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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended April 30, 1997
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _______________ to _______________
Commission file number 0-20488
PMR CORPORATION
(Exact name of registrant as specified in its charter)
Delaware 23-2491707
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.
3990 Old Town Avenue, Suite 206A
San Diego, California 92110
(Address of principal executive offices)
(619) 295-2227
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act: NONE
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $.01 par value
(Title of Class)
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter periods that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. [X] YES [ ] NO
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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
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. [X]
As of July 24, 1997, 5,045,778 shares of Common Stock, par value $.01
per share, were outstanding and the aggregate market value of the shares of
Common Stock held by non-affiliates was approximately $51,692,000.00 based upon
the closing sale price of the Registrant's Common Stock upon the NASDAQ National
Market at $21.6875 per share of Common Stock. See Footnote (1) below.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Proxy Statement for the Registrant's 1997 Annual
Meeting of Stockholders ("1997 Proxy Statement") are incorporated by reference
into Items 10, 11, 12, and 13 in Part III. If the Proxy Statement is not filed
by August 28, 1997, an Amendment to this Form setting forth this information
will be duly filed with the Securities and Exchange Commission.
(1) The information provided shall in no way be construed as an admission
that any person whose holdings are excluded from the figure is not an
affiliate or that any person whose holdings are included is an
affiliate and any such admission is hereby disclaimed. The information
provided is included solely for record keeping purposes of the
Securities and Exchange Commission.
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PART I
ITEM 1. BUSINESS
GENERAL
Except for the historical information contained herein, the following discussion
contains forward-looking statements that involve risks and uncertainties. The
Company's actual results could differ materially from those discussed here.
Factors that could cause or contribute to such differences include without
limitation, those discussed in the description of the Company's business below
and the sections entitled "Risk Factors" and "Management's Discussion and
Analysis of Financial Condition and Results of Operations" as well as those
discussed in our documents incorporated herein by reference.
PMR Corporation (the "Company") is a leader in the development and
management of programs and services for individuals who have been diagnosed with
a Serious Mental Illness ("SMI"). These diseases, which are often chronic and
life long, are primarily schizophrenia and bi-polar disorder (manic depression)
and according to studies sponsored by the National Institute of Mental Health
(NIMH), afflict approximately 2.8% of the U.S. population. The Company's
programs have been developed to assist providers of health care services in
delivering care and treatment programs which serve as alternatives to more
costly inpatient behavioral healthcare for the SMI population. The Company's
clinical philosophy emphasizes early intervention to identify and reduce the
incidence of crises events and thus contain the high costs associated with
catastrophic events. Through its disease management approach, the Company
believes that its programs may achieve a reduction in health care costs and
result in improved clinical outcomes.
The Company operates three lines of business devoted to behavioral
health care: acute outpatient psychiatric services ("Outpatient Program"), case
management services ("Case Management Program") and chemical dependency services
("Chemical Dependency Program"). In recent years, the Company's principal focus
has been on the growth of its Outpatient Program and Case Management Program,
which are targeted exclusively to serve the SMI population. Looking forward, the
Company intends to blend these products into a single, integrated continuum of
outpatient services and may develop new services in the areas of site
management, clinical information, outcomes analysis and residential services.
The Company's original program, representing its largest source of
revenues, is its Outpatient Program, which serves as an alternative to inpatient
hospitalization. The Outpatient Program includes two core programs developed for
varying levels of acuity: a partial hospitalization program and a structured
outpatient program. It is designed for consumers who require coordinated,
intensive, and comprehensive treatment services beyond those typically offered
at an outpatient clinical level of care. The objective of the Outpatient Program
is to provide stabilization and/or rehabilitation at costs which are typically
less than those offered by inpatient providers. Since 1988, the Company has been
a leader in the management of psychiatric partial hospitalization programs
serving persons in the SMI population with 36programs in 11 states, including
Arizona, Arkansas, California, Colorado, Hawaii, Kentucky, Illinois, Indiana,
Michigan,
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Tennessee and Texas. The Company also has signed contracts to open programs in
Ohio and Washington in the second half of Fiscal 1998. The Company operates
these Outpatient Programs under management contracts with local health care
providers ("Providers") such as acute care hospitals and community mental health
centers ("CMHCs").
The Case Management Program is an intensive case management service
which consists of a proprietary intensive case management model which utilizes
detailed protocols for delivering and managing the treatment and care of SMI
patients. This program was established to work with community-based providers of
mental health care (such as case management agencies and CMHC's) to develop,
manage and operate case management and rehabilitation systems designed to serve
the SMI population in either a managed care or the more traditional,
fee-for-service environment. The Company presently operates its Case Management
Programs in Nashville and Memphis, Tennessee, and in Little Rock, Russellville
and El Dorado, Arkansas.
Through wholly-owned subsidiaries, the Company is a provider of Chemical
Dependency Programs which consist of the treatment of chemical dependency and
substance abuse, primarily to patients of managed care organizations in Southern
California. The Company also manages ambulatory detoxification programs in
Arkansas for public sector (Medicaid and other government funded programs)
patients.
In fiscal 1997 the Company also began the development of a site
management and clinical information division. The Company believes that it has a
unique opportunity to collect, analyze and process clinical and pharma-economic
data on the diseases of schizophrenia and bi-polar disorder. This information
may be extremely valuable in outcomes analysis and development of "best
practices" for the treatment of this patient population. The Company plans to
market its network and its information to pharmaceutical companies, clinical
research organizations, CMHC's and other providers. This division also intends
to participate in clinical research trials as the Company has access to several
thousand individuals who may be candidates for new treatments in these areas. On
January 24, 1997 the Company entered into an agreement with the Applied
Informatics division of United HealthCare with respect to developing this
business.
The Company's objective is to be a leading developer and provider of a
continuum of programs which deliver cost effective mental health services for
individuals within the SMI population. Since the SMI population receives the
vast majority of its health care funding from state, local and federal agencies,
the Company aims to develop programs which assist these entities in containing
rapidly growing and often uncontrolled health care costs. Through the successful
development and operation of these programs, the Company's mission is to foster
the recovery of individuals from the devastating effects of serious mental
illnesses and chemical dependency, and to ensure the cost-effective treatment
and rehabilitation services which limit hospitalization, afford significant
relief from symptoms, and contribute to better quality health care in the
communities within which the Company and its subsidiaries operate.
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STRATEGY
In order to achieve its objectives, the Company's strategy is to (i)
actively pursue new contracts for its Outpatient Programs and increase
profitability of existing programs; (ii) increase the enrollment and market area
of existing Case Management Programs and seek to develop new markets for case
management; (iii) combine the outpatient and case management services into an
integrated service and expand it to the Company's existing markets; (iv) develop
the infrastructure for its site management and clinical information business and
identify business opportunities to capitalize on that infrastructure; and (v)
identify additional services which the Company can provide to the SMI population
and the Providers which serve these clients, as part of its comprehensive
disease management approach.
THE MARKET AND INDUSTRY BACKGROUND
According to the National Advisory Mental Health Council, which is part
of the NIMH, in 1995 severe mental illness consumed $27 billion in direct
medical costs and more than $74 billion in total costs (including estimates of
lost productivity). Studies by the Council indicate that approximately 5.6
million Americans over the age of nine suffer from a severe mental illness such
as schizophrenia, manic depression, autism, panic disorder and obsessive
compulsive disorder.
Schizophrenia is the primary diagnosis among the Company's patient
population. Schizophrenia afflicts approximately 1% of the U.S. population. The
vast majority of the costs of treating these populations are borne by federal,
state and local government programs, primarily Medicare and Medicaid.
According to a study by Dorothy Rice and Leonard Miller of the
University of California, as of 19901, the direct medical costs of Schizoprenia
are consumed in the following categories:
<TABLE>
<S> <C>
Mental health organizations (such as CMHC's) 38%
Nursing homes 31%
Short stay hospitals 15%
Support costs 8%
Other professional services 4%
Physician services 2%
Pharmaceuticals 2%
</TABLE>
The Company believes that its services participate in (or provide
alternatives to) 96% of the market for clinical services as defined above.
Moreover, the Company believes that in most cases,
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1 The Company believes that the costs allocation has shifted since 1990 towards
a higher pharmaceutical component due to the introduction and rapid adoption of
several new and more costly anti-psychotic drugs.
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its services offer cost effective alternatives to existing services offered
primarily by locally managed not-for-profit providers.
According to the NIMH, serious mental illness is defined as
neuro-biological disorders of the brain and are characterized by measurable
disturbances in brain function and structure. The specific biological causes of
these diseases remains unknown. With the exception of autism, effective
medications exist which generate medical responses in 60-90% of individuals with
a serious mental illness. Unfortunately, approximately 40% of the SMI
population, or 2.2 million people, do not receive these effective treatments, or
often treatment of any kind. For schizophrenia, several studies have shown even
higher percentages of non-treatment.
The effect of de-institutionalization on the SMI population, and its
link to widespread homelessness among the SMI, has been described in E. Fuller
Torrey's 1997 work on the mental illness crisis, Out of the Shadows. Torrey
points out that the population of SMI patients in public psychiatric hospitals
declined from 558,239 in 1955 to 71,619 in 1994. The true impact of this
phenomenon is actually larger since the U.S. population grew 58% over this
period (and the incidence of serious mental illness has not changed). Torrey
estimates that 60-75% of the de-institutionalized patients were diagnosed with
schizophrenia or bi-polar disorder, which is the population of the Company's
focus. Based on numerous studies of homelessness over the past fifteen years,
Torrey estimates that approximately 35% of the homeless population has a severe
mental illness.
Although health care for SMI is funded by numerous public sources,
states play a much larger role for mental health care than they do in the
delivery of general health care services. For more than 150 years, state mental
health authorities have been responsible for administering funds to ensure that
the SMI population received adequate treatment. Typically, the state mental
health authorities receive annual appropriations to operate services for
individuals that have been designated based on the classification of their
illness. Since the 1960s, states have been able to access third party federal
payments through the Medicare and Medicaid program. State systems were
historically dominated by hospitals. However, over recent years outpatient care
has grown rapidly as it became recognized as a lower cost alternative and as
many in-patient providers came under intense scrutiny over questionable
admitting practices. In the late 1970s it became common for states to contract
for services which they did not provide, generally using CMHC's, case management
agencies and other not for profit service agencies.
More recently, a major shift has occurred in the delivery of mental
health services in the United States. State mental health authorities have now
evolved from a provider of funded hospital services to a manager of a broad
range of services financed from several public funding sources. Several states
now contract with private, for profit, managed care companies to assume the
administration and insurance risk of health care benefits for Medicaid
populations. At least nine states, including Colorado, Hawaii, Iowa,
Massachusetts, Minnesota, Montana, Ohio, Utah, and Tennessee have implemented
"carve out" behavioral healthcare contracts within their overall Medicaid
managed care programs and have contracted or are expected to contract directly
with behavioral health managed care companies to provide such services.
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However, contracting for the management of the SMI population is at an
early stage. Individuals with a serious and persistent mental illness have a
need for specialized treatment and rehabilitation services. Coordination and
monitoring of services is crucial to avoid fragmentation which results because
SMI needs often extend across the boundaries of different service sectors and
funding streams. As states look toward implementing Medicaid managed care, the
ability to effectively identify and manage services for a high utilizing and
often transient SMI population becomes crucial to the success of a managed care
entity. The Company believes that its contracts in Tennessee and Arkansas
represent some of the early examples of third party contracts designed
specifically for this population.
Prior to the commencement of its case management business, the
Company's principal source of revenue was the Company's Outpatient Program which
relies on Medicare as its primary source of funding. With respect to the Case
Management Program, the Company will largely rely upon state administered
Medicaid programs for funding.
See "Regulatory Matters."
PROGRAMS AND OPERATIONS
ACUTE OUTPATIENT PSYCHIATRIC PROGRAMS
The Company's Outpatient Program consists principally of psychiatric
partial hospitalization programs developed by the Company which are ambulatory
outpatient programs that provide intensive, coordinated clinical services to
patients with a SMI. These patients generally require coordinated, intensive,
comprehensive and multi-disciplinary treatment not typically provided in a
traditional outpatient setting. In 1996 the Company introduced a new service, a
structured outpatient clinic, to meet the needs of patients who complete the
partial hospitalization program. This program is designed to maintain the gains
achieved during partial hospitalization and to prevent relapse. In 1997 the
Company intends to expand its structured outpatient program to include clients
that are at a lower level of clinical risk but still require maintenance to
reduce the likelihood of decompensation. This expansion, which includes three
levels of care, is designed to introduce techniques and protocols utilized by
the Company's Case Management Program.
The Outpatient Programs are operated under management contracts with
Providers consisting of acute care hospitals, psychiatric hospitals and CMHC's,
and are established under the governance and administrative authority of the
Provider. They are designed to fit within a Provider's existing operations and
are operated under the Provider's name. Duration of contracts with Providers
generally range between two and five years.
The Company brings to the health care Provider management expertise
with respect to the establishment, development and operation of the Outpatient
Program that is not usually available on an in-house basis. The Company provides
complete program design and administration from start-up through ongoing
operation. The Company often retains responsibility for staffing, which may
include providing highly trained program administrators responsible for overall
management, a medical director, a community liaison director responsible for
coordination with community agencies and specialized clinical personnel. The
program administrator generally has a degree in
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psychology or social work and several years of experience in health care
administration. Typically, the medical director is a board eligible or certified
psychiatrist and the other professionals and care givers have various levels of
training and experience, usually in nursing, psychology or social work.
The programs are normally operated in conjunction with proprietary
policy and procedure manuals that have been developed by the Company which are
customized for each Provider and which establish guidelines to ensure that
licensing requirements are satisfied. The Company also provides many other
services which are often unavailable to the Provider on an in-house basis, such
as quality assurance systems, initial and on-going staff training, statistical
tracking and financial analysis of program performance and utilization
management reviews.
Patients admitted to these programs undergo a complete assessment
process that includes psychiatric, psycho-social, medical, and, as needed, other
specialized evaluations. An individual treatment plan is developed by the
admitting physician for each patient who is then assigned to specific treatment
groups that best meets his or her needs. A care coordinator is assigned to each
patient upon admission, coordinating the various services provided to the
patient. Each program site provides comprehensive treatment services which may
include specialty services for geriatric patients, dually diagnosed patients
(those having a mental illness along with a substance abuse problem) and core
treatment services for the seriously mentally ill patients.
All Outpatient Programs provide programming five or six days a week.
Structured outpatient services offer treatment for patients who are less
symptomatic and higher functioning than patients needing partial
hospitalization. Daily schedules include group psychotherapy and individual
therapy. The treatment program is conducted by therapists, nurses and mental
health specialists who are supervised by the appropriate department of the
Hospital or CMHC and by senior clinical managers in the programs.
The Company believes that its Outpatient Program appeals to health care
providers as a more effective means of delivering the mental health care
component. Providers have often cited as reasons to outsource the mental health
component to specialized outpatient programs, factors such as; delivery of the
expertise necessary for the development, management and administration of a
mental health program; access to skilled psychiatric professionals and support
staff needed to operate mental health care programs; and access to the expertise
necessary to develop, design and manage an accredited mental health program that
satisfies all regulatory, licensing and accreditation requirements.
As of June 1997 the Company operates 36 outpatient programs in 11
states and has approximately 1,500 patients receiving care under programs it
manages.
CASE MANAGEMENT PROGRAM
In 1993 the Company acquired and thereafter further refined its Case
Management model, a proprietary service system for managing treatment,
rehabilitation and support of services provided to consumers within the SMI
population. This model was designed to allow a managed care entity
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in a capitated financial system to manage the risk associated with the SMI
population. It accomplishes this by making available to CMHC's, state Medicaid
agencies and other payors responsible for publicly financed behavioral services,
a consistent and effective approach to managing the utilization of both acute
and community based services. SMI consumers, who are predominately covered by
Medicaid and/or Medicare due to their disability, pose a large financial risk in
a capitated system due to their heavy utilization of costly services, especially
inpatient care. The Company believes that its case management model positions it
to carve out the management of this high utilizing SMI population from the
managed care entity that has responsibility for managing an entire public
managed care system. The model can also operate in a fee-for-service
environment.
The Case Management Program utilizes comprehensive protocols that are
based upon a specific model of intensive service coordination developed at the
Boston University Center for Psychiatric Rehabilitation. The system is designed
around a case manager, also known as a personal service coordinator, whose
activities include: connecting with consumers; educating consumers about the
services, policies and procedures of the managed care system; developing
proactive, personal crisis plans; responding to consumers in crisis and linking
them to emergency services; assessing consumers' service needs and developing
personal services plans; and authorizing and reviewing services included in the
plan utilizing service-specific protocols.
Case management for the SMI population is fundamentally different from
that required for commercially insured populations. The requirements are ongoing
rather than episodic; the covered services are broader and include housing and
basic support needs; and outcomes measurement is more multi-dimensional
including components related to impairment and disability.
The provider network is also different from that accessed by the
typical commercial patient. The "primary care" mental health care providers are
CMHC's or case management agencies. These organizations may have little
experience with risk contracts or the information systems required to operate in
a managed care environment.
The mission of the Case Management Program is to facilitate the
provision of the necessary and appropriate individualized assistance to
individuals within the SMI population and enable them to live more healthy,
independent, productive and satisfying lives in the community. This is
applicable in a fee-for-service environment as well as in a managed care
environment.
In the Fall of 1995, the Company installed and commenced operation of
its Case Management Program in conjunction with two case management agencies in
Tennessee. The Case Management Program was further expanded in July 1996 when a
program was launched in Little Rock, Arkansas in conjunction with a leading CMHC
in that market. Subsequently, programs were opened with CMHC's in Russellville
and El Dorado, Arkansas. As of June, 1997, the Company has enrolled more than
5,100 clients in its Case Management Programs.
The Company has developed a new clinical program which provides
psychiatric rehabilitation and community support services. This program is
complementary to Case Management and designed to be integrated with an existing
case management program. The
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program includes a continuum of rehabilitative services including three levels
of day treatment, skills development, skills maintenance, and individual and
small group rehabilitation services designed to assist individuals with an SMI
reach recovery goals.
CHEMICAL DEPENDENCY PROGRAM
Through wholly-owned subsidiaries, the Company operates and manages
programs devoted exclusively to substance abuse and rehabilitation in ambulatory
settings, primarily to patients of managed care organizations in Southern
California. The Company's chemical dependency and substance abuse programs are
operated both as free-standing treatment services or as part of a Management
Services Agreement with health care providers. All programs have received
accreditation by the Joint Commission of American Health Organizations
("JCAHO").
The Company also offers chemical dependency programs that have been
specially developed with application to public sector clients. Public sector
clients with chemical dependency problems often are also dually diagnosed with a
mental illness. Bridging the gap between the two systems (i.e. chemical abuse
and mental health) is often difficult due to different funding streams,
treatment philosophies and regulations pertaining to Medicaid and other public
sector payors. Meeting the needs of the public sector dually diagnosed client
requires cross training of staff and development of linkage between traditional
chemical dependency providers and providers of behavioral health services.
The Company works with providers to develop the programs and
technologies including a full range of screening, crisis management, ambulatory
care and utilization management services. Through a Management Services
Agreement, the Company works with providers to develop the following programs on
behalf of public sector clients: sobering and detoxification services, dual
diagnosis treatment and rehabilitation, and screening and assessment triage.
As of June 30, 1997 the Company operated four outpatient programs in
southern California under the name of Twin Town Treatment. The Company also
manages two programs in Arkansas which provides ambulatory detoxification
services for public sector clients.
SITE MANAGEMENT AND CLINICAL INFORMATION
In January 1997, the Company began the development of a site management
and clinical information division. This division, which is still in a start up
phase of development, will seek to establish the infrastructure to participate
in clinical trials and collect clinical information related to pharmaceutical
and non-pharmaceutical clinical practice. The Company's objective is to build a
business model that contributes to the Company's revenues and earnings and to
develop an information asset that can improve and define "best practices" for
the SMI patient population. On January 24, 1997, the Company signed an agreement
with the Applied Healthcare Informatics division of United HealthCare with
respect to developing this business.
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The Company believes that its expanding service base is an excellent
platform for the development of research and clinical information business
lines. Key to that assumption is the Company's direct access to a large number
of individuals with SMI. Presently, the Company believes that it has access,
through programs it manages and through its Providers, to more than 20,000
individuals diagnosed with an SMI.
The genetic and neurobiological bases of severe mental disorders will
continue to be the focus of intensive research attention in the field.
Presently, numerous pharmaceutical companies and drug development companies have
compounds in various stages of development which are targeted for the treatment
of these disorders. The development of these compounds requires extensive
pre-clinical and clinical testing phases, many aspects of which are outsourced
to global contract research organizations ("CROs").
As the need to reduce drug development time increases, the need for increasingly
effective management of clinical trials is growing. Delays in recruiting and
enrolling qualified patients, along with patient compliance with the protocols
are significant concerns for the CROs which manage the trials. Site Management
Organizations ("SMOs") are emerging as a new industry which provides
commercialized clinical trials services under contract with CROs or directly
with the pharmaceutical sponsor. The Company is currently in the process of
developing its capabilities as a site management organization. Through its
Outpatient and Case Management Programs, the Company has a large, multi-state
patient base. The company is identifying qualified investigators and study
coordinators, and may participate in an SMO capacity in Phase III - IV clinical
trials in Fiscal 1998.
PROGRAM LOCATIONS
OUTPATIENT PROGRAM
<TABLE>
<CAPTION>
LOCATION CURRENT PROVIDER COMMENCEMENT
<S> <C> <C>
California
San Diego Hospital May 1988
El Centro Hospital January 1990
Culver City CMHC July 1990
Santee Hospital December 1990
San Francisco Hospital February 1991
Los Angeles CMHC October 1991
Studio City CMHC October 1991
Oakland Hospital January 1992
Santa Ana Hospital February 1992
Vista Hospital March 1992
Union City Hospital April 1992
Riverside Hospital August 1992
San Bernardino Hospital November 1992
Signal Hill Hospital February 1993
Sacramento Hospital November 1993
</TABLE>
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<TABLE>
<S> <C> <C>
Orange Hospital February 1995
San Jose County January 1996
La Jolla Hospital July 1996
Chula Vista Hospital January 1997
Arizona
Tucson CMHC April 1991
Phoenix CMHC June 1992
Tempe CMHC January 1995
Arkansas
Little Rock CMHC March 1994
Batesville CMHC October 1994
Russellville CMHC August 1996
Texas
Conroe CMHC November 1994
Dallas CMHC January 1996
Colorado
Denver Hospital June 1993
Hawaii
Honolulu Hospital March 1996
Illinois
Chicago Hospital April 1997
Indiana
Indianapolis CMHC July 1992
Kentucky
Frankfort Hospital April 1997
Tennessee
Kingsport Hospital April 1997
Madison Hospital April 1997
Nashville Hospital May 1997
Michigan
Detroit CMHC June 1996
CASE MANAGEMENT
LOCATION AVERAGE CLIENT POPULATION COMMENCEMENT
Tennessee
Memphis 2,361 October 1995
Nashville 1,946 September 1995
Arkansas
Little Rock 750 July 1996
El Dorado 522 September 1996
Russellville 480 September 1996
CHEMICAL DEPENDENCY
</TABLE>
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<TABLE>
<S> <C> <C>
LOCATION COMMENCEMENT
California / Twin Town
Burbank November 1993
Los Alamitos November 1993
Orange April 1994
Torrance July 1996
Arkansas
Little Rock January 1995
Russellville September 1996
</TABLE>
CONTRACTS
OUTPATIENT PROGRAM
The Outpatient Program is generally administered and operated pursuant
to the terms of written management contracts ("Contracts") with Providers. The
Contracts generally govern the term of the program, the method by which the
program is to be operated by the Company, the responsibility of the Provider for
licensure, billing, insurance and the provision of healthcare services and the
methods by which the Company will be compensated. Each Contract also contains
certain exclusivity provisions, and establishes that the Company is an
independent contractor that is not acting as an employee of, or joint venture
partner with, the Provider.
Program revenue derived by the Company under the Contracts generally
fit within three types of arrangements: 1) an all inclusive fee arrangement
based on fee-for-service rates which provide that the Company is responsible for
substantially all program costs, 2) a fee-for-service arrangement whereby
substantially all program costs are the responsibility of the Provider, and 3) a
fixed fee arrangement. In all cases, the Company provides on-site managerial
personnel. The all-inclusive arrangements constituted approximately 70% of the
Company's revenues and 33 of the 36 existing Outpatient Programs. Regardless of
the type of arrangement with the Provider, all medical services rendered in the
programs are provided by the Provider.
A significant number of the Company's Contracts require the Company to
indemnify the Provider for some or all of the management fee paid to the Company
if either third party reimbursement for mental health services provided to
patients of the programs is denied or the management fee paid to the Company is
disallowed as a reimbursable cost by Medicare. See "Regulatory Matters" and
"Risk Factors" below, and "ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS."
The Contracts are generally for a stated term (normally a duration
between two and five years). Generally, Contracts may only be terminated with
cause or upon the occurrence of certain material events including changes in
applicable laws, rules or regulations
In the past, the majority of the Company's Contracts have operated
through their stated expiration dates and have been renewed or satisfactorily
re-negotiated. As the Outpatient Programs mature and increase in number, the
Company anticipates that as a matter of normal business
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development, Contract terminations may occur on a periodic basis. In the past,
if a Contract was terminated, the Company has been successful in opening a
replacement program with another Provider in the Program's geographic area,
although no assurance can be given that the Company will successfully replace
such terminated Contracts or programs in the future
For the year ended April 30, 1997, the Company's Contracts covering
sites operated by hospitals operating under Scripps Health, a San Diego
provider, accounted for approximately 13% of the Company's revenues.
In August 1996 the Company signed an enabling agreement (the "Columbia
Agreement") with Columbia Healthcare Corporation ("Columbia"). The Columbia
Agreement relates specifically to the Company's Outpatient Program and
Columbia's ten state Mid-America Group which includes Alabama, Illinois,
Indiana, Iowa, Kentucky, Minnesota, Mississippi, Tennessee, Wisconsin and West
Virginia. The Columbia Agreement grants both Columbia and the Company mutual
rights of first refusal with respect to developing Outpatient Programs for the
SMI in markets of the Mid-America Group where Columbia owns or manages a
hospital. As of June 1997 the Company manages five programs for Columbia
hospitals in Illinois, Kentucky and Tennessee and has signed contracts for two
additional programs.
CASE MANAGEMENT
Through implementation of its Case Management Program, the Company is
responsible to develop and implement detailed operating protocols relative to
training procedures, management information systems, utilization review,
coordination of quality assurance, contract development and other management and
administrative services and under certain contracts, the provision of mental
health services. The case management provider is responsible to provide to the
Company or in affiliation with the Company, staff personnel and program
facilities, and retain final discretionary authority to approve the related
policy manual, staffing issues and overall program operations.
In the Fall of 1995, pursuant to Management and Affiliation Agreements,
the Company commenced the operation of its Case Management Program with two case
management agencies in Nashville, Tennessee and Memphis, Tennessee. In March and
April 1996, the Company also executed Management and Affiliation Agreements with
three CMHCs in Arkansas and those agreements became operational in the summer of
1996. The terms of the Management and Affiliation Agreements range from four to
six years and may only be terminated for cause upon the occurrence of such
events such as (i) a loss of accreditation or other required licensing or
regulatory qualifications: (ii) material breach by either party; (iii) certain
legislative or administrative changes that may adversely affect the continued
operation of the program; and (iv) failure to achieve certain performance
targets after designated notice and cure periods.
Pursuant to the terms of the Management and Affiliation Agreements,
through a wholly owned subsidiary, the Company manages and operates on behalf of
each case management provider, the delivery of case management and other covered
psychiatric services. Each Management and Affiliation Agreement can be operated
in a fee for service or managed care environment. In Tennessee it was
anticipated that the payor for services under the Management
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and Affiliation Agreements would be managed care organizations operating under
the Tennessee TennCare Partners State Medicaid Managed Care Program ("TennCare")
but implementation of TennCare for the SMI population was delayed until July 1,
1996 and thus, the Case Management Program was implemented on a fee for service
basis until conversion to TennCare at which time managed care organizations
became the payor for services.
Commencing on July 1, 1996, two managed care consortiums became the
payors for mental health care services under TennCare. These consortiums, known
respectively as Tennessee Behavioral Health ("TBH") and Premier Behavioral
Health ("Premier"), were fully at risk for the approximately 1.15 million
individuals who qualified for coverage based on Medicaid eligibility or other
indigency standards. The Company, through its Collaborative Care subsidiary
holds contracts for case management services with both of the managed care
consortiums. The Company has received information that Premier has notified the
state that it would withdraw from Tenncare effective, June 30, 1997. However,
the Company understands that the State of Tennessee has contested the
termination and that Premier has continued in its role as a managed care
consortium. Effective July 1, 1997 TBH amended its contract with Tenncare and is
attempting to restructure its agreements with its providers. Significant
uncertainty exists as to the future structure of Tenncare and the Company's
ability to maintain its case management revenues subsequent to a restructuring.
For the year ended April 30, 1997, case management contracts in Tennessee
accounted for 23.7% of the Company's revenues. The Company may find it necessary
to significantly restructure its contracts and relationships, depending on the
outcome of ongoing discussions among the interested parties in Tenncare. The
potential changes, which the Company cannot predict with any degree of
certainty, may have a material adverse impact on the Company's financial
condition and results of operations. SEE THE SECTION ENTITLED RISK
FACTORS-POTENTIAL CHANGES IN TENNCARE.
For the year ended April 30, 1997, case management contracts accounted
for 24.2% of the Company's revenues.
MARKETING AND COMMUNITY DEVELOPMENT
The Company's principal marketing efforts with respect to its
Outpatient Program is concentrated in the identification of prospective
Hospitals or CMHC's who may be suitable Providers. Also once having established
an affiliation, the Company assigns personnel to a program site for the purpose
of apprising health care and social service professionals in the local community
about the availability of the services, its benefits and the type of patient
clinically appropriate for service in the Outpatient Program setting. The
Company believes that its ability to secure new contracts with Providers is
based on its reputation for quality and the uniqueness of its services in its
market areas.
A significant factor in the Company's expansion into new market areas
is the ability to develop new contractual relationships with Hospitals or CMHCs.
Hospitals or CMHCs who may contract for the Company's services are identified
through an analysis of market need, discussions with key individuals in the
prospective area and an assessment of the financial and clinical profile of the
Provider.
The Company's marketing efforts with providers are undertaken by its
own marketing and development personnel who focus upon the dissemination of
information about the Company's
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programs as well as the generic benefits of case management services and
outpatient psychiatric programs.
The Company believes, and its marketing plan emphasizes, that its
Outpatient Program offers a cost effective alternative to inpatient care for
many patients and can serve to shorten or obviate inpatient stays by providing a
transition from the hospital for other patients. Additionally, the Company
believes that these cost saving benefits, coupled with the clinical benefits
provided by the less restrictive atmosphere of an intensive outpatient setting,
make its Outpatient Program attractive to third party payors, including
Medicare.
Marketing efforts for the Company's Case Management Program have
focused on developing opportunities for utilizing the Company's proprietary
systems and developing relationships with key local provider groups to be in a
position to respond with a strong, local support base. The Company will also
market the benefits of the Case Management Program to managed care organizations
and their provider networks as public-sector contracts are awarded.
The development of the Company's Chemical Dependency Program focuses on
expanding current contractual relationships and obtaining new provider
contracts. The Company's marketing for this program is focused on at-risk payors
where ambulatory chemical dependency services are of significant value.
REGULATORY MATTERS
COMPLIANCE WITH MEDICARE GUIDELINES FOR REIMBURSEMENT AND COVERAGE OF
MANAGEMENT FEES FOR PARTIAL HOSPITALIZATION PROGRAMS
A significant component of the Company's revenues are derived from
payments made by Providers to the Company for the management and administration
by the Company of Outpatient Programs managed for Providers. The Company bills
its management fee to the Provider as a purchased management and administrative
support service. Substantially all of the patients admitted to these programs
are eligible for Medicare coverage and thus, the Providers rely upon payment
from Medicare. The Providers are reimbursed their costs on an interim basis by
Medicare fiscal intermediaries and the Providers submit annual cost
reimbursement reports to the fiscal intermediaries for audit and payment
reconciliation. The Providers seek reimbursement of the Company's management
fees from these fiscal intermediaries as part of their overall payments from
Medicare. Under certain of the Company's contracts the Company is obligated
under warranty provisions to indemnify the provider for all or some portion of
the Company's management fees that may be disallowed to the Provider. In the
event a significant amount of such fees are disallowed for Providers, there
could be a material adverse effect upon the Company's financial condition and
results of operations. In addition, to the extent that Providers who contract
with the Company for management services suffer material losses in Medicare
payments, there is a greater risk of non-payment by the Providers, and a risk
that the Providers will terminate or not renew their contracts with the Company.
Thus, even though the Company does not submit claims to Medicare, it may be
adversely affected by reductions in Medicare payments or other Medicare
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policies. See "Risk Factors-Dependence Upon Third Party Reimbursement" below and
"ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS."
The Medicare Program is part of a federal health program created in
1965 as part of the federal social security system. It is administered by the
U.S. Department of Health and Human Services which has established Health Care
Financing Administration ("HCFA") to promulgate rules and regulations governing
the Medicare program and the benefits associated therewith.
Medicare guidelines indicate that, subject to certain regulatory
requirements relating to reasonable costs imposed upon a Provider, contract
management services may be used in lieu or in support of in-house staff of the
Provider and are reimbursable by Medicare. As a general rule, Medicare
guidelines indicate that contract management services costs related to
furnishing services covered by Medicare are reasonable if the costs incurred are
comparable with marketplace prices for similar services. Management of the
Company believes that the value of the Company's services is comparable with
marketplace prices for similar services.
HCFA has published criteria which partial hospitalization services must
meet in order to qualify for Medicare funding. In transmittal letter number 1303
(effective January 2, 1997) and in subsequent criteria published in Section
230.50 of the Medicare Coverage Manual, HCFA requires partial hospitalization
services to be: (i) incident to a physician's service; (ii) reasonable and
necessary for the diagnosis or treatment of the patient's conditions; and (iii)
provided by a physician with a reasonable expectation of improvement of the
patient from the treatment. The Medicare criteria for coverage, specifically
what is "reasonable and necessary" in particular cases is a subjective
determination on which health care professionals may disagree. How Medicare
applies its "reasonable and necessary" standard is not always consistent, and
that standard may be interpreted in the future in a manner which is more
restrictive than prevailing current interpretations. The Company and its
Providers have quality assurance and utilization review programs to monitor
partial hospitalization programs managed by the Company to ensure that such
programs operate in compliance with the Company's understanding of all Medicare
coverage requirements.
All of the partial hospitalization programs managed by the Company are
treated as "provider based" programs by HCFA, which administers the Medicare
program. This designation is important since partial hospitalization services
are covered only when furnished by a "provider", i.e., a hospital or a CMHC. To
the extent that partial hospitalization programs are not located in a site which
is deemed by HCFA to be "provider-based", there would not be Medicare coverage
for the services furnished at that site under Medicare's partial hospitalization
benefit. In August, 1996, HCFA published criteria for determining when programs
operated in facilities separate from a hospital's or CMHC's main premises may be
deemed to be "provider-based" programs. The proper interpretation and
application of these criteria are not entirely clear, and there is a risk that
some of the sites managed by the Company will be found not to be
"provider-based". If such determination is made, HCFA has not ruled out, in some
situations, the possibility that it would seek retrospective recoveries from
providers.
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Historically, CMHCs, unlike hospitals, were not surveyed by a Medicare
contractor before being permitted to participate in the Medicare program.
However, HCFA is now in the process of surveying all CMHCs to confirm that they
meet all applicable Medicare conditions for furnishing partial hospitalization
programs. Management believes that all the CMHCs which contract with the Company
should be found in compliance with the applicable requirements, but it is
possible that some CMHCs contracting with the Company will be terminated from
the Medicare program. It is also possible that the government will attempt to
recover payments made to such CMHCs for services which had been furnished and
paid for by Medicare.
CHANGES IN MEDICARE'S COST BASED REIMBURSEMENT FOR PARTIAL
HOSPITALIZATION SERVICES
Currently proposed legislation would implement a prospective payment
system ("PPS") for all outpatient hospital services, including partial
hospitalization, for the calendar year beginning January 1, 1999. While the
actual reimbursement rates have not been determined and thus their effect,
positive or negative, is unknown, the Company may need to negotiate
modifications to its contracts with Providers if such legislation is enacted.
The Medicare partial hospitalization benefit has a coinsurance feature,
which means that the amount paid by Medicare is the provider's reasonable cost
less "coinsurance" which is ordinarily to be paid by the patient. The
coinsurance amount is 20 percent of the charges for the services. The
coinsurance must be charged to the patient by the provider unless the patient is
indigent. If the patient is indigent, or if the patient does not pay the
provider the billed coinsurance amounts after reasonable collection efforts, the
Medicare program has historically paid those amounts as "allowable Medicare bad
debts." The allowability of Medicare bad debts to providers for whom the Company
manages partial hospitalization programs is significant since most of the
patients in programs managed by the Company are indigent or have very limited
resources. The pending budget reconciliation bills in Congress would reduce the
amount of Medicare allowable bad debts payable to providers, if enacted. Since
the House and Senate provisions are identical, the Company expects the following
reductions in Medicare allowable bad debts to occur: 25 percent for provider
fiscal years beginning on or after October 1, 1997; 40 percent for provider
fiscal years beginning on or after October 1, 1998; and 50 percent for provider
fiscal years beginning on or after October 1, 1999. The reduction in "allowable
Medicare bad debts" could have a materially adverse impact on Medicare
reimbursement to the Company's Providers and could further result in the
restructuring or loss of Provider contracts with the Company.
COMPLIANCE WITH MEDICAID REGULATIONS AND POTENTIAL CHANGES
Since the Company is involved with state Medicaid agencies and with
Providers whose clients are covered by Medicaid, the Company must comply with
the laws and regulations governing such reimbursement. Medicaid is a joint state
and federally funded program established as part of the Social Security Act in
the mid-1960s to provide certain defined health care benefits to poor, indigent
or otherwise eligible general welfare recipients. As states consider methods to
control the cost of health care services generally and behavioral health
services specifically to Medicaid recipients, and because such recipients are,
as a group, heavy users of the type of services
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which the Company offers, the impact of Medicaid reimbursement and regulatory
compliance with its rules could be material to the Company's financial condition
and results of operations.
Medicaid funding and the methods by which services are supplied to
recipients are changing rapidly. As noted, many states have "carved out"
behavioral health services from the delivery of other health services to
Medicaid recipients and are separately procuring such services on a capitated
basis requiring the contractor, and permitting subcontracted providers, to
assume risk.
The Company cannot predict the extent or scope of changes which may
occur in the ways in which state Medicaid programs contract for and deliver
services to Medicaid recipients. All Medicaid funding is generally conditioned
upon financial appropriations to state Medicaid agencies by the state
legislatures and there are ever-increasing uncertain political pressures on such
legislatures in terms of controlling and reducing such appropriations. The
overall trend is generally to impose lower reimbursement rates and to negotiate
reduced contract rates with providers, including incentives to assume risk not
only by licensed managed care organizations with whom state Medicaid agencies
contract, but by subcontracted providers, such as the Company. Part of the
Company's strategy for growth depends upon obtaining continued and increased
contracts with managed care organizations to provide behavioral health managed
care services to Medicaid recipients. Consequently, any significant reduction in
funding for Medicaid programs could have a material adverse effect on the
Company's financial condition and results of operations.
The United States Congress continues to consider legislation to
substantially alter the overall Medicaid program, to give states greater
flexibility in the design and operation of their individual Medicaid program,
and to stabilize federal spending for such benefits. Various states are also
considering substantial health care reform measures which could modify the
manner in which all health services are delivered and reimbursed, especially
with respect to Medicaid recipients and with respect to other individuals funded
by public resources. The reduction in other public resources could have an
impact upon the delivery of services to Medicaid recipients.
COMPLIANCE WITH OTHER STATE REGULATORY CONSIDERATIONS
The Company is also sensitive to the particular nature of the delivery
of behavioral health services and various state requirements with respect to
confidentiality and patient privacy. Indeed, both federal and state laws require
providers of certain behavioral health services to maintain strict
confidentiality as to treatment records and, indeed, the fact of treatment.
There are specific requirements permitting disclosure, but inadvertent or
negligent disclosure can trigger substantial criminal and other penalties.
SPECIFIC LICENSING OF PROGRAMS
The Company's Outpatient Programs are operated as outpatient
departments of Hospitals or CMHC's, thus subjecting such programs to regulation
by federal, state and local agencies. These regulations govern licensure and
conduct of operations at the facilities, review of construction plans, addition
of services and facilities and audit of cost allocations, cost reporting and
capital
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expenditures. The facilities occupied by the programs must comply with the
requirements of municipal building, health and fire codes. Inclusion of hospital
space where the Outpatient Programs are furnished within the hospitals license
is a prerequisite to participation in the Medicare programs. Additionally, the
Provider's premises and programs are subject to periodic inspection and
recertification.
AGGRESSIVE INVESTIGATION AND ENFORCEMENT OF HEALTH CARE FRAUD LAWS
The Office of the Inspector General within the U.S. Department of Health
and Human Services, as well as other Federal, state, and private organizations,
are aggressively enforcing their interpretation of Medicare and Medicaid laws
and policies, and other applicable standards. Often in such enforcement efforts,
the government has relied on the Federal False Claims Act. Under that law, if
the government prevails in a case, it is entitled to treble damages plus not
less than $5,000 nor more than $10,000 per claim, plus reasonable attorney fees
and costs. In addition, a person found to have submitted false claims can be
excluded from governmental health care programs including Medicare and Medicaid.
If a Provider contracting with the Company were excluded from governmental
health programs, no services furnished by that Provider would be covered by any
governmental health program. Some of the Providers contracting with the Company
are reported to be under active investigation for health care fraud, although
the Company is not aware of any allegations that any alleged fraud relates to
programs with which the Company is involved. If the Company were excluded from
governmental health programs, Providers contracting with the Company could not
be reimbursed for amounts paid to the Company.
To prevail in a False Claims Act case, the government need show only
that incorrect claims were submitted with "reckless disregard" or in "deliberate
ignorance" of the applicable Medicare law. The government does not have to prove
that the claims were submitted with the intent to defraud a governmental or
private health care payor. The quitam provisions of the Federal False Claims Act
permit individuals to do so is that he or she will usually be entitled to
approximately 15 to 30 percent of any ultimate recovery. Under the Federal False
Claims Act, the Office of the Inspector General, in conjunction with the
Department of Justice, have successfully made demands on thousands of providers
to settle alleged improper billing disputes at double damages or more. Although
the Company does not bill governmental programs directly, it could possibly be
liable under the False Claims Act to the extent that it is found to have
"caused" false claims to have been presented.
There are many other civil and criminal statutes at the federal and
state levels that may penalize conduct related to submitting false claims for
health care services or for offering or receiving anything of value in exchange
for the referring of patients. The penalties under many of those statutes are
severe, and the government often need not prove intent to defraud in order to
prevail. Management believes that the Company is in material compliance with
applicable regulatory and industry standards. However, in light of the
complexity of the policies governing governmental health care programs together
with changing and uncertain interpretations of those policies, it is impossible
to be absolutely assured that the government (or a quitam relator in the name of
the government) will not assert that some conduct by the Company has given rise
to potentially a large liability.
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HUMAN RESOURCES
In the aggregate, as of April 30, 1997, the Company employed
approximately 800 employees, of which 434 are full-time employees. Approximately
714 employees staff clinical programs and 86 are in corporate management
including finance, accounting, development, utilization review, training and
education, information systems, human resources and legal. None of the Company's
employees are subject to a collective bargaining agreement, and the Company
believes that its employee relations are good.
COMPETITION
The Company competes with other health care management companies for
the establishment of affiliations with acute care hospitals to operate its
Outpatient Programs. Certain of the Company's competitors have greater financial
and personnel resources than the Company.
In general, the operation of psychiatric programs is characterized by
intense competition. General, community and specialty hospitals, including
national companies and their subsidiaries, provide many different programs and
services. The Company believes that the proprietary nature of its policy and
procedures manuals as well as the level of service it provides and the expertise
of its management and field personnel provides it with a leading position in the
development and management of Outpatient Programs.
In each of the Company's current and anticipated market areas, the
Company faces competition. The Company anticipates that competition will become
more intense as pressure to contain the rising costs of health care continues to
intensify, and programs such as those operated by the Company are perceived to
help contain mental health care costs.
The Company believes that the Case Management Program provides the
means to effectively control costs in a managed, public-sector mental health
system by reducing the costs for the population that consumes the largest
portion of the treatment dollars, the SMI population. In addition, the Company
believes that the Company's Case Management Model provides state-of-the-art
treatment and rehabilitation services which serve to upgrade the existing
provider network in a community. The Company believes the benefits of its Case
Management Model are recognized as a distinguishing feature for public-sector
managed care efforts.
The Company's primary existing competitors in the case management
business are predominantly not for profit CMHC's and case management agencies.
The Company anticipates that mental health managed care companies will
eventually compete for this business. There can be no assurances that the
Company will be able to compete successfully with its present or future
competitors.
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RISK FACTORS
In addition to other information contained in this Annual Report on
Form 10-K, the following risk factors should be considered carefully by holders
of the Company's Common Stock.
1. DEPENDENCE UPON THIRD PARTY REIMBURSEMENT
A significant component of the Company's revenues derived from payments
made by Hospitals and CMHC's ("Providers") to the Company relative to the
management and administration by the Company of outpatient programs (the
"Programs") managed for Providers. The Company bills its management fee to the
Provider as a purchased management and administrative support service.
Substantially all of the patients admitted to these Programs are eligible for
Medicare coverage, thus, the Providers rely upon payment from Medicare. The
Providers are reimbursed their costs on an interim basis by Medicare fiscal
intermediaries and the Providers submit annual cost reimbursement reports to the
fiscal intermediaries for audit and payment reconciliation. The Providers seek
reimbursement of the Company's management fees from these fiscal intermediaries
as part of their overall payments from Medicare. As a general matter, payment of
the Company's management fee may be directly affected by the reimbursement
experience of the Provider. In certain instances, Providers are not obligated to
pay the Company's management fee if related claims submitted by the Provider are
denied by the fiscal intermediary. In other instances, the Company may be
obligated to indemnify a Provider to the extent the Company's management fee
charged to the Provider, is disallowed by Medicare's fiscal intermediaries for
reimbursement on the Provider's cost reimbursement report. The occurrence of
either of these events can have an adverse impact upon the Company's cash flow
and ultimate receipt of its management fees.
Applicable Medicare guidelines permit the reimbursement of contracted
for management services provided that, among other things, the associated fees
are "reasonable." As a general rule, Medicare guidelines indicate that contract
management services costs are "deemed" reasonable if the costs incurred are
comparable with marketplace prices for similar services. Although management of
the Company believes that the value of the Company's services is comparable with
marketplace prices for similar services, the determination of reasonableness may
be interpreted by HCFA or a fiscal intermediary in a manner inconsistent with
the Company's belief. Notwithstanding the Company's belief, a determination that
the Company's management fees may not be reasonable could have a material
adverse effect on the Company's finances.
HCFA has published criteria which partial hospitalization services must
meet in order to qualify for Medicare funding. In transmittal letter number 1303
(effective January 2, 1987) and in subsequent criteria published in Section
230.50 of the Medicare Coverage Manual, HCFA requires partial hospitalization
services to be: (i) incident to a physician's service; (ii) reasonable and
necessary for the diagnosis or treatment of the patient's conditions; and (iii)
provided by a physician with a reasonable expectation of improvement of the
patient from the treatment. Although the Company and its Providers have quality
assurance and utilization review programs to ensure that the partial
hospitalization Programs managed by the Company are operating in compliance with
all Medicare requirements, there can be no assurances that in the future certain
aspects of the Company's Programs will not be found to have failed to satisfy
all applicable criteria for Medicare eligibility.
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During the fourth quarter of Fiscal Year 1994, fiscal intermediaries
for Providers began a Focused Medical Review of claims for partial
hospitalization services throughout the country. A Focused Medical Review
consists of an intensive review by HCFA fiscal intermediaries on an
industry-wide basis of certain targeted claims which HCFA has identified as
being at risk of inappropriate program payment. This often occurs when HCFA
identifies significant industry-wide increases in payments of certain types of
services, as had been the case with the partial hospitalization benefit. The
Company's initial experience with the Focused Medical Review was that there were
numerous denials of Providers' claims and the denials had an adverse impact on
the Company's cash flow during Fiscal 1995 because Providers delayed payment of
the Company's management fee because of the substantial number of denials. On
behalf of the Providers, the Company strenuously disputed these denials,
particularly the interpretations implemented by one singular fiscal
intermediary.
The Focused Medical Review of claims for partial hospitalization
services conducted by fiscal intermediaries for the Providers has substantially
abated on programs managed by the Company. Although during Fiscal 1997, the
number of denied claims was reduced to a modest rate, the periodic review of
claims by HCFA fiscal intermediaries will likely continue at one or more
programs from time to time, and there can be no assurances that a Focused
Medical Review of claims will not recur at the level previously experienced by
the Company.
2. CHANGES IN MEDICARE'S COST BASED REIMBURSEMENT FOR PARTIAL
HOSPITALIZATION SERVICES
Based on proposed legislation, a prospective payment system ("PPS") for
all outpatient hospital services, including partial hospitalization, would be
implemented for the calendar year beginning January 1, 1999. While the actual
reimbursement rates have not been determined and thus their effect, positive or
negative, is unknown, the Company may need to negotiate modifications to its
contracts with Providers.
The Medicare partial hospitalization benefit has a coinsurance feature,
which means that the amount paid by Medicare is the provider's reasonable cost
less "coinsurance" which is ordinarily to be paid by the patient. The
coinsurance amount is 20 percent of the charges for the services. The
coinsurance must be charged to the patient by the provider unless the patient is
indigent. If the patient is indigent, or if the patient does not pay the
provider the billed coinsurance amounts after reasonable collection efforts, the
Medicare program has historically paid those amounts as "allowable Medicare bad
debts." The allowability of Medicare bad debts to providers for whom the Company
manages partial hospitalization programs is significant since most of the
patients in programs managed by the Company are indigent or have very limited
resources. The pending budget reconciliation bills in Congress would reduce the
amount of Medicare allowable bad debts payable to providers. Since the House and
Senate provisions are identical, the Company expects the following reductions in
Medicare allowable bad debts to occur: 25 percent for provider fiscal years
beginning on or after October 1, 1997; 40 percent for provider fiscal years
beginning on or after October 1, 1998; and 50 percent for provider fiscal years
beginning on or after October 1, 1999. The reduction in "allowable Medicare bad
debts" could have a materially adverse impact on
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Medicare reimbursement to the Company's Providers and could further result in
the restructuring or loss of Provider contracts with the Company.
3. SUFFICIENCY OF EXISTING RESERVES TO COVER UNCERTAINTIES RELATIVE TO
REIMBURSEMENT ISSUES
Reimbursement of the Company's management fees to Providers under the
Medicare program provides a substantial source of the Company's revenues.
Accordingly, the Company's Programs must at all times operate in compliance with
applicable Medicare guidelines. Failure to meet such criteria could have an
adverse effect on the Company's finances should a Provider elect to withhold
payment of the Company's management fees or in the alternative seek a refund of
such fees following an event of disallowance.
The Company maintains significant reserves identified within its
financial statements to cover the effect of primarily two uncertainties: (i)
that the Company may have an obligation to indemnify certain Providers for some
portions of its management fee which may be subject to disallowance upon audit
of a Provider's cost report by fiscal intermediaries; and (ii) that the Company
may not receive full payment of the management fees owed to it by a Provider
during the periodic review of the Provider's claims by the fiscal
intermediaries.
The Company has been advised by HCFA that certain program-related costs
are not allowable for reimbursement. The Company may be responsible for
reimbursement of the amounts previously paid to the Company that are disallowed
pursuant to obligations that exist with certain Providers. Although the Company
believes that its potential liability to satisfy such requirements has been
adequately reserved in its financial statements, there can be no assurances to
that effect. The obligation to pay the amounts estimated within the Company's
financial statements (or such greater amounts as are due), when and if they
become due, could have a material adverse impact on the Company's short term
liquidity.
4. CONTINUITY OF MANAGEMENT CONTRACTS
Substantially all of the revenues of the Company are derived from
contracts with Providers, behavioral health organizations, and case management
agencies. These contracts generally have defined terms of duration and many have
automatic renewal terms subject to termination by either party. The contracts
often provide for early termination either by the Provider if specified
performance criteria are not satisfied or by Company under various other
circumstances.
The continued success of the Company is subject to its ability to
maintain, renew or extend existing management contracts and obtain new
management contracts. Contract renewals and extensions are likely to be subject
to competing proposals from other contract management companies as well as
consideration by certain Providers to convert their mental health programs from
independently managed programs to programs operated internally or to terminate
their mental health programs. There can be no assurance that any Provider or
case management agency will continue to do business with the Company following
expiration of its management contract or earlier if such management contract is
terminable prior to expiration. In addition, any changes in
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the Medicare or Medicaid program which have the effect of limiting or reducing
reimbursement levels for mental health services provided by Programs managed by
the Company could result in the early termination of existing management
contracts and would adversely affect the ability of the Company to renew or
extend existing management contracts and to obtain new management contracts. The
termination or non-renewal of a material number of management contracts could
result in a significant decrease in the Company's net revenues and could have a
material adverse effect on the Company's business, financial condition or
results of operations.
For the Fiscal Year ended April 30, 1997 ("Fiscal 1997"), there was
only one Provider that accounted for more than ten (10%) percent of the
Company's revenues. Furthermore, although not attributed to a particular
"customer," the Company's case management programs accounted for 24.2% of the
Company's revenues during Fiscal Year 1997. These programs were largely operated
under contracts with TBH and Premier and management agreements with two (2) case
management agencies. A termination or non-renewal of any of these contracts
could have a material adverse effect on the Company's business, financial
condition or results of operation.
5. POTENTIAL CHANGES IN TENNCARE
The Company, through its Collaborative Care subsidiary holds contracts
for case management services with both of the managed care consortiums. Premier
has notified the state that it would withdraw from Tenncare effective, June 30,
1997. But the effectiveness of that notice is in question and Premier has
continued in its role as a managed care consortium. Effective July 1, 1997 TBH
amended its contract with Tenncare and is attempting to restructure its
agreements with its providers. Significant uncertainty exists as to the future
structure of Tenncare and the opportunity for the Company and its subsidiary
subsequent to a restructuring. The Company may find it prudent to significantly
restructure its contracts and relationships, depending on the outcome of ongoing
discussions among the interested parties in Tenncare. The potential changes,
which the Company cannot predict with any degree of certainty, may have a
material adverse impact on the Company's financial condition and results of
operations.
6. LIMITED OPERATING HISTORY OF CASE MANAGEMENT PROGRAMS
For the fiscal year ended April 30, 1997, the Company's Case Management
Programs accounted for 24.2% of the Company's total revenues. This reflects an
increase from 20.9% of revenues accounted for by these Programs during Fiscal
1996. The operations of the Company's Case Management Programs are subject to
limited operating history. Thus, the success of these Programs will be dependent
upon the Company's ability to manage and expand operations effectively, control
costs and recognize operating efficiencies. By virtue of the lack of operating
history, there can be no assurances that the Company will be able to maintain
these operations at the level realized during Fiscal 1997 or expand these
Programs after Fiscal 1997.
7. DIFFICULTIES OF MANAGING RAPID GROWTH
The Company expects that its outpatient psychiatric management services
business and the number of its acute outpatient, case management and chemical
dependency programs may increase
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<PAGE> 26
significantly as it pursues its growth strategy. If it materializes, this rapid
growth will place significant demands on the Company's management resources. The
Company's ability to manage its growth effectively will require it to continue
to expand its operation, financial and management information systems and to
continue to attract, train, motivate, manage and retain key employees. If the
Company is unable to manage its growth effectively, its business, financial
condition and results of operations could be adversely affected.
8. GOVERNMENT REGULATION
Mental health care is an area of extensive and frequent regulatory
change. Changes in the laws or new interpretations of existing laws can have a
significant effect on methods of doing business, costs of doing business and
amounts of reimbursement from governmental and other payers. The Company is and
will continue to be subject to varying degrees of regulation and licensing by
health or social service agencies and other regulatory authorities in the
various states and localities in which it operates or intends to operate. The
Company must operate in compliance with applicable Medicare and Medicaid
guidelines. The Company is also subject to fraud and abuse and other laws,
violations of which may result in civil and criminal penalties and exclusions
from participation in such programs. The Company at all times attempts to comply
with all such applicable laws; however, there can be no assurance that
administrative or judicial interpretation of existing laws or regulations will
not have a material adverse effect on the Company's operations or financial
condition.
The success of the Company will be dependent in part upon its ability
to satisfy the applicable regulations and requirements imposed upon its
operations. The Company's operations could also be adversely affected by, among
other things, regulatory developments such as mandatory increases in the scope
and quality of care and implementation of certain licensing and certification
standards. There can be no assurance that federal, state or local laws or
regulatory procedures which might adversely affect the Company's business,
financial condition, results or operations or prospects will not be expanded or
imposed. There can be no assurances that the regulations applicable to the
Company's operations and its arrangements with Providers will not change in the
future or that future interpretations of existing laws or new laws will not
result in the Company's services under its management contracts being deemed not
in compliance with federal Medicare/Medicaid laws.
9. DEPENDENCE ON KEY PERSONNEL
The Company depends, and will continue to depend, upon the services of
its senior management and skilled personnel. The Company presently has no
employment agreements with any of its senior executive officers. The Company is
also dependent upon its ability to attract and retain management personnel who
will be responsible for the day-to-day operations of the Company. The loss of
the services of any or all such officers or the Company's inability to attract
additional management personnel in the future could have a material adverse
effect on the Company's financial condition or results of operations.
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<PAGE> 27
The Company's success and growth strategy also depend on its ability to
attract and retain qualified clinical, marketing and other personnel. The
Company competes with general acute care hospitals and other health care
providers for the services of psychiatrists, psychologists, social workers,
therapists and other clinical personnel. Demand for such clinical personnel is
high and they are often subject to competing offers. There can be no assurance
that the Company will be able to attract and retain the qualified personnel
necessary for its business in the future.
10. COMPETITION
The mental health services industry is highly competitive. There are
many other companies engaged in the management of outpatient psychiatric
Programs, and some of these companies are substantially more established and
have greater financial and other business resources than those presently
possessed by the Company. In addition, the Company's current and potential
Providers may choose to operate mental health programs themselves rather than
contract with the Company. The inability of the Company or its Providers to
compete effectively could have a material adverse effect on the Company's
business, financial condition or results of operations.
11. POSSIBLE VOLATILITY OF STOCK PRICES
The market price of the Common Stock could be subject to significant
fluctuations in response to various factors and events, including the liquidity
of the market for the Common Stock, variations in the Company's operating
results, new statutes or regulations or changes in the interpretation of
existing statutes or regulations affecting the health care industry generally or
mental health services in particular. In addition, the stock market in recent
years has experienced broad price and volume fluctuations that often have been
unrelated to the operating performance of particular companies. These market
fluctuations also may adversely affect the market price of the Common Stock. The
Company's Common Stock is traded on the Nasdaq National Market System. There can
be no assurances as to the future trading prices of the Common Stock. Trading of
a Company's securities depends upon a number of variables most of which are
beyond the control of the Company.
12. HEALTHCARE REFORM
The Clinton Administration and various federal legislators have
considered health care reform proposals intended to control health care costs
and to improve access to medical services for uninsured individuals. These
proposals have included reductions to the Medicare and Medicaid programs and
steps to permit greater flexibility in the administration of Medicaid. In
addition, some states in which the Company operates are considering various
health care reform proposals. It is uncertain at this time what legislation on
health care reform may ultimately be proposed or enacted or whether other
changes in the administration or interpretation of governmental health care
programs will occur. There can be no assurance that future health care
legislation or other changes in the administration or interpretation of
governmental health care programs will not have a material adverse effect on the
Company's business, financial condition or results of operations.
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<PAGE> 28
13. CONCENTRATION OF OWNERSHIP; ANTI-TAKEOVER PROVISIONS
The officers and directors of the Company and their affiliates own over
fifty (50%) percent of the Company's issued and outstanding Common Stock.
Consequently, such persons will be able to elect a majority of the Company's
Board of Directors and control the Company's policies and day to day management
at least for the foreseeable future. The Company's Board of Directors has the
authority, without action by the stockholders, to issue additional shares of
Preferred Stock and to fix the rights and preferences of such shares. The
ability to issue additional shares of Preferred Stock together with certain
provisions of the Company's Certificate of Incorporation, such as staggered
terms for directors, limitations on the Stockholders' ability to call a meeting
or remove directors and the requirement of a two-thirds vote of stockholders for
amendment of certain provisions of the Certificate of Incorporation or approval
of certain business combinations, may delay, deter or prevent a change in
control of the Company, may discourage bids for the Common Stock at a premium
over the market price of the Common Stock and may adversely affect the market
price of, and the voting and other rights of the holders of, the Common Stock.
14. AVAILABILITY AND ADEQUACY OF INSURANCE
The provision of mental health care services entails an inherent risk
of liability. In recent years, participants in the industry have become subject
to an increasing number of lawsuits alleging malpractice or related legal
theories, many of which involve large claims and significant defense costs. The
Company currently maintains liability insurance intended to cover such claims
and the Company believes that its insurance is in conformity with industry
standards. There can be no assurance, however, that claims in excess of the
Company's insurance coverage or claims not covered by the Company's insurance
coverage (e.g., claims for punitive damages) will not arise. A successful claim
against the Company not covered by, or in excess of, the Company's insurance
coverage could have a material adverse effect upon the Company's financial
condition and results of operations. Claims against the Company, regardless of
their merit or eventual outcome, may also have a material adverse effect upon
the Company's ability to expand its business and would require management to
devote time to matters unrelated to the operation of the Company's business. In
addition, the Company's insurance policies must be renewed annually. There can
be no assurance that the Company will be able to obtain liability insurance
coverage in the future or that, if such coverage is available, it will be
available on acceptable terms.
15. POTENTIAL MARKET IMPACT OF SHARES ELIGIBLE FOR FUTURE SALE
Future sales by existing stockholders could adversely affect the
prevailing market price of the Common Stock. The Company presently has 5,045,303
shares of Common Stock outstanding. Of these shares, 2,548,487 are eligible for
public resale as free-trading securities, and 2,661,222 shares are held by the
Company's affiliates (directors, officers and principal stockholders) and are
considered "restricted securities" under Rule 144 under the Securities Act of
1933, as amended (the "Securities Act").
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<PAGE> 29
16. NEED FOR ADDITIONAL FINANCING TO FUND FUTURE GROWTH
The Company may require additional equity or debt financing,
collaborative arrangements with corporate partners or funds from other sources
in order to continue the establishment, development, management and marketing of
outpatient programs. No assurance can be given that funds will be available for
the Company for those purposes on acceptable terms, if at all. If additional
funds are raised by issuing equity securities, the Company's stockholders may
experience dilution.
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<PAGE> 30
ITEM 2. PROPERTIES
The Company owns no real property, but currently leases and subleases
approximately 205,000 square feet comprised of (i) a lease for the Company's
corporate headquarters expiring in 2002 and (ii) two leases for regional
administration offices for five years' duration, (iii) thirty (30) leases for
Program sites, ranging from three-to-five years' duration, none of which extend
beyond 2002. The Company anticipates that it will be moving into its new
facility in September 1997. The Company carries property and liability insurance
where required by lessors and sublessors. The Company believes that its
facilities are adequate for its short term needs.
Leases and subleases, other than the short-term and month-to-month
leases, generally provide for annual rental adjustments which are either indexed
to inflation or have been agreed upon, and further typically provide for
termination on not less than ninety (90) days' written notice.
ITEM 3. LEGAL PROCEEDINGS
The Company is not a party to any material legal proceedings required
to be reported hereunder.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY-HOLDERS
No matter was submitted to a vote of the Company's stockholders during
the fourth quarter of the fiscal year covered by this Report.
ITEM 4A. EXECUTIVE OFFICERS OF THE CORPORATION
The executive officers of the Company and their ages as of July 25,
1997 are as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION
<S> <C> <C>
Allen Tepper 49 Chairman of the Board of Directors and Chief
Executive Officer
Fred D. Furman 49 President
Mark P. Clein 38 Executive Vice President and Chief Financial Officer
Susan D. Erskine 45 Executive Vice President Development, Secretary and
Director
Susan Yeagley Sullivan 47 Senior Vice President-Finance and Treasurer
</TABLE>
ALLEN TEPPER
Mr. Allen Tepper has been Chairman and CEO of the Company since October
31, 1989. Mr. Tepper was a co-founder of Consolidated Medical Corp. in 1979,
which was engaged in out-patient clinic management for acute care hospitals in
the Philadelphia area. The company was sold
30
<PAGE> 31
to the Berwind Corporation in 1984. Mr. Tepper holds a Masters of Business
Administration degree from Northwestern University and a Bachelors degree from
Temple University.
FRED D. FURMAN
Mr. Fred D. Furman has been President since April 1997. Previously, he
held the position of Executive Vice President - Administration and General
Counsel. Prior to that, Mr. Furman was a partner at a Philadelphia law firm from
1980 to 1995. Mr. Furman is a member of the National Health Lawyers Association.
He holds a Juris Doctor degree and a Bachelor's degree from Temple University.
MARK P. CLEIN
Mr. Mark P. Clein joined the Company in 1996 as Executive Vice
President and Chief Financial Officer. From 1982 to 1995, Mr. Clein had been
employed by several New York-based investment banking and venture capital firms,
including Jefferies & Co., where he held the position of managing director of
investment banking (specializing in the health care industry), Sprout Group, an
affiliate of Donaldson, Lufkin and Jenrette, Inc. and Merrill Lynch Venture
Capital, Inc., where he focused on early stage investing in the healthcare
industry. Mr. Clein holds a Masters of Business Administration degree from
Columbia University and a Bachelors degree from the University of North
Carolina.
SUSAN D. ERSKINE
Ms. Susan D. Erskine has been Secretary and a Director of the Company
since October 31, 1989. Ms. Erskine previously held management positions in the
areas of operations, marketing and development for acute care hospitals and a
public sector focused management services organization. She holds a Master's
degree in Health Science and completed post graduate work at Stanford University
in Education and Psychology. She has extensive experience in program
development, marketing and management of psychiatric programs, both inpatient
and outpatient.
SUSAN YEAGLEY SULLIVAN
Ms. Susan Yeagley Sullivan, CPA, has been Senior Vice President and
Treasurer since May of 1996. From July 1991 through May, 1996, she held the
position of Chief Financial Officer of the Company. Ms. Yeagley Sullivan was
previously the Chief Financial Officer of a San Diego home health agency and of
a psychiatric hospital, as well as several real estate development companies in
San Diego and Dallas. Prior to that, Ms. Yeagley Sullivan was in public
accounting, holding the position of audit manager at Kenneth Leventhal & Co and
Ernst & Young. She holds a Masters in Business Administration degree and a
Bachelors of Science in Accounting degree from San Diego State University.
All officers are elected annually by the Board of Directors. Each officer serves
at the discretion of the Board of Directors. There are no family relationships
among the directors, officers or key employees of the Company.
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<PAGE> 32
PART II
ITEM 5. MARKET PRICE OF AND DIVIDENDS ON THE COMPANY'S COMMON EQUITY AND
RELATED STOCKHOLDER MATTERS
The Company's Common Stock (NASDAQ symbol "PMRP") is traded publicly
through the NASDAQ National Market System. The following table represents
quarterly information on the price range of the Company's Common Stock. This
information indicates the high and low sale prices reported by the NASDAQ
National Market System. These prices do not include retail markups, markdowns or
commissions:
<TABLE>
<CAPTION>
QUARTERS FOR THE YEAR ENDED APRIL 1997
<S> <C> <C> <C> <C>
7/31/96 10/31/96 1/31/97 4/30/97
----------- ------------ ----------- -----------
High 15.50 35.25 31.44 29.75
Low 8.50 14.13 20.25 16.75
</TABLE>
<TABLE>
<CAPTION>
QUARTERS FOR THE YEAR ENDED APRIL 1996
<S> <C> <C> <C> <C>
7/31/95 10/31/95 1/31/96 4/30/96
----------- ------------ -------------- -----------
High 6.00 5.63 5.63 10.19
Low 3.00 3.50 4.25 4.50
</TABLE>
RECENT SALES OF UNREGISTERED SECURITIES
From May 1, 1996 to April 30, 1997, the Company has sold and issued (without
payment of any selling commission to any person) the following unregistered
securities:
1. During the period, the Company granted incentive stock options to
employees and officers of the Company under its Employees' Stock Option Plan of
1990 (the "1990 Plan") (as amended and restated, the "1997 Equity Incentive
Plan") covering an aggregate of 375,080 shares of the Company's Common Stock.
The incentive stock options had exercise prices equal to at least 100% of the
fair market value of a share of Common Stock on the date of grant and ranged
from $11.00 to $28.50. Certain of these options vest over a period of time
following their respective dates of grant.
2. On April 30, 1997, the Company granted stock options to certain
executive officers of the Company in connection with the employment of such
officers, covering an aggregate 87,757 shares of Common Stock at an exercise
price of $19.875 per share.
3. During May and June 1996, 48,000 shares of Common Stock were issued to
Ronald Slack, a former director of the Company, upon exercise of warrants for
an aggregate exercise price of $242,500.00.
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<PAGE> 33
4. During June 1996, the Company issued 700,000 shares of Common Stock
upon conversion of the Company's Series C Convertible Preferred Stock by the
holders thereof. In addition, 525,000 shares of Common Stock were issued upon
the exercise of Class A Warrants, Class B Warrants and Class C Warrants (which
were issued in connection with the sale of Series C Convertible Preferred Stock
in a private placement transaction), for aggregate exercise prices for each
class of $525,000, $787,500 and $1,050,000, respectively. See "ITEM 7.
MANAGEMENT DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS- Liquidity and Capital Resources."
5. On July 1, 1996, the Company granted a consultant an option to purchase
up to 4,000 shares of Common Stock at an exercise price of $11.375 per share, in
connection with the services provided by the consultant.
6. On January 3, 1997, the Company granted a consultant an option to
purchase up to 20,000 shares of Common Stock at an exercise price of $23.375 per
share, in connection with the services provided by the consultant.
7. On April 27, 1997, the Company issued 39,524 shares of Common Stock to
Proactive Partners, L.P. and Proactive Investment Managers L.P. upon the
exercise of warrants issued to them in an earlier private placement transaction,
for an aggregate exercise price of $332,001.60.
The grant of stock options described in paragraphs 1 and 2 above were
exempt from registration under the Securities Act because such transactions did
not involve a "sale" of securities as such term is used in Section 2(3) of the
Securities Act.
The sales and issuances of securities in the transactions described in
paragraphs 3 and 4 above were deemed to be exempt from registration under the
Securities Act by virtue of Section 4(2) and/or Regulation D promulgated
thereunder.
The grant of stock options to the consultants described in paragraphs 5
and 6 above, were exempt from registration under the Securities Act because such
transactions did not involve a "sale" of securities as such term is used in
Section 2(3) of the Securities Act. Alternatively, if such grants did involve a
sale, such grants were exempt from registration under the Securities Act by
virtue of Section 4(2) and/or Regulation D promulgated thereunder.
The recipients of the securities set forth above in paragraphs 2, 3, 4,
5, 6 and 7 represented their intention to acquire the securities for investment
purposes only and not with a view to the distribution thereof. Appropriate
legends are affixed to all stock certificates issued in such transactions. All
recipients either received adequate information about the Registrant or had
access through employment or other relationships, to such information.
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<PAGE> 34
ITEM 6. SELECTED FINANCIAL DATA
(in thousands, except per share amounts)
<TABLE>
<CAPTION>
FOR THE YEAR ENDED APRIL 30
1997 1996 1995 1994 1993
--------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
INCOME STATEMENT INFORMATION
Revenues $ 56,637 $ 36,315 $ 21,747 $ 22,786 $ 16,615
Net Income (loss) 3,107 918 (2,352) 825 1,157
Net Income (loss) per share
Primary .54 .23 (.70) .24 .30
Fully Diluted .54 .21 (.70) .24 .30
Weighted Shares Outstanding
Primary 5,772 4,540 3,337 3,312 2,839
Fully Diluted 5,772 5,043 3,337 3,313 2,858
BALANCE SHEET INFORMATION
Working Capital $ 20,641 $ 10,911 $ 8,790 $ 7,705 $ 7,843
Total Assets 33,085 21,182 14,811 13,671 11,289
Long Term Debt 0 0 126 320 135
Total Liabilities 16,837 12,070 7,749 5,972 4,625
Stockholders' Equity 16,248 9,112 7,062 7,699 6,664
</TABLE>
<TABLE>
<CAPTION>
QUARTERS FOR THE YEAR ENDED APRIL 1997 QUARTERS FOR THE YEAR ENDED APRIL 1996
7/31/96 10/31/96 1/31/97 4/30/97 7/31/95 10/31/95 1/31/96 4/30/96
------- -------- ------- ------- ------- -------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues 13,028 14,293 14,190 15,126 6,006 8,215 10,154 11,940
Net Income (loss) 583 799 831 894 5 167 222 524
Net Income (loss)
per share
Primary .12 .13 .14 .15 .00 .04 .06 .11
Fully Diluted .11 .13 .14 .15 .00 .04 .06 .10
</TABLE>
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<PAGE> 35
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Except for historical information contained herein, the following
discussion contains forward-looking statements that involve risks and
uncertainties. The Company's actual results could differ materially form those
discussed here. Factors that could cause or contribute to such differences
include, without limitation, those discussed in "ITEM 1. Business", including
the section entitled "Risk Factors", as well as those discussed in any document
incorporated herein by reference.
OVERVIEW
The following table presents a year-by-year analysis of certain of the
material items that comprise elements of the Company's result of operations for
the periods contained within the financial statements included in this Form
10-K. References to "fiscal year" refer to the Company's fiscal years ended
April 30 of the relevant year.
<TABLE>
<CAPTION>
Percentage of Revenues Percentage
Year Ended April 30 Increase/Decrease
1997 1996
1997 1996 1995 vs. 1996 vs. 1995
---- ----- ----- --------- --------
<S> <C> <C> <C> <C> <C>
Revenues 100% 100% 100% 56% 67%
Operating Expenses 73% 78% 95% 45% 38%
Marketing, General and 11% 11% 14% 58% 35%
Administrative
Depreciation and Amortization 1% 2% 2% 18% 48%
Other Operating Expense 6% 4% 6% 98% 14%
Income (Loss) before Income Taxes 9% 5% (17%) 198% N/A
Provision for Income Taxes (Benefit) 4% 2% (6%) 198% N/A
Net Income (Loss) 5% 3% (11%) 238% N/A
</TABLE>
In Fiscal 1997, the Company recorded net income of $3.1 million, which
compares to net income of $.9 million during Fiscal 1996. The increase in
profitability was due to a significant increase in revenues without a
concomitant increase in operating expenses.
In Fiscal 1997, revenues in the Company's Outpatient Program expanded
by 49.3% as compared to Fiscal 1996 due to a significant increase in both
patient census and net revenue per patient. Net revenue per patient increased as
the Company maintained the focus initiated in Fiscal 1996 of providing higher
intensity services to a higher acuity patient population. As most of the
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<PAGE> 36
costs of an outpatient center are fixed or semi-fixed, the Company experienced
significant unit level operating leverage with respect to its acute outpatient
program, which was the primary factor in reducing operating expenses from 78.4%
of revenue in Fiscal 1996 to 73.1% of revenue in Fiscal 1997. These improvements
were realized notwithstanding a significant increase in operational
infrastructure in the Company's Mid-America region in anticipation of expected
growth in Fiscal 1998 and beyond. While the Company anticipates that it may
continue to experience additional efficiencies in its Outpatient business, it
does not anticipate that improvements in margins will continue at the rate
realized in Fiscal 1997.
In Fiscal 1997, revenues in the case management business grew 80.3% due
to the effect of a full year of operation in Tennessee, increases in enrollment
in Tennessee and the launch of the business in Arkansas. Before corporate
allocation, case management was modestly unprofitable as increased profits in
Tennessee were balanced by start-up losses in Arkansas. The Company anticipates
increasing pressure on revenues and profit margins in Tennessee given the
potential restructuring of Tenncare and the continued losses experienced by
Premier and TBH, the consortiums which have contracted with the Company to
provide case management services. See - "ITEM 1. BUSINESS - CONTRACTS - CASE
MANAGEMENT".
Marketing, General and Administrative expenses increased slightly as a
percentage of revenues in Fiscal 1997 as the Company invested significantly in
operational infrastructure in the Company's Mid-America region in anticipation
of expected growth in Fiscal 1998 and beyond. The Company does not anticipate
material improvements in margins at the marketing, general and administrative
level until several of the recently launched and anticipated programs in the
Mid-America region begin to mature.
Revenues from the Company's Outpatient, Case Management and Chemical
Dependency Programs were 70.6%, 24.2%, and 5.2% respectively of total revenues
in Fiscal 1997, compared to 73.8%, 20.9%, 5.3% respectively of total revenues in
Fiscal 1996. The changes in the revenue mix were due primarily to the effect of
a full year of operation of the Tennessee Case Management Program in Fiscal 1997
as compared to approximately eight months of operation in Fiscal 1996 as well as
the commencement of the Arkansas Case Management Program in Fiscal 1997.
Internal growth rates were strong within all of the business lines.
RESULTS OF OPERATIONS - FISCAL YEAR ENDED APRIL 30, 1997 COMPARED TO FISCAL YEAR
ENDED APRIL 30, 1996
Revenues. Revenues for Fiscal 1997 were $56.6 million, an increase of
$20.3 million, or 56.0% as compared to Fiscal 1996. Of this increase, $6.1
million, or 30.0%, resulted from the Company's Case Management Program in
Tennessee and Arkansas. Five percent of the increase in revenues, or $1.0
million, was attributed to growth in the Chemical Dependency Programs. These
programs benefited from a full year of operation of the Little Rock public
sector program in Arkansas, and from growth in the managed care business in
California. Total revenue growth in Chemical Dependency was 53.0% in Fiscal
1997. The remainder of the increase in revenues came from the Company's
Outpatient Program which recorded revenues of $40.0 million, an increase of
49.3% from Fiscal 1996. The growth in this business line was a combination of
same site revenue increases of 40% as compared to Fiscal
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<PAGE> 37
1996 and the addition of eight new programs in Fiscal 1997. The Company closed
two sites during Fiscal 1997.
Operating Expenses. Operating expenses for Fiscal 1997 were $41.4
million, an increase of $13 million, or 45.5% as compared to Fiscal 1996. Of
this increase, $5.4 million or 42.0%, resulted from the effect of a full year of
operations of the Case Management Program in Tennessee and the launch of the
Case Management Program in Arkansas. The remainder of the increase in operating
expenses was associated primarily with increased costs to support the revenue
growth at existing outpatient sites and the net increase of six Outpatient
Programs during Fiscal 1997.
Marketing, General and Administrative Expenses. Marketing, general and
administrative expenses for Fiscal 1997 were $6.4 million, an increase of $2.3
million, or 58.0% as compared to Fiscal 1996. The increase was related to the
following factors: the reorganization of the Company into three regions; the
significant investment in the Mid-America region to prepare for anticipated
growth associated with the agreement with Columbia Healthcare Corporation; the
start-up of the site management and clinical information division; and increases
in personnel in information systems, product development and utilization review.
Depreciation and Amortization. Depreciation and amortization expenses
for Fiscal 1997 were $701,000, an increase of $105,000, or 17.6% as compared to
Fiscal 1996. The increase was due to additional capital expenditures associated
with the start up of eight new programs and to increased capital expenditures
for information systems.
Provision for Bad Debts. Expenses related to the provision for bad
debts for Fiscal 1997 were $3.1 million, an increase of approximately $1.6
million or 112.4% as compared to Fiscal 1996. The growth in the provision was
due to an increase in the accrual rate for bad debt from 4.0% in Fiscal 1996 to
5.4% in Fiscal 1997 partially associated with higher rates of indigent clients
in the Case Management Program, limited collection experience in the Case
Management and Arkansas Chemical Dependency Program, and a more conservative
accrual for denials by third party payors.
Interest. Interest income was $217,000 in Fiscal 1997, compared to
interest expense of $2,000 in Fiscal 1996. The improvement was due to growing
cash balances throughout Fiscal 1997 and the absence of bank debt.
Dividends. Dividends were $17,000, a decrease of 114,000, or 86.9%
from Fiscal 1996. In June 1996, all shares of Series C Convertible Preferred
Stock were surrendered and converted into 700,000 shares of common stock, thus
ceasing any future dividend requirements on the Preferred Stock. See "Liquidity
and Capital Resources."
RESULTS OF OPERATIONS - FISCAL YEAR ENDED APRIL 30, 1996 COMPARED TO FISCAL YEAR
ENDED APRIL 30, 1995
Revenues. Revenues for Fiscal 1996 were $36.3 million, an increase of
$14.6 million, or 67.0% as compared to Fiscal 1995. Of this increase, $7.6
million, or 52.1%, resulted from the
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<PAGE> 38
commencement of the Company's Case Management Program in Tennessee. The
remainder of the increase in revenues came predominantly from the Company's
Outpatient Program which recorded revenues of $26.8 million, an increase of
33.3% from Fiscal 1996. Same store revenue increased 31.5% as compared to Fiscal
1995. The growth in the Outpatient Program was due to increases in average
patient census and net revenue per patient at existing sites, and the opening of
five programs at new sites during Fiscal 1996. The Company closed two sites
during Fiscal 1996. Revenues at the Company's chemical dependency subsidiary
increased 21.5% during Fiscal 1996.
