Ramsay Youth Services Inc. Form 10-Q 9/30/02

-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, VkRSfP5LSStB455Y/3BMXkHkehKiNym2KbiOAjbk2gugaawNGcwRQ76RAy9ihKYI G/58XjsVNK4M5x0NiysovA== 0000950144-02-011846.txt : 20021114 0000950144-02-011846.hdr.sgml : 20021114 20021114140150 ACCESSION NUMBER: 0000950144-02-011846 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 9 CONFORMED PERIOD OF REPORT: 20020930 FILED AS OF DATE: 20021114 FILER: COMPANY DATA: COMPANY CONFORMED NAME: RAMSAY YOUTH SERVICES INC CENTRAL INDEX KEY: 0000773136 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-HOSPITALS [8060] IRS NUMBER: 630857352 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 000-13849 FILM NUMBER: 02824015 BUSINESS ADDRESS: STREET 1: ONE ALHAMBRA PLAZA COLUMBUS CENTER STREET 2: STE 750 CITY: CORAL GABLES STATE: FL ZIP: 33134 BUSINESS PHONE: 3055696993 MAIL ADDRESS: STREET 1: COLUMBUS CENTER STREET 2: ONE ALHAMBRA PLAZA STE 750 CITY: CORAL GABLES STATE: FL ZIP: 33134 FORMER COMPANY: FORMER CONFORMED NAME: HEALTHCARE SERVICES OF AMERICA INC DATE OF NAME CHANGE: 19881120 FORMER COMPANY: FORMER CONFORMED NAME: RAMSAY HEALTH CARE INC DATE OF NAME CHANGE: 19920703 10-Q 1 g79220e10vq.htm RAMSAY YOUTH SERVICES INC. Ramsay Youth Services Inc. Form 10-Q 9/30/02

SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

Form 10-Q

(Mark One)

[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2002

[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934

For the Transition period from ______ to ______

Commission file number 0-13849

RAMSAY YOUTH SERVICES, INC.
(Exact name of registrant as specified in its charter)


Delaware (State or other jurisdiction of incorporation or organization)		63-0857352 (I.R.S. Employer Identification No.)

Columbus Center One Alhambra Plaza, Suite 750 Coral Gables, Florida (Address of principal executive offices)		33134 (Zip Code)

Registrant’s telephone number, including area code (305) 569-6993

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ].

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act).
Yes [ ] No [X]

The number of shares of the Registrant’s Common Stock outstanding as of November 13, 2002, follows:

Common Stock, par value $0.01 per share – 9,291,081 shares

RAMSAY YOUTH SERVICES, INC. AND SUBSIDIARIES

FORM 10-Q

INDEX


		Page

Part I. FINANCIAL INFORMATION

Item 1. Financial Statements (unaudited)		1

Condensed Consolidated Balance Sheets – September 30, 2002 and December 31, 2001		2

Condensed Consolidated Statements of Operations – Quarter and Nine Months ended September 30, 2002 and 2001		3

Condensed Consolidated Statements of Cash Flows – Nine Months ended September 30, 2002 and 2001		4

Notes to Condensed Consolidated Financial Statements – September 30, 2002		5

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations		12

Item 3. Quantitative and Qualitative Disclosures About Market Risk		22

Item 4. Controls and Procedures		22

Part II. OTHER INFORMATION

Item 1. Legal Proceedings		22

Item 2. Changes in Securities and Use of Proceeds		22

Item 3. Defaults upon Senior Securities		22

Item 4. Submission of Matters to a Vote of Securities Holders		23

Item 5. Other Information		23

Item 6. Exhibits and Reports on Form 8-K		23

SIGNATURES		24

PART I. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

RAMSAY YOUTH SERVICES, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED)


			September 30,		December 31,
			2002		2001

ASSETS
Current assets
	Cash and cash equivalents		$	1,608,000	$	752,000
	Accounts receivable, less allowances for doubtful accounts of $2,676,000 and $1,934,000 at September 30, 2002 and December 31, 2001, respectively			23,170,000		23,307,000
	Other current assets			5,867,000		6,091,000

		Total current assets		30,645,000		30,150,000
Other assets
	Cash held in trust			1,021,000		1,021,000
	Cost in excess of net asset value of purchased businesses, net			2,232,000		2,232,000
	Unamortized loan costs, net			842,000		1,077,000
	Deferred tax asset			6,708,000		—

		Total other assets		10,803,000		4,330,000
Property and equipment
	Land			4,635,000		4,659,000
	Buildings and improvements			38,648,000		37,829,000
	Equipment, furniture and fixtures			13,304,000		12,580,000

				56,587,000		55,068,000
	Less accumulated depreciation			22,268,000		20,537,000

				34,319,000		34,531,000

			$	75,767,000	$	69,011,000

See notes to condensed consolidated financial statements.

RAMSAY YOUTH SERVICES, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED)


				September 30,			December 31,
				2002			2001

LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities
	Accounts payable			$	5,237,000		$	5,604,000
	Accrued and other liabilities				7,970,000			6,366,000
	Amounts due to third-party contractual agencies				978,000			1,709,000
	Current portion of long-term debt				3,899,000			3,372,000

		Total current liabilities			18,084,000			17,051,000
Noncurrent liabilities
	Other accrued liabilities				4,110,000			4,129,000
	Long-term debt, less current portion				17,069,000			23,506,000

		Total liabilities			39,263,000			44,686,000

Commitments and contingencies
Stockholders’ equity
	Common stock $.01 par value—authorized 30,000,000 shares; issued 9,484,931 shares at September 30, 2002 and 9,445,449 shares at December 31, 2001				95,000			94,000
	Additional paid-in capital				127,130,000			127,047,000
	Accumulated deficit				(86,822,000	)		(98,917,000	)
	Treasury stock—193,850 common shares at September 30, 2002 and December 31, 2001, at cost				(3,899,000	)		(3,899,000	)

			Total stockholders’ equity		36,504,000			24,325,000

				$	75,767,000		$	69,011,000

See notes to condensed consolidated financial statements.

RAMSAY YOUTH SERVICES, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)


			Quarter Ended				Nine Months Ended
			September 30,				September 30,

			2002		2001		2002			2001

Revenues			$	36,323,000	$	33,638,000	$	108,863,000		$	99,267,000
Operating Expenses:
	Salaries, wages and benefits			22,671,000		21,283,000		67,706,000			61,846,000
	Other operating expenses			9,971,000		9,457,000		29,516,000			28,087,000
	Provision for doubtful accounts			401,000		264,000		1,839,000			2,183,000
	Depreciation and amortization			679,000		639,000		1,928,000			1,824,000
	Asset impairment charges			—		—		125,000			—

Total operating expenses				33,722,000		31,643,000		101,114,000			93,940,000


Income from operations				2,601,000		1,995,000		7,749,000			5,327,000

Non-operating expenses:
	Interest and other financing charges, net			576,000		746,000		1,871,000			2,597,000

		Total non-operating expenses, net		576,000		746,000		1,871,000			2,597,000
Income before income taxes				2,025,000		1,249,000		5,878,000			2,730,000
Provision (benefit) for income taxes				763,000		171,000		(6,215,000	)		472,000

Net income			$	1,262,000	$	1,078,000	$	12,093,000		$	2,258,000

Income attributable to common stockholders			$	1,262,000	$	1,078,000	$	12,093,000		$	2,258,000

Income per common share:
	Basic		$	0.14	$	0.12	$	1.30		$	0.25

	Diluted		$	0.11	$	0.10	$	1.06		$	0.23

Weighted average number of common shares outstanding:
	Basic			9,279,000		9,056,000		9,272,000			8,977,000

	Diluted			11,493,000		11,059,000		11,444,000			9,977,000

See notes to condensed consolidated financial statements.

RAMSAY YOUTH SERVICES, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)


					Nine Months Ended
					September 30,

					2002			2001

Cash flows from operating activities:
	Net income				$	12,093,000		$	2,258,000
	Adjustments to reconcile net income to net cash provided by (used in) operating activities:
		Depreciation				1,928,000			1,723,000
		Amortization, including loan costs				400,000			526,000
		Provision for doubtful accounts				1,839,000			2,183,000
		Asset impairment charges				125,000			—
		Loss on sale of assets				17,000			—
		Change in operating assets and liabilities:
			Accounts receivable			(1,702,000	)		(5,819,000	)
			Other current assets			371,000			(829,000	)
			Deferred tax assets			(6,708,000	)		—
			Accounts payable			(367,000	)		(2,146,000	)
			Accrued and other liabilities			1,585,000			2,851,000
			Amounts due to third-party contractual agencies			(731,000	)		(1,890,000	)

				Total adjustments		(3,243,000	)		(3,401,000	)

				Net cash provided by (used in) operating activities		8,850,000			(1,143,000	)

Cash flows from investing activities:
	Proceeds from the sale of assets					159,000			472,000
	Expenditures for property and equipment					(2,164,000	)		(1,826,000	)
	Cash held in trust					—			30,000

				Net cash used in investing activities		(2,005,000	)		(1,324,000	)

Cash flows from financing activities:
	Loan costs					(82,000	)		(41,000	)
	Proceeds from issuance of debt and warrants					1,528,000			4,705,000
	Payments on debt					(7,521,000	)		(2,401,000	)
	Net proceeds from exercise of options and stock purchases					99,000			26,000
	Registration costs					(13,000	)		—

				Net cash (used in) provided by financing activities		(5,989,000	)		2,289,000

Net increase (decrease) in cash and cash equivalents						856,000			(178,000	)
Cash and cash equivalents at beginning of period						752,000			1,539,000
Cash and cash equivalents at end of period					$	1,608,000		$	1,361,000

Cash paid during the period for:
	Interest				$	1,446,000		$	2,249,000

	Income taxes				$	443,000		$	417,000

See notes to condensed consolidated financial statements.

RAMSAY YOUTH SERVICES, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
SEPTEMBER 30, 2002

NOTE 1. BASIS OF PRESENTATION

Ramsay Youth Services, Inc. (the Company) is a provider and manager of mental health, substance abuse and behavioral health programs and services in residential and non-residential settings in Alabama, Florida, Georgia, 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 nine months ended September 30, 2002 are not necessarily indicative of the results that may be expected for the year. The balance sheet at December 31, 2001 has been derived from the audited financial statements at that date but does not include all of the information and footnotes required by accounting principles generally accepted in the United States of America for complete financial statements. The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. Significant estimates include valuation reserves for accounts receivable, estimates of revenue to be received from government and other contract reimbursement programs, self-insurance reserves, and estimates related to allocating purchase price to assets and liabilities for prior or future acquisitions. For further information, refer to the consolidated financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2001.

NOTE 2. ASSET SALES

On May 15, 2001, the Company sold the Palm Bay facility for $2,300,000. Proceeds from the sale included a $500,000 cash payment at closing and a $1,800,000, 8% promissory note, due and payable on June 30, 2003. During the year ended December 31, 2001, the Company agreed to accept a discount of $130,000 for the full payment of the promissory note and accrued interest, however, the borrower was unable to close the transaction by the agreed upon date. As a result, the Company does not expect to receive full payment for the promissory note until the original maturity date of June 30, 2003.

NOTE 3. TRANSACTIONS WITH AFFILIATES

In September 2002, the Company entered into a lease agreement for a 110-bed facility in Macon, Georgia (the “Macon Facility”) with a corporate affiliate of Mr. Paul J. Ramsay, Chairman of the Board of the Company and beneficial owner of approximately 60% of our outstanding common stock. The lease has a primary term of five years and two successive five year renewal options. The lease payments are approximately $480,000 per annum and at each renewal option are subject to adjustments based on the change in the Consumer Price Index during the preceding period. In accordance with the terms of the lease, the Company is responsible for all costs of ownership, including taxes, insurance, maintenance and repairs. In addition, the Company has the option to purchase the facility at any time for an amount equal to the aggregate cost of the facility (as defined in the lease agreement) adjusted for the increase in the Consumer Price Index between the commencement of the lease and the purchase date.

RAYMSAY YOUTH SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

NOTE 4. LONG-TERM DEBT

The Company’s long-term debt is as follows:


	September 30,		December 31,
	2002		2001

Variable rate Term Loan, due October 30, 2003	$	6,946,000	$	8,134,000
Revolver, due October 30, 2003		4,178,000		7,503,000
Acquisition Loan, due October 30, 2003		365,000		1,849,000
Subordinated Note (net of discount of $303,000), due January 24, 2007		4,697,000		4,660,000
Subordinated Note (net of discount of $315,000), due January 24, 2007		4,685,000		4,640,000
Other		97,000		92,000

		20,968,000		26,878,000
Less current portion		3,899,000		3,372,000

	$	17,069,000	$	23,506,000

The Company’s amended senior credit facility (the “Senior Credit Facility”) consists of a term loan (the “Term Loan”) payable in monthly installments ranging from $83,000 to $302,000 with a final installment of $3,600,000 due on October 30, 2003 and a revolving credit facility (the “Revolver”) for an amount up to the lesser of $15,000,000 or the borrowing base of the Company’s receivables (as defined in the agreement).

On September 6, 2002, the Company’s senior credit facility and subordinated debt was amended to consent to a commercial lease for the Macon Facility between the Company and a corporate affiliate of Mr. Paul J. Ramsay.

During the twelve months ended December 31, 2001, the Company exceeded the capital expenditure limitation in the Senior Credit Facility. On February 25, 2002, the Company’s lender agreed to amend the Senior Credit Facility, retroactive to December 31, 2001, to provide for among other items: (i) an increase in the permitted capital expenditures, (ii) a $3.0 million increase in the revolving credit loan commitment, and (iii) a $1.5 million additional advance on the term loan. At September 30, 2002, the Company was in compliance with all covenants stipulated in the Senior Credit Facility.

On January 25, 2000 and June 19, 2000, the Company entered into subordinated note and warrant purchase agreements with two unrelated financial institutions for an aggregate principal amount of $5.0 million each (the “Subordinated Notes”). The Subordinated Notes permit each of the financial institutions to exercise, under certain conditions, up to 475,000 warrants, which are convertible into the Company’s common stock. Borrowings under the Subordinated Notes bear interest at a rate of 12.5% per annum. The interest is payable quarterly, and the principal balance and any unpaid interest is due January 24, 2007. The aggregate value of the warrants at the time of issuance was $844,000. On August 17, 2001, one of the financial institutions exercised its warrant purchase agreement and converted 475,000 warrants into 294,597 shares of common stock utilizing the cashless exercise provision outlined in the warrant agreement.

RAYMSAY YOUTH SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

NOTE 5. EARNINGS PER SHARE

The following table sets forth the computation of basic and diluted earnings per share:


				Quarter Ended				Nine Months Ended
				September 30,				September 30,

				2002		2001		2002		2001

				(unaudited)				(unaudited)
Numerator:
	Numerator for basic earnings per share – income attributable to common stockholders			$	1,262,000	$	1,078,000	$	12,093,000	$	2,258,000

		Effect of dilutive securities		$	1,262,000	$	1,078,000	$	12,093,000	$	2,258,000

	Numerator for diluted earnings per share – income attributable to common stockholders after assumed conversions			$	1,262,000	$	1,078,000	$	12,093,000	$	2,258,000

Denominator:
	Denominator for basic earnings per share – weighted-average shares				9,279,000		9,056,000		9,272,000		8,977,000
	Effect of dilutive securities:
		Employee stock options and warrants			2,214,000		2,003,000		2,172,000		1,000,000

	Dilutive potential common shares				2,214,000		2,003,000		2,172,000		1,000,000

			Denominator for diluted earnings per share – adjusted weighted-average shares and assumed conversions		11,493,000		11,059,000		11,444,000		9,977,000

Basic earnings per share				$	0.14	$	0.12	$	1.30	$	0.25

Diluted earnings per share				$	0.11	$	0.10	$	1.06	$	0.23

For both the quarter and the nine months ended September 30, 2002, options and warrants totalling 591,781 were excluded from the above computation because their effect would be antidilutive.

For both the quarter and the nine months ended September 30, 2001, options and warrants totalling 591,781 and 786,281, respectively, were excluded from the above computation because their effect would be antidilutive.

NOTE 6. 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 eleven states and the Commonwealth of Puerto Rico. During the quarter ended June 30, 2001, the Company refined its segment definitions to more appropriately reflect its business operations and management responsibilities. The primary change from the segment information originally presented as of June 30, 2001 consists of a change in the names of the segments and the classification of certain items within the segments. Accordingly, the corresponding information for earlier periods has been reclassified to reflect its new reportable business segments, owned operations and management contract operations.

Owned Operations

The Company offers its mental health and behavioral health programs and services at its owned and leased facilities in residential and non-residential settings.

The residential setting is designed to provide a safe, secure and highly structured environment for the evaluation and development of long-term intensive treatment services. The programs focus on a cognitive behavioral model with family, group and individual counseling, social and life skills development, and educational and

RAYMSAY YOUTH SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

recreational programs. The primary focus of these services is to reshape antisocial behaviors by stressing responsibility and achievement of performance and treatment goals.

The non-residential setting is designed to meet the special needs of patients requiring a less structured environment than the residential setting, but providing the necessary level of treatment, support and assistance to transition back into society. The primary focus of this program is to provide patients, with a clinically definable emotional, psychiatric or dependency disorder, with therapeutic and intensive treatment services. Patients who are assisted through this program have either transitioned out of a residential treatment program, or do not require the intensive services of a residential treatment program.

Many of the Company’s programs are complemented with specialized educational services designed to modify behavior and assist individuals in developing their academic, social, living and vocational skills necessary to participate successfully in society.

Management Contract Operations

The Company’s programs and services in its management contract operations are similar in nature to the programs and services offered by the Company at its owned or leased operations; however, the programs and services are provided at facilities owned by the contracting governmental agency. These programs and services focus on solving the specialized needs of the respective agency by providing treatment interventions, including counseling, social interests, substance abuse education and treatment, mental health services, cognitive and life skills development, accredited education and vocational skills. The Company believes that a comprehensive approach, which develops the social, educational, and vocational skills of the individual, creates responsible, contributing, pro-social individuals. This comprehensive approach is essential to achieving the program’s objective of reducing recidivism and integrating the youth into their communities as responsible and productive individuals.

The following table sets forth, for each of the periods indicated, certain information about segment results of operations and segment assets. There are no inter-segment sales or transfers. Segment profit consists of revenue less operating expenses, and does not include investment income and other, interest and other financing charges, non-recurring items and income taxes. Total assets are those assets used in the operations in each segment. Corporate assets include cash and cash equivalents, property and equipment, intangible assets and notes receivable. The accounting policies of the reportable segments are the same as those described in the summary of significant accounting policies.

