<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON SEPTEMBER 24, 1997
REGISTRATION NO. 333-
================================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
FORM S-2
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
------------------------
PMR CORPORATION
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
<TABLE>
<S> <C>
DELAWARE 23-2491707
(STATE OR OTHER JURISDICTION (I.R.S. EMPLOYER
OF INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
</TABLE>
501 WASHINGTON STREET, 5TH FLOOR
SAN DIEGO, CALIFORNIA 92103
(619) 610-4001
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE,
OF REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
------------------------
ALLEN TEPPER
CHIEF EXECUTIVE OFFICER
PMR CORPORATION
501 WASHINGTON STREET, 5TH FLOOR
SAN DIEGO, CALIFORNIA 92103
(619) 610-4001
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE,
OF AGENT FOR SERVICE OF PROCESS)
------------------------
COPIES TO:
<TABLE>
<S> <C>
JEREMY D. GLASER, ESQ. JAMES R. TANENBAUM, ESQ.
COOLEY GODWARD LLP STROOCK & STROOCK & LAVAN LLP
4365 EXECUTIVE DRIVE, SUITE 1100 180 MAIDEN LANE
SAN DIEGO, CALIFORNIA 92121-2128 NEW YORK, NEW YORK 10038-4982
(619) 550-6000 (212) 806-5400
</TABLE>
------------------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as
practicable after the effective date of this Registration Statement.
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. [ ]
If the registrant elects to deliver its latest annual report to security
holders, or a complete and legible facsimile thereof, pursuant to Item 11(a)(1)
of this Form, check the following box. [ ]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of earlier effective
registration statement for the same offering. [ ] ------------------
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ] ------------------
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [ ]
------------------------
CALCULATION OF REGISTRATION FEE
<TABLE>
<S> <C> <C> <C> <C>
=====================================================================================================
TITLE OF EACH CLASS PROPOSED MAXIMUM PROPOSED MAXIMUM AMOUNT OF
OF SECURITIES TO BE AMOUNT TO BE OFFERING PRICE PER AGGREGATE OFFERING REGISTRATION
REGISTERED REGISTERED(1) SHARE(2) PRICE(2) FEE
- -----------------------------------------------------------------------------------------------------
Common Stock, par value
$0.01 per share........ 2,300,000 shares $23.63 $54,349,000 $16,470
=====================================================================================================
</TABLE>
(1) Includes 300,000 shares of Common Stock which may be purchased by the
Underwriters to cover over-allotments, if any.
(2) Estimated solely for the purpose of calculating the registration fee based
upon the average of the high and low prices of the Company's Common Stock on
------------------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT THAT SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SECTION 8(A), MAY
DETERMINE.
================================================================================
<PAGE> 2
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR
MAY OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT
BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR
THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE
SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE
UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS
OF ANY SUCH STATE.
SUBJECT TO COMPLETION, DATED SEPTEMBER 24, 1997
2,000,000 SHARES
[PMR CORPORATION LOGO]
COMMON STOCK
Of the shares of common stock, par value $0.01 per share (the "Common
Stock"), of PMR Corporation ("PMR" or the "Company") offered hereby (the
"Offering"), 1,490,000 shares are being offered by the Company and 510,000
shares are being offered by certain stockholders of the Company (the "Selling
Stockholders"). See "Principal and Selling Stockholders." The Company will not
receive any of the proceeds from the sale of shares by the Selling Stockholders.
The Common Stock is quoted on The Nasdaq Stock Market's National Market (the
"Nasdaq National Market") under the symbol "PMRP." On September 23, 1997, the
last reported sale price of the Common Stock on the Nasdaq National Market was
$23.44 per share. See "Price Range of Common Stock."
------------------------
SEE "RISK FACTORS" BEGINNING ON PAGE 6 FOR CERTAIN FACTORS THAT SHOULD BE
CONSIDERED BY PROSPECTIVE PURCHASERS OF THE COMMON STOCK OFFERED HEREBY.
------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
<TABLE>
<S> <C> <C> <C> <C>
======================================================================================================
PROCEEDS TO
PRICE TO UNDERWRITING PROCEEDS TO SELLING
PUBLIC DISCOUNT(1) COMPANY(2) STOCKHOLDERS
- ------------------------------------------------------------------------------------------------------
Per Share..................... $ $ $ $
- ------------------------------------------------------------------------------------------------------
Total(3)...................... $ $ $ $
======================================================================================================
</TABLE>
(1) See "Underwriting" for a description of the indemnification arrangements
with the Underwriters.
(2) Before deducting expenses of the Offering, payable by the Company, estimated
at $450,000.
(3) The Company and certain stockholders of the Company have granted to the
Underwriters a 30-day option to purchase up to an additional 300,000 shares
of Common Stock on the same terms and conditions as set forth above, solely
to cover over-allotments, if any. If the option is exercised in full, the
total "Price to Public," "Underwriting Discount," "Proceeds to Company" and
"Proceeds to Selling Stockholders" will be $ , $ ,
$ and $ , respectively. See "Underwriting."
------------------------
The Common Stock is offered by the several Underwriters named herein,
subject to prior sale, when, as and if delivered to and accepted by them and
subject to approval of certain legal matters by counsel for the Underwriters.
The Underwriters reserve the right to reject orders in whole or in part and to
withdraw, to cancel or to modify the offer without notice. It is expected that
delivery of certificates representing the Common Stock will be made on or
about , 1997.
EQUITABLE SECURITIES CORPORATION
LEHMAN BROTHERS
WESSELS, ARNOLD & HENDERSON
The date of this Prospectus is , 1997.
<PAGE> 3
[Map of United States showing PMR program sites.]
------------------------
CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN TRANSACTIONS
THAT STABILIZE, MAINTAIN OR OTHERWISE AFFECT THE PRICE OF THE COMMON STOCK,
INCLUDING OVER-ALLOTMENT, STABILIZING TRANSACTIONS, SYNDICATE SHORT COVERING
TRANSACTIONS AND PENALTY BIDS. FOR A DESCRIPTION OF THESE ACTIVITIES, SEE
"UNDERWRITING."
IN CONNECTION WITH THIS OFFERING, CERTAIN UNDERWRITERS AND SELLING GROUP
MEMBERS (IF ANY) OR THEIR RESPECTIVE AFFILIATES MAY ENGAGE IN PASSIVE MARKET
MAKING TRANSACTIONS IN THE COMMON STOCK ON THE NASDAQ NATIONAL MARKET IN
ACCORDANCE WITH RULE 103 OF REGULATION M. SEE "UNDERWRITING."
2
<PAGE> 4
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by the more detailed
information and the consolidated financial statements and accompanying notes
appearing elsewhere in this Prospectus. Prospective investors should also review
carefully the information set forth under "Risk Factors." Unless otherwise
indicated, all information in this Prospectus assumes no exercise of the
Underwriters' over-allotment option. Unless the context otherwise requires, the
terms the "Company" and "PMR" refer collectively to PMR Corporation and its
subsidiaries. All references in this Prospectus to a particular fiscal year of
the Company refer to the Company's fiscal year ended April 30 of that year.
THE COMPANY
PMR is a leading manager of specialized mental health care programs
designed to treat individuals diagnosed with a serious mental illness ("SMI"),
primarily schizophrenia and bi-polar disorder (i.e., manic-depressive illness).
PMR manages the delivery of a broad range of outpatient and community-based
psychiatric services for SMI patients, consisting of 39 intensive outpatient
programs (the "Outpatient Programs"), five case management programs (the "Case
Management Programs") and seven chemical dependency and substance abuse programs
(the "Chemical Dependency Programs"). Through its various programs, PMR employs
or contracts with more than 400 mental health professionals and currently
provides services to approximately 8,800 patients. The Company currently offers
its services in twelve states, comprised of Arizona, Arkansas, California,
Colorado, Hawaii, Illinois, Indiana, Kentucky, Michigan, Ohio, Tennessee and
Texas. PMR believes it is the only private sector company focused on providing
an integrated mental health disease management model to the SMI population.
The four-decade public policy trend of de-institutionalizing the mentally
ill from long-term care hospitals into the community has resulted in a
deterioration in SMI patient care. In response to this trend, a fragmented,
community-based system of care has evolved that does not adequately provide the
patient management or coordination of benefits required by the medically complex
SMI patient population. SMI patients typically enter the health care system
through multiple, uncoordinated points of care where services are provided in
reaction to patient crises rather than proactively to manage patient care.
Multiple physicians, case workers and other care providers handle patients in
different sites across the spectrum of care with little or no coordination. This
disjointed system of care results in low levels of patient monitoring and
medication compliance among the SMI population, which increases the incidence
rate of high-cost catastrophic events. Coordination and monitoring of patient
services is essential to avoid the debilitating effects of fragmented care
delivered by diverse outpatient providers which are reimbursed by disparate,
uncoordinated funding sources. PMR's clinical philosophy focuses on improving
outcomes and lowering costs by utilizing intensive, community-based treatment of
the SMI population in outpatient settings. Through a comprehensive patient
management approach that emphasizes early intervention to identify and reduce
the incidence of crisis events, the Company seeks to achieve significant
reductions in inpatient hospitalization and other SMI related expenses while
improving clinical outcomes and increasing patient compliance and satisfaction.
PMR's Outpatient Programs serve as a comprehensive alternative to inpatient
hospitalization and include partial hospitalization and lower intensity
outpatient services. The Case Management Programs provide an intensive,
individualized primary care service which consists of a proprietary case
management model utilizing clinical protocols for delivering care to SMI
patients. The Company also provides Chemical Dependency Programs to patients
affiliated with managed care organizations and government-funded programs.
Recently, PMR began development of a site management and clinical information
initiative. The Company believes that its access to a large SMI patient base
provides it with a unique opportunity to collect, process and analyze clinical
and pharmacoeconomic data on schizophrenia and bi-polar disorder. In January
1997, PMR entered into a collaborative agreement with United HealthCare
Corporation and its Applied HealthCare Informatics division ("Applied
Informatics") to assist in developing this initiative.
According to the National Institute of Mental Health (the "NIMH") and its
National Advisory Mental Health Council (the "NAMHC"), serious mental illnesses
are neurobiological disorders of the brain and include schizophrenia,
schizoaffective disorder, manic-depressive illness and autism, as well as severe
forms of
3
<PAGE> 5
other disorders such as major depression, panic disorder and
obsessive-compulsive disorder. These diseases are chronic and represent one of
the highest cost segments of the health care system. Industry sources indicate
that approximately 2.8% of the adult population and 3.2% of children ages 9-17
are affected by SMI, for a total SMI population in the United States of
approximately 5.6 million people. In 1995, individuals diagnosed with SMI
consumed $27 billion in direct medical costs relating to the provision of mental
health services and consumed more than $74 billion in total costs, including
estimates of lost productivity. Based on industry data, the Company estimates
that the direct medical expenditures associated with SMI represent in excess of
25% of total direct mental health care costs. However, the potential costs of
direct medical care may exceed these levels due to the approximately 2.2 million
Americans estimated to be suffering from untreated SMI. Substantially all costs
of treating and managing the SMI population are borne by federal, state and
local programs, including Medicare and Medicaid. The SMI population accesses
care primarily through community mental health centers ("CMHCs") and other
community-based health care facilities such as psychiatric and acute care
hospitals and nursing homes. CMHCs typically are not-for-profit organizations
which lack access to capital, sophisticated management information and financial
systems, and comprehensive programs for treating SMI patients.
PMR's objective is to be the leader in the management of cost-effective
programs which provide quality care and foster the successful recovery of
individuals from the devastating effects of SMI. The Company intends to achieve
this objective by (i) obtaining new contracts for its Outpatient and Case
Management Programs, (ii) establishing new programs and ancillary services,
(iii) combining its outpatient, case management and chemical dependency
capabilities into a fully-integrated mental health disease management model and
(iv) pursuing its site management and clinical information initiative. PMR
believes that its proprietary mental health disease management model will
position it to accept risk for SMI benefits and directly manage the costs
associated with providing care to the SMI population.
PMR was incorporated in the State of Delaware in 1988. The operations of
the Company include the operations of the Company's wholly owned subsidiaries,
Psychiatric Management Resources, Inc., Collaborative Care Corporation,
Collaborative Care, Inc., PMR-CD, Inc., Aldine-CD, Inc. and Twin Town
Outpatient. The principal executive offices of the Company are located at 501
Washington Street, 5th Floor, San Diego, California 92103. The Company's
telephone number is (619) 610-4001.
THE OFFERING
<TABLE>
<S> <C>
Common Stock offered by the Company..................... 1,490,000 shares
Common Stock offered by the Selling Stockholders........ 510,000 shares
Common Stock to be outstanding after the Offering(1).... 6,689,535 shares
Use of proceeds......................................... To fund the development of
additional treatment programs and
for general corporate purposes,
including potential acquisitions.
See "Use of Proceeds."
Nasdaq National Market symbol........................... PMRP
</TABLE>
- ---------------
(1) Includes an aggregate of 40,000 shares of Common Stock to be issued upon
exercise of outstanding options and warrants by certain Selling Stockholders
immediately prior to consummation of the Offering. Excludes 1,543,290 shares
of Common Stock issuable upon exercise of outstanding options to purchase
Common Stock at a weighted average exercise price of $10.98 per share and
138,000 shares of Common Stock issuable upon exercise of outstanding
warrants to purchase Common Stock at a weighted average exercise price of
$4.82 per share. See "Capitalization" and Note 7 of Notes to Consolidated
Financial Statements.
4
<PAGE> 6
SUMMARY CONSOLIDATED FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEAR ENDED APRIL 30, JULY 31,
------------------------------- -------------------
1995 1996 1997 1996 1997
------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenue.................................. $21,747 $36,316 $56,637 $13,028 $16,177
Operating expenses....................... 20,648 28,472 41,423 9,741 11,626
Marketing, general and administrative.... 2,977 4,019 6,350 1,518 2,115
Provision for bad debts.................. 1,317 1,448 3,084 602 664
Depreciation and amortization............ 403 596 701 180 216
Minority interest in loss of
subsidiary............................. (108) (1) -- -- --
------ ------ ------ ------ ------
Income (loss) from operations............ (3,490) 1,782 5,079 987 1,557
Income (loss) before income taxes........ (3,552) 1,780 5,296 1,018 1,645
Net income (loss)........................ (2,286) 1,050 3,124 600 971
Dividends on preferred stock (1)......... 66 132 17 17 --
Net income (loss) for common stock....... $(2,352) $ 918 $ 3,107 $ 583 $ 971
Earnings (loss) per common share
(fully diluted)(1)..................... $ (0.70) $ 0.21 $ 0.54 $ 0.11 $ 0.16
Weighted average shares outstanding
(fully diluted)........................ 3,337 5,043 5,772 5,291 6,012
</TABLE>
<TABLE>
<CAPTION>
JULY 31, 1997
--------------------------
ACTUAL AS ADJUSTED(2)
------- --------------
<S> <C> <C>
BALANCE SHEET DATA:
Working capital..................................................... $21,902 $ 54,447
Total assets........................................................ 34,917 67,462
Long-term debt...................................................... -- --
Stockholders' equity................................................ 17,337 49,883
</TABLE>
- ---------------
(1) Earnings (loss) per common share is affected by the retention of net income
available for Common Stock resulting from the dividends on the Company's
Series C Convertible Preferred Stock (the "Preferred Stock"). In July 1996,
all holders of the Preferred Stock exercised their options to convert all of
such shares of Preferred Stock into 700,000 shares of Common Stock.
(2) As adjusted to reflect (i) the sale of 1,490,000 shares of Common Stock
offered by the Company at an assumed public offering price of $23.44 and
(ii) the exercise of options and warrants to purchase an aggregate of 40,000
shares of Common Stock immediately prior to consummation of the Offering.
5
<PAGE> 7
RISK FACTORS
In addition to the other information in this Prospectus, the following risk
factors should be considered carefully in evaluating the Company and its
business before purchasing the shares of Common Stock offered hereby. This
Prospectus contains certain forward-looking statements which involve risks and
uncertainties. The Company's actual results could differ materially from the
results anticipated in these forward-looking statements as a result of the risk
factors set forth below and other factors described elsewhere in this
Prospectus.
DEPENDENCE UPON MEDICARE REIMBURSEMENT
A significant component of the Company's revenues is derived from payments
made by providers to the Company for managing and administering Outpatient
Programs for providers. Substantially all of the patients admitted to the
Outpatient Programs are eligible for Medicare coverage. A provider's Medicare
payments can be adversely affected by actions of the Health Care Financing
Administration ("HCFA") or fiscal intermediaries in several ways including: (i)
denials of coverage on claims for services furnished to Medicare eligible
patients; (ii) disallowances of costs claimed on the annual cost report on the
grounds that such costs are unreasonable, relate to uncovered services or are
otherwise nonallowable; or (iii) changes in the law or interpretation of the law
governing Medicare coverage and payment.
Each provider is reimbursed for its estimated reasonable costs for covered
services on an interim basis by Medicare fiscal intermediaries and submits
annual cost reports to the fiscal intermediaries for audit and payment
reconciliation. The providers generally seek reimbursement of the Company's
management fees from these fiscal intermediaries as part of their overall
payments from Medicare, and 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
coverage for claims submitted by the provider related to services furnished by
the Company are denied by Medicare's 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
intermediary for reimbursement. The occurrence of either of these events with
respect to a significant number of providers or a significant amount of fees
could have a material adverse effect upon the Company's business, financial
condition and results of operations.
During the fourth quarter of fiscal 1994, fiscal intermediaries for
providers began a review (a "Focused Medical Review") of claims for partial
hospitalization services throughout the country, including Outpatient Programs
managed by the Company. A Focused Medical Review consists of an intensive review
by fiscal intermediaries of HCFA, on an industry-wide basis, of certain targeted
claims. Focused Medical Reviews may occur for a number of reasons including,
without limitation, an intermediary's concern about coverage for claims at a
specific site or because HCFA has identified certain services as being at risk
of inappropriate program payment. This generally occurs when HCFA identifies
significant industry-wide increases in payments for certain types of services,
as had been the case with partial hospitalization benefits. The Company's
initial experience with the Focused Medical Review in fiscal 1994 was that there
were numerous denials of providers' claims, and the denials had an adverse
impact on the Company's business, financial condition and results of operations
during fiscal 1995 because providers delayed payment of the Company's management
fee due to of the substantial number of denials.
Although during 1996 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 assurance
that Focused Medical Reviews of claims will not recur at the level previously
experienced by the Company. In addition, during 1997, HCFA has increased its
scrutiny of CMHCs due to a significant increase in Medicare based outpatient
programs operated by these providers. The Company believes that Focused Medical
Reviews are likely to increase at programs managed by the Company in which CMHCs
are the providers. Any denied claims resulting from future Focused Medical
Reviews could have a material adverse effect on the Company's business,
financial condition and results of operations.
6
<PAGE> 8
All of the partial hospitalization programs managed by the Company are
treated as "provider-based" programs by HCFA. 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 and operated in a manner
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 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 program sites managed by the Company will be
found not to be "provider-based." If such determination is made, HCFA may seek
retroactive recoveries from providers. If HCFA makes a determination that
programs managed by the Company are not "provider-based" and seeks retroactive
recovery of payments from the Company's providers, such recovery could have a
material adverse effect upon the Company's business, financial condition and
results of operations. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations," "Business -- Contracts" and "-- Government
Regulation."
SUFFICIENCY OF EXISTING RESERVES TO COVER REIMBURSEMENT RISKS
The Company maintains significant reserves to cover the potential impact of
two primary uncertainties: (i) 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) 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 assurance that such reserves will be adequate. The obligation to pay the
amounts estimated within the Company's financial statements (or such greater
amounts as are due), if and when they become due, could have a material adverse
effect upon the Company's business, financial condition and results of
operations. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations," "Business -- Contracts" and "-- Government Regulation."
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.
The continued success of the Company is subject to its ability to maintain,
renew, extend or replace existing management contracts and obtain new management
contracts. These contracts generally have defined terms of duration and many
have automatic renewal provisions. The contracts often provide for early
termination either by the provider if specified performance criteria are not
satisfied or by the Company under various other circumstances.
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 terminate their mental health programs or convert their
mental health programs from independently managed programs to programs operated
internally. 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 that such management contracts will not be terminated
prior to expiration. In addition, any changes in 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 could 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 significant 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 and results of operations. See
"Business -- Contracts."
7
<PAGE> 9
POTENTIAL CHANGES IN TENNCARE
The Company holds contracts to provide case management services in
Tennessee with two managed care consortiums, Tennessee Behavioral Health ("TBH")
and Premier Behavioral Health ("Premier"), which operate under the Tennessee
TennCare Partners State Medicaid Managed Care Program ("TennCare"). In July
1996, both consortiums became the payors for mental health care services under
TennCare for the approximately 1.2 million individuals who qualify for coverage
based on Medicaid eligibility or other indigency standards. The Company
previously received information that Premier had notified the State of Tennessee
of its intention to withdraw from TennCare effective June 30, 1997. However,
Premier continued in its role as a managed care consortium and recently amended
its contract with the State of Tennessee to continue its participation in
TennCare through December 31, 1998. 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. Case Management Programs in Tennessee accounted for 23.7% and
23.2% of the Company's revenues for fiscal 1997 and for the three months ended
July 31, 1997, respectively. Depending on the outcome of ongoing discussions
among the interested parties in TennCare, the Company may find it necessary to
restructure or terminate one or more of its contracts with the managed care
consortiums or case management agencies. The potential changes, which the
Company cannot predict with any degree of certainty, could have a material
adverse effect on the Company's business, financial condition and results of
operations. See "-- Concentration of Revenues," "-- Limited Operating History of
Case Management Programs," "Management's Discussion and Analysis of Financial
Condition and Results of Operations," "Business -- Operations" and
"-- Contracts."
