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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
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2003
OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM ______ TO ______
COMMISSION FILE NUMBER 0-13849
RAMSAY YOUTH SERVICES, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 63-0857352
(STATE OR OTHER JURISDICTION OF INCORPORATION OR ORGANIZATION) (I.R.S. EMPLOYER IDENTIFICATION NO.)
COLUMBUS CENTER
ONE ALHAMBRA PLAZA, SUITE 750
CORAL GABLES, FLORIDA 33134
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE (305) 569-6993
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 [ ].
Indicate by check mark whether the registrant is an accelerated filer
(as defined in Rule 12b-2 of the Exchange Act). Yes [ ] No [X]
The number of shares of the Registrant's Common Stock outstanding as of
May 9, 2003, follows:
Common Stock, par value $0.01 per share - 9,310,825 shares
RAMSAY YOUTH SERVICES, INC. AND SUBSIDIARIES
FORM 10-Q
INDEX
PAGE
----
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements.................................................................. 1
Condensed Consolidated Balance Sheets (unaudited) - March 31, 2003 and
December 31, 2002..................................................................... 2
Condensed Consolidated Statements of Operations (unaudited) - Quarters ended
March 31, 2003 and 2002............................................................... 3
Condensed Consolidated Statements of Cash Flows (unaudited) - Quarters ended
March 31, 2003 and 2002............................................................... 4
Notes to Condensed Consolidated Financial Statements (unaudited) - March 31, 2003.............. 5
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations............................................................. 12
Item 3. Quantitative and Qualitative Disclosures About Market Risk............................ 18
Item 4. Controls and Procedures............................................................... 18
PART II. OTHER INFORMATION
Item 1. Legal Proceedings..................................................................... 18
Item 2. Changes in Securities and Use of Proceeds............................................. 18
Item 3. Defaults upon Senior Securities....................................................... 18
Item 4. Submission of Matters to a Vote of Securities Holders................................. 18
Item 5. Other Information..................................................................... 19
Item 6. Exhibits and Reports on Form 8-K...................................................... 19
SIGNATURES..................................................................................... 20
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
RAMSAY YOUTH SERVICES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
MARCH 31, DECEMBER 31,
2003 2002
----------- -----------
ASSETS
Current assets
Cash and cash equivalents........................................... $ 328,000 $ 796,000
Accounts receivable, less allowances for doubtful accounts of
$2,449,000 and $2,327,000 at March 31, 2003 and December 31,
2002, respectively................................................ 21,089,000 20,771,000
Other current assets................................................ 7,007,000 7,301,000
----------- -----------
Total current assets.............................................. 28,424,000 28,868,000
Other assets
Cash held in trust.................................................. 870,000 1,026,000
Cost in excess of net asset value of purchased businesses and
other intangible assets, net...................................... 2,286,000 2,263,000
Unamortized loan costs, net......................................... 693,000 754,000
Deferred tax assets................................................. 6,135,000 6,407,000
----------- -----------
Total other assets................................................ 9,984,000 10,450,000
Property and equipment
Land................................................................ 4,615,000 4,635,000
Buildings and improvements.......................................... 39,023,000 38,770,000
Equipment, furniture and fixtures................................... 13,594,000 13,439,000
----------- -----------
57,232,000 56,844,000
Less accumulated depreciation....................................... 23,500,000 22,865,000
----------- -----------
33,732,000 33,979,000
----------- -----------
$72,140,000 $73,297,000
=========== ===========
SEE NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.
1
RAMSAY YOUTH SERVICES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
MARCH 31, DECEMBER 31,
2003 2002
------------- -------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Accounts payable.............................................................. $ 4,504,000 $ 7,056,000
Accrued wages and other accrued liabilities .................................. 8,286,000 6,756,000
Amounts due to third-party contractual agencies............................... 1,145,000 868,000
Current portion of long-term debt............................................. 3,856,000 3,938,000
------------- -------------
Total current liabilities................................................... 17,791,000 18,618,000
Noncurrent liabilities
Other accrued liabilities..................................................... 3,675,000 3,724,000
Long-term debt, less current portion.......................................... 13,061,000 13,865,000
------------- -------------
Total liabilities........................................................... 34,527,000 36,207,000
------------- -------------
Commitments and contingencies
Stockholders' equity
Common stock $.01 par value--authorized 30,000,000 shares; issued 9,498,009
shares at March 31, 2003 and 9,491,681 shares at December 31, 2002.......... 95,000 95,000
Additional paid-in capital.................................................... 127,169,000 127,143,000
Accumulated deficit........................................................... (85,752,000) (86,249,000)
Treasury stock--193,850 common shares at March 31, 2003 and
December 31, 2002, at cost.................................................. (3,899,000) (3,899,000)
------------- -------------
Total stockholders' equity............................................ 37,613,000 37,090,000
------------- -------------
$ 72,140,000 $ 73,297,000
============= =============
SEE NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.
