<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON MARCH 24, 1997
REGISTRATION NO. 333-
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C 20549
---------------
FORM S-4
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
---------------
RAMSAY HEALTH CARE, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
---------------
DELAWARE 63-0857352 8063
(STATE OR OTHER (I.R.S. EMPLOYER (PRIMARY STANDARD
JURISDICTION IDENTIFICATION NO.) INDUSTRIAL
OF INCORPORATION OR CLASSIFICATION CODE
ORGANIZATION) NUMBER)
COLUMBUS CENTER
ONE ALHAMBRA PLAZA
SUITE 750
CORAL GABLES, FLORIDA 33134
(305) 569-6993
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER,
INCLUDING AREA CODE, OF REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
BERT G. CIBRAN
PRESIDENT
COLUMBUS CENTER
ONE ALHAMBRA PLAZA
SUITE 750
CORAL GABLES, FLORIDA 33134
(305) 569-6993
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER,
INCLUDING AREA CODE, OF AGENT FOR SERVICE)
COPIES TO:
BRADLEY P. COST, ESQ. JOHN A. SANDERS, ESQ.
HAYTHE & CURLEY RICHARD A. HEINLE, ESQ.
237 PARK AVENUE FOLEY & LARDNER
NEW YORK, NEW YORK 10017 SUITE 1800
111 NORTH ORANGE AVENUE
ORLANDO, FLORIDA 32802
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as
practicable after the effective date of this Registration Statement, approval
by the stockholders of Ramsay Managed Care, Inc. of the Agreement and Plan of
Merger attached as Appendix A to the enclosed Joint Proxy Statement/Prospectus
and approval by the stockholders of Ramsay Health Care, Inc. of the issuance
of the number of shares of common stock, $.01 par value, of Ramsay Health
Care, Inc., and the number of shares of class B preferred stock, Series 1996,
$1.00 par value, of Ramsay Health Care, Inc., contemplated by such Agreement
and Plan of Merger.
If the securities being registered on this Form are being offered in
connection with the formation of a holding company and there is compliance
with General Instruction G, check the following box. [_]
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PROPOSED
PROPOSED MAXIMUM
TITLE OF EACH MAXIMUM AGGREGATE AMOUNT OF
CLASS OF SECURITIES AMOUNT TO BE OFFERING PRICE OFFERING REGISTRATION
TO BE REGISTERED(1) REGISTERED(1) PER UNIT(2) PRICE(2) FEE
- -----------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Common Stock ($.01 par
value)............... 2,136,105 shares $3.03 $6,502,398.15 $1,970.42(3)
</TABLE>
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
(1) Based upon an assumed maximum number of shares that may be issued in the
Merger described herein. Such number is based upon the maximum number of
shares which, pursuant to the terms of the proposed Merger, may be issued
upon the Merger.
(2) Estimated solely for purposes of calculating the registration fee in
accordance with Rules 457(f)(1) and 457(f)(2) under the Securities Act of
1933, as amended, on the basis of the aggregate market value of the common
stock, $.01 par value, of Ramsay Managed Care, Inc. ("RMCI Common Stock"),
to be exchanged for the securities to be issued by the Registrant
calculated by multiplying the average of the bid and asked price per share
for the RMCI Common Stock on March 19, 1997 as reported on the OTC
Bulletin Board, times the maximum number of shares of common stock, $.01
par value, of the Registrant, issuable in the Merger plus the value of the
preferred stock, $.01 par value, of Ramsay Managed Care, Inc., to be
exchanged for the preferred stock, $1.00 par value, of the Registrant,
calculated in accordance with Rule 457(2).
(3) A filing fee in the aggregate amount of $972.35 has heretofore been paid
by the Registrant in connection with the filing of its Schedule 14A and
preliminary proxy materials.
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT
SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS
REGISTRATION STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH
SECTION 8(a) OF THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT
SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID
SECTION 8(a), MAY DETERMINE.
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
<PAGE>
RAMSAY HEALTH CARE, INC.
CROSS REFERENCE SHEET PURSUANT TO ITEM 501(B)
<TABLE>
<CAPTION>
HEADING IN JOINT
FORM S-4 ITEM NUMBER AND HEADING PROXY STATEMENT/PROSPECTUS
-------------------------------- --------------------------
<S> <C>
1.Forepart of Registration
Statement and Outside Front Forepart of Registration Statement; Outside
Cover Page of Prospectus...... Front Cover Page of Joint Proxy
Statement/Prospectus
2.Inside Front and Outside Back
Cover Pages of Prospectus..... Available Information; Table of Contents
3.Risk Factors, Ratio of Earnings
to Fixed Charges and Other Information Concerning RHCI; Selected
Information................... Consolidated Financial Information of
RHCI; Selected Consolidated Financial
Information of RMCI
4.Terms of the Transaction........ Summary; The Merger; The Merger Agreement;
Description of Capital Stock--RHCI
5.Pro Forma Financial
Information................... Summary; Pro Forma Financial Information
6.Material Contacts with the
Company Being Acquired........ The Merger
7.Additional Information Required
for Reoffering by Persons and
Parties Deemed to be
Underwriters.................. Not Applicable
8.Interests of Named Experts and
Counsel....................... Legal Matters
9.Disclosure of Commission
Position on Indemnification
for Securities Act
Liabilities................... Not Applicable
10.Information with Respect to S-3
Registrants................... Not Applicable
11.Incorporation of Certain
Information by Reference...... Not Applicable
12.Information with Respect to S-2
or S-3 Registrants............ Not Applicable
13.Incorporation of Certain Incorporation of Certain Documents by
Information by Reference...... Reference
14.Information with Respect to
Registrants Other Than S-2 or Selected Consolidated Financial Information
S-3 Registrants............... of RHCI; Information Concerning RHCI;
Management's Discussion and Analysis of
Financial Condition and Results of
Operations-- RHCI; Market Prices of RHCI
Common Stock and RMCI Common Stock
15.Information with Respect to S-3
Companies..................... Not Applicable
16.Information with Respect to S-2
or S-3 Companies.............. Not Applicable
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
HEADING IN JOINT
FORM S-4 ITEM NUMBER AND HEADING PROXY STATEMENT/PROSPECTUS
-------------------------------- --------------------------
<S> <C>
17.Information with Respect to
Companies Other Than S-2 or S- Selected Consolidated Financial Information
3 Companies................... of RMCI; Information Concerning RMCI;
Management's Discussion and Analysis of
Financial Condition and Results of
Operations-- RMCI; Market Prices of RHCI
Common Stock and RMCI Common Stock
18 Information if Proxies, Consents
or Authorizations are to be Outside Front Cover Page of Joint Proxy
Solicited..................... Statement/Prospectus; Available
Information; Summary; Introduction; The
Merger--Interests of Certain Persons in
the Merger; The Merger--Dissenters'
Rights; Information Concerning RHCI--
Management; Information Concerning RMCI--
Management
19.Information if Proxies, Consents
or Authorizations are not to
be Solicited, or in an
Exchange Offer................ Not Applicable
</TABLE>
<PAGE>
RAMSAY HEALTH CARE, INC.
COLUMBUS CENTER
ONE ALHAMBRA PLAZA
SUITE 750
CORAL GABLES, FLORIDA 33134
(305) 569-6993
March 27, 1997
To Our Stockholders:
Your Board of Directors, following the recommendation of a Special Committee
of the Board of Directors, has approved an Agreement and Plan of Merger dated
as of October 1, 1996 whereby a wholly owned subsidiary of Ramsay Health Care,
Inc. ("RHCI") will merge with and into Ramsay Managed Care, Inc. ("RMCI") in a
transaction (the "Merger") in which RMCI would become a wholly owned
subsidiary of RHCI. In the Merger, (i) each outstanding share of common stock,
$.01 par value, of RMCI, will be converted into the right to receive one-third
( 1/3) of a share of common stock, $.01 par value ("RHCI Common Stock"), of
RHCI, and (ii) each outstanding share of preferred stock, series 1996, $.01
par value, of RMCI, will be converted into the right to receive one share of
class B preferred stock, series 1996, $1.00 par value ("RHCI Series 1996
Preferred Stock"), of RHCI.
Consummation of the Merger is subject to, among other things, the approval
by the stockholders of RHCI of the issuance of the RHCI Common Stock and RHCI
Series 1996 Preferred Stock in the Merger, voting at a special meeting of
stockholders on April 18, 1997. Information concerning the special meeting,
the Merger transaction and other matters concerning RHCI and RMCI is set forth
in the accompanying proxy material. Given the importance of the Merger to RHCI
and its stockholders, I urge you to read this material carefully.
Your Board of Directors and management have carefully considered the terms
and conditions of the proposed Merger and have concluded that the Merger is in
the best interests of RHCI and its stockholders. Your Board of Directors and
management believe that, by combining the complementary strengths of RHCI and
of RMCI, the Merger will enhance the business prospects of both companies and
that stockholders will benefit from the opportunity for continued equity
participation in the combined enterprise.
Your Board of Directors has unanimously approved the Merger and recommends
that you vote FOR the issuance of the RHCI Common Stock and RHCI Series 1996
Preferred Stock in the Merger and the other proposals described in the
attached proxy materials. Since your vote is important at the special meeting
of RHCI stockholders, we ask that you promptly complete, sign, date and return
the enclosed proxy in the enclosed envelope.
I join with your Board of Directors in urging you to vote FOR the issuance
of the RHCI Common Stock and RHCI Series 1996 Preferred Stock in the Merger
and the other proposals described in the attached proxy materials.
Sincerely,
PAUL J. RAMSAY
Chairman of the Board
YOUR VOTE IS IMPORTANT
To ensure that your interests will be represented at the Meeting, whether or
not you plan to attend the Meeting, please complete, date, sign and mail your
proxy promptly in the enclosed postage-paid envelope. Stockholders who attend
the Meeting in person may revoke their proxies and vote in person if they
desire.
<PAGE>
RAMSAY HEALTH CARE, INC.
COLUMBUS CENTER
ONE ALHAMBRA PLAZA
SUITE 750
CORAL GABLES, FLORIDA 33134
(305) 569-6993
Notice of Special Meeting of Stockholders
to be held April 18, 1997
March 27, 1997
To the Stockholders of
Ramsay Health Care, Inc.:
A Special Meeting of the Stockholders of Ramsay Health Care, Inc., a
Delaware corporation ("RHCI"), will be held at The New York Palace, 455
Madison Avenue, New York, New York on April 18, 1997, at 9:30 A.M., for the
following purposes, as more fully described in the accompanying Joint Proxy
Statement/Prospectus:
1. To consider and act upon a proposal to approve, pursuant to the
requirements of the NASDAQ National Market System, the issuance of the
number of shares of (i) common stock, $.01 par value ("RHCI Common Stock"),
of RHCI, and (ii) class B preferred stock, series 1996, $1.00 par value
("RHCI Series 1996 Preferred Stock"), of RHCI, contemplated by the
Agreement and Plan of Merger dated as of October 1, 1996 (the "Merger
Agreement") among RHCI, RHCI Acquisition Corp., a Delaware corporation
("RHCI Sub"), and Ramsay Managed Care, Inc., a Delaware corporation
("RMCI") (a copy of the Merger Agreement is attached as Appendix A to the
accompanying Joint Proxy Statement/Prospectus), providing for the merger of
RHCI Sub with and into RMCI, whereupon RMCI will become a wholly owned
subsidiary of RHCI.
2. To consider and act upon a proposal to approve the Ramsay Health Care,
Inc. 1996 Long Term Incentive Plan (a copy of the 1996 Long Term Incentive
Plan is attached as Appendix E to the accompanying Joint Proxy
Statement/Prospectus).
3. To transact such other business as may properly come before the
Meeting or any adjournment or adjournments thereof.
The Board of Directors has fixed the close of business on February 28, 1997
as the record date for the determination of stockholders entitled to notice
of, and to vote at, the Meeting. A list of the stockholders entitled to vote
at the Meeting may be examined at the offices of the law firm of Haythe &
Curley located at 237 Park Avenue, New York, New York, during the ten-day
period preceding the Meeting.
By Order of the Board of Directors,
DANIEL A. SIMS
Assistant Secretary
YOUR ATTENTION IS DIRECTED TO THE ACCOMPANYING PROXY STATEMENT
You are cordially invited to attend the Meeting in person. If you do not
expect to be present, please promptly mark, sign and date the enclosed form of
Proxy and mail it in the enclosed return envelope, which requires no postage
if mailed in the United States, so that your vote can be recorded.
<PAGE>
RAMSAY MANAGED CARE, INC.
COLUMBUS CENTER
ONE ALHAMBRA PLAZA
SUITE 750
CORAL GABLES, FLORIDA 33134
(305) 569-4646
March 27, 1997
To Our Stockholders:
Your Board of Directors, following the recommendation of a Special Committee
of the Board of Directors, has approved an Agreement and Plan of Merger dated
as of October 1, 1996 whereby Ramsay Managed Care, Inc. ("RMCI") will merge
with a wholly owned subsidiary of Ramsay Health Care, Inc. ("RHCI") in a
transaction (the "Merger") in which RMCI would become a wholly owned
subsidiary of RHCI. In the Merger, (i) each outstanding share of common stock,
$.01 par value, of RMCI, will be converted into the right to receive one-third
( 1/3) of a share of common stock, $.01 par value, of RHCI, and (ii) each
outstanding share of preferred stock, series 1996, $.01 par value, of RMCI,
will be converted into the right to receive one share of class B preferred
stock, series 1996, $1.00 par value, of RHCI.
Consummation of the Merger is subject to, among other things, the approval
by the stockholders of RMCI, voting at a special meeting of stockholders on
April 18, 1997. Information concerning the special meeting, the Merger
transaction and other matters concerning RHCI and RMCI is set forth in the
accompanying proxy material. Given the importance of the Merger to RMCI and
its stockholders, I urge you to read this material carefully.
Your Board of Directors and management have carefully considered the terms
and conditions of the proposed Merger and have concluded that the Merger is in
the best interests of RMCI and its stockholders. Your Board of Directors and
management believe that, by combining the complementary strengths of RHCI and
of RMCI, the Merger will enhance the business prospects of both companies and
that stockholders will benefit from the opportunity for continued equity
participation in the combined enterprise.
Your Board of Directors has unanimously approved the Merger and recommends
that you vote FOR the Merger. Since your vote is important at the special
meeting of RMCI stockholders, we ask that you promptly complete, sign, date
and return the enclosed proxy in the enclosed envelope.
I join with your Board of Directors in urging you to vote FOR the approval
and adoption of the Agreement and Plan of Merger.
Sincerely,
PAUL J. RAMSAY
Chairman of the Board
YOUR VOTE IS IMPORTANT
To ensure that your interests will be represented at the Meeting, whether or
not you plan to attend the Meeting, please complete, date, sign and mail your
proxy promptly in the enclosed postage-paid envelope. Stockholders who attend
the Meeting in person may revoke their proxies and vote in person if they
desire.
<PAGE>
RAMSAY MANAGED CARE, INC.
COLUMBUS CENTER
ONE ALHAMBRA PLAZA
SUITE 750
CORAL GABLES, FLORIDA 33134
(305) 569-4646
Notice of Special Meeting of Stockholders
to be held April 18, 1997
March 27, 1997
To the Stockholders of
Ramsay Managed Care, Inc.:
A Special Meeting of the Stockholders of Ramsay Managed Care, Inc., a
Delaware corporation ("RMCI"), will be held at The New York Palace, 455
Madison Avenue, New York, New York on April 18, 1997, at 8:30 A.M., for the
following purposes, as more fully described in the accompanying Joint Proxy
Statement/Prospectus:
1. To consider and act upon a proposal to approve and adopt the Agreement
and Plan of Merger dated as of October 1, 1996 among Ramsay Health Care,
Inc., a Delaware corporation ("RHCI"), RHCI Acquisition Corp., a Delaware
corporation ("RHCI Sub"), and RMCI (a copy of the Agreement and Plan of
Merger is attached as Appendix A to the accompanying Joint Proxy
Statement/Prospectus), providing for the merger of RHCI Sub with and into
RMCI, whereupon RMCI will become a wholly owned subsidiary of RHCI.
2. To transact such other business as may properly come before the
Meeting or any adjournment or adjournments thereof.
The Board of Directors has fixed the close of business on February 28, 1997
as the record date for the determination of stockholders entitled to notice
of, and to vote at, the Meeting. A list of the stockholders entitled to vote
at the Meeting may be examined at the offices of the law firm of Haythe &
Curley located at 237 Park Avenue, New York, New York, during the ten-day
period preceding the Meeting.
By Order of the Board of Directors,
WARWICK D. SYPHERS
Secretary
YOUR ATTENTION IS DIRECTED TO THE ACCOMPANYING PROXY STATEMENT
You are cordially invited to attend the Meeting in person. If you do not
expect to be present, please promptly mark, sign and date the enclosed form of
Proxy and mail it in the enclosed return envelope, which requires no postage
if mailed in the United States, so that your vote can be recorded.
<PAGE>
RAMSAY MANAGED CARE, INC.
COLUMBUS CENTER
ONE ALHAMBRA PLAZA
SUITE 750
CORAL GABLES, FLORIDA 33134
----------------
RAMSAY HEALTH CARE, INC.
COLUMBUS CENTER
ONE ALHAMBRA PLAZA
SUITE 750
CORAL GABLES, FLORIDA 33134
-----------------------------------
JOINT PROXY STATEMENT/PROSPECTUS
-----------------------------------
This Joint Proxy Statement/Prospectus and the accompanying form of proxy are
being furnished in connection with the solicitation of proxies by the Boards
of Directors of Ramsay Managed Care, Inc. ("RMCI") and Ramsay Health Care,
Inc. ("RHCI") to be used at the Special Meeting of Stockholders of RMCI to be
held on April 18, 1997 (the "RMCI Meeting") and the Special Meeting of
Stockholders of RHCI to be held on April 18, 1997 (the "RHCI Meeting";
together with the RMCI Meeting, the "Meetings"). At the RMCI Meeting, the
stockholders of RMCI will consider and vote upon the Agreement and Plan of
Merger dated as of October 1, 1996 (the "Merger Agreement") among RMCI, RHCI
and RHCI Acquisition Corp., a newly formed, wholly owned subsidiary of RHCI
("RHCI Sub"). The Merger Agreement provides for the merger (the "Merger") of
RHCI Sub with and into RMCI pursuant to which RMCI will be the surviving
corporation and will become a wholly owned subsidiary of RHCI. At the RHCI
Meeting, the stockholders of RHCI will consider and vote upon a proposal (the
"Merger Proposal") to approve, pursuant to the requirements of the NASDAQ
National Market System ("NASDAQ"), the issuance of (i) the number of shares of
common stock, $.01 par value ("RHCI Common Stock"), of RHCI, and (ii) the
number of shares of class B preferred stock, series 1996, $1.00 par value
("RHCI Series 1996 Preferred Stock"), of RHCI, contemplated by the Merger
Agreement and certain other matters.
Pursuant to the terms of the Merger Agreement, (i) each share of common
stock, $.01 par value ("RMCI Common Stock"), of RMCI, outstanding as of the
time the Merger is consummated (the "Effective Time"), other than shares of
RMCI Common Stock as to which appraisal rights have been exercised, will be
converted into the right to receive one-third ( 1/3) of a share (the "Common
Stock Exchange Ratio") of RHCI Common Stock provided that cash will be paid in
lieu of fractional shares of RHCI Common Stock and (ii) each share of
preferred stock, series 1996, $.01 par value ("RMCI Series 1996 Preferred
Stock"), of RMCI, outstanding as of the Effective Time will be converted into
the right to receive one share (the "Preferred Stock Exchange Ratio", and
together with the Common Stock Exchange Ratio, the "Exchange Ratios") of RHCI
Series 1996 Preferred Stock. See "The Merger Agreement--The Merger--
Consideration to be Received in the Merger," "Description of Capital Stock--
RHCI" and "Description of Capital Stock--RMCI."
In connection with the Merger, options to acquire RMCI Common Stock issued
and outstanding immediately prior to the Merger ("RMCI Stock Options") shall
become options to purchase a number of whole shares of RHCI Common Stock
("RHCI Options") equal to the number of shares of RMCI Common Stock covered by
the RMCI Stock Options multiplied by one-third ( 1/3), at an exercise price
per share of RHCI Common Stock equal to the option exercise price of such RMCI
Stock Options multiplied by three (3). In addition, each holder of warrants to
purchase shares of RMCI Common Stock issued and outstanding immediately prior
to the Merger ("RMCI Warrants") shall, in accordance with the provisions of
the RMCI Warrants, receive upon exercise of such warrants, in lieu of the
number of shares of RMCI Common Stock provided for by such warrants, that
number of whole shares of RHCI Common Stock equal to the product of
<PAGE>
one-third ( 1/3) multiplied by the number of shares of RMCI Common Stock
subject to such RMCI Warrants, at an exercise price per share of RHCI Common
Stock equal to the warrant exercise price of such RMCI Warrants multiplied by
three (3). See "The Merger Agreement--The Merger--Stock Options and Warrants."
On March 19, 1997, the closing sales price of the RHCI Common Stock as
reported on NASDAQ was $4.19 and the closing bid price of the RMCI Common
Stock as reported on the OTC Bulletin Board was $1.00. As of the RMCI Record
Date (as hereinafter defined), there were outstanding 6,408,315 shares of RMCI
Common Stock and 100,000 shares of RMCI Series 1996 Preferred Stock. Based
upon the number of shares of RMCI Common Stock and RMCI Series 1996 Preferred
Stock outstanding on the RMCI Record Date, in the Merger, RHCI will issue an
aggregate of 2,136,105 shares of RHCI Common Stock and 100,000 shares of RHCI
Series 1996 Preferred Stock (which shares will be convertible into an
aggregate of 1,000,000 shares of the RHCI Common Stock). Accordingly, assuming
that the Merger had occurred on March 19, 1997, the aggregate market value of
the shares of RHCI Common Stock to be issued by RHCI in the Merger (including,
for this purpose, the 1,000,000 shares of RHCI Common Stock issuable upon the
conversion of the 100,000 shares of RHCI Series 1996 Preferred Stock to be
issued in the Merger) would have been approximately $13.1 million. In
addition, as a result of the Merger, RHCI will assume an aggregate of
approximately $11 million of indebtedness (including approximately $8.8
million owed by RMCI to RHCI).
RHCI has filed a Registration Statement (the "Registration Statement") on
Form S-4 pursuant to the Securities Act of 1933, as amended (the "Securities
Act"), with the Securities and Exchange Commission (the "Commission") with
respect to the shares of RHCI Common Stock issuable in connection with the
Merger. This Joint Proxy Statement/Prospectus also constitutes the Prospectus
of RHCI filed as part of the Registration Statement. Any reference to this
document as a Joint Proxy Statement/Prospectus shall also constitute a
reference to it as such Prospectus.
The information contained herein with respect to RHCI and RMCI has been
supplied by the respective corporations. The information contained herein with
respect to the Merger is qualified in its entirety by reference to the Merger
Agreement attached hereto as Appendix A and incorporated herein by reference.
SEE "RISK FACTORS" FOR CERTAIN INFORMATION THAT SHOULD BE CONSIDERED BY RHCI
AND RMCI STOCKHOLDERS COMMENCING ON PAGE 26 AND ENDING ON PAGE 37 OF THIS
JOINT PROXY STATEMENT/PROSPECTUS.
THE SECURITIES TO BE ISSUED PURSUANT TO THIS JOINT PROXY
STATEMENT/PROSPECTUS HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION, NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED
UPON THE ACCURACY OR ADEQUACY OF THIS JOINT PROXY STATEMENT/PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
This Joint Proxy Statement/Prospectus and the accompanying forms of proxy
are first being mailed to the stockholders of both RHCI and RMCI on or about
March 27, 1997.
The date of this Joint Proxy Statement/Prospectus is March 24, 1997.
2
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
AVAILABLE INFORMATION.................................................... 1
SUMMARY.................................................................. 2
CAUTIONARY STATEMENT FOR PURPOSES OF THE SAFE HARBOR PROVISIONS OF THE
PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995........................ 25
RISK FACTORS............................................................. 26
INTRODUCTION............................................................. 38
PROPOSAL I: APPROVAL AND ADOPTION OF THE MERGER PROPOSAL AND THE MERGER
AGREEMENT............................................................... 41
THE MERGER............................................................... 41
Background of the Merger............................................... 41
Recommendations of the Boards of Directors; Reasons for the Merger..... 50
Opinions of the Financial Advisors..................................... 58
Accounting Treatment................................................... 68
Certain Federal Income Tax Consequences of the Merger.................. 68
Other Agreements....................................................... 69
Interests of Certain Persons in the Merger............................. 70
Dissenters' Rights..................................................... 76
Resale Restrictions.................................................... 78
Comparative Rights of Stockholders of RHCI and RMCI.................... 78
Antitakeover Legislation............................................... 79
THE MERGER AGREEMENT..................................................... 81
Effective Time......................................................... 81
The Merger............................................................. 81
Conditions to Consummation of the Merger............................... 84
Representations and Warranties......................................... 85
Covenants--RMCI........................................................ 85
Covenants--RHCI........................................................ 86
Covenants--RHCI and RMCI............................................... 87
Termination............................................................ 87
Amendments and Waivers................................................. 88
Fees and Expenses...................................................... 88
MARKET PRICES OF RHCI COMMON STOCK AND RMCI COMMON STOCK................. 89
DIVIDEND POLICY.......................................................... 90
PRO FORMA CONDENSED FINANCIAL INFORMATION................................ 91
SELECTED CONSOLIDATED FINANCIAL INFORMATION OF RHCI...................... 97
RHCI--MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS................................................... 98
SELECTED CONSOLIDATED FINANCIAL INFORMATION OF RMCI...................... 110
RMCI--MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS................................................... 111
INFORMATION CONCERNING RHCI
BUSINESS................................................................. 117
MANAGEMENT............................................................... 131
PRINCIPAL STOCKHOLDERS................................................... 153
INFORMATION CONCERNING RMCI
BUSINESS................................................................. 157
MANAGEMENT............................................................... 166
PRINCIPAL STOCKHOLDERS................................................... 169
</TABLE>
i
<PAGE>
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
DESCRIPTION OF CAPITAL STOCK--RHCI....................................... 172
DESCRIPTION OF CAPITAL STOCK--RMCI....................................... 174
LEGAL MATTERS............................................................ 174
EXPERTS.................................................................. 175
OTHER MATTERS SET FORTH FOR ACTION AT THE RHCI MEETING................... 176
PROPOSAL II: APPROVAL OF RAMSAY HEALTH CARE, INC. 1996 LONG TERM
INCENTIVE PLAN.......................................................... 180
PROPOSAL III: OTHER MATTERS.............................................. 180
OTHER MATTERS SET FORTH FOR ACTION AT THE RMCI MEETING................... 180
PROPOSAL II: OTHER MATTERS............................................... 180
MISCELLANEOUS............................................................ 180
Stockholder Proposals.................................................. 180
INDEX TO FINANCIAL STATEMENTS............................................ F-1
APPENDICES
Appendix A--Agreement and Plan of Merger
Appendix B--Opinion of Houlihan, Lokey, Howard & Zukin, Inc.
Appendix C--Opinion of Dean Witter Reynolds Inc.
Appendix D--Section 262 of the Delaware General Corporation Law
Appendix E--Ramsay Health Care, Inc. 1996 Long Term Incentive Plan
</TABLE>
ii
<PAGE>
AVAILABLE INFORMATION
This Joint Proxy Statement/Prospectus does not contain all the information
set forth in the Registration Statement, certain portions of which are omitted
in accordance with the Rules and Regulations of the Commission. For further
information pertaining to the RHCI Common Stock and the RMCI Common Stock,
reference is made to the Registration Statement and the exhibits thereto,
which may be inspected without charge at the public reference facilities of
the Commission, Room 1024, 450 Fifth Street, N.W., Washington, D.C. 20549, and
copies of which may be obtained from the Commission at prescribed rates. The
Registrant files reports, proxy and information statements and other
information electronically with the Commission. Statements contained in this
Joint Proxy Statement/Prospectus or in any document incorporated in this Joint
Proxy Statement/Prospectus by reference as to the contents of any contract or
other document referred to herein or therein are not necessarily complete and
in each instance reference is made to the copy of such contract or other
document filed as an exhibit to the Registration Statement or such other
document, each such statement being qualified in all respects by such
reference.
RHCI and RMCI are each subject to the informational requirements of the
Securities Exchange Act of 1934, as amended (the "Exchange Act"), and in
accordance therewith, file reports, proxy statements and other information
with the Commission. Such reports, proxy statements and other information may
be inspected and copied at the public reference facilities maintained by the
Commission at 450 Fifth Street, N.W., Washington, D.C. 20549, and at the
Commission's regional offices at 7 World Trade Center, Suite 1300, New York,
New York 10048 and Northwestern Atrium Center, 500 West Madison Street, Suite
1400, Chicago, Illinois 60661. Copies of such materials may also be obtained
from the Public Reference Section of the Commission at 450 Fifth Street, N.W.,
Washington, D.C. 20549, at prescribed rates. The Commission maintains a Web
site that contains reports, proxy and information statements and other
information regarding registrants that file electronically with the
Commission. The Commission's Web site is (http://www.sec.gov).
RHCI Common Stock is traded on the over-the-counter market on the NASDAQ
National Market System under the symbol RHCI and reports, proxy statements and
other information concerning RHCI can be inspected at the National Association
of Securities Dealers, Inc., 1735 K Street, N.W., Washington, D.C. 20006.
----------------
NO PERSON IS AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATION NOT CONTAINED IN THIS JOINT PROXY STATEMENT/PROSPECTUS IN
CONNECTION WITH THE SOLICITATION AND THE OFFERING MADE HEREBY AND, IF GIVEN OR
MADE, SUCH INFORMATION OR REPRESENTATION SHOULD NOT BE RELIED UPON AS HAVING
BEEN AUTHORIZED BY RHCI OR RMCI. THIS JOINT PROXY STATEMENT/PROSPECTUS DOES
NOT CONSTITUTE ANY OFFER TO SELL, OR A SOLICITATION OF AN OFFER TO PURCHASE,
THE SECURITIES OFFERED BY THIS JOINT PROXY STATEMENT/PROSPECTUS, OR THE
SOLICITATION OF A PROXY FROM ANY PERSON, IN ANY JURISDICTION IN WHICH IT IS
UNLAWFUL TO MAKE SUCH OFFER, SOLICITATION OF AN OFFER OR PROXY SOLICITATION.
NEITHER THE DELIVERY OF THIS JOINT PROXY STATEMENT/PROSPECTUS NOR ANY
DISTRIBUTION OF THE SECURITIES MADE UNDER THIS JOINT PROXY
STATEMENT/PROSPECTUS SHALL, UNDER ANY CIRCUMSTANCES, CREATE AN IMPLICATION
THAT THERE HAS BEEN NO CHANGE IN THE AFFAIRS OF RHCI OR RMCI SINCE THE DATE OF
THIS JOINT PROXY STATEMENT/PROSPECTUS.
1
<PAGE>
SUMMARY
The following is a brief summary of information contained elsewhere in this
Joint Proxy Statement/Prospectus. This summary does not contain a complete
description of the terms of the Merger and the other matters summarized herein
and is qualified in its entirety by reference to the full text of this Joint
Proxy Statement/Prospectus and the Appendices. Stockholders are urged to read
carefully the entire Joint Proxy Statement/Prospectus and the Appendices.
MEETINGS OF STOCKHOLDERS
RHCI
This Joint Proxy Statement/Prospectus is furnished to the holders of common
stock, $.01 par value ("RHCI Common Stock"), of Ramsay Health Care, Inc., a
Delaware corporation ("RHCI"), and to the holders of class B convertible
preferred stock, series C, $1.00 par value ("RHCI Series C Preferred Stock"),
of RHCI, in connection with the solicitation of proxies by and on behalf of the
RHCI Board of Directors (the "RHCI Board") for use at the Special Meeting of
Stockholders of RHCI (the "RHCI Meeting") to be held at 9:30 A.M. on April 18,
1997 at The New York Palace, 455 Madison Avenue, New York, New York and at any
adjournments thereof. The close of business on February 28, 1997 is the record
date (the "RHCI Record Date") for determining the stockholders of RHCI entitled
to vote at the RHCI Meeting. This Joint Proxy Statement/Prospectus and the
enclosed proxy are first being sent to holders of RHCI Common Stock and the
holders of RHCI Series C Preferred Stock on or about March 27, 1997.
All proxies that are properly executed by holders of RHCI Common Stock or
RHCI Series C Preferred Stock and received by RHCI prior to the RHCI Meeting
will be voted in accordance with the instructions noted thereon. ANY PROXY THAT
DOES NOT SPECIFY TO THE CONTRARY WILL BE VOTED IN FAVOR OF THE MERGER PROPOSAL
(AS DEFINED BELOW) AND IN FAVOR OF EACH OTHER PROPOSAL SET FORTH IN SUCH PROXY
AND PRESENTED TO THE STOCKHOLDERS OF RHCI FOR APPROVAL. Any holder of RHCI
Common Stock or RHCI Series C Preferred Stock who submits a proxy will have the
right to revoke it, at any time before it is voted, by filing with the
Secretary of RHCI written notice of revocation or a duly executed later-dated
proxy, or by attending the RHCI Meeting and voting such RHCI Common Stock or
RHCI Series C Preferred Stock in person.
Purpose of RHCI Meeting
At the RHCI Meeting, RHCI's stockholders will consider and vote upon (i) a
proposal (the "Merger Proposal") to approve, pursuant to the requirements of
the NASDAQ National Market System ("NASDAQ"), the issuance of (a) the number of
shares of RHCI Common Stock and (b) the number of shares of class B preferred
stock, series 1996, $1.00 par value ("RHCI Series 1996 Preferred Stock"),
contemplated by the Agreement and Plan of Merger dated as of October 1, 1996
(the "Merger Agreement") among RHCI, Ramsay Managed Care, Inc., a Delaware
corporation ("RMCI"), and RHCI Acquisition Corp., a Delaware corporation ("RHCI
Sub"); (ii) a proposal to approve the Ramsay Health Care, Inc. 1996 Long Term
Incentive Plan (the "1996 Long Term Incentive Plan"); and (iii) such other
business as may properly come before the RHCI Meeting or any adjournments
thereof.
Voting Requirements at RHCI Meeting
Approval and adoption of the Merger Proposal and the 1996 Long Term Incentive
Plan requires the affirmative vote of a majority of the votes cast by the
holders of RHCI Common Stock and RHCI Series C Preferred Stock (voting together
with the RHCI Common Stock as a single class on the basis of the number of
shares of RHCI Common Stock into which such RHCI Series C Preferred Stock is
convertible) entitled to vote thereon at the RHCI Meeting (at which a quorum
must be present). Abstentions and broker non-votes will be
2
<PAGE>
counted as present for the purpose of determining the presence of a quorum. For
the purpose of computing the vote required for approval of matters to be voted
on at the RHCI Meeting, shares held by stockholders who abstain from voting
will be treated as being "present" and "entitled to vote" on the matter and,
thus, an abstention has the same legal effect as a vote against the matter.
However, in the case of a broker non-vote, such shares will not be treated as
"present" and "entitled to vote" on the matter and, thus, a broker non-vote
will have no effect on the outcome of the vote on the matter.
As of the RHCI Record Date, there were 8,425,431 outstanding shares of RHCI
Common Stock, each of which is entitled to one vote with respect to each matter
to be voted on at the RHCI Meeting, and 142,486 outstanding shares of RHCI
Series C Preferred Stock, each of which is entitled to ten (10) votes (voting
together with the RHCI Common Stock as a single class) with respect to each
matter to be voted on at the RHCI Meeting. As of such date, RHCI's directors,
executive officers and corporate affiliates of Paul J. Ramsay, the Chairman of
the Board of RHCI and RMCI, owned an aggregate of 3,546,112 shares of RHCI
Common Stock (calculated as if all outstanding shares of RHCI Series C
Preferred Stock were converted in accordance with their terms into shares of
RHCI Common Stock), or approximately 36.0% of the number of issued and
outstanding shares of RHCI Common Stock (calculated as if all outstanding
shares of RHCI Series C Preferred Stock were converted in accordance with their
terms into shares of RHCI Common Stock) on the RHCI Record Date, of which Mr.
Ramsay and his corporate affiliates owned an aggregate of 3,398,054 shares of
RHCI Common Stock (calculated as aforesaid), or approximately 34.5% of the
number of issued and outstanding shares of RHCI Common Stock (calculated as
aforesaid). As of the RHCI Record Date, these corporate affiliates owned 100%
of the number of issued and outstanding shares of RHCI Series C Preferred
Stock. These directors, executive officers and corporate affiliates of Mr.
Ramsay have advised RHCI that they intend to vote or to direct the vote of all
shares of RHCI Common Stock and RHCI Series C Preferred Stock over which they
have voting power FOR approval and adoption of the Merger Proposal and the 1996
Long Term Incentive Plan. RHCI has no class or series of capital stock
outstanding other than RHCI Common Stock and RHCI Series C Preferred Stock
entitled to vote at the RHCI Meeting.
Paul J. Ramsay is the Chairman of the Board of both RHCI and RMCI. Subsequent
to the Merger (as defined below), he will remain Chairman of the Board of RHCI.
His pro forma ownership in RHCI immediately after the Effective Time (as
defined below) (assuming that the Merger was consummated on the RHCI Record
Date) would be 5,560,778 shares of RHCI Common Stock (calculated as if all
outstanding shares of RHCI Series C Preferred Stock and RHCI Series 1996
Preferred Stock (collectively, the "RHCI Preferred Stock") were converted in
accordance with their terms into shares of RHCI Common Stock), or approximately
42.8% of the number of issued and outstanding shares of RHCI Common Stock at
that time (calculated as if all outstanding shares of RHCI Preferred Stock were
converted in accordance with their terms into shares of RHCI Common Stock).
RMCI
This Joint Proxy Statement/Prospectus is furnished to the holders of common
stock, $.01 par value ("RMCI Common Stock"), of RMCI, and to the holders of
preferred stock, series 1996, $.01 par value ("RMCI Series 1996 Preferred
Stock"), of RMCI, in connection with the solicitation of proxies by and on
behalf of the RMCI Board of Directors (the "RMCI Board") for use at the Special
Meeting of Stockholders of RMCI (the "RMCI Meeting") to be held at 8:30 A.M. on
April 18, 1997 at The New York Palace, 455 Madison Avenue, New York, New York
and at any adjournments thereof. The close of business on February 28, 1997 is
the record date (the "RMCI Record Date") for determining the stockholders of
RMCI entitled to vote at the RMCI Meeting. This Joint Proxy
Statement/Prospectus and the enclosed proxy are first being sent to holders of
RMCI Common Stock and the holders of RMCI Series 1996 Preferred Stock on or
about March 27, 1997.
All proxies that are properly executed by holders of RMCI Common Stock and
RMCI Series 1996 Preferred Stock and received by RMCI prior to the RMCI Meeting
will be voted in accordance with the instructions noted
3
<PAGE>
thereon. ANY PROXY THAT DOES NOT SPECIFY TO THE CONTRARY WILL BE VOTED IN FAVOR
OF APPROVAL AND ADOPTION OF THE MERGER AGREEMENT. Any holder of RMCI Common
Stock or RMCI Series 1996 Preferred Stock who submits a proxy will have the
right to revoke it, at any time before it is voted, by filing with the
Secretary of RMCI written notice of revocation or a duly executed later-dated
proxy, or by attending the RMCI Meeting and voting such RMCI Common Stock or
RMCI Series 1996 Preferred Stock in person.
Purpose of RMCI Meeting
At the RMCI Meeting, RMCI's stockholders will consider and vote upon (i) the
approval and adoption of the Merger Agreement and (ii) such other business as
may properly come before the RMCI Meeting or any adjournments thereof.
Voting Requirements at RMCI Meeting
Approval and adoption of the Merger Agreement requires the affirmative vote
of (i) the holders of a majority of the issued and outstanding shares of RMCI
Common Stock (including for this purpose, the number of shares of RMCI Common
Stock into which the shares of RMCI Series 1996 Preferred Stock are convertible
in accordance with their terms) and (ii) the holders of a majority of the
issued and outstanding shares of RMCI Series 1996 Preferred Stock (voting as a
separate class in addition to voting together with the RMCI Common Stock as set
forth in clause (i) above). Abstentions and broker non-votes will be counted as
present for the purpose of determining the presence of a quorum. For the
purpose of computing the vote required for approval of the Merger Agreement at
the RMCI Meeting, abstentions and broker non-votes will have the same effect as
a vote against the approval and adoption of the Merger Agreement.
As of the RMCI Record Date, there were 6,408,315 outstanding shares of RMCI
Common Stock, each of which is entitled to one vote with respect to each matter
to be voted on at the RMCI Meeting, and 100,000 shares of RMCI Series 1996
Preferred Stock, each of which is convertible into thirty (30) shares of RMCI
Common Stock and is entitled to thirty (30) votes (voting together with the
RMCI Common Stock as a single class) with respect to each matter to be voted on
at the RMCI Meeting. As of such date, RMCI's directors, executive officers and
corporate affiliates of Paul J. Ramsay, the Chairman of the Board of RMCI and
RHCI, owned an aggregate of 6,718,337 shares of RMCI Common Stock (calculated
as if all outstanding shares of RMCI Series 1996 Preferred Stock were converted
in accordance with their terms into shares of RMCI Common Stock), or
approximately 71.4% of the number of issued and outstanding shares of RMCI
Common Stock (calculated as if all outstanding shares of RMCI Series 1996
Preferred Stock were converted in accordance with their terms into shares of
RMCI Common Stock) on the RMCI Record Date, of which the corporate affiliates
of Mr. Ramsay owned an aggregate of 6,488,173 shares of RMCI Common Stock
(calculated as aforesaid), or approximately 69.0% of the number of issued and
outstanding shares of RMCI Common Stock (calculated as aforesaid). As of the
RMCI Record Date, these corporate affiliates owned 100% of the number of issued
and outstanding shares of RMCI Series 1996 Preferred Stock. These directors,
executive officers and corporate affiliates of Mr. Ramsay have advised RMCI
that they intend to vote or to direct the vote of all shares of RMCI Common
Stock and RMCI Series 1996 Preferred Stock over which they have voting power
FOR approval and adoption of the Merger Agreement. RMCI has no class or series
of capital stock outstanding other than RMCI Common Stock and RMCI Series 1996
Preferred Stock entitled to vote at the RMCI Meeting.
THE COMPANIES
RHCI
RHCI offers a continuum of behavioral healthcare to patients through
integrated networks of mental health delivery systems in 12 states principally
in the southeast and southwest, organized around 16 inpatient hospitals with
1,467 licensed beds (including 77 medical subacute beds) and outpatient
centers. RHCI also manages mental health programs of certain public and private
healthcare providers under management contracts.
4
<PAGE>
RHCI currently offers a comprehensive range of behavioral health services,
including acute psychiatric inpatient treatment, less intensive inpatient
treatment (including residential), partial hospitalization treatment and group
and individual outpatient treatment programs. Each of RHCI's integrated
delivery systems is centered around a core hospital facility from which market-
responsive mental health services are arranged with and provided by physicians,
psychologists and other mental health professionals under contract or
affiliated with RHCI. Certain of these systems also manage behavioral health
services on behalf of other providers and offer medical subacute services.
RHCI's strategy is to maintain what it believes is its reputation as a high-
quality provider of behavioral health services, meeting the needs of its
patients for therapeutic care in the least restrictive setting, its payors for
cost-effective and accountable treatment programs, and its stockholders for
consistent earnings and business growth.
RHCI is a Delaware corporation with executive offices located at Columbus
Center, One Alhambra Plaza, Suite 750, Coral Gables, Florida 33134 (telephone:
(305) 569-6993). All references to RHCI include RHCI and its subsidiaries,
unless the context otherwise requires. See "Information Concerning RHCI."
RMCI
RMCI manages the delivery of mental health and substance abuse care and
provides employee assistance and mental health and substance abuse treatment
programs for and on behalf of self-insured employers, health maintenance
organizations ("HMOs"), insurance companies, governmental agencies and other
third-party payors. RMCI is an integrated managed mental healthcare services
company, in that RMCI offers a full range of related mental health services and
treatment programs designed to improve and manage the treatment delivered by
healthcare professionals employed by RMCI and by other unaffiliated parties.
RMCI's services and treatment programs range from benefit design, utilization
review, case management, quality assurance and claims processing services to
fully capitated (at-risk) mental healthcare treatment. The services and
treatment programs offered by RMCI are based on company-developed methodologies
designed to improve the quality and cost-effectiveness of mental healthcare and
substance abuse treatment.
RMCI was formed in July 1993 as a wholly owned subsidiary of RHCI and began
operations in October 1993. In April 1995, RHCI distributed all of the shares
of RMCI Common Stock held by it to RHCI's stockholders in the form of a
dividend (the "Distribution"). See "The Merger--Background of the Merger."
RMCI is a Delaware corporation with executive offices located at Columbus
Center, One Alhambra Plaza, Suite 750, Coral Gables, Florida 33134 (telephone:
(305) 569-4646). All references to RMCI include RMCI and its subsidiaries,
unless the context otherwise requires. See "Information Concerning RMCI."
RISK FACTORS
Stockholders should carefully consider the matters discussed under "Risk
Factors." The matters discussed under that caption include, but are not limited
to, the high level of indebtedness of RHCI after the Merger; lack of a working
capital facility; RHCI's history of losses; control of RHCI by affiliates of
Paul J. Ramsay; significant overlap of boards of directors of RHCI and RMCI at
the time the Merger was approved; possible adverse adjustments to
reimbursement; changes in the mental healthcare industry; failure to be
successful in the expansion into new businesses in the healthcare industry;
intense competition; extensive government regulation; and possible reduction in
and other adverse changes affecting third-party reimbursement for services
rendered.
5
<PAGE>
THE MERGER
EFFECT OF THE MERGER; CONSIDERATION
Upon consummation of the merger (the "Merger") pursuant to the Merger
Agreement, RHCI Sub will be merged with and into RMCI and RMCI will become a
wholly owned subsidiary of RHCI and (i) each share of RMCI Common Stock
outstanding immediately prior to the Effective Time of the Merger, other than
shares of RMCI Common Stock as to which appraisal rights have been exercised,
will be converted into the right to receive one-third (1/3) of a share (the
"Common Stock Exchange Ratio") of fully paid and nonassessable shares of RHCI
Common Stock, provided that cash will be paid in lieu of issuing any fractional
shares of RHCI Common Stock and (ii) each share of RMCI Series 1996 Preferred
Stock outstanding immediately prior to the Effective Time will be converted
into the right to receive one (the "Preferred Stock Exchange Ratio," and
together with the Common Stock Exchange Ratio, the "Exchange Ratios") fully
paid and nonassessable share of RHCI Series 1996 Preferred Stock. Each share of
RMCI Series 1996 Preferred Stock is currently convertible into thirty (30)
shares of RMCI Common Stock and each share is currently entitled to thirty (30)
votes, subject to adjustment in certain circumstances, on all matters put to a
vote of RMCI stockholders, voting together with the RMCI Common Stock as a
single class. Each share of RHCI Series 1996 Preferred Stock will be
convertible into ten (10) shares of RHCI Common Stock and each share will be
entitled to ten (10) votes, subject to adjustment in certain circumstances, on
all matters put to a vote of RHCI stockholders, voting together with the RHCI
Common Stock as a single class. Given the foregoing 30-to-1 conversion ratio
for the RMCI Series 1996 Preferred Stock and the foregoing 10-to-1 conversion
ratio for the RHCI Series 1996 Preferred Stock, the Preferred Stock Exchange
Ratio reflects the same relative exchange ratio as the Common Stock Exchange
Ratio in that, in the Merger, a holder of a share of RMCI Series 1996 Preferred
Stock will receive a share of RHCI Series 1996 Preferred Stock whose terms
reflect the same one-third (1/3) conversion ratio (in respect of the underlying
common stock into which such preferred stock is convertible) as is applicable
to a holder of a share of RMCI Common Stock.
The determination of the Exchange Ratios was made based upon discussions
among representatives of RHCI and RMCI, the calculation assumed equity values
for RMCI based upon standard valuation methods employing multiples of revenue
and earnings for historical and forecasted results, and the historical stock
prices for the RHCI Common Stock and the RMCI Common Stock. The determination
of the Exchange Ratios was also supported by the fairness opinions rendered by
RHCI's and RMCI's respective financial advisors. See "The Merger--Opinions of
Financial Advisors".
Assuming that the Merger was consummated on the RHCI Record Date, RHCI would
issue an aggregate of 2,136,105 shares of RHCI Common Stock and an aggregate of
100,000 shares of RHCI Series 1996 Preferred Stock in the Merger. In addition,
options to purchase RMCI Common Stock would become options to purchase an
aggregate of 391,750 shares of RHCI Common Stock and warrants to purchase RMCI
Common Stock would become warrants to purchase an aggregate of 213,333 shares
of RHCI Common Stock.
See "The Merger Agreement--The Merger--Consideration to be Received in the
Merger," "The Merger Agreement--The Merger--Fractional Shares," "Description of
Capital Stock--RHCI" and "Description of Capital Stock--RMCI."
RECOMMENDATIONS OF THE BOARDS OF DIRECTORS; REASONS FOR THE MERGER
RHCI. The RHCI Board believes that the Merger is fair to and in the best
interests of RHCI and its stockholders. Accordingly, the RHCI Board, following
the recommendation of an independent Special Committee of the RHCI Board (the
"RHCI Special Committee"), has approved and adopted the Merger and the Merger
Agreement and the RHCI Board unanimously recommends that the RHCI stockholders
vote FOR the Merger Proposal.
6
<PAGE>
The recommendation of the RHCI Board is based on a number of factors, both
those considered favorably and unfavorably by the RHCI Board, which are
discussed in detail below in the section "The Merger--Recommendations of the
Boards of Directors; Reasons for the Merger--RHCI." The factors considered
favorably include the recent consolidation trends in the mental healthcare
industry which the RHCI Board believes require RHCI to offer a broader range of
services in order to compete effectively, the RHCI Board's view that the
combination of RMCI and RHCI should enhance the combined companies' ability to
attract additional capital and to refinance the combined companies' debt, the
experience and business relationships of RMCI management which will provide
additional management depth to RHCI, and the RHCI Board's belief that the
Merger should enhance stockholder value by increasing the future market value
of RHCI Common Stock as a result of the above-described anticipated benefits to
RHCI as a result of the Merger, which benefits the RHCI Board believes should
enhance the financial condition and the results of operations of RHCI and,
accordingly, the market value of RHCI Common Stock. The RHCI Board weighed
these favorable factors against factors which the RHCI Board considered
unfavorable, but which the RHCI Board determined were significantly outweighed
by the reasons for the Merger. The unfavorable factors included the possibility
that the reconsolidation of RMCI into RHCI will be misperceived by RMCI's
customers as a method by RHCI of increasing its hospital occupancy rates with
patients from RMCI rather than RMCI arranging for a less costly alternative
treatment program. The RHCI Board also considered the risks associated with
RMCI's capitated (at-risk) managed care contracts, the amount of goodwill which
will be created as a result of the Merger, and the possible negative reaction
to the Merger owing to the timing of the Merger following the April 1995
distribution of RMCI to the stockholders of RHCI.
RMCI. The RMCI Board, following the recommendation of an independent Special
Committee of the RMCI Board (the "RMCI Special Committee"), has approved and
adopted the Merger and the Merger Agreement and the RMCI Board unanimously
recommends that RMCI's stockholders vote FOR the Merger and FOR the approval
and adoption of the Merger Agreement.
The recommendation of the RMCI Board is based on a number of factors, both
those considered favorably and unfavorably by the RMCI Board, which are
discussed in detail below in the section "The Merger--Recommendations of the
Boards of Directors; Reasons for the Merger--RMCI." The factors considered
favorably include combining RMCI's operations with RHCI in order to provide a
broader range of mental healthcare services and thereby allowing RMCI to
compete more effectively, the RMCI Board's belief that the Merger will result
in the enhancement of stockholder value by giving the RMCI stockholders the
opportunity to receive an equity interest in a larger and financially stronger
integrated mental health services company, the elimination of the significant
costs attendant to RMCI's status as a public company, and the RMCI Board's
belief that alternative courses of action were not available to RMCI at the
present time. The RMCI Board weighed these favorable factors against factors
which the RMCI Board considered unfavorable, but which the RMCI Board
determined were significantly outweighed by the reasons for the Merger. The
unfavorable factors included the extensive regulation associated with RHCI's
provider healthcare business, the adverse effects on RHCI's results which could
occur should reimbursement rates decline significantly, the size of Mr.
Ramsay's ownership of the combined company which would permit him to control
its policies, and the possible negative reaction to the Merger owing to the
timing of the Merger following the April 1995 distribution of RMCI to the
stockholders of RHCI.
OPINIONS OF FINANCIAL ADVISORS
Houlihan, Lokey, Howard & Zukin, Inc. ("Houlihan Lokey") was retained by RHCI
to render the fairness opinion described below to the RHCI Board and the RHCI
Special Committee in connection with the Merger and has delivered to the RHCI
Board and the RHCI Special Committee a written opinion, dated October 1, 1996,
to the effect that, as of the date of such opinion and based upon and subject
to certain matters stated therein, the Common Stock Exchange Ratio and the
Preferred Stock Exchange Ratio are fair, from a financial point of view,
7
<PAGE>
to RHCI. The full text of Houlihan Lokey's written opinion, which sets forth
the assumptions made, matters considered and limitations on the review
undertaken, is attached as Appendix B to this Joint Proxy Statement/Prospectus
and should be read carefully in its entirety. See "The Merger --Opinions of the
Financial Advisors--RHCI."
Dean Witter Reynolds Inc. ("Dean Witter") was retained by RMCI to render the
fairness opinion described below to the RMCI Board and the RMCI Special
Committee in connection with the Merger and has delivered to the RMCI Board and
the RMCI Special Committee a written opinion, dated October 1, 1996, to the
effect that, as of the date of such opinion and based upon and subject to
certain matters as stated therein, the Common Stock Exchange Ratio and the
Preferred Stock Exchange Ratio are fair, from a financial point of view, to the
holders of RMCI Common Stock and RMCI Series 1996 Preferred Stock,
respectively. The full text of Dean Witter's written opinion, which sets forth
the assumptions made, matters considered and limitations on the review
undertaken, is attached as Appendix C to this Joint Proxy Statement/Prospectus
and should be read carefully in its entirety. See "The Merger--Opinions of the
Financial Advisors--RMCI."
ACCOUNTING TREATMENT
The Merger will be accounted for as a purchase under generally accepted
accounting principles. See "The Merger--Accounting Treatment."
COMPARATIVE RIGHTS OF STOCKHOLDERS OF RHCI AND RMCI
Both RHCI and RMCI are Delaware corporations and, therefore, the rights of
RMCI stockholders are in general similar to the rights of RHCI stockholders. In
August 1995, RHCI adopted a rights ("poison pill") plan which has certain anti-
takeover effects. See "The Merger--Comparative Rights of Stockholders of RHCI
and RMCI."
CERTAIN FEDERAL INCOME TAX CONSEQUENCES
The Merger is intended to qualify, for federal income tax purposes, as a
"tax-free reorganization" so that generally, no gain or loss would be
recognized by RMCI stockholders. It is a condition to consummation of the
Merger that RHCI and RMCI will have received an opinion of counsel to the
effect that the Merger will constitute a reorganization within the meaning of
Section 368(a) of the Internal Revenue Code of 1986, as amended (the "Code").
For a further discussion of federal income tax consequences of the Merger and
for a description of the legal opinion that RHCI and RMCI have received
concerning certain such consequences, see "The Merger--Certain Federal Income
Tax Consequences of the Merger." Since RHCI stockholders will not receive any
consideration in respect of their shares of RHCI capital stock in the Merger,
the Merger will not have any federal income tax consequences to the RHCI
stockholders.
INTERESTS OF CERTAIN PERSONS IN THE MERGER
Certain directors and certain members of the management of each of RHCI and
RMCI have interests in the Merger in addition to the interests of the
stockholders of each of RHCI and RMCI, as described below. The RHCI Board and
the RMCI Board and their respective special committees were aware of such
interests and considered them, among other matters, in approving the Merger
Agreement and the transactions contemplated thereby. See "Information
Concerning RHCI--Management--Certain Relationships and Transactions Involving
RHCI, RMCI and Affiliates Thereof." The number and percentages of shares of
RHCI and RMCI capital stock set forth in the following discussion as held by
directors, executive officers and corporate affiliates of Paul J. Ramsay,
Chairman of the Board of RHCI and RMCI, do not include shares issuable upon the
exercise of currently exercisable options and warrants held by any such
persons. See "Information Concerning RHCI--Principal Stockholders" and
"Information Concerning RMCI--Principal Stockholders."
8
<PAGE>
Interests of Paul J. Ramsay.
As of the RHCI Record Date, there were 8,425,431 outstanding shares of RHCI
Common Stock, each of which is entitled to one vote with respect to each matter
to be voted on at the RHCI Meeting and 142,486 outstanding shares of RHCI
Series C Preferred Stock, all of which shares of RHCI Series C Preferred Stock
are owned by corporate affiliates of Mr. Ramsay, each of which is entitled to
ten (10) votes (voting together with the RHCI Common Stock as a single class)
with respect to each matter voted on at the RHCI Meeting. As of such date,
RHCI's directors, executive officers and corporate affiliates of Mr. Ramsay
owned an aggregate of 3,546,112 shares of RHCI Common Stock (calculated as if
all outstanding shares of RHCI Series C Preferred Stock were converted in
accordance with their terms into shares of RHCI Common Stock), or approximately
36.0% of the issued and outstanding shares of RHCI Common Stock (calculated as
if all outstanding shares of RHCI Series C Preferred Stock were converted in
accordance with their terms into shares of RHCI Common Stock) on the RHCI
Record Date, of which Mr. Ramsay and his corporate affiliates owned an
aggregate of 3,398,054 shares of RHCI Common Stock (calculated as aforesaid),
or approximately 34.5% of the issued and outstanding shares of RHCI Common
Stock (calculated as aforesaid). These directors, executive officers and
corporate affiliates of Mr. Ramsay have advised RHCI that they intend to vote
or to direct the vote of all shares of RHCI Common Stock and RHCI Series C
Preferred Stock over which they have voting power for approval and adoption of
the Merger Proposal and the 1996 Long Term Incentive Plan. RHCI has no class or
series of capital stock outstanding other than RHCI Common Stock and RHCI
Series C Preferred Stock entitled to vote at the RHCI Meeting.
As of the RMCI Record Date, RMCI's directors, executive officers and
corporate affiliates of Paul J. Ramsay, the Chairman of the Board of both RMCI
and RHCI, owned approximately 6,718,337 shares of RMCI Common Stock (calculated
as if all outstanding shares of RMCI Series 1996 Preferred Stock were converted
in accordance with their terms into shares of RMCI Common Stock), or
approximately 71.4% of the issued and outstanding shares of RMCI Common Stock
(calculated as if all outstanding shares of RMCI Series 1996 Preferred Stock
were converted in accordance with their terms into shares of RMCI Common Stock)
on the RMCI Record Date, of which the corporate affiliates of Mr. Ramsay owned
an aggregate of 6,488,173 shares of RMCI Common Stock (calculated as
aforesaid), or approximately 69.0% of the issued and outstanding shares of RMCI
Common Stock (calculated as aforesaid). These directors, executive officers and
corporate affiliates of Mr. Ramsay have advised RMCI that they intend to vote
or to direct the vote of all shares of RMCI Common Stock and RMCI Series 1996
Preferred Stock over which they have voting power for approval and adoption of
the Merger Agreement. RMCI has no class or series of capital stock outstanding
other than RMCI Common Stock and RMCI Series 1996 Preferred Stock entitled to
vote at the RMCI Meeting.
Paul J. Ramsay is the Chairman of the Board of both RHCI and RMCI. Subsequent
to the Merger, he will remain Chairman of the Board of RHCI. His pro forma
ownership in RHCI immediately after the Effective Time (assuming that the
Merger was consummated on the RHCI Record Date) would be 5,560,778 shares of
RHCI Common Stock (calculated as if all outstanding shares of RHCI Preferred
Stock were converted in accordance with their terms into shares of RHCI Common
Stock), or approximately 42.8% of the issued and outstanding shares of RHCI
Common Stock at that time (calculated as if all outstanding shares of RHCI
Preferred Stock were converted in accordance with their terms into shares of
RHCI Common Stock). The pro forma ownership in RHCI immediately after the
Effective Time (assuming the Merger was consummated on the RHCI Record Date)
for all directors and executive officers of RHCI as a group (including Mr.
Ramsay) would be approximately 44.3%. Prior to the Merger (on the RHCI Record
Date) and prior to the distribution of RMCI by RHCI in April 1995,
respectively, Mr. Ramsay, personally and through corporate affiliates, held
shares of RHCI Common Stock and RHCI Series C Preferred Stock entitling such
persons to cast approximately 34.5% and 30.7%, respectively, of the total
number of votes cast by all RHCI stockholders in matters submitted to the vote
of stockholders. See "Information Concerning RHCI--Management--Certain
Relationships and Related Transactions Involving RHCI, RMCI and Affiliates
Thereof," "Information Concerning RHCI--Principal Stockholders" and
"Information Concerning RMCI--Principal Stockholders."
9
<PAGE>
Interests of the RHCI Special Committee.
As of the RHCI Record Date, Steven J. Shulman, as the RHCI Special Committee,
owned 17,750 shares of RHCI Common Stock. See "Information Concerning RHCI--
Management." Mr. Shulman will receive a fee of $10,000 for his service as the
RHCI Special Committee. The amount of the RHCI Special Committee fee was
determined in September 1996.
Interests of Other Directors of RHCI.
As of the RHCI Record Date, Aaron Beam, Jr., a director of both RHCI and
RMCI, owned 27,750 shares of RHCI Common Stock and 7,600 shares of RMCI Common
Stock. As of the RHCI Record Date, Peter J. Evans, a director of both RHCI and
RMCI, owned 17,750 shares of RHCI Common Stock. In addition, Mr. Evans will
receive from RMCI a bonus of $50,000 following the consummation of the Merger.
As of the RHCI Record Date, Robert E. Galloway, a director of RHCI during
fiscal 1996, owned 8,300 shares of RHCI Common Stock. As of the RHCI Record
Date, Thomas M. Haythe, a director of both RHCI and RMCI, owned 39,750 shares
of RHCI Common Stock and 10,000 shares of RMCI Common Stock. In addition, Mr.
Haythe is a partner of the New York City law firm of Haythe & Curley, which
firm rendered legal services to RHCI and RMCI during fiscal year 1996 and will
continue to render legal services to RHCI in the future and which is issuing
its legal opinion as to certain federal income tax consequences of the Merger.
See "The Merger--Certain Federal Income Tax Consequences of the Merger" and
"Legal Matters." As of the RHCI Record Date, Luis E. Lamela, a director of both
RHCI and RMCI and Vice Chairman of the RHCI Board and the RMCI Board, owned
16,000 shares of RHCI Common Stock. See also "Information Concerning RHCI--
Management--Certain Relationships and Related Transactions Involving RHCI, RMCI
and Affiliates Thereof--Other Arrangements" for information concerning
consulting arrangements between each of RHCI and RMCI and a corporation of
which Mr. Lamela is a principal. As of the RHCI Record Date, Michael S. Siddle,
a director of both RHCI and RMCI, owned 17,750 shares of RHCI Common Stock.
Assuming that the Merger occurred on the RHCI Record Date, Messrs. Beam, Evans,
Galloway, Haythe, Lamela and Siddle would own 30,283, 17,500, 8,300, 43,083,
16,000 and 17,750 shares of RHCI Common Stock, respectively.
Persons Who Are Directors of Both RMCI and RHCI.
Aaron Beam, Jr., Peter J. Evans, Thomas M. Haythe, Luis E. Lamela, Paul J.
Ramsay and Michael S. Siddle are each directors of both RHCI and RMCI. Members
of the RHCI Board who are not employees of RHCI receive a per annum fee of
$12,000 and a fee of $3,000 for each of the first four meetings of the RHCI
Board attended during the year, with no additional compensation paid for
attendance at additional meetings. In October 1996, as payment of fiscal 1997
directors' fees, RHCI issued 16,000 shares of RHCI Common Stock to each of its
directors (other than Mr. Galloway who was issued 6,300 shares of RHCI Common
Stock since Mr. Galloway did not stand for reelection at RHCI's November 1996
Annual Meeting of Stockholders and, accordingly, will not be a director for the
entire 1997 fiscal year). RMCI pays each member of the RMCI Board (other than
Paul J. Ramsay) who is not an employee of RMCI, a per annum fee of $5,000. Paul
J. Ramsay, as the Chairman of the RMCI Board, receives a per annum fee of
$10,000 from RMCI. Each director of RMCI receives reimbursement for out-of-
pocket expenses incurred in attending meetings of the RMCI Board and committees
thereof.
Directors and Management of RMCI and RHCI Subsequent to the Merger.
After the Effective Time, it is RHCI's intention that RMCI will be managed by
certain of the current officers of RMCI, including Dr. Martin Lazoritz and I.
Paul Mandelkern. Dr. Lazoritz will become the Executive Vice President and
Chief Medical Officer of RHCI and Mr. Mandelkern will become a Vice President
of RHCI after the Merger. It is contemplated that following the Effective Time,
the RMCI Board will be composed of Bert Cibran, President and Chief Operating
Officer of each of RHCI and RMCI, Peter J. Evans and Thomas M. Haythe. There
will be no change in the composition of the RHCI Board as a result of the
Merger and the current executive officers of RHCI will remain in their current
positions following the Merger. See "Information Concerning RHCI--Management."
10
<PAGE>
Interests of the RMCI Special Committee.
As of the RMCI Record Date, Moises E. Hernandez, M.D., as the RMCI Special
Committee, held currently exercisable options to purchase 45,000 shares of RMCI
Common Stock. See "Information Concerning RMCI--Principal Stockholders--
Security Ownership of Management." As compensation for his service as the RMCI
Special Committee, Dr. Hernandez received the foregoing: 45,000 currently
exercisable options to purchase RMCI Common Stock and the $5,000 annual
directors' fee and a $15,000 special directors' fee. The number of options to
purchase RMCI Common Stock and the amount of the RMCI Special Committee fee
were determined in September 1996. In the Merger, Dr. Hernandez's options shall
become options to purchase 15,000 shares of RHCI Common Stock at an exercise
price per share equal to $3.00 (an amount equal to the option exercise price in
respect of the options to purchase RMCI Common Stock multiplied by three (3)).
The treatment of Dr. Hernandez's RMCI Common Stock options in the Merger is the
same as the treatment to be afforded all other holders of options to purchase
RMCI Common Stock. See "The Merger Agreement--The Merger--Stock Options and
Warrants."
Interests of Certain Persons in the Distribution
On April 24, 1995, RHCI effected the Distribution by distributing all of the
shares of RMCI Common Stock held by it to its stockholders in the form of a
dividend. The Distribution was made on the basis of 0.26094093 of a share of
RMCI Common Stock for each one share of RHCI Common stock owned on April 21,
1995 (the "Distribution Record Date").
Persons Who Were Directors of Both RHCI and
RMCI at the Time of the Distribution.
Aaron Beam, Jr., Peter J. Evans, Thomas M. Haythe, Paul J. Ramsay, Steven J.
Shulman and Michael S. Siddle were each directors of both RHCI and RMCI at the
time of the Distribution. At the time of the Distribution: Mr. Beam owned
10,000 shares of RHCI Common Stock, 7,500 options to purchase RHCI Common
Stock, no shares of RMCI Common Stock, and 10,000 options to purchase RMCI
Common Stock; Mr. Evans owned no shares of RHCI Common Stock, 32,500 options to
purchase RHCI Common Stock, no shares of RMCI Common Stock, and 10,000 options
to purchase RMCI Common Stock; Mr. Haythe owned no shares of RHCI Common Stock,
32,500 options to purchase shares of RHCI Common Stock, no shares of RMCI
Common Stock, and 10,000 options to purchase shares of RMCI Common Stock; Mr.
Ramsay (personally and through corporate affiliates) owned 2,828,895 shares of
RHCI Common Stock, 142,486 shares of RHCI Series C Preferred Stock, 1,500,000
shares of RMCI Common Stock, 250,000 options to purchase RHCI Common Stock,
125,000 options to purchase RMCI Common Stock, and 125,000 warrants to purchase
RMCI Common Stock; Mr. Shulman owned no shares of RHCI Common Stock, 32,500
options to purchase RHCI Common Stock, no shares of RMCI Common Stock, and
10,000 options to purchase shares of RMCI Common Stock; Mr. Siddle owned no
shares of RHCI Common Stock, 59,167 options to purchase RHCI Common Stock, no
shares of RMCI Common Stock, and 10,000 options to purchase RMCI Common Stock.
Each of Messrs. Beam, Evans, Haythe, Shulman and Siddle were granted 10,000
options to purchase RMCI Common Stock in October 1994 (at an option price of
$2.00 per share) under RMCI's 1994 Stock Option Plan in connection with their
service as directors. Mr. Ramsay received 125,000 options to purchase shares of
RMCI Common Stock in October 1994 (at an option price of $2.00 per share) under
the RMCI 1994 Stock Option Plan in connection with his service as Chairman of
the Board of RMCI. Mr. Ramsay, through one of his corporate affiliates,
received 125,000 warrants to purchase RMCI Common Stock in October 1994 (at an
exercise price of $2.00).
As a result of the Distribution: Mr. Ramsay (personally and through his
corporate affiliates) in his capacity as a stockholder of RHCI, acquired an
additional 738,173 shares of RMCI Common Stock; Mr. Beam acquired an additional
2,609 shares of RMCI Common Stock; and Messrs. Evans, Haythe, Siddle and
Shulman did not acquire any additional shares of RMCI Common Stock.
11
<PAGE>
Person Who Was a Director of
RHCI at the Time of the Distribution.
Robert E. Galloway, who was a director of RHCI at the time of the
Distribution, owned 250 shares of RHCI Common Stock, 32,500 options to purchase
shares of RHCI Common Stock, no shares of RMCI Common Stock, and no options to
purchase RMCI Common Stock. As a result of the Distribution, Mr. Galloway
acquired 65 shares of RMCI Common Stock.
Persons Who Were Executive Officers of RMCI
at the Time of the Distribution.
Martin Lazoritz, M.D., Executive Vice President of RMCI at the time of the
Distribution, owned 250 shares of RHCI Common Stock, no options to purchase
RHCI Common Stock, 50,000 shares of RMCI Common Stock, and 75,000 options to
purchase shares of RMCI Common Stock. The 75,000 options to purchase RMCI
Common Stock were granted to Dr. Lazoritz in October 1994 (at an option price
of $2.00 per share) under RMCI's 1994 Stock Option Plan. As a result of the
Distribution, Dr. Lazoritz acquired an additional 65 shares of RMCI Common
Stock. I. Paul Mandelkern, Senior Vice President and General Counsel of FPM at
the time of the Distribution, owned no shares of RHCI Common Stock, no options
to purchase RHCI Common Stock, no shares of RMCI Common Stock, and 17,500
options to purchase RMCI Common Stock. The 17,500 options to purchase RMCI
Common Stock were granted to Mr. Mandelkern in October 1994 (at an option price
of $2.00 per share) under RMCI's 1994 Stock Option Plan. As a result of the
Distribution, Mr. Mandelkern acquired no additional shares of RMCI Common
Stock.
DISSENTERS' RIGHTS
Under Delaware corporate law, the holders of RMCI Common Stock and RMCI
Series 1996 Preferred Stock are entitled to appraisal rights if the Merger is
consummated, provided that certain procedures are followed. Failure to take any
necessary steps will result in a termination or waiver of the rights of a
stockholder to such appraisal.
The holders of RMCI Common Stock and RMCI Series 1996 Preferred Stock are
entitled to receive notice from RMCI, not less than twenty (20) days prior to
the date of the RMCI Meeting, that appraisal rights are available to the
stockholders of RMCI. In order to perfect their statutory appraisal rights,
holders of shares of RMCI Common Stock or RMCI Series 1996 Preferred Stock must
(i) not vote in favor of the Merger and (ii) deliver to RMCI prior to the RMCI
Meeting written notice of their intention to demand payment for their shares if
the Merger is adopted. All dissenting holders of RMCI voting stock must be
given notice of the approval, if any, of the Merger within ten (10) days of the
approval being obtained. For a more complete discussion, see "The Merger--
Dissenters' Rights."
The holders of RHCI Common Stock and RHCI Series C Preferred Stock are not
entitled to appraisal rights in connection with, or as a result of, the Merger.
12
<PAGE>
THE MERGER AGREEMENT
EFFECTIVE TIME OF THE MERGER
If the Merger Proposal and the Merger Agreement are approved by the requisite
votes of the stockholders of RHCI and RMCI, respectively, and the other
conditions to the consummation of the Merger are satisfied or waived, the
Merger will become effective at the time a certificate of merger is duly filed
with the Secretary of State of the State of Delaware or at such later time as
may be specified in such certificate (the "Effective Time"). It is anticipated
that the certificate of merger will be so filed as soon as practicable after
the satisfaction of or, where permissible, waiver of, the conditions noted
below.
CONDITIONS TO CONSUMMATION OF THE MERGER
The obligations of RHCI and RMCI to consummate the Merger are subject to the
satisfaction of or, where permissible, waiver of, certain conditions set forth
in the Merger Agreement, including obtaining the requisite approval of the
Merger Agreement by the stockholders of RMCI; obtaining the requisite approval
by RHCI's stockholders of the Merger Proposal; the receipt of necessary
regulatory, lender and other approvals and consents; the expiration of any
relevant waiting period under the Hart-Scott-Rodino Antitrust Improvements Act
of 1976, as amended; the effectiveness of the Registration Statement on Form S-
4 pursuant to the Securities Act of 1933, as amended, with the Securities and
Exchange Commission, with respect to the shares of RHCI Common Stock issuable
in connection with the Merger, and absence of any stop order related thereto in
effect or proceedings for such a stop order; approval for listing on NASDAQ,
subject to official notice of issuance, of the RHCI Common Stock to be issued
in connection with the Merger (and the shares of RHCI Common Stock issuable
upon the conversion of shares of RHCI Series 1996 Preferred Stock to be issued
in the Merger); the absence of any injunction prohibiting the consummation of
the Merger; and the receipt of a legal opinion with respect to certain federal
income tax matters.
The obligations of RHCI and RHCI Sub to consummate the Merger are subject to
certain additional conditions, including the performance by RMCI in all
material respects of all of its obligations under the Merger Agreement to be
performed by it at or prior to the Effective Time and the accuracy of the
representations and warranties of RMCI contained in the Merger Agreement and
the receipt by RHCI of a certificate signed by an executive officer of RMCI to
such effect; receipt by RHCI of the Tax Letters and of a Securities Act
Affiliate Agreement from each Securities Act Affiliate (as such terms are
defined in the Merger Agreement); and the receipt by RHCI of a copy of the
resolutions of the RMCI Board authorizing the Merger, certified by an executive
officer of RMCI.
The obligations of RMCI to consummate the Merger are also subject to
additional conditions, including the performance by RHCI and RHCI Sub in all
material respects of all of their respective obligations under the Merger
Agreement to be performed by them at or prior to the Effective Time and the
accuracy of the representations and warranties of RHCI and RHCI Sub contained
in the Merger Agreement and the receipt by RMCI of a certificate signed by an
executive officer of each of RHCI and RHCI Sub to such effect; the receipt by
RMCI of a copy of the resolutions of the RHCI Board authorizing the Merger,
certified by an executive officer of RHCI; and the filing by RHCI of a
certificate of designations with the Secretary of State of Delaware with
respect to the RHCI Series 1996 Preferred Stock.
There can be no assurance that all of the foregoing conditions to the
consummation of the Merger will be satisfied. For a description of the
conditions to the Merger, see "The Merger Agreement--Conditions to Consummation
of the Merger." See also "The Merger--Certain Federal Income Tax Consequences
of the Merger."
13
<PAGE>
TERMINATION OF THE MERGER AGREEMENT
The Merger Agreement may be terminated (i) at any time by the mutual consent
of RHCI and RMCI; (ii) by either RHCI or RMCI if the Merger has not been
consummated prior to April 30, 1997, provided that the right to terminate the
Merger Agreement on this basis will not be available to any party whose failure
to fulfill any obligation under the Merger Agreement caused the failure to
consummate the Merger by such date; (iii) at any time by either RHCI or RMCI if
there has been a breach by the other party of any representation or warranty
contained in the Merger Agreement which would have a material adverse effect on
the condition (financial or otherwise), business, assets or results of
operations of such party or a material breach of any covenant of the other
party which is not curable or, if curable, is not cured within thirty (30)
days; and (iv) upon the occurrence of certain other events, including the
failure to obtain the requisite stockholder approvals or the issuance of any
final, nonappealable order, judgment or decree restraining or prohibiting the
consummation of the Merger. See "The Merger Agreement--Termination." Under
certain circumstances involving RMCI's acceptance of an acquisition proposal
other than pursuant to the Merger, RMCI or RHCI may terminate the Merger
Agreement and RMCI may be liable to reimburse RHCI for expenses up to
$1,000,000 incurred in connection with the Merger Agreement. See "The Merger
Agreement--Fees and Expenses."
STOCK OPTIONS AND WARRANTS
At the Effective Time, each outstanding option to acquire shares of RMCI
Common Stock ("RMCI Stock Option") and each outstanding warrant to purchase
shares of RMCI Common Stock ("RMCI Warrant"), whether or not exercisable or
vested, will become (without any other changes in terms and conditions,
including the vesting schedule) an option or warrant to purchase the number of
shares of RHCI Common Stock equal to the number of shares of RMCI Common Stock
that could have been purchased under the RMCI Stock Option or RMCI Warrant
multiplied by one-third ( 1/3), at an exercise price per share of RHCI Common
Stock equal to the exercise price of such RMCI Stock Option or RMCI Warrant
multiplied by three (3), provided that any fractional shares that would result
from the exercise of any RMCI Stock Option or RMCI Warrant will be rounded to
the nearest whole number. On the RMCI Record Date, there were outstanding an
aggregate of (i) 1,175,250 options to purchase shares of RMCI Common Stock
granted under RMCI's 1994 Stock Option Plan and 1996 Long Term Incentive Plan,
all of which have an exercise price of $1.00 per share and (ii) 640,000
warrants to purchase shares of RMCI Common Stock, 450,000 of which have an
exercise price of $1.00 per share and 190,000 of which have an exercise price
of $2.00 per share. See "The Merger Agreement--The Merger--Stock Options and
Warrants."
MARKET PRICES OF RHCI COMMON STOCK AND RMCI COMMON STOCK
RHCI Common Stock has been traded on the over-the-counter market and has been
quoted on NASDAQ since October 31, 1985 and is listed under the symbol RHCI.
RMCI Common Stock has been traded on the OTC Bulletin Board since April 24,
1995 under the symbol RMCR. The information shown in the table below presents
the closing price per share for RHCI Common Stock and the closing bid price for
RMCI Common Stock on October 1, 1996, the last full trading day prior to the
public announcement of the proposed Merger, and, applying such closing prices,
the equivalent value per share of RMCI Common Stock based upon the Common Stock
Exchange Ratio (in accordance with the terms of the Merger Agreement). Given
that the Common Stock Exchange Ratio is fixed in the Merger Agreement, the
equivalent value per share of RMCI Common Stock will fluctuate from time to
time with the market price of RHCI Common Stock.
<TABLE>
<CAPTION>
EQUIVALENT
VALUE PER
RMCI
RHCI RMCI SHARE
----- ------ ----------
<S> <C> <C> <C>
Market Price as of October 1, 1996................. $2.25 $0.625 $0.75
</TABLE>
14
<PAGE>
On March 19, 1997, the closing price per share for RHCI Common Stock and the
closing bid price for RMCI Common Stock were $4.19 and $1.00, respectively
(resulting in an equivalent value per RMCI share of $1.40 as of such date). See
"Market Prices of RHCI Common Stock and RMCI Common Stock." Holders of RMCI
Common Stock and RHCI Common Stock are urged to obtain current market
quotations for the shares of RMCI Common Stock and RHCI Common Stock.
SELECTED FINANCIAL INFORMATION
Set forth below is selected financial information of RHCI and RMCI and pro
forma condensed financial information of RHCI and RMCI. The information is
derived from the consolidated financial statements of RHCI, the consolidated
financial statements of RMCI and the pro forma condensed financial information
of RHCI and RMCI. The data should be read in conjunction with the consolidated
financial statements, related notes, and other financial information of RHCI
and RMCI and the pro forma condensed financial information of RHCI and RMCI
included elsewhere herein. The pro forma financial data set forth below and
elsewhere in this Joint Proxy Statement/Prospectus are presented for
informational purposes only and are not necessarily indicative of the financial
position or results of operations which would actually have occurred if the
Merger had been consummated as of the date presented or which may be obtained
in the future.
15
<PAGE>
RAMSAY HEALTH CARE, INC. AND SUBSIDIARIES
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED JUNE 30, DECEMBER 31,
------------------------------------------------ ------------------
1992 1993 1994(1) 1995(1) 1996 1995 1996
-------- -------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENTS OF OPERATIONS
DATA:
Net revenues........... $136,946 $136,354 $137,002 $136,418 $117,423 $ 60,944 $ 66,607
Salaries, wages and
benefits.............. 60,626 63,810 64,805 72,061 66,259 32,433 33,263
Other operating ex-
penses................ 40,161 40,454 42,907 44,741 42,387 19,746 22,356
Provision for doubtful
accounts.............. 8,628 8,148 5,846 5,086 5,805 2,026 2,149
Depreciation and amor-
tization.............. 5,439 6,605 6,836 7,290 5,490 2,626 2,593
Interest and other fi-
nancing charges....... 10,488 9,494 8,906 8,347 6,892 3,509 3,034
Losses related to asset
sales and closed busi-
nesses................ -- 7,524 802 6,431 4,473 -- --
Asset impairment
charges............... -- -- -- 21,815 5,485 -- --
Restructuring and other
charges............... 2,283 1,367 -- -- -- -- --
-------- -------- -------- -------- -------- -------- --------
127,625 137,402 130,102 165,771 136,791 60,340 63,395
-------- -------- -------- -------- -------- -------- --------
Income (loss) before
minority interests,
income taxes,
extraordinary items
and cumulative effect
of accounting change.. 9,321 (1,048) 6,900 (29,353) (19,368) 604 3,212
Minority interests..... -- 1,126 4,824 887 -- (101) --
-------- -------- -------- -------- -------- -------- --------
Income (loss) before
income taxes,
extraordinary items
and cumulative effect
of accounting change.. 9,321 (2,174) 2,076 (30,240) (19,368) 705 3,212
Provision (benefit) for
income taxes.......... 3,974 159 599 (13,195) (2,887) 261 1,221
-------- -------- -------- -------- -------- -------- --------
Income (loss) before
extraordinary items
and cumulative effect
of accounting change.. 5,347 (2,333) 1,477 (17,045) (16,481) 444 1,991
Extraordinary items:
Loss from early
extinguishment of
debt, net of income
tax benefit........... (366) (1,580) (155) (257) -- -- --
Income tax benefit from
net operating loss
carryovers............ 953 -- -- -- -- -- --
Cumulative effect of
change in accounting
for income taxes...... -- 2,353 -- -- -- -- --
-------- -------- -------- -------- -------- -------- --------
Net income (loss)...... $ 5,934 $ (1,560) $ 1,322 $(17,302) $(16,481) $ 444 $ 1,991
======== ======== ======== ======== ======== ======== ========
PRIMARY EARNINGS PER
SHARE:
Income (loss) per
common and dilutive
common equivalent
share before
extraordinary items
and cumulative effect
of accounting change.. $0.68 $(0.29) $0.15 $(2.25) $(2.12) $0.05 $0.21
Net income (loss)...... $0.75 $(0.20) $0.14 $(2.28) $(2.12) $0.05 $0.21
Weighted average shares
outstanding(2)........ 7,886 7,932 9,641 7,743 7,929 9,262 9,706
</TABLE>
- --------
(1) Includes results of operations of RMCI, from July 21, 1993 (date of
inception) until April 24, 1995 (date of the Distribution), when RMCI was a
consolidated subsidiary of RHCI.
(2) Includes common and dilutive common equivalent shares outstanding.
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
-------------------------------------------- ------------
1992 1993 1994 1995 1996 1996
-------- -------- -------- -------- -------- ------------
<S> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash and cash equiva-
lents................. $ 8,628 $ 10,682 $ 6,207 $ 9,044 $ 7,605 $ 9,060
Working capital........ 26,718 23,811 21,148 24,098 11,715 9,233
Total assets........... 194,357 190,370 183,168 139,236 132,758 131,862
Long-term debt, less
current portion....... 84,879 77,429 67,707 55,568 44,664 39,531
Class B preferred
stock, Series 1987.... 2,500 -- -- -- -- --
Stockholders' equity... 76,068 79,997 80,468 61,779 46,053 48,876
</TABLE>
16
<PAGE>
RAMSAY MANAGED CARE, INC. AND SUBSIDIARIES
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
PERIOD JULY 21, YEAR ENDED JUNE 30, DECEMBER 31,
1993 (INCEPTION) --------------------- ------------------
TO JUNE 30, 1994 1995 1996 1995 1996
---------------- --------- ---------- -------- --------
<S> <C> <C> <C> <C> <C>
SUMMARY OF OPERATING DATA:
Revenues:
Managed care revenue..... $5,491 $ 14,898 $ 19,430 $ 9,118 $ 10,271
Clinical fee for service
and other revenue....... 358 1,247 2,172 880 1,350
------ --------- ---------- -------- --------
Total revenues............ 5,849 16,145 21,602 9,998 11,621
Operating expenses:
Contracted provider serv-
ices.................... 2,185 5,149 8,088 3,522 4,308
Salaries, wages and bene-
fits.................... 1,624 6,882 8,743 4,516 4,655
Management fees charged
by related companies.... 287 284 406 132 176
General and administra-
tive expenses........... 949 3,215 5,846 2,282 2,184
Goodwill write-down...... -- -- 1,929 -- --
Depreciation and amorti-
zation.................. 460 1,244 1,323 629 695
Interest................. 121 334 685 390 434
Listing and stock distri-
bution expenses......... -- 724 -- -- --
------ --------- ---------- -------- --------
Total operating expenses.. 5,626 17,832 27,020 11,471 12,452
------ --------- ---------- -------- --------
(Loss) income from
continuing operations
before income taxes...... 223 (1,687) (5,418) (1,473) (831)
Income tax (benefit) ex-
pense.................... 155 (192) -- -- --
------ --------- ---------- -------- --------
(Loss) income from contin-
uing operations.......... 68 (1,495) (5,418) (1,473) (831)
====== ========= ========== ======== ========
Discontinued operation:
Loss from operations of
discontinued HMO opera-
tion.................... -- (76) (3,149) (713) --
Loss on disposal of HMO
operation............... -- -- (4,927) -- --
------ --------- ---------- -------- --------
Net (loss) income......... $ 68 $ (1,571) $ (13,494) $ (2,186) $ (831)
====== ========= ========== ======== ========
(Loss) income per common
share from continuing op-
erations................. $ 0.03 $ (0.39) $ (0.85) $ (0.23) $ (0.13)
(Loss) per common share
from discontinued opera-
tion..................... -- (0.02) (1.27) (0.11) --
------ --------- ---------- -------- --------
(Loss) income per common
share.................... $ 0.03 $ (0.41) $ (2.12) $ (0.34) $ (0.13)
====== ========= ========== ======== ========
Weighted average number of
shares outstanding(1).... 2,058 3,789 6,378 6,371 6,397
====== ========= ========== ======== ========
</TABLE>
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
------------------------- ------------
1994 1995(2) 1996(3) 1996(4)
------- ------- ------- ------------
<S> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents.............. $ 763 $ 3,495 $ 228 $ 198
Working capital (deficit).............. (1,217) (480) (9,070) (7,252)
Total assets........................... 13,288 20,848 14,099 14,247
Long-term debt, less current portion... 2,209 7,820 5,202 4,207
Stockholders' equity (deficit)......... 1,194 5,584 (7,847) (5,671)
</TABLE>
- --------
(1) The shares of RMCI Common Stock used in the net loss per share computation
is based on the number of weighted average shares outstanding for the
respective periods.
(2) Includes $3,606 of net assets used in discontinued operation.
(3) Includes $2,027 of net assets used in discontinued operation.
(4) Includes $1,864 of net assets used in discontinued operation.
17
<PAGE>
PRO FORMA CONDENSED FINANCIAL INFORMATION
The following unaudited pro forma condensed balance sheet of RHCI as of
December 31, 1996 and unaudited pro forma condensed statements of operations of
RHCI for the six months ended December 31, 1996 and the fiscal year ended June
30, 1996 give effect to the Merger, assuming the Merger had been consummated on
July 1, 1995 and accounted for under the purchase method of accounting. The pro
forma financial information also gives effect to the sale of RMCI's wholly
owned subsidiary, Apex Healthcare, Inc. ("Apex"). See "Information Concerning
RMCI--Business--Recent Events."
The information contained in the columns entitled "Historical RHCI" and
"Historical RMCI" in the condensed balance sheet and statement of operations as
of and for the six months ended December 31, 1996 is summarized from the
unaudited consolidated financial statements of RHCI and RMCI, respectively,
included in this Joint Proxy Statement/Prospectus. The information contained in
the columns entitled "Historical RHCI" and "Historical RMCI" in the condensed
statement of operations for the fiscal year ended June 30, 1996 is summarized
from the audited consolidated financial statements of RHCI and RMCI,
respectively, included in this Joint Proxy Statement/Prospectus.
THE PRO FORMA CONDENSED FINANCIAL STATEMENTS ARE PRESENTED FOR INFORMATIONAL
PURPOSES ONLY AND ARE NOT NECESSARILY INDICATIVE OF THE FINANCIAL POSITION OR
RESULTS OF OPERATIONS WHICH WOULD ACTUALLY HAVE OCCURRED IF THE MERGER AND THE
SALE OF APEX HAD BEEN CONSUMMATED AS OF THE DATE PRESENTED AND DO NOT PURPORT
TO PROJECT RHCI'S FINANCIAL POSITION OR RESULTS OF OPERATIONS FOR ANY FUTURE
PERIOD OR DATE. The pro forma condensed financial statements should be read in
conjunction with the historical consolidated financial statements and related
notes of RHCI and RMCI, and RHCI's and RMCI's "Management's Discussion and
Analysis of Financial Condition and Results of Operations," contained elsewhere
herein.
18
<PAGE>
PRO FORMA CONDENSED BALANCE SHEET AT DECEMBER 31, 1996
(DOLLARS IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
HISTORICAL PRO FORMA ADJUSTMENTS
---------------- ----------------------------------
SALE OF RHCI
RHCI RMCI SUBTOTAL APEX(A) MERGER(B) ELIMINATIONS(C) PRO FORMA
-------- ------- -------- ------- --------- --------------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
ASSETS
Cash and cash equiva-
lents.................. $ 9,060 $ 198 $ 9,258 $ 264 $(1,300) $ -- $ 8,222
Patients accounts re-
ceivable, net.......... 24,839 1,168 26,007 -- -- -- 26,007
Other current assets.... 12,266 1,690 13,956 (1,446) -- (2,118) 10,392
-------- ------- -------- ------- ------- ------- --------
Total current assets.... 46,165 3,056 49,221 (1,182) (1,300) (2,118) 44,621
Goodwill and other in-
tangible assets........ 580 8,205 8,785 -- 14,663 -- 23,448
Other assets............ 19,246 2,252 21,498 (1,727) (1,610) (6,671) 11,490
Property and equipment,
net.................... 65,871 734 66,605 -- -- -- 66,605
-------- ------- -------- ------- ------- ------- --------
TOTAL ASSETS............ $131,862 $14,247 $146,109 $(2,909) $11,753 $(8,789) $146,164
======== ======= ======== ======= ======= ======= ========
LIABILITIES
Current liabilities..... $ 36,932 $10,308 $ 47,240 $(1,759) $ -- $(2,118) $ 41,275
(2,098)
Long-term debt, less
current portion........ 39,531 4,207 43,738 (325) -- (3,882) 39,531
Other noncurrent liabil-
ities.................. 6,523 5,403 11,926 -- (867) (2,789) 8,270
-------- ------- -------- ------- ------- ------- --------
82,986 19,918 102,904 (4,172) (867) (8,789) 89,076
STOCKHOLDERS' EQUITY
(DEFICIT).............. 48,876 (5,671) 43,205 1,263 8,212 -- 57,088
4,408
-------- ------- -------- ------- ------- ------- --------
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY
(DEFICIT).............. $131,862 $14,247 $146,109 $(2,909) $11,753 $(8,789) $146,164
======== ======= ======== ======= ======= ======= ========
</TABLE>
Notes to Unaudited Pro Forma Condensed Balance Sheet
(a) During the year ended June 30, 1996, RMCI adopted a plan to sell Apex,
which conducts RMCI's HMO operation. Accordingly, RMCI has classified its
HMO operation, the net operating assets of which totalled $1,864,000 at
December 31, 1996, as a discontinued operation. In connection with RMCI's
decision to sell Apex, in June 1996, RMCI established a reserve of
$1,830,000, which represented Apex's expected operating losses from July 1,
1996 through January 1997, the expected date of disposition at the time.
This reserve was reduced to $172,000 at December 31, 1996 based on Apex's
actual operating losses from July 1, 1996 to December 31, 1996. In March
1997, RMCI increased its reserve for Apex's expected operating losses
through the date of disposition (now expected to be on or before March 31,
1997) by $250,000. This adjustment is reflected in the pro forma
adjustments as reductions in the net proceeds expected from the sale and
the expected gain on the sale as discussed below.
In October 1996, RMCI entered into an agreement to sell Apex for estimated
net sales proceeds of $3,377,000, which exceeded the carrying value of
Apex's net operating assets at December 31, 1996, as adjusted by additional
expected Apex losses prior to the sale of $250,000, by $1,263,000. The pro
forma adjustments reflect this gain on sale as an increase to Stockholders'
Equity (Deficit). Further, the pro forma adjustments reflect that of the
net sales proceeds derived from the sale of Apex, $450,000 is required to
be held in escrow and $2,413,000 is required to repay indebtedness of RMCI.
(b) If the Effective Time of the Merger were the RHCI Record Date, in the
Merger, RHCI would issue 2,136,105 shares of RHCI Common Stock, and 100,000
shares of RHCI Series 1996 Preferred Stock, each share of which will be
convertible into 10 shares of RHCI Common Stock. This RHCI Common Stock and
RHCI Series 1996 Preferred Stock would be issued in the Merger in exchange
for 6,408,315 shares of RMCI
19
<PAGE>
Common Stock and 100,000 shares of RMCI Series 1996 Preferred Stock. This
RHCI Common Stock, including the RHCI Common Stock issuable upon the
conversion of the RHCI Series 1996 Preferred Stock, would have a pro forma
market value of approximately $9,212,000 based upon the closing sale price
of the RHCI Common Stock on NASDAQ of $2.9375 per share on December 31,
1996.
Under the purchase method of accounting, the assets and liabilities of RMCI
are adjusted to their estimated fair values. For purposes of these pro
forma financial statements, estimates have been made of the fair values of
RMCI's assets and liabilities as of December 31, 1996. These fair value
adjustments were based on the best information available to RHCI and are
subject to change as additional information becomes available.
In addition to the pro forma market value at December 31, 1996 of
$9,212,000 of RHCI Common Stock and RHCI Series 1996 Preferred Stock to be
issued in the Merger, the total purchase price includes direct acquisition
costs, primarily consisting of investment banking and legal costs, of
approximately $300,000. It is anticipated RHCI will also incur costs of
approximately $1,000,000, primarily consisting of legal, accounting,
printing and mailing costs, in connection with the issuance of RHCI Common
Stock and RHCI Series 1996 Preferred Stock with such costs recorded as a
reduction of equity in the pro forma condensed balance sheet. The following
table indicates the allocation of the total purchase price to the deficit
in net assets of RMCI:
<TABLE>
<S> <C> <C>
Deficit in net assets of RMCI at December 31,
1996.............................................. $(5,671,000)
Expected gain on the sale of Apex, based on the net
assets of Apex at December 31, 1996 (see (a)
above)............................................ 1,263,000
-----------
Adjusted deficit in net assets of RMCI............. (4,408,000)
Purchase accounting adjustments:
Identifiable intangibles arising from the acqui-
sition.......................................... 4,740,000
RMCI's existing goodwill and identifiable intan-
gible assets.................................... (8,205,000)
Goodwill arising from the acquisition............ 18,128,000
----------
14,663,000
Deferred income taxes related to purchase account-
ing adjustments:
Identifiable intangibles arising from the acqui-
sition.......................................... (1,610,000)
RMCI's existing identifiable intangible assets... 867,000
----------
(743,000)
-----------
Total purchase price, including direct acquisi-
tion costs.................................... $ 9,512,000
===========
</TABLE>
- -------
(c) This adjustment reflects the elimination of all intercompany receivables
and payables.
20
<PAGE>
PRO FORMA CONDENSED STATEMENT OF OPERATIONS
SIX MONTHS ENDED DECEMBER 31, 1996
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
<TABLE>
<CAPTION>
HISTORICAL PRO FORMA ADJUSTMENTS
---------------- ----------------------------------
SALE OF RHCI
RHCI RMCI SUBTOTAL MERGER ELIMINATIONS(C) APEX(D) PRO FORMA
------- ------- -------- ------ --------------- ------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
Net Revenues............ $66,607 $11,621 $78,228 $ -- $(456) $-- $77,772
Expenses
Salaries, wages and
benefits.............. 33,263 4,655 37,918 (102)(a) -- -- 37,816
Other operating ex-
penses................ 22,356 2,360 24,716 (23)(a) -- -- 24,693
Contracted provider
services.............. -- 4,308 4,308 -- (216) -- 4,092
Provision for doubtful
accounts.............. 2,149 -- 2,149 -- -- -- 2,149
Depreciation and amor-
tization.............. 2,593 695 3,288 385 (b) -- -- 3,673
Interest and other fi-
nancing charges....... 3,034 434 3,468 -- (240) (97) 3,131
------- ------- ------- ----- ----- ---- -------
Total Expenses.......... 63,395 12,452 75,847 260 (456) (97) 75,554
------- ------- ------- ----- ----- ---- -------
Income (Loss) From
Continuing Operations
Before Income Taxes... 3,212 (831) 2,381 (260) -- 97 2,218
Income Taxes............ (1,221) -- (1,221) -- -- -- (1,221)
------- ------- ------- ----- ----- ---- -------
Net Income (Loss) From
Continuing Operations.. $ 1,991 $ (831) $ 1,160 $(260) $ -- $ 97 $ 997
======= ======= ======= ===== ===== ==== =======
Net income from
continuing operations
per common and dilutive
common equivalent
share:
Primary................ $ 0.21 $ 0.07 (e)
Fully diluted.......... $ 0.21 $ 0.07 (e)
Weighted average number
of common and dilutive
common equivalent
shares outstanding:
Primary................ 9,706 10,417
Fully diluted.......... 9,706 10,417
</TABLE>
21
<PAGE>
PRO FORMA CONDENSED STATEMENT OF OPERATIONS FOR THE YEAR ENDED JUNE 30, 1996
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
<TABLE>
<CAPTION>
HISTORICAL PRO FORMA ADJUSTMENTS
----------------- ----------------------------------
SALE OF RHCI
RHCI(F) RMCI(G) SUBTOTAL MERGER ELIMINATIONS(C) APEX(D) PRO FORMA
-------- ------- -------- ------ --------------- ------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
Net Revenues............ $117,423 $21,602 $139,025 $ -- $(1,060) $-- $137,965
Expenses
Salaries, wages and
benefits.............. 66,259 8,743 75,002 (150)(a) -- -- 74,852
Other operating
expenses.............. 42,387 6,252 48,639 (47)(a) (180) -- 48,412
Contracted provider
services.............. -- 8,088 8,088 -- (400) -- 7,688
Provision for doubtful
accounts.............. 5,805 -- 5,805 -- -- -- 5,805
Depreciation and
amortization.......... 5,490 1,323 6,813 492 (b) -- -- 7,305
Goodwill write down.... -- 1,929 1,929 -- -- -- 1,929
Interest and other
financing charges..... 6,892 685 7,577 -- (480) (195) 6,902
Losses related to asset
sales and closed
businesses............ 4,473 -- 4,473 -- -- -- 4,473
Asset impairment
charges............... 5,485 -- 5,485 -- -- -- 5,485
-------- ------- -------- ----- ------- ---- --------
Total Expenses.......... 136,791 27,020 163,811 295 (1,060) (195) 162,851
-------- ------- -------- ----- ------- ---- --------
Loss From Continuing
Operations Before
Income Taxes........... (19,368) (5,418) (24,786) (295) -- 195 (24,886)
Income Tax Benefit...... 2,887 -- 2,887 -- -- -- 2,887
-------- ------- -------- ----- ------- ---- --------
Net Loss From Continuing
Operations............. $(16,481) $(5,418) $(21,899) $(295) $ -- $195 $(21,999)
======== ======= ======== ===== ======= ==== ========
Net loss from continuing
operations per common
and dilutive common
equivalent share:
Primary................ $ (2.12) $ (2.24)(e)
Fully diluted.......... $ (2.12) $ (2.24)(e)
Weighted average number
of common and dilutive
common equivalent
shares outstanding:
Primary................ 7,929 10,065
Fully diluted.......... 7,929 10,065
</TABLE>
22
<PAGE>
Notes to Unaudited Pro Forma Condensed Statements of Operations
(a) These adjustments reflect certain savings which RHCI expects to achieve
through reductions in operating costs in connection with the Merger. The
extent to which these savings will be achieved depends, among other things,
on economic conditions and may be affected by unanticipated changes in
business activities, inflation and certain external factors. Therefore,
there can be no assurance that these savings will be realized.
(b) This adjustment relates to the amortization of goodwill and other
intangible assets arising from the acquisition of RMCI by RHCI, as if RMCI
had been acquired on July 1, 1995. The calculation of the pro forma
amortization expense is as follows:
<TABLE>
<CAPTION>
AMORTIZATION AMORTIZATION AMORTIZATION
AMOUNT PERIOD 7/1/96-12/31/96 7/1/95-6/30/96
----------- ------------ --------------- --------------
<S> <C> <C> <C> <C>
Goodwill................ $18,128,000 25 years $ 362,000 $ 725,000
Other intangible assets:
Managed care con-
tracts............... 2,405,000 51 months 283,000 566,000
Clinical protocols.... 2,335,000 15 years 78,000 156,000
----------- --------- ----------
$22,868,000 723,000 1,447,000
Less amortization
expense recorded by
RMCI on goodwill and
other intangible
assets................. (338,000) (955,000)
--------- ----------
Net increase in
amortization expense... $ 385,000 $ 492,000
========= ==========
</TABLE>
The amortization period of goodwill and other intangible assets arising from
the acquisition of RMCI by RHCI is based on the following:
- -- Managed care contracts--as of the expected date of the Merger, the weighted
average future life of RMCI's existing contracts, based on the percentage of
each contract's annual revenue to total revenue and based on the assumption
that the contracts will, on average, renew for four additional 12-month
periods.
- -- Clinical protocols--estimated period over which RMCI's existing clinical
protocols, which are used as the basis for RMCI's treatment decisions and
product pricing, will be valid and appropriate.
- -- Goodwill--estimated period based on RHCI's assessment that RMCI's
operations, after elimination of certain overhead and public company-related
costs, will be profitable and that it has the ability to remain profitable
for an indeterminate period of time.
(c) These adjustments reflect the elimination of RHCI and RMCI intercompany
income and expense amounts including, for the six months ended December 31,
1996 and year ended June 30, 1996, interest on intercompany debt of
$240,000 and $480,000, respectively, charges for certain corporate services
provided by RHCI to RMCI of $0 and $180,000, respectively, and patient
service revenues and related contracted provider services expenses related
to certain managed care arrangements between RHCI and RMCI of $216,000 and
$400,000, respectively.
(d) This adjustment reflects the reduction in interest expense related to RMCI
indebtedness which will be repaid upon the sale of Apex.
(e) Income (Loss) per common and dilutive common equivalent share is calculated
as follows:
<TABLE>
<CAPTION>
SIX MONTHS ENDED YEAR ENDED
DECEMBER 31, 1996 JUNE 30, 1996
----------------- -------------
<S> <C> <C>
Pro forma net income (loss) from continuing
operations................................ $ 997,000 $(21,999,000)
Less: Dividends on RHCI Series C Preferred
Stock..................................... (181,000) (362,000)
Less: Dividends on RHCI Series 1996 Pre-
ferred Stock.............................. (75,000) (150,000)
----------- ------------
$ 741,000 $(22,511,000)
=========== ============
Pro forma net income (loss) from continuing
operations per share...................... $ 0.07 $ (2.24)
=========== ============
Weighted average shares outstanding (Pri-
mary and Fully Diluted)................... 10,417,000 10,065,000
=========== ============
</TABLE>
23
<PAGE>
(f) During the fiscal year ended June 30, 1996, the following nonrecurring
amounts were recorded in the consolidated statement of operations of RHCI:
(i) contractual adjustment expenses of approximately $1,900,000 related to
intermediary audits of prior year cost reports; as a result, RHCI recorded
reserves in the fourth quarter totalling $3,500,000 related to possible
future adjustments of its cost report estimates by intermediaries;
(ii) losses totalling $4,473,000 related to additional asset write-downs, cost
report settlements and other adjustments related to businesses which
closed at various times prior to fiscal 1996, a reserve for Medicaid
disproportionate share payments which the State of Louisiana has contended
were improperly paid to two of RHCI's Louisiana facilities in fiscal 1995
and 1994, and lease commitments and other costs incurred in connection
with RHCI's decision to relocate its corporate headquarters; and
(iii) asset impairment charges totalling $5,485,000 related to an excess of
carrying value of certain long-lived assets and investments over the fair
value of these assets.
(g) During the fiscal year ended June 30, 1996, RMCI recorded certain
nonrecurring amounts in its consolidated statement of operations, including
a goodwill impairment charge of $1,929,000 related to its acquisition of
Human Dynamics Institute, and $426,000 related to the write-off of deferred
development costs based on RMCI's decision not to expand in certain markets
in the United States.
COMPARATIVE PER SHARE DATA
(UNAUDITED)
The following tabulation reflects (a) the net loss per share of RHCI Common
Stock on a historical basis in comparison with the pro forma net loss per share
after giving effect to the Merger on a purchase accounting basis with RMCI and
(b) the historical net loss per share of RMCI Common Stock in comparison with
the pro forma net loss per share attributable to the one-third ( 1/3) of a
share of RHCI Common Stock which will be received for each share of RMCI Common
Stock in the Merger. The information presented in this tabulation should be
read in conjunction with the Pro Forma Condensed Financial Information and the
separate consolidated financial statements of RHCI and RMCI and the notes
thereto appearing elsewhere in this Joint Proxy Statement/Prospectus.
<TABLE>
<CAPTION>
SIX MONTHS ENDED YEAR ENDED
DECEMBER 31, 1996 JUNE 30, 1996
----------------- -------------
<S> <C> <C>
RHCI net income (loss) per common and
dilutive common equivalent share from
continuing operations:
Historical.............................. $ 0.21 $(2.12)
Pro forma............................... $ 0.07 $(2.24)
RMCI net loss per common share from
continuing operations:
Historical.............................. $(0.13) $(0.85)
Pro forma, adjusted for ratio of
exchange............................... $ 0.02 $(0.75)
</TABLE>
BOOK VALUE PER SHARE
(UNAUDITED)
The book value of RHCI Common Stock (calculated as if all outstanding shares
of RHCI Series C Preferred Stock were converted in accordance with their terms
into shares of RHCI Common Stock on a 10-for-1 basis) was $4.96 per share at
December 31, 1996. The book value of RMCI Common Stock was a deficit of $0.60
per share at December 31, 1996. The pro forma book value per share for the RHCI
Common Stock (calculated as if all outstanding shares of RHCI Series C
Preferred Stock and RHCI Series 1996 Preferred Stock were converted in
accordance with their respective terms into shares of RHCI Common Stock, each
on a 10-for-1 basis), after giving effect to the Merger, would be $4.40 at
December 31, 1996. The pro forma book value of RMCI Common Stock (calculated as
if all outstanding shares of RMCI Series 1996 Preferred Stock were converted in
accordance with their terms into shares of RMCI Common Stock, each on a 30-for-
1 basis), after giving effect to the Merger, would be $1.47 per share at
December 31, 1996, based on the issuance of one-third ( 1/3) of a share of RHCI
Common Stock for each share of RMCI Common Stock.
24
<PAGE>
CAUTIONARY STATEMENT FOR PURPOSES OF THE SAFE HARBOR PROVISIONS OF THE
PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995
In connection with the "safe harbor" provisions of the Private Securities
Litigation Reform Act of 1995, RHCI is hereby setting forth cautionary
statements identifying important factors that may cause RHCI's actual results
to differ materially from those set forth in any forward-looking statements
made by or on behalf of RHCI.
Some of the most significant factors include (i) accelerating changes
occurring in the healthcare industry, including competition from consolidating
and integrated healthcare provider systems, the imposition of more stringent
admission criteria by payors, increased payor pressures to limit lengths of
stay, limitations on reimbursement rates and limitations on annual and
lifetime patient health benefits, (ii) federal and state governmental
budgetary constraints which could have the effect of limiting the amount of
funds available to support governmental healthcare programs, including
Medicare and Medicaid, (iii) statutory, regulatory and administrative changes
or interpretations of existing statutory and regulatory provisions affecting
the conduct of RHCI's business and affecting current and prior reimbursement
for RHCI's services, and (iv) the other matters set forth under "Risk Factors"
below.
There can be no assurances that any anticipated future results will be
achieved. As a result of the factors identified above and other factors,
RHCI's actual results or financial or other condition could vary significantly
from the performance or financial or other condition set forth in any forward-
looking statements.
25
<PAGE>
RISK FACTORS
OWNERSHIP OF RHCI COMMON STOCK INVOLVES A HIGH DEGREE OF RISK. THE FOLLOWING
RISK FACTORS SHOULD BE CONSIDERED CAREFULLY WHEN EVALUATING RHCI AND ITS
BUSINESS AFTER THE MERGER. THE OCCURRENCE OF THE CIRCUMSTANCES DESCRIBED IN
THE FOLLOWING RISK FACTORS, INCLUDING IN ANY MATERIAL PART, WOULD HAVE A
MATERIAL ADVERSE EFFECT ON THE FINANCIAL CONDITION AND RESULTS OF OPERATIONS
OF RHCI.
HIGH LEVEL OF INDEBTEDNESS FOLLOWING THE MERGER
After the Merger, RHCI will continue to be highly leveraged. At December 31,
1996, RHCI's total consolidated long-term (including current maturities) debt
obligations accounted for approximately 51.3% of its total capitalization. In
addition, certain debt instruments to which RHCI is a party impose operating
and financial restrictions on RHCI which affect, limit or restrict corporate
activities. RHCI has in the past sought and received waivers from its lenders
of compliance with certain covenants, including financial covenants, contained
in its credit agreements. In connection with these waivers, RHCI paid
additional fees and expenses to its lenders. Further, in connection with the
waivers obtained for its fiscal year ended June 30, 1996, RHCI provided
additional collateral to its lenders and agreed not to pay cash dividends in
respect of the RHCI Common Stock, the RHCI Series C Preferred Stock (as
defined below), or when issued in the Merger, the RHCI Series 1996 Preferred
Stock. There can be no assurance that any future waivers, if necessary, can be
obtained or as to the terms and conditions of such waivers, if granted. In the
event that RHCI is unable to obtain any necessary future waivers from its
lenders, its lenders will be able to declare RHCI in default with respect to
such indebtedness and may exercise the remedies available to the lenders under
the credit documentation.
At December 31, 1996, RHCI's credit facilities included $31.1 million in
senior secured notes and $1.6 million in subordinated secured notes (the "1990
RHCI Credit Facility"), and approximately $19 million in letters of credit
(the "1993 RHCI Credit Facility"), which support RHCI's variable rate demand
revenue bonds. Under the 1990 RHCI Credit Facility, the senior secured notes
bear interest at 11.6% and are payable as follows: (i) semi-annual principal
payments of $3.5 million from March 31, 1997 through September 30, 1998 and
(ii) semi-annual principal payments of $5.65 million from March 31, 1999
through March 31, 2000. The subordinated secured notes bear interest at 15.6%
and require semi-annual principal payments of $0.2 million through March 31,
2000. Required annual principal payments on RHCI's variable rate demand
revenue bonds total $0.8 million through year 2000 and $0.9 million to $1.2
million in years 2001 through 2015. As a result of the Merger, amounts owed by
RMCI to RHCI will become an intercompany indebtedness, which amounts owed at
December 31, 1996 totalled approximately $8.8 million. In addition, following
the Merger, RMCI, as a wholly-owned subsidiary of RHCI, will remain indebted
to a corporate affiliate of Paul J. Ramsay, which indebtedness at February 15,
1997 totalled $2.0 million, and to a seller of a business previously acquired
by RMCI, which indebtedness at December 31, 1996 totalled $167,000. No other
indebtedness for borrowed money of RMCI will be assumed by RHCI in the Merger.
In August 1996, RHCI and the banks which are parties to the 1993 RHCI Credit
Facility agreed to terms which extended the expiration date of the letters of
credit under the 1993 RHCI Credit Facility from February 15, 1997 to August
15, 1997. In connection with this extension, RHCI agreed to reduce the banks'
exposure (through regular principal payments on the variable rate demand
revenue bonds or early redemption of certain of these bonds) by $3,162,531 on
or before December 31, 1996 (which reduction was made) and an additional
$2,145,835 on or before July 1, 1997.
In February 1997, RHCI and the banks which are parties to the 1993 RHCI
Credit Facility entered into negotiations with a view to extending the
expiration date of the letters of credit under the 1993 RHCI Credit Facility
from August 15, 1997 to November 15, 1997, including on terms which would
require RHCI to provide additional collateral to its lenders. There can be no
assurance that the extension will be effected or as to the terms and
conditions of such extension.
26
<PAGE>
RHCI's ability to make scheduled payments or to refinance its obligations
with respect to its indebtedness depends on its financial and operating
performance, which, in turn, is subject to prevailing economic conditions, to
governmental healthcare policies and to financial, business, regulatory and
other factors beyond its control. In February 1997, RHCI announced an
intention to effect a private placement of $75 million of senior debt
securities (the "Proposed Offering"). The debt securities have not been and
will not be registered under the Securities Act and may not be offered or sold
in the United States absent registration or an applicable exemption from
registration requirements. The proceeds from the Proposed Offering will be
used to refinance the 1990 RHCI Credit Facility and the 1993 RHCI Credit
Facility and for working capital and other general corporate purposes. There
can be no assurance that RHCI's operating results will continue to be
sufficient for payment of all of RHCI's indebtedness or that RHCI will be
successful in refinancing its indebtedness or obtaining an extension of the
letters of credit under the 1993 RHCI Credit Facility if necessary.
LACK OF WORKING CAPITAL FACILITY
In December 1995, RHCI fully paid down and terminated its working capital
facility under the 1993 RHCI Credit Facility. At present, RHCI's only source
of working capital is its cash flow from operations. RHCI intends to effect
the Proposed Offering for the purpose of refinancing its existing indebtedness
and to provide funds for working capital and other general corporate purposes.
There can be no assurance that RHCI's cash flow from operations will continue
to be sufficient for its working capital needs or that RHCI will be successful
in effecting the Proposed Offering.
HISTORY OF LOSSES
For each of the fiscal years ended June 30, 1996, June 30, 1995 and June 30,
1993, RHCI incurred substantial net losses of ($16,481,000), ($17,302,000) and
($1,560,000), respectively. In addition, for the fiscal years ended June 30,
1996 and June 30, 1995, RMCI incurred substantial net losses from continuing
operations of ($5,418,000) and ($1,495,000), respectively. Although RHCI was
profitable for the six months ended December 31, 1996, there can be no
assurance that RHCI will be profitable in the future. The pro forma net (loss)
income of RHCI and RMCI (assuming the Merger had been consummated and the sale
of Apex Healthcare, Inc. by RMCI had been consummated, both on July 1, 1995)
for the fiscal year ended June 30, 1996 and the six months ended December 31,
1996 would have been ($21,989,000) and $1,001,000, respectively.
CONTROL OF RHCI BY RAMSAY AFFILIATES
After giving effect to the Merger, Paul J. Ramsay, Chairman of the Board of
RHCI and RMCI, personally and through Paul Ramsay Hospitals Pty. Limited, an
Australian corporation ("Ramsay Hospitals"), Paul Ramsay Holdings Pty.
Limited, an Australian corporation ("Ramsay Holdings"), and Ramsay Holdings
HSA Limited, an Australian corporation ("Ramsay HSA"; collectively with Ramsay
Hospitals and Ramsay Holdings, the "Ramsay Affiliates"), which are all
corporations controlled by Mr. Ramsay, will beneficially own shares of RHCI
Common Stock representing approximately 44.5% of the issued and outstanding
shares of RHCI Common Stock (calculated as if all then outstanding shares of
class B convertible preferred stock, series C, $1.00 par value, of RHCI ("RHCI
Series C Preferred Stock"), and RHCI Series 1996 Preferred Stock
(collectively, "RHCI Preferred Stock") were converted in accordance with their
terms into shares of RHCI Common Stock) and will hold shares of RHCI Common
Stock and RHCI Preferred Stock entitling Mr. Ramsay and the Ramsay Affiliates
to cast approximately 42.8% of the total number of votes cast by all RHCI
stockholders on matters submitted to the vote of stockholders. Prior to the
Merger (on the RHCI Record Date), Mr. Ramsay, personally and through the
Ramsay Affiliates, beneficially owned shares of RHCI Common Stock representing
approximately 36.1% of the issued and outstanding shares of RHCI Common Stock
(calculated as if all then outstanding shares of RHCI Series C Preferred Stock
were converted in accordance with their terms into shares of RHCI Common
Stock) and held shares of RHCI Common Stock and RHCI Series C Preferred Stock
entitling Mr. Ramsay and the Ramsay Affiliates to cast approximately 34.5% of
the total number of votes cast by all RHCI stockholders on matters submitted
to the vote of stockholders. Prior to the Distribution (as hereinafter
defined), Mr. Ramsay, personally and through the Ramsay Affiliates,
beneficially owned shares of RHCI Common Stock
27
<PAGE>
representing 32.5% of the issued and outstanding shares of RHCI Common Stock
(calculated as if all then outstanding shares of RHCI Series C Preferred Stock
were converted in accordance with their terms into shares of RHCI Common
Stock) and held shares of RHCI Common Stock and RHCI Series C Preferred Stock
entitling Mr. Ramsay and the Ramsay Affiliates to cast approximately 30.7% of
the total number of votes cast by all RHCI stockholders on matters submitted
to the vote of stockholders. The size of Mr. Ramsay's voting interest will
enable Mr. Ramsay to control the policies of RHCI.
SIGNIFICANT OVERLAP OF BOARDS OF DIRECTORS OF RHCI AND RMCI
The Merger was approved by the RHCI Board, the RMCI Board and special
independent committees of each such Board. At the time of the approval of the
Merger by the RHCI Board and the RMCI Board, there was a significant overlap
of the membership of each of the Boards. Five out of the six members of the
RMCI Board at the time were members of the RHCI Board and five out of the
seven members of the RHCI Board at the time were members of the RMCI Board.
Although the Merger was approved by special independent committees of the RHCI
Board and the RMCI Board and the RHCI Board and the RMCI Board received
opinions from independent investment banking firms as to the fairness from a
financial point of view of the Exchange Ratios, given the overlap of the
membership of each of the Boards, the majority of the members of each of the
Boards could be considered to have a conflict of interest with respect to the
Merger.
POSSIBLE ADVERSE ADJUSTMENTS TO REIMBURSEMENT
RHCI records amounts due to or from third-party reimbursement sources based
on its best estimates of amounts to be ultimately received or paid under cost
reports filed with appropriate intermediaries. The determination of amounts
earned under reimbursement programs is subject to review and audit by these
intermediaries. Such determinations may be subject to administrative and
judicial reviews. Differences between amounts recorded as estimated
settlements and the audited amounts are reflected as adjustments to RHCI's net
revenues in the period in which the intermediary determination is made. During
the years ended June 30, 1995 and 1994, RHCI recorded contractual adjustment
benefits related to intermediary audits of prior year cost reports of
approximately $1,000,000 and $1,400,000, respectively. During the year ended
June 30, 1996, RHCI recorded contractual adjustment expenses related to
intermediary audits of prior year cost reports of approximately $1,900,000.
There can be no assurances as to whether any future adjustments will be of a
favorable nature or of a magnitude comparable to those made in fiscal 1995 or
1994 or will be of an unfavorable nature or of a magnitude comparable to that
made in fiscal 1996.
CHANGES IN MENTAL HEALTH INDUSTRY
Recently, the healthcare industry in general, and the mental health industry
in particular, have been the subject of substantial uncertainty as a result of
anticipated and on-going governmental and other third-party payor efforts to
contain healthcare costs. RHCI's management believes that a fundamental change
has occurred in the mental health industry, reflecting a permanent departure
from acute care inpatient hospitalization, upon which RHCI's business has been
substantially dependent, as the primary service method in favor of more cost-
effective alternatives. This change is reflected in decreases in patient days,
occupancy rates, lengths of stay, and reimbursement rates for acute care
inpatient care. There can be no assurance that RHCI will be able to adapt
successfully to the changing environment.
FAILURE TO BE SUCCESSFUL IN CONNECTION WITH EXPANSION INTO NEW BUSINESSES IN
THE HEALTHCARE INDUSTRY
Part of RHCI's business strategy is to build an integrated managed
healthcare delivery system, in part, by establishing outpatient treatment
centers and subacute treatment centers, and by expanding into the provision of
managed mental healthcare services, including on a capitated basis. RHCI has
over ten years' experience in the operation of inpatient acute care
psychiatric hospitals, but RHCI has only a short operating history in some of
these new businesses. There can be no assurance that RHCI will be successful
in continuing to expand the scope of its business in the healthcare industry,
that the new areas into which RHCI expands will be profitable or that
28
<PAGE>
these new areas will not subject RHCI to new management demands or expose RHCI
to additional areas of liability.
INTENSE COMPETITION--PROVIDER BUSINESS
Competition among hospitals and other mental healthcare providers for
patients is intense. Each of RHCI's hospitals competes with other hospitals,
some of which are larger and have greater financial resources than RHCI. Some
competing hospitals are owned and operated by governmental agencies, others by
nonprofit organizations supported by endowments and charitable contributions
and others by proprietary hospital corporations. The hospitals frequently draw
patients from areas outside their immediate locale and, therefore, RHCI's
hospitals may, in certain markets, compete with both local and distant
hospitals. In addition, RHCI's hospitals compete not only with other
psychiatric hospitals, but also with psychiatric units in general hospitals,
and outpatient services provided by RHCI may compete with private practicing
mental health professionals and publicly funded community and other mental
health centers. The competitive position of a hospital is, to a significant
degree, dependent upon the number and quality of physicians who practice at
the hospital and who are members of its medical staff. There can be no
assurance that RHCI will be able to compete successfully in the provider
business in the future.
In recent years, hospital patient days, occupancy rates and lengths of stay
for inpatient behavioral care patients in the United States have declined as a
result of cost containment pressures, changes in regulation and reimbursement,
changes in practice patterns from inpatient to outpatient treatment and other
factors. In recent years, the competitive position of hospitals has been
affected by the ability of such hospitals to obtain contracts with preferred
provider organizations ("PPOs"), health maintenance organizations ("HMOs") and
other managed care programs to provide inpatient and other services. These
contracts normally involve a discount from the hospital's established charges,
but provide a base of patient referrals. These contracts also frequently
provide for stringent pre-admission certification and for concurrent length of
stay reviews. The importance of obtaining contracts with HMOs, PPOs and other
managed care companies varies from market to market, depending on the
individual market strength of the managed care companies. There can be no
assurance that RHCI will be successful in obtaining these types of contracts
or that if obtained they will be profitable.
INTENSE COMPETITION--MANAGED CARE BUSINESS
After the Merger, RHCI, through its RMCI subsidiary, will operate in the
managed mental healthcare industry. The managed mental healthcare industry is
being affected by various external factors, including rising healthcare costs,
intense price competition, and market consolidation by major managed care
companies. RHCI will face competition from a number of sources, including
other behavioral health managed care companies and full service managed care
companies that contract to provide behavioral healthcare benefits. Also, to a
lesser extent, competition exists from fully capitated multi-specialty medical
groups and individual practice associations that directly contract with
managed care companies and other customers to provide and manage all
components of healthcare for their members, including the behavioral
healthcare component. RHCI believes that the most significant factors in a
customer's selection of a managed behavioral healthcare company include price,
the extent and depth of provider networks and quality of services. There can
be no assurance that RHCI will be able to compete successfully in the managed
care business in the future.
EXTENSIVE GOVERNMENT REGULATION
Operation of RHCI's facilities is subject to extensive and frequently
changing federal, state and local government regulation relating to licensure,
billing, financial relationships, referrals, direct employment of licensed
healthcare professionals by business corporations, conduct of operations,
addition of, or changes to, facilities and services, cost containment, and
certification under the Medicare, Medicaid and the Civilian Health and Medical
Program of Uniformed Services ("CHAMPUS") programs. Although RHCI endeavors to
comply with such regulatory requirements there can be no assurance that RHCI
will always be in full compliance. Failure to comply with applicable laws and
regulations could result in, among other things, the imposition of fines,
29
<PAGE>
temporary suspension of admission of new patients to facilities, exclusion
from participation in government reimbursement programs or revocation of
facility licenses. RHCI is unable to predict the future course of any such
legislation or regulations, or any changes in the regulatory framework or a
failure to be in compliance with applicable laws and regulations will have an
adverse impact on RHCI's operations.
Several states have been investigating whether psychiatric hospitals have
engaged in fraudulent practices such as inflated bills for medications and
services, bills for services never rendered and admitting patients, especially
children, who do not require hospitalization. RHCI has no knowledge of any
investigations into its operation of any of its facilities. There can be no
assurance, however, that such investigations will not be commenced in the
future and, if commenced, that such investigations will not have a material
adverse effect on RHCI's operations.
After the Merger, RHCI's managed behavioral business operations, in some
states, will be subject to third-party administrator and utilization review
certification, licensure and related state regulations. RMCI provides managed
behavioral healthcare services to various HMOs and provides at-risk managed
behavioral healthcare services. To date, the services provided by RMCI have
not been regulated by the departments of insurance in the states in which RMCI
operates. Although RHCI believes that RMCI is in material compliance with all
current state and federal regulatory requirements applicable to the managed
behavioral business it conducts, failure to do so could adversely affect its
operations.
Existing federal laws governing Medicare, as well as some state laws,
regulate certain aspects of the relationship between healthcare providers,
including RHCI and RMCI, and their referral sources, including physicians,
hospitals and other health care providers. The Social Security Act, and the
anti-kickback and self-referral rules thereunder, prohibit providers and
others from soliciting, offering, receiving or paying, directly or indirectly,
any remuneration in return for either making a referral for a Medicare-covered
service or item or ordering any such covered service or item and prohibit
physicians, subject to certain exceptions, from making referrals for certain
designated health services, including inpatient and outpatient hospital
services, to certain entities in which they have an investment interest or
with which they have a compensation arrangement. Violation of these
prohibitions is punishable by civil and criminal penalties and exclusion from
the Medicare program. In addition, certain states have passed similar
legislation which prohibits the referral of private pay patients. The
following states in which RHCI conducts business have passed legislation
which, under certain circumstances, either prohibits the referral of private
pay patients to healthcare entities in which the physician has an ownership or
investment interest or with which the physician has a compensation arrangement
or may require the disclosure of such interest to the patient: Arizona,
Florida, Georgia, Louisiana, Michigan, Missouri, Nevada, North Carolina, Ohio,
Oklahoma, South Carolina, Tennessee, Utah, Virginia and West Virginia.
Although RHCI believes that its provider and managed care operations are in
compliance with the provisions of the foregoing federal legislation and
similar state legislation, there can be no assurance that its operations will
not be asserted to be in violation of such legislation.
State laws which prohibit the employment of healthcare professionals by
business corporations, such as RHCI and RMCI, vary from state to state, are
often vague and have seldom been interpreted by the courts or regulatory
agencies. Although RHCI and RMCI exercise care in an effort to structure their
arrangements with healthcare providers to comply with the relevant state
statutes, and although management believes that the companies are in
compliance with these laws, there can be no assurance that governmental
officials charged with responsibility for enforcing these laws will not assert
that the companies or certain transactions in which they are involved are in
violation of such laws.
POSSIBLE REDUCTION IN AND OTHER ADVERSE CHANGES AFFECTING REIMBURSEMENT FOR
SERVICES RENDERED
RHCI receives its operating revenues predominately (approximately 93% for
the fiscal year ended June 30, 1996) under charge-based, cost-based and per
diem-based third-party reimbursement programs, including commercial insurance
programs and government insurance programs such as Medicare, Medicaid and
CHAMPUS. There can be no assurance that payments under these programs will
remain at levels comparable to
30
<PAGE>
present levels or will, in the future, be sufficient to cover the costs
allocable to patients eligible for reimbursement under these programs. Changes
in the reimbursement policies of these programs may have a material adverse
effect on RHCI's financial condition and results of operations.
RHCI's hospitals have been adversely affected by factors influencing the
entire psychiatric hospital industry. Factors which affect RHCI include (i)
the imposition of stringent length of stay and admission criteria and other
cost containment measures by payors; (ii) the failure of reimbursement rate
increases from certain payors that reimburse on a per diem or other discounted
basis to offset increases in the cost of providing services; (iii) an increase
in the percentage of its business that RHCI derives from payors that reimburse
other than on a cost-based basis; (iv) a trend toward higher deductibles and
co-insurance for individual patients; (v) a trend toward limiting employee
health benefits, such as reductions in annual and lifetime limits on mental
health coverage; and (vi) the imposition of rate of increases limits on
allowable costs recognized by cost-based payors. All of these factors may
result in reductions in the amounts that RHCI's hospitals can expect to
collect per patient day for services provided.
The business of RHCI has been and will continue to be affected by
initiatives undertaken during the past several years by major payors for
healthcare services. These initiatives, which are designed to revise payment
methodologies, monitor healthcare expenditures and limit admissions and
lengths of stay in order to contain healthcare costs, include contracting with
professional utilization review firms which screen patients for pre-admission
certification and conduct continued stay reviews. There can be no assurance
that continued utilization review and other such initiatives which reduce
admissions and lengths of stay and which limit reimbursement will not have a
material adverse effect on RHCI's financial condition and results of
operations.
POSSIBLE REQUIREMENT TO REPAY LOUISIANA MEDICAID DISPROPORTIONATE SHARE
PAYMENTS
During fiscal years 1994 and 1995, RHCI's Three Rivers facility received
Medicaid disproportionate share payments based on annual patient volume
projections made at the beginning of the facility's cost reporting periods.
The State of Louisiana has reviewed Three Rivers' annual patient volume for
these periods and has made a determination that the facility was overpaid
disproportionate share payments by the State. RHCI believes that certain of
the calculations which support Louisiana's preliminary determination are in
error and that other relevant factors affecting this determination have not
been considered.
Further, during fiscal years 1994 and 1995, certain private psychiatric
facilities in Louisiana, including RHCI's Three Rivers and Bayou Oaks
facilities, received additional disproportionate share payments based on the
facilities' classification as Louisiana teaching hospitals. The State of
Louisiana has taken the position that during this period teaching
disproportionate share payments were improperly paid by the State to certain
facilities, including the Three Rivers and Bayou Oaks facilities. RHCI
believes that, based on its understanding of the rules and regulations in
place at the time these payments were made, payments received as a result of
the teaching classification were appropriate.
In connection with the foregoing matters, the State of Louisiana has
requested repayment of approximately $5,000,000 by RHCI. On the basis of
discussions to date between RHCI and the State, RHCI believes that this matter
may be settled for an amount significantly less than the State's initial
request. Any settlement of this matter will be contingent upon the execution
of settlement documentation, the terms of which have not been agreed upon.
Further, there can be no assurance that RHCI and the State will agree on a
settlement amount or the terms and conditions of settlement documentation.
Although RHCI intends to vigorously contest any position by the State of
Louisiana which it considers adverse, RHCI cannot predict the outcome of these
matters at this time.
LIMITED AVAILABILITY OF QUALIFIED MEDICAL PERSONNEL
RHCI's success is dependent, in part, upon attracting and retaining
qualified psychiatric and other medical personnel at all of its facilities.
These personnel are available in limited numbers and are sought after by
31
<PAGE>
operators of facilities which compete with RHCI's facilities. Generally, RHCI
does not enter into employment agreements with these personnel and, therefore,
there can be no assurance that RHCI will be successful in retaining such
personnel or attracting other qualified psychiatric and other medical
personnel.
PROFESSIONAL LIABILITY RISKS
Physicians, hospitals and other healthcare providers have been subject to an
increasing number of legal claims in recent years. RHCI is subject to claims
and suits by patients and others in the ordinary course of business. RHCI
maintains hospital professional liability insurance coverage with maximum
coverage of $25,000,000 subject to a self-insured retention of $500,000 per
claim and $1,500,000 in the aggregate for each year insured. Although RHCI
believes that its insurance will be adequate to respond to known claims,
significant awards of claims or damages could have a material adverse effect
on RHCI's financial condition and results of operations.
SEASONALITY OF OPERATIONS
Psychiatric hospital admissions, particularly admissions of children and
adolescents, are subject to certain seasonal fluctuations, including decreases
in admission levels during the summer months and holiday periods. Certain of
RHCI's expenses, including debt service and certain personnel costs, are
fixed, and accordingly, there can be no assurance that RHCI will not be
adversely affected by the seasonality of its operations.
