10-Q 1 g70967e10-q.txt RAMSAY YOUTH SERVICES 1 SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q (MARK ONE) [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 [FEE REQUIRED] FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2001 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 [NO FEE REQUIRED] FOR THE TRANSITION PERIOD FROM ______ TO ______ COMMISSION FILE NUMBER 0-13849 RAMSAY YOUTH SERVICES, INC. (Exact name of registrant as specified in its charter) DELAWARE 63-0857352 (STATE OR OTHER JURISDICTION (I.R.S. EMPLOYER OF INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.) COLUMBUS CENTER ONE ALHAMBRA PLAZA, SUITE 750 CORAL GABLES, FLORIDA 33134 (ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE) REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE (305) 569-6993 Indicate by a check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ]. The number of shares of the Registrant's Common Stock outstanding as of August 8, 2001, follows: Common Stock, par value $0.01 per share - 9,137,430 shares 2 RAMSAY YOUTH SERVICES, INC. AND SUBSIDIARIES FORM 10-Q INDEX PAGE ---- PART I. FINANCIAL INFORMATION Item 1. Financial Statements............................................ 1 Condensed Consolidated Balance Sheets - June 30, 2001 (unaudited) and December 31, 2000............................................... 1 Condensed Consolidated Statements of Operations - Quarter and Six Months ended June 30, 2001 (unaudited) and 2000........................ 3 Condensed Consolidated Statements of Cash Flows - Six Months ended June 30, 2001 (unaudited) and 2000.............................. 4 Notes to Condensed Consolidated Financial Statements - June 30, 2001 (unaudited)..................................................... 5 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations....................................... 9 Item 3. Quantitative and Qualitative Disclosures About Market Risk...... 17 PART II. OTHER INFORMATION Item 1. Other Information............................................... 18 Item 2. Exhibits and Current Reports on Form 8-K........................ 19 SIGNATURES............................................................... 20 i 3 PART I. FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS RAMSAY YOUTH SERVICES, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS

SEE NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS. 1 4 RAMSAY YOUTH SERVICES, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS

SEE NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS. 2 5 RAMSAY YOUTH SERVICES, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)

SEE NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS. 3 6 RAMSAY YOUTH SERVICES, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)

SEE NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS. 4 7 RAMSAY YOUTH SERVICES, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) JUNE 30, 2001 NOTE 1. BASIS OF PRESENTATION The Company is a provider and manager of mental health, substance abuse and behavioral health programs and services in residential and non-residential settings in the states and the commonwealth of Puerto Rico. The Company offers its programs and services in Alabama, Florida, Hawaii, Missouri, Michigan, Nevada, North Carolina, South Carolina, Texas, Utah and the Commonwealth of Puerto Rico. The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and notes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments considered necessary for a fair presentation of the interim information are, unless otherwise discussed in this report, of a normal recurring nature and have been included. The Company's business is seasonal in nature and subject to general economic conditions and other factors. Accordingly, operating results for the quarter and six months ended June 30, 2001 are not necessarily indicative of the results that may be expected for the year. The balance sheet at December 31, 2000 has been derived from the audited financial statements at that date but does not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. For further information, refer to the consolidated financial statements and notes thereto included in the Company's Annual Report on Form 10-K for the year ended December 31, 2000. On August 4, 2000, the Company acquired the operating assets of Charter Behavioral Health System of Manatee Palms, L.P. ("Manatee Palms") from Charter Behavioral Health Systems, LLC and the corresponding real estate from Crescent Real Estate Funding VII, L.P. for a cash purchase price of $7,700,000. The acquisition was accounted for under the purchase method of accounting. In connection with the acquisition, the Company recorded cost in excess of net asset value of purchased businesses of $1,892,000. This amount is being amortized on a straight-line basis over a term of 20 years. The operations of Manatee Palms have been included in the Company's consolidated statement of operations effective August 4, 2000. The Company's Senior Credit Facility was amended on August 4, 2000 to provide for the approval of this acquisition. On May 15, 2001, the Company sold its facility in Palm Bay, Florida for $2,300,000. Proceeds from the sale included a $500,000 cash payment at closing and a $1,800,000, 8% promissory note, due and payable on June 30, 2003. The note is secured by the facility. NOTE 2. LONG-TERM DEBT The Company's long-term debt is as follows:

