------------------------------------------------------
Luis E. Lamela................ 48 Chief Executive Officer of the Company since January 1998; Vice
Chairman of the Board of the Company since January 1996; Chief
Executive Officer of CAC Medical Centers, a division of United
HealthCare of Florida, since May 1994; President and CEO of
Ramsay-HMO, Inc. from prior to 1993 to May 1994.
Bert G. Cibran................ 44 President and Chief Operating Officer of the Company since August
1996; President, Summa Healthcare Group, Inc. from February
1996 through August 1996; President and Chief Operating Officer
for the Florida operations of Physician Corporation of America
from February 1994 to February 1996; Executive Vice President
of Operations with Ramsay-HMO, Inc. from prior to 1993 to
February 1994.
Isabel M. Diaz................ 33 Vice President of the Company since October 1997; Executive Vice
President of Corporate Relations for United HealthCare of
Florida, Inc. and the CAC Medical Centers, Inc., a division of
United HealthCare of Florida, Inc., from May 1994 to September
1997; Vice President of Investor and Public Relations for
Ramsay-HMO, Inc. from prior to 1993 to May 1994.
Marcio C. Cabrera............. 34 Executive Vice President and Chief Financial Officer of the Company
since July 1998; Vice President of Finance for CAC Medical
Centers, a division of United HealthCare of Florida, Inc. from
June 1997 to May 1998; Vice President of Finance for United
HealthCare of Florida, Inc. from May 1994 to May 1997;
Corporate Controller for Ramsay-HMO from prior to 1993 to May
1994.
William N. Nyman.............. 45 Vice President of the Company since August 1993; Regional
Controller of the Company from prior to 1993 to July 1993.
Jorge Rico.................... 33 Vice President of the Company since February 1997; Vice President
of Administration and Information Technology for United
HealthCare of Florida, Inc. from 1994 to January 1997 and for
Ramsay-HMO, Inc. from prior to 1993 to 1994.
Marianne L. Finizio........... 39 Vice President of the Company since January 1997; Vice President of
United HealthCare of Florida, Inc. from May 1994 to December
1996; Vice President for Ramsay-HMO, Inc. from prior to 1993 to
May 1994.
9
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ITEM 2. PROPERTIES.
The following table provides information concerning 14 inpatient
facilities owned and operated or leased and operated by the Company as of June
30, 1998.
DATE OPENED TOTAL
FACILITY (7) OR ACQUIRED BEDS
- ------------------------------------- ------------------------- ------------
Havenwyck Facility
Auburn Hills, MI(1).............. November 1983 139
Brynn Marr Facility
Jacksonville, NC................. December 1983 76
Hill Crest Facility
Birmingham, AL................... January 1984 103
Heartland Facility
Nevada, MO....................... April 1984 134
Coastal Carolina Facility
Conway, SC(2).................... November 1984 98
Bayou Oaks Facility
Houma, LA(2).................... November 1985 98
Benchmark Regional Facility
Woods Cross, UT................. August 1986 68
Desert Vista Facility
Mesa, AZ(2)..................... February 1987 100
Chestnut Ridge Facility
Morgantown, WV(2)............... November 1987 70
The Haven Facility
DeSoto, TX(2).................. April 1990 102
Mission Vista Facility
San Antonio, TX(3)............. November 1991 61
Benchmark Behavioral Facility
Midvale, UT(4)................. June 1995 80
Gulf Coast Treatment Center
Fort Walton Beach, FL(5)...... December 1996 118
Dothan Facility
Dothan, Alabama............... April 1998 75
------------
Total (6)................ 1,380
============
(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. See "Item 1.
Business - Recent Developments".
(2) These facilities were sold in September 1998. See "Item 1. Business -
Recent Developments".
(3) 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. In connection with the sale of certain facilities, the
Company has agreed to sell its interest in Mission Vista to an
unrelated third party if the unrelated third party obtains consent for
the transfer from the facility's lessor. See "Item 1. Business - Recent
Developments".
(4) The building in which the Company's facility in Midvale, Utah is
located is leased for an initial period ending June 24, 1999 (with an
option to renew for an additional three years).
(5) The Company resumed operations at this facility in December 1996. For
the previous four years, this facility was leased to another healthcare
provider.
(6) Excludes Meadowlake facility, which was leased to an independent
healthcare provider in August 1997, Bethany Pavilion, a 43-bed unit
managed by the Company under a joint venture agreement during fiscal
1998, and the Palm Bay facility which was leased in July 1998.
(7) The Company believes that its facilities are well maintained and are of
adequate size for present needs.
Statement of Financial Accounting Standards (SFAS) No. 121
addresses the accounting for the impairment of long-lived assets and long-lived
assets to be disposed of, certain identifiable intangible assets and goodwill
relating to those assets, and provides guidance for recognizing and
10
12
measuring impairment losses. The statement requires that the carrying amount of
impaired assets be reduced to fair value.
As required by SFAS No. 121, the Company periodically reviews
its long-lived assets (land, buildings, fixed equipment, cost in excess of net
asset value of purchased businesses and other intangible assets) to determine if
the carrying value of these assets is recoverable, based on the future cash
flows expected from the assets. Based on this review, the Company determined
that the carrying value of certain long-lived assets were impaired (within the
meaning of the Statement) at June 30, 1998 and 1996. The amount of the
impairment, calculated as (i) the excess of carrying value of the long-lived
assets over the discounted future cash flows expected from the assets, or (ii)
the excess of the carrying value of the long-lived assets over the selling
values, totalled approximately $18.3 million and $5.5 million at June 30, 1998
and 1996, respectively. See "Item 7. Management's Discussion and Analysis of
Financial Condition and Results of Operations" and "Item 8. Financial Statements
and Supplementary Data".
The Company leases office space for its corporate headquarters
in Coral Gables, Florida, (through August 1999) and its former corporate
headquarters in New Orleans, Louisiana (through March 1999) and various regional
offices and clinics. 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 for the estimated amounts which might be recovered from the
Company as a result of all outstanding legal proceedings. In the opinion of
management, the ultimate resolution of these pending legal proceedings is not
expected to have a material adverse effect on the Company's financial position,
results of operations or liquidity.
During fiscal 1996, the State of Louisiana requested repayment
of disproportionate share payments received by two of the Company's facilities
in fiscal years 1995 and 1994 totalling approximately $5.5 million. However, the
Company believes that this matter may be settled for an amount significantly
less than the State's initial request. The Company intends to vigorously contest
any position by Louisiana which it considers adverse.
In March 1997, a former executive vice president of the
Company commenced arbitration and court proceedings (in the United States
District Court for the Eastern District of Louisiana) against the Company in
which he claims his employment was wrongfully terminated by the Company and
seeks damages of approximately $2.3 million. The Company intends to vigorously
defend the proceedings.
