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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(MARK ONE)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 [FEE REQUIRED]
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2002
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
FOR THE TRANSITION PERIOD FROM ______ TO ______
COMMISSION FILE NUMBER 0-13849
RAMSAY YOUTH SERVICES, INC.
------------------------------------------------------
(Exact name of registrant as specified in its charter)
DELAWARE 63-0857352
- -------------------------------------------------------------- ------------------------------------
(State or other jurisdiction of incorporation or organization) (I.R.S. Employer Identification No.)
COLUMBUS CENTER
ONE ALHAMBRA PLAZA, SUITE 750
CORAL GABLES, FLORIDA 33134
- -------------------------------------------------------------- ------------------------------------
(Address of principal executive offices) (Zip code)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE (305) 569-6993
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 (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ].
The number of shares of the Registrant's Common Stock outstanding as of
August 2, 2002, follows:
Common Stock, par value $0.01 per share - 9,272,145 shares
RAMSAY YOUTH SERVICES, INC. AND SUBSIDIARIES
FORM 10-Q
INDEX
PAGE
----
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (unaudited)...................................................... 1
Condensed Consolidated Balance Sheets - June 30, 2002 and
December 31, 2001..................................................................... 1
Condensed Consolidated Statements of Operations - Quarter and Six Months
ended June 30, 2002 and 2001.......................................................... 3
Condensed Consolidated Statements of Cash Flows - Six Months ended
June 30, 2002 and 2001................................................................ 4
Notes to Condensed Consolidated Financial Statements - June 30, 2002.................. 5
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations............................................................. 11
Item 3. Quantitative and Qualitative Disclosures About Market Risk............................ 20
PART II. OTHER INFORMATION
Item 1. Legal Proceedings..................................................................... 21
Item 2. Changes in Securities and Use of Proceeds............................................. 21
Item 3. Defaults upon Senior Securities....................................................... 21
Item 4. Submission of Matters to a Vote of Securities Holders................................. 21
Item 5. Other Information..................................................................... 21
Item 6. Exhibits and Reports on Form 8-K...................................................... 21
SIGNATURES..................................................................................... 22
i
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
RAMSAY YOUTH SERVICES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
JUNE 30, DECEMBER 31,
2002 2001
----------- -----------
ASSETS
Current assets
Cash and cash equivalents .................................... $ 1,118,000 $ 752,000
Accounts receivable, less allowances for doubtful accounts of
$2,453,000 and $1,934,000 at June 30, 2002 and December 31,
2001, respectively ......................................... 24,808,000 23,307,000
Other current assets ......................................... 5,795,000 6,091,000
----------- -----------
Total current assets ....................................... 31,721,000 30,150,000
Other assets
Cash held in trust ........................................... 1,021,000 1,021,000
Cost in excess of net asset value of purchased businesses, net 2,232,000 2,232,000
Unamortized loan costs, net .................................. 934,000 1,077,000
Deferred tax asset ........................................... 7,390,000 --
----------- -----------
Total other assets ......................................... 11,577,000 4,330,000
Property and equipment
Land ......................................................... 4,635,000 4,659,000
Buildings and improvements ................................... 38,396,000 37,829,000
Equipment, furniture and fixtures ............................ 13,078,000 12,580,000
----------- -----------
56,109,000 55,068,000
Less accumulated depreciation ................................ 21,673,000 20,537,000
----------- -----------
34,436,000 34,531,000
----------- -----------
$77,734,000 $69,011,000
=========== ===========
SEE NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.
1
RAMSAY YOUTH SERVICES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
JUNE 30, DECEMBER 31,
2002 2001
------------- -------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Accounts payable ......................................... $ 6,288,000 $ 5,604,000
Accrued and other liabilities ............................ 6,968,000 6,366,000
Amounts due to third-party contractual agencies .......... 1,080,000 1,709,000
Current portion of long-term debt ........................ 3,709,000 3,372,000
------------- -------------
Total current liabilities .............................. 18,045,000 17,051,000
Noncurrent liabilities
Other accrued liabilities ................................ 4,415,000 4,129,000
Long-term debt, less current portion ..................... 20,084,000 23,506,000
------------- -------------
Total liabilities ...................................... 42,544,000 44,686,000
------------- -------------
Commitments and contingencies
Stockholders' equity
Common stock $.01 par value--authorized 30,000,000 shares;
issued 9,465,995 shares at June 30, 2002 and 9,445,449
shares at December 31, 2001 ............................ 95,000 94,000
Additional paid-in capital ............................... 127,078,000 127,047,000
Accumulated deficit ...................................... (88,084,000) (98,917,000)
Treasury stock--193,850 common shares at June 30, 2002 and
December 31, 2001, at cost ............................. (3,899,000) (3,899,000)
------------- -------------
Total stockholders' equity ....................... 35,190,000 24,325,000
------------- -------------
$ 77,734,000 $ 69,011,000
============= =============
SEE NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.
2
RAMSAY YOUTH SERVICES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
QUARTER ENDED JUNE 30, SIX MONTHS ENDED JUNE 30,
------------------------------- -------------------------------
2002 2001 2002 2001
------------ ------------ ------------ ------------
Revenues ............................................ $ 36,709,000 $ 33,840,000 $ 72,540,000 $ 65,629,000
Operating Expenses:
Salaries, wages and benefits ..................... 22,839,000 20,736,000 45,035,000 40,563,000
Other operating expenses ......................... 9,853,000 9,638,000 19,545,000 18,630,000
Provision for doubtful accounts .................. 718,000 1,087,000 1,438,000 1,919,000
Depreciation and amortization .................... 624,000 592,000 1,249,000 1,185,000
Asset impairment charges ......................... -- -- 125,000 --
------------ ------------ ------------ ------------
Total operating expenses ............................ 34,034,000 32,053,000 67,392,000 62,297,000
------------ ------------ ------------ ------------
Income from operations .............................. 2,675,000 1,787,000 5,148,000 3,332,000
Non-operating expenses:
Interest and other financing charges, net ........ 605,000 866,000 1,295,000 1,851,000
------------ ------------ ------------ ------------
Total non-operating expenses, net .............. 605,000 866,000 1,295,000 1,851,000
Income before income taxes .......................... 2,070,000 921,000 3,853,000 1,481,000
(Benefit) provision for income taxes ................ (7,192,000) 125,000 (6,978,000) 301,000
------------ ------------ ------------ ------------
Net income .......................................... $ 9,262,000 $ 796,000 $ 10,831,000 $ 1,180,000
============ ============ ============ ============
Income attributable to common stockholders .......... $ 9,262,000 $ 796,000 $ 10,831,000 $ 1,180,000
============ ============ ============ ============
Income per common share:
Basic ............................................ $ 1.00 $ .09 $ 1.17 $ .13
============ ============ ============ ============
Diluted .......................................... $ 0.81 $ .08 $ 0.95 $ .13
============ ============ ============ ============
Weighted average number of common shares outstanding:
Basic ............................................ 9,272,000 8,944,000 9,268,000 8,936,000
============ ============ ============ ============
Diluted .......................................... 11,411,000 10,037,000 11,402,000 9,379,000
============ ============ ============ ============
SEE NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.