5 8 RAMSAY YOUTH SERVICES, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) The Company's senior credit facility (the "Senior Credit Facility") was amended on August 4, 2000 to provide for the acquisition of Manatee Palms. The amended Senior Credit Facility consists of (i) a term loan (the "Term Loan") payable in monthly installments ranging from $83,000 to $302,000 with a final installment of $2,100,000 due on October 30, 2003, (ii) a revolving credit facility (the "Revolver") for an amount up to the lesser of $12,000,000 or the borrowing base of the Company's receivables (as defined in the agreement) and (iii) an acquisition loan commitment of up to $6,000,000 (the "Acquisition Loan"). The Company's amended Senior Credit Facility also provided for a $1,250,000 bridge loan advance under the Acquisition Loan. The bridge loan advance is payable on the occurrence of certain events (as defined in the agreement). In connection with the aforementioned bridge loan advance, a corporate affiliate of Paul J. Ramsay, Chairman of the Board of the Company, entered into a Junior Subordinated Note Purchase Agreement with the Senior Credit Facility lender to participate in the Senior Credit Facility in an amount equal to the bridge loan advance. The Company failed to maintain the required senior debt fixed charged coverage and leverage ratios as of December 31, 2000. The Company's senior lender agreed to waive these requirements as of December 31, 2000. Effective March 31, 2001, the Company's Senior Credit Facility was amended (the "Seventh Amendment"). Under the Seventh Amendment, certain coverage and leverage ratios required to be met by the Company were revised. As of June 30, 2001, the Company is in compliance with all senior debt covenants under the Seventh Amendment. On April 14, 2001, the Company's subordinated debt agreement was amended (the "Second Amendment"). Under the Second Amendment, certain coverage and leverage ratios required to be met by the Company were revised retroactive to March 31, 2001. As of June 30, 2001, the Company is in compliance with all subordinated debt covenants. NOTE 3. EARNINGS PER SHARE The following table sets forth the computation of basic and diluted earnings per share:

6 9 RAMSAY YOUTH SERVICES, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) For both the quarter and the six months ended June 30, 2001, options and warrants totalling 792,947 and 1,792,947, respectively, were excluded from the above computation because their effect would be antidilutive. For both the quarter and the six months ended June 30, 2000, 2,441,013 options and warrants were excluded from the above computation because their effect would be antidilutive. NOTE 4. SEGMENT INFORMATION The Company is a provider and manager of mental health and behavioral health programs and services in residential and non-residential settings in ten states and the Commonwealth of Puerto Rico. During the quarter ended June 30, 2001, the Company refined its segment definitions to more appropriately reflect its business operations and management responsibilities. Accordingly, the corresponding information for earlier periods has been reclassified to reflect its new reportable business segments, owned operations and management contract operations. OWNED OPERATIONS The Company offers its mental health and behavioral health programs and services at its owned and leased facilities in residential and non-residential settings. The residential setting provides a safe, secure and highly structured environment for the evaluation and development of long-term intensive treatment services. The programs focus on a cognitive behavioral model with family, group and individual counseling, social and life skills development, and educational and recreational programs. The primary focus of these services is to reshape antisocial behaviors by stressing responsibility and achievement of performance and treatment goals. The non-residential setting is designed to meet the special needs of patients requiring a less structured environment than the residential setting, but providing the necessary level of treatment, support and assistance to transition back into society. The primary focus of this program is to provide patients, with a clinically definable emotional, psychiatric or dependency disorder, with therapeutic and intensive treatment services. Patients which are assisted through this program have either transitioned out of a residential treatment program, or do not require the intensive services of a residential treatment program. Many of the Company's programs are complemented with specialized educational services designed to modify behavior and assist individuals in developing their academic, social, living and vocational skills necessary to participate successfully in society. MANAGEMENT CONTRACT OPERATIONS The Company's programs and services in its management contract operations are similar in nature to the programs and services offered by the Company at its owned operations; however, the programs and services are provided at facilities owned by the contracting governmental agency. These programs and services focus on solving the specialized needs of the respective agency by providing effective treatment interventions, including counseling, social interests, substance abuse education and treatment, mental health services, cognitive and life skills development, accredited education and vocational skills. The Company believes that a comprehensive approach, which develops the social, educational, and vocational skills of the individual, creates responsible, contributing, pro-social individuals. This comprehensive approach is essential to achieving the program's objective of reducing recidivism and integrating the youth into their communities as responsible and productive individuals. 7 10 RAMSAY YOUTH SERVICES, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) The following table set forth, for each of the periods indicated, certain information about segment results of operations and segment assets. There are no inter-segment sales or transfers. Segment profit consists of revenue less operating expenses, and does not include investment income and other, interest and other financing charges, non-recurring items and income taxes. Total assets are those assets used in the operations in each segment. Corporate assets include cash and cash equivalents, property and equipment, intangible assets and notes receivable. The accounting policies of the reportable segments are the same as those described in the summary of significant accounting policies.

