Item 1A. Risk Factors
Acadia has updated and revised the risk factors previously disclosed in its periodic reports filed with the Securities and Exchange Commission
from time to time. In addition to the other information set forth in this report, an investor should carefully consider the factors discussed below. Any of the following risks could materially and adversely affect our business, financial condition
or results of operations. These risks should be carefully considered before making an investment decision regarding us. The risks and uncertainties described below are not the only ones we face and there may be additional risks that we are not
presently aware of or that we currently consider not likely to have a significant impact. If any of the following risks actually occurred, our business, financial condition and operating results could suffer, and the trading price of our common
stock could decline.
Fluctuations in our operating results, quarter to quarter earnings and other factors may result in significant decreases in
the price of our securities.
The capital markets experience volatility that is often unrelated to operating performance. These
broad market fluctuations may adversely affect the trading price of our securities and, as a result, there may be significant volatility in the market price of our securities. If we are unable to operate our facilities as profitably as we have in
the past or as our investors expect us to in the future, the market price of our securities will likely decline when it becomes apparent that the market expectations may not be realized. In addition to our operating results, many economic and
seasonal factors outside of our control could have an adverse effect on the price of our securities and increase fluctuations in our quarterly earnings. These factors include certain of the risks discussed herein, demographic changes, operating
results of other healthcare companies, changes in our financial estimates or recommendations of securities analysts, speculation in the press or investment community, the possible effects of war, terrorist and other hostilities, adverse weather
conditions, the level of seasonal illnesses, managed care contract negotiations and terminations, changes in general conditions in the economy or the financial markets or other developments affecting the healthcare industry.
An incident involving one or more of our patients or the failure by one or more of our facilities to provide appropriate care could result in increased
regulatory burdens, governmental investigations, negative publicity and adversely affect the trading price of our securities.
If
one or more of our facilities experiences an adverse patient incident or is found to have failed to provide appropriate patient care, an admissions hold or other adverse regulatory action could be taken against us. Any such patient incident or
adverse regulatory action could result in governmental investigations, judgments or fines and have a material adverse effect on our business, financial condition and results of operations. In addition, we could receive negative publicity or
unfavorable media attention, whether warranted or unwarranted, that could have a significant, adverse effect on the trading price of our securities.
Our revenues and results of operations are significantly affected by payments received from the government and third-party payors.
A significant portion of our revenues are from government healthcare programs, principally Medicare, Medicaid and the National Health Service
(NHS). For the six months ended June 30, 2014, Acadia derived approximately 67% of its revenues from the Medicare and Medicaid programs, and Partnerships in Care derived approximately 97% of its revenue from NHS.
Changes in these government programs in recent years have resulted in limitations on reimbursement and, in some cases, reduced levels of
reimbursement for healthcare services. Payments from federal, state and United Kingdom government healthcare programs are subject to statutory and regulatory changes, administrative rulings, interpretations and determinations, requirements for
utilization review, and governmental funding restrictions, all of which could materially increase or decrease program payments, as well as affect the cost of providing service to patients and the timing of payments to facilities. We are unable to
predict the effect of recent and future policy changes on our operations. In addition, since most states operate with balanced budgets, and since the Medicaid program is often a states largest program, some states can be expected to enact or
consider enacting legislation formulated to reduce their Medicaid expenditures. Furthermore, the recent economic downturn has increased the budgetary pressures on the federal government and many state governments, which may negatively affect the
availability of taxpayer funds for Medicare and Medicaid programs.
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If the rates paid or the scope of services covered by government payors are reduced, there could
be a material adverse effect on our business, financial condition and results of operations.
In addition to changes in government
reimbursement programs, our ability to negotiate favorable contracts with private payors, including managed care providers, significantly affects the financial condition and operating results of our facilities in the United States. Management
expects third-party payors to aggressively manage reimbursement levels and cost controls. Reductions in reimbursement amounts received from third-party payors could have a material adverse effect on our business, financial condition and results of
operations.
Our facilities acquired from Partnerships in Care rely on publicly funded entities in the United Kingdom for approximately 97% of their
revenue, and the loss or reduction of such funding or changes to procurement methods could negatively impact occupancy rates which could have a corresponding material adverse effect on our business, results of operations, financial condition or
prospects.
Referrals to Partnerships in Cares services by NHS accounted for approximately 97% of its revenue for the year
ended December 31, 2013. There is a risk that budget constraints, public spending cuts (such as the cuts announced by the United Kingdom government in the 2010 Comprehensive Spending Review and implemented in the 2011 and 2012 government
budgets) or other financial pressures could cause NHS to reduce funding for the types of services that Partnerships in Care provides. For example, in 2010, NHS announced a period of austerity and reduced spending and outsourcing of medical health
treatment, which adversely affected our results from 2010 to 2012 until such austerity was relaxed. In addition, policy changes in the United Kingdom could lead to fewer of such services being purchased by publicly funded entities or material
changes being made to their procurement practices, or the in-sourcing of mental health services, any of which could materially reduce the revenue of the Partnerships in Care facilities.
The Partnerships in Care facilities may not achieve fee rate increases or may suffer fee rate decreases, which could have an adverse impact on our
business, results of operations, financial condition or prospects.
The majority of fee rates that the facilities acquired from
Partnerships in Care decide to set for their services are subject to annual adjustments. NHS has been under budgetary pressure since the announcement by the United Kingdom Government of the Comprehensive Spending Review in 2010 imposing cuts on
government spending and have, as such, reduced its spending. This resulted in Partnerships in Care being unable to implement material price increases during the last several years (which has adversely affected its results), and there can be no
assurance that we will be able to implement price increases in the future. Furthermore, should the effect of any increase in the annual wages or other operating costs of the Partnerships in Care business exceed the effect of any increase in such
facilities weekly fee rates (which are the basis of the Partnerships in Care facilities revenue), we would have to absorb such costs and this could have a material adverse effect on our business, results of operations, financial
condition or prospects.
Our substantial debt could adversely affect our financial health and prevent us from fulfilling our obligations under our
financing arrangements.
As of June 30, 2014, we had $567.3 million of total debt, which included $296.3 million of debt under
our Amended and Restated Senior Credit Facility, $97.5 million (before a discount of $1.2 million) of debt under our 12.875% Senior Notes, $150.0 million of debt under our 6.125% Senior Notes and $24.7 million (including a premium of $2.0 million)
of debt under our 9.0% and 9.5% Revenue Bonds.
Our substantial debt could have important consequences to our business. For example, it
could:
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increase our vulnerability to general adverse economic and industry conditions;
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make it more difficult for us to satisfy our other financial obligations;
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restrict us from making strategic acquisitions or cause us to make non-strategic divestitures;
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require us to dedicate a substantial portion of our cash flow from operations to payments on our debt (including scheduled repayments on our outstanding term loan borrowings under the Amended and Restated Senior Credit
Facility), thereby reducing the availability of our cash flow to fund working capital, capital expenditures and other general corporate purposes;
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expose us to interest rate fluctuations because the interest on the Amended and Restated Senior Credit Facility is imposed at variable rates;
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make it more difficult for us to satisfy our obligations to our lenders, resulting in possible defaults on and acceleration of such debt;
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limit our flexibility in planning for, or reacting to, changes in our business and the industry in which we operate;
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place us at a competitive disadvantage compared to our competitors that have less debt;
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limit our ability to borrow additional funds; and
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limit our ability to pay dividends, redeem stock or make other distributions.