UNCERTAINTY ASSOCIATED WITH MEDICARE AND MEDICAID REIMBURSEMENT, GOVERNMENTAL
BUDGETARY CONSTRAINTS AND HEALTHCARE REFORM
A significant portion of RHCI's revenues are derived from reimbursement from
government programs such as Medicare and Medicaid, which are highly regulated
and subject to change. Future changes in governmental reimbursement could have
a material effect on RHCI's financial condition and results of operations.
In the 1995 and 1996 sessions of the United States Congress, healthcare
legislation focused on budgetary and related funding mechanism issues. A
number of reports, including the 1995 Annual Report of the Board of Trustees
of the Federal Hospital Insurance Program (Medicare) have projected that the
Medicare "trust fund" is likely to become insolvent by the year 2002 if the
current growth rate of approximately 10% per annum in Medicare expenditures
continues. Similarly, federal and state expenditures under the Medicaid
program are projected to increase significantly during the same period. In
response to these projected expenditure increases, and as part of an effort to
balance the federal budget, both the Congress and the Clinton Administration
made proposals to reduce the rate of increase in projected Medicare and
Medicaid expenditures and to change funding mechanisms and other aspects of
both programs, although none of the proposals have been enacted into law. Most
recently, the Clinton Administration has proposed Medicare and Medicaid budget
plans containing significant savings, as well as program changes, including
reducing payments to Medicare HMOs and to providers. The Clinton
Administration is attempting to increase the number of Medicare beneficiaries
subject to capitated managed care plans. Such an increase in the number of
beneficiaries subject to capitated managed care plans could reduce the amount
of cost-based reimbursement received by RHCI. As of the date of this Joint
Proxy Statement/Prospectus, that proposal has not become law.
The Medicare legislation that has been proposed by the Clinton
Administration would, with some differences, reduce projected expenditure
increases by a variety of means, including reduced payments to providers
(including RHCI), increased beneficiary premiums for physician and certain
other services, and creation of incentives for Medicare beneficiaries to
enroll in managed care plans or to accept Medicare coverage with a
substantially higher deductible. Changes in the Medicaid program would reduce
the number and extent of federal mandates concerning how state Medicaid
programs operate (including levels of benefits provided and levels of payments
to providers) and would change the funding mechanism from a sharing formula
between the federal government and a state to "block grant" funding. However,
RHCI cannot predict whether such legislation will be enacted or the effect of
any such legislation, if adopted, on its financial condition or results of
32
<PAGE>
operations. However, RHCI anticipates that, although overall Medicare and
Medicaid funding may be reduced from projected levels, the changes in such
programs may provide opportunities to RHCI to obtain increased Medicare and
Medicaid business through risk-sharing or partial risk-sharing contracts with
managed care plans and state Medicaid programs.
Both Congress and the agency responsible for administering the Medicare
program, the Health Care Financing Administration, have been investigating a
revision to the payment system for inpatient psychiatric services and hospital
outpatient services, including of the type of services provided by RHCI, which
would eliminate the cost-based structure of the current system. Under current
proposals, inpatient psychiatric services would be transitioned to a
prospective payment system where payment for services may be unrelated to the
provider's costs. If the transition to such a prospective payment system is
consistent with the transition used for acute care hospitals and capital costs
for such services, a transition period with a rate that includes a hospital
specific component and a federal component may be used. It is impossible to
predict the base year that Congress may select as the basis for the hospital
specific component for any transition period. The Clinton Administration's
Medicare budget plan also proposes to change payment for outpatient services
from a cost-based system to a prospective payment system. A federal budget
savings is estimated from such a change. The methodology for such a new system
is not described in the budget proposal. At present, no legislation has been
passed by Congress changing the payment system for the services provided by
RHCI to a prospective payment system. RHCI cannot predict whether such
legislation will be enacted or the effect of any such legislation, if adopted,
on its financial condition or results of operations, although such changes
could reduce the reimbursement received by RHCI.
In August 1996, the United States Congress passed and President Clinton
signed the Health Insurance Portability and Accountability Act, also known as
the Kassenbaum-Kennedy bill. This legislation addresses, among other things,
healthcare issues such as the portability and renewability of healthcare
insurance, the prevention of healthcare fraud and abuse and administrative
simplification to enable health information to be exchanged electronically.
The legislation, which takes effect July 1, 1997, will require employers and
insurers to cover previously insured new workers despite any pre-existing
medical conditions. In addition, employers will be required to cover all
existing employees at the same rate regardless of health status. The new law
also (a) requires that people who lose group coverage are ensured access to
individual policies, (b) increases the tax deduction on health insurance
premiums of self-employed individuals, (c) guarantees the right of small
employers to buy health insurance coverage for their employees and (d)
implements a pilot project on medical savings accounts for 750,000
individuals. RHCI does not believe that it will be directly affected by the
portability and renewability provisions of the legislation because it is not a
group health plan or a health insurance issuer offering group health insurance
coverage. RHCI also believes it is currently in compliance with all federal
fraud and abuse laws. The regulations implementing the provisions relating to
the administrative simplification have not yet been promulgated. However, RHCI
cannot predict the effect of this legislation on its financial condition or
results of operations.
Additionally, in 1996, Congress enacted the Mental Health Parity Act of 1996
(the "Parity Act") which generally requires that group health plans which
provide benefits for mental healthcare must treat mental health benefits on a
similar basis as benefits for any other illness for purposes of imposing
annual or lifetime benefit limits. The law provides that, if the plan imposes
limits on medical or surgical benefits on the basis of different categories of
benefits, the plan may do the same with regard to different categories of
mental health benefits, all in accordance with regulations to be issued by the
Department of Labor. RHCI cannot predict the effect of this legislation on its
financial condition or results of operations or on that of RMCI.
Although the United States Congress has not enacted comprehensive healthcare
reform proposals, RHCI anticipates that additional healthcare reform proposals
will continue to be introduced in future sessions of Congress. RHCI cannot
predict whether any such proposal will be adopted or the effect on RHCI or
RMCI of any proposal that does become law.
33
<PAGE>
A number of states in which RHCI has operations have either adopted or are
considering the adoption of healthcare reform proposals of general
applicability or Medicaid reform proposals, partly in response to possible
changes in Medicaid law. Where adopted, these state reform laws have often not
yet been fully implemented. RHCI cannot predict the effect of these state
healthcare reform and Medicaid reform laws on its financial condition or
results of operations, although such changes could reduce the reimbursement
received by RHCI.
DILUTION
RHCI's business strategy includes pursuing possible acquisition
opportunities which may involve using shares of RHCI Common Stock as
consideration for business transactions. The issuance of additional shares of
RHCI Common Stock in such transactions could have a dilutive effect on the
shares of RHCI Common Stock outstanding.
FAILURE TO PAY DIVIDENDS
RHCI has not declared any cash dividends on RHCI Common Stock. In addition,
under the terms of the 1993 RHCI Credit Facility, RHCI is prohibited from
paying cash dividends on RHCI Common Stock or RHCI Preferred Stock. It is the
present intention of RHCI to retain any future earnings to support the
continued growth of its business. Any future determination to pay cash
dividends will be at the discretion of the RHCI Board, and will be dependent
upon the terms and conditions of RHCI's credit facilities and RHCI's financial
condition, results of operations, capital requirements and such other factors
as the RHCI Board shall deem relevant.
POTENTIAL FACILITY CLOSURES
RHCI continually assesses events and changes in circumstances that could
affect its business strategy and the viability of its operating facilities.
RHCI may elect to consolidate services in selected markets and to close or
sell additional facilities in future periods depending on market conditions
and evolving business strategies. If RHCI closes additional hospitals and
outpatient facilities in future periods, it could result in charges to income
for the costs necessary to exit these operations.
POSSIBLE VOLATILITY OF STOCK PRICE
RHCI believes factors such as announcements with respect to healthcare
reform measures, announcements affecting other behavioral healthcare
providers, reductions in projected government healthcare program expenditures,
and quarter-to-quarter and year-to-year variations in financial results could
cause the market price of RHCI Common Stock to fluctuate substantially. Any
such adverse announcement with respect to healthcare reform measures or
program expenditures, or any shortfall in revenue or earnings from levels
expected by securities analysts, could have an immediate and significant
adverse effect on the trading price of RHCI Common Stock in any given period.
As a result, the market for RHCI Common Stock may experience price and volume
fluctuations unrelated to the operating performance of RHCI.
SUBSTANTIAL INTANGIBLE ASSETS
On a pro forma basis at December 31, 1996, after giving effect to the
Merger, a substantial portion ($23,448,000), or 16.0% of RHCI's total assets
($146,164,000), will consist of goodwill (excess of cost over fair value of
net assets acquired) and other intangible assets relating principally to the
acquisition of RMCI. There can be no assurance that the value of such
intangible assets will be realized through the future contribution of the
acquired businesses to cash flows.
POSSIBLE ADVERSE EFFECT OF AT-RISK FEE ARRANGEMENTS
Presently, in connection with RMCI's managed mental healthcare business,
RMCI charges certain managed care customers a fixed monthly "capitation fee"
for each beneficiary enrolled in that customer's mental health
34
<PAGE>
benefit program managed by RMCI. A "capitation fee" or "capitation payment" is
a fixed, prepaid payment for mental health, substance abuse or other
healthcare services for a certain contractual term paid on a per
member/beneficiary per month basis regardless of the amount of services
rendered to such beneficiary. For many of RMCI's programs, the capitation fee
includes an outpatient and an inpatient component. Depending upon both the
type of program for which a managed care customer contracts and the benefits
covered under such managed care customer's benefit program, the fee
arrangement is designed so that, with respect to both inpatient and outpatient
care, RMCI accepts full risk (all services capitated), as is generally the
case, partial risk (selected services capitated) or limited risk (full risk up
to a maximum amount), in each case for all services rendered regardless of
whether the costs exceed the fees paid to RMCI under the program.
In setting fees, RMCI relies upon a number of assumptions, including
assumptions as to utilization rates and costs, whether relating to inpatient
facilities, use of independent providers or otherwise. There can be no
assurance that these assumptions will accurately and adequately reflect actual
utilization rates and costs. If actual rates or costs exceed those projected
by RMCI with respect to a particular program, the expenses to RMCI under this
program may increase and could exceed the corresponding capitation fee which,
in either case, could have a material adverse effect on RMCI's financial
condition and results of operations.
In order for at-risk contracts to be profitable, RMCI must accurately
estimate the utilization rate for mental health services per month for members
of the managed care payor's health benefit plan and price such services
accordingly. In addition, RMCI must have internal systems which enable it to
collect appropriate statistics to analyze healthcare costs and service
utilization rates thereby allowing it to negotiate appropriate rates in its
contracts. There can be no assurance that RMCI will continue to receive fees
under these arrangements which will permit it to continue to recover the costs
of the mental health services it will be required to provide.
Some states take the position that capitated agreements in which the
provider bears the risk is, in effect, the business of insurance and should be
regulated by insurance laws. At present, no state in which RMCI has a
behavioral health at-risk contract has required its operations to be licensed
under applicable insurance laws. However, there can be no assurance that in
the future, RHCI will not be required to obtain insurance licenses in the
respective states where the at-risk arrangements are in effect or are to be
pursued. There can also be no assurance that RHCI can obtain insurance
licenses if required by the respective states in a timely or cost effective
manner.
DEPENDENCE ON A SMALL NUMBER OF MANAGED CARE CUSTOMERS; POSSIBLE ADVERSE
EFFECT OF A TERMINATION OF CONTRACTS WITH MANAGED CARE CUSTOMERS
RMCI's managed care customers are generally self-insured employers, HMOs,
insurance companies and governmental agencies. Historically, a limited number
of managed care customers have accounted for substantially all of RMCI's
revenues. At December 31, 1996, RMCI had approximately 30 managed care
customers. For the fiscal year ended June 30, 1996, RMCI's four largest
managed care customers, Walt Disney World Co., The Health Plan of The Upper
Ohio Valley, Health Options, Inc. and AlohaCare, Inc., accounted for
approximately 17.0%, 12.0%, 11.0% and 11.0%, respectively, of RMCI's total
revenues.
Certain of RMCI's managed behavioral healthcare contracts with its managed
care customers, including its contracts with Health Options, Inc., may be
terminated without cause on 90 days' notice from the customer. There can be no
assurance that these contracts will not be terminated, will be extended or
successfully renegotiated or that the terms of any new contracts will be
comparable to those of the existing contracts. The loss of business from one
or more of RMCI's major managed care customers would have a material adverse
effect on RMCI's financial condition and results of operations. In addition,
in the event that a managed care customer establishes alternative managed
mental healthcare capabilities or relationships and discontinues its
relationship with RMCI, RMCI could experience a significant decrease in
operating revenues which would have a material adverse effect on its financial
condition and results of operations.
35
<PAGE>
RMCI's revenues also are directly dependent upon the ability of each of its
managed care customers to pay RMCI on a timely basis. To the extent that any
major managed care customer experiences financial difficulty or is otherwise
unable to meet its obligations as they become due, RMCI's financial condition
and results of operations and thus, RHCI's financial condition and results of
operations after the Merger, would be materially adversely affected.
CERTAIN ANTITAKEOVER EFFECTS
Pursuant to a rights plan (the "Rights Plan"), the RHCI Board declared a
dividend distribution of one common share purchase right (the "Rights") for
each outstanding share of RHCI Common Stock (calculated on the basis as if all
outstanding shares of RHCI Series C Preferred Stock were converted into RHCI
Common Stock immediately prior to the close of business on August 14, 1995) to
RHCI stockholders of record at the close of business on August 14, 1995. Each
share of RHCI Common Stock issued after this date, including the shares of
RHCI Common Stock to be issued in the Merger, will also include one Right.
Also, in connection with the Merger, the holder of each share of RHCI Series
1996 Preferred Stock to be issued in the Merger will receive one Right for
each share of RHCI Common Stock into which such share of RHCI Series 1996
Preferred Stock is convertible.
Each Right entitles the holder thereof until August 14, 2005 (or, if
earlier, the redemption or exchange of the Rights) to buy a number of shares
of RHCI Common Stock at an exercise price of $12.00, subject to certain
antidilution adjustments (the "Purchase Price"). The Rights will be
represented by the RHCI Common Stock and RHCI Preferred Stock certificates and
will not be exercisable, or transferable apart from the RHCI Common Stock or
the RHCI Preferred Stock, until the earlier to occur of (i) 10 days following
a public announcement that a person or group of affiliated or associated
persons has acquired beneficial ownership of 20% (25% in the case of a 13G
Person, as defined below) or more of the outstanding RHCI Common Stock (an
"Acquiring Person") or (ii) 10 business days following the commencement of or
announcement of an intention to make a tender offer or exchange offer upon
consummation of which a person or group would beneficially own 20% or more of
such outstanding RHCI Common Stock. However, no person or group of affiliated
or associated persons shall be an "Acquiring Person", and the Rights will not
become exercisable or transferable apart from the RHCI Common Stock or the
RHCI Series 1996 Preferred Stock, by reason of an acquisition from Paul J.
Ramsay, Chairman of the Board of RHCI and RMCI, or from any affiliate or
associate of Mr. Ramsay, of any of the shares of RHCI Common Stock or RHCI
Series 1996 Preferred Stock currently held by affiliates of Mr. Ramsay or of
any shares of RHCI Common Stock issuable pursuant to the RHCI Series 1996
Preferred Stock or stock options or warrants currently held by Mr. Ramsay or
any affiliated or associated person. Furthermore, neither Mr. Ramsay nor any
affiliated or associated person shall be an "Acquiring Person", and the Rights
will not become exercisable or transferable apart from the RHCI Common Stock
and the RHCI Preferred Stock, by reason of an acquisition of beneficial
ownership of RHCI Common Stock by Mr. Ramsay or any affiliated or associated
persons which does not increase the number of shares of RHCI Common Stock
(including shares issuable pursuant to the RHCI Preferred Stock and under any
then currently exercisable RHCI Options or RHCI Warrants held by Mr. Ramsay or
any affiliated or associated person) held by Mr. Ramsay and any persons
affiliated or associated with Mr. Ramsay to one share less than 50% of the
RHCI Common Stock then outstanding (including any shares of RHCI Common Stock
issuable pursuant to the RHCI Preferred Stock and under any then currently
exercisable RHCI Options or RHCI Warrants held by Mr. Ramsay or any affiliated
or associated person). Generally, for purposes of the Rights Plan, a "13G
Person" is a person eligible to file a statement with the Commission on
Schedule 13G under the Exchange Act, including a registered broker/dealer, a
bank, an insurance company, a registered investment company, a registered
investment adviser or an employee benefit plan or pension fund subject to
ERISA. The date on which the Rights become exercisable is referred to herein
as the "Rights Distribution Date." As soon as practicable following the Rights
Distribution Date, separate certificates representing the Rights will be
mailed to holders of the RHCI Common Stock and RHCI Preferred Stock as of the
close of business on the Rights Distribution Date. The Rights will first
become exercisable on the Rights Distribution Date, unless earlier redeemed or
exchanged, and could then begin trading separately from the RHCI Common Stock
and RHCI Preferred Stock. The Rights will at no time have any voting rights.
36
<PAGE>
In the event that an Acquiring Person shall have acquired beneficial
ownership of 20% (25% in the case of a 13G Person) or more of the outstanding
RHCI Common Stock, each holder of a Right shall thereafter have the right to
receive, upon exercise thereof at the then current Purchase Price, that number
of shares of RHCI Common Stock which at such time would have a market value of
two times the then current Purchase Price. In the event that RHCI were
acquired in a merger or other business combination transaction or 50% or more
of its assets or earning power were sold, proper provision will be made so
that each holder of a Right shall thereafter have the right to receive, upon
the exercise thereof at the then current Purchase Price, that number of shares
of common stock of the acquiring company which at the time of such transaction
would have a market value of two times the then current Purchase Price. Any
Rights that are or were beneficially owned at any time on or after the earlier
of the Rights Distribution Date or the Shares Acquisition Date (as defined in
the Rights Agreement) by an Acquiring Person that engages in any of the events
described in the preceding sentence will become null and void and no holder of
such Rights will have any right with respect to such Rights from and after
such occurrence.
The Rights have certain anti-takeover effects. The Rights will cause
substantial dilution to a person or group that attempts to acquire RHCI on
terms not approved by the RHCI Board of Directors. The overall effect of the
above-described measures may be to discourage or render more difficult the
accomplishment of mergers or other takeover or change in control attempts. To
the extent that these measures have this effect, removal of the incumbent RHCI
Board and the management of RHCI may be rendered more difficult. Further,
these measures may have an adverse impact on the ability of RHCI stockholders
to participate in a tender or exchange offer for RHCI and in so doing diminish
the market value of the RHCI Common Stock. RHCI is not aware of any proposed
takeover attempt.
DEPENDENCE ON PAYMENTS FROM SUBSIDIARIES
RHCI is a holding company which derives substantially all of its operating
income from its subsidiaries. RHCI must rely upon dividends and other payments
from its subsidiaries to generate the funds necessary to meet its obligations.
The ability of RHCI's subsidiaries to make such payments will be subject to,
among other things, applicable state laws. Claims of creditors of RHCI's
subsidiaries, including trade creditors and lessors under their operating and
capital leases, will generally have a priority as to the assets of such
subsidiaries over the claims of RHCI and the holders of RHCI's indebtedness.
37
<PAGE>
INTRODUCTION
MEETINGS OF STOCKHOLDERS
RHCI Meeting
This Joint Proxy Statement/Prospectus is being furnished to the holders of
RHCI Common Stock and RHCI Series C Preferred Stock in connection with the
solicitation of proxies by and on behalf of the RHCI Board of Directors (the
"RHCI Board") for use at the RHCI Meeting to be held at 9:30 A.M. on April 18,
1997 at The New York Palace, 455 Madison Avenue, New York, New York and at any
adjournments thereof. The close of business on February 28, 1997 is the record
date for determining the stockholders of RHCI entitled to vote at the RHCI
Meeting (the "RHCI Record Date"). This Joint Proxy Statement/Prospectus and
the enclosed proxy are first being sent to holders of RHCI Common Stock and
RHCI Series C Preferred Stock on or about March 27, 1997.
Purpose of RHCI Meeting
At the RHCI Meeting, RHCI's stockholders will consider and vote upon (i) the
Merger Proposal; (ii) a proposal to approve the adoption of the Ramsay Health
Care, Inc. 1996 Long Term Incentive Plan (the "1996 Long Term Incentive
Plan"); and (iii) such other business as may properly come before the RHCI
Meeting or any adjournments thereof.
Voting Requirements at RHCI Meeting
Approval and adoption of the Merger Proposal and the 1996 Long Term
Incentive Plan requires the affirmative vote of a majority of the votes cast
by the holders of RHCI Common Stock and the holders of RHCI Series C Preferred
Stock (voting together with the RHCI Common Stock as a single class on the
basis of the number of shares of RHCI Common Stock into which such RHCI Series
C Preferred Stock is convertible) entitled to vote thereon at the RHCI Meeting
(at which a quorum must be present).
As of the RHCI Record Date, there were 8,425,431 outstanding shares of RHCI
Common Stock, each of which is entitled to one vote with respect to each
matter to be voted on at the RHCI Meeting and 142,486 outstanding shares of
RHCI Series C Preferred Stock, each of which is entitled to ten (10) votes
(voting together with the RHCI Common Stock as a single class) with respect to
each matter voted on at the RHCI meeting. As of such date, RHCI's directors,
executive officers and corporate affiliates of Paul J. Ramsay, the Chairman of
the Board of RHCI and RMCI, owned an aggregate of 3,546,112 shares of RHCI
Common Stock (calculated as if all outstanding shares of RHCI Series C
Preferred Stock were converted in accordance with their terms into shares of
RHCI Common Stock), or approximately 36.0% of the issued and outstanding
shares of RHCI Common Stock (calculated as if all outstanding shares of RHCI
Series C Preferred Stock were converted in accordance with their terms into
shares of RHCI Common Stock) on the RHCI Record Date, of which Mr. Ramsay and
his corporate affiliates owned an aggregate of 3,398,054 shares of RHCI Common
Stock (calculated as aforesaid), or approximately 34.5% of the issued and
outstanding shares of RHCI Common Stock (calculated as aforesaid). As of the
RHCI Record Date, these corporate affiliates owned 100% of the issued and
outstanding shares of RHCI Series C Preferred Stock. These directors,
executive officers and corporate affiliates of Mr. Ramsay have advised RHCI
that they intend to vote or to direct the vote of all shares of RHCI Common
Stock and RHCI Series C Preferred Stock over which they have voting power FOR
approval and adoption of the Merger Proposal and the 1996 Long Term Incentive
Plan. RHCI has no class or series of capital stock outstanding other than RHCI
Common Stock and RHCI Series C Preferred Stock entitled to vote at the RHCI
meeting.
Paul J. Ramsay is the Chairman of the Board of both RHCI and RMCI.
Subsequent to the Merger, he will remain Chairman of the Board of RHCI. His
pro forma ownership in RHCI immediately after the Effective Time (assuming
that the Merger was consummated on the RHCI Record Date) would be 5,560,778
shares of RHCI Common Stock (calculated as if all outstanding shares of RHCI
Preferred Stock were converted in accordance with their terms into shares of
RHCI Common Stock), or approximately 42.8% of the issued and outstanding
38
<PAGE>
shares of RHCI Common Stock at that time (calculated as if all outstanding
shares of RHCI Preferred Stock were converted in accordance with their terms
into shares of RHCI Common Stock).
RHCI Proxies
All proxies that are properly executed by holders of RHCI Common Stock and
holders of RHCI Series C Preferred Stock and received by RHCI prior to the
RHCI Meeting will be voted in accordance with the instructions noted thereon.
ANY PROXY THAT DOES NOT SPECIFY TO THE CONTRARY WILL BE VOTED IN FAVOR OF THE
MERGER PROPOSAL AND IN FAVOR OF THE 1996 LONG TERM INCENTIVE PLAN. Any holder
of RHCI Common Stock or RHCI Series C Preferred Stock who submits a proxy will
have the right to revoke it, at any time before it is voted, by filing with
the Secretary of RHCI written notice of revocation or a duly executed later-
dated proxy, or by attending the RHCI Meeting and voting such RHCI Common
Stock or RHCI Series C Preferred Stock in person.
RMCI Meeting
This Joint Proxy Statement/Prospectus is also being furnished to the holders
of RMCI Common Stock and RMCI Series 1996 Preferred Stock in connection with
the solicitation of proxies by and on behalf of the RMCI Board of Directors
(the "RMCI Board") for use at the RMCI Meeting to be held at 8:30 A.M. on
April 18, 1997 at The New York Palace, 455 Madison Avenue, New York, New York
and at any adjournments thereof. The close of business on February 28, 1997 is
the record date for determining the stockholders of RMCI entitled to vote at
the RMCI Meeting (the "RMCI Record Date"). This Joint Proxy
Statement/Prospectus and the enclosed proxy are first being sent to RMCI
stockholders on or about March 27, 1997.
Purpose of RMCI Meeting
At the RMCI Meeting, RMCI's stockholders will consider and vote upon (i) the
approval and adoption of the Merger Agreement and (ii) such other business as
may properly come before the RMCI Meeting or any adjournments thereof.
Voting Requirements at RMCI Meeting
Approval and adoption of the Merger Agreement requires the affirmative vote
of (i) the holders of a majority of the issued and outstanding shares of RMCI
Common Stock (including for this purpose the number of shares of RMCI Common
Stock into which the issued and outstanding shares of RMCI Series 1996
Preferred Stock are convertible in accordance with their terms) and (ii) the
holders of a majority of the issued and outstanding shares of RMCI Series 1996
Preferred Stock (voting as a separate class in addition to voting together
with the RMCI Common Stock as set forth in clause (i) above). As of the RMCI
Record Date, there were 6,408,315 outstanding shares of RMCI Common Stock,
each of which is entitled to one vote with respect to each matter to be voted
on at the RMCI Meeting, and 100,000 outstanding shares of RMCI Series 1996
Preferred Stock, each of which is convertible into thirty (30) shares of RMCI
Common Stock and is entitled to thirty (30) votes (voting together with the
RMCI Common Stock as a single class in addition to voting as a separate class)
with respect to each matter to be voted on at the RMCI Meeting.
As of the RMCI Record Date, RMCI's directors, executive officers and
corporate affiliates of Paul J. Ramsay, the Chairman of the Board of RMCI and
RHCI, owned 6,718,337 shares of RMCI Common Stock (calculated as if all
outstanding shares of RMCI Series 1996 Preferred Stock were converted in
accordance with their terms into shares of RMCI Common Stock), or
approximately 71.4% of the issued and outstanding shares of RMCI Common Stock
(calculated as if all outstanding shares of RMCI Series 1996 Preferred Stock
were converted in accordance with their terms into shares of RMCI Common
Stock) on the RMCI Record Date, of which the corporate affiliates of Mr.
Ramsay owned an aggregate of 6,488,173 shares of RMCI Common Stock (calculated
as aforesaid), or approximately 69.0% of the issued and outstanding shares of
RMCI Common Stock (calculated as aforesaid). As of the RMCI Record Date, these
corporate affiliates owned 100% of the issued and outstanding shares of RMCI
Series 1996 Preferred Stock. These directors, executive officers and corporate
affiliates of Mr. Ramsay have advised RMCI that they intend to vote or to
direct the vote of all shares of RMCI
39
<PAGE>
Common Stock and RMCI Series 1996 Preferred Stock over which they have voting
power FOR approval and adoption of the Merger Agreement. See "The Merger--
Other Agreements," "Certain Relationships and Related Transactions," "Security
Ownership of Certain Beneficial Owners" and "Security Ownership of
Management," below. RMCI has no class or series of capital stock outstanding
other than RMCI Common Stock and RMCI Series 1996 Preferred Stock entitled to
vote at the RMCI Meeting.
RMCI Proxies
All proxies that are properly executed by holders of RMCI Common Stock and
RMCI Series 1996 Preferred Stock and received by RMCI prior to the RMCI
Meeting will be voted in accordance with the instructions noted thereon. ANY
PROXY THAT DOES NOT SPECIFY TO THE CONTRARY WILL BE VOTED IN FAVOR OF APPROVAL
AND ADOPTION OF THE MERGER AGREEMENT. Any holder of RMCI Common Stock or RMCI
Series 1996 Preferred Stock who submits a proxy will have the right to revoke
it, at any time before it is voted, by filing with the Secretary of RMCI
written notice of revocation or a duly executed later-dated proxy, or by
attending the RMCI Meeting and voting such RMCI Common Stock or RMCI Series
1996 Preferred Stock in person.
General
Abstentions and Broker Non-Votes. At the Meetings, abstentions and broker
non-votes (as hereinafter defined) will be counted as present for the purpose
of determining the presence of a quorum. For the purpose of computing the vote
required for approval of matters to be voted on at the RHCI Meeting, shares
held by stockholders who abstain from voting will be treated as being
"present" and "entitled to vote" on the matter and, thus, an abstention has
the same legal effect as a vote against the matter. However, in the case of a
broker non-vote, such shares will not be treated as "present" and "entitled to
vote" on the matter and, thus, a broker non-vote will have no effect on the
outcome of the vote on the matter. For the purpose of computing the vote
required for approval of the Merger Agreement at the RMCI Meeting, abstentions
and broker non-votes will have the same effect as a vote against approval and
adoption of the Merger Agreement. A "broker non-vote" refers to shares
represented at the Meetings in person or by proxy by a broker or nominee where
such broker or nominee (i) has not received voting instructions on a
particular matter from the beneficial owners or persons entitled to vote and
(ii) the broker or nominee does not have the discretionary voting power on
such matter.
Costs of solicitation. All costs relating to the solicitation of proxies of
stockholders of RHCI and RMCI will be borne by RHCI and RMCI, respectively.
Proxies may be solicited by officers, directors and regular employees of RHCI
and RMCI and their subsidiaries personally, by mail or by telephone or
otherwise. RHCI and RMCI will pay brokers and other persons holding shares of
stock in their names or those of their nominees for their reasonable expenses
in sending soliciting material to their principals.
Dissenters' Rights. Under Delaware corporate law, the holders of RMCI Common
Stock and RMCI Series 1996 Preferred Stock are entitled to appraisal rights if
the Merger is consummated, provided that certain procedures are followed.
Failure to take any necessary steps will result in a termination or waiver of
the rights of a stockholder to such appraisal. Holders of RHCI Common Stock
and RHCI Series C Preferred Stock are not entitled to appraisal rights under
Delaware corporate law in connection with, or as a result of, the Merger. See
"The Merger --Dissenters' Rights."
Stockholder Proposals. Stockholder proposals intended to be presented at
RHCI's next Annual Meeting of Stockholders must be received by RHCI by July 3,
1997 in order to be considered for inclusion in RHCI's proxy statement
relating to such meeting.
If the Merger is not consummated, stockholder proposals intended to be
presented at the next Annual Meeting of Stockholders of RMCI must be received
by RMCI by July 3, 1997 in order to be considered for inclusion in RMCI's
proxy statement relating to such meeting.
IT IS IMPORTANT THAT PROXIES BE RETURNED PROMPTLY. STOCKHOLDERS WHO DO NOT
EXPECT TO ATTEND THE RESPECTIVE MEETINGS OF EACH OF RHCI AND RMCI IN PERSON
ARE URGED TO MARK, SIGN AND DATE THE ACCOMPANYING PROXY AND MAIL IT IN THE
ENCLOSED RETURN ENVELOPE, WHICH REQUIRES NO POSTAGE IF MAILED IN THE UNITED
STATES, SO THAT THEIR VOTES CAN BE RECORDED.
40
<PAGE>
PROPOSAL I: APPROVAL AND ADOPTION OF THE MERGER PROPOSAL
AND THE MERGER AGREEMENT
RHCI Proposal I. At the RHCI Meeting, RHCI's stockholders will consider and
vote upon the Merger Proposal.
RMCI Proposal I. At the RMCI Meeting, RMCI's stockholders will consider and
vote upon the approval and adoption of the Merger Agreement.
THE MERGER
The effective time, consideration and other terms of the Merger are
described in "The Merger Agreement" below. Such description includes a
discussion of the conditions to the consummation of the Merger, including that
the applicable waiting period under the Hart-Scott-Rodino Antitrust
Improvements Act of 1976 (the "HSR Act") relating to the Merger shall have
expired. The appropriate filings under the HSR Act have been made and the 30-
day waiting period thereunder is scheduled to expire on April 3, 1997 absent a
tolling of the waiting period by the Federal Trade Commission or the
Department of Justice.
BACKGROUND OF THE MERGER
The Distribution. RMCI was formed in July 1993 as a wholly owned subsidiary
of RHCI and began operations in October 1993 through the acquisition of
Florida Psychiatric Management Inc. ("FPM"). In September 1994, the RHCI Board
decided to distribute all of the shares of RMCI Common Stock held by RHCI to
RHCI's stockholders in the form of a dividend (the "Distribution"). The
Distribution was effected for a number of business reasons and in order to
attempt to achieve a number of business objectives, all of which were
determined by RHCI and RMCI to be valid and achievable at that time. These
included (i) allowing RHCI and RMCI to focus their operating resources on
their respective businesses thereby allowing RHCI and RMCI to pursue what were
believed at the time to be separate development and growth strategies, (ii)
enabling RMCI to use its publicly traded equity to make acquisitions and to
attract, motivate and retain qualified key employees by providing an incentive
program more closely tied to the performance of RMCI, and (iii) providing more
visibility to RMCI's business among securities analysts, investors and
lenders, resulting in a higher valuation of that business for stockholders.
The Distribution to RHCI's stockholders of RMCI Common Stock was completed on
April 24, 1995. Immediately after the Distribution, RMCI issued to its
stockholders, other than the Ramsay Affiliates, rights to purchase additional
shares of RMCI Common Stock for $2.00 per share (the "RMCI Rights Offering").
All 960,913 shares of RMCI Common Stock offered in the RMCI Rights Offering
were subscribed for.
During 1996, as part of their continuous evaluation of the business of RMCI
and the prospects for its business, the management of RMCI concluded that the
above-described reasons for the Distribution were no longer applicable,
primarily as a result of recent consolidation trends in the healthcare
industry. At the time of the Distribution, the present consolidation trends in
the mental healthcare industry were not apparent to the management of RMCI or
RHCI. A principal reason for the Distribution was to allow RHCI and RMCI to
pursue their development and growth strategies independently. However, it
became apparent to the management of RMCI and RHCI that, as a result of recent
consolidation in the mental healthcare industry, RMCI's and RHCI's growth
strategies are converging and not diverging. Accordingly, a combination of the
two companies was determined to be beneficial to RHCI and RMCI.
Further, the management of RMCI believes that the market value of RMCI
Common Stock does not reflect the long-term potential for the business
conducted by RMCI. Accordingly, the anticipated benefits for RMCI of being
able to make acquisitions with RMCI Common Stock and to utilize RMCI Common
Stock to attract, motivate and retain qualified key employees have not
materialized. In addition, RMCI does not have sufficient available cash
reserves or credit lines to fund any significant acquisitions. Management also
determined that the
41
<PAGE>
burden of continued compliance with federal securities laws reporting
requirements, other costs attendant to RMCI's status as a public company and
the separate costs borne by RMCI (including those owed to RHCI for
administration and other matters) would be eliminated as a result of the
Merger. Finally, after the sale of RMCI's wholly owned subsidiary, Apex
Healthcare, Inc. ("Apex") (See "Information Concerning RMCI--Business--Recent
Events"), management believes that the remaining behavioral healthcare
services operations of RMCI may have insufficient financial and operational
capability to permit RMCI to grow sufficiently as an independent, publicly
traded company and thus deprive RMCI of the ability to be recognized by the
financial community as a separate and distinct business.
Over a period of several months in 1996 during which alternative courses of
actions were considered by management of RMCI and by the RMCI Board (see the
following discussion for a description of various management, Board of
Directors and third-party meetings and discussions), management of RMCI came
to the conclusion that the best possible course of action for RMCI and its
stockholders was a reintegration with and into the operations of RHCI. The
alternative courses of action considered or pursued during this time consisted
of (i) consideration of remaining as an independent publicly traded company
following the sale of Apex, (ii) the possible sale of the component parts of
RMCI, that is, the sale of Apex, the sale of RMCI's clinics and related
operations (the "RMCI Clinics") and the sale of RMCI's behavioral healthcare
services operations (the "RMCI Behavioral Healthcare Business") and (iii) the
possible sale of RMCI (after the sale of Apex) as a whole. For the reasons
expressed in the immediately preceding paragraph, RMCI concluded that
remaining an independent publicly traded company was not a course of action
which would best serve the interests of RMCI or its stockholders. Although
RMCI determined to sell Apex for the reasons set forth under "RMCI Seeks to
Sell Apex" below, after preliminary discussions with RHCI regarding the sale
of the RMCI Clinics to RHCI and after two attempts to sell the RMCI Behavioral
Healthcare Business to third parties ended given that RMCI did not believe
that the prices being preliminarily discussed with these third parties
adequately reflected RMCI's value, RMCI determined not to pursue the strategy
of selling the individual component parts of its business. See discussion
under "RMCI Seeks to Sell Clinics and Behavioral Healthcare Business" and
"RMCI Continues Efforts to Sell its Business" below. As discussed under
"Negotiation and Approval of the Merger" below, RMCI determined to sell its
entire business (other than Apex) to RHCI, all for the reasons set forth in
detail under "Recommendations of the Boards of Directors; Reasons for the
Merger--RMCI" below.
RMCI Indebtedness to RHCI. Prior to the Distribution, RMCI had issued an
unsecured subordinated promissory note to RHCI in the principal amount of
$6,000,000 (the "RMCI Subordinated Promissory Note"), representing advances
made by RHCI to or on behalf of RMCI during the time that RMCI was a
subsidiary of RHCI. The RMCI Subordinated Promissory Note bears interest at a
rate of 8% per annum. Of the $6 million due on the RMCI Subordinated
Promissory Note, approximately $2.1 million is due on or before December 31,
1997 and the remainder is payable in 11 quarterly installments of
approximately $353,000 beginning March 31, 1998. See "Information Concerning
RHCI--Management--Certain Relationships and Transactions Involving RHCI, RMCI
and Affiliates Thereof."
In addition, as of December 31, 1996, RMCI had approximately $2,215,000 in
outstanding open account indebtedness to RHCI arising out of the Distribution
and the post-Distribution corporate services agreements between RMCI and RHCI
described under "Information Concerning RHCI--Management--Certain
Relationships and Transactions Involving RHCI, RMCI and Affiliates Thereof."
In late 1995, RMCI informed RHCI that RMCI intended to propose a
rescheduling of RMCI's debt and open account and indebtedness payments to
RHCI.
RMCI Seeks to Sell Apex. In late 1995, in response to the greater than
anticipated start-up expenses and cash reserve requirements for RMCI's HMO
business operating through Apex, RMCI considered selling Apex and using the
proceeds of the sale to reduce its outstanding indebtedness, including
indebtedness owed to RHCI. RMCI retained Dean Witter Reynolds Inc. ("Dean
Witter") as its financial advisor in connection with the sale of Apex.
42
<PAGE>
At a meeting of the RHCI Board held on November 10, 1995, Reynold J.
Jennings, President of RHCI at the time, reported on RMCI's request for a
deferral on debt payments due to RHCI, including as a result of the greater
than anticipated start-up expenses and cash reserve requirements for Apex. The
possible sale of Apex by RMCI was also discussed as a future source of funds
for RMCI's debt service. Although the possible acquisition of the remaining
businesses of RMCI by RHCI after the sale of Apex was discussed on a
preliminary basis at that meeting, the RHCI Board took no action in connection
therewith.
On January 24, 1996, the RMCI Board unanimously approved the sale of Apex,
subject to further negotiations by management and negotiation of definitive
documentation, to a group of investors including Berenson Minella & Company,
Wexford Capital Corporation, Wexford Management LLC and Parveez A. Oliaii,
President and Chief Executive Officer of Apex and an Executive Vice President
of RMCI at the time, and certain other members of the management of Apex
(collectively, the "First Apex Purchasers").
At a meeting of the RHCI Board held on January 24, 1996, Mr. Jennings
reported that if the sale of Apex by RMCI went forward as planned, the
amortization of the RMCI indebtedness to RHCI could be on schedule by June 30,
1996.
On February 15, 1996, the RMCI Board unanimously approved the sale price for
Apex offered by the First Apex Purchasers (which offered price was the same as
the purchase price discussed in the next paragraph) and authorized the
Executive Operating Committee of the RMCI Board (comprised of Peter J. Evans,
Luis E. Lamela, Thomas M. Haythe and Paul J. Ramsay) to evaluate the terms of
the sale of Apex.
At a meeting of the RMCI Executive Operating Committee held on March 5, 1996,
the terms of the Apex sale to the First Apex Purchasers were approved. On the
following day, the agreement (the "First Apex Sale Agreement") to sell Apex to
the First Apex Purchasers was executed. The purchase price provided in the
First Apex Sale Agreement was $4,500,000, plus the payment to RMCI of certain
reimbursable items incurred by Apex from February 26, 1996 through the closing
date of the proposed transaction, not to exceed $600,000 in the aggregate.
RMCI Seeks to Sell Clinics and Behavioral Healthcare Business. Following the
execution of the First Apex Sale Agreement, the RMCI Board and the management
of RMCI considered whether after the sale of Apex, RMCI would have sufficient
financial and operational capability to grow its business. The RMCI Board and
the management of RMCI began considering various options involving the sale of
the remaining businesses of RMCI. The management of RMCI began investigating
various options in order to realize the maximum possible value for RMCI
stockholders. The options included:
. The sale of RMCI as a whole to a strategic buyer which would be able to
realize additional synergies and cost savings as part of the sale and
therefore might be willing to pay a premium for RMCI.
. Separate sales of the RMCI Clinics and the RMCI Behavioral Healthcare
Business, respectively. This option would appeal to buyers who were only
interested in the managed care business or the clinics and give RMCI a
wider field of buyers and, potentially, a higher valuation.
Following the execution of the First Apex Sale Agreement, preliminary
discussions took place between RHCI and RMCI concerning the possible sale of
the RMCI Clinics to RHCI. The terms and structure of the possible sale of the
RMCI Clinics were discussed between RMCI and RHCI at the meetings held in March
and April 1996. A tentative purchase price of $2.6 million was discussed at
both of these meetings. At the April 1996 meeting, the parties also discussed
entering into a clinical services agreement pursuant to which RHCI would
provide services to RMCI's managed care business at the RMCI Clinics after the
sale and a corporate services agreement pursuant to which services of Dr.
Martin Lazoritz and I. Paul Mandelkern, who would be employed by RHCI after the
acquisition of the RMCI Clinics, would be made available to RMCI on a part-time
basis.
In connection with the proposed sale of the RMCI Clinics, at the same time,
the management of RMCI also began efforts to sell the RMCI Behavioral
Healthcare Business.
43
<PAGE>
In late April 1996, RMCI and a potential unaffiliated buyer of the RMCI
Behavioral Healthcare Business agreed to exchange certain confidential
information to facilitate discussions regarding the terms of a possible
transaction and executed a confidentiality agreement dated April 26, 1996
whereby each party agreed to maintain the confidential nature of certain
information provided by the other.
On May 1, 1996, Bert G. Cibran, who at the time was acting as a consultant
to RMCI, Dr. Lazoritz and two senior officers of the potential buyer met to
discuss a possible sale of the RMCI Behavioral Healthcare Business. During the
following three weeks at various meetings and conferences between
representatives of RMCI and representatives of the potential buyer, certain
aspects of a possible transaction with the potential buyer were discussed,
including the purchase price and whether or not the potential buyer would
purchase the RMCI Clinics. The preliminary price for the RMCI Behavioral
Healthcare Business, net of indebtedness of approximately $6.6 million
allocable to the RMCI Behavioral Healthcare Business (not including
approximately $1.6 million of indebtedness allocable to the RMCI Clinics),
discussed during these meetings was in the range of $5.0 to $5.5 million.
At a meeting of the RMCI Board held on May 13, 1996, Mr. Cibran and the RMCI
Board reviewed various aspects of the discussions with the potential buyer.
The RMCI Board authorized management to continue negotiations with a view
towards the sale of the RMCI Behavioral Healthcare Business to the potential
buyer and to engage in discussions with any other interested persons regarding
the sale of RMCI.
Ultimately, RMCI and the potential buyer were not able to agree on a
purchase price. RMCI believed that the purchase price being discussed was too
low and did not reflect what RMCI believed was the fair value of the RMCI
Behavioral Healthcare Business. As a result, discussions with the potential
buyer were terminated in late May 1996.
First Apex Purchasers Fail to Close. On June 3, 1996, the First Apex Sale
Agreement expired by its terms. The First Apex Purchasers immediately demanded
a reduction in the purchase price for Apex. On June 20, 1996 the First Apex
Purchasers formally advised RMCI that they no longer intended to proceed with
the purchase of Apex. On July 1, 1996, RMCI, Apex and the subsidiaries of Apex
filed a complaint against the First Apex Purchasers and a Vice President of
Wexford in the Circuit Court for Jefferson County, Alabama seeking no less
than $3 million plus punitive damages. Discovery in this litigation is
ongoing. See "Information Concerning RMCI--Business--Legal Proceedings."
RMCI Continues Efforts to Sell its Businesses. In furtherance of the RMCI
Board's authorization to investigate the sale of RMCI, and as a result of
preliminary discussions between representatives of RMCI and another
unaffiliated potential buyer, on June 6, 1996, in order to facilitate the
exchange of confidential information, RMCI and the other potential buyer
entered into a confidentiality agreement.
On June 18, 1996, the RMCI Executive Operating Committee (comprised of Peter
J. Evans, Luis E. Lamela, Thomas M. Haythe and Paul J. Ramsay) adopted a plan
for the sale of Apex and authorized the management of RMCI to seek new buyers
for Apex. The Committee also authorized management to continue discussions
with RHCI, the other potential buyer or any other interested buyer for the
sale of the other businesses of RMCI and to proceed with a sale of the RMCI
Clinics to RHCI in the event that the other potential buyer or another buyer
were to agree to purchase the RMCI Behavioral Healthcare Business. Mr. Cibran
reported to the Committee that the other potential buyer would begin its due
diligence activities with regard to RMCI on June 20, 1996 and also reported
that discussions with the first potential buyer had ended, including as a
result of significant differences over price.
On June 20, 1996, representatives of the other potential buyer performed a
due diligence review of the RMCI Behavioral Healthcare Business and the RMCI
Clinics. In early July 1996, the negotiations with the other potential buyer
were terminated because of significant differences over a possible purchase
price for these businesses. The discussions with this potential buyer did not
reach an advanced stage, however, the preliminary indications were that this
potential buyer would not consider an amount for these businesses, net of
indebtedness
44
<PAGE>
of approximately $8.2 million, in excess of $5.8 million to $6.8 million. As
with the other potential buyer, RMCI believed that the purchase price being
discussed was too low and did not reflect what RMCI believed was the fair value
of the RMCI Behavioral Healthcare Business and the RMCI Clinics.
Negotiation and Approval of the Merger. At its meeting on July 18, 1996, the
RMCI Executive Operating Committee received a presentation from management
concerning the possible sale of RMCI. The presentation included results of
discussions between representatives of RMCI and representatives of the other
potential buyer and RHCI. Management reported that discussions with the other
potential buyer ended with significant differences over price, but that
discussions with RHCI were proceeding and that management had determined that a
business combination with RHCI would be an appropriate transaction for RMCI to
consider. Management reported that RHCI had determined that the purchase by
RHCI of only the RMCI Clinics did not meet RHCI's strategic needs. Further, it
was reported that RHCI had concluded that the purchase of all of RMCI's
businesses other than Apex (that is, the RMCI Clinics and the RMCI Behavioral
Healthcare Business) was more in line with RHCI's desire to address recent
consolidation trends in the mental healthcare industry by allowing RHCI to
offer a broader range of services, including the managed mental healthcare
services of the type offered by RMCI in the conduct of the RMCI Behavioral
Healthcare Business. Accordingly, the Committee was told that RHCI desired to
acquire all of RMCI other than Apex. Thereafter, the Committee engaged in
extensive discussions regarding the possible merger of RMCI with a subsidiary
of RHCI in light of the failure of each of the unaffiliated potential buyers to
offer what management of RMCI believed to be an adequate price for the RMCI
Behavioral Healthcare Business and in light of RHCI's determination not to
acquire only the RMCI Clinics. The Committee noted that, based upon preliminary
indications by RHCI of its assessment of the equity value of RMCI after the
sale of Apex, which preliminary indications of equity value ultimately served
as the basis for the Exchange Ratios, the total consideration being
preliminarily discussed with RHCI exceeded the sum of the amount discussed with
RHCI for the sale of the RMCI Clinics and the amounts discussed with the
unaffiliated potential buyers of the RMCI Behavioral Healthcare Business. Based
upon the closing price of the RHCI Common Stock on July 17, 1996 of $2.94, the
aggregate market value of the RHCI Common Stock which would be issued in the
possible merger discussed at the July 18, 1996 meeting (including RHCI Common
Stock issuable upon conversion of RHCI Series 1996 Preferred Stock) would have
been approximately $9.2 million, and as a result of such merger, RHCI would
also assume an aggregate of approximately $8.2 million of debt of RMCI
outstanding in July 1996. Accordingly, the total consideration preliminarily
discussed with RHCI for the sale of RMCI (other than Apex) was $17.4 million
compared to the high end of the ranges of the total consideration preliminarily
discussed with the other potential buyers of the RMCI Clinics (including RHCI's
interest in acquiring the RMCI Clinics) and the RMCI Behavioral Healthcare
Business ranging from $14.7 million to $15.0 million. As a result, the
Committee further discussed that the separate sale of Apex and the proposed
Merger of RMCI with a subsidiary of RHCI would maximize the total consideration
to be received by RMCI for its businesses. It then discussed at length other
reasons for such a combination described below under "Recommendations of the
Boards of Directors; Reasons for the Merger--RMCI." The RMCI Executive
Operating Committee then approved, on a preliminary basis, the merger of RMCI
with a subsidiary of RHCI on the basis of estimated exchange ratios, and
subject, among other matters, to action by the RMCI Board, receipt of all
necessary lender, governmental and other approvals and receipt of appropriate
legal and financial advice from RMCI's legal and financial advisors.
At a meeting of the Executive Operating Committee of the RHCI Board
(comprised of Peter J. Evans, Luis E. Lamela, Thomas M. Haythe and Paul J.
Ramsay) also held on July 18, 1996, the proposed Merger was discussed.
Management reported that discussions regarding the possible business
combination with RMCI were proceeding and that the possible merger of the two
companies should be considered for the reasons described below under
"Recommendations of the Boards of Directors; Reasons for the Merger--RHCI."
After extensive discussion of these reasons, the members of the Committee
approved, on a preliminary basis, the merger of RMCI with a subsidiary of RHCI
on the basis of estimated exchange ratios, and subject, among other matters, to
action by the RHCI Board, the receipt of lender, governmental and other
consents and the receipt of appropriate legal and financial advice from RHCI's
legal and financial advisors.
45
<PAGE>
During the morning on August 13, 1996, the RMCI Board discussed the
favorable recommendation by the RMCI Executive Operating Committee on July 18,
1996 concerning the proposed merger. The RMCI Board engaged in an extensive
discussion of the factors discussed below under "Recommendations of the Boards
of Directors; Reasons for the Merger--RMCI." Following this extensive
discussion, the RMCI Board approved, on a preliminary basis, the merger of
RMCI with a subsidiary of RHCI, subject, among other matters, to the approval
of the merger by a special committee of the RMCI Board to be established, the
receipt of a fairness opinion from an investment banking firm to be engaged,
and the receipt of all necessary lender, governmental and other necessary
consents. The RMCI Board authorized management to engage an investment banking
firm to evaluate the fairness to the holders of the RMCI Common Stock and RMCI
Series 1996 Preferred Stock, from a financial point of view, of the exchange
ratios to be set forth in a definitive merger agreement (See "Independent
Review" below).
During the afternoon on August 13, 1996, the RHCI Executive Operating
Committee reviewed the proposed merger structure and the common stock and
preferred stock exchange ratios proposed by management in connection with the
Merger, which exchange ratios discussed ultimately became the Exchange Ratios
set forth in the Merger Agreement. The determination of the Exchange Ratios
was made based upon discussions among representatives of RHCI and RMCI, the
calculation of assumed equity values for RMCI based upon standard valuation
methods employing multiples of revenue and earnings for historical and
forecasted results, and the historical stock prices for the RHCI Common Stock
and the RMCI Common Stock. In addition, at the meeting, the RHCI Executive
Operating Committee received presentations from management and discussed at
length, proposed management structures, systems integration matters and
marketing plans, assuming completion of the proposed Merger. During the
evening of August 13, 1996, Mr. Ramsay joined the meeting of the RHCI
Executive Operating Committee by video teleconference from Sydney, Australia.
Mr. Ramsay was apprised of the various matters discussed and approved by the
Committee during the day, including the review of the proposed merger
structure and exchange ratios, management structure, systems integration
matters and marketing plans, and Mr. Ramsay indicated his agreement with all
such matters. The RHCI Executive Operating Committee authorized management to
engage an investment banking firm to evaluate the fairness to RHCI, from a
financial point of view, of the exchange ratios to be set forth in a
definitive merger agreement (See "Independent Review" below). During the
meeting, it was noted that, based on the closing sales price of $2.75 for the
RHCI Common Stock on the prior day, an exchange ratio of one-third ( 1/3) of a
share of RHCI Common Stock for each share of RMCI Common Stock would indicate
a value of approximately $0.92 per share of RMCI Common Stock, or an
approximate 33% premium over the $0.6875 average of the bid and asked prices
for the RMCI Common Stock on that day.
On September 10, 1996, the RHCI Board authorized the formation of a special
committee (the "RHCI Special Committee") to consider the Merger (See
"Independent Review" below). At the meeting, Steven J. Shulman was appointed
as the RHCI Special Committee. The RHCI Board authorized the RHCI Special
Committee to consider the Merger, subject to the receipt by the RHCI Board and
the RHCI Special Committee of an appropriate fairness opinion from an
investment banking firm, to obtaining all necessary lender, governmental and
other consents, and to the approval of the Merger by the RHCI Special
Committee and the RHCI Board. The RHCI Board specifically authorized and
empowered the RHCI Special Committee (i) to consider and evaluate (and, if so
determined by the RHCI Special Committee, to approve, disapprove and/or
suggest and negotiate changes of the proposed terms and conditions of) the
Merger and the Merger Agreement, (ii) if the RHCI Special Committee were to
approve the Merger and the Merger Agreement, to recommend that the RHCI Board
approve the Merger and the Merger Agreement, and (iii) to evaluate and approve
the form, terms and conditions of a fairness opinion in respect of the
exchange ratios to be set forth in a definitive merger agreement. The RHCI
Board also directed that the RHCI Special Committee will have all such
authorizations as may be necessary to effectuate the foregoing purposes, all
to the fullest extent permitted by the by-laws of RHCI and by applicable law.
The RHCI Board also authorized RHCI to retain Houlihan, Lokey, Howard & Zukin,
Inc. ("Houlihan Lokey") to consider the fairness, from a financial point of
view, of the Exchange Ratios to RHCI (See "Independent Review" below).
46
<PAGE>
On September 10, 1996, the RMCI Board authorized the formation of a special
committee (the "RMCI Special Committee") to consider the Merger. In addition,
given that all of the members of the RMCI Board were also members of the RHCI
Board, the RMCI Board determined to elect an additional director who was not
affiliated with RHCI (See "Independent Review" below). Accordingly, at the
meeting, Dr. Moises E. Hernandez was appointed as a director of RMCI and was
appointed as the RMCI Special Committee. In appointing Dr. Hernandez, the RMCI
Board considered favorably his background in businesses providing healthcare
services. The RMCI Board authorized the RMCI Special Committee to consider the
Merger, subject to the receipt by the RMCI Board and the RMCI Special
Committee of an appropriate fairness opinion from an investment banking firm,
to obtaining all necessary lender, governmental and other consents, and to the
approval of the Merger by the RMCI Special Committee and the RMCI Board. The
RMCI Board specifically authorized and empowered the RMCI Special Committee
(i) to consider and evaluate (and, if so determined by the RMCI Special
Committee, to approve, disapprove and/or suggest and negotiate changes of the
proposed terms and conditions of) the Merger and the Merger Agreement, (ii) if
the RMCI Special Committee were to approve the Merger and the Merger
Agreement, to recommend that the RMCI Board approve the Merger and the Merger
Agreement, and (iii) to evaluate and approve the form, terms and conditions of
a fairness opinion in respect of the exchange ratios to be set forth in a
definitive merger agreement. The RMCI Board also directed that the RMCI
Special Committee will have all such authorizations as may be necessary to
effectuate the foregoing purposes, all to the fullest extent permitted by the
by-laws of RMCI and by applicable law. The RMCI Board also authorized RMCI to
retain Dean Witter to consider the fairness, from a financial point of view,
of the Common Stock Exchange Ratio and the Preferred Stock Exchange Ratio to
the holders of RMCI Common Stock and RMCI Series 1996 Preferred Stock,
respectively (See "Independent Review" below).
In the late afternoon of September 25, 1996, the RMCI Special Committee met
with Dean Witter, its financial advisor. At the meeting, Dean Witter made a
detailed presentation to the RMCI Special Committee concerning the scope of
their engagement, their due diligence activities with respect to RMCI and RHCI
and their respective businesses and prospects, and the various methodologies
utilized in arriving at their conclusions. During the meeting, it was noted
that, based on the closing sales price of $2.188 for RHCI Common Stock on
September 19, 1996, an exchange ratio of one-third (1/3) of a share of RHCI
Common Stock for each share of RMCI Common Stock would indicate a value of
$0.73 per share of RMCI Common Stock. On September 19, 1996, the average of
the bid and asked prices for the RMCI Common Stock was $0.50 per share.
Representatives of Dean Witter then reviewed the financial terms of the
Merger, including the Exchange Ratios, with the RMCI Special Committee, and
orally advised the RMCI Special Committee that in its opinion the Common Stock
Exchange Ratio was fair, from a financial point of view, to the holders of the
RMCI Common Stock, and the Preferred Stock Exchange Ratio was fair, from a
financial point of view, to the holders of the RMCI Series 1996 Preferred
Stock. For a complete description of Dean Witter's fairness opinion and
financial analyses, see "Opinions of the Financial Advisors--RMCI" and
Appendix C hereto.
Prior to the meeting of the RMCI Special Committee, the RMCI Special
Committee was advised by management that RHCI and RMCI had determined that,
assuming the Merger was consummated under the terms as proposed and subject to
certain other conditions of the combination, the proposed Merger would be
accounted for as a purchase for financial accounting purposes. In addition,
the RMCI Special Committee was informed by management that Paul J. Ramsay had
indicated that he would vote the shares of RMCI Common Stock and RMCI Series
1996 Preferred Stock, as well as the shares of RHCI Common Stock and RHCI
Series C Preferred Stock, controlled by him, in favor of the Merger and use
his best efforts to effect the transactions contemplated by such an agreement.
During the evening on September 25, 1996, following the meeting of the RMCI
Special Committee, a meeting of the RMCI Board was convened by video
teleconference between New York, New York and Sydney, Australia. Messrs.
Ramsay, Evans and Siddle participated in the RMCI Board meeting from Sydney,
Australia and the remainder of the members of the RMCI Board were present
together in New York, New York, together with representatives of Dean Witter.
It was noted that the RMCI Special Committee had met with Dean Witter earlier
in the day and that representatives of Dean Witter were present in New York,
New York for the purpose
47
<PAGE>
of making a presentation to the full RMCI Board. Thereafter, Dean Witter made
a detailed presentation concerning the scope of their engagement, their due
diligence activities concerning RMCI and RHCI and their respective businesses
and prospects, and the various methodologies utilized in arriving at their
conclusions. Dean Witter then reviewed the financial terms of the Merger,
including the Exchange Ratios, and orally advised the RMCI Board that in its
opinion, the Common Stock Exchange Ratio was fair, from a financial point of
view, to the holders of the RMCI Common Stock, and the Preferred Stock
Exchange Ratio was fair, from a financial point of view, to the holders of the
RMCI Series 1996 Preferred Stock. After discussion, the RMCI Board determined
to adjourn in order to permit the RMCI Special Committee and the members of
the RMCI Board to consider the matters discussed at the September 25th
meetings, to discuss these matters with Dean Witter and with Howard Kurzweill,
Esq., the RMCI Special Committee's legal advisor with respect to the Merger,
and Foley & Lardner, the RMCI Board's legal advisor with respect to the
Merger, and to convene a meeting of the RMCI Board the following week by
telephonic conference call following a meeting of the RMCI Special Committee.
In the late afternoon of September 25, 1996, the RHCI Special Committee met
with Houlihan Lokey, its financial advisor. At the meeting, Houlihan Lokey
made a detailed presentation to the RHCI Special Committee concerning the
scope of their engagement, their due diligence activities with respect to RHCI
and RMCI and their respective businesses and prospects, and the various
methodologies utilized in arriving at their conclusions. During the meeting,
it was noted that, based on the closing sales price of $2.25 for RHCI Common
Stock that day, an exchange ratio of one-third (1/3) of a share of RHCI Common
Stock for each share of RMCI Common Stock would indicate a value of $0.75 per
share of RMCI Common Stock. On September 25, 1996, the average of the bid and
asked prices for the RMCI Common Stock was $0.59 per share.
Representatives of Houlihan Lokey then reviewed the financial terms of the
Merger, including the Exchange Ratios, with the RHCI Special Committee, and
orally advised the RHCI Special Committee that in its opinion the Common Stock
Exchange Ratio and the Preferred Stock Exchange Ratio were fair, from a
financial point of view, to RHCI. For a complete description of Houlihan
Lokey's financial analyses, see "Opinions of the Financial Advisors--RHCI."
Prior to the meeting of the RHCI Special Committee, the RHCI Special
Committee was advised by management that RHCI had determined that, assuming
the Merger was consummated under the terms as proposed and subject to certain
other conditions of the combination, the proposed Merger would be accounted
for as a purchase for financial accounting purposes. In addition, the RHCI
Special Committee was informed that Paul J. Ramsay had indicated that he would
vote the shares of RHCI Common Stock and RHCI Series C Preferred Stock, as
well as the shares of RMCI Common Stock and RMCI Series 1996 Preferred Stock,
controlled by him, in favor of the Merger and use his best efforts to effect
the transactions contemplated by such an agreement.
During the evening on September 25, 1996, following the meeting of the RHCI
Special Committee and after the video teleconference meeting of the RMCI Board
was adjourned, a meeting of the RHCI Board was convened by video
teleconference between New York, New York and Sydney, Australia. Messrs.
Ramsay, Evans and Siddle participated in the RHCI Board meeting from Sydney,
Australia and the remainder of the members of the RHCI Board were present
together in New York, New York, together with representatives of Houlihan
Lokey. It was noted that the RHCI Special Committee had met with Houlihan
Lokey earlier in the day and that representatives of Houlihan Lokey were
present in New York, New York for the purpose of making a presentation to the
full RHCI Board. Thereafter, Houlihan Lokey made a detailed presentation
concerning the scope of their engagement, their due diligence activities
concerning RHCI and RMCI and their respective businesses and prospects, and
the various methodologies utilized in arriving at their conclusions. Houlihan
Lokey then reviewed the financial terms of the Merger, including the Exchange
Ratios, and orally advised the RHCI Board that in its opinion the Common Stock
Exchange Ratio and the Preferred Stock Exchange Ratio were fair, from a
financial point of view, to RHCI. After discussion, the RHCI Board determined
to adjourn in order to permit the RHCI Special Committee and the members of
the RHCI Board to consider the matters discussed at the September 25th
meetings, to discuss these matters with Houlihan Lokey and with Haythe &
Curley, legal
48
<PAGE>
advisor, and to convene a meeting of the RHCI Board the following week by
telephonic conference call following a meeting of the RHCI Special Committee.
Special meetings of the RHCI Special Committee, RHCI Board, RMCI Special
Committee and RMCI Board were called for the evening of October 1, 1996.
During the five-day period of time following the September 25, 1996 meetings
of these Committees and Boards, the RMCI Special Committee conferred with
Howard Kurzweill, Esq. and the RHCI Special Committee conferred with Haythe &
Curley, all by telephone to discuss the terms and conditions of the Merger (as
described in detail below under "The Merger Agreement") and the reasons for
the Merger (as described in detail below under "Recommendation of the Boards
of Directors; Reasons for the Merger--RHCI").
During the afternoon of October 1, 1996, the RHCI Special Committee
discussed the Exchange Ratios with management of RMCI and sought to decrease
the number of shares of RHCI Common Stock to be exchanged for shares of RMCI
Common Stock. The RHCI Special Committee initially sought to decrease the
number of shares of RHCI Common Stock to be exchanged for shares of RMCI
Common Stock to reduce the consideration that RHCI would pay for RMCI in the
Merger. The RHCI Special Committee later determined to proceed with the
original exchange ratios after reviewing with Mr. Cibran on behalf of RMCI
certain managed care contract opportunities that had recently been presented
to RMCI and which, accordingly, were not apparent to the RHCI Special
Committee in its consideration of the equity value of RMCI. On the basis of
these discussions, the RHCI Special Committee determined that the Exchange
Ratios as proposed were appropriate. Following these discussions, Mr. Shulman
indicated that he was prepared to proceed with the meetings of the RHCI
Special Committee and the RHCI Board scheduled for the evening of October 1,
1996 and to approve, among other matters, the Exchange Ratios on the basis
previously proposed by management of RHCI and RMCI.
During the evening of October 1, 1996, a joint telephonic meeting of the
RMCI Special Committee and the RMCI Board was convened. Also present during
the telephonic meeting were representatives of Dean Witter, representatives of
Foley & Lardner and Howard Kurzweill, Esq. At the meeting, Dean Witter
indicated that it had updated its analysis since its presentation to the RMCI
Special Committee and the RMCI Board on September 25, 1996 and that there had
been no material change in its analysis. Accordingly, Dean Witter indicated
that it was in a position to render a written opinion to the effect that the
Common Stock Exchange Ratio was fair, from a financial point of view, to the
holders of the RMCI Common Stock, and the Preferred Stock Exchange Ratio was
fair, from a financial point of view, to the holders of the RMCI Series 1996
Preferred Stock. Dean Witter also indicated that it would deliver executed
copies of its written opinion via facsimile to the RMCI Special Committee, the
RMCI Board and their respective legal advisors contemporaneously with the
execution and delivery of the Merger Agreement that evening. There then ensued
a discussion by the members of the RMCI Board (including the RMCI Special
Committee) of the proposed terms of the Merger and the reasons for the Merger.
These reasons are detailed below under the caption "Recommendations of the
Boards of Directors; Reasons for the Merger." Following these discussions, the
RMCI Special Committee indicated that he was, by written consent, adopting
resolutions deeming the Merger to be fair and in the best interests of RMCI
and the holders of RMCI Common Stock and RMCI Series 1996 Preferred Stock,
approving the Merger on the terms and subject to the conditions set forth in
the Merger Agreement and recommending the adoption of the Merger Agreement by
the RMCI Board and the holders of RMCI Common Stock and RMCI Series 1996
Preferred Stock. Upon hearing the recommendation of the RMCI Special
Committee, the RMCI Board concurred in the analyses and recommendation of the
RMCI Special Committee (which analysis and recommendations of the RMCI Board
and the RMCI Special Committee and the reasons therefor are set forth under
"Recommendations of the Board of Directors; Reasons for the Merger--RMCI"
below). The RMCI Board then adopted resolutions to the effect that the Merger
was fair and in the best interests of RMCI and the holders of RMCI Common
Stock and RMCI Series 1996 Preferred Stock, unanimously approved and adopted
the Merger and the Merger Agreement on the terms and subject to the conditions
of the Merger Agreement and unanimously recommended that RMCI's stockholders
vote in favor of the Merger and approve and adopt the Merger Agreement.
Following the adjournment of the joint meeting of the RMCI Special Committee
and RMCI Board, during the evening of October 1, 1996, a joint telephonic
meeting of the RHCI Special Committee and the RHCI Board
49
<PAGE>
was convened. Also present during the telephonic meeting were representatives
of Houlihan Lokey and representatives of Haythe & Curley. At the meeting,
Houlihan Lokey indicated that it had updated its analysis since its
presentation to the RHCI Special Committee and the RHCI Board on September 25,
1996 and that there had not occurred any change in its analysis. Accordingly,
Houlihan Lokey indicated that it was in a position to render a written opinion
to the effect that the Common Stock Exchange Ratio and the Preferred Stock
Exchange Ratio were fair, from a financial point of view, to RHCI. Houlihan
Lokey also indicated that it would deliver executed copies of its written
opinion via facsimile to the RHCI Special Committee, the RHCI Board and their
legal advisors contemporaneously with the execution and delivery of the Merger
Agreement that evening. There then ensued a discussion by the members of the
RHCI Board (including the RHCI Special Committee) of the proposed terms of the
Merger and the reasons for the Merger. These reasons are detailed below under
the caption "Recommendations of the Boards of Directors; Reasons for the
Merger--RHCI." Following these discussions, the RHCI Special Committee
indicated that he was, by written consent, adopting resolutions deeming the
Merger to be fair and in the best interests of RHCI, approving the Merger on
the terms and subject to the conditions set forth in the Merger Agreement and
recommending the adoption of the Merger Agreement by the RHCI Board and the
holders of RHCI Common Stock and RHCI Series C Preferred Stock. Upon hearing
the recommendation of the RHCI Special Committee, the RHCI Board concurred in
the analyses and recommendation of the RHCI Special Committee (which analyses
and recommendation of the RHCI Board and the RHCI Special Committee and the
reasons therefor are set forth under "Recommendations of the Board of
Directors; Reasons for the Merger--RHCI" below). The RHCI Board then adopted
resolutions to the effect that the Merger was fair and in the best interests
of RHCI and the holders of RHCI Common Stock and RHCI Series 1996 Preferred
Stock, unanimously approved and adopted the Merger and the Merger Agreement on
the terms and subject to the conditions of the Merger Agreement and
unanimously recommended that RHCI's stockholders vote in favor of the Merger
Proposal.
In the evening of October 1, 1996, following the meetings of the RMCI
Special Committee, RMCI Board, RHCI Special Committee and RHCI Board, the
Merger Agreement was executed and delivered by RHCI, RMCI and RHCI Sub. RHCI
and RMCI issued a joint press release in the morning of October 2, 1996
announcing the signing of the Merger Agreement.
Apex Purchase Agreement. On October 30, 1996, RMCI entered into a Stock
Purchase Agreement with RoTech Medical Corporation providing for the sale of
the capital stock of Apex. The purchase price provided in the Stock Purchase
Agreement is $4,350,000. See "Information Concerning RMCI--Business--Recent
Events."
Independent Review. The RHCI Board and the RMCI Board, recognizing the
significant overlap in the respective Boards of Directors of RMCI and RHCI
(see "Information Concerning RHCI--Management" and "Information Concerning
RMCI--Management"), the interests of certain directors and members of
management of RMCI and RHCI in the Merger (see "Interests of Certain Persons
in the Merger" below), and given their recognized duties to their respective
stockholders, believed that the Merger should be evaluated from an independent
perspective. Accordingly, and as discussed above, the RHCI Board and the RMCI
Board appointed the independent Special Committees to consider the terms of
the Merger and engaged Houlihan Lokey and Dean Witter as independent financial
advisors to render fairness opinions in connection with the Merger. Based on
the favorable recommendations of their respective independent Special
Committees and the fairness opinions from their respective financial advisors
and based on the exercise of their respective business judgments, the RHCI
Board and the RMCI Board believe that the Merger is fair and in the best
interests of their respective stockholders.
RECOMMENDATIONS OF THE BOARDS OF DIRECTORS; REASONS FOR THE MERGER
RHCI
THE RHCI BOARD, FOLLOWING THE RECOMMENDATION OF THE RHCI SPECIAL COMMITTEE,
HAS UNANIMOUSLY APPROVED AND ADOPTED THE MERGER AND THE MERGER AGREEMENT AND
UNANIMOUSLY RECOMMENDS THAT THE HOLDERS OF RHCI COMMON STOCK AND THE RHCI
SERIES C PREFERRED STOCK VOTE FOR APPROVAL AND ADOPTION OF THE MERGER
PROPOSAL.
50
<PAGE>
A vote in favor of approval and adoption of the Merger Proposal constitutes a
vote FOR, pursuant to the requirements of NASDAQ, the issuance of the number of
shares of RHCI Common Stock and RHCI Series 1996 Preferred Stock contemplated
by the Merger Agreement. The RHCI Board unanimously recommends a vote FOR the
Merger Proposal. See "The Merger Agreement--The Merger."
Approval of the Merger Proposal requires, pursuant to the requirements of
NASDAQ, the affirmative vote of a majority of the votes cast by the holders of
RHCI Common Stock and RHCI Series C Preferred Stock (voting together with the
RHCI Common Stock as a single class on the basis of the number of shares of
RHCI Common Stock into which such RHCI Series C Preferred Stock is convertible)
entitled to vote thereon at the RHCI Meeting (at which a quorum is present).
The Merger Agreement is conditioned upon approval of the Merger Proposal as
aforesaid.
Prior to taking action on the Merger, the RHCI Board reviewed a draft of the
Merger Agreement and received presentations from, and reviewed the terms and
conditions of the transactions contemplated by the Merger Agreement with the
RHCI Special Committee, RHCI's management and the RHCI Special Committee's and
RHCI's legal and financial advisors. The RHCI Special Committee recommended
that the RHCI Board approve and adopt the Merger and the Merger Agreement.
On October 1, 1996, after Houlihan Lokey delivered to the RHCI Special
Committee and the RHCI Board its opinion to the effect that, as of such date,
the Exchange Ratios were fair to RHCI from a financial point of view and after
the RHCI Special Committee delivered its recommendation, the RHCI Board
determined that the Merger is fair to and in the best interests of RHCI and its
stockholders, approved and adopted the Merger and the Merger Agreement and
recommended that RHCI's stockholders vote their shares of RHCI Common Stock and
RHCI Series C Preferred Stock in favor of approval of the Merger Proposal.
The RHCI Special Committee and the RHCI Board considered an extensive number
of factors described below in reaching the recommendation described above and
believe that the Merger is in the best interests of RHCI and its stockholders.
The following factors were considered favorably by the RHCI Special Committee
and the RHCI Board in reaching the foregoing recommendation and belief:
(i) Recent consolidation trends in the mental healthcare industry require
RHCI to offer a broader range of services, including managed mental
healthcare services of the type offered by RMCI, in order to compete
effectively. These trends were not apparent to management or the RHCI Board
at the time of the Distribution. In fact, the principal underlying reason
for the Distribution was to allow each of RHCI and RMCI to pursue its
development and growth strategies independently. As a result of recent
consolidation trends, including wherein healthcare providers such as RHCI
are aligning/combining with managed care organizations such as RMCI, it is
now apparent that these development and growth strategies are converging,
not diverging. Thus, the RHCI Board determined that a combination of RHCI
and RMCI would be beneficial to each of the companies and their respective
stockholders by heightening the competitiveness of the companies in a
changing industry;
(ii) The combination of RHCI and RMCI should enhance the combined
companies' ability to attract additional capital and to refinance the
combined companies' debt. In reaching this determination, the RHCI Board
considered the amount of the combined companies' debt and cash flow from
operations (excluding Apex) and concluded that the prospects for revenue
enhancement for the combined companies (see factor (v) below) and the
combined cash flow from operations should facilitate the refinancing of
outstanding debt on favorable terms;
(iii) The expertise and business relationships of RMCI's management
should provide opportunities and additional management depth to RHCI. The
RHCI Board viewed favorably the addition of RMCI management with extensive
experience in managing the provision of and providing healthcare under
capitated (at-risk) agreements with purchasers of healthcare such as large
employers, HMOs, insurance companies and governmental agencies. The RHCI
Board concluded that this expertise should both help
51
<PAGE>
increase the efficiency and profitability of RHCI's existing provider
business and increase the marketability of RHCI's services;
(iv) The RHCI Board believes that the Merger should enhance stockholder
value by increasing the value of RHCI Common Stock, including as a result
of an anticipated increased growth rate of RHCI following the Merger and an
enhancement of the combined companies' strategic position. In arriving at
this belief, the RHCI Board recognized that RMCI was the subject of the
Distribution in April 1995. As discussed in detail above under "Background
of Merger--The Distribution," the RHCI Board concluded that circumstances
had changed since April 1995, particularly the recent consolidation trends
in the healthcare industry which were not apparent to RHCI at the time of
the Distribution. In the RHCI Board's estimation, these changes require
RHCI to broaden its services in order to compete effectively in the mental
healthcare industry. In addition, for the other reasons enumerated in this
discussion above and below, the RHCI Board considered such enumerated
additional anticipated benefits of combining RMCI with RHCI, for example,
increased revenues, heightened access to healthcare consumers as a more
integrated provider of mental healthcare services, additional management
depth, and better access to capital markets. The RHCI Board concluded that
these factors should lead to a better financial condition of and
performance by RHCI, and thereby to an increased future value of the RHCI
Common Stock;
(v) The RHCI Board believes that the Merger will provide increased
revenue opportunities, including by enhancing the attractiveness of RHCI's
mental healthcare services. In reaching this conclusion, the RHCI Board
considered the factors discussed in factors (i) through (iv) above;
(vi) The RHCI Board believes that the Merger will provide cost savings
and efficiencies for the combined companies as a result of economies of
scale for corporate activities, including in such areas as human resources,
management information systems, accounting and other financial areas, and
training, regulatory and other corporate support functions. The RHCI Board
concluded that these cost savings and efficiencies would only serve to
bolster the anticipated increased profit opportunities for the combined
companies;
(vii) Management's belief that, regardless of actions taken by federal
and state governments on healthcare reform, in order to compete
effectively, RHCI needs to position itself, through combinations and
affiliations, as an integrated provider of mental healthcare services (see,
for example, the RHCI Board's rationale discussed in factors (i) and (iv)
above);
(viii) The similar cultures and strategies of RMCI's and RHCI's
management. In analyzing a proposed business combination such as the
Merger, the RHCI Board noted that a strategic fit is not the only necessary
component for a successful combined company. It recognized that management
of the two companies must also hold similar views of the direction of the
industry in which the companies operate and views of how best to address
the needs and requirements of the marketplace from a service, quality and
cost point of view. Based on discussions with members of RHCI and RMCI
management and the RHCI Board members' knowledge of each of the
managements, the RHCI Board concluded that the RHCI and RMCI managements
shared these views. Accordingly, the RHCI Board was of the view that the
combined companies would not only enjoy a strategic fit from a products and
services point of view (see factors (i), (iii) and (v) discussed above),
but also from a management direction point of view;
(ix) The managed care protocols and methodologies possessed by RMCI and
the management information system used by RMCI, all of which RHCI, on a
stand-alone basis in order to enter the managed mental healthcare business,
would have to incur substantial costs in order to duplicate. The RHCI Board
concluded that this factor, as with the reasons set forth under clause (vi)
above, favorably supports the cost savings and cost efficiencies which
should be enjoyed by a combination of the two companies; and
(x) The written opinion of Houlihan Lokey to the RHCI Special Committee
and the RHCI Board, that, as of the date of such opinion, the Exchange
Ratios were fair, from a financial point of view, to RHCI. See "Background
of the Merger--Independent Review" above.
52
<PAGE>
In evaluating the Merger, the RHCI Special Committee and the RHCI Board also
considered the following factors, which factors were considered to be of an
unfavorable nature:
(i) The RHCI Board considered the possibility that the combination of
RMCI with RHCI will be misperceived by RMCI's customers as a method for
RHCI to increase its hospital occupancy rates with patients from RMCI
rather than RMCI arranging for a less costly alternative treatment program.
These concerns on the part of payors could reduce RMCI's ability to
maintain its current managed care contracts and impair its ability to
obtain new contracts with payors. The RHCI Board concluded that this
misconception could be corrected through the effective communication to
customers of what it believes to be RHCI's ability to provide high quality
mental healthcare on a cost effective basis;
(ii) The RHCI Board also considered that a substantial portion of the
merger consideration will be allocated to goodwill (excess of cost over
fair value of net assets acquired). Consideration was given to the fact
that there can be no assurance that the value of this intangible asset will
be realized through the future contributions of the acquired business to
cash flows. This could result in the need, in the future, for RHCI to
recognize a charge against earnings for any impairment of goodwill.
However, given the synergistic and strategic fit envisioned for the
combined companies (see the discussion above), the RHCI Board concluded
that, notwithstanding the foregoing risk, the Merger was in the best
interests of RHCI and its stockholders;
(iii) The RHCI Board considered the effects of the capitated (at-risk)
nature of a significant portion of RMCI's business. It considered that if
actual utilization rates and costs of managing the provision of mental
healthcare services exceed those projected by RMCI with respect to
particular programs or managed care contracts, RMCI's expenses under the
programs or contracts could exceed the corresponding capitation fee
received by RMCI. The RHCI Board considered the fact that in order for at-
risk contracts to be profitable, RMCI must accurately estimate the
utilization rate for mental healthcare services and must price its services
accordingly. In analyzing these factors, and on the basis of discussions
with RMCI's management, the RHCI Board concluded that RMCI's protocols and
internal information systems are such as to permit RMCI to effectively
manage the provision of mental healthcare services under capitation
arrangements on a profitable basis; and
(iv) Finally, the RHCI Board considered the timing of the Merger
following the Distribution in April 1995. It considered whether the
combined companies would be viewed negatively in the mental healthcare
industry and the financial marketplace given the length of time elapsed
between the Distribution and the Merger. In addition, the RHCI Board
considered the expenses which were incurred in connection with the
Distribution and the RMCI Rights Offering (approximately $1,600,000) and
the estimated expenses to be incurred in connection with the Merger
(approximately $1,300,000). The RHCI Board concluded that there were
compelling reasons for the Merger (see the discussion above concerning the
favorable factors and reasons for the Merger) and that the Merger was in
the long-term best interests of RHCI and its stockholders notwithstanding
any short-term negative reaction to recombining the companies and
notwithstanding the expenses associated with the Distribution and the
Merger.
The RHCI Special Committee and the RHCI Board were aware of and considered
the interests of certain directors and members of management of RHCI in the
Merger as described under "Interests of Certain Persons in the Merger" below.
The RHCI Board did not consider these interests to be a favorable or
unfavorable factor in evaluating the Merger, but rather a factor which, as
discussed under "Background of the Merger--Independent Review" above,
supported the belief that the Merger should be evaluated from an independent
perspective. The RHCI Board also considered that, based upon management's
estimates at the time of the effects of the above- described synergistic
benefits to be achieved as a result of the Merger, including the anticipated
cost savings considered by the RHCI Board, the Merger would not have a
dilutive effect. The RHCI Board did not consider this to be a favorable or an
unfavorable factor in arriving at its determination that the Merger was in the
long-term best interests of RHCI and its stockholders.
The members of the RHCI Special Committee and the RHCI Board evaluated the
factors listed above, including those which were deemed favorable and
unfavorable, in light of their knowledge of the business and operations of
RHCI, and their business judgment. In considering the foregoing factors, the
RHCI Special
53
<PAGE>
Committee and the RHCI Board did not reach their conclusion concerning the
Merger by individually evaluating these factors or by evaluating whether or
not to proceed with the Merger based upon the individual effects or
consequences of any one or a group of factors. In view of the substantial
number of factors considered, neither the RHCI Special Committee nor the RHCI
Board found it practicable to, and did not, quantify or otherwise attempt to
assign relative weights to the specific factors considered in its
determination, other than to determine that, as a whole, the favorable factors
significantly outweighed the unfavorable factors. Rather, the RHCI Special
Committee and the RHCI Board considered all of the factors, both favorable and
unfavorable, described above in the aggregate and concluded, based on their
consideration of these factors in their totality, that the Merger is in the
best interests of RHCI and its stockholders.
Based on the factors described above, the RHCI Board has unanimously
determined that the Merger is fair and in the best interests of RHCI and its
stockholders, has unanimously approved the Merger Agreement and the
transactions contemplated by the Merger Agreement and has unanimously
recommended that the stockholders of RHCI vote FOR approval of the Merger
Proposal.
RMCI
THE RMCI BOARD, FOLLOWING THE RECOMMENDATION OF THE RMCI SPECIAL COMMITTEE,
HAS UNANIMOUSLY APPROVED AND ADOPTED THE MERGER AND THE MERGER AGREEMENT AND
UNANIMOUSLY RECOMMENDS THAT HOLDERS OF RMCI COMMON STOCK AND THE HOLDERS OF
RMCI SERIES 1996 PREFERRED STOCK VOTE FOR APPROVAL AND ADOPTION OF THE MERGER
AND THE MERGER AGREEMENT.
Approval and adoption of the Merger and the Merger Agreement requires the
affirmative vote of the holders of (i) a majority of the issued and
outstanding shares of RMCI Common Stock (including for this purpose, the
number of shares of RMCI Common Stock into which the shares of RMCI Series
1996 Preferred Stock are convertible in accordance with their terms) and (ii)
a majority of the issued and outstanding shares of RMCI Series 1996 Preferred
Stock (voting as a separate class in addition to voting together with the RMCI
Common Stock as set forth in clause (i) above). The Merger Agreement is
conditioned upon approval of the Merger as aforesaid.
Prior to taking action on the Merger, the RMCI Board reviewed a draft of the
Merger Agreement and received presentations from, and reviewed the terms and
conditions of the transactions contemplated by the Merger Agreement with the
RMCI Special Committee, RMCI management and RMCI's and the RMCI Special
Committee's legal and financial advisors. The RMCI Special Committee
recommended that the RMCI Board approve and adopt the Merger and the Merger
Agreement.
On October 1, 1996, after Dean Witter delivered to the RMCI Special
Committee and the RMCI Board its opinion to the effect that, as of such date,
the Common Stock Exchange Ratio was fair, from a financial point of view, to
the holders of the RMCI Common Stock, and the Preferred Stock Exchange Ratio
was fair, from a financial point of view, to the holders of the RMCI Series
1996 Preferred Stock and after the RMCI Special Committee delivered its
recommendation, the RMCI Board determined that the Merger is fair to and in
the best interests of RMCI and its stockholders, approved and adopted the
Merger and the Merger Agreement and recommended that RMCI's stockholders vote
their shares of RMCI Common Stock and RMCI Series 1996 Preferred Stock in
favor of approval of the Merger and the Merger Agreement.
The RMCI Special Committee and the RMCI Board considered an extensive number
of factors described below in reaching the recommendations described above.
The following factors were considered favorably by the RMCI Special Committee
and the RMCI Board in reaching those recommendations:
(i) After the sale of Apex, RMCI's remaining behavioral healthcare
services operations may have insufficient financial and operational
capability to permit RMCI to grow sufficiently as an independent, publicly
traded company. In fact, an important consideration in the Distribution was
to allow RMCI to be recognized by the financial community as a separate and
distinct business, thereby enhancing its ability to
54
<PAGE>
raise equity capital and borrow sufficient funds to support its operations
and the growth of its businesses. As a result of a number of factors,
including the significantly greater than anticipated development costs
associated with Apex, the operating performance of FPM, the difficulties
encountered by FPM in connection with various growth strategies (including
as a result of the stalling of significant healthcare reform in the United
States), changes in management and other factors, RMCI has been unable to
raise additional equity or debt capital on acceptable terms. This will
adversely affect RMCI's ability to grow its business, as well as its
ability to repay its indebtedness. Therefore, the RMCI Board observed that
one of the principal reasons for the Distribution has not come to fruition.
The RMCI Board in analyzing the financial condition and performance of the
two companies and what it believed to be the prospects for revenue
enhancement and cost savings following the Merger (see factors (iii) and
(vi) below), concluded that the combined companies should enjoy an improved
financial condition and performance. This anticipated improvement led the
RMCI Board to the conclusion that the combination of RHCI and RMCI (after
the sale of Apex) should enhance the combined companies' ability to attract
additional capital and refinance the combined companies' debt, and thereby
permit the combined companies to access the debt and equity capital
necessary to take advantage of the other strengths of the combined
companies discussed below;
(ii) Generally, the market value of RMCI has not reflected what
management believes is the long-term potential for the business conducted
by RMCI. Accordingly, the anticipated benefit for RMCI of being able to,
for example, use RMCI Common Stock for acquisitions or use RMCI Common
Stock to attract and motivate qualified key employees has not materialized.
For a number of quantitative reasons, unlike the RHCI Common Stock, the
RMCI Common Stock cannot be listed on the NASDAQ National Market System or
the NASDAQ SmallCap Market. Accordingly, RMCI has been unable to utilize
short-form registration statements under the federal securities laws in
connection with the issuances of RMCI Common Stock in acquisitions and,
generally, the failure to be so listed has also inhibited the trading of
the RMCI Common Stock and thereby depressed its value. It is anticipated
that a combination of RMCI and RHCI would enhance stockholder value and
thereby allow the combined companies' common stock to reflect the combined
entities' potential. The RMCI Board reached this conclusion by analyzing
the various favorable factors set forth above and below, including the
anticipated better access to capital markets. In addition, as enumerated
below, the combination should lead to enhanced revenue possibilities and to
cost savings and cost efficiencies. The RMCI Board concluded that these
results all should lead to an improvement in the combined companies'
results of operations, and thereby to enhanced stockholder value through an
increase in future common stock value;
(iii) The burden of continued compliance with federal securities law
reporting requirements, other costs attendant to RMCI's status as a public
company and the separate costs borne by RMCI (including those owed to RHCI)
for administration and other matters would be eliminated as a result of the
Merger. The RMCI Board concluded that the elimination of these costs,
coupled with what it viewed as opportunities to further achieve cost
savings and efficiencies for the combined companies, including by
eliminating redundancies in such areas as MIS, accounting, training and
other corporate support areas, should enhance the combined companies' net
income. Accordingly, the RMCI Board viewed the cost elimination and cost
efficiency factors as favorable results of the Merger;
(iv) Alternative courses of action for RMCI (such as its sale to a person
other than RHCI) are not available at this time. RMCI's recent discussions
with other potential purchasers of RMCI (see "Background of the Merger"
above) have indicated that the price which might be received from these
potential purchasers do not reflect what management believes to be the
potential for RMCI. So too, for the reasons expressed above and below,
maintaining RMCI as a separate publicly traded company following the sale
of Apex was not considered to be a long-term viable alternative.
Accordingly, the RMCI Board concluded that the Merger was the best of the
alternative courses of action;
(v) The opportunity for RMCI stockholders to receive an equity interest
in a larger, financially stronger, integrated mental health services
company and the prospects for that combined company. The RMCI Board
concluded that the Merger presented such an opportunity for all of the
reasons and based on all of the factors set forth above and below. The RMCI
Board considered the Merger to be an opportunity
55
<PAGE>
for RMCI stockholders to improve their relative equity position, all on the
basis of Exchange Ratios which the RMCI Board considered fair in the
exercise of its business judgment and as supported by the independent
review of the RMCI Special Committee and the fairness opinion of Dean
Witter;
(vi) Management's belief that, regardless of what action that federal and
state governments take on healthcare reform, RMCI needs to position itself,
either through combinations or affiliations, as part of a company providing
a broad range of mental healthcare services. The RMCI Board considered the
recent consolidation trends in the mental healthcare industry, including
wherein healthcare providers and managers of the provision of healthcare
were aligning or combining through acquisition, merger, joint venture,
strategic alliance and other means, all in order to present the marketplace
with a broader array of products and services at one source. The RMCI Board
concluded that in order to compete effectively in the changing mental
healthcare industry, RMCI must also become part of a larger organization
offering a broader array of products and services and that the combined
companies, by being able to offer the provision of healthcare services and
the cost effective management of those services, could so offer those
products;
(vii) The similar cultures and strategies of RMCI's and RHCI's
management. In analyzing this factor, the RMCI Board reached the same
conclusions as the RHCI Board and as discussed under "Recommendations of
the Boards of Directors; Reasons for the Merger--RHCI" above;
(viii) The personnel management systems possessed by RHCI, which are more
highly developed than those possessed by RMCI and which RMCI on a stand-
alone basis would have to incur substantial costs and management time to
duplicate, but if combined could utilize without significant additional
development expense. The RMCI Board viewed this factor in the same
favorable light as the factor discussed in (iii) above. The RMCI Board
believes that combination of the companies offered cost savings and cost
efficiencies opportunities;
(ix) Based upon the market prices of RMCI Common Stock and RHCI Common
Stock at the close of business on October 1, 1996 (the date of the Merger
Agreement), RMCI stockholders would receive a premium of 20% over the
closing bid price of RMCI Common Stock of $0.625 per share on October 1,
1996. The RMCI Board viewed favorably an ability for RMCI stockholders to
improve their relative equity position (see factor (v) above) in an
exchange of equity wherein the RMCI stockholders would receive a premium
over the market price for the RMCI Common Stock at the time the Merger was
announced;
(x) The written opinion of Dean Witter to the RMCI Board, that, as of the
date of such opinion, the Common Stock Exchange Ratio was fair, from a
financial point of view, to the holders of RMCI Common Stock and the
Preferred Stock Exchange Ratio was fair, from a financial point of view, to
the holders of RMCI Series 1996 Preferred Stock. See "Background of the
Merger--Independent Review" above.
(xi) The tax-free nature (for federal income tax purposes) of the Merger.
As discussed under "Certain Federal Income Tax Consequences of the Merger"
below, no gain or loss will be recognized by RMCI stockholders on the
exchange of their shares in the Merger. As with the considerations set
forth in clauses (v) and (ix) above, the RMCI Board concluded that the tax-
free nature of the exchange only served to bolster the conclusion that the
receipt of an equity interest in the combined companies was a favorable
factor in favor of the Merger;
(xii) The RHCI Common Stock and RHCI Series 1996 Preferred Stock to be
received by the RMCI stockholders in the Merger would, in the aggregate,
constitute approximately 24.4% of the outstanding shares of RHCI Common
Stock (assuming the conversion of all shares of RHCI Preferred Stock into
shares of RHCI Common Stock) after giving effect to the Merger (assuming
that the Merger was consummated on October 1, 1996);
(xiii) In the view of the RMCI Special Committee and the RMCI Board, RHCI
Common Stock is more liquid than RMCI Common Stock, RHCI Common Stock being
included on NASDAQ and, historically, having been traded in greater volume
than RMCI Common Stock. The RMCI Board concluded that this factor added to
the favorable reasons and conclusions discussed under clauses (v), (ix) and
(xi) above regarding the equity interest to be received by RMCI
stockholders in the Merger. The RMCI Board viewed greater liquidity
favorably in that it often adds to the value of a common stock interest;
and
56
<PAGE>
(xiv) The stockholder profile of the combined company, including the
lower percentage interest (approximately 44.2%) that Paul J. Ramsay and the
Ramsay Affiliates would beneficially hold in the combined company following
the Merger (assuming that the Merger was consummated on October 1, 1996) as
compared to their beneficial holdings in RMCI (approximately 70.4% on
October 1, 1996). Although Mr. Ramsay's interest in the combined companies
will be significant, from the point of view of stockholders unaffiliated
with Mr. Ramsay, the RMCI Board viewed favorably the fact that following
the Merger these unaffiliated stockholders would hold a majority of the
voting capital stock of the combined companies (but see factor (iii)
below).
In evaluating the Merger with RHCI, the RMCI Special Committee and the RMCI
Board also considered the following factors, which factors were considered to
be of an unfavorable nature:
(i) RHCI and the healthcare industry are subject to extensive federal,
state and local regulation. Many of the facilities which RHCI operates are
reimbursed by third parties such as Medicare or Medicaid. In certain
circumstances, RHCI is directly reimbursed by Medicare and Medicaid for
services provided to patients in RHCI's hospitals. Changes in Medicare or
Medicaid reimbursement programs or regulations could adversely affect the
business of the combined companies;
(ii) There are increasing pressures from many payor sources to control
healthcare costs. In addition, there are increasing pressures from public
and private payors to limit lengths of stays in hospitals and to limit
increases in reimbursement rates for medical services. Significant
decreases in utilization and limits on reimbursement could have an adverse
effect on the results of operations of the combined companies;
(iii) The controlling nature of the relationship among corporate
affiliates of Mr. Ramsay, RHCI and RMCI, including that prior to the
Merger, Mr. Ramsay and his corporate affiliates hold an approximate 69.0%
voting interest in RMCI (on October 1, 1996) and beneficially owns
approximately 70.4% of the shares of RMCI Common Stock (on October 1, 1996)
and, immediately after the Merger (assuming the Merger was consummated on
October 1, 1996), will hold an approximate 43.1% voting interest and
beneficially own 44.2% of the shares of voting capital stock in the
combined companies. The RMCI Board noted that Mr. Ramsay's voting interest
will enable him to control the policies of the combined companies. However,
the RMCI Board also observed that Mr. Ramsay's interest in the combined
companies will be less than a majority and will be significantly less than
his present interest in RMCI; and
(iv) Finally, the RMCI Board considered the possible misperceptions
concerning the Merger that might arise in the minds of RMCI's managed care
customers, in that the Merger might be viewed as a means for RHCI to
increase its hospital occupancy rates with patients from RMCI. The RMCI
Board considered whether this misperception could reduce the combined
companies' ability to maintain existing customers or impair its ability to
obtain new managed care customers, and thereby possibly have an adverse
effect on the combined companies' results of operations and on the market
price for the RHCI Common Stock to be received by RMCI stockholders in the
Merger. The RMCI Board concluded that this misconception could be overcome
as the managed care customers continued to receive RMCI's high quality,
cost effective services following the Merger.
The RMCI Special Committee and the RMCI Board were aware of and considered
the interests of certain directors and members of management of RMCI in the
Merger as described under "Interests of Certain Persons in the Merger" below.
The RMCI Board did not consider these interests to be a favorable or
unfavorable factor in evaluating the Merger, but rather a factor which, as
discussed under "Background of the Merger--Independent Review" above,
supported the belief that the Merger should be evaluated from an independent
perspective.
The members of the RMCI Special Committee and the RMCI Board evaluated the
factors listed above in light of their knowledge of the business and
operations of RMCI, and their business judgment. In considering the foregoing
factors, both favorable and unfavorable, the RMCI Special Committee and the
RMCI Board did
57
<PAGE>
not reach their conclusion concerning the Merger by individually evaluating
these factors or by evaluating whether or not to proceed with the Merger based
upon the individual effects or consequences of any one or a group of factors.
In view of the substantial number of factors considered, neither the RMCI
Special Committee nor the RMCI Board found it practicable to, and did not,
quantify or otherwise attempt to assign relative weights to the specific
factors considered in its determination, other than to determine that, as a
whole, the favorable factors significantly outweighed the unfavorable factors.
Rather, the RMCI Special Committee and the RMCI Board considered all of the
factors, both favorable and unfavorable, described above in the aggregate and
concluded, based on their consideration of these factors in their totality,
that the Merger is in the best interests of RMCI and its stockholders.
Based on the factors described above, the RMCI Board has unanimously
determined that the Merger is fair and in the best interests of RMCI and its
stockholders, has unanimously approved the Merger Agreement and the
transactions contemplated by the Merger Agreement and certain related matters
and has unanimously resolved to recommend that the stockholders of RMCI vote
FOR approval of the Merger and the Merger Agreement.
OPINIONS OF THE FINANCIAL ADVISORS
RHCI
Houlihan Lokey was retained by RHCI to render the fairness opinion described
below to the RHCI Board and the RHCI Special Committee in connection with the
Merger. In connection with such engagement, RHCI requested that Houlihan Lokey
evaluate the fairness, from a financial point of view, to RHCI of the Exchange
Ratios. On September 25, 1996, Houlihan Lokey rendered its oral opinion to the
RHCI Special Committee and the RHCI Board, which opinion Houlihan Lokey
subsequently confirmed in writing on October 1, 1996, to the effect that, as
of the date of such opinion and based upon the matters presented to the RHCI
Special Committee and the RHCI Board, the Exchange Ratios were fair, from a
financial point of view, to RHCI. No restrictions were imposed by the RHCI
Special Committee or by the RHCI Board upon Houlihan Lokey with respect to the
investigations made or procedures followed by them in rendering its opinion.
The preparation of a fairness opinion is complex and is not necessarily
susceptible to partial analysis or summary description. The summary does not
purport to be a complete statement of the analyses and procedures applied,
judgments made or the conclusions reached by Houlihan Lokey, or a complete
description of its presentation. Houlihan Lokey believes, and so advised the
RHCI Special Committee and the RHCI Board, that its analyses must be
considered as a whole, and that selecting portions of its analyses and of the
factors considered by it, without considering all the analyses and factors,
could create an incomplete view of the process underlying its analyses and
opinion.
In connection with their opinion, Houlihan Lokey reviewed, among other
things, (i) RHCI's Forms 10-K and Annual Reports for the fiscal years ended
June 30, 1994, June 30, 1995 and June 30, 1996, which the management of RHCI
identified as the most current information available; (ii) RMCI's Forms 10-KSB
for the fiscal years ended June 30, 1995 and June 30, 1996, which management
of RMCI identified as the most current information available; (iii) projected
financial statements for RHCI and RMCI prepared by RHCI's and RMCI's
management for the fiscal year ending June 30, 1997; (iv) the Merger
Agreement; (v) the Stock Purchase Agreement between Ramsay Hospitals and RMCI
dated September 10, 1996; and (vi) the Exchange Agreement by and among RHCI,
Ramsay Hospitals and Paul J. Ramsay dated September 10, 1996. See "Information
Concerning RHCI--Management--Certain Relationships and Related Transactions
Involving RHCI, RMCI and Affiliates Thereof." In addition, Houlihan Lokey met
with management of RMCI and RHCI to discuss the Merger Proposal and the
financial condition, operations and future prospects of RMCI and RHCI,
respectively. Houlihan Lokey also reviewed the reported prices and trading
activity of the RMCI Common Stock and the RHCI Common Stock, compared certain
financial and stock market information for RHCI and RMCI with similar
information for certain other companies with publicly traded securities,
reviewed recent business
58
<PAGE>
combinations in the psychiatric healthcare industry, and performed other
studies and analyses considered appropriate. In analyzing the fairness of the
Exchange Ratios from a financial point of view, Houlihan Lokey used the above
information to, among other things, assess the reasonableness of the trading
value of both the RHCI Common Stock and the RMCI Common Stock, independently
value the RMCI Common Stock, and evaluate certain other financial consequences
of the Merger. On the basis of these analyses and as described below, Houlihan
Lokey determined that (i) the value of the RHCI Common Stock being paid as
merger consideration for the RMCI Common Stock was within the range of the
fair market value of the RMCI Common Stock and (ii) the merger consideration
is in line with similar transactions. The methods and procedures used by
Houlihan Lokey in completing its analyses are described below.
Historical Stock Trading Analysis. Houlihan Lokey reviewed trading price and
volume information for RHCI, RMCI and their respective groups of selected
companies (see Selected Company Analysis below) to assess the reasonableness
of the trading values of each of RHCI and RMCI. Both RHCI and RMCI have lower
daily trading volume and smaller market capitalizations than their respective
groups of selected companies. RHCI has higher daily trading volume, a higher
absolute price, and a larger total market capitalization than RMCI. Houlihan
Lokey considered the trading price of the RHCI Common Stock to be more
indicative of fair market value than the trading price of the RMCI Common
Stock. The additional valuation analysis completed for each of RMCI and RHCI
is further described under the headings Selected Company Analysis and Selected
Acquisition Precedent Analysis below. Houlihan Lokey also analyzed the
relative trading price of RHCI and RMCI by calculating the ratio of the
average trading price of the RHCI Common Stock to the average trading price of
the RMCI Common Stock over several time periods ending September 24, 1996. The
resulting ratios for the following periods ended September 24, 1996 were: 3.8
to 1.0 for one day, 4.0 to 1.0 for one week, 4.2 to 1.0 for one month, 3.2 to
1.0 for three months, 2.1 to 1.0 for six months, 1.6 to one for one year, and
1.4 to 1.0 since the date of the Distribution. Houlihan Lokey concluded that
the 3.0 to 1.0 exchange called for in the Exchange Ratios is within the range
of the historical trading relationship of the RHCI Common Stock to the RMCI
Common Stock.
Selected Company Analysis. Houlihan Lokey reviewed financial, operating and
stock market information for RHCI and RMCI in comparison with two groups of
selected public companies. The companies selected for comparison with RHCI
were: Apogee, Inc. Community Psychiatric Centers, Magellan Health Services,
MHM Services Incorporated, and Universal Health Services. The companies
selected for comparison with RMCI were: Apogee, Inc., Community Psychiatric
Centers, Horizon Mental Health Management, MHM Services Incorporated,
Optimumcare Corporation and PMR Corporation. The purpose of these analyses was
to ascertain how RHCI and RMCI compared with respective peers in relation to
certain financial indicators, including size, growth, profitability and
leverage. The multiples and ratios for each of the selected companies were
based on the most recent publicly available information and selected analyst
earnings estimates, adjusted to correlate with RHCI's and RMCI's fiscal year
ending dates. With respect to the selected companies, Houlihan Lokey
considered, among other things, enterprise value ("Enterprise Value") (the
summation of the current trading market value of common equity, the redemption
value of preferred equity and book value of funded debt) as a multiple of
latest twelve months ("LTM") and fiscal year end revenues and earnings before
interest, taxes, depreciation and amortization ("EBITDA"). Houlihan Lokey
selected these representative earnings levels, as opposed to reported net
income, because RHCI and RMCI both have experienced substantial losses due to
restructuring and other charges and expenses.
Houlihan Lokey's analysis of the companies compared with RHCI indicated
Enterprise Value multiples of LTM revenues of 0.36x--1.07x; RHCI's indicated
multiple was 0.65x. Houlihan Lokey's analysis of the companies compared with
RHCI indicated Enterprise Value multiples of LTM EBITDA of 8.0x--17.5x; RHCI's
indicated multiple was 17.3x. These selected companies had Enterprise Value
multiples of estimated 1997 EBITDA of 5.2x--9.2x; RHCI's indicated multiple
was 5.9x. Based upon the above analysis, Houlihan Lokey concluded that the
trading price of the RHCI Common Stock was a reasonable indication of fair
market value. The average closing prices for the RHCI Common Stock for the
following periods ending September 24, 1996 were: $2.13 for one day, $2.62 for
one month, $2.87 for three months, and $3.16 for six months.
59
<PAGE>
While there is some overlap in the selected companies, the selected
companies for RMCI, in addition to being more focused on managed care, were
generally smaller and in an earlier stage of development than those used for
comparison to RHCI. The multiples for the group comparable to RMCI were
generally higher and had a wider range from the high multiple to the low
multiple than the group comparable to RHCI. RMCI's trading multiples were
severally distorted or not calculable due to RMCI's early stage of development
and lack of historical profitability. Houlihan Lokey concluded that it could
not confirm the reasonableness of the trading price of the RMCI Common Stock
due to (i) the low absolute stock price and relative lack of trading volume
for the RMCI Common Stock, (ii) the lack of meaningful historical
representative earnings levels, and (iii) the lack of widely published
earnings estimates and research coverage for the RMCI Common Stock. As a
result, Houlihan Lokey performed an independent valuation analysis of the RMCI
Common Stock based on the below described market information for the selected
companies. Houlihan Lokey's analysis of the companies compared with RMCI
indicated Enterprise Value multiples of LTM revenues of 0.36x-2.76x, and
Enterprise Value multiples of LTM EBITDA of 8.0x-57.8x. The selected companies
had Enterprise Value multiples of estimated 1997 EBITDA of 5.9x-21.3x.
Houlihan Lokey determined that a range of LTM Revenue multiples of .75x-.85x
and 1997 EBITDA multiples of 10.0x-14.0x would be appropriate for valuing
RMCI. These multiples produced a valuation indication which translates into a
range of value for the RMCI Common Stock of approximately $.75 to $1.05 per
share. The average closing prices for the RMCI Common Stock for the following
periods ending September 24, 1996 were: $.56 for one day, $.62 for one month,
$.89 for three months, and $1.52 for six months. Based upon the above-
described Selected Company Analysis and the historical trading value of the
RHCI Common Stock, Houlihan Lokey concluded that the value of one share of
RHCI Common Stock ($2.13 to $3.16 over the time period analyzed) is within the
range of value of three shares of RMCI Common Stock ($2.25 to $3.15 based on
indicated valuation range of $.75 to $1.05 per share).
Selected Acquisition Precedent Analysis. Houlihan Lokey reviewed 24
completed or pending transactions in the health care and psychiatric health
care industries which were announced during the twelve months ending September
1996. Although none of the transactions were deemed individually comparable to
the Merger, the collective group of transactions provided some meaningful
comparisons to the Merger. Houlihan Lokey calculated the total value of the
consideration paid in these transactions as multiple of the target company's
most recent fiscal year end revenues and EBITDA. Consideration of these
transactions produced a median multiple of revenues and EBITDA of .95x and
12.5x, respectively. Limiting the analysis to the nine transactions having
total value of less than $50 million produced a median multiple of revenues
and EBITDA of .86x and 10.5x, respectively. The nine transactions are
comprised of (Target/Acquirer): Zila Inc./Bio-Dental Technologies Corp.,
Horizon-CMS Healthcare Corp./Medical Innovations Inc., Advanced NMR
Systems/Medical Diagnostics Inc., TheraTx Inc./Healian Health Group Inc., Bio-
Reference Laboratories Inc./Dianon Systems Inc., Integrated Health Services
Inc./IntegraCare Inc., Principal Health Care Inc./Admar Group Inc., CCF Health
Care Ventures Inc./NuMed Home Health Care Inc., Star Multi Care Services
Inc./AMSERV Healthcare Inc. Given that the total value of the consideration to
be paid pursuant to the Merger is dependent upon the value of the RHCI Common
Stock, Houlihan Lokey concluded that it was not possible to calculate the
exact multiples being paid for RMCI. Assuming a stock price for the RHCI
Common Stock of $2.50 per share results in a LTM Revenue purchase multiple for
RMCI of .60x. It is not possible to calculate a historical EBITDA purchase
multiple for RMCI because RMCI had negative EBITDA in the LTM period. Based
upon the above analysis, Houlihan Lokey concluded that the LTM revenue
multiple being paid for RMCI (approximately .60x) is similar to or lower than
those paid in the selected transactions (median of .86x for deals having total
value of less than $50 million).
These analyses were prepared solely for the purposes of Houlihan Lokey
providing its opinion and are not appraisals or representations of prices at
which businesses or securities may actually be sold. Analyses based on
forecasts of future results are not necessarily indicative of actual future
results, which may be more or less favorable than suggested by such analyses.
These analyses are based upon numerous factors and events that are beyond the
control of the parties and their respective advisors. Hence none of RHCI,
RMCI, Houlihan Lokey or any other person, assumes responsibility if future
results are materially different from those forecast.
Houlihan Lokey relied upon and assumed, without independent verification,
that the financial forecasts and projections provided to it had been
reasonably prepared and reflected the best currently available estimates of
60
<PAGE>
the future financial results and condition of RHCI and RMCI, and that there
had been no material change in the assets, financial condition, business or
prospects of RHCI or RMCI since the fiscal year ended June 30, 1996 financial
statements.
Houlihan Lokey did not independently verify the accuracy and completeness of
the information supplied to it with respect to RHCI and RMCI and did not
assume any responsibility with respect to it. Houlihan Lokey did not make any
physical inspection or independent appraisal of any of the properties or
assets of RHCI or RMCI. Houlihan Lokey assumed that the Merger will qualify as
a tax free reorganization within the meaning of Section 368(a) of the Code.
Houlihan Lokey's opinion was necessarily based on business, economic, market
and other conditions as they existed and could be evaluated by Houlihan Lokey
on October 1, 1996. It should be understood that, although subsequent
developments may affect its opinion, Houlihan Lokey does not have any
obligation to update, revise or reaffirm its opinion rendered to the RHCI
Special Committee or the RHCI Board. It is not currently contemplated that
such opinion will be updated.
Based upon the foregoing, and in reliance thereon, it was Houlihan Lokey's
opinion that the Common Stock Exchange Ratio and the Preferred Stock Exchange
Ratio are fair to RHCI, from a financial point of view. Houlihan Lokey noted
that its opinion was necessarily based upon financial, stock market and other
conditions and circumstances existing and disclosed to Houlihan Lokey as of
the date of its opinion.
THE FULL TEXT OF HOULIHAN LOKEY'S WRITTEN OPINION DATED OCTOBER 1, 1996,
WHICH SETS FORTH THE ASSUMPTIONS MADE, MATTERS CONSIDERED AND LIMITATIONS ON
THE REVIEW UNDERTAKEN, IS ATTACHED AS APPENDIX B TO THIS JOINT PROXY
STATEMENT/PROSPECTUS AND IS INCORPORATED HEREIN BY REFERENCE. RHCI
STOCKHOLDERS ARE URGED TO READ THIS OPINION CAREFULLY IN ITS ENTIRETY.
HOULIHAN LOKEY'S OPINION IS DIRECTED ONLY TO THE FAIRNESS TO RHCI OF THE
EXCHANGE RATIOS FROM A FINANCIAL POINT OF VIEW, DOES NOT ADDRESS ANY OTHER
ASPECT OF THE MERGER AND DOES NOT CONSTITUTE A RECOMMENDATION TO ANY RHCI
STOCKHOLDER AS TO HOW SUCH STOCKHOLDER SHOULD VOTE AT THE RHCI MEETING. THE
SUMMARY OF THE OPINION OF HOULIHAN LOKEY SET FORTH IN THIS JOINT PROXY
STATEMENT/PROSPECTUS IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO THE FULL
TEXT OF SUCH OPINION.
Houlihan Lokey is a nationally recognized investment banking firm with
special expertise in, among other things, valuing businesses and securities
and rendering fairness opinions. Houlihan Lokey is continually engaged in the
valuation of businesses and securities in connection with mergers and
acquisitions, leveraged buyouts, private placements of debt and equity,
corporate reorganizations, employee stock ownership plans, corporate and other
purposes. RHCI retained Houlihan Lokey because of Houlihan Lokey's expertise
in performing valuation and fairness analyses and its familiarity with RHCI
and its businesses. Houlihan Lokey acted as a financial advisor to the RHCI
Board in connection with the Distribution. Houlihan Lokey does not
beneficially own nor has it ever beneficially owned any interest in RHCI.
As compensation for its financial advisory services in connection with the
Merger, Houlihan Lokey will receive a $100,000 fee from RHCI. Houlihan Lokey
received a payment of $25,000 upon the execution of its engagement letter with
RHCI (which will be credited against the $100,000 fee payable to Houlihan
Lokey). Whether or not the Merger is consummated RHCI has agreed to reimburse
Houlihan Lokey for reasonable expenses incurred by Houlihan Lokey, including
fees and disbursements of counsel, provided that such expenses may not exceed
$5,000 without prior written approval of RHCI. RHCI has also agreed to
indemnify Houlihan Lokey and certain related persons against certain
liabilities to which Houlihan Lokey may become subject as a result of its
engagement, including liabilities under the federal securities laws.
RMCI
RMCI retained Dean Witter to render its opinion to the RMCI Special
Committee and the RMCI Board as to the fairness, from a financial point of
view, of the Common Stock Exchange Ratio and the Preferred Stock Exchange
Ratio, respectively, to the holders of RMCI Common Stock and RMCI Preferred
Stock, respectively. At the meeting of the RMCI Special Committee and the
meeting of the RMCI Board held on September 25,
61
<PAGE>
1996, Dean Witter rendered its oral opinion to the effect that, as of
September 25, 1996, the Common Stock Exchange Ratio is fair, from a financial
point of view, to the holders of the RMCI Common Stock, and the Preferred
Stock Exchange Ratio is fair, from a financial point of view, to the holders
of the RMCI Preferred Stock. Dean Witter confirmed its oral opinion in a
written opinion, dated October 1, 1996, to the RMCI Special Committee and the
RMCI Board. No restrictions were imposed by the RMCI Special Committee or by
the RMCI Board upon Dean Witter with respect to the investigations made or
procedures followed by them in rendering its opinion.
In connection with its opinion, Dean Witter, among other things, (i)
reviewed the Merger Agreement; (ii) reviewed the Annual Report on Form 10-KSB
and related publicly available financial information of RMCI for the two most
recent fiscal years ended June 30, 1996, the final prospectus, dated April 24,
1995, for the distribution of the RMCI Common Stock, and RMCI's definitive
Proxy Statement on Form 14A, dated October 6, 1995; (iii) reviewed the Annual
Reports on Form 10-K and related publicly available financial information of
RHCI for the three most recent fiscal years ended June 30, 1995, the Quarterly
Reports on Form 10-Q for the periods ended September 30, 1995, December 31,
1995 and March 31, 1996, and RHCI's definitive Proxy Statement on Form 14A,
dated October 5, 1995; reviewed unaudited financial information of RHCI for
the fiscal year ended June 30, 1996; (iv) reviewed certain other information,
including publicly available information, relating to the business, earnings,
cash flow, assets and prospects of RMCI and RHCI, respectively; (v) reviewed
an income statement forecast of RMCI for the fiscal years 1997 and 1998 as
furnished to Dean Witter by RMCI; reviewed an income statement forecast of
RMCI for the fiscal year 1999 as prepared on the basis of information and
assumptions furnished to Dean Witter by RMCI; reviewed selected balance sheet
and cash flow forecast items of RMCI for fiscal years 1997 through 1999 as
prepared on the basis of information and assumptions furnished to Dean Witter
by RMCI; (vi) reviewed income statement forecasts of RHCI for fiscal years
1997 through 1999 as furnished to Dean Witter by RHCI; (vii) conducted
discussions with members of senior management of RMCI and RHCI, respectively,
concerning the past and current business, operations, assets, present
financial condition and future prospects of RMCI and RHCI, respectively;
(viii) reviewed the historical reported market prices and trading activity for
the RMCI Common Stock and the RHCI Common Stock, respectively; (ix) compared
certain financial information, operating statistics and market trading
information relating to RMCI with published financial information, operating
statistics and market trading information relating to selected public
companies that Dean Witter deemed to be reasonably similar to RMCI; compared
certain financial information, operating statistics and market trading
information relating to RHCI with published financial information, operating
statistics and market trading information relating to selected public
companies that Dean Witter deemed to be reasonably similar to RHCI; (x)
compared the financial terms of the Merger with the financial terms, to the
extent publicly available, of selected other recent acquisitions that Dean
Witter deemed to be relevant; (xi) compared the financial terms of the Merger
with the financial terms of other indications of interest received by RMCI;
and (xii) reviewed such other financial studies and analyses and performed
such other investigations and took into account such other matters as Dean
Witter deemed necessary.
In preparing its opinion, Dean Witter assumed and relied upon the accuracy
and completeness of all financial and other information supplied to Dean
Witter by RMCI, RHCI or that was publicly available, respectively, and did not
independently verify such information. Dean Witter also relied upon the
managements of RMCI and RHCI, respectively, as to the reasonableness and
achievability of the financial forecasts of RMCI and RHCI (and the assumptions
and bases thereof) provided to Dean Witter or prepared on the basis of
information and assumptions furnished to Dean Witter, and with RMCI's consent
Dean Witter has assumed that such forecasts have been reasonably prepared on
the basis reflecting the best currently available estimates and judgments of
such respective managements as to the future operating performance of RMCI and
RHCI, respectively. Furthermore, Dean Witter assumed the Merger will qualify
as a reorganization within the meaning of Section 368(a) of the Internal
Revenue Code of 1986, as amended. Dean Witter had not been requested to make,
and Dean Witter did not make, an independent appraisal or evaluation of the
assets, properties, facilities or liabilities of RMCI or RHCI and Dean Witter
had not been furnished with any such appraisal or evaluation. It should be
understood that, although subsequent developments may affect its opinion, Dean
Witter does not have
62
<PAGE>
any obligation to update, revise or reaffirm the opinion it rendered to the
RMCI Special Committee or the RMCI Board. It is not currently contemplated
that such opinion will be updated.
Dean Witter did not act as financial advisor to the RMCI Special Committee
or the RMCI Board in connection with the Merger and was not requested to
solicit any interests from any other potential parties to a transaction with
RMCI, but rather was retained solely to render the opinion described herein
with respect to the Merger.
At the meeting of the RMCI Special Committee and the RMCI Board on September
25, 1996, Dean Witter presented certain financial analyses in connection with
the delivery of its oral opinion. The following is a summary of the material
financial and comparative analyses performed by Dean Witter in arriving at its
September 25, 1996 opinion which was subsequently confirmed in writing on
October 1, 1996.
Common Stock Exchange Ratio and Preferred Stock Exchange Ratio
Analysis. Dean Witter reviewed with the RMCI Special Committee and the RMCI
Board the Common Stock Exchange Ratio and the Preferred Stock Exchange Ratio
and the implied value of the price of the RMCI Common Stock and the RMCI
Series 1996 Preferred Stock, respectively, based on the closing price of RHCI
Common Stock on September 19, 1996. The closing prices of RHCI Common Stock
and RMCI Common Stock were $2.188 (the "Closing Price") and $0.50,
respectively, on September 19, 1996 implying a value for the consideration to
be received by the holders of RMCI Common Stock of $0.73 per share (the
"Implied Value") at the Common Stock Exchange Ratio of one third (1/3) of a
share of RHCI Common Stock for each share of RMCI Common Stock. Given that the
Implied Value of $0.73 per share for RMCI Common Stock was below the $1.00
conversion price for the RMCI Series 1996 Preferred Stock, Dean Witter
utilized the $3 million face value of the RMCI Series 1996 Preferred Stock
rather than the implied common equivalent value of the RMCI Series 1996
Preferred Stock. The purpose of the Common Stock Exchange Ratio and Preferred
Stock Exchange Ratio Analysis is to set forth the methodology applied by Dean
Witter to translate the Common Stock Exchange Ratio and Preferred Stock
Exchange Ratio into an implied valuation for comparative purposes only.
Therefore, Dean Witter deemed this analysis to be a "material financial"
analysis that is informational and not intended to imply a view as to
fairness.
Stock Trading History. Dean Witter examined the history of the trading
prices and volume for RMCI Common Stock, the relationship between movements in
the price of the RMCI Common Stock and movements in certain stock indices, and
the relationship between movements in the price of the RMCI Common Stock and
press announcements and other public disclosures. Dean Witter noted the
general decline in the price of the RMCI Common Stock from April 24, 1995 (the
Date of the Distribution) through September 19, 1996.
Dean Witter compared the per share market prices and trading volume of the
RMCI Common Stock over the period April 24, 1995 through September 19, 1996 in
relation to movements in the RHCI Common Stock and movements in certain stock
indices generated from four groups of selected publicly traded healthcare
companies: the Behavioral Health Care Group, the PPM Group, the Dental Managed
Care Group, and the HMO Group (as such terms are defined in "Analysis of
Selected Publicly Traded Companies" below). Dean Witter noted a greater
decline in the price of RMCI Common Stock relative to the price of RHCI Common
Stock. Dean Witter also noted generally that the price of RMCI Common Stock
exhibited a higher degree of volatility relative to the above described
indices and that each index outperformed RMCI Common Stock.
Contribution Analysis. Dean Witter calculated the contribution of each of
RMCI and RHCI to the pro forma combined entity with respect to revenues,
EBITDA and net income, without giving effect to any purchase accounting
adjustments. The foregoing contributions were examined for fiscal years ended
1996 through 1998. The analysis was based on RMCI's projections, adjusted for
cost savings provided by RMCI, for the foregoing periods and produced a
relative contribution of RMCI to the pro forma combined entity for the
foregoing periods, respectively, of (i) 14.9%, 11.3% and 16.7% of revenues,
(ii) 4.1%, 14.9% and 15.5% of EBITDA and (iii) (104.9%), 19.6% and 26.9% of
net income. Based on the closing prices of RMCI Common Stock and RHCI Common
Stock, the holders of RMCI Common Stock would have approximately 24% pro forma
fully diluted equity ownership of the pro forma combined entity.
63
<PAGE>
Dean Witter concluded that RMCI's pro forma equity ownership generally
equaled or exceeded such contribution to the pro forma combined entity and
therefore concluded that the results of such analysis support its opinions.
Analysis of Selected Publicly Traded Companies. Using publicly available
information, Dean Witter compared selected quantitative data and qualitative
information regarding RMCI with similar data of selected publicly traded
companies as described below. These data and ratios included Aggregate Value
(implied market value of common equity plus liquidation value of preferred
plus total debt outstanding) to latest twelve months revenue and latest
period-end total assets. Due to the operating performance of RMCI, Dean Witter
did not deem other multiples to be meaningful for comparative purposes.
In performing its analysis, Dean Witter concluded that there were no
publicly traded companies focusing solely in the managed behavioral healthcare
industry that it considered directly comparable to RMCI. However, Dean Witter
did identify four different categories of publicly traded healthcare companies
that were similar to various aspects of RMCI's operations. For purposes of
this analysis, Dean Witter compared RMCI to (i) six publicly traded managed
care organizations with behavioral health operations ("Behavioral Health Care
Group"): Foundation Health Corporation, Mid Atlantic Medical Services, Inc.,
PHP Health Corporation, Sierra Health Services, Inc., United Wisconsin
Services, Inc. and Value Health, Inc., (ii) 18 publicly traded physician
practice management companies ("PPM Group") based on the staff model aspect of
RMCI's operations: AHI Healthcare Systems, Inc., American Oncology Resources,
Inc., Apogee, Inc., Coastal Physician Group, Inc., EmCare Holdings, Inc., FPA
Medical Management, Inc., InPhyNet Medical Management Inc., MedCath
Incorporated, MedPartners Inc., OccuSystems, Orthodontic Centers of America,
Inc., Pediatrix Medical Group Inc., PhyCor, Inc., PhyMatrix Corp., Physician
Reliance Network, Inc., Physicians Resources Group, Inc., Sheridan Healthcare,
Inc. and Sterling Healthcare Group, Inc., (iii) four publicly traded dental
managed care organizations ("Dental Managed Care Group") based on the
ancillary managed care service aspect of RMCI: CompDent Corporation, First
Commonwealth, Inc., Safeguard Health Enterprises, Inc. and United Dental Care
Mid Atlantic Medical Services, Inc., and (iv) 10 publicly traded small and
mid-capitalized HMOs ("HMO Group"): Coventry Corporation, Health Power, Inc.,
Mid Atlantic Medical Services, Inc., Maxicare Health Plans, Inc., Physicians
Corporation of America, Physicians Health Services, Inc., Rightchoice Managed
Care, Inc., Sierra Health Services, Inc., United American Healthcare, Inc. and
United Wisconsin Services, Inc. In each of these comparisons, the implied
multiples for RMCI were generally within the range of multiples for each of
the above described groups.
When Dean Witter compared RMCI to the Behavioral Health Care Group, an
analysis of Aggregate Value to latest twelve month revenue yielded a range of
0.4x to 1.6x compared to 0.8x for RMCI at the Implied Price. An analysis of
Aggregate Value to latest period-end total assets yielded a range of 0.8x to
2.4x compared to 1.4x for RMCI at the Implied Price. When Dean Witter compared
RMCI to the PPM Group, an analysis of Aggregate Value to latest twelve month
revenue yielded a range of 0.3x to 16.1x compared to 0.8x for RMCI at the
Implied Price. An analysis of Aggregate Value to latest period-end total
assets yielded a range of 0.7x to 8.8x compared to 1.4x for RMCI at the
Implied Price. When Dean Witter compared RMCI to the Dental Managed Care
Group, an analysis of Aggregate Value to latest twelve month revenue yield a
range of 1.0x to 3.3x compared to 0.8x for RMCI at the Implied Price. An
analysis of Aggregate Value to latest period-end total assets yielded a range
of 2.2x to 3.8x compared to 1.4x for RMCI at the Implied Price. When Dean
Witter compared RMCI to the HMO Group, an analysis of Aggregate Value to
latest twelve month revenue yielded a range of 0.3x to 1.3x compared to 0.8x
at the Implied Price. An analysis of Aggregate Value to latest period-end
total assets yielded a range of 0.6x to 2.2x compared to 1.4x for RMCI at the
Implied Price.
64
<PAGE>
Set forth below is the data for each of the foregoing publicly traded
companies in the four identified categories of healthcare companies:
BEHAVIORAL HEALTH CARE GROUP:
<TABLE>
<CAPTION>
COMPANY AGG. VALUE/TOTAL ASSETS AGG. VALUE/TOTAL REVENUES
------- ----------------------- -------------------------
<S> <C> <C>
Foundation Health........... 0.8 0.7
Mid Atlantic Medical........ 1.2 0.4
PHP Healthcare.............. 2.4 1.6
Sierra Health Services...... 0.9 1.0
United Wisconsin............ NMF NMF
Value Health................ 0.9 0.4
PPM GROUP:
<CAPTION>
COMPANY AGG. VALUE/TOTAL ASSETS AGG. VALUE/TOTAL REVENUES
------- ----------------------- -------------------------
<S> <C> <C>
AHI Healthcare Systems...... 1.3 0.8
American Oncology
Resources.................. 1.2 2.4
Apogee...................... 0.7 1.0
Coastal Physician Group..... 0.8 0.3
EmCare Holdings............. 2.3 1.3
FPA Medical Management...... 2.6 2.8
InPhyNet Medical
Management................. 2.3 0.8
MedCath Incorporated........ 1.5 4.3
MedPartners, Inc............ 2.0 1.0
OccuSystems................. 3.8 4.8
Orthodontic Centers of
America.................... 8.8 16.1
Pediatrix Medical Group..... 8.5 11.8
PhyCor...................... 2.6 3.9
PhyMatrix Corp.............. 2.7 4.9
Physician Reliance Network.. 2.7 4.4
Physicians Resource Group... 2.0 5.2
Sheridan Healthcare......... 0.9 1.0
Sterling Healthcare Group,
Inc........................ 2.3 1.5
</TABLE>
DENTAL MANAGED CARE GROUP:
<TABLE>
<CAPTION>
COMPANY AGG. VALUE/TOTAL ASSETS AGG. VALUE/TOTAL REVENUES
------- ----------------------- -------------------------
<S> <C> <C>
CompDent Corporation........ 2.3 3.3
First Commonwealth.......... 3.8 2.1
Safeguard Health
Enterprises................ 2.2 1.0
United Dental Care.......... 3.4 2.8
</TABLE>
HMO GROUP:
<TABLE>
<CAPTION>
COMPANY AGG. VALUE/TOTAL ASSETS AGG. VALUE/TOTAL REVENUES
------- ----------------------- -------------------------
<S> <C> <C>
Coventry Corporation.... 1.2 0.5
Health Power............ 0.8 0.3
Mid Atlantic Medical.... 1.7 0.6
Maxicare Health Plans... 2.2 0.7
Physicians Health
Services............... 1.0 0.5
Physicians Corp. of
America................ 0.7 0.5
Right CHOICE Managed
Care................... 0.6 0.5
Sierra Health Services.. 1.2 1.3
United American
Healthcare............. 0.8 0.9
United Wisconsin
Services............... 0.6 0.4
</TABLE>
65
<PAGE>
Analysis of Selected Transactions. Dean Witter reviewed publicly available
information on certain acquisition transactions involving companies in the
healthcare industry which Dean Witter deemed to be relevant. In performing its
analyses, Dean Witter concluded that there were no transactions which are
directly comparable to the Merger due to the nature and size of RMCI's
business. However, Dean Witter did deem two transactions to be reasonably
similar to the Merger for comparison purposes: (i) the joint venture strategic
alliance between Green Springs Health Services, Inc. and Charter Medical Corp.
(subsequently renamed Magellan Health Services, Inc.); and (ii) the buyout of
Medco Behavioral Care. In a comparison of the implied multiples for RMCI to
the above described transactions, Dean Witter concluded that the results of
the analysis supported its opinion. Dean Witter calculated multiples for each
transaction based on the ratio of the Aggregate Value to such acquired
companies respective preacquisition latest twelve month revenue and latest
period-end total assets. An analysis of Aggregate Value to latest-twelve month
revenue yielded a range of 0.8x to 1.1x compared to 0.8x for RMCI at the
Implied Price. An analysis of Aggregate Value to latest period-end total
assets yielded a range of 1.0x to 1.4x compared to 1.4x for RMCI at the
Implied Price.
Discounted Cash Flow Analysis. Using discounted cash flow analysis, Dean
Witter estimated the present value of the future streams of after-tax cash
flows that RMCI would produce through 1999, assuming RMCI performed in
accordance with the RMCI financial forecasts referred to above. After-tax cash
flows were calculated as the tax-effected earnings before interest and taxes
("EBIT") of RMCI plus projected depreciation and amortization less projected
capital expenditures and projected net increases on non-cash working capital.
Dean Witter estimated the terminal value of RMCI by applying a range of
multiples to EBITDA projected for RMCI in 1999. The cash flow streams and
terminal values were then discounted to present values using different
discount rates chosen to reflect different assumptions regarding the required
rates of return of holders or prospective buyers of RMCI Common Stock. This
discounted cash flow analysis indicated a reference range for RMCI Common
Stock that was inclusive of the implied value per share of RMCI Common Stock
based on the RHCI Common Stock price per share on September 19, 1996 and the
Common Stock Exchange Ratio.
In presenting the discounted cash flow analysis, Dean Witter also advised
the RMCI Special Committee and the RMCI Board that discounted cash flow
analyses were less meaningful than other analyses presented by Dean Witter
since the common stocks of healthcare companies like RMCI generally trade on
the basis of multiples of earnings per share rather than multiples of cash
flow per share.
Analysis of Consideration. Using publicly available information, Dean Witter
compared selected quantitative data and qualitative information regarding RHCI
with similar data of selected publicly traded companies as described below. In
performing its analysis, Dean Witter identified four different categories of
publicly traded healthcare companies that were similar to various aspects of
RHCI's operations. For purposes of its analysis, Dean Witter compared RHCI to
(i) two publicly traded small-capitalized psychiatric providers ("Small Cap
Psych Group"): AMEDISYS, Inc. and NextHealth, Inc.; (ii) six publicly traded
large-capitalized psychiatric providers ("Large Cap Psych Group"): Children's
Comprehensive Services, Inc., Community Psychiatric Centers, Magellan Health
Services, Inc., Paracelsus Healthcare Corporation, Universal Health Services,
Inc. and Youth Services International, Inc.; (iii) four publicly traded
companies with significant psychiatric hospital and/or outpatient operations
("Psych Hospitals/Outpatient Operators Group"): Apogee, Inc., Community
Psychiatric Centers, Comprehensive Care Corporation and Universal Health
Services, Inc.; and (iv) nine publicly traded hospital management companies
("Hospital Management Group"): Columbia/HCA Healthcare Corporation, Community
Psychiatric Centers, Health Management Associates, Inc., Magellan Health
Services, Inc., OrNda HealthCorp, Paracelsus Healthcare Corporation, Quorum
Health Group, Inc., Tenet Healthcare Corporation and Universal Health
Services, Inc. In a comparison of RHCI to the above described companies, the
RHCI trading multiples are generally in the ranges of multiples of the
selected publicly traded companies.
