-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, SBtwW4s+oxlkmqLbWU4PW5s4pK0Vd3LFssot6qX7SL4pdH/UGFYtQzlR1uYVxDZk J1Cs8CnZyXteLQNYyGz8Hw== 0000773136-96-000005.txt : 19961016 0000773136-96-000005.hdr.sgml : 19961016 ACCESSION NUMBER: 0000773136-96-000005 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 15 CONFORMED PERIOD OF REPORT: 19960630 FILED AS OF DATE: 19961015 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: RAMSAY HEALTH CARE INC CENTRAL INDEX KEY: 0000773136 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-HOSPITALS [8060] IRS NUMBER: 630857352 STATE OF INCORPORATION: DE FISCAL YEAR END: 0630 FILING VALUES: FORM TYPE: 10-K SEC ACT: 1934 Act SEC FILE NUMBER: 000-13849 FILM NUMBER: 96643552 BUSINESS ADDRESS: STREET 1: 639 LOYOLA AVE STE 1700 STREET 2: ONE POYDRAS PLZ CITY: NEW ORLEANS STATE: LA ZIP: 70113 BUSINESS PHONE: 5045252505 MAIL ADDRESS: STREET 1: ONE POYDRAS PLAZA STREET 2: 639 LOYOLA AVE SUITE 1400 CITY: NEW ORLEANS STATE: LA ZIP: 70113 FORMER COMPANY: FORMER CONFORMED NAME: HEALTHCARE SERVICES OF AMERICA INC DATE OF NAME CHANGE: 19881120 10-K 1 FORM 10-K SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-K (Mark One) /X/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 [FEE REQUIRED] For the fiscal year ended June 30, 1996 OR / / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 [NO FEE REQUIRED] For the transition period from to Commission file number 0-13849 RAMSAY HEALTH CARE, INC. (Exact name of registrant as specified in its charter) Delaware 63-0857352 (State or other jurisdiction (I.R.S. Employer Identification No.) of incorporation or organization) Entergy Corporation Building 639 Loyola Avenue, Suite 1700 70113 New Orleans, Louisiana (Zip Code) (Address of principal executive offices) Registrant's telephone number, including area code (504) 525-2505 Securities registered pursuant to Section 12(b) of the Act: Title of Each Class Name of Each Exchange on Which Registered None None Securities registered pursuant to Section 12(g) of the Act: COMMON STOCK, $0.01 PAR VALUE (Title of Class) Indicate by a check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months, and (2) has been subject to such filing requirements for the past 90 days. Yes X No . Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. / / The number of shares of the registrant's Common Stock outstanding as of October 2, 1996 was 8,307,131. The aggregate market value of Common Stock held by non-affiliates on such date was $14,952,713. DOCUMENTS INCORPORATED BY REFERENCE Certain sections of the registrant's definitive Proxy Statement to be filed for the 1996 Annual Meeting of Stockholders are incorporated by reference into Part III. PART I Item 1. Business. General Ramsay Health Care, Inc. ("RHCI" or the "Company") is one of the leading providers of behavioral health services in the country. The Company offers a continuum of patient care through integrated networks of mental health delivery systems in 11 states, principally in the southeast and southwest, organized around 15 inpatient hospitals with 1,369 licensed beds (including 77 medical subacute beds) and outpatient centers. The Company also manages the mental health programs of certain public and private health care providers under management contracts. Overview The Company currently offers a comprehensive range of behavioral health services, including acute psychiatric inpatient treatment, less intensive inpatient treatment (including residential), partial hospitalization treatment and group and individual outpatient treatment programs. Each of the Company's integrated delivery systems is centered around a core hospital facility from which market-responsive mental health services are arranged with and provided by physicians, psychologists and other mental health professionals under contract or affiliated with the Company. Certain of these systems also manage behavioral health services on behalf of other providers and offer medical subacute services. Recent Developments On October 1, 1996, the Company and Ramsay Managed Care, Inc. ("RMCI") entered into an agreement and plan of merger providing for the acquisition of RMCI by the Company. The merger has been approved by the Board of Directors of each of the Company and RMCI following the recommendation by a special committee of the Board of Directors of each company. Upon consummation of the merger, (i) each share of common stock of RMCI will be converted into one- third (1/3) of a share of common stock of the Company, and (ii) each share of Preferred Stock, Series 1996, of RMCI (each of which is convertible into 30 shares of RMCI common stock) will be converted into one share of Class B Preferred Stock, Series 1996, of the Company (each of which will be convertible into 10 shares of RHCI common stock). The merger is intended to qualify for federal income tax purposes as a tax-free reorganization within the meaning of Section 368 (a) of the Internal Revenue Code of 1986, as amended. The merger is subject to the approval of (i) the holders of a majority of the shares of RHCI common stock and RHCI Class B Preferred Stock, Series C (voting on an as converted basis into RHCI common stock and voting together with the RHCI common stock as a single class) voting at a meeting of shareholders at which a quorum is present, and (ii) the holders of a majority of the issued and outstanding shares of RMCI common stock and RMCI Preferred Stock, Series 1996 (voting on an as converted basis into RMCI common stock and voting together with the RMCI common stock as a single class). Affiliates of Paul J. Ramsay, the Chairman of the Board of the Company and RMCI, hold an approximate 35% voting interest in the Company and an approximate 69% voting interest in 1 RMCI, and have indicated that they will vote their shares of capital stock of each company in favor of the merger. The merger is also subject to various other conditions, including the expiration of the applicable waiting period under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, the receipt of necessary lender and other consents, and the declaration of effectiveness by the Securities and Exchange Commission of a registration statement to be filed by the Company. Subject to the satisfaction of these conditions, it is expected that the merger will be consummated in March, 1997. Strategy The Company's strategy is to maintain its reputation as a high-quality provider of behavioral health services, meeting the needs of its patients for therapeutic care in the least restrictive setting, its payors for cost-effective and accountable treatment programs, and its shareholders for consistent earnings and business growth. Additional Management Resources Strengthen Organizational Structure In January 1996, the Company announced the appointment of Luis Lamela as Vice Chairman of the Board, followed in August 1996 by the appointments of Bert Cibran as President and Chief Operating Officer and Carol Lang as Chief Financial Officer. Reynold Jennings became Executive Vice President of the Company and President of the recently restructured Behavioral Hospital Division, assuring his continued leadership over the core behavioral health business. The new management team has over 40 years of healthcare operations, management and financing experience and a demonstrated history of success in the industry. With this leadership infrastructure, the Company believes it has the resources to seek and execute diversification opportunities, expand the delivery of health care, and establish a capital structure appropriate for a long-term, high-quality health care company. Decreasing Dependence on Revenue from Acute Psychiatric Inpatient Care The behavioral health industry in the United States has experienced severe cost- containment pressures imposed by managed care organizations, governmental and other third-party payors. Under increasingly stringent admissions guidelines, restrictive length of stay criteria, and other treatment constraints imposed by payors, the Company's acute inpatient care programs have generated less revenue, even though admissions to these programs have increased. To mitigate the revenue declines of acute inpatient treatment, the Company is expanding its inpatient behavioral care programs which require longer lengths of stay but less intensive treatment to accomplish effective outcomes, including residential treatment and youth- oriented correctional service programs. This will allow the Company to capitalize on its national recognition as a leading provider of certain youth offender treatment programs. To this end, the Company is seeking contracts with state agencies and judicial systems in a number of states to provide these services. 2 Reformation and Expansion of Outpatient Programs The Company's outpatient services consist primarily of partial hospitalization and group and individual therapy sessions based in or nearby its inpatient facilities. These services were originally developed as ancillary sites to deliver patient care, without specific regard to outpatient care protocols being developed and encouraged by managed care organizations. As the influence of managed care organizations increased in certain of the Company's markets, certain of the Company's outpatient programs which did not deliver care protocols consistent with managed care requirements suffered declines in patient volumes and, in some cases, were closed due to their unprofitability. In recognition of the marketplace need to satisfy both patient and payor, the Company has begun a restructuring of its outpatient product lines in markets, including markets in which managed care is a dominant payor, to provide screening, therapeutic protocols, and outcome reviews which are consistent with managed care requirements. Also, in suitable markets, the Company will look to open and/or reopen previously closed outpatient care delivery sites. This restructuring is designed to strengthen existing relationships and foster new relationships with managed care organizations. Maintain Dominance in Selected Markets The Company is the sole or primary provider of behavioral health services in certain of its markets, particularly those markets with populations of fewer than 200,000 people. The Company's strategy is to dominate the provision of behavioral health care in these markets by expanding its delivery network within a 50-mile geographic area surrounding its inpatient hospital facility and by aggressively pursuing joint ventures, contract arrangements and alliances to serve public and private sector behavioral health care needs. The Company believes that recognition as the dominant provider of behavioral health care in particular markets enhances the viability of its facilities and increases the potential for business expansion opportunities in these markets. Strengthen Alliances with General Medical/Surgical Hospitals In certain markets, the Company has initiated discussions with significant local medical/surgical (acute-care) hospitals to explore possible "vertical" integration with the Company's inpatient facilities. This integration strategy is designed to appeal to managed care organizations which seek to develop relationships with large, acute-care hospitals that provide a full spectrum of health care services, including behavioral health care. The Company believes that in certain markets a joint venture, partnership or other form of alliance with the medical/surgical hospital enhances the long-term viability of the Company's facility. To date, no such agreements of significance have been signed. Asset Utilization Of the Company's 15 inpatient facilities, four currently operate medical subacute units. These units were opened in late fiscal 1994/early fiscal 1995 after a determination was made that the demand for inpatient behavioral health services would not be sufficient to fully utilize the existing bed capacity of the facility. Also, two of the currently operational subacute units are being expanded to meet increased market demand for the subacute service. 3 Restructure Lending Relationships The Company's capital structure currently involves two lending groups and a real estate investment trust. A bank group consisting of three banks currently provides letter of credit support for five variable rate demand revenue bonds which total approximately $19 million and have been outstanding since 1985. Also, a consortium of three life insurance companies has loans outstanding to the Company totalling approximately $36 million. The Company has no short-term access to a working capital facility at the present time. The Company intends to refinance its debt during the next fiscal year to provide funds for growth and working capital, as well as to reschedule the current level of principal repayment required under the life insurance company debt. In connection with the "safe-harbor" provision of the Private Securities Litigation Reform Act of 1995, the Company notes that this Annual Report on Form 10-K contains forward- looking statements about the Company. The Company is hereby setting forth cautionary statements identifying important factors that may cause the Company's actual results to differ materially from any forward-looking statement. Some of the most significant factors include (i) accelerating changes occurring in the health care industry, including competition from consolidating and integrated health care provider systems, the imposition of more stringent admission criteria by payors, increased payor pressures to limit lengths of stay, limitations on reimbursement rates and limitations on annual and lifetime patient health benefits, (ii) federal and state governmental budgetary constraints which could have the effect of limiting the amount of funds available to support governmental health care programs, including Medicare and Medicaid, and (iii) statutory, regulatory and administrative changes or interpretations of existing statutory and regulatory provisions affecting the conduct of the Company's business and affecting current and prior reimbursement for the Company's services. While the Company believes that implementing the above-described strategies will enable the Company to improve its operations and financial condition, there can be no assurance that the Company will be successful in doing so. Facility Operations The Company's facilities specialize in the treatment of behavioral disorders. Substance abuse treatment is provided to patients who have a primary diagnosis of alcohol or substance abuse; however, many of these patients have a secondary diagnosis of, and are treated for, mental illness. Also, almost all of the Company's facilities conduct outpatient programs within the facility and/or at clinics located in the surrounding area. In response to the demands of payors, particularly managed care companies, the Company anticipates expanding its outpatient network in its continued effort to provide a less costly, yet effective level of mental health care for patients whose illness does not require intensive inpatient care. The initial goal of acute psychiatric hospitalization treatment is to evaluate and stabilize the patient so that effective treatment can be continued either on an inpatient, partial hospitalization or an outpatient basis. Under the direction of a psychiatrist, the patient's condition is assessed, a diagnosis is made and prescribed treatment follows. The treatment regimen utilizes, where appropriate, medication, individual and group therapy, adjunctive therapy and family therapy. 4 The most common disorders for which adult patients are admitted to the Company's hospitals are mood and affective disorders (such as depression), schizophrenia, situational crises and alcohol and drug dependency. These disorders are also common in children and adolescents admitted to the Company's facilities. The Company has evaluation and treatment programs designed specifically for adults, adolescents and children. Specialized programs focusing upon neuropsychiatric disorders and pain and sleep disorders have also been developed. All programs emphasize family involvement in the evaluation and treatment process. Residential treatment programs are provided by nine of the Company's facilities for low-functioning and troubled youths affected by conduct disorders, psychiatric illness, substance abuse and sexual dysfunction. These programs provide long-term inpatient care within a safe, therapeutic environment for youths displaying an inability to function at home, school, with peers or in the community in general. The highly structured programs assist the youth in learning how to change ineffective or violent behavior and cope with the difficulties and stresses of life. The primary objective of the program is behavioral awareness and self-control, leading the youth to a successful return to his/her home setting. Each psychiatric hospital has a multidisciplinary team of health care professionals, including psychiatrists, psychologists, social workers, nurses, mental health and substance abuse counselors and therapists. Generally, physician members of the professional staff maintain private practices. In certain situations, the Company guarantees minimum incomes, usually for one year, to psychiatrists willing to relocate to certain facilities. All of the Company's hospitals have a medical director who acts as liaison between the professional staff and the hospital administration staff. In addition, each clinical program has a medical unit administrator. Each of the Company's hospitals has a consulting board, comprised of hospital executives, consulting physicians and other members of the local community, which is responsible for standards of patient care. A hospital CEO supervises and is responsible for the day-to-day operations of each hospital. The Company emphasizes frequent communication, the setting of operational and financial goals and the monitoring of actual results against targeted goals. To this end, the Company collects and analyzes information on key indicators such as admissions by treatment program and payor category, daily census, full-time equivalent employees per patient day and average length of stay. On the basis of this information, the administrative staff of each hospital, together with the corporate staff of the Company, adopts new programs and modifies existing programs to improve performance. All of the Company's hospitals have been accredited by the Joint Commission on Accreditation of Healthcare Organizations ("JCAHO"). The JCAHO is a voluntary national organization which undertakes a comprehensive review for purposes of accreditation of health care facilities. In general, hospitals and certain other health care facilities are initially surveyed by JCAHO within 12 months after the commencement of operations and resurveyed at appropriate intervals thereafter. Of the Company's 15 hospitals, one was resurveyed in fiscal 1996 and three were resurveyed in fiscal 1995 and, in each instance, the facilities retained their JCAHO accreditation for an additional three years. 5 The following table summarizes certain operating data related to (i) the facilities currently operated by the Company and which were also operated by the Company during each of the fiscal years referred to below ("same facilities") and (ii) all facilities operated by the Company during the fiscal years referred to below ("all facilities"). The difference between the same facilities amounts and the all facilities amounts relates to Three Rivers Hospital, which was closed on June 30, 1995, two facilities which were sold during fiscal 1994, Benchmark Behavioral Hospital, which commenced operations in May 1995, and the Company's subacute units, which commenced operations in late fiscal 1994 and early fiscal 1995. Same Facilities Year Ended June 30 1996 1995 1994 Acute psychiatric admissions ......... 12,875 12,221 11,136 Residential treatment admissions ..... 537 551 471 Total inpatient admissions ........... 13,412 12,772 11,607 Acute psychiatric inpatient days ..... 130,522 139,571 153,444 Residential treatment inpatient days . 87,257 63,633 40,973 Total inpatient days ................. 217,779 203,204 194,417 Average bed days available ........... 392,352 369,380 400,770 Overall inpatient occupancy percentage 56% 55% 49% Partial hospitalization days (1) ..... 54,041 65,280 57,414 Outpatient visits (2) ................ 37,005 44,218 30,984 All Facilities Acute psychiatric admissions ......... 13,333 12,304 11,545 Residential treatment admissions(3) .. 588 948(3) 883(3) Subacute admissions .................. 692 323 46 Total admissions ..................... 14,613 13,575 12,474 Acute psychiatric inpatient days ..... 135,037 140,064 159,602 Residential treatment inpatient days (3) 93,038 77,509(3) 64,729(3) Subacute inpatient days .............. 15,378 6,548 1,061 Total inpatient days ................. 243,453 224,121 225,392 Average bed days available ........... 449,814 422,670 448,585 Overall inpatient occupancy percentage 54% 53% 50% Partial hospitalization days (1) ..... 54,463 65,280 60,699 Outpatient visits (2) ................ 84,438 82,240 47,725 _______________________ (1) Partial hospitalization days refer to behavioral health patient services which generally exceed three hours but do not require an overnight stay at an inpatient facility. (2) Outpatient visits refer to behavioral health patient services which generally do not exceed three hours in a given day. Also, the "All Facilities" amounts include visits related to a facility-based home health agency. (3) 1995 and 1994 statistics for the "All Facilities" include significant residential treatment admissions and inpatient days related to Three Rivers Hospital, which was closed on June 30, 1995. 6 Competition At June 30, 1996, the Company operated 15 inpatient facilities in 11 states. The Company's facilities are located in rural areas and in suburban areas of large metropolitan cities. Each facility competes with other facilities, including proprietary free-standing hospitals, not-for-profit hospitals, governmental free-standing hospitals and psychiatric units of acute care hospitals. The number of behavioral health service competitors located within each of the Company's service areas varies significantly. Some of these other facilities are larger and have greater financial resources than the Company's hospitals. In addition, some of these competing hospitals are substantially exempt from income and property taxation. The impact of competition on the Company's facilities varies depending on the proximity of the competing facility and its referral sources to the Company's facility. The Company's outpatient centers are generally located in areas near its inpatient facilities and compete with private practitioners, community mental health centers, and other companies which provide outpatient services in the markets in which the Company's outpatient centers are doing business. Also, in certain markets, the Company treats certain patient populations (e.g., adolescents or geriatrics) or provides services which are different from those provided by the Company's competitors in the particular market. The Company does not consider any of the behavioral health service competitors in its markets as dominant providers that place the Company at a competitive disadvantage. The ability of a psychiatric facility to compete with other facilities depends on the number and quality of psychiatrists and clinical psychologists practicing at the facility, and the number, type and quality of other psychiatric facilities in the area. Another factor affecting the competitiveness of psychiatric facilities is the extent to which the facility's clinical programs satisfy community needs in an effective manner from both a clinical and an economic standpoint. The Company believes that the quality of its professional staff as well as the quality and effectiveness of its programs permit it to compete effectively with the other providers of psychiatric, residential treatment, and chemical dependency care in the communities served by the Company's facilities. In addition, the Company's facilities actively seek relationships with managed care companies, which are increasingly responsible for steering patients to high quality, cost-effective providers of behavioral health services. Industry Trends The Company's inpatient facilities have been adversely affected by factors influencing the entire psychiatric hospital industry. Factors which have affected the Company's acute psychiatric inpatient business include (i) the imposition of more stringent length of stay and admission criteria by payors; (ii) the failure of reimbursement rate increases from certain payors that reimburse on a per diem or other discounted basis to offset increases in the cost of providing services; (iii) an increase in the percentage of payors that reimburse on a per diem or other discounted basis; (iv) the trend toward higher deductibles and co-insurance for individual patients; and (v) the trend by self-insured employers and managed mental health organizations toward limiting employee health benefits, including annual and lifetime limits on 7 mental health coverage. In response to these conditions, the Company has (i) tightened its staffing levels within its facilities, particularly in the areas which are not directly responsible for the provision of patient care, (ii) renegotiated contracts to reduce other operating expenses within its facilities and (iii) developed strategies to restructure its outpatient services and partial hospitalization programs to meet the demands of the marketplace. Further, the Company's business strategy includes reducing its dependence on acute psychiatric inpatient services through an expansion of residential treatment and outpatient services. See also "Strategy" above. Sources of Revenue The Company's facilities receive payments from third-party reimbursement sources, including commercial insurance carriers (which provide coverage to insureds on both an indemnity basis and through various managed care plans), Medicare, Medicaid, the Civilian Health and Medical Program of the Uniformed Services ("CHAMPUS"), Blue Cross and, for residential treatment services, various state agencies (including state judicial systems). In addition, certain payments are received directly from patients. Third-party reimbursement programs generally reimburse facilities either on the basis of facility charges (charge-based), on the basis of the facility's costs as audited or projected by the third-party payor (cost-based), or on the basis of negotiated rates (per diem-based). Generally, charge-based programs are more profitable to the Company. The following table sets forth, by category, the approximate percentages of the Company's inpatient days derived from various sources for the periods indicated. Year Ended June 30 1996 1995 1994 Charge-based programs: Commercial Insurance .......................... 8% 10% 15% Blue Cross .................................... 1 1 1 Private Pay ................................... 5 6 5 Sub-total ................................ 14 17 21 Cost-based and per diem-based programs: Blue Cross .................................... 4 6 6 CHAMPUS ....................................... 3 5 7 Medicare ...................................... 24 22 21 Medicaid ...................................... 30 31 32 State, HMO and PPO ............................ 25 19 13 Sub-total ................................ 86 83 79 Total ............................... 100% 100% 100% 8 Most commercial insurance carriers reimburse their policyholders or reimburse the Company's facilities directly for charges at rates and limits specified in their policies. Patients generally remain responsible to the facilities for any amounts not covered under their insurance policies. The trend in reimbursement for psychiatric inpatient and chemical dependency care by commercial insurance carriers is to limit inpatient days to a maximum number per year or for the patient's lifetime, or to limit the maximum dollar amount expended for a patient in a given period. Most third-party payors and other commercial carriers have also expanded benefit coverage to include partial hospitalization and other outpatient services. Partial hospitalization is formally recognized by Medicare and CHAMPUS as a covered service. In addition, managed care companies are seeking to contract with providers that offer the full spectrum of psychiatric care. Medicare is the federal health insurance program for the aged and disabled. Medicare reimbursement is typically less than the Company's facilities' established charges for services provided to Medicare patients. Patients are not responsible for the difference between the reimbursed amount and the facilities' established charges other than for applicable noncovered charges, coinsurance and deductibles. In 1983, Congress changed the Medicare law applicable to Medicare reimbursement for medical/surgical services from a retrospectively determined reasonable cost system to a prospectively determined diagnosis-related grouping ("DRG") system. Psychiatric and chemical dependency hospitals and units are exempt from the DRG reimbursement system. Medicare reimbursement to exempt psychiatric and chemical dependency hospitals and units is currently subject to the payment limitations and incentives established in the Tax Equity and Fiscal Responsibility Act of 1982 ("TEFRA"). These facilities are paid on the basis of each facility's historical costs trended forward, with a limit placed on the rate of increase in per case reimbursable costs. These TEFRA "target" rates are updated annually. Facilities with costs less than the target rate per discharge are reimbursed based on allowable Medicare costs plus an additional incentive payment. Beginning in federal fiscal year 1992, providers with costs exceeding their target rates are subject to a payment ceiling of the target amount plus the lesser of a percentage (currently 10%) of the target amount or a percentage (currently 50%) of the amount in excess of the target amount. Exemptions and exceptions are available to hospitals when events beyond the hospitals' control result in an increase in costs for a reporting period. Moreover, "new hospitals" are eligible to be exempt from the limits until they have been in operation for three years. At June 30, 1996, all of the Company's facilities were subject to the TEFRA provisions. The Health Care Financing Administration ("HCFA") has implemented changes to Medicare covering inpatient psychiatric services which are reimbursed under TEFRA. These changes provide for an increase to the TEFRA payment limitations, subject to annual revision. However, since 14 of the Company's 15 facilities which are subject to the TEFRA payment limitations are currently operating at cost levels below their respective TEFRA payment limitations, any increase in the TEFRA payment limitations has a minimal effect on the Company's results of operations. In addition, each year HCFA modifies the fee reimbursement schedules related to physician services. While these changes affect Medicare reimbursement paid directly to physicians, they do not affect the rate of Medicare reimbursement to the Company's facilities. These changes in 9 physician reimbursement have had only a minimal effect on the Company's results of operations since most of the physicians practicing at the Company's facilities bill their fees directly. Medicaid is the federal/state health insurance program for the underprivileged. Subject to certain minimum federal requirements, each state defines the extent and duration of the services covered by its Medicaid program. Moreover, although there are certain federal requirements governing the payment levels for Medicaid services, each state has its own methodology for making payment for services provided to Medicaid patients. Various state Medicaid programs cover payment for services provided to Medicaid patients at all of the Company's facilities. During fiscal years 1995 and 1994, the Company received significant payments from the Louisiana Medicaid program pursuant to enhanced reimbursement rates under the State's "disproportionate share" program. Disproportionate share payments from the State of Louisiana were virtually eliminated effective July 1, 1995. Accordingly, the Company expects that any future payments made under this program will be minimal. See "Item 3. Legal Proceedings" and "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations--Results of Operations." In 1991, Congress imposed a reduction in the annual reimbursable length of stay for patients covered under the CHAMPUS program. Effective October 1, 1991, CHAMPUS began to limit its coverage for inpatient psychiatric services to 30 days for adult patients, 45 days for child and adolescent patients and 150 days for residential treatment services, subject to waivers which are available under limited circumstances if an extension of the length of stay can be justified. Although the lengths of stay experienced by the Company on CHAMPUS adult, child and adolescent beneficiaries have generally been within these limits, the volume of CHAMPUS patients treated at the Company's facilities has declined. As set forth in the above table, the amount of the Company's patient revenues attributable to CHAMPUS have decreased from 7% in fiscal 1994 to 3% in fiscal 1996. Blue Cross plans reimburse based on charges or negotiated rates in all areas in which the Company presently operates facilities, except Alabama and Michigan. In many states in which the Company operates, Blue Cross charges are approved through a rate-setting process and, therefore, Blue Cross may reimburse the Company at a rate less than billed charges. Under cost-based Blue Cross programs, such as those in Alabama and Michigan, direct reimbursement to hospitals typically is lower than the hospital's charges, and patients are not responsible for the difference between the amount reimbursed by Blue Cross and the hospital's charges. Marketing The Company's marketing programs are aimed at referral sources within a selected service area rather than to the general public and are designed to increase awareness of a facility's programs and services. Referral sources include psychiatrists, medical practitioners, managed mental health organizations, courts and probationary officers, law enforcement agencies, schools and clergy. Each facility's marketing staff, together with other facility personnel, maintains direct contact with referral sources to support their needs. These needs may be related to a particular treatment program, the desires of the patient's family, hospital policies or the timely receipt of 10 accurate information. Each facility establishes admission targets for each referral source and results are monitored and evaluated at the facility and by the corporate staff. Regulation Operations of psychiatric hospitals are subject to extensive federal, state and local government regulations, including periodic inspection and licensing requirements. These regulations are primarily concerned with the fitness and adequacy of the facility, equipment and personnel, standards of medical care provided, the dispensing of drugs and the adequacy of fire prevention measures and other building standards. In addition, the admission and treatment of patients at the Company's hospitals are subject to certain state regulation regarding involuntary admissions, patient rights and the confidentiality of patient medical records. The Company believes that federal and state regulation may become more comprehensive and restrictive in the future, particularly with respect to reimbursement rates. In addition, numerous healthcare reform proposals have been and are expected to continue to be introduced in Congress. The Company cannot predict the form or timing of any prospective legislation or regulation, nor the effect which any legislation or regulation might have on its revenues or profitability. Capital expenditures for the construction of new facilities, the addition of beds or the acquisition of facilities or medical equipment are reviewable by governmental authorities in certain states in which approximately half the Company's facilities are located. State certificate of need or similar statutes generally provide that prior to the construction of new beds or facilities or the introduction of a new service, a state agency must determine that a need exists for those beds, facilities or services. A certificate of need is generally issued for a specific maximum amount of expenditures, number of beds or services to be provided and the holder is generally required to implement the approved project within a specific time period. In most cases, state certificate of need or similar statutes do not restrict the ability of the Company or its competitors from offering new or expanded outpatient services. Except for Arizona, Texas, Louisiana and Utah, all of the states in which the Company operates facilities have adopted certificate of need or similar statutes. Federal law contains a number of provisions designed to ensure that services rendered by health care facilities to Medicare and Medicaid patients are medically necessary, meet professionally recognized standards and are billed properly. These provisions include a requirement that admissions of Medicare and Medicaid patients to hospitals must be reviewed in a timely manner to determine the medical necessity of the admissions. In addition, the Peer Review Improvement Act of 1982 ("Peer Review Act") provides that a hospital may be required by the federal government to reimburse the government for the cost of Medicare paid services determined by a peer review organization to have been medically unnecessary. Each of the Company's hospitals has developed and implemented a quality assurance program and implemented procedures for utilization review and retrospective patient care evaluation to meet its obligations under the Peer Review Act. As a result of legislation passed in Texas in September 1993 and as described below, Peer Review Organizations ("PRO's") in that state began applying extremely restrictive interpretations to 11 the medical necessity of admissions and other services. Consequently, significant amounts of the Texas facilities' charges in fiscal 1994 were denied by such organizations until the facilities gained a full understanding of the PRO's interpretations and modified their internal systems accordingly. Charges denied in the Company's Texas facilities in fiscal 1996 and 1995 were less than 2% of these facilities' gross charges in these years. The Medicare and Medicaid Anti-Fraud and Abuse Amendments (the "Amendments") to the Social Security Act prohibit individuals or entities participating in the Medicare or Medicaid programs from knowingly and willfully offering, paying, soliciting, or receiving remuneration in order to induce referrals for items or services reimbursed under those programs. The policy objective of the Amendments is to ensure that the purpose for a referral is quality of care and not monetary gain by the referring individual. The Amendments' prohibitions only apply to Medicare and Medicaid patients and impose felony criminal penalties and civil sanctions, as well as exclusion from the Medicare and Medicaid programs. In 1989, CHAMPUS adopted regulations authorizing it to exclude from the CHAMPUS program any provider who has committed fraud or engaged in abusive practices. The term "abusive practices" is defined broadly to include, among other things, the provision of medically unnecessary services, the provision of care of inferior quality, and the failure to maintain adequate financial or medical records. The Company believes that it is in compliance with all aspects of these regulations. The Company has entered into various types of agreements with physicians and other health care providers in the ordinary course of operating its facilities, many of which provide for payments to physicians or other health care providers by the Company as compensation for services or other consideration by the providers. In order to provide guidance to healthcare providers with respect to the statute that makes certain remuneration arrangements between hospitals and physicians and other healthcare providers illegal, the United States Department of Health and Human Services (the "Department") issued regulations in 1991 and 1993 outlining certain "safe harbor" practices, which, although potentially capable of inducing prohibited referrals of business, would not be subject to enforcement action under the illegal remuneration statute. The practices covered by the regulations include, among others, certain investment transactions, lease of space and equipment, personal services and management contracts, sales of physician practices, payments to employees and waivers of beneficiary deductibles and co-payments. Although a relationship that fails to satisfy a safe harbor is not necessarily illegal, that relationship will not be exempt from scrutiny under the Amendments. The Company believes that its agreements and arrangements in this area comply with the Amendments or are otherwise protected under the safe harbors provided. However, there can be no assurance that (i) government enforcement agencies will not assert that certain of these arrangements are in violation of the illegal remuneration statute, or (ii) the statute will ultimately be interpreted by the courts in a manner consistent with the Company's practices. Several states and the Federal government have been investigating whether psychiatric hospitals have engaged in fraudulent practices such as inflating bills for medications and services, billing for services never rendered and admitting patients, especially children, who do not require hospitalization. In 1991, the Texas Attorney General disclosed that several of the Company's competitors doing business in Texas were under investigation for 12 fraudulent practices and a lawsuit seeking injunctive relief was filed against one of those competitors. This led to the passage of legislation in Texas, effective September 1, 1993, that placed severe restrictions on the marketing of behavioral health care services. In general, the legislation prohibits certain advertisement and solicitation techniques. Specifically, advertisements may not promise a cure or guarantee treatment results that cannot be substantiated, and mental health intervention and assessment services must be available and properly credentialed before they are advertised. The legislation also requires disclosure of any relationship between the treatment facility and its referral sources and prohibits a referral service from holding itself out as a qualified mental health referral service without complying with the legislation's definition of such (which requires, among other things, compliance with regulations regarding confidentiality, participation in and staffing of the referral service and payments to referral sources). Violation of the legislation may result in injunctive relief and civil penalties of up to $25,000 per violation. In June 1993, the Company signed an agreement with the Texas Attorney General whereby it agreed to continue to comply with Texas statutes regarding marketing and operating standards applicable to all psychiatric hospital companies. Acquisitions, Sales and Lease Commitments * Three Rivers Hospital. In November 1992, the Company purchased a 64-bed hospital facility in Covington, Louisiana for $2,000,000. The facility, Three Rivers Hospital, opened in January 1993. On June 30, 1995, the hospital was closed due to reduced patient volume and projected negative operating margins, and its operations were consolidated with the Company's facility located less than five miles away. In May 1996, the Company signed a letter of intent to sell Three Rivers Hospital to an independent party for approximately $2.2 million (net of transaction costs). This sale is expected to close during October 1996. See "Ownership Arrangements and Operating Agreements" and "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations--Results of Operations." * Harbor Oaks Hospital. In January 1993, the Company leased Harbor Oaks Hospital in Fort Walton Beach, Florida to another health care provider for a period of three years. The lease was extended to October 1996, at which time the Company anticipates resuming operations at the facility. * Cumberland Hospital. In August 1993, the Company sold its 175-bed Cumberland Hospital in Fayetteville, North Carolina for approximately $12 million. * Ramsay Managed Care, Inc. RHCI, through its former subsidiary RMCI, entered the managed mental health business in October 1993 with the acquisition of Florida Psychiatric Management, Inc. ("FPM") for a purchase price of $6.5 million. The managed care division expanded in June 1994 with the acquisition of a Phoenix, Arizona-based managed mental health business and, in fiscal 1995, through the award of contracts in Hawaii and West Virginia. For a variety of reasons deemed by management to be reasonable at the time, on April 24, 1995, the Company distributed, on a pro rata basis in the form of a dividend, the common stock of RMCI held by the Company to the holders of record 13 on April 21, 1995 of the Company's common and preferred stock (the "RMCI Distribution"). Subsequent to this distribution, RMCI became a separate, publicly traded Company and ceased being a subsidiary of the Company. On October 1, 1996, the Company and RMCI entered in a merger agreement pursuant to which RMCI would merge into a wholly-owned subsidiary of the Company. See "Recent Developments" above. * Atlantic Shores Hospital. In February 1994, the Company sold its 50-bed Atlantic Shores Hospital in Daytona Beach, Florida for approximately $4.8 million. * Sale/Leaseback. In April 1995, the Company consummated a sale/leaseback transaction whereby the Company sold the land, buildings and fixed equipment of two of its inpatient facilities (Desert Vista Hospital in Mesa, Arizona and Mission Vista Hospital in San Antonio, Texas) for $12.5 million and agreed to lease this property back over a term of 15 years (with three successive renewal options of five years each). The leases, which are treated as operating leases under generally accepted accounting principles, currently require aggregate annual minimum rentals of $1.58 million, payable monthly. Effective April 1 of each year, the lease payments are subject to any upward adjustment (not to exceed 3% annually) in the Consumer Price Index over the preceding 12 months. * Sale of Land. In March and April 1995, the Company sold certain real estate located in Flagstaff, Arizona and Houston, Texas. These properties were initially acquired for development approximately 10 years ago and, as of the date of sale, the properties had an aggregate book value of $1.15 million. Total net proceeds from the sales of this real estate approximated $0.75 million. * Benchmark Behavioral Hospital. Effective April 1995, the Company agreed to lease an 80-bed facility near Salt Lake City, Utah from Charter Medical Corporation for four years, with an option to renew for an additional three years. The lease, which is treated as an operating lease under generally accepted accounting principles, requires annual base rental payments of $456,000, payable monthly. In addition, the lease provides for percentage rent payments to the lessor equal to 2% of the net revenues of the facility, payable quarterly. Ownership Arrangements and Operating Agreements One physician owns a 4% interest in the subsidiary which owns the Company's Harbor Oaks Hospital. The Company may be required to repurchase, and the minority shareholder may be required to sell, the minority interest at a formula price dependent upon many factors, including the earnings per share of the subsidiary which owns the subject hospital and the price/earnings multiple of the Company, after a fixed period of time. Although the amount of the Company's repurchase obligation cannot be precisely determined, the Company does not believe that this obligation will require a material payment by the Company in the foreseeable future. In 1985, the Company and Bethany General Hospital in Bethany, Oklahoma entered into a joint development project. The general hospital and the Company hold a joint certificate of need by which they have converted 23 medical/surgical beds to psychiatric beds, and constructed a psychiatric 14 pavilion containing an additional 20 psychiatric beds. Pursuant to a joint venture agreement entered into in December 1985, the Company began managing the 23 existing beds in December 1985 and completed construction of the 20-bed pavilion in October 1986. Under the joint venture agreement, the Company is obligated to provide working capital to operate the 43-bed psychiatric unit. The Company may, at its option, continue to operate and manage the unit in three- year terms through 2004. The Company is entitled to an annual management fee of 5% of the unit's gross revenues and 65% of the net profits or losses of the unit. The agreement also provides that the Company will recover construction costs amortized over 15 years and working capital advances from operating revenue, unless the Company does not renew or breaches the agreement. In November 1992, the Company formed a limited partnership to operate Three Rivers Hospital, a 64-bed facility located in Covington, Louisiana. Pursuant to the terms of the partnership agreement, the Company, as general partner, had a 55% interest in the operations of the business and limited partners maintained a 45% interest. A wholly-owned subsidiary of the Company owns the facility and leased it to the partnership at $276,000 per annum. Due to reduced patient volume and projected negative operating margins, effective June 30, 1995, Three Rivers Hospital was closed. The Company has signed a letter of intent and expects to sell Three Rivers Hospital to an independent party in October 1996. See "Acquisitions, Sales and Lease Commitments" above. Further, in July 1996, the Three Rivers Hospital Limited Partnership was dissolved. Insurance The Company and its facilities are insured on a "claims-made" basis for professional and general liability incidents in the aggregate amount of $25,000,000, with a self-insured retention of $500,000 per claim. The Company's self-insurance program also includes "tail" coverage for prior acts retroactive to the date on which the Company could become responsible for such acts. This prior occurrence coverage operates with the same self-insured retention level. It is the Company's policy to record the liability for uninsured professional and general liability losses related to asserted and unasserted claims arising from reported and unreported incidents based on independent valuations which consider claim development factors, the specific nature of the facts and circumstances giving rise to each reported incident and the Company's history with respect to similar claims. Employees As of June 30, 1996, the Company employed approximately 1,625 full-time and 1,540 part-time employees in its facilities and contract services operations, including approximately 400 full- time equivalent nurses. In addition, the Company has a corporate headquarters staff of approximately 25, which includes individuals who specialize in various areas of hospital operations to assist facilities with particular management issues. The Company considers its relationship with its employees to be good. 15 Executive Officers of the Registrant Certain information with respect to the executive officers of the Company is set forth below: Position With the Company and Principal Occupations Name of Executive Officer During the Past Five Years Luis E. Lamela....... 46 Vice Chairman of the Board of the Company since January 1996; President and CEO of CAC Medical Centers, a division of United Health Care of Florida, since May 1994; President and CEO of Ramsay - HMO, Inc. from prior to 1991 to May 1994. Bert G. Cibran....... 42 President and Chief Operating Officer of the Company since August 1996; President, Summa Healthcare Group, Inc. (a healthcare consulting firm) from February 1996 through August 1996; President and Chief Operating Officer for the Florida operations of Physician Corporation of America from February 1994 to February 1996; Executive Vice President of Operations with Ramsay- HMO, Inc. from 1991 to February 1994. Reynold J. Jennings.. 50 Executive Vice President of the Company and President of its Behavioral Hospital Division since August 1996; President, President/Chief Operating Officer or President/CEO of the Company from September 1994 to August 1996; Executive Vice President and Chief Operating Officer of the Company from November 1993 until September 1994; various management and administrative positions with National Medical Enterprises, Inc. from prior to 1991 to October 1993. Carol C. Lang........ 49 Chief Financial Officer of the Company since August 1996; President of HealthLink Enterprises, Inc. (a healthcare consulting firm) from prior to 1991 to August 1996. Brent J. Bryson...... 47 Vice President of the Company since October 1994; (including medical leave from January 1996 through August 1996); Senior Vice President, Southern Region, with National Medical Enterprises, Inc. from November 1991 to October 1994; Vice President with National Medical Enterprises, Inc. from prior to 1991 to November 1991. John A. Quinn........ 42 Vice President of the Company since September 1991; various administrative and management positions with Community Psychiatric Centers, Inc. from prior to 1991 to September 1991. Wallace E. Smith..... 53 Vice President of the Company since prior to 1991. William N. Nyman..... 43 Vice President of the Company since August 1993. Regional Controller of the Company from prior to 1991 to July 1993. Daniel A. Sims....... 36 Corporate Controller of the Company since December 1993; Chief Financial Officer of a 175-bed medical/surgical hospital from prior to 1991 to December 1993. 16 Item 2. Properties. The following table provides information concerning the 15 inpatient facilities owned and operated or leased and operated by the Company at June 30, 1996. Total Date Opened Licensed Hospital (7) or Acquired Beds Havenwyck Hospital Auburn Hills, MI ......................... November 1983 166 Brynn Marr Hospital Jacksonville, NC ......................... December 1983 76 Hill Crest Hospital Birmingham, AL ........................... January 1984 130 Heartland Hospital Nevada, MO ............................... April 1984 152 Greenbrier Hospital Covington, LA ............................ October 1984 67 Coastal Carolina Hospital Conway, SC ............................... November 1984 98 Bayou Oaks Hospital Houma, LA(1) ............................. November 1985 98 The Bethany Pavilion Bethany, OK(2) ........................... December 1985 43 Meadowlake Hospital Enid, OK ................................. February 1986 50 Benchmark Regional Hospital Woods Cross, UT .......................... August 1986 76 Desert Vista Hospital Mesa, AZ (6) ............................. February 1987 100 Chestnut Ridge Hospital Morgantown, WV(3) ........................ November 1987 70 The Haven Hospital DeSoto, TX ............................... April 1990 102 Mission Vista Hospital San Antonio, TX (6) ...................... November 1991 61 Benchmark Behavioral Hospital Midvale, UT (4) .......................... June 1995 80 Total (5) ........................... 1,369 (1) The building in which the Company's facility in Houma, Louisiana is located is leased for an initial period ending January 31, 2005 (with an option to renew for 20 years). (2) The Bethany, Oklahoma facility is operated as a joint venture in which the Company operates and manages the behavioral health services of Bethany General Hospital. See "Item 1. Business --Ownership Arrangements and Operating Agreements." (3) The Company has entered into a 50-year ground lease for the property on which its 70-bed facility in Morgantown, West Virginia is located. (4) The building in which the Company's facility in Midvale, Utah is located is leased for an initial period ending June 24, 1999 (with an option to renew for an additional three years). See "Item 1. Business-Acquisitions, Sales and Lease Commitments." (5) Excludes Harbor Oaks Hospital and Three Rivers Hospital. Harbor Oaks Hospital, a 98-bed facility in Fort Walton Beach, Florida is owned by the Company but, as of June 30, 1996, was leased to another health care provider. Three Rivers Hospital, a 64-bed facility located in Covington, Louisiana, was closed on June 30, 1995. See "Item 1. Business -- Acquisitions, Sales and Lease Commitments and Ownership Arrangements and Operating Agreements." (6) In April 1995, the Company sold and immediately leased back the land, buildings and fixed equipment associated with these facilities. The leases have an initial term of 15 years and three successive renewal options of five years each. See "Item 1. Business -- Acquisitions, Sales and Lease Commitments." (7) The Company believes that its facilities are well maintained and are of adequate size for present needs. 17 In March 1995, the Financial Accounting Standards Board (FASB) issued Statement Number 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of" (the "Statement"). As required by the Statement, the Company periodically reviews the long-lived assets (land, buildings, fixed equipment and related cost in excess of net asset value of purchased businesses) of each of its inpatient facilities to determine if the carrying value of these assets is recoverable, based on the future cash flows expected from the assets. Based on this review, the Company determined that the carrying value of certain long-lived assets was impaired (within the meaning of the Statement) at June 30, 1996 and 1995. The amount of the impairment, calculated as the excess of carrying value of the long-lived assets over the discounted future cash flows expected from the assets, totalled approximately $4 million and $20 million at June 30, 1996 and 1995, respectively. See "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations." and "Item 8. Financial Statements and Supplementary Data." In connection with the Company's decision to relocate its corporate headquarters from New Orleans, Louisiana to Coral Gables, Florida, the Company has entered into an office lease in Coral Gables for a term of three years ending in August 1999. Upon relocation, the Company's lease in New Orleans will be terminated. Item 3. Legal Proceedings. The Company is subject to claims and suits arising in the ordinary course of business. In addition, during fiscal 1996, the State of Louisiana requested repayment of disproportionate share payments received by the Company in fiscal years 1995 and 1994 totalling approximately $5,000,000. On the basis of discussions to date between the Company and the State, the Company believes that this matter may be settled for an amount significantly less than the State's initial request. See "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations -- Results of Operations." The Company has established reserves at June 30, 1996 for the estimated amounts which might be recovered from the Company as a result of all outstanding legal proceedings. In the opinion of management, the ultimate resolution of these pending legal proceedings is not expected to have a material adverse effect on the Company's financial position, results of operations or liquidity. See "Item 8. Financial Statements and Supplementary Data." Item 4. Submission of Matters to a Vote of Security Holders. Not applicable. 18 PART II Item 5. Market For The Registrant's Common Equity and Related Stockholder Matters. The Company's Common Stock is traded in the over-the-counter market and is quoted on the NASDAQ National Market System under the symbol RHCI. On September 27, 1996, there were 660 holders of record of the Company's Common Stock. No cash dividends have been declared on the Common Stock since the Company was organized. The Company's credit documents governing its credit facilities include provisions which prohibit the payment of dividends unless the sum of (i) all dividends, redemptions and all other distributions in respect of its capital stock and (ii) all restricted investments (as defined) during the applicable fiscal year would not exceed an amount equal to 50% of the consolidated net income of the Company for the immediately preceding fiscal year and provided that, at the time of such dividend and after giving effect thereto, certain specified financial ratio covenants would not be violated and no other default or event of default would occur. Further, in connection with waivers received from the Company's lenders as of June 30, 1996, the Company agreed not to pay future cash dividends in respect of its Class B Preferred Stock, Series C. Prior to this time, the Company's credit facilities permitted the payment of the full amount of regular fixed dividends on the Class B Preferred Stock, Series C, provided that such dividends did not exceed $387,200 in each 12-month period and provided that no event of default existed or occurred as a result of the payment. The following table sets forth the range of high and low closing sales prices per share of the Company's Common Stock for each of the quarters during the years ended June 30, 1996 and 1995, as reported on the NASDAQ National Market System: High Low Year ended June 30, 1996 First Quarter ...................... $4 5/8 $3 3/8 Second Quarter ..................... 