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In addition,
the terms of our financing arrangements contain restrictive covenants that limit our ability to engage in activities that may be in our long-term best interests. Our failure to comply with those covenants could result in an event of default which,
if not cured or waived, could result in the acceleration of all of our debts, including the Amended and Restated Senior Credit Facility and the Senior Notes.
Servicing our debt will require a significant amount of cash. Our ability to generate sufficient cash to service our debt depends on many factors beyond
our control.
Our ability to make payments on and to refinance our debt, to fund planned capital expenditures and to maintain
sufficient working capital will depend on our ability to generate cash in the future. This, to a certain extent, is subject to general economic, financial, competitive, legislative, regulatory and other factors that are beyond our control.
We cannot assure you that our business will generate sufficient cash flow from operations or that future borrowings will be available to us
under the Amended and Restated Senior Credit Facility or from other sources in an amount sufficient to enable us to service our debt or to fund our other liquidity needs. If our cash flow and capital resources are insufficient to allow us to make
scheduled payments on our debt, we may need to reduce or delay capital expenditures, sell assets, seek additional capital or restructure or refinance all or a portion of our debt on or before the maturity thereof, any of which could have a material
adverse effect on our business, financial conditions or results of operations. We cannot assure you that we will be able to refinance any of our debt on commercially reasonable terms or at all, or that the terms of that debt will allow any of the
above alternative measures or that these measures would satisfy our scheduled debt service obligations. If we are unable to generate sufficient cash flow to repay or refinance our debt on favorable terms, it could significantly adversely affect our
financial condition and the value of our outstanding debt. Our ability to restructure or refinance our debt will depend on the condition of the capital markets and our financial condition. Any refinancing of our debt could be at higher interest
rates and may require us to comply with more onerous covenants, which could further restrict our business operations.
We are subject to a number of
restrictive covenants, which may restrict our business and financing activities.
Our financing arrangements impose, and the terms
of any future debt may impose, operating and other restrictions on us. Such restrictions affect, and in many respects limit or prohibit, among other things, our and our subsidiaries ability to:
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incur or guarantee additional debt and issue certain preferred stock;
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pay dividends on our common stock or redeem, repurchase or retire our common stock or subordinated debt;
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transfer or sell our assets:
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make certain payments or investments;
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make capital expenditures;
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create certain liens on assets;
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create restrictions on the ability of our subsidiaries to pay dividends or make other payments to us;
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engage in certain transactions with our affiliates; and
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merge or consolidate with other companies.
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The Amended and Restated Senior Credit Facility
also requires us to meet certain financial ratios, including a fixed charge coverage ratio and a consolidated leverage ratio.
These
restrictions may prevent us from taking actions that management believes would be in the best interests of our business, and may make it difficult for us to successfully execute our business strategy or effectively compete with companies that are
not similarly restricted. We also may incur future debt obligations that might subject us to additional restrictive covenants that could affect our financial and operational flexibility. Our ability to comply with these covenants in future periods
will largely depend on the pricing of our products and services, our success at implementing cost reduction initiatives and our ability to successfully implement
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our overall business strategy. We cannot assure you that we will be granted waivers or amendments to our financing arrangements if for any reason we are unable to comply with our financial
covenants. The breach of any of these covenants and restrictions could result in a default under the indentures governing our outstanding Senior Notes or under the Amended and Restated Senior Credit Facility, which could result in an acceleration of
our debt.
Despite our current debt level, we may incur significant additional amounts of debt, which could further exacerbate the risks associated
with our substantial debt.
We may incur substantial additional debt, including the issuance of additional notes and other secured
debt, in the future. Although the indentures governing our outstanding Senior Notes and our Amended and Restated Senior Credit Facility contain restrictions on the incurrence of additional debt, these restrictions are subject to a number of
significant qualifications and exceptions, and under certain circumstances, the amount of debt that could be incurred in compliance with these restrictions could be substantial. If new debt is added to our existing debt levels, the related risks
that we now face would intensify and we may not be able to meet all our debt obligations.
If we default on our obligations to pay our indebtedness,
we may not be able to make payments on our financing arrangements.
Any default under the agreements governing our indebtedness,
including a default under our Amended and Restated Senior Credit Facility and the indentures governing our Senior Notes, and the remedies sought by the holders of such indebtedness, could adversely affect our ability to pay the principal, premium,
if any, and interest on the notes and substantially decrease the market value of the notes. If we are unable to generate sufficient cash flows and are otherwise unable to obtain funds necessary to meet required payments of principal, premium, if
any, and interest on our indebtedness, or if we otherwise fail to comply with the various covenants, including financial and operating covenants, in the instruments governing our indebtedness (including our Amended and Restated Senior Credit
Facility and the indentures governing our Senior Notes), we would be in default under the terms of the agreements governing such indebtedness. In the event of such default, the holders of such indebtedness could elect to declare all the funds
borrowed thereunder to be due and payable, the lenders under our Amended and Restated Senior Credit Facility could elect to terminate their commitments or cease making further loans and institute foreclosure proceedings against our assets, or we
could be forced to apply all available cash flows to repay such indebtedness, and, in any such case, we could ultimately be forced into bankruptcy or liquidation. Because the Amended and Restated Senior Credit Facility and the indentures governing
our Senior Notes have customary cross-default provisions, if any of the indebtedness under our Amended and Restated Senior Credit Facility or our Senior Notes is accelerated, our other indebtedness will be accelerated, making it even more difficult
for us to repay or refinance the amounts due.
Expanding our operations internationally poses additional risks to our business.
Prior to the acquisition of Partnerships in Care, we were engaged in business activities in the United States and Puerto Rico. The acquisition
of Partnerships in Care marks our first entry into a foreign market. Our business or financial performance may be adversely affected due to the risks of operating internationally, including but not limited to the following: economic and political
instability, failure to comply with foreign laws and regulations and adverse changes in the health care policy of the United Kingdom (including decreases in funding for the services provided by Partnerships in Care), adverse changes in law and
regulations affecting the operations of Partnerships in Care, difficulties and costs of staffing and managing our new operations in the United Kingdom. If any of these events were to materialize, they could lead to disruption of our business,
significant expenditures and/or damages to our reputation, which could have a material adverse effect on our results of operations, financial condition or prospects.
As a company based outside of the United Kingdom, we will need to take certain actions to be more easily accepted in the United Kingdom. For
example, we may need to engage in a public relations campaign to emphasize service quality and company philosophy, preserve local management continuity and business practices and be transparent in our dealings with local governments and taxing
authorities. Such efforts will require significant time and effort on the part of our management team. Our results of operation could suffer if these efforts are not successful.
Our acquisition strategy exposes us to a variety of operational and financial risks.
A principal element of our business strategy is to grow by acquiring other companies and assets in the behavioral healthcare industry. Growth,
especially rapid growth, through acquisitions exposes us to a variety of operational and financial risks. We summarize the most significant of these risks below.
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Integration risks
We must integrate our acquisitions with our existing operations. This process includes the integration of the various components of our
business and of the businesses we have acquired or may do so in the future, including the following:
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additional psychiatrists, other physicians and employees who are not familiar with our operations;
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patients who may elect to switch to another behavioral healthcare provider;
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regulatory compliance programs; and
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disparate operating, information and record keeping systems and technology platforms.
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Integrating a new facility could be expensive and time consuming and could disrupt our ongoing business, negatively affect cash flow and
distract management and other key personnel from day-to-day operations.