RAYMSAY YOUTH SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)


		Quarter Ended						Nine Months Ended
		September 30,						September 30,

		2002			2001			2002			2001

Segment revenue
	Owned operations	$	29,124,000		$	26,415,000		$	87,380,000		$	78,683,000
	Management contracts		7,199,000			7,223,000			21,483,000			20,584,000

Total consolidated revenues		$	36,323,000		$	33,638,000		$	108,863,000		$	99,267,000

Segment depreciation and amortization
	Owned operations	$	613,000		$	569,000		$	1,736,000		$	1,626,000
	Management contracts		37,000			28,000			107,000			78,000

			650,000			597,000			1,843,000			1,704,000
Reconciling items
	Corporate depreciation and amortization		29,000			42,000			85,000			120,000

Total consolidated depreciation and amortization		$	679,000		$	639,000		$	1,928,000		$	1,824,000

SEGMENT PROFIT
	Owned operations	$	3,347,000		$	2,131,000		$	10,560,000		$	7,533,000
	Management contracts		703,000			1,244,000			1,945,000			2,309,000

			4,050,000			3,375,000			12,505,000			9,842,000
Reconciling items
	Corporate expenses		(1,449,000	)		(1,380,000	)		(4,631,000	)		(4,515,000	)
	Asset impairment charges		—			—			(125,000	)		—
	Interest and other financing charges		(576,000	)		(746,000	)		(1,871,000	)		(2,597,000	)

Total consolidated income before income taxes		$	2,025,000		$	1,249,000		$	5,878,000		$	2,730,000

SEGMENT CAPITAL EXPENSES
	Owned operations	$	528,000		$	522,000		$	1,950,000		$	1,488,000
	Management contracts		33,000			42,000			159,000			174,000

			561,000			564,000			2,109,000			1,662,000
Reconciling items
	Corporate assets		1,000			33,000			54,000			164,000

Total consolidated capital expenditures		$	562,000		$	597,000		$	2,163,000		$	1,826,000


		Year Ended

		September 30, 2002		December 31, 2001

Segment assets
	Owned operations	$	59,449,000	$	57,893,000
	Management contracts		6,114,000		6,729,000

Total segment assets			65,563,000		64,622,000
Reconciling items
	Corporate assets		10,204,000		4,389,000

Total consolidated assets		$	75,767,000	$	69,011,000

NOTE 7. ACCOUNTS RECEIVABLE

RAYMSAY YOUTH SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

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 8. RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS

In July 2001, the FASB issued Statement No. 143, Accounting for Asset Retirement Obligations. This Statement requires that an asset retirement cost should be capitalized as part of the cost of the related long-lived asset and subsequently allocated to expense using a systematic and rational method. This Statement is required to be adopted in fiscal years beginning after June 15, 2002. The Company does not anticipate a significant impact to the results of operations from the adoption of this Statement.

In April 2002, the FASB issued Statement No. 145, Rescission of FASB Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical Correction. This Statement eliminates extraordinary accounting treatment for reporting gain or loss on debt extinguishment, and amends other existing authoritative pronouncements to make various technical corrections, clarifies meanings, or describes their applicability under changed conditions. The provisions of this Statement are effective for the Company with the beginning of fiscal year 2003; however, early application of the Statement is encouraged. Debt extinguishments reported as extraordinary items prior to scheduled or early adoption of this Statement would be reclassified in most cases following adoption. The Company does not anticipate a significant impact on its results of operations from adopting this Statement.

In June 2002, the FASB issued Statement No. 146, Accounting for Costs Associated with Exit or Disposal Activities. This Statement requires recording costs associated with exit or disposal activities at their fair values when a liability has been incurred. Under previous guidance, certain exit costs were accrued upon management commitment to an exit plan. Adoption of this Statement is required with the beginning of fiscal year 2003. The Company has not yet completed its evaluation of the impact of adopting this Statement.

NOTE 9. INCOME TAXES

During the quarter ended June 30, 2002, the Company reversed $7.4 million of the valuation allowance placed on its deferred tax assets relating to temporary differences that will result in deductible amounts in future years and net operating loss carryforwards. During the quarter ended September 30, 2002, the Company amortized $0.7 million of its deferred tax asset, resulting in a net deferred tax asset of $6.7 million at September 30, 2002. Future realization of the tax benefit of an existing deductible temporary difference or carryforward ultimately depends on the existence of sufficient taxable income within the carryforward period available under tax law. The Company has reversed a portion of the valuation allowance because, based on a current review of available objective and verifiable evidence, it is management’s judgment that a portion of the tax benefits associated with the Company’s deferred tax assets will more likely than not be realized. Such evidence includes updated expectations about sufficient future years’ taxable income which reflect the continuing improvement in the Company’s operating results.

RAYMSAY YOUTH SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

The Company has available federal net operating loss carryforwards totaling approximately $33.0 million, which expire in the years 2010 to 2018. The Company also has available alternative minimum tax credit carryforwards of approximately $1.2 million which may be carried forward indefinitely.

The net deferred tax asset represents management’s best estimate of the tax benefits that will more likely than not be realized in future years at each reporting date. However, there can be no assurance that the Company can generate taxable income to realize the net deferred tax asset. In addition, under the Tax Reform Act of 1986, certain future changes in ownership resulting from the sale of stock may limit the amount of net operating loss carryforwards that can be utilized on an annual basis. The Company has and continues to evaluate compliance relating to the utilization of the net operating loss carryforwards, and believes it has complied in all material respects. A failure to meet the requirements could result in a loss or limitation of the utilization of carryforwards, which could have a material adverse effect on the Company’s financial position and results of operations in future periods.

Deferred taxes as of September 30, 2002 and December 31, 2001 are summarized as follows:


			September 30,			December 31,
			2002			2001

Deferred tax liabilities:
	Book basis of fixed assets over tax basis		$	57,000		$	57,000
	Prepaid maintenance			95,000			396,000
	Other			—			248,000

		Total deferred tax liabilities		152,000			701,000
Deferred tax assets:
	Allowance for doubtful accounts			668,000			735,000
	General and professional liability insurance			910,000			1,806,000
	Accrued employee benefits			824,000			816,000
	Capital loss carryovers			423,000			445,000
	Other accrued liabilities			2,320,000			2,568,000
	Other			—			2,000
	Net operating loss carryovers			13,297,000			15,899,000
	Alternative minimum tax credit carryovers			1,150,000			1,150,000

		Total deferred tax assets		19,592,000			23,421,000
Valuation allowance for deferred tax assets				(12,732,000	)		(22,720,000	)

		Deferred tax assets, net of valuation allowance		6,860,000			701,000

		Net deferred tax assets	$	6,708,000		$	—

RAMSAY YOUTH SERVICES, INC. AND SUBSIDIARIES

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS

The Company receives revenues primarily from the delivery of mental health, substance abuse and behavioral health programs and services in residential and non-residential settings. The Company receives revenues based on per diem rates, fixed fee contracts or flat or cost-based rate contracts. In addition, the Company also receives revenues from management contracts with other entities. Revenues under the Company’s programs are recognized as services are rendered. Revenues of the Company’s programs and services are affected by changes in the rates the Company charges, changes in reimbursement rates by third-party payors, the volume of individuals treated and changes in the mix of payors.

Salaries, wages and benefits include facility and program payrolls and related taxes, as well as employee benefits, including insurance and workers’ compensation coverage. Employee compensation and benefits also includes general and administrative payroll and related benefit costs, including salaries and supplemental compensation of officers.

Other operating expenses include all expenses not otherwise presented separately in the Company’s statements of operations. Significant components of these expenses at the operating level include items such as food, utilities, supplies, rent and insurance. Significant components of these expenses at the administrative level include legal, accounting, investor relations, marketing, consulting and travel expense.

The Company’s quarterly results may fluctuate significantly as a result of a variety of factors, including the timing of the opening of new programs. When the Company opens a new program, the program may be unprofitable until the program’s population, and net revenues contributed by the program, approach intended levels, primarily because the Company staffs its programs in anticipation of achieving such levels. The Company’s quarterly results may also be impacted by seasonality, as revenues generated by youth treatment services are generally seasonal in nature.

In connection with the “safe-harbor” provisions of the Private Securities Litigation Reform Act of 1995, the Company notes that this Quarterly Report on Form 10-Q contains forward-looking statements about the Company. The Company is hereby setting forth cautionary statements identifying important factors that may cause the Company’s actual results to differ materially from those set forth in any forward-looking statements or information made by or on behalf of or concerning the Company. These factors are set forth in the Company’s Form 10-K for the year ended December 31, 2001, and include (i) accelerating changes occurring in the at-risk youth industry, including competition from consolidating and integrated provider systems and limitations on reimbursement rates, (ii) federal and state governmental budgetary constraints which could have the effect of limiting the amount of funds available to support governmental programs, (iii) statutory, regulatory and administrative changes or interpretations of existing statutory and regulatory provisions affecting the conduct of the Company’s business and affecting current and prior reimbursement for the Company’s services, (iv) uncertainties regarding issues in the Puerto Rico market serviced by the Company and (v) our ability to utilize our net operating loss carryforwards. There can be no assurance that any anticipated future results will be achieved. As a result of the factors identified above and including any other factors, the Company’s actual results or financial or other condition could vary significantly from the performance or expectation set forth in any forward-looking statements or information. The Company undertakes no obligations to update these forward-looking statements.

RAYMSAY YOUTH SERVICES, INC. AND SUBSIDIARIES

RESULTS OF OPERATIONS

Quarter Ended September 30, 2002 Compared to Quarter Ended September 30, 2001

OWNED OPERATIONS SEGMENT

The following table states for the periods indicated the results of our owned operations in dollar and percentage of revenue terms (dollars in thousands):


			Quarter Ended September 30,

			2002				2001

Revenues			$	29,124	100.0	%	$	26,415	100.0	%
Expenses:
	Salaries, wages and benefits			17,069	58.6	%		16,037	60.7	%
	Other operating expenses			7,702	26.5	%		7,130	27.0	%
	Provision for doubtful accounts			393	1.3	%		548	2.0	%
	Depreciation and amortization			613	2.1	%		569	2.2	%

		Total operating expenses		25,777	88.5	%		24,284	91.9	%

Income from operations			$	3,347	11.5	%	$	2,131	8.1	%

REVENUES

Revenues increased by 10.3%, or $2.7 million, to $29.1 million in 2002 compared to $26.4 million in 2001. The increase in revenues during the period is primarily a result of (i) an increase of 1.5% in resident days (from 87,455 days in 2001 to 88,728 days in 2002), resulting in an increase in revenues of $1.5 million, (ii) an increase in average rates due to increases in per diems and a favorable per diem mix, which increased revenues by $0.9 million, (iii) a new contract awarded to one of the Company’s facilities which began on February 18, 2002 and generated $0.4 million in revenues during the quarter ended September 30, 2002 and (iv) a reduction in the general cost report reserves as a result of favorable cost report settlements which resulted in an increase in revenue of $0.4 million. The aforementioned increases were partially offset by the closure of a 20-bed facility in Puerto Rico, which decreased revenues by $0.5 million.

SALARIES, WAGES AND BENEFITS

Salaries, wages and benefits were $17.1 million, or 58.6% of revenues in 2002, compared to $16.0 million, or 60.7% in 2001. The decrease as a percentage of revenues was primarily attributable to the aforementioned increase in revenues and related efficiencies in staffing primarily in the Company’s Texas and Michigan facilities.

OTHER OPERATING EXPENSES

Other operating expenses were $7.7 million, or 26.5% of revenues in 2002, compared to $7.1 million, or 27.0% of revenues in 2001. The decrease as a percentage of revenues was primarily a result of the aforementioned increase in revenues and related operating efficiencies gained by the Company primarily in its Texas and Michigan facilities.

PROVISION FOR DOUBTFUL ACCOUNTS

The provision for doubtful accounts was $0.4 million, or 1.3% of revenues in 2002, compared to $0.5 million, or 2.0% of revenues in 2001. The decrease as a percentage of revenues was a result of additional reserves

RAYMSAY YOUTH SERVICES, INC. AND SUBSIDIARIES

recorded in 2001 related to payment delays experienced by the Company from one of its payor sources in its Jacksonville, North Carolina facility.

DEPRECIATION AND AMORTIZATION

Depreciation and amortization was $0.6 million, or 2.1% of revenues in 2002, compared to $0.6 million, or 2.2% of revenues in 2001. Depreciation and amortization did not fluctuate as a percentage of revenue when compared to the same period in the prior year.

MANAGEMENT CONTRACT SEGMENT

The following table states for the periods indicated the results of our management contract operations in dollar and percentage of revenue terms (dollars in thousands):


			Quarter Ended September 30,

			2002				2001

Revenues			$	7,199	100.0	%	$	7,223		100.0	%
Expenses:
	Salaries, wages and benefits			4,913	68.2	%		4,677		64.7	%
	Other operating expenses			1,538	21.4	%		1,558		21.6	%
	Provision for doubtful accounts			8	0.1	%		(284	)	(3.9	%)
	Depreciation and amortization			37	0.5	%		28		0.4	%

		Total operating expenses		6,496	90.2	%		5,979		82.8	%

Income from operations			$	703	9.8	%	$	1,244		17.2	%

REVENUES

Revenues during 2002 of $7.2 million approximated revenues in 2001 as increases in revenues from a new contract awarded to the Company in Florida were offset by decreases resulting from the termination of two contracts in Puerto Rico.

SALARIES, WAGES AND BENEFITS

Salaries, wages and benefits were $4.9 million, or 68.2% of revenues in 2002, compared to $4.7 million, or 64.7% in 2001. The increase as a percentage of revenues was primarily attributable to the termination of one of the Company’s Puerto Rico contracts in December 2001 which had a lower than segment-average salary cost as a percentage of revenues.

OTHER OPERATING EXPENSES

Other operating expenses were $1.5 million, or 21.4% of revenues in 2002, compared to $1.6 million, or 21.6% of revenues in 2001. Other operating expenses did not fluctuate significantly as a percentage of revenue when compared to the same period in the prior year.

PROVISION FOR DOUBTFUL ACCOUNTS

Fluctuations in the provision for doubtful accounts relate primarily to the Company’s management contracts in Puerto Rico. Due to the termination of its Puerto Rico contracts, the Company did not increase its provision for doubtful accounts in its Puerto Rico market during the quarter ended September 30, 2002.

RAYMSAY YOUTH SERVICES, INC. AND SUBSIDIARIES

DEPRECIATION AND AMORTIZATION

Depreciation and amortization was $0.04 million, or 0.5% of revenues in 2002, compared to $0.03 million, or 0.4% of revenues in 2001. Depreciation and amortization did not fluctuate significantly as a percentage of revenue when compared to the same period in the prior year.

CORPORATE AND OTHER

The following table states for the periods indicated total revenues and corporate office expenses in dollar and percentage of revenue terms (dollars in thousands):


			Quarter Ended September 30,

			2002				2001

Revenues:
	Owned operations		$	29,124			$	26,415
	Management contracts			7,199				7,223

		Total revenues	$	36,323	100.0	%	$	33,638	100.0	%
Expenses:
	Salaries, wages and benefits			689	1.9	%		569	1.7	%
	Other operating expenses			731	2.0	%		769	2.3	%
	Depreciation and amortization			29	0.1	%		42	0.1	%
	Interest and other financing charges			576	1.6	%		746	2.2	%
	Provision for income taxes			763	2.1	%		171	0.5	%

SALARIES, WAGES AND BENEFITS

Corporate salaries, wages and benefits were $0.7 million, or 1.9% of revenues in 2002, compared to $0.6 million, or 1.7% in 2001. Corporate salaries did not fluctuate significantly as a percentage of revenue when compared to the same period in the prior year.

OTHER OPERATING EXPENSES

Other operating expenses were $0.7 million, or 2.0% of revenues in 2002, compared to $0.8 million, or 2.3% of revenues in 2001. The decrease as a percentage of revenues is primarily attributable to the aforementioned increase in revenues and a reduction in various corporate office expenses.

DEPRECIATION AND AMORTIZATION

Depreciation and amortization was $0.03 million, or 0.1% of revenues in 2002, compared to $0.04 million, or 0.1% of revenues in 2001. Depreciation and amortization did not fluctuate as a percentage of revenue when compared to the same period in the prior year.

INTEREST AND OTHER FINANCING CHARGES

Interest and other financing charges was $0.6 million, or 1.6% of total consolidated revenues in 2002, compared to $0.7 million, or 2.2% of total consolidated revenues in 2001. The decrease in interest and other financing charges is primarily attributable to a decrease in the Company’s average outstanding borrowings and a decrease in interest rates on the Company’s Senior Credit Facility between periods.

PROVISION FOR INCOME TAXES

The increase in the provision for income taxes is due to the increase in the Company’s effective tax rate from 13.7% to 37.7%. During the quarter ended June 30, 2002, the Company reversed $7.4 million

RAYMSAY YOUTH SERVICES, INC. AND SUBSIDIARIES

of the valuation allowance placed on its deferred tax assets relating to temporary differences that will result in deductible amounts in future years and net operating loss carryforwards. Future realization of the tax benefit of an existing deductible temporary difference or carryforward ultimately depends on the existence of sufficient taxable income within the carryforward period available under tax law. The Company has reversed a portion of the valuation allowance because, based on a current review of available objective and verifiable evidence, it is management’s judgment that a portion of the tax benefits associated with the Company’s deferred tax assets will more likely than not be realized. Such evidence includes updated expectations about sufficient future years’ taxable income which reflect the continuing improvement in the Company’s operating results.

Nine Months Ended September 30, 2002 Compared to Nine Months Ended September 30, 2001

OWNED OPERATIONS SEGMENT

The following table states for the periods indicated the results of our owned operations in dollar and percentage of revenue terms (dollars in thousands):


			Nine Months Ended September 30,

			2002				2001

Revenues			$	87,380	100.0	%	$	78,683	100.0	%
Expenses:
	Salaries, wages and benefits			50,704	58.0	%		46,288	58.8	%
	Other operating expenses			23,002	26.3	%		21,273	27.0	%
	Provision for doubtful accounts			1,378	1.6	%		1,963	2.5	%
	Depreciation and amortization			1,736	2.0	%		1,626	2.1	%

		Total operating expenses		76,820	87.9	%		71,150	90.4	%

Income from operations			$	10,560	12.1	%	$	7,533	9.6	%

REVENUES

Revenues increased by 11.1%, or $8.7 million, to $87.4 million in 2002 compared to $78.7 million in 2001. The increase in revenues during the period is primarily a result of (i) an increase of 1.6% in resident days (from 262,746 days in 2001 to 266,898 days in 2002) resulting in an increase in revenues of $3.2 million, (ii) an increase in the rates and a favorable payor mix at several Company facilities which increased revenues by $3.9 million, (iii) positive cost report final settlements which resulted in an increase in revenues of $0.9 million, (iv) a new contract awarded to the Company which began on February 18, 2002 and generated $1.0 million in revenues during the nine-month period, and (v) the full nine-month effect of a Florida program begun in July 2001, which increased revenues by $0.7 million. The

RAYMSAY YOUTH SERVICES, INC. AND SUBSIDIARIES

aforementioned increases were partially offset by the closure of a 20-bed facility in Puerto Rico which decreased revenues by $1.0 million.

SALARIES, WAGES AND BENEFITS

Salaries, wages and benefits were $50.7 million, or 58.0% of revenues in 2002, compared to $46.3 million, or 58.8% in 2001. The decrease as a percentage of revenues is primarily attributable to the aforementioned increase in revenues as a result of the reduction in general cost report reserves and related efficiencies in staffing primarily at its Michigan and Central Florida facilities.

OTHER OPERATING EXPENSES

Other operating expenses were $23.0 million, or 26.3% of revenues in 2002, compared to $21.3 million, or 27.0% of revenues in 2001. The decrease as a percentage of revenues was primarily a result of the aforementioned increase in revenues as a result of the reduction in general cost report reserves and the related operating efficiencies gained by the Company as a result of its new contracts in the Florida market and its Texas operations.

PROVISION FOR DOUBTFUL ACCOUNTS

The provision for doubtful accounts was $1.4 million, or 1.6% of revenues in 2002, compared to $2.0 million, or 2.5% in 2001. The decrease as a percentage of revenues was primarily a result of additional reserves recorded in 2001 related to payment delays experienced by the Company from one of its payors in its Jacksonville, North Carolina facility, as well as reserves recorded by the Company related to financial difficulties experienced by one of the Company’s former referral sources to its Nevada, Missouri facility.