8 11 RAMSAY YOUTH SERVICES, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTE 5. ACCOUNTS RECEIVABLE The Company has experienced delays in the collection of receivables from its contracts in Puerto Rico. As of June 30, 2001, the Company had approximately $4.7 million in outstanding receivables due from the Commonwealth of Puerto Rico, of which $1.4 million was over 120 days past due. As of the date of this filing, the Company had collected approximately $1.3 million of the outstanding receivable balance and had established reserves of $0.8 million against the remaining balance. The Company and its advisors are in active discussions with the Government of Puerto Rico with respect to the payment of the outstanding receivables. The Company believes that it has fully performed its obligations under the Puerto Rico contracts and is entitled to receive payment of these receivables in full. Although the Company has been advised by its legal counsel that the net receivables due on the Puerto Rico contracts are collectable, there can be no assurances that future transactions or events will not result in the need for additional reserves for these accounts receivable. If the Company were to record additional reserves, it would adversely affect earnings in the period in which the reserves are recorded. NOTE 6. RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS In July 2001, the FASB issued SFAS No. 141, "Business Combinations", and SFAS No. 142, "Goodwill and Other Intangible Assets." These Statements make significant changes to the accounting for business combinations, goodwill, and intangible assets. SFAS No. 141 eliminates the pooling-of-interests method of accounting for business combinations with limited exceptions for combinations initiated prior to July 1, 2001. In addition, it further clarifies the criteria for recognition of intangible assets separately from goodwill. This statement is effective for business combinations completed after June 30, 2001. SFAS No, 142 requires that upon adoption, amortization of goodwill will cease and instead, the carrying value of goodwill will be evaluated for impairment on an annual basis. Identifiable intangible assets will continue to be amortized over their useful lives and reviewed for impairment in accordance with SFAS No. 121 "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of". The Company will adopt the provision of SFAS No. 142 effective January 1, 2002. The Company is required to adopt the provisions of SFAS 141 and SFAS 142 on January 1, 2002, with the exception of the immediate requirement to use the purchase method of accounting for all future business combinations completed after June 30, 2001. Early adoption and retroactive application of these Standards are not permitted. However, any goodwill and any intangible asset determined to have an indefinite useful life that is acquired in a business combination completed after June 30, 2001 will not be amortized. Goodwill and intangible assets acquired in business combinations completed before July 1, 2001 will continue to be amortized until December 31, 2001. The Company is currently evaluating the impact that these standards will have on its financial statements. ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The Company receives revenues primarily from the delivery of mental health, substance abuse and behavioral health programs and services in residential and non-residential settings. The Company receives revenues based on per diem rates, fixed fee contracts or flat or cost-based rate contracts. In addition, the Company also receives revenues from management contracts with other entities. Revenues under the Company's programs are recognized as services are rendered. Revenues of the Company's programs and services are affected by changes in the rates the Company charges, changes in reimbursement rates by third-party payors, the volume of individuals treated and changes in the mix of payors. Salaries, wages and benefits include facility and program payrolls and related taxes, as well as employee benefits, including insurance and workers' compensation coverage. Employee compensation and benefits also includes general and administrative payroll and related benefit costs, including salaries and supplemental compensation of officers. Other operating expenses