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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(MARK ONE)
/X/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
ACT OF 1934 [FEE REQUIRED]
FOR THE FISCAL YEAR ENDED JUNE 30, 1997
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 IDENTIFICATION NO.)
INCORPORATION OR ORGANIZATION)
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 9, 1997 was 10,835,843. The aggregate market value of Common Stock held
by non-affiliates on such date was $35,285,967.
DOCUMENTS INCORPORATED BY REFERENCE
Certain sections of the registrant's definitive Proxy Statement to be filed
for the 1997 Annual Meeting of Stockholders are incorporated by reference into
Part III.
PART I
ITEM 1. BUSINESS.
GENERAL
Ramsay Health Care, Inc. ("RHCI" or the "Company") is a leading provider and
manager of specialty managed care and behavioral healthcare services in the
country. Through the youth services division of its provider operations, the
Company offers diversified programs for at-risk and troubled youth in
residential and non-residential settings nationwide. In addition, the Company's
managed behavioral care operations provides and manages the delivery of
behavioral healthcare services for employers, insurance companies, health
maintenance organizations and governmental agencies. The Company also operates
psychiatric hospitals and manages behavioral healthcare programs on behalf of
acute care hospitals and community mental health centers under management
contracts.
OVERVIEW
As a provider of behavioral healthcare, the Company offers a comprehensive
range of products and services in its hospital division and its youth services
division. The hospital division provides services at 14 hospitals, in which 703
beds are currently devoted to acute inpatient psychiatric treatment. Patient
care is provided within the hospital division in a variety of treatment
settings: (1) acute inpatient treatment; (2) partial hospitalization programs;
and (3) group and individual outpatient treatment. Outpatient programs are
tailored to provide brief, goal-oriented psychotherapy for specific disorders
such as chemical dependency, eating disorders and mood disorders. The Company
also provides its expertise to community mental health centers and acute care
hospitals under 24 contracts to manage psychiatric programs and partial
hospitalization programs for geriatric patients and for seriously and
persistently mentally ill (SPMI) patients.
The Company's youth services division, created to serve the special needs of
juvenile offenders and adolescents with behavioral disorders, offers care at:
(1) 12 of the Company's 14 hospitals, in which 559 beds are devoted to less-
intensive residential treatment programs and additional beds are utilized for
adolescents requiring acute inpatient treatment; (2) five group homes; and (3)
day programs and other outpatient treatment settings. In both the hospital and
youth services divisions, the choice of treatment and setting depends on the
nature of the patient's disorder and the intensity and duration of treatment
required. Throughout a course of treatment, a patient is often treated in more
than one setting.
As a manager of behavioral healthcare services, the Company offers benefit
design, utilization review, case management, quality assurance and claims
processing services for over 2.1 million covered lives. As of June 30, 1997, the
Company managed care under capitated managed care programs for approximately
500,000 covered lives through fee arrangements in which the Company assumes
responsibility for the cost of providing care in exchange for a fixed per member
per month fee. For approximately 300,000 covered lives under Administrative
Services Only ("ASO") programs, the Company manages care but does not assume
responsibility for the cost of care. For approximately 1,300,000 lives, the
Company provides utilization review services. The Company has established a
network of approximately 2,800 independent physicians, psychologists and
clinicians, 13 Company-owned multi-disciplinary behavioral healthcare outpatient
clinics, as well as hospitals and other behavioral healthcare providers, to
service these lives.
RECENT DEVELOPMENTS
On September 30, 1997, the Company refinanced its outstanding senior and
subordinated secured notes, its variable rate revenue bonds and its demand note
to a corporate affiliate of Paul J. Ramsay, Chairman of the Board of the Company
and a significant shareholder, with proceeds from a credit facility consisting
of term and revolving credit debt of $38.5 million (the "Senior Credit
Facility") and the sale of $2.5 million of Class B Preferred Stock, Series 1997
(the "Series 1997 Preferred Stock") to a
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financial institution. In addition, on September 30, 1997, the Company issued an
aggregate of $17.5 million of subordinated bridge notes (the "Bridge Facility"),
of which $15.0 million was purchased by the financial institution and $2.5
million was purchased by Paul Ramsay Holdings Pty. Limited ("Ramsay Holdings"),
a corporate affiliate of Mr. Ramsay. In addition, on September 30, 1997, the
Company entered into an agreement with Ramsay Holdings pursuant to which Ramsay
Holdings purchased $4.0 million of non-convertible, non-voting Class B Preferred
Stock, Series 1997-A (the "Series 1997-A Preferred Stock").
In October 1997, pursuant to an Agreement and Plan of Merger (the
"Merger Agreement") dated as of July 1, 1997 between a wholly-owned subsidiary
of the Company and Summa Healthcare Group, Inc. ("Summa"), the Company acquired
Summa for $300,000 in cash, 250,000 shares of the Company's Common Stock and
fully exercisable warrants to purchase 500,000 shares of the Company's Common
Stock, with an exercise price of $3.25 per share (the fair market value of the
Company's Common Stock on July 1, 1997), and an expiration date of July 2007.
Summa, whose principal stockholder is Luis E. Lamela, the Vice Chairman and a
director of the Company, is engaged in the healthcare consulting, advisory and
development business. Summa's principal assets consist of projects in the
specialty managed care and healthcare services industry, including an
arrangement with a provider of healthcare services to correctional facilities
in Florida. These projects have been undertaken by the Company.
Effective June 10, 1997, the Company completed its previously
announced merger with Ramsay Managed Care, Inc. ("RMCI"). The transaction was
based on a merger agreement entered into by the Company and RMCI on October 1,
1996 and was approved by the shareholders of both companies on April 18, 1997.
STRATEGY
The Company's strategy is to maintain and enhance its position as a
leading high-quality provider and manager of specialty managed care and
behavioral healthcare services, meeting the needs of its patients for
therapeutic care with favorable outcomes in the least restrictive setting and
its payors for cost-effective and accountable treatment programs. The Company's
strategic objectives include:
. Pursue Youth Services Opportunities. The Company's youth services division
actively pursues contracts to provide care that addresses the needs of the
increasing population of at-risk and troubled youth. The division offers
specialized programs for adjudicated and non-adjudicated youth with
developmental disabilities, children and adolescent males and females with
emotional and behavioral disorders, and juvenile offenders. The Company
believes that it has established a strong reputation for effectively meeting the
needs of this growing high-incidence population through proven structured
programs that incorporate therapeutic, educational, vocational, cognitive,
behavioral and social rehabilitative treatment plans. The Company also believes
that its experience in contracting with a variety of public sector agencies to
deliver behavioral healthcare positions it to take advantage of growing
opportunities in youth services.
. Assess Existing Products, Services and Markets. Management believes that an
ongoing evaluation of the Company's existing products, services, markets and
facilities against financial and quality performance standards is integral to
success in the evolving healthcare industry. In targeted geographic markets
where demand warrants, the Company's youth services and managed care products
for which the Company has achieved recognition and expertise will be expanded.
In non-target markets, where economic, competitive, social and/or legislative
factors do not support profitable or strategic delivery of services, products
and facility operations will be phased out or modified to generate acceptable
levels of financial performance.
. Expand Managed Care Business. As Medicaid and other government programs
move toward managed care in a continuing effort to contain healthcare costs, the
Company believes there will be an increasing demand for the management of
behavioral healthcare and the organization of provider networks for patients
served under these programs. The Company will actively pursue the management and
coordination of behavioral healthcare for these populations and will organize
new and expand current systems which provide care for these beneficiaries. The
Company believes that it is well positioned to penetrate this
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market because of its experience in coordinating care as program manager for
traditional providers as well as its managed care expertise.
. Pursue Capitated Contracts. Management believes that behavioral healthcare
purchasers will increasingly contract directly with providers on a capitated
basis. Management believes that the Company has a successful record in both
managing and providing care under capitated contracts. This expertise, in
conjunction with its broad service offering, will enhance the Company's ability
to benefit from the expected growth in capitated contracts.
. Identify New Product Development Opportunities. The Company believes that
it has a successful record of providing, coordinating and managing behavioral
healthcare services to achieve favorable clinical outcomes in a cost-effective
manner. The Company intends to identify new market niches and to apply its
expertise to develop products and specialized programs which serve these
markets.
In connection with the "safe-harbor" provisions of the Private Securities
Litigation Reform Act of 1995, the Company notes that this Annual Report on Form
10-K contains forward-looking statements about the Company. The Company is
hereby setting forth cautionary statements identifying important factors that
may cause the Company's actual results to differ materially from 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 healthcare industry, including competition
from consolidating and integrated healthcare provider systems and managers of
healthcare, the imposition of more stringent admission criteria by payors,
increased payor pressures to limit lengths of stay, limitations on reimbursement
rates and limitations on annual and lifetime patient health benefits, (ii)
federal and state governmental budgetary constraints which could have the effect
of limiting the amount of funds available to support governmental healthcare
programs, including Medicare and Medicaid, (iii) statutory, regulatory and
administrative changes or interpretations of existing statutory and regulatory
provisions affecting the conduct of the Company's business and affecting current
and prior reimbursement for the Company's services and (iv) the loss of major
managed care customers or the loss of a significant number of members from the
Company's provider network. 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.
PROVIDER OPERATIONS
Youth Services Operations
Twelve of the Company's hospitals offer specialized programs for low-
functioning and troubled youths affected by conduct disorders, psychiatric
illness, substance abuse and impulse disorders. These programs provide a full
range of care including (i) acute psychiatric inpatient care, (ii) residential
treatment, consisting of long-term, less intensive inpatient care, (iii) group
homes and (iv) day programs and outpatient services. Within these environments,
clinical and program teams incorporate therapeutic, educational and vocational
programs with cognitive, behavioral and social rehabilitation programs. These
highly structured programs assist troubled youths in learning how to change
ineffective or violent behavior and how to cope with the difficulties and
stresses of life. The primary objective of these programs is behavioral
awareness and self-control, rehabilitation, and reintegration to the home
setting.
Hospital Operations
Acute Inpatient Services. Acute inpatient services are generally provided
to patients needing the most intensive behavioral healthcare treatment. The
most common disorders treated at the Company's hospitals on an acute inpatient
basis are mood and effective disorders (such as depression), psychoses,
situational crises and alcohol and drug dependency. The initial goal of acute
psychiatric hospitalization treatment is to evaluate and stabilize the patient
so that effective treatment can be continued either on an inpatient, residential
treatment, partial hospitalization or an outpatient basis. Under the direction
of a psychiatrist, the patient's condition is assessed, a diagnosis is made and
prescribed treatment
3
follows. The treatment regimen utilizes, where appropriate, medication,
individual and group therapy, adjunctive therapy and family therapy.
Each hospital has a multi-disciplinary team of healthcare professionals,
including psychiatrists, psychologists, social workers, nurses, behavioral
healthcare and substance abuse counselors and therapists. Each of the Company's
hospitals has a medical director who acts as liaison between the professional
staff and the hospital administration staff. Each of the Company's hospitals
also has a consulting board, comprised of hospital executives, consulting
physicians and other members of the local community, which is responsible for
standards of patient care. All of the Company's hospitals are accredited by the
Joint Commission on Accreditation of Healthcare Organizations ("JCAHO") and are
periodically resurveyed by the JCAHO.
Partial Hospitalization. Partial hospitalization services are provided for
limited periods per day (typically four hours or more) at established intervals,
with the patient returning home at the conclusion of each day's treatment.
Partial hospitalization services are designed to be both an alternative to
inpatient hospitalization services and a key component of care along the
continuum following inpatient hospitalization.
Outpatient/Clinical Services. Outpatient services generally consist of
treatment sessions which can be rendered in a variety of individual or group
settings at various locations, including hospitals and clinics. Once an
individual is assessed for treatment in an outpatient environment, the
individual is provided the appropriate level of care in relation to the
diagnosis.
Contract Management Services. The Company manages inpatient and partial
hospitalization programs under contracts with public and private healthcare
providers. Each management contract is individualized to address the differing
needs of each client and its community. Pursuant to the contracts, the
Company's client typically provides the necessary space (including beds for
inpatient programs) and equipment, clinical and nursing staffs, and support
services (such as billing, dietary and housekeeping). A Company employee
typically acts as the program administrator and, for its partial hospitalization
contracts, as the case manager. The Company also contracts with a psychiatrist
to be the medical director for the managed program.
The Company assists in the development of each managed program as requested
by the client hospital or community mental health center, including licensing,
staffing, and Medicare certification matters. The Company also develops and
implements a local marketing plan for the program to be offered by the client.
Each program is marketed locally with an emphasis on addressing the particular
needs of the client's community. The Company markets the program in the
community on behalf of the client, and the Company's name is not used and its
role is not publicly emphasized in the operation of the program offered by its
client.
Under each contract, the Company typically receives a fixed monthly fee,
together with reimbursement for the Company's direct costs of operating the
program, including the costs of the program administrator, case manager, and
medical director. At June 30, 1997, the Company had 24 contracts to manage
partial hospitalization program services for community mental health centers and
to manage inpatient behavioral healthcare units at medical/surgical hospitals.
Subacute Services. The Company currently operates medical subacute units
in four of its hospitals. Subacute medical healthcare services are provided to
patients who require hospitalization at a level which is less intensive than
that of an acute-care hospital. Generally, subacute patients are medically
stable and may require skilled nursing, ancillary medical, and rehabilitative
therapy services. The Company opened its subacute units in late fiscal 1994 and
early fiscal 1995 to offer medical care (to non-psychiatric patients) in
converted, previously underutilized space. In fiscal 1997, approximately 35
additional beds were converted, bringing to 114 the total number of beds
allocated by the Company for subacute medical care. The units are managed under
contracts with an unaffiliated company experienced in the operation of subacute
care hospitals. The Company has no present plans to expand its subacute
services.
4
Provider Operations Data
The following table summarizes certain data related to the Company's
provider operations. The table excludes data relating to Three Rivers
Hospital, which was closed on June 30, 1995, Meadowlake Hospital, which was
leased to another healthcare provider on August 1, 1997 and Gulf Coast Treatment
Center, which commenced operations in December 1996.
YEAR ENDED JUNE 30
----------------------------------------------------------------
1997 1996 1995
-------------------- -------------------- --------------------
Acute psychiatric admissions.................... 12,710 12,851 11,871
Residential treatment admissions................ 545 440 491
Subacute admissions............................. 960 692 323
------- ------- -------
Total inpatient admissions...................... 14,215 13,983 12,685
Acute psychiatric inpatient days................ 121,611 128,821 133,537
Residential treatment inpatient days............ 101,433 87,633 61,324
Subacute inpatient days......................... 22,999 15,378 6,548
------- ------- -------
Total inpatient days............................ 246,043 231,832 201,409
Average bed days available...................... 460,861 431,514 381,060
Overall inpatient occupancy percentage.......... 53% 54% 53%
MANAGED CARE OPERATIONS
Effective June 10, 1997, in conjunction with the merger with RMCI, the
Company initiated services as a manager of behavioral healthcare. These services
include benefit design, utilization review, case management, quality assurance
and claims processing services for, as of June 30, 1997, over 2.1 million
covered lives. The Company manages care under capitated managed care programs
for approximately 500,000 covered lives through fee arrangements in which the
Company assumes responsibility for the cost of providing care in exchange for a
fixed per member per month fee. For approximately 300,000 covered lives under
ASO programs, the Company manages care but does not assume responsibility for
the cost of care. For approximately 1,300,000 lives, the Company provides
utilization review services.
The Company manages the delivery of behavioral healthcare and substance
abuse treatment through networks of Company-employed and independent behavioral
healthcare providers on behalf of its managed care customers, primarily self-
insured employers, HMOs, insurance companies and governmental agencies. At
June 30, 1997, the Company provided managed behavioral healthcare services in
eight states through its regional offices located in Phoenix, Arizona, Miami and
Orlando, Florida, Covington, Louisiana, Charlotte, North Carolina, Cleveland,
Ohio, Oklahoma City, Oklahoma, San Antonio, Texas and Morgantown, West Virginia.
The Company's programs utilize a treatment methodology structured to
improve the quality and cost effectiveness of behavioral healthcare by
diagnosing patients as early in the therapeutic process as possible and promptly
providing the most appropriate treatment along the continuum of care in the
least restrictive setting. An integral component of its treatment methodology
is the Company's 24-hour inpatient certification service which, when utilized in
conjunction with the Company's provider network, reduces unnecessary admissions
to inpatient facilities and often results in increased utilization of more cost-
effective outpatient services.
The Company presently provides managed behavioral healthcare and substance
abuse treatment through a network of approximately 50 Company-employed
psychiatrists, psychologists and
5
clinicians, approximately 2,800 independent psychiatrists, psychologists,
clinicians, social workers and behavioral health counselors, 13 Company-owned
multi-disciplinary behavioral healthcare outpatient clinics, and approximately
150 hospitals and other facilities. The Company's staff of psychiatrists,
psychologists, clinicians and ancillary care providers are generally employed
under both salary and hourly wage arrangements. Independent physicians and other
outside providers generally receive payment on a discounted fee-for-service
basis. The Company also negotiates all-inclusive rates with the network
inpatient, day treatment and residential treatment facilities. The Company
believes that its physician-based provider network has been able to both achieve
cost savings for managed care customers and enhance the quality of behavioral
health and substance abuse treatment for patients.
Each of the Company's clinics has a full range of multi-disciplinary
behavioral healthcare professionals. A typical clinic includes at least one
psychiatrist and three to four psychologists, licensed clinical social workers
or other allied behavioral healthcare professionals. The clinics provide
treatment programs for children, adolescents and adults with a broad range of
behavioral health disorders. Intensive outpatient programs are available for
the treatment of chemical dependence, eating disorders and behavioral disorders
of adolescents. For example, an intensive outpatient treatment for patients
with substance abuse disorders might include individual and family therapy, as
well as a variety of specialty group therapies, including counseling regarding
family, vocational and leisure time issues. These programs were developed by
the Company's professional staff and are designed to achieve a rapid and
effective recovery and to reduce recidivism. Each program is designed to be
time-limited, problem-specific and recovery-oriented.
Treatment protocols within the clinics are tailored to a managed care
environment with an emphasis on high quality, goal-oriented therapy. A typical
treatment plan from initial visit to discharge takes place over approximately
eight to ten sessions. The Company generally uses short intensive therapy
sessions over the course of a treatment plan which the Company has found to be
more effective, both clinically and from a cost perspective, than longer, less
intensive therapy sessions. Psychotherapy as set forth in the treatment plan is
administered by a licensed clinical psychologist, licensed clinical social
worker, or other licensed behavioral healthcare professional. When medication
is necessary, a licensed psychiatrist or registered psychiatric nurse specialist
manages the patient's medication. Follow-up testing and periodic evaluations
are conducted to measure the effectiveness of treatment and to make necessary
changes to therapy.
The Company has developed its own utilization review and case management
criteria which enable it to determine if treatment for a given set of symptoms
is medically necessary and, if so, the appropriate level and type of care for
such symptoms. These criteria are based upon the Company's clinical experiences
and clinical protocols. The Company's utilization review and case management
regimen is not designed to restrict care, but to determine the medical necessity
and appropriateness of all inpatient admissions, lengths of stay and outpatient
treatment programs. The Company believes that the focus of its utilization
review criteria differs from the standard set of diagnosis-specific treatment
plans used by other managed care companies, in that the Company evaluates the
severity of symptoms and the biological components of an illness and also takes
into account a patient's particular personal and social circumstances. The
criteria are designed to ensure, to the degree practicable, that a covered
population, on an individual basis and in the aggregate, neither underutilizes
nor overutilizes available behavioral healthcare services.
COMPETITION
The behavioral healthcare industry is extremely competitive. The
competitive position of the Company has been, and will continue to be, affected
by the increased initiatives undertaken by federal and state governments and
other purchasers of healthcare, including insurance companies and employers, to
revise payment methodologies and monitor healthcare expenditures in order to
contain healthcare costs.
Provider Operations. The Company's 14 inpatient facilities are located in
rural areas and in suburban areas of large metropolitan cities. The Company's
facilities compete with other facilities, including proprietary freestanding
hospitals, not-for-profit hospitals, governmental freestanding hospitals
6
and psychiatric units of acute-care hospitals. The number of competitors located
within each of the Company's service areas varies significantly. Some of these
facilities are larger and have greater financial resources than the Company's
hospitals. In addition, some of these competing hospitals are substantially
exempt from income and property taxation. The impact of competition on the
Company's facilities varies depending on the proximity of the competing facility
and its referral sources to the Company's facility.
The ability of the Company to compete with other behavioral healthcare
providers depends on the number and quality of psychiatrists, clinical
psychologists and other clinicians practicing at the facility, and the number,
type and quality of other behavioral healthcare facilities in the area. Another
factor affecting competitiveness is the extent to which treatment programs
satisfy individual and community needs in an effective manner from both a
clinical and an economic standpoint. The Company believes that the quality of
its professional staff, as well as the quality and effectiveness of its
programs, permit it to compete effectively with other providers of behavioral
healthcare. In addition, the Company actively seeks relationships with managed
care companies, which are increasingly responsible for directing patients to
high quality, cost-effective providers of behavioral healthcare services.
The Company considers the industry servicing the needs of low-functioning
and troubled adolescents and juvenile offenders to be highly fragmented and
highly dependent upon specific referrals by the state agencies responsible for
ensuring these individuals receive the appropriate treatment. The Company's
believes that its demonstrated ability to provide these services and its
treatment outcomes gives it a competitive advantage.
In the provision of contract management services, the Company competes with
several national competitors and many regional and local competitors, many of
which have greater financial resources than the Company. Competition among
contract managers for hospital and community mental health center programs is
generally based upon the reputation, price, and the ability to provide financial
and other benefits to the client, including the management expertise necessary
to enable the client to offer behavioral healthcare programs that provide the
full continuum of behavioral healthcare services in a quality and cost-effective
manner. The pressure to reduce healthcare expenditures has emphasized the need
to manage the appropriateness of behavioral healthcare services provided to
patients. As a result, competitors without management experience covering the
various levels of the continuum of behavioral healthcare services may not be
able to compete successfully. The Company believes that its management
expertise will enable it to compete successfully in this market.
Managed Care Operations. Contracts for the provision of managed behavioral
healthcare services are generally competitively bid and renewed annually. In
the provision of managed behavioral healthcare services, the Company competes
with local and national managed behavioral healthcare companies, insurance
companies, HMOs and not-for-profit health plan corporations, preferred provider
organizations (PPOs) and other provider networks, as well as third-party
administrators. Many of these operations and entities have substantially
greater financial resources than the Company and offer a wider range of services
than the Company.
The ability of the Company to compete with other managed behavioral
healthcare companies depends on its ability to offer management services and
treatment under capitated arrangements which are cost-effective and produce high
quality outcomes. The Company believes that its expertise in the application of
case management, utilization review and quality assurance regimens to the
delivery of behavioral healthcare services, coupled with the provision of high
quality, goal-oriented treatment, permit it to compete effectively in the
managed behavioral healthcare services industry.
INDUSTRY TRENDS
The behavioral healthcare industry has experienced significant changes in
recent years as a result of pressure from purchasers of behavioral healthcare
services to control costs. In response, managed behavioral healthcare
organizations developed to coordinate the delivery of services in the most cost-
efficient manner. These cost containment pressures have caused a reduction in
revenues per patient
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day at inpatient facilities, as well as a shift from inpatient to outpatient and
other less costly treatment settings. This shift resulted in declines in both
admissions and average lengths of stay at inpatient facilities.
As the industry continues to evolve, behavioral healthcare companies are
beginning to integrate the provision of healthcare services with managed care
techniques. The Company believes that purchasers of behavioral healthcare will
increasingly contract directly with providers on a capitated basis and that
capitation allows purchasers of behavioral healthcare to place the
responsibility for the cost of providing care directly on the providers who can
most efficiently monitor the utilization, quality and effectiveness of care.
