Item 1. Business.
General
Ramsay Health Care, Inc. ("RHCI" or the "Company") is one of the leading providers of behavioral health services in the country. The Company offers a continuum of patient care through integrated networks of mental health delivery systems in 11 states, principally in the southeast and southwest, organized around 15 inpatient hospitals with 1,369 licensed beds (including 77 medical subacute beds) and outpatient centers. The Company also manages the mental health programs of certain public and private health care providers under management contracts.
Overview
The Company currently offers a comprehensive range of behavioral health services, including acute psychiatric inpatient treatment, less intensive inpatient treatment (including residential), partial hospitalization treatment and group and individual outpatient treatment programs. Each of the Company's integrated delivery systems is centered around a core hospital facility from which market-responsive mental health services are arranged with and provided by physicians, psychologists and other mental health professionals under contract or affiliated with the Company. Certain of these systems also manage behavioral health services on behalf of other providers and offer medical subacute services.
Recent Developments
On October 1, 1996, the Company and Ramsay Managed Care, Inc. ("RMCI") entered into an agreement and plan of merger providing for the acquisition of RMCI by the Company. The merger has been approved by the Board of Directors of each of the Company and RMCI following the recommendation by a special committee of the Board of Directors of each company. Upon consummation of the merger, (i) each share of common stock of RMCI will be converted into one- third (1/3) of a share of common stock of the Company, and (ii) each share of Preferred Stock, Series 1996, of RMCI (each of which is convertible into 30 shares of RMCI common stock) will be converted into one share of Class B Preferred Stock, Series 1996, of the Company (each of which will be convertible into 10 shares of RHCI common stock). The merger is intended to qualify for federal income tax purposes as a tax-free reorganization within the meaning of Section 368 (a) of the Internal Revenue Code of 1986, as amended.
The merger is subject to the approval of (i) the holders of a majority of the shares of RHCI common stock and RHCI Class B Preferred Stock, Series C (voting on an as converted basis into RHCI common stock and voting together with the RHCI common stock as a single class) voting at a meeting of shareholders at which a quorum is present, and (ii) the holders of a majority of the issued and outstanding shares of RMCI common stock and RMCI Preferred Stock, Series 1996 (voting on an as converted basis into RMCI common stock and voting together with the RMCI common stock as a single class). Affiliates of Paul J. Ramsay, the Chairman of the Board of the Company and RMCI, hold an approximate 35% voting interest in the Company and an approximate 69% voting interest in
RMCI, and have indicated that they will vote their shares of capital stock of each company in favor of the merger. The merger is also subject to various other conditions, including the expiration of the applicable waiting period under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, the receipt of necessary lender and other consents, and the declaration of effectiveness by the Securities and Exchange Commission of a registration statement to be filed by the Company. Subject to the satisfaction of these conditions, it is expected that the merger will be consummated in March, 1997.
Strategy
The Company's strategy is to maintain its reputation as a high-quality provider of behavioral health services, meeting the needs of its patients for therapeutic care in the least restrictive setting, its payors for cost-effective and accountable treatment programs, and its shareholders for consistent earnings and business growth.
Additional Management Resources Strengthen Organizational Structure
In January 1996, the Company announced the appointment of Luis Lamela as Vice Chairman of the Board, followed in August 1996 by the appointments of Bert Cibran as President and Chief Operating Officer and Carol Lang as Chief Financial Officer. Reynold Jennings became Executive Vice President of the Company and President of the recently restructured Behavioral Hospital Division, assuring his continued leadership over the core behavioral health business. The new management team has over 40 years of healthcare operations, management and financing experience and a demonstrated history of success in the industry. With this leadership infrastructure, the Company believes it has the resources to seek and execute diversification opportunities, expand the delivery of health care, and establish a capital structure appropriate for a long-term, high-quality health care company.
Decreasing Dependence on Revenue from Acute Psychiatric Inpatient Care
The behavioral health industry in the United States has experienced severe cost- containment pressures imposed by managed care organizations, governmental and other third-party payors. Under increasingly stringent admissions guidelines, restrictive length of stay criteria, and other treatment constraints imposed by payors, the Company's acute inpatient care programs have generated less revenue, even though admissions to these programs have increased.
To mitigate the revenue declines of acute inpatient treatment, the Company is expanding its inpatient behavioral care programs which require longer lengths of stay but less intensive treatment to accomplish effective outcomes, including residential treatment and youth- oriented correctional service programs. This will allow the Company to capitalize on its national recognition as a leading provider of certain youth offender treatment programs. To this end, the Company is seeking contracts with state agencies and judicial systems in a number of states to provide these services.
Reformation and Expansion of Outpatient Programs
The Company's outpatient services consist primarily of partial hospitalization and group and individual therapy sessions based in or nearby its inpatient facilities. These services were originally developed as ancillary sites to deliver patient care, without specific regard to outpatient care protocols being developed and encouraged by managed care organizations. As the influence of managed care organizations increased in certain of the Company's markets, certain of the Company's outpatient programs which did not deliver care protocols consistent with managed care requirements suffered declines in patient volumes and, in some cases, were closed due to their unprofitability. In recognition of the marketplace need to satisfy both patient and payor, the Company has begun a restructuring of its outpatient product lines in markets, including markets in which managed care is a dominant payor, to provide screening, therapeutic protocols, and outcome reviews which are consistent with managed care requirements. Also, in suitable markets, the Company will look to open and/or reopen previously closed outpatient care delivery sites. This restructuring is designed to strengthen existing relationships and foster new relationships with managed care organizations.
Maintain Dominance in Selected Markets
The Company is the sole or primary provider of behavioral health services in certain of its markets, particularly those markets with populations of fewer than 200,000 people. The Company's strategy is to dominate the provision of behavioral health care in these markets by expanding its delivery network within a 50-mile geographic area surrounding its inpatient hospital facility and by aggressively pursuing joint ventures, contract arrangements and alliances to serve public and private sector behavioral health care needs. The Company believes that recognition as the dominant provider of behavioral health care in particular markets enhances the viability of its facilities and increases the potential for business expansion opportunities in these markets.
Strengthen Alliances with General Medical/Surgical Hospitals
In certain markets, the Company has initiated discussions with significant local medical/surgical (acute-care) hospitals to explore possible "vertical" integration with the Company's inpatient facilities. This integration strategy is designed to appeal to managed care organizations which seek to develop relationships with large, acute-care hospitals that provide a full spectrum of health care services, including behavioral health care. The Company believes that in certain markets a joint venture, partnership or other form of alliance with the medical/surgical hospital enhances the long-term viability of the Company's facility. To date, no such agreements of significance have been signed.
Asset Utilization
Of the Company's 15 inpatient facilities, four currently operate medical subacute units. These units were opened in late fiscal 1994/early fiscal 1995 after a determination was made that the demand for inpatient behavioral health services would not be sufficient to fully utilize the existing bed capacity of the facility. Also, two of the currently operational subacute units are being expanded to meet increased market demand for the subacute service.
Restructure Lending Relationships
The Company's capital structure currently involves two lending groups and a real estate investment trust. A bank group consisting of three banks currently provides letter of credit support for five variable rate demand revenue bonds which total approximately $19 million and have been outstanding since 1985. Also, a consortium of three life insurance companies has loans outstanding to the Company totalling approximately $36 million. The Company has no short-term access to a working capital facility at the present time. The Company intends to refinance its debt during the next fiscal year to provide funds for growth and working capital, as well as to reschedule the current level of principal repayment required under the life insurance company debt.
In connection with the "safe-harbor" provision of the Private Securities Litigation Reform Act of 1995, the Company notes that this Annual Report on Form 10-K contains forward- looking statements about the Company. The Company is hereby setting forth cautionary statements identifying important factors that may cause the Company's actual results to differ materially from any forward-looking statement. Some of the most significant factors include (i) accelerating changes occurring in the health care industry, including competition from consolidating and integrated health care provider systems, the imposition of more stringent admission criteria by payors, increased payor pressures to limit lengths of stay, limitations on reimbursement rates and limitations on annual and lifetime patient health benefits, (ii) federal and state governmental budgetary constraints which could have the effect of limiting the amount of funds available to support governmental health care programs, including Medicare and Medicaid, and (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. While the Company believes that implementing the above-described strategies will enable the Company to improve its operations and financial condition, there can be no assurance that the Company will be successful in doing so.
Facility Operations
The Company's facilities specialize in the treatment of behavioral disorders. Substance abuse treatment is provided to patients who have a primary diagnosis of alcohol or substance abuse; however, many of these patients have a secondary diagnosis of, and are treated for, mental illness. Also, almost all of the Company's facilities conduct outpatient programs within the facility and/or at clinics located in the surrounding area. In response to the demands of payors, particularly managed care companies, the Company anticipates expanding its outpatient network in its continued effort to provide a less costly, yet effective level of mental health care for patients whose illness does not require intensive inpatient care.
The initial goal of acute psychiatric hospitalization treatment is to evaluate and stabilize the patient so that effective treatment can be continued either on an inpatient, partial hospitalization or an outpatient basis. Under the direction of a psychiatrist, the patient's condition is assessed, a diagnosis is made and prescribed treatment follows. The treatment regimen utilizes, where appropriate, medication, individual and group therapy, adjunctive therapy and family therapy.
The most common disorders for which adult patients are admitted to the Company's hospitals are mood and affective disorders (such as depression), schizophrenia, situational crises and alcohol and drug dependency. These disorders are also common in children and adolescents admitted to the Company's facilities. The Company has evaluation and treatment programs designed specifically for adults, adolescents and children. Specialized programs focusing upon neuropsychiatric disorders and pain and sleep disorders have also been developed. All programs emphasize family involvement in the evaluation and treatment process.
Residential treatment programs are provided by nine of the Company's facilities for low-functioning and troubled youths affected by conduct disorders, psychiatric illness, substance abuse and sexual dysfunction. These programs provide long-term inpatient care within a safe, therapeutic environment for youths displaying an inability to function at home, school, with peers or in the community in general. The highly structured programs assist the youth in learning how to change ineffective or violent behavior and cope with the difficulties and stresses of life. The primary objective of the program is behavioral awareness and self-control, leading the youth to a successful return to his/her home setting.
Each psychiatric hospital has a multidisciplinary team of health care professionals, including psychiatrists, psychologists, social workers, nurses, mental health and substance abuse counselors and therapists. Generally, physician members of the professional staff maintain private practices. In certain situations, the Company guarantees minimum incomes, usually for one year, to psychiatrists willing to relocate to certain facilities. All of the Company's hospitals have a medical director who acts as liaison between the professional staff and the hospital administration staff. In addition, each clinical program has a medical unit administrator.
Each of the Company's hospitals has a consulting board, comprised of hospital executives, consulting physicians and other members of the local community, which is responsible for standards of patient care. A hospital CEO supervises and is responsible for the day-to-day operations of each hospital. The Company emphasizes frequent communication, the setting of operational and financial goals and the monitoring of actual results against targeted goals. To this end, the Company collects and analyzes information on key indicators such as admissions by treatment program and payor category, daily census, full-time equivalent employees per patient day and average length of stay. On the basis of this information, the administrative staff of each hospital, together with the corporate staff of the Company, adopts new programs and modifies existing programs to improve performance.
All of the Company's hospitals have been accredited by the Joint Commission on Accreditation of Healthcare Organizations ("JCAHO"). The JCAHO is a voluntary national organization which undertakes a comprehensive review for purposes of accreditation of health care facilities. In general, hospitals and certain other health care facilities are initially surveyed by JCAHO within 12 months after the commencement of operations and resurveyed at appropriate intervals thereafter. Of the Company's 15 hospitals, one was resurveyed in fiscal 1996 and three were resurveyed in fiscal 1995 and, in each instance, the facilities retained their JCAHO accreditation for an additional three years.
The following table summarizes certain operating data related to (i) the facilities currently operated by the Company and which were also operated by the Company during each of the fiscal years referred to below ("same facilities") and (ii) all facilities operated by the Company during the fiscal years referred to below ("all facilities"). The difference between the same facilities amounts and the all facilities amounts relates to Three Rivers Hospital, which was closed on June 30, 1995, two facilities which were sold during fiscal 1994, Benchmark Behavioral Hospital, which commenced operations in May 1995, and the Company's subacute units, which commenced operations in late fiscal 1994 and early fiscal 1995.
Same Facilities Year Ended June 30 1996 1995 1994
Acute psychiatric admissions ......... 12,875 12,221 11,136 Residential treatment admissions ..... 537 551 471 Total inpatient admissions ........... 13,412 12,772 11,607
Acute psychiatric inpatient days ..... 130,522 139,571 153,444 Residential treatment inpatient days . 87,257 63,633 40,973 Total inpatient days ................. 217,779 203,204 194,417
Average bed days available ........... 392,352 369,380 400,770 Overall inpatient occupancy percentage 56% 55% 49%
Partial hospitalization days (1) ..... 54,041 65,280 57,414 Outpatient visits (2) ................ 37,005 44,218 30,984
All Facilities
Acute psychiatric admissions ......... 13,333 12,304 11,545 Residential treatment admissions(3) .. 588 948(3) 883(3) Subacute admissions .................. 692 323 46 Total admissions ..................... 14,613 13,575 12,474
Acute psychiatric inpatient days ..... 135,037 140,064 159,602 Residential treatment inpatient days (3) 93,038 77,509(3) 64,729(3) Subacute inpatient days .............. 15,378 6,548 1,061 Total inpatient days ................. 243,453 224,121 225,392
Average bed days available ........... 449,814 422,670 448,585 Overall inpatient occupancy percentage 54% 53% 50%
Partial hospitalization days (1) ..... 54,463 65,280 60,699 Outpatient visits (2) ................ 84,438 82,240 47,725 _______________________
(1) Partial hospitalization days refer to behavioral health patient services which generally exceed three hours but do not require an overnight stay at an inpatient facility.
(2) Outpatient visits refer to behavioral health patient services which generally do not exceed three hours in a given day. Also, the "All Facilities" amounts include visits related to a facility-based home health agency.
(3) 1995 and 1994 statistics for the "All Facilities" include significant residential treatment admissions and inpatient days related to Three Rivers Hospital, which was closed on June 30, 1995.
Competition
At June 30, 1996, the Company operated 15 inpatient facilities in 11 states. The Company's facilities are located in rural areas and in suburban areas of large metropolitan cities. Each facility competes with other facilities, including proprietary free-standing hospitals, not-for-profit hospitals, governmental free-standing hospitals and psychiatric units of acute care hospitals. The number of behavioral health service competitors located within each of the Company's service areas varies significantly. Some of these other facilities are larger and have greater financial resources than the Company's hospitals. In addition, some of these competing hospitals are substantially exempt from income and property taxation. The impact of competition on the Company's facilities varies depending on the proximity of the competing facility and its referral sources to the Company's facility.
The Company's outpatient centers are generally located in areas near its inpatient facilities and compete with private practitioners, community mental health centers, and other companies which provide outpatient services in the markets in which the Company's outpatient centers are doing business. Also, in certain markets, the Company treats certain patient populations (e.g., adolescents or geriatrics) or provides services which are different from those provided by the Company's competitors in the particular market. The Company does not consider any of the behavioral health service competitors in its markets as dominant providers that place the Company at a competitive disadvantage.
The ability of a psychiatric facility to compete with other facilities depends on the number and quality of psychiatrists and clinical psychologists practicing at the facility, and the number, type and quality of other psychiatric facilities in the area. Another factor affecting the competitiveness of psychiatric facilities is the extent to which the facility's clinical programs satisfy community needs in an effective manner from both a clinical and an economic standpoint. The Company believes that the quality of its professional staff as well as the quality and effectiveness of its programs permit it to compete effectively with the other providers of psychiatric, residential treatment, and chemical dependency care in the communities served by the Company's facilities. In addition, the Company's facilities actively seek relationships with managed care companies, which are increasingly responsible for steering patients to high quality, cost-effective providers of behavioral health services.
Industry Trends
The Company's inpatient facilities have been adversely affected by factors influencing the entire psychiatric hospital industry. Factors which have affected the Company's acute psychiatric inpatient business include (i) the imposition of more stringent length of stay and admission criteria by payors; (ii) the failure of reimbursement rate increases from certain payors that reimburse on a per diem or other discounted basis to offset increases in the cost of providing services; (iii) an increase in the percentage of payors that reimburse on a per diem or other discounted basis; (iv) the trend toward higher deductibles and co-insurance for individual patients; and (v) the trend by self-insured employers and managed mental health organizations toward limiting employee health benefits, including annual and lifetime limits on
mental health coverage. In response to these conditions, the Company has (i) tightened its staffing levels within its facilities, particularly in the areas which are not directly responsible for the provision of patient care, (ii) renegotiated contracts to reduce other operating expenses within its facilities and (iii) developed strategies to restructure its outpatient services and partial hospitalization programs to meet the demands of the marketplace. Further, the Company's business strategy includes reducing its dependence on acute psychiatric inpatient services through an expansion of residential treatment and outpatient services. See also "Strategy" above.
Sources of Revenue
The Company's facilities receive payments from third-party reimbursement sources, including commercial insurance carriers (which provide coverage to insureds on both an indemnity basis and through various managed care plans), Medicare, Medicaid, the Civilian Health and Medical Program of the Uniformed Services ("CHAMPUS"), Blue Cross and, for residential treatment services, various state agencies (including state judicial systems). In addition, certain payments are received directly from patients.
Third-party reimbursement programs generally reimburse facilities either on the basis of facility charges (charge-based), on the basis of the facility's costs as audited or projected by the third-party payor (cost-based), or on the basis of negotiated rates (per diem-based). Generally, charge-based programs are more profitable to the Company. The following table sets forth, by category, the approximate percentages of the Company's inpatient days derived from various sources for the periods indicated.