3
RAMSAY YOUTH SERVICES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
SIX MONTHS ENDED JUNE 30,
-------------------------------
2002 2001
------------ ------------
Cash flows from operating activities:
Net income .................................................. $ 10,831,000 $ 1,180,000
Adjustments to reconcile net income to net cash provided by
(used in) operating activities:
Depreciation .............................................. 1,249,000 1,112,000
Amortization, including loan costs ........................ 265,000 371,000
Provision for doubtful accounts ........................... 1,438,000 1,919,000
Asset impairment charges .................................. 125,000 --
Loss on sale of assets .................................... 17,000 --
Deferred tax benefit ...................................... (7,390,000) --
Change in operating assets and liabilities:
Accounts receivable ..................................... (2,939,000) (3,559,000)
Other current assets .................................... 441,000 (847,000)
Accounts payable ........................................ 686,000 (1,654,000)
Accrued and other liabilities ........................... 889,000 2,195,000
Amounts due to third-party contractual agencies ......... (628,000) (1,050,000)
------------ ------------
Total adjustments ..................................... (5,847,000) (1,513,000)
------------ ------------
Net cash provided by (used in) operating activities.. 4,984,000 (333,000)
------------ ------------
Cash flows from investing activities:
Proceeds from the sale of assets ............................ 159,000 472,000
Expenditures for property and equipment ..................... (1,601,000) (1,228,000)
Cash held in trust .......................................... -- 30,000
------------ ------------
Net cash used in investing activities ............... (1,442,000) (726,000)
------------ ------------
Cash flows from financing activities:
Loan costs .................................................. (66,000) (25,000)
Proceeds from issuance of debt and warrants ................. 1,502,000 2,569,000
Payments on debt ............................................ (4,643,000) (1,347,000)
Net proceeds from exercise of options and stock purchases ... 44,000 14,000
Registration costs .......................................... (13,000) --
------------ ------------
Net cash (used in) provided by financing activities.. (3,176,000) 1,211,000
------------ ------------
Net increase in cash and cash equivalents ...................... 366,000 152,000
Cash and cash equivalents at beginning of period ............... 752,000 1,539,000
------------ ------------
Cash and cash equivalents at end of period ..................... $ 1,118,000 $ 1,691,000
============ ============
Cash paid during the period for:
Interest .................................................... $ 968,000 $ 1,564,000
============ ============
Income taxes ................................................ $ 301,000 $ 223,000
============ ============
SEE NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.
4
RAMSAY YOUTH SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
JUNE 30, 2002
NOTE 1. BASIS OF PRESENTATION
Ramsay Youth Services, Inc. (the Company) is a provider and manager of
mental health, substance abuse and behavioral health programs and services in
residential and non-residential settings in Alabama, Florida, Hawaii, Missouri,
Michigan, Nevada, North Carolina, South Carolina, Texas, Utah and the
Commonwealth of Puerto Rico.
The accompanying unaudited condensed consolidated financial statements
have been prepared in accordance with generally accepted accounting principles
for interim financial information and with the instructions to Form 10-Q and
Article 10 of Regulation S-X. Accordingly, they do not include all of the
information and notes required by generally accepted accounting principles for
complete financial statements. In the opinion of management, all adjustments
considered necessary for a fair presentation of the interim information are,
unless otherwise discussed in this report, of a normal recurring nature and have
been included. The Company's business is seasonal in nature and subject to
general economic conditions and other factors. Accordingly, operating results
for the quarter and six months ended June 30, 2002 are not necessarily
indicative of the results that may be expected for the year. The balance sheet
at December 31, 2001 has been derived from the audited financial statements at
that date but does not include all of the information and footnotes required by
accounting principles generally accepted in the United States of America for
complete financial statements. The preparation of financial statements in
conformity with accounting principles generally accepted in the United States
requires management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements and the reported amounts of
revenue and expenses during the reporting period. Significant estimates include
valuation reserves for accounts receivable, estimates of revenue to be received
from government and other contract reimbursement programs, self-insurance
reserves, and estimates related to allocating purchase price to assets and
liabilities for prior or future acquisitions. For further information, refer to
the consolidated financial statements and notes thereto included in the
Company's Annual Report on Form 10-K for the year ended December 31, 2001.
NOTE 2. ASSET SALES AND CLOSED BUSINESSES
On May 15, 2001, the Company sold the Palm Bay facility for $2,300,000.
Proceeds from the sale included a $500,000 cash payment at closing and a
$1,800,000, 8% promissory note, due and payable on June 30, 2003. During the
year ended December 31, 2001, the Company agreed to accept a discount of
$130,000 for the full payment of the promissory note and accrued interest. The
promissory note included in other current assets is expected to be repaid on or
before December 31, 2002.
NOTE 3. LONG-TERM DEBT
The Company's long-term debt is as follows:
JUNE 30, DECEMBER 31,
2002 2001
----------- -----------
Variable rate Term Loan, due October 30, 2003 ...... $ 7,665,000 $ 8,134,000
Revolver, due October 30, 2003 ..................... 5,001,000 7,503,000
Acquisition Loan, due October 30, 2003 ............. 1,693,000 1,849,000
Subordinated Note (net of discount of $316,000), due
January 24, 2007 ................................ 4,684,000 4,660,000
Subordinated Note (net of discount of $328,000), due
January 24, 2007 ................................ 4,672,000 4,640,000
Other .............................................. 78,000 92,000
----------- -----------
23,793,000 26,878,000
Less current portion ............................... 3,709,000 3,372,000
----------- -----------
$20,084,000 $23,506,000
=========== ===========
5
RAMSAY YOUTH SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The Company's amended senior credit facility (the "Senior Credit
Facility") consists of a term loan (the "Term Loan") payable in monthly
installments ranging from $83,000 to $302,000 with a final installment of
$3,600,000 due on October 30, 2003 and a revolving credit facility (the
"Revolver") for an amount up to the lesser of $15,000,000 or the borrowing base
of the Company's receivables (as defined in the agreement).
During the twelve months ended December 31, 2001, the Company exceeded
the capital expenditure limitation in the Senior Credit Facility. On February
25, 2002, the Company's lender agreed to amend the Senior Credit Facility,
retroactive to December 31, 2001, to provide for among other items: (i) an
increase in the permitted capital expenditures, (ii) a $3.0 million increase in
the revolving credit loan commitment, and (iii) a $1.5 million additional
advance on the term loan. At June 30, 2002, the Company was in compliance with
all covenants stipulated in the Senior Credit Facility.
On January 25, 2000 and June 19, 2000, the Company entered into
subordinated note and warrant purchase agreements with two unrelated financial
institutions for an aggregate principal amount of $5 million each (the
"Subordinated Notes"). The Subordinated Notes permit each of the financial
institutions to exercise, under certain conditions, up to 475,000 warrants,
which are convertible into the Company's common stock. Borrowings under the
Subordinated Notes bear interest at a rate of 12.5% per annum. The interest is
payable quarterly, and the principal balance and any unpaid interest is due
January 24, 2007. The aggregate value of the warrants at the time of issuance
was $844,000. On August 17, 2001, one of the financial institutions exercised
its warrant purchase agreement and converted 475,000 warrants into 294,597
shares of common stock utilizing the cashless exercise provision outlined in the
warrant agreement.
NOTE 4. EARNINGS PER SHARE
The following table sets forth the computation of basic and diluted
earnings per share:
QUARTER ENDED JUNE 30, SIX MONTHS ENDED JUNE 30,
---------------------------- ----------------------------
2002 2001 2002 2001
----------- ----------- ----------- -----------
(unaudited) (unaudited)
Numerator:
Numerator for basic earnings per share -
income attributable to common stockholders $ 9,262,000 $ 796,000 $10,831,000 $ 1,180,000
Effect of dilutive securities ................ -- -- -- --
----------- ----------- ----------- -----------
-- -- -- --
----------- ----------- ----------- -----------
Numerator for diluted earnings per share -
income attributable to common stockholders
after assumed conversions ................ $ 9,262,000 $ 796,000 $10,831,000 $ 1,180,000
=========== =========== =========== ===========
Denominator:
Denominator for basic earnings per share -
weighted-average shares .................... 9,272,000 8,944,000 9,268,000 8,936,000
Effect of dilutive securities:
Employee stock options and warrants ........ 2,139,000 1,093,000 2,134,000 443,000
----------- ----------- ----------- -----------
Dilutive potential common shares ............. 2,139,000 1,093,000 2,134,000 443,000
----------- ----------- ----------- -----------
Denominator for diluted earnings per share -
adjusted weighted-average shares and
assumed conversions ...................... 11,411,000 10,037,000 11,402,000 9,379,000
=========== =========== =========== ===========
Basic earnings per share ........................ $ 1.00 $ .09 $ 1.17 $ .13
=========== =========== =========== ===========
Diluted earnings per share ...................... $ 0.81 $ .08 $ 0.95 $ .13
=========== =========== =========== ===========
6
RAMSAY YOUTH SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
For both the quarter and the six months ended June 30, 2002, options
and warrants totalling 591,781 were excluded from the above computation because
their effect would be antidilutive.