CONCENTRATION OF REVENUES
For fiscal 1997, only one provider accounted for more than 10% of the
Company's revenue. In addition, although not attributed to a particular
"customer," the Case Management Programs accounted for 24.2% of the Company's
revenue for fiscal 1997 and for the three months ended July 31, 1997. These
programs were largely operated under contracts with two managed care consortiums
in the State of Tennessee and management agreements with two 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 and
results of operations. See " -- Potential Changes in TennCare," "Management's
Discussion and Analysis of Financial Condition and Results of Operations,"
"Business -- Operations" and "-- Contracts."
LIMITED OPERATING HISTORY OF CASE MANAGEMENT PROGRAMS
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 assurance that the Company will be able to maintain
these operations at their current level or expand these programs in the future.
See " -- Potential Changes in TennCare," " -- Concentration of Revenues" and
"Business -- Operations."
IMPACT OF HEALTH CARE REFORM AND THE BALANCED BUDGET ACT OF 1997
Political, economic and regulatory influences are subjecting the health
care industry in the United States to fundamental change. Changes in the law,
new interpretations of existing laws, or changes in payment methodology or
amounts may have a dramatic effect on the relative costs associated with doing
business and the amount of reimbursement provided by government or other
third-party payors. In addition to specific health care legislation, both 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 cutbacks to the Medicare and Medicaid programs and steps to permit
greater flexibility in the administration of the Medicaid program. In addition,
some states in which the Company operates are considering various health care
reform proposals. The Company anticipates that federal and state governments
will continue to review and assess alternative health care delivery systems
8
<PAGE> 10
and payment methodologies, and that public debate on these issues will likely
continue in the future. Due to uncertainties regarding the ultimate features of
reform initiatives and their enactment, implementation and interpretation, the
Company cannot predict which, if any, of such reform proposals will be adopted,
when they may be adopted or what impact they may have on the Company.
Accordingly, 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 and results of operations.
The Medicare benefit has a coinsurance feature, which means that the amount
paid by Medicare is the provider's reasonable cost less "coinsurance" which is
typically the patient's responsibility. The coinsurance amount is currently 20%
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 Balanced Budget Act of 1997 reduces
the amount of allowable Medicare bad debts payable to providers as follows: 25%
for provider fiscal years beginning on or after October 1, 1997; 40% for
provider fiscal years beginning on or after October 1, 1998; and 45% for
provider fiscal years beginning on or after October 1, 1999. The reduction in
"allowable Medicare bad debts" could have a material adverse effect on Medicare
reimbursement to the Company's providers and could further result in the
restructuring or loss of provider contracts with the Company. See
"Business -- Government Regulation."
Many of the patients served in the Outpatient Programs are indigent or have
very limited resources. Accordingly, many of those patients have Medicaid
coverage in addition to Medicare coverage. In some of the states where the
Company furnishes services, the state Medicaid plans have paid the Medicare
coinsurance amount. However, under the Balanced Budget Act of 1997, states will
no longer have to pay such amounts if the amount paid by Medicare for the
service equals or exceeds what Medicaid would have paid had it been the primary
insurer. To the extent that states take advantage of this new legislation and
refuse to pay the Medicare coinsurance amounts on behalf of the Outpatient
Program patients to the degree that they had in the past, it will have an
adverse impact on the providers with whom the Company contracts, and thus may
have a material adverse effect on the Company's business, financial condition
and results of operations.
In the Balanced Budget Act of 1997, Congress directed HCFA to implement a
prospective payment system for all outpatient hospital services for the calendar
year beginning January 1, 1999. Under such a system, a pre-determined rate would
be paid to providers regardless of the providers' reasonable cost. While the
actual reimbursement rates and methodology 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, which could have a
material adverse effect on the Company's business, financial condition and
results of operations. See "Business -- Government Regulation."
GOVERNMENT REGULATION
Mental health care is an area subject to extensive and frequent regulatory
change. Changes in the laws or new interpretations of existing laws can have a
significant effect on the methods of doing business, costs of doing business and
amounts of reimbursement available from governmental and other payors. 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,
including applicable Medicare and Medicaid guidelines. The Company's business is
subject to a broad range of federal, state and local requirements including, but
not limited to, fraud and abuse laws, licensing and certification standards, and
regulations governing the scope and quality of care. Violations of these
requirements may result in civil and criminal penalties and exclusions from
participation in federal and state-funded programs. The Company at all times
attempts to comply with all such laws including applicable Medicare and Medicaid
regulations; however, there can be no assurance that the expansion or
interpretation of existing laws or regulations, or the imposition of new laws or
regulations, will not have a material adverse effect
9
<PAGE> 11
on the Company's provider relationships or the Company's business, financial
condition and results of operations.
The U.S. Department of Health and Human Services has established HCFA to
administer and interpret the rules and regulations governing the Medicare
program and the benefits associated therewith. Applicable Medicare guidelines
permit the reimbursement of contracted management services provided that, among
other things, the associated fees are "reasonable." As a general rule, Medicare
guidelines indicate that the costs incurred by a provider for contract
management services relating to furnishing Medicare-covered services are deemed
"reasonable" if the costs incurred are comparable with marketplace prices for
similar services. Although management believes that the Company's charges for
its services are 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" may have a material adverse effect on the Company's business,
financial condition and results of operations.
HCFA has also published criteria that partial hospitalization services must
meet in order to qualify for Medicare funding. Pursuant to these criteria, 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
assurance 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.
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 that contract with the Company
should be found in compliance with the applicable requirements. However, there
can be no assurance that some CMHCs contracting with the Company will not be
terminated from the Medicare program or that the government will not attempt to
recover payments made to such CMHCs for services, including payments relating to
the Company's services, which had been furnished and paid for by Medicare. See
"Business -- Government Regulation."
MANAGEMENT OF RAPID GROWTH
The Company expects that its outpatient psychiatric management services
business and the number of its Outpatient, Case Management and Chemical
Dependency Programs may increase 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 operational,
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.
DEPENDENCE ON KEY PERSONNEL
The Company depends, and will continue to depend, upon the services of its
current senior management for the management of the Company's operations and the
implementation of its business strategy. In addition, the Company's success is
also dependent upon its ability to attract and retain additional qualified
management personnel to support the Company's growth. The loss of the services
of any or all such individuals or the Company's inability to attract additional
management personnel in the future may have a material adverse effect on the
Company's business, financial condition and results of operations. The Company
presently has no employment agreements with any of its senior executive
officers.
The Company's success and growth strategy also will depend on its ability
to attract and retain qualified clinical, marketing and other personnel. The
Company competes with general acute care hospitals and other
10
<PAGE> 12
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 to support its business in the future. Any such inability
may have a material adverse effect on the Company's business, financial
condition and results of operations.
COMPETITION
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 health care
programs and services. The Company anticipates that competition will become more
intense as pressure to contain the rising costs of health care continues to
intensify, particularly as programs such as those operated by the Company are
perceived to help contain mental health care costs. Many other companies engaged
in the management of outpatient psychiatric programs compete with the Company
for the establishment of affiliations with acute care hospitals. Furthermore,
while the Company's existing competitors in the case management business are
predominantly not-for-profit CMHCs and case management agencies, the Company
anticipates that other health care management companies will eventually compete
for this business. Many of these present and future competitors are
substantially more established and have greater financial and other resources
than 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. There can be no assurance that the Company will be able to compete
effectively with its present or future competitors, and any such inability could
have a material adverse effect on the Company's business, financial condition
and results of operations.
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 annually renewable 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 business, financial condition and results of operations. In addition,
claims asserted against the Company, regardless of their merit or eventual
outcome, could have a material adverse effect upon the Company's reputation and
ability to expand its business, and could require management to devote time to
matters unrelated to the operation of the Company's business. There can be no
assurance that the Company will be able to obtain liability insurance coverage
on commercially reasonable terms in the future or that such insurance will
provide adequate coverage against potential claims.
SHARES ELIGIBLE FOR FUTURE SALE
Future sales by holders of substantial amounts of Common Stock could
adversely affect the prevailing market price of the Common Stock. The number of
shares of Common Stock available for sale in the public market is limited by
restrictions under the Securities Act of 1933, as amended (the "Securities
Act"), and lock-up agreements under which stockholders of the Company holding in
the aggregate 2,260,676 shares of Common Stock upon consummation of the Offering
(plus up to 778,175 shares of Common Stock issuable upon exercise of currently
exercisable stock options and warrants), including each of the Company's
officers, directors, the Selling Stockholders and certain other stockholders,
have agreed, subject to certain limited exceptions, that they will not directly
or indirectly, offer, pledge, sell, offer to sell, contract to sell or grant any
option to purchase or otherwise sell or dispose (or announce any offer, pledge,
offer of sale, contract of sale, grant of any option or other sale or
disposition) of any shares of Common Stock or other capital stock or securities
exchangeable or exercisable for, or convertible into, shares of Common Stock or
other capital stock
11
<PAGE> 13
for a period of 120 days after the date of this Prospectus (the "Lock-Up
Period"), without the prior written consent of Equitable Securities Corporation.
After completion of the Offering, the Company will have 6,689,535 shares of
Common Stock outstanding. Of these shares, in addition to the 2,000,000 shares
offered hereby plus any additional shares sold upon exercise of the
Underwriters' over-allotment option, 2,426,809 shares of Common Stock held by
existing stockholders (plus up to 888,115 shares of Common Stock issuable upon
exercise of currently exercisable stock options and warrants) will be eligible
for immediate sale without restriction. At the end of the Lock-Up Period,
subject to the volume limitations imposed by Rule 144 ("Rule 144") under the
Securities Act, an additional 2,260,676 shares of Common Stock (plus up to
778,175 shares of Common Stock issuable upon exercise of currently exercisable
stock options and warrants) will be eligible for immediate sale without
restriction. The remaining 2,050 shares of Common Stock held by existing
stockholders (plus up to 15,000 shares of Common Stock issuable upon exercise of
currently exercisable stock options and warrants) will become eligible for sale
at various times pursuant to Rule 144.
POSSIBLE VOLATILITY OF STOCK PRICE
The market price of the Common Stock could be subject to significant
fluctuations in response to various factors and events, including, but not
limited to, the liquidity of the market for the Common Stock, variations in the
Company's quarterly results of operations, revisions to existing earnings
estimates by research analysts and 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, some of which are
unrelated to the Company's operating performance. In addition, the stock market
in recent years has generally experienced significant 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. See "Price Range of Common Stock."
CONCENTRATION OF OWNERSHIP; ANTI-TAKEOVER PROVISIONS
Upon completion of the Offering, the officers and directors of the Company
and their affiliates will continue to own over 30% of the Company's issued and
outstanding Common Stock. Although the officers and directors do not have any
arrangements or understandings among themselves with respect to the voting of
the shares of Common Stock beneficially owned by such persons, such persons
acting together could elect a majority of the Company's Board of Directors and
control the Company's policies and day-to-day management. The Company's Board of
Directors has the authority, without action by the stockholders, to issue shares
of preferred stock and to fix the rights and preferences of such shares. The
ability to issue shares of preferred stock, together with certain provisions of
Delaware law and certain provisions of the Company's Restated 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
Restated 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. See "Principal and Selling
Stockholders."
12
<PAGE> 14
USE OF PROCEEDS
The net proceeds to the Company from the sale of the 1,490,000 shares of
Common Stock offered by the Company, at an assumed public offering price of
$23.44 per share, are estimated to be approximately $32.4 million after
deducting estimated underwriting discounts and offering expenses payable by the
Company (or approximately $36.8 million if the Underwriters' over-allotment
option is exercised in full). The Company will not receive any proceeds from the
sale of Common Stock by the Selling Stockholders.
The Company anticipates that the net proceeds will be used to fund the
development of additional treatment programs and for general corporate purposes,
including potential acquisitions of complementary businesses. The Company
explores the possibility of such acquisitions when appropriate in its judgment,
but has not progressed beyond preliminary negotiations and has not reached any
agreements in principle with respect to any material acquisitions. Pending
application of the net proceeds as described, the Company intends to invest the
net proceeds in short-term, interest-bearing, investment-grade securities.
PRICE RANGE OF COMMON STOCK
The Common Stock is quoted on the Nasdaq National Market under the symbol
"PMRP." The following table sets forth the high and low sales prices for the
Common Stock for the quarters indicated as reported on the Nasdaq National
Market.
<TABLE>
<CAPTION>
PRICE RANGE
-----------------
HIGH LOW
------ ------
<S> <C> <C>
FISCAL YEAR ENDING APRIL 30, 1998:
Second Quarter (through September 23, 1997)............ $24.50 $19.13
First Quarter.......................................... 23.86 16.75
FISCAL YEAR ENDED APRIL 30, 1997:
Fourth Quarter......................................... 29.75 16.75
Third Quarter.......................................... 31.44 20.25
Second Quarter......................................... 35.25 14.13
First Quarter.......................................... 15.50 8.50
</TABLE>
The last reported sale price of the Common Stock on the Nasdaq National
Market on September 23, 1997 was $23.44 per share. As of September 15, 1997,
there were 94 stockholders of record.
DIVIDEND POLICY
It is the policy of the Company's Board of Directors to retain earnings to
support operations and to finance continued growth of the Company rather than to
pay dividends. The Company has never paid or declared any cash dividends on its
Common Stock and does not anticipate paying any cash dividends in the
foreseeable future. The Company's credit facility contains certain restrictions
and limitations, including the prohibition against payment of dividends on
Common Stock.
13
<PAGE> 15
CAPITALIZATION
The following table sets forth the actual capitalization of the Company as
of July 31, 1997 and as adjusted to give effect to (i) the sale of the 1,490,000
shares of Common Stock offered by the Company at an assumed public offering
price of $23.44 per share and (ii) the exercise of options and warrants to
purchase an aggregate of 40,000 shares of Common Stock immediately prior to
consummation of the Offering. This table should be read in conjunction with the
more detailed information and consolidated financial statements and accompanying
notes appearing elsewhere in this Prospectus.
<TABLE>
<CAPTION>
JULY 31, 1997
-----------------------
ACTUAL AS ADJUSTED
------- -----------
(IN THOUSANDS)
<S> <C> <C>
Short-term debt, including current portion of long-term debt......... $ -- $ --
======= =======
Long-term debt and capital lease obligations......................... -- --
Stockholders' equity:
Preferred Stock, $0.01 par value: 1,000,000 shares authorized; no
shares issued and outstanding................................... -- --
Common Stock, $0.01 par value: 10,000,000 shares authorized;
5,055,500 shares issued and outstanding; 6,585,500 shares issued
and outstanding as adjusted..................................... $ 51 $ 66
Additional paid-in capital......................................... 12,257 44,787
Retained earnings.................................................. 5,029 5,029
------- -------
Total stockholders' equity...................................... 17,337 49,882
------- -------
Total capitalization............................................ $17,337 $49,882
======= =======
</TABLE>
14
<PAGE> 16
SELECTED CONSOLIDATED FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER SHARE DATA)
The following table sets forth selected consolidated financial data for the
Company for the periods and at the dates indicated. The selected financial data
as of and for the fiscal years ended April 30, 1993, 1994, 1995, 1996 and 1997
are derived from the Company's financial statements which have been audited by
Ernst & Young LLP, independent auditors. The selected financial data for the
three months ended July 31, 1996 and 1997 are derived from the Company's
unaudited interim consolidated financial statements and, in the opinion of the
Company, all normal and recurring adjustments necessary to present fairly the
Company's financial position and results of operations at the end of and for
such periods have been reflected. Results of operations for the three months
ended July 31, 1997 are not necessarily indicative of the results to be expected
for the entire fiscal year ending April 30, 1998. The following data should be
read in conjunction with the more detailed information and consolidated
financial statements and accompanying notes, as well as "Management's Discussion
and Analysis of Financial Condition and Results of Operations" and other
financial information, appearing elsewhere in this Prospectus.
<TABLE>
<CAPTION>
THREE MONTHS
ENDED
YEAR ENDED APRIL 30, JULY 31,
----------------------------------------------- -----------------
1993 1994 1995 1996 1997 1996 1997
------- ------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenue......................... $16,615 $22,786 $21,747 $36,316 $56,637 $13,028 $16,177
Expenses:
Operating expenses............ 12,273 17,165 20,648 28,472 41,423 9,741 11,626
Marketing, general and
administrative............. 2,112 2,781 2,977 4,019 6,350 1,518 2,115
Provision for bad debts....... 272 1,342 1,317 1,448 3,084 602 664
Depreciation and
amortization............... 99 276 403 596 701 180 216
Interest (income), expense.... (100) (40) 62 2 (217) (31) (89)
Minority interest in loss of
subsidiary................. -- (135) (108) (1) -- -- --
------- ------- ------- ------- ------- ------- -------
Total expenses................ 14,656 21,389 25,299 34,536 51,341 12,010 14,531
------- ------- ------- ------- ------- ------- -------
Income (loss) before income
taxes......................... 1,959 1,397 (3,552) 1,780 5,296 1,018 1,645
Income tax expense (benefit).... 802 572 (1,266) 730 2,172 418 675
------- ------- ------- ------- ------- ------- -------
Net income (loss)............... 1,157 825 (2,286) 1,050 3,124 600 971
------- ------- ------- ------- ------- ------- -------
Dividends declared on preferred
stock(1)...................... 292 28 66 132 17 17 --
------- ------- ------- ------- ------- ------- -------
Net income (loss) for common
stock......................... $ 864 $ 797 $(2,352) $ 918 $ 3,107 $ 583 $ 971
======= ======= ======= ======= ======= ======= =======
Earnings (loss) per common share
(fully diluted)............... $ 0.30 $ 0.24 $ (0.70) $ 0.21 $ 0.54 $ 0.11 $ 0.16
======= ======= ======= ======= ======= ======= =======
Weighted average shares
outstanding (fully diluted)... 2,839 3,312 3,337 5,043 5,772 5,291 6,012
</TABLE>
<TABLE>
<CAPTION>
APRIL 30,
----------------------------------------------- JULY 31,
1993 1994 1995 1996 1997 1997
------- ------- ------- ------- ------- --------
<S> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Working capital.......................... $ 7,842 $ 7,705 $ 8,790 $10,911 $20,641 $ 21,902
Total assets............................. 11,289 13,671 14,811 21,182 33,085 34,917
Long-term debt........................... 203 526 -- -- -- --
Stockholders' equity..................... 6,664 7,699 7,062 9,112 16,248 17,337
</TABLE>
- ---------------
(1) Earnings (loss) per common share is affected by the reduction of net income
available for Common Stock resulting from the dividends on the Preferred
Stock. In July 1996, all holders of the Preferred Stock exercised their
options to convert all of such shares of Preferred Stock into 700,000 shares
of Common Stock.
15
<PAGE> 17
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion should be read in conjunction with the more
detailed information and consolidated financial statements and accompanying
notes, as well as the other financial information appearing elsewhere in this
Prospectus. Except for historical information, the following discussion contains
forward-looking statements that involve risks and uncertainties. The Company's
actual results could differ materially from those discussed herein. Factors that
could cause or contribute to such differences include, but are not limited to,
those discussed in "Risk Factors," as well as those discussed elsewhere in this
Prospectus.
OVERVIEW
PMR is a leading manager of specialized mental health care programs
designed to treat individuals diagnosed with SMI, primarily schizophrenia and
bi-polar disorder (i.e., manic-depressive illness). PMR manages the delivery of
a broad range of outpatient and community-based psychiatric services for SMI
patients, consisting of 39 Outpatient Programs, five Case Management Programs
and seven Chemical Dependency Programs. Through its various programs, PMR
employs or contracts with more than 400 mental health professionals and
currently provides services to approximately 8,800 patients. The Company
currently offers its services in twelve states, comprised of Arizona, Arkansas,
California, Colorado, Hawaii, Illinois, Indiana, Kentucky, Michigan, Ohio,
Tennessee and Texas. PMR believes it is the only private sector company focused
on providing an integrated mental health disease management model to the SMI
population.
PMR's Outpatient Programs serve as a comprehensive alternative to inpatient
hospitalization and include partial hospitalization and lower intensity
outpatient services. The Case Management Programs provide an intensive,
individualized primary care service which consists of a proprietary case
management model utilizing clinical protocols for delivering care to SMI
patients. The Company also provides Chemical Dependency Programs to patients
affiliated with managed care organizations and government-funded programs.
SOURCES OF REVENUE
Outpatient Programs. PMR's Outpatient Programs are the Company's primary
source of revenue. Revenue under these programs is derived primarily from
services provided under three types of agreements: (i) an all-inclusive fee
arrangement based on fee-for-service rates which provides that the Company is
responsible for substantially all program costs; (ii) a fee-for-service
arrangement under which substantially all program costs are the responsibility
of the provider; and (iii) a fixed fee arrangement. The all-inclusive
arrangements are in effect at 36 of the 39 existing Outpatient Programs and
constituted 69.8% of the Company's revenue for the three months ended July 31,
1997. Typical contractual agreements with these providers, primarily acute care
hospitals or CMHCs, require the Company to provide, at its own expense, specific
management personnel for each program site. Patients served by the Outpatient
Programs typically are covered by Medicare.