Year Ended June 30 1996 1995 1994
Charge-based programs: Commercial Insurance .......................... 8% 10% 15% Blue Cross .................................... 1 1 1 Private Pay ................................... 5 6 5 Sub-total ................................ 14 17 21
Cost-based and per diem-based programs: Blue Cross .................................... 4 6 6 CHAMPUS ....................................... 3 5 7 Medicare ...................................... 24 22 21 Medicaid ...................................... 30 31 32 State, HMO and PPO ............................ 25 19 13 Sub-total ................................ 86 83 79 Total ............................... 100% 100% 100%
Most commercial insurance carriers reimburse their policyholders or reimburse the Company's facilities directly for charges at rates and limits specified in their policies. Patients generally remain responsible to the facilities for any amounts not covered under their insurance policies. The trend in reimbursement for psychiatric inpatient and chemical dependency care by commercial insurance carriers is to limit inpatient days to a maximum number per year or for the patient's lifetime, or to limit the maximum dollar amount expended for a patient in a given period.
Most third-party payors and other commercial carriers have also expanded benefit coverage to include partial hospitalization and other outpatient services. Partial hospitalization is formally recognized by Medicare and CHAMPUS as a covered service. In addition, managed care companies are seeking to contract with providers that offer the full spectrum of psychiatric care.
Medicare is the federal health insurance program for the aged and disabled. Medicare reimbursement is typically less than the Company's facilities' established charges for services provided to Medicare patients. Patients are not responsible for the difference between the reimbursed amount and the facilities' established charges other than for applicable noncovered charges, coinsurance and deductibles. In 1983, Congress changed the Medicare law applicable to Medicare reimbursement for medical/surgical services from a retrospectively determined reasonable cost system to a prospectively determined diagnosis-related grouping ("DRG") system. Psychiatric and chemical dependency hospitals and units are exempt from the DRG reimbursement system.
Medicare reimbursement to exempt psychiatric and chemical dependency hospitals and units is currently subject to the payment limitations and incentives established in the Tax Equity and Fiscal Responsibility Act of 1982 ("TEFRA"). These facilities are paid on the basis of each facility's historical costs trended forward, with a limit placed on the rate of increase in per case reimbursable costs. These TEFRA "target" rates are updated annually. Facilities with costs less than the target rate per discharge are reimbursed based on allowable Medicare costs plus an additional incentive payment. Beginning in federal fiscal year 1992, providers with costs exceeding their target rates are subject to a payment ceiling of the target amount plus the lesser of a percentage (currently 10%) of the target amount or a percentage (currently 50%) of the amount in excess of the target amount. Exemptions and exceptions are available to hospitals when events beyond the hospitals' control result in an increase in costs for a reporting period. Moreover, "new hospitals" are eligible to be exempt from the limits until they have been in operation for three years. At June 30, 1996, all of the Company's facilities were subject to the TEFRA provisions.
The Health Care Financing Administration ("HCFA") has implemented changes to Medicare covering inpatient psychiatric services which are reimbursed under TEFRA. These changes provide for an increase to the TEFRA payment limitations, subject to annual revision. However, since 14 of the Company's 15 facilities which are subject to the TEFRA payment limitations are currently operating at cost levels below their respective TEFRA payment limitations, any increase in the TEFRA payment limitations has a minimal effect on the Company's results of operations. In addition, each year HCFA modifies the fee reimbursement schedules related to physician services. While these changes affect Medicare reimbursement paid directly to physicians, they do not affect the rate of Medicare reimbursement to the Company's facilities. These changes in
physician reimbursement have had only a minimal effect on the Company's results of operations since most of the physicians practicing at the Company's facilities bill their fees directly.
Medicaid is the federal/state health insurance program for the underprivileged. Subject to certain minimum federal requirements, each state defines the extent and duration of the services covered by its Medicaid program. Moreover, although there are certain federal requirements governing the payment levels for Medicaid services, each state has its own methodology for making payment for services provided to Medicaid patients. Various state Medicaid programs cover payment for services provided to Medicaid patients at all of the Company's facilities. During fiscal years 1995 and 1994, the Company received significant payments from the Louisiana Medicaid program pursuant to enhanced reimbursement rates under the State's "disproportionate share" program. Disproportionate share payments from the State of Louisiana were virtually eliminated effective July 1, 1995. Accordingly, the Company expects that any future payments made under this program will be minimal. See "Item 3. Legal Proceedings" and "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations--Results of Operations."
In 1991, Congress imposed a reduction in the annual reimbursable length of stay for patients covered under the CHAMPUS program. Effective October 1, 1991, CHAMPUS began to limit its coverage for inpatient psychiatric services to 30 days for adult patients, 45 days for child and adolescent patients and 150 days for residential treatment services, subject to waivers which are available under limited circumstances if an extension of the length of stay can be justified. Although the lengths of stay experienced by the Company on CHAMPUS adult, child and adolescent beneficiaries have generally been within these limits, the volume of CHAMPUS patients treated at the Company's facilities has declined. As set forth in the above table, the amount of the Company's patient revenues attributable to CHAMPUS have decreased from 7% in fiscal 1994 to 3% in fiscal 1996.
Blue Cross plans reimburse based on charges or negotiated rates in all areas in which the Company presently operates facilities, except Alabama and Michigan. In many states in which the Company operates, Blue Cross charges are approved through a rate-setting process and, therefore, Blue Cross may reimburse the Company at a rate less than billed charges. Under cost-based Blue Cross programs, such as those in Alabama and Michigan, direct reimbursement to hospitals typically is lower than the hospital's charges, and patients are not responsible for the difference between the amount reimbursed by Blue Cross and the hospital's charges.
Marketing
The Company's marketing programs are aimed at referral sources within a selected service area rather than to the general public and are designed to increase awareness of a facility's programs and services. Referral sources include psychiatrists, medical practitioners, managed mental health organizations, courts and probationary officers, law enforcement agencies, schools and clergy. Each facility's marketing staff, together with other facility personnel, maintains direct contact with referral sources to support their needs. These needs may be related to a particular treatment program, the desires of the patient's family, hospital policies or the timely receipt of
accurate information. Each facility establishes admission targets for each referral source and results are monitored and evaluated at the facility and by the corporate staff.
Regulation
Operations of psychiatric hospitals are subject to extensive federal, state and local government regulations, including periodic inspection and licensing requirements. These regulations are primarily concerned with the fitness and adequacy of the facility, equipment and personnel, standards of medical care provided, the dispensing of drugs and the adequacy of fire prevention measures and other building standards. In addition, the admission and treatment of patients at the Company's hospitals are subject to certain state regulation regarding involuntary admissions, patient rights and the confidentiality of patient medical records.
The Company believes that federal and state regulation may become more comprehensive and restrictive in the future, particularly with respect to reimbursement rates. In addition, numerous healthcare reform proposals have been and are expected to continue to be introduced in Congress. The Company cannot predict the form or timing of any prospective legislation or regulation, nor the effect which any legislation or regulation might have on its revenues or profitability.
Capital expenditures for the construction of new facilities, the addition of beds or the acquisition of facilities or medical equipment are reviewable by governmental authorities in certain states in which approximately half the Company's facilities are located. State certificate of need or similar statutes generally provide that prior to the construction of new beds or facilities or the introduction of a new service, a state agency must determine that a need exists for those beds, facilities or services. A certificate of need is generally issued for a specific maximum amount of expenditures, number of beds or services to be provided and the holder is generally required to implement the approved project within a specific time period. In most cases, state certificate of need or similar statutes do not restrict the ability of the Company or its competitors from offering new or expanded outpatient services. Except for Arizona, Texas, Louisiana and Utah, all of the states in which the Company operates facilities have adopted certificate of need or similar statutes.
Federal law contains a number of provisions designed to ensure that services rendered by health care facilities to Medicare and Medicaid patients are medically necessary, meet professionally recognized standards and are billed properly. These provisions include a requirement that admissions of Medicare and Medicaid patients to hospitals must be reviewed in a timely manner to determine the medical necessity of the admissions. In addition, the Peer Review Improvement Act of 1982 ("Peer Review Act") provides that a hospital may be required by the federal government to reimburse the government for the cost of Medicare paid services determined by a peer review organization to have been medically unnecessary. Each of the Company's hospitals has developed and implemented a quality assurance program and implemented procedures for utilization review and retrospective patient care evaluation to meet its obligations under the Peer Review Act. As a result of legislation passed in Texas in September 1993 and as described below, Peer Review Organizations ("PRO's") in that state began applying extremely restrictive interpretations to
the medical necessity of admissions and other services. Consequently, significant amounts of the Texas facilities' charges in fiscal 1994 were denied by such organizations until the facilities gained a full understanding of the PRO's interpretations and modified their internal systems accordingly. Charges denied in the Company's Texas facilities in fiscal 1996 and 1995 were less than 2% of these facilities' gross charges in these years.
The Medicare and Medicaid Anti-Fraud and Abuse Amendments (the "Amendments") to the Social Security Act prohibit individuals or entities participating in the Medicare or Medicaid programs from knowingly and willfully offering, paying, soliciting, or receiving remuneration in order to induce referrals for items or services reimbursed under those programs. The policy objective of the Amendments is to ensure that the purpose for a referral is quality of care and not monetary gain by the referring individual. The Amendments' prohibitions only apply to Medicare and Medicaid patients and impose felony criminal penalties and civil sanctions, as well as exclusion from the Medicare and Medicaid programs. In 1989, CHAMPUS adopted regulations authorizing it to exclude from the CHAMPUS program any provider who has committed fraud or engaged in abusive practices. The term "abusive practices" is defined broadly to include, among other things, the provision of medically unnecessary services, the provision of care of inferior quality, and the failure to maintain adequate financial or medical records. The Company believes that it is in compliance with all aspects of these regulations.
The Company has entered into various types of agreements with physicians and other health care providers in the ordinary course of operating its facilities, many of which provide for payments to physicians or other health care providers by the Company as compensation for services or other consideration by the providers. In order to provide guidance to healthcare providers with respect to the statute that makes certain remuneration arrangements between hospitals and physicians and other healthcare providers illegal, the United States Department of Health and Human Services (the "Department") issued regulations in 1991 and 1993 outlining certain "safe harbor" practices, which, although potentially capable of inducing prohibited referrals of business, would not be subject to enforcement action under the illegal remuneration statute. The practices covered by the regulations include, among others, certain investment transactions, lease of space and equipment, personal services and management contracts, sales of physician practices, payments to employees and waivers of beneficiary deductibles and co-payments. Although a relationship that fails to satisfy a safe harbor is not necessarily illegal, that relationship will not be exempt from scrutiny under the Amendments. The Company believes that its agreements and arrangements in this area comply with the Amendments or are otherwise protected under the safe harbors provided. However, there can be no assurance that (i) government enforcement agencies will not assert that certain of these arrangements are in violation of the illegal remuneration statute, or (ii) the statute will ultimately be interpreted by the courts in a manner consistent with the Company's practices.
Several states and the Federal government have been investigating whether psychiatric hospitals have engaged in fraudulent practices such as inflating bills for medications and services, billing for services never rendered and admitting patients, especially children, who do not require hospitalization. In 1991, the Texas Attorney General disclosed that several of the Company's competitors doing business in Texas were under investigation for
fraudulent practices and a lawsuit seeking injunctive relief was filed against one of those competitors. This led to the passage of legislation in Texas, effective September 1, 1993, that placed severe restrictions on the marketing of behavioral health care services. In general, the legislation prohibits certain advertisement and solicitation techniques. Specifically, advertisements may not promise a cure or guarantee treatment results that cannot be substantiated, and mental health intervention and assessment services must be available and properly credentialed before they are advertised. The legislation also requires disclosure of any relationship between the treatment facility and its referral sources and prohibits a referral service from holding itself out as a qualified mental health referral service without complying with the legislation's definition of such (which requires, among other things, compliance with regulations regarding confidentiality, participation in and staffing of the referral service and payments to referral sources). Violation of the legislation may result in injunctive relief and civil penalties of up to $25,000 per violation. In June 1993, the Company signed an agreement with the Texas Attorney General whereby it agreed to continue to comply with Texas statutes regarding marketing and operating standards applicable to all psychiatric hospital companies.
Acquisitions, Sales and Lease Commitments
* Three Rivers Hospital. In November 1992, the Company purchased a 64-bed hospital facility in Covington, Louisiana for $2,000,000. The facility, Three Rivers Hospital, opened in January 1993. On June 30, 1995, the hospital was closed due to reduced patient volume and projected negative operating margins, and its operations were consolidated with the Company's facility located less than five miles away. In May 1996, the Company signed a letter of intent to sell Three Rivers Hospital to an independent party for approximately $2.2 million (net of transaction costs). This sale is expected to close during October 1996. See "Ownership Arrangements and Operating Agreements" and "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations--Results of Operations."
* Harbor Oaks Hospital. In January 1993, the Company leased Harbor Oaks Hospital in Fort Walton Beach, Florida to another health care provider for a period of three years. The lease was extended to October 1996, at which time the Company anticipates resuming operations at the facility.
* Cumberland Hospital. In August 1993, the Company sold its 175-bed Cumberland Hospital in Fayetteville, North Carolina for approximately $12 million.
* Ramsay Managed Care, Inc. RHCI, through its former subsidiary RMCI, entered the managed mental health business in October 1993 with the acquisition of Florida Psychiatric Management, Inc. ("FPM") for a purchase price of $6.5 million. The managed care division expanded in June 1994 with the acquisition of a Phoenix, Arizona-based managed mental health business and, in fiscal 1995, through the award of contracts in Hawaii and West Virginia.
For a variety of reasons deemed by management to be reasonable at the time, on April 24, 1995, the Company distributed, on a pro rata basis in the form of a dividend, the common stock of RMCI held by the Company to the holders of record
on April 21, 1995 of the Company's common and preferred stock (the "RMCI Distribution"). Subsequent to this distribution, RMCI became a separate, publicly traded Company and ceased being a subsidiary of the Company.
On October 1, 1996, the Company and RMCI entered in a merger agreement pursuant to which RMCI would merge into a wholly-owned subsidiary of the Company. See "Recent Developments" above.
* Atlantic Shores Hospital. In February 1994, the Company sold its 50-bed Atlantic Shores Hospital in Daytona Beach, Florida for approximately $4.8 million.
* Sale/Leaseback. In April 1995, the Company consummated a sale/leaseback transaction whereby the Company sold the land, buildings and fixed equipment of two of its inpatient facilities (Desert Vista Hospital in Mesa, Arizona and Mission Vista Hospital in San Antonio, Texas) for $12.5 million and agreed to lease this property back over a term of 15 years (with three successive renewal options of five years each). The leases, which are treated as operating leases under generally accepted accounting principles, currently require aggregate annual minimum rentals of $1.58 million, payable monthly. Effective April 1 of each year, the lease payments are subject to any upward adjustment (not to exceed 3% annually) in the Consumer Price Index over the preceding 12 months.
* Sale of Land. In March and April 1995, the Company sold certain real estate located in Flagstaff, Arizona and Houston, Texas. These properties were initially acquired for development approximately 10 years ago and, as of the date of sale, the properties had an aggregate book value of $1.15 million. Total net proceeds from the sales of this real estate approximated $0.75 million.
* Benchmark Behavioral Hospital. Effective April 1995, the Company agreed to lease an 80-bed facility near Salt Lake City, Utah from Charter Medical Corporation for four years, with an option to renew for an additional three years. The lease, which is treated as an operating lease under generally accepted accounting principles, requires annual base rental payments of $456,000, payable monthly. In addition, the lease provides for percentage rent payments to the lessor equal to 2% of the net revenues of the facility, payable quarterly.
Ownership Arrangements and Operating Agreements
One physician owns a 4% interest in the subsidiary which owns the Company's Harbor Oaks Hospital. The Company may be required to repurchase, and the minority shareholder may be required to sell, the minority interest at a formula price dependent upon many factors, including the earnings per share of the subsidiary which owns the subject hospital and the price/earnings multiple of the Company, after a fixed period of time. Although the amount of the Company's repurchase obligation cannot be precisely determined, the Company does not believe that this obligation will require a material payment by the Company in the foreseeable future.
In 1985, the Company and Bethany General Hospital in Bethany, Oklahoma entered into a joint development project. The general hospital and the Company hold a joint certificate of need by which they have converted 23 medical/surgical beds to psychiatric beds, and constructed a psychiatric
pavilion containing an additional 20 psychiatric beds. Pursuant to a joint venture agreement entered into in December 1985, the Company began managing the 23 existing beds in December 1985 and completed construction of the 20-bed pavilion in October 1986. Under the joint venture agreement, the Company is obligated to provide working capital to operate the 43-bed psychiatric unit. The Company may, at its option, continue to operate and manage the unit in three- year terms through 2004. The Company is entitled to an annual management fee of 5% of the unit's gross revenues and 65% of the net profits or losses of the unit. The agreement also provides that the Company will recover construction costs amortized over 15 years and working capital advances from operating revenue, unless the Company does not renew or breaches the agreement.
In November 1992, the Company formed a limited partnership to operate Three Rivers Hospital, a 64-bed facility located in Covington, Louisiana. Pursuant to the terms of the partnership agreement, the Company, as general partner, had a 55% interest in the operations of the business and limited partners maintained a 45% interest. A wholly-owned subsidiary of the Company owns the facility and leased it to the partnership at $276,000 per annum. Due to reduced patient volume and projected negative operating margins, effective June 30, 1995, Three Rivers Hospital was closed. The Company has signed a letter of intent and expects to sell Three Rivers Hospital to an independent party in October 1996. See "Acquisitions, Sales and Lease Commitments" above. Further, in July 1996, the Three Rivers Hospital Limited Partnership was dissolved.
Insurance
The Company and its facilities are insured on a "claims-made" basis for professional and general liability incidents in the aggregate amount of $25,000,000, with a self-insured retention of $500,000 per claim. The Company's self-insurance program also includes "tail" coverage for prior acts retroactive to the date on which the Company could become responsible for such acts. This prior occurrence coverage operates with the same self-insured retention level. It is the Company's policy to record the liability for uninsured professional and general liability losses related to asserted and unasserted claims arising from reported and unreported incidents based on independent valuations which consider claim development factors, the specific nature of the facts and circumstances giving rise to each reported incident and the Company's history with respect to similar claims.