We may not be able to combine successfully the operations of
recently acquired facilities with our operations, and even if such integration is accomplished, we may never realize the potential benefits of the acquisition. The integration of acquisitions with our operations requires significant attention from
management, may impose substantial demands on our operations or other projects and may impose challenges on the combined business including, but not limited to, consistencies in business standards, procedures, policies, business cultures and
internal controls and compliance. Certain acquisitions involve a capital outlay, and the return that we achieved on any capital invested may be less than the return that we would achieve on our other projects or investments. If we fail to complete
the integration of recently acquired facilities, we may never fully realize the potential benefits of the related acquisitions.
We are
integrating Partnerships in Cares business into our current business. Successful integration depends on the ability to effect any required changes in operations or personnel which may entail unforeseen liabilities. The integration of
Partnerships in Care may expose us to certain risks, including the following: difficulty in integrating Partnerships in Care in a cost-effective manner, including the establishment of effective management information and financial control systems;
unforeseen legal, regulatory, contractual, employment or other issues arising out of the combination; combining corporate cultures; maintaining employee morale and retaining key employees; potential disruptions to our on-going business caused by its
senior managements focus on integrating Partnerships in Care; and performance of the combined assets not meeting our expectations or plans. A failure to properly integrate Partnerships in Care could have a corresponding material adverse effect
on our business, results of operations, financial condition or prospects.
Benefits may not materialize
When evaluating potential acquisition targets, we identify potential synergies and cost savings that we expect to realize upon the successful
completion of the acquisition and the integration of the related operations. We may, however, be unable to achieve or may otherwise never realize the expected benefits. Our ability to realize the expected benefits from potential cost savings and
revenue improvement opportunities is subject to significant business, economic and competitive uncertainties and contingencies, many of which are beyond our control, such as changes to government regulation governing or otherwise impacting the
behavioral healthcare industry, reductions in reimbursement rates from third-party payors, reductions in service levels under our contracts, operating difficulties, client preferences, changes in competition and general economic or industry
conditions. If we are unsuccessful in implementing these improvements or if we do not achieve our expected results, it may adversely impact our business, financial condition or results of operations.
Assumptions of unknown liabilities
Facilities that we acquire, including the facilities acquired from Partnerships in Care, may have unknown or contingent liabilities, including,
but not limited to, liabilities for uncertain tax positions, liabilities for failure to comply with healthcare laws and regulations and liabilities for unresolved litigation or regulatory reviews. Although we typically attempt to exclude significant
liabilities from our acquisition transactions and seek indemnification from the sellers of such facilities, the purchase agreement with Partnerships in Care contained minimal representations and warranties about the entities and business that we
acquired. In addition, we have no indemnification rights against the sellers under the purchase agreement and all of the purchase price consideration was paid at closing of the acquisition of Partnerships in Care. Therefore, we may incur material
liabilities for the past activities of acquired entities and facilities. Even in those acquisitions in which we have such rights, we may experience difficulty enforcing the sellers obligations, or we may incur material liabilities for the past
activities of acquired facilities. Such liabilities and related legal or other costs and/or resulting damage to a facilitys reputation could negatively impact our business, financial condition or results of operations.
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Competing for acquisitions
We face competition for acquisition candidates primarily from other for-profit healthcare companies, as well as from not-for-profit entities.
Some of our competitors may have greater resources than we do. As a result, we may pay more to acquire a target business or may agree to less favorable deal terms than we would have otherwise. Our principal competitors for acquisitions have included
Universal Health Services, Aurora Behavioral Health Care and private equity firms. Also, suitable acquisitions may not be accomplished due to unfavorable terms. Further, the cost of an acquisition could result in a dilutive effect on our results of
operations, depending on various factors, including the amount paid for an acquired facility, the acquired facilitys results of operations, the fair value of assets acquired and liabilities assumed, effects of subsequent legislation and limits
on rate increases. In addition, we may have to pay cash, incur debt, or issue equity securities to pay for any such acquisition, which could adversely affect our financial results, result in dilution to our stockholders, result in increased fixed
obligations or impede our ability to manage our operations.
Managing growth
Some of the facilities we have acquired or may acquire in the future may have had significantly lower operating margins prior to the time of
our acquisition or may have had operating losses prior to such acquisition. If we fail to improve the operating margins of the facilities we acquire, operate such facilities profitably or effectively integrate the operations of the acquired
facilities, our results of operations could be negatively impacted.
Failure to comply with the international and U.S. laws and regulations
applicable to our international operations could subject us to penalties and other adverse consequences.
We face several risks
inherent in conducting business internationally, including compliance with international and U.S. laws and regulations that apply to our international operations. These laws and regulations include U.S. laws such as the Foreign Corrupt Practices Act
and other U.S. federal laws and regulations established by the Office of Foreign Asset Control, local laws such as the United Kingdom Bribery Act 2010 or other local laws which prohibit corrupt payments to governmental officials or certain payments
or remunerations to customers. Given the high level of complexity of these laws, however, there is a risk that some provisions may be inadvertently breached by us, for example through fraudulent or negligent behavior of individual employees, our
failure to comply with certain formal documentation requirements, or otherwise. Violations of these laws and regulations could result in fines, criminal sanctions against us, our officers or our employees, implementation of compliance programs, and
prohibitions on the conduct of our business. Any such violations could include prohibitions on our ability to conduct business in the United Kingdom and could materially damage our reputation, our brand, our international expansion efforts, our
ability to attract and retain employees, our business and our operating results. Our success depends, in part, on our ability to anticipate these risks and manage these challenges.
Foreign currency exchange rate fluctuations could materially impact our consolidated financial position and results of operations.
The acquisition of Partnerships in Care expanded our operations to the United Kingdom. Accordingly, a portion of our net revenues will be
derived from operations in the United Kingdom, and we intend to translate sales and other results denominated in foreign currency into U.S. dollars for our consolidated financial statements. During periods of a strengthening U.S. dollar, our
reported international sales and net earnings could be reduced because foreign currencies may translate into fewer U.S. dollars.
In all
jurisdictions in which we operate, we are also subject to laws and regulations that govern foreign investment, foreign trade and currency exchange transactions. These laws and regulations may limit our ability to repatriate cash as dividends or
otherwise to the United States and may limit our ability to convert foreign currency cash flows into U.S. dollars.
We incurred significant
transaction and acquisition-related costs in connection with the acquisition of Partnerships in Care.
We incurred substantial
costs in connection with the acquisition of Partnerships in Care, including approximately $16.0 million in transaction-related expenses. In addition, we may incur additional costs to maintain employee morale and to retain key employees, and we will
incur substantial fees and costs related to formulating and executing integration plans. Although we expect that the elimination of duplicative costs, as well as the realization of other efficiencies related to the integration of the businesses,
should allow us to more than offset incremental transaction and acquisition-related costs over time, this net benefit may not be achieved in the near term, or at all.
We made certain assumptions relating to the acquisition of Partnerships in Care in our forecasts that may prove to be materially inaccurate.
We made certain assumptions relating to the forecast level of cost savings, synergies and associated costs of the acquisition of
Partnerships in Care. Our assumptions relating to the forecast level of cost savings, synergies and associated costs of the acquisition of Partnerships in Care may be inaccurate based on the information available to us, including as the result of
the failure to realize the
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expected benefits of the acquisition of Partnerships in Care, higher than expected transaction and integration costs and unknown liabilities as well as general economic and business conditions
that may adversely affect the combined company following the acquisition of Partnerships in Care. In addition, Partnerships in Care was operating at a net loss for the year ended December 31, 2013 and for the six months ended June 30,
2014, which may impact our ability to achieve synergies and profitability from the acquisition of Partnerships in Care in the near term.