The Company believes that the merger with RMCI has enhanced its ability to
provide capitated services.
SOURCES OF REVENUE
The Company receives payments from third-party reimbursement sources,
including commercial insurance carriers (which provide coverage to insured
patients on both an indemnity basis and through various managed care plans),
Medicare, Medicaid and various governmental agencies (including state judicial
systems). In addition, payments are received directly from patients, including
copayments and deductibles related to services covered by these patients'
benefit plans. The Company's managed care customers are generally self-insured
employers, HMOs, insurance companies and governmental agencies. The Company
also receives payments under management contracts from its client hospitals and
community mental health centers.
The following table sets forth the approximate percentages of the Company's
fiscal year 1997 revenues derived from these various sources.
YEAR ENDED
JUNE 30, 1997
--------------
Medicare............................................................ 36%
Medicaid............................................................ 19%
Other government programs........................................... 11%
Managed care organizations.......................................... 13%
Blue Cross and other commercial insurance........................... 13%
Contract management customers....................................... 4%
Self-pay and other.................................................. 4%
---
100%
===
Medicare. Medicare is the federal health insurance program for the aged
and disabled. Medicare reimburses providers 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.
Psychiatric hospitals and units 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 of the
type of 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
hospitals and units is currently subject to the payment limitations and
incentives established in the Tax Equity and Fiscal Responsibility Act of 1982
("TEFRA"). These facilities are 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.
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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 hospitals exempt from
prospective payment, such as the Company's inpatient facilities, will be
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 will be capped, the formula by which
incentive payments are calculated will be modified to reduce these payments and
allowable Medicare capital costs will be reduced by 15%. The impact of the
provisions of the Balanced Budget Act is being assessed by the Company at this
time and the Company cannot predict the effect the Act will have on its results
of operations and financial condition.
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.
Other Government Programs. Services provided to low-functioning and
troubled adolescents and juvenile offenders are generally reimbursed on a per-
diem basis by various state agencies, including state judicial systems. The
per-diem rate is generally based on the nature and scope of services provided to
these patients.
Managed Care Organizations and Other Commercial Payors. The Company's
facilities are reimbursed for inpatient and outpatient behavioral healthcare
services by HMOs, 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 hospitals typically is
lower than the hospital's charges, and patients are not responsible for the
difference between the amount reimbursed by Blue Cross and the hospital's
charges.
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 to limit inpatient days to a maximum number per year or the
patient's lifetime, or to limit the maximum dollar amount expended for a patient
in a given period.
The Company also contracts with managed care organizations and other
commercial purchasers of behavioral healthcare services under managed care
contracts. The Company typically charges each managed care customer a monthly
capitation fee for each beneficiary enrolled in the customer's health benefit
program managed by the Company. Depending upon both the type of program for
which a customer contracts and the benefits covered under the customer's benefit
program, the capitation fee arrangement is designed so that, with respect to
both inpatient and outpatient care, the Company accepts full risk (all services
capitated), as is generally the case, partial risk (selected services capitated)
or limited risk (full risk up to a maximum amount). Certain contracts, such as
those for the provision of ASO programs, include fee adjustments linked to a
comparison of the customer's historical levels of utilization and cost of
providing healthcare services to current levels of utilization and cost of
providing such services.
In setting its managed care fees, the Company relies upon a number of
factors, including (i) the nature and scope of services to be provided, (ii) the
benefits offered to the managed care customer,
9
(iii) the prior utilization history and demographic characteristics of the
beneficiary population to be served, (iv) the rates charged by providers and
inpatient facilities in the service area and the mode of provision of such
services and (v) the Company's prior experience with similar programs.
MARKETING
Provider Operations. The Company's hospital marketing programs are aimed
at referral sources within a selected service area rather than to the general
public and are designed to increase awareness of a facility's programs and
services. Referral sources include psychiatrists, medical practitioners,
managed behavioral healthcare organizations, schools and clergy. Each
facility's marketing staff, together with other facility personnel, maintains
direct contact with referral sources to support their needs. These needs may be
related to a particular treatment program, the desires of the patient's family,
hospital policies or the timely receipt of accurate information.
Hospital marketing efforts also focus on increasing the number of patients
referred to the Company by primary care physicians, managed care companies and
other behavioral healthcare professionals. Increased referrals are generated by
providing information to physicians on the Company's services, establishing
contacts with managed care companies and by participating in local health
associations. The Company seeks to maintain strong relationships with its
referral sources by providing regular utilization information and updates on
patient progress to purchasers of its healthcare services and primary care
physicians. These activities are performed by full-time marketing
representatives, as well as district and area management.
The Company's marketing programs related to its youth services operations
are aimed at judicial systems, law enforcement agencies and other agencies in
all states where a need for the Company's services is perceived or known. In
some instances, these agencies request a formal proposal in a relatively short
time frame and the Company's marketing personnel work with these agencies to
provide a proposal which is responsive to their needs. In states where
established relationships exist and services are currently provided, marketing
efforts are focused on judges, probationary officers and other individuals
charged with the responsibility of placing adolescents in need of the Company's
services.
In its contract management operations, the Company has developed profiles
of hospitals and community mental health centers in the United States.
Potential clients include medical/surgical hospitals without existing behavioral
healthcare programs, as well as medical/surgical hospitals and community mental
health centers with existing behavioral healthcare programs in need of the
Company's management expertise. Regional salespersons contact prospective
clients and, where appropriate, present a detailed proposal to key decision-
makers. The proposal often contains detailed financial projections of the
proposed behavioral healthcare programs. The Company also works with the
potential client to develop contract terms responsive to the client's and its
community's specific needs.
Managed Care Operations. The Company focuses its managed care sales and
marketing efforts primarily on self-insured employers, HMOs, governmental
agencies and insurance companies. The Company has also targeted employee
benefit consulting firms that represent employers and groups of employers in the
selection and purchase of managed behavioral healthcare benefit programs. The
Company's marketing efforts emphasize its ability to provide a wide array of
cost-effective services to individuals at convenient locations within a
geographic region. The Company believes that its ability to serve a large
number of patients in a region gives it a competitive advantage in marketing to
purchasers of managed care services. The Company's marketing efforts in this
area also emphasize the Company's policy of providing regular feedback on
patient progress to the managed care customer and its ability to collect and
provide accurate utilization, cost and outcome statistics.
REGULATION
As a behavioral healthcare provider and a managed behavioral healthcare
service organization, the Company is currently subject to extensive and
frequently changing government regulations. These regulations are primarily
concerned with licensure, conduct of operations,
10
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 healthcare facilities to Medicare and Medicaid patients are
medically necessary, meet professionally recognized standards and are billed
properly. These provisions include a requirement that admissions of Medicare
and Medicaid patients to hospitals must be reviewed in a timely manner to
determine the medical necessity of the admissions. In addition, the Peer Review
Improvement Act of 1982 ("Peer Review Act") provides that a hospital may be
required by the federal government to reimburse the government for the cost of
Medicare-paid services determined by a peer review organization to have been
medically unnecessary. Each of the Company's hospitals has developed and
implemented a quality assurance program and implemented procedures for
utilization review and retrospective patient care evaluation to meet its
obligations under the Peer Review Act.
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 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 hospital services) may not, subject to
certain exceptions, refer Medicare patients for designated health services to
that entity. Similarly, facilities may not bill Medicare or any other party for
services furnished pursuant to a prohibited referral. 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 similar prohibitions 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
11
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.
Some states are beginning to regulate at-risk managed behavioral healthcare
services by finding that such entities are conducting the business of insurance
or acting as an HMO. To the extent that the Company operates or is deemed to
operate in one or more states as a prepaid limited health service organization,
insurance company, HMO, prepaid health plan, or other similar entity, it will be
required to comply with certain statutes and regulations that, among other
things, may require it to maintain minimum levels of deposits, capital, surplus,
reserves or net worth, and also may limit the ability of certain of the
Company's subsidiaries to pay dividends, make certain investments, and repay
certain indebtedness. The imposition of any such requirements will
significantly increase the Company's costs of doing business. Failure by the
Company to obtain or maintain required licenses typically also constitutes an
event of default under the Company's contracts with its managed care customers.
Florida enacted a prepaid limited health service organization statute in
1993. This statute provides for the regulation of limited service prepaid
health plans in a manner similar to the regulation of an HMO. The Company has
obtained a written determination from the staff of the Florida Department of
Insurance that it is not subject to regulation under this statute, but there can
be no assurance than the Florida Department of Insurance will not take a
contrary position in the future or that other provisions of state insurance laws
will not be applied to the Company's activities. Also, the West Virginia
Department of Insurance has issued administrative rules regulating the financial
solvency and operation of entities that contract with HMOs to provide health
services to HMO members on a prepaid basis using a network of independent
providers. The Company's HMO customer in West Virginia has requested that the
West Virginia Department of Insurance grant an exemption for the Company from
the working capital and segregated fund requirements of these rules.
Several of the states in which the Company conducts its business have
enacted legislation requiring organizations engaged in utilization review to
register and to meet certain operating standards. Utilization review
regulations typically impose requirements with respect to qualifications of
personnel, appeal procedures, confidentiality and other matters relating to
utilization review services. The Company is registered in Alabama, Arizona,
Florida, Louisiana, Missouri, Nevada, North Carolina, Oklahoma, South Carolina
and Texas for such services.
Many states in which the Company does business have adopted statutes to
regulate third-party health claims administrators, which may include aspects of
the Company's business. These statutes typically impose requirements with
respect to the financial solvency and operation of the administrator. The
Company has obtained a certificate of authority as an administrator in Ohio and
Texas.
Certain of the Company's services are subject to the provisions of the
Employee Retirement Income Security Act of 1974, as amended ("ERISA"). ERISA
governs certain aspects of the relationship between employer-sponsored health
benefit plans and certain providers of services to such plans through a series
of complex statutes and regulations that are subject to periodic interpretation
by the
12
Internal Revenue Service and the United States Department of Labor. In general,
these regulations impose, among other things, an obligation on the Company to
act as a fiduciary with respect to some of the health benefit plans it provides
services to. However, there is little direct authority governing the application
of ERISA to many of the activities and arrangements of managed behavioral
healthcare companies.
In certain states, the employment of psychiatrists, psychologists and
certain other behavioral healthcare professionals by business corporations, such
as the Company, is a permissible practice. However, other states have
legislation or regulations or have interpreted existing medical practice
licensing laws to restrict business corporations from providing behavioral
healthcare services or from the direct employment of psychiatrists and, in a few
states, psychologists and other behavioral healthcare professionals. Management
believes that the Company is in compliance with these laws.
State certificate of need or similar statutes generally provide that prior
to the construction or acquisition of new beds or facilities or the introduction
of a new service, a state agency must determine that a need exists for those
beds, facilities or services. In most cases, certificate of need or similar
statutes do not restrict the ability of the Company or its competitors from
offering new or expanded outpatient services. Except for 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 the behavioral healthcare services industry is extensive and evolving and
there can be no assurance that a regulatory agency will not take the position,
under existing or future statutes or regulations, or as a result of a change in
the manner in which existing statutes or regulations are or may be interpreted
or applied, that the conduct of all or a portion of the Company's operation
within a given jurisdiction is or will be subject to further licensure and
regulation. Expansion of the Company's businesses to cover additional
geographic areas or to different types of products or customers could also
subject it to additional licensure and regulatory requirements.
ACQUISITIONS, SALES AND LEASE COMMITMENTS
* Meadowlake Hospital. During fiscal year 1997, this 50-bed facility, located
in Enid, Oklahoma, incurred a significant operating loss. Also, due to a lack of
alternative business strategies in a limited market with significant
competition, the Company projected that this facility would not be profitable in
the future. As a result, in August 1997, consistent with the Company's strategy
of assessing its products, services, markets and facilities against financial
and quality performance standards, the Company leased this facility to an
independent healthcare provider for an initial term of three years, with four
three-year renewal options. Lease payments during the initial term total
$360,000 per year and at each renewal option are subject to adjustment based on
the change in the consumer price index during the preceding lease period. In
accordance with the terms of the lease agreement, the tenant is responsible for
all costs of ownership, including taxes, insurance, maintenance and repairs. In
addition, the tenant has the option to purchase the facility at any time during
the initial term for $3 million, less $15,417 for each month of occupancy.
Subsequent to the initial term, the tenant has the option to purchase the
facility at any time for $2.5 million.
* Summa. On July 1, 1997, the Company agreed to acquire Summa for $300,000 in
cash, 250,000 shares of the Company's Common Stock and fully exercisable
warrants to purchase 500,000 shares of the Company's Common Stock, with an
exercise price of $3.25 per share (the fair market value of the Company's Common
Stock on July 1, 1997) and an expiration date of July 2007. Summa's principal
assets consist of projects in the specialty-managed care and healthcare services
industry, including an arrangement with a provider of healthcare services to
correctional facilities in Florida. The acquisition occurred in October 1997.
13
* Ramsay Managed Care, Inc.(RMCI). In 1993, the Company formed RMCI and entered
the managed behavioral healthcare business with the acquisition of Florida
Psychiatric Management, Inc. ("FPM"). This business expanded through additional
acquisitions and development efforts and, for a number of business reasons
deemed by management to be reasonable at the time, on April 27, 1995, the
Company distributed, on a pro rata basis in the form of a dividend, the common
stock of RMCI held by the Company to the holders of record on April 21, 1995 of
the Company's Common and Preferred Stock. Subsequent to this distribution, RMCI
became a separate, publicly traded company and ceased being a subsidiary of the
Company.
During 1996, it became apparent to the management of the Company and
RMCI that, as a result of recent consolidation trends in the healthcare
industry, the development and growth strategies of both companies were
converging rather than diverging. Accordingly, the Board of Directors of both
companies determined that a merger would be beneficial to the shareholders of
both companies. On October 1, 1996, the Company and RMCI entered into a merger
agreement providing for the acquisition of RMCI by a wholly-owned subsidiary of
the Company. The transaction was approved by the shareholders of both companies
on April 18, 1997 and was closed on June 10, 1997. On the closing date, the
Company issued approximately 2,136,000 shares of Common Stock (valued based on
the closing price of the Company's Common Stock on June 10, 1997 of $3.00 per
share) and 100,000 shares of Class B Preferred Stock, Series 1996 ("the Series
1996 Preferred Stock"), which are convertible into 1,000,000 shares of Common
Stock, in exchange for all of the outstanding shares of RMCI common and
preferred stock. In addition, amounts owed by RMCI to the Company, totalling
approximately $7.0 million on June 10, 1997, and RMCI's deficit in net tangible
assets, totalling approximately $5.6 million on June 10, 1997, were included as
consideration for the acquisition of RMCI.
* Gulf Coast Treatment Center. In December 1996, the Company resumed operations
at this facility in Fort Walton Beach, Florida. This facility had been leased to
another behavioral healthcare provider for the previous four years.
* Sale/Leaseback. In April 1995, the Company consummated a sale/leaseback
transaction whereby the Company sold the land, buildings and fixed equipment of
two of its inpatient facilities (Desert Vista Hospital in Mesa, Arizona and
Mission Vista Hospital in San Antonio, Texas) for $12.5 million and agreed to
lease these properties back over a term of 15 years (with three successive
renewal options of five years each). The leases, which are treated as operating
leases under generally accepted accounting principles, currently require
aggregate annual minimum rentals of $1.62 million, payable monthly. Effective
April 1 of each year, the lease payments are subject to any upward adjustment
(not to exceed 3% annually) in the consumer price index over the preceding 12
months.
* Sales of Land. In March and April 1995, the Company sold certain real estate
located in Flagstaff, Arizona and Houston, Texas. These properties were
initially acquired for development approximately 10 years ago and, as of the
date of sale, the properties had an aggregate book value of $1.15 million.
Total net proceeds from these sales approximated $0.75 million.
* Benchmark Behavioral Hospital. Effective April 1995, the Company agreed to
lease this 80-bed facility near Salt Lake City, Utah for four years, with an
option to renew for an additional three years. The lease, which is treated as
an operating lease under generally accepted accounting principles, requires
annual base rental payments of $0.46 million, payable monthly. In addition, the
lease provides for percentage rent payments to the lessor equal to 2% of the net
revenues of the facility, payable quarterly.
OWNERSHIP ARRANGEMENTS AND OPERATING AGREEMENTS
One physician owns a 4% interest in the subsidiary which owns 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.
14
In 1985, the Company and Bethany General Hospital in Bethany, Oklahoma
entered into a joint venture whereby the general hospital and the Company hold a
joint certificate of need for a 43-bed psychiatric unit attached to the general
hospital. Under the joint venture agreement, the Company is obligated to
provide working capital to operate the 43-bed psychiatric unit. The Company
may, at its option, continue to operate and manage the unit in three-year terms
through 2004. The Company is entitled to an annual management fee of 5% of the
unit's gross revenues and 65% of the net profits or losses of the unit.
In November 1992, the Company formed a limited partnership to operate Three
Rivers Hospital, a 64-bed facility located in Covington, Louisiana and owned by
the Company. Pursuant to the terms of the partnership agreement, the Company,
as general partner, had a 55% interest in the operations of the business and
limited partners maintained a 45% interest. Due to a significant decrease in
patient volume and projected negative operating margins, on June 30, 1995, Three
Rivers Hospital was closed. Further, in July 1996, the Three Rivers Hospital
Limited Partnership was dissolved, resulting in no gain or loss to the Company.
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, 1997, the Company employed approximately 1,830 full-time and
1,400 part-time employees, including a corporate headquarters staff of
approximately 30 full-time employees. The Company considers its relationship
with its employees to be good.
15
EXECUTIVE OFFICERS OF THE REGISTRANT
Certain information with respect to the executive officers of the Company is set
forth below:
POSITON WITH THE COMPANY AND PRINCIPAL OCCUPATION
NAME OF EXECUTIVE OFFICER AGE DURING THE PAST FIVE YEARS
- ------------------------- --- -----------------------------------------------------------------------------
Luis E. Lamela................. 47 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 1992 to May 1994.
Bert G. Cibran................. 43 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
1992 to February 1994.
Martin Lazoritz, M.D........... 50 Executive Vice President and Chief Medical Officer of the Company since
January 1997; Executive Vice President of RMCI from November 1993 to
January 1997; Chief Executive Officer of FPM, the predecessor of RMCI,
since prior to 1992.
Carol C. Lang ................. 50 Executive Vice President and Chief Financial Officer of the Company since
August 1996; President of HealthLink Enterprises, Inc. (a healthcare
consulting firm) from prior to 1992 to August 1996.
Brent J. Bryson................ 48 Senior Vice President of the Company since January 1997; Vice President of
the Company from October 1994 to January 1997 (including medical leave
from January 1996 through August 1996); Senior Vice President, Southern
Region, with Tenet Healthcare Corporation from prior to 1992 to October
1994.
John A. Quinn.................. 43 Senior Vice President of the Company since January 1997; Vice President of
the Company from prior to 1992 to January 1997.
Wallace E. Smith............... 54 Senior Vice President of the Company since January 1997; Vice President
of the Company from prior to 1992 to January 1997.
I. Paul Mandelkern............. 47 Vice President and General Counsel of the Company since June 1997; Senior
Vice President and General Counsel of FPM since prior to 1992.
William N. Nyman............... 44 Vice President of the Company since August 1993; Regional Controller of
the Company from prior to 1992 to July 1993.
Jorge Rico..................... 32 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 1992 to 1994.
Dexter Simanton................ 43 Vice President of the Company since June 1997; Vice President of
Operations of FPM from June 1994 to June 1997; Director of Clinical
Services of Florida Psychiatric Associates from 1992 to June 1994.
Daniel A. Sims................. 37 Vice President and Corporate Controller of the Company since February
1997; Corporate Controller of the Company from December 1993 to January
1997; Chief Financial Officer of a 175-bed medical/surgical hospital from
prior to 1992 to November 1993.
16
ITEM 2. PROPERTIES.
The following table provides information concerning the 14 inpatient
facilities currently owned and operated or leased and operated by the Company.
BEDS UTILIZED
DATE OPENED TOTAL FOR RESIDENTIAL
HOSPITAL (7) OR ACQUIRED BEDS TREATMENT
- ------------ ----------- ----- ----------------
Havenwyck Hospital
Auburn Hills, MI...................... November 1983 166 40
Brynn Marr Hospital
Jacksonville, NC...................... December 1983 76 12
Hill Crest Hospital
Birmingham, AL........................ January 1984 130 50
Heartland Hospital
Nevada, MO............................ April 1984 152 122
Greenbrier Hospital
Covington, LA......................... October 1984 67 14
Coastal Carolina Hospital
Conway, SC............................ November 1984 98 18
Bayou Oaks Hospital
Houma, LA(1).......................... November 1985 98 --
Benchmark Regional Hospital
Woods Cross, UT....................... August 1986 76 76
Desert Vista Hospital
Mesa, AZ(2)........................... February 1987 100 48
Chestnut Ridge Hospital
Morgantown, WV(3)..................... November 1987 70 15
The Haven Hospital
DeSoto, TX............................ April 1990 102 24
Mission Vista Hospital
San Antonio, TX(2).................... November 1991 61 --
Benchmark Behavioral Hospital
Midvale, UT(4)........................ June 1995 80 40
Gulf Coast Treatment Center
Fort Walton Beach, FL(5).............. December 1996 100 100
--- ---
Total (6) 1,376 559
===== ===
(1) The building in which the Company's facility in Houma, Louisiana is located
is leased for an initial period ending January 31, 2005 (with an option to
renew for 20 years).
(2) In April 1995, the Company sold and immediately leased back the land,
buildings and fixed equipment associated with these facilities. The leases
have an initial term of 15 years and three successive renewal options of
five years each. See "Item 1. Business-Acquisitions, Sales and Lease
Commitments."
(3) The Company has entered into a 50-year ground lease for the property on
which its 70-bed facility in Morgantown, West Virginia is located.
(4) The building in which the Company's facility in Midvale, Utah is located is
leased for an initial period ending June 24, 1999 (with an option to renew
for an additional three years). See "Item 1. Business-Acquisitions, Sales
and Lease Commitments."
(5) 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 Hospital, which was leased to an independent healthcare
provider in August 1997, and Bethany Pavilion, a 43-bed unit managed by the
Company under a joint venture agreement. See "Item 1. Business-Ownership
Arrangements and Operating Agreements."
(7) The Company believes that its facilities are well maintained and are of
adequate size for present needs.
17
As required by Statement of Financial Accounting Standards (SFAS) No. 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 was impaired (within the meaning of the Statement) at June 30, 1996
and 1995. The amount of the impairment, calculated as the excess of carrying
value of the long-lived assets over the discounted future cash flows expected
from the assets, totalled approximately $5.5 million and $21.8 million at June
30, 1996 and 1995, respectively. See "Item 7. Management's Discussion and
Analysis of Financial Condition and Results of Operations." and "Item 8.
Financial Statements and Supplementary Data."
The Company leases office space for its corporate headquarters in Coral
Gables, Florida, 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. As both the number of patients served by the
Company's programs and the number of providers under contract with the Company
increase, the probability of the Company being subject to legal liability
predicated on claims alleging malpractice or related legal theories also
increases. 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 the Company in fiscal years 1995 and
1994 totalling approximately $5,000,000. However, the Company believes that this
matter may be settled for an amount significantly less than the State's initial
request. See "Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations -- Results of Operations."
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 believes the claims of this individual
are without merit and intends to vigorously defend the proceedings.