2
RAMSAY YOUTH SERVICES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
QUARTER ENDED
MARCH 31,
------------------------------
2003 2002
----------- -----------
Revenues ................................................. $36,527,000 $35,831,000
Operating Expenses:
Salaries, wages and benefits .......................... 23,571,000 22,196,000
Other operating expenses .............................. 10,554,000 9,692,000
Provision for doubtful accounts ....................... 402,000 720,000
Depreciation .......................................... 641,000 625,000
Asset impairment charges .............................. -- 125,000
----------- -----------
Total operating expenses ................................. 35,168,000 33,358,000
----------- -----------
Income from operations ................................... 1,359,000 2,473,000
Non-operating expenses:
Interest and other financing charges, net ............. 557,000 690,000
----------- -----------
Total non-operating expenses, net ................... 557,000 690,000
Income before income taxes ............................... 802,000 1,783,000
Provision for income taxes ............................... 305,000 214,000
----------- -----------
Net income ............................................... $ 497,000 $ 1,569,000
=========== ===========
Income attributable to common stockholders ............... $ 497,000 $ 1,569,000
=========== ===========
Income per common share:
Basic ................................................. $ 0.05 $ 0.17
=========== ===========
Diluted ............................................... $ 0.04 $ 0.14
=========== ===========
Weighted average number of common shares outstanding:
Basic ................................................. 9,298,000 9,264,000
=========== ===========
Diluted ............................................... 11,385,000 11,390,000
=========== ===========
SEE NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.
3
RAMSAY YOUTH SERVICES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
QUARTER ENDED
MARCH 31,
--------------------------------
2003 2002
----------- -----------
Cash flows from operating activities:
Net income................................................ $ 497,000 $ 1,569,000
Adjustments to reconcile net income to net cash provided..
by operating activities:
Depreciation............................................ 641,000 625,000
Amortization, including loan costs and debt discount ... 124,000 134,000
Provision for doubtful accounts......................... 402,000 720,000
Asset impairment charges................................ -- 125,000
Gain on sale of assets.................................. (1,000) --
Change in operating assets and liabilities:
Accounts receivable................................... (720,000) (2,863,000)
Intangible and other assets........................... 271,000 (194,000)
Deferred tax assets................................... 272,000 --
Accounts payable...................................... (2,552,000) (51,000)
Accrued salaries, wages and benefits and other
liabilities......................................... 1,481,000 2,254,000
Amounts due to third-party contractual agencies....... 277,000 (135,000)
----------- -----------
Total adjustments................................... 195,000 615,000
----------- -----------
Net cash provided by operating activities......... 692,000 2,184,000
----------- -----------
Cash flows from investing activities:
Net proceeds from the sale of assets...................... 20,000 155,000
Expenditures for property and equipment................... (413,000) (876,000)
Cash held in trust........................................ 156,000 --
----------- -----------
Net cash used in investing activities............. (237,000) (721,000)
----------- -----------
Cash flows from financing activities:
Loan costs................................................ (35,000) (53,000)
Proceeds from issuance of debt and warrants............... 80,000 1,500,000
Payments on debt.......................................... (994,000) (3,050,000)
Net proceeds from exercise of options and stock purchases. 26,000 44,000
Registration costs........................................ -- (13,000)
----------- -----------
Net cash used in financing activities............. (923,000) (1,572,000)
----------- -----------
Net decrease in cash and cash equivalents.................... (468,000) (109,000)
Cash and cash equivalents at beginning of period............. 796,000 752,000
----------- -----------
Cash and cash equivalents at end of period................... $ 328,000 $ 643,000
=========== ===========
Cash paid during the period for:
Interest.................................................. $ 468,000 $ 595,000
=========== ===========
Income taxes.............................................. $ 108,000 $ 40,000
=========== ===========
SEE NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.
4
RAMSAY YOUTH SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
MARCH 31, 2003
NOTE 1. BASIS OF PRESENTATION
Ramsay Youth Services, Inc. (the "Company") is a provider of behavioral
health care treatment programs and services focused on at-risk and special-needs
youth. The Company offers a full spectrum of treatment programs and services in
residential and non-residential settings. The programs and services are offered
through a network of Company-owned or leased facilities ("Owned Operations") and
state or government-owned facilities ("Management Contract Operations"). The
Company is headquartered in Coral Gables, Florida and has operations in Alabama,
Florida, Georgia, Hawaii, Missouri, Michigan, Nevada, North Carolina, South
Carolina, Texas, Utah and Puerto Rico. The Company also provides a limited range
of adult behavioral healthcare services at certain of its locations in response
to community demand.
The 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 accounting principles generally accepted in
the United States of America 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 ended March 31, 2003 are not
necessarily indicative of the results that may be expected for the year. The
balance sheet at December 31, 2002 has been derived from the audited financial
statements at that date. The preparation of financial statements in conformity
with accounting principles generally accepted in the United States of America
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, 2002.
NOTE 2. TRANSACTIONS WITH AFFILIATES
At March 31, 2003, three corporate affiliates of Mr. Paul J. Ramsay,
Chairman of the Board of the Company, owned an aggregate voting interest in the
Company of approximately 58%, as follows: (i) Ramsay Holdings HSA Limited owned
9.7% of the outstanding Common Stock of the Company, (ii) Ramsay Holdings Pty.
Ltd. owned approximately 40.1% of the outstanding Common Stock of the Company
and (iii) Paul Ramsay Hospitals Pty. Limited ("Ramsay Hospitals") owned
approximately 8.1% of the outstanding Common Stock of the Company.
In September 2002, the Company entered into a lease agreement for a
110-bed facility in Macon, Georgia with a corporate affiliate of Mr. Paul J.
Ramsay, Chairman of the Board of the Company and beneficial owner of
approximately 61% of the outstanding Common Stock of the Company (the "Macon
Lease"). The lease has a primary term of five years and two successive five-year
renewal options. The lease payments are $432,000 per annum and at each renewal
option is subject to adjustments based on the change in the Consumer Price Index
during the preceding period. In accordance with the terms of the lease, the
Company is responsible for all costs of ownership, including taxes, insurance,
maintenance and repairs. In addition, the Company has the option to purchase the
facility at any time for an amount equal to the aggregate cost of the facility
(as defined in the lease agreement) adjusted for the increase in the Consumer
Price Index between the commencement of the lease and the purchase date.