Operating Expenses. Operating expenses for Fiscal 1996 were $28.5
million, an increase of $7.8 million, or 37.9% as compared to Fiscal 1995. Of
this increase, $6.9 million or 88.7%, resulted from the commencement of the
Company's Case Management Program in Tennessee. The remainder of the increase in
operating expenses was associated with increased costs to support the revenue
growth at existing outpatient sites and the net increase of three Outpatient
Programs during Fiscal 1996.
Marketing, General and Administrative Expenses. Marketing, general and
administrative expenses for Fiscal 1996 were $4.0 million, an increase of $1.0
million, or 35.0% as compared to Fiscal 1995 and as compared to an increase in
revenues of 67.0%. The increase was related primarily to the following factors:
the preparation for and commencement of the Company's Case Management service in
Tennessee; the preparation for the commencement of the Case Management Program
in Arkansas; and increased marketing of the Outpatient Program.
Depreciation and Amortization. Depreciation and amortization expenses
for Fiscal 1996 were $596,000, an increase of $193,000, or 47.8% as compared to
Fiscal 1995. The increase was due largely to the amortization of intangible
assets associated with the acquisition of the remaining interest of the Twin
Town Outpatient subsidiary and covenants not to compete in Tennessee.
Provision for Bad Debts and Interest Expense(net). Expenses related to
the provision for bad debts and interest expense for Fiscal 1996 were $1.4
million, an increase of approximately $70,000, or 5.1% as compared to Fiscal
1995. The percentage increase for this category of expense was substantially
less than the percentage increase in revenues and other expenses due to a lower
provision for bad debt on Case Management revenues, substantially higher cash
balances and the repayment of outstanding bank debt in the fourth fiscal
quarter.
Dividends. Dividends were $132,000, an increase of 100% from Fiscal
1995. In June 1996, subsequent to the end of Fiscal 1996, all shares of Series C
Convertible Preferred Stock were surrendered and converted into 700,000 shares
of common stock. See "Liquidity and Capital Resources."
LIQUIDITY AND CAPITAL RESOURCES
For Fiscal 1997, net cash provided by operating activities was $3.2
million, which compares to $4.1 million in Fiscal 1996. Working capital at April
30, 1997 was $20.6 million, an increase of $9.7 million, or 90.4%, as compared
to April 30, 1996. Cash and cash equivalents at April 30, 1997 were $10.0
million, an increase of $6.1 million, or 156.4% as compared to April 30, 1996.
38
<PAGE> 39
The increases in operating cash flow, working capital and cash and cash
equivalents are due to the substantial improvement in net income during Fiscal
1997, stabilization of collections of accounts receivable, and proceeds from the
exercise of outstanding options and warrants.
Accounts receivable increased by $2.0 million, or 21.3% during Fiscal
1997, substantially less than the 56.0% increase in revenues during the same
period. As measured by days of revenue outstanding, accounts receivable declined
from 69 at April 30, 1996 to 66 at April 30, 1997.
In Fiscal 1997 the Company received $3.5 million in proceeds from the
exercise of outstanding options and warrants. Approximately $2.3 million of
these proceeds were generated from the exercise of certain outstanding warrants
that were components of a private placement transaction undertaken during Fiscal
1995.
Working capital was utilized to open six additional Outpatient Programs
and to fund the start up of the Arkansas Case Management Program. The Company
anticipates modest additional funding requirements for case management in
Arkansas in Fiscal 1998, and expects this program to be cash flow neutral during
Fiscal 1998.
Working capital is anticipated to be utilized during the year for
operations, to continue expansion of the Company's Outpatient and Case
Management Programs, for the development of the site management and clinical
information business, and for the implementation and expansion of other Company
programs. During Fiscal 1998, working capital is expected to be realized
principally from operations, as well as from a new $10 million line of credit
from Sanwa Bank which became effective November 1, 1996. Interest is payable
under this line of credit at a rate of either the Bank's reference rate plus
one-half percent or the Eurodollar rate plus two and one-half percent.
The opening of a new Outpatient Program site typically requires $45,000
to $150,000 for office equipment, supplies, lease deposits, leasehold
improvements and the hiring and training of personnel prior to opening. These
programs generally experience operating losses through an average of the first
four months of operation. The Company expects to provide cash for the start up
of the site management and clinical information business, however, in amounts
that are not yet certain due to the early stage of the program's development.
The Company is also in the process of refining the specifications for the
purchase and development of a new care management information system which will
be a state of the art data collection and repository system for the Company's
clinical information. The Company anticipates investing approximately $500,000
in this system during Fiscal 1998.
From time to time, the Company recognizes charges upon working capital
as a result of certain uncertainties associated with the health care
reimbursement rules as they apply to the Company's Outpatient Program. During
Fiscal 1997, a majority of the Company's revenues were derived from the
Company's management of its Outpatient Program. Since substantially all of the
patients of the Company's Outpatient Program are eligible for Medicare,
collection of a significant component of the Company's management fees is
dependent upon reimbursement of claims
39
<PAGE> 40
submitted to fiscal intermediaries by the Hospitals or CMHCs (Providers) on
whose behalf these programs are managed. See "ITEM 1. BUSINESS - RISK FACTORS -
DEPENDENCE ON THIRD PARTY REIMBURSEMENT".
The Company maintains reserves to cover the effect of primarily two
uncertainties: 1) that the Company may have an obligation to indemnify certain
Providers for some portions of its management fee which may be subject to
disallowance upon audit of the Providers' cost reports by fiscal intermediaries;
and 2) that the Company may not receive full payment of the management fees owed
to it by the Providers during the periodic review of the Providers' claims by
the fiscal intermediaries. In the event that a significant amount of fees
payable to the Company are disallowed, the Company's financial condition and
results of operations would be materially adversely affected.
The Company has been advised by HCFA that certain program-related costs
are not allowable for reimbursement. Under the Company's contracts with its
Providers, the Company may be responsible to indemnify Provider's for the
portion of the Company's management fee disallowed for reimbursement pursuant to
warranty obligations that exist with certain Providers. Although the Company
believes that its potential liability to satisfy such requirements has been
adequately reserved in its financial statements, the obligation to pay such
amounts when and if they become due, could have a material adverse impact on the
Company's short term liquidity. Certain factors are, in management's view,
likely to lessen the impact of any such effect, including the expectation that,
if claims arise, they will arise on a periodic basis over several years; that
any disallowance will merely be offset against obligations already owed by the
Provider to the Company. During Fiscal 1997, the Company recognized $634,000 in
charges to working capital as a result of satisfying indemnity obligations for
Providers that experienced disallowances related to the Company's management
fee. The Company was fully reserved for these disallowances.
The Focused Medical Review of claims for partial hospitalization
services conducted by fiscal intermediaries for the Providers has substantially
abated on programs managed by the Company. This has occurred as a result of a
number of factors, such as the issuance of a Medicare Program Memorandum by HCFA
during June 1995 (which defines partial hospitalization eligibility and the
scope of covered services), as well as the intensification of the Company's
utilization review and utilization management efforts. Specifically, the number
of denials reported to the Company in Fiscal 1997 represented less than 2% of
the estimated number of total claims submitted by Providers to fiscal
intermediaries. The periodic review of claims by HCFA fiscal intermediaries will
likely continue at one or more programs from time to time.
To the extent claims for services have been denied in Outpatient
Programs managed by the Company, the great majority of the denied claims have
been appealed. Approximately 47% of these appeals have reached resolution and
the Company has succeeded in securing a reversal in the substantial majority of
these cases. The appeals process continues for the substantial balance of the
denied claims. Given these results, and given the Company's experience during
Fiscal 1997 (during which the rate of denials has declined to a modest rate),
and in view of the existing reserves
40
<PAGE> 41
established within the Company's financial statements, management does not
believe fiscal intermediaries' review of outstanding claims will likely have a
material adverse effect upon the Company's liquidity and capital resources
during Fiscal 1998. However, there could be no assurance that increased review
of outstanding claims will not recur at the level previously experienced by the
Company. See "ITEM 1. BUSINESS Risk Factors."
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Financial Statements of the Company for the three fiscal years ended
April 30, 1997 and specific supplementary financial information are included in
this Report on pages S-1 and F-1 through F-16.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
There are no matters to be reported hereunder.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS
Information with regard to this item is incorporated by reference to
the definitive 1997 Proxy Statement to be filed with the Securities and Exchange
Commission within 120 days of April 30, 1997, under the caption "Election of
Directors," or in an Amendment to this Report to be filed with the Securities
and Exchange Commission. See "Item 4A. EXECUTIVE OFFICERS OF THE CORPORATION"
with regard to Executive Officers.
ITEM 11. EXECUTIVE COMPENSATION
Information with regard to this item is incorporated herein by
reference to the definitive 1997 Proxy Statement to be filed with the Securities
and Exchange Commission within 120 days of April 30, 1997, under the caption
"ADDITIONAL INFORMATION - Management Compensation," or in an Amendment to this
Report to be filed with the Securities and Exchange Commission.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Information with regard to this item is incorporated herein by
reference to the definitive 1997 Proxy Statement to be filed with the Securities
and Exchange Commission within 120 days of April 30, 1997, under the caption
"PRINCIPAL STOCKHOLDERS," or in an Amendment to this Report to be filed with the
Securities and Exchange Commission.
41
<PAGE> 42
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Information with regard to this item is incorporated herein by
reference to the definitive 1997 Proxy Statement to be filed with the Securities
and Exchange Commission within 120 days of April 30, 1997, under the caption
"ADDITIONAL INFORMATION - Certain Transactions," or in an Amendment to this
Report to be filed with the Securities and Exchange Commission.
PART IV
ITEM 14. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
<TABLE>
<CAPTION>
Page
<S> <C>
(a) The following documents are filed as part of this Report:
1. Financial Statements
Report of Independent Auditors F-1
Consolidated Balance Sheets as of April 30, 1997 and 1996 F-2
Consolidated Statements of Operations for the fiscal years F-3
ended April 30, 1997, 1996 and 1995
Consolidated Statements of Stockholders' Equity for the F-4
fiscal years ended April 30, 1997, 1996 and 1995
Consolidated Statements of Cash Flows for the fiscal F-5
years ended April 30, 1997, 1996 and 1995
Notes to Consolidated Financial Statements F-6-F-16
2. Financial Statement Schedules - The following financial schedule
is included herein:
Page Reference
Schedule II - PMR Corporation Valuation
and Qualifying Accounts S-1
</TABLE>
All other schedules for which provision is made in the applicable
accounting regulation of the Securities and Exchange Commission are not required
under the related instructions or are included in the financial statements or
the notes thereto and therefore have been omitted.
42
<PAGE> 43
3. The following Exhibits are filed as part of this Report:
<TABLE>
<CAPTION>
Exhibit
No. Description Method of Filing
- ------- ----------- ----------------
<S> <C> <C>
3.1 Restated Certificate of Incorporation of the Registrant Filed herewith
3.2 Amended and Restated ByLaws of the Registrant Filed herewith
4.1 Common Stock Specimen Certificate Incorporated by reference to the
Company's Registration Statement
on Form S-18 (Reg. No. 23-20095-A)
filed on February 11, 1988.
10.1 1997 Equity Incentive Plan (the "1997 Plan"). Filed herewith.
10.2 Form of Incentive Stock Option Agreement under the 1997 Plan. Filed herewith.
10.3 Form of Nonstatutory Stock Option Agreement under the 1997 Filed herewith.
Plan.
10.4 Outside Directors' NonQualified Stock Option Plan of 1992 Filed herewith.
(the "1992 Plan").
10.5 Form of Outside Directors' NonQualified Stock Option Filed herewith.
Agreement.
10.6 Amended and Restated Stock Option Agreement dated April 30, Filed herewith.
1996, evidencing aware to Allen Tepper.
10.7 Amended and Restated Stock Option Agreement dated April 30, Filed herewith.
1996, evidencing award to Susan Erskine.
10.8 Amended and Restated Stock Option Agreement dated February Filed herewith.
1, 1996, evidencing award to Mark Clein.
10.9 Amended and Restated Stock Option Agreement dated February Filed herewith.
1, 1996, evidencing award to Mark Clein.
10.10 Amended and Restated Stock Option Agreement dated February Filed herewith.
1, 1996, evidencing award to Mark Clein.
10.11 Amended and Restated Warrant dated July 9, 1997, evidencing Filed herewith.
award to Fred Furman.
10.12 Restated Management Agreement dated April 11, 1997 with Filed herewith.
Scripps Health.
10.13 Sublease dated April 1, 1997 with CMS Development and Filed herewith.
Management Company, Inc.
10.14 Management and Affiliation Agreement dated April 13, 1995, Filed herewith.
between Mental Health Cooperative, Inc. and Tennessee Mental
Health Cooperative, Inc. (Tennessee Mental Health
Cooperative, Inc. subsequently changed its name to
Collaborative Care Corporation)
10.15 Provider Services Agreement dated April 13, 1995, Filed herewith.
</TABLE>
43
<PAGE> 44
<TABLE>
<S> <C> <C>
between Tennessee Mental Health Cooperative, Inc. and
Mental Health Cooperative, Inc. (Tennessee Mental Health
Cooperative, Inc. subsequently changed its name to
Collaborative Care Corporation)
10.16 Management and Affiliation Agreement dated April 13, 1995, Filed herewith.
between Case Management, Inc. and Tennessee Mental Health
Cooperative, Inc. (Tennessee Mental Health Cooperative,
Inc. subsequently changed its name to Collaborative Care
Corporation)
10.17 Provider Services Agreement dated April 13, 1995, between Filed herewith.
Tennessee Mental Health Cooperative, Inc. and Case
Management, Inc. (Tennessee Mental Health Cooperative,
Inc. subsequently changed its name to Collaborative Care
Corporation)
21 Subsidiaries of the Corporation Filed herewith.
23.1 Consent of Ernst & Young Filed herewith.
27 Financial Data Schedule Filed herewith.
</TABLE>
All other exhibits for which provision is made in the applicable
regulations of the Securities and Exchange Commission are not required under the
related instructions or are inapplicable and therefore have been omitted.
(b) Reports on Form 8-K:
There were no reports on Form 8-K filed during the last quarter of the
fiscal year ended April 30, 1997.
44
<PAGE> 45
SIGNATURE
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Company has duly caused this report to be signed on its behalf
by the undersigned, thereunto duly authorized.
PMR CORPORATION
Dated: July 19, 1997
BY:/s/ Allen Tepper
-------------------------------
Allen Tepper
Chief Executive Officer
BY:/s/ Mark P. Clein
-------------------------------
Mark P. Clein
Chief Financial Officer
Pursuant to the requirements of the Securities Act of 1934, this Form 10-K has
been signed by the following persons in the capacities and on the dates
indicated.
<TABLE>
<CAPTION>
Signature Title Date
- --------- ----- ----
<S> <C> <C>
/s/ Allen Tepper Chairman, Chief Executive Officer July 19, 1997
- --------------------------- and Director
Allen Tepper
/s/ Susan D. Erskine Secretary, Treasurer and July 19, 1997
- --------------------------- Director
Susan D. Erskine
/s/ Daniel L. Frank Director July 15, 1997
- ---------------------------
Daniel L. Frank
/s/ Charles McGettigan Director July 15, 1997
- ---------------------------
Charles C. McGettigan
/s/ Richard A. Niglio Director July 16, 1997
- ---------------------------
Richard A. Niglio
/s/ Eugene D. Hill Director July 16, 1997
- ---------------------------
Eugene D. Hill
</TABLE>
45
<PAGE> 46
Schedule II
PMR Corporation
Valuation and Qualifying Accounts
<TABLE>
<CAPTION>
COL. A COL. B COL. C COL. D COL. E
Additions
Charged to
Description Balance at Charged to Other
Beginning of Costs and Accounts Deductions - Balance at End
Period Expenses Describe Describe of Period
------ -------- -------- -------- ---------
<S> <C> <C> <C> <C> <C>
Year ended April 30, 1997
Allowance for doubtful accounts $1,759,182 $3,084,166 $ -- $ (237,829)(1) $5,081,177
Contract settlement reserve $5,499,020 $3,927,371 $ -- $ 634,463 (2) $8,791,928
Year ended April 30, 1996
Allowance for doubtful accounts $1,423,054 $1,447,983 $ -- $ 1,111,855 (1) $1,759,182
Contract settlement reserve $3,523,223 $2,390,196 $ -- $ 414,399 $5,499,020
Year ended April 30, 1995
Allowance for doubtful accounts $ 400,000 $1,317,483 $ -- $ 294,429 $1,423,054
Contract settlement reserve $2,871,462 $3,899,000 $ -- $ 3,247,239 (2) $3,523,223
</TABLE>
(1) Uncollectible accounts written off, net of recoveries
(2) Write off of hospital receivables based on disallowances of the
Company's management fee on Provider's cost reimbursement report and
the Company's indemnity obligation.
S-1
<PAGE> 47
Report of Independent Auditors
The Board of Directors and Stockholders
PMR Corporation
We have audited the accompanying consolidated balance sheets of PMR Corporation
as of April 30, 1997 and 1996, and the related consolidated statements of
operations, stockholders' equity and cash flows for each of the three years in
the period ended April 30, 1997. Our audits also included the financial
statement schedule listed in the index at Item 14(a). 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 PMR
Corporation at April 30, 1997 and 1996, and the consolidated results of its
operations and its cash flows for each of the three years in the period ended
April 30, 1997, in conformity with generally accepted accounting principles.
Also, in our opinion, the related financial statement schedule, when considered
in relation to the basic financial statements taken as a whole, present fairly
in all material respects the information set forth therein.
San Diego, California
June 13, 1997
F-1
<PAGE> 48
PMR Corporation
Consolidated Balance Sheets
<TABLE>
<CAPTION>
APRIL 30
1997 1996
----------------------------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 10,048,203 $ 3,917,922
Accounts receivable, net of allowance for uncollectible
amounts of $5,081,177 in 1997 and $1,759,000 in 1996 11,268,962 9,289,895
Prepaid expenses and other current assets 572,136 321,506
Deferred income tax benefits 6,069,000 2,701,000
----------------------------------
Total current assets 27,958,301 16,230,323
Furniture and office equipment, net of accumulated depreciation of
$1,175,980 in 1997 and $869,261 in 1996 1,263,743 649,312
Long-term receivables 2,360,872 2,444,055
Other assets 1,501,622 1,858,102
----------------------------------
Total assets $ 33,084,538 $ 21,181,792
==================================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued expenses $ 1,735,658 $ 1,522,721
Accrued compensation and employee benefits 2,951,867 2,276,809
Advances from case management agencies 926,712 1,012,847
Income taxes payable 1,703,000 308,489
Dividends payable -- 71,739
Other current liabilities -- 127,213
----------------------------------
Total current liabilities 7,317,237 5,319,818
Deferred rent expense 92,822 149,531
Deferred income taxes 635,000 1,101,000
Contract settlement reserve 8,791,928 5,499,020
Commitments
Stockholders' equity:
Convertible Preferred Stock, $.01 par value, authorized shares
- 1,000,000; Series C - issued and outstanding shares -
700,000 in 1996; liquidation preference $1,750,000 -- 7,000
Common Stock, $.01 par value, authorized shares - 10,000,000;
issued and outstanding shares - 5,033,507 in 1997 and
3,577,917 in 1996 50,334 35,778
Additional paid-in capital 12,138,569 8,259,243
Notes receivable from stockholders -- (141,547)
Retained earnings 4,058,648 951,949
----------------------------------
16,247,551 9,112,423
----------------------------------
$ 33,084,538 $ 21,181,792
==================================
</TABLE>
See accompanying notes.
F-2
<PAGE> 49
PMR Corporation
Consolidated Statements of Operations
<TABLE>
<CAPTION>
YEAR ENDED APRIL 30
1997 1996 1995
----------------------------------------------------------
<S> <C> <C> <C>
Revenue $ 56,636,902 $ 36,315,921 $ 21,746,663
Expenses:
Operating expenses 41,423,157 28,471,644 20,647,965
Marketing, general and administrative 6,350,101 4,018,685 2,976,600
Provision for bad debts 3,084,166 1,447,983 1,317,483
Depreciation and amortization 700,734 595,896 403,294
Interest, (income), expense (217,297) 2,174 61,979
Minority interest in loss of subsidiary -- (524) (108,201)
----------------------------------------------------------
51,340,861 34,535,858 25,299,120
----------------------------------------------------------
Income (loss) before income taxes 5,296,041 1,780,063 (3,552,457)
Income tax expense (benefit) 2,172,000 730,000 (1,266,000)
----------------------------------------------------------
Net income (loss) 3,124,041 1,050,063 (2,286,457)
Less dividends on:
Series C Convertible Preferred Stock 17,342 131,686 65,537
----------------------------------------------------------
Net income (loss) for common stock $ 3,106,699 $ 918,377 $ (2,351,994)
==========================================================
Earnings (loss) per common share
Primary $ .54 $ .23 $ (.70)
==========================================================
Fully diluted $ .54 $ .21 $ (.70)
==========================================================
Shares used in computing earnings (loss) per share
Primary 5,772,210 4,540,280 3,337,484
==========================================================
Fully diluted 5,772,210 5,042,879 3,337,484
==========================================================
</TABLE>
See accompanying notes.
F-3
<PAGE> 50
PMR Corporation
Consolidated Statements of Stockholders' Equity
<TABLE>
<CAPTION>
SERIES C
CONVERTIBLE
PREFERRED STOCK COMMON STOCK
--------------------------------------------------------
SHARES AMOUNT SHARES AMOUNT
-------------------------------------------------------------
<S> <C> <C> <C> <C>
Balance at April 30, 1994 - $ - 3,307,653 $33,075
Issuance of Series C convertible preferred stock,
net of issuance costs of $105,628 700,000 7,000 - -
Exercise of Redeemable A Warrants to purchase
common stock - - 29,003 290
Issuance of common stock under stock option plan - - 2,000 20
Accrued interest on stockholder notes - - - -
Dividend payable on Series C preferred stock - - - -
Net loss - - - -
-------------------------------------------------------------
Balance at April 30, 1995 700,000 7,000 3,338,656 33,385
Issuance of common stock under stock option plans - - 17,174 172
Issuance of common stock for non-compete
agreements and acquisition of minority interest - - 197,087 1,971
Issuance of common stock for a note receivable - - 25,000 250
Accrued interest on stockholder notes - - - -
Dividend payable on Series C preferred stock - - - -
Proceeds from payment of stockholder notes - - - -
Net income - - - -
-------------------------------------------------------------
Balance at April 30, 1996 700,000 7,000 3,577,917 35,778
Issuance of common stock under stock option plans
including realization of income tax benefit of
$369,000 - - 96,016 960
Dividend payable on Series C preferred stock - - - -
Proceeds from payment of stockholder notes - - - -
Exercise of warrants to purchase common stock - - 657,524 6,575
Issuance of common stock for consulting services - - 2,050 21
Conversion of Series C convertible preferred stock (700,000) (7,000) 700,000 7,000
Net income - - - -
-------------------------------------------------------------
Balance at April 30, 1997 - $ - 5,033,507 $50,334
=============================================================
NOTES RECEIVABLE
PAID-IN FROM RETAINED TOTAL STOCKHOLDERS'
CAPITAL STOCKHOLDERS EARNINGS EQUITY
-----------------------------------------------------------------------
<S> <C> <C> <C> <C>
Balance at April 30, 1994 $5,280,687 $ - $2,385,566 $7,699,328
Issuance of Series C convertible preferred stock,
net of issuance costs of $105,628 1,637,372 (60,000) - 1,584,372
Exercise of Redeemable A Warrants to purchase
common stock 115,723 - - 116,013
Issuance of common stock under stock option plan 16,480 - - 16,500
Accrued interest on stockholder notes - (2,626) - (2,626)
Dividend payable on Series C preferred stock - - (65,537) (65,537)
Net loss - - (2,286,457) (2,286,457)
-----------------------------------------------------------------------
Balance at April 30, 1995 7,050,262 (62,626) 33,572 7,061,593
Issuance of common stock under stock option plans 61,202 1,184 - 62,558
Issuance of common stock for non-compete
agreements and acquisition of minority interest 1,029,279 - - 1,031,250
Issuance of common stock for a note receivable 118,500 (118,750) - -
Accrued interest on stockholder notes - (4,507) - (4,507)
Dividend payable on Series C preferred stock - - (131,686) (131,686)
Proceeds from payment of stockholder notes - 43,152 - 43,152
Net income - - 1,050,063 1,050,063
-----------------------------------------------------------------------
Balance at April 30, 1996 8,259,243 (141,547) 951,949 9,112,423
Issuance of common stock under stock option plans
including realization of income tax benefit of
$369,000 729,189 - - 730,149
Dividend payable on Series C preferred stock - - (17,342) (17,342)
Proceeds from payment of stockholder notes - 141,547 - 141,547
Exercise of warrants to purchase common stock 3,104,801 - - 3,111,376
Issuance of common stock for consulting services 45,336 - - 45,357
Conversion of Series C convertible preferred stock
- - - -
Net income - - 3,124,041 3,124,041
-----------------------------------------------------------------------
Balance at April 30, 1997 $12,138,569 $ - $4,058,648 $16,247,551
=======================================================================
</TABLE>
See accompanying notes.
F-4
<PAGE> 51
PMR Corporation
Consolidated Statements of Cash Flows
<TABLE>
<CAPTION>
YEAR ENDED APRIL 30
1997 1996 1995
----------------------------------------------------------
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net income (loss) $ 3,124,041 $ 1,050,063 $ (2,286,457)
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities:
Depreciation and amortization 700,734 595,896 403,294
Issuance of stock for consulting services 45,357 -- --
Provision for losses on accounts receivable 3,084,166 1,447,983 1,317,483
Accrued interest income on notes receivable from
stockholders -- (4,507) (2,626)
Deferred income taxes (3,834,000) (841,000) (924,000)
Minority interest in loss of joint venture -- (524) (108,201)
Changes in operating assets and liabilities:
Accounts and notes receivable (4,980,050) (3,778,660) (3,142,713)
Refundable income tax -- 817,165 (817,165)
Prepaid expenses and other assets (250,630) (88,487) (176,474)
Accounts payable and accrued expenses 212,937 474,124 154,831
Accrued compensation and employee benefits 675,058 1,415,780 (13,776)
Advances from case management agencies (86,135) 1,012,847 --
Other liabilities (127,213) (205,034) (193,742)
Contract settlement reserve 3,292,908 1,975,797 651,761
Income taxes payable 1,394,511 308,489 (356,000)
Deferred rent expense (56,709) (60,331) 83,830
----------------------------------------------------------
Net cash provided by (used in) operating activities 3,194,975 4,119,601 (5,409,955)
INVESTING ACTIVITIES
Purchases of furniture and office equipment (958,685) (179,281) (164,916)
Acquisition of Twin Town minority interest -- (185,000) --
----------------------------------------------------------
Net cash used in investing activities (958,685) (364,281) (164,916)
FINANCING ACTIVITIES
Proceeds from sale of preferred stock -- -- 1,584,372
Proceeds from sale of common stock and notes receivable from
stockholders 3,983,072 105,710 132,513
Proceeds from note payable to bank -- 800,000 2,800,000
Payments on note payable to bank -- (2,000,000) (1,600,000)
Cash dividend paid (89,081) (125,484) --
----------------------------------------------------------
Net cash provided by (used in) financing activities 3,893,991 (1,219,774) 2,916,885
----------------------------------------------------------
Net increase (decrease) in cash 6,130,281 2,535,546 (2,657,986)
Cash at beginning of year 3,917,922 1,382,376 4,040,362
----------------------------------------------------------
Cash at end of year $ 10,048,203 $ 3,917,922 $ 1,382,376
==========================================================
SUPPLEMENTAL INFORMATION:
Taxes paid $ 4,611,489 $ 380,735 $ 830,000
==========================================================
Interest paid
$ 17,612 $ 129,108 $ 107,831
==========================================================
</TABLE>
See accompanying notes.
F-5
<PAGE> 52
PMR Corporation
Notes to Consolidated Financial Statements
April 30, 1997
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION, BUSINESS AND PRINCIPLES OF CONSOLIDATION
PMR Corporation ("the Company") develops, manages and markets acute outpatient
psychiatric programs, psychiatric case management programs and substance abuse
treatment programs. The Company operates in the healthcare industry segment.
The consolidated financial statements include the accounts of the Company and
its wholly owned subsidiaries, Psychiatric Management Resources, Inc.,
Collaborative Care Corporation, PMR-CD, Inc., Aldine - CD, Inc. and Twin Town
Outpatient. Prior to July 1995, Twin Town Outpatient was a 51% owned
subsidiary.
CASH AND CASH EQUIVALENTS
Cash and cash equivalents consist of highly liquid investments with maturities,
when acquired, of three months or less.
CONCENTRATION OF CREDIT RISK
The Company grants credit to contracting providers in various states without
collateral. Losses resulting from bad debts have traditionally not exceeded
management's estimates. The Company has receivables, aggregating $6,593,000 at
April 30, 1997, from four providers, each of which comprise more than 10% of
total receivables. The Company monitors the credit worthiness of these
customers and believes the balances outstanding at April 30, 1997 are fully
collectible.
Substantially all of the Company's cash and cash equivalents is deposited in
two banks. The Company monitors the financial status of these banks and does
not believe the deposits are subject to a significant degree of risk.
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 reported amounts of assets and liabilities and related
disclosures at the date of the financial statements and the amounts of revenues
and expenses reported during the period. Actual results could differ from
those estimates. The Company's significant accounting estimates are the
allowance for uncollectible accounts and the contract settlement reserve.
F-6
<PAGE> 53
PMR Corporation
Notes to Consolidated Financial Statements (continued)
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
FURNITURE AND OFFICE EQUIPMENT
Furniture and office equipment are stated at cost and are depreciated over
their estimated useful lives using the straight-line method. Depreciation
expense for each of the three years ended April 30, 1997 was $344,254, $320,212
and $297,240, respectively.
OTHER ASSETS
Other assets are comprised of the following at April 30:
<TABLE>
<CAPTION>
1997 1996
------------------------------
<S> <C> <C>
Proprietary information and covenants not to compete $1,118,753 $1,118,753
------------------------------
Goodwill 978,858 978,858
Other 282,176 282,176
------------------------------
2,379,787 2,379,787
Less accumulated amortization 878,165 521,685
------------------------------
$1,501,622 $1,858,102
==============================
</TABLE>
Other assets are being amortized using the straight-line method over their
estimated useful lives. The estimated useful life of proprietary information
and covenants not to compete is five to nine years and goodwill is 15 years.
EARNINGS PER SHARE
Earnings per share is computed using the weighted average number of common and
common equivalent shares outstanding during the year. Common stock equivalents
consist of employee and director stock options, warrants and Convertible
Preferred Stock. Earnings per share is affected by the reduction of net income
available for common stock by the amount of dividends on Series C Convertible
Preferred Stock. The Series C Convertible Preferred Stock shares were
outstanding at April 30, 1996 but were converted to common stock during fiscal
1997 (see Note 6). Assuming the conversion of the Series C preferred stock had
taken place on May 1, 1995, primary earnings per share would have been unchanged
in fiscal 1996.
In February 1997, the Financial Accounting Standards Board issued SFAS No. 128
"Earnings per Share". SFAS No. 128 is effective for financial statements issued
for periods ending after December 15, 1997 and replaces APB Opinion 15,
"Earnings per Share" ("EPS"). SFAS No. 128 requires dual presentation of basic
and diluted earnings per share by entities with complex capital structures.
Basic EPS includes no dilution and is computed by dividing net income (loss) by
the weighted average number of common shares outstanding for the period.
Diluted EPS reflects the potential dilution of securities that could share in
the earnings of this entity. The Company plans to adopt SFAS No. 128 beginning
with its financial statements for the third fiscal quarter ended January 31,
1998. The impact of SFAS No. 128 on the calculation of either basic or diluted
net income (loss) per share for the years ended April 30, 1997, 1996 and 1995
is not expected to be material.
REVENUE RECOGNITION AND CONTRACT SETTLEMENT RESERVE
The Company's acute outpatient psychiatric program customers are primarily
acute care hospitals or community mental health centers ("Providers"). Typical
contractual agreements with providers require the Company to provide, at its
own expense, specific management personnel for each program site. Revenue
under these programs is primarily
F-7
<PAGE> 54
PMR Corporation
Notes to Consolidated Financial Statements (continued)
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
derived from services provided under three types of agreements: 1) an all
inclusive fee arrangement based on fee-for-service rates which provide that the
Company is responsible for substantially all program costs, 2) a fee-for-service
arrangement whereby substantially all of the program costs are the
responsibility of the Provider, and 3) a fixed fee arrangement. In all cases,
the Company provides on-site managerial personnel. Patients served by the acute
outpatient psychiatric programs typically are covered by the Medicare program.
The Company has been retained to manage and provide the outpatient psychiatric
portion of a managed health care program funded by the State of Tennessee
("TennCare"). Under the terms of agreements, the Company receives a monthly
case rate payment from the managed care consortium responsible for managing the
TennCare program, and is responsible for planning, coordinating and managing
psychiatric case management to residents of Tennessee who are eligible to
participate in the TennCare program using the proprietary treatment programs
developed by the Company. The Company is also responsible for providing the
related clinical care under the agreements. The Company has signed six-year
contracts with two case management agencies to provide the clinical network
necessary for the Company to meet its obligations under the TennCare program.
Revenue under this program was approximately $7,600,000 and $13,429,000 for the
years ended April 30, 1996 and 1997, respectively. There were no such revenues
in fiscal 1995.
The Company also operates chemical dependency rehabilitation programs. Revenue
from these programs for the years ended April 30, 1997, 1996 and 1995 was
$1,673,000, $1,898,000 and $1,592,000, respectively.
Revenue under the Acute Outpatient Psychiatric Programs is recognized when
services are rendered based upon contractual arrangements with Providers at the
estimated net realizable amounts. Under certain of the Company's contracts the
Company is obligated under warranty provisions to indemnify the Provider for all
or some portions of the Company's management fees that may be disallowed as
reimbursable to the Provider by Medicare's fiscal intermediaries. The Company
has recorded contract settlement reserves to provide for possible amounts
ultimately owed to its Provider customers resulting from disallowance of costs
by Medicare and Medicare cost report settlement adjustments. Such reserves is
classified as a non-current liability as ultimate resolution of substantially
all of these issues is not expected to occur during fiscal 1998.
F-8
<PAGE> 55
PMR Corporation
Notes to Consolidated Financial Statements (continued)
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Revenue under the TennCare managed care program is recognized in the period in
which the related service is to be provided.
INSURANCE
The Company carries "occurrence basis" insurance to cover general liability,
property damage and workers' compensation risks. Medical professional
liability risk is covered by a "claims made" insurance policy that provides for
guaranteed tail coverage.
NEW ACCOUNTING STANDARDS
On May 1, 1996, the Company adopted the Financial Accounting Standards Board
Statement No. 123, "Accounting for Stock-Based Compensation," Statement No. 123
allows companies to either account for stock-based compensation under the new
provisions of Statement No. 123 or under the provisions of APB Opinion 25, but
requires pro-forma disclosure in the footnotes to the financial statements as if
the measurement provisions of Statement No. 123 had been adopted. The Company
has elected to continue accounting for its stock-based compensation in
accordance with the provisions of APB Opinion 25. Accordingly, the provisions
of Statement No. 123 will not impact the financial position or the results of
operations of the Company.
The Company also adopted Financial Accounting Standards Board Statement No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
be Disposed Of," on May 1, 1996. The new Statement requires impairment losses
to be recorded on long-lived assets used in operations when indicators of
impairment are present and the undiscounted cash flows estimated to be generated
by those assets are less than the assets' carrying amount. Statement 121 also
addresses the accounting for long-lived assets that are expected to be disposed
of. Any impairment losses identified will be measured by comparing the fair
value of the asset to its carrying amount. The adoption of Statement No. 121
did not have any material impact on the financial position or results of
operations of the Company.
F-9
<PAGE> 56
PMR Corporation
Notes to Consolidated Financial Statements (continued)
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
RECLASSIFICATION
Certain classifications of accounts in the prior year have been reclassified to
reflect current year classifications.
2. ACQUISITION OF MINORITY INTEREST AND OTHER AFFILIATIONS
In July 1995, the Company acquired the 49% minority interest in Twin Town
Outpatient for $185,000 in cash and $550,000 in common stock (97,087 shares) for
total consideration of $735,000. The total purchase price was allocated to
goodwill net of minority interest of $50,142.
In October 1995, the Company entered into exclusive affiliation agreements with
two case management agencies in Tennessee (see Note 1). As part of these
agreements, the Company issued 50,000 shares each of the Company's common stock
for an aggregate value of $481,250. The agreements also provide for the Company
to grant warrants to the two agencies for the purchase of up to an aggregate
550,000 shares of common stock at fair value over a six year period if certain
performance criteria are met. During fiscal 1997, warrants for the purchase of
30,000 shares of the Company's Common Stock at the fair market value at the date
of grant were earned by the case management agencies.
3. PURCHASED PROPRIETARY INFORMATION
In April 1993, the Company purchased certain proprietary information relating
to a complete framework and service design for assisting patients with serious
and persistent mental illness to advance through the recovery process within a
managed care and cost containment environment. The complete framework and
service design includes the protocols, techniques, programs and service
development plans needed to operate the resulting new business, for which the
Company paid $50,000 cash and issued 69,118 shares of common stock valued at
$8.50 per share. The seller was entitled to receive up to 225,000 additional
shares of the Company's common stock during the four year period through April
1997, based on pre-tax income of the business resulting from the purchased
proprietary information, which would have been accounted for as additional
purchase price when, and if, issued. The earnings goals necessary in order to
entitle the sellers to additional shares of the Company's common stock were not
met. The purchase price included an agreement of the principals of Co-A-Les
Corp., the seller, not to compete for a period of up to five years after any
possible contingent purchase price shares were earned.
F-10
<PAGE> 57
PMR Corporation
Notes to Consolidated Financial Statements (continued)
4. LONG-TERM RECEIVABLES
Long-term receivables at April 30, 1997 consist primarily of amounts due from
contracting Providers for which the Company has established specific payment
terms for receivable amounts which were past due or for which payment, due to
contract terms, is expected to exceed one year. Management expects to receive
payment on the long-term receivables as contract terms are met, none of which
are expected to exceed two years.
5. LINE OF CREDIT
The Company has a credit agreement with a bank that permits borrowings up to the
lesser of 50% of the aggregate amount of eligible accounts receivable of the
Company or $10,000,000 for working capital needs that expires on December 31,
1997 and is collateralized by substantially all of the Company's assets.
Interest on borrowings is payable monthly at either the Bank's reference rate
plus 0.5% or at the Bank's Eurodollar rate plus 2.5%. There were no borrowings
outstanding at April 30, 1997.
6. STOCKHOLDERS' EQUITY
In June 1996, the Company called for redemption all outstanding shares of Series
C Convertible Preferred Stock. Holders of all the Series C shares exercised
their options to convert such shares to Common Stock and accordingly, in July
1996, the Company issued 700,000 shares of Common Stock. In conjunction with
the conversion, the Series C shareholders also exercised warrants to purchase
525,000 shares of the Company's Common Stock for net proceeds of $2,362,500.
7. STOCK OPTIONS AND WARRANTS
During 1997 the board of directors of the Company amended the Employees'
Incentive Stock Option Plan of 1990 and renamed it the 1997 Equity Incentive
Plan (the "1997 Plan"). The 1997 Plan provides for the granting of options to
purchase up to 2,000,000 shares of common stock to eligible employees and
consultants to the Company. Options may be granted for terms of up to ten years
and are generally exercisable in cumulative annual increments of 20 percent each
year, commencing one year after the date of grant. The 1997 Plan also provides
for the full vesting of all outstanding options under certain change of control
events. Option prices must equal or exceed the fair market value of the shares
on the date of grant.
The Company has a non qualified stock option plan for its outside directors
("the 1992 Plan"). The 1992 Plan provides for the Company to grant each outside
director options to purchase 15,000 shares annually, at the fair market value at
the date of grant. Options for a maximum of 525,000 shares may be granted under
this plan. The options vest 30% immediately and in ratable annual increments
over the three year period following the date of grant. In 1997, the board of
directors amended the 1992 Plan to provide for full vesting of all outstanding
options under certain change of control events.
F-11
<PAGE> 58
PMR Corporation
Notes to Consolidated Financial Statements (continued)
7. STOCK OPTIONS AND WARRANTS (CONTINUED)
Warrants to purchase shares of the Company's common stock were issued in each
of the three years in the period ended April 30, 1997 to brokers in connection
with financing transactions (See Note 6). As of April 30, 1997, broker warrants
to purchase 53,000 shares of the Company's common stock at $2.50 per share were
outstanding. These warrants expire on October 31, 1999.
Adjusted pro forma information regarding net income or loss and net income or
loss per share is required by SFAS 123, and has been determined as if the
Company had accounted for its employee stock options and stock purchase plan
under the fair value method of SFAS 123. The fair value for these options was
estimated at the date of grant using the "Black-Scholes" method for option
pricing with the following weighted average assumptions for both 1996 and 1997:
risk-free interest rates of 6.5%; dividend yield of 0%; volatility factors of
the expected market price of the Company's common stock of 88%; and a
weighted-average expected life of the option of 6 years.
For purposes of pro forma disclosures, the estimated fair value of the options
granted is amortized to expense over the options' vesting period. The
Company's pro forma information for the years ended April 30, 1997 and 1996,
follows:
<TABLE>
<CAPTION>
1997 1996
----------------------------
<S> <C> <C>
Pro forma net income (in thousands) $ 1,968 $ 98
Pro forma income per share $ .34 $ .02
Pro forma income per share, fully diluted $ .34 $ .02
</TABLE>
The pro forma effect on net income for the year ended April 30, 1997 and 1996
is not likely to be representative of the effects on reported income or loss in
future years because these amounts reflect only two years or one year of
vesting, respectively.
F-12
<PAGE> 59
PMR Corporation
Notes to Consolidated Financial Statements (continued)
7. STOCK OPTIONS AND WARRANTS (CONTINUED)
A summary of the Company's stock option activity and related information for
the years ended April 30, is as follows:
<TABLE>
<CAPTION>
WEIGHTED-AVERAGE
EXERCISE
SHARES PRICE
-------------------------------------------
<S> <C> <C>
Outstanding April 30, 1994 401,739 $ 4.99
Granted 355,620 3.55
Exercised (29,003) 4.00
Forfeited (29,232) 4.50
-------------------------------------------
Outstanding April 30, 1995 (699,124) 4.41
Granted 897,526 7.57
Exercised (13,174) 3.40
Forfeited (32,423) 4.11
-------------------------------------------
Outstanding April 30, 1996 1,551,053 6.63
Granted 486,837 20.50
Exercised (228,540) 5.17
Forfeited (27,744) 8.44
-------------------------------------------
Outstanding April 30, 1997 1,781,606 $ 14.72
===========================================
</TABLE>
At April 30, 1997 options to purchase 974,913 shares of common stock were
exercisable and 1,069,772 shares and 270,000 shares were available for future
grant under the 1997 Plan and the 1992 Plan, respectively.
The weighted-average fair value of options granted was $15.21 and $4.48 in
fiscal years 1997 and 1996, respectively.
A summary of options outstanding and exercisable as of April 30, 1997 follows:
<TABLE>
<CAPTION>
WEIGHTED- WEIGHTED- WEIGHTED-
OPTIONS AVERAGE AVERAGE OPTIONS AVERAGE
OUTSTANDING EXERCISE PRICE EXERCISE CONTRACTUAL EXERCISABLE EXERCISE
(IN THOUSANDS) RANGE PRICE LIFE (IN THOUSANDS) PRICE
- -------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
964 $2.37 - $6.50 $4.21 7.23 771 $4.18
732 $7.00 - $19.875 $16.81 9.43 204 $15.244
86 $20.875 - $28.50 $23.71 9.68 - $ -
</TABLE>
F-13
<PAGE> 60
PMR Corporation
Notes to Consolidated Financial Statements (continued)
8. INCOME TAXES
Income tax expense (benefit) consists of the following:
<TABLE>
<CAPTION>
YEAR ENDED APRIL 30
1997 1996 1995
-------------------------------------------------------
<S> <C> <C> <C>
Federal:
Current $ 4,868,000 $ 1,220,000 $ (284,000)
Deferred (3,009,000) (685,000) (698,000)
-------------------------------------------------------
1,859,000 535,000 (982,000)
State:
Current 1,138,000 351,000 (58,000)
Deferred (825,000) (156,000) (226,000)
-------------------------------------------------------
313,000 195,000 (284,000)
-------------------------------------------------------
$ 2,172,000 $ 730,000 $(1,266,000)
=======================================================
</TABLE>
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.
<TABLE>
<CAPTION>
1997 1996
---------- ----------
<S> <C> <C>
Deferred tax assets:
Contract settlement reserve $3,609,000 $2,405,000
Accrued compensation and employee benefits 531,000 501,000
Allowance for bad debts 1,979,000 497,000
State income taxes 280,000 87,000
Depreciation and amortization 163,000 77,000
Other 159,000 129,000
---------- ----------
Total deferred tax assets 6,721,000 3,696,000
Deferred tax liabilities:
Non-accrual experience method 326,000 227,000
Accrual to cash method of accounting -- 577,000
Contractual retainers 961,000 1,292,000
---------- ----------
Total deferred tax liabilities 1,287,000 2,096,000
---------- ----------
Net deferred tax assets $5,434,000 $1,600,000
========== ==========
</TABLE>
F-14
<PAGE> 61
PMR Corporation
Notes to Consolidated Financial Statements (continued)
8. INCOME TAXES (CONTINUED)
A reconciliation between the federal income tax rate and the effective income
tax rate is as follows:
<TABLE>
<CAPTION>
YEAR ENDED APRIL 30
1997 1996 1995
--------------------------------
<S> <C> <C> <C>
Statutory federal income tax rate 35% 34% 34%
State income taxes, net of federal tax benefit 6 7 6
Other -- -- (4)
--------------------------------
Effective income tax rate 41% 41% 36%
================================
</TABLE>
9. CUSTOMERS
Approximately 47% of the Company's revenues are derived from contracts with
providers in the State of California. The remainder of the Company's revenue is
derived from contracts with providers in Arizona, Arkansas, Colorado, Hawaii,
Indiana, Michigan, Tennessee and Texas. The following table summarizes the
percent of revenue earned from any individual or agency which was responsible
for ten percent or more of the Company's consolidated revenues. There is more
than one program site for some providers.
<TABLE>
<CAPTION>
YEAR ENDED APRIL 30
Provider 1997 1996 1995
-----------------------------------------------------------
<S> <C> <C> <C>
A 23 21% -
B 13 11 16%
C - 11
D 11
</TABLE>
10. EMPLOYEE BENEFITS
The Company maintains a tax deferred retirement plan under Section 401(k) of
the Internal Revenue Code for the benefit of all employees meeting minimum
eligibility requirements. Under the plan, each employee may defer up to 15% of
pre-tax earnings, subject to certain limitations. The Company will match 50%
of an employee's deferral to a maximum of 3% of the employee's gross salary.
The Company's matching contributions vest over a five year period. For the
year ended April 30, 1997, 1996 and 1995, the Company contributed $186,000,
$138,000 and $134,000, respectively, to match employee deferrals.
F-15
<PAGE> 62
PMR Corporation
Notes to Consolidated Financial Statements (continued)
11. COMMITMENTS
The Company leases its administrative facilities and certain program site
facilities under both cancelable and non-cancelable leasing arrangements.
Certain non-cancelable lease agreements call for annual rental increases based
on the consumer price index or as otherwise provided in the lease. The Company
also leases certain equipment under operating lease agreements. Future minimum
lease payments for all leases with initial terms of one year or more at April
30, 1997 are as follows: 1998 - $2,272,000; 1999 - $1,836,000; 2000 -
$1,232,000; 2001 - $1,011,000; 2002 - $666,000 and $102,000 thereafter.
Rent expense totaled $2,690,800, $1,950,000 and $1,811,000 for the year ended
April 30, 1997, 1996 and 1995, respectively.
F-16
<PAGE> 63
Schedule
<PAGE> 64
Schedule II
PMR Corporation
Valuation and Qualifying Accounts
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------------------
COL. A COL. B COL. C COL. D COL. E
- ----------------------------------------------------------------------------------------------------------------------------------
ADDITIONS
----------------------------------
CHARGED TO
DESCRIPTION BALANCE AT CHARGED TO OTHER BALANCE AT
BEGINNING OF COSTS AND ACCOUNTS- DEDUCTIONS - END OF
PERIOD EXPENSES DESCRIBE DESCRIBE PERIOD
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Year ended April 30, 1997
Allowance for doubtful accounts $1,759,182 $3,084,166 $(237,829) (1) $5,081,177
Contract settlement reserve $5,499,020 $3,927,371 $634,463 (2) $8,791,928
Year ended April 30, 1996
Allowance for doubtful accounts $1,423,054 $1,447,983 $ - $1,111,855 (1) $1,759,182
Contract settlement reserve $3,523,223 $2,390,196 $ - $414,399 (2) $5,499,020
Year ended April 30, 1995
Allowance for doubtful accounts $400,000 $1,317,483 $ - $294,429 (1) $1,423,054
Contract settlement reserve $2,871,462 $3,899,000 $ - $3,247,239 (2) $3,523,223
</TABLE>
- ------------------
(1) Uncollectible accounts written off, net of recoveries
(2) Write off of hospital receivables based on denials or estimated
adjustments by Medicare
18
<PAGE> 1
EXHIBIT 3.1
RESTATED CERTIFICATE OF INCORPORATION
OF
PMR CORPORATION
PMR CORPORATION, a corporation organized and existing under the laws of
the state of Delaware, hereby certifies as follows:
FIRST. The name of the Corporation is PMR Corporation.
SECOND. The date of the filing of the corporation's original
Certificate of Incorporation with the Secretary of State of
Delaware was January 8, 1988 under the name Zaron Capital,
Inc.
THIRD. This Restated Certificate of Incorporation was duly adopted by
the corporation in accordance with Section 245 of the General
Corporation Law of the State of Delaware.
FOURTH. This Restated Certificate of Incorporation of the corporation
restates and integrates and does not further amend the
provisions of the corporation's Certificate of Incorporation
as theretofore amended or supplemented. There are no
discrepancies between the provisions of the Certificate of
Incorporation and the provisions of this Restated Certificate
of Incorporation.
1.
<PAGE> 2
FIFTH. The Certificate of Incorporation of the corporation shall be
restated to read in full as follows:
ARTICLE I.
The name of this corporation is PMR CORPORATION.
ARTICLE II.
The address, including street, number, city, and county, of the
registered office of the corporation in the State of Delaware is 1209 Orange
Street, Wilmington, New Castle County, Delaware 19801.
ARTICLE III.
The name of the registered agent in Delaware at such address is The
Corporation Trust Company.
ARTICLE IV.
The purposes of the corporation are to engage in any lawful act or
activity for which corporations may be organized under the General Corporation
Law of the State of Delaware.
ARTICLE V.
A. The total number of shares of stock which the Corporation shall have
authority to issue is eleven million (11,000,000) which shall be divided into
three classes designated and hereinafter called "Common Stock," "Series A $4.50
Convertible Preferred Stock" and "Preferred Stock." The Common Stock shall
consist of ten million (10,000,000) shares, each with a par value of One Cent
($.01). The "Series A $4.50 Convertible Preferred Stock" shall consist of two
hundred thousand (200,000) shares, each with a par value of One Cent ($.01). The
"Preferred Stock" shall consist of eight hundred thousand (800,000) shares, each
with a par value of One Cent ($.01).
The Board of Directors shall have the authority to fix by resolution
such designations, powers, preferences, rights, qualifications, limitations or
restrictions on the shares of Preferred Stock that may be desired.
2.
<PAGE> 3
ARTICLE VI.
AMENDMENTS TO BYLAWS. All of the powers of this Corporation, insofar as
the same may be lawfully vested by this Certificate of Incorporation in the
Board of Directors are hereby conferred upon the Board of Directors of this
Corporation. In furtherance and not in limitation of that power, the Board of
Directors shall have the power to make, adopt, alter, amend and repeal from time
to time Bylaws of this Corporation, subject to the right of stockholders
entitled to vote with respect thereto to adopt, alter, amend and repeal Bylaws
by the Board of Directors; provided, however, that Bylaws shall not be adopted,
altered, amended or repealed by the stockholders of the Corporation except by
the affirmative vote of the holders of two-thirds of the combined voting power
of the then outstanding shares of stock entitled to vote on any proposed
amendment to the Bylaws.
ARTICLE VII.
No director shall be personally liable to the Company or its
stockholders for monetary damages for any breach of fiduciary duty by such
director as a director, except (i) for breach of the director's duty of loyalty
to the Company or its stockholders, (ii) for acts or omissions not in good faith
or which involve intentional misconduct or a knowing violation of law, (iii)
pursuant to Section 174 of the General Corporation Law of the State of Delaware,
or (iv) for any transaction from which the director derived an improper personal
benefit. No amendment to or repeal of this Article 7 shall apply to or have any
effect on the liability or alleged liability of any director of the Company for
or with respect to any acts or omissions of such director occurring prior to
such amendment or repeal.
ARTICLE VIII.
The board of directors of the Corporation may by resolution adopted
from time to time or as may be permitted by the Bylaws indemnify such persons,
and to the full extent, permitted by the General Corporation Law of the State of
Delaware as amended from time to time. The board of directors of the Corporation
may by resolution adopted from time to time purchase and maintain insurance on
behalf of such persons, and to the full extent, permitted by the General
Corporation Law of the State of Delaware as amended from time to time.
ARTICLE IX.
AMENDMENTS TO CERTIFICATE OF INCORPORATION. Amendments to the
Certificate of Incorporation of the Corporation shall require the affirmative
vote of the holders of two-thirds of the combined voting power of the then
outstanding shares of stock entitled to vote on any proposed amendment to the
Certificate of Incorporation. Notwithstanding the foregoing, in the event that a
resolution to amend the Certificate of Incorporation of
3.
<PAGE> 4
the Corporation is adopted by the affirmative vote of at least eighty percent
(80%) of the Board of Directors, approval of the amendment shall only require
the affirmative vote of the holders of a majority of the combined voting power
of the then outstanding shares of stock entitled to vote generally on such
amendment, voting together as a single class.
ARTICLE X.
BOARD OF DIRECTORS:
A. NUMBERS, ELECTIONS AND TERMS. Except as otherwise fixed by or
pursuant to provisions hereof relating to the rights of the holders of any class
or series of stock having a preference over common stock as to dividends or upon
liquidation to elect additional Directors under specified circumstances, the
number of Directors of the Corporation shall be fixed from time to time by
affirmative vote of a majority of the Directors then in office. The Directors,
other than those who may be elected by the holders of any classes or series of
stock having a preference over the common stock as to dividends or upon
liquidation, shall be classified, with respect to the time for which they
severally hold office, into three classes, as nearly equal in number as
possible, as shall be provided in the manner specified in the Bylaws of the
Corporation, one class to be originally elected for a term expiring at the
annual meeting of stockholders to be held in 1997, another class to be
originally elected for a term expiring at the annual meeting of stockholders to
be held in 1998, and another class to be originally elected for a term expiring
at the annual meeting of stockholders to be held in 1999, with each class to
hold office until its successor is elected and qualified. At each annual meeting
of the stockholders of the Corporation after 1996, the successors of the class
of Directors whose term expires at that meeting shall be elected to hold office
for a term expiring at the annual meeting of stockholders held in the third year
following the year of their election. Election of directors need not be by
written ballot unless so provided in the Bylaws of the corporation.
B. NEWLY CREATED DIRECTORSHIPS AND VACANCIES. Except as otherwise fixed
by or pursuant to provisions hereof relating to the rights of the holders of any
class or series of stock having a preference over common stock as to dividends
or upon liquidation to elect additional Directors under specified circumstances,
newly created directorships resulting from any increase in the number of
directors and any vacancies on the Board of Directors resulting from death,
resignation, disqualification, removal or other cause shall be filled by the
affirmative vote of a majority of the remaining Directors then in office, even
though less than a quorum of the Board of Directors. Any Director elected in
accordance with the preceding sentence shall hold office for the remainder of
the full term of the class of Directors in which the new directorship was
created or the vacancy occurred and until such Director's successor shall have
been elected and
4.
<PAGE> 5
qualified. No decrease in the number of Directors constituting the Board of
Directors shall shorten the term of any incumbent director.
C. REMOVAL. Except as otherwise fixed by or pursuant to provisions
hereof relating to the rights of the holders of any class or series of stock
having a preference over common stock as to dividends or upon liquidation to
elect additional Directors under specified circumstances, any Director may be
removed from office only for cause and only by the affirmative vote of the
holders of two-thirds of the combined voting power of the then outstanding
shares of stock entitled to vote generally in the election of Directors, voting
together as a single class.
D. AMENDMENT, REPEAL, ETC. Notwithstanding anything contained in this
Certificate of Incorporation to the contrary, the consent of the Board of
Directors shall be required to alter, amend, or adopt any provisions
inconsistent with or repeal this Article X.
5.
<PAGE> 6
IN WITNESS WHEREOF, said PMR Corporation has caused this Restated
Certificate of Incorporation to be signed by its Chief Executive Officer, Allen
Tepper, and attested to by its Secretary, Susan D. Erskine, this 9th day of May,
1997.
/s/ Allen Tepper
-----------------------
Allen Tepper
Chief Executive Officer
Attest:
/s/ Susan D. Erskine
- --------------------
Susan D. Erskine
Secretary
6.
<PAGE> 1
EXHIBIT 3.2
PMR CORPORATION
AMENDED AND RESTATED BY-LAWS
ARTICLE I
IDENTIFICATION
SECTION 1. NAME. The name of the Corporation is PMR CORPORATION.
SECTION 2. REGISTERED OFFICE. The address of the registered office of
the Corporation shall be 3990 Old Town Avenue, Suite 206A, San Diego, California
92110.
SECTION 3. SEAL. The seal of the Corporation shall be circular in form
and mounted upon a metal die, suitable for impressing the same upon paper. About
the periphery of the seal shall appear the words "PMR CORPORATION". In the
center of the seal shall appear the word "Delaware" and the year of
incorporation of the Corporation. The seal shall be kept in the Office of the
Secretary of the Corporation.
SECTION 4. FISCAL YEAR. The Board of Directors shall have the power by
resolution to fix the fiscal year of the Corporation. If the Board of Directors
shall fail to do so, the President shall fix the fiscal year.
ARTICLE II
CAPITAL STOCK
SECTION 1. CERTIFICATES REPRESENTING SHARES. The certificates for
shares of the Corporation shall be signed by the Chairman of the Board, the
President or by a Vice-President and the Secretary or an Assistant Secretary and
shall be sealed with the corporate seal, which may be a facsimile, engraved or
printed, but where such certificate is signed by a transfer agent or a
registrar, the signature of any corporate officer upon such certificate may be a
facsimile, engraved or printed. In case any officer who has signed, or whose
facsimile signature has been placed upon any share certificate shall have ceased
to be such officer because of death, resignation, or otherwise, before the
certificate is issued, it may be issued by the Corporation with the same effect
as if the officer had not ceased to be such at the date of its issue. The name
of the person owning the shares represented thereby, with the number of such
shares and the date of issue, shall be entered on the Corporation's books, and
on the face of the share certificate. The share certificates shall be of the
form, not inconsistent with the Certificate of Incorporation, as shall be
approved by the Board of Directors.
1.
<PAGE> 2
SECTION 2. FORM. Every holder of stock in the Corporation shall be
entitled to have a certificate, signed by, or in the name of the Corporation by
the Chairman of the Board, the President or a Vice-President and the Secretary
or an Assistant Secretary of the Corporation, certifying the number of shares
owned by such holder in the Corporation. If such a certificate is countersigned
(1) by a transfer agent or an assistant transfer agent other than the
Corporation or its employee or (2) by a registrar, other than the Corporation or
its employee, the signature of any such President, Vice-President, Secretary, or
Assistant Secretary may be facsimiles. In case any officer or officers who have
signed, or whose facsimile signature or signatures have been used on, any such
certificate or certificates shall cease to be such officer or officers of the
Corporation whether because of death, resignation or otherwise before such
certificate or certificates have been delivered by the Corporation, such
certificate or certificates may nevertheless be issued and delivered as though
the person or persons who signed such certificate or certificates or whose
facsimile signature or signatures have been used thereon had not ceased to be
such officer or officers of the Corporation. All certificates for shares shall
be consecutively numbered or otherwise identified. The name of the person to
whom the shares represented thereby are issued, with the number of shares and
date of issue, shall be entered on the books of the Corporation. Shares of stock
of the Corporation shall only be transferred on the books of the Corporation by
the holder of record thereof or by such holder's attorney duly authorized in
writing, upon surrender to the Corporation of the certificate or certificates
for such shares endorsed by the appropriate person or persons, with such
evidence of the authenticity of such endorsement, transfer, authorization, and
other matters as the Corporation may reasonably require, and accompanied by all
necessary stock transfer stamps. In that event, it shall be the duty of the
Corporation to issue a new certificate to the person entitled thereto, cancel
the old certificate or certificates, and record the transaction on its books.
SECTION 3. LOST, STOLEN OR DESTROYED CERTIFICATES. The Corporation may
issue a new certificate for shares of stock in the place of any certificate
theretofore issued and alleged to have been lost, stolen or destroyed, but the
Board of Directors may require the owner of such lost, stolen or destroyed
certificate, or his legal representative, to furnish an affidavit as to such
loss, theft, or destruction and to give a bond in such form and substance, and
with such surety or sureties, with fixed or open penalty, as it may direct, to
indemnify the Corporation against any claim that may be made against it on
account of the alleged loss, theft or destruction of such certificate.
ARTICLE III
THE STOCKHOLDERS
SECTION 1. PLACE OF MEETINGS. Meetings of the stockholders of the
Corporation may be held at such place, either within or without the State of
Delaware, as may be
2.
<PAGE> 3
designated in the respective notices, or waivers of notice, thereof, or proxies
to represent stockholders thereat.
SECTION 2. STOCKHOLDERS' MEETINGS.
2.1 ANNUAL MEETING. The annual meeting of the stockholders for
the election of directors and for the transaction of such other business as may
properly come before the meeting shall be held in each calendar year on such day
as shall be fixed by the Board of Directors from time to time. If the annual
meeting shall not be called and held during a calendar year, any stockholder may
call such meeting at any time thereafter.
2.2 SPECIAL MEETINGS. Special meetings of the stockholders may
be called by or at the request of the Chairman of the Board, the Chief Executive
Officer or President. The Secretary or any Assistant Secretary shall call a
special meeting of the stockholders at the written request of a majority of the
directors. At any time upon written request of any person or persons entitled to
call a special meeting, it shall be the duty of the Secretary to call a special
meeting of the stockholders to be held at such time as the Secretary may fix,
not less than ten (10) nor more than sixty (60) days after the receipt of the
request. If the Secretary shall neglect or refuse to issue such call, the person
or persons making the request may do so.
SECTION 3. CORPORATE RECORDS; INSPECTION.
3.1 OBLIGATION TO MAINTAIN. The Corporation shall keep at its
registered office or at its principal place of business an original or duplicate
record of the proceedings of the stockholders and of the Board of Directors, the
original or a copy of its By-Laws, certified by the Secretary of the
Corporation, the Corporation's stock ledger, and a list of its stockholders,
giving the names of the stockholders in alphabetical order, and showing their
respective addresses, the number and classes of shares held by each, the number
and date of certificates issued for the shares, and the number and date of
cancellation of every certificate surrendered for cancellation. The Corporation
shall also keep appropriate, complete and accurate books or records of account,
which may be kept at its registered office, or at its principal place of
business.
3.2 RIGHT OF INSPECTION. Every stockholder of record shall
have a right to examine, upon written demand under oath stating the purpose
thereof, in person or by agent or attorney, during usual business hours, for any
proper purpose, the stock ledger, the list of stockholders, the Corporation's
books or records of account, and records of the proceedings of the stockholders
and directors, and make copies or extracts therefrom. A proper purpose shall
mean any purpose reasonably related to such person's interest as a stockholder.
In every instance where an attorney or other agent shall be the person who seeks
the right to inspection, the demand under oath shall be accompanied by a power
of
3.
<PAGE> 4
attorney or such other writing which authorizes the attorney or other agent to
so act on behalf of the stockholder. The demand under oath shall be directed to
the Corporation at its registered office in the State of Delaware or at its
principal place of business.
SECTION 4. NOTICE OF MEETINGS - WAIVER. Written or printed notice,
stating the place, date and hour of the meeting and, in case of a special
meeting, the purpose or purposes for which the meeting is called, shall be
delivered not less than ten (10), nor more than sixty (60), days before the date
of the meeting, either personally or by mail, by or at the direction of the
President, the Secretary, or the officer or person calling the meeting, to each
stockholder of record entitled to vote at such meeting, and to each holder of
other securities having voting power. If mailed, such notice shall be deemed to
be delivered when deposited in the United States mail, postage prepaid, directed
to the stockholder or such other security holder at his address as it appears on
the records of the Corporation. An affidavit of the Secretary or an Assistant
Secretary or of the transfer agent of the corporation that the notice has been
given shall, in the absence of fraud, be prima facie evidence of the facts
stated therein. Waiver by a stockholder of notice in writing of a stockholders'
meeting, signed by him, whether before or after the time stated therein, shall
be equivalent to the giving of such notice, and neither the business to be
transacted at, nor the purpose of, such meeting need be specified in such
waiver. Attendance by a stockholder, whether in person or by proxy, at a
stockholders' meeting shall constitute a waiver of notice of such meeting,
except where a person attends a meeting for the express purpose of objecting, at
the beginning of the meeting, to the transaction of any business because the
meeting was not lawfully called or convened.
SECTION 5. FIXING RECORD DATE. For the purpose of determining
stockholders entitled to notice of or to vote at any meeting of stockholders or
any adjournment thereof, or entitled to receive payment of any dividend, or in
order to make a determination of stockholders, such date in any case to be not
more than sixty (60) days, and in case of a meeting of stockholders not less
than ten (10) days, prior to the date on which the particular action, requiring
such determination of stockholders, is to be taken. If no record date is fixed:
(a) the record date for the determination of stockholders entitled to notice of
or to vote at a meeting of stockholders, shall be at the close of business on
the day next preceding the day on which notice is given, or, if notice is
waived, at the close of business on the day next preceding the day on which the
meeting is held; (b) the record date for determining stockholders for any other
purpose shall be at the close of business on the day on which the Board of
Directors adopts the resolution relating thereto. When a determination of
stockholders entitled to notice of or to vote at any meeting of stockholders has
been made as provided in this Section, such determination shall apply to any
adjournment thereof; provided, however, that the Board of Directors may fix a
new record date for the adjourned meeting.
4.
<PAGE> 5
SECTION 6. VOTING LIST. The officer of the Corporation who has charge
of the stock ledger of the Corporation shall prepare and make, at least ten (10)
days before every meeting of stockholders, a complete list of the stockholders
entitled to vote at such meeting, arranged in alphabetical order, with the
address of and the number of shares held by each, which list shall be open to
the examination of any stockholder, for any purpose germane to the meeting
during the ordinary business hours, for a period of at least ten (10) days prior
to the meeting, either at a place within the city where the meeting is to be
held, which place shall be specified in the notice of the meeting, or, if not so
specified at the place where the meeting is to be held. Such list shall also be
produced and kept at the time and place of the meeting during the whole time of
the meeting, and shall be subject to the inspection of any stockholder who is
present. The stock ledger shall be the only evidence as to who are the
stockholders entitled to examine the stock ledger, the stockholder's list, or
the books of the Corporation, or to vote in person or by proxy at any meeting of
stockholders.
SECTION 7. QUORUM. The holders of a majority of the shares outstanding
and entitled to vote at a meeting, present in person or represented by proxy,
shall constitute a quorum at a meeting of stockholders, except as otherwise
provided by statute or by the Certificate of Incorporation. The stockholders
present at a duly organized meeting may continue to do business until
adjournment, notwithstanding the withdrawal of enough of the stockholders to
leave less than a quorum. If a meeting cannot be organized because a quorum has
not attended, the majority of those present or represented by proxy, and
entitled to vote at the meeting, may, except as otherwise provided by law,
adjourn the meeting to such time and place as they may determine. When a
specified item of business requires a vote by a class or series (if the
Corporation shall then have outstanding shares of more than one (1) class or
series) voting as a class, the holders of a majority of the shares of such class
or series shall constitute a quorum (as to such class or series) for the
transaction of such item of business.
SECTION 8. VOTING AT MEETINGS.
8.1 VOTING STOCK. Except as otherwise provided by law or by
the Certificate of Incorporation, each stockholder shall have one (1) vote for
each share of stock entitled to vote and held of record by such stockholder and
a proportionate vote for each fractional share so held. Any action which may be
taken at a meeting of the stockholders may be taken without a meeting, without
prior notice and without a vote, if a consent in writing, setting forth the
action so taken, shall be signed by the holders of outstanding stock having not
less than the minimum number of votes that would be necessary to authorize or
take such action at a meeting at which all shares entitled to vote thereon
present and voted and shall be filed with the Secretary of the Corporation.
5.
<PAGE> 6
8.2 PROXIES. A stockholder, or the holder of any other
security having voting power, may vote either in person or by proxy executed in
writing by the stockholder, or by his duly authorized attorney-in-fact. No
unrevoked proxy shall be voted or acted upon after three (3) years from the date
of its execution, unless the proxy provides for a longer period. A duly executed
proxy shall be irrevocable if it states that it is irrevocable and if, and only
so long as, it is coupled with an interest sufficient in law to support an
irrevocable power.
8.3 VOTING OF SHARES OWNED BY OTHER CORPORATIONS. Shares
standing in the name of another corporation may be voted by such officer, agent
or proxy as the By-Laws of such other corporation may prescribe, or, in the
absence of such provision, as the board of directors of such other corporation
may determine; or, in the absence of such provision or determination, as the
President or Vice President and Secretary or Assistant Secretary of such other
corporation may by proxy, duly executed and sealed (but not necessarily
acknowledged or verified), designate.
8.4 VOTING OF SHARES OWNED BY FIDUCIARIES. Shares held by an
administrator, executor, guardian or conservator may be voted by him, either in
person or by proxy, without a transfer of such shares into his name. Shares
standing in the name of a trustee may be voted by him, either in person or by
proxy, but no trustee shall be entitled to vote shares held by him without a
transfer of such shares into his name. It shall not be necessary for such
fiduciary to obtain a court order authorizing him to vote such shares. The
general proxy of a fiduciary shall be given the same weight and effect as the
general proxy of an individual or corporation.
8.5 VOTING OF SECURITIES OWNED BY TWO OR MORE PERSONS. If
shares or other securities having voting power stand of record in the names of
two or more persons, the right to vote such securities and the effect of such
vote shall be determined as provided in Section 217 of the General Corporation
Law of Delaware, effective July 3, 1967, or any law amending or supplementing
the same.
8.6 VOTING OF SHARES OWNED BY RECEIVERS. Shares standing in
the name of a receiver may be voted by such receiver without the transfer
thereof into his name if authority so to do be contained in an appropriate order
of the court by which such receiver was appointed.
8.7 VOTING OF PLEDGED SHARES. A stockholder whose shares are
pledged shall be entitled to vote such shares unless in the transfer by the
pledgor on the books of the Corporation he has expressly empowered the pledgee
to vote thereon, in which case only the pledgee, or his proxy, may represent
such stock and vote thereon.
6.
<PAGE> 7
8.8 ORDER OF BUSINESS. The order of business at annual
meetings, and so far as practicable at all other meetings, of stockholders,
shall be as follows:
(a) Proof of due notice of meeting.
(b) Call of roll - examination of proxies.
(c) Reading and disposal of any unapproved minutes.
(d) Annual reports of officers and committees.
(e) Unfinished business.
(f) New business.
(g) Election of directors.
(h) Adjournment.
SECTION 9. JUDGES OF ELECTION.
9.1 APPOINTMENT OF JUDGES. In advance of any meeting of
stockholders, the Board of Directors may appoint judges of election, who need
not be stockholders, to act at such meeting or any adjournment thereof. If
judges of election be not so appointed, the chairman of any such meeting may,
and on the request of any stockholder or his proxy, shall make such appointment
at the meeting. The number of judges shall be one (1) or three (3). If appointed
at a meeting on the request of one (1) or more stockholders or proxies, the
majority of shares present and entitled to vote shall determine whether one (1)
or three (3) judges are to be appointed. No person who is a candidate for
office shall act as a judge.
9.2 FAILURE TO ACT. In case any person appointed as judge
fails to appear or fails or refuses to act, the vacancy may be filled by
appointment made by the Board of Directors in advance of the convening of the
meeting, or at the meeting by the person or officer acting as chairman.
9.3 DUTIES OF JUDGES. The judges of election shall determine
the number of shares outstanding and the voting power of each, the shares
represented at the meeting, the existence of a quorum, the authenticity,
validity, and effect of proxies, receive votes or ballots, hear and determine
all challenges and questions in any way arising in connection with the right to
vote, count, and tabulate all votes, determine the result, and do such acts as
may be proper to conduct the election. If there be three (3) judges of election,
the decision, act or certificate of a majority shall be effective in all
respects as the decision, act or certificate of all.
7.
<PAGE> 8
9.4 JUDGES' CERTIFICATE. On request of the chairman of the
meeting, or of any stockholder or his proxy, the judges shall make a report in
writing of any challenge or question or matter determined by them, and execute a
certificate of any fact found by them. Any report or certificate made by them
shall be prima facie evidence of the facts stated therein.
ARTICLE IV
THE BOARD OF DIRECTORS
SECTION 1. SECTION The business and affairs of the Corporation shall be
managed by a Board of Directors (who need not be residents of the State of
Delaware, nor stockholders of the Corporation).
SECTION 2. NUMBERS, ELECTIONS AND TERMS. Except as otherwise fixed by
or pursuant to provisions of the Certificate of Incorporation relating to the
rights of the holders of any class or series of stock having a preference over
common stock as to dividends or upon liquidation to elect additional directors
under specified circumstances, the number of directors of the Corporation shall
be fixed from time to time by affirmative vote of a majority of the directors
then in office. The directors, other than those who may be elected by the
holders of any classes or series of stock having a preference over the common
stock as to dividends or upon liquidation, shall be classified, with respect to
the time for which they severally hold office, into three classes, as nearly
equal in number as possible, one class to be originally elected for a term
expiring at the annual meeting of stockholders to be held in 1997, another class
to be originally elected for a term expiring at the annual meeting of
stockholders to be held in 1998, and another class to be originally elected for
a term expiring at the annual meeting of stockholders to be held in 1999, with
each class to hold office until its successor is elected and qualified. At each
annual meeting of the stockholders of the Corporation after 1996, the successors
of the class of directors whose term expires at that meeting shall be elected to
hold office for a term expiring at the annual meeting of stockholders held in
the third year following the year of their election. The directors shall be
elected by a plurality of votes of the shares present in person or represented
by proxy at the meeting and entitled to vote in the election of directors.
Election of directors shall be by written ballot if any stockholder so requests.
SECTION 3. SECTION Only persons who are nominated in accordance with
the following procedures shall be eligible for election by the stockholders as
directors of the Corporation. Nominations of persons for election as directors
of the Corporation may be made at a meeting of stockholders (a) by or at the
direction of the Board of Directors, (b) by any nominating committee or persons
appointed by the Board of Directors or (c) by any stockholder of the Corporation
entitled to vote for the election of directors at
8.
<PAGE> 9
the meeting who complies with the notice procedures set forth in this Section 3.
Such nominations, other than those made by or at the direction of the Board of
Directors, shall be made pursuant to timely notice in writing to the Secretary
of the Corporation. To be timely, a stockholder's notice shall be delivered to
or mailed and received at the principal executive office of the Corporation not
less than 50 days nor more than 75 days prior to the meeting; provided, however,
that in the event that less than 60 days' notice or prior public disclosure of
the date of the meeting is given or made to stockholders, notice by the
stockholder to be timely must be so received not later than the close of
business on the tenth day following the day on which such notice of the date of
the meeting was mailed or such public disclosure was made, whichever first
occurs. Such stockholder's notice to the Secretary of the Corporation shall set
forth (a) as to each person whom the stockholder proposes to nominate for
election or reelection as a director, (i) the name, age, business address and
residence address of the person, (ii) the principal occupation or employment of
the person, (iii) the class and number of shares of capital stock of the
Corporation which are beneficially owned by the person and (iv) any other
information relating to the person that is required to be disclosed in
solicitations for proxies for election of directors pursuant to Regulation 14A
under the Securities Exchange Act of 1934, as now or hereafter amended; and (b)
as to the stockholder giving the notice, (i) the name and record address of such
stockholder and (ii) the class and number of shares of capital stock of the
Corporation which are beneficially owned by such stockholder. The Corporation
may require any proposed nominee to furnish such other information as may
reasonably be required by the Corporation to determine the eligibility of such
proposed nominee to serve as a director of the Corporation. No person shall be
eligible for election by the stockholders as a director of the Corporation
unless nominated in accordance with the procedures set forth herein. The
chairman of the meeting of the stockholders shall, if the facts warrant,
determine and declare to the meeting that nomination was not made in accordance
with the foregoing procedure, and if he should so determine, he shall so declare
to the meeting and the defective nomination shall be disregarded.
SECTION 4. NEWLY CREATED DIRECTORSHIPS AND VACANCIES. Except as
otherwise fixed by or pursuant to provisions of the Certificate of Incorporation
relating to the rights of the holders of any class or series of stock having a
preference over common stock as to dividends or upon liquidation to elect
additional directors under specified circumstances, newly created directorships
resulting from any increase in the number of directors and any vacancies on the
Board of Directors resulting from death, resignation, disqualification, removal
or other cause shall be filled by the affirmative vote of a majority of the
remaining directors then in office, even though less then a quorum of the Board
of Directors. Any director elected in accordance with the preceding sentence
shall hold office for the remainder of the full term of the class of directors
in which the new directorship was created or the vacancy occurred and until such
director's successor shall
9.
<PAGE> 10
have been elected and qualified. No decrease in the number of directors
constituting the Board of Directors shall shorten the term of any incumbent
director.
SECTION 5. PLACE OF MEETINGS. Meetings of the Board of Directors of the
Corporation, annual, regular or special, may be held either within or without
the State of Delaware.
SECTION 6. DIRECTORS' MEETINGS.
6.1 ANNUAL MEETING. The Board of Directors shall meet each
year immediately after the annual meeting of the stockholders, at the place
where such meeting of the stockholders has been held for the purpose of
organization, election of officers, and consideration of any other business that
may properly by brought before the meeting. No notice of any kind to either old
or new members of the Board of Directors for such annual meeting shall be
necessary.
6.2 REGULAR MEETINGS. Regular meetings of the Board of
Directors shall be held without notice at such time and place as may, from time
to time, be fixed by resolution of the Board or as may be specified in the call
of the meeting.
6.3 SPECIAL MEETINGS. Special meetings of the Board of
Directors may be called by or at the request of the Chairman of the Board, the
Chief Executive Officer or the President on at least forty-eight (48) hours
notice to each director, either personally, by telephone, by mail, or by
facsimile; in like manner and on like notice the Chairman of the Board, Chief
Executive Officer or the President must call a special meeting on the written
request of any member of the Board of Directors. Notice of any special meeting
of the Board of Directors may be waived in writing signed by the person or
persons entitled to such notice, whether before or after the time stated
therein, and shall be equivalent to the giving of such notice. Neither the
business to be transacted at, nor the purpose of, any special meeting of the
Board of Directors, need be specified in the notice or waiver of notice of such
meeting. Notice of such special meeting shall include the place, day and hour of
such special meeting.
6.4 ADJOURNMENT. If a quorum shall not be present at any
meeting of the Board of Directors, the directors present thereat may adjourn the
meeting. When a meeting is adjourned, it shall not be necessary to give any
notice of the adjourned meeting, or of the business to be transacted at an
adjourned meeting, other than by announcement at the meeting at which such
adjournment is taken.
SECTION 7. QUORUM. A majority of the number of directors fixed in
accordance with these By-Laws shall constitute a quorum for the transaction of
business. The act of the majority of the directors present at a meeting at which
a quorum is present shall be the act of the Board of Directors; provided that,
if all of the directors shall severally or
10.
<PAGE> 11
collectively consent in writing to any action to be taken by the Corporation,
and the writing or writings are filed with the minutes of the proceedings of the
Board of Directors, such action shall be as valid corporate action as though it
had been authorized at a duly convened meeting of the Board of Directors; and
provided, further, that one (1) or more directors may participate in a meeting
of the Board by means of conference telephone or similar communications
equipment by means of which all persons participating in the meeting can hear
each other.
SECTION 8. REMOVAL. Except as otherwise fixed by or pursuant to
provisions of the Certificate of Incorporation relating to the rights of the
holders of any class or series of stock having a preference over common stock as
to dividends or upon liquidation to elect additional directors under specified
circumstances, any director may be removed from office only for cause and only
by the affirmative vote of the holders of two-thirds of the combined voting
power of the then outstanding shares of stock entitled to vote generally in the
election of directors, voting together as a single class.