Prior to the merger with the Company, RMCI sold its subsidiary which, as a
licensed HMO in Louisiana, Alabama and Mississippi, managed and provided prepaid
healthcare services to its members. On September 29, 1997, RMCI received a
demand for indemnification by the purchaser of this subsidiary in an amount
totalling approximately $5.8 million, an amount in excess of the purchase price
paid by the purchaser for the HMO subsidiary. The demand alleges, among other
things, that certain of the assets of the subsidiary were disallowed as admitted
assets by the Alabama and Louisiana Departments of Insurance and that certain of
the liabilities of the subsidiary were understated as of the date of the sale.
The Company believes this demand is without merit and 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.
In connection with an earlier terminated transaction involving the possible
sale of RMCI's former HMO subsidiary to a former possible purchaser, RMCI
commenced an action on July 1, 1996 in the Circuit Court of Jefferson County,
Alabama against a former officer of the subsidiary and the former possible
purchaser. The complaint (a) alleges that all defendants tortiously and
fraudulently
18
interfered with RMCI's proposed sale of the subsidiary, (b) alleges that the
former officer breached his employment contract with RMCI and his fiduciary
duties to all plaintiffs and (c) seeks damages in an amount of no less than $3.0
million, plus punitive damages. On October 4, 1996, the former officer asserted
a counterclaim which alleges that RMCI breached his employment contract by
terminating him without cause and failed to pay him certain compensation
allegedly owed pursuant to the employment contract. As a result, the
counterclaim seeks damages of at least $0.325 million and other remedies. In
addition, on October 21, 1996, the former possible purchaser of the subsidiary
asserted counterclaims against RMCI alleging fraud and breach of contract and
seeking unspecified compensatory and punitive damages. Discovery in this
litigation is ongoing. In addition, RMCI has agreed to indemnify the purchaser
of the subsidiary against any liabilities, costs and expenses sustained by the
purchaser arising out of this matter.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
Not applicable.
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS.
The Company's Common Stock is traded in the over-the-counter market and is
quoted on the NASDAQ National Market System under the symbol RHCI. On October 9,
1997, there were 526 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 in effect as of September 30,
1997 include provisions which prohibit the payment of cash dividends to its
common shareholders.
In connection with a recapitalization of the interests of Mr. Ramsay 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 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, provided (a) the Company's
EBITDA (as defined in the Company's credit documentation) for its fiscal year
ending June 30, 1998 is equal to or greater than $16.5 million, (b) the Company
has availability under its revolving credit facility in excess of $4.0 million
at that time, (c) the financial institution originally providing the revolving
credit facility has syndicated a
19
portion of the revolving credit facility and (d) the subordinated bridge notes
provided by such financial institution on September 30, 1997 has been refinanced
(collectively, the "Conditions").
The Company's credit documentation prohibits the payment of dividends
in respect of the Series C Preferred Stock, Series 1996 Preferred Stock and
Series 1997-A Preferred Stock unless the Conditions are satisfied.
On September 30, 1997, the Company also sold to a financial
institution, which effected the refinancing, $2.5 million of Series 1997
Preferred Stock. The Series 1997 Preferred Stock is non-voting, is senior to
the Series C Preferred Stock, the Series 1996 Preferred Stock and the Series
1997-A Preferred Stock in liquidation and as to dividends, is initially
convertible (subject to adjustment), at the option of the holder, into 394,945
shares of Common Stock, is optionally redeemable by the Company at a premium
beginning in September 2000, and is manditorily redeemable at the earlier to
occur of a change in control of the Company or September 2007. Dividends on the
Series 1997 Preferred Stock are payable quarterly at 9%, unless the Company is
unable to meet an adjusted minimum fixed charge ratio, at which time dividends
accrue at a rate of 11%, until paid.
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, 1997 and 1996, as reported on the NASDAQ National
Market System:
HIGH LOW
---- ---
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
Year ended June 30, 1996
First Quarter.................................................. $4 5/8 $3 3/8
Second Quarter................................................. 3 3/4 2 1/2
Third Quarter.................................................. 3 15/16 2 7/8
Fourth Quarter................................................. 4 3/8 2 7/8
On October 9, 1997, the closing sales price of the Company's Common
Stock was $4 7/8 per share.
20
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
----------------------------------------
1997 1996 1995 1994 1993
----------- ------------ ------------ ------------ ----------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
Statement of Operations Data:
Total revenues............................................ $136,719 $117,423 $136,418 $137,002 $136,354
Salaries, wages and benefits.............................. 67,793 66,259 72,061 64,805 63,810
Other operating expenses.................................. 46,819 42,387 44,741 42,907 40,454
Provision for doubtful accounts........................... 5,688 5,805 5,086 5,846 8,148
Depreciation and amortization............................. 5,473 5,490 7,290 6,836 6,605
Interest and other financing charges...................... 5,942 6,892 8,347 8,906 9,494
Losses related to asset sales and closed businesses....... --- 4,473 6,431 802 7,524
Asset impairment charges.................................. --- 5,485 21,815 --- ---
Restructuring and other charges........................... --- --- --- --- 1,367
-------- -------- -------- -------- --------
131,715 136,791 165,771 130,102 137,402
-------- -------- -------- -------- --------
Income (loss) before minority interests, income
taxes, extraordinary item and cumulative
effect of accounting change............................. 5,004 (19,368) (29,353) 6,900 (1,048)
Minority interests........................................ --- --- 887 4,824 1,126
-------- -------- -------- -------- --------
Income (loss) before income taxes,
extraordinary item and cumulative effect
of accounting change.................................... 5,004 (19,368) (30,240) 2,076 (2,174)
Provision (benefit) for income taxes...................... 1,726 (2,887) (13,195) 599 159
-------- -------- -------- -------- --------
Income (loss) before extraordinary item
and cumulative effect of accounting change.............. 3,278 (16,481) (17,045) 1,477 (2,333)
Extraordinary item:
Loss from early extinguishment of debt,
net of income tax benefit............................... --- --- (257) (155) (1,580)
Cumulative effect of change in accounting
for income taxes........................................ --- --- --- --- 2,353
-------- -------- -------- -------- --------
Net income (loss)......................................... $ 3,278 $(16,481) $(17,302) $ 1,322 $ (1,560)
======== ======== ======== ======== ========
Primary earnings per share:
Income (loss) per common and dilutive
common equivalent share before
extraordinary item and cumulative
effect of accounting change............................. $0.33 $(2.12) $(2.25) $0.15 $(0.29)
Net income (loss)......................................... $0.33 $(2.12) $(2.28) $0.14 $(0.20)
Weighted average shares
outstanding(1).......................................... 10,431 7,929 7,743 9,641 7,932
(1) Includes common and dilutive common equivalent shares outstanding.
JUNE 30
-------
1997 1996 1995 1994 1993
-------- -------- -------- -------- --------
Balance Sheet Data:
Working capital................................ $ 9,960 $ 11,715 $ 24,098 $ 21,148 $ 23,811
Total assets................................... 141,189 132,758 139,236 183,168 190,370
Long-term debt................................. 47,254 44,664 55,568 67,707 77,429
Stockholders' equity........................... 59,182 46,053 61,779 80,468 79,997
21
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
RESULTS OF OPERATIONS
Patient revenues of the Company's inpatient facilities are affected by changes
in the rates the Company charges, changes in reimbursement rates by third-party
payors, the volume of patients treated and changes in the mix of payors and
patient types. The Company's facilities provide services to patients requiring
intensive patient care, less intensive residential treatment care and outpatient
treatment. Also, at four of the Company's facilities, medical subacute services
are provided. The reimbursement rates for intensive inpatient care are generally
greater than the rates paid for residential treatment care. However, the average
length of stay for patients in residential treatment programs is significantly
greater than that for patients in intensive inpatient programs.
Generally, charges for each facility's services are reimbursed under third-
party reimbursement programs at the amount billed or at rates which are less
than the facility's charges. When operating revenues (charges) per patient day
are higher than the negotiated per-diem rate or the facility's costs, the
difference is recorded as a reduction of gross revenues. These lower rates can
be based on a negotiated per-diem amount or based on the facility's costs as
audited or projected by the third-party payors. For the fiscal year ended June
30, 1997, the Company derived approximately 36% of its revenues from the
Medicare program. Certain legislative changes enacted in July 1997 will impact
the level of Medicare reimbursement received by the Company's facilities
beginning July 1, 1998--see "Item 1. Business-Sources of Revenue."
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 the years ended June 30, 1997 and 1995, the Company recorded contractual
adjustment benefits related to intermediary audits of prior year cost reports of
approximately $1.5 million and $1.0 million, respectively. During the year ended
June 30, 1996, the Company recorded contractual adjustment expenses related to
intermediary audits of prior year cost reports of approximately $1.9 million. As
a result of this negative experience, the Company recorded additional
contractual adjustment expenses totaling $3.5 million in its June 30, 1996
financial statements related to possible future adjustments of its cost report
estimates by intermediaries. 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.
The Company also receives capitated amounts for behavioral healthcare services
provided to patients 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.
Several years ago, the Federal Government established a funding mechanism,
known as disproportionate share, which was meant to adequately reimburse
facilities serving a disproportionately high volume of Medicaid patients,
relative to other providers. Disproportionate share funding was established
under Title XIX of the Social Security Act, administered at the State level and
approved/overseen by the Health Care Financing Administration, since Medicaid
services are jointly funded by each State as well as the Federal Government. In
fiscal years 1995 and 1994, the Company received significant disproportionate
share payments from the Louisiana Medicaid program. Statutory changes virtually
eliminated the disproportionate share funding mechanism in Louisiana and, for
the years ended June 30, 1997 and 1996, disproportionate share payments received
by the Company's Louisiana facilities were not material.
22
The impact of Louisiana disproportionate share payments on revenues and income
from continuing operations in fiscal year 1995 was approximately $5.6 million
and $3.7 million, respectively. During fiscal year 1996, the State of Louisiana
requested repayment of disproportionate share payments received by two of the
Company's Louisiana facilities in fiscal years 1995 and 1994 totaling
approximately $5.0 million. The repayment requests related to a) alleged
overpayments made to the Company's former Three Rivers Hospital, which was
closed on June 30, 1995, because the State believed Three Rivers' actual annual
inpatient volume was less than its projection of annual inpatient volume made at
the beginning of its 1994 cost reporting year and b) alleged improper teaching
hospital payments made to Three Rivers Hospital and Bayou Oaks Hospital because
the State believed these facilities were not qualifying teaching hospitals at
the time these payments were made. The Company believes that certain of the
calculations which support the State's calculation have not been considered.
Further, the Company believes that, based on its understanding of the rules and
regulations in place at the time the teaching hospital payments were made,
payments received as a result of the teaching classification were appropriate.
The Company believes that this matter may be settled for an amount
significantly less than the State's initial requests. Any settlement of this
matter will be contingent upon the execution of settlement documentation, the
terms of which have not been agreed upon. Further, there can be no assurance
that the Company and the State will agree on a settlement amount or the terms
and conditions of settlement documentation. The Company intends to vigorously
contest any position by the State of Louisiana which the Company considers
adverse and believes that adequate provision has been made at June 30, 1997 and
1996 for the estimated amount which might be recovered from the Company as a
result of this matter. See "Item 8. Financial Statements and Supplementary
Data."
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 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
23
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 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
24
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.
1996 COMPARED TO 1995
For purposes of comparing the Company's statements of operations between 1996
and 1995, same facilities exclude Benchmark South, which was opened in late
fiscal 1995, and Three Rivers Hospital, which was closed on June 30, 1995.
Total revenues decreased from $136.4 million in 1995 to $117.4 million in 1996
primarily because $12.9 million of revenues related to RMCI were included in the
prior year total (prior to the distribution of RMCI on April 24, 1995) and
because revenues decreased between years due to the impact of intermediary
audits of prior year cost reports, which reduced revenues by $5.4 million in
1996 (see "1997 Compared to 1996" above) and increased revenues in 1995 by $1.0
million. Also, during 1996, the Company replaced approximately $6.4 million in
patient revenues related to Three Rivers Hospital and $5.6 million in
disproportionate share revenues recorded in 1995 with a $4.7 million increase in
revenues from Benchmark South, a $6.6 million increase in subacute revenues and
a $1.6 million increase in contract management revenues. Net outpatient revenues
remained stable between 1996 and 1995, increasing $0.3 million, or 2%.
Same facility net inpatient revenues decreased $0.9 million between years as
same facility net inpatient revenue per patient day decreased 8% due to the
growth in residential treatment services, which are less intensive and generally
reimbursed at rates which are less than the rates received for acute psychiatric
inpatient services. During 1996, same facility residential treatment patient
days comprised 40% of the Company's behavioral health same facility patient
days, compared to 31% in 1995.
Total salaries, wages and benefits in 1996 were $66.3 million, compared to
$72.1 million in 1995. The material changes in salaries, wages and benefits
included (a) a $1.1 million increase in same facility salaries, wages and
benefits, (b) a $4.8 million decrease related to the closure of the Three Rivers
facility, (c) a $2.6 million increase related to the opening of Benchmark South,
(d) an increase of $1.4 million related to increased volume in the Company's
subacute units and (e) salaries, wages and benefits of $5.5 million in fiscal
1995 related to RMCI.
Other operating expenses in 1996 were $42.4 million, compared to $44.7 million
in 1995. The material changes in other operating expenses between years included
(a) a $3.0 million decrease related to the closure of the Three Rivers facility,
(b) a $2.5 million increase related to the opening of Benchmark South, (c) an
increase of $2.4 million related to increased volume in the Company's subacute
units, and (d) other operating expenses in 1995 related to RMCI of $6.2 million.
The Company's same facility other operating expenses remained stable between
years, increasing $0.3 million, or 1%. Also, during the latter half of 1996, the
Company recorded expenses totalling approximately $0.8 million related to two
individually significant professional liability cases. Based on the facts and
circumstances of each case, the Company increased its reserves related to these
cases up to its self-insured limit. As a result of this negative experience, the
Company reevaluated its reserve for known and unknown professional and general
liability claims and increased this reserve by an additional $0.75 million
during the fourth quarter of 1996. In addition, based on an increase in claims
under the Company's self-insured health plan during the latter half of 1996, the
Company increased its reserve for incurred but not reported health insurance
claims by $0.2 million in the fourth quarter of 1996.
The provision for doubtful accounts increased from $5.1 million in 1995 to
$5.8 million in 1996. This increase primarily related to the same facilities,
which recorded additional provisions on per-
25
diem based residential treatment business in 1996. These provisions were
necessary as doubt arose with respect to the ability of certain payors to repay
the Company for services rendered in 1996. The majority of these payors are
state agencies which receive funds from various federal and state sources to pay
the Company for its services. Management initiated steps to limit its exposure
on uncollectible per-diem based residential treatment business in the future,
including by (a) establishing a clear understanding prior to admitting patients
as to the funding sources through which the Company will be paid for its
services, (b) immediate follow-up with these funding sources to ensure initial
claims are billed in accordance with the agency's guidelines and (c) ongoing
monitoring of residential treatment claims, by agency or program, to ensure that
claims will be paid.
Depreciation and amortization in 1996 totalled $5.5 million, compared
to $7.3 million in 1995. Depreciation expense decreased by $0.4 million on two
facilities which were sold and leased back in April 1995. Also, in June 1995,
the book values of four facilities were considered impaired pursuant to the
provisions of SFAS No. 121, which reduced depreciation expense in 1996 by an
additional $0.6 million. Finally, depreciation and amortization expense in 1995
related to RMCI totalled $0.9 million.
Interest expense decreased from $8.3 million in 1995 and $6.9 million
in 1996. This decrease related to debt reductions made in 1995 on the Company's
senior and subordinated secured notes (including a $7.5 million prepayment in
April 1995), which reduced interest expense in 1996 by $1.2 million. Also,
interest expense in 1995 related to RMCI totaled $0.2 million.
Primarily in the fourth quarter of 1996, the Company recorded losses
totaling 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. In 1995,
the Company recorded losses totaling approximately $6.4 million related to a
sale/leaseback transaction, the sale of real estate, the closure of Three Rivers
Hospital, the closure of other outpatient operations and the abandonment of
certain development projects.
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 and 1995 statements of operations totaling approximately $5.5 million
and $21.8 million, respectively. These amounts include asset impairment charges
related to the Company's investment in other healthcare enterprises of
approximately $1.5 million, based on an assessment of the future cash flows
expected to be realized by the Company from these businesses.
Minority interests in 1995 primarily reflects the limited partners'
share of net income of Three Rivers Hospital prior to its closure on June 30,
1995.
The Company recorded a $2.9 million benefit for income taxes in fiscal
year 1996 compared to a $13.2 million benefit for income taxes in fiscal year
1995. The income tax benefit recorded in fiscal year 1996 was recorded at an
effective tax rate significantly less than the statutory tax rate due to a
deferred tax valuation allowance of $4.4 million at June 30, 1996.
IMPACT OF INFLATION
The psychiatric hospital industry is labor intensive, and wages and
related expenses increase in inflationary periods. Additionally, suppliers
generally seek to pass along rising costs to the Company in the form of higher
prices. The Company monitors the operations of its facilities to mitigate the
effect of inflation and increases in the costs of health care. To the extent
possible, the Company seeks to offset increased costs through increased rates,
new programs and operating efficiencies. However, reimbursement arrangements
may hinder the Company's ability to realize the full effect of rate increases.
To date, inflation has not had a significant impact on operations.
26
FINANCIAL CONDITION
The Company records amounts due to or from third-party contractual
agencies (Medicare, Medicaid and Blue Cross) based on its best estimate, using
the principles of cost reimbursement, of amounts to be ultimately received or
paid under current and prior years' cost reports filed (or to be filed) with the
appropriate intermediaries. Ultimate settlements and other lump sum adjustments
due from and paid to these intermediaries occur at various times during the
fiscal year. At June 30, 1997, amounts due from Medicare, Medicaid and Blue
Cross totaled $4.4 million, $0.6 million and $0.7 million, respectively. Also,
at June 30, 1997, amounts due to Medicare, Medicaid and Blue Cross totaled $6.1
million, $0.8 million and $0.2 million, respectively. See "Results of
Operations" above.
At June 30, 1996, net cash advances made by the Company to or on behalf of
RMCI totaled $8.2 million. Of this amount, $6 million primarily related to the
funding of certain RMCI acquisitions and was represented by an unsecured,
interest-bearing (8%), subordinated promissory note due from RMCI and issued on
October 25, 1994. The remaining amount included $0.36 million of accrued
interest on the promissory note since October 1, 1995 and $1.85 million of
additional amounts paid by RHCI on behalf of RMCI and charges by RHCI to RMCI
for certain administrative services. The net amount advanced to RMCI as of the
effective date of the merger, totaling approximately $7.0 million, was included
in the consideration for RMCI.
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, which included the value of RMCI's
established clinical protocols and existing managed care contracts, of
approximately $4.7 million. The identifiable intangible assets are expected to
be recovered over periods ranging from four to 15 years and cost in excess of
net asset value of purchased businesses is expected to be recovered over a 25-
year period. As partial consideration for the acquisition of RMCI, the Company
assumed RMCI's $2.75 million demand note to a corporate affiliate of Mr. Ramsay
and issued Common Stock, the value of which was $5.6 million (net of issuance
costs totaling $0.8 million) and Series 1996 Preferred Stock, the value of which
was $3.1 million (including accrued dividends of $0.1 million), on June 10,
1997.
The Company has net deferred tax assets totaling approximately $14.8
million, which are reduced by a valuation allowance of $5.4 million, at June 30,
1997. During 1997, the Company's valuation allowance increased primarily as a
result of deferred tax assets acquired in connection with the merger of RMCI
which are not considered realizable. Management has considered the effects of
implementing tax planning strategies, consisting of the sales of certain
appreciated property, as the primary basis for recognizing deferred tax assets
at June 30, 1997. The ultimate realization of deferred tax assets may be
affected by changes in the underlying values of the properties considered in the
Company's tax planning strategies, which values are dependent upon the operating
results and cash flows of the individual properties. The Company evaluates the
realizability of its deferred tax assets on a quarterly basis by reviewing its
tax planning strategies and the adequacy of its valuation allowance.
The Company's accounts payable and other accrued current liabilities increased
between years from $5.0 million to $7.3 million and $4.4 million to $5.2
million, respectively, primarily due to acquired liabilities in connection with
the merger of RMCI and accrued and unpaid costs in connection with the Company's
refinancing efforts. Hospital and medical claims payable relate to RMCI's
reserve for claims incurred but not yet paid in connection with its capitated
provider contracts.
As mentioned elsewhere, on September 30, 1997, the Company refinanced
its then existing credit facilities. Consequently, the amounts which were
currently due under the Company's former credit facilities, totaling $11.6
million at June 30, 1997, have been excluded from current liabilities since the
refinancing resulted in this amount being outstanding for an uninterrupted
period extending beyond one year from June 30, 1997.
During 1997, amounts owed to minority interests decreased by $0.8 million
primarily based on a final distribution made to minority partners in the Three
Rivers Hospital Limited Partnership,
27
the operations of which closed on June 30, 1995. Subsequent to this
distribution, the limited partnership was dissolved, resulting in no gain or
loss to the Company.
In August 1996, a corporate affiliate of Mr. Ramsay acquired through a
private placement, 275,546 shares of Common Stock of the Company at a price of
$2.75 per share. These shares were issued for management fees due under a
management agreement with a corporate affiliate of Mr. Ramsay which was in
effect during fiscal 1997. On September 10, 1996, the Company entered into a
letter agreement which terminated this management agreement effective July 1,
1997. In consideration for this termination, the Company issued warrants to
another corporate affiliate of Mr. Ramsay to purchase 250,000 shares of Common
Stock at an exercise price of $2.63 per share. These warrants were fully
exercisable as of September 10, 1996, expire on September 10, 2006 and had a
weighted average fair value on the date of issuance of $0.85 per warrant. As a
result, the Company recorded other operating expenses and additional paid-in
capital of $212,000 related to these warrants.
LIQUIDITY AND CAPITAL RESOURCES
On September 30, 1997, the Company refinanced its existing senior and
subordinated secured notes, its variable rate revenue bonds and its demand note
to a corporate affiliate of Mr. Ramsay with proceeds from a senior secured
credit facility consisting of term and revolving credit debt of $38.5 million,
the sale of $2.5 million of Series 1997 Preferred Stock to a financial
institution and the sale of $4.0 million of Series 1997-A Preferred Stock to a
corporate affiliate of Mr. Ramsay. In addition, on September 30, 1997, the
Company issued $17.5 million of subordinated bridge notes, of which $15.0
million was purchased by a financial institution and $2.5 million was purchased
by a corporate affiliate of Mr. Ramsay. The bridge notes held by the financial
institution contain a contingent payment obligation which (i) is payable upon
the earlier to occur of certain events (each, an "Event"), including a change of
control involving the Company, a public offering by the Company of Common Stock,
the repayment after March 1998 of the bridge notes and September 30, 2002, (ii)
is payable by the issuance of shares of Common Stock, as required by the
Company's credit documentation, and (iii) is payable in an amount which is to be
determined immediately prior to an Event, depending on the date of the Event,
either (a) by reference to a percentage of the increase in the aggregate market
value for the Company's Common Stock, calculated on a fully-diluted basis, over
a base amount, or (b) by reference to a percentage of the aggregate market value
for the Company's Common Stock, calculated on a fully-diluted basis, on the date
of the Event. It is contemplated that any refinancing of the bridge notes would
also contain a contingent payment obligation based upon the aggregate market
value for the Company's Common Stock.