We are
subject to taxation in certain foreign jurisdictions following the acquisition of Partnerships in Care. Any adverse development in the tax laws of such jurisdictions or any disagreement with our tax positions could have a material adverse effect on
our business, financial condition or results of operations. In addition, our effective tax rate could change materially as a result of certain changes in our mix of United States and foreign earnings and other factors, including changes in tax laws.
We are subject to taxation in, and to the tax laws and regulations of, certain foreign jurisdictions as a result of our operations
and our corporate and financing structure after the acquisition of Partnerships in Care. Adverse developments in these tax laws or regulations, or any change in position regarding the application, administration or interpretation thereof, in any
applicable jurisdiction, could have a material adverse effect on our business, financial condition or results of operations. In addition, the tax authorities in any applicable jurisdiction may disagree with the tax treatment or characterization of
any of our transactions, which, if successfully challenged by such tax authorities, could have a material adverse effect on our business, financial condition or results of operations. Certain changes in the mix of our earnings between jurisdictions
and assumptions used in the calculation of income taxes, among other factors, could have a material adverse effect on our overall effective tax rate. In addition, legislative proposals to change the United States taxation of foreign earnings could
also increase our effective tax rate.
A worsening of the economic and employment conditions in the geographies in which we operate could materially
affect our business and future results of operations.
During periods of high unemployment, governmental entities often experience
budget deficits as a result of increased costs and lower than expected tax collections. These budget deficits at the federal, state and local levels have decreased, and may continue to decrease, spending for health and human service programs,
including Medicare and Medicaid in the United States, which are significant payor sources for our facilities. In periods of high unemployment, we also face the risk of potential declines in the population covered under private insurance, patient
decisions to postpone or decide against receiving behavioral healthcare services, potential increases in the uninsured and underinsured populations we serve and further difficulties in collecting patient co-payment and deductible receivables.
Furthermore, the availability of liquidity and capital resources to fund the continuation and expansion of many business operations worldwide
has been limited in recent years. Our ability to access the capital markets on acceptable terms may be severely restricted at a time when we would like, or need, access to those markets, which could have a negative impact on our growth plans, our
flexibility to react to changing economic and business conditions and our ability to refinance existing debt (including debt under our Amended and Restated Senior Credit Facility and Senior Notes). The recent economic downturn or other economic
conditions could also adversely affect the counterparties to our agreements, including the lenders under the Amended and Restated Senior Credit Facility, causing them to fail to meet their obligations to us.
If we fail to comply with extensive laws and government regulations, we could suffer penalties or be required to make significant changes to our
operations.
Companies operating in the behavioral healthcare industry in the United States are required to comply with extensive
and complex laws and regulations at the federal, state and local government levels relating to, among other things: billing practices and prices for services; relationships with physicians and other referral sources; necessity and quality of medical
care; condition and adequacy of facilities; qualifications of medical and support personnel; confidentiality, maintenance and security issues associated with health-related information and patient health information, or PHI; the screening,
stabilization and/or transfer of patients who have emergency medical conditions; certification, licensure and accreditation of our facilities; operating policies and procedures; activities regarding competitors; and addition or expansion of
facilities and services.
Among these laws are the anti-kickback provision of the Social Security Act, or the Anti-Kickback Statute, the
federal physician self-referral, or the Stark Law, the federal False Claims Act, or the False Claims Act, and similar state laws. These laws, and particularly the Anti-Kickback Statute and the Stark Law, impact the relationships that we may have
with physicians and other potential referral sources. We have a variety of financial relationships with physicians and other professionals who refer patients to our facilities, including employment contracts, leases and professional service
agreements. The Office of the Inspector General of the Department of Health and Human Services has issued certain exceptions and safe harbor regulations that outline practices that are deemed acceptable under the Stark Law and Anti-Kickback Statute.
While we endeavor to comply with applicable exceptions and safe harbors, certain of our current arrangements with physicians and other potential referral sources may not qualify for safe harbor protection. Failure to meet a safe harbor does not mean
that the arrangement necessarily violates the Anti-Kickback Statute, but may
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subject the arrangements to greater scrutiny. We cannot offer assurances that practices that are outside of a safe harbor will not be found to violate the Anti-Kickback Statute. Allegations of
violations of the Stark Law and Anti-Kickback Statute may be brought under the federal Civil Monetary Penalty Law, which requires a lower burden of proof than other fraud and abuse laws.
These laws and regulations are extremely complex, and, in many cases, we do not have the benefit of regulatory or judicial interpretation. In
the future, it is possible that different interpretations of these laws and regulations could subject our current or past practices to allegations of impropriety or illegality or could require us to make changes in our arrangements for facilities,
equipment, personnel, services, capital expenditure programs and operating expenses. A determination that we have violated one or more of these laws could subject us to liabilities, including civil penalties, exclusion of one or more facilities from
participation in the government healthcare programs and, for violations of certain laws and regulations, criminal penalties. Even the public announcement that we are being investigated for possible violations of these laws could cause our reputation
to suffer and have a material adverse effect on our business, financial condition or results of operations. In addition, we cannot predict whether other legislation or regulations at the federal or state level will be adopted, what form such
legislation or regulations may take or what their impact on us may be.
The construction and operation of healthcare facilities in the
United States are subject to extensive federal, state and local regulation relating to, among other things, the adequacy of medical care, equipment, personnel, operating policies and procedures, fire prevention, rate-setting, compliance with
building codes and environmental protection. Additionally, such facilities are subject to periodic inspection by government authorities to assure their continued compliance with these various standards. If we fail to adhere to these standards, we
could be subject to monetary and operational penalties.
Many of our U.S. facilities are also accredited by third-party accreditation
agencies such as The Joint Commission. If any of our existing healthcare facilities lose their accreditation or any of our new facilities fail to receive accreditation, such facilities could become ineligible to receive reimbursement under Medicare
or Medicaid.
Similarly, providers of behavioral healthcare services in the United Kingdom are also subject to a highly regulated business
environment. Failure to comply with regulations, lapses in the standards of care, the receipt of poor ratings or lower ratings, the receipt of a negative report that leads to a determination of regulatory noncompliance, or the failure to cure any
defect noted in an inspection report could lead to substantial penalties, including the loss of registration or closure of one or more facilities as well as damage to reputation.
Our facilities acquired from Partnerships in Care operate in a highly regulated business environment, which is subject to political and regulatory
scrutiny. Failure to comply with regulations or the introduction of new regulations or standards with which Partnerships in Care does not comply could lead to substantial penalties, including the loss of registration on one or more of our
facilities.
The business of the facilities acquired from Partnerships in Care is subject to a high level of regulation and
oversight, in particular from: the Care Quality Commission (CQC), the independent regulator for health and adult social care in England; Healthcare Improvement Scotland (HIS), the independent regulator for healthcare services
in Scotland; Healthcare Inspectorate Wales (HIW), the independent regulator of for all healthcare services in Wales; and Monitor, the non-departmental public body of the United Kingdom government that serves as the sector regulator for
health services in England. The regulatory requirements relevant to Partnerships in Cares business span the range of Partnerships in Cares operations from the establishment of new facilities, which are subject to registration
requirements, to the recruitment and appointment of staff, occupational health and safety, duty of care to the people Partnerships in Care supports, administration of controlled drugs, clinical standards, conduct of Partnerships in Cares
professional and care staff and other requirements.