SECTION 9. INTEREST OF DIRECTORS AND OFFICERS IN CONTRACTS.
9.1 No contract or transaction between the Corporation and one
(1) or more of its directors or officers, or between the Corporation and any
other corporation, partnership, association, or other organization in which one
(1) or more of its directors or officers are directors or officers, or have a
financial interest, shall be void or voidable solely for this reason, or solely
because the director or officer is present at or participates in the meeting of
the board or committee thereof which authorizes the contract or transaction, or
solely because his or their votes are counted for such purpose, if:
(a) The material facts as to his interest and as to
the contract or transaction are disclosed or are known to the Board of Directors
or the committee in good faith authorizes the contract or transaction by a vote
sufficient for such purpose without counting the vote of the interested director
or directors; or
(b) The material facts as to his interest and as to
the contract or transaction are disclosed or are known to the stockholders
entitled to vote thereon, and the contract or transaction is specifically
approved in good faith by vote of the stockholders; or
(c) The contract or transaction is fair as to the
Corporation as of the time it is authorized, approved or ratified by the Board
of Directors, a committee thereof, or the stockholders.
9.2 Common or interested directors may be counted in
determining the presence of a quorum at a meeting of the Board of Directors or
of a committee which authorizes the contract or transaction.
11.
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SECTION 10. FINANCIAL REPORT TO SHAREHOLDERS. The directors of the
Corporation shall cause to be sent to the stockholders, within one hundred and
twenty (120) days after the close of its fiscal year, or as soon thereafter as
possible, a financial report as of the closing date of the preceding fiscal
year. Such report shall be independently audited and shall give a summary of the
assets and liabilities of the Corporation, the amount of dividends paid or
declared during the past year, the condition, as to surplus or deficit and how
acquired or created, the number of shares issued and outstanding, together with
any such particulars as are necessary to disclose the general nature of the
liabilities and assets of the Corporation. The report shall also set forth a
balance sheet as of the closing date of the preceding fiscal or calendar year,
together with a statement of income and profit and loss for the year ended on
that date, accompanied by any report thereon of independent accountants.
SECTION 11. COMPENSATION OF DIRECTORS. The members of the Board of
Directors may pursuant to a resolution of the Board be paid a fee and expenses
of attendance for attendance at all annual, regular, special and adjourned
meetings of the Board or committee meetings. Any director of the Corporation may
also serve the Corporation in any other capacity, and receive compensation
therefor in any form.
ARTICLE V
COMMITTEES
SECTION 1. COMMITTEES. The Board of Directors may, by resolution passed
by the majority of the whole board, designate one (1) or more committees, each
committee to consist of one or more directors of the Corporation, to perform
such duties and make such investigations and reports as the Board of Directors
shall by resolution determine unless otherwise limited by these By-Laws or by
law. The Board of Directors may designate one (1) or more directors as alternate
members of any committee, who may replace any absent or disqualified member at
any meeting of the committee. No member of a committee shall continue to be a
member thereof after he ceases to be a director of the Corporation. The Board of
Directors shall have the power at any time to increase or decrease the number of
members of any committee, to fill vacancies thereon, to change any members
thereof, and to change the functions or terminate the existence thereof. Each
committee shall keep regular minutes of its meetings and report the same to the
Board of Directors when required.
SECTION 2. COMMITTEE RULES. Each committee of the Board of Directors
may fix its own rules of procedure and shall hold its meetings as provided by
such rules, except as may otherwise be provided in a resolution of the Board
designating such committee. Unless otherwise provided in such a resolution, the
presence of at least a majority of the members of the committee shall be
necessary to constitute a quorum. The
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vote of a majority of committee members present at a meeting at which a quorum
is present shall be the act of a committee.
ARTICLE VI
THE OFFICERS
SECTION 1. NUMBER. The principal officers of the Corporation shall be
elected by the Board of Directors and shall consist of a Chairman of the Board,
a President and/or Chief Executive Officer, one (1) or more Vice Presidents, if
elected, a Chief Operating Officer and Chief Financial Officer, also if elected,
a Secretary and a Treasurer, and such other subordinate officers and assistant
officers and agents as may deemed necessary or desirable by the Board of
Directors, in such manner and for such terms as the Board of Directors may
prescribe. Any two (2) or more principal offices may be held by the same person,
except the offices of President and Secretary. In its discretion, the Board of
Directors may choose not to fill an office for any period that it may deem
advisable.
SECTION 2. GENERAL DUTIES. All officers and agents of the Corporation,
as between themselves and the Corporation, shall have such authority and perform
such duties in the management of the Corporation as may be provided in these
By-Laws, or as may be determined by resolution of the Board of Directors not
inconsistent with these By-Laws.
SECTION 3. ELECTION, TERM OF OFFICE AND QUALIFICATION. The officers
shall be elected annually by the Board of Directors at its annual meeting, or as
soon after such annual meeting as may conveniently be possible. Each officer
shall hold office until his successor is chosen and qualified; or until his
death, or until he shall have resigned, or shall have been removed in the manner
provided in Section 4. New offices may be created and filled at any meeting of
the Board of Directors.
SECTION 4. REMOVAL. Any officer or agent elected or appointed by the
Board of Directors may be removed by the Board of Directors whenever in its
judgment the best interests of the Corporation will be served thereby, but such
removal shall be without prejudice to the contract rights, if any, of the person
so removed.
SECTION 5. RESIGNATIONS. Any officer may resign at any time by giving
written notice to the Board of Directors, or to the Chairman of the Board, if
one is elected, the President or Secretary. Such resignation shall take effect
on receipt unless the time of effectiveness is specified therein, and, unless
otherwise specified therein, the acceptance of such resignation shall not be
necessary to make it effective.
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SECTION 6. VACANCIES. Any vacancy in any office because of death,
resignation, removal or any other cause shall be filled for the unexpired
portion of the term in the manner prescribed in these By-Laws for election or
appointment to such office.
SECTION 7. THE CHAIRMAN OF THE BOARD. The Chairman of the Board, if one
is elected, shall be chosen from among the directors, shall preside at all
meetings of the stockholders and the Board of Directors, if present, and shall,
in general, perform all duties incident to the office of Chairman of the Board
and such other duties as, from time to time, may be assigned to him by the Board
of Directors.
SECTION 8. THE CHIEF EXECUTIVE OFFICER. The Chief Executive Officer
shall be the principal executive officer of the Corporation. The Chief Executive
Officer shall have general charge of the business, affairs and property of the
Corporation and control over its officers, agents and employees; and shall see
that all orders and resolutions of the Board of Directors are carried into
effect. The Chief Executive Officer shall execute bonds, mortgages and other
contracts requiring a seal, under the seal of the Corporation, except where
required or permitted by law to be otherwise signed and executed and except
where the signing and execution thereof shall be expressly delegated by the
Board of Directors to some other officer or agent of the Corporation. The Chief
Executive Officer shall have such other powers and perform such other duties as
may be prescribed by the Board of Directors or as may be provided in these
By-Laws.
SECTION 9. THE PRESIDENT. The President shall, in the absence or
disability of the Chief Executive Officer, act with all of the powers and be
subject to all the restrictions of the Chief Executive Officer. The President
shall also perform such other duties and have such other powers as the Board of
Directors, the Chief Executive Officer or these By-Laws may, from time to time,
prescribe.
SECTION 10. THE VICE PRESIDENT. The Vice President or Vice Presidents,
if elected, shall have such power and perform such duties as the Board of
Directors may from time to time prescribe or as the President may from time to
time delegate. At the request of the President, a Vice President may, in the
case or the absence or inability to act of the President, temporarily act in his
place. In the case of the death of the President, or in the case of his absence
or inability to act, a Vice President shall act temporarily in his place until
such time as the Board of Directors shall elect a new President.
SECTION 11. THE SECRETARY. The Secretary shall keep or cause to be kept
in books provided for the purpose the minutes of the meetings of the
stockholders and of the Board of Directors, shall see that all notices are duly
given in accordance with the provisions of these By-Laws and as required by law,
shall be custodian of the records and of the seal of the Corporation and see
that the seal is affixed to all documents, the execution of which on behalf of
the Corporation under its seal is duly authorized in
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accordance with the provisions of these By-Laws; and, in general, shall perform
all duties incident to the office of Secretary and such other duties as may,
from time to time, be assigned to him by the Board of Directors or by the
Corporation's principal executive officer.
SECTION 12. THE TREASURER. The Treasurer shall: (a) in the absence of
the Board's appointment of a Chief Financial Officer, whose specific duties
shall be established by the Board, be the financial officer of the Corporation;
(b) have charge and custody of, and be responsible for, all funds of the
Corporation, and deposit all such funds in the name of the Corporation in such
banks, trust companies or other depositories as shall be selected by the Board
of Directors; (c) receive, and give receipts for, moneys due and payable to the
Corporation from any source whatsoever; and (d) in general, perform all the
duties incident to the office of Treasurer and such other duties as, from time
to time, may be assigned to him by the Board of Directors or by the
Corporation's principal executive officer. The Treasurer shall render to the
Corporation's principal executive officer and the Board of Directors, whenever
the same shall be required, an account of all his transactions as Treasurer and
of the financial condition of the Corporation. He shall, if required to do so by
the Board of Directors, give the Corporation a bond, the premiums for which
shall be paid by the Corporation, in such amount and with such surety or
sureties as may be ordered by the Board of Directors, for the faithful
performance of the duties of his office and for the restoration to the
Corporation, in case of his death, resignation, retirement or removal from
office, of all books, papers, vouchers, money and other property of whatever
kind in his possession or under his control belonging to the Corporation.
SECTION 13. OTHER OFFICERS; ASSISTANT OFFICERS AND AGENTS. Officers,
assistant officers and agents, if any, other than those whose duties are
provided for in these By-Laws, shall have such authority and perform such duties
as may from time to time be prescribed by the Board of Directors.
SECTION 14. COMPENSATION. The salaries or other compensation of the
officers shall be fixed, from time to time, by the Board of Directors. No
officer shall be prevented from receiving such salary by reason of the fact he
is also a director of the Corporation.
ARTICLE VII
INDEMNIFICATION OF DIRECTORS, OFFICERS, AGENTS AND EMPLOYEES
SECTION 1. INDEMNIFICATION IN SUITS AND PROCEEDINGS WITH OTHERS. The
Corporation shall indemnify any person who was or is a party or is threatened to
be made a party to any threatened, pending or completed action, suit or
proceeding, whether civil, criminal, administrative or investigative (other than
an action by or in the right of the
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Corporation) by reason of the fact that he is or was a director, officer,
employee or agent of the Corporation, or is or was serving at the request of the
corporation as a director, officer, employee or agent of another corporation,
partnership, joint venture, trust or other enterprise, against expenses
(including attorney's fees), judgments, fines and amounts paid in settlement
actually and reasonably incurred by him in connection with such action, suit or
proceeding if he acted in good faith and in a manner he reasonably believed to
be in or not opposed to the best interests of the Corporation, and, with respect
to any criminal action or proceeding, had no reasonable cause to believe his
conduct was unlawful. The termination of any action, suit or proceeding by
judgment, order, settlement, conviction, or upon a plea of nolo contendere or
its equivalent, shall not, of itself, create a presumption that the person did
not act in good faith and in a manner which he reasonably believed to be in or
not opposed to the best interests of the Corporation, and, with respect to any
criminal action or proceeding, had reasonable cause to believe that his conduct
was unlawful.
SECTION 2. INDEMNIFICATION IN DERIVATIVE SUITS. The Corporation shall
indemnify any person who was or is a party or is threatened to be made a party
to any threatened, pending or completed action or suit by or in the right of the
Corporation to procure a judgment in its favor by reason of the fact that he is
or was a director, officer, employee or agent of the Corporation, or is or was
serving at the request of the Corporation as a director, officer, employee or
agent of another corporation, partnership, joint venture, trust or other
enterprise against expenses (including attorney's fees) actually and reasonably
incurred by him in connection with the defense or settlement of such action or
suit if he acted in good faith and in a manner he reasonably believed to be in
or not opposed to the best interests of the Corporation, except that no
indemnification shall be made in respect of any claim, issue or matter as to
which such person shall have been adjudged to be liable for negligence or
misconduct in the performance of his duty to the Corporation unless and only to
the extent that the Court of Chancery or the court in which such action or suit
was brought shall determine upon application that, despite the adjudication of
liability but in view of all the circumstances of the case, such person is
fairly and reasonably entitled to indemnity for such expenses which the Court of
Chancery or such other court shall deem proper.
SECTION 3. REASONABLE DEFENSE EXPENSES. To the extent that a director,
officer, employee or agent of the Corporation has been successful on the merits
or otherwise in defense of any action, suit or proceeding referred to in
Sections 1 and 2 of this Article, or in defense of any claim, issue or matter
therein, he shall be indemnified against expenses (including attorney's fees)
actually and reasonably incurred by him in connection therewith.
SECTION 4. STANDARD OF CONDUCT AND DETERMINATION. Any indemnification
under Section 1 and 2 of this Article (unless ordered by a court) shall be made
by the
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Corporation only as authorized in the specific case upon a determination that
indemnification of the director, officer, employee or agent is proper in the
circumstances because he has met the applicable standard of conduct set forth in
Sections 1 and 2 of this Article.
Such determination shall be made (1) by the Board of Directors
by a majority vote of a quorum consisting of directors who were not parties to
such action, suit or proceeding, or (2) if such quorum is not obtainable, or,
even if obtainable a quorum of disinterested directors so directs, by
independent legal counsel in a written opinion, or (3) by the stockholders.
SECTION 5. ADVANCE OF DEFENSE EXPENSES. Expenses incurred in defending
a civil or criminal action, suit or proceeding may be paid by the Corporation in
advance of the final disposition of such action, suit or proceeding as
authorized by the Board of Directors in the manner provided in Section 4 of this
Article upon receipt of an undertaking by or on behalf of the director, officer,
employee or agent to repay such amount unless it shall ultimately be determined
that he is entitled to be indemnified by the Corporation as authorized in this
Section.
SECTION 6. NONEXCLUSIVITY OF INDEMNIFICATION. The indemnification
provided by this Section shall not be deemed exclusive of any other rights to
which those indemnified may be entitled under any bylaw, agreement, vote of
stockholders or disinterested directors or otherwise, both as to action in his
official capacity and as to action in another capacity while holding such
office, and shall continue as to a person who has ceased to be a director,
officer, employee or agent and shall inure to the benefit of the heirs,
executors and administrators of such person.
SECTION 7. INSURANCE AUTHORIZATION. The Corporation may purchase and
maintain insurance on behalf of any person who is or was a director, officer,
employee or agent of the Corporation, or is or was serving at the request of the
Corporation as a director, officer, employee or agent of another corporation,
partnership, joint venture, trust or other enterprise against any liability
asserted against him and incurred by him in any such capacity, or arising out of
his status as such, whether or not the Corporation would have the power to
indemnify him against such liability under the provisions of this Section.
SECTION 8. DEFINITION OF "CORPORATION" IN MERGERS. For purposes of this
Section, references to "the Corporation" shall include, in the case of a merger
or consolidation, in addition to the resulting Corporation, any constituent
corporation (including any constituent of a constituent) absorbed in a
consolidation or merger which, if its separate existence had continued, would
have had power and authority to indemnify its directors, officers and employees
or agents, so that any person who is or was a
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director, officer, employee or agent of such constituent corporation, or is or
was serving at the request of such constituent corporation as a director,
officer, employee or agent of another corporation, partnership, joint venture,
trust or other enterprise, shall stand in the same position under the provisions
of this Section with respect to the resulting or supervising corporation as he
would have with respect to such constituent corporation if its separate
existence had continued.
SECTION 9. OTHER DEFINITIONS. For references to "fines" shall include
any excise taxes assessed on a person with respect to an employee benefit plan;
and references to "serving at the request of the Corporation" purposes of this
Section, reference to "other enterprises" shall include employee benefit plans;
shall include any service as a director, officer, employee or agent of the
Corporation which imposes duties on, or involves services by, such director,
officer, employee, or agent with respect to an employee benefit plan, its
participants or beneficiaries; and a person who acted in good faith and in a
manner he reasonably believed to be in the interest of the participants and
beneficiaries of an employee benefit plan shall be deemed to have acted in a
manner "not opposed to the best interests of the Corporation" as referred to in
this Section.
ARTICLE VIII
SPECIAL CORPORATE ACTS
SECTION 1. DEPOSIT OF FUNDS. The moneys of the Corporation shall be
deposited in the name of the Corporation in such depositories as the Board of
Directors shall designate or otherwise authorize, and shall be drawn out only in
such manner as the Board of Directors shall prescribe.
SECTION 2. EXECUTION OF DEEDS, CONTRACT, ETC. Subject always to the
specific directions of the Board of Directors, all deeds and mortgages made by
the Corporation and all other written contracts and agreements to which the
Corporation shall be a party shall be executed in its name by the Chief
Executive Officer, the President or Vice President and attested by the Secretary
or Assistant Secretary; and the Secretary or Assistant Secretary, when necessary
or required, shall affix the corporate seal thereto.
SECTION 3. ENDORSEMENT OF STOCK CERTIFICATES. Subject always to the
specific directions of the Board of Directors, any share or shares of stock
issued by any corporation and owned by the Corporation (including reacquired
shares of stock of the Corporation) may, for sale or transfer, be endorsed in
the name of the Corporation by the Chief Executive Officer, the President or a
Vice President, and attested by the Secretary or an Assistant Secretary either
with or without affixing thereto the corporate seal.
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SECTION 4. VOTING OF SHARES OWNED BY CORPORATION. Subject always to the
specific directions of the Board of Directors, any share or shares of stock
issued by any other corporation and owned or controlled by the Corporation may
be voted at any stockholders' meeting of such other corporation by the Chief
Executive Officer, if he be present, or in his absence, the President of the
Corporation, if he be present, or in his absence by a Vice President of the
Corporation who may be present. Whenever, in the judgment of the Chief Executive
Officer, or, in his absence, the President, or, in his absence, a Vice
President, it is desirable for the Corporation to execute a proxy or give a
stockholder's consent in respect to any share or shares of stock issued by any
other corporation and owned by the Corporation, such proxy or consent shall be
executed in the name of the Corporation by the Chief Executive Officer, the
President or a Vice President of the Corporation and shall be attested by the
Secretary or Assistant Secretary of the Corporation under the corporate seal
without necessity of any authorization by the Board of Directors. Any person or
persons designated in the manner above stated as the proxy or proxies of the
Corporation shall have full right, power and authority to vote the share or
shares of stock issued by such other corporation and owned by the Corporation
the same as such share or shares might be voted by the Corporation.
SECTION 5. LOANS. The Corporation may lend money to, or guarantee any
obligation of, or otherwise assist any officer or other employee of the
Corporation or of its subsidiary, including any officer or employee who is a
director of the Corporation or its subsidiary, whenever, in the judgment of the
directors, such loan, guaranty or assistance may reasonably be expected to
benefit the Corporation. The loan, guaranty or other assistance may be with or
without interest, and may be unsecured, or secured in such manner as the Board
of Directors shall approve, including, without limitation, a pledge of shares of
stock of the Corporation. Nothing in this section contained shall be deemed to
deny, limit or restrict the powers of guaranty or warranty of the Corporation at
common law or under any statute.
SECTION 6. DIVIDENDS. Dividends upon the capital stock of the
Corporation, subject to the provisions of the Certificate of Incorporation, if
any, may be declared by the Board of Directors at any regular or special
meeting, pursuant to law. Dividends may be paid in cash, in property, or in
shares of the capital stock, subject to the provisions of the Certificate of
Incorporation. Before payment of any dividend, there may be set aside out of any
funds of the Corporation available for dividends such sum or sums as the
directors from time to time, in their absolute discretion, think proper as a
reserve or reserves to meet contingencies, or for equalizing dividends, or for
repairing or maintaining any property of the Corporation, or any other purpose
and the directors may modify or abolish any such reserve in the manner in which
it was created.
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ARTICLE IX
AMENDMENTS
The Board of Directors shall have the power to make, adopt, alter,
amend and repeal from time to time the By-Laws of the Corporation, subject to
the right of the stockholders entitled to vote with respect thereto to adopt,
alter, amend and repeal bylaws by the Board of Directors; provided, however,
that By-Laws shall not be adopted, altered, amended or repealed by the
stockholders of the Corporation except by the affirmative vote of the holders of
two-thirds of the combined voting power of the then outstanding shares of stock
entitled to vote on any proposed amendment to the By-Laws.
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EXHIBIT 10.1
PMR CORPORATION
1997 EQUITY INCENTIVE PLAN
RECITALS
A. The Plan was originally adopted as the PMR Corporation Employees'
Incentive Stock Option Plan of 1990 by the Board of Directors on February 1,
1990, and was approved by the stockholders of the Company on August 16, 1990.
B. The Plan was amended on July 8, 1993 to increase the number of
shares of Common Stock available for grants under the Plan to 500,000, and the
amendment was approved by the stockholders of the Company on October 14, 1993.
C. The Plan was amended on June 14, 1995 to increase the number of
shares of Common Stock available for grants under the Plan to 2,000,000, and the
amendment was approved by the stockholders of the Company on October 18, 1995.
D. The Plan was amended and restated on April 10, 1997, pursuant to
which the Plan was renamed as the PMR Corporation 1997 Equity Incentive Plan and
was amended in certain respects. Pursuant to the terms of the Plan, stockholder
approval was not required for the April 10, 1997 amendment.
THE PLAN
1. PURPOSES.
(a) The purpose of the Plan is to provide a means by which selected
Employees and Directors and Consultants may be given an opportunity to benefit
from increases in the value of the common stock of the Company ("Common Stock")
through the granting of (i) Incentive Stock Options, (ii) Nonstatutory Stock
Options, (iii) stock bonuses, and (iv) rights to purchase restricted stock. The
Plan amends and restates the PMR Corporation Employees' Incentive Stock Option
Plan of 1990 (the "Prior Plan").
(b) The Company, by means of the Plan, seeks to retain the services of
persons who are now Employees, Directors or Consultants, to secure and retain
the services of new Employees, Directors and Consultants, and to provide
incentives for such persons to exert maximum efforts for the success of the
Company and its Affiliates.
(c) The Company intends that the Stock Awards issued under the Plan
shall, in the discretion of the Board or any Committee to which responsibility
for administration of the Plan has been delegated pursuant to subsection 3(c),
be either (i) Options granted pursuant to Section 6 hereof, including Incentive
Stock Options and Nonstatutory Stock
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Options, or (ii) stock bonuses or rights to purchase restricted stock granted
pursuant to Section 7 hereof. All Options shall be separately designated
Incentive Stock Options or Nonstatutory Stock Options at the time of grant,
and in such form as issued pursuant to Section 6, and a separate certificate or
certificates will be issued for shares purchased on exercise of each type of
Option.
2. DEFINITIONS.
(a) "AFFILIATE" means any parent corporation or subsidiary corporation,
whether now or hereafter existing, as those terms are defined in Sections 424(e)
and (f) respectively, of the Code.
(b) "BOARD" means the Board of Directors of the Company.
(c) "CAUSE" shall mean termination due to the occurrence of any of the
following: (a) any intentional action or intentional failure to act by Optionee
which was performed in bad faith and to the material detriment of the Company;
(b) Optionee intentionally refuses or intentionally fails to act in accordance
with any lawful direction or order of the Company; (c) Optionee willfully and
habitually neglects his duties of employment; (d) Optionee's engaging or
participating in any activity which is competitive with or injurious to the
Company in the judgment of the Board of Directors; (e) Optionee's commission of
any fraud against the Company or use or appropriation for his personal use and
benefit of any funds, assets or properties of the Company not authorized by the
Company to be so used or appropriated; or (f) Optionee is convicted of a felony
crime involving moral turpitude.
(d) "CHANGE IN CONTROL" shall mean the occurrence of any of the
following events:
(i) The Company is merged, consolidated or
reorganized into or with another corporation, partnership, limited
liability company, or other entity or person, and as a result of such
merger, consolidation or reorganization less than 70% of the combined
voting power of the then-outstanding securities of such corporation,
partnership, limited liability company, or other entity or person
immediately after such transaction are held in the aggregate by holders
of voting securities of the Company immediately prior to such
transaction;
(ii) The Company sells all or substantially all of
its assets to any other corporation, partnership, limited liability
company, or other entity or person, and thereafter, less than 70% of
the combined voting power of the then-outstanding voting securities of
the acquiring or consolidated entity are held in the aggregate by the
holders of voting securities of the Company immediately prior to such
sale;
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(iii) There is a report filed on Schedule 13D or
Schedule 14D-1 (or any successor schedule, form or report), each as
promulgated pursuant to the Securities Exchange Act of 1934 (the
"Exchange Act") disclosing that any person (as the term "person" is
used in Section 13(d)(3) or Section 14(d)(2) of the Exchange Act) has
become the beneficial owner (as the term "beneficial owner" is defined
under Rule 13d-3 or any successor rule or regulation promulgated under
the Exchange Act) representing 30% or more of the combined voting power
of the then-outstanding voting securities of the Company;
(iv) The Company shall file a report or proxy
statement with the Securities and Exchange Commission pursuant to the
Exchange Act disclosing in response to Item 1 of Form 8-K thereunder or
Item 5(b) or Item 14 of Schedule 14A thereunder (or any successor
schedule, form or report or item therein) that a change in control of
the Company has or may have occurred or will or may occur in the future
pursuant to any then-existing contract or transaction; or
(v) During any period of two (2) consecutive years,
individuals who at the beginning of any such period constitute the
directors of the Company cease for any reason to constitute at least a
majority of the Board of Directors of the Company unless the election
or the nomination for election by the Company's shareholders of each
director of the Company first elected during such period was approved
by a vote of at least two-thirds of the directors of the Company then
still in office who were directors of the Company at the beginning of
such two (2)-year period.
(e) "CODE" means the Internal Revenue Code of 1986, as amended.
(f) "COMMITTEE" means a Committee appointed by the Board in accordance
with subsection 3(c) of the Plan.
(g) "COMPANY" means PMR Corporation, a Delaware corporation.
(h) "CONSTRUCTIVE TERMINATION" means that the Optionee voluntarily
terminates his or her employment with the Company after any of the following are
undertaken, following a Change in Control, without Optionee's express written
consent:
(i) the assignment to Optionee of any duties or
responsibilities which are inconsistent with, or result in any
diminution or adverse change of, Optionee's position, status or
circumstances of employment as in effect immediately prior to a Change
in Control; an adverse change in Optionee's titles, offices, benefits
and/or perquisites as in effect immediately prior to a Change in
Control; any removal of Optionee from or any failure to re-elect
Optionee to any offices held by Optionee immediately prior to a Change
in Control, including, but
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not limited to, Optionee's membership on the Board, except in
connection with the termination of his employment for death,
disability, retirement, Cause, or any voluntary termination of
employment by Optionee other than a Constructive Termination;
(ii) a reduction by the Company in Optionee's annual
base salary by greater than five percent (5%) from that which was in
effect immediately prior to a Change in Control;
(iii) a relocation of Optionee, or the Company's
principal executive offices if Optionee's principal office is at such
offices, to a location more than forty (40) miles from the location at
which Optionee was performing his duties prior to a Change in Control,
except for required travel by Optionee on the Company's business to an
extent substantially consistent with Optionee's business travel
obligations at the time of a Change in Control;
(iv) any material breach by the Company of any
material provision of Optionee's Stock Award Agreement following a
Change in Control; or
(v) any failure by the Company to obtain the
assumption of Optionee's Stock Award Agreement by any successor or
assign of the Company.
(i) "CONSULTANT" means any person, including an advisor, engaged by the
Company or an Affiliate to render consulting services and who is compensated for
such services, provided that the term "Consultant" shall not include Directors
who are paid only a director's fee by the Company or who are not compensated by
the Company for their services as Directors.
(j) "CONTINUOUS STATUS AS AN EMPLOYEE, DIRECTOR OR CONSULTANT" means
the employment or relationship as a Director or Consultant is not interrupted or
terminated. The Board, in its sole discretion, may determine whether Continuous
Status as an Employee, Director or Consultant shall be considered interrupted in
the case of: (i) any leave of absence approved by the Board, including sick
leave, military leave, or any other personal leave; or (ii) transfers between
locations of the Company or between the Company, Affiliates or their successors.
(k) "DIRECTOR" means a member of the Board.
(l) "EMPLOYEE" means any person, including Officers and Directors,
employed by the Company or any Affiliate of the Company. Neither service as a
Director nor payment of a director's fee by the Company shall be sufficient to
constitute "employment" by the Company.
4.
<PAGE> 5
(m) "EXCHANGE ACT" means the Securities Exchange Act of 1934, as
amended.
(n) "FAIR MARKET VALUE" means, as of any date, the value of the Common
Stock of the Company determined as follows:
(i) If the Common Stock is listed on any established stock
exchange, or traded on the Nasdaq National Market or the Nasdaq SmallCap Market,
the Fair Market Value of a share of Common Stock shall be the closing sales
price for such stock (or the closing bid, if no sales were reported) as quoted
on such exchange or market (or the exchange or market with the greatest volume
of trading in Common Stock) on the day of determination, as reported in the Wall
Street Journal or such other source as the Board deems reliable;
(ii) In the absence of such markets for the Common Stock, the
Fair Market Value shall be determined in good faith by the Board.
(o) "INCENTIVE STOCK OPTION" means an Option intended to qualify as an
incentive stock option within the meaning of Section 422 of the Code and the
regulations promulgated thereunder.
(p) "NON-EMPLOYEE DIRECTOR" means a Director who either (i) is not a
current Employee or Officer of the Company or its parent or subsidiary, does not
receive compensation (directly or indirectly) from the Company or its parent or
subsidiary for services rendered as a consultant or in any capacity other than
as a Director (except for an amount as to which disclosure would not be required
under Item 404(a) of Regulation S-K promulgated pursuant to the Securities Act
of 1933 ("Regulation S-K"), does not possess an interest in any other
transaction as to which disclosure would be required under Item 404(a) of
Regulation S-K, and is not engaged in a business relationship as to which
disclosure would be required under Item 404(b) of Regulation S-K; or (ii) is
otherwise considered a "non-employee director" for purposes of Rule 16b-3.
(q) "NONSTATUTORY STOCK OPTION" means an Option not intended to qualify
as an Incentive Stock Option.
(r) "OFFICER" means a person who is an officer of the Company within
the meaning of Section 16 of the Exchange Act and the rules and regulations
promulgated thereunder.
(s) "OPTION" means a stock option granted pursuant to the Plan.
(t) "OPTION AGREEMENT" means a written agreement between the Company
and an Optionee evidencing the terms and conditions of an individual Option
grant. Each Option Agreement shall be subject to the terms and conditions of the
Plan.
5.
<PAGE> 6
(u) "OPTIONEE" means a person to whom an Option is granted pursuant to
the Plan.
(v) "OUTSIDE DIRECTOR" means a Director who either (i) is not a current
employee of the Company or an "affiliated corporation" (within the meaning of
Treasury regulations promulgated under Section 162(m) of the Code), is not a
former employee of the Company or an "affiliated corporation" receiving
compensation for prior services (other than benefits under a tax qualified
pension plan), was not an officer of the Company or an "affiliated corporation"
at any time, and is not currently receiving direct or indirect remuneration from
the Company or an "affiliated corporation" for services in any capacity other
than as a Director, or (ii) is otherwise considered an "outside director" for
purposes of Section 162(m) of the Code.
(w) "PLAN" means this PMR Corporation 1997 Equity Incentive Plan.
(x) "RULE 16b-3" means Rule 16b-3 of the Exchange Act or any successor
to Rule 16b-3, as in effect when discretion is being exercised with respect to
the Plan.
(y) "STOCK AWARD" means any right granted under the Plan, including any
Option, any stock bonus and any right to purchase restricted stock.
(z) "STOCK AWARD AGREEMENT" means a written agreement between the
Company and a holder of a Stock Award evidencing the terms and conditions of an
individual Stock Award grant. Each Stock Award Agreement shall be subject to the
terms and conditions of the Plan.
3. ADMINISTRATION.
(a) The Plan shall be administered by the Board unless and until the
Board delegates administration to a Committee, as provided in subsection 3(c).
(b) The Board shall have the power, subject to, and within the
limitations of, the express provisions of the Plan:
(i) To determine from time to time which of the persons
eligible under the Plan shall be granted Stock Awards; when and how each Stock
Award shall be granted; whether a Stock Award will be an Incentive Stock Option,
a Nonstatutory Stock Option, a stock bonus, a right to purchase restricted stock
or a combination of the foregoing; the provisions of each Stock Award granted
(which need not be identical), including the time or times when a person shall
be permitted to receive stock pursuant to a Stock Award and the number of shares
with respect to which a Stock Award shall be granted to each such person.
6.
<PAGE> 7
(ii) To construe and interpret the Plan and Stock Awards
granted under it, and to establish, amend and revoke rules and regulations for
its administration. The Board, in the exercise of this power, may correct any
defect, omission or inconsistency in the Plan or in any Stock Award Agreement,
in a manner and to the extent it shall deem necessary or expedient to make the
Plan fully effective.
(iii) To amend the Plan or a Stock Award as provided in
Section 13.
(iv) Generally, to exercise such powers and to perform such
acts as the Board deems necessary or expedient to promote the best interests of
the Company which are not in conflict with the provisions of the Plan.
(c) The Board may delegate administration of the Plan to a committee or
committees ("Committee") of one or more members of the Board. In the discretion
of the Board, a Committee may consist solely of two or more Outside Directors,
in accordance with Code Section 162(m), or solely of two or more Non-Employee
Directors, in accordance with Rule 16(b)-3. If administration is delegated to a
Committee, the Committee shall have, in connection with the administration of
the Plan, the powers theretofore possessed by the Board (and references in this
Plan to the Board shall thereafter be to the Committee), subject, however, to
such resolutions, not inconsistent with the provisions of the Plan, as may be
adopted from time to time by the Board. The Board may abolish the Committee at
any time and revest in the Board the administration of the Plan. Additionally,
and notwithstanding anything to the contrary contained herein, the Board or the
Committee may delegate to a committee of one or more members of the Board the
authority to grant Stock Awards to certain eligible persons who are not subject
to the requirements of Section 16 of the Exchange Act in accordance with
guidelines approved by the Board or Committee.
4. SHARES SUBJECT TO THE PLAN.
(a) Subject to the provisions of Section 12 relating to adjustments
upon changes in stock, the stock that may be issued pursuant to Stock Awards
shall not exceed in the aggregate two million (2,000,000) shares of Common
Stock. If any Stock Award shall for any reason expire or otherwise terminate, in
whole or in part, without having been exercised in full (or vested in the case
of Restricted Stock), the stock not acquired under such Stock Award shall revert
to and again become available for issuance under the Plan.
(b) The stock subject to the Plan may be unissued shares or reacquired
shares, bought on the market or otherwise.
7.
<PAGE> 8
5. ELIGIBILITY.
(a) Incentive Stock Options may be granted only to Employees. Stock
Awards other than Incentive Stock Options may be granted only to Employees,
Directors or Consultants.
(b) No person shall be eligible for the grant of an Incentive Stock
Option if, at the time of grant, such person owns (or is deemed to own pursuant
to Section 424(d) of the Code) stock possessing more than ten percent (10%) of
the total combined voting power of all classes of stock of the Company or of any
of its Affiliates unless the exercise price of such Option is at least one
hundred ten percent (110%) of the Fair Market Value of such stock at the date of
grant and the Option is not exercisable after the expiration of five (5) years
from the date of grant.
(c) Subject to the provisions of Section 12 relating to adjustments
upon changes in stock, no person shall be eligible to be granted Stock Awards
covering more than Four Hundred Thousand (400,000) shares of the Company's
Common Stock in any calendar year.
6. OPTION PROVISIONS.
Each Option shall be in such form and shall contain such terms and
conditions as the Board shall deem appropriate. The provisions of separate
Options need not be identical, but each Option shall include (through
incorporation of provisions hereof by reference in the Option or otherwise) the
substance of each of the following provisions:
(a) TERM. No Option shall be exercisable after the expiration of ten
(10) years from the date it was granted.
(b) PRICE. The exercise price of each Incentive Stock Option shall be
not less than one hundred percent (100%) of the Fair Market Value of the stock
subject to the Option on the date the Option is granted and the exercise price
of each Nonstatutory Stock Option shall be not less than eighty-five percent
(85%) of the Fair Market Value of the stock subject to the Option on the date
the Option is granted. Notwithstanding the foregoing, an Option may be granted
with an exercise price lower than that set forth in the preceding sentence if
such Option is granted pursuant to an assumption or substitution for another
option in a manner satisfying the provisions of Section 424(a) of the Code.
(c) CONSIDERATION. The purchase price of stock acquired pursuant to an
Option shall be paid, to the extent permitted by applicable statutes and
regulations, either (i) in cash at the time the Option is exercised, or (ii) at
the discretion of the Board or the Committee, at the time of the grant of the
Option, (A) by delivery to the Company of other Common Stock of the Company, (B)
according to a deferred payment or other
8.
<PAGE> 9
arrangement (which may include, without limiting the generality of the
foregoing, the use of other Common Stock of the Company) with the person to whom
the Option is granted or to whom the Option is transferred pursuant to
subsection 6(d), or (C) in any other form of legal consideration that may be
acceptable to the Board.
In the case of any deferred payment arrangement, interest shall be
payable at least annually and shall be charged at the minimum rate of interest
necessary to avoid the treatment as interest, under any applicable provisions of
the Code, of any amounts other than amounts stated to be interest under the
deferred payment arrangement.
(d) TRANSFERABILITY. An Incentive Stock Option shall not be
transferable except by will or by the laws of descent and distribution, and
shall be exercisable during the lifetime of the person to whom the Incentive
Stock Option is granted only by such person. A Nonstatutory Stock Option may be
transferred to the extent provided in the Option Agreement; provided that if the
Option Agreement does not expressly permit the transfer of a Nonstatutory Stock
Option, the Nonstatutory Stock Option shall not be transferable except by will,
by the laws of descent and distribution or pursuant to a domestic relations
order satisfying the requirements of Rule 16a-12 under the Exchange Act and
shall be exercisable during the lifetime of the person to whom the Option is
granted only by such person or any transferee pursuant to a domestic relations
order. Notwithstanding the foregoing, the person to whom the Option is granted
may, by delivering written notice to the Company, in a form satisfactory to the
Company, designate a third party who, in the event of the death of the Optionee,
shall thereafter be entitled to exercise the Option.
(e) VESTING. The total number of shares of stock subject to an Option
may, but need not, be allotted in periodic installments (which may, but need
not, be equal). The Option Agreement may provide that from time to time during
each of such installment periods, the Option may become exercisable ("vest")
with respect to some or all of the shares allotted to that period, and may be
exercised with respect to some or all of the shares allotted to such period
and/or any prior period as to which the Option became vested but was not fully
exercised. The Option may be subject to such other terms and conditions on the
time or times when it may be exercised (which may be based on performance or
other criteria) as the Board may deem appropriate. The provisions of this
subsection 6(e) are subject to any Option provisions governing the minimum
number of shares as to which an Option may be exercised.
Notwithstanding anything herein to the contrary, (i) any and all
Options held by an Optionee shall become immediately exercisable if the
Optionee's Continuous Status as an Employee or Consultant is, within one (1)
year following a Change in Control, (1) terminated by the Company other than for
Cause, or (2) terminated in a Constructive
9.
<PAGE> 10
Termination and (ii) any and all Options held by Directors shall become
immediately exercisable upon the occurrence of a Change in Control.
(f) TERMINATION OF EMPLOYMENT OR RELATIONSHIP AS A DIRECTOR OR
CONSULTANT. In the event an Optionee's Continuous Status as an Employee,
Director or Consultant terminates (other than upon the Optionee's death or
disability), the Optionee may exercise his or her Option (to the extent that the
Optionee was entitled to exercise it at the date of termination) but only within
such period of time ending on the earlier of (i) the date three (3) months after
the termination of the Optionee's Continuous Status as an Employee, Director or
Consultant (or such longer or shorter period specified in the Option Agreement),
or (ii) the expiration of the term of the Option as set forth in the Option
Agreement. If, at the date of termination, the Optionee is not entitled to
exercise his or her entire Option, the shares covered by the unexercisable
portion of the Option shall revert to and again become available for issuance
under the Plan. If, after termination, the Optionee does not exercise his or her
Option within the time specified in the Option Agreement, the Option shall
terminate, and the shares covered by such Option shall revert to and again
become available for issuance under the Plan.
An Optionee's Option Agreement may also provide that if the exercise of
the Option following the termination of the Optionee's Continuous Status as an
Employee, Director or Consultant (other than upon the Optionee's death or
disability) would be prohibited at any time solely because the issuance of
shares would violate the registration requirements under the Securities Act of
1933, as amended (the "Securities Act"), then the Option shall terminate on the
earlier of (i) the expiration of the term of the Option set forth in the first
paragraph of this subsection 6(f), or (ii) the expiration of a period of three
(3) months after the termination of the Optionee's Continuous Status as an
Employee, Director or Consultant during which the exercise of the Option would
not be in violation of such registration requirements.
(g) DISABILITY OF OPTIONEE. In the event an Optionee's Continuous
Status as an Employee, Director or Consultant terminates as a result of the
Optionee's disability, the Optionee may exercise his or her Option (to the
extent that the Optionee was entitled to exercise it at the date of
termination), but only within such period of time ending on the earlier of (i)
the date twelve (12) months following such termination (or such longer or
shorter period specified in the Option Agreement), or (ii) the expiration of the
term of the Option as set forth in the Option Agreement. If, at the date of
termination, the Optionee is not entitled to exercise his or her entire Option,
the shares covered by the unexercisable portion of the Option shall revert to
and again become available for issuance under the Plan. If, after termination,
the Optionee does not exercise his or her Option within the time specified
herein, the Option shall terminate, and the shares covered by such Option shall
revert to and again become available for issuance under the Plan.
10.
<PAGE> 11
(h) DEATH OF OPTIONEE. In the event of the death of an Optionee during,
or within a period specified in the Option after the termination of, the
Optionee's Continuous Status as an Employee, Director or Consultant, the Option
may be exercised (to the extent the Optionee was entitled to exercise the Option
at the date of death) by the Optionee's estate, by a person who acquired the
right to exercise the Option by bequest or inheritance or by a person designated
to exercise the option upon the Optionee's death pursuant to subsection 6(d),
but only within the period ending on the earlier of (i) the date twelve (12)
months following the date of death (or such longer or shorter period specified
in the Option Agreement), or (ii) the expiration of the term of such Option as
set forth in the Option Agreement. If, at the time of death, the Optionee was
not entitled to exercise his or her entire Option, the shares covered by the
unexercisable portion of the Option shall revert to and again become available
for issuance under the Plan. If, after death, the Option is not exercised within
the time specified herein, the Option shall terminate, and the shares covered by
such Option shall revert to and again become available for issuance under the
Plan.
(i) EARLY EXERCISE. The Option may, but need not, include a provision
whereby the Optionee may elect at any time while an Employee, Director or
Consultant to exercise the Option as to any part or all of the shares subject to
the Option prior to the full vesting of the Option. Any unvested shares so
purchased may be subject to a repurchase right in favor of the Company or to any
other restriction the Board determines to be appropriate.
7. TERMS OF STOCK BONUSES AND PURCHASES OF RESTRICTED STOCK.
Each stock bonus or restricted stock purchase agreement shall be in
such form and shall contain such terms and conditions as the Board or the
Committee shall deem appropriate. The terms and conditions of stock bonus or
restricted stock purchase agreements may change from time to time, and the terms
and conditions of separate agreements need not be identical, but each stock
bonus or restricted stock purchase agreement shall include (through
incorporation of provisions hereof by reference in the agreement or otherwise)
the substance of each of the following provisions as appropriate:
(a) PURCHASE PRICE. The purchase price under each restricted stock
purchase agreement shall be such amount as the Board or Committee shall
determine and designate in such agreement, but in no event shall the purchase
price be less than eighty-five percent (85%) of the stock's Fair Market Value on
the date such award is made. Notwithstanding the foregoing, the Board or the
Committee may determine that eligible participants in the Plan may be awarded
stock pursuant to a stock bonus agreement in consideration for past services
actually rendered to the Company for its benefit.
11.
<PAGE> 12
(b) TRANSFERABILITY. No rights under a stock bonus or restricted stock
purchase agreement shall be transferable except by will or the laws of descent
and distribution or, if the agreement so provides, pursuant to a domestic
relations order satisfying the requirements of Rule 16a-12 under the Exchange
Act, so long as stock awarded under such agreement remains subject to the terms
of the agreement.
(c) CONSIDERATION. The purchase price of stock acquired pursuant to a
stock purchase agreement shall be paid either: (i) in cash at the time of
purchase; (ii) at the discretion of the Board or the Committee, according to a
deferred payment or other arrangement with the person to whom the stock is sold;
or (iii) in any other form of legal consideration that may be acceptable to the
Board or the Committee in its discretion. Notwithstanding the foregoing, the
Board or the Committee to which administration of the Plan has been delegated
may award stock pursuant to a stock bonus agreement in consideration for past
services actually rendered to the Company or for its benefit.
(d) VESTING. Shares of stock sold or awarded under the Plan may, but
need not, be subject to a repurchase option in favor of the Company in
accordance with a vesting schedule to be determined by the Board or the
Committee.
(e) TERMINATION OF CONTINUOUS STATUS AS AN EMPLOYEE, DIRECTOR OR
CONSULTANT. In the event a Participant's Continuous Status as an Employee,
Director or Consultant terminates, the Company may repurchase or otherwise
reacquire any or all of the shares of stock held by that person which have not
vested as of the date of termination under the terms of the stock bonus or
restricted stock purchase agreement between the Company and such person.
8. CANCELLATION AND RE-GRANT OF OPTIONS.
(a) The Board or the Committee shall have the authority to effect, at
any time and from time to time, (i) the repricing of any outstanding Options
under the Plan and/or (ii) with the consent of any adversely affected holders of
Options, the cancellation of any outstanding Options under the Plan and the
grant in substitution therefor of new Options under the Plan covering the same
or different numbers of shares of stock, but having an exercise price per share
not less than eighty-five percent (85%) of the Fair Market Value for a
Nonstatutory Stock Option, one hundred percent (100%) of the Fair Market Value
for an Incentive Stock Option or, in the case of an Incentive Stock Option held
by a 10% stockholder (as described in subsection 5(b)), not less than one
hundred ten percent (110%) of the Fair Market Value per share of stock on the
new grant date. Notwithstanding the foregoing, the Board or the Committee may
grant an Option with an exercise price lower than that set forth above if such
Option is granted as part of a transaction to which section 424(a) of the Code
applies.
12.
<PAGE> 13
(b) Shares subject to an Option canceled under this Section 8 shall
continue to be counted against the maximum award of Options permitted to be
granted pursuant to subsection 5(c) of the Plan. The repricing of an Option
under this Section 8, resulting in a reduction of the exercise price, shall be
deemed to be a cancellation of the original Option and the grant of a substitute
Option; in the event of such repricing, both the original and the substituted
Options shall be counted against the maximum awards of Options permitted to be
granted pursuant to subsection 5(c) of the Plan. The provisions of this
subsection 8(b) shall be applicable only to the extent required by Section
162(m) of the Code.
9. COVENANTS OF THE COMPANY.
(a) During the terms of the Stock Awards, the Company shall keep
available at all times the number of shares of stock required to satisfy such
Stock Awards.
(b) The Company shall seek to obtain from each regulatory commission or
agency having jurisdiction over the Plan such authority as may be required to
issue and sell shares under Stock Awards; provided, however, that this
undertaking shall not require the Company to register under the Securities Act
of 1933 either the Plan, any Stock Award or any stock issued or issuable
pursuant to any such Stock Award. If, after reasonable efforts, the Company is
unable to obtain from any such regulatory commission or agency the authority
which counsel for the Company deems necessary for the lawful issuance and sale
of stock under the Plan, the Company shall be relieved from any liability for
failure to issue and sell stock upon exercise of such Stock Awards unless and
until such authority is obtained.
10. USE OF PROCEEDS FROM STOCK.
Proceeds from the sale of stock pursuant to Stock Awards shall
constitute general funds of the Company.
11. MISCELLANEOUS.
(a) The Board shall have the power to accelerate the time at which a
Stock Award may first be exercised or the time during which a Stock Award or any
part thereof will vest pursuant to subsection 6(e) or 7(d), notwithstanding the
provisions in the Stock Award stating the time at which it may first be
exercised or the time during which it will vest.
(b) Neither an Employee, Director nor a Consultant nor any person to
whom a Stock Award is transferred in accordance with the Plan shall be deemed to
be the holder of, or to have any of the rights of a holder with respect to, any
shares subject to such
13.
<PAGE> 14
Stock Award unless and until such person has satisfied all requirements for
exercise of the Stock Award pursuant to its terms.
(c) Nothing in the Plan or any instrument executed or Stock Award
granted pursuant thereto shall confer upon any Employee, Consultant or other
holder of Stock Awards any right to continue in the employ of the Company or any
Affiliate or to continue serving as a Consultant and Director, or shall affect
the right of the Company or any Affiliate to terminate the employment of any
Employee with or without notice and with or without cause, or the right to
terminate the relationship of any Consultant pursuant to the terms of such
Consultant's agreement with the Company or Affiliate or service as a Director
pursuant to the Company's By-laws.
(d) To the extent that the aggregate Fair Market Value (determined at
the time of grant) of stock with respect to which Incentive Stock Options are
exercisable for the first time by any Optionee during any calendar year under
all plans of the Company and its Affiliates exceeds one hundred thousand dollars
($100,000), the Options or portions thereof which exceed such limit (according
to the order in which they were granted) shall be treated as Nonstatutory Stock
Options.
(e) The Company may require any person to whom a Stock Award is
granted, or any person to whom a Stock Award is transferred in accordance with
the Plan, as a condition of exercising or acquiring stock under any Stock Award,
(1) to give written assurances satisfactory to the Company as to such person's
knowledge and experience in financial and business matters and/or to employ a
purchaser representative reasonably satisfactory to the Company who is
knowledgeable and experienced in financial and business matters, and that he or
she is capable of evaluating, alone or together with the purchaser
representative, the merits and risks of exercising the Stock Award; and (2) to
give written assurances satisfactory to the Company stating that such person is
acquiring the stock subject to the Stock Award for such person's own account and
not with any present intention of selling or otherwise distributing the stock.
The foregoing requirements, and any assurances given pursuant to such
requirements, shall be inoperative if (i) the issuance of the shares upon the
exercise or acquisition of stock under the Stock Award has been registered under
a then currently effective registration statement under the Securities Act, or
(ii) as to any particular requirement, a determination is made by counsel for
the Company that such requirement need not be met in the circumstances under the
then applicable securities laws. The Company may, upon advice of counsel to the
Company, place legends on stock certificates issued under the Plan as such
counsel deems necessary or appropriate in order to comply with applicable
securities laws, including, but not limited to, legends restricting the transfer
of the stock.
(f) To the extent provided by the terms of a Stock Award Agreement, the
person to whom a Stock Award is granted may satisfy any federal, state or local
tax
14.
<PAGE> 15
withholding obligation relating to the exercise or acquisition of stock under a
Stock Award by any of the following means or by a combination of such means: (1)
tendering a cash payment; (2) authorizing the Company to withhold shares from
the shares of the Common Stock otherwise issuable to the participant as a result
of the exercise or acquisition of stock under the Stock Award; or (3) delivering
to the Company owned and unencumbered shares of the Common Stock of the Company.
12. ADJUSTMENTS UPON CHANGES IN STOCK.
(a) If any change is made in the stock subject to the Plan, or subject
to any Stock Award, without the receipt of consideration by the Company (through
merger, consolidation, reorganization, recapitalization, reincorporation, stock
dividend, dividend in property other than cash, stock split, liquidating
dividend, combination of shares, exchange of shares, change in corporate
structure or other transaction not involving the receipt of consideration by the
Company), the Plan will be appropriately adjusted in the class(es) and maximum
number of shares subject to the Plan pursuant to subsection 4(a) and the maximum
number of shares subject to award to any person during any calendar year
pursuant to subsection 5(c), and the outstanding Stock Awards will be
appropriately adjusted in the class(es) and number of shares and price per share
of stock subject to such outstanding Stock Awards. Such adjustments shall be
made by the Board or the Committee, the determination of which shall be final,
binding and conclusive. (The conversion of any convertible securities of the
Company shall not be treated as a "transaction not involving the receipt of
consideration by the Company".)
(b) In the event of: (1) a dissolution, liquidation or sale of
substantially all of the assets of the Company; (2) a merger or consolidation in
which the Company is not the surviving corporation; or (3) a reverse merger in
which the Company is the surviving corporation but the shares of the Company's
common stock outstanding immediately preceding the merger are converted by
virtue of the merger into other property, whether in the form of securities,
cash or otherwise, then to the extent permitted by applicable law: (i) any
surviving corporation or a parent of such surviving corporation shall assume any
Stock Awards outstanding under the Plan or shall substitute similar Stock Awards
for those outstanding under the Plan, or (ii) such Stock Awards shall continue
in full force and effect. In the event any surviving corporation or its parent
refuses to assume or continue such Stock Awards, or to substitute similar Stock
Awards for those outstanding under the Plan, then, with respect to Stock Awards
held by persons then performing services as Employees, Directors or Consultants,
the vesting of such Stock Awards may, if so determined by the Board, be
accelerated as provided in the Agreement thereunder. If the Stock Award does not
provide for acceleration of vesting in the event of certain corporate events,
then the Stock Award shall be terminated if not exercised prior to such event.
15.
<PAGE> 16
13. AMENDMENT OF THE PLAN AND STOCK AWARDS.
(a) The Board at any time, and from time to time, may amend the Plan.
However, except as provided in Section 12 relating to adjustments upon changes
in stock, no amendment shall be effective unless approved by the stockholders of
the Company to the extent stockholder approval is necessary for the Plan to
satisfy the requirements of Section 422 of the Code, Rule 16b-3 or any Nasdaq or
securities exchange listing requirements.
(b) The Board may in its sole discretion submit any other amendment to
the Plan for stockholder approval, including, but not limited to, amendments to
the Plan intended to satisfy the requirements of Section 162(m) of the Code and
the regulations thereunder regarding the exclusion of performance-based
compensation from the limit on corporate deductibility of compensation paid to
certain executive officers.
(c) It is expressly contemplated that the Board may amend the Plan in
any respect the Board deems necessary or advisable to provide eligible
Employees, Directors or Consultants with the maximum benefits provided or to be
provided under the provisions of the Code and the regulations promulgated
thereunder relating to Incentive Stock Options and/or to bring the Plan and/or
Incentive Stock Options granted under it into compliance therewith.
(d) Rights under any Stock Award granted before amendment of the Plan
shall not be impaired by any amendment of the Plan unless (i) the Company
requests the consent of the person to whom the Stock Award was granted and (ii)
such person consents in writing.
(e) The Board at any time, and from time to time, may amend the terms
of any one or more Stock Awards; provided, however, that the rights under any
Stock Award shall not be impaired by any such amendment unless (i) the Company
requests the consent of the person to whom the Stock Award was granted and (ii)
such person consents in writing.
14. TERMINATION OR SUSPENSION OF THE PLAN.
(a) The Board may suspend or terminate the Plan at any time. Unless
sooner terminated, the Plan shall terminate ten (10) years from the date the
Plan is adopted by the Board or approved by the stockholders of the Company,
whichever is earlier. No Stock Awards may be granted under the Plan while the
Plan is suspended or after it is terminated.
(b) Rights and obligations under any Stock Award granted while the Plan
is in effect shall not be impaired by suspension or termination of the Plan,
except with the
16.
<PAGE> 17
consent of the person to whom the Stock Award was granted. The terms of the
Prior Plan shall remain in effect and apply to grants made pursuant to the terms
of the Prior Plan.
15. EFFECTIVE DATE OF PLAN.
The Plan became effective on February 1, 1990, the date of adoption by
the Board, and was initially approved by the stockholders on August 16, 1990
and, as amended, on October 14, 1993 and October 18, 1995.
17.
<PAGE> 1
EXHIBIT 10.2
INCENTIVE STOCK OPTION
____________________________________, Optionee:
PMR CORPORATION (the "Company"), pursuant to its 1997 Equity Incentive
Plan (the "Plan"), has granted to you, the optionee named above, an option to
purchase shares of the common stock of the Company ("Common Stock"). This option
is intended to qualify as an "incentive stock option" within the meaning of
Section 422 of the Internal Revenue Code of 1986, as amended (the "Code").
The grant hereunder is in connection with and in furtherance of the
Company's compensatory benefit plan for participation of the Company's employees
(including officers), directors or consultants. Defined terms not explicitly
defined in this agreement but defined in the Plan shall have the same
definitions as in the Plan.
The details of your option are as follows:
1. TOTAL NUMBER OF SHARES SUBJECT TO THIS OPTION. The total number of
shares of Common Stock subject to this option is ____________________ (______).
2. VESTING. Subject to the limitations contained herein, [20%] of the
shares will vest (become exercisable) on each anniversary of the date of grant,
beginning on ____________, 19__ , until either (i) you cease to provide services
to the Company for any reason, or (ii) this option becomes fully vested. In
addition, your option may become fully vested as described in the attached
Change in Control Vesting Policy.
3. EXERCISE PRICE AND METHOD OF PAYMENT.
(a) EXERCISE PRICE. The exercise price of this option is
_________________ ($____) per share, being not less than the fair market value
of the Common Stock on the date of grant of this option.
(b) METHOD OF PAYMENT. Payment of the exercise price per share
is due in full upon exercise of all or any part of each installment which has
accrued to you. You may elect, to the extent permitted by applicable statutes
and regulations, to make payment of the exercise price under one of the
following alternatives:
(i) Payment of the exercise price per share in cash
(including check) at the time of exercise;
(ii) Payment pursuant to a program developed under
Regulation T as promulgated by the Federal Reserve Board which, prior to the
issuance of Common Stock, results in either the receipt of cash (or check) by
the Company or the receipt of
1.
<PAGE> 2
irrevocable instructions to pay the aggregate exercise price to the Company from
the sales proceeds;
(iii) Provided that at the time of exercise the
Company's Common Stock is publicly traded and quoted regularly in the Wall
Street Journal, payment by delivery of already-owned shares of Common Stock,
held for the period required to avoid a charge to the Company's reported
earnings, and owned free and clear of any liens, claims, encumbrances or
security interests, which Common Stock shall be valued at its fair market value
on the date of exercise; or
(iv) Payment by a combination of the methods of
payment permitted by subparagraph 3(b)(i) through 3(b)(iii) above.
4. WHOLE SHARES. This option may only be exercised for whole shares.
5. SECURITIES LAW COMPLIANCE. Notwithstanding anything to the contrary
contained herein, this option may not be exercised unless the shares issuable
upon exercise of this option are then registered under the Securities Act or, if
such shares are not then so registered, the Company has determined that such
exercise and issuance would be exempt from the registration requirements of the
Securities Act.
6. TERM. The term of this option commences on ____________, 19__, the
date of grant, and expires on _________________ (the "Expiration Date"), which
date shall be no more than ten (10) years from date this option is granted,
unless this option expires sooner as set forth below or in the Plan. In no event
may this option be exercised on or after the Expiration Date. This option shall
terminate prior to the Expiration Date as follows: three (3) months after the
termination of your Continuous Status as an Employee, Director or Consultant
with the Company or an Affiliate of the Company unless one of the following
circumstances exists:
(a) Your termination of Continuous Status as an Employee,
Director or Consultant is due to your disability. This option will then expire
on the earlier of the Expiration Date set forth above or twelve (12) months
following such termination of Continuous Status as an Employee, Director or
Consultant. You should be aware that if your disability is not considered a
permanent and total disability within the meaning of Section 422(c)(6) of the
Code, and you exercise this option more than three (3) months following the date
of your termination of employment, your exercise will be treated for tax
purposes as the exercise of a "nonstatutory stock option" instead of an
"incentive stock option."
(b) Your termination of Continuous Status as an Employee,
Director or Consultant is due to your death or your death occurs within three
(3) months following your termination of Continuous Status as an Employee,
Director or Consultant for any
2.
<PAGE> 3
other reason. This option will then expire on the earlier of the Expiration Date
set forth above or twelve (12) months after your death.
(c) If during any part of such three (3)-month period you may
not exercise your option solely because of the condition set forth in paragraph
5 above, then your option will not expire until the earlier of the Expiration
Date set forth above or until this option shall have been exercisable for an
aggregate period of three (3) months after your termination of Continuous Status
as an Employee, Director or Consultant.
(d) If your exercise of the option within three (3) months
after termination of your Continuous Status as an Employee, Director or
Consultant with the Company or with an Affiliate of the Company would result in
liability under Section 16(b) of the Securities Exchange Act of 1934, then your
option will expire on the earlier of (i) the Expiration Date set forth above,
(ii) the tenth (10th) day after the last date upon which exercise would result
in such liability or (iii) six (6) months and ten (10) days after the
termination of your Continuous Status as an Employee, Director or Consultant
with the Company or an Affiliate of the Company.
However, this option may be exercised following termination of
Continuous Status as an Employee, Director or Consultant only as to that number
of shares as to which it was exercisable on the date of termination of
Continuous Status as an Employee, Director or Consultant under the provisions of
paragraph 2 of this option.
In order to obtain the federal income tax advantages associated with an
"incentive stock option," the Code requires that at all times beginning on the
date of grant of the option and ending on the day three (3) months before the
date of the option's exercise, you must be an employee of the Company or an
Affiliate of the Company, except in the event of your death or permanent and
total disability. The Company has provided for continued vesting or extended
exercisability of your option under certain circumstances for your benefit, but
cannot guarantee that your option will necessarily be treated as an "incentive
stock option" if you provide services to the Company or an Affiliate of the
Company as a consultant or exercise your option more than three (3) months after
the date your employment with the Company and all Affiliates of the Company
terminates.
7. EXERCISE.
(a) This option may be exercised, to the extent specified
above, by delivering a notice of exercise (in a form designated by the Company)
together with the exercise price to the Secretary of the Company, or to such
other person as the Company may designate, during regular business hours,
together with such additional documents as the Company may then require pursuant
to subsection 11(e) of the Plan.
(b) By exercising this option you agree that:
3.
<PAGE> 4
(i) as a precondition to the completion of any
exercise of this option, the Company may require you to enter an arrangement
providing for the payment by you to the Company of any tax withholding
obligation of the Company arising by reason of (1) the exercise of this option;
(2) the lapse of any substantial risk of forfeiture to which the shares are
subject at the time of exercise; or (3) the disposition of shares acquired upon
such exercise; and
(ii) you will notify the Company in writing within
fifteen (15) days after the date of any disposition of any of the shares of the
Common Stock issued upon exercise of this option that occurs within two (2)
years after the date of this option grant OR within one (1) year after such
shares of Common Stock are transferred upon exercise of this option.
8. TRANSFERABILITY. This option is not transferable, except by will or
by the laws of descent and distribution, and is exercisable during your life
only by you. Notwithstanding the foregoing, by delivering written notice to the
Company, in a form satisfactory to the Company, you may designate a third party
who, in the event of your death, shall thereafter be entitled to exercise this
option.
9. REDUCTION FOR DISQUALIFIED INDIVIDUALS.
(a) If this option becomes fully vested in connection with
Optionee's termination following a Change in Control as described in the Plan,
and if Optionee is deemed to be a "disqualified individual" as defined in
Section 280G of the Code (which includes certain officers and highly compensated
employees of the Company), then if the aggregate of the Optionee's gain upon the
exercise of the option with respect to shares that became fully vested because
of a Change in Control and all other payments made to Optionee in connection
with a Change in Control would constitute a "parachute payment" within the
meaning of Section 280G of the Code and would, but for this subsection (a),
subject Optionee to liability for the twenty percent (20%) excise tax imposed by
Section 4999 of the Code (the "Excise Tax"), then, subject to the provisions of
subsection (b) hereof, the option exercise shall be reduced to the largest
amount which the Company determines would result in no portion of such exercise
being subject to the Excise Tax (but in no event shall the option exercise be
reduced below the number of shares vested prior to acceleration in connection
with a Change in Control). The Company's determination of any required deduction
pursuant to this subsection (a) shall be conclusive and binding upon Optionee.
However, if the Internal Revenue Service ("IRS") nevertheless determines that an
exercise is subject to the Excise Tax, then subsection (b) hereof shall apply.
(b) If notwithstanding the reduction described in subsection
(a) hereof (or in the absence of any such reduction), the IRS determines that
Optionee is liable for
4.
<PAGE> 5
the Excise Tax as a result of the exercise, then Optionee shall be obligated to
rescind within thirty (30) days after final IRS determination, the exercise of
shares that subject the Optionee to the Excise Tax; provided, however, that
Optionee shall not be obligated to rescind the exercise of shares that were
vested prior to acceleration in connection with a Change in Control. The
rescinded amount shall be the smallest such amount, if any, as shall be required
so that no portion of Optionee's exercise shall be subject to the Excise Tax. In
the event of any rescission hereunder, the Company shall return to Optionee the
full exercise price paid by Optionee for the shares being rescinded.
10. OPTION NOT A SERVICE CONTRACT. This option is not an employment
contract and nothing in this option shall be deemed to create in any way
whatsoever any obligation on your part to continue in the employ of the Company,
or of the Company to continue your employment with the Company. In addition,
nothing in this option shall obligate the Company or any Affiliate of the
Company, or their respective shareholders, Board of Directors, officers or
employees to continue any relationship which you might have as a Director or
Consultant for the Company or Affiliate of the Company.
11. NOTICES. Any notices provided for in this option or the Plan shall
be given in writing and shall be deemed effectively given upon receipt or, in
the case of notices delivered by the Company to you, five (5) days after deposit
in the United States mail, postage prepaid, addressed to you at the address
specified below or at such other address as you hereafter designate by written
notice to the Company.
12. GOVERNING PLAN DOCUMENT. This option is subject to all the
provisions of the Plan, a copy of which is attached hereto and its provisions
are hereby made a part of this option, including without limitation the
provisions of Section 6 of the Plan relating to option provisions, and is
further subject to all interpretations, amendments, rules and regulations which
may from time to time be promulgated and adopted pursuant to the
5.
<PAGE> 6
Plan. In the event of any conflict between the provisions of this option and
those of the Plan, the provisions of the Plan shall control.
Dated the ____ day of __________________, 19__.
Very truly yours,
PMR CORPORATION
By: _______________________________
Duly authorized on behalf
of the Board of Directors
ATTACHMENTS:
1997 Equity Incentive Plan
Notice of Exercise
Change in Control Vesting Policy
6.
<PAGE> 7
The undersigned:
(a) Acknowledges receipt of the foregoing option and the
attachments referenced therein and understands that all rights and liabilities
with respect to this option are set forth in the option and the Plan; and
(b) Acknowledges that as of the date of grant of this option,
it sets forth the entire understanding between the undersigned optionee and the
Company and its Affiliates regarding the acquisition of stock in the Company and
supersedes all prior oral and written agreements on that subject with the
exception of (i) the options previously granted and delivered to the undersigned
under stock option plans of the Company, and (ii) the following agreements only:
NONE ____________________________________
(Initial)
OTHER ____________________________________
____________________________________
____________________________________
___________________________________
OPTIONEE
___________________________________
Address
___________________________________
___________________________________
7.
<PAGE> 8
NOTICE OF EXERCISE
PMR Corporation
3990 Old Town Avenue
Suite 206A
San Diego, CA 92110-0000
Date of Exercise: ___________
Ladies and Gentlemen:
This constitutes notice under my stock option that I elect to purchase
the number of shares for the price set forth below.
Type of option: Incentive
Stock option dated: ____________
Number of shares as to which option is exercised: ____________
Certificates to be issued in name of: ____________
Total exercise price: $ __________
Cash payment delivered herewith: $ __________
Value of ______ shares of common stock delivered herewith(1): $ __________
- ------------------
(1) Shares must meet the public trading requirements set forth in the option.
Shares must be valued in accordance with the terms of the option being
exercised, must have been owned for the minimum period required in the option,
and must be owned free and clear of any liens, claims, encumbrances or security
interests. Certificates must be endorsed or accompanied by an executed
assignment separate from certificate.
8.
<PAGE> 9
By this exercise, I agree (i) to provide such additional documents as
you may require pursuant to the terms of the Company's 1997 Equity Incentive
Plan, (ii) to provide for the payment by me to you (in the manner designated by
you) of your withholding obligation, if any, relating to the exercise of this
option, and (iii) to notify you in writing within fifteen (15) days after the
date of any disposition of any of the shares of Common Stock issued upon
exercise of this option that occurs within two (2) years after the date of grant
of this option OR within one (1) year after such shares of Common Stock are
issued upon exercise of this option.
Very truly yours,
9.
<PAGE> 10
PMR CORPORATION
CHANGE IN CONTROL VESTING POLICY (THE "POLICY")
In the event the employment of a person holding an option under the
1997 Equity Incentive Plan (the "Optionee") is, within one (1) year following a
"Change in Control," (i) terminated by the Company other than for "Cause," or
(ii) terminated in a "Constructive Termination," then the option held by such
Optionee shall be fully vested.
For purposes of this Policy, the following definitions shall apply:
"CHANGE IN CONTROL" shall mean the occurrence of any of the following
events:
(a) The Company is merged, consolidated or reorganized into or
with another corporation, partnership, limited liability company, or other
entity or person, and as a result of such merger, consolidation or
reorganization less than 70% of the combined voting power of the
then-outstanding securities of such corporation, partnership, limited liability
company, or other entity or person immediately after such transaction are held
in the aggregate by holders of voting securities of the Company immediately
prior to such transaction;
(b) The Company sells all or substantially all of its assets
to any other corporation, partnership, limited liability company, or other
entity or person, and thereafter, less than 70% of the combined voting power of
the then-outstanding voting securities of the acquiring or consolidated entity
are held in the aggregate by the holders of voting securities of the Company
immediately prior to such sale;
(c) There is a report filed on Schedule 13D or Schedule 14D-1
(or any successor schedule, form or report), each as promulgated pursuant to the
Securities Exchange Act of 1934 (the "Exchange Act") disclosing that any person
(as the term "person" is used in Section 13(d)(3) or Section 14(d)(2) of the
Exchange Act) has become the beneficial owner (as the term "beneficial owner" is
defined under Rule 13d-3 or any successor rule or regulation promulgated under
the Exchange Act) representing 30% or more of the combined voting power of the
then-outstanding voting securities of the Company;
(d) The Company shall file a report or proxy statement with
the Securities and Exchange Commission pursuant to the Exchange Act disclosing
in response to Item 1 of Form 8-K thereunder or Item 5(b) or Item 14 of Schedule
14A thereunder (or any successor schedule, form or report or item therein) that
a change in control of the Company has or may have occurred or will or may occur
in the future pursuant to any then-existing contract or transaction; or
1.
<PAGE> 11
(e) During any period of two (2) consecutive years,
individuals who at the beginning of any such period constitute the directors of
the Company cease for any reason to constitute at least a majority of the Board
of Directors of the Company unless the election or the nomination for election
by the Company's shareholders of each director of the Company first elected
during such period was approved by a vote of at least two-thirds of the
directors of the Company then still in office who were directors of the Company
at the beginning of such two (2)-year period.
"CAUSE" shall mean termination due to the occurrence of any of the
following: (a) any intentional action or intentional failure to act by Optionee
which was performed in bad faith and to the material detriment of the Company;
(b) Optionee intentionally refuses or intentionally fails to act in accordance
with any lawful direction or order of the Company; (c) Optionee willfully and
habitually neglects his duties of employment; (d) Optionee's engaging or
participating in any activity which is competitive with or injurious to the
Company in the judgment of the Board of Directors; (e) Optionee's commission of
any fraud against the Company or use or appropriation for his personal use and
benefit of any funds, assets or properties of the Company not authorized by the
Company to be so used or appropriated; or (f) Optionee is convicted of a felony
crime involving moral turpitude.
"CONSTRUCTIVE TERMINATION" means that the Optionee voluntarily
terminates his or her employment with the Company after any of the following are
undertaken, following a Change in Control, without Optionee's express written
consent:
(a) the assignment to Optionee of any duties or
responsibilities which are inconsistent with, or result in any diminution or
adverse change of, Optionee's position, status or circumstances of employment as
in effect immediately prior to a Change in Control; an adverse change in
Optionee's titles, offices, benefits and/or perquisites as in effect immediately
prior to a Change in Control; any removal of Optionee from or any failure to
re-elect Optionee to any offices held by Optionee immediately prior to a Change
in Control, including, but not limited to, Optionee's membership on the Board,
except in connection with the termination of his employment for death,
disability, retirement, Cause, or any voluntary termination of employment by
Optionee other than a Constructive Termination;
(b) a reduction by the Company in Optionee's annual base
salary by greater than five percent (5%) from that which was in effect
immediately prior to a Change in Control;
(c) a relocation of Optionee, or the Company's principal
executive offices if Optionee's principal office is at such offices, to a
location more than forty (40) miles from the location at which Optionee was
performing his duties prior to a Change in
2.
<PAGE> 12
Control, except for required travel by Optionee on the Company's business to an
extent substantially consistent with Optionee's business travel obligations at
the time of a Change in Control;
(d) any material breach by the Company of any material
provision of Optionee's Stock Award Agreement following a Change in Control; or
(e) any failure by the Company to obtain the assumption of
Optionee's Stock Award Agreement by any successor or assign of the Company.
3.
<PAGE> 1
EXHIBIT 10.3
NONSTATUTORY STOCK OPTION
____________, Optionee:
PMR CORPORATION (the "Company"), pursuant to its 1997 Equity Incentive
Plan (the "Plan"), has granted to you, the optionee named above, an option to
purchase shares of the common stock of the Company ("Common Stock"). This option
is not intended to qualify as an "incentive stock option" within the meaning of
Section 422 of the Internal Revenue Code of 1986, as amended (the "Code").
The grant hereunder is in connection with and in furtherance of the
Company's compensatory benefit plan for participation of the Company's employees
(including officers), directors or consultants. Defined terms not explicitly
defined in this agreement but defined in the Plan shall have the same
definitions as in the Plan.
The details of your option are as follows:
1. TOTAL NUMBER OF SHARES SUBJECT TO THIS OPTION. The total number of
shares of Common Stock subject to this option is ____________________ (_______).
2. VESTING. Subject to the limitations contained herein, [20%] of the
shares will vest (become exercisable) on each anniversary of the date of grant,
beginning on ____________, 19__ , until either (i) you cease to provide services
to the Company for any reason, or (ii) this option becomes fully vested. In
addition, your option may become fully vested as described in the attached
Change in Control Vesting Policy.
3. EXERCISE PRICE AND METHOD OF PAYMENT.
(a) EXERCISE PRICE. The exercise price of this option is
_________________ ($____) per share, being not less than eighty-five percent
(85%) of the fair market value of the Common Stock on the date of grant of this
option.
(b) METHOD OF PAYMENT. Payment of the exercise price per share is
due in full upon exercise of all or any part of each installment which has
accrued to you. You may elect, to the extent permitted by applicable statutes
and regulations, to make payment of the exercise price under one of the
following alternatives:
(i) Payment of the exercise price per share in cash (including
check) at the time of exercise;
(ii) Payment pursuant to a program developed under Regulation
T as promulgated by the Federal Reserve Board which, prior to the issuance of
Common
1.
<PAGE> 2
Stock, results in either the receipt of cash (or check) by the Company or
the receipt of irrevocable instructions to pay the aggregate exercise price to
the Company from the sales proceeds;
(iii) Provided that at the time of exercise the Company's
Common Stock is publicly traded and quoted regularly in the Wall Street Journal,
payment by delivery of already-owned shares of Common Stock, held for the period
required to avoid a charge to the Company's reported earnings, and owned free
and clear of any liens, claims, encumbrances or security interests, which Common
Stock shall be valued at its fair market value on the date of exercise; or
(iv) Payment by a combination of the methods of payment
permitted by subparagraph 3(b)(i) through 3(b)(iii) above.
4. WHOLE SHARES. This option may only be exercised for whole shares.
5. SECURITIES LAW COMPLIANCE. Notwithstanding anything to the contrary
contained herein, this option may not be exercised unless the shares issuable
upon exercise of this option are then registered under the Securities Act or, if
such shares are not then so registered, the Company has determined that such
exercise and issuance would be exempt from the registration requirements of the
Securities Act.
6. TERM. The term of this option commences on ____________, 19__, the date
of grant, and expires on _________________ (the "Expiration Date"), which date
shall be no more than ten (10) years from date this option is granted, unless
this option expires sooner as set forth below or in the Plan. In no event may
this option be exercised on or after the Expiration Date. This option shall
terminate prior to the Expiration Date as follows: three (3) months after the
termination of your Continuous Status as an Employee, Director or Consultant
with the Company or an Affiliate of the Company unless one of the following
circumstances exists:
(a) Your termination of Continuous Status as an Employee, Director
or Consultant is due to your disability. This option will then expire on the
earlier of the Expiration Date set forth above or twelve (12) months following
such termination of Continuous Status as an Employee, Director or Consultant.
(b) Your termination of Continuous Status as an Employee, Director
or Consultant is due to your death or your death occurs within three (3) months
following your termination of Continuous Status as an Employee, Director or
Consultant for any other reason. This option will then expire on the earlier of
the Expiration Date set forth above or twelve (12) months after your death.
2.
<PAGE> 3
(c) If during any part of such three (3)-month period you may not
exercise your option solely because of the condition set forth in paragraph 5
above, then your option will not expire until the earlier of the Expiration Date
set forth above or until this option shall have been exercisable for an
aggregate period of three (3) months after your termination of Continuous Status
as an Employee, Director or Consultant.
(d) If your exercise of the option within three (3) months after
termination of your Continuous Status as an Employee, Director or Consultant
with the Company or with an Affiliate of the Company would result in liability
under section 16(b) of the Securities Exchange Act of 1934, then your option
will expire on the earlier of (i) the Expiration Date set forth above, (ii) the
tenth (10th) day after the last date upon which exercise would result in such
liability or (iii) six (6) months and ten (10) days after the termination of
your Continuous Status as an Employee, Director or Consultant with the Company
or an Affiliate of the Company.
However, this option may be exercised following termination of Continuous
Status as an Employee, Director or Consultant only as to that number of shares
as to which it was exercisable on the date of termination of Continuous Status
as an Employee, Director or Consultant under the provisions of paragraph 2 of
this option.
7. EXERCISE.
(a) This option may be exercised, to the extent specified above, by
delivering a notice of exercise (in a form designated by the Company) together
with the exercise price to the Secretary of the Company, or to such other person
as the Company may designate, during regular business hours, together with such
additional documents as the Company may then require pursuant to subsection
11(e) of the Plan.
(b) By exercising this option you agree that, as a precondition to
the completion of any exercise, the Company may require you to enter an
arrangement providing for the payment by you to the Company of any tax
withholding obligation of the Company arising by reason of (1) the exercise of
this option; (2) the lapse of any substantial risk of forfeiture to which the
shares are subject at the time of exercise; or (3) the disposition of shares
acquired upon such exercise. You also agree that the exercise of this option has
not been completed and that the Company is under no obligation to issue any
shares of Common Stock to you until such an arrangement is established or the
Company's tax withholding obligations are satisfied, as determined by the
Company.
8. TRANSFERABILITY. This option is not transferable, except by will or by
the laws of descent and distribution, and is exercisable during your life only
by you. Notwithstanding the foregoing, by delivering written notice to the
Company, in a form
3.
<PAGE> 4
satisfactory to the Company, you may designate a third party who, in the event
of your death, shall thereafter be entitled to exercise this option.
9. REDUCTION FOR DISQUALIFIED INDIVIDUALS.
(a) If this option becomes fully vested in connection with
Optionee's termination following a Change in Control as described in the Plan,
and if Optionee is deemed to be a "disqualified individual" as defined in
Section 280G of the Code (which includes certain officers and highly compensated
employees of the Company), then if the aggregate of the Optionee's gain upon the
exercise of the option with respect to shares that became fully vested because
of a Change in Control and all other payments made to Optionee in connection
with a Change in Control would constitute a "parachute payment" within the
meaning of Section 280G of the Code and would, but for this subsection (a),
subject Optionee to liability for the twenty percent (20%) excise tax imposed by
Section 4999 of the Code (the "Excise Tax"), then, subject to the provisions of
subsection (b) hereof, the option exercise shall be reduced to the largest
amount which the Company determines would result in no portion of such exercise
being subject to the Excise Tax (but in no event shall the option exercise be
reduced below the number of shares vested prior to acceleration in connection
with a Change in Control). The Company's determination of any required deduction
pursuant to this subsection (a) shall be conclusive and binding upon Optionee.
However, if the Internal Revenue Service ("IRS") nevertheless determines that an
exercise is subject to the Excise Tax, then subsection (b) hereof shall apply.
(b) If notwithstanding the reduction described in subsection (a)
hereof (or in the absence of any such reduction), the IRS determines that
Optionee is liable for the Excise Tax as a result of the exercise, then Optionee
shall be obligated to rescind within thirty (30) days after final IRS
determination, the exercise of shares that subject the Optionee to the Excise
Tax; provided, however, that Optionee shall not be obligated to rescind the
exercise of shares that were vested prior to acceleration in connection with a
Change in Control. The rescinded amount shall be the smallest such amount, if
any, as shall be required so that no portion of Optionee's exercise shall be
subject to the Excise Tax. In the event of any rescission hereunder, the Company
shall return to Optionee the full exercise price paid by Optionee for the shares
being rescinded.