Under the terms of the Senior Credit Facility, the Company was provided a) a
$12.5 million term loan, payable in 18 quarterly installments ranging from
approximately $0.4 million to $0.9 million, beginning July 1, 1998, b) a $10
million term loan, payable in 20 quarterly installments of $62,500, beginning
January 1, 1998 and eight quarterly installments of approximately $1.0 million,
beginning January 1, 2003 and c) a revolving credit facility (the "Revolver")
for an amount up to the lesser of $16 million or the borrowing base of the
Company's receivables, as defined in the agreement. In addition, a corporate
affiliate of Mr. Ramsay purchased additional preferred shares in the Company
upon closing and, under certain limited circumstances related to an estimated
liability, agreed to purchase Common Stock at a price of $5.17 per share (the
30-day average stock price prior to the closing). As a result, on September 30,
1997, the Company entered into an agreement with a corporate affiliate of Mr.
Ramsay pursuant to which the corporate affiliate purchased 4,000 shares of
Series 1997-A Preferred Stock at $1,000 per share. The purchase price, which
totaled $4.0 million, was paid by (i) offset against approximately $0.6 million
in dividends accrued through September 30, 1997 on the Series C Preferred Stock
and the Series 1996 Preferred Stock, (ii) offset against approximately $0.4
million in unpaid accrued interest and commitment fees on the former demand
note, (iii) $0.25 million in principal due on the former demand note which was
not refinanced with proceeds of the bridge notes and (iv) approximately $2.8
million in cash. Provided certain operating and financing targets are achieved
by September 30, 1998, the Series 1997-A Preferred Stock is mandatorily
redeemable and the Revolver will increase to $20 million. See "Item 5. Market
for the Registrant's Common Equity and Related Stockholder Matters."
28
Proceeds of the refinancing were used as follows: (a) principal repayments of
$27.5 million of 11.6% senior secured notes and $1.4 million of 15.6%
subordinated secured notes held by a group of insurance companies, (b) repayment
of $3.4 million of bank debt created on September 2, 1997 upon the redemption of
one of the Company's variable rate revenue bonds, (c) repayment of approximately
$0.9 million of accrued interest on the above obligations, (d) creation of a
cash collateral account in an amount totaling approximately $12.9 million which
will be used to redeem the remaining variable rate revenue bonds and to pay
accrued interest thereon on their redemption dates of November 3, 1997 and
December 1, 1997, (e) repayment of $2.5 million of the $2.75 million loan to a
corporate affiliate of Mr. Ramsay, (f) payment of a $2.2 million prepayment
penalty to the group of insurance companies holding the senior and subordinated
secured notes and (g) transaction costs totaling approximately $2.8 million. In
order to satisfy these payments, the amount drawn down on the Revolver totaled
approximately $8.3 million on September 30, 1997. In addition, the Company drew
down an additional $1.7 million on the Revolver on September 30, 1997, leaving
the unused portion of the Revolver at $6 million.
The Company's current primary cash requirements relate to its normal
operating expenses and routine capital improvements at its facilities. Also,
the State of Louisiana has taken the position that certain disproportionate
share payments were improperly paid to two of the Company's Louisiana
facilities. See "Results of Operations" above and "Item 3. Legal Proceedings."
On the basis of its historical cash collection experience, its
projected cash needs and the refinancing of the Company's debt on September 30,
1997, the Company believes that its cash resources and internally generated
funds from future operations will be sufficient to meet its current cash
requirements and future identifiable needs.
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 1997 Annual
Meeting of Stockholders to be held on November 20, 1997 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, 1997.
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.
29
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-26 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.
Also, 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.
(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.
30
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: BY
-------------------- ------------------------------------------
BERT G. CIBRAN
PRESIDENT AND PRINCIPAL EXECUTIVE OFFICER
DATED: BY
-------------------- ------------------------------------------
CAROL C. LANG
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: BY
-------------------- ------------------------------------------
PAUL J. RAMSAY
CHAIRMAN OF THE BOARD AND DIRECTOR
DATED: BY
-------------------- ------------------------------------------
LUIS E. LAMELA
EXECUTIVE VICE CHAIRMAN OF THE BOARD
AND DIRECTOR
31
SIGNATURE/TITLE
---------------
DATED: BY
---------------------- ---------------------------------
AARON BEAM, JR.
DIRECTOR
DATED: BY
---------------------- ---------------------------------
PETER J. EVANS
DIRECTOR
DATED: BY
---------------------- ---------------------------------
THOMAS M. HAYTHE
DIRECTOR
DATED: BY
---------------------- ---------------------------------
STEVEN J. SHULMAN
DIRECTOR
DATED: BY
---------------------- ---------------------------------
MICHAEL S. SIDDLE
DIRECTOR
32
RAMSAY HEALTH CARE, INC. AND SUBSIDIARIES
INDEX TO FINANCIAL STATEMENTS AND
FINANCIAL STATEMENT SCHEDULES
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, 1997 and 1996........... F-3
Consolidated Statements of Operations -- For the Years
Ended June 30, 1997, 1996 and 1995......................... F-5
Consolidated Statements of Stockholders' Equity -- For the
Years Ended June 30, 1997, 1996 and 1995................... F-6
Consolidated Statements of Cash Flows --
For the Years Ended June 30, 1997, 1996 and 1995........... 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
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, 1997 and 1996, and the related
consolidated statements of operations, stockholders' equity, and cash flows for
each of the three years in the period ended June 30, 1997. 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, 1997 and 1996, and the
consolidated results of their operations and their cash flows for each of the
three years in the period ended June 30, 1997, in conformity with generally
accepted accounting principles.
As discussed in Note 3 to the consolidated financial statements, the
Company changed its method of accounting for the impairment of long-lived assets
in 1995.
ERNST & YOUNG LLP
Miami, Florida
September 18, 1997,
except for Note 5, the first and fourth paragraphs
of Note 7 and the third paragraph of Note 12,
as to which the date is September 30, 1997
F-2
RAMSAY HEALTH CARE, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
JUNE 30
1997 1996
------------- -------------
ASSETS
Current assets
Cash and cash equivalents............ $ 1,723,000 $ 7,605,000
Patient accounts receivable, less
allowances for doubtful
accounts of $4,386,000 and
$4,573,000 at June 30,
1997 and 1996, respectively........ 25,802,000 23,410,000
Amounts due from third-party
contractual agencies................ 5,653,000 6,479,000
Current portion of receivable from
affiliated company.................. --- 1,412,000
Other receivables.................... 3,139,000 2,985,000
Deferred income taxes................ --- 1,398,000
Other current assets................. 1,699,000 2,372,000
------------ ------------
Total current assets............. 38,016,000 45,661,000
Other assets
Cash held in trust................... 827,000 745,000
Cost in excess of net asset value of
purchased businesses................ 19,281,000 591,000
Other intangible assets.............. 4,680,000 ---
Unamortized preopening and loan costs 1,837,000 1,040,000
Receivable from affiliated company,
less current portion................ --- 6,795,000
Deferred income taxes................ 9,411,000 10,141,000
Other noncurrent assets.............. 1,155,000 1,392,000
------------ ------------
Total other assets............... 37,191,000 20,704,000
Property and equipment
Land................................. 5,025,000 5,025,000
Buildings and improvements........... 71,190,000 69,200,000
Equipment, furniture and fixtures.... 22,294,000 20,325,000
------------ ------------
98,509,000 94,550,000
Less accumulated depreciation.......... 32,527,000 28,157,000
------------ ------------
65,982,000 66,393,000
------------ ------------
$141,189,000 $132,758,000
============ ============
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
F-3
RAMSAY HEALTH CARE, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
JUNE 30
1997 1996
------------ ------------
LIABILITIES AND
STOCKHOLDERS' EQUITY
Current liabilities
Accounts payable...................... $ 7,284,000 $ 4,990,000
Accrued salaries and wages............ 6,282,000 5,169,000
Hospital and medical claims payable... 1,975,000 ---
Other accrued liabilities............. 5,218,000 4,412,000
Amounts due to third-party
contractual agencies................. 7,075,000 8,435,000
Current portion of long-term debt..... 222,000 10,940,000
------------ ------------
Total current liabilities....... 28,056,000 33,946,000
Noncurrent liabilities
Other accrued liabilities............. 6,617,000 7,170,000
Long-term debt, less current portion.. 35,632,000 44,664,000
Short term debt expected to be
refinanced........................... 11,622,000 ---
Minority interests.................... 80,000 925,000
------------ ------------
Total noncurrent liabilities.... 53,951,000 52,759,000
Commitments and contingencies
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 $362,000 at June 30,
1997 and $91,000 at June 30, 1996.... 504,000 233,000
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 $121,000................ 3,121,000 ---
Common stock $.01 par value--authorized
20,000,000 shares; issued
11,150,640 shares at June 30,
1997 and 8,605,108 shares at
June 30, 1996........................ 112,000 86,000
Additional paid-in capital........... 106,332,000 99,899,000
Retained earnings (deficit).......... (46,988,000) (50,266,000)
Treasury stock--581,550 common
shares at June 30, 1997 and
June 30, 1996, at cost........... (3,899,000) (3,899,000)
------------ ------------
Total stockholders' equity.... 59,182,000 46,053,000
------------ ------------
$141,189,000 $132,758,000
============ ============
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
F-4
RAMSAY HEALTH CARE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
YEAR ENDED JUNE 30
--------------------------------------------
1997 1996 1995
------------ -------------- --------------
Revenues:
Net operating revenues................ $134,669,000 $116,305,000 $135,929,000
Investment income and other........... 2,050,000 1,118,000 489,000
------------ ------------ ------------
TOTAL REVENUES........................... 136,719,000 117,423,000 136,418,000
------------ ------------ ------------
Expenses:
Salaries, wages and benefits.......... 67,793,000 66,259,000 72,061,000
Other operating expenses.............. 46,819,000 42,387,000 44,741,000
Provision for doubtful accounts....... 5,688,000 5,805,000 5,086,000
Depreciation and amortization......... 5,473,000 5,490,000 7,290,000
Interest and other financing charges.. 5,942,000 6,892,000 8,347,000
Losses related to asset sales and
closed businesses.................... --- 4,473,000 6,431,000
Asset impairment charges.............. --- 5,485,000 21,815,000
------------ ------------ ------------
TOTAL EXPENSES........................... 131,715,000 136,791,000 165,771,000
------------ ------------ ------------
INCOME (LOSS) BEFORE MINORITY INTERESTS,
INCOME TAXES AND EXTRAORDINARY ITEM.... 5,004,000 (19,368,000) (29,353,000)
Minority interests....................... --- --- 887,000
------------ ------------ ------------
INCOME (LOSS) BEFORE INCOME TAXES AND
EXTRAORDINARY ITEM.................... 5,004,000 (19,368,000) (30,240,000)
Provision (benefit) for income taxes..... 1,726,000 (2,887,000) (13,195,000)
------------ ------------ ------------
INCOME (LOSS) BEFORE EXTRAORDINARY ITEM.. 3,278,000 (16,481,000) (17,045,000)
Extraordinary item:
Loss from early extinguishment of
debt, less applicable
income tax benefit of $206,000...... --- --- (257,000)
------------ ------------ ------------
NET INCOME (LOSS)........................ $ 3,278,000 $(16,481,000) $(17,302,000)
============ ============ ============
Income (loss) per common and dilutive
common equivalent share:
Before extraordinary item............... $0.33 $(2.12) $(2.25)
Extraordinary item:
Loss from early extinguishment
of debt........................... --- --- (0.03)
------------ ------------ ------------
$0.33 $(2.12) $(2.28)
============ ============ ============
Weighted average number of common and
dilutive common equivalent shares
outstanding............................. 10,431,000 7,929,000 7,743,000
============ ============ ============
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
F-5
RAMSAY HEALTH CARE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
CLASS B CLASS B
CLASS A CONVERTIBLE CONVERTIBLE
CONVERTIBLE PREFERRED PREFERRED ADDITIONAL RETAINED
PREFERRED STOCK STOCK COMMON PAID-IN EARNINGS TREASURY
STOCK SERIES C SERIES 1996 STOCK CAPITAL (DEFICIT) STOCK
----------- ----------- ------------- -------- ------------ ------------ -----------
BALANCE AT JULY 1, 1994 $ 23,000 $233,000 $ --- $ 82,000 $100,048,000 $(16,483,000) $(3,435,000)
Exercise of stock options
(74,166 shares)........... --- --- --- 1,000 378,000 --- ---
Shares issued in
connection with employee
stock purchase plan
(15,869 shares)........... --- --- --- --- 89,000 --- ---
Dividends on Class B
convertible preferred
stock, Series C........... --- --- --- --- (364,000) --- ---
Purchase of treasury stock
(99,800 shares)........... --- --- --- --- --- --- (464,000)
Redemption of Class A
convertible preferred
stock..................... (23,000) --- --- --- (100,000) --- ---
Distribution of subsidiary
to stockholders........... --- --- --- --- (904,000) --- ---
Net loss................... --- --- --- --- --- (17,302,000) ---
----------- ----------- ---------- -------- ------------ ------------ -------------
BALANCE AT JUNE 30, 1995 --- 233,000 --- 83,000 99,147,000 (33,785,000) (3,899,000)
Exercise of stock options
(3,000 shares)............ --- --- --- --- 10,000 --- ---
Shares issued in
connection with employee
stock purchase plan
(21,760 shares)........... --- --- --- --- 70,000 --- ---
Other shares issued
(289,553 shares).......... --- --- --- 3,000 1,034,000 --- ---
Dividends on Class B
convertible preferred
stock, Series C........... --- --- --- --- (362,000) --- ---
Net loss................... --- --- --- --- --- (16,481,000) ---
----------- ----------- ---------- -------- ------------ ------------ -------------
BALANCE AT JUNE 30, 1996 --- 233,000 --- 86,000 99,899,000 (50,266,000) (3,899,000)
Shares issued in
connection with employee
stock purchase plan
(15,860 shares)........... --- --- --- --- 40,000 --- ---
Shares issued in
connection with
management and directors'
fees (393,846 shares)..... --- --- --- 4,000 918,000 --- ---
Issuance of common stock
(2,135,826 shares) and
Series 1996 preferred
stock (100,000 shares and
accrued dividends of
$121,000) in connection
with merger, net of costs. --- --- 3,121,000 22,000 5,625,000 --- ---
Issuance of warrants
(250,000 shares).......... --- --- --- --- 212,000 --- ---
Dividends on Class B
convertible preferred
stock, Series C........... --- 271,000 --- --- (362,000) --- ---
Net income................. --- --- --- --- --- 3,278,000 ---
----------- ----------- ---------- -------- ------------ ------------ -------------
BALANCE AT JUNE 30, 1997 $ --- $504,000 $3,121,000 $112,000 $106,332,000 $(46,988,000) $(3,899,000)
=========== =========== ========== ======== ============ ============ =============
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
F-6
RAMSAY HEALTH CARE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEAR ENDED JUNE 30
---------------------------------------------
1997 1996 1995
------------- -------------- --------------
Cash flows from operating activities
Net income (loss)....................... $ 3,278,000 $(16,481,000) $(17,302,000)
Adjustments to reconcile net income
(loss) to net cash provided by
operating activities:
Depreciation and amortization,
including loan costs............ 5,833,000 6,003,000 8,074,000
Asset impairment charges......... --- 5,485,000 21,815,000
Loss on early extinguishment of
debt............................ --- --- 463,000
Write-off of development and
other costs..................... 571,000 381,000 716,000
Loss on disposal of assets....... --- -- 5,096,000
Provision (benefit) for deferred
income taxes.................... 1,222,000 (2,887,000) (13,584,000)
Provision for doubtful accounts.. 5,688,000 5,805,000 5,086,000
Management and director fees
paid in common stock............ 922,000 600,000 ---
Issuance of warrants............. 212,000 --- ---
Minority interests............... --- --- 887,000
Cash flows from (increase)
decrease in operating assets:
Patient accounts receivable. (6,992,000) (7,651,000) (4,410,000)
Other current assets........ 1,287,000 (1,632,000) (522,000)
Other noncurrent assets..... 237,000 225,000 616,000
Cash flows from increase
(decrease) in operating
liabilities:
Accounts payable............ 1,505,000 1,105,000 2,466,000
Accrued salaries, wages and
other liabilities.......... (2,536,000) 9,202,000 (749,000)
Amounts due to third-party
contractual agencies....... (1,360,000) 3,439,000 267,000
------------ ------------ ------------
Total adjustments...... 6,589,000 20,075,000 26,221,000
------------ ------------ ------------
Net cash provided
by operating
activities........ 9,867,000 3,594,000 8,919,000
------------ ------------ ------------
Cash flows from investing activities
Proceeds from sales of assets.... --- --- 970,000
Expenditures for property and
equipment....................... (3,490,000) (1,467,000) (2,726,000)
Development project costs........ --- --- (2,124,000)
Preopening costs................. (386,000) --- (329,000)
Restricted cash used for debt
payments........................ --- --- 5,311,000
Cash held in trust............... 268,000 1,033,000 (974,000)
------------ ------------ ------------
Net cash provided
by (used in)
investing
activities......... (3,608,000) (434,000) 128,000
------------ ------------ ------------
Cash flows from financing activities
Loan costs....................... (1,755,000) (217,000) (290,000)
Payment of costs related to
acquisition..................... (365,000) --- ----
Proceeds from sale/leaseback of
facilities and equipment........ --- --- 12,015,000
Amounts received from affiliate.. 1,124,000 --- ---
Distributions to minority
interests....................... (900,000) (742,000) (2,466,000)
Proceeds from working capital
facility........................ --- --- 2,500,000
Proceeds from private placement
of shares of subsidiary......... --- --- 3,320,000
Increase (decrease) in cash due
to acquisition (distribution)
of subsidiary................... 1,474,000 --- (1,427,000)
Payment of costs related to
distribution of subsidiary...... --- --- (1,696,000)
Net proceeds from exercise of
options and stock purchases..... 40,000 517,000 468,000
Payments on debt................. (10,906,000) (3,795,000) (17,683,000)
Payment of preferred stock
dividends....................... (91,000) (362,000) (364,000)
Payment of costs related to
issuance of stock............... (762,000) --- ---
Cancellation of Class A
preferred stock................. --- --- (123,000)
Purchase of treasury stock...... --- --- (464,000)
------------ ------------ ------------
Net cash used in
financing
activities........ (12,141,000) (4,599,000) (6,210,000)
------------ ------------ ------------
Net increase (decrease) in cash
and cash equivalents............ (5,882,000) (1,439,000) 2,837,000
Cash and cash equivalents at
beginning of year............... 7,605,000 9,044,000 6,207,000
------------ ------------ ------------
Cash and cash equivalents at end
of year......................... $ 1,723,000 $ 7,605,000 $ 9,044,000
============ ============ ============
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
F-7
RAMSAY HEALTH CARE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
------------------------------------------
BASIS OF PRESENTATION
The consolidated financial statements include the accounts of Ramsay
Health Care, Inc. and its majority-owned subsidiaries (the "Company"). All
significant intercompany accounts and transactions have been eliminated in
consolidation.
INDUSTRY
The Company is a provider and manager of behavioral healthcare services
in the United States, principally in the Southeast and Southwest. As a provider
of behavioral healthcare, the Company offers a comprehensive range of services
at 14 hospitals (12 of which have units providing less intensive residential
treatment services) and various freestanding outpatient clinics. As a manager of
behavioral healthcare, the Company coordinates and manages the delivery of
services to patients under contracts with self-insured employers, health
maintenance organizations ("HMOs"), government agencies and other purchasers of
healthcare services. The Company also manages behavioral healthcare programs
under contracts with other hospitals and community mental health centers.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the consolidated financial
statements and accompanying notes. Actual results could differ from those
estimates.
CASH EQUIVALENTS
Cash equivalents include short-term, highly liquid interest-bearing
investments consisting primarily of commercial paper, money market mutual funds
and deposits and demand revenue bonds. Deposits in banks may exceed the amount
of insurance provided on such deposits. The Company performs reviews of the
credit worthiness of its depository banks. The Company has not experienced any
losses on its deposits of cash in banks.
CASH HELD IN TRUST
Cash held in trust is revocable by the Company under certain
circumstances and includes cash and short-term investments set-aside for the
payment of losses in connection with the Company's self-insured retentions for
hospital professional and general liability claims. In addition, at June 30,
1997, cash held in trust includes $350,000 from the April 1, 1997 sale of an HMO
subsidiary by the entity which was acquired by the Company on June 10, 1997 (see
Note 12).
CONCENTRATIONS OF CREDIT RISK
The Company provides services to patients without insurance and accepts
assignments of patients' third party benefits without requiring collateral.
Exposure to losses on receivables due from patients is principally dependent on
each patient's financial condition. The Company monitors its exposure for credit
losses and maintains allowances for anticipated losses.
F-8
RAMSAY HEALTH CARE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
INTANGIBLE ASSETS AND DEFERRED COSTS
Cost in excess of net asset value of purchased businesses primarily relates
to the acquisition of Ramsay Managed Care, Inc. (RMCI), a managed behavioral
healthcare company, on June 10, 1997 (see Note 2). This amount is being
amortized on a straight-line basis over 25 years.
Other intangible assets include the values assigned to established clinical
protocols and managed care contracts acquired in connection with the merger of
RMCI. The value assigned to clinical protocols will be amortized on a straight-
line basis over 15 years, the estimated period these protocols are considered
valid and appropriate. The value assigned to managed care contracts will be
amortized over four years, the estimated weighted average life, including
estimated renewals, of contracts which were in existence as of the date of the
merger.
The Company periodically reviews its intangible assets to assess
recoverability. The carrying value of cost in excess of net asset value of
purchased businesses is reviewed by the Company's management if the facts and
circumstances suggest that it may be impaired. If this review indicates that
these costs will not be recoverable, as determined based on the undiscounted
cash flows of the entity over the remaining amortization period, the carrying
value of these costs is reduced by the estimated shortfall of cash flows.
Preopening costs principally consist of salaries and other costs incurred
prior to opening a new facility, program or business. Effective July 1, 1996,
these costs are deferred and amortized on a straight-line basis over one year.
Prior to July 1, 1996, these costs were deferred and amortized on a straight-
line basis over two years.
Loan costs are deferred and amortized ratably over the life of the loan and
are included in interest and other financing charges. When a loan or a portion
thereof is prepaid, a proportionate amount of deferred loan costs associated
with the borrowing is written off and reported as an extraordinary loss from
early extinguishment of debt in the Company's statement of operations.
Accumulated amortization of the Company's cost in excess of net asset value
of purchased businesses, other intangible assets and preopening and loan costs
as of June 30, 1997 and 1996 was $7,671,000 and $6,880,000, respectively.
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost, except for assets considered to
be impaired pursuant to Statement of Financial Accounting Standards (SFAS) No.
121, which are stated at fair value of the assets as of the date the assets are
determined to be impaired. Upon the sale or retirement of property and
equipment, the cost and related accumulated depreciation are removed from the
accounts and the resulting gain or loss is included in operations.
Depreciation is computed substantially on the straight-line method for
financial reporting purposes and on accelerated methods for income tax purposes.
The general range of estimated useful lives for financial reporting purposes is
twenty to forty years for buildings and five to twenty years for equipment. For
the years ended June 30, 1997, 1996 and 1995, depreciation expense recorded on
the Company's property and equipment totaled $ 4,681,000, $ 4,491,000 and
$5,721,000, respectively.
MEDICARE, MEDICAID AND OTHER CONTRACTED REIMBURSEMENT PROGRAMS
Revenues are recognized at the time services are provided. Net revenues
include estimated reimbursable amounts from Medicare, Medicaid and other
contracted reimbursement programs. Amounts received by the Company for treatment
of patients covered by such programs, which may be based on the cost of services
provided or predetermined rates, are generally less than the established billing
rates of the Company's hospitals. Final determination of amounts earned under
contracted reimbursement programs is
F-9
RAMSAY HEALTH CARE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
subject to review and audit by the appropriate agencies. Differences between
amounts recorded as estimated settlements and the audited amounts are reflected
as adjustments to net revenues in the period the final determination is made
(see Note 10).