NOTE 5. SEGMENT INFORMATION
The Company is a provider and manager of mental health and behavioral
health programs and services in residential and non-residential settings in ten
states and the Commonwealth of Puerto Rico. During the quarter ended June 30,
2001, the Company refined its segment definitions to more appropriately reflect
its business operations and management responsibilities. The primary change from
the segment information originally presented as of June 30, 2001 consists of a
change in the names of the segments and the classification of certain items
within the segments. Accordingly, the corresponding information for earlier
periods has been reclassified to reflect its new reportable business segments,
owned operations and management contract operations.
OWNED OPERATIONS
The Company offers its mental health and behavioral health programs and
services at its owned and leased facilities in residential and non-residential
settings.
The residential setting provides a safe, secure and highly structured
environment for the evaluation and development of long-term intensive treatment
services. The programs focus on a cognitive behavioral model with family, group
and individual counseling, social and life skills development, and educational
and recreational programs. The primary focus of these services is to reshape
antisocial behaviors by stressing responsibility and achievement of performance
and treatment goals.
The non-residential setting is designed to meet the special needs of
patients requiring a less structured environment than the residential setting,
but providing the necessary level of treatment, support and assistance to
transition back into society. The primary focus of this program is to provide
patients, with a clinically definable emotional, psychiatric or dependency
disorder, with therapeutic and intensive treatment services. Patients which are
assisted through this program have either transitioned out of a residential
treatment program, or do not require the intensive services of a residential
treatment program.
Many of the Company's programs are complemented with specialized
educational services designed to modify behavior and assist individuals in
developing their academic, social, living and vocational skills necessary to
participate successfully in society.
MANAGEMENT CONTRACT OPERATIONS
The Company's programs and services in its management contract
operations are similar in nature to the programs and services offered by the
Company at its owned operations; however, the programs and services are provided
at facilities owned by the contracting governmental agency. These programs and
services focus on solving the specialized needs of the respective agency by
providing effective treatment interventions, including counseling, social
interests, substance abuse education and treatment, mental health services,
cognitive and life skills development, accredited education and vocational
skills. The Company believes that a comprehensive approach, which develops the
social, educational, and vocational skills of the individual, creates
responsible, contributing, pro-social individuals. This comprehensive approach
is essential to achieving the program's objective of reducing recidivism and
integrating the youth into their communities as responsible and productive
individuals.
The following table sets forth, for each of the periods indicated,
certain information about segment results of operations and segment assets.
There are no inter-segment sales or transfers. Segment profit consists of
revenue less operating expenses, and does not include investment income and
other, interest and other financing charges, non-recurring items and income
taxes. Total assets are those assets used in the operations in each segment.
Corporate assets include cash and cash equivalents, property and equipment,
7
RAMSAY YOUTH SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
intangible assets and notes receivable. The accounting policies of the
reportable segments are the same as those described in the summary of
significant accounting policies.
QUARTER ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
------------------------------- -------------------------------
2002 2001 2002 2001
------------ ------------ ------------ ------------
SEGMENT REVENUE
Owned operations ......................... $ 29,330,000 $ 26,855,000 $ 58,255,000 $ 52,179,000
Management contracts ..................... 7,379,000 6,985,000 14,285,000 13,450,000
------------ ------------ ------------ ------------
Total consolidated revenues ................. $ 36,709,000 $ 33,840,000 $ 72,540,000 $ 65,629,000
============ ============ ============ ============
SEGMENT DEPRECIATION AND AMORTIZATION
Owned operations ......................... $ 560,000 $ 523,000 $ 1,125,000 $ 1,051,000
Management contracts ..................... 37,000 28,000 69,000 56,000
------------ ------------ ------------ ------------
597,000 551,000 1,194,000 1,107,000
Reconciling items
Corporate depreciation and amortization .. 27,000 41,000 55,000 78,000
------------ ------------ ------------ ------------
Total consolidated depreciation and
amortization .............................. $ 624,000 $ 592,000 $ 1,249,000 $ 1,185,000
============ ============ ============ ============
SEGMENT PROFIT
Owned operations ......................... $ 3,899,000 $ 2,758,000 $ 7,208,000 $ 5,280,000
Management contracts ..................... 662,000 563,000 1,246,000 1,188,000
------------ ------------ ------------ ------------
4,561,000 3,321,000 8,454,000 6,468,000
Reconciling items
Corporate expenses ....................... (1,886,000) (1,534,000) (3,181,000) (3,136,000)
Asset impairment charges ................. -- -- (125,000) --
Interest and other financing charges ..... (605,000) (866,000) (1,295,000) (1,851,000)
------------ ------------ ------------ ------------
Total consolidated income before income taxes $ 2,070,000 $ 921,000 $ 3,853,000 $ 1,481,000
============ ============ ============ ============
SEGMENT CAPITAL EXPENSES
Owned operations ......................... $ 704,000 $ 515,000 $ 1,422,000 $ 968,000
Management contracts ..................... 19,000 45,000 126,000 130,000
------------ ------------ ------------ ------------
723,000 560,000 $ 1,548,000 1,098,000
Reconciling items
Corporate assets ......................... 2,000 102,000 53,000 130,000
------------ ------------ ------------ ------------
Total consolidated capital expenditures ..... $ 725,000 $ 662,000 $ 1,601,000 $ 1,228,000
============ ============ ============ ============
YEAR ENDED
-------------------------------
JUNE 30, DECEMBER 31,
2002 2001
------------ ------------
SEGMENT ASSETS
Owned operations ......................... $ 61,368,000 $ 57,893,000
Management contracts ..................... 6,482,000 6,729,000
------------ ------------
Total segment assets ........................ 67,850,000 64,622,000
Reconciling items
Corporate assets ......................... 9,884,000 4,389,000
------------ ------------
Total consolidated assets ................... $ 77,734,000 $ 69,011,000
============ ============
NOTE 6. ACCOUNTS RECEIVABLE
The Company has experienced delays in the collection of receivables
from its contracts in Puerto Rico. As of June 30, 2002, the Company had
approximately $3.9 million in outstanding receivables due from the Commonwealth
of Puerto Rico, of which $1.5 million was over 120 days past due. Reserves
8
RAMSAY YOUTH SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
against outstanding Puerto Rico receivables were $1.4 million as of June 30,
2002. The Company and its advisors are in active discussions with the Government
of Puerto Rico with respect to the payment of the outstanding receivables. The
Company believes that it has fully performed its obligations under the Puerto
Rico contracts and is entitled to receive payment of these receivables in full.
Although the Company has been advised by its legal counsel that the net
receivables due on the Puerto Rico contracts are collectable, there can be no
assurances that future transactions or events will not result in the need for
additional reserves for these accounts receivable. If the Company were to record
additional reserves, it would adversely affect earnings in the period in which
the reserves are recorded.
NOTE 7. RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
In July 2001, the Financial Accounting Standards Board ("FASB") issued
Statement No. 141, ACCOUNTING FOR BUSINESS COMBINATIONS, and Statement No. 142,
GOODWILL AND OTHER INTANGIBLE ASSETS. These statements modify accounting for
business combinations after June 30, 2001 and will affect the Company's
treatment of goodwill and other intangible assets at the start of fiscal year
2002. The statements require that goodwill existing at the date of adoption be
reviewed for possible impairment and that impairment tests be periodically
repeated, with impaired assets written-down to fair value. Additionally,
existing goodwill and intangible assets must be assessed and classified
consistent with the statements' criteria. Intangible assets with estimated
useful lives will continue to be amortized over those periods. Amortization of
goodwill and intangible assets with indeterminate lives will cease. Under this
Statement, initial testing of goodwill must be conducted within six months of
adoption. The Company has adopted this Statement, completed the testing of
goodwill and determined that there is no impairment of goodwill as of January 1,
2002. The Company recorded amortization of goodwill expense of $31,000 for the
quarter ended June 30, 2001 and $83,000 for the six months ended June 30, 2001.