Employees
As of June 30, 1996, the Company employed approximately 1,625 full-time and 1,540 part-time employees in its facilities and contract services operations, including approximately 400 full- time equivalent nurses. In addition, the Company has a corporate headquarters staff of approximately 25, which includes individuals who specialize in various areas of hospital operations to assist facilities with particular management issues. The Company considers its relationship with its employees to be good.
Executive Officers of the Registrant
Certain information with respect to the executive officers of the Company is set forth below:
Position With the Company and Principal Occupations Name of Executive Officer During the Past Five Years
Luis E. Lamela....... 46 Vice Chairman of the Board of the Company since January 1996; President and CEO of CAC Medical Centers, a division of United Health Care of Florida, since May 1994; President and CEO of Ramsay - HMO, Inc. from prior to 1991 to May 1994.
Bert G. Cibran....... 42 President and Chief Operating Officer of the Company since August 1996; President, Summa Healthcare Group, Inc. (a healthcare consulting firm) from February 1996 through August 1996; President and Chief Operating Officer for the Florida operations of Physician Corporation of America from February 1994 to February 1996; Executive Vice President of Operations with Ramsay- HMO, Inc. from 1991 to February 1994.
Reynold J. Jennings.. 50 Executive Vice President of the Company and President of its Behavioral Hospital Division since August 1996; President, President/Chief Operating Officer or President/CEO of the Company from September 1994 to August 1996; Executive Vice President and Chief Operating Officer of the Company from November 1993 until September 1994; various management and administrative positions with National Medical Enterprises, Inc. from prior to 1991 to October 1993.
Carol C. Lang........ 49 Chief Financial Officer of the Company since August 1996; President of HealthLink Enterprises, Inc. (a healthcare consulting firm) from prior to 1991 to August 1996.
Brent J. Bryson...... 47 Vice President of the Company since October 1994; (including medical leave from January 1996 through August 1996); Senior Vice President, Southern Region, with National Medical Enterprises, Inc. from November 1991 to October 1994; Vice President with National Medical Enterprises, Inc. from prior to 1991 to November 1991.
John A. Quinn........ 42 Vice President of the Company since September 1991; various administrative and management positions with Community Psychiatric Centers, Inc. from prior to 1991 to September 1991.
Wallace E. Smith..... 53 Vice President of the Company since prior to 1991.
William N. Nyman..... 43 Vice President of the Company since August 1993. Regional Controller of the Company from prior to 1991 to July 1993.
Daniel A. Sims....... 36 Corporate Controller of the Company since December 1993; Chief Financial Officer of a 175-bed medical/surgical hospital from prior to 1991 to December 1993.
Item 2.
Item 2. Properties.
The following table provides information concerning the 15 inpatient facilities owned and operated or leased and operated by the Company at June 30, 1996.
Total Date Opened Licensed Hospital (7) or Acquired Beds Havenwyck Hospital Auburn Hills, MI ......................... November 1983 166 Brynn Marr Hospital Jacksonville, NC ......................... December 1983 76 Hill Crest Hospital Birmingham, AL ........................... January 1984 130 Heartland Hospital Nevada, MO ............................... April 1984 152 Greenbrier Hospital Covington, LA ............................ October 1984 67 Coastal Carolina Hospital Conway, SC ............................... November 1984 98 Bayou Oaks Hospital Houma, LA(1) ............................. November 1985 98 The Bethany Pavilion Bethany, OK(2) ........................... December 1985 43 Meadowlake Hospital Enid, OK ................................. February 1986 50 Benchmark Regional Hospital Woods Cross, UT .......................... August 1986 76 Desert Vista Hospital Mesa, AZ (6) ............................. February 1987 100 Chestnut Ridge Hospital Morgantown, WV(3) ........................ November 1987 70 The Haven Hospital DeSoto, TX ............................... April 1990 102 Mission Vista Hospital San Antonio, TX (6) ...................... November 1991 61 Benchmark Behavioral Hospital Midvale, UT (4) .......................... June 1995 80 Total (5) ........................... 1,369
(1) The building in which the Company's facility in Houma, Louisiana is located is leased for an initial period ending January 31, 2005 (with an option to renew for 20 years). (2) The Bethany, Oklahoma facility is operated as a joint venture in which the Company operates and manages the behavioral health services of Bethany General Hospital. See "Item 1. Business --Ownership Arrangements and Operating Agreements." (3) The Company has entered into a 50-year ground lease for the property on which its 70-bed facility in Morgantown, West Virginia is located. (4) The building in which the Company's facility in Midvale, Utah is located is leased for an initial period ending June 24, 1999 (with an option to renew for an additional three years). See "Item 1. Business-Acquisitions, Sales and Lease Commitments." (5) Excludes Harbor Oaks Hospital and Three Rivers Hospital. Harbor Oaks Hospital, a 98-bed facility in Fort Walton Beach, Florida is owned by the Company but, as of June 30, 1996, was leased to another health care provider. Three Rivers Hospital, a 64-bed facility located in Covington, Louisiana, was closed on June 30, 1995. See "Item 1. Business -- Acquisitions, Sales and Lease Commitments and Ownership Arrangements and Operating Agreements." (6) In April 1995, the Company sold and immediately leased back the land, buildings and fixed equipment associated with these facilities. The leases have an initial term of 15 years and three successive renewal options of five years each. See "Item 1. Business -- Acquisitions, Sales and Lease Commitments." (7) The Company believes that its facilities are well maintained and are of adequate size for present needs.
In March 1995, the Financial Accounting Standards Board (FASB) issued Statement Number 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of" (the "Statement"). As required by the Statement, the Company periodically reviews the long-lived assets (land, buildings, fixed equipment and related cost in excess of net asset value of purchased businesses) of each of its inpatient facilities to determine if the carrying value of these assets is recoverable, based on the future cash flows expected from the assets. Based on this review, the Company determined that the carrying value of certain long-lived assets was impaired (within the meaning of the Statement) at June 30, 1996 and 1995. The amount of the impairment, calculated as the excess of carrying value of the long-lived assets over the discounted future cash flows expected from the assets, totalled approximately $4 million and $20 million at June 30, 1996 and 1995, respectively. See "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations." and "Item 8. Financial Statements and Supplementary Data."
In connection with the Company's decision to relocate its corporate headquarters from New Orleans, Louisiana to Coral Gables, Florida, the Company has entered into an office lease in Coral Gables for a term of three years ending in August 1999. Upon relocation, the Company's lease in New Orleans will be terminated.
Item 3.
Item 3. Legal Proceedings.
The Company is subject to claims and suits arising in the ordinary course of business. In addition, during fiscal 1996, the State of Louisiana requested repayment of disproportionate share payments received by the Company in fiscal years 1995 and 1994 totalling approximately $5,000,000. On the basis of discussions to date between the Company and the State, the Company believes that this matter may be settled for an amount significantly less than the State's initial request. See "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations -- Results of Operations."
The Company has established reserves at June 30, 1996 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. See "Item 8. Financial Statements and Supplementary Data."
Item 4.
Item 4. Submission of Matters to a Vote of Security Holders.
Not applicable.
PART II
Item 5.
Item 5. Market For The Registrant's Common Equity and Related Stockholder Matters.
The Company's Common Stock is traded in the over-the-counter market and is quoted on the NASDAQ National Market System under the symbol RHCI. On September 27, 1996, there were 660 holders of record of the Company's Common Stock. No cash dividends have been declared on the Common Stock since the Company was organized. The Company's credit documents governing its credit facilities include provisions which prohibit the payment of dividends unless the sum of (i) all dividends, redemptions and all other distributions in respect of its capital stock and (ii) all restricted investments (as defined) during the applicable fiscal year would not exceed an amount equal to 50% of the consolidated net income of the Company for the immediately preceding fiscal year and provided that, at the time of such dividend and after giving effect thereto, certain specified financial ratio covenants would not be violated and no other default or event of default would occur. Further, in connection with waivers received from the Company's lenders as of June 30, 1996, the Company agreed not to pay future cash dividends in respect of its Class B Preferred Stock, Series C. Prior to this time, the Company's credit facilities permitted the payment of the full amount of regular fixed dividends on the Class B Preferred Stock, Series C, provided that such dividends did not exceed $387,200 in each 12-month period and provided that no event of default existed or occurred as a result of the payment.
The following table sets forth the range of high and low closing sales prices per share of the Company's Common Stock for each of the quarters during the years ended June 30, 1996 and 1995, as reported on the NASDAQ National Market System:
High Low
Year ended June 30, 1996 First Quarter ...................... $4 5/8 $3 3/8 Second Quarter ..................... 3 3/4 2 1/2 Third Quarter ...................... 3 15/16 2 7/8 Fourth Quarter ..................... 4 3/8 2 7/8
Year ended June 30, 1995 First Quarter ...................... $8 1/8 $6 Second Quarter ..................... 8 1/8 6 1/4 Third Quarter ...................... 7 7/8 5 3/4 Fourth Quarter * ................... 7 1/2 3 5/8
On October 2, 1996, the closing sales price of the Company's Common Stock was $2 3/8 per share.
* The distribution of Ramsay Managed Care, Inc. occurred during the fourth quarter of fiscal 1995. See "Item 1. Business--Acquisitions, Sales and Lease Commitments".
Item 6.
Item 6. Selected Financial Data.
The following table sets forth selected consolidated financial information for the periods shown and is qualified by reference to, and should be read in conjunction with, the Consolidated Financial Statements and Notes thereto and "Item 7.
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations.
RESULTS OF OPERATIONS
Patient revenues of the Company's inpatient facilities are affected by changes in the rates the Company charges, changes in reimbursement rates by third-party payors, the volume of patients treated and changes in the mix of payors and patient types. The Company's facilities provide services to patients requiring intensive inpatient care, less intensive residential treatment care and outpatient treatment. Also, at four of the Company's facilities, medical subacute services are provided. The reimbursement rates for intensive inpatient care are generally greater than the rates paid for residential treatment care. However, the average length of stay for patients in residential treatment programs is significantly greater than that for patients in intensive inpatient programs.
Generally, charges for each facility's services are reimbursed under third-party reimbursement programs at the amount billed or at rates which are less than the facility's charges. These lower rates can be based on a negotiated per diem amount or based on the facility's costs as audited or projected by the third-party payors. When operating revenues (charges) per patient day are higher than the negotiated per diem rate or the facility's costs, the difference is recorded as a reduction of gross revenues. Bad debts consist primarily of commercial and self-pay accounts receivable deemed uncollectible.
The Company records amounts due to or from third-party reimbursement sources based on its best estimates of amounts to be ultimately received or paid under cost reports filed with appropriate intermediaries. The final determination of amounts earned under reimbursement programs is subject to review and audit by these intermediaries. Differences between amounts recorded as estimated settlements and the audited amounts are reflected as adjustments to the Company's net revenues in the period in which the final determination is made. During the years ended June 30, 1995, and 1994, the Company recorded contractual adjustment benefits related to intermediary audits of prior year cost reports of approximately $1,000,000 and $1,400,000, respectively. During the year ended June 30, 1996, the Company recorded contractual adjustment expenses related to intermediary audits of prior year cost reports of approximately $1,900,000. As a result of this negative experience, the Company recorded reserves totalling $3,500,000 in its June 30, 1996 financial statements related to possible future adjustments of its cost report estimates by intermediaries. Management believes that adequate provision has been made for any adjustments that may result from future intermediary reviews and audits.
Several years ago, the Federal Government established a funding mechanism, known as disproportionate share, which was meant to adequately reimburse facilities serving a disproportionately high volume of Medicaid patients, relative to other providers. Disproportionate share funding was established under Title XIX of the Social Security Act, administered at the State level and approved/overseen by the Health Care Financing Administration, since Medicaid services are jointly funded by each State as well as the Federal Government. In fiscal years 1995 and 1994, the Company received significant disproportionate share payments from the Louisiana Medicaid program. Statutory changes virtually eliminated the disproportionate share funding mechanism in
Louisiana and, for the year ended June 30 1996, disproportionate share payments received by the Company's Louisiana facilities were not material.
The impact of Louisiana disproportionate share payments on net revenues and income from continuing operations in fiscal 1995 was approximately $5,600,000 and $3,700,000, respectively, and the impact of Louisiana disproportionate share payments on net revenues and income from continuing operations in fiscal 1994 was approximately $14,300,000 and $9,300,000, respectively. The majority of Louisiana disproportionate share payments was received at the Company's Three Rivers Hospital facility, which treated primarily Medicaid-eligible adolescents diagnosed with various behavioral disorders. This facility was further adversely impacted by the State of Louisiana's application of significantly more restrictive admission criteria in December 1994 for adolescents seeking inpatient psychiatric treatment in the State. Due to a negative operating margin in the fourth quarter of fiscal 1995 and a significant decrease in admissions since December 1994, on June 30, 1995, the Company closed Three Rivers Hospital and consolidated its operations with the Company's Greenbrier Hospital facility located less than five miles away.
During fiscal 1996, the State of Louisiana requested repayment of disproportionate share payments received by two of the Company's Louisiana facilities in fiscal years 1995 and 1994 totalling approximately $5,000,000. The repayment requests related to a) alleged overpayments made to Three Rivers Hospital because the State believed Three Rivers' actual annual inpatient volume was less than its projection of annual inpatient volume made at the beginning of its 1994 cost reporting year and b) alleged improper teaching hospital payments made to Three Rivers Hospital and Bayou Oaks Hospital because the State believed these facilities were not qualifying teaching hospitals at the time these payments were made. The Company believes that certain of the calculations which support the State's calculation of annual inpatient volume in 1994 are in error and that other relevant factors affecting the State's calculation have not been considered. Further, the Company believes that, based on its understanding of the rules and regulations in place at the time the teaching hospital payments were made, payments received as a result of the teaching classification were appropriate.
On the basis of discussions to date between the Company and the State, the Company believes that this matter may be settled for an amount significantly less than the State's initial requests. Any settlement of this matter will be contingent upon the execution of settlement documentation, the terms of which have not been agreed upon. Further, there can be no assurance that the Company and the State will agree on a settlement amount or the terms and conditions of settlement documentation. The Company intends to vigorously contest any position by the State of Louisiana which the Company considers adverse and believes that adequate provision has been made at June 30, 1996 for the estimated amount which might be recovered from the Company as a result of this matter. See "Item 8.
Item 8. Financial Statements and Supplementary Data.
Financial statements of the Company and its consolidated subsidiaries are set forth herein beginning on page.
Item 9.
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.
Not applicable.
PART III
Item 10.
Item 10. Directors and Executive Officers of the Registrant.
Information with respect to the Company's executive officers is contained in Part I under "Item 1. Business -- Executive Officers of the Registrant." The information required by this Item with respect to directors will be contained in the Company's definitive Proxy Statement ("Proxy Statement") for its 1996 Annual Meeting of Stockholders to be held on November 21, 1996 and is incorporated herein by reference. Such Proxy Statement will be filed with the Securities and Exchange Commission not later than 120 days subsequent to June 30, 1996.
Item 11.
Item 11. Executive Compensation.
The information required with respect to this Item will be contained in the Proxy Statement, and such information is incorporated herein by reference.
Item 12.
Item 12. Security Ownership of Certain Beneficial Owners and Management.
The information required with respect to this Item will be contained in the Proxy Statement, and such information is incorporated herein by reference.
Item 13.
Item 13. Certain Relationships and Related Transactions.
The information required with respect to this Item will be contained in the Proxy Statement, and such information is incorporated herein by reference.
PART IV
Item 14.
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K.
(a) Documents filed as Part of the Report:
1. Financial Statements
Information with respect to this Item is contained on Pages to of this Annual Report on Form 10-K.
2. Financial Statement Schedules
All schedules have been omitted because they are inapplicable or the information is provided in the consolidated financial statements, including the notes thereto.
3. Exhibits
Information with respect to this Item is contained in the attached Index to Exhibits.
(b) Reports on Form 8-K:
There were no reports on Form 8-K filed by the Company for the quarter ended June 30, 1996. On October 2, 1996, the Company filed a Current Report on Form 8-K relating to a proposed merger between the Company and Ramsay Managed Care, Inc.
(c) Exhibits Required by Item 601 of Regulation S-K:
Exhibits required to be filed by the Company pursuant to Item 601 of Regulation S-K are contained in Exhibits listed in response to Item 14(a)3, and are incorporated herein by reference. The agreements, management contracts and compensatory plans and arrangements required to be filed as an Exhibit to this Form 10-K are listed in Exhibits 4.4, 10.4, 10.58, 10.88, 10.93, 10.94, 10.95, 10.96, 10.97 and 10.98.
POWER OF ATTORNEY
The Registrant, and each person whose signature appears below, hereby appoints Bert G. Cibran and Thomas M. Haythe as attorneys-in-fact with full power of substitution, severally, to execute in the name and on behalf of the registrant and each such person, individually and in each capacity stated below, one or more amendments to the annual report which amendments may make such changes in the report as the attorney-in-fact acting deems appropriate and to file any such amendment to the report with the Securities and Exchange Commission.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto fully authorized.
RAMSAY HEALTH CARE, INC.