The Company also receives capitated amounts for behavioral healthcare
services provided to patients 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.
CONTRACTED PROVIDER SERVICES
The Company contracts with various healthcare providers for the provision
of healthcare services. Contracted providers are primarily hospitals, physicians
and other providers of healthcare services. Hospitals are generally compensated
for their contracted services on a per-diem basis, with physicians and other
healthcare providers generally being compensated on a discounted fee-for-service
basis.
The Company provides a reserve for claims incurred but not yet reported
based on past experience, together with current factors. Estimates are adjusted
as changes in these factors occur, and such adjustments are reported in the year
of determination. Although considerable variability is inherent in such
estimates, management believes that the Company's reserve is adequate.
PROFESSIONAL AND GENERAL LIABILITY INSURANCE
The Company maintains self-insured retentions related to its professional
and general liability insurance program. The Company's operations are insured
for professional liability on a claims-made basis and for general liability on
an occurrence basis. The Company records the liability for uninsured
professional and general liability losses related to asserted and unasserted
claims arising from reported and unreported incidents based on independent
valuations which consider claim development factors, the specific nature of the
facts and circumstances giving rise to each reported incident and the Company's
history with respect to similar claims. The development factors are based on a
blending of the Company's actual experience with industry standards.
INCOME TAXES
Income taxes are accounted for in accordance with SFAS No. 109. SFAS No.
109 requires recognition of deferred tax assets and liabilities for the expected
future tax consequences of temporary differences between the carrying amounts of
assets and liabilities for financial reporting purposes and the amounts used for
income tax purposes.
MINORITY INTERESTS
The equity of minority partners in subsidiaries is reported on the balance
sheet as minority interests. Minority interests reflect changes for the
respective share of income of the subsidiaries attributable to the minority
partners, the effect of which is also reflected in the results of operations of
the Company, and for distributions made to the minority partners. In July 1996,
a final distribution of $900,000 was made to limited partners in
connection with the dissolution of a partnership in which the Company was a
55% general partner. Subsequent to this distribution, this partnership was
dissolved, resulting in no gain or loss to the Company.
F-10
RAMSAY HEALTH CARE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
EARNINGS PER SHARE
Primary earnings per share are calculated by dividing income before
extraordinary items and net income, as adjusted by reduced interest expense
pursuant to the modified treasury stock method, by the weighted average number
of common and dilutive common equivalent shares outstanding during each period.
The Company's common stock equivalents, which are anti-dilutive in years in
which a loss is incurred and, therefore, excluded from the calculation in those
years, include Class A convertible preferred stock (which was redeemed by the
Company in June 1995), Class B convertible preferred stock, Series C ("Series C
Preferred Stock"), Class B, convertible preferred stock, Series 1996 ("Series
1996 Preferred Stock"), and stock options and warrants to purchase Common Stock.
Fully diluted earnings per share have not been presented separately because the
variance from primary earnings per share is not significant.
In February 1997, the Financial Accounting Standards Board issued Statement
No. 128, Earnings per Share, which is required to be adopted on December 31,
1997. At that time, the Company will be required to change the method currently
used to compute earnings per share and to restate all prior periods. Under the
new requirements for calculating primary earnings per share, the dilutive effect
of stock options will be excluded. The impact is expected to result in an
increase in primary and fully diluted earnings per share for the year ended June
30, 1997 of $0.02 per share and $0.01 per share, respectively. The Company
expects that the impact of Statement No. 128 on the calculation of primary and
fully diluted earnings per share for the year ended June 30, 1996 will be
immaterial.
STOCK-BASED COMPENSATION
The Company grants stock options for a fixed number of shares to employees
with an exercise price equal to the fair value of the shares on the date of
grant. The Company adopted SFAS No. 123, Accounting for Stock Based
Compensation, during fiscal 1997, and will continue to account for stock option
grants in accordance with Accounting Principles Board Opinion No. 25,
Accounting for Stock Issued to Employees, and, accordingly, recognizes no
compensation expense for stock options granted.
FINANCIAL INSTRUMENTS
The carrying amount of financial instruments including cash and cash
equivalents, accounts receivable from patient services, and accounts payable
approximate fair value as of June 30, 1997. It is not practicable to estimate
the fair value of the Company's preferred stock because of the lack of a quoted
market price and the inability to estimate fair value without incurring
excessive costs.
2. TRANSACTIONS WITH AFFILIATES
----------------------------
On April 24, 1995, the Company distributed the stock of RMCI held by it to
the holders of record on April 21, 1995 of the Company's Common and Preferred
Stock and, thereafter, RMCI ceased being a subsidiary of the Company. The
distribution, which was recorded at net book value, reduced additional paid-in
capital of the Company by $904,000. In addition, costs related to the
distribution of RMCI, which included accounting, legal, printing, investment
banking and distribution agent fees and expenses, were charged to the operations
of RMCI (and not the Company) effective on the date of the distribution and
costs related to a private placement and rights offering by RMCI were deducted
from additional paid-in capital of RMCI (and not the Company) on the effective
date of the distribution.
F-11
RAMSAY HEALTH CARE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
On October 1, 1996, the Company and RMCI entered into a merger agreement
providing for the acquisition of RMCI by a wholly owned subsidiary of the
Company. The transaction was approved by the shareholders of both companies on
April 18, 1997 and became effective on June 10, 1997, at which time the results
of operations of RMCI are included in the Company's statement of operations.
The merger was structured as a tax-free exchange recorded using the purchase
method of accounting and, accordingly, the purchase price has been preliminary
allocated to the assets purchased and the liabilities assumed based upon their
fair values at the date of acquisition. The total consideration (including
acquisition costs of approximately $400,000) was approximately $24,000,000.
In exchange for all of the outstanding shares of RMCI common and preferred
stock, the Company issued 2,135,826 shares of Common Stock (valued based on the
closing price of the Company's Common Stock on June 10, 1997 of $3.00 per share)
and 100,000 shares of Series 1996 Preferred Stock, which are convertible into
1,000,000 shares of Common Stock. In addition, amounts owed by RMCI to the
Company, totalling approximately $7,000,000 on June 10, 1997, were included as a
portion of the consideration for the acquisition of RMCI. The Company also
assumed $7,388,000 of liabilities of RMCI.
Included in liabilities assumed was a $2,750,000 obligation owed by RMCI
to a corporate affiliate of Paul J. Ramsay, the Chairman of the Board of the
Company, along with unpaid accrued interest and commitment fees of approximately
$300,000. The loan bears interest at 15% (or approximately $30,000 in June
1997), is due and payable on demand, and was refinanced in September 1997 (see
Note 5). No amounts were paid with respect to this loan facility from June 10,
1997 to the date of the refinancing.
The following unaudited pro forma information as of June 30, 1997 and 1996
has been prepared assuming the merger had been consummated on July 1, 1995 and
accounted for under the purchase method of accounting. This unaudited pro forma
combined summary information may not be indicative of the actual results which
may be realized in the future. Neither expected benefits nor cost reductions
anticipated by the Company have been reflected in the accompanying unaudited pro
forma combined financial data.
YEAR ENDED JUNE 30
------------------------------
1997 1996
-------------- --------------
Net revenues............................ $158,734,000 $139,025,000
Net loss................................ (1,371,000) (22,413,000)
Net loss from per common and dilutive
common equivalent share................ $ (0.18) $ (2.28)
Net loss per common and dilutive common equivalent share does not include
common stock equivalents since their effect is anti-dilutive.
At June 30, 1997, three corporate affiliates of Paul J. Ramsay owned an
aggregate voting interest in the Company of approximately 43%, as follows: (a)
Ramsay Holdings HSA Limited owned 15% of the outstanding Common Stock of the
Company and 50% of the outstanding Series C Preferred Stock of the Company, (b)
Paul Ramsay Holdings Pty. Limited ("Pty. Limited") owned approximately 6% of the
outstanding Common Stock of the Company and the remaining 50% of the outstanding
Series C Preferred Stock and (c) Paul Ramsay Hospitals Pty. Limited ("Ramsay
Hospitals") owned approximately 9% of the outstanding Common Stock of the
Company and 100% of the outstanding Series 1996 Preferred Stock of the Company.
Pursuant to an Agreement and Plan of Merger (the "Merger Agreement") dated
as of July 1, 1997, between a wholly-owned subsidiary of the Company and Summa
Healthcare Group, Inc. ("Summa"), the Company agreed to acquire Summa for
$300,000 in cash, 250,000 shares of the Company's Common Stock and fully
exercisable warrants to purchase 500,000 shares of the Company's Common Stock,
with an exercise price of $3.25 per share (the fair market value of the
Company's Common Stock on the date of the Merger Agreement) and an expiration
date of July 2007.
F-12
RAMSAY HEALTH CARE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
Summa, whose principal stockholder is Luis E. Lamela, the Vice Chairman and
a director of the Company, is engaged in the healthcare consulting, advisory and
development business. During 1997, Summa rendered consulting services to the
Company, for which it was paid $237,500. Also, in connection with the merger
with RMCI, the Company assumed approximately $200,000 in fees owed to Summa by
RMCI. Summa's principal assets consist of projects in the specialty managed care
and health services industry, including an arrangement with a provider of
healthcare services to correctional facilities in Florida. These projects will
be undertaken by the Company. The closing of the merger is scheduled to occur
during the Company's second quarter of fiscal 1998 and is subject to customary
closing conditions. Upon closing, the merger will be recorded under the purchase
method of accounting with the related goodwill being allocated and amortized
over an appropriate period commensurate with the value and life of the projects.
In October 1995 and August 1996, Pty. Limited acquired through private
placements 275,863 shares and 275,546 shares, respectively, of Common Stock of
the Company at a price of $3.625 and $2.75 per share, respectively. Of the
total shares acquired in October 1995, 121,363 were issued for cash and 154,500
were issued for management fees due during the remainder of fiscal 1996 under
the Company's management agreement with another corporate affiliate (the
"Management Fee Affiliate") of Mr. Ramsay. The shares acquired in August 1996
were issued for management fees due under the management agreement during fiscal
1997.
In October 1996, the Company issued 118,300 shares of Common Stock valued
at $164,000 to its board of directors in lieu of cash payment for fiscal 1997
director fees. The Common Stock was awarded at fair market value on the date of
issuance ($1.39 per share) and the amount was included in other operating
expenses.
On September 10, 1996, the Company entered into a letter agreement with the
Management Fee Affiliate and Pty. Limited which terminated the management
agreement effective July 1, 1997. In consideration for this termination, the
Company issued warrants to Pty. Limited to purchase 250,000 shares of Common
Stock at an exercise price of $2.63 per share. These warrants are fully
exercisable as of September 10, 1996, expire on September 10, 2006 and had a
weighted average fair value on the date of issuance of $0.85 per warrant. As a
result, the Company recorded other operating expenses of $212,000 related to
these warrants.
During the years ended June 30, 1997, 1996 and 1995, pursuant to the
management agreement, the Company incurred management fee expenses of $758,000,
$737,000 and $716,000, respectively, which are included in other operating
expenses.
The Company recorded interest income of $440,000, $600,000 and $110,000
during fiscal 1997 (prior to the merger), 1996, and 1995 (subsequent to the
distribution on April 24, 1995), respectively, on interest-bearing amounts owed
by RMCI.
3. IMPAIRMENT OF ASSETS
--------------------
In the fourth quarter of fiscal 1995, the Company elected to early adopt
the provisions of SFAS No. 121. SFAS No. 121 requires that a new cost basis be
established for impaired assets (within the meaning of SFAS No. 121) based on
the fair value of the assets as of the date the assets are determined to be
impaired, and that previously recorded accumulated depreciation related to the
impaired assets be eliminated.
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 was impaired (within the meaning of
SFAS No. 121) at June 30, 1996 and 1995. The
F-13
RAMSAY HEALTH CARE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
amount of the impairment, calculated as the excess of carrying value of the
long-lived assets over the fair value of the assets (estimated using discounted
future cash flows expected from the assets), totaled approximately $4,000,000
($3,400,000 after tax) and $20,300,000 ($11,400,000 after tax) at June 30, 1996
and 1995, respectively. In accordance with SFAS No. 121, the facilities'
carrying amount of cost in excess of net asset value of purchased businesses,
totalling $3,800,000 in 1995 (zero in 1996), was written off prior to recording
an impairment to the carrying amount of property and equipment.
In 1996 and 1995, the Company recorded additional asset impairment charges
totaling approximately $1,500,000 related to its investments in other healthcare
enterprises. The amount of the impairment charges was based on an assessment of
the future expected cash flows to be realized by the Company from these
enterprises.
4. LOSSES RELATED TO ASSET SALES AND CLOSED BUSINESSES
---------------------------------------------------
Primarily in the fourth quarter of fiscal 1996, the Company recorded losses
totaling approximately $4,500,000 related to additional asset write-downs, cost
report settlements and other adjustments related to businesses which closed at
various times prior to fiscal 1996, a reserve for disproportionate share
payments which the State of Louisiana has contended were improperly paid to two
of the Company's Louisiana facilities in fiscal 1995 and 1994, and lease
commitments and other costs incurred in connection with the Company's decision
to relocate its corporate headquarters.
During fiscal 1996, the State of Louisiana requested repayment of
disproportionate share payments received by two of the Company's Louisiana
facilities in fiscal years 1995 and 1994 totaling approximately $5,000,000. The
repayment requests related to a) alleged overpayments made to Three Rivers
Hospital because the State believed Three Rivers' actual annual inpatient volume
was less than its projection of annual inpatient volume made at the beginning of
its 1994 cost reporting year and b) alleged improper teaching hospital payments
made to Three Rivers Hospital and Bayou Oaks Hospital because the State believed
these facilities were not qualifying teaching hospitals at the time these
payments were made. The Company believes that certain of the calculations which
support the State's calculation of annual inpatient volume in 1994 are in error
and that other relevant factors affecting the State's calculation have not been
considered. Further, the Company believes that, based on its understanding of
the rules and regulations in place at the time the teaching hospital payments
were made, payments received as a result of the teaching classification were
appropriate.
On the basis of discussions to date between the Company and the State, the
Company believes that this matter may be settled for an amount significantly
less than the State's initial requests. Any settlement of this matter will be
contingent upon the execution of settlement documentation, the terms of which
have not been agreed upon. Further, there can be no assurance that the Company
and the State will agree on a settlement amount or the terms and conditions of
settlement documentation. The Company intends to vigorously contest any
position by the State of Louisiana which the Company considers adverse and
believes that adequate provision has been made at June 30, 1997 and 1996 for the
estimated amount which might be recovered from the Company as a result of this
matter. This amount is classified as a current liability in the Company's
balance sheet at June 30, 1997 and 1996.
During the third quarter of fiscal 1995, the Company recorded a $3,600,000
loss in connection with the sale and leaseback of two inpatient facilities and a
$400,000 loss in connection with the sale of real estate. In addition, the
Company closed certain outpatient operations during fiscal 1995, incurred
additional losses in fiscal 1995 on outpatient operations closed in fiscal 1994,
and closed Three Rivers Hospital on June 30, 1995. Losses recorded in fiscal
1995 as a result of these closures totaled approximately $1,500,000.
F-14
RAMSAY HEALTH CARE INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
5. LONG-TERM DEBT
--------------
The Company's long-term debt is as follows:
JUNE 30
-------------------------
1997 1996
----------- -----------
11.6% senior secured notes.............. $27,544,000 $34,169,000
Variable rate revenue bonds............. 15,700,000 19,400,000
15.6% subordinated secured notes........ 1,385,000 1,846,000
15% demand note to affiliate............ 2,750,000 ---
Other................................... 97,000 189,000
----------- -----------
47,476,000 55,604,000
Less current portion.................... 222,000 10,940,000
----------- -----------
$47,254,000 $44,664,000
=========== ===========
On September 30, 1997, the Company refinanced its existing senior and
subordinated secured notes, its variable rate revenue bonds and its demand note
to affiliate with proceeds from a credit facility consisting of term and
revolving credit debt of $38,500,000 (the "Senior Credit Facility") and the sale
of $2,500,000 of Class B Preferred Stock, Series 1997 (the "Series 1997
Preferred Stock") to a financial institution. In addition, on September 30,
1997, the financial institution issued a $17,500,000 subordinated bridge
facility, of which $2,500,000 was purchased by Ramsay Hospitals (the "Bridge
Facility"). Consequently, the amounts currently due under the senior and
subordinated secured notes and variable rate bonds of $11,622,000 have been
excluded from current liabilities since the refinancing resulted in this amount
being outstanding for an uninterrupted period extending beyond one year from the
balance sheet date.
Under the terms of the Senior Credit Facility, the Company was provided a)
a $12,500,000 term loan, payable in 18 quarterly installments ranging from
$437,500 to $875,000, beginning July 1, 1998, b) a $10,000,000 term loan,
payable in 20 quarterly installments of $62,500, beginning January 1, 1998, and
eight quarterly installments ranging from $1,062,500 to $1,125,000, beginning
January 1, 2003 and c) a revolving credit facility (the "Revolver") for an
amount up to the lesser of $16,000,000 or the borrowing base of the Company's
receivables (defined as 70% of the Company's patient accounts receivable,
receivables due from managed care customers and receivables due from customers
whose behavioral health operations are managed by the Company). In addition, the
financial institution required that a corporate affiliate of Paul J. Ramsay
purchase additional shares in the Company upon closing and, under certain
limited circumstances related to an estimated liability, purchase Common Stock
at a price of $5.17 per share (the 30-day average stock price prior to the
closing). As a result, on September 30, 1997, 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 Class
B Preferred Stock, Series 1997-A ("Series 1997-A Preferred Stock"), $1.00 par
value, at $1,000 per share. The purchase price, which totaled $4,000,000, was
paid by i) offset against approximately $600,000 in dividends accrued through
September 30, 1997 on the Series C Preferred Stock and the Series 1996 Preferred
Stock, ii) offset against approximately $380,000 in unpaid accrued interest and
commitment fees, iii) $250,000 in principal due to a corporate affiliate of Mr.
Ramsay which was not refinanced with proceeds of the Bridge Facility and iv)
approximately $2,800,000 in cash. The shares are entitled to cumulative
dividends at a rate of 9% per annum ($360,000 per year, $90.00 per preferred
share) and to a liquidation preference of $1,000 per share under certain
circumstances. The Series 1997-A Preferred Stock shall be redeemed at a price of
$1,000 per share and dividends on the Series C Preferred Stock, Series 1996
Preferred Stock and Series 1997-A Preferred Stock shall be paid (see Note 7),
provided a) the Company's EBITDA (as defined in the agreement) for its fiscal
year ending June 30, 1998 is equal to or greater than $16,500,000, b) the
Company has availability under the Revolver in excess of $4,000,000, c) the
financial institution syndicates a portion of the Revolver and d) the Bridge
Facility is refinanced as described below. The Series 1997-A Preferred Stock is
junior to the Series 1997 Preferred Stock in liquidation and as to dividends.
Interest on the term loans and the Revolver varies and, at the option of
the Company, would equal i) a function of the prime lending rate (8.50% at
September 25, 1997) plus a margin ranging from 1.25% to 1.75%, based on the
Company's leverage ratio (as defined in the credit agreement) or ii) the LIBOR
rate (approximately 5.75% at September 25, 1997) plus a margin ranging from
2.75% to 3.25%, based on the Company's leverage ratio. In addition, the Company
is obligated to pay an amount equal to one half of 1% of the unused portion of
the $16,000,000 Revolver.
F-15
RAMSAY HEALTH CARE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
The Bridge Facility, which is unsecured and due and payable in September
2005, bears interest at rates ranging from 11% to 12.5% through September 1998,
at which time the interest rate increases to 13%. The Bridge Facility is
expected to be refinanced with the proceeds of a private placement of
$17,500,000 8-year senior subordinated notes by December 31, 1997. The Company
also expects that the senior subordinated notes may include a contingent payment
obligation ("CPO") payable to the noteholders at the earlier to occur of (i) the
fifth anniversary of the placement of the notes; (ii) redemption or repayment of
the notes; (iii) sale of or a change in control involving the Company or (iv) a
public offering of the Company's Common Stock (together, the "Exit"). The
amount of the CPO would equal a certain percentage of the increase in the fully
diluted equity value of the Company during the period from closing to Exit and
would be payable in cash or the Company's Common Stock. The Bridge Facility
provides for a similar CPO in the event the private placement does not occur.
The Senior Credit Facility requires that the Company meet certain
covenants, including (i) the maintenance of certain fixed charge, interest
coverage and leverage ratios, (ii) the maintenance of a minimum level of EBITDA
and tangible net worth (as defined in the credit agreement) and (iii) a
limitation on capital expenditures. The Company is also required to meet an
adjusted minimum fixed charge ratio ("Modified Fixed Charge Coverage Ratio"),
which includes preferred dividends payable in the calculation thereof, in order
to pay dividends on the Series 1997 Preferred Stock. The Company's credit
facilities also prohibit the payments of cash dividends to the common
shareholders of the Company.
In connection with the refinancing of the Company's debt on September 30,
1997, the Company also sold to the financial institution, which effected the
refinancing, $2,500,000 of Series 1997 Preferred Stock. The Series 1997
Preferred Stock is non-voting, is senior to the Series C Preferred Stock, the
Series 1996 Preferred Stock and the Series 1997-A Preferred Stock in liquidation
and as to dividends, is convertible, at the option of the holder, into
approximately 400,000 shares of Common Stock, is optionally redeemable by the
Company at a premium beginning in September 2000, and is manditorily redeemable
at the earlier to occur of a change in control of the Company or September 2007.
Dividends on the Series 1997 Preferred Stock are payable quarterly at 9%, or
$56,250 per quarter, unless the Company is unable to meet its Modified Fixed
Charge Coverage Ratio, at which time the dividend rate increases to 11%, or
$68,750 per quarter.
The aggregate scheduled maturities of the Senior Credit Facility, the
Bridge Facility and certain immaterial capital lease obligations outstanding
during the next five fiscal years are as follows: 1998 -- $222,000; 1999 --
$2,200,000; 2000 -- $2,687,500; 2001 -- $3,237,500; and 2002 -- $3,625,000.
The Company has pledged substantially all of its real property, receivables
and other assets as collateral for the Senior Credit Facility.
The Company believes that the refinancing represents the fair value of the
Company's borrowing.
Proceeds of the Senior Credit Facility, the Bridge Facility, the Series
1997 Preferred Stock and the Series 1997-A Preferred Stock were used as follows:
a) principal repayments of $27,544,000 of 11.6% senior secured notes and
$1,385,000 of 15.6% subordinated secured notes held by a group of insurance
companies, b) repayment of $3,400,000 of bank debt created on September 2, 1997
upon the redemption of one of the Company's variable rate revenue bonds, c)
repayment of approximately $900,000 of accrued interest on the above
obligations, d) creation of a cash collateral account in an amount totaling
approximately $12,900,000 which will be used to redeem the remaining variable
rate revenue bonds and to pay accrued interest thereon on their redemption dates
of November 3, 1997 and December 1, 1997, e) repayment of $2,500,000 of the
$2,750,000 loan to Ramsay Hospitals, f) payment of a $2,200,000 prepayment
penalty to the group of insurance companies holding the senior and subordinated
secured notes and g) transaction costs totaling approximately $2,800,000. In
order to satisfy these payments, the amount drawn down on the Revolver totaled
approximately $8,300,000 on September 30, 1997.
F-16
RAMSAY HEALTH CARE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
In connection with the aforementioned refinancing and planned
extinguishment of debt outstanding at June 30, 1997, the Company expects to
incur a loss on extinguishment of debt of approximately $2,000,000, net of
taxes, which will be recorded in the first quarter of fiscal year 1998.