DEPRECIATION AND AMORTIZATION

Depreciation and amortization was $1.7 million or 2.0% of revenues in 2002, compared to $1.6 million, or 2.1% of revenues in 2001. Depreciation and amortization did not fluctuate significantly as a percentage of revenue during the nine months ended September 30, 2002 when compared to the same period in the prior year.

MANAGEMENT CONTRACT SEGMENT

The following table states for the periods indicated the results of our management contract operations in dollar and percentage of revenue terms (dollars in thousands):


			Nine Months Ended September 30,

			2002				2001

Revenues			$	21,483	100.0	%	$	20,584	100.0	%
Expenses:
	Salaries, wages and benefits			14,442	67.2	%		13,488	65.5	%
	Other operating expenses			4,528	21.1	%		4,489	21.8	%
	Provision for doubtful accounts			461	2.1	%		220	1.1	%
	Depreciation and amortization			107	0.5	%		78	0.4	%

		Total operating expenses		19,538	90.9	%		18,275	88.8	%

Income from operations			$	1,945	9.1	%	$	2,309	11.2	%

RAYMSAY YOUTH SERVICES, INC. AND SUBSIDIARIES

REVENUES

Revenues increased by 4.4%, or $0.9 million, to $21.5 million in 2002 compared to $20.6 million in 2001. The revenue increase is a result of (i) the full nine-month effect of the expansion of two Florida programs started in June 2001, which increased revenues by $1.9 million, and (ii) a new contract awarded to the Company which began operations on February 18, 2002 and generated $1.7 million in revenues during the nine-month period. The aforementioned increases were partially offset by the termination of two of the Company’s Puerto Rico contracts, which decreased revenues by $1.7 million and a decrease in billings at two of the Company’s Florida contracts which decreased revenues by $1.0 million.

SALARIES, WAGES AND BENEFITS

Salaries, wages and benefits were $14.4 million, or 67.2% of revenues in 2002, compared to $13.5 million, or 65.5% in 2001. The increase as a percentage of revenues was primarily attributable to the termination of one of the Company’s Puerto Rico contracts in December 2001 which had a lower than segment-average salary cost as a percentage of revenues.

OTHER OPERATING EXPENSES

Other operating expenses were $4.5 million or 21.1% of revenues in 2002, compared to $4.5 million or 21.8% of revenues in 2001. Other operating expenses did not fluctuate significantly as a percentage of revenue when compared to the same period in the prior year.

PROVISION FOR DOUBTFUL ACCOUNTS

The provision for doubtful accounts was $0.5 million, or 2.1% of revenues in 2002, compared to $0.2 million, or 1.1% in 2001. Fluctuations in the provision for doubtful accounts relate primarily to the increase in reserves related to the Company’s management contracts in Puerto Rico. The Company increased its provision for doubtful accounts by $0.3 million during the nine month period ended September 30, 2002, when compared to the same period in the prior year.

DEPRECIATION AND AMORTIZATION

Depreciation and amortization was $0.1 million, or 0.5% of revenues in 2002, compared to $0.08 million, or 0.4% of revenues in 2001. Depreciation and amortization did not fluctuate significantly as a percentage of revenues.

RAYMSAY YOUTH SERVICES, INC. AND SUBSIDIARIES

CORPORATE AND OTHER

The following table states for the periods indicated total revenues and corporate office expenses in dollar and percentage of revenue terms (dollars in thousands):


			Nine Months Ended September 30,

			2002					2001

Revenues:
	Owned operations		$	87,380				$	78,683
	Management contracts			21,483					20,584

		Total revenues	$	108,863		100.0	%	$	99,267	100.0	%
Expenses:
	Salaries, wages and benefits			2,560		2.4	%		2,070	21.	%
	Other operating expenses			1,986		1.8	%		2,325	2.3	%
	Depreciation and amortization			85		0.1	%		120	0.1	%
	Interest and other financing charges			1,871		1.7	%		2,597	2.6	%
	Asset impairment charges			125		0.1	%		—	—
	Provision for income taxes			(6,215	)	(5.7	%)		472	0.5	%

SALARIES, WAGES AND BENEFITS

Corporate salaries, wages and benefits were $2.6 million, or 2.4% of revenues in 2002, compared to $2.1 million, or 2.1% in 2001. The increase as a percentage of revenues is attributable to a $0.5 million charge for the restructuring of an employment contract for one of the Company’s executives during the quarter ended June 30, 2002.

OTHER OPERATING EXPENSES

Other operating expenses were $2.0 million, or 1.8% of revenues in 2002, compared to $2.3 million, or 2.3% of revenues in 2001. The decrease as a percentage of revenues is primarily attributable to a reduction in professional fees, travel and various other corporate office expenses.

DEPRECIATION AND AMORTIZATION

Depreciation and amortization was $0.09 million, or 0.1% of revenues in 2002, compared to $0.1 million, or 0.1% of revenues in 2001. Depreciation and amortization did not fluctuate as a percentage of revenue when compared to the same period in the prior year.

INTEREST AND OTHER FINANCING CHARGES

Interest and other financing charges was $1.9 million, or 1.7% of total consolidated revenues in 2002, compared to $2.6 million, or 2.6% of total consolidated revenues in 2001. The decrease in interest and other financing charges is primarily attributable to a decrease in the Company’s average outstanding borrowings and a decrease in interest rates on the Company’s Senior Credit Facility between periods.

ASSET IMPAIRMENT CHARGES

During the nine months ended September 30, 2002, the Company recorded asset impairment charges of $0.1 million in connection with assets held for sale in South Carolina. The asset impairment charge was determined based on the difference between the carrying value of the asset and expected net proceeds from the sale.

PROVISION FOR INCOME TAXES

During the nine months ended September 30, 2002, the Company reversed $6.7 million of the valuation allowance placed on its deferred tax assets relating to temporary differences that will result in deductible amounts in future years and net operating loss carryforwards. Future realization of the tax benefit of an existing deductible temporary difference or carryforward ultimately depends on the existence of sufficient taxable income within the carryforward period available under tax law. The Company has reversed a portion of the valuation allowance because, based on a current review of available objective and

RAYMSAY YOUTH SERVICES, INC. AND SUBSIDIARIES

verifiable evidence, it is management’s judgment that a portion of the tax benefits associated with the Company’s deferred tax assets will more likely than not be realized. Such evidence includes updated expectations about sufficient future years’ taxable income which reflect the continuing improvement in the Company’s operating results.

The net deferred tax asset represents management’s best estimate of the tax benefits that will more likely than not be realized in future years at each reporting date. However, there can be no assurance that the Company can generate taxable income to realize the net deferred tax asset. In addition, under the Tax Reform Act of 1986, certain future changes in ownership resulting from the sale of stock may limit the amount of net operating loss carryforwards that can be utilized on an annual basis. The Company has and continues to evaluate compliance relating to the utilization of the net operating loss carryforwards, and believes it has complied in all respects. A failure to meet the requirements could result in a loss or limitation of the utilization of carryforwards, which could have a material adverse effect on the Company’s financial position and results of operations in future periods.

NEW ACCOUNTING REQUIREMENTS

RAYMSAY YOUTH SERVICES, INC. AND SUBSIDIARIES

LIQUIDITY AND CAPITAL RESOURCES

The Company’s primary liquidity needs are for working capital, capital expenditures, and debt service. The Company’s primary sources of liquidity are cash flows from operations and borrowings under its revolving credit line.

At September 30, 2002 and December 31, 2001, the Company had $12.6 million and $13.1 million, respectively, in working capital and $1.6 million and $0.8 million, respectively, in cash and cash equivalents. Working capital as of September 30, 2002 consisted primarily of $1.6 million in cash and cash equivalents, $23.2 million in accounts receivable and $5.9 million in other current assets, net of $18.1 million in current liabilities. The decrease in working capital between periods is primarily a result of a decrease in net accounts receivable and other current assets, partially offset by an increase in current liabilities resulting primarily from year end timing differences in the payment of certain liabilities.

Net cash provided by operating activities increased to $8.9 million during the nine months ended September 30, 2002. The increase in cash provided by operating activities was primarily attributable to the increase in net income during the period and favorable variances in operating assets and liabilities.

Cash used in investing activities was $2.0 million for the nine months ended September 30, 2002 as compared to cash used in investing activities of $1.3 million during the nine months ended September 30, 2001. The increase in investing activities was primarily attributable to $2.2 million used in expenditures for property and equipment, offset by approximately $0.2 million in proceeds from the sale of certain assets. Cash used in investing activities during 2001 was primarily attributable to $1.8 million used in expenditures for property and equipment, offset by approximately $0.5 million in proceeds from the sale of certain assets.

Net cash used in financing activities was $6.0 million for the nine months ended September 30, 2002 as compared to cash provided by financing activities of $2.3 million during the nine months ended September 30, 2001. Cash used in financing activities in 2002 and 2001 related primarily to repayments of borrowings under the Company’s term loan offset by proceeds from borrowing under the revolving credit facility.

The Company has experienced delays in the collection of receivables from its contracts in Puerto Rico. As of September 30, 2002, the Company had approximately $3.3 million in outstanding receivables due from the Commonwealth of Puerto Rico, of which $2.0 million was over 120 days past due. Reserves against outstanding Puerto Rico receivables were $1.4 million as of September 30, 2002. The Company and its advisors are in active discussions with the Government of Puerto Rico with respect to the payment of the outstanding receivables. The Company believes that it has fully performed its obligations under the Puerto Rico contracts and is entitled to receive payment of these receivables in full. Although the Company has been advised by its legal counsel that the net receivables due on the Puerto Rico contracts are collectable, there can be no assurances that future transactions or events will not result in the need for additional reserves for these accounts receivable. If the Company were to record additional reserves, it would adversely affect earnings in the period in which the reserves are recorded.

The Government of Puerto Rico has informed the Company that, as a result of budgetary constraints, it will cancel various contracts with private sector providers. In connection therewith, the Company has agreed with the Government of Puerto Rico to terminate its contract to provide educational services to juveniles in Puerto Rico effective August 14, 2002. On April 16, 2002, the Company and the Government of Puerto Rico agreed to the cancellation of the Company’s contract to provide a 20-bed specialized mental health treatment program for youth referred by the Mental Health and Anti-Addiction Services Administration of Puerto Rico. Total revenues and operating losses from these contracts during the nine-month period ended September 30, 2002 were $2.0 million and $0.4 million, respectively.

Management of the Company believes that it can meet its current cash requirements and future identifiable needs with internally generated funds from operations and funds available under its Senior Credit Facility. However, if the Company should need to obtain liquidity through other sources of debt or

RAYMSAY YOUTH SERVICES, INC. AND SUBSIDIARIES

equity, the following factors, in addition to the risk factors discussed in the Company’s Form 10-K for December 31, 2001, should be considered:

• Ability to Raise Additional Capital. Although the Company believes that it can obtain additional liquidity, there can be no assurances that the Company will be able to raise debt or equity capital through other sources, or if obtained, that it will be on terms acceptable to the Company. The incurring or assumption by the Company of additional indebtedness could result in the issuance of additional equity and/or debt, which could have a dilutive effect on current shareholders and a significant effect on the Company’s operations.

• Ability to Borrow Funds under Senior Credit Facility. The Company’s ability to borrow funds under its Senior Credit Facility may be terminated if the Company fails to comply with the restrictive financial and operating covenants contained in the Senior Credit Facility. If the Company is unable to operate its business within the covenants specified in the Senior Credit Facility, the Company’s ability to obtain future amendments to the covenants is not assured, and the Company’s ability to make borrowings required to operate its business could be restricted or terminated. Such a restriction or termination would have a material adverse effect on the Company’s liquidity.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

While the Company is exposed to changes in interest rates as a result of its outstanding variable rate debt, the Company does not currently utilize any derivative financial instruments related to its interest rate exposure. The Company believes that its exposure to market risk will not result in a material adverse effect on the Company’s consolidated financial condition, results of operations or liquidity.

ITEM 4. CONTROLS AND PROCEDURES

Our Chief Executive Officer and Chief Financial Officer have evaluated the effectiveness of the design and operation of our disclosure controls and procedures within the last ninety days and have concluded that the disclosure controls and procedures are effective in timely alerting them to material information relating to the Company and its subsidiaries required to be included in our periodic filings with the Securities and Exchange Commission. There were no significant changes in our internal controls or in other factors that could significantly affect these controls subsequent to the last day they were evaluated by our Chief Executive Officer and Chief Financial Officer, nor were there any corrective actions required with regard to significant deficiencies and material weaknesses.

PART II – OTHER INFORMATION

Item 1. Legal Proceedings

The Company is party to certain claims, suits and complaints, whether arising from the acts or omissions of its employees, providers or others, which arise in the ordinary course of business. The Company has established reserves at June 30, 2002 for the estimated amounts, which might be recovered from the Company as a result of all outstanding legal proceedings. In the opinion of management, the ultimate resolution of these pending legal proceedings is not expected to have a material adverse effect on the Company’s financial position, results of operations or liquidity.

Item 2. Changes in Securities and Use of Proceeds

None.

Item 3. Defaults upon Senior Securities

None.

RAYMSAY YOUTH SERVICES, INC. AND SUBSIDIARIES

Item 4. Submission of Matters to a Vote of Securities Holders

None.

Item 5. Other Information

None.

Item 6. Exhibits and Reports on Form 8-K

(a) Exhibits

The Exhibits required to be filed as part of this Quarterly Report on Form 10-Q are as follows:


Exhibit 10.1		Ninth Amendment to Loan and Security Agreement and Consent dated as of September 6, 2002 by and among the Company, the subsidiaries of the Company and Fleet Capital Corporation, as agent and lender.

Exhibit 10.2		Fourth Amendment to Amended and Restated Subordinated Note and Warrant Purchase Agreement dated as of September 6, 2002 by and among the Company, the subsidiaries of the Company as Guarantors and SunTrust Banks, Inc. and ING Capital, LLC as Purchasers.

Exhibit 10.3		Commercial Lease Agreement dated as of September, 2002 between Ramsay Hospital Properties, Inc. and Ramsay Youth Services of Georgia, Inc.

Exhibit 10.4		Guarantee of Obligation Pursuant to Lease Agreement described in Exhibit 10.3 above dated as of September, 2002 by the Company in favor of Ramsay Hospital Properties, Inc.

Exhibit 11		Computation of Net Income Per Share.

Exhibit 99.1		Chief Executive Officer Certification Pursuant to 18 U.S.C. Section 1350

Exhibit 99.2		Chief Financial Officer Certification Pursuant to 18 U.S.C. Section 1350

Exhibit 99.3		Press Release dated November 8, 2002

(b) Current Reports on Form 8-K

The Company did not file any Current Reports on Form 8-K during the quarter ended September 30, 2002.

RAYMSAY YOUTH SERVICES, INC. AND SUBSIDIARIES

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereupon duly authorized.


		RAMSAY YOUTH SERVICES, INC. Registrant

		/s/ Marcio C. Cabrera

		Marcio C. Cabrera Executive Vice President and Chief Financial Officer

Date: November 13, 2002

CERTIFICATION

I, Luis E. Lamela, Chief Executive Officer of Ramsay Youth Services, Inc. (the “Company”), certify that:

1. I have reviewed this quarterly report on Form 10-Q of the Company;

2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary in order to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the Company as of, and for, the periods presented in this quarterly report;

4. The Company’s Chief Financial Officer and I are responsible for establishing and maintaining “disclosure controls and procedures” (as defined in Exchange Act Rules 13a-14 and 15d-14) for the Company and we have:

(a) designed such disclosure controls and procedures to ensure that material information relating to the Company, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared;

(b) evaluated the effectiveness of the Company’s disclosure controls and procedures as of a date within 90 days prior to the filing date of the date of this quarterly report (the “Evaluation Date”); and

(c) presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;

5. The Company’s Chief Financial Officer and I have disclosed, based on our most recent evaluation, to the Company’s auditors and to the audit committee of the Company’s board of directors:

(a) all significant deficiencies in the design or operation of internal controls which could adversely affect the Company’s ability to record, process, summarize and report financial data and have identified for the Company’s auditors any material weaknesses in internal controls; and

(b) any fraud, whether or not material, that involves management or other employees who have a significant role in the Company’s internal controls; and

6. The Company’s Chief Financial Officer and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.


Date: November 13, 2002
		By: /s/ Luis E. Lamela

		Chief Executive Officer

CERTIFICATION

I, Marcio C. Cabrera, Chief Financial Officer of Ramsay Youth Services, Inc. (the “Company”), certify that:

1. I have reviewed this quarterly report on Form 10-Q of the Company;

4. The Company’s Chief Executive Officer and I are responsible for establishing and maintaining “disclosure controls and procedures” (as defined in Exchange Act Rules 13a-14 and 15d-14) for the Company and we have:

(c) presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;

5. The Company’s Chief Executive Officer and I have disclosed, based on our most recent evaluation, to the Company’s auditors and to the audit committee of the Company’s board of directors:

(b) any fraud, whether or not material, that involves management or other employees who have a significant role in the Company’s internal controls; and