Dated: 10/7/96 By /s/ Bert G. Cibran Bert G. Cibran President and Principal Executive Officer
Dated: 10/7/96 By /s/ Carol C. Lang Carol C. Lang Principal Financial Officer
Pursuant to the requirements of the Securities and Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated. Signature/Title
Dated: 10/8/96 By /s/ Paul J. Ramsay Paul J. Ramsay Chairman of the Board and Director
Dated: 10/7/96 By /s/ Luis E. Lamela Luis E. Lamela Executive Vice Chairman of the Board and Director
Signature/Title
Dated: 10/7/96 By /s/ Aaron Beam, Jr. Aaron Beam, Jr. Director
Dated: 10/7/96 By /s/ Peter J. Evans Peter J. Evans Director
Dated: __________________ By__________________________________________ Robert E. Galloway Director
Dated: 10/7/96 By /s/ Thomas M. Haythe Thomas M. Haythe Director
Dated: 10/7/96 By /s/ Steven J. Shulman Steven J. Shulman Director
Dated: 10/8/96 By /s/ Michael S. Siddle Michael S. Siddle Director
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RAMSAY HEALTH CARE, INC. AND SUBSIDIARIES INDEX TO FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULES
The following consolidated financial statements of the Registrant and its subsidiaries are submitted herewith in response to Item 8 and Item 14(a)(1):
Page Number
Report of Independent Auditors........................... Consolidated Balance Sheets -- June 30, 1996 and 1995.... Consolidated Statements of Operations-- For the Years Ended June 30, 1996, 1995 and 1994.................. Consolidated Statements of Stockholders' Equity -- For the Years Ended June 30, 1996, 1995 and 1994........ Consolidated Statements of Cash Flows -- For the Years Ended June 30, 1996, 1995 and 1994.................. Notes to Consolidated Financial Statements...............
All schedules have been omitted because they are inapplicable or the information is provided in the consolidated financial statements, including the notes thereto.
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REPORT OF INDEPENDENT AUDITORS
Board of Directors and Stockholders Ramsay Health Care, Inc.
We have audited the accompanying consolidated balance sheets of Ramsay Health Care, Inc. and Subsidiaries as of June 30, 1996 and 1995, and the related consolidated statements of operations, stockholders' equity, and cash flows for each of the three years in the period ended June 30, 1996. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of Ramsay Health Care, Inc. and Subsidiaries at June 30, 1996 and 1995, and the consolidated results of their operations and their cash flows for each of the three years in the period ended June 30, 1996, in conformity with generally accepted accounting principles.
As discussed in Note 3 to the consolidated financial statements, the Company changed its method of accounting for the impairment of long-lived assets in 1995.
ERNST & YOUNG LLP
New Orleans, Louisiana October 8, 1996
RAMSAY HEALTH CARE, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS
June 30 1996 1995
ASSETS
Current assets Cash and cash equivalents ......................... $ 7,605,000 $ 9,044,000 Patient accounts receivable, less allowances for doubtful accounts of $4,573,000 and $3,886,000 at June 30, 1996 and 1995, respectively ......... 23,410,000 21,564,000 Amounts due from third-party contractual agencies . 6,479,000 5,956,000 Current portion of receivable from affiliated company ......................................... 1,412,000 325,000 Other receivables ................................. 2,985,000 3,330,000 Deferred income taxes ............................. 1,398,000 -- Other current assets .............................. 2,372,000 2,764,000 Total current assets ............................ 45,661,000 42,983,000
Other assets Cash held in trust ................................ 745,000 1,778,000 Cost in excess of net asset value of purchased businesses ...................................... 591,000 663,000 Unamortized preopening and loan costs ............. 1,040,000 2,221,000 Receivable from affiliated company, less current portion 6,795,000 7,170,000 Deferred income taxes ............................. 10,141,000 8,652,000 Other noncurrent assets ........................... 1,392,000 2,301,000 20,704,000 22,785,000
Property and equipment Land .............................................. 5,025,000 5,383,000 Buildings and improvements ........................ 69,200,000 77,630,000 Equipment, furniture and fixtures ................. 20,325,000 19,611,000 94,550,000 102,624,000 Less accumulated depreciation ..................... 28,157,000 29,156,000 66,393,000 73,468,000
$ 132,758,000 $139,236,000
See notes to consolidated financial statements.
RAMSAY HEALTH CARE, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS
June 30 1996 1995
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities Accounts payable........................ $ 4,990,000 $ 3,868,000 Accrued salaries and wages.............. 5,169,000 4,843,000 Other accrued liabilities............... 4,412,000 1,347,000 Amounts due to third-party contractual agencies.................. 8,435,000 4,996,000 Current portion of long-term debt....... 10,940,000 3,831,000 Total current liabilities.......... 33,946,000 18,885,000
Noncurrent liabilities Other accrued liabilities .............. 7,170,000 1,337,000 Long-term debt, less current portion.... 44,664,000 55,568,000 Minority interests...................... 925,000 1,667,000 Total noncurrent liabilities....... 52,759,000 58,572,000
Stockholders' equity Class B convertible preferred stock, Series C, $1 par value--authorized 152,321 shares; issued 142,486 shares (liquidation value of $7,244,000) including accrued dividends of $91,000 ................. 233,000 233,000 Common stock, $.01 par value-- authorized 20,000,000 shares; issued 8,605,108 shares at June 30, 1996 and 8,290,795 shares at June 30, 1995............... 86,000 83,000 Additional paid-in capital.............. 99,899,000 99,147,000 Retained earnings (deficit) ............ (50,266,000) (33,785,000) Treasury stock--581,550 common shares at June 30, 1996 and June 30, 1995, at cost............ ( 3,899,000) (3,899,000) Total stockholders' equity......... 46,053,000 61,779,000
$ 132,758,000 $ 139,236,000
See notes to consolidated financial statements.
RAMSAY HEALTH CARE, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS
Year Ended June 30 1996 1995 1994
NET REVENUES ...................... $ 117,423,000 $ 136,418,000 $ 137,002,000 Expenses: Salaries, wages and benefits ..... 66,259,000 72,061,000 64,805,000 Other operating expenses ......... 42,387,000 44,741,000 42,907,000 Provision for doubtful accounts .. 5,805,000 5,086,000 5,846,000 Depreciation and amortization .... 5,490,000 7,290,000 6,836,000 Interest and other financing charges ........................ 6,892,000 8,347,000 8,906,000 Losses related to asset sales and closed businesses ........... 4,473,000 6,431,000 802,000 Asset impairment charges ......... 5,485,000 21,815,000 --
TOTAL EXPENSES .................... 136,791,000 165,771,000 130,102,000
INCOME (LOSS) BEFORE MINORITY INTERESTS, INCOME TAXES AND EXTRAORDINARY ITEM ............... (19,368,000) (29,353,000) 6,900,000 Minority interests ................ -- 887,000 4,824,000
INCOME (LOSS) BEFORE INCOME TAXES AND EXTRAORDINARY ITEM ..... (19,368,000) (30,240,000) 2,076,000
Provision (benefit) for income taxes ............................ (2,887,000) (13,195,000) 599,000
INCOME (LOSS) BEFORE EXTRAORDINARY ITEM ............... (16,481,000) (17,045,000) 1,477,000 Extraordinary item: Loss from early extinguishment of debt, less applicable income tax benefit of $206,000 in 1995 and $103,000 in 1994 ............. -- (257,000) (155,000)
NET INCOME (LOSS) ................. $ (16,481,000) $ (17,302,000) $ 1,322,000
Income (loss) per common and dilutive common equivalent share: Primary: Before extraordinary item ........ $ (2.12) $ (2.25) $ 0.15 Extraordinary item: Loss from early extinguishment of debt .......... -- (0.03) (0.01)
$ (2.12) $ (2.28) $ 0.14 Fully diluted: Before extraordinary item ........................... $ (2.12) $ (2.24) $ 0.15 Extraordinary item: Loss from early extinguishment of debt ........ -- (0.03) (0.01)
$ (2.12) $ (2.27) $ 0.14 Weighted average number of common and dilutive common equivalent shares outstanding: Primary .......................... 7,929,000 7,743,000 9,641,000 Fully diluted .................... 7,929,000 7,794,000 9,679,000
See notes to consolidated financial statements.
RAMSAY HEALTH CARE, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Class B Class A Convertible Convertible Preferred Additional Retained Preferred Stock Common Paid-In Earnings Treasury Stock Series C Stock Capital (Deficit) Stock
BALANCE AT JULY 1, 1993 $ 23,000 $142,000 $ 81,000 $ 99,847,000 $(17,805,000) $(2,291,000)
Exercise of stock options (112,834 shares) .... -- -- 1,000 565,000 -- -- Dividends on Class B convertible preferred stock, Series C ... -- 91,000 -- (364,000) -- -- Purchase of treasury stock (160,000 shares) .... -- -- -- -- -- (1,144,000) Net income .. -- -- -- -- 1,322,000 --
BALANCE AT JUNE 30, 1994 ....... 23,000 233,000 82,000 100,048,000 (16,483,000) (3,435,000)
Exercise of stock options (74,166 shares) .... -- -- 1,000 378,000 -- -- Shares issued in connection with employee stock purchase plan (15,869 shares) .... -- -- -- 89,000 -- -- Dividends on Class B convertible preferred stock, Series C ... -- -- -- (364,000) -- -- Purchase of treasury stock (99,800 shares) ... -- -- -- -- -- (464,000) Redemption of Class A convertible preferred stock ...... (23,000) -- -- (100,000) -- -- Distribution of subsidiary to stockholders -- -- -- (904,000) -- -- Net loss .... -- -- -- -- (17,302,000) --
BALANCE AT JUNE 30, 1995 ........ -- 233,000 83,000 99,147,000 (33,785,000) (3,899,000)
Exercise of stock options (3,000 shares) .... -- -- -- 10,000 -- -- Shares issued in connection with employee stock purchase plan (21,760 shares) ... -- -- -- 70,000 -- -- Other shares issued (289,553 shares) .... -- -- 3,000 1,034,000 -- -- Dividends on Class B convertible preferred stock, Series C ... -- -- -- (362,000) -- -- Net loss .... -- -- -- -- (16,481,000) --
BALANCE AT JUNE 30, 1996 ........ $ -- $233,000 $86,000 $ 99,899,000 $(50,266,000) $(3,899,000)
See notes to consolidated financial statements.
RAMSAY HEALTH CARE, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS
Year Ended June 30 1996 1995 1994 Cash flows from operating activities Net income (loss) ............. $(16,481,000) $(17,302,000 $ 1,322,000 Adjustments to reconcile net income (loss) to net cash provided by operating activities: Depreciation and amortization .............. 6,003,000 8,074,000 7,638,000 Asset impairment charges ................... 5,485,000 21,815,000 -- Loss on early extinguishment of debt ...................... -- 463,000 258,000 Write-off of development and other costs ............... 381,000 716,000 -- Loss on disposal of assets ................. -- 5,096,000 722,000 Deferred income tax benefit ................... (2,887,000) (13,584,000) (1,188,000) Provision for doubtful accounts ......... 5,805,000 5,086,000 5,846,000 Management and director fees paid in common stock ........... 600,000 -- -- Minority interests ......... -- 887,000 4,824,000 Cash flows from (increase) decrease in operating assets: Patient accounts receivable .............. (7,651,000) (4,410,000) (2,169,000) Other current assets .................. (1,632,000) (522,000) (2,071,000) Other noncurrent assets .................. 225,000 616,000 (554,000) Cash flows from increase (decrease) in operating liabilities: Accounts payable ......... 1,105,000 2,466,000 (2,484,000) Accrued salaries, wages and other liabilities ............. 9,202,000 (749,000) 2,072,000 Amounts due to third-party contractual agencies ................ 3,439,000 267,000 (1,385,000) Total adjustments ........... 20,075,000 26,221,000 11,509,000 Net cash provided by operating activities ........... 3,594,000 8,919,000 12,831,000 Cash flows from investing activities Proceeds from sales of assets ................... -- 970,000 16,422,000 Acquisitions of businesses .................. -- -- (6,022,000) Expenditures for property and equipment ................... (1,467,000) (2,726,000) (5,070,000) Development project costs ....................... -- (2,124,000) (388,000) Preopening costs ............. -- (329,000) (2,195,000) Restricted cash (reserved) used for debt payments ............... -- 5,311,000 (5,311,000) Cash held in trust ........... 1,033,000 (974,000) 806,000 Net cash provided by (used in) investing activities ........... (434,000) 128,000 (1,758,000) Cash flows from financing activities Loan costs ................... (217,000) (290,000) (222,000) Proceeds from sale/leaseback of facilities and equipment ................... -- 12,015,000 -- Distributions to minority interests .......... (742,000) (2,466,000) (2,741,000) Proceeds from working capital facility .................... -- 2,500,000 -- Proceeds from private placement of shares of subsidiary .................. -- 3,320,000 -- Reduction in cash due to distribution of subsidiary ............... -- (1,427,000) -- Payment of costs related to distribution of subsidiary .................. -- (1,696,000) -- Net proceeds from exercise of options and stock purchases ......... 517,000 468,000 566,000 Payments on debt ............. (3,795,000) (17,683,000) (11,734,000) Payment of preferred stock dividends ............. (362,000) (364,000) (273,000) Cancellation of Class A preferred stock ...................... -- (123,000) -- Purchase of treasury stock ...................... -- (464,000) (1,144,000) Net cash used in financing activities ........... (4,599,000) (6,210,000) (15,548,000) Net increase (decrease) in cash and cash equivalents .................... (1,439,000) 2,837,000 (4,475,000) Cash and cash equivalents at beginning of year .............. 9,044,000 6,207,000 10,682,000 Cash and cash equivalents at end of year .................... $ 7,605,000 $ 9,044,000 $ 6,207,000
See notes to consolidated financial statements.
RAMSAY HEALTH CARE, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Summary of Significant Accounting Policies
Basis of Presentation
The consolidated financial statements include the accounts of Ramsay Health Care, Inc. and its majority-owned subsidiaries (the "Company"). All significant intercompany accounts and transactions have been eliminated in consolidation.
Industry
The Company is a provider of a full continuum of behavioral health services. It offers patient care through integrated networks of mental health delivery systems in eleven states, principally in the southeast and southwest, built around 15 inpatient hospitals with 1,369 licensed beds (including 77 medical subacute beds), outpatient centers and management contracts. Nine of the Company's facilities also provide less intensive residential treatment services. During fiscal years 1995 and 1994, the Company operated a managed mental health business through a subsidiary, the stock of which was distributed in the form of a dividend to the Company's stockholders in April 1995. See Note 2.
Use of Estimates
The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates. See Notes 4, 9 and 11.
Reclassifications
Certain amounts in the fiscal 1995 and 1994 financial statements have been reclassified to conform with the fiscal 1996 presentation.
Cash Equivalents
Cash equivalents include short-term, highly liquid interest-bearing investments consisting primarily of certificates of deposit, commercial paper, money market mutual funds and demand revenue bonds.
Cash Held in Trust
Cash held in trust is revocable by the Company under certain circumstances and includes cash and short-term investments set aside for the payment of losses in connection with the Company's self-insurance program for hospital professional and general liability claims.
RAMSAY HEALTH CARE, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued)
Intangible Assets and Deferred Costs
Cost in excess of net asset value of purchased businesses is amortized on a straight- line basis over 40 years. The carrying value of cost in excess of net asset value of purchased businesses is reviewed by Company management if the facts and circumstances suggest that it may be impaired. If this review indicates that these costs will not be recoverable, as determined based on the undiscounted cash flows of the entity over the remaining amortization period, the Company's carrying value of these costs is reduced by the estimated shortfall of cash flows.
Preopening costs, principally salaries and other costs incurred prior to opening a new facility, program or business, are deferred and amortized on a straight-line basis over two years.
Loan costs are deferred and amortized ratably over the life of the loan and are included in interest and other financing charges. When a loan or a portion thereof is prepaid, a proportionate amount of deferred loan costs associated with the borrowing is written off and reported as an extraordinary loss from early extinguishment of debt in the Company's statement of operations.
Accumulated amortization of the Company's intangible assets and deferred costs as of June 30, 1996 and 1995 was $6,880,000 and $7,544,000, respectively.
Property and Equipment
Property and equipment are stated at cost, except for assets considered to be impaired pursuant to FASB Statement Number 121, which are stated at fair value of the assets as of the date the assets are determined to be impaired. Upon the sale or retirement of property and equipment, the cost and related accumulated depreciation are removed from the accounts and the resulting gain or loss is included in operations.
Depreciation is computed substantially on the straight-line method for financial reporting purposes and on accelerated methods for income tax purposes. The general range of estimated useful lives for financial reporting purposes is twenty to forty years for buildings and five to twenty years for equipment.
Medicare, Medicaid and Other Contracted Reimbursement Programs
Net revenues include estimated reimbursable amounts from Medicare, Medicaid and other contracted reimbursement programs. Amounts received by the Company for treatment of patients covered by such programs, which may be based on the cost of services provided or predetermined rates, are generally less than the established billing rates of the Company's hospitals. Final determination of
RAMSAY HEALTH CARE, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued)
amounts earned under contracted reimbursement programs is subject to review and audit by the appropriate agencies. Differences between amounts recorded as estimated settlements and the audited amounts are reflected as adjustments to net revenues in the period the final determination is made. See Note 11.
Professional and General Liability Insurance
The Company maintains a self-insurance program for its hospital professional and general liability insurance. The Company and its facilities are insured for professional and general liability in the aggregate amount of $25 million with self-insured retentions of $500,000 per claim and $1,500,000 aggregate per year. The Company records the liability for uninsured professional and general liability losses related to asserted and unasserted claims arising from reported and unreported incidents based on independent valuations which consider claim development factors, the specific nature of the facts and circumstances giving rise to each reported incident and the Company's history with respect to similar claims. The development factors are based on a blending of the Company's actual experience with industry standards.
Income Taxes
Income taxes are accounted for in accordance with Statement of Financial Accounting Standards (SFAS) No. 109. SFAS 109 requires recognition of deferred tax assets and liabilities for the expected future tax consequences of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes.
Minority Interests
The equity of minority partners in subsidiaries is reported on the balance sheet as minority interests. Minority interests reflect changes for the respective share of income of the subsidiaries attributable to the minority partners, the effect of which is also reflected in the results of operations of the Company, and for distributions made to the minority partners.