include all expenses not otherwise presented separately in the Company's statements of operations. Significant components of these expenses at the operating level include items such as food, utilities, supplies, rent and insurance. Significant components of these expenses at the administrative level include legal, accounting, investor relations, marketing, consulting and travel expense. The Company's quarterly results may fluctuate significantly as a result of a variety of factors, including the timing of the opening of new programs. When the Company opens a new program, the program may be unprofitable until the program's population, and net revenues contributed by the program, approach intended levels, primarily because the Company staffs its programs in anticipation of achieving such levels. The Company's quarterly results may also be impacted by seasonality, as revenues generated by youth treatment services are generally seasonal in nature. IN CONNECTION WITH THE "SAFE-HARBOR" PROVISIONS OF THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995, THE COMPANY NOTES THAT THIS QUARTERLY REPORT ON FORM 10-Q CONTAINS FORWARD-LOOKING STATEMENTS ABOUT THE COMPANY. THE COMPANY IS HEREBY SETTING FORTH CAUTIONARY STATEMENTS IDENTIFYING IMPORTANT FACTORS THAT MAY CAUSE THE COMPANY'S ACTUAL RESULTS TO DIFFER MATERIALLY FROM THOSE SET FORTH IN ANY FORWARD-LOOKING STATEMENTS OR INFORMATION MADE BY OR ON BEHALF OF OR CONCERNING THE COMPANY. SOME OF THE MOST SIGNIFICANT FACTORS INCLUDE (I) ACCELERATING CHANGES OCCURRING IN THE AT-RISK YOUTH INDUSTRY, INCLUDING COMPETITION FROM CONSOLIDATING AND INTEGRATED PROVIDER SYSTEMS AND LIMITATIONS ON REIMBURSEMENT RATES, (II) FEDERAL AND STATE GOVERNMENTAL BUDGETARY CONSTRAINTS WHICH COULD HAVE THE EFFECT OF LIMITING THE AMOUNT OF 9 12 RAMSAY YOUTH SERVICES, INC. AND SUBSIDIARIES FUNDS AVAILABLE TO SUPPORT GOVERNMENTAL PROGRAMS, (III) STATUTORY, REGULATORY AND ADMINISTRATIVE CHANGES OR INTERPRETATIONS OF EXISTING STATUTORY AND REGULATORY PROVISIONS AFFECTING THE CONDUCT OF THE COMPANY'S BUSINESS AND AFFECTING CURRENT AND PRIOR REIMBURSEMENT FOR THE COMPANY'S SERVICES AND (IV) THE COMPANY'S INABILITY TO SUCCESSFULLY IMPLEMENT ITS NEW STRATEGIC DIRECTION OF PROVIDING TREATMENT AND EDUCATION PROGRAMS FOR AT-RISK AND TROUBLED YOUTH, AND (V) UNCERTAINTIES REGARDING ISSUES IN THE PUERTO RICO MARKET SERVICED BY THE COMPANY. THERE CAN BE NO ASSURANCE THAT ANY ANTICIPATED FUTURE RESULTS WILL BE ACHIEVED. AS A RESULT OF THE FACTORS IDENTIFIED ABOVE AND INCLUDING ANY OTHER FACTORS, THE COMPANY'S ACTUAL RESULTS OR FINANCIAL OR OTHER CONDITION COULD VARY SIGNIFICANTLY FROM THE PERFORMANCE OR EXPECTATION SET FORTH IN ANY FORWARD-LOOKING STATEMENTS OR INFORMATION. RESULTS OF OPERATIONS QUARTER ENDED JUNE 30, 2001 COMPARED TO QUARTER ENDED JUNE 30, 2000 OWNED OPERATIONS SEGMENT The following tables state for the periods indicated the results of our owned operations in dollar and percentage of revenue terms (dollars in thousands):

REVENUES Revenues increased from $20.4 million in the quarter ended June 30, 2000 to $26.9 million in the quarter ended June 30, 2001. The increase of $6.5 million in revenues from 2000 to 2001 is primarily a result of (i) an increase in revenues of $2.8 million from the acquisition of the Manatee Palms facilities and (ii) an increase of $3.7 million in the Company's other facilities primarily due to a total increase in census of 11.6% between periods (from 68,000 days during the quarter ended June 30, 2000 to 75,900 days during the quarter ended June 30, 2001). SALARIES, WAGES AND BENEFITS Salaries, wages and benefits were $12.1 million, or 59.1% of revenues for the quarter ended June 30, 2000, compared to $15.5 million, or 57.7% of revenues for the quarter ended June 30, 2001. The decrease as a percentage of revenues is primarily due to the outsourcing of certain services at the Company's Michigan facility and the previously discussed 11.6% total increase in census between periods. OTHER OPERATING EXPENSES Other operating expenses were $5.4 million or 26.6% of revenues for the quarter ended June 30, 2000, compared to $7.4 million, or 27.4% of revenues for the quarter ended June 30, 2001. The increase as a percentage of revenues is primarily due to the aforementioned outsourcing of certain services at the Company's Michigan