When Dean Witter compared RHCI to the Small Cap Psych Group, an analysis of
Aggregate Value to latest twelve month revenue yielded a range of 0.6x to 1.0x
compared to 0.7x for RHCI at its Closing Price. An analysis of Aggregate Value
to latest period-end total assets yielded a range of 0.4x to 1.6x compared to
0.6x for RHCI at the Closing Price.
66
<PAGE>
When Dean Witter compared RHCI to the Large Cap Psych Group, an analysis of
Aggregate Value to latest twelve month revenue yielded a range of 0.8x to 4.4x
compared to 0.7x for RHCI at its Closing Price. An analysis of Aggregate Value
to latest period-end total assets yielded a range of 0.8x to 2.9x compared to
0.6x for RHCI at the Closing Price. An analysis of Aggregate Value to EBIT
yielded a range of 5.6x to 28.4x compared to 11.1x for RHCI at its Closing
Price. An analysis of Aggregate Value to EBITDA yielded a range of 4.0x to
23.4x compared to 6.3x for RHCI at its Closing Price.
When Dean Witter compared RHCI to the Psych Hospital/Outpatient Operations
Group, an analysis of Aggregate Value to latest twelve month revenue yielded a
range of 0.9x to 1.3x compared to 0.7x for RHCI at its Closing Price. An
analysis of Aggregate Value to latest period-end total assets yielded a range
of 0.7x to 1.6x compared to 0.6x for RHCI at the Closing Price. An analysis of
Aggregate Value to EBIT yielded a range of 12.3x to 15.8x compared to 11.1x
for RHCI at its Closing Price. An analysis of Aggregate Value to EBITDA
yielded a range of 7.5x to 17.1x compared to 6.3x for RHCI at its Closing
Price.
When Dean Witter compared RHCI to the Hospital Management Group, an analysis
of Aggregate Value to latest twelve month revenue yielded a range of 0.8x to
3.6x compared to 0.7x for RHCI at its Closing Price. An analysis of Aggregate
Value to latest period-end total assets yield a range of 0.8x to 4.2x compared
to 0.6x for RHCI at the Closing Price. An analysis of Aggregate Value to EBIT
yielded a range of 5.8x to 17.8x compared to 11.1x for RHCI at its Closing
Price. An analysis of Aggregate Value to EBITDA yielded a range of 5.8x to
15.0x compared to 6.3x for RHCI at its Closing Price.
No company or transaction used in the above analyses is directly comparable
to RMCI, RHCI or the Merger. Accordingly, an analysis of the results of the
foregoing is not mathematical; rather, it involves complex considerations and
judgments concerning differences in the financial and operating
characteristics of the companies and other factors that could affect the
public trading values of the companies to which they are being compared.
The summary set forth above does not purport to be a complete description of
the analyses performed by Dean Witter. The preparation of a fairness opinion
involves various determinations as to the most appropriate and relevant
methods of financial review and the application of these methods to the
particular circumstances and, therefore, such an opinion is not readily
susceptible to summary description. Accordingly, notwithstanding the separate
factors summarized above, Dean Witter believes that its analyses must be
considered as a whole and that selected portions of its analyses and the
factors considered by it, without considering all analyses and factors, could
create an incomplete view of the evaluation process underlying its opinion. In
performing its analyses, Dean Witter made numerous assumptions with respect to
industry performance, general business and economic conditions and other
matters, many of which are beyond RMCI's or RHCI's control. The analyses
performed by Dean Witter are not necessarily indicative of actual values or
future results, which may be significantly more or less favorable than
suggested by such analyses. Additionally, analyses relating to the values of
businesses do not purport to be appraisals or to reflect the prices at which
businesses actually may be sold.
THE FULL TEXT OF THE OPINION OF DEAN WITTER DATED OCTOBER 1, 1996, WHICH
SETS FORTH THE ASSUMPTIONS MADE, MATTERS CONSIDERED AND LIMITATIONS ON THE
REVIEW UNDERTAKEN, IS ATTACHED AS APPENDIX C TO THIS JOINT PROXY
STATEMENT/PROSPECTUS AND IS INCORPORATED HEREIN BY REFERENCE. RMCI
STOCKHOLDERS ARE URGED TO READ THIS OPINION IN ITS ENTIRETY. DEAN WITTER'S
OPINION DOES NOT CONSTITUTE A RECOMMENDATION TO ANY RMCI STOCKHOLDER AS TO HOW
SUCH STOCKHOLDER SHOULD VOTE AT THE RMCI SPECIAL MEETING. THE SUMMARY OF THE
OPINION OF DEAN WITTER SET FORTH IN THIS JOINT PROXY STATEMENT/PROSPECTUS IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO THE FULL TEXT OF SUCH OPINION.
Dean Witter is an investment banking firm engaged, among other things, in
the valuation of businesses and securities in connection with mergers,
acquisitions, underwriting, sales and distributions of listed and unlisted
securities, private placements and valuations for corporate and other
purposes. The RMCI Special Committee and the RMCI Board selected Dean Witter
to render a fairness opinion because it is a nationally recognized investment
banking firm which has substantial experience in transactions similar to the
Merger and is familiar
67
<PAGE>
with RMCI and its business. Dean Witter is currently rendering additional
investment banking services to RMCI, by acting as financial advisor in the
sale of Apex.
As compensation for its financial advisory services in connection with the
Merger, Dean Witter received a $200,000 fee from RMCI, paid $50,000 upon
execution of its engagement letter with RMCI and $150,000 on October 4, 1996.
Whether or not the Merger is consummated RMCI has agreed to reimburse Dean
Witter for reasonable expenses incurred by Dean Witter, including fees and
disbursements of counsel, provided that such expenses may not exceed $25,000
without the prior written approval of RMCI. RMCI has also agreed to indemnify
Dean Witter and certain related persons against certain liabilities to which
Dean Witter may become subject as a result of its engagement, including
liabilities under the federal securities laws.
Dean Witter regularly publishes research reports regarding the healthcare
industry and the businesses and securities of publicly owned companies in that
industry. In the ordinary course of its business, Dean Witter trades the RMCI
Common Stock and the RHCI Common Stock for its own account and for the account
of its customers and may at any time hold a long or short position in such
securities.
ACCOUNTING TREATMENT
The Merger will be accounted for as a purchase under generally accepted
accounting principles. Under this accounting method, assets and liabilities of
RMCI will be recorded at their fair value at the Effective Time, with the
excess of the purchase price over the net tangible and identifiable intangible
assets acquired being recorded as goodwill.
CERTAIN FEDERAL INCOME TAX CONSEQUENCES OF THE MERGER
Material Federal Income Tax Consequences to the RMCI Stockholders. The
following summary describes the material federal income tax consequences of
the Merger to holders of RMCI Common Stock and to the holders of RMCI Series
1996 Preferred Stock who are citizens or residents of the United States. It
does not discuss all the tax consequences that may be relevant to RMCI
stockholders in special tax situations (such as insurance companies, dealers
in securities, tax-exempt organizations or non-U.S. persons) or to RMCI
stockholders who acquired their shares of RMCI Common Stock pursuant to the
exercise of employee stock options or otherwise as compensation.
RHCI and RMCI have received the opinion of Haythe & Curley, to the effect
that, under current federal income tax law and assuming that the Merger and
related transactions will take place as described in the Merger Agreement:
(i) the Merger will constitute a reorganization for federal income tax
purposes within the meaning of Section 368(a) of the Code;
(ii) no gain or loss will be recognized by stockholders of RMCI on the
exchange of their shares of RMCI Common Stock for shares of RHCI Common
Stock or on the exchange of their shares of RMCI Series 1996 Preferred
Stock for shares of RHCI Series 1996 Preferred Stock, respectively,
pursuant to the terms of the Merger;
(iii) the tax basis of the shares of RHCI stock received pursuant to the
Merger generally will be the same as the basis of the shares of RMCI stock
exchanged therefor (less any proportionate part of such basis allocable to
any fractional interest in any share of RHCI stock);
(iv) the holding period for shares of RHCI stock received pursuant to the
Merger will include the period that the shares of RMCI stock exchanged
therefor were held by the holder, provided such shares were held as a
capital asset by the holder;
(v) an RMCI stockholder who receives cash in lieu of a fractional share
of RHCI stock will be treated for federal income tax purposes as having
received the fractional share of RHCI stock pursuant to the Merger and then
having received the cash in lieu of the fractional share as a distribution
in full payment in exchange therefor as provided in Section 302(a) of the
Code; and
68
<PAGE>
(vi) if a stockholder of RMCI dissents to the Merger and receives solely
cash in exchange for his RMCI stock, the cash will be treated as having
been received as a distribution in redemption of the RMCI stock, subject to
the rules in Section 302 of the Code.
It is a condition to RMCI's and RHCI's obligations to consummate the Merger
that an opinion to the effect of the foregoing be delivered to RMCI and RHCI.
The opinion of Haythe & Curley is based on certain representations made by
RHCI, RHCI Sub, RMCI and certain stockholders of RMCI in the Merger Agreement
and as referred to in Section 5.06 of the Merger Agreement. An opinion of
counsel represents counsel's best legal judgment, but has no binding effect or
official status of any kind, and no assurance can be given that contrary
positions may not be taken by the Internal Revenue Service (the "IRS") or a
court considering the issues. Neither RHCI nor RMCI has requested a ruling
from the IRS with regard to any of the federal income tax consequences of the
Merger. Since RHCI stockholders will not receive any consideration in respect
of their shares of RHCI capital stock in the Merger, the Merger will not have
any federal income tax consequences to the RHCI stockholders.
Certain Additional Federal Income Tax Consequences. A holder of RMCI Stock
Options who receives RHCI Stock Options will generally realize no taxable gain
or loss on the substitution of the RHCI Stock Options for the RMCI Stock
Options. A holder of RMCI Warrants will not realize taxable gain or loss by
reason of becoming entitled to receive, on exercise of such warrants, shares
of RHCI Common Stock.
Certain Federal Income Tax Consequences to RMCI and RHCI. Consummation of
the Merger may cause a limitation to apply to the rate at which either or both
of RMCI and RHCI may utilize any of its net operating loss carryovers or other
similar tax attributes to offset future taxable income. Based upon current
information and estimates, management of RMCI and RHCI believe that the effect
of any such limitation would not be material.
Unless RMCI and RHCI elect to follow certain procedures necessary to secure
a waiver from the IRS under Section 1504(a)(3)(B) of the Code, RMCI and its
subsidiaries may not be included in the consolidated federal income tax
returns filed by RHCI and its subsidiaries for taxable years through June 30,
2000. Management has not yet determined whether to apply for a waiver or to
file separate returns for such period.
THE DISCUSSION SET FORTH ABOVE IS INCLUDED FOR GENERAL INFORMATION ONLY. THE
DISCUSSION IS BASED ON CURRENTLY EXISTING PROVISIONS OF THE CODE, EXISTING AND
PROPOSED TREASURY REGULATIONS THEREUNDER AND CURRENT ADMINISTRATIVE RULINGS
AND COURT DECISIONS. ALL OF THE FOREGOING ARE SUBJECT TO CHANGE AND ANY SUCH
CHANGE COULD AFFECT THE CONTINUING VALIDITY OF THIS DISCUSSION. NO INFORMATION
IS PROVIDED HEREIN WITH RESPECT TO THE TAX CONSEQUENCES, IF ANY, OF THE MERGER
UNDER APPLICABLE FOREIGN, STATE AND LOCAL LAWS. RMCI STOCKHOLDERS ARE URGED TO
CONSULT THEIR OWN TAX ADVISORS AS TO THE SPECIFIC TAX CONSEQUENCES TO THEM OF
THE MERGER, INCLUDING TAX RETURN REPORTING REQUIREMENTS, THE APPLICABILITY AND
EFFECT OF FOREIGN, STATE, LOCAL AND OTHER APPLICABLE TAX LAWS AND THE POSSIBLE
EFFECT OF ANY PROPOSED CHANGES IN THE TAX LAWS.
OTHER AGREEMENTS
On May 3, 1996, Ramsay Holdings entered into a secured demand loan facility
with Coutts & Co. AG ("Coutts") pursuant to which Ramsay Holdings is entitled
to borrow an amount equal to the lesser of $7,000,000 and the collateral value
of certain assets which have been pledged to Coutts. The current collateral
includes, among other items, 1,679,898 of the shares of RHCI Common Stock and
the 142,486 shares of RHCI Series C Preferred Stock held by Ramsay Holdings
and Ramsay HSA. Ramsay Holdings has the right (but is under no obligation) to
pledge additional shares of RHCI Common Stock to secure the obligations of
Ramsay Holdings to Coutts.
69
<PAGE>
Coutts is entitled to repayment of amounts outstanding under the loan
facility on demand. In the event that Ramsay Holdings were to default on its
obligations to Coutts under the loan facility, Coutts would be entitled to
liquidate the pledged stock to repay the outstanding debt. In the event that
Coutts were to attempt to liquidate the pledged stock, the sale of the stock
would be subject to the volume limitations pursuant to Rule 144 under the
Securities Act.
INTERESTS OF CERTAIN PERSONS IN THE MERGER
Certain directors and certain members of the management of each of RHCI and
RMCI have certain interests in the Merger in addition to the interests of the
stockholders of each of RHCI and RMCI, as described below. The RHCI Board and
the RMCI Board and their respective special committees were aware of such
interests and considered them, among other matters, in approving the Merger
Agreement and the transactions contemplated thereby. See "Information
Concerning RHCI--Management--Certain Relationships and Transactions involving
RHCI, RMCI and Affiliates Thereof." The number and percentages of shares of
RHCI and RMCI capital stock set forth in the following discussion as held by
directors, executive officers and corporate affiliates of Paul J. Ramsay,
Chairman of the Board of RHCI and RMCI, do not include shares issuable upon
the exercise of currently exercisable options and warrants held by any such
persons. See "Information Concerning RHCI--Principal Stockholders" and
"Information Concerning RMCI--Principal Stockholders."
Interests of Paul J. Ramsay.
As of the RHCI Record Date, there were 8,425,431 outstanding shares of RHCI
Common Stock, each of which is entitled to one vote with respect to each
matter to be voted on at the RHCI Meeting and 142,486 outstanding shares of
RHCI Series C Preferred Stock (all of which shares of RHCI Series C Preferred
Stock are owned by corporate affiliates of Mr. Ramsay), each of which is
entitled to ten (10) votes (voting together with the RHCI Common Stock as a
single class) with respect to each matter voted on at the RHCI Meeting. As of
such date, RHCI's directors, executive officers and corporate affiliates of
Mr. Ramsay owned an aggregate of 3,546,112 shares of RHCI Common Stock
(calculated as if all outstanding shares of RHCI Series C Preferred Stock were
converted in accordance with their terms into shares of RHCI Common Stock), or
approximately 36.0% of the issued and outstanding shares of RHCI Common Stock
(calculated as if all outstanding shares of RHCI Series C Preferred Stock were
converted in accordance with their terms into shares of RHCI Common Stock) on
the RHCI Record Date, of which Mr. Ramsay and his corporate affiliates owned
an aggregate of 3,398,054 shares of RHCI Common Stock (calculated as
aforesaid), or approximately 34.5% of the issued and outstanding shares of
RHCI Common Stock (calculated as aforesaid). These directors, executive
officers and corporate affiliates of Mr. Ramsay have advised RHCI that they
intend to vote or to direct the vote of all shares of RHCI Common Stock and
RHCI Series C Preferred Stock over which they have voting power for approval
and adoption of the Merger Proposal and the 1996 Long Term Incentive Plan.
Approval and adoption of the Merger Proposal and the 1996 Long Term Incentive
Plan requires the affirmative vote of a majority of the votes cast by the
holders of RHCI Common Stock and the holders of RHCI Series C Preferred Stock
(voting together with the RHCI Common Stock as a single class on the basis of
the number of shares of RHCI Common Stock into which such RHCI Series C
Preferred Stock is convertible) entitled to vote thereon at the RHCI Meeting
(at which a quorum must be present). RHCI has no class or series of capital
stock outstanding other than RHCI Common Stock and RHCI Series C Preferred
Stock entitled to vote at the RHCI Meeting.
As of the RMCI Record Date, RMCI's directors, executive officers and
corporate affiliates of Paul J. Ramsay, the Chairman of the Board of both RMCI
and RHCI, owned approximately 6,718,337 shares of RMCI Common Stock
(calculated as if all outstanding shares of RMCI Series 1996 Preferred Stock
were converted in accordance with their terms into shares of RMCI Common
Stock), or approximately 71.4% of the issued and outstanding shares of RMCI
Common Stock (calculated as if all outstanding shares of RMCI Series 1996
Preferred Stock were converted in accordance with their terms into shares of
RMCI Common Stock) on the RMCI Record Date, of which the corporate affiliates
of Mr. Ramsay owned an aggregate of 6,488,173 shares of RMCI Common Stock
(calculated as aforesaid), or approximately 69.0% of the issued and
outstanding shares of RMCI Common Stock (calculated as aforesaid). These
directors, executive officers and corporate affiliates of
70
<PAGE>
Mr. Ramsay have advised RMCI that they intend to vote or to direct the vote of
all shares of RMCI Common Stock and RMCI Series 1996 Preferred Stock over
which they have voting power for approval and adoption of the Merger
Agreement. Approval and adoption of the Merger Agreement requires the
affirmative vote of (i) the holders of a majority of the issued and
outstanding shares of RMCI Common Stock (calculated as if all outstanding
shares of RMCI Series 1996 Preferred Stock were converted in accordance with
their terms into shares of RMCI Common Stock) and (ii) the holders of a
majority of the issued and outstanding shares of RMCI Series 1996 Preferred
Stock (voting as a separate class). RMCI has no class or series of capital
stock outstanding other than RMCI Common Stock and RMCI Series 1996 Preferred
Stock entitled to vote at the RMCI Meeting.
Subsequent to the Merger, Mr. Ramsay will remain Chairman of the Board of
RHCI. His pro forma ownership in RHCI immediately after the Effective Time
(assuming that the Merger was consummated on the RHCI Record Date) would be
5,560,778 shares of RHCI Common Stock (calculated as if all outstanding shares
of RHCI Preferred Stock were converted in accordance with their terms into
shares of RHCI Common Stock), or approximately 42.8% of the issued and
outstanding shares of RHCI Common Stock at that time (calculated as if all
outstanding shares of RHCI Preferred Stock were converted in accordance with
their terms into shares of RHCI Common Stock). The pro forma ownership in RHCI
immediately after the Effective Time (assuming the Merger was consummated on
the RHCI Record Date) for all directors and executive officers of RHCI as a
group (including Mr. Ramsay) would be approximately 44.3%. Prior to the Merger
(on the RHCI Record Date) and prior to the Distribution, respectively, Mr.
Ramsay, personally and through the Ramsay Affiliates, held shares of RHCI
Common Stock and RHCI Series C Preferred Stock entitling such persons to cast
approximately 34.5% and 30.7%, respectively, of the total number of votes cast
by all RHCI stockholders on matters submitted to the vote of stockholders. See
"Information Concerning RHCI--Management--Certain Relationships and Related
Transactions Involving RHCI, RMCI and Affiliates Thereof," "Information
Concerning RHCI--Principal Stockholders" and "Information Concerning RMCI--
Principal Stockholders."
Interests of the RHCI Special Committee.
As of the RHCI Record Date, Steven J. Shulman, as the RHCI Special
Committee, owned 17,750 shares of RHCI Common Stock. See "Information
Concerning RHCI--Management." Mr. Shulman will receive a fee of $10,000 for
his service as the RHCI Special Committee. The amount of the RHCI Special
Committee fee was determined in September 1996.
Interests of Other Directors of RHCI.
As of the RHCI Record Date, Aaron Beam, Jr., a director of both RHCI and
RMCI, owned 27,750 shares of RHCI Common Stock and 7,600 shares of RMCI Common
Stock. As of the RHCI Record Date, Peter J. Evans, a director of both RHCI and
RMCI, owned 17,750 shares of RHCI Common Stock. In addition, Mr. Evans will
receive from RMCI a bonus of $50,000 following the consummation of the Merger.
As of the RHCI Record Date, Robert E. Galloway, a director of RHCI during
fiscal 1996, owned 8,300 shares of RHCI Common Stock. As of the RHCI Record
Date, Thomas M. Haythe, a director of both RHCI and RMCI, owned 39,750 shares
of RHCI Common Stock and 10,000 shares of RMCI Common Stock. In addition, Mr.
Haythe is a partner of the New York City law firm of Haythe & Curley, which
firm rendered legal services to RHCI and RMCI during fiscal year 1996 and will
continue to render legal services to RHCI in the future and which is issuing
its legal opinion as to certain federal income tax consequences of the Merger.
See "The Merger--Certain Federal Income Tax Consequences of the Merger" and
"Legal Matters." As of the RHCI Record Date, Luis E. Lamela, a director of
both RHCI and RMCI and Vice Chairman of the RHCI Board and the RMCI Board,
owned 16,000 shares of RHCI Common Stock. See also "Information Concerning
RHCI--Management--Certain Relationships and Related Transactions Involving
RHCI, RMCI and Affiliates Thereof--Other Arrangements" for information
concerning consulting arrangements between each of RHCI and RMCI and a
corporation of which Mr. Lamela is a principal. As of the RHCI Record Date,
Michael S. Siddle, a director of both RHCI and RMCI, owned 17,750 shares of
RHCI Common Stock. Assuming the Merger occurred on the RHCI Record Date,
Messrs. Beam, Evans, Galloway, Haythe, Lamela and Siddle would own 30,283,
17,500, 8,300, 43,083, 16,000 and 17,750 shares of RHCI Common Stock,
respectively.
71
<PAGE>
For the pro forma beneficial ownership after the Merger of each of the
directors of RHCI, see the table set forth under "Information Concerning RHCI--
Principal Stockholders--Security Ownership of Management."
Persons Who Are Directors of Both RMCI and RHCI.
Aaron Beam, Jr., Peter J. Evans, Thomas M. Haythe, Luis E. Lamela, Paul J.
Ramsay and Michael S. Siddle are each directors of both RHCI and RMCI. Members
of the RHCI Board who are not employees of RHCI receive a per annum fee of
$12,000 and a fee of $3,000 for each of the first four meetings of the RHCI
Board attended during the year, with no additional compensation paid for
attendance at additional meetings. In October 1996, as payment of fiscal 1997
directors' fees, RHCI issued 16,000 shares of RHCI Common Stock to each of its
directors (other than Mr. Galloway who was issued 6,300 shares of RHCI Common
Stock since Mr. Galloway did not stand for reelection at RHCI's November 1996
Annual Meeting of Stockholders and, accordingly, will not be a director for the
entire 1997 fiscal year). RMCI pays each member of the RMCI Board (other than
Paul J. Ramsay) who is not an employee of RMCI, a per annum fee of $5,000. Paul
J. Ramsay, as the Chairman of the RMCI Board, receives a per annum fee of
$10,000 from RMCI. Each director of RMCI receives reimbursement for out-of-
pocket expenses incurred in attending meetings of the RMCI Board and committees
thereof.
Directors and Management of RMCI and RHCI Subsequent to the Merger.
After the Effective Time, it is RHCI's intention that RMCI will be managed by
certain of the current officers of RMCI, including Dr. Martin Lazoritz and I.
Paul Mandelkern. Dr. Lazoritz will become the Executive Vice President and
Chief Medical Officer of RHCI and Mr. Mandelkern will become a Vice President
of RHCI after the Merger. It is contemplated that following the Effective Time,
the RMCI Board will be composed of Bert Cibran, President and Chief Operating
Officer of each of RHCI and RMCI, Peter J. Evans and Thomas M. Haythe. There
will be no change in the composition of the RHCI Board as a result of the
Merger and the current executive officers of RHCI will remain in their current
positions following the Merger. See "Information Concerning RHCI--Management."
Interests of the RMCI Special Committee.
As of the RMCI Record Date, Moises E. Hernandez, M.D., as the RMCI Special
Committee, held currently exercisable options to purchase 45,000 shares of RMCI
Common Stock. See "Information Concerning RMCI--Principal Stockholders--
Security Ownership of Management." As compensation for his service as the RMCI
Special Committee, Dr. Hernandez received the foregoing: 45,000 currently
exercisable options to purchase RMCI Common Stock and the $5,000 annual
directors' fee and a $15,000 special directors' fee. The number of options to
purchase RMCI Common Stock and the amount of the RMCI Special Committee fee
were determined in September 1996. In the Merger, Dr. Hernandez's options will
become options to purchase 15,000 shares of RHCI Common Stock at an exercise
price per share equal to $3.00 (an amount equal to the option exercise price in
respect of the options to purchase RMCI Common Stock multiplied by three (3)).
The treatment of Dr. Hernandez's RMCI Common Stock options in the Merger is the
same as the treatment to be afforded all other holders of options to purchase
RMCI Common Stock. See "The Merger Agreement--The Merger--Stock Options and
Warrants."
Stock Options and Warrants.
On April 24, 1995, RHCI effected the Distribution. In connection with the
Distribution and in accordance with RHCI's 1990, 1991 and 1993 Stock Option
Plans, RHCI made certain antidilution adjustments to stock options issued under
these Stock Option Plans. These adjustments were made to reflect the reduction
in the market price of the RHCI Common Stock following the Distribution and to
preserve the aggregate "spread" (if any) between the aggregate option price
under each option and the aggregate market value of the shares of RHCI Common
Stock purchasable upon exercise of the option. Accordingly, the exercise price
of each option outstanding under RHCI's 1990, 1991 and 1993 Stock Option Plans
was adjusted by multiplying the exercise
72
<PAGE>
price in effect prior to the Distribution by 0.8011 and the number of shares
covered by each option was adjusted by multiplying the number of shares prior
to the Distribution by 1.2483. All information contained in this Joint Proxy
Statement/Prospectus reflects such adjustments.
On November 10, 1995, the RHCI Board approved an offer (the "Repricing
Offer") to the holders of options to purchase RHCI Common Stock under the RHCI
Stock Option Plans whereby each option holder could exchange existing options
held by such holder for amended options to purchase the same number of shares
of RHCI Common Stock at an exercise price of $2.50 per share; provided that
such repriced options (the "Repriced Options") would not be exercisable until
the date which is six months prior to their expiration date and provided
further that vested Repriced Options would become exercisable earlier in the
event that, at the time of exercise, the closing price for the RHCI Common
Stock as quoted on NASDAQ has equalled or exceeded $7.00 (subject to
adjustment for events affecting the RHCI Common Stock or the capital structure
of RHCI) per share on at least 15 trading days, which need not be consecutive,
subsequent to November 10, 1995. The Repriced Options are not currently
exercisable.
On August 13, 1996, the RMCI Board approved an offer (the "RMCI Repricing
Offer") to the holders of RMCI Stock Options under RMCI's 1994 Stock Option
Plan whereby each option holder could exchange existing options with exercise
prices of $2.00 per share held by such holder for amended options to purchase
the same number of shares of RMCI Common Stock at an exercise price of $1.00
per share (which was in excess of the market price of the RMCI Common Stock at
the time); provided that such repriced options (the "RMCI Repriced Options")
would not be exercisable until the date which is six months prior to their
expiration date and provided further that vested RMCI Repriced Options would
become exercisable earlier in the event that, at the time of exercise, the
average of the closing bid and asked prices for the RMCI Common Stock as
quoted on the OTC Bulletin Board has equalled or exceeded $2.333 (the
"Acceleration Price") (subject to adjustment for events affecting the RMCI
Common Stock or the capital structure of RMCI, such as the Merger) per share
on at least 15 trading days, which need not be consecutive, subsequent to
August 13, 1996. None of the RMCI Repriced Options are currently exercisable.
In connection with the Merger, each outstanding RMCI Stock Option and RMCI
Warrant, including RMCI Repriced Options, whether or not exercisable or
vested, will become (without any other changes in terms or conditions,
including vesting schedule) an option or warrant to purchase the number of
shares of RHCI Common Stock equal to the number of shares of RMCI Common Stock
that could have been purchased under the RMCI Stock Option or RMCI Warrant
multiplied by one-third ( 1/3), at a price per share of the RHCI Common Stock
equal to the exercise price of such RMCI Stock Option or RMCI Warrant
multiplied by three (3), provided that any fractional shares that would result
from the exercise of any RMCI Stock Option or RMCI Warrant will be rounded to
the nearest whole number. Also in connection with the Merger, the Acceleration
Price in respect of RMCI Repriced Options will increase to $7.00. On the RMCI
Record Date, there were outstanding an aggregate of (i) 1,175,250 options to
purchase shares of RMCI Common Stock granted under RMCI's 1994 Stock Option
Plan and 1996 Long Term Incentive Plan all of which have an exercise price of
$1.00 per share and (ii) 640,000 warrants to purchase shares of RMCI Common
Stock, 450,000 of which have an exercise price of $1.00 per share and 190,000
of which have an exercise price of $2.00 per share. See "The Merger
Agreement--The Merger--Stock Options and Warrants" and "Information Concerning
RHCI--Management."
73
<PAGE>
The following table sets forth the number of options to purchase RHCI Common
Stock and the number of warrants to purchase RHCI Common Stock to be held by
each director of RHCI and each current executive officer of RHCI named in the
Summary Compensation Table (see "Information Concerning RHCI--Management")
after giving effect to the Merger and assuming that the Effective Date was
January 1, 1997:
<TABLE>
<CAPTION>
PRO FORMA NUMBER OF PRO FORMA EXERCISE PRICE
NAME OPTIONS/WARRANTS AFTER THE MERGER(1) AFTER THE MERGER
---- ------------------------------------ ------------------------
<S> <C> <C>
Directors:
Aaron Beam, Jr.......... 11,112 $2.50
3,333 3.00
Peter J. Evans.......... 42,320 2.50
3,333 3.00
Thomas M. Haythe........ 42,320 2.50
3,333 3.00
Luis E. Lamela.......... 15,000 2.63
125,000 3.13
83,333 3.00
6,667(2) 6.00
Paul J. Ramsay(3)....... 25,000 2.50
250,000(2) 2.63
500,000 2.75
141,667 3.00
41,667(2) 6.00
Steven J. Shulman....... 42,320 2.50
Michael S. Siddle....... 75,608 2.50
3,333 3.00
Executive Officers:
Wallace E. Smith........ 47,853(2) 4.27(4)
1,000(2) 6.00
John A. Quinn........... 60,692 2.50
667 6.00
Brent J. Bryson......... 60,000 2.75
William N. Nyman........ 34,129 2.50
19,206 2.75
667 6.00
</TABLE>
- --------
(1) Unless otherwise designated, all of the options and warrants to purchase
RHCI Common Stock set forth in this table are not currently exercisable,
but are exercisable on a date which is six months prior to their
expiration date (ranging from 6 to 10 years from the date hereof), but
would become exercisable earlier in the event that, at the time of
exercise, the closing price for the RHCI Common Stock on NASDAQ has
equalled or exceeded $7.00 (subject to adjustment for events affecting the
RHCI Common Stock or the capital structure of RHCI) per share on a least
15 trading days, which need not be consecutive, subsequent to November 10,
1995.
(2) Currently exercisable.
(3) Includes warrants to purchase RHCI Common Stock held by the Ramsay
Affiliates.
(4) A weighted average exercise price.
74
<PAGE>
Interests of Certain Persons in the Distribution.
On April 24, 1995, RHCI effected the Distribution by distributing all of the
shares of RMCI Common Stock held by it to its stockholders in the form of a
dividend. The Distribution was made on the basis of 0.26094093 of a share of
RMCI Common Stock for each one share of RHCI Common stock owned on April 21,
1995 (the "Distribution Record Date").
Persons Who Were Directors of Both RHCI and RMCI at the Time of the
Distribution.
Aaron Beam, Jr., Peter J. Evans, Thomas M. Haythe, Paul J. Ramsay, Steven J.
Shulman and Michael S. Siddle were each directors of both RHCI and RMCI at the
time of the Distribution. At the time of the Distribution: Mr. Beam owned
10,000 shares of RHCI Common Stock, 7,500 options to purchase RHCI Common
Stock, no shares of RMCI Common Stock, and 10,000 options to purchase RMCI
Common Stock; Mr. Evans owned no shares of RHCI Common Stock, 32,500 options to
purchase RHCI Common Stock, no shares of RMCI Common Stock, and 10,000 options
to purchase RMCI Common Stock; Mr. Haythe owned no shares of RHCI Common Stock,
32,500 options to purchase shares of RHCI Common Stock, no shares of RMCI
Common Stock, and 10,000 options to purchase shares of RMCI Common Stock; Mr.
Ramsay (personally and through the corporate affiliates) owned 2,828,895 shares
of RHCI Common Stock, 142,486 shares of RHCI Series C Preferred Stock, 250,000
options to purchase RHCI Common Stock, 1,500,000 shares of RMCI Common Stock,
125,000 options to purchase RMCI Common Stock, and 125,000 warrants to purchase
RMCI Common Stock; Mr. Shulman owned no shares of RHCI Common Stock, 32,500
options to purchase RHCI Common Stock, no shares of RMCI Common Stock, and
10,000 options to purchase shares of RMCI Common Stock; Mr. Siddle owned no
shares of RHCI Common Stock, 59,167 options to purchase RHCI Common Stock, no
shares of RMCI Common Stock, and 10,000 options to purchase RMCI Common Stock.
Each of Messrs. Beam, Evans, Haythe, Shulman and Siddle were granted 10,000
options to purchase RMCI Common Stock in October 1994 (at an option price of
$2.00 per share) under RMCI's 1994 Stock Option Plan in connection with their
service as directors. Mr. Ramsay received 125,000 options to purchase shares of
RMCI Common Stock in October 1994 (at an option price of $2.00 per share) under
the RMCI 1994 Stock Option Plan in connection with his service as Chairman of
the Board of RMCI. Mr. Ramsay, through one of his corporate affiliates,
received 125,000 warrants to purchase RMCI Common Stock in October 1994 (at an
exercise price of $2.00).
As a result of the Distribution: Mr. Ramsay (personally and through the
Ramsay Affiliates) in his capacity as a stockholder of RHCI, acquired an
additional 738,173 shares of RMCI Common Stock; Mr. Beam acquired an additional
2,609 shares of RMCI Common Stock; and Messrs. Evans, Haythe, Siddle and
Shulman did not acquire any additional shares of RMCI Common Stock.
Person Who Was a Director of RHCI at the Time of the Distribution.
Robert E. Galloway, who was a director of RHCI at the time of the
Distribution, owned 250 shares of RHCI Common Stock, 32,500 options to purchase
shares of RHCI Common Stock, no shares of RMCI Common Stock, and no options to
purchase RMCI Common Stock. As result of the Distribution, Mr. Galloway
acquired 65 shares of RMCI Common Stock.
Persons Who Were Executive Officers of RMCI at the Time of the Distribution.
Martin Lazoritz, M.D., Executive Vice President of RMCI at the time of the
Distribution, owned 250 shares of RHCI Common Stock, no options to purchase
RHCI Common Stock, 50,000 shares of RMCI Common Stock, and 75,000 options to
purchase shares of RMCI Common Stock. The 75,000 options to purchase RMCI
Common Stock were granted to Dr. Lazoritz in October 1994 (at an option price
of $2.00 per share) under RMCI's 1994 Stock Option Plan. As a result of the
Distribution, Dr. Lazoritz acquired an additional 65 shares of RMCI
75
<PAGE>
Common Stock. I. Paul Mandelkern, Senior Vice President and General Counsel of
FPM at the time of the Distribution, owned no shares of RHCI Common Stock, no
options to purchase RHCI Common Stock, no shares of RMCI Common Stock, and
17,500 options to purchase RMCI Common Stock. The 17,500 options to purchase
RMCI Common Stock were granted to Mr. Mandelkern in October 1994 (at an option
price of $2.00 per share) under RMCI's 1994 Stock Option Plan. As a result of
the Distribution, Mr. Mandelkern acquired no additional shares of RMCI Common
Stock.
DISSENTERS' RIGHTS
Holders of shares of RMCI Common Stock are entitled to appraisal rights
under Section 262 ("Section 262") of the Delaware General Corporation Law (the
"Delaware Law"). Section 262 is reprinted in its entirety as Appendix D to
this Joint Proxy Statement/Prospectus. All references in Section 262 and in
this summary of rights of dissenting stockholders to a "stockholder" or
"holders of RMCI Common Stock" are to the record holder or holders of the
dissenting shares of RMCI Common Stock. A person having a beneficial interest
in shares of RMCI Common Stock that are held of record in the name of another
person, such as a broker or nominee, must act promptly to cause the record
holder to follow the steps summarized below properly and in a timely manner to
perfect whatever appraisal rights the beneficial owner may have.
The following discussion presents the material provisions of Section 262,
however, it is not a complete statement of the law relating to appraisal
rights and is qualified in its entirety by reference to Appendix D. This
discussion and Appendix D should be reviewed carefully by any holder who
wishes to exercise statutory appraisal rights or who wishes to preserve the
right to do so, as failure to comply with the procedures set forth herein or
therein will result in the loss of appraisal rights.
The holders of RMCI Common Stock and RMCI Series 1996 Preferred Stock are
entitled to receive notice from RMCI, not less than twenty (20) days prior to
the date of the RMCI Meeting, that appraisal rights are available to the
stockholders of RMCI. In order to perfect their statutory appraisal rights,
holders of shares of RMCI Common Stock or RMCI Series 1996 Preferred Stock
must (i) not vote in favor of the Merger and (ii) deliver to RMCI prior to the
RMCI Meeting written notice of their intention to demand payment for their
shares if the Merger is adopted. An abstention by a holder of RMCI Common
Stock or RMCI Series 1996 Preferred Stock will not constitute a waiver of such
holder's appraisal rights. All dissenting holders of RMCI voting stock must be
given notice of the approval, if any, of the Merger within ten (10) days of
the approval being obtained. A demand for appraisal must be executed by or for
the stockholder of record, fully and correctly, as such stockholder's name
appears on the certificate or certificates representing shares of RMCI Common
Stock. If the shares of RMCI Common Stock are owned of record in a fiduciary
capacity, such as by a trustee, guardian or custodian, such demand must be
executed by the fiduciary. If the shares of RMCI Common Stock are owned of
record by more than one person, as in a joint tenancy in common, such demand
must be executed by all joint owners. An authorized agent, including an agent
for two or more joint owners, may execute the demand for appraisal for a
stockholder of record; however, the agent must identify the record owner and
expressly disclose the fact that, in exercising the demand, such person is
acting for the record owner.
A record owner, such as a broker or trustee, who holds shares of RMCI Common
Stock as a nominee for others, may exercise appraisal rights with respect to
the shares held for all or less than all beneficial owners of shares as to
which such person is the record owner. In such case the written demand must
set forth the number of shares covered by such demand. Where the number of
shares is not expressly stated, the demand will be presumed to cover all
shares of RMCI Common Stock outstanding in the name of such record owner. A
beneficial owner enjoys the benefits of shares, where, a trustee, executor,
broker, bank or nominee may have legal possession and record ownership of the
shares. Stock held through a brokerage firm may be held of record through a
nominee. Beneficial owners should inquire as to whether their stock is held
through a nominee and, if it is, govern themselves accordingly. Beneficial
owners who are not record owners and who intend to exercise
76
<PAGE>
appraisal rights should instruct their record owners to comply strictly with
the statutory requirements with respect to the exercise of appraisal rights
prior to the RMCI Meeting.
A stockholder who elects to exercise appraisal rights should mail or deliver
his written demand to: RMCI, Columbus Center, One Alhambra Plaza, Suite 750,
Coral Gables, Florida 33134, Attention: Secretary. The written demand for
appraisal should specify the stockholder's name and mailing address, the
number of shares of RMCI Common Stock owned, and that the stockholder is
thereby demanding appraisal of his or her shares. Within ten days after the
Effective Time, RMCI must provide notice of the Effective Time to all
stockholders who have complied with Section 262.
Within one hundred twenty (120) days after the Effective Time, either RMCI
or any stockholder who has complied with the required conditions of Section
262 may file a petition in the Delaware Court of Chancery (the "Delaware
Court") demanding a determination of the fair value of the shares of the
dissenting stockholders. Stockholders seeking to exercise appraisal rights
should not assume that RMCI will file a petition with respect to the appraisal
of the fair value of their shares of RMCI Common Stock or that RMCI will
initiate any negotiations with respect to the fair value of such shares.
Accordingly, RMCI stockholders should initiate any petitions or negotiations
with respect to the perfection of their appraisal rights within the time
periods and in the manner prescribed in Section 262. If a petition for an
appraisal is timely filed, after a hearing on such petition, the Delaware
Court will determine which stockholders are entitled to appraisal rights and
will appraise the shares of RMCI Common Stock owned by such stockholders,
determining the fair value of such shares, exclusive of any element of value
arising from the accomplishment or expectation of the Merger, together with a
fair rate of interest to be paid, if any, upon the amount determined to be the
fair value. In determining fair value, the Delaware Court is to take into
account all relevant factors. In Weinberger v. UOP Inc., et al, decided
February 1, 1983, the Delaware Supreme Court discussed the considerations that
could be considered in determining fair value in an appraisal proceeding,
stating that "proof of value by any techniques or methods which are generally
considered acceptable in the financial community and otherwise admissible in
court" should be considered, and that "fair price obviously requires
consideration of all relevant factors involving the value of a company." The
Delaware Supreme Court stated that in making this determination of fair value
the court must consider market value, asset value, dividends, earnings
prospects, the nature of the enterprise and any other facts which could be
ascertained as of the date of the Merger which throw any light on future
prospects of the merged corporation. Section 262 provides that fair value is
to be "exclusive of any elements of value arising from the accomplishment or
expectation of the merger." In Weinberger, the Delaware Supreme Court
construed Section 262 to mean that "elements of future value, including the
nature of the enterprise, which are known or susceptible of proof as of the
date of the merger and not the product of speculation, may be considered."
Stockholders considering seeking appraisal should recognize that the fair
value of their shares determined under Section 262 could be more, the same as
or less than the consideration they are to receive pursuant to the Merger
Agreement if they do not seek appraisal of their shares. The cost of the
appraisal proceeding may be determined by the Delaware Court and taxed against
the parties as the Delaware Court deems equitable in the circumstances. Upon
application of a dissenting stockholder, the Delaware Court may order that all
or a portion of the expenses incurred by any dissenting stockholder in
connection with the appraisal proceeding, including without limitation,
reasonable attorneys' fees and the fees and expenses of experts, be charged
pro rata against the value of all shares of stock entitled to appraisal. In
the absence of such a determination or assessment, each party bears his or her
own expenses.
Any holder of RMCI Common Stock who has duly demanded appraisal in
compliance with Section 262 will not, after the Effective Time, be entitled to
vote for any purpose such shares subject to such demand or to receive payment
of dividends or other distributions on such shares, except for dividends or
distributions payable to stockholders of record at a date prior to the
Effective Time.
At any time within sixty (60) days after the Effective Time, any stockholder
will have the right to withdraw his or her demand for appraisal and to accept
the terms offered in the Merger; after this period, the stockholder
77
<PAGE>
may withdraw his or her demand for appraisal only with the consent of RMCI. If
no petition for appraisal is filed with the Delaware Court within one hundred
twenty (120) days after the Effective Time, stockholders' rights to appraisal
shall cease, and all holders of RMCI Common Stock will be entitled to receive
the consideration offered per share of RMCI Common Stock as provided for in
the Merger Agreement. Inasmuch as RMCI has no obligation to file such a
petition, and has no present intention to do so, any holder of RMCI Common
Stock who desires such a petition to be filed is advised to file it on a
timely basis. However, no petition timely filed in the Delaware Court
demanding appraisal may be dismissed as to any stockholder without the
approval of the Delaware Court, and such approval may be conditioned upon such
terms as the Delaware Court deems just.
The holders of RHCI Common Stock and RHCI Series C Preferred Stock are not
entitled to appraisal rights in connection with, or as a result of, the
Merger.
RESALE RESTRICTIONS
The shares of RHCI Common Stock to be issued to RMCI stockholders in
connection with the Merger have been registered under the Securities Act. All
shares of RHCI Common Stock received by RMCI stockholders in the Merger will
be freely transferable, except that shares of RHCI Common Stock received by
persons who are deemed to be "affiliates" (as such term is defined under the
Securities Act) of RMCI prior to the Merger may be resold by them only in
transactions permitted by the resale provisions of Rule 145 promulgated under
the Securities Act (or Rule 144 in the case of such persons who become
affiliates of RHCI) or as otherwise permitted under the Securities Act.
Persons who may be deemed to be affiliates of RMCI or RHCI generally include
individuals or entities that control, are controlled by, or are under common
control with, such party and may include certain officers and directors of
such party as well as principal stockholders of such party. This Joint Proxy
Statement/Prospectus does not cover resales of RHCI Common Stock received by
any person who may be deemed to be an affiliate of RMCI.
COMPARATIVE RIGHTS OF STOCKHOLDERS OF RHCI AND RMCI
Since both RMCI and RHCI are Delaware corporations, the rights of RMCI
stockholders are in general similar to the rights of RHCI stockholders.
Pursuant to the Rights Plan, the RHCI Board declared a dividend distribution
of the Rights for each outstanding share of RHCI Common Stock (calculated on
the basis as if all outstanding shares of RHCI Series C Preferred Stock were
converted into RHCI Common Stock immediately prior to the close of business on
August 14, 1995) of RHCI to RHCI stockholders of record at the close of
business on August 14, 1995. Each share of RHCI Common Stock issued after this
date, including shares of RHCI Common Stock to be issued in the Merger, will
also include one Right. Also, in connection with the Merger, the holder of
each share of RHCI Series 1996 Preferred Stock to be issued in the Merger will
also receive one right for each share of RHCI Common Stock into which such
share of RHCI Series 1996 Preferred Stock is convertible.
Each Right entitles the holder thereof until August 14, 2005 (or, if
earlier, the redemption or exchange of the Rights) to buy a number of shares
of RHCI Common Stock at the Purchase Price. The Rights will be represented by
the RHCI Common Stock and RHCI Series 1996 Preferred Stock certificates and
will not be exercisable, or transferable apart from the RHCI Common Stock or
the RHCI Series 1996 Preferred Stock, until the earlier to occur of (i) 10
days following a public announcement that an Acquiring Person has acquired
beneficial ownership of 20% (25% in the case of a 13G Person, as defined
below) or more of the outstanding RHCI Common Stock or (ii) 10 business days
following the commencement of or announcement of an intention to make a tender
offer or exchange offer upon consummation of which a person or group would
beneficially own 20% or more of such outstanding RHCI Common Stock. However,
no person or group of affiliated or associated persons shall be an "Acquiring
Person," and the Rights will not become exercisable or transferable apart from
the RHCI Common Stock or the RHCI Series 1996 Preferred Stock, by reason of an
acquisition from Paul J. Ramsay, Chairman of the Board of RHCI, or from any
affiliate or associate of Mr. Ramsay, of any of the
78
<PAGE>
shares of RHCI Common Stock or RHCI Series 1996 Preferred Stock currently held
by affiliates of Mr. Ramsay or of any shares of RHCI Common Stock issuable
pursuant to the RMCI Series 1996 Preferred Stock or stock options currently
held by Mr. Ramsay or any affiliated or associated person. Furthermore,
neither Mr. Ramsay nor any affiliated or associated person shall be an
"Acquiring Person," and the Rights will not become exercisable or transferable
apart from the RHCI Common Stock, by reason of an acquisition of beneficial
ownership of RHCI Common Stock by Mr. Ramsay or any affiliated or associated
persons which does not increase the number of shares of RHCI Common Stock
(including shares issuable pursuant to the RHCI Series 1996 Preferred Stock
and under any then currently exercisable RHCI Options or RHCI Warrants held by
Mr. Ramsay or any affiliated or associated person) held by Mr. Ramsay and any
persons affiliated or associated with Mr. Ramsay to one share less than 50% of
the RHCI Common Stock then outstanding (including any shares of RHCI Common
Stock issuable pursuant to the RHCI Preferred Stock and under any then
currently exercisable RHCI Options or RHCI Warrants held by Mr. Ramsay or any
affiliates or associated person). Generally, for purposes of the Rights Plan,
a "13G Person" is a person eligible to file a statement with the Commission on
Schedule 13G under the Exchange Act, including a registered broker/dealer, a
bank, an insurance company, a registered investment company, a registered
investment adviser or an employee benefit plan or pension fund subject to
ERISA. As soon as practicable following the Rights Distribution Date, separate
certificates representing the Rights will be mailed to holders of the RHCI
Common Stock and RHCI Series 1996 Preferred Stock as of the close of business
on the Rights Distribution Date. The Rights will first become exercisable on
the Rights Distribution Date, unless earlier redeemed or exchanged, and could
then begin trading separately from the RHCI Common Stock and RHCI Series 1996
Preferred Stock. The Rights will at no time have any voting rights.
In the event that an Acquiring Person shall have acquired beneficial
ownership of 20% (25% in the case of a 13G Person) or more of the outstanding
RHCI Common Stock, each holder of a Right shall thereafter have the right to
receive, upon exercise thereof at the then current Purchase Price, that number
of shares of RHCI Common Stock which at such time would have a market value of
two times the then current Purchase Price. In the event that RHCI were
acquired in a merger or other business combination transaction or 50% or more
of its assets or earning power were sold, proper provision will be made so
that each holder of a Right shall thereafter have the right to receive, upon
the exercise thereof at the then current Purchase Price, that number of shares
of common stock of the acquiring company which at the time of such transaction
would have a market value of two times the then current Purchase Price. Any
Rights that are or were beneficially owned at any time on or after the earlier
of the Rights Distribution Date or the Shares Acquisition Date (as defined in
the Rights Agreement) by an Acquiring Person that engages in any of the events
described in the preceding sentence will become null and void and no holder of
such Rights will have any right with respect to such Rights from and after
such occurrence.
The Rights have certain anti-takeover effects. The Rights will cause
substantial dilution to a person or group that attempts to acquire RHCI on
terms not approved by the RHCI Board. The overall effect of the above-
described measures may be to discourage or render more difficult the
accomplishment of mergers or other takeover or change in control attempts. To
the extent that these measures have this effect, removal of the incumbent RHCI
Board and RHCI's management may be rendered more difficult. Further, these
measures may have an adverse impact on the ability of RHCI stockholders to
participate in a tender or exchange offer for RHCI and in so doing diminish
the market value of the RHCI Common Stock. RHCI is not aware of any proposed
takeover attempt.
ANTITAKEOVER LEGISLATION
Section 203 of the Delaware Law provides that, subject to certain exceptions
specified therein, a corporation shall not engage in any business combination
with any "interested stockholder" for a three-year period following the date
that such stockholder becomes an interested stockholder unless (i) prior to
such date, the board of directors of the corporation approved either the
business combination or the transaction which resulted in the stockholder
becoming an interested stockholder, (ii) upon consummation of the transaction
which resulted in the
79
<PAGE>
stockholder becoming an interested stockholder, the interested stockholder
owned at least 85% of the voting stock of the corporation outstanding at the
time the transaction commenced (excluding certain shares), or (iii) on or
subsequent to such date, the business combination is approved by the board of
directors of the corporation and by the affirmative vote of at least 66 2/3%
of the outstanding voting stock which is not owned by the interested
stockholder. Except as specified in Section 203 of the Delaware Law, an
interested stockholder is defined to include (x) any person that is the owner
of 15% or more of the outstanding voting stock of the corporation, or is an
affiliate or associate of the corporation and was the owner of 15% or more of
the outstanding voting stock of the corporation, at any time within three
years immediately prior to the relevant date and (y) the affiliates and
associates of any such person.
Under certain circumstances, Section 203 of the Delaware Law makes it more
difficult for a person who would be an "interested stockholder" to effect
various business combinations from the restrictions imposed thereunder. The
Certificates of Incorporation of both RHCI and of RMCI do not exclude RHCI or
RMCI from the restrictions imposed under Section 203 of the Delaware Law. The
provisions of Section 203 of the Delaware Law may encourage companies
interested in acquiring either RHCI or RMCI to negotiate in advance with the
Board of Directors of such company, since the stockholder approval requirement
would be avoided if a majority of the directors then in office approve, prior
to the time the stockholder becomes an interested stockholder, either the
business combination or the transaction which results in the stockholder
becoming an interested stockholder.
80
<PAGE>
THE MERGER AGREEMENT
THE INFORMATION CONTAINED IN THIS JOINT PROXY STATEMENT/PROSPECTUS WITH
RESPECT TO THE MERGER AGREEMENT IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO
THE COMPLETE TEXT OF THE MERGER AGREEMENT ATTACHED HERETO AS APPENDIX A, WHICH
IS INCORPORATED HEREIN BY REFERENCE. RHCI AND RMCI STOCKHOLDERS ARE URGED TO
READ THE MERGER AGREEMENT CAREFULLY.
EFFECTIVE TIME
The Merger Agreement provides that the Merger will become effective at the
time a certificate of merger is duly filed with the Secretary of State of the
State of Delaware or at such later time as may be specified in the certificate
of merger. The time at which the Merger will become effective is referred to
herein as the "Effective Time." Such filing, together with all other filings
or recordings required by the Delaware Law in connection with the Merger, will
be made as soon as practicable after the approval by the stockholders of RHCI
of the Merger Proposal and the approval and adoption by the stockholders of
RMCI of the Merger Agreement and the satisfaction or, to the extent permitted
under the Merger Agreement, waiver of all conditions to the Merger contained
in the Merger Agreement.
THE MERGER
At the Effective Time, RHCI Sub will be merged with and into RMCI at which
time the separate existence of RHCI Sub will cease and RMCI will be the
surviving corporation (the "Surviving Corporation") and a wholly owned
subsidiary of RHCI. From and after the Effective Time, the Surviving
Corporation will possess all the assets, rights, privileges, powers and
franchises and be subject to all of the liabilities, restrictions,
disabilities and duties of RMCI and RHCI Sub, as provided under Delaware Law.
CONSIDERATION TO BE RECEIVED IN THE MERGER. At the Effective Time:
(i) each share of RMCI Common Stock or RMCI Series 1996 Preferred Stock
held by RMCI as treasury stock or outstanding and owned by RHCI or any
subsidiary of RHCI immediately prior to the Effective Time will be canceled
and no payment shall be made with respect thereto;
(ii) each share of the common stock of RHCI Sub outstanding immediately
prior to the Effective Time will be converted into one share of common
stock of the Surviving Corporation;
(iii) each share of RMCI Common Stock outstanding immediately prior to
the Effective Time (except for shares described in clause (i) above or
shares held by stockholders who have perfected appraisal rights under
Delaware Law) will be converted into the right to receive one-third ( 1/3)
of a fully paid and nonassessable share of RHCI Common Stock (including
Rights in respect thereof under the Rights Plan); provided that
stockholders will receive cash in lieu of fractional shares of RHCI Common
Stock as described in "Fractional Shares" below; and
(iv) each share of RMCI Series 1996 Preferred Stock outstanding
immediately prior to the Effective Time (except for shares described in
clause (i) above or shares held by stockholders who have perfected
appraisal rights under Delaware Law) will be converted into the right to
receive one fully paid and non-assessable share of RHCI Series 1996
Preferred Stock. For a description of the rights and preferences of the
RMCI Series 1996 Preferred Stock and the RHCI Series 1996 Preferred Stock,
see "Description of Capital Stock--RHCI" and "Description of Capital
Stock--RMCI."
The determination of the Exchange Ratios was made based upon discussions
among representatives of RHCI and RMCI, the calculation of assumed equity
values for RMCI based upon standard valuation methods employing multiples of
revenue and earnings for historical and forecasted results, and the historical
stock prices for the RHCI Common Stock and the RMCI Common Stock. The
determination of the Exchange Ratios was
81
<PAGE>
also supported by the fairness opinions rendered by RHCI's and RMCI's
respective financial advisors. See "The Merger--Opinions of Financial
Advisors."
Assuming that the Merger was consummated on the RHCI Record Date, RHCI would
issue an aggregate of 2,136,105 shares of RHCI Common Stock and an aggregate
of 100,000 shares of RHCI Series 1996 Preferred Stock in the Merger. In
addition, options to purchase RMCI Common Stock would become options to
purchase an aggregate of 391,750 shares of RHCI Common Stock and warrants to
purchase RMCI Common Stock would become warrants to purchase an aggregate of
213,333 shares of RHCI Common Stock.
EXCHANGE OF SHARES. Before the Effective Time, RHCI will appoint an agent
reasonably acceptable to RMCI (the "Exchange Agent") for the purpose of
exchanging certificates representing RMCI Common Stock and RMCI Series 1996
Preferred Stock. As of the Effective Time, RHCI will deposit with the Exchange
Agent, for the benefit of holders of RMCI Common Stock and RMCI Series 1996
Preferred Stock, as the case may be, certificates representing the shares of
RHCI Common Stock and RHCI Series 1996 Preferred Stock issuable pursuant to
the Merger Agreement in exchange for outstanding shares of RMCI Common Stock
and RMCI Series 1996 Preferred Stock. Promptly after the Effective Time, RHCI
will, or will cause the Exchange Agent to, send to each holder of RMCI Common
Stock and RMCI Series 1996 Preferred Stock, as the case may be, at the
Effective Time a letter of transmittal to be used in such exchange. RMCI
STOCKHOLDERS ARE REQUESTED NOT TO SURRENDER THEIR CERTIFICATES FOR EXCHANGE
UNTIL THEY RECEIVE A LETTER OF TRANSMITTAL AND INSTRUCTIONS FROM THE EXCHANGE
AGENT OR RHCI.
Each holder of shares of RMCI Common Stock and RMCI Series 1996 Preferred
Stock that have been converted into a right to receive RHCI Common Stock and
RHCI Series 1996 Preferred Stock, respectively, upon surrender to the Exchange
Agent of a certificate or certificates representing such shares of RMCI Common
Stock and RMCI Series 1996 Preferred Stock, together with a properly completed
letter of transmittal, will be entitled to receive in exchange therefor that
number of whole shares of RHCI Common Stock and RHCI Series 1996 Preferred
Stock, respectively, which such holder has the right to receive pursuant to
the Merger Agreement and cash in lieu of any fractional shares of RHCI Common
Stock as contemplated by the Merger Agreement, and the certificate or
certificates for shares of RMCI Common Stock so surrendered and RMCI Series
1996 Preferred Stock shall be canceled. Until so surrendered, each such
certificate will, after the Effective Time, represent for all purposes only
the right to receive such shares of RHCI Common Stock and RHCI Series 1996
Preferred Stock, respectively, and, in the case of RMCI Common Stock, cash in
lieu of any fractional shares.
If any shares of RHCI Common Stock or RHCI Series 1996 Preferred Stock are
to be issued to any person other than the registered holder of the shares of
RMCI Common Stock or RMCI Series 1996 Preferred Stock, respectively,
represented by the certificate or certificates surrendered in exchange
therefor, it will be a condition to such issuance that the certificate or
certificates so surrendered be properly endorsed or otherwise be in proper
form for transfer and that the person requesting such issuance shall pay to
the Exchange Agent any transfer or other taxes required as a result of such
issuance.
After the Effective Time, there will be no further registration of transfers
of shares of RMCI Common Stock or RMCI Series 1996 Preferred Stock. If, after
the Effective Time, certificates representing shares of RMCI Common Stock or
RMCI Series 1996 Preferred Stock are presented for transfer, they will be
canceled and exchanged for certificates representing RHCI Common Stock and
RHCI Series 1996 Preferred Stock, respectively, and cash, if applicable,
pursuant to the terms of the Merger Agreement.
Any shares of RHCI Common Stock or RHCI Series 1996 Preferred Stock made
available to the Exchange Agent pursuant to the provisions of the Merger
Agreement that remain unclaimed by the holders of shares of RMCI Common Stock
or RMCI Series 1996 Preferred Stock six months after the Effective Time will,
upon request, be returned to RHCI, and any such holder who has not exchanged
his shares prior to that time will be entitled thereafter to look only to RHCI
to exchange such shares. Notwithstanding the foregoing, RHCI will not be
liable to any holder of shares of RMCI Common Stock or RMCI Series 1996
Preferred Stock for any amount paid, or any shares of RHCI Common Stock or
RHCI Series 1996 Preferred Stock delivered, to a public official
82
<PAGE>
pursuant to applicable abandoned property laws. Any shares of RHCI Common
Stock or RHCI Series 1996 Preferred Stock or other amounts remaining unclaimed
by stockholders of RMCI two years after the Effective Time (or such earlier
date immediately prior to such time as such amounts would otherwise escheat to
or become property of any governmental entity) will, to the extent permitted
by applicable law, become the property of RHCI free and clear of any claims or
interest of any person previously entitled thereto.
No dividends or other distributions on shares of RHCI Common Stock or RHCI
Series 1996 Preferred Stock will be paid to the holder of any certificates
representing shares of RMCI Common Stock or RMCI Series 1996 Preferred Stock,
respectively, until such certificates are surrendered for exchange as provided
in the Merger Agreement. Upon such surrender, there will be paid, without
interest, to the person in whose name the certificates representing the shares
of RHCI Common Stock or RHCI Series 1996 Preferred Stock, as the case may be,
into which such shares were converted are registered, all dividends and other
distributions paid in respect of such RHCI Common Stock or RHCI Series 1996
Preferred Stock, as applicable, on a date subsequent to, and in respect of a
record date after, the Effective Time.
FRACTIONAL SHARES. No fractional shares of RHCI Common Stock will be issued
in the Merger. All fractional shares of RHCI Common Stock that a holder of
shares of RMCI Common Stock would otherwise be entitled to receive as a result
of the Merger will be aggregated, and, if a fractional share results from such
aggregation, such holder will be entitled to receive, in lieu thereof, an
amount in cash determined by multiplying the average of the daily closing sale
price per share of RHCI Common Stock on NASDAQ for the ten trading days
immediately prior to the Effective Time by the fraction of a share of RHCI
Common Stock to which such holder would otherwise have been entitled.
Alternatively, RHCI will have the option of instructing the Exchange Agent to
aggregate all fractional shares of RHCI Common Stock, sell such shares in the
public market and distribute to each holder of shares of RMCI Common Stock
entitled thereto a pro rata portion of the proceeds of such sale. No cash in
lieu of fractional shares of RHCI Common Stock will be paid to any holder of
shares of RMCI Common Stock until certificates representing such shares of
RMCI Common Stock are surrendered and exchanged in accordance with the Merger
Agreement.
No fractional shares of RHCI Series 1996 Preferred Stock will be issued in
the Merger. Each holder of RMCI Series 1996 Preferred Stock who would be
entitled to receive as a result of the Merger an aggregate number of shares of
RHCI Series 1996 Preferred Stock comprising a fractional share, will have the
right to receive an aggregate number of shares of RHCI Series 1996 Preferred
Stock rounded up or down to the nearest whole share of RHCI Series 1996
Preferred Stock.
STOCK OPTIONS AND WARRANTS. At the Effective Time, each outstanding RMCI
Stock Option and RMCI Warrant, including RMCI Repriced Options, whether or not
exercisable, and whether or not vested, shall become (without any other
changes in terms or conditions, including vesting schedule) an option or
warrant to purchase the number of shares of RHCI Common Stock equal to the
number of shares of RMCI Common Stock that could have been purchased under
such RMCI Stock Option or RMCI Warrant multiplied by one-third ( 1/3), at a
price per share of RHCI Common Stock equal to the exercise price of such RMCI
Stock Option or RMCI Warrant multiplied by three (3). No fractional shares of
RHCI Common Stock will be issued in connection with the exercise of any such
RMCI Stock Option or RMCI Warrant; rather, the aggregate number of shares to
be issued pursuant to any such exercise will be rounded to the nearest whole
number. Also in connection with the Merger, the Acceleration Price in respect
of RMCI Repriced Options will increase to $7.00. On the RMCI Record Date,
there were outstanding an aggregate of (i) 1,175,250 options to purchase
shares of RMCI Common Stock granted under RMCI's 1994 Stock Option Plan and
1996 Long Term Incentive Plan, all of which have an exercise price of $1.00
per share and (ii) 640,000 warrants to purchase shares of RMCI Common Stock,
450,000 of which have an exercise price of $1.00 per share and 190,000 of
which have an exercise price of $2.00 per share.
ADJUSTMENT OF CONSIDERATION. If at any time between the date of the Merger
Agreement and the Effective Time, any change in the outstanding shares of RHCI
Common Stock or RHCI Series 1996 Preferred Stock shall occur, including by
reason of any reclassification, recapitalization, stock split or combination,
exchange or
83
<PAGE>
readjustment of shares, or any stock dividend thereon with a record date
during such period, the number of shares of RHCI Common Stock and RHCI Series
1996 Preferred Stock to be issued and delivered in the Merger in exchange for
each outstanding share of RMCI Common Stock and RMCI Series 1996 Preferred
Stock as provided in the Merger Agreement shall be appropriately adjusted.
DISSENTING SHARES. Shares of RMCI Common Stock and RMCI Series 1996
Preferred Stock outstanding immediately prior to the Effective Time and held
by a holder who has not voted in favor of the Merger or consented thereto in
writing and who has demanded appraisal for such shares of RMCI Common Stock or
RMCI Series 1996 Preferred Stock, as the case may be, in accordance with
Delaware Law shall not be converted into a right to receive shares of RHCI
Common Stock (or cash in lieu of any fractional shares thereof) or RHCI Series
1996 Preferred Stock, as the case may be, unless such holder fails to perfect
or withdraws or otherwise loses his right to appraisal. If after the Effective
Time such holder fails to perfect or withdraws or loses his right to
appraisal, such shares of RMCI Common Stock or RMCI Series 1996 Preferred
Stock, as the case may be, shall be treated as if they had been converted as
of the Effective Time into a right to receive shares of RHCI Common Stock (and
cash in lieu of any fractional shares thereof) or RHCI Series 1996 Preferred
Stock, as the case may be. See "The Merger--Dissenters' Rights."
CONDITIONS TO CONSUMMATION OF THE MERGER
CONDITIONS TO OBLIGATIONS OF RHCI AND RMCI. The obligations of RMCI, RHCI
and RHCI Sub to consummate the Merger are subject to the satisfaction of the
following conditions: (i) the stockholders of RMCI shall have approved the
Merger by the affirmative vote of (a) the holders of a majority of the
outstanding shares of RMCI Common Stock (calculated as if all outstanding
shares of RMCI Series 1996 Preferred Stock were converted in accordance with
their terms into shares of RMCI Common Stock) and (b) the holders of a
majority of the issued and outstanding shares of RMCI Series 1996 Preferred
Stock (voting as a separate class); (ii) the stockholders of RHCI shall have
approved the issuance of RHCI Common Stock and RHCI Series 1996 Preferred
Stock in connection with the Merger in accordance with the rules of NASDAQ;
(iii) RHCI and RMCI shall have received an opinion, in form and substance
reasonably satisfactory to RHCI and RMCI, from recognized tax counsel, based
upon certain factual representations of RMCI, RHCI and RHCI Sub reasonably
requested by such counsel, dated the Effective Time, to the effect that the
Merger will be treated for federal income tax purposes as a reorganization
within the meaning of Section 368(a) of the Code; (iv) the shares of RHCI
Common Stock to be issued in the Merger (and the shares of RHCI Common Stock
issuable upon the conversion of shares of RHCI Series 1996 Preferred Stock to
be issued in the Merger) shall have been approved for listing on NASDAQ,
subject to official notice of issuance and satisfactory distribution; (v) the
Registration Statement shall have been declared effective and no stop order
suspending its effectiveness shall be in effect and no proceedings for such
purpose shall be pending before the Commission; (vi) any applicable waiting
period under the HSR Act relating to the Merger shall have expired; (vii) no
provision of any applicable domestic law or regulation and no judgment,
injunction, order or decree of a court of competent jurisdiction shall
restrain or prohibit the consummation of the Merger; and (viii) RHCI shall
have received the consents required for the consummation of the Merger
pursuant to the 1990 RHCI Credit Facility and the 1993 RHCI Credit Facility.
There can be no assurance that all of the foregoing conditions to the
consummation of the Merger will be satisfied.
ADDITIONAL CONDITIONS TO OBLIGATIONS OF RHCI AND RHCI SUB. The obligations
of RHCI and RHCI Sub to consummate the Merger are subject to the satisfaction
of the following further conditions: (i) RMCI shall have performed in all
material respects all of its obligations under the Merger Agreement required
to be performed by it at or prior to the Effective Time and the
representations and warranties of RMCI contained in the Merger Agreement shall
be true in all material respects at and as of the Effective Time as if made at
and as of such time and the receipt by RHCI of a certificate signed by an
executive officer of RMCI to such effect; (ii) receipt by RHCI of agreements
from each Securities Act Affiliate and representation letters from Paul J.
Ramsay and the Ramsay Affiliates, each as described under "The Merger
Agreement--Covenants--RMCI--Certain Agreements With Affiliates and Others";
and (iii) receipt by RHCI of a copy of the resolutions of the RMCI
84
<PAGE>
Board authorizing the Merger, certified by an executive officer of RMCI. There
can be no assurance that all of the foregoing conditions to the consummation
of the Merger will be satisfied.
ADDITIONAL CONDITIONS TO OBLIGATIONS OF RMCI. The obligations of RMCI to
consummate the Merger are also subject to the satisfaction of the following
conditions: (i) RHCI and RHCI Sub shall have performed in all material
respects all of their respective obligations under the Merger Agreement
required to be performed by them at or prior to the Effective Time and the
representations and warranties of RHCI and RHCI Sub contained in the Merger
Agreement shall be true in all material respects at and as of the Effective
Time as if made at and as of such time and the receipt by RMCI of a
certificate signed by an executive officer of each of RHCI and RHCI Sub to
such effect; (ii) the receipt by RMCI of a copy of the resolutions of the RHCI
Board authorizing the Merger, certified by an executive officer of RHCI; and
(iii) a certificate of designations shall have been duly filed by RHCI with
the Secretary of State of the State of Delaware with respect to the RHCI
Series 1996 Preferred Stock. There can be no assurance that all of the
foregoing conditions to the consummation of the Merger will be satisfied.
REPRESENTATIONS AND WARRANTIES
The Merger Agreement contains representations and warranties by each of RHCI
and RMCI relating to corporate existence, powers and similar matters,
corporate authorization, governmental filings and approvals, non-contravention
of corporate documents, agreements and instruments, capitalization,
subsidiaries, Commission filings, financial statements, disclosure documents,
absence of certain changes, undisclosed material liabilities, litigation,
taxes and tax treatment, retirement and other employee plans and benefits,
compliance with law, finders' fees, opinions of financial advisors,
stockholder votes required and Medicare and Medicaid compliance.
COVENANTS--RMCI
CONDUCT OF RMCI. RMCI has agreed that, except as expressly contemplated by
the Merger Agreement or as disclosed in writing to RHCI prior to the date of
the Merger Agreement, until the Effective Time or earlier termination of the
Merger Agreement, it will conduct its business in the ordinary course
consistent with past practice and will use its best efforts to preserve intact
its business organization and relationships with third parties and to keep
available the services of its present officers and employees and that, except
as otherwise approved in writing by RHCI or as expressly contemplated by the
Merger Agreement, it will, and, in most cases, will cause its subsidiaries to,
among other things: (a) not amend or propose any change to its certificate of
incorporation or by-laws; (b) not engage in any mergers or consolidations with
any person (other than a wholly owned subsidiary) or acquire a material amount
of stock or assets of any other person, provided that RMCI may sell all or
substantially all of the business and assets of Apex or discontinue the
operations of Apex (See "Information Concerning RMCI --Business--Recent
Events"); (c) not sell, lease, license or otherwise dispose of material
assets, subject to certain exceptions; (d) not declare or pay any dividends or
make any distributions in respect of its capital stock (except in respect of
the RMCI Series 1996 Preferred Stock), not issue any form of securities
(except in respect of certain employee or director benefit arrangements or
upon the exercise of the RMCI Warrants or RMCI Stock Options), and not effect
certain other changes in its capitalization with certain exceptions; (e) not
agree or commit to do (or permit any of its subsidiaries to agree or commit to
do) any of the foregoing; and (f) not take, or agree or commit to take, any
action that would make any of its representations or warranties under the
Merger Agreement inaccurate in any material respect at or prior to the
Effective Time.
RMCI has further agreed that, from the date of the Merger Agreement to the
Effective Time, it will not enter or commit to enter into any material
contract or agreement, except in the ordinary course of business consistent
with past practice or as expressly permitted by the Merger Agreement or RHCI,
and that except as otherwise provided in the Merger Agreement, RMCI may, and
upon RHCI's request will, upon the occurrence of any condition entitling it to
repurchase any shares of RMCI Common Stock subject to a right of repurchase,
take any and all steps to consummate such repurchases.
85
<PAGE>
ACQUISITION PROPOSALS FOR RMCI. Until the Effective Time or earlier
termination of the Merger Agreement, RMCI and its subsidiaries and the
officers, directors, employees or other agents of RMCI and its subsidiaries
will not, directly or indirectly, (i) take any action to solicit, initiate or
encourage any RMCI Acquisition Proposal (as defined below) or (ii) unless
otherwise required in accordance with the fiduciary duties of the RMCI Board
under applicable law as advised by counsel to RMCI, engage in negotiations
with, or disclose any nonpublic information relating to RMCI or any of its
subsidiaries or afford access to the properties, books or records of RMCI or
any of its subsidiaries to, any person that may be considering making, or has
made, an RMCI Acquisition Proposal. RMCI has agreed to notify RHCI promptly
after receipt of any RMCI Acquisition Proposal or any indication that any
person is considering making an RMCI Acquisition Proposal or any request for
nonpublic information relating to RMCI or any of its subsidiaries or for
access to the properties, books or records of RMCI or any of its subsidiaries
by any person that may be considering making, or has made, an RMCI Acquisition
Proposal. For purposes of this paragraph, "RMCI Acquisition Proposal" means
any offer or proposal for, or any indication of interest in, a merger or other
business combination involving RMCI or any of its subsidiaries or the
acquisition of any equity interest in, or a substantial portion of the assets
of, RMCI or any of its subsidiaries, other than the transactions contemplated
by the Merger Agreement or the sale or other disposition of Apex. See "Fees
and Expenses" below.
CERTAIN AGREEMENTS WITH AFFILIATES AND OTHERS. RMCI has agreed that, to
ensure that the issuance of RHCI Common Stock and RHCI Series 1996 Preferred
Stock in the Merger complies with the Securities Act, prior to the Effective
Time, RMCI will cause to be delivered to RHCI a list identifying each person
who might at the time of the RMCI Meeting be deemed to be an "affiliate" of
RMCI for purposes of Rule 145 under the Securities Act (each, a "Securities
Act Affiliate"). RMCI will use its best efforts to obtain from each person who
is identified as a possible Securities Act Affiliate prior to the Effective
Time an agreement providing that such person will not offer to sell, sell or
otherwise dispose of any RHCI Common Stock or RHCI Series 1996 Preferred Stock
issued to such person in the Merger in violation of the Securities Act.
To ensure that the Merger will qualify as a reorganization within the
meaning of Section 368 of the Code, RMCI has agreed that it will use its best
efforts to obtain from each of Paul J. Ramsay and the Ramsay Affiliates, at or
before the Effective Time, a representation letter stating that such
stockholder has no present plan or intention to sell any of the shares of RHCI
Common Stock or RHCI Series 1996 Preferred Stock which such stockholder
receives in the Merger. RMCI has also agreed that it will not knowingly take
any action that would jeopardize the qualification of the Merger as a
reorganization under Section 368(a) of the Code.
COVENANTS--RHCI
CONDUCT OF RHCI. RHCI has agreed that, except as expressly contemplated by
the Merger Agreement, unless consented to in writing by RMCI, it will conduct
its business in the ordinary course consistent with past practice, will use
its best efforts to preserve intact its business organization and
relationships with third parties and to keep available the services of its
present officers and employees and will not amend any of the material terms or
provisions of its capital stock, except for amendments which affect equally
all shares of RHCI Common Stock or RHCI Series 1996 Preferred Stock.
RHCI SUB. RHCI has agreed that it will take all action necessary to cause
RHCI Sub to perform its obligations under the Merger Agreement and to
consummate the Merger on the terms and conditions set forth in the Merger
Agreement. RHCI has also agreed to take certain actions, and to refrain from
certain other actions, relating to the eligibility of the Merger to qualify as
a reorganization under Section 368 of the Code.
INDEMNIFICATION FOR RMCI OFFICERS AND DIRECTORS. RHCI has also agreed that,
from and after the Effective Time, RHCI and the Surviving Corporation will
each indemnify, defend and hold harmless, to the fullest extent permitted by
law, in the case of the Surviving Corporation, the present and former officers
and directors of RMCI and its subsidiaries against all losses, claims, damages
and liabilities in respect of acts or omissions occurring at or prior to the
Effective Time. RHCI will cause the Surviving Corporation (and its successors)
to establish and maintain provisions in its certificate of incorporation and
by-laws concerning the
86
<PAGE>
indemnification and exoneration of RMCI's former and present officers,
directors, employees and agents that are no less favorable to those persons
than the provisions of RMCI's certificate of incorporation and by-laws in
effect on the date of the Merger Agreement.
NASDAQ LISTING. RHCI will use its best efforts to cause the shares of RHCI
Common Stock to be issued in the Merger and the shares of RHCI Common Stock
issuable upon conversion of the RHCI Series 1996 Preferred Stock to be
approved for listing on NASDAQ subject to official notice of issuance, prior
to the Effective Time.
COVENANTS--RHCI AND RMCI
ACCESS TO INFORMATION. Each of RHCI and RMCI has agreed that, until the
Effective Time or earlier termination of the Merger Agreement, it will provide
the other party, including representatives of such other party, access to
information concerning itself under its control, subject to the
confidentiality agreement between RHCI and RMCI dated August 19, 1996 (which
will continue in effect even if the Merger Agreement is terminated), and will
notify the other party of its receipt of certain communications relating to
the transactions contemplated by the Merger Agreement that it may receive.
ADDITIONAL COVENANTS. In addition, each of RHCI and RMCI has agreed to: (i)
subject to the terms and conditions of the Merger Agreement, use its best
efforts to take all actions necessary, proper or advisable under applicable
laws and regulations to consummate the transactions contemplated by the Merger
Agreement; (ii) cooperate to make certain filings and obtain certain consents
necessary to consummate the transactions contemplated by the Merger Agreement;
(iii) consult with the other party prior to issuing any press release or
making any public announcement related to the Merger and the transactions
contemplated by the Merger Agreement; (iv) cause a meeting of the stockholders
of each company to be duly called and held, at which, subject to the
requirements of their respective fiduciary duties, each board of directors
will recommend approval and adoption by their respective stockholders of the
Merger Agreement and the Merger and the transactions contemplated thereby; and
(v) take all actions necessary in connection with this Joint Proxy
Statement/Prospectus and in connection with the issuance of the RHCI Common
Stock and the RHCI Series 1996 Preferred Stock pursuant to the Merger
Agreement.
TERMINATION
The Merger Agreement may be terminated and the Merger may be abandoned at
any time prior to the Effective Time (notwithstanding any approval of the
Merger Agreement by the stockholders of RMCI or approval of the Merger
Proposal by the stockholders of RHCI): (i) by mutual written consent of RMCI
and RHCI; (ii) by either RMCI or RHCI, if the Merger has not been consummated
by April 30, 1997 (provided that the right to terminate the Merger Agreement
under this clause shall not be available to any party whose failure to fulfill
any of its obligations under the Merger Agreement has been the cause of or
resulted in the failure to consummate the Merger by such date); (iii) by
either RMCI or RHCI, if there shall be any applicable domestic law, rule or
regulation that makes consummation of the Merger illegal or otherwise
prohibited or if any judgment, injunction, order or decree of a court of
competent jurisdiction shall restrain or prohibit the consummation of the
Merger, and such judgment, injunction, order or decree shall become final and
nonappealable; (iv) by either RMCI or RHCI, if the stockholder approvals
referred to in clause (i) or clause (ii) of "Conditions to Obligations of RHCI
and RMCI" above shall not have been obtained; or (v) by either RMCI or RHCI
(the "Terminating Party") if (x) there has been a breach by the other party of
any representation or warranty contained in the Merger Agreement which would
have or would be reasonably likely to have a material adverse effect on the
condition (financial or otherwise), business, assets or results of operations
of RMCI and its subsidiaries or RHCI and its subsidiaries, as the case may be,
or (y) there has been a material breach of any of the covenants or agreements
set forth in the Merger Agreement on the part of the other party, which breach
is not curable or, if curable, is not cured within 30 days after written
notice of such breach is given by the Terminating Party to the other party or
(z) RMCI has entered into an agreement or agreement in principle with respect
to any RMCI Acquisition Proposal.
87
<PAGE>
If the Merger Agreement is terminated pursuant to the terms thereof, the
Merger Agreement shall become void and of no effect with no liability on the
part of any party thereto, subject to certain exceptions. See "Fees and
Expenses" below.
AMENDMENTS AND WAIVERS
The Merger Agreement may be amended or any provisions thereof may be waived
prior to the Effective Time if such amendment or waiver is in writing and
signed, in the case of an amendment, by RMCI, RHCI and RHCI Sub and, in the
case of a waiver, by the party against whom the waiver is to be effective;
provided that (i) any waiver or amendment will be effective against RHCI or
RMCI only if the special committee of the board of directors of such party
approves such waiver or amendment and only such special committee can take
actions on behalf of that party and (ii) after the adoption of the Merger
Agreement by the stockholders of RMCI, no such amendment or waiver may without
the further approval of such stockholders and each party's board of directors
upon recommendation of its special committee, alter or change (x) the amount
or kind of consideration to be received in exchange for any shares of capital
stock of RMCI, (y) any term of the certificate of incorporation of the
Surviving Corporation or (z) any of the terms or conditions of the Merger
Agreement if such alteration or change would adversely affect the holders of
any shares of capital stock of RMCI. Any change in the Exchange Ratios, the
accounting treatment of the Merger, the anticipated federal income tax
consequences of the Merger or any other material change in the terms and
conditions of the Merger will require the resolicitation of proxies from (and
after adoption of the Merger Proposal and the Merger Agreement, the approval
of) the RHCI and RMCI stockholders. In connection therewith, RHCI and RMCI
will provide their respective stockholders with an amended or supplemented
Joint Proxy Statement/Prospectus reflecting any such changes and will
resolicit proxies from the RHCI and RMCI stockholders.
FEES AND EXPENSES
All costs and expenses incurred in connection with the Merger Agreement are
to be paid by the party incurring such cost or expense except as described
below.
In the event that RMCI shall have entered into an agreement or agreement in
principle with respect to any RMCI Acquisition Proposal and RMCI or RHCI shall
terminate the Merger Agreement, RMCI has agreed promptly to reimburse RHCI for
all of RHCI's reasonable documented out-of-pocket expenses (up to a maximum of
$1,000,000), but in no event later than five business days after the
termination of the Merger Agreement.
RMCI and RHCI shall each pay one-half of all costs and expenses related to
printing, filing and mailing the Registration Statement (as defined in the
Merger Agreement) and the Joint Proxy Statement/Prospectus and all Commission
and other regulatory filing fees.
88
<PAGE>
MARKET PRICES OF RHCI COMMON STOCK AND RMCI COMMON STOCK
RHCI Common Stock has been traded on NASDAQ since October 31, 1985 and is
listed under the symbol RHCI. On December 31, 1996, there were approximately
590 holders of record of RHCI Common Stock.
RMCI Common Stock has been traded on the OTC Bulletin Board since April 24,
1995 under the symbol RMCR. On December 31, 1996, there were approximately 610
holders of record of RMCI Common Stock.
The following table sets forth (i) the high and low closing sales prices per
share of RHCI Common Stock as reported on NASDAQ for each of the quarters
during the fiscal years ended June 30, 1995 and June 30, 1996, and the
completed quarters in the fiscal year ending June 30, 1997, and (ii) the high
and low closing bid prices per share of the RMCI Common Stock as reported on
the OTC Bulletin Board from and after April 24, 1995 (the date of the
Distribution) for each of the quarters during the fiscal years ended June 30,
1995 and June 30, 1996 and the completed quarters in the fiscal year ending
June 30, 1997. The price quotations listed for RMCI below reflect inter-dealer
prices, without retail mark-up, mark-down or commissions and may not represent
actual transactions.
<TABLE>
<CAPTION>
RHCI RMCI
COMMON STOCK COMMON STOCK
PRICES PRICES(1)
------------- ----------------
HIGH LOW HIGH LOW
------ ------ ------ ------
<S> <C> <C> <C> <C>
YEAR ENDED JUNE 30, 1995
First Quarter................................ $ 8.13 $ 6.00 -- --
Second Quarter............................... 8.13 6.25 -- --
Third Quarter................................ 7.88 5.75 -- --
Fourth Quarter............................... 7.50 3.63 $ 4.50(1) $ 2.00(1)
YEAR ENDED JUNE 30, 1996
First Quarter................................ 4.63 3.38 3.88 2.25
Second Quarter............................... 3.75 2.50 2.75 1.63
Third Quarter................................ 3.94 2.88 3.25 1.88
Fourth Quarter............................... 4.38 2.88 2.44 1.69
YEAR ENDING JUNE 30, 1997
First Quarter................................ 3.25 2.13 1.69 0.38
Second Quarter............................... 3.13 1.39 0.81 0.34
</TABLE>
- --------
(1) From April 24, 1995, the date of the Distribution.
On October 1, 1996, the last full trading day prior to the public
announcement of the Merger Agreement, the closing price per share of RHCI
Common Stock as reported on NASDAQ was $2.25. On March 19, 1997, the closing
price per share of RHCI Common Stock as reported on NASDAQ was $4.19. On
October 1, 1996, the last full trading day prior to the public announcement of
the Merger Agreement, the closing bid price per share of RMCI Common Stock as
reported on the OTC Bulletin Board was $0.625. On March 19, 1997, the closing
bid price per share of RMCI Common Stock as reported on the OTC Bulletin Board
was $1.00.
HOLDERS OF RMCI COMMON STOCK AND RHCI COMMON STOCK ARE URGED TO OBTAIN
CURRENT MARKET QUOTATIONS FOR THE SHARES OF RMCI COMMON STOCK AND RHCI COMMON
STOCK.
89
<PAGE>
DIVIDEND POLICY
No cash dividends have been declared on the RHCI Common Stock since RHCI was
organized or on the RMCI Common Stock since the Distribution. RHCI's credit
documents governing its credit facilities include provisions which prohibit
the payment of dividends unless the sum of (i) all dividends, redemptions and
all other distributions in respect of its capital stock and (ii) all
restricted investments (as defined) during the applicable fiscal year would
not exceed an amount equal to 50% of the consolidated net income of RHCI for
the immediately preceding fiscal year and provided that, at the time of such
dividend and after giving effect thereto, certain specified financial ratio
covenants would not be violated and no other default or event of default would
occur. Further, in connection with waivers RHCI received from its lenders as
of June 30, 1996, RHCI agreed not to pay cash dividends in respect of the RHCI
Common Stock and the RHCI Series C Preferred Stock, or, when issued in the
Merger, the RHCI Series 1996 Preferred Stock. Prior to this time, RHCI's
credit facilities permitted the payment of the full amount of regular fixed
dividends on the RHCI Series C Preferred Stock, provided that such dividends
did not exceed $387,200 in each 12-month period and provided that no event of
default existed or occurred as a result of the payment.
90
<PAGE>
PRO FORMA CONDENSED FINANCIAL INFORMATION
The following unaudited pro forma condensed balance sheet of RHCI as of
December 31, 1996 and unaudited pro forma condensed statements of operations
of RHCI for the six months ended December 31, 1996 and the fiscal year ended
June 30, 1996 give effect to the Merger, assuming the Merger had been
consummated on July 1, 1995 and accounted for under the purchase method of
accounting. The pro forma financial information also gives effect to the sale
of RMCI's wholly owned subsidiary, Apex. See "Information Concerning RMCI--
Business--Recent Events."
The information contained in the columns entitled "Historical RHCI" and
"Historical RMCI" in the condensed balance sheet and statement of operations
as of and for the six months ended December 31, 1996 is summarized from the
unaudited consolidated financial statements of RHCI and RMCI, respectively,
included in this Joint Proxy Statement/Prospectus. The information contained
in the columns entitled "Historical RHCI" and "Historical RMCI" in the
condensed statement of operations for the fiscal year ended June 30, 1996 is
summarized from the audited consolidated financial statements of RHCI and
RMCI, respectively, included in this Joint Proxy Statement/Prospectus.
THE PRO FORMA CONDENSED FINANCIAL STATEMENTS ARE PRESENTED FOR INFORMATIONAL
PURPOSES ONLY AND ARE NOT NECESSARILY INDICATIVE OF THE FINANCIAL POSITION OR
RESULTS OF OPERATIONS WHICH WOULD ACTUALLY HAVE OCCURRED IF THE MERGER AND THE
SALE OF APEX HAD BEEN CONSUMMATED AS OF THE DATE PRESENTED AND DO NOT PURPORT
TO PROJECT RHCI'S FINANCIAL POSITION OR RESULTS OF OPERATIONS FOR ANY FUTURE
PERIOD OR DATE. The pro forma condensed financial statements should be read in
conjunction with the historical consolidated financial statements and related
notes of RHCI and RMCI, and RHCI's and RMCI's "Management's Discussion and
Analysis of Financial Condition and Results of Operations" contained elsewhere
herein.
PRO FORMA CONDENSED BALANCE SHEET AT DECEMBER 31, 1996
(DOLLARS IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
HISTORICAL PRO FORMA ADJUSTMENTS
---------------- ----------------------------------
SALE OF RHCI
RHCI RMCI SUBTOTAL APEX(A) MERGER(B) ELIMINATIONS(C) PRO FORMA
-------- ------- -------- ------- --------- --------------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
ASSETS
Cash and cash equiva-
lents.................. $ 9,060 $ 198 $ 9,258 $ 264 $(1,300) $ -- $ 8,222
Patients accounts re-
ceivable, net.......... 24,839 1,168 26,007 -- -- -- 26,007
Other current assets.... 12,266 1,690 13,956 (1,446) -- (2,118) 10,392
-------- ------- -------- ------- ------- ------- --------
Total current assets.... 46,165 3,056 49,221 (1,182) (1,300) (2,118) 44,621
Goodwill and other in-
tangible assets........ 580 8,205 8,785 -- 14,663 -- 23,448
Other assets............ 19,246 2,252 21,498 (1,727) (1,610) (6,671) 11,490
Property and equipment,
net.................... 65,871 734 66,605 -- -- -- 66,605
-------- ------- -------- ------- ------- ------- --------
TOTAL ASSETS........... $131,862 $14,247 $146,109 $(2,909) $11,753 $(8,789) $146,164
======== ======= ======== ======= ======= ======= ========
LIABILITIES
Current liabilities..... $ 36,932 $10,308 $ 47,240 $(1,759) $ -- $(2,118) $ 41,275
(2,088)
Long-term debt, less
current portion........ 39,531 4,207 43,738 (325) -- (3,882) 39,531
Other noncurrent liabil-
ities.................. 6,523 5,403 11,926 -- (867) (2,789) 8,270
-------- ------- -------- ------- ------- ------- --------
82,986 19,918 102,904 (4,172) (867) (8,789) 89,076
STOCKHOLDERS' EQUITY
(DEFICIT).............. 48,876 (5,671) 43,205 1,263 8,212 -- 57,088
4,408
-------- ------- -------- ------- ------- ------- --------
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY
(DEFICIT).............. $131,862 $14,247 $146,109 $(2,909) $11,753 $(8,789) $146,164
======== ======= ======== ======= ======= ======= ========
</TABLE>
91
<PAGE>
Notes to Unaudited Pro Forma Condensed Balance Sheet
(a) During the year ended June 30, 1996, RMCI adopted a plan to sell Apex,
which conducts RMCI's HMO operation. Accordingly, RMCI has classified its
HMO operation, the net operating assets of which totalled $1,864,000 at
December 31, 1996, as a discontinued operation. In connection with RMCI's
decision to sell Apex, in June 1996, RMCI established a reserve of
$1,830,000, which represented Apex's expected operating losses from July
1, 1996 through January 1997, the expected date of disposition at the
time. This reserve was reduced to $172,000 at December 31, 1996 based on
Apex's actual operating losses from July 1, 1996 to December 31, 1996. In
March 1997, RMCI increased its reserve for Apex's expected operating
losses through the date of disposition (now expected to be on or before
March 31, 1997) by $250,000. This adjustment is reflected in the pro forma
adjustments as reductions in the net proceeds expected from the sale and
the expected gain on the sales as discussed below.
In October 1996, RMCI entered into an agreement to sell Apex for estimated
net sales proceeds of $3,377,000, which exceeded the carrying value of
Apex's net operating assets at December 31, 1996, as adjusted by additional
expected Apex losses prior to the sale of $250,000, by $1,263,000. The pro
forma adjustments reflect this gain on sale as an increase to Stockholders'
Equity (Deficit). Further, the pro forma adjustments reflect that of the
net sales proceeds derived from the sale of Apex, $450,000 is required to
be held in escrow and $2,413,000 is required to repay indebtedness of RMCI.
(b) If the Effective Time of the Merger were the RHCI Record Date, in the
Merger, RHCI would issue 2,136,105 shares of RHCI Common Stock, and
100,000 shares of RHCI Series 1996 Preferred Stock, each share of which
will be convertible into 10 shares of RHCI Common Stock. This RHCI Common
Stock and RHCI Series 1996 Preferred Stock would be issued in the Merger
in exchange for 6,408,315 shares of RMCI Common Stock and 100,000 shares
of RMCI Series 1996 Preferred Stock. This RHCI Common Stock, including the
RHCI Common Stock issuable upon the conversion of the RHCI Series 1996
Preferred Stock, would have a pro forma market value of approximately
$9,212,000 based upon the closing sale price of the RHCI Common Stock on
NASDAQ of $2.9375 per share on December 31, 1996.
Under the purchase method of accounting, the assets and liabilities of RMCI
are adjusted to their estimated fair values. For purposes of these pro
forma financial statements, estimates have been made of the fair values of
RMCI's assets and liabilities as of December 31, 1996. These fair value
adjustments were based on the best information available to RHCI and are
subject to change as additional information becomes available.
In addition to the pro forma market value at December 31, 1996 of
$9,212,000 of RHCI Common Stock and RHCI Series 1996 Preferred Stock to be
issued in the Merger, the total purchase price includes direct acquisition
costs, primarily consisting of investment banking and legal costs, of
approximately $300,000. It is anticipated RHCI will also incur costs of
approximately $1,000,000, primarily consisting of legal, accounting,
printing and mailing costs, in connection with the issuance of RHCI Common
Stock and RHCI Series 1996 Preferred Stock with such costs recorded as a
reduction of equity in the pro forma condensed balance sheet. The following
table indicates the allocation of the total purchase price to the deficit
in net assets of RMCI:
<TABLE>
<S> <C> <C>
Deficit in net assets of RMCI at December 31,
1996............................................. $(5,671,000)
Expected gain on the sale of Apex, based on the
net assets of
Apex at December 31, 1996 (see (a) above)........ 1,263,000
Adjusted deficit in net assets of RMCI............ (4,408,000)
Purchase accounting adjustments:
Identifiable intangibles arising from the
acquisition...................................... 4,740,000
RMCI's existing goodwill and identifiable
intangible assets................................ (8,205,000)
Goodwill arising from the acquisition............. 18,128,000
----------
14,663,000
Deferred income taxes related to purchase
accounting adjustments:
Identifiable intangibles arising from the
acquisition...................................... (1,610,000)
RMCI's existing identifiable intangible assets.... 867,000
----------
(743,000)
-----------
Total purchase price, including direct acquisition
costs............................................ $ 9,512,000
===========
</TABLE>
(c) This adjustment reflects the elimination of all intercompany receivables
and payables.
92
<PAGE>
PRO FORMA CONDENSED STATEMENT OF OPERATIONS
SIX MONTHS ENDED DECEMBER 31, 1996
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
<TABLE>
<CAPTION>
HISTORICAL PRO FORMA ADJUSTMENTS
---------------- ----------------------------------
SALE OF RHCI
RHCI RMCI SUBTOTAL MERGER ELIMINATIONS(C) APEX(D) PRO FORMA
------- ------- -------- ------ --------------- ------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
Net Revenues............ $66,607 $11,621 $78,228 $ -- $(456) $ -- $77,772
Expenses
Salaries, wages and
benefits.............. 33,263 4,655 37,918 (102)(a) -- -- 37,816
Other operating
expenses.............. 22,356 2,360 24,716 (23)(a) -- -- 24,693
Contracted provider
services.............. -- 4,308 4,308 -- (216) -- 4,092
Provision for doubtful
accounts.............. 2,149 -- 2,149 -- -- -- 2,149
Depreciation and
amortization.......... 2,593 695 3,288 385 (b) -- -- 3,673
Interest and other
financing charges..... 3,034 434 3,468 -- (240) (97) 3,131
------- ------- ------- ----- ----- ----- -------
Total Expenses......... 63,395 12,452 75,847 260 (456) (97) 75,554
------- ------- ------- ----- ----- ----- -------
Income (Loss) From
Continuing Operations
Before Income Taxes.... 3,212 (831) 2,381 (260) -- 97 2,218
Income Taxes............ (1,221) -- (1,221) -- -- -- (1,221)
------- ------- ------- ----- ----- ----- -------
Net Income (Loss) From
Continuing Operations.. $ 1,991 $ (831) $ 1,160 $(260) $ -- $ 97 $ 997
======= ======= ======= ===== ===== ===== =======
Net income from
continuing operations
per common and dilutive
common equivalent
share:
Primary................ $0.21 $0.07 (e)
Fully diluted.......... $0.21 $0.07 (e)
Weighted average number
of common and dilutive
common equivalent
shares outstanding:
Primary................ 9,706 10,417
Fully diluted.......... 9,706 10,417
</TABLE>
93
<PAGE>
PRO FORMA CONDENSED STATEMENT OF OPERATIONS FOR THE YEAR ENDED JUNE 30, 1996
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
<TABLE>
<CAPTION>
HISTORICAL PRO FORMA ADJUSTMENTS
----------------- ----------------------------------
SALE OF RHCI
RHCI(F) RMCI(G) SUBTOTAL MERGER ELIMINATIONS(C) APEX(D) PRO FORMA
-------- ------- -------- ------ --------------- ------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
Net Revenues............ $117,423 $21,602 $139,025 $ -- $(1,060) $ -- $137,965
Expenses
Salaries, wages and
benefits.............. 66,259 8,743 75,002 (150)(a) -- -- 74,852
Other operating
expenses.............. 42,387 6,252 48,639 (47)(a) (180) -- 48,412
Contracted provider
services.............. -- 8,088 8,088 -- (400) -- 7,688
Provision for doubtful
accounts.............. 5,805 -- 5,805 -- -- -- 5,805
Depreciation and
amortization.......... 5,490 1,323 6,813 492 (b) -- -- 7,305
Goodwill write down.... -- 1,929 1,929 -- -- -- 1,929
Interest and other
financing charges..... 6,892 685 7,577 -- (480) (195) 6,902
Losses related to asset
sales and closed
businesses............ 4,473 -- 4,473 -- -- -- 4,473
Asset impairment
charges............... 5,485 -- 5,485 -- -- -- 5,485
-------- ------- -------- ----- ------- ----- --------
Total Expenses......... 136,791 27,020 163,811 295 (1,060) (195) 162,851
-------- ------- -------- ----- ------- ----- --------
Loss From Continuing
Operations Before
Income Taxes........... (19,368) (5,418) (24,786) (295) -- 195 (24,886)
Income Tax Benefit...... 2,887 -- 2,887 -- -- -- 2,887
-------- ------- -------- ----- ------- ----- --------
Net Loss From Continuing
Operations............. $(16,481) $(5,418) $(21,899) $(295) $ -- $ 195 $(21,999)
======== ======= ======== ===== ======= ===== ========
Net loss from continuing
operations per common
and dilutive common
equivalent share:
Primary................ $(2.12) $(2.24)(e)
Fully diluted.......... $(2.12) $(2.24)(e)
Weighted average number
of common and dilutive
common equivalent
shares outstanding:
Primary................ 7,929 10,065
Fully diluted.......... 7,929 10,065
</TABLE>
94
<PAGE>
Notes to Unaudited Pro Forma Condensed Statements of Operations
(a) These adjustments reflect certain savings which RHCI expects to achieve
through reductions in operating costs in connection with the Merger. The
extent to which these savings will be achieved depends, among other
things, on economic conditions and may be affected by unanticipated
changes in business activities, inflation and certain external factors.
Therefore, there can be no assurance that these savings will be realized.
(b) This adjustment relates to the amortization of goodwill and other
intangible assets arising from the acquisition of RMCI by RHCI, as if RMCI
had been acquired on July 1, 1995. The calculation of the pro forma
amortization expense is as follows:
<TABLE>
<CAPTION>
AMORTIZATION AMORTIZATION AMORTIZATION
AMOUNT PERIOD 7/1/96-12/31/96 7/1/95-6/30/96
----------- ------------ --------------- --------------
<S> <C> <C> <C> <C>
Goodwill................ $18,128,000 25 years $ 362,000 $ 725,000
Other intangible assets:
Managed care con-
tracts................ 2,405,000 51 months 283,000 566,000
Clinical protocols..... 2,335,000 15 years 78,000 156,000
----------- --------- ----------
$22,868,000 723,000 1,447,000
Less amortization
expense recorded by
RMCI on goodwill and
other intangible
assets................. (338,000) (955,000)
--------- ----------
Net increase in
amortization expense... $ 385,000 $ 492,000
========= ==========
</TABLE>
The amortization period of goodwill and other intangible assets arising from
the acquisition of RMCI by RHCI is based on the following:
-- Managed care contracts--as of the expected date of the Merger, the
weighted average future life of RMCI's existing contracts, based on the
percentage of each contract's annual revenue to total revenue and based
on the assumption that the contracts will, on average, renew for four
additional 12-month periods.
-- Clinical protocols--estimated period over which RMCI's existing clinical
protocols, which are used as the basis for RMCI's treatment decisions
and product pricing, will be valid and appropriate.
-- Goodwill--estimated period based on RHCI's assessment that RMCI's
operations, after elimination of certain overhead and public company-
related costs, will be profitable and that it has the ability to remain
profitable for an indeterminate period of time.
(c) These adjustments reflect the elimination of RHCI and RMCI intercompany
income and expense amounts including, for the six months ended December
31, 1996 and year ended June 30, 1996, interest on intercompany debt of
$240,000 and $480,000, respectively, charges for certain corporate
services provided by RHCI to RMCI of $0 and $180,000, respectively, and
patient service revenues and related contracted provider services expenses
related to certain managed care arrangements between RHCI and RMCI of
$216,000 and $400,000, respectively.
(d) This adjustment reflects the reduction in interest expense related to RMCI
indebtedness which will be repaid upon the sale of Apex.
(e) Income (Loss) per common and dilutive common equivalent share is
calculated as follows:
<TABLE>
<CAPTION>
SIX MONTHS ENDED YEAR ENDED
DECEMBER 31, 1996 JUNE 30, 1996
----------------- -------------
<S> <C> <C>
Pro forma net income (loss) from continuing
operations................................ $ 997,000 $(21,999,000)
Less: Dividends on RHCI Series C Preferred
Stock..................................... (181,000) (362,000)
Less: Dividends on RHCI Series 1996
Preferred Stock........................... (75,000) (150,000)
----------- ------------
$ 741,000 $(22,511,000)
=========== ============
Pro forma net income (loss) from continuing
operations per share...................... $ 0.07 $ (2.24)
=========== ============
Weighted average shares outstanding
(Primary and Fully Diluted)............... 10,417,000 10,065,000
=========== ============
</TABLE>
95
<PAGE>
(f) During the fiscal year ended June 30, 1996, the following nonrecurring
amounts were recorded in the consolidated statement of operations of RHCI:
(i) contractual adjustment expenses of approximately $1,900,000 related to
intermediary audits of prior year cost reports; as a result, RHCI
recorded reserves in the fourth quarter totalling $3,500,000 related to
possible future adjustments of its cost report estimates by
intermediaries;
(ii) losses totalling $4,473,000 related to additional asset write-downs,
cost report settlements and other adjustments related to businesses
which closed at various times prior to fiscal 1996, a reserve for
Medicaid disproportionate share payments which the State of Louisiana
has contended were improperly paid to two of RHCI's Louisiana
facilities in fiscal 1995 and 1994, and lease commitments and other
costs incurred in connection with RHCI's decision to relocate its
corporate headquarters; and
(iii) asset impairment charges totalling $5,485,000 related to an excess of
carrying value of certain long-lived assets and investments over the
fair value of these assets.
(g) During the fiscal year ended June 30, 1996, RMCI recorded certain
nonrecurring amounts in its consolidated statement of operations,
including a goodwill impairment charge of $1,929,000 related to its
acquisition of Human Dynamics Institute, and $426,000 related to the
write-off of deferred development costs based on RMCI's decision not to
expand in certain markets in the United States.
96
<PAGE>
SELECTED CONSOLIDATED FINANCIAL INFORMATION OF RHCI
The following selected consolidated financial information is derived from
the consolidated financial statements of RHCI. The following tables should be
read in conjunction with the consolidated financial statements and related
notes, and "RHCI--Management's Discussion and Analysis of Financial Condition
and Results of Operations," included elsewhere in this Joint Proxy
Statement/Prospectus.
RAMSAY HEALTH CARE, INC. AND SUBSIDIARIES
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED JUNE 30, DECEMBER 31,
------------------------------------------------ ------------------
1992 1993 1994(1) 1995(1) 1996 1995 1996
-------- -------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENTS OF OPERATIONS
DATA:
Net revenues........... $136,946 $136,354 $137,002 $136,418 $117,423 $ 60,944 $ 66,607
Salaries, wages and
benefits.............. 60,626 63,810 64,805 72,061 66,259 32,433 33,263
Other operating
expenses.............. 40,161 40,454 42,907 44,741 42,387 19,746 22,356
Provision for doubtful
accounts.............. 8,628 8,148 5,846 5,086 5,805 2,026 2,149
Depreciation and
amortization.......... 5,439 6,605 6,836 7,290 5,490 2,626 2,593
Interest and other
financing charges..... 10,488 9,494 8,906 8,347 6,892 3,509 3,034
Losses related to asset
sales and closed
businesses............ -- 7,524 802 6,431 4,473 -- --
Asset impairment
charges............... -- -- -- 21,815 5,485 -- --
Restructuring and other
charges............... 2,283 1,367 -- -- -- -- --
-------- -------- -------- -------- -------- -------- --------
127,625 137,402 130,102 165,771 136,791 60,340 63,395
-------- -------- -------- -------- -------- -------- --------
Income (loss) before
minority interests,
income taxes,
extraordinary items
and cumulative effect
of accounting change.. 9,321 (1,048) 6,900 (29,353) (19,368) 604 3,212
Minority interests..... -- 1,126 4,824 887 -- (101) --
-------- -------- -------- -------- -------- -------- --------
Income (loss) before
income taxes,
extraordinary items
and cumulative effect
of accounting change.. 9,321 (2,174) 2,076 (30,240) (19,368) 705 3,212
Provision (benefit) for
income taxes.......... 3,974 159 599 (13,195) (2,887) 261 1,221
-------- -------- -------- -------- -------- -------- --------
Income (loss) before
extraordinary items
and cumulative effect
of accounting change.. 5,347 (2,333) 1,477 (17,045) (16,481) 444 1,991
Extraordinary items:
Loss from early
extinguishment of
debt, net of income
tax benefit........... (366) (1,580) (155) (257) -- -- --
Income tax benefit from
net operating loss
carryovers............ 953 -- -- -- -- -- --
Cumulative effect of
change in accounting
for income taxes...... -- 2,353 -- -- -- -- --
-------- -------- -------- -------- -------- -------- --------
Net income (loss)...... $ 5,934 $ (1,560) $ 1,322 $(17,302) $(16,481) $ 444 $ 1,991
======== ======== ======== ======== ======== ======== ========
Primary earnings per
share:
Income (loss) per
common and dilutive
common equivalent
share before
extraordinary items
and cumulative effect
of accounting change.. $ 0.68 $ (0.29) $ 0.15 $ (2.25) $ (2.12) $ 0.05 $ 0.21
Net income (loss)...... $ 0.75 $ (0.20) $ 0.14 $ (2.28) $ (2.12) $ 0.05 $ 0.21
Weighted average shares
outstanding(2)........ 7,886 7,932 9,641 7,743 7,929 9,262 9,706
</TABLE>
- --------
(1) Includes results of operations of RMCI, from July 21, 1993 (date of
inception) until April 24, 1995 (date of the Distribution), when RMCI was
a consolidated subsidiary of RHCI.
(2) Includes common and dilutive common equivalent shares outstanding.
<TABLE>
<CAPTION>
JUNE 30,
-------------------------------------------- DECEMBER 31,
1992 1993 1994 1995 1996 1996
-------- -------- -------- -------- -------- ------------
<S> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash and cash
equivalents........... $ 8,628 $ 10,682 $ 6,207 $ 9,044 $ 7,605 $ 9,060
Working capital........ $ 26,718 $ 23,811 $ 21,148 $ 24,098 $ 11,715 $ 9,233
Total assets........... 194,357 190,370 183,168 139,236 132,758 131,862
Long-term debt, less
current portion....... 84,879 77,429 67,707 55,568 44,664 39,531
Class B preferred
stock, Series 1987.... 2,500 -- -- -- -- --
Stockholders' equity... 76,068 79,997 80,468 61,779 46,053 48,876
</TABLE>
97
<PAGE>
RHCI
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
Patient revenues of RHCI's inpatient facilities are affected by changes in
the rates RHCI charges, changes in reimbursement rates by third-party payors,
the volume of patients treated and changes in the mix of payors and patient
types. RHCI's facilities provide services to patients requiring intensive
inpatient care, less intensive residential treatment care and outpatient
treatment. Also, at four of RHCI's facilities, medical subacute services are
provided. The reimbursement rates for intensive inpatient care are generally
greater than the rates paid for residential treatment care. However, the
average length of stay for patients in residential treatment programs is
significantly greater than that for patients in intensive inpatient programs.
Generally, charges for each facility's services are reimbursed under third-
party reimbursement programs at the amount billed or at rates which are less
than the facility's charges. These lower rates can be based on a negotiated
per diem amount or based on the facility's costs as audited or projected by
the third-party payors. When operating revenues (charges) per patient day are
higher than the negotiated per diem rate or the facility's costs, the
difference is recorded as a reduction of gross revenues. Bad debts consist
primarily of commercial and self-pay accounts receivable deemed uncollectible.
RHCI records amounts due to or from third-party reimbursement sources based
on its best estimates of amounts to be ultimately received or paid under cost
reports filed with appropriate intermediaries. The final determination of
amounts earned under reimbursement programs is subject to review and audit by
these intermediaries. Differences between amounts recorded as estimated
settlements and the audited amounts are reflected as adjustments to RHCI's net
revenues in the period in which the final determination is made. During the
years ended June 30, 1995 and 1994, RHCI recorded contractual adjustment
benefits related to intermediary audits of prior year cost reports of
approximately $1,000,000 and $1,400,000, respectively. During the year ended
June 30, 1996, RHCI recorded contractual adjustment expenses related to
intermediary audits of prior year cost reports of approximately $1,900,000. As
a result of this negative experience, RHCI recorded reserves totalling
$3,500,000 in its June 30, 1996 financial statements related to possible
future adjustments of its cost report estimates by intermediaries. Management
of RHCI believes that adequate provision has been made for any adjustments
that may result from future intermediary reviews and audits.
Several years ago, the federal government established a funding mechanism,
known as disproportionate share, which was meant to adequately reimburse
facilities serving a disproportionately high volume of Medicaid patients,
relative to other providers. Disproportionate share funding was established
under Title XIX of the Social Security Act, administered at the state level
and approved/overseen by the Health Care Financing Administration, since
Medicaid services are jointly funded by each state as well as the federal
government. In fiscal years 1995 and 1994, RHCI received significant
disproportionate share payments from state Medicaid programs, particularly in
Louisiana. Statutory changes virtually eliminated the disproportionate share
funding mechanism in Louisiana and, for the year ended June 30, 1996,
disproportionate share payments received by RHCI's Louisiana facilities were
not material.
The impact of Louisiana disproportionate share payments on net revenues and
income from continuing operations in fiscal 1995 was approximately $5,600,000
and $3,700,000, respectively, and the impact of Louisiana disproportionate
share payments on net revenues and income from continuing operations in fiscal
1994 was approximately $14,300,000 and $9,300,000, respectively. The majority
of Louisiana disproportionate share payments was received at RHCI's Three
Rivers Hospital facility, which treated primarily Medicaid-eligible
adolescents diagnosed with various behavioral disorders. This facility was
further adversely impacted by the State of Louisiana's application of
significantly more restrictive admission criteria beginning in December 1994
for adolescents seeking inpatient psychiatric treatment in the State. Due to a
negative operating margin in the fourth quarter of fiscal 1995 and a
significant decrease in admissions since December 1994, on June 30, 1995,
98
<PAGE>
RHCI closed Three Rivers Hospital and consolidated the operations of this
facility with RHCI's Greenbrier Hospital facility located less than five miles
away.
During fiscal 1996, the State of Louisiana requested repayment of
disproportionate share payments received by two of RHCI's Louisiana facilities
in fiscal years 1995 and 1994 totalling approximately $5,000,000. The
repayment requests related to (i) alleged overpayments made to Three Rivers
Hospital because the State believed Three Rivers' actual annual inpatient
volume was less than its projection of annual inpatient volume made at the
beginning of its 1994 cost reporting year and (ii) alleged improper teaching
hospital payments made to Three Rivers Hospital and Bayou Oaks Hospital
because the State believed these facilities were not qualifying teaching
hospitals at the time these payments were made. RHCI believes that certain of
the calculations which support the State's calculation of annual inpatient
volume in 1994 are in error and that other relevant factors affecting the
State's calculation have not been considered. Further, RHCI believes that,
based on its understanding of the rules and regulations in place at the time
the teaching hospital payments were made, payments received as a result of the
teaching classification were appropriate.
On the basis of discussions to date between RHCI and the State, RHCI
believes that this matter may be settled for an amount significantly less than
the State's initial requests. Any settlement of this matter will be contingent
upon the execution of settlement documentation, the terms of which have not
been agreed upon. Further, there can be no assurance that RHCI and the State
will agree on a settlement amount or the terms and conditions of settlement
documentation. RHCI intends to contest, vigorously, any position by the State
of Louisiana which RHCI considers adverse and believes that adequate provision
has been made at June 30, 1996 for the estimated amount which might be
recovered from RHCI as a result of this matter.
The following table sets forth, for the periods indicated, certain items of
RHCI's consolidated statements of operations as a percentage of RHCI's net
revenues. For comparison purposes, the prior year percentages exclude the
operations of RMCI, which, as discussed elsewhere, through the Distribution,
became a separate publicly traded company in April 1995, and the amount of
Louisiana disproportionate share payments recorded as net revenues in 1995 and
1994. The discussion following this table quantifies the significant
fluctuations in amounts reported in RHCI's consolidated statements of
operations between periods.
<TABLE>
<CAPTION>
AS A PERCENTAGE OF
NET REVENUES FOR
AS A PERCENTAGE OF NET REVENUES THE SIX MONTHS ENDED
FOR THE YEAR ENDED JUNE 30, DECEMBER 31,
------------------------------------ ----------------------
1994 1995 1996 1995 1996
---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Net revenues............ 100.0% 100.0% 100.0% 100.0% 100.0%
Salaries, wages and
benefits............... 54.1 56.4 56.4 53.2 49.9
Other operating
expenses............... 33.8 32.6 36.1 32.4 33.6
Provision for doubtful
accounts............... 5.0 4.3 4.9 3.3 3.2
Depreciation and
amortization........... 5.5 5.4 4.7 4.3 3.9
Interest and other
financing charges...... 7.5 6.9 5.9 5.8 4.6
Losses related to asset
sales and closed
businesses............. 0.7 5.5 3.8 -- --
Asset impairment
charges................ -- 18.5 4.7 -- --
---------- ---------- ---------- ---------- ----------
Income (loss) before
minority interests,
income taxes and
extraordinary item..... (6.6)% (29.6)% (16.5)% 1.0% 4.8%
========== ========== ========== ========== ==========
</TABLE>
SIX MONTHS ENDED DECEMBER 31, 1996 COMPARED TO SIX MONTHS ENDED DECEMBER 31,
1995
Net revenues in the six months ended December 31, 1996 were $66.6 million,
compared to $60.9 million in the comparable period of the prior fiscal year.
The material changes in net revenues between these periods consisted of (a) a
$1.0 million decrease in same facility net inpatient revenues between periods,
(b) a $3.6 million increase in net patient revenues related to RHCI's subacute
operations, (c) a $0.7 million increase in net revenues related to RHCI's
contract services division, (d) a $0.4 million decrease in net revenues due to
amounts recorded
99
<PAGE>
in the prior year period related to a facility previously closed and (e) the
impact of a favorable cash judgment awarded RHCI by the courts of the State of
Missouri. In this matter, the courts ruled that RHCI's facility in Nevada,
Missouri had received insufficient reimbursement from the Missouri Department
of Social Services for the provision of behavioral healthcare to Medicaid
patients from 1990 to 1996. This judgment, net of costs, increased net
revenues in the six months ended December 31, 1996 by $2.9 million.
Same facility net inpatient revenues decreased 2.2% between periods (from
$45.1 million in the prior year comparable period to $44.1 million in the
current year period due to continued pressure from managed care organizations
and other payors to reduce the reimbursement rates for acute psychiatric
services, as well as the continued shift of RHCI's inpatient business from
acute psychiatric patients to less intensive (and consequently lower paying)
residential treatment patients. For the six months ended December 31, 1996,
approximately 42% of RHCI's behavioral health patient days related to
residential treatment patients, compared to 40% in the prior year comparable
period. In addition, net revenue related to subacute operations increased by
$3.6 million between periods (from $5.3 million in the prior year period, or
9% of total net revenues of RHCI, to $8.9 million in the current year period,
or 13% of total net revenues of RHCI), as subacute patient days increased from
6,040 in the prior year comparable period to 10,151 in the current year
period.
Salaries, wages and benefits in the six months ended December 31, 1996 were
$33.3 million, compared to $32.4 million in the comparable period of the prior
year. Same facility salaries, wages and benefits decreased $0.8 million (from
$28.4 million to $27.6 million) between periods, or 3%, due to the continued
increase in residential treatment services, which are less labor intensive
than acute psychiatric services. The decrease in same facility salaries, wages
and benefits was offset by a $1.2 million increase in subacute salaries, wages
and benefits, due to the increase in subacute patient volume between periods,
and a $0.4 million increase in salaries, wages and benefits related to RHCI's
contract services division.
Other operating expenses in the six months ended December 31, 1996 were
$22.4 million, compared to $19.7 million in the comparable period of the prior
fiscal year. Same facility other operating expenses remained stable between
periods at $15.8 million, whereas other operating expenses of the subacute
units increased by $2.1 million between periods, due to the previously
discussed increase in subacute patient volume between periods, and corporate
other operating expenses of RHCI increased $0.5 million between periods.
The provision for doubtful accounts in the six months ended December 31,
1996 totalled $2.1 million, which compares to the $2.0 million provision for
doubtful accounts in the prior year comparable period. Also, depreciation and
amortization expense in the six months ended December 31, 1996 and 1995
totalled $2.6 million.
Interest expense decreased from $3.5 million in the six months ended
December 31, 1995 to $3.0 million in the current year comparable period. Debt
levels were reduced between periods through regularly scheduled principal
payments on RHCI's subordinated secured notes and variable rate demand revenue
bonds and a $3.1 million principal payment made on RHCI's senior secured notes
on September 30, 1996. Also, in the prior year comparable period, RHCI
recorded interest expense in respect of borrowings under a working capital
facility which was paid off and cancelled in December 1995.
1996 COMPARED TO 1995
The following are the significant changes in RHCI's operations between
fiscal 1996 and 1995. These changes affect the comparison of revenues and
expenses of RHCI between years as discussed below.
. The Distribution on April 24, 1995.
. Virtual elimination of Louisiana disproportionate share payments to
RHCI, as discussed above.
. The closure of Three Rivers Hospital on June 30, 1995.
. Commencement of operations in April 1995 at an 80-bed leased facility
near Salt Lake City, Utah (Benchmark South).
100
<PAGE>
. The closure of several day treatment centers and outpatient clinics
throughout fiscal 1996 and 1995 due to negative operating margins.
. Significant increase in occupancy at RHCI's subacute units, as well as
an expansion of RHCI's contract services division.
. Significant asset impairment charges and losses related to asset sales
and closed businesses in fiscal 1996 and 1995.
Net revenues decreased from $136.4 million in 1995 to $117.4 million in 1996
primarily because $12.9 million of revenues related to RMCI were included in
the prior year total and because same facility net inpatient revenues
decreased $7.3 million between years. During fiscal 1996, RHCI replaced
approximately $6.4 million in patient revenues related to Three Rivers
Hospital and $5.5 million in Louisiana disproportionate share revenues
recorded in fiscal 1995 with a $4.7 million increase in revenues from
Benchmark South, a $6.6 million increase in subacute revenues and a $1.6
million increase in contract services revenues. Net outpatient revenues
remained stable between 1996 and 1995, increasing $0.3 million, or 2%.
Same facility net inpatient revenues decreased $7.3 million between periods
primarily due to the impact of intermediary audits of prior year cost reports,
which reduced same facility net inpatient revenues by $5.4 million in 1996
(including the establishment of a $3.5 million reserve for possible future
adjustments) and increased same facility net inpatient revenues in 1995 by $1
million. During the year ended June 30, 1996, RHCI recorded contractual
adjustment expenses of approximately $1.9 million related to intermediary
audits during fiscal 1996 of RHCI's prior year cost reports. The overall
negative adjustment to RHCI's estimated cost report settlements was
principally due to an audit of RHCI's Havenwyck facility's Blue Cross cost
reports for years 1992, 1993, 1994 and 1995. As a result of RHCI's negative
experience in the fourth quarter of fiscal 1996 with respect to estimated cost
report settlements, RHCI recorded reserves at fiscal 1996 year end totalling
$3,500,000 related to possible future adjustments of its cost report
settlements by intermediaries. Management of RHCI believes that this reserve
is adequate and that its net revenues in future periods will not be negatively
impacted by future intermediary audits of cost report settlements recorded at
June 30, 1996.
In addition to the impact of prior year cost report settlements on RHCI's
net revenues between 1996 and 1995, RHCI's same facility net inpatient revenue
per patient day decreased 8% between years due to the growth in residential
treatment services, which are less intensive and generally reimbursed at rates
which are less than the rates received for acute psychiatric inpatient
services. During fiscal 1996, same facility residential treatment patient days
comprised 40% of same facility patient days, compared to 31% in fiscal 1995.
Further, in 1996 and 1995 RHCI's residential treatment net revenue per patient
day was approximately $200 less than its acute psychiatric net revenue per
patient day (excluding Louisiana disproportionate share revenues).
Total salaries, wages and benefits in fiscal 1996 were $66.3 million,
compared to $72.1 million in fiscal 1995. The material changes in salaries,
wages and benefits included (a) a $1.1 million increase in same facility
salaries, wages and benefits, (b) a $4.8 million decrease related to the
closure of the Three Rivers facility, (c) a $2.6 million increase related to
the opening of Benchmark South, (d) an increase of $1.4 million related to
increased volume in RHCI's subacute units and (e) salaries, wages and benefits
of $5.5 million in fiscal 1995 related to RMCI.
Other operating expenses in fiscal 1996 were $42.4 million, compared to
$44.7 million in fiscal 1995. The material changes in other operating expenses
between periods included (a) a $3.0 million decrease related to the closure of
the Three Rivers facility, (b) a $2.5 million increase related to the opening
of Benchmark South, (c) an increase of $2.4 million related to increased
volume in RHCI's subacute units, and (d) other operating expenses in fiscal
1995 related to RMCI of $6.2 million. RHCI's same facility other operating
expenses remained stable between periods, increasing $0.3 million, or 1%.
Also, during the latter half of 1996, RHCI recorded expenses totalling
approximately $800,000 related to two individually significant professional
liability cases. Based on the facts and circumstances of each case, RHCI
increased its reserves related to these cases up to its self-insured limit. As
a result of this negative experience, RHCI reevaluated its reserve for known
and unknown
101
<PAGE>
professional and general liability claims and increased this reserve by an
additional $750,000 during the fourth quarter of fiscal 1996. In addition,
based on an increase in claims under RHCI's self-insured health plan during
the latter half of 1996, RHCI increased its reserve for incurred but not
reported health insurance claims by $200,000 in the fourth quarter of fiscal
1996.
The provision for doubtful accounts increased from $5.1 million in fiscal
1995 to $5.8 million in fiscal 1996. This increase primarily related to the
same facilities, which recorded additional provisions on per-diem based
residential treatment business in 1996. These provisions were necessary as
doubt arose with respect to the ability of certain payors to repay RHCI for
services rendered in fiscal 1996. The majority of these payors are state
agencies which receive funds from various federal and state sources to pay
RHCI for its services. Management has initiated steps to limit its exposure on
uncollectible per-diem based residential treatment business in the future,
including by (a) establishing a clear understanding prior to admitting
patients as to the funding sources through which RHCI will be paid for its
services, (b) immediate follow-up with these funding sources to ensure initial
claims are billed in accordance with the agency's guidelines and (c) on-going
monitoring of residential treatment claims, by agency or program, to ensure
that claims will be paid.
Depreciation and amortization in fiscal 1996 totalled $5.5 million, compared
to $7.3 million in fiscal 1995. Depreciation expense decreased by $0.4 million
on two facilities which were sold and leased back in April 1995. Also, in June
1995, the book values of four facilities were considered impaired pursuant to
the provisions of Statement Number 121 "Accounting for the Impairment of Long-
Lived Assets and for Long-Lived Assets to be Disposed of" ("Statement 121"),
issued by the Financial Accounting Standards Board ("FASB"), which reduced
depreciation expense in fiscal 1996 by an additional $0.6 million. Finally,
depreciation and amortization expense in fiscal 1995 related to RMCI totalled
$0.9 million.
Interest expense decreased from $8.3 million in 1995 to $6.9 million in
1996. This decrease related to debt reductions made in fiscal 1995 on RHCI's
senior and subordinated secured notes (including a $7.5 million prepayment in
April 1995), which reduced interest expense in 1996 by $1.2 million. Also,
interest expense in fiscal 1995 related to RMCI totalled $0.2 million.
Primarily in the fourth quarter of fiscal 1996, RHCI recorded losses
totalling approximately $4.5 million related to additional asset write-downs,
cost report settlements and other adjustments related to businesses which
closed at various times prior to fiscal 1996, a reserve for disproportionate
share payments which the State of Louisiana has contended were improperly paid
to two of RHCI's Louisiana facilities in fiscal 1995 and 1994 and lease
commitments and other costs incurred in connection with RHCI's decision to
relocate its corporate headquarters. The amounts related to businesses which
closed at various times prior to fiscal 1996, totalling approximately
$800,000, primarily reduced RHCI's net accounts receivable and property and
equipment balances and are not expected to have an impact on RHCI's liquidity.
The amounts related to the disproportionate share matter and the relocation of
RHCI's corporate headquarters were primarily recorded as a current liability,
based on the possibility that these matters may be settled or paid prior to
June 30, 1997. However, RHCI believes that the resolution of the
disproportionate share matter and future amounts to be paid in connection with
the relocation of its headquarters will not have a material adverse effect on
its liquidity.
In fiscal 1995, RHCI recorded losses totalling approximately $6.4 million
related to a sale/leaseback transaction, the sale of real estate, the closure
of Three Rivers Hospital, the closure of other outpatient operations and the
abandonment of certain development projects. The sale/leaseback transaction
and the sale of real estate reduced RHCI's net property and equipment and real
estate held for development accounts, respectively, and the losses due to
closures and abandonments were not material to RHCI's working capital, equity
or liquidity. See "1995 Compared to 1994" below.
In March 1995, the FASB issued Statement 121. Statement 121 requires
companies to compare the recorded values of long-lived assets (defined as
land, buildings, fixed equipment and related cost in excess of net asset value
of purchased businesses) against the expected future cash flows to be
generated by these assets. Pursuant to the principles of measurement contained
in Statement 121 and RHCI's expectations, RHCI recorded an asset
102
<PAGE>
impairment charge in its 1996 and 1995 statement of operations totalling
approximately $4 million and $20 million, respectively.
In June 1996 and 1995, RHCI recorded additional asset impairment charges
related to its investment in other healthcare enterprises of approximately
$1.5 million, based on an assessment of the future cash flows expected to be
realized by RHCI from these businesses.
Minority interests in 1995 primarily reflects the limited partners' share of
net income of Three Rivers Hospital prior to its closure on June 30, 1995.
RHCI recorded a $2.9 million benefit for income taxes in fiscal year 1996
compared to a $13.2 million benefit for income taxes in fiscal year 1995. The
income tax benefit recorded in fiscal year 1996 was recorded at an effective
tax rate significantly less than the statutory tax rate due to a deferred tax
valuation allowance of $4.4 million at June 30, 1996.
1995 COMPARED TO 1994
The following are the significant changes in RHCI's operations between 1995
and 1994. These changes affect the comparison of revenues and operating
expenses of RHCI between years as discussed below.
. In October 1993, RHCI, through its subsidiary RMCI, entered the managed
mental health business through its acquisition of FPM. This business was
expanded in June 1994 with the acquisition of an Arizona-based managed
mental health business and, in succeeding months, with the execution of
additional contracts for the provision of managed mental healthcare. The
revenues and expenses of RMCI and its subsidiaries were included in
RHCI's revenues and expenses from October 1993 to April 24, 1995, when
the Distribution was effected.
. Louisiana disproportionate share payments received by RHCI during fiscal
1995 were approximately $8.7 less than the amount received in fiscal
1994.
. In February 1994, RHCI sold its Atlantic Shores facility in Daytona
Beach, Florida. In addition, RHCI closed several day treatment centers
and outpatient clinics during 1995 and 1994 due to negative operating
margins. The sale and these closures are referred to in this section as
the "sold/closed facilities".
. RHCI opened four subacute units in late fiscal 1994/early fiscal 1995.
. RHCI expanded its contract services division during fiscal 1995.
. Significant asset impairment charges and losses related to asset sales
and closed businesses in fiscal 1995.
Net revenues for fiscal 1995 were $136.4 million, compared to $137.0 million
in fiscal 1994. The material changes in net revenues consisted of (a) a $12.6
million decrease (11%) in same facility net inpatient revenues, (b) a $2.9
million increase (21%) in same facility net outpatient revenues, (c) a $4.5
million increase in net revenues attributable to RHCI's subacute operations,
(d) a $7.1 million increase (from $5.8 million to $12.9 million) in net
revenues related to RMCI, (e) a $0.6 million increase (from $0.5 million to
$1.1 million) in revenues associated with contract services and (f) a $3.1
million decrease in net patient revenues related to the sold/closed facilities
(excluding the Three Rivers facility, which, for purposes of comparing 1995 to
1994, is included in the same facility totals).
Same facility net inpatient revenues decreased $12.6 million between years.
Of this amount, $8.7 million was related to a reduction in disproportionate
share payments to Three Rivers Hospital and Bayou Oaks Hospital. Excluding the
change in disproportionate share payments between periods, same facility net
inpatient revenues decreased approximately $3.9 million. Of this amount, $3.6
million is attributable to the decline in admissions at the Three Rivers
facility, which decline resulted from the State of Louisiana's application of
significantly more restrictive admission criteria to facilities in the State
treating the behavioral disorders of adolescents. The
103
<PAGE>
inpatient census at this facility decreased from an average of 65 patients in
fiscal 1994 to 36 patients in fiscal 1995, with an average of 20 patients
subsequent to December 1, 1994 when the new admission rules became effective.
As stated earlier, on June 30, 1995, RHCI closed Three Rivers Hospital and
consolidated the operations of this facility with its Greenbrier facility
located less than five miles away.
Excluding the above factors, net inpatient revenues related to all other
inpatient facilities were stable and patient days and admissions related to
these facilities increased 4.5% and 10%, respectively, between periods. The
growth rate in admissions exceeded that in patient days due to an overall
decline in the inpatient average length of stay from 17.6 days in 1994 to 15.7
days in 1995. In addition, these facilities experienced a decrease in net
inpatient revenue per patient day due to a continued shift in patient mix from
charge-based payors to cost-based and negotiated per-diem rate payors, as well
as an increase in same facility residential treatment days as a percentage of
total same facility patient days. Net revenue per patient day on cost-based
and negotiated per-diem rate payors is generally less than that for charge-
based payors.
Same facility net outpatient revenues totalled $17.0 million in 1995
compared to $14.1 million in 1994. This increase is primarily due to an
expansion of partial hospitalization day services because of an increased
market focus by facility administrators.
Total salaries, wages and benefits in fiscal 1995 were $72.1 million,
compared to $64.8 million in fiscal 1994. The material changes in this expense
item consisted of (a) a $1.7 million (or 3.0%) increase in same facility
salaries, wages and benefits, (b) an increase in salaries, wages and benefits
of $2.1 million attributable to RHCI's subacute operations, (c) a $3.9 million
increase (from $1.6 million to $5.5 million) in salaries, wages and benefits
related to RMCI, (d) a $0.7 million increase in salaries, wages and benefits
associated with contract services and (e) a $1.2 million decrease in salaries,
wages and benefits attributable to the sold/closed facilities.