Inspections by regulators can be carried out on both an announced and, in most cases,
unannounced basis, depending on the specific regulatory provisions relating to the different services Partnerships in Care provides. A failure to comply with regulations in the future, the receipt of poor ratings or lower ratings, the receipt of a
negative report that leads to a determination of regulatory noncompliance, or Partnerships in Cares failure to cure any defect noted in an inspection report could result in reputational damage to Partnerships in Care, fines, or the revocation
or suspension of the registration or closure of any care facility or service. Additionally, as placing authorities monitor performance, negative changes in regulatory compliance may affect the number of referrals made to Partnerships in Care. In
addition, frequent changes are made to regulatory assessment methods.
We cannot guarantee that current laws, regulations and regulatory
assessment methodologies will not be modified or replaced in the future. Such future developments and amendments may negatively impact Partnerships in Cares operations which could have a material adverse effect on Partnerships in Cares
business, results of operations, financial condition or prospects.
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Our business in the United Kingdom relies upon maintaining strong relationships with commissioners employed
by publicly funded entities and any reorganization of such publicly funded entities may result in the loss of those relationships.
The relationships that the sales and marketing function of our facilities in the United Kingdom holds with commissioners is a key driver of
referrals to such facilities. Should there be a major reorganization of publicly funded entities, such as the NHS reorganization announced in 2010 and implemented between 2012 and 2013, we may need to rebuild such relationships which could result in
a decrease in the number of referrals made to the Partnerships in Care facilities, which could have a corresponding material adverse effect on our business, results of operations, financial condition or prospects.
We may be required to spend substantial amounts to comply with statutes and regulations relating to privacy and security of patient health information.
There are currently numerous legislative and regulatory initiatives in both the U.S. and the United Kingdom addressing patient
privacy and information security concerns. In particular, federal regulations issued under HIPAA require our U.S. facilities to comply with standards to protect the privacy, security and integrity of PHI. These regulations have imposed extensive
administrative requirements, technical and physical information security requirements, restrictions on the use and disclosure of PHI and related financial information and have provided patients with additional rights with respect to their health
information. Compliance with these regulations requires substantial expenditures, which could negatively impact our business, financial condition or results of operations. In addition, our management has spent, and may spend in the future,
substantial time and effort on compliance measures.
Violations of the privacy and security regulations could subject our operations to
substantial civil monetary penalties and substantial other costs and penalties associated with a breach of data security, including criminal penalties.
We may be subject to liabilities from claims brought against our facilities.
We are subject to medical malpractice lawsuits and other legal actions in the ordinary course of business. Some of these actions may involve
large claims, as well as significant defense costs. We cannot predict the outcome of these lawsuits or the effect that findings in such lawsuits may have on us. All professional and general liability insurance we purchase is subject to policy
limitations. Management believes that, based on our past experience and actuarial estimates, our insurance coverage is adequate considering the claims arising from the operations of our facilities. While we continuously monitor our coverage, our
ultimate liability for professional and general liability claims could change materially from our current estimates. If such policy limitations should be partially or fully exhausted in the future, or payments of claims exceed our estimates or are
not covered by our insurance, it could have a material adverse effect on our business, financial condition or results of operations.
We have been
and could become the subject of governmental investigations, regulatory actions and whistleblower lawsuits.
Healthcare companies
in both the United States and the United Kingdom are subject to numerous investigations by various governmental agencies. Certain of our facilities have received, and other facilities may receive, government inquiries from, and may be subject to
investigation by, governmental agencies. Depending on whether the underlying conduct in these or future inquiries or investigations could be considered systemic, their resolution could have a material adverse effect on our business, financial
condition and results of operations.
Further, under the federal False Claims Act, private parties are permitted to bring qui tam or
whistleblower lawsuits against companies that submit false claims for payments to, or improperly retain overpayments from, the government. Because qui tam lawsuits are filed under seal, we could be named in one or more such lawsuits of
which we are not aware.
We are subject to uncertainties regarding recent health reform and budget legislation.
The expansion of health insurance coverage in the United States under the Patient Protection and Affordable Care Act and the Reconciliation
Act, or, collectively, the Health Reform Legislation, may increase the number of patients using our facilities who have either private or public program coverage. In addition, a disproportionately large percentage of new Medicaid coverage is likely
to be in states that currently have relatively low income eligibility requirements and may include states where we have facilities. Furthermore, as a result of the Health Reform Legislation, there may be a reduction in uninsured patients, which
should reduce our expense from uncollectible accounts receivable.
Notwithstanding the foregoing, the Health Reform Legislation makes a
number of other changes to Medicare and Medicaid which management believes may have an adverse impact on us. The various provisions in the Health Reform Legislation that directly or indirectly affect reimbursement are scheduled to take effect over a
number of years. Health Reform Legislation provisions are likely to be affected by the incomplete nature of implementing regulations or expected forthcoming interpretive guidance, gradual implementation or future legislation. Further, Health Reform
Legislation provisions, such as those creating the Medicare Shared Savings Program and the Independent Payment Advisory Board, create certain flexibilities in how healthcare may be reimbursed by federal programs in the future. Thus, we cannot
predict the impact of the Health Reform Legislation on our future reimbursement at this time.
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The Health Reform Legislation also contains provisions aimed at reducing fraud and abuse in
healthcare. The Health Reform Legislation amends several existing laws, including the federal Anti-Kickback Statute and the False Claims Act, making it easier for government agencies and private plaintiffs to prevail in lawsuits brought against
healthcare providers. Congress revised the intent requirement of the Anti-Kickback Statute to provide that a person is not required to have actual knowledge or specific intent to commit a violation of the Anti-Kickback Statute in order to be found
guilty of violating such law. The Health Reform Legislation also provides that any claims for items or services that violate the Anti-Kickback Statute are also considered false claims for purposes of the federal civil False Claims Act. The Health
Reform Legislation provides that a healthcare provider that knowingly retains an overpayment in excess of 60 days is subject to the federal civil False Claims Act.
The impact of the Health Reform Legislation on each of our facilities may vary. We cannot predict the impact the Health Reform Legislation may
have on our business, results of operations, cash flow, capital resources and liquidity, or whether we will be able to adapt successfully to the changes required by the Health Reform Legislation.
We are similarly unable to guarantee that current United Kingdom laws, regulations and regulatory assessment methodologies will not be
modified or replaced in the future. Additionally, there is a risk that budget constraints, public spending cuts (such as the cuts announced by the United Kingdom government in the 2010 Comprehensive Spending Review and implemented in the 2011 and
2012 government budgets) or other financial pressures could cause NHS to reduce funding for the types of services that Partnerships in Care provides. Such policy changes in the United Kingdom could lead to fewer services being purchased by publicly
funded entities or material changes being made to their procurement practices, any of which could materially reduce Partnerships in Cares revenue. These and other future developments and amendments may negatively impact our operations, which
could have a material adverse effect on our business, financial condition or results of operations.
We operate in a highly competitive industry,
and competition may lead to declines in patient volumes.
The healthcare industry is highly competitive, and competition among
healthcare providers (including hospitals) for patients, physicians and other healthcare professionals has intensified in recent years. There are other healthcare facilities that provide behavioral and other mental health services comparable to at
least some of those offered by our facilities in each of the geographical areas in which we operate. Some of our competitors are owned by tax-supported governmental agencies or by nonprofit corporations and may have certain financial advantages not
available to us, including endowments, charitable contributions, tax-exempt financing and exemptions from sales, property and income taxes.