In July 2001, the FASB issued Statement No. 143, ACCOUNTING FOR ASSET
RETIREMENT OBLIGATIONS. This Statement requires that an asset retirement cost
should be capitalized as part of the cost of the related long-lived asset and
subsequently allocated to expense using a systematic and rational method. This
Statement is required to be adopted in fiscal years beginning after June 15,
2002. The Company does not anticipate a significant impact to the results of
operations from the adoption of this Statement.
In October 2001, the FASB issued Statement No. 144, ACCOUNTING FOR THE
IMPAIRMENT OR DISPOSAL OF LONG-LIVED ASSETS. This Statement supersedes Statement
No. 121 but retains many of its fundamental provisions. Additionally, this
Statement expands the scope of discontinued operations to include more disposal
transactions. The provisions of this Statement are effective for the Company
with the beginning of fiscal year 2002. The Company has determined that there is
no financial statement impact related to the adoption of this Statement.
In April 2002, the FASB issued Statement No. 145, RESCISSION OF FASB
STATEMENTS NO. 4, 44, AND 64, AMENDMENT OF FASB STATEMENT NO. 13, AND TECHNICAL
CORRECTION. This Statement eliminates extraordinary accounting treatment for
reporting gain or loss on debt extinguishment, and amends other existing
authoritative pronouncements to make various technical corrections, clarifies
meanings, or describes their applicability under changed conditions. The
provisions of this Statement are effective for the Company with the beginning of
fiscal year 2003; however, early application of the Statement is encouraged.
Debt extinguishments reported as extraordinary items prior to scheduled or early
adoption of this Statement would be reclassified in most cases following
adoption. The Company does not anticipate a significant impact on its results of
operations from adopting this Statement.
In June 2002, the FASB issued Statement No. 146, ACCOUNTING FOR COSTS
ASSOCIATED WITH EXIT OR DISPOSAL ACTIVITIES. This Statement requires recording
costs associated with exit or disposal activities at their fair values when a
liability has been incurred. Under previous guidance, certain exit costs were
accrued upon management commitment to an exit plan. Adoption of this Statement
is required with the beginning of fiscal year 2003. The Company has not yet
completed its evaluation of the impact of adopting this Statement.
9
RAMSAY YOUTH SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 8. INCOME TAXES
During the quarter ended June 30, 2002, the Company reversed $7.4
million of the valuation allowance placed on its deferred tax assets relating to
temporary differences that will result in deductible amounts in future years and
net operating loss carryforwards. Future realization of the tax benefit of an
existing deductible temporary difference or carryforward ultimately depends on
the existence of sufficient taxable income within the carryforward period
available under tax law. The Company has reversed a portion of the valuation
allowance because, based on a current review of available objective and
verifiable evidence, it is management's judgment that a portion of the tax
benefits associated with the Company's deferred tax assets will more likely than
not be realized. Such evidence includes updated expectations about sufficient
future years' taxable income which reflect the continuing improvement in the
Company's operating results.
The Company has available federal net operating loss carryforwards
totaling approximately $33.0 million, which expire in the years 2010 to 2018.
The Company also has available alternative carryforwards of approximately $1.2
million which may be carried forward indefinitely.
The net deferred tax asset represents management's best estimate of the
tax benefits that will more likely than not be realized in future years at each
reporting date. However, there can be no assurance that the Company can generate
taxable income to realize the net deferred tax asset. In addition, under the Tax
Reform Act of 1986, certain future changes in ownership resulting from the sale
of stock may limit the amount of net operating loss carryforwards that can be
utilized on an annual basis. The Company has and continues to evaluate
compliance relating to the utilization of the net operating loss carryforwards,
and believes it has complied in all respects. A failure to meet the requirements
could result in a loss or limitation of the utilization of carryforwards, which
could have a material adverse effect on the Company's financial position and
results of operations in future periods.
Deferred taxes as of June 30, 2002 and December 31, 2001 are summarized
as follows:
JUNE 30, DECEMBER 31,
2002 2001
------------ ------------
Deferred tax liabilities:
Book basis of fixed assets over tax basis ......... $ 57,000 $ 57,000
Prepaid maintenance ............................... 194,000 396,000
Other ............................................. -- 248,000
------------ ------------
Total deferred tax liabilities ................ 251,000 701,000
Deferred tax assets:
Allowance for doubtful accounts ................... 989,000 735,000
General and professional liability insurance ...... 1,003,000 1,806,000
Accrued employee benefits ......................... 899,000 816,000
Capital loss carryovers ........................... 423,000 445,000
Other accrued liabilities ......................... 2,568,000 2,568,000
Other ............................................. -- 2,000
Net operating loss carryovers ..................... 13,297,000 15,899,000
Alternative minimum tax credit carryovers ......... 1,150,000 1,150,000
------------ ------------
Total deferred tax assets ..................... 20,329,000 23,421,000
Valuation allowance for deferred tax assets .......... (12,688,000) (22,720,000)
------------ ------------
Deferred tax assets, net of valuation allowance 7,641,000 701,000
------------ ------------
Net deferred tax assets ....................... $ 7,390,000 $ --
============ ============
10
RAMSAY YOUTH SERVICES, INC. AND SUBSIDIARIES
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The Company receives revenues primarily from the delivery of mental
health, substance abuse and behavioral health programs and services in
residential and non-residential settings. The Company receives revenues based on
per diem rates, fixed fee contracts or flat or cost-based rate contracts. In
addition, the Company also receives revenues from management contracts with
other entities. Revenues under the Company's programs are recognized as services
are rendered. Revenues of the Company's programs and services are affected by
changes in the rates the Company charges, changes in reimbursement rates by
third-party payors, the volume of individuals treated and changes in the mix of
payors.
Salaries, wages and benefits include facility and program payrolls and
related taxes, as well as employee benefits, including insurance and workers'
compensation coverage. Employee compensation and benefits also includes general
and administrative payroll and related benefit costs, including salaries and
supplemental compensation of officers.
Other operating expenses include all expenses not otherwise presented
separately in the Company's statements of operations. Significant components of
these expenses at the operating level include items such as food, utilities,
supplies, rent and insurance. Significant components of these expenses at the
administrative level include legal, accounting, investor relations, marketing,
consulting and travel expense.
The Company's quarterly results may fluctuate significantly as a result
of a variety of factors, including the timing of the opening of new programs.
When the Company opens a new program, the program may be unprofitable until the
program's population, and net revenues contributed by the program, approach
intended levels, primarily because the Company staffs its programs in
anticipation of achieving such levels. The Company's quarterly results may also
be impacted by seasonality, as revenues generated by youth treatment services
are generally seasonal in nature.
IN CONNECTION WITH THE "SAFE-HARBOR" PROVISIONS OF THE PRIVATE
SECURITIES LITIGATION REFORM ACT OF 1995, THE COMPANY NOTES THAT THIS QUARTERLY
REPORT ON FORM 10-Q 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. THESE FACTORS ARE SET FORTH IN THE
COMPANY'S FORM 10-K FOR THE YEAR ENDED DECEMBER 31, 2001, AND INCLUDE (I)
ACCELERATING CHANGES OCCURRING IN THE AT-RISK YOUTH INDUSTRY, INCLUDING
COMPETITION FROM CONSOLIDATING AND INTEGRATED PROVIDER SYSTEMS AND LIMITATIONS
ON REIMBURSEMENT RATES, (II) FEDERAL AND STATE GOVERNMENTAL BUDGETARY
CONSTRAINTS WHICH COULD HAVE THE EFFECT OF LIMITING THE AMOUNT OF FUNDS
AVAILABLE TO SUPPORT GOVERNMENTAL PROGRAMS, (III) STATUTORY, REGULATORY AND
ADMINISTRATIVE CHANGES OR INTERPRETATIONS OF EXISTING STATUTORY AND REGULATORY
PROVISIONS AFFECTING THE CONDUCT OF THE COMPANY'S BUSINESS AND AFFECTING CURRENT
AND PRIOR REIMBURSEMENT FOR THE COMPANY'S SERVICES AND (IV) UNCERTAINTIES
REGARDING ISSUES IN THE PUERTO RICO MARKET SERVICED BY THE COMPANY. THERE CAN BE
NO ASSURANCE THAT ANY ANTICIPATED FUTURE RESULTS WILL BE ACHIEVED. AS A RESULT
OF THE FACTORS IDENTIFIED ABOVE AND INCLUDING ANY OTHER FACTORS, THE COMPANY'S
ACTUAL RESULTS OR FINANCIAL OR OTHER CONDITION COULD VARY SIGNIFICANTLY FROM THE
PERFORMANCE OR EXPECTATION SET FORTH IN ANY FORWARD-LOOKING STATEMENTS OR
INFORMATION. THE COMPANY UNDERTAKES NO OBLIGATIONS TO UPDATE THESE
FORWARD-LOOKING STATEMENTS.