Other operating expenses in fiscal 1995 were $44.7 million, compared to
$42.9 million in fiscal 1994. The material changes in other operating expenses
consisted of (a) a $2.3 million decrease (6%) in same facility other operating
expenses, (b) an increase in other operating expenses of $3.4 million
attributable to the subacute operations, (c) a $2.8 million increase (from
$3.4 million to $6.2 million) in other operating expenses related to RMCI, (d)
a $0.2 million increase in other operating expenses associated with contract
services and (e) a decrease of $2.2 million in other operating expenses
attributable to the sold/closed facilities. The decrease in same facility
other operating expenses was due to focused cost-cutting initiatives within
these facilities during the year.
The provision for doubtful accounts in fiscal 1995 was $5.1 million,
compared to $5.8 million in fiscal 1994. A $1.2 million decrease in same
facility provision for doubtful accounts (from $5.7 million in fiscal 1994 to
$4.5 million in fiscal 1995) was offset by increases in the provision for
doubtful accounts associated with subacute and contract services of $0.1
million and $0.3 million, respectively. The decrease in same facility
provision for doubtful accounts was primarily the result of a continued shift
in patient mix and the corresponding shift from charge-based payors (which
requires a larger amount to be paid by the patient) to cost-based and
negotiated commercial insurance per-diem rate payors.
Depreciation and amortization in fiscal 1995 totalled $7.3 million, compared
to $6.8 million in fiscal 1994. The overall change in this expense item was
primarily due to (a) a $0.5 million increase in depreciation and amortization
related to subacute operations, (b) a $0.5 million increase in depreciation
and amortization related to RMCI and (c) $0.5 million decrease in depreciation
and amortization attributable to the sold/closed facilities.
Interest expense decreased from $8.9 million in 1994 to $8.3 million in
1995. Debt levels were reduced between periods through scheduled principal
payments of (a) $5.65 million on RHCI's senior secured notes, (b) $0.5 million
on RHCI's subordinated secured notes and (c) $0.8 million on RHCI's variable
rate demand revenue bonds. In addition, on May 1, 1995, RHCI prepaid $7.5
million of principal on the senior secured notes and, in connection with the
sale of Atlantic Shores Hospital in February 1994, the variable rate demand
revenue bonds associated with that facility, totalling $4.3 million, were
redeemed. The reduction in interest as a result of these principal payments
was offset by an increase in interest rates on the variable rate demand
revenue bonds, interest
104
<PAGE>
on the working capital facility drawing and interest incurred in fiscal 1995
prior to the Distribution on debt incurred in connection with RMCI
acquisitions made during the second half of fiscal 1994.
In fiscal 1995, RHCI reported losses associated with assets sales and closed
businesses of approximately $6.4 million. This amount is comprised of the
following significant items:
1. Sale/Leaseback Transaction: On April 12, 1995, RHCI consummated a
sale/leaseback transaction whereby RHCI sold the land, buildings and fixed
equipment of two of its inpatient facilities for $12.5 million and agreed
to lease these properties back over a term of 15 years (with three
successive renewal options of five years each). The leases, which are
treated as operating leases under generally accepted accounting principles,
require aggregate annual minimum rental payments of $1.5 million, payable
monthly. Each April 1, the lease payments are subject to any upward
adjustment (not to exceed 3% annually) to the Consumer Price Index over the
preceding 12 months.
Net sale proceeds associated with this transaction totalled $12.1 million
which, when compared to the net book value of assets sold of $15.7 million,
resulted in a loss of $3.6 million. On May 1, 1995, RHCI utilized a portion
of the proceeds from the above transaction and prepaid $7.5 million of
principal due on the senior secured notes as follows: $3.5 million due on
September 30, 1995, $3.5 million due on March 31, 1996 and $0.5 million due
on September 30, 1996. In connection with this prepayment, RHCI wrote down
a proportionate amount of unamortized loan costs related to the senior
secured notes, totalling $229,000, and incurred a yield maintenance charge
from the holders of the senior secured notes, totalling $234,000. These
amounts are reported as a loss from early extinguishment of debt, net of
applicable income taxes, in the 1995 statement of operations.
2. Real Estate Sales: In March and April 1995, RHCI sold certain real
estate located in Flagstaff, Arizona and Houston, Texas, respectively.
These properties were acquired for development approximately 10 years ago
and had an aggregate book value of $1.15 million. Net proceeds from the
sale of this real estate totalled approximately $0.75 million, resulting in
a loss of $0.4 million.
3. Closure of Day Treatment and Other Outpatient Operations: During 1995,
RHCI closed its remaining day treatment centers as well as certain
outpatient clinics which were producing negative operating margins. In
addition, RHCI recorded cost report settlements and asset write-downs
totalling $380,000 and $190,000, respectively, which became evident in 1995
subsequent to these closures and subsequent to the closure of day treatment
centers in late fiscal 1994. Finally, RHCI sold an outpatient
rehabilitation clinic in San Antonio, Texas in June 1995. The total losses
incurred related to these events was approximately $1,300,000.
4. Closure of Three Rivers Hospital: RHCI recorded certain losses,
totalling approximately $0.2 million, resulting from its decision to close
Three Rivers Hospital on June 30, 1995 and consolidate the operations of
this facility with its Greenbrier facility.
5. Development Projects: RHCI pursued several development opportunities
during the year including the potential acquisition of a competitor, the
development of rural health clinics and the potential acquisition of a
contract management company. These efforts were abandoned or otherwise
terminated during the year resulting in a charge against earnings of
approximately $0.8 million.
In the fourth quarter of fiscal 1994, RHCI decided to terminate its
development activities related to its day treatment division and to close
certain of these centers due to the poor operating performance of this
division. In addition, RHCI also decided to close four outpatient clinics
related to its Heartland Hospital facility during this quarter. Finally,
certain adjustments were made which resulted in gain recognition on the sale
of Atlantic Shores Hospital facility, which was sold in February 1994. The
total net losses related to these closures and sale in fiscal 1994 was $0.8
million.
In the fourth quarter of fiscal 1995, RHCI elected to adopt Statement 121
and, after applying the principles of measurement contained in Statement 121
and RHCI's expectations, recorded a charge against earnings, before
105
<PAGE>
taxes, of $20.3 million. This amount is reflected as an asset impairment
charge in the 1995 consolidated statement of operations.
In June 1995, RHCI recorded an additional asset impairment charge related to
its investment in a healthcare enterprise in Germany of approximately $1.5
million, based on a reassessment of the future expected cash flows to be
realized by RHCI from this business.
Minority interests primarily reflects the limited partner's share of net
income of Three Rivers Hospital prior to its closure on June 30, 1995.
IMPACT OF INFLATION
The psychiatric hospital industry is labor intensive, and wages and related
expenses increase in inflationary periods. Additionally, suppliers generally
seek to pass along rising costs to RHCI in the form of higher prices. RHCI
monitors the operations of its facilities to mitigate the effect of inflation
and increases in the costs of healthcare. To the extent possible, RHCI seeks
to offset increased costs through increased rates, new programs and operating
efficiencies. However, reimbursement arrangements may hinder RHCI's ability to
realize the full effect of rate increases. To date, inflation has not had a
significant impact on operations.
FINANCIAL CONDITION
RHCI records amounts due to or from third-party contractual agencies
(Medicare, Medicaid and Blue Cross) based on its best estimate, using the
principles of cost reimbursement, of amounts to be ultimately received or paid
under current and prior years' cost reports filed (or to be filed) with the
appropriate intermediaries. Ultimate settlements and other lump-sum
adjustments due from and paid to these intermediaries occur at various times
during the fiscal year. At June 30, 1996, amounts due from Medicare, Medicaid
and Blue Cross totalled $3.6 million, $2.4 million and $0.5 million,
respectively. Also, at June 30, 1996, amounts due to Medicare, Medicaid and
Blue Cross totalled $6.3 million, $1.0 million and $1.1 million, respectively.
At December 31, 1996, amounts due from Medicare, Medicaid and Blue Cross
totalled $2.2 million, $0.5 million and $0.2 million, respectively. Also at
December 31, 1996, amounts due to Medicare, Medicaid and Blue Cross totalled
$7.9 million, $0.9 million and $0.8 million, respectively. Changes in these
amounts since June 30, 1996 are the result of fiscal intermediary lump sum
adjustments, prior year cost report settlements and current year estimated
settlements recorded during the six months ended December 31, 1996. See
"Results of Operations" above.
At December 31, 1996, net cash advances made by RHCI to or on behalf of RMCI
totalled approximately $8.8 million. Of this amount, $6 million primarily
related to the funding of certain RMCI acquisitions and is represented by the
RMCI Subordinated Promissory Note due from RMCI. The remaining amount includes
$0.60 million of accrued interest on the RMCI Subordinated Promissory Note
since October 1, 1995 and $2.215 million of additional amounts paid by RHCI on
behalf of RMCI and charges by RHCI to RMCI for certain administrative services
(the "Additional Amount"). Of the $6 million due on the RMCI Subordinated
Promissory Note, approximately $2.1 million is due on or before December 31,
1997 and the remainder is payable in 11 quarterly installments of
approximately $353,000, beginning March 31, 1998. RHCI has agreed that the
payment of interest on the RMCI Subordinated Promissory Note for the period
October 1, 1995 through December 31, 1997, as well as the Additional Amount
will not be required until after January 1, 1998, all on terms and conditions
to be mutually agreed to by RHCI and RMCI. Following the Merger, amounts owing
by RMCI to RHCI will remain outstanding as intercompany indebtedness.
RHCI has net deferred tax assets totalling approximately $10.6 million and
$11.5 million, which includes a valuation allowance of $4.4 million, at
December 31, 1996 and June 30, 1996, respectively. Management has considered
the effects of implementing tax planning strategies, consisting of the sales
of certain appreciated property, as the primary basis for recognizing deferred
tax assets. The ultimate realization of deferred tax assets may be affected by
changes in the underlying values of the properties considered in RHCI's tax
planning
106
<PAGE>
strategies, which values are dependent upon the operating results and cash
flows of the individual properties. RHCI evaluates the realizability of its
deferred tax assets on a quarterly basis by reviewing its tax planning
strategies and the adequacy of its valuation allowance.
In December 1996, RHCI resumed operations at its facility in Fort Walton
Beach, Florida, which had been leased to another behavioral healthcare
provider for the previous four years. In connection with the resumption of
operations at this facility, RHCI incurred preopening costs of approximately
$330,000. These costs will be amortized over the twelve-month period ending
November 30, 1997.
At December 31, 1996, the current portion of long-term debt was $12.0
million, compared to $10.9 million at June 30, 1996. This increase was due to
RHCI's commitment during 1996 to reduce the credit exposure of its bank group
by an additional $2.0 million on or before July 1, 1997.
Noncurrent other accrued liabilities increased from $1.3 million at June 30,
1995 to $7.2 million at June 30, 1996 due to the establishment of reserves as
discussed in "Results of Operations" above.
During 1996, amounts owed to minority interests decreased by $0.7 million
based on distributions to the minority partners in the Three Rivers Hospital
Limited Partnership. In July 1996, a final distribution of $0.9 million was
made to the limited partners in connection with the dissolution of the Three
Rivers Limited Partnership, resulting in no gain or loss to RHCI. Subsequent
to this distribution, the Three Rivers Hospital Limited Partnership was
dissolved.
In October 1995 and August 1996, Ramsay Holdings acquired through private
placements, 275,863 shares and 275,546 shares, respectively, of RHCI Common
Stock at a price of $3.625 and $2.75 per share, respectively. Of the total
shares acquired in October 1995, 121,363 were issued for cash and 154,500 were
issued for management fees due during the remainder of fiscal 1996 under
RHCI's management agreement with Ramsay Health Care Pty. Limited ("Ramsay Pty.
Limited"). The shares acquired in August 1996 were issued for management fees
due under the management agreement during fiscal 1997. This management
agreement was terminated in September 1996. See "Information Concerning RHCI--
Management--Certain Relationships and Related Transactions Involving RHCI,
RMCI and Affiliates Thereof."
LIQUIDITY AND CAPITAL RESOURCES
As of December 31, 1996, the 1990 RHCI Credit Facility includes $31.1
million in senior secured notes and $1.6 million in subordinated secured
notes, and the 1993 RHCI Credit Facility consists of approximately $19 million
in letters of credit. The senior secured notes bear interest at 11.6% and
require semi-annual principal payments of approximately $3.5 million from
March 31, 1997 through September 30, 1998 and semi-annual principal payments
of $5.65 million from March 31, 1999 through March 31, 2000. The subordinated
secured notes bear interest at 15.6% and require semi-annual principal
payments of $0.2 million through March 31, 2000. Required annual principal
payments on the variable rate demand revenue bonds total $0.8 million through
year 2000 and $0.9 million to $1.2 million in years 2001 through 2015. In
December 1995, RHCI fully paid down and terminated its working capital
facility with its bank group originally available under the 1993 RHCI Credit
Facility.
In September 1995, and again in August 1996, RHCI and banks supporting the
1993 RHCI Credit Facility agreed to terms which extended the expiration date
of the letters of credit under the 1993 RHCI Credit Facility from May 15, 1996
to February 15, 1997 and from February 15, 1997 to August 15, 1997,
respectively. In connection with the initial extension, RHCI agreed to reduce
the banks' credit exposure (through regular principal payments on the variable
rate demand revenue bonds or early redemption of certain of these bonds) by
$3,162,531 on or before July 1, 1996. This requirement was extended by the
bank group to December 31, 1996 as part of the August 1996 extension (which
reduction was made) and RHCI also agreed to reduce the banks' credit exposure
by an additional $2,145,835 on or before July 1, 1997. In February 1997, RHCI
and the banks
107
<PAGE>
which are parties to the 1993 RHCI Credit Facility entered into negotiations
with a view to extending the expiration date of the letters of credit under
the 1993 RHCI Credit Facility from August 15, 1997 to November 15, 1997,
including on terms which would require RHCI to provide additional collateral
to its lenders. There can be no assurance that the extension will be effected
or as to the terms and conditions of such extension.
In February 1997, RHCI announced an intention to effect a private placement
of $75 million of senior debt securities (the "Proposed Offering"). The debt
securities have not been and will not be registered under the Securities Act
and may not be offered or sold in the United States absent registration or an
applicable exemption from registration requirements. The proceeds from the
Proposed Offering will be used to refinance the 1990 RHCI Credit Facility and
the 1993 RHCI Credit Facility and for working capital and other general
corporate purposes. There can be no assurance that RHCI will be successful in
completing the Proposed Offering, or as to the timing thereof, or that the
terms of the Proposed Offering will not change from that set forth above. In
the event the Proposed Offering is not completed or is delayed for an extended
period of time, RHCI may be required to seek waivers from its existing
lenders, including with respect to the timing of scheduled principal payments
during 1997. There can be no assurance that any such waivers will be granted
or as to the terms and conditions of such waivers, if granted.
RHCI's current credit facilities require that RHCI meet certain covenants,
including (i) the maintenance of a minimum level of consolidated tangible net
worth, (ii) the maintenance of a working capital ratio and (iii) the
maintenance of certain fixed charge coverage and debt service ratios. From
time to time, the lenders have agreed to waive or otherwise adjust certain of
these ratios and levels. In connection with these waivers and adjustments,
RHCI pays additional fees and expenses. Further, as part of the waivers and
adjustments obtained as of June 30, 1996, RHCI agreed to provide its Hillcrest
Hospital facility and related assets as additional collateral to the lenders
and agreed not to pay future cash dividends in respect of RHCI Preferred
Stock. RHCI anticipates that waivers of compliance with financial covenants
may be required in the future. There can be no assurance that these waivers
will be obtained or as to the terms and conditions of these waivers if
obtained.
During the fiscal year ended June 30, 1996, net cash provided by the
operating activities of RHCI decreased from approximately $8.9 million in 1995
to approximately $3.6 million. This $5.3 million decrease is the result of (a)
an approximate $5 million decrease in cash flows from the same facilities,
represented by a $2.8 million decline in operating income and a $2.2 million
increase in outstanding receivables of these facilities, (b) increases in cash
flows of RHCI's contract services and subacute divisions of approximately $0.9
million and $2.6 million, respectively, (c) RMCI cash flows of approximately
$1 million included in RHCI's 1995 cash flows prior to the Distribution, (d) a
net reduction in corporate overhead expenses between years of approximately $1
million and (e) a decrease in cash flows, primarily as a result of
disproportionate share payments received in fiscal 1995 of approximately $4
million. The operating income decline in the same facilities was primarily
related to two facilities which, due to inpatient census declines and payor
mix changes, reported an aggregate operating income decline of $2.7 million
between years. Also, receivables of the same facilities increased as the
collection period on RHCI's expanding residential treatment business is longer
than that of the acute inpatient psychiatric business. The improvement between
years in cash flows of the contract services and subacute divisions is due to
the start-up nature of these operations in fiscal 1995.
During the six months ended December 31, 1996, net cash provided by the
operating activities of RHCI increased from approximately $0.1 million in the
prior year comparable period to approximately $8.5 million. This increase was
primarily the result of (a) an improvement in net income between periods
(after giving effect to deferred tax expenses) of approximately $2.2 million,
(b) cost report settlements with third-party contractual agencies and changes
in estimated settlements, which increased by $4.6 million in the current year
period and (c) a $0.7 million reduction in the increase in patient accounts
receivable between periods.
During fiscal 1996, RHCI's investing activities were limited to expenditures
for property and equipment totalling $1.5 million and utilization of cash held
in trust to pay settlement and legal costs in connection with RHCI's self-
insurance program for professional and general liability claims. Expenditures
for property and
108
<PAGE>
equipment decreased from prior year levels due primarily to construction costs
incurred in 1994 and 1995 in connection with the development of RHCI's
subacute units.
During fiscal 1996, RHCI fully paid down and terminated its working capital
facility originally available under the 1993 RHCI Credit Facility, made
regularly scheduled payments on its subordinated secured notes under the 1990
RHCI Credit Facility and variable rate demand revenue bonds, and paid off a
capital lease obligation.
As of June 30, 1996, RHCI's principal liquidity requirements included (a)
principal payments due on its senior secured and subordinated secured notes in
September 1996 under the 1990 RHCI Credit Facility, (b) the agreed upon
reduction in the banks' credit exposure under the 1993 RHCI Credit Facility
through the redemption of one of the outstanding variable rate demand revenue
bonds and (c) construction costs of approximately $1.1 million related to the
conversion of 37 beds at its Texas facilities from psychiatric care to
subacute care. These requirements were satisfied, principally through
internally generated funds and funds received from the settlement of an action
previously brought by RHCI against the State of Missouri and involving claims
for reimbursement under Medicaid programs. No other commitments to make
material capital expenditures exist at this time.
RHCI expects to satisfy its remaining fiscal 1997 liquidity requirements,
including the debt payment due on March 31, 1997 under the 1990 RHCI Credit
Facility, from internally generated funds from operations, proceeds from the
sale of its Three Rivers Hospital facility and repayments of amounts owing by
RMCI to RHCI, including under the RMCI Subordinated Promissory Note. The Three
Rivers Hospital facility is expected to be sold to an independent party in
March 1997 for approximately $2.2 million, net of transaction costs. RHCI
expects to satisfy its remaining liquidity needs after fiscal 1997 through
internally generated funds and proceeds from the Proposed Offering.
At this time, RHCI has not entered into a definitive agreement to sell its
Three Rivers Hospital facility and, accordingly, there can be no assurance
that RHCI will consummate the sale of the facility. Although it intends to
effect the Proposed Offering, it does not have any commitment to refinance its
outstanding debt. Further, RHCI believes that the resolution of the
disproportionate share matter with the State of Louisiana (see "Results of
Operations" above) will not have a material adverse effect on its liquidity.
109
<PAGE>
SELECTED CONSOLIDATED FINANCIAL INFORMATION OF RMCI
The following selected consolidated financial information is derived from
the consolidated financial statements of RMCI. The following tables should be
read in conjunction with the consolidated financial statements and related
notes, and "RMCI--Management's Discussion and Analysis of Financial Condition
and Results of Operations," included elsewhere in this Joint Proxy
Statement/Prospectus.
RAMSAY MANAGED CARE, INC. AND SUBSIDIARIES
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
PERIOD JULY 21, YEAR ENDED JUNE 30, DECEMBER 31,
1993 (INCEPTION) --------------------- ------------------
TO JUNE 30, 1994 1995 1996 1995 1996
---------------- --------- ---------- -------- --------
<S> <C> <C> <C> <C> <C>
SUMMARY OF OPERATING
DATA:
Revenues:
Managed care revenue.. $5,491 $ 14,898 $ 19,430 $ 9,118 $ 10,271
Clinical fee for serv-
ice and other reve-
nue.................. 358 1,247 2,172 880 1,350
------ --------- ---------- -------- --------
Total revenues.......... 5,849 16,145 21,602 9,998 11,621
Operating expenses:
Contracted provider
services............. 2,185 5,149 8,088 3,522 4,308
Salaries, wages and
benefits............. 1,624 6,882 8,743 4,516 4,655
Management fees
charged by related
companies............ 287 284 406 132 176
General and adminis-
trative expenses..... 949 3,215 5,846 2,282 2,184
Goodwill write-down... -- -- 1,929 -- --
Depreciation and amor-
tization............. 460 1,244 1,323 629 695
Interest.............. 121 334 685 390 434
Listing and stock dis-
tribution expenses... -- 724 -- -- --
------ --------- ---------- -------- --------
Total operating ex-
penses................. 5,626 17,832 27,020 11,471 12,452
------ --------- ---------- -------- --------
(Loss) income from con-
tinuing operations be-
fore income taxes...... 223 (1,687) (5,418) (1,473) (831)
Income tax (benefit) ex-
pense.................. 155 (192) -- -- --
------ --------- ---------- -------- --------
(Loss) income from con-
tinuing operations..... 68 (1,495) (5,418) (1,473) (831)
Discontinued operation:
Loss from operations
of discontinued HMO
operation............ -- (76) (3,149) (713) --
Loss on disposal of
HMO operation........ -- -- (4,927) -- --
------ --------- ---------- -------- --------
Net (loss) income....... $ 68 $ (1,571) $ (13,494) $ (2,186) $ (831)
====== ========= ========== ======== ========
(Loss) income per common
share from continuing
operations............. $ 0.03 $ (0.39) $ (0.85) $ (0.23) $ (0.13)
(Loss) per common share
from discontinued
operation.............. -- (0.02) (1.27) (0.11) --
------ --------- ---------- -------- --------
(Loss) income per common
share.................. $ 0.03 $ (0.41) $ (2.12) $ (0.34) $ (0.13)
====== ========= ========== ======== ========
Weighted average number
of shares
outstanding(1)......... 2,058 3,789 6,378 6,371 6,397
====== ========= ========== ======== ========
</TABLE>
<TABLE>
<CAPTION>
JUNE 30,
------------------------- DECEMBER 31,
1994 1995(2) 1996(3) 1996(4)
------- ------- ------- ------------
<S> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents.............. $ 763 $ 3,495 $ 228 $ 198
Working capital (deficit).............. (1,217) (480) (9,070) (7,252)
Total assets........................... 13,288 20,848 14,099 14,247
Long-term debt, less current portion... 2,209 7,820 5,202 4,207
Stockholders' equity (deficit)......... 1,194 5,584 (7,847) (5,671)
</TABLE>
- -------
(1) The shares of RMCI Common Stock used in the net loss per share computation
is based on the number of weighted average shares outstanding for the
respective periods.
(2) Includes $3,606 of net assets used in discontinued operation.
(3) Includes $2,027 of net assets used in discontinued operation.
(4) Includes $1,864 of net assets used in discontinued operation.
110
<PAGE>
RMCI
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
OVERVIEW
RMCI provides comprehensive managed healthcare services through wholly owned
subsidiary companies. The behavioral health services are composed of the
management of mental health services and substance abuse care on behalf of
self-insured employers, HMOs, insurance companies and government agencies in
different states. RMCI not only manages such care but also provides, where
appropriate, the delivery of care through integrated systems involving clinics
and other providers. These services range from benefit design, case
management, claims processing to fully capitated (at-risk) mental healthcare
treatment.
At December 31, 1996, RMCI operates in 10 states and has a strategy to
consolidate its behavioral health operations through development and joint
venture efforts in various regions of the country in which it currently
operates.
During the year, RMCI applied for and received a license to operate an HMO
in the state of Alabama. During the year, RMCI also conducted HMO operations
in the states of Louisiana and Mississippi. In June 1996, RMCI adopted a
formal plan for the sale of its HMO operation during fiscal 1997 and recorded
a loss related to the disposal of this discontinued operation of $4.9 million.
RESULTS OF OPERATIONS
RMCI began earning HMO revenue in June 1995. For the year ended June 30,
1996, these revenues accounted for approximately 6.0% of RMCI's revenues.
During the year ended June 30, 1996, RMCI adopted a formal plan to discontinue
the operations comprising its HMO business. These operations were recorded as
a discontinued operation at June 30, 1996. Accordingly, the following
discussion of operations pertains entirely to RMCI's behavioral health
services and related corporate activities during the year ended June 30, 1996.
The following table sets forth, for the periods indicated, certain items of
RMCI's consolidated statements of income as a percentage of RMCI's net
revenues.
111
<PAGE>
<TABLE>
<CAPTION>
AS A PERCENTAGE OF AS A PERCENTAGE OF TOTAL
TOTAL REVENUES FOR THE REVENUES FOR THE SIX MONTHS
YEAR ENDED JUNE 30 ENDED DECEMBER 31
------------------------- ------------------------------
1995 1996 1995(A) 1996
----------- ----------- --------------- -------------
<S> <C> <C> <C> <C>
Total revenues.......... 100.0% 100.0% 100.0% 100.0%
----------- ----------- ------------- -------------
Operating expenses:
Contracted provider
services............. 31.9% 37.4% 35.2% 37.1%
Salaries, wages and
benefits............. 42.6% 40.5% 45.2% 40.1%
Management fees
charged by related
companies............ 1.8% 1.9% 1.3% 1.5%
General and
administrative
expenses............. 19.9% 27.1% 22.8% 18.8%
Goodwill write-down... -- 8.9% -- --
Depreciation and
amortization......... 7.7% 6.1% 6.3% 6.0%
Interest expense...... 2.1% 3.2% 3.9% 3.7%
Listing and stock
distribution costs... 4.5% -- -- --
----------- ----------- ------------- -------------
110.5% 125.1% 114.7% 107.2%
----------- ----------- ------------- -------------
Loss from continuing
operations before
income taxes......... (10.5)% (25.1)% (14.7)% (7.2)%
Discontinued operation:
Loss from operations
of discontinued HMO
operation............ -- (14.6)% (7.1)% --
Loss on disposal of
HMO operation........ -- (22.8)% -- --
----------- ----------- ------------- -------------
Net loss before income
taxes................ (10.5)% (62.5)% (21.8)% (7.2)%
=========== =========== ============= =============
</TABLE>
- --------
(a) Certain amounts for the six months ended December 31, 1995 have been
reclassified to reflect RMCI's discontinued HMO operation.
SIX MONTHS ENDED DECEMBER 31, 1996 COMPARED TO SIX MONTHS ENDED DECEMBER 31,
1995
Net revenues in the six months ended December 31, 1996, were $11.62 million
compared to $10.0 million in the comparable period of the prior fiscal year.
The increase in net revenues is attributable to new or expanded managed care
contracts obtained, in particular in North Carolina effective October 1995 and
Texas effective September 1996. Clinical fee for service and other revenue
increased as a result of new clinics opened during calendar years 1995 and
1996.
Contracted provider services expenses increased to $4.31 million in the six
months ended December 31, 1996 compared to $3.52 million in the prior year
December period.
Other operating expenses, comprising salaries and wages, and general and
administrative expenses, increased from $6.80 million to $6.84 million but
decreased as a percentage of net revenues, reflecting increased efficiencies
of RMCI's managed behavioral health division, given its expanded business
base.
RMCI recorded a loss from continuing operations before income taxes in the
six month period ended December 31, 1996 of $831,000 compared to a loss from
continuing operations before income taxes of $1,473,000 incurred in the same
period in the prior year. RMCI's results continue to be impacted by corporate
costs generally associated with being a public company, increased interest and
amortization expenses, and continuing start-up costs in the clinical
operations of RMCI.
At June 30, 1996, RMCI established a reserve for future losses expected to
be incurred by its discontinued HMO operation amounting to $1,830,000. During
the six months ended December 31, 1996, losses incurred by the discontinued
HMO operation and charged against this reserve totalled $1,658,000. In the
prior year comparable period, the HMO operation recorded a loss of $713,000.
112
<PAGE>
YEAR ENDED JUNE 30, 1996 COMPARED TO YEAR ENDED JUNE 30, 1995
Net revenues from continuing operations for fiscal 1996, were $21.6 million
compared to $16.1 million in fiscal 1995. The revenue increase is mainly due
to a full year of operations of The Health Plan of The Upper Ohio Valley
contract in West Virginia and a number of new managed care contracts entered
into during the year, including in Ohio and in North Carolina.
Contracted provider services increased to $8.1 million in fiscal 1996
compared to $5.1 million in fiscal 1995 as a result of the increased number of
members whose care is managed by RMCI. The percentage of net revenues
represented increased from 31.9% in fiscal 1995 to 37.4% in fiscal 1996.
Salaries, wages and benefits expense increased from $6.9 million in fiscal
1995 to $8.7 million in the year ended June 30, 1996, primarily as a result of
the continued expansion of the operations of RMCI in various regions,
including Florida, Arizona, Hawaii and West Virginia.
General and administrative operating expenses, including management fees
charged by related companies, increased from $3.5 million in fiscal 1995 to
$6.3 million in fiscal 1996 as a result of the expansion of the operations of
RMCI into existing markets and targeted new markets.
Depreciation and amortization expense increased from $1.2 million to $1.3
million mainly as a result of the amortization of goodwill associated with the
acquisition of FPM and FPMBH of Arizona, Inc. (f/k/a Ramsay HDI) ("FPMBH").
Interest expense increased from $334,000 in fiscal 1995 to $685,000 in
fiscal 1996 primarily as a result of financing charges related to the
acquisition of businesses previously described.
RMCI incurred a loss before taxes from continuing operations of $5.42
million for the reasons discussed above and as a result of a goodwill
impairment charge of $1,929,000 related to the goodwill associated with the
acquisition of the assets of the Human Dynamics Institute ("HDI"). At the time
of the acquisition, HDI had contracts with five major vendors and the
possibility of obtaining an additional major contract. During 1996, HDI lost
four of its existing contracts and was not awarded the new major contract.
Consequently, RMCI wrote-off the goodwill attributed to these contracts. The
amount of the impairment was determined based on the relative cash flows
generated by each of the contracts lost.
During the year ended June 30, 1996, RMCI's HMO operation incurred a loss
from operations of $3.15 million. Given that this operation did not commence
until the end of fiscal year 1995, its loss from operations in fiscal year
1995 was only $76,000. The operating loss sustained in fiscal year 1996 was
primarily due to the start--up nature of the business, the operation's
establishment of offices and subsequent expansion into Mississippi and
Alabama, and the extreme competition existing in the states, particularly in
Louisiana, in which the operation attempted to do business. During 1995 and
1996, a number of new HMOs obtained licenses to do business in these states,
which significantly limited membership and, hence, the revenues of the
business. RMCI's board of directors evaluated its alternatives and, in June
1996, RMCI adopted a formal plan to sell its HMO operation. Accordingly,
RMCI's HMO operation has been accounted for as a discontinued operation. In
connection with its decision to sell its HMO operation, RMCI reduced the net
assets of the business to the expected net proceeds from the sale and recorded
a loss on disposition of $3.1 million. Additionally, RMCI recorded a provision
of $1.83 million for operating losses to be incurred during the phaseout
period.
LIQUIDITY AND CAPITAL RESOURCES
In connection with the Distribution, RMCI and RHCI entered into the Second
Amended and Restated Distribution Agreement (the "Distribution Agreement").
Pursuant to the Distribution Agreement, each of RHCI and RMCI had agreed to
pay to the other the net amount of all outstanding intercompany receivables
and payables as of April 24, 1995 (other than those evidenced by the RMCI
Subordinated Promissory Note). As of
113
<PAGE>
December 31, 1996, RMCI owed RHCI approximately $2.215 million for
administrative services performed by RHCI and amounts advanced to or paid on
behalf of RMCI, and accrued interest on the RMCI Subordinated Promissory Note
of $600,000. See the discussion below under "Indebtedness" concerning RHCI's
agreement not to require repayment of net cash advances and such accrued
interest on the RMCI Subordinated Promissory Note until after January 1, 1998.
During fiscal 1996, RMCI used net cash of $2.1 million in its continuing
operations. This compares with $2.6 million provided by continuing operations
in fiscal 1995. The decrease in funds from continuing operations is
attributable to an operating loss of $5.4 million in 1996 compared to an
operating loss of $1.5 million in 1995. RMCI anticipates that the sources of
liquidity during fiscal 1997 will primarily be from its cash flows from
continuing operations, funds anticipated to be received from the disposition
of Apex and the proceeds from a $3 million private placement of preferred
stock discussed below.
Net cash used in investing activities of $0.8 million in fiscal 1996
compares with $1.2 million used in fiscal 1995. These funds were primarily
used to acquire property and equipment and for the earn-out payment required
in various purchase agreements (see "Indebtedness" below). In 1996, RMCI
reduced its expenditures for property and equipment by $400,000.
Net cash provided by financing activities was $4.25 million in fiscal 1996,
compared to $5.0 million in fiscal 1995. The main source of financing funds
was advances from the Ramsay Affiliates (see discussion below).
RMCI expects to use its sources of liquidity for working capital and other
general corporate purposes, including for the payment of costs and expenses
discussed above and costs associated with the establishment and development of
its managed mental healthcare business.
There can be no assurance that RMCI will expand its operations by
development, acquisition or internal expansion or that any development effort,
acquisition or expansion will be profitable.
As discussed below (see "Indebtedness") RMCI believes that it may require
additional funds for working capital and general corporate purposes.
Financing. On April 26, 1996, RMCI amended its credit facility (the "First
Union Credit Facility") with First Union National Bank of Florida ("First
Union"). A previous Revolving Credit Facility for up to $4,200,000 was
replaced by a $1,500,000 Revolving Master Line of Credit (the "First Union
Master Revolver"), and a $100,000 Term Loan (the "First Union Term Loan").
The $100,000 First Union Term Loan is repayable over 36 months through level
principal payments of $2,777.70, plus interest. At December 31, 1996,
$1,500,000 was outstanding under the First Union Master Revolver. The First
Union Master Revolver bears interest at the following rates, as applicable and
selected by RMCI from time to time: (i) First Union's LIBOR adjusted rate plus
3.0% or (ii) First Union's prime rate plus 0.75%. The $100,000 Term Loan bears
interest at First Union's prime rate plus 1.0%.
In October 1996, the First Union Credit Facility was further amended
pursuant to which Apex guaranteed the obligations of RMCI under the First
Union Credit Facility and RMCI pledged all of the shares of capital stock of
Apex to First Union as collateral.
As part of the acquisition of FPM in October 1993, RMCI issued 7% three year
debentures, totalling $2,500,000 (see "Indebtedness" below). These debentures
were prepaid with the proceeds of a $1,667,000 three year secured term loan
from First Union on April 28, 1995. This three year term loan bears interest
at (i) the Bank's LIBOR adjusted rate plus 2.5% or (ii) the bank's prime rate
plus 0.50%, as selected by RMCI. Principal on this three year term loan is
payable quarterly with a final maturity of January 31, 1998. The three year
secured term loan, the First Union Term Loan and the First Union Master
Revolver are secured by a pledge of the stock of RMCI's subsidiaries and the
assets of RMCI's subsidiaries.
114
<PAGE>
The First Union Credit Facility contains covenants customary for facilities
of this type which include, without limitation, covenants which contain
limitations on the ability of FPM and its subsidiaries, subject to certain
exceptions, to (i) assume or incur liens, (ii) alter the nature of their
business or effect mergers, consolidations, or sales of assets, (iii) incur
indebtedness or make investments, (iv) acquire businesses, or (v) pay
dividends to RMCI. In addition, the First Union Credit Facility contains
financial covenants related to senior debt to cash flow, interest coverage,
and minimum stockholders' equity. At June 30, 1996, FPM's minimum
stockholders' equity ratio was less than the requirement. The Bank agreed to
waive this requirement for the year ended June 30, 1996.
It is RMCI's intention to repay all amounts owing to First Union, totalling
$2,413,000 at December 31, 1996, from the proceeds of the proposed sale of
Apex.
Indebtedness. In connection with RMCI's acquisition of all the outstanding
shares of common stock of FPM in October 1993, FPM issued 7% Debentures due
October 31, 1996 (the "FPM Debentures") in the aggregate principal amount of
$2,500,000 to the selling stockholders of FPM, including Martin Lazoritz,
Robert W. Pollack and I. Paul Mandelkern, officers of RMCI or its
subsidiaries. Subsequently, on April 28, 1995, these FPM Debentures were
prepaid with the proceeds of the $1,667,000 three year secured term loan
discussed above.
In connection with RMCI's acquisition of the assets of HDI, through a wholly
owned subsidiary FPMBH, RMCI issued a promissory note in the principal amount
of $1,000,000 (the "HDI Note") to Phoenix South Community Mental Health
Centers ("Phoenix South"). Interest accrues on the HDI Note at a fixed rate of
8.25% per annum and is payable monthly in arrears, together with equal
installments of principal, until the HDI Note matures on June 30, 1997. At
December 31, 1996, $167,000 was outstanding under the HDI Note. The HDI Note
is secured pursuant to a stock pledge agreement dated June 30, 1994, pursuant
to which Phoenix South has a first priority lien on all of the common stock of
FPMBH. Upon payment in full of the HDI Note, First Union will have a first
priority lien on the common stock of FPMBH under the First Union Credit
Facility.
In addition, in connection with the Distribution of RMCI from RHCI, RMCI
issued to RHCI the RMCI Subordinated Promissory Note, in the principal amount
of $6,000,000, evidencing certain funds advanced to or on behalf of RMCI by
RHCI, including in connection with the acquisition of certain acquired
businesses. Prior to its issuance, the amounts evidenced by the RMCI
Subordinated Promissory Note were recorded as intercompany indebtedness
between RMCI and RHCI. Interest accrues on the RMCI Subordinated Promissory
Note at an annual fixed rate of 8%.
The RMCI Subordinated Promissory Note is unsecured and is subordinated and
junior in right of payment to all indebtedness of RMCI and its subsidiaries
incurred in connection with the acquisition of HDI and future acquisitions of
other managed mental healthcare services businesses, and any other Senior
Indebtedness (as defined in the RMCI Subordinated Promissory Note), including
indebtedness arising under the First Union Credit Facility and any other bank
indebtedness of RMCI or its subsidiaries. At the present time, Senior
Indebtedness outstanding is comprised of the HDI Note, the three year secured
term note to First Union and amounts due under the First Union Term Loan and
the First Union Master Revolver.
In September 1996, RHCI and RMCI commenced negotiations to restructure the
payment terms associated with the net cash advances from RHCI totaling
approximately $2,215,000 as of December 31, 1996 and $600,000 of the interest
due on the RMCI Subordinated Promissory Note from October 1995 to December 31,
1996. Of the $6,000,000 due on the RMCI Subordinated Promissory Note,
approximately $2,118,000 is due on or before December 31, 1997 and the
remainder is payable in 11 quarterly installments of approximately $353,000,
beginning March 31, 1998. RHCI has agreed not to require repayment of the
interest on the RMCI Subordinated Promissory Note for the period October 1,
1995 through December 31, 1997 or the net cash advances until after January 1,
1998, all on terms and conditions to be mutually agreed upon. Following the
Merger, amounts owing by RMCI to RHCI will remain outstanding as intercompany
indebtedness.
115
<PAGE>
In June 1996, at the request of RMCI, Ramsay Hospitals agreed to loan RMCI
up to $3,000,000 for working capital and general corporate purposes. On June
28, 1996, RMCI borrowed $1,600,000, which was evidenced by a demand promissory
note (the "First Hospitals Note") payable to Ramsay Hospitals with an interest
rate of 12% per annum. In addition, on August 7 and August 8, 1996, RMCI
borrowed an aggregate of $800,000, which was evidenced by a demand promissory
note (the "Second Hospitals Note") payable to Ramsay Hospitals in the
principal amount of the lesser of the amount borrowed or $1,400,000, with an
interest rate of 12% per annum. On September 10, 1996, as described below, the
First Hospitals Note and the Second Hospitals Note were repaid and cancelled.
On September 10, 1996, RMCI entered into a stock purchase agreement with
Ramsay Hospitals, pursuant to which Ramsay Hospitals purchased 100,000 shares
of RMCI Series 1996 Preferred Stock at a purchase price of $3,000,000. The
purchase price was paid by (i) offset against the outstanding principal
amounts under the First Hospitals Note and the Second Hospitals Note
($1,600,000 and $800,000, respectively), (ii) offset against the aggregate
accrued unpaid interest on such notes through September 10, 1996 ($54,667) and
(iii) $545,333 in cash. In connection with the purchase of the 100,000 shares
of RMCI Series 1996 Preferred Stock by Ramsay Hospitals, RMCI issued warrants
to Ramsay Hospitals to purchase 300,000 shares of RMCI Common Stock, at an
exercise price of $1.00 per share.
In September 1996, Ramsay Hospitals agreed to provide an additional loan
facility, if required, of up to $2,000,000 to RMCI for working capital and
general corporate purposes. In March 1997, Ramsay Hospitals agreed to increase
this loan facility to $5,000,000, the additional proceeds of which would be
available only to repay amounts owing by RMCI to RHCI, including under the
RMCI Subordinated Promissory Note. RMCI has agreed to borrow under this
increased loan facility upon the request of RHCI. Borrowings under this
facility will bear interest at 15% per annum and RMCI has agreed to pay Ramsay
Hospitals a $100,000 facility fee in consideration for making the facility
available to RMCI, and an additional facility fee of $150,000 in the event of
a drawing under the increased loan facility made available in March 1997. At
February 15, 1997, $2,000,000 was borrowed by RMCI under the facility.
RMCI may be required to raise additional funds for working capital, general
corporate purposes, development and growth beyond its immediate plans and/or
to remain competitive with its larger competitors. Any additional equity
financing may result in substantial dilution to the stockholders of RMCI.
Except for the debt financing to be provided by the above-mentioned commitment
by Ramsay Hospitals and the First Union Master Revolver (both of which are
fully drawn), RMCI has made no arrangements to obtain any additional
financing, and there can be no assurance that RMCI will be able to obtain any
required additional funds.
116
<PAGE>
INFORMATION CONCERNING RHCI
BUSINESS
GENERAL
RHCI offers a continuum of behavioral healthcare to patients through
integrated networks of mental health delivery systems in 12 states (Alabama,
Arizona, Florida, Louisiana, Michigan, Missouri, North Carolina, Oklahoma,
South Carolina, Texas, Utah and West Virginia) organized around 16 inpatient
hospitals with 1,467 licensed beds (including 77 medical subacute beds) and
outpatient centers. See "Properties" below. RHCI also manages the mental
health programs of certain public and private healthcare providers under
management contracts.
OVERVIEW
RHCI currently offers a comprehensive range of behavioral health services,
including acute psychiatric inpatient treatment, less intensive inpatient
treatment (including residential), partial hospitalization treatment and group
and individual outpatient treatment programs. Each of RHCI's integrated
delivery systems is centered around a core hospital facility from which
market-responsive mental health services are arranged with and provided by
physicians, psychologists and other mental health professionals under contract
or affiliated with RHCI. Certain of these systems also manage behavioral
health services on behalf of other providers and offer medical subacute
services.
STRATEGY
RHCI's strategy is to maintain what it believes is its reputation as a high-
quality provider of behavioral health services, meeting the needs of its
patients for therapeutic care in the least restrictive setting, its payors for
cost-effective and accountable treatment programs, and its stockholders for
consistent earnings and business growth. Following the Merger, RHCI intends to
pursue the following:
Continue to Expand Services in Selected Markets. RHCI is pursuing and
developing specialized treatment programs to expand service offerings that
meet the needs of its target markets. To increase its revenues base,
management plans to expand partial hospitalization, outpatient and intensive
outpatient programs at certain of its facilities and in other markets where
demand exists.
Pursue Capitated Contracts. Management believes that behavioral healthcare
purchasers will increasingly contract directly with providers on a capitated
basis. Management believes that RHCI has a track record in both managing and
providing care under capitated contracts. Management further believes that
this expertise, in conjunction with its broadening service offering, should
enable RHCI to benefit from the expected growth in capitated contracts.
Pursue Contract Management Opportunities. RHCI believes that in order to be
successful in the delivery of capitated behavioral healthcare services,
providers must have the qualitative and quantitative tools to monitor
treatment progress and demonstrate their effectiveness to purchasers of
behavioral healthcare. To meet these needs, RHCI offers sophisticated
information systems and infrastructure to support a full range of patient
treatment services such as case management, utilization review, practice
management, collections, claims processing and capitation modeling to
independent capitated providers. RHCI believes that as a result of the Merger
and its existing expertise in contract management, it will have an opportunity
to market its administrative and processing capabilities to other behavioral
healthcare providers.
Penetrate Medicaid Market. As Medicaid and other government programs move
toward managed care in a continuing effort to contain healthcare costs, RHCI
believes there will be an increasing demand for the organization of provider
networks and the management of behavioral healthcare to patients served under
these programs. In most cases, traditional providers of behavioral healthcare
services to these beneficiaries such as
117
<PAGE>
community mental health centers and not-for-profit hospitals in most cases do
not have organized networks, sophisticated information systems and the ability
to monitor utilization and outcomes. In conjunction with traditional
providers, RHCI will actively pursue the management and coordination of
behavioral healthcare for these populations and will organize new and expand
current systems which provide care for these beneficiaries. RHCI believes that
it is well positioned to penetrate this market because of its experience in
coordinating care as program manager for traditional providers as well as its
managed care expertise.
Expand Treatment for Underserved Populations. RHCI believes demand for
behavioral healthcare services for certain high-incidence populations will
continue to offer opportunities for growth. Specifically, RHCI intends to use
its treatment expertise to address the needs of juvenile offenders and the
elderly, each of which represents large and what management believes to be
underserved populations. RHCI believes that its experience in contracting with
a variety of public agencies (for example, judicial and health and human
services) positions RHCI to take advantage of opportunities by offering what
it believes to be proven structured programs to serve these populations.
Additional Management Resources Strengthen Organizational Structure. In
January 1996, RHCI announced the appointment of Luis E. Lamela as Vice
Chairman of the Board, followed in August 1996 by the appointments of Bert G.
Cibran as President and Chief Operating Officer and Carol C. Lang as Chief
Financial Officer. The new management team has over 60 years of healthcare
operations, management and financing experience and a demonstrated history of
success in the industry. With this leadership infrastructure, RHCI believes it
has the resources to seek and execute diversification opportunities, expand
the delivery of healthcare, and establish a capital structure appropriate for
a long-term, high-quality healthcare company.
FACILITY OPERATIONS
RHCI's facilities specialize in the treatment of behavioral disorders.
Substance abuse treatment is provided to patients who have a primary diagnosis
of alcohol or substance abuse; however, many of these patients have a
secondary diagnosis of, and are treated for, mental illness. Also, almost all
of RHCI's facilities conduct outpatient programs within the facility and/or at
clinics located in the surrounding area. In response to the demands of payors,
particularly managed care companies, RHCI anticipates expanding its outpatient
network in its continued effort to provide a less costly, yet effective level
of mental healthcare for patients whose illness does not require intensive
inpatient care.
The initial goal of acute psychiatric hospitalization treatment is to
evaluate and stabilize the patient so that effective treatment can be
continued either on an inpatient, partial hospitalization or an outpatient
basis. Under the direction of a psychiatrist, the patient's condition is
assessed, a diagnosis is made and prescribed treatment follows. The treatment
regimen utilizes, where appropriate, medication, individual and group therapy,
adjunctive therapy and family therapy.
The most common disorders for which adult patients are admitted to RHCI's
hospitals are mood and affective disorders (such as depression),
schizophrenia, situational crises and alcohol and drug dependency. These
disorders are also common in children and adolescents admitted to RHCI's
facilities. RHCI has evaluation and treatment programs designed specifically
for adults, adolescents and children. Specialized programs focusing upon
neuropsychiatric disorders and pain and sleep disorders have also been
developed. All programs emphasize family involvement in the evaluation and
treatment process.
Residential treatment programs are provided by nine of RHCI's facilities for
low-functioning and troubled youths affected by conduct disorders, psychiatric
illness, substance abuse and sexual dysfunction. These programs provide long-
term inpatient care within a safe, therapeutic environment for youths
displaying an inability to function at home, school, with peers or in the
community in general. The highly structured programs assist the youth in
learning how to change ineffective or violent behavior and cope with the
difficulties and stresses of life. The primary objective of the program is
behavioral awareness and self-control, leading the youth to a successful
return to his/her home setting.
118
<PAGE>
Each psychiatric hospital has a multidisciplinary team of healthcare
professionals, including psychiatrists, psychologists, social workers, nurses,
mental health and substance abuse counselors and therapists. Generally,
physician members of the professional staff maintain private practices. In
certain situations, RHCI guarantees minimum incomes, usually for one year, to
psychiatrists willing to relocate to certain facilities. All of RHCI hospitals
have a medical director who acts as liaison between the professional staff and
the hospital administration staff. In addition, each clinical program has a
medical unit administrator.
Each of RHCI's hospitals has a consulting board, comprised of hospital
executives, consulting physicians and other members of the local community,
which is responsible for standards of patient care. A hospital CEO supervises
and is responsible for the day-to-day operations of each hospital. RHCI
emphasizes frequent communication, the setting of operational and financial
goals and the monitoring of actual results against targeted goals. To this
end, RHCI collects and analyzes information on key indicators such as
admissions by treatment program and payor category, daily census, full-time
equivalent employees per patient day and average length of stay. On the basis
of this information, the administrative staff of each hospital, together with
the corporate staff of RHCI, adopts new programs and modifies existing
programs to improve performance.
All of RHCI's hospitals have been accredited by the Joint Commission on
Accreditation of Healthcare Organizations ("JCAHO"). The JCAHO is a voluntary
national organization which undertakes a comprehensive review for purposes of
accreditation of healthcare facilities. In general, hospitals and certain
other healthcare facilities are initially surveyed by JCAHO within 12 months
after the commencement of operations and resurveyed at appropriate intervals
thereafter. Of RHCI's 15 hospitals, one was resurveyed in fiscal 1996 and
three were resurveyed in fiscal 1995 and, in each instance, the facilities
retained their JCAHO accreditation for an additional three years.
The following table summarizes certain operating data related to (i) the
facilities currently operated by RHCI and which were also operated by RHCI
during each of the fiscal years referred to below ("same facilities") and (ii)
all facilities operated by RHCI during the fiscal years referred to below
("all facilities"). The difference between the same facilities amounts and the
all facilities amounts relates to Three Rivers Hospital, which was closed on
June 30, 1995, two facilities which were sold during fiscal 1994, Benchmark
Behavioral Hospital, which commenced operations in May 1995, and RHCI's
subacute units, which commenced operations in late fiscal 1994 and early
fiscal 1995.
119
<PAGE>
SAME FACILITIES
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30
-------------------------
1996 1995 1994
------- ------- -------
<S> <C> <C> <C>
Acute psychiatric admissions......................... 12,875 12,221 11,136
Residential treatment admissions..................... 537 551 471
------- ------- -------
Total inpatient admissions........................... 13,412 12,772 11,607
Acute psychiatric inpatient days..................... 130,522 139,571 153,444
Residential treatment inpatient days................. 87,257 63,633 40,973
------- ------- -------
Total inpatient days................................. 217,779 203,204 194,417
Average bed days available........................... 392,352 369,380 400,770
Overall inpatient occupancy percentage............... 56% 55% 49%
Partial hospitalization days (1)..................... 54,041 65,280 57,414
Outpatient visits (2)................................ 37,005 44,218 30,984
</TABLE>
ALL FACILITIES
<TABLE>
<S> <C> <C> <C>
Acute
psychiatric
admissions.... 13,333 12,304 11,545
Residential
treatment
admissions(3).. 588 948(3) 883(3)
Subacute
admissions.... 692 323 46
------- ------- -------
Total
admissions.... 14,613 13,575 12,474
Acute
psychiatric
inpatient
days.......... 135,037 140,064 159,602
Residential
treatment
inpatient days
(3)........... 93,038 77,509(3) 64,729(3)
Subacute
inpatient
days.......... 15,378 6,548 1,061
------- ------- -------
Total inpatient
days.......... 243,453 224,121 225,392
Average bed
days
available..... 449,814 422,670 448,585
Overall
inpatient
occupancy
percentage.... 54% 53% 50%
Partial
hospitalization
days (1)...... 54,463 65,280 60,699
Outpatient
visits (2).... 84,438 82,240 47,725
</TABLE>
- --------
(1) Partial hospitalization days refer to behavioral health patient services
which generally exceed three hours but do not require an overnight stay at
an inpatient facility.
(2) Outpatient visits refer to behavioral health patient services which
generally do not exceed three hours in a given day. Also, the "All
Facilities" amounts include visits related to a facility-based home health
agency.
(3) 1995 and 1994 statistics for the "All Facilities" include significant
residential treatment admissions and inpatient days related to Three
Rivers Hospital, which was closed on June 30, 1995.
COMPETITION
The behavioral healthcare industry is extremely competitive. The competitive
position of RHCI has been, and will continue to be, affected by the increased
initiatives undertaken by federal and state governments and other purchasers
of healthcare, including insurance companies and employers, to revise payment
methodologies and monitor healthcare expenditures in order to contain
healthcare costs.
At December 31, 1996, RHCI operated 16 inpatient facilities in 12 states
(See "Properties" below). RHCI's facilities are located in rural areas and in
suburban areas of large metropolitan cities. Each facility competes with other
facilities, including proprietary free-standing hospitals, not-for-profit
hospitals, governmental free-standing hospitals and psychiatric units of acute
care hospitals. The number of behavioral health service competitors located
within each of RHCI's service areas varies significantly. Some of these other
facilities are larger and have greater financial resources than RHCI's
hospitals. In addition, some of these competing hospitals are
120
<PAGE>
substantially exempt from income and property taxation. The impact of
competition on RHCI's facilities varies depending on the proximity of the
competing facility and its referral sources to RHCI's facility.
RHCI's outpatient centers are generally located in areas near its inpatient
facilities and compete with private practitioners, community mental health
centers, and other companies which provide outpatient services in the markets
in which RHCI's outpatient centers are doing business. Also, in certain
markets, RHCI treats certain patient populations (e.g., adolescents or
geriatrics) or provides services which are different from those provided by
RHCI's competitors in the particular market. RHCI does not consider any of the
behavioral health service competitors in its markets as dominant providers
that place RHCI at a competitive disadvantage.
The ability of a psychiatric facility to compete with other facilities
depends on the number and quality of psychiatrists and clinical psychologists
practicing at the facility, and the number, type and quality of other
psychiatric facilities in the area. Another factor affecting the
competitiveness of psychiatric facilities is the extent to which the
facility's clinical programs satisfy community needs in an effective manner
from both a clinical and an economic standpoint. RHCI believes that the
quality of its professional staff as well as the quality and effectiveness of
its programs permit it to compete effectively with the other providers of
psychiatric, residential treatment, and chemical dependency care in the
communities served by RHCI's facilities. In addition, RHCI's facilities
actively seek relationships with managed care companies, which are
increasingly responsible for steering patients to high quality, cost-effective
providers of behavioral health services.
INDUSTRY TRENDS
RHCI's inpatient facilities have been adversely affected by factors
influencing the entire psychiatric hospital industry. Factors which have
affected RHCI's acute psychiatric inpatient business include (i) the
imposition of more stringent length of stay and admission criteria by payors;
(ii) the failure of reimbursement rate increases from certain payors that
reimburse on a per diem or other discounted basis to offset increases in the
cost of providing services; (iii) an increase in the percentage of payors that
reimburse on a per diem or other discounted basis; (iv) the trend toward
higher deductibles and co-insurance for individual patients; and (v) the trend
by self-insured employers and managed mental health organizations toward
limiting employee health benefits, including annual and lifetime limits on
mental health coverage. In response to these conditions, RHCI has (i)
tightened its staffing levels within its facilities, particularly in the areas
which are not directly responsible for the provision of patient care, (ii)
renegotiated contracts to reduce other operating expenses within its
facilities and (iii) developed strategies to restructure its outpatient
services and partial hospitalization programs to meet the demands of the
marketplace. Further, RHCI's business strategy includes reducing its
dependence on acute psychiatric inpatient services through an expansion of
residential treatment and outpatient services. See "Information Concerning
RHCI--Business--Strategy" above.
SOURCES OF REVENUE
RHCI's facilities receive payments from third-party reimbursement sources,
including commercial insurance carriers (which provide coverage to insureds on
both an indemnity basis and through various managed care plans), Medicare,
Medicaid, CHAMPUS, Blue Cross and, for residential treatment services, various
state agencies (including state judicial systems). In addition, certain
payments are received directly from patients.
Third-party reimbursement programs generally reimburse facilities either on
the basis of facility charges (charge-based), on the basis of the facility's
costs as audited or projected by the third-party payor (cost-based), or on the
basis of negotiated rates (per diem-based). Generally, charge-based programs
are more profitable to RHCI. The following table sets forth, by category, the
approximate percentages of RHCI's inpatient days derived from various sources
for the periods indicated.
121
<PAGE>
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30
------------------------
1996 1995 1994
------ ------ ------
<S> <C> <C> <C>
Charge-based programs:
Commercial Insurance........................ 8% 10% 15%
Blue Cross.................................. 1 1 1
Private Pay................................. 5 6 5
------ ------ ------
Sub-total................................. 14 17 21
Cost-based and per diem-based programs:
Blue Cross.................................. 4 6 6
CHAMPUS..................................... 3 5 7
Medicare.................................... 24 22 21
Medicaid.................................... 30 31 32
State, HMO and PPO.......................... 25 19 13
------ ------ ------
Sub-total................................. 86 83 79
------ ------ ------
Total................................... 100% 100% 100%
====== ====== ======
</TABLE>
Most commercial insurance carriers reimburse their policyholders or
reimburse RHCI's facilities directly for charges at rates and limits specified
in their policies. Patients generally remain responsible to the facilities for
any amounts not covered under their insurance policies. The trend in
reimbursement for psychiatric inpatient and chemical dependency care by
commercial insurance carriers is to limit inpatient days to a maximum number
per year or for the patient's lifetime, or to limit the maximum dollar amount
expended for a patient in a given period.
Most third-party payors and other commercial carriers have also expanded
benefit coverage to include partial hospitalization and other outpatient
services. Partial hospitalization is formally recognized by Medicare and
CHAMPUS as a covered service. In addition, managed care companies are seeking
to contract with providers that offer the full spectrum of psychiatric care.
Medicare is the federal health insurance program for the aged and disabled.
Medicare reimbursement is typically less than RHCI's facilities' established
charges for services provided to Medicare patients. Patients are not
responsible for the difference between the reimbursed amount and the
facilities' established charges other than for applicable noncovered charges,
coinsurance and deductibles. In 1983, Congress changed the Medicare law
applicable to Medicare reimbursement for medical/surgical services from a
retrospectively determined reasonable cost system to a prospectively
determined diagnosis-related grouping ("DRG") system. Psychiatric and chemical
dependency hospitals and units are exempt from the DRG reimbursement system.
Both Congress and the agency responsible for administering the Medicare
program, the Health Care Financing Administration, have been investigating a
revision to the payment system for inpatient psychiatric services and hospital
outpatient services, including of the type of services provided by RHCI, which
would eliminate the cost-based structure of the current system. Under current
proposals, inpatient psychiatric services would be transitioned to a
prospective payment system where payment for services may be unrelated to the
provider's costs.
Medicare reimbursement to exempt psychiatric and chemical dependency
hospitals and units is currently subject to the payment limitations and
incentives established in the Tax Equity and Fiscal Responsibility Act of 1982
("TEFRA"). These facilities are paid on the basis of each facility's
historical costs trended forward, with a limit placed on the rate of increase
in per case reimbursable costs. These TEFRA "target" rates are updated
annually. Facilities with costs less than the target rate per discharge are
reimbursed based on allowable Medicare costs plus an additional incentive
payment. Beginning in federal fiscal year 1992, providers with costs exceeding
their target rates are subject to a payment ceiling of the target amount plus
the lesser of a percentage (currently 10%) of the target amount or a
percentage (currently 50%) of the amount in excess of the target amount.
Exemptions and exceptions are available to hospitals when events beyond the
hospitals' control result in an increase in costs for a reporting period.
Moreover, "new hospitals" are eligible to be exempt from the limits
122
<PAGE>
until they have been in operation for three years. At December 31, 1996, 15 of
RHCI's 16 facilities were subject to the TEFRA provisions.
The Health Care Financing Administration ("HCFA") has implemented changes to
Medicare covering inpatient psychiatric services which are reimbursed under
TEFRA. These changes provide for an increase to the TEFRA payment limitations,
subject to annual revision. However, since 14 of RHCI's 15 facilities which
are subject to the TEFRA payment limitations are currently operating at cost
levels below their respective TEFRA payment limitations, any increase in the
TEFRA payment limitations has a minimal effect on RHCI's results of
operations. In addition, each year HCFA modifies the fee reimbursement
schedules related to physician services. While these changes affect Medicare
reimbursement paid directly to physicians, they do not affect the rate of
Medicare reimbursement to RHCI's facilities. These changes in physician
reimbursement have had only a minimal effect on RHCI's results of operations
since most of the physicians practicing at RHCI's facilities bill their fees
directly.
Medicaid is the federal/state health insurance program for the
underprivileged. Subject to certain minimum federal requirements, each state
defines the extent and duration of the services covered by its Medicaid
program. Moreover, although there are certain federal requirements governing
the payment levels for Medicaid services, each state has its own methodology
for making payment for services provided to Medicaid patients. Various state
Medicaid programs cover payment for services provided to Medicaid patients at
all of RHCI's facilities. During fiscal years 1995 and 1994, RHCI received
significant payments from the Louisiana Medicaid program pursuant to enhanced
reimbursement rates under the State's "disproportionate share" program.
Disproportionate share payments from the State of Louisiana were virtually
eliminated effective July 1, 1995. Accordingly, RHCI expects that any future
payments made under this program will be minimal. See "Risk Factors--Possible
Requirement to Repay Louisiana Disproportionate Medicaid Share Payments" and
"RHCI--Management's Discussion and Analysis of Financial Condition and Results
of Operations--Results of Operations."
In 1991, Congress imposed a reduction in the annual reimbursable length of
stay for patients covered under the CHAMPUS program. Effective October 1,
1991, CHAMPUS began to limit its coverage for inpatient psychiatric services
to 30 days for adult patients, 45 days for child and adolescent patients and
150 days for residential treatment services, subject to waivers which are
available under limited circumstances if an extension of the length of stay
can be justified. Although the lengths of stay experienced by RHCI on CHAMPUS
adult, child and adolescent beneficiaries have generally been within these
limits, the volume of CHAMPUS patients treated at RHCI's facilities has
declined. As set forth in the above table, the amount of RHCI's patient
revenues attributable to CHAMPUS have decreased from 7% in fiscal 1994 to 3%
in fiscal 1996.
Blue Cross plans reimburse based on charges or negotiated rates in all areas
in which RHCI presently operates facilities, except Alabama and Michigan. In
many states in which RHCI operates, Blue Cross charges are approved through a
rate-setting process and, therefore, Blue Cross may reimburse RHCI at a rate
less than billed charges. Under cost-based Blue Cross programs, such as those
in Alabama and Michigan, direct reimbursement to hospitals typically is lower
than the hospital's charges, and patients are not responsible for the
difference between the amount reimbursed by Blue Cross and the hospital's
charges.
MARKETING
RHCI's marketing programs are aimed at referral sources within a selected
service area rather than to the general public and are designed to increase
awareness of a facility's programs and services. Referral sources include
psychiatrists, medical practitioners, managed mental health organizations,
courts and probationary officers, law enforcement agencies, schools and
clergy. Each facility's marketing staff, together with other facility
personnel, maintains direct contact with referral sources to support their
needs. These needs may be related to a particular treatment program, the
desires of the patient's family, hospital policies or the timely receipt of
accurate information. Each facility establishes admission targets for each
referral source and results are monitored and evaluated at the facility and by
the corporate staff.
123
<PAGE>
REGULATION
Operations of psychiatric hospitals are subject to extensive federal, state
and local government regulations, including periodic inspection and licensing
requirements. These regulations are primarily concerned with the fitness and
adequacy of the facility, equipment and personnel, standards of medical care
provided, the dispensing of drugs and the adequacy of fire prevention measures
and other building standards. In addition, the admission and treatment of
patients at RHCI's hospitals are subject to certain state regulation regarding
involuntary admissions, patient rights and the confidentiality of patient
medical records.
RHCI believes that federal and state regulation may become more
comprehensive and restrictive in the future, particularly with respect to
reimbursement rates. In addition, numerous healthcare reform proposals have
been and are expected to continue to be introduced in Congress. RHCI cannot
predict the form or timing of any prospective legislation or regulation, nor
the effect which any legislation or regulation might have on its revenues or
profitability.
Capital expenditures for the construction of new facilities, the addition of
beds or the acquisition of facilities or medical equipment are reviewable by
governmental authorities in certain states in which approximately half if
RHCI's facilities are located. State certificate of need or similar statutes
generally provide that prior to the construction of new beds or facilities or
the introduction of a new service, a state agency must determine that a need
exists for those beds, facilities or services. A certificate of need is
generally issued for a specific maximum amount of expenditures, number of beds
or services to be provided and the holder is generally required to implement
the approved project within a specific time period. In most cases, state
certificate of need or similar statutes do not restrict the ability of RHCI or
its competitors from offering new or expanded outpatient services. Except for
Arizona, Texas, Louisiana and Utah, all of the states in which RHCI operates
facilities have adopted certificate of need or similar statutes.
Federal law contains a number of provisions designed to ensure that services
rendered by healthcare facilities to Medicare and Medicaid patients are
medically necessary, meet professionally recognized standards and are billed
properly. These provisions include a requirement that admissions of Medicare
and Medicaid patients to hospitals must be reviewed in a timely manner to
determine the medical necessity of the admissions. In addition, the Peer
Review Improvement Act of 1982 ("Peer Review Act") provides that a hospital
may be required by the federal government to reimburse the government for the
cost of Medicare paid services determined by a peer review organization to
have been medically unnecessary. Each of RHCI's hospitals has developed and
implemented a quality assurance program and implemented procedures for
utilization review and retrospective patient care evaluation to meet its
obligations under the Peer Review Act. As a result of legislation passed in
Texas in September 1993 and as described below, Peer Review Organizations
("PROs") in that state began applying extremely restrictive interpretations to
the medical necessity of admissions and other services. Consequently,
significant amounts of the Texas facilities' charges in fiscal 1994 were
denied by such organizations until the facilities gained a full understanding
of the PRO's interpretations and modified their internal systems accordingly.
Charges denied in RHCI's Texas facilities in fiscal 1996 and 1995 were less
than 2% of these facilities' gross charges in these years.
The Medicare and Medicaid Anti-Fraud and Abuse Amendments (the "Amendments")
to the Social Security Act prohibit individuals or entities participating in
the Medicare or Medicaid programs from knowingly and willfully offering,
paying, soliciting, or receiving remuneration in order to induce referrals for
items or services reimbursed under those programs. The policy objective of the
Amendments is to ensure that the purpose for a referral is quality of care and
not monetary gain by the referring individual. The Amendments' prohibitions
only apply to Medicare and Medicaid patients and impose felony criminal
penalties and civil sanctions, as well as exclusion from the Medicare and
Medicaid programs. In 1989, CHAMPUS adopted regulations authorizing it to
exclude from the CHAMPUS program any provider who has committed fraud or
engaged in abusive practices. The term "abusive practices" is defined broadly
to include, among other things, the provision of medically unnecessary
services, the provision of care of inferior quality, and the failure to
maintain adequate financial or medical records. RHCI believes that it is in
compliance with all aspects of these regulations.
124
<PAGE>
RHCI has entered into various types of agreements with physicians and other
healthcare providers in the ordinary course of operating its facilities, many
of which provide for payments to physicians or other healthcare providers by
RHCI as compensation for services or other consideration by the providers. In
order to provide guidance to healthcare providers with respect to the statute
that makes certain remuneration arrangements between hospitals and physicians
and other healthcare providers illegal, the United States Department of Health
and Human Services ("HHS") issued regulations in 1991 and 1993 outlining
certain "safe harbor" practices, which, although potentially capable of
inducing prohibited referrals of business, would not be subject to enforcement
action under the illegal remuneration statute. The practices covered by the
regulations include, among others, certain investment transactions, lease of
space and equipment, personal services and management contracts, sales of
physician practices, payments to employees and waivers of beneficiary
deductibles and co-payments. Although a relationship that fails to satisfy a
safe harbor is not necessarily illegal, that relationship will not be exempt
from scrutiny under the Amendments. RHCI believes that its agreements and
arrangements in this area comply with the Amendments or are otherwise
protected under the safe harbors provided. However, there can be no assurance
that (i) government enforcement agencies will not assert that certain of these
arrangements are in violation of the illegal remuneration statute, or (ii) the
statute will ultimately be interpreted by the courts in a manner consistent
with RHCI's practices.
Under another federal provision, known as the "Stark" law or "self-referral"
prohibition, physicians who have an investment or compensation relationship
with an entity furnishing certain designated health services (including
inpatient and outpatient hospital services) may not, subject to certain
exceptions, refer Medicare patients for designated health services to that
entity. Similarly, facilities may not bill Medicare or any other party for
services furnished pursuant to a prohibited referral. Violation of these
provisions may result in disallowance of Medicare claims for the affected
services, as well as the imposition of civil monetary penalties and program
exclusion. In addition, the Stark law prevents states from receiving federal
Medicaid matching payments for designated health services that are provided as
a result of a prohibited referral. Often as a result of this requirement, a
number of states have enacted similar prohibitions to the Stark law covering
referrals of non-Medicare, as well as Medicare business. The following states
in which RHCI conducts business have passed legislation which, under certain
circumstances, either may prohibit the referral of private pay patients to
healthcare entities in which the physician has an ownership or investment
interest or with which the physician has a compensation arrangement or may
require the disclosure of such interest to the patient: Arizona, Florida,
Georgia, Louisiana, Michigan, Missouri, Nevada, North Carolina, Ohio,
Oklahoma, South Carolina, Tennessee, Utah and West Virginia. All of these
rules are very restrictive, prohibit submission of claims for payment for
prohibited referrals and provide for the imposition of civil monetary and
criminal penalties. RHCI is unable to predict how these laws may be applied in
the future, or whether the federal government or states in which RHCI operates
will enact more restrictive legislation or restrictions that could under
certain circumstances impact RHCI's operations.
Several states and the federal government have been investigating whether
psychiatric hospitals have engaged in fraudulent practices such as inflating
bills for medications and services, billing for services never rendered and
admitting patients, especially children, who do not require hospitalization.
In 1991, the Texas Attorney General disclosed that several of RHCI's
competitors doing business in Texas were under investigation for fraudulent
practices and a lawsuit seeking injunctive relief was filed against one of
those competitors. This led to the passage of legislation in Texas, effective
September 1, 1993, that placed severe restrictions on the marketing of
behavioral healthcare services. In general, the legislation prohibits certain
advertisement and solicitation techniques. Specifically, advertisements may
not promise a cure or guarantee treatment results that cannot be
substantiated, and mental health intervention and assessment services must be
available and properly credentialed before they are advertised. The
legislation also requires disclosure of any relationship between the treatment
facility and its referral sources and prohibits a referral service from
holding itself out as a qualified mental health referral service without
complying with the legislation's definition of such (which requires, among
other things, compliance with regulations regarding confidentiality,
participation in and staffing of the referral service and payments to referral
sources). Violation of the legislation may result in injunctive relief and
civil penalties of up to $25,000 per violation. In June 1993, RHCI signed an
agreement with the Texas Attorney
125
<PAGE>
General whereby it agreed to continue to comply with Texas statutes regarding
marketing and operating standards applicable to all psychiatric hospital
companies.
Additionally, in 1996, Congress enacted the Mental Health Parity Act of 1996
(the "Parity Act") which generally requires that group health plans which
provide benefits for mental health care must treat mental health benefits on a
similar basis as benefits for any other illness for purposes of imposing
annual or lifetime benefit limits. The law provides that, if the plan imposes
limits on medical or surgical benefits on the basis of different categories of
benefits, the plan may do the same with regard to different categories of
mental health benefits, in accordance with regulations to be issued by the
United States Department of Labor. RHCI cannot predict the effect of this
legislation on its financial condition or results of operations or that of
RMCI.
State laws which prohibit the employment of healthcare professionals by
business corporations, such as RHCI and RMCI, vary from state to state, are
often vague and have seldom been interpreted by the courts or regulatory
agencies. Although RHCI and RMCI exercise care in an effort to structure their
arrangements with healthcare providers to comply with the relevant state
statutes, and although management believes that the companies are in
compliance with these laws, there can be no assurance that governmental
officials charged with responsibility for enforcing these laws will not assert
that the companies or certain transactions in which they are involved are in
violation of such laws.
ACQUISITIONS, SALES AND LEASE COMMITMENTS
. Three Rivers Hospital. In November 1992, RHCI purchased a 64-bed hospital
facility in Covington, Louisiana for $2,000,000. The facility, Three Rivers
Hospital, opened in January 1993. On June 30, 1995, the hospital was closed
due to reduced patient volume and projected negative operating margins, and
its operations were consolidated with RHCI's facility located less than five
miles away. In May 1996, RHCI signed a letter of intent to sell Three Rivers
Hospital to an independent party for approximately $2.2 million (net of
transaction costs). This sale is expected to close during March 1997. See
"Information Concerning RHCI--Business--Ownership Arrangements and Operating
Agreements" below and "RHCI--Management's Discussion and Analysis of Financial
Condition and Results of Operations--Results of Operations."
. Gulf Coast Treatment Center. In January 1993, RHCI leased Harbor Oaks
Hospital in Fort Walton Beach, Florida to another healthcare provider for an
initial period of three years, which lease term was extended through October
1996. RHCI resumed operations at the facility under the name Gulf Coast
Treatment Center in December 1996.
. Cumberland Hospital. In August 1993, RHCI sold its 175-bed Cumberland
Hospital in Fayetteville, North Carolina for approximately $12 million.
. RMCI. RHCI, through its former subsidiary RMCI, entered the managed mental
health business in October 1993 with the acquisition of FPM for a purchase
price of $6.5 million. The managed care division expanded in June 1994 with
the acquisition of a Phoenix, Arizona-based managed mental health business
and, in fiscal 1995, through the award of contracts in Hawaii and West
Virginia.
For a variety of reasons deemed by management to be reasonable at the time,
on April 24, 1995, RHCI effected the Distribution. Subsequent to the
Distribution, RMCI became a separate, publicly traded company and ceased being
a subsidiary of RHCI.
. Atlantic Shores Hospital. In February 1994, RHCI sold its 50-bed Atlantic
Shores Hospital in Daytona Beach, Florida for approximately $4.8 million.
. Sale/Leaseback. In April 1995, RHCI consummated a sale/leaseback
transaction whereby RHCI sold the land, buildings and fixed equipment of two
of its inpatient facilities (Desert Vista Hospital in Mesa, Arizona and
Mission Vista Hospital in San Antonio, Texas) for $12.5 million and agreed to
lease this property back over
126
<PAGE>
a term of 15 years (with three successive renewal options of five years each).
The leases, which are treated as operating leases under generally accepted
accounting principles, currently require aggregate annual minimum rentals of
$1.58 million, payable monthly. Effective April 1 of each year, the lease
payments are subject to any upward adjustment (not to exceed 3% annually) in
the Consumer Price Index over the preceding 12 months.
. Sale of Land. In March and April 1995, RHCI sold certain real estate
located in Flagstaff, Arizona and Houston, Texas. These properties were
initially acquired for development approximately 10 years ago and, as of the
date of sale, the properties had an aggregate book value of $1.15 million.
Total net proceeds from the sales of this real estate approximated $0.75
million.
. Benchmark Behavioral Hospital. Effective April 1995, RHCI agreed to lease
an 80-bed facility near Salt Lake City, Utah from Charter Medical Corporation
for four years, with an option to renew for an additional three years. The
lease, which is treated as an operating lease under generally accepted
accounting principles, requires annual base rental payments of $456,000. In
addition, the lease provides for percentage rent payments to the lessor equal
to 2% of the net revenues of the facility, payable quarterly.
OWNERSHIP ARRANGEMENTS AND OPERATING AGREEMENTS
One physician owns a 4% interest in the subsidiary which owns RHCI's Gulf
Coast Treatment Center facility. RHCI may be required to repurchase, and the
minority shareholder may be required to sell, the minority interest at a
formula price dependent upon many factors, including the earnings per share of
the subsidiary which owns the subject hospital and the price/earnings multiple
of RHCI, after a fixed period of time. Although the amount of RHCI's
repurchase obligation cannot be precisely determined, RHCI does not believe
that this obligation will require a material payment by RHCI in the
foreseeable future.
In 1985, RHCI and Bethany General Hospital in Bethany, Oklahoma entered into
a joint development project. The general hospital and RHCI hold a joint
certificate of need by which they have converted 23 medical/surgical beds to
psychiatric beds, and constructed a psychiatric pavilion containing an
additional 20 psychiatric beds. Pursuant to a joint venture agreement entered
into in December 1985, RHCI began managing the 23 existing beds in December
1985 and completed construction of the 20-bed pavilion in October 1986. Under
the joint venture agreement, RHCI is obligated to provide working capital to
operate the 43-bed psychiatric unit. RHCI may, at its option, continue to
operate and manage the unit in three-year terms through 2004. RHCI is entitled
to an annual management fee of 5% of the unit's gross revenues and 65% of the
net profits or losses of the unit. The agreement also provides that RHCI will
recover construction costs amortized over 15 years and working capital
advances from operating revenue, unless RHCI does not renew or breaches the
agreement.
In November 1992, RHCI formed a limited partnership to operate Three Rivers
Hospital, a 64-bed facility located in Covington, Louisiana. Pursuant to the
terms of the partnership agreement, RHCI, as general partner, had a 55%
interest in the operations of the business and limited partners maintained a
45% interest. A wholly owned subsidiary of RHCI owns the facility and leased
it to the partnership at $276,000 per annum. Due to reduced patient volume and
projected negative operating margins, effective June 30, 1995, Three Rivers
Hospital was closed. RHCI has signed a letter of intent and expects to sell
Three Rivers Hospital to an independent party in March 1997. See "Information
Concerning RHCI--Business--Acquisitions, Sales and Lease Commitments" above.
Further, in July 1996, the Three Rivers Hospital Limited Partnership was
dissolved.
INSURANCE
RHCI and its facilities are insured on a "claims made" basis for
professional and general liability incidents in the aggregate amount of
$25,000,000, with a self-insured retention of $500,000 per claim. RHCI's self-
insurance program also includes "tail" coverage for prior acts retroactive to
the date on which RHCI could become responsible for such acts. This prior
occurrence coverage operates with the same self-insured retention level. It is
RHCI's policy to record the liability for uninsured professional and general
liability losses related to
127
<PAGE>
asserted and unasserted claims arising from reported and unreported incidents
based on independent valuations which consider claim development factors, the
specific nature of the facts and circumstances giving rise to each reported
incident and RHCI's history with respect to similar claims.
EMPLOYEES
As of June 30, 1996, RHCI employed approximately 1,625 full-time and 1,540
part-time employees in its facilities and contract services operations,
including approximately 400 full-time equivalent nurses. In addition, RHCI has
a corporate headquarters staff of approximately 25, which includes individuals
who specialize in various areas of hospital operations to assist facilities
with particular management issues. RHCI considers its relationship with its
employees to be good.
PROPERTIES
The following table provides information concerning the 16 inpatient
facilities owned and operated by RHCI at December 31, 1996.
<TABLE>
<CAPTION>
TOTAL
DATE OPENED LICENSED
HOSPITAL(7) OR ACQUIRED BEDS
----------- ------------- --------
<S> <C> <C>
Havenwyck Hospital
Auburn Hills, MI.............................. November 1983 166
Brynn Marr Hospital
Jacksonville, NC.............................. December 1983 76
Hill Crest Hospital
Birmingham, AL................................ January 1984 130
Heartland Hospital
Nevada, MO.................................... April 1984 152
Greenbrier Hospital
Covington, LA................................. October 1984 67
Coastal Carolina Hospital
Conway, SC.................................... November 1984 98
Bayou Oaks Hospital
Houma, LA(1).................................. November 1985 98
The Bethany Pavilion
Bethany, OK(2)................................ December 1985 43
Meadowlake Hospital
Enid, OK...................................... February 1986 50
Benchmark Regional Hospital
Woods Cross, UT............................... August 1986 76
Desert Vista Hospital
Mesa, AZ(6)................................... February 1987 100
Chestnut Ridge Hospital
Morgantown, WV(3)............................. November 1987 70
The Haven Hospital
DeSoto, TX.................................... April 1990 102
Mission Vista Hospital
San Antonio, TX(6)............................ November 1991 61
Benchmark Behavioral Hospital
Midvale, UT (4)............................... June 1995 80
Gulf Coast Treatment Center
Fort Walton Beach, FL......................... December 1996(8) 98
-----
Total(5)................................... 1,467
=====
</TABLE>
128
<PAGE>
- --------
(1) The building in which RHCI's facility in Houma, Louisiana is located is
leased for an initial period ending January 31, 2005 (with an option to
renew for 20 years).
(2) The Bethany, Oklahoma facility is operated as a joint venture in which
RHCI operates and manages the behavioral health services of Bethany
General Hospital. See "Information Concerning RHCI --Business--Ownership
Arrangements and Operating Agreements."
(3) RHCI has entered into a 50-year ground lease for the property on which its
70-bed facility in Morgantown, West Virginia is located.
(4) The building in which RHCI's facility in Midvale, Utah is located is
leased for an initial period ending June 24, 1999 (with an option to renew
for an additional three years). See "Information Concerning RHCI--
Business--Acquisitions, Sales and Lease Commitments."
(5) Excludes Three Rivers Hospital. Three Rivers Hospital, a 64-bed facility
located in Covington, Louisiana, was closed on June 30, 1995. See
"Information Concerning RHCI--Business--Ownership Arrangements and
Operating Agreements."
(6) In April 1995, RHCI sold and immediately leased back the land, building
and fixed equipment associated with these facilities. The leases have an
initial term of 15 years and three successive renewal options of five
years each. See "Information Concerning RHCI--Business--Acquisition, Sales
and Lease Commitments."
(7) RHCI believes that its facilities are well maintained and are of adequate
size for present needs.
(8) Gulf Coast Treatment Center, a 98-bed facility in Fort Walton Beach,
Florida, which was formerly known as Harbor Oaks Hospital, is owned by
RHCI, but was leased to another healthcare provider through October 1996.
RHCI resumed operations at the facility in December 1996.
In March 1995, the FASB issued Statement 121. As required by Statement 121,
RHCI periodically reviews the long-lived assets (land, buildings, fixed
equipment and related cost in excess of net asset value of purchased
businesses) of each of its inpatient facilities to determine if the carrying
value of these assets is recoverable, based on the future cash flows expected
from the assets. Based on this review, RHCI determined that the carrying value
of certain long-lived assets was impaired (within the meaning of Statement
121) at June 30, 1996 and 1995. The amount of the impairment, calculated as
the excess of carrying value of the long-lived assets over the discounted
future cash flows expected from the assets, totalled approximately $4 million
and $20 million at June 30, 1996 and 1995, respectively. See "RHCI--
Management's Discussion and Analysis of Financial Condition and Results of
Operations."
In connection with RHCI's decision to relocate its corporate headquarters
from New Orleans, Louisiana to Coral Gables, Florida, RHCI has entered into an
office lease in Coral Gables for a term of three years ending in August 1999.
Upon relocation, RHCI's lease in New Orleans will be terminated.
LEGAL PROCEEDINGS
RHCI is subject to claims and suits arising in the ordinary course of
business. In addition, during fiscal 1996, the State of Louisiana requested
repayment of disproportionate share payments received by RHCI in fiscal years
1995 and 1994 totalling approximately $5,000,000. On the basis of discussions
to date between RHCI and the State, RHCI believes that this matter may be
settled for an amount significantly less than the State's initial request. See
"RHCI--Management's Discussion and Analysis of Financial Condition and Results
of Operations--Results of Operations."
RHCI has established reserves at June 30, 1996 for the estimated amounts
which might be recovered from RHCI 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
RHCI's financial position, results of operations or liquidity.
In February 1997, Reynold J. Jennings, a former Executive Vice President of
RHCI, resigned his employment with RHCI, to accept other employment, in breach
of his employment agreement with RHCI. In such case, under the employment
agreement between RHCI and Mr. Jennings, RHCI is required to make
129
<PAGE>
payments to Mr. Jennings of approximately $400,000 less approximately $100,000
owing by Mr. Jennings to RHCI in respect of split-dollar life insurance
premiums paid by RHCI and less any damages caused by Mr. Jennings' breach of
his employment agreement. In March 1997, Mr. Jennings commenced arbitration
and court proceedings (in the United States District Court for the Eastern
District of Louisiana) against RHCI in which he claims his employment was
terminated by RHCI and seeks damages of approximately $2,300,000. RHCI intends
to vigorously defend the proceedings. See "Information Concerning RHCI--
Management--Executive Compensation."
130
<PAGE>
MANAGEMENT
DIRECTORS OF RHCI
Certain information concerning the directors of RHCI is set forth below. All
of the directors of RHCI will remain as directors following the Merger.
Name of Director and Biographical Information
AARON BEAM, JR., age 52, Executive Vice President and Chief Financial
Officer of HEALTHSOUTH Corporation (provider of medical rehabilitation
services) since prior to 1991; Director of HEALTHSOUTH Corporation since 1993;
Director of RMCI; Director of RHCI since 1991.
PETER J. EVANS, age 47, Financial consultant to a number of Australian
companies; Partner, P.J. Evans & Co., a chartered accounting firm in
Australia, since prior to 1991; Former partner in big six accounting firm;
Director of Ramsay Pty. Limited (owner and operator of hospitals in
Australia); Prime Television Limited (operator of an Australian television
network); and RMCI; Director of RHCI since 1989.
THOMAS M. HAYTHE, age 57, Partner, Haythe & Curley (attorneys) since prior
to 1991; Director of Novametrix Medical Systems Inc. (manufacturer of
electronic medical instruments); Isomedix Inc. (provider of sterilization
services); Guest Supply, Inc. (provider of hotel guest room amenities,
accessories and products); Westerbeke Corporation (manufacturer of marine
engine products); and RMCI; Director of RHCI since 1987.
LUIS E. LAMELA, age 46, Vice Chairman of the Board of RHCI since January
1996; Chief Executive Officer of CAC Medical Centers, a division of United
HealthCare of Florida, since July 1996; President and Chief Executive Officer
of CAC--United HealthCare Plans of Florida from May 1994 to July 1996;
President and Chief Executive Officer of Ramsay--HMO, Inc. from prior to 1991
to May 1994; Director of RMCI; Director of RHCI since January 1996.
PAUL J. RAMSAY, age 60, Chairman of the Board of RHCI since July 1988;
President of RHCI from February 1988 to July 1988; Chairman of the Board of
RHCI from November 1987 to February 1988; involved in the healthcare industry
for more than 25 years; Chairman of the Board of Ramsay Pty. Limited (or its
predecessors); Ramsay Hospitals and Prime Television Limited; Director of
RMCI; Director of RHCI since 1987.
STEVEN J. SHULMAN, age 45, President of the Pharmacy and Disease Management
Group of Value Health, Inc. (provider of specialty managed care programs)
since September 1995; Executive Vice President of Value Health, Inc. since
prior to 1991 to September 1995; Director of Value Health, Inc. and Novametrix
Medical Systems Inc.; Director of RHCI since 1991.
MICHAEL S. SIDDLE, age 47, Managing Director (Chief Executive Officer) of
Ramsay Pty. Limited (or its predecessors) and Ramsay Hospitals since prior to
1991; various executive positions with corporations controlled by Paul J.
Ramsay since prior to 1991; Director of Prime Television Limited and RMCI;
Director of RHCI since 1987.
131
<PAGE>
EXECUTIVE OFFICERS OF RHCI
The executive officers of RHCI are as follows (all of the executive officers
of RHCI will remain as executive officers following the Merger):
<TABLE>
<CAPTION>
NAME POSITION AGE
---- -------- ---
<S> <C> <C>
Luis E. Lamela................ Executive Vice Chairman of the Board 46
Bert G. Cibran................ President and Chief Operating Officer 42
Carol C. Lang................. Executive Vice President and Chief
Financial Officer 50
Brent J. Bryson............... Senior Vice President 47
John A. Quinn................. Senior Vice President 42
Wallace E. Smith, Ph.D........ Senior Vice President 53
William N. Nyman.............. Vice President 43
Jorge Rico.................... Vice President 32
Daniel A. Sims................ Vice President and Corporate Controller 37
</TABLE>
Executive officers serve at the discretion of the RHCI Board. Certain
information concerning the executive officers of RHCI is set forth below.
Luis E. Lamela has been Executive Vice Chairman of the Board of RHCI since
January 1996; Chief Executive Officer of CAC Medical Centers, a division of
United HealthCare of Florida, since July 1996; President and Chief Executive
Officer of CAC A United HealthCare Plans of Florida from May 1994 to July
1996; President and Chief Executive Officer of Ramsay A HMO, Inc. from prior
to 1992 to May 1994; Director of RMCI; Director of RHCI since January 1996.
Bert G. Cibran has been President and Chief Operating Officer of RHCI since
August 1996; President of Summa Healthcare Group, Inc. (a healthcare
consulting firm) from February 1996 through August 1996; President and Chief
Operating Officer for the Florida operations of Physician Corporation of
America from February 1994 to February 1996; Executive Vice President of
Operations with Ramsay--HMO, Inc. from prior to 1992 to February 1994.
Carol C. Lang has been Executive Vice President and Chief Financial Officer
of RHCI since August 1996; President of HealthLink Enterprises, Inc.
("Healthlink") (a healthcare consulting firm) from prior to 1992 to August
1996.
Brent J. Bryson has been Senior Vice President of RHCI since January 1997
and Vice President of RHCI since October 1994; Senior Vice President, Southern
Region, with National Medical Enterprises, Inc. from November 1991 to October
1994; Vice President with National Medical Enterprises, Inc. from prior to
1992 to November 1991.
John A. Quinn has been Senior Vice President of RHCI since January 1997 and
Vice President since September 1991.
Wallace E. Smith, Ph.D. has been Senior Vice President of RHCI since prior
to 1992.
William N. Nyman has been Vice President of RHCI since August 1993. Regional
Controller of RHCI from prior to 1992 to July 1993.
Jorge Rico has been Vice President of RHCI since February 1997; Vice
President of Administration for United Health of Florida, Inc. from 1994 to
1997 and for Ramsay-HMO, Inc. from prior to 1992 to 1994.
132
<PAGE>
Daniel A. Sims has been Corporate Controller of RHCI since December 1993 and
Vice President since February 1997; Chief Financial Officer of a 175-bed
medical/surgical hospital from prior to 1992 to December 1993.
Executive officers serve at the discretion of the RHCI Board. No family
relationship exists among any of the Directors or executive officers of RHCI.
COMPENSATION OF DIRECTORS OF RHCI
During fiscal 1996, RHCI paid directors who were not employees of RHCI an
annual fee of $12,000 and a fee of $3,000 for each of the first four meetings
of the RHCI Board attended. On September 1, 1995, approximately 25% of the
fiscal 1996 fees to nonemployee directors were paid by way of the issuance of
1,750 shares of RHCI Common Stock and the grant of options to purchase 1,750
shares of RHCI Common Stock. Additionally, RHCI reimbursed directors for out-
of-pocket expenses incurred in connection with attending meetings of the RHCI
Board and committees of the RHCI Board. For fiscal 1997, it is RHCIs policy to
pay directors who are not employees of RHCI an annual fee of $12,000 and a fee
of $3,000 for each of the first four meetings of the RHCI Board attended
during the year, with no additional compensation to be paid for attendance at
additional meetings. In accordance with the terms of RHCIs credit agreements,
in October 1996, as payment of fiscal 1997 directors' fees, RHCI issued 16,000
shares of RHCI Common Stock to each of its directors (other than Mr. Galloway
who was issued 6,300 shares of RHCI Common Stock since Mr. Galloway did not
stand for reelection at RHCI's November 1996 Annual Meeting of Stockholders
and, accordingly, will not be a director for the entire 1997 fiscal year).
133
<PAGE>
EXECUTIVE COMPENSATION
The following table sets forth information for the fiscal years ended June
30, 1996, 1995 and 1994 concerning the compensation paid or awarded to the
Chief Executive Officer and the other most highly compensated executive
officers of RHCI.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM
COMPENSATION
ANNUAL COMPENSATION AWARDS
----------------------------- -------------
FISCAL SECURITIES
YEAR OTHER ANNUAL UNDERLYING ALL OTHER
NAME AND ENDED SALARY BONUS COMPENSATION STOCK OPTIONS COMPENSATION
PRINCIPAL POSITION JUNE 30 ($) ($) ($) (#) ($)
------------------ ------- ------- ------- ------------ ------------- ------------
<S> <C> <C> <C> <C> <C> <C>
Reynold J. Jennings(1).. 1996 225,859 (2) 7,500(3) 124,830(5) 4,421(9)
Former Executive Vice 1995 225,859 135,000 7,500(3) 50,000(6)(7) 63,830(9)
President 1994 141,162 -- 12,150(4) 124,830(7)(8) 7,319(9)
Wallace E. Smith........ 1996 160,609 12,000 4,800(3) -- --
Vice President 1995 160,609 6,300 4,800(3) -- --
1994 159,908 27,000 4,800(3) 6,242(7) 836
John A. Quinn........... 1996 155,598 20,000 4,800(3) 20,000(10) --
Senior Vice President 1995 135,156 45,000 4,800(3) -- --
1994 126,823 25,000 4,800(3) 6,242(7) 481
Brent J. Bryson......... 1996 122,248 -- 1,800(3) -- --
Senior Vice President 1995 131,748 -- 3,600(3) 18,725(7) --
1994 -- -- -- -- --
William N. Nyman........ 1996 120,478 20,000 4,800(3) 5,000(11) --
Vice President 1995 115,012 25,000 4,800(3) -- --
1994 104,889 25,000 4,000(3) 6,242(7) --
Gregory H. Browne(12)... 1996 59,865 -- -- -- 188,855(13)
Former Chief Executive 1995 220,757 -- 32,046(4) -- --
Officer 1994 206,472 -- 27,860(4) -- --
</TABLE>
- --------
(1) Mr. Jennings became Chief Executive Officer of RHCI in January 1996. He
assumed the position of Executive Vice President in August 1996 upon the
appointment of Bert G. Cibran as President and Chief Operating Officer of
RHCI. Mr. Jennings left the employment of RHCI in February 1997. See
"Employment and Other Agreements" below.
(2) Bonus for the fiscal year ended June 30, 1996 has not yet been
determined.
(3) Represents an automobile allowance.
(4) Includes a housing allowance for Mr. Jennings of approximately $9,000 and
for Mr. Browne of approximately $20,000.
(5) Represents options to purchase shares of RHCI Common Stock granted in
fiscal 1996. Does not include the repricing in fiscal 1996 of options to
purchase an aggregate of 299,660 shares of RHCI Common Stock.
(6) Does not include the repricing in fiscal 1995 of options to purchase
124,830 shares of RHCI Common Stock.
(7) Reflects the antidilution adjustment in connection with the Distribution.
(8) Does not include the repricing in fiscal 1994 of options to purchase
124,830 shares of RHCI Common Stock granted in fiscal 1994.
(9) Includes moving expense reimbursement and other costs of relocation
totalling $51,619 in 1995. Amount also includes or, in 1996 and 1994
represents, the benefit to Mr. Jennings of premiums paid by RHCI during
the fiscal year with respect to a split-dollar insurance arrangement,
which benefit was determined by calculating the time value of money from
the date premiums were paid until the date (March 1999) premiums may be
repaid to RHCI.
(10) Represents options to purchase shares of RHCI Common Stock granted in
fiscal 1996. Does not include the repricing in fiscal 1996 of options to
purchase an aggregate of 60,692 shares of RHCI Common Stock.
(11) Represents options to purchase shares of RHCI Common Stock granted in
fiscal 1996. Does not include the repricing in fiscal 1996 of options to
purchase an aggregate of 34,129 shares of RHCI Common Stock.
(12) Effective September 30, 1995, Mr. Browne resigned from his position as
Chief Executive Officer of RHCI. As part of a termination agreement
between Mr. Browne and RHCI, RHCI agreed to pay Mr. Browne his then
current salary of $231,000 during the twelve month period subsequent to
his resignation and certain travel costs, estimated at $18,000, following
his resignation. These amounts were accrued in RHCI's fiscal 1995
consolidated financial statements contained in this Joint Proxy
Statement/Prospectus.
(13) Includes severance payments of $177,435 and, as part of Mr. Browne's
severance arrangements, travel costs subsequent to his resignation of
$11,420, all through June 30, 1996.
134
<PAGE>
On April 24, 1995, RHCI effected the Distribution. In connection with the
Distribution and in accordance with RHCI's 1990, 1991 and 1993 Stock Option
Plans, RHCI made certain antidilution adjustments to stock options issued
under these Stock Option Plans. These adjustments were made to reflect the
reduction in the market price of the RHCI Common Stock following the
Distribution and to preserve the aggregate "spread" (if any) between the
aggregate option price under each option and the aggregate market value of the
shares of RHCI Common Stock purchasable upon exercise of the option.
Accordingly, the exercise price of each option outstanding under RHCI's 1990,
1991 and 1993 Stock Option Plans was adjusted by multiplying the exercise
price in effect prior to the Distribution by 0.8011 and the number of shares
covered by each option was adjusted by multiplying the number of shares prior
to the Distribution by 1.2483. All information contained in this Proxy
Statement reflects such adjustments.
On November 10, 1995, the RHCI Board approved an offer (the "Repricing
Offer") to the holders of options to purchase RHCI Common Stock under the RHCI
Stock Option Plans whereby each option holder could exchange existing options
held by such holder for amended options to purchase the same number of shares
of RHCI Common Stock at an exercise price of $2.50 per share; provided that
such repriced options (the "Repriced Options") would not be exercisable until
the date which is six months prior to their expiration date and provided
further that vested Repriced Options would become exercisable earlier in the
event that, at the time of exercise, the closing price for the RHCI Common
Stock as quoted on NASDAQ has equalled or exceeded $7.00 (subject to
adjustment for events affecting the RHCI Common Stock or the capital structure
of RHCI) per share on at least 15 trading days, which need not be consecutive,
subsequent to November 10, 1995. An aggregate of 1,539,095 (out of 2,052,630
outstanding) RHCI Stock Options were repriced pursuant to the Repricing Offer.
135
<PAGE>
The following table sets forth the grants of stock options to the executive
officers named in the Summary Compensation Table during the fiscal year ended
June 30, 1996. The table also includes options which were repriced pursuant to
the Repricing Offer. The amounts shown for each of the named executive
officers as potential realizable values are based on arbitrarily assumed
annualized rates of stock price appreciation of five percent and ten percent
over the exercise price of the options during the full terms of the options.
No gain to the optionees is possible without an increase in stock price which
will benefit all stockholders proportionately. These potential realizable
values are based solely on arbitrarily assumed rates of appreciation required
by applicable Securities and Exchange Commission regulations. Actual gains, if
any, on option exercises and holdings of RHCI Common Stock are dependent on
the future performance of the RHCI Common Stock and overall stock market
conditions. There can be no assurance that the potential realizable values
shown in this table will be achieved.
STOCK OPTION GRANTS IN FISCAL 1996
<TABLE>
<CAPTION>
POTENTIAL REALIZABLE
VALUE AT ASSUMED
ANNUAL RATES OF STOCK
PRICE APPRECIATION
INDIVIDUAL GRANTS FOR OPTION TERM
-------------------------------------------------- -----------------------
% OF TOTAL
OPTIONS
GRANTED TO EXERCISE OR
OPTIONS EMPLOYEES IN BASE PRICE EXPIRATION
NAME GRANTED (#) FISCAL YEAR ($/SH) DATE 5%($) 10%($)
---- ----------- ------------ ----------- ---------- ---------- -----------
<S> <C> <C> <C> <C> <C> <C>
Reynold J.
Jennings.. 124,830(1) $2.50 11/9/2003 148,500 357,000
50,000(1) $2.50 6/1/2005 74,000 177,000
124,830(2,3) 51.3% $2.50 8/30/2005 196,000 496,800
John A.
Quinn..... 12,483(1) $2.50 8/7/2001 10,100 21,000
18,725(1) $2.50 2/4/2002 16,700 37,300
6,242(1) $2.50 3/12/2003 6,600 15,200
6,242(1) $2.50 5/26/2004 8,000 18,700
20,000(2,3) 8.2% $2.50 8/30/2005 31,400 79,600
William N.
Nyman..... 2,497(1) $2.50 8/7/2001 2,000 4,200
6,242(1) $2.50 2/4/2002 5,600 12,400
14,148(1) $2.50 3/12/2003 15,000 34,400
6,242(1) $2.50 11/9/2003 7,400 17,900
5,000(2,3) 2.1% $2.50 8/30/2005 7,900 19,900
Gregory H.
Browne(4).. 10,403(1) $2.50 (4) (4) (4)
124,830(1) $2.50 (4) (4) (4)
43,691(1) $2.50 (4) (4) (4)
8,321(3,5) $2.50 (4) (4) (4)
</TABLE>
- --------
(1) Represents options to purchase shares of RHCI Common Stock which were
granted to the named executive officer in a fiscal year prior to 1996 but
which were repriced during fiscal 1996 pursuant to the Repricing Offer
discussed above.
(2) Represents options to purchase shares of RHCI Common Stock which were
granted to the named executive officer during fiscal 1996 with an exercise
price of $3.38 per share and which were repriced during fiscal 1996
pursuant to the Repricing Offer discussed above.
(3) The options include a reload feature. The reload feature provides that if
upon exercise of an option the optionee pays the exercise price of such
option in shares of RHCI Common Stock owned by the optionee for at least
six months, RHCI shall grant such optionee on the date of such exercise an
additional option to purchase a number of shares of RHCI Common Stock
equal to the number of shares of RHCI Common Stock transferred to RHCI in
payment of the exercise price.
(4) Effective September 30, 1995, Mr. Browne resigned from his position as
Chief Executive Officer of RHCI. All outstanding stock options held by Mr.
Browne expired unexercised on August 13, 1996.
(5) Represents options to purchase shares of RHCI Common Stock which were
granted on November 10, 1995 (the date of the Repricing Offer) while Mr.
Browne was a director with an exercise price of $2.50 per share.
136
<PAGE>
The following table summarizes stock options exercised during fiscal 1996
and the number and value of options held by the executive officers named in
the Summary Compensation Table at June 30, 1996.
STOCK OPTION EXERCISES IN FISCAL 1996 AND
STOCK OPTION VALUES AT JUNE 30, 1996
<TABLE>
<CAPTION>
NUMBER OF VALUE OF UNEXERCISED
UNEXERCISED OPTIONS IN-THE-MONEY OPTIONS
SHARES AT JUNE 30, 1996(#) AT JUNE 30, 1996($)(1)
ACQUIRED VALUE ------------------------- -------------------------
NAME ON EXERCISE REALIZED EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- ---- ----------- -------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Reynold J. Jennings..... -- -- -- 299,660 -- 149,830
Wallace E. Smith........ -- -- 47,853 -- -- --
John A. Quinn........... 3,000 1,125 -- 60,692 -- 30,346
William N. Nyman........ -- -- -- 34,129 -- 17,065
Gregory H. Browne(2).... -- -- -- 187,245(2) -- 93,622(2)
</TABLE>
- --------
(1) In-the-money options are those where the fair market value of the
underlying RHCI Common Stock exceeds the exercise price of the option. The
value of in-the-money options is determined in accordance with regulations
of the Securities and Exchange Commission by subtracting the aggregate
exercise price of the options from the aggregate year-end value of the
underlying RHCI Common Stock.
(2) Effective September 30, 1995, Mr. Browne resigned from his position as
Chief Executive Officer of RHCI. All outstanding stock options held by Mr.
Browne expired unexercised on August 13, 1996.
All outstanding stock options in the above table held by the executive
officers (except Mr. Smith) were repriced pursuant to the Repricing Offer.
In accordance with applicable Commission regulations, the following table
sets forth information as to the repricing of all options held by each
executive officer of RHCI during the past ten fiscal years.
137
<PAGE>
TEN-YEAR OPTION REPRICINGS
<TABLE>
<CAPTION>
LENGTH OF
MARKET PRICE ORIGINAL
OF EXERCISE OPTION TERM
NUMBER OF STOCK AT PRICE AT REMAINING AT
OPTIONS TIME OF TIME OF NEW DATE OF
REPRICED OR REPRICING OR REPRICING OR EXERCISE REPRICING OR
NAME DATE AMENDED AMENDMENT AMENDMENT PRICE AMENDMENT
- ---- ----------------- ----------- ------------ ------------ -------- ------------
<S> <C> <C> <C> <C> <C> <C>
Reynold J. Jennings..... November 10, 1995 124,830 $2.50 $3.75 $2.50 8 years
50,000 2.50 3.75 2.50 9.5 years
124,830 2.50 3.38 2.50 10 years
June 1, 1995 124,830 3.75 5.51 3.75 8 years
May 26, 1994 124,830 5.51 6.31 5.51 9 years
Wallace E. Smith........ November 16, 1992 20,804 $4.01 $5.61 $4.01 3 years
29,128 4.01 5.61 4.01 8 years
April 7, 1992 20,804 5.61 7.81 5.61 4 years
29,128 5.61 7.81 5.61 9 years
November 11, 1991 29,128 7.81 11.32 7.81 10 years
John A. Quinn........... November 10, 1995 12,483 $2.50 $4.01 $2.50 6 years
18,725 2.50 4.01 2.50 6 years
6,242 2.50 4.25 2.50 7.5 years
6,242 2.50 5.51 2.50 8.5 years
17,000 2.50 3.38 2.50 10 years
November 16, 1992 12,483 4.01 5.61 4.01 8 years
18,725 4.01 5.61 4.01 9 years
April 7, 1992 12,483 5.61 7.81 5.61 9 years
18,725 5.61 7.81 5.61 10 years
November 11, 1991 12,483 7.81 11.32 7.81 10 years
William N. Nyman........ November 10, 1995 2,497 $2.50 $4.01 $2.50 6 years
6,242 2.50 4.01 2.50 6 years
14,148 2.50 4.25 2.50 7.5 years
6,242 2.50 6.31 2.50 8 years
5,000 2.50 3.38 2.50 10 years
November 16, 1992 2,497 4.01 5.61 4.01 8 years
6,242 4.01 5.61 4.01 9 years
6,242 4.01 5.61 4.01 9 years
April 7, 1992 2,497 5.61 7.81 5.61 9 years
6,242 5.61 7.81 5.61 10 years
6,242 5.61 7.01 5.61 10 years
November 11, 1991 2,497 7.81 11.22 7.81 10 years
6,242 7.81 11.32 7.81 10 years
Bruce R. Soden(1)....... November 16, 1992 8,321 $4.01 $6.01 $4.01 3 years
22,886 4.01 5.61 4.01 8 years
18,725 4.01 5.61 4.01 9 years
April 7, 1992 22,886 5.61 7.81 5.61 9 years
18,725 5.61 7.01 5.61 10 years
November 11, 1991 22,886 7.81 11.66 7.81 10 years
Gregory H. Browne(2).... November 10, 1995 10,403 $2.50 $4.01 $2.50 6 years
124,830 2.50 4.01 2.50 6 years
43,691 2.50 4.25 2.50 7.5 years
November 16, 1992 8,321 4.01 6.01 4.01 3 years
10,403 4.01 5.61 4.01 8 years
249,660 4.01 5.61 4.01 9 years
April 7, 1992 10,403 5.61 7.81 5.61 9 years
124,830 5.61 7.01 5.61 10 years
November 11, 1991 10,403 7.81 11.32 7.81 10 years
</TABLE>
138
<PAGE>
<TABLE>
<CAPTION>
LENGTH OF
MARKET PRICE ORIGINAL
OF EXERCISE OPTION TERM
NUMBER OF STOCK AT PRICE AT REMAINING AT
OPTIONS TIME OF TIME OF NEW DATE OF
REPRICED OR REPRICING OR REPRICING OR EXERCISE REPRICING OR
NAME DATE AMENDED AMENDMENT AMENDMENT PRICE AMENDMENT
- ---- ----------------- ----------- ------------ ------------ -------- ------------
<S> <C> <C> <C> <C> <C> <C>
Curtis L. Dosch(3)...... November 16, 1992 2,497 $4.01 $5.61 $4.01 8 years
6,242 4.01 5.61 4.01 9 years
6,242 4.01 5.61 4.01 9 years
April 7, 1992 2,497 5.61 7.81 5.61 9 years
6,242 5.61 7.81 5.61 10 years
6,242 5.61 7.01 5.61 10 years
November 11, 1991 2,497 7.81 11.22 7.81 10 years
6,242 7.81 11.32 7.81 10 years
Rea A. Oliver(4)........ November 16, 1992 15,000 $5.00 $7.00 $5.00 9 years
5,000 5.00 7.00 5.00 8 years
April 7, 1992 5,000 7.00 9.75 7.00 10 years
5,000 7.00 8.75 7.00 10 years
5,000 7.00 9.75 7.00 9 years
November 11, 1991 5,000 9.75 14.13 9.75 10 years
</TABLE>
- --------
(1) Mr. Soden was the Chief Financial Officer of RHCI from September 1991 to
September 1993 and a member of its Board of Directors from September 1993
to August 1995.
(2) Effective September 30, 1995, Mr. Browne resigned from his position as
Chief Executive Officer of RHCI. All outstanding stock options held by Mr.
Browne expired unexercised on August 13, 1996.
(3) Mr. Dosch resigned from RHCI in March 1996. All outstanding stock options
held by Mr. Dosch expired unexercised.
(4) Mr. Oliver resigned from RHCI in March 1994. All outstanding stock
options held by Mr. Oliver expired unexercised.
EMPLOYMENT AND OTHER AGREEMENTS
In August 1996, RHCI entered into an employment agreement with Bert G.
Cibran, President and Chief Operating Officer of RHCI, providing for the
payment of an initial annual base salary of $300,000, subject to annual
increases determined by the RHCI Board and minimum annual increases based on
the Consumer Price Index. In addition, Mr. Cibran is entitled to an annual
bonus in an amount equal to 2% of any increase in the operating income of RHCI
over the preceding fiscal year. The employment agreement is for an initial
term of three years with annual renewals. Pursuant to the employment
agreement, RHCI agreed to provide Mr. Cibran an automobile allowance and
options to purchase 125,000 shares of RHCI Common Stock. In addition, Mr.
Cibrans employment by RHCI may be terminated by either RHCI or Mr. Cibran;
however, in the event RHCI terminates Mr. Cibrans employment without due
cause, RHCI must continue to pay Mr. Cibran his base salary in effect at the
time for 24 months after the date of such termination. The agreement also
provides for a lump sum cash payment to Mr. Cibran of his bonus and 24 months
base salary upon termination of his employment for any reason following
certain change of control events involving RHCI.
In August 1996, RHCI entered into an employment agreement with Reynold J.
Jennings, Executive Vice President of RHCI, providing for the payment of an
initial annual base salary of $275,000, subject to annual increases determined
by the RHCI Board and minimum annual increases based on the Consumer Price
Index. In addition, Mr. Jennings is entitled to an annual bonus in an amount
equal to 2% of any increase in the operating income of RHCI over the preceding
fiscal year. The employment agreement, which replaces an employment agreement
entered into in October 1993, expires on December 31, 1999. The agreement also
provides for a split-dollar insurance arrangement, pursuant to which RHCI will
pay the premium costs of life insurance for Mr. Jennings (up to $150,000). The
premium costs are repayable by Mr. Jennings to RHCI under certain
circumstances and also are scheduled to be forgiven and treated as a bonus in
November 1998, provided Mr. Jennings is employed by RHCI at that time. Mr.
Jennings employment agreement also provides for the use of an RHCI automobile
and gives him the right to require RHCI to purchase options covering 124,830
shares of RHCI Common Stock granted to him pursuant to his initial employment
agreement at a price of $3.20 per share (as adjusted for stock dividends or
splits). In addition, Mr. Jennings will receive reimbursement of relocation
139
<PAGE>
expenses in an amount not to exceed $60,000. Pursuant to the employment
agreement, Mr. Jennings employment by RHCI may be terminated by either RHCI
or, upon six months notice, by Mr. Jennings; however, in the event RHCI
terminates Mr. Jennings employment without due cause, RHCI must continue to
pay Mr. Jennings his base salary in effect at the time through December 31,
1999. The employment agreement also provides for a lump sum cash payment to
Mr. Jennings of his bonus and the greater of (a) 12 months base salary, or (b)
the base salary that would have been payable to Mr. Jennings from the date of
termination through December 31, 1999, upon the termination of his employment
for any reason following certain change of control events involving RHCI. Mr.
Jennings resigned his employment with RHCI in February 1997 to accept other
employment, in breach of his employment agreement with RHCI. In such case,
under the employment agreement, RHCI is required to make payments to Mr.
Jennings of approximately $400,000 less approximately $100,000 owing by Mr.
Jennings to RHCI in respect of split-dollar life insurance premiums paid by
RHCI and less any damages caused by Mr. Jennings' breach of his employment
agreement. In March 1997, Mr. Jennings commenced arbitration and court
proceedings (in the United States District Court for the Eastern District of
Louisiana) against RHCI in which he claims his employment was terminated by
RHCI and seeks damages of approximately $2,300,000. RHCI intends to vigorously
defend the proceedings.
In August 1996, RHCI entered into a two year services agreement with
Healthlink, a Florida corporation of which Carol C. Lang is the sole
stockholder, pursuant to which Healthlink agreed to make available to RHCI the
services of Carol C. Lang, as the Executive Vice President and Chief Financial
Officer of RHCI. Prior to entering into the services agreement, Healthlink has
acted as a consultant to RHCI. The services agreement provides for the payment
of an initial annual base compensation to Healthlink of $240,000, subject to
annual increases determined by the RHCI Board and minimum annual increases
based on the Consumer Price Index. In addition, Healthlink is entitled to a
bonus of up to 40% of the base compensation, based on the achievement of
targets set by the President of RHCI or the RHCI Board. In addition, pursuant
to the services agreement, RHCI agreed to provide Ms. Lang options to purchase
100,000 shares of RHCI Common Stock. The services agreement may be terminated
by RHCI or, upon three months notice, by Healthlink; however, in the event
RHCI terminates the agreement without due cause, RHCI must continue to pay the
base compensation until the later of the end of the term of the services
agreement or six months after the date of termination. The services agreement
also provides for a lump sum cash payment to Healthlink of any bonus due and
the greater of (a) 12 months base compensation or (b) the base compensation
that would have been payable to Healthlink from the date of termination to the
last day of the services agreement, upon the termination of the services
agreement for any reason following certain change of control events involving
RHCI.
In September 1996, RHCI entered into an employment agreement with Brent J.
Bryson, Senior Vice President of RHCI, providing for the payment of an initial
annual base salary of $180,000, subject to annual review by the RHCI Board.
The employment agreement also provides for the payment of a bonus of up to 2%
of the improvement in operating income of assigned operations, based upon the
achievement by RHCI and Mr. Bryson of certain performance targets. In
addition, the agreement provides for an automobile allowance, the
reimbursement of certain relocation expenses and options to purchase 60,000
shares of RHCI Common Stock. Pursuant to the employment agreement, if RHCI
terminates the agreement for any reason other than due cause, Mr. Bryson will
be entitled to continue to receive his base salary for a period of six months
after the date of such termination.
In January 1992, RHCI entered into an employment agreement with Gregory H.
Browne, Chief Executive Officer of RHCI through September 30, 1995, providing
for the payment of an initial annual base salary of $200,000, subject to
annual increases determined by the RHCI Board and minimum annual increases
based on the Consumer Price Index. The employment agreement was for an initial
term of two years with annual renewals. Mr. Browne's employment agreement was
renewed in January 1994 and again in January 1995. In addition, in February
1995, Mr. Browne's base salary was increased by $25,000 by the RHCI Board.
Pursuant to the employment agreement, RHCI agreed to provide Mr. Browne with
housing and automobile allowances, reimbursement of certain travel expenses
and a bonus based on the positive percentage change in earnings per share
between years. In September 1995, Mr. Browne announced his intention to resign
from his positions as
140
<PAGE>
Vice Chairman and Chief Executive Officer of RHCI, effective September 30,
1995. As part of a termination agreement, RHCI paid Mr. Browne his then
current salary during the 12-month period subsequent to his resignation and
certain travel costs following his resignation.
In January 1992, RHCI entered into employment agreements with Wallace E.
Smith, Senior Vice President of RHCI and John A. Quinn, Senior Vice President
of RHCI, for the payment of initial annual base salaries to Mr. Smith and Mr.
Quinn of $125,000 and $115,000, respectively, subject to annual review by the
RHCI Board. The base salaries of Mr. Smith and Mr. Quinn have been increased
periodically since the inception of the agreement and, for the fiscal year
ended June 30, 1996, their base salaries were $160,000 and $155,000,
respectively. The agreements also provide for the payment to Mr. Smith and Mr.
Quinn of a bonus of up to 30% of their respective base salaries based upon the
attainment of certain performance targets, as well as a discretionary amount
based on job performance and approved by the Compensation and Conflict of
Interest Committee of the RHCI Board. In addition, the employment agreements
provide for an automobile allowance and the reimbursement of certain
relocation expenses. Pursuant to the agreements, if RHCI terminates either of
the agreements for any reason other than due cause, the employee will be
entitled to continue to receive his base salary for a period of six months
after the date of such termination.
In March 1997, RHCI entered into an employment agreement with Martin
Lazoritz, M.D. to serve as RHCI's Executive Vice President and Chief Medical
Officer, providing for the payment of an initial annual base salary of
$275,000, subject to annual increases determined by the RHCI Board and minimum
annual increases based on the Consumer Price Index. In addition, Dr. Lazoritz
is entitled to an annual bonus to be determined by the RHCI Board. The
employment agreement is for an initial term of three years commencing on the
date of the Merger, with annual renewals thereafter. Pursuant to the
employment agreement, RHCI agreed to provide Dr. Lazoritz options to purchase
100,000 shares of RHCI Common Stock. Dr. Lazoritz's employment by RHCI may be
terminated by either RHCI or Dr. Lazoritz; however, in the event RHCI
terminates Dr. Lazoritz's employment without due cause, RHCI must continue to
pay Dr. Lazoritz his base salary in effect at the time for 12 months after the
date of such termination. The agreement also provides for a lump sum cash
payment to Dr. Lazoritz of 12 months' base salary upon termination of his
employment for any reason following certain change of control events involving
RHCI.
COMPLIANCE WITH SECTION 16(A) OF THE SECURITIES EXCHANGE ACT OF 1934
Section 16(a) of the Exchange Act requires RHCI's directors and executive
officers, and persons who own more than ten percent of RHCI's Common Stock, to
file with the Commission initial reports of ownership and reports of changes
in ownership of RHCI Common Stock. Officers, directors and greater than ten
percent (10%) stockholders are required by Commission regulations to furnish
RHCI with copies of all Section 16(a) reports they file. For the fiscal year
ended June 30, 1996, all Section 16 reporting persons made all filings in a
timely manner.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS INVOLVING RHCI, RMCI AND
AFFILIATES THEREOF
Relationship with the Ramsay Affiliates
Ramsay HSA, Ramsay Holdings and Ramsay Hospitals are corporations controlled
by RHCI's Chairman, Paul J. Ramsay. At January 1, 1997, Ramsay HSA and Ramsay
Holdings owned of record approximately 23.2% of the issued and outstanding
shares of RHCI Common Stock and 100% of the issued and outstanding shares of
RHCI Series C Preferred Stock and had an approximate 34.3% voting interest in
RHCI. In addition, the Ramsay Affiliates hold a voting interest in RMCI of
approximately 69.0%. After consummation of the Merger, the Ramsay Affiliates
will hold approximately 29.5% of the issued and outstanding shares of RHCI
Common Stock and 100% of the issued and outstanding shares of RHCI Preferred
Stock and will hold a voting interest in RHCI of approximately 42.7%. See
"Compensation Committee Interlocks and Insider Participation" below.
141
<PAGE>
Management Agreements
In June 1992, RHCI renewed its management agreement (the "Management
Agreement") with Ramsay Health Care Pty. Limited (the "Manager"), an affiliate
of Paul J. Ramsay. Pursuant to the Management Agreement, the Manager provides
managerial services to RHCI including, but not limited to (a) participation in
overall strategic planning of RHCI, (b) strategic and operational discussions
with the executive officers of RHCI, (c) review and evaluation of possible
acquisition candidates, (d) review of material contracts and commitments
entered into by RHCI and (e) participation in debt refinancing negotiations.
In addition, the Manager provides a pool of management standby resources (on
both a part-time and full-time basis) to mitigate the impact of executive and
senior management turnover. The Management Agreement provides for the payment
of an initial annual management fee of $677,422, subject to increases based on
increases in the Consumer Price Index and subject to certain restrictions set
forth in certain credit agreements to which RHCI is a party. The management
fee payable under the Management Agreement was set on the basis of a
negotiated amount based on the time spent by personnel of the Manager in
performing the duties pursuant to the Management Agreement. During the fiscal
year ended June 30, 1996, RHCI incurred management fee expenses of $737,000
for services performed by the Manager under the Management Agreement. Of this
total, approximately $560,000 was paid by way of the issuance of shares of
RHCI Common Stock to Ramsay Holdings and the remainder was paid in cash. In
August 1996, RHCI issued additional shares of RHCI Common Stock to Ramsay
Holdings for management fees due under the Management Agreement in fiscal
1997. (See Stock Purchase Agreementsa,9AK and "Compensation Committee
Interlocks and Insider Participation" below.)
On September 10, 1996, RHCI entered into a letter agreement with the Manager
and Ramsay Holdings which terminated the Management Agreement effective July
1, 1997. In consideration for this termination, RHCI issued to Ramsay Holdings
warrants to purchase 250,000 shares of RHCI Common Stock at an exercise price
of $2.63 per share. These warrants are fully exercisable and expire on
September 10, 2006.
Effective on the Distribution Date, RMCI entered into a management agreement
(the "RMCI Management Agreement") with the Manager. The term of the RMCI
Management Agreement will terminate upon the earlier of (i) October 1997 or
(ii) one year after written notice of termination given by either party to the
RMCI Management Agreement. The RMCI Management Agreement provides for the
payment of an annual management fee equal to the greater of $100,000 per annum
and 0.50% of the gross revenues of RMCI and its subsidiaries on a consolidated
basis for any such year. Pursuant to the RMCI Management Agreement, the
Manager provides managerial services to RMCI including, but not limited to (a)
participation in overall strategic planning of RMCI, (b) strategic and
operational discussions with the chief executive and other officers of RMCI,
(c) review and evaluation of possible acquisition candidates and development
projects, (d) review of material contracts and commitments entered into by
RMCI and (e) participation in bank and other financing negotiations. In
addition, the Manager will provide a pool of management standby resources (on
both a part-time and full-time basis) to mitigate the impact of any executive
and senior management turnover. The management fee payable to the Manager
under the RMCI Management Agreement has been established on the basis of a
negotiated amount based on the anticipated time to be spent and out-of-pocket
costs to be incurred by personnel of the Manager in performing its duties
pursuant to the RMCI Management Agreement, including expenses for travel by
the Manager's personnel to and from RMCI's annual management conference and
all other meetings at which representatives of the Manager will be present.
There will be no separate reimbursement for such travel and other out-of-
pocket costs, all of which will be paid from the annual management fee. In
addition, directors of RMCI who reside in Australia and who incur travel
expenses and other out-of-pocket costs in their capacities as directors,
including in connection with their attendance at Board of Director and other
meetings of RMCI, will not receive separate reimbursement for such costs. The
RMCI Management Agreement will terminate on the Effective Date of the Merger.
Distribution of RMCI and the Rights Offering by RMCI
On April 24, 1995 (the "Distribution Date"), RHCI effected the Distribution
to the holders of record as of April 21, 1995 (the "Distribution Record Date")
of (i) the RHCI Common Stock, (ii) RHCI's Class A Convertible Preferred Stock,
par value $1.00 per share, and (iii) the RHCI Series C Preferred Stock.
142
<PAGE>
In connection with the Distribution, Ramsay HSA received its pro rata share
of RMCI Common Stock based upon the number of issued and outstanding shares of
RHCI Common Stock held by Ramsay HSA as of the Distribution Record Date and,
in addition, each of Ramsay HSA and Ramsay Holdings received their respective
pro rata share of RMCI Common Stock based upon the number of issued and
outstanding shares of RHCI Common Stock into which the issued and outstanding
RHCI Series C Preferred Stock held by them was convertible as of the
Distribution Record Date.
Immediately after the close of business on the Distribution Date, RMCI
effected the RMCI Rights Offering and issued, at no cost, to the holders of
RHCI Common Stock of record as of the Distribution Date, other than the Ramsay
Affiliates, transferrable rights (the "Rights") to subscribe for and purchase
up to 980,913 shares of RMCI Common Stock for a price of $2.00 per share. The
RMCI Rights Offering expired on June 8, 1995 with all Rights having been
exercised.
Debt Financing Arrangements
In connection with the Distribution in April 1995, RMCI issued to RHCI the
RMCI Subordinated Promissory Note in the principal amount of $6,000,000, which
note bears interest at 8% per annum and evidences certain advances by RHCI
made to or on behalf of RMCI since RMCI's inception, including for working
capital and other general corporate purposes and partially to finance the cash
portion of the purchase prices of certain acquired businesses. In addition, at
December 31, 1996, RMCI owed RHCI $600,000 of accrued interest on the RMCI
Subordinated Promissory Note from October 1, 1995 and approximately $2,215,000
of additional amounts paid by RHCI on behalf of RMCI or charged by RHCI to
RMCI for certain administrative services. Of the $6,000,000 due on the RMCI
Subordinated Promissory Note, approximately $2,100,000 is due on or before
December 31, 1997 and the remainder is payable in 11 quarterly installments of
approximately $353,000, beginning March 31, 1998. RHCI has agreed that the
payment of interest on the RMCI Subordinated Promissory Note for the period
October 1, 1995 through December 31, 1997, as well as the additional amounts
owed of approximately $2,215,000, will not be required to be made until after
January 1, 1998, all on terms and conditions to be mutually agreed to by RHCI
and RMCI. Following the Merger, amounts owing by RMCI to RHCI will remain
outstanding as intercompany indebtedness.
The RMCI Subordinated Promissory Note is unsecured and subordinated and
junior in right of payment to all indebtedness of RMCI and its subsidiaries
incurred in connection with (i) the acquisition of FPM, (ii) the acquisition
of HDI, a former managed mental healthcare services division of Phoenix South,
(iii) future acquisitions of other managed mental healthcare services
businesses and (iv) any other Senior Indebtedness (as defined in the RMCI
Subordinated Promissory Note), including any indebtedness arising under the
First Union Credit Facility and any other bank indebtedness of RMCI or its
subsidiaries.
Issuance of RMCI Common Stock and Warrants to Ramsay Hospitals Prior to the
Distribution
On October 27, 1994 (the "First Closing"), prior to the Distribution, RMCI
consummated $3,320,000 of a $5,820,000 private placement of RMCI Common Stock
(the "Private Placement"). At the First Closing, Ramsay Hospitals purchased
1,500,000 shares of RMCI Common Stock (the "First Shares") and three officers
of RMCI purchased an aggregate of 160,000 shares of RMCI Common Stock. On May
31, 1995, Ramsay Hospitals purchased 1,250,000 shares of RMCI Common Stock
(the "Second Shares"; collectively with the First Shares, the "Private
Placement Shares") for an aggregate purchase price of $2,500,000.
In connection with the Private Placement and the Distribution, RMCI issued
warrants (the "Private Placement Warrants") to purchase an aggregate of
125,000 shares of RMCI Common Stock to Ramsay Hospitals, at an exercise price
per share of $2.00 per share.
As part of the Private Placement, RMCI and Ramsay Hospitals entered into a
Registration Rights Agreement, pursuant to which RMCI granted to Ramsay
Hospitals and its transferees one "demand" and unlimited "piggyback"
registration rights covering the Private Placement Shares and the 125,000
shares of RMCI Common Stock issuable upon the exercise of the Private
Placement Warrants.
143
<PAGE>
Other Issuances of RMCI Common Stock
On October 27, 1994, prior to the Distribution, in conjunction with the
purchase of shares of RMCI Common Stock by Ramsay Hospitals, RMCI issued and
sold 75,000 shares of RMCI Common Stock to Parveez A. Oliaii and 50,000 shares
of RMCI Common Stock to Martin Lazoritz, executive officers of RMCI, and
35,000 shares of RMCI Common Stock to another officer of a subsidiary of RMCI,
in each case at a purchase price per share equal to $2.00 per share. RMCI
entered into stock purchase agreements with each of these officers pursuant to
which these individuals purchased their respective shares of RMCI Common
Stock. Mr. Oliaii issued a promissory note to RMCI in the original principal
amount of $148,500 as part of the purchase price for the 75,000 shares of RMCI
Common Stock purchased by him. Principal on the promissory note is payable in
quarterly installments commencing on December 31, 1995. Interest on such
promissory note is computed at a fluctuating rate per annum equal to the one
year London Interbank Offered Rate, as in effect from time to time, and is
payable quarterly in arrears, commencing on March 31, 1995.
RMCI and its subsidiaries Apex, Apex Healthcare of Louisiana, Inc., Apex
Healthcare of Alabama, Inc. and Apex Healthcare of Mississippi, Inc. commenced
an action on July 1, 1996 in the Circuit Court of Jefferson County, Alabama
against Parveez A. Oliaii (a former officer of RMCI and the former Chief
Executive Officer of Apex), and against Berenson Minella & Company, Wexford
Capital Corporation, Wexford Management LLC, Apex Acquisition Corporation and
Karen M. Ryugo (collectively, the "Other Defendants"). The complaint alleges
that all defendants tortiously and fraudulently interfered with RMCI's
proposed sale of Apex, including its subsidiaries, and alleges that Mr. Oliaii
breached his employment contract with RMCI and his fiduciary duties to all
plaintiffs. The complaint seeks damages in an amount of no less than $3
million, plus punitive damages. On October 4, 1996, Mr. Oliaii asserted a
counterclaim alleging that the plaintiffs breached his employment contract by
terminating him without cause and failing to pay him certain compensation
allegedly owed pursuant to the employment contract. Mr. Oliaii's counterclaim
seeks damages of at least $325,000 and other remedies. In addition, on October
21, 1996, the Other Defendants asserted counterclaims against RMCI and Apex
alleging fraud and breach of contract seeking unspecified compensatory and
punitive damages. Discovery in this litigation is ongoing.
Certain Agreements in Connection with the Distribution
Following the Distribution, RHCI and RMCI became separate, publicly traded
companies with the contractual arrangements described below. Other than by
reason of their equity ownership in RHCI and RMCI, neither Ramsay Holdings,
Ramsay HSA, nor Ramsay Hospitals have any interest in RHCI's or RMCI's rights
and benefits arising under these contractual arrangements. In addition other
than by reason of his equity ownership interests in Ramsay HSA, Ramsay
Holdings and Ramsay Hospitals, Mr. Ramsay does not have any ownership
interests in RHCI or RMCI or their respective rights and benefits under these
contractual arrangements.
In connection with the Distribution, RHCI and RMCI entered into a Second
Amended and Restated Distribution Agreement (the "Distribution Agreement")
which set forth the terms of the Distribution and certain agreements in
connection with the Distribution and the RMCI Rights Offering. In addition,
RHCI and RMCI entered into a Rights Agreement (the "Rights Agreement"),
Employee Benefit Agreement (the "Employee Benefit Agreement"), Tax Sharing
Agreement (the "Tax Sharing Agreement") and Corporate Services Agreement (the
"Corporate Services Agreement), and RMCI issued the RMCI Subordinated
Promissory Note to RHCI. Except as otherwise provided in these agreements, all
covenants and agreements terminate on the sixth anniversary of the
Distribution Date. Amounts payable to RHCI under these agreements during
fiscal year 1996 totaled approximately $180,000.
The Distribution Agreement provides that RHCI and RMCI will indemnify each
other with respect to (i) claims in connection with the Prospectus or the
Registration Statement on Form S-1 relating to the Distribution with respect
to the information provided by RHCI or RMCI, as the case may be; (ii) failure
to perform, or violation of the Distribution Agreement, the Rights Agreement,
the Employee Benefit Agreement, the Tax
144
<PAGE>
Sharing Agreement, the Corporate Services Agreement or the RMCI Subordinated
Promissory Note; and (iii) claims related to their respective businesses
whether the occurrence giving rise to the claim occurred prior to or
subsequent to the Distribution Date. Under the Distribution Agreement, RMCI
will also indemnify RHCI for all matters arising out of or relating to the
acquisitions of FPM, Florida Psychiatric Associates, a physician practice
group located in Orlando, Florida, and HDI, including with respect to earn-out
obligations and purchase price indebtedness thereunder. In addition, the
Distribution Agreement provides that RHCI will honor certain non-compete
covenants relating to such acquisitions.
The Distribution Agreement provides for the repayment of all intercompany
receivables or payables reflected on the books and records of RHCI or RMCI
(other than those evidenced by the RMCI Subordinated Promissory Note, which
are governed by the terms of the RMCI Subordinated Promissory Note) between
RHCI and its subsidiaries on the one hand, and RMCI and its subsidiaries, on
the other hand. At June 30, 1996, the net amount owed to RHCI by RMCI totalled
approximately $1,850,000. Notwithstanding the terms of the Distribution
Agreement, RHCI has agreed not to require repayment of this amount until after
July 1, 1997, all on terms and conditions to be agreed to between RHCI and
RMCI. See "Debt Financing Arrangements" above.