10. OPTION NOT A SERVICE CONTRACT. This option is not an employment
contract and nothing in this option shall be deemed to create in any way
whatsoever any obligation on your part to continue in the employ of the Company,
or of the Company to continue your employment with the Company. In addition,
nothing in this option shall obligate the Company or any Affiliate of the
Company, or their respective shareholders, Board of Directors, officers or
employees to continue any relationship which you might have as a Director or
Consultant for the Company or Affiliate of the Company.
4.
<PAGE> 5
11. NOTICES. Any notices provided for in this option or the Plan shall be
given in writing and shall be deemed effectively given upon receipt or, in the
case of notices delivered by the Company to you, five (5) days after deposit in
the United States mail, postage prepaid, addressed to you at the address
specified below or at such other address as you hereafter designate by written
notice to the Company.
12. GOVERNING PLAN DOCUMENT. This option is subject to all the provisions
of the Plan, a copy of which is attached hereto and its provisions are hereby
made a part of this option, including without limitation the provisions of
Section 6 of the Plan relating to option provisions, and is further subject to
all interpretations, amendments, rules and regulations which may from time to
time be promulgated and adopted pursuant to the Plan. In the event of any
conflict between the provisions of this option and those of the Plan, the
provisions of the Plan shall control.
Dated the ____ day of __________________, 19__.
Very truly yours,
PMR CORPORATION
By:____________________________
Duly authorized on behalf
of the Board of Directors
ATTACHMENTS:
1997 Equity Incentive Plan
Notice of Exercise
Change in Control Vesting Policy
5.
<PAGE> 6
The undersigned:
(a) Acknowledges receipt of the foregoing option and the attachments
referenced therein and understands that all rights and liabilities with respect
to this option are set forth in the option and the Plan; and
(b) Acknowledges that as of the date of grant of this option, it
sets forth the entire understanding between the undersigned optionee and the
Company and its Affiliates regarding the acquisition of stock in the Company and
supersedes all prior oral and written agreements on that subject with the
exception of (i) the options previously granted and delivered to the undersigned
under stock option plans of the Company, and (ii) the following agreements only:
NONE___________________________________________________
(Initial)
OTHER__________________________________________________
__________________________________________________
__________________________________________________
____________________________________________
OPTIONEE
____________________________________________
Address
____________________________________________
____________________________________________
6.
<PAGE> 7
NOTICE OF EXERCISE
PMR Corporation
3990 Old Town Avenue
Suite 206A
San Diego, CA 92110-0000
Date of Exercise: ___________
Ladies and Gentlemen:
This constitutes notice under my stock option that I elect to purchase the
number of shares for the price set forth below.
Type of option: Nonstatutory
Stock option dated: ______________
Number of shares as to which option is exercised: ______________
Certificates to be issued in name of: ______________
Total exercise price: $_____________
Cash payment delivered herewith: $_____________
Value of ______ shares of common stock delivered herewith(1): $_____________
By this exercise, I agree (i) to provide such additional documents as you
may require pursuant to the terms of the Company's 1997 Equity incentive Plan
and (ii) to provide for the payment by me to you (in the manner designated by
you) of your withholding obligation, if any, relating to the exercise of this
option.
Very truly yours,
_________________________________
__________
(1) Shares must meet the public trading requirements set forth in the
option. Shares must be valued in accordance with the terms of the option being
exercised, must have been owned for the minimum period required in the option,
and must be owned free and clear of any liens, claims, encumbrances or security
interests. Certificates must be endorsed or accompanied by an executed
assignment separate from certificate.
7.
<PAGE> 8
PMR CORPORATION
CHANGE IN CONTROL VESTING POLICY (THE "POLICY")
In the event the employment or relationship as a consultant to the Company
of a person holding an option under the 1997 Equity Incentive Plan (the
"Optionee") is, within one (1) year following a "Change in Control," (i)
terminated by the Company other than for "Cause," or (ii) terminated in a
"Constructive Termination," then the option held by such Optionee shall be fully
vested. Moreover, all options held by directors shall become fully vested
immediately upon the occurrence of a Change in Control.
For purposes of this Policy, the following definitions shall apply:
"CHANGE IN CONTROL" shall mean the occurrence of any of the following
events:
(a) The Company is merged, consolidated or reorganized into or with
another corporation, partnership, limited liability company, or other entity or
person, and as a result of such merger, consolidation or reorganization less
than 70% of the combined voting power of the then-outstanding securities of such
corporation, partnership, limited liability company, or other entity or person
immediately after such transaction are held in the aggregate by holders of
voting securities of the Company immediately prior to such transaction;
(b) The Company sells all or substantially all of its assets to any
other corporation, partnership, limited liability company, or other entity or
person, and thereafter, less than 70% of the combined voting power of the
then-outstanding voting securities of the acquiring or consolidated entity are
held in the aggregate by the holders of voting securities of the Company
immediately prior to such sale;
(c) There is a report filed after the date on which the option is
granted on Schedule 13D or Schedule 14D-1 (or any successor schedule, form or
report), each as promulgated pursuant to the Securities Exchange Act of 1934
(the "Exchange Act") disclosing that any person (as the term "person" is used in
Section 13(d)(3) or Section 14(d)(2) of the Exchange Act) has become the
beneficial owner (as the term "beneficial owner" is defined under Rule 13d-3 or
any successor rule or regulation promulgated under the Exchange Act)
representing 30% or more of the combined voting power of the then-outstanding
voting securities of the Company;
(d) The Company shall file a report or proxy statement with the
Securities and Exchange Commission pursuant to the Exchange Act disclosing in
response to Item 1 of Form 8-K thereunder or Item 5(b) or Item 14 of Schedule
14A thereunder (or any successor schedule, form or report or item therein) that
a change in
1.
<PAGE> 9
control of the Company has or may have occurred or will or may occur in the
future pursuant to any then-existing contract or transaction; or
(e) During any period of two (2) consecutive years, individuals who
at the beginning of any such period constitute the directors of the Company
cease for any reason to constitute at least a majority of the Board of Directors
of the Company unless the election or the nomination for election by the
Company's shareholders of each director of the Company first elected during such
period was approved by a vote of at least two-thirds of the directors of the
Company then still in office who were directors of the Company at the beginning
of such two (2)-year period.
"CAUSE" shall mean termination due to the occurrence of any of the
following: (a) any intentional action or intentional failure to act by Optionee
which was performed in bad faith and to the material detriment of the Company;
(b) Optionee intentionally refuses or intentionally fails to act in accordance
with any lawful direction or order of the Company; (c) Optionee willfully and
habitually neglects his duties of employment; (d) Optionee's engaging or
participating in any activity which is competitive with or injurious to the
Company in the judgment of the Board of Directors; (e) Optionee's commission of
any fraud against the Company or use or appropriation for his personal use and
benefit of any funds, assets or properties of the Company not authorized by the
Company to be so used or appropriated; or (f) Optionee is convicted of a felony
crime involving moral turpitude.
"CONSTRUCTIVE TERMINATION" means that the Optionee voluntarily terminates
his or her employment with the Company after any of the following are
undertaken, following a Change in Control, without Optionee's express written
consent:
(a) the assignment to Optionee of any duties or responsibilities
which are inconsistent with, or result in any diminution or adverse change of,
Optionee's position, status or circumstances of employment as in effect
immediately prior to a Change in Control; an adverse change in Optionee's
titles, offices, benefits and/or perquisites as in effect immediately prior to a
Change in Control; any removal of Optionee from or any failure to re-elect
Optionee to any offices held by Optionee immediately prior to a Change in
Control, including, but not limited to, Optionee's membership on the Board,
except in connection with the termination of his employment for death,
disability, retirement, Cause, or any voluntary termination of employment by
Optionee other than a Constructive Termination;
(b) a reduction by the Company in Optionee's annual base salary by
greater than five percent (5%) from that which was in effect immediately prior
to a Change in Control;
2.
<PAGE> 10
(c) a relocation of Optionee, or the Company's principal executive
offices if Optionee's principal office is at such offices, to a location more
than forty (40) miles from the location at which Optionee was performing his
duties prior to a Change in Control, except for required travel by Optionee on
the Company's business to an extent substantially consistent with Optionee's
business travel obligations at the time of a Change in Control;
(d) any material breach by the Company of any material provision of
Optionee's Stock Award Agreement following a Change in Control; or
(e) any failure by the Company to obtain the assumption of
Optionee's Stock Award Agreement by any successor or assign of the Company.
3.
<PAGE> 1
EXHIBIT 10.4
PMR CORPORATION
OUTSIDE DIRECTORS' NON-QUALIFIED
STOCK OPTION PLAN OF 1992
SECTION 1. STATEMENT OF POLICY. The Board of Directors of PMR Corporation
believes that it would be in the interest of the Corporation to adopt a stock
option plan for its outside directors in order to encourage the acquisition of a
personal proprietary interest in the Corporation by those directors of the
Corporation who are not also employees of the Corporation. It is anticipated
that stock ownership in the Corporation by such persons will stimulate their
efforts and strengthen their desire to remain with the Corporation and will
enable the Corporation from time to time to attract other persons of quality to
become directors of the Corporation. This Plan, which is to be known as the
Outside Directors Non-Qualified Stock Option Plan of 1992, is not intended to be
qualified for preferential tax treatment as an incentive stock option plan under
applicable provisions of the Code.
SECTION 2. DEFINITIONS. When used in this Plan, unless the context
otherwise requires:
(a) "BOARD" shall mean the Board of Directors of the Corporation, as
constituted from time to time, or any Committee appointed by the Board, as
described in Section 3.
(b) "CODE" shall mean the Internal Revenue Code of 1986, as amended.
(c) "CORPORATION" shall mean PMR Corporation, a Delaware corporation.
(d) "GRANTEE" shall mean an individual to whom an Option is granted
pursuant to the terms and conditions of the Plan.
(e) "OPTION" shall mean a stock option granted pursuant to the terms and
conditions of the Plan.
(f) "OUTSIDE DIRECTOR" shall mean a director of the Corporation who is not
an employee of the Corporation or any Subsidiary.
(g) "PLAN" shall mean this Outside Directors' Stock Option Plan of 1992,
which was authorized by the Board on August 3, 1992, as amended from time to
time.
(h) "SHARE" shall mean a share of common stock of the Corporation.
1.
<PAGE> 2
(i) "SUBSIDIARY" shall mean any company of which stock possessing more
than 50% of the total combined voting power of all classes of stock is owned by
the Corporation or by a Subsidiary of the Corporation, including corporations
which become Subsidiaries after the date of adoption of this Plan.
SECTION 3. ADMINISTRATION OF THE PLAN. The Plan shall be administered by
the Board or by a Committee appointed by the Board, provided that no outside
director shall sit on such Committee and no Outside Director shall vote on
issues related to the Plan. Any member of said Committee so appointed may be
removed at any time, with or without cause by the Board, and all vacancies on
said Committee shall be filled by action of the Board. If the Committee is
appointed, rules for the notice and conduct of Committee meetings and action to
administer the Plan shall be prescribed by the Board. (Hereinafter, all
references to the Board shall be deemed to apply to any such Committee so
appointed by the Board.)
SECTION 4. OPTION SHARES. The aggregate number of Shares which may be
issued upon exercise of Options under the Plan shall not exceed five hundred
twenty-five thousand (525,000). The Shares shall consist of authorized but
unissued Shares. If any Option shall expire or terminate for any reason, without
having been exercised in full, Options for the unpurchased Shares subject
thereto may again be granted under the Plan.
SECTION 5. TIME FOR GRANTING OPTIONS. Options may be granted by the Board
pursuant to this Plan at any time as long as Shares reserved to this Plan shall
remain unissued; provided, that, unless otherwise determined by the Board,
options shall be granted annually as of the date of the regular meeting of the
Board closest to the anniversary date of the Plan.
SECTION 6. PERSONS ELIGIBLE. All Outside Directors shall be eligible to
receive Options pursuant to the terms of this Plan.
SECTION 7. AMOUNT LIMITATIONS ON GRANT OF OPTIONS. The number of Shares to
be optioned to eligible persons shall be determined by the Board in its sole
discretion; provided, however, that, unless otherwise determined by the Board,
each person who is an Outside Director of the Corporation at the time of the
regular meeting referenced in Section 6 shall be granted an Option to purchase
fifteen thousand (15,000) Shares.
SECTION 8. FORM OF OPTIONS. The written evidence of Options shall be
determined from time to time by the Board. An Option Agreement signed by the
Chairman of the Board or the President or a Vice President, attested by the
Treasurer or Assistant Treasurer or Secretary or Assistant Secretary of the
Corporation, and having the seal of the Corporation affixed thereto, shall be
issued to each Grantee. Each Option
2.
<PAGE> 3
Agreement shall specify the maximum number of Shares for which it may be
exercised assuming that it fully vests in the Grantee ("Maximum Number of
Shares").
SECTION 9. TERM AND VESTING OF OPTIONS. Unless otherwise determined by the
Board, an Option shall vest in the Grantee and shall be exercisable by the
Grantee only to the following extent:
(a) Thirty percent ( 30% ) of the Maximum Number of Shares shall vest in
the Grantee upon the grant of the Option; and
(b) Subject to Section 15, on each of the first, second and third
anniversaries of the date of grant of the Option, the Option shall vest in the
Grantee to the extent of an additional twenty-three and one-third percent
(23.33%) of the Maximum Number of Shares.
At any time, subject to Section 12, a Grantee may exercise his Option for all or
any portion of the Maximum Number of Shares which is then vested. Unless
otherwise determined by the Board, and subject to Sections 12 and 15, each
vested portion of an Option shall be exercisable for a term of five (5) years
from the date of vesting. Upon expiration of any such term, any vested portion
of an Option not exercised in full shall expire and be of no further force or
effect.
Notwithstanding the foregoing provisions under this Section 9, upon a Change in
Control (as defined below) this Option shall be fully vested. For purposes of
this Section 9, a "Change in Control" shall occur upon any of the following
events:
(i) The Company is merged, consolidated or reorganized into or with
another corporation, partnership, limited liability company, or other entity or
person, and as a result of such merger, consolidation or reorganization less
than 70% of the combined voting power of the then-outstanding securities of such
corporation, partnership, limited liability company, or other entity or person
immediately after such transaction are held in the aggregate by holders of
voting securities of the Company immediately prior to such transaction;
(ii) The Company sells all or substantially all of its assets to any
other corporation, partnership, limited liability company, or other entity or
person, and thereafter, less than 70% of the combined voting power of the
then-outstanding voting securities of the acquiring or consolidated entity are
held in the aggregate by the holders of voting securities of the Company
immediately prior to such sale;
(iii) There is a report filed on Schedule 13D or Schedule 14D-1 (or
any successor schedule, form or report), each as promulgated pursuant to the
Securities Exchange Act of 1934 (the "Exchange Act") disclosing that any person
(as the term
3.
<PAGE> 4
"person" is used in Section 13(d)(3) or Section 14(d)(2) of the Exchange Act)
has become the beneficial owner (as the term "beneficial owner" is defined under
Rule 13d-3 or any successor rule or regulation promulgated under the Exchange
Act) representing 30% or more of the combined voting power of the
then-outstanding voting securities of the Company;
(iv) The Company shall file a report or proxy statement with the
Securities and Exchange Commission pursuant to the Exchange Act disclosing in
response to Item 1 of Form 8-K thereunder or Item 5(b) or Item 14 of Schedule
14A thereunder (or any successor schedule, form or report or item therein) that
a change in control of the Company has or may have occurred or will or may occur
in the future pursuant to any then-existing contract or transaction; or
(v) During any period of two (2) consecutive years, individuals who
at the beginning of any such period constitute the directors of the Company
cease for any reason to constitute at least a majority of the Board of Directors
of the Company unless the election or the nomination for election by the
Company's shareholders of each director of the Company first elected during such
period was approved by a vote of at least two-thirds of the directors of the
Company then still in office who were directors of the Company at the beginning
of such two (2)-year period.
SECTION. 10. ASSIGNABILITY OF OPTIONS. During the lifetime of the Grantee,
the Option may be exercised only by him. Options and all rights thereunder shall
be nonassignable and nontransferable by the Grantee other than by will or the
laws of descent and distribution and in accordance with Sections 12 and 15(b)
hereof.
SECTION 11. OPTION PRICE. The price per share of the shares to be
purchased pursuant to the exercise of any option shall be as fixed by the Board,
but in no event shall be less than the fair market value of a Share on the day
on which the Option is granted. Fair market value shall be determined as
provided in Section 20.2031-2 of the Federal Estate Tax Regulations and, if not
inconsistent therewith, shall be the published closing bid price for such Shares
on the largest public market to which they have been admitted for trading.
EXERCISE OF OPTIONS
SECTION 12. HOW TO EXERCISE OPTION. An Option shall be exercised by
delivery of a duly signed notice in writing specifying the number of Shares to
be purchased making reference to the Option Agreement, together with the full
purchase price of the Shares to be purchased, to the Secretary or an officer of
the Corporation appointed by the Chairman of the Board for the purpose of
receiving the same; provided, however, that no
4.
<PAGE> 5
Option granted pursuant to the Plan may be exercised at any time when the Option
or the granting or exercise thereof violates any law or government' order or
regulation.
SECTION 13. PAYMENT FOR SHARES. Payment for the Shares purchased pursuant
to the exercise of an Option, including reimbursement to the Corporation of any
funds it must set aside as withholding taxes, if any, on such portion of the
price as may be determined to be income subject to withholding, shall be made at
the time of the exercise of the Option, in cash or by check payable to the order
of the Corporation or, if approved in each case by the Board, by one of the
following: (i) delivery to the Corporation of cash for at least 25% of the
Option price, plus the Grantee's promissory note which shall bear interest at
the rate of 9% per annum, which shall be payable over a period not to exceed two
years from the date of exercise, and which shall be secured by a pledge of the
Shares so purchased; or (ii) delivery to the Corporation of a number of Shares
already owned by the Grantee which Shares have an aggregate market value equal
to the aggregate Option price; or (iii) such other method of payment as the
Board may determine, but in all cases only to the extent that the Board
determines such payment or method of payment is good and legal consideration for
the Shares purchased. The Corporation may lend money or guaranty loans by third
parties to any individual finance the exercise of any Option granted under the
Plan or to carry Shares thereby acquired, in all cases to the extent that
counsel for the Corporation determines such loan or guaranty to be in conformity
with applicable provisions of law.
SECTION 14. COMPLIANCE WITH SECURITIES LAWS. Within a reasonable time
after the due exercise of an Option, the Corporation shall cause to be delivered
to the Grantee a certificate for the Shares purchased pursuant to the exercise
of the option. The Corporation may postpone the issuance and delivery of Shares
upon any exercise of an Option until (a) the admission of such Shares to listing
on any stock exchange on which Shares of the same class are then listed and (b)
the completion of such registration or other qualification of such Shares under
any state or Federal law, rule or regulation as the Corporation shall determine
to be necessary or advisable. Any person exercising an Option shall make such
representations (including representations to the effect that such person will
not dispose of such Shares in violation of the federal securities laws, if
required by the Corporation) and furnish such information as may in the opinion
of counsel for the Corporation be appropriate to permit the Corporation, in
light of the existence or nonexistence of an effective Registration Statement
under the Securities Act of 1933, with respect to such shares, to issue the
Shares in compliance with the provisions of that or any comparable act. The
Corporation may place any appropriate legend on any certificate evidencing the
Shares. Nothing herein shall be deemed to require that the Corporation file or
amend a Registration Statement.
5.
<PAGE> 6
SECTION 15. TERMINATION OF SERVICE AS DIRECTOR.
(a) In general, any unvested portion of an Option shall terminate at the
close of business on the date on which the Grantee ceases to provide services to
the Corporation for any reason whatsoever as a director, consultant, or
employee.
(b) Notwithstanding the foregoing, if the cessation of the Grantee's
service as a director is due to the death or permanent and total disability (as
defined in Section 22(e)(3) of the Code) of the Grantee, any unvested portion of
an Option which would have vested within the unserved portion of such Grantee's
term as a director shall vest as scheduled.
(c) Nothing contained herein or in any Option Agreement shall be construed
to confer upon any director any right to continue to serve as a director of the
Corporation or any Subsidiary or to derogate from any right of the Corporation
or any Subsidiary.
SECTION 16. ADJUSTMENT OF OPTIONED SHARES. If, prior to the complete
exercise of any Option, there shall be declared and paid a stock dividend upon
the Shares, or if the Shares shall be split up, converted, exchanged,
reclassified, or in any way substituted for, or if the Corporation shall merge
or consolidate with another corporation, then, in any such event, the Option, to
the extent that it has not been exercised, shall entitle the holder upon its
future exercise to such number and kind of securities or other property, subject
to the terms of the Option, to which the holder would have been entitled had
such holder actually owned the Shares subject to the unexercised portion of the
Option at the time of the occurrence of such stock dividend, split-up,
conversion, exchange, reclassification, substitution, merger or consolidation;
and the aggregate purchase price upon the future exercise of the Option shall be
the same as if the originally optioned Shares of the Corporation were being
purchased thereunder, provided that no fractions shall be issued and the
aggregate purchase price shall be appropriately reduced on account of any
fractions not so issued. If any such event should occur, the number of Shares,
with respect to which Options remain to be granted or with respect to which
Options may be re-granted, shall be similarly adjusted.
RULES, AMENDMENTS AND INTERPRETATION
SECTION 17. AMENDMENT. Except as provided in Section 18, the Board may at
any time withdraw or amend the Plan and the terms and conditions of any Options
not previously granted, and the Board, with the consent of the affected holder
of an Option, may at any time withdraw or amend the Plan and the terms and
conditions of any Option, which previously have been granted.
SECTION 18. AMENDMENTS REQUIRING STOCKHOLDERS' APPROVAL. Notwithstanding
the provisions of Section 17, any amendment which has the effect of
6.
<PAGE> 7
conforming this Plan to the requirements for an Incentive Stock Option Plan as
set forth in the Code shall not be effective unless approved by the shareholders
of the Corporation at a meeting called for such purpose within twelve months
before or after the adoption of such amendment by the Board.
SECTION 19. INTERPRETATION. A determination of the Board as to any
question which may arise with respect to the interpretation of the provisions
of the Plan and Options shall be final.
SECTION 20. RULES AND REGULATIONS. The Board may establish and revise such
rules, regulations and take such other actions with respect to the Plan as are
not inconsistent with the resolutions of the shareholders authorizing the Plan,
and as the Board deems advisable to make the Plan and Options effective and
provide for their administration.
SECTION 21. EFFECTIVENESS OF THE PLAN. The Plan is effective as of
August 3, 1992.
7.
<PAGE> 1
EXHIBIT 10.5
NONSTATUTORY STOCK OPTION
OUTSIDE DIRECTORS' NON-QUALIFIED STOCK OPTION PLAN OF 1992
____________________, Optionee:
PMR CORPORATION (the "Company"), pursuant to its Outside Directors'
Non-Qualified Stock Option Plan of 1992 (the "Plan") has on __________, 19__
(the "Grant Date") granted to you, the optionee named above, an option to
purchase shares of the common stock of the Company ("Common Stock"). This option
is not intended to qualify and will not be treated as an "incentive stock
option" within the meaning of Section 422 of the Internal Revenue Code of 1986,
as amended (the "Code").
The grant hereunder is in connection with and in furtherance of the
Company's compensatory benefit plan for participation of the Company's Outside
Directors' (as defined in the Plan).
The details of your option are as follows:
1. The total number of shares of Common Stock subject to this option is
fifteen thousand (15,000). Subject to the limitations contained herein, this
option shall be exercisable in accordance with the Plan.
2. The exercise price of this option is ___________________ ($_____) per
share, being the "fair market value" (as defined in the Plan) of the Common
Stock on the date of grant of this option.
3. Subject to the limitations contained herein, this option shall become
exercisable (i.e., vest) as to four thousand five hundred (4,500) shares on the
Grant Date, and shall vest further in equal annual installments of three
thousand five hundred (3,500) shares on each anniversary of the Grant Date until
fully vested. In addition, this option will become fully vested upon the
occurrence of a Change in Control (as defined in the Plan).
4. (a) This option may be exercised, to the extent specified above, by
delivering a notice of exercise (in a form designated by the Company) together
with the exercise price to the Secretary of the Company, or to such other person
as the Company may designate, during regular business hours, together with such
additional documents as the Company may then require pursuant to section 14 of
the Plan. This option may not be exercised for any number of shares which would
require the issuance of anything other than whole shares.
1.
<PAGE> 2
(b) By exercising this option you agree that the Company may require
you to enter an arrangement providing for the cash payment by you to the Company
of any tax withholding obligation of the Company arising by reason of the
exercise of this option or the lapse of any substantial risk of forfeiture to
which the shares are subject at the time of exercise.
5. Any notices provided for in this option or the Plan shall be given in
writing and shall be deemed effectively given upon receipt or, in the case of
notices delivered by the Company to you, five (5) days after deposit in the
United States mail, postage prepaid, addressed to you at the address specified
below or at such other address as you hereafter designate by written notice to
the Company.
6. This option is subject to all the provisions of the Plan, a copy of
which is attached hereto and its provisions are hereby made a part of this
option, and is further subject to all interpretations, amendments, rules and
regulations which may from time to time be promulgated and adopted pursuant to
the Plan. In the event of any conflict between the provisions of this option and
those of the Plan, the provisions of the Plan shall control.
Dated the day of ___________________, 19__.
Very truly yours,
PMR CORPORATION
By:___________________________________
Duly authorized on behalf
of the Board of Directors
ATTACHMENTS:
Outside Directors' Non-Qualified Stock Option Plan of 1992, with Amendment
2.
<PAGE> 3
The undersigned:
(a) Acknowledges receipt of the foregoing option and the attachments
referenced therein and understands that all rights and liabilities with respect
to this option are set forth in the option and the Plan;
(b) Acknowledges that as of the date of grant of this option, it sets
forth the entire understanding between the undersigned optionee and the Company
and its affiliates regarding the acquisition of stock in the Company and
supersedes all prior oral and written agreements on that subject with the
exception of (i) the options and any other stock awards previously granted and
delivered to the undersigned under stock award plans of the Company, and (ii)
the following agreements only:
NONE __________________________________________________
(Initial)
OTHER __________________________________________________
__________________________________________________
__________________________________________________
____________________________________________
OPTIONEE
____________________________________________
Address
____________________________________________
____________________________________________
3.
<PAGE> 1
EXHIBIT 10.6
"THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED UNDER
THE SECURITIES ACT OF 1933, AS AMENDED, OR ANY APPLICABLE STATE SECURITIES
LAWS. THESE SECURITIES MAY NOT BE SOLD, TRANSFERRED OR OTHERWISE DISPOSED OF
IN THE ABSENCE OF REGISTRATION, OR THE AVAILABILITY OF EXEMPTION FROM
REGISTRATION, UNDER THE SECURITIES ACT OF 1933, AS AMENDED, BASED ON AN OPINION
LETTER OF COUNSEL SATISFACTORY TO THE COMPANY OR A NO-ACTION LETTER FROM THE
SECURITIES AND EXCHANGE COMMISSION."
AMENDED AND RESTATED
OPTION TO PURCHASE COMMON STOCK
OF
PMR CORPORATION
Void after April 30, 2001
This certifies that, for value received, ALLEN TEPPER ("Holder"), is
entitled, subject to the terms set forth below, to purchase from PMR
CORPORATION (the "Company"), a Delaware corporation, shares of the Common Stock
of the Company (the "Shares"), as constituted on the effective date hereof (the
"Option Issue Date"), with the Notice of Exercise attached hereto duly
executed, and simultaneous payment therefor in lawful money of the United
States, at the Exercise Price as set forth in Section 2 below. The number,
character and Exercise Price of the shares are subject to adjustment as
provided below.
1. TERM OF OPTION. Subject to compliance with the vesting provisions
identified at Paragraph 2.3 hereafter, this Option shall be exercisable, in
whole or in part, during the term commencing on the Option Issue Date and
ending at 5:00 p.m. on April 30, 2001, and shall be void thereafter.
2. EXERCISE PRICE, NUMBER OF SHARES AND VESTING PROVISIONS.
2.1 EXERCISE PRICE. The Exercise Price at which this Option may
be exercised shall be $9.75 per share of common stock, as adjusted pursuant to
Section 11 hereof.
2.2 NUMBER OF SHARES. The number of shares of the Company's
Common Stock, $.01 par value per share ("Common Stock") which may be purchased
pursuant to this Option shall be 25,000 shares, as adjusted pursuant to Section
11 hereof.
2.3 VESTING. The Options granted hereunder have immediately
vested as of the Option Issue Date.
1.
<PAGE> 2
2.4 DEATH OF HOLDER AND TERMINATION.
(a) If the Holder shall die while in the employ of the
Company, his estate, personal representatives, or beneficiary shall have the
right, subject to the provisions of this Paragraph 2 hereof, to exercise the
Option (only to the extent that the Holder would have been entitled to do so as
of the date of his death) at any time within twelve (12) months from the date
of his death.
(b) In the event Holder's employment by the Company is
terminated for "cause", as defined above, or Holder voluntarily terminates his
employment with the Company, Holder shall have 30 days in which to exercise the
Option (only to the extent that the Holder would have been entitled to do so as
of the date of his termination) and thereafter, Holder's right in and to the
Option shall lapse and terminate.
3. EXERCISE OF OPTION.
(a) The Exercise Price shall either be payable in cash or
by bank or certified check; or by cashless exercise through the delivery by the
Holder to the Company of shares of the Company's Common Stock for which Holder
is the record and beneficial owner, or a withholding by the Company of shares
of Common Stock that Holder is otherwise entitled to receive upon exercise of
the Option or by any combination thereof. If shares of common stock of the
Company are tendered or withheld as payment of the Exercise Price, the value of
such shares shall be their "market value" as of the trading date immediately
preceding the date of exercise. The "market value" shall be:
(i) If the Company's common stock is traded in
the over-the-counter market and not on any national securities exchange nor in
the NASDAQ Reporting System, the market value shall be the average of the mean
between the last bid and ask prices per share, as reported by the National
Quotation Bureau, Inc., or an equivalent generally accepted reporting service,
or if not so reported, the average of the closing bid and asked prices for a
share as furnished to the Company by any member of the National Association of
Securities Dealers, Inc., selected by the Company for that purpose.
(ii) If the Company's common stock is traded on a
national securities exchange or in the NASDAQ Reporting System, the market
value shall be either (1) the simple average of the high and low prices at
which a share of the Company's common stock traded, as quoted on the NASDAQ-NMS
or its other principal exchange, or (2) the price of the last sale of a share
of common stock as similarly quoted, whichever is higher, and rounding out such
figure to the next higher multiple of 12.5 cents (unless the figure is already
a multiple of 12.5 cents).
2.
<PAGE> 3
If such tender would result in an issuance of a whole number of shares and a
fractional share of Common Stock, the value of such fractional share shall be
paid to the Company in cash or by check by the Holder.
(b) The purchase rights represented by this Option are
exercisable by the Holder in whole or in part, at any time, or from time to
time, by the surrender of this Option and the Notice of Exercise annexed hereto
duly completed and executed on behalf of the Holder, at the office of the
Company (or such other office or agency of the Company as it may designate by
notice in writing to the Holder at the address of the Holder appearing on the
books of the Company).
(c) This Option shall be deemed to have been exercised
immediately prior to the close of business on the date of its surrender for
exercise as provided above, and the person entitled to receive the shares of
Common Stock issuable upon such exercise shall be treated for all purposes as
the holder of record of such shares as of the close of business on such date.
As promptly as practicable on or after such date and in any event within ten
(10) days thereafter, the Company at its expense shall issue and deliver to the
person or persons entitled to receive the same a certificate or certificates
for the number of shares issuable upon such exercise. In the event that this
Option is exercised in part, the Company at its expense will execute and
deliver a new Option of like tenor exercisable for the number of shares for
which this Option may then be exercised.
4. NO FRACTIONAL SHARES OR SCRIP. No fractional shares or scrip
representing fractional shares shall be issued upon the exercise of this
Option. In lieu of any fractional share to which the Holder would otherwise be
entitled, the Company shall make a cash payment equal to the Exercise Price
multiplied by such fraction.
5. REPLACEMENT OF OPTION. On receipt of evidence reasonably satisfactory
to the Company of the loss, theft, destruction or mutilation of this Option
and, in the case of loss, theft or destruction, or delivery of an indemnity
agreement reasonably satisfactory in form and substance to the Company or, in
the case of mutilation, on surrender and cancellation of this Option, the
Company at its expense shall execute and deliver, in lieu of this Option, a new
Option of like tenor and amount.
6. RIGHTS OF STOCKHOLDER. Except as otherwise contemplated herein, the
Holder shall not be entitled to vote or receive dividends or be deemed the
holder of Common Stock or any other securities of the Company that may at any
time be issuable on the exercise hereof for any purpose, nor shall anything
contained herein be construed to confer upon the Holder, as such, any of the
rights of a stockholder of the Company or any right to vote for the election of
directors or upon any matter submitted to stockholders at any meeting thereof,
or to give or withhold consent to any corporate action (whether upon any
3.
<PAGE> 4
recapitalization, issuance of stock, reclassification of stock, change of par
value, or change of stock to no par value, consolidation, merger, conveyance or
otherwise) or to receive notice of meetings, or to receive dividends or
subscription rights or otherwise until the Option shall have been exercised as
provided herein.
7. TRANSFER OF OPTION.
7.1 NON-TRANSFERABILITY. The Option shall not be assigned,
transferred, pledged or hypothecated in any way, nor subject to execution,
attachment or similar process, otherwise than by will or by the laws of descent
and distribution. Any attempted assignment, transfer, pledge, hypothecation or
other disposition of the Option contrary to the provisions hereof, and the levy
of an execution, attachment, or similar process upon the Option, shall be null
and void and without effect.
7.2 COMPLIANCE WITH SECURITIES LAWS; RESTRICTIONS ON TRANSFERS.
(a) The Holder of this Option, by acceptance hereof,
acknowledges that this Option and the Shares to be issued upon exercise hereof
are being acquired solely for the Holder's own account and not as a nominee for
any other party, and for investment (unless such shares are subject to resale
pursuant to an effective prospectus), and that the Holder will not offer, sell
or otherwise dispose of this Option or any Shares to be issued upon exercise
hereof except under circumstances that will not result in a violation of
applicable federal and state securities laws. Upon exercise of this Option,
the Holder shall, if requested by the Company, confirm in writing, in a form
satisfactory to the Company, that the shares of Common Stock so purchased are
being acquired solely for the Holder's own account and not as a nominee for any
other party, for investment (unless such shares are subject to resale pursuant
to an effective prospectus), and not with a view toward distribution or resale.
(b) Neither this Option nor any share of Common Stock
issued upon exercise of this Option may be offered for sale or sold, or
otherwise transferred or sold in any transaction which would constitute a sale
thereof within the meaning of the Securities Act of 1933, as amended (the "1933
Act"), unless (i) such security has been registered for sale under the 1933 Act
and registered or qualified under applicable state securities laws relating to
the offer an sale of securities, or (ii) exemptions from the registration
requirements of the 1933 Act and the registration or qualification requirements
of all such state securities laws are available and the Company shall have
received an opinion of counsel satisfactory to the Company that the proposed
sale or other disposition of such securities may be effected without
registration under the 1933 Act and would not result in any violation of any
applicable state securities laws relating to the registration or qualification
of securities for sale, such counsel and such opinion to be satisfactory to the
Company.
4.
<PAGE> 5
(c) All Shares issued upon exercise hereof shall be
stamped or imprinted with a legend in substantially the following form (in
addition to any legend required by state securities laws).
"THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED UNDER
THE SECURITIES ACT OF 1933, AS AMENDED (THE "ACT"), OR ANY APPLICABLE STATE
SECURITIES LAWS. THESE SECURITIES MAY NOT BE SOLD, TRANSFERRED OR OTHERWISE
DISPOSED OF IN THE ABSENCE OF REGISTRATION, OR THE AVAILABILITY OF EXEMPTION
FROM REGISTRATION, UNDER THE SECURITIES ACT OF 1933, AS AMENDED, BASED ON AN
OPINION LETTER OF COUNSEL SATISFACTORY TO THE COMPANY OR A NO-ACTION LETTER
FROM THE SECURITIES AND EXCHANGE COMMISSION."
Holder recognizes that investing in the Option and the Common Stock
involves a high degree of risk, and Holder is in a financial position to hold
the Option and the Common Stock indefinitely and is able to bear the economic
risk and withstand a complete loss of its investment in the Option and the
Common Stock. The Holder is a sophisticated investor and is capable of
evaluating the merits and risks of investing in the Company. The Holder has
had an opportunity to discuss the Company's business, management and financial
affairs with the Company's management, has been given full and complete access
to information concerning the Company, and has utilized such access to its
satisfaction for the purpose of obtaining information or verifying information
and have had the opportunity to inspect the Company's operation. Holder has
had the opportunity to ask questions of, and receive answers from the
management of the Company (and any person acting on its behalf) concerning the
Option and the Common Stock and the agreements and transactions contemplated
hereby, and to obtain any additional information as Holder may have requested
in making its investment decision. The Holder is an "accredited investor", as
defined by Regulation D promulgated under the Act.
8. RESERVATION AND ISSUANCE OF STOCK.
(a) The Company covenants that during the term that this
Option is exercisable, the Company will reserve from its authorized and
unissued Common Stock a sufficient number of shares to provide for the issuance
of the shares upon the exercise of this Option, and from time to time will take
all steps necessary to amend its Certificate of Incorporation to provide
sufficient reserves of shares of Common Stock issuable upon the exercise of the
Option.
(b) The Company further covenants that all shares of
Common Stock issuable upon the due exercise of this Option will be free and
clear from all taxes or liens,
5.
<PAGE> 6
charges and security interests created by the Company with respect to the
issuance thereof, however, the Company shall not be obligated or liable for the
payment of any taxes, liens or charges of Holder, or any other party
contemplated by paragraph 7, incurred in connection with the issuance of this
Option or the Common Stock upon the due exercise of this Option. The Company
agrees that its issuance of this Option shall constitute full authority to its
officers who are charged with the duty of executing stock certificates to
execute and issue the necessary certificates for the shares of Common Stock
upon the exercise of this Option. The Common Stock issuable upon the due
exercise of this Option, will, upon issuance in accordance with the terms
hereof, be duly authorized, validly issued, fully paid and non-assessable.
9. NOTICES.
(a) Whenever the Exercise Price or number of shares
purchasable hereunder shall be adjusted pursuant to Section 11 hereof, the
Company shall issue a certificate signed by its Chief Financial Officer setting
forth, in reasonable detail, the event requiring the adjustment, the amount of
the adjustment, the method by which such adjustment was calculated, and the
Exercise Price and number of shares purchasable hereunder after giving effect
to such adjustment, and shall cause a copy of such certificate to be mailed (by
first-class mail, postage prepaid) to the Holder of this Option.
(b) All notices, advices and communications under this
Option shall be deemed to have been given, (i) in the case of personal
delivery, on the date of such delivery and (ii) in the case of mailing, on the
third business day following the date of such mailing, addressed as follows:
If to the Company:
PMR Corporation
3990 Old Town Avenue,
Suite 206A
San Diego, CA 92110
Attn: Allen Tepper, Chief Executive Officer
With a Copy to:
Jeremy D. Glaser, Esquire
Cooley Godward LLP
4365 Executive Drive, Suite 1100
San Diego, CA 92121-2128
and to the Holder:
6.
<PAGE> 7
at the address of the Holder appearing on the books
of the Company or the Company's transfer agent, if
any.
Either of the Company or the Holder may from time to time change the
address to which notices to it are to be mailed hereunder by notice in
accordance with the provisions of this Paragraph 9.
10. AMENDMENTS.
(a) Any term of this Option may be amended with the
written consent of the Company and the Holder. Any amendment effected in
accordance with this Section 10 shall be binding upon the Holder, each future
holder and the Company.
(b) No waivers of, or exceptions to, any term, condition
or provision of this Option, in any one or more instances, shall be deemed to
be, or construed as, a further or continuing waiver of any such term, condition
or provision.
11. ADJUSTMENTS. The number of Shares of Common Stock purchasable
hereunder and the Exercise Price is subject to adjustment from time to time
upon the occurrence of certain events, as follows:
11.1 REORGANIZATION, MERGER OR SALE OF ASSETS. If at any time
while this Option, or any portion thereof, is outstanding and unexpired there
shall be (i) a reorganization (other than a combination, reclassification,
exchange or subdivision of shares otherwise provided for herein), (ii) a merger
or consolidation of the Company with or into another corporation in which the
Company is not the surviving entity, or a reverse triangular merger in which
the Company is the surviving entity but the shares of the Company's capital
stock outstanding immediately prior to the merger are converted by virtue of
the merger into other property, whether in the form of securities, cash or
otherwise, or (iii) a sale or transfer of substantially all of the Company's
properties and assets as, or substantially as, an entirety to any other person,
then, as a part of such reorganization, merger, consolidation, sale or
transfer, lawful provision shall be made so that the holder of this Option
shall thereafter be entitled to receive upon payment of the Exercise Price then
in effect, the number of shares of stock or other securities or property of the
successor corporation resulting from such reorganization, merger,
consolidation, sale or transfer that a holder of the shares deliverable upon
exercise of this Option would have been entitled to receive in such
reorganization, consolidation, merger, sale or transfer if this Option had been
exercised immediately before such reorganization, merger, consolidation, sale
or transfer, all subject to further adjustment as provided in this Section 11.
The foregoing provisions of this Section 11.1 shall similarly apply to
successive reorganizations, consolidations, mergers, sales and transfers and to
the stock or securities of any other corporation that are at the time
receivable upon the exercise of this
7.
<PAGE> 8
Option. If the per-share consideration payable to the Holder hereof for shares
in connection with any such transaction is in a form other than cash or
marketable securities, then the value of such consideration shall be determined
in good faith by the Company's Board of Directors. In all events, appropriate
adjustment (as determined in good faith by the Company's Board of Directors)
shall be made in the application of the provisions of this Option with respect
to the rights and interests of the Holder after the transaction, to the end
that the provisions of this Option shall be applicable after that event, as
near as reasonably may be, in relation to any shares or other property
deliverable after that event upon exercise of this Option.
11.2 Reclassification. If the Company, at any time while this
Option, or any portion thereof, remains outstanding and unexpired, by
reclassification of securities or otherwise, shall change any of the securities
as to which purchase rights under this Option exist into the same or a
different number of securities of any other class or classes, this Option shall
thereafter represent the right to acquire such number and kind of securities as
would have been issuable as the result of such change with respect to the
securities that were subject to the purchase rights under this Option
immediately prior to such reclassification or other change and the Exercise
Price therefor shall be appropriately adjusted, all subject to further
adjustment as provided in this Section 11.
11.3 SPLIT, SUBDIVISION OR COMBINATION OF SHARES. If the Company
at any time while this Option, or any portion thereof, remains outstanding and
unexpired shall split, subdivide or combine the securities as to which purchase
rights under this Option exist, into a different number of securities of the
same class, the Exercise Price and the number of shares issuable upon exercise
of this Option shall be proportionately adjusted.
11.4 ADJUSTMENTS FOR DIVIDENDS IN STOCK OR OTHER SECURITIES OR
PROPERTY. If while this Option, or any portion hereof, remains outstanding and
unexpired the holders of the securities as to which purchase rights under this
Option exist at the time shall have received, or, on or after the record date
fixed for the determination of eligible Stockholders, shall have become
entitled to receive, without payment therefor, other or additional stock or
other securities or property (other than cash) of the Company by way of
dividend, then and in each case, this Option shall represent the right to
acquire, in addition to the number of shares of the security receivable upon
exercise of this Option, and without payment of any additional consideration
therefor, the amount of such other or additional stock or other securities or
property (other than cash) of the Company that such holder would hold on the
date of such exercise had it been the holder of record of the security
receivable upon exercise of this Option on the date hereof and had thereafter,
during the period from the date hereof to and including the date of such
exercise, retained such shares and/or all other additional stock, other
securities or property available by this Option as aforesaid during such
period.
8.
<PAGE> 9
11.5 The Company will not, by any voluntary action, avoid or seek
to avoid the observance or performance of any of the terms to be observed or
performed hereunder by the Company, but will at all times in good faith assist
in the carrying out of all the provisions of this Section 11 and in the taking
of all such action as may be necessary or appropriate in order to protect the
rights of the Holders of this Option against impairment.
12. SEVERABILITY. Whenever possible, each provision of this Option shall
be interpreted in such manner as to be effective and valid under applicable
law, but if any provision of this Option is held to be invalid, illegal or
unenforceable in any respect under any applicable law or rule in any
jurisdiction, such invalidity, illegality or unenforceability shall not affect
the validity, legality or enforceability of any other provision of this Option
in such jurisdiction or affect the validity, legality or enforceability of any
provision in any other jurisdiction, but this Option shall be reformed,
construed and enforced in such jurisdiction as if such invalid, illegal or
unenforceable provision had never been contained herein.
13. GOVERNING LAW. The corporate law of the State of Delaware shall
govern all issues and questions concerning the relative rights of the Company
and its stockholders. All other questions concerning the construction,
validity, interpretation and enforceability of this Option and the exhibits and
schedules hereto shall be governed by, and construed in accordance with, the
laws of the State of Delaware, without giving effect to any choice of law or
conflict of law rules or provisions (whether of the State of Delaware or any
other jurisdiction) that would cause the application of the laws of any
jurisdiction other than the State of Delaware.
14. JURISDICTION. In connection with the enforcement of a decision in
arbitration pursuant to section 16 hereof, the Holder and the Company agree to
submit to personal jurisdiction and to waive any objection as to venue in the
federal or state courts in the City in which the headquarters of the Company is
located, which as of the date hereof is San Diego, California. Service of
process on the Company or the Holder in any action arising out of or relating
to this Option shall be effective if mailed to such party at the address listed
in Section 9 hereof.
15. ARBITRATION. If a dispute arises as to interpretation of this Option,
it shall be decided exclusively and finally by three arbitrators in an
arbitration proceeding conforming to the Rules of the American Arbitration
Association applicable to commercial arbitration. The arbitrators shall be
appointed as follows: one by the Company, one by the Holder and the third by
the said two arbitrators, or, if they cannot agree, then the third arbitrator
shall be appointed by the American Arbitration Association. The third
arbitrator shall be chairman of the panel and shall be impartial. The
arbitration shall take place in the City in which the headquarters of the
Company is located, which as of the date hereof is San Diego, California. The
decision of a majority
9.
<PAGE> 10
of the Arbitrators shall be conclusively binding upon the parties and final,
and such decision shall be enforceable as a judgment in any court of competent
jurisdiction. Each party shall pay the fees and expenses of the arbitrator
appointed by it, its counsel and its witnesses. The parties shall share
equally the fees and expenses of the impartial arbitrator.
16. CORPORATE POWER; AUTHORIZATION; ENFORCEABLE OBLIGATIONS. The
execution, delivery and performance by the Company of this Agreement: (i) are
within the Company's corporate power; (ii) have been duly authorized by all
necessary or proper corporate action; (iii) are not in contravention of the
Company's certificate of incorporation or by-laws; (iv) will not violate in any
material respect, any law or regulation, including any and all Federal and
state securities laws, or any order or decree of any court or governmental
instrumentality; and (v) will not, in any material respect, conflict with or
result in the breach or termination of, or constitute a default under any
agreement or other material instrument to which the Company is a party or by
which the Company is bound.
17. SUCCESSORS AND ASSIGNS. This Option shall inure to the benefit of and
be binding on the respective successors, assigns and legal representatives of
the Holder and the Company.
10.
<PAGE> 11
IN WITNESS WHEREOF, the Company has caused this Option to be executed
by its officers thereunto duly authorized.
Option Issue Date: April 30, 1996
HOLDER PMR CORPORATION
By: /s/ Allen Tepper By: /s/ Mark Clein
------------------------ ------------------------
Allen Tepper Mark Clein,
Executive Vice President
11.
<PAGE> 12
NOTICE OF EXERCISE
TO: PMR CORPORATION
(1) The undersigned hereby elects to purchase _________ shares of
Common Stock of PMR CORPORATION pursuant to the terms of the attached Option,
and tenders herewith payment of the purchase price for such shares in full.
(2) In exercising this Option, the undersigned hereby confirms and
acknowledges that the shares of Common Stock to be issued upon conversion
thereof are being acquired solely for the account of the undersigned and not as
a nominee for any other party, and for investment (unless such shares are
subject to resale pursuant to an effective prospectus), and that the
undersigned will not offer, sell or otherwise dispose of any such shares of
Common Stock except under circumstances that will not result in a violation of
the Securities Act of 1933, as amended, or any state securities laws.
(3) Please issue a certificate or certificates representing said
shares of Common Stock in the name of the undersigned or in such other name as
is specified below:
----------------------------
(Name)
----------------------------
(Name)
- ---------------------------- ----------------------------
(Date) (Signature)
12.
<PAGE> 1
EXHIBIT 10.7
"THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED UNDER
THE SECURITIES ACT OF 1933, AS AMENDED, OR ANY APPLICABLE STATE SECURITIES
LAWS. THESE SECURITIES MAY NOT BE SOLD, TRANSFERRED OR OTHERWISE DISPOSED OF
IN THE ABSENCE OF REGISTRATION, OR THE AVAILABILITY OF EXEMPTION FROM
REGISTRATION, UNDER THE SECURITIES ACT OF 1933, AS AMENDED, BASED ON AN OPINION
LETTER OF COUNSEL SATISFACTORY TO THE COMPANY OR A NO-ACTION LETTER FROM THE
SECURITIES AND EXCHANGE COMMISSION."
AMENDED AND RESTATED
OPTION TO PURCHASE COMMON STOCK
OF
PMR CORPORATION
Void after April 30, 2006
This certifies that, for value received, SUSAN ERSKINE ("Holder"), is
entitled, subject to the terms set forth below, to purchase from PMR
CORPORATION (the "Company"), a Delaware corporation, shares of the Common Stock
of the Company (the "Shares"), as constituted on the effective date hereof (the
"Option Issue Date"), with the Notice of Exercise attached hereto duly
executed, and simultaneous payment therefor in lawful money of the United
States, at the Exercise Price as set forth in Section 2 below. The number,
character and Exercise Price of the shares are subject to adjustment as
provided below.
1. TERM OF OPTION. Subject to compliance with the vesting provisions
identified at Paragraph 2.3 hereafter, this Option shall be exercisable, in
whole or in part, during the term commencing on the Option Issue Date and
ending at 5:00 p.m. on April 30, 2006, and shall be void thereafter.
2. EXERCISE PRICE, NUMBER OF SHARES AND VESTING PROVISIONS.
2.1 EXERCISE PRICE. The Exercise Price at which this Option may
be exercised shall be $9.75 per share of common stock, as adjusted pursuant to
Section 11 hereof.
2.2 NUMBER OF SHARES. The number of shares of the Company's
Common Stock, $.01 par value per share ("Common Stock") which may be purchased
pursuant to this Option shall be 21,671 shares, as adjusted pursuant to Section
11 hereof.
2.3 VESTING. The Options granted hereunder have immediately
vested as of the Option Issue Date.
1.
<PAGE> 2
2.4 DEATH OF HOLDER AND TERMINATION.
(a) If the Holder shall die while in the employ of the
Company, his estate, personal representatives, or beneficiary shall have the
right, subject to the provisions of this Paragraph 2 hereof, to exercise the
Option (only to the extent that the Holder would have been entitled to do so as
of the date of his death) at any time within twelve (12) months from the date
of his death.
(b) In the event Holder's employment by the Company is
terminated for "cause", as defined above, or Holder voluntarily terminates his
employment with the Company, Holder shall have 30 days in which to exercise the
Option (only to the extent that the Holder would have been entitled to do so as
of the date of his termination) and thereafter, Holder's right in and to the
Option shall lapse and terminate.
3. EXERCISE OF OPTION.
(a) The Exercise Price shall either be payable in cash or
by bank or certified check; or by cashless exercise through the delivery by the
Holder to the Company of shares of the Company's Common Stock for which Holder
is the record and beneficial owner, or a withholding by the Company of shares
of Common Stock that Holder is otherwise entitled to receive upon exercise of
the Option or by any combination thereof. If shares of common stock of the
Company are tendered or withheld as payment of the Exercise Price, the value of
such shares shall be their "market value" as of the trading date immediately
preceding the date of exercise. The "market value" shall be:
(i) If the Company's common stock is traded in
the over-the-counter market and not on any national securities exchange nor in
the NASDAQ Reporting System, the market value shall be the average of the mean
between the last bid and ask prices per share, as reported by the National
Quotation Bureau, Inc., or an equivalent generally accepted reporting service,
or if not so reported, the average of the closing bid and asked prices for a
share as furnished to the Company by any member of the National Association of
Securities Dealers, Inc., selected by the Company for that purpose.
(ii) If the Company's common stock is traded on a
national securities exchange or in the NASDAQ Reporting System, the market
value shall be either (1) the simple average of the high and low prices at
which a share of the Company's common stock traded, as quoted on the NASDAQ-NMS
or its other principal exchange, or (2) the price of the last sale of a share
of common stock as similarly quoted, whichever is higher, and rounding out such
figure to the next higher multiple of 12.5 cents (unless the figure is already
a multiple of 12.5 cents).
2.
<PAGE> 3
If such tender would result in an issuance of a whole number of shares and a
fractional share of Common Stock, the value of such fractional share shall be
paid to the Company in cash or by check by the Holder.
(b) The purchase rights represented by this Option are
exercisable by the Holder in whole or in part, at any time, or from time to
time, by the surrender of this Option and the Notice of Exercise annexed hereto
duly completed and executed on behalf of the Holder, at the office of the
Company (or such other office or agency of the Company as it may designate by
notice in writing to the Holder at the address of the Holder appearing on the
books of the Company).
(c) This Option shall be deemed to have been exercised
immediately prior to the close of business on the date of its surrender for
exercise as provided above, and the person entitled to receive the shares of
Common Stock issuable upon such exercise shall be treated for all purposes as
the holder of record of such shares as of the close of business on such date.
As promptly as practicable on or after such date and in any event within ten
(10) days thereafter, the Company at its expense shall issue and deliver to the
person or persons entitled to receive the same a certificate or certificates
for the number of shares issuable upon such exercise. In the event that this
Option is exercised in part, the Company at its expense will execute and
deliver a new Option of like tenor exercisable for the number of shares for
which this Option may then be exercised.
4. NO FRACTIONAL SHARES OR SCRIP. No fractional shares or scrip
representing fractional shares shall be issued upon the exercise of this
Option. In lieu of any fractional share to which the Holder would otherwise be
entitled, the Company shall make a cash payment equal to the Exercise Price
multiplied by such fraction.
5. REPLACEMENT OF OPTION. On receipt of evidence reasonably satisfactory
to the Company of the loss, theft, destruction or mutilation of this Option
and, in the case of loss, theft or destruction, or delivery of an indemnity
agreement reasonably satisfactory in form and substance to the Company or, in
the case of mutilation, on surrender and cancellation of this Option, the
Company at its expense shall execute and deliver, in lieu of this Option, a new
Option of like tenor and amount.
6. RIGHTS OF STOCKHOLDER. Except as otherwise contemplated herein, the
Holder shall not be entitled to vote or receive dividends or be deemed the
holder of Common Stock or any other securities of the Company that may at any
time be issuable on the exercise hereof for any purpose, nor shall anything
contained herein be construed to confer upon the Holder, as such, any of the
rights of a stockholder of the Company or any right to vote for the election of
directors or upon any matter submitted to stockholders at any meeting thereof,
or to give or withhold consent to any corporate action (whether upon any
3.
<PAGE> 4
recapitalization, issuance of stock, reclassification of stock, change of par
value, or change of stock to no par value, consolidation, merger, conveyance or
otherwise) or to receive notice of meetings, or to receive dividends or
subscription rights or otherwise until the Option shall have been exercised as
provided herein.
7. TRANSFER OF OPTION.
7.1 NON-TRANSFERABILITY. The Option shall not be assigned,
transferred, pledged or hypothecated in any way, nor subject to execution,
attachment or similar process, otherwise than by will or by the laws of descent
and distribution. Any attempted assignment, transfer, pledge, hypothecation or
other disposition of the Option contrary to the provisions hereof, and the levy
of an execution, attachment, or similar process upon the Option, shall be null
and void and without effect.
7.2 COMPLIANCE WITH SECURITIES LAWS; RESTRICTIONS ON TRANSFERS.
(a) The Holder of this Option, by acceptance hereof,
acknowledges that this Option and the Shares to be issued upon exercise hereof
are being acquired solely for the Holder's own account and not as a nominee for
any other party, and for investment (unless such shares are subject to resale
pursuant to an effective prospectus), and that the Holder will not offer, sell
or otherwise dispose of this Option or any Shares to be issued upon exercise
hereof except under circumstances that will not result in a violation of
applicable federal and state securities laws. Upon exercise of this Option,
the Holder shall, if requested by the Company, confirm in writing, in a form
satisfactory to the Company, that the shares of Common Stock so purchased are
being acquired solely for the Holder's own account and not as a nominee for any
other party, for investment (unless such shares are subject to resale pursuant
to an effective prospectus), and not with a view toward distribution or resale.
(b) Neither this Option nor any share of Common Stock
issued upon exercise of this Option may be offered for sale or sold, or
otherwise transferred or sold in any transaction which would constitute a sale
thereof within the meaning of the Securities Act of 1933, as amended (the "1933
Act"), unless (i) such security has been registered for sale under the 1933 Act
and registered or qualified under applicable state securities laws relating to
the offer an sale of securities, or (ii) exemptions from the registration
requirements of the 1933 Act and the registration or qualification requirements
of all such state securities laws are available and the Company shall have
received an opinion of counsel satisfactory to the Company that the proposed
sale or other disposition of such securities may be effected without
registration under the 1933 Act and would not result in any violation of any
applicable state securities laws relating to the registration or qualification
of securities for sale, such counsel and such opinion to be satisfactory to the
Company.
4.
<PAGE> 5
(c) All Shares issued upon exercise hereof shall be
stamped or imprinted with a legend in substantially the following form (in
addition to any legend required by state securities laws).
"THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED UNDER
THE SECURITIES ACT OF 1933, AS AMENDED (THE "ACT"), OR ANY APPLICABLE STATE
SECURITIES LAWS. THESE SECURITIES MAY NOT BE SOLD, TRANSFERRED OR OTHERWISE
DISPOSED OF IN THE ABSENCE OF REGISTRATION, OR THE AVAILABILITY OF EXEMPTION
FROM REGISTRATION, UNDER THE SECURITIES ACT OF 1933, AS AMENDED, BASED ON AN
OPINION LETTER OF COUNSEL SATISFACTORY TO THE COMPANY OR A NO-ACTION LETTER
FROM THE SECURITIES AND EXCHANGE COMMISSION."
Holder recognizes that investing in the Option and the Common Stock
involves a high degree of risk, and Holder is in a financial position to hold
the Option and the Common Stock indefinitely and is able to bear the economic
risk and withstand a complete loss of its investment in the Option and the
Common Stock. The Holder is a sophisticated investor and is capable of
evaluating the merits and risks of investing in the Company. The Holder has
had an opportunity to discuss the Company's business, management and financial
affairs with the Company's management, has been given full and complete access
to information concerning the Company, and has utilized such access to its
satisfaction for the purpose of obtaining information or verifying information
and have had the opportunity to inspect the Company's operation. Holder has
had the opportunity to ask questions of, and receive answers from the
management of the Company (and any person acting on its behalf) concerning the
Option and the Common Stock and the agreements and transactions contemplated
hereby, and to obtain any additional information as Holder may have requested
in making its investment decision. The Holder is an "accredited investor", as
defined by Regulation D promulgated under the Act.
8. RESERVATION AND ISSUANCE OF STOCK.
(a) The Company covenants that during the term that this
Option is exercisable, the Company will reserve from its authorized and
unissued Common Stock a sufficient number of shares to provide for the issuance
of the shares upon the exercise of this Option, and from time to time will take
all steps necessary to amend its Certificate of Incorporation to provide
sufficient reserves of shares of Common Stock issuable upon the exercise of the
Option.
(b) The Company further covenants that all shares of
Common Stock issuable upon the due exercise of this Option will be free and
clear from all taxes or liens,
5.
<PAGE> 6
charges and security interests created by the Company with respect to the
issuance thereof, however, the Company shall not be obligated or liable for the
payment of any taxes, liens or charges of Holder, or any other party
contemplated by paragraph 7, incurred in connection with the issuance of this
Option or the Common Stock upon the due exercise of this Option. The Company
agrees that its issuance of this Option shall constitute full authority to its
officers who are charged with the duty of executing stock certificates to
execute and issue the necessary certificates for the shares of Common Stock
upon the exercise of this Option. The Common Stock issuable upon the due
exercise of this Option, will, upon issuance in accordance with the terms
hereof, be duly authorized, validly issued, fully paid and non-assessable.
9. NOTICES.
(a) Whenever the Exercise Price or number of shares
purchasable hereunder shall be adjusted pursuant to Section 11 hereof, the
Company shall issue a certificate signed by its Chief Financial Officer setting
forth, in reasonable detail, the event requiring the adjustment, the amount of
the adjustment, the method by which such adjustment was calculated, and the
Exercise Price and number of shares purchasable hereunder after giving effect
to such adjustment, and shall cause a copy of such certificate to be mailed (by
first-class mail, postage prepaid) to the Holder of this Option.
(b) All notices, advices and communications under this
Option shall be deemed to have been given, (i) in the case of personal
delivery, on the date of such delivery and (ii) in the case of mailing, on the
third business day following the date of such mailing, addressed as follows:
If to the Company:
PMR Corporation
3990 Old Town Avenue,
Suite 206A
San Diego, CA 92110
Attn: Allen Tepper, Chief Executive Officer
With a Copy to:
Jeremy D. Glaser, Esquire
Cooley Godward LLP
4365 Executive Drive, Suite 1100
San Diego, CA 92121-2128
and to the Holder:
6.
<PAGE> 7
at the address of the Holder appearing on the books
of the Company or the Company's transfer agent, if
any.
Either of the Company or the Holder may from time to time change the
address to which notices to it are to be mailed hereunder by notice in
accordance with the provisions of this Paragraph 9.
10. AMENDMENTS.
(a) Any term of this Option may be amended with the
written consent of the Company and the Holder. Any amendment effected in
accordance with this Section 10 shall be binding upon the Holder, each future
holder and the Company.
(b) No waivers of, or exceptions to, any term, condition
or provision of this Option, in any one or more instances, shall be deemed to
be, or construed as, a further or continuing waiver of any such term, condition
or provision.
11. ADJUSTMENTS. The number of Shares of Common Stock purchasable
hereunder and the Exercise Price is subject to adjustment from time to time
upon the occurrence of certain events, as follows:
11.1 REORGANIZATION, MERGER OR SALE OF ASSETS. If at any time
while this Option, or any portion thereof, is outstanding and unexpired there
shall be (i) a reorganization (other than a combination, reclassification,
exchange or subdivision of shares otherwise provided for herein), (ii) a merger
or consolidation of the Company with or into another corporation in which the
Company is not the surviving entity, or a reverse triangular merger in which
the Company is the surviving entity but the shares of the Company's capital
stock outstanding immediately prior to the merger are converted by virtue of
the merger into other property, whether in the form of securities, cash or
otherwise, or (iii) a sale or transfer of substantially all of the Company's
properties and assets as, or substantially as, an entirety to any other person,
then, as a part of such reorganization, merger, consolidation, sale or
transfer, lawful provision shall be made so that the holder of this Option
shall thereafter be entitled to receive upon payment of the Exercise Price then
in effect, the number of shares of stock or other securities or property of the
successor corporation resulting from such reorganization, merger,
consolidation, sale or transfer that a holder of the shares deliverable upon
exercise of this Option would have been entitled to receive in such
reorganization, consolidation, merger, sale or transfer if this Option had been
exercised immediately before such reorganization, merger, consolidation, sale
or transfer, all subject to further adjustment as provided in this Section 11.
The foregoing provisions of this Section 11.1 shall similarly apply to
successive reorganizations, consolidations, mergers, sales and transfers and to
the stock or securities of any other corporation that are at the time
receivable upon the exercise of this
7.
<PAGE> 8
Option. If the per-share consideration payable to the Holder hereof for shares
in connection with any such transaction is in a form other than cash or
marketable securities, then the value of such consideration shall be determined
in good faith by the Company's Board of Directors. In all events, appropriate
adjustment (as determined in good faith by the Company's Board of Directors)
shall be made in the application of the provisions of this Option with respect
to the rights and interests of the Holder after the transaction, to the end
that the provisions of this Option shall be applicable after that event, as
near as reasonably may be, in relation to any shares or other property
deliverable after that event upon exercise of this Option.
11.2 Reclassification. If the Company, at any time while this
Option, or any portion thereof, remains outstanding and unexpired, by
reclassification of securities or otherwise, shall change any of the securities
as to which purchase rights under this Option exist into the same or a
different number of securities of any other class or classes, this Option shall
thereafter represent the right to acquire such number and kind of securities as
would have been issuable as the result of such change with respect to the
securities that were subject to the purchase rights under this Option
immediately prior to such reclassification or other change and the Exercise
Price therefor shall be appropriately adjusted, all subject to further
adjustment as provided in this Section 11.
11.3 SPLIT, SUBDIVISION OR COMBINATION OF SHARES. If the Company
at any time while this Option, or any portion thereof, remains outstanding and
unexpired shall split, subdivide or combine the securities as to which purchase
rights under this Option exist, into a different number of securities of the
same class, the Exercise Price and the number of shares issuable upon exercise
of this Option shall be proportionately adjusted.
11.4 ADJUSTMENTS FOR DIVIDENDS IN STOCK OR OTHER SECURITIES OR
PROPERTY. If while this Option, or any portion hereof, remains outstanding and
unexpired the holders of the securities as to which purchase rights under this
Option exist at the time shall have received, or, on or after the record date
fixed for the determination of eligible Stockholders, shall have become
entitled to receive, without payment therefor, other or additional stock or
other securities or property (other than cash) of the Company by way of
dividend, then and in each case, this Option shall represent the right to
acquire, in addition to the number of shares of the security receivable upon
exercise of this Option, and without payment of any additional consideration
therefor, the amount of such other or additional stock or other securities or
property (other than cash) of the Company that such holder would hold on the
date of such exercise had it been the holder of record of the security
receivable upon exercise of this Option on the date hereof and had thereafter,
during the period from the date hereof to and including the date of such
exercise, retained such shares and/or all other additional stock, other
securities or property available by this Option as aforesaid during such
period.
8.
<PAGE> 9
11.5 The Company will not, by any voluntary action, avoid or seek
to avoid the observance or performance of any of the terms to be observed or
performed hereunder by the Company, but will at all times in good faith assist
in the carrying out of all the provisions of this Section 11 and in the taking
of all such action as may be necessary or appropriate in order to protect the
rights of the Holders of this Option against impairment.
12. SEVERABILITY. Whenever possible, each provision of this Option shall
be interpreted in such manner as to be effective and valid under applicable
law, but if any provision of this Option is held to be invalid, illegal or
unenforceable in any respect under any applicable law or rule in any
jurisdiction, such invalidity, illegality or unenforceability shall not affect
the validity, legality or enforceability of any other provision of this Option
in such jurisdiction or affect the validity, legality or enforceability of any
provision in any other jurisdiction, but this Option shall be reformed,
construed and enforced in such jurisdiction as if such invalid, illegal or
unenforceable provision had never been contained herein.
13. GOVERNING LAW. The corporate law of the State of Delaware shall
govern all issues and questions concerning the relative rights of the Company
and its stockholders. All other questions concerning the construction,
validity, interpretation and enforceability of this Option and the exhibits and
schedules hereto shall be governed by, and construed in accordance with, the
laws of the State of Delaware, without giving effect to any choice of law or
conflict of law rules or provisions (whether of the State of Delaware or any
other jurisdiction) that would cause the application of the laws of any
jurisdiction other than the State of Delaware.
14. JURISDICTION. In connection with the enforcement of a decision in
arbitration pursuant to section 16 hereof, the Holder and the Company agree to
submit to personal jurisdiction and to waive any objection as to venue in the
federal or state courts in the City in which the headquarters of the Company is
located, which as of the date hereof is San Diego, California. Service of
process on the Company or the Holder in any action arising out of or relating
to this Option shall be effective if mailed to such party at the address listed
in Section 9 hereof.
15. ARBITRATION. If a dispute arises as to interpretation of this Option,
it shall be decided exclusively and finally by three arbitrators in an
arbitration proceeding conforming to the Rules of the American Arbitration
Association applicable to commercial arbitration. The arbitrators shall be
appointed as follows: one by the Company, one by the Holder and the third by
the said two arbitrators, or, if they cannot agree, then the third arbitrator
shall be appointed by the American Arbitration Association. The third
arbitrator shall be chairman of the panel and shall be impartial. The
arbitration shall take place in the City in which the headquarters of the
Company is located, which as of the date hereof is San Diego, California. The
decision of a majority
9.
<PAGE> 10
of the Arbitrators shall be conclusively binding upon the parties and final,
and such decision shall be enforceable as a judgment in any court of competent
jurisdiction. Each party shall pay the fees and expenses of the arbitrator
appointed by it, its counsel and its witnesses. The parties shall share
equally the fees and expenses of the impartial arbitrator.
16. CORPORATE POWER; AUTHORIZATION; ENFORCEABLE OBLIGATIONS. The
execution, delivery and performance by the Company of this Agreement: (i) are
within the Company's corporate power; (ii) have been duly authorized by all
necessary or proper corporate action; (iii) are not in contravention of the
Company's certificate of incorporation or by-laws; (iv) will not violate in any
material respect, any law or regulation, including any and all Federal and
state securities laws, or any order or decree of any court or governmental
instrumentality; and (v) will not, in any material respect, conflict with or
result in the breach or termination of, or constitute a default under any
agreement or other material instrument to which the Company is a party or by
which the Company is bound.
17. SUCCESSORS AND ASSIGNS. This Option shall inure to the benefit of and
be binding on the respective successors, assigns and legal representatives of
the Holder and the Company.
10.
<PAGE> 11
IN WITNESS WHEREO, the Company has caused this Option to be executed
by its officers thereunto duly authorized.
Option Issue Date: April 30, 1996
HOLDER PMR CORPORATION
By: /s/ Susan Erskine By: /s/ Allen Tepper
- ---------------------------- ----------------------------
Susan Erskine Allen Tepper, Chief
Executive Officer
11.
<PAGE> 12
NOTICE OF EXERCISE
TO: PMR CORPORATION
(1) The undersigned hereby elects to purchase _________ shares of
Common Stock of PMR CORPORATION pursuant to the terms of the attached Option,
and tenders herewith payment of the purchase price for such shares in full.
(2) In exercising this Option, the undersigned hereby confirms and
acknowledges that the shares of Common Stock to be issued upon conversion
thereof are being acquired solely for the account of the undersigned and not as
a nominee for any other party, and for investment (unless such shares are
subject to resale pursuant to an effective prospectus), and that the
undersigned will not offer, sell or otherwise dispose of any such shares of
Common Stock except under circumstances that will not result in a violation of
the Securities Act of 1933, as amended, or any state securities laws.
(3) Please issue a certificate or certificates representing said
shares of Common Stock in the name of the undersigned or in such other name as
is specified below:
----------------------------
(Name)
----------------------------
(Name)
- ---------------------------- ----------------------------
(Date) (Signature)
12.
<PAGE> 1
EXHIBIT 10.8
75,000 Option/MC
"THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED UNDER
THE SECURITIES ACT OF 1933, AS AMENDED, OR ANY APPLICABLE STATE SECURITIES
LAWS. THESE SECURITIES MAY NOT BE SOLD, TRANSFERRED OR OTHERWISE DISPOSED OF
IN THE ABSENCE OF REGISTRATION, OR THE AVAILABILITY OF EXEMPTION FROM
REGISTRATION, UNDER THE SECURITIES ACT OF 1933, AS AMENDED, BASED ON AN OPINION
LETTER OF COUNSEL SATISFACTORY TO HE COMPANY OR A NO-ACTION LETTER FROM THE
SECURITIES AND EXCHANGE COMMISSION."
AMENDED AND RESTATED
OPTION TO PURCHASE COMMON STOCK
OF
PMR CORPORATION
Void after February 1, 2003
This certifies that, for value received, MARK CLEIN ("Holder"), is
entitled, subject to the terms set forth below, to purchase from PMR
CORPORATION (the "Company"), a Delaware corporation, shares of the Common Stock
of the Company (the "Shares"), as constituted on the effective date hereof (the
"Option Issue Date"), with the Notice of Exercise attached hereto duly
executed, and simultaneous payment therefor in lawful money of the United
States, at the Exercise Price as set forth in Section 2 below. The number,
character and Exercise Price of the shares are subject to adjustment as
provided below.
1. TERM OF OPTION. Subject to compliance with the vesting
provisions identified at Paragraph 2.3 hereafter, this Option shall be
exercisable, in whole or in part, during the term commencing on the Option
Issue Date and ending at 5:00 p.m. on February 1, 2003, and shall be void
thereafter.
2. EXERCISE PRICE, NUMBER OF SHARES AND VESTING PROVISIONS.
2.1 EXERCISE PRICE. The Exercise Price at which this
Option may be exercised shall be $4.75 per share of common stock, as adjusted
pursuant to Section 11 hereof.
2.2 NUMBER OF SHARES. The number of shares of the
Company's Common Stock, $.01 par value per share ("Common Stock") which may be
purchased pursuant to this Option shall be 75,000 shares, as adjusted pursuant
to Section 11 hereof.
1.
<PAGE> 2
2.3 VESTING. The Options granted hereunder shall vest
100% on May 1, 2001, provided Holder remains continuously employed by the
Company from June 1, 1996 through May 1, 2001. No partial vesting shall be
permitted.
2.4 IMMEDIATE VESTING. Notwithstanding the provisions of
Paragraph 2.3 hereof, all of the Options shall immediately vest and become
immediately exercisable by Holder under any of the following circumstances:
(i) Once the "market capitalization" of the
Company has been equal to or greater than the average of $125,000,000 for a
period of thirty (30) consecutive "trading days." For the purposes of this
subparagraph 2.4(i) the term "trading day" shall mean any day on which the New
York Stock Exchange is open for trading; and the term "market capitalization"
shall be defined as the product of the "market value" (as such term is defined
in subparagraph 3(a) hereafter) of the Company's Common Stock and the fully
diluted number of shares of common stock (as determined on a basis consistent
with that utilized to determine the fully diluted number of shares used in
computing earnings for financial accounting purposes) outstanding as determined
on each of the trading days.
(ii) If a "change in control" of the Company
occurs; or
(iii) If during the term hereof, Holder is
terminated as Chief Financial Officer of the Company for any reason whatsoever
other than "cause".
For purposes of subparagraph 2.4(ii), the term "change in control"
shall be deemed to have occurred if (i) any "Person" who is not an existing
stockholder of the Company as of the date hereof (as the term "Person" is used
in Section 13(d) and Section 14(d) of the Securities Exchange Act of 1934),
becomes, after the date hereof, the beneficial owner, directly or indirectly of
securities of the Company representing twenty-five (25%) percent or more of the
combined voting power of the Company's then outstanding securities in a
transaction not approved by the Company's Board of Directors; (ii) there occurs
a contested proxy solicitation of the Company's shareholders that results in the
contesting party obtaining the ability to vote securities representing
twenty-five (25%) percent or more of the combined voting power of the Company's
then outstanding securities; or (iii) there occurs a sale, exchange, transfer or
other disposition of substantially all of the assets of the Company to another
entity, except to an entity controlled directly or indirectly by the Company, or
a merger, consolidation or other reorganization of the Company in which the
Company is not the surviving entity, or a plan of liquidation or dissolution of
the Company other than pursuant to bankruptcy or insolvency laws is adopted. For
the purposes of subparagraphs (i) and (ii) above, a "change in control" shall
not be deemed to have occurred provided: (a) at least a majority of the
Company's Board of Directors continue in such capacity immediately following
such transaction; and (b) the Holder
2.
<PAGE> 3
(provided he is employed by the Company at that time) continues to hold
substantially similar positions of employment with the Company immediately
following such transaction as existed prior to the transaction.
For purposes of subparagraph 2.4(iii), upon the occurrence of any of
the following events, a termination shall constitute a termination for "cause":
(a) any act or failure to act (or series or combination thereof) by Holder done
with the intent to harm in any material respect the interests of the Company,
not otherwise cured to the reasonable satisfaction of the Company within
fifteen (15) days of written notice from the Company identifying such act or
failure to act; (b) the commission by Holder of a felony for which he is
convicted by a court of competent jurisdiction; (c) the finding by a court of
competent jurisdiction that Holder perpetrated a dishonest act or common law
fraud against the Company or any affiliate thereof; (d) a grossly negligent act
or failure to act (or series or combination thereof) by Holder detrimental to a
material extent to the interests of the Company or any affiliate thereof not
otherwise cured to the satisfaction of the Company within fifteen (15) days of
written notice from the Company identifying such act or failure to act; (e) the
continued refusal to follow the directives of the Board which are consistent
with Holder's duties and responsibilities commensurate with his position as
Chief Financial Officer, within fifteen (15) days of written notice to that
effect from the Company, unless the failure to follow such directive was based
upon a written opinion of counsel that such directives would be in violation of
the Holder's fiduciary duty, if any, to the Company or would result in a
violation of Delaware law.
If a dispute arises between the Holder and the Company as to the
occurrence, or non-occurrence, as the case may be, of an event identified in
subparagraphs (a) - (e) above, such dispute shall be settled by arbitration in
accordance with paragraph 16 of this Agreement.
2.5. DEATH OF HOLDER AND TERMINATION.
(a) If the Holder shall die while in the employ
of the Company, his estate, personal representatives, or beneficiary shall have
the right, subject to the provisions of this Paragraph 2 hereof, to exercise
the Option (only to the extent that the Holder would have been entitled to do
so as of the date of his death) at any time within twelve (12) months from the
date of his death.
(b) In the event Holder's employment by the
Company is terminated for "cause", as defined above, or Holder voluntarily
terminates his employment with the Company, Holder shall have 30 days in which
to exercise the Option (only to the extent that the Holder would have been
entitled to do so as of the date of his termination) and thereafter, Holder's
right in and to the Option shall lapse and terminate.
3.
<PAGE> 4
3. EXERCISE OF OPTION.
(a) The Exercise Price shall either be payable in cash or
by bank or certified check; or by cashless exercise through the delivery by the
Holder to the Company of shares of the Company's Common Stock for which Holder
is the record and beneficial owner, or a withholding by the Company of shares
of Common Stock that Holder is otherwise entitled to receive upon exercise of
the Option or by any combination thereof. If shares of common stock of the
Company are tendered or withheld as payment of the Exercise Price, the value of
such shares shall be their "market value" as of the trading date immediately
preceding the date of exercise. The "market value" shall be:
(i) If the Company's common stock is traded in
the over-the-counter market and not on any national securities exchange nor in
the NASDAQ Reporting System, the market value shall be the avenge of the mean
between the last bid and ask prices per share, as reported by the National
Quotation Bureau, Inc., or an equivalent generally accepted reporting service,
or if not so reported, the avenge of the closing bid and asked prices for a
share as furnished to the Company by any member of the National Association of
Securities Dealers, Inc., selected by the Company for that purpose.
(ii) If the Company's common stock is traded on a
national securities exchange or in the NASDAQ Reporting System, the market
value shall be either (1) the simple average of the high and low prices at
which a share of the Company's common stock traded, as quoted on the NASDAQ-NMS
or its other principal exchange, or (2) the price of the last sale of a share
of common stock as similarly quoted, whichever is higher, and rounding out such
figure to the next higher multiple of 12.5 cents (unless the figure is already
a multiple of 12.5 cents).
If such tender would result in an issuance of a whole number of shares and a
fractional share of Common Stock, the value of such fractional share shall be
paid to the Company in cash or by check by the Holder.
(b) The purchase rights represented by this Option are
exercisable by the Holder in whole or in part, at any time, or from time to
time, by the surrender of this Option and the Notice of Exercise annexed hereto
duly completed and executed on behalf of the Holder, at the office of the
Company (or such other office or agency of the Company as it may designate by
notice in writing to the Holder at the address of the Holder appearing on the
books of the Company).
(c) This Option shall be deemed to have been exercised
immediately prior to the close of business on the date of its surrender for
exercise as provided above, and the person entitled to receive the shares of
Common Stock issuable upon such
4.
<PAGE> 5
exercise shall be treated for all purposes as the holder of record of such
shares as of the close of business on such date. As promptly as practicable on
or after such date and in any event within ten (10) days thereafter, the
Company at its expense shall issue and deliver to the person or persons
entitled to receive the same a certificate or certificates for the number of
shares issuable upon such exercise. In the event that this Option is exercised
in part, the Company at its expense will execute and deliver a new Option of
like tenor exercisable for the number of shares for which this Option may then
be exercised.
4. NO FRACTIONAL SHARES OR SCRIP. No fractional shares or scrip
representing fractional shares shall be issued upon the exercise of this
Option. In lieu of any fractional share to which the Holder would otherwise be
entitled, the Company shall make a cash payment equal to the Exercise Price
multiplied by such fraction.
5. REPLACEMENT OF OPTION. On receipt of evidence reasonably
satisfactory to the Company of the loss, theft, destruction or mutilation of
this Option and, in the case of loss, theft or destruction, on delivery of an
indemnity agreement reasonably satisfactory in form and substance to the
Company or, in the case of mutilation, on surrender and cancellation of this
Option, the Company at its expense shall execute and deliver, in lieu of this
Option, a new Option of like tenor and amount.