5
RAMSAY YOUTH SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
In December 1999, the Company entered into an agreement with one of its
directors to serve as a senior advisor in connection with legal issues,
acquisitions, financings and other transactions involving the Company. During
the quarters ended March 31, 2003 and 2002, the Company paid the director
$15,000 in connection with these advisory services.
NOTE 3. LONG-TERM DEBT
The Company's long-term debt is as follows:
MARCH 31, DECEMBER 31,
2003 2002
----------- -----------
Variable rate Term Loan, due September 1, 2004........... $ 5,195,000 $ 6,102,000
Revolver, due October 29, 2004........................... 1,991,000 1,911,000
Acquisition Loan, due October 29, 2004................... 208,000 287,000
Subordinated Note (net of discount of $289,000), due
January 24, 2007...................................... 4,725,000 4,711,000
Subordinated Note (net of discount of $301,000), due
January 24, 2007...................................... 4,714,000 4,699,000
Other.................................................... 84,000 93,000
----------- -----------
16,917,000 17,803,000
Less current portion..................................... 3,856,000 3,938,000
----------- -----------
$13,061,000 $13,865,000
=========== ===========
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 payment of any
outstanding principal balance due on September 1, 2004 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) and an
acquisition loan commitment of up to $6,000,000 (the "Acquisition Loan").
On September 6, 2002, the Company's senior credit facility and
subordinated debt was amended to consent to a commercial lease for the Macon
Facility between the Company and a corporate affiliate of Mr. Paul J. Ramsay. On
March 14, 2003, the Senior Credit Facility was amended, effective December 31,
2002, to extend the maturity date to October 29, 2004.
At March 31, 2003, the Company was in compliance with all covenants
stipulated in the Senior Credit Facility.
6
RAMSAY YOUTH SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 4. EARNINGS PER SHARE
The following table sets forth the computation of basic and diluted
earnings per share:
QUARTER ENDED MARCH 31,
------------------------------
2003 2002
----------- -----------
Numerator:
Numerator for basic earnings per share - income
attributable to common stockholders ............ $ 497,000 $ 1,569,000
Effect of dilutive securities ...................... -- --
----------- -----------
Numerator for diluted earnings per share -
income attributable to common stockholders
after assumed conversions ...................... $ 497,000 $ 1,569,000
=========== ===========
Denominator:
Denominator for basic earnings per share -
weighted-average shares .......................... 9,298,000 9,264,000
Effect of dilutive securities:
Employee stock options and warrants .............. 2,087,000 2,126,000
----------- -----------
Dilutive potential common shares ................... 2,087,000 2,126,000
----------- -----------
Denominator for diluted earnings per share -
adjusted weighted-average shares and
assumed conversions ............................ 11,385,000 11,390,000
=========== ===========
Basic earnings per share .............................. $ 0.05 $ 0.17
=========== ===========
Diluted earnings per share ............................ $ 0.04 $ 0.14
=========== ===========
For the quarters March 31, 2003 and 2002, options and warrants
totalling 552,819 and 591,781, respectively, were excluded from the above
computation because their effect would be antidilutive.
NOTE 5. SEGMENT INFORMATION
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 is designed to provide 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 who are
assisted through this program have either transitioned out of a residential
treatment program, or do not require the intensive services of a residential
treatment program.
7
RAMSAY YOUTH SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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 or leased 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 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,
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.
8
RAMSAY YOUTH SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
QUARTER ENDED MARCH 31,
-------------------------------
2003 2002
------------ ------------
Segment revenue
Owned operations ................................... $ 29,117,000 $ 28,925,000
Management contracts ............................... 7,410,000 6,906,000
------------ ------------
Total consolidated revenues ........................... $ 36,527,000 $ 35,831,000
============ ============
Segment depreciation and amortization
Owned operations .................................... $ 583,000 $ 565,000
Management contracts ............................... 44,000 32,000
------------ ------------
627,000 597,000
Reconciling items
Corporate depreciation and amortization ............ 14,000 28,000
------------ ------------
Total consolidated depreciation and amortization ...... $ 641,000 $ 625,000
============ ============
SEGMENT PROFIT
Owned operations .................................... $ 2,666,000 $ 3,308,000
Management contracts ............................... 529,000 585,000
------------ ------------
3,195,000 3,893,000
Reconciling items
Corporate expenses ................................. (1,836,000) (1,295,000)
Asset impairment charges ........................... -- (125,000)
Interest and other financing charges ............... (557,000) (690,000)
------------ ------------
Total consolidated income before income taxes ......... $ 802,000 $ 1,783,000
============ ============
SEGMENT CAPITAL EXPENSES
Owned operations ................................... $ 381,000 $ 718,000
Management contracts ............................... 25,000 107,000
------------ ------------
406,000 825,000
Reconciling items
Corporate assets ................................... 7,000 51,000
------------ ------------
Total consolidated capital expenditures ............... $ 413,000 $ 876,000
============ ============
MARCH 31, 2003 DECEMBER 31, 2002
-------------- -----------------
Segment assets
Owned operations ................................... $ 58,182,000 $ 59,267,000
Management contracts ............................... 5,100,000 5,140,000
------------ ------------
Total segment assets .................................. 63,282,000 64,407,000
Reconciling items
Corporate assets ................................... 8,858,000 8,890,000
------------ ------------
Total consolidated assets ............................. $ 72,140,000 $ 73,297,000
============ ============
NOTE 6. ACCOUNTS RECEIVABLE
The Company has experienced delays in the collection of receivables
from its contracts in Puerto Rico. As of March 31, 2003, the Company had
approximately $2,000,000 in outstanding receivables due from the Commonwealth of
Puerto Rico, of which $1,100,000 was over 120 days past due. Reserves against
outstanding Puerto Rico receivables were $1,100,000 as of March 31, 2003. As of
May 9, 2003, the Company had collected approximately $0.4 million of the March
31, 2003 outstanding receivable balance, all of which related to receivables
under 120 days past due. The Company and its advisors are in active discussions
with the Government of Puerto Rico with respect to the payment of the
outstanding receivables. The Company believes that it has fully performed its
obligations under the Puerto
9
RAMSAY YOUTH SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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 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.