Pursuant to the Corporate Services Agreement, RHCI receives (i) a monthly
fee of $15,000 per month for certain administrative and other services which
RHCI historically has provided to RMCI and continues to provide following the
Distribution Date, payable monthly in arrears in cash, and (ii) reasonable
out-of-pocket expenses incurred by RHCI in providing such services. Effective
as of July 1, 1996, RMCI and RHCI amended the Corporate Services Agreement
(the "Amended Corporate Services Agreement"). Pursuant to the Amended
Corporate Services Agreement, RMCI will receive a fee of $15,000 per month,
payable monthly in arrears in cash, for the provision by RMCI to RHCI of
certain management services of Dr. Martin Lazoritz and I. Paul Mandelkern.
Pursuant to the Amended Corporate Services Agreement, Dr. Lazoritz and Mr.
Mandelkern will provide services to RHCI in such areas as new business
development, contract management and medical oversight. The foregoing fees are
subject to quarterly review by the parties and to adjustment, if necessary, to
reflect any increase or decrease or additional services being provided by RHCI
or RMCI, as the case may be.
The Corporate Services Agreement also provides that RMCI will utilize RHCI's
network of mental health hospitals and clinics as a "preferred provider" to
the extent practicable and to the extent clinically and geographically
appropriate, all as determined by RMCI, for the treatment of individuals
covered under agreements held by RMCI. The fees for such services will be at
mutually agreed upon rates and which will be no less favorable to RHCI or RMCI
than fees paid by RMCI to an unaffiliated third-party preferred provider. The
Corporate Services Agreement will terminate as of the Effective Time.
Pursuant to the Tax Sharing Agreement, RHCI has agreed to indemnify RMCI for
any income tax liability (i) attributable to the operations of RMCI during any
period on or before October 27, 1994 and (ii) attributable to the operations
of RHCI and its subsidiaries (other than RMCI and its subsidiaries), and RMCI
has agreed to indemnify RHCI for any income tax liability attributable to the
operations of RMCI and its subsidiaries for all periods beginning the day
after October 27, 1994.
Pursuant to the Employee Benefit Agreement, following the Distribution,
employees of RMCI continued to be eligible to participate in certain employee
benefit plans maintained by RHCI and in which such employees have been
eligible to participate during a transition period during which RMCI is
obligated to establish its own health insurance and other employee benefit
plans. Under the Employee Benefit Agreement, RMCI has assumed all liabilities
relating to employees of RMCI and its subsidiaries, including for accrued
vacation, sick pay and holidays, and RHCI is responsible for providing COBRA
coverage to any RMCI employee who was entitled to such coverage prior to or on
the Distribution Date. In addition, each party will reimburse the other for
costs and expenses incurred by it in performing its obligations under the
Employee Benefit Agreement to the same extent and in the same manner as the
parties allocated such costs and expenses prior to the Distribution, including
costs and expenses incurred by RHCI in administering such employee benefit
plans for the benefit of RMCI employees which are not otherwise reimbursed to
RHCI.
145
<PAGE>
Stock Purchase Agreements
In October 1995, RHCI entered into a Stock Purchase Agreement with Ramsay
Holdings and the Manager pursuant to which Ramsay Holdings agreed to purchase
275,863 shares of RHCI Common Stock at a purchase price of $3.625 per share,
as follows: (i) 121,363 of the shares for a purchase price of $439,940.88,
payable in cash and (ii) 154,500 of the shares for a purchase price of
$560,062.50, payable $1,545 in cash and $558,517.50 as a partial payment by
RHCI of management fees due for fiscal year 1996 under the Management
Agreement.
In August 1996, RHCI entered into another Stock Purchase Agreement with
Ramsay Holdings and the Manager pursuant to which Ramsay Holdings agreed to
purchase 275,546 shares of RHCI Common Stock at a purchase price of $2.75 per
share. The purchase price of $757,752.00 was payable $2,755.46 in cash and
$754,996.54 as a payment by RHCI of management fees due for fiscal 1997 under
the Management Agreement.
Other Arrangements
Thomas M. Haythe, a director of RHCI and RMCI, is a partner of the New York
City law firm of Haythe & Curley, which firm rendered legal services to RHCI
and RMCI during fiscal year 1996 and will continue to render legal services to
RHCI in the future. See "Compensation Committee Interlocks and Insider
Participation," "The Merger--Certain Federal Income Tax Consequences of the
Merger" and "Legal Matters."
Robert E. Galloway, a director of RHCI during fiscal 1996, rendered
consulting services to RHCI during fiscal year 1996. Mr. Galloway received
$60,000 for these services.
RHCI and RMCI have entered into indemnification agreements with their
respective directors and executive officers. These agreements provide that the
directors and executive officers will be indemnified to the fullest possible
extent permitted by Delaware law against all expenses (including attorneys'
fees), judgments, fines, penalties, taxes and settlement amounts paid or
incurred by them in any action or proceeding (including any action by or in
the right of RHCI or any of its subsidiaries or affiliates or of RMCI or any
of its subsidiaries or affiliates, as the case may be), on account of their
service as directors, officers, employees, fiduciaries or agents of RHCI or
any of its subsidiaries or affiliates or of RMCI or any of its subsidiaries or
affiliates, as the case may be, and their service at the request of RHCI or
any of its subsidiaries or affiliates or RMCI or any of its subsidiaries or
affiliates, as the case may be, as directors, officers, employees, fiduciaries
or agents of another corporation, partnership, joint venture, trust, employee
benefit plan or other enterprise.
Each of RHCI and RMCI has entered into a Consulting Agreement (the "Summa
Consulting Agreements") dated as of January 1, 1996 with Summa Healthcare
Group, Inc. ("Summa"), a company of which Luis E. Lamela, the Vice Chairman of
the Board of RHCI and RMCI, is the principal. Under the Summa Consulting
Agreements, Summa will provide RHCI and RMCI with advisory and consulting
services in connection with strategic planning, business development, investor
relations and operations. The Summa Consulting Agreements provide that Summa
will receive a consulting fee of $12,500 per month from RHCI and $21,000 per
month from RMCI. In addition, under the Summa Consulting Agreement with RMCI,
Summa would be entitled to a success fee to be negotiated in good faith
between RMCI and Summa with respect to any significant acquisition or
divestiture as to which Summa renders substantial consulting or advisory
services. Each of the Summa Consulting Agreements is for an initial term of
one year, subject to automatic renewal from year to year unless either party
gives a notice of non-renewal three months prior to expiration of the then
current term. In addition, each Summa Consulting Agreement may be cancelled by
either party on three months' notice effective at any time following the
initial term. Upon termination of the Summa Consulting Agreements, Summa is
entitled to payment of any fee earned to the effective date of termination.
Effective February 1, 1997, the Summa Consulting Agreement with RMCI was
terminated and the Summa Consulting Agreement with RHCI was amended to provide
for a monthly consulting fee of $30,000 and to provide that Summa would be
entitled to a success fee to be negotiated in good faith between RHCI and
Summa with respect to any significant transactions involving RHCI as to which
Summa renders substantial consulting or advisory services.
146
<PAGE>
The offices of FPM and Florida Psychiatric Associates, Inc. ("FPA") in
Orlando, Florida and several of their clinics and other offices are leased
from partnerships of which Dr. Martin Lazoritz and other employees of RMCI are
partners. Total rental expense under these leases for the fiscal years ended
June 30, 1994, 1995 and 1996 was $361,998, $414,000 and $355,000,
respectively. RMCI believes that the rent and other terms and conditions of
these leases are no less favorable to RMCI than RMCI could obtain from non-
affiliated third parties.
Option Repricing/Warrant Exchange
On August 13, 1996, the RMCI Board approved the RMCI Repricing Offer to the
holders of RMCI Stock Options under RMCI's 1994 Stock Option Plan whereby each
option holder could exchange existing options with exercise prices of $2.00
per share held by such holder for amended options to purchase the same number
of shares of RMCI Common Stock at an exercise price of $1.00 per share (which
was in excess of the market price of the RMCI Common Stock at the time);
provided that the RMCI Repriced Options would not be exercisable until the
date which is six months prior to their expiration date and provided further
that vested RMCI Repriced Options would become exercisable earlier in the
event that, at the time of exercise, the average of the closing bid and asked
prices for the RMCI Common Stock as quoted on the OTC Bulletin Board has
equalled or exceeded the Acceleration Price (subject to adjustment for events
affecting the RMCI Common Stock or the capital structure of RMCI, such as the
Merger) per share on at least 15 trading days, which need not be consecutive,
subsequent to August 13, 1996. All RMCI Stock Options which were subject to
the RMCI Repricing Offer were repriced. None of the RMCI Repriced Options are
currently exercisable. After giving effect to the Merger, all RMCI Stock
Options, including the RMCI Repriced Options, will become options to purchase
RHCI Common Stock, provided that the number of shares of RHCI Common Stock
covered by each such option will be equal to one-third (1/3) of the number
covered by the RMCI Stock Option, the exercise price will be equal to the then
existing exercise price multiplied by three (3) and, in the case of the RMCI
Repriced Options, the Acceleration Price will be equal to $7.00. See "The
Merger Agreement--The Merger--Stock Options and Warrants."
At the request of RMCI, Paul J. Ramsay agreed to surrender certain RMCI
Stock Options granted to him under RMCI's 1994 Stock Option Plan in exchange
for the issuance to Ramsay Hospitals of warrants to purchase RMCI Common
Stock. RMCI made this request in order to make additional shares of RMCI
Common Stock available for grant under RMCI's 1994 Stock Option Plan.
Accordingly, on September 10, 1996, Mr. Ramsay, RMCI and Ramsay Hospitals
entered into an Exchange Agreement pursuant to which Mr. Ramsay surrendered
for cancellation an aggregate of 100,000 RMCI Stock Options granted by RMCI to
Mr. Ramsay under RMCI's 1994 Stock Option Plan in exchange for the issuance to
Ramsay Hospitals of warrants (the "Exchanged Warrants") to purchase an
aggregate of 100,000 shares of RMCI Common Stock at an exercise price of $1.00
per share. The Exchanged Warrants will be exercisable during the period April
25, 2004 through October 25, 2004, provided that the Exchanged Warrants will
be exercisable earlier in the event that, at the time of exercise, the average
of the closing bid and asked prices for the RMCI Common Stock as quoted on the
OTC Bulletin Board equals or exceeds $2.333 (the "Warrant Acceleration Price")
(subject to adjustment for events affecting the RMCI Common Stock or the
capital structure of RMCI, such as the Merger) per share on at least 15
trading days, which need not be consecutive, subsequent to September 10, 1996.
None of the Exchanged Warrants are currently exercisable. See "The Merger
Agreement--The Merger--Stock Options and Exchanged Warrants." After giving
effect to the Merger, the Exchanged Warrants (as will be the case for all RMCI
Exchanged Warrants) will become warrants to purchase RHCI Common Stock,
provided that the number of shares covered by the Exchanged Warrants will be
equal to one-third (1/3) of the number covered by the Exchanged Warrants prior
to the Merger, the exercise price will be equal to the then existing exercise
price multiplied by the three (3) and the Warrant Acceleration Price will be
equal to $7.00. See "The Merger Agreement--The Merger--Stock Options and
Warrants."
At the request of RHCI, Paul J. Ramsay agreed to surrender certain options
granted to him under RHCIs stock option plans in exchange for the issuance of
warrants to purchase RHCI Common Stock to Ramsay
147
<PAGE>
Hospitals. RHCI made this request in order to make additional shares of RHCI
Common Stock available for grant under its stock option plans. Accordingly, on
September 10, 1996, Mr. Ramsay, RHCI and Ramsay Hospitals entered into an
Exchange Agreement pursuant to which Mr. Ramsay surrendered for cancellation
an aggregate of 476,070 stock options to purchase shares of RHCI Common Stock
granted by RHCI to Mr. Ramsay under its stock option plans in exchange for the
issuance to Ramsay Hospitals of warrants to purchase 500,000 shares of RHCI
Common Stock at an exercise price of $2.75 per share. The warrants will be
exercisable during the period December 31, 2002 through June 30, 2003,
provided that the warrants will be exercisable earlier in the event that, at
the time of exercise, the closing price for the RHCI Common Stock as quoted on
NASDAQ equals or exceeds $7.00 (subject to adjustment for events affecting the
RHCI Common Stock or the capital structure of RHCI) per share on at least 15
trading days, which need not be consecutive, subsequent to September 10, 1996.
These warrants are not currently exercisable.
Purchase of RMCI Series 1996 Preferred Stock
In June 1996, at the request of RMCI, Ramsay Hospitals agreed to loan RMCI
up to $3,000,000 for working capital and general corporate purposes. On June
28, 1996, RMCI borrowed $1,600,000, which was evidenced by a demand promissory
note (the "First Hospitals Note") with an interest rate of 12% per annum. In
addition, on August 7 and August 8, 1996, RMCI borrowed an aggregate of
$800,000, which was evidenced by a demand promissory note (the "Second
Hospitals Note") payable to Ramsay Hospitals in the principal amount of the
lesser of the amount borrowed or $1,400,000, with an interest rate of 12% per
annum. On September 10, 1996, as described below, the First Hospitals Note and
the Second Hospitals Note were repaid and cancelled. See "Information
Concerning RHCI--Principal Stockholders."
On September 10, 1996, RMCI entered into a stock purchase agreement with
Ramsay Hospitals, pursuant to which Ramsay Hospitals purchased 100,000 shares
of RMCI Series 1996 Preferred Stock for a purchase price of $3,000,000. The
purchase price was paid by (i) offset against the outstanding principal
amounts under the First Hospitals Note and the Second Hospitals Note
($1,600,000 and $800,000, respectively); (ii) offset against the aggregate
accrued unpaid interest on such notes through September 10, 1996 ($54,667) and
(iii) $545,333 in cash. In connection with the purchase of the 100,000 shares
of RMCI Series 1996 Preferred Stock by Ramsay Hospitals, RMCI issued warrants
to Ramsay Hospitals to purchase 300,000 shares of RMCI Common Stock, at an
exercise price of $1.00 per share.
In September 1996, Ramsay Hospitals agreed to lend up to an additional
$2,000,000 to RMCI for working capital and general corporate purposes, which
amount will be evidenced by a demand promissory note bearing interest at 15%
per annum. At February 15, 1997, $2,000,000 was borrowed by RMCI under the
facility. RMCI agreed to pay Ramsay Hospitals a $100,000 facility fee in
consideration for making the additional facility available to RMCI, and an
additional facility fee of $150,000 in the event of a drawing by RMCI under
the increased loan facility made available in March 1997.
Compensation Committee Interlocks and Insider Participation
The members of the Compensation Committee of the RHCI Board are Aaron Beam,
Jr., Peter J. Evans and Thomas M. Haythe. Mr. Beam is a director of RMCI. Mr.
Evans is a director of RMCI and each of the Ramsay Affiliates, which are
significant stockholders of RHCI and RMCI, and is a director of Ramsay Health
Care Pty. Limited, which provides management services to RHCI pursuant to the
Management Agreement for which it received an annual management fee. See
"Information Concerning RHCI--Management--Certain Relationships and Related
Transactions Involving RHCI, RMCI and Affiliates Thereof" and "Security
Ownership of Certain Beneficial Owners". Mr. Haythe is a director of RMCI and
is a partner of the New York City law firm of Haythe & Curley, which firm
rendered legal services to RHCI and RMCI during the last fiscal year and will
continue to render legal services to RHCI in the future, and which firm has
rendered an opinion to RHCI and RMCI concerning certain federal income tax
consequences of the Merger. See "The Merger--Certain Federal Income Tax
Consequences of the Merger," "Information Concerning RHCI--Certain
Relationships and Related Transactions Involving RHCI, RMCI and Affiliates
Thereof" and "Legal Matters."
148
<PAGE>
Ramsay HSA, Ramsay Holdings and Ramsay Hospitals are corporations of which
Mr. Evans is a director. At January 1, 1997, Ramsay HSA and Ramsay Holdings
owned of record approximately 23.2% of the issued and outstanding shares of
RHCI Common Stock and 100% of the issued and outstanding shares of RHCI Series
C Preferred Stock and had an approximate 34.3% voting interest in RHCI. In
addition, the Ramsay Affiliates hold a voting interest in RMCI of
approximately 69.0%. After consummation of the Merger, the Ramsay Affiliates
will hold approximately 29.5% of the issued and outstanding shares of RHCI
Common Stock and 100% of the issued and outstanding shares of RHCI Preferred
Stock and will hold a voting interest in RHCI of approximately 42.7%. See
"Certain Relationships and Related Transactions Involving RHCI, RMCI and
Affiliates Thereof--Relationships with the Ramsay Affiliates" above.
In June 1992, RHCI renewed the Management Agreement with the Manager of
which Mr. Evans is a director. Pursuant to the Management Agreement, the
Manager provides managerial services to RHCI including, but not limited to (a)
participation in overall strategic planning of RHCI, (b) strategic and
operational discussions with the executive officers of RHCI, (c) review and
evaluation of possible acquisition candidates, (d) review of material
contracts and commitments entered into by RHCI and (e) participation in debt
refinancing negotiations. In addition, the Manager provides a pool of
management standby resources (on both a part-time and full-time basis) to
mitigate the impact of executive and senior management turnover. The
Management Agreement provides for the payment of an initial annual management
fee of $677,422, subject to increases based on increases in the Consumer Price
Index and subject to certain restrictions set forth in certain credit
agreements to which RHCI is a party. The management fee payable under the
Management Agreement was set on the basis of a negotiated amount based on the
time spent by personnel of the Manager in performing the duties pursuant to
the Management Agreement. During the fiscal year ended June 30, 1996, RHCI
incurred management fee expenses of $737,000 for services performed by the
Manager under the Management Agreement. Of this total, approximately $560,000
was paid by way of the issuance of shares of RHCI Common Stock to Ramsay
Holdings and the remainder was paid in cash. In August 1996, RHCI issued
additional shares of RHCI Common Stock to Ramsay Holdings for management fees
due under the Management Agreement in fiscal 1997. See "Certain Relationships
and Related Transactions Involving RHCI, RMCI and Affiliates thereof--Stock
Purchase Agreements" and "Certain Relationships and Related Transactions
Involving RHCI, RMCI and Affiliates thereof--Management Agreements" above.
On September 10, 1996, RHCI entered into a letter agreement with the Manager
and Ramsay Holdings which terminated the Management Agreement effective July
1, 1997. In consideration for this termination, RHCI issued to Ramsay Holdings
warrants to purchase 250,000 shares of RHCI Common Stock at an exercise price
of $2.63 per share. These warrants are fully exercisable and expire on
September 10, 2006.
Effective on the Distribution Date, RMCI entered into the RMCI Management
Agreement with the Manager. The term of the RMCI Management Agreement will
terminate upon the earlier of (i) October 1997 or (ii) one year after written
notice of termination given by either party to the RMCI Management Agreement.
The RMCI Management Agreement provides for the payment of an annual management
fee equal to the greater of $100,000 per annum or 0.50% of the gross revenues
of RMCI and its subsidiaries on a consolidated basis for any such year.
Pursuant to the RMCI Management Agreement, the Manager provides managerial
services to RMCI including, but not limited to (a) participation in overall
strategic planning of RMCI, (b) strategic and operational discussions with the
chief executive and other officers of RMCI, (c) review and evaluation of
possible acquisition candidates and development projects, (d) review of
material contracts and commitments entered into by RMCI and (e) participation
in bank and other financing negotiations. In addition, the Manager will
provide a pool of management standby resources (on both a part-time and full-
time basis) to mitigate the impact of any executive and senior management
turnover. The management fee payable to the Manager under the RMCI Management
Agreement has been established on the basis of a negotiated amount based on
the anticipated time to be spent and out-of-pocket costs to be incurred by
personnel of the Manager in performing its duties pursuant to the RMCI
Management Agreement, including expenses for travel by the Manager's personnel
to and from RMCI's annual management conference and all other meetings at
which representatives of the Manager will be present. There will be no
separate reimbursement for such travel and other out-of-pocket costs, all of
which will
149
<PAGE>
be paid from the annual management fee. In addition, directors of RMCI who
reside in Australia and who incur travel expenses and other out-of-pocket
costs in their capacities as directors, including in connection with their
attendance at Board of Director and other meetings of RMCI, will not receive
separate reimbursement for such costs. The RMCI Management Agreement will
terminate on the Effective Date of the Merger.
On the Distribution Date, RHCI effected the Distribution to the holders of
record as of the Distribution Record Date of (i) the RHCI Common Stock, (ii)
RHCI's Class A Convertible Preferred Stock, par value $1.00 per share, and
(iii) the RHCI Series C Preferred Stock.
In connection with the Distribution, Ramsay HSA, of which Mr. Evans is a
director, received its pro rata share of RMCI Common Stock based upon the
number of issued and outstanding shares of RHCI Common Stock held by Ramsay
HSA as of the Distribution Record Date and, in addition, each of Ramsay HSA
and Ramsay Holdings, of which Mr. Evans is a director, received their
respective pro rata share of RMCI Common Stock based upon the number of issued
and outstanding shares of RHCI Common Stock into which the issued and
outstanding RHCI Series C Preferred Stock held by them was convertible as of
the Distribution Record Date.
Immediately after the close of business on the Distribution Date, RMCI
effected the RMCI Rights Offering and issued, at no cost, to the holders of
RHCI Common Stock of record as of the Distribution Date, other than the Ramsay
Affiliates, the Rights to subscribe for and purchase up to 980,913 shares of
RMCI Common Stock for a price of $2.00 per share. The RMCI Rights Offering
expired on June 8, 1995 with all Rights having been exercised.
In connection with the Distribution in April 1995, RMCI issued to RHCI the
RMCI Subordinated Promissory Note in the principal amount of $6,000,000, which
note bears interest at 8% per annum and evidences certain advances by RHCI
made to or on behalf of RMCI since RMCI's inception, including for working
capital and other general corporate purposes and partially to finance the cash
portion of the purchase prices of certain acquired businesses. In addition, at
December 31, 1996, RMCI owed RHCI $600,000 of accrued interest on the RMCI
Subordinated Promissory Note from October 1, 1995 and approximately $2,215,000
of additional amounts paid by RHCI on behalf of RMCI or charged by RHCI to
RMCI for certain administrative services. Of the $6,000,000 due on the RMCI
Subordinated Promissory Note, approximately $2,100,000 is due on or before
December 31, 1997 and the remainder is payable in 11 quarterly installments of
approximately $353,000, beginning March 31, 1998. RHCI has agreed that the
payment of interest on the RMCI Subordinated Promissory Note for the period
October 1, 1995 through December 31, 1997, as well as the additional amounts
owed of approximately $2,215,000, will not be required to be made until after
January 1, 1998, all on terms and conditions to be mutually agreed to by RHCI
and RMCI. Following the Merger, amounts owing by RMCI to RHCI will remain
outstanding as intercompany indebtedness.
The RMCI Subordinated Promissory Note is unsecured and subordinated and
junior in right of payment to all indebtedness of RMCI and its subsidiaries
incurred in connection with (i) the acquisition of FPM, (ii) the acquisition
of HDI, a former managed mental healthcare services division of Phoenix South,
(iii) future acquisitions of other managed mental healthcare services
businesses and (iv) any other Senior Indebtedness (as defined in the RMCI
Subordinated Promissory Note), including any indebtedness arising under the
First Union Credit Facility and any other bank indebtedness of RMCI or its
subsidiaries.
On the First Closing, prior to the Distribution, RMCI consummated $3,320,000
of a $5,820,000 private placement of RMCI Common Stock (the "Private
Placement"). At the First Closing, Ramsay Hospitals purchased the First Shares
and three officers of RMCI purchased an aggregate of 160,000 shares of RMCI
Common Stock. On May 31, 1995, Ramsay Hospitals purchased the Second Shares
for an aggregate purchase price of $2,500,000.
In connection with the Private Placement and the Distribution, RMCI issued
the Private Placement Warrants to purchase an aggregate of 125,000 shares of
RMCI Common Stock to Ramsay Hospitals, at an exercise price per share of $2.00
per share.
150
<PAGE>
As part of the Private Placement, RMCI and Ramsay Hospitals entered into a
Registration Rights Agreement, pursuant to which RMCI granted to Ramsay
Hospitals and its transferees one "demand" and unlimited "piggyback"
registration rights covering the Private Placement Shares and the 125,000
shares of RMCI Common Stock issuable upon the exercise of the Private
Placement Warrants.
Following the Distribution, RHCI and RMCI became separate, publicly traded
companies with the contractual arrangements described above. Other than by
reason of their equity ownership in RHCI and RMCI, neither Ramsay Holdings,
Ramsay HSA, nor Ramsay Hospitals have any interest in RHCI's or RMCI's rights
and benefits arising under these contractual arrangements. In addition, other
than by reason of his equity ownership interests in Ramsay HSA, Ramsay
Holdings and Ramsay Hospitals, Mr. Ramsay does not have any ownership
interests in RHCI or RMCI or their respective rights and benefits under these
contractual arrangements.
In October 1995, RHCI entered into a Stock Purchase Agreement with Ramsay
Holdings and the Manager pursuant to which Ramsay Holdings agreed to purchase
275,863 shares of RHCI Common Stock at a purchase price of $3.625 per share,
as follows: (i) 121,363 of the shares for a purchase price of $439,940.88,
payable in cash and (ii) 154,500 of the shares for a purchase price of
$560,062.50, payable $1,545 in cash and $558,517.50 as a partial payment by
RHCI of management fees due for fiscal year 1996 under the Management
Agreement.
In August 1996, RHCI entered into another Stock Purchase Agreement with
Ramsay Holdings and the Manager pursuant to which Ramsay Holdings agreed to
purchase 275,546 shares of RHCI Common Stock at a purchase price of $2.75 per
share. The purchase price of $757,752.00 was payable $2,755.46 in cash and
$754,996.54 as a payment by RHCI of management fees due for fiscal 1997 under
the Management Agreement.
RHCI and RMCI have entered into indemnification agreements with their
respective directors and executive officers. These agreements provide that the
directors and executive officers will be indemnified to the fullest possible
extent permitted by Delaware law against all expenses (including attorneys'
fees), judgments, fines, penalties, taxes and settlement amounts paid or
incurred by them in any action or proceeding (including any action by or in
the right of RHCI or any of its subsidiaries or affiliates or of RMCI or any
of its subsidiaries or affiliates, as the case may be), on account of their
service as directors, officers, employees, fiduciaries or agents of RHCI or
any of its subsidiaries or affiliates or of RMCI or any of its subsidiaries or
affiliates, as the case may be, and their service at the request of RHCI or
any of its subsidiaries or affiliates or RMCI or any of its subsidiaries or
affiliates, as the case may be, as directors, officers, employees, fiduciaries
or agents of another corporation, partnership, joint venture, trust, employee
benefit plan or other enterprise.
At the request of RMCI, Paul J. Ramsay agreed to surrender certain RMCI
Stock Options granted to him under RMCI's 1994 Stock Option Plan in exchange
for the issuance to Ramsay Hospitals, of which Mr. Evans is a director, of
warrants to purchase RMCI Common Stock. RMCI made this request in order to
make additional shares of RMCI Common Stock available for grant under RMCI's
1994 Stock Option Plan. Accordingly, on September 10, 1996, Mr. Ramsay, RMCI
and Ramsay Hospitals entered into an Exchange Agreement pursuant to which Mr.
Ramsay surrendered for cancellation an aggregate of 100,000 RMCI Stock Options
granted by RMCI to Mr. Ramsay under RMCI's 1994 Stock Option Plan in exchange
for the issuance to Ramsay Hospitals of the Exchanged Warrants to purchase an
aggregate of 100,000 shares of RMCI Common Stock at an exercise price of $1.00
per share. The Exchanged Warrants will be exercisable during the period April
25, 2004 through October 25, 2004, provided that the Exchanged Warrants will
be exercisable earlier in the event that, at the time of exercise, the average
of the closing bid and asked prices for the RMCI Common Stock as quoted on the
OTC Bulletin Board equals or exceeds $2.333 (the "Warrant Acceleration Price")
(subject to adjustment for events affecting the RMCI Common Stock or the
capital structure of RMCI, such as the Merger) per share on at least 15
trading days, which need not be consecutive, subsequent to September 10, 1996.
None of the Exchanged Warrants are currently exercisable. See "The Merger
Agreement--The Merger--Stock Options and Exchanged Warrants." After giving
effect to the Merger, the Exchanged Warrants (as will be the case for all RMCI
Exchanged Warrants) will become warrants to purchase RHCI Common Stock,
provided that the number of shares covered by the Exchanged Warrants will be
equal to one-third ( 1/3) of the number covered by the
151
<PAGE>
Exchanged Warrants prior to the Merger, the exercise price will be equal to
the then existing exercise price multiplied by three (3) and the Warrant
Acceleration Price will be equal to $7.00. See "The Merger Agreement--The
Merger--Stock Options and Warrants."
At the request of RHCI, Paul J. Ramsay agreed to surrender certain options
granted to him under RHCIs stock option plans in exchange for the issuance of
warrants to purchase RHCI Common Stock to Ramsay Hospitals. RHCI made this
request in order to make additional shares of RHCI Common Stock available for
grant under its stock option plans. Accordingly, on September 10, 1996, Mr.
Ramsay, RHCI and Ramsay Hospitals entered into an Exchange Agreement pursuant
to which Mr. Ramsay surrendered for cancellation an aggregate of 476,070 stock
options to purchase shares of RHCI Common Stock granted by RHCI to Mr. Ramsay
under its stock option plans in exchange for the issuance to Ramsay Hospitals
of warrants to purchase 500,000 shares of RHCI Common Stock at an exercise
price of $2.75 per share. The warrants will be exercisable during the period
December 31, 2002 through June 30, 2003, provided that the warrants will be
exercisable earlier in the event that, at the time of exercise, the closing
price for the RHCI Common Stock as quoted on NASDAQ equals or exceeds $7.00
(subject to adjustment for events affecting the RHCI Common Stock or the
capital structure of RHCI) per share on at least 15 trading days, which need
not be consecutive, subsequent to September 10, 1996. These warrants are not
currently exercisable.
In June 1996, at the request of RMCI, Ramsay Hospitals agreed to loan RMCI
up to $3,000,000 for working capital and general corporate purposes. On June
28, 1996, RMCI borrowed $1,600,000, which was evidenced by the First Hospitals
Note with an interest rate of 12% per annum. In addition, on August 7 and
August 8, 1996, RMCI borrowed an aggregate of $800,000, which was evidenced by
the Second Hospitals Note payable to Ramsay Hospitals in the principal amount
of the lesser of the amount borrowed or $1,400,000, with an interest rate of
12% per annum. On September 10, 1996, as described below, the First Hospitals
Note and the Second Hospitals Note were repaid and cancelled. See "Information
Concerning RHCI--Principal Stockholders."
On September 10, 1996, RMCI entered into a stock purchase agreement with
Ramsay Hospitals, pursuant to which Ramsay Hospitals purchased 100,000 shares
of RMCI Series 1996 Preferred Stock for a purchase price of $3,000,000. The
purchase price was paid by (i) offset against the outstanding principal
amounts under the First Hospitals Note and the Second Hospitals Note
($1,600,000 and $800,000, respectively); (ii) offset against the aggregate
accrued unpaid interest on such notes through September 10, 1996 ($54,667) and
(iii) $545,333 in cash. In connection with the purchase of the 100,000 shares
of RMCI Series 1996 Preferred Stock by Ramsay Hospitals, RMCI issued warrants
to Ramsay Hospitals to purchase 300,000 shares of RMCI Common Stock, at an
exercise price of $1.00 per share.
In September 1996, Ramsay Hospitals agreed to lend up to an additional
$2,000,000 to RMCI for working capital and general corporate purposes, which
amount will be evidenced by a demand promissory note bearing interest at 15%
per annum. At February 15, 1997, $2,000,000 was borrowed by RMCI under the
facility. RMCI agreed to pay Ramsay Hospitals a $100,000 facility fee in
consideration for making the additional facility available to RMCI, and an
additional facility fee of $150,000 in the event of a drawing by RMCI under
the increased loan facility made available in March 1997.
152
<PAGE>
PRINCIPAL STOCKHOLDERS
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
The stockholders (including any "group," as that term is used in Section
13(d)(3) of the Securities Exchange Act of 1934) who, to the knowledge of the
RHCI Board, owned beneficially more than five percent of any class of the
outstanding voting securities of RHCI as of January 1, 1997 and their
respective shareholdings as of such date (according to information furnished
by them to RHCI), are set forth in the following table. The following table
also sets forth the stockholders who, to the knowledge of the RHCI Board, will
own beneficially more than five percent of any class of the outstanding voting
securities of RHCI after the Merger and their respective shareholdings
calculated on a pro forma basis as if the Merger had been consummated on
January 1, 1997. Except as indicated in the footnotes to the table, all of
such shares are owned with sole voting and investment power.
<TABLE>
<CAPTION>
PRO FORMA BENEFICIAL
OWNERSHIP OF RHCI AFTER
MERGER(2)
-----------------------------
NUMBER OF NUMBER OF PERCENTAGE
NAME AND ADDRESS TITLE OF RHCI SHARES PERCENTAGE OF RHCI SHARES OF RHCI
BENEFICIAL OWNER RHCI CLASS OWNED(1) RHCI CLASS OWNED(1) CLASS
- ---------------- ----------- ----------- ------------- ------------- -----------
<S> <C> <C> <C> <C> <C>
Paul J. Ramsay.......... Common 3,648,054(3) 36.12% 5,952,444(5) 44.49%
Paul Ramsay Group
154 Pacific Highway Series C
Greenwich, NSW 2065 Preferred 142,486(4) 100.0% 142,486(6) 100.0%
Australia Series 1996
Preferred -- -- 100,000(6) 100.0%
Ramsay Holdings HSA..... Common 2,117,065(4) 23.17% 2,301,207(6) 20.41%
Limited
c/o Haythe & Curley
237 Park Avenue New
York, Series C
New York 10017 Preferred 71,303(4) 50.0% 71,303(6) 50.0%
Paul Ramsay Holdings
Pty.................... Common 1,513,239(4) 16.12% 1,575,154(6) 13.67%
Limited
c/o Haythe & Curley
237 Park Avenue New
York, Series C
New York 10017 Preferred 71,183(4) 50.0% 71,183(6) 50.0%
Paul Ramsay Hospitals
Pty.................... Common -- -- 2,058,333(6) 17.59%
Limited
c/o Haythe & Curley
237 Park Avenue New
York, Series 1996
New York 10017 Preferred -- -- 100,000(6) 100.0%
Brinson Holdings, Inc... Common 776,100(7) 9.21% 776,100 7.35%
Brinson Partners, Inc.
Brinson Trust Company
209 South LaSalle
Chicago, Illinois 60604
Merrill Lynch & Co.,
Inc.................... Common 586,300(8) 6.96% 586,300 5.55%
World Financial Center,
North Tower
250 Vesey Street
New York, New York
10281
Heartland Advisors,
Inc.................... Common 1,530,800(9) 18.17% 1,530,800 14.49%
790 North Milwaukee
Street
Milwaukee, Wisconsin
53202
</TABLE>
- --------
(1) Includes all shares that each named person is entitled to receive within
60 days, through the exercise of any option, warrant, conversion right, or
similar arrangement. Such shares are deemed to be owned and outstanding by
such person individually for purposes of calculating the number of shares
owned and the percentage of class for each such named person, but are not
deemed outstanding for purposes of such calculations for any other named
person.
(2) Assumes that the Merger was consummated on January 1, 1997.
153
<PAGE>
(3) Mr. Ramsay's beneficial ownership of RHCI Common Stock includes 2,117,065
shares of RHCI Common Stock beneficially owned by Ramsay HSA and 1,513,239
shares of RHCI Common Stock beneficially owned by Ramsay Holdings, which
entities Mr. Ramsay indirectly controls. The shares beneficially owned by
Ramsay HSA consist of 1,404,035 shares of RHCI Common Stock currently
owned of record by Ramsay HSA and 713,030 shares of RHCI Common Stock
issuable upon the conversion of 71,303 shares of RHCI Series C Preferred
Stock currently outstanding and owned by Ramsay HSA. The shares
beneficially owned by Ramsay Holdings consist of 551,409 shares of RHCI
Common Stock currently owned of record by Ramsay Holdings, 250,000 shares
of RHCI Common Stock issuable upon the exercise of currently exercisable
warrants to purchase shares of RHCI Common Stock and 711,830 shares of
RHCI Common Stock issuable upon the conversion of 71,183 shares of RHCI
Series C Preferred Stock currently outstanding and owned by Ramsay
Holdings. Does not include 25,000 shares of RHCI Common Stock issuable
upon the exercise of RHCI Options granted to Mr. Ramsay, which are not
currently exercisable and 500,000 shares of RHCI Common Stock issuable
upon the exercise of warrants held by Ramsay Hospitals, which are not
currently exercisable.
(4) These shares are included in the beneficial ownership of RHCI Common Stock
of Paul J. Ramsay and are included in footnote (3) above.
(5) Includes (a) the shares included in footnote (3) above, (b) 916,666 shares
of RHCI Common Stock to be received by Ramsay Hospitals as a result of the
Merger, (c) 184,142 shares of RHCI Common Stock to be received by Ramsay
HSA as a result of the Merger, (d) 61,915 shares of RHCI Common Stock to
be received by Ramsay Holdings as a result of the Merger, (e) 141,667
shares of RHCI Common Stock issuable upon the exercise of warrants to be
received by Ramsay Hospitals as a result of the Merger and (f) 1,000,000
shares of RHCI Common Stock issuable upon the conversion of 100,000 shares
of RHCI Series 1996 Preferred Stock to be received by Ramsay Hospitals as
a result of the Merger. Does not include 33,333 shares of RHCI Common
Stock issuable upon the exercise of warrants to be received by Ramsay
Hospitals as a result of the Merger, which are not currently exercisable
and 8,333 shares of RHCI Common Stock issuable upon the exercise of RHCI
Options to be received by Paul J. Ramsay as a result of the Merger, which
are not currently exercisable. See "The Merger Agreement--The Merger--
Consideration to be Received in the Merger" and "The Merger Agreement--The
Merger--Stock Options and Warrants."
(6) These shares are included in the pro forma beneficial ownership of RHCI
Common Stock of Paul J. Ramsay and are included in footnote (5) above.
(7) Information as to the holdings of Brinson Holdings, Inc. ("BHI"), Brinson
Partners, Inc. ("BPI") and Brinson Trust Company ("BTC") is based upon a
report on Schedule 13G filed with the Securities and Exchange Commission.
Such report indicates that 776,100 shares were owned by BPI with shared
voting and shared dispositive power and 211,060 shares were owned by BTC
with shared voting and shared dispositive power. Such report indicates
that BTC is a bank and the wholly owned subsidiary of BPI, an investment
adviser registered under the Investment Advisers Act of 1940, which in
turn is a wholly owned subsidiary of BHI, a parent holding company. BHI is
a wholly owned subsidiary of SBC Holding (USA), Inc. ("SBC"), whose
address is 222 Broadway, New York, New York 10038. SBC is a wholly owned
subsidiary of Swiss Bank Corporation, whose address is Aeschenplatz 6 CH-
4002, Basel, Switzerland.
(8) Information as to the holdings of Merrill Lynch & Co., Inc. ("Merrill") is
based upon a report on Schedule 13G filed with the Securities and Exchange
Commission. Such report indicates that 586,300 shares were owned by
Merrill and its affiliates with shared voting and dispositive power.
Merrill and its affiliates disclaim any beneficial interest in such
shares, other than shares held by Merrill and its affiliates in
proprietary accounts.
(9) Information as to the holdings of Heartland Advisors, Inc. ("HAI") is
based upon a report on Schedule 13G filed with the Securities and Exchange
Commission. Such report indicates that HAI owned 1,154,800 shares with
sole voting power 1,530,800 shares with sole dispositive power. Such
report indicates that HAI is an investment adviser registered under the
Investment Advisers Act of 1940.
On May 3, 1996, Ramsay Holdings entered into a secured demand loan facility
with Coutts pursuant to which Ramsay Holdings is entitled to borrow an amount
equal to the lesser of $7,000,000 and the collateral value of certain assets
which have been pledged to Coutts. The current collateral includes, among
other things,
154
<PAGE>
1,679,898 of the shares of RHCI Common Stock held by Ramsay Holdings and
Ramsay HSA and the 142,486 shares of RHCI Series C Preferred Stock held by
Ramsay Holdings and Ramsay HSA (the "Pledged Stock"). Ramsay Holdings has the
right (but is under no obligation) to pledge additional shares of RHCI Common
Stock to secure the obligations of Ramsay Holdings to Coutts.
Coutts is entitled to repayment of amounts outstanding under the loan
facility on demand. In the event that Ramsay Holdings were to default on its
obligations to Coutts under the loan facility, Coutts would be entitled to
liquidate the Pledged Stock to repay the outstanding debt. In the event that
Coutts were to attempt to liquidate the Pledged Stock, the sale of the stock
would be subject to the volume limitations pursuant to Rule 144 under the
Securities Act.
SECURITY OWNERSHIP OF MANAGEMENT
The following table sets forth, as of January 1, 1997, the number of shares
of RHCI Common Stock beneficially owned by each of RHCI's directors, each
current executive officer named in the Summary Compensation Table, and all
directors and executive officers as a group, based upon information obtained
from such persons.
<TABLE>
<CAPTION>
PRO FORMA BENEFICIAL
OWNERSHIP OF RHCI AFTER
MERGER(2)
---------------------------
NUMBER OF
RHCI PERCENTAGE NUMBER OF
NAME OF TITLE OF SHARES OF RHCI RHCI SHARES PERCENTAGE
BENEFICIAL OWNER RHCI CLASS OWNED(1) CLASS OWNED(1) OF RHCI CLASS
- ---------------- ----------- --------- ---------- ----------- -------------
<S> <C> <C> <C> <C> <C>
Paul J. Ramsay.......... Common 3,648,054(3) 36.12% 5,952,444(5) 44.49%
Series C 142,486(4) 100.0% 142,486(6) 100.0%
Preferred
Series 1996 -- -- 100,000(6) 100.0%
Preferred
Aaron Beam, Jr.......... Common 27,750 * 30,283 *
Peter J. Evans.......... Common 17,750 * 17,750 *
Thomas M. Haythe........ Common 39,750 * 43,083 *
Luis E. Lamela.......... Common 16,000 * 16,000 *
Steven J. Shulman....... Common 17,750 * 17,750 *
Michael S. Siddle....... Common 17,750 * 17,750 *
Brent Bryson............ Common -- * -- *
William N. Nyman........ Common -- * --
John A. Quinn........... Common 3,000 * 3,000 *
Wallace E. Smith........ Common 48,783(7) * 48,783(7) *
All directors, executive
officers and other
officers as a group (14
persons)............... Common 3,843,965 37.88% 6,154,221 45.84%
Series C 142,486 100.0% 142,486 100.0%
Preferred
Series 1996 -- -- 100,000 100.0%
Preferred
</TABLE>
- --------
(*) Indicates ownership percentage of less than one percent (1%).
(1) Includes all shares that each named person is entitled to receive within
60 days, through the exercise of any option, warrant, conversion right, or
similar arrangement. Such shares are deemed to be owned and outstanding by
such person individually, and by all directors and officers as a group,
for purposes of calculating the number of shares owned and the percentage
of class for each such named person and the group, but are not deemed to
be outstanding for purposes of such calculations for any other named
person.
(2) Assumes that the Merger was consummated on January 1, 1997.
(3) Mr. Ramsay's beneficial ownership of RHCI Common Stock includes 2,117,065
shares of RHCI Common Stock beneficially owned by Ramsay HSA and 1,513,239
shares of RHCI Common Stock beneficially
155
<PAGE>
owned by Ramsay Holdings, which entities Mr. Ramsay indirectly controls.
The shares beneficially owned by Ramsay HSA consist of 1,404,035 shares of
RHCI Common Stock owned of record by Ramsay HSA and 713,030 shares of RHCI
Common Stock issuable upon the conversion of 71,303 shares of RHCI Series C
Preferred Stock owned of record by Ramsay HSA. The shares beneficially
owned by Ramsay Holdings consist of 551,409 shares of RHCI Common Stock
currently owned of record by Ramsay Holdings, consist of 551,409 shares of
RHCI Common Stock owned of record by Ramsay Holdings, 250,000 shares of
RHCI Common Stock issuable upon the exercise of currently exercisable
warrants to purchase shares of RHCI Common Stock and 711,830 shares of RHCI
Common Stock issuable upon the conversion of 71,183 shares of RHCI Series C
Preferred Stock owned of record by Ramsay Holdings. Does not include 25,000
shares of RHCI Common Stock issuable upon the exercise of RHCI Options
granted to Mr. Ramsay, which are not currently exercisable, and 500,000
shares of RHCI Common Stock issuable upon the exercise of warrants held by
Ramsay Hospitals, which are not currently exercisable.
(4) These shares are included in the beneficial ownership of RHCI Common Stock
of Paul J. Ramsay and are included in footnote (3) above.
(5) Includes (a) the shares included in footnote (3) above, (b) 916,666 shares
of RHCI Common Stock to be received by Ramsay Hospitals as a result of the
Merger, (c) 184,142 shares of RHCI Common Stock to be received by Ramsay
HSA as a result of the Merger, (d) 61,915 shares of RHCI Common Stock to
be received by Ramsay Holdings as a result of the Merger, (e) 141,667
shares of RHCI Common Stock issuable upon the exercise of warrants to be
received by Ramsay Hospitals as a result of the Merger and (f) 1,000,000
shares of RHCI Common Stock issuable upon the conversion of 100,000 shares
of RHCI Series 1996 Preferred Stock to be received by Ramsay Hospitals as
a result of the Merger. Does not include 33,333 shares of RHCI Common
Stock issuable upon the exercise of warrants to be received by Ramsay
Hospitals as a result of the Merger, which are not currently exercisable
and 8,333 shares of RHCI Common Stock issuable upon the exercise of RHCI
Options to be received by Paul J. Ramsay as a result of the Merger, which
are not currently exercisable. See "The Merger Agreement--The Merger--
Consideration to be Received in the Merger" and "The Merger Agreement--The
Merger--Stock Options and Warrants."
(6) These shares are included in the pro forma beneficial ownership of RHCI
Common Stock of Paul J. Ramsay and are included in footnote (5) above.
(7) Includes 47,853 shares of RHCI Common Stock issuable upon the exercise of
currently exercisable options to purchase shares of RHCI Common Stock
pursuant to RHCI's 1990, 1991 and 1993 stock option plans.
156
<PAGE>
INFORMATION CONCERNING RMCI
BUSINESS
DESCRIPTION OF BUSINESS.
GENERAL
RMCI began operations in October 1993 through the acquisition of FPM. RMCI
became a publicly held company on April 24, 1995 through the Distribution, on
a pro-rata basis in the form of a dividend, by RHCI, of all of the shares of
RMCI Common Stock, held by RHCI on April 24, 1995, to the holders of record on
April 21, 1995, of (i) the RHCI Common Stock, (ii) RHCI's Class A Convertible
Preferred Stock, par value $1.00 per share and (iii) the RHCI Series C
Preferred Stock.
Prior to the Distribution, RMCI comprised the managed care activities
operated by RHCI consisting of managed behavioral healthcare services
operating as FPM Behavioral Health, Inc. based in Orlando, Florida and HMO
services operating through Apex, based in Birmingham, Alabama.
THE MANAGED CARE INDUSTRY
Healthcare costs in the United States have risen from $27 billion in 1960,
comprising five percent of the gross domestic product, to more than $1
trillion in 1994, comprising more than 14 percent of the gross domestic
product. In response to the rapid increases in healthcare costs, employers,
insurers, government entities and healthcare providers have sought cost-
effective alternatives to conventional indemnity insurance for the delivery of
and payment for quality healthcare services. The integration of the delivery
of, and payment for, healthcare services distinguishes managed care companies
from conventional health insurance plans.
RMCI'S BEHAVIORAL HEALTHCARE SERVICES
FPM manages and provides the delivery of mental healthcare and substance
abuse treatment through networks of RMCI-employed and independent mental
healthcare providers on behalf of its managed care customers, primarily self-
insured employers, HMOs, insurance companies and governmental agencies. FPM is
an integrated managed mental healthcare services company, in that it provides
a full range of related mental health services and treatment programs designed
to improve and manage the treatment delivered by healthcare professionals
employed by FPM and by other unaffiliated parties. FPM's services and
treatment programs range from benefit design, utilization review, case
management, quality assurance and claims processing services to fully
capitated (at-risk) mental healthcare treatment. At December 31, 1996, FPM
provided managed mental healthcare services in 16 states to approximately
800,000 individuals through its regional offices located in Phoenix, Arizona,
Miami and Orlando, Florida, Covington, Louisiana, Charlotte, North Carolina,
Cleveland, Ohio, Oklahoma City, Oklahoma, San Antonio, Texas and Morgantown,
West Virginia. In addition, for approximately 1,300,000 covered lives, FPM
provides utilization review services.
FPM programs utilize a treatment methodology structured to improve the
quality and cost effectiveness of mental healthcare by diagnosing patients as
early in the therapeutic process as possible and promptly providing the most
appropriate level of treatment in the least restrictive setting. An integral
component of its treatment methodology is FPM's 24-hour on-site inpatient
certification service which, when utilized in conjunction with RMCI's provider
network, reduces unnecessary admissions to inpatient facilities and often
results in the increased utilization of more cost effective outpatient
services.
FPM presently provides managed healthcare and substance abuse treatment
through a network of approximately 48 RMCI-employed physicians, psychologists
and clinicians, approximately 2,800 independent physicians, psychologists and
clinicians, 13 RMCI-operated multidisciplinary mental health outpatient
facilities ("clinics"), and approximately 150 contracted hospitals and other
facilities. RMCI's full and part-time staff of physicians, psychologists,
clinicians and ancillary care providers are generally employed under both
salary and
157
<PAGE>
hourly wage arrangements. Generally, subsidiaries of RMCI have contracts with
independent physicians and other outside providers who are paid on a
discounted fee-for-service basis.
RMCI believes that its physician-based provider network has been able to
both achieve cost savings for managed care customers and enhance the quality
of mental health and substance abuse treatment for patients.
FPM also provides an Administrative Services Only Program (the "ASO
Program") through which beneficiaries telephone a toll-free, 24-hour telephone
line that is monitored by employed clinicians. The clinicians assess a
beneficiary's particular needs and verify eligibility for benefits coverage.
In the event a beneficiary requires inpatient care, the clinician will
authorize the coverage of the admission and refer the beneficiary to an
inpatient facility. If outpatient services are recommended, the clinician will
refer a beneficiary either to a RMCI-employed or independent contract
provider. FPM's customers typically are responsible for payment of inpatient
facility and outpatient provider charges under the ASO Program.
RMCI'S HMO SERVICES
An HMO provides prepaid healthcare services to its members through primary
care and specialty physicians employed by the HMO at facilities operated by
the HMO, and/or through a network of independent primary care and specialty
physicians and other healthcare providers who contract with the HMO to furnish
such services. Primary care physicians include internists, family
practitioners and pediatricians. Generally, access to specialty physicians and
other healthcare providers must be approved by the member's primary care
physician. These other healthcare providers include, among others, hospitals,
nursing homes, home health agencies, pharmacies, mental health and substance
abuse centers, diagnostic centers, optometrists, outpatient surgery centers,
dentists, urgent care centers, and durable medical equipment suppliers.
Because access to these other healthcare providers must be approved by the
primary care physician, the HMO product is a restrictive form of managed care.
RMCI's HMO services operated through RMCI's wholly owned subsidiary Apex,
which currently has licenses to operate HMO's in Louisiana, Mississippi and
Alabama. During the year ended June 30, 1996, RMCI adopted a formal plan for
the sale of the operation comprising its HMO business. The disposition of
RMCI's HMO operation is expected to be completed during fiscal 1997. See "RMCI
Management's Discussion and Analysis of Financial Condition and Results of
Operations" above.
On October 30, 1996, RMCI entered into a Stock Purchase Agreement with
RoTech Medical Corporation for the sale of the capital stock of Apex. See
"Information Concerning RMCI--Business--Recent Events" below.
COMPETITION
The healthcare industry in general, and the managed mental healthcare
services industry in particular, are highly fragmented and extremely
competitive. Contracts for the provision of managed mental healthcare services
are generally bid and renewed annually. Furthermore, competition in the
managed mental healthcare services industry has intensified in recent years.
FPM competes with local and national behavioral companies, large insurance
companies, HMOs and not-for-profit health plan corporations, PPOs and other
provider networks as well as third-party administrators, all of which also
offer services to manage mental healthcare costs.
Many of these operations and entities have substantially greater financial
resources than RMCI and offer a wider range of services than RMCI.
The competitive position of RMCI also has been, and in all likelihood will
continue to be, affected by the increased initiatives undertaken during the
past several years by federal and state governments and other major purchasers
of healthcare, including insurance companies and employers, to revise payment
methodologies and monitor healthcare expenditures in order to contain
healthcare costs.
158
<PAGE>
REVENUE PROFILE
With respect to each of its managed care programs, RMCI typically charges
each managed care customer a monthly capitation fee for each beneficiary
enrolled in the customer's health benefit program managed by RMCI.
Depending upon both the type of program for which a customer contracts and
the benefits covered under such customer's benefit program, the capitation fee
arrangement is designed so that, with respect to both inpatient and outpatient
care, FPM accepts full risk (all services capitated), as is generally the
case, partial risk (selected services capitated) or limited risk (full risk up
to a maximum amount), in each case for costs that exceed the fees attributable
to such program. Certain FPM contracts, such as those for the provision of the
ASO Program, may include fee adjustments linked to a comparison of the level
of utilization and/or cost of providing healthcare services on behalf of the
customer, given the customers' historical level of utilization and/or cost of
providing such services prior to its contracting with FPM.
In setting its fees, RMCI relies upon a number of factors, including:
. the nature and scope of services to be provided;
. the benefits offered to the managed care customer;
. the prior utilization history and demographic make-up of the beneficiary
population to be served;
. the rates charged by providers and inpatient facilities in the service
area and the mode of the provision of such services; and
. RMCI's prior experience with similar programs.
RMCI believes that its management information systems and provider networks
enable it to develop the policies, procedures and internal controls necessary
to assess and manage the risks associated with capitated arrangements. There
can be no assurance, however, that RMCI's assumptions as to utilization rates
and costs, whether relating to inpatient facilities, use of permitted
nonaffiliated providers or otherwise, will accurately and adequately reflect
actual utilization rates and costs. If rates and costs exceed those projected
with respect to a particular program, the expenses to RMCI of providing such
program could be increased and could exceed the corresponding capitation fee,
which, in either case, could have a material adverse effect on RMCI's
financial condition and results of operation.
HMO services began earning revenue in June 1995, and represented
approximately 6.0% of RMCI revenues for the year ended June 1996. Because of
RMCI's decision to dispose of its HMO operation during fiscal 1997, the
revenue and expenses related to its HMO operation have been reclassified as a
discontinued operation. In connection with its decision to discontinue its HMO
operation, RMCI, in the fourth fiscal quarter, recorded a loss on discontinued
operation of $4.9 million.
The following table sets forth, for the periods indicated, the percentage of
RMCI's total revenues for continuing operations derived from the FPM's managed
mental healthcare (at-risk) programs, ASO Programs, and clinical services:
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30
----------------------
SOURCES 1996 1995 1994
------- ------ ------ ------
<S> <C> <C> <C>
Managed care (at-risk).............................. 83.0% 84.0% 76.8%
Managed care (ASO).................................. 6.2% 8.3% 17.8%
Net clinical and other.............................. 10.8% 7.7% 5.4%
------ ------ ------
100.0% 100.0% 100.0%
====== ====== ======
</TABLE>
CUSTOMERS
FPM's customers are generally self-insured employers, HMOs, insurance
companies and government agencies. At December 31, 1996, FPM provided managed
mental healthcare services in 8 states to approximately
159
<PAGE>
800,000 individuals who are either employees, enrollees, or members of
subsidiaries of its customers. In addition, for approximately 1,300,000
covered lives, FPM provides utilization review services. Historically,
however, a limited number of managed care customers has accounted for
substantially all of FPM's revenues. The following table sets forth, for the
period indicated, the percentage of RMCI's total revenues accounted for by (i)
each customer of RMCI from which RMCI derived more than 10% of its total
revenues or (ii) the three largest customers of RMCI in the year indicated.
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30
------------------------
CUSTOMER 1996 1995 1994(d)
-------- ------ ------ --------
<S> <C> <C> <C>
The Walt Disney World Company...................... 17.0% 21.7% 38.0%
The School Board of Orange County, Florida......... (a) (a) 13.1%
Health Options, Inc. (b)........................... 11.0% 10.4% 13.0%
AlohaCare, Inc. (c)................................ 11.0% 9.2% --
The Health Plan of The Upper Ohio Valley (e)....... 12.0% (a) --
</TABLE>
- --------
(a) Percentage of revenue was below 10%.
(b) Contract with Health Options, Inc. commenced August 1, 1993
(c) Contract with AlohaCare, Inc. commenced August 1, 1994.
(d) Inclusive of predecessor corporation, Florida Psychiatric Management,
Inc., for period not owned by RMCI.
(e) Contract with The Health Plan of The Upper Ohio Valley commenced January
1, 1995.
RMCI's revenues also are directly dependent upon the ability of each of its
customers to pay RMCI on a timely basis. To the extent that any customer
experiences financial difficulty or is otherwise unable to meet its
obligations as they become due, RMCI's financial condition and results of
operations could be materially adversely affected. To date, RMCI's customers
have generally paid RMCI on a timely basis.
SALES AND MARKETING
The senior management team of RMCI and the regional executives of each of
its operating subsidiaries are responsible for marketing and sales. Typically,
RMCI markets its services to the potential customer's senior operating and
marketing staff, medical director or healthcare managers.
Marketing of FPM's services is provided at both a regional and national
level. FPM's regional offices employ marketing personnel to interface with
existing and potential customers in the immediate area, and surrounding
networks. FPM's offices in Florida employ a national marketing team which both
coordinates the regional marketing efforts and directs national marketing
strategies.
FPM focuses its marketing and sales efforts primarily on insurance carriers,
nonprofit healthcare corporations, HMOs, government employee groups and self-
insured employers. FPM has also targeted employee benefit consulting firms
that represent employers and groups of employers in the selection and purchase
of managed mental healthcare benefit programs.
MANAGEMENT INFORMATION SYSTEMS
RMCI's managed care operations use integrated information systems developed
and/or customized specifically to meet RMCI's needs and to allow for
aggregation of data and comparison across markets. These information systems
support marketing, sales, underwriting, contract administration, billing,
financial and other administrative functions, as well as customer service,
appointment scheduling, authorization and referral management, concurrent
review, physician capitation, claims administration and provider management.
An important element of RMCI's information systems is the decision support
database which is used by marketing and corporate personnel for such items as
provider profiling, quality assessment, member satisfaction measurement,
employer reporting and utilization review, among others.
RMCI's information systems are continually being upgraded to incorporate new
products and to take advantage of the latest advances in technology.
160
<PAGE>
GOVERNMENT REGULATION
As a managed healthcare services company and a healthcare provider, RMCI is
currently subject to extensive and frequently changing government regulations.
These regulations are primarily concerned with licensure, conduct of
operations, financial solvency, standards of medical care provided, the
dispensing of drugs, the confidentiality of medical records of patients, and
the direct employment of psychiatrists, psychologists, and other licensed
professionals by business corporations. The various types of regulatory
activity affect RMCI's business either by controlling its operations,
restricting licensure of the business entity or by controlling the
reimbursement for services provided. Generally, regulatory agencies have broad
discretionary powers when granting, renewing or revoking licenses or granting
approvals. In addition, the time necessary to obtain licenses varies from
state to state. In certain cases, more than one regulatory agency in each
jurisdiction may assert that it has authority over the activities of RMCI.
State licensing laws and other regulations are subject to amendment and to
interpretation by regulatory agencies with broad discretionary powers. Any
such licensure and/or regulation could require RMCI to modify its operations
materially in order to comply with applicable regulatory requirements and may
have a material adverse effect on RMCI's business, financial condition or
results of operations.
To the extent that RMCI operates or is deemed to operate in one or more
states as a prepaid limited health service organization, insurance company,
HMO, prepaid health plan, or other similar entity, it will be required to
comply with certain statutes and regulations that, among other things, may
require it to maintain minimum levels of deposits, capital, surplus, reserves
or net worth, and also may limit the ability of RMCI and its subsidiaries to
pay dividends, make certain investments, and repay certain indebtedness. The
imposition of any such requirements will significantly increase RMCI's costs
of doing business. Failure by RMCI to obtain or maintain required licenses
typically also constitutes an event of default under RMCI's contracts with its
customers. The loss of business from one or more of RMCI's major customers as
a result of such an event of default or otherwise could have a material
adverse effect on RMCI's business, financial condition or results of
operations.
Several of the states in which FPM conducts its business have enacted
legislation requiring organizations engaged in utilization review to register
and to meet certain operating standards. Utilization review regulations
typically impose requirements with respect to qualifications of personnel,
appeal procedures, confidentiality and other matters relating to utilization
review services. FPM is registered in Arizona, Florida, Louisiana, Missouri,
North Carolina, Oklahoma, South Carolina, and Texas for such services. FPM has
been able to comply with the applicable legislation without significant
expense to date. FPM may be required to comply with similar statutes if other
states in which it conducts its business impose such requirements.
Many states in which FPM does business have adopted statutes to regulate
third-party health claims administrators, which may include aspects of RMCI's
business. These statutes typically impose requirements with respect to the
financial solvency and operation of the administrator. FPM has obtained a
certificate of authority as an administrator in Ohio and Texas. RMCI may be
required to comply with similar statutes in other states in which it conducts
business.
Florida enacted a prepaid limited health service organization statute in
1993. This statute provides for the regulation of limited service prepaid
health plans in a manner similar to the regulation of an HMO. FPM has obtained
a written determination from the staff of the Florida Department of Insurance
that it is not subject to regulation under this statute, but there can be no
assurance that the Florida Department of Insurance will not take a contrary
position in the future. The West Virginia Department of Insurance has issued
administrative rules regulating the financial solvency and operation of
entities that contract with HMOs to provide health services to HMO members on
a prepaid basis using a network of independent providers. FPMs HMO customer in
West Virginia has requested the West Virginia Department of Insurance to grant
an exemption for FPM from the working capital and segregated fund requirements
of these rules. However, there is no assurance this request will be granted
and there can be no assurance that such rules will not have a material adverse
effect upon RMCI's business, financial condition or results of operations.
161
<PAGE>
Several of the states in which FPM operates regulate PPOs. Generally, FPM is
exempt from PPO regulations but, as required by North Carolina law, FPM has
obtained a certificate of registration as a PPO in North Carolina. FPM may be
required to comply with similar statutes in other states.
Certain of RMCI's services are subject to the provisions of the Employee
Retirement Income Security Act of 1974, as amended ("ERISA"). ERISA governs
certain aspects of the relationship between employer-sponsored health benefit
plans and certain providers of services to such plans through a series of
complex statutes and regulations that are subject to periodic interpretation
by the IRS and the United States Department of Labor. In general, these
regulations impose, among other things, an obligation on FPM to act as a
fiduciary with respect to some of the health benefit plans it provides
services to. However, there is little direct authority governing the
application of ERISA to many of the activities and arrangements of managed
mental healthcare and substance abuse treatment companies such as those
operated by FPM.
RMCI is also affected directly by regulations imposed upon healthcare
providers and indirectly by regulations imposed upon RMCI's customers.
Regulations imposed upon healthcare providers include provisions relating to
the conduct of and ethics in the practice of psychiatry, psychology, social
work and related mental healthcare professions, and, in certain cases, the
common law duty to warn others of danger or to prevent patient self-injury. In
addition, there are federal and state laws that require providers of mental
health or substance abuse treatment services to maintain the confidentiality
of treatment records and information with respect to such patients. These laws
generally specify the conditions under which patient-specific information may
be disclosed, and may be enforced through the imposition of criminal fines and
other penalties. Regulations imposed upon RMCI's customers include, among
other things, benefits mandated by statute, exclusions from coverage
prohibited by statute, procedures governing the payment and processing of
claims, record keeping and reporting requirements, requirements for and
payment rates applicable to coverage of Medicare and Medicaid beneficiaries,
provider contracting and enrollee rights, and confidentiality requirements.
Any such direct and indirect regulation could have a material adverse effect
on RMCI's business, financial condition or results of operation.
In certain states, the employment of psychiatrists, psychologists and
certain other mental healthcare professionals by business corporations, such
as FPM, is a permissible practice. However, other states have legislation or
regulations or have interpreted existing medical practice licensing laws to
restrict business corporations from providing mental health services or from
the direct employment of psychiatrists and, in a few states, psychologists and
other mental healthcare professionals. For example, various state boards of
medical examiners have regulations which prohibit psychiatrists, and in a few
cases, psychologists, from being employed by business corporations and only
permit employment by professional corporations. These statutes vary from state
to state, are often vague and have seldom been interpreted by the courts or
regulatory agencies. Although FPM exercises care in an effort to structure its
arrangements with healthcare providers to comply with the relevant state
statutes, and although management believes that RMCI is in compliance with
these laws, there can be no assurance that (i) governmental officials charged
with responsibility for enforcing these laws will not assert that RMCI or
certain transactions in which it is involved are in violation of such laws;
(ii) such state laws will ultimately be interpreted by the courts in a manner
inconsistent with the practices of RMCI or (iii) evolving interpretations of
such state laws or the adoption of other state laws or regulations will not
make it necessary for RMCI to restructure certain of its arrangements.
Federal and some state laws impose restrictions on physicians' referrals
and, in a few states, on psychologists' and other mental healthcare
professionals' referrals for certain designated health services to entities
with which they have financial relationships. RMCI believes its operations are
structured to comply with these restrictions to the extent applicable.
However, there are efforts to expand the scope of these referral restrictions
at both the federal and state level. Certain states are considering adopting
similar restrictions or expanding the scope of existing restrictions. There
can be no assurance that the federal government or other states in which RMCI
operates will not enact similar or more restrictive legislation or
restrictions that could, under certain circumstances, impact RMCI's
operations.
162
<PAGE>
FPM provides clinical services in its behavioral health programs to some
patients who are beneficiaries of the federal Medicare and Medicaid programs.
The compensation received by FPM for such services is established by fee
schedules and other similar cost containment measures. There can be no
assurance that future legislation will not adversely effect FPM's compensation
for services provided by FPM to Medicare and Medicaid beneficiaries. At
present, the revenues received by FPM under the Medicare and Medicaid programs
are not material.
The Social Security Act imposes criminal and civil penalties upon persons
who make or receive kickbacks, bribes or rebates in connection with the
Medicare or Medicaid programs. These antifraud and abuse rules prohibit
providers and others from soliciting, offering, receiving or paying, directly
or indirectly, any remuneration in return for either making a referral for
Medicare or Medicaid covered services or items or ordering any covered
services or items. Upon conviction, violations of these rules may be punished
by fines of up to $25,000 or imprisonment for up to five years, or both. In
addition, the Medicare and Medicaid Patient and Program Protection Act of 1987
imposes civil sanctions for violation of these prohibitions, punishable by
exclusion from the Medicare and Medicaid program. Such exclusion, if applied
to FPM's operations, could result in significant loss of reimbursement. In
order to provide guidance with respect to the anti-fraud and abuse rules, the
Office of the Inspector General of HHS has issued regulations outlining
certain "safe harbor" practices which, although potentially capable of
including prohibited referrals, would not be prohibited if all applicable
requirements are met. A relationship which fails to satisfy a safe harbor is
not necessarily illegal, but could be scrutinized under a case-by-case
analysis. Since the anti-fraud and abuse laws have been broadly interpreted,
they limit the manner in which RMCI can acquire professional practices and
market its services to, and contract for services with, psychiatrists,
psychologists, and other mental healthcare professionals. Management considers
and seeks to comply with these regulations in planning its activities, and
believes that its activities, even if not within a safe harbor, do not violate
the anti-fraud and abuse statute. However, no assurance can be given regarding
compliance in any particular factual situation, as there is no procedure for
advisory opinions from government officials.
In connection with RMCI's entry into HMO businesses in the southeastern
United States, RMCI, through its subsidiary Apex, has obtained licenses from
the Louisiana Department of Insurance, the Mississippi Department of Insurance
and the Alabama Department of Insurance to operate HMOs in Louisiana,
Mississippi and Alabama, respectively. The operation of HMOs in the foregoing
states subjects RMCI and its subsidiaries to extensive state and federal
regulation of both their operations and structure. In addition, applicable
state and local laws regulate the scope of benefits provided to RMCI's HMO
members, RMCI's quality assurance and utilization review procedures,
enrollment requirements and member grievance procedures, the form and
provisions of provider contracts and RMCI's marketing and advertising efforts.
Furthermore, RMCI's operation of HMOs requires it to file periodic reports
with, and subject itself to review by, federal and state governmental
authorities. Any changes in or additions to the current statutes and
regulations governing its HMO businesses could adversely affect RMCI's
business, financial condition or results of operations. See "Information
Concerning RMCI--Business--Recent Events" below.
RMCI believes that it is currently in compliance in all material respects
with applicable current statutes and regulations governing its business. RMCI
monitors its compliance with applicable statutes and regulations and works
with regulators concerning various compliance issues that arise from time to
time. Notwithstanding the foregoing, the regulatory approach to the managed
healthcare services industry is evolving and there can be no assurance that a
regulatory agency will not take the position, under existing or future
statutes or regulations, or as a result of a change in the manner in which
existing statutes or regulations are or may be interpreted or applied, that
the conduct of all or a portion of RMCI's operation within a given
jurisdiction is or will be subject to further licensure and/or regulation.
Expansion of RMCI's businesses to cover additional geographic areas or to
different types of customers could also subject it to additional licensure
and/or regulatory requirements.
ACQUISITIONS
FLORIDA PSYCHIATRIC MANAGEMENT, INC. RMCI acquired all of the capital stock
of FPM on October 29, 1993. This acquisition marked the entry of RMCI into the
direct provision of managed mental healthcare
163
<PAGE>
services. FPM is headquartered in Orlando, Florida. FPM was founded, and RMCI
is continuing its operation, based on the concept that clinically oriented
managed care can control costs and curb reimbursement abuses while assuring
that each patient receives the most appropriate level of treatment in a
quality manner. The consideration for the acquisition was a combination of
$4,000,000 in cash, $2,500,000 of debentures and a contingent earn-out payment
based on the attainment of certain earnings and revenue levels over the
ensuing two years. At June 30, 1995 all parties agreed to an additional
payment of $450,000, which was paid on October 31, 1995, and cancellation of
the earn-out provision. In connection with this acquisition, RMCI recorded
cost in excess of net asset value of purchased businesses and other intangible
assets of approximately $4,900,000 and $3,100,000, respectively.
FLORIDA PSYCHIATRIC ASSOCIATES, INC. As of June 1, 1994, RMCI acquired all
of the capital stock of FPA, a physician practice group located in Orlando,
Florida, for $50,000 in cash. In connection with the acquisition, RMCI entered
into employment agreements with each of the seller-physicians for two to four
year periods. Prior to its acquisition by RMCI, FPA was the largest network
contract provider for RMCI in the State of Florida.
FPMBH OF ARIZONA, INC. The assets of the Human Dynamics Institute, a former
managed mental healthcare services division of Phoenix South, were acquired by
a wholly owned subsidiary of RMCI on June 30, 1994. FPMBH now serves as RMCI's
regional office in Arizona and provides managed mental healthcare services
through its contract provider networks in Arizona, Nevada and New Mexico.
FPMBH's managed care customers are primarily health maintenance organizations
and insurance companies. The consideration for the acquisition was a
combination of $1,000,000 in cash, a $1,000,000 promissory note, 86,425 shares
of RMCI Common Stock and a contingent earn-out payment based upon the
attainment of certain revenue levels over the ensuing two years. The earn-out
payment of $425,789 was paid on October 31, 1996. In connection with this
acquisition, RMCI recorded cost in excess of net asset value of purchased
businesses totaling approximately $3,000,000. In June 1996, RMCI recognized a
goodwill impairment charge of $1,929,000 related to the goodwill associated
with this acquisition. See "RMCI--Management's Discussion and Analysis of
Financial Condition and Results of Operations" above.
EMPLOYEES
As of December 31, 1996, RMCI had 224 full time equivalent employees. RMCI
believes that its relationship with its employees is good.
DESCRIPTION OF PROPERTIES
RMCI's headquarters in Coral Gables, Florida are leased. RMCI's offices in
Orlando, Florida and several RMCI-operated clinics are leased from
partnerships of which Martin Lazoritz, an Executive Vice President, and other
employees of RMCI are partners under leases expiring through August 2003. In
addition, RMCI leases other office space and clinics in various cities in the
United States which expire from September 1996 to April 1999. RMCI does not
anticipate that it will experience any difficulty in renewing these leases
upon their expiration or obtaining different space on comparable terms if
these leases are not renewed. RMCI believes that these facilities are well
maintained and are of adequate size for present needs. However, expansion of
RMCI's operations will require obtaining additional space which RMCI believes
will be available on commercially reasonable terms.
LEGAL PROCEEDINGS
From time to time, RMCI 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. As both the number of
people serviced by RMCI's programs and the number of providers under contract
with RMCI increase, the probability of RMCI being subject to legal liability
predicated on claims alleging malpractice or related legal theories also
increases. Currently, there are no such claims, suits or complaints pending
which, in the opinion of management, would have a material adverse effect on
the RMCI's business, financial condition, results of operation or liquidity.
164
<PAGE>
RMCI and its subsidiaries Apex, Apex Healthcare of Louisiana, Inc., Apex
Healthcare of Alabama, Inc. and Apex Healthcare of Mississippi, Inc. commenced
an action on July 1, 1996 in the Circuit Court of Jefferson County, Alabama
against Parveez A. Oliaii (a former officer of RMCI and the former chief
executive officer of Apex), and against Berenson Minella & Company, Wexford
Capital Corporation, Wexford Management LLC, Apex Acquisition Corporation and
Karen M. Ryugo (collectively, the "Other Defendants"). The complaint alleges
that all defendants tortiously and fraudulently interfered with RMCI's
proposed sale of Apex, including its subsidiaries, and alleges that Mr. Oliaii
breached his employment contract with RMCI and his fiduciary duties to all
plaintiffs. The complaint seeks damages in an amount of no less than $3
million, plus punitive damages. On October 4, 1996, Mr. Oliaii asserted a
counterclaim alleging that the plaintiffs breached his employment contract by
terminating him without cause and failing to pay him certain compensation
allegedly owed pursuant to the employment contract. Mr. Oliaii's counterclaim
seeks damages of at least $325,000 and other remedies. In addition, on October
21, 1996, the Other Defendants asserted counterclaims against RMCI and Apex
alleging fraud and breach of contract seeking unspecified compensatory and
punitive damages. Discovery in this litigation is ongoing.
RECENT EVENTS
On October 30, 1996, RMCI entered into a Stock Purchase Agreement with
RoTech Medical Corporation, a Delaware corporation ("RoTech"), providing for
the sale (the "Apex Sale") of all of the issued and outstanding shares (the
"Apex Shares") of common stock of Apex to RoTech. The purchase price for the
Apex Shares is $4,350,000. The closing of the Apex Sale is subject to
obtaining necessary regulatory approvals and licenses from the states of
Alabama, Mississippi and Louisiana and other customary and usual closing
conditions.
165
<PAGE>
MANAGEMENT
DIRECTORS OF RMCI
Certain information concerning the Directors of RMCI is set forth below.
Name of Director and Biographical Information
AARON BEAM, JR., age 52, Executive Vice President and Chief Financial
Officer of HEALTHSOUTH Corporation (provider of medical rehabilitation
services) since prior to 1991; Director of HEALTHSOUTH Corporation since 1993;
Director of RHCI.
PETER J. EVANS, age 47, Financial consultant to a number of Australian
companies; Partner, P.J. Evans & Co., a chartered accounting firm in
Australia, since prior to 1991; Former partner in big six accounting firm;
Director of Ramsay Pty. Limited (owner and operator of hospitals in
Australia); Prime Television Limited (operator of an Australian television
network); and RHCI.
THOMAS M. HAYTHE, age 57, Partner, Haythe & Curley (attorneys) since prior
to 1991; Director of Novametrix Medical Systems Inc. (manufacturer of
electronic medical instruments); Isomedix Inc. (provider of sterilization
services); Guest Supply, Inc. (provider of hotel guest room amenities,
accessories and products); Westerbeke Corporation (manufacturer of marine
engine products); and RHCI.
MOISES E. HERNANDEZ, M.D., age 53, Physician in private practice in internal
medicine and gastroenterology since prior to 1991; Managing Partner and
Medical Director of Gastroenterology Group of South Florida since prior to
1991; Fellow, American College of Gastroenterology; Fellow, American College
of Physicians.
LUIS E. LAMELA, age 46, Vice Chairman of the Board of RMCI since January
1996; Chief Executive Officer of CAC Medical Centers, a division of United
HealthCare of Florida, since July 1996; President and Chief Executive Officer
of CAC--United HealthCare Plans of Florida from May 1994 to July 1996;
President and Chief Executive Officer of Ramsay--HMO, Inc. from prior to 1991
to May 1994; Director of RHCI.
PAUL J. RAMSAY, age 60, Chairman of the Board of RMCI since June 1994;
Chairman of the Board of RHCI since July 1988; President of RHCI from February
1988 to July 1988; Chairman of the Board of Ramsay Pty. Limited (or its
predecessors); Ramsay Hospitals and Prime Television Limited; involved in the
healthcare industry for more than 25 years; Director of RHCI.
MICHAEL S. SIDDLE, age 47, Managing Director (Chief Executive Officer) of
Ramsay Pty. Limited (or its predecessors) and Ramsay Hospitals since prior to
1991; various executive positions with corporations controlled by Paul J.
Ramsay since prior to 1991; Director of Prime Television Limited and RHCI.
166
<PAGE>
EXECUTIVE OFFICERS
The executive officers of RMCI are as follows:
<TABLE>
<CAPTION>
NAME POSITION AGE
---- -------- ---
<C> <S> <C>
Luis E. Lamela.............. Executive Vice Chairman of the RMCI Board 46
since January 1996; Executive Vice Chairman
of the RHCI Board since January 1996; Chief
Executive Officer of CAC Medical Centers, a
division of United Health Care of Florida,
since July 1996; President and Chief
Operating Officer of CAC--United HealthCare
Plans of Florida from May 1994 to July
1996; President and Chief Executive Officer
of Ramsay--HMO, Inc. from prior to 1992 to
May 1994; Director and Executive Vice
Chairman of the Board of RHCI.
Bert G. Cibran.............. President and Chief Operating Officer of 42
RMCI since August 1996; President of Summa
Healthcare Group, Inc. (a healthcare
consulting firm) from February 1996 through
August 1996; President and Chief Operating
Officer for the Florida operations of
Physician Corporation of America from
February 1994 to February 1996; Executive
Vice President of Operations with Ramsay--
HMO, Inc. from prior to 1992 to February
1994; President and Chief Operating Officer
of RMCI.
Martin Lazoritz, M.D........ Executive Vice President of RMCI since 49
November 1993; Executive Vice President and
Chief Medical Officer of RHCI since January
1997; President and Chief Executive Officer
of FPM since prior to 1992.
I. Paul Mandelkern.......... Senior Vice President and General Counsel 47
of FPM since July 1990; Vice President of
RMCI from November 1993 to October 1994;
Partner of a private law firm from prior to
1992 to May 1991.
Robert W. Pollack, M.D...... Medical Director of RMCI since November 49
1993; Medical Director of FPM and
physician-employee of FPA since prior to
1992.
Dexter A. Simanton, Psy.D... Vice President of Operations of FPM since 42
June 1994; Director of Clinical Operations
at FPA since September 1992; mental health
therapist at FPA since prior to 1992.
Philip G. Symon............. Treasurer and Assistant Secretary of RMCI 33
since June 1994; Financial Projects Manager
of RHCI from April 1993 to June 1994;
Financial Projects Manager of Ramsay--HMO,
Inc. from January 1992 to April 1993;
Independent contractor for financial
services from prior to 1992 to January
1992.
Warwick D. Syphers.......... Executive Vice President and Chief 44
Financial Officer of RMCI since February
1995; Secretary of Prime Television Limited
from prior to 1992.
</TABLE>
167
<PAGE>
Executive officers serve at the discretion of the RMCI Board. No family
relationships exist among any of the Directors or executive officers of RMCI.
In connection with the acquisition of FPM, RMCI entered into three-year
employment agreements through October 31, 1996 with each of Dr. Martin
Lazoritz and I. Paul Mandelkern, each of which has been extended through
October 31, 1997. Each of these employment agreements may be terminated by the
employee without cause upon 90 days prior written notice effective at any time
commencing October 31, 1995. The employment agreements provide that Dr.
Lazoritz and Mr. Mandelkern will receive annual base salaries of $250,000 and
$150,000, respectively, and annual formula based bonuses (not in excess of
100% of their respective base salaries) based upon growth in revenue and
operating income. The employment agreements also provide for participation in
all employee benefit plans and programs offered by RMCI. The employment
agreements provide that if the employee dies, becomes disabled (i.e., unable
to perform his normal duties for a cumulative period of six months in any
consecutive 12-month period), or is terminated by RMCI for "due cause," RMCI
will pay to such employee, or the employee's legal representative, all base
salary through the date of death or termination for due cause and, in the case
of termination due to disability, through the first to occur of (i) payment of
benefits to the employee under a disability plan or policy maintained by RMCI
or (ii) the death of the employee, and, except in the case of termination for
due cause, bonus amounts accrued and unpaid to the date of such death or
disability (or date of termination if later than disability date). If RMCI
terminates employment without cause, it will be required to pay bonus amounts
accrued and unpaid to the date of such termination and salary through October
31, 1996 or, in the case of such termination without cause during the one year
extension, through October 31, 1997. Pursuant to the employment agreements,
each of Dr. Lazoritz and Mr. Mandelkern has agreed that he will not directly
or indirectly compete with RMCI so long as he is employed by RMCI and for a
period of one year thereafter. Effective upon the Merger, the employment
agreement with Dr. Lazoritz will be terminated and the employment agreement
between RHCI and Dr. Lazoritz will become effective. See "Information
Concerning RHCI--Management--Employment and Other Agreements."
RMCI also has employment agreements with certain other key employees of
RMCI, including with certain of its medical directors.
168
<PAGE>
PRINCIPAL STOCKHOLDERS
Security Ownership of Certain Beneficial Owners
The stockholders (including any "group," as that term is used in Section
13(d)(3) of the Exchange Act) who, to the knowledge of the RMCI Board, owned
beneficially more than five percent of any class of the outstanding voting
securities of RMCI as of January 1, 1997 and their respective shareholdings as
of such date (according to information furnished by them to RMCI), are set
forth in the following table. The following table also sets forth the
stockholders who, to the knowledge of the RMCI Board, will own beneficially
more than five percent of any class of the outstanding voting securities of
RHCI after the Merger and their respecting shareholdings calculated on a pro
forma basis as if the Merger had been consummated on January 1, 1997. Except
as indicated in the footnotes to the table, all of such shares are owned with
sole voting and investment power.
<TABLE>
<CAPTION>
PRO FORMA BENEFICIAL OWNERSHIP OF RHCI
AFTER MERGER(2)
--------------------------------------------
TITLE NUMBER OF PERCENTAGE NUMBER OF PERCENTAGE
NAME AND ADDRESS OF RMCI RMCI SHARES OF RMCI TITLE OF RHCI SHARES OF RHCI
OF BENEFICIAL OWNER CLASS OWNED(1) CLASS RHCI CLASS OWNED(1) CLASS
------------------- ----------- ----------- ---------- --------------------------- ------------
<S> <C> <C> <C> <C> <C> <C>
Paul J. Ramsay......... Common 6,913,173(3) 70.30% Common 5,952,444(5) 44.49%
c/o Paul Ramsay Group
154 Pacific Highway Series 1996 100,000(4) 100.0% Series 1996 100,000(6) 100.0%
Greenwich, NSW 2065 Preferred Preferred
Australia Stock Stock
Series C 142,486(6) 100.0%
Preferred
Stock
Paul Ramsay Hospitals
Pty. Limited......... Common 6,175,000(4) 62.79% Common 2,058,333(6) 17.59%
c/o Haythe & Curley
237 Park Avenue, Series 1996 100,000(4) 100.0% Series 1996 100,000(6) 100.0%
20th Floor Preferred Preferred
New York, New York Stock Stock
10017
Ramsay Holdings HSA
Limited............... Common 552,428(4) 8.62% Common 2,301,207(6) 20.41%
c/o Haythe & Curley
237 Park Avenue, Series C 71,303(6) 50.0%
20th Floor Preferred
New York, New York Stock
10017
Paul Ramsay Holdings
Pty Limited......... Common 185,745(4) 2.90% Common 1,575,154(6) 13.67%
c/o Haythe & Curley
237 Park Avenue, Series C 71,183(6) 50.0%
20th Floor Preferred
New York, New York Stock
10017
</TABLE>
- --------
(1) Includes all shares that each named person is entitled to receive within
60 days, through the exercise of any option, warrant, conversion right, or
similar arrangement. Such shares are deemed to be owned and outstanding by
such person individually, and by all directors and officers as a group,
for purposes of
169
<PAGE>
calculating the number of shares owned and the percentage of class for each
such named person and the group, but are not deemed to be outstanding for
purposes of such calculations for any other named person.
(2) Assumes that the Merger was consummated on January 1, 1997.
(3) Mr. Ramsay's beneficial ownership of RMCI Common Stock is based on
6,175,000 shares of RMCI Common Stock beneficially owned by Ramsay
Hospitals, 552,428 shares of RMCI Common Stock beneficially owned by
Ramsay HSA and 185,745 shares of RMCI Common Stock beneficially owned by
Ramsay Holdings, which entities Mr. Ramsay indirectly controls. The shares
beneficially owned by Ramsay Hospitals include 425,000 shares of RMCI
Common Stock issuable upon the exercise of currently exercisable warrants
and 3,000,000 shares of RMCI Common Stock issuable upon the conversion of
100,000 shares of RMCI Series 1996 Preferred Stock. Does not include
25,000 shares of RMCI Common Stock issuable upon the exercise of RMCI
Stock Options granted to Mr. Ramsay, which are not currently exercisable
and 100,000 shares of RMCI Common Stock issuable upon the exercise of
warrants held by Ramsay Hospitals, which are not currently exercisable.
See "Information Concerning RHCI--Management--Certain Relationships and
Related Transactions Involving RHCI, RMCI and Affiliates Thereof."
(4) These shares are included in the beneficial ownership of RMCI Common Stock
of Paul J. Ramsay and are included in footnote (3) above.
(5) Includes (a) the shares of RHCI beneficially owned by Mr. Ramsay prior to
the Merger (see "Information Concerning RHCI--Principal Stockholders--
Security Ownership of Certain Beneficial Owners" above), (b) 916,666
shares of RHCI Common Stock to be received by Ramsay Hospitals as a result
of the Merger, (c) 184,142 shares of RHCI Common Stock to be received by
Ramsay HSA as a result of the Merger, (d) 61,915 shares of RHCI Common
Stock to be received by Ramsay Holdings as a result of the Merger, (e)
141,667 shares of RHCI Common Stock issuable upon the exercise of warrants
to be received by Ramsay Hospitals as a result of the Merger and (f)
1,000,000 shares of RHCI Common Stock issuable upon the conversion of
100,000 shares of RHCI Series 1996 Preferred Stock to be received by
Ramsay Hospitals as a result of the Merger. Does not include 33,333 shares
of RHCI Common Stock issuable upon the exercise of warrants to be received
by Ramsay Hospitals as a result of the Merger, which are not currently
exercisable and 8,333 shares of RHCI Common Stock issuable upon the
exercise of RHCI Options to be received by Paul J. Ramsay as a result of
the Merger, which are not currently exercisable. See "The Merger
Agreement--The Merger--Consideration to be Received in the Merger" and
"The Merger Agreement--The Merger--Stock Options and Warrants."
(6) These shares are included in the pro forma beneficial ownership of RHCI
Common Stock of Paul J. Ramsay and are included in footnote (5) above.
170
<PAGE>
Security Ownership of Management
The following table sets forth, as of January 1, 1997, the number of shares
of each class of outstanding voting securities of RMCI beneficially owned by
each of RMCI's directors, each executive officer, and all directors and
executive officers as a group, based upon information obtained from such
persons.
<TABLE>
<CAPTION>
PRO FORMA BENEFICIAL OWNERSHIP OF RHCI
AFTER MERGER(2)
----------------------------------------------
TITLE TITLE NUMBER OF PERCENTAGE
NAME OF BENEFICIAL OF RMCI NUMBER OF RMCI PERCENTAGE OF OF RHCI RHCI SHARES OF RHCI
OWNER CLASS SHARES OWNED (1) RMCI CLASS CLASS OWNED(1) CLASS
------------------ ------------ ---------------- ------------- --------------- -------------- -------------
<S> <C> <C> <C> <C> <C> <C>
Paul J. Ramsay.......... Common 6,913,173(3) 70.30% Common 5,952,444(5) 44.49%
Series 1996 100,000(4) 100.0% Series 1996 100,000(6) 100.00%
Preferred Preferred 142,486(6) 100.00%
Series C
Preferred
Aaron Beam, Jr ......... Common 7,600 * Common 30,283 *
Peter J. Evans.......... Common -0- -- Common 17,750 *
Thomas M. Haythe........ Common 10,000 * Common 43,083 *
Moises E. Hernandez, Common 45,000(7) * Common 15,000 *
M.D....
Luis E. Lamela.......... Common -0- -- Common 16,000 --
Michael S. Siddle....... Common -0- -- Common 17,750 *
Martin Lazoritz, M.D. .. Common 85,061 1.33% Common 28,588 *
I. Paul Mandelkern...... Common 5,235 * Common 2,245 *
Robert Pollack, M.D. ... Common 17,268 * Common 5,756 *
Kenneth L. Burkhart, Common 105,000 1.64% Common 35,000 *
M.D. ...
Warwick D. Syphers...... Common -0- * Common -0- --
All directors, ......... Common 7,190,598(2)(3) 72.79% Common 6,164,652 46.03%
executive officers and Series 1996 100,000 100.0% Series 1996 100,000 100.0%
other officers as a Preferred Preferred
group (15 persons) Series C 142,486 100.0%
Preferred
</TABLE>
- --------
* Indicates ownership percentage of less than one percent.
(1) Includes all shares that each named person is entitled to receive within
60 days, through the exercise of any option, warrant, conversion right, or
similar arrangement. Such shares are deemed to be owned and outstanding by
such person individually for purposes of calculating the number of shares
owned and the percentage of class for each such named person, but are not
deemed to be outstanding for purposes of such calculations for any other
named person.
(2) Assumes that the Merger was consummated on January 1, 1997.
(3) Mr. Ramsay's beneficial ownership of RMCI Common Stock is based on
6,175,000 shares of RMCI Common Stock beneficially owned by Ramsay
Hospitals, 552,428 shares of RMCI Common Stock beneficially owned by
Ramsay HSA and 185,745 shares of RMCI Common Stock beneficially owned by
Ramsay Holdings, which entities Mr. Ramsay indirectly controls. The shares
beneficially owned by Ramsay Hospitals include 425,000 shares of RMCI
Common Stock issuable upon the exercise of currently exercisable warrants
and 3,000,000 shares of RHCI Common Stock issuable upon the conversion of
100,000 shares of RMCI Series 1996 Preferred Stock. Does not include
25,000 shares of RMCI Common Stock issuable upon the exercise of RMCI
Stock Options granted to Mr. Ramsay, which are not currently
171
<PAGE>
exercisable and 100,000 shares of RMCI Common Stock issuable upon the
exercise of warrants held by Ramsay Hospitals, which are not currently
exercisable. See "Information Concerning RHCI-- Management--Certain
Relationships and Related Transactions Involving RHCI, RMCI and Affiliates
Thereof."
(4) These shares are included in the beneficial ownership of RMCI Common Stock
of Paul J. Ramsay and are included in footnote (3) above.
(5) Includes (a) the shares of RHCI beneficially owned by Mr. Ramsay prior to
the Merger (see "Information Concerning RHCI--Principal Stockholders--
Security Ownership of Certain Beneficial Owners" above), (b) 916,666
shares of RHCI Common Stock to be received by Ramsay Hospitals as a result
of the Merger, (c) 184,142 shares of RHCI Common Stock to be received by
Ramsay HSA as a result of the Merger, (d) 61,915 shares of RHCI Common
Stock to be received by Ramsay Holdings as a result of the Merger, (e)
141,667 shares of RHCI Common Stock issuable upon the exercise of warrants
to be received by Ramsay Hospitals as a result of the Merger and (f)
1,000,000 shares of RHCI Common Stock issuable upon the conversion of
100,000 shares of RHCI Series 1996 Preferred Stock to be received by
Ramsay Hospitals as a result of the Merger. Does not include 33,333 shares
of RHCI Common Stock issuable upon the exercise of warrants to be received
by Ramsay Hospitals as a result of the Merger, which are not currently
exercisable and 8,333 shares of RHCI Common Stock issuable upon the
exercise of RHCI Options to be received by Paul J. Ramsay as a result of
the Merger, which are not currently exercisable. See "The Merger
Agreement--The Merger--Consideration to be Received in the Merger" and
"The Merger Agreement--The Merger--Stock Options and Warrants."
(6) These shares are included in the pro forma beneficial ownership of RHCI
Common Stock of Paul J. Ramsay and are included in footnote (5) above.
(7) Consists of 45,000 shares of RMCI Common Stock issuable upon the exercise
of currently exercisable options to purchase shares of RMCI Common Stock.
DESCRIPTION OF CAPITAL STOCK--RHCI
AUTHORIZED CAPITAL STOCK
RHCI's authorized capital stock consists of 20,000,000 shares of RHCI Common
Stock and 1,000,000 shares of Class B Preferred Stock, $1.00 par value (the
"Class B Preferred Stock") issuable in series of which 152,321 shares are
designated as the RHCI Series C Preferred Stock and 100,000 shares are
designated as the RHCI Series 1996 Preferred Stock. In accordance with the
terms of RHCI's Certificate of Incorporation, the RHCI Board may, without
stockholder approval, authorize the issuance (and designate the rights,
preferences and privileges) of additional shares of Class B Preferred Stock.
There were 8,425,431 shares of RHCI Common Stock, 142,486 shares of RHCI
Series C Preferred Stock and no shares of RHCI Series 1996 Preferred Stock
issued and outstanding at December 31, 1996.
RHCI COMMON STOCK
At December 31, 1996, approximately 590 persons were holders of record of
RHCI Common Stock. Each outstanding share of RHCI Common Stock is entitled to
one vote on all matters submitted to a vote of stockholders. See "RHCI Series
C Preferred Stock" and "RHCI Series 1996 Preferred Stock" below. The RHCI
Common Stock does not have cumulative voting rights. Holders of RHCI Common
Stock have no conversion, redemption or preemptive rights. All outstanding
shares of RHCI Common Stock are, and the shares offered hereby by RHCI will
be, fully paid and non-assessable. In the event of any liquidation,
dissolution or winding-up of the affairs of RHCI, the holders of RHCI Common
Stock will be entitled to share ratably in its assets remaining after
provision for payment of creditors and after the liquidation preference of any
RHCI Preferred Stock outstanding at the time.
Subject to the rights of the holders of RHCI Preferred Stock, the holders of
the RHCI Common Stock are entitled to receive dividends when and if declared
by the RHCI Board out of funds legally available for that purpose. RHCI's
ability to pay dividends is restricted under the terms of certain loan
agreements to which RHCI is a party.
172
<PAGE>
The Transfer Agent for the RHCI Common Stock is First Union National Bank of
North Carolina, Charlotte, North Carolina.
RHCI SERIES C PREFERRED STOCK
Except as set forth specifically below or as required by law, the holder of
each share of the RHCI Series C Preferred Stock is entitled to ten (10) votes
on all matters submitted to a vote of the stockholders of RHCI and otherwise
has voting rights and powers equal to the voting rights and powers of the RHCI
Common Stock. The holders of the RHCI Series C Preferred Stock vote together
with the holders of the RHCI Common Stock as one class upon any matter
submitted to a vote of stockholders, except those matters required by law to
be submitted to a class vote of the RHCI Series C Preferred Stock. Each share
of RHCI Series C Preferred Stock is convertible into shares of RHCI Common
Stock on a 10-for-1 basis and is entitled to cumulative dividends at an annual
rate of $2.542 (5%) per share, payable quarterly in arrears. Each of these
shares is also entitled to a liquidation preference of $50.84 per share, under
certain circumstances.
RHCI SERIES 1996 PREFERRED STOCK
Except as set forth specifically below or as required by law, the holder of
each share of the RHCI Series 1996 Preferred Stock is entitled to the number
of votes equal to the number of shares of RHCI Common Stock each share of RHCI
Series 1996 Preferred Stock is convertible into on all matters submitted to a
vote of the stockholders of RHCI and otherwise has voting rights and powers
equal to the voting rights and powers of the RHCI Common Stock. The holders of
the RHCI Series 1996 Preferred Stock vote together with the holders of the
RHCI Common Stock as one class upon any matter submitted to a vote of
stockholders, except those matters required by law to be submitted to a class
vote of the RHCI Series 1996 Preferred Stock. Each share of RHCI Series 1996
Preferred Stock is initially convertible into ten shares of RHCI Common Stock,
subject to adjustment, and is entitled to cumulative dividends at an annual
rate of $1.50 (5%) per share, payable quarterly in arrears. Each of these
shares is also entitled to a liquidation preference of $30.00 per share, under
certain circumstances.
RHCI is governed by the provisions of Section 203 of the Delaware Law, an
anti-takeover law. In general, the statute prohibits a public Delaware
corporation from engaging in a "business combination" with an "interested
stockholder" 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. A "business combination"
includes mergers, asset sales and other transactions resulting in a financial
benefit to the interested stockholder. An "interested stockholder" is a person
who, together with affiliates and associates, owns (or within three years, did
own) 15% or more of the corporation's voting stock. The foregoing statute will
not be applicable to the Merger.
The overall effect of the Delaware Law, the ability of the RHCI Board to
issue additional shares of Class B Preferred Stock without further action by
RHCI's stockholders, and the Rights Plan (see "The Merger-- Comparative Rights
of Stockholders of RHCI and RMCI"), may be to render more difficult the
accomplishment of mergers or other takeover or change in control attempts.
Therefore, removal of RHCI's incumbent Board of Directors and management may
be rendered more difficult. Further, this may have an adverse impact on the
ability of stockholders of RHCI to participate in a tender or exchange offer
for the RHCI Common Stock and in so doing diminish the market value of the
RHCI Common Stock. RHCI is not aware of any proposed takeover attempt or any
proposed attempt to acquire a large block of RHCI Common Stock. The Delaware
Law may also discourage open market purchases of the RHCI Common Stock.
173
<PAGE>
DESCRIPTION OF CAPITAL STOCK--RMCI
AUTHORIZED CAPITAL STOCK
RMCI's authorized capital stock consists of 1,000,000 shares of preferred
stock, par value $0.01 per share, 71,092 of which were designated as Series A
Convertible Preferred Stock (the "Series A Preferred Stock") and 100,000 of
which are designated as Series 1996 Preferred Stock, and 20,000,000 shares of
RMCI Common Stock. In accordance with the terms of RMCI's Certificate of
Incorporation, the RMCI Board may, without stockholder approval authorize the
issuance (and designate the rights, preferences and privileges) of additional
shares of Preferred Stock. In October 1994, RHCI converted all of the
outstanding shares of Series A Preferred Stock into shares of RMCI Common
Stock and the shares of RMCI Common Stock into which such shares were
converted were distributed as a part of the Distribution. A total of 2,413,577
shares of RMCI Common Stock, consisting of all of the shares of RMCI Common
Stock held by RHCI, were distributed to stockholders of RHCI in the
Distribution. There were 6,408,315 shares of RMCI Common Stock and 100,000
shares of RMCI Series 1996 Preferred Stock issued and outstanding at December
31, 1996.
RMCI COMMON STOCK
The holders of RMCI Common stock are entitled to one vote for each share on
all matters voted on by RMCI stockholders. The Certificate of Incorporation of
RMCI does not provide for cumulative voting in the election of directors. No
cash dividends have been declared on the RMCI Common Stock since the
Distribution. Subject to any preferential rights of any outstanding series of
Preferred Stock created by the RMCI Board from time to time and restrictive
covenants limiting the payment of dividends and distribution of assets set
forth in the RMCI Subordinated Promissory Note and set forth in the First
Union Credit Facility, the holders of RMCI Common Stock will be entitled to
such dividends as may be declared from time to time by the RMCI Board from
funds available therefor, and upon liquidation will be entitled to receive pro
rata all assets of RMCI available for distribution to such holders.
The Transfer Agent for the RMCI Common Stock is First Union National Bank of
North Carolina, Charlotte, North Carolina.
RMCI SERIES 1996 PREFERRED STOCK
RMCI has authorized and designated 100,000 shares of RMCI Series 1996
Preferred Stock for issuance. Each of these shares is initially convertible
into 30 shares of RMCI Common Stock, subject to adjustment, and is entitled to
cumulative dividends at a rate per annum of $1.50 (5%) per share payable
quarterly in arrears. Each of these shares is also entitled to a liquidation
preference of $30.00 per share, under certain circumstances. Each share of
RMCI Series 1996 Preferred Stock is entitled to the number of votes equal to
the number of shares of RMCI Common Stock each share of RMCI Series 1996
Preferred Stock is convertible into on all matters put to a vote of the
stockholders of RMCI and otherwise have voting rights and powers equal to the
voting rights and powers of the RMCI Common Stock. See "Information Concerning
RHCI--Management--Certain Relationships and Related Transactions Involving
RHCI, RMCI and Affiliates--Purchase of RMCI Series 1996 Preferred Stock."
LEGAL MATTERS
The validity of the shares of RHCI Common Stock being offered hereby is
being passed upon for RHCI by Haythe & Curley, 237 Park Avenue, New York, New
York 10017. In addition, Haythe & Curley has rendered a tax opinion to RHCI
and RMCI concerning certain federal income tax consequences of the Merger.
Thomas M. Haythe, a Director of RHCI and RMCI, is a partner in Haythe & Curley
(See "The Merger--Certain Federal Income Tax Consequences of the Merger" and
"Information Concerning RHCI--Management"). As of the date hereof, members of
Haythe & Curley own, directly or indirectly, 10,000 shares of RMCI Common
Stock and 39,750 shares of RHCI Common Stock.
174
<PAGE>
EXPERTS
The consolidated financial statements of RHCI at June 30, 1996, and for each
of the three years in the period ended June 30, 1996, included in this Joint
Proxy Statement/Prospectus, have been audited by Ernst & Young LLP,
independent auditors, as set forth in their report appearing elsewhere herein,
and are included in reliance upon such report given upon the authority of such
firm as experts in accounting and auditing.
The consolidated financial statements of RMCI at June 30, 1996 and for each
of the two years in the period ended June 30, 1996, included in this Joint
Proxy Statement/Prospectus, have been audited by Ernst & Young LLP,
independent certified public accountants, as set forth in their report
appearing elsewhere herein, and are included in reliance upon such report
given upon the authority of such firm as experts in accounting and auditing.
175
<PAGE>
OTHER MATTERS SET FORTH FOR ACTION AT THE RHCI MEETING
PROPOSAL II: APPROVAL OF RAMSAY HEALTH CARE, INC.1996 LONG TERM INCENTIVE PLAN
The RHCI Board believes that attracting and retaining key employees and
directors of high quality is essential to RHCI's growth and success. The RHCI
Board also believes that important advantages to RHCI are gained by a
comprehensive compensation program which includes different types of
incentives for motivating such individuals and rewards for outstanding
service. In this regard, stock options and other stock-related awards have
been and will continue to be an important element of RHCI's compensation
program because such awards enable employees and directors to acquire or
increase their proprietary interest in RHCI, thereby promoting a close
identity of interests between such individuals and RHCI's stockholders. Such
awards also provide to employees and directors an increased incentive to
expend their maximum efforts for the success of RHCI's business.
Accordingly, on August 13, 1996, the RHCI Board adopted, subject to
stockholder approval at the RHCI Meeting, the 1996 Long Term Incentive Plan.
In authorizing grants of a wide range of awards, including options, stock
appreciation rights ("SARs"), restricted stock, performance awards and other
stock-based awards, the 1996 Long Term Incentive Plan is intended to give RHCI
greater flexibility to respond to rapidly changing business, economic and
regulatory requirements and conditions. In addition, such flexibility will
enhance the ability of RHCI to closely link compensation to performance. The
1996 Long Term Incentive Plan will not become effective unless approved by the
holders of a majority of the shares of RHCI Common Stock present or
represented and voting thereon at the Meeting. The text of the 1996 Long Term
Incentive Plan is set forth in Exhibit E hereto.
The following discussion of the material features of the 1996 Long Term
Incentive Plan is qualified by reference to the text of the 1996 Long Term
Incentive Plan set forth in Exhibit E hereto.
Shares Subject to the Plan. Under the 1996 Long Term Incentive Plan, 750,000
shares of RHCI Common Stock will be available for issuance of awards. Shares
distributed under the 1996 Long Term Incentive Plan may be either newly issued
shares or treasury shares. If any shares subject to the 1996 Long Term
Incentive Plan are forfeited or the award is settled in cash or otherwise
terminates without a distribution of shares, the shares subject to such award
will again be available for awards under the 1996 Long Term Incentive Plan.
Thus, for example, if an award is voluntarily surrendered in exchange for a
new award, the shares that were subject to the surrendered award would be
available for the new award (or other awards) under the 1996 Long Term
Incentive Plan.
The 1996 Long Term Incentive Plan provides that, in the event of changes in
the corporate structure of RHCI affecting the Common Stock, the Compensation
Committee may adjust (i) the number and kind of shares which may be issued in
connection with awards, (ii) the number and kind of shares issued or issuable
in respect of outstanding awards and (iii) the exercise price, grant price or
purchase price relating to any award, and the Compensation Committee may also
provide for cash payments relating to awards. The Compensation Committee may
also adjust performance conditions and other terms of awards in response to
these kinds of events or to changes in applicable laws, regulations or
accounting principles. The 1996 Long Term Incentive Plan provides that, in
connection with any merger or consolidation in which RHCI is not the surviving
corporation or any sale or transfer by RHCI of all or substantially all its
assets or any tender offer or exchange offer for or the acquisition, directly
or indirectly, by any person or group of all or a majority of the then
outstanding voting securities of RHCI, all outstanding options under the 1996
Long Term Incentive Plan will become exercisable in full on and after (i) 15
days prior to the effective date of such merger, consolidation, sale, transfer
or acquisition or (ii) the date of commencement of such tender offer or
exchange offer, as the case may be.
Eligibility. Any employee, including any officer or employee-director of, or
consultant or other individual providing services to, RHCI and its
subsidiaries or affiliated companies is eligible to receive awards under the
176
<PAGE>
1996 Long Term Incentive Plan. Directors of RHCI who are not employees are
eligible for grants of stock options under the 1996 Long Term Incentive Plan.
Administration. The 1996 Long Term Incentive Plan will be administered by
the Compensation Committee of the RHCI Board. Subject to the terms and
conditions of the 1996 Long Term Incentive Plan, the Compensation Committee is
authorized to designate participants who are employees, directors or
consultants of RHCI and its subsidiaries and affiliated companies, determine
the type and number of awards to be granted, set terms and conditions of such
awards, prescribe forms of award agreements, interpret the 1996 Long Term
Incentive Plan, specify rules and regulations relating to the 1996 Long Term
Incentive Plan, and make all other determinations which may be necessary or
advisable for the administration of the 1996 Long Term Incentive Plan.
The 1996 Long Term Incentive Plan provides that in the event that any member
of the Compensation Committee is not a "nonemployee director" as defined in
Rule 16b-3 under the Exchange Act, the maximum number of shares of RHCI Common
Stock which may be subject to options granted to all directors is 750,000 and
the maximum number of shares of RHCI Common Stock which may be subject to
options granted to each director is 250,000.
Stock Options and SARs. The Compensation Committee is authorized to grant
stock options, including both incentive stock options ("ISOs"), which can
result in potentially favorable tax treatment to the participant, and
nonqualified stock options, and also to grant SARs entitling the participant
to receive the excess of the fair market value of a share on the date of
exercise or other specified date over the grant price of the SAR. The exercise
price per share of RHCI Common Stock subject to an option and the grant price
of an SAR is determined by the Compensation Committee, provided that the
exercise price may not be less than the fair market value of the RHCI Common
Stock on the date of grant. The term of each such option or SAR, the times at
which each such option or SAR shall be exercisable, and provisions requiring
forfeiture of unexercised options at or following termination of employment,
generally will be fixed by the Compensation Committee, except no ISO or SAR
relating thereto will have a term exceeding ten (10) years. Options may be
exercised by payment of the exercise price in cash, or in RHCI Common Stock,
outstanding awards or other property (including notes or obligations to make
payment on a deferred basis, such as through "cashless exercises") having a
fair market value equal to the exercise price, as the Compensation Committee
may determine from time to time. Methods of exercise and settlement and other
terms of the SARs will be determined by the Compensation Committee.
Restricted Stock. The 1996 Long Term Incentive Plan also authorizes the
Compensation Committee to grant restricted stock. Restricted stock is an award
of shares which may not be disposed of by participants and which may be
forfeited in the event of certain terminations of employment prior to the end
of a restriction period established by the Compensation Committee. Such an
award would entitle the participant to all of the rights of a stockholder of
RHCI, including the right to vote the shares and the right to receive any
dividends thereon, unless otherwise determined by the Compensation Committee.
Performance Awards. The 1996 Long Term Incentive Plan also authorizes the
Compensation Committee to grant to eligible employees performance awards. A
performance award is an award which consists of a right (i) denominated or
payable in cash, RHCI Common Stock, other securities or other property
(including, without limitation, restricted securities), and (ii) which shall
confer on the holder thereof rights valued as determined by the Compensation
Committee and payable to, or exercisable by, the holder of the performance
award upon the achievement of such performance goals during such performance
periods as the Compensation Committee shall establish. Subject to the terms of
the 1996 Long Term Incentive Plan and any applicable award agreement,
performance goals to be achieved during any performance period, the length of
any performance period, the amount of any performance award granted and the
amount of any payment or transfer to be made pursuant to any performance award
will be determined by the Compensation Committee and by the other terms and
conditions of any performance award.
Other Stock-Based Awards. In order to enable RHCI to respond to business,
economic and regulatory developments, and to trends in executive compensation
practices, the 1996 Long Term Incentive Plan authorizes
177
<PAGE>
the Compensation Committee to grant awards that are denominated or payable in,
valued in whole or in part by reference to, or otherwise based on or related
to RHCI Common Stock. The Compensation Committee determines the terms and
conditions of such awards, including consideration to be paid to exercise
awards in the nature of purchase rights, the period during which awards will
be outstanding, and forfeiture conditions and restrictions on awards.
Other Terms of Awards. The flexible terms of the 1996 Long Term Incentive
Plan will permit the Compensation Committee to impose performance conditions
with respect to any award. Such conditions may require that an award be
forfeited, in whole or in part, if performance objectives are not met, or
require that the time of exercisability or settlement of an award be linked to
achievement of performance conditions.
No awards may be granted under the 1996 Long Term Incentive Plan after June
30, 2006.
Awards may be settled in cash, stock, other awards or other property, in the
discretion of the Compensation Committee. The Compensation Committee may
condition the payment of an award on the withholding of taxes and may provide
that a portion of the RHCI Common Stock or other property to be distributed
will be withheld (or previously acquired RHCI Common Stock or other property
surrendered by the participant) to satisfy withholding and other tax
obligations. Awards granted under the 1996 Long Term Incentive Plan may not be
pledged or otherwise encumbered and are not transferable except by will or by
the laws of descent and distribution to a guardian or legal representative
designated to exercise such person's rights and receive distributions under
the 1996 Long Term Incentive Plan upon such person's death, or otherwise if
permitted under Rule 16b-3 and by the Compensation Committee.
Awards under the 1996 Long Term Incentive Plan are generally granted for no
consideration other than services. The Compensation Committee may, however,
grant awards alone or in addition to, in tandem with or in substitution for
any other award under the 1996 Long Term Incentive Plan, other awards under
other RHCI plans, or other rights to payment from RHCI. Awards granted in
addition to or in tandem with other awards may be granted either at the same
time or at different times. If an award is granted in substitution for another
award, the participant must surrender such other award in consideration for
the grant of the new award.
The RHCI Board may amend, modify or terminate the 1996 Long Term Incentive
Plan at any time provided that, unless required by law, (i) the number of
shares of RHCI Common Stock available under the 1996 Long Term Incentive Plan
may not be amended without stockholder approval (subject to certain provisions
relating to adjustment as discussed above) and (ii) no amendment or
termination of the 1996 Long Term Incentive Plan may, without a participant's
consent, adversely affect any rights already accrued under the 1996 Long Term
Incentive Plan by the participant. In addition, no amendment or modification
shall, unless previously approved by the stockholders (where such approval is
necessary to satisfy then applicable requirements of federal securities laws,
the Code, or rules of any stock exchange on which the RHCI Common Stock is
listed) (i) in any manner affect the eligibility requirements of the 1996 Long
Term Incentive Plan, (ii) increase the number of shares of RHCI Common Stock
subject to any option, (iii) change the purchase price of the shares of RHCI
Common Stock subject to any option, (iv) extend the period during which awards
may be granted under the 1996 Long Term Incentive Plan or (v) materially
increase the benefits to participants under the 1996 Long Term Incentive Plan.
Unless earlier terminated by the RHCI Board, the 1996 Long Term Incentive
Plan will terminate when no shares remain available for issuance and RHCI has
no further obligation with respect to any outstanding award.
The 1996 Long Term Incentive Plan is not subject to any provisions of ERISA,
nor is the 1996 Long Term Incentive Plan a qualified plan within the meaning
of Section 401(a) of the Code.
Federal Income Tax Implications of the Plan. The following description
summarizes the material federal income tax consequences arising with respect
to the issuance and exercise of awards granted under the 1996 Long Term
Incentive Plan. The grant of an option or SAR (including a stock-based award
in the nature of a
178
<PAGE>
purchase right) will create no tax consequences for the participant or RHCI. A
participant will not have taxable income upon exercising an ISO (except that
the alternative minimum tax may apply) and RHCI will receive no tax deduction
at that time. Upon exercising an option other than an ISO (including a stock-
based award in the nature of a purchase right), the participant must generally
recognize ordinary income equal to the difference between the exercise price
and fair market value of the freely transferable and nonforfeitable RHCI
Common Stock acquired on the date of exercise, and upon exercising an SAR, the
participant must generally recognize ordinary income equal to the cash or the
fair market value of the freely transferable and nonforfeitable RHCI Common
Stock received. In each case, RHCI will be entitled to a tax deduction equal
to the amount recognized as ordinary income by the participant.
A participant's disposition of shares acquired upon the exercise of an
option, SAR or other stock-based award in the nature of a purchase right
generally will result in short-term or long-term capital gain or loss measured
by the difference between the sale price and the participant's tax basis in
such shares (or the exercise price of the option in the case of shares
acquired by exercise of an ISO and held for the applicable ISO holding
periods). Generally, there will be no tax consequences to RHCI in connection
with a disposition of shares acquired under an option or other award, except
that RHCI will be entitled to a tax deduction (and the participant will
recognize ordinary taxable income) if shares acquired upon exercise of an ISO
are disposed of before the applicable ISO holding periods have been satisfied.
With respect to other awards granted under the 1996 Long Term Incentive Plan
that may be settled either in cash or in RHCI Common Stock or other property
that is either not restricted as to transferability or not subject to a
substantial risk of forfeiture, the participant must generally recognize
ordinary income equal to the cash or the fair market value of RHCI Common
Stock or other property received. RHCI will be entitled to a tax deduction for
the same amount. With respect to awards involving stock or other property that
is restricted as to transferability and subject to a substantial risk of
forfeiture, the participant must generally recognize ordinary income equal to
the fair market value of the shares or other property received at the first
time the shares or other property become transferable or not subject to a
substantial risk of forfeiture, whichever occurs earlier. RHCI will be
entitled to a tax deduction in an amount equal to the ordinary income
recognized by the participant. A participant may elect under Section 83(b) of
the Code to be taxed at the time of receipt of shares or other property rather
than upon lapse of restrictions on transferability or the substantial risk of
forfeiture, but if the participant subsequently forfeits such shares or
property he would not be entitled to any tax deduction, including as a capital
loss, for the value of the shares or property on which he previously paid tax.
Such election must be made and filed with the Internal Revenue Service within
thirty days of the receipt of the shares or other property.
Section 162(m) of the Code limits deductibility of certain compensation for
each of the chief executive officer and the four highest paid executive
officers employed at year end to $1 million per year, effective for tax years
beginning on or after January 1, 1994. RHCI anticipates that action will be
taken with respect to awards under the 1996 Long Term Incentive Plan to ensure
deductibility.
The Compensation Committee may condition the payment of an award on the
withholding of taxes and may provide that a portion of the RHCI Common Stock
or other property to be distributed will be withheld (or previously acquired
stock or other property surrendered by the participant) to satisfy withholding
and other tax obligations.
The foregoing summarizes the material federal income tax consequences
arising with respect to the issuance and exercise of awards granted under the
1996 Long Term Incentive Plan. Different tax rules may apply with respect to
participants who are subject to Section 16 of the Exchange Act when they
acquire RHCI Common Stock (i) in a transaction deemed to be a nonexempt
purchase under that statute or (ii) within six months of an exempt grant of a
derivative security under the 1996 Long Term Incentive Plan. This summary does
not address the effects of other federal taxes or taxes imposed under state,
local or foreign tax laws.
THE BOARD OF DIRECTORS RECOMMENDS THAT RHCI'S STOCKHOLDERS VOTE FOR APPROVAL
OF THE 1996 LONG TERM INCENTIVE PLAN. IT IS THE INTENTION OF THE PERSONS NAMED
IN THE ACCOMPANYING FORM OF PROXY TO VOTE THE SHARES REPRESENTED THEREBY IN
FAVOR OF SUCH APPROVAL UNLESS OTHERWISE INSTRUCTED IN SUCH PROXY.
179
<PAGE>
PROPOSAL III: OTHER MATTERS
The RHCI Board does not know of any other matters which may be brought
before the RHCI Meeting. However, if any such other matters are properly
presented for action, it is the intention of the persons named in the
accompanying form of proxy to vote the shares represented thereby in
accordance with their judgment on such matters.
OTHER MATTERS SET FORTH FOR ACTION AT THE RMCI MEETING
PROPOSAL II: OTHER MATTERS
The RMCI Board does not know of any other matters which may be brought
before the RMCI Meeting. However, if any such other matters are properly
presented for action, it is the intention of the persons named in the
accompanying form of proxy to vote the shares represented thereby in
accordance with their judgment on such matters.
MISCELLANEOUS
All costs relating to the solicitation of proxies of holders of RHCI Common
Stock and RMCI Common Stock will be borne by RHCI and RMCI, respectively.
Proxies may be solicited by officers, directors and regular employees of RHCI
and RMCI and their subsidiaries personally, by mail, by telephone or
otherwise. RHCI and RMCI will pay brokers and other persons holding shares of
stock in their names or those of their nominees for their reasonable expenses
in sending soliciting material to their principals.
It is important that proxies be returned promptly. Stockholders who do not
expect to attend the respective Meetings of each of RHCI and RMCI in person
are urged to mark, sign and date the accompanying proxy and mail it in the
enclosed return envelope, which requires no postage if mailed in the United
States, so that their votes can be recorded.
STOCKHOLDER PROPOSALS
Stockholder proposals intended to be presented at the next Annual Meeting of
Stockholders of RHCI must be received by RHCI by July 3, 1997 in order to be
considered for inclusion in RHCI's proxy statement relating to such meeting.
If the Merger is not consummated, stockholder proposals intended to be
presented at the next Annual Meeting of Stockholders of RMCI must be received
by RMCI by July 3, 1997 in order to be considered for inclusion in RMCI's
proxy statement relating to such meeting.
180
<PAGE>
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
RAMSAY HEALTH CARE, INC. AND SUBSIDIARIES
Report of Independent Auditors........................................... F-2
Consolidated Balance Sheets as of June 30, 1995 and 1996 and December 31,
1996 (unaudited)........................................................ F-3
Consolidated Statements of Operations for the Years Ended June 30, 1994,
1995 and 1996 and the six months ended December 31, 1995 and 1996
(unaudited)............................................................. F-4
Consolidated Statements of Stockholders' Equity for the Years Ended June
30, 1994, 1995 and 1996 and the six months ended December 31, 1996
(unaudited)............................................................. F-5
Consolidated Statements of Cash Flows for the Years Ended June 30, 1994,
1995 and 1996 and the six months ended December 31, 1995 and 1996
(unaudited)............................................................. F-6
Notes to Consolidated Financial Statements............................... F-7
RAMSAY MANAGED CARE, INC. AND SUBSIDIARIES
Report of Independent Certified Public Accountants....................... F-22
Consolidated Balance Sheet as of June 30, 1996 and December 31, 1996
(unaudited)............................................................. F-22
Consolidated Statements of Operations for the Years Ended June 30, 1995
and 1996 and the six months ended December 31, 1995 and 1996
(unaudited)............................................................. F-24
Consolidated Statements of Stockholders' Equity (Deficit) for the Years
Ended June 30, 1995 and 1996 and the six months ended December 31, 1996
(unaudited)............................................................. F-25
Consolidated Statements of Cash Flows for the Years Ended June 30, 1995
and 1996 and the six months ended December 31, 1995 and 1996
(unaudited)............................................................. F-26
Notes to Consolidated Financial Statements............................... F-28
</TABLE>
F-1
<PAGE>
REPORT OF INDEPENDENT AUDITORS
Board of Directors and Stockholders
Ramsay Health Care, Inc.
We have audited the accompanying consolidated balance sheets of Ramsay
Health Care, Inc. and Subsidiaries as of June 30, 1996 and 1995, and the
related consolidated statements of operations, stockholders' equity, and cash
flows for each of the three years in the period ended June 30, 1996. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position
of Ramsay Health Care, Inc. and Subsidiaries at June 30, 1996 and 1995, and
the consolidated results of their operations and their cash flows for each of
the three years in the period ended June 30, 1996, in conformity with
generally accepted accounting principles.
As discussed in Note 3 to the consolidated financial statements, the Company
changed its method of accounting for the impairment of long-lived assets in
1995.
Ernst & Young LLP
New Orleans, Louisiana
October 8, 1996
F-2
<PAGE>
RAMSAY HEALTH CARE, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
JUNE 30,
-------------------------- DECEMBER 31,
1995 1996 1996
------------ ------------ ------------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
Current assets
Cash and cash equivalents........... $ 9,044,000 $ 7,605,000 $ 9,060,000
Patient accounts receivable, less
allowances for doubtful accounts of
$3,886,000, $4,573,000 and
$3,725,000 (unaudited) at June 30,
1995, June 30, 1996 and December
31, 1996, respectively............. 21,564,000 23,410,000 24,839,000
Amounts due from third-party
contractual agencies............... 5,956,000 6,479,000 2,938,000
Current portion of receivable from
affiliated company................. 325,000 1,412,000 2,118,000
Other receivables................... 3,330,000 2,985,000 3,646,000
Deferred income taxes............... -- 1,398,000 1,398,000
Other current assets................ 2,764,000 2,372,000 2,166,000
------------ ------------ ------------
Total current assets................ 42,983,000 45,661,000 46,165,000
Other assets
Cash held in trust.................. 1,778,000 745,000 457,000
Cost in excess of net asset value of
purchased businesses............... 663,000 591,000 580,000
Unamortized preopening and loan
costs.............................. 2,221,000 1,040,000 1,207,000
Receivable from affiliated company,
less current portion............... 7,170,000 6,795,000 6,697,000
Deferred income taxes............... 8,652,000 10,141,000 9,190,000
Other non-current assets............ 2,301,000 1,392,000 1,695,000
------------ ------------ ------------
22,785,000 20,704,000 19,826,000
Property and equipment
Land................................ 5,383,000 5,025,000 5,025,000
Building and improvements........... 77,630,000 69,200,000 70,149,000
Equipment, furniture and fixtures... 19,611,000 20,325,000 21,067,000
------------ ------------ ------------
102,624,000 94,550,000 96,241,000
Less accumulated depreciation....... 29,156,000 28,157,000 30,370,000
------------ ------------ ------------
73,468,000 66,393,000 65,871,000
------------ ------------ ------------
$139,236,000 $132,758,000 $131,862,000
============ ============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Accounts payable.................... $ 3,868,000 $ 4,990,000 $ 4,740,000
Accrued salaries and wages.......... 4,843,000 5,169,000 5,492,000
Other accrued liabilities........... 1,347,000 4,412,000 5,114,000
Amounts due to third-party contrac-
tual agencies...................... 4,996,000 8,435,000 9,616,000
Current portion of long-term debt... 3,831,000 10,940,000 11,970,000
------------ ------------ ------------
Total current liabilities........... 18,885,000 33,946,000 36,932,000
Noncurrent liabilities
Other accrued liabilities........... 1,337,000 7,170,000 6,498,000
Long-term debt, less current por-
tion............................... 55,568,000 44,664,000 39,531,000
Minority interests.................. 1,667,000 925,000 25,000
------------ ------------ ------------
Total noncurrent liabilities........ 58,572,000 52,759,000 46,054,000
Stockholders' equity
Class B convertible preferred stock,
Series C, $1 par value--authorized
152,321 shares; issued 142,486
shares (liquidation value of
$7,244,000) including accrued divi-
dends of $91,000 at June 30, 1995
and June 30, 1996 and $181,000 (un-
audited) at December 31, 1996...... 233,000 233,000 324,000
Common stock, $.01 par value--autho-
rized 20,000,000 shares; issued
8,290,795, 8,605,108 and 9,006,981
(unaudited) shares at June 30,
1995, June 30, 1996 and December
31, 1996, respectively............. 83,000 86,000 90,000
Additional paid-in capital.......... 99,147,000 99,899,000 100,636,000
Retained earnings (deficit)......... (33,785,000) (50,266,000) (48,275,000)
Treasury stock--581,550 common
shares, at cost.................... (3,899,000) (3,899,000) (3,899,000)
------------ ------------ ------------
Total stockholders' equity.......... 61,779,000 46,053,000 48,876,000
------------ ------------ ------------
$139,236,000 $132,758,000 $131,862,000
============ ============ ============
</TABLE>
See notes to consolidated financial statements.
F-3
<PAGE>
RAMSAY HEALTH CARE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED JUNE 30, DECEMBER 31,
---------------------------------------- ------------------------
1994 1995 1996 1995 1996
------------ ------------ ------------ ----------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
NET REVENUES............ $137,002,000 $136,418,000 $117,423,000 $60,944,000 $66,607,000
Expenses:
Salaries, wages and
benefits.............. 64,805,000 72,061,000 66,259,000 32,433,000 33,263,000
Other operating ex-
penses................ 42,907,000 44,741,000 42,387,000 19,746,000 22,356,000
Provision for doubtful
accounts.............. 5,846,000 5,086,000 5,805,000 2,026,000 2,149,000
Depreciation and amor-
tization.............. 6,836,000 7,290,000 5,490,000 2,626,000 2,593,000
Interest and other fi-
nancing charges....... 8,906,000 8,347,000 6,892,000 3,509,000 3,034,000
Losses related to asset
sales and closed busi-
nesses................ 802,000 6,431,000 4,473,000 -- --
Asset impairment
charges............... -- 21,815,000 5,485,000 -- --
------------ ------------ ------------ ----------- -----------
TOTAL EXPENSES.......... 130,102,000 165,771,000 136,791,000 60,340,000 63,395,000
============ ============ ============ =========== ===========
INCOME (LOSS) BEFORE
MINORITY INTERESTS,
INCOME TAXES AND
EXTRAORDINARY ITEM..... 6,900,000 (29,353,000) (19,368,000) 604,000 3,212,000
Minority interests...... 4,824,000 887,000 -- (101,000) --
------------ ------------ ------------ ----------- -----------
INCOME (LOSS) BEFORE
INCOME TAXES AND
EXTRAORDINARY ITEM..... 2,076,000 (30,240,000) (19,368,000) 705,000 3,212,000
Provision (benefit) for
income taxes........... 599,000 (13,195,000) (2,887,000) 261,000 1,221,000
------------ ------------ ------------ ----------- -----------
INCOME (LOSS) BEFORE EX-
TRAORDINARY ITEM....... 1,477,000 (17,045,000) (16,481,000) 444,000 1,991,000
Extraordinary item:
Loss from early
extinguishment of
debt, less applicable
income tax benefit of
$103,000 in 1994 and
$206,000 in 1995...... (155,000) (257,000) -- -- --
------------ ------------ ------------ ----------- -----------
NET INCOME (LOSS)....... $ 1,322,000 $(17,302,000) $(16,481,000) $ 444,000 $ 1,991,000
============ ============ ============ =========== ===========
Income (loss) per common
and dilutive common
equivalent share:
Primary:
Before extraordinary
item.................. $ 0.15 $ (2.25) $ (2.12) $ 0.05 $ 0.21
Extraordinary item:
Loss from early extin-
guishment of debt.... (0.01) (0.03) -- -- --
------------ ------------ ------------ ----------- -----------
$ 0.14 $ (2.28) $ (2.12) $ 0.05 $ 0.21
============ ============ ============ =========== ===========
Fully diluted:
Before extraordinary
item.................. $ 0.15 $ (2.24) $ (2.12) $ 0.05 $ 0.21
Extraordinary item:
Loss from early extin-
guishment of debt.... (0.01) (0.03) -- -- --
------------ ------------ ------------ ----------- -----------
$ 0.14 $ (2.27) $ (2.12) $ 0.05 $ 0.21
============ ============ ============ =========== ===========
Weighted average number
of common and dilutive
common equivalent
shares outstanding:
Primary................ 9,641,000 7,743,000 7,929,000 9,262,000 9,706,000
Fully diluted.......... 9,679,000 7,794,000 7,929,000 9,438,000 9,706,000
</TABLE>
See notes to consolidated financial statements.
F-4
<PAGE>
RAMSAY HEALTH CARE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
CLASS B
CLASS A CONVERTIBLE
CONVERTIBLE PREFERRED ADDITIONAL RETAINED
PREFERRED STOCK COMMON PAID-IN EARNINGS TREASURY
STOCK SERIES C STOCK CAPITAL (DEFICIT) STOCK
----------- ----------- ------- ------------ ------------ -----------
<S> <C> <C> <C> <C> <C> <C>
BALANCE AT JULY 1,
1993................... $ 23,000 $142,000 $81,000 $ 99,847,000 $(17,805,000) $(2,291,000)
Exercise of stock
options (112,834
shares)............... -- -- 1,000 565,000 -- --
Dividends on Class B
convertible preferred
stock, Series C....... -- 91,000 -- (364,000) -- --
Purchase of treasury
stock (160,000
shares)............... -- -- -- -- -- (1,144,000)
Net income............. -- -- -- -- 1,322,000 --
-------- -------- ------- ------------ ------------ -----------
BALANCE AT JUNE 30,
1994................... 23,000 233,000 82,000 100,048,000 (16,483,000) (3,435,000)
Exercise of stock
options (74,166
shares)............... -- -- 1,000 378,000 -- --
Shares issued in
connection with
employee stock
purchase plan (15,869
shares)............... -- -- -- 89,000 -- --
Dividends on Class B
convertible preferred
stock, Series C....... -- -- -- (364,000) -- --
Purchase of treasury
stock (99,800
shares)............... -- -- -- -- -- (464,000)
Redemption of Class A
convertible
preferred stock....... (23,000) -- -- (100,000) -- --
Distribution of
subsidiary to
stockholders.......... -- -- -- (904,000) -- --
Net loss............... -- -- -- -- (17,302,000) --
-------- -------- ------- ------------ ------------ -----------
BALANCE AT JUNE 30,
1995................... -- 233,000 83,000 99,147,000 (33,785,000) (3,899,000)
Exercise of stock
options (3,000
shares)............... -- -- -- 10,000 -- --
Shares issued in
connection with
employee stock
purchase plan (21,760
shares)............... -- -- -- 70,000 -- --
Other shares issued
(289,553 shares)...... -- -- 3,000 1,034,000 -- --
Dividends on Class B
convertible preferred
stock, Series C....... -- -- -- (362,000) -- --
Net loss............... -- -- -- -- (16,481,000) --
-------- -------- ------- ------------ ------------ -----------
BALANCE AT JUNE 30,
1996................... -- 233,000 86,000 99,899,000 (50,266,000) (3,899,000)
Issuance of shares
(401,873 shares)--
unaudited............. -- -- 4,000 919,000 -- --
Dividends on Class B
convertible preferred
stock, Series C--
unaudited............. -- 91,000 -- (182,000) -- --
Net income--unaudited.. -- -- -- -- 1,991,000 --
-------- -------- ------- ------------ ------------ -----------
BALANCE AT DECEMBER 31,
1996 (unaudited)....... $ -- $324,000 $90,000 $100,636,000 $(48,275,000) $(3,899,000)
======== ======== ======= ============ ============ ===========
</TABLE>
See notes to consolidated financial statements.