6. The Company’s Chief Executive Officer and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.


Date: November 13, 2002
		By: /s/ Marcio C. Cabrera

		Chief Financial Officer

26 EX-10.1 3 g79220exv10w1.txt NINTH AMENDMENT TO LOAN & SECURITY AGREEMENT EXHIBIT 10.1 NINTH AMENDMENT TO LOAN AND SECURITY AGREEMENT AND CONSENT This Ninth Amendment to Loan and Security Agreement and Consent (this "NINTH AMENDMENT") is entered into as of the [____]day of September, 2002, between RAMSAY YOUTH SERVICES, INC., a Delaware corporation, f/k/a RAMSAY HEALTH CARE, INC. ("HOLDINGS"), with its principal place of business at Columbus Center, One Alhambra Plaza, Suite 750, Coral Gables, Florida 33134, each of the Subsidiaries of Holdings party to this Ninth Amendment and listed in EXHIBIT B to the Loan Agreement (the "HOLDINGS SUBSIDIARIES"), each of which is a corporation or other legal entity as indicated in EXHIBIT B, is organized under the laws of the jurisdiction indicated in EXHIBIT B, and has its principal place of business at the location indicated in EXHIBIT B (Holdings, the Holdings Subsidiaries, and each other Subsidiary of Holdings or of any Subsidiary of Holdings from time to time party to the Loan Agreement referred to below are hereinafter collectively referred to as "BORROWERS" and each individually as a "BORROWER"), and FLEET CAPITAL CORPORATION, a Rhode Island corporation (in its individual capacity, "FCC"), with offices at 5950 Sherry Lane, Suite 300, Dallas, Texas 75225, as a Lender, and as agent for all Lenders, in such capacity, "AGENT"), and such Persons who are or hereafter become parties to the Loan Agreement as a Lender. Capitalized terms used but not defined in this Ninth Amendment have the meanings assigned to them in Appendix A of that certain Loan and Security Agreement and Consent dated October 30, 1998, among Borrowers, Lenders and Agent, as amended (the "LOAN AGREEMENT"). W I T N E S S E T H: WHEREAS, by letter dated July 1, 2002, Agent and Lenders consented to the formation by Holdings of Ramsay Youth Services of Georgia, Inc., a Delaware corporation, as its wholly-owned subsidiary ("RYSG"); WHEREAS, the Borrowers have requested that Agent and Lenders (i) amend the Loan Agreement to reflect the addition of RYSG as a subsidiary of Holdings and a guarantor of the obligations and (ii) consent to (a) the execution of the Macon Lease (as defined below) by RYSG and Ramsay Hospital Properties, Inc. a Delaware corporation ("RHPI") and (b) the consummation of the transactions contemplated therein; and WHEREAS, subject to the terms and conditions herein contained, Agent and Lenders have agreed to the Borrowers' request to consent to the execution of the Macon Lease and the consummation of the transactions contemplated therein and hereby amend the Loan Agreement as set forth in this Ninth Amendment. NOW, THEREFORE, for and in consideration of the mutual covenants and agreements herein contained and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged and confessed, Borrowers, Agent and Lenders hereby agree as follows: SECTION 1. Subject to the satisfaction of each condition precedent set forth in SECTION 3 hereof and in reliance on the representations, warranties, covenants and agreements contained in this Ninth Amendment, the Loan Agreement shall be amended effective September [___]2002 (the "NINTH AMENDMENT EFFECTIVE DATE") in the manner provided in this SECTION 1: 1.1 ADDITIONAL DEFINITIONS. APPENDIX A of the Loan Agreement shall be and is hereby amended by adding the following definitions to such Appendix: MACON LEASE - THAT CERTAIN COMMERCIAL LEASE DATED SEPTEMBER [___], 2002 BY AND AMONG RHPI AND RYSG; NINTH AMENDMENT - THAT CERTAIN NINTH AMENDMENT TO LOAN AND SECURITY AGREEMENT AND CONSENT DATED AS OF SEPTEMBER [___], 2002 AMONG BORROWERS, AGENT AND LENDERS; NINTH AMENDMENT EFFECTIVE DATE - THE DATE ON WHICH THE NINTH AMENDMENT BECOMES EFFECTIVE PURSUANT TO SECTION 3 OF THE NINTH AMENDMENT RHPI - RAMSAY HOSPITAL PROPERTIES, INC., A DELAWARE CORPORATION; RYSG - RAMSAY YOUTH SERVICES OF GEORGIA, INC., A DELAWARE CORPORATION. 1.2 AMENDMENT TO EXHIBITS. Exhibits B, D, E, F, G, J, L and V to the Loan Agreement shall be amended in their entirety by substituting Exhibits B, D, E, F, G, J, L and V attached hereto for such Exhibits. 1.3 CORPORATE OR NAME CHANGE. SUBSECTION 8.1.12 of the Loan and Security Agreement is hereby added to Section 8 as follows: 8.1.12 CORPORATE OR NAME CHANGE. EACH BORROWER WILL NOTIFY AGENT IN WRITING THIRTY (30) DAYS PRIOR TO ANY CHANGE IN SUCH BORROWER'S NAME, IDENTITY OR CORPORATE STRUCTURE. NO BORROWER SHALL CHANGE ITS STATE OF ORGANIZATION WITHOUT THE PRIOR WRITTEN CONSENT OF AGENT. 1.4 AMENDMENT TO TOTAL INDEBTEDNESS. Subsections (xi) and (xii) of SUBSECTION 8.2.3 of the Loan and Security Agreement shall be amended in their entirety as follows: (XI) INDEBTEDNESS OF HOLDINGS INCURRED IN CONNECTION WITH THE GUARANTY OF THE MACON LEASE; AND (XII) INDEBTEDNESS NOT INCLUDED IN PARAGRAPHS (I) THROUGH (XI) ABOVE WHICH BY ITS TERMS IS UNSECURED AND DOES NOT EXCEED AT ANY TIME, IN THE AGGREGATE, THE SUM OF FIVE HUNDRED THOUSAND DOLLARS ($500,000). 2 1.5 AMENDMENT TO LEASES. SUBSECTION 8.2.16 of the Loan and Security Agreement shall be amended in its entirety to read as follows: 8.2.16 LEASES. BECOME OR PERMIT ANY OF THE SUBSIDIARIES OF HOLDINGS TO BECOME, A LESSEE UNDER ANY OPERATING LEASE EXECUTED AFTER THE CLOSING DATE (OTHER THAN A LEASE UNDER WHICH A BORROWER OR ANY OF ITS SUBSIDIARIES IS LESSOR OR THE MACON LEASE) OF PROPERTY IF THE AGGREGATE RENTALS PAYABLE DURING ANY CURRENT OR FUTURE PERIOD OF 12 CONSECUTIVE MONTHS UNDER THE LEASE IN QUESTION AND ALL OTHER LEASES EXECUTED AFTER THE CLOSING DATE UNDER WHICH HOLDINGS OR ANY OF ITS SUBSIDIARIES IS THEN LESSEE WOULD EXCEED $500,000. THE TERM "RENTALS" MEANS, AS OF THE DATE OF DETERMINATION, ALL PAYMENTS WHICH THE LESSEE IS REQUIRED TO MAKE BY THE TERMS OF ANY LEASE. SECTION 2. CONSENT. Effective as of the Ninth Amendment Effective Date, Agent and Lenders hereby consent to (i) RYSG's execution of the Macon Lease with RHPI as landlord pursuant to the reasonable requirements of RYSG's business and upon terms which are fully disclosed to Agent and no less favorable than would be obtained in a comparable arm's length transaction with a Person not an Affiliate of RYSG as required by SECTION 8.2.4 and (ii) the consummation of the transactions contemplated in the Macon Lease. Borrowers acknowledge and agree that the foregoing consents are limited solely to the matters expressly set forth. Nothing contained in the consent set forth herein shall obligate Agent and Lenders to grant any additional or future consent pursuant to SECTION 8.2.4 of the Loan Agreement or any other provision of the Loan Agreement or any other Loan Document. SECTION 3. CONDITIONS PRECEDENT TO EFFECTIVENESS OF AMENDMENTS. The amendments to the Loan Agreement contained in SECTION 1 of this Ninth Amendment shall be effective only upon the satisfaction of each of the conditions set forth in this SECTION 3. If each condition set forth in this SECTION 3 has not been satisfied by September [____], 2002, this Ninth Amendment and all obligations of Lenders contained herein shall, at the option of Lenders, terminate. 3.1 DOCUMENTATION. Agent and Lenders shall have received, in form and substance acceptable to Agent and Lenders and their counsel, a duly executed copy of this Ninth Amendment. Agent and each Lender shall have received, in form and substance acceptable to Agent and Lenders and their counsel, a duly executed original of each of the following: (i) Pledge Amendment of Holdings, (ii) Guaranty of RYSG, (iii) Security Agreement of RYSG, (iv) Landlord Agreement between RHPI and Agent and (v) any other documents, instruments and certificates as Agent and Lenders and their counsel shall require in connection therewith prior to the date hereof, all in form and substance satisfactory to Agent and Lenders and their counsel. 3.2 2007 SUBORDINATED DEBT DOCUMENTS. ING and SunTrust shall have (i) consented to (a) RYSG's execution of the Macon Lease and (b) the execution by Holdings' of the Guarantee of the Macon Lease and the consummation of the transactions contemplated thereby and (ii) amended the 2007 Subordinated Debt Documents in a manner and on terms and conditions satisfactory to the Agent and Lenders. 3 3.3 CORPORATE EXISTENCE AND AUTHORITY. Agent and Lenders shall have received such resolutions, certificates and other documents as Agent and Lenders shall request relative to the authorization, execution and delivery by each Loan Party of this Ninth Amendment, including, but not limited to the following: 1. Company General Certificate for RYSG; 2. Copy of Resolutions of RYSG, authorizing the execution of the Ninth Amendment and the other documents required by Section 3.1 hereof; and 3. Good Standing Certificates for RYSG from its state of incorporation. 3.4 NO DEFAULT. No Default or Event of Default shall exist. 3.5 NO LITIGATION. No action, proceeding, investigation, regulation or legislation shall have been instituted, threatened or proposed before any court, governmental agency or legislative body to enjoin, restrain or prohibit, or to obtain damages in respect of, or which is related to or arises out of this Ninth Amendment, the Loan Agreement or the consummation of the transactions contemplated hereby. 3.6 FEE. Borrowers shall have paid to Agent an amendment fee of $2,500. SECTION 4. REPRESENTATIONS AND WARRANTIES OF BORROWERS AND RYSG. To induce Agent and Lenders to enter into this Ninth Amendment, each Loan Party hereby represents and warrants to Agent and Lenders as follows: 4.1 NO LIABILITIES OF RYSG. RYSG has no material liabilities, indebtedness or other obligations (including, without limitation, contingent liabilities). 4.2 REAFFIRMATION OF REPRESENTATIONS AND WARRANTIES. Each representation and warranty of any Loan Party contained in the Loan Agreement and the other Loan Documents, as amended hereby, is true and correct on the date hereof and will be true and correct after giving effect to (i) the amendments set forth in SECTION 1 hereof and (ii) the formation of RYSG. 4.3 NO OUTSTANDING JUNIOR SUBORDINATED DEBT OR PREFERRED STOCK. As of the date hereof, there is no outstanding Indebtedness with respect to the Junior Subordinated Debt Documents and no Preferred Stock is outstanding. 4.4 CORPORATE AUTHORITY; NO CONFLICTS. The execution, delivery and performance by each Borrower of this Ninth Amendment and all documents, instruments and agreements contemplated herein are within each Borrower's respective corporate powers, have been duly authorized by necessary action, require no action by or in respect of, or filing with, any court or agency of government and do not violate or constitute a default under any provision of applicable Law or any material agreement binding upon any Loan Party or result in the creation or imposition of any Lien upon any of the assets of any Loan Party except as permitted in the Loan Agreement, as amended hereby. 4 4.5 ENFORCEABILITY. This Ninth Amendment constitutes the valid and binding obligation of each of the Borrowers enforceable in accordance with its terms, except as (i) the enforceability thereof may be limited by bankruptcy, insolvency or similar laws affecting creditors' rights generally, and (ii) the availability of equitable remedies may be limited by equitable principles of general application. 4.6 NO DEFENSES. No Loan Party has any defenses to payment, counterclaims or rights of set off with respect to the Obligations. SECTION 5. MISCELLANEOUS. 5.1 REAFFIRMATION OF LOAN DOCUMENTS; EXTENSION OF LIENS. Any and all of the terms and provisions of the Loan Agreement and the Loan Documents shall, except as amended and modified hereby, remain in full force and effect. Borrowers hereby extend the Liens securing the Obligations until the Obligations have been paid in full, and agree that the amendments and modifications herein contained shall in no manner affect or impair the Obligations or the Liens securing the payment and performance thereof. 5.2 PARTIES IN INTEREST. All of the terms and provisions of this Ninth Amendment shall bind and inure to the benefit of the parties hereto and their respective successors and assigns. 5.3 LEGAL EXPENSES. The Borrowers hereby agree to pay promptly following receipt of an invoice detailing all reasonable fees and expenses of counsel to Agent and Lenders incurred by Agent or any Lender, in connection with the preparation, negotiation and execution of this Ninth Amendment and all related documents. 5.4 COMPLETE AGREEMENT. THIS NINTH AMENDMENT, THE LOAN AGREEMENT AND THE OTHER LOAN DOCUMENTS REPRESENT THE FINAL AGREEMENT BETWEEN THE PARTIES AND MAY NOT BE CONTRADICTED BY EVIDENCE OF PRIOR, CONTEMPORANEOUS OR ORAL AGREEMENTS OF THE PARTIES. THERE ARE NO UNWRITTEN ORAL AGREEMENTS BETWEEN THE PARTIES. 5.5 HEADINGS. The headings, captions and arrangements used in this Ninth Amendment are, unless specified otherwise, for convenience only and shall not be deemed to limit, amplify or modify the terms of this Ninth Amendment, nor affect the meaning thereof. (SIGNATURE PAGES FOLLOW) 5 IN WITNESS WHEREOF, the parties hereto have caused this Ninth Amendment to be duly executed by their respective authorized officers on the date and year first above written. BORROWERS: RAMSAY YOUTH SERVICES, INC. By: -------------------------------------------------- Marcio C. Cabrera Executive Vice President BOUNTIFUL PSYCHIATRIC HOSPITAL, INC. EAST CAROLINA PSYCHIATRIC SERVICES CORPORATION GREAT PLAINS HOSPITAL, INC. GULF COAST TREATMENT CENTER, INC. HAVENWYCK HOSPITAL, INC. H. C. CORPORATION HSA HILL CREST CORPORATION HSA OF OKLAHOMA, INC. MICHIGAN PSYCHIATRIC SERVICES, INC. RAMSAY TREATMENT SERVICES, INC. f/k/a RAMSAY EDUCATIONAL SERVICES, INC. RAMSAY MANAGED CARE, INC. RAMSAY YOUTH SERVICES OF ALABAMA, INC. RAMSAY YOUTH SERVICES OF FLORIDA, INC. RAMSAY YOUTH SERVICES OF SOUTH CAROLINA, INC. RHCI SAN ANTONIO, INC. TRANSITIONAL CARE VENTURES, INC. TRANSITIONAL CARE VENTURES (TEXAS), INC. By: -------------------------------------------------- Marcio C. Cabrera Vice President H. C. PARTNERSHIP By: H.C. CORPORATION, General Partner By: HSA HILL CREST CORPORATION, General Partner By: -------------------------------------------- Marcio C. Cabrera Vice President 6 AGENT AND LENDERS: FLEET CAPITAL CORPORATION ("Agent" and a "Lender") By: -------------------------------------------------- Dennis M. Hansen Senior Vice President Revolving Credit Loan Commitment: $15,000,000.00 Revolving Credit Percentage: 100% Term Loan Commitment: $ 6,945,763.00 Term Loan Percentage: 100% Acquisition Loan Commitment: $ 364,862.87 Acquisition Loan Percentage: 100% 7 CONSENT AND REAFFIRMATION The undersigned (each a "GUARANTOR") hereby (i) acknowledges receipt of a copy of the foregoing Ninth Amendment to Loan and Security Agreement and Consent (the "NINTH AMENDMENT"); (ii) consents to Borrowers' execution and delivery thereof; (iii) agrees to be bound thereby; and (iv) affirms that nothing contained therein shall modify in any respect whatsoever its guaranty of the obligations of the Borrowers to Lenders pursuant to the terms of its Guaranty in favor of Agent and the Lenders (the "GUARANTY") and reaffirms that the Guaranty is and shall continue to remain in full force and effect. Although Guarantor has been informed of the matters set forth herein and has acknowledged and agreed to same, Guarantor understands that the Lenders have no obligation to inform Guarantor of such matters in the future or to seek Guarantor's acknowledgment or agreement to future amendments or waivers, and nothing herein shall create such duty. IN WITNESS WHEREOF, the undersigned has executed this Consent and Reaffirmation on and as of the date of the Ninth Amendment. GUARANTOR: RAMSAY YOUTH SERVICES OF GEORGIA, INC. By: -------------------------------------------------- Marcio C. Cabrera President RAMSAY YOUTH SERVICES PUERTO RICO, INC. By: -------------------------------------------------- Marcio C. Cabrera Vice President 8 EXHIBIT B BORROWERS AND EACH SUBSIDIARY'S BUSINESS LOCATIONS [SEE ATTACHED] EXHIBIT D JURISDICTIONS IN WHICH EACH BORROWER AND EACH SUBSIDIARY ARE AUTHORIZED TO DO BUSINESS [SEE ATTACHED] EXHIBIT E CAPITAL STRUCTURE OF BORROWERS [SEE ATTACHED] EXHIBIT F CORPORATE NAMES [SEE ATTACHED] EXHIBIT G TAX IDENTIFICATION NUMBERS OF SUBSIDIARIES [SEE ATTACHED] EXHIBIT J [SEE ATTACHED] EXHIBIT L [SEE ATTACHED] EXHIBIT V [SEE ATTACHED] EX-10.2 4 g79220exv10w2.txt FOURTH AMENDMENT TO AMEND SUBORDINATED NOTE EXHIBIT 10.2 FOURTH AMENDMENT TO AMENDED AND RESTATED SUBORDINATED NOTE AND WARRANT PURCHASE AGREEMENT This Fourth Amendment to Amended and Restated Note and Warrant Purchase Agreement (the "Amendment") is entered into as of the ___ day of September, 2002, by and among RAMSAY YOUTH SERVICES, INC., a Delaware corporation (the "COMPANY"), each of the Subsidiaries of the Company listed on the signature pages hereto, as guarantors (the "SUBSIDIARY GUARANTORS"), SUNTRUST BANKS, INC., a Georgia corporation ("SUNTRUST"), and ING CAPITAL LLC, a Delaware limited liability company ("ING"; SunTrust and ING individually, a "PURCHASER" and, collectively, the "PURCHASERS") and FLEET CAPITAL CORPORATION, or any successor thereto as Agent (the "AGENT") under the Senior Credit Agreement on behalf of and for the benefit of itself and the Senior Lenders. W I T N E S S E T H: WHEREAS, Company, the Subsidiary Guarantors (excluding Ramsay Youth Services of Georgia, Inc.) and the Purchasers are parties to that certain Amended and Restated Subordinated Note and Warrant Purchase Agreement, dated as of June 19, 2000, as amended by that certain First Amendment to Amended and Restated Subordinated Note and Warrant Purchase Agreement and First Amendment to Amended and Restated Subordination Agreement, dated as of July 31, 2000, as further amended by that certain Second Amendment to Amended and Restated Subordinated Note and Warrant Purchase Agreement, dated as of April 16, 2001, and as further amended by that certain Third Amendment to Amended and Restated Subordinated Note and Warrant Purchase Agreement and Second Amendment to the Amended and Restated Subordination Agreement, dated as of February 25, 2002 (as amended, restated, modified or otherwise supplemented from time to time, the "PURCHASE AGREEMENT"; capitalized terms used herein but not otherwise defined shall have the meanings given to such terms in the Purchase Agreement); WHEREAS, the Company formed a wholly-owned subsidiary, Ramsay Youth Services of Georgia, Inc., a Delaware corporation ("RYSG"), for the purpose of commencing operations in Georgia, including the execution and delivery of that certain Commercial Lease (the "Macon Lease") dated September __, 2002, between RYSG and Ramsay Hospital Properties, Inc. ("Landlord"); WHEREAS, the Company will guarantee the obligations of RYSG under the Macon Lease pursuant to the terms of that certain Guarantee, dated the date of the Macon Lease (the "Guarantee"); WHEREAS, Landlord is affiliated with the Controlling Shareholder; WHEREAS, RYSG shall, by execution of this Amendment, join in as a Subsidiary Guarantor under the Purchase Agreement, and shall be bound by the terms and conditions of the Purchase Agreement, including but not limited to, the guaranty obligations of Article 4 of the Purchase Agreement; WHEREAS, Company has requested that the Purchasers make certain amendments to the Purchase Agreement and the Purchasers are willing to do so on the terms and conditions set forth herein; NOW, THEREFORE, in consideration of the terms and conditions contained herein, the parties hereto, intending to be legally bound, hereby agree as follows: SECTION 1. 1.1 ADDITIONAL DEFINITIONS. Article 1 of the Purchase Agreement (Definitions) is hereby amended by adding the following definitions: "Guarantee of Macon Lease" shall mean that certain Guarantee, dated September __, 2002, by Ramsay Youth Services, Inc., whereby the Company guarantees the obligations of Ramsay Youth Services of Georgia, Inc. under the Macon Lease. "Macon Lease" shall mean that certain Commercial Lease, dated September __, 2002, between Ramsay Hospital Properties, Inc. and Ramsay Youth Services of Georgia, Inc. 1.2 AMENDMENT TO SCHEDULE 6.1.1 OF THE PURCHASE AGREEMENT. Schedule 6.1.1 of the Purchase Agreement (list of Subsidiaries) is hereby amended and restated in its entirety by substituting the attached Schedule 6.1.1 hereto. 1.3 AMENDMENT TO SECTION 8.6 OF THE PURCHASE AGREEMENT. Section 8.6 (Debt) of the Purchase Agreement is hereby amended by adding a subsection (j) and amending subsection (i) as follows: (i) Debt under the Guarantee of Macon Lease; and (j) Debt not included in paragraphs (a) through (i) above which by its terms is unsecured and does not exceed at any time, in the aggregate, the sum of $750,000. 1.4 AMENDMENT TO SECTION 8.7 OF THE PURCHASE AGREEMENT. Section 8.7 (Lease Obligations) of the Purchase Agreement is hereby amended and restated as follows: Section 8.7 LEASE OBLIGATIONS. Create or suffer to exist any obligations for the payment of rent for any property under operating leases or agreements to lease (other than Capital Leases or the Macon Lease) except for rental obligations of the Company and its Subsidiaries, on a consolidated basis, not to exceed $750,000 in any twelve month period. 1.5 CONSENT TO MACON LEASE. The Purchasers hereby consent to (i) the execution by RYSG of the Macon Lease with Landlord upon terms no less favorable than would be obtained by the Company or its Subsidiaries in a comparable arms' length transaction with a Person other than an Affiliate, and (ii) the consummation of the transactions contemplated in the Macon Lease. Nothing contained in this consent shall obligate the Purchasers to grant any future consent pursuant to Section 8.5 (Transactions with Affiliates) of the Purchase Agreement. 2 1.6 GUARANTY OF OBLIGATIONS. RYSG hereby agrees to be bound by the terms and conditions of the Purchase Agreement, including but not limited to, the guaranty obligations under Article 4 of the Purchase Agreement. SECTION 2. CONDITIONS TO EFFECTIVENESS OF AMENDMENT. This Amendment shall become effective (the "AMENDMENT EFFECTIVE DATE") when each Purchaser shall have received a duly executed counterpart of this Amendment executed by each party hereto. SECTION 3. REPRESENTATIONS AND WARRANTIES OF BORROWERS. To induce Lenders to enter into this Amendment, the Company hereby represents and warrants to each Lender as follows: 3.1 REAFFIRMATION OF REPRESENTATIONS AND WARRANTIES. Each representation and warranty of the Company or any Subsidiary Guarantor contained in the Purchase Agreement, Subordination Agreement and the other Loan Documents, as amended hereby, is true and correct on the date hereof and will be true and correct after giving effect to the amendments set forth in SECTION 1 hereof. 