facility. PROVISION FOR DOUBTFUL ACCOUNTS The provision for doubtful accounts were $0.6 million or 2.7% of revenues for the quarter ended June 30, 2000, compared to $0.7 million, or 2.6% of revenues for the quarter ended June 30, 2001. Provision for doubtful accounts 10 13 RAMSAY YOUTH SERVICES, INC. AND SUBSIDIARIES during the quarter ended June 30, 2001 did not fluctuate significantly as a percentage of revenue when compared to the same period in the prior year. DEPRECIATION AND AMORTIZATION Depreciation and amortization was $0.4 million or 2.1% of revenues for the quarter ended June 30, 2000, compared to $0.5 million, or 2.0% of revenues for the quarter ended June 30, 2001. Depreciation and amortization during the quarter ended June 30, 2001 did not fluctuate significantly as a percentage of revenue when compared to the same period in the prior year. MANAGEMENT CONTRACT SEGMENT The following tables state for the periods indicated the results of our management contract operations in dollar and percentage of revenue terms (dollars in thousands):

REVENUES Revenues increased from $4.9 million in the quarter ended June 30, 2000 to $6.9 million in the quarter ended June 30, 2001. The increase of $2.0 million in revenues from 2000 to 2001 is primarily a result of an increase in revenues of $1.0 million from the acquisition of a management contract in Florida in August 2000 and the effect of new programs awarded to the Company in Florida and Puerto Rico. SALARIES, WAGES AND BENEFITS Salaries, wages and benefits increased from $2.9 million or 60.2% of revenue in the quarter ended June 30, 2000 to $4.5 million or 64.7% of revenue in the quarter ended June 30, 2001. The increase as a percentage of revenues is primarily due to more intensive staffing for new services provided by the Company at its Florida contracts. OTHER OPERATING EXPENSES Other operating expenses increased from $1.0 million or 19.6% of revenue in the quarter ended June 30, 2000 to $1.5 million or 21.5% of management contract revenue in the quarter ended June 30, 2001. The increase as a percentage of revenues is primarily due to an increase in operating expenses for new services provided by the Company at its Florida contracts. PROVISION FOR DOUBTFUL ACCOUNTS The provision for doubtful accounts increased from $0.3 million or 6.7% of revenue in the quarter ended June 30, 2000 to $0.4 million or 5.5% of revenue in the quarter ended June 30, 2001. The provision for doubtful accounts recorded by the Company during the quarter ended June 30, 2000 and 2001 are primarily related to the Company's management contract operations in Puerto Rico. The 11 14 RAMSAY YOUTH SERVICES, INC. AND SUBSIDIARIES increase in the provision from $.3 million in 2000 to $0.4 million in 2001 is attributable to the delays in receivable collections from the Company's management contracts in Puerto Rico. DEPRECIATION AND AMORTIZATION Depreciation and amortization increased from 0.3% of revenue in the quarter ended June 30, 2000 to 0.4% of revenue in the quarter ended June 30, 2001. Depreciation and amortization did not fluctuate significantly as a percentage of revenue. CORPORATE AND OTHER The following tables state for the periods indicated total revenues and corporate office expenses in dollar and percentage of revenue terms (dollars in thousands):

SALARIES, WAGES AND BENEFITS Corporate office salaries, wages and benefits were $0.7 million or 2.6% of total consolidated revenues for the quarter ended June 30, 2000, compared to $0.7 million or 2.1% of total consolidated revenues for the same period in 2001. The decrease as a percentage of total consolidated revenues is primarily due to the increase in total consolidated revenues of $8.6 million during the quarter. OTHER OPERATING EXPENSES Corporate office other operating expenses were $0.7 million or 2.6% of total consolidated revenues for the quarter ended June 30, 2000, compared to $0.8 million or 2.3% of total consolidated revenues for the same period in 2001. The decrease as a percentage of total consolidated revenues is primarily due to the increase in total consolidated revenues of $8.6 million during the quarter. DEPRECIATION AND AMORTIZATION Corporate office depreciation and amortization was $0.1 million or 0.5% of total consolidated revenues for the quarter ended June 30, 