F-5
<PAGE>
RAMSAY HEALTH CARE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED JUNE 30, DECEMBER 31,
---------------------------------------- ------------------------
1994 1995 1996 1995 1996
------------ ------------ ------------ ----------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Cash flows from operat-
ing activities
Net income (loss)...... $ 1,322,000 $(17,302,000) $(16,481,000) $ 444,000 $ 1,991,000
Adjustments to
reconcile net income
(loss) to net cash
provided by operating
activities:
Depreciation and amor-
tization............. 7,638,000 8,074,000 6,003,000 3,035,000 2,739,000
Asset impairment
charges.............. -- 21,815,000 5,485,000 -- --
Loss on early extin-
guishment of debt.... 258,000 463,000 -- -- --
Write-off of develop-
ment and other
costs................ -- 716,000 381,000 -- --
Loss on disposal of
assets............... 722,000 5,096,000 -- -- --
Deferred income tax
expense (benefit).... (1,188,000) (13,584,000) (2,887,000) 261,000 951,000
Provision for doubtful
accounts............. 5,846,000 5,086,000 5,805,000 2,026,000 2,149,000
Management and direc-
tor fees paid in com-
mon stock............ -- -- 600,000 -- 461,000
Minority interests.... 4,824,000 887,000 -- (101,000) --
Cash flows from (in-
crease) decrease in
operating assets:
Patient accounts re-
ceivable............. (2,169,000) (4,410,000) (7,651,000) (4,277,000) (3,578,000)
Other current assets.. (2,071,000) (522,000) (1,632,000) 222,000 2,676,000
Other non-current as-
sets................. (554,000) 616,000 225,000 95,000 (205,000)
Cash flows from in-
crease (decrease) in
operating liabili-
ties:
Accounts payable...... (2,484,000) 2,466,000 1,105,000 (1,440,000) (250,000)
Accrued salaries,
wages and other lia-
bilities............. 2,072,000 (749,000) 9,202,000 (478,000) 353,000
Amounts due to third-
party contractual
agencies............. (1,385,000) 267,000 3,439,000 336,000 1,181,000
------------ ------------ ------------ ----------- -----------
Total adjustments.... 11,509,000 26,221,000 20,075,000 (321,000) 6,477,000
------------ ------------ ------------ ----------- -----------
Net cash provided by
operating activi-
ties............... 12,831,000 8,919,000 3,594,000 123,000 8,468,000
------------ ------------ ------------ ----------- -----------
Cash flows from invest-
ing activities
Proceeds from sales of
assets............... 16,422,000 970,000 -- -- --
Acquisitions of busi-
nesses............... (6,022,000) -- -- -- --
Expenditures for prop-
erty and equipment... (5,070,000) (2,726,000) (1,467,000) (648,000) (1,743,000)
Development project
costs................ (388,000) (2,124,000) -- -- --
Preopening costs...... (2,195,000) (329,000) -- (22,000) (349,000)
Restricted cash (re-
served) used for debt
payments............. (5,311,000) 5,311,000 -- -- --
Cash held in trust.... 806,000 (974,000) 1,033,000 186,000 288,000
------------ ------------ ------------ ----------- -----------
Net cash provided by
(used in) investing
activities........... (1,758,000) 128,000 (434,000) (484,000) (1,804,000)
------------ ------------ ------------ ----------- -----------
Cash flows from financ-
ing activities
Loan costs............ (222,000) (290,000) (217,000) (217,000) (115,000)
Proceeds from
sale/leaseback of fa-
cilities and equip-
ment................. -- 12,015,000 -- -- --
Distributions to mi-
nority interests..... (2,741,000) (2,466,000) (742,000) (720,000) (900,000)
Proceeds from working
capital facility..... -- 2,500,000 -- -- --
Proceeds from private
placement of shares
of subsidiary........ -- 3,320,000 -- -- --
Reduction in cash due
to distribution of
subsidiary........... -- (1,427,000) -- -- --
Payment of costs re-
lated to distribution
of subsidiary........ -- (1,696,000) -- -- --
Net proceeds from
exercise of options
and stock purchases.. 566,000 468,000 517,000 526,000 --
Payments on debt...... (11,734,000) (17,683,000) (3,795,000) (2,700,000) (4,103,000)
Payment of preferred
stock dividends...... (273,000) (364,000) (362,000) (182,000) (91,000)
Cancellation of Class
A preferred stock.... -- (123,000) -- -- --
Purchase of treasury
stock................ (1,144,000) (464,000) -- -- --
------------ ------------ ------------ ----------- -----------
Net cash used in fi-
nancing activities... (15,548,000) (6,210,000) (4,599,000) (3,293,000) (5,209,000)
------------ ------------ ------------ ----------- -----------
Net increase (decrease)
in cash and cash
equivalents........... (4,475,000) 2,837,000 (1,439,000) (3,654,000) 1,455,000
Cash and cash equiva-
lents at beginning of
period................ 10,682,000 6,207,000 9,044,000 9,044,000 7,605,000
------------ ------------ ------------ ----------- -----------
Cash and cash equiva-
lents at end of peri-
od.................... $ 6,207,000 $ 9,044,000 $ 7,605,000 $ 5,390,000 $ 9,060,000
============ ============ ============ =========== ===========
</TABLE>
See notes to consolidated financial statements.
F-6
<PAGE>
RAMSAY HEALTH CARE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
The consolidated financial statements include the accounts of Ramsay Health
Care, Inc. ("RHCI") and its majority-owned subsidiaries. All significant
intercompany accounts and transactions have been eliminated in consolidation.
Industry
RHCI is a provider of a full continuum of behavioral health services. It
offers patient care through integrated networks of mental health delivery
systems in eleven states, principally in the southeast and southwest, built
around 15 inpatient hospitals with 1,369 licensed beds (including 77 medical
subacute beds), outpatient centers and management contracts. Nine of RHCI's
facilities also provide less intensive residential treatment services. During
fiscal years 1995 and 1994, RHCI operated a managed mental health business
through a subsidiary, the stock of which was distributed in the form of a
dividend to RHCI's stockholders in April 1995. See Note 2.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates. See
Notes 4, 9 and 11.
Reclassifications
Certain amounts in the fiscal 1995 and 1994 financial statements have been
reclassified to conform with the fiscal 1996 presentation.
Cash Equivalents
Cash equivalents include short-term, highly liquid interest-bearing
investments with maturities of three months or less when purchased, consisting
primarily of certificates of deposit, commercial paper, money market mutual
funds and demand revenue bonds.
Cash Held in Trust
Cash held in trust is revocable by RHCI under certain circumstances and
includes cash and short-term investments set aside for the payment of losses
in connection with RHCI's self-insurance program for hospital professional and
general liability claims.
Intangible Assets and Deferred Costs
Cost in excess of net asset value of purchased businesses is amortized on a
straight-line basis over 40 years. The carrying value of cost in excess of net
asset value of purchased businesses is reviewed by RHCI management if the
facts and circumstances suggest that it may be impaired. If this review
indicates that these costs will not be recoverable, as determined based on the
undiscounted cash flows of the entity over the remaining amortization period,
RHCI's carrying value of these costs is reduced by the estimated shortfall of
cash flows.
Preopening costs, principally salaries and other costs incurred prior to
opening a new facility, program or business, are deferred and amortized on a
straight-line basis over two years.
Loan costs are deferred and amortized ratably over the life of the loan and
are included in interest and other financing charges. When a loan or a portion
thereof is prepaid, a proportionate amount of deferred loan costs
F-7
<PAGE>
RAMSAY HEALTH CARE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
associated with the borrowing is written off and reported as an extraordinary
loss from early extinguishment of debt in RHCI's statement of operations.
Accumulated amortization of RHCI's intangible assets and deferred costs as
of June 30, 1996 and 1995 was $6,880,000 and $7,544,000, respectively.
Property and Equipment
Property and equipment are stated at cost, except for assets considered to
be impaired pursuant to FASB Statement Number 121 ("Statement 121"), which are
stated at fair value of the assets as of the date the assets are determined to
be impaired. Upon the sale or retirement of property and equipment, the cost
and related accumulated depreciation are removed from the accounts and the
resulting gain or loss is included in operations.
Depreciation is computed substantially on the straight-line method for
financial reporting purposes and on accelerated methods for income tax
purposes. The general range of estimated useful lives for financial reporting
purposes is twenty to forty years for buildings and five to twenty years for
equipment.
Net Revenues
Revenues are recognized at the time services are provided. Net revenues
include estimated reimbursable amounts from Medicare, Medicaid and other
contracted reimbursement programs. Amounts received by RHCI for treatment of
patients covered by such programs, which may be based on the cost of services
provided or predetermined rates, are generally less than the established
billing rates of RHCI's hospitals. Final determination of amounts earned under
contracted reimbursement programs is subject to review and audit by the
appropriate agencies. Differences between amounts recorded as estimated
settlements and the audited amounts are reflected as adjustments to net
revenues in the period the final determination is made. See Note 11.
Professional and General Liability Insurance
RHCI maintains a self-insurance program for its hospital professional and
general liability insurance. RHCI and its facilities are insured for
professional and general liability in the aggregate amount of $25 million with
self-insured retentions of $500,000 per claim and $1,500,000 aggregate per
year. RHCI records the liability for uninsured professional and general
liability losses related to asserted and unasserted claims arising from
reported and unreported incidents based on independent valuations which
consider claim development factors, the specific nature of the facts and
circumstances giving rise to each reported incident and RHCI's history with
respect to similar claims. The development factors are based on a blending of
RHCI's actual experience with industry standards.
Income Taxes
Income taxes are accounted for in accordance with Statement of Financial
Accounting Standards (SFAS) No. 109. SFAS 109 requires recognition of deferred
tax assets and liabilities for the expected future tax consequences of
temporary differences between the carrying amounts of assets and liabilities
for financial reporting purposes and the amounts used for income tax purposes.
Minority Interests
The equity of minority partners in subsidiaries is reported on the balance
sheet as minority interests. Minority interests reflect changes for the
respective share of income of the subsidiaries attributable to the minority
partners, the effect of which is also reflected in the results of operations
of RHCI, and for distributions made to the minority partners.
F-8
<PAGE>
RAMSAY HEALTH CARE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Earnings Per Share
Primary earnings per share are calculated by dividing income before
extraordinary items and net income by the weighted average number of common
and dilutive common equivalent shares outstanding during each period. RHCI's
common stock equivalents include Class A convertible preferred stock (which
was redeemed by RHCI in June 1995), Series C Preferred Stock, and RHCI Stock
Options and warrants to purchase RHCI Common Stock. Fully diluted earnings per
share are calculated as if all conversions and exercises had occurred at the
beginning of the year.
Stock Options
RHCI grants stock options for a fixed number of shares to employees with an
exercise price equal to the fair value of the shares at the date of grant.
RHCI accounts for stock option grants in accordance with APB Opinion No. 25,
Accounting for Stock Issued to Employees, and accordingly, recognizes no
compensation expense for the stock option grants. RHCI intends to continue to
account for its stock compensation arrangements under the provisions of APB
No. 25 and does not believe that the implementation of Statement of Financial
Accounting Standards No. 123, Accounting for Stock-Based Compensation (SFAS
123), will have a material impact on its financial position or results of
operations. Upon adoption of SFAS 123 in fiscal 1997, RHCI will provide in its
financial statements the pro forma disclosures required by SFAS 123.
Unaudited Financial Statements
The accompanying unaudited 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 six months ended December 31, 1996 are not necessarily
indicative of the results that may be expected for the year.
2. TRANSACTIONS WITH AFFILIATED COMPANIES
In October 1993, RHCI, through its subsidiary RMCI, entered the managed
mental health business through an acquisition of FPM. The managed care
division expanded in June 1994 with the acquisition of a Phoenix, Arizona-
based managed mental health business and, in fiscal 1995, through the award of
contracts in Hawaii and West Virginia. On April 24, 1995, RHCI distributed the
stock of RMCI held by it to the holders of record on April 21, 1995 of the
RHCI Common Stock and RHCI Preferred Stock. Subsequent to this distribution,
which was recorded at net book value, RMCI ceased being a subsidiary of RHCI.
The distribution of RMCI reduced additional paid-in capital of RHCI by
$904,000. In addition, costs related to the distribution of RMCI, which
included accounting, legal, printing, investment banking and distribution
agent fees and expenses, were charged to the operations of RMCI (and not RHCI)
effective on the date of the distribution and costs related to a private
placement and rights offering by RMCI were deducted from additional paid-in
capital of RMCI (and not RHCI) on the effective date of the distribution.
RMCI is governed by a board of directors which is substantially the same as
RHCI's board of directors. At June 30, 1996, total net cash advances made by
RHCI to or on behalf of RMCI, including for purposes of partially funding
acquisitions and for working capital and other corporate purposes, totalled
$8,207,000. Of this amount, $6,000,000 is represented by an unsecured,
interest-bearing (8%), subordinated promissory note due
F-9
<PAGE>
RAMSAY HEALTH CARE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
from RMCI and issued on October 25, 1994. The remaining amount, which is also
unsecured, includes $360,000 of accrued interest on the promissory note since
October 1, 1995 and $1,847,000 (of which approximately $1,600,000 was
outstanding on the distribution date) of additional amounts paid by RHCI on
behalf of RMCI or charges by RHCI to RMCI for certain administrative services.
Of the $6,000,000 due on the promissory note, approximately $1,412,000 is due
on or before June 30, 1997 and the remainder is payable in 13 quarterly
installments of approximately $353,000, beginning September 30, 1997. RHCI has
agreed that the payment of interest on the promissory note for the period
October 1, 1995 through June 30, 1996, as well as the $1,847,000 of additional
amounts owed, will not be required until after July 1, 1997, all on terms and
conditions to be mutually agreed to by RHCI and RMCI. During fiscal 1996 and
1995, total income recorded on amounts advanced to RMCI were approximately
$600,000 and $110,000, respectively.
On October 1, 1996, RHCI and RMCI entered into the Merger Agreement
providing for the acquisition of RMCI by RHCI. Upon consummation of the
Merger, in exchange for all of the outstanding shares of RMCI Common Stock and
RMCI Series 1996 Preferred Stock, the Company will issue approximately
2,130,000 shares of RHCI Common Stock and 100,000 shares of RHCI Series 1996
Preferred Stock, which will be convertible into 1,000,000 shares of RHCI
Common Stock. In addition, following the Merger, all amounts owed by RMCI to
RHCI will become an intercompany payable and receivable between RMCI and RHCI,
respectively. The merger is subject to approval by the shareholders of each
company, the receipt of lender, governmental and other consents and the
declaration of effectiveness by the Securities and Exchange Commission of a
registration statement to be filed by RHCI. Subject to the satisfaction of
these conditions, it is expected that the Merger will be consummated in March,
1997.
At June 30, 1996, Ramsay Holdings HSA Limited owns approximately 17.5% of
the outstanding RHCI Common Stock and 50% of the outstanding RHCI Series C
Preferred Stock. Paul Ramsay Holdings Pty. Limited ("Pty. Limited") owns
approximately 3.4% of the outstanding RHCI Common Stock and the remaining 50%
of the outstanding RHCI Series C Preferred Stock.
In October 1995 and August 1996, Pty. Limited, a corporate affiliate of Paul
J. Ramsay, the Chairman of the Board of RHCI, acquired through private
placements 275,863 shares and 275,546 shares, respectively, of RHCI Common
Stock at a price of $3.625 and $2.75 per share, respectively. Of the total
shares acquired in October 1995, 121,363 were issued for cash and 154,500 were
issued for management fees due during the remainder of fiscal 1996 under
RHCI's management agreement with another corporate affiliate (the "Management
Fee Affiliate") of Mr. Ramsay. The shares acquired in August 1996 were issued
for management fees due under the management agreement during fiscal 1997.
With the issuance of the additional shares, the voting interest in RHCI held
by Mr. Ramsay increased to approximately 34.8%.
On September 10, 1996, RHCI entered into a letter agreement with the
Management Fee Affiliate and Pty. Limited which terminates the management
agreement effective July 1, 1997. In consideration for this termination, RHCI
issued warrants to Pty. Limited to purchase 250,000 shares of RHCI Common
Stock at an exercise price of $2.63 per share. These warrants are fully
exercisable as of September 10, 1996 and expire on September 10, 2006.
During the years ended June 30, 1996, 1995 and 1994, pursuant to the
management agreement, RHCI incurred management fee expenses of $737,000,
$716,000 and $698,000, respectively.
3. IMPAIRMENT OF ASSETS
In the fourth quarter of fiscal 1995, the Company elected to adopt early the
provisions of Statement 121. Statement 121 requires that a new cost basis be
established for impaired assets (within the meaning of Statement
F-10
<PAGE>
RAMSAY HEALTH CARE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
121) based on the fair value of the assets as of the date the assets are
determined to be impaired, and that previously recorded accumulated
depreciation related to the impaired assets be eliminated.
As required by Statement 121, RHCI periodically reviews the long-lived
assets (land, buildings, fixed equipment and related cost in excess of net
asset value of purchased businesses) of each of its inpatient facilities to
determine if the carrying value of these assets is recoverable, based on the
future cash flows expected from the assets. Based on this review, RHCI
determined that the carrying value of certain long-lived assets was impaired
(within the meaning of Statement 121) at June 30, 1996 and 1995 due to
declines in the operating performance of the facilities. The amount of the
impairment, calculated as the excess of carrying value of the long-lived
assets over the fair value of the assets (estimated using discounted future
cash flows expected from the assets), totalled approximately $4,000,000
($3,400,000 after tax) and $20,300,000 ($11,400,000 after tax) at June 30,
1996 and 1995, respectively. In accordance with Statement 121, the facilities'
carrying amount of cost in excess of net asset value of purchased businesses,
totalling $3,800,000 in 1995 (zero in 1996), was written off prior to
recording an impairment to the carrying amount of property and equipment.
In 1996 and in 1995, RHCI recorded additional asset impairment charges
totalling approximately $1,500,000 related to its investments in other
healthcare enterprises. The amount of the impairment charges was based on an
assessment of the future expected cash flows to be realized by RHCI from these
enterprises.
4. CONTINGENCIES AND LOSSES RELATED TO ASSET SALES AND CLOSED BUSINESSES
Primarily in the fourth quarter of fiscal 1996, RHCI recorded losses
totalling approximately $4,500,000 related to additional asset write-downs,
cost report settlements and other adjustments related to businesses which
closed at various times prior to fiscal 1996, a reserve for disproportionate
share payments which the State of Louisiana has contended were improperly paid
to two of RHCI's Louisiana facilities in fiscal 1995 and 1994, and lease
commitments and other costs incurred in connection with RHCI's decision to
relocate its corporate headquarters.
During fiscal 1996, the State of Louisiana requested repayment of
disproportionate share payments received by two of RHCI's Louisiana facilities
in fiscal years 1995 and 1994 totalling approximately $5,000,000. The
repayment requests related to a) alleged overpayments made to Three Rivers
Hospital because the State believed Three Rivers' actual annual inpatient
volume was less than its projection of annual inpatient volume made at the
beginning of its 1994 cost reporting year and b) alleged improper teaching
hospital payments made to Three Rivers Hospital and Bayou Oaks Hospital
because the State believed these facilities were not qualifying teaching
hospitals at the time these payments were made. RHCI believes that certain of
the calculations which support the States calculation of annual inpatient
volume in 1994 are in error and that other relevant factors affecting the
States calculation have not been considered. Further, RHCI believes that,
based on its understanding of the rules and regulations in place at the time
the teaching hospital payments were made, payments received as a result of the
teaching classification were appropriate.
On the basis of discussions to date between RHCI and the State, RHCI
believes that this matter may be settled for an amount significantly less than
the States initial requests. Any settlement of this matter will be contingent
upon the execution of settlement documentation, the terms of which have not
been agreed upon. Further, there can be no assurance that RHCI and the State
will agree on a settlement amount or the terms and conditions of settlement
documentation. RHCI intends to vigorously contest any position by the State of
Louisiana which RHCI considers adverse and believes that adequate provision
has been made at June 30, 1996 for the estimated amount which might be
recovered from RHCI as a result of this matter. This amount is classified as a
current liability in RHCI's balance sheet at June 30, 1996.
F-11
<PAGE>
RAMSAY HEALTH CARE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
During the third quarter of fiscal 1995, RHCI recorded a $3,600,000 loss in
connection with the sale and leaseback of two inpatient facilities and a
$400,000 loss in connection with the sale of real estate. In addition, RHCI
closed certain outpatient operations during fiscal 1995, incurred additional
losses in 1995 on outpatient operations closed in fiscal 1994, and closed
Three Rivers Hospital on June 30, 1995. Losses recorded in 1995 as a result of
these closures totalled approximately $1,500,000.
During the fourth quarter of fiscal 1994, RHCI terminated its plan to
develop additional outpatient treatment centers and closed or made the
decision to close certain of these centers already in operation. The losses
associated with these actions, which totalled approximately $1.3 million, were
offset by a $500,000 gain recognized on the sale of RHCI's Atlantic Shores
Hospital facility.
5. LONG-TERM DEBT
RHCI's long-term debt is as follows:
<TABLE>
<CAPTION>
JUNE 30,
-----------------------
1995 1996 DECEMBER 31, 1996
----------- ----------- -----------------
(UNAUDITED)
<S> <C> <C> <C>
11.6% senior secured notes due in
semi-annual installments through
March 31, 2000..................... $34,169,000 $34,169,000 $31,075,000
Variable rate revenue bonds through
2015............................... 20,200,000 19,400,000 18,600,000
15.6% subordinated secured notes due
in semi-annual installments through
March 31, 2000..................... 2,308,000 1,846,000 1,615,000
Capital lease obligation............ 919,000 -- --
Working capital facility............ 1,500,000 -- --
Other............................... 303,000 189,000 211,000
----------- ----------- -----------
59,399,000 55,604,000 51,501,000
Less amounts due within one year.... 3,831,000 10,940,000 11,970,000
----------- ----------- -----------
$55,568,000 $44,664,000 $39,531,000
=========== =========== ===========
</TABLE>
The aggregate scheduled maturities of long-term debt during the five years
subsequent to June 30, 1996 are as follows: 1997--$10,940,000; 1998--
$8,260,000; 1999--$10,343,000; 2000--$12,462,000; and 2001--$800,000.
RHCI has pledged substantially all of its real property as collateral on
RHCI's long-term debt.
In 1984 and 1985, RHCI entered into loan agreements with various state and
local governmental agencies for the purpose of financing or providing
reimbursement for the construction costs of certain of RHCI's psychiatric
hospitals. Each state governmental agency funded its loan with proceeds of
tax-exempt variable rate demand revenue bonds in the same amount as its loan.
These loans, which generally have a term of 30 years, have an outstanding
balance at June 30, 1996 of $19,400,000. The interest rates on the loans are
the same as the applicable revenue bonds and ranged from 3.4% to 6.6% at June
30, 1996. RHCI is required to maintain an irrevocable standby letter of credit
for each bond in an amount equal to the total principal payments due under the
bond, plus approximately one quarter's interest. Such letters of credit are
provided in a credit facility with a group of banks finalized in May 1993 (the
"1993 Credit Facility"). The 1993 Credit Facility provides that, prior to the
expiration of the letters of credit on August 15, 1997, the revenue bonds
could be redeemed by RHCI through drawings under each letter of credit. RHCI
has the ability and intends to exercise its rights under the 1993 Credit
Facility (if the letters of credit are not further extended beyond August 15,
1997) and would convert these drawings into loans, the terms of which would
require repayment 366 days from the date of the conversions and which would
bear interest, at RHCI's option, at either a rate per annum equal to (i) the
prime rate of its principal lender plus an incremental interest rate of 1% per
annum or (ii) the LIBOR adjusted rate plus an incremental interest rate of 2
3/4% per annum. These loans would be collateralized by certain of RHCI's
facilities
F-12
<PAGE>
RAMSAY HEALTH CARE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
which are currently collateralizing the revenue bonds. Because the terms of
this alternative source of financing do not require repayment within one year,
RHCI classifies the noncurrent portion of the amounts due under the revenue
bonds as long-term debt in the accompanying financial statements.
The 1993 Credit Facility originally included approximately $27,500,000 in
letters of credit and $4,000,000 in a working capital facility. Due to
principal payments and the redemption of the variable rate revenue bonds
associated with the sale of a facility in 1994, the letters of credit
outstanding at June 30, 1996 totalled $20,300,000. In addition, RHCI fully
paid down and terminated its working capital facility with its bank group in
December 1995.
In September 1995, and again in August 1996, RHCI and banks supporting the
1993 Credit Facility agreed to terms which extended the expiration date of the
underlying letters of credit from May 15, 1996 to February 15, 1997 and from
February 15, 1997 to August 15, 1997, respectively. In connection with the
initial extension, RHCI agreed to reduce the bank groups exposure under the
1993 Credit Facility by an additional $3 million on or before July 1, 1996.
This requirement was extended by the bank group to December 31, 1996 as part
of the August 1996 extension. On January 2, 1997, this requirement was
satisfied when RHCI fully redeemed, with a $2,900,000 (unaudited) principal
payment, one of the outstanding variable rate revenue bonds supported by the
1993 Credit Facility.
On April 30, 1990, RHCI entered into credit facilities (the "1990 Credit
Facilities") with a group of insurance companies and banks. The 1990 Credit
Facilities included $56,500,000 in senior secured notes and $3,000,000 in
subordinated secured notes. The senior secured notes bear interest at 11.6%
and require a principal payment of $3,093,250 on September 30, 1996, semi-
annual principal payments of $3,531,250 from March 31, 1997 through September
30, 1998 and semi-annual principal payments of $5,650,000 from March 31, 1999
through March 31, 2000. The subordinated secured notes bear interest at 15.6%
and are due in semi-annual installments of $230,769 that began on March 31,
1994 and end on March 31, 2000. In connection with a $7,500,000 prepayment of
principal on the senior secured notes in May 1995, RHCI wrote down a
proportionate amount of unamortized loan costs related to the senior secured
notes, totalling $229,000, and incurred a yield maintenance charge from the
holders of the senior secured notes, totalling $234,000. These amounts, net of
an applicable income tax benefit of $206,000, are reported as a loss from
early extinguishment of debt in the 1995 statement of operations.
Under the 1993 and 1990 Credit Facilities, RHCI is required to meet certain
covenants, including: (1) the maintenance of a minimum level of consolidated
tangible net worth; (2) the maintenance of a working capital ratio; and (3)
the maintenance of certain fixed charge coverage and debt service ratios. From
time to time, the lenders under the 1993 and 1990 Credit Facilities have
agreed to waive or otherwise adjust certain of these ratios and levels. In
connection with these waivers and adjustments, RHCI pays additional fees and
expenses. Effective June 30, 1996, pursuant to waiver agreements, RHCI
obtained from its lenders under the 1993 and 1990 Credit Facilities,
modifications to certain of its debt covenants through June 30, 1997. In
connection with these waiver agreements, RHCI agreed to provide its Hillcrest
Hospital facility and related assets as additional collateral to the lenders
and agreed not to pay future cash dividends in respect of its Series C
Preferred Stock. Based on RHCI's projected operating results, RHCI believes
its debt covenant requirements, as set forth in these waiver agreements for
periods through June 30, 1997, or the original debt agreements for periods
from July 1, 1997 through June 30, 1998, will be achieved. At June 30, 1996
and December 31, 1996 (unaudited) RHCI was in compliance with its debt
covenant requirements.
6. OPERATING LEASES
In April 1995, RHCI sold and leased back the land, buildings and fixed
equipment of two of its inpatient facilities. The leases have a primary term
of 15 years (with three successive renewal options of 5 years each) and
currently require aggregate annual minimum rentals of $1.58 million, payable
monthly. Effective April 1 of each year, the lease payments are subject to any
upward adjustment (not to exceed 3% annually) in the consumer
F-13
<PAGE>
RAMSAY HEALTH CARE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
price index over the preceding twelve months. Effective April 1995, RHCI
agreed to lease an 80-bed facility near Salt Lake City, Utah for four years,
with an option to renew for an additional three years. The lease requires
annual base rental payments of $456,000, payable monthly, and percentage
rental payments equal to 2% of the net revenues of the facility, payable
quarterly. RHCI leases office space for various other purposes over terms
ranging from one to five years. Rent expense related to noncancellable
operating leases amounted to $3,269,000, $2,718,000 and $2,052,000 for the
years ended June 30, 1996, 1995 and 1994, respectively.
Future minimum lease payments required under noncancellable operating leases
as of June 30, 1996 are as follows: 1997--$2,993,000; 1998--$2,699,000; 1999--
$2,464,000; 2000--$1,783,000; 2001--$1,770,000; and thereafter--$14,520,000.
7. STOCKHOLDERS EQUITY
The Certificate of Incorporation of RHCI, as amended, authorizes the
issuance of 20,000,000 shares of RHCI Common Stock, $.01 par value, 800,000
shares of Class A Preferred Stock, $1.00 par value, and 1,000,000 shares of
Class B Preferred Stock, $1.00 par value, of which 333,333 shares have been
designated as Class B Preferred Stock, Series 1987, $1.00 par value, and
152,321 shares have been designated as the RHCI Series C Preferred Stock.
Outstanding capital stock at June 30, 1996 included 8,605,108 shares of RHCI
Common Stock, of which 581,550 shares are held in treasury, and 142,486 shares
of RHCI Series C Preferred Stock. The shares of RHCI Series C Preferred Stock
were issued in June 1993 in connection with a recapitalization of the
interests of Paul J. Ramsay, RHCI's chairman. The shares are entitled to
cumulative dividends at a rate of 5% per annum, payable quarterly in arrears,
and to a liquidation preference of $50.84 per share under certain
circumstances. The shares are convertible into that number of fully paid and
nonassessable shares of RHCI Common Stock that results from dividing the
conversion price in effect at conversion into $50.84 and multiplying the
quotient obtained by the number of shares of RHCI Series C Preferred Stock
being converted. The current conversion price is $5.084 per share. Each share
of RHCI Series C Preferred Stock is entitled to ten (10) votes on all matters
put to a vote of the shareholders of RHCI and otherwise has voting rights and
powers equal to the voting rights and powers of the RHCI Common Stock.
The RHCI Board has adopted a Stockholders Rights Plan, under which RHCI
distributed a dividend of one common share purchase right for each outstanding
share of RHCI Common Stock (calculated as if all outstanding shares of RHCI
Series C Preferred Stock were converted into shares of RHCI Common Stock).
Each right becomes exercisable upon the occurrence of certain events for a
number of shares of RHCI Common Stock having a market price totalling $24
(subject to certain anti-dilution adjustments which may occur in the future).
The rights currently are not exercisable and will be exercisable only if a new
person acquires 20% or more of RHCI's Common Stock or announces a tender offer
resulting in ownership of 20% or more of RHCI's Common Stock. The rights,
which expire on August 14, 2005, are redeemable in whole or in part at RHCI's
option at any time before a 20% or greater position has been acquired, for a
price of $.01 per right.
RHCI's credit documents governing its credit facilities include provisions
which prohibit the payment of dividends unless the sum of (i) all dividends,
redemptions and all other distributions in respect of its capital stock and
(ii) all restricted investments (as defined) during the applicable fiscal year
would not exceed an amount equal to 50% of the consolidated net income of RHCI
for the immediately preceding fiscal year and provided that, at the time of
such dividend and after giving effect thereto, certain specified financial
ratio covenants would not be violated and no other default or event of default
would occur. Further, in connection with waivers received from RHCI's lenders
under the 1993 and 1990 Credit Facilities as of June 30, 1996, RHCI agreed not
to pay future cash dividends in respect of its RHCI Series C Preferred Stock.
Prior to this time, RHCI's credit facilities permitted the payment of regular
fixed dividends on the RHCI Series C Preferred Stock, provided that such
F-14
<PAGE>
RAMSAY HEALTH CARE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
dividends did not exceed $387,200 in each 12-month period and provided that no
event of default existed or occurred as a result of such payment.
8. OPTIONS AND WARRANTS
RHCI's stock option plans provide for options to various key employees and
non-employee directors to purchase shares of RHCI Common Stock at no less than
the fair market value of the stock on the date of grant. RHCI Options granted
become exercisable in varying increments including (a) 100% one year after the
date of grant, (b) 50% each year beginning one year after the date of grant
and (c) 33% each year beginning on the date of grant. RHCI options issued to
employees and directors are subject to anti-dilution adjustments and generally
expire the earlier of 10 years after the date of grant or 60 days after the
employee's termination date or the director's resignation date. At June 30,
1996, the weighted average remaining life of all outstanding options was seven
years.
During 1996, in connection with a repricing opportunity authorized by RHCI
Board on November 10, 1995, approximately 1,500,000 options were voluntarily
repriced by the optionholders. Under the repricing opportunity, the exercise
prices of the holders outstanding options were reduced to $2.50 per share, the
closing price for the RHCI Common Stock on the NASDAQ National Market System
on November 10, 1995. The repriced options are not exercisable until the
closing price for the RHCI Common Stock, as quoted on the NASDAQ National
Market System, equals or exceeds $7.00 per share for at least 15 trading days,
which need not be consecutive, subsequent to November 10, 1995. The closing
price for the RHCI Common Stock has not exceeded $7.00 per share since
November 10, 1995 and, therefore, none of the repriced options were
exercisable at June 30, 1996.
At June 30, 1996, there were no shares available for grant under the 1990
Stock Option Plan and 79,057, 64,802 and 178,142 shares available for grant
under the 1991, 1993 and 1995 Stock Option Plans, respectively. The table
below summarizes the activity in the plans in fiscal years 1996, 1995 and
1994.
F-15
<PAGE>
RAMSAY HEALTH CARE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
<TABLE>
<CAPTION>
1990 PLAN 1991 PLAN
---------------------- -----------------------
NUMBER PRICE RANGE NUMBER PRICE RANGE
OF OPTIONS PER SHARE OF OPTIONS PER SHARE
---------- ----------- ---------- -----------
<S> <C> <C> <C> <C>
Outstanding, July 1, 1993........ 332,001 $ 5.00 1,061,501 $5.00-$6.25
Granted........................ -- -- 173,000 $6.88-$7.88
Canceled....................... -- -- (33,991) $5.00-$7.88
Exercised...................... (38,332) $ 5.00 (74,502) $5.00-$5.31
-------- ---------
Outstanding, June 30, 1994....... 293,669 $ 5.00 1,126,008 $5.00-$7.88
Granted........................ -- -- -- --
Canceled....................... (52,013) $ 4.01 (66,885) $4.25-$7.88
Exercised...................... (31,999) $ 5.00 (42,167) $5.00-$5.31
Effect of Distribution of
Subsidiary.................... 64,972 266,924
-------- ---------
Outstanding, June 30, 1995....... 274,629 $4.01-$5.00 1,283,880 $3.75-$6.31
Granted........................ -- --
Canceled/expired............... (110,885) $ 4.01 (39,736) $4.01-$6.31
Exercised...................... -- --
-------- ---------
Outstanding, June 30, 1996....... 163,744 $2.50-$4.01 1,244,144 $2.50-$6.31
======== =========
Exercisable, June 30, 1996....... 63,252 166,961
======== =========
Exercisable, June 30, 1995....... 274,629 909,390
======== =========
Exercisable, June 30, 1994....... 293,669 982,669
======== =========
<CAPTION>
1993 PLAN 1995 PLAN
---------------------- -----------------------
NUMBER PRICE RANGE NUMBER PRICE RANGE
OF OPTIONS PER SHARE OF OPTIONS PER SHARE
---------- ----------- ---------- -----------
<S> <C> <C> <C> <C>
Outstanding, July 1, 1993........ -- -- -- --
Granted........................ 271,500 $6.88-$7.88 -- --
Canceled....................... (15,505) $ 7.88 -- --
Exercised...................... -- -- -- --
--------
Outstanding, June 30, 1994....... 255,995 $6.88-$7.88 -- --
Granted........................ 65,000 $3.75-$6.63 -- --
Canceled....................... (101,037) $5.51-$7.88 -- --
Exercised...................... -- -- -- --
Effect of Distribution of
Subsidiary.................... 46,930 -- --
--------
Outstanding, June 30, 1995....... 266,888 $3.75-$6.31 -- --
Granted........................ 108,750 $ 3.38 321,858 $2.50-$4.01
Canceled....................... (49,756) $2.50-$6.31 -- --
Exercised...................... (3,000) $ 3.38 -- --
-------- ---------
Outstanding, June 30, 1996....... 322,882 $2.50-$6.31 321,858 $2.50-$4.01
======== =========
Exercisable, June 30, 1996....... 67,774 4,161
======== =========
Exercisable, June 30, 1995....... 210,669 --
======== =========
Exercisable, June 30, 1994....... 9,999 N/A
======== =========
</TABLE>
On September 10, 1996, RHCI entered into an Exchange Agreement with a
corporate affiliate of Paul J. Ramsay whereby Mr. Ramsay exchanged 476,070
options with an exercise price of $2.50 per share (pursuant to
F-16
<PAGE>
RAMSAY HEALTH CARE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
the repricing opportunity discussed above), for warrants to purchase an
aggregate of 500,000 shares for RHCI Common Stock at $2.75 per share. The
warrants, which expire in June 2003, are not exercisable until the closing
price for the RHCI Common Stock, as quoted on the NASDAQ National Market
System, equals or exceeds $7.00 per share for at least 15 trading days, which
need not be consecutive, subsequent to September 10, 1996. Most of the options
exchanged were originally granted under the 1991 Plan.
As part of the 1990 Credit Facilities, RHCI issued warrants to Aetna Life
Insurance Company and Monumental Life Insurance Company to purchase an
aggregate of 113,301 shares of the RHCI Common Stock at $9.61 per share. As a
result of anti-dilution adjustments, at June 30, 1996, the purchase price is
$6.43 per share and a total of 139,597 warrants are outstanding. These
warrants are exercisable on or before March 31, 2000.
9. INCOME TAXES
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. Significant components
of RHCI's deferred tax liabilities and assets are as follows:
<TABLE>
<CAPTION>
JUNE 30,
-----------------------
1995 1996
----------- -----------
<S> <C> <C>
Deferred tax liabilities:
Book basis of fixed assets over tax basis............ $ 4,023,000 $ 2,710,000
Change in tax accounting methods..................... 685,000 --
Economic performance................................. 316,000 237,000
----------- -----------
Total deferred tax liabilities..................... 5,024,000 2,947,000
Deferred Tax assets:
Allowance for doubtful accounts...................... 609,000 1,211,000
General and professional liability insurance......... 635,000 899,000
Accrued employee benefits............................ 417,000 374,000
Investment in nonconsolidated subsidiaries........... 1,401,000 1,644,000
Impairment of investment............................. 568,000 677,000
Other accrued liabilities............................ -- 2,280,000
Other................................................ 356,000 1,307,000
Net operating loss carryovers........................ 8,146,000 8,962,000
Alternative minimum tax credit carryovers............ 1,544,000 1,544,000
----------- -----------
Total deferred tax assets.......................... 13,676,000 18,898,000
Valuation allowance for deferred tax assets............ -- (4,412,000)
----------- -----------
Deferred tax assets, net of valuation allowance...... 13,676,000 14,486,000
----------- -----------
Net deferred tax assets.............................. $ 8,652,000 $11,539,000
=========== ===========
</TABLE>
F-17
<PAGE>
RAMSAY HEALTH CARE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The provision (benefit) for income taxes consists of the following:
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30,
---------------------------------------
1994 1995 1996
----------- ------------ ------------
<S> <C> <C> <C>
Income taxes currently payable:
Federal............................. $ 810,000 $ -- $ --
State............................... 874,000 183,000 --
Deferred income taxes:
Federal............................. (1,196,000) (12,154,000) (2,577,000)
State............................... 8,000 (1,430,000) (310,000)
----------- ------------ ------------
$ 496,000 $(13,401,000) $ (2,887,000)
=========== ============ ============
The provision (benefit) for income taxes is reported in the consolidated
statements of operations as follows:
<CAPTION>
YEAR ENDED JUNE 30,
---------------------------------------
1994 1995 1996
----------- ------------ ------------
<S> <C> <C> <C>
Provision (benefit) for income taxes.. $ 599,000 $(13,195,000) $ (2,887,000)
Income tax benefit from loss on early
extinguishment of debt............... (103,000) (206,000) --
----------- ------------ ------------
$ 496,000 $(13,401,000) $ (2,887,000)
=========== ============ ============
The provision (benefit) for income taxes included in the consolidated
statements of operations differs from the amounts computed by applying the
statutory rate to income (loss) before income taxes, as follows:
<CAPTION>
YEAR ENDED JUNE 30,
---------------------------------------
1994 1995 1996
----------- ------------ ------------
<S> <C> <C> <C>
Income (loss) before income taxes,
extraordinary items and cumulative
effect of accounting change.......... $ 2,076,000 $(30,240,000) $(19,368,000)
Federal statutory income tax rate..... 34% 34% 34%
----------- ------------ ------------
706,000 (10,282,000) (6,585,000)
Benefit of net operating loss recog-
nized................................ (921,000) (2,503,000) --
Increase in valuation allowance....... -- -- 4,412,000
Write-off of cost in excess of net
asset value of purchased businesses.. -- 956,000 --
Income tax benefit from loss on early
extinguishment of debt............... (103,000) (206,000) --
State income taxes.................... 882,000 (1,247,000) (310,000)
Other................................. (68,000) (119,000) (404,000)
----------- ------------ ------------
$ 496,000 $(13,401,000) $ (2,887,000)
=========== ============ ============
</TABLE>
RHCI has net deferred tax assets of $11,539,000 and $8,652,000 at June 30,
1996 and 1995, respectively. In evaluating the need for a valuation allowance
to reduce the deferred tax assets to the amount that is considered more likely
than not to be realized, management has considered the effects of implementing
tax planning strategies, consisting of the sales of certain appreciated
property. RHCI's valuation allowance related to deferred tax assets was
increased from zero at June 30, 1995 to $4,412,000 at June 30, 1996, based on
increases in RHCI's deferred tax assets which are not considered realizable
given the estimated effects of managements tax planning strategies.
F-18
<PAGE>
RAMSAY HEALTH CARE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
At June 30, 1996, net operating loss carryovers of approximately $23,600,000
(of which $17,600,000 expires from 2000 to 2003, $3,800,000 expires in 2010
and $2,200,000 expires in 2011) and alternative minimum tax credit carryovers
of approximately $1,500,000 are available to reduce future federal income
taxes, subject to certain annual limitations.
10. FAIR VALUES OF FINANCIAL INSTRUMENTS
The following methods and assumptions were used by RHCI in estimating the
fair values of its financial instruments:
Cash and cash equivalents and cash held in trust: The carrying amount
reported in the balance sheet for cash and cash equivalents and cash held in
trust approximates its fair value.
Receivable from affiliated company: It was not practicable to estimate the
fair value of the receivable from affiliated company as the borrowing rate of
the affiliate was not determinable. Management believes this receivable is not
impaired at June 30, 1996 and 1995.
Debt: The fair value of RHCI's senior secured and subordinated secured notes
is estimated using discounted cash flow analyses, based on RHCI's estimated
current incremental borrowing rate for similar types of borrowing
arrangements. The carrying amounts of all other debt instruments approximate
estimated fair value.
The carrying amounts and estimated fair values of RHCI's financial
instruments at June 30, 1996 and 1995 are as follows:
<TABLE>
<CAPTION>
1995 1996
--------------------- ---------------------
CARRYING FAIR CARRYING FAIR
AMOUNT VALUE AMOUNT VALUE
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Cash and cash equivalents....... $9,044,000 $9,044,000 $7,605,000 $7,605,000
Cash held in trust.............. 1,778,000 1,778,000 745,000 745,000
Receivable from affiliated
company........................ 7,495,000 (see above) 8,207,000 (see above)
Debt:
Senior and subordinated
notes........................ 36,477,000 38,226,000 36,015,000 36,904,000
Other......................... 22,922,000 22,922,000 19,589,000 19,589,000
</TABLE>
11. REIMBURSEMENT FROM THIRD-PARTY CONTRACTUAL AGENCIES
RHCI records amounts due to or from third-party contractual agencies based
on its best estimates of amounts to be ultimately received or paid under cost
reports filed with the appropriate intermediaries. Final determination of
amounts earned under contractual reimbursement programs is subject to review
and audit by these intermediaries. Differences between amounts recorded as
estimated settlements and the audited amounts are reflected as adjustments to
net revenues in the period the final determination is made. During the years
ended June 30, 1995 and 1994, RHCI recorded contractual reimbursement benefits
of approximately $1,000,000 and $1,400,000, respectively, related to
intermediary audits of prior year cost reports. During the year ended June 30,
1996, RHCI recorded contractual adjustment expenses of approximately
$1,900,000 related to intermediary audits of prior year cost reports. As a
result of this negative experience, RHCI recorded reserves in the fourth
quarter of fiscal 1996 totalling $3,500,000 related to possible future
adjustments of its cost report estimates by intermediaries. Management
believes that adequate provision has been made for any adjustments that may
result from future intermediary reviews and audits and is not aware of any
claims, disputes or unsettled matters concerning third-party reimbursement
that would have a material adverse effect on RHCI's financial statements.
F-19
<PAGE>
RAMSAY HEALTH CARE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
During the fiscal year ended June 30, 1996, RHCI derived approximately 70%
of its net revenues from services provided to patients covered by various
federal and state governmental programs. Management believes it is reasonably
possible that the volume of patients or amount of reimbursement received under
these programs could be curtailed, resulting in decreases in RHCI's net
revenues.
12. SAVINGS PLAN
RHCI has a 401(k) tax deferred savings plan, administered by an independent
trustee, covering substantially all employees over age twenty-one meeting a
one-year minimum service requirement. The plan was adopted for the purpose of
supplementing employees' retirement, death and disability benefits. RHCI may,
at its option, contribute to the plan through an Employer Matching Account,
but is under no obligation to do so. An employee becomes vested in his
Employer Matching Account over a four-year period.
RHCI did not contribute to the plan in 1996 and 1995. In 1994, RHCI
contributed $160,000 to the plan.
13. LITIGATION
RHCI is subject to claims and suits arising in the ordinary course of
business. In the opinion of management, the ultimate resolution of such
pending legal proceedings will not have a material adverse effect on RHCI's
financial position, results of operations or liquidity. See Note 4.
14. ALLOWANCE FOR DOUBTFUL ACCOUNTS
Activity in RHCI's allowance for doubtful accounts consists of the
following:
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30,
-------------------------------------
1994 1995 1996
----------- ----------- -----------
<S> <C> <C> <C>
Balance at beginning of year........... $ 4,955,000 $ 3,925,000 $ 3,886,000
Provision for doubtful accounts........ 5,846,000 5,086,000 5,805,000
Write-offs of uncollectible patient ac-
counts receivable..................... (6,876,000) (5,125,000) (5,118,000)
----------- ----------- -----------
Balance at end of year................. $ 3,925,000 $ 3,886,000 $ 4,573,000
=========== =========== ===========
</TABLE>
15. SUPPLEMENTAL CASH FLOW INFORMATION
RHCI's non-cash investing and financing activities and cash payments for
interest and income taxes were as follows:
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30,
--------------------------------
1994 1995 1996
---------- ---------- ----------
<S> <C> <C> <C>
Distribution of subsidiary to stockholders... $ -- $ 904,000 $ --
Receivable from subsidiary distributed to
stockholders................................ -- 7,600,000 --
Issuance of debt in connection with acquisi-
tions....................................... 3,500,000 -- --
Issuance of stock in lieu of cash payment for
management and director fees................ -- -- 600,000
Cash paid during the year for:
Interest (net of amount capitalized)......... $8,064,000 $6,518,000 $5,260,000
Income taxes................................. 398,000 1,231,000 249,000
</TABLE>
F-20
<PAGE>
RAMSAY HEALTH CARE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
16. QUARTERLY RESULTS OF OPERATIONS AND OTHER SUPPLEMENTAL INFORMATION
(UNAUDITED)
Following is a summary of RHCI's quarterly results of operations for the
years ended June 30, 1996 and 1995.
<TABLE>
<CAPTION>
QUARTER ENDED
--------------------------------------------------
SEPTEMBER 30 DECEMBER 31 MARCH 31(2) JUNE 30(3)
------------ ----------- ----------- -----------
<S> <C> <C> <C> <C>
1996
Net revenues.............. $29,129,000 $31,815,000 $31,888,000 $24,591,000
Income (loss) before in-
come taxes............... (631,000) 1,336,000 1,040,000 (21,113,000)
Net income (loss)......... (391,000) 835,000 638,000 (17,563,000)
Income (loss) per common
and dilutive common
equivalent share(1)
Primary:
Income (loss) per com-
mon share............ $(0.06) $ 0.09 $0.07 $(2.23)
=========== =========== =========== ===========
Fully diluted:
Income (loss) per com-
mon share............ $(0.06) $ 0.09 $0.07 $(2.23)
=========== =========== =========== ===========
1995
Net revenues.............. $35,823,000 $35,634,000 $33,547,000 $31,414,000
Income (loss) before in-
come taxes and extraordi-
nary items............... 939,000 613,000 (5,315,000) (26,477,000)
Income (loss) before ex-
traordinary items........ 588,000 437,000 (3,960,000) (14,110,000)
Net income (loss)......... 588,000 437,000 (4,321,000) (14,006,000)
Income (loss) per common
and dilutive common
equivalent share(1)
Primary:
Before extraordinary
items................ $0.06 $0.05 $(0.52) $(1.83)
Extraordinary items... -- -- (0.05) 0.01
----------- ----------- ----------- -----------
Income (loss) per com-
mon share............ $0.06 $0.05 $(0.57) $(1.82)
=========== =========== =========== ===========
Fully diluted:
Before extraordinary
items................ $0.06 $0.05 $(0.52) $(1.83)
Extraordinary items... -- -- (0.05) 0.01
----------- ----------- ----------- -----------
Income (loss) per com-
mon share............ $0.06 $0.05 $(0.57) $(1.82)
=========== =========== =========== ===========
</TABLE>
- --------
(1) The quarterly earnings per share amounts may not equal the annual amounts
due to changes in the average common and dilutive common equivalent shares
outstanding during the year.
(2) As further described in Note 4, during the third quarter of fiscal 1995,
RHCI recorded losses totalling $4.0 million ($2.9 million after estimated
income tax benefit) related to a sale/leaseback transaction and the sale
of real estate.
(3) As further described in Note 3, in the fourth quarter of fiscal 1996 and
1995, RHCI recorded asset impairment charges primarily related to the
application of the principles of Statement 121 of $5.5 million ($4.7
million after estimated income tax benefit) and $21.8 million ($12.3
million after estimated income tax benefit), respectively. As further
described in Notes 4 and 11, in the fourth quarter of fiscal 1996, RHCI
recorded losses related to asset sales and closed businesses of
approximately $4.5 million ($3.8 million after estimated income tax
benefit) and contractual adjustment expenses related to cost report
settlements/reserves of approximately $7 million ($6 million after
estimated income tax benefit). Also, RHCI recorded additional asset write-
downs/reserves of approximately $2.9 million ($2.4 million after estimated
income tax benefit) in the fourth quarter of fiscal 1996.
F-21
<PAGE>
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
The Board of Directors and Stockholders
Ramsay Managed Care, Inc.
We have audited the accompanying consolidated balance sheet of Ramsay
Managed Care, Inc. and subsidiaries as of June 30, 1996, and the related
consolidated statements of operations, stockholders' equity (deficit), and
cash flows for each of the two years in the period ended June 30, 1996. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position
of Ramsay Managed Care, Inc. and subsidiaries at June 30, 1996, and the
consolidated results of their operations and their cash flows for each of the
two years in the period ended June 30, 1996, in conformity with generally
accepted accounting principles.
Ernst & Young LLP
Orlando, Florida
August 28, 1996, except for
Note 16, as to which the date
is October 21, 1996
F-22
<PAGE>
RAMSAY MANAGED CARE, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
JUNE 30, 1996 DECEMBER 31, 1996
------------- -----------------
(UNAUDITED)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents.................... $ 228,000 $ 198,000
Accounts receivable, less allowance for
doubtful accounts of $334,000 and $282,000
(unaudited) at June 30, 1996 and December
31, 1996, respectively...................... 846,000 1,168,000
Prepaid expenses............................. 382,000 217,000
Other current assets......................... 37,000 27,000
Current assets of discontinued operation..... 1,744,000 1,446,000
------------ ------------
Total current assets........................... 3,237,000 3,056,000
Other assets:
Goodwill and other intangible assets......... 8,152,000 8,205,000
Other noncurrent assets...................... 60,000 75,000
Other assets of discontinued operation....... 1,862,000 2,177,000
------------ ------------
Total other assets............................. 10,074,000 10,457,000
Property and equipment:
Building and improvements.................... 128,000 130,000
Equipment, furniture and fixtures............ 1,830,000 1,907,000
------------ ------------
1,958,000 2,037,000
Less accumulated depreciation.................. 1,170,000 1,303,000
------------ ------------
788,000 734,000
------------ ------------
Total assets................................... $ 14,099,000 $ 14,247,000
============ ============
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current liabilities:
Accounts payable............................. $ 1,397,000 $ 985,000
Accrued salaries and wages................... 641,000 668,000
Hospital and medical claims payable.......... 1,667,000 1,845,000
Other current liabilities.................... 959,000 506,000
Line of credit and note payable.............. 1,900,000 1,500,000
Current portion of long-term debt............ 2,334,000 2,873,000
Current liabilities of discontinued opera-
tion........................................ 1,579,000 1,759,000
Reserve for operating loss from discontinued
operation................................... 1,830,000 172,000
------------ ------------
Total current liabilities...................... 12,307,000 10,308,000
Due to affiliate............................... 1,851,000 2,789,000
Advances from affiliate........................ 1,600,000 1,600,000
Deferred income taxes.......................... 986,000 1,014,000
Long-term debt, less current portion........... 5,202,000 4,207,000
Stockholders' deficit
Convertible preferred stock, $.01 par value,
authorized 1,000,000 shares; issued 100,000
shares at December 31, 1996 (unaudited)..... -- 3,000,000
Common stock, $.01 par value: Authorized
shares--20,000,000; Issued shares--6,397,304
at June 30, 1996 and 6,408,315 (unaudited)
shares at December 31, 1996................. 64,000 64,000
Additional paid-in capital................... 7,095,000 7,102,000
Accumulated deficit.......................... (15,006,000) (15,837,000)
------------ ------------
Total stockholders' deficit.................... (7,847,000) (5,671,000)
------------ ------------
Total liabilities and stockholders' deficit.... $ 14,099,000 $ 14,247,000
============ ============
</TABLE>
See accompanying notes.
F-23
<PAGE>
RAMSAY MANAGED CARE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED JUNE 30, DECEMBER 31,
------------------------- ------------------------
1995 1996 1995 1996
----------- ------------ ----------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C>
Revenues:
Managed care revenue.... $14,898,000 $ 19,430,000 $ 9,118,000 $10,271,000
Clinical fee for service
and other revenue...... 1,247,000 2,172,000 880,000 1,350,000
----------- ------------ ----------- -----------
Total revenues............ 16,145,000 21,602,000 9,998,000 11,621,000
Operating expenses:
Contracted provider
services............... 5,149,000 8,088,000 3,522,000 4,308,000
Salaries, wages and ben-
efits.................. 6,882,000 8,743,000 4,516,000 4,655,000
Management fees charged
by related companies... 284,000 406,000 132,000 176,000
General and administra-
tive expenses.......... 3,215,000 5,846,000 2,282,000 2,184,000
Goodwill write-down..... -- 1,929,000 -- --
Depreciation and amorti-
zation................. 1,244,000 1,323,000 629,000 695,000
Interest................ 334,000 685,000 390,000 434,000
Listing and stock dis-
tribution expenses..... 724,000 -- -- --
----------- ------------ ----------- -----------
Total operating expenses.. 17,832,000 27,020,000 11,471,000 12,452,000
Loss from continuing
operations before income
taxes.................... (1,687,000) (5,418,000) (1,473,000) (831,000)
Income tax benefit........ (192,000) -- -- --
----------- ------------ ----------- -----------
Loss from continuing oper-
ations................... (1,495,000) (5,418,000) (1,473,000) (831,000)
Discontinued operation:
Loss from operations of
discontinued HMO
operation.............. (76,000) (3,149,000) (713,000) --
Loss on disposal of HMO
operation, including
provision of $1,830,000
for operating losses
during phaseout
period................. -- (4,927,000) -- --
----------- ------------ ----------- -----------
Loss from discontinued
operation.............. (76,000) (8,076,000) (713,000) --
----------- ------------ ----------- -----------
Net loss.................. $(1,571,000) $(13,494,000) $(2,186,000) $ (831,000)
=========== ============ =========== ===========
Loss per common share from
continuing operations.... $ (0.39) $ (.85) $ (0.23) $ (0.13)
Loss per common share from
discontinued operation... (0.02) (1.27) (0.11) 0.00
----------- ------------ ----------- -----------
Loss per common share..... $ (0.41) $ (2.12) $ (0.34) $ (0.13)
=========== ============ =========== ===========
Weighted average number of
shares outstanding....... 3,789,000 6,378,000 6,370,909 6,397,304
=========== ============ =========== ===========
</TABLE>
See accompanying notes.
F-24
<PAGE>
RAMSAY MANAGED CARE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
<TABLE>
<CAPTION>
CLASS A TOTAL
CONVERTIBLE CONVERTIBLE ADDITIONAL RETAINED STOCKHOLDERS'
PREFERRED PREFERRED COMMON PAID-IN NOTE EARNINGS EQUITY
STOCK STOCK STOCK CAPITAL RECEIVABLE (DEFICIT) (DEFICIT)
----------- ----------- ------- ---------- ---------- ------------ -------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at July 1,
1994................... $ 1,000 -- $21,000 $1,104,000 $ -- $ 68,000 $ 1,194,000
Dividend paid on 71,092
shares of Class A con-
vertible preferred
stock................. -- -- -- -- -- (9,000) (9,000)
Conversion of 71,092
shares of Class A con-
vertible preferred
stock................. (1,000) -- 4,000 (3,000) -- -- --
Issuance of 1,500,000
shares of common stock
to Paul Ramsay
Hospitals Pty,
Limited, net of
expenses of $281,000.. -- -- 15,000 2,704,000 -- -- 2,719,000
Issuance of 160,000
shares of common stock
to three officers of
the Company, net of
expenses of $19,000... -- -- 2,000 299,000 (148,000) -- 153,000
Issuance of 1,250,000
shares of common stock
to Paul Ramsay
Hospitals Pty.
Limited, net of
expenses of $225,000.. -- -- 12,000 2,263,000 -- -- 2,275,000
Issuance of 960,913
shares of common stock
in relation to fully
subscribed Rights Is-
sue, net of expenses
of $886,000........... -- -- 10,000 1,026,000 (213,000) -- 823,000
Net loss............... -- -- -- -- -- (1,571,000) (1,571,000)
Balance at June 30, 1995
....................... -- -- 64,000 7,393,000 (361,000) (1,512,000) 5,584,000
Issuance of 20,563
shares of common stock
under RMCI employee
stock purchase plan... -- -- -- 32,000 -- -- 32,000
Exercise of options.... -- -- -- 12,000 -- -- 12,000
Payment of note receiv-
able.................. -- -- -- -- 19,000 -- 19,000
Allowance for
uncollectible note
receivable............ -- -- -- (342,000) 342,000 -- --
Net loss............... -- -- -- -- -- (13,494,000) (13,494,000)
Balance at June 30,
1996................... -- -- 64,000 7,095,000 -- (15,006,000) (7,847,000)
Issuance of 100,000
shares of convertible
preferred stock
(unaudited)........... -- $3,000,000 -- -- -- -- 3,000,000
Issuance of 11,011
shares of common stock
under RMCI employee
stock purchase plan
(unaudited)........... -- -- -- 7,000 -- -- 7,000
Net loss (unaudited)... -- -- -- -- -- (831,000) (831,000)
Balance at December 31,
1996 (unaudited)....... $ -- $3,000,000 $64,000 $7,102,000 $ -- $(15,837,000) $ (5,671,000)
</TABLE>
See accompanying notes.
F-25
<PAGE>
RAMSAY MANAGED CARE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED JUNE 30, DECEMBER 31,
------------------------ -----------------------
1995 1996 1995 1996
----------- ----------- ----------- ----------
(UNAUDITED)
<S> <C> <C> <C> <C>
CASH FLOWS FROM CONTINUING
OPERATING ACTIVITIES:
Net loss from continuing
operations................ $(1,495,000) $(5,418,000) $(1,473,000) $ (831,000)
Adjustments to reconcile
net loss from continuing
operations to net cash
(used in) provided by
operating activities:
Depreciation and
amortization.............. $ 1,244,000 1,323,000 629,000 695,000
Loss on disposal of
property and equipment.... 24,000 23,000 -- --
Goodwill write-down........ -- 1,929,000 -- --
Write-down of deferred
costs..................... -- 364,000 -- --
Other...................... 19,000 -- 43,000 13,000
Cash flows from (increase)
decrease in operating
assets:
Accounts receivable,
net..................... (554,000) 79,000 55,000 (322,000)
Prepaid expenses......... (37,000) (315,000) (364,000) 165,000
Other current assets..... (461,000) 679,000 503,000 10,000
Cash flows from increase
(decrease) in operating
liabilities:
Accounts payable......... 1,992,000 (921,000) (1,530,000) (412,000)
Accrued salaries, wages
and other liabilities... (95,000) (136,000) 253,000 27,000
Hospital and medical
claims payable.......... 536,000 777,000 525,000 178,000
Due to related party..... 1,441,000 (1,441,000) 227,000 938,000
Other current liabili-
ties.................... -- 959,000 (114,000) (398,000)
----------- ----------- ----------- ----------
Total adjustments........ 4,109,000 3,320,000 227,000 894,000
----------- ----------- ----------- ----------
Net cash (used in)
provided by continuing
operations activities... 2,614,000 (2,098,000) (1,246,000) 63,000
CASH FLOWS FROM
DISCONTINUED OPERATION
Net loss from discontinued
operation................. (76,000) (8,076,000) (713,000) --
Adjustments to reconcile
net loss from discontinued
operation to net cash used
in discontinued operation:
Loss on disposition of
discontinued operation.. -- 4,927,000 -- --
Depreciation and amorti-
zation.................. -- 724,000 57,000 --
(Increase) decrease in
current assets of
discontinued operation.. (907,000) (836,000) 45,000 298,000
Increase in other assets
of discontinued opera-
tion.................... (2,930,000) (2,765,000) (875,000) (315,000)
Increase in current
liabilities of
discontinued operation.. 218,000 1,361,000 299,000 180,000
Decrease in reserve for
operating loss from
discontinued operation.. -- -- -- (1,658,000)
----------- ----------- ----------- ----------
Total adjustments........ (3,619,000) 3,411,000 (474,000) (1,495,000)
----------- ----------- ----------- ----------
Net cash used in discon-
tinued operation........ (3,695,000) (4,665,000) (1,187,000) (1,495,000)
</TABLE>
See accompanying notes.
F-26
<PAGE>
RAMSAY MANAGED CARE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS--(CONTINUED)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED JUNE 30, DECEMBER 31,
------------------------ -----------------------
1995 1996 1995 1996
----------- ----------- ----------- ----------
(UNAUDITED)
<S> <C> <C> <C> <C>
CASH FLOWS FROM INVESTING
ACTIVITIES
Expenditures for property
and equipment............. (610,000) (250,000) (152,000) (79,000)
Sale of interest in
partnerships.............. 325,000 -- -- --
Acquisitions of businesses,
net of cash acquired...... (450,000) (426,000) -- --
Goodwill, preopening and
development costs......... (466,000) (300,000) (167,000) (615,000)
Other noncurrent assets.... -- 220,000 57,000 --
----------- ----------- ----------- ----------
Net cash used in investing
activities................ (1,201,000) (756,000) (262,000) (694,000)
CASH FLOWS FROM FINANCING
ACTIVITIES
Advances from affiliate.... 119,000 3,451,000 -- 2,400,000
Payment on debt............ (2,728,000) (985,000) (299,000) (856,000)
Repayment on note
receivable to purchase
common stock.............. -- -- 10,000 --
Issuance of common stock,
net....................... 5,970,000 63,000 -- 7,000
Issuance of preferred
stock..................... -- -- -- 545,000
Loan costs related to
refinancing............... (243,000) -- -- --
Issuance of debt........... 1,845,000 1,723,000 -- --
Other...................... 51,000 -- -- --
----------- ----------- ----------- ----------
Net cash provided by (used
in) financing activities.. 5,014,000 4,252,000 (289,000) 2,096,000
Net (decrease) increase in
cash and cash
equivalents............... 2,732,000 (3,267,000) (2,984,000) (30,000)
Cash and cash equivalents
at beginning of period.... 763,000 3,495,000 3,495,000 228,000
----------- ----------- ----------- ----------
Cash and cash equivalents
at end of period.......... $ 3,495,000 $ 228,000 $ 511,000 $ 198,000
=========== =========== =========== ==========
SUPPLEMENTAL DISCLOSURES OF
CASH FLOW INFORMATION
Cash paid (received) during
the year for:
Interest................. $ 222,000 $ 400,000 $ 258,000 $ 165,000
=========== =========== =========== ==========
Income taxes............. $ 129,000 $ 41,000 $ (125,000) $ (172,000)
=========== =========== =========== ==========
</TABLE>
See accompanying notes.
F-27
<PAGE>
RAMSAY MANAGED CARE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1996
(Information pertaining to the six months ended December 31, 1995 and 1996 and
subsequent to December 31, 1996 is unaudited.)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
Ramsay Managed Care, Inc. ("RMCI") was incorporated on July 21, 1993;
however, substantial operations did not commence until October 29, 1993 when
RMCI acquired the stock of Florida Psychiatric Management, Inc. ("FPM") (see
Note 3). Prior to April 24, 1995, RMCI was a wholly owned subsidiary of Ramsay
Health Care, Inc. (RHCI). On April 24, 1995, RHCI distributed its
stockholdings in RMCI to its stockholders as a dividend. A major stockholder
and chairman of RMCI is also a major stockholder in RHCI. RMCI has significant
interaction with RHCI. (See Notes 5 and 11).
The consolidated financial statements include the accounts of RMCI and its
majority-owned subsidiaries (collectively, RMCI). All significant intercompany
accounts and transactions have been eliminated in consolidation.
The accompanying unaudited consolidated financial statements have been
prepared in accordance with generally accepted accounting principles for
interim financial information and with the instructions to Form 10-QSB and
Item 310(b)(2) of Regulation S-B. 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 these footnotes, of a normal recurring nature
and have been included. RMCI's business is seasonal in nature and subject to
general economic conditions and other factors. Accordingly, operating results
for the six months ended December 31, 1996 are not necessarily indicative of
the results that may be expected for the year.
Industry
RMCI's business consists of (i) behavioral healthcare services, through
which it manages and provides the delivery of mental health and substance
abuse services given by both independent and affiliated providers on behalf of
its clients-insurance carriers, health maintenance organizations ("HMO") and
self-insured employers and (ii) HMO services through which it manages and
provides prepaid health services to its members. RMCI's first HMO began
operations in June 1995. In June 1996, RMCI adopted a formal plan to sell its
HMO operations.
Concentrations of Credit Risk
RMCI provides services to self-insured patients without requiring
collateral. Exposure to losses on receivables is principally dependent on each
patient's financial condition. RMCI monitors its exposure for credit losses
and maintains allowances for anticipated losses.
Use of Estimates
The preparation of these consolidated financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the amounts reported in the consolidated
financial statements and accompanying notes. Actual results could differ from
those estimates.
F-28
<PAGE>
RAMSAY MANAGED CARE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Cash Equivalents
Cash equivalents include short-term, highly liquid interest-bearing
investments with a maturity of 90 days or less at the date of acquisition and
consist primarily of money market deposits.
Financial Instruments
The carrying amounts of financial instruments including cash and cash
equivalents, accounts receivable and accounts payable approximate fair value
as of June 30, 1996.
Minimum Liquidity Requirements
RMCI is required under the regulations of the states in which it operates an
HMO to maintain minimum liquidity requirements. Such amounts are included in
the accompanying balance sheet as other assets of discontinued operation.
Revenues
Revenues consist primarily of managed care and clinical fee for service
revenue. Managed care revenue represents capitated amounts received for
behavioral health services provided to patients covered by certain managed
care contracts as well as amounts received for case management, utilization
review and quality assurance oversight on the delivery of behavioral health
services given by independent providers on behalf of clients. Managed care
revenue is recognized during the period in which enrolled lives are covered
for capitated payments received. Clinical fee for service revenue represents
professional fees for outpatient services which are provided on a fee for
service basis. Clinical fee for service revenues is recognized as services are
provided.
For the year ended June 30, 1996, approximately 49% of revenue was earned
from four managed care customers. Walt Disney World Co. comprised
approximately $3,624,000 or 17% of revenue. The Health Plan of the Upper Ohio
Valley comprised approximately $2,647,000 or 12% of revenue. Health Options,
Inc. and AlohaCare, Inc. comprised approximately $2,366,000 and $2,451,000,
respectively, or approximately 11% each.
For the year ended June 30, 1995, approximately 41% of revenue was earned
from three managed care customers. Walt Disney World Co. comprised
approximately $3,513,000 or 22% of revenue. Health Options, Inc. and
AlohaCare, Inc. comprised approximately $1,690,000 and $1,491,000 or
approximately 10% and 9% of revenue, respectively.
Contracted Provider Services
RMCI contracts with various healthcare providers for the provision of health
care services. Providers contracted are primarily hospitals, physicians and
other providers of healthcare services. Hospitals are generally compensated
for their contracted services on a per diem basis, with physicians and other
healthcare providers generally being compensated on a discounted fee-for-
service basis.
RMCI provides for claims incurred but not yet reported based on past
experience, together with current factors. Estimates are adjusted as changes
in these factors occur and such adjustments are reported in the year of
determination. Although considerable variability is inherent in such
estimates, management believes that these reserves are adequate.
Goodwill and Other Intangible Assets
Goodwill consists of cost in excess of the net asset value of purchased
businesses. Other intangible assets represent the value assigned to acquired
clinical protocols, established provider networks and existing contracts
related to acquired companies (see Note 3). These costs are generally
amortized over 10 to 25 years.
F-29
<PAGE>
RAMSAY MANAGED CARE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
RMCI periodically evaluates the recoverability of the carrying amounts of
intangible assets by determining if any impairment indicators are present.
These indicators include estimating the undiscounted cash flows of the entity
acquired over the remaining amortization period. (See Note 14).
Preopening costs, principally salaries and other costs incurred prior to
opening a new clinic, HMO or other operations are deferred until the entity
begins operations whereupon the costs are amortized on a straight-line basis
over two years.
Organizational costs, principally specific external costs related to the
formation and licensure of RMCI's HMOs, are deferred and amortized on a
straight-line basis over a period of five years from the start of operations.
Property and Equipment
Property and equipment are stated at cost. Upon sale or retirement of
property or equipment, the cost and related accumulated depreciation are
removed from the accounts and the resulting gain or loss is included in
operations.
Depreciation is computed on the straight-line method for financial reporting
purposes and on an accelerated method for income tax purposes. The general
range of estimated useful lives is five to forty years for buildings and three
to twenty years for equipment.
Income Taxes
RMCI accounts for income taxes in accordance with Financial Accounting
Standards Board ("FASB") Statement No. 109, Accounting for Income Taxes. Under
this method, deferred income taxes at the end of each period are determined
based on the differences between the financial statement and tax basis of
assets and liabilities using the enacted tax rates for the years in which the
taxes are expected to be paid or recovered.
Stock Based Compensation
RMCI grants stock options for a fixed number of shares to employees with an
exercise price equal to the fair value of the shares at the date of grant.
RMCI plans to adopt Statement of Financial Accounting Standards No. 123,
Accounting for Stock-Based Compensation, and will continue to account for
stock option grants in accordance with APB Opinion No. 25, Accounting for
Stock Issued to Employees, and, accordingly, recognizes no compensation
expense for the stock option grants. Since RMCI has not adopted the
recognition and measurement provisions of Statement No. 123, the adoption of
Statement No. 123 will have no material effect.
Loss Per Common Share
Loss per common share is calculated by dividing net loss by the weighted
average number of common shares outstanding during the period. Stock options
and warrants are considered common stock equivalents and are, in 1996 and 1995
anti dilutive for purposes of calculating primary and fully diluted loss per
share. Fully diluted net loss per common share is not materially different
from primary net loss per common share.
Reclassifications
Certain reclassifications have been made to the prior year financial
statements to conform with the 1996 presentation.
F-30
<PAGE>
RAMSAY MANAGED CARE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
2. SOURCES OF LIQUIDITY
During 1996, RMCI incurred a loss from continuing operations of $5,418,000,
a net loss of $13,494,000 and a cash flow deficit from continuing operations
of $2,098,000. At June 30, 1996, current liabilities exceeded current assets
by $9,070,000 and there is a deficiency in stockholders' equity of $7,847,000.
Management's plan to address this situation and continue operations,
includes the following:
. Sale of its HMO operations
. A commitment by an affiliate of RMCI's major shareholder to acquire $1.4
million of 5% convertible preferred stock and to convert RMCI's $1.6
million of advances from affiliate at June 30, 1996 to 5% convertible
preferred stock.
. A commitment by an affiliate of RMCI's major shareholder to loan RMCI up
to $2,000,000. Borrowings under this facility will bear interest at 15%
per annum and the Company has agreed to pay such affiliate a $100,000
facility fee in consideration for making the facility available to the
Company. At February 15, 1997, $2,000,000 was borrowed by the Company
under the facility.
Management's opinion is that these actions will be adequate to enable RMCI
to continue to operate as a going concern.
3. PLAN OF MERGER
On October 1, 1996, the Company and Ramsay Health Care, Inc. ("RHCI")
entered into an Agreement and Plan of Merger providing for the merger of the
Company into a wholly owned subsidiary of RHCI. Following the merger, all
amounts owed to RHCI by the Company will become an intercompany payable and
receivable between the Company and RHCI, respectively.
The merger is subject to approval by the shareholders of each company, the
receipt of lender, governmental and other consents and the declaration of
effectiveness by the Securities and Exchange Commission of a registration
statement filed by RHCI. Subject to the satisfaction of these conditions, it
is expected that the merger will be consummated in March 1997.
4. ACQUISITIONS
On October 29, 1993, RMCI acquired, in a transaction accounted for as a
purchase, the stock of FPM, a regional provider of managed behavioral
healthcare services based in Orlando, Florida, for $7,141,000 consisting of
cash of $4,641,000 (including $641,000 in acquisition costs), the issuance of
an aggregate of $2,500,000 of three-year 7% debentures, and contingent
consideration based on the attainment of certain earnings and revenue levels
over the ensuing two years. At June 30, 1995, all parties agreed to an
additional payment of $450,000 which was paid on October 31, 1995 and
cancellation of the earn-out provisions. In connection with this acquisition,
RMCI recorded goodwill and other intangible assets of approximately
$8,000,000.
On June 30, 1994, RMCI, through a wholly owned subsidiary (Ramsay HDI,
Inc.), acquired, in a transaction accounted for as a purchase, the assets of
Human Dynamics Institute (HDI), a Phoenix, Arizona-based managed behavioral
healthcare business for $3,001,000 consisting of cash of $1,000,000, a three-
year $1,000,000 note bearing interest at 8.25%, the assumption of certain
liabilities, the issuance of 86,425 shares of common stock and contingent
consideration based upon the attainment of certain revenue levels over the
ensuing two years. In connection with this acquisition, RMCI recorded goodwill
totaling approximately $3,000,000. Subsequently, Ramsay HDI, Inc. changed its
name to FPMBH of Arizona, Inc.
F-31
<PAGE>
RAMSAY MANAGED CARE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The earn-out payment of $426,000, which is payable on or before October 31,
1996, increased the amount of goodwill related to the acquisition of HDI.
In June 1994, RMCI, through a wholly owned subsidiary acquired, in a
transaction accounted for as a purchase, the stock of Florida Psychiatric
Associates, P.A. (FPA), a provider of mental health and substance abuse
services in an outpatient environment in the central Florida area, for a cash
payment of $50,000. In connection with this acquisition, RMCI recorded
goodwill totaling approximately $393,000.
5. LINE OF CREDIT AND NOTE PAYABLE
RMCI's line of credit and note payable consist of the following:
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1996 1996
---------- ------------
(UNAUDITED)
<S> <C> <C>
Secured line of credit promissory note bank,
principal payable on demand, interest at prime rate
plus .75% or LIBOR plus 300 basis points (interest
rate of 8.0625% at June 30, 1996).................. $1,500,000 $1,500,000
Secured promissory note issued to Apex Acquisition
Corporation, payable on demand, interest at prime
rate plus .5% (interest rate of 8.75% at June 30,
1996), secured by the stocks and assets of RMCI's
subsidiary, Apex Healthcare, Inc. The note was paid
on August 9, 1996.................................. 400,000 --
---------- ----------
$1,900,000 $1,500,000
========== ==========
</TABLE>
On April 26, 1996, RMCI amended its $4,200,000 revolving credit agreement,
originally entered into on April 28, 1995. The revolving credit agreement was
replaced by a $1,500,000 secured Revolving Master Line of Credit and a
$100,000 Term Loan. The secured Revolving Master Line of Credit is to be used
solely for working capital and other general corporate purposes.
In addition, RMCI received a secured overline line of credit note from First
Union National Bank of Florida, Inc. for $500,000. At June 30, 1996, RMCI has
not borrowed any funds against the overline line of credit note. At June 30,
1996 the overline of credit was terminated.
The line of credit promissory note and the overline line of credit are
secured by the stock and assets of RMCI's subsidiaries, FPM Behavioral Health,
Inc. and its subsidiaries (FPMBH) and Apex Healthcare, Inc. The Credit
Facility contains covenants, which include, without limitation, covenants
which contain limitations on the ability of FPM and its subsidiaries, subject
to certain exceptions, to (i) assume or incur liens, (ii) alter the nature of
their business or effect mergers, consolidations, or sales of assets, (iii)
incur indebtedness or make investments, (iv) acquire businesses, or (v) pay
dividends to RMCI. In addition, the Credit Facility contains financial
covenants related to senior debt to cash flow, interest coverage, and minimum
stockholders' equity. At June 30, 1996, FPM's minimum stockholders' equity was
less than the requirement. The bank waived this requirement for the year ended
June 30, 1996.
In October 1996, the Credit Facility was further amended pursuant to which
Apex Healthcare, Inc. ("Apex"), a wholly owned subsidiary of the Company,
guaranteed the obligations of the Company under the Credit Facility and the
Company pledged all of the Shares of capital stock of Apex to the Bank as
collateral.
F-32
<PAGE>
RAMSAY MANAGED CARE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
6. LONG-TERM DEBT
RMCI's long-term debt consists of the following:
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1996 1996
---------- ------------
(UNAUDITED)
<S> <C> <C>
8% 6-year unsecured promissory note issued to RHCI
payable quarterly, due September 30, 2000.......... $6,000,000 $6,000,000
Variable rate (interest rate of 8.0625% at June 30,
1996), 3-year secured term loan to bank, payable
quarterly, due January 31, 1998.................... 1,111,000 833,000
8.25% 3-year secured promissory note issued in
connection with the acquisition of HDI, payable
monthly, due June 30, 1997......................... 333,000 167,000
3-year secured term loan to bank, payable monthly
through April 5, 1999, interest at prime rate plus
1% (interest rate of 9.25% at June 30, 1996)....... 92,000 80,000
---------- ----------
7,536,000 7,080,000
Less amounts due within one year.................... 2,334,000 2,873,000
---------- ----------
$5,202,000 $4,207,000
========== ==========
</TABLE>
The aggregate scheduled maturities of long-term debt during the five years
subsequent to June 30, 1996 follow: 1997--$2,334,000; 1998--$2,001,000; 1999--
$1,437,000; 2000--$1,412,000; and 2001--$352,000.
The 8% 6-year unsecured promissory note issued to RHCI, which is RMCI's
former parent corporation, is subordinate and junior to all indebtedness of
RMCI. Principal will be payable in equal quarterly installments beginning
September 30, 1996, with the final payment due on September 30, 2000. Interest
is payable after July 1, 1997.
The 8.25% secured promissory note due June 30, 1997 is secured by the stock
of RMCI's wholly owned subsidiary, FPMBH of Arizona, Inc., which was the
acquiring entity of the assets of HDI. The note is payable in monthly
installments which began July 31, 1994.
The term loans to the bank are secured by the stock and assets of RMCI's
subsidiaries, FPMBH and Apex Healthcare, Inc. The term loans require among
other things, that FPMBH maintain various financial ratios and restricts a
portion of FPMBH's equity for distribution to RMCI.
Under the provisions of the term loan, FPMBH was required to maintain a
minimum stockholder's equity of $850,000 plus 75% of its net income subsequent
to June 30, 1996. At June 30, 1996, FPM's minimum stockholder's equity was
less than the requirements. The bank waived this requirement for the year
ended June 30, 1996.
As a result of its financial condition, RMCI is unable to determine a fair
market value for its long-term fixed rate debt.
F-33
<PAGE>
RAMSAY MANAGED CARE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
7. INCOME TAXES
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. Significant components
of RMCI's deferred tax assets and liabilities at June 30, 1996 are as follows:
<TABLE>
<S> <C>
Deferred tax assets:
Hospital and medical claims payable........................... $ 42,000
Loss on discontinued operations............................... 1,853,000
Net operating loss carryforwards.............................. 1,797,000
Accrued employee benefits..................................... 257,000
Allowance for doubtful accounts............................... 129,000
Related party expense deductible in future period............. 135,000
Alternative minimum tax credit................................ 59,000
Other......................................................... 7,000
Valuation allowance........................................... (4,267,000)
-----------
Total deferred tax assets....................................... 12,000
Deferred tax liabilities:
Other intangible assets....................................... 867,000
Change in tax accounting method............................... 51,000
Tax over book depreciation and amortization................... 80,000
Total deferred tax liabilities.................................. 998,000
-----------
Net deferred tax liabilities.................................... $ 986,000
===========
</TABLE>
The income tax benefit consists of the following:
<TABLE>
<CAPTION>
JUNE 30,
----------------
1995 1996
--------- -----
<S> <C> <C>
Income taxes currently payable:
Federal.................................................. $ -- $ --
State.................................................... 47,000 --
Deferred income taxes:
Federal.................................................. (179,000) --
State.................................................... (60,000) --
--------- -----
$(192,000) $ --
========= =====
</TABLE>
F-34
<PAGE>
RAMSAY MANAGED CARE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The income tax benefit included in the consolidated statement of operations
differs from the amounts computed by applying the statutory rate to income
before taxes, as follows:
<TABLE>
<CAPTION>
JUNE 30,
-------------------------
1995 1996
----------- ------------
<S> <C> <C>
Loss before taxes................................ $(1,763,000) $(13,494,000)
Federal statutory income tax rate................ 34% 34%
----------- ------------
(599,000) (4,588,000)
Nondeductible amortization of goodwill........... 124,000 124,000
Nondeductible write-down of goodwill............. -- 656,000
Nondeductible stock distribution costs........... 246,000 --
State income taxes, net of federal tax benefit... (9,000) (400,000)
Other, net....................................... 46,000 (59,000)
Change in valuation allowance.................... -- 4,267,000
----------- ------------
$ (192,000) $ --
=========== ============
</TABLE>
RMCI has recorded a valuation allowance with respect to the future tax
benefits and the net operating loss reflected as deferred tax assets due to
the uncertainty of their ultimate realization. At June 30, 1996, net operating
loss carryforwards of approximately $4,741,000 for federal income tax
purposes, which expire from 2005 to 2010, and approximately $6,393,000 for
state income tax purposes, which expire from 2005 to 2010, are available to
reduce future income taxes subject to certain return loss year rules.
8. STOCKHOLDERS' EQUITY (DEFICIT)
Effective April 5, 1995, the RMCI Board approved a 1-for-2 reverse stock
split of the RMCI Common Stock. Per share data and number of shares included
in the accompanying consolidated financial statements have been adjusted to
reflect the effect of the reverse stock split.
On June 23, 1994, RMCI issued 71,092 shares of Class A convertible preferred
stock with a liquidation value of $10 per share, or $710,920, to RHCI. Among
other things, each share of preferred stock was convertible into shares of
RMCI Common Stock on a 5-for-1 basis and had total voting rights equivalent to
355,460 shares of RMCI Common Stock. On October 1, 1994, the Class A
convertible preferred stock was converted into 355,460 shares of RMCI Common
Stock.
On October 27, 1994, RMCI issued 1,500,000 shares of RMCI Common Stock to
Ramsay Hospitals (an affiliate of RMCI's major stockholder and Chairman) for
$2.00 per share, or $3,000,000 with an option to acquire 1,250,000 additional
shares of RMCI Common Stock at $2.00 per share on or before May 31, 1995 or
$2.20 per share on or before August 31, 1995. On May 31, 1995, this option was
exercised and an additional 1,250,000 shares of RMCI Common Stock was issued
for $2,500,000.
Also on October 27, 1994, RMCI sold 160,000 shares of RMCI Common Stock to
three officers of RMCI for a total of $320,000. Of this amount $148,500 was in
the form of a promissory note from one of the officers, payable quarterly
starting December 31, 1995 with the final repayment due September 30, 1999.
Interest is payable quarterly in arrears at a rate equivalent to one year
LIBOR (6.125% at June 30, 1996). At June 30, 1996, RMCI has fully reserved for
this note.
On April 24, 1995, RHCI distributed its total holdings in RMCI (2,413,577
shares of RMCI Common Stock) to its stockholders in the form of a dividend.
F-35
<PAGE>
RAMSAY MANAGED CARE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Also on April 24, 1995, RMCI commenced a rights offering (the Rights
Offering) pursuant to which RMCI distributed, at no cost, transferable rights
to purchase up to 960,913 shares of common stock. Each Right entitled the
holder to purchase one share of RMCI Common Stock at $2.00 per share. All
Rights were exercised.
In connection with the April 24, 1995 rights issue, an officer of RMCI
exercised rights through the issuance of two promissory notes. One note for
$75,000 is payable in eight quarterly installments commencing September 6,
1995 with the final payment due June 8, 1997. The other note for approximately
$138,000 is payable in three equal annual installments commencing June 8,
1998, with the final installment due June 8, 2000. Interest on both notes is
payable quarterly in arrears at a rate equivalent to one year LIBOR. At June
30, 1996, RMCI has fully reserved these notes.
RMCI has adopted a 1994 Stock Option Plan (1994 Option Plan) which permits
the issuance of options to officers and other key employees. The 1994 Option
Plan reserves 1,000,000 shares of RMCI Common Stock for grant.
In October 1994, RMCI:
. Granted options under the 1994 Option Plan, to certain directors, key
officers and other employees to purchase an aggregate of 475,250 shares
of RMCI Common Stock, at an option price per share of $2.00. These
options vest over a three to four-year period. At June 30, 1996, options
to acquire 146,750 of RMCI Common Stock were exercisable.
. Granted options under the 1994 Option Plan, to the chairman of the board
and former vice chairman/president and chief executive officer of RMCI
for each to purchase 25,000 (50,000 in total) shares of RMCI Common
Stock at an option price per share of $2.00. These options are
exercisable in September 2004 or at an earlier date if, at the time of
exercise, the closing price of RMCI Common Stock has equaled or exceeded
$20 on at least twenty trading days, which need not be consecutive. The
options granted to the former vice chairman/president and chief
executive officer expired, unexercised in August, 1996.
Also in October 1994, RMCI granted warrants to purchase 125,000 shares of
RMCI Common Stock to Ramsay Hospitals and warrants to purchase 52,000 shares
of RMCI Common Stock to certain others persons at a price of $2.00 per share.
The warrants issued to Ramsay Hospitals vest immediately. The other warrants
vest one-third on each anniversary date over three years.
In November 1994, RMCI, under the 1994 Option Plan, granted options to
certain key employees to purchase an aggregate of 60,000 shares of RMCI Common
Stock, at an option price of $2.00 per share. The options vest over a four-
year period and 20,000 options are exercisable at June 30, 1996.
In 1996 RMCI granted options to purchase 75,000 shares of RMCI Common Stock
at $2.44 per share and 250,000 shares of RMCI Common Stock at $2.31 per share.
During 1995, RMCI granted options to purchase 97,500 shares of RMCI Common
Stock at $2.00 per share. The options vest ratably over a four-year period
beginning on the anniversary date of the award.
RMCI also issued, during 1996 and 1995, warrants to purchase 50,000 and
13,000 shares of RMCI Common Stock at $2.44 and $2.00 per share, respectively.
The 1996 warrants vest one-sixth on the second anniversary and the remainder
on the third anniversary. The 1995 warrants vest one-third at date of issuance
and one-third on each of the next two anniversary dates, respectively.
F-36
<PAGE>
RAMSAY MANAGED CARE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Summary information on stock options and warrants is shown in the following
table:
<TABLE>
<CAPTION>
PRICE
OPTIONS WARRANTS EXERCISABLE RANGE
--------- -------- ----------- ----------
<S> <C> <C> <C> <C>
Balance at July 1, 1994............ -- -- -- --
Granted.......................... 682,750 190,000 -- $1.00-2.00
Become exercisable............... -- -- 129,000 2.00
Balance at June 30, 1995........... 682,750 190,000 129,000 2.00
Granted.......................... 325,000 50,000 -- 1.00-2.44
Become exercisable............... -- -- 219,250 2.00
Exercised........................ -- -- (6,000) 1.00
Canceled......................... (33,700) -- (9,700) 1.00
Balance at June 30, 1996........... 974,050 240,000 332,550 1.00-2.44
Granted (unaudited).............. 362,500 400,000 300,000 1.00
Canceled (unaudited)............. (161,300) -- -- 2.00
Balance at December 31, 1996 (unau-
dited)............................ 1,175,250 640,000 632,550 $1.00-2.44
</TABLE>
RMCI has adopted a 1994 Employee Stock Purchase Plan (1994 ESPP) that allows
employees to acquire up to 100,000 shares of RMCI Common Stock at a 15%
discount to the lower of the market price of the RMCI Common Stock at the
beginning or end of a six-month period. The Plan went into effect July 1,
1995. During 1996, RMCI issued approximately 20,500 shares of RMCI Common
Stock related to the ESPP.
At June 30, 1996, shares of RMCI Common Stock reserved for future issuance
are as follows:
<TABLE>
<S> <C>
1994 Option Plan................................................ 994,000
1994 ESPP....................................................... 79,500
Warrants........................................................ 240,000
---------
1,313,500
=========
</TABLE>
In August, 1996, RMCI adopted the 1996 Long Term Incentive Plan under which
500,000 shares of RMCI Common Stock are available for option grants to
officers, directors and key employees.
In connection with a repricing opportunity authorized by the RMCI Board on
August 13, 1996, approximately 974,000 options were voluntarily repriced by
the optionholders. Under the repricing opportunity, the exercise prices of the
holders outstanding options were reduced to $1.00 per share, the closing price
for the RMCI Common Stock as quoted on the OTC Bulletin Board on August 13,
1996. The repriced options are not exercisable until the earlier of the date
which is six months prior to their expiration or the closing price for the
RMCI Common Stock, as quoted on the OTC Bulletin Board, equals or exceeds
$2.333 per share for at least 15 trading days, which need not be consecutive,
subsequent to August 13, 1996. The closing price for the RMCI Common Stock has
not exceeded $2.333 per share since August 13, 1996 and, therefore, none of
the repriced options are currently exercisable.
9. STATUTORY COMPLIANCE
RMCI's regulated HMO subsidiaries are required to maintain a minimum level
of statutory equity by each state in which they operate and are regulated as
an HMO. At June 30, 1996, these subsidiaries were required to maintain total
statutory equity of $1,800,000. At June 30, 1996, each individual HMO
subsidiary had sufficient equity to meet each individual state's statutory
equity requirements. In addition, the HMO regulations of various states also
limit distribution of earnings or equity transfers to defined amounts.
F-37
<PAGE>
RAMSAY MANAGED CARE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
10. PENSION PLAN
Prior to April 24, 1995, RMCI participated in a 401(k) tax deferred savings
plan sponsored by RHCI. Subsequent to that date, RMCI formed its own 401(k)
tax deferred savings plan and its employees no longer participate in the RHCI
plan. RMCI's plan covers substantially all employees over age 21 meeting a
one-year minimum service requirement. RMCI plan was adopted for the purpose of
supplementing employees' retirement, death and disability benefits. RMCI may,
at its option, contribute to the plan through an Employer Matching Account,
but is under no obligation to do so. An employee becomes vested in his
Employer Matching Account over a four-year period. The funds contributed by
RMCI's employees to the RHCI plan will be transferred to RMCI's plan once IRS
approval is received. No contribution to the plan was made by RMCI during 1996
or 1995.
11. OPERATING LEASES
RMCI leases certain equipment and office space under noncancelable operating
leases that expire in various years through 2003. Future minimum payments
under noncancelable operating leases with initial terms of one year or more
consists of the following at June 30, 1996:
<TABLE>
<S> <C>
Year ending June 30
1997........................................................ $1,072,000
1998........................................................ 937,000
1999........................................................ 558,000
2000........................................................ 440,000
2001........................................................ 318,000
Thereafter.................................................. 221,000
----------
Total minimum lease payments................................ $3,546,000
==========
</TABLE>
RMCI has an operating lease agreement with a related party for building,
office and parking space for which minimum future lease payments total
$1,357,000. These payments are included in the total future minimum lease
payments of $3,546,000. Total lease and rental expense for operating leases
included in operations for the year ended June 30, 1996 amounted to $1,246,000
(1995-$675,000). This amount includes $355,000 in 1996 ($414,000 in 1995) of
rent expense related to leases with related parties.
12. RELATED PARTY TRANSACTIONS
RHCI provides management, accounting, information systems, tax, insurance
and personnel functions to RMCI. RMCI is charged management fees for these
services. The amount due to RHCI for these services and other amounts paid by
RHCI on behalf of RMCI are included in due to affiliates at June 30, 1996.
The amount due to affiliates includes advances from RHCI to fund working
capital and other general corporate purposes. Intercompany advances from RHCI
were non-interest bearing through October 25, 1994. On October 25, 1994,
advances from RHCI aggregating $6,000,000 were converted into an 8%
subordinated note payable to RHCI. This note did not begin to accrue interest
until March 1995. An analysis of RMCI's amount due to RHCI is as follows:
<TABLE>
<S> <C>
Balance at July 1, 1995....................................... $1,441,000
Additions during the year ended June 30, 1996................. 410,000
----------
Balance at June 30, 1996...................................... $1,851,000
==========
</TABLE>
F-38
<PAGE>
RAMSAY MANAGED CARE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The average outstanding balance (excluding the $6,000,000 promissory note)
was $1,669,000 for the year ended June 30, 1996 and $2,922,000 for the year
ended June 30, 1995.
RHCI has agreed not to require payment of the $1,851,000 of advances it has
made to RMCI, or interest on the $6,000,000 subordinated note until after July
1, 1997. RMCI and RHCI are currently negotiating to restructure the repayment
of the intercompany advances and interest due on the note.
On June 28, 1996 RMCI received $1.6 million in advances from an affiliate of
the major shareholder. An additional $1.4 million was committed to be advanced
during the year ended June 30, 1997. On August 7 and August 8, 1996, RMCI
borrowed an aggregate of $800,000. The amounts advanced currently bear
interest at 12% and are payable on demand. The affiliate has committed to
convert this amount to 5% convertible preferred stock, consequently, at June
30, 1996 the $1.6 million advance has been classified as a long-term
liability.
On September 10, 1996, RMCI entered into a stock purchase agreement with an
affiliate, pursuant to which such affiliate purchased 100,000 shares of Series
1996 Convertible Preferred Stock at a purchase price of $3,000,000. The
purchase price was paid by (i) offset against the outstanding principal
amounts under two promissory notes ($1,600,000 and $800,000, respectively),
(ii) offset against the aggregate accrued unpaid interest on such notes
through September 10, 1996 ($54,667) and (iii) $545,333 in cash. In connection
with the purchase of the 100,000 shares of Series 1996 Convertible Preferred
Stock by such affiliate, RMCI issued warrants to such affiliate to purchase
300,000 shares of Common Stock, at an exercise price of $1.00 per share.
13. DISCONTINUED OPERATION
In June 1996, RMCI adopted a formal plan for the sale of its HMO operations
by January 1997. RMCI's HMO operations are accounted for as a discontinued
operation, and accordingly its operations are segregated in the accompanying
statement of operations. Net revenues and operating costs and expenses for
1995 have been reclassified for amounts associated with the discontinued
operation.
Revenues and related losses associated with the discontinued operation of
the last two fiscal years were as follows:
<TABLE>
<CAPTION>
1995 1996
------- ----------
<S> <C> <C>
Revenues................................................ $69,000 $1,347,000
======= ==========
Loss from operations.................................... $76,000 $3,149,000
------- ----------
Loss on disposal: -- 3,097,000
Estimated unrecovered costs through expected disposal
date................................................. -- 1,830,000
------- ----------
Loss on disposal...................................... -- 4,927,000
------- ----------
Loss from discontinued operations....................... $76,000 $8,076,000
======= ==========
</TABLE>
No income tax benefit was recognized for losses on discontinued operation
for book purposes due to the uncertainty of their ultimate realization.
RMCI has established a reserve for operating losses from the discontinued
operation by estimating the losses of the HMO operations through the expected
disposition date of January, 1997.
F-39
<PAGE>
RAMSAY MANAGED CARE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The components of net assets of discontinued operation included in the
Consolidated Balance Sheet at June 30, 1996 are as follows:
<TABLE>
<S> <C>
Cash and cash equivalents........................................ $1,618,000
Accounts receivable, net......................................... 38,000
Prepaid expenses................................................. 78,000
Other current assets............................................. 10,000
Restricted assets................................................ 1,565,000
Property and equipment, net...................................... 297,000
Accounts payable................................................. (234,000)
Accrued salaries and wages....................................... (86,000)
Hospital and medical claims payable.............................. (143,000)
Other current liabilities........................................ (1,116,000)
----------
$2,027,000
==========
</TABLE>
As of October 30, 1996, the Company entered into a definitive agreement to
sell its HMO operation to an established healthcare provider for $4,350,000.
The closing of the sale is subject to regulatory approvals, third party
consents and other customary closing conditions. Due to these conditions, the
Company will not adjust the loss on the sale of discontinued operation that
was recorded for the year ended June 30, 1996 until the completion of the
sale.
14. FOURTH QUARTER ADJUSTMENTS
In the fourth quarter of fiscal 1996, RMCI made certain strategic decisions
affecting the future operations of RMCI. Among other things, RMCI determined
that it would not expand in certain markets in the United States. As a result,
approximately $426,000 of development costs that had been deferred were
charged to operations in the fourth quarter.
Also during the fourth quarter, RMCI wrote-down $1.9 million of goodwill
(see Note 15), and recorded a loss on discontinued operation of $5.4 million
(see Note 13).
15. GOODWILL WRITE-DOWN
In June 1996, RMCI recognized a goodwill impairment charge of $1,929,000
related to the HDI acquisition (see Note 4). At the time of the acquisition
HDI had contracts with five major vendors and the possibility of obtaining an
additional major contract. During 1996, HDI lost four of its existing
contracts and was not awarded the new major contract.
16. CONTINGENCY
On July 1, 1996, RMCI and Apex filed an action against the potential buyers
of Apex. The complaint alleges tortious and fraudulent interference with
RMCI's proposed sale of Apex. On October 21, 1996, certain of these defendants
asserted counterclaims against RMCI and Apex alleging fraud and breach of
contract. The counterclaims seek unspecified compensatory and punitive
damages. RMCI is unable to determine the ultimate outcome of this litigation
or possible range of loss, if any.
F-40
<PAGE>
APPENDIX A
AGREEMENT AND PLAN OF MERGER
DATED AS OF OCTOBER 1, 1996,
AMONG
RAMSAY MANAGED CARE, INC.,
RAMSAY HEALTH CARE, INC.,
AND
RHCI ACQUISITION CORP.
<PAGE>
TABLE OF CONTENTS*
<TABLE>
<CAPTION>
PAGE
----
<C> <S> <C>
ARTICLE I. THE MERGER.................................................. A-1
SECTION 1.01 The Merger............................................. A-1
SECTION 1.02 Conversion of Shares................................... A-1
SECTION 1.03 Surrender and Payment.................................. A-2
SECTION 1.04 Stock Options, Warrants and Restricted Stock........... A-3
SECTION 1.05 Adjustments............................................ A-4
SECTION 1.06 Fractional Shares...................................... A-4
SECTION 1.07 Dissenting Shares...................................... A-4
ARTICLE II. THE SURVIVING CORPORATION................................... A-5
SECTION 2.01 Certificate of Incorporation........................... A-5
SECTION 2.02 Bylaws................................................. A-5
SECTION 2.03 Directors and Officers................................. A-5
ARTICLE III. REPRESENTATIONS AND WARRANTIES OF THE COMPANY.............. A-5
SECTION 3.01 Corporate Existence and Power.......................... A-5
SECTION 3.02 Corporate Authorization................................ A-5
SECTION 3.03 Governmental Authorization............................. A-5
SECTION 3.04 Non-Contravention...................................... A-5
SECTION 3.05 Capitalization......................................... A-6
SECTION 3.06 Subsidiaries........................................... A-6
SECTION 3.07 SEC Filings............................................ A-7
SECTION 3.08 Financial Statements................................... A-7
Joint Proxy Statement/Prospectus; Registration
SECTION 3.09 Statement............................................. A-7
SECTION 3.10 Absence of Certain Changes............................. A-8
SECTION 3.11 No Undisclosed Material Liabilities.................... A-9
SECTION 3.12 Litigation............................................. A-9
SECTION 3.13 Taxes.................................................. A-9
SECTION 3.14 Tax Free Merger........................................ A-9
SECTION 3.15 ERISA.................................................. A-10
SECTION 3.16 Compliance with Laws................................... A-11
SECTION 3.17 Finders' Fees.......................................... A-11
SECTION 3.18 Opinion of Financial Advisor........................... A-11
SECTION 3.19 Vote Required.......................................... A-12
SECTION 3.20 Medicare and Medicaid.................................. A-12
ARTICLE IV. REPRESENTATIONS AND WARRANTIES OF RHCI...................... A-12
SECTION 4.01 Corporate Existence and Power.......................... A-12
SECTION 4.02 Corporate Authorization................................ A-12
SECTION 4.03 Governmental Authorization............................. A-12
SECTION 4.04 Non-Contravention...................................... A-13
SECTION 4.05 Capitalization......................................... A-13
SECTION 4.06 Subsidiaries........................................... A-14
SECTION 4.07 SEC Filings............................................ A-14
SECTION 4.08 Financial Statements................................... A-14
Joint Proxy Statement/Prospectus Registration
SECTION 4.09 Statement............................................. A-15
SECTION 4.10 Absence of Certain Changes............................. A-15
SECTION 4.11 No Undisclosed Material Liabilities.................... A-16
SECTION 4.12 Litigation............................................. A-16
SECTION 4.13 Taxes.................................................. A-16
</TABLE>
A-i
<PAGE>
<TABLE>
<CAPTION>
PAGE
----
<C> <S> <C>
SECTION 4.14 Tax Free Merger....................................... A-16
SECTION 4.15 ERISA................................................. A-17
SECTION 4.16 Compliance with Laws.................................. A-18
SECTION 4.17 Finders' Fees......................................... A-18
SECTION 4.18 Opinion of Financial Advisor.......................... A-18
SECTION 4.19 Vote Required......................................... A-18
SECTION 4.20 Medicare and Medicaid................................. A-18
ARTICLE V. COVENANTS OF THE COMPANY..................................... A-19
SECTION 5.01 Conduct of the Company................................ A-19
SECTION 5.02 Access to Information................................. A-20
SECTION 5.03 Other Offers.......................................... A-20
SECTION 5.04 Notice of Certain Events.............................. A-20
SECTION 5.05 Affiliates............................................ A-20
SECTION 5.06 Tax Letters........................................... A-21
ARTICLE VI. COVENANTS OF RHCI........................................... A-21
SECTION 6.01 Conduct of RHCI....................................... A-21
SECTION 6.02 Access to Information................................. A-21
SECTION 6.03 Obligations of Merger Subsidiary...................... A-21
SECTION 6.04 Director and Officer Liability........................ A-21
SECTION 6.05 NASDAQ National Market System Listing................. A-21
SECTION 6.06 Notice of Certain Events.............................. A-22
ARTICLE VII. COVENANTS OF RHCI AND THE COMPANY.......................... A-22
SECTION 7.01 Best Efforts.......................................... A-22
SECTION 7.02 Certain Filings....................................... A-22
SECTION 7.03 Public Announcements.................................. A-22
SECTION 7.04 Further Assurances.................................... A-22
SECTION 7.05 Stockholder Meeting................................... A-23
SECTION 7.06 Preparation of the Joint Proxy Statement/Prospectus
and Registration Statement............................ A-23
ARTICLE VIII. CONDITIONS TO THE MERGER.................................. A-23
SECTION 8.01 Conditions to the Obligations of Each Party........... A-23
Conditions to the Obligations of RHCI and Merger
SECTION 8.02 Subsidiary........................................... A-24
SECTION 8.03 Conditions to the Obligations of the Company.......... A-24
ARTICLE IX. TERMINATION................................................. A-25
SECTION 9.01 Termination........................................... A-25
SECTION 9.02 Effect of Termination................................. A-25
ARTICLE X. MISCELLANEOUS................................................ A-25
SECTION 10.01 Notices............................................... A-25
SECTION 10.02 Survival of Representations and Warranties............ A-26
SECTION 10.03 Amendments; No Waivers................................ A-26
SECTION 10.04 Fees and Expenses..................................... A-27
SECTION 10.05 Successors and Assigns................................ A-27
SECTION 10.06 Governing Law......................................... A-27
SECTION 10.07 Counterparts; Effectiveness........................... A-27
SECTION 10.08 Entire Agreement...................................... A-27
</TABLE>
- --------
* The Table of Contents is not a part of this Agreement.
A-ii
<PAGE>
AGREEMENT AND PLAN OF MERGER
AGREEMENT AND PLAN OF MERGER dated as of October 1, 1996, among Ramsay
Managed Care, Inc., a Delaware corporation (the "Company"), Ramsay Health
Care, Inc., a Delaware corporation ("RHCI"), and RHCI Acquisition Corp., a
Delaware corporation and a wholly owned subsidiary of RHCI ("Merger
Subsidiary").
WHEREAS, the Boards of Directors of RHCI, Merger Subsidiary and the Company
have (in the case of the Company and RHCI, following the recommendation of
their respective special committees) approved this Agreement and the Merger
(as defined below);
WHEREAS, for federal income tax purposes, it is intended that the Merger
shall qualify as a reorganization within the meaning of Section 368(a) of the
Code (as defined below); and
WHEREAS, for accounting purposes, it is intended that the Merger shall be
accounted for as a purchase.
NOW, THEREFORE, in consideration of the foregoing and the respective
representations, warranties, covenants and agreements set forth herein, the
parties hereto agree as follows:
ARTICLE I.
The Merger
Section 1.01 The Merger. (a) At the Effective Time (as defined in Section
1.01(b) below), Merger Subsidiary shall be merged (the "Merger") with and into
the Company in accordance with the General Corporation Law of the State of
Delaware ("Delaware Law"), whereupon the separate existence of Merger
Subsidiary shall cease, and the Company shall be the surviving corporation
(the "Surviving Corporation").
(b) As soon as practicable after satisfaction or, to the extent permitted
hereunder, waiver of all conditions to the Merger, the Company and Merger
Subsidiary will file a certificate of merger with the Secretary of State of
the State of Delaware and make all other filings or recordings required by
Delaware Law in connection with the Merger. The closing of the Merger will
take place at the offices of Haythe & Curley, 237 Park Avenue, New York, New
York 10017, or such other place as the parties may agree. The Merger shall
become effective at such time as the certificate of merger is duly filed with
the Secretary of State of the State of Delaware or at such later time as is
specified in the certificate of merger (the "Effective Time").
(c) From and after the Effective Time, the Surviving Corporation shall
possess all the assets, rights, privileges, powers and franchises and be
subject to all of the liabilities, restrictions, disabilities and duties of
the Company and Merger Subsidiary, all as provided under Delaware Law.
Section 1.02 Conversion of Shares. At the Effective Time:
(a) (i) each outstanding share of common stock, $.01 par value per share
(the "Shares"), of the Company and (ii) each share of series 1996
convertible preferred stock, $.01 par value per share (the "Company
Preferred Shares"), of the Company held by the Company as treasury stock or
owned by RHCI or any subsidiary of RHCI immediately prior to the Effective
Time shall be cancelled, and no payment shall be made with respect thereto;
(b) each share of common stock, $.01 par value per share, of Merger
Subsidiary outstanding immediately prior to the Effective Time shall be
converted into and become one share of common stock, $.01 par value per
share, of the Surviving Corporation with the same rights, powers and
privileges as the shares so converted and shall constitute the only
outstanding shares of capital stock of the Surviving Corporation;
(c) each Share outstanding immediately prior to the Effective Time shall,
except as otherwise provided in Section 1.02(a) or as provided in Section
1.07 with respect to Shares as to which appraisal rights have
A-1
<PAGE>
been exercised, be converted into the right to receive one-third ( 1/3)(the
"Conversion Number") of a fully paid and nonassessable share of RHCI's
common stock, $.01 par value per share (the "RHCI Common Stock"), including
Rights (as hereafter defined) in respect thereof under the Rights Plan (as
hereafter defined); and
(d) each Company Preferred Share outstanding immediately prior to the
Effective Time shall, except as otherwise provided in Section 1.02(a) or as
provided in Section 1.07 with respect to Company Preferred Shares as to
which appraisal rights have been exercised, be converted into the right to
receive one (1) (the "Preferred Conversion Number") fully paid and
nonassessable share of RHCI's Class B Preferred Stock, Series 1996, $1.00
par value per share having the rights and preferences set forth in Section
8.03(iii) hereof (the "RHCI Series 1996 Preferred Stock").
Section 1.03 Surrender and Payment. (a) Prior to the Effective Time, RHCI
shall appoint an agent reasonably acceptable to the Company (which may be
First Union National Bank of North Carolina ("First Union of North Carolina"))
(the "Exchange Agent") for the purpose of exchanging certificates representing
Shares and Company Preferred Shares. As of the Effective Time, RHCI shall
deposit with the Exchange Agent for the benefit of the holders of Shares and
Company Preferred Shares, as the case may be, for exchange in accordance with
this Section 1.03, through the Exchange Agent, (i) certificates representing
the shares of RHCI Common Stock issuable pursuant to Section 1.02 in exchange
for outstanding Shares and (ii) certificates representing the shares of RHCI
Series 1996 Preferred Stock issuable pursuant to Section 1.02 in exchange for
outstanding Company Preferred Shares. Promptly after the Effective Time, RHCI
will send, or will cause the Exchange Agent to send, to each holder of Shares
and Company Preferred Shares, as the case may be, at the Effective Time a
letter of transmittal for use in such exchange (which shall specify that the
delivery shall be effected, and risk of loss and title shall pass, only upon
proper delivery of the certificates representing Shares or Company Preferred
Shares, as the case may be, to the Exchange Agent).
(b) (i) Each holder of Shares that have been converted into a right to
receive RHCI Common Stock, upon surrender to the Exchange Agent of a
certificate or certificates representing such Shares, together with a properly
completed letter of transmittal covering such Shares, will be entitled to
receive in exchange therefor (1) that number of whole shares of RHCI Common
Stock which such holder has the right to receive pursuant to Section 1.02, and
(2) cash in lieu of fractional shares of RHCI Common Stock which such holder
has the right to receive pursuant to Section 1.06, and the certificate or
certificates for Shares so surrendered shall be cancelled. Until so
surrendered, each such certificate shall, after the Effective Time, represent
for all purposes, only the right to receive upon such surrender the
certificate representing shares of RHCI Common Stock and cash in lieu of any
fractional shares of RHCI Common Stock as contemplated by this Section 1.03
and Section 1.06.
(ii) Each holder of Company Preferred Shares that have been converted into a
right to receive RHCI Series 1996 Preferred Stock, upon surrender to the
Exchange Agent of a certificate or certificates representing such Company
Preferred Shares, together with a properly completed letter of transmittal
covering such Company Preferred Shares, will be entitled to receive in
exchange therefor that number of whole shares of RHCI Series 1996 Preferred
Stock which such holder has the right to receive pursuant to Section 1.02, and
the certificate or certificates for Company Preferred Shares so surrendered
shall be cancelled. Until so surrendered, each such certificate shall, after
the Effective Time, represent for all purposes, only the right to receive upon
such surrender the certificate representing shares of RHCI Series 1996
Preferred Stock as contemplated by this Section 1.03.
(c) If any shares of RHCI Common Stock or RHCI Series 1996 Preferred Stock,
as the case may be, are to be issued to a Person other than the registered
holder of the Shares or the Company Preferred Shares, respectively,
represented by the certificate or certificates surrendered in exchange
therefor, it shall be a condition to such issuance that the certificate or
certificates so surrendered shall be properly endorsed or otherwise be in
proper form for transfer and that the Person requesting such issuance shall
pay to the Exchange Agent any transfer or other taxes required as a result of
such issuance to a Person other than the registered holder of such Shares or
such Company Preferred Shares or establish to the satisfaction of the Exchange
Agent that such tax has been paid or is not payable. For purposes of this
Agreement, "Person" means an individual, a corporation, a partnership, an
association, a trust or any other entity or organization, including a
government or political subdivision or any agency or instrumentality thereof.
A-2
<PAGE>
(d) After the Effective Time, there shall be no further registration of
transfers of Shares or Company Preferred Shares. If, after the Effective Time,
certificates representing Shares or Company Preferred Shares are presented to
the Surviving Corporation, they shall be cancelled and exchanged as provided
for, and in accordance with the procedures set forth, in this Article I.
(e) Any shares of RHCI Common Stock or RHCI Series 1996 Preferred Stock made
available to the Exchange Agent pursuant to Section 1.03(a) that remain
unclaimed by the holders of Shares or Company Preferred Shares, as the case
may be, six months after the Effective Time shall be returned to RHCI, upon
demand, and any such holder who has not exchanged his Shares or Company
Preferred Shares, as the case may be, in accordance with this Section prior to
that time shall thereafter look only to RHCI to exchange such Shares or such
Company Preferred Shares. Notwithstanding the foregoing, RHCI shall not be
liable to any holder of Shares or Company Preferred Shares, as the case may
be, for any amount paid, or any shares of RHCI Common Stock or RHCI Series
1996 Preferred Stock delivered, to a public official pursuant to applicable
abandoned property laws. Any shares of RHCI Common Stock or RHCI Series 1996
Preferred Stock or other amounts remaining unclaimed by holders of Shares or
Company Preferred Shares, as the case may be, two years after the Effective
Time (or such earlier date immediately prior to such time as such amounts
would otherwise escheat to or become property of any governmental entity)
shall, to the extent permitted by applicable law, become the property of RHCI
free and clear of any claims or interest of any Person previously entitled
thereto.
(f) No dividends or other distributions on shares of RHCI Common Stock or
RHCI Series 1996 Preferred Stock shall be paid to the holder of any
unsurrendered certificates representing Shares or Company Preferred Shares, as
the case may be, until such certificates are surrendered as provided in this
Section. Upon such surrender, there shall be paid, without interest, to the
person in whose name the certificates representing the shares of RHCI Common
Stock or RHCI Series 1996 Preferred Stock, as the case may be, into which such
shares were converted are registered, all dividends and other distributions
paid in respect of such RHCI Common Stock or RHCI Series 1996 Preferred Stock,
as the case may be, on a date subsequent to, and in respect of a record date
after, the Effective Time.
(g) Any shares of RHCI Common Stock or RHCI Series 1996 Preferred Stock made
available to the Exchange Agent pursuant to Section 1.03(a) to be exchanged
for Shares or Company Preferred Shares, as the case may be, for which
appraisal rights have been perfected shall be returned to RHCI, upon demand.
Section 1.04 Stock Options, Warrants and Restricted Stock. (a) At the
Effective Time, each outstanding option to purchase Shares (a "Company
Option"), whether or not exercisable, and whether or not vested, and each
outstanding warrant to purchase Shares (a "Company Warrant") shall become an
option or warrant to purchase the number of shares of RHCI Common Stock equal
to the number of Shares that could have been purchased under such Company
Option or Company Warrant multiplied by the Conversion Number, at a price per
share of RHCI Common Stock equal to the option exercise price of such Company
Option divided by the Conversion Number or the price per share of RHCI Common
Stock equal to the warrant exercise price of such Company Warrant divided by
the Conversion Number (a "Substitute Security"). No fractional shares of RHCI
Common Stock shall be the subject of or issued in connection with the exercise
of any such Substitute Securities; rather, the aggregate number of shares
which are the subject of and which are to be issued pursuant to any such
exercise of Substitute Securities shall be rounded up or down to the nearest
whole number. Each Substitute Security shall be subject to all of the other
terms and conditions of the original Company Option or original Company
Warrant to which it relates, including the vesting schedule and conditions to
the exercisability thereof.
(b) At the Effective Time, each Share subject to transfer restrictions or
repurchase rights (the "Restricted Stock") shall upon conversion into the
Conversion Number of shares of RHCI Common Stock be subject to the same terms
and conditions, including such transfer restrictions or repurchase rights, as
the Restricted Stock.
(c) Prior to the Effective Time, (i) the Company shall use its best efforts
to obtain any consents from holders of Company Options granted under the
Company's stock option or compensation plans or arrangements or
A-3
<PAGE>
holders of the Restricted Stock, as the case may be, and (ii) the Company and
RHCI shall make any amendments to the terms of such stock option award or plan
or compensation plans or arrangements or other applicable agreements
(including using their respective best efforts to obtain any necessary
stockholder consents or approvals in connection therewith) that, in the case
of either clauses (i) or (ii), are necessary to give effect to the
transactions contemplated by Section 1.04(a) and (b).
Section 1.05 Adjustments. If at any time during the period between the date
of this Agreement and the Effective Time, any change in the outstanding shares
of RHCI Common Stock or RHCI Series 1996 Preferred Stock shall occur,
including by reason of any reclassification, recapitalization, stock split or
combination, exchange or readjustment of shares, or any stock dividend thereon
with a record date during such period, the Conversion Number or the Preferred
Conversion Number, as the case may be, shall be appropriately adjusted.
Section 1.06 Fractional Shares. (a) No fractional shares of RHCI Common
Stock shall be issued in the Merger. All fractional shares of RHCI Common
Stock that a holder of Shares would otherwise be entitled to receive as a
result of the Merger shall be aggregated and if a fractional share results
from such aggregation, such holder shall be entitled to receive, in lieu
thereof, an amount in cash determined by multiplying the average of the daily
closing sale price per share of RHCI Common Stock on the NASDAQ National
Market System for the ten trading days next preceding the Effective Time by
the fraction of a share of RHCI Common Stock to which such holder would
otherwise have been entitled. Alternatively, RHCI shall have the option of
instructing the Exchange Agent to aggregate all fractional shares of RHCI
Common Stock, sell such shares in the public market and distribute to holders
of Shares a pro rata portion of the proceeds of such sale. No such cash in
lieu of fractional shares of RHCI Common Stock shall be paid to any holder of
Shares until certificates representing such Shares are surrendered and
exchanged in accordance with Section 1.03.
(b) No fractional shares of RHCI Series 1996 Preferred Stock shall be issued
in the Merger. Each holder of Company Preferred Shares who would by virtue of
this Article I be entitled to receive as a result of the Merger an aggregate
number of shares of RHCI Series 1996 Preferred Stock comprising a fractional
share, will have the right to receive an aggregate number of shares of RHCI
Series 1996 Preferred Stock rounded up or down to the nearest whole share of
RHCI Series 1996 Preferred Stock.
Section 1.07 Dissenting Shares. Notwithstanding Section 1.02, Shares and
Company Preferred Shares outstanding immediately prior to the Effective Time
and held by a holder who has not voted in favor of the Merger or consented
thereto in writing and who has demanded appraisal for such Shares or Company
Preferred Shares, as the case may be, in accordance with Delaware Law shall
not be converted into a right to receive shares of RHCI Common Stock (or cash
in lieu of any fractional shares thereof) or RHCI Series 1996 Preferred Stock,
as the case may be, unless such holder fails to perfect or withdraws or
otherwise loses his right to appraisal. If after the Effective Time such
holder fails to perfect or withdraws or loses his right to appraisal, such
Shares or Company Preferred Shares, as the case may be, shall be treated as if
they had been converted as of the Effective Time into a right to receive
shares of RHCI Common Stock (and cash in lieu of any fractional shares
thereof) or RHCI Series 1996 Preferred Stock, as the case may be. The Company
shall give RHCI prompt notice of any demands received by the Company for
appraisal of Shares or Company Preferred Shares, and RHCI shall have the right
to participate in all negotiations and proceedings with respect to such
demands. The Company shall not, except with the prior written consent of RHCI,
make any payment with respect to, or settle or offer to settle, any such
demands.
A-4
<PAGE>
ARTICLE II.
The Surviving Corporation
Section 2.01 Certificate of Incorporation. The certificate of incorporation
of Merger Subsidiary in effect at the Effective Time shall be the certificate
of incorporation of the Surviving Corporation until amended in accordance with
applicable law.
Section 2.02 Bylaws. The bylaws of Merger Subsidiary in effect at the
Effective Time shall be the bylaws of the Surviving Corporation until amended
in accordance with applicable law.
Section 2.03 Directors and Officers. From and after the Effective Time,
until successors are duly elected or appointed and qualified in accordance
with applicable law, (i) the directors of Merger Subsidiary at the Effective
Time shall be the directors of the Surviving Corporation, and (ii) the
officers of the Company at the Effective Time shall be the officers of the
Surviving Corporation.
ARTICLE III.
Representations and Warranties of the Company
The Company represents and warrants to RHCI that:
Section 3.01 Corporate Existence and Power. The Company is a corporation
duly incorporated, validly existing and in good standing under the laws of the
State of Delaware, and has all corporate powers and all governmental licenses,
permits, authorizations, consents and approvals required to carry on its
business as now conducted except where the failure to do so would not have or
reasonably be expected to have, individually or in the aggregate, a material
adverse effect on the condition (financial or otherwise), business, assets or
results of operations of the Company and its Subsidiaries (as defined in
Section 3.06(a) hereof) taken as a whole (a "Company Material Adverse
Effect"). The Company is duly qualified to do business as a foreign
corporation and is in good standing in each jurisdiction where the character
of the property owned or leased by it or the nature of its activities makes
such qualification necessary, except for those jurisdictions where the failure
to be so qualified would not have or reasonably be expected to have,
individually or in the aggregate, a Company Material Adverse Effect. The
Company has heretofore delivered to RHCI true and complete copies of the
Company's certificate of incorporation and bylaws as currently in effect.
Section 3.02 Corporate Authorization. The execution, delivery and
performance by the Company of this Agreement and the consummation of the
Merger by the Company are within the Company's corporate powers and, except
for any required approval by the Company's stockholders in connection with the
consummation of the Merger, have been duly authorized by all necessary
corporate action. This Agreement constitutes a valid and binding agreement of
the Company.
Section 3.03 Governmental Authorization. The execution, delivery and
performance by the Company of this Agreement and the consummation of the
Merger by the Company require no action by or in respect of, or filing with,
any governmental body, agency, official or authority other than (i) the filing
of a certificate of merger in accordance with Delaware Law and (ii) compliance
with applicable requirements of the Hart-Scott-Rodino Antitrust Improvements
Act of 1976 (the "HSR Act") and the Securities Exchange Act of 1934 and the
rules and regulations promulgated thereunder (the "Exchange Act"), except
where the failure of any such action to be taken or filing to be made would
not have or reasonably be expected to have, individually or in the aggregate,
a Company Material Adverse Effect or prevent consummation of the transactions
contemplated hereby.
Section 3.04 Non-Contravention. Except as disclosed on Exhibit 3.04 to the
Company Disclosure Schedule delivered by the Company to RHCI simultaneously
with the execution and delivery hereof (the "Company Disclosure Schedule"),
the execution, delivery and performance by the Company of this Agreement
A-5
<PAGE>
and the consummation of the Merger by the Company do not and will not (i)
contravene or conflict with the certificate of incorporation or bylaws of the
Company, (ii) assuming compliance with the matters referred to in Section
3.03, contravene or conflict with or constitute a violation of any provision
of any law, regulation, judgment, injunction, order or decree binding upon or
applicable to the Company or any of its Subsidiaries, (iii) constitute a
default under or give rise to a right of termination, cancellation or
acceleration of any right or obligation of the Company or any of its
Subsidiaries or to a loss of any benefit to which the Company or any of its
Subsidiaries is entitled under any provision of any material agreement or
other instrument binding upon the Company or any of its Subsidiaries or any
license, franchise, permit or other similar authorization held by the Company
or any of its Subsidiaries, or (iv) result in the creation or imposition of
any Lien on any material asset of the Company or any of its Subsidiaries,
except for any occurrences or results referred to in clauses (ii), (iii) and
(iv) which would not have or reasonably be expected to have, individually or
in the aggregate, a Company Material Adverse Effect or prevent consummation of
the transactions contemplated hereby. For purposes of this Agreement, "Lien"
means, with respect to any asset, any mortgage, lien, pledge, charge, security
interest or encumbrance or adverse claim of any kind in respect of such asset.
Section 3.05 Capitalization. The authorized capital stock of the Company
consists of 20,000,000 Shares and 1,000,000 shares of preferred stock, $.01
par value per share, of which 100,000 shares have been designated as Company
Preferred Shares. As of September 15, 1996, there were outstanding (w)
6,397,304 Shares, (x) 100,000 Company Preferred Shares (which such shares were
then convertible into 3,000,000 Shares), (y) Company Options to purchase an
aggregate of 1,170,750 Shares and (z) Company Warrants to purchase an
aggregate of 640,000 Shares. All outstanding shares of capital stock of the
Company have been duly authorized and validly issued and are fully paid and
nonassessable and free of preemptive rights. Except as set forth in this
Section and except for changes since September 15, 1996 resulting from the
exercise of Company Options, Company Warrants or other obligations to issue
Shares referred to above outstanding on such date, there are outstanding as of
the date hereof (i) no shares of capital stock or other voting securities of
the Company, (ii) no securities of the Company convertible into or
exchangeable for shares of capital stock or voting securities of the Company,
and (iii) no options, warrants or other rights to acquire from the Company,
and no obligation of the Company to issue, any capital stock, voting
securities or securities convertible into or exchangeable for capital stock or
voting securities of the Company (the items in clauses (i), (ii) and (iii)
being referred to collectively as the "Company Securities"). There are no
outstanding obligations of the Company or any of its Subsidiaries to
repurchase, redeem or otherwise acquire any Company Securities.
Section 3.06 Subsidiaries. (a) Each Subsidiary of the Company is an entity
duly organized, validly existing and in good standing under the laws of its
jurisdiction of organization and has all corporate, partnership or company
powers, as applicable, and, to the Company's knowledge, all material
governmental licenses, permits, authorizations, consents and approvals
required to carry on its business as now conducted. Each Subsidiary of the
Company is duly qualified to do business as a foreign entity and is in good
standing in each jurisdiction where the character of the property owned or
leased by it or the nature of its activities makes such qualification
necessary, except where failure to be so would not have or reasonably be
expected to have, individually or in the aggregate, a Company Material Adverse
Effect. For purposes of this Agreement, "Subsidiary" of any Person means (i)
any corporation or other entity of which securities or other ownership
interests having ordinary voting power to elect a majority of the board of
directors or other persons performing similar functions are directly or
indirectly owned by such Person and (ii) any partnership of which such Person
is a general partner.
(b) Except (i) in the case of certain Subsidiaries, the stock of which is
pledged to First Union National Bank of Florida ("First Union of Florida") in
connection with the transactions contemplated by the Loan and Security
Agreement dated as of April 6, 1995 between FPM Behavioral Health, Inc. and
First Union of Florida, as amended (the "FPM Loan Agreement"), (ii) in the
case of a certain Subsidiary, the stock of which is pledged to Phoenix South
Community Mental Health Center, Inc. pursuant to the Stock Pledge Agreement
dated June 30, 1994, and (iii) for certain limitations and restrictions set
forth in the FPM Loan Agreement, all of the outstanding capital stock or other
ownership interests, as applicable, of each Subsidiary of the Company which is
owned by
A-6
<PAGE>
the Company, directly or indirectly, is owned free and clear of any Lien and
free of any other limitation or restriction (including any restriction on the
right to vote, sell or otherwise dispose of such capital stock or other
ownership interests, as applicable). There are no outstanding (i) securities
of the Company or any of its Subsidiaries convertible into or exchangeable for
shares of capital stock or other voting securities or ownership interests in
any Subsidiary of the Company, or (ii) options or other rights to acquire from
the Company or any of its Subsidiaries, and no other obligation of the Company
or any of its Subsidiaries to issue, any capital stock, voting securities or
other ownership interests in, or any securities convertible into or
exchangeable for any capital stock, voting securities or ownership interests
in, any Subsidiary of the Company (the items in clauses (i) and (ii) being
referred to collectively as the "Company Subsidiary Securities"). There are no
outstanding obligations of the Company or any of its Subsidiaries to
repurchase, redeem or otherwise acquire any outstanding Company Subsidiary
Securities.
Section 3.07 EC Filings. (a) The Company has delivered or made available to
RHCI (i) its annual report on Form 10-KSB for the fiscal year ended June 30,
1996 (the "Company 10-K"), (ii) its proxy statement relating to the annual
meeting of stockholders held on November 10, 1995, and (iii) all of its other
reports, statements, schedules and registration statements filed by the
Company with the Securities and Exchange Commission (the "SEC") since June 30,
1996, and in each case all materials incorporated therein by reference or
filed therewith as exhibits (the filings referred to in clauses (i) through
(iii) above and the materials referred to above, in each case delivered or
made available to RHCI prior to the date hereof, being hereinafter referred to
as the "Company SEC Filings").
(b) As of its filing date, each such report or statement filed pursuant to
the Exchange Act complied as to form in all material respects with the
requirements of the Exchange Act and did not contain any untrue statement of a
material fact or omit to state any material fact necessary in order to make
the statements made therein, in the light of the circumstances under which
they were made, not misleading.
(c) Each such registration statement and any amendment thereto filed
pursuant to the Securities Act of 1933 and the rules and regulations
promulgated thereunder (the "Securities Act"), as of the date such statement
or amendment became effective, complied as to form in all material respects
with the Securities Act and did not contain any untrue statement of a material
fact or omit to state any material fact required to be stated therein or
necessary to make the statements therein not misleading.
Section 3.08 Financial Statements. The audited consolidated financial
statements of the Company and its consolidated Subsidiaries included in the
Company 10-K referred to in Section 3.07 fairly present in all material
respects, in conformity with generally accepted accounting principles applied
on a consistent basis (except as may be indicated in the notes thereto), the
consolidated financial position of the Company and its consolidated
Subsidiaries as of the dates thereof and their consolidated results of
operations and cash flows for the periods then ended.
Section 3.09 Joint Proxy Statement/Prospectus; Registration Statement. None
of the information supplied by the Company for inclusion in (a) the joint
proxy statement relating to the meetings of the Company's and RHCI's
stockholders to be held in connection with the Merger (also constituting the
prospectus in respect of RHCI Common Stock to be exchanged for Shares in the
Merger) (the "Joint Proxy Statement/Prospectus"), to be filed by the Company
and RHCI with the SEC, and any amendments or supplements thereto, or (b) the
Registration Statement on Form S-4 (the "Registration Statement") to be filed
by RHCI with the SEC in connection with the Merger, and any amendments or
supplements thereto, will, at the respective times such documents are filed,
and, in the case of the Joint Proxy Statement/Prospectus, at the time the
Joint Proxy Statement/Prospectus or any amendment or supplement thereto is
first mailed to stockholders of the Company and at the time such stockholders
vote on adoption of this Agreement and at the Effective Time, and, in the case
of the Registration Statement, when it becomes effective under the Securities
Act, contain any untrue statement of a material fact or omit to state any
material fact necessary in order to make the statements made therein, in the
light of the circumstances under which they were made, not misleading. All
documents that the Company is responsible for filing with the SEC in
connection with the Merger will comply as to form in all material respects
with the applicable provisions of the Exchange Act, the Securities Act and
state securities laws.
A-7
<PAGE>
Section 3.10 Absence of Certain Changes. Except as contemplated hereby or as
described or provided for in any Company SEC Filing or as disclosed on Exhibit
3.10 to the Company Disclosure Schedule, since June 30, 1996, the Company and
its Subsidiaries have conducted their business in all material respects in the
ordinary course consistent with past practices and there has not been:
(a) any event, occurrence or development or state of circumstances or
facts, which affects or relates to the Company or any of its Subsidiaries
or the industry in which they operate, which has had or would reasonably be
expected to have a Company Material Adverse Effect;
(b) any declaration, setting aside or payment of any dividend or other
distribution with respect to any shares of capital stock of the Company, or
any repurchase, redemption or other acquisition by the Company or any of
its Subsidiaries of any outstanding shares of capital stock or other
securities of, or other ownership interests in, the Company or any of its
Subsidiaries;
(c) any amendment of any material term of any outstanding security of the
Company or any of its Subsidiaries;
(d) any incurrence, assumption or guarantee by the Company or any of its
Subsidiaries of any indebtedness for borrowed money other than in the
ordinary course of business and in amounts and on terms consistent with
past practices;
(e) any creation or assumption by the Company or any of its Subsidiaries
of any Lien on any material asset other than in the ordinary course of
business consistent with past practices;
(f) any making of any loan, advance or capital contributions to or
investment in any Person other than loans, advances or capital
contributions to or investments in wholly owned Subsidiaries made in the
ordinary course of business consistent with past practices;
(g) any change in any method of accounting or accounting practice by the
Company or any of its Subsidiaries, except for any such change required by
reason of a concurrent change in generally accepted accounting principles
or to conform a Subsidiary's accounting policies and practices to those of
the Company;
(h) except for contractual obligations existing on the date hereof, other
than in the ordinary course of business consistent with past practices, any
(i) grant of any severance or termination pay to any director, officer or
employee of the Company, (ii) entering into of any employment, deferred
compensation or other similar agreement (or any amendment to any such
existing agreement) with any director, officer or employee of the Company
or any of its Subsidiaries except in the ordinary course of business
consistent with past practice with persons who are not executive officers,
(iii) increase in benefits payable under any existing severance or
termination pay policies or employment agreements, (iv) increase in
compensation, bonus or other benefits payable to directors, officers or
employees of the Company or any of its Subsidiaries, other than in the
ordinary course of business consistent with past practices or (v)
acceleration of the exercisability or vesting of any Company Options or
Restricted Stock, as the case may be;
(i) any material labor dispute, other than individual grievances, or any
activity or proceeding by a labor union or representative thereof to
organize any employees of the Company or any of its Subsidiaries, which
employees were not subject to a collective bargaining agreement at June 30,
1996 or any lockouts, strikes, slowdowns, work stoppages or threats thereof
by or with respect to such employees;
(j) any actual or, to the Company's knowledge, threatened dispute between
the Company or any of its Subsidiaries and any vendor or customer, other
than disputes which would not have or reasonably be expected to have,
individually or in the aggregate, a Company Material Adverse Effect;
(k) any actual or, to the Company's knowledge, threatened suspension or
cancellation of any governmental license, permit, authorization, consent or
approval, other than those the suspension or cancellation of which would
not have or reasonably be expected to have, individually or in the
aggregate, a Company Material Adverse Effect; or
A-8
<PAGE>
(l) to the Company's knowledge, any change in any federal or state law,
rule or regulation applicable to the Company or any of its Subsidiaries, or
in the interpretation or application thereof, which individually or in the
aggregate has had or would reasonably be expected to have a Company
Material Adverse Effect.