Revenue under the Outpatient Program is recognized at estimated net
realizable amounts when services are rendered based upon contractual
arrangements with providers. Under certain of the Company's contracts, the
Company is obligated to indemnify the provider for all or some portion of the
Company's management fees that may not be deemed reimbursable to the provider by
Medicare's fiscal intermediaries. As of July 31, 1997, the Company had recorded
$9.7 million in 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 are
classified as non-current liabilities because ultimate determination of
substantially all of the potential contract disallowances is not anticipated to
occur during fiscal 1998. See "Risk Factors -- Dependence Upon Medicare
Reimbursement" and "-- Sufficiency of Existing Reserves to Cover Reimbursement
Risks."
Case Management Programs. For its Case Management Programs in Tennessee,
the Company receives a monthly case rate payment from the managed care
consortiums responsible for managing the TennCare program and is responsible for
planning, coordinating and managing psychiatric case management services for its
consumers who are eligible to participate in the TennCare program. The Company
also is responsible for
16
<PAGE> 18
providing a portion of the related outpatient clinical care under certain of the
agreements. Revenue under the TennCare program is recognized in the period in
which the related service is to be provided. These revenues represent
substantially all of the Company's case management revenues. See "Risk
Factors -- Potential Changes in TennCare," "-- Concentration of Revenues" and
"-- Limited Operating History of Case Management Programs."
Chemical Dependency Programs. In Southern California, the Company contracts
primarily with managed care companies and commercial insurers to provide its
outpatient chemical dependency services. The contracts are structured as
fee-for-service or case rate reimbursement and revenue is recognized in the
period in which the related service is delivered. In Arkansas, the Company
manages detoxification and dual diagnosis programs for individuals eligible for
public sector reimbursement. The Company generates revenue based on a
combination of state-funded grants and Medicaid fee-for-service reimbursement.
Revenue is recognized in the period in which the related service is delivered.
RESULTS OF OPERATIONS
The following table sets forth, for the periods indicated, the percentage
of revenue represented by the respective financial items:
<TABLE>
<CAPTION>
THREE MONTHS
ENDED
YEAR ENDED APRIL 30, JULY 31,
------------------------- -----------------
1995 1996 1997 1996 1997
----- ----- ----- ----- -----
<S> <C> <C> <C> <C> <C>
Revenue................................ 100.0% 100.0% 100.0% 100.0% 100.0%
Operating expenses..................... 95.0 78.4 73.1 74.8 71.9
Marketing, general and
administrative....................... 13.7 11.1 11.2 11.7 13.1
Provision for bad debts................ 6.1 4.0 5.5 4.6 4.1
Depreciation and amortization.......... 1.9 1.6 1.2 1.4 1.3
Interest (income), expense............. 0.3 0.0 (0.4) (0.2) (0.6)
------ ------ ------ ------
- - - -
Total expenses......................... 116.3 95.1 90.7 92.2 89.8
------ ------ ------ ------
- - - -
Income (loss) before income taxes...... (16.3)% 4.9% 9.4% 7.8% 10.2%
======= ======= ======= =======
</TABLE>
THREE MONTHS ENDED JULY 31, 1997 COMPARED TO THREE MONTHS ENDED JULY 31, 1996
Revenue. Revenue increased from $13.0 million for the three months ended
July 31, 1996 to $16.2 million for the three months ended July 31, 1997, an
increase of $3.1 million, or 24.2%. The Outpatient Programs recorded revenue of
$11.5 million, an increase of 24.0% as compared to the three months ended July
31, 1996. This increase was the result of same-site increases in revenue of 7.0%
and the gross addition of eight new programs as compared to the three months
ended July 31, 1996. The increase in same-site revenue was due to increases in
revenue per patient day attributable to the Outpatient Programs' emphasis on a
higher-acuity patient population. The remainder of the increase in revenue came
predominantly from the Case Management Programs in Tennessee and Arkansas, which
recorded revenue of $3.9 million, an increase of 25.3%, as compared to the three
months ended July 31, 1996. This increase was attributable to enrollment growth
in existing programs and the launch of an additional Case Management Program in
Arkansas. Revenue from the Chemical Dependency Programs was $786,000, an
increase of 30.6% as compared to the three months ended July 31, 1996. This
increase was attributable to a strong census increase in the first Arkansas
Chemical Dependency Program.
Operating expenses. Operating expenses consist of costs incurred at the
program sites and costs associated with the field management responsible for
administering the programs. Operating expenses increased from $9.7 million for
the three months ended July 31, 1996 to $11.6 million for the three months ended
July 31, 1997, an increase of $1.9 million, or 19.4%. As a percentage of
revenue, operating expenses declined from 74.8% for the three months ended July
31, 1996 to 71.9% for the three months ended July 31,
17
<PAGE> 19
1997. Operating expenses increased less rapidly than revenue due to the
substantial component of fixed and semi-fixed costs in the Outpatient and Case
Management Programs.
Marketing, general and administrative. Marketing, general and
administrative expenses consist of corporate overhead expense and regional
administrative, development and clinical expenses which are not direct program
expenses. Marketing, general and administrative expenses increased from $1.5
million for the three months ended July 31, 1996 to $2.1 million for the three
months ended July 31, 1997, an increase of $596,000, or 39.3%. This increase was
due to investment in regional offices to support existing and anticipated
programs, as well as enhancements to corporate infrastructure including
utilization review and information technology.
Provision for bad debts. Provision for bad debt expense increased from
$602,000 for the three months ended July 31, 1996 to $664,000 for the three
months ended July 31, 1997, an increase of $62,000, or 10.3%. This increase was
due primarily to an increase in revenue which was partially offset by a modest
decrease in the percentage used to accrue for the provision for bad debts. The
Company has modestly reduced this percentage based on its collection experience
over the past year. However, the Company expects this percentage to fluctuate
based on the aggressiveness of fiscal intermediaries in reviewing claims related
to the Outpatient Programs and the number of programs that the Company operates
which serve a significant indigent population.
Depreciation and amortization. Depreciation and amortization expense
increased from $180,000 for the three months ended July 31, 1996 to $216,000 for
the three months ended July 31, 1997, an increase of $35,000, or 19.6%. The
increase was due largely to expenditures for capital equipment and leasehold
improvements, as well as start-up costs associated with the gross addition of
eight new Outpatient Programs and one new Chemical Dependency Program.
Interest (income), expense. Interest income increased from $31,000 for the
three months ended July 31, 1996 to $89,000 for the three months ended July 31,
1997, an increase of $58,000, or 184.7%. This increase resulted primarily from
higher cash and cash equivalent balances.
Income (loss) before income taxes. Income before income taxes increased
from $1.0 million for the three months ended July 31, 1996 to $1.6 million for
the three months ended July 31, 1997, an increase of $627,000, or 61.6%. Income
before income taxes as a percentage of revenue increased from 7.8% to 10.2% over
this period of time.
YEAR ENDED APRIL 30, 1997 COMPARED TO YEAR ENDED APRIL 30, 1996
Revenue. Revenue increased from $36.3 million for the year ended April 30,
1996 to $56.6 million for the year ended April 30, 1997, an increase of $20.3
million, or 56.0%. The Outpatient Programs recorded revenue of $40.0 million, an
increase of 49.3% as compared to fiscal 1996. This increase was the result of
same-site increases in revenue of 40.0% compared to fiscal 1996 and the gross
addition of eight new programs in fiscal 1997. The remainder of the increase in
revenue came predominantly from the growth in Case Management Programs in
Tennessee and the introduction of Case Management Programs in Arkansas, which
recorded revenue of $13.7 million, an increase of 80.3% as compared to fiscal
1996. Revenue from the Chemical Dependency Programs was $2.9 million, an
increase of 54.4% as compared to fiscal 1996. This increase was attributable to
a full year of operation of the Little Rock public sector program in Arkansas
and to growth in the managed care business in California.
Operating expenses. Operating expenses increased from $28.5 million for the
year ended April 30, 1996 to $41.4 million for the year ended April 30, 1997, an
increase of $13.0 million, or 45.5%. Of this increase, $5.4 million, or 42.0%,
resulted from the effect of a full year of operations of the Case Management
Programs in Tennessee and the launch of the Case Management Programs in
Arkansas. The remainder of the increase in operating expenses was associated
primarily with increased costs to support the revenue growth at existing
Outpatient Programs and the net addition of six Outpatient Programs during
fiscal 1997.
Marketing, general and administrative. Marketing, general and
administrative expenses increased from $4.0 million for the year ended April 30,
1996 to $6.4 million for the year ended April 30, 1997, an increase of
18
<PAGE> 20
$2.3 million, or 58.0%. The increase was related to the following factors: (i)
the reorganization of the Company into three regions; (ii) the significant
investment in the Mid-America region to prepare for anticipated growth
associated with the agreement with Columbia/HCA Healthcare Corporation
("Columbia"); (iii) the start-up of the site management and clinical information
initiative; and (iv) increases in personnel associated with information systems,
development and utilization review.
Provision for bad debts. Provision for bad debt expense increased from $1.4
million for the year ended April 30, 1996 to $3.1 million for the year ended
April 30, 1997, an increase of $1.6 million, or 113.0%. This increase was due to
an increase in the percentage for bad debt from 4.0% in fiscal 1996 to 5.4% in
fiscal 1997, which resulted in part from higher rates of indigent clients in the
Case Management Programs, limited collection experience in the Case Management
Programs and in the Chemical Dependency Programs in Arkansas, and a more
conservative percentage for denials by third-party payors.
Depreciation and amortization. Depreciation and amortization expense
increased from $596,000 for the year ended April 30, 1996 to $701,000 for the
year ended April 30, 1997, an increase of $105,000, or 17.6%. The increase was
due to additional capital expenditures associated with the start-up of eight new
Outpatient Programs and increased capital expenditures for information systems.
Interest (income), expense. Interest expense decreased from $2,000 for the
year ended April 30, 1996 to interest income of $217,000 for the year ended
April 30, 1997, an increase of $219,000. The improvement was due to higher cash
and cash equivalent balances and the absence of bank debt in fiscal 1997.
Income (loss) before income taxes. Income before income taxes increased
from $1.8 million for the year ended April 30, 1996 to $5.3 million for the year
ended April 30, 1997, an increase of $3.5 million, or 197.5%. Income before
income taxes as a percentage of revenue increased from 4.9% to 9.4% over this
period of time.
YEAR ENDED APRIL 30, 1996 COMPARED TO YEAR ENDED APRIL 30, 1995
Revenue. Revenue increased from $21.7 million for the year ended April 30,
1995 to $36.3 million for the year ended April 30, 1996, an increase of $14.6
million, or 67.0%. The Outpatient Programs recorded revenue of $26.8 million, an
increase of 33.3% as compared to fiscal 1995. This increase was due to increases
in average patient census and net revenue per patient at existing program sites,
and the gross addition of five new Outpatient Programs during fiscal 1996. The
remainder of the increase in revenue came predominantly from the commencement of
the Case Management Programs in Tennessee, which recorded revenue of $7.6
million. Revenue from the Chemical Dependency Programs was $1.9 million, an
increase of 21.5% as compared to fiscal 1995.
Operating expenses. Operating expenses increased from $20.6 million for the
year ended April 30, 1995 to $28.5 million for the year ended April 30, 1996, an
increase of $7.8 million, or 37.9%. Of this increase, $6.9 million resulted from
the commencement of the Case Management Programs in Tennessee. The remainder of
the increase in operating expenses was associated with increased costs to
support the revenue growth at existing Outpatient Programs and the net addition
of three Outpatient Programs during fiscal 1996.
Marketing, general and administrative. Marketing, general and
administrative expenses increased from $3.0 million for the year ended April 30,
1995 to $4.0 million for the year ended April 30, 1996, an increase of $1.0
million, or 35.0%. The increase was related primarily to the following factors:
(i) the preparation for and commencement of the Case Management Programs in
Tennessee; (ii) the preparation for the commencement of the Case Management
Programs in Arkansas; and (iii) increased marketing of the Outpatient Programs.
Provision for bad debts. Provision for bad debt expense increased from $1.3
million for the year ended April 30, 1995 to $1.4 million for the year ended
April 30, 1996, an increase of $131,000, or 9.9%. This increase was
substantially less than the percentage increase in revenue and other expenses
due to a lower provision for bad debts on revenue from the Case Management
Programs.
Depreciation and amortization. Depreciation and amortization expense
increased from $403,000 for the year ended April 30, 1995 to $596,000 for the
year ended April 30, 1996, an increase of $193,000, or 47.8%.
19
<PAGE> 21
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.
Interest (income), expense. Interest expense decreased from $62,000 for the
year ended April 30, 1995 to $2,000 for the year ended April 30, 1996, a
decrease of $60,000, or 96.5%. This decrease resulted primarily from
substantially higher cash and cash equivalent balances in fiscal 1996 and the
repayment of outstanding bank debt in the fourth quarter of fiscal 1996.
Income (loss) before income taxes. Income before income taxes increased
from a loss of $3.6 million for the year ended April 30, 1995 to income of $1.8
million for the year ended April 30, 1996, an increase of $5.3 million. Income
before income taxes as a percentage of revenue increased to 4.9% over this
period of time.
LIQUIDITY AND CAPITAL RESOURCES
For the three months ended July 31, 1997, net cash used in operating
activities was $854,000. Working capital was $21.9 million, an increase of $1.3
million, or 6.1%, as compared to April 30, 1997. Cash and cash equivalents at
July 31, 1997 were $8.6 million, a decrease of $1.4 million, or 14.2% as
compared to April 30, 1997.
The negative cash flow from operating activities during the three months
ended July 31, 1997 was primarily due to increases in accounts receivable. This
increase in accounts receivable was a result of significant revenue increases
combined with an increase in days sales outstanding from 67 in fiscal 1997 to 79
for the three months ended July 31, 1997. The increase in days sales outstanding
was due to delays in payments associated with six of the Outpatient Programs
which are presently subject to a review of claims. The other significant use of
cash was the purchase of furniture and office equipment associated with recently
opened program sites and investment in information technology.
Working capital is anticipated to be utilized during fiscal 1998 for
operations, to continue expansion of the Outpatient and Case Management
Programs, for the development of the site management and clinical information
initiative, and for the implementation and expansion of the Company's other
programs. During fiscal 1998, working capital is expected to be realized
principally from operations, as well as from a $10.0 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 initiative in amounts that are not yet
certain due to the early stage development of this initiative. The Company also
is in the process of refining the specifications for the purchase and
development of a new care management information system which will include a
data collection and repository system for the Company's clinical information.
From time to time, the Company recognizes charges to operations as a result
of particular uncertainties associated with the health care reimbursement rules
as they apply to the Outpatient Programs. During fiscal 1997, a majority of the
Company's revenue was derived from the management of the Outpatient Programs.
Since substantially all of the patients of the Outpatient Programs are eligible
for Medicare, collection of a significant component of the Company's management
fees is dependent upon reimbursement of claims submitted to fiscal
intermediaries by the hospitals or CMHCs on whose behalf these programs are
managed. Under the Company's contracts with its providers, the Company may be
responsible to indemnify providers 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, if and when they
become due, could have a material adverse effect on the Company's short term
liquidity.
20
<PAGE> 22
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 and that any disallowance will merely be
offset against obligations already owed by the provider to the Company. See
"Risk Factors -- Dependence Upon Medicare Reimbursement."
The Company maintains significant reserves to cover the potential impact of
two primary uncertainties: (i) 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) 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 assurance that such reserves will be adequate. The obligation to pay the
amounts estimated within the Company's financial statements (or such greater
amounts as are due), if and when they become due, could have a material adverse
effect upon the Company's business, financial condition and results of
operations. See "Risk Factors -- Sufficiency of Existing Reserves to Cover
Reimbursement Risks," "Business -- Contracts" and "-- Government Regulation."
IMPACT OF INFLATION
A substantial portion of the Company's revenue is subject to reimbursement
rates that are regulated by the federal and state governments and that do not
automatically adjust for inflation. As a result, increased operating costs due
to inflation, such as labor and supply costs, without a corresponding increase
in reimbursement rates, may adversely affect the Company's earnings in the
future.
21
<PAGE> 23
BUSINESS
PMR is a leading manager of specialized mental health care programs
designed to treat individuals diagnosed with SMI, primarily schizophrenia and
bi-polar disorder (i.e., manic-depressive illness). PMR manages the delivery of
a broad range of outpatient and community-based psychiatric services for SMI
patients, consisting of 39 Outpatient Programs, five Case Management Programs
and seven Chemical Dependency Programs. Through its various programs, PMR
employs or contracts with more than 400 mental health professionals and
currently provides services to approximately 8,800 patients. The Company
currently offers its services in twelve states, comprised of Arizona, Arkansas,
California, Colorado, Hawaii, Illinois, Indiana, Kentucky, Michigan, Ohio,
Tennessee and Texas. PMR believes it is the only private sector company focused
on providing an integrated mental health disease management model to the SMI
population.
PMR's Outpatient Programs serve as a comprehensive alternative to inpatient
hospitalization and include partial hospitalization and lower intensity
outpatient services. The Case Management Programs provide an intensive,
individualized primary care service which consists of a proprietary case
management model utilizing clinical protocols for delivering care to SMI
patients. The Company also provides Chemical Dependency Programs to patients
affiliated with managed care organizations and government-funded programs.
Recently, PMR began development of a site management and clinical information
initiative. The Company believes that its access to a large SMI patient base
provides it with a unique opportunity to collect, process and analyze clinical
and pharmacoeconomic data on schizophrenia and bi-polar disorder. In January
1997, PMR entered into a collaborative agreement with United HealthCare
Corporation and its Applied Informatics division to assist in developing this
initiative.
INDUSTRY OVERVIEW
According to the NIMH and the NAMHC, serious mental illnesses are
neurobiological disorders of the brain and include schizophrenia,
schizoaffective disorder, manic-depressive illness and autism, as well as severe
forms of other disorders such as major depression, panic disorder and
obsessive-compulsive disorder. These diseases are chronic and represent one of
the highest cost segments of the health care system. Industry sources indicate
that approximately 2.8% of the adult population and 3.2% of children ages 9-17
are affected by SMI, for a total SMI population in the United States of
approximately 5.6 million people. In 1995, individuals diagnosed with SMI
consumed $27 billion in direct medical costs relating to the provision of mental
health services and consumed more than $74 billion in total costs, including
estimates of lost productivity. Based on industry data, the Company estimates
that the direct medical expenditures associated with SMI represent in excess of
25% of total direct mental health care costs. However, the potential costs of
direct medical care may exceed these levels due to the approximately 2.2 million
Americans estimated to be suffering from untreated SMI. The cost and quality of
care for the SMI population has been adversely affected by several continuing
public policy trends including: (i) the de-institutionalization of SMI patients
from long-term care hospitals into the community; (ii) the fragmented provision
of care through under-funded, community-based organizations; and (iii)
disparate, uncoordinated funding sources.
DE-INSTITUTIONALIZATION OF THE SMI POPULATION
Since 1955, the SMI population in the United States has experienced
extensive de-institutionalization resulting in the public psychiatric hospital
census declining from approximately 560,000 individuals to approximately 72,000
individuals in 1994. The effect of de-institutionalization is exacerbated by the
fact that the general population grew 58% over this same period, while the SMI
incidence rate remained stable. Industry sources estimate that there are
approximately 763,000 individuals in the United States currently diagnosed with
SMI who otherwise would have received inpatient treatment prior to
de-institutionalization, of which 60%-75% are patients with schizophrenia or
bi-polar disorder. The result of this trend has been increased rates of
transinstitutionalism and homelessness among SMI patients. Transinstitutionalism
is a term utilized to describe the mechanism by which de-institutionalized
individuals receive care in one or more alternate settings such as nursing
homes, general hospitals, jails and prisons. Industry estimates indicate that
23% of nursing home residents have a mental disorder and that more than 98,000
general hospital beds are occupied by SMI patients. Furthermore, approximately
10% of all prison and jail inmates are SMI diagnosed
22
<PAGE> 24
and 35% of the approximately 350,000 homeless individuals in the United States
are currently suffering from SMI disorders.
De-institutionalization has exacerbated an ineffective and disorganized
system of care for a medically complex patient population with highly
specialized needs. Coordination and monitoring of services is crucial to avoid
fragmentation of care for SMI patients. SMI patients typically enter the health
care system through multiple, uncoordinated access points including emergency
rooms, CMHCs, substance abuse centers, community case managers and crisis
management hotlines. Services provided are generally disparate, often
duplicative and structured to function reactively to patient crises rather than
proactively to manage patient care. Multiple physicians, case workers and other
care providers handle patients in different sites across the spectrum of care
with little or no coordination. Under the current system, patient monitoring and
medication compliance is generally low for SMI patients, leading to an increased
incidence rate of high-cost catastrophic events.
EVOLUTION OF GOVERNMENT ROLE
The majority of the costs of treating and managing the SMI population are
borne by federal, state and local government programs, including Medicare and
Medicaid. States play a much larger role in the provision of mental health care
services than they do in the delivery of general health care services,
particularly for the SMI population. Many states operate and manage psychiatric
hospitals and CMHCs, the latter of which are often the primary care setting for
SMI patients. CMHCs typically are not-for-profit, government affiliated or
independently operated organizations which lack access to capital, sophisticated
management information and financial systems, and comprehensive programs for
treating SMI patients. CMHCs traditionally have not been included in managed
care networks and thus may be unfamiliar with the needs and demands of managed
care. This provider segment also is extremely fragmented, with each community
having one or more agencies and boards of directors. As costs for public sector
mental health care have continued to escalate, states have begun to turn to the
private sector to assume the administrative and financial risk of providing
mental health care to state Medicaid populations. At least nine states,
including Colorado, Hawaii, Iowa, Massachusetts, Minnesota, Montana, Ohio,
Tennessee and Utah, have established some of the first contracts to "carve-out"
behavioral health care directly 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. The expensive
and difficult-to-manage SMI population creates significant challenges for
managed care companies unfamiliar with the requirements of these disorders.