11
RAMSAY YOUTH SERVICES, INC. AND SUBSIDIARIES
RESULTS OF OPERATIONS
QUARTER ENDED JUNE 30, 2002 COMPARED TO QUARTER ENDED JUNE 30, 2001
OWNED OPERATIONS SEGMENT
The following table states for the periods indicated the results of our
owned operations in dollar and percentage of revenue terms (dollars in
thousands):
QUARTER ENDED JUNE 30,
---------------------------------------------
2002 2001
------------------- -------------------
Revenues ......................... $29,330 100.0% $26,855 100.0%
Expenses:
Salaries, wages and benefits .. 16,705 57.0% 15,515 57.8%
Other operating expenses ...... 7,693 26.2% 7,357 27.4%
Provision for doubtful accounts 473 1.6% 702 2.6%
Depreciation and amortization . 560 1.9% 523 1.9%
------- ------ ------- ------
Total operating expenses .... 25,431 86.7% 24,097 89.7%
------- ------ ------- ------
Income from operations ........... $ 3,899 13.3% $ 2,758 10.3%
======= ====== ======= ======
REVENUES
Revenues increased by 9.2%, or $2.5 million, to $29.3 million in 2002
compared to $26.9 million in 2001. The increase in revenues during the period is
primarily a result of (i) an increase of 3.4% in resident days (from 89,861 days
in 2001 to 92,954 days in 2002), resulting in an increase in revenues of $2.2
million, (ii) a positive cost report audit which resulted in an increase in
revenue of $0.5 million and (iii) an increase in the rates at three of the
Company's facilities which increased revenues by $0.2 million. The
aforementioned increases were partially offset by the closure of a facility in
Puerto Rico, which decreased revenues by $0.4 million.
SALARIES, WAGES AND BENEFITS
Salaries, wages and benefits were $16.7 million, or 57% of revenues in
2002, compared to $15.5 million, or 57.8% in 2001. The decrease as a percentage
of revenues was primarily attributable to the aforementioned increase in
revenues as a result of the positive cost report audit.
OTHER OPERATING EXPENSES
Other operating expenses were $7.7 million, or 26.2% of revenues in
2002, compared to $7.4 million, or 27.4% of revenues in 2001. The decrease as a
percentage of revenues was primarily a result of operating efficiencies gained
by the Company as a result of its growth in the Florida market.
PROVISION FOR DOUBTFUL ACCOUNTS
The provision for doubtful accounts was $0.5 million, or 1.6% of
revenues in 2002, compared to $0.7 million, or 2.6% in 2001. The decrease as a
percentage of revenues was a result of additional reserves recorded in 2001
related to payment delays experienced by the Company from one of its payor
sources in its Jacksonville, North Carolina facility.
12
RAMSAY YOUTH SERVICES, INC. AND SUBSIDIARIES
DEPRECIATION AND AMORTIZATION
Depreciation and amortization was $0.6 million, or 1.9% of revenues in
2002, compared to $0.5 million, or 1.9% of revenues in 2001. Depreciation and
amortization did not fluctuate as a percentage of revenue when compared to the
same period in the prior year.
MANAGEMENT CONTRACT SEGMENT
The following table states for the periods indicated the results of our
management contract operations in dollar and percentage of revenue terms
(dollars in thousands):
QUARTER ENDED JUNE 30,
-----------------------------------------
2002 2001
----------------- -----------------
Revenues ......................... $7,379 100.0% $6,985 100.0%
Expenses:
Salaries, wages and benefits .. 4,863 65.9% 4,500 64.4%
Other operating expenses ...... 1,572 21.3% 1,509 21.6%
Provision for doubtful accounts 245 3.3% 385 5.5%
Depreciation and amortization . 37 0.5% 28 0.4%
------ ----- ------ -----
Total operating expenses .... 6,717 91.0% 6,422 91.9%
------ ----- ------ -----
Income from operations ........... $ 662 9.0% $ 563 8.1%
====== ===== ====== =====
REVENUES
Revenues increased by 5.6%, or $0.4 million, to $7.4 million in 2002
compared to $7.0 in 2001. The revenue increase is a result of (i) the full
quarter effect of the expansion of two programs in June 2001, which increased
revenues by $0.8 million, and (ii) a new contract awarded to the Company which
began operations on February 18, 2002 and generated $0.7 million in revenues
during the quarter. The aforementioned increases were partially offset by the
termination of one of the Company's Puerto Rico contracts in December 2001 which
decreased revenues by $0.7 million and a decrease in billings at two of the
Company's Florida facilities which decreased revenues by $0.4 million.
SALARIES, WAGES AND BENEFITS
Salaries, wages and benefits were $4.9 million, or 65.9% of revenues in
2002, compared to $4.5 million, or 64.4% in 2001. The increase as a percentage
of revenues was primarily attributable to the termination of one of the
Company's Puerto Rico contracts in December 2001 which had a lower than
segment-average salary cost as a percentage of revenues.
OTHER OPERATING EXPENSES
Other operating expenses were $1.6 million, or 21.3% of revenues in
2002, compared to $1.5 million, or 21.6% of revenues in 2001. Other operating
expenses did not fluctuate significantly as a percentage of revenue when
compared to the same period in the prior year.
PROVISION FOR DOUBTFUL ACCOUNTS
The provision for doubtful accounts was $0.2 million, or 3.3% of
revenues in 2002, compared to $0.4 million, or 5.5% in 2001. Fluctuations in the
provision for doubtful accounts relate primarily to the Company's management
contracts in Puerto Rico. As a result, the decrease of the Company's Puerto Rico
operations in relation to the total management contract segment has resulted in
the decrease in the provision for doubtful accounts as a percentage of revenue.
13
RAMSAY YOUTH SERVICES, INC. AND SUBSIDIARIES
DEPRECIATION AND AMORTIZATION
Depreciation and amortization was $0.04 million, or 0.5% of revenues in
2002, compared to $0.03 million, or 0.4% of revenues in 2001. Depreciation and
amortization did not fluctuate significantly as a percentage of revenue when
compared to the same period in the prior year.
CORPORATE AND OTHER
The following table states for the periods indicated total revenues and
corporate office expenses in dollar and percentage of revenue terms (dollars in
thousands):
QUARTER ENDED JUNE 30,
---------------------------------------------------
2002 2001
------------------------- -------------------------
Revenues:
Owned operations....................... $29,330 $26,855
Management contracts................... 7,379 6,985
------------ ------------
Total revenues....................... $36,709 100.0% $33,840 100.0%
Expenses:
Salaries, wages and benefits........... 1,271 3.5% 721 2.1%
Other operating expenses............... 588 1.6% 772 2.3%
Depreciation and amortization.......... 27 0.1% 41 0.1%
Investment and other financing charges. 605 1.6% 866 2.6%
Provision for income taxes............. (7,192) (19.6%) 125 0.4%
SALARIES, WAGES AND BENEFITS
Corporate salaries, wages and benefits were $1.3 million, or 3.5% of
revenues in 2002, compared to $0.7 million, or 2.1% in 2001. The increase as a
percentage of revenues is primarily attributable to a $0.5 million charge for
the restructuring of an employment contract for one of the Company's executives
during the quarter ended June 30, 2002.