3 3/4 2 1/2 Third Quarter ...................... 3 15/16 2 7/8 Fourth Quarter ..................... 4 3/8 2 7/8 Year ended June 30, 1995 First Quarter ...................... $8 1/8 $6 Second Quarter ..................... 8 1/8 6 1/4 Third Quarter ...................... 7 7/8 5 3/4 Fourth Quarter * ................... 7 1/2 3 5/8 On October 2, 1996, the closing sales price of the Company's Common Stock was $2 3/8 per share. * The distribution of Ramsay Managed Care, Inc. occurred during the fourth quarter of fiscal 1995. See "Item 1. Business--Acquisitions, Sales and Lease Commitments". 19 Item 6. Selected Financial Data. The following table sets forth selected consolidated financial information for the periods shown and is qualified by reference to, and should be read in conjunction with, the Consolidated Financial Statements and Notes thereto and "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations" appearing elsewhere in this Annual Report on Form 10-K. Year Ended June 30 1996 1995 1994 1993 1992 (in thousands, except per share data) Statement of Operations Data: Net revenues ......... $ 117,423 $136,418 $137,002 $136,354 $136,946 Salaries, wages and benefits .......... 66,259 72,061 64,805 63,810 60,626 Other operating expenses .......... 42,387 44,741 42,907 40,454 40,161 Provision for doubtful accounts . 5,805 5,086 5,846 8,148 8,628 Depreciation and amortization ...... 5,490 7,290 6,836 6,605 5,439 Interest and other financing charges . 6,892 8,347 8,906 9,494 10,488 Losses related to asset sales and closed businesses . 4,473 6,431 802 7,524 -- Asset impairment charges ........... 5,485 21,815 -- -- -- Restructuring and other charges ..... -- -- -- 1,367 2,283 136,791 165,771 130,102 137,402 127,625 Income (loss) before minority interests, income taxes, extraordinary items and cumulative effect of accounting change ............ (19,368) (29,353) 6,900 (1,048) 9,321 Minority interests ... -- 887 4,824 1,126 -- Income (loss) before income taxes, extraordinary items and cumulative effect of accounting change (19,368) (30,240) 2,076 (2,174) 9,321 Provision (benefit) for income taxes ...... (2,887) (13,195) 599 159 3,974 Income (loss) before extraordinary items and cumulative effect of accounting change (16,481) (17,045) 1,477 (2,333) 5,347 Extraordinary items: Loss from early extinguishment of debt, net of income tax benefit -- (257) (155) (1,580) (366) Income tax benefit from net operating loss carryovers ........ -- -- -- -- 953 Cumulative effect of change in accounting for income taxes ....... -- -- -- 2,353 -- Net income (loss) .... $ (16,481)$(17,302) 1,322 $(1,560) $ 5,934 Primary earnings per share: Income (loss) per common and dilutive common equivalent share before extraordinary items and cumulative effect of accounting change .. $ (2.12) $ (2.25) $ 0.15 $ (0.29) $ 0.68 Net income (loss) ... $ (2.12) $ (2.28) $ 0.14 $ (0.20) $ 0.75 Weighted average shares outstanding(1) ..... 7,929 7,743 9,641 7,932 7,886 (1) Includes common and dilutive common equivalent shares outstanding. June 30 1996 1995 1994 1993 1992 (in thousands) Balance Sheet Data: Working capital $ 11,715 $ 24,098 $ 21,148 $ 23,811 $ 26,718 Total assets 132,758 139,236 183,168 190,370 194,357 Long-term debt 44,664 55,568 67,707 77,429 84,879 Class B preferred stock, Series 1987 --- --- --- --- 2,500 Stockholders' equity 46,053 61,779 80,468 79,997 76,068 20 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations. RESULTS OF OPERATIONS Patient revenues of the Company's inpatient facilities are affected by changes in the rates the Company charges, changes in reimbursement rates by third-party payors, the volume of patients treated and changes in the mix of payors and patient types. The Company's facilities provide services to patients requiring intensive inpatient care, less intensive residential treatment care and outpatient treatment. Also, at four of the Company's facilities, medical subacute services are provided. The reimbursement rates for intensive inpatient care are generally greater than the rates paid for residential treatment care. However, the average length of stay for patients in residential treatment programs is significantly greater than that for patients in intensive inpatient programs. Generally, charges for each facility's services are reimbursed under third-party reimbursement programs at the amount billed or at rates which are less than the facility's charges. These lower rates can be based on a negotiated per diem amount or based on the facility's costs as audited or projected by the third-party payors. When operating revenues (charges) per patient day are higher than the negotiated per diem rate or the facility's costs, the difference is recorded as a reduction of gross revenues. Bad debts consist primarily of commercial and self-pay accounts receivable deemed uncollectible. The Company records amounts due to or from third-party reimbursement sources based on its best estimates of amounts to be ultimately received or paid under cost reports filed with appropriate intermediaries. The final determination of amounts earned under reimbursement programs is subject to review and audit by these intermediaries. Differences between amounts recorded as estimated settlements and the audited amounts are reflected as adjustments to the Company's net revenues in the period in which the final determination is made. During the years ended June 30, 1995, and 1994, the Company recorded contractual adjustment benefits related to intermediary audits of prior year cost reports of approximately $1,000,000 and $1,400,000, respectively. During the year ended June 30, 1996, the Company recorded contractual adjustment expenses related to intermediary audits of prior year cost reports of approximately $1,900,000. As a result of this negative experience, the Company recorded reserves totalling $3,500,000 in its June 30, 1996 financial statements related to possible future adjustments of its cost report estimates by intermediaries. Management believes that adequate provision has been made for any adjustments that may result from future intermediary reviews and audits. Several years ago, the Federal Government established a funding mechanism, known as disproportionate share, which was meant to adequately reimburse facilities serving a disproportionately high volume of Medicaid patients, relative to other providers. Disproportionate share funding was established under Title XIX of the Social Security Act, administered at the State level and approved/overseen by the Health Care Financing Administration, since Medicaid services are jointly funded by each State as well as the Federal Government. In fiscal years 1995 and 1994, the Company received significant disproportionate share payments from the Louisiana Medicaid program. Statutory changes virtually eliminated the disproportionate share funding mechanism in 21 Louisiana and, for the year ended June 30 1996, disproportionate share payments received by the Company's Louisiana facilities were not material. The impact of Louisiana disproportionate share payments on net revenues and income from continuing operations in fiscal 1995 was approximately $5,600,000 and $3,700,000, respectively, and the impact of Louisiana disproportionate share payments on net revenues and income from continuing operations in fiscal 1994 was approximately $14,300,000 and $9,300,000, respectively. The majority of Louisiana disproportionate share payments was received at the Company's Three Rivers Hospital facility, which treated primarily Medicaid-eligible adolescents diagnosed with various behavioral disorders. This facility was further adversely impacted by the State of Louisiana's application of significantly more restrictive admission criteria in December 1994 for adolescents seeking inpatient psychiatric treatment in the State. Due to a negative operating margin in the fourth quarter of fiscal 1995 and a significant decrease in admissions since December 1994, on June 30, 1995, the Company closed Three Rivers Hospital and consolidated its operations with the Company's Greenbrier Hospital facility located less than five miles away. During fiscal 1996, the State of Louisiana requested repayment of disproportionate share payments received by two of the Company's Louisiana facilities in fiscal years 1995 and 1994 totalling approximately $5,000,000. The repayment requests related to a) alleged overpayments made to Three Rivers Hospital because the State believed Three Rivers' actual annual inpatient volume was less than its projection of annual inpatient volume made at the beginning of its 1994 cost reporting year and b) alleged improper teaching hospital payments made to Three Rivers Hospital and Bayou Oaks Hospital because the State believed these facilities were not qualifying teaching hospitals at the time these payments were made. The Company believes that certain of the calculations which support the State's calculation of annual inpatient volume in 1994 are in error and that other relevant factors affecting the State's calculation have not been considered. Further, the Company believes that, based on its understanding of the rules and regulations in place at the time the teaching hospital payments were made, payments received as a result of the teaching classification were appropriate. On the basis of discussions to date between the Company and the State, the Company believes that this matter may be settled for an amount significantly less than the State's initial requests. Any settlement of this matter will be contingent upon the execution of settlement documentation, the terms of which have not been agreed upon. Further, there can be no assurance that the Company and the State will agree on a settlement amount or the terms and conditions of settlement documentation. The Company intends to vigorously contest any position by the State of Louisiana which the Company considers adverse and believes that adequate provision has been made at June 30, 1996 for the estimated amount which might be recovered from the Company as a result of this matter. See "Item 8. Financial Statements and Supplementary Data." The following table sets forth, for the periods indicated, certain items of the Company's consolidated statements of operations as a percentage of the Company's net revenues. For comparison purposes, the prior year percentages exclude the operations of RMCI which, as discussed elsewhere, was distributed in the form of a dividend to the Company's stockholders 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 the Company's consolidated statements of operations between periods. 22 As a Percentage of Net Revenues Year Ended June 30, 1996 1995 1994 Net revenues ........................................ 100.0% 100.0% 100.0% Salaries, wages and benefits ......................... 56.4 56.4 54.1 Other operating expenses ............................. 36.1 32.6 33.8 Provision for doubtful accounts ...................... 4.9 4.3 5.0 Depreciation and amortization ........................ 4.7 5.4 5.5 Interest and other financing charges ................. 5.9 6.9 7.5 Losses related to asset sales and closed businesses .. 3.8 5.5 0.7 Asset impairment charges ............................. 4.7 18.5 -- Loss before minority interests, income taxes and extraordinary item ................(16.5)% (29.6)% (6.6)% 1996 Compared to 1995 The following are the significant changes in the Company's operations between fiscal 1996 and 1995. These changes affect the comparison of revenues and expenses of the Company between years as discussed below. * The RMCI Distribution on April 24, 1995. * Virtual elimination of Louisiana disproportionate share payments to the Company, 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). * The closure of several day treatment centers and outpatient clinics during fiscal 1996 and 1995 due to negative operating margins. * Significant increase in occupancy at the Company's subacute units, as well as an expansion of the Company'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, the Company replaced approximately $6.4 million in patient revenues related to Three Rivers Hospital and $5.5 million in disproportionate share revenues recorded in fiscal 23 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. In addition, the Company'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, the Company's residential treatment net revenue per patient day was approximately $200 less than its acute psychiatric net revenue per patient day (excluding 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 the Company'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 the Company's subacute units, and (d) other operating expenses in fiscal 1995 related to RMCI of $6.2 million. The Company's same facility other operating expenses remained stable between periods, increasing $0.3 million, or 1%. And, during 1996, the Company increased its liability for self-insurance claims and incurred certain other expenses which were not present in fiscal 1995. 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 the Company for services rendered in fiscal 1996. 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 FASB Statement Number 121, 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. 24 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 the Company'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, the Company 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 the Company's Louisiana facilities in fiscal 1995 and 1994 (see "Results of Operations" above) and lease commitments and other costs incurred in connection with the Company's decision to relocate its corporate headquarters. In fiscal 1995, the Company 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. See "1995 Compared to 1994" below. In March 1995, the Financial Accounting Standards Board (FASB) issued Statement Number 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of " (the "Statement"). The Statement 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 the Statement and the Company's expectations, the Company recorded asset impairment charges in its 1996 and 1995 statement of operations totalling approximately $4 million and $20 million, respectively. In June 1996 and 1995, the Company 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 the Company 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. The Company 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 the Company's operations between 1995 and 1994. These changes affect the comparison of revenues and expenses of the Company between years as discussed below. 25 * In October 1993, the Company, 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 health care. The revenues and expenses of RMCI and its subsidiaries were included in the Company's revenues and expenses from October 1993 to April 24, 1995, when the RMCI Distribution was effected. * Louisiana disproportionate share payments received by the Company during fiscal 1995 were approximately $8.7 million less than the amount received in fiscal 1994. * In February 1994, the Company sold its Atlantic Shores facility in Daytona Beach, Florida. In addition, the Company 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". * The Company opened four subacute units in late fiscal 1994/early fiscal 1995. * The Company 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 the Company'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 26 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, the Company 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 the Company'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. 27 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) a $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 the Company's senior secured notes, (b) $0.5 million on the Company's subordinated secured notes and (c) $0.8 million on the Company's variable rate demand revenue bonds. In addition, on May 1, 1995, the Company 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 on a working capital facility drawing and interest incurred in fiscal 1995 prior to the RMCI Distribution on debt incurred in connection with RMCI acquisitions made during the second half of fiscal 1994. In fiscal 1995, the Company recorded losses associated with asset 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, the Company consummated a sale/leaseback transaction whereby the Company 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 approximately $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, the Company 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, the Company wrote down a proportionate amount of unamortized loan costs related to the senior secured notes, totalling $229,000, and incurred a yield maintenance charge from the holders of the senior secured notes, totalling $234,000. These amounts are recorded 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, the Company sold certain real estate located in Flagstaff, Arizona and Houston, Texas, respectively. These properties were acquired for development approximately 10 28 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, the Company closed its remaining day treatment centers as well as certain outpatient clinics which were producing negative operating margins. In addition, the Company 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, the Company sold an outpatient rehabilitation clinic in San Antonio, Texas in June 1995. The total losses incurred related to these events was approximately $1.3 million. 4. Closure of Three Rivers Hospital: The Company 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: The Company pursued several development opportunities during 1995 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, the Company 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, the Company 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, 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, the Company elected to adopt FASB Statement Number 121 and, after applying the principles of measurement contained in the Statement and the Company's expectations, recorded a charge against earnings, before taxes, of $20.3 million. This amount is reflected as an asset impairment charge in the 1995 consolidated statement of operations. In June 1995, the Company 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 the Company 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. 29 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 the Company in the form of higher prices. The Company monitors the operations of its facilities to mitigate the effect of inflation and increases in the costs of health care. To the extent possible, the Company seeks to offset increased costs through increased rates, new programs, and operating efficiencies. However, reimbursement arrangements may hinder the Company's ability to realize the full effect of rate increases. To date, inflation has not had a significant impact on operations. FINANCIAL CONDITION The Company 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. See "Results of Operations" above. At June 30, 1996, net cash advances made by the Company to or on behalf of RMCI totalled $8.2 million. Of this amount, $6 million primarily related to the funding of certain RMCI acquisitions and is represented by an unsecured, interest-bearing (8%), subordinated promissory note due from RMCI and issued on October 25, 1994. The remaining amount includes $0.36 million of accrued interest on the promissory note since October 1, 1995 and $1.85 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 promissory note, approximately $1.4 million 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 Additional Amount will not be required until after July 1, 1997, all on terms and conditions to be mutually agreed to by RHCI and RMCI. In June 1996 and 1995, the Company recorded a write-down of fixed and intangible assets associated with certain of its inpatient facilities totalling approximately $4 million and $20 million, respectively. In accordance with FASB Statement Number 121, the facilities' carrying amount of cost in excess of net asset value of purchased businesses, if applicable, was eliminated prior to making a reduction of these facilities' carrying amounts of impaired property and equipment. The property and equipment impairment, which totalled approximately $4.0 million and $16.5 million, respectively, was recorded pursuant to the Statement as a direct reduction in the cost basis of the related property and equipment (rather than as an increase to accumulated depreciation on these assets). 30 The Company has net deferred tax assets totalling approximately $11.5 million, which includes a valuation allowance of $4.4 million, at June 30, 1996. 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 at June 30, 1996. The ultimate realization of deferred tax assets may be affected by changes in the underlying values of the properties considered in the Company's tax planning strategies, which values are dependent upon the operating results and cash flows of the individual properties. The Company 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. At June 30, 1996, the current portion of long-term debt was $10.9 million, compared to $3.8 million at June 30, 1995. This increase was due to (a) the Company's commitment during 1996 to reduce the credit exposure of its bank group by $3.0 million by December 31, 1996 (see "Liquidity and Capital Resources" below) and (b) principal payments on the senior secured notes of $6.6 million which came due within one year during fiscal 1996. These increases were offset by payments during 1996 of $1.5 million on the amount outstanding at June 30, 1995 under the Company's former working capital facility and payments of $0.9 million on a former capital lease obligation. At June 30, 1995, no amounts were classified as current on the senior secured notes based on a prepayment of principal on these notes in April 1995. 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, the Three Rivers Limited Partnership was dissolved. In October 1995 and August 1996, a corporate affiliate of Paul J. Ramsay, the Chairman of the Board of the Company, acquired through private placements 275,863 shares and 275,546 shares, respectively, of Common Stock of the Company at a price of $3.625 and $2.75 per share, respectively. Of the total shares acquired in October 1995, 121,363 were issued for cash and 154,500 were issued for management fees due during the remainder of fiscal 1996 under the Company's management agreement with another corporate affiliate 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 the interest in the Company held by Mr. Ramsay increased from approximately 30.9% to approximately 34.8%. LIQUIDITY AND CAPITAL RESOURCES The Company's credit facilities include $34.2 million in senior secured notes, approximately $20 million in letters of credit and $1.8 million in subordinated secured notes. The senior secured notes bear interest at 11.6% and require a principal payment of approximately $3.1 million on September 30, 1996, semi-annual principal payments of approximately $3.5 million from 31 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, the Company fully paid down and terminated its working capital facility with its bank group. In September 1995, and again in August 1996, the Company and banks supporting the Credit Agreement agreed to terms which extended the expiration date of the Credit Agreement from May 15, 1996 to February 15, 1997 and from February 15, 1997 to August 15, 1997, respectively. In connection with the initial extension, the Company agreed to reduce the banks' exposure 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. The Company's credit facilities require that the Company meet certain convenants, including (a) the maintenance of a minimum level of consolidated tangible net worth, (b) the maintenance of a working capital ratio and (c) 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, the Company pays additional fees and expenses. Further, as part of the waivers and adjustments obtained as of June 30, 1996, the Company agreed to provide its Hillcrest Hospital facility and related assets as additional collateral to the lenders and agreed not to pay future cash dividends in respect of its Class B Preferred Stock, Series C. In connection with the Company's business strategy, the Company is currently pursuing a transaction involving one of its facilities which has been financed, in part, by variable rate revenue bonds, which bonds are supported by the letter of credit from the Company's bank group. Under the current structure of the proposed transaction, the Company would contribute the facility and its operations to a new entity which would be jointly owned by the Company and a medical/surgical facility in the same market area. The medical/surgical facility would contribute cash and other consideration to the new entity. Through economies of scale, infrastructure savings and new business opportunities of the new entity, the Company believes its income from the new entity could approximate the income currently realized from this facility. In connection with this transaction, the revenue bonds outstanding on the facility would be redeemed or a substitute letter of credit would be issued, thereby achieving the Company's commitment to reduce the exposure of its bank group by the required $3.0 million. In May 1996, the Company signed a letter of intent to sell its Three Rivers facility to an independent party. The Company expects to receive approximately $2.2 million from the sale of this facility prior to October 31, 1996. In response to market demands, the Company is currently converting an additional 37 beds at its Texas facilities from psychiatric care to subacute care. Renovation costs associated with this project, which is expected to be completed by January 1, 1997, will approximate $1.1 million. No other commitments to make material capital expenditures exists at this time. The Company's current primary cash requirements relate to its normal operating expenses, the requirement to reduce its banks' credit exposure as discussed above, principal payments on its senior secured notes (which resume on September 30, 1996), routine capital improvements at its facilities and the above mentioned renovation project. Also, the State of Louisiana has taken the position that certain disproportionate share payments were improperly paid to two of the Company's Louisiana facilities. See "Results of Operations" above and "Item 3. Legal Proceedings." 32 On the basis of its historical cash collection experience and projected cash needs, the Company believes that its existing cash resources, internally generated funds from operations, proceeds from the sale of Three Rivers Hospital, debt reductions derived from its business strategy and a refinancing of the Company's outstanding debt will be sufficient to meet its current cash requirements and future identifiable needs. At this time, the Company has not entered into a definitive agreement to sell its Three Rivers Hospital and does not have any commitment to refinance its outstanding debt. Further, the Company believes that the resolution of the matter with the State of Louisiana will not have a material adverse effect on its liquidity. Item 8. Financial Statements and Supplementary Data. Financial statements of the Company and its consolidated subsidiaries are set forth herein beginning on page F-1. Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure. Not applicable. 33 PART III Item 10. Directors and Executive Officers of the Registrant. Information with respect to the Company's executive officers is contained in Part I under "Item 1. Business -- Executive Officers of the Registrant." The information required by this Item with respect to directors will be contained in the Company's definitive Proxy Statement ("Proxy Statement") for its 1996 Annual Meeting of Stockholders to be held on November 21, 1996 and is incorporated herein by reference. Such Proxy Statement will be filed with the Securities and Exchange Commission not later than 120 days subsequent to June 30, 1996. Item 11. Executive Compensation. The information required with respect to this Item will be contained in the Proxy Statement, and such information is incorporated herein by reference. Item 12. Security Ownership of Certain Beneficial Owners and Management. The information required with respect to this Item will be contained in the Proxy Statement, and such information is incorporated herein by reference. Item 13. Certain Relationships and Related Transactions. The information required with respect to this Item will be contained in the Proxy Statement, and such information is incorporated herein by reference. 34 PART IV Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K. (a) Documents filed as Part of the Report: 1. Financial Statements Information with respect to this Item is contained on Pages F-1 to F-26 of this Annual Report on Form 10-K. 2. Financial Statement Schedules All schedules have been omitted because they are inapplicable or the information is provided in the consolidated financial statements, including the notes thereto. 3. Exhibits Information with respect to this Item is contained in the attached Index to Exhibits. (b) Reports on Form 8-K: There were no reports on Form 8-K filed by the Company for the quarter ended June 30, 1996. On October 2, 1996, the Company filed a Current Report on Form 8-K relating to a proposed merger between the Company and Ramsay Managed Care, Inc. (c) Exhibits Required by Item 601 of Regulation S-K: Exhibits required to be filed by the Company pursuant to Item 601 of Regulation S-K are contained in Exhibits listed in response to Item 14(a)3, and are incorporated herein by reference. The agreements, management contracts and compensatory plans and arrangements required to be filed as an Exhibit to this Form 10-K are listed in Exhibits 4.4, 10.4, 10.58, 10.88, 10.93, 10.94, 10.95, 10.96, 10.97 and 10.98. 35 POWER OF ATTORNEY The Registrant, and each person whose signature appears below, hereby appoints Bert G. Cibran and Thomas M. Haythe as attorneys-in-fact with full power of substitution, severally, to execute in the name and on behalf of the registrant and each such person, individually and in each capacity stated below, one or more amendments to the annual report which amendments may make such changes in the report as the attorney-in-fact acting deems appropriate and to file any such amendment to the report with the Securities and Exchange Commission. SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto fully authorized. RAMSAY HEALTH CARE, INC. Dated: 10/7/96 By /s/ Bert G. Cibran Bert G. Cibran President and Principal Executive Officer Dated: 10/7/96 By /s/ Carol C. Lang Carol C. Lang Principal Financial Officer Pursuant to the requirements of the Securities and Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated. Signature/Title Dated: 10/8/96 By /s/ Paul J. Ramsay Paul J. Ramsay Chairman of the Board and Director Dated: 10/7/96 By /s/ Luis E. Lamela Luis E. Lamela Executive Vice Chairman of the Board and Director 36 Signature/Title Dated: 10/7/96 By /s/ Aaron Beam, Jr. Aaron Beam, Jr. Director Dated: 10/7/96 By /s/ Peter J. Evans Peter J. Evans Director Dated: __________________ By__________________________________________ Robert E. Galloway Director Dated: 10/7/96 By /s/ Thomas M. Haythe Thomas M. Haythe Director Dated: 10/7/96 By /s/ Steven J. Shulman Steven J. Shulman Director Dated: 10/8/96 By /s/ Michael S. Siddle Michael S. Siddle Director 37 [THIS PAGE INTENTIONALLY LEFT BLANK] RAMSAY HEALTH CARE, INC. AND SUBSIDIARIES INDEX TO FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULES The following consolidated financial statements of the Registrant and its subsidiaries are submitted herewith in response to Item 8 and Item 14(a)(1): Page Number Report of Independent Auditors........................... F-3 Consolidated Balance Sheets -- June 30, 1996 and 1995.... F-4 Consolidated Statements of Operations-- For the Years Ended June 30, 1996, 1995 and 1994.................. F-6 Consolidated Statements of Stockholders' Equity -- For the Years Ended June 30, 1996, 1995 and 1994........ F-7 Consolidated Statements of Cash Flows -- For the Years Ended June 30, 1996, 1995 and 1994.................. F-8 Notes to Consolidated Financial Statements............... F-9 All schedules have been omitted because they are inapplicable or the information is provided in the consolidated financial statements, including the notes thereto. F1 [THIS PAGE INTENTIONALLY LEFT BLANK] F2 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 F3 RAMSAY HEALTH CARE, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS June 30 1996 1995 ASSETS Current assets Cash and cash equivalents ......................... $ 7,605,000 $ 9,044,000 Patient accounts receivable, less allowances for doubtful accounts of $4,573,000 and $3,886,000 at June 30, 1996 and 1995, respectively ......... 23,410,000 21,564,000 Amounts due from third-party contractual agencies . 6,479,000 5,956,000 Current portion of receivable from affiliated company ......................................... 1,412,000 325,000 Other receivables ................................. 2,985,000 3,330,000 Deferred income taxes ............................. 1,398,000 -- Other current assets .............................. 2,372,000 2,764,000 Total current assets ............................ 45,661,000 42,983,000 Other assets Cash held in trust ................................ 745,000 1,778,000 Cost in excess of net asset value of purchased businesses ...................................... 591,000 663,000 Unamortized preopening and loan costs ............. 1,040,000 2,221,000 Receivable from affiliated company, less current portion 6,795,000 7,170,000 Deferred income taxes ............................. 10,141,000 8,652,000 Other noncurrent assets ........................... 1,392,000 2,301,000 20,704,000 22,785,000 Property and equipment Land .............................................. 5,025,000 5,383,000 Buildings and improvements ........................ 69,200,000 77,630,000 Equipment, furniture and fixtures ................. 20,325,000 19,611,000 94,550,000 102,624,000 Less accumulated depreciation ..................... 28,157,000 29,156,000 66,393,000 73,468,000 $ 132,758,000 $139,236,000 See notes to consolidated financial statements. F4 RAMSAY HEALTH CARE, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS June 30 1996 1995 LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities Accounts payable........................ $ 4,990,000 $ 3,868,000 Accrued salaries and wages.............. 5,169,000 4,843,000 Other accrued liabilities............... 4,412,000 1,347,000 Amounts due to third-party contractual agencies.................. 8,435,000 4,996,000 Current portion of long-term debt....... 10,940,000 3,831,000 Total current liabilities.......... 33,946,000 18,885,000 Noncurrent liabilities Other accrued liabilities .............. 7,170,000 1,337,000 Long-term debt, less current portion.... 44,664,000 55,568,000 Minority interests...................... 925,000 1,667,000 Total noncurrent liabilities....... 52,759,000 58,572,000 Stockholders' equity Class B convertible preferred stock, Series C, $1 par value--authorized 152,321 shares; issued 142,486 shares (liquidation value of $7,244,000) including accrued dividends of $91,000 ................. 233,000 233,000 Common stock, $.01 par value-- authorized 20,000,000 shares; issued 8,605,108 shares at June 30, 1996 and 8,290,795 shares at June 30, 1995............... 86,000 83,000 Additional paid-in capital.............. 99,899,000 99,147,000 Retained earnings (deficit) ............ (50,266,000) (33,785,000) Treasury stock--581,550 common shares at June 30, 1996 and June 30, 1995, at cost............ ( 3,899,000) (3,899,000) Total stockholders' equity......... 46,053,000 61,779,000 $ 132,758,000 $ 139,236,000 See notes to consolidated financial statements. F5 RAMSAY HEALTH CARE, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS Year Ended June 30 1996 1995 1994 NET REVENUES ...................... $ 117,423,000 $ 136,418,000 $ 137,002,000 Expenses: Salaries, wages and benefits ..... 66,259,000 72,061,000 64,805,000 Other operating expenses ......... 42,387,000 44,741,000 42,907,000 Provision for doubtful accounts .. 5,805,000 5,086,000 5,846,000 Depreciation and amortization .... 5,490,000 7,290,000 6,836,000 Interest and other financing charges ........................ 6,892,000 8,347,000 8,906,000 Losses related to asset sales and closed businesses ........... 4,473,000 6,431,000 802,000 Asset impairment charges ......... 5,485,000 21,815,000 -- TOTAL EXPENSES .................... 136,791,000 165,771,000 130,102,000 INCOME (LOSS) BEFORE MINORITY INTERESTS, INCOME TAXES AND EXTRAORDINARY ITEM ............... (19,368,000) (29,353,000) 6,900,000 Minority interests ................ -- 887,000 4,824,000 INCOME (LOSS) BEFORE INCOME TAXES AND EXTRAORDINARY ITEM ..... (19,368,000) (30,240,000) 2,076,000 Provision (benefit) for income taxes ............................ (2,887,000) (13,195,000) 599,000 INCOME (LOSS) BEFORE EXTRAORDINARY ITEM ............... (16,481,000) (17,045,000) 1,477,000 Extraordinary item: Loss from early extinguishment of debt, less applicable income tax benefit of $206,000 in 1995 and $103,000 in 1994 ............. -- (257,000) (155,000) NET INCOME (LOSS) ................. $ (16,481,000) $ (17,302,000) $ 1,322,000 Income (loss) per common and dilutive common equivalent share: Primary: Before extraordinary item ........ $ (2.12) $ (2.25) $ 0.15 Extraordinary item: Loss from early extinguishment of debt .......... -- (0.03) (0.01) $ (2.12) $ (2.28) $ 0.14 Fully diluted: Before extraordinary item ........................... $ (2.12) $ (2.24) $ 0.15 Extraordinary item: Loss from early extinguishment of debt ........ -- (0.03) (0.01) $ (2.12) $ (2.27) $ 0.14 Weighted average number of common and dilutive common equivalent shares outstanding: Primary .......................... 7,929,000 7,743,000 9,641,000 Fully diluted .................... 7,929,000 7,794,000 9,679,000 See notes to consolidated financial statements. F6 RAMSAY HEALTH CARE, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY Class B Class A Convertible Convertible Preferred Additional Retained Preferred Stock Common Paid-In Earnings Treasury Stock Series C Stock Capital (Deficit) Stock BALANCE AT JULY 1, 1993 $ 23,000 $142,000 $ 81,000 $ 99,847,000 $(17,805,000) $(2,291,000) Exercise of stock options (112,834 shares) .... -- -- 1,000 565,000 -- -- Dividends on Class B convertible preferred stock, Series C ... -- 91,000 -- (364,000) -- -- Purchase of treasury stock (160,000 shares) .... -- -- -- -- -- (1,144,000) Net income .. -- -- -- -- 1,322,000 -- BALANCE AT JUNE 30, 1994 ....... 23,000 233,000 82,000 100,048,000 (16,483,000) (3,435,000) Exercise of stock options (74,166 shares) .... -- -- 1,000 378,000 -- -- Shares issued in connection with employee stock purchase plan (15,869 shares) .... -- -- -- 89,000 -- -- Dividends on Class B convertible preferred stock, Series C ... -- -- -- (364,000) -- -- Purchase of treasury stock (99,800 shares) ... -- -- -- -- -- (464,000) Redemption of Class A convertible preferred stock ...... (23,000) -- -- (100,000) -- -- Distribution of subsidiary to stockholders -- -- -- (904,000) -- -- Net loss .... -- -- -- -- (17,302,000) -- BALANCE AT JUNE 30, 1995 ........ -- 233,000 83,000 99,147,000 (33,785,000) (3,899,000) Exercise of stock options (3,000 shares) .... -- -- -- 10,000 -- -- Shares issued in connection with employee stock purchase plan (21,760 shares) ... -- -- -- 70,000 -- -- Other shares issued (289,553 shares) .... -- -- 3,000 1,034,000 -- -- Dividends on Class B convertible preferred stock, Series C ... -- -- -- (362,000) -- -- Net loss .... -- -- -- -- (16,481,000) -- BALANCE AT JUNE 30, 1996 ........ $ -- $233,000 $86,000 $ 99,899,000 $(50,266,000) $(3,899,000) See notes to consolidated financial statements. F7 RAMSAY HEALTH CARE, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS Year Ended June 30 1996 1995 1994 Cash flows from operating activities Net income (loss) ............. $(16,481,000) $(17,302,000 $ 1,322,000 Adjustments to reconcile net income (loss) to net cash provided by operating activities: Depreciation and amortization .............. 6,003,000 8,074,000 7,638,000 Asset impairment charges ................... 5,485,000 21,815,000 -- Loss on early extinguishment of debt ...................... -- 463,000 258,000 Write-off of development and other costs ............... 381,000 716,000 -- Loss on disposal of assets ................. -- 5,096,000 722,000 Deferred income tax benefit ................... (2,887,000) (13,584,000) (1,188,000) Provision for doubtful accounts ......... 5,805,000 5,086,000 5,846,000 Management and director fees paid in common stock ........... 600,000 -- -- Minority interests ......... -- 887,000 4,824,000 Cash flows from (increase) decrease in operating assets: Patient accounts receivable .............. (7,651,000) (4,410,000) (2,169,000) Other current assets .................. (1,632,000) (522,000) (2,071,000) Other noncurrent assets .................. 225,000 616,000 (554,000) Cash flows from increase (decrease) in operating liabilities: Accounts payable ......... 1,105,000 2,466,000 (2,484,000) Accrued salaries, wages and other liabilities ............. 9,202,000 (749,000) 2,072,000 Amounts due to third-party contractual agencies ................ 3,439,000 267,000 (1,385,000) Total adjustments ........... 20,075,000 26,221,000 11,509,000 Net cash provided by operating activities ........... 3,594,000 8,919,000 12,831,000 Cash flows from investing activities Proceeds from sales of assets ................... -- 970,000 16,422,000 Acquisitions of businesses .................. -- -- (6,022,000) Expenditures for property and equipment ................... (1,467,000) (2,726,000) (5,070,000) Development project costs ....................... -- (2,124,000) (388,000) Preopening costs ............. -- (329,000) (2,195,000) Restricted cash (reserved) used for debt payments ............... -- 5,311,000 (5,311,000) Cash held in trust ........... 1,033,000 (974,000) 806,000 Net cash provided by (used in) investing activities ........... (434,000) 128,000 (1,758,000) Cash flows from financing activities Loan costs ................... (217,000) (290,000) (222,000) Proceeds from sale/leaseback of facilities and equipment ................... -- 12,015,000 -- Distributions to minority interests .......... (742,000) (2,466,000) (2,741,000) Proceeds from working capital facility .................... -- 2,500,000 -- Proceeds from private placement of shares of subsidiary .................. -- 3,320,000 -- Reduction in cash due to distribution of subsidiary ............... -- (1,427,000) -- Payment of costs related to distribution of subsidiary .................. -- (1,696,000) -- Net proceeds from exercise of options and stock purchases ......... 517,000 468,000 566,000 Payments on debt ............. (3,795,000) (17,683,000) (11,734,000) Payment of preferred stock dividends ............. (362,000) (364,000) (273,000) Cancellation of Class A preferred stock ...................... -- (123,000) -- Purchase of treasury stock ...................... -- (464,000) (1,144,000) Net cash used in financing activities ........... (4,599,000) (6,210,000) (15,548,000) Net increase (decrease) in cash and cash equivalents .................... (1,439,000) 2,837,000 (4,475,000) Cash and cash equivalents at beginning of year .............. 9,044,000 6,207,000 10,682,000 Cash and cash equivalents at end of year .................... $ 7,605,000 $ 9,044,000 $ 6,207,000 See notes to consolidated financial statements. F8 RAMSAY HEALTH CARE, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. Summary of Significant Accounting Policies Basis of Presentation The consolidated financial statements include the accounts of Ramsay Health Care, Inc. and its majority-owned subsidiaries (the "Company"). All significant intercompany accounts and transactions have been eliminated in consolidation. Industry The Company is a provider of a full continuum of behavioral health services. It offers patient care through integrated networks of mental health delivery systems in eleven states, principally in the southeast and southwest, built around 15 inpatient hospitals with 1,369 licensed beds (including 77 medical subacute beds), outpatient centers and management contracts. Nine of the Company's facilities also provide less intensive residential treatment services. During fiscal years 1995 and 1994, the Company operated a managed mental health business through a subsidiary, the stock of which was distributed in the form of a dividend to the Company's stockholders in April 1995. See Note 2. Use of Estimates The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates. See Notes 4, 9 and 11. Reclassifications Certain amounts in the fiscal 1995 and 1994 financial statements have been reclassified to conform with the fiscal 1996 presentation. Cash Equivalents Cash equivalents include short-term, highly liquid interest-bearing investments consisting primarily of certificates of deposit, commercial paper, money market mutual funds and demand revenue bonds. Cash Held in Trust Cash held in trust is revocable by the Company under certain circumstances and includes cash and short-term investments set aside for the payment of losses in connection with the Company's self-insurance program for hospital professional and general liability claims. F9 RAMSAY HEALTH CARE, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued) Intangible Assets and Deferred Costs Cost in excess of net asset value of purchased businesses is amortized on a straight- line basis over 40 years. The carrying value of cost in excess of net asset value of purchased businesses is reviewed by Company management if the facts and circumstances suggest that it may be impaired. If this review indicates that these costs will not be recoverable, as determined based on the undiscounted cash flows of the entity over the remaining amortization period, the Company's carrying value of these costs is reduced by the estimated shortfall of cash flows. Preopening costs, principally salaries and other costs incurred prior to opening a new facility, program or business, are deferred and amortized on a straight-line basis over two years. Loan costs are deferred and amortized ratably over the life of the loan and are included in interest and other financing charges. When a loan or a portion thereof is prepaid, a proportionate amount of deferred loan costs associated with the borrowing is written off and reported as an extraordinary loss from early extinguishment of debt in the Company's statement of operations. Accumulated amortization of the Company's intangible assets and deferred costs as of June 30, 1996 and 1995 was $6,880,000 and $7,544,000, respectively. Property and Equipment Property and equipment are stated at cost, except for assets considered to be impaired pursuant to FASB Statement Number 121, which are stated at fair value of the assets as of the date the assets are determined to be impaired. Upon the sale or retirement of property and equipment, the cost and related accumulated depreciation are removed from the accounts and the resulting gain or loss is included in operations. Depreciation is computed substantially on the straight-line method for financial reporting purposes and on accelerated methods for income tax purposes. The general range of estimated useful lives for financial reporting purposes is twenty to forty years for buildings and five to twenty years for equipment. Medicare, Medicaid and Other Contracted Reimbursement Programs Net revenues include estimated reimbursable amounts from Medicare, Medicaid and other contracted reimbursement programs. Amounts received by the Company for treatment of patients covered by such programs, which may be based on the cost of services provided or predetermined rates, are generally less than the established billing rates of the Company's hospitals. Final determination of F10 RAMSAY HEALTH CARE, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued) amounts earned under contracted reimbursement programs is subject to review and audit by the appropriate agencies. Differences between amounts recorded as estimated settlements and the audited amounts are reflected as adjustments to net revenues in the period the final determination is made. See Note 11. Professional and General Liability Insurance The Company maintains a self-insurance program for its hospital professional and general liability insurance. The Company and its facilities are insured for professional and general liability in the aggregate amount of $25 million with self-insured retentions of $500,000 per claim and $1,500,000 aggregate per year. The Company records the liability for uninsured professional and general liability losses related to asserted and unasserted claims arising from reported and unreported incidents based on independent valuations which consider claim development factors, the specific nature of the facts and circumstances giving rise to each reported incident and the Company's history with respect to similar claims. The development factors are based on a blending of the Company's actual experience with industry standards. Income Taxes Income taxes are accounted for in accordance with Statement of Financial Accounting Standards (SFAS) No. 109. SFAS 109 requires recognition of deferred tax assets and liabilities for the expected future tax consequences of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. Minority Interests The equity of minority partners in subsidiaries is reported on the balance sheet as minority interests. Minority interests reflect changes for the respective share of income of the subsidiaries attributable to the minority partners, the effect of which is also reflected in the results of operations of the Company, and for distributions made to the minority partners. Earnings Per Share Primary earnings per share are calculated by dividing income before extraordinary items and net income by the weighted average number of common and dilutive common equivalent shares outstanding during each period. The Company's common stock equivalents include Class A convertible preferred stock (which was redeemed by the Company in June 1995), Class B convertible preferred stock, Series C and stock options and warrants to purchase Common Stock. Fully diluted earnings per share are calculated as if all conversions and exercises had occurred at the beginning of the year. F11 RAMSAY HEALTH CARE, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued) Stock Options The Company grants stock options for a fixed number of shares to employees with an exercise price equal to the fair value of the shares at the date of grant. The Company accounts for stock option grants in accordance with APB Opinion No. 25, Accounting for Stock Issued to Employees, and, accordingly, recognizes no compensation expense for the stock option grants. 2. Transactions with Affiliated Companies In October 1993, the Company, through its subsidiary Ramsay Managed Care, Inc. ("RMCI"), entered the managed mental health business through an acquisition of Florida Psychiatric Management, Inc. The managed care division expanded in June 1994 with the acquisition of a Phoenix, Arizona-based managed mental health business and, in fiscal 1995, through the award of contracts in Hawaii and West Virginia. On April 24, 1995, the Company distributed the stock of RMCI held by it to the holders of record on April 21, 1995 of the Company's Common and Preferred Stock. Subsequent to this distribution, which was recorded at net book value, RMCI ceased being a subsidiary of the Company. The distribution of RMCI reduced additional paid-in capital of the Company by $904,000. In addition, costs related to the distribution of RMCI, which included accounting, legal, printing, investment banking and distribution agent fees and expenses, were charged to the operations of RMCI (and not the Company) effective on the date of the distribution and costs related to a private placement and rights offering by RMCI were deducted from additional paid-in capital of RMCI (and not the Company) on the effective date of the distribution. RMCI is governed by a Board of Directors which is substantially the same as the Company's Board of Directors. At June 30, 1996, total net cash advances made by the Company to or on behalf of RMCI, including for purposes of partially funding acquisitions and for working capital and other corporate purposes, totalled $8,207,000. Of this amount, $6,000,000 is represented by an unsecured, interest-bearing (8%), subordinated promissory note due from RMCI and issued on October 25, 1994. The remaining amount, which is also unsecured, includes $360,000 of accrued interest on the promissory note since October 1, 1995 and $1,847,000 (of which approximately $1,600,000 was outstanding on the distribution date) of additional amounts paid by RHCI on behalf of RMCI or charges by RHCI to RMCI for certain administrative services. Of the $6,000,000 due on the promissory note, approximately $1,412,000 is due on or before June 30, 1997 and the remainder is payable in 13 quarterly installments of approximately $353,000, beginning September 30, 1997. RHCI has agreed that the payment of interest on the promissory note for the period October 1, 1995 through June 30, 1996, as well as the $1,847,000 of additional amounts owed, will not be required until after July 1, 1997, all on terms and conditions to be mutually agreed to by RHCI and RMCI. During fiscal 1996 and 1995, total income F12 RAMSAY HEALTH CARE, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued) recorded on amounts advanced to RMCI were approximately $600,000 and $110,000, respectively. On October 1, 1996, the Company and RMCI entered into an agreement and plan of merger providing for the acquisition of RMCI by the Company. Upon consummation of the merger, in exchange for all of the outstanding shares of common and preferred stock of RMCI, the Company will issue approximately 2,130,000 shares of Common Stock and 100,000 shares of Class B Preferred Stock, Series 1996, which will be convertible into 1,000,000 shares of Common Stock of the Company. In addition, following the merger, all amounts owed by RMCI to the Company will become an intercompany payable and receivable between RMCI and RHCI, respectively. The merger is subject to approval by the shareholders of each company, the receipt of lender, governmental and other consents and the declaration of effectiveness by the Securities and Exchange Commission of a registration statement to be filed by the Company. Subject to the satisfaction of these conditions, it is expected that the merger will be consummated in March, 1997. At June 30, 1996, Ramsay Holdings HSA Limited owns approximately 17.5% of the outstanding Common Stock of the Company and 50% of the outstanding Class B Preferred Stock, Series C of the Company. Paul Ramsay Holdings Pty. Limited ("Pty. Limited") owns approximately 3.4% of the outstanding Common Stock of the Company and the remaining 50% of the outstanding Class B Preferred Stock, Series C. In October 1995 and August 1996, Pty. Limited, a corporate affiliate of Paul J. Ramsay, the Chairman of the Board of the Company, acquired through private placements 275,863 shares and 275,546 shares, respectively, of Common Stock of the Company at a price of $3.625 and $2.75 per share, respectively. Of the total shares acquired in October 1995, 121,363 were issued for cash and 154,500 were issued for management fees due during the remainder of fiscal 1996 under the Company's management agreement with another corporate affiliate (the "Management Fee Affiliate") of Mr. Ramsay. The shares acquired in August 1996 were issued for management fees due under the management agreement during fiscal 1997. With the issuance of the additional shares, the voting interest in the Company held by Mr. Ramsay increased to approximately 34.8%. On September 10, 1996, the Company entered into a letter agreement with the Management Fee Affiliate and Pty. Limited which terminates the management agreement effective July 1, 1997. In consideration for this termination, the Company issued warrants to Pty. Limited to purchase 250,000 shares of Common Stock at an exercise price of $2.63 per share. These warrants are fully exercisable as of September 10, 1996 and expire on September 10, 2006. F13 RAMSAY HEALTH CARE, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued) During the years ended June 30, 1996, 1995 and 1994, pursuant to the management agreement, the Company incurred management fee expenses of $737,000, $716,000 and $698,000, respectively. 3. Impairment of Assets In the fourth quarter of fiscal 1995, the Company elected to adopt early the provisions of FASB Statement Number 121 (the "Statement"). The Statement requires that a new cost basis be established for impaired assets (within the meaning of the Statement) based on the fair value of the assets as of the date the assets are determined to be impaired, and that previously recorded accumulated depreciation related to the impaired assets be eliminated. As required by the Statement, the Company periodically reviews the long-lived assets (land, buildings, fixed equipment and related cost in excess of net asset value of purchased businesses) of each of its inpatient facilities to determine if the carrying value of these assets is recoverable, based on the future cash flows expected from the assets. Based on this review, the Company determined that the carrying value of certain long-lived assets was impaired (within the meaning of the Statement) at June 30, 1996 and 1995. The amount of the impairment, calculated as the excess of carrying value of the long-lived assets over the fair value of the assets (estimated using discounted future cash flows expected from the assets), totalled approximately $4,000,000 ($3,400,000 after tax) and $20,300,000 ($11,400,000 after tax) at June 30, 1996 and 1995, respectively. In accordance with the Statement, the facilities' carrying amount of cost in excess of net asset value of purchased businesses, totalling $3,800,000 in 1995 (zero in 1996), was written off prior to recording an impairment to the carrying amount of property and equipment. In 1996 and in 1995, the Company recorded additional asset impairment charges totalling approximately $1,500,000 related to its investments in other healthcare enterprises. The amount of the impairment charges was based on an assessment of the future expected cash flows to be realized by the Company from these enterprises. 4. Losses Related to Asset Sales and Closed Businesses Primarily in the fourth quarter of fiscal 1996, the Company recorded losses totalling approximately $4,500,000 related to additional asset write-downs, cost report settlements and other adjustments related to businesses which closed at various times prior to fiscal 1996, a reserve for disproportionate share payments which the State of Louisiana has contended were improperly paid to two of the Company's Louisiana facilities in fiscal 1995 and 1994, and lease commitments and other costs incurred in connection with the Company's decision to relocate its corporate headquarters. F14 RAMSAY HEALTH CARE, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued) During fiscal 1996, the State of Louisiana requested repayment of disproportionate share payments received by two of the Company's Louisiana facilities in fiscal years 1995 and 1994 totalling approximately $5,000,000. The repayment requests related to a) alleged overpayments made to Three Rivers Hospital because the State believed Three Rivers' actual annual inpatient volume was less than its projection of annual inpatient volume made at the beginning of its 1994 cost reporting year and b) alleged improper teaching hospital payments made to Three Rivers Hospital and Bayou Oaks Hospital because the State believed these facilities were not qualifying teaching hospitals at the time these payments were made. The Company believes that certain of the calculations which support the State's calculation of annual inpatient volume in 1994 are in error and that other relevant factors affecting the State's calculation have not been considered. Further, the Company believes that, based on its understanding of the rules and regulations in place at the time the teaching hospital payments were made, payments received as a result of the teaching classification were appropriate. On the basis of discussions to date between the Company and the State, the Company believes that this matter may be settled for an amount significantly less than the State's initial requests. Any settlement of this matter will be contingent upon the execution of settlement documentation, the terms of which have not been agreed upon. Further, there can be no assurance that the Company and the State will agree on a settlement amount or the terms and conditions of settlement documentation. The Company intends to vigorously contest any position by the State of Louisiana which the Company considers adverse and believes that adequate provision has been made at June 30, 1996 for the estimated amount which might be recovered from the Company as a result of this matter. During the third quarter of fiscal 1995, the Company recorded a $3,600,000 loss in connection with the sale and leaseback of two inpatient facilities and a $400,000 loss in connection with the sale of real estate. In addition, the Company closed certain outpatient operations during fiscal 1995, incurred additional losses in 1995 on outpatient operations closed in fiscal 1994, and closed Three Rivers Hospital on June 30, 1995. Losses recorded in 1995 as a result of these closures totalled approximately $1,500,000. During the fourth quarter of fiscal 1994, the Company terminated its plan to develop additional outpatient treatment centers and closed or made the decision to close certain of these centers already in operation. The losses associated with these actions, which totalled approximately $1.3 million, were offset by a $500,000 gain recognized on the sale of the Company's Atlantic Shores Hospital facility. F15 RAMSAY HEALTH CARE, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued) 5. Long-Term Debt The Company's long-term debt is as follows: June 30 1996 1995 11.6% senior secured notes due in semi-annual installments through March 31, 2000 ................... $ 34,169,000 $ 34,169,000 Variable rate revenue bonds through 2015 .............. 