6. RIGHTS OF STOCKHOLDER. Except as otherwise contemplated
herein, the Holder shall not be entitled to vote or receive dividends or be
deemed the holder of Common Stock or any other securities of the Company that
may at any time be issuable on the exercise hereof for any purpose, nor shall
anything contained herein be construed to confer upon the Holder, as such, any
of the rights of a stockholder of the Company or any right to vote for the
election of directors or upon any matter submitted to stockholders at any
meeting thereof, or to give or withhold consent to any corporate action
(whether upon any recapitalization, issuance of stock, reclassification of
stock, change of par value, or change of stock to no par value, consolidation,
merger, conveyance or otherwise) or to receive notice of meetings, or to
receive dividends or subscription rights or otherwise until the Option shall
have been exercised as provided herein.
7. TRANSFER OF OPTION.
7.1. NON-TRANSFERABILITY. The Option shall not be
assigned, transferred, pledged or hypothecated in any way, nor subject to
execution, attachment or similar process, otherwise than by will or by the laws
of descent and distribution. Any attempted assignment, transfer, pledge,
hypothecation or other disposition of the Option contrary to the provisions
hereof, and the levy of an execution, attachment, or similar process upon the
Option, shall be null and void and without effect.
5.
<PAGE> 6
7.2. COMPLIANCE WITH SECURITIES LAWS; RESTRICTIONS ON
TRANSFERS.
(a) The Holder of this Option, by acceptance
hereof, acknowledges that this Option and the Shares to be issued upon exercise
hereof are being acquired solely for the Holder's own account and not as a
nominee for any other party, and for investment (unless such shares are subject
to resale pursuant to an effective prospectus), and that the Holder will not
offer, sell or otherwise dispose of this Option or any Shares to be issued upon
exercise hereof except under circumstances that will not result in a violation
of applicable federal and state securities laws. Upon exercise of this Option,
the Holder shall, if requested by the Company, confirm in writing, in a form
satisfactory to the Company, that the shares of Common Stock so purchased are
being acquired solely for the Holder's own account and not as a nominee for any
other party, for investment (unless such shares are subject to resale pursuant
to an effective prospectus), and not with a view toward distribution or resale.
(b) Neither this Option nor any share of Common
Stock issued upon exercise of this Option may be offered for sale or sold, or
otherwise transferred or sold in any transaction which would constitute a sale
thereof within the meaning of the Securities Act of 1933, as amended (the "1933
Act"), unless (i) such security has been registered for sale under the 1933 Act
and registered or qualified under applicable state securities laws relating to
the offer an sale of securities, or (ii) exemptions from the registration
requirements of the 1933 Act and the registration or qualification requirements
of all such state securities laws are available and the Company shall have
received an opinion of counsel satisfactory to the Company that the proposed
sale or other disposition of such securities may be effected without
registration under the 1933 Act and would not result in any violation of any
applicable state securities laws relating to the registration or qualification
of securities for sale, such counsel and such opinion to be satisfactory to the
Company.
(c) All Shares issued upon exercise hereof shall
be stamped or imprinted with a legend in substantially the following form (in
addition to any legend required by state securities laws).
"HE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED UNDER
THE SECURITIES ACT OF 1933, AS AMENDED (THE "ACT"), OR ANY APPLICABLE STATE
SECURITIES LAWS. THESE SECURITIES MAY NOT BE SOLD, TRANSFERRED OR OTHERWISE
DISPOSED OF IN THE ABSENCE OF REGISTRATION, OR THE AVAILABILITY OF EXEMPTION
FROM REGISTRATION, UNDER THE SECURITIES ACT OF 1933, AS AMENDED, BASED ON AN
OPINION LETTER OF COUNSEL SATISFACTORY TO THE COMPANY OR A NO-ACTION LETTER
FROM THE SECURITIES AND EXCHANGE COMMISSION."
6.
<PAGE> 7
Holder recognizes that investing in the Option and the Common Stock
involves a high degree of risk, and Holder is in a financial position to hold
the Option and the Common Stock indefinitely and is able to bear the economic
risk and withstand a complete loss of its investment in the Option and the
Common Stock. The Holder is a sophisticated investor and is capable of
evaluating the merits and risks of investing in the Company. The Holder has
had an opportunity to discuss the Company's business, management and financial
affairs with the Company's management, has been given full and complete access
to information concerning the Company, and has utilized such access to its
satisfaction for the purpose of obtaining information or verifying information
and have had the opportunity to inspect the Company's operation. Holder has
had the opportunity to ask questions of, and receive answers from the
management of the Company (and any person acting on its behalf) concerning the
Option and the Common Stock and the agreements and transactions contemplated
hereby, and to obtain any additional information as Holder may have requested
in making its investment decision. The Holder is an "accredited investor", as
defined by Regulation D promulgated under the Act.
8. RESERVATION AND ISSUANCE OF STOCK.
(a) The Company covenants that during the term that this Option is
exercisable, the Company will reserve from its authorized and unissued Common
Stock a sufficient number of shares to provide for the issuance of the shares
upon the exercise of this Option, and from time to time will take all steps
necessary to amend its Certificate of Incorporation to provide sufficient
reserves of shares of Common Stock issuable upon the exercise of the Option.
(b) The Company further covenants that all shares of Common Stock
issuable upon the due exercise of this Option will be free and clear from all
taxes or liens, charges and security interests created by the Company with
respect to the issuance thereof, however, the Company shall not be obligated or
liable for the payment of any taxes, liens or charges of Holder, or any other
party contemplated by paragraph 7, incurred in connection with the issuance of
this Option or the Common Stock upon the due exercise of this Option. The
Company agrees that its issuance of this Option shall constitute full authority
to its officers who are charged with the duty of executing stock certificates
to execute and issue the necessary certificates for the shares of Common Stock
upon the exercise of this Option. The Common Stock issuable upon the due
exercise of this Option, will, upon issuance in accordance with the terms
hereof, be duly authorized, validly issued, fully paid and non-assessable.
7.
<PAGE> 8
9. NOTICES.
(a) Whenever the Exercise Price or number of shares
purchasable hereunder shall be adjusted pursuant to Section 11 hereof, the
Company shall issue a certificate signed by its Chief Financial Officer setting
forth, in reasonable detail, the event requiring the adjustment, the amount of
the adjustment, the method by which such adjustment was calculated, and the
Exercise Price and number of shares purchasable hereunder after giving effect
to such adjustment, and shall cause a copy of such certificate to be mailed (by
first-class mail, postage prepaid) to the Holder of this Option.
(b) All notices, advices and communications under this
Option shall be deemed to have been given, (i) in the case of personal
delivery, on the date of such delivery and (ii) in the case of mailing, on the
third business day following the date of such mailing, addressed as follows:
If to the Company:
PMR Corporation
3990 Old Town Avenue,
Suite 206A
San Diego, CA 92110
Attn: Allen Tepper, Chief Executive Officer
With a Copy to:
Stephen M. Cohen, Esquire
Buchanan Ingersoll, Professional Corporation
Two Logan Square, 12th Floor
18th & Arch Streets
Philadelphia, PA 19 103-2771
and to the Holder:
at the address of the Holder appearing on the
books of the Company or the Company's transfer agent,
if any.
With a Copy to:
Joel I. Papernik, Esquire
Squadron, Ellenoff, Plesent & Sheinfeld, LLP
551 Fifth Avenue
New York, NY 10176
8.
<PAGE> 9
Either of the Company or the Holder may from time to time change the
address to which notices to it are to be mailed hereunder by notice in
accordance with the provisions of this Paragraph 9.
10. AMENDMENTS.
(a) Any term of this Option may be amended with the
written consent of the Company and the Holder. Any amendment effected in
accordance with this Section 10 shall be binding upon the Holder, each future
holder and the Company.
(b) No waivers of, or exceptions to, any term, condition
or provision of this Option, in any one or more instances, shall be deemed to
be, or construed as, a further or continuing waiver of any such term, condition
or provision.
11. ADJUSTMENTS. The number of Shares of Common Stock purchasable
hereunder and the Exercise Price is subject to adjustment from time to time
upon the occurrence of certain events, as follows:
11.1. REORGANIZATION, MERGER OR SALE OF ASSETS. If at any
time while this Option, or any portion thereof, is outstanding and unexpired
there shall be (i) a reorganization (other than a combination,
reclassification, exchange or subdivision of shares otherwise provided for
herein), (ii) a merger or consolidation of the Company with or into another
corporation in which the Company is not the surviving entity, or a reverse
triangular merger in which the Company is the surviving entity but the shares
of the Company's capital stock outstanding immediately prior to the merger are
converted by virtue of the merger into other property, whether in the form of
securities, cash or otherwise, or (iii) a sale or transfer of substantially all
of the Company's properties and assets as, or substantially as, an entirety to
any other person, then, as a part of such reorganization, merger,
consolidation, sale or transfer, lawful provision shall be made so that the
holder of this Option shall thereafter be entitled to receive upon payment of
the Exercise Price then in effect, the number of shares of stock or other
securities or property of the successor corporation resulting from such
reorganization, merger, consolidation, sale or transfer that a holder of the
shares deliverable upon exercise of this Option would have been entitled to
receive in such reorganization, consolidation, merger, sale or transfer if this
Option had been exercised immediately before such reorganization, merger,
consolidation, sale or transfer, all subject to further adjustment as provided
in this Section 11. The foregoing provisions of this Section 11.1 shall
similarly apply to successive reorganizations, consolidations, mergers, sales
and transfers and to the stock or securities of any other corporation that are
at the time receivable upon the exercise of this Option. If the per-share
consideration payable to the Holder hereof for shares in connection with any
such transaction is in a form other than cash or marketable securities, then
the value of such consideration shall be determined in good faith by the
Company's
9.
<PAGE> 10
Board of Directors. In all events, appropriate adjustment (as determined in
good faith by the Company's Board of Directors) shall be made in the
application of the provisions of this Option with respect to the rights and
interests of the Holder after the transaction, to the end that the provisions
of this Option shall be applicable after that event, as near as reasonably may
be, in relation to any shares or other property deliverable after that event
upon exercise of this Option.
11.2. RECLASSIFICATION. If the Company, at any time while
this Option, or any portion thereof, remains outstanding and unexpired, by
reclassification of securities or otherwise, shall change any of the securities
as to which purchase rights under this Option exist into the same or a
different number of securities of any other class or classes, this Option shall
thereafter represent the right to acquire such number and kind of securities as
would have been issuable as the result of such change with respect to the
securities that were subject to the purchase rights under this Option
immediately prior to such reclassification or other change and the Exercise
Price therefor shall be appropriately adjusted, all subject to further
adjustment as provided in this Section 11.
11.3. SPLIT, SUBDIVISION OR COMBINATION OF SHARES. If the
Company at any time while this Option, or any portion thereof, remains
outstanding and unexpired shall split, subdivide or combine the securities as
to which purchase rights under this Option exist, into a different number of
securities of the same class, the Exercise Price and the number of shares
issuable upon exercise of this Option shall be proportionately adjusted.
11.4. ADJUSTMENTS FOR DIVIDENDS IN STOCK OR OTHER
SECURITIES OR PROPERTY. If while this Option, or any portion hereof, remains
outstanding and unexpired the holders of the securities as to which purchase
rights under this Option exist at the time shall have received, or, on or after
the record date fixed for the determination of eligible Stockholders, shall
have become entitled to receive, without payment therefor, other or additional
stock or other securities or property (other than cash) of the Company by way
of dividend, then and in each case, this Option shall represent the right to
acquire, in addition to the number of shares of the security receivable upon
exercise of this Option, and without payment of any additional consideration
therefor, the amount of such other or additional stock or other securities or
property (other than cash) of the Company that such holder would hold on the
date of such exercise had it been the holder of record of the security
receivable upon exercise of this Option on the date hereof and had thereafter,
during the period from the date hereof to and including the date of such
exercise, retained such shares and/or all other additional stock, other
securities or property available by this Option as aforesaid during such
period.
11.5. The Company will not, by any voluntary action, avoid
or seek to avoid the observance or performance of any of the terms to be
observed or performed
10.
<PAGE> 11
hereunder by the Company, but will at all times in good faith assist in the
carrying out of all the provisions of this Section 11 and in the taking of all
such action as may be necessary or appropriate in order to protect the rights
of the Holders of this Option against impairment.
12. REGISTRATION RIGHTS. The Holder shall be entitled to the
registration rights set forth in that certain Registration Rights Agreement of
even date herewith by and between the Company and such Holder.
13. SEVERABILITY. Whenever possible, each provision of this
Option shall be interpreted in such manner as to be effective and valid under
applicable law, but if any provision of this Option is held to be invalid,
illegal or unenforceable in any respect under any applicable law or rule in any
jurisdiction, such invalidity, illegality or unenforceability shall not affect
the validity, legality or enforceability of any other provision of this Option
in such jurisdiction or affect the validity, legality or enforceability of any
provision in any other jurisdiction, but this Option shall be reformed,
construed and enforced in such jurisdiction as if such invalid, illegal or
unenforceable provision had never been contained herein.
14. GOVERNING LAW. The corporate law of the State of Delaware
shall govern all issues and questions concerning the relative rights of the
Company and its stockholders. All other questions concerning the construction,
validity, interpretation and enforceability of this Option and the exhibits and
schedules hereto shall be governed by, and construed in accordance with, the
laws of the State of Delaware, without giving effect to any choice of law or
conflict of law rules or provisions (whether of the State of Delaware or any
other jurisdiction) that would cause the application of the laws of any
jurisdiction other than the State of Delaware.
15. JURISDICTION. In connection with the enforcement of a
decision in arbitration pursuant to section 16 hereof, the Holder and the
Company agree to submit to personal jurisdiction and to waive any objection as
to venue in the federal or state courts in the City in which the headquarters
of the Company is located, which as of the date hereof is San Diego,
California. Service of process on the Company or the Holder in any action
arising out of or relating to this Option shall be effective if mailed to such
party at the address listed in Section 9 hereof.
16. ARBITRATION. If a dispute arises as to interpretation of this
Option, it shall be decided exclusively and finally by three arbitrators in an
arbitration proceeding conforming to the Rules of the American Arbitration
Association applicable to commercial arbitration. The arbitrators shall be
appointed as follows: one by the Company, one by the Holder and the third by
the said two arbitrators, or, if they cannot agree, then the third arbitrator
shall be appointed by the American Arbitration
11.
<PAGE> 12
Association. The third arbitrator shall be chairman of the panel and shall be
impartial. The arbitration shall take place in the City in which the
headquarters of the Company is located, which as of the date hereof is San
Diego, California. The decision of a majority of the Arbitrators shall be
conclusively binding upon the parties and final, and such decision shall be
enforceable as a judgment in any court of competent jurisdiction. Each party
shall pay the fees and expenses of the arbitrator appointed by it, its counsel
and its witnesses. The parties shall share equally the fees and expenses of
the impartial arbitrator.
17. CORPORATE POWER; AUTHORIZATION; ENFORCEABLE OBLIGATIONS. The
execution, delivery and performance by the Company of this Agreement: (i) are
within the Company's corporate power; (ii) have been duly authorized by all
necessary or proper corporate action; (iii) are not in contravention of the
Company's certificate of incorporation or by-laws; (iv) will not violate in any
material respect, any law or regulation, including any and all Federal and
state securities laws, or any order or decree of any court or governmental
instrumentality; and (v) will not, in any material respect, conflict with or
result in the breach or termination of, or constitute a default under any
agreement or other material instrument to which the Company is a party or by
which the Company is bound.
18. SUCCESSORS AND ASSIGNS. This Option shall inure to the
benefit of and be binding on the respective successors, assigns and legal
representatives of the Holder and the Company.
IN WITNESS WHEREOF, the Company has caused this Option to be executed
by its officers thereunto duly authorized.
Option Issue Date: February 1, 1996
HOLDER PMR CORPORATION
By: /s/ Mark Clein By: /s/ Allen Tepper
- ---------------------------- ----------------------------
Mark Clein Allen Tepper, Chief
Executive Officer
12.
<PAGE> 13
NOTICE OF EXERCISE
TO: PMR CORPORATION
(1) The undersigned hereby elects to purchase ______ shares of
Common Stock of PMR CORPORATION pursuant to the terms of the attached Option,
and tenders herewith payment of the purchase price for such shares in full.
(2) In exercising this Option, the undersigned hereby confirms and
acknowledges that the shares of Common Stock to be issued upon conversion
thereof are being acquired solely for the account of the undersigned and not as
a nominee for any other party, and for investment (unless such shares are
subject to resale pursuant to an effective prospectus), and that the
undersigned will not offer, sell or otherwise dispose of any such shares of
Common Stock except under circumstances that will not result in a violation of
the Securities Act of 1933, as amended, or any state securities laws.
(3) Please issue a certificate or certificates representing said
shares of Common Stock in the name of the undersigned or in such other name as
is specified below:
----------------------------
(Name)
----------------------------
(Name)
- ---------------------------- ----------------------------
(Date) Signature)
13.
<PAGE> 1
EXHIBIT 10.9
125,000 Option/MC
"THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED UNDER
THE SECURITIES ACT OF 1933, AS AMENDED, OR ANY APPLICABLE STATE SECURITIES
LAWS. THESE SECURITIES MAY NOT BE SOLD, TRANSFERRED OR OTHERWISE DISPOSED OF
IN THE ABSENCE OF REGISTRATION, OR THE AVAILABILITY OF EXEMPTION FROM
REGISTRATION, UNDER THE SECURITIES ACT OF 1933, AS AMENDED, BASED ON AN OPINION
LETTER OF COUNSEL SATISFACTORY TO THE COMPANY OR A NO-ACTION LETTER FROM THE
SECURITIES AND EXCHANGE COMMISSION."
AMENDED AND RESTATED
OPTION TO PURCHASE COMMON STOCK
OF
PMR CORPORATION
Void after February 1, 2003
This certifies that, for value received, MARK CLEIN ("Holder"), is
entitled, subject to the terms set forth below, to purchase from PMR
CORPORATION (the "Company"), a Delaware corporation, shares of the Common Stock
of the Company (the "Shares"), as constituted on the effective date hereof (the
"Option Issue Date"), with the Notice of Exercise attached hereto duly
executed, and simultaneous payment therefor in lawful money of the United
States, at the Exercise Price as set forth in Section 2 below. The number,
character and Exercise Price of the shares are subject to adjustment as
provided below.
1. TERM OF OPTION. Subject to compliance with the vesting
provisions identified at Paragraph 2.3 hereafter, this Option shall be
exercisable, in whole or in part, during the term commencing on the Option
Issue Date and ending at 5:00 p.m. on February 1, 2003, and shall be void
thereafter.
2. EXERCISE PRICE, NUMBER OF SHARES AND VESTING PROVISIONS.
2.1 EXERCISE PRICE. The Exercise Price at which this
Option may be exercised shall be $4.75 per share of common stock, as adjusted
pursuant to Section 11 hereof.
2.2 NUMBER OF SHARES. The number of shares of the
Company's Common Stock, $.01 par value per share ("Common Stock") which may be
purchased pursuant to this Option shall be 125,000 shares, as adjusted pursuant
to Section 11 hereof.
1.
<PAGE> 2
2.3 VESTING. The Options granted hereunder shall vest in
accordance with the following schedule:
(i) 20% provided Holder remains continuously
employed by the Company from June 1, 1996 through February 1, 1997;
(ii) 40% provided Holder remains continuously
employed by the Company from June 1, 1996 through February 1, 1998;
(iii) 60% provided Holder remains continuously
employed by the Company from June 1, 1996 through February 1, 1999;
(iv) 80% provided Holder remains continuously
employed by the Company from June 1, 1996 through February 1, 2000; and
(v) 100% provided Holder remains continuously
employed by the Company from June 1, 1996 through February 1, 2001.
2.4 IMMEDIATE VESTING. Notwithstanding the provisions of
Paragraph 2.3 hereof, all of the Options shall immediately vest and become
immediately exercisable by Holder under any of the following circumstances:
(i) Once the "market capitalization" of the
Company has been equal to or greater than the average of $100,000,000 for a
period of thirty (30) consecutive "trading days." For the purposes of this
subparagraph 2.4(i) the term "trading day" shall mean any day on which the New
York Stock Exchange is open for trading; and the term "market capitalization"
shall be defined as the product of the "market value" (as such term is defined
in subparagraph 3(a) hereafter) of the Company's Common Stock and the fully
diluted number of shares of common stock (as determined on a basis consistent
with that utilized to determine the fully diluted number of shares used in
computing earnings for financial accounting purposes) outstanding as determined
on each of the trading days.
(ii) If a "change in control" of the Company
occurs; or
(iii) If during the term hereof, Holder is
terminated in form or substance as Chief Financial Officer of the Company for
any reason whatsoever other than "cause".
For purposes of subparagraph 2.4(ii), the term "change in control"
shall be deemed to have occurred if (i) any "Person" who is not an existing
stockholder of the Company as of the date hereof (as the term "Person" is used
in Section 13(d) and Section 14(d) of the Securities Exchange Act of 1934),
becomes, after the date hereof, the beneficial owner,
2.
<PAGE> 3
directly or indirectly of securities of the Company representing twenty-five
(25%) percent or more of the combined voting power of the Company's then
outstanding securities in a transaction not approved by the Company's Board of
Directors; (ii) there occurs a contested proxy solicitation of the Company's
shareholders that results in the contesting party obtaining the ability to vote
securities representing twenty- five (25%) percent or more of the combined
voting power of the Company's then outstanding securities; or (iii) there
occurs a sale, exchange, transfer or other disposition of substantially all of
the assets of the Company to another entity, except to an entity controlled
directly or indirectly by the Company, or a merger, consolidation or other
reorganization of the Company in which the Company is not the surviving entity,
or a plan of liquidation or dissolution of the Company other than pursuant to
bankruptcy or insolvency laws is adopted. For the purposes of subparagraphs
(i) and (ii) above, a "change in control" shall not be deemed to have occurred
provided: (a) at least a majority of the Company's Board of Directors continue
in such capacity immediately following such transaction; and (b) the Holder
(provided he is employed by the Company at that time) continues to hold
substantially similar positions of employment with the Company immediately
following such transaction as existed prior to the transaction.
For purposes of subparagraph 2.4(iii), upon the occurrence of any of
the following events, a termination shall constitute a termination for "cause":
(a) any act or failure to act (or series or combination thereof) by Holder done
with the intent to harm in any material respect the interests of the Company,
not otherwise cured to the reasonable satisfaction of the Company within
fifteen (15) days of written notice from the Company identifying such act or
failure to act; (b) the commission by Holder of a felony for which he is
convicted by a court of competent jurisdiction; (c) the finding by a court of
competent jurisdiction that Holder perpetrated a dishonest act or common law
fraud against the Company or any affiliate thereof; (d) a grossly negligent act
or failure to act (or series or combination thereof) by Holder detrimental to a
material extent to the interests of the Company or any affiliate thereof not
otherwise cured to the satisfaction of the Company within fifteen (15) days of
written notice from the Company identifying such act or failure to act; (e) the
continued refusal to follow the directives of the Board which are consistent
with Holder's duties and responsibilities commensurate with his position as
Chief Financial Officer, within fifteen (15) days of written notice to that
effect from the Company, unless the failure to follow such directive was based
upon a written opinion of counsel that such directives would be in violation of
the Holder's fiduciary duty, if any, to the Company or would result in a
violation of Delaware law.
If a dispute arises between the Holder and the Company as to the
occurrence, or non-occurrence, as the case may be, of an event identified in
subparagraphs (a) - (e) above, such dispute shall be settled by arbitration in
accordance with paragraph 16 of this Agreement.
3.
<PAGE> 4
2.5. DEATH OF HOLDER AND TERMINATION.
(a) If the Holder shall die while in the employ
of the Company, his estate, personal representatives, or beneficiary shall have
the right, subject to the provisions of this Paragraph 2 hereof, to exercise
the Option (only to the extent that the Holder would have been entitled to do
so as of the date of his death) at any time within twelve (12) months from the
date of his death.
(b) In the event Holder's employment by the
Company is terminated for "cause", as defined above, or Holder voluntarily
terminates his employment with the Company, Holder shall have 30 days in which
to exercise the Option (only to the extent that the Holder would have been
entitled to do so as of the date of his termination) and thereafter, Holder's
right in and to the Option shall lapse and terminate.
3. EXERCISE OF OPTION.
(a) The Exercise Price shall either be payable in cash or
by bank or certified check; or by cashless exercise through the delivery by the
Holder to the Company of shares of the Company's Common Stock for which Holder
is the record and beneficial owner, or a withholding by the Company of shares
of Common Stock that Holder is otherwise entitled to receive upon exercise of
the Option or by any combination thereof. If shares of common stock of the
Company are tendered or withheld as payment of the Exercise Price, the value of
such shares shall be their "market value" as of the trading date immediately
preceding the date of exercise. The "market value" shall be:
(i) If the Company's common stock is traded in
the over-the-counter market and not on any national securities exchange nor in
the NASDAQ Reporting System, the market value shall be the average of the mean
between the last bid and ask prices per share, as reported by the National
Quotation Bureau, Inc., or an equivalent generally accepted reporting service,
or if not so reported, the average of the closing bid and asked prices for a
share as furnished to the Company by any member of the National Association of
SecUrities Dealers, Inc., selected by the Company for that purpose.
(ii) If the Company's common stock is traded on a
national securities exchange or in the NASDAQ Reporting System, the market
value shall be either (1) the simple average of the high and low prices at
which a share of the Company's common stock traded, as quoted on the NASDAQ-NMS
or its other principal exchange, or (2) the price of the last sale of a share
of common stock as similarly quoted, whichever is higher, and rounding out such
figure to the next higher multiple of 12.5 cents (unless the figure is already
a multiple of 12.5 cents). If such tender would result in
4.
<PAGE> 5
an issuance of a whole number of shares and a fractional share of Common Stock,
the value of such fractional share shall be paid to the Company in cash or by
check by the Holder.
(b) The purchase rights represented by this Option are
exercisable by the Holder in whole or in part, at any time, or from time to
time, by the surrender of this Option and the Notice of Exercise annexed hereto
duly completed and executed on behalf of the Holder, at the office of the
Company (or such other office or agency of the Company as it may designate by
notice in writing to the Holder at the address of the Holder appearing on the
books of the Company).
(c) This Option shall be deemed to have been exercised
immediately prior to the close of business on the date of its surrender for
exercise as provided above, and the person entitled to receive the shares of
Common Stock issuable upon such exercise shall be treated for all purposes as
the holder of record of such shares as of the close of business on such date.
As promptly as practicable on or after such date and in any event within ten
(10) days thereafter, the Company at its expense shall issue and deliver to the
person or persons entitled to receive the same a certificate or certificates
for the number of shares issuable upon such exercise. In the event that this
Option is exercised in part, the Company at its expense will execute and
deliver a new Option of like tenor exercisable for the number of shares for
which this Option may then be exercised.
4. NO FRACTIONAL SHARES OR SCRIP. No fractional shares or scrip
representing fractional shares shall be issued upon the exercise of this
Option. In lieu of any fractional share to which the Holder would otherwise be
entitled, the Company shall make a cash payment equal to the Exercise Price
multiplied by such fraction.
5. REPLACEMENT OF OPTION. On receipt of evidence reasonably
satisfactory to the Company of the loss, theft, destruction or mutilation of
this Option and, in the case of loss, theft or destruction, on delivery of an
indemnity agreement reasonably satisfactory in form and substance to the
Company or, in the case of mutilation, on surrender and cancellation of this
Option, the Company at its expense shall execute and deliver, in lieu of this
Option, a newOption of like tenor and amount.
6. RIGHTS OF STOCKHOLDER. Except as otherwise contemplated
herein, the Holder shall not be entitled to vote or receive dividends or be
deemed the holder of Common Stock or any other securities of the Company that
may at any time be issuable on the exercise hereof for any purpose, nor shall
anything contained herein be construed to confer upon the Holder, as such, any
of the rights of a stockholder of the Company or any right to vote for the
election of directors or upon any matter submitted to stockholders at any
meeting thereof, or to give or withhold consent to any corporate action
(whether
5.
<PAGE> 6
upon any recapitalization, issuance of stock, reclassification of stock, change
of par value, or change of stock to no par value, consolidation, merger,
conveyance or otherwise) or to receive notice of meetings, or to receive
dividends or subscription rights or otherwise until the Option shall have been
exercised as provided herein.
7. TRANSFER OF OPTION.
7.1. NON-TRANSFERABILITY. The Option shall not be
assigned, transferred, pledged or hypothecated in any way, nor subject to
execution, attachment or similar process, otherwise than by will or by the laws
of descent and distribution. Any attempted assignment, transfer, pledge,
hypothecation or other disposition of the Option contrary to the provisions
hereof, and the levy of an execution, attachment, or similar process upon the
Option, shall be null and void and without effect.
7.2. COMPLIANCE WITH SECURITIES LAWS; RESTRICTIONS ON
TRANSFERS.
(a) The Holder of this Option, by acceptance
hereof, acknowledges that this Option and the Shares to be issued upon exercise
hereof are being acquired solely for the Holder's own account and not as a
nominee for any other party, and for investment (unless such shares are subject
to resale pursuant to an effective prospectus), and that the Holder will not
offer, sell or otherwise dispose of this Option or any Shares to be issued upon
exercise hereof except under circumstances that will not result in a violation
of applicable federal and state securities laws. Upon exercise of this Option,
the Holder shall, if requested by the Company, confirm in writing, in a form
satisfactory to the Company, that the shares of Common Stock so purchased are
being acquired solely for the Holder's own account and not as a nominee for any
other party, for investment (unless such shares are subject to resale pursuant
to an effective prospectus), and not with a view toward distribution or resale.
(b) Neither this Option nor any share of Common
Stock issued upon exercise of this Option may be offered for sale or sold, or
otherwise transferred or sold in any transaction which would constitute a sale
thereof within the meaning of the Securities Act of 1933, as amended (the "1933
Act"), unless (i) such security has been registered for sale under the 1933 Act
and registered or qualified under applicable state securities laws relating to
the offer and sale of securities, or (ii) exemptions from the registration
requirements of the 1933 Act and the registration or qualification requirements
of all such state securities laws are available and the Company shall have
received an opinion of counsel satisfactory to the Company that the proposed
sale or other disposition of such securities may be effected without
registration under the 1933 Act and would not result in any violation of any
applicable state securities laws relating to the registration or qualification
of securities for sale, such counsel and such opinion to be satisfactory to the
Company.
6.
<PAGE> 7
(c) All Shares issued upon exercise hereof shall
be stamped or imprinted with a legend in substantially the following form (in
addition to any legend required by state securities laws).
"THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED UNDER
THE SECURITIES ACT OF 1933, AS AMENDED (THE "ACT"), OR ANY APPLICABLE STATE
SECURITIES LAWS. THESE SECURITIES MAY NOT BE SOLD, TRANSFERRED OR OTHERWISE
DISPOSED OF IN THE ABSENCE OF REGISTRATION, OR THE AVAILABILITY OF EXEMPTION
FROM REGISTRATION, UNDER THE SECURITIES ACT OF 1933, AS AMENDED, BASED ON AN
OPINION LETTER OF COUNSEL SATISFACTORY TO THE COMPANY OR A NO-ACTION LETTER
FROM THE SECURITIES AND EXCHANGE COMMISSION."
Holder recognizes that investing in the Option and the Common Stock
involves a high degree of risk, and Holder is in a financial position to hold
the Option and the Common Stock indefinitely and is able to bear the economic
risk and withstand a complete loss of its investment in the Option and the
Common Stock. The Holder is a sophisticated investor and is capable of
evaluating the merits and risks of investing in the Company. The Holder has
had an opportunity to discuss the Company's business, management and financial
affairs with the Company's management, has been given full and complete access
to information concerning the Company, and has utilized such access to its
satisfaction for the purpose of obtaining information or verifying information
and have had the opportunity to inspect the Company's operation. Holder has
had the opportunity to ask questions of, and receive answers from the
management of the Company (and any person acting on its behalf) concerning the
Option and the Common Stock and the agreements and transactions contemplated
hereby, and to obtain any additional information as Holder may have requested
in making its investment decision. The Holder is an "accredited investor", as
defined by Regulation D promulgated under the Act.
8. RESERVATION AND ISSUANCE OF STOCK.
(a) The Company covenants that during the term that this
Option is exercisable, the Company will reserve from its authorized and
unissued Common Stock a sufficient number of shares to provide for the issuance
of the shares Upon the exercise of this Option, and from time to time will take
all steps necessary to amend its Certificate of Incorporation to provide
sufficient reserves of shares of Common Stock issuable upon the exercise of the
Option.
(b) The Company further covenants that all shares of
Common Stock issuable upon the due exercise of this Option will be free and
clear from all taxes or liens,
7.
<PAGE> 8
charges and security interests created by the Company with respect to the
issuance thereof, however, the Company shall not be obligated or liable for the
payment of any taxes, liens or charges of Holder, or any other party
contemplated by paragraph 7, incurred in connection with the issuance of this
Option or the Common Stock upon the due exercise of this Option. The Company
agrees that its issuance of this Option shall constitute full authority to its
officers who are charged with the duty of executing stock certificates to
execute and issue the necessary certificates for the shares of Common Stock
upon the exercise of this Option. The Common Stock issuable upon the due
exercise of this Option, will, upon issuance in accordance with the terms
hereof, be duly authorized, validly issued, fully paid and non-assessable.
9. NOTICES.
(a) Whenever the Exercise Price or number of shares
purchasable hereunder shall be adjusted pursuant to Section 11 hereof, the
Company shall issue a certificate signed by its Chief Financial Officer setting
forth, in reasonable detail, the event requiting the adjustment, the amount of
the adjustment, the method by which such adjustment was calculated, and the
Exercise Price and number of shares purchasable hereunder after giving effect
to such adjustment, and shall cause a copy of such certificate to be mailed (by
first-class mail, postage prepaid) to the Holder of this Option.
(b) All notices, advices and communications under this
Option shall be deemed to have been given, (i) in the case of personal
delivery, on the date of such delivery and (ii) in the case of mailing, on the
third business day following the date of such mailing, addressed as follows:
If to the Company:
PMR Corporation
3990 Old Town Avenue,
Suite 206A
San Diego, CA 92110
Attn: Allen Tepper, Chief Executive Officer
With a Copy to:
Stephen M. Cohen, Esquire
Buchanan Ingersoll, Professional Corporation
Two Logan Square, 12th Floor
18th & Arch Streets
Philadelphia, PA 19103-2771
and to the Holder:
8.
<PAGE> 9
at the address of the Holder appearing on the books
of the Company or the Company's transfer agent, if
any.
With a Copy to:
Joel I. Papernik, Esquire
Squadron, Ellenoff, Plesent & Sheinfeld, LLP
551 Fifth Avenue
New York, NY 10176
Either of the Company or the Holder may from time to time change the
address to which notices to it are to be mailed hereunder by notice in
accordance with the provisions of this Paragraph 9.
10. AMENDMENTS.
(a) Any term of this Option may be amended with the
written consent of the Company and the Holder. Any amendment effected in
accordance with this Section 10 shall be binding upon the Holder, each future
holder and the Company.
(b) No waivers of, or exceptions to, any term, condition
or provision of this Option, in any one or more instances, shall be deemed to
be, or construed as, a further or continuing waiver of any such term, condition
or provision.
11. ADJUSTMENTS. The number of Shares of Common Stock purchasable
hereunder and the Exercise Price is subject to adjustment from time to time
upon the occurrence of certain events, as follows:
11.1. REORGANIZATION, MERGER OR SALE OF ASSETS. If at any
time while this Option, or any portion thereof, is outstanding and unexpixed
there shall be (i) a reorganization (other than a combination,
reclassification, exchange or subdivision of shares otherwise provided for
herein), (ii) a merger or consolidation of the Company with or into another
corporation in which the Company is not the surviving entity, or a reverse
triangular merger in which the Company is the surviving entity but the shares
of the Company's capital stock outstanding immediately prior to the merger are
converted by virtue of the merger into other property, whether in the form of
securities, cash or otherwise, or (iii) a sale or transfer of substantially all
of the Company's properties and assets as, or substantially as, an entirety to
any other person, then, as a part of such reorganization, merger,
consolidation, sale or transfer, lawful provision shall be made so that the
holder of this Option shall thereafter be entitled to receive upon payment of
the Exercise Price then in effect, the number of shares of Stock or other
securities or property of the successor corporation resulting from such
reorganization, merger, consolidation, sale or transfer that a holder of the
shares deliverable upon exercise of this Option would
9.
<PAGE> 10
have been entitled to receive in such reorganization, consolidation, merger,
sale or transfer if this Option had been exercised immediately before such
reorganization, merger, consolidation, sale or transfer, all subject to further
adjustment as provided in this Section 11. The foregoing provisions of this
Section 11.1 shall similarly apply to successive reorganizations,
consolidations, mergers, sales and transfers and to the stock or securities of
any other corporation that are at the time receivable upon the exercise of this
Option. If the per-share consideration payable to the Holder hereof for shares
in connection with any such transaction is in a form other than cash or
marketable securities, then the value of such consideration shall be determined
in good faith by the Company's Board of Directors. In all events, appropriate
adjustment (as determined in good faith by the Company's Board of Directors)
shall be made in the application of the provisions of this Option with respect
to the rights and interests of the Holder after the transaction, to the end
that the provisions of this Option shall be applicable after that event, as
near as reasonably may be, in relation to any shares or other property
deliverable after that event upon exercise of this Option.
11.2. RECLASSIFICATION. If the Company, at any time while
this Option, or any portion thereof, remains outstanding and unexpired, by
reclassification of securities or otherwise, shall change any of the securities
as to which purchase rights under this Option exist into the same or a
different number of securities of any other class or classes, this Option shall
thereafter represent the right to acquire such number and kind of securities as
would have been issuable as the result of such change with respect to the
securities that were subject to the purchase rights under this Option
immediately prior to such reclassification or other change and the Exercise
Price therefor shall be appropriately adjusted, all subject to further
adjustment as provided in this Section l1.
11.3. SPLIT, SUBDIVISION OR COMBINATION OF SHARES. If the
Company at any time while this Option, or any portion thereof, remains
outstanding and unexpired shall split, subdivide or combine the securities as
to which purchase rights under this Option exist, into a different number of
securities of the same class, the Exercise Price and the number of shares
issuable upon exercise of this Option shall be proportionately adjusted.
11.4. ADJUSTMENTS FOR DIVIDENDS IN STOCK OR OTHER
SECURITIES OR PROPERTY. If while this Option, or any portion hereof, remains
outstanding and unexpired the holders of the securities as to which purchase
rights under this Option exist at the time shall have received, or, on or after
the record date fixed for the determination of eligible Stockholders, shall
have become entitled to receive, without payment therefor, other or additional
stock or other securities or property (other than cash) of the Company by way
of dividend, then and in each case, this Option shall represent the right to
acquire, in addition to the number of shares of the security receivable upon
exercise of this Option, and without payment of any additional consideration
therefor, the amount of such other or
10.
<PAGE> 11
additional stock or other securities or property (other than cash) of the
Company that such holder would hold on the date of such exercise had it been
the holder of record of the security receivable upon exercise of this Option on
the date hereof and had thereafter, during the period from the date hereof to
and including the date of such exercise, retained such shares and/or all other
additional stock, other securities or property available by this Option as
aforesaid during such period.
11.5 The Company will not, by any voluntary action, avoid
or seek to avoid the observance or performance of any of the terms to be
observed or performed hereunder by the Company, but will at all times in good
faith assist in the carrying out of all the provisions of this Section 11 and
in the taking of all such action as may be necessary or appropriate in order to
protect the rights of the Holders of this Option against impairment.
12. REGISTRATION RIGHTS. The Holder shall be entitled to the
registration rights set forth in that certain Registration Rights Agreement of
even date herewith by and between the Company and such Holder.
13. SEVERABILITY. Whenever possible, each provision of this
Option shall be interpreted in such manner as to be effective and valid under
applicable law, but if any provision of this Option is held to be invalid,
illegal or unenforceable in any respect under any applicable law or rule in any
jurisdiction, such invalidity, illegality or unenforceability shall not affect
the validity, legality or enforceability of any other provision of this Option
in such jurisdiction or affect the validity, legality or enforceability of any
provision in any other jurisdiction, but this Option shall be reformed,
construed and enforced in such jurisdiction as if such invalid, illegal or
unenforceable provision had never been contained herein.
14. GOVERNING LAW. The corporate law of the State of Delaware
shall govern all issues and questions concerning the relative rights of the
Company and its stockholders. All other questions concerning the construction,
validity, interpretation and enforceability of this Option and the exhibits and
schedules hereto shall be governed by, and construed in accordance with, the
laws of the State of Delaware, without giving effect to any choice of law or
conflict of law rules or provisions (whether of the State of Delaware or any
other jurisdiction) that would cause the application of the laws of any
jurisdiction other than the State of Delaware.
15. JURISDICTION. In connection with the enforcement of a
decision in arbitration pursuant to section 16 hereof, the Holder and the
Company agree to submit to personal jurisdiction and to waive any objection as
to venue in the federal or state courts in the City in which the headquarters
of the Company is located, which as of the date hereof is San Diego,
California. Service of process on the Company or the Holder in any
11.
<PAGE> 12
action arising out of or relating to this Option shall be effective if mailed
to such party at the address listed in Section 9 hereof.
16. ARBITRATION. If a dispute arises as to interpretation of this
Option, it shall be decided exclusively and finally by three arbitrators in an
arbitration proceeding conforming to the Rules of the American Arbitration
Association applicable to commercial arbitration. The arbitrators shall be
appointed as follows: one by the Company, one by the Holder and the third by
the said two arbitrators, or, if they cannot agree, then the third arbitrator
shall be appointed by the American Arbitration Association. The third
arbitrator shall be chairman of the panel and shall be impartial. The
arbitration shall take place in the City in which the headquarters of the
Company is located, which as of the date hereof is San Diego, California. The
decision of a majority of the Arbitrators shall be conclusively binding upon
the parties and final, and such decision shall be enforceable as a judgment in
any court of competent jurisdiction. Each party shall pay the fees and
expenses of the arbitrator appointed by it, its counsel and its witnesses. The
parties shall share equally the fees and expenses of the impartial arbitrator.
17. CORPORATE POWER; AUTHORIZATION; ENFORCEABLE OBLIGATIONS. The
execution, delivery and performance by the Company of this Agreement: (i) are
within the Company's corporate power; (ii) have been duly authorized by all
necessary or proper corporate action; (iii) are not in contravention of the
company's certificate of incorporation or by-laws; (iv) will not violate in any
material respect, any law or regulation, including any and all Federal and
state securities laws, or any order or decree of any court or governmental
instrumentality; and (v) will not, in any material respect, conflict with or
result in the breach or termination of, or constitute a default under any
agreement or other material instrument to which the Company is a party or by
which the Company is bound.
18. SUCCESSORS AND ASSIGNS. This Option shall inure to the
benefit of and be binding on the respective successors, assigns and legal
representatives of the Holder and the Company.
IN WITNESS WHEREO, the Company has caused this Option to be executed
by its officers thereunto duly authorized. Option Issue Date: February 1, 1996
HOLDER PMR CORPORATION
By: /s/ Mark Clein By: /s/ Allen Tepper
- ---------------------------- ----------------------------
Mark Clein Allen Tepper, Chief Executive
Officer
12.
<PAGE> 13
NOTICE OF EXERCISE
TO: PMR CORPORATION
(1) The undersigned hereby elects to purchase ____________ shares
of Common Stock of PMR CORPORATION pursuant to the terms of the attached
Option, and tenders herewith payment of the purchase price for such shares in
full.
(2) In exercising this Option, the undersigned hereby confirms and
acknowledges that the shares of Common Stock to be issued upon conversion
thereof are being acquired solely for the account of the undersigned and not as
a nominee for any other party, and for investment (unless such shares are
subject to resale pursuant to an effective prospectus), and that the
undersigned will not offer, sell or otherwise dispose of any such shares of
Common Stock except under circumstances that will not result in a violation of
the Securities Act of 1933, as amended, or any state securities laws.
(3) Please issue a certificate or certificates representing said
shares of Common Stock in the name of the undersigned or in such other name as
is specified below:
----------------------------
(Name)
----------------------------
(Name)
- ---------------------------- ----------------------------
(Date) (Signature)
13.
<PAGE> 1
EXHIBIT 10.10
20,000 Options/MC
"THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED UNDER
THE SECURITIES ACT OF 1933, AS AMENDED, OR ANY APPLICABLE STATE SECURITIES
LAWS. THESE SECURITIES MAY NOT BE SOLD, TRANSFERRED OR OTHERWISE DISPOSED OF
IN THE ABSENCE OF REGISTRATION, OR THE AVAILABILITY OF EXEMPTION FROM
REGISTRATION, UNDER THE SECURITIES ACT OF 1933, AS AMENDED, BASED ON AN OPINION
LETTER OF COUNSEL SATISFACTORY TO THE COMPANY OR A NO-ACTION LETTER FROM THE
SECURITIES AND EXCHANGE COMMISSION."
AMENDED AND RESTATED
OPTION TO PURCHASE COMMON STOCK
OF
PMR CORPORATION
Void after February 1, 2003
This certifies that, for value received, MARK CLEIN ("Holder"), is
entitled, subject to the terms set forth below, to purchase from PMR
CORPORATION (the "Company"), a Delaware corporation, shares of the Common Stock
of the Company (the "Shares"), as constituted on the effective date hereof (the
"Option Issue Date"), with the Notice of Exercise attached hereto duly
executed, and simultaneous payment therefor in lawful money of the United
States, at the Exercise Price as set forth in Section 2 below. The number,
character and Exercise Price of the shares are subject to adjustment as
provided below.
1. TERM OF OPTION. Subject to compliance with the vesting
provisions identified at Paragraph 2.3 hereafter, this Option shall be
exercisable, in whole or in part, during the term commencing on the Option
Issue Date and ending at 5:00 p.m. on February 1, 2003, and shall be void
thereafter.
2. EXERCISE PRICE, NUMBER OF SHARES AND VESTING PROVISIONS.
2.1 EXERCISE PRICE. The Exercise Price at which this
Option may be exercised shall be $4.75 per share of common stock, as adjusted
pursuant to Section 11 hereof.
2.2 NUMBER OF SHARES. The number of shares of the
Company's Common Stock, $.01 par value per share ("Common Stock") which may be
purchased pursuant to this Option shall be 20,000 shares, as adjusted pursuant
to Section 11 hereof.
1.
<PAGE> 2
2.3 VESTING. The Options granted hereunder have
immediately vested as of the Option Issue Date.
2.4. DEATH OF HOLDER AND TERMINATION.
(a) If the Holder shall die while in the employ
of the Company, his estate, personal representatives, or beneficiary shall have
the right, subject to the provisions of this Paragraph 2 hereof, to exercise
the Option (only to the extent that the Holder would have been entitled to do
so as of the date of his death) at any time within twelve (12) months from the
date of his death.
(b) In the event Holder's employment by the
Company is terminated for "cause", as defined above, or Holder voluntarily
terminates his employment with the Company, Holder shall have 30 days in which
to exercise the Option (only to the extent that the Holder would have been
entitled to do so as of the date of his termination) and thereafter, Holder's
right in and to the Option shall lapse and terminate.
3. EXERCISE OF OPTION.
(a) The Exercise Price shall either be payable in cash or
by bank or certified check; or by cashless exercise through the delivery by the
Holder to the Company of shares of the Company's Common Stock for which Holder
is the record and beneficial owner, or a withholding by the Company of shares
of Common Stock that Holder is otherwise entitled to receive upon exercise of
the Option or by any combination thereof. If shares of common stock of the
Company are tendered or withheld as payment of the Exercise Price, the value of
such shares shall be their "market value" as of the trading date immediately
preceding the date of exercise. The "market value" shall be:
(i) If the Company's common stock is traded in
the over-the-counter market and not on any national securities exchange nor in
the NASDAQ Reporting System, the market value shall be the average of the mean
between the last bid and ask prices per share, as reported by the National
Quotation Bureau, Inc., or an equivalent generally accepted reporting service,
or if not so reported, the average of the closing bid and asked prices for a
share as furnished to the Company by any member of the National Association of
Securities Dealers, Inc., selected by the Company for that purpose.
(ii) If the Company's common stock is traded on a
national securities exchange or in the NASDAQ Reporting System, the market
value shall be either (1) the simple average of the high and low prices at
which a share of the Company's common stock traded, as quoted on the NASDAQ-NMS
or its other principal exchange, or (2) the price of the last sale of a share
of common stock as similarly quoted,
2.
<PAGE> 3
whichever is higher, and rounding out such figure to the next higher multiple
of 12.5 cents (unless the figure is already a multiple of 12.5 cents).
If such tender would result in an issuance of a whole number of shares and a
fractional share of Common Stock, the value of such fractional share shall be
paid to the Company in cash or by check by the Holder.
(b) The purchase rights represented by this Option are
exercisable by the Holder in whole or in part, at any time, or from time to
time, by the surrender of this Option and the Notice of Exercise annexed hereto
duly completed and executed on behalf of the Holder, at the office of the
Company (or such other office or agency of the Company as it may designate by
notice in writing to the Holder at the address of the Holder appearing on the
books of the Company).
(c) This Option shall be deemed to have been exercised
immediately prior to the close of business on the date of its surrender for
exercise as provided above, and the person entitled to receive the shares of
Common Stock issuable upon such exercise shall be treated for all purposes as
the holder of record of such shares as of the close of business on such date.
As promptly as practicable on or after such date and in any event within ten
(10) days thereafter, the Company at its expense shall issue and deliver to the
person or persons entitled to receive the same a certificate or certificates
for the number of shares issuable upon such exercise. In the event that this
Option is exercised in part, the Company at its expense will execute and
deliver a new Option of like tenor exercisable for the number of shares for
which this Option may then be exercised.
4. NO FRACTIONAL SHARES OR SCRIP. No fractional shares or scrip
representing fractional shares shall be issued upon the exercise of this
Option. In lieu of any fractional share to which the Holder would otherwise be
entitled, the Company shall make a cash payment equal to the Exercise Price
multiplied by such fraction.
5. REPLACEMENT OF OPTION. On receipt of evidence reasonably
satisfactory to the Company of the loss, theft, destruction or mutilation of
this Option and, in the case of loss, theft or destruction, or delivery of an
indemnity agreement reasonably satisfactory in form and substance to the
Company or, in the case of mutilation, on surrender and cancellation of this
Option, the Company at its expense shall execute and deliver, in lieu of this
Option, a new Option of like tenor and amount.
6. RIGHTS OF STOCKHOLDER. Except as otherwise contemplated
herein, the Holder shall not be entitled to vote or receive dividends or be
deemed the holder of Common Stock or any other securities of the Company that
may at any time be issuable on the exercise hereof for any purpose, nor shall
anything contained herein be construed
3.
<PAGE> 4
to confer upon the Holder, as such, any of the rights of a stockholder of the
Company or any right to vote for the election of directors or upon any matter
submitted to stockholders at any meeting thereof, or to give or withhold
consent to any corporate action (whether upon any recapitalization, issuance of
stock, reclassification of stock, change of par value, or change of stock to no
par value, consolidation, merger, conveyance or otherwise) or to receive notice
of meetings, or to receive dividends or subscription rights or otherwise until
the Option shall have been exercised as provided herein.
7. TRANSFER OF OPTION.
7.1. NON-TRANSFERABILITY. The Option shall not be
assigned, transferred, pledged or hypothecated in any way, nor subject to
execution, attachment or similar process, otherwise than by will or by the laws
of descent and distribution. Any attempted assignment, transfer, pledge,
hypothecation or other disposition of the Option contrary to the provisions
hereof, and the levy of an execution, attachment, or similar process upon the
Option, shall be null and void and without effect.
7.2. COMPLIANCE WITH SECURITIES LAWS; RESTRICTIONS ON
TRANSFERS.
(a) The Holder of this Option, by acceptance
hereof, acknowledges that this Option and the Shares to be issued upon exercise
hereof are being acquired solely for the Holder's own account and not as a
nominee for any other party, and for investment (unless such shares are subject
to resale pursuant to an effective prospectus), and that the Holder will not
offer, sell or otherwise dispose of this Option or any Shares to be issued upon
exercise hereof except under circumstances that will not result in a violation
of applicable federal and state securities laws. Upon exercise of this Option,
the Holder shall, if requested by the Company, confirm in writing, in a form
satisfactory to the Company, that the shares of Common Stock so purchased are
being acquired solely for the Holder's own account and not as a nominee for any
other party, for investment (unless such shares are subject to resale pursuant
to an effective prospectus), and not with a view toward distribution or resale.
(b) Neither this Option nor any share of Common
Stock issued upon exercise of this Option may be offered for sale or sold, or
otherwise transferred or sold in any transaction which would constitute a sale
thereof within the meaning of the Securities Act of 1933, as amended (the "1933
Act"), unless (i) such security has been registered for sale under the 1933 Act
and registered or qualified under applicable state securities laws relating to
the offer an sale of securities, or (ii) exemptions from the registration
requirements of the 1933 Act and the registration or qualification requirements
of all such state securities laws are available and the Company shall have
received an opinion of counsel satisfactory to the Company that the proposed
sale or other disposition of such securities may be effected without
registration under the 1933 Act and
4.
<PAGE> 5
would not result in any violation of any applicable state securities laws
relating to the registration or qualification of securities for sale, such
counsel and such opinion to be satisfactory to the Company.
(c) All Shares issued upon exercise hereof shall
be stamped or imprinted with a legend in substantially the following form (in
addition to any legend required by state securities laws).
"THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED UNDER
THE SECURITIES ACT OF 1933, AS AMENDED (THE "ACT"), OR ANY APPLICABLE STATE
SECURITIES LAWS. THESE SECURITIES MAY NOT BE SOLD, TRANSFERRED OR OTHERWISE
DISPOSED OF IN THE ABSENCE OF REGISTRATION, OR THE AVAILABILITY OF EXEMPTION
FROM REGISTRATION, UNDER THE SECURITIES ACT OF 1933, AS AMENDED, BASED ON AN
OPINION LETTER OF COUNSEL SATISFACTORY TO THE COMPANY OR A NO-ACTION LETTER
FROM THE SECURITIES AND EXCHANGE COMMISSION."
Holder recognizes that investing in the Option and the Common Stock
involves a high degree of risk, and Holder is in a financial position to hold
the Option and the Common Stock indefinitely and is able to bear the economic
risk and withstand a complete loss of its investment in the Option and the
Common Stock. The Holder is a sophisticated investor and is capable of
evaluating the merits and risks of investing in the Company. The Holder has
had an opportunity to discuss the Company's business, management and financial
affairs with the Company's management, has been given full and complete access
to information concerning the Company, and has utilized such access to its
satisfaction for the purpose of obtaining information or verifying information
and have had the opportunity to inspect the Company's operation. Holder has
had the opportunity to ask questions of, and receive answers from the
management of the Company (and any person acting on its behalf) concerning the
Option and the Common Stock and the agreements and transactions contemplated
hereby, and to obtain any additional information as Holder may have requested
in making its investment decision. The Holder is an "accredited investor", as
defined by Regulation D promulgated under the Act.
8. RESERVATION AND ISSUANCE OF STOCK.
(a) The Company covenants that during the term that this
Option is exercisable, the Company will reserve from its authorized and
unissued Common Stock a sufficient number of shares to provide for the issuance
of the shares upon the exercise of this Option, and from time to time will take
all steps necessary to amend its Certificate of
5.
<PAGE> 6
Incorporation to provide sufficient reserves of shares of Common Stock issuable
upon the exercise of the Option.
(b) The Company further covenants that all shares of
Common Stock issuable upon the due exercise of this Option will be free and
clear from all taxes or liens, charges and security interests created by the
Company with respect to the issuance thereof, however, the Company shall not be
obligated or liable for the payment of any taxes, liens or charges of Holder,
or any other party contemplated by paragraph 7, incurred in connection with the
issuance of this Option or the Common Stock upon the due exercise of this
Option. The Company agrees that its issuance of this Option shall constitute
full authority to its officers who are charged with the duty of executing stock
certificates to execute and issue the necessary certificates for the shares of
Common Stock upon the exercise of this Option. The Common Stock issuable upon
the due exercise of this Option, will, upon issuance in accordance with the
terms hereof, be duly authorized, validly issued, fully paid and
non-assessable.
9. NOTICES.
(a) Whenever the Exercise Price or number of shares
purchasable hereunder shall be adjusted pursuant to Section 11 hereof, the
Company shall issue a certificate signed by its Chief Financial Officer setting
forth, in reasonable detail, the event requiring the adjustment, the amount of
the adjustment, the method by which such adjustment was calculated, and the
Exercise Price and number of shares purchasable hereunder after giving effect
to such adjustment, and shall cause a copy of such certificate to be mailed (by
first-class mail, postage prepaid) to the Holder of this Option.
(b) All notices, advices and communications under this
Option shall be deemed to have been given, (i) in the case of personal
delivery, on the date of such delivery and (ii) in the case of mailing, on the
third business day following the date of such mailing, addressed as follows:
If to the Company:
PMR Corporation
3990 Old Town Avenue,
Suite 206A
San Diego, CA 92110
Attn: Allen Tepper, Chief Executive Officer
With a Copy to:
Stephen M. Cohen, Esquire
Buchanan Ingersoll, Professional Corporation
6.
<PAGE> 7
Two Logan Square, 12th Floor
18th & Arch Streets
Philadelphia, PA 19103-2771
and to the Holder:
at the address of the Holder appearing on the books
of the Company or the Company's transfer agent, if
any.
with a Copy to:
Joel I. Papernik, Esquire
Squadron, Ellenoff, Plesent & Sheinfeld, LLP
551 Fifth Avenue
New York, NY 10176
Either of the Company or the Holder may from time to time change the
address to which notices to it are to be mailed hereunder by notice in
accordance with the provisions of this Paragraph 9.
10. AMENDMENTS.
(a) Any term of this Option may be amended with the
written consent of the Company and the Holder. Any amendment effected in
accordance with this Section 10 shall be binding upon the Holder, each future
holder and the Company.
(b) No waivers of, or exceptions to, any term, condition
or provision of this Option, in any one or more instances, shall be deemed to
be, or construed as, a further or continuing waiver of any such term, condition
or provision.
11. ADJUSTMENTS. The number of Shares of Common Stock purchasable
hereunder and the Exercise Price is subject to adjustment from time to time
upon the occurrence of certain events, as follows:
11.1. REORGANIZATION, MERGER OR SALE OF ASSETS. If at any
time while this Option, or any portion thereof, is outstanding and unexpired
there shall be (i) a reorganization (other than a combination,
reclassification, exchange or subdivision of shares otherwise provided for
herein), (ii) a merger or consolidation of the Company with or into another
corporation in which the Company is not the surviving entity, or a reverse
triangular merger in which the Company is the surviving entity but the shares
of the Company's capital stock outstanding immediately prior to the merger are
converted by virtue of the merger into other property, whether in the form of
securities, cash or otherwise, or (iii) a sale or transfer of substantially all
of the Company's properties and
7.
<PAGE> 8
assets as, or substantially as, an entirety to any other person, then, as a
part of such reorganization, merger, consolidation, sale or transfer, lawful
provision shall be made so that the holder of this Option shall thereafter be
entitled to receive upon payment of the Exercise Price then in effect, the
number of shares of stock or other securities or property of the successor
corporation resulting from such reorganization, merger, consolidation, sale or
transfer that a holder of the shares deliverable upon exercise of this Option
would have been entitled to receive in such reorganization, consolidation,
merger, sale or transfer if this Option had been exercised immediately before
such reorganization, merger, consolidation, sale or transfer, all subject to
further adjustment as provided in this Section 11. The foregoing provisions of
this Section 11.1 shall similarly apply to successive reorganizations,
consolidations, mergers, sales and transfers and to the stock or securities of
any other corporation that are at the time receivable upon the exercise of this
Option. If the per-share consideration payable to the Holder hereof for shares
in connection with any such transaction is in a form other than cash or
marketable securities, then the value of such consideration shall be determined
in good faith by the Company's Board of Directors. In all events, appropriate
adjustment (as determined in good faith by the Company's Board of Directors)
shall be made in the application of the provisions of this Option with respect
to the rights and interests of the Holder after the transaction, to the end
that the provisions of this Option shall be applicable after that event, as
near as reasonably may be, in relation to any shares or other property
deliverable after that event upon exercise of this Option.
11.2. RECLASSIFICATION. If the Company, at any time while
this Option, or any portion thereof, remains outstanding and unexpired, by
reclassification of securities or otherwise, shall change any of the securities
as to which purchase rights under this Option exist into the same or a
different number of securities of any other class or classes, this Option shall
thereafter represent the right to acquire such number and kind of securities as
would have been issuable as the result of such change with respect to the
securities that were subject to the purchase rights under this Option
immediately prior to such reclassification or other change and the Exercise
Price therefor shall be appropriately adjusted, all subject to further
adjustment as provided in this Section 11.
11.3. SPLIT, SUBDIVISION OR COMBINATION OF SHARES. If the
Company at any time while this Option, or any portion thereof, remains
outstanding and unexpired shall split, subdivide or combine the securities as
to which purchase rights under this Option exist, into a different number of
securities of the same class, the Exercise Price and the number of shares
issuable upon exercise of this Option shall be proportionately adjusted.
11.4. ADJUSTMENTS FOR DIVIDENDS IN STOCK OR OTHER
SECURITIES OR PROPERTY. If while this Option, or any portion hereof, remains
outstanding and unexpired the holders of the securities as to which purchase
rights under this Option exist at the time
8.
<PAGE> 9
shall have received, or, on or after the record date fixed for the
determination of eligible Stockholders, shall have become entitled to receive,
without payment therefor, other or additional stock or other securities or
property (other than cash) of the Company by way of dividend, then and in each
case, this Option shall represent the right to acquire, in addition to the
number of shares of the security receivable upon exercise of this Option, and
without payment of any additional consideration therefor, the amount of such
other or additional stock or other securities or property (other than cash) of
the Company that such holder would hold on the date of such exercise had it
been the holder of record of the security receivable upon exercise of this
Option on the date hereof and had thereafter, during the period from the date
hereof to and including the date of such exercise, retained such shares and/or
all other additional stock, other securities or property available by this
Option as aforesaid during such period.
11.5 The Company will not, by any voluntary action, avoid
or seek to avoid the observance or performance of any of the terms to be
observed or performed hereunder by the Company, but will at all times in good
faith assist in the carrying out of all the provisions of this Section 11 and
in the taking of all such action as may be necessary or appropriate in order to
protect the rights of the Holders of this Option against impairment.
12. REGISTRATION RIGHTS. The Holder shall be entitled to the
registration rights set forth in that certain Registration Rights Agreement of
even date herewith by and between the Company and such Holder.
13. SEVERABILITY. Whenever possible, each provision of this
Option shall be interpreted in such manner as to be effective and valid under
applicable law, but if any provision of this Option is held to be invalid,
illegal or unenforceable in any respect under any applicable law or rule in any
jurisdiction, such invalidity, illegality or unenforceability shall not affect
the validity, legality or enforceability of any other provision of this Option
in such jurisdiction or affect the validity, legality or enforceability of any
provision in any other jurisdiction, but this Option shall be reformed,
construed and enforced in such jurisdiction as if such invalid, illegal or
unenforceable provision had never been contained herein.
14. GOVERNING LAW. The corporate law of the State of Delaware
shall govern all issues and questions concerning the relative rights of the
Company and its stockholders. All other questions concerning the construction,
validity, interpretation and enforceability of this Option and the exhibits and
schedules hereto shall be governed by, and construed in accordance with, the
laws of the State of Delaware, without giving effect to any choice of law or
conflict of law rules or provisions (whether of the State of Delaware or any
other jurisdiction) that would cause the application of the laws of any
jurisdiction other than the State of Delaware.
9.
<PAGE> 10
15. JURISDICTION. In connection with the enforcement of a
decision in arbitration pursuant to section 16 hereof, the Holder and the
Company agree to submit to personal jurisdiction and to waive any objection as
to venue in the federal or state courts in the City in which the headquarters
of the Company is located, which as of the date hereof is San Diego,
California. Service of process on the Company or the Holder in any action
arising out of or relating to this Option shall be effective if mailed to such
party at the address listed in Section 9 hereof.
16. ARBITRATION. If a dispute arises as to interpretation of this
Option, it shall be decided exclusively and finally by three arbitrators in an
arbitration proceeding conforming to the Rules of the American Arbitration
Association applicable to commercial arbitration. The arbitrators shall be
appointed as follows: one by the Company, one by the Holder and the third by
the said two arbitrators, or, if they cannot agree, then the third arbitrator
shall be appointed by the American Arbitration Association. The third
arbitrator shall be chairman of the panel and shall be impartial. The
arbitration shall take place in the City in which the headquarters of the
Company is located, which as of the date hereof is San Diego, California. The
decision of a majority of the Arbitrators shall be conclusively binding upon
the parties and final, and such decision shall be enforceable as a judgment in
any court of competent jurisdiction. Each party shall pay the fees and
expenses of the arbitrator appointed by it, its counsel and its witnesses. The
parties shall share equally the fees and expenses of the impartial arbitrator.
17. CORPORATE POWER; AUTHORIZATION; ENFORCEABLE OBLIGATIONS. The
execution, delivery and performance by the Company of this Agreement: (i) are
within the Company's corporate power; (ii) have been duly authorized by all
necessary or proper corporate action; (iii) are not in contravention of the
Company's certificate of incorporation or by-laws; (iv) will not violate in any
material respect, any law or regulation, including any and all Federal and
state securities laws, or any order or decree of any court or governmental
instrumentality; and (v) will not, in any material respect, conflict with or
result in the breach or termination of, or constitute a default under any
agreement or other material instrument to which the Company is a party or by
which the Company is bound.
18. SUCCESSORS AND ASSIGNS. This Option shall inure to the
benefit of and be binding on the respective successors, assigns and legal
representatives of the Holder and the Company.
IN WITNESS WHEREO, the Company has caused this Option to be executed
by its officers thereunto duly authorized.
Option Issue Date: February 1, 1996
10.
<PAGE> 11
HOLDER PMR CORPORATION
By: /s/ Mark Clein By: /s/ Allen Tepper
---------------------------- ----------------------------
Mark Clein Allen Tepper, Chief Executive
Officer
11.
<PAGE> 12
NOTICE OF EXERCISE
TO: PMR CORPORATION
(1) The undersigned hereby elects to purchase _________ shares of
Common Stock of PMR CORPORATION pursuant to the terms of the attached Option,
and tenders herewith payment of the purchase price for such shares in full.
(2) In exercising this Option, the undersigned hereby confirms and
acknowledges that the shares of Common Stock to be issued upon conversion
thereof are being acquired solely for the account of the undersigned and not as
a nominee for any other party, and for investment (unless such shares are
subject to resale pursuant to an effective prospectus), and that the
undersigned will not offer, sell or otherwise dispose of any such shares of
Common Stock except under circumstances that will not result in a violation of
the Securities Act of 1933, as amended, or any state securities laws.
(3) Please issue a certificate or certificates representing said
shares of Common Stock in the name of the undersigned or in such other name as
is specified below:
----------------------------
(Name)
----------------------------
(Name)
- ---------------------------- ----------------------------
(Date) (Signature)
12.
<PAGE> 1
Exhibit 10.11
AMENDED AND RESTATED
WARRANT TO PURCHASE
COMMON STOCK OF
PMR CORPORATION
Void after 5:00 p.m. Eastern Standard Time on April 26, 2000
This is to verify that, FOR VALUE RECEIVED, Fred Furman, (hereinafter
referred to as the "Holder") is entitled to purchase, subject to the terms and
conditions hereof, from PMR Corporation, a Delaware corporation ("Company"),
90,000 shares of Common Stock, par value $.01 per share of the Company (the
"Common Stock") at any time during the period commencing at 9:00 a.m., Eastern
Standard Time on April 26, 1995 (the "Commencement Date") and ending at 5:00
p.m. Eastern Standard Time on April 25, 2000 (the "Termination Date") at an
exercise price of $3.50 per share of Common Stock. The number of shares of
Common Stock purchasable upon exercise of this Warrant are subject to certain
limitations upon exercise identified at Paragraph 8 hereafter. Furthermore, the
number of shares of Common Stock purchasable upon exercise of this Warrant and
the exercise price per share shall be subject to adjustment from time to time
upon the occurrence of certain events as set forth below. This Warrant amends
and restates and supercedes that certain warrant dated as of April 26, 1995,
with respect to the purchase of up to 90,000 shares of Common Stock.
The shares of Common Stock or any other shares or other units of stock or
other securities or property, or any combination thereof then receivable upon
exercise of this Warrant, as adjusted from time to time, are sometimes referred
to hereinafter as "Exercise Shares". The exercise price per share as from time
to time in effect is referred to hereinafter as the "Exercise Price".
1. EXERCISE OF WARRANT; ISSUANCE OF EXERCISE SHARES.
(a) EXERCISE OF WARRANT. Subject to the vesting period set forth
hereafter, this Warrant may be exercised in whole or in part at any time or from
time to time on or after the Commencement Date and until and including the
Termination Date, upon surrender on any business day to the Company at its
principal office, presently located at the address of the Company set forth in
Paragraph 9 hereof, (or such other office of the Company, if any, as shall
theretofore have been designated by the Company by written notice to the
Holder), together with: (i) a completed and executed Notice of Warrant Exercise
in the form set forth in Appendix A hereto and made a part hereof and (ii)
payment of the full Exercise Price for the amount of Exercise Shares set forth
in the
1.
<PAGE> 2
Notice of Warrant Exercise, in lawful money of the United States of America by
certified check or cashier's check, made payable to the order of the Company.
In the event that this Warrant shall be duly exercised in part prior to
the Termination Date, the Company shall issue a new Warrant or Warrants of like
tenor evidencing the rights of the Holder thereof to purchase the balance of the
Exercise Shares purchasable under the Warrant so surrendered that shall not have
been purchased.
No adjustments shall be made for any cash dividends on Exercise Shares
issuable upon exercise of the Warrant. The Company shall cancel Warrant
Certificates surrendered upon exercise of Warrants.
(b) ISSUANCE OF EXERCISE SHARES; DELIVERY OF WARRANT CERTIFICATE. The
Company shall, within ten (10) business days or as soon thereafter as is
practicable of the exercise of this Warrant, issue in the name of and cause to
be delivered to the Holder (or such other person or persons, if any, as the
Holder shall have designated in the Notice of Warrant Exercise) one or more
certificates representing the Exercise Shares to which the Holder (or such other
person or persons) shall be entitled upon such exercise under the terms hereof.
Such certificate or certificates shall be deemed to have been issued and the
Holder (or such other person or persons so designated) shall be deemed to have
become the record holder of the Exercise Shares as of the date of the due
exercise of this Warrant.
(c) EXERCISE SHARES FULLY PAID AND NON-ASSESSABLE. The Company agrees and
covenants that all Exercise Shares issuable upon the due exercise of the Warrant
represented by this Warrant Certificate will, upon issuance in accordance with
the terms hereof, be duly authorized, validly issued, fully paid and
non-assessable and free and clear of all taxes (other than taxes which, pursuant
to Paragraph 2 hereof, the Company shall not be obligated to pay) or liens,
charges, and security interests created by the Company with respect to the
issuance thereof.
(d) RESERVATION OF EXERCISE SHARES. At the time of or before taking any
action which would cause an adjustment pursuant to this Paragraph increasing the
number of shares of capital stock constituting the Exercise Shares, the Company
will take any corporate action which may, in the opinion of its counsel, be
necessary in order that the Company have remaining, after such adjustment, a
number of shares of such capital stock unissued and unreserved for other
purposes sufficient to permit the exercise of all the then outstanding Warrants
of like tenor immediately after such adjustment; the Company will also from time
to time take action to increase the authorized amount of its capital stock
constituting the Exercise Shares if at any time the number of shares of capital
stock authorized but remaining unissued and unreserved for other purposes shall
be insufficient to permit the exercise of the Warrants then outstanding. The
Company may but shall not be limited to reserve and keep available, out of the
aggregate of its authorized but
2.
<PAGE> 3
unissued shares of capital stock, for the purpose of enabling it to satisfy any
obligation to issue Exercise Shares upon exercise of Warrants, through the
Termination Date, the number of Exercise Shares deliverable upon the full
exercise of this Warrant and all other Warrants of like tenor then outstanding.
At the time of or before taking any action which would cause an adjustment
pursuant to this Paragraph, reducing the Exercise price below the then par value
(if any) of the Exercise Shares issuable upon exercise of the Warrants, the
Company will take any corporate action which may, in the opinion of its counsel,
be necessary in order to assure that the par value per share of the Exercise
Shares is at all times equal to or less than the Exercise Price per share and so
that the Company may validly and legally issue fully paid and non-assessable
Exercise Shares at the Exercise Price, as so adjusted; the Company will also
from time to time take such action if at any time the Exercise Price is below
the then par value of the Exercise Shares.
(e) FRACTIONAL SHARES. The Company shall not be required to issue
fractional shares of capital stock upon the exercise of this Warrant or to
deliver Warrant Certificates which evidence fractional shares of capital stock.
In the event that any fraction of an Exercise Share would, except for the
provisions of this subparagraph (e), be issuable upon the exercise of this
Warrant, the Company shall pay to the Holder exercising the Warrant an amount in
cash equal to such fraction multiplied by the Current Market Value of the
Exercise Share. For purposes of this subparagraph (e), the current Market Value
shall be determined as follows:
(i) if the Exercise Shares are traded in the over-the-counter market
and not on any national securities exchange and not in the NASDAQ Reporting
System, the average of the mean between the last bid and asked prices per share,
as reported by the National Quotation Bureau, Inc., or an equivalent generally
accepted reporting service, for the last business day prior to the date on which
this Warrant is exercised, or if not so reported, the average of the closing bid
and asked prices for an Exercise Share as furnished to the Company by any member
of the National Association of Securities Dealers, Inc., selected by the Company
for that purpose.
(ii) if the Exercise Shares are listed or traded on a national
securities exchange or in the NASDAQ National Market System, the closing price
on the principal national securities exchange on which they are so listed or
traded or in the NASDAQ National Market System, as the case may be, on the last
business day prior to the date of the exercise of this Warrant. The closing
price referred to in this clause (ii) shall be the last reported sales price or,
in case no such reported sale takes place on such day, the average of the
reported closing bid and asked prices, in either case on the national securities
exchange on which the Exercise Shares are then listed or in the NASDAQ Reporting
System; or
3.
<PAGE> 4
(iii) if no such closing price or closing bid and asked prices are
available, as determined in any reasonable manner as may be prescribed by the
Board of Directors of the Company.
2. PAYMENT OF TAXES. The Company need not pay any documentary stamp taxes, if
any, attributable to the initial issuance of Exercise Shares upon the exercise
of this Warrant. Furthermore, the Company shall not be required to pay any tax
or taxes which may be payable in respect of any transfer involved in the issue
of any Warrant Certificates or any certificates for Exercise Shares in a name
other than that of the Holder of a Warrant Certificate surrendered upon the
exercise of a Warrant, and the Company shall not be required to issue or deliver
such certificates unless or until the person or persons requesting the issuance
thereof shall have paid to the Company the amount of such tax or shall have
established to the satisfaction of the Company that such tax has been paid.
3. MUTILATED OR MISSING WARRANT CERTIFICATES. In case any Warrant Certificate
shall be mutilated, lost, stolen or destroyed, the Company may in its discretion
issue, in exchange and substitution for and upon cancellation of the mutilated
Warrant Certificate, or in lieu of and in substitution for the Warrant
Certificate lost, stolen or destroyed, a new Warrant Certificate or Warrant
Certificates of like tenor and in the same aggregate denomination, but only (i)
in the case of loss, theft or destruction, upon receipt of evidence satisfactory
to the Company of such loss, theft or destruction of such Warrant Certificate
and indemnity or bond, if requested, also satisfactory to them and (ii) in the
case of mutilation, upon surrender of the mutilated Warrant. Applicants for such
substitute Warrant Certificates shall also comply with such other reasonable
regulations and pay such other reasonable charges as the Company or its counsel
may prescribe.
4. RIGHTS OF HOLDER. The Holder shall not, by virtue of anything contained in
this Warrant Certificate or otherwise, be entitled to any right whatsoever,
either in law or equity, of a stockholder of the Company, including without
limitation, the right to receive dividends or to vote or to consent or to
receive notice as a shareholder in respect of the meetings of shareholders or
the election of directors of the Company or any other matter.
5. ADJUSTMENT OF EXERCISE SHARES AND EXERCISE PRICE. The Exercise price and the
number and kind of Exercise Shares purchasable upon the exercise of this Warrant
shall be subject to adjustment from time to time upon the happening of certain
events as hereinafter provided. The Exercise Price in effect at any time and the
number and kind of securities purchasable upon exercise of each Warrant shall be
subject to adjustment as follows:
(a) In the case the Company shall (i) pay a dividend or make a
distribution on its shares of Common Stock in shares of Common Stock, (ii)
subdivide or classify its
4.
<PAGE> 5
outstanding Common Stock into a greater number of shares, or (iii) combine or
reclassify its outstanding Common Stock into a smaller number of shares, the
Exercise Price in effect at the time of the record date for such dividend or
distribution or of the effective date of such subdivision, combination or
reclassification shall be proportionally adjusted so that the Holder of this
Warrant exercised after such date shall be entitled to receive the aggregate
number and kind of shares which, if this Warrant had been exercised by such
Holder immediately prior to such date, he would have owned upon such exercise
and been entitled to receive upon such dividend, subdivision, combination or
reclassification. For example, if the Company declares a 2 for 1 stock dividend
or stock split and the Exercise Price immediately prior to such event was $5.00
per share, the adjusted Exercise Price immediately after such event would be
$2.50 per share. Such adjustment shall be made successively whenever any event
listed above shall occur.
(b) Whenever the Exercise Price payable upon exercise of each Warrant is
adjusted pursuant to Subsection (a) above, the number of Exercise Shares
purchasable upon exercise of this Warrant shall simultaneously be adjusted by
multiplying the number of Exercise Shares initially issuable upon exercise of
this Warrant by the Exercise Price in effect on the date hereof and dividing the
product so obtained by the Exercise Price, as adjusted.
(c) No adjustment in the Exercise Price shall be required unless such
adjustment would require an increase or decrease of at least ten cents ($0.10)
in such price; provided, however, that any adjustments which by reason of this
Subsection (c) are not required to be made shall be carried forward and taken
into account in any subsequent adjustment required to be made hereunder. All
calculations under this Paragraph (5) shall be made to the nearest cent or to
the nearest one-hundredth of a share, as the case may be. Anything in this
Paragraph (5) to the contrary notwithstanding, the Company shall be entitled,
but shall not be required, to make such changes in the exercise Price, in
addition to those required by this Paragraph (5), as it, in its sole discretion,
shall determine to be advisable in order that any dividend or distribution in
shares of Common Stock, subdivision, reclassification or combination of Common
Stock (excluding cash dividends) referred to hereinabove in this Paragraph (5)
hereafter made by the Company to the holders of its Common Stock shall not
result in any tax to the holders of its Common Stock or securities convertible
into Common Stock.
(d) Whenever the Exercise Price is adjusted, as herein provided, the
Company shall promptly cause a notice setting forth the adjusted Exercise Price
and adjusted number of Shares issuable upon exercise of each Warrant to be
mailed to the Holders, at their last addresses appearing in the Warrant
Register. The Company may retain a firm of independent certified public
accountants selected by the Board of Directors (who may be the regular
accountants employed by the Company) to make any computation required by
5.
<PAGE> 6
this Paragraph (5), and a certificate signed by such firm shall be conclusive
evidence of the correctness of such adjustment.
(e) Whenever the Exercise Price shall be adjusted as required by the
provisions of the foregoing Paragraph, the Company shall forthwith file in the
custody of its secretary or an Assistant Secretary at its principal office and
with its stock transfer agent, if any, an officer's certificate showing the
adjusted Exercise Price determined as herein provided, setting forth in
reasonable detail the facts requiring such adjustment, including a statement of
the number of additional shares of Common Stock, if any, and such other facts as
shall be necessary to show the reason for and the manner of computing such
adjustment. Each such officer's certificate shall be made available at all
reasonable times for inspection by the holder and the Company shall, forthwith
after each such adjustment, mail a copy by certified mail of such certificate to
the Holder.
6. RESTRICTIONS ON TRANSFERABILITY.
(a) WARRANT. This Warrant shall not be transferable except by will or by
the laws of descent and distribution, and shall be exercisable only by the
Holder.
(b) EXERCISE SHARES.
(i) RESTRICTIONS ON TRANSFER; INDEMNIFICATION. No Exercise Share may
be offered for sale or sold, or otherwise transferred or sold in any transaction
which would constitute a sale thereof within the meaning of the Securities Act
of 1933, as amended (the "1933 Act"), unless (i) such security has been
registered for sale under the 1933 Act and registered or qualified under
applicable state securities laws relating to the offer and sale of securities,
or (ii) exemptions from the registration requirements of the 1933 Act and the
registration or qualification requirements of all such state securities laws are
available and the Company shall have received an opinion of counsel satisfactory
to the Company that the proposed sale or other disposition of such securities
may be effected without registration under the 1933 Act and would not result in
any violation of any applicable state securities laws relating to the
registration or qualification of securities for sale, such counsel and such
opinion to be satisfactory to the Company.