NOTE 7. RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
In July 2001, the Financial Accounting Standard Board ("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 did not have an impact
to its results of operations from the adoption of this Statement.
In April 2002, the FASB issued Statement No. 145, RESCISSION OF FASB
STATEMENTS NO. 4, 44, AND 64, AMENDMENT OF FASB STATEMENT NO. 13, AND TECHNICAL
CORRECTION. This Statement eliminates extraordinary accounting treatment for
reporting gain or loss on debt extinguishment, and amends other existing
authoritative pronouncements to make various technical corrections, clarifies
meanings, or describes their applicability under changed conditions. The
provisions of this Statement are effective for the Company with the beginning of
fiscal year 2003; however, early application of the Statement is encouraged.
Debt extinguishments reported as extraordinary items prior to scheduled or early
adoption of this Statement would be reclassified in most cases following
adoption. The Company did not have an impact to 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 did not have an
impact to its results of operations from adopting this Statement.
In November 2002, the FASB issued Financial Interpretation (FIN) No.
45, GUARANTOR'S ACCOUNTING AND DISCLOSURE REQUIREMENTS FOR GUARANTEES, INCLUDING
INDIRECT GUARANTEES OF INDEBTEDNESS OF OTHERS. FIN No. 45 clarifies and expands
on existing disclosure requirements for guarantees, including product
warranties. FIN No. 45 also requires recognition of a liability at fair value of
a company's obligations under certain guarantee contracts. The disclosure
requirements are effective for financial statements of interim or annual periods
ending after December 15, 2002. The initial recognition and measurement
provisions of FIN No. 45 are applied only on a prospective basis to guarantees
issued after December 31, 2002, irrespective of the guarantors' fiscal year-end.
The Company did not have an impact to its results from operations from the
adoption of this Statement.
In December 2002, the FASB issued Statement No. 148, ACCOUNTING FOR
STOCK-BASED COMPENSATION--TRANSITION AND DISCLOSURE, an amendment of FASB
Statement No. 123. This Statement provides alternative methods of transition for
a voluntary change to the fair value based method of accounting for stock-based
employee compensation. In addition, this Statement amends the disclosure
requirements of Statement 123 to require prominent disclosures in both annual
and interim financial statements about the method of accounting for stock-based
employee compensation and the effect of the method used on reported results. The
Company did not have an impact to the results of operations from the adoption of
this Statement.
In January 2003, the FASB issued FIN No. 46, Consolidation of Variable
Interest Entities. FIN No. 46 provides accounting guidance for consolidation of
off-balance sheet entities with certain characteristics (variable interest
entities). All enterprises with variable interest in variable interest entities
created after January 31, 2003, shall apply the provisions of this
interpretation immediately. A public entity with variable interest in a variable
interest entity created before February 1, 2003 shall apply the provisions of
this interpretation no later than the first interim or annual reporting period
beginning after June 15, 2003. The Company does not believe that the
implementation of FIN No. 46 will have a material impact on its financial
condition, results of operations or cash flows.
NOTE 8. ACCOUNTING FOR STOCK-BASED COMPENSATION
The Company accounts for its stock-based compensation plans under
Accounting Principles Board ("APB") Opinion No. 25, Accounting for Stock Issued
to Employees. The pro forma information below is based on provisions of
Statement of Financial Accounting Standard ("FAS") No. 123, Accounting for
Stock-Based Compensation, as amended by FAS 148, Accounting for Stock-Based
Compensation--Transition and Disclosure, issued in December 2002.
The Company's options and warrants become fully vested upon a change in
control of the Company. As a result of the Company's pending merger discussed in
Note 10, the proforma information shown below assumes the options and warrants
will be fully amortized to compensation expense by June 30, 2003.
(In thousands, except per share amounts)
2003 2002
------------ -----------
Net earnings as reported ................. $ 497,000 $ 1,569,000
Compensation expense under FAS 123 ....... 1,734,000 435,000
------------ -----------
Net earnings (loss) pro forma ............ $ (1,237,000) $ 1,134,000
============ ===========
Net earnings (loss) per share - Basic
As reported .............................. $ 0.05 $ 0.17
Pro forma ................................ $ (0.13) $ 0.12
Net earnings (loss) per share - Diluted
As reported .............................. $ 0.04 $ 0.14
Pro forma ................................ $ (0.11) $ .010
NOTE 9. INCOME TAXES
During the quarter ended June 30, 2002, the Company reversed $7,390,000
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.