Prior to its merger with the Company, a subsidiary of the
Company sold one of its wholly owned subsidiaries, a licensed health maintenance
organization in Louisiana, Alabama and Mississippi. On September 29, 1997, the
Company received a demand for indemnification by the purchaser of this
subsidiary in an amount totalling approximately $5.8 million, an amount in
excess of the purchase price paid by the purchaser for the HMO subsidiary. The
Company intends to vigorously defend any proceedings which may result from this
matter. In addition, on September 30, 1997, the Company demanded indemnification
from the purchaser for various matters in an amount exceeding $2.0 million.
See footnote 15 to the consolidated financial statements set
forth under "Item 8. Financial Statements and Supplementary Data".
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
Not applicable.
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PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS.
The Company's Common Stock is traded in the over-the-counter
market and is quoted on the NASDAQ National Market System under the symbol RHCI.
On October 2, 1998, there were 504 holders of record of the Company's Common
Stock. No cash dividends have been declared on the Common Stock since the
Company was organized. Also, the Company's credit facilities include provisions
which prohibit the payment of cash dividends to its common shareholders.
In connection with a recapitalization of the interests of Mr.
Paul J. Ramsay, Chairman of the Board of the Company and a significant
shareholder, in June 1993, the Company issued 142,486 shares of Class B
Preferred Stock, Series C (the "Series C Preferred Stock"), which are
convertible into 1,424,860 shares of Common Stock (subject to adjustment). Each
share of Series C Preferred Stock is entitled to (i) cumulative dividends at a
rate of 5% per annum (or an aggregate of $362,200 per year), (ii) a liquidation
preference of $50.84 under certain circumstances and (iii) ten votes on all
matters put to a vote of the shareholders of the Company.
On June 10, 1997, as partial consideration for the acquisition
of Ramsay Managed Care, Inc. ("RMCI"), the Company issued 100,000 shares of
Series 1996 Preferred Stock, which are convertible into 1,000,000 shares of
Common Stock (subject to adjustment), to a corporate affiliate of Mr. Ramsay.
Each share of Series 1996 Preferred Stock is entitled to (i) cumulative
dividends at a rate of 5% per annum (or an aggregate of $150,000 per year), (ii)
a liquidation preference of $30.00 under certain circumstances and (iii) ten
votes on all matters put to a vote of the shareholders of the Company.
On September 30, 1997, in connection with a refinancing of the
Company's then existing indebtedness, the Company entered into an agreement with
a corporate affiliate of Mr. Ramsay pursuant to which the corporate affiliate
purchased 4,000 shares of non-convertible, non-voting Series 1997-A Preferred
Stock at $1,000 per share. The shares are entitled to cumulative dividends at a
rate of 9% per annum (or an aggregate of $360,000 per year) and to a liquidation
preference of $1,000 per share under certain circumstances. The Series 1997-A
Preferred Stock is mandatorily redeemable at a price of $1,000 per share,
together with all accrued and unpaid dividends, under certain circumstances.
The Company's credit documentation generally prohibits the
payment of dividends in respect of the Series C Preferred Stock, Series 1996
Preferred Stock and Series 1997-A Preferred Stock.
On September 30, 1997, the Company also sold to a financial
institution, which effected the refinancing, $2.5 million of Series 1997
Preferred Stock. On September 30, 1998, the Series 1997 Preferred Stock was
redeemed by the Company.
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The following table sets forth the range of high and low
closing sales prices per share of the Company's Common Stock for each of the
quarters during the years ended June 30, 1998 and 1997, as reported on the
NASDAQ National Market System:
HIGH LOW
----------------- -----------------
Year ended June 30, 1998
First Quarter..................................... $5 3/4 $3 1/4
Second Quarter.................................... 5 9/16 2 3/4
Third Quarter..................................... 4 1/4 2 13/16
Fourth Quarter.................................... 3 1/4 1 5/8
Year ended June 30, 1997
First Quarter..................................... $3 5/16 $1 7/8
Second Quarter.................................... 3 1/4 1 25/64
Third Quarter..................................... 4 5/8 2 1/8
Fourth Quarter.................................... 4 1/8 2 5/8
On October 2, 1998, the closing sales price of the Company's
Common Stock was $1 1/4 per share.
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ITEM 6. SELECTED FINANCIAL DATA.
The following table sets forth selected consolidated financial
information for the periods shown and is qualified by reference to, and should
be read in conjunction with, the Consolidated Financial Statements and Notes
thereto and "Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations" appearing elsewhere in this Annual Report on Form
10-K.
YEAR ENDED JUNE 30
--------------------------------------------------------------------
1998 1997 1996 1995 1994
------------ ------------ ------------ ------------ ------------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
Statement of Operations Data:
Total revenues.............................. $155,453 $136,719 $117,423 $136,418 $137,002
Salaries, wages and benefits................ 82,740 67,793 66,259 72,061 64,805
Other operating expenses.................... 64,252 46,819 42,387 44,741 42,907
Provision for doubtful accounts............. 6,649 5,688 5,805 5,086 5,846
Depreciation and amortization............... 5,714 5,473 5,490 7,290 6,836
Interest and other financing charges........ 7,230 5,942 6,892 8,347 8,906
Restructuring and other charges............. 2,349 -- -- -- --
Losses related to asset sales and closed
businesses............................... 12,483 -- 4,473 6,431 802
Asset impairment charges.................... 18,316 -- 5,485 21,815 --
------------ ------------ ------------ ------------ ------------
199,733 131,715 136,791 165,771 130,102
------------ ------------ ------------ ------------ ------------
Income (loss) before minority interest,
income taxes and extraordinary item....... (44,280) 5,004 (19,368) (29,353) 6,900
Minority interest........................... -- -- -- 887 4,824
------------ ------------ ------------ ------------ ------------
Income (loss) before income taxes and
extraordinary losses..................... (44,280) 5,004 (19,368) (30,240) 2,076
Provision (benefit) for income taxes........ 9,981 1,726 (2,887) (13,195) 599
------------ ------------ ------------ ------------ ------------
Income (loss) before extraordinary item..... (54,261) 3,278 (16,481) (17,045) 1,477
Extraordinary item:
Loss from early extinguishment of debt,
net of income tax benefit................. (4,322) -- -- (257) (155)
============ ============ ============ ============ ============
Net income (loss)........................... $(58,583) $ 3,278 $(16,481) $(17,302) $ 1,322
============ ============ ============ ============ ============
Income (loss) per common share:
Basic:
Before extraordinary item............ $(5.12) $.35 $(2.12) $(2.25) $0.14
Extraordinary item:
Loss from early extinguishment of
debt............................. (.40) -- -- (0.03) (0.02)
============ ============ ============ ============ ============
$(5.52) $.35 $(2.12) $(2.28) $0.12
============ ============ ============ ============ ============
Diluted:
Before extraordinary item............ $(5.12) $.32 $(2.12) $(2.25) $0.13
Extraordinary item:
Loss from early extinguishment of
debt........................... (.40) -- -- (0.03) (0.02)
============ ============ ============ ============ ============
$(5.52) $.32 $(2.12) $(2.28) $0.11
============ ============ ============ ============ ============
Weighted average number of common
shares outstanding:
Basic.................................... 10,784 8,404 7,928 7,740 7,751
============ ============ ============ ============ ============
Diluted.................................. 10,784 10,228 7,928 7,756 8,695
============ ============ ============ ============ ============
JUNE 30
--------------------------------------------------------------------
1998 1997 1996 1995 1994
------------ ------------ ------------ ------------ ------------
Balance Sheet Data:
Working capital.................. $1,340 $9,960 $11,715 $24,098 $21,148
Total assets..................... 85,091 141,189 132,758 139,236 183,168
Long-term debt................... 14,398 47,254 44,664 55,568 67,707
Stockholders' equity............. 1,188 59,182 46,053 61,779 80,468
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
RESULTS OF OPERATIONS
On February 19, 1998, the Company announced a change in
strategic direction in order to focus on becoming a leader in the youth services
industry. The company's strategic plan is now focused on repositioning the
Company for growth in the at-risk youth industry and strengthening the Company's
financial position. The Company has engaged an investment banking firm to assist
in the execution of this growth strategy. The firm will advise the Company in
connection with acquisitions and other strategic initiatives necessary to expand
the Company's existing youth services business. In addition, the investment
banking firm has rendered advisory services in association with the divestiture
of the Company's non-youth services businesses. See "Item 1. Business - Recent
Developments".