3.2 CORPORATE AUTHORITY; NO CONFLICTS. The execution, delivery and performance of this Amendment (i) is within the Company's and each Subsidiary Guarantor's respective corporate powers, (ii) has been duly authorized by all necessary corporate and shareholder action, (iii) does not require the consent, approval, authorization of, or registration or filing with, any Person under any Material Contract, with any Person under the organizational documents of the Consolidated Companies, or with any governmental authority other than such consents, approvals, authorizations, registrations or filings which have been made or obtained and are in full force and effect, and (iv) will not cause a breach or default under any of the Consolidated Companies Material Contracts or organizational documents of any of the Consolidated Companies except as could not reasonably be expected to have a Material Adverse Effect. 3.3 ENFORCEABILITY. This Amendment has been duly executed and delivered for the benefit of or on behalf of the Company and constitutes the legal, valid and binding obligation of Company and each of the Subsidiary Guarantors, enforceable against it in accordance with its terms, except as the enforceability hereof may be limited by bankruptcy, insolvency, reorganization, moratorium and other laws affecting creditors' rights and remedies in general, and by general principles of equity. or similar laws affecting creditor's rights generally, and after giving effect to this Amendment, all of the representations and warranties set forth in Article 6 of the Purchase Agreement are true and correct in all material respects and no Default or Event of Default has occurred and is continuing as of the date hereof. SECTION 4. MISCELLANEOUS. 4.1 SURVIVAL. Except as expressly provided herein, the Purchase Agreement and the Subordination Agreement shall continue in full force and effect, and the unamended terms and conditions of the Purchase Agreement and the Subordination Agreement are expressly incorporated herein and ratified and confirmed in all respects. This Amendment is not intended to be or to create, nor shall it be construed as, a novation or an accord and satisfaction. 3 4.2 EFFECT OF AMENDMENT. From and after the date hereof, references to the Purchase Agreement shall be references to the Purchase Agreement as amended hereby. 4.3 ENTIRE UNDERSTANDING. This Amendment constitutes the entire agreement among the parties hereto with respect to the subject matter hereof. Neither this Amendment nor any provision hereof may be changed, waived, discharged, modified or terminated orally, but only by an instrument in writing signed by the parties required to be a party thereto pursuant to Section 10.4 of the Purchase Agreement. 4.4 LEGAL EXPENSES. The Company hereby agrees to pay promptly all reasonable fees and expenses of counsel to each Purchaser incurred by such Purchaser in connection with the preparation, negotiation and execution of this Amendment and all related documents. 4.5 GOVERNING LAW. THIS AMENDMENT SHALL BE CONSTRUED IN ACCORDANCE WITH AND BE GOVERNED BY THE LAW (WITHOUT GIVING EFFECT TO THE CONFLICT OF LAW PRINCIPLES THEREOF) OF THE STATE OF GEORGIA. 4.6 COUNTERPARTS. This Amendment may be executed in any number of counterparts and by the different parties hereto on separate counterparts, each of which when so executed and delivered shall be an original, but all of which together shall constitute one and the same instrument. 4.7 HEADINGS. The headings, captions and arrangements used in this Amendment are, unless specified otherwise, for convenience only and shall not be deemed to limit, amplify or modify the terms of this Amendment, nor affect the meaning thereof. 4.8 CONSENT AND REAFFIRMATION OF SUBSIDIARY GUARANTY. Each undersigned Subsidiary Guarantor, including, but not limited to, RYSG, hereby (i) acknowledges receipt of a copy of the foregoing Amendment, (ii) consents to the Company's execution and delivery thereof, (iii) agrees to be bound thereby and (iv) affirms that nothing contained therein shall modify in any respect whatsoever its guaranty of the obligations of the Company to the Purchasers pursuant to the terms of its Guaranty in favor of the Purchasers (the "GUARANTY") and reaffirms that the Guaranty is and shall continue to remain in full force and effect. Although each Subsidiary Guarantor has been informed of the matters set forth herein and has acknowledged and agreed to same, each Subsidiary Guarantor understands that the Purchasers have no obligation to inform any Subsidiary Guarantor of such matters in the future or to seek any Subsidiary Guarantor's acknowledgment or agreement to future amendments or waivers, and nothing herein shall create such duty. (SIGNATURE PAGES FOLLOW) 4 IN WITNESS WHEREOF, the parties hereto have caused this Amendment to be duly executed by their respective authorized officers on the date and year first above written. COMPANY: RAMSAY YOUTH SERVICES, INC. By: ------------------------------------------- Marcio Cabrera Executive Vice President SUBSIDIARY GUARANTORS: BETHANY PSYCHIATRIC HOSPITAL, INC. BOUNTIFUL PSYCHIATRIC HOSPITAL, INC. EAST CAROLINA PSYCHIATRIC SERVICES CORPORATION GREAT PLAINS HOSPITAL, INC. GULF COAST TREATMENT CENTER, INC. HAVENWYCK HOSPITAL, INC. H. C. CORPORATION HSA HILL CREST CORPORATION HSA OF OKLAHOMA, INC. MICHIGAN PSYCHIATRIC SERVICES, INC. RAMSAY EDUCATIONAL SERVICES, INC. RAMSAY LOUISIANA, INC. RAMSAY MANAGED CARE, INC. RAMSAY YOUTH SERVICES OF ALABAMA, INC. RAMSAY YOUTH SERVICES OF FLORIDA, INC. RAMSAY YOUTH SERVICES OF SOUTH CAROLINA, INC. RHCI SAN ANTONIO, INC. TRANSITIONAL CARE VENTURES, INC. TRANSITIONAL CARE VENTURES (TEXAS), INC. By: ------------------------------------------- Marcio Cabrera Vice President RAMSAY YOUTH SERVICES OF GEORGIA, INC. By: ------------------------------------------- Marcio Cabrera President 5 H. C. PARTNERSHIP By: H.C. CORPORATION, General Partner By: HSA HILL CREST CORPORATION, General Partner By: ------------------------------------------- Marcio Cabrera Vice President PURCHASERS: SUNTRUST BANKS, INC. By: ------------------------------------------- Name: Title: ING CAPITAL LLC By: ------------------------------------------- Name: Title: AGENT: FLEET CAPITAL CORPORATION By: ------------------------------------------- Name: Title: 6 EX-10.3 5 g79220exv10w3.txt COMMERCIAL LEASE AGREEMENT EXHIBIT 10.3 COMMERCIAL LEASE The parties to this Lease Agreement (hereinafter referred to as the "Lease"), made on September __, 2002 (but effective as of the date set forth herein as the commencement of the term) are Ramsay Hospital Properties, Inc., hereinafter referred to as "Landlord", which expression shall include the heirs, successors and assigns thereof, whose address is c/o Torys, LLP, 237 Park Avenue, New York, New York 10017, and Ramsay Youth Services of Georgia, Inc., hereinafter referred to as "Tenant", which expression shall include the heirs, successors and assigns thereof, whose address in One Alhambra Plaza, Suite 750, Coral Gables, Florida 33134. WITNESSETH: In consideration of the rents and covenants herein set forth, Landlord hereby leases to Tenant, and Tenant hereby rents from Landlord and has exclusive use of the Premises containing approximately Eighty-Four Thousand (84,000) Square Feet and located on approximately 19.45 acres of land which has the following addresses: 3500 Riverside Drive, 3472 and 3431 Northside Drive and 3541 Athens Drive in Macon, Georgia and all of the personal property located in each of the Premises (hereinafter called "Leased Premises"). A legal description of the Leased Premises is attached hereto as Exhibit A. This Lease shall be for the term, upon the rentals and subject to the terms and conditions set forth in this Lease Agreement. 1. LANDLORD'S WARRANTIES. Landlord hereby warrants: 1.1 that it is the owner of the Leased Premises; 1.2 that it has full authority to enter into this Lease; 1.3 that Tenant shall have peaceful and quiet use and possession of the Leased Premises without hindrance on the part of Landlord, so long as Tenant abides by the terms of this Lease, and subject to any mortgages or other matters to which this Lease is or shall become subject or subordinate. 2. USE. The Leased Premises shall be used by Tenant as a residential treatment facility, specialty hospital and/or psychiatric acute hospital. Tenant will occupy the Leased Premises on the Commencement Date, and thereafter will continuously conduct in the Leased Premises the business permitted hereunder. Tenant will not use or permit or suffer the use of, the Leased Premises for any purpose not permitted hereunder. Tenant shall not commit or suffer to be committed any nuisance or other act or thing against public policy. Tenant agrees not to deface or damage the Leased Premises in any manner or overload the floors of the Leased Premises. Tenant agrees not to permit the use of the Leased Premises or any part thereof for any purpose prohibited by law or by applicable zoning, building, use, health, environmental or safety requirements of federal, state or local authorities, and Tenant further agrees, at its sole expense, to comply with and conform to all requirements of all governmental authorities having jurisdiction thereof, present or future, relating in any way to the condition, use and occupancy of the Leased Premises. 3. TERM. Except as provided in subparagraph 3.1 hereof, the term of this Lease shall commence on September 1, 2002 (the "Commencement Date") and the initial term shall be for a period of Five (5) years, ending on August 31, 2007. Tenant shall have an option to extend the term of this Lease for two additional periods of five (5) years each, provided that the option set forth in this paragraph (a) may only be exercised upon written notice from Tenant to Landlord given no less than six months prior to the expiration of the initial or extended Term then in effect, as applicable. 3.1 Should the Leased Premises not be available for occupancy as defined in Paragraph 3.2 by the Commencement Date, Landlord shall not be liable for any damage caused thereby, nor shall this Lease be void or voidable, but Tenant shall not be liable for any rent until the Leased Premises are available for occupancy. 3.2 As used herein, "available for occupancy" shall mean that the Leased Premises were available for the Tenant to enter, use and occupy for its stated use pursuant to Paragraph 2 and the Landlord has complied with all zoning and occupancy requirements of the applicable governmental authorities. 4. BASIC RENT. 4.1 Tenant covenants and agrees to pay to Landlord, as rental for the Leased Premises, an amount per annum equal to 12% of the Aggregate Cost (as defined below). Such amount shall be payable in equal monthly installments. For all purposes of this Lease, the term "Aggregate Cost" shall mean the sum of the following amounts: (1) the purchase price paid by the Landlord for the Leased Premises: (2) all costs incurred by Landlord in connection with its purchase of the Leased Premises, including all costs of settlement (it being agreed that such costs shall include without limitation all engineering, general contracting, environmental, legal, consulting, title insurance and recording costs and expenses); and (3) all costs incurred by Landlord subsequent to its purchase of the Leased Premises in connection with the renovation, rehabilitation and improvement of the Leased Premises in preparation for the use of the Leased Premises by Tenant pursuant to this Lease. Landlord shall deliver a certificate to Tenant setting forth the amount of the Aggregate Costs within 60 days after the Commencement Date. Until the 2 delivery of such certificate, Tenant shall pay Basic Rent pay at the rate of $40,000 per month, subject to adjustment retroactively upon the delivery of such certificate. Rental payments are to be made in advance on the first (1st) day of each calendar month during the term of this Lease. All rents payable by Tenant to Landlord under this Lease shall be paid to Landlord at the office of Landlord herein designated by it for notices. Tenant will promptly pay all rentals herein prescribed when and as the same shall become due and payable. If Landlord shall pay any monies or incur any expenses in correction of violation of covenants herein set forth, any amounts so paid or incurred shall, at Landlord's option, and on notice to Tenant, be considered additional rentals, payable by Tenant with the first installment of rental thereafter becoming due and payable, and may be collected or enforced as by law provided in respect of rentals. 4.2 COST OF LIVING INCREASE. The rent provided for above shall be adjusted effective upon the first day of the month immediately following the expiration of 12 months from the Commencement Date and upon the expiration of each 12 months thereafter in accordance with the changes in the U.S. Consumer Price Index for All Urban Consumers (1982-8=100), hereinafter called the "CPI". The monthly rent shall be increased to an amount equal to the monthly rent set forth above multiplied by a fraction the numerator of which is the CPI for the second calendar month immediately preceding the adjustment date and the denominator of which is the CPI for the second calendar month preceding the Commencement Date. Provided, however, in no event shall the monthly rent be less than the amount set forth above. The amount of increase for any calendar year shall be no greater than Five (5) percent. 4.3 SECURITY DEPOSIT. Tenant shall deposit with Landlord or its Agent upon execution of this Lease Five Thousand and 00/100 Dollars ($5,000.00) as a security deposit that shall be held as security for the full and faithful performance by Tenant of each and every term, covenant and condition of this Lease. If any of the rents or other charges or sums payable by Tenant shall be overdue and unpaid or should payments be made on behalf of Tenant, then Landlord or its agent may, at its option, appropriate and apply the security deposit, or so much thereof as may be necessary to compensate toward the payment of the rents, charges or other sums due from Tenant, or towards any loss, damage or expense sustained by Landlord resulting from such default on the part of the Tenant; and in such event Tenant shall upon demand restore the security deposit to the original sum deposited. In the event Tenant performs all of Tenant's obligations under this lease, the security deposit shall be returned in full to Tenant within thirty (30) days after the expiration or sooner termination of the term of this Lease and the surrender of the Leased Premises by Tenant in compliance with the provisions of this Lease. The security deposit may be placed in an interest bearing account and any interest thereon shall be the property of the party due the same. If paid to the agent of the Tenant, said deposit will be held by the agent in a trust account for the benefit of the Landlord. 5. OPERATING EXPENSES. Tenant shall pay during the term hereof, in addition to the Basic Rent the amount of all Operating Expenses in accordance with the following provisions: 3 5.1 "TRIPLE NET LEASE" Rental Payments are considered NNN (Net, Net, Net). Tenant shall be responsible for all Operating Expenses, which shall include all real estates taxes, insurance and maintenance of the Leased Premises. Operating Expenses shall be defined as follows: Operating Expenses are determined by standard accounting practices including the following costs (but excluding those items specifically set forth in Section 5.2 below): (a) water and sewer charges and the cost of electricity, heating, ventilation, air conditioning, and other utilities not separately metered in the Leased Premises and paid for by Tenant; (b) utilities, surcharges and other costs, levies or assessments resulting from statutes or regulations promulgated by any governmental authority in connection with the use or occupancy of the Leased Premises; (c) cost of insurance obtained by Tenant or Landlord; (d) repair and maintenance (including capital expenditures) of the structural portions and the roofs of the Leased Premises and upkeep of parking facilities; (e) costs and expenses of gardening and landscaping; (f) maintenance of signs; (g) costs and expenses of repairs, resurfacing, repairing, maintenance, painting, lighting, cleaning, refuse removals, security and similar items of the Leased Premises. Tenant shall have the right to seek a real estate tax abatement at its sole cost and expense. Landlord agrees to cooperate with Tenant in this endeavor and if Tenant is successful, Tenant shall be reimbursed its pro rata share as defined in this Section 5.1 of any net abatement proceeds after expenses related to the abatement. 5.2 EXCLUSIONS FROM OPERATING EXPENSES. Notwithstanding the provisions of Section 5.1 above to the contrary, "Operating Expenses" shall not include: (a) brokerage commissions, finders' fees, attorneys' fees, space planning costs incurred by Landlord in leasing or attempting to lease space in the Leased Premises; (b) any income, estate, or inheritance taxes associated with the ownership of the Leased Premises. 6. ENVIRONMENTAL LAWS. 6.1 Tenant shall not bring or permit to be brought onto the Leased Premises any Hazardous Materials (as defined below) without the prior written approval of Landlord. Any approval must be preceded by submission to Landlord of appropriate Material Safety Data Sheets (MSD Sheets). In the event of approval by Landlord, Tenant covenants that it will (1) comply with all requirements of any constituted public authority and all federal, state and local codes, statutes, rules and regulations, and laws, whether now in force or hereafter adopted relating to Tenant's use of the Leased Premises or relating to the storage, use, disposal, processing, distribution, shipping or sales of any hazardous, flammable, toxic, or dangerous materials, waste or substance, the presence of which is regulated by a federal, state, or local law, ruling, rule 4 or regulation (hereafter collectively referred to as "Hazardous Materials"); (2) comply with any reasonable recommendations by the insurance carrier of either Landlord or Tenant relating to the use by Tenant on the Leased Premises of such Hazardous Materials; (3) refrain from unlawfully disposing of or allowing the disposal of any Hazardous Materials upon, within, about or under the Leased Premises; and (4) remove all Hazardous Materials from the Leased Premises, either after their use by Tenant or upon the expiration or earlier termination of this Lease, in compliance with all applicable laws. 6.2 Tenant shall be responsible for obtaining all necessary permits in connection with its use, storage and disposal of Hazardous Materials, and shall develop and maintain, and where necessary file with the appropriate authorities, all reports, receipts, manifests, filings, lists and invoices covering those Hazardous Materials, and Tenant shall provide Landlord with copies of all such items upon request. Tenant shall provide within five (5) days after receipt thereof, copies of all notices, orders, claims or other correspondence from any federal, state or local government or agency alleging any violation of any environmental law or regulation by Tenant, or related in any manner to Hazardous Materials. In addition, Tenant shall provide Landlord with copies of all responses to such correspondence at the time of the response. 6.3 Tenant hereby indemnifies and holds harmless Landlord, its successors and assigns from and against any and all losses, liabilities, damages, injuries, penalties, fines, costs, expenses and claims of any and every kind whatsoever (including attorney's fees and costs, expenses or claims asserted or arising under the Comprehensive Environmental Response, Compensation and Liability Act of 1980, as amended, from time to time, and regulations promulgated thereunder, any so-called state or local "Superfund" or "Superlien" law or any other federal, state or local statute, law or ordinance, code, rule, regulation, order or decree regulating, relating to, or imposing liability or standards of conduct concerning any Hazardous Materials) paid, incurred or suffered by, or asserted against, Landlord as a result of any claim, demand or judicial or administrative motion by any person or entity (including governmental or private entities) for, with respect to, or as a direct or indirect result of, the presence on or under or the escape, seepage, leakage, spillage, discharge, emission or release from the Leased Premises of any Hazardous Materials caused by Tenant or Tenant's agents, employees, invitees or successors in interest. This indemnity shall also apply to any release of Hazardous Materials caused by a fire or other casualty to the Leased Premises if such Hazardous Materials were stored on the Leased Premises by Tenant, its agents, employees, invitees or successors in interest. 6.4 If Tenant fails to comply with the covenants to be performed hereunder with respect to Hazardous Materials, or if any environmental protection lien is filed against the Leased Premises as a result of the actions of Tenant, its agents, employees or invitees, then the occurrence of any such events shall be considered a default hereunder. 6.5 Tenant will give Landlord prompt notice of any release of Hazardous Materials, reportable or non-reportable, to federal, state or local authorities, or of any fire, or any damage occurring on or to the Leased Premises. 5 6.6 Tenant will use and occupy the Leased Premises and conduct its business in such a manner that the Leased Premises are neat, clean and orderly at all times with all chemicals or Hazardous Materials marked for easy identification and stored according to all codes as outlined above. 