At March 31, 2003, the Company had federal net operating loss
carryforwards totaling approximately $25,231,000, which expire in the years 2010
to 2018. The Company also has available
10
RAMSAY YOUTH SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
alternative minimum tax credit carryforwards of approximately $1,150,000 which
may be carried forward indefinitely.
The net deferred tax assets represent 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 assets. 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 material 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 March 31, 2003 and December 31, 2002 are
summarized as follows:
MARCH 31, DECEMBER 31,
2003 2002
------------ ------------
Deferred tax liabilities:
Book basis of intangible assets over tax basis .......... $ 41,000 $ 41,000
Prepaid maintenance ..................................... 270,000 325,000
------------ ------------
Total deferred tax liabilities ...................... 311,000 366,000
------------ ------------
Deferred tax assets:
Allowance for doubtful accounts ......................... 529,000 537,000
General and professional liability insurance ............ 878,000 833,000
Accrued employee benefits ............................... 887,000 726,000
Capital loss carryovers ................................. 445,000 445,000
Tax basis of fixed assets over book basis ............... 116,000 116,000
Other accrued liabilities ............................... 1,119,000 1,182,000
Net operating loss carryovers ........................... 8,579,000 11,014,000
Alternative minimum tax credit carryovers ............... 1,150,000 1,150,000
------------ ------------
Total deferred tax assets ........................... 13,703,000 16,003,000
Valuation allowance for deferred tax assets ................ (7,257,000) (9,230,000)
------------ ------------
Deferred tax assets, net of valuation allowance ..... 6,446,000 6,773,000
------------ ------------
Net deferred tax assets ............................. $ 6,135,000 $ 6,407,000
============ ============
NOTE 10. SUBSEQUENT EVENT
On April 8, 2003, the Company entered into an agreement and plan of
merger (the "Agreement") with Psychiatric Solutions, Inc. ("PSI"). Under the
terms of the Agreement, PSI will pay in cash $5.00 per share of outstanding
common stock, and assume the Company's outstanding debt. The transaction is
subject to customary closing conditions including receipt of regulatory
approvals as well as approval by the Company's stockholders. PSI is in the
process of arranging financing for the transaction. The merger is scheduled for
completion by early July 2003.
On May 1, 2003, Mr. Aaron Beam, Jr. resigned from his position as a
member of the Company's Board of Directors and as a member of the Compensation,
Audit and Independent Directors Committees of the Board of Directors. In
addition, on May 1, 2003, Mr. Beam agreed to the cancellation of options to
purchase 13,334 shares of Ramsay Common Stock in exchange for a payment of
$40,000.
11
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.
On April 8, 2003, the Company entered into an agreement and plan of
merger (the "Agreement") with Psychiatric Solutions, Inc. ("PSI"). Under the
terms of the Agreement, PSI will pay in cash $5.00 per share of outstanding
common stock, and assume the Company's outstanding debt. The transaction is
subject to customary closing conditions including receipt of regulatory
approvals as well as approval by the Company's stockholders. PSI is in the
process of arranging financing for the transaction. The merger is scheduled for
completion in early July 2003.
In connection with the "safe-harbor" provisions of the Private
Securities Litigation Reform Act of 1995, Ramsay Youth Services, Inc. ("Ramsay"
or the "Company") notes that this report contains forward-looking statements
about the Company. The Company is hereby setting forth cautionary statements
identifying important factors that may cause the Company's actual results to
differ materially from those set forth in any forward-looking statements or
information made by or on behalf of or concerning the Company. Some of the most
significant factors include (i) accelerating changes occurring in the behavioral
healthcare and at-risk youth industry, including competition from consolidating
and integrated provider systems and limitations on reimbursement rates, (ii)
federal and state governmental budgetary constraints which could have the effect
of limiting the amount of funds available to support governmental programs,
(iii) statutory, regulatory and administrative changes or interpretations of
existing statutory and regulatory provisions affecting the conduct of the
Company's business and affecting current and prior reimbursement for the
Company's services, (iv) fluctuations in the numbers of patients receiving
treatment in our health care treatment programs and (v) failure to complete the
merger with PSI as contemplated in the Agreement. There can be no assurance that
any anticipated future results will be achieved. As a result of the factors
identified above, and including any other factors, the Company's actual results
or financial condition could vary significantly from the performance or
expectation set forth in any forward-looking statements or information.
12
RAMSAY YOUTH SERVICES, INC. AND SUBSIDIARIES
ANALYSTS' REPORTS
Investors should also be aware that while the Company does, at various
times, communicate with securities analysts, it is against the Company's policy
to disclose to them any material non-public information or other confidential
information. Accordingly, shareholders should not assume that the Company agrees
with any statement or report issued by an analyst irrespective of the content of
the statement or report. To the extent that reports issued by securities
analysts contain any projections, forecasts or opinions, such reports are not
the responsibility of the Company.