In addition to the facilities that the Company is retaining as
part of its youth service business (the "Retained Assets"), during the fiscal
years ended June 30, 1998, 1997 and 1996, the Company was also a provider and
manager of behavioral healthcare services (the "Divested Assets"). See "Item 1.
Business Recent Developments".
Revenues of the Company's facilities 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's facilities provide services to individuals requiring intensive care,
less intensive residential treatment care and outpatient treatment. Also, at
four of the Company's facilities, medical subacute services are provided. (Three
of these facilities which provide medical subacute services were sold in
September 1998. See "Item 1. Business - Recent Developments".) The reimbursement
rates for intensive inpatient care are generally greater than the rates paid for
residential treatment care. However, the average length of stay for individuals
in residential treatment programs is greater than that for individuals in
intensive inpatient programs.
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.
During fiscal 1997 and 1998 the Company also received
capitated amounts for behavioral healthcare services provided to individuals
covered by certain managed care contracts. Capitated revenues are recognized
during the period in which enrolled lives are covered for capitated payments
received. Revenue received from the management of facilities not owned by the
Company and for case management, utilization review and quality assurance
oversight on the delivery of behavioral healthcare services by independent
providers on behalf of clients is recognized at the time the services are
provided.
1998 COMPARED TO 1997
Total revenues increased from $136.7 million in 1997 to $155.5
million in 1998. Of this amount, revenues related to Retained Assets totalled
$50.9 million in 1998 as compared to $44.7 million in 1997. Revenues related to
Divested Assets totalled $104.5 million in 1998 as compared to $85.1 million in
1997. Excluded from Divested and Retained Asset revenues in 1997 are (i) a $2.9
million favorable cash judgment awarded by the courts of the State of Missouri
related to one of the Company's Retained Assets, (ii) a $1.5 million benefit
related to intermediary audits of prior year cost reports (approximately $1.0
million of this amount related to Divested Assets and $0.5 million related to
Retained Assets), and (iii) a $1.3 million derivative transaction entered into
in connection with a refinancing effort. No similar such items occurred in 1998.
15
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The increase in revenues related to Retained Assets from 1997
to 1998 of $6.2 million is attributable to an increase in revenues from
residential treatment centers from $15.4 million in 1997 to $23.1 million in
1998, which is offset by a decrease in revenues from intensive treatment units
of $1.3 million. The increase in residential treatment center revenues from
fiscal 1997 to fiscal 1998 was primarily due to an increase in total census
between years of 58% (from 65,316 days to 103,450 days).
The increase in revenues related to Divested Assets from 1997
to 1998 of $19.4 million is attributable to (i) an increase in managed
behavioral healthcare services revenues of $22.3 million related to RMCI, (ii)
an increase in the Company's medical subacute unit revenues of $9.2 million
attributable to an increase in total census between years, (iii) a decrease in
revenues at the Company's Greenbrier facility of $2.7 million due to the closure
and sale of the facility in fiscal 1998, (iv) a decrease in revenues generated
from the Company's Meadowlake facility which closed in May 1997 of $2.7 million,
(v) decreases in revenues in the Company's facilities located in Houma,
Louisiana, Midvale, Utah and Mesa, Arizona by $2.5 million, $1.3 million and
$1.5 million, respectively, due to a decrease in census between years, and (vi)
a decrease in revenues at the Company's management contracts division of $.9
million due to the loss of certain contracts.
Total salaries, wages and benefits increased from $67.8
million in 1997 to $82.7 million in 1998. Of this amount, salaries, wages and
benefits related to Retained Assets totalled $28.0 million in 1998 as compared
to $23.1 million in 1997. Salaries, wages and benefits related to Divested
Assets totalled $48.9 million in 1998 as compared to $42.0 million in 1997.
Corporate salaries, wages and benefits totalled $5.8 million in 1998 as compared
to $2.7 million in 1997.
The increase in salaries, wages and benefits related to
Retained Assets from 1997 to 1998 of $4.9 million is attributable to (i) an
increase in salaries, wages and benefits of $1.5 million at Gulf Coast Treatment
Center due to a full year of operation in fiscal 1998, (ii) an increase of $0.5
million due to the start-up of the Dothan and Palm Bay facilities, and (iii) an
increase in salaries, wages and benefits in other Retained Assets facilities of
$3.0 million due to an increase in total census between years.
The increase in salaries, wages and benefits related to the
Divested Assets from 1997 to 1998 of $6.9 million is attributable to (i) an
increase in salaries, wages and benefits of the Company's managed care
operations of $7.0 million, (ii) an increase of $3.9 million attributable to an
increase in total census between years at the Company's medical subacute units,
(iii) a decrease in contract management salaries, wages and benefits of $0.8
million due to the loss of contracts, (iv) a decrease in salaries, wages and
benefits at the Meadowlake facility of $1.4 million, (v) a decrease in salaries,
wages and benefits of the Company's facilities located in Houma, Louisiana,
Mesa, Arizona and Midvale, Utah by $2.0 million due to reductions in total
census, (vi) a decrease in the Greenbrier facility of $1.0 million due to both a
reduction in census and its sale on June 2, 1998 and (vii) an increase in
self-insurance reserves of $1.4 million due primarily to negative development of
self-insured workers' compensation claims.