19,400,000 20,200,000 15.6% subordinated secured notes due in semi-annual installments through March 31, 2000 .................. 1,846,000 2,308,000 Capital lease obligation .......... -- 919,000 Working capital facility .......... -- 1,500,000 Other ............................. 189,000 303,000 55,604,000 59,399,000 Less amounts due within one year ......................... 10,940,000 3,831,000 $ 44,664,000 $ 55,568,000 The aggregate scheduled maturities of long-term debt during the five years subsequent to June 30, 1996 are as follows: 1997 -- $10,940,000; 1998 -- $8,260,000; 1999 -- $10,343,000; 2000 -- $12,462,000; and 2001 -- $800,000. The Company has pledged substantially all of its real property as collateral on the Company's long-term debt. In 1984 and 1985, the Company entered into loan agreements with various state and local governmental agencies for the purpose of financing or providing reimbursement for the construction costs of certain of the Company's psychiatric hospitals. Each state governmental agency funded its loan with proceeds of tax-exempt variable rate demand revenue bonds in the same amount as its loan. These loans, which generally have a term of 30 years, have an outstanding balance at June 30, 1996 of $19,400,000. The interest rates on the loans are the same as the applicable revenue bonds and ranged from 3.4% to 6.6% at June 30, 1996. The Company is required to maintain an irrevocable standby letter of credit for each bond in an amount equal to the total principal payments due under the bond, plus approximately one quarter's interest. Such letters of credit are provided in a credit facility with a group of banks finalized in May 1993 (the "1993 Credit Facility"). The 1993 Credit Facility originally included approximately $27,500,000 in letters of credit and $4,000,000 in a working capital facility. Due to principal payments and the redemption of the variable rate revenue bonds associated with the sale of a facility in 1994, the letters of credit outstanding at June 30, 1996 totalled $20,300,000. In addition, the Company fully paid down and terminated its working capital facility with its bank group in December 1995. F16 RAMSAY HEALTH CARE, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued) In September 1995, and again in August 1996, the Company and banks supporting the 1993 Credit Facility agreed to terms which extended its expiration date from May 15, 1996 to February 15, 1997 and from February 15, 1997 to August 15, 1997, respectively. In connection with the initial extension, the Company agreed to reduce the bank group's exposure under the 1993 Credit Facility by an additional $3 million on or before July 1, 1996. This requirement was extended by the bank group to December 31, 1996 as part of the August 1996 extension. On April 30, 1990, the Company entered into credit facilities (the "1990 Credit Facilities") with a group of insurance companies and banks. The 1990 Credit Facilities included $56,500,000 in senior secured notes and $3,000,000 in subordinated secured notes. The senior secured notes bear interest at 11.6% and require a principal payment of $3,093,250 on September 30, 1996, semi-annual principal payments of $3,531,250 from March 31, 1997 through September 30, 1998 and semi-annual principal payments of $5,650,000 from March 31, 1999 through March 31, 2000. The subordinated secured notes bear interest at 15.6% and are due in semi-annual installments of $230,769 that began on March 31, 1994 and end on March 31, 2000. In connection with a $7,500,000 prepayment of principal on the senior secured notes in May 1995, the Company wrote down a proportionate amount of unamortized loan costs related to the senior secured notes, totalling $229,000, and incurred a yield maintenance charge from the holders of the senior secured notes, totalling $234,000. These amounts, net of an applicable income tax benefit of $206,000, are reported as a loss from early extinguishment of debt in the 1995 statement of operations. Under the 1993 and 1990 Credit Facilities, the Company is required to meet certain covenants, including: (1) the maintenance of a minimum level of consolidated tangible net worth; (2) the maintenance of a working capital ratio; and (3) the maintenance of certain fixed charge coverage and debt service ratios. From time to time, the lenders under the 1993 and 1990 Credit Facilities have agreed to waive or otherwise adjust certain of these ratios and levels. In connection with these waivers and adjustments, the Company pays additional fees and expenses. Further, as part of the waivers and adjustments obtained as of June 30, 1996, the Company agreed to provide its Hillcrest Hospital facility and related assets as additional collateral to the lenders and agreed not to pay future cash dividends in respect of its Class B Preferred Stock, Series C. 6. Operating Leases In April 1995, the Company sold and leased back the land, buildings and fixed equipment of two of its inpatient facilities. The leases have a primary term of 15 years (with three successive renewal options of 5 years each) and currently require aggregate annual minimum rentals of $1.58 million, payable monthly. Effective April 1 of each year, the lease payments are subject to any upward adjustment (not to exceed 3% annually) in the consumer price index over the preceding twelve months. Effective April 1995, the Company agreed to lease an 80-bed facility near Salt Lake City, Utah for four years, with an option to renew for an additional three years. The lease requires annual base rental payments of $456,000, payable monthly, and percentage rental payments equal to 2% of the net revenues of the facility, payable quarterly. The Company leases office space for various other purposes over terms ranging from one to five years. Rent expense related to noncancellable operating leases amounted to F17 RAMSAY HEALTH CARE, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued) $3,269,000, $2,718,000 and $2,052,000 for the years ended June 30, 1996, 1995 and 1994, respectively. Future minimum lease payments required under noncancellable operating leases as of June 30, 1996 are as follows: 1997--$2,993,000; 1998--$2,699,000; 1999--$2,464,000; 2000-- $1,783,000; 2001--$1,770,000; and thereafter--$14,520,000. 7. Stockholders' Equity The Certificate of Incorporation of the Company, as amended, authorizes the issuance of 20,000,000 shares of Common Stock, $.01 par value, 800,000 shares of Class A Preferred Stock, $1.00 par value, and 1,000,000 shares of Class B Preferred Stock, $1.00 par value, of which 333,333 shares have been designated as Class B Preferred Stock, Series 1987, $1.00 par value, and 152,321 shares have been designated as Class B Preferred Stock, Series C, $1.00 par value ("Series C Preferred Stock"). Outstanding capital stock at June 30, 1996 included 8,605,108 shares of Common Stock, of which 581,550 shares are held in treasury, and 142,486 shares of Series C Preferred Stock. The shares of Series C Preferred Stock were issued in June 1993 in connection with a recapitalization of the interests of Paul J. Ramsay, the Company's chairman. The shares are entitled to cumulative dividends at a rate of 5% per annum, payable quarterly in arrears, and to a liquidation preference of $50.84 per share under certain circumstances. The shares are convertible into that number of fully paid and nonassessable shares of Common Stock that results from dividing the conversion price in effect at conversion into $50.84 and multiplying the quotient obtained by the number of shares of Series C Preferred Stock being converted. The current conversion price is $5.084 per share. Each share of Series C Preferred Stock is entitled to ten (10) votes on all matters put to a vote of the shareholders of the Company and otherwise has voting rights and powers equal to the voting rights and powers of the Common Stock. The Board of Directors has adopted a Stockholders Rights Plan, under which the Company distributed a dividend of one common share purchase right for each outstanding share of the Company's Common Stock (calculated as if all outstanding shares of Series C Preferred Stock were converted into shares of Common Stock). Each right becomes exercisable upon the occurrence of certain events for a number of shares of the Company's Common Stock having a market price totalling $24 (subject to certain anti-dilution adjustments which may occur in the future). The rights currently are not exercisable and will be exercisable only if a new person acquires 20% or more of the Company's Common Stock or announces a tender offer resulting in ownership of 20% or more of the Company's Common Stock. The rights, which expire on August 14, 2005, are redeemable in whole or in part at the Company's option at any time before a 20% or greater position has been acquired, for a price of $.01 per right. F18 RAMSAY HEALTH CARE, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued) The Company's credit documents governing its credit facilities include provisions which prohibit the payment of dividends unless the sum of (i) all dividends, redemptions and all other distributions in respect of its capital stock and (ii) all restricted investments (as defined) during the applicable fiscal year would not exceed an amount equal to 50% of the consolidated net income of the Company for the immediately preceding fiscal year and provided that, at the time of such dividend and after giving effect thereto, certain specified financial ratio covenants would not be violated and no other default or event of default would occur. Further, in connection with waivers received from the Company's lenders under the 1993 and 1990 Credit Facilities as of June 30, 1996, the Company agreed not to pay future cash dividends in respect of its Series C Preferred Stock. Prior to this time, the Company's credit facilities permitted the payment of regular fixed dividends on the Series C Preferred Stock, provided that such dividends did not exceed $387,200 in each 12-month period and provided that no event of default existed or occurred as a result of such payment. 8. Options and Warrants The Company's stock option plans provide for options to various key employees and non-employee directors to purchase shares of Common Stock at no less than the fair market value of the stock on the date of grant. Options granted become exercisable in varying increments including (a) 100% one year after the date of grant, (b) 50% each year beginning one year after the date of grant and (c) 33% each year beginning on the date of grant. Options issued to employees and directors are subject to anti-dilution adjustments and generally expire the earlier of 10 years after the date of grant or 60 days after the employee's termination date or the director's resignation date. At June 30, 1996, the weighted average remaining life of all outstanding options was seven years. During 1996, in connection with a repricing opportunity authorized by the Company's Board of Directors on November 10, 1995, approximately 1,500,000 of options were voluntarily repriced by the optionholders. Under the repricing opportunity, the exercise prices of the holders' outstanding options were reduced to $2.50 per share, the closing price for the Common Stock on the NASDAQ National Market System on November 10, 1995. The repriced options are not exercisable until the closing price for the Common Stock, as quoted on the NASDAQ National Market System, equals or exceeds $7.00 per share for at least 15 trading days, which need not be consecutive, subsequent to November 10, 1995. The closing price for the Company's Common Stock has not exceeded $7.00 per share since November 10, 1995 and, therefore, none of the repriced options were exercisable at June 30, 1996. F19 RAMSAY HEALTH CARE, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued) At June 30, 1996, there were no shares available for grant under the 1990 Stock Option Plan and 79,057, 64,802 and 178,142 shares available for grant under the 1991, 1993 and 1995 Stock Option Plans, respectively. The table below summarizes the activity in the plans in fiscal years 1996, 1995 and 1994. 1990 Plan 1991 Plan Number Price Range Number Price Range of Options Per Share of Options Per Share Outstanding, July 1, 1993 ......... 332,001 $5.00 1,061,501 $5.00-$6.25 Granted .............. -- -- 173,000 $6.88-$7.88 Canceled ............. -- -- (33,991) $5.00-$7.88 Exercised ............ (38,332) $5.00 (74,502) $5.00-$5.31 Outstanding, June 30, 1994 ....... 293,669 $5.00 1,126,008 $5.00-$7.88 Granted .............. -- -- -- -- Canceled ............. (52,013) $4.01 (66,885) $4.25-$7.88 Exercised ............ (31,999) $5.00 (42,167) $5.00-$5.31 Effect of Distribution of Subsidiary ....... 64,972 266,924 Outstanding, June 30, 1995 ....... 274,629 $4.01-$5.00 1,283,880 $3.75-$6.31 Granted .............. -- -- Canceled/expired (110,885) $4.01 (39,736) $4.01-$6.31 Exercised ............ -- -- Outstanding, June 30, 1996 ....... 163,744 $2.50-$4.01 1,244,144 $2.50-$6.31 Exercisable, June 30, 1996 ....... 63,252 166,961 Exercisable, June 30, 1995 ....... 274,629 909,390 Exercisable, June 30, 1994 ....... 293,669 982,669 1993 Plan 1995 Plan Number Price Range Number Price Range of Options Per Share of Options Per Share Outstanding, July 1, 1993 ........ -- -- -- -- Granted .............. 271,500 $6.88-$7.88 -- -- Canceled ............. (15,505) $7.88 -- Exercised ............ -- -- -- -- Outstanding, June 30, 1994 ....... 255,995 $6.88-$7.88 -- -- Granted .............. 65,000 $3.75-$6.63 -- -- Canceled ............. (101,037) $5.51-$7.88 -- -- Exercised ............ -- -- -- -- Effect of Distribution of Subsidiary ....... 46,930 -- -- Outstanding, June 30, 1995 ....... 266,888 $3.75-$6.31 -- -- Granted .............. 108,750 $3.38 321,858 $2.50-$4.01 Canceled ............. (49,756) $2.50-$6.31 -- -- Exercised ............ (3,000) $3.38 -- -- Outstanding, June 30, 1996 ....... 322,882 $2.50-$6.31 321,858 $2.50-$4.01 Exercisable, June 30, 1996 ....... 67,774 4,161 Exercisable, June 30, 1995 ....... 210,669 -- Exercisable, June 30, 1994 ....... 9,999 N/A F20 RAMSAY HEALTH CARE, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued) On September 10, 1996, the Company entered into an Exchange Agreement with a corporate affiliate of Paul J. Ramsay whereby Mr. Ramsay exchanged 476,070 options with an exercise price of $2.50 per share (pursuant to the repricing opportunity discussed above), for warrants to purchase an aggregate of 500,000 shares for Common Stock at $2.75 per share. The warrants, which expire in June 2003, are not exercisable until the closing price for the Common Stock, as quoted on the NASDAQ National Market System, equals or exceeds $7.00 per share for at least 15 trading days, which need not be consecutive, subsequent to September 10, 1996. Most of the options exchanged were originally granted under the 1991 Plan. As part of the 1990 Credit Facilities, the Company issued warrants to Aetna Life Insurance Company and Monumental Life Insurance Company to purchase an aggregate of 113,301 shares of the Company's Common Stock at $9.61 per share. As a result of anti-dilution adjustments, at June 30, 1996, the purchase price is $6.43 per share and a total of 139,597 warrants are outstanding. These warrants are exercisable on or before March 31, 2000. 9. Income Taxes Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. Significant components of the Company's deferred tax liabilities and assets are as follows: June 30 1996 1995 Deferred tax liabilities: Book basis of fixed assets over tax basis ....... $ 2,710,000 $ 4,023,000 Change in tax accounting methods ................ -- 685,000 Economic performance ............................ 237,000 316,000 Total deferred tax liabilities ............... 2,947,000 5,024,000 Deferred tax assets: Allowance for doubtful accounts ................. 1,211,000 609,000 General and professional liability insurance .... 899,000 635,000 Accrued employee benefits ....................... 374,000 417,000 Investment in nonconsolidated subsidiaries ...... 1,644,000 1,401,000 Impairment of investment ........................ 677,000 568,000 Other accrued liabilities ....................... 2,280,000 -- Other ........................................... 1,307,000 356,000 Net operating loss carryovers ................... 8,962,000 8,146,000 Alternative minimum tax credit carryovers ....... 1,544,000 1,544,000 Total deferred tax assets .................... 18,898,000 13,676,000 Valuation allowance for deferred tax assets ..... (4,412,000) -- Deferred tax assets, net of valuation allowance 14,486,000 13,676,000 Net deferred tax assets ...................... $11,539,000 $ 8,652,000 F21 RAMSAY HEALTH CARE, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued) The provision (benefit) for income taxes consists of the following: Year Ended June 30 1996 1995 1994 Income taxes currently payable: Federal .......... $ -- $ -- $ 810,000 State ............ -- 183,000 874,000 Deferred income taxes: Federal .......... (2,577,000) (12,154,000) (1,196,000) State ............ (310,000) (1,430,000) 8,000 $ (2,887,000) $(13,401,000) $ 496,000 The provision (benefit) for income taxes is reported in the consolidated statements of operations as follows: Year Ended June 30 1996 1995 1994 Provision (benefit) for income taxes...... $ (2,887,000) $(13,195,000) $ 599,000 Income tax benefit from loss on early extinguishment of debt................. -- (206,000) (103,000) $ (2,887,000) $(13,401,000) $ 496,000 The provision (benefit) for income taxes included in the consolidated statements of operations differs from the amounts computed by applying the statutory rate to income (loss) before income taxes, as follows: Year Ended June 30 1996 1995 1994 Income (loss) before income taxes,extraordinary items and cumulative effect of accounting change............ $(19,368,000) $(30,240,000) $ 2,076,000 Federal statutory income tax rate......... 34% 34% 34% (6,585,000) (10,282,000) 706,000 Benefit of net operating loss recognized --- (2,503,000) (921,000) Increase in valuation allowance 4,412,000 --- --- Write-off of cost in excess of net asset value of purchased businesses.......... --- 956,000 --- Income tax benefit from loss on early extinguishment of debt ................ --- (206,000) (103,000) State income taxes............. (310,000) (1,247,000) 882,000 Other.......................... (404,000) (119,000) (68,000) $ (2,887,000) $(13,401,000) $ 496,000 The Company has net deferred tax assets of $11,539,000 and $8,652,000 at June 30, 1996 and 1995, respectively. In evaluating the realizability of its deferred tax assets and the need for a valuation allowance, management has considered the effects of implementing tax planning strategies, consisting of the sales of certain appreciated property. The Company's valuation F22 RAMSAY HEALTH CARE, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued) allowance related to deferred tax assets was increased from zero at June 30, 1995 to $4,412,000 at June 30, 1996, based on increases in the Company's deferred tax assets which are not considered realizable given the estimated effects of management's tax planning strategies. At June 30, 1996, net operating loss carryovers of approximately $23,600,000 (of which $17,600,000 expires from 2000 to 2003, $3,800,000 expires in 2010 and $2,200,000 expires in 2011) and alternative minimum tax credit carryovers of approximately $1,500,000 are available to reduce future federal income taxes, subject to certain annual limitations. 10. Fair Values of Financial Instruments The following methods and assumptions were used by the Company in estimating the fair values of its financial instruments: Cash and cash equivalents and cash held in trust: The carrying amount reported in the balance sheet for cash and cash equivalents and cash held in trust approximates its fair value. Receivable from affiliated company: It was not practicable to estimate the fair value of the receivable from affiliated company as the borrowing rate of the affiliate was not determinable. Management believes this receivable is not impaired at June 30, 1996 and 1995. Debt: The fair value of the Company's senior secured and subordinated secured notes is estimated using discounted cash flow analyses, based on the Company's estimated current incremental borrowing rate for similar types of borrowing arrangements. The carrying amounts of all other debt instruments approximate estimated fair value. The carrying amounts and estimated fair values of the Company's financial instruments at June 30, 1996 and 1995 are as follows: 1996 1995 Carrying Fair Carrying Fair Amount Value Amount Value Cash and cash equivalents ........... $ 7,605,000 $ 7,605,000 $ 9,044,000 $ 9,044,000 Cash held in trust ..... 745,000 745,000 1,778,000 1,778,000 Receivable from affiliated company .... 8,207,000 (see above) 7,495,000 (see above) Debt: Senior and subordinated notes .............. 36,015,000 36,904,000 36,477,000 38,226,000 Other ............... 19,589,000 19,589,000 22,922,000 22,922,000 11. Reimbursement from Third-Party Contractual Agencies The Company records amounts due to or from third-party contractual agencies based on its best estimates of amounts to be ultimately received or paid under cost reports filed with the appropriate intermediaries. Final determination of amounts earned under contractual reimbursement programs is subject to review and audit by these intermediaries. Differences between amounts recorded as estimated settlements and the audited amounts are reflected as F23 RAMSAY HEALTH CARE, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued) adjustments to net revenues in the period the final determination is made. During the years ended June 30, 1995 and 1994, the Company recorded contractual reimbursement benefits of approximately $1,000,000 and $1,400,000, respectively, related to intermediary audits of prior year cost reports. During the year ended June 30, 1996 the Company recorded contractual adjustment expenses of approximately $1,900,000 related to intermediary audits of prior year cost reports. As a result of this negative experience, the Company recorded reserves in the fourth quarter of fiscal 1996 totalling $3,500,000 related to possible future adjustments of its cost report estimates by intermediaries. Management believes that adequate provision has been made for any adjustments that may result from future intermediary reviews and audits. During the fiscal year ended June 30, 1996, the Company derived approximately 70% of its net revenues from services provided to patients covered by various federal and state governmental programs. Management believes it is reasonably possible that the volume of patients or amount of reimbursement received under these programs could be curtailed, resulting in decreases in the Company's net revenues. 12. Savings Plan The Company has a 401(k) tax deferred savings plan, administered by an independent trustee, covering substantially all employees over age twenty-one meeting a one-year minimum service requirement. The plan was adopted for the purpose of supplementing employees' retirement, death and disability benefits. The Company may, at its option, contribute to the plan through an Employer Matching Account, but is under no obligation to do so. An employee becomes vested in his Employer Matching Account over a four-year period. The Company did not contribute to the plan in 1996 and 1995. In 1994, the Company contributed $160,000 to the plan. 13. Litigation The Company is subject to claims and suits arising in the ordinary course of business. In the opinion of management, the ultimate resolution of such pending legal proceedings will not have a material adverse effect on the Company's financial position, results of operations or liquidity. See Note 4. 14. Allowance for Doubtful Accounts Activity in the Company's allowance for doubtful accounts consists of the following: Year Ended June 30 1996 1995 1994 Balance at beginning of year....... $ 3,886,000 $ 3,925,000 $ 4,955,000 Provision for doubtful accounts ... 5,805,000 5,086,000 5,846,000 Write-offs of uncollectible patient accounts receivable...... (5,118,000) (5,125,000) (6,876,000) Balance at end of year............. $ 4,573,000 $ 3,886,000 $ 3,925,000 F24 RAMSAY HEALTH CARE, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued) 15. Supplemental Cash Flow Information The Company's non-cash investing and financing activities and cash payments for interest and income taxes were as follows: Year Ended June 30 1996 1995 1994 Distribution of subsidiary to stockholders ...................... $ -- $ 904,000 $ -- Receivable from subsidiary distributed to stockholders ...................... -- 7,600,000 -- Issuance of debt in connection with acquisitions ................. -- -- 3,500,000 Issuance of stock in lieu of cash payment for management and director fees ................. 600,000 -- -- Cash paid during the year for: Interest (net of amount capitalized) ...................... $ 5,260,000 $ 6,518,000 $8,064,000 Income taxes ......................... 249,000 1,231,000 398,000 F25 RAMSAY HEALTH CARE, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued) 16. Quarterly Results of Operations and Other Supplemental Information (Unaudited) Following is a summary of the Company's quarterly results of operations for the years ended June 30, 1996 and 1995. Quarter Ended September 30 December 31 March 31(2) June 30(3) 1996 Net revenues .... $ 29,129,000 $ 31,815,000 $ 31,888,000 $ 24,591,000 Income (loss) before income taxes .......... (631,000) 1,336,000 1,040,000 (21,113,000) Net income (loss) ......... (391,000) 835,000 638,000 (17,563,000) Income (loss) per common and dilutive common equivalent share(1) Primary: Income (loss) per common share ........ $(0.06) $0.09 $0.07 $(2.23) Fully diluted: Income (loss) per common share ........ $(0.06) $0.09 $0.07 $(2.23) 1995 Net revenues .... $ 35,823,000 $ 35,634,000 $ 33,547,000 $ 31,414,000 Income (loss) before income taxes and extraordinary items ......... 939,000 613,000 (5,315,000) (26,477,000) Income (loss) before extraordinary items ......... 588,000 437,000 (3,960,000) (14,110,000) Net income (loss) ........ 588,000 437,000 (4,321,000) (14,006,000) Income (loss) per common and dilutive common equivalent share(1) Primary: Before extraordinary items ........ $0.06 $0.05 $(0.52) $(1.83) Extraordinary items ....... -- -- (0.05) 0.01 Income (loss) per common share ....... $0.06 $0.05 $(0.57) $(1.82) Fully diluted: Before extraordinary items ....... $0.06 $0.05 $(0.52) $(1.83) Extraordinary items ....... -- -- (0.05) 0.01 Income (loss) per common share ...... $0.06 $0.05 $(0.57) $(1.82) (1) The quarterly earnings per share amounts may not equal the annual amounts due to changes in the average common and dilutive common equivalent shares outstanding during the year. (2) As further described in Note 4, during the third quarter of fiscal 1995, the Company recorded losses totalling $4.0 million ($2.9 million after estimated income tax benefit) related to a sale/leaseback transaction and the sale of real estate. (3) As further described in Note 3, in the fourth quarter of fiscal 1996 and 1995, the Company recorded asset impairment charges primarily related to the application of the principles of FASB Statement No. 121 of $5.5 million ($4.7 million after estimated income tax benefit) and $21.8 million ($12.3 million after estimated income tax benefit), respectively. As further described in Notes 4 and 11, in the fourth quarter of fiscal 1996, the Company recorded losses related to asset sales and closed businesses of approximately $4.5 million ($3.8 million after estimated income tax benefit) and contractual adjustment expenses related to cost report settlements/reserves of approximately $7 million ($6 million after estimated income tax benefit). Also, the Company recorded additional asset write- downs/reserves of approximately $2.9 million ($2.4 million after estimated income tax benefit) in the fourth quarter of fiscal 1996. F26 INDEX OF EXHIBITS Page Number 2.1 Recapitalization Agreement dated as of June 30, 1993 by and among the Company, Ramsay Holdings HSA Limited and Paul Ramsay Holdings Pty. Limited (incorporated by reference to Exhibit 2.2 to the Company's Annual Report on Form 10-K for the year ended June 30, 1994) ......................... -- 2.2 Agreement of sale and purchase dated April 12, 1995 by and between Mesa Psychiatric Hospital, Inc. and Capstone Capital Corporation (incorporated by reference to Exhibit 2.7 to the Company's Annual Report on Form 10-K for the year ended June 30, 1995). Pursuant to Reg. S-K, Item 601(b)(2), the Company agrees to furnish a copy of the Schedules and Exhibits to such Agreement to the Commission upon request .............................................. -- 2.3 Agreement of sale and purchase dated April 12, 1995 by and between RHCI San Antonio, Inc. and Capstone Capital Corporation (incorporated by reference to Exhibit 2.8 to the Company's Annual Report on Form 10-K for the year ended June 30, 1995). Pursuant to Reg. S-K, Item 601(b)(2), the Company agrees to furnish a copy of the Schedules and Exhibits to such Agreement to the Commission upon request . -- 2.4 Agreement and Plan of Merger dated as of October 1, 1996 among Ramsay Managed Care, Inc., the Company and RHCI Acquisition Corp. (incorporated by reference to Exhibit 2 to the Company's Current Report on Form 8-K dated October 2, 1996). Pursuant to Reg. S-K, Item 601(b)(2), the Company agrees to furnish a copy of the Disclosure Schedules to such Agreement to the Commission upon request -- 3.1 Restated Certificate of Incorporation of the Company, as amended (incorporated by reference to Exhibit 3.1 to the Company's Annual Report on Form 10-K for the year ended June 30, 1990)............................................. -- 3.2 Certificate of Amendment of Restated Certificate of Incorporation of the Company filed on April 17, 1991 (incorporated by reference to Exhibit 3.2 to the Company's Registration Statement on Form S-2, Registration No. 33-40762) ................................ -- 3.3 Certificate of Correction to Certificate of Amendment of Restated Certificate of Incorporation of the Company filed on April 18, 1991 (incorporated by reference to Exhibit 3.3 to the Company's Registration Statement on Form Registration No. 33-40762) ........................... -- 3.4 By-Laws of the Company, as amended to date (incorporated by reference to Exhibit 3.4 to the Company's Annual Report on Form 10-K for the year ended June 30, 1994) ..... -- 3.5 Certificate of Designation of Preferred Stock of the Company filed on June 27, 1991 (incorporated by reference to Exhibit 3.5 to the Company's Registration Statement on Form S-2, Registration No. 33-40762) ................... -- 3.6 Certificate of Designation of Preferred Stock of the Company filed on July 9, 1991 (incorporated by reference to Exhibit 3.6 to the Company's Registration Statement on Form S-2, Registration No. 33-40762) ................... -- 3.7 Certificate of Designation of Preferred Stock of the Company filed on June 29, 1993(incorporated by reference to Exhibit 3.7 to the Company's Annual Report on Form 10-K for the year ended June 30, 1994) ......................... -- E-1 Page Number 4.1 Trust Indenture dated as of March 31, 1990, between the Company, Bountiful Psychiatric Hospital, Inc., Cumberland Mental Health, Inc., East Carolina Psychiatric Services Corporation, Havenwyck Hospital, Inc., Mesa Psychiatric Hospital, Inc., Psychiatric Institute of West Virginia, Inc., and The Citizens and Southern National Bank and Susan L. Adams (incorporated by reference to Exhibit 4.1 to the Company's Annual Report on Form 10-K for the year ended June 30, 1990) -- 4.2 First Supplemental Trust Indenture dated as of June 15, 1991 between the Company, Bountiful Psychiatric Hospital, Inc., Cumberland Mental Health, Inc., East Carolina Psychiatric Services Corporation, Havenwyck Hospital, Inc., Mesa Psychiatric Hospital, Inc. and Psychiatric Hospital of West Virginia, Inc. and The Citizens and Southern National Bank, a national banking association, and an individual trustee, as Trustees (incorporated by reference to Exhibit 4.4 to the Company's Registration Statement on Form S-2, Registration No.33-40762) ................................. -- 4.3 Second Supplemental Trust Indenture dated as of May 15, 1993 between the Company, Bountiful Psychiatric Hospital, Inc., Cumberland Mental Health, Inc., East Carolina Psychiatric Services Corporation, Havenwyck Hospital, Inc., Mesa Psychiatric Hospital,Inc. and Psychiatric Hospital of West Virginia, Inc. and NationsBank of Georgia, National Association and Susan L. Adams (incorporated by reference to Exhibit 4.3 to the Company's Annual Report on Form 10-K for the year ended June 30, 1994) ......................... -- 4.4 Third Supplemental Trust Indenture dated as of April 12, 1995 between the Company, Bountiful Psychiatric Hospital, Inc., Cumberland Mental Health, Inc., East Carolina Psychiatric Services Corporation, Havenwyck Hospital, Inc., Mesa Psychiatric Hospital, Inc. and Psychiatric Hospital of West Virginia, Inc., and NationsBank of Georgia, National Association and Elizabeth Talley, as Trustee ..... 4.5 Fourth Supplemental Trust Indenture dated as of September 15, 1995 between the Company, Bountiful Psychiatric Hospital, Inc., Cumberland Mental Health, Inc., East Carolina Psychiatric Services, Havenwyck Hospital, Inc., Mesa Psychiatric Hospital, Inc. and Psychiatric Institute of West Virginia, Inc. and NationsBank of Georgia, National Association and Elizabeth Talley, as Trustee (incorporated by reference to Exhibit 10.100 to the Company's Quarterly Report on Form 10-Q for the quarter ended September 30, 1995) ................................. -- 4.6 Subsidiary Borrower Note of Atlantic Treatment Center, Inc. dated May 21, 1993 in the principal amount of $4,607,945 payable to the order of Societe Generale, New York Branch (incorporated by reference to Exhibit 4.5 to the Company's Annual Report on Form 10-K for the year ended June 30, 1994) -- 4.7 Subsidiary Borrower Note of Carolina Treatment Center, Inc. dated May 21, 1993 in the principal amount of $5,030,000 payable to the order of Societe Generale, New York Branch (substantially identical to Exhibit 4.6) ................. -- 4.8 Subsidiary Borrower Note of Greenbrier Hospital, Inc. dated May 21, 1993 in the principal amount of $5,973,125 payable to the order of Societe Generale, New York Branch (substantially identical to Exhibit 4.6) .................. -- 4.9 Subsidiary Borrower Note of Gulf Coast Treatment Center, Inc. dated May 21, 1993 in the principal amount of $4,392,500 payable to the order of Societe Generale, New York Branch (substantially identical to Exhibit 4.6) .. -- E-2 Page Number 4.10 Subsidiary Borrower Note of Houma Psychiatric Hospital, Inc. dated May 21, 1993 in the principal amount of $3,979,589 payable to the order of Societe Generale, New York Branch (substantially identical to Exhibit 4.6) .................. -- 4.11 Subsidiary Borrower Note of HSA of Oklahoma, Inc. dated May 21, 1993 in the principal amount of $3,445,562 payable to the order of Societe Generale, New York Branch (substantially identical to Exhibit 4.6) ................... -- 10.1 Note Purchase Agreement dated as of March 31, 1990, among the Company, Bountiful Psychiatric Hospital, Inc., Cumberland Mental Health, Inc., East Carolina Psychiatric Services Corporation, Havenwyck Hospital, Inc., Mesa Psychiatric Hospital, Inc., Psychiatric Institute of West Virginia, Inc., and Aetna Life Insurance Company regarding the purchase by Aetna Life Insurance Company of $26,000,000 principal amount of 11.6% Senior Secured $1,000,000 principal amount of 15.6% Subordinated Secured Notes, and Warrants to Purchase Common Stock of the Company (incorporated by reference to Exhibit 10.2 to the Company's Annual Report on Form 10-K for the year ended June 30, 1990) -- 10.2 Note Purchase Agreement pursuant to which Monumental Life Insurance Company purchased $15,500,000 principal amount of 11.6% Senior Secured Notes, $2,000,000 principal amount of 15.6% Subordinated Secured Notes, and Warrants to Purchase Common Stock of the Company (substantially identical to Exhibit 10.1) .......................................... -- 10.3 Note Purchase Agreement pursuant to which Connecticut Mutual Life Insurance Company purchased $15,000,000 principal amount of 11.6% Senior Secured Notes(substantially identical to Exhibit 10.1) ................................ -- 10.4 Pledge and Security Agreement between Bountiful Psychiatric Hospital, Inc. and The Citizens and Southern National Bank 10.5 Pledge and Security Agreement dated as of March 31, 1990, between the Company and The Citizens and Southern National Bank (substantially identical to Exhibit 10.4) ........... -- 10.6 Pledge and Security Agreement between Michigan Psychiatric Services, Inc. and The Citizens and Southern National Bank (substantially identical to Exhibit 10.4) ............. -- 10.7 Pledge and Security Agreement between Americare of Galax, Inc. and The Citizens and Southern National Bank (substantially identical to Exhibit 10.4) ............... -- 10.8 Deed of Trust, Security Agreement, and Financing Statement dated as of March 31, 1990 from Bountiful Psychiatric Hospital, Inc. to Merrill Title Company for the benefit of The Citizens and Southern National Bank and Susan L. Adams covering certain property in Woods Cross, Utah (incorporated by reference to Exhibit 10.10 to the Company's Annual Report on Form 10-K for the year ended June 30, 1990) -- 10.9 Deed of Trust and Security Agreement from Cumberland Mental Health, Inc. to First American Title Insurance Company for the benefit of The Citizens and Southern National Bank and Susan L. Adams covering certain property in Fayetteville, North Carolina (substantially identical to Exhibit 10.8) ................................ -- 10.10 Deed of Trust and Security Agreement from East Carolina Psychiatric Services Corporation to First American Title Insurance Company for the benefit of The Citizens and Southern National Bank and Susan L. Adams covering certain property in Jacksonville, North Carolina (substantially identical to Exhibit 10.8) ................................ -- E-3 Page Number 10.11 Mortgage and Security Agreement dated as of March 31, 1990 from Havenwyck Hospital, Inc. to The Citizens and Southern National Bank and Susan L. Adams covering certain property in Auburn Hills, Michigan (incorporated by reference to Exhibit 10.12 to the Company's Annual Report on Form 10-K for the year ended June 30, 1990) .......................... -- 10.12 Leasehold Deed of Trust, Assignment of Rents and Security Agreement with Financing Statement dated as of March 31, 1990 from Mesa Psychiatric Hospital, Inc. to Transamerica Title Insurance Company for the benefit of The Citizens and Southern National Bank and Susan L. Adams covering certain property in Mesa, Arizona (incorporated by reference to Exhibit 10.13 to the Company's Annual Report on Form 10-K for the year ended June 30, 1990) ............................. -- 10.13 Leasehold Deed of Trust and Security Agreement from Psychiatric Institute of West Virginia, Inc. to J. Nicholas Barth, Esq., for the benefit of The Citizens and Southern National Bank and Susan L. Adams covering certain property in Morgantown, West Virginia (substantially identical to Exhibit 10.12) ............................................ -- 10.14 Obligor Subrogation and Contribution Agreement dated as of April 30, 1990 among The Citizens and Southern National Bank, Susan L. Adams, the Company, Bountiful Psychiatric Hospital, Inc., Cumberland Mental Health, Inc., East Carolina Psychiatric Services Corporation, Havenwyck Hospital, Inc., Mesa Psychiatric Hospital, Inc., and Psychiatric Institute of West Virginia, Inc. (incorporated by reference to Exhibit 10.15 to the Company's Annual Report on Form 10-K for the year ended June 30, 1990) ............ -- 10.15 Credit Agreement dated as of May 15, 1993 among the Company and certain of its subsidiaries named therein, Societe Generale, New York Branch, First Union National Bank of North Carolina and Hibernia National Bank, as lenders, and Societe Generale, as issuing bank and agent (incorporated by reference to Exhibit 10.16 to the Company's Annual Report on Form 10-K for the year ended June 30, 1994) -- 10.16 Security Agreement dated as of May 15, 1993 by Atlantic Treatment Center, Inc. in favor of Societe Generale, as agent for the lenders which are parties to that certain Credit Agreement described in Exhibit 10.15 above, and covering certain property in Daytona Beach, Florida (incorporated by reference to Exhibit 10.17 to the Company's Annual Report on Form 10-K for the year ended June 30, 1994) -- 10.17 Security Agreement dated as of May 15, 1993 by Carolina Treatment Center, Inc. in favor of Societe Generale, as agent for the lenders which are parties to that certain Credit Agreement described in Exhibit 10.15 above (substantially identical to Exhibit 10.16) ................ -- 10.18 Security Agreement dated as of May 15, 1993 by Great Plains Hospital, Inc. in favor of Societe Generale, as agent for the lenders which are parties to that certain Credit Agreement described in Exhibit 10.15 above (substantially identical to Exhibit 10.16) ............................... -- 10.19 Security Agreement dated as of May 15, 1993 by Greenbrier Hospital, Inc. in favor of Societe Generale, as agent for the lenders which are parties to that certain Credit Agreement described in Exhibit 10.15 above (substantially identical to Exhibit 10.16) ............................... -- 10.20 Security Agreement dated as of May 15, 1993 by Gulf Coast Treatment Center, Inc. in favor of Societe Generale, as agent for the lenders which are parties to that certain Credit Agreement described in Exhibit 10.15 above (substantially identical to Exhibit 10.16) ................ -- E-4 Page Number 10.21 Security Agreement dated as of May 15, 1993 by Houma Psychiatric Hospital, Inc. in favor of Societe Generale, as agent for the lenders which are parties to that certain Credit Agreement described in Exhibit 10.15 above (substantially identical to Exhibit 10.16) ............... -- 10.22 Security Agreement dated as of May 15, 1993 by HSA of Oklahoma, Inc. in favor of Societe Generale, as agent for the lenders which are parties to that certain Credit Agreement described in Exhibit 10.15 above (substantially identical to Exhibit 10.16) ................................ -- 10.23 Security Agreement dated as of May 15, 1993 by The Haven Hospital, Inc. in favor of Societe Generale, as agent for the lenders which are parties to that certain Credit Agreement described in Exhibit 10.15 above (substantially identical to Exhibit 10.16) ................ -- 10.24 Security Agreement dated as of May 15, 1993 by the Company in favor of Societe Generale, as agent for the lenders which are parties to that certain Credit Agreement described in Exhibit 10.15 above (substantially identical to Exhibit 10.16) -- 10.25 Accounts Receivable Security Agreement dated as of May 15, 1993 by Americare of Galax, Inc. in favor of Societe Generale, as agent for the lenders which are parties to that certain Credit Agreement described in Exhibit 10.15 above (incorporated by reference to Exhibit 10.26 to the Company's Annual Report on Form 10-K for the year ended June 30, 1994) ............................................ -- 10.26 Accounts Receivable Security Agreement dated as May 15, 1993 by Bountiful Psychiatric Hospital, Inc. in favor of Societe Generale, as agent for the lenders which are parties to that certain Credit Agreement described in Exhibit 10.15 above (substantially identical to Exhibit 10.25) ............................................ -- 10.27 Accounts Receivable Security Agreement dated as of May 15, 1993 by Cumberland Mental Health, Inc. in favor of Societe Generale, New York Branch, as agent for the lenders which are parties to that certain Credit Agreement described in Exhibit 10.15 above (substantially identical to Exhibit 10.25) ............................................ -- 10.28 Accounts Receivable Security Agreement dated as of May 15, 1993 by East Carolina Psychiatric Services Corporation in favor of Societe Generale, New York Branch, as agent for the lenders which are parties to that certain Credit Agreement described in Exhibit 10.15 above (substantially identical to Exhibit 10.25) ................ -- 10.29 Accounts Receivable Security Agreement dated as of May 15, 1993 by Havenwyck Hospital, Inc. in favor of Societe Generale, New York Branch as agent for the lenders which are parties to that certain Credit Agreement described in Exhibit 10.15 above (substantially identical to Exhibit 10.25) ......................................... -- 10.30 Accounts Receivable Security Agreement dated as of May 15, 1993 by Mesa Psychiatric Hospital, Inc. in favor of Societe Generale, New York Branch, as agent for the lenders which are parties to that certain Credit Agreement described in Exhibit 10.15 above (substantially identical to Exhibit 10.25) ............................................ -- 10.31 Accounts Receivable Security Agreement dated as of May 15, 1993 by Michigan Psychiatric Services, Inc. in favor of Societe Generale, New York Branch, as agent for the lenders which are parties to that certain Credit Agreement described in Exhibit 10.15 above (substantially identical to Exhibit 10.25) ............................... -- E-5 Page Number 10.32 Accounts Receivable Security Agreement dated as of May 15, 1993 by Psychiatric Institute of West Virginia, Inc. in favor of Societe Generale, New York Branch, as agent for the lenders which are parties to that certain Credit Agreement described in Exhibit 10.15 above (substantially identical to Exhibit 10.25) ................ -- 10.33 Stock Pledge Agreement dated as of May 15, 1993, among the Company in favor of Societe Generale, New York Branch, as agent for the lenders which are parties to that certain Credit Agreement described in Exhibit 10.15 above (incorporated by reference to Exhibit 10.34 to the Company's Annual Report on Form 10-K for the year ended June 30, 1994) -- 10.34 Revolving Credit Guarantee dated as of May 15, 1993 by Americare of Galax, Inc. in favor of Societe Generale, New York Branch, as agent for the lenders which are parties to that certain Credit Agreement described in Exhibit 10.15 above (incorporated by reference to Exhibit 10.35 to the Company's Annual Report on Form 10-K for the year ended June 30, 1994) ............................................ -- 10.35 Revolving Credit Guarantee dated as of May 15, 1993 by Bethany Psychiatric Hospital, Inc. in favor of Societe Generale, New York Branch, as agent for the lenders which are parties to that certain Credit Agreement described in Exhibit 10.15 above (substantially identical to Exhibit 10.34) ............................................ -- 10.36 Revolving Credit Guarantee dated as of May 15, 1993 by Bountiful Psychiatric Hospital, Inc. in favor of Societe Generale, New York Branch, as agent for the lenders which are parties to that certain Credit Agreement described in Exhibit 10.15 above (substantially identical to Exhibit 10.34) ............................................ -- 10.37 Revolving Credit Guarantee dated as of May 15, 1993 by Cumberland Mental Health, Inc. in favor of Societe Generale, New York Branch, as agent for the lenders which are parties to that certain Credit Agreement described in Exhibit 10.15 above (substantially identical to Exhibit 10.34) .......... -- 10.38 Revolving Credit Guarantee dated as of May 15, 1993 by East Carolina Psychiatric Services Corporation in favor of Societe Generale, New York Branch, as agent for the lenders which are parties to that certain Credit Agreement described in Exhibit 10.15 above (substantially identical to Exhibit 10.34) ............................................ -- 10.39 Revolving Credit Guarantee dated as of May 15, 1993 by Havenwyck Hospital, Inc. in favor of Societe Generale, New York Branch, as agent for the lenders which are parties to that certain Credit Agreement described in Exhibit 10.15 above (substantially identical to Exhibit 10.34) .. -- 10.40 Revolving Credit Guarantee dated as of May 15, 1993 by Mesa Psychiatric Hospital, Inc. in favor of Societe Generale, New York Branch, as agent for the lenders which are parties to that certain Credit Agreement described in Exhibit 10.15 above (substantially identical to Exhibit 10.34) ............................................ -- 10.41 Revolving Credit Guarantee dated as of May 15, 1993 by Michigan Psychiatric Services, Inc. in favor of Societe Generale, New York Branch, as agent for the lenders which are parties to that certain Credit Agreement described in Exhibit 10.15 above (substantially identical to Exhibit 10.34) ............................................ -- E-6 Page Number 10.42 Revolving Credit Guarantee dated as of May 15, 1993 by Psychiatric Institute of West Virginia, Inc. in favor of Societe Generale, New York Branch, as agent for the lenders which are parties to that certain Credit Agreement described in Exhibit 10.15 above (substantially identical to Exhibit 10.34) ......................................... -- 10.43 Management Fee Subordination Agreement dated May 15, 1993, among Paul J. Ramsay and Ramsay Health Care Pty. Ltd. in favor of Societe Generale, New York Branch, as agent for the lenders which are parties to that certain Credit Agreement described in Exhibit 10.15 above (incorporated by reference to Exhibit 10.44 to the Company's Annual Report on Form 10-K for the year ended June 30, 1994) ..... -- 10.44 Mortgage and Fixture Filing and Assignment of Leases and Rents dated as of May 15, 1993 granted by Atlantic Treatment Center, Inc. to Societe Generale, individually and as agent for the lenders which are parties to that certain Credit Agreement described in Exhibit 10.15 above, with respect to certain real property located in Volusia County, Florida (incorporated by reference to Exhibit 10.45 to the Company's Annual Report on Form 10-K for the year ended June 30, 1994) ..................................... -- 10.45 Mortgage and Fixture Filing and Assignment of Leases and Rents dated as of May 15, 1993 granted by Carolina Treatment Center, Inc. to Societe Generale, individually and as agent for the lenders which are parties to that certain Credit Agreement described in Exhibit 10.15 above, with respect to certain real property located in Horry County, South Carolina (substantially identical to Exhibit 10.44) ............................................ -- 10.46 Deed of Trust and Fixture Filing and Assignment of Leases and Rents dated as of May 15, 1993 granted by Great Plains Hospital, Inc. to Jacob W. Bayer, Jr. as Trustee for the benefit of Societe Generale, individually and as agent for the lenders which are parties to that certain Credit Agreement described in Exhibit 10.15 above, with respect to certain real property located in Vernon County, Missouri (substantially identical to Exhibit 10.44) ................ -- 10.47 Mortgage, Security and Assignment of Leases and Rents dated as of May 15, 1993 by Greenbrier Hospital, Inc. to Societe Generale individually and as agent for the lenders which are parties to that certain Credit Agreement described in Exhibit 10.15 above, with respect to certain real property located in St. Tammany Parish, Louisiana (substantially identical to Exhibit 10.44) ............................... -- 10.48 Mortgage and Fixture Filing and Assignment of Leases and Rents dated as of May 15, 1993 granted by Gulf Coast Treatment Center, Inc. to Societe Generale, individually and as agent for the lenders which are parties to that certain Credit Agreement described in Exhibit 10.15 above, with respect to certain real property located in Okaloosa County, Florida (substantially identical to Exhibit 10.44) -- 10.49 Mortgage, Security Agreement and Assignment of Leases and Rents dated as of May 15, 1993 granted by Houma Psychiatric Hospital, Inc. to Societe Generale, individually and as agent for the lenders which are parties to that certain Credit Agreement described in Exhibit 10.15 above, with respect to certain real property located in the City of Houma, Parish of Terrebonne, Louisiana (substantially identical to Exhibit 10.44) ............................... -- E-7 Page Nimber 10.50 Mortgage with Power of Sale and Fixture Filing and Assignment of Leases and Rents dated as of May 15, 1993 granted by HSA of Oklahoma, Inc. to Societe Generale, individually and as agent for the lenders which are parties to that certain Credit Agreement described in Exhibit 10.15 above, with respect to certain real property located in Garfield County, Oklahoma (substantially identical to Exhibit 10.44) ............................................ -- -- 10.51 Deed of Trust and Fixture Filing and Assignment of Leases and Rents dated as of May 15, 1993 granted by The Haven Hospital, Inc. to Societe Generate, individually and as agent for the lenders which are parties to that certain Credit Agreement described in Exhibit 10.15 above, with respect to certain real property located in the City of DeSoto, Dallas County, Texas (substantially identical to Exhibit 10.44) ............................................ -- 10.52 Loan Agreement between Okaloosa County, Florida and Gulf Coast Treatment Center, Inc. dated October 1, 1984, relating to the issuance of bonds for Gulf Coast Treatment Center, Inc. (incorporated by reference to Exhibit 10.16 to the Company's Registration Statement on Form S-1, Registration No. 2-9892) .................................. -- 10.53 Loan Agreement between Louisiana Public Facilities Authority and Greenbrier Hospital, Inc. dated November 1, 1984, relating to the issuance of bonds for Greenbrier Hospital, Inc. (incorporated by reference to Exhibit 10.17 to the Company's Registration Statement on Form S-1, Registration No. 2-98921) ....................... -- 10.54 Loan Agreement between Horry County, South Carolina and Carolina Treatment Center, Inc. dated December 1, 1984, relating to the issuance of bonds for Carolina Treatment Center, Inc. (incorporated by reference to Exhibit 10.18 to the Company's Registration Statement on Form S-1, Registration No. 2-98921) ................................. -- 10.55 Loan Agreement between Louisiana Public Facilities Authority and Houma Psychiatric Hospital, Inc. dated as of September 1, 1985, relating to the issuance of bonds for HSA Bayou Oaks Hospital (incorporated by reference to Exhibit 10.56 to the Company's Annual Report on Form 10-K for the year ended June 30, 1994) ......................... -- 10.56 Ground Lease between Facilities Management Corporation, as landlord, and Psychiatric Institute of West Virginia, Inc., as tenant, dated as of September 30, 1985 (incorporated by reference to Exhibit 10.57 to the Company's Annual Report on Form 10-K for the year ended June 30, 1994) ............................................ -- 10.57 Lease Agreement between Houma Psychiatric Hospital, Inc. and Hospital Service District No. 1 of the Parish of Terrebonne, State of Louisiana, effective February 1, 1985 (incorporated by reference to Exhibit 10.38 to the Company's Registration Statement on Form S- 1, Registration No. 2-98921) -- 10.58 Lease among Bethany Psychiatric Hospital, Inc., Bethany General Hospital, the City of Bethany, Oklahoma and the Bethany General Hospital Trust dated December 9, 1985 (ground lease) ............................................ 10.59 Loan Agreement between The Enid Development Authority and HSA of Oklahoma,Inc. dated as of October 1, 1985, relating to The Enid Development Authority Variable Rate Demand Revenue Bonds (Meadowlake Hospital Project) (incorporated by reference to Exhibit 10.60 to the Company's Annual Report on Form 10-K for the year ended June 30, 1995) -- E-8 Page Number 10.60 Ramsay Health Care, Inc. 1990 Stock Option Plan, as amended to date (incorporated by reference to Exhibit 4.3 to the Company's Registration Statement on Form S-8 filed on March 6, 1991) ............................................ -- 10.61 Lease Agreement dated August 30, 1988 between the Company and Ayshire Land Dome Joint Venture relating to office space at One Poydras Plaza, New Orleans, Louisiana (incorporated by reference to Exhibit 10.78 to the Company's Registration Statement on Form S-2, Registration No. 33-40762) ....... -- 10.62 Ramsay Health Care, Inc. Deferred Compensation and Retirement Plan (incorporated by reference to Exhibit 10.79 to the Company's Registration Statement on Form S-2,Registration No. 33-40762) ....................... -- 10.63 Personnel and Facility Sharing Agreement dated as of June 27, 1991 between the Company and Ramsay Holdings HSA Limited (incorporated by reference to Exhibit 10.83 to the Company's Registration Statement on Form S-2, Registration No.33-40762) ................................. -- 10.64 Indemnity Agreement dated as of June 1991 between the Company and Ramsay Holdings HSA Limited (incorporated by reference to Exhibit 10.84 to the Company's Registration Statement on Form S-2, Registration No. 33-40762) ............................................. -- 10.65 Management Agreement dated as of June 25, 1992 between the Company and Ramsay Health Care Pty. Limited (incorporated by reference to Exhibit 10.90 to the Company's Annual Report on Form 10-K for the year ended June 30, 1992) ............... -- 10.66 Ramsay Health Care, Inc. 1991 Stock Option Plan (incorporated by reference to Exhibit 10.91 to the Company's Annual Report on Form 10-K for the year ended June 30, 1992) -- 10.67 Employment Agreement dated January 23, 1992 between the Company and Wallace E. Smith (incorporated by reference to Exhibit 10.94 to the Company's Annual Report on Form 10-K for the year ended June 30, 1992) .......................... -- 10.68 Employment Agreement dated January 23, 1992 between the Company and John A. Quinn (incorporated by reference to Exhibit 10.95 to the Company's Annual Report on Form 10-K for the year ended June 30, 1992) .......................... -- 10.69 Lease dated April 4, 1992 between The Union Labor Life Insurance Company and the Company (incorporated by reference to Exhibit 10.98 to the Company's Annual Report on Form 10-K for the year ended June 30, 1992) ........................ -- 10.70 Lease dated May 27, 1992 between Gail Buy and Bountiful Psychiatric Hospital (incorporated by reference to Exhibit 10.99 to the Company's Annual Report on Form 10-K for the year ended June 30, 1992) ................................. -- 10.71 Lease Agreement dated as of February 12, 1993 by and between Gulf Coast Treatment Center, Inc and Vendell of Florida, Inc. (incorporated by reference to Exhibit 10.82 to the Company's Annual Report on Form 10-K for the year ended June 30, 1994) ...................................... -- 10.72 Ramsay Health Care, Inc. 1993 Stock Option Plan (incorporated by reference to Exhibit 10.83 to the Company's Quarterly Report on Form 10-Q for the quarter ended December 31, 1993) .................................. -- E-9 PagE Number 10.73 Ramsay Health Care, Inc. 1993 Employee Stock Purchase Plan (incorporated by reference to Exhibit 10.84 to the Company's Quarterly Report on Form 10-Q for the quarter ended December 31, 1993 ........................... -- 10.74 Fourth Modification, Extension and Amendment of Lease Agreement dated November 15, 1993 between the Company and One Poydras Plaza Venture relating to the Company's office space at One Poydras Plaza, New Orleans, Louisiana (incorporated by reference to Exhibit 10.84 to the Company's Annual Report on Form 10-K for the year ended June 30, 1994) ............................................ -- 10.75 Employment Agreement dated July 19, 1994 between the Company and Brent J. Bryson (incorporated by reference to Exhibit 10.85 to the Company's Annual Report on Form 10-K for the year ended June 30, 1995) .................... -- 10.76 Rights Agreement dated as of August 1, 1995 between Ramsay Health Care, Inc. and First Union National Bank of North Carolina, as Rights Agent, which includes the form of Right Certificate as Exhibit A and the Summary of Rights to Purchase Common Shares as Exhibit B (incorporated by reference to Exhibit 4.1 to the Company's Current Report on Form 8-K dated August 1, 1995) ......................... -- 10.77 Letter Agreement dated June 30, 1995 among Ramsay Health Care, Inc., Ramsay Holdings HSA Limited and Paul Ramsay Holdings Pty. Limited (incorporated by reference to Exhibit 4.2 to the Company's Current Report on Form 8-K dated August 1, 1995) ........................................... -- 10.78 Lease Agreement dated April 12, 1995 between Capstone Capital Corporation and Mesa Psychiatric Hospital, Inc. (incorporated by reference to Exhibit 10.88 to the Company's Annual Report on Form 10-K for the year ended June 30, 1995) ............................................ -- 10.79 Lease Agreement dated April 12, 1995 between Capstone Capital of San Antonio,LTD, d/b/a Cahaba of San Antonio, LTD. and RHCI San Antonio, Inc. (incorporated by reference to Exhibit 10.89 to the Company's Annual Report on Form 10-K for the year ended June 30, 1995) .................... -- 10.80 Facility Lease Agreement dated June 26, 1995 by and between Charter Canyon Behavioral Health System, Inc. and Bountiful Psychiatric Hospital, Inc. (incorporated by reference to Exhibit 10.90 to the Company's Annual Report on Form 10-K for the year ended June 30, 1995) ......................... -- 10.81 Employment termination letter dated September 15, 1995 between the Company and Gregory H. Browne (incorporated by reference to Exhibit 10.91 to the Company's Annual Report on Form 10-K for the year ended June 30, 1995) ............ -- 10.82 Second Amended and Restated Distribution Agreement between the Company and Ramsay Managed Care, Inc. ("RMCI") (incorporated by reference to Exhibit 10.1 to RMCI's Registration Statement on Form S-1 (Registration No. 33-78034) filed with the Commission on April 24, 1995) -- 10.83 Employee Benefit Agreement dated as of February 1, 1995 between the Company and RMCI (incorporated by reference to Exhibit 10.4 to RMCI's Registration Statement on Form S-1 (Registration No. 33-78034) filed with the Commission on April 24, 1995) ........................................... -- E-10 Page Number 10.84 Tax Sharing Agreement dated as of October 25, 1994 between the Company and RMCI(incorporated by reference to Exhibit 10.5 to RMCI's Registration Statement on Form S-1 (Registration No. 33-78034) filed with the Commission on April 24, 1995) ........................................ -- 10.85 Corporate Services Agreement dated as of January 2, 1995 between the Company and RMCI (incorporated by reference to Exhibit 10.6 to RMCI's Registration Statement on Form S-1 (Registration No. 33-78034) filed with the Commission on April 24, 1995) ........................................... -- 10.86 Form of Withholding Tax Agreement between the Company, Ramsay Holdings HSA Limited, Paul Ramsay Holdings Pty. Limited and Ramsay Health Care Pty. Limited (incorporated by reference to Exhibit 10.7 to RMCI's Registration Statement on Form S-1 (Registration No. 33-78034) filed with the Commission on April 24, 1995) .................... -- 10.87 $6,000,000 Subordinated Promissory Note of RMCI, as amended (incorporated by reference to Exhibit 10.13 to RMCI's Registration Statement on Form S-1 (Registration No. 33-78034) filed with the Commission on April 24, 1995) -- 10.88 Consent and Amendment dated April 12, 1996 among the Company and certain of its subsidiaries named therein, Societe Generale, New York Branch, First Union National Bank of North Carolina and Hibernia National Bank, as lenders, and Societe Generale, as issuing bank and agent .. 10.89 Second Amendment to Credit Agreement dated as of September 15, 1995 among the Company and certain of its subsidiaries named therein, Societe Generale, New York Branch, First Union National Bank of North Carolina and Hibernia National Bank, as lenders, and Societe Generale, as issuing bank and agent (incorporated by reference to Exhibit 10.99 to the Company's Quarterly Report on Form 10-Q for the quarter ended September 30, 1995) ............ -- 10.90 Amended and Restated Stock Purchase Agreement dated October 12, 1995 by and among Paul Ramsay Holdings Pty. Limited, Ramsay Health Care, Inc. and, solely for the purpose of Section I, III and VI of the agreement, Ramsay Health Care Pty. Limited (incorporated by reference to Exhibit 10.101 to the Company's Quarterly Report on Form 10-Q for the quarter ended September 30, 1995) ....... -- 10.91 Amendment to Rights Agreement, dated October 3, 1995 between Ramsay Health Care, Inc. and First Union Bank of North Carolina, as Rights Agent (incorporated by reference to Exhibit 10.102 to the Company's Quarterly Report on Form 10-Q for the quarter ended September 30, 1995) ..................................................... -- 10.92 Ramsay Health Care, Inc. 1995 Long Term Incentive Plan (incorporated by reference to Exhibit 10.103 to the Company's Quarterly Report on Form 10-Q for the quarter ended December 31, 1995) .................................. -- 10.93 Third Amendment to Credit Agreement dated as of August 15, 1996 among the Company and certain subsidiaries named therein, Societe Generale, New York Branch, First Union National Bank of North Carolina and Hibernia National Bank, as lenders, and Societe Generale, as issuing bank and agent ................................................. 10.94 Stock Purchase Agreement dated as of August 13, 1996 by and among Paul Ramsay Holdings Pty. Limited, the Company and, solely for purposes of Sections I, III and IV thereof, Ramsay Health Care Pty. Limited ........................... E-11 Page Number 10.95 Amended and Restated Employment Agreement dated as of August 15, 1996 by and between Reynold Jennings and the Company ............................................... 10.96 Exchange Agreement dated September 10, 1996, by and among the Company, Paul Ramsay Hospitals Pty. Limited and Paul J. Ramsay, including a related Warrant Certificate dated September 10, 1996 issued to Ramsay Hospital Pty. Limited ................................................... 10.97 Consulting Agreement dated as of January 1, 1996 between the Company and Summa Healthcare Group, Inc. .............. 10.98 Letter Agreement dated as of September 10, 1996 by and among the Company, Ramsay Health Care Pty. Limited and Paul Ramsay Holdings Pty. Limited, included a related Warrant Certificate dated September 10, 1996 issued to Paul Ramsay Holdings Pty. Limited ..................................... 11 Computation of Net Income Per Share ....................... 21 Subsidiaries of the Company ............................... 23 Consent of Ernst & Young LLP .............................. 27 Financial Data Schedule ................................... Copies of exhibits filed with this Annual Report on Form 10-K or incorporated herein by reference do not accompany copies hereof for distribution to stockholders of the Company. The Company will furnish a copy of any of such exhibits to any stockholder requesting it. E-12 EX-4 2 EXHIBIT 4.4 THIRD SUPPLEMENTAL TRUST INDENTURE EXHIBIT 4.4 - -------------------------------------------------------------------------------- THIRD SUPPLEMENTAL TRUST INDENTURE Dated as of April 12, 1995 Between RAMSAY HEALTH CARE, INC., 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 Trustees - -------------------------------------------------------------------------------- Table of Contents Page Parties............................................................... 1 Section 1. Definitions............................................... 2 Section 1.1. Definitions Contained in Original Indenture........................................... 2 Section 1.2. New Definitions................................ 3 Section 2. Sale-Leaseback of Desert Vista Hospital................... 4 Section 2.1. Conditions of the Sale-Leaseback Transaction......................................... 4 Section 2.2. Disposition of Amounts Deposited with Trustee............................................. 5 Section 3. Appraisals................................................ 6 Section 4. Miscellaneous............................................. 6 Section 4.1. Applicability of Original Indenture............ 6 Section 4.2. Counterparts................................... 7 Section 4.3. No Legend Required............................. 7 Section 4.4. No Responsibility of Trustees for Recitals............................................ 7 Section 4.5. Consent of Lenders to Supplement............... 7 Section 4.6. Furnishing of Documents........................ 7 Section 4.7. Payment of Special Counsel Fees................ 7 i THIRD SUPPLEMENTAL TRUST INDENTURE THIRD SUPPLEMENTAL TRUST INDENTURE dated as of April 12, 1995 (herein called the "Supplement") between RAMSAY HEALTH CARE, INC., a Delaware corporation (the "Company"), BOUNTIFUL PSYCHIATRIC HOSPITAL, INC., a Utah corporation ("Bountiful Psychiatric"), CUMBERLAND MENTAL HEALTH, INC., a North Carolina corporation ("Cumberland"), EAST CAROLINA PSYCHIATRIC SERVICES CORPORATION, a North Carolina corporation ("East Carolina Psychiatric"), HAVENWYCK HOSPITAL, INC., a Michigan corporation ("Havenwyck"), MESA PSYCHIATRIC HOSPITAL, INC., an Arizona corporation ("Mesa Psychiatric"), and PSYCHIATRIC INSTITUTE OF WEST VIRGINIA, INC., a Virginia corporation ("Psychiatric Institute; together with the Company, Bountiful Psychiatric, Cumberland, East Carolina Psychiatric, Havenwyck and Mesa Psychiatric collectively being hereinafter referred to as the "Obligors"), whose post office addresses are One Poydras Plaza, 639 Loyola Avenue, Suite 1700, New Orleans, Louisiana 70113, and NATIONSBANK OF GEORGIA, NATIONAL ASSOCIATION (formerly The Citizens and Southern National Bank), a national banking association (the "Trustee"), whose post office address is 600 Peachtree Street, Suite 900, Atlanta Georgia 30308, Attention: Corporate Trust Department and ELIZABETH TALLEY (the "Individual Trustee"), whose post office address is 600 Peachtree Street, Suite 900, Atlanta, Georgia 30308, as Trustees (the Trustee and the Individual Trustee hereinafter collectively referred to as the "Trustees"). WHEREAS, the Obligors on April 30, 1990 issued their 11.6% Senior Secured Notes due March 31, 2000 in the aggregate principal amount of $56,500,000 (the "Senior Notes") and their 15.6% Subordinated Secured Notes due March 31, 2000 in the aggregate principal amount of $3,000,000 (the "Subordinated Notes"; and the Senior Notes and Subordinated Notes collectively, the "Notes") under and secured by the Trust Indenture dated as of March 31, 1990 from the Obligors to the Trustees (the "Original Indenture"); and WHEREAS, the Obligors and the Trustees entered into a First Supplemental Trust Indenture dated as of June 15, 1991 (the "First Supplemental Indenture") and entered into a Second Supplemental Trust Indenture dated as of May 15, 1993 (the "Second Supplemental Indenture"; and the Original Indenture as amended by the First Supplemental Indenture, the Second Supplemental Indenture, as hereby 2 amended and as the same may be further amended and supplemented from time to time being referred to as the "Indenture"); and WHEREAS, the Trustees are beneficiaries under that certain Leasehold Deed of Trust, Assignment of Rents and Security Agreement with Financing Statement (Fixture Filing) dated as of March 31, 1990 (the "Mesa Psychiatric Mortgage") delivered by Mesa Psychiatric pursuant to the Indenture; and WHEREAS, the Obligors have requested the holders of the Senior Notes and the Subordinated Notes to consent to certain amendments to the Indenture and the holders of all of the Notes outstanding have consented in writing to such changes and all other matters set forth in or effectuated by this Supplement; and WHEREAS, all things necessary to make this Supplement the valid obligation of the Obligors according to its tenor and effect have been done or authorized; NOW, THEREFORE, in consideration of the premises and of the sum of Ten Dollars and of other good and valuable consideration, receipt whereof upon the delivery of this Supplement the Obligors hereby acknowledge, and in order to strengthen the financial and operating condition of each and every Obligor, directly or indirectly, as a result of the enhanced ability of the Company to provide financial, accounting, consulting and administrative assistance and services to each other Obligor, and in order to secure the payment, subject to Sec. 10 of the Indenture, of both the principal of and interest and premium, if any, on the Notes at any time outstanding thereunder according to their tenor and the provisions thereof, and, further subject to Sec. 10 of the Indenture, to secure the faithful performance and observance of all the covenants and provisions in the Notes, the Note Agreements, the Pledge Agreements, the Mortgages and in the Indenture contained, the Obligors hereby covenant and agree with the Trustees for the equal and pro rata benefit of all present and future holders of all Notes issued under the Indenture, subject to Sec. 10 of the Indenture, without any preference, priority or distinction as follows: Section I. Definitions. Section 1.1. Definitions Contained in Original Indenture. Except as otherwise provided in Section 1.2 of this Supplement, words and phrases defined in the Original Indenture shall have the same meanings ascribed to them 3 therein when used herein, unless the context or use indicates a different meaning or intent. Section 1.2. New Definitions. Unless the context otherwise requires, the terms hereinafter set forth when used in the Indenture shall have the following meanings and the following definitions shall be equally applied to both the singular and plural forms to any of the terms herein defined: "`Additional Sum' shall mean an amount equal to $234,000." "`Buyer-Lessor' shall mean Capstone Capital Corporation, a Maryland corporation, or an affiliate thereof." "`Desert Vista Assets' shall mean the Land Parcels, buildings, improvements, fixtures and all other real property constituting the Desert Vista Hospital." "`Lease' shall mean a lease agreement to be entered into between Buyer-Lessor and Mesa Psychiatric of the Desert Vista Assets." "`Mesa Net Proceeds of Sale' shall mean, with respect to the purchase price proceeds to be paid to Mesa Psychiatric for the Desert Vista Assets, an aggregate amount equal to $7,500,000." "`Sale-Leaseback Transaction' shall mean the sale-leaseback transaction between Buyer-Lessor and Mesa Psychiatric pursuant to which, among other things, (i) Mesa Psychiatric will sell to Buyer-Lessor for an aggregate purchase price of $8,550,000 (subject to adjustment as agreed to between the Company and Buyer-Lessor) the Desert Vista Assets and (ii) pursuant to the Lease, Buyer-Lessor will lease the Desert Vista Assets to Mesa Psychiatric for an initial term of 15 years (with three successive renewal options of 5 years each) for aggregate annual Rentals of $1,026,000 (subject to adjustment as agreed to between the Company and Buyer-Lessor), payable monthly, subject to an annual upward adjustment from the Consumer Price Index with an annual cap of 3%." 4 Section 2. Sale-Leaseback of Desert Vista Hospital. Section 2.1. Conditions of the Sale-Leaseback Transaction. In accordance with the provisions of Sec. 4.2(c) of the Indenture, and notwithstanding the provisions of Sec.Sec. 3.21(d) and 3.21(e) of the Indenture, Mesa Psychiatric is hereby permitted to consummate the Sale-Leaseback Transaction. The Trustees shall release the Lien of the Mesa Psychiatric Mortgage and the security interests therein with respect to the collateral covered thereby upon compliance by the Obligors with each of the following conditions: (a) such sale shall have been the subject of a binding contract to purchase the Desert Vista Assets between Mesa Psychiatric and Buyer-Lessor or any assignee thereof (the "Purchaser") (the "Desert Hospital Sale Contract"); (b) Mesa Psychiatric shall have determined by resolution of its Board of Directors that the sale of the Desert Vista Assets is made at an amount not less than the fair market value thereof at the time of the execution of the Desert Vista Hospital Sale Contract and Mesa Psychiatric shall furnish each Noteholder and the Trustee on or prior to the date of closing the sale of the Desert Vista Assets a copy of such resolution certified by the Secretary or an Assistant Secretary of Mesa Psychiatric; (c) on the date of sale of the Desert Vista Assets and concurrently with the release by the Trustees of the Lien of the applicable Mortgage, the Obligors shall pay or cause the Purchaser to pay an amount equal to the Mesa Net Proceeds of Sale plus the Additional Sum by wire transfer of immediately available funds to the account specified by the Trustee for deposit in trust for the benefit of the Noteholders, such account to be in the name of Mesa Psychiatric and held and disbursed in accordance with Section 2.2 of this Supplement; and (d) On the date of sale of the Desert Vista Assets, the Trustees shall have received an opinion of counsel for Mesa Psychiatric, dated the date of such sale, to the effect that upon deposit of the Mesa Net Proceeds of Sale with the Trustees, the Trustees shall have a perfected security interest in such Mesa Net Proceeds of Sale entitled to the same priority as the Mesa Psychiatric Mortgage with respect to the Desert Vista Assets. 5 Section 2.2 Disposition of Amounts Deposited with Trustee. (a) The Mesa Net Proceeds of Sale and the Additional Sum shall constitute property of Mesa Psychiatric subject to the Lien of the Indenture and shall be held by the Trustee in a separate account under the Indenture containing only the Mesa Net Proceeds of Sale and the Additional Sum; (b) The Mesa Net Proceeds of Sale shall be applied by the Trustee within three Business Days following receipt by the Trustee from the Company of a copy of a written consent by the Lenders under the Credit Agreement to such application, which consent shall be reasonably satisfactory to the Company (the "Written Consent"), to the prepayment of $7,500,000 principal amount of the Senior Secured Notes, as follows: $7,062,500 to the payment in full of the principal prepayments of the Senior Secured Notes due and payable on September 30, 1995 and March 31, 1996, respectively, and the balance of $437,500 to the principal prepayment of the Senior Secured Notes due and payable on September 30, 1996; provided, however, that if the Company shall not furnish a copy of the Written Consent to the Trustee, the Trustee shall apply the Mesa Net Proceeds of Sale to the payment of the Senior Secured Notes as and when such payments become due pursuant to Section 5.2(a) of the Indenture until the Mesa Net Proceeds of Sale are exhausted. (c) The Additional Sum shall be applied by the Trustee as follows: (i) if the Written Consent shall not have been furnished to the Trustee on or before the close of business on April 30, 1995, the Trustee shall on May 1, 1995 pay the Additional Sum to the Holders of the Senior Secured Notes pro rata; or (ii) if the Written Consent shall have been furnished to the Trustee on or before the close of business on April 30, 1995, the Trustee shall pay the Additional Sum to the Holders of the Senior Secured Notes concurrently with the prepayment of principal of the Senior Secured Notes pursuant to Section 2.2(b) of this Supplement. (d) Prior to the exercise of remedies upon an Event of Default or the application thereof as provided in this Section, the Mesa Net Proceeds of Sale and the 6 Additional Sum shall be in the name of Mesa Psychiatric, as directed by an authorized financial officer of the Company, in direct obligations of the United States of America or any agency thereof maturing on or prior to the respective dates of application of such moneys to the prepayment of the Senior Secured Notes. Interest earned on such investments (i) from the date of consummation of the Sale-Leaseback Transaction to the date of disbursement of such amounts in accordance with the provisions of Section 2.2(b) shall be for the account of the Holders of the Senior Notes, if the Trustee shall have received a copy of the Written Consent on or prior to April 30, 1995 and (ii) from the date of consummation of the Sale-Leaseback Transaction to the date of disbursement of such amounts in accordance with the provisions of Section 2.2(c) shall be for the account of the Obligors, if the Trustee shall not have received a copy of the Written Consent on or prior to April 30, 1995; provided that upon the exercise of remedies upon an Event of Default, all such investment interest on deposit with the Trustee or paid to it thereafter shall be applied to the payment of the principal, premium, if any, and interest on the Senior Secured Notes. Section 3. Appraisals. The Company will furnish to the Noteholders not more than 90 days following the date of consummation of the Sale-Leaseback Transaction appraisals of Benchmark Regional Hospital, Brynn Marr Hospital, Chestnut Ridge Hospital and Havenwyck Hospital. Each such appraisal shall be (i) conducted by Valuation Counselors, Inc., Atlanta, Georgia, or another firm of appraisers selected by the Company with the consent of the Noteholders and (ii) in a form substantially similar to the form of appraisals of such Hospitals furnished to the Noteholders in connection with their purchase of the Notes pursuant to Section 7(a)(vi) of the Note Agreements or in such other form as shall be satisfactory to the Noteholders. Section 4. Miscellaneous. Section 4.1. Applicability of Original Indenture. The provisions of the Original Indenture, as heretofore supplemented and amended and as supplemented and amended by this Supplement, are hereby ratified, approved and confirmed and remain in full force and effect. This Supplement shall be construed as having been authorized, executed and delivered under the provisions of Sec. 8.2 of the Indenture. 7 Section 4.2. Counterparts. This Supplement may be simultaneously executed in several counterparts, each of which shall be an original and all of which shall constitute but one and the same instrument. Section 4.3. No Legend Required. Any and all notices, requests, certificates and any other instruments, including the Notes may refer to the Indenture or the Trust Indenture dated as of March 31, 1990, without making specific reference to this Supplement, but nevertheless all such references shall be deemed to include this Supplement unless the context shall otherwise require. Section 4.4. No Responsibility of Trustees for Recitals. The recitals and statements contained in this Supplement shall be taken as the recitals and statements of the Obligors, and the Trustee assume no responsibility for the correctness of the same. Section 4.5. Consent of Lenders to Supplement. The Company represents and covenants that it has obtained the written consent of the Agent under the Credit Agreement to its execution of this Supplement. Section 4.6. Furnishing of Documents. The Company will within 10 business days after the date of the closing of the Sale-Leaseback Transaction furnish to each holder of the Notes, the Trustee and Chapman and Cutler (a) fully executed counterparts of this Supplement and (b) the Desert Hospital Sale Contract. Section 4.7. Payment of Special Counsel Fees. The Company will pay within 30 days after receipt of a statement therefor, the reasonable fees and disbursements of Chapman and Cutler as special counsel to the Noteholders in connection with the execution and delivery of the waiver and consent dated April 12, 1995 and this Supplement. * * * IN WITNESS WHEREOF, each Obligor has caused this Supplement to be executed on its behalf by its President or Vice President and Vice President or Secretary or Assistant Secretary; and NationsBank of Georgia, National Association has caused this Supplement to be executed on its behalf by one of its Corporate Trust Officers and attested by one of its Assistant Secretaries and Elizabeth Talley has hereunto set her hand, all as of the date first above written. RAMSAY HEALTH CARE, INC. By____________________________ Name: Reynold J. Jennings Title: President ATTEST: _________________________ Name: Daniel A. Sims Title: Assistant Secretary BOUNTIFUL PSYCHIATRIC HOSPITAL, INC. By____________________________ Name: Reynold J. Jennings Title: President ATTEST: _________________________ Name: Daniel A. Sims Title: Assistant Secretary CUMBERLAND MENTAL HEALTH, INC. By____________________________ Name: Reynold J. Jennings Title: President ATTEST: _________________________ Name: Daniel A. Sims Title: Assistant Secretary EAST CAROLINA PSYCHIATRIC SERVICES CORPORATION By____________________________ Name: Reynold J. Jennings Title: President ATTEST: _________________________ Name: Daniel A. Sims Title: Assistant Secretary HAVENWYCK HOSPITAL, INC. By____________________________ Name: Reynold J. Jennings Title: President ATTEST: _________________________ Name: Daniel A. Sims Title: Assistant Secretary MESA PSYCHIATRIC HOSPITAL,INC. By____________________________ Name: Reynold J. Jennings Title: President ATTEST: _________________________ Name: Daniel A. Sims Title: Assistant Secretary PSYCHIATRIC INSTITUTE OF WEST VIRGINIA, INC. By____________________________ Name: Reynold J. Jennings Title: President ATTEST: ______________________ Name: Daniel A. Sims Title: Assistant Secretary NATIONSBANK OF GEORGIA, NATIONAL ASSOCIATION, As Corporate Trustee (SEAL) By____________________________ Name: Title: President ATTEST: _________________________ Name: Title: ______________________________ Elizabeth Talley, As Individual Trustee EX-10 3 EXHIBIT 10.4 PLEDGE AND SECURITY AGREEMENT EXHIBIT 10.4 PLEDGE AND SECURITY AGREEMENT Dated March 31, 1990 Between BOUNTIFUL PSYCHIATRIC HOSPITAL, INC. (the "Company") And THE CITIZENS AND SOUTHERN NATIONAL BANK, as Trustee (the "Secured Party") TABLE OF CONTENTS Section Page Parties.............................................................1 Recitals............................................................1 1. PLEDGE AND DEPOSIT OF COLLATERAL...........................2 2. WARRANTIES.................................................2 3. FURTHER ASSURANCE..........................................3 4. ADMINISTRATION OF PLEDGED SECURITIES.......................3 5. DEFAULT AND REMEDIES.......................................5 6. THE SECURED PARTY..........................................6 7. MISCELLANEOUS.............................................10 Signatures.........................................................11 ATTACHMENTS TO PLEDGE AND SECURITY AGREEMENT: Schedule 1 - Description of Pledged Capital Stock -i- PLEDGE AND SECURITY AGREEMENT THIS PLEDGE AND SECURITY AGREEMENT dated March 31, 1990 (this "Security Agreement") is between Bountiful Psychiatric Hospital, Inc., a Utah corporation (the "Company") and The Citizens and Southern National Bank, a national banking association, as trustee (the "Secured Party"). R E C I T A L S: A. The Company, Ramsay Health Care, Inc., a Delaware corporation, Cumberland Mental Health, Inc., a North Carolina corporation, East Carolina Psychiatric Services Corporation, a North Carolina corporation, Havenwyck Hospital, Inc., a Michigan corporation, Mesa Psychiatric Hospital, Inc., an Arizona corporation, and Psychiatric Institute Of West Virginia, Inc., a Virginia corporation (collectively, the "Obligors"), have entered into the separate Note Purchase Agreements dated as of March 31, 1990 (the "Note Agreements") with the institutional investors (the "Note Purchasers") named in the Note Agreements providing for the commitment of the Note Purchasers to purchase the 11.6% Senior Secured Notes due March 31, 2000 in the aggregate principal amount of $56,500,000 and the 15.6% Subordinated Secured Notes due March 31, 2000 in the aggregate principal amount of $3,000,000 constituting the joint and several obligations of the Obligors (collectively, the "Notes"), which Notes the Obligors are creating and issuing under and pursuant to that certain Trust Indenture (the "Indenture") dated as of March 31, 1990 between the Obligors and The Citizens and Southern National Bank and Susan L. Adams, as Trustees (the "Trustees"). B. The Company is the owner of 100% of the outstanding capital stock of Mesa Psychiatric Hospital, Inc. (another joint and several Obligor on the Notes). C. The Note Purchasers have required as a condition of their purchase of the Notes that the Company execute this Security Agreement as further security for the Notes, and the Company is willing to execute this Security Agreement. D. The Company, on and as of the date of this Agreement, owns 100% of the shares of outstanding capital stock of the corporations named in Schedule 1 hereto; said 2 shares being evidenced by securities more specifically identified in Schedule 1 hereto. NOW, THEREFORE, as one of the inducements to and as part of the consideration for the purchase by the Note Purchasers of the Notes and in consideration of the premises and other good and valuable consideration, the receipt whereof is hereby acknowledged: SECTION 1. PLEDGE AND DEPOSIT OF COLLATERAL. 1.1 The Company does hereby pledge, assign and deposit with the Secured Party, and grant the Secured Party a security interest in, the shares of capital stock of the corporations named in Schedule 1 hereto evidenced by the certificates described in Schedule 1 hereto, together with the proceeds thereof (hereinafter, together with any additional collateral that may be deposited with the Secured Party hereunder, called the "Pledged Securities"). This pledge, deposit and grant of a security interest is made as and shall at all times constitute, subject to Section 10 of the Indenture, equal and pro rata security for the payment in full of all principal of, premium, if any, and interest on the Notes, including any and all extensions, renewals or refundings thereof in whole or in part, and the performance and observance by the Company of all covenants and conditions contained in the Notes and the Note Agreements; and as security for all expenses and charges, legal or otherwise, paid or incurred by the Secured Party in realizing upon or protecting this Security Agreement or the indebtedness hereby secured. SECTION 2. WARRANTIES. The Company hereby represents and warrants to the Secured Party that: (a) the pledged shares of capital stock described in Schedule 1 hereto are all duly authorized, validly issued, fully paid and nonassessable shares of the issuing corporation and constitute all of the issued and outstanding shares of capital stock, of any class, of each of such issuing corporations; (b) the Company is the owner of the Pledged Securities and all rights incident thereto free and clear of any lien, security interest or other claim thereto other than the pledge and security interest made hereunder; and 3 (c) the Pledged Securities have been duly endorsed in blank or accompanied by an assignment or assignments sufficient to transfer title thereto. SECTION 3. FURTHER ASSURANCE. The Company agrees on request of the Secured Party to execute and deliver to the Secured Party such other documents or instruments as shall be deemed necessary or appropriate by the Secured Party to confirm unto the Secured Party the pledge hereunder of the Pledged Securities. As and when any other Pledged Securities shall come into the possession of the Company or under its control, the Company shall forthwith deposit and pledge the same with the Secured Party, together with such proper instruments of assignment and transfer as the Secured Party may reasonably require, which shall include express authority to the Secured Party to vote any shares of stock included therein to the extent herein provided or permitted and to cause such authority to be recorded in the entry of transfer of such stock on the books of the corporation issuing the same. SECTION 4. ADMINISTRATION OF PLEDGED SECURITIES. 4.1 Unless and until a Default or an Event of Default, as defined in Section 6.1 of the Indenture, shall have occurred and be continuing, the Company shall be entitled: (a) to vote all or any part of the Pledged Securities at any and all meetings of shareholders of the corporations which have issued the Pledged Securities and to execute consents in respect thereof, and to consent to, ratify or waive notice of any or all meetings of the shareholders with the same force and effect as if this Security Agreement had not been made, and, if necessary and upon the receipt of the written request from the Company, the Secured Party shall from time to time execute and deliver to the Company appropriate powers of attorney or proxies for that purpose, provided that without the prior, written consent of the Secured Party, the Company shall not be entitled to exercise any consensual right or power to convert or exchange any debt security pledged hereunder for any other "security" as defined in Section 2(1) of the Securities Act of 1933, as amended; and (b) to receive, collect or to have paid over all dividends or interest declared or paid on the Pledged Securities, except (i) dividends or distributions constituting stock dividends, (ii) dividends or distributions in kind, or (iii) liquidating dividends 4 (either partial or complete), any and all such excepted dividends and distributions to constitute and be additional security for the purposes aforesaid and to be paid over and/or pledged and deposited with the Secured Party and the Secured Party shall have in respect thereof all of the powers and rights as are herein provided in respect of the initial Pledged Securities. 4.2 The Company shall pay over to the Secured Party, immediately upon receipt, any money or other distribution upon or in respect of the Pledged Securities or any part thereof, other than dividends or interest which the Company is entitled to receive or retain under Section 4.1(b). 4.3 All payments or other distributions received by the Company upon or in respect of the Pledged Securities other than dividends or interest which the Company is entitled to receive and retain under Section 4.1(b) shall be held in trust for the Secured Party and forthwith delivered by the Company in the form received, with the Company's endorsement in blank for transfer or accompanied by an assignment or assignments sufficient to transfer title thereto, and shall constitute part of the Pledged Securities. 4.4 Except as set forth in clause (i) of this Section 4.4, the Secured Party may at any time (i) only so long as a Default or an Event of Default shall have occurred and be continuing, cause any Pledged Securities to be registered in its or its nominee's name with or without any indication of pledge or security interest, (ii) file financing statements with respect to any Pledged Securities without the signature of the Company, and (iii) deliver any of the Pledged Securities to the Company for a period of not more than 21 days or to the Issuer thereof for the purpose of making exchanges or registrations or transfers or for such other purposes in furtherance of the security interest in the Pledged Securities as the Secured Party may deem advisable. 4.5 The Company hereby appoints the Secured Party the attorney-in-fact of the Company for the purpose of carrying out the provisions of this Security Agreement and taking any action and executing or completing any instruments which the Secured Party may deem necessary or advisable to accomplish the purpose hereof, which appointment as attorney in-fact is irrevocable and coupled with an interest; provided, however, that the Secured Party shall have no duty or obligation to the Company or the holders of the Notes to collect or enforce payment of any of 5 the Pledged Securities or any claims for interest thereon whether by way of presentment, demand, protest, notice of dishonor or otherwise. Without limiting the generality of the foregoing, in the event that a Default or an Event of Default shall have occurred and be continuing the Secured Party shall have the right and power to receive, endorse and collect all checks made payable to the order of the Company representing payments of principal, interest or any other distribution or payment in respect of the Pledged Securities or any part thereof and to give full discharge for the same. SECTION 5. DEFAULT AND REMEDIES. 5.1 The Company acknowledges and agrees that the term Event of Default wherever used in this Security Agreement shall mean an Event of Default as defined in Section 6.1 of the Indenture. 5.2 If an Event of Default shall occur and be continuing, the Secured Party shall have all the rights, remedies and options of a secured party under the Illinois Uniform Commercial Code in respect to the Pledged Securities and, upon, but only upon, the written direction of the Required Holders, shall (a) without demand on the Company or anyone, at any time or from time to time thereafter, upon ten days advance notice to the Company setting forth the time and place of such sale, sell, free from any equity of redemption in or of the Company (any such right of equity being, to the extent permitted by applicable law, hereby expressly waived and released), the Pledged Securities or any part thereof at any brokers' board or at public or private sale. The Secured Party is authorized at any sale or other disposition of the Pledged Securities, if it deems it advisable to do so, to restrict the prospective bidders or purchasers to persons who will represent and agree that they are purchasing for their own account for investment and not with a view to the distribution or resale of any of the Pledged Securities. Without limiting any of the other provisions hereof, the Secured Party at any such sale or sales may sell all the Pledged Securities as a unit even though the sale price thereof may be in excess of the amount remaining unpaid on the indebtedness hereby secured. No notice or advertisement of any sale or sales (whether or not adjournments of such sale occur) need be given other than as hereinabove provided for, and any such sale or sales may be adjourned from time to time by announcement at the time and place of such sale or at the time and place appointed for any adjourned sale or sales. Any sale or sales shall be for cash and may be upon such other terms and at such price or prices as may be 6 acceptable to the Secured Party. The Secured Party or the holder of any Note may purchase the Pledged Securities or any part thereof at any sale or sales, and for the purpose of making settlement for or payment of the purchase price, shall be entitled to turn in and use the Note or Notes and any claims for interest matured and unpaid thereon, in order that there may be credited as paid on the purchase price the sum apportionable and applicable to the Notes so turned in, including principal and interest thereof, out of the net proceeds of such sale after allowing for the proportion of the total purchase price required to be paid in actual cash; (b) revoke all powers of attorney and proxies which the Secured Party may have delivered to the Company pursuant to Section 4.1(a) and shall vote and exercise, or cause the nominee or nominees of the Secured Party to vote and exercise, such powers of an owner with respect to any Pledged Securities as the holders of 51% or more in aggregate principal amount of the outstanding Notes shall direct; and (c) exercise any other rights or remedies now or hereafter existing at law or in equity or by statute. 5.3 The proceeds of any sale of or other realization upon all or any part of the Pledged Securities, and any other cash at the time held by the Secured Party under this Security Agreement, shall be paid to the Trustees under the Indenture and such Trustees shall apply such proceeds in the manner provided in Section 6.10 of the Indenture. 5.4 The satisfaction or performance of any part of the indebtedness hereby secured shall not affect the security hereby afforded or intended to be afforded for any other indebtedness hereby secured; but the pledge hereby made shall at all times remain in full force and effect for the benefit of all indebtedness hereby secured until all such indebtedness is fully satisfied. SECTION 6. THE SECURED PARTY. The Citizens and Southern National Bank accepts the duties and responsibilities of the Secured Party hereunder on and subject to the following terms and conditions: 6.1 Except during the continuance of an Event of Default known to the Secured Party, the Secured Party undertakes to perform such duties and only such duties as are specifically set forth in this Security Agreement, and 7 no implied covenants or obligations shall be read into this Security Agreement against the Secured Party. 6.2 In case an Event of Default has occurred and is continuing to the knowledge of the Secured Party, the Secured Party shall exercise such of the rights and power vested in it by this Security Agreement and use the same degree of care and skill in its exercise as an ordinary prudent man would exercise or use under the circumstances in the conduct of his own affairs. 6.3 No provision of this Security Agreement shall be construed to relieve the Secured Party from liability for its own negligent action, negligent failure to act, or wilful misconduct, except that: (a) this Section shall not be construed to limit the effect of Section 6.1; (b) the Secured Party may consult with counsel selected by the Secured Party and the advice or opinion of such counsel on legal matters shall be full and complete authorization and protection in respect of any action taken or suffered hereunder in good faith and in accordance with such advice or opinion of counsel; (c) the Secured Party shall not be liable with respect to any action taken or omitted to be taken by the Secured Party in good faith in accordance with any direction or request of the Required Holders with which the Secured Party is required by the provisions hereof to comply; (d) the Secured Party shall not be liable for any error of judgment made in good faith by any of its officers unless it shall be proved that the Secured Party was negligent in ascertaining the pertinent facts; (e) in the absence of bad faith on its part, the Secured Party may conclusively rely, as to the truth of the statements and the correctness of the opinions expressed therein, upon any note, notice, resolution, consent, certificate, affidavit, letter, telegram, teletype message, statement, order, or other document believed by it to be genuine and correct and to have been signed or sent by the proper person or persons; but upon receipt of instruments furnished to the Secured Party pursuant to the provisions of this Security Agreement, the Secured Party shall examine the same to determine whether or not such instruments conform to the requirements of this Security Agreement. 8 (f) no provision of this Security Agreement shall require the Secured Party to expend or risk its own funds or otherwise incur any financial liability in the performance of any of its duties hereunder or in the exercise of any of its rights or powers, if it shall have reasonable grounds for believing that repayment of such funds or adequate indemnity against such risk or liability is not reasonably assured to it; and (g) the Secured Party shall not be deemed to have knowledge of any Event of Default unless and until an officer of the corporate trust department of the Secured Party who customarily handles corporate trusts shall have actual knowledge thereof or the Secured Party shall have received written notice thereof from a Noteholder. 6.4 The Secured Party shall not be responsible for the correctness of the recitals and statements herein. 6.5 The Secured Party shall not be responsible for the validity, genuineness or effectiveness of any collateral given to or held by it or the effectiveness of the Pledge Agreements and the security interest purported to be created thereby. 6.6 The Secured Party and any affiliated corporation may become the owner of any Note hereby secured and be interested in any financial transaction with the Company, and the Secured Party may act as depositary or otherwise in respect to other securities of the Company, all with the same rights which it would have if not the Secured Party. 6.7 The Secured Party may resign and be discharged of the trusts created by mailing notice specifying the date when such resignation shall take effect to the Company and to the holders of the Notes. Such resignation shall take effect on the day specified in such notice (being not less than 60 days after the mailing of such notice) unless previously a successor secured party shall have been appointed as hereinafter provided, in which event such resignation shall take effect immediately upon the appointment of such successor. The Secured Party may be removed and/or a successor secured party may be appointed at any time by an instrument or concurrent instruments in writing signed and acknowledged by the Required Holders and delivered to the Secured Party and to the Company and, in the case of appointment of a successor secured party, to such successor secured party. 9 Any successor secured party shall be a state or national bank or trust company in good standing, organized under the laws of the United States of America or of any State thereof, having capital, surplus and undivided profits aggregating at least $100,000,000, if there be such a bank or trust company willing and able to accept this trust upon reasonable and customary terms. 6.8 Every successor secured party appointed hereunder shall execute, acknowledge and deliver to its predecessor and also to the Company, an instrument in writing accepting such appointment hereunder, and thereupon such successor secured party without any further act, deed or conveyance, shall become fully vested with all the estates, properties, rights, powers, trusts, duties and obligations of its predecessor; but such predecessor shall, nevertheless, on the written request of the Company, or of any successor secured party, execute and deliver an instrument transferring to such successor secured party all the estates, properties, rights, titles, powers and trusts of such predecessor hereunder. Should any deed, conveyance or instrument in writing from the Company be required to more fully and certainly vest in such successor secured party the estates, rights, titles, powers and duties hereby vested, any and all such instruments in writing shall, on request of the successor secured party, be executed, acknowledged and delivered by the Company. 6.9 The Secured Party shall be entitled to reasonable compensation (which shall not be limited by any provision of law in regard to the compensation of a trustee of an express trust) for all services rendered, and to reimbursement for all reasonable expenses, disbursements and advances incurred or made by it in and about the admini stration of the trusts herein provided for and in and about foreclosure, enforcement or other protection of this Security Agreement or the security interest hereof (including reasonable compensation and expenses and disbursements of its counsel and of all persons not regularly in its employ). The Company agrees to pay such compensation for services of the Secured Party and to reimburse it for such expenses, disbursements and advances and to indemnify and save harmless the Secured Party from and against all loss, liability and expense incurred in good faith and without negligence on its part in the exercise or performance of any rights, remedies or duties under this Security Agreement; and the Secured Party agrees to look solely to the Company for such payments and indemnification. 10 SECTION 7. MISCELLANEOUS. 7.1 Whenever any of the parties hereto is referred to, such reference shall be deemed to include the successors and assigns of such party; and all the covenants, promises and agreements in this Security Agreement contained by or on behalf of the Secured Party, shall bind and inure to the benefit of the respective successors and assigns of such parties whether so expressed or not. 7.2 The unenforceability or invalidity of any provision or provisions of this Security Agreement shall not render any other provision or provisions herein contained unenforceable or invalid. 7.3 The Secured Party shall release this Security Agreement and the lien hereof by proper instrument or instruments upon presentation of satisfactory evidence that all indebtedness hereby secured has been fully paid or discharged. 7.4 Any term, covenant, agreement or condition of this Security Agreement may be amended or compliance therewith may be waived (either generally or in a particular instance and either retrospectively or prospectively) by an instrument in writing executed by the Company and the Secured Party, if the Company shall have obtained and filed with the Secured Party the consent in writing of the Required Holders. 7.5 All notices or other communications required or contemplated by the provisions hereof shall, unless otherwise specified, be in writing or by direct telex-to telex, and shall be deemed to have been given or made on the fourth Business Day after deposit thereof in the United States mail, first class postage prepaid, or when received if sent by facsimile communication or delivered by hand or by overnight courier, addressed as follows: If to the Company: One Poydras Plaza 639 Loyola Avenue Suite 1400 New Orleans, Louisiana 70113 If to the Secured Party: 33 North Avenue, N.E., Suite 700 Atlanta, Georgia 30308 Attention: Corporate Trust Department Fax No.: (404) 897-3142 11 If to any holder of Notes: at its address for notices provided for in the Note Agreements. or to any such party at such other address as such party may designate by notice duly given in accordance with this Section to other parties. 7.6 This Security Agreement shall be governed by and construed in accordance with the laws of the State of Illinois. 7.7 This Security Agreement may be executed, acknowledged and delivered in any number of counterparts, each of such counterparts constituting an original but all together only one Security Agreement. IN WITNESS WHEREOF, the parties hereto have caused this Security Agreement to be duly executed, all as of the day and year first above written. BOUNTIFUL PSYCHIATRIC HOSPITAL, INC. By_______________________________ Its President ATTEST: ____________________________ Assistant Secretary THE CITIZENS AND SOUTHERN NATIONAL BANK, Secured Party as aforesaid By_________________________________ Its Corporate Trust Officer DESCRIPTION OF PLEDGED CAPITAL STOCK Certificate No. of Issuing Corporation No. Shares Issued in the Name of Mesa Psychiatric 2 800 Bountiful Psychiatric Hospital, Inc. Hospital, Inc. SCHEDULE 1 to PLEDGE AND SECURITY AGREEMENT EX-10 4 EXHIBIT 10.58 THE CITY OF BETHANY, OKLAHOMA EXHIBIT 10.58 THE CITY OF BETHANY, OKLAHOMA and THE BETHANY HOSPITAL TRUST and BETHANY GENERAL HOSPITAL through the HOSPITAL BOARD OF THE CITY OF BETHANY, OKLAHOMA Lessor and BETHANY PSYCHIATRIC HOSPITAL, INC. Lessee LEASE Dated as of December 9, 1985 Property Located at Bethany, Oklahoma EXHIBIT 10.58 L E A S E LEASE, dated as of December 9, 1985, between THE CITY OF BETHANY, OKLAHOMA, a municipal corporation ("City"), THE BETHANY HOSPITAL TRUST, a Public Trust created under the laws of the State of Oklahoma ("Trust"), and BETHANY GENERAL HOSPITAL through THE HOSPITAL BOARD OF THE CITY OF BETHANY, OKLAHOMA, a body created by ordinance of the City pursuant to 11 0.S. Sec.30-102 ("Board"), with City, Trust and Board being hereinafter collectively called "Lessor" and BETHANY PSYCHIATRIC HOSPITAL, INC., an Oklahoma corporation ("Lessee"). RECITALS: WHEREAS, City is the owner of the real property in Oklahoma County, Oklahoma, described on Exhibit "A" attached hereto (the "Land"), and WHEREAS, by Amended Lease Agreement dated September 16, 1969 (the "City Lease"), City leased the Land to the Trust, and WHEREAS, the Trust and the Board entered into a Contract dated March 23, 1967 (the "Contract") relating to the management of Bethany General Hospital (the "Hospital") located on the Land, and WHEREAS, under date of August 29, 1985, the Trust, the City and the Board entered into a Management Agreement with Lessee (the "Management Agreement") pertaining to the construction of a twenty bed psychiatric pavilion on a part of the Land, the remodeling of 6,442 square feet of the Hospital and the operation of the pavilion and the remodeled portion of the hospital as a forty bed psychiatric unit, and WHEREAS, pursuant to the terms of and as partial consideration for the Management Agreement, the City, the Trust and the Board agree to lease a portion of the Land to the Lessee. NOW, THEREFORE, in consideration of the mutual covenants and agreements herein contained and other good and valuable consideration, the receipt of which is hereby acknowledged, it is agreed as follows: 1. Definitions. Capitalized terms used herein which are defined in the Management Agreement shall have the respective meanings set forth in the Management Agreement, 2 unless otherwise defined herein. Terms defined in the foregoing recitals shall have the meanings set forth therein and, in addition, the following terms shall have the follow ing meanings: Building Area: The term Building Area shall mean the tract of land containing 14,578.29 square feet or .34 acres, more or less, described on Exhibit "B" attached hereto upon which Lessee is to construct the psychiatric pavilion as provided in the Management Agreement. Parking Area: The term Parking Area shall mean the tract of land described on Exhibit "C" attached hereto which is adjacent to the Building Area and is to be used for parking in connection with the psychiatric pavilion. Common Areas: The term Common Areas shall mean parking areas, roadways, pedestrian sidewalks, landscape areas, and all other areas or improvements on the Land which may, from time to time, be provided by the Lessor for the convenience and use of patients, visitors and tenants of the Hospital and their respective invitees. Leased Premises: The term Leased Premises shall mean: (a) the Building Area, (b) the Parking Area, (c) all the rights, easements and appurte nances belonging and usually had and enjoyed in connection with the Building Area and the Parking Area, and (d) the use, in common with others to whom Lessor has granted or may hereafter grant rights to use the same, of the Common Areas. Depositary: The Depositary shall be a bank or trust company, appointed by Lessor, having its principal office in Oklahoma City or Bethany, Oklahoma, and having a combined capital, surplus and undistributed profits (according to its most recent published statement) of at least $5,000,000. First Mortgagee: the holder, from time to time, of the First Mortgage. Insurance Requirements: all terms of an insurance policy covering or applicable to the Leased Premises or any part thereof, all require ments of the issuer of any such policy and all 3 orders, rules, regulations and other requirements of the National Board of Fire Underwriters (or any other body exercising similar functions) applicable to or affecting the Leased Premises or any part thereof or any use or condition of the Leased Premises or any part thereof. Lease: this Lease, as at the time amended, modified or supplemented. Lease Term: as defined in Section 2. Legal Requirements: all laws, statutes, codes, acts, ordinances, orders, judgments, de crees, injunctions, rules, regulations, permits, licenses, authorizations, directions and require ments of all governments, departments, commissions, boards, courts, authorities, agencies, officials and officers, foreseen or unforeseen, ordinary or extraordinary, which now or at any time hereafter may be applicable to the Leased Premises or any part thereof. Lessee's Equipment: all equipment, furniture and furnishings and any additions or replacement thereto which are owned by the Lessee, for which the Lessee has not been repaid under the Terms of the Management Agreement and are to be located on the Land. First Mortgage: a first mortgage of Lessee's interest under this Lease as provided for in Section 19. Taking: a taking during the Lease Term of all or any part of the Leased Premises or any leasehold or other interest therein or right accruing thereto, as the result or in lieu or in anticipation of the exercise of the right of condemnation or eminent domain, or a change of grade affecting the Leased Premises or any part thereof. Unavoidable Delays: Delays due to strikes, acts of God, governmental restrictions, enemy action, riot, civil commotion, fire, unavoidable casualty or other causes beyond the control of Lessee. Improvements: As defined in Section 4. 4 Impositions: As defined in Section 8. 2. Property; Lease Term. Upon and subject to the conditions and limitations set forth below, Lessor leases to Lessee, and Lessee rents from Lessor, the Leased Premises. TO HAVE AND TO HOLD for a term commencing on December 9, 1985, and expiring at midnight on December 9, 1988, unless the term of this Lease ("Lease Term") shall sooner terminate as hereinafter provided. Provided, however, the term of this Lease shall be automatically extended for five (5) additional three (3) year periods unless Lessee gives written notice to Board no later than one hundred twenty (120) days prior to the end of the initial term or any three (3) year extension that it does not wish there to be an automatic extension. 3. Rent. The execution and delivery by Lessee of the Management Agreement and the completion of construction of the psychiatric pavilion as therein provided constitutes prepaid rent for the entire term hereof, including all renewals. PROVIDED, HOWEVER, in the event the Management Agreement shall terminate prior to the end of the Lease Term then beginning with the first day of the first calendar month following termination of the Management Agreement, the Lessee shall pay as additional rent monthly in advance on the first day of each calendar month the sum of Four Thousand One Hundred Sixty-Six and 67/100 Dollars ($4,166.67). 4. Ownership of Improvements. Prior to termina tion of this Lease the improvements constructed by Lessee on the Land (the Improvements) shall be and remain the property of Lessee. On termination of the Lease Term, whether by expiration of time or otherwise, title to the Improvements shall be surrendered to and the Improvements shall become the full and absolute property of the City without further action by the Lessor or the Lessee. The Lessee's interest in this Lease and all of the Lessee's right, title and interest in and to the Improvements shall be non-separable, and any attempt to transfer, mortgage, assign, convey or otherwise encumber in whole or in part either of such interests shall be void and ineffective (whether by act of the Lessee, judicial decrees, judgment or otherwise) unless there shall be a complete transfer, mortgage, assignment or encumbrance to the same party of the Lessee's interest under this Lease and the Lessee's interest in he Improvements. Any severance resulting from the Lessee's title to the Improvements shall not change the character of the Improvements as real property. 5 5. Use of Property. Prior to the termination of the Management Agreement, Lessee shall use the Leased Premises for the purposes of providing psychiatric and chemical dependency services and psychiatric and chemical dependency ancillary therapy and office space, as provided for in the Management Agreement. After termination of the Management Agreement, the Leased Premises may be used for any lawful hospital related purpose. 