6.7 Upon obtaining knowledge of any event that could result in Tenant or any affiliated entity incurring liability or obligations in respect of environmental laws or governmental agency requirements or release of Hazardous Materials regarding the Leased Premises, Tenant shall, at its sole cost and expense, (i) obtain and provide to Landlord reports, certificates, engineering studies and tests and other written material or data, including, without limitation, Phase I and Phase II environmental reports and tests (collectively, "Environmental Studies") assessing the environmental conditions regarding the Leased Premises, and (ii) take such remedial action and undertake such investigation or other action as required by environmental laws or governmental agency requirements or as is appropriate and consistent with good business practice under the circumstances. If Landlord at any time has a reasonable basis to believe that there may be a previously undisclosed environmental condition in violation of environmental laws or governmental agency requirements or release of Hazardous Materials regarding the Leased Premises, or if any default under this Article 6 occurs, or for any or no reason within 90 days prior to the scheduled expiration date of this Lease or within 90 days prior to or following any early termination of this Lease, then, in any such case, upon Landlord's request therefor, Tenant agrees to obtain and provide to Landlord, at Tenant's sole cost and expense, such Environmental Studies as Landlord may reasonably require so as to satisfy Landlord that Tenant is in compliance with such environmental laws or governmental agency requirements or remediating any such release, to the extent relevant, and otherwise that the Leased Premises and Tenant each is in compliance with the terms and conditions of this Article 6 and all environmental laws and governmental agency requirements. Should Tenant fail to obtain and provide to Landlord such Environmental Studies within 30 days after Landlord's request, Landlord shall have the right to obtain them at Tenant's sole cost and expense. 6.8. The indemnities and warranties and all other covenants, terms and conditions contained in this Article 6 shall survive the termination of this Lease. 7. SERVICES. Subject to the provisions of Paragraph 5, above, Landlord agrees to see that there are furnished to the Leased Premises electricity, plumbing services, including reasonably hot and cold water and sanitary sewers, reasonable heat and air conditioning during the heating and air conditioning seasons of each year, and to adequately illuminate parking and passageways and stairways, all subject to interruption due to accident, to the making of repairs, alterations or improvements, to labor difficulties, to trouble in obtaining fuel, electricity, service or supplies from the sources from which they are usually obtained for said Leased Premises, governmental restraints, or to any cause beyond the Landlord's reasonable control. In the event of any interruption, Landlord covenants that it shall use all reasonable efforts to restore service as promptly as can be accomplished. 6 8. TERMINATION. This Lease and the tenancy hereby created shall cease and terminate at the end of the term hereof, without the necessity of any notice from either Landlord or Tenant to terminate the same, and Tenant hereby waives notice to vacate the Leased Premises and agrees that Landlord shall be entitled to the benefit of all provisions of law respecting the summary recovery of possession of Leased Premises from a Tenant holding over to the same extent as if statutory notice had been given. For the period of two (2) months prior to the expiration of the term of this Lease, Landlord shall have the right to show the Leased Premises and all parts thereof to prospective tenants during normal business hours as long as such showing does not interfere with the operation of Tenant's business and Landlord provides reasonable notice to Tenant. At the expiration or earlier termination of this Lease Agreement, Tenant shall, at Tenant's expense, remove all of the Tenant's personal property and trade fixtures (provided that Landlord has consented to the removal of said items as provided in this Paragraph), and repair all injury done by or in connection with the installation or removal of said property or fixtures, and surrender the Leased Premises, broom clean and in as good condition as they were at the beginning of the term, reasonable wear excepted. All repairs performed by or for Tenant shall be performed in a good, workmanlike manner and to the Landlord's satisfaction. All property of Tenant remaining on the Leased Premises within ten (10) business days after the expiration or earlier termination of this Lease Agreement shall be conclusively deemed abandoned and, at Landlord's option, may be retained by Landlord, or may be removed by Landlord, and Tenant shall reimburse Landlord for the reasonable cost of such removal. Landlord may have any such property stored at Tenant's risk and expense provided the Landlord notifies Tenant of the property's location and the terms upon which it is stored. 9. OPERATION BY TENANT. Tenant will replace promptly at its own expense with glass of like kind and quality any plate glass of the Leased Premises which may become broken or cracked due to Tenant's negligence. Tenant will not use or permit the use of any apparatus or musical instrument for sound reproduction or transmission in such manner that the sounds so re-produced, transmitted or produced shall be audible beyond the interior of the Leased Premises. Tenant will keep all mechanical apparatus free of vibration and noise which may be transmitted beyond the confines of the Leased Premises. Tenant will comply with all laws and ordinances, all rules and regulations of governmental authorities, all regulations and recommendations of the Fire Underwriters Rating Bureau and such reasonable rules and regulations as Landlord may prescribe on advanced written notice to Tenant with respect to the use or occupancy of the Leased Premises by Tenant. 10. MAINTENANCE, REPAIRS, ALTERATIONS AND COMMON AREAS SERVICES. 10.1 TENANT'S OBLIGATIONS. (a) Tenant shall keep the Leased Premises, interior and exterior walls, roof and the equipment used for the Leased Premises in good condition and repair. Except as provided in Paragraph 17, there shall be no 7 abatement of rent or liability of Tenant on account of any injury or interference with Tenant's business with respect to any improvements, alterations or repairs made by Tenant to the Leased Premises or any part thereof. (b) On the last day of the term hereof, or on any sooner termination, Tenant shall surrender the Leased Premises to Landlord in the same condition as received, ordinary wear and tear excepted, clean and free of debris. Any damage or deterioration of the Leased Premises shall not be deemed ordinary wear and tear if the same could have been prevented by good maintenance practices by Tenant. Tenant shall repair any damage to the Leased Premises occasioned by the installation or removal of Tenant's trade fixtures, alterations, furnishings and equipment. Except as otherwise stated in this Lease, Tenant shall leave the air lines, power panels, electrical distribution systems, lighting fixtures, air conditioning, window coverings, wall coverings, carpets, wall paneling, ceilings and plumbing on the Leased Premises in good operating condition. 10.3 ALTERATIONS AND ADDITIONS. (a) Tenant shall not, without Landlord's prior written consent, make any alterations, improvements, additions, Utility Installations or repairs in, on or about the Leased Premises. As used in this paragraph, the term "Utility Installation" shall mean carpeting, window and wall coverings, power panels, electrical distribution systems, lighting fixtures, air conditioning, plumbing and telephone and telecommunication wiring and equipment. At the expiration of the term, Landlord may require the removal of any or all of said alterations, improvements, additions or Utility Installations, at Tenant's expense. Should Landlord permit Tenant to make its own alterations, improvements, additions or Utility Installations, Tenant shall use only such contractor as has been expressly approved by Landlord, and Landlord may require Tenant to provide Landlord, at Tenant's sole cost and expense, a lien and completion bond in an amount equal to one and one-half times the estimated cost of such improvements, to insure Landlord against any liability for mechanic's and materialmen's liens and to insure completion of the work. Should Tenant make any alterations, improvements, additions or Utility Installations without the prior approval of Landlord, or use a contractor not expressly approved by Landlord, Landlord may, at any time during the term of this Lease, require that Tenant remove any part or all of the same. (b) Any alterations, improvements, additions or Utility Installations in or about the Leased Premises that Tenant shall desire to make shall be presented to Landlord in written form, with proposed detailed plans. Landlord shall give its consent to Tenant's making any reasonable alteration, improvement, addition or Utility Installation, that is necessary for the intended use of the leased Premises, and such consent shall be deemed conditioned upon Tenant acquiring a permit to do so from the applicable governmental agencies, furnishing a copy thereof to Landlord prior to the commencement of the work and compliance by Tenant with all conditions of said permit in a prompt and expeditious manner. 8 (c) Tenant shall pay, when due, all claims for labor or materials furnished or alleged to have been furnished to or for Tenant at or for Tenant at or for use in the Leased Premises, which claims are or may be secured by any mechanic's or materialmen's lien against the Leased Premises or any interest therein. (d) Tenant shall give the Landlord not less than ten (10) days' notice prior to the commencement of any work in the Leased Premises by Tenant, and Landlord shall have the right to post notices of non-responsibility in or on the Leased Premises as provided by law. If Tenant shall, in good faith, contest the validity of any such lien, claim or demand, the Tenant shall, at its sole expense, defend itself and Landlord against the same and shall pay and satisfy any such adverse judgment that may be rendered thereon before the enforcement thereof against the Landlord or the Leased Premises, provided that, if Landlord shall require, Tenant shall furnish to Landlord a surety bond satisfactory to Landlord in an amount equal to such contested lien claim or demand indemnifying Landlord against liability for the same and holding the Leased Premises free from the effect of such lien or claim. In addition, Landlord may require Tenant to pay Landlord's reasonable attorney's fees and costs in participating in such action if Landlord shall decide it is to Landlord's best interest so to do. (e) All alterations, improvements, additions and Utility Installations (whether or not such Utility Installations constitute trade fixtures of Tenant), which may be made to the Leased Premises by Tenant, including but not limited to, floor coverings, paneling, doors, drapes, built-ins, moldings, sound attenuation, and lighting and telephone or communication systems, conduit, wiring and outlets, shall be made and done in a good and workmanlike manner and of good and sufficient quality and materials and shall be the property of Landlord and remain upon and be surrendered with the Leased Premises at the expiration of the Lease term, unless Landlord requires their removal pursuant to paragraph 10.3(a). Provided Tenant is not in default, notwithstanding the provisions of this paragraph 10.3(e), Tenant's personal property and equipment other than that which is affixed to the Leased Premises so that it cannot be removed without material damage to the Leased Premises and other than Utility Installations, shall remain the property of Tenant and may be removed by Tenant subject to the provisions of paragraph 10.2. (f) Tenant shall provide Landlord with as-built plans and specifications for any alterations, improvements, additions or Utility Installations. 11. CONTESTING STATUTES. Tenant agrees that the Leased Premises shall not be used in violation of any federal or state statute, or municipal ordinance or law. If Tenant shall desire to contest the validity of any statute, rule, order, ordinance, requirement or regulation, Tenant may, at Tenant's own cost and expense, carry on such contest, and any noncompliance by Tenant during such contest shall not be deemed a breach of the covenants contained in this paragraph 11, provided that Tenant shall indemnify Landlord against all liability for costs, expenses, claims, losses, damages, fines and penalties, including reasonable attorneys' fees and costs, resulting from or reasonably incurred in connection with such contest and noncompliance. 9 In the event of the existence or enactment of any law or the making of any ordinance, rule, ruling or regulation which materially impedes or limits the use of the Leased Premises for any of the specific purposes set forth in paragraph 2 hereof, at the election of Tenant, to be exercised by notice thereof in writing, this Lease shall thereupon terminate and all liability hereunder shall cease from and after the date such impediment or limitation becomes effective, and all prepaid rent and additional rent, if any, shall be prorated on a daily basis and the excess, if any, paid by Landlord to Tenant. 12. SIGNS AND ADVERTISING. Tenant will not place or suffer to be placed or maintained on the exterior of the leased Premises or on the glass of any window or door of the Leased Premises any sign, lettering, decoration, advertising matter or other thing of any kind, without first obtaining Landlord's written approval thereof. Tenant further agrees to maintain such sign, lettering, decoration, advertising matter or other thing as may be approved in good condition and repair at all times. The Landlord shall not be obligated to approve any proposed sign if the sign should detract from the overall aesthetic of the Leased Premises. 13. INSURANCE. Tenant shall not permit any use of the Leased Premises which will make voidable any insurance on the Leased Premises or which shall be contrary to any law or regulation from time to time established by the New England Fire Insurance Rating Association, or any similar body succeeding to its powers. Tenant shall, on demand, reimburse Landlord in full for all extra insurance premiums caused by the Tenant's use of the Leased Premises. Tenant shall comply, without delay, with all reasonable requirements or recommendations from Landlord's insurance carrier regarding the maintenance and operation of the Leased Premises. The Tenant shall maintain with respect to the Leased Premises together with contractual liability endorsements covering Tenant's obligations under this Lease, comprehensive general public liability insurance with maximum coverage of $5,000,000 single limit in responsible companies qualified to do business in the State of Georgia and in good standing therein, insuring the Landlord as well as Tenant against injury to persons or damage to property as provided. The Tenant shall deposit with the Landlord certificates for such insurance at or prior to the commencement of the term, and thereafter within thirty (30) days prior to the expiration of any such policies. All such insurance certificates shall provide that such policies shall not be canceled without at least ten (10) days' prior written notice to each insured named therein. The Tenant shall include the Landlord in said policy as one of the named insured. The Tenant shall maintain with respect to the Leased Premises at its sole cost and expense insurance against loss by fire and all of the risks and perils usually covered by an extended coverage endorsement to a policy of casualty insurance upon property comparable to the Leased Premises, including vandalism, malicious mischief and so called "all risk" of physical loss endorsements, in an amount equal to not less than 100 % of the full replacement cost thereof. 10 14. NO LIABILITY. Tenant agrees to take such steps as it may deem necessary and adequate for the protection of itself, and its agents, employees and invitees, and the property of the foregoing, against injury, damage or loss, by insurance, as a self insurer, or otherwise. The Landlord, its agents and employees shall not be liable for any damage to property of the Tenant entrusted to employees of the Tenant or to any property, goods, or things contained in the Leased Premises or stored in the basement, or other part of the Leased Premises, unless due to the gross negligence or willful misconduct of the Landlord, its agents, contractors or employees. Tenant shall not be entitled to claim a constructive eviction from the Leased Premises for any condition or condition which Tenant is responsible for remedying pursuant to the provisions of this Lease and shall not be entitled to claim a constructive eviction from the Leased Premises unless Tenant shall have first notified Landlord in writing of the condition or conditions giving rise thereto, and the Landlord shall have failed within a twenty (20) day period after receipt of said notice to remedy such conditions, except in the case of emergency, in which case Landlord shall remedy such condition as soon as reasonably possible. To the extent possible, Tenant shall obtain, for each policy of insurance secured by it, provisions permitting waiver of any claim against Landlord for loss or damage within the scope of the insurance, and Tenant, for itself and its insurers, waives all claims against the Landlord as to such claims covered by such insurance. Nothing herein shall be construed to vary the force and effect of the first paragraph of this paragraph 14, and nothing contained in this paragraph 14 shall be deemed to excuse Landlord from its own gross negligence or willful misconduct. To the extent possible, Landlord shall obtain, for each policy of insurance secured by it, provisions permitting waiver of any claim against Tenant for loss or damage within the scope of the insurance, and Landlord, for itself and its insurers, waives all claims against the Tenant as to such claims covered by such insurance. Nothing contained in this paragraph shall be deemed to excuse Tenant from its own negligence or misconduct. 15. INDEMNITY. Landlord shall not be liable for, and Tenant will indemnify and save harmless Landlord of and from, all fines, suits, claims, demands, losses, actions, attorneys' fees, damage, costs, expenses, disbursements, judgments, executions, liabilities, payments in settlement of any action, payments on any judgments, and interest, for any injury to person or damage to or loss of property on or about the Leased Premises, caused by the negligence or misconduct of, or breach of this Lease by, Tenant, its employees, subtenants, invitees or by any other person entering the Leased Premises under express or implied invitation of Tenant, or arising out of Tenant's use of the Leased Premises. Landlord shall not be liable or responsible for any loss or damage to any property or death or injury to any person occasioned by theft, fire, act of God, public enemy, criminal conduct of third parties, injunction, riot, strike, insurrection, war, court order, requisition or other action by any governmental body or authority, or any other matter beyond the control of 11 Landlord, or for any injury or damage or inconvenience which may arise through repair or alteration of any part of the Leased Premises, or failure to make repairs, or from any cause whatever except Landlord's gross negligence or willful misconduct. 16. FIRE OR OTHER CASUALTY. In the event the Leased Premises shall be damaged by fire or other casualty, and as a result thereof the Tenant is unable to conduct its business, then the Tenant shall give immediate notice thereof to the Landlord, and after such notice, the rent for the Leased Premises shall be abated and the Landlord shall be allowed a reasonable time (not to exceed sixty (60) days to repair the damage to the interior of the Leased Premises and restore same to such condition as will permit the resumption of the Tenant's business operations in accordance with all the requirements of applicable licensing authorities. In the event that the damage referred to herein above shall be of such a nature as to permit the Tenant's continued operations of business under its applicable licenses, thence the Tenant shall give immediate notice of such damage to the Landlord, and after such notice, an equitable abatement of rent shall be allowed to the Tenant for the time such part or parts of the Leased Premises shall remain untenantable or incapable of use and occupancy and this Lease shall, unless notice is given as set forth below, continue in full force and effect, and Landlord shall, at its own expense, with reasonable promptness not to exceed sixty (60) days, subject to force majeure as defined in Paragraph 24, and delays in making of insurance adjustments by Landlord, repair the Leased Premises. If the damage results from the act or omission of Tenant, or Tenant's agents, employees or invitees, Tenant shall not be entitled to any abatement or reduction of rent except to the extent Landlord is paid insurance proceeds for such lost rents. Landlord need not restore fixtures and improvements owned by Tenant or floor coverings, furnishings and other decorative features furnished by Tenant except to the extent Landlord's insurance covers such loss. In the event the Leased Premises shall, before or after the commencement of the term, be so severely damaged that it is not practicable to repair the same, and the Landlord shall decide to demolish or rebuild the Leased Premises, upon notice to Tenant, the term of this Lease shall cease and terminate, effective as of the time of the damage, and the accrued rent, if any, shall be paid up to the time of the damage. All proceeds of insurance payable as a result of fire or other casualty shall be the sole property of the Landlord, except for any portion of said proceeds which represents payment for damage to fixtures and improvements owned by Tenant or floor covering, furnishings and other decorative features furnished by Tenant and which are not restored by Landlord. Landlord agrees that if the repairs provided for herein cannot be made within sixty (60) days from the date of the casualty, subject to force majeure as defined in Paragraph 24, then in such event Tenant shall have the right, after said sixty (60) days' period but prior to substantial completion, to terminate this Lease on thirty (30) days' written notice to Landlord. Tenant may terminate this Lease if work is not fully completed within ninety (90) days. Tenant will take all steps necessary to prevent unreasonable fire hazards. Tenant agrees that any fire insurance policy carried by Tenant insuring Tenant's property located upon the Leased Premises shall contain a provision whereby the insurance carrier waives any right of subrogation against Landlord. 