RESULTS OF OPERATIONS
QUARTER ENDED MARCH 31, 2003 COMPARED TO QUARTER ENDED MARCH 31, 2002
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 MARCH 31,
---------------------------------------------
2003 2002
-------------------- --------------------
Revenues ............................... $29,117 100.0% $28,925 100.0%
Expenses:
Salaries, wages and benefits ........ 17,112 58.8% 16,931 58.5%
Other operating expenses ............ 8,362 28.7% 7,609 26.3%
Provision for doubtful accounts ..... 394 1.3% 512 1.8%
Depreciation and amortization ....... 583 2.0% 565 2.0%
------- ----- ------- -----
Total operating expenses .......... 26,451 90.8% 25,617 88.6%
------- ----- ------- -----
Income from operations ................. $ 2,666 9.2% $ 3,308 11.4%
======= ===== ======= =====
REVENUES
Revenues increased by 0.7%, or $0.2 million, to $29.1 million in 2003
compared to $28.9 million in 2002. The increase in revenues during the period is
primarily a result of an increase of 5.1% in resident days (from 85,881 days in
2002 to 90,247 days in 2003), resulting in an increase in revenues of $0.7
million and the opening of the Company's facility in Macon, Georgia in February
2003 which generated $0.3 million in revenues during the quarter ended March 31,
2003. The aforementioned increases were partially offset by the closure of a
20-bed facility in Puerto Rico, which decreased revenues by $0.5 million and the
closure of two group homes in South Carolina , which decreased revenues by $0.3
million.
SALARIES, WAGES AND BENEFITS
Salaries, wages and benefits were $17.1 million, or 58.8% of revenues
in 2003, compared to $16.9 million, or 58.5% in 2002. Salaries, wages and
benefits increased as a percentage of revenues primarily as a result of start up
expenses associated with the Company's new facility in Macon, Georgia.
OTHER OPERATING EXPENSES
Other operating expenses were $8.4 million, or 28.7% of revenues in
2003, compared to $7.6 million, or 26.3% of revenues in 2002. The increase as a
percentage of revenues was primarily a result of start up expenses associated
with the Company's new facility in Macon, Georgia.
13
RAMSAY YOUTH SERVICES, INC. AND SUBSIDIARIES
PROVISION FOR DOUBTFUL ACCOUNTS
The provision for doubtful accounts was $0.4 million, or 1.3% of
revenues in 2003, compared to $0.5 million, or 1.8% of revenues in 2002.
Provision for doubtful accounts did not fluctuate significantly as a percentage
of revenue when compared with the same period in the prior year.
DEPRECIATION AND AMORTIZATION
Depreciation and amortization was $0.6 million, or 2.0% of revenues in
2003, compared to $0.6 million, or 2.0% of revenues in 2002. 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 MARCH 31,
---------------------------------------------
2003 2002
-------------------- --------------------
Revenues ............................... $ 7,410 100.0% $ 6,906 100.0%
Expenses:
Salaries, wages and benefits ........ 5,217 70.4% 4,664 67.5%
Other operating expenses ............ 1,612 21.8% 1,417 20.5%
Provision for doubtful accounts ..... 8 0.1% 208 3.0%
Depreciation and amortization ....... 44 0.6% 32 0.5%
------- ---- ------- ----
Total operating expenses .......... 6,881 92.9% 6,321 91.5%
------- ---- ------- ----
Income from operations ................. $ 529 7.1% $ 585 8.5%
======= ==== ======= ====
REVENUES
Revenues increased by 7.3% or $0.5 million, to $7.4 million in 2003
compared to $6.9 million in 2002. The increase in revenue is attributed to (i) a
new contract awarded to the Company in Georgia which generated $0.7 million and
(ii) the full period effect of a Florida contract started in February 2002,
increasing revenues by $0.4 million. The aforementioned revenue increases were
offset by the cancellation of a Puerto Rico contract which decreased revenues by
$0.6 million for the period.
SALARIES, WAGES AND BENEFITS
Salaries, wages and benefits were $5.2 million, or 70.4% of revenues in
2003, compared to $4.7 million, or 67.5% in 2002. The increase as a percentage
of revenues was primarily attributable to training and related expenses
associated with a new Georgia contract, combined with the termination of the
Puerto Rico contract in August 2002 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 21.8% of revenues in
2003, compared to $1.4 million, or 20.5% of revenues in 2002. Other operating
expenses increased as a percentage of revenues due to start up expenses
associated with a new Georgia contract.
14
RAMSAY YOUTH SERVICES, INC. AND SUBSIDIARIES
PROVISION FOR DOUBTFUL ACCOUNTS
Fluctuations in the provision for doubtful accounts relate primarily to
the Company's management contracts in Puerto Rico. Due to the termination of its
Puerto Rico contracts, the Company did not increase its provision for doubtful
accounts in its Puerto Rico market during the quarter ended March 31, 2003.
DEPRECIATION AND AMORTIZATION
Depreciation and amortization was $0.04 million, or 0.6% of revenues in
2003, compared to $0.03 million, or 0.5% of revenues in 2002. 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 MARCH 31,
----------------------------------------------
2003 2002
--------------------- ---------------------
Revenues:
Owned operations .................... $29,117 $28,925
Management contracts ................ 7,410 6,906
------- -------
Total revenues .................... $36,527 100.0% $35,831 100.0%
Expenses:
Salaries, wages and benefits ........ 1,242 3.4% 601 1.7%
Other operating expenses ............ 580 1.6% 666 1.9%
Depreciation and amortization ....... 14 0.0% 28 0.1%
Interest and other financing charges 557 1.5% 690 1.9%
Asset impairment charges ............ -- 0.0% 125 0.3%
Provision for income taxes .......... 305 0.8% 214 0.6%
SALARIES, WAGES AND BENEFITS
Corporate salaries, wages and benefits were $1.2 million, or 3.4% of
revenues in 2003, compared to $0.6 million, or 1.7% in 2002. The increase in
salaries, wages and benefits as a percentage of revenues is primarily
attributable to a $0.3 million charge for the amendment to an employment
contract for one of the Company's executives associated with the previously
mentioned agreement and plan of merger with Psychiatric Solutions, Inc.