OTHER OPERATING EXPENSES
Other operating expenses were $0.6 million, or 1.6% of revenues in
2002, compared to $0.8 million, or 2.3% of revenues in 2001. The decrease as a
percentage of revenues is primarily attributable to a reduction in travel and
various other corporate office expenses.
DEPRECIATION AND AMORTIZATION
Depreciation and amortization was $0.03 million, or 0.1% of revenues in
2002, compared to $0.04 million, or 0.1% of revenues in 2001. Depreciation and
amortization did not fluctuate as a percentage of revenue when compared to the
same period in the prior year.
INTEREST AND OTHER FINANCING CHARGES
Interest and other financing charges was $0.6 million, or 1.6% of total
consolidated revenues in 2002, compared to $0.9 million, or 2.6% of total
consolidated revenues in 2001. The decrease in interest and other financing
charges is primarily attributable to a decrease in the Company's average
outstanding borrowings and a decrease in interest rates on the Company's Senior
Credit Facility between periods.
14
RAMSAY YOUTH SERVICES, INC. AND SUBSIDIARIES
PROVISION FOR INCOME TAXES
During the quarter ended June 30, 2002, the Company reversed $7.4
million of the valuation allowance placed on its deferred tax assets relating to
temporary differences that will result in deductible amounts in future years and
net operating loss carryforwards. Future realization of the tax benefit of an
existing deductible temporary difference or carryforward ultimately depends on
the existence of sufficient taxable income within the carryforward period
available under tax law. The Company has reversed a portion of the valuation
allowance because, based on a current review of available objective and
verifiable evidence, it is management's judgment that a portion of the tax
benefits associated with the Company's deferred tax assets will more likely than
not be realized. Such evidence includes updated expectations about sufficient
future years' taxable income which reflect the continuing improvement in the
Company's operating results.
The Company has available federal net operating loss carryforwards
totaling approximately $33.0 million, which expire in the years 2010 to 2018.
The Company also has available alternative carryforwards of approximately
$1.2 million which may be carried forward indefinitely.
The net deferred tax asset represents management's best estimate of the
tax benefits that will more likely than not be realized in future years at each
reporting date. However, there can be no assurance that the Company can generate
taxable income to realize the net deferred tax asset. In addition, under the Tax
Reform Act of 1986, certain future changes in ownership resulting from the sale
of stock may limit the amount of net operating loss carryforwards that can be
utilized on an annual basis. The Company has and continues to evaluate
compliance relating to the utilization of the net operating loss carryforwards,
and believes it has complied in all respects. A failure to meet the requirements
could result in a loss or limitation of the utilization of carryforwards, which
could have a material adverse effect on the Company's financial position and
results of operations in future periods.
SIX MONTHS ENDED JUNE 30, 2002 COMPARED TO SIX MONTHS ENDED JUNE 30, 2001
OWNED OPERATIONS SEGMENT
The following table states for the periods indicated the results of our
owned operations in dollar and percentage of revenue terms (dollars in
thousands):
SIX MONTHS ENDED JUNE 30,
-------------------------------------------
2002 2001
------------------ ------------------
Revenues ......................... $58,255 100.0% $52,179 100.0%
Expenses:
Salaries, wages and benefits .. 33,636 57.7% 30,272 58.0%
Other operating expenses ...... 15,301 26.3% 14,161 27.2%
Provision for doubtful accounts 985 1.7% 1,415 2.7%
Depreciation and amortization . 1,125 1.9% 1,051 2.0%
------- ----- ------- -----
Total operating expenses .... 51,047 87.6% 46,899 89.9%
------- ----- ------- -----
Income from operations ........... $ 7,208 12.4% $ 5,280 10.1%
======= ===== ======= =====
REVENUES
Revenues increased by 11.6%, or $6.1 million, to $58.3 million in 2002
compared to $52.2 million in 2001. The increase in revenues during the period is
primarily a result of (i) an increase of 4.6% in resident days (from 175,291
days in 2001 to 183,286 days in 2002) resulting in an increase in revenues of
$4.9 million, (ii) an increase in the rates at three of the Company's facilities
which increased revenues by $1.1 million, and (iii) a positive cost report audit
which resulted in an increase in revenue of $0.5 million. The aforementioned
15
RAMSAY YOUTH SERVICES, INC. AND SUBSIDIARIES
increases were partially offset by the closure of a facility in Puerto Rico,
which decreased revenues by $0.4 million.
SALARIES, WAGES AND BENEFITS
Salaries, wages and benefits were $33.6 million, or 57.7% of revenues
in 2002, compared to $30.3 million, or 58.0% in 2001. Salaries, wages and
benefits did not fluctuate significantly as a percentage of revenue when
compared to the same period last year.
OTHER OPERATING EXPENSES
Other operating expenses were $15.3 million, or 26.3% of revenues in
2002, compared to $14.2 million, or 27.2% of revenues in 2001. The decrease as a
percentage of revenues was primarily a result of operating efficiencies gained
by the Company as a result of its new contracts in the Florida market.
PROVISION FOR DOUBTFUL ACCOUNTS
The provision for doubtful accounts was $1.0 million, or 1.7% of
revenues in 2002, compared to $1.4 million, or 2.7% in 2001. The decrease as a
percentage of revenues was primarily a result of additional reserves recorded in
2001 related to payment delays experienced by the Company from one of its payors
in its Jacksonville, North Carolina facility, as well as reserves recorded by
the Company related to financial difficulties experienced by one of the
Company's former referral sources to its Nevada, Missouri facility.
DEPRECIATION AND AMORTIZATION
Depreciation and amortization was $1.1 million or 1.9% of revenues in
2002, compared to $1.1 million, or 2.0% of revenues in 2001. Depreciation and
amortization during the six months ended June 30, 2002 did not fluctuate
significantly as a percentage of revenue when compared to the same period in the
prior year.
MANAGEMENT CONTRACT SEGMENT
The following table states for the periods indicated the results of our
management contract operations in dollar and percentage of revenue terms
(dollars in thousands):
SIX MONTHS ENDED JUNE 30,
-------------------------------------------
2002 2001
------------------ ------------------
Revenues ......................... $14,285 100.0% $13,450 100.0%
Expenses:
Salaries, wages and benefits .. 9,528 66.7% 8,789 65.3%
Other operating expenses ...... 2,989 20.9% 2,913 21.7%
Provision for doubtful accounts 453 3.2% 504 3.8%
Depreciation and amortization . 69 0.5% 56 0.4%
------- ----- ------- -----
Total operating expenses .... 13,039 91.3% 12,262 91.2%
------- ----- ------- -----
Income from operations ........... $ 1,246 8.7% $ 1,188 8.8%
======= ===== ======= =====
REVENUES
Revenues increased by 6.2%, or $0.8 million, to $14.3 million in 2002
compared to $13.5 million in 2001. The revenue increase is a result of (i) the
full six-month effect of the expansion of two programs in June 2001, which
increased revenues by $1.9 million, and (ii) a new contract awarded to the
Company which began operations on February 18, 2002 and generated $0.9 million
in revenues during the six-month period. The aforementioned increases were
partially offset
16
RAMSAY YOUTH SERVICES, INC. AND SUBSIDIARIES
by the termination of one of the Company's Puerto Rico contracts in December
2001, which decreased revenues by $1.4 million and a decrease in billings at two
of the Company's Florida contracts which decreased revenues by $0.6 million.
SALARIES, WAGES AND BENEFITS
Salaries, wages and benefits were $9.5 million, or 66.7% of revenues in
2002, compared to $8.8 million, or 65.3% in 2001. The increase as a percentage
of revenues was primarily attributable to the termination of one of the
Company's Puerto Rico contracts in December 2001 which had a lower than
segment-average salary cost as a percentage of revenues.
OTHER OPERATING EXPENSES
Other operating expenses were $3.0 million or 20.9% of revenues in
2002, compared to $2.9 million or 21.7% of revenues in 2001. Other operating
expenses did not fluctuate significantly as a percentage of revenue when
compared to the same period in the prior year.