If our competitors are better able to attract patients, recruit and retain physicians and other healthcare professionals, expand services or
obtain favorable managed care contracts at their facilities, we may experience a decline in patient volume and our results of operations may be adversely affected.
NHS is the principal provider of secure mental healthcare services in the United Kingdom, with approximately 70% of the totals beds in the
United Kingdom. As the preferred provider, there is a bias toward referrals to NHS, and therefore NHS facilities have maintained high occupancy rates. As a result of budget constraints, independent operators have emerged to satisfy the demand for
mental health services not supplied by NHS. We face competition in the United Kingdom from other independent sector providers and publicly funded entities for individuals requiring care and for appropriate sites on which to develop or expand
facilities in the United Kingdom. Should we fail to compete effectively with our peers and competitors in the industry, or if the competitive environment intensifies, individuals may be referred elsewhere for services that we provide, negatively
impacting our ability to secure referrals and limiting the expansion of our business.
The trend by insurance companies and managed care
organizations to enter into sole-source contracts may limit our ability to obtain patients.
Insurance companies and managed care
organizations in the United States are entering into sole-source contracts with healthcare providers, which could limit our ability to obtain patients since we do not offer the range of services required for these contracts. Moreover, private
insurers, managed care organizations and, to a lesser extent, Medicaid and Medicare, are beginning to carve-out specific services, including mental health and substance abuse services, and establish small, specialized networks of providers for such
services at fixed reimbursement rates. Continued growth in the use of carve-out arrangements could materially adversely affect our business to the extent we are not selected to participate in such networks or if the reimbursement rate is not
adequate to cover the cost of providing the service.
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Our performance depends on our ability to recruit and retain quality psychiatrists and other physicians.
The success and competitive advantage of our facilities depends, in part, on the number and quality of the psychiatrists and other
physicians on the medical staffs of our facilities and our maintenance of good relations with those medical professionals. Although we employ psychiatrists and other physicians at many of our facilities, psychiatrists and other physicians generally
are not employees of our facilities, and, in a number of our markets, they have admitting privileges at competing hospitals providing acute or inpatient behavioral health services. Such physicians (including psychiatrists) may terminate their
affiliation with us at any time or admit their patients to competing healthcare facilities or hospitals. If we are unable to attract and retain sufficient numbers of quality psychiatrists and other physicians by providing adequate support personnel
and facilities that meet the needs of those psychiatrists and other physicians, they may stop referring patients to our facilities and our results of operations may decline.
It may become difficult for us to attract and retain an adequate number of psychiatrists and other physicians to practice in certain of the
communities in which our facilities are located. Our failure to recruit psychiatrists and other physicians to these communities or the loss of such medical professionals in these communities could make it more difficult to attract patients to our
facilities and thereby may have a material adverse effect on our business, financial condition or results of operations. Additionally, our ability to recruit psychiatrists and other physicians is closely regulated. The form, amount and duration of
assistance we can provide to recruited psychiatrists and other physicians is limited by the Stark Law, the Anti-Kickback Statute, state anti-kickback statutes, and related regulations. For example, the Stark Law requires, among other things, that
recruitment assistance can be provided only to psychiatrists and other physicians who meet certain geographic and practice relocation requirements, that the amount of assistance cannot be changed during the term of the recruitment agreement, and
that the recruitment payments cannot generally benefit psychiatrists and other physicians currently in practice in the community beyond recruitment costs actually incurred by them.
Our facilities face competition for staffing that may increase our labor costs and reduce our profitability.
Our operations depend on the efforts, abilities, and experience of our management and medical support personnel, including our therapists,
nurses, pharmacists and mental health technicians, as well as our psychiatrists and other professionals. We compete with other healthcare providers in recruiting and retaining qualified management, physicians (including psychiatrists) and support
personnel responsible for the daily operations of our business, financial condition or results of operations.
The nationwide shortage of
nurses and other medical support personnel in the United States has been a significant operating issue facing us and other healthcare providers. This shortage may require us to enhance wages and benefits to recruit and retain nurses and other
medical support personnel or require us to hire more expensive temporary or contract personnel. In addition, certain of our facilities are required to maintain specified staffing levels. To the extent we cannot meet those levels, we may be required
to limit the services provided by these facilities, which would have a corresponding adverse effect on our net operating revenues.
Increased labor union activity is another factor that could adversely affect our labor costs. As of June 30, 2014, labor unions
represented employees at only six of our 52 facilities. With the acquisition of Partnerships in Care, the Royal College of Nursing represents nursing employees at all of our facilities in the United Kingdom. To the extent that a greater portion of
our employee base unionizes, it is possible that our labor costs could increase materially.
We cannot predict the degree to which we will
be affected by the future availability or cost of attracting and retaining talented medical support staff. If our general labor and related expenses increase, we may not be able to raise our rates correspondingly. Our failure either to recruit and
retain qualified management, psychiatrists, therapists, nurses and other medical support personnel or control our labor costs could have a material adverse effect on our results of operations.
We depend heavily on key management personnel, and the departure of one or more of our key executives or a significant portion of our local facility
management personnel could harm our business.
The expertise and efforts of our senior executives and the chief executive officer,
chief financial officer, medical director, physicians and other key members of our facility management personnel are critical to the success of our business. The loss of the services of one or more of our senior executives or of a significant
portion of our facility management personnel could significantly undermine our management expertise and our ability to provide efficient, quality healthcare services at our facilities, which could harm our business.
The Partnerships in Care senior management team was important to our acquisition of Partnerships in Care. The loss of members of the
Partnerships in Care management team could impact our ability to successfully integrate and operate the Partnerships in Care facilities and business.
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We could face risks associated with, or arising out of, environmental, health and safety laws and
regulations.
We are subject to various federal, state and local laws and regulations that:
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regulate certain activities and operations that may have environmental or health and safety effects, such as the generation, handling and disposal of medical wastes;
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impose liability for costs of cleaning up, and damages to natural resources from, past spills, waste disposals on and off-site, or other releases of hazardous materials or regulated substances; and
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regulate workplace safety.
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Compliance with these laws and regulations could increase our
costs of operation. Violation of these laws may subject us to significant fines, penalties or disposal costs, which could negatively impact our results of operations, financial condition or cash flows. We could be responsible for the investigation
and remediation of environmental conditions at currently or formerly operated or leased sites, as well as for associated liabilities, including liabilities for natural resource damages, third party property damage or personal injury resulting from
lawsuits that could be brought by the government or private litigants, relating to our operations, the operations of facilities or the land on which our facilities are located. We may be subject to these liabilities regardless of whether we lease or
own the facility, and regardless of whether such environmental conditions were created by us or by a prior owner or tenant, or by a third party or a neighboring facility whose operations may have affected such facility or land. That is because
liability for contamination under certain environmental laws can be imposed on current or past owners or operators of a site without regard to fault. We cannot assure you that environmental conditions relating to our prior, existing or future sites
or those of predecessor companies whose liabilities we may have assumed or acquired will not have a material adverse effect on our business, financial condition or results of operations.
State efforts to regulate the construction or expansion of healthcare facilities in the United States could impair our ability to operate and expand our
operations.