The Holder agrees to indemnify and hold harmless the Company against any
loss, damage, claim or liability arising from the disposition of this Warrant or
any Exercise Share held by such holder or any interest therein in violation of
the provisions of this Paragraph 6.
(ii) RESTRICTIVE LEGENDS. Unless and until otherwise permitted by
this Paragraph 6, each Certificate representing Exercise Shares issued upon
exercise of this Warrant or to any transferee of the person to whom the Exercise
Shares were issued, shall bear a legend setting forth the requirements of
Paragraph (b)(ii) of this Paragraph 6,
6.
<PAGE> 7
together with such other legend or legends as may otherwise be deemed necessary
or appropriate by counsel to the Company.
(iii) NOTICE OF PROPOSED TRANSFERS. Prior to any transfer, offer to
transfer or attempted transfer of any Exercise Share, the holder of such
security shall give written notice to the Company of such holder's intention to
effect such transfer. Each such notice shall (x) describe the manner and
circumstances of the proposed transfer in sufficient detail, and shall contain
an undertaking by the person giving such notice to furnish such other
information as may be required, to enable counsel to render the opinions
referred to below, and shall (y) designate the counsel for the person giving
such notice, such counsel to be satisfactory to the Company. The person giving
such notice shall submit a copy thereof to the counsel designated in such notice
and the Company shall submit a copy thereof to its counsel, and the following
provisions shall apply:
(A) If, in the opinion of each such counsel, the proposed
transfer of the Exercise Share may be effected without registration of such
security under the 1933 Act, the Company shall, as promptly as practicable, so
notify the holder of such security and such holder shall thereupon be entitled
to transfer such security in accordance with the terms of the notice delivered
by such holder to the Company. Each certificate evidencing the securities thus
to be transferred (and each certificate evidencing any untransferred balance of
the securities evidenced by such certificate) shall bear the restrictive legends
referred to in subparagraph (b)(ii) above, unless in the opinion of each such
counsel such legend is not required in order to insure compliance with the 1933
Act.
(B) If, in the opinion of either of such counsel, the proposed
transfer of securities may not be effected without registration under the 1933
Act, the Company shall, as promptly as practicable, so notify the holder
thereof. However, the Company shall have no obligation to register such
securities under the 1933 Act, except as otherwise provided herein.
The holder of the securities giving the notice under this subparagraph
(b)(iii) shall not be entitled to transfer any of the securities until receipt
of notice from the Company under Paragraph (A) of this subparagraph (b)(iii) or
registration of such securities under the 1933 Act has become effective.
(d) REMOVAL OF LEGEND. The Company shall, at the request of any registered
holder of an Exercise Share, exchange the certificate representing such security
for a certificate representing the same security not bearing the restrictive
legend required by subparagraph (b)(ii) if, in the opinion of counsel to the
Company, such restrictive legend is no longer necessary.
7.
<PAGE> 8
7. REGISTRATION UNDER THE SECURITIES ACT OF 1933. To the extent that the
Exercise Shares constitute "restricted securities" under the 1933 Act, the
Holder may cause the Exercise Shares to be registered by the Company as follows:
(a) The Company shall advise the Holder by written notice prior to the
filing of a registration statement under the 1933 Act, (excluding registration
on Forms S-8, S-4, or any successor forms thereto) covering securities of the
Company to be offered and sold to the public generally and shall, upon the
request of the Holder given at least ten (10) business days prior to the filing
of such registration statement, include in any such registration statement such
information as may be required to permit a public offering of the Exercise
Shares by the Holder. The Company shall supply prospectuses and qualify the
Exercise Shares for sale in such states as the Company qualifies its securities;
provided, however, that the Company will not be required to maintain the
registration of the Exercise Shares for any longer period than it shall require
for its own purposes. The Holder shall furnish such information as may be
reasonably requested by the Company in order to include such Exercise Shares in
the registration statement.
(b) The following provisions of this Paragraph 7 shall also be applicable:
(i) The Company shall bear the entire cost and expense of any
registration of securities initiated by it under subparagraphs (a) and (b) of
this Paragraph (7) notwithstanding that Exercise Shares subject to this Warrant
may be included in any such registration. The Holder, whose Exercise Shares are
included in any such registration statement pursuant to this Paragraph (7)
shall, however, bear the fees of its own counsel and any registration fees,
transfer taxes or underwriting discounts or commissions applicable to the
Exercise Shares sold by it pursuant thereto and bear any other costs imposed by
applicable federal or state securities laws, rules or regulations.
(ii) In connection with any such Registration covered by
subparagraphs (a) or (b), notwithstanding anything to the contrary contained
herein, the Company shall have no obligation: (A) to assist or cooperate in the
offering or disposition of any such Exercise Shares; (B) to indemnify or hold
harmless the Holders of such securities being registered or any underwriter
designated by such Holders; (C) to obtain a commitment from an underwriter
relative to the sale of such Exercise Shares; or (D) to include such Exercise
Shares within an underwritten offering of the Company.
8. LIMITATIONS UPON EXERCISE.
(a) Holder's right to purchase all 90,000 shares covered by the Warrant
shall vest on April 26, 1995.
(b) Notwithstanding the above, this Warrant must be exercised by the later
of: (i) while the Holder is employed by the Company; or (ii) within three months
of the date
8.
<PAGE> 9
the Holder's employment is terminated; or (iii) in the event of the
death or the total and permanent disability (as defined in Section 22(e)(3) of
the Internal Revenue Code of 1986) of the Holder, within one year of the date
employment is terminated.
9. NOTICES. All notices or other communications under this Warrant Certificate
shall be in writing and shall be deemed to have been given if delivered by hand
or mailed by certified mail, postage prepaid, return receipt request, addressed
as follows:
If to the Company:
PMR Corporation
3990 Old Town Avenue
Suite 206A
San Diego, CA 92110
Attention: Chief Executive Officer, Mr. Allen Tepper
and to the Holder:
Fred Furman
3990 Old Town Avenue
Suite 206A
San Diego, CA 92110
at the address of the Holder appearing on the books of the
Company or the Company's transfer agent, if any.
Either of the Company or the Holder may from time to time change the
address to which notices to it are to be mailed hereunder by notice in
accordance with the provisions of the Paragraph 9.
10. SUPPLEMENTS AND AMENDMENTS. The Company may from time to time supplement or
amend this Warrant Certificate without the approval of any holders of Warrants
in order to cure any ambiguity or to correct or supplement any provision
contained herein which may be defective or inconsistent with any other
provision, or to make any other provisions in regard to matters or questions
herein arising hereunder which the Company may deem necessary or desirable and
which shall not materially adversely affect the interests of the Holder.
11. SUCCESSORS AND ASSIGNS. This Warrant shall inure to the benefit of and
be binding on the respective successors, assigns and legal representatives of
the Holder and the Company.
9.
<PAGE> 10
12. SEVERABILITY. If for any reason any provision, paragraph or terms of this
Warrant Certificate is held to be invalid or unenforceable, all other valid
provisions herein shall remain in full force and effect and all terms,
provisions and paragraphs of this Warrant shall be deemed to be severable.
13. GOVERNING LAW. This Warrant shall be deemed to be a contract made
under the laws of the State of Delaware and for all purposes shall be
governed by and construed in accordance with the laws of said State.
14. HEADINGS. Paragraph and subparagraph headings, used herein are
included herein for convenience of reference only shall not affect the
construction of this Warrant Certificate nor constitute a part of this
Warrant Certificate for any other purpose.
IN WITNESS WHEREOF, the Company has caused this Amended and Restated
Warrant to be duly executed as of this 9th day of July, 1997.
PMR Corporation
By:/s/ Allen Tepper
----------------------------------
Allen Tepper,
Chief Executive Officer
10.
<PAGE> 11
APPENDIX A
NOTICE OF WARRANT EXERCISE
Pursuant to a Warrant by and between the undersigned and PMR Corporation,
a Delaware corporation (the "Company"), dated as of July 9, 1997, and subject to
the vesting periods set forth therein, the undersigned hereby irrevocably elects
to exercise its warrant to the extent of purchasing ______________ shares of
Common Stock, $.01 par value (the "Warrant Shares"), of the Company as provided
for therein.
Payment of the full Purchase Price of the Warrant Shares is enclosed
herewith, in the form of a check made payable to the Company.
The undersigned requests that a certificate for the Warrant Shares be
issued in the name of:
_________________________________
_________________________________
_________________________________
(Please print name, address and social security number)
Dated:____________________________, 199___
Address: _________________________________
_________________________________
_________________________________
Signature: ________________________________
11.
<PAGE> 1
EXHIBIT 10.12
RESTATED MANAGEMENT AGREEMENT
THIS AGREEMENT is restated as of the 11th day of April, 1997, by and
between Scripps Health, a California non-profit public benefit corporation (the
"Hospital"), with an address of 9888 Genesee Avenue, Post Office Box 28, La
Jolla, California 92038, and PMR Corporation, a Delaware corporation ("PMR")duly
authorized as a foreign corporation doing business in California, with an
address of Cabrillo Plaza, 3990 Old Town Avenue, Suite 206A, San Diego,
California 92110.
RECITALS
A. The parties entered into a prior management agreement in July, 1996 and
addenda related thereto and wish to consolidate the management agreement and
addenda into one restated agreement ("Agreement") for ease of reference.
B. Hospital is licensed as a general acute care hospital in California and
desires to establish an outpatient acute psychiatric program (the "Program").
C. PMR is in the business of developing and administering outpatient acute
psychiatric programs.
D. Hospital desires to avail itself of PMR's services and PMR desires to
provide such services to Hospital as set forth herein (the "Agreement").
NOW, THEREFORE, the parties hereto, intending to be legally bound hereby,
agree as follows:
1. Term and Termination.
1.1 Term. The term of this Agreement (the "Term") shall begin October 1,
1996 and shall terminate September 30, 1999. Prior to October 1, 1996, the
parties shall continue to be bound by the terms of the previous Management
Agreement between them entered into on August 11, 1993. The prior Management
Agreement shall terminate effective September 30, 1996.
1.2 Termination for Cause. Either party shall have the right to terminate
this Agreement prior to the end of the Term upon written notice to the other
party if such other party has defaulted in the performance of any of the terms
of this
<PAGE> 2
Agreement and such default has continued uncured for more than sixty (60) days
after written notice of such default. The process and the time period for
resolving notices issued pursuant to this clause is as set forth in Paragraph
1.5. The actual damages to be assessed to the defaulting party shall be
determined in accordance with Paragraph 1.3.
1.3 Termination Compensation. If prior to September 30, 1998, this
Agreement is terminated without cause prior to its specified Term as set forth
in Paragraph 1.1 above, either by Hospital or PMR, the parties agree that a
determination of actual damages will be difficult, and, thus, it is agreed that
liquidated damages of Two Hundred Fifty Thousand Dollars ($250,000.00) shall be
paid by the terminating party to the other party. A voluntary termination is
defined as any termination without cause prior to the specified Term of this
Agreement EXCEPT the following terminations:
a. A termination for cause pursuant to Paragraph 1.2;
b. A termination pursuant to Paragraph 1.4;
c. A termination due to the sale or closing of Hospital for any
reason;
d. A termination due to the termination of the business of PMR for any
reason;
e. A termination due to the lack of appropriate licenses and
certifications as a result of suspension, revocation, failure to obtain, or any
other reason; or due to the application of laws requiring termination of this
Agreement without cause or penalty; or
f. A termination of a Program at a specific site by the mutual consent
of the parties.
1.4 Economic Feasibility: Performance Levels; Regulatory Changes; Admission
and Service Criteria. Hospital and PMR have determined that the PMR Program is
based upon assumptions of economic viability which rely upon the achievement of
certain specific performance levels, the continuation of existing payment and
reimbursement practices of payors and third-party payors, and the patterns of
patient medical utilization pertaining to admissions and services deemed
necessary by payors, third-party payors, and medical experts. In the event that
any one of these assumptions is determined to be invalid with respect to this
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Agreement, the parties shall meet in an attempt to set new thresholds of
evaluation. If the parties cannot agree within a period of sixty (60) days or
less, the Agreement shall terminate without any obligation by either party for
the liquidated damages set forth in Paragraph 1.3 or any other liability
hereunder arising specifically as a consequence of such termination. These
assumptions of economic viability are more specifically defined as follows:
1.4.1 Anticipated Performance. Hospital and PMR, upon due analysis,
have projected that certain performance levels are essential for economic
viability. Upon due consideration, these minimum levels are established as 6,000
patient visits per year for each Program site.
1.4.2 Payment and Reimbursement. Hospital and PMR have determined that
the existing payment criteria and reimbursement methodologies projected for this
Program for services to patients under this Program are adequate for economic
viability.
1.4.3 Admission and Service Criteria. Hospital is recognized as one of
the outstanding and quality institutions in the community, and PMR is recognized
as a competent and quality organization for the resources provided under this
Agreement. Pursuant to these reputations, Hospital and PMR agree that the
criteria for admission and service to patients under this Agreement shall be
consistent with the medical utilization and service standards promulgated by
Medicare and other third-party payors for admission to service and for services
rendered under this Agreement and that any deviation from these standards shall
render this Program economically not viable within the meaning of this
Subparagraph. Conformity to these standards shall be monitored in accordance
with the provisions of Subparagraphs 2.1.i(d) and 3.4.5 relating to utilization
review.
1.5 Avoidance of Termination. Within thirty (30) days of receipt of a
notice issued pursuant to Paragraph 1.2 or Section 5, Hospital and PMR shall
meet and use their best efforts to negotiate a solution to the problem with
respect to which such notice was sent. Such good faith negotiations shall
particularly be required with reference to notices given pursuant to Section 5.
In the event Hospital and PMR are unable to negotiate a solution to the problem
within a sixty (60) day period following the initial meeting for the purpose of
negotiating a solution to the problem, the Agreement may be terminated by the
party initiating notice pursuant to Paragraph 1.2, the termination to be
effective on the sixtieth day aforementioned.
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<PAGE> 4
1.6 Multi-facility Operations. Hospital and PMR acknowledge that Hospital
is a system of community hospitals and health care capabilities and that the
Program envisioned and defined by this Agreement may have application at more
than one of Hospital's provider facilities. Accordingly, the parties agree that
this Agreement shall encompass any and all of the Hospital's provider facilities
in which the Program is placed and that Hospital shall have the final decision
with respect to placement of Program, after due consultation with PMR and
appropriate analyses. In and of itself, a discontinuation of the Program at a
provider facility shall not be deemed to be a termination of this Agreement as
long as the Program continues in operation hereunder in at least one provider
site.
It is further agreed that Hospital's provider facilities at which the
Program will be placed will be identified and agreed to in writing by Hospital
and PMR and that additional placements of the Program may occur upon approval of
Hospital as also agreed to in writing by Hospital and PMR.
It is further acknowledged by PMR that the Program when placed at
Hospital's provider facility is the responsibility of the Administrator of
subject facility and that all decisions involving the respective Program,
subject to the authority of this Agreement, shall be subject to the
Administrator's authority and responsibility.
1.7 Joint Resources and Medical Directors. PMR and Hospital acknowledge
that the Program will be centrally administered through the Department of
Behavioral Medicine of Hospital, or as otherwise designated by Hospital, and
that Hospital will provide resources through the Department of Behavioral
Medicine in support of Program including but not limited to the following:
1.7.1 Medical Director. Hospital, at its discretion but with
consultation from PMR, will provide a medical director (the "Hospital Medical
Director") and related medical direction to Program. The Hospital Medical
Director appointed by Hospital will coordinate medical direction with on-site
Medical Director appointed by PMR. The Hospital Medical Director shall be
responsible directly to Hospital for conduct of medical affairs and for
coordination of medical activities with PMR and with on-site Medical Directors
appointed by PMR.
1.7.2 Administration and Management Services. Hospital, through its
Department of Behavioral Medicine, or as otherwise designated, shall provide
administrative and management
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<PAGE> 5
services to Program in cooperation with PMR, its staff and resources. The
provision of these administrative and management services, including the
logistical resources they constitute (space, equipment, campus overhead, etc.)
shall be supplemental and supportive to PMR, its staff and resources; and these
provisions for services shall not be construed to modify, interfere with, or
otherwise obstruct the performance of the obligations of PMR as set forth in
Section 2 of Agreement.
2. Obligations of PMR.
2.1 General. PMR shall cause to be furnished administrative management
services necessary to develop and operate the Program so as to provide high
quality patient care. Such services shall include the following:
a. obtaining, with the appropriate cooperation of Hospital, all
necessary licenses and Medicare certification;
b. planning, design and production of all community liaison and
educational literature;
c. Program development;
d. ongoing Program administration;
e. ongoing community liaison support;
f. staff development and continuing education;
g. administration of occupational and rehabilitation therapies;
h. quality assurance, which shall include:
(a) determining compliance with Hospital's quality assurance
program;
(b) providing outcome-oriented quality assurance assistance
designed to achieve improvement in over-all quality of care;
(c) reviewing and monitoring Program staff with respect to the
quality and scope of patient services.
i. utilization review, which shall include:
(a) review of admitting physician's determination
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<PAGE> 6
of a qualified patient's need for care;
(b) document outcome-related improvements to the patient from
Program;
(c) ongoing review of patient records to monitor medical
necessity determination by professional staff;
(d) establishment of a utilization review sub-unit for monitoring
utilization and admission criteria which shall include Hospital's Medical
Director, Executive Director of Department of Behavioral Medicine, and
utilization review personnel (as designated by Hospital) and which shall meet no
less often than every sixty (60) days to evaluate utilization and admissions to
Program and report findings and recommendations to the Administrator of
Hospital's provider facility in which Program is placed.
j. coordination with community agencies that have clients in need of
the Program services;
k. assistance in developing contracts for services with third-party
payors;
l. assistance in insuring compliance with all licensing agencies;
m. selection of necessary non-physician medical and non-medical
personnel; and
n. social services, publication materials, expend-able supplies,
rental expenses, drugs, office equipment and other items necessary to administer
the Program.
2.2 Program Development. PMR shall assist Hospital in the development,
upgrading and maintenance of the Program to meet or exceed applicable state,
federal and JCAHO standards. Such assistance shall consist of the development
and maintenance of a comprehensive set of procedures and policies for Hospital
(the "Policy Manual") covering all aspects of the Program that are not
inconsistent with Hospital's procedures and policies. The Policy Manual, and
periodic additions, deletions or amendments thereto, shall be submitted to
Hospital for its approval pursuant to Subparagraph 3.8.1.
2.3 Program Premises. PMR shall identify suitable premises for Program
locations and, upon approval of locations and plans for design and renovation of
premises by Hospital,
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<PAGE> 7
shall negotiate and secure leases for the premises, design and renovate
premises, furnish and equip consistent with Program needs, and shall make
available such premises to the Program. Subject to Section 2.3.1, lease and or
rental expenses shall be an operating expenses of PMR.
2.3.1 Premises Owned or Leased by Hospital. In the event a
Program is located on premises owned or leased by Hospital, Hospital shall pay
all costs associated with that Program's premises including rent, insurance,
utilities, maintenance, etc.
2.4 Personnel to be Provided.
2.4.1 Program Administrator/Medical Director. PMR shall provide for
each Program location having a design size of sixty (60) or more patients a
Program Administrator, a Medical Director, and the personnel necessary to
operate the Program except as otherwise provided herein. The Program
Administrator shall perform the functions as provided in Exhibit A hereto and
shall report to and be accountable to the Chief Executive Officer of the
Hospital or his/her designee and shall report through the Chief Executive
Officer to the governing body of the Hospital. The Medical Director shall
perform the functions as provided in Exhibit B hereto and shall maintain a
reporting relationship to the Chief Medical Officer of the Hospital.
2.4.2 Assignment of PMR Personnel. The following PMR personnel will be
available to Hospital personnel on an as-needed basis to ensure the overall
success of Program:
(a) the President of PMR will be available to participate in
regular administrative meetings at Hospital and to interface with the senior
personnel of Hospital on overall progress of Program.
(b) the Chief Financial Officer of PMR will be available to
consult with financial personnel of Hospital administration on issues related to
reimbursement, billings and audits.
(c) the Executive Vice President and Senior Vice President of PMR
will be available to participate in planning forums held at Hospital to explore
issues related to the expansion of the Program and/or development of other
adjunctive services and to assist with the solution of problems in key areas
with the Hospital administrators and to monitor ongoing progress.
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<PAGE> 8
(d) the Regional Vice President who is assigned to the region in
which Hospital is located will be available to consult on administrative and
personnel matters.
(e) the Vice President-Quality Assurance of PMR, who shall be a
board-certified psychiatrist, the Clinical Director of PMR, a licensed Social
Worker, and the Vice President of Quality Development will be available to
Hospital to consult on matters relating to the quality of the service provided
by the Program. In addition, the Vice President-Quality Assurance will be
available to consult on operating protocols and on Program operations.
2.4.3 Selection of Assigned Personnel. PMR shall select the persons
who will serve in each of the capacities listed in Subparagraphs 2.4.1 and
2.4.2; provided, however, that, pursuant to the review of qualifications
contemplated by Paragraph 3.6, all such personnel shall be reasonably
satisfactory to Hospital.
2.4.4 Availability of Assigned Personnel. PMR agrees that all
personnel listed in Subparagraph 2.4.2 will be available to Hospital when
required for issues related to operations and management of the Program.
2.5 Employment Services. PMR will recruit, select, evaluate and nominate
all medical and non-medical personnel for Hospital's evaluation pursuant to
Paragraph 3.6. All non-physician personnel shall be retained and paid for by
PMR, following approval by Hospital. All physician personnel shall be nominated
by PMR subject to Hospital's approval as set forth in Section 3.7.3.
2.6 Supervision and Control of Personnel. PMR shall be responsible for the
direction and control of all Program personnel with respect to administrative
services except to the extent Hospital may be responsible as provided in this
Agreement, and shall cause all personnel to comply to the extent applicable with
all terms and conditions of this Agreement and with the Policy Manual, as
amended and as approved by Hospital pursuant to Subparagraph 3.8.1.
2.7 Qualification. Any personnel performing services at the Program and
selected by, employed by or having a contract with PMR pursuant to Paragraphs
2.5 or 2.6 shall be appropriately licensed and qualified to perform such
services.
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<PAGE> 9
2.8 Requirement of Hospital Staff Membership. The Program Medical Director
and other PMR staff members as appropriate must qualify for and be members in
good standing at all times of the Medical Staff or Allied Medical Staff of
Hospital. If such membership in good standing of the Medical Director or
applicable PMR staff member is suspended, revoked or terminated, then the
Medical Director or such PMR staff member shall not be permitted to render
services at the Program until such good standing membership has been fully
restored and PMR shall provide the services of a comparable professional during
the interim or as permanent replacement.
2.9 Insurance.
2.9.1 PMR Insurance. For the Term of this Agreement, PMR shall procure
and maintain at its own cost comprehensive general and medical/professional
liability insurance with elements of self-insurance or deductibles common to the
industry covering personal injury, bodily injury, and property damage in the
following amounts:
(a) Personal/bodily injury: $1,000,000 per claimant and
$3,000,000 annual aggregate.
(b) Property damage: $500,000 per occurrence and $500,000 annual
aggregate.
2.9.2 Other Policy Requirements. Hospital shall be named as an
additional insured on such insurance policy and such coverage shall be primary.
Such insurance shall be written on an occurrence basis by an insurance company
authorized to transact the insurance business in the state in which Hospital is
located; provided, however, such insurance may be written on a claims-made basis
if tail coverage is guaranteed at the time the primary insurance policy is
written and PMR purchases and maintains such tail coverage upon the termination
of Agreement for the maximum reporting period available or five (5) years,
whichever is longer.
3. Obligations of Hospital.
3.1 Licensing. The Program shall be operated as and considered a department
of the Hospital and shall be licensed in the name of Hospital with all
appropriate authorities. Hospital shall, at all times, be the owner and holder
of all licenses and accreditations with respect to the Program.
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<PAGE> 10
3.2 Personnel and Supplies. Hospital shall provide PMR with access to
services and supplies through appropriate departments of Hospital (including,
but not limited to, food services, purchasing capabilities and contracts,
laundry arrangements and the like), which services and supplies shall be
contracted separately and paid for by PMR at Hospital's cost.
3.3 Program Premises. Hospital shall inspect and approve premises, in
consultation with PMR, and shall specify for PMR the trade style and related
public displays that shall accompany premises for Program identification. PMR
will incur the cost, to the extent reasonable, for the trade style and public
displays in connection with lease and renovation of the premises.
3.4 Billing and Maintenance of Statistical Information.
3.4.1 Hospital to be Provider. Hospital shall be the contracting party
for the Program and shall be the "provider" within the meaning of all contracts
and agreements for services with all patients of the Program and all third-party
payors. Hospital has the duty to verify all third-party payor existence and
under the direction and supervision of PMR will verify Program coverage for each
patient.
3.4.2 Billing for Program Services. Hospital or its designee shall
perform the function of billing for all services rendered at the Program, shall
collect and maintain all statistical and collection information necessary for
the management of the Program and shall pay the costs thereof.
3.4.3 Medical Records. All patient medical records shall be the
property of Hospital and shall be integrated into the unified records system of
the Hospital.
3.4.4 Record Request. Hospital will promptly notify PMR of any payor
request for records information from a third party or intermediary regarding a
Program patient.
3.5 Insurance.
3.5.1 Hospital Insurance. For the Term of this Agreement, Hospital
shall procure and maintain at its own cost comprehensive general and hospital
professional liability insurance with elements of self-insurance or deductibles
common to the industry covering personal injury, bodily injury, and property
damage in the following amounts:
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<PAGE> 11
(a) Personal/bodily injury: $1,000,000 per claimant and
$3,000,000 annual aggregate.
(b) Property damage: $500,000 per occurrence and $500,000 annual
aggregate.
3.5.2 Other Policy Requirements. PMR shall be named as an additional
insured on such insurance policy and such coverage shall be primary. Such
insurance shall be written on an occurrence basis by an insurance company
authorized to transact insurance business in the state in which Hospital is
located; provided, however, such insurance may be written on a claims-made basis
if tail coverage is guaranteed at the time the primary insurance policy is
written and Hospital purchases and maintains such tail coverage upon the
termination of Agreement for the maximum reporting period available or five (5)
years, whichever is longer.
3.5.3 Risk Management Program. Hospital, or its nominee, shall create
and manage, in cooperation with PMR, a risk management program designed to
monitor and minimize all insurable risks related to the Program. Risk management
techniques and discussions shall be a regular part of the procedures implemented
pursuant to Subparagraph 3.8.1.
3.6 Employment of Personnel. PMR will timely advise Hospital of the
employment of all personnel in the Program and Hospital shall review the
qualifications of all such personnel, whether employees or independent
contractors of PMR, and shall make any objection to such employment within
ninety (90) days of the date of their employment. All such personnel shall be
deemed approved by Hospital unless PMR is otherwise notified within the ninety
(90) day period noted herein.
3.7 Medical Supervision.
3.7.1 Administration of Hospital. The Administrator of Hospital's
provider facility in which Program is placed shall be responsible for the
operation of the Program conducted by Hospital and the implementation of
policies with respect to Hospital. Notwithstanding the authority granted to PMR,
Hospital shall retain and at all times exercise control over the affairs of
Hospital, shall establish general operating policies, pursuant to Subparagraph
3.8.1, to be carried out by PMR pursuant to this Agreement and shall be
accountable and responsible for all duties of Hospital. Hospital is responsible
for all patient affairs and Medical Staff relationships with respect to the
Program. Hospital shall have final authority to approve the
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Policy Manual and staffing plan established for it.
3.7.2 Lines of Authority. The Medical Director of the Program shall be
responsible to the Department of Medicine of Hospital's provider facility
Medical Staff, or as otherwise designated, in which Program is placed in all
matters pertaining to the medical policies and medical operations of the
Program. The Program Director shall report to the Administrator of Hospital's
provider facility in which Program is placed.
Additionally, Hospital shall establish lines of authority for
interface between PMR and the Medical Staff and hospital departments for each
discipline for which PMR provides related services hereunder, and Hospital shall
supervise and have responsibility for all hospital departmental activities
involving PMR services.
3.7.3 Corporate Practice of Medicine. Each party hereto acknowledges
and agrees that neither party is authorized or licensed to practice medicine in
California and will neither have nor exercise any control or direction over the
methods by which physicians shall provide professional medical services to
patients of Hospital. Each party's sole interest and authority is to ensure that
the services and obligations performed hereunder by that party's employees or
agents (which shall not include the performance or direction of professional
medical services to patients of Hospital) are being performed in a competent and
efficient manner. Notwithstanding the foregoing, Hospital shall ensure that all
attending physicians who shall provide services to patients of the Program shall
be members of the Hospital's medical staff and that all active members of
Hospital's Medical Staff shall maintain all required licenses to practice
medicine and shall remain in compliance with all applicable hospital and Medical
Staff bylaws and regulations. Further, Hospital, through its Medical Staff and
related committees, shall maintain appropriate control over the quality of
patient services rendered at the Hospital, in accordance with all applicable
laws, rules and regulations.
3.7.4 Medical Staff Committees. All medical staff committees at the
Hospital are responsible for all medical activities at the Program.
3.8 Coordination. Hospital shall meet regularly with the Program
Administrator and the Medical Director of the Program to discuss the operation
of the Program.
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3.8.1 Approval of Policy Manual. Hospital shall promptly review and
evaluate all changes to the Policy Manual suggested by PMR pursuant to Paragraph
2.2. Neither the original Policy Manual nor any such changes shall be
implemented without approval by Hospital which shall bear responsibility for the
medical and operating appropriateness of the Policy Manual and any changes
thereto.
3.8.2 Community Liaison. The Hospital shall regularly consult with the
Program Administrators and senior PMR personnel with regard to the creation and
implementation of pro-active community education and outreach activities with
respect to the Program.
4. Compensation and Expense. In consideration of all the services to be provided
by PMR, as set forth in this Agreement, it is agreed that proper, fair and
competitive compensation to PMR, as of the date of this Agreement, is as set
forth in the attached fee schedule, identified as Exhibit C. PMR represents that
the fees set forth in such Exhibit are consistent with the fair market value of
the services for which such fees are charged and are reasonable and customary
within its industry and within the local area served by Hospital. Hospital shall
provide PMR monthly, no later than the date on which fees are due and payable to
PMR, a report of patient activity/census sufficient to allow PMR to verify the
calculation of fees made by Hospital.
4.1 Uncompensated Care; Contracted Services; Capitation Agreements. The fee
schedule as set forth in Exhibit C notwithstanding, PMR and Hospital agree that
payment due to PMR for services rendered under this Agreement as set forth in
Exhibit C shall be reduced in cases involving uncompensated care. Uncompensated
care is defined as all cases in which the actual payment to Hospital for its
services to patients is less than the payment anticipated to be received by
Hospital. The payment anticipated to be received by Hospital is in all cases the
actual retail charge EXCEPT in cases in which Hospital has agreed to accept less
than the retail charge through contracts and formal arrangements with
third-party payors. The fee payable to PMR for cases involving uncompensated
care shall be reduced to the percentage relationship the actual payment bears to
the retail charge.
For all categories of cases in which Hospital agrees to accept less than
the retail charge through contracts and formal arrangements with third-party
payors, which are for these purposes referred to as Contracted Services, and
Capitation Arrangements, Hospital and PMR shall agree upon the methodology
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<PAGE> 14
for, form of, conditions for, and amount of payment (which together shall be
termed METHOD OF PAYMENT)to PMR for services rendered to patients pursuant to
this Agreement who are beneficiaries of these Contracted Services and Capitation
Arrangements.
These agreements between PMR and Hospital for payment to PMR for services
rendered to patients covered by these Contracted Services and Capitation
Arrangements shall be formalized in writing as addenda to this Agreement on
Exhibit D from time to time as these Contracted Services and Capitation
Arrangements are consummated. Hospital and PMR agree that services to Medicare
beneficiaries are not categories of cases currently subject to the provisions of
this paragraph.
It is acknowledged by Hospital and PMR that neither Hospital nor PMR
anticipates that the other is required under these provisions to provide
economic subsidy one to the other, but, that each anticipates to retain the
economic advantages upon which this Agreement is predicated. Therefore Hospital
and PMR agree to consult one with the other with respect to all categories of
cases in which Hospital elects to or is required to accept less than the retail
charge for payment and agree to use their best efforts to negotiate an agreement
with respect to METHOD OF PAYMENT to PMR of services to be rendered pursuant to
the third party payor arrangement. Hospital and PMR acknowledge and agree that
in the event of a lack of accord with respect to payment to PMR for services to
be rendered to beneficiaries of these third party payor Contracted Services and
Capitation Arrangements, the economic provisions of Sections 1.3 and 1.4
underlying this Agreement shall control.
4.2 Payment of Fees. Payment to PMR for fees due PMR for services under
this Agreement shall be made by Hospital by the end of the second month
following the month in which the services are provided by PMR to Hospital,
provided however, with respect to any Program initiated after June 1, 1996,
payment shall be made by Hospital by the end of the month following the month in
which the services are provided by PMR to Hospital.
4.3 Concurrent Review. In the event that a payor with whom Hospital is
regularly engaged denies Hospital reimbursement of fees paid to PMR with respect
to any patient of the Program as a consequence of the payor's determination that
the services rendered were inappropriate or otherwise non-chargeable to the
determining payor, PMR shall not be entitled to be paid its fees with respect to
such patient services. PMR, on Hospital's behalf, shall process and appeal the
denial of any such claims
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<PAGE> 15
which PMR determines should be appealed and in the event the denial is
overturned and payment for the services made by the payor to Hospital, Hospital
in turn shall promptly pay to PMR its Management Fee with respect to the
services rendered by PMR. If there are denied claims or claims in review
outstanding at the termination of this Agreement (and during the term of the
Agreement), Hospital shall not bear any financial risk for such denied claims or
appeals, (except to the extent that such claims are paid to Hospital), but
Hospital shall cooperate in the processing of appeals with respect to those
claims and Hospital shall regularly and promptly provide PMR with all
information relating to these claims including the overturning of denials from
receipt of payment and if requested by PMR, Hospital shall appoint PMR's
designee as Hospital's designee to process these claims and communicate with
intermediaries or third party payors.
4.4 Annual Review of Fees. The parties shall meet annually to review the
fee schedule which shall be effective until replaced by adjustments agreed upon
between the parties. Any such adjustments shall be made in good faith
recognition of cost increases which have occurred in Hospital's local market
area since any prior adjustment plus other factors deemed relevant by the
parties.
5. Standards of Services. PMR and Hospital hereby agree, in connection with the
operation of Hospital and the Program, to comply with all laws, rules, and
regulations of all governmental authorities having jurisdiction over each, and
any recommendations and policies resulting from Hospital's quality assurance
program and its general policies and procedures as well as recommendations made
by PMR's Vice President-Quality Assurance which recommendations are designed to
comply with applicable laws, rules, or regulations. The parties hereto
acknowledge that a material part of the consideration for this Agreement is the
other party's compliance with the provisions of this Section 5. The parties
further acknowledge that the non-compliance by either with any of the applicable
laws, rules, and regulations applicable to such party may have a material
adverse effect on the other party. The parties therefore agree to cooperate in
good faith with each other to monitor and ensure such compliance.
5.1 Ongoing Quality and Compliance Reviews. The performance of all services
rendered hereunder shall be reviewed as part of Hospital's ongoing quality
assurance program and by PMR's Vice President-Quality Assurance pursuant to the
provisions of Paragraph 2.4 above. In the event of non-compliance with any
standards for service set forth herein or applicable laws, rules, or regulations
by either party hereto, the other party shall give
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<PAGE> 16
the non-complying party notice thereof, and such party shall so comply or cause
such compliance as soon as practicable thereafter, but in any event within
thirty (30) days after such notice.
5.2 Change in Laws or Regulations. The parties acknowledge that applicable
laws, rules, and regulations or interpretations thereof may change at any time
during the Term of this Agreement or any extensions thereof and that such change
or interpretations may require a modification of this Agreement. Notwithstanding
the provisions of Paragraph 10.6, the parties hereby agree to give each other
immediate notice of such change in applicable laws, rules, or regulations,
whereupon the parties shall meet in good faith to negotiate a modification of
this Agreement such that it complies with such changes in applicable laws,
rules, or regulations.
5.3 Notice from Governmental/Regulatory Entities. The parties hereby agree
to give each other a copy of any notice or contact received from any
governmental or regulatory entity having jurisdiction thereof with respect to
the Program that any activity of such party is in violation of any applicable
law, rule, or regulation and to continue to promptly inform the other party of
all responses and procedures taken as a result of such notice or contact until
the alleged violation is cured, and to provide such other party with evidence of
the successful conclusion of the event.
6. Independent Contractor. No relationship of employer and employee or of joint
venture between PMR and Hospital is created by this Agreement, it being mutually
understood and acknowledged that PMR is at all times acting and performing as an
independent contractor hereunder. Hospital shall neither have nor exercise any
control or direction over the methods by which PMR or its employees perform
their administrative functions; provided, however, that any medical services
which may be rendered by PMR personnel shall be rendered under the direct
supervision and control of appropriate Hospital staff. No contracted provider or
employee of PMR shall have any claim under this Agreement or otherwise against
Hospital for salary or other compensation, vacation or sick pay, sick leave,
retirement benefits, social security, workers' compensation, disability or
unemployment insurance benefits or any other employee benefits of any kind.
7. Non-Interference.
7.1 Anti-Raiding. During the Term of this Agreement and thereafter for a
period of one (1) year, either party may hire an
16
<PAGE> 17
employee or independent contractor of the other party, provided that the party
offering employment or engagement first obtains the approval of the other party.
This provision shall have no force or effect to inhibit either party from hiring
or engaging the employee or independent contractor of the other party from and
after the first anniversary date of the termination of this Agreement without
the prior consent of the other party.
7.2 Patient Care. Notwithstanding Paragraph 7.1, neither party shall hereby
be prohibited from dealing with and providing services to any patient.
7.3 Exclusive Dealing, Right of First Refusal. During the Term of the
Agreement, in San Diego County, California, neither party, except through or
with the other party, shall enter into any agreement with any person or other
business entity to provide for the furnishing of any service related to this
Agreement ("Services"). The term Services shall also include outpatient chemical
dependency and case management services except for those Services presently
being delivered in San Diego County by Hospital. In the event either party
wishes to provide for the furnishing of any Services in San Diego County,
California, such party must offer in writing to the other party the right to
participate in the furnishing of such Services and the offeree party shall have
thirty (30) days from receipt of the writing to accept or reject such offer. In
the event there is no response to the offer or the offer is rejected, the
offeror shall be free to provide such Services in San Diego County, California
as set forth in the written offer without the participation of the offeree.
8. Access to Books and Records/Confidentiality.
8.1 Record Maintenance and Access. Until the expiration of four (4) years
after the furnishing of the services called for by this Agreement, PMR shall,
upon request, make available to the Secretary, U.S. Comptroller General, and
their representatives, this Agreement and all other books, documents and records
as are necessary to certify the nature and extent of the costs incurred by
Hospital in purchasing services under this Agreement. If PMR provides such
services through a subcontract worth Ten Thousand Dollars ($10,000.00) or more
over a twelve-month period with a related organization, the subcontract shall
also contain a clause permitting access by the Secretary, Comptroller General,
and their representatives to the books and records of the related organization.
17
<PAGE> 18
8.2 Mutual Confidentiality. Hospital and PMR agree that some information
received by one party from the other pursuant to this Agreement shall be
confidential. Except as provided in Paragraph 8.1 or as may otherwise be
required by law or legal process, it is therefore agreed that any information
received by one party from the other, and clearly designated in writing as
"CONFIDENTIAL", or in any other matter which indicates its confidential nature
(hereinafter referred to as "Confidential Information"), shall not be disclosed
by the other party and shall not be used by the other party for purposes other
than those contemplated by this Agreement. Confidential Information includes,
without limitation, information as to any patient as well as information
relating to business practices, costs, users or purchasers of either party's
services, research or services. Confidential Information does not include:
(a) information which has become known to third parties or has become
publicly known through no fault of the receiving party; or
(b) information already in the receiving party's possession prior to
the disclosure of said information to the receiving party; or
(c) information subsequently disclosed to the receiving party by a
third party who is not under any obligation or confidentiality to the disclosing
party; or
(d) information approved for disclosure by prior written consent of
the disclosing party; or
(e) information which the parties have agreed as necessary to
disclose.
8.3 Proprietary Information of PMR. The partial hospitalization system
developed by PMR and provided to Hospital for use in the Program pursuant to
this Agreement, the materials encompassing the system and the improvements to
the system developed by PMR from time to time, all of which are referred to
herein as the "System," are the proprietary property and trade secrets of PMR.
The System includes, but is not limited to, methods, techniques and other
know-how and the Program materials supplied during the Term, such as the
so-called Generic Policies and Procedures manual, the Program Managers Handbook,
the admissions screening system, the core medical record system and forms, the
guidelines and forms for conducting effective treatment planning meetings, the
utilization review systems and forms, the post-discharge follow-up system and
forms, the community rela-
18
<PAGE> 19
tions development and maintenance systems and forms, the key-monitor management
system, and the materials setting forth and explaining the principal and special
treatment modalities, including the generic focused treatment product, the
Substance Abuse/Mental Illness Dual Diagnosis Tract (also known as MICA), the
Community Transition Tract (also known as CTT), the Developmental
Disabilities/Mental Illness Tract and the Geriatric Senior/Affective Disorders
program. This Agreement is for services only. Hospital agrees that it shall not
acquire any rights to, or to use, such proprietary property, trade secrets or
the materials by virtue of the payment of fees hereunder or the provision during
the Term of such materials for use by the Hospital.
9. Service of Notices. All notices and other communications and all legal
process in regard hereto shall be validly given or served if in writing and
delivered personally or sent certified mail, postage prepaid, return receipt
requested, to the address set forth below or such address as either party may
designate to the other in writing:
If to Hospital:
Scripps Health
9888 Genesee Avenue
Post Office Box 28
La Jolla, California 92038
Attention: Sister Mary Jo Anderson, Executive Vice
President
If to PMR:
PMR Corporation
Cabrillo Plaza
3990 Old Town Avenue, Suite 206A
San Diego, California 92110
Attention: Mr. Allen Tepper, CEO
10. Miscellaneous.
10.1 Mutual Indemnity. Notwithstanding any other provision of this
Agreement, each party hereto shall indemnify and hold the other party harmless
from any and all claims, damages and liabilities arising out of such party's
negligence in the performance or non-performance of its duties hereunder. For
purposes of indemnity, negligence shall be determined by a trier of fact of
competent jurisdiction.
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<PAGE> 20
10.2 Binding Effect. This Agreement shall be binding upon and inure to the
benefit of the parties hereto and their successors and assigns.
10.3 Choice of Law. The validity, enforceability and interpretation of any
of the clauses of Agreement shall be determined and governed by the laws of the
State of California.
10.4 Entire Agreement. This Agreement constitutes the entire agreement
between the parties hereto with respect to the subject matter hereof and
supersedes all prior and contemporaneous agreements, understanding, negotiations
and discussions of the parties whether written or oral.
10.5 Written Notification. No amendment, modification or supplement of any
provision of this Agreement shall be effective unless in writing, signed by the
parties hereto; and no waiver of any party's obligations under this Agreement,
or consent to any departure therefrom, shall be effective unless in writing,
signed by the parties hereto and then only in the specific instance and for the
specific purpose given.
10.6 Severability. If any provision of this Agreement is held to be
inoperative, unenforceable or invalid under present or future laws effective
during the Term of this Agreement, such shall be inoperative, unenforceable or
invalid without affecting the remaining provisions. This Agreement shall be
construed and enforced as if such illegal, invalid or unenforceable provision
had never comprised a part of this Agreement, and, to that end, the provisions
of this Agreement are declared to be severable. Notwithstanding the foregoing,
however, the parties agree to negotiate a modification of this Agreement
pursuant to the provisions of Paragraph 5.2 in the event any provision of this
Agreement is believed by a party in good faith to be invalid under applicable
laws, rules, or regulations.
10.7 Number and Gender. Whenever the context of this Agreement requires,
the singular shall include the plural and the masculine gender shall include the
feminine.
10.8 Joint Negotiations. This Agreement is the product of negotiations
between the parties and is not to be interpreted more strongly in favor of one
party or the other in the interpretation or enforcement thereof.
10.9 Paragraph Headings. Paragraph headings in this Agreement are included
for convenience of reference only and are not part of this Agreement for any
other purpose.
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<PAGE> 21
10.10 Counterparts. This Agreement may be executed in counterparts and
either party hereto may execute any counterpart, each of which, when executed
and delivered, will be deemed to be an original, and all of which counterparts
taken together will be deemed to be but one and the same instrument. The
execution of this Agreement by any party hereto will not become effective until
a counterpart hereof has been executed by each other party hereto.
10.11 Assignability. Notwithstanding Paragraph 10.2, neither party shall
assign, sell or transfer this Agreement or any interest herein without the prior
written consent of the other party, which consent shall not be unreasonably
withheld. In the event that the primary business and/or substantially all of the
assets of PMR is transferred to an affiliate of PMR, PMR shall have the right to
assign all of its rights under Agreement to any such affiliate during the Term
of Agreement, and any such assignee/affiliate shall acquire all of the rights
and assume all of the obligations of PMR under this Agreement.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
executed as of the date first written above.
HOSPITAL: SCRIPPS HEALTH, a California non-
profit public benefit corporation
By: Sister Mary Jo Anderson
----------------------------------
Title: Sr. VP Hospital Operations
-------------------------------
PMR: PMR CORPORATION, a Delaware
corporation
By: /s/ FRED FURMAN
----------------------------------
Title: President
-------------------------------
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<PAGE> 22
[EXHIBITS EXCLUDED]
<PAGE> 1
EXHIBIT 10.13
SUBLEASE
BETWEEN
CMS DEVELOPMENT AND MANAGEMENT COMPANY, INC.
as Sublandlord
AND
PMR CORPORATION
as Subtenant
<PAGE> 2
TABLE OF CONTENTS
-----------------
<TABLE>
<S> <C> <C>
ARTICLE 1 DESCRIPTION OF LEASED SPACE, PRIME LEASE................................ 1
1.1 Demise of Leased Space.................................................. 1
1.2 Prime Lease............................................................. 1
1.3. Protection of Prime Lease............................................... 2
1.4 Sublandlord's Prime Lease Obligations................................... 2
ARTICLE 2 TERM.................................................................... 2
2.1 Commencement and Expiration............................................. 2
ARTICLE 3 RENT.................................................................... 2
3.1 Monthly Base Rent....................................................... 2
3.2 Annual Increase in Rent................................................. 3
3.3 Late Charge............................................................. 3
ARTICLE 4 - USE; LIMITATIONS........................................................ 3
4.1 Uses.................................................................... 3
4.2 Regulations and CC&R's.................................................. 4
ARTICLE 5 - CONSTRUCTION OF INITIAL IMPROVEMENTS.................................... 4
5.1 Improvement Work........................................................ 4
ARTICLE 6 - ALTERATIONS AND ADDITIONS............................................... 4
6.1 Alterations............................................................. 4
6.2 Removal of Improvements................................................. 4
ARTICLE 7 - UTILITIES AND SERVICES.................................................. 5
7.1 Utilities and Services.................................................. 5
ARTICLE 8 - INDEMNIFICATION......................................................... 5
8.1 Indemnity and Defense................................................... 5
8.2 Exculpation............................................................. 6
ARTICLE 9 - INSURANCE............................................................... 6
ARTICLE 10 - CARE OF LEASED SPACE.................................................... 7
10.1 Subtenant's Obligation.................................................. 7
ARTICLE 11 - PAYMENT OF OPERATING COSTS, PROPERTY - TAXES
AND UTILITY CHARGES..................................................... 8
11.1 Costs, Taxes, and Utility Charges....................................... 8
11.2 Payment .......................................................... 8
11.3 Subtenant's Proportionate Share......................................... 8
ARTICLE 12 - BROKERAGE COMMISSIONS................................................... 9
12.1 Representations......................................................... 9
12.2 Payment................................................................. 9
ARTICLE 13 - RIGHTS RESERVED BY SUBLANDLORD.......................................... 9
13.1 Reserved Rights......................................................... 9
</TABLE>
<PAGE> 3
<TABLE>
<S> <C> <C>
ARTICLE 14 - ASSIGNMENT AND SUBLETTING............................................... 9
14.1 Assignment.............................................................. 9
14.2 Subleasing.............................................................. 10
ARTICLE 15 - QUIET ENJOYMENT......................................................... 10
15.1 Quiet Enjoyment......................................................... 10
ARTICLE 16 - DEFAULT................................................................. 10
16.1 Subtenant's Default..................................................... 10
16.2 Remedies................................................................ 11
16.3 Damages................................................................. 11
16.4 Worth at Time of Award.................................................. 11
16.5 Waiver.................................................................. 12
16.6 Curing Subtenant's Default.............................................. 12
ARTICLE 17 - ATTORNEYS' FEES......................................................... 12
ARTICLE 18 - DESTRUCTION OR DAMAGE................................................... 12
ARTICLE 19 - CONDEMNATION............................................................ 13
ARTICLE 20 - ASSIGNMENT OF PRIME LEASE............................................... 13
ARTICLE 21 - STATEMENT OF STATUS (ESTOPPEL).......................................... 13
21.1 Certificate............................................................. 13
21.2 Estoppel................................................................ 14
ARTICLE 22 - PARKING................................................................. 14
22.1 Parking Rights.......................................................... 14
ARTICLE 23 - SECURITY DEPOSIT........................................................ 14
23.1 Security Deposit........................................................ 14
ARTICLE 24 - CERTAIN ALLOWANCES...................................................... 14
24.1 Moving Allowance........................................................ 14
24.2 Termination Fee Allowance............................................... 15
ARTICLE 25 - GENERAL PROVISIONS...................................................... 15
25.1 Successors.............................................................. 15
25.2 Entire Agreement........................................................ 15
25.3 Terms and Headings...................................................... 15
25.4 Light/Air............................................................... 15
25.5 Time ................................................................... 16
25.6 Examination............................................................. 16
25.7 No Recording............................................................ 16
25.8 Governing Law........................................................... 16
25.9 Provisions Severable.................................................... 16
25.10 Notices................................................................. 16
25.11 Waiver of Jury Trial.................................................... 17
</TABLE>
<PAGE> 4
SUBLEASE
THIS SUBLEASE (the "Sublease") is made this 1st day of April,
1997 between CMS DEVELOPMENT AND MANAGEMENT COMPANY, INC., a Delaware
corporation ("Sublandlord") and PMR CORPORATION, a Delaware corporation
("Subtenant").
BACKGROUND
A. Pursuant to a Master Lease dated July 10, 1996 (the "Prime Lease"),
Sublandlord leases from an affiliate of Lennar Partners, successor in interest
to Oliver McMillan Village Hillcrest 2, L.P. (the "Prime Landlord") the fifth
floor (the "Fifth Floor") in the medical building located at 501 Washington
Avenue, San Diego, California (the "Building"). The Building is part of a larger
"mixed use" condominium project known as the Village Hillcrest (the "Project"),
which includes a rehabilitation hospital, medical offices, retail uses, a
multi-screen movie theater, offices and a multi-level subterranean parking
structure. Capitalized terms used herein without definition shall have the same
meanings ascribed to those terms in the Prime Lease.
B. Subtenant desires to lease the Fifth Floor for use as executive and
administrative offices for Subtenant. Sublandlord is willing to sublease the
Fifth Floor to Subtenant on the terms and conditions hereinafter set forth.
ARTICLE 1
DESCRIPTION OF LEASED SPACE, PRIME LEASE
1.1 Demise of Leased Space. Sublandlord hereby leases to Subtenant
and Subtenant hereby hires from Sublandlord, pursuant to the terms, covenants,
conditions and uses herein set forth, the Fifth Floor, consisting of
approximately 20,717 square feet of space (the "Leased Space"), outlined in
black on the floor plan attached hereto as Exhibit "A".
1.2 Prime Lease. The Prime Lease is incorporated herein by this
reference. Subtenant acknowledges receipt of a copy of the Prime Lease, and
agrees that Subtenant's rights with respect to the use and occupancy of the
Leased Space are in all respects subject to the terms, conditions and
limitations of the Prime Lease. Subtenant shall be responsible for all
obligations of Sublandlord under the Prime Lease relating to the use and
occupancy of the Leased Space, provided that the Monthly Base
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<PAGE> 5
Rent payable by Subtenant shall be as provided in Article 3 of this Sublease.
1.3. Protection of Prime Lease. Subtenant shall not do or cause to
be done or suffer or permit any act or thing which would constitute a default
under the Prime Lease or cause the Prime Lease or the rights of Sublandlord as
lessee thereunder to be terminated or which would cause Sublandlord to become
liable for any damages, costs, claims or penalties or would increase the rent or
other charges or obligations of Sublandlord as lessee under the Prime Lease, or
would adversely affect or reduce any of Sublandlord's rights or benefits under
the Prime Lease.
1.4 Sublandlord's Prime Lease Obligations. Sublandlord agrees that
it shall pay all amounts due and perform all obligations required of it under
the Prime Lease in a timely manner. Sublandlord agrees that it shall not amend,
modify, terminate or otherwise change the Prime Lease in any manner which
affects Subtenant or this Sublease without first obtaining the approval of
Subtenant, which approval shall not be unreasonably withheld.
ARTICLE 2
TERM
2.1 Commencement and Expiration. The term of this Sublease shall be
for a term (the "Term") commencing on the earlier of (i) substantial completion
of Sublandlord's Improvement Work to the Leased Space as provided in Article 5
and Exhibit B hereto or (ii) Subtenant's occupancy of all or any substantial
portion of the Leased Space ("Commencement Date"), and expiring, subject to
earlier termination as provided elsewhere in this Sublease, on April 3, 2002.
Under no circumstances shall the Term extend beyond the expiration, surrender or
termination of the Prime Lease, whether the Prime Lease expires by its own
terms, is terminated due to default or for any other reason. Provided that this
Sublease is not terminated due to Subtenant's default hereunder, Sublandlord
shall not attempt to extend the Prime Lease or otherwise compete with Subtenant
for occupancy of the Leased Space or any part thereof upon the expiration of the
Term.
ARTICLE 3
RENT
3.1 Monthly Base Rent. Subtenant agrees to pay to Sublandlord,
without prior notice or demand, in advance, on the first (1st) day of each and
every calendar month during the Term,
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<PAGE> 6
and Sublandlord shall accept, monthly base rent ("Monthly Base Rent") as
follows: for the period beginning on the Commencement Date and expiring on the
day preceding the nine (9) month anniversary of the Commencement Date, the
Monthly Base Rent shall be Sixteen Thousand Five Hundred Ninety Dollars
($16,590) per month; for the period from and after the nine (9) month
anniversary of the Commencement Date the Monthly Base Rent shall be Twenty One
Thousand Seven Hundred Fifty Two Dollars ($21,752.85) per month, subject to
annual increase as set forth in Section 3.2. Notwithstanding the foregoing, the
Monthly Base Rent for the first full month of the Term shall be paid by Tenant
upon the execution of this Sublease. If the Term shall commence or end on a day
other than the first day of a month, the Monthly Base Rent for said first and
last partial month shall be prorated on a per diem basis, and the Monthly Base
Rent for the month in which the nine month anniversary of the Commencement Date
falls shall be adjusted on a per diem basis to reflect the adjustment in Monthly
Base Rent as of such anniversary as provided above.
3.2 Annual Increase in Rent. On the one year anniversary of the
Commencement Date (or, if the Commencement Date is other than the first day of a
calendar month, the one year anniversary of the first day of the first calendar
month following the Commencement Date), and on each annual anniversary of such
date during the term of this Agreement (each, an "Anniversary Date"), the
Monthly Base Rent then payable under this Sublease shall be increased by a fixed
four percent (4%) of the Monthly Base Rent in effect immediately preceding such
Anniversary Date.
3.3 Late Charge. In the event that any payment of Monthly Base Rent
or any other sum payable by Subtenant to Sublandlord hereunder (all of which
sums shall be collectable as additional rent hereunder) is not paid within ten
(10) days after its due date, Subtenant agrees (i) that liquidated damages for
the late payment of such rent in the amount of six percent (6%) of such rent
shall be and become due to Sublandlord on the eleventh day after such payment is
due and (ii) to pay such liquidated damages to Sublandlord upon demand.
Subtenant agrees that the foregoing liquidated damages are reasonable under the
circumstances existing at the time this Sublease is executed, and understands
that the foregoing liquidated damages represent compensation to Sublandlord for
damages incurred by reason of Subtenant's failure to make payment of rent within
ten (10) days after the date when due.
ARTICLE 4
USE; LIMITATIONS
4.1 Uses. The Leased Space may be used only for executive and
administrative offices for a health care company or any other use permitted
under the Prime Lease. Any other use of
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<PAGE> 7
the Leased Space shall require Sublandlord's consent, which may be granted or
withheld in its sole discretion.
4.2 Regulations and CC&R's. In addition to the Prime Lease, this
Sublease and the interest of all parties hereto shall be subject to any and all
Rules and Regulations promulgated from time to time by the Prime Landlord as
well as the Master Declaration and the Hospital/Medical Declaration
(collectively, the "CC&R's") and to all of the covenants, conditions,
restrictions, reservations, easements, liens and provisions therein contained,
and Subtenant, by acceptance of this Sublease, hereby covenants and agrees to
comply with the provisions of such Rules and Regulations and the CC&R's in its
use and occupation of the Leased Space. Subtenant acknowledges that this
Sublease shall be subordinate to the CC&R's and any amendments or modifications
thereof.
ARTICLE 5
CONSTRUCTION OF INITIAL IMPROVEMENTS
5.1 Improvement Work. Sublandlord shall construct initial
improvements to the Leased Space in accordance with the Improvement Work Letter
Agreement attached hereto as Exhibit B.
ARTICLE 6
ALTERATIONS AND ADDITIONS
6.1 Alterations. Subtenant shall not make any structural
alterations, improvements or additions to the Leased Space without obtaining the
prior written consent of Sublandlord, which consent shall not be unreasonably
withheld or delayed. Sublandlord's consent shall be conditioned upon Subtenant's
removing any such additions, alterations, or improvements upon the expiration or
termination of this Sublease and restoring the Leased Space to the same
condition as on the date Subtenant took possession, provided that Sublandlord
shall not require such removal if the Prime Landlord does not require such
removal. All work performed by Subtenant pursuant to this Article shall be
subject to the requirements of the Prime Lease, including but not limited to the
obligation to post notices of non-responsibility and provide lien and completion
bonds in certain circumstances as provided in Article 6 of the Prime Lease.
6.2 Removal of Improvements. Unless their removal is required by the
Prime Landlord under the Prime Lease, all additions, alterations, and
improvements made to the Leased Space by or on behalf of Subtenant shall become
the property of Sublandlord and be surrendered with the Leased Space upon the
expiration
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<PAGE> 8
or termination of this Sublease, provided that Subtenant's personal property and
trade fixtures that can be removed without material damage to the Leased Space
shall remain the property of Subtenant and may be removed. Subtenant shall
promptly repair any damage to the Leased Space or to the Building resulting from
such removal.
ARTICLE 7
UTILITIES AND SERVICES
7.1 Utilities and Services. Sublandlord shall not be obligated to
provide any utilities or services to Subtenant, it being understood that
Subtenant shall be entitled to receive directly from the Prime Landlord the
utilities and services to be provided by the Prime Landlord to the Leased Space
under the Prime Lease. If Prime Landlord shall default or delay in providing or
performing any utility, service, repair, restoration or other obligation under
the Prime Lease as such items pertain to the Leased Space, Sublandlord's only
obligations to Subtenant on account thereof shall be (i) to permit Subtenant, at
its expense, to prosecute an action against Prime Landlord for damages or
specific performance for Subtenant's benefit, and (ii) to make a good faith
effort, and to reasonably cooperate with Subtenant (at Subtenant's expense) in
attempting, to cause Prime Landlord to provide or perform such service or
obligation. Any condition resulting from such default or delay by Prime Landlord
shall not constitute an eviction, actual or constructive, of Subtenant. No such
default or delay shall excuse Subtenant from the payment of rent or performance
or observance of any of its other obligations hereunder.
ARTICLE 8
INDEMNIFICATION
8.1 Indemnity and Defense. Subtenant agrees to indemnify Sublandlord
and to hold Sublandlord free and harmless from and against any and all
liabilities, costs, expenses, damages, claims, and losses of every kind and
nature whatsoever arising out of or related to: (a) Subtenant's use and
occupancy of the Leased Space, or any work, activity, or other thing done in,
on, or about the Leased Space by Subtenant or anyone claiming under Subtenant;
or (b) any breach or default by Subtenant under this Sublease or of any
obligations of Subtenant imposed by law; or (c) any negligent or otherwise
tortious act or omission of Subtenant, its agents, employees, invitees, or
contractors. The foregoing indemnity includes, but is not limited to, injuries,
death, and property damage suffered by Subtenant's employees except to the
extent caused by the active (as opposed to passive)
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<PAGE> 9
negligence or willful acts of Sublandlord, its agents or employees. Subtenant
shall, at Subtenant's sole cost and expense, and by legal counsel reasonably
satisfactory to Sublandlord, defend Sublandlord in any action or proceeding
arising from any such matter and shall indemnify Sublandlord and hold
Sublandlord free and harmless from and against all costs, attorneys' fees,
expert witness fees, and any other expenses incurred in such action or
proceeding. As a material part of the consideration for Sublandlord's execution
of this Sublease, Subtenant hereby assumes all risk of damage or injury to any
person or property in, on, or about any part of the Leased Space in the physical
possession of Subtenant or anyone claiming under Subtenant, from any cause,
except to the extent of the active negligence or willful acts of Sublandlord and
Sublandlord's agents and employees.
Sublandlord agrees to indemnify Subtenant and to hold Subtenant free
and harmless from and against any and all liabilities, costs, expenses, damages,
claims and losses of every kind and nature whatsoever arising out of or related
to any breach or default by Sublandlord under this Sublease or any injury, death
or property damage resulting from the active (as opposed to passive) negligence
or willful misconduct of Sublandlord, its agents or employees.
8.2 Exculpation. Sublandlord shall not be liable for injury or
damage that may be sustained by the person or property of the Subtenant, its
employees, invitees, or customers, or any other person in or about the Leased
Space, caused by or resulting from fire, steam, electricity, gas, water, or rain
or from the breakage, leakage, obstruction, or other defects of pipes,
sprinklers, wires, appliances, plumbing, air conditioning, or lighting fixtures,
whether such damage or injury results from conditions arising upon the Leased
Space or upon other portions of the Building or from other sources, except to
the extent such damage or injury results from the active (as opposed to passive)
negligence or willful acts of Sublandlord. Sublandlord shall not be liable for
any damages arising from any act or omission of Prime Landlord or any other
occupant of the Tower, Building or Project.
ARTICLE 9
INSURANCE
9.1 Subtenant shall maintain at its own cost and expense (i)
insurance against fire and such other perils as may be included in a standard
fire and special extended coverage insurance form on all of Subtenant's property
located in the Leased Space in an amount adequate to cover at least ninety
percent (90%) of their replacement cost; and (ii) commercial general liability
insurance on an occurrence basis with limits of liabil-
-6-
<PAGE> 10
ity in an amount not less than $1,000,000 combined single limit for each
occurrence with respect to loss of life, bodily or personal injury and damage to
property by water or otherwise. All such insurance shall be issued by insurers
approved by Sublandlord, shall provide for a deductible not greater than
$10,000.00 from any loss payable, shall contain appropriate endorsements denying
Subtenant's insurers the right of subrogation against Sublandlord and all
parties to, or bound by, the CC&R's, and shall contain a provision whereby each
insurer agrees not to cancel such insurance without 30 days prior written notice
to Sublandlord. With respect only to the general liability insurance,
Sublandlord and the Prime Landlord shall be named as an additional insured. On
or before the Commencement Date, Subtenant shall furnish Sublandlord with
certificates evidencing the aforesaid insurance coverage, and renewal
certificates shall be furnished to Sublandlord at least ten (10) days prior to
the expiration date of such insurance.
9.2 Sublandlord shall maintain at its own cost and expense
commercial general liability insurance on an occurrence basis with limits of
liability in an amount not less than $1,000,000 combined single limit for each
occurrence with respect to loss of life, bodily or personal injury and damage to
property. The liability insurance maintained by Sublandlord shall be secondary
to the liability insurance maintained by Subtenant with respect to occurrences
in, on or about the Leased Premises. Upon Subtenant's request, but not more
frequently than once per year, Sublandlord shall provide Subtenant a certificate
of insurance evidencing this insurance coverage.
ARTICLE 10
CARE OF LEASED SPACE
10.1 Subtenant's Obligation. Except for the obligations of Prime
Landlord under Article 7 and Section 10.2 of the Prime Lease, and except for the
provisions of Article 18, Subtenant shall keep the Leased Space in good
condition and repair, including replacements as needed, and shall not commit or
permit any waste upon the Leased Space. If Subtenant fails to keep the Leased
Space in reasonable repair, Sublandlord may at Sublandlord's option, after
reasonable prior written notice to Subtenant, enter the Leased Space in order to
keep the Leased Space in good condition and repair, and Subtenant shall
immediately pay to Sublandlord the cost thereof.
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ARTICLE 11
PAYMENT OF OPERATING COSTS, PROPERTY
TAXES AND UTILITY CHARGES
11.1 Costs, Taxes, and Utility Charges. Subtenant agrees to pay to
Sublandlord, as additional rent under this Sublease, and at the times and in the
manner provided in this Article 11, (i) Subtenant's Proportionate Share (as
defined below) of the amounts by which Operating Costs and Property Taxes (as
defined in the Prime Lease) for any calendar year exceed $218,265.00 (the
"Expense Stop") and (ii) Subtenant's Proportionate Share of the cost of all
Utilities (as defined in the Prime Lease). Subtenant's Proportionate Share of
said amounts is hereinafter called "Subtenant's Share of Costs, Taxes, and
Utilities."
11.2 Payment. If Prime Landlord bills Subtenant directly for
Subtenant's Share of Costs, Taxes and Utilities, Subtenant shall pay the amount
so billed directly to Prime Landlord as and when due. Otherwise, Subtenant's
Share of Costs, Taxes, and Utilities for any calendar year shall be due and
payable to Sublandlord no later than twenty (20) days after Sublandlord delivers
to Subtenant, after the calendar year has ended, a copy of the statement of
Costs, Taxes and Utilities provided by Prime Landlord to Sublandlord. If
pursuant to the Prime Lease Sublandlord is required to pay estimated monthly
installments on account thereof, Subtenant shall upon demand pay to Sublandlord
estimated monthly installments of Subtenant's Share of Costs, Taxes and
Utilities. If the monthly installments paid by Subtenant on account of Costs,
Taxes and Utilities for any year is more or less than the actual Subtenant's
Share of such costs for such year, Subtenant shall pay the amount due or receive
a credit as provided in Section 11.2 of the Prime Lease.
If the Commencement Date is other than January 1, Subtenant's Share
of Costs, Taxes, and Utilities for the calendar year in which the Commencement
Date occurs shall be multiplied by a fraction, the numerator of which shall be
the number of days from the Commencement Date to the following December 31 and
the denominator of which shall be 365 and Subtenant's Share of Costs, Taxes, and
Utilities for the calendar year in which the Term expires shall be multiplied by
a fraction, the numerator of which shall be the number of days in the calendar
year to the expiration date and the denominator of which shall be 365.
11.3 Subtenant's Proportionate Share. "Subtenant's Proportionate
Share" shall mean, with respect to Costs and Taxes, 100% of the total such costs
allocated to the Fifth Floor. With respect to Utilities that are charged to
tenants in the Tower without regard to occupancy or usage, Subtenant's
Proportionate
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Share shall be 100% of the total such costs allocated to the Fifth Floor;
otherwise Subtenant's Proportionate Share with respect to Utilities shall mean
the percentage obtained by dividing the rentable area of the Leased Space by the
total occupied area of the Fifth Floor.
ARTICLE 12
BROKERAGE COMMISSIONS
12.1 Representations. Sublandlord and Subtenant each represent and
warrant to the other that it has not dealt with any broker or agent other than
Lambert Smith Hampton (San Diego), Inc. (the "Broker"). Subtenant and
Sublandlord agree to indemnify and hold the other harmless for, from and against
any claims for brokerage commissions with respect to this Sublease made by any
broker or agent other than the Broker with whom, as applicable, Subtenant or
Sublandlord may have dealt with respect to this Sublease. The foregoing
indemnification shall include the reasonable attorneys' fees of the party being
indemnified.
12.2 Payment. Sublandlord shall pay the Broker a commission for its
services in connection with this Sublease in accordance with the terms of a
separate agreement between Sublandlord and the Broker.
ARTICLE 13
RIGHTS RESERVED BY SUBLANDLORD
13.1 Reserved Rights. In addition to the rights reserved by Prime
Landlord pursuant to Section 13.1 of the Prime Lease, Sublandlord shall have the
right to enter upon the Leased Space at reasonable times and with reasonable
notice for the purposes of making inspections and for access to any pipe or
utility chases or similar areas accessible from the Leased Space.
ARTICLE 14
ASSIGNMENT AND SUBLETTING
14.1 Assignment. Subtenant shall not assign this Sublease without
Sublandlord's prior written consent, which consent shall not be unreasonably
withheld so long as the financial condition of the proposed assignee is
acceptable to Sublandlord. No assignment shall relieve Subtenant of its
obligations hereunder.
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<PAGE> 13
14.2 Subleasing. Subtenant shall not sublease the Leased Space or
any portion thereof without the prior written consent of Sublandlord, which
consent shall not be unreasonably withheld so long as the financial condition of
the proposed sublessee is acceptable to Sublandlord. No sublease shall release
Subtenant from responsibility for performance of the terms, covenants and
conditions of this Sublease with respect to the space covered by any sublease.
ARTICLE 15
QUIET ENJOYMENT
15.1 Ouiet Enjoyment. Subtenant, provided no default exists
hereunder and is continuing, shall have quiet and peaceable enjoyment of the
Leased Space throughout the Term without hindrance or molestation by Sublandlord
or by anyone claiming by, through or under Sublandlord.
ARTICLE 16
DEFAULT
16.1 Subtenant's Default. The occurrence of any one or more of the
following events shall constitute a default and breach of this Sublease by
Subtenant: (a) if Subtenant fails to pay any Rent or any other charges required
to be paid by Subtenant under this Sublease when due and payable for a period
of five (5) days after written notice thereof is received by Subtenant
specifying such failure, provided that Subtenant shall not be entitled to such
notice and grace period more than two times in any consecutive twelve (12) month
period; or (b) if Subtenant fails to perform promptly and fully any other
covenant, condition, or agreement contained in this Sublease and such failure
continues for twenty (20) days after receipt of written notice thereof from
Sublandlord to Subtenant or such longer time as is reasonably required by
Subtenant to cure; or (c) if Subtenant makes a general assignment for the
benefit of creditors or provides for an arrangement, composition, extension, or
adjustment with its creditors; or (d) if Subtenant files a voluntary petition
for relief, or if a petition against Subtenant in a proceeding under the federal
bankruptcy laws or other insolvency laws is filed and not withdrawn or dismissed
within ninety (90) days thereafter, or if under the provisions of any law
providing for reorganization or winding up of corporations any court of
competent jurisdiction assumes jurisdiction, custody, or control of Subtenant or
any substantial part of its property and such jurisdiction, custody, or control
remains in force unrelinquished, unstayed, or unterminated for a period of
ninety (90) days; or (e) if, in any proceeding or action in which Subtenant
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is a party, a trustee, receiver, agent, or custodian is appointed to take charge
of the Leased Space or any of Subtenant's property (or has the authority to do
so) for the purpose of enforcing a lien against the Leased Space or Subtenant's
property.
16.2 Remedies. In the event of Subtenant's default hereunder, then
in addition to all other rights or remedies available to Sublandlord,
Sublandlord shall have the right, at Sublandlord's option, without further
notice or demand of any kind, to the following: (a) terminate this Sublease and
Subtenant's right to possession of the Leased Space and reenter the Leased Space
and take possession thereof, and Subtenant shall have no further claim to the
Leased Space under this Sublease; or (b) continue this Sublease in effect and
collect Rent or other charges that have or thereafter become due and payable; or
(c) elect the remedy set forth in subpart (b) of this Section 16.2, and
thereafter elect to terminate this Sublease and Subtenant's right to possession
of the Leased Space under subpart (a) of this Section 16.2.
16.3 Damages. Should Sublandlord elect to terminate this Sublease
under the provisions of Section 16.2, Sublandlord may recover as damages from
Subtenant the following: (a) the worth at the time of the award of any unpaid
Rent which had been earned at the time of termination; plus (b) the worth at the
time of the award of the amount by which the unpaid Rent which would have been
earned after termination until the time of award exceeds the amount of such
rental loss that Subtenant proves could have been reasonably avoided; plus (c)
the worth at the time of the award of the amount by which the unpaid Rent for
the balance of the Term after the time of the award exceeds the amount of the
rental loss that Subtenant proves could be reasonably avoided; plus (d) any
other actual and reasonable amount necessary to compensate Sublandlord for all
detriment proximately caused by Subtenant's failure to perform its obligations
under this Sublease or that in the ordinary course of things would be likely to
result therefrom, limited to any costs or expenses (including attorneys, fees)
incurred by Sublandlord in (i) retaking possession of the Leased Space, (ii)
maintaining the Leased Space after Subtenant's default, (iii) preparing the
Leased Space for reletting to a new Subtenant, including any repairs or
alterations, and (iv) reletting the Leased Space, including brokers,
commissions. The term "Rent," as used in this Sublease, includes the Monthly
Base Rent plus all additional rent under this Sublease and all other sums
becoming due that are the equivalent of rent.
16.4 Worth at Time of Award. "The worth at the time of the award,"
as that phrase is used in Section 16.3(a) and (b), is to be computed by allowing
interest at the maximum rate allowed by law at the time of the award. "The worth
at the time of the award" as that phrase is used in Section 16.3(c), is to be
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computed by discounting the amount at the discount rate of the Federal Reserve
Bank at the time of the award plus one percent (l%).
16.5 Waiver. Waiver by Sublandlord of any breach of any term,
covenant, or condition of this Sublease shall not be deemed a waiver of such
term, covenant, or condition. Acceptance of Rent by Sublandlord subsequent to
any breach hereof shall not be deemed a waiver of any preceding breach other
than the failure to pay the particular Rent so accepted, regardless of
Sublandlord's knowledge of any breach at the time of such acceptance of Rent.
Sublandlord shall not be deemed to have waived any term, covenant, or condition
unless Sublandlord gives Subtenant written notice of such waiver.
16.6 Curing Subtenant's Default. If Subtenant defaults in the
performance of any of its obligations under this Sublease, then, after prior
written notice to Subtenant of its intention to do so, Sublandlord may, but
shall not be obligated to, and without waiving such default, perform the same
for the account and at the expense of Subtenant. Subtenant shall pay Sublandlord
all costs of such performance promptly upon receipt of a bill therefor.
ARTICLE 17
ATTORNEYS' FEES
17.1 In the event that either party to this Sublease commences any
action or proceeding against the other by reason of any default or alleged
default of any term or condition of this Sublease, or for interpretation of this
Sublease, the prevailing party in such action or proceeding will be entitled to
recover such amount as the court may judge to be reasonable attorneys, fees. The
court shall determine the prevailing party.
ARTICLE 18
DESTRUCTION OR DAMAGE
18.1 If the Building or any portion thereof, including the Leased
Space, is damaged or destroyed by fire or other casualty, the provisions of
Article 18 of the Prime Lease shall apply. Anything contained in this Sublease
to the contrary notwithstanding, Sublandlord may, in its sole discretion,
exercise any option available to Sublandlord under the Prime Lease to terminate
the Prime Lease in the event of fire or other casualty.
18.2 If the Leased Space is partially damaged or destroyed by fire
or other casualty, the Monthly Base Rent shall
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equitably abate, to the extent that the Leased Space is rendered untenantable,
for the period from the date of such damage or destruction to the date the
damage is repaired or restored, but only to the extent that the monthly base
rent payable by Sublandlord under the Prime Lease and allocable to the Leased
Space is similarly abated. Thus, for example, if one third of the monthly base
rent under the Prime Lease allocable to the Leased Space is abated, one third of
the Monthly Base Rent payable hereunder shall be abated for the same period.
ARTICLE 19
CONDEMNATION
19.1 If the Leased Space is condemned and taken by any authority,
the provisions of Article 19 of the Prime Lease shall apply.
ARTICLE 20
ASSIGNMENT OF PRIME LEASE
20.1 Sublandlord may assign, in whole or in part, Sublandlord's
interest in this Sublease and may assign all of its interest under the Prime
Lease. In the event of any assignment by Sublandlord of the Prime Lease and this
Sublease, Sublandlord shall be, and is hereby entirely free and relieved of, all
liability under any and all covenants and obligations contained in or derived
from this Sublease or arising out of any act, occurrence or omission relating to
the Leased Space which occurs after the consummation of such sale, exchange, or
assignment, except for obligations, if any, owing at the time of such sale,
exchange or assignment.
ARTICLE 21
STATEMENT OF STATUS (ESTOPPEL)
21.1 Certificate. Within ten (10) days after written request from
one party to the other, the party so requested shall execute and deliver to the
other or its named designee a written statement certifying that (a) this
Sublease is unmodified and in full force and effect or is in full force and
effect as modified and stating the modifications; (b) the amount of the Monthly
Base Rent and the date to which Monthly Base Rent and additional rent have been
paid in advance; (c) the amount of any security deposited with Sublandlord; and
(d) that Sublandlord or Subtenant, as the case may be, is not in default
hereunder or, if either is
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claimed to be in default, setting forth the nature of any claimed default.
21.2 Estoppel. Any such statement described in Section 22.1 may be
relied upon by a purchaser, assignee, or lender.
ARTICLE 22
PARKING
22.1 Parking Rights. Tenant shall have the right, pursuant to
Article 23 of the Prime Lease and any applicable rules and regulations adopted
by Prime Landlord, to park automobiles in the Parking Structure. Subtenant must
make arrangements for such parking, and pay all required fees directly to, Prime
Landlord.
ARTICLE 23
SECURITY DEPOSIT
23.1 Security Deposit. Upon the execution of this Sublease Subtenant
shall deposit with Sublandlord the sum of Forty Three Thousand Five Hundred Six
Dollars ($43,506.00) (the "Security Deposit") to be held as collateral security
for the payment of Base Rent and all other sums of money payable by Subtenant
under this Sublease, and for the faithful performance of all other covenants and
agreements of Subtenant under this Sublease. The Security Deposit, without
interest, shall be repaid to Subtenant within thirty (30) days after the
expiration or sooner termination of this Sublease, provided Subtenant shall have
made all such payments and performed all such covenants and agreements. Upon any
default by Subtenant hereunder, at Sublandlord's sole option, Sublandlord may
apply all or part of the Security Deposit on account of such default, and
thereafter Subtenant shall promptly restore the original amount of the Security
Deposit.
ARTICLE 24
CERTAIN ALLOWANCES
24.1 Moving Allowance. In consideration for the faithful performance
by Subtenant of all of its obligations under this Sublease, Sublandlord shall
pay Subtenant a moving allowance in the amount of $16,590.00 to reimburse
Subtenant for third party costs incurred in connection with the relocation of
its
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offices to the Leased Space. Sublandlord shall pay this moving allowance to
Subtenant within thirty (30) days after Subtenant takes possession of the Leased
Space and commences payment of Monthly Base Rent.
24.2 Termination Fee Allowance. In consideration for the faithful
performance by Subtenant of all of its obligations under this Sublease,
Sublandlord shall pay Subtenant a termination fee allowance in the amount of
$50,000 to reimburse Subtenant for the termination fee payable by Subtenant to
its existing landlord to terminate its existing lease and other costs to be
incurred by Subtenant. Sublandlord shall pay this termination fee allowance
within thirty (30) days after Subtenant takes possession of the Leased Space and
commences the payment of Monthly Base Rent.
ARTICLE 25
GENERAL PROVISIONS
25.1 Successors. The terms and conditions herein contained shall,
subject to the provisions as to assignment, apply to and bind the heirs,
successors, executors, administrators, and assigns of the parties hereto.
25.2 Entire Agreement. This Sublease together with the Exhibits
attached hereto contains the entire agreement between the parties and shall not
be modified in any manner except by an instrument in writing executed by the
parties or their respective successors in interest. All such Exhibits are
incorporated into and made a part of this Sublease.
25.3 Terms and Headings. The words "Sublandlord" and "Subtenant" as
used herein shall include the plural as well as the singular. Words used in any
gender include other genders. If there be more than one Subtenant the
obligations hereunder imposed upon Subtenant shall be joint and several.
Introductory headings at the beginning of each numbered Article and Section of
this Sublease are solely for the convenience of the parties and should not be
deemed to be a limitation upon or description of the contents of any such
paragraph.
25.4 Light/Air. No rights to light or air over any property whether
belonging to Sublandlord or to any other person, are granted to Subtenant by
this Sublease.
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25.5 Time. Time is of the essence of this Sublease with the
exception of Sublandlord's delivery of possession hereunder.
25.6 Examination. Submission of this instrument for examination or
signature by Subtenant does not constitute a reservation of or option for lease,
and it is not effective as a lease or otherwise until execution by and delivery
to both Sublandlord and Subtenant.
25.7 No Recording. Subtenant shall not record this Sublease without
the prior consent of Sublandlord.
25.8 Governing Law. This Sublease shall be governed by and construed
in accordance with the laws of the State of California.