SCHIZOPHRENIA
The primary diagnosis of the SMI population treated by PMR is
schizophrenia, an incurable biological disorder which affects approximately 1%
of the general population. Approximately 70% of the patients treated at the
Company's programs are diagnosed with schizophrenia. The remainder are afflicted
with bi-polar disorder, major depression, schizoaffective disorder or other
personality disorders. Industry sources indicate that up to 50% of patients
suffering from schizophrenia receive no treatment for symptoms. In addition, due
to the stigma and social constraints that accompany schizophrenia, 25% of
schizophrenics attempt to end their lives through suicide. In general, each year
a significant percentage of individuals with schizophrenia are admitted for an
inpatient hospitalization and virtually all of the diagnosed population is
prescribed a chronic medication regimen. These individuals often suffer from a
substance abuse or chemical dependency diagnosis. Based on industry data, the
Company estimates that schizophrenia consumes approximately $20 billion in
annual mental health care expenditures. The direct medical costs of
schizophrenia are consumed primarily in CMHCs, nursing homes and acute care
hospitals.
ADVANCES IN PHARMACEUTICAL TREATMENTS
Since the introduction of Clozaril in the United States in 1989, several
pharmaceutical products have been developed for SMI patients that have resulted
in significant improvements in treatment. Although the specific biological
causes of SMI remain unknown, the efficacy of many treatment regimens has been
found to be comparable to that in other branches of medicine. For example, with
the exception of autism, medications
23
<PAGE> 25
exist which generate medical responses in 60%-90% of patients with SMI. For
schizophrenia and schizoaffective disorder, research has shown that standard
anti-psychotic medication will reduce psychotic symptoms in 60% of patients and
in 70%-85% of those experiencing symptoms for the first time. These newer
medications, with proper compliance, offer significant potential for recovery to
individuals afflicted with SMI.
STRATEGY
PMR's objective is to be the leader in the management of cost-effective
programs which provide quality care and foster the successful recovery of
individuals from the devastating effects of SMI. Following are the key
components of the Company's strategy:
- OBTAIN NEW CONTRACTS FOR OUTPATIENT AND CASE MANAGEMENT PROGRAMS. PMR
plans to expand into new geographic markets and increase penetration in
its existing markets by leveraging its reputation as a leading manager of
outpatient psychiatric programs for the SMI population. The Company seeks
to identify new markets and potential strategic alliances for these
programs. In addition, the Company invests in program enhancements which
offer additional benefits to providers and patients while increasing
program profitability to the Company.
- ESTABLISH NEW PROGRAMS AND ANCILLARY SERVICES. PMR maintains an ongoing
effort to identify and establish new programs and services which can
positively influence the outcomes and reduce the costs of mental health
care for the SMI population. Such services include the Company's
structured outpatient clinic, which is a lower intensity "step-down"
outpatient service designed to meet the needs of patients who have
completed the partial hospitalization program or are at other levels of
recovery. In addition, the Company has established an ambulatory
detoxification program in Arkansas. By adding additional programs and
ancillary services, PMR is able to extend the breadth and depth of its
treatment capabilities and more effectively provide needed care to SMI
patients.
- COMBINE EXISTING PROGRAMS INTO A FULLY-INTEGRATED DISEASE MANAGEMENT
MODEL. PMR believes its proprietary mental health disease management
model will position the Company to accept the clinical and financial
risks associated with providing care on a capitated basis to the SMI
population. The Company intends to integrate its Case Management and
Chemical Dependency Programs into markets where outpatient psychiatric
services are already being provided by the Company in order to offer a
more comprehensive mental health care program. By combining existing
Outpatient Programs with its case management capabilities, PMR believes
it can offer an integrated SMI care program to payors which will result
in improved clinical outcomes on a cost-effective basis.
- PURSUE SITE MANAGEMENT AND CLINICAL INFORMATION INITIATIVE. PMR is
pursuing a site management and clinical information initiative. The
Company intends to develop a proprietary database that will facilitate
its ability to participate in clinical trials, to collect information
related to clinical practice, and to define appropriate clinical
protocols for treating SMI patients. PMR believes that its access to more
than 20,000 individuals diagnosed with SMI provides it with a unique
opportunity to pursue such business opportunities and expand its
potential base of customers.
OPERATIONS
The Company currently operates three specialized mental health care
programs comprised of its Outpatient, Case Management and Chemical Dependency
Programs. These programs are designed to ensure that high quality,
cost-effective treatment and rehabilitation services are provided which decrease
hospitalization and assist patients in overcoming the disabling effects of SMI.
In addition, the Company has recently begun to pursue a site management and
clinical information initiative focused on collecting, processing and analyzing
clinical and pharmacoeconomic data related to schizophrenia and bi-polar
disorder.
OUTPATIENT PROGRAMS
PMR's Outpatient Programs are operated under management contracts with
acute care hospitals, psychiatric hospitals and CMHCs, and consist principally
of intensive outpatient programs which serve as
24
<PAGE> 26
alternatives to inpatient care. These programs target patients in crisis or
those recovering from crisis and thus provide more intensive clinical services
than those generally available in a traditional outpatient setting. The Company
currently manages 39 programs in Arizona, Arkansas, California, Colorado,
Hawaii, Illinois, Indiana, Kentucky, Michigan, Ohio, Tennessee and Texas. The
Company's contracts are with 27 separate providers including Scripps Health,
Sutter Health System, St. Luke's Hospital of San Francisco and the University of
California, Irvine. In addition, the Company entered into an agreement in July
1996 with Columbia which provides access to a ten-state region which presently
includes approximately 70 hospitals. Typically, the Company's contracts are two
to five years in length. While contract expirations occur from time to time in
the ordinary course of business, the Company vigorously attempts to extend and
renew existing contracts and to maintain its market share through the addition
of new contracts.
The Outpatient Programs consist principally of psychiatric partial
hospitalization programs which are ambulatory in nature and provide intensive,
coordinated clinical services to patients diagnosed with SMI. In 1996, the
Company introduced its structured outpatient clinic which is a lower intensity
"step-down" outpatient service designed to continue the care, maintain the gains
achieved and prevent the relapse of patients who have completed the partial
hospitalization program. To further expand the Company's potential client
population, in August 1997, the Company broadened its structured outpatient
program by introducing techniques and protocols utilized in the Case Management
Programs in an effort to include clients that are at a lower level of clinical
risk.
Patients admitted to the Outpatient Programs undergo a complete assessment
and treatment planning process that includes psychiatric, psycho-social, medical
and other specialized evaluations. Each SMI individual is assigned a care
coordinator responsible for managing the comprehensive treatment available to
the patient, which includes specialty services for geriatric and dually
diagnosed patients. All Outpatient Programs provide programming five or six days
a week. Treatments include daily group psychotherapy and individual therapy
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. In its Outpatient Programs where the Company retains
designated staffing responsibilities, the Company often provides program
administrators, medical directors, nurses, community liaisons and other clinical
personnel. In these cases, the program administrator generally has a degree in
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 have various levels of training in
nursing, psychology or social work.
Through its Outpatient Programs, the Company brings management expertise to
the health care provider with respect to the establishment, development and
operation of an outpatient program for SMI patients that is not usually
available on an in-house basis. Services provided under Outpatient Program
management contracts include complete program design and administration from
start-up through ongoing program operation. These programs are intended to
enhance the delivery of outpatient mental health services by introducing
proprietary clinical protocols and procedures, conducting quality assurance and
utilization reviews, ensuring compliance with government regulations and
licensure requirements, supplying highly trained certified personnel, providing
market research support and expanding the range of services provided. In
addition, the programs also enhance the management of financial and
administrative services by providing coding and billing support to the providers
and performing budget, financial and statistical analyses designed to monitor
facility performance. The Company believes these comprehensive features enhance
the efficiency and quality of care provided by its Outpatient Programs.
CASE MANAGEMENT PROGRAMS
PMR's Case Management Programs were created in 1993 to treat the SMI
population in a managed care environment. The case management model was
developed in part from proprietary clinical protocols and assessment tools which
were purchased in 1993 from leading researchers in the field of psychiatric
rehabilitation. Specifically, the Company's programs provide SMI individuals
with personalized, one-on-one services designed to stabilize their daily lives
and provide early intervention in crisis situations, thereby limiting the
catastrophic events which lead to inpatient hospitalizations. The Case
Management Programs utilize comprehensive protocols based upon a specific model
of intensive service coordination in conjunction with a
25
<PAGE> 27
case manager whose responsibilities include consumer education, the development
of crisis plans, responding to crisis events, linking patients to emergency
services, assessing patient needs, reviewing patient treatment plans, and
authorizing and reviewing services. Case management services vary by market and
need of the population and may include 24-hour case management, crisis
intervention, respite services, housing assistance, medication management and
routine health screening. PMR believes that its Case Management Programs
represent the core clinical tool for managing the SMI population in either a
capitated or fee-for-service environment and enable its patients to live more
healthy, independent, productive and satisfying lives in the community.
PMR provides its case management services through long-term exclusive
management agreements with leading independent case management agencies and
CMHCs. Pursuant to those agreements, the Company contributes its proprietary
protocols and management expertise and, when necessary, negotiates case
management rates and contracts on behalf of the providers. The Company also
provides training, management information systems support, and accounting and
financial services. Presently, the Company manages programs at two case
management agencies in Tennessee and three CMHCs in Arkansas.
In September 1995, PMR began providing case management services in
Tennessee through exclusive management agreements with two leading case
management agencies based in Memphis and Nashville. In July 1996, the State of
Tennessee implemented the behavioral health program of TennCare, its Medicaid
managed care initiative, which resulted in a complete transition to behavioral
managed health care for the Medicaid population, including approximately 45,000
SMI patients. Consequently, PMR became the leading provider of case management
services to two managed care consortiums, Premier which consists of Columbia and
Green Spring Health Services, Inc. (a subsidiary of Magellan Health Services,
Inc.), and TBH which consists of Merit Behavioral Care Corporation and Tennessee
Behavioral Health. See "Risk Factors -- Potential Changes in TennCare,"
"-- Concentration of Revenues," "-- Limited Operating History of Case Management
Programs" and "Business -- Contracts."
In July 1996, the Company's Arkansas program became operational with the
launch of case management services at CMHCs in Little Rock and Russelville. A
third site, at a CMHC in El Dorado, Arkansas, opened in September 1996. These
three CMHCs serve a potential market of approximately 4,000 SMI patients.
PMR has developed a new clinical program which provides psychiatric
rehabilitation and community support services to SMI individuals. This program
is designed to be integrated with the Company's existing Case Management
Program. The new clinical program provides a continuum of rehabilitative
services including day treatment, skills development, skills maintenance, and
individual and small group rehabilitation services designed to help individuals
with SMI achieve recovery goals.
CHEMICAL DEPENDENCY PROGRAMS
Public sector patients with mental illness often are dually diagnosed with
a chemical dependency problem and bridging the gap between the two illnesses is
often difficult due to different funding streams, treatment philosophies and
regulations pertaining to Medicaid and other public sector payors. Through its
Chemical Dependency Programs, PMR works with both public and private payors to
develop programs and technologies which include a full range of screening,
triage, crisis management, ambulatory care and utilization review services for
individuals suffering from chemical addictions. The Company also works with
providers to develop detoxification services, and dual diagnosis treatment and
rehabilitation. The Company believes that its programs and treatment protocols
enable it to meet effectively the specific needs of this patient population.
In January 1996, the Company opened its first outpatient detoxification
program for adults in affiliation with Little Rock Community Mental Health
Center in order to manage the detoxification of state-funded and Medicaid
beneficiaries on an outpatient basis. Since its opening, the Company believes
that its outpatient program at this center has stabilized substantially all of
the individuals who were previously directed to a state inpatient detoxification
facility. The Company opened its second ambulatory detoxification program in
Arkansas in September 1996. Given that the cost of stabilizing chemically
dependent individuals on an ambulatory basis is significantly lower relative to
inpatient treatment, PMR believes that states and other agencies will be
interested in developing similar arrangements.
26
<PAGE> 28
The Company also operates and manages programs devoted exclusively to
substance abuse and rehabilitation in ambulatory settings, primarily for
patients of managed care organizations in Southern California. These programs
are operated as free-standing treatment services or as part of a management
services agreement with providers. Currently, the Company operates four
outpatient facilities that provide intensive chemical dependency services under
five distinct programs. All of these programs have received accreditation with
commendations by the Joint Commission of American Health Organizations. In
addition, the Company is a primary provider of outpatient chemical dependency
rehabilitation services to MedPartners Inc. in the Los Angeles basin.
SITE MANAGEMENT AND CLINICAL INFORMATION INITIATIVE
PMR recently began pursuit of a site management and clinical information
initiative. This initiative 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 in treating SMI individuals. In January 1997, the Company
signed a collaborative agreement with United HealthCare Corporation and its
Applied Informatics division to develop this initiative. Pursuant to this
agreement, Applied Informatics will provide information systems and database
compilation services to PMR in order to facilitate the development of a
proprietary database that captures clinical information relating to the care of
SMI patients.
The genetic and neurobiological bases of SMI will continue to be the focus
of intensive research attention. 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"). Delays in recruiting and enrolling qualified patients, along with
patient compliance issues, are significant concerns for the CROs which manage
the trials. As a result, site management organizations ("SMOs") are emerging as
a new industry sector which provides commercialized clinical trial services
under contract with CROs or directly with a pharmaceutical sponsor.
The Company believes that its expanding service base is an excellent
platform for the development of research and clinical information capabilities
due to its 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 SMI. The Company
is currently in the process of developing its capabilities to participate in
clinical trials, to collect information related to clinical practice and to
define appropriate clinical protocols for treating SMI patients.
CONTRACTS
OUTPATIENT PROGRAMS
Each Outpatient Program is generally administered and operated pursuant to
the terms of written management contracts with providers. These 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 health care services, and the methods by
which the Company will be compensated. The contracts are generally for a stated
term 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.
Revenues derived by the Company under these contracts generally fit within
three types of arrangements: (i) an all-inclusive fee arrangement based on
fee-for-service rates which provides that the Company is responsible for
substantially all program costs; (ii) a fee-for-service arrangement whereby
substantially all program costs are the responsibility of the provider; and
(iii) a fixed fee arrangement. The all-inclusive arrangements are in effect at
36 of the 39 existing Outpatient Programs and constituted approximately 69.8% of
the Company's revenues for the three months ended July 31, 1997. Typical
contractual agreements with these providers, primarily acute care hospitals or
CMHCs, require the Company to provide, at its own
27
<PAGE> 29
expense, specific management personnel for each program site. 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 if the management fee paid to the Company
is not reimbursable by Medicare. See "Risk Factors -- Dependence Upon Medicare
Reimbursement," "-- Sufficiency of Existing Reserves to Cover Reimbursement
Risks," "Management's Discussion and Analysis of Financial Condition and Results
of Operations" and "Business -- Government Regulation."
As the Outpatient Programs mature and increase in number, the Company
anticipates that as a matter of normal business 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.
In August 1996, the Company signed an enabling agreement (the "Columbia
Agreement") with Columbia. The Columbia Agreement relates specifically to the
Company's Outpatient Program and Columbia's ten state Mid-America Group which is
comprised of 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 in the Mid-America Group markets where Columbia
owns or manages a hospital. As of August 1997, the Company managed five programs
for Columbia hospitals in Illinois, Kentucky and Tennessee and had signed
contracts for two additional programs.
The Company's contracts covering sites operated by hospitals operating
under Scripps Health, a San Diego provider, accounted for approximately 12.6%
and 14.4% of the Company's revenues for fiscal 1997 and for the three months
ended July 31, 1997, respectively. No other provider accounted for more than 10%
of the Company's revenues for fiscal 1997.
CASE MANAGEMENT PROGRAMS
Each Case Management Program is generally administered pursuant to a
management and affiliation agreement with a contracting provider and operates
through a wholly owned subsidiary of the Company. The Company is responsible for
developing and implementing detailed operating protocols relating 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.
Pursuant to the terms of the management and affiliation agreements, the Company
manages and operates, on behalf of each case management provider, the delivery
of case management and other covered psychiatric services. The case management
provider is responsible for staff personnel and program facilities, and retains
final discretionary authority to approve the related policy manual, staffing
issues and overall program operations.
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 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. In the Fall of 1995, the Company commenced
the operation of its Case Management Programs with two case management agencies
in Nashville, Tennessee and Memphis, Tennessee. In March and April of 1996, the
Company also executed management and affiliation agreements with three CMHCs in
Arkansas, which became operational in 1996. See "Risk Factors -- Concentration
of Revenues" and "-- Limited Operating History of Case Management Programs."
Commencing in July 1996, two managed care consortiums became the payors for
mental health care services under TennCare. These consortiums, known as TBH and
Premier, were fully at-risk for the
28
<PAGE> 30
approximately 1.2 million individuals who qualified for coverage based on
Medicaid eligibility or other indigency standards. The Company holds contracts
for Case Management Programs with both of the managed care consortiums. The
Company previously received information that Premier had notified the State of
Tennessee of its intention to withdraw from TennCare effective June 30, 1997.
However, Premier continued in its role as a managed care consortium and recently
amended its contract with the State of Tennessee to continue its participation
in TennCare through December 31, 1998. 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. Depending on the outcome of ongoing discussions among the
interested parties in TennCare, the Company may find it necessary to restructure
or terminate one or more of its contracts with the managed care consortiums or
case management agencies. The potential changes, which the Company cannot
predict with any degree of certainty, could have a material adverse effect on
the Company's business, financial condition and results of operations. See "Risk
Factors -- Potential Changes in TennCare."
CHEMICAL DEPENDENCY PROGRAMS
Each Chemical Dependency Program is generally administered and operated
pursuant to the terms of a chemical dependency management agreement with
providers and payors. The Company is responsible for furnishing all management,
administrative and business services required to develop and operate Medicaid-
funded intensive outpatient rehabilitative services and commercial chemical
dependency rehabilitation services primarily reimbursed by managed care
organizations. The Company also is responsible for creating and implementing
appropriate policies and procedures, admissions guidelines and other protocols
for each Chemical Dependency Program. The provider is responsible for staff
personnel, program facilities and for providing detoxification services.
The terms of the Company's commercial chemical dependency management
agreements, which represent a significant portion of the Company's Chemical
Dependency Program revenues, range from one to three years and may only be
terminated for cause upon the occurrence of such events as (i) a loss of
accreditation or other required licensing or regulatory qualifications, (ii) the
failure of either party to maintain required liability insurance coverage, (iii)
certain legislative changes that may affect the legal validity of the agreement,
(iv) the insolvency of either party, (v) a material misrepresentation of any
warranty set forth in the agreement or (vi) any material breach of the agreement
that is not cured as provided in the agreement.
CORPORATE COMPLIANCE
PMR's corporate compliance program is designed to ensure that its services
are operated in conformity with all applicable federal, state and local
regulations including those governing qualification for reimbursement under the
Medicare and Medicaid programs. Historically, the Company has recognized the
complexity of the regulations governing health care in general and the Company's
services in particular, and has taken a proactive approach to ensure the
appropriate level of corporate resources dedicated to monitoring the Company's
compliance with these issues. The Company's internal compliance program was
formalized in fiscal 1996 and includes annual training sessions for all
employees regarding fraud and abuse issues, periodic utilization and quality
assurance reviews of each of the Company's programs, and a 24-hour hotline which
is available to all employees. The Company employs a compliance officer who is
responsible for the Company's corporate compliance program and reports directly
to the Company's President. In addition, the Company recently formed a committee
comprised of outside board members responsible for reviewing the structure of
and initiatives within the Company's corporate compliance program.
MARKETING AND DEVELOPMENT
PMR's principal marketing efforts with respect to its Outpatient and Case
Management Programs are concentrated in the identification of prospective
hospitals, CMHCs and case management agencies which may be suitable providers.
Providers that 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
29
<PAGE> 31
financial and clinical profile of the provider. The Company also markets the
benefits of its Outpatient and Case Management Programs to managed care
organizations and their provider networks as public sector contracts are
awarded. The development of the Chemical Dependency Programs focuses on
expanding current contractual relationships, obtaining new provider contracts
and marketing primarily to at-risk payors where ambulatory chemical dependency
services are of significant value.
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 benefits of the Company's programs. 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.
COMPETITION
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 health care
programs and services. The Company anticipates that competition will become more
intense as pressure to contain the rising costs of health care continues to
intensify, particularly as programs such as those operated by the Company are
perceived to help contain mental health care costs. Many other companies engaged
in the management of outpatient psychiatric programs compete with the Company
for the establishment of affiliations with acute care hospitals. Furthermore,
while the Company's existing competitors in the case management business are
predominantly not-for-profit CMHCs and case management agencies, the Company
anticipates that other health care management companies will eventually compete
for this business. Many of these present and future competitors are
substantially more established and have greater financial and other resources
than 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. There can be no assurance that the Company will be able to compete
effectively with its present or future competitors, and any such inability could
have a material adverse effect on the Company's business, financial condition
and results of operations.
GOVERNMENT REGULATION
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. 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 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 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 business, 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 policies. See "Risk
Factors -- Dependence Upon Medicare Reimbursement," "-- Sufficiency of Existing
Reserves to Cover Reimbursement Risks" and "Management's Discussion and Analysis
of Financial Condition and Results of Operations."