In fiscal 1997, the Company contemplated a separate refinancing of its
credit facilities and in connection therewith, the Company entered into a
derivative transaction in March 1997 to fix the interest rate on the underlying
debt instrument. As a result of the Company's decision to refinance its credit
facilities as described above, in the fourth quarter of fiscal 1997, the Company
recorded income on the derivative transaction of approximately $1,280,000 and
wrote-off approximately $600,000 of costs directly related to this previous
refinancing effort.
6. OPERATING LEASES
----------------
In April 1995, the Company sold and leased back the land, buildings and
fixed equipment of two of its inpatient facilities. The leases have a primary
term of 15 years (with three successive renewal options of 5 years each) and
currently require aggregate annual minimum rentals of $1.62 million, payable
monthly. Effective April 1 of each year, the lease payments are subject to any
upward adjustment (not to exceed 3% annually) in the consumer price index over
the preceding twelve months. Effective April 1995, the Company agreed to lease
an 80-bed facility near Salt Lake City, Utah for four years, with an option to
renew for an additional three years. The lease requires annual base rental
payments of $456,000, payable monthly, and percentage rental payments equal to
2% of the net revenues of the facility, payable quarterly. The Company leases
office space for various other purposes over terms ranging from one to five
years. Rent expense related to noncancellable operating leases amounted to
$2,837,000, $3,269,000 and $2,718,000 for the years ended June 30, 1997, 1996
and 1995, respectively.
Future minimum lease payments required under noncancellable operating
leases as of June 30, 1997 are as follows: 1998 -- $4,088,000; 1999 --
$3,409,000; 2000 -- $2,503,000; 2001 -- $2,195,000; 2002 -- $2,080,000; and
thereafter -- $13,220,000.
In August 1997, the Company leased its Meadowlake facility in Oklahoma to
an independent healthcare provider for an initial term of three years, with four
three-year renewal options. Lease payments during the initial term total
$360,000 per year and at each renewal option are subject to adjustment based on
the change in the consumer price index during the preceding lease period. In
accordance with the terms of the lease agreement, the tenant is responsible for
all costs of ownership, including taxes, insurance, maintenance and repairs. In
addition, the tenant has the option to purchase the facility at any time during
the initial term for $3,000,000, less $15,417 for each month of occupancy.
Subsequent to the initial term, the tenant has the option to purchase the
facility at any time for $2,500,000. The book value of the facility was
$2,554,000 on June 30, 1997 which, based on the purchased option included in the
lease, approximates market value.
7. STOCKHOLDERS' EQUITY
--------------------
The Certificate of Incorporation of the Company, as amended, authorizes the
issuance of 20,000,000 shares of Common Stock, $.01 par value, 800,000 shares of
Class A Preferred Stock, $1.00 par value, and 1,000,000 shares of Class B
Preferred Stock, $1.00 par value, of which 333,333 shares have been designated
as Class B Preferred Stock, Series 1987, $1.00 par value, 152,321 shares have
been designated as Series C Preferred Stock, $1.00 par value, 100,000 shares
have been designated as Series 1996 Preferred Stock, $1.00 par value, 100,000
shares have been designated as Series 1997 Preferred Stock, $1.00 par value and
4,000 shares have been designated as Series 1997-A Preferred Stock (see Note 5).
Outstanding capital stock at June 30, 1997 included 11,150,919 shares of
Common Stock, of which 581,550 shares are held in treasury, 142,486 shares of
Series C Preferred Stock and 100,000 shares of Series 1996 Preferred Stock. The
shares of Series C Preferred Stock were issued in June 1993 in connection with a
recapitalization of the interests of Paul J. Ramsay, the Company's chairman.
The shares
F-17
RAMSAY HEALTH CARE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
are entitled to cumulative dividends at a rate of 5% per annum ($362,200 per
year, $2.54 per preferred share) and to a liquidation preference of $50.84 per
share under certain circumstances. The shares are convertible into that number
of fully paid and nonassessable shares of Common Stock that results from
dividing the conversion price in effect at conversion into $50.84 and
multiplying the quotient obtained by the number of shares of Series C Preferred
Stock being converted. The current conversion price is $5.084 per share and, as
a result, the Series C Preferred Stock are convertible into 1,424,860 shares of
Common Stock. Each share of Series C Preferred Stock is entitled to ten (10)
votes on all matters put to a vote of the shareholders of the Company and
otherwise has voting rights and powers equal to the voting rights and powers of
the Common Stock.
The shares of Series 1996 Preferred Stock were issued to Ramsay Hospitals
in June 1997 in connection with the merger of RMCI. The shares are entitled to
cumulative dividends at a rate of 5% per annum ($150,000 per year, $1.50 per
preferred share) and to a liquidation preference of $30.00 per share under
certain circumstances. The shares are convertible into that number of fully
paid and nonassessable shares of Common Stock that results from dividing the
conversion price in effect at conversion into $30.00 and multiplying the
quotient obtained by the number of shares of Series 1996 Preferred Stock being
converted. The current conversion price is $3.00 per share and, as a result,
the Series 1996 Preferred Stock are convertible into 1,000,000 shares of Common
Stock. Each share of Series 1996 Preferred Stock is entitled to ten (10) votes
on all matters put to a vote of the shareholders of the Company and otherwise
has voting rights and powers equal to the voting rights and powers of the Common
Stock.
In connection with the refinancing of the Company's debt on September 30,
1997, dividends on the Series C Preferred Stock and the Series 1996 Preferred
Stock become payable provided a) the Company's EBITDA (as defined in the
agreement) for its fiscal year ending June 30, 1998 is equal to or greater than
$16,500,000, b) the Company has availability under the Revolver in excess of
$4,000,000 at that time, c) the financial institution syndicates a portion of
the Revolver and d) the Bridge Facility is refinanced as described in Note 5.
The Company's Board of Directors has adopted a Stockholders Rights Plan,
under which the Company distributed a dividend of one common share purchase
right for each outstanding share of the Company's Common Stock (calculated as if
all outstanding shares of Series C Preferred Stock were converted into shares of
Common Stock). Each right becomes exercisable upon the occurrence of certain
events for a number of shares of the Company's Common Stock having a market
price totaling $24 (subject to certain anti-dilution adjustments which may occur
in the future). The rights currently are not exercisable and will be exercisable
only if a new person acquires 20% or more (25% or more in the case of certain
persons, including investment companies and investment advisors) of the
Company's Common Stock or announces a tender offer resulting in ownership of 20%
or more of the Company's Common Stock. The rights, which expire on August 14,
2005, are redeemable in whole or in part at the Company's option at any time
before a 20% or greater position has been acquired, for a price of $.01 per
right.
8. OPTIONS AND WARRANTS
- ------------------------
On September 10, 1996, the Company entered into an Exchange Agreement
whereby Mr. Ramsay exchanged 476,070 options with an exercise price of $2.50 per
share (pursuant to the repricing opportunity discussed below), for warrants to
purchase an aggregate of 500,000 shares of Common Stock at $2.75 per share. The
warrants, which expire in June 2003, are not exercisable until the closing price
of the Common Stock, as quoted on the NASDAQ National Market System, equals or
exceeds $7.00 per share for at least 15 trading days, which need not be
consecutive, subsequent to September 10, 1996. Most of the options exchanged
were originally granted under the Company's 1991 Stock Option Plan.
As part of the Company's senior and subordinated notes (which were
refinanced on September 30, 1997), the Company issued warrants to Aetna Life
Insurance Company and Monumental Life Insurance Company. As of June 30, 1997,
these warrants entitle their holders to purchase an aggregate of 202,165 shares
of the Company's Common Stock at $4.44 per share. These warrants are exercisable
on or before March 31, 2000.
F-18
RAMSAY HEALTH CARE, INC. SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
The Company has additional warrants outstanding to purchase an aggregate of
213,000 shares of the Company's Common Stock (133,000 of which are owned by
corporate affiliates of Paul J. Ramsay). These warrants were issued in exchange
for warrants to purchase common stock of RMCI, and became warrants of the
Company as part of the merger with RMCI.
The Company's Stock Option Plans provide for options to various key
employees and non-employee directors to purchase shares of Common Stock at no
less than the fair market value of the stock on the date of grant. Options
granted become exercisable in varying increments including (a) 100% one year
after the date of grant, (b) 50% each year beginning one year after the date of
grant (c) 33% each year beginning on the date of grant and (d) 33% each year
beginning one year from the date of grant. Options issued to employees and
directors are subject to anti-dilution adjustments and generally expire the
earlier of 10 years after the date of grant or 60 days after the employee's
termination date or the director's resignation. The weighted average remaining
contractual life of all outstanding options at June 30, 1997 is approximately
seven years.
In connection with a repricing opportunity authorized by the Company's
Board of Directors on November 10, 1995, approximately 1,500,000 options (of
which approximately 440,000 are still outstanding at June 30, 1997) were
voluntarily repriced by the optionholders. Under this repricing opportunity,
the exercise prices of the holders' outstanding options were reduced to $2.50
per share, the closing price for the Common Stock on the NASDAQ National Market
System on November 10, 1995. In addition, the Company granted an additional
690,000 options in fiscal 1997 (including former RMCI options which became
options to purchase an aggregate of 314,000 shares of the Company's Common Stock
on the date of the merger). These options, along with the options repriced on
November 10, 1995, are not exercisable until the closing price of the Common
Stock, as quoted on the NASDAQ National Market System, equals or exceeds $7.00
per share for at least 15 trading days, which need not be consecutive. As of
June 30, 1997, none of these options is exercisable.
The Company has frozen its 1990 Stock Option Plan, and authorized
1,516,924, 396,930, 500,000 and 500,000 shares under its 1991, 1993, 1995 and
1996 Stock Option Plans, respectively. At June 30, 1997, 177,669 shares were
available for issuance under these Plans.
In connection with the merger of RMCI, the Company succeeded to RMCI's
Stock Option Plans, which authorize an aggregate of 500,000 shares of Common
Stock. At June 30, 1997, 185,586 shares were available for issuance under the
RMCI Plans.
Summarized information regarding the Company's Stock Option Plans is as
follows:
F-19
RAMSAY HEALTH CARE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
Options exercisable based solely on employees rendering additional service:
Weighted
Number Average
of Option Exercise
Shares Price Price
------------------------------------
Options outstanding at July 1, 1994 1,675,672 $5.00-$7.88
Granted 65,000 $6.88-$7.88
Exercised (74,166) $5.00-$5.31
Canceled (219,935) $4.01-$7.88
Effect of Distribution of 378,826
Subsidiary ----------
Options outstanding at June 30, 1995 1,825,397
Granted 430,608 $2.50-$4.01
Exercised (3,000) $ 3.38
Modified/Canceled (1,630,959) $2.50-$7.88
----------
Options outstanding at June 30, 1996 622,046 $2.50-$6.31 $3.72
Granted 1,432,500 $2.44-$2.75 $2.72
Exercised ---
Canceled (43,689) $2.50-$4.25 $3.18
----------
Options outstanding at June 30, 1997 2,010,857 $2.44-$6.31 $3.02
==========
Exercisable at June 30, 1997 484,008
==========
Exercisable at June 30, 1996 302,148
==========
Exercisable at June 30, 1995 1,394,688
==========
Weighted average fair value of options $1.07
granted during fiscal 1997 ========
Options not exercisable until the closing price for the Common Stock as quoted
on the NASDAQ National Market System equals or exceeds $7.00 per share for at
least 15 trading days:
Weighted
Number Average
of Option Exercise
Shares Price Price
-----------------------------------
Options outstanding at June 30, 1995 ---
Granted 1,430,582 $ 2.50
Exercised ---
Canceled ---
---------
Options outstanding at June 30, 1996 1,430,582 $ 2.50 $2.50
Granted 375,851 $ 2.75 $2.75
Exchanged in connection with RMCI
merger 314,414 $ 3.00 $3.00
Exercised ---
Canceled (990,940) $ 2.50 $2.50
---------
Options outstanding at June 30, 1997 1,129,907 $2.50-$3.00 $2.72
=========
Exercisable at June 30, 1997 ---
=========
Weighted average fair value of options $1.14
granted during fiscal 1997 =====
F-20
RAMSAY HEALTH CARE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
Shares of common stock reserved for future issuance at June 30, 1997 are as
follows:
Options........................ 3,140,764
Warrants....................... 1,165,498
Conversion of Preferred Stock.. 2,424,860
---------
6,731,122
=========
Pro forma information regarding net income and earnings per share has been
determined as if the Company had accounted for its employee stock options under
the fair value method of SFAS No. 123, Accounting for Stock-Based Compensation.
The fair value for these options was estimated at the date of grant using a
Black-Scholes option pricing model with the following weighted-average
assumptions: risk-free interest rates of 6%; dividend yields of 0%; volatility
factors of the expected market price of the Company's Common Stock of .506; and
a weighted-average expected life of the options based on the vesting period of
the options (ranging from one to three years).
The Black-Scholes option valuation model was developed for use in estimating
the fair value of traded options which have no vesting restrictions and are
fully transferable. In addition, option valuation models require the input of
highly subjective assumptions including the expected stock price volatility.
Because the Company's employee stock options have characteristics significantly
different from those of traded options, and because changes in the subjective
input assumptions can materially affect the fair value estimate, in management's
opinion, the existing models do not necessarily provide a reliable single
measure of the fair value of its employee stock options.
For purposes of pro forma disclosures, the estimated fair value of the
options is amortized to expense over the options' vesting period. The effect of
compensation expense from stock option awards on pro forma net income reflects
only the vesting of fiscal year ended 1996 awards in 1996 and the vesting of
fiscal year ended 1997 and 1996 awards in 1997, in accordance with SFAS No. 123.
Because compensation expense associated with a stock option award is recognized
over the vesting period, the initial impact of applying SFAS No. 123 may not be
indicative of compensation expense in future years, when the effect of the
amortization of multiple awards will be reflected in pro forma net income. The
Company's pro forma information follows:
YEAR ENDED JUNE 30
---------------------------
1997 1996
----------- --------------
Pro forma net income (loss) $2,713,000 $(16,798,000)
========== ============
Pro forma net income (loss) per share $ 0.22 $ (2.12)
========== ============
9. INCOME TAXES
- -- ------------
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. Significant components
of the Company's deferred tax liabilities and assets are as follows:
F-21
RAMSAY HEALTH CARE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
JUNE 30
-------------
1997 1996 1995
------------ ------------- --------------
Deferred tax liabilities:
Book basis of fixed assets over tax
basis................................. $ 2,068,000 $ 2,710,000 $ 4,023,000
Change in tax accounting methods....... --- --- 685,000
Economic performance................... 72,000 237,000 316,000
Specifically identifiable intangibles.. 661,000 --- ---
Other.................................. 1,402,000 --- ---
----------- ----------- ------------
Total deferred tax liabilities..... 4,203,000 2,947,000 5,024,000
Deferred tax assets:
Allowance for doubtful accounts........ 1,269,000 1,211,000 609,000
General and professional liability
insurance............................. 778,000 899,000 635,000
Accrued employee benefits.............. 874,000 374,000 417,000
Investment in nonconsolidated
subsidiaries.......................... 1,320,000 1,644,000 1,401,000
Impairment of investment............... 597,000 677,000 568,000
Other accrued liabilities.............. 2,782,000 2,280,000 ---
Other.................................. 43,000 1,307,000 356,000
Net operating loss carryovers.......... 10,187,000 8,962,000 8,146,000
Alternative minimum tax credit
carryovers............................ 1,138,000 1,544,000 1,544,000
----------- ----------- ------------
Total deferred tax assets.......... 18,988,000 18,898,000 13,676,000
Valuation allowance for deferred tax
assets................................. (5,374,000) (4,412,000) ---
----------- ----------- ------------
Deferred tax assets, net of
valuation allowance............... 13,614,000 14,486,000 13,676,000
----------- ----------- ------------
Net deferred tax assets............ $ 9,411,000 $11,539,000 $ 8,652,000
=========== =========== ============
The provision (benefit) for income taxes consists of the following:
YEAR ENDED JUNE 30
------------------
1997 1996 1995
----------- ----------- ------------
Income taxes currently payable:
Federal........ $ 204,000 $ --- $ ---
State.......... 300,000 --- 183,000
Deferred income taxes:
Federal........ 1,039,000 (2,577,000) (12,154,000)
State.......... 183,000 (310,000) (1,430,000)
----------- ----------- ------------
$ 1,726,000 $(2,887,000) $(13,401,000)
=========== =========== ============
The provision (benefit) for income taxes is reported in the consolidated
statements of operations as follows:
YEAR ENDED JUNE 30
------------------------------------------
1997 1996 1995
----------- ------------- --------------
Provision (benefit) for income taxes.... $1,726,000 $(2,887,000) $(13,195,000)
Income tax benefit from loss on early
extinguishment of debt................. --- --- (206,000)
---------- ----------- ------------
$1,726,000 $(2,887,000) $(13,401,000)
========== =========== ============
F-22
RAMSAY HEALTH CARE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
The provision (benefit) for income taxes included in the consolidated
statements of operations differs from amounts computed by applying the statutory
rate to income (loss) before income taxes, as follows:
YEAR ENDED JUNE 30
--------------------------------------------
1997 1996 1995
------------ -------------- --------------
Income (loss) before income taxes,
extraordinary items and cumulative
effect of accounting change............ $5,004,000 $(19,368,000) $(30,240,000)
Federal statutory income tax rate....... 34% 34% 34%
---------- ------------ ------------
1,726,000 (6,585,000) (10,282,000)
Benefit of net operating loss recognized (428,000) --- (2,503,000)
Increase in valuation allowance......... 962,000 4,412,000 ---
Write-off of cost in excess of net
asset value of purchased businesses.... --- --- 956,000
Income tax benefit from loss on early
extinguishment of debt................. --- --- (206,000)
State income taxes...................... (183,000) (310,000) (1,247,000)
Other................................... (351,000) (404,000) (119,000)
---------- ------------ ------------
$1,726,000 $ (2,887,000) $(13,401,000)
========== ============ ============
The Company has net deferred tax assets of $9,411,000 and $11,539,000 at
June 30, 1997 and 1996, respectively. In evaluating the reliability of its
deferred tax assets and the need for a valuation allowance, management has
considered the effects of implementing tax planning strategies, consisting of
the sales of certain appreciated property. The Company's valuation allowance
related to deferred tax assets was increased from $4,412,000 at June 30, 1996,
to $5,374,000 at June 30, 1997 primarily as a result of deferred tax assets
acquired in connection with the merger of RMCI which are not considered
realizable.
At June 30, 1997, net operating loss carryovers of approximately
$26,800,000 (of which approximately $14,300,000 expires from 2001 to 2002,
$5,700,000 expires in 2010 and $6,800,000 expires from 2011 to 2012) and
alternative minimum tax credit carryovers of approximately $1,140,000 are
available to reduce future federal income taxes, subject to certain annual
limitations.
10. REIMBURSEMENT FROM THIRD-PARTY CONTRACTUAL AGENCIES
The Company records amounts due to or from third-party contractual agencies
based on its best estimates of amounts to be ultimately received or paid under
cost reports filed with the appropriate intermediaries. Final determination of
amounts earned under contractual reimbursement programs is subject to review and
audit by these intermediaries. Differences between amounts recorded as
estimated settlements and the audited amounts are reflected as adjustments to
net revenues in the period the final determination is made. During fiscal 1995,
the Company recorded contractual reimbursement benefits of approximately
$1,500,000 and $1,000,000, respectively, related to intermediary audits of prior
year cost reports. During fiscal 1996, the Company recorded contractual
adjustment expenses of approximately $1,900,000 related to intermediary audits
of prior year cost reports. As a result of this negative experience, the
Company recorded reserves in the fourth quarter of fiscal 1996 totaling
$3,500,000 related to possible future adjustments of its cost report estimates
by intermediaries.
During the year ended June 30, 1997, the Company received a favorable cash
judgment totaling approximately $2,900,000, net of related costs, by the courts
of the State of Missouri. In this matter, the courts ruled that the Company's
facility in Nevada, Missouri had received insufficient reimbursement from the
Missouri Department of Social Services for the provision of behavioral
healthcare to Medicaid patients from 1990 to 1996.
Management believes that adequate provision has been made for any
adjustments that may result from future intermediary reviews and audits and is
not aware of any claims, disputes or unsettled matters concerning third-party
reimbursement that would have a material adverse effect on the Company's
financial statements.
F-23
RAMSAY HEALTH CARE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The Company derived approximately 65%, 70% and 54% of its net revenues from
services provided to patients covered by various federal and state governmental
programs in fiscal 1997, 1996 and 1995, respectively.
11. SAVINGS PLAN
------------
The Company has a 401(k) tax deferred savings plan, administered by an
independent trustee, covering substantially all employees over age twenty-one
meeting a one-year minimum service requirement. The plan was adopted for the
purpose of supplementing employees' retirement, death and disability benefits.
The Company may, at its option, contribute to the plan through an Employer
Matching Account, but is under no obligation to do so. An employee becomes
vested in his Employer Matching Account over a four-year period.
The Company did not contribute to the plan in 1997, 1996 or 1995.
12. LITIGATION
----------
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. As both the number of patients served
by the Company's programs and the number of providers under contract with the
Company increase, the probability of the Company being subject to legal
liability predicated on claims alleging malpractice or related legal theories
also increases. 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.
In March 1997, a former executive vice president of the Company commenced
arbitration and court proceedings against the Company in which he claims his
employment was terminated by the Company and seeks damages of approximately
$2,300,000. The Company believes the claims of this individual are without
merit and intends to vigorously defend the proceedings.
Prior to the merger with the Company, RMCI sold its subsidiary which, as a
licensed HMO in Louisiana, Alabama and Mississippi, managed and provided prepaid
healthcare services to its members. On September 29, 1997, RMCI received a
demand for indemnification by the purchaser of this subsidiary in an amount
totalling approximately $5,800,000. The demand alleges, among other things,
that certain of the assets of the subsidiary were disallowed as admitted assets
by the Alabama and Louisiana Departments of Insurance and that certain of the
liabilities of the subsidiary were understated as of the date of the sale. The
Company believes this demand is without merit and intends to vigorously defend
any proceedings which may result from this matter.
In connection with an earlier terminated transaction involving the possible
sale of RMCI's former HMO subsidiary to a former possible purchaser, RMCI
commenced an action against a former officer of the subsidiary and the former
possible purchaser. The complaint a) alleges that all defendants tortiously and
fraudulently interfered with RMCI's proposed sale of the subsidiary, b) alleges
that the former officer breached his employment contract with RMCI and his
fiduciary duties to all plaintiffs and c) seeks damages in an amount of no less
than $3,000,000, plus punitive damages. The former officer has asserted a
counterclaim which alleges that RMCI breached his employment contract by
terminating him without cause and failed to pay him certain compensation
allegedly owed pursuant to the employment contract. As a result, the
counterclaim seeks damages of at least $325,000 and other remedies. In
addition, the former possible purchaser of the subsidiary has asserted
counterclaims against RMCI alleging fraud and breach of contract and seeking
unspecified compensatory and punitive damages. Discovery in this litigation is
ongoing. Following the merger, RMCI remains as a party to the foregoing
actions. In addition, RMCI has agreed to indemnify the purchaser of the
subsidiary against any liabilities, costs and expenses sustained by the
purchaser arising out of such actions.