A majority of the states in which we operate facilities in the United States have enacted certificate of need, or CON,
laws that regulate the construction or expansion of healthcare facilities, certain capital expenditures or changes in services or bed capacity. In giving approval for these actions, these states consider the need for additional or expanded
healthcare facilities or services. Our failure to obtain necessary state approval could (i) result in our inability to acquire a targeted facility, complete a desired expansion or make a desired replacement, (ii) make a facility ineligible
to receive reimbursement under the Medicare or Medicaid programs or (iii) result in the revocation of a facilitys license or impose civil or criminal penalties on us, any of which could harm our business.
In addition, significant CON reforms have been proposed in a number of states that would increase the capital spending thresholds and provide
exemptions of various services from review requirements. In the past, we have not experienced any material adverse effects from such requirements, but we cannot predict the impact of these changes upon our operations.
We may be unable to extend leases at expiration, which could harm our business, financial condition or results of operations.
We lease the real property on which a number of our facilities are located. Our lease agreements generally give us the right to renew or extend
the term of the leases and, in certain cases, purchase the real property. These renewal and purchase rights generally are based upon either prescribed formulas or fair market value. Management expects to renew, extend or exercise purchase options
with respect to our leases in the normal course of business; however, there can be no assurance that these rights will be exercised in the future or that we will be able to satisfy the conditions precedent to exercising any such renewal, extension
or purchase options. Furthermore, the terms of any such options that are based on fair market value are inherently uncertain and could be unacceptable or unfavorable to us depending on the circumstances at the time of exercise. If we are not able to
renew or extend our existing leases, or purchase the real property subject to such leases, at or prior to the end of the existing lease terms, or if the terms of such options are unfavorable or unacceptable to us, our business, financial condition
or results of operations could be adversely affected.
Controls designed to reduce inpatient services may reduce our revenues.
Controls imposed by Medicare, Medicaid and commercial third-party payors designed to reduce admissions and lengths of stay, commonly referred
to as utilization review, have affected and are expected to continue to affect our facilities. Inpatient utilization, average lengths of stay and occupancy rates continue to be negatively affected by payor-required preadmission
authorization and utilization review and by payor pressure to maximize outpatient and alternative healthcare delivery services for less acutely ill patients. Efforts to impose more stringent cost controls are expected to continue. For example, the
Health Reform Legislation potentially expands the use of prepayment review by Medicare contractors by eliminating statutory restrictions on its use. Utilization review is also a requirement of most non-governmental managed-care organizations and
other third party payors. Although we are unable to predict the effect these controls and changes will have on our operations, significant limits on the scope of services reimbursed and on reimbursement rates and fees could have a material adverse
effect on our financial condition and results of operations.
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Additionally, the outsourcing of behavioral health care to the private sector is a relatively
recent development in the United Kingdom. There has been some opposition to outsourcing. While we anticipate that NHS will continue to rely increasingly upon outsourcing, we cannot assure you that the outsourcing trend will continue. The absence of
future growth in the outsourcing of behavioral healthcare services could have a material adverse impact on our business, financial condition and results of operations.
Although we have facilities in 24 states, the United Kingdom and Puerto Rico, we have substantial operations in each of the United Kingdom, Arkansas,
Mississippi and Tennessee, which makes us especially sensitive to regulatory, economic, environmental and competitive conditions and changes in those locations.
On a pro forma basis at June 30, 2014, we operated 75 facilities, 33 of which are located in the United Kingdom, Arkansas, Mississippi and
Tennessee. Our revenues in those facilities represented approximately 48% of our revenue for the twelve months ended June 30, 2014. This concentration makes us particularly sensitive to legislative, regulatory, economic, environmental and
competition changes in those locations. Any material change in the current payment programs or regulatory, economic, environmental or competitive conditions in these locations could have a disproportionate effect on our overall business results.
In addition, some of our facilities are located in hurricane-prone areas. In the past, hurricanes have had a disruptive effect on the
operations of facilities and the patient populations in hurricane-prone areas. Our business activities could be significantly disrupted by a particularly active hurricane season or even a single storm, and our property insurance may not be adequate
to cover losses from such storms or other natural disasters.
We are required to treat patients with emergency medical conditions regardless of
ability to pay.
In accordance with our internal policies and procedures, as well as the Emergency Medical Treatment and Active
Labor Act, or EMTALA, we provide a medical screening examination to any individual who comes to one of our hospitals while in active labor and/or seeking medical treatment (whether or not such individual is eligible for insurance benefits and
regardless of ability to pay) to determine if such individual has an emergency medical condition. If it is determined that such person has an emergency medical condition, we provide such further medical examination and treatment as is required to
stabilize the patients medical condition, within the facilitys capability, or arrange for transfer of such individual to another medical facility in accordance with applicable law and the treating hospitals written procedures. Our
obligations under EMTALA may increase substantially; Centers for Medicare and Medicaid Services has recently sought stakeholder comments concerning the potential applicability of EMTALA to hospital inpatients and the responsibilities of hospitals
with specialized capabilities, such as ours, to accept the transfer of such patients. If the number of indigent and charity care patients with emergency medical conditions we treat increases significantly, or if regulations expanding our obligations
to inpatients under EMTALA are proposed and adopted, our results of operations may be harmed.
An increase in uninsured or underinsured patients or
the deterioration in the collectability of the accounts of such patients could harm our results of operations.
Collection of
receivables from third-party payors and patients is critical to our operating performance. Our primary collection risks relate to uninsured patients and the portion of the bill that is the patients responsibility, which primarily includes
co-payments and deductibles. We estimate our provisions for doubtful accounts based on general factors such as payor source, the agings of the receivables and historical collection experience. At June 30, 2014, our allowance for doubtful
accounts represented approximately 18% of our accounts receivable balance as of such date. We routinely review accounts receivable balances in conjunction with these factors and other economic conditions that might ultimately affect the
collectability of the patient accounts and make adjustments to our allowances as warranted. Significant changes in business office operations, payor mix, economic conditions or trends in federal and state governmental health coverage (including
implementation of the Health Reform Legislation) could affect our collection of accounts receivable, cash flow and results of operations. If we experience unexpected increases in the growth of uninsured and underinsured patients or in bad debt
expenses, our results of operations will be harmed.
A cyber security incident could cause a violation of HIPAA and other privacy laws and
regulations or result in a loss of confidential data.
A cyber-attack that bypasses our information technology, or IT, security
systems causing an IT security breach, loss of PHI or other data subject to privacy laws, loss of proprietary business information, or a material disruption of our IT business systems, could have a material adverse impact on our business, financial
condition or results of operations. In addition, our future results of operations, as well as our reputation, could be adversely impacted by theft, destruction, loss, or misappropriation of PHI, other confidential data or proprietary business
information.
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Failure to maintain effective internal control over financial reporting in accordance with Section 404
of Sarbanes-Oxley, could have a material adverse effect on our business.
We are required to maintain internal control over
financial reporting under Section 404 of Sarbanes-Oxley. If we are unable to maintain adequate internal control over financial reporting, we may be unable to report our financial information on a timely basis, may suffer adverse regulatory
consequences or violations of NASDAQ listing rules and may breach the covenants under our financing arrangements. There could also be a negative reaction in the financial markets due to a loss of investor confidence in us and the reliability of our
financial statements. Confidence in our financial statements is also likely to suffer if we or our independent registered public accounting firm report a material weakness in our internal control over financial reporting.
As part of the acquisition of Partnerships in Care, we assumed Partnerships in Cares existing pension plans and a defined contribution plan and
are responsible for an underfunded pension liability. In addition, we may be required to increase funding of the pension plans and/or be subject to restrictions on the use of excess cash.