Earnings Per Share
Primary earnings per share are calculated by dividing income before extraordinary items and net income by the weighted average number of common and dilutive common equivalent shares outstanding during each period. The Company's common stock equivalents include Class A convertible preferred stock (which was redeemed by the Company in June 1995), Class B convertible preferred stock, Series C and stock options and warrants to purchase Common Stock. Fully diluted earnings per share are calculated as if all conversions and exercises had occurred at the beginning of the year.
RAMSAY HEALTH CARE, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued)
Stock Options
The Company grants stock options for a fixed number of shares to employees with an exercise price equal to the fair value of the shares at the date of grant. The Company accounts for stock option grants in accordance with APB Opinion No. 25, Accounting for Stock Issued to Employees, and, accordingly, recognizes no compensation expense for the stock option grants.
2. Transactions with Affiliated Companies
In October 1993, the Company, through its subsidiary Ramsay Managed Care, Inc. ("RMCI"), entered the managed mental health business through an acquisition of Florida Psychiatric Management, Inc. The managed care division expanded in June 1994 with the acquisition of a Phoenix, Arizona-based managed mental health business and, in fiscal 1995, through the award of contracts in Hawaii and West Virginia. On April 24, 1995, the Company distributed the stock of RMCI held by it to the holders of record on April 21, 1995 of the Company's Common and Preferred Stock. Subsequent to this distribution, which was recorded at net book value, RMCI ceased being a subsidiary of the Company.
The distribution of RMCI reduced additional paid-in capital of the Company by $904,000. In addition, costs related to the distribution of RMCI, which included accounting, legal, printing, investment banking and distribution agent fees and expenses, were charged to the operations of RMCI (and not the Company) effective on the date of the distribution and costs related to a private placement and rights offering by RMCI were deducted from additional paid-in capital of RMCI (and not the Company) on the effective date of the distribution.
RMCI is governed by a Board of Directors which is substantially the same as the Company's Board of Directors. At June 30, 1996, total net cash advances made by the Company to or on behalf of RMCI, including for purposes of partially funding acquisitions and for working capital and other corporate purposes, totalled $8,207,000. Of this amount, $6,000,000 is represented by an unsecured, interest-bearing (8%), subordinated promissory note due from RMCI and issued on October 25, 1994. The remaining amount, which is also unsecured, includes $360,000 of accrued interest on the promissory note since October 1, 1995 and $1,847,000 (of which approximately $1,600,000 was outstanding on the distribution date) of additional amounts paid by RHCI on behalf of RMCI or charges by RHCI to RMCI for certain administrative services. Of the $6,000,000 due on the promissory note, approximately $1,412,000 is due on or before June 30, 1997 and the remainder is payable in 13 quarterly installments of approximately $353,000, beginning September 30, 1997. RHCI has agreed that the payment of interest on the promissory note for the period October 1, 1995 through June 30, 1996, as well as the $1,847,000 of additional amounts owed, will not be required until after July 1, 1997, all on terms and conditions to be mutually agreed to by RHCI and RMCI. During fiscal 1996 and 1995, total income
RAMSAY HEALTH CARE, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued)
recorded on amounts advanced to RMCI were approximately $600,000 and $110,000, respectively.
On October 1, 1996, the Company and RMCI entered into an agreement and plan of merger providing for the acquisition of RMCI by the Company. Upon consummation of the merger, in exchange for all of the outstanding shares of common and preferred stock of RMCI, the Company will issue approximately 2,130,000 shares of Common Stock and 100,000 shares of Class B Preferred Stock, Series 1996, which will be convertible into 1,000,000 shares of Common Stock of the Company. In addition, following the merger, all amounts owed by RMCI to the Company will become an intercompany payable and receivable between RMCI and RHCI, respectively. The merger is subject to approval by the shareholders of each company, the receipt of lender, governmental and other consents and the declaration of effectiveness by the Securities and Exchange Commission of a registration statement to be filed by the Company. Subject to the satisfaction of these conditions, it is expected that the merger will be consummated in March, 1997.
At June 30, 1996, Ramsay Holdings HSA Limited owns approximately 17.5% of the outstanding Common Stock of the Company and 50% of the outstanding Class B Preferred Stock, Series C of the Company. Paul Ramsay Holdings Pty. Limited ("Pty. Limited") owns approximately 3.4% of the outstanding Common Stock of the Company and the remaining 50% of the outstanding Class B Preferred Stock, Series C.
In October 1995 and August 1996, Pty. Limited, a corporate affiliate of Paul J. Ramsay, the Chairman of the Board of the Company, acquired through private placements 275,863 shares and 275,546 shares, respectively, of Common Stock of the Company at a price of $3.625 and $2.75 per share, respectively. Of the total shares acquired in October 1995, 121,363 were issued for cash and 154,500 were issued for management fees due during the remainder of fiscal 1996 under the Company's management agreement with another corporate affiliate (the "Management Fee Affiliate") of Mr. Ramsay. The shares acquired in August 1996 were issued for management fees due under the management agreement during fiscal 1997. With the issuance of the additional shares, the voting interest in the Company held by Mr. Ramsay increased to approximately 34.8%.
On September 10, 1996, the Company entered into a letter agreement with the Management Fee Affiliate and Pty. Limited which terminates the management agreement effective July 1, 1997. In consideration for this termination, the Company issued warrants to Pty. Limited to purchase 250,000 shares of Common Stock at an exercise price of $2.63 per share. These warrants are fully exercisable as of September 10, 1996 and expire on September 10, 2006.
RAMSAY HEALTH CARE, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued)
During the years ended June 30, 1996, 1995 and 1994, pursuant to the management agreement, the Company incurred management fee expenses of $737,000, $716,000 and $698,000, respectively.
3. Impairment of Assets
In the fourth quarter of fiscal 1995, the Company elected to adopt early the provisions of FASB Statement Number 121 (the "Statement"). The Statement requires that a new cost basis be established for impaired assets (within the meaning of the Statement) based on the fair value of the assets as of the date the assets are determined to be impaired, and that previously recorded accumulated depreciation related to the impaired assets be eliminated.
As required by the Statement, the Company periodically reviews the long-lived assets (land, buildings, fixed equipment and related cost in excess of net asset value of purchased businesses) of each of its inpatient facilities to determine if the carrying value of these assets is recoverable, based on the future cash flows expected from the assets. Based on this review, the Company determined that the carrying value of certain long-lived assets was impaired (within the meaning of the Statement) at June 30, 1996 and 1995. The amount of the impairment, calculated as the excess of carrying value of the long-lived assets over the fair value of the assets (estimated using discounted future cash flows expected from the assets), totalled approximately $4,000,000 ($3,400,000 after tax) and $20,300,000 ($11,400,000 after tax) at June 30, 1996 and 1995, respectively. In accordance with the Statement, the facilities' carrying amount of cost in excess of net asset value of purchased businesses, totalling $3,800,000 in 1995 (zero in 1996), was written off prior to recording an impairment to the carrying amount of property and equipment.
In 1996 and in 1995, the Company recorded additional asset impairment charges totalling approximately $1,500,000 related to its investments in other healthcare enterprises. The amount of the impairment charges was based on an assessment of the future expected cash flows to be realized by the Company from these enterprises.
4. Losses Related to Asset Sales and Closed Businesses
Primarily in the fourth quarter of fiscal 1996, the Company recorded losses totalling approximately $4,500,000 related to additional asset write-downs, cost report settlements and other adjustments related to businesses which closed at various times prior to fiscal 1996, a reserve for disproportionate share payments which the State of Louisiana has contended were improperly paid to two of the Company's Louisiana facilities in fiscal 1995 and 1994, and lease commitments and other costs incurred in connection with the Company's decision to relocate its corporate headquarters.
RAMSAY HEALTH CARE, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued)
During fiscal 1996, the State of Louisiana requested repayment of disproportionate share payments received by two of the Company's Louisiana facilities in fiscal years 1995 and 1994 totalling approximately $5,000,000. The repayment requests related to a) alleged overpayments made to Three Rivers Hospital because the State believed Three Rivers' actual annual inpatient volume was less than its projection of annual inpatient volume made at the beginning of its 1994 cost reporting year and b) alleged improper teaching hospital payments made to Three Rivers Hospital and Bayou Oaks Hospital because the State believed these facilities were not qualifying teaching hospitals at the time these payments were made. The Company believes that certain of the calculations which support the State's calculation of annual inpatient volume in 1994 are in error and that other relevant factors affecting the State's calculation have not been considered. Further, the Company believes that, based on its understanding of the rules and regulations in place at the time the teaching hospital payments were made, payments received as a result of the teaching classification were appropriate.
On the basis of discussions to date between the Company and the State, the Company believes that this matter may be settled for an amount significantly less than the State's initial requests. Any settlement of this matter will be contingent upon the execution of settlement documentation, the terms of which have not been agreed upon. Further, there can be no assurance that the Company and the State will agree on a settlement amount or the terms and conditions of settlement documentation. The Company intends to vigorously contest any position by the State of Louisiana which the Company considers adverse and believes that adequate provision has been made at June 30, 1996 for the estimated amount which might be recovered from the Company as a result of this matter.
During the third quarter of fiscal 1995, the Company recorded a $3,600,000 loss in connection with the sale and leaseback of two inpatient facilities and a $400,000 loss in connection with the sale of real estate. In addition, the Company closed certain outpatient operations during fiscal 1995, incurred additional losses in 1995 on outpatient operations closed in fiscal 1994, and closed Three Rivers Hospital on June 30, 1995. Losses recorded in 1995 as a result of these closures totalled approximately $1,500,000.
During the fourth quarter of fiscal 1994, the Company terminated its plan to develop additional outpatient treatment centers and closed or made the decision to close certain of these centers already in operation. The losses associated with these actions, which totalled approximately $1.3 million, were offset by a $500,000 gain recognized on the sale of the Company's Atlantic Shores Hospital facility.
RAMSAY HEALTH CARE, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued)
5. Long-Term Debt
The Company's long-term debt is as follows:
June 30 1996 1995 11.6% senior secured notes due in semi-annual installments through March 31, 2000 ................... $ 34,169,000 $ 34,169,000 Variable rate revenue bonds through 2015 .............. 19,400,000 20,200,000 15.6% subordinated secured notes due in semi-annual installments through March 31, 2000 .................. 1,846,000 2,308,000 Capital lease obligation .......... -- 919,000 Working capital facility .......... -- 1,500,000 Other ............................. 189,000 303,000 55,604,000 59,399,000 Less amounts due within one year ......................... 10,940,000 3,831,000 $ 44,664,000 $ 55,568,000
The aggregate scheduled maturities of long-term debt during the five years subsequent to June 30, 1996 are as follows: 1997 -- $10,940,000; 1998 -- $8,260,000; 1999 -- $10,343,000; 2000 -- $12,462,000; and 2001 -- $800,000.
The Company has pledged substantially all of its real property as collateral on the Company's long-term debt.
In 1984 and 1985, the Company entered into loan agreements with various state and local governmental agencies for the purpose of financing or providing reimbursement for the construction costs of certain of the Company's psychiatric hospitals. Each state governmental agency funded its loan with proceeds of tax-exempt variable rate demand revenue bonds in the same amount as its loan. These loans, which generally have a term of 30 years, have an outstanding balance at June 30, 1996 of $19,400,000. The interest rates on the loans are the same as the applicable revenue bonds and ranged from 3.4% to 6.6% at June 30, 1996. The Company is required to maintain an irrevocable standby letter of credit for each bond in an amount equal to the total principal payments due under the bond, plus approximately one quarter's interest. Such letters of credit are provided in a credit facility with a group of banks finalized in May 1993 (the "1993 Credit Facility").
The 1993 Credit Facility originally included approximately $27,500,000 in letters of credit and $4,000,000 in a working capital facility. Due to principal payments and the redemption of the variable rate revenue bonds associated with the sale of a facility in 1994, the letters of credit outstanding at June 30, 1996 totalled $20,300,000. In addition, the Company fully paid down and terminated its working capital facility with its bank group in December 1995.
RAMSAY HEALTH CARE, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued)
In September 1995, and again in August 1996, the Company and banks supporting the 1993 Credit Facility agreed to terms which extended its expiration date from May 15, 1996 to February 15, 1997 and from February 15, 1997 to August 15, 1997, respectively. In connection with the initial extension, the Company agreed to reduce the bank group's exposure under the 1993 Credit Facility by an additional $3 million on or before July 1, 1996. This requirement was extended by the bank group to December 31, 1996 as part of the August 1996 extension.
On April 30, 1990, the Company entered into credit facilities (the "1990 Credit Facilities") with a group of insurance companies and banks. The 1990 Credit Facilities included $56,500,000 in senior secured notes and $3,000,000 in subordinated secured notes. The senior secured notes bear interest at 11.6% and require a principal payment of $3,093,250 on September 30, 1996, semi-annual principal payments of $3,531,250 from March 31, 1997 through September 30, 1998 and semi-annual principal payments of $5,650,000 from March 31, 1999 through March 31, 2000. The subordinated secured notes bear interest at 15.6% and are due in semi-annual installments of $230,769 that began on March 31, 1994 and end on March 31, 2000. In connection with a $7,500,000 prepayment of principal on the senior secured notes in May 1995, the Company wrote down a proportionate amount of unamortized loan costs related to the senior secured notes, totalling $229,000, and incurred a yield maintenance charge from the holders of the senior secured notes, totalling $234,000. These amounts, net of an applicable income tax benefit of $206,000, are reported as a loss from early extinguishment of debt in the 1995 statement of operations.
Under the 1993 and 1990 Credit Facilities, the Company is required to meet certain covenants, including: (1) the maintenance of a minimum level of consolidated tangible net worth; (2) the maintenance of a working capital ratio; and (3) the maintenance of certain fixed charge coverage and debt service ratios. From time to time, the lenders under the 1993 and 1990 Credit Facilities have agreed to waive or otherwise adjust certain of these ratios and levels. In connection with these waivers and adjustments, the Company pays additional fees and expenses. Further, as part of the waivers and adjustments obtained as of June 30, 1996, the Company agreed to provide its Hillcrest Hospital facility and related assets as additional collateral to the lenders and agreed not to pay future cash dividends in respect of its Class B Preferred Stock, Series C.
6. Operating Leases
In April 1995, the Company sold and leased back the land, buildings and fixed equipment of two of its inpatient facilities. The leases have a primary term of 15 years (with three successive renewal options of 5 years each) and currently require aggregate annual minimum rentals of $1.58 million, payable monthly. Effective April 1 of each year, the lease payments are subject to any upward adjustment (not to exceed 3% annually) in the consumer price index over the preceding twelve months. Effective April 1995, the Company agreed to lease an 80-bed facility near Salt Lake City, Utah for four years, with an option to renew for an additional three years. The lease requires annual base rental payments of $456,000, payable monthly, and percentage rental payments equal to 2% of the net revenues of the facility, payable quarterly. The Company leases office space for various other purposes over terms ranging from one to five years. Rent expense related to noncancellable operating leases amounted to
RAMSAY HEALTH CARE, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued)
$3,269,000, $2,718,000 and $2,052,000 for the years ended June 30, 1996, 1995 and 1994, respectively.
Future minimum lease payments required under noncancellable operating leases as of June 30, 1996 are as follows: 1997--$2,993,000; 1998--$2,699,000; 1999--$2,464,000; 2000-- $1,783,000; 2001--$1,770,000; and thereafter--$14,520,000.
7. Stockholders' Equity
The Certificate of Incorporation of the Company, as amended, authorizes the issuance of 20,000,000 shares of Common Stock, $.01 par value, 800,000 shares of Class A Preferred Stock, $1.00 par value, and 1,000,000 shares of Class B Preferred Stock, $1.00 par value, of which 333,333 shares have been designated as Class B Preferred Stock, Series 1987, $1.00 par value, and 152,321 shares have been designated as Class B Preferred Stock, Series C, $1.00 par value ("Series C Preferred Stock").
Outstanding capital stock at June 30, 1996 included 8,605,108 shares of Common Stock, of which 581,550 shares are held in treasury, and 142,486 shares of Series C Preferred Stock. The shares of Series C Preferred Stock were issued in June 1993 in connection with a recapitalization of the interests of Paul J. Ramsay, the Company's chairman. The shares are entitled to cumulative dividends at a rate of 5% per annum, payable quarterly in arrears, and to a liquidation preference of $50.84 per share under certain circumstances. The shares are convertible into that number of fully paid and nonassessable shares of Common Stock that results from dividing the conversion price in effect at conversion into $50.84 and multiplying the quotient obtained by the number of shares of Series C Preferred Stock being converted. The current conversion price is $5.084 per share. Each share of Series C Preferred Stock is entitled to ten (10) votes on all matters put to a vote of the shareholders of the Company and otherwise has voting rights and powers equal to the voting rights and powers of the Common Stock.
The Board of Directors has adopted a Stockholders Rights Plan, under which the Company distributed a dividend of one common share purchase right for each outstanding share of the Company's Common Stock (calculated as if all outstanding shares of Series C Preferred Stock were converted into shares of Common Stock). Each right becomes exercisable upon the occurrence of certain events for a number of shares of the Company's Common Stock having a market price totalling $24 (subject to certain anti-dilution adjustments which may occur in the future). The rights currently are not exercisable and will be exercisable only if a new person acquires 20% or more of the Company's Common Stock or announces a tender offer resulting in ownership of 20% or more of the Company's Common Stock. The rights, which expire on August 14, 2005, are redeemable in whole or in part at the Company's option at any time before a 20% or greater position has been acquired, for a price of $.01 per right.
RAMSAY HEALTH CARE, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued)
The Company's credit documents governing its credit facilities include provisions which prohibit the payment of dividends unless the sum of (i) all dividends, redemptions and all other distributions in respect of its capital stock and (ii) all restricted investments (as defined) during the applicable fiscal year would not exceed an amount equal to 50% of the consolidated net income of the Company for the immediately preceding fiscal year and provided that, at the time of such dividend and after giving effect thereto, certain specified financial ratio covenants would not be violated and no other default or event of default would occur. Further, in connection with waivers received from the Company's lenders under the 1993 and 1990 Credit Facilities as of June 30, 1996, the Company agreed not to pay future cash dividends in respect of its Series C Preferred Stock. Prior to this time, the Company's credit facilities permitted the payment of regular fixed dividends on the Series C Preferred Stock, provided that such dividends did not exceed $387,200 in each 12-month period and provided that no event of default existed or occurred as a result of such payment.