The Medicare Program was 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 HCFA to administer and interpret rules and
regulations governing the Medicare program and the benefits associated
therewith.
30
<PAGE> 32
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. Applicable Medicare guidelines permit
the reimbursement of contracted management services provided that, among other
things, the associated fees are "reasonable." As a general rule, Medicare
guidelines indicate that the costs incurred by a provider for contract
management services relating to furnishing Medicare-covered services are deemed
"reasonable" if the costs are comparable with marketplace prices for similar
services. Although management believes that the Company's charges for its
services are 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 business,
financial condition and results of operations.
HCFA has published criteria that 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. As a condition of the service being "reasonable and
necessary," the patient must otherwise need inpatient psychiatric hospital care,
or be at risk of relapsing and requiring inpatient care if the partial
hospitalization services are not furnished. 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.
Medicare's application of 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. Although the
Company and its providers have quality assurance and utilization review programs
to monitor partial hospitalization programs managed by the Company in order to
ensure that such programs operate in compliance with the Company's understanding
of all Medicare coverage requirements, there can be no assurance 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.
All of the partial hospitalization programs managed by the Company are
treated as "provider-based" programs by HCFA. 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 and operated in a manner
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 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 program sites managed by the Company will be
found not to be "provider-based." If such determination is made, HCFA may seek
retroactive recoveries from providers. If HCFA makes a determination that
programs managed by the Company are not "provider-based" and seeks retroactive
recovery of payments from the Company's providers, such recovery could have a
material adverse effect upon the Company's business, financial condition and
results of operations. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and "Business -- Contracts."
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 that contract with the Company
should be found in compliance with the applicable requirements. However, there
can be no assurance that some CMHCs contracting with the Company will not be
terminated from the Medicare program or that the government will not attempt to
recover payments made to such CMHCs for services, including payments relating to
the Company's services, which had been furnished and paid for by Medicare.
Changes in Medicare's Cost-Based Reimbursement for Partial Hospitalization
Services. In the Balanced Budget Act of 1997, Congress directed HCFA to
implement a prospective payment system for all outpatient hospital services for
the calendar year beginning January 1, 1999. Under such a system, a
pre-determined rate
31
<PAGE> 33
would be paid to providers regardless of the provider's reasonable cost. While
the actual reimbursement rates and methodology 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, which could have a material adverse effect on the Company's business,
financial condition and results of operations.
The Medicare benefit has a coinsurance feature, which means that the amount
paid by Medicare is the provider's reasonable cost less "coinsurance" which
typically is the patient's responsibility. The coinsurance amount is currently
20% 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
Balanced Budget Act of 1997 reduces the amount of allowable Medicare bad debts
payable to providers as follows: 25% for provider fiscal years beginning on or
after October 1, 1997; 40% for provider fiscal years beginning on or after
October 1, 1998; and 45% for provider fiscal years beginning on or after October
1, 1999. The reduction in "allowable Medicare bad debts" could have a material
adverse effect 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. Although there is federal
financial participation in state Medicaid programs, states have broad discretion
in determining the methods for paying providers, the amounts of payment, and
limiting the number of eligible providers. Thus, flexibility was increased by
the Balanced Budget Act of 1997, which repeals a prior law that required states
to pay enough to cover the costs of a provider that was efficiently and
effectively operated. 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 which the Company offers, the impact of Medicaid reimbursement and
regulatory compliance with its rules could be material to the Company's
business, 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
business, financial condition and results of operations.
Periodically, the United States Congress considers 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
32
<PAGE> 34
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.
Many of the patients served in the Outpatient Programs managed by the
Company are indigent or have very limited resources. Accordingly, many of those
patients have Medicaid coverage in addition to Medicare coverage. In some of the
states where the Company furnishes services, the state Medicaid plans have paid
the Medicare coinsurance amount. However, under the Balanced Budget Act of 1997,
states will no longer have to pay such amounts if the amount paid by Medicare
for the service equals or exceeds what Medicaid would have paid had it been the
primary insurer. To the extent that states take advantage of this new
legislation and refuse to pay the Medicare coinsurance amounts on behalf of the
Outpatient Program patients to the extent that they had in the past, it will
have an adverse impact on the providers with whom the Company contracts, and
thus, may have a material adverse effect on the Company's business, financial
condition and results of operations.
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 CMHCs, 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 expenditures. The facilities occupied by
the programs must comply with the requirements of municipal building, health and
fire codes. Additionally, the provider's premises and programs may be subject to
periodic inspection and recertification to maintain required licenses and to
continue participation as a Medicaid provider.
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; however,
the Company is not aware 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 qui tam provisions of the Federal False Claims
Act permit individuals also to bring suits under the Federal False Claims Act.
The incentive for an individual to do so is that he or she will usually be
entitled to approximately 15%-30% 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.
33
<PAGE> 35
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 qui tam relator in the name of the government)
will not assert that some conduct by the Company has given rise to a potentially
large liability.
In the past, there have been occasions when Medicare fiscal intermediaries
have denied coverage for all or substantially all of the claims submitted by the
providers where the Company had a management contract. Such denials have
occurred even though a physician has certified that the Outpatient Program
services were medically necessary. Notwithstanding the Company's ongoing efforts
to assure that the Outpatient Program services furnished by it under contract
are consistent with its understanding of the Medicare coverage criteria, it is
possible that there will be future occasions when a substantial number of
services furnished at a site managed by the Company will be deemed to be
noncovered. The Health Insurance Portability and Accountability Act of 1996
grants the U.S. Department of Health and Human Services broad authority to
impose civil monetary penalties on providers for certain activities. Among those
activities are the repeated submission of claims for services which are not
medically necessary. If there were again to be occasions when a Medicare fiscal
intermediary denied a large number of claims for a site managed by the Company,
it is possible that the government would seek sanctions from the provider and
possibly from the Company. While the Company believes that it would be
inappropriate for the government to seek such sanctions for services for which
the coverage criteria are interpreted differently at different times and which
have been ordered by a physician, it is not clear at this time how the
government will apply this new authority.
EMPLOYEES
As of September 15, 1997, PMR employed approximately 900 employees, of
which 480 are full-time employees. Approximately 810 employees staff clinical
programs and approximately 90 are in corporate management including finance,
accounting, development, utilization review, training and education, information
systems, human resources and legal areas. None of the Company's employees are
subject to a collective bargaining agreement and the Company believes that its
employee relations are good.
LEGAL PROCEEDINGS
The Company is not a party to any material legal proceedings.
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 April 3, 2002, (ii) two leases for regional
administration offices expiring in July 2001 and September 2001, respectively,
and (iii) 30 leases for program sites, averaging three years duration, none of
which extends beyond 2002. The Company carries property and liability insurance
where required by lessors and sub-lessors. The Company believes that its
facilities are adequate for its short-term needs.
Leases and sub-leases, 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 typically provide for termination on not
less than 90 days written notice.
34
<PAGE> 36
MANAGEMENT
EXECUTIVE OFFICERS AND DIRECTORS
The table below sets forth certain information concerning each of the
executive officers and directors of the Company:
<TABLE>
<CAPTION>
NAME AGE POSITION
- ------------------------------------- ---- ----------------------------------------
<S> <C> <C>
Allen Tepper......................... 50 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
Charles E. Galetto................... 47 Senior Vice President-Finance and
Treasurer
Daniel L. Frank (1).................. 41 Director
Eugene D. Hill, III (2).............. 45 Director
Charles C. McGettigan(1)............. 52 Director
Richard A. Niglio (2)................ 55 Director
</TABLE>
- ---------------
(1) Member of Audit Committee
(2) Member of Compensation Committee
Allen Tepper co-founded the Company in 1988, has served as Chairman and
Chief Executive Officer of the Company since October 1989 and previously served
as President from October 1989 to April 1997. Mr. Tepper co-founded Consolidated
Medical Corp., which was engaged in out-patient clinic management for acute care
hospitals in the Philadelphia area. The company was subsequently sold to the
Berwind Corporation in 1984 and Mr. Tepper remained with the company until
December 1986 as Senior Vice President. Mr. Tepper holds a Masters of Business
Administration degree from Northwestern University and a Bachelors degree from
Temple University.
Fred D. Furman has served as President of the Company since April 1997.
Previously, he held the position of Executive Vice President -- Administration
and General Counsel from March 1995 to April 1997. Prior to joining the Company,
Mr. Furman was a partner at Kleinbard, Bell and Brecker, a Philadelphia law firm
from 1980 to March 1995. Mr. Furman is a member of the National Health Lawyers
Association. He holds a Juris Doctor degree and a Bachelors degree from Temple
University.
Mark P. Clein has served as Executive Vice President and Chief Financial
Officer of the Company since May 1996. Prior to joining the Company, Mr. Clein
was a Managing Director of Health Care Investment Banking for Jefferies & Co.,
an investment banking firm, from August 1995 to May 1996, a Managing Director of
Rodman & Renshaw, Inc., an investment banking firm, from March 1995 to August
1995, a Managing Director of Mabon Securities Corp., an investment banking firm,
from March 1993 to March 1995, a Vice President with Sprout Group, an affiliate
of Donaldson, Lufkin and Jenrette, Inc., from May 1991 to March 1993, and a Vice
President and partner with Merrill Lynch Venture Capital, Inc. from 1982 to
February 1990 and from August 1990 to February 1991. 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 co-founded the Company in 1988 and has served as Executive
Vice President, Secretary and a director of the Company since October 1989. Ms.
Erskine previously served in several operational and marketing management
positions with acute care hospitals and health care management organizations.
Ms. Erskine holds a Masters in Health Science degree and completed post-graduate
work at Stanford University in Education and Psychology, and she holds a
Bachelors degree from the University of Miami.
35
<PAGE> 37
Charles E. Galetto has served as Senior Vice President-Finance and
Treasurer of the Company since August 1997. Prior to joining the Company, Mr.
Galetto was Vice President-Corporate Controller of Medtrans, a medical
transportation company, from June 1996 to July 1997 and Vice President, Chief
Financial Officer, Treasurer and Secretary of Data/Ware Development, Inc., a
computer hardware and software developer, from 1989 to May 1996. Mr. Galetto
holds a Bachelors degree from Wayne State University.
Daniel L. Frank has served as a director of the Company since 1992. Mr.
Frank has been with Coram Healthcare since 1996, where he serves as President -
Lithotripsy. From 1993 to 1996, Mr. Frank was Chief Executive Officer of Western
Medical Center-Anaheim and Santa Ana, a provider of acute and long-term health
care. From 1991 to 1993, he was the President of Summit Ambulatory Network.
Eugene D. Hill, III has served as a director of the Company since 1995. Mr.
Hill has been employed with Accel Partners, a venture capital firm, since 1994
and has been a General Partner of the firm since 1995, focusing on health care
services investments. Prior to that time, he was President of United Behavioral
Health at United HealthCare Corporation from 1992 to 1994. From 1988 to 1992, he
served as President and CEO of U.S. Behavioral Health, a managed behavioral
health care company. Previously Mr. Hill was the President and Chairman of
Sierra Health and Life Insurance Company. Mr. Hill serves on the Boards of
Directors of Paidos Healthcare, Navix Radiology Systems, Abaton.com, Delos
WomensHealth, Presdium and Cornerstone Physicians.
Charles C. McGettigan has served as a director of the Company since 1992.
Mr. McGettigan was a co-founder in November 1988 and remains a Managing Director
of McGettigan, Wick & Co., Inc., an investment banking firm. He is a co-general
partner of a limited partnership which, through its holdings, is a principal
stockholder of the Company. See "Principal and Selling Stockholders." Mr.
McGettigan has previously had investment banking experience with firms such as
Blyth Eastman Dillon & Co., Dillon, Read & Co. Inc., Woodman, Kirkpatrick &
Gilbreath and Hambrecht & Quist. Mr. McGettigan serves on the Boards of
Directors of digital dictation, inc., I-Flow Corp., Modtech, Inc., Onsite
Energy, Phoenix Network, Sonex Research, Tanknology -- NDE, Vie de France and
Wray-Tech Instruments.
Richard A. Niglio has served as a director of the Company since 1992. Mr.
Niglio has been Chief Executive Officer and Director of Children's Discovery
Centers of America, Inc., since 1987. From 1982 until March 1987, he was
President, Chief Executive Officer and a director of Victoria Station
Incorporated, a restaurant chain based in Larkspur, California. Prior to that
time, he held various executive positions with several major publicly held
companies such as Kentucky Fried Chicken and International Multi-Foods.
36
<PAGE> 38
PRINCIPAL AND SELLING STOCKHOLDERS
The following table sets forth certain information regarding the beneficial
ownership of the Company's Common Stock as of September 15, 1997 and as adjusted
to reflect the sale of the Common Stock offered hereby: (i) by each person known
to the Company to be the beneficial owner of more than 5% of the outstanding
Common Stock; (ii) by each Selling Stockholder; (iii) by each executive officer
and director of the Company; and (iv) all executive officers and directors of
the Company as a group.
<TABLE>
<CAPTION>
BENEFICIAL OWNERSHIP BENEFICIAL OWNERSHIP
PRIOR TO OFFERING NUMBER OF AFTER OFFERING
--------------------- SHARES BEING ---------------------
NAME NUMBER PERCENT(1) OFFERED(2) NUMBER PERCENT(1)
--------------------------------- -------- ---------- ------------ -------- ----------
<S> <C> <C> <C> <C> <C>
Entities affiliated with
Proactive Investment Managers,
L.P.(3)........................ 1,728,714 32.8% 350,000 1,378,714 20.3%
Charles C. McGettigan(3)......... 964,407 18.3 210,700 753,707 11.1
J. Patterson McBaine(3).......... 1,597,814 30.7 350,000 1,247,814 18.5
Jon D. Gruber(3)................. 1,622,014 31.1 350,000 1,272,014 19.0
Myron A. Wick, III(3)............ 895,407 17.2 210,700 684,707 10.2
Allen Tepper(4).................. 1,113,281 21.1 100,000 1,013,281 14.9
Susan D. Erskine(5).............. 161,919 3.1 20,000 141,919 2.1
Daniel L. Frank(6)............... 76,000 1.5 -- 76,000 1.1
Eugene D. Hill, III(7)........... 24,000 * -- 24,000 *
Richard A. Niglio(8)............. 76,000 1.5 -- 76,000 1.1
Mark P. Clein(9)................. 243,000 4.5 20,000 223,000 3.2
Fred D. Furman(10)............... 125,937 2.4 20,000 105,937 1.6
Charles E. Galetto............... 0 -- -- 0 --
All executive officers and
directors as a group (9
persons)(11)................... 2,784,544 46.6 370,700 2,413,844 32.2
</TABLE>
- ---------------
* Less than one percent.
(1) Applicable percentages of ownership prior to the Offering are based on
5,159,535 shares of Common Stock outstanding on September 15, 1997,
adjusted as required by rules promulgated by the Securities and Exchange
Commission (the "SEC"). Applicable percentages of ownership after the
Offering are based on 6,689,535 shares of Common Stock outstanding. This
table is based upon information supplied by officers, directors and
principal stockholders and Schedules 13D and 13G (if any) filed with the
SEC. Unless otherwise indicated in the footnotes to this table and subject
to community property laws where applicable, the Company believes that each
of the stockholders named in this table has sole voting and investment
power with respect to the shares indicated as beneficially owned. Any
security that any person named above has the right to acquire within 60
days is deemed to be outstanding for purposes of calculating the percentage
ownership of such person, but is not deemed to be outstanding for purposes
of calculating the ownership percentage of any other person.
(2) An additional 100,000 shares of Common Stock may be sold by certain Selling
Stockholders and others listed in the above table if the Underwriters'
over-allotment option is exercised in full as follows: Proactive Partners,
L.P., 39,200 shares; Fremont Proactive Partners, L.P., 2,940 shares;
Lagunitas Partners, L.P., 27,860 shares; Daniel L. Frank, 10,000 shares;
Eugene D. Hill, III, 10,000 shares; and Richard A. Niglio, 10,000 shares.
Shares of Common Stock offered by Messrs. Clein and Furman and, if the
Underwriters' over-allotment option is exercised in full, by Messrs. Frank,
Hill and Niglio, will have been acquired by such person pursuant to the
exercise of outstanding options or warrants to purchase shares of Common
Stock held by each of them.
(3) Charles C. McGettigan, a director of the Company since 1992, Myron A. Wick,
III, J. Patterson McBaine and Jon D. Gruber are general partners of
Proactive Investment Managers, L.P. Proactive Investment Managers, L.P. is
the General Partner of Proactive Partners, L.P. and Fremont Proactive
Partners, L.P. Shares beneficially owned include (i) 39,056 shares held by
Proactive Investment Managers, L.P. (which include 26,500 shares issuable
pursuant to a warrant exercisable within 60 days
37
<PAGE> 39
of September 15, 1997), (ii) 796,670 shares held by Proactive Partners,
L.P. (which include 26,500 shares issuable pursuant to a warrant
exercisable within 60 days of September 15, 1997), (iii) 59,681 shares held
by Fremont Proactive Partners, L.P., (iv) 69,000 shares held by Mr.
McGettigan (which include 64,500 shares issuable pursuant to options
exercisable within 60 days of September 15, 1997), (v) 664,707 shares held
by entities controlled by Messrs. Gruber and McBaine (which include (A)
590,407 shares held by Lagunitas Partners L.P., a limited partnership of
which Messrs. Gruber and McBaine and an investment advisor controlled by
Messrs. Gruber and McBaine are controlling general partners, (B) 21,000
shares held by a limited partnership of which Messrs. Gruber and McBaine
are the sole general partners and (C) 53,300 shares held in various
accounts by an investment advisor controlled by Messrs. Gruber and
McBaine), (vi) 37,700 shares held by Mr. McBaine and (vii) 61,900 shares
held by Mr. Gruber. Proactive Investment Managers, L.P. and Messrs.
McGettigan, Wick, McBaine and Gruber, as general partners of Proactive
Investment Managers, L.P., share voting and investment power of the shares
and may be deemed to be beneficial owners of the shares held by Proactive
Partners, L.P. and Fremont Proactive Partners, L.P. Messrs. McGettigan,
Wick, McBaine and Gruber disclaim beneficial ownership of any shares held
by Proactive Investment Managers, L.P., Proactive Partners, L.P., Fremont
Proactive Partners, L.P. or other entities they control as described above,
except to the extent of their respective interests in such shares arising
from their pecuniary interest in such partnerships. Proactive Partners,
L.P., Fremont Proactive Partners, L.P. and Lagunitas Partners L.P. are
offering 196,000, 14,700 and 139,300 shares, respectively, in the Offering.
(4) Includes 9,076 shares held by Mr. Tepper, 905,033 shares held by Mr.
Tepper, as Trustees FBO Tepper Family Trust (the "Family Trust"), 85,000
shares held by Mr. Tepper and Ms. Tepper as Trustees FBO The Tepper 1996
Charitable Remainder Trust UA DTD dated 11/19/96 (the "Charitable Remainder
Trust"), and 114,172 shares issuable pursuant to options exercisable within
60 days of September 15, 1997. Of the shares being sold, 30,000 shares will
be sold by the Family Trust and 70,000 shares will be sold by the
Charitable Remainder Trust.
(5) Includes 87,566 shares issuable pursuant to options exercisable within 60
days of September 15, 1997 and 7,000 shares held by Ms. Erskine's spouse,
William N. Erskine, who has sole voting and dispositive power over such
shares.
(6) Includes 64,500 shares issuable pursuant to options exercisable within 60
days of September 15, 1997.
(7) Includes 24,000 shares issuable pursuant to options exercisable within 60
days of September 15, 1997.
(8) Includes 64,500 shares issuable pursuant to options exercisable within 60
days of September 15, 1997.
(9) Includes 220,000 shares issuable pursuant to options exercisable within 60
days of September 15, 1997.
(10) Includes 90,000 shares issuable pursuant to an outstanding warrant and
35,937 shares issuable pursuant to options exercisable within 60 days of
September 15, 1997.
(11) Includes 818,175 shares of Common Stock issuable pursuant to exercise of
outstanding options and warrants within 60 days of September 15, 1997, as
described in the notes above, as applicable.
38
<PAGE> 40
UNDERWRITING
The Underwriters named below (the "Underwriters"), for whom Equitable
Securities Corporation, Lehman Brothers Inc. and Wessels, Arnold & Henderson,
L.L.C. are acting as representatives (the "Representatives"), have severally
agreed, subject to the terms and conditions of the Underwriting Agreement, to
purchase from the Company and the Selling Stockholders the number of shares of
Common Stock set forth opposite their respective names below.
<TABLE>
<CAPTION>
NUMBER
UNDERWRITERS OF SHARES
---------------------------------------------------------------- ---------
<S> <C>
Equitable Securities Corporation................................
Lehman Brothers Inc.............................................
Wessels, Arnold & Henderson, L.L.C..............................
---------
Total................................................. 2,000,000
=========
</TABLE>
The Company is obligated to sell and the Underwriters are obligated to
purchase all of the shares offered hereby, if any are purchased.
The Common Stock is offered subject to receipt and acceptance by the
Underwriters and to certain other conditions, including the right to reject
orders in whole or in part. The Representatives have informed the Company and
the Selling Stockholders that they do not expect to confirm sales to accounts
over which they exercise discretionary authority.
The Underwriting Agreement provides that the Company and the Selling
Stockholders will indemnify the Underwriters against certain liabilities,
including civil liabilities under the Securities Act, or will contribute to
payments which the Underwriters may be required to make in respect thereof.