6. Maintenance and Repairs. Lessor, at its expense and as a Direct Operating Expense billable to the Unit in accordance with the Management Agreement, will keep the Building Area and Improvements in good safe and clean order and condition and will promptly make all necessary or appropriate repairs, replacements and renewals thereof, whether interior or exterior, structural or non-structural, ordinary or extraordinary, foreseen or unforeseen. In the event the Management Agreement shall terminate prior to the end of the Lease Term, such maintenance and repair shall be the responsibility of Lessee, and the cost thereof shall be a credit against rent due hereunder. Lessee will give Lessor ten (10) days prior written notice before incurring an expense in excess of $5,000.00 which it intends to credit against rent. 7. Removal or Demolition of Improvements; Alter ations and Additions. Lessee shall have the right to make alterations, additions and changes in any of the Improvements so long as such do not materially or substantially decrease the value of the same. 8. Impositions. Subject to Section 11 relating to contests, Lessor and Lessee will pay as a Direct Operating Expense payable from the revenues of the Unit all taxes and assessments ("Impositions") against their respective interests in the Leased Premises during the term hereof before any interest, penalty, fine or cost may be added for non-payment, and will furnish to the other party for inspection within 30 days after written request, official receipts of the appropriate taxing authority or other proof satisfactory to such other party evidencing such payment. In the event the Management Agreement shall terminate prior to the end of the Lease Term, such taxes and assessments shall, subject to Section 11, be paid by Lessee. In the event the Management Agreement is terminated prior to the end of the Lease Term, if by law any Imposition may be paid in installments, Lessee shall be obligated to pay only those installments as they become due from time to time before any interest, penalty, fine or cost may be added thereto; and any Imposition relating to the fiscal period of the taxing authority, part of which is included within the 6 term of this Lease and a part of which extends beyond such term shall be apportioned between Lessor and Lessee as of the expiration of the term of this Lease. 9. Compliance with Requirements, etc. Subject to Section 11 relating to contests, each of Lessor and Lessee, at its own expense, will, to the extent applicable to their respective use of and activities in, and obligations hereunder with respect to, the Leased Premises, promptly and diligently (a) comply with all Legal Requirements and Insurance Requirements, and (b) procure, maintain and comply with all permits, licenses, franchises and other authorizations required for any use of the Leased Premises or any part thereof then being made, and for the proper erection, installation, operation and maintenance of the Improvements. 10. Liens, etc. Lessee will not directly or indirectly create or permit to remain, and will discharge any mortgage, lien, security interest, encumbrance or charge on, pledge of or conditional sale or other title retention agreement with respect to the Leased Premises or any part thereof, other than (a) this Lease (b) a First Mortgage, and related security documents in accordance with section 19, (c) while the Management Agreement is in effect, liens for any Impositions and thereafter, liens for Impositions not yet payable, or payable without the addition of any fine, penalty, interest or cost for non-payment, or being contested as permitted by Section 11, (d) subject to section 11, liens of mechanics, materialmen, suppliers or vendors, or rights thereto, incurred in the ordinary course of business for sums which under the terms of the related contracts are not at the time due, provided that adequate provision for the payment thereof shall have been made, and (e) liens created by Lessor. 11. Permitted Contests. Lessor or Lessee, at its own expense, may contest by appropriate legal proceedings conducted in good faith and with due diligence, the amount or validity or application, in whole or in part, of any Imposition or any Legal Requirement or Insurance Requirement provided that (a) such party shall first make all contested payments, under protest if it desires, unless such proceed ings shall suspend the collection thereof from Lessor, and from the Leased Premises, (b) neither the Leased Premises nor any part thereof or interest therein would be in any danger of being sold, forfeited, lost or interfered with, and (c) in the case of any Legal Requirement, Lessor and/or Lessee would not be in any danger of any additional civil or any criminal liability for failure to comply therewith and 7 the Leased Premises would not be subject to the imposition of any lien as a result of such failure. 12. Utility Services; Lessor Maintenance. Subject to Section VIC. of the Management Agreement, Lessor will pay or cause to be paid all charges for all public or private utility services and protective services at any time rendered to or in connection with the Leased Premises or any part thereof, will comply with all contracts relating to any such services, and will do all other things required for the maintenance and continuance of all such services. After termination of the Management Agreement, Lessee will reim burse Lessor monthly, within ten (10) days after written request, for Lessor's actual cost of providing such services. Lessor's request for reimbursement shall contain supporting calculations and other information reasonably requested by Lessee, have attached thereto invoices and other supporting data and be certified as correct by a Certified Public Accountant acceptable to Lessee. Lessor will maintain the Common Area and the Parking Area. 13. Quiet Enjoyment. Lessor covenants that Lessor is the owner of fee simple title to the Leased Premises free of all liens and encumbrances and that Lessee, upon performing and complying with all covenants, agreements, terms and conditions of this Lease on its part to be performed or complied with, shall not be hindered or molested in its enjoyment of the Leased Premises. 14. Insurance. 14.1 Risks. The Lessee shall keep all Im provements insured against loss or damage by fire and other hazards. Each of Lessor and Lessee shall provide liability insurance for personal injury and death and property damage for the benefit of Lessor and Lessee. Lessee shall provide appropriate workmen's compensation or other insurance against liability arising from claims of workmen in respect of and during the period of any work on or about the Leased Premises. During the term of the Management Agreement, costs of such insurance shall be Direct Operating Expenses payable from the revenue of the Unit. 14.2 Coverage. The Lessee shall maintain fire and extended coverage insurance in an amount of full replacement cost with "agreed amount" and "inflation guard" endorsements and with deductible not to exceed $1,000, or in such greater amount or other terms as First Mortgagee may require, which policy shall be written by a company or companies having a Best's rating of A: IX or better. The cost of such insurance shall be a Direct Operating Expense 8 payable from the revenue of the Unit. Each of Lessor and Lessee shall carry liability insurance in the amount required by the Oklahoma Political Subdivisions Tort Claims Act. 14.3 Policy Forms. All policies of insurance to be furnished hereunder shall be in forms, companies and amounts satisfactory to First Mortgagee, with Standard Mortgage Clauses attached to all policies in favor of and in form satisfactory to First Mortgagee, including provisions requiring that the coverage evidenced thereby shall not be terminated or materially modified without thirty (30) days' prior written notice to Lessor, Lessee and First Mortgagee. 14.4 Policy Provisions. All insurance main tained pursuant to this section shall (a) include an effec tive waiver by the insurer of all rights of subrogation against any named insured or such insured's interest in the Leased Premises or any income derived therefrom; and (b) provide that any losses shall be payable notwithstanding any act or failure to act or negligence of Lessor or Lessee or any other Person. All policies of insurance provided for shall name Lessor, Lessee and the First Mortgagee as insurers as their respective interests may appear. Lessee, at its sole cost and expense, shall main tain such other insurance and in such amounts as may from time to time be reasonably required by First Mortgagee. A Standard Mortgagee Clause naming each Leasehold Mortgagee as additional insured (on its own behalf and on behalf of any Institutional Lenders which it may represent) and the Leasehold Mortgagee whose Leasehold Mortgage is prior in lien as sole loss payee shall be added to any and all insurance policies required to be carried by Lessee hereunder. At or prior to the commencement of the Lease term and thereafter not less than fifteen (15) days prior to the expiration dates of the expiring policies theretofore fur nished pursuant to this Agreement, originals of the policies (or, in the case of blanket insurance policies and general public liability insurance policies, certificates of the insurers) bearing notations evidencing the payment of premi ums or accompanied by other evidence of such payment satis factory to Lessor or Lessee, as the case may be, and First Mortgagee, shall be delivered to First Mortgagee with copies thereof certified as true and correct delivered to Lessor or Lessee, as the case may be. 9 15. Damage to or Destruction of Property. 15.1 Lessee to Give Notice. In case of any material damage to or destruction of the Leased Premises or any part thereof, Lessee will promptly give written notice thereof to Lessor and First Mortgagee, generally describing the nature and extent of such damage or destruction. 15.2 Restoration. Except as provided in Section 15.4 below, in case of any damage to or destruction of the Improvements or any part thereof, Lessee, at its expense, shall promptly commence and complete (subject to Unavoidable Delays) the restoration, replacements or rebuilding of the Improvements as nearly as possible to its value, condition and character immediately prior to such damage or destruction, with such alterations and additions as may be made at Lessee's election pursuant to and subject to the terms of section 7 (such restoration, replacement, rebuilding, alterations and additions, together with any temporary repairs and property protection pending completion of the work, being herein called "Restoration"). 15.3 Application of Insurance Proceeds. Insurance proceeds received on account of any damage to or destruction of the Leased Premises or any part thereof shall be paid to the First Mortgagee, if any, to be applied in accordance with the then existing credit agreement between Lessee, First Mortgagee and other creditors named therein. If there is no First Mortgage, then said proceeds shall be held by a Depositary and applied as follows: (a) If Lessee is obligated to or elects to rebuild, the proceeds shall be paid to Lessee or as Lessee may direct, from time to time as Restoration progresses, to pay (or reimburse Lessee for) the cost of Restoration in the manner and under the conditions that the Lessor may require, including, without limitation; (i) approval of plans and specifications of such work before such work shall be commenced, (ii) suitable completion or performance bonds and Builder's All Risk insurance, (iii) The Improvements shall be so restored or rebuilt as to be of at least equal value as prior to such damage or destruction, and (iv) written request of Lessee accompanied by evidence, satisfactory to Lessor, that the amount requested has been paid or is then due and payable and is properly a part of such cost. Upon receipt by Lessor of evidence satisfactory to it that 10 Restoration has been completed and the cost thereof paid in full, and that there are no mechanics' or similar liens for labor or materials supplied in connection therewith, the balance, if any, of such proceeds shall be paid to the Lessee or as Lessee may direct. (b) If Lessee is not obligated to and does not elect to rebuild, said insurance proceeds shall be paid to Lessee, or as Lessee may direct. 15.4 Limits on Obligation to Restore. (a) In the event of damage or destruction of 50% or greater at any time or damage or destruction of 25% or greater during the last year of the initial term or any renewal term, Lessee at its option may terminate this Lease by written notice to Lessor within sixty (60) days following such damage or destruction as of a date specified in such notice within ninety (90) days of such damage or destruction. Upon such termination, Lessee shall have no liability to restore the Leased Premises. (b) So long as there is a First Mortgagee, Lessee's obligation in Section 15.2 shall only apply if and to the extent said First Mortgagee shall make funds for such purpose available to Lessee in accordance with the terms of the then existing credit agreement between Lessee and such First Mortgagee, and other creditors named therein. If Lessee is not obligated to restore the Leased Premises as a result of the operation of this paragraph 15.4(b) then (i) this Lease shall terminate at the option of either party and upon such termination Lessee shall remove to the surface elevation of the adjoining ground all debris and restore the Leased Premises as nearly as practical to their condition prior to the erection of the Improvements. Provided, however, Lessee shall not be responsible for removal of concrete slab, paving or underground utility lines. 11 16. Taking. 16.1 Lessee to Give Notice, etc. In case of a Taking of all or any part of the Leased Premises or the commencement of any proceedings or negotiations which might result in such Taking, Lessee will promptly give written notice thereof to Lessor and First Mortgagee, generally describing the nature and extent of such Taking or the nature of such proceedings and negotiations and the nature and extent of the Taking which might result therefrom, as the case may be. Lessor and Lessee may each file and prosecute their respective claims for an award, but all awards and other payments on account of a Taking shall be paid to the Depositary, except as provided in the first sentence of Section 16.4 below. 16.2 Total Taking. In case of a Taking (other than for temporary use) of the fee of the entire Leased Premises, this Lease shall terminate as of the date of such Taking. In case of a Taking (other than for temporary use) of, (a) such perpetual easement on the entire Leased Premises, or (b) such a substantial part of the Leased Premises, as shall result, in the good faith judgment of Lessee, in the Leased Premises remaining after such Taking (even if Restoration were made) being unsuitable for Lessee's use, or (c) a Taking of 25% or greater during the last year of the initial term or any renewal term, Lessee may, at its option, terminate this Lease by written notice to Lessor given within 60 days after such Taking, as of a date specified in such notice within 90 days after such Taking. Any Taking of the character referred to in this Section 16.2, which results in the termination of this Lease, is referred to as a "Total Taking". No such termination shall terminate the right of Lessee or First Mortgage with respect to awards or other payments on account of a Taking. 16.3 Partial Taking. In case of a Taking of the Leased Premises other than a Total Taking, (a) this Lease shall remain in full force and effect as to the portion of the Leased Premises remaining immediately after such Taking, (b) rent shall be reduced pro-rata, based on the Lessee's reduced interest based on the number of operational beds, and (c) Lessee, at its expense, will promptly commence and complete, subject to Unavoidable Delays, Restoration of the Leased Premises as nearly as possible to its value, condition and character immediately prior to such Taking, except for any reduction in area caused thereby, provided that, in case of a Taking for temporary use, Lessee shall not be required to effect Restoration until such Taking is terminated. So long as 12 there is a First Mortgagee, Lessee's obligation to restore shall only apply if and to the extent that said First Mortgagee shall make funds for such purpose available to Lessee in accordance with the terms of the then existing credit agreement between Lessee and such First Mortgagee. 16.4 Application of Awards and Other Payments. Awards and other payments on account of a Taking shall be paid to the First Mortgagee, if any, to be applied in accordance with the then existing credit agreement between Lessee, First Mortgagee and other creditors named therein. If there is no First Mortgagee, then said awards and other payments shall be applied as follows: (a) Net awards and payments received on account of a Taking other than a Taking for temporary use or a Total Taking shall be held and applied to pay the cost of Restoration of the Property, such application to be made substantially as provided in paragraph (a) of section 15.3, with respect to insurance proceeds. The balance, if any, shall be paid to Lessee. (b) Net awards and payments received on account of a Taking for temporary use shall be paid to the Lessee, provided that, if any portion of any such award or payment is made by reason of any damage to or destruction of the Leased Premises such portion shall be held and applied as provided in the first sentence of paragraph (a) of this Section 16.4. (c) Net awards and payments received on account of a Total Taking shall be allocated as follows: First: There shall be paid to Lessor an amount equal to the fair market value of the improved Building Area as determined by an appraisal. Second: Any remaining balance shall be paid to Lessee. Not more than thirty (30) days after any Taking referred to in paragraph (c) of this Section 16.4, Lessor shall cause a member of The American Institute of Real Estate Appraisers, or an organization that is a successor thereto, or in the event no such organization exists, an 13 organization of appraisers substantially similar thereto, (hereinafter "MAI Appraiser") to determine the value of the interest of Lessor as required by the provisions of such paragraph. Lessor's appraisal shall be the value if Lessee does not (a) within ten (10) days after receipt of notice of Lessor's appraisal employ an MAI Appraiser to determine the value and (b) within thirty (30) days after the effective date of notice of such objection submit to Lessor Lessee's appraisal and a written summary of the methods used and data collected to make the determination. If Lessor's and Les see's appraisal differ by less than ten percent (10%), they shall be averaged. If they differ by more than ten percent (10%), the two appraisers shall jointly appoint a third MAI Appraiser. The appraisal that among the three is furthest from the median of the appraisals shall be disregarded and the mean average of the other two shall be the value and binding upon Lessor and Lessee. Lessor and Lessee shall each pay one-half (1/2) of the expense of all appraisals. 16.5 First Mortgagee Participation. The First Mortgagee, if any, shall have the right to participate in all proceedings and negotiations described in Section 16.1. 17. Right to Perform Lessee's Covenants. In the event that Lessee shall fail to perform any act required hereunder to be performed by Lessee, then Lessor or First Mortgagee may, but shall be under no obligation to, after such notice to Lessee, if any, as may be reasonable under the circumstances, perform such act with the same effect as if made or performed by Lessee. Entry by Lessor or First Mortgagee upon the Leased Premises for such purpose shall not waive or release Lessee from any obligation or default hereunder (except in the case of any obligation or default which shall have been fully performed or cured by Mortgagee). Lessee shall reimburse Lessor and First Mortgagee for all sums so paid by Lessor or First Mortgagee and all costs and expenses incurred by Lessor and First Mortgagee in connection with the performance of any such act. Any amount not reimbursed to the Lessor within ten (10) days after demand may be deducted from payments due to the Lessee under the Management Agreement. 18. Right to Perform Lessor's Covenants. In the event that Lessor shall fail to pay any sum or perform any act required hereunder to be paid or performed by Lessor, then Lessee may, but shall be under no obligation to, after such notice to Lessor as may be reasonable under the circumstances, pay such sum or perform such act with the same effect as if performed by Lessor. Lessor shall reimburse Lessee for all sums so paid by Lessee and all costs and 14 expenses incurred by Lessee in the performance of any such act. Any amount not reimbursed within ten (10) days after demand may be deducted from rent, or from payments due to Lessor under the Management Agreement. 19. Leasehold Mortgages. (a) Leasehold Mortgage Authorized Without Lessor's prior consent Lessee may mortgage or otherwise encumber Lessee's leasehold estate created by this Lease and including all, Improvements (the "Leasehold Estate") to or for the benefit of the Lenders, to secure an amount not to exceed the amount of $1,700,000.00 plus accrued interest, or to replace, restructure, refinance, refund or renew such mortgage (including, without limitation such replacement, restructure or refinancing involving a mortgagee as trustee, agent or other representative capacity to secure notes or bonds or other obligations issued by Lessee), under a Leasehold Mortgage and assign this Lease as security for such Mortgage or Mortgages. Any other Leasehold Mortgage shall require prior written consent of the Board. (b) Notice to Lessor (i) (1) If Lessee shall on one or more occasions mortgage or otherwise encumber Lessee's Leasehold Estate to or for the benefit of one or more Institutional Lenders, and if the holder of such Leasehold Mortgage shall provide Lessor with notice of such Leasehold Mortgage together with a copy of such Leasehold Mortgage and the name and address of the Leasehold Mortgagee, Lessor and Lessee agree that, following receipt of such notice by Lessor, the provisions of this Section 19 shall apply in respect to each such Leasehold Mortgage. (2) In the event of any assignment of a Leasehold Mortgage or in the event of a change of address of a Leasehold Mortgagee or of any Assignee of such Leasehold Mortgage, notice of the new name and address shall be provided to Lessor. (ii) Lessor shall promptly upon receipt of a communication purporting to constitute the notice provided for by subsection (b)(i) above 15 acknowledge receipt of such communication as constituting the notice provided for by subsection (b)(i) above and agree to be bound by the provi sions of the Lease for the benefit of the Leasehold Mortgagee by an instrument in recordable form or, in the alternative, notify the Lessee and the Leasehold Mortgagee of the rejection of such communication as not conforming with the provisions of subsection (b)(i) and specify the specific basis of such rejection. (iii) After Lessor has received the notice provided for by subsection (b)(i) above, the Lessee, upon being requested to do so by Lessor, shall with reasonable promptness provide Lessor with copies of the note or other obligation secured by such Leasehold Mortgage and of any other documents pertinent to the Leasehold Mortgage as specified by the Lessor. If requested to do so by Lessor, the Lessee shall thereafter also provide the Lessor from time to time with a copy of each amendment or other modification or supplement to such instruments. All recorded documents shall be accompanied by the appropriate certification of the applicable Recording Office as to their authenticity as true and correct copies of official records and all nonrecorded documents shall be accompanied by a certification by Lessee that such documents are true and correct copies of the originals. From time to time upon being requested to do so by Lessor, Lessee shall also notify Lessor of the date and place of recording and other pertinent recording data with respect to such instruments as have been recorded. Neither Lessee's failure to provide any of the documents described above certified as so provided, nor any other act or omission by Lessee shall affect the validity of a Leasehold Mortgage or the Leasehold Mortgagee's exercise of its rights under this Lease or the Leasehold Mortgage. (c) Definitions (i) The term "Institutional Lender(s)" as used in this Section 19 shall refer to a savings bank, savings and loan association, commercial bank, trust company, credit union, insurance company, educational institution, real estate investment trust or pension fund, in each case whether acting for itself or as agent or trustee or other representative capacity for the 16 holders of notes, bonds or other obligations of Lessee. The term "Institutional Lender(s)" shall also include other lenders of substance which perform functions similar to any of the foregoing, and which have assets in excess of fifty million dollars ($50,000,000) at the time the Leasehold Mortgage loan or obligation is made or incurred. (ii) The term "Leasehold Mortgage" as used in this Section 19 shall include a mortgage, a deed of trust, a deed to secure debt, assignment of rents and profits or other security instrument by which Lessee's Leasehold Estate is mortgaged, conveyed, assigned, or otherwise encumbered, to secure a debt or other obligation. (iii) The term "Leasehold Mortgagee" as used in this Section 19 shall refer to any holder of a Leasehold Mortgage, whether for itself or in a representative capacity, in respect to which the notice provided for by subsection (b) of this Section 19 has been given and received and as to which the provisions of this Section 19 are applicable. (d) Consent of Leasehold Mortgagee Required No termination, surrender or modification of this Lease by Lessor and/or Lessee whether pursuant to Section 2, 15 or 16 or otherwise (other than a termination by Lessor after an Event of Default made in accordance with the provisions of this Section 19) shall be effective unless consented to in writing by all Leasehold Mortgagees. (e) Default Notice Lessor, upon providing Lessee any notice of: (i) default under this Lease, or (ii) a termination of this Lease, or (iii) a matter on which Lessor may predicate or claim a default, shall at the same time provide a copy of such notice to every Leasehold Mortgagee. No such notice by Lessor to Lessee shall be deemed to have been duly given unless and until a copy thereof has been so received by every Leasehold Mortgagee. From and after such notice has been received by every Leasehold Mortgagee, such Leasehold Mortgagee shall have the same period, after the giving of such notice upon it, for remedying any default or acts or omissions which are the subject matter of such notice or causing the same to be remedied, as is given Lessee after the giving of such notice to Lessee, plus in each instance, the additional period of time specified in subsections (f) 17 and (g) of this Section 19 to remedy, commence remedying or cause to be remedied the defaults or acts or omissions which are the subject matter of such notice specified in any such notice. Lessor shall accept such performance by or at the instigation of such Leasehold Mortgagee as if the same had been done by Lessee. Lessee authorizes each Leasehold Mortgagee to take any such action at such Leasehold Mortgagee's option and does hereby authorize entry upon the Leased Premises by the Leasehold Mortgagee for such purpose. (f) Notice to Leasehold Mortgagee (i) Anything contained in this Lease to the contrary notwithstanding, if any default shall occur which entitles Lessor to terminate this Lease, Lessor shall have no right to terminate this Lease unless, following the expiration of the period of time given Lessee to cure such default or the act or omission which gave rise to such default, Lessor shall notify every Leasehold Mortgagee of Lessor's intent to so terminate at least 30 days in advance of the proposed effective date of such termination if such default is capable of being cured by the payment of money, and at least 45 days in advance of the proposed effective date of such termination if such default is not capable of being cured by the payment of money. The provisions of subsection (g) below of this Section 19 shall apply if, during such 30- or 45-day termination notice period, any Leasehold Mortgagee shall: (1) notify Lessor of such Leasehold Mortgagee's desire to nullify such notice, and (2) pay or cause to be paid all rent, additional rent, and other payments then due and in arrears as specified in the Termination Notice to such Leasehold Mortgagee and which may become due during such 30- or 45-day period, and (3) comply or in good faith, with reasonable diligence and continuity, commence to comply with all nonmonetary requirements of this Lease then in default and reasonably susceptible of being complied with by such Leasehold Mortgagee; provided, however, that such Leasehold Mortgagee shall not be required during such 45-day period to cure or commence to cure any default consisting of Lessee's failure to satisfy and discharge any lien, charge or other encumbrance 18 against the Lessee's interest in this Lease or the Leased Premises junior in priority to the lien of the Leasehold Mortgage held by such Leasehold Mortgagee. (ii) Any notice to be given by Lessor to a Leasehold Mortgagee pursuant to any provision of this Section 19 shall be deemed properly addressed if sent to the Leasehold Mortgagee who served the notice referred to in subsection (b)(i)(l) unless notice of a change of Leasehold Mortgage ownership has been given to Lessor pursuant to subsection (b)(i)(2). (g) Procedure On Default (i) If Lessor shall elect to terminate this Lease by reason of any default of Lessee, and a Leasehold Mortgagee shall have proceeded in the manner provided for by subsection (f) of this Section 19, the specified date for the termination of this Lease as fixed by Lessor in its Termination Notice shall be extended for a period of six months, provided that such Leasehold Mortgagee shall, during such six-month period: (1) Pay or cause to be paid the rent, additional rent and other monetary obligations of Lessee under this Lease as the same become due, and continue its good faith efforts to perform all of Lessee's other obligations under this Lease, excepting (A) obligations of Lessee to satisfy or otherwise discharge any lien, charge or other encumbrance against Lessee's interest in this Lease or the Leased Premises junior in priority to the lien of the Leasehold Mortgage held by such Leasehold Mortgagee and (B) nonmonetary obligations then in default and not reasonably susceptible of being cured by such Leasehold Mortgagee (which shall include Section 20(c) and 20(d), without limitation) (2) if not enjoined or stayed or otherwise prohibited by legal process, take steps to acquire or sell Lessee's interest in this Lease by foreclosure of the Leasehold Mortgage or other appropriate means and prosecute the same to completion with due diligence. (ii) If at the end of such six (6) month period such Leasehold Mortgagee is complying with 19 subsection (g)(i), this Lease shall not then terminate, and the time for completion by such Leasehold Mortgagee of its proceedings shall continue so long as such Leasehold Mortgagee is enjoined or stayed or otherwise prohibited by legal process and thereafter for so long as such Leasehold Mortgagee proceeds to complete steps to acquire or sell Lessee's interest in this Lease by foreclosure of the Leasehold Mortgage or by other appropriate means with reasonable diligence and continuity. Nothing in this subsection (g) of this Section 19, however, shall be construed to extend this Lease beyond the original term thereof as extended by any options to extend the term of this Lease properly exercised by Lessee or a Leasehold Mortgagee in accordance with Section 19, nor to require a Leasehold Mortgagee to continue such foreclosure proceedings after the default has been cured. If the default shall be cured and the Leasehold Mortgagee shall discontinue such foreclosure proceedings, this Lease shall continue in full force and effect as if Lease had not defaulted under this Lease. (iii) If a Leasehold Mortgage is complying with subsection (g)(i) of this Section 19, upon the acquisition of Lessee's Leasehold Estate herein by such Leasehold Mortgagee or its designee or any other purchaser at a foreclosure sale or otherwise, this Lease shall continue in full force and effect as if Lessee had not defaulted under this Lease. (iv) For the purpose of this Section 19, the making of a Leasehold Mortgage shall not be deemed to constitute an assignment or transfer of this Lease or the Leasehold Estate hereby created, nor shall any Leasehold Mortgagee, as such, be deemed top be an assignee or transferee of this Lease or of the Leasehold Estate hereby created so as to require such Leasehold Mortgagee, as such, to assume the performance of any of the terms, covenants or conditions on the part of the Lessee to be performed hereunder, but the purchaser at any sale of this Lease and of the Leasehold Estate hereby created in any proceedings for the foreclosure of any Leasehold Mortgage, or the assignee or transferee of this Lease and of the Leasehold Estate hereby created in any proceedings for the foreclosure of any Leasehold Mortgage, or the assignee or transferee of this Lease and of 20 the Leasehold Estate hereby created under any instrument of assignment or transfer in lieu of the foreclosure of any Leasehold Mortgage shall be deemed to be an assignee or transferee within the meaning of this Section 19, and shall be deemed to have agreed to perform all of the terms, covenants and conditions on the part of the Lessee to be performed hereunder from and after the date of such purchase and assignment, but only for so long as such purchaser or assignee is the owner of the Leasehold Estate. If the Leasehold Mortgagee shall become holder of the Leasehold Estate and if the Improvements shall have been or become materially damaged on, before or after the date of such purchase and assignment, the Leasehold Mortgagee or its designee shall be obligated to repair, replace or reconstruct the Improvements if Lessee is obligated to do so under Section 15, only to the extent of the net insurance proceeds received by the Leasehold Mortgagee or its designee by reason of such damage. However, should such net insurance proceeds be insufficient to repair, replace or reconstruct the building or other improvements to the extent required by Section 15 and should the Leasehold Mortgagee or its designee choose not to fully reconstruct the Improvements to the extent required by said Section 15 such failure shall constitute an event of default under this Lease. (v) Any Leasehold Mortgagee or other acquirer of the Leasehold Estate of Lessee pursuant to foreclosure, assignment in lieu of foreclosure or other proceedings may, upon acquir ing Lessee's Leasehold Estate, without further consent of Lessor, sell and assign the Leasehold Estate on such terms and to such persons and organizations as are acceptable to such Leasehold Mortgagee or acquirer and thereafter be relieved of all obligations under this Lease; provided that such assignee has delivered to Lessor its written agreement to be bound by all of the provisions of this Lease. (vi) Notwithstanding any other provisions of this Lease, any sale of this Lease and of the Leasehold Estate hereby created in any proceedings for the foreclosure of any Leasehold Mortgage, or the assignment or transfer of this Lease and of the Leasehold Estate hereby created in lieu of the foreclosure of any Leasehold 21 Mortgage shall be deemed to be a permitted sale, transfer or assignment of this Lease and of the Leasehold Estate hereby created. (h) New Lease In the event of the termination of this Lease for any reason whatsoever, including, without limitation, due to a default by Lessee under this Lease or a rejection of this Lease by Lessee as debtor-in-possession or by Lessee's trustee in bankruptcy, Lessor shall, in addition to providing the notices of default and termination as required by subsections (e) and (f) above of this Section 19, provide each Leasehold Mortgagee with written notice that the Lease has been terminated, together with a statement of all sums which would at that time be due under this Lease but for such termination, and of all other defaults, if any, then known to Lessor. Lessor agrees to enter into a new lease ("New Lease") of the Leased Premises with such Leasehold Mortgagee or its designee for the remainder of the term of this Lease, effective as of the date of termination, at the rent and additional rent, and upon the terms, covenants and conditions (including all options to renew but excluding requirements which are not applicable or which have already been fulfilled) of this Lease, provided: (i) Such Leasehold Mortgagee shall make written request upon Lessor for such New Lease within 60 days after the date such Leasehold Mortgagee receives Landlord's Notice of Termination of this Lease given pursuant to this subsection (h). (ii) Such Leasehold Mortgagee or its designee shall pay or cause to be paid to Lessor at the time of the execution and delivery of such New Lease, any and all sums which would at the time of execution and delivery thereof be due pursuant to this Lease but for such termination and, in addition thereto, all reasonable expenses, including reasonable attorneys' fees, which Lessor shall have incurred by reason of such termination and the execution and delivery of the New Lease and which have not otherwise been received by Lessor from Lessee or other party in interest under Lessee. Upon the execution of such New Lease, Lessor shall allow to the Lessee named therein as an offset against the sums otherwise due under this subsection (h)(ii) or under the New Lease, an amount equal to the net income derived by Lessor from the Leased Premises during the 22 period from the date of termination of this Lease to the date of the beginning of the Lease term of such New Lease. In the event of a controversy as to the amount to be paid to Lessor pursuant to this subsection (h)(ii), the payment obligation shall be satisfied if Lessor shall be paid the amount not in controversy, and the Leasehold Mortgagee or its designee shall agree to pay any additional sum ultimately determined to be due plus interest at the rate of 10% per annum. (iii) Such Leasehold Mortgagee or its designee shall agree to remedy any of Lessee's defaults of which said Leasehold Mortgagee was notified by Lessor's Notice of Termination and which are reasonably susceptible of being so cured by Leasehold Mortgagee or its designee. Provided, however, that such Leasehold Mortgagee or its designee shall not be required to cure any default consisting of Lessee's failure to satisfy and discharge any lien, charge or other encumbrance against the Lessee's interest in this Lease or the Leased Premises junior in priority to the lien of the Leasehold Mortgage held by the Leasehold Mortgagee. (iv) Any New Lease made pursuant to this subsection (h) and any renewal lease entered into with a Leasehold Mortgagee shall be prior to any mortgage or other lien, charge or encumbrance on the fee of the Leased Premises and the Lessee under such New Lease shall have the same right, title and interest in and to the Leased Premises and the buildings, improvements and fixtures thereon as Lessee had under this Lease. (v) The Lessee under any such New Lease shall be liable to perform the obligations imposed on the Lessee by such New Lease only during the period such person has ownership of such Leasehold Estate. (i) New Lease Priorities If more than one Leasehold Mortgagee shall request a New Lease pursuant to subsection (h)(i) of this Section 19, Lessor shall enter into such New Lease with the Leasehold Mortgagee whose Leasehold Mortgage is prior in lien, or with the designee of such Leasehold Mortgagee. Lessor, without liability to Lessee or any Leasehold Mortgagee with an adverse claim, may rely upon a mortgagee 23 title insurance policy issued by a responsible title insurance company doing business within the state in which the Leased Premises are located as the basis for determining the appropriate Leasehold Mortgagee who is entitled to such New Lease. (j) Leasehold Mortgagee Need Not Cure Specified Defaults Nothing herein contained shall require any Leasehold Mortgagee or its designee as a condition to its exercise of right hereunder to cure any default of Lessee not reasonably susceptible of being cured by such Leasehold Mortgagee or its designee, or a subsequent owner of the Leasehold Estate through foreclosure hereof (including, without limitation, Sections 20(c) and 20(d)), in order to comply with the provisions of subsection (f) or (g) of this Section 19, or as a condition of entering into the New Lease provided for by subsection (h) of this Section 19. (k) No Merger So long as any Leasehold Mortgage is in existence, unless all Leasehold Mortgagees shall otherwise expressly consent in writing, the fee title to the Leased Premises and the Leasehold Estate of Lessee therein created by this Lease shall not merge but shall remain separate and distinct, notwithstanding the acquisition of said fee title and said Leasehold Estate by Lessor or by Lessee or by a third party, by purchase or otherwise. (l) Future Amendments In the event Lessee seeks to mortgage its Leasehold Estate, Lessor agrees to amend this Lease from time to time to the extent reasonably requested by an Institutional Lender proposing to make Lessee a loan secured by a first lien upon Lessee's Leasehold Estate, provided that such proposed amendments do not materially and adversely affect the rights of Lessor or its interest in the Leased Premises. All reasonable expenses incurred by Lessor in connection with any such amendment shall be paid by Lessee. (m) Estoppel Certificate Lessor shall, without charge, at any time and from time to time hereafter, but not more frequently than twice in any one-year period (or more frequently if such request is made in connection with any sale or mortgaging of Lessee's Leasehold interest or permitted subletting by 24 Lessee), within 10 days after written request of Lessee to do so, certify by written instrument duly executed and acknowledged to any Leasehold Mortgagee or purchaser, or proposed Leasehold Mortgagee or proposed purchaser, or any other person, firm or corporation specified in such request: (A) as to whether this Lease has been supplemented or amend ed, and if so, the substance and manner of such supplement or amendment; (B) as to the validity and force and effect of this Lease, in accordance with its tenor; (C) as to the existence of any default hereunder; (D) as to the existence of any offsets, counterclaims or defenses hereto on the part of the Lessee; (E) as to the commencement and expiration dates of the term of this Lease; and (F) as to any other matters as may be reasonably so requested. Any such certificate may be relied upon by the Lessee and any other person, firm or corporation to whom the same may be exhibited or delivered, and the contents of such certificate shall be binding on the Lessor. (n) Notices Notices from Lessor to the Leasehold Mortgagee shall be mailed or personally delivered to the address furnished Lessor pursuant to subsection (b) of this Section 19, and those from the Leasehold Mortgagee to Lessor shall be mailed or personally delivered to the address designated pursuant to the provisions of Section 26 hereof. Such notices, demands and requests shall be given in the manner described in Section 26 and shall in all respects be governed by the provisions of that Section. (o) Erroneous Payments No payment made to Lessor by a Leasehold Mortgagee shall constitute agreement that such payment was, in fact, due under the terms of this Lease; and a Leasehold Mortgagee having made any payment to Lessor pursuant to Lessor's wrongful, improper or mistaken notice or demand shall be entitled to the return of any such payment or portion thereof provided he shall have made demand therefor not later than one year after the date of its payment. (p) Performance of Leasehold Mortgagee Leasehold Mortgagee shall have the right, but not the obligation, at any time prior to termination of this Lease to pay all rents due hereunder, to effect any insurance, to pay any taxes or assessments, to make any repair or improvements or otherwise to do any act or thing required of the Lessee hereunder or necessary or proper to prevent the termination of this Lease, and Leasehold 25 Mortgagee is authorized to enter the Leased Premises for any such purpose. All such acts and things shall be effective to prevent a termination of this Lease as if done by Lessee instead of Leasehold Mortgagee. (q) Survival The provisions of this section 19 shall survive any termination of this Lease. 20. Events of Default; Termination. If any one or more of the following events ("Events of Default") shall occur: (a) if Lessee shall fail to pay any rent and such failure shall continue for more than twenty (20) days after notice thereof from Lessor; or (b) if Lessee shall fail to perform or comply with any term hereof, such failure shall continue for more than 90 days after notice thereof from Lessor, and Lessee shall not, subject to Unavoidable Delays, within such period commence with due diligence and dispatch the curing of such default, or, having so commenced, shall thereafter fail or neglect, for reasons other than Unavoidable Delays, to prosecute or complete with due diligence and dispatch the curing of such default; or (c) if Lessee shall make a general assignment for the benefit of creditors, or shall admit in writing its inability to pay its debts as they become due or shall file a petition in bankruptcy, or shall be adjudicated a bankrupt or insolvent, or shall file a petition seeking any reorganization, arrangement, composition, readjustment, liquidation, dissolution or similar relief under any present or future statute, law or regulation, or shall file an answer admitting or shall fail seasonably to contest the material allegations of a petition filed against it in any such proceeding, or shall seek or consent to or acquiesce in the appointment of any trustee, receiver or liquidator of Lessee or any material part of its properties; or (d) if, within 90 days after the commencement of any proceeding against Lessee seeking any reorganization, arrangement, composition, readjustment, liquidation, 26 dissolution or similar relief under any present or future statute, law or regulation, such proceeding shall not have been dismissed, or if, within 90 days after the appointment without the consent or acquiescence of Lessee, of any trustee, receiver or liquidator of Lessee or of any material part of its properties, such appointment shall not have been vacated; then, and in any such event (regardless of the tendency of any proceeding which has or might have the effect of preventing Lessee from complying with the terms of this Lease), Lessor, at any time thereafter may give a written termination notice to Lessee, and, subject to Section 19, on the date specified in such notice this Lease shall terminate and, the Lease Term shall expire and terminate by limitation, and all rights of Lessee under this Lease shall cease, unless before such date (i) all arrears of Rent, (together with interest thereon at the rate of 10% per annum) and all reasonable costs and expenses (including, without limitation, reasonable attorneys' fees and expenses) incurred by or on behalf of Lessor hereunder, shall have been paid by Lessee, and (ii) all other defaults at the time existing under this Lease shall have been fully remedied to the reasonable satisfaction of Lessor. 21. No Waiver, etc., by Lessor or Lessee. No failure by Lessor or Lessee to insist upon the strict performance of any term hereof or to exercise any right, power or remedy consequent upon a breach thereof, and no submission by Lessee or acceptance by Lessor of full or partial rent during the continuance of any such breach, shall constitute a waiver of any such breach or of any such term. No waiver of any breach shall effect or alter this Lease, which shall continue in full force and effect, or the respective rights of Lessor or Lessee with respect to any other then existing or subsequent breach. No foreclosure, sale or other proceeding under any Mortgage or any other mortgage with respect to the Leased Premises shall discharge or otherwise affect the obligations of Lessee hereunder. 22. Acceptance of Surrender. No modification, termination or surrender of this Lease or surrender of the Leased Premises or any part thereof whether pursuant to Sections 15 or 16 or otherwise, or of any interest therein by Lessee shall be valid or effective unless agreed to and accepted in writing by Lessor and First Mortgagee, if any, and no act by any representative or agent of Lessor or First Mortgagee, other than such a written agreement and acceptance by Lessor and First Mortgagee, shall constitute an acceptance thereof. 27 23. Estoppel Certificate by Lessee. Lessee will execute, acknowledge and deliver to Lessor, promptly upon request, a certificate certifying that (a) this Lease is unmodified and in full force and effect (or, if there have been modifications, that the Lease is in full force and effect, as modified, and stating the modifications), (b) the dates, if any, to which Rent, has been paid, and (c) no notice has been received by Lessee of any default which has not been cured, except as to defaults specified in said certificate. Any such certificate may be relied upon by any prospective purchaser or mortgagee of the Leased Premises or any part thereof. 24. End of Lease Term. Upon the expiration or, other termination of the term of this Lease, Lessee shall quit and surrender to Lessor the Leased Premises ordinary wear and tear and damage by fire and other casualty excepted, and shall remove all Lessee's Equipment therefrom. 25. Provisions Subject to Applicable Law. All rights, powers and remedies provided herein may be exercised only to the extent that the exercise thereof does not violate any applicable law, and are intended to be limited to the extent necessary so that they will not render this Lease invalid, unenforceable or not entitled to be recorded under any applicable law. If any term of this Lease shall be held to be invalid, illegal or unenforceable, the validity of the other terms of this Lease shall in no way be affected thereby. 26. Notices, etc. All notices and other communi cations hereunder shall be in writing and shall be deemed to have been given when mailed by first class registered or certified mail, postage prepaid, or personally delivered addressed (a) if to Lessee, 2000 Southbridge Parkway, Suite 200, Birmingham, Alabama 35209, with a copy to the Leased Premises, or at such other address as Lessee shall have furnished in writing to Lessor, or (b) if the Lessor, at 7600 N.W. 23rd St., Bethany, Oklahoma or at such other address as Lessor shall have furnished in writing to Lessee. 27. Easements. If requested by Lessee, Lessor will join in any easements, licenses, plats or restrictions determined by Lessee to be necessary or desirable for the operation of the Lease Premises; provided, however, the form of any such instruments is subject to the approval of Lessor which will not be unreasonably withheld or delayed. 28. Assignment. The Lessee shall have the right to assign this Lease, with the consent of the Lessor, which shall not be unreasonably withheld or delayed, to any 28 transferee of substantially all of Lessee's assets (including the Lessee's rights under the Management Agreement if still in effect) provided such transferree expressly assumes, by writing delivered to Lessor, all of the obligations of the transferring party under this Lease. 29. Miscellaneous. This Lease may be changed, waived, discharged or terminated only by an instrument in writing signed by the party against which enforcement of such change, waiver, discharge or termination is sought. This Lease shall be binding upon and inure to the benefit of and be enforceable by the respective successors and assigns of the parties hereto. The headings in this Lease are for purposes of reference only and shall not limit or define the meaning hereof. This Lease may be executed in any number of counterparts, each of which is an original, but all of which shall constitute one instrument. In the event of a conflict between the terms of this Lease and the terms of the City Lease or the Contract, the terms of this Lease shall control. City joins in this Lease as owner of the Leased Premises to lease the Leased Premises to Lessee and to evidence its approval of and ratify the terms and provisions hereof, however, nothing herein contained shall create an indebtedness of the City. IN WITNESS WHEREOF, the parties hereto have caused this Lease to be executed and their respective seals to be hereunto affixed and attested by their respective officers thereunto duly authorized. BETHANY PSYCHIATRIC HOSPITAL, INC., ATTEST: an Oklahoma corporation By: Its Assistant Secretary Its President BETHANY GENERAL HOSPITAL By: THE HOSPITAL BOARD OF ATTEST: THE CITY OF BETHANY, OKLAHOMA By: Its Secretary Its Chairman 29 THE CITY OF BETHANY, OKLAHOMA ATTEST: By: Its Clerk Its Mayor THE BETHANY HOSPITAL TRUST, ATTEST: a Public Trust By: Its Secretary Its Chairman 1 STATE OF ALABAMA) )ss. COUNTY OF JEFFERSON) The foregoing instrument was acknowledged before me this ______ day of _________, 1986, by Charles A. Speir, as President of Bethany Psychiatric Hospital, Inc., an Oklahoma corporation, on behalf of the corporation. Notary Public My Commission Expires: (SEAL) STATE OF OKLAHOMA ) ) ss. COUNTY OF OKLAHOMA) The foregoing instrument was acknowledged before me this _____ day of ________, 1985, by ______________ as _______________ of The Hospital Board of the City of Bethany, Oklahoma, on behalf of Bethany General Hospital. Notary Public My Commission Expires: (SEAL) 2 STATE OF OKLAHOMA) ) ss. COUNTY OF OKLAHOMA) The foregoing instrument was acknowledged before me this _____ day of _________, 1985, by _________________ as _______________, Chairman of The Bethany Hospital Trust, a public trust, on behalf of the Trust. Notary Public My Commission Expires: (SEAL) STATE OF OKLAHOMA) ) ss. COUNTY OF OKLAHOMA) The foregoing instrument was acknowledged before me this _____ day of _______, 1985, by ______________ as _______________ of The City of Bethany, Oklahoma, on behalf of The City of Bethany, Oklahoma. Notary Public My Commission Expires: (SEAL) 1 EXHIBIT "A" Schedule A A part of the Northwest Quarter (NW/4) of Section TWENTY-NINE (29), Township TWELVE (12) North, Range FOUR (4) West of the Indian Meridian, more particularly described as follows, to-wit: Beginning at a point in the North line of said Northwest Quarter (NW/4) 685 feet West of the Northeast corner of said Northwest Quarter (NW/4) for the point or place of beginning; thence South and at right angles to the North line of said Northwest Quarter (NW/4) a distance of 50 feet to the point of a curvature; thence to the left along the arc of a curve having a radius of 775.06 feet for a distance of 533.35 feet to the point of a reverse curve; thence to the right and along an arc of a curve having a radius of 707.78 feet for a distance of 198.69 feet to the point of a compound tangency; thence Southwesterly and to the right along the arc of the curve having a radius of 329.36 feet for a distance of 134.18 feet to the point of a tangency; thence West and parallel with the North line of said Northwest Quarter (NW/4) a distance of 735 feet to the point of a curvature; thence to the right and along the arc of a curve having a radius of 444.71 feet for a distance of 39.33 feet to the point of a compound tangency; thence Northeasterly and to the right along the arc of a curve having a radius of 379.66 feet for a distance of 195.56 feet to the point of a reverse curve; thence to the left along the arc of a curve having a radius of 770.95 feet for a distance of 551.77 feet to the point of a tangency; thence North and at right angles to the North line of said Northwest Quarter (NW/4) a distance of 50 feet to a point on the North line of said Northwest Quarter (NW/4) 1,085 feet West of the Northeast corner of said Northwest Quarter (NW/4); thence East along the North line of said Northwest Quarter (NW/4) a distance of 400 feet to the point or place of beginning. (NOTE: Subject to requirement No. 6) EXHIBIT "B" December 20, 1985 LEGAL DESCRIPTION of property from Bethany General Hospital Tract for use as Psychiatric Ward Addition A part of the Northwest Quarter (NW 1/4) of Section Twenty-nine (29), Township Twelve (12) North, Range Four (4) West of the Indian Meridian, more particularly described as follows, to wit: COMMENCING at a point in the North line of said Northwest Quarter (NW 1/4) 685.00 feet West of the Northeast corner of said Northwest Quarter (NW 1/4); THENCE South and at right angles to the North line of said Northwest Quarter (NW 1/4) a distance of 50.00 feet to the point of a curvature; THENCE to the left along the arc of a curve having a radius of 775.06 feet for a distance of 533.35 feet to the point of a reverse curve; THENCE to the right and along an arc of a curve having a radius of 707.78 feet for a distance of 198.69 feet to the point of a compound tangency; THENCE South westerly and to the right along the arc of a curve having a radius of 329.36 feet for a distance of 134.18 feet to the point of a tangency; THENCE West and parallel with the North line of said Northwest Quarter (NW 1/4) a distance of 521.84 feet; THENCE North 74.19 feet to the point of BEGINNING; THENCE North 00 degrees 00'00" East a distance of 168.00 feet; THENCE North 90 degrees 00'00" West a distance of 6.50 feet; THENCE North 00 degrees 00'00" East a distance of 26.00 feet to a point on the South building line of the Bethany General Hospital, THENCE North 90 degrees 00'00" West along said South building line a distance of 61.59 feet; THENCE South 00 degrees 00'00" West a distance of 25.17 feet; THENCE North 90 degrees 00'00" West a distance of 24.33 feet; THENCE South 00 degrees 00'00" West a distance of 37.25 feet; THENCE North 90 degrees 00'00" West a distance of 12.00 feet; THENCE South 00 degrees 00'00" West a distance of 25.00 feet; THENCE South 90 degrees 00'00" East a distance of 12.00 feet; THENCE South 00 degrees 00'00" West a distance of 21.75 feet; THENCE South 90 degrees 00'00" East a distance of 27.08 feet; THENCE South 00 degrees 00'00" West a distance of 84.83 feet; THENCE South 90 degrees 00'00" East a distance of 65.33 feet to the point or place of BEGINNING containing 15149.92 square feet or .3478 acres more or less. 1 EXHIBIT "C" December 20, 1985 LEGAL DESCRIPTION of property from Bethany General Hospital Tract for use as Psychiatric Ward Addition Parking Lot A part of the Northwest Quarter (NW 1/4) of Section Twenty-nine (29), Township Twelve (12) North, Range Four (4) West of the Indian Meridian, more particularly described as follows, to wit: COMMENCING at a point in the North line of said Northwest Quarter (NW 1/4) 685.00 feet West of the Northeast corner of said Northwest Quarter (NW 1/4); THENCE South and at right angles to the North line of said Northwest Quarter (NW 1/4) a distance of 50.00 feet to the point of a curvature; THENCE to the left along the end of a curve having a radius of 775.06 feet for a distance of 533.35 feet to the point of a reverse curve; THENCE to the right and along an arc of a curve having a radius of 707.78 feet for a distance of 198.69 feet to the point of a compound tangency; THENCE South westerly and to the right along the arc of a curve having a radius of 329.36 feet for a distance of 134.18 feet to the point of a tangency; THENCE West and parallel with the North line of said Northwest Quarter (NW 1/4) a distance of 614.26 feet; THENCE North 118.70 feet to the point of BEGINNING; THENCE North 00 degrees 00'00" East a distance of 62.02 feet; THENCE North 90 degrees 00'00" West a distance of 12.00 feet; THENCE North 00 degrees 00'00" East a distance of 25.00 feet; THENCE South 90 degrees 00'00" East a distance of 12.00 feet; THENCE North 00 degrees 00'00" East a distance of 36.50 feet; THENCE North 90 degrees 00'00" West a distance of 40.39 feet to a point on the East Right-of-way line of Thompkins Avenue; THENCE Southwesterly along said Right-of-way line on a curve to the right having a radius of 800.95 feet a distance of 100.25 feet having a chord length and bearing of 100.18 feet South 37 degrees 25'16" West to a point of a reverse curve; THENCE on a curve to the left having a radius of 349.66 feet a distance of 54.75 feet having a chord length and bearing of 54.70 feet South 36 degrees 31'15" West; THENCE South 90 degrees 00'00" East a distance of 133.82 feet to the point or place of BEGINNING containing 10440.29 square feet or .2397 acres more or less. EX-10 5 EXHIBIT 10.88 CONSENT AND AMENDMENT EXHIBIT 10.88 CONSENT AND AMENDMENT This Consent and Amendment dated as of April __, 1995 (herein called this "Consent") among Ramsay Health Care, Inc., a Delaware corporation (the "Company"), certain subsidiaries of the Company (such subsidiaries together with the Company, collectively being hereinafter referred to as the "Obligors"), Societe Generale, New York Branch, as agent (the "Agent"), on behalf of the Lenders (as defined in the Credit Agreement dated as of May 15, 1993 (the "Credit Agreement"), among the Obligors, Hibernia National Bank, as a lender, First Union National Bank of North Carolina, as a lender, and Societe Generale, New York Branch, as lender, issuing bank and agent), and the Lenders. WHEREAS, the Obligors have requested the Agent and the Lenders to consent to certain transactions, and to amend the terms of the Credit Agreement, all as set forth herein, and the Agent and the Lenders are willing to give such consent to such transactions and agree to such amendment, as set forth herein. NOW, THEREFORE, in consideration of the premises and of other good and valuable consideration, receipt of which is hereby acknowledged, and intending to be legally bound, the parties hereto hereby agree as follows: SECTION 1. DEFINITIONS; REPRESENTATIONS AND WARRANTIES. Section 1.1. Definitions Contained in Credit Agreement. Capitalized terms used herein and not otherwise defined herein shall have the meanings assigned to such terms in the Credit Agreement. Section 1.2. Representations and Warranties. The Obligors hereby represent and warrant to the Agent as of the date hereof, for the benefit of the Lenders, that (i) the representations and warranties of the Obligors set forth in Article VI of the Credit Agreement are true and correct on and as of the date of this Consent, except to the extent that such representations and warranties expressly relate to an earlier date; (ii) no Default or Event of Default has occurred and is continuing as of the date of this Consent; (iii) the consummation of the Transaction (as defined below) will not result in any present or projected violation of Section 7.16 or any other provision of the Credit Agreement (except Sections 7.14, 7.21, 7.22 and 7.25 as to which this Consent is being delivered); (iv) the information furnished to the Agent by or on behalf of the Company in connection with this Consent does not contain any misstatement or understatement of a material fact and does not omit to state a material fact necessary in order to make the statements contained therein not misleading in light of the circumstances under which they were made; (v) all obligations of the Obligors due and payable under the Credit Documents on or as 2 of the closing date of the Transaction (the "Closing Date") will be paid in full on the Closing Date, and the reasonable attorneys fees of the Agent in connection with miscellaneous matters related to the Credit Agreement prior to the date of this Consent and in connection with this Consent will be paid within 30 days after receipt of a statement therefor; (vi) pursuant to Section 2.04(g) of the Credit Agreement, the Company is by separate notice of even date permanently reducing the Revolving Credit Maximum Commitment Amount from $4,000,000 to $2,000,000; and (vii) each of the Leases (as hereinafter defined) will be absolute net, the Seller-Lessees (as hereinafter defined) will be responsible, without limitation, for all taxes, repairs, maintenance, insurance, capital improvements and other expenses in connection with the operations of the Hospitals (as hereinafter defined), and the Leases will be accounted for as operating leases under generally accepted accounting principles. SECTION 2. CONSENT Section 2.1 Consent to Sale-Leaseback Transaction. With respect to the restrictions on sale-leaseback transactions, guarantees, operating leases, the prepayment of any of the Life Company Senior Notes and/or the Life Company Subordinated Notes, and amendments, modifications and supplements of the Life Company Indenture set forth in Sections 7.14, 7.21, 7.22 and 7.25 of the Credit Agreement, the Agent, on behalf of the Lenders, hereby consents to the consummation of a transaction (the various transactions described in this Section 2.1, hereinafter the "Transaction"), pursuant to which two wholly-owned subsidiaries of the Company described below will enter into sale-leaseback transactions with Capstone Capital Corporation or an affiliate thereof (collectively, "Buyer-Lessor"). As part of the Transaction, (i) RHCI San Antonio, Inc., a Delaware corporation and an indirect wholly-owned subsidiary of the Company ("RHCI S.A."), will sell to Buyer-Lessor for an aggregate purchase price of $3,950,000 (subject to adjustment as agreed to between the Company and Buyer-Lessor) the land, buildings, improvements, fixtures and all other real property constituting the Mission Vista hospital facilities owned by RHCI S.A. and located in San Antonio, Texas (the "Mission Vista Assets"), (ii) Mesa Psychiatric Hospital, Inc., an Arizona corporation and wholly- owned subsidiary of the Company ("Mesa"; Mesa and RHCI S.A. are sometimes hereinafter referred to individually as a "Seller- Lessee" or collectively as the "Seller-Lessees"), will sell to Buyer-Lessor for an aggregate purchase price of $8,550,000 (subject to adjustment as agreed to between the Company and Buyer-Lessor) the land, buildings, improvements, fixtures and all other real property constituting the Desert Vista hospital facilities owned by Mesa and located in Mesa, Arizona (the "Desert Vista Assets" and collectively with the Mission Vista Assets, the "Hospitals"), (iii) pursuant to leases to be entered into between Buyer-Lessor and the Seller-Lessees in substantially 3 the form thereof heretofore delivered to the Agent (the "Leases"), Buyer-Lessor will lease each of the Hospitals to the Seller-Lessees for an initial term of 15 years (with three successive renewal options of five years each) for aggregate annual lease payments of $1,539,600 (subject to adjustment as agreed to between the Seller-Lessees and the Buyer-Lessor), payable monthly, subject to an annual upward adjustment based upon the CPI (national index) with an annual cap of 3%, (iv) the Company will guarantee all obligations of the Seller-Lessees under the Leases and (v) the Third Supplemental Trust Indenture dated as of April 12, 1995, in the form attached hereto as Exhibit A, will be executed and delivered by the parties thereto, pursuant to which, inter alia, $7,500,000 of the proceeds of the Transaction will be applied to the prepayment not later than April 30, 1995 of the Life Company Senior Notes with a prepayment premium not exceeding $234,000. SECTION 3. AMENDMENT Section 3.1. Restriction on use of Revolving Credit Loans. The parties hereto hereby agree that Section 2.04(f) of the Credit Agreement is amended by adding the following proviso to the end of such Section: "; provided that no proceeds of the Revolving Credit Loans shall be used by the Company to fund working capital or other capital needs of Mesa Psychiatric Hospital, Inc." Section 3.2. Termination of Certain Documents. The parties hereto hereby agree that the Separate Revolving Credit Guaranty and the Accounts Receivable Security Agreement executed and delivered by Mesa Psychiatric Hospital, Inc. ("Mesa") in favor of the Agent of the benefit of the Lenders are hereby terminated and of no further force or effect and all of the obligations of and security interests granted by Mesa thereunder are hereby released and discharged. The parties agree to execute and deliver such further documents and instruments as shall be reasonably necessary and appropriate to effectuate the foregoing, including UCC termination statements with respect to the security interests granted pursuant to such Mesa Accounts Receivable Security Agreement. Mesa shall be a third party beneficiary of this Section 3.2. SECTION 4. MISCELLANEOUS Section 4.1. Applicability of Credit Agreement. The provisions of the Credit Agreement are hereby ratified, approved and confirmed and remain in full force and effect. 