8. Options and Warrants
The Company's stock option plans provide for options to various key employees and non-employee directors to purchase shares of Common Stock at no less than the fair market value of the stock on the date of grant. Options granted become exercisable in varying increments including (a) 100% one year after the date of grant, (b) 50% each year beginning one year after the date of grant and (c) 33% each year beginning on the date of grant. Options issued to employees and directors are subject to anti-dilution adjustments and generally expire the earlier of 10 years after the date of grant or 60 days after the employee's termination date or the director's resignation date. At June 30, 1996, the weighted average remaining life of all outstanding options was seven years.
During 1996, in connection with a repricing opportunity authorized by the Company's Board of Directors on November 10, 1995, approximately 1,500,000 of options were voluntarily repriced by the optionholders. Under the repricing opportunity, the exercise prices of the holders' outstanding options were reduced to $2.50 per share, the closing price for the Common Stock on the NASDAQ National Market System on November 10, 1995. The repriced options are not exercisable until the closing price for the Common Stock, as quoted on the NASDAQ National Market System, equals or exceeds $7.00 per share for at least 15 trading days, which need not be consecutive, subsequent to November 10, 1995. The closing price for the Company's Common Stock has not exceeded $7.00 per share since November 10, 1995 and, therefore, none of the repriced options were exercisable at June 30, 1996.
RAMSAY HEALTH CARE, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued)
At June 30, 1996, there were no shares available for grant under the 1990 Stock Option Plan and 79,057, 64,802 and 178,142 shares available for grant under the 1991, 1993 and 1995 Stock Option Plans, respectively. The table below summarizes the activity in the plans in fiscal years 1996, 1995 and 1994.
1990 Plan 1991 Plan
Number Price Range Number Price Range of Options Per Share of Options Per Share
Outstanding, July 1, 1993 ......... 332,001 $5.00 1,061,501 $5.00-$6.25 Granted .............. -- -- 173,000 $6.88-$7.88 Canceled ............. -- -- (33,991) $5.00-$7.88 Exercised ............ (38,332) $5.00 (74,502) $5.00-$5.31
Outstanding, June 30, 1994 ....... 293,669 $5.00 1,126,008 $5.00-$7.88 Granted .............. -- -- -- -- Canceled ............. (52,013) $4.01 (66,885) $4.25-$7.88 Exercised ............ (31,999) $5.00 (42,167) $5.00-$5.31 Effect of Distribution of Subsidiary ....... 64,972 266,924
Outstanding, June 30, 1995 ....... 274,629 $4.01-$5.00 1,283,880 $3.75-$6.31 Granted .............. -- -- Canceled/expired (110,885) $4.01 (39,736) $4.01-$6.31 Exercised ............ -- --
Outstanding, June 30, 1996 ....... 163,744 $2.50-$4.01 1,244,144 $2.50-$6.31
Exercisable, June 30, 1996 ....... 63,252 166,961
Exercisable, June 30, 1995 ....... 274,629 909,390
Exercisable, June 30, 1994 ....... 293,669 982,669
1993 Plan 1995 Plan
Number Price Range Number Price Range of Options Per Share of Options Per Share
Outstanding, July 1, 1993 ........ -- -- -- -- Granted .............. 271,500 $6.88-$7.88 -- -- Canceled ............. (15,505) $7.88 -- Exercised ............ -- -- -- --
Outstanding, June 30, 1994 ....... 255,995 $6.88-$7.88 -- -- Granted .............. 65,000 $3.75-$6.63 -- -- Canceled ............. (101,037) $5.51-$7.88 -- -- Exercised ............ -- -- -- -- Effect of Distribution of Subsidiary ....... 46,930 -- --
Outstanding, June 30, 1995 ....... 266,888 $3.75-$6.31 -- -- Granted .............. 108,750 $3.38 321,858 $2.50-$4.01 Canceled ............. (49,756) $2.50-$6.31 -- -- Exercised ............ (3,000) $3.38 -- --
Outstanding, June 30, 1996 ....... 322,882 $2.50-$6.31 321,858 $2.50-$4.01
Exercisable, June 30, 1996 ....... 67,774 4,161
Exercisable, June 30, 1995 ....... 210,669 --
Exercisable, June 30, 1994 ....... 9,999 N/A
RAMSAY HEALTH CARE, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued)
On September 10, 1996, the Company entered into an Exchange Agreement with a corporate affiliate of Paul J. Ramsay whereby Mr. Ramsay exchanged 476,070 options with an exercise price of $2.50 per share (pursuant to the repricing opportunity discussed above), for warrants to purchase an aggregate of 500,000 shares for Common Stock at $2.75 per share. The warrants, which expire in June 2003, are not exercisable until the closing price for the Common Stock, as quoted on the NASDAQ National Market System, equals or exceeds $7.00 per share for at least 15 trading days, which need not be consecutive, subsequent to September 10, 1996. Most of the options exchanged were originally granted under the 1991 Plan.
As part of the 1990 Credit Facilities, the Company issued warrants to Aetna Life Insurance Company and Monumental Life Insurance Company to purchase an aggregate of 113,301 shares of the Company's Common Stock at $9.61 per share. As a result of anti-dilution adjustments, at June 30, 1996, the purchase price is $6.43 per share and a total of 139,597 warrants are outstanding. These warrants are exercisable on or before March 31, 2000.
9. Income Taxes
Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. Significant components of the Company's deferred tax liabilities and assets are as follows:
June 30 1996 1995 Deferred tax liabilities: Book basis of fixed assets over tax basis ....... $ 2,710,000 $ 4,023,000 Change in tax accounting methods ................ -- 685,000 Economic performance ............................ 237,000 316,000 Total deferred tax liabilities ............... 2,947,000 5,024,000 Deferred tax assets: Allowance for doubtful accounts ................. 1,211,000 609,000 General and professional liability insurance .... 899,000 635,000 Accrued employee benefits ....................... 374,000 417,000 Investment in nonconsolidated subsidiaries ...... 1,644,000 1,401,000 Impairment of investment ........................ 677,000 568,000 Other accrued liabilities ....................... 2,280,000 -- Other ........................................... 1,307,000 356,000 Net operating loss carryovers ................... 8,962,000 8,146,000 Alternative minimum tax credit carryovers ....... 1,544,000 1,544,000 Total deferred tax assets .................... 18,898,000 13,676,000 Valuation allowance for deferred tax assets ..... (4,412,000) -- Deferred tax assets, net of valuation allowance 14,486,000 13,676,000 Net deferred tax assets ...................... $11,539,000 $ 8,652,000
RAMSAY HEALTH CARE, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued)
The provision (benefit) for income taxes consists of the following:
Year Ended June 30 1996 1995 1994
Income taxes currently payable: Federal .......... $ -- $ -- $ 810,000 State ............ -- 183,000 874,000
Deferred income taxes: Federal .......... (2,577,000) (12,154,000) (1,196,000) State ............ (310,000) (1,430,000) 8,000 $ (2,887,000) $(13,401,000) $ 496,000
The provision (benefit) for income taxes is reported in the consolidated statements of operations as follows:
Year Ended June 30 1996 1995 1994
Provision (benefit) for income taxes...... $ (2,887,000) $(13,195,000) $ 599,000 Income tax benefit from loss on early extinguishment of debt................. -- (206,000) (103,000) $ (2,887,000) $(13,401,000) $ 496,000
The provision (benefit) for income taxes included in the consolidated statements of operations differs from the amounts computed by applying the statutory rate to income (loss) before income taxes, as follows:
Year Ended June 30 1996 1995 1994
Income (loss) before income taxes,extraordinary items and cumulative effect of accounting change............ $(19,368,000) $(30,240,000) $ 2,076,000 Federal statutory income tax rate......... 34% 34% 34% (6,585,000) (10,282,000) 706,000 Benefit of net operating loss recognized --- (2,503,000) (921,000) Increase in valuation allowance 4,412,000 --- --- Write-off of cost in excess of net asset value of purchased businesses.......... --- 956,000 --- Income tax benefit from loss on early extinguishment of debt ................ --- (206,000) (103,000) State income taxes............. (310,000) (1,247,000) 882,000 Other.......................... (404,000) (119,000) (68,000) $ (2,887,000) $(13,401,000) $ 496,000
The Company has net deferred tax assets of $11,539,000 and $8,652,000 at June 30, 1996 and 1995, respectively. In evaluating the realizability of its deferred tax assets and the need for a valuation allowance, management has considered the effects of implementing tax planning strategies, consisting of the sales of certain appreciated property. The Company's valuation
RAMSAY HEALTH CARE, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued)
allowance related to deferred tax assets was increased from zero at June 30, 1995 to $4,412,000 at June 30, 1996, based on increases in the Company's deferred tax assets which are not considered realizable given the estimated effects of management's tax planning strategies.
At June 30, 1996, net operating loss carryovers of approximately $23,600,000 (of which $17,600,000 expires from 2000 to 2003, $3,800,000 expires in 2010 and $2,200,000 expires in 2011) and alternative minimum tax credit carryovers of approximately $1,500,000 are available to reduce future federal income taxes, subject to certain annual limitations.
10. Fair Values of Financial Instruments
The following methods and assumptions were used by the Company in estimating the fair values of its financial instruments:
Cash and cash equivalents and cash held in trust: The carrying amount reported in the balance sheet for cash and cash equivalents and cash held in trust approximates its fair value.
Receivable from affiliated company: It was not practicable to estimate the fair value of the receivable from affiliated company as the borrowing rate of the affiliate was not determinable. Management believes this receivable is not impaired at June 30, 1996 and 1995.
Debt: The fair value of the Company's senior secured and subordinated secured notes is estimated using discounted cash flow analyses, based on the Company's estimated current incremental borrowing rate for similar types of borrowing arrangements. The carrying amounts of all other debt instruments approximate estimated fair value.
The carrying amounts and estimated fair values of the Company's financial instruments at June 30, 1996 and 1995 are as follows:
1996 1995
Carrying Fair Carrying Fair Amount Value Amount Value
Cash and cash equivalents ........... $ 7,605,000 $ 7,605,000 $ 9,044,000 $ 9,044,000 Cash held in trust ..... 745,000 745,000 1,778,000 1,778,000 Receivable from affiliated company .... 8,207,000 (see above) 7,495,000 (see above) Debt: Senior and subordinated notes .............. 36,015,000 36,904,000 36,477,000 38,226,000 Other ............... 19,589,000 19,589,000 22,922,000 22,922,000
11. Reimbursement from Third-Party Contractual Agencies
The Company records amounts due to or from third-party contractual agencies based on its best estimates of amounts to be ultimately received or paid under cost reports filed with the appropriate intermediaries. Final determination of amounts earned under contractual reimbursement programs is subject to review and audit by these intermediaries. Differences between amounts recorded as estimated settlements and the audited amounts are reflected as
RAMSAY HEALTH CARE, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued)
adjustments to net revenues in the period the final determination is made. During the years ended June 30, 1995 and 1994, the Company recorded contractual reimbursement benefits of approximately $1,000,000 and $1,400,000, respectively, related to intermediary audits of prior year cost reports. During the year ended June 30, 1996 the Company recorded contractual adjustment expenses of approximately $1,900,000 related to intermediary audits of prior year cost reports. As a result of this negative experience, the Company recorded reserves in the fourth quarter of fiscal 1996 totalling $3,500,000 related to possible future adjustments of its cost report estimates by intermediaries. Management believes that adequate provision has been made for any adjustments that may result from future intermediary reviews and audits.
During the fiscal year ended June 30, 1996, the Company derived approximately 70% of its net revenues from services provided to patients covered by various federal and state governmental programs. Management believes it is reasonably possible that the volume of patients or amount of reimbursement received under these programs could be curtailed, resulting in decreases in the Company's net revenues.
12. Savings Plan
The Company has a 401(k) tax deferred savings plan, administered by an independent trustee, covering substantially all employees over age twenty-one meeting a one-year minimum service requirement. The plan was adopted for the purpose of supplementing employees' retirement, death and disability benefits. The Company may, at its option, contribute to the plan through an Employer Matching Account, but is under no obligation to do so. An employee becomes vested in his Employer Matching Account over a four-year period.
The Company did not contribute to the plan in 1996 and 1995. In 1994, the Company contributed $160,000 to the plan.
13. Litigation
The Company is subject to claims and suits arising in the ordinary course of business. In the opinion of management, the ultimate resolution of such pending legal proceedings will not have a material adverse effect on the Company's financial position, results of operations or liquidity. See Note 4.
14. Allowance for Doubtful Accounts
Activity in the Company's allowance for doubtful accounts consists of the following:
Year Ended June 30 1996 1995 1994
Balance at beginning of year....... $ 3,886,000 $ 3,925,000 $ 4,955,000 Provision for doubtful accounts ... 5,805,000 5,086,000 5,846,000 Write-offs of uncollectible patient accounts receivable...... (5,118,000) (5,125,000) (6,876,000)
Balance at end of year............. $ 4,573,000 $ 3,886,000 $ 3,925,000
RAMSAY HEALTH CARE, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued)
15. Supplemental Cash Flow Information
The Company's non-cash investing and financing activities and cash payments for interest and income taxes were as follows:
Year Ended June 30 1996 1995 1994
Distribution of subsidiary to stockholders ...................... $ -- $ 904,000 $ -- Receivable from subsidiary distributed to stockholders ...................... -- 7,600,000 -- Issuance of debt in connection with acquisitions ................. -- -- 3,500,000 Issuance of stock in lieu of cash payment for management and director fees ................. 600,000 -- --
Cash paid during the year for: Interest (net of amount capitalized) ...................... $ 5,260,000 $ 6,518,000 $8,064,000 Income taxes ......................... 249,000 1,231,000 398,000
RAMSAY HEALTH CARE, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued)
16. Quarterly Results of Operations and Other Supplemental Information (Unaudited)
Following is a summary of the Company's quarterly results of operations for the years ended June 30, 1996 and 1995.
Quarter Ended September 30 December 31 March 31(2) June 30(3) Net revenues .... $ 29,129,000 $ 31,815,000 $ 31,888,000 $ 24,591,000 Income (loss) before income taxes .......... (631,000) 1,336,000 1,040,000 (21,113,000) Net income (loss) ......... (391,000) 835,000 638,000 (17,563,000)
Income (loss) per common and dilutive common equivalent share(1) Primary: Income (loss) per common share ........ $(0.06) $0.09 $0.07 $(2.23) Fully diluted: Income (loss) per common share ........ $(0.06) $0.09 $0.07 $(2.23)
Net revenues .... $ 35,823,000 $ 35,634,000 $ 33,547,000 $ 31,414,000 Income (loss) before income taxes and extraordinary items ......... 939,000 613,000 (5,315,000) (26,477,000) Income (loss) before extraordinary items ......... 588,000 437,000 (3,960,000) (14,110,000) Net income (loss) ........ 588,000 437,000 (4,321,000) (14,006,000)
Income (loss) per common and dilutive common equivalent share(1) Primary: Before extraordinary items ........ $0.06 $0.05 $(0.52) $(1.83) Extraordinary items ....... -- -- (0.05) 0.01 Income (loss) per common share ....... $0.06 $0.05 $(0.57) $(1.82) Fully diluted: Before extraordinary items ....... $0.06 $0.05 $(0.52) $(1.83) Extraordinary items ....... -- -- (0.05) 0.01 Income (loss) per common share ...... $0.06 $0.05 $(0.57) $(1.82)
(1) The quarterly earnings per share amounts may not equal the annual amounts due to changes in the average common and dilutive common equivalent shares outstanding during the year. (2) As further described in Note 4, during the third quarter of fiscal 1995, the Company recorded losses totalling $4.0 million ($2.9 million after estimated income tax benefit) related to a sale/leaseback transaction and the sale of real estate. (3) As further described in Note 3, in the fourth quarter of fiscal 1996 and 1995, the Company recorded asset impairment charges primarily related to the application of the principles of FASB Statement No. 121 of $5.5 million ($4.7 million after estimated income tax benefit) and $21.8 million ($12.3 million after estimated income tax benefit), respectively. As further described in Notes 4 and 11, in the fourth quarter of fiscal 1996, the Company recorded losses related to asset sales and closed businesses of approximately $4.5 million ($3.8 million after estimated income tax benefit) and contractual adjustment expenses related to cost report settlements/reserves of approximately $7 million ($6 million after estimated income tax benefit). Also, the Company recorded additional asset write- downs/reserves of approximately $2.9 million ($2.4 million after estimated income tax benefit) in the fourth quarter of fiscal 1996.