The Underwriters, through the Representatives, have advised the Company and
the Selling Stockholders that the Underwriters propose to offer the shares of
Common Stock to the public initially at the public offering price set forth on
the cover page of this Prospectus and to selected dealers at such public
offering price less a concession not to exceed $ per share. The
selected dealers may reallow a concession to certain other dealers not to exceed
$ per share. After the initial offering to the public, the public
offering price, the concession to selected dealers and the reallowance to other
dealers may be changed by the Representatives.
The Company and certain stockholders of the Company have granted the
Underwriters, an option, exercisable for 30 days from the date of this
Prospectus, to purchase at the public offering price less the underwriting
discount as set forth on the cover page of this Prospectus, up to 300,000
additional shares of Common Stock. If the Underwriters exercise their option to
purchase any of the additional shares of Common Stock, each of the Underwriters
will have a firm commitment, subject to certain conditions, to purchase
approximately the same percentage thereof which the number of shares of Common
Stock to be purchased by each of them as shown in the above table bears to the
Underwriters' initial commitment. The Underwriters may exercise such option
solely to cover over-allotments, if any, in connection with the sale of the
Common Stock offered hereby. The Underwriters, should they exercise their
over-allotment option, will exercise such option on a pro rata basis.
In order to facilitate the Offering, the Underwriters may engage in
transactions that stabilize, maintain or otherwise affect the price of the
Common Stock during and after the Offering. Specifically, the Underwriters may
over-allot or otherwise create a short position in the Common Stock for their
own account by selling more shares of Common Stock than have been sold to them
by the Company and the Selling Stockholders. The Underwriters may elect to cover
any such short position by purchasing shares of Common Stock in the open market
or by exercising the over-allotment option granted to the Underwriters. In
addition, the Underwriters may stabilize or maintain the price of the Common
Stock by bidding for or purchasing shares of Common Stock in the open market and
may impose penalty bids, under which selling concessions allowed to syndicate
members or other broker-dealers participating in the Offering are reclaimed if
shares of Common Stock previously distributed in the Offering are repurchased in
connection with stabilization transactions or otherwise. The effect of these
transactions may be to stabilize or maintain the market price of the Common
39
<PAGE> 41
Stock at a level above that which might otherwise prevail in the open market.
The imposition of a penalty bid may also affect the price of the Common Stock to
the extent that it discourages resales thereof. No representation is made as to
the magnitude or effect of any such stabilization or other transactions. Such
transactions may be effected on the Nasdaq National Market or otherwise and, if
commenced, may be discontinued at any time.
In connection with the Offering, certain Underwriters (and selling group
members) may also engage in passive market making transactions in the Common
Stock on the Nasdaq National Market. Passive market making consists of
displaying bids on the Nasdaq National Market limited by the prices of
independent market makers and effecting purchases limited by such prices and in
response to order flow. Rule 103 of Regulation M promulgated by the SEC limits
the amount of net purchases that each passive market maker may make and the
displayed size of each bid. Passive market making may stabilize the market price
of the Common Stock at a level above that which might otherwise prevail in the
open market and, if commenced, may be discontinued at any time.
In connection with the Offering, the Company and stockholders of the
Company holding in the aggregate 2,260,676 shares of Common Stock upon
consummation of the Offering, including each of the Company's officers and
directors, the Selling Stockholders and certain other stockholders, have agreed,
subject to certain limited exceptions, that they will not directly or
indirectly, offer, pledge, sell, offer to sell, contract to sell or grant any
option to purchase or otherwise sell or dispose (or announce any offer, pledge,
offer of sale, contract of sale, grant of any option or other sale or
disposition), of any shares of Common Stock or other capital stock or securities
exchangeable or exercisable for, or convertible into, shares of Common Stock or
other capital stock for a period of 120 days after the date of this Prospectus
without the prior written consent of Equitable Securities Corporation.
LEGAL MATTERS
The validity of the shares of Common Stock offered hereby will be passed
upon for the Company by Cooley Godward LLP, San Diego, California. Certain legal
matters will be passed upon for the Underwriters by Stroock & Stroock & Lavan
LLP, New York, New York.
EXPERTS
The consolidated financial statements of the Company at April 30, 1997 and
1996 and for each of the three years in the period ended April 30, 1997,
appearing in this Prospectus and Registration Statement have been audited by
Ernst & Young LLP, independent auditors, as set forth in their report thereon
appearing elsewhere herein and are included in reliance upon such report given
on the authority of such firm as experts in accounting and auditing.
AVAILABLE INFORMATION
The Company has filed with the SEC a registration statement on Form S-2 (as
amended, the "Registration Statement") under the Securities Act with respect to
the Common Stock offered by this Prospectus. This Prospectus, which constitutes
a part of the Registration Statement, does not contain all the information set
forth in the Registration Statement. For further information with respect to the
Company and the Common Stock, reference is made to the Registration Statement
and to the exhibits and schedules filed therewith. Statements contained in this
Prospectus as to the contents of any contract or other document referred to are
not necessarily complete, and in each instance reference is made to the copy of
such contract or other document filed as an exhibit to the Registration
Statement, each such statement being qualified in all respects by such
reference.
The Company is subject to the informational requirements of the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), and in accordance
therewith files reports and other information with the SEC. A copy of the
Registration Statement, including exhibits and schedules thereto, filed by the
Company
40
<PAGE> 42
with the SEC, as well as reports and other information filed by the Company with
the SEC may be inspected without charge (and copies of the material contained
therein may be obtained from the SEC upon payment of applicable copying charges)
at the public reference facilities maintained by the SEC at 450 Fifth Street,
N.W., Washington, D.C. 20549 and at the following regional offices: Midwest
Regional Office, 500 West Madison, Suite 1400, Chicago, Illinois 60661 and the
Northeast Regional Office, 7 World Trade Center, Suite 1300, New York, New York
10048. In addition, registration statements and certain other filings made with
the SEC through its Electronic Data Gathering, Analysis and Retrieval ("EDGAR")
system are publicly available through the SEC's site on the World Wide Web,
located at http://www.sec.gov. The Registration Statement, including exhibits
thereto and amendments thereof, has been filed with the SEC via the EDGAR
system. In addition, such reports, proxy statements and other information
concerning the Company can be inspected at the National Association of
Securities Dealers, Inc., 1735 K Street, N.W., Washington, D.C. 20006.
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
The Company's Annual Report on Form 10-K for the fiscal year ended April
30, 1997, the Company's Proxy Statement for the 1997 Annual Meeting of
Shareholders filed pursuant to Rule 14a-6 of the Exchange Act, the Company's
Quarterly Report on Form 10-Q for the three months ended July 31, 1997 and the
Company's Registration Statement on Form 10 filed on July 31, 1992, as amended,
which contains descriptions of the Company's Common Stock and certain rights
relating to the Common Stock, including any amendment or reports filed for the
purpose of updating such descriptions, each as filed by the Company with the
SEC, are hereby incorporated by reference in this Prospectus except as
superseded or modified herein. Any statement contained in any document
incorporated by reference herein shall be deemed to be modified or superseded
for purposes of this Prospectus to the extent that a statement contained herein
modifies or supersedes such statement. Any such statement so modified or
superseded shall not be deemed, except as modified or superseded, to constitute
a part of this Prospectus. The Company will provide without charge to each
person, including any beneficial owner, to whom this Prospectus is delivered,
upon written or oral request of such person, a copy of any and all of the
documents that have been incorporated by reference herein (other than exhibits
to such documents which are not specifically incorporated by reference into such
documents). Such requests should be directed to Mark P. Clein, the Chief
Financial Officer, at the Company's principal executive offices at 501
Washington Street, 5th Floor, San Diego, California 92103, telephone number
(619) 610-4001.
41
<PAGE> 43
PMR CORPORATION
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Consolidated Annual Financial Statements:
Report of Independent Auditors....................................................... F-2
Consolidated Balance Sheets as of April 30, 1996 and 1997............................ F-3
Consolidated Statements of Operations for the years ended April 30, 1995, 1996 and
1997.............................................................................. F-4
Consolidated Statements of Stockholders' Equity for the years ended April 30, 1995,
1996 and 1997..................................................................... F-5
Consolidated Statements of Cash Flows for the years ended April 30, 1995, 1996 and
1997.............................................................................. F-6
Notes to Consolidated Financial Statements........................................... F-7
Consolidated Interim Financial Statements (Unaudited):
Condensed Consolidated Balance Sheet as of July 31, 1997 (Unaudited)................. F-15
Condensed Consolidated Statements of Operations for the three months ended July 31,
1996 and 1997 (Unaudited)......................................................... F-16
Condensed Consolidated Statements of Cash Flows for the three months ended July 31,
1996 and 1997 (Unaudited)......................................................... F-17
Notes to Condensed Consolidated Financial Statements (Unaudited)..................... F-18
</TABLE>
F-1
<PAGE> 44
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, 1996 and 1997, 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. 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, 1996 and 1997, 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.
/s/ Ernst & Young LLP
San Diego, California
June 13, 1997
F-2
<PAGE> 45
PMR CORPORATION
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
APRIL 30,
---------------------------
1996 1997
----------- -----------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents..................................... $ 3,917,922 $10,048,203
Accounts receivable, net of allowance for uncollectible
amounts of $1,759,000 in 1996 and $5,081,177 in 1997....... 9,289,895 11,268,962
Prepaid expenses and other current assets..................... 321,506 572,136
Deferred income tax benefits.................................. 2,701,000 6,069,000
----------- -----------
Total current assets............................................ 16,230,323 27,958,301
Furniture and office equipment, net of accumulated depreciation
of $869,261 in 1996 and $1,175,980 in 1997.................... 649,312 1,263,743
Long-term receivables........................................... 2,444,055 2,360,872
Other assets.................................................... 1,858,102 1,501,622
----------- -----------
Total assets.................................................... $21,181,792 $33,084,538
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued expenses......................... $ 1,522,721 $ 1,735,658
Accrued compensation and employee benefits.................... 2,276,809 2,951,867
Advances from case management agencies........................ 1,012,847 926,712
Income taxes payable.......................................... 308,489 1,703,000
Dividends payable............................................. 71,739 --
Other current liabilities..................................... 127,213 --
----------- -----------
Total current liabilities....................................... 5,319,818 7,317,237
Deferred rent expense........................................... 149,531 92,822
Deferred income taxes........................................... 1,101,000 635,000
Contract settlement reserve..................................... 5,499,020 8,791,928
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 -- 3,577,917 in 1996 and
5,033,507 in 1997.......................................... 35,778 50,334
Additional paid-in capital.................................... 8,259,243 12,138,569
Notes receivable from stockholders............................ (141,547) --
Retained earnings............................................. 951,949 4,058,648
----------- -----------
Total stockholders' equity...................................... 9,112,423 16,247,551
----------- -----------
Total liabilities and stockholders' equity...................... $21,181,792 $33,084,538
=========== ===========
</TABLE>
See accompanying notes.
F-3
<PAGE> 46
PMR CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEAR ENDED APRIL 30,
-------------------------------------------
1995 1996 1997
----------- ----------- -----------
<S> <C> <C> <C>
Revenue............................................. $21,746,663 $36,315,921 $56,636,902
Expenses:
Operating expenses................................ 20,647,965 28,471,644 41,423,157
Marketing, general and administrative............. 2,976,600 4,018,685 6,350,101
Provision for bad debts........................... 1,317,483 1,447,983 3,084,166
Depreciation and amortization..................... 403,294 595,896 700,734
Interest (income), expense........................ 61,979 2,174 (217,297)
Minority interest in loss of subsidiary........... (108,201) (524) --
----------- ----------- -----------
25,299,120 34,535,858 51,340,861
----------- ----------- -----------
Income (loss) before income taxes................... (3,552,457) 1,780,063 5,296,041
Income tax expense (benefit)........................ (1,266,000) 730,000 2,172,000
----------- ----------- -----------
Net income (loss)................................... (2,286,457) 1,050,063 3,124,041
Less dividends on:
Series C Convertible Preferred Stock.............. 65,537 131,686 17,342
----------- ----------- -----------
Net income (loss) for common stock.................. $(2,351,994) $ 918,377 $ 3,106,699
=========== =========== ===========
Earnings (loss) per common share
Primary........................................... $ (0.70) $ 0.23 $ 0.54
=========== =========== ===========
Fully diluted..................................... $ (0.70) $ 0.21 $ 0.54
=========== =========== ===========
Shares used in computing earnings (loss) per share
Primary........................................... 3,337,484 4,540,280 5,772,210
=========== =========== ===========
Fully diluted..................................... 3,337,484 5,042,879 5,772,210
=========== =========== ===========
</TABLE>
See accompanying notes.
F-4
<PAGE> 47
PMR CORPORATION
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
SERIES C
CONVERTIBLE
PREFERRED STOCK COMMON STOCK NOTES RECEIVABLE TOTAL
----------------- ------------------- PAID-IN FROM RETAINED STOCKHOLDERS'
SHARES AMOUNT SHARES AMOUNT CAPITAL STOCKHOLDERS EARNINGS EQUITY
-------- ------ --------- ------- ----------- ---------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at April 30,
1994................... -- $ -- 3,307,653 $33,075 $ 5,280,687 $ -- $ 2,385,566 $ 7,699,328
Issuance of Series C
convertible preferred
stock, net of
issuance costs of
$105,628............. 700,000 7,000 -- -- 1,637,372 (60,000) -- 1,584,372
Exercise of Redeemable
A Warrants to
purchase common
stock................ -- -- 29,003 290 115,723 -- -- 116,013
Issuance of common
stock under stock
option plan.......... -- -- 2,000 20 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 Apri1 30,
1995................... 700,000 7,000 3,338,656 33,385 7,050,262 (62,626) 33,572 7,061,593
Issuance of common
stock under stock
option plans......... -- -- 17,174 172 61,202 1,184 -- 62,558
Issuance of common
stock for non-compete
agreements and
acquisition of
minority interest.... -- -- 197,087 1,971 1,029,279 -- -- 1,031,250
Issuance of common
stock for a note
receivable........... -- -- 25,000 250 118,500 (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 Apri1 30,
1996................... 700,000 7,000 3,577,917 35,778 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.......... -- -- 96,016 960 729,189 -- -- 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................ -- -- 657,524 6,575 3,104,801 -- -- 3,111,376
Issuance of common
stock for consulting
services............. -- -- 2,050 21 45,336 -- -- 45,357
Conversion of Series C
convertible preferred
stock................ (700,000) (7,000) 700,000 7,000 -- -- -- --
Net income............. -- -- -- -- -- -- 3,124,041 3,124,041
--------- ------- --------- ------- ----------- -------- ----------- -----------
Balance at April 30,
1997................... -- $ -- 5,033,507 $50,334 $12,138,569 $ -- $ 4,058,648 $ 16,247,551
========= ======= ========= ======= =========== ======== =========== ===========
</TABLE>
F-5
<PAGE> 48
PMR CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED APRIL 30,
---------------------------------------
1995 1996 1997
----------- ----------- -----------
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net income (loss)....................................... $(2,286,457) $ 1,050,063 $ 3,124,041
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities:
Depreciation and amortization......................... 403,294 595,896 700,734
Issuance of stock for consulting services............. -- -- 45,357
Provision for losses on accounts receivable........... 1,317,483 1,447,983 3,084,166
Accrued interest income on notes receivable from
stockholders....................................... (2,626) (4,507) --
Deferred income taxes................................. (924,000) (841,000) (3,834,000)
Minority interest in loss of joint venture............ (108,201) (524) --
Changes in operating assets and liabilities:
Accounts and notes receivable...................... (3,142,713) (3,778,660) (4,980,050)
Refundable income tax.............................. (817,165) 817,165 --
Prepaid expenses and other assets.................. (176,474) (88,487) (250,630)
Accounts payable and accrued expenses.............. 154,831 474,124 212,937
Accrued compensation and employee benefits......... (13,776) 1,415,780 675,058
Advances from case management agencies............. -- 1,012,847 (86,135)
Other liabilities.................................. (193,742) (205,034) (127,213)
Contract settlement reserve........................ 651,761 1,975,797 3,292,908
Income taxes payable............................... (356,000) 308,489 1,394,511
Deferred rent expense.............................. 83,830 (60,331) (56,709)
----------- ----------- -----------
Net cash provided by (used in) operating activities..... (5,409,955) 4,119,601 3,194,975
INVESTING ACTIVITIES
Purchases of furniture and office equipment............. (164,916) (179,281) (958,685)
Acquisition of Twin Town minority interest.............. -- (185,000) --
----------- ----------- -----------
Net cash used in investing activities................... (164,916) (364,281) (958,685)
FINANCING ACTIVITIES
Proceeds from sale of preferred stock................... 1,584,372 -- --
Proceeds from sale of common stock and notes receivable
from stockholders..................................... 132,513 105,710 3,983,072
Proceeds from note payable to bank...................... 2,800,000 800,000 --
Payments on note payable to bank........................ (1,600,000) (2,000,000) --
Cash dividend paid...................................... -- (125,484) (89,081)
----------- ----------- -----------
Net cash provided by (used in) financing activities..... 2,916,885 (1,219,774) 3,893,991
----------- ----------- -----------
Net increase (decrease) in cash......................... (2,657,986) 2,535,546 6,130,281
Cash at beginning of year............................... 4,040,362 1,382,376 3,917,922
----------- ----------- -----------
Cash at end of year..................................... $ 1,382,376 $ 3,917,922 $10,048,203
=========== =========== ===========
SUPPLEMENTAL INFORMATION:
Taxes paid.............................................. $ 830,000 $ 380,735 $ 4,611,489
=========== =========== ===========
Interest paid........................................... $ 107,831 $ 129,108 $ 17,612
=========== =========== ===========
</TABLE>
See accompanying notes.
F-6
<PAGE> 49
PMR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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, Collaborative Care, Inc., 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.
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 $297,240, $320,212
and $344,254, respectively.
F-7
<PAGE> 50
PMR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Other Assets
Other assets are comprised of the following at April 30:
<TABLE>
<CAPTION>
1996 1997
---------- ----------
<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......................... 521,685 878,165
---------- ----------
$1,858,102 $1,501,622
========== ==========
</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 Convertible
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, 1995, 1996 and 1997 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 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
F-8
<PAGE> 51
PMR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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, 1995, 1996 and 1997
was $1,673,000, $1,898,000 and $2,902,000, 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.
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> 52
PMR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (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.
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.
F-10
<PAGE> 53
PMR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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.
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, 1996 and 1997,
follows:
<TABLE>
<CAPTION>
1996 1997
----- ------
<S> <C> <C>
Pro forma net income (in thousands)......................... $ 98 $1,968
Pro forma income per share.................................. $0.02 $ 0.34
Pro forma income per share, fully diluted................... $0.02 $ 0.34
</TABLE>
F-11
<PAGE> 54
PMR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The pro forma effect on net income for the years ended April 30, 1996 and
1997 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.
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....................... 411,739 $ 4.99
Granted........................................ 355,620 3.55
Exercised...................................... (31,003) 4.00
Forfeited...................................... (29,232) 4.50
--------- ------
Outstanding April 30, 1995....................... 707,124 4.41
Granted........................................ 897,526 7.57
Exercised...................................... (17,174) 3.40
Forfeited...................................... (32,423) 4.11
--------- ------
Outstanding April 30, 1996....................... 1,555,053 6.63
Granted........................................ 486,837 20.50
Exercised...................................... (228,540) 5.17
Forfeited...................................... (27,744) 8.44
--------- ------
Outstanding April 30, 1997....................... 1,785,606 $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 $4.48 and $15.21 in
fiscal years 1996 and 1997, respectively.
A summary of options outstanding and exercisable as of April 30, 1997
follows:
<TABLE>
<CAPTION>
WEIGHTED- WEIGHTED- WEIGHTED-
AVERAGE AVERAGE AVERAGE
OPTIONS EXERCISE PRICE EXERCISE CONTRACTUAL OPTIONS EXERCISE
OUTSTANDING RANGE PRICE LIFE EXERCISABLE PRICE
- -------------------------- ------------------ --------- ----------- -------------- ---------
(IN THOUSANDS) (IN THOUSANDS)
<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-12
<PAGE> 55
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,
-----------------------------------------
1995 1996 1997
----------- ---------- ----------
<S> <C> <C> <C>
Federal:
Current................................ $ (284,000) $1,220,000 $4,868,000
Deferred............................... (698,000) (685,000) (3,009,000)
---------- ---------- -----------
(982,000) 535,000 1,859,000
State:
Current................................ (58,000) 351,000 1,138,000
Deferred............................... (226,000) (156,000) (825,000)
---------- ---------- -----------
(284,000) 195,000 313,000
---------- ---------- -----------
$(1,266,000) $ 730,000 $2,172,000
========== ========== ===========
</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>
1996 1997
----------- -----------
<S> <C> <C>
Deferred tax assets:
Contract settlement reserve....................... $2,405,000 $3,609,000
Accrued compensation and employee benefits........ 501,000 531,000
Allowance for bad debts........................... 497,000 1,979,000
State income taxes................................ 87,000 280,000
Depreciation and amortization..................... 77,000 163,000
Other............................................. 129,000 159,000
---------- ----------
Total deferred tax assets........................... 3,696,000 6,721,000
Deferred tax liabilities:
Non-accrual experience method..................... 227,000 326,000
Accrual to cash method of accounting.............. 577,000 --
Contractual retainers............................. 1,292,000 961,000
---------- ----------
Total deferred tax liabilities...................... 2,096,000 1,287,000
---------- ----------
Net deferred tax assets............................. $1,600,000 $5,434,000
========== ==========
</TABLE>
A reconciliation between the federal income tax rate and the effective
income tax rate is as follows:
<TABLE>
<CAPTION>
YEAR ENDED APRIL 30,
----------------------
1995 1996 1997
---- ---- ----
<S> <C> <C> <C>
Statutory federal income tax rate....................................... 34% 34% 35%
State income taxes, net of federal tax benefit.......................... 6 7 6
Other................................................................... (4) -- --
-- -- --
Effective income tax rate............................................... 36% 41% 41%
== == ==
</TABLE>
F-13
<PAGE> 56
PMR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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 1995 1996 1997
---------------------------------------------------------------- ---- ---- ----
<S> <C> <C> <C>
A............................................................. --% 21% 23%
B............................................................. 16 11 13
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, 1995, 1996 and 1997, the Company contributed $134,000, $138,000
and $186,000, respectively, to match employee deferrals.