OTHER OPERATING EXPENSES
Other operating expenses were $0.6 million, or 1.6% of revenues in
2003, compared to $0.7 million, or 1.9% of revenues in 2002. The decrease as a
percentage of revenues is primarily attributable to the aforementioned increase
in revenues and a reduction in various corporate office expenses.
DEPRECIATION AND AMORTIZATION
Depreciation and amortization was $0.01 million, or 0.03% of revenues
in 2003, compared to $0.03 million, or 0.1% of revenues in 2002. Depreciation
and amortization did not materially fluctuate as a percentage of revenue when
compared to the same period in the prior year.
15
RAMSAY YOUTH SERVICES, INC. AND SUBSIDIARIES
INTEREST AND OTHER FINANCING CHARGES
Interest and other financing charges was $0.6 million, or 1.5% of total
consolidated revenues in 2003, compared to $0.7 million, or 1.9% of total
consolidated revenues in 2002. 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
The increase in the provision for income taxes is due to the increase
in the Company's effective tax rate from 12% to 38%. 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 $25.2 million, which expire in the years 2010 to 2018.
The Company also has available alternative minimum tax credit carryforwards of
approximately $1.2 million which may be carried forward indefinitely.
The net deferred tax assets 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 assets. 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 material 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 Standard Board ("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 did not have an impact
to its results of operations from the adoption of this Statement.
In April 2002, the FASB issued Statement No. 145, RESCISSION OF FASB
STATEMENTS NO. 4, 44, AND 64, AMENDMENT OF FASB STATEMENT NO. 13, AND TECHNICAL
CORRECTION. This Statement eliminates extraordinary accounting treatment for
reporting gain or loss on debt extinguishment, and amends other existing
authoritative pronouncements to make various technical corrections, clarifies
meanings, or describes their applicability under changed conditions. The
provisions of this Statement are effective for the Company with the beginning of
fiscal year 2003; however, early application of the Statement is encouraged.
Debt extinguishments reported as extraordinary items prior to scheduled or early
adoption of this Statement would be reclassified in most cases following
adoption. The Company did not have an impact to 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 did not have an
impact to its results of operations from adopting this Statement.
In November 2002, the FASB issued Financial Interpretation (FIN) No.
45, GUARANTOR'S ACCOUNTING AND DISCLOSURE REQUIREMENTS FOR GUARANTEES, INCLUDING
INDIRECT GUARANTEES OF INDEBTEDNESS OF OTHERS. FIN No. 45 clarifies and expands
on existing disclosure requirements for guarantees, including product
warranties. FIN No. 45 also requires recognition of a liability at fair value of
a company's obligations under certain guarantee contracts. The disclosure
requirements are effective for financial statements of interim or annual periods
ending after December 15, 2002. The initial recognition and measurement
provisions of FIN No. 45 are applied only on a prospective basis to guarantees
issued after December 31, 2002, irrespective of the guarantors' fiscal year-end.
The Company did not have an impact to its results from operations from the
adoption of this Statement.
In December 2002, the FASB issued Statement No. 148, ACCOUNTING FOR
STOCK-BASED COMPENSATION--TRANSITION AND DISCLOSURE, an amendment of FASB
Statement No. 123. This Statement provides alternative methods of transition for
a voluntary change to the fair value based method of accounting for stock-based
employee compensation. In addition, this Statement amends the disclosure
requirements of Statement 123 to require prominent disclosures in both annual
and interim financial statements about the method of accounting for stock-based
employee compensation and the effect of the method used on reported results. The
Company did not have an impact to the results of operations from the adoption of
this Statement.
In January 2003, the FASB issued FIN No. 46, Consolidation of Variable
Interest Entities. FIN No. 46 provides accounting guidance for consolidation of
off-balance sheet entities with certain characteristics (variable interest
entities). All enterprises with variable interest in variable interest entities
created after January 31, 2003, shall apply the provisions of this
interpretation immediately. A public entity with variable interest in a variable
interest entity created before February 1, 2003 shall apply the provisions of
this interpretation no later than the first interim or annual reporting period
beginning after June 15, 2003. The Company does not believe that the
implementation of FIN No. 46 will have a material impact on its financial
condition, results of operations or cash flows.
LIQUIDITY AND CAPITAL RESOURCES
The Company's primary liquidity needs are for working capital, capital
expenditures, and debt service. The Company's primary sources of liquidity are
cash flows from operations and borrowings under its revolving credit line.
At March 31, 2003 and December 31, 2002, the Company had $10.6 million
and $10.3 million, respectively, in working capital including $0.3 million and
$0.8 million, respectively, in cash and cash
16
RAMSAY YOUTH SERVICES, INC. AND SUBSIDIARIES
equivalents. Working capital as of March 31, 2003 consisted primarily of $0.3
million in cash and cash equivalents, $21.1 million in accounts receivable and
$7.0 million in other current assets, net of $17.8 million in current
liabilities. The increase in working capital between periods is primarily a
result of a decrease in current liabilities attributable to month-end timing
differences in the payment of certain liabilities.
Cash used in investing activities was $0.2 million for the quarter
ended March 31, 2003 as compared to cash used in investing activities of $0.7
million during the quarter ended March 31, 2002. The decrease in investing
activities was primarily attributable to $0.4 million used in expenditures for
property and equipment, offset by approximately $0.2 million in proceeds from
the sale of certain assets and cash held in trust. Cash used in investing
activities during 2002 was primarily attributable to $0.9 million used in
expenditures for property and equipment, offset by approximately $0.2 million in
proceeds from the sale of certain assets.