2000, compared to $0.04 million or 0.1% of total consolidated revenues for the same period in 2001. The decrease is due to the Company's completion of the amortization of certain projects during the fiscal year ended December 31, 2000. INTEREST AND OTHER FINANCING CHARGES Interest and other financing charges increased from $0.5 million or 2.1% of total consolidated revenues for the quarter ended June 30, 2000 to $0.9 million or 2.6% of total consolidated revenues for the quarter ended June 30, 2001. The increase in interest and other financing charges is primarily attributable to an increase in the Company's average outstanding borrowings between quarters. 12 15 RAMSAY YOUTH SERVICES, INC. AND SUBSIDIARIES PROVISION FOR INCOME TAXES For both periods presented, the provision for income taxes was recorded at an effective tax rate significantly less than the statutory tax rate due to the Company's significant net operating loss carryovers. SIX MONTHS ENDED JUNE 30, 2001 COMPARED TO SIX MONTHS ENDED JUNE 30, 2000 OWNED OPERATIONS SEGMENT The following tables state for the periods indicated the results of our owned operations in dollar and percentage of revenue terms (dollars in thousands):

REVENUES Revenues increased from $40.6 million in the six months ended June 30, 2000 to $52.3 million in the six months ended June 30, 2001. The increase of $11.7 million in revenues from 2000 to 2001 is primarily a result of (i) an increase in revenues of $5.6 million from the acquisition of the Manatee Palms facilities and (ii) an increase of $6.1 million in the Company's other facilities primarily due to a total increase in census of 9.9% between periods (from approximately 134,000 days during the quarter ended June 30, 2000 to approximately 147,000 days during the quarter ended June 30, 2001). SALARIES, WAGES AND BENEFITS Salaries, wages and benefits were $23.9 million, or 58.9% of revenues for the six months ended June 30, 2000, compared to $30.3 million, or 57.9% of revenues for the six months ended June 30, 2001. The decrease as a percentage of revenues is primarily due to the outsourcing of certain services at the Company's Michigan facility and the previously discussed 9.9% total increase in census between periods. OTHER OPERATING EXPENSES Other operating expenses were $10.8 million or 26.5% of revenues for the six months ended June 30, 2000, compared to $14.2 million, or 27.2% of revenues for the six months ended June 30, 2001. The increase as a percentage of revenues is primarily due to the aforementioned outsourcing of certain services at the Company's Michigan facility. PROVISION FOR DOUBTFUL ACCOUNTS The provision for doubtful accounts was $1.1 million or 2.6% of revenues for the six months ended June 30, 2000, compared to $1.4 million, or 2.7% of revenues for the six months ended June 30, 2001. Provision for doubtful accounts during the six months ended June 30, 2001 did not fluctuate significantly as a percentage of revenue when compared to the same period in the prior year. 13 16 RAMSAY YOUTH SERVICES, INC. AND SUBSIDIARIES DEPRECIATION AND AMORTIZATION Depreciation and amortization was $0.9 million or 2.2% of revenues for the six months ended June 30, 2000, compared to $1.1 million, or 2.0% of revenues for the six months ended June 30, 2001. Depreciation and amortization during the six months ended June 30, 2001 did not fluctuate significantly as a percentage of revenue when compared to the same period in the prior year. MANAGEMENT CONTRACT SEGMENT The following tables state for the periods indicated the results of our management contract operations in dollar and percentage of revenue terms (dollars in thousands):

REVENUES Revenues increased from $8.2 million in the six months ended June 30, 2000 to $13.4 million in the six months ended June 30, 2001. The increase of $5.2 million in revenues from 2000 to 2001 is primarily a result of an increase in revenues of $1.9 million from the acquisition of a management contract in Florida in August 2000 and the effect of new programs awarded to the Company in Florida and Puerto Rico. SALARIES, WAGES AND BENEFITS Salaries, wages and benefits increased from $5.1 million or 63.1% of revenue in the six months ended June 30, 2000 to $8.8 million or 65.8% of revenue in the six months ended June 30, 2001. The increase as a percentage of