Section 3.11 No Undisclosed Material Liabilities. Except as described or
provided for in any Company SEC Filing, there are no liabilities of the
Company or any of its Subsidiaries of any kind whatsoever, whether accrued,
contingent, absolute, determined, determinable or otherwise, and there is no
existing condition, situation or set of circumstances which, individually or
in the aggregate, have or would reasonably be expected to have a Company
Material Adverse Effect, other than:
(i) liabilities disclosed or provided for in the Company's consolidated
balance sheet dated as of June 30, 1996 included in the Company 10-K;
(ii) liabilities incurred in the ordinary course of business consistent
with past practices since June 30, 1996, which in the aggregate are not
material to the Company and its Subsidiaries, taken as a whole; and
(iii) liabilities under this Agreement.
Section 3.12 Litigation. Except as described or provided for in any Company
SEC Filing or as disclosed on Exhibit 3.12 to the Company Disclosure Schedule,
there is no action, suit, investigation or proceeding pending against, or to
the knowledge of the Company, threatened against the Company or any of its
Subsidiaries or any of their respective properties before any court or
arbitrator or any governmental body, agency or official which would have or
reasonably be expected to have, individually or in the aggregate, a Company
Material Adverse Effect.
Section 3.13 Taxes. (i) The Company and its Subsidiaries have timely filed
all tax returns, statements, reports and forms required to be filed with any
tax authority when due in accordance with all applicable laws except where the
failure to do so would not have or reasonably be expected to have,
individually or in the aggregate, a Company Material Adverse Effect; (ii) no
deficiency in payment of any taxes for any period has been asserted by any
taxing authority which remains unsettled at the date hereof except for
deficiencies which would not have or reasonably be expected to have,
individually or in the aggregate, a Company Material Adverse Effect; and (iii)
the Company is not liable and it is not reasonably likely that the Company
will be liable for any taxes not heretofore paid or reserved against in the
Company June 30, 1996 financial statements except those which would not have
or reasonably be expected to have, individually or in the aggregate, a Company
Material Adverse Effect.
For purposes of this Agreement, "tax" or "taxes" means all net income, gross
income, gross receipts, sales, use, ad valorem, transfer, accumulated
earnings, personal holding company, excess profits, franchise, profits,
license, withholding, payroll, employment, excise, severance, stamp,
occupation, premium, property or windfall profits taxes, customs duties or
other taxes, fees, assessments or charges of any kind whatsoever, together
with any interest and any penalties, additions to tax or additional amounts
imposed by any taxing authority (domestic or foreign).
Section 3.14 Tax Free Merger. (a) At the Effective Time, the Surviving
Corporation will hold at least 90 percent of the fair market value of the net
assets, and at least 70 percent of the fair market value of the gross assets,
held by the Company prior to the Merger. For purposes of this representation,
amounts used by the Company to pay reorganization expenses and all
redemptions, distributions and payments, in cash or property, made by the
Company in connection with the Merger shall be included as assets of the
Company prior to the Merger.
(b) In the Merger, Shares and Company Preferred Shares representing control
of the Company, as defined in Section 368(c)(1) of the Internal Revenue Code
of 1986, as amended (the "Code"), will be exchanged solely for voting stock of
RHCI. For purposes of this representation, Shares and Company Preferred Shares
exchanged for cash or other property originating with RHCI will be treated as
outstanding Shares and Company Preferred Shares on the date of the Merger.
A-9
<PAGE>
(c) There is no intercorporate indebtedness existing between RHCI and the
Company or between Merger Subsidiary and the Company that was issued,
acquired, or will be settled, in any case at a discount.
(d) Except as provided in Section 10.04 of this Agreement, the Company and
the stockholders of the Company will pay their respective expenses, if any,
incurred in connection with the Merger.
(e) The Company is not an investment company as such term is defined in
Section 368(a)(2)(F)(iii) and (iv) of the Code.
(f) The Company is not under the jurisdiction of a court in a Title 11 or
similar case within the meaning of Section 368(a)(3)(A) of the Code.
(g) On the Effective Date, the fair market value of the assets of the
Company will exceed the sum of the Company's liabilities plus the amount of
liabilities, if any, to which the assets are subject.
(h) The Company has not knowingly taken, and will not knowingly take, any
action that would jeopardize the qualification of the Merger as a
reorganization within the meaning of Section 368(a) of the Code.
Section 3.15 ERISA. (a) "Employee Plans" shall mean each "employee benefit
plan", as defined in Section 3(3) of the Employee Retirement Income Security
Act of 1974, as amended ("ERISA"), which (i) is subject to any provision of
ERISA and (ii) is maintained, administered or contributed to by the Company or
any affiliate (as defined below) and covers any employee or former employee of
the Company or any affiliate or under which the Company or any affiliate has
any liability. Copies of such plans (and, if applicable, related trust
agreements) and all amendments thereto and written interpretations thereof
will be promptly furnished to RHCI after the date of this Agreement. For
purposes of this Section and Section 4.15, "affiliate" of any Person means any
other Person which, together with such Person, would be treated as a single
employer under Section 414 of the Code. No Employee Plan individually or
collectively constitutes a "defined benefit plan" as defined in Section 3(35)
of ERISA.
(b) No Employee Plan constitutes a "multiemployer plan", as defined in
Section 3(37) of ERISA, and no Employee Plan is maintained in connection with
any trust described in Section 501(c)(9) of the Code. No Employee Plan is
subject to Title IV of ERISA. Neither the Company nor any of its affiliates
has incurred, nor has reason to expect to incur, any liability under Title IV
of ERISA arising in connection with the termination of, or complete or partial
withdrawal from, any plan previously covered by Title IV of ERISA that would
have, or reasonably be expected to have, individually or in the aggregate, a
Company Material Adverse Effect. Nothing done or omitted to be done and no
transaction or holding of any asset under or in connection with any Employee
Plan has or will make the Company or any of its Subsidiaries or any officer or
director of the Company or any of its Subsidiaries subject to any liability
under Title I of ERISA or liable for any tax pursuant to Section 4975 of the
Code that would have, or reasonably be expected to have, individually or in
the aggregate, a Company Material Adverse Effect.
(c) Except as disclosed on Exhibit 3.15 to the Company Disclosure Schedule
or except to the extent it would not have, or reasonably be expected to have,
individually or in the aggregate, a Company Material Adverse Effect, (i) each
Employee Plan which is intended to be qualified under Section 401(a) of the
Code is so qualified and has been so qualified during the period from its
adoption to date, and each trust forming a part thereof is exempt from tax
pursuant to Section 501(a) of the Code and (ii) each Employee Plan has been
maintained in compliance with its terms and with the requirements prescribed
by any and all statutes, orders, final rules and final regulations, including
but not limited to ERISA and the Code, which are applicable to such Employee
Plan.
(d) Except to the extent it would not have, or reasonably be expected to
have, individually or in the aggregate, a Company Material Adverse Effect,
there is no contract, agreement, plan or arrangement covering any employee or
former employee of the Company or any affiliate that, individually or
collectively, could give
A-10
<PAGE>
rise to the payment of any amount that would not be deductible pursuant to the
terms of Sections 162(a)(1) or 280G of the Code.
(e) "Benefit Arrangement" shall mean each employment, severance or other
similar contract, arrangement or policy and each plan or arrangement (written
or oral) providing for compensation, bonus, profit-sharing, stock option, or
other stock related rights or other forms of incentive or deferred
compensation, vacation benefits, insurance coverage (including any self-
insured arrangements), health or medical benefits, disability benefits,
workers' compensation, supplemental unemployment benefits, severance benefits
and post-employment or retirement benefits (including compensation, health or
medical insurance or other benefits) which (i) is not an Employee Plan, (ii)
is entered into, maintained or contributed to, as the case may be, by the
Company or any of its affiliates and (iii) covers any employee or former
employee of the Company or any of its affiliates. Copies or descriptions of
the Benefit Arrangements will be promptly furnished to RHCI. The Company will
promptly furnish to RHCI a schedule showing all outstanding Company Options,
including the applicable exercise price with respect thereto. Except to the
extent that it would not have, or reasonably be expected to have, individually
or in the aggregate, a Company Material Adverse Effect, each Benefit
Arrangement has been maintained in compliance with its terms and with the
requirements prescribed by any and all statutes, orders, rules and regulations
that are applicable to such Benefit Arrangement.
(f) Except to the extent that it would not have, or reasonably be expected
to have, individually or in the aggregate, a Company Material Adverse Effect,
the transactions contemplated hereby will not result in any liability for
severance pay to any employee or accelerate the exercisability or vesting of
any Company Options or Restricted Stock, as the case may be, nor will any
employee be entitled to any payment solely by reason of such transactions.
(g) The Company does not provide, nor has it made any current or past
commitment to provide, post-retirement health or medical benefits for retired
employees of the Company or its Subsidiaries, except as specifically required
under Section 4980B of the Code or Section 601 of ERISA. The Company has
substantially complied with the notice and continuation requirements of
Section 4980B of the Code and Section 601 of ERISA.
(h) Except as disclosed on Exhibit 3.15 to the Company Disclosure Schedule
and subject to the provisions of Section 3.10(h), there has been no amendment
to, written interpretation or announcement (whether or not written) by the
Company or any of its affiliates relating to, or change in employee
participation or coverage under, any Employee Plan or Benefit Arrangement
which in the aggregate would increase the per employee expense of maintaining
such Employee Plan or Benefit Arrangement above the level of the expense
incurred on a per employee basis in respect thereof for the fiscal year ended
on June 30, 1996 except to the extent, with respect to all employees, that
such increase results from premium increases in the normal course or as would
not have, or reasonably be expected to have, individually or in the aggregate,
a Company Material Adverse Effect.
Section 3.16 Compliance with Laws. Except as described or provided for in
any Company SEC Filing or as disclosed on Exhibit 3.16 to the Company
Disclosure Schedule, neither the Company nor any of its Subsidiaries is in
violation of, or has violated, any applicable provisions of any laws,
statutes, ordinances or regulations other than violations which would not, in
the aggregate, reasonably be expected to have a Company Material Adverse
Effect.
Section 3.17 Finders' Fees. Except for Dean Witter Reynolds, Inc. ("Dean
Witter"), there is no investment banker, broker, finder or other intermediary
which has been retained by or is authorized to act on behalf of the Company or
any of its Subsidiaries who might be entitled to any fee or commission in
connection with the transactions contemplated by this Agreement.
Section 3.18 Opinion of Financial Advisor. The Company has received the
opinion of Dean Witter to the effect that, as of the date of such opinion, the
Conversion Number and the Preferred Conversion Number is fair to the Company's
stockholders from a financial point of view, a copy of which opinion will be
delivered to RHCI.
A-11
<PAGE>
Section 3.19 Vote Required. Except as contemplated by this Agreement, the
affirmative vote of the holders of a majority of the outstanding (i) voting
power of the Shares and Company Preferred Shares, voting together as a single
class, and (ii) Company Preferred Shares, voting as a separate class, are the
only votes of the holders of any class or series of the Company's capital
stock necessary to approve this Agreement and the transactions contemplated
hereby.
Section 3.20 Medicare and Medicaid. The Company and its Subsidiaries have
complied in all material respects with all Medicare and Medicaid laws, rules
and regulations and have filed all returns, cost reports and other filings in
the manner prescribed, except where the failure to do so would not have or
reasonably be expected to have, individually or in the aggregate, a Company
Material Adverse Effect. All returns, cost reports and other filings made by
the Company and its Subsidiaries to Medicare, Medicaid or any other
governmental health or welfare related entity or any other third-party payor
are in all material respects true and complete, except where the failure to be
so would not have or reasonably be expected to have, individually or in the
aggregate, a Company Material Adverse Effect. No deficiency in any such
returns, cost reports and other filings, including deficiencies for late
filings, has been asserted or, to the Company's knowledge, threatened by any
federal or state agency or instrumentality or other provider reimbursement
entities relating to Medicare or Medicaid claims or third-party payor, and, to
the knowledge of the Company, there is no basis for any claims or requests for
reimbursement from any such agency, instrumentality, entity or third-party
payor except for any deficiencies which would not have or reasonably be
expected to have, individually or in the aggregate, a Company Material Adverse
Effect. Neither the Company nor any of its Subsidiaries has been subject to
any audit relating to fraudulent Medicare or Medicaid procedures or practices,
except for audits which would not have or reasonably be expected to have,
individually or in the aggregate, a Company Material Adverse Effect.
ARTICLE IV.
Representations and Warranties of RHCI
RHCI represents and warrants to the Company that:
Section 4.01 Corporate Existence and Power. Each of RHCI and Merger
Subsidiary is a corporation duly incorporated, validly existing and in good
standing under the laws of the State of Delaware and has all corporate powers
and all governmental licenses, permits, authorizations, consents and approvals
required to carry on its business as now conducted, except where the failure
to do so would not have or reasonably be expected to have, individually or in
the aggregate, a material adverse effect on the condition (financial or
otherwise), business, assets or results of operations of RHCI and its
Subsidiaries taken as a whole (a "RHCI Material Adverse Effect"). RHCI is duly
qualified to do business as a foreign corporation and is in good standing in
each jurisdiction where the character of the property owned or leased by it or
the nature of its activities makes such qualification necessary, except for
those jurisdictions where the failure to be so qualified would not have or
reasonably be expected to have, individually or in the aggregate, a RHCI
Material Adverse Effect. RHCI has heretofore delivered to the Company true and
complete copies of RHCI's certificate of incorporation and bylaws as currently
in effect. Since the date of its incorporation, Merger Subsidiary has not
engaged in any activities other than in connection with or as contemplated by
this Agreement.
Section 4.02 Corporate Authorization. The execution, delivery and
performance by RHCI and Merger Subsidiary of this Agreement and the
consummation of the Merger by Merger Subsidiary are within the corporate
powers of RHCI and Merger Subsidiary and have been duly authorized by all
necessary corporate action, except for any required approval by RHCI's
stockholders of the issuance of RHCI Common Stock and RHCI Series 1996
Preferred Stock in connection with the Merger. This Agreement constitutes a
valid and binding agreement of RHCI and Merger Subsidiary.
Section 4.03 Governmental Authorization. The execution, delivery and
performance by RHCI and Merger Subsidiary of this Agreement and the
consummation of the Merger by Merger Subsidiary require no
A-12
<PAGE>
action by or in respect of, or filing with, any governmental body, agency,
official or authority other than (i) the filing of a certificate of merger in
accordance with Delaware Law; (ii) compliance with any applicable requirements
of the HSR Act, the Exchange Act and the Securities Act; (iii) compliance with
the listing requirements of the National Association of Securities Dealers,
Inc. ("NASD"); and (iv) compliance with any applicable state securities or
Blue Sky laws, except where the failure of any such action to be taken or
filing to be made would not have or reasonably be expected to have,
individually or in the aggregate, a RHCI Material Adverse Effect or prevent
consummation of the transactions contemplated hereby.
Section 4.04 Non-Contravention. Except with respect to (x) the Credit
Agreement (the "RHCI Credit Agreement") dated as of May 15, 1993 among RHCI,
certain Subsidiaries of RHCI, Societe Generale, New York Branch, First Union
National Bank of North Carolina and Hibernia National Bank, as amended, and
(y) the Trust Indenture (the "RHCI Trust Indenture") dated as of March 31,
1990 among RHCI, certain Subsidiaries of RHCI, the Citizens and Southern
National Bank and Susan L. Adams, as amended, the execution, delivery and
performance by RHCI and Merger Subsidiary of this Agreement and the
consummation of the Merger by Merger Subsidiary do not and will not (i)
contravene or conflict with the certificate of incorporation or bylaws of RHCI
or Merger Subsidiary, (ii) assuming compliance with the matters referred to in
Section 4.03, contravene or conflict with or constitute a violation of any
provision of law, regulation, judgment, injunction, order or decree binding
upon or applicable to RHCI or any of its Subsidiaries, (iii) constitute a
default under or give rise to any right of termination, cancellation or
acceleration of any right or obligation of RHCI or any of its Subsidiaries or
to a loss of any benefit to which RHCI or any of its Subsidiaries is entitled
under any material agreement or other instrument binding upon RHCI or any of
its Subsidiaries or any license, franchise, permit or other similar
authorization held by RHCI or any of its Subsidiaries, or (iv) result in the
creation or imposition of any Lien on any material asset of RHCI or any of its
Subsidiaries, except for any occurrences or results referred to in clauses
(ii), (iii) and (iv) which would not have or reasonably be expected to have,
individually or in the aggregate, a RHCI Material Adverse Effect or prevent
consummation of the transactions contemplated hereby.
Section 4.05 Capitalization. The authorized capital stock of RHCI consists
of 20,000,000 shares of RHCI Common Stock, 800,000 shares of Class A Preferred
Stock, $1.00 par value per share (the "Class A Preferred Stock"), and
1,000,000 shares of Class B Preferred Stock, $1.00 par value per share, of
which 333,333 shares have been designated as Class B Preferred Stock, Series
1987, $1.00 par value per share (the "Class B Preferred Stock, Series 1987")
and 152,321 shares have been designated as the Class B Preferred Stock,
Series C, $1.00 par value per share (the "Series C Preferred Stock"). As of
September 15, 1996, there were outstanding (v) 8,306,726 shares of RHCI Common
Stock (with attached common share purchase rights (the "Rights") in accordance
with RHCI's Stockholder Rights Plan (the "Rights Plan") evidenced by the
Rights Agreement dated August 1, 1995, as amended, between RHCI and First
Union of North Carolina), (w) no shares of Class A Preferred Stock or Class B
Preferred Stock, Series 1987, (x) 142,486 shares of Series C Preferred Stock
(which such shares were then convertible into 1,424,860 shares of RHCI Common
Stock) (with attached Rights in accordance with the Rights Plan), (y) employee
and other stock options to purchase an aggregate of 1,967,411 shares of RHCI
Common Stock and (z) warrants to purchase an aggregate of 908,588 shares of
RHCI Common Stock. All outstanding shares of capital stock of RHCI have been
duly authorized and validly issued and are fully paid and nonassessable and
free of preemptive rights. Except as set forth in this Section, and except for
changes since September 15, 1996 resulting from the exercise of employee stock
options or other obligations to issue shares of RHCI Common Stock referred to
above outstanding on such date, there are outstanding as of the date hereof
(i) no shares of capital stock or other voting securities of RHCI, (ii) no
securities of RHCI convertible into or exchangeable for shares of capital
stock or voting securities of RHCI, and (iii) no options, warrants or other
rights to acquire from RHCI, and, no obligation of RHCI to issue, any capital
stock, voting securities or securities convertible into or exchangeable for
capital stock or voting securities of RHCI (the items in clauses (i), (ii) and
(iii) being referred to collectively as the "RHCI Securities"). There are no
outstanding obligations of RHCI or any of its Subsidiaries to repurchase,
redeem or otherwise acquire any RHCI Securities. The shares of RHCI Common
Stock and the shares of RHCI Series 1996 Preferred Stock to be exchanged for
Shares and Company Preferred Shares, respectively, in the Merger have been
duly authorized, except for any required approval by RHCI's stockholders of
the issuance of RHCI Common Stock and RHCI Series 1996
A-13
<PAGE>
Preferred Stock in connection with the Merger, and when issued and delivered
in accordance with the terms of this Agreement, will have been validly issued
and will be fully paid and nonassessable and the issuance thereof is not
subject to any preemptive or other similar right. The transactions
contemplated hereby will not by themselves result in the Rights under the
Rights Plan becoming exercisable.
Section 4.06 Subsidiaries. (a) Each Subsidiary of RHCI is an entity duly
organized, validly existing and in good standing under the laws of its
jurisdiction of organization, has all corporate, partnership or company
powers, as applicable, and, to RHCI's knowledge, all material governmental
licenses, authorizations, consents and approvals required to carry on its
business as now conducted. Each Subsidiary of RHCI is duly qualified to do
business as a foreign entity and is in good standing in each jurisdiction
where the character of the property owned or leased by it or the nature of its
activities makes such qualification necessary, except where failure to be
would not have or reasonably be expected to have, individually or in the
aggregate, a RHCI Material Adverse Effect.
(b) Except (i) for certain limitations and restrictions set forth in the
RHCI Credit Agreement and the RHCI Trust Indenture and (ii) in the case of
certain Subsidiaries of RHCI the stock of which is pledged pursuant to the
RHCI Credit Agreement and the RHCI Trust Indenture, all of the outstanding
capital stock or other ownership interests, as applicable, of each Subsidiary
of RHCI which is owned by RHCI, directly or indirectly, is owned free and
clear of any Lien and free of any other limitation or restriction (including
any restriction on the right to vote, sell or otherwise dispose of such
capital stock or other ownership interests, as applicable). There are no
outstanding (i) securities of RHCI or any of its Subsidiaries convertible into
or exchangeable for shares of capital stock or other voting securities or
ownership interests in any Subsidiary of RHCI, or (ii) options or other rights
to acquire from RHCI or any of its Subsidiaries, and no other obligation of
RHCI or any of its Subsidiaries to issue, any capital stock, voting securities
or other ownership interests in, or any securities convertible into or
exchangeable for any capital stock, voting securities or ownership interests
in, any Subsidiary of RHCI (the items in clauses (i) and (ii) being referred
to collectively as the "RHCI Subsidiary Securities"). Except as described or
provided for in any RHCI SEC Filing (as defined below) or as disclosed on
Exhibit 4.06 to the RHCI Disclosure Schedule delivered by RHCI to the Company
simultaneously with the execution and delivery hereof (the "RHCI Disclosure
Schedule"), there are no outstanding obligations of RHCI or any of its
Subsidiaries to repurchase, redeem or otherwise acquire any outstanding RHCI
Subsidiary Securities.
Section 4.07 SEC Filings. (a) RHCI has delivered or made available to the
Company (i) its annual report on Form 10-K for the fiscal year ended June 30,
1995 (the "RHCI 10-K"), (ii) its quarterly reports on Form 10-Q for its fiscal
quarters ended September 30, 1995, December 31, 1995 and March 31, 1996, (iii)
its current reports on Form 8-K dated August 2, 1995 and September 20, 1995,
(iv) its proxy statement relating to the annual meeting of stockholders held
on November 10, 1995, and (v) all of its other reports, statements, schedules
and registration statements filed by RHCI with the SEC since June 30, 1995,
and in each case all materials incorporated therein by reference or filed
therewith as exhibits (the filings referred to in clauses (i) through (v)
above and the materials referred to above, in each case delivered or made
available to the Company prior to the date hereof, being hereinafter referred
to as the "RHCI SEC Filings").
(b) As of its filing date, each such report or statement filed pursuant to
the Exchange Act complied as to form in all material respects with the
requirements of the Exchange Act and did not contain any untrue statement of a
material fact or omit to state any material fact necessary in order to make
the statements made therein, in the light of the circumstances under which
they were made, not misleading.
(c) Each such registration statement and any amendment thereto filed
pursuant to the Securities Act, as of the date such statement or amendment
became effective, complied as to form in all material respects with the
Securities Act and did not contain any untrue statement of a material fact or
omit to state any material fact required to be stated therein or necessary to
make the statements therein not misleading.
Section 4.08 Financial Statements. The audited consolidated financial
statements and unaudited consolidated interim financial statements of RHCI and
its consolidated Subsidiaries included in the RHCI 10-K
A-14
<PAGE>
and the quarterly reports on Form 10-Q referred to in Section 4.07 fairly
present in all material respects, in conformity with generally accepted
accounting principles applied on a consistent basis (except as may be
indicated in the notes thereto), the consolidated financial position of RHCI
and its consolidated Subsidiaries as of the dates thereof and their
consolidated results of operations and cash flows for the periods then ended
(subject, in the case of any unaudited interim financial statements, to normal
year-end adjustments, none of which, individually or in the aggregate, would
have a RHCI Material Adverse Effect).
Section 4.09 Joint Proxy Statement/Prospectus; Registration Statement. None
of the information supplied by RHCI for inclusion in (a) the Joint Proxy
Statement/Prospectus to be filed by the Company and RHCI with the SEC and any
amendments or supplements thereto, or (b) the Registration Statement to be
filed by RHCI with the SEC in connection with the Merger, and any amendments
or supplements thereto, will, at the respective times when such documents are
filed, and, in the case of the Joint Proxy Statement/Prospectus, at the time
the Joint Proxy Statement/Prospectus or any amendment or supplement thereto is
first mailed to stockholders of RHCI and at the time such stockholders vote on
adoption of this Agreement and at the Effective Time, and, in the case of the
Registration Statement, when it becomes effective under the Securities Act,
contain any untrue statement of a material fact or omit to state any material
fact necessary in order to make the statements made therein, in the light of
the circumstances under which they were made, not misleading. All documents
that RHCI is responsible for filing with the SEC in connection with the Merger
will comply as to form in all material respects with the applicable provisions
of the Exchange Act, the Securities Act and state securities laws.
Section 4.10 Absence of Certain Changes. Except as contemplated hereby or as
described or provided for in any RHCI SEC Filing or as disclosed on Exhibit
4.10 to the RHCI Disclosure Schedule, since March 31, 1996, RHCI and its
Subsidiaries have conducted their business in all material respects in the
ordinary course consistent with past practices and there has not been:
(a) any event, occurrence or development or state of circumstances or
facts, which affects or relates to RHCI or any of its Subsidiaries or the
industry in which they operate, which has had or would reasonably be
expected to have a RHCI Material Adverse Effect;
(b) any declaration, setting aside or payment of any dividend or other
distribution with respect to any shares of capital stock of RHCI, or any
repurchase, redemption or other acquisition by RHCI or any of its
Subsidiaries of any outstanding shares of capital stock or other securities
of, or other ownership interests in, RHCI or any of its Subsidiaries;
(c) any amendment of any material term of any outstanding security of
RHCI or any of its Subsidiaries;
(d) any incurrence, assumption or guarantee by RHCI or any of its
Subsidiaries of any indebtedness for borrowed money other than in the
ordinary course of business and in amounts and on terms consistent with
past practices;
(e) any creation or assumption by RHCI or any of its Subsidiaries of any
Lien on any material asset other than in the ordinary course of business
consistent with past practices;
(f) any making of any loan, advance or capital contributions to or
investment in any Person other than loans, advances or capital
contributions to or investments in wholly owned Subsidiaries of RHCI made
in the ordinary course of business consistent with past practices;
(g) any change in any method of accounting or accounting practice by RHCI
or any of its Subsidiaries, except for any such change required by reason
of a concurrent change in generally accepted accounting principles or to
conform a Subsidiary's accounting policies and practices to those of RHCI;
(h) except for contractual obligations existing on the date hereof, other
than in the ordinary course of business consistent with past practices, any
(i) grant of any severance or termination pay to any director, officer or
employee of RHCI, (ii) entering into of any employment, deferred
compensation or other similar agreement (or any amendment to any such
existing agreement) with any director, officer or employee of
A-15
<PAGE>
RHCI or any of its Subsidiaries, (iii) increase in benefits payable under
any existing severance or termination pay policies or employment
agreements, or (iv) increase in compensation, bonus or other benefits
payable to directors, officers or employees of RHCI or any of its
Subsidiaries;
(i) any material labor dispute, other than individual grievances, or any
activity or proceeding by a labor union or representative thereof to
organize any employees of RHCI or any of its Subsidiaries, which employees
were not subject to a collective bargaining agreement at March 31, 1996, or
any lockouts, strikes, slowdowns, work stoppages or threats thereof by or
with respect to such employees;
(j) any actual or, to RHCI's knowledge, threatened dispute between RHCI
or any of its Subsidiaries and any vendor or customer, other than disputes
which would not have or reasonably be expected to have, individually or in
the aggregate, a RHCI Material Adverse Effect;
(k) any actual or, to RHCI's knowledge, threatened suspension or
cancellation of any governmental license, permit, authorization, consent or
approval, other than those the suspension or cancellation of which would
not have or reasonably be expected to have, individually or in the
aggregate, a RHCI Material Adverse Effect; or
(l) to RHCI's knowledge, any change in any federal or state law, rule or
regulation applicable to RHCI or any of its Subsidiaries, or in the
interpretation or application thereof, which individually or in the
aggregate has had or would reasonably be expected to have a RHCI Material
Adverse Effect.
Section 4.11 No Undisclosed Material Liabilities. Except as described or
provided for in any RHCI SEC Filing or as disclosed on Exhibit 4.11 to the
RHCI Disclosure Schedule, there are no liabilities of RHCI or any of its
Subsidiaries of any kind whatsoever, whether accrued, contingent, absolute,
determined, determinable or otherwise, and there is no existing condition,
situation or set of circumstances which, individually or in the aggregate,
have or would reasonably be expected to have a RHCI Material Adverse Effect,
other than:
(i) liabilities disclosed or provided for in RHCI's consolidated balance
sheet dated as of March 31, 1996 included in RHCI's quarterly report on
Form 10-Q for the fiscal quarter ended March 31, 1996;
(ii) liabilities incurred in the ordinary course of business consistent
with past practices since March 31, 1996, which in the aggregate are not
material to RHCI and its Subsidiaries, taken as a whole; and
(iii) liabilities under this Agreement.
Section 4.12 Litigation. Except as described or provided for in any RHCI SEC
Filing or as disclosed on Exhibit 4.12 to the RHCI Disclosure Schedule, there
is no action, suit, investigation or proceeding pending against, or, to the
knowledge of RHCI, threatened against RHCI or any of its Subsidiaries or any
of their respective properties before any court or arbitrator or any
governmental body, agency or official which would have or reasonably be
expected to have a RHCI Material Adverse Effect.
Section 4.13 Taxes. (i) RHCI and its Subsidiaries have timely filed all tax
returns, statements, reports and forms required to be filed with any tax
authority when due in accordance with all applicable laws except where the
failure to do so would not have or reasonably be expected to have,
individually or in the aggregate, a RHCI Material Adverse Effect; (ii) no
deficiency in payment of any taxes for any period has been asserted by any
taxing authority which remains unsettled at the date hereof except for
deficiencies which would not have or reasonably be expected to have,
individually or in the aggregate, a RHCI Material Adverse Effect; and (iii)
RHCI is not liable and it is not reasonably likely that RHCI will be liable
for any taxes not heretofore paid or reserved against in the RHCI March 31,
1996 financial statements except those which would not have or reasonably be
expected to have, individually or in the aggregate, a RHCI Material Adverse
Effect.
Section 4.14 Tax Free Merger. (a) Following the Merger, the Surviving
Corporation will hold at least 90 percent of the fair market value of the net
assets and at least 70 percent of the fair market value of the gross assets,
held by the Company prior to the Merger, and at least 90 percent of the fair
market value of the net assets and at least 70 percent of the fair market
value of the gross assets, held by Merger Subsidiary prior to the Merger. For
purposes of this representation, amounts used by the Company to pay
reorganization expenses and all
A-16
<PAGE>
redemptions, distributions and payments, in cash or property, made by the
Company in connection with the Merger shall be included as assets of the
Company prior to the Merger.
(b) Prior to the Merger, RHCI will be in control of Merger Subsidiary within
the meaning of Section 368(c) of the Code.
(c) RHCI has no plan or intention as part of the plan of the Merger to cause
the Surviving Corporation to issue after the Effective Time additional shares
of stock that would result in RHCI losing control of the Surviving Corporation
within the meaning of Section 368(c) of the Code or any warrants, options,
convertible securities, or any other type of right pursuant to which any
person could acquire stock in the Surviving Corporation that, if exercised or
converted, would affect RHCI's acquisition or retention of control of the
Surviving Corporation, as defined in Section 368(c) of the Code.
(d) RHCI has no plan or intention to reacquire any of the RHCI Common Stock
or RHCI Series 1996 Preferred Stock issued in the Merger.
(e) RHCI has no plan or intention to liquidate the Surviving Corporation, to
merge the Surviving Corporation with or into another corporation or to sell or
otherwise dispose of the Surviving Corporation stock except for transfers of
stock to a corporation controlled by RHCI.
(f) Following the Merger, the Surviving Corporation will continue the
Company's historic business or use a significant portion of its historic
business assets in a business.
(g) Merger Subsidiary will have no liabilities assumed by the Company and
will not transfer to the Company any assets subject to liabilities, in the
Merger.
(h) There is no intercorporate indebtedness existing between RHCI and the
Company or between Merger Subsidiary and the Company that was issued,
acquired, or will be settled, in any case at a discount.
(i) Except as provided in Section 10.04 of this Agreement, RHCI and Merger
Subsidiary will pay their respective expenses incurred in connection with the
Merger.
(j) Neither RHCI nor Merger Subsidiary is an investment company as such term
is defined in Section 368(a)(2)(F)(iii) and (iv) of the Code.
(k) Following the Effective Time, RHCI shall use its best efforts, and shall
cause the Surviving Corporation to use its best efforts, to conduct its
business and the Surviving Corporation's business in a manner which would not
jeopardize the characterization of the Merger as a reorganization within the
meaning of Section 368(a)(2)(E) of the Code.
Section 4.15 ERISA. (a) "RHCI Employee Plans" shall mean each "employee
benefit plan", as defined in Section 3(3) of ERISA, which (i) is subject to
any provision of ERISA and (ii) is maintained, administered or contributed to
by RHCI or any affiliate (as defined in Section 3.15) and covers any employee
or former employee of RHCI or any affiliate or under which RHCI or any
affiliate has any liability. No RHCI Employee Plan individually or
collectively constitutes a "defined benefit plan" as defined in Section 3(35)
of ERISA.
(b) No RHCI Employee Plan constitutes a "multiemployer plan", as defined in
Section 3(37) of ERISA, and no RHCI Employee Plan is maintained in connection
with any trust described in Section 501(c)(9) of the Code. No RHCI Employee
Plan is subject to Title IV of ERISA. Neither RHCI nor any of its affiliates
has incurred, nor has reason to expect to incur, any liability under Title IV
of ERISA arising in connection with the termination of, or complete or partial
withdrawal from, any plan previously covered by Title IV of ERISA that would
have, or reasonably be expected to have, individually or in the aggregate, a
RHCI Material Adverse Effect. Nothing done or omitted to be done and no
transaction or holding of any asset under or in connection with any RHCI
Employee Plan has or will make RHCI or any of its Subsidiaries or any officer
of director of RHCI or any of its Subsidiaries subject to any liability under
Title I of ERISA or liable for any tax pursuant to Section 4975
A-17
<PAGE>
of the Code that would have, or reasonably be expected to have, individually
or in the aggregate, a RHCI Material Adverse Effect.
(c) Except to the extent it would not have, or reasonably be expected to
have, individually or in the aggregate, a RHCI Material Adverse Effect, (i)
each RHCI Employee Plan which is intended to be qualified under Section 401(a)
of the Code is so qualified and has been so qualified during the period from
its adoption to date, and each trust forming a part thereof is exempt from tax
pursuant to Section 501(a) of the Code, and (ii) each RHCI Employee Plan has
been maintained in compliance with its terms and with the requirements
prescribed by any and all statutes, orders, final rules and final regulations,
including but not limited to ERISA and the Code, which are applicable to such
Plan.
(d) RHCI does not provide, nor has it made any current or past commitment to
provide, post-retirement health and medical benefits for retired employees of
RHCI or its affiliates, except as specifically required under Section 4980B of
the Code or Section 601 of ERISA. RHCI has substantially complied with the
notice and continuation requirements of Section 4980B of the Code and Section
601 of ERISA.
Section 4.16 Compliance with Laws. Except as described or provided for in
any RHCI SEC Filing or as disclosed on Exhibit 4.16 to the RHCI Disclosure
Schedule, neither RHCI nor any of its Subsidiaries is in violation of, or has
violated, any applicable provisions of any laws, statutes, ordinances or
regulations other than violations which would not, in the aggregate,
reasonably be expected to have a RHCI Material Adverse Effect.
Section 4.17 Finders' Fees. Except for Houlihan, Lokey, Howard & Zukin, Inc.
("Houlihan Lokey"), whose fees will be paid by RHCI, there is no investment
banker, broker, finder or other intermediary which has been retained by or is
authorized to act on behalf of RHCI or any of its Subsidiaries who might be
entitled to any fee or commission in connection with the transactions
contemplated by this Agreement.
Section 4.18 Opinion of Financial Advisor. RHCI has received the opinion of
Houlihan Lokey to the effect that, as of the date of such opinion, the
Conversion Number and the Preferred Conversion Number are fair to RHCI from a
financial point of view, a copy of which opinion will be delivered to the
Company.
Section 4.19 Vote Required. The affirmative vote of the holders of a
majority of the shares of RHCI Common Stock and Series C Preferred Stock
(voting with the RHCI Common Stock on the basis of the number of shares of
RHCI Common Stock into which such Series C Preferred Stock is convertible)
voted at a meeting of stockholders is the only vote of the holders of any
class or series of RHCI's capital stock necessary to approve this Agreement
and the transactions contemplated hereby.
Section 4.20 Medicare and Medicaid. Except as described or provided for in
any RHCI SEC Filing or as disclosed on Exhibit 4.20 to the RHCI Disclosure
Schedule, RHCI and its Subsidiaries have complied in all material respects
with all Medicare and Medicaid laws, rules and regulations and have filed all
returns, cost reports and other filings in the manner prescribed, except where
the failure to do so would not have or reasonably be expected to have,
individually or in the aggregate, a RHCI Material Adverse Effect. Except as
described or provided for in any RHCI SEC Filing or as disclosed on Exhibit
4.20 to the RHCI Disclosure Schedule, all returns, cost reports and other
filings made by RHCI and its Subsidiaries to Medicare, Medicaid or any other
governmental health or welfare related entity or any other third-party payor
are in all material respects true and complete, except where the failure to be
so would not have or reasonably be expected to have, individually or in the
aggregate, a RHCI Material Adverse Effect. Except as described or provided for
in any RHCI SEC Filing or as disclosed on Exhibit 4.20 to the RHCI Disclosure
Schedule, no deficiency in any such returns, cost reports and other filings,
including deficiencies for late filings, has been asserted or, to RHCI's
knowledge, threatened by any federal or state agency or instrumentality or
other provider reimbursement entities relating to Medicare or Medicaid or
third-party payor claims, and, to the knowledge of RHCI, there is no basis for
any claims or requests for reimbursement from any such agency,
instrumentality, entity or third-party payor except for any deficiencies which
would not have or reasonably be expected to have, individually or in the
aggregate, a RHCI Material Adverse Effect. Neither RHCI nor any of its
Subsidiaries has been subject to any audit relating to
A-18
<PAGE>
fraudulent Medicare or Medicaid procedures or practices, except for audits
which would not have or reasonably be expected to have, individually or in the
aggregate, a RHCI Material Adverse Effect.
ARTICLE V.
Covenants of the Company
The Company agrees with RHCI that:
Section 5.01 Conduct of the Company. Except as expressly contemplated by
this Agreement or as described or provided for in any Company SEC Filing or as
disclosed in writing by the Company (including in the Company Disclosure
Schedule) prior to the date of this Agreement, from the date hereof until the
earlier to occur of the Effective Time and the termination hereof, the Company
and its Subsidiaries (i) shall conduct their business in the ordinary course
consistent with past practice and (ii) shall use their respective best efforts
to preserve intact their business organizations and relationships with third
parties and to keep available the services of their present officers and
employees. Except as otherwise approved in writing by RHCI or as expressly
contemplated by this Agreement, and without limiting the generality of the
foregoing, from the date hereof until the Effective Time:
(a) the Company will not adopt or propose any change in its certificate
of incorporation or bylaws;
(b) the Company will not, and, except with respect to the Apex
Transaction (as hereinafter defined), will not permit any of its
Subsidiaries to, merge or consolidate with any other Person (other than
another wholly owned Subsidiary) or acquire a material amount of stock or
assets of any other Person;
(c) except with respect to the sale (whether by sale of all or
substantially all of its assets or capital stock, or by merger or other
business combination) of, or the discontinuance of the operations of, Apex
Healthcare, Inc. and its Subsidiaries (the "Apex Transaction"), the Company
will not, and will not permit any of its Subsidiaries to, sell, lease,
license or otherwise dispose of any material assets or property except (i)
pursuant to existing contracts or commitments, (ii) in the ordinary course
consistent with past practice or (iii) transfers between the Company and/or
its Subsidiaries;
(d) except in respect of the Company Preferred Shares, the Company will
not declare or pay any dividends or make any distributions on any Company
Securities;
(e) the Company will not, and will not permit any of its Subsidiaries to,
(i) issue, deliver or sell, or authorize or propose the issuance, delivery
or sale of, any Company Securities or Company Subsidiary Securities, other
than the issuance of the Company Preferred Shares, the issuance of Company
Securities under the Ramsay Managed Care, Inc. 1994 Stock Option Plan the
Ramsay Managed Care, Inc. 1996 Long Term Incentive Plan and the Ramsay
Managed Care, Inc. 1994 Employee Stock Purchase Plan or the issuance of
Shares either upon the exercise of Company Options or Company Warrants or
conversion of the Company Preferred Shares, (ii) split, combine or
reclassify any Company Securities or Company Subsidiary Securities or (iii)
repurchase, redeem or otherwise acquire any Company Securities or any
Company Subsidiary Securities;
(f) except as otherwise expressly permitted hereby, the Company will not
make any commitment or enter into any contract or agreement material to the
Company and its Subsidiaries taken as a whole except in the ordinary course
of business consistent with past practice;
(g) except as otherwise expressly permitted hereby, the Company will not,
and will not permit any of its Subsidiaries to, agree or commit to do any
of the foregoing;
(h) the Company will not, and will not permit any of its Subsidiaries to,
take or agree to commit to take any action that would make any
representation and warranty of the Company hereunder inaccurate in any
material respect at, or as of any time prior to, the Effective Time; or
(i) except as otherwise provided in this Agreement, the Company may, and
upon RHCI's request will, upon the occurrence of any condition entitling
the Company to repurchase any Shares subject to such repurchase, take any
and all steps to consummate the repurchase of such Shares.
A-19
<PAGE>
Section 5.02 Access to Information. From the date hereof until the earlier
to occur of the Effective Time and the termination hereof, the Company will
give RHCI, its counsel, financial advisors, auditors and other authorized
representatives full access to the offices, properties, books and records of
the Company and its Subsidiaries, will furnish to RHCI, its counsel, financial
advisors, auditors and other authorized representatives such financial and
operating data and other information as such Persons may reasonably request
and will instruct the Company's employees, counsel and financial advisors to
cooperate with RHCI in its investigation of the business of the Company and
its Subsidiaries; provided that no investigation pursuant to this Section
shall affect any representation or warranty given by the Company to RHCI
hereunder. All nonpublic information provided to, or obtained by, RHCI in
connection with the transactions contemplated hereby shall be "Evaluation
Material" for purposes of the Confidentiality Agreement dated as of August 19,
1996 between RHCI and the Company.
Section 5.03 Other Offers. Except in connection with the Apex Transaction,
from the date hereof until the earlier to occur of the Effective Time and the
termination hereof, the Company and its Subsidiaries and the officers,
directors, employees or other agents of the Company and its Subsidiaries will
not, directly or indirectly, (i) take any action to solicit, initiate or
encourage any Company Acquisition Proposal (as defined below) or (ii) unless
otherwise required in accordance with the fiduciary duties of the Board of
Directors under applicable law as advised by counsel to the Company, engage in
negotiations with, or disclose any nonpublic information relating to the
Company or any of its Subsidiaries or afford access to the properties, books
or records of the Company or any of its Subsidiaries to, any Person that may
be considering making, or has made, a Company Acquisition Proposal. Except in
connection with the Apex Transaction, the Company will promptly notify RHCI
after receipt of any Company Acquisition Proposal or any indication that any
Person is considering making a Company Acquisition Proposal or any request for
nonpublic information relating to the Company or any of its Subsidiaries or
for access to the properties, books or records of the Company or any of its
Subsidiaries by any Person that may be considering making, or has made, a
Company Acquisition Proposal. For purposes of this Agreement, "Company
Acquisition Proposal" means any offer or proposal for, or any indication of
interest in, a merger or other business combination involving the Company or
any of its Subsidiaries or the acquisition of any equity interest in, or a
substantial portion of the assets of, the Company or any of its Subsidiaries,
other than the transactions contemplated by this Agreement and other than the
Apex Transaction.
Section 5.04 Notices of Certain Events. The Company shall promptly notify
RHCI of:
(i) any notice or other communication from any Person alleging that the
consent of such Person (or another Person) is or may be required in
connection with the transactions contemplated by this Agreement;
(ii) any notice or other communication from any governmental or
regulatory agency or authority in connection with the transactions
contemplated by this Agreement; and
(iii) any actions, suits, claims, investigations or proceedings commenced
or, to its knowledge, threatened against, relating to or involving or
otherwise affecting the Company or any of its Subsidiaries which, if
pending on the date of this Agreement, would have been required to have
been disclosed pursuant to Section 3.12 or which relate to the consummation
of the transactions contemplated by this Agreement, or of any event or
circumstance which would cause any of the Company's representations and
warranties contained herein to be incorrect in any material respect.
Section 5.05 Affiliates. To ensure that the issuance of RHCI Common Stock
and RHCI Series 1996 Preferred Stock in the Merger complies with the
Securities Act, prior to the Effective Time, the Company shall cause to be
delivered to RHCI a list identifying each Person who might at the time of the
meeting of the Company's stockholders be deemed to be an "affiliate" of the
Company for purposes of Rule 145 under the Securities Act (each, a "Securities
Act Affiliate"). The Company shall use its best efforts to obtain from each
Person who is identified as a possible Securities Act Affiliate prior to the
Effective Time an agreement (a "Securities Act Affiliate Agreement") providing
that such person will not offer to sell, sell or otherwise dispose of any RHCI
Common Stock or RHCI Series 1996 Preferred Stock issued to such Person in the
Merger in violation of the Securities Act.
A-20
<PAGE>
Section 5.06 Tax Letters. To ensure that the Merger will qualify as a
reorganization within the meaning of Section 368 of the Code, the Company will
use its best efforts to obtain from each of Paul J. Ramsay and each of his
affiliated companies which owns Shares or Company Preferred Shares at or
before the Effective Time, a representation letter (a "Tax Letter") stating
that such stockholder has no present plan or intention to sell any of the
shares of RHCI Common Stock or RHCI Series 1996 Preferred Stock which such
stockholder receives in the Merger.
ARTICLE VI.
Covenants of RHCI
RHCI agrees with the Company that:
Section 6.01 Conduct of RHCI. Except as expressly contemplated by this
Agreement, from the date hereof until the earlier to occur of the Effective
Time and the termination hereof, unless the Company shall have consented in
writing thereto (which consent shall not be unreasonably withheld or delayed),
RHCI and its Subsidiaries (i) shall conduct their business in the ordinary
course consistent with past practice, (ii) shall use their respective best
efforts to preserve intact their business organizations and relationships with
third parties and to keep available the services of their present officers and
employees, and (iii) shall not amend any of the material terms or provisions
of any of the RHCI Securities, except for any such amendments which affect
equally all shares of RHCI Common Stock or all shares of RHCI Series 1996
Preferred Stock, as the case may be.
Section 6.02 Access to Information. From the date hereof until the earlier
to occur of the Effective Time and the termination hereof, RHCI will give the
Company, its counsel, financial advisors, auditors and other authorized
representatives full access to the offices, properties, books and records of
RHCI and its Subsidiaries, will furnish to the Company, its counsel, financial
advisors, auditors and other authorized representatives such financial and
operating data and other information as such Persons may reasonably request
and will instruct RHCI's employees, counsel and financial advisors to
cooperate with the Company in its investigation of the business of RHCI and
its Subsidiaries; provided that no investigation pursuant to this Section
shall affect any representation or warranty given by RHCI to the Company
hereunder. All nonpublic information provided to, or obtained by, the Company
in connection with the transactions contemplated hereby shall be "Evaluation
Material" for purposes of the Confidentiality Agreement dated as of August 19,
1996 between RHCI and the Company.
Section 6.03 Obligations of Merger Subsidiary. RHCI will take all action
necessary to cause Merger Subsidiary to perform its obligations under this
Agreement and to consummate the Merger on the terms and conditions set forth
in this Agreement.
Section 6.04 Director and Officer Liability. From and after the Effective
Time, (a) RHCI shall indemnify, defend and hold harmless the present and
former officers and directors of the Company and its Subsidiaries against all
losses, claims, damages and liability in respect of acts or omissions
occurring at or prior to the Effective Time and (b) the Surviving Corporation
shall indemnify, defend and hold harmless to the fullest extent permitted by
law the present and former officers and directors of the Company and its
Subsidiaries against all losses, claims, damages and liability in respect of
acts or omissions occurring at or prior to the Effective Time. RHCI shall
cause the Surviving Corporation (and its successors and assigns) to establish
and maintain provisions in its certificate of incorporation or by-laws
concerning the indemnification and exoneration of the Company's and its
Subsidiaries' former and present officers, directors, employees and agents
that are no less favorable to those persons than the provisions of the
Company's certificate of incorporation and by-laws in effect on the date
hereof.
Section 6.05 NASDAQ National Market System Listing. RHCI shall use its best
efforts to cause the shares of RHCI Common Stock to be issued in the Merger
and the shares of RHCI Common Stock issuable
A-21
<PAGE>
upon the conversion of the RHCI Series 1996 Preferred Stock and issuable in
connection with the exercise of Substitute Securities to be approved for
listing on the NASDAQ National Market System subject to official notice of
issuance, prior to the Effective Time.
Section 6.06 Notice of Certain Events. Each of RHCI and Merger Subsidiary
shall promptly notify the Company of:
(i) any notice or other communication from any Person alleging that the
consent of such Person (or other Person) is or may be required in
connection with the transactions contemplated by this Agreement;
(ii) any notice or other communication from any governmental or
regulatory agency or authority in connection with the transactions
contemplated by this Agreement; and
(iii) any actions, suits, claims, investigations or proceedings commenced
or, to its knowledge, threatened against, relating to or involving or
otherwise affecting it or any of its Subsidiaries which, if pending on the
date of this Agreement, would have been required to have been disclosed
pursuant to Section 4.12 or which relate to the consummation of the
transactions contemplated by this Agreement, or of any event or
circumstance which would cause any of RHCI's representations and warranties
contained herein to be incorrect in any material respect.
ARTICLE VII.
Covenants of RHCI and the Company
The parties hereto agree with each other that:
Section 7.01 Best Efforts. Subject to the terms and conditions of this
Agreement, each party will use its best efforts to take, or cause to be taken,
all actions and to do, or cause to be done, all things necessary, proper or
advisable under applicable laws and regulations to consummate the transactions
contemplated by this Agreement.
Section 7.02 Certain Filings. The Company and RHCI shall cooperate with one
another (a) in connection with the preparation of the Registration Statement
and Joint Proxy Statement/Prospectus, and (b) in determining whether any
action by or in respect of, or filing with, any governmental body, agency or
official, or authority is required, or any actions, consents, approvals or
waivers are required to be obtained from parties to any material contracts, in
connection with the consummation of the transactions contemplated by this
Agreement and (c) in seeking any such actions, consents, approvals or waivers
or making any such filings, furnishing information required in connection
therewith or with the Registration Statement and Joint Proxy
Statement/Prospectus and seeking timely to obtain any such actions, consents,
approvals or waivers.
Section 7.03 Public Announcements. RHCI and the Company will consult with
each other before issuing any press release or making any public statement
with respect to this Agreement and the transactions contemplated hereby and,
except as may be required by applicable law or any listing agreement with any
national securities exchange or interdealer quotation system, will not issue
any such press release or make any such public statement prior to such
consultation.
Section 7.04 Further Assurances. At and after the Effective Time, the
officers and directors of the Surviving Corporation will be authorized to
execute and deliver, in the name and on behalf of the Company or Merger
Subsidiary, any deeds, bills of sale, assignments, assurances, instruments or
other documents and to take and do, in the name and on behalf of the Company
or Merger Subsidiary, any other actions and things to vest, perfect or confirm
of record or otherwise in the Surviving Corporation any and all right, title
and interest in, to and under any of the rights, properties or assets of the
Company acquired or to be acquired by the Surviving Corporation as a result
of, or in connection with, the Merger.
A-22
<PAGE>
Section 7.05 Stockholder Meeting. Each of RHCI and the Company shall cause a
meeting of its stockholders (each, a "Stockholder Meeting") to be duly called
and held as soon as reasonably practicable for the purpose of voting on the
approval and adoption of this Agreement and the Merger. The Directors of RHCI
and the Directors of the Company shall, unless otherwise required in
accordance with their fiduciary duties as advised by counsel, recommend
approval and adoption of this Agreement and the Merger by RHCI's stockholders
and the Company's stockholders, respectively. In connection with such
meetings, each of RHCI and the Company will, subject to the foregoing, use its
best efforts to obtain the necessary approvals by its stockholders of this
Agreement, the transactions contemplated hereby and such other matters as are
contemplated by the terms of this Agreement or required by Delaware Law, and
will otherwise comply with all legal requirements applicable to such meetings.
Section 7.06 Preparation of the Joint Proxy Statement/Prospectus and
Registration Statement. RHCI and the Company shall promptly prepare and file
with the SEC a preliminary version of the Joint Proxy Statement/Prospectus and
will use their best efforts to respond to the comments of the SEC in
connection therewith and to furnish all information required to prepare the
definitive Joint Proxy Statement/Prospectus. After receiving comments from the
SEC, RHCI shall promptly file with the SEC the Registration Statement
containing the Joint Proxy Statement/Prospectus. Each of RHCI and the Company
shall use its best efforts to have the Registration Statement declared
effective under the Securities Act as promptly as practicable after such
filing. RHCI shall also take any action (other than qualifying to do business
in any jurisdiction in which it is not now so qualified or filing a general
consent to service of process in any jurisdiction) required to be taken under
any applicable state securities laws in connection with the issuance of RHCI
Common Stock and RHCI Series 1996 Preferred Stock in the Merger and the
Company shall furnish all information concerning the Company and the holders
of Shares and Company Preferred Shares as may be reasonably requested in
connection with any such action. Promptly after the effectiveness of the
Registration Statement, each party will cause the Joint Proxy
Statement/Prospectus to be mailed to its stockholders, and if necessary, after
the definitive Joint Proxy Statement/Prospectus shall have been mailed,
promptly circulate amended, supplemented or supplemental proxy materials and,
if required in connection therewith, resolicit proxies.
ARTICLE VIII.
Conditions to the Merger
Section 8.01 Conditions to the Obligations of Each Party. The obligations of
the Company, RHCI and Merger Subsidiary to consummate the Merger are subject
to the satisfaction of the following conditions:
(i) this Agreement shall have been adopted by the requisite vote of the
stockholders of the Company in accordance with Delaware Law;
(ii) any applicable waiting period under the HSR Act relating to the
Merger shall have expired;
(iii) no provision of any applicable domestic law or regulation and no
judgment, injunction, order or decree of a court of competent jurisdiction
shall restrain or prohibit the consummation of the Merger;
(iv) there shall have been approved, by the requisite vote of RHCI's
stockholders, the issuance of RHCI Common Stock and RHCI Series 1996
Preferred Stock in connection with the Merger in accordance with the rules
of the NASD;
(v) the Registration Statement shall have been declared effective and no
stop order suspending the effectiveness of the Registration Statement shall
be in effect and no proceedings for such purpose shall be pending before
the SEC;
(vi) the shares of RHCI Common Stock to be issued in the Merger and the
shares of RHCI Common Stock issuable upon the conversion of RHCI Series
1996 Preferred Stock to be issued in the Merger shall have been approved
for listing on the NASDAQ National Market System, subject to official
notice of issuance and satisfactory distribution;
A-23
<PAGE>
(vii) RHCI and the Company shall have received an opinion from recognized
tax counsel, based upon certain factual representations of the Company,
RHCI and Merger Subsidiary reasonably requested by such counsel, dated the
date of the Effective Time, to the effect that the Merger will be treated
for federal income tax purposes as a reorganization within the meaning of
Section 368(a) of the Code, in form and substance reasonably satisfactory
to the Company and RHCI; and
(viii) RHCI shall have received the consents required for the
consummation of the transactions contemplated hereby pursuant to the RHCI
Credit Agreement and the RHCI Trust Indenture.
Section 8.02 Conditions to the Obligations of RHCI and Merger
Subsidiary. The obligations of RHCI and Merger Subsidiary to consummate the
Merger are subject to the satisfaction of the following further conditions:
(i) the Company shall have performed in all material respects all of its
obligations hereunder required to be performed by it at or prior to the
Effective Time, the representations and warranties of the Company contained
in this Agreement shall be true in all material respects at and as of the
Effective Time as if made at and as of such time, and RHCI shall have
received a certificate signed by an executive officer of the Company to the
foregoing effect;
(ii) receipt by RHCI of the Tax Letters and of a Securities Act
Affiliates Agreement from each Securities Act Affiliate; and
(iii) RHCI shall have received a copy of the resolutions of the Board of
Directors of the Company authorizing the Merger, which copy shall be
certified by an executive officer of the Company.
Section 8.03 Conditions to the Obligations of the Company. The obligations
of the Company to consummate the Merger are subject to the satisfaction of the
following further conditions:
(i) RHCI and Merger Subsidiary shall have performed in all material
respects all of their respective obligations hereunder required to be
performed by them at or prior to the Effective Time, the representations
and warranties of RHCI and Merger Subsidiary contained in this Agreement
shall be true in all material respects at and as of the Effective Time as
if made at and as of such time, and the Company shall have received a
certificate signed by an executive officer of each of RHCI and Merger
Subsidiary to the foregoing effect;
(ii) the Company shall have received a copy of the resolutions of the
Board of Directors of RHCI authorizing the Merger, which copy shall be
certified by an executive officer of RHCI;
(iii) a Certificate of Designations shall have been duly filed by RHCI
with the Secretary of State of the State of Delaware with respect to the
RHCI Series 1996 Preferred Stock, which Certificate of Designations shall
provide that the RHCI Series 1996 Preferred Stock shall have the following
rights and preferences: (i) each share of RHCI Series 1996 Preferred Stock
shall be entitled to the payment of cumulative cash dividends at an annual
rate of $1.50 per share payable quarterly in arrears, (ii) each share of
RHCI Series 1996 Preferred Stock shall be entitled to a liquidation
preference of $30.00 per share payable prior to any distribution of assets
or funds of RHCI to any class of capital stock of RHCI other than the
Series C Preferred Stock, (iii) each share of RHCI Series 1996 Preferred
Stock shall be entitled to a number of votes per share on all matters put
to a vote of stockholders of RHCI (voting together with the holders of RHCI
Common Stock and Series C Preferred Stock as one class) equal to the number
of whole shares of RHCI Common Stock into which such share of RHCI Series
1996 Preferred Stock is then convertible, (iv) each share of RHCI Series
1996 Preferred Stock shall be convertible at any time into a number of
shares of RHCI Common Stock determined by dividing the conversion price
(which, subject to antidilution adjustments, initially shall be $3.00) into
$30.00, (v) each share of RHCI Series 1996 Preferred Stock shall otherwise
be entitled to rights and preferences substantially similar to those
applicable to the Company Preferred Stock; and
(iv) RHCI shall have caused Merger Subsidiary to amend the certificate of
incorporation of Merger Subsidiary to comply with Section 6.04, all in form
and substance reasonably satisfactory to the Company.
A-24
<PAGE>
ARTICLE IX.
TERMINATION
Section 9.01 Termination. This Agreement may be terminated and the Merger
may be abandoned at any time prior to the Effective Time (notwithstanding any
approval of this Agreement by the stockholders of the Company or RHCI);
(i) by mutual written consent of the Company and RHCI;
(ii) by either the Company or RHCI, if the Merger has not been
consummated by April 30, 1997 (provided that the right to terminate this
Agreement under this clause shall not be available to any party whose
failure to fulfill any of its obligations under this Agreement has been the
cause of or resulted in the failure to consummate the Merger by such date);
(iii) by either the Company or RHCI, if there shall be any applicable
domestic law, rule or regulation that makes consummation of the Merger
illegal or otherwise prohibited or if any judgment, injunction, order or
decree of a court of competent jurisdiction shall restrain or prohibit the
consummation of the Merger, and such judgment, injunction, order or decree
shall become final and nonappealable;
(iv) by either the Company or RHCI, if the stockholder approvals referred
to in Section 8.01(i) or 8.01 (iv) shall not have been obtained by reason
of the failure to obtain the requisite vote upon a vote at a duly held
meeting of stockholders or at any adjournment thereof; or
(v) by either the Company or RHCI (the "Terminating Party") if (x) there
has been a breach by the other party of any representation or warranty
contained in this Agreement which would have or would be reasonably likely
to have a RHCI Material Adverse Effect or Company Material Adverse Effect,
as the case may be, or (y) there has been a material breach of any of the
covenants or agreements set forth in this Agreement on the part of the
other party, which breach is not curable or, if curable, is not cured
within 30 days after written notice of such breach is given by the
Terminating Party to the other party, or (z) the Company has entered into
an agreement or agreement in principle with respect to any Company
Acquisition Proposal.
Section 9.02 Effect of Termination. If this Agreement is terminated pursuant
to Section 9.01, this Agreement shall become void and of no effect with no
liability on the part of any party hereto, except that (a) the agreements
contained in Section 10.04, the last sentence of Section 5.02 and the last
sentence of Section 6.02 shall survive the termination hereof and (b) the
parties shall be liable for any willful breaches hereof.
ARTICLE X.
miscellaneous
Section 10.01 Notices. All notices, requests and other communications to any
party hereunder shall be in writing (including telecopy or similar writing)
and shall be given,
if to RHCI or Merger Subsidiary, to:
Entergy Corporation Building
639 Loyola Avenue
Suite 1700
New Orleans, Louisiana 70113
Telephone: (504) 525-2505
Telecopy: (504) 585-0505
Attention: President
A-25
<PAGE>
with a copy to:
Haythe & Curley
237 Park Avenue
New York, New York 10017
Telephone: (212) 880-6000
Telecopy: (212) 682-0200
Attention: Bradley P. Cost, Esq.
if to the Company, to:
Entergy Corporation Building
639 Loyola Avenue
Suite 1725
New Orleans, Louisiana 70113
Telephone: (504) 585-0515
Telecopy: (504) 585-0506
Attention: President
with a copy to:
Foley & Lardner
Suite 1800
111 North Orange Avenue
Orlando, Florida 32802
Telephone: (407) 423-7656
Telecopy: (407) 648-1743
Attention: John A. Sanders, Esq.
or such other address or telecopy number as such party may hereafter specify
for the purpose by notice to the other parties hereto. Each such notice,
request or other communication shall be effective (i) if given by telecopy,
when such telecopy is transmitted to the telecopy number specified in this
Section and the appropriate answerback is received or (ii) if given by any
other means, when delivered at the address specified in this Section.
Section 10.02 Survival of Representations and Warranties. The
representations and warranties and agreements contained herein and in any
certificate or other writing delivered pursuant hereto shall not survive the
Effective Time, except Section 6.04, Section 7.04 and Article I.
Section 10.03 Amendments; No Waivers. (a) Any provision of this Agreement
may be amended or waived prior to the Effective Time if, and only if, such
amendment or waiver is in writing and signed, in the case of an amendment, by
the Company, RHCI and Merger Subsidiary or, in the case of a waiver, by the
party against whom the waiver is to be effective; provided that (i) any waiver
or amendment shall be effective against a party only if the special committee
of the Board of Directors of such party approves such waiver or amendment and
only such special committee of the Board of Directors can take actions on
behalf of that party and (ii) after the adoption of this Agreement by the
stockholders of the Company, no such amendment or waiver shall, without the
further approval of such stockholders and each party's Board of Directors upon
recommendation of its special committee, alter or change (x) the amount or
kind of consideration to be received in exchange for any shares of capital
stock of the Company, (y) any term of the certificate of incorporation of the
Surviving Corporation or (z) any of the terms or conditions of this Agreement
if such alteration or change would adversely affect the holders of any shares
of capital stock of the Company.
(b) No failure or delay by any party in exercising any right, power or
privilege hereunder shall operate as a waiver thereof nor shall any single or
partial exercise thereof preclude any other or further exercise thereof or the
exercise of any other right, power or privilege. The rights and remedies
herein provided shall be cumulative and not exclusive of any rights or
remedies provided by law.
A-26
<PAGE>
Section 10.04 Fees and Expenses.
(a) Except as otherwise provided in this Section, all costs and expenses
incurred in connection with this Agreement shall be paid by the party
incurring such cost or expense.
(b) In the event that the Company shall have entered into an agreement or
agreement in principle with respect to any Company Acquisition Proposal
before termination of this Agreement, and the Company or RHCI shall
terminate this Agreement, the Company agrees promptly to reimburse RHCI in
immediately available funds for all of RHCI's reasonable documented out-of-
pocket expenses (up to a maximum of $1,000,000) but in no event later than
five business days after the termination of this Agreement.
(c) The Company and RHCI shall each pay one-half of all costs and
expenses related to printing, filing and mailing the Registration Statement
and the Joint Proxy Statement/Prospectus and all SEC and other regulatory
filing fees.
Section 10.05 Successors and Assigns. The provisions of this Agreement shall
be binding upon and inure to the benefit of the parties hereto and their
respective successors and assigns, provided that no party may assign, delegate
or otherwise transfer any of its rights or obligations under this Agreement
without the consent of the other parties hereto.
Section 10.06 Governing Law. This Agreement shall be construed in accordance
with and governed by the law of the State of Delaware applicable in the case
of agreements made and to be performed entirely within such State.
Section 10.07 Counterparts; Effectiveness. This Agreement may be signed in
any number of counterparts, each of which shall be an original, with the same
effect as if the signatures thereto and hereto were upon the same instrument.
This Agreement shall become effective when each party hereto shall have
received counterparts hereof signed by all of the other parties hereto.
Section 10.08 Entire Agreement. This Agreement and the Confidentiality
Agreement dated as of August 19, 1996 between RHCI and the Company constitute
the entire agreement between the parties with respect to the subject matter
hereof and supersede all prior agreements, understandings and negotiations,
both written and oral, between the parties with respect to the subject matter
of this Agreement. No representation, inducement, promise, understanding,
condition or warranty not expressly set forth herein has been made or relied
upon by either party hereto. Neither this Agreement nor any provision hereof
is intended to confer upon any Person other than the parties hereto any rights
or remedies hereunder except for the provisions of Section 6.04, which are
intended for the benefit of the Company's former and present officers,
directors, employees and agents and the provisions of Article I, which are
intended for the benefit of the Company's stockholders, including holders of
Restricted Stock, Company Options, and Company Warrants.
* * * *
A-27
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be duly
executed by their respective authorized officers as of the day and year first
above written.
Ramsey Managed Care, Inc.
/s/ Martin Lazoritz
By: _________________________________
Title: Executive Vice President
Ramsey Health Care, Inc.
/s/ Bert Cibran
By: _________________________________
Title: President
RHCI Aquisition Corp.
/s/ Bert Cibran
By: _________________________________
Title: President
A-28
<PAGE>
ATTESTATIONS
I, Warwick D. Syphers, Executive Vice President of Ramsay Managed Care,
Inc., a Delaware corporation ("RMCI"), certify that the signature of Martin
Lazoritz, Executive Vice President of RMC, appearing on the foregoing
Agreement and Plan of Merger dated as of October 1, 1996 among RMCI, Ramsay
Health Care, Inc. and RHCI Acquisition Corp., is a true specimen of his
signature.
Dated as of October 1, 1996
/s/ Warwick D. Syphers
_____________________________________
Warwick D. Syphers Executive Vice
President
I, Luis E. Lamela, Vice Chairman of the Board of Ramsay Health Care, Inc., a
Delaware corporation ("RHCI"), certify that the signature of Bert Cibran,
President of RHCI, appearing on the foregoing Agreement and Plan of Merger
dated as of October 1, 1996 among Ramsay Managed Care, Inc., RHCI and RHCI
Acquisition Corp., is a true specimen of his signature.
Dated as of October 1, 1996
/s/ Luis E. Lamela
_____________________________________
Luis E. LamelaVice Chairman of the
Board
I, Luis E. Lamela, Vice Chairman of the Board of RHCI Acquisition Corp., a
Delaware corporation ("Merger Subsidiary"), certify that the signature of Bert
Cibran, President of Merger Subsidiary, appearing on the foregoing Agreement
and Plan of Merger dated as of October 1, 1996 among Ramsay Managed Care,
Inc., Ramsay Health Care, Inc. and Merger Subsidiary, is a true specimen of
his signature.
Dated as of October 1, 1996
/s/ Luis E. Lamela
_____________________________________
Luis E. Lamela Vice Chairman of the
Board
A-29
<PAGE>
APPENDIX B
HOULIHAN LOKEY HOWARD ZUKIN
----------------
A SPECIALTY INVESTMENT BANKING FIRM
October 1, 1996
To The Special Committee
of the Board of Directors
Ramsay Health Care, Inc.
To The Board of Directors
Ramsay Health Care, Inc.
Gentlemen:
Ramsay Health Care, Inc. ("RHCI" or the "Company") has entered into an
agreement and plan of merger dated as of October 1, 1996 pursuant to which the
Company will acquire (the "Merger") the common stock of Ramsay Managed Care,
Inc. ("RMCI") and the preferred stock of RMCI in a stock for stock merger. We
further understand that to effectuate the Merger, RHCI will form RHCI
Acquisition Corp. ("Acquisition"), which will merge with RMCI, with RMCI being
the surviving entity. Each outstanding share of RMCI common stock, other than
treasury shares or shares owned by RHCI, will be converted into the right to
receive one-third (ha) (the "Conversion Number") of a share of RHCI common
stock, and each outstanding share of RMCI preferred stock outstanding, other
than treasury shares or shares owned by RHCI, will be converted into the right
to receive one (1) (the "Preferred Conversion Number") share of RHCI Class B
preferred stock, Series 1996. The Merger and the related transactions are
referred to herein as the "Transaction."
You have requested our opinion (the "Opinion") as to the matters set forth
below. The Opinion does not address the Company's underlying business decision
to effect the Transaction. Furthermore, at your request, we have not
negotiated the Transaction or advised you with respect to alternatives to it.
In connection with this Opinion, we have made such reviews, analyses and
inquiries as we have deemed necessary and appropriate under the circumstances.
Among other things, we have:
1. reviewed the following financial information:
(i) Company's Form 10-Ks and Annual Reports for the fiscal years
ended June 30, 1994 and June 30, 1995, and unaudited financial
statements for the fiscal year ended June 30, 1996, which management
has identified as the most current information available;
(ii) RMCI's Form 10-KSB for the fiscal year ended June 30, 1995 and
June 30, 1996, which management has identified as the most current
information available; and
(iii) projected financial statements for RHCI and RMCI prepared by
RHCI and RMCI management, for the fiscal year ending June 30, 1997;
2. reviewed copies of the following documents and agreements:
(i) Agreement and Plan of Merger among Ramsay Managed Care Inc.,
Ramsay Health Care, Inc., and RHCI Acquisition Corp., dated as of
October 1, 1996;
(ii) Stock Purchase Agreement between Paul Ramsay Hospitals Pty.
Limited and Ramsay Managed Care, Inc., dated September 10, 1996;
B-1
<PAGE>
(iii) Exchange Agreement by and among Ramsay Health Care, Inc., Paul
Ramsay Hospitals Pty. Limited and Paul J. Ramsay, dated September 10,
1996; and
(iv) Exchange Agreement by and among Ramsay Managed Care, Inc., Paul
Ramsay Hospitals Pty. Limited and Paul J. Ramsay, dated September 10,
1996;
3. met with management of RMCI and the Company to discuss the Transaction
and the financial condition, operation and future prospects of RMCI and the
Company;
4. reviewed information on publicly traded companies we deemed comparable
to RMCI and the Company respectively;
5. reviewed certain information regarding transactions we deemed
comparable to the Transaction; and
6. conducted such other analysis as we deemed appropriate under the
circumstances.
We have relied upon and assumed, without independent verification, that the
financial forecasts and projections provided to us have been reasonably
prepared and reflect the best currently available estimates of the future
financial results and condition of the Company and RMCI, and that there has
been no material change in the assets, financial condition, business or
prospects of the Company or RMCI since the fiscal year ended June 30, 1996
financial statements.
We have not independently verified the accuracy and completeness of the
information supplied to us with respect to the Company and RMCI and do not
assume any responsibility with respect to it. We have not made any physical
inspection or independent appraisal of any of the properties or assets of the
Company or RMCI. We have assumed that the Merger will qualify as a tax free
reorganization within the meaning of Section 368(a) of the Internal Revenue
Code. Our opinion is necessarily based on business, economic, market and other
conditions as they exist and can be evaluated by us at the date of this
letter.
Based upon the foregoing, and in reliance thereon, it is our opinion that
the Conversion Number and the Preferred Conversion Number are fair to the
Company, from a financial point of view.
Houlihan, Lokey, Howard & Zukin,
Inc.
B-2
<PAGE>
APPENDIX C
DEAN WITTER REYNOLDS INC.
TWO WORLD TRADE CENTER
NEW YORK, NEW YORK 10048
October 1, 1996
Board of Directors and
Special Committee of the
Board of Directors
Ramsay Managed Care, Inc.
639 Loyola Avenue
Suite 1725
New Orleans, Louisiana 70113
Gentlemen:
Ramsay Managed Care, Inc., a Delaware corporation (the "Company"), Ramsay
Health Care, Inc., a Delaware corporation ("RHCI"), and RHCI Acquisition
Corp., a Delaware corporation and a wholly owned subsidiary of RHCI (the
"Merger Subsidiary"), have entered into an Agreement and Plan of Merger, dated
as of October 1, 1996 (the "Agreement"), providing for Merger Subsidiary to be
merged with and into the Company, whereupon the separate existence of Merger
Subsidiary shall cease, and the Company shall be the surviving corporation
(the "Merger"). The Agreement provides that (a) each outstanding share of
common stock, $.01 par value per share, of the Company (the "Company Common
Stock") outstanding immediately prior to the Effective Time, except Company
Common Stock as to which appraisal rights have been validly exercised, shall
be converted into the right to receive one-third (1/3rd) of a share (the
"Conversion Number") of common stock, $.01 par value per share, of RHCI (the
"RHCI Common Stock"), and (b) each share of series 1996 convertible preferred
stock, $.01 par value per share, of the Company (the "Company Preferred
Stock") outstanding immediately prior to the Effective Time, except Company
Preferred Stock as to which appraisal rights have been validly exercised,
shall be converted into the right to receive one share (the "Preferred
Conversion Number") of Class B Preferred Stock, Series 1996, $1.00 par value
per share, of RHCI (the "RHCI Series 1996 Preferred Stock").
You have requested our opinion, as investment bankers, as of the date
hereof, as to the fairness, from a financial point of view, to the holders of
Company Common Stock and holders of Company Preferred Stock of the Conversion
Number, and the Preferred Conversion Number, respectively.
In arriving at the opinion set forth below, we have, among other things:
(1) reviewed the Agreement;
(2) reviewed the Annual Report on Form 10-KSB and related publicly
available financial information of the Company for the two most recent
fiscal years ended June 30, 1996, the final prospectus, dated April 24,
1995, for the distribution of the Company Common Stock, and the Company's
definitive Proxy Statement on Form 14A, dated October 6, 1995;
(3) reviewed the Annual Reports on Form 10-K and related publicly
available financial information of RHCI for the three most recent fiscal
years ended June 30, 1995, the Quarterly Reports on Form 10-Q for the
periods ended September 30, 1995, December 31, 1995 and March 31, 1996, and
RHCI's definitive Proxy Statement on Form 14A, dated October 5, 1995;
reviewed unaudited financial information of RHCI for the fiscal year ended
June 30, 1996;
C-1
<PAGE>
(4) reviewed certain other information, including publicly available
information, relating to the business, earnings, cash flow, assets and
prospects of the Company and RHCI, respectively;
(5) reviewed an income statement forecast of the Company for the fiscal
years 1997 and 1998 as furnished to us by the Company; reviewed an income
statement forecast of the Company for the fiscal year 1999 as prepared on
the basis of information and assumptions furnished to us by the Company;
reviewed selected balance sheet and cash flow forecast items of the Company
for fiscal years 1997 through 1999 as prepared on the basis of information
and assumptions furnished to us by the Company;
(6) reviewed income statement forecasts of RHCI for fiscal years 1997
through 1999 as furnished to us by RHCI;
(7) conducted discussions with members of senior management of the
Company and RHCI, respectively, concerning the past and current business,
operations, assets, present financial condition and future prospects of the
Company and RHCI, respectively;
(8) reviewed the historical reported market prices and trading activity
for the Company Common Stock and the RHCI Common Stock, respectively;
(9) compared certain financial information, operating statistics and
market trading information relating to the Company with published financial
information, operating statistics and market trading information relating
to selected public companies that we deemed to be reasonably similar to the
Company; compared certain financial information, operating statistics and
market trading information relating to RHCI with published financial
information, operating statistics and market trading information relating
to selected public companies that we deemed to be reasonably similar to
RHCI;
(10) compared the financial terms of the Merger with the financial terms,
to the extent publicly available, of selected other recent acquisitions
that we deemed to be relevant;
(11) compared the financial terms of the Merger with the financial terms
of other indications of interest received by the Company; and
(12) reviewed such other financial studies and analyses and performed
such other investigations and took into account such other matters as we
deemed necessary.
In preparing our opinion, we have assumed and relied upon the accuracy and
completeness of all financial and other information supplied to us by the
Company, RHCI or that is publicly available, respectively, and we have not
independently verified such information. We also have relied upon the
managements of the Company and RHCI, respectively, as to the reasonableness
and achievability of the financial forecasts of the Company and RHCI (and the
assumptions and bases thereof) provided to us or prepared on the basis of
information and assumptions furnished to us, and with your consent we have
assumed that such forecasts have been reasonably prepared on the basis
reflecting the best currently available estimates and judgments of such
respective managements as to the future operating performance of the Company
and RHCI, respectively. Furthermore, we assumed, the Merger will qualify as a
reorganization within the meaning of Section 368(a) of the Internal Revenue
Code of 1986, as amended. We have not been requested to make, and we have not
made, an independent appraisal or evaluation of the assets, properties,
facilities or liabilities of the Company or RHCI and we have not been
furnished with any such appraisal or evaluation.
It should be noted that this opinion necessarily is based upon prevailing
market conditions (including current market prices for the Company Common
Stock and the RHCI Common Stock) and other circumstances and conditions as
they exist and can be evaluated at this time, and does not represent our
opinion as to what the actual value of the Company Common Stock or the RHCI
Common Stock will be after the date hereof.
We have not acted as financial advisor to the Board of Directors of the
Company in connection with the Merger and have not been requested to solicit
any interests from any other potential parties to a transaction with the
Company, but rather have been retained solely to render the opinion set forth
below with respect to the Merger and will receive a fee for our services. In
connection with the sale of Apex Healthcare, Inc., we are
C-2
<PAGE>
currently acting as financial advisor to the Board of Directors of the Company
and may receive a fee for our service which is contingent upon the
consummation of a transaction. In addition, in the ordinary course of our
business, we actively trade the securities of the Company and RHCI for our own
account and for the accounts of customers and, accordingly, may at any time
hold a long or short position in such securities. In addition, we have not
acted as financial advisor to RHCI, nor have we acted as manager of any RHCI
security offering, and have not received any advisory or offering fees from
RHCI.
On the basis of, and subject to the foregoing and other matters that we
consider pertinent, we are of the opinion that, as of the date hereof, the
Conversion Number is fair, from a financial point of view, to the holders of
Company Common Stock, and the Preferred Conversion Number is fair from a
financial point of view, to the holders of Company Preferred Stock.
Very truly yours,
Dean Witter Reynolds Inc.
C-3
<PAGE>
APPENDIX D
SECTION 262 OF THE DELAWARE GENERAL CORPORATION LAW
262 APPRAISAL RIGHTS. (a) Any stockholder of a corporation of this State who
holds shares of stock on the date of the making of a demand pursuant to
subsection (d) of this section with respect to such shares, who continuously
holds such shares through the effective date of the merger or consolidation,
who has otherwise complied with subsection (d) of this section and who has
neither voted in favor of the merger or consolidation nor consented thereto in
writing pursuant to (S)228 of this title shall be entitled to an appraisal by
the Court of Chancery of the fair value of his shares of stock under the
circumstances described in subsections (b) and (c) of this section. As used in
this section, the word "stockholder" means a holder of record of stock in a
stock corporation and also a member of record of a nonstock corporation; the
words "stock" and "share" mean and include what is ordinarily meant by those
words and also membership or membership interest of a member of a nonstock
corporation; and the words "depository receipt" mean a receipt or other
instrument issued by a depository representing an interest in one or more
shares, or fractions thereof, solely of stock of a corporation, which stock is
deposited with the depository.
(b) Appraisal rights shall be available for the shares of any class or
series of stock of a constituent corporation in a merger or consolidation to
be effected pursuant to (S)251, 252, 254, 257, 258, 263 or 264 of this title:
(1) Provided, however, that no appraisal rights under this section shall
be available for the shares of any class or series of stock, which stock,
or depository receipts in respect thereof, at the record date fixed to
determine the stockholders entitled to receive notice of and to vote at the
meeting of stockholders to act upon the agreement of merger or
consolidation, were either (i) listed on a national securities exchange or
designated as a national market system security on an interdealer quotation
system by the National Association of Securities Dealers, Inc. or (ii) held
of record by more than 2,000 holders; and further provided that no
appraisal rights shall be available for any shares of stock of the
constituent corporation surviving a merger if the merger did not require
for its approval the vote of the holders of the surviving corporation as
provided in (1) subsections (f) or (g) of (S)251 of this title.
(2) Notwithstanding paragraph (1) of this subsection, appraisal rights
under this section shall be available for the shares of any class or series
of stock of a constituent corporation if the holders thereof are required
by the terms of an agreement of merger or consolidation pursuant to
(S)(S)251, 252, 254, 257, 258, 263 and 264 of this title to accept for such
stock anything except:
a. Shares of stock of the corporation surviving or resulting from
such merger or consolidation, or depository receipts in respect
thereof:
b. Shares of stock of any other corporation, or depository receipts
in respect thereof, which shares of stock or depository receipts at the
effective date of the merger or consolidation will be either listed on
a national securities exchange or designated as a national market
system security on an interdealer quotation system by the National
Association of Securities Dealers, Inc. or held of record by more than
2,000 holders:
c. Cash in lieu of fractional shares or fractional depository
receipts described in the foregoing subparagraphs a. and b. of this
paragraph: or
d. Any combination of the shares of stock, depository receipts and
cash in lieu of fractional shares or fractional depository receipts
described in the foregoing subparagraphs a., b. and c. of this
paragraph.
(3) In the event all of the stock of a subsidiary Delaware corporation
party to a merger effected under (S)253 of this title is not owned by the
parent corporation immediately prior to the merger, appraisal rights shall
be available for the shares of the subsidiary Delaware corporation.
D-1
<PAGE>
(c) Any corporation may provide in its certificate of incorporation that
appraisal rights under this section shall be available for the shares of any
class or series of its stock as a result of an amendment to its certificate of
incorporation, any merger or consolidation in which the corporation is a
constituent corporation or the sale of all or substantially all of the assets
of the corporation. If the certificate of incorporation contains such a
provision, the procedures of this section, including those set forth in
subsections (d) and (e) of this section, shall apply as nearly as is
practicable.
(d) Appraisal rights shall be perfected as follows:
(1) If a proposed merger or consolidation for which appraisal rights are
provided under this section is to be submitted for approval at a meeting of
stockholders, the corporation, not less than 20 days prior to the meeting,
shall notify each of its stockholders who was such on the record date for
such meeting with respect to shares for which appraisal rights are
available pursuant to subsections (b) or (c) hereof that appraisal rights
are available for any or all of the shares of the constituent corporations,
and shall include in such notice a copy of this section. Each stockholder
electing to demand the appraisal of his shares shall deliver to the
corporation, before the taking of the vote on the merger or consolidation,
a written demand for appraisal of his shares. Such demand will be
sufficient if it reasonably informs the corporation of the identity of the
stockholder and that the stockholder intends thereby to demand the
appraisal of his shares. A proxy or vote against the merger or
consolidation shall not constitute such a demand. A stockholder electing to
take such action must do so by a separate written demand as herein
provided. Within 10 days after the effective date of such merger or
consolidation, the surviving or resulting corporation shall notify each
stockholder of each constituent corporation who has complied with this
subsection and has not voted in favor of or consented to the merger or
consolidation of the date that the merger or consolidation has become
effective; or
(2) If the merger or consolidation was approved pursuant to (S)228 or
(S)253 of this title, each constituent corporation, either before the
effective date of the merger or consolidation or within ten days
thereafter, shall notify each of the holders of any class or series of
stock of such constituent corporation who are entitled to appraisal rights
of the approval of the merger or consolidation and that appraisal rights
are available for any or all shares of such class or series of stock of
such constituent corporation, and shall include in such notice a copy of
this section; provided that, if the notice is given on or after the
effective date of the merger or consolidation, such notice shall be given
by the surviving or resulting corporation to all such holders of any class
or series of stock of a constituent corporation that are entitled to
appraisal rights. Such notice may, and, if given on or after the effective
date of the merger or consolidation, shall, also notify such stockholders
of the effective date of the merger or consolidation. Any stockholder
entitled to appraisal rights may, within twenty days after the date of
mailing of such notice, demand in writing from the surviving or resulting
corporation the appraisal of such holder's shares. Such demand will be
sufficient if it reasonably informs the corporation of the identity of the
stockholder and that the stockholder intends thereby to demand the
appraisal of such holder's shares. If such notice did not notify
stockholders of the effective date of the merger or consolidation, either
(i) each such constituent corporation shall send a second notice before the
effective date of the merger or consolidation notifying each of the holders
of any class or series of stock of such constituent corporation that are
entitled to appraisal rights of the effective date of the merger or
consolidation or (ii) the surviving or resulting corporation shall send
such a second notice to all such holders on or within 10 days after such
effective date; provided, however, that if such second notice is sent more
than 20 days following the sending of the first notice, such second notice
need only be sent to each stockholder who is entitled to appraisal rights
and who has demanded appraisal of such holder's shares in accordance with
this subsection. An affidavit of the secretary or assistant secretary or of
the transfer agent of the corporation that is required to give either
notice that such notice has been given shall, in the absence of fraud, be
prima facie evidence of the facts stated therein. For purposes of
determining the stockholders entitled to receive either notice, each
constituent corporation may fix, in advance, a record date that shall be
not more than 10 days prior to the date the notice is given; provided that,
if the notice is given on or after the effective date of the merger or
consolidation, the record date shall be such effective date. If no record
date is fixed and the notice is given prior to the effective date, the
record date shall be the close of business on the day next preceding the
day on which the notice is given.
D-2
<PAGE>
(e) Within 120 days after the effective date of the merger or consolidation,
the surviving or resulting corporation or any stockholder who has complied
with subsections (a) and (d) hereof and who is otherwise entitled to appraisal
rights, may file a petition in the Court of Chancery demanding a determination
of the value of the stock of all such stockholders. Notwithstanding the
foregoing, at any time within 60 days after the effective date of the merger
or consolidation, any stockholder shall have the right to withdraw his demand
for appraisal and to accept the terms offered upon the merger or
consolidation. Within 120 days after the effective date of the merger or
consolidation, any stockholder who has complied with the requirements of
subsections (a) and (d) hereof, upon written request, shall be entitled to
receive from the corporation surviving the merger or resulting from the
consolidation a statement setting forth the aggregate number of shares not
voted in favor of the merger or consolidation and with respect to which
demands for appraisal have been received and the aggregate number of holders
of such shares. Such written statement shall be mailed to the stockholder
within 10 days after his written request for such a statement is received by
the surviving or resulting corporation or within 10 days after expiration of
the period for delivery of demands for appraisal under subsection (d) hereof,
whichever is later.
(f) Upon the filing of any such petition by a stockholder, service of a copy
thereof shall be made upon the surviving or resulting corporation, which shall
within 20 days after such service file in the office of the Register in
Chancery in which the petition was filed a duly verified list containing the
names and addresses of all stockholders who have demanded payment for their
shares and with whom agreements as to the value of their shares have not been
reached by the surviving or resulting corporation. If the petition shall be
filed by the surviving or resulting corporation, the petition shall be
accompanied by such a duly verified list. The Register in Chancery, if so
ordered by the Court, shall give notice of the time and place fixed for the
hearing of such petition by registered or certified mail to the surviving or
resulting corporation and to the stockholders shown on the list at the
addresses therein stated. Such notice shall also be given by 1 or more
publications at least 1 week before the day of the hearing, in a newspaper of
general circulation published in the City of Wilmington, Delaware or such
publication as the Court deems advisable. The forms of the notices by mail and
by publication shall be approved by the Court, and the costs thereof shall be
borne by the surviving or resulting corporation.
(g) At the hearing on such petition, the Court shall determine the
stockholders who have complied with this section and who have become entitled
to appraisal rights. The Court may require the stockholders who have demanded
an appraisal for their shares and who hold stock represented by certificates
to submit their certificates of stock to the Register in Chancery for notation
thereon of the pendency of the appraisal proceedings; and if any stockholder
fails to comply with such direction, the Court may dismiss the proceedings as
to such stockholder.
(h) After determining the stockholders entitled to an appraisal, the Court
shall appraise the shares, determining their fair value exclusive of any
element of value arising from the accomplishment or expectation of the merger
or consolidation, together with a fair rate of interest, if any, to be paid
upon the amount determined to be the fair value. In determining such fair
value, the Court shall take into account all relevant factors. In determining
the fair rate of interest, the Court may consider all relevant factors,
including the rate of interest which the surviving or resulting corporation
would have had to pay to borrow money during the pendency of the proceeding.
Upon application by the surviving or resulting corporation or by any
stockholder entitled to participate in the appraisal proceeding, the Court
may, in its discretion, permit discovery or other pretrial proceedings and may
proceed to trial upon the appraisal prior to the final determination of the
stockholder entitled to an appraisal. Any stockholder whose name appears on
the list filed by the surviving or resulting corporation pursuant to
subsection (f) of this section and who has submitted his certificates of stock
to the Register in Chancery, if such is required, may participate fully in all
proceedings until it is finally determined that he is not entitled to
appraisal rights under this section.
(i) The Court shall direct the payment of the fair value of the shares,
together with interest, if any, by the surviving or resulting corporation to
the stockholders entitled thereto. Interest may be simple or compound, as the
Court may direct. Payment shall be so made to each such stockholder, in the
case of holders of uncertificated stock forthwith, and the case of holders of
shares represented by certificates upon the surrender to the corporation
D-3
<PAGE>
of the certificates representing such stock. The Court's decree may be
enforced as other decrees in the Court of Chancery may be enforced, whether
such surviving or resulting corporation be a corporation of this State or of
any state.
(j) The costs of the proceeding may be determined by the Court and taxed
upon the parties as the Court deems equitable in the circumstances. Upon
application of a stockholder, the Court may order all or a portion of the
expenses incurred by any stockholder in connection with the appraisal
proceeding, including, without limitation, reasonable attorney's fees and the
fees and expenses of experts, to be charged pro rata against the value of all
the shares entitled to an appraisal.
(k) From and after the effective date of the merger or consolidation, no
stockholder who has demanded his appraisal rights as provided in subsection
(d) of this section shall be entitled to vote such stock for any purpose or to
receive payment of dividends or other distributions on the stock (except
dividends or other distributions payable to stockholders of record at a date
which is prior to the effective date of the merger or consolidation);
provided, however, that if no petition for an appraisal shall be filed within
the time provided in subsection (e) of this section, or if such stockholder
shall deliver to the surviving or resulting corporation a written withdrawal
of his demand for an appraisal and an acceptance of the merger or
consolidation, either within 60 days after the effective date of the merger or
consolidation as provided in subsection (e) of this section or thereafter with
the written approval of the corporation, then the right of such stockholder to
an appraisal shall cease. Notwithstanding the foregoing, no appraisal
proceeding in the Court of Chancery shall be dismissed as to any stockholder
without the approval of the Court, and such approval may be conditioned upon
such terms as the Court deems just.
(1) The shares of the surviving or resulting corporation to which the shares
of such objecting stockholders would have been convened had they assented to
the merger or consolidation shall have the status of authorized and unissued
shares of the surviving or resulting corporation. (As amended by Ch. 79. L.
'95, Ch. 299. L. '96, and Ch. 349. L. '96, eff. 7-1-96.)
D-4
<PAGE>
APPENDIX E
RAMSAY HEALTH CARE, INC.
1996 LONG TERM INCENTIVE PLAN
Section 1. Purpose. The purposes of this Ramsay Health Care, Inc. 1996 Long
Term Incentive Plan (the "Plan") are to encourage selected employees,
officers, directors and consultants of, and other individuals providing
services to, Ramsay Health Care, Inc. (together with any successor thereto,
the "Company") and its Affiliates (as defined below) to acquire a proprietary
interest in the growth and performance of the Company, to generate an
increased incentive to contribute to the Company's future success and
prosperity thus enhancing the value of the Company for the benefit of its
stockholders, and to enhance the ability of the Company and its Affiliates to
attract and retain exceptionally qualified individuals upon whom, in large
measure, the sustained progress, growth and profitability of the Company
depend.
Section 2. Definitions. As used in the Plan, the following terms shall have
the meanings set forth below:
"Affiliate" shall mean (i) any entity that, directly or through one or more
intermediaries, is controlled by the Company and (ii) any entity in which the
Company has a significant equity interest, as determined by the Committee.
"Award" shall mean any Option, Stock Appreciation Right, Restricted
Security, Performance Award, or Other Stock-Based Award granted under the
Plan.
"Award Agreement" shall mean any written agreement, contract or other
instrument or document evidencing any Award granted under the Plan.
"Board" shall mean the Board of Directors of the Company.
"Cause", as used in connection with the termination of a Participant's
employment, shall mean (i) with respect to any Participant employed under a
written employment agreement with the Company or an Affiliate of the Company
which agreement includes a definition of "cause," "cause" as defined in such
agreement or, if such agreement contains no such definition, a material breach
by the Participant of such agreement, or (ii) with respect to any other
Participant, the failure to perform adequately in carrying out such
Participant's employment responsibilities, including any directives from the
Board, or engaging in such behavior in his personal or business life as to
lead the Committee in its reasonable judgment to determine that it is in the
best interests of the Company to terminate his employment.
"Common Stock" shall mean the common stock of the Company, $.01 par value.
"Code" shall mean the Internal Revenue Code of 1986, as amended from time to
time, and the regulations promulgated thereunder.
"Committee" shall mean the Compensation and Conflict of Interest Committee
or any other committee of the Board designated by the Board to administer the
Plan and composed of not less than three non-employee directors.
"Common Shares" shall mean any or all, as applicable, of the Common Stock
and such other securities or property as may become the subject of Awards, or
become subject to Awards, pursuant to an adjustment made under Section 4(b) of
the Plan and any other securities of the Company or any Affiliate or any
successor that may be so designated by the Committee.
"Employee" shall mean any employee of the Company or of any Affiliate.
E-1
<PAGE>
"Exchange Act" shall mean the Securities Exchange Act of 1934, as amended.
"Fair Market Value" shall mean (A) with respect to any property other than
the Common Shares, the fair market value of such property determined by such
methods or procedures as shall be established from time to time by the
Committee; and (B) with respect to the Common Shares, the last sale price
regular way on the date of reference, or, in case no sale takes place on such
date, the average of the high bid and low asked prices, in either case on the
principal national securities exchange on which the Common Shares are listed
or admitted to trading, or if the Common Shares are not listed or admitted to
trading on any national securities exchange, the last sale price reported on
the National Market System of the National Association of Securities Dealers
Automated Quotation System ("NASDAQ") on such date, or the average of the
closing high bid and low asked prices in the over-the-counter market reported
on NASDAQ on such date, whichever is applicable, or if there are no such
prices reported on NASDAQ on such date, as furnished to the Committee by any
New York Stock Exchange member selected from time to time by the Committee for
such purpose. If there is no bid or asked price reported on any such date, the
Fair Market Value shall be determined by the Committee in accordance with the
regulations promulgated under Section 2031 of the Code, or by any other
appropriate method selected by the Committee.
"Good Reason", as used in connection with the termination of a Participant's
employment, shall mean (i) with respect to any Participant employed under a
written employment agreement with the Company or an Affiliate of the Company,
"good reason" as defined in such written agreement or, if such agreement
contains no such definition, a material breach by the Company of such
agreement, or (ii) with respect to any other Participant, a failure by the
Company to pay such Participant any amount otherwise vested and due and a
continuation of such failure for 30 business days following notice to the
Company thereof.
"Incentive Stock Option" shall mean an option granted under Section 6(a) of
the Plan that is intended to meet the requirements of Section 422 of the Code
or any successor provision thereto.
"Non-Qualified Stock Option" shall mean an option granted under Section 6(a)
of the Plan that is not intended to be an Incentive Stock Option. Any stock
option granted by the Committee which is not designated an Incentive Stock
Option shall be deemed a Non-Qualified Stock Option.
"Option" shall mean an Incentive Stock Option or a Non-Qualified Stock
Option.
"Other Stock-Based Award" shall mean any right granted under Section 6(e) of
the Plan.
"Participant" shall mean any individual granted an Award under the Plan.
"Performance Award" shall mean any right granted under Section 6(d) of the
Plan.
"Person" shall mean any individual, corporation, partnership, association,
joint-stock company, trust, unincorporated organization, or government or
political subdivision thereof.
"Released Securities" shall mean securities that were Restricted Securities
but with respect to which all applicable restrictions have expired, lapsed or
been waived in accordance with the terms of the Plan or the applicable Award
Agreement.
"Restricted Securities" shall mean any Common Shares granted under Section
6(c) of the Plan, any right granted under Section 6(c) of the Plan that is
denominated in Common Shares or any other Award under which issued and
outstanding Common Shares are held subject to certain restrictions.
"Rule 16a-1" and "Rule 16b-3" shall mean Rule 16a-1 and Rule 16b-3,
respectively, promulgated by the Securities and Exchange Commission under the
Exchange Act, or any successor rule or regulation thereto as in effect from
time to time.
E-2
<PAGE>
"Stock Appreciation Right" shall mean any right granted under Section 6(b)
of the Plan.
Section 3. Administration. The Plan shall be administered by the Committee.
Subject to the terms of the Plan and applicable law, and in addition to other
express powers and authorizations conferred on the Committee by the Plan, the
Committee shall have full power and authority to: (i) designate Participants;
(ii) determine the type or types of Awards to be granted to an eligible
Employee or other individual under the Plan; (iii) determine the number and
classification of Common Shares to be covered by (or with respect to which
payments, rights or other matters are to be calculated in connection with)
Awards; (iv) determine the terms and conditions of any Award; (v) determine
whether, to what extent, and under what circumstances Awards may be settled or
exercised in cash, Common Shares, other securities, other Awards or other
property, or canceled, forfeited or suspended, and the method or methods by
which Awards may be settled, exercised, canceled, forfeited or suspended; (vi)
determine requirements for the vesting of Awards or performance criteria to be
achieved in order for Awards to vest; (vii) determine whether, to what extent
and under what circumstances cash, Common Shares other securities, other
Awards, other property and other amounts payable with respect to an Award
under the Plan shall be deferred either automatically or at the election of
the holder thereof or of the Committee; (viii) interpret and administer the
Plan and any instrument or agreement relating to, or Award made under, the
Plan; (ix) establish, amend, suspend or waive such rules and regulations and
appoint such agents as it shall deem appropriate for the proper administration
of the Plan; and (x) make any other determination and take any other action
that the Committee deems necessary or desirable for the administration of the
Plan. Unless otherwise expressly provided in the Plan, all designations,
determinations, interpretations and other decisions under or with respect to
the Plan or any Award shall be within the sole discretion of the Committee,
may be made at any time and shall be final, conclusive and binding upon all
Persons, including the Company, any Affiliate, any Participant, any holder or
beneficiary of any Award, any shareholder and any Employee. Notwithstanding
the foregoing, the maximum number of Awards which may be granted to any one
Participant under this Plan shall not exceed 250,000 Common Shares, subject to
the adjustments provided in Section 4(b) hereof and no Awards under this Plan
shall be granted after June 30, 2006.
Section 4. Common Shares Available for Awards.
(a) Common Shares Available. Subject to adjustment as provided in Section
4(b):
(i) Calculation of Number of Common Shares Available. The number of
Common Shares available for granting Awards under the Plan shall be
750,000, any or all of which may be or may be based on Common Stock, any
other security which becomes the subject of Awards, or any combination
thereof. Initially 750,000 shares of Common Stock shall be reserved for
Awards hereunder. Further, if, after the effective date of the Plan, any
Common Shares covered by an Award granted under the Plan or to which such
an Award relates, are forfeited, or if an Award otherwise terminates or is
canceled without the delivery of Shares or of other consideration, then the
Common Shares covered by such Award or to which such Award relates, or the
number of Common Shares otherwise counted against the aggregate number of
Common Shares available under the Plan with respect to such Award, to the
extent of any such forfeiture, termination or cancellation, shall again be,
or shall become, available for granting Awards under the Plan.
(ii) Accounting for Awards. For purposes of this Section 4.
(A) if an Award is denominated in or based upon Common Shares, the
number of Common Shares covered by such Award or to which such Award
relates shall be counted on the date of grant of such Award against the
aggregate number of Common Shares available for granting Awards under
the Plan and against the maximum number of Awards available to any
Participant; and
(B) Awards not denominated in Common Shares may be counted against
the aggregate number of Common Shares available for granting Awards
under the Plan and against the maximum number of Awards available to
any participant in such amount and at such time as the Committee shall
determine under procedures adopted by the Committee consistent with the
purposes of the Plan;
provided, however, that Awards that operate in tandem with (whether
granted simultaneously with or at a different time from), or that are
substituted for, other Awards may be counted or not counted under
E-3
<PAGE>
procedures adopted by the Committee in order to avoid double counting. Any
Common Shares that are delivered by the Company, and any Awards that are
granted by, or become obligations of, the Company, through the assumption
by the Company or an Affiliate of, or in substitution for, outstanding
awards previously granted by an acquired company shall, in the case of
Awards granted to Participants who are officers or directors of the Company
for purposes of Section 16 of the Exchange Act, be counted against the
Common Shares available for granting Awards under the Plan.
(iii) Sources of Common Shares Deliverable Under Awards. Any Common
Shares delivered pursuant to an Award may consist, in whole or in part, of
authorized and unissued Common Shares or of treasury Common Shares.
(b) Adjustments. In the event that the Committee shall determine that any
dividend or other distribution (whether in the form of cash, Common Shares,
other securities or other property), recapitalization, stock split, reverse
stock split, reorganization, merger, consolidation, split-up, spin-off,
combination, repurchase or exchange of Common Shares or other securities of
the Company, issuance of warrants or other rights to purchase Common Shares or
other securities of the Company, or other similar corporate transaction or
event affects the Common Shares such that an adjustment is determined by the
Committee to be appropriate in order to prevent dilution or enlargement of the
benefits or potential benefits intended to be made available under the Plan,
then the Committee shall, in such manner as it may deem equitable, adjust any
or all of (i) the number and kind of Common Shares (or other securities or
property) which thereafter may be made the subject of Awards, (ii) the number
and kind of Common Shares (or other securities or property) subject to
outstanding Awards, and (iii) the grant or exercise price with respect to any
Award or, if deemed appropriate, make provision for a cash payment to the
holder of an outstanding Award; provided, however, that the number of Common
Shares subject to any Award denominated in Common Shares shall always be a
whole number.
In connection with any merger or consolidation in which the Company is not
the surviving corporation and which results in the holders of the outstanding
voting securities of the Company (determined immediately prior to such merger
or consolidation) owning less than a majority of the outstanding voting
securities of the surviving corporation (determined immediately following such
merger or consolidation), or any sale or transfer by the Company of all or
substantially all its assets or any tender offer or exchange offer for or the
acquisition, directly or indirectly, by any person or group of all or a
majority of the then outstanding voting securities of the Company, all
outstanding Options under the Plan shall become exercisable in full,
notwithstanding any other provision of the Plan or of any outstanding options
granted thereunder, on and after (i) the fifteenth day prior to the effective
date of such merger, consolidation, sale, transfer or acquisition or (ii) the
date of commencement of such tender offer or exchange offer, as the case may
be. The provisions of the foregoing sentence shall apply to any outstanding
Options which are Incentive Stock Options to the extent permitted by Section
422(d) of the Code and such outstanding Options in excess thereof shall,
immediately upon the occurrence of the event described in clause (i) or (ii)
of the foregoing sentence, be treated for all purposes of the Plan as
NonQualified Stock Options and shall be immediately exercisable as such as
provided in the foregoing sentence.
Section 5. Eligibility. Any Employee, including any officer or employee-
director of the Company or of any Affiliate, and any consultant of, or other
individual providing services to, the Company or any Affiliate shall be
eligible to be designated a Participant. A non-employee director shall be
eligible to receive NonQualified Stock Options under the Plan.
Section 6. Awards.
(a) Options. The Committee is hereby authorized to grant to eligible
individuals options to purchase Common Shares (each, an "Option") which shall
contain the following terms and conditions and with such additional terms and
conditions, in either case not inconsistent with the provisions of the Plan,
as the Committee shall determine:
(i) Exercise Price. The purchase price per Common Share purchasable under
an Option shall be determined by the Committee; provided, however, that
such purchase price shall not be less than the Fair
E-4
<PAGE>
Market Value of a Common Share on the date of grant of such Option, or such
other price as required under Subsection 6(a)(iv) hereof.
(ii) Time and Method of Exercise. Subject to the terms of Section
6(a)(iii), the Committee shall determine the time or times at which an
Option may be exercised in whole or in part, and the method or methods by
which, and the form or forms (including, without limitation, cash, Common
Shares, outstanding Awards, or other property, or any combination thereof,
having a Fair Market Value on the exercise date equal to the relevant
exercise price) in which, payment of the exercise price with respect
thereto may be made or deemed to have been made.
(iii) Exercisability Upon Death, Retirement and Termination of
Employment. Subject to the condition that no Option may be exercised in
whole or in part after the expiration of the Option period specified in the
applicable Award Agreement:
(A) Subject to the terms of paragraph (D) below, upon the death of a
Participant while employed or within 3 months of retirement or
disability as defined in paragraph (B) below, the person or persons to
whom such Participant's rights with respect to any Option held by such
Participant are transferred by will or the laws of descent and
distribution may, prior to the expiration of the earlier of: (1) the
outside exercise date determined by the Committee at the time of
granting the Option, or (2) nine months after such Participant's death,
purchase any or all of the Common Shares with respect to which such
Participant was entitled to exercise such Option immediately prior to
such Participant's death, and any Options not so exercisable will lapse
on the date of such Participant's death;
(B) Subject to the terms of paragraph (D) below, upon termination of
a Participant's employment with the Company (x) as a result of
retirement pursuant to a retirement plan of the Company or an Affiliate
or disability (as determined by the Committee) of such Participant, (y)
by the Company other than for Cause, or (z) by the Participant with
Good Reason, such Participant may, prior to the expiration of the
earlier of: (1) the outside exercise date determined by the Committee
at the time of granting the Option, or (2) three months after the date
of such termination, purchase any or all of the Common Shares with
respect to which such Participant was entitled to exercise any Options
immediately prior to such termination, and any Options not so
exercisable will lapse on such date of termination;
(C) Subject to the terms of paragraph (D) below, upon termination of
a Participant's employment with the Company under any circumstances not
described in paragraphs (A) or (B) above, such Participant's Options
shall be canceled to the extent not theretofore exercised;
(D) Upon (i) the death of the Participant, or (ii) termination of the
Participant's employment with the Company (x) by the Company other than
for Cause (y) by the Participant with Good Reason or (z) as a result of
retirement or disability as defined in paragraph (B) above, the Company
shall have the right to cancel all of the Options such Participant was
entitled to exercise at the time of such death or termination (subject
to the terms of paragraphs (A) or (B) above) for a payment in cash
equal to the excess, if any, of the Fair Market Value of one Common
Share on the date of death or termination over the exercise price of
such Option for one Common Share times the number of Common Shares
subject to the Option and exercisable at the time of such death or
termination; and
(E) Upon expiration of the respective periods set forth in each of
paragraphs (A) through (C) above, the Options of a Participant who has
died or whose employment has been terminated shall be canceled to the
extent not theretofore canceled or exercised.
(F) For purposes of paragraphs (A) through (D) above, the period of
service of an individual as a director or consultant of the Company or
an Affiliate shall be deemed the period of employment.
(iv) Incentive Stock Options. The following provisions shall apply only
to Incentive Stock Options granted under the Plan:
(A) No Incentive Stock Option shall be granted to any eligible
Employee who, at the time such Option is granted, owns securities
possessing more than ten percent (10%) of the total combined voting
power of all classes of securities of the Company or of any Affiliate,
except that such an Option may
E-5
<PAGE>
be granted to such an Employee if at the time the Option is granted the
option price is at least one hundred ten percent (110%) of the Fair
Market Value of the Common Shares (determined in accordance with
Section 2) subject to the Option, and the Option by its terms is not
exercisable after the expiration of five (5) years from the date the
Option is granted; and
(B) To the extent that the aggregate Fair Market Value of the Common
Shares with respect to which Incentive Stock Options (without regard to
this subsection) are exercisable for the first time by any individual
during any calendar year (under all plans of the Company and its
Affiliates) exceeds $100,000, such Options shall be treated as Non-
Qualified Stock Options. This subsection shall be applied by taking
Options into account in the order in which they were granted. If some
but not all Options granted on any one day are subject to this
subsection, then such Options shall be apportioned between Incentive
Stock Option and Non-Qualified Stock Option treatment in such manner as
the Committee shall determine. For purposes of this subsection, the
Fair Market Value of any Common Shares shall be determined, in
accordance with Section 2, as of the date the Option with respect to
such Common Shares is granted.
(v) Other Terms and Conditions of Options. Notwithstanding any provision
contained in the Plan to the contrary, during any period when any member of
the Committee shall not be a "nonemployee director" as defined in Rule 16b-
3, then, the terms and conditions of Options granted under the Plan to any
director or officer, as defined in Rule 16a-1, of the Company during such
period unless other terms and conditions are approved in advance by the
Board, shall be as follows:
(A) The price at which each Common Share subject to an option may be
purchased shall, subject to any adjustments which may be made pursuant
to Section 4, in no event be less than the Fair Market Value of a
Common Share on the date of grant, and provided further that in the
event the option is intended to be an Incentive Stock Option and the
optionee owns on the date of grant securities possessing more than ten
percent (10%) of the total combined voting power of all classes of
securities of the Company or of any Affiliate, the price per share
shall not be less than one hundred ten percent (110%) of the Fair
Market Value per Common Share on the date of grant.
(B) The Option may be exercised to purchase Common Shares covered by
the Option not sooner than six (6) months following the date of grant.
The Option shall terminate and no Common Shares may be purchased
thereunder more than ten (10) years after the date of grant, provided
that if the Option is intended to be an Incentive Stock Option and the
Optionee owns on the date of grant securities possessing more than ten
percent (10%) of the total combined voting power of all classes of
securities of the Company or of any Affiliate, the Option shall
terminate and no Common Shares may be purchased thereunder more than
five (5) years after the date of grant.
(C) The maximum number of Common Shares which may be subject to
options granted to all directors pursuant to this Section 5(j) shall be
750,000 shares in the aggregate. The maximum number of Common Shares
which may be subject to options granted to any director of the Company
shall be 250,000 shares.
(b) Stock Appreciation Rights. The Committee is hereby authorized to grant
to eligible Employees "Stock Appreciation Rights." Each Stock Appreciation
Right shall consist of a right to receive the excess of (i) the Fair Market
Value of one Common Share on the date of exercise or, if the Committee shall
so determine in the case of any such right other than one related to any
Incentive Stock Option, at any time during a specified period before or after
the date of exercise over (ii) the grant price of the right as specified by
the Committee, which shall not be less than one hundred percent (100%) of the
Fair Market Value of one Common Share on the date of grant of the Stock
Appreciation Right (or, if the Committee so determines, in the case of any
Stock Appreciation Right retroactively granted in tandem with or in
substitution for another Award, on the date of grant of such other Award).
Subject to the terms of the Plan and any applicable Award Agreement, the grant
price, term, methods of exercise, methods of settlement, and any other terms
and conditions of any Stock Appreciation Right granted under the Plan shall be
as determined by the Committee. The Committee may impose such conditions or
restrictions on the exercise of any Stock Appreciation Right as it may deem
appropriate.
E-6
<PAGE>
(c) Restricted Securities.
(i) Issuance. The Committee is hereby authorized to grant to eligible
Employees "Restricted Securities" which shall consist of the right to
receive, by purchase or otherwise. Common Shares which are subject to such
restrictions as the Committee may impose (including, without limitation,
any limitation on the right to vote such Common Shares or the right to
receive any dividend or other right or property), which restrictions may
lapse separately or in combination at such time or times, in such
installments or otherwise. as the Committee may deem appropriate.
(ii) Registration. Restricted Securities granted under the Plan may be
evidenced in such manner as the Committee may deem appropriate, including,
without limitation, book-entry registration or issuance of a stock
certificate or certificates. In the event any stock certificate is issued
in respect of Restricted Securities granted under the Plan, such
certificate shall be registered in the name of the Participant and shall
bear an appropriate legend referring to the terms, conditions and
restrictions applicable to such Restricted Securities.
(iii) Forfeiture. Except as otherwise determined by the Committee, upon
termination of a Participant's employment for any reason during the
applicable restriction period, all of such Participant's Restricted
Securities which had not become Released Securities by the date of
termination of employment shall be forfeited and reacquired by the Company;
provided, however, that the Committee may, when it finds that a waiver
would be in the best interests of the Company, waive in whole or in part
any or all remaining restrictions with respect to such Participant's
Restricted Securities. Unrestricted Common Shares, evidenced in such manner
as the Committee shall deem appropriate, shall be issued to the holder of
Restricted Securities promptly after such Restricted Securities become
Released Securities.
(d) Performance Awards. The Committee is hereby authorized to grant to
eligible Employees "Performance Awards." Each Performance Award shall consist
of a right, (i) denominated or payable in cash, Common Shares, other
securities or other property (including, without limitation, Restricted
Securities), and (ii) which shall confer on the holder thereof rights valued
as determined by the Committee and payable to, or exercisable by, the holder
of the Performance Award, in whole or in part, upon the achievement of such
performance goals during such performance periods as the Committee shall
establish. Subject to the terms of the Plan and any applicable Award
Agreement, the performance goals to be achieved during any performance period,
the length of any performance period, the amount of any Performance Award
granted, the termination of a Participant's employment and the amount of any
payment or transfer to be made pursuant to any Performance Award shall be
determined by the Committee and by the other terms and conditions of any
Performance Award. The Committee shall issue performance goals prior to the
commencement of the performance period to which such performance goals
pertain.
(e) Other Stock-Based Awards. The Committee is hereby authorized to grant to
eligible Employees "Other Stock Based Awards." Each Other Stock-Based Award
shall consist of a right (i) which is other than an Award or right described
in Section 6(a), (b), (c) or (d) above and (ii) which is denominated or
payable in, valued in whole or in part by reference to, or otherwise based on
or related to, Common Shares (including, without limitation, securities
convertible into Common Shares) as are deemed by the Committee to be
consistent with the purposes of the Plan; provided, however, that such right
shall comply, to the extent deemed desirable by the Committee, with Rule 16b-3
and applicable law. Subject to the terms of the Plan and any applicable Award
Agreement, the Committee shall determine the terms and conditions of Other
Stock-Based Awards. Common Shares or other securities delivered pursuant to a
purchase right granted under this Section 6(e) shall be purchased for such
consideration, which may be paid by such method or methods and in such form or
forms, including, without limitation, cash, Common Shares, other securities,
other Awards, other property, or any combination thereof, as the Committee
shall determine.
(f) General.
(i) No Cash Consideration for Awards. Awards may be granted for no cash
consideration or for such minimal cash consideration as may be required by
applicable law.
E-7
<PAGE>
(ii) Awards May Be Granted Separately or Together. Awards may, in the
discretion of the Committee, be granted either alone or in addition to, in
tandem with, or in substitution for any other Award, except that in no
event shall an Incentive Stock Option be granted together with a Non-
Qualified Stock Option in such a manner that the exercise of one Option
affects the right to exercise the other.
Awards granted in addition to or in tandem with other Awards may be
granted either at the same time as or at a different time from the grant of
such other awards.
(iii) Forms of Payment Under Awards. Subject to the terms of the Plan and
of any applicable Award Agreement, payments or transfers to be made by the
Company or an Affiliate upon the grant, exercise or payment of an Award may
be made in such form or forms as the Committee shall determine, including,
without limitation, cash, Common Shares, other securities, other Awards, or
other property, or any combination thereof, and may be made in a single
payment or transfer, in installments, or on a deferred basis, in each case
in accordance with rules and procedures established by the Committee. Such
rules and procedures may include, without limitation, provisions for the
payment or crediting of reasonable interest on installment or deferred
payments. In accordance with the above, the Committee may elect (i) to pay
a Participant (or such Participant's permitted transferee) upon the
exercise of an Option in whole or in part, in lieu of the exercise thereof
and the delivery of Common Shares thereunder, an amount of cash equal to
the excess, if any, of the Fair Market Value of one Common Share on the
date of such exercise over the exercise price of such Option for one Common
Share times the number of Common Shares subject to the Option or portion
thereof so exercised or (ii) to settle other stock denominated Awards in
cash.
(iv) Limits on Transfer of Awards.
(A) No award (other than Released Securities), and no right under any
such Award, may be assigned, alienated, pledged, attached, sold or
otherwise transferred or encumbered by a Participant otherwise than by
will or by the laws of descent and distribution (or, in the case of
Restricted Securities, to the Company) and any such purported
assignment, alienation, pledge, attachment, sale or other transfer or
encumbrance shall be void and unenforceable against the Company or any
Affiliate.
(B) Each award, and each right under any Award, shall be exercisable
during the Participant's lifetime only by the Participant or, if
permissible under applicable law, by the Participant's guardian or
legal representative.
(v) Terms of Awards. The term of each Award shall be for such period as
may be determined by the Committee; provided, however, that in no event
shall the term of any Option exceed a period of ten years from the date of
its grant.
(vi) Rule 16b-3 Six-Month Limitations. To the extent required in order to
maintain the exemption provided under Rule 16b-3 only, any equity security
offered pursuant to the Plan must be held for at least six months after the
date of grant, and with respect to any derivative security issued pursuant
to the Plan, at least six months must elapse from the date of acquisition
of such derivative security to the date of disposition of the derivative
security (other than upon exercise or conversion) or its underlying equity
security. Terms used in the preceding sentence shall, for the purposes of
such sentence only, have the meanings, if any, assigned or attributed to
them under Rule 16b-3.
(vii) Common Share Certificates. All certificates for Common Shares
delivered under the Plan pursuant to any Award of the exercise thereof
shall be subject to such stop transfer orders and other restrictions as the
Committee may deem advisable under the Plan or the rules, regulations, and
other requirements of the Securities and Exchange Commission, any stock
exchange upon which such Common Shares are then listed, and any applicable
Federal or state securities laws, and the Committee may cause a legend or
legends to be put on any such certificates to make appropriate reference to
such restrictions.
(viii) Delivery of Common Shares or Other Securities and Payment by
Participant of Consideration. No Common Shares or other securities shall be
delivered pursuant to any Award until payment in full of
E-8
<PAGE>
any amount required to be paid pursuant to the Plan or the applicable Award
Agreement is received by the Company. Such payment may be made by such
method or methods and in such form or forms as the Committee shall
determine, including, without limitation, cash, Common Shares, other
securities, other Awards or other property, or any combination thereof;
provided that the combined value, as determined by the Committee, of all
cash and cash equivalents and the Fair Market Value of any such Common
Shares or other property so tendered to the Company, as of the date of such
tender, is at least equal to the full amount required to be paid pursuant
to the Plan or the applicable Award Agreement to the Company.
Section 7. Amendments; Adjustments and Termination. Except to the extent
prohibited by applicable law and unless otherwise expressly provided in an
Award Agreement or in the Plan:
(a) Amendments to the Plan. The Board may amend, alter, suspend,
discontinue, or terminate the Plan without the consent of any stockholder,
Participant, other holder or beneficiary of an Award, or other Person;
provided, however, that, subject to the Company's rights to adjust Awards
under Sections 7(c) and (d), any amendment, alteration, suspension,
discontinuation, or termination that would impair the rights of any
Participant, or any other holder or beneficiary of any Award theretofore
granted, shall not to that extent be effective without the consent of such
Participant, other holder or beneficiary of an Award, as the case may be; and
provided further, however, that notwithstanding any other provision of the
Plan or any Award Agreement, without the approval of the stockholders of the
Company no such amendment, alteration, suspension, discontinuation, or
termination shall be made that would:
(i) increase the total number of Common Shares available for Awards under
the Plan, except as provided in Section 4 hereof; or
(ii) otherwise cause the Plan to cease to comply with any tax or
regulatory requirement, including for these purposes any approval or other
requirement which is or would be a prerequisite for exemptive relief from
Section 16(b) of the Exchange Act.
(b) Amendments to Awards. The Committee may waive any conditions or rights
under, amend any terms of, or alter, suspend, discontinue, cancel or
terminate, any Award theretofore granted, prospectively or retroactively;
provided, however, that, subject to the Company's rights to adjust Awards
under Sections 7(c) and (d), any amendment, alteration, suspension,
discontinuation, cancellation or termination that would impair the rights of
any Participant or holder or beneficiary of any Award theretofore granted,
shall not to that extent be effective without the consent of such Participant
or holder or beneficiary of an Award, as the case may be.
(c) Adjustment of Awards Upon Certain Acquisitions. In the event the Company
or any Affiliate shall assume outstanding employee awards or the right or
obligation to make future such awards in connection with the acquisition of
another business or another corporation or business entity, the Committee may
make such adjustments, not inconsistent with the terms of the Plan, in the
terms of Awards as it shall deem appropriate in order to achieve reasonable
comparability or other equitable relationship between the assumed awards and
the Awards granted under the Plan as so adjusted.
(d) Adjustments of Awards Upon the Occurrence of Certain Unusual or Non-
recurring Events. The Committee is hereby authorized to make adjustments in
the terms and conditions of, and the criteria included in, Awards in
recognition of unusual or non-recurring events (including, without limitation,
the events described in Section 4(b) hereof) affecting the Company, any
Affiliate, or the financial statements of the Company or any Affiliate, or of
changes in applicable laws, regulations, or accounting principles, whenever
the Committee determines that such adjustments are appropriate in order to
prevent dilution or enlargement of the benefits or potential benefits intended
to be made available under the Plan.
Section 8. General Provisions.
(a) No Rights to Awards. No Employee or other Person shall have any claim to
be granted any Award under the Plan, and there is no obligation for uniformity
of treatment of Employees, or holders or beneficiaries
E-9
<PAGE>
of Awards under the Plan. The terms and conditions of Awards need not be the
same with respect to each recipient.
(b) Delegation. Subject to the terms of the Plan and applicable law, the
Committee may delegate to one or more officers or managers of the Company or
any Affiliate, or to a committee of such officers or managers, the authority,
subject to such terms and limitations as the Committee shall determine, to
grant Awards to, or to cancel, modify, waive rights with respect to, alter,
discontinue, suspend, or terminate Awards; provided, however, that, no such
delegation shall be permitted with respect to Awards held by Employees who are
officers or directors of the Company for purposes of Section 16 of the
Exchange Act, or any successor section thereto or who are otherwise subject to
such Section.
(c) Correction of Defects, Omissions, and Inconsistencies. The Committee may
correct any defect, supply any omission, or reconcile any inconsistency in the
Plan or any Award in the manner and to the extent it shall deem desirable to
carry the Plan into effect.
(d) Withholding. The Company or any Affiliate shall be authorized to
withhold from any Award granted, from any payment due or transfer made under
any Award or under the Plan or from any compensation or other amount owing to
a Participant the amount (in cash, Common Shares, other securities, other
Awards, or other property) of withholding taxes due in respect of an Award,
its exercise, or any payment or transfer under such Award or under the Plan
and to take such other action as may be necessary in the opinion of the
Company or Affiliate to satisfy all obligations for the payment of such taxes.
(e) No Limit on Other Compensation Arrangements. Nothing contained in the
Plan shall prevent the Company or any Affiliate from adopting or continuing in
effect other or additional compensation arrangements, and such arrangements
may be either generally applicable or applicable only in specific cases.
(f) No Right to Employment. The grant of an Award shall not be construed as
giving a Participant the right to be retained in the employ of the Company or
any Affiliate. Further, the Company or an Affiliate may at any time dismiss a
Participant from employment, free from any liability, or any claim under the
Plan, unless otherwise expressly provided in the Plan or in any Award
Agreement.
(g) Governing Law. The validity, construction and effect of the Plan and any
rules and regulations relating to the Plan shall be determined in accordance
with the laws of the State of Delaware and applicable Federal law.
(h) Severability. If any provision of the Plan or any Award is or becomes or
is deemed to be invalid, illegal or unenforceable in any jurisdiction or as to
any Person or Award under any law deemed applicable by the Committee, such
provision shall be construed or deemed amended to conform to applicable laws,
or if it cannot be construed or deemed amended without, in the determination
of the Committee, materially altering the intent of the Plan or the Award,
such provision shall be stricken as to such jurisdiction, Person or Award and
the remainder of the Plan and any such Award shall remain in full force and
effect.
(i) No Trust or Fund Created. Neither the Plan nor any Award shall create or
be construed to create a trust or separate fund of any kind or a fiduciary
relationship between the Company or any Affiliate and a Participant or any
other Person. To the extent that any Person acquires a right to receive
payments from the Company or any Affiliate pursuant to an Award, such right
shall be no greater than the right of any unsecured general creditor of the
Company or any Affiliate.
(j) No Fractional Common Shares. No fractional Common Shares shall be issued
or delivered pursuant to the Plan or any Award, and the Committee shall
determine whether cash, other securities, or other property shall be paid or
transferred in lieu of any fractional Common Shares or whether such fractional
Common Shares or any rights thereto shall be canceled, terminated, or
otherwise eliminated.
E-10
<PAGE>
(k) Headings. Headings are given to the Sections and subsections of the Plan
solely as a convenience to facilitate reference. Such headings shall not be
deemed in any way material or relevant to the construction or interpretation
of the Plan or any provision thereof.
Section 9. Adoption, Approval and Effective Date of the Plan. The Plan shall
be considered adopted and shall become effective on the date the Plan is
approved by the Board; provided, however, that the Plan and any Awards granted
under the Plan shall be void, if the stockholders of the Company shall not
have approved the adoption of the Plan within twelve (12) months after the
effective date, by a majority of votes cast thereon at a meeting of
stockholders duly called and held for such purpose.
E-11
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 20. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
Under Section 145 of the Delaware General Corporation Law, as amended, RHCI
has the power to indemnify directors and officers under certain prescribed
circumstances and subject to certain limitations against certain costs and
expenses, including attorney's fees, actually and reasonably incurred in
connection with any action, suit or proceeding, whether civil, criminal,
administrative or investigative, to which any of them is a party by reason of
such person's being a director or officer of RHCI if it is determined that such
person acted in accordance with the applicable standard of conduct set forth in
such statutory provisions.
RHCI's Certificate of Incorporation contains a provision which eliminates the
personal liability of a director of RHCI to RHCI or to any of its stockholders
for monetary damages for a breach of his fiduciary duty as a director, except
in the case where the director breached his duty of loyalty, failed to act in
good faith, engaged in intentional misconduct or knowingly violated a law,
authorized the payment of a dividend or approved a stock repurchase in
violation of Delaware corporate law, or obtained an improper personal benefit.
Section 4.1 of the By-laws of RHCI contains provisions relating to the
indemnification of directors and officers, which provide, in general, that RHCI
shall indemnify its officers and directors to the fullest extent authorized by
the laws of the State of Delaware, as they may be amended from time to time.
RHCI has entered into indemnification agreements with its directors and
executive officers. These agreements provide that the directors and executive
officers will be indemnified to the fullest possible extent permitted by
Delaware law against all expenses (including attorneys' fees), judgments,
fines, penalties, taxes and settlement amounts paid or incurred by them in any
action or proceeding (including any action by or in the right of RHCI or any of
its subsidiaries or affiliates), on account of their service as directors,
officers, employees, fiduciaries or agents of RHCI or any of its subsidiaries
or affiliates, and their service at the request of RHCI or any of its
subsidiaries or affiliates, as directors, officers, employees, fiduciaries or
agents of another corporation, partnership, joint venture, trust, employee
benefit plan or other enterprise.
RHCI maintains liability insurance for its officers and directors, insuring
them against certain losses arising from claims or charges made against them
while acting in their capacities as officers or directors of RHCI.
ITEM 21. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
A list of Exhibits required to be filed as part of this Registration
Statement on Form S-4 is listed in the attached Index to Exhibits and is
incorporated herein by reference.
ITEM 22. UNDERTAKINGS.
(A) The undersigned registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being made, a
post-effective amendment to this registration statement:
(i) To include any prospectus required by Section 10(a)(3) of the
Securities Act of 1933;
(ii) To reflect in the prospectus any facts or events arising after
the effective date of the registration statement (or the most recent
post-effective amendment thereof) which, individually or in the
aggregate, represent a fundamental change in the information set forth
in the registration statement. Notwithstanding the foregoing, any
increase or decrease in volume of securities offered (if the total
dollar value of securities offered would not exceed that which was
registered) and any deviation from the low or high and of the estimated
maximum offering range may be reflected in the form of prospectus filed
with the Commission pursuant to Rule 424(b) if, in the aggregate, the
changes in volume and price represent no more than 20 percent change in
the maximum aggregate offering price set forth in the "Calculation of
Registration Fee" table in the effective registration statement;
(iii) To include any material information with respect to the plan of
distribution not previously disclosed in the registration statement or
any material change to such information in the registration statement.
II-1
<PAGE>
(2) That, for the purpose of determining any liability under the
Securities Act of 1933, each such post-effective amendment shall be deemed
to be a new registration statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed
to be the initial bona fide offering thereof.
(3) To remove from registration by means of a post-effective amendment
any of the securities being registered which remain unsold at the
termination of the offering.
(B) The undersigned Registrant hereby undertakes as follows: that prior to
any public reoffering of the securities registered hereunder through use of a
prospectus which is a part of this registration statement, by any person or
party who is deemed to be an underwriter within the meaning of Rule 145(c),
the issuer undertakes that such reoffering prospectus will contain the
information called for by the applicable registration form with respect to
reofferings by persons who may be deemed underwriters, in addition to the
information called for by the other items of the applicable form.
(C) The Registrant undertakes that every prospectus: (i) that is filed
pursuant to the paragraph immediately preceding, or (ii) that purports to meet
the requirements of Section 10(a)(3) of the Act and is used in connection with
an offering of securities subject to Rule 415, will be filed as a part of an
amendment to the registration statement and will not be used until such
amendment is effective, and that, for purposes of determining any liability
under the Securities Act of 1933, each such post-effective amendment shall be
deemed to be a new registration statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed to
be the initial bona fide offering thereof.
(D) Insofar as indemnification for liabilities arising under the Securities
Act of 1933 may be permitted to directors, officers and controlling persons of
the Registrant pursuant to the provisions of the Certificate of Incorporation
of the Registrant or the laws of the State of Delaware or otherwise, the
Registrant has been advised that in the opinion of the Securities and Exchange
Commission such indemnification is against public policy as expressed in the
Act and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the
Registrant of expenses incurred or paid by a director, officer or controlling
person of the Registrant in the successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling person in
connection with the securities being registered, the Registrant will, unless
in the opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question whether
such indemnification by it is against public policy as expressed in the Act
and will be governed by the final adjudication of such issue.
(E) The undersigned Registrant hereby undertakes that:
(1) For purposes of determining any liability under the Securities Act of
1933, the information omitted from the form of prospectus filed as part of
this registration statement in reliance upon Rule 430A and contained in a
form of prospectus filed by the Registrant pursuant to Rule 424(b)( l ) or
(4) or 497(h) under the Securities Act shall be deemed to be part of this
registration statement as of the time it was declared effective.
(2) For the purposes of determining any liability under the Securities
Act of 1933, each post-effective amendment that contains a form of
prospectus shall be deemed to be a new registration statement relating to
the securities offered therein and the offering of such securities at that
time shall be deemed to be the initial bona fide offering thereof.
(F) The undersigned Registrant hereby undertakes to respond to requests for
information that is incorporated by reference into the prospectus pursuant to
Items 4, 10(b), 11 or 13 of this Form, within one business day of receipt of
such request' and to send the incorporated documents by first class mail or
other equally prompt means. This includes the information contained in
documents filed subsequent to the effective date of the registration statement
through the date of responding to the request.
(G) The undersigned Registrant hereby undertakes to supply by means of a
post-effective amendment all information concerning a transaction, and the
company being acquired involved therein, that was not the subject of and
included in the registration statement when it became effective.
II-2
<PAGE>
INDEX OF EXHIBITS
<TABLE>
<CAPTION>
PAGE
NUMBER
------
<C> <S> <C>
2.1 Agreement and Plan of Merger dated as of October 1, 1996 among
Ramsay Managed Care, Inc. ("RMCI"), RHCI and RHCI Acquisition
Corp. (incorporated by reference to Exhibit 2 to the RHCI's
Current Report on Form 8-K dated October 2, 1996). Pursuant to
Reg. S-K, Item 601(b)(2), RHCI agrees to furnish a copy of the
Disclosure Schedules to such Agreement to the Commission upon
request.........................................................