INDEX OF EXHIBITS
Page Number
2.1 Recapitalization Agreement dated as of June 30, 1993 by and among the Company, Ramsay Holdings HSA Limited and Paul Ramsay Holdings Pty. Limited (incorporated by reference to Exhibit 2.2 to the Company's Annual Report on Form 10-K for the year ended June 30, 1994) ......................... --
2.2 Agreement of sale and purchase dated April 12, 1995 by and between Mesa Psychiatric Hospital, Inc. and Capstone Capital Corporation (incorporated by reference to Exhibit 2.7 to the Company's Annual Report on Form 10-K for the year ended June 30, 1995). Pursuant to Reg. S-K, Item 601(b)(2), the Company agrees to furnish a copy of the Schedules and Exhibits to such Agreement to the Commission upon request .............................................. --
2.3 Agreement of sale and purchase dated April 12, 1995 by and between RHCI San Antonio, Inc. and Capstone Capital Corporation (incorporated by reference to Exhibit 2.8 to the Company's Annual Report on Form 10-K for the year ended June 30, 1995). Pursuant to Reg. S-K, Item 601(b)(2), the Company agrees to furnish a copy of the Schedules and Exhibits to such Agreement to the Commission upon request . --
2.4 Agreement and Plan of Merger dated as of October 1, 1996 among Ramsay Managed Care, Inc., the Company and RHCI Acquisition Corp. (incorporated by reference to Exhibit 2 to the Company's Current Report on Form 8-K dated October 2, 1996). Pursuant to Reg. S-K, Item 601(b)(2), the Company agrees to furnish a copy of the Disclosure Schedules to such Agreement to the Commission upon request --
3.1 Restated Certificate of Incorporation of the Company, as amended (incorporated by reference to Exhibit 3.1 to the Company's Annual Report on Form 10-K for the year ended June 30, 1990)............................................. --
3.2 Certificate of Amendment of Restated Certificate of Incorporation of the Company filed on April 17, 1991 (incorporated by reference to Exhibit 3.2 to the Company's Registration Statement on Form S-2, Registration No. 33-40762) ................................ --
3.3 Certificate of Correction to Certificate of Amendment of Restated Certificate of Incorporation of the Company filed on April 18, 1991 (incorporated by reference to Exhibit 3.3 to the Company's Registration Statement on Form Registration No. 33-40762) ........................... --
3.4 By-Laws of the Company, as amended to date (incorporated by reference to Exhibit 3.4 to the Company's Annual Report on Form 10-K for the year ended June 30, 1994) ..... --
3.5 Certificate of Designation of Preferred Stock of the Company filed on June 27, 1991 (incorporated by reference to Exhibit 3.5 to the Company's Registration Statement on Form S-2, Registration No. 33-40762) ................... --
3.6 Certificate of Designation of Preferred Stock of the Company filed on July 9, 1991 (incorporated by reference to Exhibit 3.6 to the Company's Registration Statement on Form S-2, Registration No. 33-40762) ................... --
3.7 Certificate of Designation of Preferred Stock of the Company filed on June 29, 1993(incorporated by reference to Exhibit 3.7 to the Company's Annual Report on Form 10-K for the year ended June 30, 1994) ......................... --
E-1
Page Number
4.1 Trust Indenture dated as of March 31, 1990, between the Company, Bountiful Psychiatric Hospital, Inc., Cumberland Mental Health, Inc., East Carolina Psychiatric Services Corporation, Havenwyck Hospital, Inc., Mesa Psychiatric Hospital, Inc., Psychiatric Institute of West Virginia, Inc., and The Citizens and Southern National Bank and Susan L. Adams (incorporated by reference to Exhibit 4.1 to the Company's Annual Report on Form 10-K for the year ended June 30, 1990) --
4.2 First Supplemental Trust Indenture dated as of June 15, 1991 between the Company, Bountiful Psychiatric Hospital, Inc., Cumberland Mental Health, Inc., East Carolina Psychiatric Services Corporation, Havenwyck Hospital, Inc., Mesa Psychiatric Hospital, Inc. and Psychiatric Hospital of West Virginia, Inc. and The Citizens and Southern National Bank, a national banking association, and an individual trustee, as Trustees (incorporated by reference to Exhibit 4.4 to the Company's Registration Statement on Form S-2, Registration No.33-40762) ................................. --
4.3 Second Supplemental Trust Indenture dated as of May 15, 1993 between the Company, Bountiful Psychiatric Hospital, Inc., Cumberland Mental Health, Inc., East Carolina Psychiatric Services Corporation, Havenwyck Hospital, Inc., Mesa Psychiatric Hospital,Inc. and Psychiatric Hospital of West Virginia, Inc. and NationsBank of Georgia, National Association and Susan L. Adams (incorporated by reference to Exhibit 4.3 to the Company's Annual Report on Form 10-K for the year ended June 30, 1994) ......................... --
4.4 Third Supplemental Trust Indenture dated as of April 12, 1995 between the Company, Bountiful Psychiatric Hospital, Inc., Cumberland Mental Health, Inc., East Carolina Psychiatric Services Corporation, Havenwyck Hospital, Inc., Mesa Psychiatric Hospital, Inc. and Psychiatric Hospital of West Virginia, Inc., and NationsBank of Georgia, National Association and Elizabeth Talley, as Trustee .....
4.5 Fourth Supplemental Trust Indenture dated as of September 15, 1995 between the Company, Bountiful Psychiatric Hospital, Inc., Cumberland Mental Health, Inc., East Carolina Psychiatric Services, Havenwyck Hospital, Inc., Mesa Psychiatric Hospital, Inc. and Psychiatric Institute of West Virginia, Inc. and NationsBank of Georgia, National Association and Elizabeth Talley, as Trustee (incorporated by reference to Exhibit 10.100 to the Company's Quarterly Report on Form 10-Q for the quarter ended September 30, 1995) ................................. --
4.6 Subsidiary Borrower Note of Atlantic Treatment Center, Inc. dated May 21, 1993 in the principal amount of $4,607,945 payable to the order of Societe Generale, New York Branch (incorporated by reference to Exhibit 4.5 to the Company's Annual Report on Form 10-K for the year ended June 30, 1994) --
4.7 Subsidiary Borrower Note of Carolina Treatment Center, Inc. dated May 21, 1993 in the principal amount of $5,030,000 payable to the order of Societe Generale, New York Branch (substantially identical to Exhibit 4.6) ................. --
4.8 Subsidiary Borrower Note of Greenbrier Hospital, Inc. dated May 21, 1993 in the principal amount of $5,973,125 payable to the order of Societe Generale, New York Branch (substantially identical to Exhibit 4.6) .................. --
4.9 Subsidiary Borrower Note of Gulf Coast Treatment Center, Inc. dated May 21, 1993 in the principal amount of $4,392,500 payable to the order of Societe Generale, New York Branch (substantially identical to Exhibit 4.6) .. --
E-2
Page Number
4.10 Subsidiary Borrower Note of Houma Psychiatric Hospital, Inc. dated May 21, 1993 in the principal amount of $3,979,589 payable to the order of Societe Generale, New York Branch (substantially identical to Exhibit 4.6) .................. --
4.11 Subsidiary Borrower Note of HSA of Oklahoma, Inc. dated May 21, 1993 in the principal amount of $3,445,562 payable to the order of Societe Generale, New York Branch (substantially identical to Exhibit 4.6) ................... --
10.1 Note Purchase Agreement dated as of March 31, 1990, among the Company, Bountiful Psychiatric Hospital, Inc., Cumberland Mental Health, Inc., East Carolina Psychiatric Services Corporation, Havenwyck Hospital, Inc., Mesa Psychiatric Hospital, Inc., Psychiatric Institute of West Virginia, Inc., and Aetna Life Insurance Company regarding the purchase by Aetna Life Insurance Company of $26,000,000 principal amount of 11.6% Senior Secured $1,000,000 principal amount of 15.6% Subordinated Secured Notes, and Warrants to Purchase Common Stock of the Company (incorporated by reference to Exhibit 10.2 to the Company's Annual Report on Form 10-K for the year ended June 30, 1990) --
10.2 Note Purchase Agreement pursuant to which Monumental Life Insurance Company purchased $15,500,000 principal amount of 11.6% Senior Secured Notes, $2,000,000 principal amount of 15.6% Subordinated Secured Notes, and Warrants to Purchase Common Stock of the Company (substantially identical to Exhibit 10.1) .......................................... --
10.3 Note Purchase Agreement pursuant to which Connecticut Mutual Life Insurance Company purchased $15,000,000 principal amount of 11.6% Senior Secured Notes(substantially identical to Exhibit 10.1) ................................ --
10.4 Pledge and Security Agreement between Bountiful Psychiatric Hospital, Inc. and The Citizens and Southern National Bank
10.5 Pledge and Security Agreement dated as of March 31, 1990, between the Company and The Citizens and Southern National Bank (substantially identical to Exhibit 10.4) ........... --
10.6 Pledge and Security Agreement between Michigan Psychiatric Services, Inc. and The Citizens and Southern National Bank (substantially identical to Exhibit 10.4) ............. --
10.7 Pledge and Security Agreement between Americare of Galax, Inc. and The Citizens and Southern National Bank (substantially identical to Exhibit 10.4) ............... --
10.8 Deed of Trust, Security Agreement, and Financing Statement dated as of March 31, 1990 from Bountiful Psychiatric Hospital, Inc. to Merrill Title Company for the benefit of The Citizens and Southern National Bank and Susan L. Adams covering certain property in Woods Cross, Utah (incorporated by reference to Exhibit 10.10 to the Company's Annual Report on Form 10-K for the year ended June 30, 1990) --
10.9 Deed of Trust and Security Agreement from Cumberland Mental Health, Inc. to First American Title Insurance Company for the benefit of The Citizens and Southern National Bank and Susan L. Adams covering certain property in Fayetteville, North Carolina (substantially identical to Exhibit 10.8) ................................ --
10.10 Deed of Trust and Security Agreement from East Carolina Psychiatric Services Corporation to First American Title Insurance Company for the benefit of The Citizens and Southern National Bank and Susan L. Adams covering certain property in Jacksonville, North Carolina (substantially identical to Exhibit 10.8) ................................ --
E-3
Page Number
10.11 Mortgage and Security Agreement dated as of March 31, 1990 from Havenwyck Hospital, Inc. to The Citizens and Southern National Bank and Susan L. Adams covering certain property in Auburn Hills, Michigan (incorporated by reference to Exhibit 10.12 to the Company's Annual Report on Form 10-K for the year ended June 30, 1990) .......................... --
10.12 Leasehold Deed of Trust, Assignment of Rents and Security Agreement with Financing Statement dated as of March 31, 1990 from Mesa Psychiatric Hospital, Inc. to Transamerica Title Insurance Company for the benefit of The Citizens and Southern National Bank and Susan L. Adams covering certain property in Mesa, Arizona (incorporated by reference to Exhibit 10.13 to the Company's Annual Report on Form 10-K for the year ended June 30, 1990) ............................. --
10.13 Leasehold Deed of Trust and Security Agreement from Psychiatric Institute of West Virginia, Inc. to J. Nicholas Barth, Esq., for the benefit of The Citizens and Southern National Bank and Susan L. Adams covering certain property in Morgantown, West Virginia (substantially identical to Exhibit 10.12) ............................................ --
10.14 Obligor Subrogation and Contribution Agreement dated as of April 30, 1990 among The Citizens and Southern National Bank, Susan L. Adams, the Company, Bountiful Psychiatric Hospital, Inc., Cumberland Mental Health, Inc., East Carolina Psychiatric Services Corporation, Havenwyck Hospital, Inc., Mesa Psychiatric Hospital, Inc., and Psychiatric Institute of West Virginia, Inc. (incorporated by reference to Exhibit 10.15 to the Company's Annual Report on Form 10-K for the year ended June 30, 1990) ............ --
10.15 Credit Agreement dated as of May 15, 1993 among the Company and certain of its subsidiaries named therein, Societe Generale, New York Branch, First Union National Bank of North Carolina and Hibernia National Bank, as lenders, and Societe Generale, as issuing bank and agent (incorporated by reference to Exhibit 10.16 to the Company's Annual Report on Form 10-K for the year ended June 30, 1994) --
10.16 Security Agreement dated as of May 15, 1993 by Atlantic Treatment Center, Inc. in favor of Societe Generale, as agent for the lenders which are parties to that certain Credit Agreement described in Exhibit 10.15 above, and covering certain property in Daytona Beach, Florida (incorporated by reference to Exhibit 10.17 to the Company's Annual Report on Form 10-K for the year ended June 30, 1994) --
10.17 Security Agreement dated as of May 15, 1993 by Carolina Treatment Center, Inc. in favor of Societe Generale, as agent for the lenders which are parties to that certain Credit Agreement described in Exhibit 10.15 above (substantially identical to Exhibit 10.16) ................ --
10.18 Security Agreement dated as of May 15, 1993 by Great Plains Hospital, Inc. in favor of Societe Generale, as agent for the lenders which are parties to that certain Credit Agreement described in Exhibit 10.15 above (substantially identical to Exhibit 10.16) ............................... --
10.19 Security Agreement dated as of May 15, 1993 by Greenbrier Hospital, Inc. in favor of Societe Generale, as agent for the lenders which are parties to that certain Credit Agreement described in Exhibit 10.15 above (substantially identical to Exhibit 10.16) ............................... --
10.20 Security Agreement dated as of May 15, 1993 by Gulf Coast Treatment Center, Inc. in favor of Societe Generale, as agent for the lenders which are parties to that certain Credit Agreement described in Exhibit 10.15 above (substantially identical to Exhibit 10.16) ................ --
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10.21 Security Agreement dated as of May 15, 1993 by Houma Psychiatric Hospital, Inc. in favor of Societe Generale, as agent for the lenders which are parties to that certain Credit Agreement described in Exhibit 10.15 above (substantially identical to Exhibit 10.16) ............... --
10.22 Security Agreement dated as of May 15, 1993 by HSA of Oklahoma, Inc. in favor of Societe Generale, as agent for the lenders which are parties to that certain Credit Agreement described in Exhibit 10.15 above (substantially identical to Exhibit 10.16) ................................ --
10.23 Security Agreement dated as of May 15, 1993 by The Haven Hospital, Inc. in favor of Societe Generale, as agent for the lenders which are parties to that certain Credit Agreement described in Exhibit 10.15 above (substantially identical to Exhibit 10.16) ................ --
10.24 Security Agreement dated as of May 15, 1993 by the Company in favor of Societe Generale, as agent for the lenders which are parties to that certain Credit Agreement described in Exhibit 10.15 above (substantially identical to Exhibit 10.16) --
10.25 Accounts Receivable Security Agreement dated as of May 15, 1993 by Americare of Galax, Inc. in favor of Societe Generale, as agent for the lenders which are parties to that certain Credit Agreement described in Exhibit 10.15 above (incorporated by reference to Exhibit 10.26 to the Company's Annual Report on Form 10-K for the year ended June 30, 1994) ............................................ --
10.26 Accounts Receivable Security Agreement dated as May 15, 1993 by Bountiful Psychiatric Hospital, Inc. in favor of Societe Generale, as agent for the lenders which are parties to that certain Credit Agreement described in Exhibit 10.15 above (substantially identical to Exhibit 10.25) ............................................ --
10.27 Accounts Receivable Security Agreement dated as of May 15, 1993 by Cumberland Mental Health, Inc. in favor of Societe Generale, New York Branch, as agent for the lenders which are parties to that certain Credit Agreement described in Exhibit 10.15 above (substantially identical to Exhibit 10.25) ............................................ --
10.28 Accounts Receivable Security Agreement dated as of May 15, 1993 by East Carolina Psychiatric Services Corporation in favor of Societe Generale, New York Branch, as agent for the lenders which are parties to that certain Credit Agreement described in Exhibit 10.15 above (substantially identical to Exhibit 10.25) ................ --
10.29 Accounts Receivable Security Agreement dated as of May 15, 1993 by Havenwyck Hospital, Inc. in favor of Societe Generale, New York Branch as agent for the lenders which are parties to that certain Credit Agreement described in Exhibit 10.15 above (substantially identical to Exhibit 10.25) ......................................... --
10.30 Accounts Receivable Security Agreement dated as of May 15, 1993 by Mesa Psychiatric Hospital, Inc. in favor of Societe Generale, New York Branch, as agent for the lenders which are parties to that certain Credit Agreement described in Exhibit 10.15 above (substantially identical to Exhibit 10.25) ............................................ --
10.31 Accounts Receivable Security Agreement dated as of May 15, 1993 by Michigan Psychiatric Services, Inc. in favor of Societe Generale, New York Branch, as agent for the lenders which are parties to that certain Credit Agreement described in Exhibit 10.15 above (substantially identical to Exhibit 10.25) ............................... --
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10.32 Accounts Receivable Security Agreement dated as of May 15, 1993 by Psychiatric Institute of West Virginia, Inc. in favor of Societe Generale, New York Branch, as agent for the lenders which are parties to that certain Credit Agreement described in Exhibit 10.15 above (substantially identical to Exhibit 10.25) ................ --
10.33 Stock Pledge Agreement dated as of May 15, 1993, among the Company in favor of Societe Generale, New York Branch, as agent for the lenders which are parties to that certain Credit Agreement described in Exhibit 10.15 above (incorporated by reference to Exhibit 10.34 to the Company's Annual Report on Form 10-K for the year ended June 30, 1994) --
10.34 Revolving Credit Guarantee dated as of May 15, 1993 by Americare of Galax, Inc. in favor of Societe Generale, New York Branch, as agent for the lenders which are parties to that certain Credit Agreement described in Exhibit 10.15 above (incorporated by reference to Exhibit 10.35 to the Company's Annual Report on Form 10-K for the year ended June 30, 1994) ............................................ --
10.35 Revolving Credit Guarantee dated as of May 15, 1993 by Bethany Psychiatric Hospital, Inc. in favor of Societe Generale, New York Branch, as agent for the lenders which are parties to that certain Credit Agreement described in Exhibit 10.15 above (substantially identical to Exhibit 10.34) ............................................ --
10.36 Revolving Credit Guarantee dated as of May 15, 1993 by Bountiful Psychiatric Hospital, Inc. in favor of Societe Generale, New York Branch, as agent for the lenders which are parties to that certain Credit Agreement described in Exhibit 10.15 above (substantially identical to Exhibit 10.34) ............................................ --
10.37 Revolving Credit Guarantee dated as of May 15, 1993 by Cumberland Mental Health, Inc. in favor of Societe Generale, New York Branch, as agent for the lenders which are parties to that certain Credit Agreement described in Exhibit 10.15 above (substantially identical to Exhibit 10.34) .......... --