revenues is primarily due to more intensive staffing for new services provided by the Company at its Florida contracts. OTHER OPERATING EXPENSES Other operating expenses increased from $1.8 million or 21.6% of revenue in the six months ended June 30, 2000 to $2.9 million or 21.6% of revenue in the six months ended June 30, 2001. Other operating expenses during the six months ended June 30, 2001 did not fluctuate as a percentage of revenue when compared to the same period in the prior year. PROVISION FOR DOUBTFUL ACCOUNTS The provision for doubtful accounts increased from $0.4 million or 4.9% of revenue in the six months ended June 30, 2000 to $0.5 million or 3.7% of revenue in the six months ended June 30, 2001. The provision for doubtful accounts recorded by the Company during the six months ended June 30, 2000 and 2001 are primarily related to the Company's management contract operations in Puerto Rico. The increase in the provision from $0.4 million in 2000 to $0.5 million in 2001 is attributable to the delays in receivable collections from the Company's management contracts in Puerto Rico. 14 17 RAMSAY YOUTH SERVICES, INC. AND SUBSIDIARIES DEPRECIATION AND AMORTIZATION Depreciation and amortization increased from 0.3% of revenue in the six months ended June 30, 2000 to 0.4% of management contract revenue in the six months ended June 30, 2001. Depreciation and amortization did not fluctuate significantly as a percentage of revenues. CORPORATE AND OTHER The following tables state for the periods indicated total revenues and corporate office expenses in dollar and percentage of revenue terms (dollars in thousands):

SALARIES, WAGES AND BENEFITS Corporate office salaries, wages and benefits were $1.3 million or 2.7% of total consolidated revenues for the six months ended June 30, 2000, compared to $1.5 million or 2.3% of total consolidated revenues for the same period in 2001. The decrease as a percentage of total consolidated revenues is primarily due to the increase in total consolidated revenues of $16.9 million during the six months ended June 30, 2001. OTHER OPERATING EXPENSES Corporate office other operating expenses were $1.4 million or 3.0% of total consolidated revenues for the six months ended June 30, 2000, compared to $1.6 million or 2.4% of total consolidated revenues for the same period in 2001. The decrease as a percentage of total consolidated revenues is primarily due to the increase in total consolidated revenues of $16.9 million during the six months ended June 30, 2001. DEPRECIATION AND AMORTIZATION Corporate office depreciation and amortization was $0.2 million or 0.5% of total consolidated revenues for the six months ended June 30, 2000, compared to $0.08 million or 0.1% of total consolidated revenues for the same period in 2001. The decrease is due to the Company's completion of the amortization of certain projects during the fiscal year ended December 31, 2000. INTEREST AND OTHER FINANCING CHARGES Interest and other financing charges increased from $1.0 million or 2.0% of total consolidated revenues for the six months ended June 30, 2000 to $1.9 million or 2.8% of total consolidated revenues for the six months ended June 30, 2001. The increase in interest and other financing charges is primarily attributable to an increase in the Company's average outstanding borrowings between periods. 15 18 RAMSAY YOUTH SERVICES, INC. AND SUBSIDIARIES PROVISION FOR INCOME TAXES For both periods presented, the provision for income taxes was recorded at an effective tax rate significantly less than the statutory tax rate due to the Company's significant net operating loss carryovers. LIQUIDITY AND CAPITAL RESOURCES At June 30, 2001 and December 31, 2000, the Company had $11.8 million and $8.3 million, respectively, in working capital and $1.7 million and $1.5 million, respectively, in cash and cash equivalents. The Company's principal sources of liquidity as of June 30, 2001 and December 31, 2000 consisted primarily of the aforementioned cash and cash equivalents and accounts receivable of $24.7 million and $23.0 million, respectively. Net cash used in operating activities was $0.3 million for the six months ended June 30, 2001. During the six months ended June 30, 2001, cash used in operating activities was impacted by a $4.4 million increase in accounts receivable