2.2 Recapitalization Agreement dated as of June 30, 1993 by and
among RHCI, Ramsay Holdings HSA Limited and Paul Ramsay Holdings
Pty. Limited (incorporated by reference to Exhibit 2.2 to RHCI's
Annual Report on Form 10-K for the year ended June 30, 1994)....
2.3 Agreement of sale and purchase dated April 12, 1995 by and
between Mesa Psychiatric Hospital, Inc. and Capstone Capital
Corporation (incorporated by reference to Exhibit 2.7 to RHCI's
Annual Report on Form 10-K for the year ended June 30, 1995).
Pursuant to Reg. S-K, Item 601(b)(2), RHCI agrees to furnish a
copy of the Schedules and Exhibits to such Agreement to the
Commission upon request.........................................
2.4 Agreement of sale and purchase dated April 12, 1995 by and
between RHCI San Antonio, Inc. and Capstone Capital Corporation
(incorporated by reference to Exhibit 2.8 to RHCI's Annual
Report on Form 10-K for the year ended June 30, 1995). Pursuant
to Reg. S-K, Item 601(b)(2), RHCI agrees to furnish a copy of
the Schedules and Exhibits to such Agreement to the Commission
upon request....................................................
3.1 Restated Certificate of Incorporation of RHCI, as amended
(incorporated by reference to Exhibit 3.1 to RHCI's Annual
Report on Form 10-K for the year ended June 30, 1990)...........
3.2 Certificate of Amendment of Restated Certificate of
Incorporation of RHCI filed on April 17, 1991 (incorporated by
reference to Exhibit 3.2 to RHCI's Registration Statement on
Form S-2, Registration No. 33-40762)............................
3.3 Certificate of Correction to Certificate of Amendment of
Restated Certificate of Incorporation of RHCI filed on April 18,
1991 (incorporated by reference to Exhibit 3.3 to RHCI's
Registration Statement on Form Registration No. 33-40762).......
3.4 By-Laws of RHCI, as amended to date (incorporated by reference
to Exhibit 3.4 to RHCI's Annual Report on Form 10-K for the year
ended June 30, 1994)............................................
3.5 Certificate of Designation of Preferred Stock of RHCI filed on
June 27, 1991 (incorporated by reference to Exhibit 3.5 to
RHCI's Registration Statement on Form S-2, Registration
No. 33-40762)...................................................
3.6 Certificate of Designation of Preferred Stock of RHCI filed on
July 9, 1991 (incorporated by reference to Exhibit 3.6 to RHCI's
Registration Statement on Form S-2, Registration
No. 33-40762)...................................................
3.7 Certificate of Designation of Preferred Stock of RHCI filed on
June 29, 1993 (incorporated by reference to Exhibit 3.7 to
RHCI's Annual Report on Form 10-K for the year ended
June 30, 1994)..................................................
3.8 Certificate of Designations of Preferred Stock of RHCI filed on
March 13, 1997..................................................
4.1 Trust Indenture dated as of March 31, 1990, between RHCI,
Bountiful Psychiatric Hospital, Inc., Cumberland Mental Health,
Inc., East Carolina Psychiatric Services Corporation, Havenwyck
Hospital, Inc., Mesa Psychiatric Hospital, Inc., Psychiatric
Institute of West Virginia, Inc., and The Citizens and Southern
National Bank and Susan L. Adams (incorporated by reference to
Exhibit 4.1 to RHCI's Annual Report on Form 10-K for the year
ended June 30, 1990)............................................
</TABLE>
II-3
<PAGE>
<TABLE>
<CAPTION>
PAGE
NUMBER
------
<C> <S> <C>
4.2 First Supplemental Trust Indenture dated as of June 15, 1991
between RHCI, Bountiful Psychiatric Hospital, Inc., Cumberland
Mental Health, Inc., East Carolina Psychiatric Services
Corporation, Havenwyck Hospital, Inc., Mesa Psychiatric
Hospital, Inc. and Psychiatric Hospital of West Virginia, Inc.
and The Citizens and Southern National Bank, a national banking
association, and an individual trustee, as Trustees
(incorporated by reference to Exhibit 4.4 to RHCI's
Registration Statement on Form S-2, Registration No.33-40762)..
4.3 Second Supplemental Trust Indenture dated as of May 15, 1993
between RHCI, Bountiful Psychiatric Hospital, Inc., Cumberland
Mental Health, Inc., East Carolina Psychiatric Services
Corporation, Havenwyck Hospital, Inc., Mesa Psychiatric
Hospital, Inc. and Psychiatric Hospital of West Virginia, Inc.
and NationsBank of Georgia, National Association and Susan L.
Adams (incorporated by reference to Exhibit 4.3 to RHCI's
Annual Report on Form 10-K for the year ended June 30,
1994)..........................................................
4.4. Third Supplemental Trust Indenture dated as of April 12, 1995
between RHCI, Bountiful Psychiatric Hospital, Inc., Cumberland
Mental Health, Inc., East Carolina Psychiatric Services
Corporation, Havenwyck Hospital, Inc., Mesa Psychiatric
Hospital, Inc. and Psychiatric Hospital of West Virginia, Inc.,
and NationsBank of Georgia, National Association and Elizabeth
Talley, as Trustee (incorporated by reference to Exhibit 4.4 to
RHCI's Annual Report on Form 10-K for the fiscal year ended
June 30, 1996).................................................
4.5 Fourth Supplemental Trust Indenture dated as of September 15,
1995 between RHCI, Bountiful Psychiatric Hospital, Inc.,
Cumberland Mental Health, Inc., East Carolina Psychiatric
Services, Havenwyck Hospital, Inc., Mesa Psychiatric Hospital,
Inc. and Psychiatric Institute of West Virginia, Inc. and
NationsBank of Georgia, National Association and Elizabeth
Talley, as Trustee (incorporated by reference to Exhibit 10.100
to RHCI's Quarterly Report on Form 10-Q for the quarter ended
September 30, 1995)............................................
4.6 Subsidiary Borrower Note of Atlantic Treatment Center, Inc.
dated May 21, 1993 in the principal amount of $4,607,945
payable to the order of Societe Generale, New York Branch
(incorporated by reference to Exhibit 4.5 to RHCI's Annual
Report on Form 10-K for the year ended June 30, 1994)..........
4.7 Subsidiary Borrower Note of Carolina Treatment Center, Inc.
dated May 21, 1993 in the principal amount of $5,030,000
payable to the order of Societe Generale, New York Branch
(substantially identical to Exhibit 4.6).......................
4.8 Subsidiary Borrower Note of Greenbrier Hospital, Inc. dated May
21, 1993 in the principal amount of $5,973,125 payable to the
order of Societe Generale, New York Branch (substantially
identical to Exhibit 4.6)......................................
4.9 Subsidiary Borrower Note of Gulf Coast Treatment Center, Inc.
dated May 21, 1993 in the principal amount of $4,392,500
payable to the order of Societe Generale, New York Branch
(substantially identical to Exhibit 4.6).......................
4.10 Subsidiary Borrower Note of Houma Psychiatric Hospital, Inc.
dated May 21, 1993 in the principal amount of $3,979,589
payable to the order of Societe Generale, New York Branch
(substantially identical to Exhibit 4.6).......................
4.11 Subsidiary Borrower Note of HSA of Oklahoma, Inc. dated May 21,
1993 in the principal amount of $3,445,562 payable to the order
of Societe Generale, New York Branch (substantially identical
to Exhibit 4.6)................................................
5 Opinion of Haythe & Curley.....................................
8 Tax Opinion of Haythe & Curley.................................
</TABLE>
II-4
<PAGE>
<TABLE>
<CAPTION>
PAGE
NUMBER
------
<C> <S> <C>
10.1 Note Purchase Agreement dated as of March 31, 1990, among RHCI,
Bountiful Psychiatric Hospital, Inc., Cumberland Mental Health,
Inc., East Carolina Psychiatric Services Corporation, Havenwyck
Hospital, Inc., Mesa Psychiatric Hospital, Inc., Psychiatric
Institute of West Virginia, Inc., and Aetna Life Insurance
Company regarding the purchase by Aetna Life Insurance Company
of $26,000,000 principal amount of 11.6% Senior Secured
$1,000,000 principal amount of 15.6% Subordinated Secured
Notes, and Warrants to Purchase Common Stock of RHCI
(incorporated by reference to Exhibit 10.2 to RHCI's Annual
Report on Form 10-K for the year ended June 30, 1990)..........
10.2 Note Purchase Agreement pursuant to which Monumental Life
Insurance Company purchased $15,500,000 principal amount of
11.6% Senior Secured Notes, $2,000,000 principal amount of
15.6% Subordinated Secured Notes, and Warrants to Purchase
Common Stock of RHCI (substantially identical to Exhibit
10.1)..........................................................
10.3 Note Purchase Agreement pursuant to which Connecticut Mutual
Life Insurance Company purchased $15,000,000 principal amount
of 11.6% Senior Secured Notes(substantially identical to
Exhibit 10.1)..................................................
10.4 Pledge and Security Agreement between Bountiful Psychiatric
Hospital, Inc. and The Citizens and Southern National Bank.....
10.5 Pledge and Security Agreement dated as of March 31, 1990,
between RHCI and The Citizens and Southern National Bank
(substantially identical to Exhibit 10.4)......................
10.6 Pledge and Security Agreement between Michigan Psychiatric
Services, Inc. and The Citizens and Southern National Bank
(substantially identical to Exhibit 10.4)......................
10.7 Pledge and Security Agreement between Americare of Galax, Inc.
and The Citizens and Southern National Bank (substantially
identical to Exhibit 10.4).....................................
10.8 Deed of Trust, Security Agreement, and Financing Statement
dated as of March 31, 1990 from Bountiful Psychiatric Hospital,
Inc. to Merrill Title Company for the benefit of The Citizens
and Southern National Bank and Susan L. Adams covering certain
property in Woods Cross, Utah (incorporated by reference to
Exhibit 10.10 to RHCI's Annual Report on Form 10-K for the year
ended June 30, 1990)...........................................
10.9 Deed of Trust and Security Agreement from Cumberland Mental
Health, Inc. to First American Title Insurance Company for the
benefit of The Citizens and Southern National Bank and Susan L.
Adams covering certain property in Fayetteville, North Carolina
(substantially identical to Exhibit 10.8)......................
10.10 Deed of Trust and Security Agreement from East Carolina
Psychiatric Services Corporation to First American Title
Insurance Company for the benefit of The Citizens and Southern
National Bank and Susan L. Adams covering certain property in
Jacksonville, North Carolina (substantially identical to
Exhibit 10.8)..................................................
10.11 Mortgage and Security Agreement dated as of March 31, 1990 from
Havenwyck Hospital, Inc. to The Citizens and Southern National
Bank and Susan L. Adams covering certain property in Auburn
Hills, Michigan (incorporated by reference to Exhibit 10.12 to
RHCI's Annual Report on Form 10-K for the year ended June 30,
1990)..........................................................
10.12 Leasehold Deed of Trust, Assignment of Rents and Security
Agreement with Financing Statement dated as of March 31, 1990
from Mesa Psychiatric Hospital, Inc. to Transamerica Title
Insurance Company for the benefit of The Citizens and Southern
National Bank and Susan L. Adams covering certain property in
Mesa, Arizona (incorporated by reference to Exhibit 10.13 to
RHCI's Annual Report on Form 10-K for the year ended June 30,
1990)..........................................................
</TABLE>
II-5
<PAGE>
<TABLE>
<CAPTION>
PAGE
NUMBER
------
<C> <S> <C>
10.13 Leasehold Deed of Trust and Security Agreement from Psychiatric
Institute of West Virginia, Inc. to J. Nicholas Barth, Esq.,
for the benefit of The Citizens and Southern National Bank and
Susan L. Adams covering certain property in Morgantown, West
Virginia (substantially identical to Exhibit 10.12)............
10.14 Obligor Subrogation and Contribution Agreement dated as of
April 30, 1990 among The Citizens and Southern National Bank,
Susan L. Adams, RHCI, Bountiful Psychiatric Hospital, Inc.,
Cumberland Mental Health, Inc., East Carolina Psychiatric
Services Corporation, Havenwyck Hospital, Inc., Mesa
Psychiatric Hospital, Inc., and Psychiatric Institute of West
Virginia, Inc. (incorporated by reference to Exhibit 10.15 to
RHCI's Annual Report on Form 10-K for the year ended June 30,
1990)..........................................................
10.15 Credit Agreement dated as of May 15, 1993 among RHCI and
certain of its subsidiaries named therein, Societe Generale,
New York Branch, First Union National Bank of North Carolina
and Hibernia National Bank, as lenders, and Societe Generale,
as issuing bank and agent (incorporated by reference to Exhibit
10.16 to RHCI's Annual Report on Form 10-K for the year ended
June 30, 1994).................................................
10.16 Security Agreement dated as of May 15, 1993 by Atlantic
Treatment Center, Inc. in favor of Societe Generale, as agent
for the lenders which are parties to that certain Credit
Agreement described in Exhibit 10.15 above, and covering
certain property in Daytona Beach, Florida (incorporated by
reference to Exhibit 10.17 to RHCI's Annual Report on Form 10-K
for the year ended June 30, 1994)..............................
10.17 Security Agreement dated as of May 15, 1993 by Carolina
Treatment Center, Inc. in favor of Societe Generale, as agent
for the lenders which are parties to that certain Credit
Agreement described in Exhibit 10.15 above (substantially
identical to Exhibit 10.16)....................................
10.18 Security Agreement dated as of May 15, 1993 by Great Plains
Hospital, Inc. in favor of Societe Generale, as agent for the
lenders which are parties to that certain Credit Agreement
described in Exhibit 10.15 above (substantially identical to
Exhibit 10.16).................................................
10.19 Security Agreement dated as of May 15, 1993 by Greenbrier
Hospital, Inc. in favor of Societe Generale, as agent for the
lenders which are parties to that certain Credit Agreement
described in Exhibit 10.15 above (substantially identical to
Exhibit 10.16).................................................
10.20 Security Agreement dated as of May 15, 1993 by Gulf Coast
Treatment Center, Inc. in favor of Societe Generale, as agent
for the lenders which are parties to that certain Credit
Agreement described in Exhibit 10.15 above (substantially
identical to Exhibit 10.16)....................................
10.21 Security Agreement dated as of May 15, 1993 by Houma
Psychiatric Hospital, Inc. in favor of Societe Generale, as
agent for the lenders which are parties to that certain Credit
Agreement described in Exhibit 10.15 above (substantially
identical to Exhibit 10.16)....................................
10.22 Security Agreement dated as of May 15, 1993 by HSA of Oklahoma,
Inc. in favor of Societe Generale, as agent for the lenders
which are parties to that certain Credit Agreement described in
Exhibit 10.15 above (substantially identical to Exhibit
10.16).........................................................
10.23 Security Agreement dated as of May 15, 1993 by The Haven
Hospital, Inc. in favor of Societe Generale, as agent for the
lenders which are parties to that certain Credit Agreement
described in Exhibit 10.15 above (substantially identical to
Exh 10.16).....................................................
10.24 Security Agreement dated as of May 15, 1993 by RHCI in favor of
Societe Generale, as agent for the lenders which are parties to
that certain Credit Agreement described in Exhibit 10.15 above
(substantially identical to Exhibit 10.16).....................
</TABLE>
II-6
<PAGE>
<TABLE>
<CAPTION>
PAGE
NUMBER
------
<C> <S> <C>
10.25 Accounts Receivable Security Agreement dated as of May 15, 1993
by Americare of Galax, Inc. in favor of Societe Generale, as
agent for the lenders which are parties to that certain Credit
Agreement described in Exhibit 10.15 above (incorporated by
reference to Exhibit 10.26 to RHCI's Annual Report on Form 10-K
for the year ended June 30, 1994) .............................
10.26 Accounts Receivable Security Agreement dated as May 15, 1993 by
Bountiful Psychiatric Hospital, Inc. in favor of Societe
Generale, as agent for the lenders which are parties to that
certain Credit Agreement described in Exhibit 10.15 above
(substantially identical to Exhibit 10.25).....................
10.27 Accounts Receivable Security Agreement dated as of May 15, 1993
by Cumberland Mental Health, Inc. in favor of Societe Generale,
New York Branch, as agent for the lenders which are parties to
that certain Credit Agreement described in Exhibit 10.15 above
(substantially identical to Exhibit 10.25).....................
10.28 Accounts Receivable Security Agreement dated as of May 15, 1993
by East Carolina Psychiatric Services Corporation in favor of
Societe Generale, New York Branch, as agent for the lenders
which are parties to that certain Credit Agreement described in
Exhibit 10.15 above (substantially identical to Exhibit
10.25).........................................................
10.29 Accounts Receivable Security Agreement dated as of May 15, 1993
by Havenwyck Hospital, Inc. in favor of Societe Generale, New
York Branch as agent for the lenders which are parties to that
certain Credit Agreement described in Exhibit 10.15 above
(substantially identical to Exhibit 10.25).....................
10.30 Accounts Receivable Security Agreement dated as of May 15, 1993
by Mesa Psychiatric Hospital, Inc. in favor of Societe
Generale, New York Branch, as agent for the lenders which are
parties to that certain Credit Agreement described in Exhibit
10.15 above (substantially identical to Exhibit 10.25).........
10.31 Accounts Receivable Security Agreement dated as of May 15, 1993
by Michigan Psychiatric Services, Inc. in favor of Societe
Generale, New York Branch, as agent for the lenders which are
parties to that certain Credit Agreement described in Exhibit
10.15 above (substantially identical to Exhibit 10.25).........
10.32 Accounts Receivable Security Agreement dated as of May 15, 1993
by Psychiatric Institute of West Virginia, Inc. in favor of
Societe Generale, New York Branch, as agent for the lenders
which are parties to that certain Credit Agreement described in
Exhibit 10.15 above (substantially identical to Exhibit
10.25).........................................................
10.33 Stock Pledge Agreement dated as of May 15, 1993, among RHCI in
favor of Societe Generale, New York Branch, as agent for the
lenders which are parties to that certain Credit Agreement
described in Exhibit 10.15 above (incorporated by reference to
Exhibit 10.34 to RHCI's Annual Report on Form 10-K for the year
ended June 30, 1994)...........................................
10.34 Revolving Credit Guarantee dated as of May 15, 1993 by
Americare of Galax, Inc. in favor of Societe Generale, New York
Branch, as agent for the lenders which are parties to that
certain Credit Agreement described in Exhibit 10.15 above
(incorporated by reference to Exhibit 10.35 to RHCI's Annual
Report on Form 10-K for the year ended June 30, 1994)..........
10.35 Revolving Credit Guarantee dated as of May 15, 1993 by Bethany
Psychiatric Hospital, Inc. in favor of Societe Generale, New
York Branch, as agent for the lenders which are parties to that
certain Credit Agreement described in Exhibit 10.15 above
(substantially identical to Exhibit 10.34).....................
10.36 Revolving Credit Guarantee dated as of May 15, 1993 by
Bountiful Psychiatric Hospital, Inc. in favor of Societe
Generale, New York Branch, as agent for the lenders which are
parties to that certain Credit Agreement described in Exhibit
10.15 above (substantially identical to Exhibit 10.34).........
</TABLE>
II-7
<PAGE>
<TABLE>
<CAPTION>
PAGE
NUMBER
------
<C> <S> <C>
10.37 Revolving Credit Guarantee dated as of May 15, 1993 by
Cumberland Mental Health, Inc. in favor of Societe Generale,
New York Branch, as agent for the lenders which are parties to
that certain Credit Agreement described in Exhibit 10.15 above
(substantially identical to Exhibit 10.34).....................
10.38 Revolving Credit Guarantee dated as of May 15, 1993 by East
Carolina Psychiatric Services Corporation in favor of Societe
Generale, New York Branch, as agent for the lenders which are
parties to that certain Credit Agreement described in Exhibit
10.15 above (substantially identical to Exhibit 10.34).........
10.39 Revolving Credit Guarantee dated as of May 15, 1993 by
Havenwyck Hospital, Inc. in favor of Societe Generale, New York
Branch, as agent for the lenders which are parties to that
certain Credit Agreement described in Exhibit 10.15 above
(substantially identical to Exhibit 10.34).....................
10.40 Revolving Credit Guarantee dated as of May 15, 1993 by Mesa
Psychiatric Hospital, Inc. in favor of Societe Generale, New
York Branch, as agent for the lenders which are parties to that
certain Credit Agreement described in Exhibit 10.15 above
(substantially identical to Exhibit 10.34).....................
10.41 Revolving Credit Guarantee dated as of May 15, 1993 by Michigan
Psychiatric Services, Inc. in favor of Societe Generale, New
York Branch, as agent for the lenders which are parties to that
certain Credit Agreement described in Exhibit 10.15 above
(substantially identical to Exhibit 10.34).....................
10.42 Revolving Credit Guarantee dated as of May 15, 1993 by
Psychiatric Institute of West Virginia, Inc. in favor of
Societe Generale, New York Branch, as agent for the lenders
which are parties to that certain Credit Agreement described in
Exhibit 10.15 above (substantially identical to Exhibit
10.34).........................................................
10.43 Management Fee Subordination Agreement dated May 15, 1993,
among Paul J. Ramsay and Ramsay Health Care Pty. Ltd. in favor
of Societe Generale, New York Branch, as agent for the lenders
which are parties to that certain Credit Agreement described in
Exhibit 10.15 above (incorporated by reference to Exhibit 10.44
to RHCI's Annual Report on Form 10-K for the year ended June
30, 1994)......................................................
10.44 Mortgage and Fixture Filing and Assignment of Leases and Rents
dated as of May 15, 1993 granted by Atlantic Treatment Center,
Inc. to Societe Generale, individually and as agent for the
lenders which are parties to that certain Credit Agreement
described in Exhibit 10.15 above, with respect to certain real
property located in Volusia County, Florida (incorporated by
reference to Exhibit 10.45 to RHCI's Annual Report on Form 10-K
for the year ended June 30, 1994)..............................
10.45 Mortgage and Fixture Filing and Assignment of Leases and Rents
dated as of May 15, 1993 granted by Carolina Treatment Center,
Inc. to Societe Generale, individually and as agent for the
lenders which are parties to that certain Credit Agreement
described in Exhibit 10.15 above, with respect to certain real
property located in Horry County, South Carolina (substantially
identical to Exhibit 10.44)....................................
10.46 Deed of Trust and Fixture Filing and Assignment of Leases and
Rents dated as of May 15, 1993 granted by Great Plains
Hospital, Inc. to Jacob W. Bayer, Jr. as Trustee for the
benefit of Societe Generale, individually and as agent for the
lenders which are parties to that certain Credit Agreement
described in Exhibit 10.15 above, with respect to certain real
property located in Vernon County, Missouri (substantially
identical to Exhibit 10.44)....................................
</TABLE>
II-8
<PAGE>
<TABLE>
<CAPTION>
PAGE
NUMBER
------
<C> <S> <C>
10.47 Mortgage, Security and Assignment of Leases and Rents dated as
of May 15, 1993 by Greenbrier Hospital, Inc. to Societe
Generale individually and as agent for the lenders which are
parties to that certain Credit Agreement described in Exhibit
10.15 above, with respect to certain real property located in
St. Tammany Parish, Louisiana (substantially identical to
Exhibit 10.44).................................................
10.48 Mortgage and Fixture Filing and Assignment of Leases and Rents
dated as of May 15, 1993 granted by Gulf Coast Treatment
Center, Inc. to Societe Generale, individually and as agent for
the lenders which are parties to that certain Credit Agreement
described in Exhibit 10.15 above, with respect to certain real
property located in Okaloosa County, Florida (substantially
identical to Exhibit 10.44)....................................
10.49 Mortgage, Security Agreement and Assignment of Leases and Rents
dated as of May 15, 1993 granted by Houma Psychiatric Hospital,
Inc. to Societe Generale, individually and as agent for the
lenders which are parties to that certain Credit Agreement
described in Exhibit 10.15 above, with respect to certain real
property located in the City of Houma, Parish of Terrebonne,
Louisiana (substantially identical to Exhibit 10.44)...........
10.50 Mortgage with Power of Sale and Fixture Filing and Assignment
of Leases and Rents dated as of May 15, 1993 granted by HSA of
Oklahoma, Inc. to Societe Generale, individually and as agent
for the lenders which are parties to that certain Credit
Agreement described in Exhibit 10.15 above, with respect to
certain real property located in Garfield County, Oklahoma
(substantially identical to Exhibit 10.44).....................
10.51 Deed of Trust and Fixture Filing and Assignment of Leases and
Rents dated as of May 15, 1993 granted by The Haven Hospital,
Inc. to Societe Generate, individually and as agent for the
lenders which are parties to that certain Credit Agreement
described in Exhibit 10.15 above, with respect to certain real
property located in the City of DeSoto, Dallas County, Texas
(substantially identical to Exhibit 10.44).....................
10.52 Loan Agreement between Okaloosa County, Florida and Gulf Coast
Treatment Center, Inc. dated October 1, 1984, relating to the
issuance of bonds for Gulf Coast Treatment Center, Inc.
(incorporated by reference to Exhibit 10.16 to RHCI's
Registration Statement on Form S-1, Registration No. 2-9892)...
10.53 Loan Agreement between Louisiana Public Facilities Authority
and Greenbrier Hospital, Inc. dated November 1, 1984, relating
to the issuance of bonds for Greenbrier Hospital, Inc.
(incorporated by reference to Exhibit 10.17 to RHCI's
Registration Statement on Form S-1, Registration No. 2-98921)..
10.54 Loan Agreement between Horry County, South Carolina and
Carolina Treatment Center, Inc. dated December 1, 1984,
relating to the issuance of bonds for Carolina Treatment
Center, Inc. (incorporated by reference to Exhibit 10.18 to
RHCI's Registration Statement on Form S-1, Registration No. 2-
98921).........................................................
10.55 Loan Agreement between Louisiana Public Facilities Authority
and Houma Psychiatric Hospital, Inc. dated as of September 1,
1985, relating to the issuance of bonds for HSA Bayou Oaks
Hospital (incorporated by reference to Exhibit 10.56 to RHCI's
Annual Report on Form 10-K for the year ended June 30, 1994)...
10.56 Ground Lease between Facilities Management Corporation, as
landlord, and Psychiatric Institute of West Virginia, Inc., as
tenant, dated as of September 30, 1985 (incorporated by
reference to Exhibit 10.57 to RHCI's Annual Report on Form 10-K
for the year ended June 30, 1994)..............................
</TABLE>
II-9
<PAGE>
<TABLE>
<CAPTION>
PAGE
NUMBER
------
<C> <S> <C>
10.57 Lease Agreement between Houma Psychiatric Hospital, Inc. and
Hospital Service District No. 1 of the Parish of Terrebonne,
State of Louisiana, effective February 1, 1985 (incorporated by
reference to Exhibit 10.38 to RHCI's Registration Statement on
Form S-1, Registration No. 2-98921)............................
10.58 Lease among Bethany Psychiatric Hospital, Inc., Bethany General
Hospital, the City of Bethany, Oklahoma and the Bethany General
Hospital Trust dated December 9, 1985 (ground lease)
(incorporated by reference to Exhibit 10.58 to RHCI's Annual
Report on Form 10-K for the fiscal year ended June 30, 1996)...
10.59 Loan Agreement between The Enid Development Authority and HSA
of Oklahoma, Inc. dated as of October 1, 1985, relating to The
Enid Development Authority Variable Rate Demand Revenue Bonds
(Meadowlake Hospital Project) (incorporated by reference to
Exhibit 10.60 to RHCI's Annual Report on Form 10-K for the year
ended June 30, 1994)...........................................
10.60 Ramsay Health Care, Inc. 1990 Stock Option Plan, as amended to
date (incorporated by reference to Exhibit 4.3 to RHCI's
Registration Statement on Form S-8 filed on March 6, 1991).....
10.61 Lease Agreement dated August 30, 1988 between RHCI and Ayshire
Land Dome Joint Venture relating to office space at One Poydras
Plaza, New Orleans, Louisiana (incorporated by reference to
Exhibit 10.78 to RHCI's Registration Statement on Form S-2,
Registration No. 33-40762).....................................
10.62 Ramsay Health Care, Inc. Deferred Compensation and Retirement
Plan (incorporated by reference to Exhibit 10.79 to RHCI's
Registration Statement on Form S-2, Registration No. 33-
40762).........................................................
10.63 Personnel and Facility Sharing Agreement dated as of June 27,
1991 between RHCI and Ramsay Holdings HSA Limited (incorporated
by reference to Exhibit 10.83 to RHCI's Registration Statement
on Form S-2, Registration No.33-40762).........................
10.64 Indemnity Agreement dated as of June 1991 between RHCI and
Ramsay Holdings HSA Limited (incorporated by reference to
Exhibit 10.84 to RHCI's Registration Statement on Form S-2,
Registration No. 33-40762).....................................
10.65 Management Agreement dated as of June 25, 1992 between RHCI and
Ramsay Health Care Pty. Limited (incorporated by reference to
Exhibit 10.90 to RHCI's Annual Report on Form 10-K for the year
ended June 30, 1992)...........................................
10.66 Ramsay Health Care, Inc. 1991 Stock Option Plan (incorporated
by reference to Exhibit 10.91 to RHCI's Annual Report on Form
10-K for the year ended June 30, 1992).........................
10.67 Employment Agreement dated January 23, 1992 between RHCI and
Wallace E. Smith (incorporated by reference to Exhibit 10.94 to
RHCI's Annual Report on Form 10-K for the year ended June 30,
1992)..........................................................
10.68 Employment Agreement dated January 23, 1992 between RHCI and
John A. Quinn (incorporated by reference to Exhibit 10.95 to
RHCI's Annual Report on Form 10-K for the year ended June 30,
1992)..........................................................
10.69 Lease dated April 4, 1992 between The Union Labor Life
Insurance Company and RHCI (incorporated by reference to
Exhibit 10.98 to RHCI's Annual Report on Form 10-K for the year
ended June 30, 1992)...........................................
10.70 Lease dated May 27, 1992 between Gail Buy and Bountiful
Psychiatric Hospital (incorporated by reference to Exhibit
10.99 to RHCI's Annual Report on Form 10-K for the year ended
June 30, 1992).................................................
</TABLE>
II-10
<PAGE>
<TABLE>
<CAPTION>
PAGE
NUMBER
------
<C> <S> <C>
10.71 Lease Agreement dated as of February 12, 1993 by and between
Gulf Coast Treatment Center, Inc and Vendell of Florida, Inc.
(incorporated by reference to Exhibit 10.82 to RHCI's Annual
Report on Form 10-K for the year ended June 30, 1994)..........
10.72 Ramsay Health Care, Inc. 1993 Stock Option Plan (incorporated
by reference to Exhibit 10.83 to RHCI's Quarterly Report on
Form 10-Q for the quarter ended December 31, 1993).............
10.73 Ramsay Health Care, Inc. 1993 Employee Stock Purchase Plan
(incorporated by reference to Exhibit 10.84 to RHCI's Quarterly
Report on Form 10-Q for the quarter ended December 31, 1993)...
10.74 Fourth Modification, Extension and Amendment of Lease Agreement
dated November 15, 1993 between RHCI and One Poydras Plaza
Venture relating to RHCI's office space at One Poydras Plaza,
New Orleans, Louisiana (incorporated by reference to Exhibi
10.84 to RHCI's Annual Report on Form 10-K for the year ended
June 30, 1994).................................................
10.75 Employment Agreement dated July 19, 1994 between RHCI and Brent
J. Bryson (incorporated by reference to Exhibit 10.85 to RHCI's
Annual Report on Form 10-K for the year ended June 30, 1995)...
10.76 Rights Agreement dated as of August 1, 1995 between Ramsay
Health Care, Inc. and First Union National Bank of North
Carolina, as Rights Agent, which includes the form of Right
Certificate as Exhibit A and the Summary of Rights to Purchase
Common Shares as Exhibit B (incorporated by reference to
Exhibit 4.1 to RHCI's Current Report on Form 8-K dated August
1, 1995).......................................................
10.77 Letter Agreement dated June 30, 1995 among Ramsay Health Care,
Inc., Ramsay Holdings HSA Limited and Paul Ramsay Holdings Pty.
Limited (incorporated by reference to Exhibit 4.2 to RHCI's
Current Report on Form 8-K dated August 1, 1995)...............
10.78 Lease Agreement dated April 12, 1995 between Capstone Capital
Corporation and Mesa Psychiatric Hospital, Inc. (incorporated
by reference to Exhibit 10.88 to RHCI's Annual Report on Form
10-K for the year ended June 30, 1995).........................
10.79 Lease Agreement dated April 12, 1995 between Capstone Capital
of San Antonio, LTD, d/b/a Cahaba of San Antonio, LTD. and RHCI
San Antonio, Inc. (incorporated by reference to Exhibit 10.89
to RHCI's Annual Report on Form 10-K for the year ended June
30, 1995)......................................................
10.80 Facility Lease Agreement dated June 26, 1995 by and between
Charter Canyon Behavioral Health System, Inc. and Bountiful
Psychiatric Hospital, Inc. (incorporated by reference to
Exhibit 10.90 to RHCI's Annual Report on Form 10-K for the year
ended June 30, 1995)...........................................
10.81 Employment termination letter dated September 15, 1995 between
RHCI and Gregory H. Browne (incorporated by reference to
Exhibit 10.91 to RHCI's Annual Report on Form 10-K for the year
ended June 30, 1995)...........................................
10.82 Second Amended and Restated Distribution Agreement between RHCI
and RMCI (incorporated by reference to Exhibit 10.1 to RMCI's
Registration Statement on Form S-1 (Registration No. 33-78034)
filed with the Commission on April 24, 1995)...................
10.83 Employee Benefit Agreement dated as of February 1, 1995 between
RHCI and RMCI (incorporated by reference to Exhibit 10.4 to
RMCI's Registration Statement on Form S-1 (Registration No. 33-
78034) filed with the Commission on April 24, 1995)............
10.84 Tax Sharing Agreement dated as of October 25, 1994 between RHCI
and RMCI (incorporated by reference to Exhibit 10.5 to RMCI's
Registration Statement on Form S-1 (Registration No. 33-78034)
filed with the Commission on April 24, 1995)...................
</TABLE>
II-11
<PAGE>
<TABLE>
<CAPTION>
PAGE
NUMBER
------
<C> <S> <C>
10.85 Corporate Services Agreement dated as of January 2, 1995
between RHCI and RMCI (incorporated by reference to Exhibit
10.6 to RMCI's Registration Statement on Form S-1 (Registration
No. 33-78034) filed with the Commission on April 24, 1995).....
10.86 Form of Withholding Tax Agreement between RHCI, Ramsay Holdings
HSA Limited, Paul Ramsay Holdings Pty. Limited and Ramsay
Health Care Pty. Limited (incorporated by reference to Exhibit
10.7 to RMCI's Registration Statement on Form S-1 (Registration
No. 33-78034) filed with the Commission on April 24, 1995).....
10.87 $6,000,000 Subordinated Promissory Note of RMCI, as amended
(incorporated by reference to Exhibit 10.13 to RMCI's
Registration Statement on Form S-1 (Registration No. 33-78034)
filed with the Commission on April 24, 1995)...................
10.88 Consent and Amendment dated April 12, 1996 among RHCI and
certain of its subsidiaries named therein, Societe Generale,
New York Branch, First Union National Bank of North Carolina
and Hibernia National Bank, as lenders, and Societe Generale,
as issuing bank and agent (incorporated by reference to Exhibit
10.88 to RHCI's Annual Report on Form 10-K for the fiscal year
ended June 30, 1996)...........................................
10.89 Second Amendment to Credit Agreement dated as of September 15,
1995 among RHCI and certain of its subsidiaries named therein,
Societe Generale, New York Branch, First Union National Bank of
North Carolina and Hibernia National Bank, as lenders, and
Societe Generale, as issuing bank and agent (incorporated by
reference to Exhibit 10.99 to RHCI's Quarterly Report on Form
10-Q for the quarter ended September 30, 1995).................
10.90 Amended and Restated Stock Purchase Agreement dated October 12,
1995 by and among Paul Ramsay Holdings Pty. Limited, Ramsay
Health Care, Inc. and, solely for the purpose of Section I, III
and VI of the agreement, Ramsay Health Care Pty. Limited
(incorporated by reference to Exhibit 10.101 to RHCI's
Quarterly Report on Form 10-Q for the quarter ended September
30, 1995)......................................................
10.91 Amendment to Rights Agreement, dated October 3, 1995 between
Ramsay Health Care, Inc. and First Union Bank of North
Carolina, as Rights Agent (incorporated by reference to Exhibit
10.102 to RHCI's Quarterly Report on Form 10-Q for the quarter
ended September 30, 1995)......................................
10.92 Ramsay Health Care, Inc. 1995 Long Term Incentive Plan
(incorporated by reference to Exhibit 10.103 to RHCI's
Quarterly Report on Form 10-Q for the quarter ended December
31, 1995)......................................................
10.93 Third Amendment to Credit Agreement dated as of August 15, 1996
among RHCI and certain subsidiaries named therein, Societe
Generale, New York Branch, First Union National Bank of North
Carolina and Hibernia National Bank, as lenders, and Societe
Generale, as issuing bank and agent (incorporated by reference
to Exhibit 10.93 to RHCI's Annual Report on Form 10-K for the
fiscal year ended June 30, 1996)...............................
10.94 Stock Purchase Agreement dated as of August 13, 1996 by and
among Paul Ramsay Holdings Pty. Limited, RHCI and, solely for
purposes of Sections I, III and IV thereof, Ramsay Health Care
Pty. Limited (incorporated by reference to Exhibit 10.94 to
RHCI's Annual Report on Form 10-K for the fiscal year ended
June 30, 1996).................................................
10.95 Amended and Restated Employment Agreement dated as of August
15, 1996 by and between Reynold Jennings and RHCI (incorporated
by reference to Exhibit 10.95 to RHCI's Annual Report on Form
10-K for the fiscal year ended June 30, 1996)..................
10.96 Exchange Agreement dated September 10, 1996, by and among RHCI,
Paul Ramsay Hospitals Pty. Limited and Paul J. Ramsay,
including a related Warrant Certificate dated September 10,
1996 issued to Ramsay Hospital Pty. Limited (incorporated by
reference to Exhibit 10.96 to RHCI's Annual Report on Form 10-K
for the fiscal year ended June 30, 1996).......................
</TABLE>
II-12
<PAGE>
<TABLE>
<CAPTION>
PAGE
NUMBER
------
<C> <S> <C>
10.97 Consulting Agreement dated as of January 1, 1996 between RHCI
and Summa Healthcare Group, Inc. (incorporated by reference to
Exhibit 10.97 to RHCI's Annual Report on Form 10-K for the
fiscal year ended June 30, 1996)..............................
10.98 Letter Agreement dated as of September 10, 1996 by and among
RHCI, Ramsay Health Care Pty. Limited and Paul Ramsay Holdings
Pty. Limited, included a related Warrant Certificate dated
September 10, 1996 issued to Paul Ramsay Holdings Pty. Limited
(incorporated by reference to Exhibit 10.98 to RHCI's Annual
Report on Form 10-K for the fiscal year ended June 30, 1996)..
10.99 Employment Agreement dated August 12, 1996 by and between RHCI
and Remberto Cibran (incorporated by reference to Exhibit
10.99 to RHCI's Quarterly Report and Form 10-Q for the quarter
ended September 30, 1996).....................................
10.100 Services Agreement dated August 12, 1996 by and between RHCI
and HealthLink Enterprises, Inc. (incorporated by reference to
Exhibit 10.100 to RHCI's Quarterly Report on Form 10-Q for the
quarter ended September 30, 1996).............................
10.101 Amendment No. 2 dated as of November 1, 1996 to that certain
Rights Agreement dated as of August 1, 1995, as amended by
that certain Amendment dated as of October 1, 1995, between
RHCI and First Union National Bank of North Carolina, as
Rights Agent (incorporated by reference to Exhibit 10.101 to
RHCI's Quarterly Report on Form 10-Q for the quarter ended
September 30, 1996)...........................................
11 Computation of Net Income Per Share (incorporated by reference
to Exhibit 11 to RHCI's Quarterly Report on Form 10-Q for the
quarter ended December 31, 1996)..............................
21 Subsidiaries of RHCI..........................................
23.1 Consent of Ernst & Young LLP (see "Consent of Independent
Auditors" included in the Registration Statement).............
23.2 Consent of Ernst & Young LLP (see "Consent of Independent
Certified Public Accountants Auditors" included in the
Registration Statement).......................................
23.3 Consent of Haythe & Curley (contained in Exhibit 5)...........
23.4 Consent of Haythe & Curley (contained in Exhibit 8)...........
23.5 Consent of Houlihan, Lokey, Howard & Zukin, Inc...............
23.6 Consent of Dean Witter Reynolds Inc...........................
27 Financial Data Schedule (incorporated by reference to Exhibit
27 to RHCI's Quarterly Report on Form 10-Q for the quarter
ended December 31, 1996)......................................
99.1 Fairness Opinion of Houlihan, Lokey, Howard & Zukin, Inc......
99.2 Fairness Opinion of Dean Witter Reynolds Inc..................
</TABLE>
Copies of the exhibits filed with this Registration Statement on Form S-4 or
incorporated by reference herein do not accompany copies hereof for
distribution to stockholders of RHCI. RHCI will furnish a copy of any such
exhibits to any stockholder requesting the same.
II-13
<PAGE>
POWER OF ATTORNEY
The Registrant and each person whose signature appears below hereby appoints
the agent for service named in the Registration Statement, Paul J. Ramsay and
Bert G. Cibran as attorneys-in-fact with full power of substitution,
severally, to execute in their respective names and on behalf of the
Registrant and each such person individually and in each capacity stated
below, one or more amendments (including post-effective amendments) to this
Registration Statement as the attorney-in-fact acting in the premises deems
appropriate and to file any such amendment to this Registration Statement with
the Securities and Exchange Commission.
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THE REGISTRANT
HAS DULY CAUSED THIS REGISTRATION STATEMENT TO BE SIGNED ON ITS BEHALF BY THE
UNDERSIGNED, THEREUNTO DULY AUTHORIZED, IN THE CITY OF CORAL GABLES, STATE OF
FLORIDA THE 24TH DAY OF MARCH, 1997.
Ramsay Health Care, Inc.
/s/ Bert G. Cibran
By: _________________________________
BERT G. CIBRAN (PRESIDENT AND
PRINCIPAL EXECUTIVE OFFICER)
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THIS
REGISTRATION STATEMENT HAS BEEN SIGNED BY THE FOLLOWING PERSONS IN THE
CAPACITIES AND ON THE DATES INDICATED.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<S> <C> <C>
/s/ Bert G. Cibran President and Principal Dated: March 24, 1997
__________________________________________ Executive Officer
BERT G. CIBRAN
/s/ Carol C. Lang Principal Financial Officer Dated: March 24, 1997
__________________________________________
CAROL C. LANG
/s/ Daniel A. Sims Principal Accounting Officer Dated: March 24, 1997
__________________________________________
DANIEL A. SIMS
/s/ Paul J. Ramsay Chairman of the Board Dated: March 24, 1997
__________________________________________ and Director
PAUL J. RAMSAY
/s/ Luis E. Lamela Vice Chairman of the Board Dated: March 24, 1997
__________________________________________ and Director
LUIS E. LAMELA
/s/ Aaron Beam, Jr. Director Dated: March 24, 1997
__________________________________________
AARON BEAM, JR.
</TABLE>
II-14
<PAGE>
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<S> <C> <C>
/s/ Peter J. Evans Director Dated: March 24, 1997
__________________________________________
PETER J. EVANS
/s/ Thomas M. Haythe Director Dated: March 24, 1997
__________________________________________
THOMAS M. HAYTHE
/s/ Steven J. Shulman Director Dated: March 24, 1997
__________________________________________
STEVEN J. SHULMAN
/s/ Michael S. Siddle Director Dated: March 24, 1997
__________________________________________
MICHAEL S. SIDDLE
</TABLE>
II-15
<PAGE>
CONSENT OF INDEPENDENT AUDITORS
We hereby consent to the reference to our firm under the caption "Experts"
and to the use of our report dated October 8, 1996 with respect to the
financial statements of Ramsay Health Care, Inc. included in the Joint Proxy
Statement/Prospectus of Ramsay Health Care, Inc. and Ramsay Managed Care, Inc.
constituting part of this Registration Statement on Form S-4 of Ramsay Health
Care, Inc., for the registration of 2,136,105 shares of its common stock.
Ernst & Young LLP
New Orleans, Louisiana March 24, 1997
II-16
<PAGE>
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
We consent to the reference to our firm under the caption "Experts" and to
the use of our report dated August 28, 1996 (except for Note 16 , as to which
the date is October 21, 1996) with respect to the financial statements of
Ramsay Managed Care, Inc. included in the Joint Proxy Statement/Prospectus of
Ramsay Health Care, Inc. and Ramsay Managed Care, Inc. constituting part of
this Registration Statement on Form S-4 of Ramsay Health Care, Inc. for the
registration of 2,136,105 shares of its common stock.
Ernst & Young LLP
Orlando, Florida
March 24, 1997
II-17
<PAGE>
INDEX OF EXHIBITS
<TABLE>
<CAPTION>
PAGE
NUMBER
------
<C> <S> <C>
2.1 Agreement and Plan of Merger dated as of October 1, 1996 among
Ramsay Managed Care, Inc. ("RMCI"), RHCI and RHCI Acquisition
Corp. (incorporated by reference to Exhibit 2 to the RHCI's
Current Report on Form 8-K dated October 2, 1996). Pursuant to
Reg. S-K, Item 601(b)(2), RHCI agrees to furnish a copy of the
Disclosure Schedules to such Agreement to the Commission upon
request......................................................... --
2.2 Recapitalization Agreement dated as of June 30, 1993 by and
among RHCI, Ramsay Holdings HSA Limited and Paul Ramsay Holdings
Pty. Limited (incorporated by reference to Exhibit 2.2 to RHCI's
Annual Report on Form 10-K for the year ended June 30, 1994).... --
2.3 Agreement of sale and purchase dated April 12, 1995 by and
between Mesa Psychiatric Hospital, Inc. and Capstone Capital
Corporation (incorporated by reference to Exhibit 2.7 to RHCI's
Annual Report on Form 10-K for the year ended June 30, 1995).
Pursuant to Reg. S-K, Item 601(b)(2), RHCI agrees to furnish a
copy of the Schedules and Exhibits to such Agreement to the
Commission upon request......................................... --
2.4 Agreement of sale and purchase dated April 12, 1995 by and
between RHCI San Antonio, Inc. and Capstone Capital Corporation
(incorporated by reference to Exhibit 2.8 to RHCI's Annual
Report on Form 10-K for the year ended June 30, 1995). Pursuant
to Reg. S-K, Item 601(b)(2), RHCI agrees to furnish a copy of
the Schedules and Exhibits to such Agreement to the Commission
upon request.................................................... --
3.1 Restated Certificate of Incorporation of RHCI, as amended
(incorporated by reference to Exhibit 3.1 to RHCI's Annual
Report on Form 10-K for the year ended June 30, 1990)........... --
3.2 Certificate of Amendment of Restated Certificate of
Incorporation of RHCI filed on April 17, 1991 (incorporated by
reference to Exhibit 3.2 to RHCI's Registration Statement on
Form S-2, Registration No. 33-40762)............................ --
3.3 Certificate of Correction to Certificate of Amendment of
Restated Certificate of Incorporation of RHCI filed on April 18,
1991 (incorporated by reference to Exhibit 3.3 to RHCI's
Registration Statement on Form Registration No. 33-40762)....... --
3.4 By-Laws of RHCI, as amended to date (incorporated by reference
to Exhibit 3.4 to RHCI's Annual Report on Form 10-K for the year
ended June 30, 1994)............................................ --
3.5 Certificate of Designation of Preferred Stock of RHCI filed on
June 27, 1991 (incorporated by reference to Exhibit 3.5 to
RHCI's Registration Statement on Form S-2, Registration No. 33-
40762).......................................................... --
3.6 Certificate of Designation of Preferred Stock of RHCI filed on
July 9, 1991 (incorporated by reference to Exhibit 3.6 to RHCI's
Registration Statement on Form S-2, Registration No. 33-40762).. --
3.7 Certificate of Designation of Preferred Stock of RHCI filed on
June 29, 1993 (incorporated by reference to Exhibit 3.7 to
RHCI's Annual Report on Form 10-K for the year ended June 30,
1994)........................................................... --
3.8 Certificate of Designations of Preferred Stock of RHCI filed on
March 13, 1997.................................................. --
4.1 Trust Indenture dated as of March 31, 1990, between RHCI,
Bountiful Psychiatric Hospital, Inc., Cumberland Mental Health,
Inc., East Carolina Psychiatric Services Corporation, Havenwyck
Hospital, Inc., Mesa Psychiatric Hospital, Inc., Psychiatric
Institute of West Virginia, Inc., and The Citizens and Southern
National Bank and Susan L. Adams (incorporated by reference to
Exhibit 4.1 to RHCI's Annual Report on Form 10-K for the year
ended June 30, 1990) ........................................... --
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
PAGE
NUMBER
------
<C> <S> <C>
4.2 First Supplemental Trust Indenture dated as of June 15, 1991
between RHCI, Bountiful Psychiatric Hospital, Inc., Cumberland
Mental Health, Inc., East Carolina Psychiatric Services
Corporation, Havenwyck Hospital, Inc., Mesa Psychiatric
Hospital, Inc. and Psychiatric Hospital of West Virginia, Inc.
and The Citizens and Southern National Bank, a national banking
association, and an individual trustee, as Trustees
(incorporated by reference to Exhibit 4.4 to RHCI's
Registration Statement on Form S-2, Registration No. 33-
40762)......................................................... --
4.3 Second Supplemental Trust Indenture dated as of May 15, 1993
between RHCI, Bountiful Psychiatric Hospital, Inc., Cumberland
Mental Health, Inc., East Carolina Psychiatric Services
Corporation, Havenwyck Hospital, Inc., Mesa Psychiatric
Hospital, Inc. and Psychiatric Hospital of West Virginia, Inc.
and NationsBank of Georgia, National Association and Susan L.
Adams (incorporated by reference to Exhibit 4.3 to RHCI's
Annual Report on Form 10-K for the year ended June 30, 1994)... --
4.4 Third Supplemental Trust Indenture dated as of April 12, 1995
between RHCI, Bountiful Psychiatric Hospital, Inc., Cumberland
Mental Health, Inc., East Carolina Psychiatric Services
Corporation, Havenwyck Hospital, Inc., Mesa Psychiatric
Hospital, Inc. and Psychiatric Hospital of West Virginia, Inc.,
and NationsBank of Georgia, National Association and Elizabeth
Talley, as Trustee (incorporated by reference to Exhibit 4.4 to
RHCI's Annual Report on Form 10-K for the fiscal year ended
June 30, 1996)................................................. --
4.5 Fourth Supplemental Trust Indenture dated as of September 15,
1995 between RHCI, Bountiful Psychiatric Hospital, Inc.,
Cumberland Mental Health, Inc., East Carolina Psychiatric
Services, Havenwyck Hospital, Inc., Mesa Psychiatric Hospital,
Inc. and Psychiatric Institute of West Virginia, Inc. and
NationsBank of Georgia, National Association and Elizabeth
Talley, as Trustee (incorporated by reference to Exhibit 10.100
to RHCI's Quarterly Report on Form 10-Q for the quarter ended
September 30, 1995)............................................ --
4.6 Subsidiary Borrower Note of Atlantic Treatment Center, Inc.
dated May 21, 1993 in the principal amount of $4,607,945
payable to the order of Societe Generale, New York Branch
(incorporated by reference to Exhibit 4.5 to RHCI's Annual
Report on Form 10-K for the year ended June 30, 1994).......... --
4.7 Subsidiary Borrower Note of Carolina Treatment Center, Inc.
dated May 21, 1993 in the principal amount of $5,030,000
payable to the order of Societe Generale, New York Branch
(substantially identical to Exhibit 4.6)....................... --
4.8 Subsidiary Borrower Note of Greenbrier Hospital, Inc. dated May
21, 1993 in the principal amount of $5,973,125 payable to the
order of Societe Generale, New York Branch (substantially
identical to Exhibit 4.6)...................................... --
4.9 Subsidiary Borrower Note of Gulf Coast Treatment Center, Inc.
dated May 21, 1993 in the principal amount of $4,392,500
payable to the order of Societe Generale, New York Branch
(substantially identical to Exhibit 4.6)....................... --
4.10 Subsidiary Borrower Note of Houma Psychiatric Hospital, Inc.
dated May 21, 1993 in the principal amount of $3,979,589
payable to the order of Societe Generale, New York Branch
(substantially identical to Exhibit 4.6)....................... --
4.11 Subsidiary Borrower Note of HSA of Oklahoma, Inc. dated May 21,
1993 in the principal amount of $3,445,562 payable to the order
of Societe Generale, New York Branch (substantially identical
to Exhibit 4.6)................................................ --
5 Opinion of Haythe & Curley..................................... --
8 Tax Opinion of Haythe & Curley................................. --
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
PAGE
NUMBER
------
<C> <S> <C>
10.1 Note Purchase Agreement dated as of March 31, 1990, among RHCI,
Bountiful Psychiatric Hospital, Inc., Cumberland Mental Health,
Inc., East Carolina Psychiatric Services Corporation, Havenwyck
Hospital, Inc., Mesa Psychiatric Hospital, Inc., Psychiatric
Institute of West Virginia, Inc., and Aetna Life Insurance
Company regarding the purchase by Aetna Life Insurance Company
of $26,000,000 principal amount of 11.6% Senior Secured
$1,000,000 principal amount of 15.6% Subordinated Secured
Notes, and Warrants to Purchase Common Stock of RHCI
(incorporated by reference to Exhibit 10.2 to RHCI's Annual
Report on Form 10-K for the year ended June 30, 1990).......... --
10.2 Note Purchase Agreement pursuant to which Monumental Life
Insurance Company purchased $15,500,000 principal amount of
11.6% Senior Secured Notes, $2,000,000 principal amount of
15.6% Subordinated Secured Notes, and Warrants to Purchase
Common Stock of RHCI (substantially identical to Exhibit
10.1).......................................................... --
10.3 Note Purchase Agreement pursuant to which Connecticut Mutual
Life Insurance Company purchased $15,000,000 principal amount
of 11.6% Senior Secured Notes (substantially identical to
Exhibit 10.1).................................................. --
10.4 Pledge and Security Agreement between Bountiful Psychiatric
Hospital, Inc. and The Citizens and Southern National Bank..... --
10.5 Pledge and Security Agreement dated as of March 31, 1990,
between RHCI and The Citizens and Southern National Bank
(substantially identical to Exhibit 10.4)...................... --
10.6 Pledge and Security Agreement between Michigan Psychiatric
Services, Inc. and The Citizens and Southern National Bank
(substantially identical to Exhibit 10.4)...................... --
10.7 Pledge and Security Agreement between Americare of Galax, Inc.
and The Citizens and Southern National Bank (substantially
identical to Exhibit 10.4)..................................... --
10.8 Deed of Trust, Security Agreement, and Financing Statement
dated as of March 31, 1990 from Bountiful Psychiatric Hospital,
Inc. to Merrill Title Company for the benefit of The Citizens
and Southern National Bank and Susan L. Adams covering certain
property in Woods Cross, Utah (incorporated by reference to
Exhibit 10.10 to RHCI's Annual Report on Form 10-K for the year
ended June 30, 1990)........................................... --
10.9 Deed of Trust and Security Agreement from Cumberland Mental
Health, Inc. to First American Title Insurance Company for the
benefit of The Citizens and Southern National Bank and Susan L.
Adams covering certain property in Fayetteville, North Carolina
(substantially identical to Exhibit 10.8)...................... --
10.10 Deed of Trust and Security Agreement from East Carolina
Psychiatric Services Corporation to First American Title
Insurance Company for the benefit of The Citizens and Southern
National Bank and Susan L. Adams covering certain property in
Jacksonville, North Carolina (substantially identical to
Exhibit 10.8).................................................. --
10.11 Mortgage and Security Agreement dated as of March 31, 1990 from
Havenwyck Hospital, Inc. to The Citizens and Southern National
Bank and Susan L. Adams covering certain property in Auburn
Hills, Michigan (incorporated by reference to Exhibit 10.12 to
RHCI's Annual Report on Form 10-K for the year ended June 30,
1990).......................................................... --
10.12 Leasehold Deed of Trust, Assignment of Rents and Security
Agreement with Financing Statement dated as of March 31, 1990
from Mesa Psychiatric Hospital, Inc. to Transamerica Title
Insurance Company for the benefit of The Citizens and Southern
National Bank and Susan L. Adams covering certain property in
Mesa, Arizona (incorporated by reference to Exhibit 10.13 to
RHCI's Annual Report on Form 10-K for the year ended June 30,
1990).......................................................... --
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
PAGE
NUMBER
------
<C> <S> <C>
10.13 Leasehold Deed of Trust and Security Agreement from Psychiatric
Institute of West Virginia, Inc. to J. Nicholas Barth, Esq.,
for the benefit of The Citizens and Southern National Bank and
Susan L. Adams covering certain property in Morgantown, West
Virginia (substantially identical to Exhibit 10.12)............ --
10.14 Obligor Subrogation and Contribution Agreement dated as of
April 30, 1990 among The Citizens and Southern National Bank,
Susan L. Adams, RHCI, Bountiful Psychiatric Hospital, Inc.,
Cumberland Mental Health, Inc., East Carolina Psychiatric
Services Corporation, Havenwyck Hospital, Inc., Mesa
Psychiatric Hospital, Inc., and Psychiatric Institute of West
Virginia, Inc. (incorporated by reference to Exhibit 10.15 to
RHCI's Annual Report on Form 10-K for the year ended June 30,
1990).......................................................... --
10.15 Credit Agreement dated as of May 15, 1993 among RHCI and
certain of its subsidiaries named therein, Societe Generale,
New York Branch, First Union National Bank of North Carolina
and Hibernia National Bank, as lenders, and Societe Generale,
as issuing bank and agent (incorporated by reference to Exhibit
10.16 to RHCI's Annual Report on Form 10-K for the year ended
June 30, 1994)................................................. --
10.16 Security Agreement dated as of May 15, 1993 by Atlantic
Treatment Center, Inc. in favor of Societe Generale, as agent
for the lenders which are parties to that certain Credit
Agreement described in Exhibit 10.15 above, and covering
certain property in Daytona Beach, Florida (incorporated by
reference to Exhibit 10.17 to RHCI's Annual Report on Form 10-K
for the year ended June 30, 1994).............................. --
10.17 Security Agreement dated as of May 15, 1993 by Carolina
Treatment Center, Inc. in favor of Societe Generale, as agent
for the lenders which are parties to that certain Credit
Agreement described in Exhibit 10.15 above (substantially
identical to Exhibit 10.16).................................... --
10.18 Security Agreement dated as of May 15, 1993 by Great Plains
Hospital, Inc. in favor of Societe Generale, as agent for the
lenders which are parties to that certain Credit Agreement
described in Exhibit 10.15 above (substantially identical to
Exhibit 10.16)................................................. --
10.19 Security Agreement dated as of May 15, 1993 by Greenbrier
Hospital, Inc. in favor of Societe Generale, as agent for the
lenders which are parties to that certain Credit Agreement
described in Exhibit 10.15 above (substantially identical to
Exhibit 10.16)................................................. --
10.20 Security Agreement dated as of May 15, 1993 by Gulf Coast
Treatment Center, Inc. in favor of Societe Generale, as agent
for the lenders which are parties to that certain Credit
Agreement described in Exhibit 10.15 above (substantially
identical to Exhibit 10.16).................................... --
10.21 Security Agreement dated as of May 15, 1993 by Houma
Psychiatric Hospital, Inc. in favor of Societe Generale, as
agent for the lenders which are parties to that certain Credit
Agreement described in Exhibit 10.15 above (substantially
identical to Exhibit 10.16).................................... --
10.22 Security Agreement dated as of May 15, 1993 by HSA of Oklahoma,
Inc. in favor of Societe Generale, as agent for the lenders
which are parties to that certain Credit Agreement described in
Exhibit 10.15 above (substantially identical to Exhibit
10.16)......................................................... --
10.23 Security Agreement dated as of May 15, 1993 by The Haven
Hospital, Inc. in favor of Societe Generale, as agent for the
lenders which are parties to that certain Credit Agreement
described in Exhibit 10.15 above (substantially identical to
Exhibit 10.16)................................................. --
10.24 Security Agreement dated as of May 15, 1993 by RHCI in favor of
Societe Generale, as agent for the lenders which are parties to
that certain Credit Agreement described in Exhibit 10.15 above
(substantially identical to Exhibit 10.16)..................... --
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
PAGE
NUMBER
------
<C> <S> <C>
10.25 Accounts Receivable Security Agreement dated as of May 15, 1993
by Americare of Galax, Inc. in favor of Societe Generale, as
agent for the lenders which are parties to that certain Credit
Agreement described in Exhibit 10.15 above (incorporated by
reference to Exhibit 10.26 to RHCI's Annual Report on Form 10-K
for the year ended June 30, 1994).............................. --
10.26 Accounts Receivable Security Agreement dated as May 15, 1993 by
Bountiful Psychiatric Hospital, Inc. in favor of Societe
Generale, as agent for the lenders which are parties to that
certain Credit Agreement described in Exhibit 10.15 above
(substantially identical to Exhibit 10.25)..................... --
10.27 Accounts Receivable Security Agreement dated as of May 15, 1993
by Cumberland Mental Health, Inc. in favor of Societe Generale,
New York Branch, as agent for the lenders which are parties to
that certain Credit Agreement described in Exhibit 10.15 above
(substantially identical to Exhibit 10.25)..................... --
10.28 Accounts Receivable Security Agreement dated as of May 15, 1993
by East Carolina Psychiatric Services Corporation in favor of
Societe Generale, New York Branch, as agent for the lenders
which are parties to that certain Credit Agreement described n
Exhibit 10.15 above (substantially identical to Exhibit
10.25)......................................................... --
10.29 Accounts Receivable Security Agreement dated as of May 15, 1993
by Havenwyck Hospital, Inc. in favor of Societe Generale, New
York Branch as agent for the lenders which are parties to that
certain Credit Agreement described in Exhibit 10.15 above
(substantially identical to Exhibit 10.25)..................... --
10.30 Accounts Receivable Security Agreement dated as of May 15, 1993
by Mesa Psychiatric Hospital, Inc. in favor of Societe
Generale, New York Branch, as agent for the lenders which are
parties to that certain Credit Agreement described in Exhibit
10.15 above (substantially identical to Exhibit 10.25)......... --
10.31 Accounts Receivable Security Agreement dated as of May 15, 1993
by Michigan Psychiatric Services, Inc. in favor of Societe
Generale, New York Branch, as agent for the lenders which are
parties to that certain Credit Agreement described in Exhibit
10.15 above (substantially identical to Exhibit 10.25)......... --
10.32 Accounts Receivable Security Agreement dated as of May 15, 1993
by Psychiatric Institute of West Virginia, Inc. in favor of
Societe Generale, New York Branch, as agent for the lenders
which are parties to that certain Credit Agreement described in
Exhibit 10.15 above (substantially identical to Exhibit
10.25)......................................................... --
10.33 Stock Pledge Agreement dated as of May 15, 1993, among RHCI in
favor of Societe Generale, New York Branch, as agent for the
lenders which are parties to that certain Credit Agreement
described in Exhibit 10.15 above (incorporated by reference to
Exhibit 10.34 to RHCI's Annual Report on Form 10-K for the year
ended June 30, 1994)........................................... --
10.34 Revolving Credit Guarantee dated as of May 15, 1993 by
Americare of Galax, Inc. in favor of Societe Generale, New York
Branch, as agent for the lenders which are parties to that
certain Credit Agreement described in Exhibit 10.15 above
(incorporated by reference to Exhibit 10.35 to RHCI's Annual
Report on Form 10-K for the year ended June 30, 1994).......... --
10.35 Revolving Credit Guarantee dated as of May 15, 1993 by Bethany
Psychiatric Hospital, Inc. in favor of Societe Generale, New
York Branch, as agent for the lenders which are parties to that
certain Credit Agreement described in Exhibit 10.15 above
(substantially identical to Exhibit 10.34)..................... --
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
PAGE
NUMBER
------
<C> <S> <C>
10.36 Revolving Credit Guarantee dated as of May 15, 1993 by
Bountiful Psychiatric Hospital, Inc. in favor of Societe
Generale, New York Branch, as agent for the lenders which are
parties to that certain Credit Agreement described in Exhibit
10.15 above (substantially identical to Exhibit 10.34)......... --
10.37 Revolving Credit Guarantee dated as of May 15, 1993 by
Cumberland Mental Health, Inc. in favor of Societe Generale,
New York Branch, as agent for the lenders which are parties to
that certain Credit Agreement described in Exhibit 10.15 above
(substantially identical to Exhibit 10.34)..................... --
10.38 Revolving Credit Guarantee dated as of May 15, 1993 by East
Carolina Psychiatric Services Corporation in favor of Societe
Generale, New York Branch, as agent for the lenders which are
parties to that certain Credit Agreement described in Exhibit
10.15 above (substantially identical to Exhibit 10.34)......... --
10.39 Revolving Credit Guarantee dated as of May 15, 1993 by
Havenwyck Hospital, Inc. in favor of Societe Generale, New York
Branch, as agent for the lenders which are parties to that
certain Credit Agreement described in Exhibit 10.15 above
(substantially identical to Exhibit 10.34)..................... --
10.40 Revolving Credit Guarantee dated as of May 15, 1993 by Mesa
Psychiatric Hospital, Inc. in favor of Societe Generale, New
York Branch, as agent for the lenders which are parties to that
certain Credit Agreement described in Exhibit 10.15 above
(substantially identical to Exhibit 10.34)..................... --
10.41 Revolving Credit Guarantee dated as of May 15, 1993 by Michigan
Psychiatric Services, Inc. in favor of Societe Generale, New
York Branch, as agent for the lenders which are parties to that
certain Credit Agreement described in Exhibit 10.15 above
(substantially identical to Exhibit 10.34)..................... --
10.42 Revolving Credit Guarantee dated as of May 15, 1993 by
Psychiatric Institute of West Virginia, Inc. in favor of
Societe Generale, New York Branch, as agent for the lenders
which are parties to that certain Credit Agreement described in
Exhibit 10.15 above (substantially identical to Exhibit
10.34)......................................................... --
10.43 Management Fee Subordination Agreement dated May 15, 1993,
among Paul J. Ramsay and Ramsay Health Care Pty. Ltd. in favor
of Societe Generale, New York Branch, as agent for the lenders
which are parties to that certain Credit Agreement described in
Exhibit 10.15 above (incorporated by reference to Exhibit 10.44
to RHCI's Annual Report on Form 10-K for the year ended June
30, 1994)...................................................... --
10.44 Mortgage and Fixture Filing and Assignment of Leases and Rents
dated as of May 15, 1993 granted by Atlantic Treatment Center,
Inc. to Societe Generale, individually and as agent for the
lenders which are parties to that certain Credit Agreement
described in Exhibit 10.15 above, with respect to certain real
property located in Volusia County, Florida (incorporated by
reference to Exhibit 10.45 to RHCI's Annual Report on Form 10-K
for the year ended June 30, 1994).............................. --
10.45 Mortgage and Fixture Filing and Assignment of Leases and Rents
dated as of May 15, 1993 granted by Carolina Treatment Center,
Inc. to Societe Generale, individually and as agent for the
lenders which are parties to that certain Credit Agreement
described in Exhibit 10.15 above, with respect to certain real
property located in Horry County, South Carolina (substantially
identical to Exhibit 10.44).................................... --
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
PAGE
NUMBER
------
<C> <S> <C>
10.46 Deed of Trust and Fixture Filing and Assignment of Leases and
Rents dated as of May 15, 1993 granted by Great Plains
Hospital, Inc. to Jacob W. Bayer, Jr. as Trustee for the
benefit of Societe Generale, individually and as agent for the
lenders which are parties to that certain Credit Agreement
described in Exhibit 10.15 above, with respect to certain real
property located in Vernon County, Missouri (substantially
identical to Exhibit 10.44).................................... --
10.47 Mortgage, Security and Assignment of Leases and Rents dated as
of May 15, 1993 by Greenbrier Hospital, Inc. to Societe
Generale individually and as agent for the lenders which are
parties to that certain Credit Agreement described in Exhibit
10.15 above, with respect to certain real property located in
St. Tammany Parish, Louisiana (substantially identical to
Exhibit 10.44)................................................. --
10.48 Mortgage and Fixture Filing and Assignment of Leases and Rents
dated as of May 15, 1993 granted by Gulf Coast Treatment
Center, Inc. to Societe Generale, individually and as agent for
the lenders which are parties to that certain Credit Agreement
described in Exhibit 10.15 above, with respect to certain real
property located in Okaloosa County, Florida (substantially
identical to Exhibit 10.44).................................... --
10.49 Mortgage, Security Agreement and Assignment of Leases and Rents
dated as of May 15, 1993 granted by Houma Psychiatric Hospital,
Inc. to Societe Generale, individually and as agent for the
lenders which are parties to that certain Credit Agreement
described in Exhibit 10.15 above, with respect to certain real
property located in the City of Houma, Parish of Terrebonne,
Louisiana (substantially identical to Exhibit 10.44)........... --
10.50 Mortgage with Power of Sale and Fixture Filing and Assignment
of Leases and Rents dated as of May 15, 1993 granted by HSA of
Oklahoma, Inc. to Societe Generale, individually and as agent
for the lenders which are parties to that certain Credit
Agreement described in Exhibit 10.15 above, with respect to
certain real property located in Garfield County, Oklahoma
(substantially identical to Exhibit 10.44)..................... --
10.51 Deed of Trust and Fixture Filing and Assignment of Leases and
Rents dated as of May 15, 1993 granted by The Haven Hospital,
Inc. to Societe Generate, individually and as agent for the
lenders which are parties to that certain Credit Agreement
described in Exhibit 10.15 above, with respect to certain real
property located in the City of DeSoto, Dallas County, Texas
(substantially identical to Exhibit 10.44)..................... --
10.52 Loan Agreement between Okaloosa County, Florida and Gulf Coast
Treatment Center, Inc. dated October 1, 1984, relating to the
issuance of bonds for Gulf Coast Treatment Center, Inc.
(incorporated by reference to Exhibit 10.16 to RHCI's
Registration Statement on Form S-1, Registration No. 2-9892)... --
10.53 Loan Agreement between Louisiana Public Facilities Authority
and Greenbrier Hospital, Inc. dated November 1, 1984, relating
to the issuance of bonds for Greenbrier Hospital, Inc.
(incorporated by reference to Exhibit 10.17 to RHCI's
Registration Statement on Form S-1, Registration No. 2-98921).. --
10.54 Loan Agreement between Horry County, South Carolina and
Carolina Treatment Center, Inc. dated December 1, 1984,
relating to the issuance of bonds for Carolina Treatment
Center, Inc. (incorporated by reference to Exhibit 10.18 to
RHCI's Registration Statement on Form S-1, Registration No. 2-
98921)......................................................... --
10.55 Loan Agreement between Louisiana Public Facilities Authority
and Houma Psychiatric Hospital, Inc. dated as of September 1,
1985, relating to the issuance of bonds for HSA Bayou Oaks
Hospital (incorporated by reference to Exhibit 10.56 to RHCI's
Annual Report on Form 10-K for the year ended June 30, 1994)... --
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
PAGE
NUMBER
------
<C> <S> <C>
10.56 Ground Lease between Facilities Management Corporation, as
landlord, and Psychiatric Institute of West Virginia, Inc., as
tenant, dated as of September 30, 1985 (incorporated by
reference to Exhibit 10.57 to RHCI's Annual Report on Form 10-K
for the year ended June 30, 1994).............................. --
10.57 Lease Agreement between Houma Psychiatric Hospital, Inc. and
Hospital Service District No. 1 of the Parish of Terrebonne,
State of Louisiana, effective February 1, 1985 (incorporated by
reference to Exhibit 10.38 to RHCI's Registration Statement on
Form S-1, Registration No. 2-98921)............................ --
10.58 Lease among Bethany Psychiatric Hospital, Inc., Bethany General
Hospital, the City of Bethany, Oklahoma and the Bethany General
Hospital Trust dated December 9, 1985 (ground lease)
(incorporated by reference to Exhibit 10.58 to RHCI's Annual
Report on Form 10-K for the fiscal year ended June 30, 1996)... --
10.59 Loan Agreement between The Enid Development Authority and HSA
of Oklahoma, Inc. dated as of October 1, 1985, relating to The
Enid Development Authority Variable Rate Demand Revenue Bonds
(Meadowlake Hospital Project) (incorporated by reference to
Exhibit 10.60 to RHCI's Annual Report on Form 10-K for the year
ended June 30, 1994)........................................... --
10.60 Ramsay Health Care, Inc. 1990 Stock Option Plan, as amended to
date (incorporated by reference to Exhibit 4.3 to RHCI's
Registration Statement on Form S-8 filed on March 6, 1991)..... --
10.61 Lease Agreement dated August 30, 1988 between RHCI and Ayshire
Land Dome Joint Venture relating to office space at One Poydras
Plaza, New Orleans, Louisiana (incorporated by reference to
Exhibit 10.78 to RHCI's Registration Statement on Form S-2,
Registration No. 33-40762)..................................... --
10.62 Ramsay Health Care, Inc. Deferred Compensation and Retirement
Plan (incorporated by reference to Exhibit 10.79 to RHCI's
Registration Statement on Form S-2, Registration
No. 33-40762).................................................. --
10.63 Personnel and Facility Sharing Agreement dated as of June 27,
1991 between RHCI and Ramsay Holdings HSA Limited (incorporated
by reference to Exhibit 10.83 to RHCI's Registration Statement
on Form S-2, Registration No.33-40762)......................... --
10.64 Indemnity Agreement dated as of June 1991 between RHCI and
Ramsay Holdings HSA Limited (incorporated by reference to
Exhibit 10.84 to RHCI's Registration Statement on Form S-2,
Registration No. 33-40762)..................................... --
10.65 Management Agreement dated as of June 25, 1992 between RHCI and
Ramsay Health Care Pty. Limited (incorporated by reference to
Exhibit 10.90 to RHCI's Annual Report on Form 10-K for the year
ended June 30, 1992)........................................... --
10.66 Ramsay Health Care, Inc. 1991 Stock Option Plan (incorporated
by reference to Exhibit 10.91 to RHCI's Annual Report on Form
10-K for the year ended June 30, 1992)......................... --
10.67 Employment Agreement dated January 23, 1992 between RHCI and
Wallace E. Smith (incorporated by reference to Exhibit 10.94 to
RHCI's Annual Report on Form 10-K for the year ended June 30,
1992).......................................................... --
10.68 Employment Agreement dated January 23, 1992 between RHCI and
John A. Quinn (incorporated by reference to Exhibit 10.95 to
RHCI's Annual Report on Form 10-K for the year ended June 30,
1992).......................................................... --
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
PAGE
NUMBER
------
<C> <S> <C>
10.69 Lease dated April 4, 1992 between The Union Labor Life
Insurance Company and RHCI (incorporated by reference to
Exhibit 10.98 to RHCI's Annual Report on Form 10-K for the year
ended June 30, 1992)........................................... --
10.70 Lease dated May 27, 1992 between Gail Buy and Bountiful
Psychiatric Hospital (incorporated by reference to Exhibit
10.99 to RHCI's Annual Report on Form 10-K for the year ended
June 30, 1992)................................................. --
10.71 Lease Agreement dated as of February 12, 1993 by and between
Gulf Coast Treatment Center, Inc and Vendell of Florida, Inc.
(incorporated by reference to Exhibit 10.82 to RHCI's Annual
Report on Form 10-K for the year ended June 30, 1994).......... --
10.72 Ramsay Health Care, Inc. 1993 Stock Option Plan (incorporated
by reference to Exhibit 10.83 to RHCI's Quarterly Report on
Form 10-Q for the quarter ended December 31, 1993)............. --
10.73 Ramsay Health Care, Inc. 1993 Employee Stock Purchase Plan
(incorporated by reference to Exhibit 10.84 to RHCI's Quarterly
Report on Form 10-Q for the quarter ended December 31, 1993)... --
10.74 Fourth Modification, Extension and Amendment of Lease Agreement
dated November 15, 1993 between RHCI and One Poydras Plaza
Venture relating to RHCI's office space at One Poydras Plaza,
New Orleans, Louisiana (incorporated by reference to Exhibit
10.84 to RHCI's Annual Report on Form 10-K for the year ended
June 30, 1994)................................................. --
10.75 Employment Agreement dated July 19, 1994 between RHCI and Brent
J. Bryson (incorporated by reference to Exhibit 10.85 to RHCI's
Annual Report on Form 10-K for the year ended June 30, 1995)... --
10.76 Rights Agreement dated as of August 1, 1995 between Ramsay
Health Care, Inc. and First Union National Bank of North
Carolina, as Rights Agent, which includes the form of Right
Certificate as Exhibit A and the Summary of Rights to Purchase
Common Shares as Exhibit B (incorporated by reference to
Exhibit 4.1 to RHCI's Current Report on Form 8-K dated August
1, 1995)....................................................... --
10.77 Letter Agreement dated June 30, 1995 among Ramsay Health Care,
Inc., Ramsay Holdings HSA Limited and Paul Ramsay Holdings Pty.
Limited (incorporated by reference to Exhibit 4.2 to RHCI's
Current Report on Form 8-K dated August 1, 1995)............... --
10.78 Lease Agreement dated April 12, 1995 between Capstone Capital
Corporation and Mesa Psychiatric Hospital, Inc. (incorporated
by reference to Exhibit 10.88 to RHCI's Annual Report on Form
10-K for the year ended June 30, 1995)......................... --
10.79 Lease Agreement dated April 12, 1995 between Capstone Capital
of San Antonio, LTD, d/b/a Cahaba of San Antonio, LTD. and RHCI
San Antonio, Inc. (incorporated by reference to Exhibit 10.89
to RHCI's Annual Report on Form 10-K for the year ended June
30, 1995)...................................................... --
10.80 Facility Lease Agreement dated June 26, 1995 by and between
Charter Canyon Behavioral Health System, Inc. and Bountiful
Psychiatric Hospital, Inc. (incorporated by reference to
Exhibit 10.90 to RHCI's Annual Report on Form 10-K for the year
ended June 30, 1995)........................................... --
10.81 Employment termination letter dated September 15, 1995 between
RHCI and Gregory H. Browne (incorporated by reference to
Exhibit 10.91 to RHCI's Annual Report on Form 10-K for the year
ended June 30, 1995)........................................... --
10.82 Second Amended and Restated Distribution Agreement between RHCI
and RMCI (incorporated by reference to Exhibit 10.1 to RMCI's
Registration Statement on Form S-1 (Registration No. 33-78034)
filed with the Commission on April 24, 1995)................... --
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
PAGE
NUMBER
------
<C> <S> <C>
10.83 Employee Benefit Agreement dated as of February 1, 1995 between
RHCI and RMCI (incorporated by reference to Exhibit 10.4 to
RMCI's Registration Statement on Form S-1 (Registration No. 33-
78034) filed with the Commission on April 24, 1995)............ --
10.84 Tax Sharing Agreement dated as of October 25, 1994 between RHCI
and RMCI (incorporated by reference to Exhibit 10.5 to RMCI's
Registration Statement on Form S-1 (Registration No. 33-78034)
filed with the Commission on April 24, 1995)................... --
10.85 Corporate Services Agreement dated as of January 2, 1995
between RHCI and RMCI (incorporated by reference to Exhibit
10.6 to RMCI's Registration Statement on Form S-1 (Registration
No. 33-78034) filed with the Commission on April 24, 1995)..... --
10.86 Form of Withholding Tax Agreement between RHCI, Ramsay Holdings
HSA Limited, Paul Ramsay Holdings Pty. Limited and Ramsay
Health Care Pty. Limited (incorporated by reference to Exhibit
10.7 to RMCI's Registration Statement on Form S-1 (Registration
No. 33-78034) filed with the Commission on April 24, 1995)..... --
10.87 $6,000,000 Subordinated Promissory Note of RMCI, as amended
(incorporated by reference to Exhibit 10.13 to RMCI's
Registration Statement on Form S-1 (Registration No. 33-78034)
filed with the Commission on April 24, 1995)................... --
10.88 Consent and Amendment dated April 12, 1996 among RHCI and
certain of its subsidiaries named therein, Societe Generale,
New York Branch, First Union National Bank of North Carolina
and Hibernia National Bank, as lenders, and Societe Generale,
as issuing bank and agent (incorporated by reference to Exhibit
10.88 to RHCI's Annual Report on Form 10-K for the fiscal year
ended June 30, 1996)........................................... --
10.89 Second Amendment to Credit Agreement dated as of September 15,
1995 among RHCI and certain of its subsidiaries named therein,
Societe Generale, New York Branch, First Union National Bank of
North Carolina and Hibernia National Bank, as lenders, and
Societe Generale, as issuing bank and agent (incorporated by
reference to Exhibit 10.99 to RHCI's Quarterly Report on Form
10-Q for the quarter ended September 30, 1995)................. --
10.90 Amended and Restated Stock Purchase Agreement dated October 12,
1995 by and among Paul Ramsay Holdings Pty. Limited, Ramsay
Health Care, Inc. and, solely for the purpose of Section I, III
and VI of the agreement, Ramsay Health Care Pty. Limited
(incorporated by reference to Exhibit 10.101 to RHCI's
Quarterly Report on Form 10-Q for the quarter ended September
30, 1995)...................................................... --
10.91 Amendment to Rights Agreement, dated October 3, 1995 between
Ramsay Health Care, Inc. and First Union Bank of North
Carolina, as Rights Agent (incorporated by reference to Exhibit
10.102 to RHCI's Quarterly Report on Form 10-Q for the quarter
ended September 30, 1995)...................................... --
10.92 Ramsay Health Care, Inc. 1995 Long Term Incentive Plan
(incorporated by reference to Exhibit 10.103 to RHCI's
Quarterly Report on Form 10-Q for the quarter ended December
31, 1995)...................................................... --
10.93 Third Amendment to Credit Agreement dated as of August 15, 1996
among RHCI and certain subsidiaries named therein, Societe
Generale, New York Branch, First Union National Bank of North
Carolina and Hibernia National Bank, as lenders, and Societe
Generale, as issuing bank and agent (incorporated by reference
to Exhibit 10.93 to RHCI's Annual Report on Form 10-K for the
fiscal year ended June 30, 1996)............................... --
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
PAGE
NUMBER
------
<C> <S> <C>
10.94 Stock Purchase Agreement dated as of August 13, 1996 by and
among Paul Ramsay Holdings Pty. Limited, RHCI and, solely for
purposes of Sections I, III and IV thereof, Ramsay Health Care
Pty. Limited (incorporated by reference to Exhibit 10.94 to
RHCI's Annual Report on Form 10-K for the fiscal year ended
June 30, 1996)................................................ --
10.95 Amended and Restated Employment Agreement dated as of August
15, 1996 by and between Reynold Jennings and RHCI
(incorporated by reference to Exhibit 10.95 to RHCI's Annual
Report on Form 10-K for the fiscal year ended June 30, 1996).. --
10.96 Exchange Agreement dated September 10, 1996, by and among
RHCI, Paul Ramsay Hospitals Pty. Limited and Paul J. Ramsay,
including a related Warrant Certificate dated September 10,
1996 issued to Ramsay Hospital Pty. Limited (incorporated by
reference to Exhibit 10.96 to RHCI's Annual Report on Form 10-
K for the fiscal year ended June 30, 1996).................... --
10.97 Consulting Agreement dated as of January 1, 1996 between RHCI
and Summa Healthcare Group, Inc. (incorporated by reference to
Exhibit 10.97 to RHCI's Annual Report on Form 10-K for the
fiscal year ended June 30, 1996).............................. --
10.98 Letter Agreement dated as of September 10, 1996 by and among
RHCI, Ramsay Health Care Pty. Limited and Paul Ramsay Holdings
Pty. Limited, included a related Warrant Certificate dated
September 10, 1996 issued to Paul Ramsay Holdings Pty. Limited
(incorporated by reference to Exhibit 10.98 to RHCI's Annual
Report on Form 10-K for the fiscal year ended June 30, 1996).. --
10.99 Employment Agreement dated August 12, 1996 by and between RHCI
and Remberto Cibran (incorporated by reference to Exhibit
10.99 to RHCI's Quarterly Report and Form 10-Q for the quarter
ended September 30, 1996)..................................... --
10.100 Services Agreement dated August 12, 1996 by and between RHCI
and HealthLink Enterprises, Inc. (incorporated by reference to
Exhibit 10.100 to RHCI's Quarterly Report on Form 10-Q for the
quarter ended September 30, 1996)............................. --
10.101 Amendment No. 2 dated as of November 1, 1996 to that certain
Rights Agreement dated as of August 1, 1995, as amended by
that certain Amendment dated as of October 1, 1995, between
RHCI and First Union National Bank of North Carolina, as
Rights Agent (incorporated by reference to Exhibit 10.101 to
RHCI's Quarterly Report on Form 10-Q for the quarter ended
September 30, 1996)........................................... --
11 Computation of Net Income Per Share (incorporated by reference
to Exhibit 11 to RHCI's Quarterly Report on Form 10-Q for the
quarter ended December 31, 1996).............................. --
21 Subsidiaries of RHCI.......................................... --
23.1 Consent of Ernst & Young LLP (see "Consent of Independent
Auditors" included in the Registration Statement)............. --
23.2 Consent of Ernst & Young LLP (see "Consent of Independent
Certified Public Accountants Auditors" included in the
Registration Statement)....................................... --
23.3 Consent of Haythe & Curley (contained in Exhibit 5)........... --
23.4 Consent of Haythe & Curley (contained in Exhibit 8)........... --
23.5 Consent of Houlihan, Lokey, Howard & Zukin, Inc............... --
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
PAGE
NUMBER
------
<C> <S> <C>
23.6 Consent of Dean Witter Reynolds Inc.............................. --
27 Financial Data Schedule (incorporated by reference to Exhibit 27
to RHCI's Quarterly Report on Form 10-Q for the quarter ended
December 31, 1996)............................................... --
99.1 Fairness Opinion of Houlihan, Lokey, Howard & Zukin, Inc......... --
99.2 Fairness Opinion of Dean Witter Reynolds Inc..................... --
</TABLE>
Copies of the exhibits filed with this Registration Statement on Form S-4 or
incorporated by reference herein do not accompany copies hereof for
distribution to stockholders of RHCI. RHCI will furnish a copy of any such
exhibits to any stockholder requesting the same.
<PAGE>
EXHIBIT 3.8
CERTIFICATE OF DESIGNATIONS OF
PREFERRED STOCK
OF
RAMSAY HEALTH CARE, INC.
PURSUANT TO SECTION 151(G) OF THE
GENERAL CORPORATION LAW OF THE STATE OF DELAWARE
The undersigned, Bert G. Cibran, President of Ramsay Health Care, Inc., a
corporation organized and existing under the General Corporation Law of the
State of Delaware (the "Corporation"), on behalf of the Corporation and in
accordance with the provisions of Section 103 thereof, DOES HEREBY CERTIFY:
That pursuant to the authority conferred upon the Board of Directors of the
Corporation by Section 2 of Paragraph (4) of the Amended and Restated
Certificate of Incorporation of the Corporation, and in accordance with the
provisions of Section 151(g) of the General Corporation Law of the State of
Delaware, on February 26, 1997, the Board of Directors of the Corporation
authorized and designated 100,000 of the authorized shares of the Class B
Preferred Stock, $0.01 par value, of the Corporation as Class B Preferred
Stock, Series 1996 and adopted the following resolution in connection
therewith:
RESOLVED, that the Board of Directors of the Corporation, in accordance with
Section 151(g) of the General Corporation Law of the State of Delaware and
Section 2 of Paragraph (4) of the Corporation's Amended and Restated
Certificate of Incorporation, hereby authorizes and designates 100,000 shares
of Class B Preferred Stock, par value $1.00 per share, as Class B Preferred
Stock, Series 1996 (the "Series 1996 Preferred Stock"), which Series 1996
Preferred Stock shall be described and limited as follows:
(a) Definitions. For purposes of this Designation, the following
definitions shall apply:
"Additional Shares of Common Stock" shall mean all shares of Common Stock,
par value $0.01 per share (the "Common Stock"), of the Corporation issued
subsequent to the Base Date (or, pursuant to subparagraph (e)(v), deemed to be
issued subsequent to the Base Date) by the Corporation, other than shares of
Common Stock issued or issuable (A) upon conversion of shares of Class B
Preferred Stock, par value $1.00 per share, Series C (the "Series C Preferred
Stock") and shares of Series 1996 Preferred Stock; (B) pursuant to any Options
issued under the 1990, 1991 and 1993 Stock Option Plans and the 1995 and 1996
Long Term Incentive Plans of the Corporation as in effect on the Base Date or
under any other or additional option, incentive or similar plan approved by
the Board of Directors of the Corporation subsequent to the Base Date; and (C)
upon exercise of Options or Convertible Securities other than those covered by
clause (B) above, in each case which Options or Convertible Securities were
outstanding as of the Base Date.
"Base Date" shall mean the effective date of the merger of Ramsay Managed
Care, Inc. a Delaware corporation, with RHCI Acquisition Corp., a Delaware
corporation, pursuant to the Agreement and Plan of Merger dated October 1,
1996.
"Board of Directors" shall mean the Board of Directors of the Corporation.
"Common Stock Outstanding" shall include all Common Stock issued and
outstanding and issuable upon exercise of all outstanding Options and
conversion of all outstanding Convertible Securities.
"Convertible Securities" shall mean any evidences of indebtedness, shares or
other securities convertible into or exchangeable for shares of Common Stock.
"Effective Price" of Additional Shares of Common Stock shall mean the
quotient determined by dividing the total number of Additional Shares of
Common Stock issued or sold, or deemed to have been issued or sold by the
Corporation under subparagraph (e)(v), into the aggregate consideration
received or deemed to have been received by the Corporation for such issue
under subparagraph (e)(v).
<PAGE>
"Market Price" shall mean, for any day, the last sale price regular way, or,
in case no sale takes place on any such day, the average of the closing bid
and asked prices regular way, for the Common Stock in either case on the
principal national securities exchange on which the Common Stock is listed or
admitted to trading, or, if the Common Stock is not listed or admitted to
trading on any national securities exchange, the last sale price for the
shares of Common Stock on the Nasdaq National Market or the Nasdaq SmallCap
Market, whichever is applicable, or, if such shares shall not be included in
such markets, the closing bid price in the over-the-counter market, in each
such case averaged over a period of 20 consecutive business days ending
immediately prior to the day as of which the Market Price is being determined.
If at any time the shares of Common Stock are not listed on any national
securities exchange, included in the Nasdaq National Market or the Nasdaq
SmallCap Market or quoted in the over-the-counter market, the Market Price of
the shares of Common Stock shall be deemed to be the higher of (i) the book
value thereof, as determined in accordance with generally accepted accounting
principles consistent with those then being applied by the Corporation by any
firm of independent certified public accountants (which may be the regular
auditors of the Corporation) of recognized national standing selected by the
Board of Directors of the Corporation, as of the last day of the last calendar
month ending prior to the date as of which the determination is to be made,
and (ii) the fair value thereof, as determined in good faith by an independent
brokerage firm, Standard & Poor's Corporation or Moody's Investors Service, as
selected by the Board of Directors of the Corporation, as of a date which is
within 15 days preceding the date as of which the determination is to be made.
"Options" shall mean rights, options or warrants to subscribe for, purchase
or otherwise acquire shares of Common Stock or Convertible Securities.
(b) Dividend Rights. From and after the issuance of the Series 1996
Preferred Stock, the holders of outstanding Series 1996 Preferred Stock
shall be entitled to receive, and shall be paid, when and as declared by
the Board of Directors, out of funds legally available therefor, cumulative
cash dividends at an annual rate of $1.50 per share, payable in arrears
quarterly on January 15, April 15, July 15 and October 15, to stockholders
of record on a date not more than 20 days prior to the date on which such
cash dividends are payable, said dividends to commence accrual on the date
of issuance of the applicable shares. Such dividends shall be prior and in
preference to any declaration of payment of any dividend on any class or
series of capital stock of the Corporation, including without limitation,
the Common Stock and the Class A Preferred Stock, par value $1.00 per share
(the "Class A Preferred Stock"), of the Corporation, but shall rank junior
in right of payment with any declaration of payment of dividends on the
Series C Preferred Stock, which payment of dividends shall be senior and
preferred to any payment of dividends in respect of the Series 1996
Preferred Stock. Such dividends in respect of the Series 1996 Preferred
Stock shall be cumulative and shall accrue whether or not declared by the
Board of Directors. No cash dividends shall be paid with respect to any
class or series of capital stock of the Corporation, including without
limitation, the Class A Preferred Stock and the Common Stock, but other
than the Series C Preferred Stock, until all dividends accrued on any
outstanding shares of the Series 1996 Preferred Stock, whether or not
declared, have been set apart and fully paid. No accumulation of dividends
on the Series 1996 Preferred Stock shall bear interest.
(c) Liquidation Rights. In the event of liquidation, dissolution or
winding up of the Corporation, whether voluntary or involuntary, the
holders of the Series 1996 Preferred Stock, by reason of their ownership
thereof, shall be entitled to receive in exchange for and in redemption of
each share of Series 1996 Preferred Stock held, prior and in preference to
any distribution of any of the assets or surplus funds of the Corporation
to the holders of any class or series of capital stock of the Corporation,
including without limitation, the Class A Preferred Stock and the Common
Stock, but other than any distribution of any of the assets or surplus
funds of the Corporation to the holders of the Series C Preferred Stock,
which distribution shall be senior and preferred to any distribution in
respect of the Series 1996 Preferred Stock, an amount equal to $30.00 per
share held plus all accrued but unpaid dividends, whether or not declared,
on each such share. Subject to the prior preferential amounts to be paid to
the holders of the Series C Preferred Stock, all of the preferential
amounts to be paid to the holders of the Series 1996 Preferred Stock under
this Section (c) shall be paid or set apart for payment before the payment
or setting apart for payment of any amount
<PAGE>
for, or the distribution of any assets or surplus funds of the Corporation
to, the holders of any other class or series of capital stock of the
Corporation other than the Series C Preferred Stock, but including without
limitation, the Class A Preferred Stock and the Common Stock of the
Corporation, in connection with such liquidation, dissolution or winding
up, whether voluntary or involuntary. If the assets or surplus funds to be
distributed to the holders of the Series 1996 Preferred Stock are
insufficient to permit the payment to such holders of their full
preferential amount, the assets and surplus funds legally available for
distribution shall be distributed ratably among the holders of the Series
1996 Preferred Stock in proportion to the full preferential amount each
such holder is otherwise entitled to receive. After the payment or
distribution to the holders of the Series 1996 Preferred Stock of the full
preferential amounts aforesaid, the holders of the Class A Preferred Stock
and the Common Stock then outstanding shall be entitled to receive ratably
all the remaining assets of the Corporation.
(d) Voting Rights. Except as required by law, each share of the Series
1996 Preferred Stock shall entitle the holder thereof to that number of
votes per share equal to the number of whole shares of Common Stock into
which such share of Series 1996 Preferred Stock is then convertible on all
matters put to a vote of the stockholders of the Corporation and shall
otherwise have voting rights and powers equal to the voting rights and
powers of the Common Stock. Such number of votes shall be appropriately
adjusted in the event of any recapitalization, reorganization, stock
dividend, stock split or similar event affecting the capital stock of the
Corporation. In any and all circumstances, the holders of the Series 1996
Preferred Stock shall be entitled to notice of any stockholders' meeting in
accordance with the Bylaws of the Corporation and shall vote together with
the holders of the Common Stock as one class upon any matter submitted to a
vote of stockholders, except those matters required by law to be submitted
to a class vote of the holders of Series 1996 Preferred Stock.
(e) Conversion. The holders of the Series 1996 Preferred Stock shall have
conversion rights as follows:
(i) Right to Convert.
(A) Each share of Series 1996 Preferred Stock shall be
convertible, at the option of the holder thereof, at any time after
the date of issuance of such share at the office of the Corporation
of or any transfer agent for the Series 1996 Preferred Stock, into
that number of fully paid and nonassessable shares of Common Stock
that results from dividing the Conversion Price per share in effect
at conversion into $30.00 and multiplying the quotient obtained by
the number of shares of Series 1996 Preferred Stock being converted.
The initial Conversion Price is $3.00 per share. The initial
Conversion Price is subject to adjustment from time to time as
provided herein.
(B) No fractional shares of Common Stock shall be issued upon
conversion of shares of Series 1996 Preferred Stock and if any
shares of Series 1996 Preferred Stock surrendered for conversion by
a holder, in the aggregate, for conversion which would otherwise
result in a fractional share of Common Stock, then such fractional
share shall be redeemed by the Corporation at the then effective
Conversion Price per share, payable as promptly as possible when
funds are legally available therefor.
(ii) Mechanics of Conversion. Before any holder of shares of Series
1996 Preferred Stock shall be entitled to convert the such shares into
shares of Common Stock, such holder shall surrender the certificate or
certificates therefor, duly endorsed and accompanied by properly
executed stock powers, at the office of the Corporation or of any
transfer agent for the Series 1996 Preferred Stock, shall give written
notice to the Corporation at such office of the name or names in which
such holder wishes the certificate or certificates for shares of Common
Stock to be issued if different from the name shown on the books and
records of the Corporation and shall pay any applicable transfer taxes.
Said conversion notice shall also contain such representations as may
reasonably be required by the Corporation to the effect that the shares
of Common Stock to be received upon conversion are not being acquired
and will not be transferred in any way which might violate the then
applicable securities laws. The Corporation shall, as soon as
practicable thereafter, issue and deliver at such office to such holder
of Series 1996 Preferred Stock, or to the nominee or nominees of such
holder, a certificate or certificates
<PAGE>
for the number shares of Common Stock to which such holder shall be
entitled as aforesaid. Such conversion shall be deemed to have been
made immediately prior to the close of business on the date of such
surrender of the certificate or certificates for the shares of Series
1996 Preferred Stock to be converted, and the person or persons
entitled to receive the shares of Common Stock issuable upon such
conversion shall be treated for all purposes as the record holder or
holders of such shares of Common Stock as of such date. All
certificates issued upon such conversion shall contain a legend
governing restrictions, if any, upon such shares imposed by applicable
securities laws.
(iii) Adjustment for Subdivisions or Combinations of Common Stock. In
the event that the Corporation at any time or from time to time after
the Base Date effects a subdivision or combination of its outstanding
Common Stock into a greater or lesser number of shares without a
proportionate and corresponding subdivision or combination of its
outstanding Series 1996 Preferred Stock, then and in each such event
the Conversion Price shall be decreased or increased proportionately.
(iv) Adjustments for Dividends, Distributions and Convertible
Securities. In the event that the Corporation at any time or from time
to time after the Base Date shall make or issue, or fix a record date
for the determination of holders of Common Stock entitled to receive, a
dividend or other distribution payable in Additional Shares of Common
Stock, Options or Convertible Securities without payment of any
consideration by such holder of such shares of Common Stock, without a
proportionate and corresponding dividend or other distribution to
holders of shares of Series 1996 Preferred Stock, then and in each such
event the maximum number of shares (as set forth in the instrument
relating thereto without regard to any provisions contained therein for
subsequent adjustment of such number) of Common Stock issuable in
payment of such dividend or distribution or upon conversion or exercise
of such Convertible Securities shall be deemed, for purposes of this
subparagraph (e)(iv), to be issued and outstanding as of the time of
such issuance or, in the event such a record date shall have been
fixed, as of the close of business on such record date. In each such
event the then applicable Conversion Price shall be decreased as of the
time of such issuance or, in the event such a record date shall have
been fixed, as of the close of business on such record date, by
multiplying the then applicable Conversion Price by a fraction,
(A) the numerator of which shall be the total number of shares of
Common Stock issued and outstanding or deemed pursuant to the terms
hereof to be issued and outstanding immediately prior to the time of
such issuance or the close of business on such record date, as
applicable; and
(B) the denominator of which shall be (x) the total number of
shares of Common Stock issued and outstanding or deemed pursuant to
the terms hereof to be issued and outstanding immediately prior to
the time of such issuance or the close of business on such record
date, as applicable, plus (y) the total number of shares of Common
Stock issuable in payment of such dividend or distribution or upon
conversion or exercise of such Options or Convertible Securities;
and provided, however, (i) if such record date shall have been fixed and
such dividend is not fully paid or if such distribution is not fully made
on the date fixed therefor, the Conversion Price shall be recomputed
accordingly as of the close of business on such record date and thereafter
the Conversion Price shall be adjusted pursuant to this subparagraph
(e)(iv) as of the time of actual payment of such dividends or
distributions; or (ii) if such Convertible Securities provide, with the
passage of time or otherwise, for any decrease or increase in the number of
shares of Common Stock issuable upon conversion or exercise thereof (or
upon the occurrence of a record date with respect thereto), the Conversion
Price computed upon the original issue thereof (or upon the occurrence of a
record date with respect thereto), and any subsequent adjustments based
thereon, shall, upon any such decrease or increase becoming effective, be
recomputed to reflect such decrease or increase insofar as it affects the
rights of conversion or exercise of the Convertible Securities then
outstanding; or (iii) upon the expiration of any rights of conversion or
exercise under any unexercised Convertible Securities, the Conversion Price
computed upon the original issue thereof (or upon the occurrence of a
record date with respect thereto), and any subsequent adjustments based
thereon, shall, upon such expiration, be recomputed as if the only
additional shares of Common Stock issued were the
<PAGE>
shares of such stock, if any, actually issued upon the conversion or
exercise of such Convertible Securities; or (iv) in the event of issuance
of Convertible Securities which expire by their terms not more than sixty
(60) days after the date of issuance thereof, no adjustments of the
Conversion Price shall be made until the expiration or exercise of all such
Convertible Securities, whereupon such adjustment shall be made in the
manner provided in this subparagraph (e)(iv).
(v) Adjustment of Conversion Price for Diluting Issues.
(A) If at any time or from time to time after the Base Date, the
Corporation issues or sells, or is deemed by the provisions of this
subparagraph (e)(v) to have issued or sold Additional Shares of
Common Stock, for an Effective Price less than the Conversion Price
for the Series 1996 Preferred Stock in effect on the date of and
immediately prior to such issue, or the Corporation issues or sells,
or is deemed by the provisions of this subparagraph (e)(v) to have
issued or sold Additional Shares of Common Stock, for an Effective
Price less than the Market Price in effect on the date of and
immediately prior to such issue, then and in each such case the then
existing Conversion Price for the Series 1996 Preferred Stock shall
be reduced, as of the opening of business of the date of such issue
or sale, to the lower of the prices determined as follows:
(1) by multiplying the Conversion Price for the Series 1996
Preferred Stock in effect immediately prior to the time of such
issue or sale by a fraction (a) the numerator of which shall be
the sum of (i) the number of shares of Common Stock Outstanding
immediately prior to such issue or sale plus (ii) the number of
shares of Common Stock which the aggregate consideration
received (or by the provisions hereof deemed to have been
received) by the Corporation for the total number of Additional
Shares of Common Stock so issued or sold would purchase at such
Conversion Price for the Series 1996 Preferred Stock and (b) the
denominator of which shall be the number of shares of Common
Stock Outstanding at the close of business on the date of such
issue or sale after giving effect to such issue or sale of
Additional Shares of Common Stock; and
(2) by multiplying the Conversion Price for the Series 1996
Preferred Stock in effect immediately prior to the time of such
issue or sale by a fraction (a) the numerator of which shall be
the sum of (i) the number of shares of Common Stock Outstanding
immediately prior to such issue or sale multiplied by the Market
Price immediately prior to such issue or sale plus (ii) the
aggregate consideration received (or by the provisions hereof
deemed to have been received) by the Corporation for the total
number of Additional Shares of Common Stock so issued or sold,
and (b) the denominator of which shall be the product of (iii)
the number of shares of Common Stock Outstanding at the close of
business on the date of such issue or sale after giving effect
to such issue or sale of Additional Shares of Common Stock,
multiplied by (iv) the Market Price immediately prior to such
issue or sale.
(B) For the purpose of making any adjustment required under this
subparagraph (e)(v), the consideration received by the Corporation
for any issue or sale of securities shall (1) to the extent it
consists of cash, be computed at the net amount of cash received by
the Corporation prior to deduction of any expenses payable by the
Corporation and any underwriting or similar commissions,
compensation or concessions paid or allowed by the Corporation in
connection with such issue or sale, (2) to the extent it consists of
property other than cash, be computed at the fair value of that
property as determined in good faith by the Board of Directors and
(3) if Additional Shares of Common Stock, Convertible Securities or
Options to purchase either Additional Shares of Common Stock or
Convertible Securities are issued or sold together with other stock
or securities or other assets of the Corporation for a consideration
which covers both, be computed (as provided in clauses (1) and (2)
above) as the portion of the consideration so received that may be
reasonably determined in good faith by the Board of Directors to be
allocable to such Additional Shares of Common Stock, Convertible
Securities or Options.
(C) For the purpose of the adjustment required under this
subparagraph (e)(v), if at any time or from time to time after the
Base Date, the Corporation issues or sells any Options or
<PAGE>
Convertible Securities (other than Options specified in the
definition of "Additional Shares of Common Stock"), then in each
case the Corporation shall be deemed to have issued at the time of
the issuance of such Options or Convertible Securities the maximum
number of Additional Shares of Common Stock (as set forth in the
instruments relating thereto, giving effect to any provision
contained therein for a subsequent upward adjustment of such number)
issuable upon exercise or conversion thereof and to have received as
consideration for the issuance of such shares an amount equal to the
total amount of the consideration, if any, received by the
Corporation for the issuance of such Options or Convertible
Securities plus, in the case of such Options, the minimum amounts of
consideration, if any (as set forth in the instruments relating
thereto, giving effect to any provision contained therein for a
subsequent downward adjustment of such consideration), payable to
the Corporation upon the exercise of such Options and, in the case
of Convertible Securities, the minimum amounts of consideration, if
any, payable to the Corporation (other than by cancellation of
liabilities or obligations evidenced by such Convertible
Securities). No further adjustment of the Conversion Price for the
Series 1996 Preferred Stock, adjusted upon the issuance of such
Options or Convertible Securities, shall be made as a result of the
actual issuance of Additional Shares of Common Stock on the exercise
of any such Options or the conversion of any such Convertible
Securities. If any such Options or the conversion privilege
represented by any such Convertible Securities shall expire without
having been exercised and fewer than the maximum number of
Additional Shares of Common Stock deemed issued thereunder upon
issuance thereof shall have actually been issued thereunder, or more
than the minimum consideration deemed to have been received by the
Corporation upon issuance thereof shall have been actually received
by the Corporation, then the Conversion Price for the Series 1996
Preferred Stock adjusted upon the issuance of such Options or
Convertible Securities shall be readjusted to the Conversion Price
for the Series 1996 Preferred Stock which would have been in effect
had an adjustment been made on the basis that the only Additional
Shares of Common Stock so issued were the Additional Shares of
Common Stock, if any, actually issued or sold on the exercise of
such Options or rights of conversion of such Convertible Securities,
and such Additional Shares of Common Stock, if any, were issued or
sold for the consideration actually received by the Corporation upon
such exercise, plus the consideration, if any, actually received by
the Corporation for the granting of all such Options, whether or not
exercised, plus the consideration received for issuing or selling
the Convertible Securities actually converted plus the
consideration, if any, actually received by the Corporation (other
than by cancellation of liabilities or obligations evidenced by such
Convertible Securities) on the conversion of such Convertible
Securities.
(D) Except as expressly provided herein, no adjustment in the
Conversion Price of any share of Series 1996 Preferred Stock shall
be made in respect of the issue of Additional Shares of Common Stock
unless the consideration per share for such Additional Shares of
Common Stock issued or sold or deemed to be issued or sold by the
Corporation is less than the Conversion Price for such share of
Series 1996 Preferred Stock or Market Price, in each case, in effect
on the date of, and immediately prior to, such issue or sale.
(vi) Reorganizations, Mergers, Consolidations, or Sales of Assets. If
at any time or from time to time there shall be a capital
reorganization of the Common Stock (other than a subdivision,
combination, reclassification, or exchange of shares provided for
elsewhere in this paragraph (e)) or a merger or consolidation of the
Corporation with or into another corporation, or the sale of all or
substantially all of the Corporation's properties and assets to any
other person which is effected so that holders of Common Stock are
entitled to receive (either directly or upon subsequent liquidation)
stock, securities or assets with respect to or in exchange for Common
Stock, then, as a part of such reorganization, merger, consolidation,
or sale, provision shall be made so that the holders of the Series 1996
Preferred Stock shall thereafter be entitled to receive upon conversion
of the Series 1996 Preferred Stock, the number of shares of stock,
securities or assets of the Corporation, or of the successor
corporation resulting from such merger or consolidation or sale, to
which a holder of
<PAGE>
Common Stock deliverable upon conversion would have been entitled in
connection such capital reorganization, merger, consolidation, or sale.
In any such case, appropriate adjustment shall be made in the
application of the provisions of this paragraph (e) with respect to the
rights of the holders of the Series 1996 Preferred Stock after the
reorganization, merger, consolidation, or sale to the end that the
provisions of this paragraph (e) (including adjustment of the
Conversion Price then in effect and the number of shares purchasable
upon conversion of the Series 1996 Preferred Stock) shall be applied
thereafter with as nearly an equivalent effect as may be practicable.
(vii) No Adjustment. No adjustment to the Conversion Price shall be
made if such adjustment would result in a change in the Conversion
Price of less than $.01. Any adjustment of less than $.01 which is not
made shall be carried forward and shall be made at the time of and
together with any subsequent adjustment which, on a cumulative basis,
amounts to an adjustment of $.01 or more in the Conversion Price.
(viii) Certificate as to Adjustments. Upon the occurrence of each
adjustment or readjustment of the Conversion Price pursuant to this
paragraph (e), the Corporation at its expense shall promptly compute
such adjustment or readjustment in accordance with the terms hereof and
cause independent public accountants selected by the Corporation to
verify such computation and prepare and furnish to each holder of
Series 1996 Preferred Stock a certificate setting forth such adjustment
or readjustment and showing in detail the facts upon which such
adjustment or readjustment is based. The Corporation shall, upon the
written request at any time of any holder of Series 1996 Preferred
Stock, furnish or cause to be furnished to such holder a like
certificate setting forth (i) such adjustments and readjustments, (ii)
the Conversion Price at that time in effect, and (iii) the number of
shares of Common Stock and the amount, if any, of other property which
at that time would be received upon the conversion of Series 1996
Preferred Stock.
(ix) Notices of Record Date. In the event of any taking by the
Corporation of a record of the holders of any class of securities of
the Corporation other than Series 1996 Preferred Stock for the purpose
of determining the holders thereof who are entitled to receive any
dividend or other distribution, any Convertible Securities or any right
to subscribe for, purchase or otherwise acquire any shares of stock of
any class or any other securities or property, or to receive any other
right, the Corporation shall mail to each holder of Series 1996
Preferred Stock at least twenty (20) days prior to the date specified
therein, a notice specifying the date on which any such record is to be
taken for the purpose of such dividend, distribution or rights, and the
amount and character of such dividend, distribution or rights.
(x) Reservation of Stock Issuable Upon Conversion. The Corporation
shall at all times reserve and keep available out of its authorized but
unissued shares of Common Stock solely for the purpose of effecting the
conversion of the shares of Series 1996 Preferred Stock such number of
its shares of Common Stock as shall from time to time be sufficient to
effect the conversion of all outstanding shares of the Series 1996
Preferred Stock; and if at any time the number of authorized but
unissued shares of Common Stock shall not be sufficient to effect the
conversion of all then outstanding shares of Series 1996 Preferred
Stock, the Corporation will take such corporate action as may, in the
opinion of its counsel, be necessary to increase its authorized but
unissued shares of Common Stock to such number of shares as shall be
sufficient for such purpose.
(f) Protective Provisions. In addition to any other rights provided by
law, so long as any Series 1996 Preferred Stock shall be outstanding, the
Corporation shall not, without first obtaining the affirmative vote or
written consent of the holders of not less than 66 2/3% of such outstanding
shares of Series 1996 Preferred Stock, amend or repeal any provision of, or
add any provision to, the Corporation's Certificate of Incorporation or
Bylaws, as amended, or file any certificate of designations, preferences
and rights of any series of Preferred Stock, par value $0.01 per share, of
the Corporation, if such action would alter or change the preferences,
rights, privileges or powers of, or the restrictions provided for the
benefit of, any Series 1996 Preferred Stock. Nothing herein shall be deemed
to restrict the Board of Directors from amending the terms hereof prior to
the issuance of any Series 1996 Preferred Stock.
<PAGE>
(g) Notices. Any notice required by the provisions hereof to be given to
the holders of shares of Series 1996 Preferred Stock shall be deemed given
if deposited in the United States Postal Service, postage prepaid, and
addressed to each holder of record at his address appearing on the books of
the Corporation. For so long as Paul J. Ramsay or any entity controlled by
him shall be the beneficial owner of any shares of the Series 1996
Preferred Stock, a copy of any such notices shall also be given to Haythe &
Curley, 237 Park Avenue, New York, New York 10017, Attention: Thomas M.
Haythe, Esq.
The designation was authorized by resolution duly adopted by the Board of
Directors of the Corporation at a meeting thereof duly called and held on
February 26, 1997, at which a quorum was present and acting throughout.
IN WITNESS WHEREOF, the Corporation has caused its corporate seal to be
hereunder affixed and this Certificate of Designations to be signed by Bert G.
Cibran, its President and Chief Executive Officer, on the 13th day of March,
1997.
---------------------
Bert G. Cibran
President
<PAGE>
EXHIBIT 5
[HAYTHE & CURLEY LETTERHEAD]
March 24, 1997
Ramsay Health Care, Inc.
One Alhambra Plaza
Suite 750
Coral Gables, Florida 33134
Dear Sirs:
We have acted as counsel for Ramsay Health Care, Inc., a Delaware
corporation (the "Company"), in connection with the Registration Statement on
Form S-4, as it may be amended (the "Registration Statement"), filed by the
Company under the Securities Act of 1933, as amended, with respect to
2,136,105 shares (the "Shares") of common stock, $.01 par value (the "Common
Stock"), of the Company to be issued by the Company in connection with the
Merger (the "Merger") of RHCI Acquisition Corp., a Delaware corporation
("Merger Sub") and a wholly owned subsidiary of the Company, with and into
Ramsay Managed Care, Inc., a Delaware corporation ("RMCI"), pursuant to the
terms of the Agreement and Plan of Merger dated as of October 1, 1996, (the
"Merger Agreement"), by and among the Company, Merger Sub and RMCI.
In connection with the Registration Statement, we have examined such records
and documents and such questions of law as we have deemed necessary or
appropriate for the purposes of this opinion. On the basis of such
examination, we advise you that in our opinion that the Shares have been duly
and validly authorized and, when issued in accordance with resolutions duly
adopted by the board of directors of the Company and the terms of the Merger
Agreement, will be duly and validly issued, fully paid and non-assessable.
We hereby consent to the filing of this opinion as Exhibit 5 to the
Registration Statement and to the reference to us under the caption "Legal
Matters" in the Joint Proxy Statement/Prospectus constituting a part of the
Registration Statement.
Very truly yours,
/s/ Haythe & Curley
<PAGE>
EXHIBIT 8
[HAYTHE & CURLEY LETTERHEAD]
March 24, 1997
Ramsay Health Care, Inc.
One Alhambra Plaza
Suite 750
Coral Gables, Florida 33134
Ramsay Managed Care, Inc.
One Alhambra Plaza
Suite 750
Coral Gables, Florida 33134
Gentlemen and Ladies:
You have requested our opinion as to certain federal income tax consequences
of the proposed merger (the "Merger") of Ramsay Managed Care, Inc., a Delaware
corporation ("RMCI"), with and into RHCI Acquisition Corp., a Delaware
corporation ("Merger Subsidiary") and wholly owned subsidiary of Ramsay Health
Care, Inc., a Delaware corporation ("RHCI"), pursuant to which Merger
Subsidiary will cease to exist and RMCI will continue as the surviving
corporation of the Merger.
In reaching the opinions expressed below, we have reviewed and relied on (i)
the Agreement and Plan of Merger, dated as of October 1, 1996, among RMCI,
RHCI and Merger Subsidiary (the "Merger Agreement"), and (ii) certain
representations made by RHCI, Merger Subsidiary, RMCI and certain stockholders
of RMCI.
Based upon and subject to the foregoing, and assuming that the Merger and
related transactions will take place in accordance with all the terms of the
Merger Agreement, it is our opinion that:
(i) the Merger will qualify as a reorganization within the meaning of
Section 368(a) of the Internal Revenue Code of 1986, as amended (the
"Code");
(ii) no gain or loss will be recognized by the holders of common stock,
$.01 par value per share, of RMCI ("RMCI Common Stock") upon the exchange
of RMCI Common Stock for common stock, $.01 par value, of RHCI ("RHCI
Common Stock") pursuant to the Merger or by the holders of preferred stock,
series 1996, $.01 par value per share, of RMCI ("RMCI Preferred Stock")
upon the exchange of RMCI Preferred Stock for class B preferred stock,
series 1996, par value $1.00 per share, of RHCI ("RHCI Series 1996
Preferred Stock") pursuant to the Merger (see clause (v) below for the tax
consequences of payments in lieu of fractional shares);
(iii) the basis of the RHCI Common Stock and RHCI Series 1996 Preferred
Stock received by a stockholder of RMCI pursuant to the Merger, including
any fractional share interest deemed received as described in clause (v)
below, will be the same as the basis of RMCI Common Stock or RMCI Preferred
Stock surrendered in exchange therefor;
(iv) the holding period of the RHCI Common Stock and RHCI Series 1996
Preferred Stock received by a stockholder of RMCI pursuant to the Merger
will include the period during which the RMCI Common Stock and RMCI
Preferred Stock surrendered therefor was held, provided that such RMCI
Common Stock or RMCI Preferred Stock is a capital asset in the hands of the
stockholder of RMCI on the effective date of the Merger;
(v) a holder of RMCI Common Stock receiving cash in lieu of a fractional
share of RHCI Common Stock will be treated as having received the
fractional share of RHCI Common Stock in the Merger and then having
received the payment in lieu of the fractional share as a distribution in
full payment in exchange for the fractional share as provided in Section
302(a) of the Code; and
<PAGE>
(vi) a holder of RMCI Common Stock who dissents to the Merger and
receives only cash in exchange for his RMCI Common Stock will be treated as
having received a distribution in redemption of his RMCI Common Stock,
subject to the rules in Section 302 of the Code.
We hereby consent to the filing of this opinion as Exhibit 8 to the
Registration Statement and to the references to us under the captions "The
Merger--Certain Federal Income Tax Consequences of the Merger" and "Legal
Matters" in the prospectus constituting a part of the Registration Statement.
Very truly yours,
/s/ Haythe & Curley
<PAGE>
EXHIBIT 21
SUBSIDIARIES OF RAMSAY HEALTH CARE, INC.
Americare of Galax, Inc.
Atlantic Treatment Center, Inc.
Bethany Psychiatric Hospital, Inc.
Bountiful Psychiatric Hospital, Inc.
Carolina Treatment Center, Inc.
Cumberland Mental Health, Inc.
East Carolina Psychiatric Services Corporation
Flagstaff Psychiatric Hospital, Inc.
Great Plains Hospital, Inc.
Greenbrier Hospital, Inc.
Gulf Coast Treatment Center, Inc.
Havenwyck Hospital, Inc.
H.C. Corporation
Health Group of Las Cruces, Inc.
Houma Psychiatric Hospital, Inc.
HSA Hill Crest Corporation
HSA Lynnhave, Inc.
HSA Medical Offices of Mesa, Inc.
HSA of Oklahoma, Inc.
Integrated Behavioral Services, Inc.
Life Centers of Michigan, Inc.
Manhattan Psychiatric Hospital, Inc.
Meadowlake/Western Alliance, LLC
Mesa Psychiatric Hospital, Inc.
Michigan Psychiatric Services, Inc.
Psychiatric Institute of West Virginia, Inc.
PsychOptions, Inc.
Ramsay Chicago, Inc.
Ramsay Louisiana, Inc.
Ramsay Management Services of West Virginia, Inc.
Ramsay New Orleans, Inc.
Ramsay Nevada, Inc.
Ramsay Nursing Home Services, Inc.
Ramsay Research & Education Institute, Inc.
RHCI Concord, Inc.
RHCI San Antonio, Inc.
Rural Health Care Centers of America
The Haven Hospital, Inc.
Transitional Care Ventures, Inc.
Transitional Care Ventures (Arizona), Inc.
Transitional Care Ventures (Florida), Inc.
Transitional Care Ventures (North Texas), Inc.
Transitional Care Ventures (South Carolina), Inc.
Transitional Care Ventures (Texas), Inc.
<PAGE>
EXHIBIT 23.5
CONSENT OF HOULIHAN, LOKEY, HOWARD & ZUKIN, INC.
We hereby consent to the inclusion in the Joint Proxy Statement/Prospectus
forming part of this Registration Statement on Form S-4 and to the inclusion
as an exhibit to this Registration Statement on Form S-4 of our opinion dated
October 1, 1996 to the Special Committee of the Board of Directors and to the
Board of Directors of Ramsay Health Care, Inc., attached as Appendix B to such
Joint Proxy Statement/Prospectus and to the references to such opinion
therein, and as attached as Exhibit 99.1 to this Registration Statement on
Form S-4. In giving such consent, we do not admit that we come within the
category of persons whose consent is required under the Securities Act of 1933
and the rules and regulations issued thereunder, and we do not thereby admit
that we are experts with respect to any part of the Registration Statement
within the meaning of the term "expert" as used in the Securities Act of 1933,
as amended, or the rules and regulations of the Securities and Exchange
Commission promulgated thereunder.
HOULIHAN, LOKEY, HOWARD & ZUKIN, INC.
New York, New York
March 24, 1997
<PAGE>
EXHIBIT 23.6
CONSENT OF DEAN WITTER REYNOLDS INC.
We hereby consent to the inclusion in the Joint Proxy Statement/Prospectus
forming part of this Registration Statement on Form S-4 and to the inclusion
as an exhibit to this Registration Statement on Form S-4 of our opinion dated
October 1, 1996 to the Special Committee of the Board of Directors and to the
Board of Directors of Ramsay Managed Care, Inc., attached as Appendix C to
such Joint Proxy Statement/Prospectus and to the references to such opinion
therein, and as attached as Exhibit 99.2 to this Registration Statement on
Form S-4. In giving such consent, we do not admit that we come within the
category of persons whose consent is required under the Securities Act of 1933
and the rules and regulations issued thereunder, and we do not thereby admit
that we are experts with respect to any part of the Registration Statement
within the meaning of the term "expert" as used in the Securities Act of 1933,
as amended, or the rules and regulations of the Securities and Exchange
Commission promulgated thereunder.
DEAN WITTER REYNOLDS INC.
New York, New York
March 24, 1997
<PAGE>
EXHIBIT 99.1
HOULIHAN LOKEY HOWARD ZUKIN
A SPECIALTY INVESTMENT BANKING FIRM
October 1, 1996
To The Special Committee
of the Board of Directors
Ramsay Health Care, Inc.
To The Board of Directors
Ramsay Health Care, Inc.
Gentlemen:
Ramsay Health Care, Inc. ("RHCI" or the "Company") has entered into an
agreement and plan of merger dated as of October 1, 1996 pursuant to which the
Company will acquire (the "Merger") the common stock of Ramsay Managed Care,
Inc. ("RMCI") and the preferred stock of RMCI in a stock for stock merger. We
further understand that to effectuate the Merger, RHCI will form RHCI
Acquisition Corp. ("Acquisition"), which will merge with RMCI, with RMCI being
the surviving entity. Each outstanding share of RMCI common stock, other than
treasury shares or shares owned by RHCI, will be converted into the right to
receive one-third (ha) (the "Conversion Number") of a share of RHCI common
stock, and each outstanding share of RMCI preferred stock outstanding, other
than treasury shares or shares owned by RHCI, will be converted into the right
to receive one (1) (the "Preferred Conversion Number") share of RHCI Class B
preferred stock, Series 1996. The Merger and the related transactions are
referred to herein as the "Transaction."
You have requested our opinion (the "Opinion") as to the matters set forth
below. The Opinion does not address the Company's underlying business decision
to effect the Transaction. Furthermore, at your request, we have not
negotiated the Transaction or advised you with respect to alternatives to it.
In connection with this Opinion, we have made such reviews, analyses and
inquiries as we have deemed necessary and appropriate under the circumstances.
Among other things, we have:
1.reviewed the following financial information:
(i) Company's Form 10-Ks and Annual Reports for the fiscal years ended
June 30, 1994 and June 30, 1995, and unaudited financial statements
for the fiscal year ended June 30, 1996, which management has
identified as the most current information available;
(ii) RMCI's Form 10-KSB for the fiscal year ended June 30, 1995 and
June 30, 1996, which management has identified as the most current
information available; and
(iii) projected financial statements for RHCI and RMCI prepared by RHCI
and RMCI management, for the fiscal year ending June 30, 1997;
2.reviewed copies of the following documents and agreements:
(i) Agreement and Plan of Merger among Ramsay Managed Care Inc., Ramsay
Health Care, Inc., and RHCI Acquisition Corp., dated as of October
1, 1996;
(ii) Stock Purchase Agreement between Paul Ramsay Hospitals Pty.
Limited and Ramsay Managed Care, Inc., dated September 10, 1996;
<PAGE>
(iii) Exchange Agreement by and among Ramsay Health Care, Inc., Paul
Ramsay Hospitals Pty. Limited and Paul J. Ramsay, dated September
10, 1996; and
(iv) Exchange Agreement by and among Ramsay Managed Care, Inc., Paul
Ramsay Hospitals Pty. Limited and Paul J. Ramsay, dated September
10, 1996;
3. met with management of RMCI and the Company to discuss the Transaction
and the financial condition, operation and future prospects of RMCI and
the Company;
4. reviewed information on publicly traded companies we deemed comparable
to RMCI and the Company respectively;
5.reviewed certain information regarding transactions we deemed comparable
to the Transaction; and
6.conducted such other analysis as we deemed appropriate under the
circumstances.
We have relied upon and assumed, without independent verification, that the
financial forecasts and projections provided to us have been reasonably
prepared and reflect the best currently available estimates of the future
financial results and condition of the Company and RMCI, and that there has
been no material change in the assets, financial condition, business or
prospects of the Company or RMCI since the fiscal year ended June 30, 1996
financial statements.
We have not independently verified the accuracy and completeness of the
information supplied to us with respect to the Company and RMCI and do not
assume any responsibility with respect to it. We have not made any physical
inspection or independent appraisal of any of the properties or assets of the
Company or RMCI. We have assumed that the Merger will qualify as a tax free
reorganization within the meaning of Section 368(a) of the Internal Revenue
Code. Our opinion is necessarily based on business, economic, market and other
conditions as they exist and can be evaluated by us at the date of this
letter.
Based upon the foregoing, and in reliance thereon, it is our opinion that
the Conversion Number and the Preferred Conversion Number are fair to the
Company, from a financial point of view.
Houlihan, Lokey, Howard & Zukin,
Inc.
<PAGE>
EXHIBIT 99.2
DEAN WITTER REYNOLDS INC.
TWO WORLD TRADE CENTER
NEW YORK. NEW YORK 10048
October 1, 1996
Board of Directors and
Special Committee of the
Board of Directors
Ramsay Managed Care, Inc.
639 Loyola Avenue
Suite 1725
New Orleans, Louisiana 70113
Gentlemen:
Ramsay Managed Care, Inc., a Delaware corporation (the "Company"), Ramsay
Health Care, Inc., a Delaware corporation ("RHCI"), and RHCI Acquisition
Corp., a Delaware corporation and a wholly owned subsidiary of RHCI (the
"Merger Subsidiary"), have entered into an Agreement and Plan of Merger, dated
as of October 1, 1996 (the "Agreement"), providing for Merger Subsidiary to be
merged with and into the Company, whereupon the separate existence of Merger
Subsidiary shall cease, and the Company shall be the surviving corporation
(the "Merger"). The Agreement provides that (a) each outstanding share of
common stock, $.01 par value per share, of the Company (the "Company Common
Stock") outstanding immediately prior to the Effective Time, except Company
Common Stock as to which appraisal rights have been validly exercised, shall
be converted into the right to receive one-third ( 1/3rd) of a share (the
"Conversion Number") of common stock, $.01 par value per share, of RHCI (the
"RHCI Common Stock"), and (b) each share of series 1996 convertible preferred
stock, $.01 par value per share, of the Company (the "Company Preferred
Stock") outstanding immediately prior to the Effective Time, except Company
Preferred Stock as to which appraisal rights have been validly exercised,
shall be converted into the right to receive one share (the "Preferred
Conversion Number") of Class B Preferred Stock, Series 1996, $1.00 par value
per share, of RHCI (the "RHCI Series 1996 Preferred Stock").
You have requested our opinion, as investment bankers, as of the date
hereof, as to the fairness, from a financial point of view, to the holders of
Company Common Stock and holders of Company Preferred Stock of the Conversion
Number, and the Preferred Conversion Number, respectively.
In arriving at the opinion set forth below, we have, among other things:
(1) reviewed the Agreement;
(2) reviewed the Annual Report on Form 10-KSB and related publicly
available financial information of the Company for the two most recent
fiscal year ended June 30, 1996, the final prospectus, dated April 24,
1995, for the distribution of the Company Common Stock, and the Company's
definitive Proxy Statement on Form 14A, dated October 6, 1995;
(3) reviewed the Annual Reports on Form 10-K and related publicly
available financial information of RHCI for the three most recent fiscal
years ended June 30, 1995, the Quarterly Reports on Form 10-Q for the
periods ended September 30, 1995, December 31, 1995 and March 31, 1996, and
RHCI's definitive Proxy Statement on Form 14A, dated October 5, 1995;
reviewed unaudited financial information of RHCI for the fiscal year ended
June 30, 1996;
(4) reviewed certain other information, including publicly available
information, relating to the business, earnings, cash flow, assets and
prospects of the Company and RHCI, respectively;
<PAGE>
(5) reviewed an income statement forecast of the Company for the fiscal
years 1997 and 1998 as furnished to us by the Company; reviewed an income
statement forecast of the Company for the fiscal year 1999 as prepared on
the basis of information and assumptions furnished to us by the Company;
reviewed selected balance sheet and cash flow forecast items of the Company
for fiscal years 1997 through 1999 as prepared on the basis of information
and assumptions furnished to us by the Company;
(6) reviewed income statement forecasts of RHCI for fiscal years 1997
through 1999 as furnished to us by RHCI;
(7) conducted discussions with members of senior management of the
Company and RHCI, respectively, concerning the past and current business,
operations, assets, present financial condition and future prospects of the
Company and RHCI, respectively;
(8) reviewed the historical reported market prices and trading activity
for the Company Common Stock and the RHCI Common Stock, respectively;
(9) compared certain financial information, operating statistics and
market trading information relating to the Company with published financial
information, operating statistics and market trading information relating
to selected public companies that we deemed to be reasonably similar to the
Company; compared certain financial information, operating statistics and
market trading information relating to RHCI with published financial
information, operating statistics and market trading information relating
to selected public companies that we deemed to be reasonably similar to
RHCI;
(10) compared the financial terms of the Merger with the financial terms,
to the extent publicly available, of selected other recent acquisitions
that we deemed to be relevant;
(11) compared the financial terms of the Merger with the financial terms
of other indications of interest received by the Company; and
(12) reviewed such other financial studies and analyses and performed
such other investigations and took into account such other matters as we
deemed necessary.
In preparing our opinion, we have assumed and relied upon the accuracy and
completeness of all financial and other information supplied to us by the
Company, RHCI or that is publicly available, respectively, and we have not
independently verified such information. We also have relied upon the
managements of the Company and RHCI, respectively, as to the reasonableness
and achievability of the financial forecasts of the Company and RHCI (and the
assumptions and bases thereof) provided to us or prepared on the basis of
information and assumptions furnished to us, and with your consent we have
assumed that such forecasts have been reasonably prepared on the basis
reflecting the best currently available estimates and judgments of such
respective managements as to the future operating performance of the Company
and RHCI, respectively. Furthermore, we assumed, the Merger will qualify as a
reorganization within the meaning of Section 368(a) of the Internal Revenue
Code of 1986, as amended. We have not been requested to make, and we have not
made, an independent appraisal or evaluation of the assets, properties,
facilities or liabilities of the Company or RHCI and we have not been
furnished with any such appraisal or evaluation.
It should be noted that this opinion necessarily is based upon prevailing
market conditions (including current market prices for the Company Common
Stock and the RHCI Common Stock) and other circumstances and conditions as
they exist and can be evaluated at this time, and does not represent our
opinion as to what the actual value of the Company Common Stock or the RHCI
Common Stock will be after the date hereof.
We have not acted as financial advisor to the Board of Directors of the
Company in connection with the Merger and have not been requested to solicit
any interests from any other potential parties to a transaction with the
Company, but rather have been retained solely to render the opinion set forth
below with respect to the Merger and will receive a fee for our services. In
connection with the sale of Apex Healthcare, Inc., we are currently acting as
financial advisor to the Board of Directors of the Company and may receive a
fee for our service which is contingent upon the consummation of a
transaction. In addition, in the ordinary course of our business, we actively
trade the securities of the Company and RHCI for our own account and for the
accounts of
<PAGE>
customers and, accordingly, may at any time hold a long or short position in
such securities. In addition, we have not acted as financial advisor to RHCI,
nor have we acted as manager of any RHCI security offering, and have not
received any advisory or offering fees from RHCI.
On the basis of, and subject to the foregoing and other matters that we
consider pertinent, we are of the opinion that, as of the date hereof, the
Conversion Number is fair, from a financial point of view, to the holders of
Company Common Stock, and the Preferred Conversion Number is fair from a
financial point of view, to the holders of Company Preferred Stock.
Very truly yours,
Dean Witter Reynolds Inc.