10.38 Revolving Credit Guarantee dated as of May 15, 1993 by East Carolina Psychiatric Services Corporation in favor of Societe Generale, New York Branch, as agent for the lenders which are parties to that certain Credit Agreement described in Exhibit 10.15 above (substantially identical to Exhibit 10.34) ............................................ --
10.39 Revolving Credit Guarantee dated as of May 15, 1993 by Havenwyck Hospital, Inc. in favor of Societe Generale, New York Branch, as agent for the lenders which are parties to that certain Credit Agreement described in Exhibit 10.15 above (substantially identical to Exhibit 10.34) .. --
10.40 Revolving Credit Guarantee dated as of May 15, 1993 by Mesa Psychiatric Hospital, Inc. in favor of Societe Generale, New York Branch, as agent for the lenders which are parties to that certain Credit Agreement described in Exhibit 10.15 above (substantially identical to Exhibit 10.34) ............................................ --
10.41 Revolving Credit Guarantee dated as of May 15, 1993 by Michigan Psychiatric Services, Inc. in favor of Societe Generale, New York Branch, as agent for the lenders which are parties to that certain Credit Agreement described in Exhibit 10.15 above (substantially identical to Exhibit 10.34) ............................................ --
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10.42 Revolving Credit Guarantee dated as of May 15, 1993 by Psychiatric Institute of West Virginia, Inc. in favor of Societe Generale, New York Branch, as agent for the lenders which are parties to that certain Credit Agreement described in Exhibit 10.15 above (substantially identical to Exhibit 10.34) ......................................... --
10.43 Management Fee Subordination Agreement dated May 15, 1993, among Paul J. Ramsay and Ramsay Health Care Pty. Ltd. in favor of Societe Generale, New York Branch, as agent for the lenders which are parties to that certain Credit Agreement described in Exhibit 10.15 above (incorporated by reference to Exhibit 10.44 to the Company's Annual Report on Form 10-K for the year ended June 30, 1994) ..... --
10.44 Mortgage and Fixture Filing and Assignment of Leases and Rents dated as of May 15, 1993 granted by Atlantic Treatment Center, Inc. to Societe Generale, individually and as agent for the lenders which are parties to that certain Credit Agreement described in Exhibit 10.15 above, with respect to certain real property located in Volusia County, Florida (incorporated by reference to Exhibit 10.45 to the Company's Annual Report on Form 10-K for the year ended June 30, 1994) ..................................... --
10.45 Mortgage and Fixture Filing and Assignment of Leases and Rents dated as of May 15, 1993 granted by Carolina Treatment Center, Inc. to Societe Generale, individually and as agent for the lenders which are parties to that certain Credit Agreement described in Exhibit 10.15 above, with respect to certain real property located in Horry County, South Carolina (substantially identical to Exhibit 10.44) ............................................ --
10.46 Deed of Trust and Fixture Filing and Assignment of Leases and Rents dated as of May 15, 1993 granted by Great Plains Hospital, Inc. to Jacob W. Bayer, Jr. as Trustee for the benefit of Societe Generale, individually and as agent for the lenders which are parties to that certain Credit Agreement described in Exhibit 10.15 above, with respect to certain real property located in Vernon County, Missouri (substantially identical to Exhibit 10.44) ................ --
10.47 Mortgage, Security and Assignment of Leases and Rents dated as of May 15, 1993 by Greenbrier Hospital, Inc. to Societe Generale individually and as agent for the lenders which are parties to that certain Credit Agreement described in Exhibit 10.15 above, with respect to certain real property located in St. Tammany Parish, Louisiana (substantially identical to Exhibit 10.44) ............................... --
10.48 Mortgage and Fixture Filing and Assignment of Leases and Rents dated as of May 15, 1993 granted by Gulf Coast Treatment Center, Inc. to Societe Generale, individually and as agent for the lenders which are parties to that certain Credit Agreement described in Exhibit 10.15 above, with respect to certain real property located in Okaloosa County, Florida (substantially identical to Exhibit 10.44) --
10.49 Mortgage, Security Agreement and Assignment of Leases and Rents dated as of May 15, 1993 granted by Houma Psychiatric Hospital, Inc. to Societe Generale, individually and as agent for the lenders which are parties to that certain Credit Agreement described in Exhibit 10.15 above, with respect to certain real property located in the City of Houma, Parish of Terrebonne, Louisiana (substantially identical to Exhibit 10.44) ............................... --
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10.50 Mortgage with Power of Sale and Fixture Filing and Assignment of Leases and Rents dated as of May 15, 1993 granted by HSA of Oklahoma, Inc. to Societe Generale, individually and as agent for the lenders which are parties to that certain Credit Agreement described in Exhibit 10.15 above, with respect to certain real property located in Garfield County, Oklahoma (substantially identical to Exhibit 10.44) ............................................ -- --
10.51 Deed of Trust and Fixture Filing and Assignment of Leases and Rents dated as of May 15, 1993 granted by The Haven Hospital, Inc. to Societe Generate, individually and as agent for the lenders which are parties to that certain Credit Agreement described in Exhibit 10.15 above, with respect to certain real property located in the City of DeSoto, Dallas County, Texas (substantially identical to Exhibit 10.44) ............................................ --
10.52 Loan Agreement between Okaloosa County, Florida and Gulf Coast Treatment Center, Inc. dated October 1, 1984, relating to the issuance of bonds for Gulf Coast Treatment Center, Inc. (incorporated by reference to Exhibit 10.16 to the Company's Registration Statement on Form S-1, Registration No. 2-9892) .................................. --
10.53 Loan Agreement between Louisiana Public Facilities Authority and Greenbrier Hospital, Inc. dated November 1, 1984, relating to the issuance of bonds for Greenbrier Hospital, Inc. (incorporated by reference to Exhibit 10.17 to the Company's Registration Statement on Form S-1, Registration No. 2-98921) ....................... --
10.54 Loan Agreement between Horry County, South Carolina and Carolina Treatment Center, Inc. dated December 1, 1984, relating to the issuance of bonds for Carolina Treatment Center, Inc. (incorporated by reference to Exhibit 10.18 to the Company's Registration Statement on Form S-1, Registration No. 2-98921) ................................. --
10.55 Loan Agreement between Louisiana Public Facilities Authority and Houma Psychiatric Hospital, Inc. dated as of September 1, 1985, relating to the issuance of bonds for HSA Bayou Oaks Hospital (incorporated by reference to Exhibit 10.56 to the Company's Annual Report on Form 10-K for the year ended June 30, 1994) ......................... --
10.56 Ground Lease between Facilities Management Corporation, as landlord, and Psychiatric Institute of West Virginia, Inc., as tenant, dated as of September 30, 1985 (incorporated by reference to Exhibit 10.57 to the Company's Annual Report on Form 10-K for the year ended June 30, 1994) ............................................ --
10.57 Lease Agreement between Houma Psychiatric Hospital, Inc. and Hospital Service District No. 1 of the Parish of Terrebonne, State of Louisiana, effective February 1, 1985 (incorporated by reference to Exhibit 10.38 to the Company's Registration Statement on Form S- 1, Registration No. 2-98921) --
10.58 Lease among Bethany Psychiatric Hospital, Inc., Bethany General Hospital, the City of Bethany, Oklahoma and the Bethany General Hospital Trust dated December 9, 1985 (ground lease) ............................................
10.59 Loan Agreement between The Enid Development Authority and HSA of Oklahoma,Inc. dated as of October 1, 1985, relating to The Enid Development Authority Variable Rate Demand Revenue Bonds (Meadowlake Hospital Project) (incorporated by reference to Exhibit 10.60 to the Company's Annual Report on Form 10-K for the year ended June 30, 1995) --
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10.60 Ramsay Health Care, Inc. 1990 Stock Option Plan, as amended to date (incorporated by reference to Exhibit 4.3 to the Company's Registration Statement on Form S-8 filed on March 6, 1991) ............................................ --
10.61 Lease Agreement dated August 30, 1988 between the Company and Ayshire Land Dome Joint Venture relating to office space at One Poydras Plaza, New Orleans, Louisiana (incorporated by reference to Exhibit 10.78 to the Company's Registration Statement on Form S-2, Registration No. 33-40762) ....... --
10.62 Ramsay Health Care, Inc. Deferred Compensation and Retirement Plan (incorporated by reference to Exhibit 10.79 to the Company's Registration Statement on Form S-2,Registration No. 33-40762) ....................... --
10.63 Personnel and Facility Sharing Agreement dated as of June 27, 1991 between the Company and Ramsay Holdings HSA Limited (incorporated by reference to Exhibit 10.83 to the Company's Registration Statement on Form S-2, Registration No.33-40762) ................................. --
10.64 Indemnity Agreement dated as of June 1991 between the Company and Ramsay Holdings HSA Limited (incorporated by reference to Exhibit 10.84 to the Company's Registration Statement on Form S-2, Registration No. 33-40762) ............................................. --
10.65 Management Agreement dated as of June 25, 1992 between the Company and Ramsay Health Care Pty. Limited (incorporated by reference to Exhibit 10.90 to the Company's Annual Report on Form 10-K for the year ended June 30, 1992) ............... --
10.66 Ramsay Health Care, Inc. 1991 Stock Option Plan (incorporated by reference to Exhibit 10.91 to the Company's Annual Report on Form 10-K for the year ended June 30, 1992) --
10.67 Employment Agreement dated January 23, 1992 between the Company and Wallace E. Smith (incorporated by reference to Exhibit 10.94 to the Company's Annual Report on Form 10-K for the year ended June 30, 1992) .......................... --
10.68 Employment Agreement dated January 23, 1992 between the Company and John A. Quinn (incorporated by reference to Exhibit 10.95 to the Company's Annual Report on Form 10-K for the year ended June 30, 1992) .......................... --
10.69 Lease dated April 4, 1992 between The Union Labor Life Insurance Company and the Company (incorporated by reference to Exhibit 10.98 to the Company's Annual Report on Form 10-K for the year ended June 30, 1992) ........................ --
10.70 Lease dated May 27, 1992 between Gail Buy and Bountiful Psychiatric Hospital (incorporated by reference to Exhibit 10.99 to the Company's Annual Report on Form 10-K for the year ended June 30, 1992) ................................. --
10.71 Lease Agreement dated as of February 12, 1993 by and between Gulf Coast Treatment Center, Inc and Vendell of Florida, Inc. (incorporated by reference to Exhibit 10.82 to the Company's Annual Report on Form 10-K for the year ended June 30, 1994) ...................................... --
10.72 Ramsay Health Care, Inc. 1993 Stock Option Plan (incorporated by reference to Exhibit 10.83 to the Company's Quarterly Report on Form 10-Q for the quarter ended December 31, 1993) .................................. --
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PagE Number 10.73 Ramsay Health Care, Inc. 1993 Employee Stock Purchase Plan (incorporated by reference to Exhibit 10.84 to the Company's Quarterly Report on Form 10-Q for the quarter ended December 31, 1993 ........................... --
10.74 Fourth Modification, Extension and Amendment of Lease Agreement dated November 15, 1993 between the Company and One Poydras Plaza Venture relating to the Company's office space at One Poydras Plaza, New Orleans, Louisiana (incorporated by reference to Exhibit 10.84 to the Company's Annual Report on Form 10-K for the year ended June 30, 1994) ............................................ --
10.75 Employment Agreement dated July 19, 1994 between the Company and Brent J. Bryson (incorporated by reference to Exhibit 10.85 to the Company's Annual Report on Form 10-K for the year ended June 30, 1995) .................... --
10.76 Rights Agreement dated as of August 1, 1995 between Ramsay Health Care, Inc. and First Union National Bank of North Carolina, as Rights Agent, which includes the form of Right Certificate as Exhibit A and the Summary of Rights to Purchase Common Shares as Exhibit B (incorporated by reference to Exhibit 4.1 to the Company's Current Report on Form 8-K dated August 1, 1995) ......................... --
10.77 Letter Agreement dated June 30, 1995 among Ramsay Health Care, Inc., Ramsay Holdings HSA Limited and Paul Ramsay Holdings Pty. Limited (incorporated by reference to Exhibit 4.2 to the Company's Current Report on Form 8-K dated August 1, 1995) ........................................... --
10.78 Lease Agreement dated April 12, 1995 between Capstone Capital Corporation and Mesa Psychiatric Hospital, Inc. (incorporated by reference to Exhibit 10.88 to the Company's Annual Report on Form 10-K for the year ended June 30, 1995) ............................................ --
10.79 Lease Agreement dated April 12, 1995 between Capstone Capital of San Antonio,LTD, d/b/a Cahaba of San Antonio, LTD. and RHCI San Antonio, Inc. (incorporated by reference to Exhibit 10.89 to the Company's Annual Report on Form 10-K for the year ended June 30, 1995) .................... --
10.80 Facility Lease Agreement dated June 26, 1995 by and between Charter Canyon Behavioral Health System, Inc. and Bountiful Psychiatric Hospital, Inc. (incorporated by reference to Exhibit 10.90 to the Company's Annual Report on Form 10-K for the year ended June 30, 1995) ......................... --
10.81 Employment termination letter dated September 15, 1995 between the Company and Gregory H. Browne (incorporated by reference to Exhibit 10.91 to the Company's Annual Report on Form 10-K for the year ended June 30, 1995) ............ --
10.82 Second Amended and Restated Distribution Agreement between the Company and Ramsay Managed Care, Inc. ("RMCI") (incorporated by reference to Exhibit 10.1 to RMCI's Registration Statement on Form S-1 (Registration No. 33-78034) filed with the Commission on April 24, 1995) --
10.83 Employee Benefit Agreement dated as of February 1, 1995 between the Company and RMCI (incorporated by reference to Exhibit 10.4 to RMCI's Registration Statement on Form S-1 (Registration No. 33-78034) filed with the Commission on April 24, 1995) ........................................... --
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10.84 Tax Sharing Agreement dated as of October 25, 1994 between the Company and RMCI(incorporated by reference to Exhibit 10.5 to RMCI's Registration Statement on Form S-1 (Registration No. 33-78034) filed with the Commission on April 24, 1995) ........................................ --
10.85 Corporate Services Agreement dated as of January 2, 1995 between the Company and RMCI (incorporated by reference to Exhibit 10.6 to RMCI's Registration Statement on Form S-1 (Registration No. 33-78034) filed with the Commission on April 24, 1995) ........................................... --
10.86 Form of Withholding Tax Agreement between the Company, Ramsay Holdings HSA Limited, Paul Ramsay Holdings Pty. Limited and Ramsay Health Care Pty. Limited (incorporated by reference to Exhibit 10.7 to RMCI's Registration Statement on Form S-1 (Registration No. 33-78034) filed with the Commission on April 24, 1995) .................... --
10.87 $6,000,000 Subordinated Promissory Note of RMCI, as amended (incorporated by reference to Exhibit 10.13 to RMCI's Registration Statement on Form S-1 (Registration No. 33-78034) filed with the Commission on April 24, 1995) --
10.88 Consent and Amendment dated April 12, 1996 among the Company and certain of its subsidiaries named therein, Societe Generale, New York Branch, First Union National Bank of North Carolina and Hibernia National Bank, as lenders, and Societe Generale, as issuing bank and agent ..
10.89 Second Amendment to Credit Agreement dated as of September 15, 1995 among the Company and certain of its subsidiaries named therein, Societe Generale, New York Branch, First Union National Bank of North Carolina and Hibernia National Bank, as lenders, and Societe Generale, as issuing bank and agent (incorporated by reference to Exhibit 10.99 to the Company's Quarterly Report on Form 10-Q for the quarter ended September 30, 1995) ............ --
10.90 Amended and Restated Stock Purchase Agreement dated October 12, 1995 by and among Paul Ramsay Holdings Pty. Limited, Ramsay Health Care, Inc. and, solely for the purpose of Section I, III and VI of the agreement, Ramsay Health Care Pty. Limited (incorporated by reference to Exhibit 10.101 to the Company's Quarterly Report on Form 10-Q for the quarter ended September 30, 1995) ....... --
10.91 Amendment to Rights Agreement, dated October 3, 1995 between Ramsay Health Care, Inc. and First Union Bank of North Carolina, as Rights Agent (incorporated by reference to Exhibit 10.102 to the Company's Quarterly Report on Form 10-Q for the quarter ended September 30, 1995) ..................................................... --
10.92 Ramsay Health Care, Inc. 1995 Long Term Incentive Plan (incorporated by reference to Exhibit 10.103 to the Company's Quarterly Report on Form 10-Q for the quarter ended December 31, 1995) .................................. --
10.93 Third Amendment to Credit Agreement dated as of August 15, 1996 among the Company and certain subsidiaries named therein, Societe Generale, New York Branch, First Union National Bank of North Carolina and Hibernia National Bank, as lenders, and Societe Generale, as issuing bank and agent .................................................
10.94 Stock Purchase Agreement dated as of August 13, 1996 by and among Paul Ramsay Holdings Pty. Limited, the Company and, solely for purposes of Sections I, III and IV thereof, Ramsay Health Care Pty. Limited ...........................
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10.95 Amended and Restated Employment Agreement dated as of August 15, 1996 by and between Reynold Jennings and the Company ...............................................
10.96 Exchange Agreement dated September 10, 1996, by and among the Company, Paul Ramsay Hospitals Pty. Limited and Paul J. Ramsay, including a related Warrant Certificate dated September 10, 1996 issued to Ramsay Hospital Pty. Limited ...................................................
10.97 Consulting Agreement dated as of January 1, 1996 between the Company and Summa Healthcare Group, Inc. ..............
10.98 Letter Agreement dated as of September 10, 1996 by and among the Company, Ramsay Health Care Pty. Limited and Paul Ramsay Holdings Pty. Limited, included a related Warrant Certificate dated September 10, 1996 issued to Paul Ramsay Holdings Pty. Limited .....................................
11 Computation of Net Income Per Share .......................
21 Subsidiaries of the Company ...............................
23 Consent of Ernst & Young LLP ..............................
27 Financial Data Schedule ...................................
Copies of exhibits filed with this Annual Report on Form 10-K or incorporated herein by reference do not accompany copies hereof for distribution to stockholders of the Company. The Company will furnish a copy of any of such exhibits to any stockholder requesting it.
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