4 Section 4.2. Counterparts. This Consent may be executed in several counterparts, each of which shall be an original and all of which shall constitute but one and the same instrument. * * * 5 IN WITNESS WHEREOF, the parties hereto have executed this Consent and Amendment as of the date first written above. GREENBRIER HOSPITAL, INC. RAMSAY HEALTH CARE, INC. By__________________________ By____________________________ Name: Reynold J. Jennings Name: Reynold J. Jennings Title: President Title: President HOUMA PSYCHIATRIC GULF COAST TREATMENT HOSPITAL, INC. CENTER, INC. By__________________________ By____________________________ Name: Reynold J. Jennings Name: Reynold J. Jennings Title: President Title: President HSA OF OKLAHOMA, INC. ATLANTIC TREATMENT CENTER, INC. By__________________________ By____________________________ Name: Reynold J. Jennings Name: Reynold J. Jennings Title: President Title: President CAROLINA TREATMENT CENTER, GREAT PLAINS HOSPITAL, INC. INC. By__________________________ By____________________________ Name: Reynold J. Jennings Name: Reynold J. Jennings Title: President Title: President THE HAVEN HOSPITAL, INC. By____________________________ Name: Reynold J. Jennings Title: President This execution page is part of the Consent and Amendment dated as of __________, 1995 among Ramsay Health Care, Inc., certain of its subsidiaries, and Societe Generale, New York Branch, as agent, and the Lenders. 6 AGENT: SOCIETE GENERALE, NEW YORK BRANCH, AS AGENT By____________________________ Name: Sedare Coradin Title: Vice President LENDERS: FIRST UNION NATIONAL BANK OF NORTH CAROLINA By:________________________________ Its:_______________________________ HIBERNIA NATIONAL BANK By:________________________________ Its:_______________________________ SOCIETE GENERALE By:________________________________ Its:_______________________________ This execution page is part of the Consent and Amendment dated as of ____________, 1995 among Ramsay Health Care, Inc., certain of its subsidiaries, and Societe Generale, New York Branch, as agent, and the Lenders. 7 EXHIBIT A Third Supplemental Trust Indenture EX-10 6 EXHIBIT 10.93 CREDIT AGREEMENT EXHIBIT 10.93 THIRD AMENDMENT TO CREDIT AGREEMENT AND NOTE MODIFICATION AGREEMENT This THIRD AMENDMENT TO CREDIT AGREEMENT AND NOTE MODIFICATION AGREEMENT dated as of August 15, 1996 (this "Amendment") amending the Credit Agreement dated as of May 15, 1993, as heretofore amended by the First Amendment and the Second Amendment described below, the "Credit Agreement") among RAMSAY HEALTH CARE, INC. (the "Company"), a Delaware corporation, GREENBRIER HOSPITAL, INC. ("Greenbrier"), a Louisiana corporation, HOUMA PSYCHIATRIC HOSPITAL, INC. ("Houma"), a Louisiana corporation, HSA OF OKLAHOMA, INC. ("HSA"), an Oklahoma corporation, CAROLINA TREATMENT CENTER, INC. ("Carolina"), a South Carolina corporation, GULF COAST TREATMENT CENTER, INC. ("Gulf Coast"), a Florida corporation, and ATLANTIC TREATMENT CENTER, INC. ("Atlantic"), a Florida corporation, as Borrowers (collectively, the Borrowers"), GREAT PLAINS HOSPITAL, INC., a Missouri corporation, and THE HAVEN HOSPITAL, INC., a Delaware corporation, as Guarantors (collectively, the "Guarantors"), SOCIETE GENERALE, a French banking corporation acting by and through its New York Branch, FIRST UNION NATIONAL BANK OF NORTH CAROLINA, a national banking association, and HIBERNIA NATIONAL BANK, a national banking association, as Lenders (collectively, the "Lenders"), and SOCIETE GENERALE, as the issuer of the Letters of Credit described in the Credit Agreement (in such capacity, the "Issuing Bank") and as agent for the Lenders as provided in the Credit Agreement (in such capacity, the "Agent"), and modifying the Subsidiary Borrower Notes described in the Credit Agreement, W I T N E S S E T H: A. Pursuant to the Credit Agreement, at the request of the Borrowers, the Issuing Bank issued the Letters of Credit to support certain Bonds theretofore issued to finance certain hospital assets for the benefit of the Borrowers. Subsequent to the original issuance of the Letters of Credit, (i) the Letter of Credit issued for the account of Atlantic was terminated in connection with the sale of Atlantic's hospital assets and (ii) the other Letters of Credit have been reduced in connection with the sale of Atlantic's hospital assets and (ii) the other Letters of Credit have been reduced in connection with mandatory sinking fund payments of principal of the Bonds supported by such Letters of Credit. As of the date of this Amendment, the outstanding Letters of Credit and the respective amounts thereof are as follows: 1 Letter of Interest Account Credit Principal Interest Coverage Party Amount Component Component Calculation Greenbrier $5,344,375.00 $5,100,000.00 $244,375.00 115 days @ 15% 360-day year Houma 3,665,410.95 3,500,000.00 165,410.95 115 days @ 15% 365-day year HSA 3,132,330.00 3,000,000.00 132,330.00 115 days @ 14% 365-day year Carolina 4,401,250.00 4,200,000.00 201,250.00 115 days @ 15% 360-day year Gulf Coast 3,765,000.00 3,600,000.00 165,000.00 110 days @ 15% 360-day year TOTAL $20,308,365.95 $19,400,000.00 $908,365.95 B. The Credit Agreement also provided for Revolving Credit Loans by the Lenders to the Company up to a maximum aggregate outstanding principal balance of $4,000,000 to provide working capital for conducting the operations of the company and certain of its consolidated subsidiaries. Pursuant to Section 2.04 (g) of the Credit Agreement, (i) by letter dated April 12, 1995, the Company irrevocably elected to permanently reduce the Revolving Credit Maximum Commitment Amount from $4,000,000 to $2,000,000 and (ii) by letter dated December 27, 1995, the Company irrevocably elected to reduce the Revolving Credit Commitment Amount to zero and terminate the Revolving Credit Commitment. C. As of the date of this Amendment, the maximum credit available to be outstanding for the benefit of the Borrowers pursuant to the Credit Agreement (the Maximum Credit Availability as defined herein) is $20,308,365.95 (up to $20,308,365.95 under the Letters of Credit or, in the event of conversion to one or more Term Loans, up to $19,400,000 under the Term Loan Commitments). D. Pursuant to a Consent and Amendment dated as of April 12, 1995 among the Borrowers, the Guarantors, the Lenders, the Issuing Bank and the Agent (the "First Amendment"), (i) the Agent, on behalf of the Lenders, consented to the consummation of certain sale-leaseback transactions between two wholly-owned subsidiaries of the Company and Capstone Capital Corporation and (ii) Section 2.04 (f) of the Credit Agreement was amended by adding the following provision to the end of such section: 2 " ;provided that no proceeds of the Revolving Credit Loans shall be used by the Company to fund working capital or other capital needs of Mesa Psychiatric Hospital, Inc." E. Pursuant to a Second Amendment dated as of September 15, 1995 among the Borrowers, the Guarantors, the Lenders, the Issuing Bank and the Agent (the "second Amendment"), the Banks agreed (1) to extend the stated expiration date of the Letters of Credit to February 15, 1997 and (2) to certain amendments to the Credit Agreement. F. The Borrowers have requested the Lenders, the Agent and the Issuing Bank (collectively in such capacities, the "Banks") (1) to extend the stated expiration date of the Letters of Credit from February 15, 1997 to August 15, 1997, and (2) to agree to certain amendments to the Credit Agreement. Upon the terms and conditions set forth in this Amendment, the Banks are willing (i) to extend the stated expiration date of the Letters of Credit and (ii) to agree to certain amendments to the Credit Agreement, all as hereinafter provided. NOW, THEREFORE, in consideration of the foregoing and the understandings herein set forth and intending to be legally bound, the Borrowers, the Guarantors, the Lenders, the Issuing Bank and the Agent hereby agree as follows: 1. Definitions. As used in this Amendment and in the Credit Agreement, the term "Agreement" shall mean the Credit Agreement as amended by the First Amendment, the Second Amendment and this Amendment. All terms used herein and not otherwise defined shall have the meanings ascribed to such terms in the Credit Agreement. 2. Extension of Letters of Credit. The Borrowers hereby request the Banks to extend the stated expiration date of the Letters of Credit to August 15, 1997. Subject to the payment of the extension fee set forth in section 3 of this Amendment and to the other conditions precedent hereinafter set forth, the Issuing Bank will extend the stated expiration date of the Letters of Credit to August 15, 1997, such extension to be effected through the issuance by the Issuing Bank to the Greenbrier Trustee, the Houma Trustee, the HSA Trustee, the Carolina Trustee and the Gulf Coast Trustee, respectively, of an Amendment No. 2 to each of the outstanding Letters of Credit effective as of August 15, 1996. 3. Extension Fee. On the date of execution and delivery of this Amendment, the Company shall pay to the Agent in immediately available funds a non refundable extension fee in the amount of $35,000. Such extension fee shall be shared by the Lenders pro rata on the basis of their respective Percentages. 3 4. Amendments to Credit Agreement. 4.1. The definitions of the following terms set forth in Section 1.01 of the Credit Agreement are hereby amended and restated in full as follows: "Commitment Fee Rate" means, at any time, (i) three percent (3%) per annum if the Debt Service and Lease Payment Coverage Ratio of the Consolidated Companies for the most recent 12-month period for which financial statements of the Consolidated Companies have been provided to the Agent pursuant to Section 7.12 is greater than 1.25 to 1, (ii) three and one-half percent (3 1/2%) per annum if such Debt Service and Lease Payment Coverage Ratio is equal to or less than 1.25 to 1 and equal to or greater than 1.00 to 1, and (iii) four percent (4%) per annum if such Debt Service and Lease Payment Coverage Ratio is less than 1.00 to 1; provided that, if and so long as such Dept Service and Lease Payment Coverage Ratio of the Consolidated Companies is greater than 1.25 to 1 and no Event of Default has occurred and is continuing, the Commitment Fee Rate shall be reduced by one-quarter percent (1/4%) for each permanent reduction from and after August 15, 1996 of $3,000,000 in the Maximum Credit Availability. 4.2. Section 2.03(f) (1) of the Credit Agreement is hereby amended and restated in full as follows: (1) Amortization and Maturity. The principal of each Term Loan shall be due and payable in full, together with all unpaid accrued interest thereon, on the 366th day after the date of conversion to such Term Loan. All payments shall be applied first to the payment of interest due and payable on the respective Term Loan and then to the reduction of the outstanding principal balance thereof. 4.3. Section 7.16(a) of the Credit Agreement is hereby amended and restated in full as follows: (a) Consolidated Maximum Annual Debt Service and Lease Payment Coverage Ratio. The Obligors will maintain, and the Company will cause the other Consolidated Companies to maintain, as to the Consolidated Companies on a consolidated basis, as of the end of each fiscal quarter of the Consolidated Companies for the 12-month period then ended, a Maximum Annual Debt Service and Lease Payment Coverage Ratio of at least the following amounts from and after the date indicated: 4 From and Maximum Annual Debt Service after June 30 and Least Payment Coverage Ratio 1996 1.00 to 1 1997 1.20 to 1 4.4. Section 7.16 (e) of the Credit Agreement is hereby amended and restated in full as follows: (e) Consolidated Tangible Net Worth. The Obligors will mainain, and the company will cause the other Consolidated Companies to maintain, at all times a Consolidated Tangible Net Worth of at least the following amounts from and after the date indicated: From and Consolidated after June 30 Tangible Net Worth 1996 $48,000,000 1997 $50,000,000 4.5. Section 7.24 of the Credit Agreement is hereby amended and restated in full as follows: Section 7.24. Management Agreements. The Obligors will not pay, and the Company will not permit any of the other Consolidated Companies to pay, any Ramsay Management Fees, except Ramsay Management Fees payable by the Company to any Paul Ramsay Affiliate pursuant to the Ramsay Management Agreement; provided that (i) the Company's obligation to pay Ramsay Management Fees shall be subordinate to all amounts now or hereafter owing by the Company to the Agent, the Issuing Bank or the Lenders under the Credit Documents and (ii) the Company's obligations to pay Ramsay Management Fees for services rendered during each Fiscal Year shall accrue and may be paid in common stock of the Company at any time, but shall not be paid in cash or other property (except such common stock) until after all of the Letters of Credit have terminated and the Obligors have paid all of their obligations under the Credit Documents. The Company will cause Ramsay Health Care Pty. Ltd to execute and deliver to the Agent and the Lenders on the Closing Date a Ramsay Management Fee Subordination Agreement (the "Ramsay Management Fee Subordination Agreement") pursuant to which Ramsay Health Care Pty. Ltd will subordinate all present and future claims to Ramsay Management Fees owing under the Ramsay Management Agreement (or any successor management agreement) to all amounts now or hereafter owing by any Obligor under the Credit Documents. The Company will not (i) amend, modify or supplement the Ramsay Management Agreement, other than one or more extensions of the term thereof on 5 the same terms and conditions as are in effect on the Closing Date and other than an assignment thereof by a Paul Ramsay Affiliate to another Paul Ramsay Affiliate (in each case subject to the Ramsay Management Fee Subordination Agreement), (ii) enter into any other management agreement with Paul J. Ramsay or any Paul Ramsay Affiliate, or (iii) enter into any management agreement with any other Person (other than a Consolidated Company) with respect to the management by such person of material operations of any Obligor or of the Consolidated Companies taken as a whole. 4.6. Section 7.34 of the Credit Agreement is hereby amended and restated in full as follows: Section 7.34. Reduction of Maximum Credit Availability. The Borrowers will cause the Maximum Credit Availability to be reduced to not more than $17,145,835.32 by December 31, 1996, and to not more than $15,000,000 by July 1, 1997, through permanent reductions in the total of the Letter of Credit Amounts of the Letters of Credit as a result of mandatory sinking fund redemptions and/or optional redemptions of Bonds. 5. Modifications to Subsidiary Borrower Notes. 5.1. The definitions of the following terms set forth in each of the Subsidiary Borrower Notes are hereby modified and amended and restated in full as follows: "Base Rate Increment" means one percent (1%) per annum. "Eurodollar Rate Increment" means two and three-quarters percent (2 3/4%) per annum. The modifications set forth in this Section 5.1 were made, and are hereby deemed to have been made, effective as of September 15, 1995. 5.2. Section 6(a) of each of the Subsidiary Borrower Notes is hereby modified and amended and restated in full as follows: (a) Amortization and Maturity. The principal of the Term Loan shall be due and payable in full, together with all unpaid accrued interest thereon, on the 366th day after the date of conversion to the Term Loan. All payments shall be applied first to the payment of interest due and payable on the Term Loan and then to the reduction of the outstanding principal balance thereof. 6 5.3. All references in each of the Subsidiary Borrower Notes to the Credit Agreement shall be deemed to mean the Credit Agreement, as defined in and amended by this Amendment and as the same may hereafter be amended. 6. Conditions Precedent. As conditions precedent to the Banks' execution and delivery of this Amendment, the Agent shall have received the following in form and substance satisfactory to the Banks: (a) A certificate of the president, chief executive officer or chief financial officer of each Obligor as of the date of execution and delivery by the Obligors of this Amendment stating that (1) the representations and warranties contained in Section 7 of this Amendment are true and correct, (2) all obligations, covenants, agreements and conditions contained in the Agreement to be performed or satisfied by such Obligor on or prior to the date of execution and delivery by the Obligors of this Amendment have been performed or satisfied in all respects, (3) since June 30, 1995, there has been no material adverse change in the properties, business, operations, assets, condition (financial or otherwise) or prospects of such Obligor (or, in the case of the certificate of the respective officer of the Company, the Consolidated Companies taken as a whole) other than as disclosed in such certificate, and (4) after giving effect to this Amendment, no Default or Event of Default has occurred and is continuing; (b) An opinion of Haythe & Curley, New York, New York, counsel to the Obligors, to the effect that (1) the execution and delivery by the Obligors of this Amendment has been duly authorized by all requisite corporate action, (2) this Amendment has been duly executed and delivered by the Obligors and constitutes the legal, valid and binding obligation of the Obligors enforceable against the Obligors in accordance with its terms, except to the extent that the enforceability thereof may be limited by applicable bankruptcy, insolvency, reorganization, moratorium or other laws affecting the rights of creditors generally and by the application of general principles of equity, and (3) the execution and delivery of this Amendment does not conflict with or constitute a default under the Life Company Indenture or the Consolidated Companies' Operating Leases with Capstone Capital Corporation and Charter Canyon Behavioral Health System, Inc. or the Consolidated Companies have otherwise obtained all requisite consents of the parties to such agreements in connection with this Amendment; and (c) Such other documents, certificates and opinions of counsel as the Agent may reasonably request. 7. Representations and Warranties. The Obligors hereby represent and warrant that: (a) The representations and warranties made by the Obligors in the Credit Agreement and all documents delivered in connection therewith are true and correct on and as of the date of execution and delivery by the Obligors of this Amendment, except to the extent that such 7 representations and warranties expressly relate to an earlier date. After giving effect to this Amendment, no Default or Event of Default has occurred and is continuing on the date of execution and delivery by the Obligors of this Amendment. (b) This Amendment has been duly authorized by all requisite action on behalf of the Obligors and constitutes the legal, valid and binding obligation of the Obligors, enforceable in accordance with its terms, except as the same may be limited by applicable bankruptcy, insolvency, reorganization, moratorium or other laws or equitable principles affecting creditors' rights generally. (c) The Obligors have obtained all consents and approvals necessary to their execution and delivery of this Amendment. 8. Costs and Expenses. The Obligors hereby agree to pay on demand all costs and expenses of the Agent and the Issuing Bank in connection with the preparation, execution and delivery of this Amendment and the amendments extending the Letters of Credit being delivered pursuant to section 2 of this Amendment, including without limitation the reasonable fees and expenses of counsel for the Agent and the Issuing Bank with respect thereto. 9. Counterparts. This Amendment may be executed in one or more counterparts each of which shall constitute an original Amendment and all of which together shall constitute one and the same Amendment. 10. Effect. Upon the execution and delivery of this Amendment, the Credit Agreement shall be and be deemed to be amended as set forth in this Amendment. All of the provisions of the Credit Agreement shall remain in full force and effect as amended by this Amendment. 11. Governing Law. This Amendment shall be governed by, and construed in accordance with, the laws of the State of New York, without regard to principles of conflicts of law. The foregoing choice of law is made pursuant to Section 5-1401 of the General Obligations Law of the State of New York. 8 IN WITNESS WHEREOF, the Obligors, the Lenders, the Issuing Bank and the Agent have caused this Agreement to be duly executed and delivered as of the date first above written. (CORPORATE SEAL) RAMSAY HEALTH CARE, INC. Attest ____________________________ By _________________________________ Assistant Secretary President (CORPORATE SEAL) GREENBRIER HOSPITAL, INC. Attest ____________________________ By _________________________________ Assistant Secretary President (CORPORATE SEAL) HOUMA PSYCHIATRIC HOSPITAL, INC. Attest ____________________________ By _________________________________ Assistant Secretary President (CORPORATE SEAL) HSA OF OKLAHOMA, INC. Attest ____________________________ By _________________________________ Assistant Secretary President (CORPORATE SEAL) CAROLINA TREATMENT CENTER, INC. Attest ____________________________ By _________________________________ Assistant Secretary President This execution page is part of the Third Amendment to Credit Agreement and Note Modification Agreement dated as of August 15, 1996 amending the Credit Agreement dated as of May 15, 1993, as amended, among Ramsay Health Care, Inc., Greenbrier Hospital, Inc., Houma Psychiatric Hospital, Inc., HSA of Oklahoma, Inc., Carolina Treatment Center, Inc., Gulf Coast Treatment Center, Inc. and Atlantic Treatment Center, Inc., as Borrowers, Great Plains Hospital, Inc. and the Haven Hospital, Inc., as Guarantors, Societe Generale, New York Branch, First Union National Bank of North Carolina and Hibernia National Bank, as Lenders, Societe Generale, as Issuing Bank, and Societe Generale, as Agent, and modifying the Subsidiary Borrower Notes described therein. 9 (CORPORATE SEAL) GULF COAST TREATMENT, INC. Attest ____________________________ By _________________________________ Assistant Secretary President (CORPORATE SEAL) ATLANTIC TREATMENT CENTER, INC. Attest ____________________________ By _________________________________ Assistant Secretary President (CORPORATE SEAL) GREAT PLAINS HOSPITAL, INC. Attest ____________________________ By _________________________________ Assistant Secretary President (CORPORATE SEAL) THE HAVEN HOSPITAL, INC. Attest ____________________________ By _________________________________ Assistant Secretary President This execution page is part of the Third Amendment to Credit Agreement and Note Modification Agreement dated as of August 15, 1996 amending the Credit Agreement dated as of May 15, 1993, as amended, among Ramsay Health Care, Inc., Greenbrier Hospital, Inc., Houma Psychiatric Hospital, Inc., HSA of Oklahoma, Inc., Carolina Treatment Center, Inc., Gulf Coast Treatment Center, Inc. and Atlantic Treatment Center, Inc., as Borrowers, Great Plains Hospital, Inc. and the Haven Hospital, Inc., as Guarantors, Societe Generale, New York Branch, First Union National Bank of North Carolina and Hibernia National Bank, as Lenders, Societe Generale, as Issuing Bank, and Societe Generale, as Agent, and modifying the Subsidiary Borrower Notes described therein. 10 SOCIETE GENERALE, NEW YORK BRANCH, as Lender, Issuing Bank and Agent By ____________________________ Title _________________________ This execution page is part of the Third Amendment to Credit Agreement and Note Modification Agreement dated as of August 15, 1996 amending the Credit Agreement dated as of May 15, 1993, as amended, among Ramsay Health Care, Inc., Greenbrier Hospital, Inc., Houma Psychiatric Hospital, Inc., HSA of Oklahoma, Inc., Carolina Treatment Center, Inc., Gulf Coast Treatment Center, Inc. and Atlantic Treatment Center, Inc., as Borrowers, Great Plains Hospital, Inc. and the Haven Hospital, Inc., as Guarantors, Societe Generale, New York Branch, First Union National Bank of North Carolina and Hibernia National Bank, as Lenders, Societe Generale, as Issuing Bank, and Societe Generale, as Agent, and modifying the Subsidiary Borrower Notes described therein. 11 FIRST UNION BANK OF NORTH CAROLINA, as Lender By ____________________________ Title ___________________________ This execution page is part of the Third Amendment to Credit Agreement and Note Modification Agreement dated as of August 15, 1996 amending the Credit Agreement dated as of May 15, 1993, as amended, among Ramsay Health Care, Inc., Greenbrier Hospital, Inc., Houma Psychiatric Hospital, Inc., HSA of Oklahoma, Inc., Carolina Treatment Center, Inc., Gulf Coast Treatment Center, Inc. and Atlantic Treatment Center, Inc., as Borrowers, Great Plains Hospital, Inc. and the Haven Hospital, Inc., as Guarantors, Societe Generale, New York Branch, First Union National Bank of North Carolina and Hibernia National Bank, as Lenders, Societe Generale, as Issuing Bank, and Societe Generale, as Agent, and modifying the Subsidiary Borrower Notes described therein. 12 HIBERNIA NATIONAL BANK, as Lender By ____________________________ Title ___________________________ This execution page is part of the Third Amendment to Credit Agreement and Note Modification Agreement dated as of August 15, 1996 amending the Credit Agreement dated as of May 15, 1993, as amended, among Ramsay Health Care, Inc., Greenbrier Hospital, Inc., Houma Psychiatric Hospital, Inc., HSA of Oklahoma, Inc., Carolina Treatment Center, Inc., Gulf Coast Treatment Center, Inc. and Atlantic Treatment Center, Inc., as Borrowers, Great Plains Hospital, Inc. and the Haven Hospital, Inc., as Guarantors, Societe Generale, New York Branch, First Union National Bank of North Carolina and Hibernia National Bank, as Lenders, Societe Generale, as Issuing Bank, and Societe Generale, as Agent, and modifying the Subsidiary Borrower Notes described therein. 13 EX-10 7 EXHIBIT 10.94 STOCK PURCHASE AGREEMENT EXHIBIT 10.94 STOCK PURCHASE AGREEMENT STOCK PURCHASE AGREEMENT dated as of August 13, 1996 by and among Paul Ramsay Holdings Pty. Limited, an Australian corporation (the "Acquiror"), Ramsay Health Care, Inc., a Delaware corporation (the "Seller"), and, solely for the purposes of Sections I, III and IV hereof, Ramsay Health Care Pty. Limited, an Australian corporation (the "Manager"). W I T N E S S E T H: WHEREAS, the Manager is an affiliate of the Acquiror and a party to that certain Amended and Restated Management Agreement dated as of June 25, 1992 with the Seller (the "Management Agreement") pursuant to which the Seller, among other matters, is obligated to pay certain management fees ("Management Fees") and other amounts to the Manager; WHEREAS, an agreement of the Seller with certain of its lenders restricts or may restrict the payment in cash of the amounts now and hereafter due pursuant to the Management Agreement; and WHEREAS, the Seller, the Acquiror and the Manager desire to provide for the issuance of 275,546 shares of common stock, $.01 par value (the "Common Stock"), of the Seller (the "Shares") for a purchase price of $757,752.00, payable $2,755.46 in cash and as a prepayment by the Seller of $754,996.54 in Management Fees; NOW, THEREFORE, in consideration of the premises and the mutual covenants and agreements hereinafter set forth, the parties hereto hereby agree as follows: SECTION I PURCHASE AND SALE OF THE SHARES A. Purchase and Sale of the Shares. Subject to the terms and conditions of this Agreement and on the basis of the representations, warranties, covenants and agreements herein contained, the Manager hereby directs the Seller to, the Seller does hereby, issue and convey to the Acquiror on the date hereof, and the Acquiror hereby acquires and accepts from the Seller on the date hereof, the Shares. B. Consideration for the Shares. The Shares are being issued for a purchase price of $757,752.00 payable 178961.2 1271-0370 2 $2,755.46 in cash and as a prepayment by the Seller of $754,996.54 of amounts now and hereafter due during the Seller's current fiscal year pursuant to the Management Agreement, representing a purchase price of $2.75 per share of Common Stock. The Manager hereby accepts the issuance by the Seller to the Acquiror of the Shares as a prepayment of $754,996.54 of the amounts now or hereafter due during the Seller's current fiscal year pursuant to the Management Agreement. The Seller hereby acknowledges receipt of $2,755.46 in cash from the Manager in payment of the cash portion of the purchase price for the Shares. C. Delivery of the Shares. The Acquiror hereby acknowledges receipt of a certificate of the Seller representing the Shares. SECTION II REPRESENTATIONS AND WARRANTIES OF THE SELLER The Seller hereby represents and warrants to the Acquiror and the Manager, as of the date hereof, that: A. Organization; Good Standing. The Seller is a corporation duly organized, validly existing and in good standing under the laws of its jurisdiction of incorporation and has full corporate power and authority to own its properties and to conduct the businesses in which it is now engaged. B. Authority. The Seller has full corporate power and authority to execute and deliver this Agreement and to perform all of its obligations hereunder, and no consent or approval of any other person or governmental authority is required therefor. The execution and delivery of this Agreement by the Seller, the performance by the Seller of its covenants and agreements hereunder and the consummation by the Seller of the transactions contemplated hereby have been duly authorized by all necessary corporate action. This Agreement constitutes a valid and legally binding obligation of the Seller, enforceable against the Seller in accordance with its terms, except as such enforceability may be limited by bankruptcy, insolvency or other similar laws of general application relating to or affecting the enforcement of creditors' rights or by general principles of equity. C. No Legal Bar; Conflicts. Neither the execution and delivery of this Agreement, nor the consummation of the transactions contemplated hereby, violates any provision of the Certificate of Incorporation or By-Laws of the Seller or any law, statute, ordinance, regulation, order, judgment or decree of any 178961.2 1271-0370 3 court or governmental agency, or conflicts with or results in any breach of any of the terms of or constitutes a default under or results in the termination of or the creation of any lien pursuant to the terms of any contract or agreement to which the Seller is a party or by which the Seller or any of its assets is bound. D. Authorization of Shares. The Shares being purchased by the Acquiror hereunder have been duly and validly authorized and, upon delivery of the certificate representing ownership by the Acquiror of the Shares as herein provided, for the consideration herein provided, such Shares will be duly and validly issued, fully paid and nonassessable. SECTION III REPRESENTATIONS AND WARRANTIES OF THE ACQUIROR AND THE MANAGER Each of the Acquiror and the Manager, jointly and severally, hereby represents and warrants to the Seller, as of the date hereof, that: A. Authority. It has full corporate power and authority to execute and deliver this Agreement and to perform all of its obligations hereunder, and no consent or approval of any other person or governmental authority is required therefor. The execution and delivery of this Agreement by it, the performance by it of its covenants and agreements hereunder and the consummation by it of the transactions contemplated hereby have been duly authorized by all necessary corporate action. This Agreement constitutes a valid and legally binding obligation of it, enforceable against it in accordance with its terms, except as such enforceability may be limited by bankruptcy, insolvency or other similar laws of general application relating to or affecting the enforcement of creditors' rights or by general principles of equity. B. No Legal Bar; Conflicts. Neither the execution and delivery of this Agreement, nor the consummation of the transactions contemplated hereby, violates any law, statute, ordinance, regulation, order, judgment or decree of any court or governmental agency, or conflicts with or results in any breach of any of the terms of or constitutes a default under or results in the termination of or the creation of any lien pursuant to the terms of any contract or agreement to which it is a party or by which it or any of its assets is bound. 178961.2 1271-0370 4 C. Investment in the Seller. (i) It understands that the Seller proposes to issue and deliver to the Acquiror the Shares pursuant to this Agreement without compliance with the registration requirements of the Securities Act of 1933, as amended (the "Securities Act"); that for such purpose the Seller will rely upon its representations and warranties contained herein; and that such non-compliance with registration is not permissible unless such representations and warranties are correct. (ii) It understands that, under existing rules of the Securities and Exchange Commission (the "SEC"), the Acquiror may be unable to sell the Shares except to the extent that the Shares may be sold (i) pursuant to an effective registration statement covering such sale pursuant to the Securities Act and applicable state securities laws or an applicable exemption therefrom or (ii) in a bona fide private placement to a purchaser who shall be subject to the same restrictions on any resale or (iii) subject to the restrictions contained in Rule 144 under the Securities Act ("Rule 144"). (iii) It is not relying on the Seller respecting the financial, tax and other economic considerations of an investment in the Common Stock, and it has relied on the advice of, or has consulted with, only its own advisors. (iv) It is familiar with the provisions of Rule 144 and the limitations upon the availability and applicability of such rule. (v) It is a sophisticated investor familiar with the type of risks inherent in the acquisition of restricted securities such as the Shares and its financial position is such that it can afford to retain the Shares for an indefinite period of time without realizing any direct or indirect cash return on its investment. (vi) It has such knowledge and experience in financial, tax and business matters so as to enable it to utilize the information made available to it in connection with the issuance of the Shares to the Acquiror and to evaluate the merits and risks of an investment in the Shares and to make an informed investment decision with respect thereto. (vii) The Acquiror is purchasing the Shares as an investment for its sole account, and without any present view towards the resale or other distribution thereof. 178961.2 1271-0370 5 D. Legend. Each certificate representing Shares shall contain upon its face or upon the reverse side thereof a legend to the following effect: "These securities have not been registered under the Securities Act of 1933, as amended, or qualified under state securities laws and may not be sold, pledged, or otherwise transferred unless (a) covered by an effective registration statement under the Securities Act of 1933, as amended, and qualified under applicable state securities laws, or (b) the Corporation has been furnished with an opinion of counsel acceptable to the Corporation to the effect that no registration or qualification is legally required for such transfer." SECTION IV MISCELLANEOUS A. Notices. All notices, requests or instructions hereunder shall be in writing and delivered personally, by telecopy or sent by registered or certified mail, postage prepaid, as follows: (1) if to the Acquiror or the Manager: 154 Pacific Highway Greenwich NSW 2065 Australia Telecopy: (011) 61-2-906-5205 (2) if to the Seller: One Poydras Plaza 639 Loyola Avenue Suite 1700 New Orleans, Louisiana 70113 Attention: President Telecopy No.: (504) 585-0500 Any of the above addresses may be changed at any time by notice given as provided above; provided, however, that any such notice of change of address shall be effective only upon receipt. All notices, requests or instructions given in accordance herewith shall be deemed received on the date of delivery, if hand delivered or delivered by telecopy, and five days after the date of mailing, if mailed. B. Survival of Representations. Each representation, warranty, covenant and agreement of the parties hereto herein 6 contained shall survive the execution of this Agreement, notwithstanding any investigation at any time made by or on behalf of any party hereto. C. Entire Agreement. This Agreement and the documents referred to herein contain the entire agreement between the parties hereto with respect to the transactions contemplated hereby, and amends and restates the Original Agreement in its entirety. No modification hereof shall be effective unless in writing and signed by the party against which it is sought to be enforced. D. Assignment. This Agreement shall not be assignable by the Seller or the Acquiror except pursuant to a writing executed by each of the parties hereto; provided that the Acquiror may assign any of its rights hereunder to any affiliate of the Acquiror which agrees to be bound by all of the obligations of the Acquiror hereunder or to any lender in connection with any financing transaction entered into by the Acquiror or any of its affiliates and that the Manager hereby assigns its rights to acquire the Shares to the Acquiror. E. Invalidity, Etc. If any provision of this Agreement, or the application of any such provision to any person or circumstance, shall be held invalid by a court of competent jurisdiction, the remainder of this Agreement, or the application of such provision to persons or circumstances other than those as to which it is held invalid, shall not be affected thereby. F. Expenses. Except as expressly set forth herein, each of the parties hereto shall bear such party's own expenses in connection with this Agreement and the transactions contemplated hereby. G. Headings. The headings of this Agreement are for convenience of reference only and are not part of the substance of this Agreement. H. Binding Effect. This Agreement shall be binding upon and inure to the benefit of the parties hereto and their respective successors and assigns. I. Governing Law. This Agreement shall be governed by and construed in accordance with the laws of the State of Delaware applicable in the case of agreements made and to be performed entirely within such State. J. Counterparts. This Agreement may be executed in counterparts, each of which shall be deemed an original, but all of which taken together shall constitute one and the same instrument. 7 K. Third Party Beneficiary. This Agreement shall not create any rights in favor of any person not a party hereto. * * * 8 IN WITNESS WHEREOF, this Agreement has been duly executed by the parties hereto as of the date first above written. PAUL RAMSAY HOLDINGS PTY. LIMITED By_________________________________ Name: Title: RAMSAY HEALTH CARE, INC. By_________________________________ Name: Title: Solely for the purposes of Sections I, III and IV: RAMSAY HEALTH CARE PTY. LIMITED By_________________________________ Name: Title: EX-10 8 EXHIBIT 10.95 EMPLOYMENT AGREEMENT EXHIBIT 10.95 EMPLOYMENT AGREEMENT AGREEMENT made as of the 12th day of August, 1996 by and between RAMSAY HEALTH CARE, INC., a Delaware corporation (the "Company"), and REYNOLD JENNINGS (the "Employee"). W I T N E S S E T H : WHEREAS, the Employee has heretofore been employed by the Company and the Company wishes to continue to retain the services of the Employee, and the Employee wishes to continue to serve in the employ of the Company, upon the terms and conditions hereinafter set forth. NOW, THEREFORE, in consideration of the premises and the mutual agreements hereinafter set forth, the parties hereto hereby agree as follows: 1. Employment. 1.1 The Company agrees to employ the Employee, and the Employee agrees to serve in the employ of the Company, for the term set forth in Section 1.2, in the position and with the responsibilities, duties and authority set forth in Section 2 and on the other terms and conditions set forth in this Agreement. 1.2 The term of the Employee's employment under this Agreement (the "term of this Agreement") shall commence on the date hereof and shall terminate on December 31, 1999, unless sooner terminated in accordance with this Agreement. 2. Position; Duties. 2.1 During the term of this Agreement, the Employee shall serve in the position of Executive Vice President of the Company and President of the Behavioral Hospital Division of the Company. The Employee shall perform, faithfully and diligently, such duties, and shall have such responsibilities, appropriate to such positions, as shall be assigned to him from time to time by the President and Chief Operating Officer of the Company. The Employee shall report directly to the President and Chief Operating Officer of the Company. The Employee shall devote his complete and undivided attention to the performance of his duties and responsibilities hereunder during the normal working hours of executive employees of the Company. 2 2.2 The Employee covenants and agrees that during the term of this Agreement he will not render professional services of any type for, to or on behalf of any other individual, firm or corporation (other than an educational or charitable entity) and will not engage, directly or indirectly, in any activity competitive with the Company's business, whether alone or as a partner, officer, director, employee, agent, consultant, shareholder, trustee, fiduciary or other representative of any other individual, firm or corporation, without the express prior written consent of the Company. 2.3 The Employee agrees to relocate from New Orleans, Louisiana to Atlanta, Georgia as soon as possible in connection with the establishment of a regional operations office for the Behavioral Hospital Division of the Company in Atlanta. 3. Salary; Bonus; Stock Options. 3.1 (a) During the term of this Agreement, in consideration of the performance by the Employee of the services set forth in Section 2 and his observance of the other covenants set forth herein, the Company shall pay the Employee, and the Employee shall accept, a base salary at the rate of $275,000 per annum, payable in accordance with the standard payroll practices of the Company. (b) The base salary set forth in Section 3.1(a) above shall be adjusted annually (but not decreased) on each anniversary date of this Agreement by multiplying such base salary by a fraction, the numerator of which shall be the Consumer Price Index for the July preceding the month in which such adjustment is to be made, and the denominator of which shall be the Consumer Price Index for the previous July. For purposes hereof, "Consumer Price Index" shall mean the "Consumer Price Index for all Urban Consumers, Urban Wage Earners and Clerical Workers-U.S. City Average (1982-84=100)" issued monthly by the Bureau of Labor Statistics of the United States Department of Labor, or any successor index thereto appropriately adjusted. The Employee shall be entitled to such additional increases in base salary as shall be awarded from time to time by the Board of Directors of the Company in its sole discretion. 3.2 (a) In addition to the base salary provided for in Section 3.1, the Company shall pay to the Employee with respect to each fiscal year of the Company (or portion thereof in the case of the fiscal years of the Company in which the Employee's employment with the Company shall begin and shall terminate) during the term of this Agreement, subject to the provisions of Section 3.2(c) hereof, a bonus in an amount equal to two percent (2%) of any 3 increase in "operating income" (as hereinafter defined) for such fiscal year (or for such portion thereof) over the corresponding operating income for the preceding fiscal year (or for such corresponding portion thereof). (b) For purposes of this Section 3.2, "operating income" shall mean income from operations (calculated in accordance with generally accepted accounting principles), but excluding (i) income from any operations over which the Employee has no administrative control; (ii) the amount of the bonus determined in accordance with this Section 3.2; and (iii) any material accounting adjustments relating to the period prior to June 30, 1993. The foregoing shall be calculated on a "same store" basis. (c) In the event of the termination of the employment of the Employee pursuant to Section 6.3 (Due Cause) or Section 6.5 (Termination by Employee) of this Agreement, the Employee shall not be entitled to a bonus for the fiscal year of the Company in which such termination takes place. The Employee shall not be entitled to a bonus for any fiscal year of the Company subsequent to the fiscal year in which the termination of his employment takes place. (d) In addition to the bonus provided for in Section 3.2(a), the Company shall each year during the term of this Agreement pay the Employee an additional bonus in such amount as shall be determined by the Board of Directors of the Company, which bonus may be based in part on additional activities of the Employee. 3.3 The Employee, or the Employee's estate, shall have the right, upon written notice from the Employee, or the Employee's estate, delivered to the Company at any time on or after the Effective Date (as hereinafter defined) and until January 15, 2000 to surrender to the Company for cancellation all or any of the options to purchase 124,830 shares of the common stock of the Company ("Common Stock"), granted to the Employee on November 9, 1993, and, upon such surrender, the Company shall pay to the Employee in cash an amount equal to the product of (x) $3.20436 multiplied by (y) the number of shares of Common Stock underlying the options so surrendered (subject to applicable Federal, state and local withholding). The reference in this paragraph to "$3.20436" shall be appropriately adjusted for any stock split, stock dividend or similar event affecting the Common Stock occurring after the date hereof and on or prior to the date of surrender. As used herein, the term "Effective Date" shall mean October 31, 1996. 4 4. Expense Reimbursement. During the term of this Agreement, the Company shall reimburse the Employee for all reasonable and necessary out-of-pocket expenses incurred by him in connection with the performance of his duties hereunder, upon the presentation of proper accounts therefor in accordance with the Company's policies and annual budget parameters. 5. Benefits. 5.1 Benefit Plans. During the term of this Agreement, the Employee will be eligible to participate in all employee benefit plans and programs of the Company, including, without limitation, group life insurance, disability, 401(k), group hospitalization, surgical and major medical insurance plans of the Company, in accordance with the provisions of such plans and programs as in effect from time to time. 5.2 Vacation and Sick Days. The Employee shall be entitled to four weeks' paid vacation and to paid sick days, all in accordance with Company policies in effect from time to time for its executive employees. 5.3 Relocation Allowance. In connection with the establishment of a regional operations office for the Behavioral Hospital Division of the Company in Atlanta, Georgia, the Company shall pay or reimburse the Employee for reasonable moving expenses, up to $60,000, incurred by the Employee in moving from New Orleans, Louisiana to Atlanta, Georgia (including costs of temporary housing, realtor fees and equity shortfalls on the sale of the Employee's current home and closing costs (exclusive of loan discount points) on the purchase of the Employee's new home, as approved by the President and Chief Operating Officer of the Company), subject to the presentation of proper accounts therefor in accordance with the Company's policies. 5.4 Automobile. During the term of this Agreement, the Company shall provide the Employee with an automobile and the Company shall pay or reimburse the Employee for the costs associated with insuring, operating and maintaining such automobile, consistent with past practice. 5.5 Split Dollar Life Insurance. In addition to any other insurance which may now or hereafter be provided by the Company on the life of the Employee under any group contract or otherwise, the Company shall, during the term of this Agreement and thereafter as herein provided, pay premiums of up to $50,000 per year (up to $150,000 in the aggregate over the three-year period beginning with the date of the first premium payment under the Employment 5 Agreement between the Employee and the Company dated October 2, 1993 the "1993 Employment Agreement") for a split-dollar life insurance policy on the life of the Employee. Premiums shall be payable by the Company at a rate not greater than $25,000 semi-annually. Such policy shall be owned by the Employee or by a trust for the benefit of the Employee or members of the immediate family of the Employee. The aggregate amount of premiums paid by the Company shall constitute indebtedness of the Employee to the Company (i) to be forgiven and treated as a bonus on (x) the fifth anniversary of the date that the Employee began employment with the Company (the "Commencement Date"), if the Employee is employed by the Company on such fifth anniversary, or (y) the date of termination of employment of the Employee pursuant to Section 6.2 (Disability) prior to the fifth anniversary of the Commencement Date, (ii) to be repaid by the Employee if the employment of the Employee shall be terminated by the Company pursuant to Section 6.3 (Due Cause) of this Agreement or by the Employee other than pursuant to Section 6.2 (Disability) or 6.6 (Change in Control) of this Agreement, if such termination occurs prior to the fifth anniversary of the Commencement Date, on the date of termination of his employment with the Company, and (iii) to be secured by the death benefit or cash value of such policy as hereinafter set forth. The Employee or the trust, as the case may be, will execute and deliver to the Company a collateral assignment of the policy on a form approved by the insurance company issuing such policy. The Company will be entitled to satisfy the indebtedness owed to it when and to the extent that the policy is surrendered or the proceeds thereof are paid at death and the Company shall release the collateral assignment pro tanto upon such satisfaction. In the event of termination of employment of the Employee pursuant to Section 6.4 (Other Termination) or Section 6.6 (Change in Control) of this Agreement, notwithstanding any provision of Section 6 of this Agreement to the contrary, the Company shall continue to pay the premiums referred to above, at the semiannual rate referred to above, until there shall have been paid an aggregate of $150,000 in premiums subsequent to the Commencement Date. The Employee agrees that (i) in the event of his death prior to the fifth anniversary of the Commencement Date, the portion of such death benefit equal to the aggregate amount of premiums paid by the Company prior to his death shall be paid to the Company; (ii) neither the Company, the Employee nor the trust shall terminate or surrender the policy or any part thereof or withdraw from or be loaned any part of the cash value of such policy prior to 6 the Company's receipt of payment of the aggregate amount of premiums paid by the Company for such policy; (iii) neither the Employee nor the trust shall transfer legal or beneficial ownership of the policy or use the policy as security for any loan; and (iv) he shall, to the extent possible, take such action as is necessary to cause: (a) the terms of the policy to satisfy the requirements of this Section 5.5, (b) the issuer of the policy to pay the amounts in the manner described above, and (c) the trust to satisfy and be bound by the provisions of this Section 5.5. The Company and the Employee shall enter into a Split Dollar Agreement embodying the foregoing terms and other standard terms and conditions. 6. Termination of Employment. 6.1 Death. In the event of the death of the Employee during the term of this Agreement, the Company shall pay to the estate or other legal representative of the Employee (a) the base salary provided for in Section 3 accrued to the date of death and not theretofore paid to the Employee and (b) any bonus payable pursuant to Section 3.2. Rights and benefits of the estate or other legal representative of the Employee under the benefit plans and programs of the Company shall be determined in accordance with the provisions of such plans and programs. Neither the estate or other legal representative of the Employee nor the Company shall have any further rights or obligations under this Agreement, except as provided in Sections 3.3, 5.5 and 6.7. 6.2 Disability. If, during the term of this Agreement, the Employee shall become incapacitated by reason of sickness, accident or other physical or mental disability and shall be unable to perform his normal duties hereunder for a cumulative period of three (3) months in any period of six (6) consecutive months, the employment of the Employee hereunder may be terminated by the Company or the Employee. In the event of such termination, the Company shall (a) pay to the Employee any bonus payable pursuant to Section 3.2 and (b) continue to pay to the Employee the base salary provided for in Section 3 until the first to occur of (i) the expiration of a period of six months from the date of such termination, (ii) the commencement of payment of benefits to the Employee under any disability plan or policy maintained by the Company or (iii) the death of the Employee. Rights and benefits of the Employee under the benefit plans and programs of the Company shall be determined in accordance with the provisions of such plans and programs. Neither the Employee nor the Company shall have any further rights or obligations under this Agreement, except as provided in Sections 3.3, 5.5, 6.7, 7, 8, 9 and 10. 