25.9 Provisions Severable. If any provision of the Sublease shall be
determined to be illegal or unenforceable, such provision shall be deemed
severable from the balance of this Sublease, which shall remain in full force
and effect.
25.10 Notices. All notices given between the parties will be given
in writing and mailed or delivered to the following addresses:
To the Sublandlord:
Horizon/CMS Healthcare Corporation
6001 Indian School Road, NE
Suite 530
Albuquerque, NM 87110
Attention: Mr. Jeff Stuve
To the Subtenant:
PMR Corporation
Fifth Floor
501 Washington Avenue
San Diego, CA
Attention:_________________________________
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25.11 Waiver of Jury Trial. Each of Sublandlord and Subtenant waive
trial by jury in any action arising out of or in connection with the Sublease.
IN WITNESS WHEREOF, the parties have signed this Sublease as of the
day and year first above written.
SUBLANDLORD:
CMS DEVELOPMENT AND MANAGEMENT COMPANY,
INC., a Delaware corporation
By: /s/ J. SEAN DAILY
------------------------------------
SUBTENANT:
PMR CORPORATION, a Delaware corporation
By: /s/ FRED FURMAN
------------------------------------
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<PAGE> 21
[EXHIBITS EXCLUDED]
<PAGE> 1
EXHIBIT 10.14
MANAGEMENT AND AFFILIATION AGREEMENT
BETWEEN
MENTAL HEALTH COOPERATIVE, INC.
AND
TENNESSEE MENTAL HEALTH COOPERATIVE, INC.
DATED
APRIL 13, 1995
<PAGE> 2
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C> <C>
I. TERM AND TERMINATION...................................................................... 2
1.1 Conditions Precedent and Term.................................................. 2
1.1.1 Conditions Precedent............................................... 2
1.1.2 Term............................................................... 2
1.2 Termination by Agreement....................................................... 3
1.3 Termination for Cause.......................................................... 3
1.4 Adverse Effect Upon Tax-Exempt Status.......................................... 4
1.5 Termination Due to Legislative or Administrative Changes....................... 4
1.6 Avoidance of Termination....................................................... 4
1.7 Sale of TMHC Assets Upon Termination........................................... 5
II. AFFILIATION; APPOINTMENT AND AUTHORITY OF MANAGER......................................... 5
2.1 Affiliation with Manager....................................................... 5
2.2 Contracts with Case Manager.................................................... 5
2.3 Authority of Manager........................................................... 6
III. OBLIGATIONS OF MANAGER.................................................................... 6
3.1 Capitalization of Provider Operations and Expansion............................ 6
3.2 Management and Administrative Services......................................... 6
3.2.1 Financial Responsibilities......................................... 6
3.2.2 Policies and Procedures............................................ 7
3.2.3 Management Information Systems..................................... 7
3.2.4 Roll-Out Systems................................................... 7
3.2.5 Personnel and Employment Matters................................... 7
3.2.6 Authorization and Utilization Management........................... 8
3.2.7 Quality Assurance.................................................. 8
3.2.8 Collaborative Care Enhancement..................................... 9
3.2.9 Marketing.......................................................... 9
3.2.10 Contract Development............................................... 9
3.2.11 Additional Services................................................ 9
3.3 Program Development............................................................ 10
3.4 Provider Facilities............................................................ 10
3.5 Insurance...................................................................... 10
3.5.1 Manager Insurance.................................................. 10
3.5.2 Other Policy Requirements.......................................... 11
3.6 Indemnification................................................................ 11
3.7 Provider Designee to Manager's Board of Directors.............................. 11
3.8 Approval of Subsequent Amendments of Manager's Charter and Bylaws.............. 11
IV. OBLIGATIONS OF PROVIDER................................................................... 11
4.1 Execution and Delivery of Services Agreement................................... 11
4.1.1 Case Management.................................................... 12
</TABLE>
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<TABLE>
<S> <C> <C>
4.1.2 Crisis Services for Children and Adolescents....................... 12
4.1.3 Respite Care....................................................... 12
4.1.4 Crisis Service..................................................... 12
4.1.5 Clinical Operations................................................ 12
4.1.6 Other Psychiatric Services......................................... 12
4.2 Amendment of Provider Charter and Bylaws....................................... 13
4.2.1 Provider's Board Positions......................................... 13
4.2.2 Management Advisory Committee...................................... 13
4.2.3 Approval of Subsequent Amendments of Charter and Bylaws............ 13
4.3 Certifications, Licenses, Etc.................................................. 13
4.4 Provider to be "Provider of Services".......................................... 13
4.5 Program Facilities............................................................. 13
4.6 Medical Records................................................................ 14
4.7 Insurance...................................................................... 14
4.7.1 Provider Insurance................................................. 14
4.7.2 Other Policy Requirements.......................................... 14
4.7.3 Risk Management Program............................................ 14
4.8 Indemnification................................................................ 14
4.9 Employment of Provider Personnel............................................... 15
4.9.1 Employment Practices............................................... 15
4.9.2 Supervision and Control............................................ 15
4.10 Supervision of Case Management Programs........................................ 15
V. MANAGEMENT FEE, EXPENSES, AND DISBURSEMENT OF FUNDS........................................ 16
5.1 General Parameters for Financial Arrangements.................................. 16
5.1.1 Case Management Activities......................................... 16
5.1.2 Capital Investments................................................ 16
5.1.3 Capitated, Case Rate, and Other Payments........................... 16
5.1.4 State Grants....................................................... 17
5.1.5 Subcapitated Payment............................................... 17
5.1.6 Payment for Old Asset Depreciation................................. 17
5.1.7 Management Fee..................................................... 17
5.1.8 Payment for New Asset Depreciation................................. 18
5.1.9 Retained Reserves.................................................. 18
5.1.10 Return of Capital Investments...................................... 18
5.1.11 Distribution of Remaining Retained Reserves........................ 18
5.1.12 Example of Financial Distributions................................. 19
5.2 The Model...................................................................... 19
5.2.1 Projected Payments................................................. 20
5.3 Actual Payments of Compensation................................................ 20
5.4 Priority of Payments........................................................... 20
5.5 Quarterly Review of Financial Arrangements..................................... 21
5.6 Accumulation and Payment of Shortfalls......................................... 22
5.7 Fair Market Value of Compensation.............................................. 22
5.8 Receipt of Capitated Payments and Grants by Remittance Clearinghouse........... 22
</TABLE>
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<TABLE>
<S> <C> <C>
VI. REPRESENTATIONS AND WARRANTIES........................................................... 23
6.1 Provider's Representations and Warranties...................................... 23
6.1.1 Corporate Capacity................................................. 23
6.1.2 Corporate Powers; Consents; Absence of Conflicts With Other
Agreements, Etc.................................................... 23
6.1.3 Securities Representations......................................... 23
6.1.4 Manager's Name..................................................... 26
6.2 Manager's Representations and Warranties....................................... 26
6.2.1 Corporate Capacity................................................. 26
6.2.2 Corporate Powers; Consents; Absence of Conflicts With
Other Agreements, Etc.............................................. 26
VII. STANDARDS OF SERVICES.................................................................... 27
7.1 Ongoing Quality and Compliance Reviews........................................ 27
7.2 Change in Laws or Regulations................................................. 27
7.3 Notice from Governmental/Regulators Entities.................................. 28
VIII. INDEPENDENT CONTRACTOR................................................................... 28
IX. COVENANT NOT TO COMPETE.................................................................. 28
9.1 Noncompetition................................................................. 28
9.2 Anti-Raiding................................................................... 29
9.3 Severability of Non-Compete Covenants.......................................... 29
X. CONFIDENTIALITY AGREEMENT................................................................ 29
10.1 Confidentiality of Agreements.................................................. 29
10.2 Confidential Information....................................................... 30
10.3 Proprietary Information of Manager............................................. 30
10.3.1 Acknowledgment of Proprietary Interest............................. 30
10.3.2 Covenant Not to Divulge Trade Secrets.............................. 31
10.3.3 Return of Materials at Termination................................. 31
10.3.4 Application to Provider Representatives............................ 31
XI. STOCK TRANSACTIONS....................................................................... 31
11.1 Stock Warrant Agreement........................................................ 31
11.2 Registration Rights............................................................ 32
11.3 Provider's Covenants Regarding Stock Transactions.............................. 32
XII. ARBITRATION.............................................................................. 33
XIII. MISCELLANEOUS............................................................................ 33
13.1 Service of Notices............................................................. 33
13.2 Binding Effect................................................................. 34
13.3 Choice of Law.................................................................. 34
13.4 Entire Agreement............................................................... 34
13.5 Amendments..................................................................... 34
</TABLE>
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<TABLE>
<S> <C> <C>
13.6 Severability................................................................... 35
13.7 Number and Gender.............................................................. 35
13.8 Joint Negotiations............................................................. 35
13.9 Headings....................................................................... 35
13.10 Assignment..................................................................... 35
13.11 Counterparts................................................................... 35
13.12 Attorneys Fees................................................................. 35
</TABLE>
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<TABLE>
<S> <C>
EXHIBIT A - Manager's Home Office Personnel
EXHIBIT B - Form of Provider Services Agreement
EXHIBIT C - Materials Reviewed by Provider
EXHIBIT D - Definition of Accredited Investor
EXHIBIT E - Form of Stock Warrant Agreement
EXHIBIT F - Form of Registration Rights Agreement
EXHIBIT G - Financial Model for Management and Affiliation Agreement
EXHIBIT H - Information Regarding Capitated and Subcapitated Payments
EXHIBIT I - Permitted Investments
EXHIBIT J - Collaborative Care Model (Table of Contents only)
EXHIBIT K - Example of Financial Distributions
</TABLE>
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<PAGE> 7
MANAGEMENT AND AFFILIATION AGREEMENT
THIS MANAGEMENT AND AFFILIATION AGREEMENT (this "Agreement") is made
as of the 13th day of April, 1995, by and between MENTAL HEALTH COOPERATIVE,
INC., a Tennessee non-profit corporation ("Provider"), and TENNESSEE MENTAL
HEALTH COOPERATIVE, INC., a Tennessee for-profit corporation ("Manager").
RECITALS
A. Provider is a Tennessee non-profit corporation that is exempt
from federal income tax as an organization described in Section 501(c)(3) of the
Internal Revenue Code of 1986, as amended (the "IRC").
B. Provider is a qualified provider of case management and other
psychiatric services.
C. PMR Corporation a/k/a Psychiatric Management Resources, Inc.
("PMR") is a Delaware for-profit corporation in the business of developing and
administering outpatient acute psychiatric case management programs.
D. The State of Tennessee has created a statewide program, known as
TennCare, to provide managed care health coverage to the State's Medicaid and
uninsured population through contracts with a number of managed care
organizations ("MCOs").
E. The TennCare program legislation is to be amended to include the
provision of certain covered services to patients that suffer from serious and
persistent mental illness ("SPMI").
F. PMR has expertise in developing and managing psychiatric case
management programs for SPMI patients.
G. PMR has created a wholly-owned, for-profit subsidiary (i.e.,
Manager), to contract with payers, including MCOs participating in the TennCare
program, for the provision of case management and other covered psychiatric
services to persons in the State of Tennessee covered by those payers.
H. Manager desires to contract with qualified Tennessee case
management companies to provide case management and other covered psychiatric
services to the persons in the State of Tennessee covered by the payers and the
TennCare program.
<PAGE> 8
I. Provider desires to affiliate with and avail itself of PMR's
management services and Manager desires to provide such services to Provider as
set forth in this Agreement.
J. Provider and Manager have executed a Provider Services Agreement
of even date herewith (the "Services Agreement") pursuant to which Provider has
agreed to provide "Covered Services" to "Covered Persons" in accordance with
"Payer Plan Agreements" as those terms are defined in the Services Agreement.
K. Case Management, Inc. ("CMI") is a qualified provider of case
management and other psychiatric services located in Memphis, Tennessee.
L. Manager and CMI intend to execute a Management and Affiliation
Agreement (the "CMI Management Agreement") that is substantially the same as
this Agreement.
M. Manager and CMI intend to execute a Provider Services Agreement
(the "CMI Services Agreement") that is substantially the same as the Services
Agreement executed by Provider.
NOW, THEREFORE, Manager and Provider, intending to be legally bound
hereby, agree as follows:
I. TERM AND TERMINATION.
1.1 Conditions Precedent and Term.
1.1.1 Conditions Precedent. As conditions precedent to the
effectiveness of this Agreement and the commencement of the Term hereof, (i) the
relevant Tennessee statutes, regulations, and other legislation, including
without limitation those relating to the TennCare program, shall be amended or
otherwise appropriately modified, so that (a) the TennCare program includes
coverage of SPMI patients and (b) the services to be provided to SPMI patients
and adolescents by Manager and Provider pursuant to the contracts with the MCOs
(i.e., Payer Plan Agreements) and by Provider pursuant to the Services Agreement
shall be reimbursed in full by the TennCare program and/or other Tennessee
programs, and (ii) Manager shall directly execute a Payer Plan Agreement with a
MCO (i.e., a Payer) for the provision of such services upon the terms and
conditions set forth in the Services Agreement. The satisfaction of these
conditions precedent shall be evidenced by a written acknowledgement to that
effect, which has been executed by Manager and Provider. The date on which the
Manager and the Provider agree and acknowledge that the above-described
conditions precedent have been satisfied and this Agreement is effective is
referred to herein as the "Effective Date."
1.1.2 Term. Provided that the conditions precedent set forth in
subparagraph 1.1.1 above are satisfied, the term of this Agreement (the "Term")
shall be six (6) years, commencing upon the Effective Date first mentioned
above. Unless and until
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terminated in accordance with the terms of this Agreement set forth below, this
Agreement shall automatically renew for successive one (1) year periods
thereafter. If either party intends not to renew this Agreement upon the
expiration of the initial or any renewal Term, that party must give the other
party at least sixty (60) days' written notice of such intent not to renew, in
which case this Agreement shall terminate at the end of the then-expiring
initial or renewal Term.
1.2 Termination by Agreement. In the event Provider and Manager
shall mutually agree in writing, this Agreement may be terminated on the date
specified in such written agreement.
1.3 Termination for Cause. Either party shall have the right,
but not the obligation, to terminate this Agreement at any time for cause by
giving written notice to the other party of such intent to terminate the
Agreement. Cause for termination includes, but is not limited to:
1.3.1 the material breach of any of the representations
and warranties set forth in Article VI below;
1.3.2 the disciplining, loss of license, or loss of
certification, accreditation, or qualification of
Provider by any licensing, regulatory, or
professional organization or agency with
jurisdiction over Provider;
1.3.3 the failure of either party to maintain the
required liability insurance coverage protection;
1.3.4 a finding by any licensing, regulatory, or
professional organization that this Agreement
violates any state or federal law;
1.3.5 any change in federal or state law that causes
this Agreement to be in violation of any federal
or state law or regulation and the parties fail to
reach agreement regarding amendment of this
Agreement so as to comply with such law or
regulation in the manner set forth in Section 1.5
below;
1.3.6 the habitual neglect or continued failure of
either party to perform its duties and obligations
under the Agreement;
1.3.7 the initiation of bankruptcy, insolvency,
dissolution, liquidation, or receivership
proceedings by or against either party;
1.3.8 an admission by either party in writing that it is
unable to pay its debts as they mature or the
making by either party of a general assignment for
the benefit of creditors;
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1.3.9 the breach of any other material provision of this
Agreement by either party if after sixty (60)
days' written notice setting forth the details of
the breach and the intent to terminate is given by
the terminating party and the breach is not cured
by the breaching party during such time period,
unless such breach cannot reasonably be cured
within such sixty (60) day period and the
breaching party has begun to cure such breach
during such sixty 60) day period and diligently
pursues such remedial action until such breach is
cured;
1.3.10 the material breach of the Services Agreement
described in Section 4.1 below, or the Stock
Warrant Agreement or Registration Rights Agreement
described in Article XI below; or
1.3.11 the termination of the Services Agreement for any
reason.
1.4 Adverse Effect Upon Tax-Exempt Status. In the event that (i) it
is ever determined that any of the transactions contemplated by this Agreement
shall have a material adverse effect upon the Provider's non-profit status under
state law or Provider's tax-exempt status under IRC Section 501(c)(3), and (ii)
an opinion letter stating such conclusion is delivered to the parties by legal
counsel having recognized expertise in such matters, then both parties agree to
negotiate in good faith to amend the Agreement to conform with the then-existing
laws and regulations regarding such non-profit and tax-exempt status. If
agreement cannot be reached with respect to such amendments within ninety (90)
days of notice from Provider (including delivery of the above-referenced legal
opinion) of such determination that the Agreement has an adverse effect upon
Provider's non-profit or tax-exempt status (or such earlier time required by
law), then this Agreement may be immediately terminated by Provider by written
notice to Manager.
1.5 Termination Due to Legislative or Administrative Changes. In the
event that there shall be a change in the statutes, regulations, or instructions
relating to the Tennessee Medicaid or TennCare programs, the adoption of any new
legislation or regulations applicable to this Agreement, a change in any
applicable third party payer reimbursement system (including, without
limitation, those of the Payers and the Payer Plan Agreements described in the
Services Agreement) or the initiation of an enforcement action with respect to
legislation, regulations, or instructions applicable to this Agreement, any of
which affects the continuing viability or legality of this Agreement or
materially affects the compensation that Provider and Manager will receive under
this Agreement, then both parties agree to negotiate in good faith to amend the
Agreement to conform with the then-existing laws and regulations. If agreement
cannot be reached with respect to such amendments within ninety (90) days of
such change, adoption, or enforcement (or such earlier time as may be required
by such legislation or regulations), this Agreement may be immediately
terminated by either party by written notice to the other party.
1.6 Avoidance of Termination. Within five (5) days of receipt of a
notice issued pursuant to subparagraph 1.3.9 above, Provider and Manager shall
meet and use their best efforts to negotiate a solution to the problem with
respect to which such notice was sent.
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Such good faith negotiations shall particularly be required with reference to
notices given pursuant to subparagraphs 1.4 and 1.5. Notwithstanding such
meeting, the times for termination of the Agreement as set forth in this Article
I shall remain in effect unless Manager and Provider agree otherwise.
1.7 Sale of TMHC Assets Upon Termination. In the event that this
Agreement is terminated by Provider for cause pursuant to Section 1.3 above,
then Provider shall have the right, upon giving Manager the notice specified
below, to (i) purchase Manager's fixed assets that were specifically utilized in
the provision of services by Manager and/or Provider pursuant to this Agreement
and the related Services Agreement, and (ii) receive an assignment of the
contracts (i.e., Payer Plan Agreements) between Manager and Payers that relate
to the case management services to be furnished by Provider pursuant to the
Services Agreement; provided that such Payer Plan Agreements can then be
assigned to Provider, and provided further that in the event such Payer Plan
Agreement cannot be assigned to Provider without the Payer's consent, that
Manager shall use its best efforts to procure the consent of such assignment
from the appropriate Payer. For so long as the value of Manager's unrecouped
capital investment relating to the assets to be transferred exceeds the fair
market value of such assets, the purchase price shall equal the sum of the fair
market value of such assets and the fair market value of the contracts to be
assigned (in no case, however, shall the purchase price exceed the Manager's
unrecouped capital investment). For so long as the value of Manager's unrecouped
capital investment is less than the fair market value of the fixed assets to be
assigned, then the purchase price shall equal the fair market value of such
assets. Provider shall notify Manager in writing within thirty (30) days of such
termination of this Agreement whether Provider desires to exercise its right to
purchase such assets and receive an assignment of such agreements, and
thereafter, Manager shall transfer such assets and assign such Payer Plan
Agreements to Provider as reasonably soon as possible after payment by Provider
of the consideration specified herein in cash or cash equivalents. In the event
that Provider fails to provide such notice within the thirty (30) day period,
then it shall be conclusively presumed that Provider does not desire to exercise
such option and the option granted herein shall terminate. To the extent that
under these conditions Provider desires to purchase Manager's assets and receive
an assignment of Payer Plan Agreements that also relate to services performed by
CMI, then Provider must obtain the prior written consent of CMI before Provider
may purchase those assets or receive an assignment of those Payer Plan
Agreements.
II. AFFILIATION; APPOINTMENT AND AUTHORITY OF MANAGER.
2.1 Affiliation with Manager. Except to the extent otherwise
permitted by Section 9.1 below, Provider agrees to affiliate with Manager on an
exclusive basis for the Term of this Agreement for the management and
administration of Provider and the expansion of Provider's facilities, services,
and programs.
2.2 Contracts with Case Manager. Provider acknowledges and agrees
that Manager shall be permitted to contract with and manage CMI (Case
Management, Inc.) and other case management organizations that provide services
and programs similar to those of Provider and CMI, so long as such organizations
other than CMI have received the prior
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written approval of Provider. Provider, CMI, and the other case management
organizations that have been approved by Provider and CMI and executed a similar
management and affiliation agreement with Manager are referred to herein
collectively as the "Case Managers" and individually as a "Case Manager."
2.3 Authority of Manager. Provider appoints Manager as the sole and
exclusive provider of management, administrative, and business services
specifically described herein for Provider. Manager shall have the commensurate
power and authority to provide such management, administrative, and business
services for Provider. Pursuant to the terms and conditions of the Services
Agreement, Manager shall be permitted to contract with the "Payers" for the
provision of Covered Services by Provider to Covered Persons as those terms are
defined in the Services Agreement.
III. OBLIGATIONS OF MANAGER.
3.1 Capitalization of Provider Operations and Expansion. Manager and
Provider desire and intend to expand Provider's and CMI's services and case
management programs into a number of markets and communities throughout the
State of Tennessee in order to adequately service the TennCare Payer contracts.
In connection with such expansion, Manager acknowledges and agrees that it shall
assist Provider in expanding Provider's current facilities, services, and
programs in Davidson County and in acquiring new facilities for Provider and
developing new Provider services and programs (i.e., roll-out programs) in new
Tennessee markets, which have been identified and agreed upon by Manager and
Provider. In order to ensure that Manager has adequate capital to perform its
obligations under this Agreement, Manager shall obtain an irrevocable letter of
credit from a bank mutually acceptable to Manager and Provider pursuant to which
Manager may draw up to Two Million and No/100ths Dollars ($2,000,00.00) for a
term of one (1) year. Manager shall obtain the letter of credit on or before the
Effective Date, and Manager agrees that funds obtained pursuant to the letter of
credit shall be utilized only for the obligations of Manager under this
Agreement and the CMI Management Agreement. Notwithstanding the foregoing,
Provider acknowledges that Manager shall draw upon the letter of credit or
otherwise obtain capital funds and spend such funds in Manager's sole discretion
after consultation with Provider and CMI.
3.2 Management and Administrative Services. Manager shall cause to
be furnished all administrative and management services necessary to develop and
operate the Provider's facilities and case management programs in each of the
markets mutually acceptable to Manager and Provider, so as to provide high
quality patient care. In connection therewith, Manager shall create and staff a
home office that shall provide full-service management and administrative
services for Provider, including the following:
3.2.1 Financial Responsibilities. Manager shall be responsible
for administering Provider's accounts receivable (including receipt of capitated
payments and other billing and collection activities), accounts payable, and
implementation of appropriate accounting systems. In performing such financial
duties, Manager shall use reasonable
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efforts to operate Provider in a manner that will preserve and enhance the
economic viability and stability of Provider.
3.2.2 Policies and Procedures. Manager shall be responsible for
creation and implementation of all detailed operating protocols for the
provision of Provider's case management and other psychiatric services. Such
protocols include provision of appropriate policies and procedures manuals,
program manager handbooks, admissions screening systems, the core medical
records systems and forms, guidelines and forms for treatment planning meetings,
utilization review systems and forms, post-discharge follow-up systems and
forms, community relations development and maintenance systems and forms, a key-
monitor management system, and materials regarding principal and special
treatment modalities. Manager shall submit such protocols to Provider's Board of
Directors for approval before implementation. In the event that Provider's Board
of Directors disapproves of any such protocols, then representatives of Manager
and Provider shall revise the disapproved protocols so that such protocols are
reasonably acceptable to both Manager and Provider.
3.2.3 Management Information Systems. Manager shall provide all
management information systems (including appropriate computer hardware and
software) necessary for the operations of Provider in the Provider's various
facilities throughout the State of Tennessee.
3.2.4 Roll-Out Systems. Manager shall provide the policies and
procedures for the creation of new sites for Provider services and facilities
and development of new treatment programs for SPMI patients.
3.2.5 Personnel and Employment Matters.
(a) Provider's Personnel. Except for Manager's home
office personnel described below, all personnel at the Provider's
various facilities, including those providing case management and
patient care services (e.g., "Health Professionals" as that term is
defined in the Services Agreement) shall be employees of or
independent contractors with Provider. Manager shall assist Provider
in recruitment, training, and evaluation of all Provider employees and
independent contractors, and Manager shall make recommendations to
Provider's officers and directors regarding such employment matters.
All personnel recruited by Manager to perform services at the
Provider's facilities or in the Provider's case management programs
shall be appropriately licensed and qualified to perform such
services. Although Manager shall be responsible for management of
Provider's payroll, Provider is responsible for the actual payment of
Provider's employees and independent contractors and the provision of
funds for such payments. Provider's employees and independent
contractors shall not be eligible for nor participate in any of the
health or benefit plans of either Manager or PMR; Provider shall be
totally responsible for providing any and all health or other benefits
for its employees.
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(b) Manager's Home Office Personnel. In providing the
management and administrative services described herein, Manager shall
create and staff a home office. In connection therewith, Manager shall
employ or hire as independent contractors persons for those positions
described in Exhibit A hereto. Manager shall, in its sole discretion,
select the persons who will serve in each of the capacities listed in
Exhibit A hereto, provided, however, all such personnel shall be
reasonably satisfactory to Provider. Manager agrees that all personnel
listed in Exhibit A will be available to Provider when required for
issues related to operation and management of the Provider's
facilities and case management programs. Manager is responsible for
payment of Manager's employees and independent contractors and the
provision of funds for such payments. Manager's employees and
independent contractors shall not be eligible for nor participate in
any of the health or benefit plans of Provider; Manager shall be
totally responsible for providing any and all health or other benefits
for its employees.
(c) Employment Practices. Employment practices of Manager
shall comply with all applicable federal and state laws, rules,
regulations, and guidelines and the rules, regulations, and guidelines
of regulatory agencies having appropriate jurisdiction over such
matters.
(d) Supervision and Control. Manager shall be responsible
for the direction and control of all of Manager's employees and
independent contractors and shall cause all personnel to comply to the
extent applicable with all terms and conditions of this Agreement and
with the protocols, as amended and as approved by Provider pursuant to
subparagraph 3.2.2, and the Policy Manual, as amended and approved
pursuant to subparagraph 3.3.
3.2.6 Authorization and Utilization Management.
(a) Preauthorization and MCO Utilization Review. Manager
shall coordinate authorization of services and utilization management
with each Payer. Manager shall provide a central office for the
authorization of services to Payer patients by Provider. Manager's
medical director, in consultation with Payer medical directors and
Provider medical directors, psychiatrists, and nurses shall determine
patient treatment programs and length of stay.
(b) Utilization Review of Provider Programs. Manager
shall coordinate utilization review of the Provider's programs, which
shall include: (i) review of the determination of a qualified
patient's need for care; (ii) document outcome-related improvements to
the patient from Provider's case management programs; and (iii)
ongoing review of patient records to monitor medical necessity
determination by professional staff.
3.2.7 Quality Assurance. Manager shall coordinate quality assurance
reviews with respect to Provider's case management and psychiatric service
programs, which shall include:
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(a) determining compliance with Provider's quality
assurance program;
(b) providing outcome-oriented quality assurance
assistance designed to achieve improvement in over-all quality of
care; and
(c) reviewing and monitoring Provider's case management
program staff with respect to the quality and scope of patient
services.
3.2.8 Collaborative Care Enhancement. Manager shall use reasonable
efforts to enhance the Collaborative Care Model that has been developed for
Provider. The Collaborative Care Model in its current state, which includes the
matters described in the table of contents in Exhibit J attached hereto, shall
be provided to the Provider upon the effectiveness of this Agreement.
3.2.9 Marketing. Manager shall market and advertise the services
provided to Payer patients by Provider.
3.2.10 Contract Development. Manager and Provider shall jointly
develop (including negotiation and execution of definitive agreements) contracts
for the provision of services to Payer patients by Provider (i.e., the Payer
Plan Agreements defined in the Services Agreement). In this regard, Manager
shall use its best efforts to develop appropriate Payer Plan Agreements with
Payers participating in the TennCare program for the provision of services to
Payer patients in Tennessee covered by a Payer. In developing such Payer Plan
Agreements, Manager shall have the power and authority to negotiate and execute
contracts and obligate Provider to the extent permitted by Section 2.1 of the
Services Agreement.
3.2.11 Additional Services. Manager shall provide the following
additional management and administrative services:
(a) assisting Provider (with Provider's cooperation) in
obtaining all necessary certifications, licenses, permits,
accreditations, etc., and assisting Provider in insuring compliance
with all licensing and regulatory agencies;
(b) planning, design and production of all community
liaison and educational literature;
(c) ongoing administration of Provider's case management
and psychiatric service programs;
(d) ongoing community liaison support;
(e) Provider staff development and continuing education;
(f) coordination with community agencies that have
clients in need of the Provider's case management programs and
psychiatric services; and
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(g) such other management or administrative services that
are specifically identified and mutually agreed upon by Manager and
Provider.
3.3 Program Development. Manager shall assist Provider in developing
and expanding Provider's case management and psychiatric service programs.
Manager shall assist Provider in the development, upgrading, and maintenance of
the Provider's case management programs to meet or exceed applicable state,
federal, agency, and third-party payer standards. Such assistance shall consist
of the development and maintenance of a comprehensive set of procedures and
policies for Provider (the "Policy Manual") covering all aspects of the
Provider's case management programs. The Policy Manual and periodic additions,
deletions, or amendments thereto, shall be submitted to Provider's Board of
Directors for its prior approval, which approval shall not be unreasonably
withheld. In the event that any aspect of the Policy Manual is not approved, it
shall be revised so that it is reasonably acceptable to both Provider and
Manager.
3.4 Provider Facilities. Manager shall assist Provider in expanding
the Provider's current facilities in Davidson County. Manager and Provider shall
jointly identify and agree upon suitable facilities for the provision of
Provider's case management program services in locations other than Provider's
current facilities in Davidson County. Manager shall assist Provider in the
negotiations to acquire such premises by lease or otherwise. Provider shall be
responsible for obtaining such premises by execution of the applicable lease or
purchase agreements, and the rental for such acquired premises shall be
Provider's cost and expense. To the extent that the landlord provides a separate
build-out allowance or includes the cost of build-out in the rental rate,
Provider shall be responsible for the cost of such build-out. Manager shall be
responsible for the build-out costs in excess of the landlord's allowance and/or
the rental component for build-out, as well as furnishing and equipping of such
premises, and the cost of such furniture, equipment, and excess build-out shall
be Manager's cost and expense. All such premises and the build-out thereof shall
be approved by Manager and Provider. The capital necessary for the equipping,
furnishing and excess build-out of such facilities shall be provided by Manager
in accordance with subparagraph 3.1 above and shall be reimbursed to Manager in
accordance with Article V below.
3.5 Insurance.
3.5.1 Manager Insurance. For the Term of this Agreement, Manager
shall procure and maintain at its own cost comprehensive general and
professional liability insurance with elements of self-insurance or deductibles
common to the industry covering personal injury, bodily injury, and property
damage in the following amounts:
(a) Personal/bodily injury: One Million and No/100ths
Dollars ($1,000,000.00) per claimant and Three Million and No/100ths
Dollars ($3,000,000.00) annual aggregate.
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(b) Property damage: Five Hundred Thousand and No/100ths
Dollars ($500,000.00) per occurrence and Five Hundred Thousand and
No/100ths Dollars ($500,000.00) annual aggregate.
3.5.2 Other Policy Requirements. Such insurance shall be written
on an occurrence basis by an insurance company authorized to transact the
insurance business in the State of Tennessee; provided, however, that such
insurance may be written on a claims-made basis if tail coverage is guaranteed
at the time the primary insurance policy is written and Manager purchases and
maintains such tail coverage upon the termination of Agreement for the maximum
reporting period available or five (5) years, whichever is longer.
3.6 Indemnification. Manager agrees to indemnify and hold harmless
Provider and Provider's directors, officers, employees, independent contractors,
and agents ("Provider Indemnitees") from and against any and all claims,
demands, causes of action, costs, and liabilities (including, without
limitation, reasonable attorneys' fees), caused by, resulting from, or
attributable to the grossly negligent or intentional acts or omissions of
Manager and/or Manager's directors, officers, employees, independent
contractors, and agents with respect to the duties and obligations imposed on
Manager hereunder. Manager shall have the right, at Manager's sole expense, of
defending any such third party claim. Notwithstanding anything to the contrary
herein, Manager is not obligated to indemnify the Provider Indemnitees or any
other party for any claims, demands, causes of action, costs, or liabilities
resulting from the acts or omissions of the Provider Indemnitees or such other
party.
3.7 Provider Designee to Manager's Board of Directors. The Manager's
Charter and Bylaws shall provide that one of the Manager's Directors shall be a
person designated by the Provider's Board of Directors.
3.8 Approval of Subsequent Amendments of Manager's Charter and
Bylaws. The Manager's Charter and Bylaws shall provide that the provisions in
the Charter and Bylaws regarding the appointment of one member of the Manager's
Board of Directors by Provider shall not be amended without the prior approval
of the Provider's Board of Director's, which approval shall not be unreasonably
withheld.
IV. OBLIGATIONS OF PROVIDER.
4.1 Execution and Delivery of Services Agreement.
Provider agrees to execute and deliver simultaneously with this
Agreement a Services Agreement in substantially the form of Exhibit B attached
hereto. Pursuant to the Services Agreement, Provider shall provide the Covered
Services described therein, including the following services, at each Provider
facility serving the various Tennessee markets jointly identified by Manager and
Provider.
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4.1.1 Case Management. Provider shall provide case management of
the services provided to eligible patients pursuant to the terms and conditions
of the Payer Plan Agreements among Manager, Provider, and the Payers. In the
provision of such case management services at each Provider location, Provider
shall employ or otherwise engage the services of a Case Management Director,
Administrative Assistant, Housing Developer, Team Leader, appropriate Case
Managers, and an Assessment Team (composed of a minimum of 2 members).
4.1.2 Crisis Services for Children and Adolescents. Provider
shall provide crisis services for children and adolescents covered by the Payers
pursuant to the terms and conditions of the Payer Plan Agreements.
4.1.3 Respite Care. Provider shall provide respite services to
eligible patients, including the identification and provision of temporary
housing for such patients. In providing such services, Provider shall employ or
otherwise engage a Respite Coordinator and have appropriate agreements with
respite providers.
4.1.4 Crisis Service. Provider shall operate a twenty-four (24)
crisis hot-line and crisis services. In providing such services, Provider shall
employ or otherwise engage a Director of Crisis Services, an appropriate number
of Counselors (including, lead counselors, regular shift counselors, and night
shift counselors), and a Triage Coordinator. Each of such persons shall possess
the appropriate qualifications, credentials, training, etc. to provide such
services.
4.1.5 Clinical Operations. Provider shall provide appropriate
clinical services and treatment to eligible patients. In providing such
services, Provider shall employ or otherwise engage a Medical Director and an
appropriate number of Health Professionals defined in the Services Agreement.
Each of such persons shall possess the appropriate qualifications, credentials,
training, etc. to provide such services.
4.1.6 Other Psychiatric Services. Provider shall also provide
the following "other psychiatric services" in addition to the case management
and other services described in subparagraphs 4.1.1 through 4.1.5 above:
(a) rehab/crisis services
(b) rehab/clinic services
(c) grant revenue/housing
(d) grant revenue/TDMHMR
(e) grant revenue/crisis
(f) grant revenue/homeless outreach
(g) grant revenue/respite
(h) grant revenue/medical doctors
All agreements of Provider described in subparagraphs 4.1.1 through
4.1.6 above shall receive the prior written consent of Manager, which consent
shall not be unreasonably withheld.
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4.2 Amendment of Provider Charter and Bylaws. As a condition
subsequent to the continued effectiveness of this Agreement, Provider shall also
agree to amend its Charter and Bylaws within thirty (30) days after the
execution of this Agreement to provide for the following:
4.2.1 Provider's Board Positions. The Provider's Charter and
Bylaws shall provide that (i) the maximum number of members of the Provider's
Board of Directors shall be fifteen (15) Directors, (ii) one of the Provider's
Directors shall be the person then acting as the Manager's Chief Executive
Officer, and (iii) Manager shall be permitted to designate two (2) additional
members of the Provider's Board of Directors, which persons may or may not be
employees or affiliates of Manager or PMR.
4.2.2 Management Advisory Committee. The Provider's Charter and
Bylaws shall provide for a committee to be called the "Management Advisory
Committee." The Management Advisory Committee shall be composed of six (6)
members, three of which shall be appointed by Manager's Board of Directors and
three of which shall be appointed by Provider's Board of Directors. The
Management Advisory Committee shall review all financial information and
administrative reports and make recommendations to the Provider's Board of
Directors in matters involving the management, administration, operation, and
financial affairs of the Provider.
4.2.3 Approval of Subsequent Amendments of Charter and Bylaws.
The Provider's Charter and Bylaws shall provide that the provisions in the
Charter and Bylaws regarding (i) the number and appointment of members of the
Provider's Board of Directors, and (ii) the composition, purpose, and authority
of the Management Advisory Committee shall not be amended without the prior
approval of each of the three members of the Provider's Board of Directors that
have been designated by Manager.
4.3 Certifications, Licenses, Etc. The Provider shall ensure that
its case management and psychiatric service programs shall be certified,
licensed, and/or otherwise appropriately qualified in the name of Provider with
all appropriate authorities. Provider shall, at all times, be the owner and
holder of all licenses and accreditations with respect to the Provider's case
management and other psychiatric program services.
4.4 Provider to be "Provider of Services". Provider shall be the
"provider" within the meaning of all contracts and agreements with all
third-party payers for case management and other psychiatric program services
described in subparagraph 4.1 above. As the "provider of services," Provider has
the duty to verify with Manager the Payer for each patient and the program
coverage for such patient.
4.5 Program Facilities. Provider shall permit Manager to utilize
Provider's current facilities, equipment, and supplies in Davidson County in
connection with the services to be provided by the parties pursuant to this
Agreement. Provider shall timely review and approve Manager's choice of premises
and related build-out for additional facilities in the new markets identified by
Manager for expansion of Provider's programs. Provider shall provide case
management and other psychiatric program services in all such markets and
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at all such facilities pursuant to the terms and conditions of this Agreement
and the Services Agreement.
4.6 Medical Records. Provider shall maintain all medical and patient
records in the manner and for the period of time required by law and industry
practice. All patient medical records shall be the property of Provider.
Provider will promptly notify Manager of any Payer request for records or
information from a third party regarding a patient in a Provider program.
4.7 Insurance.
4.7.1 Provider Insurance. For the Term of this Agreement,
Provider shall procure and maintain at its own cost comprehensive general and
professional liability insurance with elements of self-insurance or deductibles
common to the industry covering personal injury, bodily injury, and property
damage in the following amounts:
(a) Personal/bodily injury: One Million and No/100ths
Dollars ($1,000,000.00) per claimant and Three Million and No/100ths
Dollars ($3,000,000.00) annual aggregate.
(b) Property damage: Five Hundred Thousand and No/100ths
Dollars ($500,000.00) per occurrence and Five Hundred Thousand and
No/100ths Dollars ($500,000.00) annual aggregate.
4.7.2 Other Policy Requirements. Such insurance shall be written
on an occurrence basis by an insurance company authorized to transact insurance
business in the state in which Provider is located; provided, however, such
insurance may be written on a claims-made basis if tail coverage is guaranteed
at the time the primary insurance policy is written and Provider purchases and
maintains such tail coverage upon the termination of Agreement for the maximum
reporting period available or five (5) years, whichever is longer.
4.7.3 Risk Management Program. Provider shall create and manage,
in cooperation with Manager, a risk management program designed to monitor and
minimize all insurable risks related to the Provider's case management program.
Risk management techniques and discussions shall be a regular part of the
procedures implemented pursuant to the Policy Manual approved by Provider
pursuant to subparagraph 3.3.
4.8 Indemnification. Provider agrees to indemnify and hold
harmless Manager and Manager's directors, officers, employees, independent
contractors, and agents ("Manager Indemnitees") from and against any and all
claims, demands, causes of action, costs, and liabilities (including, without
limitation, reasonable attorneys' fees), caused by, resulting from, or
attributable to the grossly negligent or intentional acts or omissions of the
Provider and/or the Provider's directors, officers, employees, independent
contractors, and agents with respect to the duties and obligations imposed on
the Provider hereunder. Provider shall have the right, at Provider's sole
expense, of defending any such third party claim.
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Notwithstanding anything to the contrary herein, Provider is not obligated to
indemnify the Manager Indemnitees or any other party for any claims, demands,
causes of action, costs or liabilities, resulting from the acts or omissions of
the Manager Indemnitees or such other party.
4.9 Employment of Provider Personnel. Manager will advise Provider
of Manager's recommendations regarding employment of all personnel for the
Provider's programs and facilities, and Provider shall timely review such
recommendations and the qualifications of all such personnel. Provider shall
employ or hire as independent contractors persons for those positions necessary
for the staffing of Provider's programs and facilities. Provider shall, in its
sole discretion, select the persons who will serve in each of those positions
for Provider; provided, however, all such personnel shall be reasonably
satisfactory to Manager. Provider agrees that all Provider personnel will be
available to Manager when required for issues related to the operation and
management of the Provider's facilities and case management programs. Provider
is responsible for payment of Provider's employees and independent contractors
and the provision of funds for such payments. Provider's employees shall not be
eligible for nor participate in any of the health or benefit plans of Manager or
PMR; Provider shall be totally responsible for providing any and all health or
other benefits for its employees.
4.9.1 Employment Practices. Employment practices of Provider
shall comply with all applicable federal and state laws, rules, regulations, and
guidelines and the rules, regulations, and guidelines of regulatory agencies
having appropriate jurisdiction over such matters.
4.9.2 Supervision and Control. Provider shall be responsible for
the direction and control of all of Provider's employees and independent
contractors and shall cause all personnel to comply to the extent applicable
with all terms and conditions of this Agreement and with the protocols, as
amended and as approved by Manager and Provider pursuant to subparagraph 3.2.2,
and the Policy Manual, as amended and approved pursuant to subparagraph 3.3.
4.10 Supervision of Case Management Programs. Provider shall be
responsible for the operation of the Provider's case management programs and the
implementation of policies with respect thereto. Notwithstanding the authority
granted to Manager hereunder, Provider shall retain and at all times exercise
ultimate control over the affairs of Provider, and shall be accountable and
responsible for all duties of Provider and Provider's services and programs.
Provider shall have final authority to approve the Policy Manual and staffing
plans for Provider's facilities. Provider shall establish a chain of command for
each program through which Provider provides case management and related
psychiatric services hereunder and shall supervise and bear the responsibility
for all medical services provided through the Programs. The foregoing reporting
relationships shall be in addition to any relationships established by Manager
with respect to the administrative management of the programs.
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V. MANAGEMENT FEE, EXPENSES, AND DISBURSEMENT OF FUNDS.
5.1 General Parameters for Financial Arrangements.
In determining the amount of the various payments that are to be
made to each party pursuant to this Agreement and the related Services
Agreement, Manager and Provider have agreed that the following are: (i) the
parties to be involved in such financial arrangements and (ii) the components of
the funds to be received by Manager and the payments that are to be made to each
party:
5.1.1 Case Management Activities. Manager and Provider
acknowledge and agree that the monies available for distribution to Manager and
Provider pursuant to this Agreement and the related Services Agreement are based
upon the Manager's receipts, revenues, expenditures, and payments related to the
case management and other psychiatric services provided in Tennessee by Manager
and every Case Manager (defined in subparagraph 2.2 above). The case management
activities of Manager and the Case Managers are governed by the management and
affiliation agreements between Manager and each Case Manager (in substantially
the form of this Agreement and referred to herein collectively as the
"Management Agreements" and individually as a "Management Agreement"), and the
provider services agreement between Manager and each Case Manager (in
substantially the form of the Services Agreement).
5.1.2 Capital Investments. Manager shall make capital
investments for the operations of Provider and the other Case Managers as
described in subparagraph 3.1 above, which shall be repaid as described below.
In the event that a Case Manager desires to make capital investments for
expansion of their respective facilities and operations, and Manager approves of
such investment (which approval shall not be unreasonably withheld), then such
Case Manager's capital investment shall be repaid in the same manner and
according to the same priority that Manager's capital investment shall be
repaid. The cost associated with borrowing any funds to make such capital
investment (e.g., interest, loan origination fees, etc.) shall be the sole cost
of Manager or a Case Manager, as the case may be, and such costs of borrowing
shall not be reimbursed pursuant to this Agreement.
5.1.3 Capitated, Case Rate, and Other Payments. With respect to
each contract (i.e., a Payer Plan Agreement defined in the Services Agreement)
between a Payer and Manager for the provision of case management and other
psychiatric services to Covered Persons in accordance with the Payer's
respective Payer Plan (as those terms are defined in the Services Agreement),
Manager shall receive (directly or by assignment from the Case Managers) (i) a
monthly fee that is equal to a specific capitated amount per member per month
("PMPM") multiplied times the number of that Payer's Covered Persons, (ii) a
specific case rate payment, and/or (iii) some other type of payment. These
monthly capitated, case rate, and/or other payments from a Payer to Manager for
case management services described in this Agreement are collectively referred
to herein as the "Capitated Payment," and the Capitated Payment may vary for
each Payer, depending upon the terms of the particular Payer Plan Agreement with
a Payer for case management services.
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5.1.4 State Grants. In some instances, the State of Tennessee
through grant programs ("Grants"), rather than the TennCare program and its
participating Payers, will be the source of funding for the case management and
other psychiatric services to be provided by Manager and the Case Managers to
eligible Tennessee beneficiaries. In those instances where Grants provide the
funding for case management activities, the Grants shall be received by Manager,
either directly from the State agency making such Grant or by assignment from
the Case Manager receiving such Grant. To the extent permitted by the terms and
conditions of the Grant, such Grant shall be administered by Manager in the same
manner and according to the same procedures as a Capitated Payment. If the terms
of a Grant do not permit the Grant to be utilized by the parties in the same
manner as a Capitated Payment, then the parties agree to use their best efforts
to meet and agree upon the manner in which the services that are the subject of
such Grant shall be provided and reimbursed. With the exception of capital
investments by Manager and the Case Managers described in subparagraph 5.1.2
above, the cumulative Capitated Payments and Grants received by Manager (either
directly or by assignment from the Case Managers) provide the funds for the case
management and related psychiatric service activities of Manager and the Case
Managers and provide the funds that eventually result in the accumulation of the
Retained Reserves (defined below). The parties acknowledge and agree that
Manager and the Case Managers shall be permitted to and may provide other health
and psychiatric services in Tennessee besides the case management and other
psychiatric services that are the subject of this Agreement, the other
Management Agreements, and the services agreements, and the financial
distributions described in this Agreement do not include any monies received by
Manager or the Case Managers for such other activities not related to the case
management and other psychiatric services described herein or in the other
Management Agreements.
5.1.5 Subcapitated Payment. Manager shall pay each Case Manager
from the Capitated Payments and the Grants an amount, referred to herein as the
"Subcapitated Payment," for the case management and other psychiatric services
provided by the respective Case Manager at its various facilities in accordance
with its applicable provider service agreement. Each Case Manager shall pay for
all of the costs associated with its case management and other psychiatric
service obligations (e.g., the case manager's costs described in the
consolidated pro forma budgets appearing behind Tab 1 of the Model defined
below) from its Subcapitated Payment.
5.1.6 Payment for Old Asset Depreciation. Manager shall also pay
to each Case Manager from the Capitated Payments and the Grants an amount equal
to the depreciation of each Case Manager's facilities and equipment that are in
existence on the date of the Case Manager's respective Management Agreement and
utilized in accordance with the terms and conditions of the Case Manager's
respective Management Agreement and provider services agreement. Such payment
for depreciation is referred to herein as a payment for "Old Asset
Depreciation."
5.1.7 Management Fee. Manager shall pay itself from the
Capitated Payments and the Grants an amount, referred to herein as the
"Management Fee," to reimburse Manager for the cost of the management and
administrative services provided
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pursuant to this Agreement and the other Management Agreements with other Case
Managers (net of depreciation of capital assets acquired by Manager in
connection with the case management activities of Manager and the Case Managers
and net of the repayment of Manager's capital investments). Such costs of
Manager shall include the Manager's home office expenses described in the pro
forma budgets behind Tab 2 of the Model (defined below). The parties intend that
the Management Fee shall reimburse Manager for its costs for management and
administrative services described herein in the amount budgeted in the Model. To
the extent that the Management Fee does not cover Manager's actual costs or the
budgeted amount exceeds Manager's actual costs, the Management Fee shall be
adjusted as described in subparagraph 5.5 below.
5.1.8 Payment for New Asset Depreciation. Manager shall then pay
itself from the Capitated Payments and Grants an amount equal to the
depreciation of the capital assets (e.g., build-out of new case manager
facilities, furniture, and equipment) that are acquired by Manager with its
capital investments for case management activities. To the extent that a Case
Manager, rather than Manager, has made such a capital investment for the Case
Manager's case management activities, then Manager shall pay such Case Manager
an amount equal to the depreciation of the capital assets (e.g., build-out of
new Case Manager facilities, furniture, and equipment) that are acquired with
the Case Manager's capital investments for case management activities. Such
depreciation shall be computed in accordance with generally accepted accounting
principles based on the depreciable capital assets' useful lives using the
straight line method. Such payment for depreciation is referred to herein as a
payment for "New Asset Depreciation."
5.1.9 Retained Reserves. Subtraction of the cumulative
Subcapitated Payments, payments for Old Asset Depreciation, the Management Fee,
and payments for New Asset Depreciation from the cumulative amount of the
Capitated Payments and Grants results in an amount referred to herein as the
"Retained Reserves."
5.1.10 Return of Capital Investments. The Retained Reserves
shall first be utilized by Manager to pay Manager and each Case Manager, which
made a capital investment described in subparagraph 5.1.2 above, a thirty-five
percent (35%) annual return of Manager's and the Case Managers' respective
capital investments (the "Investment Return") until such time as all such
capital investments have been repaid (i.e., 35% of the amount of a party's
capital investment shall be repaid each year until such time as the full amount
of such capital investments are repaid). In the case of subsequent capital
investments by Manager and the Case Managers, the amount of such subsequent
capital investment shall be added to the amount of the original and any
subsequent capital investments and 35% of such cumulative amount of original and
subsequent capital investments shall be repaid on an annual basis until such
time as all capital investments have been repaid. No interest is paid with
respect to any of the capital investments.
5.1.11 Distribution of Remaining Retained Reserves. The
remainder of the Retained Reserves shall be paid to Manager and the Case
Managers as follows:
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(a) The remaining Retained Reserves shall be paid seventy
percent (70%) to the Case Managers and thirty percent (30%) to Manager
until such time as the Case Managers have received payments that
cumulatively equal seventy percent (70%) of the cumulative Investment
Return.
(b) After such time as the payments received by the Case
Managers pursuant to subparagraph 5.1.11(a) above cumulatively equal
seventy percent (70%) of the cumulative Investment Return, the
remainder of the Retained Reserves shall be paid fifty percent (50%)
to Manager and fifty percent (50%) to the Case Managers.
(c) Amounts to be received by the Case Managers pursuant
to these distributions of the remaining Retained Reserves shall be
made to each Case Manager on a pro rata basis based upon the
percentage of Manager's gross revenues attributable to the case
management and other psychiatric services of each respective Case
Manager to Manager's total gross revenues that result from the case
management and other psychiatric services of Manager and all Case
Managers.
(d) Distributions of the Retained Reserves in the manner
described herein shall be made within thirty (30) days of the end of
each calendar quarter after the parties have completed the quarterly
review of financial arrangements described in subparagraph 5.5 below.
5.1.12 Example of Financial Distributions. Attached hereto as
Exhibit K is a hypothetical example of the manner in which the distribution of
funds will be made to Manager, Provider, CMI and other approved Case Managers
for the various financial components described herein. The parties acknowledge
and agree that (i) the example is purely hypothetical, (ii) the example is only
intended to be used for clarification of the manner in which the various
distributions will be made to the parties, and (iii) the example is not a
representation or estimation of the actual funds that will be received or
distributed.
5.2 The Model.
In connection with the negotiation and preparation of this
Agreement, Manager and Provider have prepared a budgetary analysis (referred to
herein as the "Model," a copy of which is attached hereto as Exhibit G) of the
expected revenues and expenses, which are involved in the case management
activities contemplated by this Agreement, the other Management Agreements, and
the related provider services agreements, and the payment of those expenses and
distribution of funds. The Model analyzes the expected management and
administrative costs (net of depreciation and interest on Manager's capital
investments) for the Manager's home office (See Tab 2 of the Model). The Model
also analyzes the estimated lives, revenues, expenses, and other applicable
financial factors for the ten projected markets for case management services to
be provided by the Case Managers (See Tabs 3 through 12 of the Model). The Model
then analyzes the lives, incremental depreciation, program costs, and Capitated
Payments expected for the Manager's home office and the ten projected markets on
a consolidated basis (See Tab 1 of the Model).
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5.2.1 Projected Payments. Based upon the estimated Capitated
Payment and Subcapitated Payment, the parties have projected the amounts that
would be paid for Old Asset Depreciation, the Management Fee, and New Asset
Depreciation. The Parties have also estimated the remaining Retained Reserves
and the payments to be made from the Retained Reserves to Manager for its
Investment Return, as well as the 70/30 and 50/50 distributions of the final
amount of the Retained Reserves. (See page 1 of the Model.)
5.3 Actual Payments of Compensation. The parties acknowledge and
agree that the Model determines the Subcapitated Payment and Management Fee,
based upon the parties' current estimates of costs and other relevant factors,
and the Capitated Payment, based upon the parties' current estimate of such
payment after discussions with Payers. The actual Capitated Payments, Grants,
any withholds by the Payers for risk pools, Subcapitated Payments and Management
Fee, shall be set forth on Exhibit H to be attached hereto, which exhibit shall
be amended from time to time to reflect the actual amounts for those financial
components. The time and manner of making such payments to Manager, Provider,
CMI, and other Case Managers shall also be set forth in Exhibit H. The parties
also acknowledge and agree that the actual costs and other relevant data, as
well as the amount of the Capitated Payment and Management Fee, may change;
therefore, in accordance with subparagraph 5.5 below, the parties agree that
they shall make appropriate adjustments of the payments to be made to the
parties for the compensation components described in subparagraph 5.1 above by
utilizing the compensation components described in subparagraph 5.1 above and
the same methodology that they originally utilized in preparing the (i)
budgetary pro formas of the Model and (ii) the hypothetical example of financial
distributions (Exhibit K). To the extent that sufficient funds are not available
for Manager to make each of the payments described herein, Manager shall make
the payments in the priority set forth in Section 5.4 below.
5.4 Priority of Payments. In the event that sufficient funds are not
available for Manager to make each of the payments described herein, Manager
shall make the payments in the following order of priority:
5.4.1 the Subcapitated Payments to the Case Managers;
5.4.2 the payment for Old Asset Depreciation to the Case
Managers for assets existing on the Effective Date of
this Agreement;
5.4.3 the Management Fee to Manager;
5.4.4 the payment for New Asset Depreciation to Manager (and
to the Case Managers to the extent that they make
capital investments for acquisition of capital assets
subsequent to the Effective Date);
5.4.5 the thirty-five percent (35%) Investment Return to
Manager (and to the Case Managers to the extent that
they make capital investments for acquisition of capital
assets subsequent to the Effective Date); and
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5.4.6 the 70/30 or, if applicable, the 50/50 distribution of
Retained Reserves to the Case Managers and Manager,
respectively.
In making the Subcapitated Payments to the Case Managers for their
costs, Manager shall pay for (i) all costs of the Case Managers that are equal
to or less than the budgeted amount for each cost category set forth
specifically in the Model and (ii) all costs that are in excess of the budgeted
amount for a cost category specifically set forth in the Model, provided that
Manager has specifically approved in writing in advance such excess expenditure.
5.5 Quarterly Review of Financial Arrangements.
5.5.1 Within ten (10) days at the end of each quarter of the
Term of this Agreement, Manager shall prepare for itself and for each Case
Manager the unaudited financial statements for such prior quarter. Within ten
(10) days after such quarterly financial statements have been prepared, the
parties shall review the fees and other compensation paid in accordance with
this Agreement and shall make appropriate adjustments that are approved by
Manager and the Case Managers. Such adjustments shall be effective from and
after the date that the parties agree to such an adjustment. Any such
adjustments shall be made in accordance with the methodology originally utilized
in preparing the budgetary pro formas in the Model with good faith recognition
of (i) cost increases which have occurred in each Case Manager's local market
areas, (ii) the Manager's actual costs for the management and administrative
costs described herein, (iii) the actual Capitated Payments received from Payers
and the Grants received from the State of Tennessee or its agencies, and (iv)
other factors deemed relevant by the parties since any prior adjustment. In the
event the parties cannot reach an agreement regarding an adjustment of the fees
and other compensation paid hereunder, the provisions of Article XII shall
apply.
5.5.2 If the Subcapitated Payments are not sufficient to
reimburse the Case Managers for their actual costs that were budgeted in the
Model or preapproved by Manager for the prior quarter, then the quarterly
adjustment of the Subcapitated Payments for the next quarter shall include an
adjustment to reimburse the Case Managers for the shortfall in reimbursement for
the budgeted or preapproved expenses for the prior quarters. Such shortfalls in
reimbursement for the budgeted or preapproved expenses for the prior quarters
shall have the same priority of payment as the Subcapitated Payments to the Case
Managers. In the event that funds are not available in a particular quarter to
reimburse the Case Managers for such shortfalls, the shortfalls in such
unreimbursed expenses shall be accumulated and reimbursed at the end of the next
quarter in which such funds are available.
5.5.3 If the Management Fee is not sufficient to reimburse the
Manager for its actual costs that were budgeted in the Model, then the quarterly
adjustment of the Management Fee for the next quarter shall include an
adjustment to reimburse Manager for the shortfall in reimbursement for the
budgeted management and administrative expenses for the prior quarters. Such
shortfalls in reimbursement for the budgeted
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management or administrative expenses for the prior quarters shall have the same
priority of payment as the Management Fee to the Manager. In the event that
funds are not available in a particular quarter to reimburse the Manager for
such shortfalls, the shortfalls in such unreimbursed expenses shall be
accumulated and reimbursed at the end of the next quarter in which such funds
are available.
5.6 Accumulation and Payment of Shortfalls. In the event that there
are shortfalls in the payment of any Subcapitated Payments, payments for Old
Asset Depreciation, the Management Fee, payments for New Asset Depreciation, or
the Investment Return, and such shortfalls cannot be paid during the next
quarter after the quarterly adjustment, then each such shortfall shall be
accumulated and paid at the end of the next quarter for which funds are
available for such payment. The payment of such accumulated shortfalls shall be
made in the same priority as payments for such financial components as set forth
in subparagraph 5.4 above until such time as all such shortfalls have been
reimbursed. There shall not be any 70/30 or 50/50 distributions of Retained
Reserves until such time as all such accumulated shortfalls have been repaid.
5.7 Fair Market Value of Compensation. The parties agree that, to
the best of their knowledge, the compensation and other payments set forth above
(based on the assumptions of the Model) are consistent with the fair market
value of the services for which such fees are paid and are reasonable and
customary within the industry and within the areas served by Manager and the
Case Managers.
5.8 Receipt of Capitated Payments and Grants by Remittance
Clearinghouse. The parties agree that all Capitated Payments shall be received
by and processed through a national remittance clearinghouse. Such processing of
Capitated Payments and Grants shall be organized so that all Capitated Payments
and Grants for case management and related psychiatric services shall be
received by the clearinghouse and deposited into an account established with a
national money center bank and that withdrawals from such account require the
authorization of Manager and the Case Managers. The clearinghouse shall be given
standing instructions to advise Manager and the Case Managers of each deposit
within one (1) business day thereof; and, within ten (10) business days of the
date of each such deposit, Manager and the Case Managers shall jointly prepare
and deliver to the clearinghouse an authorization to make payment from such
receipts to the parties in accordance with the terms and conditions of this
Article V. For such purposes, each party shall designate a readily available
representative and alternate representative so that such authorizations can be
obtained and delivered to the clearinghouse in a timely manner. In the event of
a dispute among the parties as to the distribution of funds from the
clearinghouse account, undisputed payments shall be made to the parties not
involved in such dispute. If a dispute is of such a nature that it involves all
parties or all funds, then to the extent possible payments shall be made to the
parties in the priority set forth in subparagraph 5.4 above to provide
sufficient funds for the parties to cover their expense and continue to operate
until the dispute is resolved. All such disputes shall be resolved in the manner
set forth in Article XII. Funds that are not to be paid immediately to the
parties (e.g., the Retained Reserves or funds related to disputed payments)
shall be invested in the permitted investments set forth in Exhibit I attached
hereto. The agreements with the
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clearinghouse and bank shall be in form and substance acceptable to those
parties, Manager and the Case Managers.
VI. REPRESENTATIONS AND WARRANTIES.
6.1 Provider's Representations and Warranties. Provider represents
and warrants to Manager the following:
6.1.1 Corporate Capacity. Provider is a Tennessee non-profit
corporation validly existing in good standing under the laws of the State of
Tennessee. Provider has the requisite power and authority to enter into the
Management Agreement, to perform its obligations thereunder, and to conduct its
businesses as now being conducted. Provider is duly authorized, qualified, and
licensed under all applicable laws, regulations, ordinances, and orders of
governmental authorities having jurisdiction to own its properties and conduct
its business in the place and in the manner now conducted.
6.1.2 Corporate Powers; Consents; Absence of Conflicts With
Other Agreements, Etc. The execution, delivery, and performance of this
Agreement by Provider and the consummation of the transactions contemplated
herein by Provider:
(a) are within Provider's corporate powers and the terms
of Provider's Charter or Articles of Incorporation, Bylaws, and any
amendments thereto, and have been duly and properly authorized by all
appropriate corporate action;
(b) to the best of Provider's knowledge, will neither
conflict with nor result in any breach or contravention of, nor permit
the acceleration of the maturity of, or the creation of any lien
under, any indenture, mortgage, agreement, lease, contract,
instrument, or understanding to which Provider is a party or by which
Provider is bound, including without limitation the Basic Grants from
the Tennessee Department of Mental Health and Mental Retardation and
other grants that Provider receives from the State of Tennessee or its
agencies;
(c) will not violate any judgment, decree, order, writ, or
injunction of any court or governmental authority to which Provider
may be subject; and
(d) are and will constitute the valid and legally binding
obligation of Provider, enforceable in accordance with the terms of
this Agreement, except as enforceability may be restricted, limited,
or delayed by applicable bankruptcy or other laws affecting creditors'
rights generally and except as enforceability may be subject to
general principles of equity.
6.1.3 Securities Representations.
(a) The Provider recognizes that the PMR Common Stock (the
"Common Stock") that will be issued to Provider in connection with the
transactions
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described in this Agreement is issued upon its representations and
warranties contained in this Agreement, and Provider agrees to
indemnify and hold harmless Manager and PMR against any
misrepresentation, breach, or failure on its part to fulfill any
covenants or agreements set forth in this Agreement with respect to
the transfer of such Common Stock.
(b) The Provider is the sole party in interest, is not
acquiring the shares of Common Stock as an agent or otherwise for any
other person, and the Provider is acquiring the shares of Common Stock
for investment and not with a view to their resale or distribution.
(c) The Provider has received copies of the materials
described on Exhibit C hereto (the "Materials") and has read carefully
and understands those materials.
(d) The Provider is familiar with the business and
financial condition, properties, operations and prospects of PMR, all
as generally described in the Materials, and, at a reasonable time
prior to the execution of this Agreement, has been afforded the
opportunity to ask questions of and receive satisfactory answers from
PMR's officers and directors, or other persons acting on PMR's behalf,
concerning the business and financial condition, properties,
operations and prospects of PMR and concerning the terms and
conditions of the offering of the shares of Common Stock and has asked
such questions as Provider desires to ask, and all such questions have
been answered to the full satisfaction of the Provider.
(e) The Provider has carefully reviewed the Materials, and
based upon the contents thereof, understands and acknowledges that the
acquisition of the shares of Common Stock and Common Stock purchase
warrants of PMR set forth within this Agreement may involve various
risks and that Provider has the requisite knowledge and experience in
business and financial matters that it is capable of evaluating these
risks and in making an informed investment decision has elected to
assume such risks. In making an informed investment decision
hereunder, Provider has relied solely upon the information contained
within the Materials.
(f) The Provider is relying solely on the information
contained in the Materials and the answers to questions with respect
thereto furnished to it by PMR. No representations or warranties have
been made to the Provider by PMR as to the tax consequences of this
investment or as to profits, losses, or cash flow that may be received
or sustained as a result of this investment, other than those
contained in the Materials.
(g) All documents, records and books pertaining to a
proposed investment in the shares of Common Stock that the Provider
has requested, have been made available to the Provider.
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(h) The Provider represents that, if it is not an
"Accredited Investor" (as that term is defined in Exhibit D hereto)
Provider's representatives personally have such knowledge of finance,
securities, and investments, generally, and experience and skill in
investments based on actual participation, that Provider's
representatives are capable of evaluating the merits and risks of
Provider's prospective investment in PMR.
(i) The Provider is acquiring the shares of Common Stock
solely for the Provider's own beneficial account, for investment
purposes, and not with a view to, or for resale in connection with,
any distribution of the shares of Common Stock. The Provider
understands that the offer and sale of the shares of Common Stock
pursuant to this Agreement have not been registered under the
Securities Act of 1933, as amended (the "Securities Act"), or any
state securities laws by reason of specific exemptions under the
provisions thereof that depend in part upon the investment intent of
the Provider and of the other representations made by the Provider in
this Agreement. The Provider understands that PMR and Manager are
relying upon the representations, covenants, and agreements contained
in this Agreement for the purpose of determining whether this
transaction meets the requirements for such exemptions.
(j) The Provider understands that the shares of Common
Stock are "restricted securities" under applicable federal securities
laws and that the Securities Act and the rules of the Securities and
Exchange Commission ("SEC") provide in substance that the Provider may
dispose of the shares of Common Stock only pursuant to an effective
registration statement under the Securities Act or an exemption
therefrom, and, except as provided in Section 11.2 below, the Provider
understands that PMR has no obligation to register any of the shares
of Common Stock purchased by the Provider thereunder, or to take
action so as to permit sales pursuant to the Securities Act (including
Rule 144 thereunder). As a consequence, the Provider understands that
the Provider must bear the economic risks of the investment in the
shares of Common Stock for an indefinite period of time. The Provider
understands that the Provider may not at any time demand the purchase
by PMR of the Provider's shares of Common Stock.
(k) The Provider agrees: (A) that the Provider will not
sell, assign, pledge, give, transfer, or otherwise dispose of the
shares of Common Stock or any interest therein, or make any offer or
attempt to do any of the foregoing, except pursuant to a registration
of the shares of Common Stock under the Securities Act and all
applicable state securities laws or in a transaction that is exempt
from the registration provisions of the Securities Act and all
applicable state securities laws; (B) that PMR and any transfer agent
for the shares of Common Stock shall not be required to give effect to
any purported transfer of any of the shares of Common Stock except
upon compliance with the foregoing restrictions; and (C) that a legend
in substantially the following form will be placed on the certificates
representing the shares of Common Stock transferred to Provider:
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THE SHARES REPRESENTED BY THIS CERTIFICATE
HAVE BEEN TAKEN WITHOUT A VIEW TO THE
DISTRIBUTION THEREOF WITHIN THE MEANING OF
THE SECURITIES ACT OF 1933, AS AMENDED, AND
MAY NOT BE SOLD, PLEDGED, TRANSFERRED OR
OTHERWISE DISPOSED OF EXCEPT IN ACCORDANCE
WITH SUCH ACT AND THE RULES AND REGULATIONS
THEREUNDER AND IN ACCORDANCE WITH APPLICABLE
STATE SECURITIES LAWS. PMR WILL NOT TRANSFER
SUCH SHARES EXCEPT UPON RECEIPT OF A
FAVORABLE OPINION OF ITS COUNSEL AND/OR
EVIDENCE SATISFACTORY TO PMR THAT THE
REGISTRATION PROVISIONS OF SUCH ACT HAVE
BEEN COMPLIED WITH OR THAT SUCH REGISTRATION
IS NOT REQUIRED AND THAT SUCH TRANSFER WILL
NOT VIOLATE ANY APPLICABLE STATE SECURITIES
LAWS.
(l) The Provider has not offered or sold any portion of
the subscribed for shares of Common Stock and has no present intention
of dividing such shares of Common Stock with others or of reselling or
otherwise disposing of any portion of such shares of Common Stock
either currently or after the passage of a fixed or determinable
period of time or upon the occurrence or non-occurrence of any
pre-determined event or circumstance.
6.1.4 Manager's Name. Provider has requested that PMR's
subsidiary, which is a party to this Agreement, be named "Tennessee Mental
Health Cooperative, Inc.," a name that is substantially similar to Provider's
name. Provider has consented to PMR's and Manager's use of that name, and
Provider has agreed that neither PMR nor Manager shall pay a license or use fee
in connection with the use of that name.
6.2 Manager's Representations and Warranties. Manager shall
represent and warrant to Provider the following:
6.2.1 Corporate Capacity. Manager is a Tennessee corporation
validly existing in good standing under the laws of the State of Tennessee.
Manager has the requisite power and authority to enter into this Agreement, to
perform its obligations hereunder, and to conduct its businesses as now being
conducted. Manager is duly authorized, qualified, and licensed under all
applicable laws, regulations, ordinances, and orders of governmental authorities
having jurisdiction to own its properties and conduct its business in the place
and in the manner now conducted.
6.2.2 Corporate Powers; Consents; Absence of Conflicts With
Other Agreements, Etc. The execution, delivery, and performance of this
Agreement by Manager and the consummation of the transactions contemplated
therein by Manager:
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(a) are within Manager's corporate powers and the terms of
Manager's Charter or Bylaws or any amendments thereto, and have been
duly and properly authorized by all appropriate corporate action;
(b) to the best of Manager's knowledge, will neither
conflict with nor result in any breach or contravention of, nor permit
the acceleration of the maturity of, or the creation of any lien
under, any indenture, mortgage, agreement, lease, contract,
instrument, or understanding to which Manager is a party or by which
Manager is bound;
(c) will not violate any judgment, decree, order, writ, or
injunction of any court or governmental authority to which Manager may
be subject; and
(d) are and will constitute the valid and legally binding
obligation of Manager, enforceable in accordance with the terms of
this Agreement, except as enforceability may be restricted, limited,
or delayed by applicable bankruptcy or other laws affecting creditors'
rights generally and except as enforceability may be subject to
general principles of equity.
VII. STANDARDS OF SERVICES.
Manager and Provider each agree, in connection with the operation of
Provider and its programs, to comply with all laws, rules, and regulations of
all governmental authorities having jurisdiction over each, and any
recommendations and policies resulting from Manager's and Provider's respective
quality assurance programs and their general policies and procedures regarding
quality assurance matters, which recommendations are designed to comply with
applicable laws, rules, or regulations. The parties hereto acknowledge that a
material part of the consideration for this Agreement is the other party's
compliance with the provisions of this Article VII. The parties further
acknowledge that the non-compliance by either with any of the applicable laws,
rules, and regulations applicable to such party may have a material adverse
effect on the other party. The parties therefore agree to cooperate in good
faith with each other to monitor and ensure such compliance.
7.1 Ongoing Quality and Compliance Reviews. The performance of all
services rendered hereunder shall be reviewed as part of Provider's ongoing
quality assurance program by Manager's quality assurance personnel pursuant to
the provisions of subparagraph 3.2.7 above. In the event of non-compliance with
any standards for service set forth herein or applicable laws, rules, or
regulations by either party hereto, the other party shall give the non-complying
party notice thereof, and such party shall so comply or cause such compliance as
soon as practicable thereafter, but in any event within thirty (30) days after
such notice.
7.2 Change in Laws or Regulations. The parties acknowledge that
applicable laws, rules, and regulations including, but not limited to, Medicaid
or TennCare billing guidelines and related or included fee structures, may
change at any time during the Term of this Agreement or any extensions thereof
and that such change may require a
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modification of this Agreement. The parties hereby agree to give each other
immediate notice of such change in applicable laws, rules, or regulations,
whereupon the parties shall meet in good faith to negotiate a modification of
this Agreement such that it complies with such changes in applicable laws,
rules, regulations, guidelines, or fee structures.
7.3 Notice from Governmental/Regulators Entities. The parties hereby
agree to give each other a copy of any notice or contact received from any
governmental or regulatory entity, having jurisdiction thereof with respect to
the case management programs, that any activity of such party is in violation of
any applicable law, rule, or regulation and to continue to promptly inform the
other party of all responses and procedures taken as a result of such notice or
contact until the alleged violation is cured, and to provide such other party
with evidence of the successful conclusion of the event.
VIII. INDEPENDENT CONTRACTOR.
No relationship of employer and employee or of joint venture between
Manager and Provider is created by this Agreement, it being mutually understood
and acknowledged that Manager is at all times acting and performing as an
independent contractor hereunder. No employee or independent contractor of one
party shall have any claim under this Agreement or otherwise against the other
party for salary or other compensation, vacation or sick pay, sick leave,
retirement benefits, social security, workers' compensation, disability or
unemployment insurance benefits or any other employee benefits of any kind.
IX. COVENANT NOT TO COMPETE.
9.1 Noncompetition. In consideration of the delivery of fifty
thousand (50,000) shares of Common Stock of PMR and the covenants of Manager
hereunder, Provider agrees that, during the term of this Agreement, neither
Provider, nor any subsidiary or affiliate of Provider, nor any of their
officers, directors, employees, or agents shall directly or indirectly, in any
capacity, own, manage, operate, control, participate in the management or
control of, be employed by, contract with, consult with, lend Provider's name
to, receive any remuneration or maintain or continue any interest whatsoever in,
any enterprise or medical practice, whether private or otherwise, providing case
management and related psychiatric services of the type described in this
Agreement or the Services Agreement to patients within the State of Tennessee
(including, but not limited to, the execution of a Payer Plan Agreement with any
Payer); provided, however, if this Agreement is terminated by Manager prior to
the end of the Term due to an uncured default by Provider, then the term of this
covenant of Provider not to compete shall extend for the duration of the
unexpired Term of this Agreement plus six (6) months. In the event that this
Agreement is terminated by Provider for cause as set forth in subparagraph 1.3
above, then this covenant of Provider not to compete shall terminate on the date
that this Agreement is so terminated. This covenant not to compete does not
apply to (i) Provider's ownership of (a) shares in publicly traded companies (so
long as such ownership percentage is less than one percent), and (b) shares of
PMR stock; (ii) Provider's current Directors that on the Effective Date of this
Agreement already have an interest in an organization that competes with
Provider; or (iii) arrangements for the provision of case management and related
psychiatric services
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described in this Agreement to patients within Davidson County and the
Tennessee counties contiguous to Davidson County, so long as Provider has given
Manager the right of first refusal to participate in each such arrangement by
the notice described below and Manager has declined to participate in such
arrangement. In the event that Provider desires to participate in any such
competitive arrangement in Davidson County or any county contiguous to Davidson
County, Provider shall give Manager written notice specifying all of the
material terms and conditions of such arrangement. Within thirty (30) days
thereafter, Manager shall notify Provider in writing whether Manager desires to
participate in that arrangement. In the event that Manager declines to
participate in such arrangement or fails to submit such notice of Manager's
intent within such thirty (30) day period (in which case Manager shall be deemed
to have declined to participate), then Provider shall be permitted within one
(1) year thereafter to enter into such arrangement on substantially the same
terms and conditions presented to Manager at Provider's sole cost and expense.
In the event, that Provider does not enter into such arrangement with the one
(1) year period or the terms and conditions are substantially different, then
Provider must again provide Manager the right of first refusal to participate in
such arrangement.
9.2 Anti-Raiding. Provider also agrees that, during the Term of this
Agreement, and for a period of six (6) months after the expiration or sooner
termination of this Agreement by Manager due to an uncured default by Provider,
neither Provider, nor any subsidiary or affiliate of Provider, nor any of their
officers, directors, employees, or agents will directly or indirectly, in any
capacity, (a) solicit or otherwise attempt to contact any person, or an
immediate family member of any person, who has been a patient of a Payer or
Provider in connection with this Agreement or the Services Agreement for
purposes of inducing such person to become a patient of Provider or another
medical practice or case management organization in which Provider provides such
services or otherwise has an interest, or (b) solicit for employment or employ
any person who has been an employee of Provider or Manager.
9.3 Severability of Non-Compete Covenants. Provider further agrees
that if any restriction contained in this Article IX is held by any court of
competent jurisdiction to be unenforceable or unreasonable, a lesser restriction
shall be severable therefrom and shall be enforced in its place, and the
remaining restrictions contained herein shall be enforceable independently of
each other. In the event of a threatened breach of this covenant by Provider,
Manager shall be entitled to injunctive relief, without the necessity of posting
a bond, cash or otherwise and without precluding any other remedies as may be
available at law or in equity for the breach of this covenant.
X. CONFIDENTIALITY AGREEMENT.
10.1 Confidentiality of Agreements. Except for disclosure required
by law, Provider and Manager shall agree to keep confidential the terms and
conditions of this Agreement, the Stock Warrant Agreement, the Registration
Rights Agreement, the Services Agreement, and Manager's and Provider's
proprietary or confidential information (both documentary and software).
Additionally, Provider agrees to use its best efforts to circulate to its
agents, employees, officers and others who have knowledge of any part of this
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Agreement or the operations of the Provider and Manager hereafter an insider
trading memorandum which highlights and addresses the concerns of insider
trading to the extent prohibited under relevant federal securities laws.
Provider shall take all reasonable efforts to prevent the dissemination of
confidential nonpublic information, including, but not limited to, strict
adherence to Section 10.1 of this Agreement and the distribution of an insider
trading memorandum, as set forth above.
10.2 Confidential Information. Provider and Manager agree that some
information received by one party from the other pursuant to this Agreement
shall be confidential. Except as may otherwise be required by law or legal
process, it is therefore agreed that any information received by one party from
the other, and clearly designated in writing as "CONFIDENTIAL," or in any other
matter which indicates its confidential nature (hereinafter referred to as
"Confidential Information"), shall not be disclosed by the other party and shall
not be used by the other party for purposes other than those contemplated by
this Agreement. Confidential Information also includes, without limitation,
information as to any patient as well as information relating to business
practices, costs, users or purchasers of either party's services, research or
services. Confidential Information does not include:
(a) information that has become known to third parties or
has become publicly known through no fault of the receiving party; or
(b) information already in the receiving party's
possession prior to the disclosure of said information to the
receiving party; or
(c) information subsequently disclosed to the receiving
party by a third party who is not under any obligation or
confidentiality to the disclosing party; or
(d) information approved for disclosure by prior written
consent of the disclosing party; or
(e) information that the parties have agreed is necessary
to disclose.
10.3 Proprietary Information of Manager.
10.3.1 Acknowledgment of Proprietary Interest. Provider
recognizes the proprietary interest of Manager in any Trade Secrets of Manager.
As used herein, the term "Trade Secrets" includes all of Manager's confidential
or proprietary information, including without limitation any confidential
information of Manager encompassed in any reports, protocols, plans, proposals,
codes, marketing and sales programs, financial projections, cost summaries,
pricing formulae, client contracts, client lists, and all concepts, ideas,
materials, or information related to the business of Manager or Manager's
clients which have not previously been released to the public at large by duly
authorized representatives of Manager, whether or not such information would be
protectable as a Trade Secret or the copying of which would be enjoined or
restrained by a court as constituting unfair
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competition. Provider acknowledges and agrees that any and all Trade Secrets of
Manager learned by Provider during the course of its engagement by Manager or
otherwise, whether developed by Manager alone or in conjunction with others,
shall be and are the property of Manager.
10.3.2 Covenant Not to Divulge Trade Secrets. Provider
acknowledges and agrees that Manager is entitled to prevent the disclosure of
Trade Secrets of Manager. As a portion of the consideration for the continuing
engagement of Provider hereunder and for the compensation being paid to Provider
by Manager, Provider agrees at all times during the term of said engagement by
Manager, and thereafter, to hold said Trade Secrets in strictest confidence and
not to disclose same or allow them to be disclosed to any person, firm, or
corporation, other than to persons engaged by Manager to further the business of
Manager, and not to use the same, except in the pursuit of the business of
Manager, without the prior written consent of Manager.
10.3.3 Return of Materials at Termination. In the event of any
termination of this Agreement, with or without cause, Provider shall promptly
deliver to Manager all materials, property, documents, data, and other
information belonging to Manager or pertaining to Trade Secrets. Provider shall
not take any materials, property, documents, or other information or any
reproduction or excerpt thereof, belonging to Manager or containing or
pertaining to Trade Secrets.
10.3.4 Application to Provider Representatives. This Article X
shall apply to Provider and any director, officer, employee, independent
contractor, or agent of Provider and shall survive the termination of this
Agreement.