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 $1,811,000, $1,950,000 and $2,690,800 for the year
ended April 30, 1995, 1996 and 1997, respectively.
F-14
<PAGE> 57
PMR CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEET
(UNAUDITED)
ASSETS
<TABLE>
<CAPTION>
JULY 31,
1997
-----------
<S> <C>
Current assets:
Cash and cash equivalents..................................................... $ 8,619,595
Notes and accounts receivable, net of allowance for uncollectible amounts of
$5,709,854................................................................. 13,887,987
Prepaid expenses and other current assets..................................... 501,580
Deferred income tax benefits.................................................. 6,069,000
-----------
Total current assets............................................................ 29,078,162
Furniture and office equipment, net of accumulated depreciation of $1,306,203... 1,827,024
Long-term receivables........................................................... 2,595,435
Other assets.................................................................... 1,416,298
-----------
Total assets.................................................................... $34,916,919
===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and other current liabilities................................ $ 1,197,458
Accrued compensation and employee benefits.................................... 3,044,205
Advances from case management agencies........................................ 643,677
Income taxes payable.......................................................... 2,291,067
-----------
Total current liabilities....................................................... 7,176,407
Deferred rent expense........................................................... 108,949
Deferred income taxes........................................................... 635,000
Contract settlement reserve..................................................... 9,659,603
Stockholders' equity:
Common Stock, $.01 par value, authorized shares -- 10,000,000; issued and
outstanding shares -- 5,033,507............................................ 50,555
Additional paid-in capital.................................................... 12,257,032
Retained earnings............................................................. 5,029,373
-----------
Total stockholders' equity...................................................... 17,336,960
-----------
Total liabilities and stockholders' equity...................................... $34,916,919
===========
</TABLE>
See notes to consolidated condensed financial statements.
F-15
<PAGE> 58
PMR CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
JULY 31,
---------------------------
1996 1997
----------- -----------
<S> <C> <C>
Revenue........................................................... $13,028,083 $16,176,780
Expenses:
Operating expenses.............................................. 9,741,050 11,626,432
Marketing, general and administrative........................... 1,518,193 2,114,651
Provision for bad debts......................................... 601,511 663,530
Depreciation and amortization................................... 180,242 215,615
Interest (income), expense...................................... (31,168) (88,748)
----------- -----------
12,009,828 14,531,480
----------- -----------
Income before income taxes........................................ 1,018,255 1,645,300
Income tax expense................................................ 418,000 674,574
----------- -----------
Net income........................................................ 600,255 970,726
Less dividends on:
Series C Convertible Preferred Stock............................ 17,342 --
----------- -----------
Net income for common stock....................................... $ 582,913 $ 970,726
=========== ===========
Earnings per common share
Primary......................................................... $ 0.12 $ 0.16
=========== ===========
Fully diluted................................................... $ 0.11 $ 0.16
=========== ===========
Shares used in computing earnings per share
Primary......................................................... 5,102,789 6,011,977
=========== ===========
Fully diluted................................................... 5,291,050 6,011,977
=========== ===========
</TABLE>
See notes to consolidated condensed financial statements.
F-16
<PAGE> 59
PMR CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
JULY 31,
---------------------------
1996 1997
----------- -----------
<S> <C> <C>
OPERATING ACTIVITIES
Net income...................................................... $ 600,255 $ 970,726
Adjustments to reconcile net income to net cash provided by
(used in) operating activities:
Depreciation and amortization................................... 180,242 215,615
Provision for losses on accounts receivable..................... 601,511 663,530
Deferred income taxes........................................... 418,000 --
Changes in operating assets and liabilities:
Receivables.................................................. (2,877,698) (3,517,119)
Prepaid expenses and other current assets.................... (53,751) 70,556
Advances from case management agencies....................... -- (283,035)
Accounts payable and accrued compensation.................... 210,423 (445,862)
Contracts settlement reserve................................. 1,116,038 867,675
Deferred rent expense........................................ (352,029) 16,127
Income taxes payable......................................... -- 588,067
----------- -----------
Net cash used in operating activities............................. (157,009) (853,720)
INVESTING ACTIVITIES
Purchases of furniture and equipment............................ (101,804) (693,571)
Net cash used in investing activities............................. (101,804) (693,571)
FINANCING ACTIVITIES
Decrease in notes receivable from stockholders.................. 265,844 --
Payments on note payable to bank................................ (31,242) --
Proceeds from exercise of options and warrants.................. 1,729,375 118,684
Cash dividend paid.............................................. (86,577) --
----------- -----------
Net cash provided by financing activities......................... 1,877,400 118,684
----------- -----------
Net increase (decrease) in cash and cash equivalents.............. $ 1,618,587 $(1,428,608)
========== ==========
</TABLE>
See notes to condensed consolidated financial statements.
F-17
<PAGE> 60
PMR CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE A -- BASIS OF PRESENTATION
The accompanying unaudited financial statements have been prepared in
accordance with generally accepted accounting principles for interim financial
information and with Rule 10-01 of Regulation S-X. Accordingly, they do not
include all of the information and footnotes required by generally accepted
accounting principles for audited financial statements. In the opinion of
management, all adjustments (consisting of normal recurring accruals) considered
necessary for a fair presentation of the financial position of the Company have
been included. Operating results for the three months ended July 31, 1997 are
not necessarily indicative of the results to be expected for the year ending
April 30, 1998. For further information, refer to the financial statements and
footnotes thereto included in the Company's Annual Report on Form 10-K for the
year ended April 30, 1997.
NOTE B -- RECLASSIFICATION
Certain first quarter 1997 amounts have been reclassified to conform to the
first quarter 1998 presentation.
F-18
<PAGE> 61
======================================================
NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATIONS IN CONNECTION WITH THIS OFFERING OTHER THAN THOSE CONTAINED IN
THIS PROSPECTUS AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS
SHOULD NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY, THE SELLING
STOCKHOLDERS OR THE UNDERWRITERS. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER
TO SELL OR A SOLICITATION OF AN OFFER TO BUY ANY SECURITY OTHER THAN THE SHARES
OF COMMON STOCK OFFERED HEREBY NOR DOES IT CONSTITUTE AN OFFER TO SELL OR A
SOLICITATION OF AN OFFER TO BUY ANY OF THE SECURITIES OFFERED HEREBY TO ANY
PERSON IN ANY JURISDICTION IN WHICH SUCH AN OFFER OR SOLICITATION WOULD BE
UNLAWFUL. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER
SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THE INFORMATION
CONTAINED HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO THE DATE HEREOF.
------------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
-----
<S> <C>
Prospectus Summary.................... 3
Risk Factors.......................... 6
Use of Proceeds....................... 13
Price Range of Common Stock........... 13
Dividend Policy....................... 13
Capitalization........................ 14
Selected Consolidated Financial
Data................................ 15
Management's Discussion and Analysis
of Financial Condition and Results
of Operations....................... 16
Business.............................. 22
Management............................ 35
Principal and Selling Stockholders.... 37
Underwriting.......................... 39
Legal Matters......................... 40
Experts............................... 40
Available Information................. 40
Incorporation of Certain Documents by
Reference........................... 41
Index to Financial Statements......... F-1
</TABLE>
======================================================
======================================================
2,000,000 SHARES
[PMR CORPORATION LOGO]
COMMON STOCK
-----------------
PROSPECTUS
-----------------
EQUITABLE SECURITIES CORPORATION
LEHMAN BROTHERS
WESSELS, ARNOLD & HENDERSON
, 1997
======================================================
<PAGE> 62
PART II
INFORMATION NOT REQUIRED IN THE PROSPECTUS
ITEM 14. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The estimated expenses of the Company in connection with the Offering are
as follows:
<TABLE>
<S> <C>
SEC registration fee............................................ $ 16,470
NASD fee........................................................ 5,935
Nasdaq National Market fee for listing additional shares........ 17,500
Printing and engraving expenses................................. 100,000
Accounting fees and expenses.................................... 75,000
Legal fees and expenses......................................... 200,000
Blue Sky filing fees and expenses............................... 5,000
Miscellaneous................................................... 30,095
--------
TOTAL........................................................... $450,000
========
</TABLE>
ITEM 15. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
The Registrant's Certificate of Incorporation and Bylaws include provisions
to (i) eliminate the personal liability of its directors for monetary damages
resulting from breaches of their fiduciary duty to the extent permitted by
Section 102(b)(7) of the Delaware General Corporation Law (the "DGCL") and (ii)
require the Registrant to indemnify its directors and officers to the fullest
extent permitted by applicable law, including circumstances in which
indemnification is otherwise discretionary. Pursuant to Section 145 of the DGCL,
a corporation generally has the power to indemnify its present and former
directors, officers, employees and agents against expenses incurred by them in
connection with any suit to which they are or are threatened to be made, a party
by reason of their serving in such positions so long as they acted in good faith
and in a manner they reasonably believed to be in or not opposed to, the best
interests of the corporation and with respect to any criminal action, they had
no reasonable cause to believe their conduct was unlawful. The Registrant
believes that these provisions are necessary to attract and retain qualified
persons as directors and officers. These provisions do not eliminate the
directors' or officers' duty of care, and, in appropriate circumstances,
equitable remedies such as injunctive or other forms of non-monetary relief will
remain available under the DGCL. In addition, each director will continue to be
subject to liability pursuant to Section 174 of the DGCL, for breach of the
director's duty of loyalty to the Registrant, for acts or omissions not in good
faith or involving intentional misconduct, for knowing violations of law, for
acts or omissions that the director believes to be contrary to the best
interests of the Registrant or its stockholders, for any transaction from which
the director derived an improper personal benefit, for acts or omissions
involving a reckless disregard for the director's duty to the Registrant or its
stockholders when the director was aware or should have been aware of a risk of
serious injury to the Registrant or its stockholders, for acts or omission that
constitute an unexcused pattern of inattention that amounts to an abdication of
the director's duty to the Registrant or its stockholders, for improper
transactions between the director and the Registrant and for improper loans to
directors and officers. The provision also does not affect a director's
responsibilities under any other law, such as the federal securities law or
state or federal environmental laws.
Delaware corporations are also authorized to obtain insurance to protect
directors and officers from certain liabilities, including liabilities against
which corporations cannot indemnify their directors and officers. The Company
maintains directors and officers liability insurance providing aggregate
coverage of $10 million.
At present, there is no pending litigation or proceeding involving a
Director or officer of the Registrant as to which indemnification is being
sought nor is the Registrant aware of any threatened litigation that may result
in claims for indemnification by any officer or Director.
II-1
<PAGE> 63
ITEM 16. EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- ---------------------------------------------------------------------------
<C> <C> <S>
1.1 -- Form of Underwriting Agreement
3.1 -- The Company's Restated Certificate of Incorporation, filed with the
Delaware Secretary of State on July 10, 1997.*
3.2 -- The Company's Amended and Restated Bylaws.*
4.1 -- Common Stock Specimen Certificate.+
5.1 -- Opinion of Cooley Godward LLP as to the legality of the securities being
registered.**
10.1 -- The Company's 1997 Equity Incentive Plan (filed as Exhibit 10.1).*
10.2 -- Form of Incentive Stock Option Agreement under the 1997 Plan (filed as
Exhibit 10.2).*
10.3 -- Form of Nonstatutory Stock Option Agreement under the 1997 Plan (filed as
Exhibit 10.).*
10.4 -- Outside Directors' Non-Qualified Stock Option Plan of 1992 (the "1992
Plan") (filed as Exhibit 10.4).*
10.5 -- Form of Outside Directors' Non-Qualified Stock Option Agreement (filed as
Exhibit 10.5).*
10.6 -- Amended and Restated Stock Option Agreement dated April 30, 1996,
evidencing aware to Allen Tepper (filed as Exhibit 10.6).*
10.7 -- Amended and Restated Stock Option Agreement dated April 30, 1996,
evidencing award to Susan Erskine (filed as Exhibit 10.7).*
10.8 -- Amended and Restated Stock Option Agreement dated February 1, 1996,
evidencing award to Mark Clein (filed as Exhibit 10.8).*
10.9 -- Amended and Restated Stock Option Agreement dated February 1, 1996,
evidencing award to Mark Clein (filed as Exhibit 10.9).*
10.10 -- Amended and Restated Stock Option Agreement dated February 1, 1996,
evidencing award to Mark Clein (filed as Exhibit 10.10).*
10.11 -- Amended and Restated Warrant dated July 9, 1997, evidencing award to Fred
Furman (filed as Exhibit 10.11).*
10.12 -- Restated Management Agreement dated April 11, 1997 with Scripps Health
(filed as Exhibit 10.12).*
10.13 -- Sublease dated April 1, 1997 with CMS Development and Management Company,
Inc. (filed as Exhibit 10.13).*
10.14 -- Management and Affiliation Agreement dated April 13, 1995, between Mental
Health Cooperative, Inc. and Tennessee Mental Health Cooperative, Inc. with
Addendum (filed as Exhibit 10.14). (Tennessee Mental Health Cooperative,
Inc. subsequently changed its name to Collaborative Care Corporation.)*
10.15 -- Second Addendum to Management and Affiliation Agreement dated November 1,
1996 between Mental Health Cooperative, Inc. and Collaborative Care
Corporation.
10.16 -- Provider Services Agreement dated April 13, 1995, between Tennessee Mental
Health Cooperative, Inc. and Mental Health Cooperative, Inc. (filed as
Exhibit 10.15). (Tennessee Mental Health Cooperative, Inc. subsequently
changed its name to Collaborative Care Corporation.)*
</TABLE>
II-2
<PAGE> 64
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- ---------------------------------------------------------------------------
<C> <C> <S>
10.17 -- Management and Affiliation Agreement dated April 13, 1995, between Case
Management, Inc. and Tennessee Mental Health Cooperative, Inc. with
Addendum (filed as Exhibit 10.16). (Tennessee Mental Health Cooperative,
Inc. subsequently changed its name to Collaborative Care Corporation.)*
10.18 -- Provider Services Agreement dated April 13, 1995, between Tennessee Mental
Health Cooperative, Inc. and Case Management, Inc. (filed as Exhibit
10.17). (Tennessee Mental Health Cooperative, Inc. subsequently changed its
name to Collaborative Care Corporation.)*
10.19 -- Sanwa Bank California Credit Agreement dated February 2, 1996, as amended
on October 31, 1996.
21.1 -- List of Subsidiaries.
23.1 -- Consent of Cooley Godward LLP (included in Exhibit 5.1).**
23.2 -- Consent of Ernst & Young LLP, independent auditors.
24.1 -- Power of Attorney (included in Part II of the Registration Statement).
</TABLE>
- ---------------
* Incorporated by reference to exhibits filed with the SEC in the Company's
Annual Report on Form 10-K for the year ended April 30, 1997.
+ Incorporated by reference to the Company's Registration Statement on Form
S-18 (Reg. No. 23-20095-A) filed on February 11, 1988.
** To be filed by amendment.
ITEM 17. UNDERTAKINGS.
Insofar as indemnification for liabilities arising under the Securities Act
of 1933, as amended, may be permitted to directors, officers and controlling
persons of the Registrant pursuant to the Certificate of Incorporation or Bylaws
of the Registrant and the Delaware General Corporation Law or otherwise, the
Registrant has been advised that in the opinion of the Securities and Exchange
Commission, such indemnification is against public policy as expressed in the
Securities Act of 1933, as amended, and is, therefore, unenforceable. In the
event that a claim for indemnification against such liabilities (other than
payment by the Registrant of expenses incurred or paid by a director, officer or
controlling person of the Registrant in the successful defense of any action,
suit or proceeding) is asserted by such director, officer or controlling person
in connection with the securities being registered hereunder, the Registrant
will, unless in the opinion of its counsel the matter has already been settled
by controlling precedent, submit to a court of appropriate jurisdiction the
question of whether such indemnification by it is against public policy as
expressed in the Securities Act of 1933, as amended, and shall be governed by
the final adjudication of such issue.
The undersigned Registrant hereby undertakes:
1. that for purposes of determining any liability under the Securities
Act of 1933, as amended, the information omitted from the form of
prospectus filed as part of this registration statement in reliance upon
Rule 430A and contained in a form of prospectus filed by the Registrant
pursuant to Rule 424(b)(1) or (4) or 497(h) under the Securities Act of
1933, as amended, shall be deemed to be part of this registration statement
as of the time it was declared effective.
2. that for the purpose of determining any liability under the
Securities Act of 1933, as amended, each such post-effective amendment that
contains a form of prospectus shall be deemed to be a new registration
statement relating to the securities offered therein, and the offering of
such securities at that time shall be deemed to be the initial bona fide
offering thereof.
II-3
<PAGE> 65
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended, the
Registrant certifies that it has reasonable grounds to believe that it meets all
of the requirements for filing on Form S-2 and has duly caused this registration
statement to be signed on its behalf by the undersigned, thereunto duly
authorized, in the County of San Diego, State of California, on September 24,
1997.
PMR CORPORATION
By /s/ ALLEN TEPPER
------------------------------------
Allen Tepper, Chairman of the Board
and Chief Executive Officer
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature
appears below constitutes and appoints Allen Tepper, Fred D. Furman and Mark P.
Clein, and each or any one of them, as his true and lawful attorneys-in-fact and
agents, with full power of substitution and resubstitution, for him and in his
name, place, and stead, in any and all capacities, to sign any and all
amendments (including post-effective amendments, exhibits thereto and other
documents in connection therewith) to this Registration Statement and any
subsequent registration statement filed by the registrant pursuant to Rule
462(b) of the Securities Act of 1933, as amended, which relates to this
Registration Statement, and to file the same, with all exhibits thereto, and
other documents in connection therewith, with the Securities and Exchange
Commission, granting unto said attorneys-in-fact and agents, and each of them,
full power and authority to do and perform each and every act and thing
requisite and necessary to be done in connection therewith, as fully to all
intents and purposes as he might or could do in person, hereby ratifying and
confirming all that said attorneys-in-fact and agents, or any of them, or their
or his substitute or substitutes, may lawfully do or cause to be done by virtue
hereof.
Pursuant to the requirements of the Securities Act of 1933, this
registration statement has been signed by the following persons in the
capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE CAPACITY DATE
- --------------------------------------------- --------------------------- -------------------
<S> <C> <C>
/s/ ALLEN TEPPER Chairman of the Board and September 24, 1997
- --------------------------------------------- Chief Executive Officer
Allen Tepper (Principal Executive
Officer)
/s/ FRED D. FURMAN President September 24, 1997
- ---------------------------------------------
Fred D. Furman
/s/ MARK P. CLEIN Executive Vice President September 24, 1997
- --------------------------------------------- and Chief Financial Officer
Mark P. Clein (Principal Financial and
Accounting Officer)
/s/ SUSAN D. ERSKINE Executive Vice President- September 24, 1997
- --------------------------------------------- Development, Secretary and
Susan D. Erskine Director
/s/ DANIEL L. FRANK Director September 24, 1997
- ---------------------------------------------
Daniel L. Frank
</TABLE>
II-4
<PAGE> 66
<TABLE>
<CAPTION>
SIGNATURE CAPACITY DATE
- --------------------------------------------- --------------------------- -------------------
<S> <C> <C>
/s/ EUGENE D. HILL, III Director September 24, 1997
- ---------------------------------------------
Eugene D. Hill, III
/s/ CHARLES C. MCGETTIGAN Director September 24, 1997
- ---------------------------------------------
Charles C. McGettigan
/s/ RICHARD A. NIGLIO Director September 24, 1997
- ---------------------------------------------
Richard A. Niglio
</TABLE>
II-5
<PAGE> 67
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- ---------------------------------------------------------------------------
<C> <C> <S>
1.1 -- Form of Underwriting Agreement
3.1 -- The Company's Restated Certificate of Incorporation, filed with the
Delaware Secretary of State on July 10, 1997.*
3.2 -- The Company's Amended and Restated Bylaws.*
4.1 -- Common Stock Specimen Certificate.+
5.1 -- Opinion of Cooley Godward LLP as to the legality of the securities being
registered.**
10.1 -- The Company's 1997 Equity Incentive Plan (filed as Exhibit 10.1).*
10.2 -- Form of Incentive Stock Option Agreement under the 1997 Plan (filed as
Exhibit 10.2).*
10.3 -- Form of Nonstatutory Stock Option Agreement under the 1997 Plan (filed as
Exhibit 10.).*
10.4 -- Outside Directors' Non-Qualified Stock Option Plan of 1992 (the "1992
Plan") (filed as Exhibit 10.4).*
10.5 -- Form of Outside Directors' Non-Qualified Stock Option Agreement (filed as
Exhibit 10.5).*
10.6 -- Amended and Restated Stock Option Agreement dated April 30, 1996,
evidencing aware to Allen Tepper (filed as Exhibit 10.6).*
10.7 -- Amended and Restated Stock Option Agreement dated April 30, 1996,
evidencing award to Susan Erskine (filed as Exhibit 10.7).*
10.8 -- Amended and Restated Stock Option Agreement dated February 1, 1996,
evidencing award to Mark Clein (filed as Exhibit 10.8).*
10.9 -- Amended and Restated Stock Option Agreement dated February 1, 1996,
evidencing award to Mark Clein (filed as Exhibit 10.9).*
10.10 -- Amended and Restated Stock Option Agreement dated February 1, 1996,
evidencing award to Mark Clein (filed as Exhibit 10.10).*
10.11 -- Amended and Restated Warrant dated July 9, 1997, evidencing award to Fred
Furman (filed as Exhibit 10.11).*
10.12 -- Restated Management Agreement dated April 11, 1997 with Scripps Health
(filed as Exhibit 10.12).*
10.13 -- Sublease dated April 1, 1997 with CMS Development and Management Company,
Inc. (filed as Exhibit 10.13).*
10.14 -- Management and Affiliation Agreement dated April 13, 1995, between Mental
Health Cooperative, Inc. and Tennessee Mental Health Cooperative, Inc. with
Addendum (filed as Exhibit 10.14). (Tennessee Mental Health Cooperative,
Inc. subsequently changed its name to Collaborative Care Corporation.)*
10.15 -- Second Addendum to Management and Affiliation Agreement dated November 1,
1996 between Mental Health Cooperative, Inc. and Collaborative Care
Corporation.