The increase in salaries, wages and benefits related to the
corporate office from 1997 to 1998 of $3.1 million is attributable to an
increase of $1.2 million in incentive bonuses accruals during 1998 and an
increase of $2.0 million due to the hiring of new personnel in fiscal 1998
(primarily related to the acquisition of RMCI and Summa).
Other operating expenses increased from $46.8 million in 1997
to $64.3 million in 1998. Of this amount, other operating expenses related to
Retained Assets totalled $14.1 million in 1998 as compared to $11.2 million in
1997. Other operating expenses related to Divested Assets totalled $41.4 million
in 1998 as compared to $31.2 million in 1997. Other operating expenses related
to the Company's corporate office totalled $8.8 million in 1998 as compared to
$4.4 million in 1997.
The increase in other operating expenses related to Retained
Assets from 1997 to 1998 of $2.9 million is attributable to (i) an increase in
other operating expenses of $0.5 million at Gulf Coast Treatment Center, (ii)
other operating expenses of the new Dothan and Palm Bay facilities and start-up
expenses related to a new contract in Puerto Rico of $1.0 million and (iii) an
increase in other operating
16
18
expenses of $1.4 million due to an increase in total census between years at the
remainder of the Company's Retained Assets.
The increase in other operating expenses related to Divested
Assets from 1997 to 1998 of $10.2 million is primarily attributable to (i) an
increase of $12.5 million in other operating expenses of the Company's managed
care operations, (ii) an increase of $1.0 million attributable to an increase in
census at the Company's medical subacute units, (iii) a decrease in other
operating expenses at the Meadowlake facility of $0.9 million and (iv) a
decrease of $2.4 million in other Divested Assets due to decreases in census
between years.
The increase in corporate other operating expenses of $4.4
million from fiscal 1997 to fiscal 1998 is attributable to (i) an increase of
$2.8 million in legal reserves due to the Company's outstanding litigation (see
"Item 3. Legal Proceedings"), (ii) an increase of $0.6 million in self-insurance
reserves due to negative development of self-insured malpractice claims and
(iii) an increase in professional fees of approximately $1.0 million due
primarily to the integration of the managed care operations during fiscal 1998.
The provision for doubtful accounts increased from $5.7
million in 1997 to $6.6 million in 1998. Provision for doubtful accounts as a
percentage of total revenues approximated 4.2% for 1997 and 1998.
Depreciation and amortization increased from $5.5 million in
1997 to $5.7 million in 1998 primarily due to the current year amortization of
intangible assets recorded in connection with the managed care acquisition in
June 1997 offset by curtailing of depreciation on assets held for sale.
Interest and other financing charges increased from $5.9
million in 1997 to $7.2 million in 1998. The increase was primarily attributable
to a $1.3 million non-refundable fee charged by a financial institution in
connection with an amendment to the Company's credit facility. See "Item 8.
Financial Statements and Supplementary Data".
In connection with the Company's change in strategic
direction, the Company initiated a restructuring of personnel at its corporate
headquarters, including the identification and communication of severance
arrangements with individual personnel. These amounts, which in the aggregate
totalled $2.3 million, are reflected as restructuring charges in the
accompanying statement of operations.
During the year ended June 30, 1998, the Company recorded
losses of approximately $12.5 million related to the sale of the managed care
operations and the Three Rivers and Greenbrier facilities. See "Item 8.
Financial Statements and Supplementary Data".
During fiscal 1998, the Company recorded asset impairment
charges of $18.3 million relating to (i) the difference in the carrying values
and the selling price of the Divested Assets held as of June 30, 1998 ($17.6
million) (See "Item 1. Business - Recent Developments") and (ii) the write-off
of cost in excess of net asset value of purchased businesses due to an asset
impairment resulting from the change in strategic direction ($0.7 million). See
"Item 8. Financial Statements and Supplementary Data".
The Company recorded a provision for income taxes in 1998 of
$10.0 million, which primarily represents a full valuation allowance on its
previously recorded deferred tax assets. The realizability of these assets had
been based on the implementation of tax planning strategies that contemplated
the sales of certain appreciated property. In connection with the Company's
change in strategic direction, the Company determined that those tax planning
strategies would not be realized and a full valuation allowance was considered
necessary.
1997 COMPARED TO 1996
For purposes of comparing the Company's statements of
operations between 1997 and 1996, same facilities exclude Meadowlake Hospital,
which the Company decided in fiscal 1997 to lease to
17
19
another healthcare provider (and which lease commenced in August 1997), and Gulf
Coast Treatment Center, which resumed operations in December 1996.
Total revenues increased from $117.4 million in 1996 to $136.7
million in 1997. The change in revenues between years consisted of (a) increases
in revenues related to contract management and subacute services of $2.3 million
and $7.8 million, respectively, (b) the impact of intermediary audits of prior
year cost reports, which increased revenues in 1997 by $1.5 million but
decreased revenues in 1996 by $5.4 million, (c) a decrease in same facility net
inpatient revenues (excluding the impact of prior year cost report settlements)
of $2.0 million, or 2.4%, (d) a decrease in revenues of Meadowlake Hospital of
$1.7 million, (e) managed behavioral services revenues realized subsequent to
the acquisition of RMCI of $2.0 million and (f) other revenues recorded in 1997
of $4.2 million. Net outpatient revenues remained stable between years and net
patient revenues in 1997 related to Gulf Coast Treatment Center approximated the
revenues realized by the Company from the lease of this facility in 1996.
During the year ended June 30, 1996, the Company recorded
contractual adjustment expenses of approximately $1.9 million related to
intermediary audits during 1996 of its prior year cost reports. The overall
negative adjustment to the Company's estimated cost report settlements was
principally due to an audit of its Havenwyck facility's Blue Cross cost reports
for years 1992, 1993, 1994 and 1995. As a result of its negative experience in
the fourth quarter of 1996 with respect to estimated cost report settlements,
the Company recorded additional contractual adjustment expenses at June 30, 1996
totalling $3.5 million related to possible future adjustments of its cost report
settlements by intermediaries. During the year ended June 30, 1997, the Company
recorded contractual adjustment benefits of approximately $1.5 million related
to intermediary audits of its prior year cost reports. Management believes that
its revenues in future periods will not be negatively impacted by future
intermediary audits of cost report settlements recorded at June 30, 1997 and
1996.