XI. STOCK TRANSACTIONS.
11.1 Stock Warrant Agreement. As part of the consideration for the
transactions contemplated in this Agreement and the CMI Management Agreement,
Manager has agreed to cause PMR to grant to Provider and CMI the option to
purchase additional shares of Common Stock of PMR in the event that Manager
obtains certain levels of profitability as a result of the case management
activities relating to this Agreement and the CMI Management Agreement. In
connection therewith, Manager agrees to cause PMR to execute and deliver to
Provider and to CMI, one or more stock warrant agreements in substantially the
form of Exhibit E hereto (each a "Stock Warrant Agreement"), which provides that
for five (5) years Provider and CMI shall have the right to purchase at the
then-current market rate (defined below) their pro rata portion of ten thousand
(10,000) shares of Common Stock of PMR for every Four Hundred Twenty-Five
Thousand and No/100ths Dollars ($425,000.00) of pre-tax net income of Manager
that was generated during each fiscal period ending April 30 as a result of (i)
the case management activities of Manager and Provider pursuant to this
Agreement and the Services Agreement and (ii) the case management activities of
Manager and CMI pursuant to the CMI Management Agreement and the Provider
Services Agreement between Manager and CMI (the "CMI Services Agreement"). The
pro rata portion of Provider and CMI shall be determined on the basis of the
percentage of Manager's gross revenues attributable to the case
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management and other psychiatric services of Provider and CMI, respectively, to
Manager's total gross revenues that result from the case management and other
psychiatric service activities of Manager, Provider, and CMI. The then-current
market rate for purposes of determining the purchase price upon exercising the
warrant shall be the average closing price of the Common Stock of PMR on the
principal exchange on which it trades (including for this purpose, NASDAQ) for
the ten (10) trading days prior to the end of the Manager's fiscal year end of
April 30 for the year of determination. The parties agree that Manager's pre-tax
net income for purposes of these calculations shall not include the Manager's
income from other sources or other activities nor the costs from such other
activities or categories of cost not included in the Model. The determination of
Manager's pre-tax net income shall be made within ninety (90) days of the end of
each fiscal year of Manager in connection with the audit of Manager by Manager's
independent certified public accountants. Notwithstanding anything to the
contrary contained herein, Manager, Provider, and CMI agree that the maximum
aggregate number of shares of Common Stock that may be purchased by Provider and
CMI cumulatively pursuant to the Stock Warrant Agreements shall not exceed five
hundred fifty thousand (550,000) shares of Common Stock.
11.2 Registration Rights. The Manager agrees to grant certain
incidental registration rights to the Provider and CMI pursuant to which the
Manager will, under those terms and conditions set forth in a Registration
Rights Agreement, in substantially the form of Exhibit F hereto, cause the
resale of the shares of Common Stock issued as consideration for the covenant
not to compete pursuant to Section 9.1 of this Agreement and shares of Common
Stock issuable upon exercise of the Stock Warrant Agreements issued pursuant to
Section 11.1 of this Agreement, to be the subject of a Registration Statement
filed with the SEC. Notwithstanding the foregoing, neither Manager nor PMR have
any obligation to provide for or guarantee the resale of such stock.
11.3 Provider's Covenants Regarding Stock Transactions. The Provider
recognizes and agrees that the Common Stock purchased pursuant to the Stock
Warrant Agreement will be issued to Provider based upon Provider's
representations and warranties contained herein and in the Stock Warrant
Agreement, and Provider agrees to indemnify and hold PMR and Manager harmless
against any misrepresentation, breach, or failure on its part to fulfill any
covenants or agreements set forth in this Agreement or the Stock Warrant
Agreement. Provider agrees to furnish any additional information reasonably
requested by Manager or PMR to assure compliance with applicable federal and
state securities laws in connection with the purchase and issuance of the shares
of Common Stock. Provider agrees to notify Manager, PMR, and PMR's legal
counsel, if there is any change in the status of Provider prior to the
consummation of the purchase or issuance of shares of Common Stock to Provider
pursuant to this Agreement and the Stock Warrant Agreement. Finally, Provider
agrees to execute and deliver such documents as PMR and Manager may reasonably
require in connection with the issuance of the Stock Warrant Agreement and the
Common Stock to be purchased and transferred in connection with this Agreement
and the Stock Warrant Agreement. The form and substance of all such
documentation shall be approved by PMR and Provider.
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XII. ARBITRATION.
In the event that a dispute arises with respect to this Agreement,
then either party may request binding arbitration in order to resolve such
dispute. In such event, the party requesting arbitration shall do so by giving
notice to that effect to the other party, specifying in said notice, in
reasonable detail, the nature of the dispute and designating one of the
arbitrators. Within thirty (30) days after such notice is given, the other party
shall designate one of the arbitrators by notice given to the party requesting
arbitration. The determination of the two designated arbitrators shall be
binding and conclusive upon the parties. However, if the two designated
arbitrators shall fail to make such determination within thirty (30) days after
both have been designated, then they shall select a third arbitrator. The
determination of the majority of the three arbitrators shall be binding and
conclusive on the parties. If a party shall fail or refuse to designate an
arbitrator within the time period provided above, then such arbitrator shall be
appointed by the application of the other party by the Middle Tennessee Chapter
of the American Arbitration Association. If the two arbitrators designated as
set forth above shall fail to make such determination within such thirty (30)
day period, and shall fail to designate a third arbitrator within thirty (30)
days thereafter, then such third arbitrator shall be appointed upon application
of either party by the Middle Tennessee Chapter of the American Arbitration
Association. Each party shall bear the expenses of the arbitrator appointed by
such party or on behalf of such party. Expenses of the third arbitrator, if
necessary, shall be shared equally by the parties. The decision in any such
arbitration may be enforced, on the application of either party thereto, by the
order or judgment of a court of competent jurisdiction sitting in Davidson
County, Tennessee. Any arbitration will be conducted during the arbitration
proceeding. In the event the parties cannot agree on rules to govern discovery,
the arbitrators shall designate what, if any, discovery shall be authorized. The
parties may, by agreement, jointly appoint one arbitrator to decide any dispute.
In such event, the parties shall share the expense of the arbitrator. The
prevailing party in any such arbitration conducted pursuant to this Agreement
shall be entitled to recover from the losing party reasonable expenses,
attorneys' fees, and costs incurred in connection therewith in the manner set
forth in subparagraph 13.12 below.
XIII. MISCELLANEOUS.
13.1 Service of Notices. All notices and other communications and
all legal process in regard hereto shall be validly given or served if in
writing and delivered personally or sent certified mail, postage prepaid, return
receipt requested in the case notices to Manager, to the address set forth below
or such address as either party may designate to the other in writing:
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If to Provider:
Mental Health Cooperative, Inc.
275 Cumberland Bend
Nashville, Tennessee 37228
Attention: Executive Director
Phone number: (615) 726-3340
With a copy to:
Boult Cummings Conners & Berry
414 Union Street, Suite 1600
Nashville, Tennessee 37219
Attention: Mr. E. Berry Holt, III
Phone number: (615) 252-2312
If to Manager:
Tennessee Mental Health Cooperative, Inc.
275 Cumberland Bend
Nashville, Tennessee 37228
Attention: Mr. Allen Tepper
Phone number:
--------------------------------
With a copy to:
PMR Corporation
Cabillo Plaza
3990 Old Town Avenue, Suite 206A
San Diego, California 92110
Attention: Mr Allen Tepper, President
13.2 Binding Effect. This Agreement shall be binding upon and inure
to the benefit of the parties hereto and their successors and permitted assigns.
13.3 Choice of Law. The validity, enforceability and interpretation
of any of the clauses of this Agreement shall be determined and governed by the
laws of the State of Tennessee.
13.4 Entire Agreement. This Agreement constitutes the entire
agreement between the parties hereto with respect to the subject matter hereof
and supersedes all prior and contemporaneous agreements, understanding,
negotiations and discussions of the parties whether written or oral.
13.5 Amendments. No amendment, modification or supplement of any
provision of this Agreement shall be effective unless in writing, signed by
the parties hereto; and no
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waiver of any party's obligations under this Agreement, or consent to any
departure therefrom, shall be effective unless in writing, signed by the
parties hereto and then only in the specific instance and for the specific
purpose given.
13.6 Severability. If any provision of this Agreement is held to be
inoperative, unenforceable, or invalid under present or future laws effective
during the Term of this Agreement, such shall be inoperative, unenforceable or
invalid without affecting the remaining provisions. This Agreement shall be
construed and enforced as if such illegal, invalid or unenforceable provision
had never comprised a part of this Agreement, and, to that end, the provisions
of this Agreement are declared to be severable. Notwithstanding the foregoing,
however, the parties agree to negotiate a modification of this Agreement
pursuant to the provisions of subparagraph 13.5 in the event any provision of
this Agreement is believed by a party in good faith to be invalid under
applicable laws, rules, or regulations.
13.7 Number and Gender. Whenever the context of this Agreement
requires, the singular shall include the plural and the masculine gender shall
include the feminine.
13.8 Joint Negotiations. This Agreement is the product of
negotiations between the parties and is not to be interpreted more strongly in
favor of one party or the other in the interpretation or enforcement thereof.
13.9 Headings. Headings in this Agreement are included for convenience
of reference only and are not part of this Agreement for any other purpose.
13.10 Assignment. Neither party shall assign, sell or transfer this
Agreement or any interest herein without the prior written consent of the other
party, which consent shall not be unreasonably withheld. In the event that the
primary business and/or substantially all of the assets of Manager is
transferred to an affiliate of Manager, Manager shall have the right to assign
all of its rights under Agreement to any such affiliate during the Term of
Agreement, and any such assignee/affiliate shall acquire all of the rights and
assume all of the obligations of Manager under this Agreement.
13.11 Counterparts. This Agreement may be executed in counterparts
and either party hereto may execute any counterpart, each of which, when
executed and delivered, will be deemed to be an original, and all of which
counterparts taken together will be deemed to be but one and the same
instrument. The execution of this Agreement by any party hereto will not
become effective until a counterpart hereof has been executed by each other
party hereto.
13.12 Attorneys Fees. In the event of any litigation or arbitration
concerning any controversy, claim, or dispute between the parties hereto, the
prevailing party shall be entitled to recover from the losing party reasonable
expenses, attorneys' fees, and costs incurred therein or in the enforcement or
collection of any judgment or award rendered therein. The "prevailing party"
means the party determined by the court or arbitrator to have most nearly
prevailed, even if such party did not prevail in all matters, not necessarily
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<PAGE> 42
the one in whose favor a judgment is rendered. Further, in the event of any
default by a party under this Agreement, such defaulting party shall pay all
the expenses and attorneys' fees incurred by the other party in connection with
such default, whether or not any litigation or arbitration is commenced.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
executed as of the Effective Date first written above.
PROVIDER: MENTAL HEALTH COOPERATIVE, INC.
By: /s/ PAM WOMACK
-----------------------------------
Name: Pam Womack
---------------------------------
Title:
---------------------------------
By: /s/ WILLIAM F. MOYNIHAN
-----------------------------------
Name: William F. Moynihan
---------------------------------
Title: President of the Board
---------------------------------
MANAGER: TENNESSEE MENTAL HEALTH
COOPERATIVE, INC.
By: /s/ ALLEN TEPPER
-----------------------------------
Name: Allen Tepper
---------------------------------
Title:
---------------------------------
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<PAGE> 43
[EXHIBITS EXCLUDED]
<PAGE> 44
10.17
ADDENDUM TO
MANAGEMENT AND AFFILIATION AGREEMENT
This ADDENDUM TO MANAGEMENT AND AFFILIATION AGREEMENT
("Addendum") is made this 25th day of August, 1995, by and between Mental Health
Cooperative, Inc., a Tennessee not-profit corporation ("Provider"), and
Tennessee Mental Health Cooperative, Inc., a Tennessee for-profit corporation
("Manager").
RECITALS
A. Provider and Manager entered into a Management and Affiliation Agreement
("Agreement") and a Provider Services Agreement ("Services Agreement") as of
April 13, 1995.
B. Provider and Manager entered into the Agreement and Services Agreement
in the anticipation of the expansion of the TennCare program to include the
provision of certain covered services to patients who suffer from serious and
persistent mental illness ("SPMI").
C. The expansion of the TennCare program to the SPMI patients has been
delayed by the State of Tennessee but the parties hereto wish to implement the
Agreement and Services Agreement as hereinafter provided.
NOW, THEREFORE, Manager and Provider, intending to be legally bound hereby,
agree as follows:
AGREEMENT
1. Effective Date. The effective date of the Agreement and Services
Agreement shall be September 1, 1995 ("Effective Date"). Section 1.1.1 of the
Agreement entitled "Conditions Precedent" is hereby declared null and void and
of no force and effect whatsoever.
2. Letter of Credit. Section 3.1 of the Agreement requires Manager to
obtain an irrevocable letter of credit ("Letter of Credit") on or before the
Effective Date of the Agreement. The parties hereto agree that the obligation to
obtain the Letter of Credit shall be deferred until otherwise mutually agreed to
by the parties. In lieu of the Letter of Credit, upon the Effective Date, PMR
shall loan $500,000 to Manager for 1 year and shall provide a Line of Credit to
Manager in the amount of $500,000. PMR shall secure the Line of Credit by
maintaining $500,000 in cash or cash equivalents in its bank accounts or by
having $500,000 available on PMR's Line of Credit from its banks or any
combination thereof totaling $500,000. PMR's Line of Credit to Manager shall
terminate on the latter of the first anniversary of the Agreement or the
implementation of the expansion of the TennCare Program to SPMI patients. The
$500,000 loan and $500,000 Line of Credit from PMR to Manager shall be available
to pay Subcapitated Payments to Case Managers under paragraph 5.4.1 of the
Agreement.
<PAGE> 45
3. Other Case Managers. Section 2.2 of the Agreement allows Manager to
contract with other Case Managers other than Provider so long as Provider gives
its prior written approval. The parties hereto agree that such prior written
approval shall only be needed for Case Managers providing services in the State
of Tennessee and no such prior written approval shall be required for contracts
which Manager enters into with Case Managers who provide services exclusively
outside of the State of Tennessee.
4. Provider's Board Positions. Paragraph 4.2.1 (iii) of the Agreement is
hereby amended to read, "Manager shall be permitted to designate two (2)
additional members of the Provider's Board of Directors (not to exceed a total
of three (3) directors, including the director to be designated under Paragraph
4.2.1(ii) hereof), which persons may or may not be employees or affiliates of
Manager or PMR, provided, however, that Provider shall have the right to approve
each designee, which approval shall not be unreasonably withheld by Provider."
5. Independent Annual Audit. Manager shall cause its financial records to
be independently audited on an annual basis, the cost of which shall be paid for
by Manager.
6. Case Management Network. Manager shall use its best efforts to create a
network of entities to provide case management services, both inside and outside
of the State of Tennessee, and to have these entities become Case Managers under
the terms of the Agreement.
7. Effect of Addendum, Definitions. All other terms and conditions of the
Agreement shall remain in full force and effect except as modified herein. The
definitions of the Agreement shall apply to this Addendum.
7.1 Wherever in the Agreement the phrase "related psychiatric
services" appears, it shall mean "other psychiatric services."
7.2 In Paragraph 5.1.3 of the Agreement, it is agreed that the
"Capitated Payment" shall include payments received for other psychiatric
services rendered by Provider.
8. Establishing Present Book Value for Old Asset Depreciation. Pursuant to
Paragraph 5.1.6 of the Agreement, each Case Manager shall be paid certain
amounts from the Capitated Payments and the Grants for depreciation of certain
assets. Within twenty (20) days of the Effective Date, Case Manager shall submit
to Manager a schedule of all assets eligible for payments for Old Asset
Depreciation and the schedule shall include (1) the initial book value of each
asset, (2) the dollar amount which each asset has been depreciated by Case
Manager through the Effective Date and (3) the difference thereof, which is the
present book value, shall be eligible for Old Asset Depreciation over the
asset's remaining useful life as originally determined at the time of
acquisition by Case Manager.
2
<PAGE> 46
9. Quarterly Review of Financial Arrangements. The following shall be added
as Paragraph 5.5.4 to the Agreement: "A breach of this Paragraph 5.5 shall be
subject to Paragraph 1.3.9 hereof."
SIGNATURES TO FOLLOW ON PAGE FOUR
3
<PAGE> 47
IN WITNESS WHEREOF, the parties hereto have caused this Addendum to be
executed on the day and year first written above.
PROVIDER: MENTAL HEALTH COOPERATIVE, INC.,
a Tennessee not-profit corporation,
By: /S/ PAM WOMACK
Name: Pam Womack
Title: Executive Director
By: _______________________________
Name: ________________________
Title: _______________________
MANAGER: TENNESSEE MENTAL HEALTH COOPERATIVE,
INC., a Tennessee for-profit corporation
By: /S/ ALLEN TEPPER
Name: Allen Tepper
Title: _______________________
<PAGE> 1
EXHIBIT 10.15
PROVIDER SERVICES AGREEMENT
BETWEEN
TENNESSEE MENTAL HEALTH COOPERATIVE, INC.
AND
MENTAL HEALTH COOPERATIVE, INC.
<PAGE> 2
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C> <C>
ARTICLE I
DEFINITIONS
1.1 Capitation................................................................. 2
1.2 Covered Persons............................................................ 2
1.3 Covered Services........................................................... 2
1.4 Emergency Care............................................................. 2
1.5 Health Professional........................................................ 2
1.6 Management Agreement....................................................... 2
1.7 Necessary.................................................................. 2
1.8 Participating Provider .................................................... 2
1.9 Payer...................................................................... 3
1.10 Payer Plan................................................................. 3
1.11 Payer Plan Agreements...................................................... 3
1.12 Preauthorization........................................................... 3
1.13 TennCare................................................................... 3
ARTICLE II
PAYER PLAN AGREEMENTS
2.1 Contract Authority......................................................... 3
2.2 Agreement Compliance....................................................... 4
2.3 Policies................................................................... 4
2.4 Copies..................................................................... 4
ARTICLE III
DUTIES AND OBLIGATIONS OF PROVIDER
3.1 Participation in Payer Plan................................................ 4
3.2 Cooperation with Utilization Management, Quality
Improvement, and Other Managed Care Requirements........................... 4
3.3 Managed Care Efforts....................................................... 5
3.4 No Guarantee of Utilization................................................ 5
3.5 Referrals.................................................................. 5
3.6 Provider Services.......................................................... 5
3.7 Confidentiality............................................................ 5
3.7.1 Acknowledgment of Proprietary Interest......................... 5
3.7.2 Covenant Not to Divulge Trade Secrets.......................... 6
3.7.3 Return of Materials at Termination............................. 6
3.7.4 Application to Provider Representatives........................ 6
3.8 Reporting Changes of Provider Information.................................. 6
3.9 Changes in Services........................................................ 6
3.10 Notice of Lawsuit.......................................................... 6
3.11 Site Visits................................................................ 6
3.12 Preauthorization of Services............................................... 7
3.13 Emergency Services......................................................... 7
</TABLE>
-i-
<PAGE> 3
<TABLE>
<S> <C> <C>
ARTICLE IV
DUTIES AND OBLIGATIONS OF TMHC
4.1 General.................................................................... 7
4.2 Administrative Services.................................................... 7
4.3 Compensation............................................................... 7
4.4 Utilization Management and Quality Improvement............................. 7
4.5 Participating Payer List................................................... 7
4.6 Medical Records............................................................ 7
4.7 Marketing Materials........................................................ 7
4.8 Provider-Patient Relationship.............................................. 8
4.9 Verification of Coverage................................................... 8
4.10 Liaison.................................................................... 8
4.11 Reports.................................................................... 8
ARTICLE V
REPRESENTATIONS AND WARRANTIES
5.1 Provider Representations and Warranties.................................... 8
5.1.1 Certifications................................................. 8
5.1.2 Corporate Capacity............................................. 8
5.1.3 Corporate Powers............................................... 8
5.2 TMHC Representations and Warranties........................................ 9
5.2.1 Corporate Capacity............................................. 9
5.2.2 Power and Authority............................................ 9
ARTICLE VI
CAPITATED SERVICES AND COMPENSATION
6.1 Responsibility for Capitated Services...................................... 10
6.2 Accessibility of Services.................................................. 10
6.3 Employment of Health Professionals......................................... 10
6.4 Subcontracting Prohibited.................................................. 10
6.5 Disciplinary Action........................................................ 11
6.6 Identification of Covered Persons.......................................... 11
6.7 Calculation of Capitation.................................................. 11
6.8 Payment of Capitation...................................................... 11
6.9 Payment Adjustments........................................................ 12
6.10 Compensation of Provider Employees......................................... 12
6.11 No Additional Payments..................................................... 12
6.12 Hold Harmless.............................................................. 12
ARTICLE VII
REGULATORY COMPLIANCE
7.1 Licenses................................................................... 12
7.2 Notice..................................................................... 12
</TABLE>
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<PAGE> 4
<TABLE>
<S> <C> <C>
ARTICLE VIII
QUALITY MANAGEMENT AND UTILIZATION REVIEW
8.1 Quality Management Program................................................. 13
8.2 Quality Studies............................................................ 13
8.3 Utilization Management..................................................... 13
8.4 Coordination of Programs................................................... 13
8.5 Data Reports............................................................... 13
ARTICLE IX
MEDICAL RECORDS AND CONFIDENTIALITY
9.1 Maintenance of Medical Records............................................. 13
9.2 Transferability............................................................ 13
9.3 Access to Medical Records.................................................. 14
9.4 Confidentiality of Medical Records......................................... 14
ARTICLE X
INDEPENDENT RELATIONSHIP
10.1 Status of Parties.......................................................... 14
10.2 Third Parties.............................................................. 14
ARTICLE XI
INSURANCE AND INDEMNITY
11.1 No Liability............................................................... 14
11.2 Indemnification............................................................ 14
11.3 Insurance.................................................................. 15
ARTICLE XII
COVERED PERSON COMPLAINTS AND GRIEVANCES
ARTICLE XIII
PARTICIPATION IN ALTERNATIVE HEALTH CARE PROGRAMS
ARTICLE XIV
TERM AND TERMINATION
14.1 Termination Date........................................................... 16
14.2 Termination by Agreement................................................... 16
14.3 Termination for Cause...................................................... 16
14.4 Adverse Effect Upon Tax-Exempt Status...................................... 17
14.5 Termination Due to Legislative or Administrative Changes................... 17
14.6 Continuation............................................................... 18
14.7 Post-Termination Matters................................................... 18
14.8 Other Remedies............................................................. 18
14.9 Avoidance of Termination................................................... 18
</TABLE>
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<PAGE> 5
<TABLE>
<S> <C> <C>
ARTICLE XV
ARBITRATION
15.1 Arbitration................................................................ 18
ARTICLE XVI
MISCELLANEOUS
16.1 Exhibits................................................................... 19
16.2 Entire Agreement........................................................... 19
16.3 Modification of this Agreement............................................. 20
16.4 Assignment................................................................. 20
16.5 Notice..................................................................... 20
16.6 Attorneys Fees............................................................. 21
16.7 Severance of Invalid Provisions............................................ 21
16.8 Waiver..................................................................... 21
16.9 Captions................................................................... 21
</TABLE>
EXHIBIT 1.3 - COVERED SERVICES
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<PAGE> 6
PROVIDER SERVICES AGREEMENT
BETWEEN
TENNESSEE MENTAL HEALTH COOPERATIVE, INC.
AND
MENTAL HEALTH COOPERATIVE, INC.
THIS PROVIDER SERVICES AGREEMENT (the "Agreement") is made and
entered into as of the 13th day of April, 1995 (the "Effective Date"),
by and between TENNESSEE MENTAL HEALTH COOPERATIVE, INC., a Tennessee
corporation (hereinafter referred to as "TMHC"), and MENTAL HEALTH COOPERATIVE,
INC., a Tennessee nonprofit corporation (hereinafter referred to as "Provider"),
which are collectively referred to hereinafter as "the Parties."
W I T N E S S E T H
WHEREAS, TMHC is organized for the primary purpose of developing and
promoting a coordinated and cost effective program for the distribution and
delivery of mental health care to the residents of Tennessee who suffer from
serious and permanent mental illness ("SPMI") through contracts with providers;
WHEREAS, TMHC and Provider will contract with managed care
organizations, health maintenance organizations, and other payers to provide
mental health services for SPMI individuals covered by the payers' health care
plans;
WHEREAS, TMHC desires to enter agreements with providers of case
management and other mental health care services who will agree to (i) comply
with the compensation and utiliza tion management mechanisms established by
TMHC, (ii) participate in and comply with the protocols, policies, and
procedures that may be adopted from time to time by TMHC and contracted payers,
and (iii) join TMHC in its commitment to satisfy needs of individuals with SPMI
in such provider's service area, through a cost-effective, case management
system of mental health care services;
WHEREAS, Provider is duly certified, licensed, and otherwise
qualified to provide case management services in the State of Tennessee, whose
licenses, certifications, and qualifications are without limitation or
restriction, and who desires to provide services as described herein; and
WHEREAS, Provider desires to enter into an agreement with TMHC to
cooperate with TMHC in providing case management and other mental health care
services to SPMI individuals covered by the contracted payers upon the terms and
conditions set forth in this Agreement.
NOW, THEREFORE, for and in consideration of the promises and mutual
covenants herein contained and other good and valuable consideration, it is
mutually agreed by and between the parties hereto as follows:
<PAGE> 7
ARTICLE I
DEFINITIONS
1.1 Capitation shall mean the compensation paid Provider by TMHC
under this Agreement for providing or arranging for the provision of Covered
Services. The term "Capitation" shall include capitated, case rate, and other
payments.
1.2 Covered Persons shall mean those persons who are eligible to
receive case management and other mental health care services pursuant to
enrollment in a Payer Plan.
1.3 Covered Services shall mean the case management and other mental
health care services described in Exhibit 1.3.
1.4 Emergency Care shall mean bona fide emergency services provided
after the sudden onset of a condition manifesting itself by acute symptoms of
sufficient severity, including severe pain, such that the absence of immediate
medical, psychiatric, and case management attention could reasonably be expected
to result in:
1.4.1 placing the person's health in serious jeopardy;
1.4.2 serious impairment to bodily functions; or
1.4.3 serious dysfunction of any bodily organ or part.
1.5 Health Professional means any physician, psychiatrist,
psychologist, clinical social worker, case manager, licensed counselor, nurse,
physician extender (e.g., nurse practitioner, physician assistant), or other
allied health professional, who is an employee or independent contractor of
Provider and provides certain Covered Services to Covered Persons pursuant to an
agreement with Provider or a Payer.
1.6 Management Agreement shall mean that certain Management and
Affiliation Agreement dated the date of this Agreement between TMHC and
Provider, pursuant to which TMHC shall provide full management services for
Provider.
1.7 Necessary services and/or supplies shall mean the use of
services or supplies as provided by a Provider required to identify or treat a
Covered Person's SPMI Condition and which, as determined by TMHC or Payer are:
(1) consistent with the symptoms or diagnosis and treatment of SPMI patients;
(2) appropriate with regard to standards of good mental health practice
established by the organized community of mental health and case management
providers; (3) not solely for convenience of such Covered Person, his or her
physician, hospital, or another health care provider; and (4) the most
appropriate supply or level of service needed to provide Covered Services to
such Covered Persons.
1.8 Participating Provider shall mean a Health Professional that has
entered into a written agreement with a Payer and/or Payer Plan to participate
in a health care provider
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<PAGE> 8
panel established by Payer and/or Payer Plan and to comply with the
reimbursement mechanisms and utilization management procedures established by
Payer and/or Payer Plan.
1.9 Payer shall mean any entity, including, but not limited to,
health maintenance organizations and other managed care organizations, that has
contracted with TMHC and/or Provider to obtain Covered Services for its
enrollees and that is responsible for paying the cost of such Covered Services.
1.10 Payer Plan shall mean the health care programs established by
any Payer that include the delivery of Covered Services to Covered Persons.
1.11 Payer Plan Agreements shall mean those certain agreements
between (i) TMHC and/or Provider, and (ii) Payers that describe the terms and
conditions for the provision of Covered Services to Covered Persons by TMHC
and/or Provider in accordance with each Payer's Payer Plan.
1.12 Preauthorization shall mean the authorization granted to
Provider by TMHC to provide specific Covered Services to a Covered Person. TMHC
shall supply Provider with protocols that set forth those Covered Services for
which Preauthorization must be obtained and the procedures for obtaining such
Preauthorization.
1.13 TennCare shall mean the medical assistance program for
individuals who are eligible for Medicaid or are uninsured that is administered
by the State of Tennessee pursuant to section 1115(a) of the Social Security
Act.
ARTICLE II
PAYER PLAN AGREEMENTS
2.1 Contract Authority. TMHC and Provider shall jointly develop
contracts with Payers for the provision of Covered Services to Covered Persons
(referred to herein as "Payer Plan Agreements") that are mutually acceptable to
TMHC and Provider. If TMHC, Provider, and the applicable Payer determine that
Provider will not directly execute a Payer Plan Agreement, then TMHC shall have
the authority on behalf of Provider to execute, deliver, and amend those Payer
Plan Agreements that have received the prior written approval of Provider. TMHC
shall notify Provider not less than fourteen (14) days in advance of the
effective date of any such Payer Plan Agreement and provide Provider with a
summary of its terms and conditions. TMHC shall use its best efforts to ensure
that the Payer Plan Agreements are assignable to the provider(s) of case
management services.
To the extent required by TMHC, Provider, or any Payer, Provider
shall execute, deliver, and thereby become a direct party to any Payer Plan
Agreement that is mutually acceptable to and has been approved by TMHC,
Provider, and the Payer. If Provider executes a Payer Plan Agreement directly
with a Payer, then Provider shall assign to TMHC the Capitation payments to be
received from the Payer for distribution in accordance with Article V of the
Management Agreement.
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<PAGE> 9
If TMHC negotiates a Payer Plan Agreement with a Payer that has not
been approved by Provider, TMHC shall notify Provider not less than sixty (60)
days in advance of the effective date of any such proposed Payer Plan Agreement
and provide Provider with a summary of the terms and conditions of such Payer
Plan Agreement. Provider shall notify TMHC of Provider's acceptance or rejection
of such Payer Plan Agreement on or before thirty (30) days after Provider's
receipt of such summary materials. Rejection of such a proposed Payer Plan
Agreement shall not terminate Provider's obligations under this Agreement with
respect to Covered Services to be provided to Covered Persons of other Payers
under Payer Plan Agreements previously or subsequently provided and/or executed
by Provider.
2.2 Agreement Compliance. Provider agrees to comply with all
operational and procedural rules and regulations promulgated by those Payers
whose Payer Plan Agreements Provider has approved and/or executed pursuant to
Section 2.1 hereto or that are otherwise applicable pursuant to regulations
promulgated by the State of Tennessee. TMHC shall notify Provider in writing of
any changes that such Payers or the State of Tennessee may make to such
operational or procedural rules and regulations.
2.3 Policies. Provider agrees to be bound by all of the policies,
rules, and regulations adopted by TMHC and/or Payer from time to time in
connection with Payer Plans, as they relate to Payer Plan Agreements and this
Agreement. TMHC or Payer shall notify Provider of such policies, rules,
regulations, and amendments thereto.
2.4 Copies. Copies of TMHC and Payer policies, rules, and
regulations and any other pertinent documents pertaining to the Payer Plan
Agreements and related Payer Plans shall be provided to and be available for
examination by Provider upon request.
ARTICLE III
DUTIES AND OBLIGATIONS OF PROVIDER
3.1 Participation in Payer Plan. Pursuant to Payer Plan Agreements
executed by TMHC and/or Provider in accordance with Section 2.1 hereof, Provider
shall participate in Payer Plans and shall provide or arrange for the provision
of Covered Services to Covered Persons. Provider and Provider's staff and
administrative personnel shall treat Covered Persons promptly, fairly, and
courteously. TMHC and Provider shall portray each other in a positive light to
Covered Persons and the public. Provider shall, consistent with the managed
care, peer review, and quality assurance programs of TMHC and Payers, provide a
level of care that is both Necessary and consistent with the quality of care
established by TMHC protocols and guidelines.
3.2 Cooperation with Utilization Management, Quality Improvement,
and Other Managed Care Requirements. Provider shall comply with the utilization
management and quality improvement plan and managed care requirements,
procedures, and protocols established by TMHC and/or Payer, including, but not
limited to, Preauthorization of Covered Services, admissions for inpatient and
outpatient hospital services, concurrent review and discharge planning of
patients receiving Covered Services, prior authorization
-4-
<PAGE> 10
of referrals, claims review, peer review, and complaint resolution as TMHC or
Payer may from time to time notify Provider.
3.3 Managed Care Efforts. Provider shall utilize managed care
methods and practices consistent with sound medical and case management practice
as determined in accordance with accepted community professional standards for
rendering quality care. Provider shall abide by the procedures and criteria
adopted by TMHC and Payer to monitor the necessity and quality of Covered
Services provided to Covered Persons and cooperate fully with TMHC and Payer in
the development of appropriate approaches to managed care consistent with sound
medical practice.
3.4 No Guarantee of Utilization. Provider acknowledges that TMHC
does not warrant or guarantee that Provider shall be utilized by a Covered
Person or any number of Covered Persons within any Payer Plan.
3.5 Referrals. Consistent with the direction and Preauthorization by
TMHC and with sound medical practice and in accordance with accepted community
professional standards for rendering quality medical care and case management
services, Provider shall use Provider's best effort to make referrals of Covered
Persons to other Participating Providers in the Payer Plans. TMHC shall provide
a list of Participating Providers to Provider.
3.6 Provider Services. Provider shall provide Covered Services to
Covered Persons in accordance with the terms set forth in this Agreement, the
applicable Payer Plan Agreement, and in the same manner, in accordance with the
same standards, and within the same time availability as provided to any of
Provider's patients that are not Covered Persons. Provider shall not refuse to
accept any Covered Person as a patient on the basis of race, color, religion,
sex, national origin, Payer Plan, health status, or medical condition of such
patient, except with the prior approval of TMHC. Provider shall assist TMHC in
monitoring accessibility to care for Covered Persons, including scheduling of
appointments and waiting times. Provider shall provide only those Covered
Services that are Necessary.
3.7 Confidentiality.
3.7.1 Acknowledgment of Proprietary Interest. Provider
recognizes the proprietary interest of TMHC in any Trade Secrets of
TMHC. As used herein, the term "Trade Secrets" includes all of
TMHC's confidential or proprietary information, including without
limitation any confidential information of TMHC encompassed in any
reports, protocols, plans, proposals, codes, marketing and sales
programs, financial projections, cost summaries, pricing formulae,
client contracts, client lists, and all concepts, ideas, materials,
or information related to the business of TMHC or TMHC's clients
that have not previously been released to the public at large by
duly authorized representatives of TMHC, whether or not such
information would be protectable as a trade secret or the copying of
which would be enjoined or restrained by a court as constituting
unfair competition. Provider acknowledges and agrees that any and
all Trade Secrets of TMHC learned by Provider during the
-5-
<PAGE> 11
course of its engagement by TMHC or otherwise, whether developed by
TMHC alone or in conjunction with others, shall be and are the
property of TMHC.
3.7.2 Covenant Not to Divulge Trade Secrets. Provider
acknowledges and agrees that TMHC is entitled to prevent the
disclosure of Trade Secrets of TMHC. As a portion of the
consideration for the continuing engagement of Provider hereunder
and for the compensation being paid to Provider by TMHC, Provider
agrees at all times during the term of said engagement by TMHC, and
thereafter, to hold said Trade Secrets in strictest confidence and
not to disclose same or allow them to be disclosed to any person,
firm, or corporation, other than to persons engaged by TMHC to
further the business of TMHC, and not to use the same, except in the
pursuit of the business of TMHC, without the prior written consent
of TMHC.
3.7.3 Return of Materials at Termination. In the event
of any termination of this Agreement, with or without cause,
Provider shall promptly deliver to TMHC all materials, property,
documents, data, and other information belonging to TMHC or
pertaining to Trade Secrets. Provider shall not take any materials,
property, documents, or other information or any reproduction or
excerpt thereof, belonging to TMHC or containing or pertaining to
Trade Secrets.
3.7.4 Application to Provider Representatives. This
Section 3.7 shall apply to Provider and any director, officer,
employee, independent contractor, or agent of Provider and shall
survive the termination of this Agreement.
3.8 Reporting Changes of Provider Information. Provider shall use
Provider's best efforts to notify TMHC in writing, at least thirty (30) calendar
days prior to any change in Provider's business address, business telephone
number, office hours, tax identification number, malpractice insurance carrier
or coverage, State of Tennessee license number, or any DEA registration number.
3.9 Changes in Services. If Provider must involuntarily limit or
discontinue any Covered Services, it will provide TMHC with written notice as
soon as possible upon Provider's learning of the limitation or discontinuation.
3.10 Notice of Lawsuit. Provider agrees to notify TMHC of any suits
or claims filed against Provider by or relating to a Payer or a Covered Person,
within five working days of Provider's receipt of notice of such claim having
been filed or such action having been brought. Provider shall provide TMHC with
any information regarding such claims or actions reasonably requested by TMHC,
subject to the law regarding confidentiality of patient records, and not
including any information that would otherwise be privileged under law.
3.11 Site Visits. Provider shall permit TMHC or Payer to conduct
on-site inspections of Provider's facilities to review the site and Provider's
record keeping practices in order to ensure conformance with standards of TMHC
or Payer.
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3.12 Preauthorization of Services. For all non-Emergency Services
for which verification of eligibility or Preauthorization is required, Provider
shall secure TMHC's authorization before providing Covered Services pursuant to
the requirements set forth in TMHC protocols, this Agreement and the Payer Plan
Agreements. If Preauthorization cannot be obtained due to a holiday, weekend, or
after hours, Provider agrees to notify TMHC the first working day after
rendering the Covered Services.
3.13 Emergency Services. Provider shall use its best efforts to
notify TMHC within 48 hours of providing Emergency Services or providing Covered
Services to a Covered Person with an emergency. Provider shall provide Emergency
Services when Necessary and shall not be required to first obtain
Preauthorization from TMHC.
ARTICLE IV
DUTIES AND OBLIGATIONS OF TMHC
4.1 General. TMHC shall develop, execute, and deliver Payer Plan
Agreements with Payers that meet the requirements of Section 2.1. Pursuant to
such Payer Plan Agreements, Provider shall provide or arrange for the provision
of Covered Services to Covered Persons. TMHC shall furnish Provider with a
written summary of the terms and conditions of each proposed Payer Plan
Agreement. The summaries of all Payer Plan Agreements approved and/or executed
by Provider pursuant to Section 2.1 shall become appendices to this Agreement.
4.2 Administrative Services. TMHC shall perform the administrative,
claims processing, marketing, advertising, member services, quality management,
and utilization management services as described more fully in the Management
Agreement.
4.3 Compensation. TMHC shall compensate Provider for Covered
Services, in accordance with the provisions of Article VI.
4.4 Utilization Management and Quality Improvement. TMHC shall
provide Provider with written information concerning utilization management,
quality improvement, and complaint resolution plans administered by TMHC or a
Payer and any modifications thereto.
4.5 Participating Payer List. TMHC shall provide Provider with a
current list of Payers who have executed Payer Plan Agreements under which
Provider is obligated to provide Covered Services to Covered Persons and
periodically shall update such list.
4.6 Medical Records. TMHC shall, and shall seek Payer's agreement
to, maintain any medical records to which it or Payer has access under this
Agreement in confidence and in accordance with applicable law.
4.7 Marketing Materials. TMHC shall arrange for Payers to list
Provider as a Participating Provider in the specialty area(s) designated by
Provider in marketing and
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informational materials developed and distributed by those Payers whose
contracts Provider has approved and/or executed pursuant to Section 2.1.
4.8 Provider-Patient Relationship. TMHC shall not intervene in any
way or manner with the rendition of services by Provider, it being understood
and agreed that the traditional relationship between mental health care provider
and patient shall be maintained.
4.9 Verification of Coverage. TMHC shall provide Provider adequate
and timely verification of eligibility of Covered Persons and Preauthorization
of Covered Services to be provided to Covered Persons. In order that Provider
may verify coverage for particular Covered Persons, TMHC shall establish a
system for verification and Preauthorization.
4.10 Liaison. TMHC shall maintain continuing liaison and close
cooperation between TMHC, Provider, and Payers.
4.11 Reports. TMHC shall provide Provider with utilization reports
that it prepares in relation to Provider and Covered Persons that have utilized
Provider pursuant to this Agreement in order that Provider may better manage the
cost of services utilized by Covered Persons.
ARTICLE V
REPRESENTATIONS AND WARRANTIES
5.1 Provider Representations and Warranties.
5.1.1 Certifications. Provider represents and warrants
that it has all certifications, licenses, permits, and other
qualifications required by federal and state law to operate its
facilities and provide Covered Services, and all certifications and
accreditations necessary for Provider to participate as a provider
of services in TennCare.
5.1.2 Corporate Capacity. Provider represents and
warrants that it is a Tennessee non-profit corporation validly
existing in good standing under the laws of the State of Tennessee.
Provider has the requisite power and authority to enter into this
Agreement, to perform its obligations hereunder, and to conduct its
businesses as now being conducted. Provider is duly authorized,
qualified, and licensed under all applicable laws, regulations,
ordinances, and orders of governmental authorities having
jurisdiction to own its properties and conduct its business in the
place and in the manner now conducted.
5.1.3 Corporate Powers. Provider represents and warrants
that the execution, delivery, and performance of this Agreement by
Provider and the consummation of the transactions contemplated
herein by Provider:
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(1) are within Provider's corporate powers and the
terms of Provider's Charter or Articles of
Incorporation, Bylaws or any amendments thereto,
and have been duly and properly authorized by all
appropriate corporate action;
(2) to the best of Provider's knowledge, will neither
conflict with nor result in any breach or
contravention of, nor permit the acceleration of
the maturity of, or the creation of any lien
under, any indenture, mortgage, agreement, lease,
contract, instrument, or understanding to which
Provider is a party or by which Provider is bound,
including without limitation the Basic Grants from
the Tennessee Department of Mental Health and
Mental Retardation;
(3) will not violate any judgment, decree, order,
writ, or injunction of any court or governmental
authority to which Provider may be subject; and
(4) are and will constitute the valid and legally
binding obligation of Provider, enforceable in
accordance with the terms of this Agreement,
except as enforceability may be restricted,
limited, or delayed by applicable bankruptcy or
other laws affecting creditors' rights generally
and except as enforceability may be subject to
general principles of equity.
5.2 TMHC Representations and Warranties.
5.2.1 Corporate Capacity. TMHC represents and warrants
that it is a Tennessee corporation validly existing in good standing
under the laws of the State of Tennessee. TMHC has the requisite
power and authority to enter into this Agreement, to perform its
obligations thereunder, and to conduct its businesses as now being
conducted. TMHC is duly authorized, qualified, and licensed under
all applicable laws, regulations, ordinances, and orders of
governmental authorities having jurisdiction to own its properties
and conduct its business in the place and in the manner now
conducted.
5.2.2 Power and Authority. TMHC represents and warrants
that the execution, delivery, and performance of this Agreement by
TMHC and the consummation of the transactions contemplated herein by
TMHC:
(1) are within TMHC's corporate powers and the terms
of TMHC's Charter or Articles of Incorporation,
Bylaws or any amendments thereto, and have been
duly and properly authorized by all appropriate
corporate action;
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(2) to the best of TMHC's knowledge, will neither
conflict with nor result in any breach or
contravention of, nor permit the acceleration of
the maturity of, or the creation of any lien
under, any indenture, mortgage, agreement, lease,
contract, instrument, or understanding to which
TMHC is a party or by which TMHC is bound;
(3) will not violate any judgment, decree, order,
writ, or injunction of any court or governmental
authority to which TMHC may be subject; and
(4) are and will constitute the valid and legally
binding obligation of TMHC, enforceable in
accordance with the terms of this Agreement,
except as enforceability may be restricted,
limited, or delayed by applicable bankruptcy or
other laws affecting creditors' rights generally
and except as enforceability may be subject to
general principles of equity.
ARTICLE VI
CAPITATED SERVICES AND COMPENSATION
6.1 Responsibility for Capitated Services. Subject to verification
of eligibility, Preauthorization, and applicable utilization management
procedures, it is agreed by the parties hereto that all Covered Services
required by Covered Persons pursuant to a Payer Plan Agreement are to be
provided by Provider. Provider shall be responsible for the total costs of
Covered Services when they are provided to Covered Persons for whom Provider is
entitled to a Capitation payment.
6.2 Accessibility of Services. Provider shall make readily available
and accessible Covered Services to Covered Persons at the locations designated
by TMHC in accordance with the Management Agreement during normal business
hours, and Provider shall be reasonably available to provide Covered Services
after hours. Emergency Services shall be available on a twenty-four hours a
day/seven days a week basis.
6.3 Employment of Health Professionals. Provider shall employ or
contract with such employees, Health Professionals, and suppliers as shall be
necessary to provide Covered Services to Covered Persons. Provider shall be
responsible for paying employees, Health Professionals, and suppliers for
Covered Services rendered. TMHC shall assist Provider in the recruitment,
retention, and evaluation of such employees, Health Professionals, and suppliers
in accordance with the Management Agreement.
6.4 Subcontracting Prohibited. Provider shall not contract or
subcontract with other case management or psychiatric service organizations for
the provision of Covered Services to Covered Persons pursuant to a Payer Plan,
except with the prior written consent of TMHC which consent shall not
unreasonably be withheld.
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6.5 Disciplinary Action. In the event an employee, Health
Professional, or supplier fails to comply with the applicable provisions of this
Agreement, TMHC shall so notify Provider. Provider shall use its best efforts to
bring such individual or supplier into compliance with the applicable provisions
of the Agreement. Provider agrees to reassign such individual or supplier from
the activities pursuant to this Agreement or terminate such employment or
arrangement in the event that such individual or supplier fails to comply with
the applicable provisions of this Agreement within thirty (30) days of Provider
providing such individual or supplier with notice of noncompliance.
6.6 Identification of Covered Persons. In order to identify Covered
Persons and determine compensation under this Agreement, TMHC shall provide
Provider with the following information regarding Covered Persons within two (2)
days after receipt from the applicable Payer:
(a) the names of the Covered Persons who are currently
enrolled in a Payer Plan;
(b) the names of Covered Persons who have terminated their
enrollment in a Payer Plan and the effective date of
such termination;
(c) the Capitation rates payable to Provider for Covered
Persons who are enrolled in a Payer Plan;
(d) the names of new Covered Persons and copies of their
enrollment forms; and
(e) all other necessary and pertinent information regarding
Covered Persons for whom Provider is responsible for
providing Covered Services.
For the purpose of calculating Capitation payments due under this
Agreement, the number of Covered Persons will be determined when the necessary
information is received from the applicable Payers.
6.7 Calculation of Capitation. Each month, TMHC shall pay a
Capitation payment as payment in full for Covered Services to be provided or
made available to Covered Persons who are eligible to receive Covered Services
during such month. Capitation payments shall be calculated as set forth in
Article V of the Management Agreement and Exhibit G thereto.
6.8 Payment of Capitation. Provided that the parties have given the
remittance clearinghouse the appropriate instructions for such payments in the
manner set forth in Article V of the Management Agreement, Capitation payments
shall be made no later than two (2) days after receipt of the capitated or other
payments from the Payer for each month during the term hereof in which the
Provider provides or arranges for the provision of Covered Services for Covered
Persons who are eligible to receive such Covered Services during such month.
TMHC, however, may vary the time of payment in accordance with the terms of a
particular Payer Plan.
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6.9 Payment Adjustments. TMHC shall make retroactive Capitation
payment adjustments for Covered Persons found either to be eligible (additions)
or not to be eligible (deletions) to receive Covered Services during the month
to which the adjustments apply. Such adjustments shall be made in accordance
with the applicable Payer Plan Agreement. Retroactive Capitation payment
adjustments for deletions will not exceed ninety (90) days. Provider shall be
responsible for seeking payment for services rendered directly from persons
determined retroactively to be ineligible for Covered Services.
6.10 Compensation of Provider Employees. Provider shall be
responsible for compensating and shall compensate its Health Professionals and
suppliers for Covered Services rendered to Covered Persons, regardless of
whether the Capitation payments made hereunder are sufficient for such purposes.
Notwithstanding any other provision of this Agreement, should Provider not pay
its Health Professionals, or suppliers in a timely manner for Covered Services
rendered, TMHC may, after conferring with Provider, make such payments and
withhold such amounts paid from Provider's monthly Capitation payment.
6.11 No Additional Payments. Provider agrees to accept the monthly
Capitation payment from TMHC as payment in full for Covered Services rendered
and not to seek additional payments or compensation from Covered Persons
regardless of whether or not payment is received from TMHC.
6.12 Hold Harmless. Provider agrees that in no event, including, but
not limited to nonpayment by TMHC or TMHC's breach of this Agreement, shall any
Covered Person be liable for any sums owed by TMHC, and neither Provider, nor
its agents or trustees (including TMHC pursuant to the Management Agreement),
shall bill, charge, collect a deposit or other sum, or seek compensation,
remuneration, reimbursement from or maintain any action at law or have any other
recourse against, or make any surcharge upon, a Covered Person or other person
acting on a Covered Person's behalf to collect sums owed by TMHC. The
obligations set forth in this Section 6.12 shall survive termination of this
Agreement regardless of the cause giving rise to such termination and shall be
construed to the benefit of Covered Persons, and the provisions of this Section
6.12 shall supersede any oral or written agreement to the contrary now existing
or hereafter entered into between Provider and TMHC or any persons acting on
their behalf.
ARTICLE VII
REGULATORY COMPLIANCE
7.1 Licenses. Provider agrees that it shall maintain all Licenses
required by state or federal law to operate Provider's facilities and provide
Covered Services, and all certifications and accreditations necessary for
Provider to participate as a provider of services in TennCare.
7.2 Notice. Provider agrees to notify TMHC promptly in the event
that any action is taken against any such certifications, licenses, permits, or
accreditations required by state or federal law to operate Provider's facilities
or to provide Covered Services and
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all certifications and accreditations necessary for Provider to participate as a
provider of services in TennCare.
ARTICLE VIII
QUALITY MANAGEMENT AND UTILIZATION REVIEW
8.1 Quality Management Program. Provider shall abide by and comply
with the requirements of and participate in TMHC's quality management program
for services provided to Covered Persons. TMHC shall provide Provider with
copies of the applicable quality management program documents and instructions.
8.2 Quality Studies. Provider shall participate in quality
management studies conducted by TMHC and Provider regarding any procedure or
problem identified by TMHC's quality management program.
8.3 Utilization Management. Provider agrees to comply with the
requirements of and participate in TMHC's utilization review program. The
express purpose of the TMHC's utilization review program shall be to ensure the
delivery of Necessary services. TMHC shall provide Provider with copies of the
applicable utilization review program documents and instructions.
8.4 Coordination of Programs. Provider shall coordinate its
utilization review activities with TMHC's utilization review program instituted
in accordance with the Management Agreement.
8.5 Data Reports. Provider agrees to provide TMHC with all encounter
data with regard to Covered Services provided to Covered Persons, including
utilization and cost data required to meet governmental regulatory requirements,
and such other data as may be reasonably requested by TMHC.
ARTICLE IX
MEDICAL RECORDS AND CONFIDENTIALITY
9.1 Maintenance of Medical Records. Provider shall maintain, with
respect to each Covered Person receiving Covered Services, a medical record in
such form and containing such information as may be required by the laws, rules,
and regulations of the State of Tennessee. Provider shall maintain for at least
five (5) years after the date of delivery of services, and readily make
available to TMHC, applicable Payers, and governmental agencies with regulatory
authority, medical and all related administrative records of Covered Persons
that receive Covered Services, as required by TMHC in accordance with this
Agreement or pursuant to applicable law.
9.2 Transferability. Provider agrees, upon request of a Covered
Person or such person's Participating Provider, subject to applicable disclosure
and confidentiality laws, to transfer the medical records of the Covered Person
to such primary Participating Provider. This Section shall survive the
termination or expiration of this Agreement.
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9.3 Access to Medical Records. Provider shall provide TMHC with all
records necessary to carry out TMHC's utilization management and quality
improvement programs. Subject to applicable disclosure and confidentiality laws,
Provider shall upon request, permit TMHC, each applicable Payer, or any duly
designated third party to inspect and make copies of medical records, books, and
other records of Provider relating to Covered Services provided to Covered
Persons and the cost thereof during the term of this Agreement and thereafter
for a period of time in conformance with state and federal law. TMHC and each
applicable Payer shall be entitled to obtain copies of Covered Persons' medical
records. The provisions of this paragraph shall not waive or limit any
restriction on release or disclosure of patient records established in any other
provision of this Agreement or as otherwise required by state or federal law.
9.4 Confidentiality of Medical Records. Provider agrees that
information concerning Covered Persons shall be kept confidential and shall not
be disclosed to any person except as authorized by Tennessee and federal law.
This confidentiality provision shall remain in effect notwithstanding any
subsequent termination or expiration of this Agreement.
ARTICLE X
INDEPENDENT RELATIONSHIP
10.1 Status of Parties. None of the provisions of this Agreement are
intended to create nor shall be deemed or construed to create any relationship
between TMHC and Provider other than that of independent entities contracting
with each other hereunder solely for the purpose of effecting the provisions of
this Agreement. Neither of the Parties, nor any of their respective officers,
directors, or employees, shall be construed to be the agent, employee, or
representative of the other, except to the extent specifically provided herein
or in the Management Agreement. Neither party is authorized to represent the
other for any purpose whatsoever without the prior consent of the other except
as specifically provided in Articles II and IV hereof.
10.2 Third Parties. This Agreement shall not create, nor be deemed
or construed to create, any rights in any third party, including any Payer or
Covered Person.
ARTICLE XI
INSURANCE AND INDEMNITY
11.1 No Liability. Neither TMHC nor Provider, nor any of their
respective officers, directors, agents, employees, or independent contractors,
shall be liable to third parties for any act or omission of the other party or
its respective officers, directors, agents, employees, or independent
contractors.
11.2 Indemnification. Provider agrees to indemnify and hold harmless
TMHC and TMHC's directors, officers, employees, independent contractors, and
agents from and against any and all claims, demands, causes of action, costs,
and liabilities (including, without limitation, reasonable attorneys' fees),
caused by, resulting from, or attributable to
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the grossly negligent or intentional acts or omissions of the Provider and/or
the Provider's directors, officers, employees, independent contractors, and
agents with respect to the duties and obligations imposed on the Provider
hereunder.
TMHC agrees to indemnify and hold harmless Provider and Provider's
directors, officers, employees, independent contractors, and agents from and
against any and all claims, demands, causes of action, costs, and liabilities
(including, without limitation, reasonable attorneys' fees), caused by,
resulting from, or attributable to the grossly negligent or intentional acts or
omissions of TMHC and/or TMHC's directors, officers, employees, independent
contractors, and agents with respect to the duties and obligations imposed on
TMHC hereunder.
11.3 Insurance. During the term of this Agreement, Provider agrees
to maintain at its sole cost and expense, such policies of general and
professional liability insurance coverage in amounts set forth in the Management
Agreement, as shall be necessary to insure Provider and TMHC or named insured
against any claim for damages arising in connection with Provider's
responsibilities under this Agreement. Provider shall furnish TMHC with copies
of such insurance policies and copies of all amendments and renewals to such
policies so long as this Agreement is in effect. Provider also shall furnish
TMHC with certificates reflecting such coverage and shall provide TMHC with
prior written notice of the cancellation or proposed cancellation thereof for
any cause.
ARTICLE XII
COVERED PERSON COMPLAINTS AND GRIEVANCES
Notification. Provider shall notify TMHC of any complaints received
by Provider with regard to Covered Services rendered by Provider within five (5)
days of receipt of such complaint. Provider shall cooperate with TMHC in the
investigation and resolution of any complaint under the protocols and procedures
established by TMHC for resolution of such complaints.
ARTICLE XIII
PARTICIPATION IN ALTERNATIVE HEALTH CARE PROGRAMS
Provider shall be precluded from participating in or contracting
with any other Payer, health care provider organization, health maintenance
organization, managed care organization, insurer, or otherwise to provide
Covered Services in the State of Tennessee in accordance with the Provider's
covenant not to compete that is contained in Section 9.1 of the Management
Agreement.
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ARTICLE XIV
TERM AND TERMINATION
14.1 Termination Date. This Agreement shall have an initial term
that shall expire on the sixth (6th) anniversary of the Effective Date (the
"Termination Date"). Unless terminated in accordance with the terms of this
Agreement, this Agreement shall automatically renew for successive one (1) year
terms thereafter. If either party intends not to renew the Agreement, the party
must give the other party at least sixty (60) days' prior written notice of such
intent not to renew.
14.2 Termination by Agreement. In the event Provider and TMHC shall
mutually agree in writing, this Agreement may be terminated on the date
specified in such written agreement.
14.3 Termination for Cause. Either party shall have the right, but
not the obligation, to terminate this Agreement at any time for cause by giving
written notice to the other party of such intent to terminate the Agreement.
Cause for termination includes, but is not limited to:
14.3.1 the material breach of any of the representations and
warranties set forth in Article V;
14.3.2 the failure of Provider to provide Covered Services
pursuant to the terms of the Agreement and any Payer
Plan Agreement;
14.3.3 the disciplining, loss of license, or loss of
certification, accreditation, or qualification by any
licensing, regulatory, or professional organization or
agency with jurisdiction over Provider;
14.3.4 the commission or omission of any act or conduct by
Provider that is detrimental to a Covered Person's
health or safety;
14.3.5 the failure of Provider to maintain the required
liability insurance coverage protection;
14.3.6 a finding by any licensing, regulatory, or
professional organization having jurisdiction over the
subject matter of this Agreement that the Agreement
violates any state or federal law;
14.3.7 any change in federal or state law that causes this
Agreement to be in violation of any federal or state
law or regulation;
14.3.8 the habitual neglect or continued failure of either
party to perform its duties and obligations under the
Agreement;
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14.3.9 the initiation of bankruptcy, insolvency, dissolution,
liquidation, or receivership proceedings by or against
either party;
14.3.10 an admission by either party in writing that it is
unable to pay its debts as they mature or the making
by either party of a general assignment for the
benefit of creditors;
14.3.11 the breach of any other material provision of this
Agreement by either party if after sixty (60) days'
written notice setting forth the details of the breach
and the intent to terminate is given by the
terminating party and the breach is not cured by the
breaching party during such time period, unless such
breach cannot reasonably be cured within such sixty
(60) day period and the breaching party has begun to
cure such breach during such sixty (60) day period and
diligently pursues such remedial action until such
breach is cured;
14.3.12 the material breach of the Management Agreement, the
Stock Warrant Agreement or the Registration Rights
Agreement of even date herewith between Provider and
TMHC; or
14.3.13 the termination of the Management Agreement for any
reason.
14.4 Adverse Effect Upon Tax-Exempt Status. In the event that (i) it
is ever determined that any of the transactions contemplated by this Agreement
shall have a material adverse effect upon the Provider's non-profit status under
state law or Provider's tax-exempt status under IRC Section 501(c)(3), and (ii)
an opinion letter stating such conclusion is delivered to the parties by legal
counsel having recognized expertise in such matters, then both parties agree to
negotiate in good faith to amend the Agreement to conform with the then-existing
laws and regulations regarding such non-profit and tax-exempt status. If
agreement cannot be reached with respect to such amendments within ninety (90)
days of notice from Provider (including delivery of the above-referenced legal
opinion) of such determination that the Agreement has an adverse effect upon
Provider's non-profit or tax-exempt status (or such earlier time required by
law), then this Agreement may be immediately terminated by Provider by written
notice to Manager.
14.5 Termination Due to Legislative or Administrative Changes. In
the event that there shall be a change in the statutes, regulations, or
instructions relating to the Tennessee Medicaid or TennCare programs, the
adoption of any new legislation or regulations applicable to this Agreement, a
change in any applicable third party payer reimbursement system (including,
without limitation, those of the Payers and the Payer Plan Agreements), or the
initiation of an enforcement action with respect to legislation, regulations, or
instructions applicable to this Agreement, any of which affects the continuing
viability or legality of this Agreement or materially affects the compensation
that Provider and TMHC will receive under the Management Agreement, then both
parties agree to negotiate in good faith to amend the Agreement to conform with
the then-existing laws and regulations. If agreement cannot be reached with
respect to such amendments within
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ninety (90) days of such change, adoption, or enforcement (or such earlier time
as may be required by such legislation or regulations), this Agreement may be
terminated immediately by either party by written notice to the other party.
14.6 Continuation. If, upon termination of the Agreement by TMHC,
Provider is obligated under any Payer Plan Agreement to provide Covered Services
extending beyond the termination date of the Agreement, at TMHC's request,
Provider shall continue to provide Covered Services to Covered Persons under the
terms and conditions the Payer Plan Agreements in effect as of the termination
date of this Agreement until the renewal date of such Payer Plan Agreements.
Provider shall continue to provide Covered Services under such circumstances at
the Capitation rates then in effect. Provider shall continue to provide Covered
Services to Covered Persons under the care of Provider after the date a Payer
Plan Agreement renews until such time as TMHC makes appropriate provision for
assumption of such services by another provider. Provider shall provide such
continuous services at the Capitation rates then in effect, and TMHC or the
applicable Payers shall pay Provider for such services at the Capitation rate
then in effect.
14.7 Post-Termination Matters. Notwithstanding termination of this
Agreement, TMHC and Payer shall continue to have access to the records
maintained by Provider in accordance with Article IX above for a period of three
(3) years from the date of the provision of the Covered Services to Covered
Persons to which the records refer for purposes consistent with their rights,
duties, and obligations under this Agreement and any Payer Agreement. After the
effective date of termination, this Agreement shall be deemed to remain in
effect for the resolution of all matters unresolved at that date. Termination of
this Agreement shall not effect the rights, obligations, and liabilities of the
parties arising out of the transactions occurring prior to termination.
14.8 Other Remedies. Nothing contained herein shall be construed to
limit either party's lawful remedies in the event of a material breach of this
Agreement.
14.9 Avoidance of Termination. TMHC and Provider agree to use their
best efforts promptly to give the other party notice of any breach of this
Agreement and any other problem related to this Agreement that could lead to a
termination of this Agreement. Within five (5) days of receipt of such notice,
representatives of TMHC and Provider shall meet and use their best efforts to
negotiate a solution to the problem with respect to which such notice was sent.
Such good faith negotiations shall particularly be required with reference to
notices given pursuant to Sections 14.2.12, 14.3, 14.4 and 14.5 above.
Notwithstanding such meeting, the time period for termination of this Agreement
as set forth in this Article XIV shall remain in effect unless otherwise agreed
in writing.
ARTICLE XV
ARBITRATION
15.1 Arbitration. In the event that a dispute arises with respect to
this Agreement, then either party may request binding arbitration in order to
resolve such dispute. In such event, the party requesting arbitration shall do
so by giving notice to that
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effect to the other party, specifying in said notice, in reasonable detail, the
nature of the dispute and designating one of the arbitrators. Within thirty (30)
days after such notice is given, the other party shall designate one of the
arbitrators by notice given to the party requesting arbitration. The
determination of the two designated arbitrators shall be binding and conclusive
upon the parties. However, if the two designated arbitrators shall fail to make
such determination within thirty (30) days after both have been designated, then
they shall select a third arbitrator. The determination of the majority of the
three arbitrators shall be binding and conclusive on the parties. If a party
shall fail or refuse to designate an arbitrator within the time period provided
above, then such arbitrator shall be appointed by the application of the other
party by the Middle Tennessee Chapter of the American Arbitration Association.
If the two arbitrators designated as set forth above shall fail to make such
determination within such thirty (30) day period, and shall fail to designate a
third arbitrator within thirty (30) days thereafter, then such third arbitrator
shall be appointed upon application of either party by the Middle Tennessee
Chapter of the American Arbitration Association. Each party shall bear the
expenses of the arbitrator appointed by such party or on behalf of such party.
Expenses of the third arbitrator, if necessary, shall be shared equally by the
parties. The decision in any such arbitration may be enforced, on the
application of either party thereto, by the order or judgment of a court of
competent jurisdiction sitting in Davidson County, Tennessee. Any arbitration
will be conducted during the arbitration proceeding. In the event the parties
cannot agree on rules to govern discovery, the arbitrators shall designate what,
if any, discovery shall be authorized. The parties may, by agreement, jointly
appoint one arbitrator to decide any dispute. In such event, the parties shall
share the expense of the arbitrator. The prevailing party in any such
arbitration conducted pursuant to this Agreement shall be entitled to recover
from the losing party reasonable expenses, attorneys' fees, and costs incurred
in connection therewith in the manner set forth in subparagraph 16.6 below.
ARTICLE XVI
MISCELLANEOUS
16.1 Exhibits. All Exhibits and attachments referenced in this
Agreement and attached hereto are incorporated herein by reference.
16.2 Entire Agreement. Except for the Management Agreement and Stock
Warrant Agreement of even date herewith, this Agreement supersedes all previous
agreements, promises, negotiations, or representations, between the parties,
whether oral or written, and this Agreement constitutes the entire agreement
regarding the subject matter hereof existing between the parties. No party shall
be entitled to benefits other than those specified herein and in the Management
Agreement and the Stock Warrant Agreement. As between or among the parties, no
oral statements or prior written material not specifically incorporated herein
shall be of any force and effect. The parties specifically acknowledge that in
entering into and executing this Agreement, the parties rely solely upon the
representation and agreements contained in this Agreement and in the Management
Agreement and the Stock Warrant Agreement and no others. All prior
representations or agreements, whether written or verbal, not expressly
incorporated or referenced herein are
-19-
<PAGE> 25
superseded and no changes in or additions to this Agreement shall be recognized
unless and until made in accordance with Section 17.4 below.
16.3 Modification of this Agreement. This Agreement may be amended
or modified as mutually agreed by the parties in writing signed by both parties.
16.4 Assignment. This Agreement, being intended to secure the
services of and be personal to the Provider, shall not be assigned, sublet,
delegated, or transferred by Provider without the prior written consent of TMHC.
TMHC may assign the Agreement to any entity that is controlled by, under common
control with, or that controls TMHC, or that is formed as the result of an
internal restructuring of TMHC and/or its affiliates without Provider's consent;
provided, however, such assignment shall not release PMR of its obligations
under the Stock Warrant Agreement or Registration rights Agreement. This
Agreement shall inure to the benefit of and shall bind the successors and
permitted assignees of TMHC and Provider.
16.5 Notice. Any notice required to be given pursuant to the terms
and provisions hereof shall be sent by hand delivery, by certified mail, return
receipt requested, postage prepaid, or by telefacsimile, to TMHC or to the
Provider at the respective addresses or phone numbers indicated below. Notice
shall be deemed to be effective when mailed or hand delivered, but notice of
change of address shall be effective upon receipt.
If to TMHC:
Tennessee Mental Health Cooperative, Inc.
275 Cumberland Bend
Nashville, Tennessee 37228
Attention: Mr. Allen Tepper
Phone number:
----------------------------
With a copy to:
PMR Corporation
Cabrillo Plaza
3990 Old Town Avenue, Suite 206A
San Diego, California 92110
Attention: Mr. Allen Tepper, President
Phone number: (619) 295-2227
If to Provider:
Mental Health Cooperative, Inc.
275 Cumberland Bend
Nashville, Tennessee 37228
Attention: Executive Director
Phone number: (615) 726-3340
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<PAGE> 26
With a copy to:
Boult Cummings Conners & Berry
414 Union Street, Suite 1600
Nashville, Tennessee 37219
Attention: Mr. E. Berry Holt, III
Phone number: (615) 252-2312
16.6 Attorneys Fees. In the event of any litigation or arbitration
concerning any controversy, claim, or dispute between the parties hereto, the
prevailing party shall be entitled to recover from the losing party reasonable
expenses, attorneys' fees, and costs incurred therein or in the enforcement or
collection of any judgment or award rendered therein. The "prevailing party"
means the party determined by the court or arbitrator to have most nearly
prevailed, even if such party did not prevail in all matters, not necessarily
the one in whose favor a judgment is rendered. Further, in the event of any
default by a party under this Agreement, such defaulting party shall pay all
the expenses and attorneys' fees incurred by the other party in connection with
such default, whether or not any litigation or arbitration is commenced.
16.7 Severance of Invalid Provisions. In the event that any one or more
of the provisions of this Agreement shall, for any reason, be held to be
invalid, illegal, or unenforceable in any respect by a court of competent
jurisdiction, the parties agree that such court may interpret this Agreement
without reference to such invalid, illegal, or unenforceable provision;
provided, however, that wherever possible such court shall modify or restrict
the meaning of such provision so that, as modified, it shall be enforceable.
16.8 Waiver. The waiver by either party of any breach of any provision
of this Agreement or warranty representation herein set forth shall not be
construed as a waiver of any subsequent breach of the same or any other
provision. The failure to exercise any right hereunder shall not operate as a
waiver of such right. All rights and remedies provided herein are cumulative.
16.9 Captions. The captions contained herein are for reference purposes
only and shall not affect the meaning of this Agreement.
16.10 Governing Law. This Agreement shall be construed and enforced in
accordance with the laws of the State of Tennessee, and venue shall be in
Davidson County.
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<PAGE> 27
IN WITNESS WHEREOF, the foregoing Agreement between TMHC and Provider
is entered into by and between the undersigned parties, to be effective as of
the date first written above.
TMHC: TENNESSEE MENTAL HEALTH
COOPERATIVE, INC.
By: /s/ ALLEN TEPPER
---------------------------------
Name: Allen Tepper
-------------------------------
Title:
------------------------------
PROVIDER: MENTAL HEALTH COOPERATIVE, INC.
By: /s/ PAM WOMACK
---------------------------------
Name: Pam Womack
-------------------------------
Title:
------------------------------
By: /s/ WILLIAM F. MOYNIHAN
---------------------------------
Name: William F. Moynihan
-------------------------------
Title:
------------------------------
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<PAGE> 28
EXHIBIT 1.3
COVERED SERVICES
The following are the Covered Services to be provided by Provider:
(1) A highly accessible, but managed point of entry into the local
treatment and service system. This includes availability of
twenty-four hour crisis and assessment services provided in the
Covered Person's home, in the streets, in the jails, or in hospital
emergency rooms.
(2) Initial CRG determinations on Covered Persons first entering the
system for mental health services, and completion of the required,
semi-annual CRG re-assessments.
(3) Twenty-four hour, full support case management and continuous
treatment team services where case managers provide a full range of
community support services. These include assisting with living
arrangements; securing entitlements; assisting with health issues,
medication and symptom monitoring, and other basic survival
supports; and assessing and developing rehabilitation readiness. All
of these services are aimed at decreasing the Covered Person's use
of emergency rooms and inpatient services and at helping the Covered
Person to manage his/her mental illness on a daily basis with
increasing independence and decreased reliance on paid care-givers
to the extent possible.
(4) Out-of-home crisis respite services with a crisis companion for
Covered Persons who might otherwise have been admitted to inpatient
care. Through the crisis unit, "bridge" case management services are
also available for Covered Persons first entering the system, until
such time as a regular case management connection is established.
(5) Psychiatric services where psychiatric and nursing staff provide
medication, administration, and monitoring. Psychiatric and nursing
staff coordinate with case management teams so that Covered Persons
receive continuous care from the same team of staff on an ongoing
basis, across all inpatient and outpatient episodes of care.
(6) Representative payee service for Covered Persons who need someone to
be payee of their SSI/SSDI check. Representative payee assists with
budgeting monthly income and insuring that bills, such as rent and
utilities, are paid monthly. This helps insure community stability
for Covered Persons.
Exhibit 1.3 - Page 1
<PAGE> 1
EXHIBIT 10.16
MANAGEMENT AND AFFILIATION AGREEMENT
DATED APRIL 13, 1995
between
CASE MANAGEMENT, INC.
and
TENNESSEE MENTAL HEALTH COOPERATIVE, INC.
[This agreement is substantially identical in all material respects to the
Management and Affiliation Agreement dated April 13, 1995 between Mental Health
Cooperative, Inc. and Tennessee Mental Health Cooperative, Inc. filed herewith
as Exhibit 10.14, except for the name of the party contracting with Company's
subsidiary is Case Management, Inc. and except that this agreement is not
subject to the addendum filed as part of Exhibit 10.14 but is modified pursuant
to the Addendum to Management and Affiliation Agreement which is filed as part
of this exhibit.]
<PAGE> 2
ADDENDUM TO
MANAGEMENT AND AFFILIATION AGREEMENT
This ADDENDUM TO MANAGEMENT AND AFFILIATION AGREEMENT ("Addendum") is
made this 6th day of September, 1995, by and between Case Management, Inc., a
Tennessee not-profit corporation ("Provider"), and Tennessee Mental Health
Cooperative, Inc., a Tennessee for-profit corporation ("Manager").
RECITALS
A. Provider and Manager entered into a Management and Affiliation
Agreement ("Agreement") and a Provider Services Agreement ("Services
Agreement") bearing even date herewith.
B. Provider and Manager entered into the Agreement and Services
Agreement in the anticipation of the expansion of the TennCare program to
include the provision of certain covered services to patients who suffer from
serious and persistent mental illness ("SPMI").
C. The expansion of the TennCare program to the SPMI patients has been
delayed by the State of Tennessee but the parties hereto wish to implement the
Agreement and Services Agreement as hereinafter provided.
NOW, THEREFORE, Manager and Provider, intending to be legally bound
hereby, agree as follows:
AGREEMENT
1. Effective Date. The effective date of the Agreement and Services
Agreement shall be October 1, 1995 ("Effective Date"). Section 1.1.1 of the
Agreement entitled "Conditions Precedent" is hereby declared null of void and
of no force and effect whatsoever.
2. Letter of Credit. Section 3.1 of the Agreement requires Manager to
obtain an irrevocable letter of credit ("Letter of Credit") on or before the
Effective Date of the Agreement. The parties hereto agree that the obligation
to obtain the Letter of Credit shall be deferred until otherwise mutually
agreed to be the parties. In lieu of the Letter of Credit, PMR has loaned
$500,000 to Manager for one (1) year and has provided a Line of Credit to
Manager in the amount of $500,000. PMR shall secure the Line of Credit by
maintaining $500,000 in cash or cash equivalents in its bank accounts or by
having $500,000 available on PMR's Line of
<PAGE> 3
Credit from its banks or any combination thereof totaling $500,000. PMR's Line
of Credit to Manager shall terminate on the latter of the first anniversary of
the Agreement or the implementation of the expansion of the TennCare Program to
SPMI patients. The $500,000 loan and $500,000 Line of Credit from PMR to
Manager shall be available to pay Subcapitated Payments to Case Managers under
paragraph 5.4.1 of the Agreement.
3. Other Case Managers. Section 2.2 of the Agreement allows
Manager to contract with other Case Managers other than Provider so long as
Provider gives its prior written approval. The parties hereto agree that such
prior written approval shall only be needed for Case Managers providing
services in the State of Tennessee and no such prior written approval shall be
required for contracts which Manager enters into with Case Managers who provide
services exclusively outside of the State of Tennessee.
4. Provider's Board Positions. Paragraph 4.2.1(iii) of the
Agreement is hereby amended to read, "Manager shall be permitted to designate
two (2) additional members of the Provider's Board of Directors (not to exceed
a total of three (3) directors, including the director to be designated under
Paragraph 4.2.1(ii) hereof), which persons may or may not be employees or
affiliates of Manager of PMR, provided, however, that Provider shall have the
right to approve each designee, which approval shall not be unreasonably
withheld by Provider."
5. Independent Annual Audit. Manager shall cause its financial
records to be independently audited on an annual basis, the cost of which shall
be paid for by Manager.
6. Case Management Network. Manager shall use its best efforts
to create a network of entities to provide Case Management services, both inside
and outside of the State of Tennessee, and to have these entities become Case
Managers under the terms of the Agreement.
7. Written Agreement with Mental Health Cooperative, Inc.
Manager shall use its best efforts to assist in the consummation of a formal
affiliation agreement between provider and Mental Health Cooperative, which
efforts shall be to obtain consummation of an agreement within ninety (90) days
of the effective date of the agreement.
8. Employment Agreements. Due to accrued employment benefits
payable to Provider's employees, and for other business reasons, Manager shall
agree that Provider shall become a party to any employment agreement(s) that
Manager may enter into with individuals employed by Provider who shall become
employees of Manager under the terms of the agreement.
-2-
<PAGE> 4
9. Case Management Activities and State Grants. Sections 5.1.1.
and 5.1.4, respectively, shall be revised, as needed, to insure that the
language setting forth the scope of the agreement is not restricting the
participation or effect of Provider's involvement in the agreement to the state
of Tennessee.
10. Quarterly Review of Financial Arrangements. The following
shall be added as Paragraph 5.5.4 to the Agreement. "A breach of this Paragraph
5.5 shall be subject to paragraph 1.3.9 hereof."
11. Establishing Present Book Value for Old Asset Depreciation.
Pursuant to Paragraph 5.1.6 of the Agreement, each Case Manager shall be paid
certain amounts from the Capitated Payments and the Grants for depreciation of
certain assets. Within twenty (20) days of the Effective Date, Case Manager
shall submit to Manager a schedule of all assets eligible for payments for Old
Asset Depreciation and the schedule shall include (1) the initial book value of
each asset, (2) the dollar amount which each asset has been depreciated by Case
Manager through the Effective Date and (3) the difference thereof, which is the
present book value, shall be eligible for Old Asset Depreciation over the
asset's remaining useful life as originally determined at the time of
acquisition by Case Manager.
12. Effect of Addendum, Definitions. All other terms and
conditions of the Agreement shall remain in full force and effect except as
modified herein. The definitions of the Agreement shall apply to this Addendum.
13.1 Wherever in the Agreement the phrase "related
psychiatric services" appears, it shall mean "other psychiatric services."
13.2 In Paragraph 5.1.3 of the Agreement, it is agreed that
the "Capitated Payment" shall include payments received for other psychiatric
services rendered by Provider.
-3-
<PAGE> 5
IN WITNESS WHEREOF, the parties hereto have caused this Addendum to be
executed on the day and year first written above.
PROVIDER: CASE MANAGEMENT, INC.
a Tennessee non-profit corporation
BY: /s/ W. R. C. SMITH
-------------------------------
NAME: W. R. C. Smith
--------------------------
TITLE: President
-------------------------
MANAGER: TENNESSEE MENTAL HEALTH COOPERATIVE,
INC., a Tennessee for-profit corporation
BY: /s/ ALLEN TEPPER
-------------------------------
NAME: Allen Tepper
--------------------------
TITLE: Chief Executive Officer
-------------------------
-4-
<PAGE> 1
EXHIBIT 10.17
PROVIDER SERVICES AGREEMENT
DATED APRIL 13, 1995
between
TENNESSEE MENTAL HEALTH COOPERATIVE, INC.
and
CASE MANAGEMENT, INC.
[This agreement is substantially identical in all material respects to the
Provider Services Agreement dated April 13, 1995 between Tennessee Mental Health
Cooperative, Inc. and Mental Health Cooperative, Inc. filed herewith as Exhibit
10.15, except that the party contracting with the Company's subsidiary is Case
Management, Inc. and except that this agreement is modified by the Addendum to
Management and Affiliation Agreement filed as part of Exhibit 10.16 (including
an amended effective date of October 1, 1995).]
<PAGE> 1
EXHIBIT 21
The following is a list of the subsidiaries of PMR Corporation:
NAME: JURISDICTION OF ORGANIZATION:
- -------------------------------------------------------------------------------
Psychiatric Management Resources, Inc. California
Collaborative Care, Inc. California
PMR-CD, Inc. California
Aldine-DC, Inc. California
Twin Town Outpatient, a general partnership California
Collaborative Care Corporation Tennessee
<PAGE> 1
EXHIBIT 23.1
CONSENT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
We consent to the incorporation by reference in the Registration Statement (Form
S-8/S-3 No. 33-72664) pertaining to the Employees' Incentive Stock Option Plan
of 1990 and the Outside Directors' Non-Qualified Stock Option Plan of 1992 and
the Registration Statement (Form S-3 No. 33-77848) pertaining to the
registration of 554,272 shares of common stock and the Registration Statement
(Form S-3 No. 33-97202) pertaining to the registration of 1,388,087 shares of
common stock of our report dated June 13, 1997, with respect to the consolidated
financial statements and schedule of PMR Corporation included in the Annual
Report (Form 10-K) for the year ended April 30, 1997.
ERNST & YOUNG LLP
July 28, 1997
San Diego, California
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<FISCAL-YEAR-END> APR-30-1997
<PERIOD-START> MAY-01-1996
<PERIOD-END> APR-30-1997
<CASH> 10,048,203
<SECURITIES> 0
<RECEIVABLES> 16,350,139
<ALLOWANCES> 5,081,177
<INVENTORY> 0
<CURRENT-ASSETS> 27,958,301
<PP&E> 1,263,743
<DEPRECIATION> 1,175,980
<TOTAL-ASSETS> 33,084,538
<CURRENT-LIABILITIES> 7,317,237
<BONDS> 0
<COMMON> 50,334
0
0
<OTHER-SE> 16,197,217
<TOTAL-LIABILITY-AND-EQUITY> 33,084,538
<SALES> 0
<TOTAL-REVENUES> 56,636,902
<CGS> 0
<TOTAL-COSTS> 41,423,157
<OTHER-EXPENSES> 700,734
<LOSS-PROVISION> 3,084,166
<INTEREST-EXPENSE> (217,297)
<INCOME-PRETAX> 5,296,041
<INCOME-TAX> 2,172,000
<INCOME-CONTINUING> 3,124,041
<DISCONTINUED> 0
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