7 6.3 Due Cause. The employment of the Employee hereunder may be terminated by the Company at any time during the term of this Agreement for Due Cause (as hereinafter defined). In the event of such termination, the Company shall pay to the Employee (a) the base salary provided for in Section 3 accrued to the date of such termination and not theretofore paid to the Employee and (b) any bonus payable pursuant to Section 3.2(d). Rights and benefits of the Employee under the benefit plans and programs of the Company shall be determined in accordance with the provisions of such plans and programs. For purposes hereof, "Due Cause" shall mean (a) the Employee's material breach, by willful action or inaction, of any of the material provisions of this Agreement, or (b) the Employee's conviction in a court of law of any felony, or of any crime or offense concerning money or property of the Company. Neither the Employee nor the Company shall have any further rights or obligations under this Agreement, except as provided in Sections 3.3, 5.5, 6.7, 7, 8, 9 and 10. 6.4 Other Termination by the Company. The Company may terminate the Employee's employment at any time for whatever reason it deems appropriate or without reason. In the event of such termination, the Company shall (a) pay to the Employee any bonus payable pursuant to Section 3.2 and (b) continue to pay the base salary provided for in Section 3 (at the annual rate then in effect) until December 31, 1999 or the death of the Employee, whichever first occurs. Rights and benefits of the Employee under the benefit plans and programs of the Company shall be determined in accordance with the provisions of such plans and programs. Neither the Employee nor the Company shall have any further rights or obligations under this Agreement, except as provided in Sections 3.3, 5.5, 6.7, 7, 8, 9 and 10. 6.5 Termination by the Employee. The Employee may terminate his employment with the Company during the term of this Agreement upon six (6) months' prior written notice to the Company. In the event of such termination, the Company shall pay to the Employee (a) the base salary provided for in Section 3 accrued to the date of termination and not theretofore paid to the Employee and (b) any bonus payable pursuant to Section 3.2(d). Rights and benefits of the Employee under the benefit plans and programs of the Company shall be determined in accordance with the provisions of such plans and programs. Neither the Employee nor the Company shall have any further rights or obligations under this Agreement, except as provided in Sections 3.3, 5.5, 7, 8, 9 and 10. 8 6.6 Change in Control. If, within a period of six (6) months following a change in control of the Company, the employment of the Employee hereunder is terminated for any reason whatsoever, whether by the Employee or by the Company, the Company shall pay to the Employee (a) any bonus payable to the Employee pursuant to Section 3 and any amounts payable pursuant to Section 4 or 5 and (b) severance pay in an amount equal to (x) the greater of twelve (12) months base salary or the base salary that would have been payable to the Employee from the date of termination to December 31, 1999, if such termination is by the Company, or (y) twelve (12) months' base salary if such termination is by the Employee (in the case of both (x) and (y) at the highest annual rate in effect during the one-year period ending on the date of termination of employment). Such severance payment shall be made to the Employee in a cash lump sum on the date of termination of employment. For purposes of this Agreement, a change in control of the Company shall be deemed to have occurred if: (A) a "person" (meaning an individual, a partnership, or other group or association as defined in Sections 13(d) and 14(d) of the Securities Exchange Act of 1934) acquires fifty percent (50%) or more of the combined voting power of the outstanding securities of the Company having a right to vote in elections of directors; or (B) Continuing Directors (as hereinafter defined) shall for any reason cease to constitute a majority of the Board of Directors of the Company; or (C) all or substantially all of the business of the Company is disposed of by the Company to a party or parties other than a subsidiary or other affiliate of the Company, in which the Company owns less than a majority of the equity, pursuant to a partial or complete liquidation of the Company, sale of assets (including stock of a subsidiary of the Company) or otherwise. For purposes of this Agreement, the term "Continuing Director" shall mean a member of the Board of Directors of the Company who either was a member of the Board of Directors on the date hereof or who subsequently became a Director and whose election was voted for by Ramsay Holdings HSA Limited ("RHHL") or by a Continuing Director with the acquiescence of RHHL. A Director shall not be considered a Continuing Director for purposes of this Agreement if 9 his election was voted for by RHHL, or by a Continuing Director with the acquiescence of RHHL, (i) pursuant to an agreement with, or at the direction, request or suggestion of, any individual, firm or corporation in connection with the purchase or other acquisition or receipt by such individual, firm or corporation of all or any shares of capital stock of the Company or (ii) in anticipation of the sale or other disposition by RHHL of all or any of its shares of capital stock of the Company. 6.7 Stock Options. In the event of termination of the Employee's employment with the Company: (i) pursuant to Section 6.4 (Other Termination) or 6.6 (Change in Control) of this Agreement, the Company shall cause each stock option heretofore granted by the Company to the Employee to become fully exercisable (and to remain exercisable until December 31, 1999 or for the maximum period permitted by the plan or agreement pursuant to which such option was granted) unless such action, in the opinion of counsel to the Company, would violate, or adversely affect the status of such option or the plan (if any) pursuant to which such option was granted under, Rule 16b-3 under Section 16 of the Securities Exchange Act of 1934; and (ii) pursuant to Section 6.1 (Death), 6.2 (Disability), 6.4 (Other Termination) or 6.6 (Change in Control) of this Agreement, the Company shall cause each stock option heretofore granted by the Company to the Employee to become exercisable without regard to the requirement that the closing price for the Common Stock as quoted on the NASDAQ National Market System shall have equalled or exceeded $7.00 per share on at least twenty (20) trading days subsequent to November 10, 1995. 7. Confidential Information. 7.1 The Employee shall, during the term of this Agreement and at all times thereafter, treat as confidential and, except as required in the performance of his duties and responsibilities under this Agreement, not disclose, publish or otherwise make available to the public or to any individual, firm or corporation any confidential material (as hereinafter defined). The Employee agrees that all confidential material, together with all notes and records of the Employee relating thereto, and all copies or facsimiles thereof in the possession of the Employee, are the exclusive property of the Company and the Employee agrees to return such material to the Company promptly upon the termination of the Employee's employment with the Company. 7.2 For the purposes hereof, the term "confidential material" shall mean all information acquired by the Employee in the course of the 10 Employee's employment with the Company in any way concerning the products, projects, activities, business or affairs of the Company or the Company's customers, including, without limitation, all information concerning trade secrets and the products or projects of the Company and/or any improvements therein, all sales and financial information concerning the Company, all customer and supplier lists, all information concerning projects in research and development or marketing plans for any such products or projects, and all information in any way concerning the products, projects, activities, business or affairs of customers of the Company which is furnished to the Employee by the Company or any of its agents or customers, as such; provided, however, that the term "confidential material" shall not include information which (a) becomes generally available to the public other than as a result of a disclosure by the Employee, (b) was available to the Employee on a non-confidential basis prior to his employment with the Company or (c) becomes available to the Employee on a non-confidential basis from a source other than the Company or any of its agents or customers provided that such source is not bound by a confidentiality agreement with the Company or any of such agents or customers. 8. Interference With the Company. 8.1 The Employee acknowledges that the services to be rendered by him to the Company are of a special and unique character. The Employee agrees that, in consideration of his employment hereunder, the Employee will not (a) for a period of one year commencing on the date of termination of his employment with the Company, (i) solicit or endeavor to solicit patient referrals, either on his own account or for any person, firm, corporation or other organization, from (x) any person, including any physician, clinical psychologist, social worker or consultant to the Company, who, during the period of the Employee's employment with the Company, made patient referrals to the Company, or (y) any employee of the Company, or (ii) solicit or entice or endeavor to solicit or entice away from the Company any person who was a director, officer, employee or consultant of the Company, either on his own account or for any person, firm, corporation or other organization, whether or not such person would commit any breach of his contract of employment by reason of leaving the service of the Company, and the Employee agrees not to employ, directly or indirectly, any person who was a director, officer or employee of the Company or who by reason of such position at any time is or may be likely to be in possession of any confidential information or trade secrets relating to the businesses or products of the Company or (b) at any time, take any action or make any statement the effect of which would be, directly or indirectly, to impair the good will of the 11 Company or the business reputation or good name of the Company or be otherwise detrimental to the interests of the Company, including any action or statement intended, directly or indirectly, to benefit a competitor of the Company. 8.2 The Employee and the Company agree that if, in any proceeding, the court or other authority shall refuse to enforce the covenants herein set forth because such covenants cover too extensive a geographic area or too long a period of time, any such covenant shall be deemed appropriately amended and modified in keeping with the intention of the parties to the maximum extent permitted by law. 9. Inventions. Any and all inventions, innovations or improvements ("inventions") made, developed or created by the Employee (whether at the request or suggestion of the Company or otherwise, whether alone or in conjunction with others, and whether during regular hours of work or otherwise) during the period of his employment with the Company which may be directly or indirectly useful in, or relate to, the business of the Company, shall be promptly and fully disclosed by the Employee to the Board of Directors of the Company and shall be the Company's exclusive property as against the Employee, and the Employee shall promptly deliver to an appropriate representative of the Company as designated by the Board of Directors all papers, drawings, models, data and other material relating to any inventions made, developed or created by him as aforesaid. The Employee shall, at the request of the Company and without any payment therefor, execute any documents necessary or advisable in the opinion of the Company's counsel to direct issuance of patents or copyrights to the Company with respect to such inventions as are to be the Company's exclusive property as against the Employee or to vest in the Company title to such inventions as against the Employee. The expense of securing any such patent or copyright shall be borne by the Company. 10. Equitable Relief. In the event of a breach or threatened breach by the Employee of any of the provisions of Sections 7, 8 or 9 of this Agreement, the Employee hereby consents and agrees that the Company shall be entitled to an injunction or similar equitable relief from any court of competent jurisdiction restraining the Employee from committing or continuing any such breach or threatened breach or granting specific performance of any act required to be performed by the Employee under any of such provisions, without the necessity of showing any actual damage or that money damages would not 12 afford an adequate remedy and without the necessity of posting any bond or other security. Nothing herein shall be construed as prohibiting the Company from pursuing any other remedies at law or in equity which it may have. For purposes of Sections 7, 8, 9 and 10 of this Agreement, the term "Company" shall be deemed to include the subsidiaries and affiliates of the Company. 11. Successors and Assigns. 11.1 Assignment by the Company. The Company shall require any successors (whether direct or indirect, by purchase, merger, consolidation or otherwise) to all or substantially all of the business and/or assets of the Company to assume and agree to perform this Agreement in the same manner and to the same extent that the Company would be required to perform if no such succession had taken place. As used in this Section, "the Company" shall mean the Company as hereinbefore defined and any successor to its business and/or assets as aforesaid which otherwise becomes bound by all the terms and provisions of this Agreement by operation of law and this Agreement shall be binding upon, and inure to the benefit of, the Company, as so defined. 11.2 Assignment by the Employee. The Employee may not assign this Agreement or any part thereof without the prior written consent of a majority of the Board of Directors of the Company; provided, however, that nothing herein shall preclude one or more beneficiaries of the Employee from receiving any amount that may be payable following the occurrence of his legal incompetency or his death and shall not preclude the legal representative of his estate from receiving such amount or from assigning any right hereunder to the person or persons entitled thereto under his will or, in the case of intestacy, to the person or persons entitled thereto under the laws of intestacy applicable to his estate. The term "beneficiaries", as used in this Agreement, shall mean a beneficiary or beneficiaries so designated to receive any such amount or, if no beneficiary has been so designated, the legal representative of the Employee (in the event of his incompetency) or the Employee's estate. 12. Governing Law. This Agreement shall be deemed a contract made under, and for all purposes shall be construed in accordance with, the laws of the State of Delaware applicable to contracts to be performed entirely within such State. In the event that a court of any jurisdiction shall hold any of the provisions of this Agreement to be wholly or partially unenforceable for any reason, such determination shall not bar or in any way affect the Company's right to relief as provided for herein in the courts of any other jurisdiction. 13 Such provisions, as they relate to each jurisdiction, are, for this purpose, severable into diverse and independent covenants. Service of process on the parties hereto at the addresses set forth herein shall be deemed adequate service of such process. 13. Entire Agreement. This Agreement contains all the understandings and representations between the parties hereto pertaining to the subject matter hereof and supersedes all undertakings and agreements, whether oral or in writing, if any there be, previously entered into by them with respect thereto, including without limitation the 1993 Employment Agreement, the amendment to the Employment Agreement dated May 26, 1994 and the letter agreement between the Employee and the Company dated June 3, 1994. 14. Amendment; Modification; Waiver. No provision of this Agreement may be amended or modified unless such amendment or modification is agreed to in writing and signed by the Employee and by a duly authorized representative of the Company other than the Employee. Except as otherwise specifically provided in this Agreement, no waiver by either party hereto of any breach by the other party hereto of any condition or provision of this Agreement to be performed by such other party shall be deemed a waiver of a similar or dissimilar provision or condition at the same or any prior or subsequent time, nor shall the failure of or delay by either party hereto in exercising any right, power or privilege hereunder operate as a waiver thereof to preclude any other or further exercise thereof or the exercise of any other such right, power or privilege. 15. Arbitration. Any controversy or claim arising out of or relating to this Agreement, or any breach thereof, shall, except as provided in Section 10, be settled by arbitration in accordance with the rules of the American Arbitration Association then in effect and judgment upon such award rendered by the arbitrator may be entered in any court having jurisdiction thereof. The arbitration shall be held in the area where the Company then has its principal place of business. The arbitration award may include an award of attorneys' fees and costs. 16. Notices. Any notice to be given hereunder shall be in writing and delivered personally or sent by certified mail, postage prepaid, return receipt requested, addressed to the party concerned at the address 14 indicated below or at such other address as such party may subsequently designate by like notice: If to the Company: Ramsay Health Care, Inc. One Poydras Plaza 639 Loyola Avenue, Suite 1400 New Orleans, Louisiana 70113 Attention: President If to the Employee: Mr. Reynold Jennings c/o Ramsay Health Care, Inc. One Poydras Plaza 639 Loyola Avenue, Suite 1400 New Orleans, Louisiana 70113 17. Severability. Should any provision of this Agreement be held by a court or arbitration panel of competent jurisdiction to be enforceable only if modified, such holding shall not affect the validity of the remainder of this Agreement, the balance of which shall continue to be binding upon the parties hereto with any such modification to become a part hereof and treated as though originally set forth in this Agreement. The parties further agree that any such court or arbitration panel is expressly authorized to modify any such unenforceable provision of this Agreement in lieu of severing such unenforceable provision from this Agreement in its entirety, whether by rewriting the offending provision, deleting any or all of the offending provision, adding additional language to this Agreement, or by making such other modifications as it deems warranted to carry out the intent and agreement of the parties as embodied herein to the maximum extent permitted by law. The parties expressly agree that this Agreement as so modified by the court or arbitration panel shall be binding upon and enforceable against each of them. In any event, should one or more of the provisions of this Agreement be held to be invalid, illegal or unenforceable in any respect, such invalidity, illegality or unenforceability shall not affect any other provisions hereof, and if such provision or provisions are not modified as provided above, this Agreement shall be construed as if such invalid, illegal or unenforceable provisions had never been set forth herein. 18. Withholding. Anything to the contrary notwithstanding, all payments required to be made by the Company hereunder to the Employee or his beneficiaries, including his estate, shall be subject to withholding of such amounts relating to taxes as the Company may reasonably determine it should withhold pursuant to any applicable law or regulation. 19. Survivorship. The respective rights and obligations of the parties hereunder shall survive any termination of this Agreement to the extent necessary to the intended preservation of such rights and obligations. 20. Titles. Titles of the sections of this Agreement are intended solely for convenience and no provision of this Agreement is to be construed by reference to the title of any section. * * * 16 IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the date first above written. RAMSAY HEALTH CARE, INC. By Reynold Jennings EX-10 9 EXHIBIT 10.96 EXCHANGE AGREEMENT EXHIBIT 10.96 EXCHANGE AGREEMENT Exchange Agreement (the "Agreement") dated September 10, 1996, by and among Ramsay Health Care, Inc., a Delaware corporation ("RHCI"), Paul Ramsay Hospitals Pty. Limited, an Australian corporation ("Ramsay Hospitals"), and Paul J. Ramsay ("Ramsay"). R E C I T A L S: WHEREAS, the Board of Directors of RHCI has authorized the exchange of outstanding options (the "Options") to purchase an aggregate of 476,070 shares of common stock, $.01 par value (the "Common Stock"), of RHCI held by Ramsay for warrants (the "Warrants") to purchase an aggregate of 500,000 shares of Common Stock; and WHEREAS, Ramsay has directed RHCI to issue the Warrants to Ramsay Hospitals. NOW, THEREFORE, in consideration of the foregoing, and the mutual covenants and agreements contained herein, and for other good and valuable consideration the receipt and adequacy of which are hereby acknowledged, the parties hereto agree as follows: SECTION I. ISSUANCE OF WARRANTS A. In exchange for the Warrants, Ramsay hereby surrenders and delivers the Options to RHCI for cancellation and RHCI hereby acknowledges receipt of option certificates dated November 10, 1995 representing the Options. Ramsay hereby directs RHCI to issue the Warrants to Ramsay Hospitals. RHCI hereby issues and delivers to Ramsay Hospitals the Warrants and Ramsay Hospitals acknowledges receipt of a certificate representing the Warrants in the form of Exhibit A hereto. SECTION II REPRESENTATIONS AND WARRANTIES OF RHCI RHCI hereby represents and warrants to each of Ramsay Hospitals and Ramsay, as of the date hereof, that: 182915.2 1271-1370 2 A. Organization; Good Standing. RHCI is a corporation duly organized, validly existing and in good standing under the laws of its jurisdiction of incorporation and has full corporate power and authority to own its properties and to conduct the businesses in which it is now engaged. B. Authority. RHCI has the corporate power and authority to issue and deliver the Warrants in accordance with the terms hereof. RHCI has duly authorized the execution and delivery of this Agreement and this Agreement constitutes a valid and legally binding obligation of the Company enforceable in accordance with its terms, except as such enforceability may be limited by bankruptcy, insolvency or other similar laws of general application relating to or affecting the enforcement of creditors' rights or by general principles of equity. The shares of Common Stock issuable upon the exercise of the Warrants, when issued and paid for in accordance with the terms of the warrant certificate evidencing the Warrants, will be validly issued, fully paid and nonassessable shares of Common Stock. C. No Legal Bar; Conflicts. Neither the execution and delivery of this Agreement, nor the consummation of the transactions contemplated hereby, violates any provision of the Certificate of Incorporation or By-Laws of RHCI or any law, statute, ordinance, regulation, order, judgment or decree of any court or governmental agency, or conflicts with or results in any breach of any of the terms of or constitutes a default under or results in the termination of or the creation of any lien pursuant to the terms of any contract or agreement to which RHCI is a party or by which RHCI or any of its assets is bound. SECTION III REPRESENTATIONS AND WARRANTIES OF RAMSAY HOSPITALS Ramsay Hospitals hereby represents and warrants to each of RHCI and Ramsay, as of the date hereof, that: A. Authority. Ramsay Hospitals has the corporate power and authority to execute and deliver this Agreement and to perform all of its obligations hereunder, and no consent or approval of any other person or governmental authority is required therefor. The execution and delivery of this Agreement by Ramsay Hospitals, the performance by Ramsay Hospitals of its covenants and agreements hereunder and the consummation by Ramsay 3 Hospitals of the transactions contemplated hereby have been duly authorized by all necessary corporate action. This Agreement constitutes a valid and legally binding obligation of Ramsay Hospitals, enforceable against Ramsay Hospitals in accordance with its terms, except as such enforceability may be limited by bankruptcy, insolvency or other similar laws of general application relating to or affecting the enforcement of creditors' rights or by general principles of equity. B. No Legal Bar; Conflicts. Neither the execution and delivery of this Agreement, nor the consummation of the transactions contemplated hereby, violates any law, statute, ordinance, regulation, order, judgment or decree of any court or governmental agency, or conflicts with or results in any breach of any of the terms of or constitutes a default under or results in the termination of or the creation of any lien pursuant to the terms of any contract or agreement to which Ramsay Hospitals is a party or by which Ramsay Hospitals or any of its assets is bound. C. Investment in RHCI. (i) Ramsay Hospitals understands that RHCI proposes to issue and deliver to Ramsay Hospitals the Warrants pursuant to this Agreement without compliance with the registration requirements of the Securities Act of 1933, as amended (the "Securities Act"); that for such purpose RHCI will rely upon the representations and warranties of Ramsay Hospitals contained herein; and that such non-compliance with registration is not permissible unless such representations and warranties are correct. (ii) Ramsay Hospitals understands that, under existing rules of the Securities and Exchange Commission (the "SEC"), Ramsay Hospitals may be unable to sell the Warrants or the underlying shares of Common Stock with respect to which the Warrants are exercisable (the "RHCI Shares") except to the extent that the Warrants or the RHCI Shares may be sold (i) pursuant to an effective registration statement covering the Warrants or the RHCI Shares pursuant to the Securities Act and applicable state securities laws or an applicable exemption therefrom or (ii) in a bona fide private placement to a purchaser who shall be subject to the same restrictions on any resale or (iii) subject to the restrictions contained in Rule 144 under the Securities Act ("Rule 144"). (iii) Ramsay Hospitals is not relying on RHCI respecting the financial, tax and other economic 4 considerations of an investment in the Warrants and the Common Stock; Ramsay Hospitals has relied on the advice of, or has consulted with, only its own advisors. (iv) Ramsay Hospitals is familiar with the provisions of Rule 144 and the limitations upon the availability and applicability of such rule. (v) Ramsay Hospitals is a sophisticated investor familiar with the type of risks inherent in the acquisition of restricted securities such as the Warrants and the RHCI Shares and its financial position is such that it can afford to retain such securities for an indefinite period of time without realizing any direct or indirect cash return on its investment. (vi) Ramsay Hospitals has such knowledge and experience in financial, tax and business matters so as to enable it to utilize the information made available to it in connection with the issuance of the Warrants and the RHCI Shares to Ramsay Hospitals and to evaluate the merits and risks of an investment in the Warrants and the RHCI Shares and to make an informed investment decision with respect thereto. (vii) Ramsay Hospitals is acquiring the Warrants and the RHCI Shares as an investment for its sole account, and without any present view towards the sale or other distribution thereof. (viii) Ramsay Hospitals is an "accredited investor" as that term is defined in Rule 501 of Regulation D promulgated under the Securities Act. SECTION IV REPRESENTATIONS AND WARRANTIES OF PAUL J. RAMSAY Ramsay hereby represents and warrants to each of RHCI and Ramsay Hospitals, as of the date hereof, that: A. Ramsay has good and valid title to the Options, free and clear of all liens, charges, encumbrances, security interests or adverse claims whatsoever and has the right to transfer the Options to RHCI, and upon the transfer of the Options to RHCI hereunder, RHCI will acquire good and marketable title to the Options, free and clear of any lien, encumbrance, charge, security interest or claim whatsoever. 182915.2 1271-1370 5 B. Ramsay has duly executed and delivered this Agreement, and this Agreement constitutes a valid and legal binding obligation of Ramsay, enforceable against him in accordance with its terms. SECTION V MISCELLANEOUS A. Notices. All notices, requests or instructions hereunder shall be in writing and delivered personally or sent by registered or certified mail, postage prepaid, or sent via facsimile transmission as follows: (1) if to RHCI: Entergy Corporation Building 639 Loyola Avenue, Suite 1700 New Orleans, Louisiana 70113 Attention: President Telecopier: (504) 585-0505 Telephone: (504) 525-2505 (2) if to Ramsay Hospitals: c/o Ramsay Health Care Pty. Limited Suite 103 1st Floor, 156 Pacific Highway Greenwich NSW 2065 Australia Attention: Paul J. Ramsay Telecopier: 011-61-2-906-5205 Telephone: 011-61-2-906-3444 Any of the above addresses may be changed at any time by notice given as provided above; provided, however, that any such notice of change of address shall be effective only upon receipt. All notices, requests or instructions given in accordance herewith shall be deemed received on the date of delivery, if hand delivered, two days after the date of mailing, if mailed or on the day of transmission, if sent via facsimile provided telephonic confirmation of receipt is obtained promptly after completion of transmission. B. Survival of Representations. Each representation, warranty, covenant and agreement of the parties hereto herein contained shall survive the execution of this Agreement, notwithstanding any investigation at any time made by or on behalf of any party hereto. 6 C. Entire Agreement. This Agreement and the documents referred to herein contain the entire agreement between the parties hereto with respect to the transactions contemplated hereby, and no modification hereof shall be effective unless in writing and signed by the party against which it is sought to be enforced. D. Assignment. This Agreement shall not be assignable by RHCI, Ramsay Hospitals or Ramsay except pursuant to a writing executed by each of the parties hereto; provided, however, that Ramsay Hospitals may assign this Agreement and the Warrants to any corporation or other entity directly or indirectly controlled by Ramsay. E. Invalidity, Etc. If any provision of this Agreement, or the application of any such provision to any person or circumstance, shall be held invalid by a court of competent jurisdiction, the remainder of this Agreement, or the application of such provision to persons or circumstances other than those as to which it is held invalid, shall not be affected thereby. F. Expenses. Each of the parties hereto shall bear such party's own expenses in connection with this Agreement and the transactions contemplated hereby. G. Headings; Gender. The headings of this Agreement are for convenience of reference only and are not part of the substance of this Agreement. In this Agreement references to a particular gender shall include the other genders as the context requires. H. Binding Effect. This Agreement shall be binding upon and inure to the benefit of the parties hereto and their respective successors and assigns. I. Governing Law. This Agreement shall be governed by and construed in accordance with the laws of the State of Delaware applicable in the case of agreements made and to be performed entirely within such State. J. Counterparts. This Agreement may be executed in counterparts, each of which shall be deemed an original, but all of which taken together shall constitute one and the same instrument. * * * 7 IN WITNESS WHEREOF, this Agreement has been duly executed by the parties hereto as of the date first above written. RAMSAY HEALTH CARE, INC. By:________________________________ Name: Remberto Cibran Title: President PAUL RAMSAY HOSPITALS PTY. LIMITED By:________________________________ Name: Peter J. Evans Title: Director ----------------------------------- Paul J. Ramsay 8 EXHIBIT A THIS WARRANT CERTIFICATE AND THE WARRANTS EVIDENCED HEREBY HAVE NOT BEEN REGISTERED UNDER THE UNITED STATES SECURITIES ACT OF 1933 (THE "SECURITIES ACT") BUT HAVE BEEN ISSUED PURSUANT TO AN EXEMPTION FROM SUCH REGISTRATION AND MAY NOT BE SOLD, TRANSFERRED, PLEDGED, HYPOTHECATED OR OTHERWISE DISPOSED OF UNTIL EITHER (i) THE HOLDER THEREOF SHALL HAVE RECEIVED AN OPINION OF COUNSEL REASONABLY SATISFACTORY TO THE COMPANY (AS HEREINAFTER DEFINED) THAT REGISTRATION THEREOF UNDER THE SECURITIES ACT IS NOT REQUIRED OR (ii) A REGISTRATION STATEMENT UNDER THE SECURITIES ACT WITH RESPECT THERETO SHALL HAVE BECOME EFFECTIVE. THIS WARRANT CERTIFICATE IS ISSUED PURSUANT TO AND IS SUBJECT TO THE TERMS AND CONDITIONS OF AN EXCHANGE AGREEMENT (THE "EXCHANGE AGREEMENT") DATED SEPTEMBER 10, 1996 BY AND AMONG RAMSAY HEALTH CARE, INC., PAUL RAMSAY HOSPITALS, PTY. LIMITED AND PAUL J. RAMSAY (A COPY OF WHICH IS ON FILE AT THE PRINCIPAL OFFICE OF THE COMPANY) AND IS ENTITLED TO THE BENEFITS THEREOF. 500,000 Warrants WARRANT CERTIFICATE To Subscribe for and Purchase shares of Common Stock, par value $.01, of RAMSAY HEALTH CARE, INC. THIS CERTIFIES that, for value received, Paul Ramsay Hospitals, Pty. Limited, an Australian corporation, or its registered successors and assigns, is the owner of the number of warrants (the "Warrants") set forth above, each of which entitles the owner thereof to purchase from Ramsay Health Care, Inc., a Delaware corporation (herein called the "Company"), one share of Common Stock, par value $.01, of the Company (individually, a "Common Share" and collectively, the "Common Shares"), at an initial exercise price of $2.75 per share, subject to adjustment from time to time pursuant to the provisions of paragraph 2. The Warrants evidenced hereby may be exercised by the registered holder hereof at any time during the period from December 31, 2002 through 5:00 P.M. New York City Time on June 30, 2003; provided, however, that notwithstanding the foregoing, such Warrants may be exercised at any time after the date hereof, if at the time of such exercise, the Market Price (as defined in Section 2(a)(H) hereof, but calculated without giving effect to the last 9 clause of the first sentence of such definition) shall have equalled or exceeded $7.00 (the "Acceleration Price") on at least fifteen (15) trading days, which need not be consecutive, subsequent to the date hereof. For purposes of this Warrant Certificate, the term "Common Shares" shall mean the class of capital stock of the Company designated common stock, par value $.01, as constituted on the date hereof, and any other class of capital stock of the Company resulting from successive changes or reclassifications of the Common Shares. 1. Exercise of Warrants. Subject to the foregoing, the Warrants evidenced hereby may be exercised by the registered holder hereof, in whole or in part, by the surrender of this Warrant Certificate, duly endorsed (unless endorsement is waived by the Company), at the principal office of the Company (or at such other office or agency of the Company as it may designate by notice in writing to the registered holder hereof at such holder's last address appearing on the books of the Company) and upon payment to the Company by certified or official bank check or checks payable to the order of the Company of the purchase price of the Common Shares purchased. The Company agrees that the Common Shares so purchased shall be deemed to be issued to the registered holder hereof on the date on which this Warrant Certificate shall have been surrendered and payment made for such Common Shares as aforesaid; provided, however, that no such surrender and payment on any date when the stock transfer books of the Company shall be closed shall be effective to constitute the person entitled to receive such Common Shares as the record holder thereof on such date, but such surrender and payment shall be effective to constitute the person entitled to receive such Common Shares as the record holder thereof for all purposes immediately after the opening of business on the next succeeding day on which such stock transfer books are open. The certificate(s) for such Common Shares shall be delivered to the registered holder hereof within a reasonable time, not exceeding five days, after the Warrants evidenced hereby shall have been so exercised and a new Warrant Certificate evidencing the number of Warrants, if any, remaining unexercised shall also be issued to the registered holder within such time unless such Warrants shall have expired. No fractional Common Shares of the Company, or scrips for any such fractional shares, shall be issued upon the exercise of any Warrants. 2. Adjustment in Exercise Price and Number of Shares. The initial exercise price of $2.75 per share shall be subject to adjustment from time to time as hereinafter provided (such price, as last adjusted, being hereinafter called the "Exercise Price"). Upon each adjustment of the Exercise Price, the holder of this Warrant shall thereafter 10 be entitled to purchase at the Exercise Price resulting from such adjustment, the number of shares obtained by multiplying the Exercise Price in effect immediately prior to such adjustment by the number of shares purchasable pursuant hereto immediately prior to such adjustment and dividing the product thereof by the Exercise Price resulting from such adjustment. (a) Adjustment of Warrant Exercise Price upon Issue of Common Shares. Except in the case of the issuance from time to time of Excluded Shares (as defined below), if and whenever after the date hereof the Company shall issue or sell any Common Shares for a consideration per share less than the Exercise Price in effect immediately prior to the time of such issue or sale, or the Company shall issue or sell any Common Shares for a consideration per share less than the Market Price (as hereinafter defined) of the Common Shares at the time of such issue or sale, then, forthwith upon such issue or sale, the Exercise Price shall be reduced (but not increased, except as otherwise specifically provided in Section 2(a)(C)) to the lower of the prices (calculated to the nearest cent) determined as follows: (x) by dividing (i) an amount equal to the sum of (A) the aggregate number of Common Shares outstanding immediately prior to such issue or sale multiplied by the then existing Exercise Price, and (B) the consideration, if any, received by the Company upon such issue or sale, by (ii) the aggregate number of Common Shares outstanding immediately after such issue or sale; and (y) by multiplying the Exercise Price in effect immediately prior to the time of such issue or sale by a fraction, the numerator of which shall be the sum of (i) the aggregate number of Common Shares outstanding immediately prior to such issue or sale multiplied by the Market Price of the Common Shares immediately prior to such issue or sale plus (ii) the consideration received by the Company upon such issue or sale, and the denominator of which shall be the product of (iii) the aggregate number of Common Shares outstanding immediately after such issue or sale, multiplied by (iv) the Market Price of the Common Shares immediately prior to such issue or sale. No adjustment of the Exercise Price, however, shall be made in an amount less than $.01 per share, but any such lesser adjustment shall be carried forward and shall be made upon the earlier of (i) the third anniversary of the issuance or 11 deemed issuance of the securities requiring such adjustment hereunder, and (ii) the time of and together with the next subsequent adjustment. For purposes hereof, the term "Excluded Shares" shall mean Common Shares issued to employees, officers, directors or affiliates of, or consultants to, the Company (or any of its subsidiaries, direct or indirect), pursuant to any agreement, plan (including without limitation stock option plans and stock purchase plans), arrangement or stock option heretofore or hereafter approved by the Board of Directors of the Company, including without duplication pursuant to options or warrants to purchase or rights to subscribe for such Common Shares, securities which by their terms are convertible into or exchangeable for such Common Shares, and options and warrants to purchase or rights to subscribe for such convertible or exchangeable securities. For purposes of this Section 2(a), the following paragraphs (A) to (I), inclusive, shall be applicable: (A) Issuance of Rights or Options. In case at any time after the date hereof the Company shall in any manner grant (whether directly or by assumption in a merger or otherwise) any rights to subscribe for or to purchase, or any options for the purchase of Common Shares or any stock or securities convertible into or exchangeable for Common Shares (such convertible or exchangeable stock or securities being herein called "Convertible Securities"), whether or not such rights or options or the right to convert or exchange any such Convertible Securities are immediately exercisable, and the price per share for which Common Shares are issuable upon the exercise of such rights or options or upon conversion or exchange of such Convertible Securities (determined by dividing (i) the total amount, if any, received or receivable by the Company as consideration for the granting of such rights or options, plus the minimum aggregate amount of additional consideration, if any, payable to the Company upon the exercise of such rights or options, or plus, in the case of such rights or options which relate to Convertible Securities, the minimum aggregate amount of additional consideration, if any, payable upon the issue or sale of such Convertible Securities and upon the conversion or exchange thereof, by (ii) the total maximum number of Common Shares issuable upon the exercise of such rights or options or 12 upon the conversion or exchange of all such Convertible Securities issuable upon the exercise of such rights or options) shall be less than the Exercise Price in effect immediately prior to the time of the granting of such rights or options or less than the Market Price of the Common Shares determined as of the date of granting such rights or options, as the case may be, then the total maximum number of Common Shares issuable upon the exercise of such rights or options or upon conversion or exchange of all such Convertible Securities issuable upon the exercise of such rights or options shall be deemed to be outstanding as of the date of the granting of such rights or options and to have been issued for such price per share, with the effect on the Exercise Price specified in Section 2(a). Except as provided in subparagraph (C), no further adjustment of the Exercise Price shall be made upon the actual issue of such Common Shares or of such Convertible Securities upon exercise of such rights or options or upon the actual issue of such Common Shares upon conversion or exchange of such Convertible Securities. (B) Issuance of Convertible Securities. In case at any time after the date hereof the Company shall in any manner issue (whether directly or by assumption in a merger or otherwise) or sell any Convertible Securities, whether or not the right to exchange or convert thereunder is immediately exercisable, and the price per share for which Common Shares are issuable upon such conversion or exchange (determined by dividing (i) the total amount, if any, received or receivable by the Company as consideration for the issue or sale of such Convertible Securities, plus the minimum aggregate amount of additional consideration, if any, payable to the Company upon the conversion or exchange thereof, by (ii) the total maximum number of Common Shares issuable upon the conversion or exchange of all such Convertible Securities) shall be less than the Exercise Price in effect immediately prior to the time of such issue or sale, or less than the Market Price of the Common Shares determined as of the date of such issue or sale of such Convertible Securities, as the case may be, then the total maximum number of Common Shares issuable upon conversion or exchange of all such Convertible Securities shall be deemed to be outstanding as of the date of the issue 13 or sale of such Convertible Securities and to have been issued for such price per share, with the effect on the Exercise Price specified in Section 2(a); provided, however, that (a) except as otherwise provided in subparagraph (C), no further adjustment of the Exercise Price shall be made upon the actual issue of such Common Shares upon conversion or exchange of such Convertible Securities, and (b) if any such issue or sale of such Convertible Securities is made upon exercise of any rights to subscribe for or to purchase or any option to purchase any such Convertible Securities for which adjustments of the Exercise Price have been or are to be made pursuant to the provisions of subparagraph (A), no further adjustment of the Exercise Price shall be made by reason of such issue or sale. (C) Change in Option Price or Conversion Rate. Upon the happening of any of the following events, namely, if the purchase price provided for in any right or option referred to in subparagraph (A), the additional consideration, if any, payable upon the conversion or exchange of any Convertible Securities referred to in subparagraphs (A) or (B), or the rate at which any Convertible Securities referred to in subparagraphs (A) or (B) are convertible into or exchangeable for Common Shares shall change (other than under or by reason of provisions designed to protect against dilution), the Exercise Price then in effect hereunder shall forthwith be readjusted (increased or decreased, as the case may be) to the Exercise Price which would have been in effect at such time had such rights, options or Convertible Securities still outstanding provided for such changed purchase price, additional consideration or conversion rate, as the case may be, at the time initially granted, issued or sold. On the expiration of any such option or right referred to in subparagraph (A), or the termination of any such right to convert or exchange any such Convertible Securities referred to in subparagraphs (A) or (B), the Exercise Price then in effect hereunder shall forthwith be readjusted (increased or decreased, as the case may be) to the Exercise Price which would have been in effect at the time of such expiration or termination had such right, option or Convertible Securities, to the extent outstanding immediately prior to such expiration 14 or termination, never been granted, issued or sold, and the Common Shares issuable thereunder shall no longer be deemed to be outstanding. If the purchase price provided for in any such right or option referred to in subparagraph (A) or the rate at which any Convertible Securities referred to in subparagraphs (A) or (B) are convertible into or exchangeable for Common Shares shall be reduced at any time under or by reason of provisions with respect thereto designed to protect against dilution, then in case of the delivery of Common Shares upon the exercise of any such right or option or upon conversion or exchange of any such Convertible Securities, the Exercise Price then in effect hereunder shall, if not already adjusted, forthwith be adjusted to such amount as would have obtained had such right, option or Convertible Securities never been issued as to such Common Shares and had adjustments been made upon the issuance of the Common Shares delivered as aforesaid, but only if as a result of such adjustment the Exercise Price then in effect hereunder is thereby reduced. (D) Stock Dividends. In case at any time the Company shall declare a dividend or make any other distribution upon any class or series of stock of the Company payable in Common Shares or Convertible Securities, any Common Shares or Convertible Securities, as the case may be, issuable in payment of such dividend or distribution shall be deemed to have been issued or sold without consideration with the effect on the Exercise Price specified in Section 2(a). (E) Consideration for Stock. In case at any time Common Shares or Convertible Securities or any rights or options to purchase any such Common Shares or Convertible Securities shall be issued or sold for cash, the consideration therefor shall be deemed to be the amount received by the Company therefor, after deduction therefrom of any expenses incurred or any underwriting commissions or concessions paid or allowed by the Company in connection therewith. In case at any time any Common Shares, Convertible Securities or any rights or options to purchase any such Common Shares or Convertible Securities shall be issued or sold for consideration other than cash, the amount of the consideration other than cash received by the Company shall be deemed to be 15 the fair value of such consideration, as determined reasonably and in good faith by the Board of Directors of the Company, after deduction of any expenses incurred or any underwriting commissions or concessions paid or allowed by the Company in connection therewith. In case at any time any Common Shares, Convertible Securities or any rights or options to purchase any Common Shares or Convertible Securities shall be issued in connection with any merger or consolidation in which the Company is the surviving corporation, the amount of consideration received therefor shall be deemed to be the fair value, as determined reasonably and in good faith by the Board of Directors of the Company, of such portion of the assets and business of the nonsurviving corporation as such Board of Directors may determine to be attributable to such Common Shares, Convertible Securities, rights or options, as the case may be. In case at any time any rights or options to purchase any shares of Common Stock or Convertible Securities shall be issued in connection with the issue and sale of other securities of the Company, together comprising one integral transaction in which no consideration is allocated to such rights or options by the parties thereto, such rights or options shall be deemed to have been issued without consideration. In the event of any consolidation or merger of the Company in which stock or securities of another corporation or other entity are issued in exchange for Common Stock of the Company or in the event of any sale of all or substantially all of the assets of the Company for stock or other securities of any corporation or other entity, the Company shall be deemed to have issued a number of shares of its Common Stock for stock or securities of the other corporation or other entity computed on the basis of the actual exchange ratio on which the transaction was predicated and for a consideration equal to the fair market value on the date of such transaction of such stock or securities of the other corporation or other entity, and if any such calculation results in the adjustment of the Exercise Price, the determination of the number of shares of Common Stock receivable upon exercise of this Warrant Certificate immediately prior to such merger, consolidation or sale, for purposes of Section 2(c), shall be made after giving effect to such adjustment of the Exercise Price. 16 (F) Record Date. In case the Company shall take a record of the holders of its Common Shares for the purpose of entitling them (i) to receive a dividend or other distribution payable in Common Shares or Convertible Securities, or (ii) to subscribe for or purchase Common Shares or Convertible Securities, then such record date shall be deemed to be the date of the issue or sale of the Common Shares or Convertible Securities deemed to have been issued or sold as a result of the declaration of such dividend or the making of such other distribution or the date of the granting of such right of subscription or purchase, as the case may be. (G) Treasury Shares. The number of Common Shares outstanding at any given time shall not include shares owned or held by or for the account of the Company, and the disposition of any such shares shall be considered an issue or sale of Common Shares for the purposes of Section 2(a). (H) Definition of Market Price. The term "Market Price" shall mean, for any day, the last sale price for the Common Shares on the principal securities exchange on which the Common Shares are listed or admitted to trading, or, if not so listed or admitted to trading on any securities exchange, the last sale price for the Common Shares on the National Association of Securities Dealers National Market System, or, if the Common Shares shall not be listed on such system, the NASDAQ Small Cap Market, or, if the Common Shares shall not be listed on such market, the average of the closing bid and asked prices in the over-the-counter market, in each such case, unless otherwise provided herein (including in the second sentence of this Warrant Certificate), averaged over a period of 20 consecutive business days prior to the day as of which the Market Price is being determined. If at any time the Common Shares are not listed on any such exchange, such system or such market or quoted in the over-the-counter market, the Market Price of the Common Shares 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 Company, by any firm of independent certified public accountants (which may be the regular auditors of the Company) of recognized 17 national standing selected by the Board of Directors of the Company, as of the last day of the month ending within 31 days preceding 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 of a date which is within 15 days preceding the date as of which the determination is to be made. (I) Certain Acquisitions. Anything herein to the contrary notwithstanding, in case at any time after the date hereof the Company shall issue any Common Shares or Convertible Securities, or any rights or options to purchase any Common Shares or Convertible Securities, in connection with the acquisition by the Company of the stock or assets of any other corporation or other entity or the merger of any other corporation or other entity with and into the Company under circumstances where on the date of the issuance of such Common Shares or Convertible Securities, or such rights or options, the consideration received for such Common Shares or deemed to have been received for the Common Shares into which such Convertible Securities are convertible or for which such rights or options are exercisable is less than the Market Price of the Common Shares, but on the date the number of Common Shares or Convertible Securities, or in the case of Convertible Securities other than stock, the aggregate principal amount of Convertible Securities, or the number of such rights or options was determined (as set forth in a binding agreement between the Company and the other party to the transaction) the consideration received for such Common Shares or deemed to have been received for the Common Shares into which such Convertible Securities are convertible or for which such rights or options are exercisable would not have been less than the Market Price of the Common Shares, such Common Shares shall not be deemed to have been issued for less than the Market Price of the Common Shares. (b) Subdivision or Combination of Stock. In case the Company shall at any time subdivide its outstanding Common Shares into a greater number of shares, each of the Exercise Price and the Acceleration Price in effect immediately prior to such subdivision shall be proportionately reduced, and 18 conversely, in case the outstanding Common Shares of the Company shall be combined into a smaller number of shares, each of the Exercise Price and the Acceleration Price in effect immediately prior to such combination shall be proportionately increased. (c) Reorganization, Reclassification, Consolidation, Merger. If any capital reorganization, reclassification of the capital stock of the Company, consolidation or merger of the Company with another corporation or other entity, or sale, transfer or other disposition of all or substantially all of the Company's properties to another corporation or other entity shall be effected, then, as a condition of such reorganization, reclassification, consolidation, merger, sale, transfer or other disposition, lawful and adequate provision shall be made whereby each holder of Warrants shall thereafter have the right to purchase and receive upon the basis and upon the terms and conditions herein specified and in lieu of the Common Shares immediately theretofore issuable upon exercise of the Warrants, such shares of stock, securities or properties as may be issuable or payable with respect to or in exchange for a number of outstanding Common Shares equal to the number of Common Shares immediately theretofore issuable upon exercise of the Warrants, had such reorganization, reclassification, consolidation, merger, sale, transfer or other disposition not taken place, and in any such case appropriate provision shall be made with respect to the rights and interests of each holder of Warrants to the end that the provisions hereof (including, without limitation, provision for adjustment of the Exercise Price and the Acceleration Price) shall thereafter be applicable, as nearly equivalent as may be practicable in relation to any shares of stock, securities or properties thereafter deliverable upon the exercise thereof. The Company shall not effect any such consolidation, merger, sale, transfer or other disposition, unless prior to or simultaneously with the consummation thereof the successor corporation or other entity, if other than the Company, resulting from such consolidation or merger, or the corporation or other entity purchasing or otherwise acquiring such properties shall assume, by written instrument executed and mailed or delivered to the holders of Warrants at the last address of such holders appearing on the books of the Company, the obligation to deliver to such holders such shares of stock, securities or properties, in accordance with the foregoing provisions, as such holders may be entitled to acquire. The above provisions of this subparagraph 2(c) shall similarly apply to successive reorganizations, reclassifications, consolidations, mergers, sales, transfers, or other dispositions. 19 (d) Liquidating Dividends. In case at any time the Company shall distribute pro rata to all holders of its Common Shares evidences of its indebtedness or assets (excluding cash dividends or cash distributions paid out of retained earnings or retained surplus) then, forthwith upon such distribution, the Exercise Price shall be reduced by the fair market value of the evidences of indebtedness or assets so distributed applicable to one Common Share (as conclusively determined by an investment banking firm designated by a majority in interest of the holders of Warrants; it being understood that the fees of such investment banking firm shall be borne by the Company). (e) Notice of Determination. Except as otherwise provided herein, upon any adjustment of the Exercise Price, then and in each such case the Company shall promptly obtain the certification of a firm of independent certified public accountants (which may be the regular auditors of the Company) of recognized national standing selected by the Company's Board of Directors, which certification shall state the Exercise Price resulting from such adjustment and the increase or decrease, if any, in the number of Common Shares issuable upon exercise of the Warrants held by each holder of Warrants, setting forth in reasonable detail the method of calculation and the facts upon which such calculation is based. The Company shall promptly mail a copy of such accountants' certification to each holder of Warrants. (f) Intent of Provisions. If any event occurs as to which, in the opinion of the Board of Directors of the Company, the other provisions of this Section 2 are not strictly applicable or if strictly applicable, would not fairly protect the rights of the holders of the Warrants in accordance with the essential intent and principles of such provisions, then such Board of Directors shall appoint a firm of independent certified public accountants (which may be the regular auditors of the Company) of recognized national standing, which shall give their opinion upon the adjustment, if any, on a basis consistent with such essential intent and principles, necessary to preserve, without dilution, the rights of the holders of Warrants. Upon receipt of such opinion by the Board of Directors of the Company, the Company shall forthwith make the adjustments described therein; provided, however, that no such adjustment pursuant to this Section 2(f) shall have the effect of increasing the Exercise Price as otherwise determined pursuant to the other provisions of this Section 2 except in the event of a combination of shares of the type contemplated in Section 2(b) and then in no event to an 20 amount larger than the Exercise Price as adjusted pursuant to Section 2(b). 