F-24
RAMSAY HEALTH CARE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
13. ALLOWANCE FOR DOUBTFUL ACCOUNTS
-------------------------------
Activity in the Company's allowance for doubtful accounts consists of the
following:
YEAR ENDED JUNE 30
----------------------------------------
1997 1996 1995
------------ ------------ ------------
Balance at beginning of year........... $ 4,573,000 $ 3,886,000 $ 3,925,000
Provision for doubtful accounts......... 5,688,000 5,805,000 5,086,000
Write-offs of uncollectible patient
accounts receivable.................... (6,323,000) (5,118,000) (5,125,000)
Allowance recorded in connection with
the acquisition of RMCI................ 448,000 --- ---
----------- ----------- -----------
Balance at end of year.................. $ 4,386,000 $ 4,573,000 $ 3,886,000
=========== =========== ===========
14. SUPPLEMENTAL CASH FLOW INFORMATION
----------------------------------
The Company's non-cash investing and financing activities and cash payments
for interest and income taxes were as follows:
YEAR ENDED JUNE 30
-------------------------------------
1997 1996 1995
----------- ----------- -----------
Distribution of subsidiary to
stockholders........................... $ --- $ --- $ 904,000
Receivable from subsidiary distributed
to stockholders........................ --- --- 7,600,000
Merger with RMCI:
Cost in excess of net asset value of
purchased businesses.................. 18,048,000 --- ---
Other intangible assets................ 4,740,000 --- ---
Issuance of Common Stock............... 6,408,000 --- ---
Issuance of Series 1996 Preferred Stock 3,000,000 --- ---
Noncurrent liabilities................. 750,000 --- ---
Issuance of stock in lieu of cash
payment for management and directors'
fees................................... 922,000 600,000 ---
Cash paid during the year for:
Interest (net of amount capitalized).. $ 4,663,000 $5,260,000 $6,518,000
Income taxes........................... 129,000 249,000 1,231,000
F-25
RAMSAY HEALTH CARE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
15. QUARTERLY RESULTS OF OPERATIONS AND OTHER SUPPLEMENTAL INFORMATION
------------------------------------------------------------------
(UNAUDITED)
-----------
Following is a summary of the Company's quarterly results of operations for the
years ended June 30, 1997 and 1996.
QUARTER ENDED
-------------
1997 SEPTEMBER 30 DECEMBER 31 MARCH 31 JUNE 30(2)
---- ------------ ----------- ----------- ------------
Net revenues............................ $31,535,000 $35,072,000 $31,801,000 $ 38,311,000
Income before income taxes.............. 148,000 3,064,000 1,083,000 709,000
Net income.............................. 148,000 1,843,000 672,000 615,000
Income per common and dilutive common
- -------------------------------------
equivalent share(1)
- -------------------
Primary:
Income per common share.............. $ 0.01 $ 0.19 $ 0.06 $ 0.06
=========== =========== =========== ============
Fully diluted:
Income per common share.............. $ 0.01 $ 0.19 $ 0.06 $ 0.06
=========== =========== =========== ============
1996
----
Net revenues............................ $29,129,000 $31,815,000 $31,888,000 $ 24,591,000
Income (loss) before income taxes....... (631,000) 1,336,000 1,040,000 (21,113,000)
Net income (loss)....................... (391,000) 835,000 638,000 (17,563,000)
Income (loss) per common and dilutive
- -------------------------------------
common equivalent share(1)
- --------------------------
Primary:
Income (loss) per common share....... $ (0.06) $ 0.09 $ 0.07 $ (2.23)
=========== =========== =========== ============
Fully diluted:
Income (loss) per common share....... $ (0.06) $ 0.09 $ 0.07 $ (2.23)
=========== =========== =========== ============
(1) The quarterly earnings per share amounts may not equal the annual amounts
due to changes in the average common and dilutive common equivalent shares
outstanding during the year.
(2) As further described in Note 5, in the fourth quarter of fiscal 1997, the
Company recorded net revenues related to a derivative transaction of
approximately $1.28 million and wrote-off approximately $0.6 million of
costs related to a contemplated refinancing. As further described in
Note 4, in the fourth quarter of fiscal 1996, the Company recorded asset
impairment charges primarily related to the application of the principles
of FASB Statement No. 121 of $5.5 million ($4.7 million after estimated
income tax benefit).
As further described in Notes 4 and 10, in the fourth quarter of fiscal
1996, the Company recorded losses related to asset sales and closed
businesses of approximately $4.5 million ($3.8 million after estimated
income tax benefit) and contractual adjustment expenses related to cost
report settlements/reserves of approximately $7 million ($6 million after
estimated income tax benefit). Also, the Company recorded additional asset
writedowns/reserves of approximately $2.9 million ($2.4 million after
estimated income tax benefit) in the fourth quarter of fiscal 1996.
F-26
INDEX OF EXHIBITS
Page
Number
--------------
2.1 Recapitalization Agreement dated as of June 30, 1993 by and among the Company,
Ramsay Holdings HSA Limited and Paul Ramsay Holdings Pty. Limited (incorporated by
reference to Exhibit 2.2 to the Company's Annual Report on Form 10-K for the year
ended June 30, 1994)................................................................ --
2.2 Agreement of sale and purchase dated April 12,1995 by and between Mesa Psychiatric
Hospital, Inc. and Capstone Capital Corporation (incorporated by reference to
Exhibit 2.7 to the Company's Annual Report on Form 10-K for the year ended June 30,
1995). Pursuant to Reg. S-K, Item 601(b)(2), the Company agrees to furnish a copy
of the Schedules and Exhibits to such Agreement to the Commission upon request...... --
2.3 Agreement of sale and purchase dated April 12, 1995 by and between RHCI San
Antonio, Inc. and Capstone Capital Corporation (incorporated by reference to
Exhibit 2.8 to the Company's Annual Report on Form 10-K for the year ended June 30,
1995). Pursuant to Reg. S-K, Item 601(b)(2), the Company agrees to furnish a copy
of the Schedules and Exhibits to such Agreement to the Commission upon request...... --
2.4 Agreement and Plan of Merger dated as of October 1, 1996 among Ramsay Managed Care,
Inc., the Company and RHCI Acquisition Corp. (incorporated by reference to Exhibit
2 to the Company's Current Report on Form 8-K dated October 2, 1996). Pursuant to
Reg. S-K, Item 601(b)(2), the Company agrees to furnish a copy of the Disclosure
Schedules to such Agreement to the Commission upon request..........................
2.5 Agreement and Plan of Merger dated as of July 1, 1997 among Summa Healthcare Group,
Inc., the Company and Ramsay Acquisition Corporation................................ --
3.1 Restated Certificate of Incorporation of the Company, as amended (incorporated by
reference to Exhibit 3.1 to the Company's Annual Report on Form 10-K for the year
ended June 30, 1990)................................................................ --
3.2 Certificate of Amendment of Restated Certificate of Incorporation of the Company
filed on April 17, 1991 (incorporated by reference to Exhibit 3.2 to the Company's
Registration Statement on Form S-2, Registration No. 33-40762)...................... --
3.3 Certificate of Correction to Certificate of Amendment of Restated Certificate of
Incorporation of the Company filed on April 18, 1991 (incorporated by reference to
Exhibit 3.3 to the Company's Registration Statement on Form S-2, Registration No.
33-40762)........................................................................... --
3.4 By-Laws of the Company, as amended to date (incorporated by reference to Exhibit
3.4 to the Company's Annual Report on Form 10-K for the year ended June 30, 1994)... --
3.5 Certificate of Designation of Preferred Stock of the Company filed on June 27, 1991
(incorporated by reference to Exhibit 3.5 to the Company's Registration Statement
on Form S-2, Registration No. 33-40762)............................................. --
3.6 Certificate of Designation of Preferred Stock of the Company filed on July 9, 1991
(incorporated by reference to Exhibit 3.6 to the Company's Registration Statement
on Form S-2, Registration No. 33-40762)............................................. --
E-1
3.7 Certificate of Designation of Preferred Stock of the Company filed on June 29, 1993
(incorporated by reference to Exhibit 3.7 to the Company's Annual Report on Form
10-K for the year ended June 30, 1994)................................................ --
3.8 Certificate of Designation of Preferred Stock of the Company with respect to its
Class B Preferred Stock, Series 1996 filed on March 13, 1997...........................
3.9 Certificate of Designation of Preferred Stock of the Company with respect to its
Class B Preferred Stock, Series 1997 filed on September 30, 1997......................
3.10 Certificate of Designation of Preferred Stock of the Company with respect to its
Class B Preferred Stock, Series 1997-A filed on September 30, 1997....................
3.11 Preferred Stock Purchase Agreement dated as of September 30, 1997 between the
Company and General Electric Capital Corporation......................................
3.12 Preferred Stock Purchase Agreement dated as of September 30, 1997 between the
Company and Paul Ramsay Holdings Pty. Limited.........................................
3.13 Common Stock Purchase Agreement dated as of September 30, 1997 between the Company
and Paul Ramsay Holdings Pty. Limited.................................................
4.1 Trust Indenture dated as of March 31, 1990, between the Company, Bountiful
Psychiatric Hospital, Inc., Cumberland Mental Health, Inc., East Carolina
Psychiatric Services Corporation, Havenwyck Hospital, Inc., Mesa Psychiatric
Hospital, Inc., Psychiatric Institute of West Virginia, Inc., and The Citizens and
Southern National Bank and Susan L. Adams (incorporated by reference to Exhibit 4.1
to the Company's Annual Report on Form 10-K for the year ended June 30, 1990)......... --
4.2 First Supplemental Trust Indenture dated as of June 15, 1991 between the Company,
Bountiful Psychiatric Hospital, Inc., Cumberland Mental Health, Inc., East Carolina
Psychiatric Services Corporation, Havenwyck Hospital, Inc., Mesa Psychiatric
Hospital, Inc. and Psychiatric Hospital of West Virginia, Inc. and The Citizens and
Southern National Bank, a national banking association, and an individual trustee,
as Trustees (incorporated by reference to Exhibit 4.4 to the Company's Registration
Statement on Form S-2, Registration No. 33-40762)..................................... --
4.3 Second Supplemental Trust Indenture dated as of May 15, 1993 between the Company,
Bountiful Psychiatric Hospital, Inc., Cumberland Mental Health, Inc., East Carolina
Psychiatric Services Corporation, Havenwyck Hospital, Inc., Mesa Psychiatric
Hospital, Inc. and Psychiatric Hospital of West Virginia, Inc., and NationsBank of
Georgia, National Association, and Susan L. Adams (incorporated by reference to
Exhibit 4.3 to the Company's Annual Report on Form 10-K for the year ended June 30,
1994)................................................................................. --
4.4 Third Supplemental Trust Indenture dated as of April 12, 1995 between the Company,
Bountiful Psychiatric Hospital, Inc., Cumberland Mental Health, Inc., East Carolina
Psychiatric Services Corporation, Havenwyck Hospital, Inc., Mesa Psychiatric
Hospital, Inc. and Psychiatric Hospital of West Virginia, Inc., and NationsBank of
Georgia, National Association, and Elizabeth Talley, as Trustee (incorporated by
reference to Exhibit 4.4 to the Company's Annual Report on Form 10-K for the year
ended June 30, 1996).................................................................. --
E-2
4.5 Fourth Supplemental Trust Indenture dated as of September 15, 1995 between the
Company, Bountiful Psychiatric Hospital, Inc., Cumberland Mental Health, Inc., East
Carolina Psychiatric Services Corporation, Havenwyck Hospital, Inc., Mesa
Psychiatric Hospital, Inc. and Psychiatric Institute of West Virginia, Inc. and
NationsBank of Georgia, National Association, and Elizabeth Talley, as Trustee
(incorporated by reference to Exhibit 10.100 to the Company's Quarterly Report on
Form 10-Q for the quarter ended September 30, 1995)................................... --
4.6 Fifth Supplemental Trust Indenture dated as of June 1, 1997 between the Company,
Bountiful Psychiatric Hospital, Inc., Cumberland Mental Health, Inc., East Carolina
Psychiatric Services Corporation, Havenwyck Hospital, Inc. and Psychiatric
Institute of West Virginia, Inc. and The Bank of New York and Thomas Zakrzewski,
as Trustees...........................................................................
4.7 Subsidiary Borrower Note of Atlantic Treatment Center, Inc. dated May 21, 1993 in
the principal amount of $4,607,945 payable to the order of Societe Generale, New
York Branch (incorporated by reference to Exhibit 4.5 to the Company's Annual
Report on Form 10-K for the year ended June 30, 1994)................................. --
4.8 Subsidiary Borrower Note of Carolina Treatment Center, Inc. dated May 21, 1993 in
the principal amount of $5,030,000 payable to the order of Societe Generale, New
York Branch (substantially identical to Exhibit 4.7).................................. --
4.9 Subsidiary Borrower Note of Greenbrier Hospital, Inc. dated May 21, 1993 in the
principal amount of $5,973,125 payable to the order of Societe Generale, New York
Branch (substantially identical to Exhibit 4.7)....................................... --
4.10 Subsidiary Borrower Note of Gulf Coast Treatment Center, Inc. dated May 21, 1993 in
the principal amount of $4,392,500 payable to the order of Societe Generale, New
York Branch (substantially identical to Exhibit 4.7).................................. --
4.11 Subsidiary Borrower Note of Houma Psychiatric Hospital, Inc. dated May 21, 1993 in
the principal amount of $3,979,589 payable to the order of Societe Generale, New
York Branch (substantially identical to Exhibit 4.7).................................. --
4.12 Subsidiary Borrower Note of HSA of Oklahoma, Inc. dated May 21, 1993 in the
principal amount of $3,445,562 payable to the order of Societe Generale, New York
Branch (substantially identical to Exhibit 4.7)....................................... --
10.1 Note Purchase Agreement dated as of March 31, 1990, among the Company, Bountiful
Psychiatric Hospital, Inc., Cumberland Mental Health, Inc., East Carolina
Psychiatric Services Corporation, Havenwyck Hospital, Inc., Mesa Psychiatric
Hospital, Inc., Psychiatric Institute of West Virginia, Inc., and Aetna Life
Insurance Company regarding the purchase by Aetna Life Insurance Company of
$26,000,000 principal amount of 11.6% Senior Secured Notes, $1,000,000 principal
amount of 15.6% Subordinated Secured Notes and Warrants to Purchase Common Stock of
the Company (incorporated by reference to Exhibit 10.2 to the Company's Annual
Report on Form 10-K for the year ended June 30, 1990)................................. --
10.2 Note Purchase Agreement pursuant to which Monumental Life Insurance Company
purchased $15,500,000 principal amount of 11.6% Senior Secured Notes, $2,000,000
principal amount of 15.6% Subordinated Secured Notes and Warrants to Purchase
Common Stock of the Company (substantially identical to Exhibit 10.1)................. --
E-3
10.3 Note Purchase Agreement pursuant to which Connecticut Mutual Life Insurance Company
purchased $15,000,000 principal amount of 11.6% Senior Secured Notes (substantially
identical to Exhibit 10.1)............................................................ --
10.4 Pledge and Security Agreement between Bountiful Psychiatric Hospital, Inc. and The
Citizens and Southern National Bank (incorporated by reference to Exhibit 10.4 to
the Company's Annual Report on Form 10-K for the year ended June 30, 1996) --
10.5 Pledge and Security Agreement dated as of March 31, 1990 between the Company
and The Citizens and Southern National Bank (substantially identical to Exhibit
10.4)................................................................................. --
10.6 Pledge and Security Agreement between Michigan Psychiatric Services, Inc. and The
Citizens and Southern National Bank (substantially identical to Exhibit 10.4)......... --
10.7 Pledge and Security Agreement between Americare of Galax, Inc. and The Citizens and
Southern National Bank (substantially identical to Exhibit 10.4)...................... --
10.8 Deed of Trust, Security Agreement, and Financing Statement dated as of March 31,
1990 from Bountiful Psychiatric Hospital, Inc. to Merrill Title Company for the
benefit of The Citizens and Southern National Bank and Susan L. Adams covering
certain property in Woods Cross, Utah (incorporated by reference to Exhibit 10.10
to the Company's Annual Report on Form 10-K for the year ended June 30, 1990)......... --
10.9 Deed of Trust and Security Agreement from Cumberland Mental Health, Inc. to First
American Title Insurance Company for the benefit of The Citizens and Southern
National Bank and Susan L. Adams covering certain property in Fayetteville, North
Carolina (substantially identical to Exhibit 10.8).................................... --
10.10 Deed of Trust and Security Agreement from East Carolina Psychiatric Services
Corporation to First American Title Insurance Company for the benefit of The
Citizens and Southern National Bank and Susan L. Adams covering certain property in
Jacksonville, North Carolina (substantially identical to Exhibit 10.8)................. --
10.11 Mortgage and Security Agreement dated as of March 31, 1990 from Havenwyck Hospital,
Inc. to The Citizens and Southern National Bank and Susan L. Adams covering certain
property in Auburn Hills, Michigan (incorporated by reference to Exhibit 10.12 to
the Company's Annual Report on Form 10-K for the year ended June 30, 1990)............ --
10.12 Leasehold Deed of Trust, Assignment of Rents and Security Agreement with Financing
Statement dated as of March 31, 1990 from Mesa Psychiatric Hospital, Inc. to
Transamerica Title Insurance Company for the benefit of The Citizens and Southern
National Bank and Susan L. Adams covering certain property in Mesa, Arizona
(incorporated by reference to Exhibit 10.13 to the Company's Annual Report on Form
10-K for the year ended June 30, 1990)................................................ --
10.13 Leasehold Deed of Trust and Security Agreement from Psychiatric Institute of West
Virginia, Inc. to J. Nicholas Barth, Esq., for the benefit of The Citizens and
Southern National Bank and Susan L. Adams covering certain property in Morgantown,
West Virginia (substantially identical to Exhibit 10.12).............................. --
E-4
10.14 Obligor Subrogation and Contribution Agreement dated as of April 30, 1990 among The
Citizens and Southern National Bank, Susan L. Adams, the Company, Bountiful
Psychiatric Hospital, Inc., Cumberland Mental Health, Inc., East Carolina
Psychiatric Services Corporation, Havenwyck Hospital, Inc., Mesa Psychiatric
Hospital, Inc., and Psychiatric Institute of West Virginia, Inc. (incorporated by
reference to Exhibit 10.15 to the Company's Annual Report on Form 10-K for the year
ended June 30, 1990)................................................................ --
10.15 Credit Agreement dated as of May 15, 1993 among the Company and certain of its
subsidiaries named therein, Societe Generale, New York Branch, First Union National
Bank of North Carolina and Hibernia National Bank, as lenders, and Societe
Generale, as issuing bank and agent (incorporated by reference to Exhibit 10.16 to
the Company's Annual Report on Form 10-K for the year ended June 30, 1994).......... --
10.16 Second Amendment to Credit Agreement dated as of September 15, 1995 among the
Company and certain of its subsidiaries named therein, Societe Generale, New York
Branch, First Union National Bank of North Carolina and Hibernia National Bank, as
lenders, and Societe Generale, as issuing bank and agent (incorporated by reference
to Exhibit 10.99 to the Company's Quarterly Report on Form 10-Q for the quarter
ended September 30, 1995............................................................ --
10.17 Third Amendment to Credit Agreement dated as of August 15, 1996 among the Company
and certain subsidiaries named therein, Societe Generale, New York Branch, First
Union National Bank of North Carolina and Hibernia National Bank, as lenders, and
Societe Generale, as issuing bank and agent (incorporated by reference to Exhibit
10.93 to the Company's Annual Report on Form 10-K for the year ended June 30, 1996.. --
10.18 Fourth Amendment to Credit Agreement, First Amendment to Waiver, Consent to Merger
and Extension Agreement dated as of May 15, 1997 among the Company and certain
subsidiaries named therein, Societe Generale, New York Branch, First Union National
Bank of North Carolina and Hibernia National Bank, as lenders, and Societe
Generale, as issuing bank and agent.................................................
10.19 Fifth Amendment to Credit Agreement, Amendment to Fourth Amendment and Amendment to
Waiver dated as of June 4, 1997 among the Company and certain subsidiaries named
therein, Societe Generale, New York Branch, First Union National Bank of North
Carolina and Hibernia National Bank, as lenders, and Societe Generale, as issuing
bank and agent......................................................................