12 The Tenant shall not permit any use of the Leased Premises which will make voidable any insurance on the Leased Premises, or on the contents of the Leased Premises, or which shall be contrary to any law or regulation from time to time established by the New England Fire Insurance Rating Association, or any similar body succeeding to its powers. The Tenant shall on demand reimburse the Landlord all extra insurance premiums caused by the Tenant's use of the Leased Premises. All insurance proceeds payable or assigned to Landlord by Tenant from the loss of fire, condemnation or other casualty will be limited to the proceeds from the insurance coverage required under this Lease. 17. CONDEMNATION. If the whole of the Leased Premises shall be taken or condemned by any competent authority for any public use or purpose, then the term hereby granted shall cease on the day prior to the taking of possession by such authority or on the day prior to the vesting of title in such authority, whichever first occurs and rent hereunder shall be paid to and adjusted as of that day. Landlord agrees to give written notice of such taking to Tenant promptly. If a portion of the Leased Premises shall be taken or condemned and, as a result thereof, there shall be such a major change in the character of the Leased Premises as to prevent Tenant from using the same in substantially the same manner as theretofore used, then in that event, the Tenant may either cancel and terminate this Lease as of the date when the part of the Leased Premises so taken or condemned shall be required for such public purpose, or said Tenant may continue to occupy the remaining portion, providing, however, the Tenant shall give written notice to the Landlord within fifteen (15) days after receipt of notice from Landlord of any taking or vesting of title, of its election. In the event the Tenant shall remain in possession and occupation of the remaining portion, all the terms and conditions of this Lease shall remain in full force and effect with respect to such remaining portion, except that the rent reserved to be paid hereunder shall be equitably adjusted according to the amount and value of such remaining space. The entire award of damages or compensation for the Leased Premises taken, or the amount paid pursuant to private purchase in lieu thereof, whether such condemnation or sale be total or partial, shall belong to and be the property of Landlord and the Tenant hereby assigns to the Landlord any and all such award or purchase price. All insurance proceeds payable or assigned to Landlord by Tenant from the loss of fire, condemnation or other casualty will be limited to the proceeds from the insurance coverage required under this Lease. Nothing herein contained shall be deemed or construed to prevent Tenant from interposing and prosecuting in any condemnation proceeding, a claim for moving expenses, trade fixtures installed or owned by the Tenant and in the case of a partial condemnation of the Leased Premises, the cost, loss or damage sustained by the Tenant as the result of any alterations, modifications or repairs which may be reasonably required of the Tenant in order to place the remaining portion of the Leased Premises not so condemned, in a suitable condition for the Tenant's occupancy. 18. INSPECTION BY LANDLORD. Tenant will permit Landlord, its agents, employees and contractors to enter the Leased Premises and all parts thereof 13 during the Tenant's regular business hours to inspect the same as long as same does not interfere with the operation of Tenant's business. 19. ASSIGNMENT AND SUBLETTING. 19.1 LANDLORD'S CONSENT REQUIRED. Tenant shall not voluntarily or by operation of law (including as a result of a change in control) assign, transfer, mortgage, sublet or otherwise transfer or encumber all or any part of Tenant's interest in the Lease or in the Leased Premises, without Landlord's prior written consent, which Landlord shall not unreasonably withhold. Landlord shall respond to Tenant's request for consent hereunder in a timely manner and any attempted assignment, transfer, mortgage, encumbrance or subletting without such consent shall be void, and shall constitute a material default and breach of this Lease, without the need for notice to Tenant under Paragraph 21.1. 19.2 TENANT AFFILIATE. Notwithstanding the provisions of Paragraph 19.1 hereof, Tenant may assign or sublet the Leased Premises or any portion thereof, without Landlord's consent, to any corporation which controls, is controlled by or is under common control with Tenant, or to any corporation resulting from the merger or consolidation with Tenant, or to any person or entity which acquires all the assets of Tenant as a going concern or the business that is being conducted on the Leased Premises, all of which are referred to as "Tenant Affiliate"; provided that before such assignment shall be effective, (a) said assignee shall assume, in full, the obligations of Tenant under this Lease and (b) Landlord shall be given written notice of such assignment and assumption. Any such assignment shall not, in any way, affect or limit the liability of Tenant under the terms of this Lease even if after such assignment or subletting the terms of this Lease are materially changed or altered without the consent of Tenant, the consent of which shall not be necessary. 19.3 TERMS AND CONDITIONS APPLICABLE TO ASSIGNMENT AND SUBLETTING. (a) Regardless of Landlord's consent, no assignment or subletting shall release Tenant of Tenant's obligations hereunder or alter the primary liability of Tenant to pay the rent and other sums due Landlord hereunder including the Operating Expenses, and to perform all other obligations to be performed by Tenant hereunder. (b) Landlord may accept rent from any person other than Tenant pending approval or disapproval of such assignment. (c) Neither a delay in the approval or disapproval of such assignment or subletting, nor the acceptance of rent, shall constitute a waiver or estoppel of Landlord's right to exercise its remedies for the breach of any of the terms or conditions of this Paragraph 19.3 of this Lease. (d) If Tenant's obligations under this lease have been guaranteed by third parties, then an assignment or sublease, and Landlord's consent thereto, 14 shall not be effective unless said guarantors give their written consent to such sublease and the terms thereof. (e) The consent by Landlord to any assignment or subletting shall not constitute a consent to any subsequent assignment or subletting by Tenant or to any subsequent or successive assignment or subletting by the sublessee. However, Landlord may consent to subsequent sublettings and assignments of the sublease or any amendments or modifications thereto without notifying Tenant or anyone else liable on this Lease or such sublease and without obtaining their consent, and such action shall not relieve such persons from liability under this Lease or said sublease; however, such persons shall not be responsible to the extent any such amendment or modification enlarges or increases the obligations of the Tenant or sublessee under this Lease or such sublease. (f) In the event of any default under this Lease, Landlord may proceed directly against Tenant, any guarantors or any one else responsible for the performance of this Lease, including the sublessee, without first exhausting Landlord's remedies against any other person or entity responsible therefor to Landlord, or any security held by Landlord or Tenant. (g) Landlord's written consent to any assignment or subletting of the Leased Premises by Tenant shall not constitute an acknowledgement that no default then exists under this Lease of the obligations to be performed by Tenant nor shall such consent be deemed a waiver of any then existing default, except as may be otherwise stated by Landlord at the time. (h) The discovery of the fact that any financial statement relied upon by Landlord in giving its consent to an assignment or subletting was materially false shall, at Landlord's election, render Landlord's said consent null and void. 19.4 ADDITIONAL TERMS AND CONDITIONS APPLICABLE TO SUBLETTING. Regardless of Landlord's consent, the following terms and conditions shall apply to any subletting by Tenant of all or any part of the Leased Premises and shall be deemed included in all subleases under this Lease whether or not expressly incorporated therein: (a) Tenant hereby assigns and transfers to Landlord all of Tenant's interest in all rentals and income arising from any sublease heretofore or hereafter made by Tenant, and Landlord may collect such rent and income and apply same toward Tenant's obligations under this Lease; provided, however, that until a default shall occur in the performance of Tenant's obligations under this Lease, Tenant may receive, collect and enjoy the rents accruing under such sublease. Landlord shall not, by reason of this or any other assignment of such sublease to Landlord nor by reason of the collection of the rents from a sublessee, be deemed liable to the sublessee for any failure of Tenant to perform and comply with any of Tenant's obligations to such sublessee under such sublease. Tenant hereby irrevocably authorizes and directs any such sublessee, 15 upon receipt of a written notice from Landlord stating that a default exists in the performance of Tenant's obligations under this Lease, to pay to Landlord the rents due and to become due under the sublease. Tenant agrees that such sublessee shall have the right to rely upon any statement and request from Landlord, and that such sublessee shall pay such rents to Landlord without any obligation or right to inquire as to whether such default exists and notwithstanding any notice from or claim from Tenant to the contrary. Tenant shall have no right or claim against said sublessee or Landlord for any such rents so paid by said sublessee to Landlord. (b) No sublease entered into by Tenant shall be effective unless and until it has been approved in writing by Landlord. In entering into any sublease, Tenant shall use only such form of sublease as is satisfactory to Landlord, and once approved by Landlord such sublease shall not be changed or modified without Landlord's prior written consent. Any sublessee shall, by reason of entering into a sublease under this Lease, be deemed, for the benefit of Landlord, to have assumed and agreed to conform and comply with each and every obligation herein to be performed by Tenant other than such obligations as are contrary to or inconsistent with provisions contained in a sublease to which Landlord has expressly consented in writing. (c) In the event Tenant shall default in the performance of its obligations under this Lease, Landlord at its option and without any obligation to do so, may require any sublessee to attorn to Landlord, in which event Landlord shall undertake the obligations of Tenant under such sublease from the time of the exercise of such option to the termination of such sublease; provided however, Landlord shall not be liable for any prepaid rents or security deposit paid by such sublessee to Tenant or for any other prior defaults of Tenant under such sublease. (d) No sublessee shall further assign or sublet all or any part of the Leased Premises without Landlord's prior written consent. (e) With respect to any subletting to which Landlord has consented, Landlord agrees to deliver a copy of any notice of default by Tenant to the sublessee. Such sublessee shall have the right to cure a default of Tenant within three (3) days after service of said notice of default upon such sublessee, and the sublessee shall have a right of reimbursement and offset from and against Tenant for any such defaults cured by the sublessee. 19.5 LANDLORD'S EXPENSES. In the event Tenant shall assign or sublet the Leased Premises or request the consent of Landlord to any assignment or subletting or if Tenant shall request the consent of Landlord for any act Tenant proposes to do then Tenant shall pay Landlord's reasonable costs and expenses incurred in connection therewith, including attorneys', architects', engineers' or other consultants' fees. 19.6 CONDITIONS TO CONSENT. Landlord reserves the right to condition any approval to assign or sublet upon Landlord's determination that; (a) the proposed assignee or sublessee shall conduct a business on the Leased Premises of a quality substantially equal to that of Tenant, and (b) the proposed 16 assignee or sublessee be as least as financially responsible as Tenant was expected to be at the time of the execution of this Lease or of such assignment or subletting, whichever is greater. 20. PERFORMANCE BY TENANT. Tenant covenants and agrees that it will perform all agreements herein expressed on its part to be performed, and that it will promptly upon receipt of written notice specifying action desired by Landlord in connection with any such covenant, except the covenant to pay rent, commence to comply with such notice. If Tenant shall not commence and proceed diligently to comply with such notice to the satisfaction of Landlord within twenty (20) business days after delivery thereof, then Landlord may, at its option, enter upon the Leased Premises, and do the thing specified in said notice, and Landlord shall have no liability to Tenant for any loss or damage resulting in any way from such action by Landlord, and Tenant agrees to pay promptly upon demand, any reasonable expense incurred by Landlord in taking such action. 21. DEFAULT; REMEDIES. 21.1 DEFAULT. The occurrence of any one or more of the following events shall constitute a material default of this Lease by Tenant: (a) The vacation or abandonment of the Leased Premises by Tenant. Vacation of the Leased Premises shall include the failure to occupy the Leased Premises for a continuous period of sixty (60) days or more, whether or not the rent is paid. (b) The breach by Tenant of any of the covenants, conditions or provisions of Paragraphs 10.3 (alterations), 19 (assignment or subletting), 21.1(a) (vacation or abandonment), 21.1(e) (insolvency), 21. l (f) (false statement), or 26 (estoppel certificate), all of which are hereby deemed to be material, non-curable defaults without the necessity of any notice by Landlord to Tenant thereof. (c) The failure by Tenant to make any payment of rent or any other payment required to be made by Tenant hereunder, as and when due, where such failure shall continue for a period of seven (7) days after written notice thereof from Landlord to Tenant. In the event that Landlord serves Tenant with a Notice to Pay Rent or Quit pursuant to applicable Unlawful Detainer statutes such Notice to Pay Rent or Quit shall also constitute the notice required by this subparagraph. (d) The failure by Tenant to observe or perform any of the covenants, conditions or provisions of this Lease to be observed or performed by Tenant other than those referenced in subparagraphs (b) and (c), above, where such failure shall continue for a period of thirty (30) days after written notice thereof from Landlord to Tenant; provided, however, that if the nature of Tenant's noncompliance is such that more than thirty (30) days are reasonably 17 required for its cure, then Tenant shall not be deemed to be in default if Tenant commenced such cure within said thirty (30) day period and thereafter diligently pursues such cure to completion. To the extent permitted by law, such thirty (30) days notice shall constitute the sole and exclusive notice required to be given to Tenant under applicable Unlawful Detainer statutes. (e) The making by Tenant of any general arrangement or general assignment for the benefit of creditors; (ii) Tenant becoming a "Debtor" as defined in 11 U.S. Sec. 101 or any successor statute thereto (unless, in the case of a petition filed against Tenant, the same is dismissed within sixty (60) days); (iii) the appointment of a trustee or receiver to take possession of substantially of all of Tenant's assets located at the leased Premises or of Tenant's interest in this Lease, where possession is not restored to Tenant within (30) days; or (iv) the attachment, execution or other judicial seizure of substantially all of Tenant's assets located at the Leased Premises or of Tenant's interest in this Lease, where such seizure is not discharged within thirty (30) days. In the event that any provision of this paragraph 21.1(e) is contrary to any applicable law, such provision shall be of no force or effect. (f) The discovery by Landlord that any financial statement given to Landlord by Tenant, or its successor in interest or by any guarantor of Tenant's obligation hereunder, was materially false. 21.2 REMEDIES. In the event of any material default or breach of this Lease by Tenant that has not been cured within the time frame defined in 22.1 (d) of this Lease, Landlord may at any time thereafter, with or without notice or demand and without limiting Landlord in the exercise of any right or remedy which Landlord may have by reason of such default: (a) Terminate Tenant's right to possession of the Leased Premises by any lawful means, in which case this Lease and the term hereof shall terminate and Tenant shall immediately surrender possession of the Leased Premises to Landlord. In such event, Landlord shall be entitled to recover from Tenant all damages incurred by Landlord by reason of Tenant's default including, but not limited to, the cost of recovering possession of the Leased Premises; expenses of reletting, including necessary renovation and alteration of the Leased Premises, reasonable attorneys' fees, and any real estate commission actually paid; the worth at the time of award by the court having jurisdiction thereof of the amount by which the unpaid rent for the balance of the term after the time of such award exceeds the amount of such rental loss for the same period that Tenant proves could be reasonably avoided; that portion of the leasing commission paid by Landlord applicable to the unexpired term of this Lease. (b) Maintain Tenant's right to possession in which case this Lease shall continue in effect whether or not Tenant shall have vacated or abandoned the Leased Premises. In such event, Landlord shall be entitled to enforce all of Landlord's rights and remedies under this Lease, including the right to recover the rent as it becomes due hereunder. (c) Pursue any other remedy now or hereafter available to Landlord under the laws or judicial decisions of the state wherein the Leased Premises are located. Unpaid installments of rent and other unpaid monetary obligations 18 of Tenant under the terms of this Lease shall bear interest from the date due at the maximum rate then allowable by law. 21.3 DEFAULT BY LANDLORD. Landlord shall not be in default unless Landlord fails to perform obligations required of Landlord within a reasonable time, but in no event later than thirty (30) days after written notice by Tenant to Landlord and to the holder of any first mortgage or deed of trust covering the Leased Premises whose name and address shall have been furnished to Tenant in writing, specifying wherein Landlord has failed to perform such obligation; provided, however, that if the nature of Landlord's obligation is such that more than thirty (30) days are required for performance, then Landlord shall not be in default if Landlord commences performance within such 30-day period and thereafter diligently pursues the same to completion. 21.4 LATE CHARGES. Tenant hereby acknowledges that late payment by Tenant to Landlord of Basic Rent, Operating Expenses or any other sums due hereunder will cause Landlord to incur costs not contemplated by this Lease, the exact amount of which will be extremely difficult to ascertain. Such costs include, but are not limited to, processing and accounting charges, and late charges which may be imposed on Landlord by the terms of any mortgage or trust deed covering the Leased Premises. Accordingly, if any installment of Basic Rent, Operating Expenses, or any other sum due from Tenant shall not be received by Landlord or Landlord's designee within ten (10) days after such amount shall be due, then, without any requirement for notice to Tenant, Tenant shall pay to Landlord a late charge equal to Five (5) percent of such overdue amount. The parties hereby agree that such late charge represents a fair and reasonable estimate of the costs Landlord will incur by reason of late payment by Tenant. Acceptance of such late charge by Landlord shall in no event constitute a waiver of Tenant's default with respect to such overdue amount, nor prevent Landlord from exercising any of its rights and remedies granted hereunder. 22. REMEDIES CUMULATIVE. No mention in this Lease of a specific right or remedy shall preclude Landlord from exercising any other right or from having any other remedy, or from maintaining any action to which it may otherwise be entitled either at law. 23. SUCCESSORS AND ASSIGNS. This Lease and the covenants and conditions herein contained shall inure to the benefit of and be binding upon Landlord, its successors and assigns and shall be binding upon Tenant, its successors and assigns, and shall inure to the benefit of Tenant and only such assigns of Tenant to whom the assignment by Tenant has been consented to by Landlord pursuant to the provisions of Paragraph 19 hereof. 