and other assets and a $1.7 million decrease in accounts payable. Cash used in investing activities was $0.7 million for the six months ended June 30, 2001. Investing activities are primarily attributable to $1.2 million used in capital expenditures, offset by approximately $0.5 million in proceeds from the sale of certain assets. Net cash provided by financing activities was $1.2 million for the six months ended June 30, 2001. Financing activities consisted primarily of proceeds from the Company's revolving credit facility which were used to finance capital expenditures and make required term loan payments under the Company's senior credit facility. The Company has experienced delays in the collection of receivables from its contracts in Puerto Rico. As of June 30, 2001, the Company had approximately $4.7 million in outstanding receivables due from the Commonwealth of Puerto Rico, of which $1.4 million was over 120 days past due. As of the date of this filing, the Company had collected approximately $1.3 million of the outstanding receivable balance and had established reserves of $0.8 million against the remaining balance. The Company and its advisors are in active discussions with the Government of Puerto Rico with respect to the payment of the outstanding receivables. The Company believes that it has fully performed its obligations under the Puerto Rico contracts and is entitled to receive payment of these receivables in full. Although the Company has been advised by its legal counsel that the net receivables due on the Puerto Rico contracts are collectable, there can be no assurances that future transactions or events will not result in the need for additional reserves for these accounts receivable. If the Company were to record additional reserves, it would adversely affect earnings in the period in which the reserves are recorded. Management of the Company believes that it can meet its current cash requirements and future identifiable needs with internally generated funds from operations and availability in its Senior Credit Facility. If the Company is unable to collect the Puerto Rico receivables, the Company may need to obtain liquidity through other sources of debt or equity. Although the Company believes that it has the ability to raise such additional liquidity, there can be no assurances that the Company will be able to raise debt or equity capital through other sources, or if obtained, that it will be on terms acceptable to the Company. The incurring or assumption by the Company of additional indebtedness could result in the issuance of additional equity and/or debt which could have a dilutive effect on current shareholders and a significant effect on the Company's operations. 16 19 RAMSAY YOUTH SERVICES, INC. AND SUBSIDIARIES ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK While the Company is exposed to changes in interest rates as a result of its outstanding variable rate debt, the Company does not currently utilize any derivative financial instruments related to its interest rate exposure. The Company believes that its exposure to market risk will not result in a material adverse effect on the Company's consolidated financial condition, results of operations or liquidity. PART II - OTHER INFORMATION ITEM 1. OTHER INFORMATION The Company is party to certain claims, suits and complaints, whether arising from the acts or omissions of its employees, providers or others, which arise in the ordinary course of business. The Company has established reserves at June 30, 2001 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. 17 20 RAMSAY YOUTH SERVICES, INC. AND SUBSIDIARIES ITEM 2. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits The Exhibits required to be filed as part of this Quarterly Report on Form 10-Q are as follows: Exhibit 11 Computation of Net Income Per Share Exhibit 99.18 Press Release dated July 25, 2001 (b) Current Reports on Form 8-K The Company did not file any Current Reports on Form 8-K during the quarter ended June 30, 2001. 18 21 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereupon duly authorized. RAMSAY YOUTH SERVICES, INC. Registrant /s/ MARCIO C. CABRERA ----------------------------------- Marcio C. Cabrera Executive V.P. and Chief Financial Officer Date: August 8, 2001 19

RAMSAY YOUTH SERVICES INC 10-Q