3. Other Notices. If at any time prior to the expiration of the Warrants evidenced hereby: (a) The Company shall declare any dividend on the Common Shares payable in shares of capital stock of the Company, cash or other property; or (b) The Company shall authorize the issue of any options, warrants or rights pro rata to all holders of Common Shares entitling them to subscribe for or purchase any shares of stock of the Company or to receive any other rights; or (c) The Company shall authorize the distribution pro rata to all holders of Common Shares of evidences of its indebtedness or assets (excluding cash dividends or cash distributions paid out of retained earnings or retained surplus); or (d) There shall occur any reclassification of the Common Shares, or any consolidation or merger of the Company with or into another corporation or other entity (other than a consolidation or merger in which the Company is the continuing corporation and which does not result in any reclassification of the Common Shares) or a sale or transfer to another corporation or other entity of all or substantially all of the properties of the Company; or (e) There shall occur the voluntary or involun tary liquidation, dissolution or winding up of the affairs of the Company; then, and in each of such cases, the Company shall deliver to the registered holder hereof at its last address appearing on the books of the Company, as promptly as practicable but in any event at least 15 days prior to the applicable record date (or determination date) mentioned below, a notice stating, to the extent such information is available, (i) the date on which a record is to be taken for the purpose of such dividend, distribution or rights, or, if a record is not to be taken, the date as of which the holders of Common Shares of record to be entitled to such dividend, distribution or rights are to be determined, or (ii) the date on which such reclassification, consolidation, merger, sale, transfer, liquidation, dissolution or winding up is expected to become effective and the date as of which 21 it is expected that holders of Common Shares of record shall be entitled to exchange their Common Shares for securities or other property deliverable upon such reclassification, consolidation, merger, sale, transfer, liquidation, dissolution or winding up. 4. Representations and Warranties of the Company. The Company represents and warrants to and covenants with the registered holder hereof as follows: (a) The Company is a corporation duly organized, validly existing and in good standing under the laws of the State of Delaware, is duly qualified and in good standing under the laws of any foreign jurisdiction where the failure to be so qualified would have a material adverse effect on its ability to perform its obligations under the Warrants evidenced by this Warrant Certificate and it has full corporate power and authority to issue the Warrants and to carry out the provisions of the Warrants evidenced by this Warrant Certificate. (b) The issuance, execution and delivery of this Warrant Certificate has been duly authorized by all necessary corporate action on the part of the Company and each of the Warrants evidenced by this Warrant Certificate constitutes the valid and legally binding obligation of the Company, enforceable against it in accordance with the terms hereof, except as such enforceability may be limited by bankruptcy, insolvency or other laws affecting generally the enforceability of creditors' rights, by general principles of equity and by limitations on the availability of equitable remedies. (c) Neither the execution and delivery of the Warrants evidenced by this Warrant Certificate by the Company, nor compliance by the Company with the provisions hereof, violates any provision of its Certificate of Incorporation or By-Laws, as amended, or any law, statute, ordinance, regulation, order, judgment or decree of any court or governmental agency, or conflicts with or will result in any breach of the terms of or constitute a default under or result in the termination of or the creation of any lien pursuant to the terms of any agreement or instrument to which the Company is a party or by which it or any of its properties is bound. 5. Company to Provide Stock. The Company covenants and agrees that all shares of capital stock of the Company which may be issued upon the exercise of the Warrants evidenced hereby will be duly authorized, validly issued and fully paid and nonassessable and free from all 22 taxes, liens and charges with respect to the issue thereof to the registered holder hereof. The Company further covenants and agrees that during the period within which the Warrants evidenced hereby may be exercised, the Company will at all times reserve such number of shares of its capital stock as may be sufficient to permit the exercise in full of the Warrants evidenced hereby. 6. Registered Holder. The registered holder of this Warrant Certificate shall be deemed the owner hereof and of the Warrants evidenced hereby for all purposes. The registered holder of this Warrant Certificate shall not be entitled by virtue of ownership of this Warrant Certificate to any rights whatsoever as a shareholder of the Company. 7. Transfer. This Warrant Certificate and the Warrants evidenced hereby may be sold, transferred, pledged, hypothecated or otherwise disposed of; provided that this Warrant Certificate and the Warrants evidenced hereby may not be sold, transferred, pledged, hypothecated or otherwise disposed of unless, in the opinion of counsel reasonably satisfactory to the Company, such transfer would not result in a violation of the provisions of the Securities Act. Any transfer of this Warrant Certificate and the Warrants evidenced hereby, in whole or in part, shall be effected upon surrender of this Warrant Certificate, duly endorsed (unless endorsement is waived by the Company), at the principal office or agency of the Company referred to in Section 1 hereof. If all of the Warrants evidenced hereby are being sold, transferred, pledged, hypothecated or otherwise disposed of, the Company shall issue a new Warrant Certificate registered in the name of the appropriate transferee(s). If less than all of the Warrants evidenced hereby are being sold, transferred, pledged, hypothecated or otherwise disposed of, the Company shall issue new Warrant Certificates, in each case in the appropriate number of Warrants, registered in the name of the registered holder hereof and the transferee(s), as applicable. Any Common Shares of the Company issued upon any exercise hereof may not be sold, transferred, pledged, hypothecated or otherwise disposed of unless, in the opinion of counsel reasonably satisfactory to the Company, such transfer would not result in a violation of the Securities Act. Each taker and holder of this Warrant Certificate, the Warrants evidenced hereby and any shares of capital stock of the Company issued upon exercise of any such Warrants, by taking or holding the same, consents to and agrees to be bound by the provisions of this Section 7. * * * 23 IN WITNESS WHEREOF, RAMSAY HEALTH CARE, INC. has caused this Warrant Certificate to be signed by a duly authorized officer and this Warrant Certificate to be dated September 10, 1996. RAMSAY HEALTH CARE, INC. By Name: Remberto Cibran Title: President 24 FORM OF EXERCISE (to be executed by the registered holder hereof) The undersigned hereby exercises ____ Warrants to subscribe for and purchase shares of common stock, par value $.01 ("Common Shares"), of RAMSAY HEALTH CARE, INC. evidenced by the within Warrant Certificate and herewith makes payment of the purchase price in full. Kindly issue certificates for the Common Shares in accordance with the instructions given below. The certificate for the unexercised balance of the Warrants evidenced by the within Warrant Certificate, if any, will be registered in the name of the undersigned. Dated: Instructions for registration of shares Name (please print) Social Security or Other Identifying Number: Address: _________________________________ Street _________________________________ City, State and Zip Code EX-10 10 EXHIBIT 10.97 CONSULTING AGREEMENT EXHIBIT 10.97 CONSULTING AGREEMENT CONSULTING AGREEMENT dated as of January 1, 1996 between RAMSAY HEALTH CARE, INC., a Delaware corporation (the "Company"), and SUMMA HEALTHCARE GROUP, INC., a Florida corporation (the "Consultant"). W I T N E S S E T H: WHEREAS, the Company desires to engage the Consultant to provide certain advisory and consulting services with respect to the business of the Company, and the Consultant is willing to provide such services on the terms and conditions set forth herein. NOW, THEREFORE, in consideration of the premises and the mutual agreements hereinafter set forth, the parties hereto hereby agree as follows: 1. Agreement. The Company hereby retains the Consultant, and the Consultant hereby agrees, to render to the Company the consulting services described in Section 3 on the terms and conditions set forth herein. 2. Term. The term of this Agreement shall commence as of January 1, 1996 and shall continue in full force and effect until terminated pursuant to Section 6 of this Agreement. 3. Consulting Services. 3.1 During the term of this Agreement, the Consultant shall provide the Company with such advisory and consulting services as shall be requested by the Chairman of the Company in connection with (a) strategic planning, overall evaluation of the Company's facilities and services, assistance in developing and targeting managed care agreements, general evaluation of case management and quality assurance programs, and, with respect to certain critical relationships of the Company, assisting with physician interaction and liaising with other providers, and (b) business development and investor relations. 3.2 The Consultant shall render its services hereunder through its principal, Luis E. Lamela (the "Principal") and such other individuals as shall be approved by the Company. The Consultant shall devote such time and attention as shall be necessary and appropriate to the proper performance of the Consultant's duties hereunder. 2 3.3 The Consultant shall report to the Chairman of the Company. 4. Compensation. In consideration of the services to be provided by the Consultant hereunder and the other agreements and covenants of the Consultant set forth herein, the Company shall pay the Consultant a consulting fee of $10,000 per month with respect to the services described in Section 3.1(a) and $2,500 per month with respect to the services described in Section 3.1(b), in each case payable in advance on the first day of each month. 5. Expense Reimbursement. During the term of this Agreement, the Company shall reimburse the Consultant for reasonable business expenses, including but not limited to travel, telephone and telecopying expenses, incurred by the Consultant in the performance of its duties hereunder. Such reimbursement shall be made monthly, against invoice of the Consultant accompanied by appropriate documentation of such expenses. 6. Termination. 6.1 The term of this Agreement shall terminate on December 31, 1996, unless extended in accordance with this Section 6.1. As of December 31, 1996, and as of December 31 of each subsequent year (each, an "Automatic Renewal Date"), unless either party shall have given a notice of non-extension not less than three (3) months prior to such Automatic Renewal Date, the term of this Agreement shall be extended automatically for a period of one year to the anniversary of the expiration date of the then-current term of this Agreement. 6.2 Either the Company or the Consultant may terminate this Agreement, with or without reason, by written notice to the other, with an effective date of not less than three (3) months' following the date such notice is given. The effective date of any termination pursuant to this Section 6.2 shall not be prior to January 1, 1997. 6.3 Upon termination of this Agreement, the Company shall pay to the Consultant any portion of the Compensation referred to in Section 4 of this Agreement earned as of the effective date of such termination and not theretofore paid, and shall reimburse the Consultant for expenses referred to in Section 5 of this Agreement incurred through the date of such termination, and the Company and the Consultant shall have no further rights or obligations under this Agreement except as provided in Sections 7, 8 and 9 of this Agreement. 3 7. Confidential Information. 7.1 The Consultant and the Principal shall, during the term of this Agreement and at all times thereafter, treat as confidential and, except as required in sthe performance of its and his duties under this Agreement, not disclose, publish or otherwise make available to the public or to any individual, firm or corporation (other than an employee or professional advisor of the Company), any confidential material (as hereinafter defined). The Consultant and the Principal agree that all confidential material is the exclusive property of the Company, and the Consultant and the Principal agree to return such material to the Company promptly upon the termination of the Consultant's services under this Agreement. 7.2 For purposes hereof, the term "confidential material" shall mean all information in any way concerning the products, projects, activities, business or affairs of the Company acquired by the Consultant or the Principal in the course of providing services to the Company; provided, however, that the term "confidential material" shall not include information which (i) becomes generally available to the public other than as a result of an unauthorized disclosure by the Consultant or the Principal, (ii) was available to the Consultant or the Principal on a non-confidential basis prior to its consultancy with the Company or (iii) becomes available to the Consultant or the Principal on a non-confidential basis from a source other than the Company, provided that such source is not bound by a confidentiality agreement with the Company. 8. Equitable Relief. In the event of a breach or threatened breach by the Consultant or the Principal of any of the provisions of Section 7 of this Agreement, the Consultant hereby consents and agrees that the Company shall be entitled to pre-judgment injunctive relief or similar equitable relief restraining the Consultant or the Principal from committing or continuing any such breach or threatened breach or granting specific performance of any act required to be performed by the Consultant or the Principal under any of such provisions, without the necessity of showing any actual damage or that money damages would not afford an adequate remedy and without the necessity of posting any bond or other security. Nothing herein shall be construed as prohibiting the Company from pursuing any other remedies at law or in equity which it may have. 9. Indemnification. The Company shall defend, indemnify and save harmless the Consultant and the Principal against and from any and all 4 loss, liabilities, obligations, damages, penalties, claims, costs, charges and expenses, including reasonable attorneys' fees and disbursements, which may be imposed upon or incurred by or asserted against the Consultant or the Principal arising out of the performance by the Consultant of its duties hereunder (unless due to the gross negligence or willful misconduct of the Consultant or the Principal). In the event that any action or proceeding is commenced against the Consultant or the Principal with respect to any matter for which the Consultant or the Principal may be entitled to indemnification pursuant to this Section 10, the Consultant shall give written notice thereof to the Company and the Company shall have the right to defend such action or proceeding with counsel selected by the Company and approved in writing by the Consultant. 10. Notices. All notices, certificates and other communications hereunder shall be in writing and shall be given by personal delivery, overnight courier, telex, telefax or other electronic means of transmission or by certified or registered mail, postage prepaid, return receipt requested, to the parties at the addresses set forth below, or to such other address as a party shall designate to the other party in writing: if to the Company: Ramsay Health Care, Inc. 639 Loyola Avenue, Suite 1700 New Orleans, Louisiana Attention: Chairman Telefax: (504) 585-0505 if to the Consultant: Summa Healthcare Group, Inc. 75 Valencia Avenue Suite 102 Coral Gables, Florida 33134 Attention: President Telefax: (305) 567-1169 Notices, certificates and other communications shall be deemed given, in the case of personal delivery, overnight courier, telex, telefax or other electronic means of transmission, on the date of actual receipt by the party entitled thereto and, in the case of mailing, on the third day following the date of deposit in the mails. 11. Entire Agreement. This Agreement constitutes the entire agreement of the parties hereto with respect to 5 the subject matter hereof and no amendment or modification hereof shall be valid or binding unless made in writing and signed by the party against whom enforcement thereof is sought. 12. Binding Effect. This Agreement shall be binding upon and inure to the benefit of the parties hereto, and their respective successors, heirs, executors, administrators, legal representatives and assigns. 13. Nonwaiver. No course of dealing nor any delay on the part of the Company or the Consultant in exercising any rights hereunder shall operate as a waiver of any such rights. No waiver of any default or breach of this Agreement shall be deemed a continuing waiver or a waiver of any other breach or default. 14. Independent Contractor. It is the intention of the parties that the Consultant shall be retained by the Company pursuant to this Agreement, and shall perform its duties hereunder, as an independent contractor. Nothing herein shall be deemed to create a partnership, joint venture or employment relationship between the Consultant and the Company. 15. Governing Law. This Agreement shall be governed by and construed in accordance with the laws of the State of Delaware. 16. Retention of Records. Until the expiration of four (4) years after the furnishing of services pursuant to this Agreement, the Consultant shall upon written request make available to the Company, the Secretary of the Department of Health and Human Services, the Comptroller General of the United States, or any of their duly authorized representatives, this Agreement and any books, documents, and records that are necessary to verify the nature and extent of the costs. In addition, the Consultant agrees to promptly notify the Company in the event any such request is made by the Secretary of Health and Human Services or the Comptroller General of the United States, or any of their duly authorized representatives, and to furnish the Company with copies of any documents furnished to such persons. * * * 6 IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the day and year first above written. RAMSAY HEALTH CARE, INC. By SUMMA HEALTHCARE GROUP, INC. By Luis E. Lamela President EX-10 11 EXHIBIT 10.98 LADIES AND GENTLEMEN EXHIBIT 10.98 RAMSAY HEALTH CARE, INC. Entergy Corporation Building 639 Loyola Avenue, Suite 1700 New Orleans, Louisiana 70113 As of September 10, 1996 Ramsay Health Care Pty. Limited Paul Ramsay Holdings Pty. Limited 154 Pacific Highway Greenwich NSW 2065 Australia Ladies and Gentlemen: Reference is made to that certain Amended and Restated Management Agreement (the "Management Agreement") dated as of June 25, 1992 by and among Ramsay Health Care Pty. Limited ("Ramsay Health Care") and Ramsay Health Care, Inc. ("RHCI"). The parties hereto hereby agree that the Management Agreement shall be terminated, effective July 1, 1997 (the "Termination Date"), and in consideration therefor, RHCI agrees to issue and convey the Warrants (as defined below) on the date hereof to or at the direction of Ramsay Health Care. Ramsay Health Care hereby directs RHCI to, RHCI does hereby, issue and convey to Paul Ramsay Holdings Pty. Limited ("Ramsay Holdings"), and Ramsay Holdings hereby acquires and accepts from RHCI on the date hereof, warrants (the "Warrants") to purchase 250,000 shares of the common stock, $.01 par value, of RHCI at an exercise price of $2.625 per share and otherwise on the terms and conditions set forth in the warrant certificate attached as Exhibit A hereto. Notwithstanding the foregoing, the parties hereto acknowledge and agree that the Management Agreement shall remain in full force and effect from the date hereof until the Termination Date. Ramsay Health Care Pty. Limited Paul Ramsay Holdings Pty. Limited As of September 10, 1996 Page 2 This Agreement may be executed in counterparts (including by facsimile), each of which shall be deemed an original, but all of which taken together shall constitute one and the same instrument. If the foregoing correctly sets forth our agreement, please so indicate by signing in the space below. RAMSAY HEALTH CARE, INC. By:________________________________ Remberto Cibran President Agreed and Accepted: RAMSAY HEALTH CARE PTY. LIMITED By:_____________________________ Peter J. Evans Director PAUL RAMSAY HOLDINGS PTY. LIMITED By:_____________________________ Peter J. Evans Director EXHIBIT A THIS WARRANT CERTIFICATE AND THE WARRANTS EVIDENCED HEREBY HAVE NOT BEEN REGISTERED UNDER THE UNITED STATES SECURITIES ACT OF 1933 (THE "SECURITIES ACT") BUT HAVE BEEN ISSUED PURSUANT TO AN EXEMPTION FROM SUCH REGISTRATION AND MAY NOT BE SOLD, TRANSFERRED, PLEDGED, HYPOTHECATED OR OTHERWISE DISPOSED OF UNTIL EITHER (i) THE HOLDER THEREOF SHALL HAVE RECEIVED AN OPINION OF COUNSEL REASONABLY SATISFACTORY TO THE COMPANY (AS HEREINAFTER DEFINED) THAT REGISTRATION THEREOF UNDER THE SECURITIES ACT IS NOT REQUIRED OR (ii) A REGISTRATION STATEMENT UNDER THE SECURITIES ACT WITH RESPECT THERETO SHALL HAVE BECOME EFFECTIVE. 250,000 Warrants WARRANT CERTIFICATE To Subscribe for and Purchase shares of Common Stock, par value $.01, of RAMSAY HEALTH CARE, INC. THIS CERTIFIES that, for value received, Paul Ramsay Holdings Pty. Limited, an Australian corporation, or its registered successors and assigns, is the owner of the number of warrants (the "Warrants") set forth above, each of which entitles the owner thereof to purchase from Ramsay Health Care, Inc., a Delaware corporation (herein called the "Company"), at any time during the period from the date hereof through 5:00 P.M., New York City Time on September 10, 2006, one share of Common Stock, par value $.01, of the Company (individually, a "Common Share" and collectively, the "Common Shares"), at an initial exercise price of $2.625 per share, subject to adjustment from time to time pursuant to the provisions of paragraph 2. For purposes of this Warrant Certificate, the term "Common Shares" shall mean the class of capital stock of the Company designated common stock, par value $.01, as constituted on the date hereof, and any other class of capital stock of the Company resulting from successive changes or reclassifications of the Common Shares. 1. Exercise of Warrants. The Warrants evidenced hereby may be exercised by the registered holder hereof, in whole or in part, by the surrender of this Warrant Certificate, duly endorsed (unless endorsement is waived by the Company), at the principal office of the Company (or at such other office or agency of the Company as it may designate by notice in writing to the registered holder hereof at such holder's last address appearing on the books of the 2 Company) and upon payment to the Company by certified or official bank check or checks payable to the order of the Company of the purchase price of the Common Shares purchased. The Company agrees that the Common Shares so purchased shall be deemed to be issued to the registered holder hereof on the date on which this Warrant Certificate shall have been surrendered and payment made for such Common Shares as aforesaid; provided, however, that no such surrender and payment on any date when the stock transfer books of the Company shall be closed shall be effective to constitute the person entitled to receive such Common Shares as the record holder thereof on such date, but such surrender and payment shall be effective to constitute the person entitled to receive such Common Shares as the record holder thereof for all purposes immediately after the opening of business on the next succeeding day on which such stock transfer books are open. The certificate(s) for such Common Shares shall be delivered to the registered holder hereof within a reasonable time, not exceeding five days, after the Warrants evidenced hereby shall have been so exercised and a new Warrant Certificate evidencing the number of Warrants, if any, remaining unexercised shall also be issued to the registered holder within such time unless such Warrants shall have expired. No fractional Common Shares of the Company, or scrips for any such fractional shares, shall be issued upon the exercise of any Warrants. 2. Adjustment in Exercise Price and Number of Shares. The initial exercise price of $2.75 per share shall be subject to adjustment from time to time as hereinafter provided (such price, as last adjusted, being hereinafter called the "Exercise Price"). Upon each adjustment of the Exercise Price, the holder of this Warrant shall thereafter be entitled to purchase at the Exercise Price resulting from such adjustment, the number of shares obtained by multiplying the Exercise Price in effect immediately prior to such adjustment by the number of shares purchasable pursuant hereto immediately prior to such adjustment and dividing the product thereof by the Exercise Price resulting from such adjustment. (a) Adjustment of Warrant Exercise Price upon Issue of Common Shares. Except in the case of the issuance from time to time of Excluded Shares (as defined below), if and whenever after the date hereof the Company shall issue or sell any Common Shares for a consideration per share less than the Exercise Price in effect immediately prior to the time of such issue or sale, or the Company shall issue or sell any Common Shares for a consideration per share less than the Market Price (as hereinafter defined) of the Common Shares at the time of such issue or sale, then, forthwith upon such issue or sale, the Exercise Price shall be reduced (but not increased, except as otherwise specifically 3 provided in Section 2(a)(C)) to the lower of the prices (calculated to the nearest cent) determined as follows: (x) by dividing (i) an amount equal to the sum of (A) the aggregate number of Common Shares outstanding immediately prior to such issue or sale multiplied by the then existing Exercise Price, and (B) the consideration, if any, received by the Company upon such issue or sale, by (ii) the aggregate number of Common Shares outstanding immediately after such issue or sale; and (y) by multiplying the Exercise Price in effect immediately prior to the time of such issue or sale by a fraction, the numerator of which shall be the sum of (i) the aggregate number of Common Shares outstanding immediately prior to such issue or sale multiplied by the Market Price of the Common Shares immediately prior to such issue or sale plus (ii) the consideration received by the Company upon such issue or sale, and the denominator of which shall be the product of (iii) the aggregate number of Common Shares outstanding immediately after such issue or sale, multiplied by (iv) the Market Price of the Common Shares immediately prior to such issue or sale. No adjustment of the Exercise Price, however, shall be made in an amount less than $.01 per share, but any such lesser adjustment shall be carried forward and shall be made upon the earlier of (i) the third anniversary of the issuance or deemed issuance of the securities requiring such adjustment hereunder, and (ii) the time of and together with the next subsequent adjustment. For purposes hereof, the term "Excluded Shares" shall mean Common Shares issued to employees, officers, directors or affiliates of, or consultants to, the Company (or any of its subsidiaries, direct or indirect), pursuant to any agreement, plan (including without limitation stock option plans and stock purchase plans), arrangement or stock option heretofore or hereafter approved by the Board of Directors of the Company, including without duplication pursuant to options or warrants to purchase or rights to subscribe for such Common Shares, securities which by their terms are convertible into or exchangeable for such Common Shares, and options and warrants to purchase or rights to subscribe for such convertible or exchangeable securities. 4 For purposes of this Section 2(a), the following paragraphs (A) to (I), inclusive, shall be applicable: (A) Issuance of Rights or Options. In case at any time after the date hereof the Company shall in any manner grant (whether directly or by assumption in a merger or otherwise) any rights to subscribe for or to purchase, or any options for the purchase of Common Shares or any stock or securities convertible into or exchangeable for Common Shares (such convertible or exchangeable stock or securities being herein called "Convertible Securities"), whether or not such rights or options or the right to convert or exchange any such Convertible Securities are immediately exercisable, and the price per share for which Common Shares are issuable upon the exercise of such rights or options or upon conversion or exchange of such Convertible Securities (determined by dividing (i) the total amount, if any, received or receivable by the Company as consideration for the granting of such rights or options, plus the minimum aggregate amount of additional consideration, if any, payable to the Company upon the exercise of such rights or options, or plus, in the case of such rights or options which relate to Convertible Securities, the minimum aggregate amount of additional consideration, if any, payable upon the issue or sale of such Convertible Securities and upon the conversion or exchange thereof, by (ii) the total maximum number of Common Shares issuable upon the exercise of such rights or options or upon the conversion or exchange of all such Convertible Securities issuable upon the exercise of such rights or options) shall be less than the Exercise Price in effect immediately prior to the time of the granting of such rights or options or less than the Market Price of the Common Shares determined as of the date of granting such rights or options, as the case may be, then the total maximum number of Common Shares issuable upon the exercise of such rights or options or upon conversion or exchange of all such Convertible Securities issuable upon the exercise of such rights or options shall be deemed to be outstanding as of the date of the granting of such rights or options and to have been issued for such price per share, with the effect on the Exercise Price specified in Section 2(a). Except as provided in subparagraph (C), no further adjustment of the Exercise Price shall be made upon the actual issue of such Common Shares or of such Convertible Securities upon exercise of such 5 rights or options or upon the actual issue of such Common Shares upon conversion or exchange of such Convertible Securities. (B) Issuance of Convertible Securities. In case at any time after the date hereof the Company shall in any manner issue (whether directly or by assumption in a merger or otherwise) or sell any Convertible Securities, whether or not the right to exchange or convert thereunder is immediately exercisable, and the price per share for which Common Shares are issuable upon such conversion or exchange (determined by dividing (i) the total amount, if any, received or receivable by the Company as consideration for the issue or sale of such Convertible Securities, plus the minimum aggregate amount of additional consideration, if any, payable to the Company upon the conversion or exchange thereof, by (ii) the total maximum number of Common Shares issuable upon the conversion or exchange of all such Convertible Securities) shall be less than the Exercise Price in effect immediately prior to the time of such issue or sale, or less than the Market Price of the Common Shares determined as of the date of such issue or sale of such Convertible Securities, as the case may be, then the total maximum number of Common Shares issuable upon conversion or exchange of all such Convertible Securities shall be deemed to be outstanding as of the date of the issue or sale of such Convertible Securities and to have been issued for such price per share, with the effect on the Exercise Price specified in Section 2(a); provided, however, that (a) except as otherwise provided in subparagraph (C), no further adjustment of the Exercise Price shall be made upon the actual issue of such Common Shares upon conversion or exchange of such Convertible Securities, and (b) if any such issue or sale of such Convertible Securities is made upon exercise of any rights to subscribe for or to purchase or any option to purchase any such Convertible Securities for which adjustments of the Exercise Price have been or are to be made pursuant to the provisions of subparagraph (A), no further adjustment of the Exercise Price shall be made by reason of such issue or sale. (C) Change in Option Price or Conversion Rate. Upon the happening of any of the following events, namely, if the purchase price provided for in any right or option referred to in subparagraph (A), the additional consideration, if any, payable upon the conversion or exchange of any Convertible Securities 6 referred to in subparagraphs (A) or (B), or the rateat which any Convertible Securities referred to in subparagraphs (A) or (B) are convertible into or exchangeable for Common Shares shall change (other than under or by reason of provisions designed to protect against dilution), the Exercise Price then in effect hereunder shall forthwith be readjusted (increased or decreased, as the case may be) to the Exercise Price which would have been in effect at such time had such rights, options or Convertible Securities still outstanding provided for such changed purchase price, additional consideration or conversion rate, as the case may be, at the time initially granted, issued or sold. On the expiration of any such option or right referred to in subparagraph (A), or the termination of any such right to convert or exchange any such Convertible Securities referred to in subparagraphs (A) or (B), the Exercise Price then in effect hereunder shall forthwith be readjusted (increased or decreased, as the case may be) to the Exercise Price which would have been in effect at the time of such expiration or termination had such right, option or Convertible Securities, to the extent outstanding immediately prior to such expiration or termination, never been granted, issued or sold, and the Common Shares issuable thereunder shall no longer be deemed to be outstanding. If the purchase price provided for in any such right or option referred to in subparagraph (A) or the rate at which any Convertible Securities referred to in subparagraphs (A) or (B) are convertible into or exchangeable for Common Shares shall be reduced at any time under or by reason of provisions with respect thereto designed to protect against dilution, then in case of the delivery of Common Shares upon the exercise of any such right or option or upon conversion or exchange of any such Convertible Securities, the Exercise Price then in effect hereunder shall, if not already adjusted, forthwith be adjusted to such amount as would have obtained had such right, option or Convertible Securities never been issued as to such Common Shares and had adjustments been made upon the issuance of the Common Shares delivered as aforesaid, but only if as a result of such adjustment the Exercise Price then in effect hereunder is thereby reduced. (D) Stock Dividends. In case at any time the Company shall declare a dividend or make any other distribution upon any class 7 or series of stock of the Company payable in Common Shares or Convertible Securities, any Common Shares or Convertible Securities, as the case may be, issuable in payment of such dividend or distribution shall be deemed to have been issued or sold without consideration with the effect on the Exercise Price specified in Section 2(a). (E) Consideration for Stock. In case at any time Common Shares or Convertible Securities or any rights or options to purchase any such Common Shares or Convertible Securities shall be issued or sold for cash, the consideration therefor shall be deemed to be the amount received by the Company therefor, after deduction therefrom of any expenses incurred or any underwriting commissions or concessions paid or allowed by the Company in connection therewith. In case at any time any Common Shares, Convertible Securities or any rights or options to purchase any such Common Shares or Convertible Securities shall be issued or sold for consideration other than cash, the amount of the consideration other than cash received by the Company shall be deemed to be the fair value of such consideration, as determined reasonably and in good faith by the Board of Directors of the Company, after deduction of any expenses incurred or any underwriting commissions or concessions paid or allowed by the Company in connection therewith. In case at any time any Common Shares, Convertible Securities or any rights or options to purchase any Common Shares or Convertible Securities shall be issued in connection with any merger or consolidation in which the Company is the surviving corporation, the amount of consideration received therefor shall be deemed to be the fair value, as determined reasonably and in good faith by the Board of Directors of the Company, of such portion of the assets and business of the nonsurviving corporation as such Board of Directors may determine to be attributable to such Common Shares, Convertible Securities, rights or options, as the case may be. In case at any time any rights or options to purchase any shares of Common Stock or Convertible Securities shall be issued in connection with the issue and sale of other securities of the Company, together comprising one integral transaction in which no consideration is allocated to such rights or options by the parties thereto, such rights or options shall be deemed to have been issued without consideration. In the event of any consolidation or merger of the Company in which stock or 8 securities of another corporation or other entity are issued in exchange for Common Stock of the Company or in the event of any sale of all or substantially all of the assets of the Company for stock or other securities of any corporation or other entity, the Company shall be deemed to have issued a number of shares of its Common Stock for stock or securities of the other corporation or other entity computed on the basis of the actual exchange ratio on which the transaction was predicated and for a consideration equal to the fair market value on the date of such transaction of such stock or securities of the other corporation or other entity, and if any such calculation results in the adjustment of the Exercise Price, the determination of the number of shares of Common Stock receivable upon exercise of this Warrant Certificate immediately prior to such merger, consolidation or sale, for purposes of Section 2(c), shall be made after giving effect to such adjustment of the Exercise Price. (F) Record Date. In case the Company shall take a record of the holders of its Common Shares for the purpose of entitling them (i) to receive a dividend or other distribution payable in Common Shares or Convertible Securities, or (ii) to subscribe for or purchase Common Shares or Convertible Securities, then such record date shall be deemed to be the date of the issue or sale of the Common Shares or Convertible Securities deemed to have been issued or sold as a result of the declaration of such dividend or the making of such other distribution or the date of the granting of such right of subscription or purchase, as the case may be. (G) Treasury Shares. The number of Common Shares outstanding at any given time shall not include shares owned or held by or for the account of the Company, and the disposition of any such shares shall be considered an issue or sale of Common Shares for the purposes of Section 2(a). (H) Definition of Market Price. The term "Market Price" shall mean, for any day, the last sale price for the Common Shares on the principal securities exchange on which the Common Shares are listed or admitted to trading, or, if not so listed or admitted to trading on any securities exchange, the last sale price for the Common Shares on the National Association of Securities Dealers National Market System, or, if the Common Shares shall not be listed on such system, the NASDAQ Small Cap Market, or, if the Common Shares shall not be listed 9 on such market, the average of the closing bid and asked prices in the over-the-counter market, in each such case, unless otherwise provided herein, averaged over a period of 20 consecutive business days prior to the day as of which the Market Price is being determined. If at any time the Common Shares are not listed on any such exchange, such system or such market or quoted in the over-the-counter market, the Market Price of the Common Shares 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 Company, by any firm of independent certified public accountants (which may be the regular auditors of the Company) of recognized national standing selected by the Board of Directors of the Company, as of the last day of the month ending within 31 days preceding 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 of a date which is within 15 days preceding the date as of which the determination is to be made. (I) Certain Acquisitions. Anything herein to the contrary notwithstanding, in case at any time after the date hereof the Company shall issue any Common Shares or Convertible Securities, or any rights or options to purchase any Common Shares or Convertible Securities, in connection with the acquisition by the Company of the stock or assets of any other corporation or other entity or the merger of any other corporation or other entity with and into the Company under circumstances where on the date of the issuance of such Common Shares or Convertible Securities, or such rights or options, the consideration received for such Common Shares or deemed to have been received for the Common Shares into which such Convertible Securities are convertible or for which such rights or options are exercisable is less than the Market Price of the Common Shares, but on the date the number of Common Shares or Convertible Securities, or in the case of Convertible Securities other than stock, the aggregate principal amount of Convertible Securities, or the number of such rights or options was determined (as set forth in a binding agreement between the Company and the other party to the transaction) the consideration received for such Common Shares or deemed to have been received for the Common Shares into which such Convertible 10 Securities are convertible or for which such rights or options are exercisable would not have been less than the Market Price of the Common Shares, such Common Shares shall not be deemed to have been issued for less than the Market Price of the Common Shares. (b) Subdivision or Combination of Stock. In case the Company shall at any time subdivide its outstanding Common Shares into a greater number of shares, the Exercise Price in effect immediately prior to such subdivision shall be proportionately reduced, and conversely, in case the outstanding Common Shares of the Company shall be combined into a smaller number of shares, the Exercise Price in effect immediately prior to such combination shall be proportionately increased. (c) Reorganization, Reclassification, Consolidation, Merger. If any capital reorganization, reclassification of the capital stock of the Company, consolidation or merger of the Company with another corporation or other entity, or sale, transfer or other disposition of all or substantially all of the Company's properties to another corporation or other entity shall be effected, then, as a condition of such reorganization, reclassification, consolidation, merger, sale, transfer or other disposition, lawful and adequate provision shall be made whereby each holder of Warrants shall thereafter have the right to purchase and receive upon the basis and upon the terms and conditions herein specified and in lieu of the Common Shares immediately theretofore issuable upon exercise of the Warrants, such shares of stock, securities or properties as may be issuable or payable with respect to or in exchange for a number of outstanding Common Shares equal to the number of Common Shares immediately theretofore issuable upon exercise of the Warrants, had such reorganization, reclassification, consolidation, merger, sale, transfer or other disposition not taken place, and in any such case appropriate provision shall be made with respect to the rights and interests of each holder of Warrants to the end that the provisions hereof (including, without limitation, provision for adjustment of the Exercise Price) shall thereafter be applicable, as nearly equivalent as may be practicable in relation to any shares of stock, securities or properties thereafter deliverable upon the exercise thereof. The Company shall not effect any such consolidation, merger, sale, transfer or other disposition, unless prior to or simultaneously with the consummation thereof the successor corporation or other entity, if other than the Company, resulting from such consolidation or merger, or the corporation or other entity purchasing or otherwise acquiring such properties shall assume, by written instrument executed and mailed or delivered to the holders of Warrants at the last address of such holders appearing on the books of the Company, the obligation to deliver to such 11 holders such shares of stock, securities or properties, in accordance with the foregoing provisions, as such holders may be entitled to acquire. The above provisions of this subparagraph 2(c) shall similarly apply to successive reorganizations, reclassifications, consolidations, mergers, sales, transfers, or other dispositions. (d) Liquidating Dividends. In case at any time the Company shall distribute pro rata to all holders of its Common Shares evidences of its indebtedness or assets (excluding cash dividends or cash distributions paid out of retained earnings or retained surplus) then, forthwith upon such distribution, the Exercise Price shall be reduced by the fair market value of the evidences of indebtedness or assets so distributed applicable to one Common Share (as conclusively determined by an investment banking firm designated by a majority in interest of the holders of Warrants; it being understood that the fees of such investment banking firm shall be borne by the Company). (e) Notice of Determination. Except as otherwise provided herein, upon any adjustment of the Exercise Price, then and in each such case the Company shall promptly obtain the certification of a firm of independent certified public accountants (which may be the regular auditors of the Company) of recognized national standing selected by the Company's Board of Directors, which certification shall state the Exercise Price resulting from such adjustment and the increase or decrease, if any, in the number of Common Shares issuable upon exercise of the Warrants held by each holder of Warrants, setting forth in reasonable detail the method of calculation and the facts upon which such calculation is based. The Company shall promptly mail a copy of such accountants' certification to each holder of Warrants. (f) Intent of Provisions. If any event occurs as to which, in the opinion of the Board of Directors of the Company, the other provisions of this Section 2 are not strictly applicable or if strictly applicable, would not fairly protect the rights of the holders of the Warrants in accordance with the essential intent and principles of such provisions, then such Board of Directors shall appoint a firm of independent certified public accountants (which may be the regular auditors of the Company) of recognized national standing, which shall give their opinion upon the adjustment, if any, on a basis consistent with such essential intent and principles, necessary to preserve, without dilution, the rights of the holders of Warrants. Upon receipt of such opinion by the Board of Directors of the Company, the Company shall forthwith make the adjustments described therein; provided, however, that no such adjustment pursuant to this 12 Section 2(f) shall have the effect of increasing the Exercise Price as otherwise determined pursuant to the other provisions of this Section 2 except in the event of a combination of shares of the type contemplated in Section 2(b) and then in no event to an amount larger than the Exercise Price as adjusted pursuant to Section 2(b). 3. Other Notices. If at any time prior to the expiration of the Warrants evidenced hereby: (a) The Company shall declare any dividend on the Common Shares payable in shares of capital stock of the Company, cash or other property; or (b) The Company shall authorize the issue of any options, warrants or rights pro rata to all holders of Common Shares entitling them to subscribe for or purchase any shares of stock of the Company or to receive any other rights; or (c) The Company shall authorize the distribution pro rata to all holders of Common Shares of evidences of its indebtedness or assets (excluding cash dividends or cash distributions paid out of retained earnings or retained surplus); or (d) There shall occur any reclassification of the Common Shares, or any consolidation or merger of the Company with or into another corporation or other entity (other than a consolidation or merger in which the Company is the continuing corporation and which does not result in any reclassification of the Common Shares) or a sale or transfer to another corporation or other entity of all or substantially all of the properties of the Company; or (e) There shall occur the voluntary or involuntary liquidation, dissolution or winding up of the affairs of the Company; then, and in each of such cases, the Company shall deliver to the registered holder hereof at its last address appearing on the books of the Company, as promptly as practicable but in any event at least 15 days prior to the applicable record date (or determination date) mentioned below, a notice stating, to the extent such information is available, (i) the date on which a record is to be taken for the purpose of such dividend, distribution or rights, or, if a record is not to be taken, the date as of which the holders of Common Shares of record to be entitled to such dividend, distribution or rights are to be determined, or (ii) the date on which such reclassification, consolidation, 13 merger, sale, transfer, liquidation, dissolution or winding up is expected to become effective and the date as of which it is expected that holders of Common Shares of record shall be entitled to exchange their Common Shares for securities or other property deliverable upon such reclassification, consolidation, merger, sale, transfer, liquidation, dissolution or winding up. 4. Representations and Warranties of the Company. The Company represents and warrants to and covenants with the registered holder hereof as follows: (a) The Company is a corporation duly organized, validly existing and in good standing under the laws of the State of Delaware, is duly qualified and in good standing under the laws of any foreign jurisdiction where the failure to be so qualified would have a material adverse effect on its ability to perform its obligations under the Warrants evidenced by this Warrant Certificate and it has full corporate power and authority to issue the Warrants and to carry out the provisions of the Warrants evidenced by this Warrant Certificate. (b) The issuance, execution and delivery of this Warrant Certificate has been duly authorized by all necessary corporate action on the part of the Company and each of the Warrants evidenced by this Warrant Certificate constitutes the valid and legally binding obligation of the Company, enforceable against it in accordance with the terms hereof, except as such enforceability may be limited by bankruptcy, insolvency or other laws affecting generally the enforceability of creditors' rights, by general principles of equity and by limitations on the availability of equitable remedies. (c) Neither the execution and delivery of the Warrants evidenced by this Warrant Certificate by the Company, nor compliance by the Company with the provisions hereof, violates any provision of its Certificate of Incorporation or By-Laws, as amended, or any law, statute, ordinance, regulation, order, judgment or decree of any court or governmental agency, or conflicts with or will result in any breach of the terms of or constitute a default under or result in the termination of or the creation of any lien pursuant to the terms of any agreement or instrument to which the Company is a party or by which it or any of its properties is bound. 5. Company to Provide Stock. The Company covenants and agrees that all shares of capital stock of the Company which may be issued upon the exercise of the Warrants evidenced hereby will be duly authorized, validly issued and fully paid and nonassessable and free from all taxes, liens and charges with respect 14 to the issue thereof to the registered holder hereof. The Company further covenants and agrees that during the period within which the Warrants evidenced hereby may be exercised, the Company will at all times reserve such number of shares of its capital stock as may be sufficient to permit the exercise in full of the Warrants evidenced hereby. 6. Registered Holder. The registered holder of this Warrant Certificate shall be deemed the owner hereof and of the Warrants evidenced hereby for all purposes. The registered holder of this Warrant Certificate shall not be entitled by virtue of ownership of this Warrant Certificate to any rights whatsoever as a shareholder of the Company. 7. Transfer. This Warrant Certificate and the Warrants evidenced hereby may be sold, transferred, pledged, hypothecated or otherwise disposed of; provided that this Warrant Certificate and the Warrants evidenced hereby may not be sold, transferred, pledged, hypothecated or otherwise disposed of unless, in the opinion of counsel reasonably satisfactory to the Company, such transfer would not result in a violation of the provisions of the Securities Act. Any transfer of this Warrant Certificate and the Warrants evidenced hereby, in whole or in part, shall be effected upon surrender of this Warrant Certificate, duly endorsed (unless endorsement is waived by the Company), at the principal office or agency of the Company referred to in Section 1 hereof. If all of the Warrants evidenced hereby are being sold, transferred, pledged, hypothecated or otherwise disposed of, the Company shall issue a new Warrant Certificate registered in the name of the appropriate transferee(s). If less than all of the Warrants evidenced hereby are being sold, transferred, pledged, hypothecated or otherwise disposed of, the Company shall issue new Warrant Certificates, in each case in the appropriate number of Warrants, registered in the name of the registered holder hereof and the transferee(s), as applicable. Any Common Shares of the Company issued upon any exercise hereof may not be sold, transferred, pledged, hypothecated or otherwise disposed of unless, in the opinion of counsel reasonably satisfactory to the Company, such transfer would not result in a violation of the Securities Act. Each taker and holder of this Warrant Certificate, the Warrants evidenced hereby and any shares of capital stock of the Company issued upon exercise of any such Warrants, by taking or holding the same, consents to and agrees to be bound by the provisions of this Section 7. * * * 15 IN WITNESS WHEREOF, RAMSAY HEALTH CARE, INC. has caused this Warrant Certificate to be signed by a duly authorized officer and this Warrant Certificate to be dated September 10, 1996. RAMSAY HEALTH CARE, INC. By Name: Remberto Cibran Title: President FORM OF EXERCISE (to be executed by the registered holder hereof) The undersigned hereby exercises ____ Warrants to subscribe for and purchase shares of common stock, par value $.01 ("Common Shares"), of RAMSAY HEALTH CARE, INC. evidenced by the within Warrant Certificate and herewith makes payment of the purchase price in full. Kindly issue certificates for the Common Shares in accordance with the instructions given below. The certificate for the unexercised balance of the Warrants evidenced by the within Warrant Certificate, if any, will be registered in the name of the undersigned. Dated: Instructions for registration of shares Name (please print) Social Security or Other Identifying Number: Address: Street City, State and Zip Code EX-11 12 EXHIBIT 11 COMPUTATION OF NET INCOME PER SHARE EXHIBIT 11 RAMSAY HEALTH CARE, INC. AND SUBSIDIARIES COMPUTATION OF NET INCOME PER SHARE Year Ended June 30 1996 1995 1994 Primary Weighted average common shares outstanding ......... 7,929,071 7,743,314 7,738,422 Class A convertible preferred stock ............ ---* ---* 22,910 Class B convertible preferred stock, Series C ................... ---* ---* 1,424,860 Net effect of dilutive stock options and warrants--based on the treasury stock method using average market price ...................... ---* ---* 454,911 Total ................ 7,929,071 7,743,314 9,641,103 Income (loss) before extraordinary items ........ $(16,481,000) $(17,045,000) $ 1,477,000 Extraordinary items ......... --- (257,000) (155,000) Net income (loss) ........... $(16,481,000) $(17,302,000) $ 1,322,000 Per share amounts: Income (loss) before extraordinary items ...... $(2.12) $(2.25) $0.15 Extraordinary items ....... -- (0.03) (0.01) Net income (loss) ......... $(2.12) $(2.28) $0.14 Fully diluted Weighted average common shares outstanding ......... 7,929,071 7,793,542 7,738,422 Class A convertible preferred stock ............ ---* ---* 22,910 Class B convertible preferred stock, Series C ................... ---* ---* 1,424,860 Net effect of dilutive stock options and warrants--based on the treasury stock method using the year-end market price, if higher than average market price ............... ---* ---* 492,793 Total .................. 7,929,071 7,793,542 9,678,985 Income (loss) before extraordinary items ........ $(16,481,000) $(17,045,000) $ 1,477,000 Extraordinary items ......... --- (257,000) (155,000) Net income (loss) ........... $(16,481,000) $(17,302,000) $ 1,322,000 Per share amounts: Income (loss) before extraordinary items ...... $(2.12) $(2.24) $0.15 Extraordinary items ....... --- (0.03) (0.01) Net income (loss) ......... $(2.12) $(2.27) $ 0.14 * Common stock equivalents not considered given loss reported for the year. EX-21 13 EXHIBIT 21 SUBSIDIARIES OF RHCI EXHIBIT 21 Subsidiaries of Ramsay Health Care, Inc. Americare of Galax, Inc. Atlantic Treatment Center, Inc. Behavioral Medicine Services of West Virginia, 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 Lynnhaven, 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. EX-23 14 EXHIBIT 23 CONSENT OF INDEPENDENT AUDITORS Exhibit 23 CONSENT OF INDEPENDENT AUDITORS We consent to the incorporation by reference in the Registration Statements (Forms S-8 No. 33-52991, No. 33-47997, No. 33-44697 and No. 33-39260) of Ramsay Health Care, Inc. of our report dated October 8, 1996, with respect to the consolidated financial statements of Ramsay Health Care, Inc., included in this Annual Report (Form 10-K) for the year ended June 30, 1996. ERNST & YOUNG LLP New Orleans, Louisiana October 8, 1996 EX-27 15 EXHIBIT 27 FINANCIAL DATA SCHEDULE WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.
5 0000773136 Ramsay Health Care, Inc. U. S. Dollars YEAR Jun-30-1996 Jul-01-1995 Jun-30-1996 7,605,000 0 27,983,000 4,573,000 0 45,661,000 94,550,000 28,157,000 132,758,000 33,946,000 44,664,000 0 233,000 86,000 45,734,000 132,758,000 0 117,423,000 0 108,646,000 15,448,000 5,805,000 6,892,000 (19,368,000) (2,887,000) (16,481,000) 0 0 0 (16,481,000) (2.12) (2.12)
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