Net cash used in financing activities was $0.9 million for the quarter
ended March 31, 2003 as compared to cash provided by financing activities of
$1.6 million during the quarter ended March 31, 2002. Cash used in financing
activities in 2003 and 2002 related 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 March 31, 2003, the Company had
approximately $2.0 million in outstanding receivables due from the Commonwealth
of Puerto Rico, of which $1.1 million was over 120 days past due. Reserves
against outstanding Puerto Rico receivables were $1.1 million as of March 31,
2003. As of May 9, 2003, the Company had collected approximately $0.4 million of
the March 31, 2003 outstanding receivable balance, all of which related to
receivables under 120 days past due. The Company and its advisors are in active
discussions with the Government of Puerto Rico with respect to the payment of
the outstanding receivables. 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 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.
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 29, 2004 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). As of March 31,
2003, the availability under the Revolver was approximately $10.2 million.
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, 2002, should be considered:
17
RAMSAY YOUTH SERVICES, INC. AND SUBSIDIARIES
- - 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.
- - 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.
ITEM 4. CONTROLS AND PROCEDURES
Our Chief Executive Officer and Chief Financial Officer have concluded,
based on their evaluation within 90 days of the filing date of this report, that
our disclosure controls and procedures are effective for gathering, analyzing
and disclosing the information we are required to disclose in our reports filed
under the Securities Exchange Act of 1934. There have been no significant
changes in our internal controls or in other factors that could significantly
affect these controls subsequent to the date of the previously mentioned
evaluation.
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 March 31, 2003 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
None.
18
RAMSAY YOUTH SERVICES, INC. AND SUBSIDIARIES
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 Third Amendment to Employment Agreement dated April 18, 2003 by
and between the Company and Bert Cibran.....................................
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........................................................................
(b) Current Reports on Form 8-K
The Company filed a Current Report on Form 8-K dated March 21,
2003 reporting its earnings for the fourth quarter and full
year ended December 31, 2002.
The Company filed a Current Report on Form 8-K dated April 9,
2003 reporting the signing of a definitive merger agreement
with Psychiatric Solutions, Inc.
The Company filed a Current Report on Form 8-K dated May 14,
2003 reporting its earnings for the first quarter ending March
31, 2003.
19
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: May 14, 2003
20
CERTIFICATION
I, Luis E. Lamela, Chief Executive Officer of Ramsay Youth Services, Inc. (the
"Company"), certify that:
1. I have reviewed this quarterly report on Form 10-Q of the Company;
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact necessary
in order to make the statements made, in light of the circumstances under which
such statements were made, not misleading with respect to the period covered by
this report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
Company as of, and for, the periods presented in this quarterly report;
4. The Company's Chief Financial Officer and I are responsible for
establishing and maintaining "disclosure controls and procedures" (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the Company and we have:
(a) designed such disclosure controls and procedures to ensure
that material information relating to the Company, including its consolidated
subsidiaries, is made known to us by others within those entities, particularly
during the period in which this quarterly report is being prepared;
(b) evaluated the effectiveness of the Company's disclosure
controls and procedures as of a date within 90 days prior to the filing date of
the date of this quarterly report (the "Evaluation Date"); and
(c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our evaluation
as of the Evaluation Date;
5. The Company's Chief Financial Officer and I have disclosed, based on
our most recent evaluation, to the Company's auditors and to the audit committee
of the Company's board of directors:
(a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the Company's ability to record,
process, summarize and report financial data and have identified for the
Company's auditors any material weaknesses in internal controls; and
(b) any fraud, whether or not material, that involves management
or other employees who have a significant role in the Company's internal
controls; and
6. The Company's Chief Financial Officer and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Date: May 14, 2003 By: /s/ Luis E. Lamela
-------------------------------
Chief Executive Officer
21
CERTIFICATION
I, Marcio C. Cabrera, Chief Financial Officer of Ramsay Youth Services, Inc.
(the "Company"), certify that:
1. I have reviewed this quarterly report on Form 10-Q of the Company;
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact necessary
in order to make the statements made, in light of the circumstances under which
such statements were made, not misleading with respect to the period covered by
this report; and
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
Company as of, and for, the periods presented in this quarterly report.
4. The Company's Chief Executive Officer and I are responsible for
establishing and maintaining "disclosure controls and procedures" (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the Company and we have:
(a) designed such disclosure controls and procedures to ensure
that material information relating to the Company, including its consolidated
subsidiaries, is made known to us by others within those entities, particularly
during the period in which this quarterly report is being prepared;
(b) evaluated the effectiveness of the Company's disclosure
controls and procedures as of a date within 90 days prior to the filing date of
the date of this quarterly report (the "Evaluation Date"); and
(c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our evaluation
as of the Evaluation Date;
5. The Company's Chief Executive Officer and I have disclosed, based on
our most recent evaluation, to the Company's auditors and to the audit committee
of the Company's board of directors:
(a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the Company's ability to record,
process, summarize and report financial data and have identified for the
Company's auditors any material weaknesses in internal controls; and
(b) any fraud, whether or not material, that involves management
or other employees who have a significant role in the Company's internal
controls; and
6. The Company's Chief Executive Officer and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Date: May 14, 2003 By: /s/ Marcio C. Cabrera
------------------------------------
Chief Financial Officer
22