PROVISION FOR DOUBTFUL ACCOUNTS
The provision for doubtful accounts was $0.5 million, or 3.2% of
revenues in 2002, compared to $0.5 million, or 3.8% in 2001. Fluctuations in the
provision for doubtful accounts relate primarily to the Company's management
contracts in Puerto Rico. As a result, the decrease of the Company's Puerto Rico
operations in relation to the total management contract segment has resulted in
the decrease in the provision for doubtful accounts as a percentage of revenues.
DEPRECIATION AND AMORTIZATION
Depreciation and amortization was $0.07 million, or 0.5% of revenues in
2002, compared to $0.06 million, or 0.4% of revenues in 2001. Depreciation and
amortization did not fluctuate significantly as a percentage of revenues.
CORPORATE AND OTHER
The following table states for the periods indicated total revenues and
corporate office expenses in dollar and percentage of revenue terms (dollars in
thousands):
SIX MONTHS ENDED JUNE 30,
---------------------------------------------------
2002 2001
------------------------- -------------------------
Revenues:
Owned operations....................... $58,255 $52,179
Management contracts................... 14,285 13,450
------------ ------------
Total revenues....................... $72,540 100.0% $65,629 100.0%
Expenses:
Salaries, wages and benefits........... 1,871 2.6% 1,502 2.3%
Other operating expenses............... 1,255 1.7% 1,556 2.4%
Depreciation and amortization.......... 55 0.1% 78 0.1%
Interest and other financing charges... 1,295 1.8% 1,851 2.8%
Asset impairment charges............... 125 0.2% -- 0.0%
Provision for income taxes............. (6,978) (9.6%) 301 0.5%
17
RAMSAY YOUTH SERVICES, INC. AND SUBSIDIARIES
SALARIES, WAGES AND BENEFITS
Corporate salaries, wages and benefits were $1.9 million, or 2.6% of
revenues in 2002, compared to $1.5 million, or 2.3% in 2001. The increase as a
percentage of revenues is attributable to a $0.5 million charge for the
restructuring of an employment contract for one of the Company's executives.
OTHER OPERATING EXPENSES
Other operating expenses were $1.3 million, or 1.7% of revenues in
2002, compared to $1.6 million, or 2.4% of revenues in 2001. The decrease as a
percentage of revenues is primarily attributable to a reduction in travel and
various other corporate office expenses.
DEPRECIATION AND AMORTIZATION
Depreciation and amortization was $0.06 million, or 0.1% of revenues in
2002, compared to $0.08 million, or 0.1% of revenues in 2001. Depreciation and
amortization did not fluctuate as a percentage of revenue when compared to the
same period in the prior year.
INTEREST AND OTHER FINANCING CHARGES
Interest and other financing charges was $1.3 million, or 1.8% of total
consolidated revenues in 2002, compared to $1.9 million, or 2.8% of total
consolidated revenues in 2001. The decrease in interest and other financing
charges is primarily attributable to a decrease in the Company's average
outstanding borrowings and a decrease in interest rates on the Company's Senior
Credit Facility between periods.
PROVISION FOR INCOME TAXES
During the six months ended June 30, 2002, the Company reversed
$7.4 million of the valuation allowance placed on its deferred tax
assets relating to temporary differences that will result in deductible amounts
in future years and net operating loss carryforwards. Future realization of the
tax benefit of an existing deductible temporary difference or carryforward
ultimately depends on the existence of sufficient taxable income within the
carryforward period available under tax law. The Company has reversed a portion
of the valuation allowance because, based on a current review of available
objective and verifiable evidence, it is management's judgment that a portion
of the tax benefits associated with the Company's deferred tax assets will more
likely than not be realized. Such evidence includes updated expectations about
sufficient future years' taxable income which reflect the continuing
improvement in the Company's operating results.
The Company has available federal net operating loss carryforwards
totaling approximately $33.0 million, which expire in the years 2010 to 2018.
The Company also has available alternative carryforwards of approximately $1.2
million which may be carried forward indefinitely.
The net deferred tax asset represents management's best estimate of
the tax benefits that will more likely than not be realized in future years at
each reporting date. However, there can be no assurance that the Company can
generate taxable income to realize the net deferred tax asset. In addition,
under the Tax Reform Act of 1986, certain future changes in ownership resulting
from the sale of stock may limit the amount of net operating loss carryforwards
that can be utilized on an annual basis. The Company has and continues to
evaluate compliance relating to the utilization of the net operating loss
carryforwards, and believes it has complied in all respects. A failure to meet
the requirements could result in a loss or limitation of the utilization of
carryforwards, which could have a material adverse effect on the Company's
financial position and results of operations in future periods.
NEW ACCOUNTING REQUIREMENTS
In July 2001, the Financial Accounting Standards Board ("FASB") issued
Statement No. 141, ACCOUNTING FOR BUSINESS COMBINATIONS, and Statement No. 142,
GOODWILL AND OTHER INTANGIBLE ASSETS. These statements modify accounting for
business combinations after June 30, 2001 and will affect the Company's
treatment of goodwill and other intangible assets at the start of fiscal year
2002. The statements require that goodwill existing at the date of adoption be
reviewed for possible impairment and that impairment tests be periodically
repeated, with impaired assets written-down to fair value. Additionally,
existing goodwill and intangible assets must be assessed and classified
consistent with the statements' criteria. Intangible assets with estimated
useful lives will continue to be amortized over those periods. Amortization of
goodwill and intangible assets with indeterminate lives will cease. Under this
Statement, initial testing of goodwill must be conducted within six months of
adoption. The Company has adopted this Statement, completed the testing of
goodwill and determined that there is no impairment of goodwill as of January 1,
2002. The Company recorded amortization of goodwill expense of $31,000 for the
quarter ended June 30, 2001 and $83,000 for the six months ended June 30, 2001.
In July 2001, the FASB issued Statement No. 143, ACCOUNTING FOR ASSET
RETIREMENT OBLIGATIONS. This Statement requires that an asset retirement cost
should be capitalized as part of the cost of the related long-lived asset and
subsequently allocated to expense using a systematic and rational method. This
18
RAMSAY YOUTH SERVICES, INC. AND SUBSIDIARIES
Statement is required to be adopted in fiscal years beginning after June 15,
2002. The Company does not anticipate a significant impact to the results of
operations from the adoption of this Statement.
In October 2001, the FASB issued Statement No. 144, ACCOUNTING FOR THE
IMPAIRMENT OR DISPOSAL OF LONG-LIVED ASSETS. This Statement supersedes Statement
No. 121 but retains many of its fundamental provisions. Additionally, this
Statement expands the scope of discontinued operations to include more disposal
transactions. The provisions of this Statement are effective for the Company
with the beginning of fiscal year 2002. The Company has determined that there is
no financial statement impact related to the adoption of this Statement.
In April 2002, the FASB issued Statement No. 145, RESCISSION OF FASB
STATEMENTS NO. 4, 44, AND 64, AMENDMENT OF FASB STATEMENT NO. 13, AND TECHNICAL
CORRECTION. This Statement eliminates extraordinary accounting treatment for
reporting gain or loss on debt extinguishment, and amends other existing
authoritative pronouncements to make various technical corrections, clarifies
meanings, or describes their applicability under changed conditions. The
provisions of this Statement are effective for the Company with the beginning of
fiscal year 2003; however, early application of the Statement is encouraged.
Debt extinguishments reported as extraordinary items prior to scheduled or early
adoption of this Statement would be reclassified in most cases following
adoption. The Company does not anticipate a significant impact on its results of
operations from adopting this Statement.
In June 2002, the FASB issued Statement No. 146, ACCOUNTING FOR COSTS
ASSOCIATED WITH EXIT OR DISPOSAL ACTIVITIES. This Statement requires recording
costs associated with exit or disposal activities at their fair values when a
liability has been incurred. Under previous guidance, certain exit costs were
accrued upon management commitment to an exit plan. Adoption of this Statement
is required with the beginning of fiscal year 2003. The Company has not yet
completed its evaluation of the impact of adopting this Statement.