Same facility net inpatient revenues decreased slightly due to
a 6% decline in acute psychiatric patient days between years, continued
pressures from managed care organizations and other payors to reduce
reimbursement rates for acute psychiatric services, and the continued shift of
the Company's inpatient business from acute psychiatric patients to less
intensive (and consequently lower paying) residential treatment patients. For
the year ended June 30, 1997, approximately 45% of the Company's behavioral
health same facility patient days related to residential treatment patients,
compared to 40% in the prior year.
Contract management revenues increased by $2.3 million in 1997
due to additional contracts signed and subacute revenues increased by $7.8
million due to additional patient volume, which was possible because of an
expansion of the subacute units at two facilities. Also, other revenues included
$1.28 million of income recorded on a derivative transaction entered into
earlier in fiscal 1997 in connection with a previous refinancing effort and $2.9
million related to a favorable cash judgement awarded the Company by the courts
of the State of Missouri. In this matter, the courts ruled that the Company's
facility in Nevada, Missouri had received insufficient reimbursement from the
Missouri Department of Social Services for the provision of behavioral
healthcare to Medicaid patients from 1990 to 1996.
Total salaries, wages and benefits increased from $66.3
million in 1996 to $67.8 million in 1997 as a result of (a) a $3.0 million
(5.5%) decrease in same facility salaries, wages and benefits, primarily as a
result of the continued shift in the Company's business to residential treatment
services, which are less intensive and, consequently, require less staffing, (b)
an increase in contract management salaries, wages and benefits, due to
additional contracts, of $1.0 million, (c) an increase of $2.6 million related
to increased volume in the Company's subacute units and (d) a decrease in
salaries, wages and benefits at Meadowlake Hospital of $0.4 million, which was
offset by increases at Gulf Coast Treatment Center and managed behavioral
services of $0.6 million and $0.8 million, respectively.
Other operating expenses in 1997 were $46.8 million, compared
to $42.4 million in 1996. This increase is primarily related to (a) a $3.7
million increase in other operating expenses of the subacute units, (b) a
decrease in same facility other operating expenses of $1.0 million (3.3%), (c)
an increase in
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20
other operating expenses associated with Meadowlake Hospital of
$0.3 million and (d) other operating expenses of Gulf Coast Treatment Center and
managed behavioral services of $0.5 million and $0.9 million, respectively.
The provision for doubtful accounts, which consist primarily
of commercial and self-pay accounts receivable deemed uncollectible, remained
stable between years, including the percentage of same facility bad debts to
same facility revenues, which totalled 4.5% in 1997 and 4.4% in 1996. The
provision for bad debts of Meadowlake Hospital did not change significantly from
the prior year and the provision for bad debts of Gulf Coast Treatment Center
was not material in 1997.
Depreciation and amortization did not change significantly
between years.
Interest expense decreased from $6.9 million in 1996 to $5.9
million in 1997. This decrease related to debt reductions made in 1996 and 1997
on the Company's senior and subordinated secured notes and variable rate demand
revenue bonds outstanding. As stated elsewhere, this debt was refinanced by the
Company on September 30, 1997.
Primarily in the fourth quarter of 1996, the Company recorded
losses totalling approximately $4.5 million related to additional asset
write-downs, cost report settlements and other adjustments related to businesses
which closed at various times prior to 1996, a reserve for disproportionate
share payments which the State of Louisiana has contended were improperly paid
to two of the Company's Louisiana facilities in fiscal 1995 and 1994 (see
"Results of Operations" above) and lease commitments and other costs incurred in
connection with the Company's decision to relocate its corporate headquarters.
Pursuant to the principles of measurement contained in SFAS
No. 121 and the Company's expectations, the Company recorded asset impairment
charges in its 1996 statement of operations of approximately $5.5 million. This
amount includes an asset impairment charge related to the Company's investment
in another healthcare enterprise of approximately $1.5 million, based on an
assessment of the future cash flows expected to be realized by the Company from
this business. The Company reviewed the value of its long-lived assets
throughout 1997 and determined there were no impairment indicators in 1997.
The Company recorded a $1.7 million provision for income taxes
in 1997, which approximated the statutory tax rate, and a $2.9 million benefit
for income taxes in 1996. The income tax benefit recorded in fiscal year 1996
was recorded at an effective tax rate significantly less than the statutory tax
rate due to a deferred tax valuation allowance of $4.4 million at June 30, 1996.
IMPACT OF INFLATION
The at-risk youth industry is labor intensive, and wages and
related expenses increase in inflationary periods. Additionally, suppliers
generally seek to pass along rising costs to the Company in the form of higher
prices. The Company monitors the operations of its facilities to mitigate the
effect of inflation and increases in the costs of health care. To the extent
possible, the Company seeks to offset increased costs through increased rates,
new programs and operating efficiencies. However, reimbursement arrangements may
hinder the Company's ability to realize the full effect of rate increases. To
date, inflation has not had a significant impact on operations.
IMPACT OF YEAR 2000
The Company has determined that it will be required to upgrade
certain portions of its software, hardware and equipment so that its systems and
equipment will function properly with respect to dates in the year 2000 and
thereafter. Affected systems do not include those used within the Company for
purposes of individual care. The Company will utilize both internal and external
resources to upgrade and test certain software for year 2000 readiness. The
Company anticipates substantially completing the Year 2000 project by June 1999.
The total cost of the Year 2000 project is estimated at $450,000, primarily for
the purchase of new software that will be capitalized. To date, the Company has
incurred approximately
19
21
$300,000 related to the assessment of, and preliminary efforts on, developing
its Year 2000 compliance project plan, purchase of new software and equipment,
and installation of vendor supplied upgrades.
The costs for the Year 2000 project and the date on which the
Company believes it will complete the Year 2000 modifications are based on
management's best estimates, which were derived utilizing numerous assumptions
of future events, including the continued availability of certain resources. The
Company's operating results could be materially impacted if actual costs of the
Year 2000 project are significantly higher than management estimates or if the
systems and equipment of the Company or those of other companies on which it
relies are not compliant in a timely manner.
FINANCIAL CONDITION
The Company's consolidated balance sheet as of June 30, 1998
reflects the impact of the sale of the Three Rivers facility in May 1998, and
Greenbrier facility and managed care operations in June 1998. Net proceeds form
the sales were used to partially prepay the Company's debt. In addition, net
assets held for sale at June 30, 1998 include the expected net realizable value
of the Company's non-youth service assets which the Company sold in September
1998. See "Item 1. Business - Recent Developments" and "Item 8. Financial
Statements and Supplementary Data".