Partnerships in Care is the sponsor of a defined benefit pension plan (the Partnerships in Care Limited Pension and Life Assurance Plan) that
covers approximately 187 members in the United Kingdom, most of whom are inactive and retired former employees. As of May 1, 2005, this plan was closed to new participants but then-current participants continue to accrue benefits. As of
December 31, 2013, the net deficit recognized under UK GAAP in respect of this scheme was £4.9 million. Although this underfunded position was considered in determining the purchase price for Partnerships in Care, it may adversely
affect the combined company as follows:
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Laws and regulations normally require a new funding plan to be agreed upon every three years, with the next new funding plan to be agreed upon with the plan trustees by March 2015. Changes in actuarial assumptions,
including future discount, inflation and interest rates, investment returns and mortality rates, may increase the underfunded position of the pension plan and cause the combined company to increase its contributions to the pension plan to cover
underfunded liabilities.
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The pension plan is regulated in the United Kingdom, and trustees represent the interests of covered workers. Laws and regulations could create an immediate funding obligation to the pension plan which could be
significantly greater than the £5 million assumed for accounting purposes as of December 31, 2013, and could impact the ability to use Partnerships in Cares existing cash or the combined companys future excess cash to
grow the business or finance other obligations. The use of Partnerships in Cares cash and future cash flows beyond the operation of Partnerships in Cares business or the satisfaction of Partnerships in Cares obligations would
require negotiations with the trustees and regulators.
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We also assumed an additional pension plan (the Federated Pension
Plan), of which fewer than five Partnerships in Care employees are participants, and a defined contribution plan (the Partnerships in Care Limited New Generation Personal Pension) under which participants receive contributions as a proportion of
earnings. Maintenance of these plans may result in additional expenses. Termination of these plans could have an adverse impact on employee relations and a material adverse effect on our financial results.
Future sales of common stock by our existing stockholders may cause our stock price to fall.
The market price of our common stock could decline as a result of sales by our existing stockholders in the market, or the perception that
these sales could occur. These sales might also make it more difficult for us to sell equity securities at a time and price that we deem appropriate.
Waud Capital Partners, L.L.C. (Waud Capital Partners) and certain of its affiliates, along with certain members of our management,
have certain demand and piggyback registration rights with respect to shares of our common stock beneficially owned by them. The presence of additional shares of our common stock trading in the public market, as a result of the exercise of such
registration rights, may have an adverse effect on the market price of our securities.
If securities or industry analysts do not publish research
or reports about our business, if they were to change their recommendations regarding our stock adversely or if our operating results do not meet their expectations, our stock price and trading volume could decline.
The trading market for our common stock will be influenced by the research and reports that industry or securities analysts publish about us.
If one or more of these analysts cease coverage of us or fail to publish regular reports on us, we could lose visibility in the financial markets, which in turn could cause our stock price or trading volume to decline. Moreover, if one or more of
the analysts who cover us downgrade our stock or if our operating results do not meet their expectations, our stock price could decline.
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We incur substantial costs as a result of being a public company.
As a public company, we incur significant legal, accounting, insurance and other expenses, including costs associated with public company
reporting requirements. We incur costs associated with complying with the requirements of the Sarbanes-Oxley Act of 2002, or Sarbanes-Oxley, the Dodd-Frank Wall Street Reform and Consumer Protection Act, or the Dodd-Frank Act, and related rules
implemented by the SEC and NASDAQ. Enacted in July 2010, the Dodd-Frank Act contains significant corporate governance and executive compensation-related provisions, some of which the SEC has recently implemented by adopting additional rules and
regulations in areas such as executive compensation. The expenses incurred by public companies generally for reporting and corporate governance purposes have been increasing. Management expects these laws and regulations to increase our legal and
financial compliance costs and to make some activities more time consuming and costly, although management is currently unable to estimate these costs with any degree of certainty. These laws and regulations could make it more difficult or costly
for us to obtain certain types of insurance, including director and officer liability insurance, and we may be forced to accept reduced policy limits and coverage or incur substantially higher costs to obtain the same or similar coverage. These laws
and regulations could also make it more difficult for us to attract and retain qualified persons to serve on our board of directors, our board committees or as our executive officers. Furthermore, if we are unable to satisfy our obligations as a
public company, we could be subject to delisting of our common stock, fines, sanctions and other regulatory action and potentially civil litigation.
We are party to a stockholders agreement with Waud Capital Partners which provides it with certain rights over Company matters.
Waud Capital Partners owns approximately 19.7% of our outstanding common stock. In accordance with the terms of the stockholders agreement
among Waud Capital Partners, Acadia and certain current and former members of our management, for so long as Waud Capital Partners owns at least 17.5% of our outstanding common stock, it is entitled to designate the pro rata number of our directors
that is proportional (but rounded up to the nearest whole number) to its percentage ownership of our outstanding common stock, subject to the NASDAQ rules regarding director independence, and has consent rights to many corporate actions, such as
issuing equity or debt securities, paying dividends, acquiring any interest in another company and materially changing our business activities. It is possible that the interests of Waud Capital Partners may in some circumstances conflict with our
interests and the interests of our stockholders.
Provisions of our charter documents or Delaware law could delay or prevent an acquisition of us,
even if the acquisition would be beneficial to our stockholders, and could make it more difficult for stockholders to change management.
Provisions of our amended and restated certificate of incorporation and amended and restated bylaws may discourage, delay or prevent a merger,
acquisition or other change in control that stockholders may consider favorable, including transactions in which stockholders might otherwise receive a premium for their shares. This is because these provisions may prevent or frustrate attempts by
stockholders to replace or remove our management. These provisions include:
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a classified board of directors;
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a prohibition on stockholder action through written consent;
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a requirement that special meetings of stockholders be called only upon a resolution approved by a majority of our directors then in office;
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advance notice requirements for stockholder proposals and nominations; and
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the authority of the board of directors to issue preferred stock with such terms as the board of directors may determine.
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Section 203 of the Delaware General Corporation Law (DGCL) prohibits a publicly-held Delaware corporation from engaging in a business
combination with an interested stockholder, generally a person that together with its affiliates owns or within the last three years has owned 15% of voting stock, for a period of three years after the date of the transaction in which the person
became an interested stockholder, unless the business combination is approved in a prescribed manner. Although we have elected not to be subject to Section 203 of the DGCL, our amended and restated certificate of incorporation contains
provisions that have the same effect as Section 203, except that they provide that Waud Capital Partners, its affiliates and any investment fund managed by Waud Capital Partners and any persons to whom Waud Capital Partners sells at least five
percent (5%) of our outstanding voting stock will be deemed to have been approved by our board of directors, and thereby not subject to the restrictions set forth in our amended and restated certificate of incorporation that have the same
effect as Section 203 of the DGCL. Accordingly, the provision in our amended and restated certificate of incorporation that adopts a modified version of Section 203 of the DGCL may discourage, delay or prevent a change in control of us.
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As a result of these provisions in our charter documents and Delaware law, the price investors
may be willing to pay in the future for shares of our common stock may be limited.
We do not anticipate paying any cash dividends in the
foreseeable future.
We intend to retain our future earnings, if any, for use in our business or for other corporate purposes and
do not anticipate that cash dividends with respect to common stock will be paid in the foreseeable future. Any decision as to the future payment of dividends will depend on our results of operations, financial position and such other factors as our
board of directors, in its discretion, deems relevant. In addition, the terms of our debt substantially limit our ability to pay dividends. As a result, capital appreciation, if any, of our common stock will be a stockholders sole source of
gain for the foreseeable future.