LIQUIDITY AND CAPITAL RESOURCES
The Company's primary liquidity needs are for working capital, capital
expenditures, and debt service. The Company's primary sources of liquidity are
cash flows from operations and borrowings under its revolving credit line.
At June 30, 2002 and December 31, 2001, the Company had $13.7 million
and $13.1 million, respectively, in working capital and $1.1 million and $0.8
million, respectively, in cash and cash equivalents. Working capital as of June
30, 2002 consisted primarily of $1.1 million in cash and cash equivalents, $24.8
million in accounts receivable and $5.8 million in other current assets, net of
$18.0 million in current liabilities. The increase in working capital between
periods is primarily a result of an increase in accounts receivable resulting
from new programs started during 2002, partially offset by an increase in
current liabilities resulting primarily from year end timing differences in the
payment of certain liabilities.
Net cash provided by operating activities increased to $5.0 million
during the six months ended June 30, 2002. The increase in cash provided by
operating activities was primarily attributable to the increase in net income
during the period and favorable variances in operating assets and liabilities.
Cash used in investing activities was $1.4 million for the six months
ended June 30, 2002 as compared to cash used in investing activities of $0.7
million during the six months ended June 30, 2001. The increase in investing
activities was primarily attributable to $1.6 million used in capital
expenditures, offset by approximately $0.2 million in proceeds from the sale of
certain assets.
Net cash used in financing activities was $3.2 million for the six
months ended June 30, 2002 as compared to cash provided by financing activities
of $1.2 million during the six months ended June 30, 2001. Cash used in
financing activities in 2002 related primarily to repayments of borrowings under
the Company's term loan offset by proceeds from borrowing under the revolving
credit facility. During 2001, cash provided by financing activities related
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RAMSAY YOUTH SERVICES, INC. AND SUBSIDIARIES
primarily to repayments of borrowings under the Company's term loan offset by
proceeds from borrowing under the revolving credit facility
The Company has experienced delays in the collection of receivables
from its contracts in Puerto Rico. As of June 30, 2002, the Company had
approximately $3.9 million in outstanding receivables due from the Commonwealth
of Puerto Rico, of which $1.5 million was over 120 days past due. Reserves
against outstanding Puerto Rico receivables were $1.4 million as of June 30,
2002. The Company and its advisors are in active discussions with the Government
of Puerto Rico with respect to the payment of the outstanding receivables. The
Company believes that it has fully performed its obligations under the Puerto
Rico contracts and is entitled to receive payment of these receivables in full.
Although the Company has been advised by its legal counsel that the net
receivables due on the Puerto Rico contracts are collectable, there can be no
assurances that future transactions or events will not result in the need for
additional reserves for these accounts receivable. If the Company were to record
additional reserves, it would adversely affect earnings in the period in which
the reserves are recorded.
The Government of Puerto Rico has informed the Company that, as a
result of budgetary constraints, it will cancel various contracts with private
sector providers. In connection therewith, the Company has agreed with the
Government of Puerto Rico to terminate its contract to provide educational
services to juveniles in Puerto Rico effective August 14, 2002. On April 16,
2002, the Company and the Government of Puerto Rico agreed to the cancellation
of the Company's contract to provide a 20-bed specialized mental health
treatment program for youth referred by the Mental Health and Anti-Addiction
Services Administration of Puerto Rico. Total revenues and operating losses from
these contracts during the six-month period ended June 30, 2002 were $1.7
million and ($0.4) million, respectively.
Management of the Company believes that it can meet its current cash
requirements and future identifiable needs with internally generated funds from
operations and funds available under its Senior Credit Facility. However, if the
Company should need to obtain liquidity through other sources of debt or equity,
the following factors, in addition to the risk factors discussed in the
Company's Form 10-K for December 31, 2001, should be considered:
o ABILITY TO RAISE ADDITIONAL CAPITAL. Although the Company believes that it
can obtain additional liquidity, there can be no assurances that the
Company will be able to raise debt or equity capital through other sources,
or if obtained, that it will be on terms acceptable to the Company. The
incurring or assumption by the Company of additional indebtedness could
result in the issuance of additional equity and/or debt, which could have a
dilutive effect on current shareholders and a significant effect on the
Company's operations.
o ABILITY TO BORROW FUNDS UNDER SENIOR CREDIT FACILITY. The Company's ability
to borrow funds under its Senior Credit Facility may be terminated if the
Company fails to comply with the restrictive financial and operating
covenants contained in the Senior Credit Facility. If the Company is unable
to operate its business within the covenants specified in the Senior Credit
Facility, the Company's ability to obtain future amendments to the
covenants is not assured, and the Company's ability to make borrowings
required to operate its business could be restricted or terminated. Such a
restriction or termination would have a material adverse effect on the
Company's liquidity.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
While the Company is exposed to changes in interest rates as a result
of its outstanding variable rate debt, the Company does not currently utilize
any derivative financial instruments related to its interest rate exposure. The
Company believes that its exposure to market risk will not result in a material
adverse effect on the Company's consolidated financial condition, results of
operations or liquidity.
20
RAMSAY YOUTH SERVICES, INC. AND SUBSIDIARIES
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The Company is party to certain claims, suits and complaints, whether
arising from the acts or omissions of its employees, providers or others, which
arise in the ordinary course of business. The Company has established reserves
at June 30, 2002 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.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITIES HOLDERS
On May 23, 2002, the Company held its Annual Meeting of Stockholders
(the "Meeting"). The matters voted upon at the Meeting included (i) the election
of seven directors to hold office until the Company's 2002 Annual Meeting of
Stockholders, and (ii) the ratification of the selection of Deloitte & Touche
LLP as the Company's independent auditors for fiscal year ending December 31,
2002.
The following nominees were elected as indicated in the proxy statement
pursuant to the vote of the Company's stockholders:
DIRECTORS VOTES FOR VOTES WITHHELD VOTES ABSTAINING
- --------------- -------------- ------------------ --------------------
Aaron Beam, Jr. 8,731,224 71,123 --
Peter J. Evans 8,731,359 70,988 --
Thomas M. Haythe 8,731,359 70,988 --
Luis E. Lamela 8,710,974 91,373 --
Paul J. Ramsay 8,710,793 91,554 --
Steven J. Shulman 8,731,224 71,123 --
Michael S. Siddle 8,731,178 71,169 --
The proposal to ratify the selection of Deloitte & Touche LLP as the
Company's independent auditors for fiscal year ending December 31, 2002 was
ratified by the Company's stockholders. Votes for the ratification were
8,799,702, votes against were 2,602 and votes abstaining were 43.
ITEM 5. OTHER INFORMATION
None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
The Exhibits required to be filed as part of this Quarterly
Report on Form 10-Q are as follows:
Exhibit 10.1 Second Amendment to Employment Agreement dated July 30, 2002 by and between
the Company and Luis Lamela.......................................................
Exhibit 10.2 Second Amendment to Employment Agreement dated July 30, 2002 by and between
the Company and Bert Cibran.......................................................
Exhibit 10.3 Letter Agreement dated July 30, 2002 by and between the Company and Marcio C.
Cabrera...........................................................................
Exhibit 10.4 Letter Agreement dated July 30, 2002 by and between the Company and Jorge Rico....
Exhibit 10.5 Letter Agreement dated July 30, 2002 by and between the Company and Isabel M.
Diaz..............................................................................
Exhibit 11 Computation of Net Income Per Share...............................................
Exhibit 99.1 Chief Executive Officer Certification Pursuant to 18 U.S.C. Section 1350..........
Exhibit 99.2 Chief Financial Officer Certification Pursuant to 18 U.S.C. Section 1350..........
Exhibit 99.3 Press Release dated July 31, 2002.................................................
Exhibit 99.4 Press Release dated August 2, 2002................................................
(b) Current Reports on Form 8-K
The Company did not file any Current Reports on Form 8-K
during the quarter ended June 30, 2002.
21
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned thereupon duly authorized.
RAMSAY YOUTH SERVICES, INC.
Registrant
/s/ MARCIO C. CABRERA
----------------------------------
Marcio C. Cabrera
Executive Vice President and
Chief Financial Officer
Date: August 9, 2002
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