The Company records amounts due to or from third-party
contractual agencies (Medicare, Medicaid and Blue Cross) based on its best
estimate, using the principles of cost reimbursement, of amounts to be
ultimately received or paid under current and prior years' cost reports filed
(or to be filed) with the appropriate intermediaries. Ultimate settlements and
other lump sum adjustments due from and paid to these intermediaries occur at
various times during the fiscal year. At June 30, 1998, amounts due from
Medicare, Medicaid and Blue Cross totalled approximately $4.9 million, $1.0
million and $1.2 million, respectively. Also, at June 30, 1998, amounts due to
Medicare, Medicaid and Blue Cross totalled approximately $7.3 million, $1.0
million and $0.6 million, respectively. Changes in these amounts since June 30,
1997 are the result of fiscal intermediary lump sum adjustments, prior year cost
report settlements and current year estimated settlements recorded during the
year ended June 30, 1998.
In connection with the merger of RMCI in June 1997, the
Company recorded cost in excess of net asset value of purchased businesses of
approximately $18.8 million and identifiable intangible assets of approximately
$4.7 million, which included the value of RMCI's established clinical protocols
and existing managed care contracts. The cost in excess of net asset value of
purchased businesses recorded in connection with RMCI was increased during the
year ended June 30, 1998, based on changes (during the one year period after the
RMCI merger) to a litigation matter concerning RMCI. In connection with the
previously discussed sale of the Company's managed care business, which closed
on June 2, 1998 and which include all operating entities of RMCI, the Company
recorded a loss of $8.9 million. As a result of the sale, the balances of cost
in excess of net value of purchased businesses and other intangible assets
relating to RMCI were written-off.
On October 9, 1997, the Company acquired Summa Healthcare
Group, Inc. ("Summa") and recorded cost in excess of net asset value of
purchased businesses of approximately $1.8 million, which included (i) cash
consideration of $0.3 million, (ii) the issuance of Common Stock, which had a
market value as of July 1, 1997, the date of the Agreement and Plan of Merger,
of $0.8 million and (iii) the issuance of warrants, which had an estimated fair
value of approximately $0.7 million (using a Black-Scholes pricing model). The
issuance of Common Stock and warrants increased the Company's additional paid-in
capital by $1.5 million on the date of the acquisition.
The principal assets of Summa, whose principal stockholder is
Luis E. Lamela, the Vice Chairman, a director and, as of January 1, 1998, the
Chief Executive Officer of the Company, consist of projects in the specialty
managed care and health services industry. These projects were undertaken by the
Company on October 9, 1997, the effective date of the merger. As a result of the
Company's change in strategic direction, several projects were abandoned and the
Company recorded an asset impairment charge of approximately $0.7 million during
fiscal 1998.
20
22
Other current accrued liabilities increased from $5.2 million
at June 30, 1997 to $9.6 million at June 30, 1998 primarily as a result of (i)
an increase in accrued expenses associated with the sale of the Divested Assets
of approximately $3.5 million, (ii) a $2.3 million increase due to restructuring
accruals recorded during fiscal 1998, (iii) an increase in fees due to a
financial institution of $1.3 million as a result of an amendment to the
Company's credit facility and (iv) a decrease of $2.3 million relating to assets
held for sale at June 30, 1998 and the sale of the managed care operation on
June 2, 1998.
Other noncurrent accrued liabilities increased from $6.6
million to $13.0 million primarily as a result of (i) an increase of $2.8
million in the Company's legal reserves as a result of outstanding legal cases
and (ii) an increase of $1.0 million in accrued expenses relating to the sale of
the Divested Assets.
LIQUIDITY AND CAPITAL RESOURCES
On September 30, 1997, the Company refinanced its then
existing credit facilities with proceeds from a credit facility from a financial
institution consisting of (i) a term loan of $12.5 million and a term loan of
$10.0 million (the "Term Loans"), (ii) a revolving credit facility of up to
$16.5 million (the "Revolving Credit Loan") and (iii) subordinated bridge notes,
of which $15.0 million was purchased by the financial institution ("Series A
Bridge Notes") and $2.5 million was purchased by Ramsay Holdings, a corporate
affiliate of Mr. Ramsay (collectively known as "Subordinated Note Purchase
Agreement").
In addition, on September 30, 1997, the Company entered into
an agreement with Ramsay Holdings and the financial institution pursuant to
which (i) Ramsay Holdings purchased $4.0 million of non-convertible, non-voting
Class B Preferred Stock, Series 1997-A (the "Series 1997-A Preferred Stock") and
(ii) the financial institution purchased $2.5 million of Class B Preferred
Stock, Series 1997 (the "Series 1997 Preferred Stock").
In connection with the Company's change in strategic direction
and asset sales, the Credit Agreement and Subordinated Note Purchase Agreements
were amended and restated on March 27, 1998, May 20, 1998, June 29, 1998, and
July 29, 1998 and amended and restated as of September 30, 1998 (the "Amended
and Restated Credit Facility").
As required by the Amended and Restated Credit Facility, in
September 1998 the Company used the net proceeds from the sale of the Divested
Asset to (i) repay in full the Term Loans, (ii) repay in full the Series A
Bridge Notes, (iii) redeem all of the outstanding shares of the Series 1997
Preferred Stock, (iv) pay certain fees payable to the financial institution in
connection with the Amended and Restated Credit Facility and (v) repay a portion
of the Revolving Credit Loan. Subsequent to the allocation of the aforementioned
proceeds, the balance of the Revolving Credit Loan was $7.9 million.
In addition, the Amended and Restated Credit Facility extended
the maturity of the Revolving Credit Loan to September 30 1999, and adjusted the
amount of the Revolving Credit Loan to an amount up to the lesser of $9.0
million or the borrowing base of the Company's receivables (defined as 85% of
the Company's net receivables less certain adjustments as set forth in the
agreement).
Interest on the Revolving Credit Loan is equal to an index
rate (8.25% at September 30, 1998) plus 2%. Also, the Company is obligated to
pay an amount equal to one half of 1% of the unused portion of the Revolving
Credit Loan.
In addition to the payments to the financial institution previously
discussed, the Amended and Restated Credit Facility provides for the following
fees (i) $130,000 on October 31, 1998 if the Revolving Credit Loan and accrued
interest has not been paid in full, (ii) $1.3 million on December 31, 1998 if
the Company has not repaid $3.5 million of the Revolving Credit Loan with
proceeds from the issuance of subordinated debt or equity, and (iii) $250,000 on
March 31, 1999 and $25,000 per month each month thereafter, if the Revolving
Credit Loan and accrued interest has not been paid in full.
21
23
The Company's current cash requirements relate to its normal
operating expenses and routine capital improvements at its youth service
facilities, the expansion of its youth service business, the payment of
restructuring changes, principally severance, and the payment of liabilities
associated with the sales of its Divested Assets.
The Company's short term liquidity is also affected by the
amounts and timing of collections received on accounts receivable balances.