10.20 Security Agreement dated as of May 15, 1993 by Atlantic Treatment Center, Inc. in
favor of Societe Generale, as agent for the lenders which are parties to that
certain Credit Agreement described in Exhibit 10.15 above, and covering certain
property in Daytona Beach, Florida (incorporated by reference to Exhibit 10.17 to
the Company's Annual Report on Form 10-K for the year ended June 30, 1994).......... --
10.21 Security Agreement dated as of May 15, 1993 by Carolina Treatment Center, Inc. in
favor of Societe Generale, as agent for the lenders which are parties to that
certain Credit Agreement described in Exhibit 10.15 above (substantially identical
to Exhibit 10.20)................................................................... --
10.22 Security Agreement dated as of May 15, 1993 by Great Plains Hospital, Inc., in
favor of Societe Generale, as agent for the lenders which are parties to that
certain Credit Agreement described in Exhibit 10.15 above (substantially identical
to Exhibit 10.20)................................................................... --
E-5
10.23 Security Agreement dated as of May 15, 1993 by Greenbrier Hospital, Inc. in favor
of Societe Generale, as agent for the lenders which are parties to that certain
Credit Agreement described in Exhibit 10.15 above (substantially identical to
Exhibit 10.20)........................................................................ --
10.24 Security Agreement dated as of May 15, 1993 by Gulf Coast Treatment Center, Inc. in
favor of Societe Generale, as agent for the lenders which are parties to that
certain Credit Agreement described in Exhibit 10.15 above (substantially identical
to Exhibit 10.20)..................................................................... --
10.25 Security Agreement dated as of May 15, 1993 by Houma Psychiatric Hospital, Inc. in
favor of Societe Generale, as agent for the lenders which are parties to that
certain Credit Agreement described in Exhibit 10.15 above (substantially identical
to Exhibit 10.20)..................................................................... --
10.26 Security Agreement dated as of May 15, 1993 by HSA of Oklahoma, Inc. in favor of
Societe Generale, as agent for the lenders which are parties to that certain Credit
Agreement described in Exhibit 10.15 above (substantially identical to Exhibit
10.20)................................................................................ --
10.27 Security Agreement dated as of May 15, 1993 by The Haven Hospital, Inc. in favor of
Societe Generale, as agent for the lenders which are parties to that certain Credit
Agreement described in Exhibit 10.15 above (substantially identical to Exhibit
10.20)................................................................................ --
10.28 Security Agreement dated as of May 15, 1993 by the Company in favor of Societe
Generale, as agent for the lenders which are parties to that certain Credit
Agreement described in Exhibit 10.15 above (substantially identical to Exhibit
10.20)................................................................................ --
10.29 Accounts Receivable Security Agreement dated as of May 15, 1993 by Americare of
Galax, Inc. in favor of Societe Generale, as agent for the lenders which are
parties to that certain Credit Agreement described in Exhibit 10.15 above
(incorporated by reference to Exhibit 10.26 to the Company's Annual Report on Form
10-K for the year ended June 30, 1994)................................................ --
10.30 Accounts Receivable Security Agreement dated as of May 15, 1993 by Bountiful
Psychiatric Hospital, Inc. in favor of Societe Generale, as agent for the lenders
which are parties to that certain Credit Agreement described in Exhibit 10.15 above
(substantially identical to Exhibit 10.29)............................................ --
10.31 Accounts Receivable Security Agreement dated as of May 15, 1993 by Cumberland
Mental Health, Inc. in favor of Societe Generale, New York Branch, as agent for the
lenders which are parties to that certain Credit Agreement described in Exhibit
10.15 above (substantially identical to Exhibit 10.29)................................ --
10.32 Accounts Receivable Security Agreement dated as of May 15, 1993 by East Carolina
Psychiatric Services Corporation in favor of Societe Generale, New York Branch, as
agent for the lenders which are parties to that certain Credit Agreement described
in Exhibit 10.15 above (substantially identical to Exhibit 10.29)..................... --
10.33 Accounts Receivable Security Agreement dated as of May 15, 1993 by Havenwyck
Hospital, Inc. in favor of Societe Generale, New York Branch as agent for the
lenders which are parties to that certain Credit Agreement described in Exhibit
10.15 above (substantially identical to Exhibit 10.29)................................ --
E-6
10.34 Accounts Receivable Security Agreement dated as of May 15, 1993 by Mesa Psychiatric
Hospital, Inc. in favor of Societe Generale, New York Branch, as agent for the
are parties to that certain Credit Agreement described in Exhibit
10.15 above (substantially identical to Exhibit 10.29)................................ --
10.35 Accounts Receivable Security Agreement dated as of May 15, 1993 by Michigan
Psychiatric Services, Inc. in favor of Societe Generale, New York Branch, as agent
for the lenders which are parties to that certain Credit Agreement described in
Exhibit 10.15 above (substantially identical to Exhibit 10.29)........................ --
10.36 Accounts Receivable Security Agreement dated as of May 15, 1993 by Psychiatric
Institute of West Virginia, Inc. in favor of Societe Generale, New York Branch, as
agent for the lenders which are parties to that certain Credit Agreement described
in Exhibit 10.15 above (substantially identical to Exhibit 10.29)..................... --
10.37 Stock Pledge Agreement dated as of May 15, 1993, among the Company in favor of
Societe Generale, New York Branch, as agent for the lenders which are parties to
that certain Credit Agreement described in Exhibit 10.15 above (incorporated by
reference to Exhibit 10.34 to the Company's Annual Report on Form 10-K for the year
ended June 30, 1994).................................................................. --
10.38 Revolving Credit Guarantee dated as of May 15, 1993 by Americare of Galax, Inc. in
favor of Societe Generale, New York Branch, as agent for the lenders which are
parties to that certain Credit Agreement described in Exhibit 10.15 above
(incorporated by reference to Exhibit 10.35 to the Company's Annual Report on Form
10-K for the year ended June 30, 1994)................................................ --
10.39 Revolving Credit Guarantee dated as of May 15, 1993 by Bethany Psychiatric
Hospital, Inc. in favor of Societe Generale, New York Branch, as agent for the
lenders which are parties to that certain Credit Agreement described in Exhibit
10.15 above (substantially identical to Exhibit 10.38)................................ --
10.40 Revolving Credit Guarantee dated as of May 15, 1993 by Bountiful Psychiatric
Hospital, Inc. in favor of Societe Generale, New York Branch, as agent for the
lenders which are parties to that certain Credit Agreement described in Exhibit
10.15 above (substantially identical to Exhibit 10.38)................................ --
10.41 Revolving Credit Guarantee dated as of May 15, 1993 by Cumberland Mental Health,
Inc. in favor of Societe Generale, New York Branch, as agent for the lenders which
are parties to that certain Credit Agreement described in Exhibit 10.15 above
(substantially identical to Exhibit 10.38)............................................ --
10.42 Revolving Credit Guarantee dated as of May 15, 1993 by East Carolina Psychiatric
Services Corporation in favor of Societe Generale, New York Branch, as agent for
the lenders which are parties to that certain Credit Agreement described in Exhibit
10.15 above (substantially identical to Exhibit 10.38)................................ --
10.43 Revolving Credit Guarantee dated as of May 15, 1993 by Havenwyck Hospital, Inc. in
favor of Societe Generale, New York Branch, as agent for the lenders which are
parties to that certain Credit Agreement described in Exhibit 10.15 above
(substantially identical to Exhibit 10.38)............................................ --
10.44 Revolving Credit Guarantee dated as of May 15, 1993 by Mesa Psychiatric Hospital,
Inc. in favor of Societe Generale, New York Branch, as agent for the lenders which
are parties to that certain Credit Agreement described in Exhibit 10.15 above
(substantially identical to Exhibit 10.38)............................................ --
E-7
10.45 Revolving Credit Guarantee dated as of May 15, 1993 by Michigan Psychiatric
Services, Inc. in favor of Societe Generale, New York Branch, as agent for the
are parties to that certain Credit Agreement described in Exhibit
10.15 above (substantially identical to Exhibit 10.38).............................. --
10.46 Revolving Credit Guarantee dated as of May 15, 1993 by Psychiatric Institute of
West Virginia, Inc. in favor of Societe Generale, New York Branch, as agent for
the lenders which are parties to that certain Credit Agreement described in Exhibit
10.15 above (substantially identical to Exhibit 10.38).............................. --
10.47 Management Fee Subordination Agreement dated May 15, 1993, among Paul J. Ramsay
and Ramsay Health Care Pty. Ltd. in favor of Societe Generale, New York Branch, as
agent for the lenders which are parties to that certain Credit Agreement described
in Exhibit 10.15 above (incorporated by reference to Exhibit 10.44 to the Company's
Annual Report on Form 10-K for the year ended June 30, 1994)........................ --
10.48 Mortgage and Fixture Filing and Assignment of Leases and Rents dated as of May 15,
1993 granted by Atlantic Treatment Center, Inc. to Societe Generale, individually
and as agent for the lenders which are parties to that certain Credit Agreement
described in Exhibit 10.15 above, with respect to certain real property located in
Volusia County, Florida (incorporated be reference to Exhibit 10.45 to the
Company's Annual Report on Form 10-K for the year ended June 30, 1994).............. --
10.49 Mortgage and Fixture Filing and Assignment of Leases and Rents dated as of May 15,
1993 granted by Carolina Treatment Center, Inc. to Societe Generale, individually
and as agent for the lenders which are parties to that certain Credit Agreement
described in Exhibit 10.15 above, with respect to certain real property located in
Horry County, South Carolina (substantially identical to Exhibit 10.48)............. --
10.50 Deed of Trust and Fixture Filing and Assignment of Leases and Rents dated as of May
15, 1993 granted by Great Plains Hospital, Inc. to Jacob W. Bayer, Jr. as Trustee
for the benefit of Societe Generale, individually and as agent for the lenders
which are parties to that certain Credit Agreement described in Exhibit 10.15
above, with respect to certain real property located in Vernon County, Missouri
(substantially identical to Exhibit 10.48).......................................... --
10.51 Mortgage, Security and Assignment of Leases and Rents dated as of May 15, 1993 by
Greenbrier Hospital, Inc. to Societe Generale individually as agent for the lenders
which are parties to that certain Credit Agreement described in Exhibit 10.15
above, with respect to certain real property located in St. Tammany Parish,
Louisiana (substantially identical to Exhibit 10.48)................................ --
10.52 Mortgage and Fixture Filing and Assignment of Leases and Rents dated as of May 15,
1993 granted by Gulf Coast Treatment Center, Inc. to Societe Generale, individually
and as an agent for the lenders which are parties to that certain Credit Agreement
described in Exhibit 10.15 above, with respect to certain real property located in
Okaloosa County, Florida (substantially identical to Exhibit 10.48).................. --
10.53 Mortgage, Security Agreement and Assignment of Leases and Rents dated as of May
15, 1993 granted by Houma Psychiatric Hospital, Inc. to Societe Generale,
individually and as an agent for the lenders which are parties to that Certain
Credit Agreement described in Exhibit 10.15 above, with respect to certain real
property located in the City of Houma, Parish of Terrebonne, Louisiana
(substantially identical to Exhibit 10.48)........................................... --
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10.54 Mortgage with Power of Sale and Fixture Filing and Assignment of Leases and Rents
dated as of May 15, 1993 granted by HSA of Oklahoma, Inc. to Societe Generale,
and as agent for the lenders which are parties to that certain Credit
Agreement described in Exhibit 10.15 above, with respect to certain real property
located in Garfield County, Oklahoma (substantially identical to Exhibit 10.48)....... --
10.55 Deed of Trust and Fixture Filing and Assignment of Leases and Rents dated as of May
15, 1993 granted by the Haven Hospital, Inc. to Societe Generate, individually and
as agent for the lenders which are parties to that certain Credit Agreement
described in Exhibit 10.15 above, with respect to certain real property located in
the City of DeSoto, Dallas County, Texas (substantially identical to Exhibit 10.48)... --
10.56 Loan Agreement between Okaloosa County, Florida and Gulf Coast Treatment Center,
Inc. dated October 1, 1984, relating to the issuance of bonds for Gulf Coast
Treatment Center, Inc. (incorporated by reference to Exhibit 10.16 to the Company's
Registration Statement on Form S-1, Registration No. 2-98921)......................... --
10.57 Loan Agreement between Louisiana Public Facilities Authority and Greenbrier
Hospital, Inc. dated November 1, 1984, relating to the issuance of bonds for
Greenbrier Hospital, Inc. (incorporated by reference to Exhibit 10.17 to the
Company's Registration Statement on Form S-1, Registration No. 2-98921)............... --
10.58 Loan Agreement between Horry County, South Carolina and Carolina Treatment Center,
Inc. dated December 1, 1984, relating to the issuance of bonds for Carolina
Treatment Center, Inc. (incorporated by reference to Exhibit 10.18 to the Company's
Registration Statement on Form S-1, Registration No. 2-98921)......................... --
10.59 Loan Agreement between Louisiana Public Facilities Authority and Houma Psychiatric
Hospital, Inc. dated September 1, 1985, relating to the issuance of bonds for Houma
Psychiatric Hospital, Inc. (incorporated by reference to Exhibit 10.56 to the
Company's Annual Report on Form 10-K for the year ended June 30, 1994)................ --
10.60 Ground Lease between Facilities Management Corporation, as landlord, and
Psychiatric Institute of West Virginia, Inc., as tenant, dated as of September 30,
1985 (incorporated by reference to Exhibit 10.57 to the Company's Annual Report on
Form 10-K for the year ended June 30, 1994)........................................... --
10.61 Lease Agreement between Houma Psychiatric Hospital, Inc. and Hospital Service
District No. 1 of the Parish of Terrebonne, State of Louisiana, effective February
1, 1985 (incorporated by reference to Exhibit 10.38 to the Company's Registration
Statement on Form S-1, Registration No. 2-98921)...................................... --
10.62 Lease among Bethany Psychiatric Hospital, Inc., Bethany General Hospital, the City
of Bethany, Oklahoma and the Bethany General Hospital Trust dated December 9, 1985
(ground lease) (incorporated by reference to Exhibit 10.58 to the Company's Annual
Report on Form 10-K for the year ended June 30, 1996)................................. --
10.63 Loan Agreement between The Enid Development Authority and HSA of Oklahoma, Inc.
dated as of October 1, 1985, relating to The Enid Development Authority Variable
Rate Demand Revenue Bonds (Meadowlake Hospital Project) (incorporated by reference
to Exhibit 10.60 to the Company's Annual Report on Form 10-K for the year ended
June 30, 1994)........................................................................ --
10.64 Ramsay Health Care, Inc. 1990 Stock Option Plan, as amended to date (incorporated
by reference Exhibit 4.3 to the Company's Registration Statement on Form S-8 filed
on March 6, 1991)..................................................................... --
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10.65 Lease Agreement dated August 30, 1988 between the Company and Ayshire Land Dome
Joint Venture relating to office space at One Poydras Plaza, New Orleans, Louisiana
by reference to Exhibit 10.78 to the Company's Registration Statement
on Form S-2, Registration No. 33-40762)............................................. --
10.66 Ramsay Health Care, Inc. Deferred Compensation and Retirement Plan (incorporated by
reference to Exhibit 10.79 to the Company's Registration Statement on Form S-2,
Registration No. 33-40762).......................................................... --
10.67 Personnel and Facility Sharing Agreement dated as of June 27, 1991 between the
Company and Ramsay Holdings HSA Limited (incorporated by reference to Exhibit 10.83
to the Company's Registration Statement on Form S-2, Registration No. 33-40762)..... --
10.68 Indemnity Agreement dated as of June 1991 between the Company and Ramsay Holdings
HSA Limited (incorporated by reference to Exhibit 10.84 to the Company's
Registration Statement on Form S-2, Registration No. 33-40762)...................... --
10.69 Management Agreement dated as of June 25, 1992 between the Company and Ramsay
Health Care Pty. Limited (incorporated by reference to Exhibit 10.90 to the
Company's Annual Report on Form 10-K for the year ended June 30, 1992).............. --
10.70 Ramsay Health Care, Inc. 1991 Stock Option Plan (incorporated by reference to
Exhibit 10.91 to the Company's Annual Report on Form 10-K for the year ended June
30, 1992)........................................................................... --
10.71 Employment Agreement dated January 23, 1992 between the Company and Wallace E.
Smith (incorporated by reference to Exhibit 10.94 to the Company's Annual Report on
Form 10-K for the year ended June 30, 1992)......................................... --
10.72 Employment Agreement dated January 23, 1992 between the Company and John A. Quinn
(incorporated by reference to Exhibit 10.95 to the Company's Annual Report on Form
10-K for the year ended June 30, 1992).............................................. --
10.73 Lease dated April 4, 1992 between the Union Labor Life Insurance Company and the
Company (incorporated by reference to Exhibit 10.98 to the Company's Annual Report
on Form 10-K for the year ended June 30, 1992) --
10.74 Lease dated May 27, 1992 between Gail Buy and Bountiful Psychiatric Hospital
(incorporated by reference to Exhibit 10.99 to the Company's Annual Report on Form
10-K for the year ended June 30, 1992) --
10.75 Lease Agreement dated as of February 12, 1993 by and between Gulf Coast Treatment
Center, Inc. and Vendell of Florida, Inc. (incorporated by reference to Exhibit
10.82 to the Company's Annual Report on Form 10-K for the year ended June 30, 1994)
.................................................................................... --
10.76 Ramsay Health Care, Inc. 1993 Stock Option Plan (incorporated by reference to
Exhibit 10.83 to the Company's Quarterly Report on Form 10-Q for the quarter ended
December 31, 1993)................................................................. --
10.77 Ramsay Health Care, Inc. 1993 Employee Stock Purchase Plan (incorporated by
reference to Exhibit 10.84 to the Company's Quarterly Report on Form 10-Q for the
quarter ended December 31, 1993)................................................... --
10.78 Fourth Modification, Extension and Amendment of Lease Agreement dated November 15,
1993 between the Company and One Poydas Plaza Venture relating to the Company's
office space at One Poydras Plaza, New Orleans, Louisiana (incorporated by
reference to Exhibit 10.84 to the Company's Annual Report on Form 10-K for the year
ended June 30, 1994)............................................................... --
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10.79 Employment Agreement dated July 19, 1994 between the Company and Brent J. Bryson
(incorporated by reference to Exhibit 10.85 to the Company's Annual Report on Form
10-K for the year ended June 30, 1995).............................................. --
10.80 Rights Agreement dated as of August 1, 1995 between the Company and First Union
National Bank of North Carolina, as Rights Agent, which includes the form of Right
Certificate as Exhibit A and the Summary Rights to Purchase Common Shares as
Exhibit B (incorporated by reference to Exhibit 4.1 to the Company's Current
Report on Form 8-K dated August 1, 1995)............................................ --
10.81 Amendment to Rights Agreement, dated October 3, 1995 between the Company and First
Union National Bank of North Carolina, as Rights Agent (incorporated by reference
to Exhibit 10.102 to the Company's Quarterly Report on Form 10-Q for the quarter
ended September 30, 1995)........................................................... --
10.82 Amendment No. 2 to Rights Agreement, dated as of November 1, 1996 between the
Company and First Union National Bank of North Carolina, as Rights Agent
(incorporated by reference to Exhibit 10.101 to the Company's Quarterly Report on
Form 10-Q for the quarter ended September 30, 1996)................................. --
10.83 Letter Agreement dated June 30, 1995 among the Company, Ramsay Holdings HSA Limited
and Paul Ramsay Holdings Pty. Limited (incorporated by reference to Exhibit 4.2 to
the Company's Current Report on Form 8-K dated August 1, 1995)...................... --
10.84 Lease Agreement dated April 12, 1995 between Capstone Capital Corporation and Mesa
Psychiatric Hospital, Inc. (incorporated by reference to Exhibit 10.88 to the
Company's Annual Report on Form 10-K for the year ended June 30, 1995).............. --
10.85 Lease Agreement dated April 12, 1995 between Capstone Capital of San Antonio, LTD,
d/b/a Cahaba of San Antonio, LTD. and RHCI San Antonio, Inc. (incorporated by
reference to Exhibit 10.89 to the Company's Annual Report on Form 10-K for the
year ended June 30, 1995)........................................................... --
10.86 Facility Lease Agreement dated June 26, 1995 by and between Charter Canyon
Behavioral Health Systems, Inc. and Bountiful Psychiatric Hospital, Inc.
(incorporated by reference to Exhibit 10.90 to the Company's Annual Report on Form
10-K for the year ended June 30, 1995............................................... --
10.87 Employment termination letter dated September 15, 1995 between the Company and
Gregory H. Browne (incorporated by reference to Exhibit 10.91 to the Company's
Annual Report on Form 10-K for the year ended June 30, 1995)........................ --
10.88 Second Amended and Restated Distribution Agreement between the Company and Ramsay
Managed Care, Inc. ("RMCI") (incorporated by reference to Exhibit 10.1 to RMCI's
Registration Statement on Form S-1 (Registration No. 33-78034) filed with the
Commission on April 24, 1995)....................................................... --
10.89 Employee Benefit Agreement dated as of February 1, 1995 between the Company and
RMCI (incorporated by reference to Exhibit 10.4 to RMCI's Registration Statement
on Form S-1 (Registration No. 33-78034) filed with the Commission on April 24, 1995)
.................................................................................... --
10.90 Tax Sharing Agreement dated as of October 25, 1994 between the Company and RMCI
(incorporated by reference to Exhibit 10.5 to RMCI's Registration Statement on Form
S-1 (Registration No. 33-78034) filed with the Commission on April 24, 1995)........ --
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10.91 Corporate Services Agreement dated as of January 2, 1995 between the Company and
(incorporated by reference to Exhibit 10.6 to RMCI's Registration Statement on
Form S-1 (Registration No. 33-78034) filed with the Commission on April 24, 1995).... --
10.92 Form of Withholding Tax Agreement between the Company, Ramsay Holdings HSA Limited,
Paul Ramsay Holdings Pty. Limited and Ramsay Health Care Pty. Limited (incorporated
by reference to Exhibit 10.7 to RMCI's Registration Statement on Form S-1
(Registration No.33-78034) filed with the Commission on April 24,1995................ --
10.93 $6,000,000 Subordinated Promissory Note of RMCI, as amended (incorporated by
reference to Exhibit 10.13 to RMCI's Registration Statement on Form S-1
(Registration No. 33-78034) filed with the Commission on April 24, 1995)............. --
10.94 Consent and Amendment dated April 12,1996 among the Company and certain of its
subsidiaries named therein, Societe Generale, New York Branch, First Union National
Bank of North Carolina and Hibernia National Bank, as lenders, and Societe Generale,
as issuing bank and agent (incorporated by reference to Exhibit 10.88 to the
Company's Annual Report on Form 10-K for the year ended June 30, 1996)............... --
10.95 Amended and Restated Stock Purchase Agreement dated October 12, 1995 by and
among Paul Ramsay Holdings Pty. Limited, Ramsay Health Care, Inc. and, solely
for the purpose of Section I, III and VI of the agreement, Ramsay Health Care
Pty. Limited (incorporated by reference to Exhibit 10.101 to the Company's
Quarterly Report on Form 10-Q for the quarter ended September 30, 1995............... --
10.96 Amendment to Rights Agreement, date October 3, 1995 between Ramsay Health Care,
Inc. and First Union National Bank of North Carolina, as Rights Agent
incorporated by reference to Exhibit 10.102 to the Company's Quarterly Report on
Form 10-Q for the quarter ended September 30, 1995).................................. --
10.97 Ramsay Health Care, Inc. 1995 Long Term Incentive Plan (incorporated by
reference to Exhibit 10.103 to the Company's Quarterly Report on Form 10-Q for
the quarter ended December 31, 1995)................................................. --
10.98 Stock Purchase Agreement dated as of August 13,1996 by and among Paul Ramsay
Holdings Pty. Limited, the Company and, solely for purposes of Sections I, III
and IV thereof, Ramsay Health Care Pty. Limited (incorporated by reference to
Exhibit 10.94 to the Company's Annual Report on Form 10-K for the year ended
June 30, 1996........................................................................ --
10.99 Amended and Restated Employment Agreement dated as of August 15, 1996 by and
between Reynold Jennings and the Company (incorporated by reference to Exhibit
10.95 to the Company's Annual Report on Form 10-K for the year ended June 30,
1996)................................................................................ --
10.100 Exchange Agreement dated September 10, 1996, by and among the Company, Paul
Ramsay Hospitals Pty. Limited and Paul J. Ramsay, including a relates Warrant
Certificate dated September 10, 1996 issued to Ramsay Hospitals Pty. Limited
(incorporated by reference to Exhibit 10.96 to the Company's Annual Report on
Form 10-K for the year ended June 30, 1996)......................................... --
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10.101 Consulting Agreement dated as of January 1, 1996 between the Company and
Summa Healthcare Group, Inc. (incorporated by reference to Exhibit 10.97
to the Company's Annual Report on Form 10-K for the year ended June 30,
1996)............................................................................. --
10.102 Consulting Agreement dated as of February 1, 1997 between the Company
and Summa Healthcare Group, Inc................................................... --
10.103 Letter Agreement dated as of September 10, 1996 by and among the
Company, Ramsay Health Care Pty. Limited and Paul Ramsay Holdings Pty.
Limited, including a related Warrant Certificate dated September 10,
1996 issued to Paul Ramsay Holdings Pty. Limited (incorporated by
reference to Exhibit 10.98 to the Company's Annual Report on Form 10-K
for the year ended June 30, 1996)................................................. --
10.104 Employment Agreement dated August 12, 1996 by and between the Company
and Remberto Cibran (incorporated by reference to Exhibit 10.99 to the
Company's Quarterly Report on Form 10-Q for the quarter ended September
30, 1996.......................................................................... --
10.105 Services Agreement dated August 12, 1996 by and between the Company and
HealthLink Enterprises, Inc. (incorporated by reference to Exhibit
10.100 to the Company's Quarterly Report on Form 10-Q for the quarter
ended September 30, 1996........................................................... --
10.106 Credit Agreement, including all Annexes thereto, dated September 30,
1997 among the Company, The Lenders from Time to Time Party Thereto,
General Electric Capital Corporation, as Administrative Agent, and GECC
Capital Markets Group, as Syndication Agent.......................................
10.107 Subordinated Note Purchase Agreement dated as of September 30, 1997
among the Company, as Issuer, and General Electric Capital Corporation
and Paul Ramsay Holdings Pty. Limited, as Purchasers..............................
10.108 Registration Rights Agreement dated as of September 30, 1997 between the
Company and General Electric Capital Corporation..................................
10.109 Release of Collateral, Termination and Cash Collateral Agreement dated
as of September 30, 1997 among the Company and certain subsidiaries
named therein, Societe Generale, New York Branch, First Union National
Bank of North Carolina and Hiberina National Bank, as lenders, and
Societe Generale, as issuing bank and agent.......................................
11 Computation of Net Income (Loss) Per Share........................................
21 Subsidiaries of the Company.......................................................
23 Consent of Ernst & Young LLP......................................................
27 Financial Data Schedule...........................................................
Copies of exhibits filed with this Annual Report on Form 10-K or incorporated
herein by reference do not accompany copies hereof for distribution to
stockholders of the Company. The Company will furnish a copy of such exhibits
to any stockholder requesting it.
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