24. FORCE MAJEURE. Landlord shall be excused for the period of any delay in the performance of any obligations hereunder when prevented from so doing by cause or causes beyond Landlord's control which shall include without limitation, all labor disputes, civil commotion, war, war-like operations, acts of terrorism, invasion, rebellion, hostilities, military or usurped power, 19 sabotage, governmental regulations or controls, fire or other casualty, inability to obtain any material, utility, service, or financing not within the control of the Landlord or through acts of God. 25. NOTICES. Any notice from the Landlord to the Tenant relating to the Leased Premises or to the occupancy thereof , shall be deemed duly served if mailed to the Tenant at the address listed below, registered or certified mail, return receipt requested, postage prepaid, addressed to the Tenant at: Ramsay Youth Services of Georgia, Inc. One Alhambra Plaza, Suite 750 Coral Gables, Florida 33134 Attention: Vice President of Corporate Services Any notice from the Tenant to the Landlord relating to the Leased Premises or to the occupancy thereof, shall be deemed duly served, if mailed to the Landlord by registered or certified mail, return receipt requested, postage prepaid, addressed to the Landlord at such address as the Landlord may from time to time advise in writing. All rent notices shall be paid and sent to the Landlord at the address in the opening paragraph of this Lease. Either party may, at any time or from time to time, designate in writing a substitute address for that above set forth, and thereafter notices shall be directed to such substitute address. 26. ESTOPPEL CERTIFICATE. 26.1 Tenant shall at any time upon not less than ten (10) days' prior written notice from Landlord execute, acknowledge and deliver to Landlord a statement in writing, in form and substance reasonably satisfactory to Landlord, (1) certifying that this Lease is unmodified and in full force and effect (or, if modified, stating the nature of such modification and certifying that this Lease, as so modified, is in full force and effect), the amount of any security deposit, and the date to which the rent and other charges are paid in advance, if any, and (2) acknowledging that there are not, to Tenant's knowledge, any uncured defaults on the part of Landlord hereunder, or specifying such defaults if any are claimed. Any such statement may be conclusively relied upon by any prospective purchaser or encumbrancer of the Leased Premises. 26.2 At Landlord's option, Tenant's failure to deliver such statement within such time shall be a material breach of this Lease or shall be conclusive upon Tenant (1) that this Lease is in full force and effect, without modification except as may be represented by Landlord, (2) that there are no uncured defaults in Landlord's performance, and (3) that not more than one month's rent has been paid in advance. Any such failure by Tenant may be considered by Landlord as a default by Tenant under this Lease. 20 26.3 If Landlord desires to finance, refinance, or sell the Leased Premises, or any part thereof, Tenant hereby agrees to deliver to any lender or purchaser designated by Landlord such financial statements of Ramsay Youth Services, Inc. and of Tenant as may be reasonably required by such lender or purchaser. Such statements shall include the past three fiscal years' financial statements of Ramsay Youth Services, Inc. and of Tenant. All such financial statements shall be received by Landlord and such lender or purchaser in confidence and shall be used only for the purposes herein set forth. 27. APPLICABLE LAW. This Lease shall be construed under the laws of the State of Georgia. 28. CAPTIONS AND HEADINGS. The captions and headings throughout this Lease are for convenience and reference only, and the words contained therein shall in no way be held or deemed to define, limit, describe, explain, modify, amplify or add to the interpretation, construction or meaning of any provision or the scope or intent of this Lease nor in any way affect this Lease. 29. PURCHASE OPTIONS. (a) Tenant shall have the right and option, exercisable upon thirty (30) days notice to Landlord at any time during the Term, to purchase the Leased Premises from Landlord on the terms and conditions provided below. Upon receipt of such notice, Landlord shall have the obligation to sell the Leased Premises to Tenant on such terms and conditions. (b) Landlord shall have the right and option, exercisable upon thirty (30) days notice to Tenant after the occurrence of a Sale Event (as defined below) to require Tenant to purchase the Leased Premises from Landlord on the terms and conditions provided below. Upon receipt of such notice, Tenant shall have the obligation to purchase the Leased Premises from Landlord on such terms and conditions. (c) Any purchase and sale of the Leased Premises pursuant to the exercise of the option set forth in either subparagraph (a) or (b) above shall be consummated within thirty (30) days following delivery of the notice of exercise thereof. The purchase price for the Leased Premises upon any such purchase and sale shall be paid in cash and shall be equal to the Aggregate Costs plus, commencing on the first anniversary of the Commencement Date, an amount equal to (x) the percentage increase in the CPI subsequent to the Commencement Date multiplied by (y) the Aggregate Costs. All other terms and conditions, and the manner of closing, of such purchase and sale, including, without limitation, the form of deed, quality of title conveyed and title clearance obligations of seller, shall be as is reasonable and customary for purchase and sale transactions in the Macon, Georgia area for properties similar to the Leased Premises. (d) For purposes hereof, each of the following shall be a Sale Event: 21 (1) a material breach or material default by Tenant under this Lease which entitles Landlord to terminate this Lease or results in the termination of this Lease; and (2) a Change in Control of Ramsay Youth Services, Inc. ("RYSI"). The occurrence of any of the following events shall constitute a "Change in Control": (i) any "person", as such term is used in Sections 3(a)(9) and 13(d) of the Securities Exchange Act of 1934 (other than Paul Ramsay and entities 26 controlled directly or indirectly by him), becomes a "beneficial owner," as such term is used in Rule 13d-3 promulgated under that act, of 35% or more of the Voting Stock of RYSI; (ii) the majority of the board of directors of RYSI consists of individuals other than Incumbent Directors, which term means the members of the board on the date of this Lease; provided that any person becoming a director subsequent to such date whose election or nomination for election was supported by two-thirds of the directors who then comprised the Incumbent Directors shall be considered to be an Incumbent Director; (iii) RYSI adopts any plan of liquidation providing for the distribution of all or substantially all of its assets; (iv) all or substantially all of the assets or business of RYSI is disposed of pursuant to a merger, consolidation or other transaction (unless the stockholders of the Company immediately prior to such merger, consolidation or other transaction beneficially own, directly or indirectly, in substantially the same proportion as they owned the Voting Stock of RYSI, all of the Voting Stock or other ownership interests of the entity or entities, if any, that succeed to the business of RYSI); or (v) RYSI combines with another company and is the surviving corporation but, immediately after the combination, the stockholders of RYSI immediately prior to the combination hold, directly or indirectly, less than 80% of the Voting Stock of the combined company (there being excluded from the number of shares held by such stockholders, but not from the Voting Stock of the combined company, any shares received by affiliates of such other company in exchange for stock of such other company). (vi) For purposes hereof, "Voting Stock" shall mean securities of any class or classes having general voting power under ordinary circumstances, in the absence of contingencies, to elect the directors of a corporation. 30. GUARANTY. Tenant agrees that Tenant shall arrange for all of the obligations of the Tenant under this Lease to be guaranteed by RYSI. In furtherance of the foregoing, the Tenant hereby agrees to deliver to the Landlord, on or prior to the Commencement Date, a guaranty agreement, in a form which is satisfactory to the Landlord in its sole discretion, duly executed by RYSI in favor of the Landlord, wherein RYSI guarantees all of such obligations. 22 IN WITNESS WHEREOF, the parties hereto have executed this Lease Agreement under their respective seals as of the day and year first above written. LANDLORD: RAMSAY HOSPITAL PROPERTIES, INC. C/O TORYS, LLP 237 PARK AVENUE NEW YORK, NEW YORK 10017 ATTEST: By: - ---------------------------- ------------------------------------ Its: - ---------------------------- ------------------------------------ TENANT: RAMSAY YOUTH SERVICES OF GEORGIA, INC. One Alhambra Plaza, Suite 750 Coral Gables, Florida 33134 ATTEST: By: - ---------------------------- ------------------------------------ Its: - ---------------------------- ------------------------------------ 23 EX-10.4 6 g79220exv10w4.txt GUARANTEE OF OBLIGATION - LEASE AGREEMENT EXHIBIT 10.4 GUARANTEE Guarantee dated as of September , 2002 made by Ramsay Youth Services, Inc. (the "Guarantor"). Reference is made to the Commercial Lease made on September __, 2002 (the "Lease") between Ramsay Youth Services of Georgia, Inc. (the "Tenant") and Ramsay Hospital Properties, Inc. (the "Landlord") being entered into by the Landlord and the Tenant contemporaneously with the execution and delivery hereof. All capitalized terms used herein and not otherwise defined shall have the meanings of such terms as defined in the Lease. The Guarantor owns 100% of the issued and outstanding capital stock of the Tenant. The Guarantor, in consideration of and as an inducement to the Landlord to enter into the Lease with the Tenant, and for other good and valuable consideration, the receipt of which is hereby acknowledged, hereby agrees with the Landlord as follows: 1. The Guarantor hereby unconditionally and irrevocably guarantees to the Landlord the prompt and complete payment when due of all amounts owing to the Landlord by the Tenant under the Lease and the timely satisfaction of all other obligations owed by the Tenant to the Landlord pursuant to the Lease (such amounts owing and other obligations are herein referred to collectively as the "Obligations"). 2. This Guaranty shall be construed as a continuing, absolute and unconditional guaranty of payment and performance (and not merely of collection) without regard to the validity or enforceability of the Lease or any right of defense, set-off or counterclaim which may at any time be available to or be asserted by the Tenant against the Landlord (other than a right of defense arising out of a breach by the Landlord of a material term of the Lease), or by any other circumstance whatsoever which constitutes, or might be construed to constitute, an equitable or legal discharge of the Tenant or the Guarantor from the Obligations, in bankruptcy or in any other instance, and the obligations and liabilities of the Guarantor shall not be conditioned or contingent upon the pursuit by the Landlord or any other person at any time of any right or remedy against the Tenant or against any other person which may be or become liable in respect of all or any part of the Obligations. 3. This Guarantee shall remain in full force and effect and be binding in accordance with and to the extent of its terms upon the Guarantor and the Guarantor's successors and assigns, and shall inure to the benefit of the Landlord and its successors and assigns until the Obligations shall have been irrevocably satisfied by payment and performance in full. 4. All notices, requests and demands hereunder shall be in writing and delivered by hand, or by registered or certified mail, return receipt requested, addressed to the Guarantor at: Ramsay Youth Services, Inc. One Alhambra Plaza, Suite 750 Coral Gables, Florida 33134 Attention: Chief Executive Officer IN WITNESS WHEREOF, the undersigned has caused this Guarantee to be executed on its behalf as of the __ day of September, 2002. RAMSAY YOUTH SERVICES, INC. By: ------------------------------------- Name: Title: 2 EX-11 7 g79220exv11.txt COMPUTATION OF NET INCOME PER SHARE EXHIBIT 11 RAMSAY YOUTH SERVICES, INC. AND SUBSIDIARIES
QUARTER ENDED NINE MONTHS ENDED SEPTEMBER 30, SEPTEMBER 30, ---------------------------- ---------------------------- 2002 2001 2002 2001 ----------- ----------- ----------- ----------- (unaudited) (unaudited) Numerator: Numerator for basic earnings per share - income attributable to common stockholders ............ $ 1,262,000 $ 1,078,000 $12,093,000 $ 2,258,000 Effect of dilutive securities ...................... ----------- ----------- ----------- ----------- $ 1,262,000 $ 1,078,000 $12,093,000 $ 2,258,000 ----------- ----------- ----------- ----------- Numerator for diluted earnings per share - income attributable to common stockholders after assumed conversions ...................... $ 1,262,000 $ 1,078,000 $12,093,000 $ 2,258,000 =========== =========== =========== =========== Denominator: Denominator for basic earnings per share - weighted-average shares .......................... 9,279,000 9,056,000 9,272,000 8,977,000 Effect of dilutive securities: Employee stock options and warrants .............. 2,214,000 2,003,000 2,172,000 1,000,000 ----------- ----------- ----------- ----------- Dilutive potential common shares ................... 2,214,000 2,003,000 2,172,000 1,000,000 ----------- ----------- ----------- ----------- Denominator for diluted earnings per share - adjusted weighted-average shares and assumed conversions ............................ 11,493,000 11,059,000 11,444,000 9,977,000 =========== =========== =========== =========== Basic earnings per share .............................. $ 0.14 $ 0.12 $ 1.30 $ 0.25 =========== =========== =========== =========== Diluted earnings per share ............................ $ 0.11 $ 0.10 $ 1.06 $ 0.23 =========== =========== =========== ===========
EX-99.1 8 g79220exv99w1.txt CERTIFICATION OF CEO EXHIBIT 99.1 CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 In connection with the Quarterly Report of Ramsay Youth Services, Inc. (the "Company") on Form 10-Q for the period ending September 30, 2002, as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, Luis E. Lamela, Chief Executive Officer of the Company, certify, pursuant to 18 U.S.C. ss. 1350, as adopted pursuant to ss. 906 of the Sarbanes-Oxley Act of 2002, that: (1) The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and (2) The information contained in the Report fairly presents, in all material respects, the financial condition and result of operations of the Company. /s/ LUIS E. LAMELA ----------------------------------------- Luis E. Lamela Chief Executive Officer November 13, 2002 EX-99.2 9 g79220exv99w2.txt CERTIFICATION OF CFO EXHIBIT 99.2 CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 In connection with the Quarterly Report of Ramsay Youth Services, Inc. (the "Company") on Form 10-Q for the period ending September 30, 2002 as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, Marcio C. Cabrera, Chief Financial Officer of the Company, certify, pursuant to 18 U.S.C. ss. 1350, as adopted pursuant to ss. 906 of the Sarbanes-Oxley Act of 2002, that: (1) The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and (2) The information contained in the Report fairly presents, in all material respects, the financial condition and result of operations of the Company. /S/ MARCIO C. CABRERA ----------------------------------------- Marcio C. Cabrera Chief Financial Officer November 13, 2002 EX-99.3 10 g79220exv99w3.txt PRESS RELEASE DATED 8/2/02 EXHIBIT 99.3 FOR IMMEDIATE RELEASE RAMSAY YOUTH SERVICES, INC. ANNOUNCES THIRD QUARTER RESULTS CORAL GABLES, FLORIDA, NOVEMBER 8, 2002 . . . RAMSAY YOUTH SERVICES, INC. (NASDAQ:RYOU) today announced results for the third quarter ended September 30, 2002. The Company reported total revenues of $36,323,000 as compared to total revenues of $33,638,000 for the same period of the prior year. Reported net income for the third quarter was $1,262,000, or $0.11 per fully diluted share, as compared to net income of $1,078,000, or $0.10 per fully diluted share in the same quarter of the prior year. As a result of the reversal of the deferred tax valuation allowance in the second quarter of 2002, the Company's effective tax rate increased to 37.7% during the current quarter, as compared to an effective tax rate of 13.7% in the same quarter of the prior year. This change in the effective tax rate reduced net income for the quarter by $486,000, or $0.04 per fully diluted share. For the nine months ended September 30, 2002, the Company reported total revenues of $108,863,000, as compared to total revenues of $99,267,000 for the same period of the prior year. Reported net income for the nine month period was $12,093,000, or $1.06 per fully diluted share as compared to net income of $2,258,000, or $0.23 per fully diluted share in the same period of the prior year. The results for the current nine month period were positively impacted by the reversal of a deferred tax asset valuation allowance in June 2002. This reversal of deferred tax asset valuation allowance, net of the amortization of deferred tax assets, increased net income during the current period by $6,708,000, or $0.59 per fully diluted share. Commenting on the results, Luis E. Lamela, President and CEO of Ramsay Youth Services, Inc., stated, "We are extremely pleased with our performance in the quarter and nine month period. The results reflect the on-going demand for our services and our continued success in growing the specialized treatment areas of our business." Ramsay Youth Services, Inc. is a leading provider and manager of mental health, substance abuse and behavioral health programs and services in residential and non-residential settings in eleven states and the Commonwealth of Puerto Rico. Except for historical information contained herein, the matters set forth in this news release are forward-looking statements as defined under the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. The forward-looking statements involve known and unknown risks and uncertainties. Actual operations and results may differ materially from those expected in the forward looking statements made by the Company. Please refer to Ramsay's filings with the Securities and Exchange Commission for additional information, specifically the Risk Factors section in the Company's Form 10K for the year ended December 31, 2001. Tables Follow ### Contact: Isa Diaz Executive Vice President Corporate Relations (305) 569-4626 RAMSAY YOUTH SERVICES, INC. AND SUBSIDIARIES OPERATING RESULTS
QUARTER ENDED SEPTEMBER 30, -------------------------------------------------------------- 2002 2001 ------------------------- ---------------------------- Revenues $36,323,000 100.0% $33,638,000 100.0% Operating expenses: Salaries, wages and benefits 22,671,000 62.4% 21,283,000 63.3% Other operating expenses 9,971,000 27.4% 9,457,000 28.1% Provision for doubtful accounts 401,000 1.1% 264,000 0.8% Depreciation and amortization 679,000 1.9% 639,000 1.9% ----------- ---- ----------- ----- Total operating expenses 33,722,000 92.8% 31,643,000 94.1% ----------- ---- ----------- ----- Income from operations 2,601,000 7.2% 1,995,000 5.9% Non-operating expenses: Interest and other financing charges, net 576,000 1.6% 746,000 2.2% ----------- ---- ----------- ----- Total non-operating expenses, net 576,000 1.6% 746,000 2.2% Income before income taxes 2,025,000 5.6% 1,249,000 3.7% (Benefit) provision for income taxes 763,000 2.1% 171,000 0.5% ----------- ---- ----------- ----- Net income $ 1,262,000 3.5% $ 1,078,000 3.2% =========== === =========== === Income per common share: Basic $ 0.14 $ 0.12 =========== =========== Diluted $ 0.11 $ 0.10 =========== =========== Weighted average number of common shares outstanding: Basic 9,279,000 9,056,000 =========== =========== Diluted 11,493,000 11,059,000 =========== ===========
RAMSAY YOUTH SERVICES, INC. AND SUBSIDIARIES OPERATING RESULTS
NINE MONTHS ENDED SEPTEMBER 30, --------------------------------------------------------------- 2002 2001 ---------------------------- ------------------------- Revenues $ 108,863,000 100.0% $ 99,267,000 100.0% Operating expenses: Salaries, wages and benefits 67,706,000 62.2% 61,846,000 62.3% Other operating expenses 29,516,000 27.1% 28,087,000 28.3% Provision for doubtful accounts 1,839,000 1.7% 2,183,000 2.2% Depreciation and amortization 1,928,000 1.8% 1,824,000 1.8% Asset impairment charges 125,000 0.1% -- 0.0% ------------- ----- ------------- ----- Total operating expenses 101,114,000 92.9% 93,940,000 94.6% ------------- ----- ------------- ----- Income from operations 7,749,000 7.1% 5,327,000 5.4% Non-operating expenses: Interest and other financing charges, net 1,871,000 1.7% 2,597,000 2.6% ------------- ----- ------------- ----- Total non-operating expenses, net 1,871,000 1.7% 2,597,000 2.6% Income before income taxes 5,878,000 5.4% 2,730,000 2.8% (Benefit) provision for income taxes (6,215,000) (5.7%) 472,000 0.5% ------------- ----- ------------- ----- Net income $ 12,093,000 11.1% $ 2,258,000 2.3% ============= ===== ============= ===== Income per common share: Basic $ 1.30 $ 0.25 ============= ============= Diluted $ 1.06 $ 0.23 ============= ============= Weighted average number of common shares outstanding: Basic 9,272,000 8,977,000 ============= ============= Diluted 11,444,000 9,977,000 ============= =============
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•		Ability to Raise Additional Capital. Although the Company believes that it can obtain additional liquidity, there can be no assurances that the Company will be able to raise debt or equity capital through other sources, or if obtained, that it will be on terms acceptable to the Company. The incurring or assumption by the Company of additional indebtedness could result in the issuance of additional equity and/or debt, which could have a dilutive effect on current shareholders and a significant effect on the Company’s operations.

•		Ability to Borrow Funds under Senior Credit Facility. The Company’s ability to borrow funds under its Senior Credit Facility may be terminated if the Company fails to comply with the restrictive financial and operating covenants contained in the Senior Credit Facility. If the Company is unable to operate its business within the covenants specified in the Senior Credit Facility, the Company’s ability to obtain future amendments to the covenants is not assured, and the Company’s ability to make borrowings required to operate its business could be restricted or terminated. Such a restriction or termination would have a material adverse effect on the Company’s liquidity.