In order to finance its current operations and expansion
activities and repay the remaining debt on the Revolving Credit Loan, the
Company has entered into a letter of intent with a new financial institution for
a credit facility of up to $22.0 million (the "New Credit Facility"). When
consummated, the New Credit Facility is expected to provide a $8.0 million term
loan payable over five years, a revolving credit facility of up to $8.0 million
and a $6.0 million acquisition facility. The Company continues to pursue
negotiations to obtain other debt or equity capital in the event that the New
Credit Facility is not completed.
Management of the Company believes that it can meet its
current cash requirements and future identifiable needs with (i) internally
generated funds from operations, (ii) the Amended and Restated Credit Facility
(until the New Credit Facility is entered into) or the New Credit Facility and
(iii) its ability to obtain debt or equity capital through other sources. There
can be no assurance that the Company will enter into the New Credit Facility or
that it will be able to obtain other debt or equity capital in the event that
the New Credit Facility is not completed.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not applicable.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
Financial statements of the Company and its consolidated
subsidiaries are set forth herein beginning on page F-1.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
Not applicable.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
Information with respect to the Company's executive officers
is contained in Part I "Item 1. Business - Executive Officers of the
Registrant." The information required by this Item with respect to directors
will be contained in the Company's definitive Proxy Statement ("Proxy
Statement") for its 1998 Annual Meeting of Stockholders to be held on November
19, 1998 and is incorporated herein by reference. Such Proxy Statement will be
filed with the Securities and Exchange Commission not later than 120 days
subsequent to June 30, 1998.
ITEM 11. EXECUTIVE COMPENSATION.
The information required with respect to this Item will be
contained in the Proxy Statement, and such information is incorporated herein by
reference.
22
24
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The information required with respect to this Item will be
contained in the Proxy Statement, and such information is incorporated herein by
reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
The information required with respect to this Item will be
contained in the Proxy Statement, and such information is incorporated herein by
reference.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.
(A) DOCUMENTS FILED AS PART OF THE REPORT:
1. FINANCIAL STATEMENTS
Information with respect to this Item is
contained on Pages F-1 to F-27 of this Annual Report
on Form 10-K.
2. FINANCIAL STATEMENT SCHEDULES
All schedules have been omitted because they
are inapplicable or the information is provided in
the consolidated financial statements, including the
notes thereto.
3. EXHIBITS
Information with respect to this Item is
contained in the attached Index to Exhibits.
(B) REPORTS ON FORM 8-K:
On June 24, 1997, the Company filed with the
Commission a Current Report on Form 8-K related to
the merger with RMCI. In addition, on August 22,
1997, the Company filed a Current Report on Form
8-K/A to include the financial statements and pro
forma financial information related to the merger
with RMCI. Also, on June 17, 1998, the Company filed
with the Commission a Current Report on Form 8-K
related to the sale of all of the issued and
outstanding shares of common stock of FPMBH and the
sale of the Greenbrier facility. Also, on October 9,
1998, the Company filed with the Commission a Current
Report or Form 8-K related to the sale of its
behavioral health facilities.
(C) EXHIBITS REQUIRED BY ITEM 601 OF REGULATION S-K:
Exhibits required to be filed by the Company pursuant
to Item 601 of Regulation S-K are contained in
Exhibits listed in response to Item 14(a)3, and are
incorporated herein by reference. The agreements,
management contracts and compensatory plans and
arrangements required to be filed as an Exhibit to
this Form 10-K are listed in Exhibits 10.64, 10.66,
10.69, 10.71, 10.72, 10.76, 10.77, 10.79, 10.91,
10.97, 10.99, 10.101, 10.102, 10.104 and 10.105.
23
25
POWER OF ATTORNEY
The Registrant, and each person whose signature appears below, hereby
appoints Bert G. Cibran and Thomas M. Haythe as attorneys-in-fact with full
power of substitution, severally, to execute in the name and on behalf of the
registrant and each such person, individually and in each capacity stated below,
one or more amendments to the annual report which amendments may make such
changes in the report as the attorney-in-fact acting deems appropriate and to
file any such amendment to the report with the Securities and Exchange
Commission.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned thereunto fully authorized.
RAMSAY HEALTH CARE, INC.
Dated: 10/9/98 By \s\ Bert G. Cibran
------------- ----------------------------------
Bert G. Cibran
President And Chief Operating Officer
Dated: 10/9/98 By \s\ Marcio C. Cabrera
------------- ----------------------------------
Marcio C. Cabrera
Executive Vice President And
Chief Financial Officer
Pursuant to the requirements of the Securities and Exchange Act of
1934, this report has been signed below by the following persons on behalf of
the registrant and in the capacities and on the dates indicated.
SIGNATURE/TITLE
---------------
Dated: 10/6/98 By /s/ Paul J. Ramsay
------------- ----------------------------------
Paul J. Ramsay
Chairman of the Board of Directors
Dated: 10/12/98 By \s\ Luis E. Lamela
------------- ----------------------------------
Luis E. Lamela
Chief Executive Officer, Executive
Vice Chairman of The Board and
Director
24
26
SIGNATURE/TITLE
---------------
Dated: By
------------- ----------------------------------
Aaron Beam, Jr.
Director
Dated: 10/6/98 By \s\ Peter J. Evans
------------- ----------------------------------
Peter J. Evans
Director
Dated: 10/9/98 By \s\ Thomas M. Haythe
------------- ----------------------------------
Thomas M. Haythe
Director
Dated: By
------------- ----------------------------------
Steven J. Shulman
Director
Dated: 10/5/98 By \s\ Michael S. Siddle
------------- ----------------------------------
Michael S. Siddle
Director
25
27
RAMSAY HEALTH CARE, INC. AND SUBSIDIARIES
INDEX TO FINANCIAL STATEMENTS
The following consolidated financial statements of the Registrant and
its subsidiaries are submitted herewith in response to Item 8 and Item 14(a)(1):
PAGE
NUMBER
------
Report of Independent Certified Public Accountants.................. F-2
Consolidated Balance Sheets - June 30, 1998 and 1997................ F-3
Consolidated Statements of Operations - For the Years
Ended June 30, 1998, 1997 and 1996............................. F-5
Consolidated Statements of Redeemable Preferred Stock and
Stockholders' Equity - For the Years Ended
June 30, 1998, 1997 and 1996.................................. F-6
Consolidated Statements of Cash Flows - For the Years
Ended June 30, 1998, 1997 and 1996............................ F-7
Notes to Consolidated Financial Statements.......................... F-8
All schedules have been omitted because they are inapplicable or the
information is provided in the consolidated financial statements, including the
notes thereto.
F-1
28
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
Board of Directors and Stockholders
Ramsay Health Care, Inc. and Subsidiaries
We have audited the accompanying consolidated balance sheets of Ramsay
Health Care, Inc. and subsidiaries as of June 30, 1998 and 1997, and the related
consolidated statements of operations, redeemable preferred stock and
stockholders' equity, and cash flows for each of the three years in the period
ended June 30, 1998. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position of
Ramsay Health Care, Inc. and subsidiaries at June 30, 1998 and 1997, and the
consolidated results of their operations and their cash flows for each of the
three years in the period ended June 30, 1998, in conformity with generally
accepted accounting principles.
ERNST & YOUNG LLP
Miami, Florida
October 1, 1998
F-2
29
RAMSAY HEALTH CARE, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
JUNE 30
----------------------------------
1998 1997
--------------- --------------
ASSETS
Current assets
Cash and cash equivalents................................. $2,907,000 $1,723,000
Accounts receivable, less allowances for doubtful
accounts of $2,395,000 and $4,386,000 at June 30,
1998 and 1997, respectively.............................. 12,023,000 25,802,000
Amounts due from third-party contractual agencies......... 7,114,000 5,653,000
Other receivables......................................... 2,138,000 3,139,000
Other current assets...................................... 1,084,000 1,699,000
Net assets held for sale.................................. 25,768,000 --
--------------- --------------
Total current assets.................................. 51,034,000 38,016,000
Other assets
Cash held in trust......................................... 1,964,000 827,000
Cost in excess of net asset value of purchased businesses.. 1,318,000 19,281,000
Other intangible assets.................................... -- 4,680,000
Unamortized loan costs..................................... 2,397,000 1,837,000
Deferred income taxes...................................... -- 9,411,000
Other noncurrent assets.................................... -- 1,155,000
--------------- --------------
Total other assets.................................... 5,679,000 37,191,000
Property and equipment
Land........................................................ 2,648,000 5,025,000
Buildings and improvements.................................. 29,698,000 71,190,000
Equipment, furniture and fixtures........................... 11,422,000 22,294,000
--------------- --------------
43,768,000 98,509,000
Less accumulated depreciation............................... 15,390,000 32,527,000
--------------- --------------
28,378,000 65,982,000
--------------- --------------
$85,091,000 $141,189,000
=============== ==============
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
F-3
30
RAMSAY HEALTH CARE, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
JUNE 30
----------------------------------
1998 1997
-------------- ---------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Accounts payable......................................... $6,040,000 $7,284,000
Accrued salaries and wages............................... 3,973,000 6,282,000
Hospital and medical claims payable...................... -- 1,975,000
Other accrued liabilities................................ 9,609,000 5,218,000
Amounts due to third-party contractual agencies.......... 8,853,000 7,075,000
Current portion of long-term debt........................ 21,219,000 222,000
-------------- ---------------
Total current liabilities.......................... 49,694,000 28,056,000
Noncurrent liabilities
Other accrued liabilities................................ 13,046,000 6,617,000
Long-term debt, less current portion..................... 14,398,000 35,632,000
Short term debt expected to be refinanced................ -- 11,622,000
Minority interests....................................... 25,000 80,000
-------------- ---------------
Total noncurrent liabilities....................... 27,469,000 53,951,000
Commitments and contingencies
Class B convertible redeemable preferred stock, Series
1997, $1 par value - authorized 100,000 shares; issued
100,000 shares (liquidation value of $2,500,000 plus
accrued dividends), net of issuance costs of $100,000
and including accrued dividends of $69,000 at June 30,
1998.................................................... 2,469,000 --
Class B redeemable preferred stock Series 1997-A,
$1 par value - authorized 4,000 shares; issued 4,000
shares (liquidation value of $4,000,000 plus accrued
dividends) including accrued dividends of $271,000 at
June 30, 1998........................................... 4,271,000 --
Stockholders' equity
Class B convertible preferred stock, Series C, $1 par
value - authorized 152,321 shares; issued 142,486 shares
(liquidation value of $7,244,000), including accrued
dividends of $272,000 at June 30, 1998 and $362,000 at
June 30, 1997........................................... 414,000 504,000
Class B convertible preferred stock, Series 1996, $1 par
value - authorized 100,000 shares; issued 100,000 shares
(liquidation value of $3,000,000), including accrued
dividends of $113,000 at June 30, 1998 and $121,000 at
June 30, 1997........................................... 3,113,000 3,121,000
Common stock $.01 par value--authorized 30,000,000 shares;
issued 11,453,400 shares at June 30, 1998 and 11,150,640
shares at June 30, 1997................................. 115,000 112,000
Additional paid-in capital............................... 107,016,000 106,332,000
Retained earnings (deficit).............................. (105,571,000) (46,988,000)
Treasury stock--581,550 common shares at
June 30, 1998 and June 30, 1997, at cost................ (3,899,000) (3,899,000)
-------------- ---------------
Total stockholders' equity....................... 1,188,000 59,182,000
-------------- ---------------
$85,091,000 $141,189,000
============== ===============
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
F-4
31
RAMSAY HEALTH CARE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
YEAR ENDED JUNE 30
------------------------------------------------------
1998 1997 1996
---- ---- ----
Revenues:
Provider-based revenue.................................... $130,884,000 $132,705,000 $116,305,000
Managed care revenue...................................... 24,313,000 1,964,000 --
Investment income and other............................... 256,000 2,050,000 1,118,000
------------ ------------ ------------
TOTAL REVENUES............................................... 155,453,000 136,719,000 117,423,000
------------ ------------ ------------
Expenses:
Salaries, wages and benefits.............................. 82,740,000 67,793,000 66,259,000
Other operating expenses.................................. 53,486,000 45,115,000 42,387,000
Managed care patient costs................................ 10,766,000 1,704,000 --
Provision for doubtful accounts........................... 6,649,000 5,688,000 5,805,000
Depreciation and amortization............................. 5,714,000 5,473,000 5,490,000
Interest and other financing charges...................... 7,230,000 5,942,000 6,892,000
Restructuring charges..................................... 2,349,000 -- --
Losses related to asset sales and closed businesses....... 12,483,000 -- 4,473,000
Asset impairment charges.................................. 18,316,000 -- 5,485,000
------------ ------------ ------------
TOTAL EXPENSES............................................... 199,733,000 131,715,000 136,791,000
------------ ------------ ------------
INCOME (LOSS) BEFORE INCOME TAXES AND
EXTRAORDINARY ITEM........................................ (44,280,000) 5,004,000 (19,368,000)
Provision (benefit) for income taxes......................... 9,981,000 1,726,000 (2,887,000)
------------ ------------ ------------
INCOME (LOSS) BEFORE EXTRAORDINARY ITEM...................... (54,261,000) 3,278,000 (16,481,000)
Extraordinary Item:
Loss from early extinguishment of debt................... (4,322,000) -- --
------------ ------------ ------------
NET INCOME (LOSS)......................