10.16 -- Provider Services Agreement dated April 13, 1995, between Tennessee Mental
Health Cooperative, Inc. and Mental Health Cooperative, Inc. (filed as
Exhibit 10.15). (Tennessee Mental Health Cooperative, Inc. subsequently
changed its name to Collaborative Care Corporation.)*
</TABLE>
<PAGE> 68
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- ---------------------------------------------------------------------------
<C> <C> <S>
10.17 -- Management and Affiliation Agreement dated April 13, 1995, between Case
Management, Inc. and Tennessee Mental Health Cooperative, Inc. with
Addendum (filed as Exhibit 10.16). (Tennessee Mental Health Cooperative,
Inc. subsequently changed its name to Collaborative Care Corporation.)*
10.18 -- Provider Services Agreement dated April 13, 1995, between Tennessee Mental
Health Cooperative, Inc. and Case Management, Inc. (filed as Exhibit
10.17). (Tennessee Mental Health Cooperative, Inc. subsequently changed its
name to Collaborative Care Corporation.)*
10.19 -- Sanwa Bank California Credit Agreement dated February 2, 1996, as amended
on October 31, 1996.
21.1 -- List of Subsidiaries.
23.1 -- Consent of Cooley Godward LLP (included in Exhibit 5.1).**
23.2 -- Consent of Ernst & Young LLP, independent auditors.
24.1 -- Power of Attorney (included in Part II of the Registration Statement).
</TABLE>
- ---------------
* Incorporated by reference to exhibits filed with the SEC in the Company's
Annual Report on Form 10-K for the year ended April 30, 1997.
+ Incorporated by reference to the Company's Registration Statement on Form S-18
(Reg. No. 23-20095-A) filed on February 11, 1988.
** To be filed by amendment.
<PAGE> 1
EXHIBIT 1.1
2,000,000 SHARES
PMR CORPORATION
COMMON STOCK
UNDERWRITING AGREEMENT
_________________, 1997
EQUITABLE SECURITIES CORPORATION
LEHMAN BROTHERS INC.
WESSELS, ARNOLD & HENDERSON, L.L.C.
c/o Equitable Securities Corporation
As Representatives of the several
Underwriters
800 Nashville City Center
Nashville, Tennessee 37219-1743
Ladies and Gentlemen:
The undersigned, PMR Corporation, a corporation organized and
existing under the laws of the State of Delaware (the "Company"), and the
Selling Stockholders (as hereinafter defined) hereby confirm their respective
agreements with you (the "Representatives") and the other underwriters named in
Schedule 1 hereto (you and the other underwriters being herein collectively
called the "Underwriters") as follows:
1. Introductory. The Company proposes, subject to the terms and
conditions stated herein, to issue and sell to the Underwriters 1,490,000 shares
of Common Stock, par value $.01 per share (the "Common Stock"), of the Company.
Certain stockholders of the Company named in Schedule 2 hereto (each, a "Selling
Stockholder" and together, the "Selling Stockholders") propose, subject to the
terms and conditions stated herein, to sell to the Underwriters an aggregate of
510,000 shares of Common Stock, with each Selling Stockholder selling the number
of shares of Common Stock set forth opposite such Selling Stockholder's name on
Schedule 2 hereto. The shares to be sold by the Company and the shares to be
sold by the Selling Stockholders are referred to herein as the "Shares." In
addition, solely for the purpose of covering over-allotments, the Company
proposes to issue and sell to the Underwriters, at the option of the
Underwriters, up to an additional 300,000 shares of Common Stock (the
"Additional Shares"). The Common Stock is more fully described in the Prospectus
referred to below.
<PAGE> 2
2. Representations and Warranties of the Company and the Selling
Stockholders.
(a) The Company represents and warrants to, and agrees
with, the several Underwriters that:
(i) The Company has filed with the Securities and
Exchange Commission (the "Commission") a registration statement on
Form S-2 and, as necessary to cause such registration statement to
become effective, has filed one or more amendments thereto
(Registration No. 333-____) for the registration of the Shares and
the Additional Shares under the Securities Act of 1933, as amended
(the "Act"). Such registration statement, including all documents
incorporated by reference therein, the prospectus, financial
statements and schedules, exhibits and all other documents filed as a
part thereof, as amended at the time of effectiveness of the
registration statement, including any information deemed to be a part
thereof as of the time of effectiveness pursuant to paragraph (b) of
Rule 430A or Rule 434 of the rules and regulations of the Commission
under the Act (the "Regulations"), and any additional registration
statement filed pursuant to Rule 462(b) of the Regulations with
respect to the Shares ("Rule 462(b) Registration Statement"), is
herein called the "Registration Statement," and the prospectus
(including any prospectus subject to completion meeting the
requirements of Rule 434(b) of the Regulations provided by the
Company together with any term sheet meeting the requirements of such
Rule 434(b) as the prospectus provided to meet the requirements of
Section 10(a) of the Act), including all documents incorporated by
reference therein, in the form first filed with the Commission
pursuant to Rule 424(b) of the Regulations or filed as part of the
Registration Statement at the time of effectiveness if no such Rule
424(b) or Rule 434 filing is required, is herein called the
"Prospectus." The term "Preliminary Prospectus" as used herein each
prospectus subject to completion filed with the Registration
Statement or any amendment thereto (including the prospectus subject
to completion, if any, included in the Registration Statement or any
amendment thereto at the time it was or is declared effective). Any
reference herein to the Registration Statement, any Preliminary
Prospectus or the Prospectus shall be deemed to refer to and include
the documents incorporated by reference therein pursuant to Item 12
of Form S-2 which were filed under the Securities Exchange Act of
1934, as amended (the "Exchange Act"), on or before the effective
date of the Registration Statement, the date of such Preliminary
Prospectus or the date of the Prospectus, as the case may be.
(ii) At the time of the effectiveness of the
Registration Statement and at all times subsequent thereto until and
including the Closing Date (as defined in Section 3) and each
Additional Closing Date (as defined in Section 3), if any, and during
such longer period as the Prospectus may be required to be delivered
in connection with sales by the Underwriters or a dealer, and during
such longer period until any post-effective amendment thereto shall
become effective, the Registration Statement and the Prospectus and
any amendments thereof and supplements thereto contained or will
contain all statements which are required to be stated therein in
accordance with the Act and the Regulations, complied or will comply
with the Act and the Regulations and the Exchange
<PAGE> 3
Act and the rules and regulations thereunder, and does not or will
not contain any untrue statement of a material fact or omit to state
any material fact required to be stated therein or necessary to make
the statements therein not misleading, and no event will have
occurred which should have been set forth in an amendment or
supplement to the Registration Statement or the Prospectus which has
not then been set forth in such an amendment or supplement; each
Preliminary Prospectus, as of the date filed with the Commission, did
not include any untrue statement of a material fact or omit to state
any material fact required to be stated therein or necessary to make
the statements therein not misleading; except that no representation
or warranty is made in this Section 2(a)(ii) with respect to
statements or omissions made in reliance upon and in conformity with
written information furnished to the Company expressly for inclusion
in any Preliminary Prospectus, the Registration Statement, or the
Prospectus, or any amendment or supplement thereto, as stated in
Section 8(b) with respect to any Underwriter by or on behalf of such
Underwriter through the Representatives. Any term sheet and
prospectus subject to completion provided by the Company to the
Underwriters for use in connection with the offering and sale of the
Shares pursuant to Rule 434 of the Regulations together are not
materially different from the last preliminary prospectus included in
the Registration Statement at the time of its effectiveness
(exclusive of any information deemed to be a part thereof by virtue
of Rule 434(d) of the Regulations).
(iii) The documents incorporated or deemed to be
incorporated by reference in the Prospectus, at the time they were or
hereafter are filed (or, if any amendment with respect to any such
document was filed, when such amendment was filed) with the
Commission, complied and will comply in all material respects with
the requirements of the Exchange Act and the rules and regulations of
the Commission thereunder, and, when read together with the other
information in the Prospectus, at the time the Registration Statement
and any amendments thereto became effective and at the Closing Date
and each Additional Closing Date, if any, did not and will not
contain an untrue statement of a material fact or omit to state a
material fact required to be stated therein or necessary to make the
statements therein not misleading.
(iv) Neither the Commission nor, to the knowledge
of the Company, the "blue sky" or securities authority of any
jurisdiction has issued an order suspending the effectiveness of the
Registration Statement (a "Stop Order"), preventing or suspending the
use of any Preliminary Prospectus, the Prospectus, the Registration
Statement, or any amendment or supplement thereto, refusing to permit
the effectiveness of the Registration Statement, or suspending the
registration or qualification of the Shares or the Additional Shares,
nor, to the knowledge of the Company, has any of such authority
instituted or threatened to institute any proceedings with respect to
a Stop Order.
(v) Any contract, agreement, instrument, lease,
license or other document required to be described in the
Registration Statement or the Prospectus has been properly described
therein. Any contract, agreement, instrument, lease, license or other
document required to be filed as an exhibit to the Registration
Statement has been filed with the Commission as an exhibit to the
Registration Statement.
<PAGE> 4
(vi) Each of the Company and its subsidiaries is a
corporation duly organized, validly existing and in good standing
under the laws of its respective jurisdiction of incorporation, with
full corporate power and authority, and all necessary consents,
authorizations, approvals, orders, licenses, certificates and permits
of and from, and declarations and filings with, all federal, state,
local and other governmental authorities and all courts and other
tribunals, to own, lease, license and use its respective properties
and assets and to carry on its respective businesses in the manner
described in the Prospectus, including such consents, authorizations,
approvals, orders, licenses, certificates, permits, declarations and
filings as are required under such federal and state health care
laws, statutes and regulations as are applicable to the Company and
its subsidiaries (except for such consents, authorizations,
approvals, orders, licenses, certificates, permits, declarations and
filings which the failure to have obtained, individually or in the
aggregate, does not and will not have a material adverse effect upon
the results of operations, business, condition (financial or
otherwise) prospects, properties or assets of the Company and its
subsidiaries, taken as a whole), and neither the Company nor its
subsidiaries has received any notice of proceedings relating to the
revocation or modification of any such consent, authorization,
approval, order, license, certificate, permit, declaration or filing,
nor, to the best knowledge of the Company and its subsidiaries, is
there any basis therefor; no such consent, authorization, approval,
order, license, certificate, permit, declaration or filing contains a
materially burdensome restriction to the Company and its subsidiaries
not adequately disclosed in the Registration Statement and the
Prospectus; the Company and each of its subsidiaries has fulfilled
and performed in all material respects all of their respective
obligations with respect to each such consent, authorization,
approval, order, license, certificate, permit, declaration or filing,
and no event has occurred which allows (or which, with notice or
lapse of time or both, would allow) revocation or termination thereof
or results in any material impairment of the rights of the holder of
any such consent, authorization, approval, order, license,
certificate, permit, declaration or filing. Each of the Company and
its subsidiaries is duly qualified to do business and is in good
standing in every jurisdiction in which its ownership, leasing,
licensing or use of property and assets or the conduct of its
business makes such qualification necessary, except where the failure
to be so qualified or in good standing, individually or in the
aggregate, does not and will not have a material adverse effect upon
the results of operations, business, condition (financial or
otherwise), prospects, properties or assets of the Company and its
subsidiaries, taken as a whole.
(vii) The Company had, at July 31, 1997, an
authorized and outstanding capitalization as set forth in the
Prospectus under the caption "Capitalization." Each outstanding share
of Common Stock (including the Shares being sold by the Selling
Stockholders) are duly and validly authorized and issued, fully paid
and nonassessable and were not issued and are not now in violation of
or subject to any preemptive or similar rights. The Shares and
Additional Shares being sold by the Company hereunder are duly and
validly authorized and, when issued, delivered and sold in accordance
with this Agreement, will be duly and validly issued and outstanding,
fully paid and
<PAGE> 5
nonassessable, and will not have been issued in violation of or be
subject to any preemptive or similar rights and the Underwriters will
receive good title to the Shares and Additional Shares purchased by
them from the Company, free and clear of all liens, security
interests, pledges, charges, claims, encumbrances, restrictions on
transfer, stockholder agreements, voting trust, voting rights or
other defect of title whatsoever. The securities of the Company
conform to the descriptions thereof contained in the Registration
Statement or the Prospectus. There is no commitment, plan or
arrangement to issue, and no outstanding option, warrant or
other right calling for the issuance of, any share of capital stock
of the Company or any security or other instrument which by its terms
is convertible into, exercisable for, or exchangeable for capital
stock of the Company, except as properly described in the Prospectus.
Except for the Shares being sold by the Selling Stockholders, no
holder of securities of the Company has any rights to the
registration of securities of the Company because of the filing of
the Registration Statement or otherwise in connection with the sale
of the Shares and Additional Shares contemplated hereby (other than
any such registration rights that have been waived in writing). All
of the issued and outstanding shares of capital stock of each
subsidiary of the Company has been duly and validly authorized and
issued, fully paid and nonassessable and were not issued in violation
of preemptive or similar rights. The Company owns, directly or
indirectly, all of the outstanding shares of capital stock of each of
its subsidiaries free and clear of all liens, security interests,
pledges, charges, claims, encumbrances, restrictions on transfer,
stockholder agreements, voting trust, voting rights or other defect
of title whatsoever.
(viii) The consolidated financial statements, any
supplementary financial information and any related schedules of the
Company and its subsidiaries included in or incorporated by reference
into the Registration Statement and the Prospectus fairly present, in
all material respects, with respect to the Company and its
subsidiaries, the financial position, the results of operations and
the other information purported to be shown therein at the respective
dates and for the respective periods to which they apply. Such
financial statements, supplementary financial information and related
schedules have been prepared in accordance with United States
generally accepted accounting principles ("GAAP") consistently
applied throughout the periods involved, are correct and complete,
and are in accordance with the books and records of the Company and
its subsidiaries in all material respects. The financial data set
forth in the Prospectus under the captions "Summary Consolidated
Financial Data," "Capitalization," "Selected Consolidated Financial
Data" and "Management's Discussion and Analysis of Financial
Condition and Results of Operations" fairly present, on the basis
stated in the Prospectus, the information set forth therein and have
been compiled on a basis consistent with that of the financial
statements included in or incorporated by reference into the
Registration Statement and the Prospectus. Ernst & Young LLP, who
have certified the financial statements and supporting schedules
thereto included in the Registration Statement and the Prospectus,
and whose report is filed with the Commission as part of the
Registration Statement and the Prospectus, are, and during the
periods covered by the report included in the Registration Statement
and the Prospectus were, independent public accountants with respect
to the Company and its subsidiaries as required by the Act and the
<PAGE> 6
Regulations. No other financial statements are required by Form S-2
or otherwise to be included in the Registration Statement or the
Prospectus. There has been no material adverse change in the results
of operations, business, condition (financial or otherwise),
properties, or assets of the Company or any of its subsidiaries from
the latest information set forth in the Registration Statement or the
Prospectus, except as properly described in the Prospectus; and there
is no fact known to the Company which could reasonably be expected to
have a material adverse effect on the future prospects of the Company
or any of its subsidiaries (other than political or economic matter
of general applicability or as properly described in the Prospectus).
(ix) There is no action, suit, arbitration, claim,
governmental or other proceeding or investigation (domestic or
foreign, formal or informal) pending or, to the knowledge of the
Company, threatened in writing, or in prospect (or any basis therefor
known to the Company) with respect to the Company or its subsidiaries
or any of their respective operations, businesses, properties or
assets except as properly described in the Prospectus or such as,
individually or in the aggregate, do not now have and are not
reasonably expected in the future to have a material adverse effect
upon the results of operations, business, condition (financial or
otherwise), prospects, properties or assets of the Company and its
subsidiaries, taken as a whole. Neither the Company nor any of its
subsidiaries is in violation of, or in default with respect to, any
law, rule, regulation, order, judgment or decree (domestic or
foreign), except as properly described in the Prospectus or such as
in the aggregate do not now have and are not reasonably expected in
the future to have, individually or in the aggregate, a material
adverse effect upon the results of operations, business, condition
(financial or otherwise), prospects, properties or assets of the
Company and its subsidiaries, taken as a whole, nor is the Company or
any of its subsidiaries required to take any action in order to avoid
any such violation or default.
(x) Each of the Company and its subsidiaries has
fee simple title which is good and marketable (or which is good and
indefeasible or other local variation thereof) to all real property
and good and marketable title to all personal property owned by each
of them, in each case free and clear of all liens, security
interests, pledges, charges, encumbrances, mortgages and defects
(except as properly described in the Prospectus). The real property
and buildings which the Prospectus indicates are held under lease by
the Company and any of its subsidiaries are held by them under legal,
valid, binding, subsisting and enforceable leases free of exceptions
(except as properly described in the Prospectus). No real property
leased, or to the knowledge of the Company licensed or used, by the
Company or any of its subsidiaries lies in an area which is or, to
the knowledge of the Company, will be, subject to zoning, use or
building code restrictions which would prohibit, and no state of
facts relating to the actions or inaction of another person or entity
or his, her or its ownership, leasing, licensing or use of any real
or personal property exists or, to the knowledge of the Company, will
exist, which would prevent the continued effective leasing, licensing
or use of such real property in the respective businesses of the
Company and its subsidiaries as presently conducted or as the
Prospectus indicates they contemplate conducting (except as properly
<PAGE> 7
described in the Prospectus or such as do not now have and will not
in the future have, individually or in the aggregate, a material
adverse effect upon the results of operations, business, condition
(financial or otherwise), prospects, properties or assets of the
Company and its subsidiaries, taken as a whole).
(xi) Each of the Company and its subsidiaries
possesses such authority, licenses, approvals, franchises,
certificates and permits issued by the appropriate local, state,
federal or foreign regulatory agencies or bodies necessary to conduct
the businesses now operated by them, except for such authority,
licenses, approvals, franchises, certificates and permits the absence
of which, individually or in the aggregate, would not have a material
adverse effect on the results of operations, business, condition
(financial or otherwise), prospects, properties or assets of the
Company and its subsidiaries, taken as a whole; and neither the
Company nor any of its subsidiaries has received any notice of
proceedings relating to the revocation or modification of any such
authority, license, approval, franchise, certificate or permit which,
individually or in the aggregate, if the subject of an unfavorable
decision, ruling, or finding, would have a material adverse effect
upon the results of operations, business, condition (financial or
otherwise), prospects, properties or assets of the Company and its
subsidiaries, taken as a whole.
(xii) None of the Company, its subsidiaries nor, to
the knowledge of the Company, any other party is now or is expected
by the Company to be in violation or breach of, or in default with
respect to any contract, agreement, instrument, lease, license,
arrangement or understanding to which the Company or any of its
subsidiaries is a party, or to which any of their respective
properties or assets are subject, and each such contract, agreement,
instrument, lease, license, arrangement and understanding is in full
force and effect and is the legal, valid and binding obligation of
the Company or one of its subsidiaries and, to the knowledge of the
Company, the other parties thereto and is enforceable against the
Company or one of its subsidiaries and, to the knowledge of the
Company, against the other parties thereto in accordance with its
terms. Each of the Company and its subsidiaries enjoys peaceful and
undisturbed possession under all such leases and licenses under which
it is operating. Neither the Company nor its subsidiaries is a party
to or bound by any contract, agreement, instrument, lease, license,
arrangement or understanding, or subject to any charter or other
restriction, which has had or is reasonably expected in the future to
have, individually or in the aggregate, a material adverse effect on
the results of operations, business, condition (financial or
otherwise), prospects, properties or assets of the Company and its
subsidiaries, taken as a whole, except as properly disclosed in the
Prospectus. Neither the Company nor its subsidiaries is in violation
or breach of, or in default with respect to, any term of its
respective certificate or articles of incorporation or bylaws.
(xiii) All patents, patent applications, trademarks,
trademark applications, trade names, service marks, copyrights,
franchises and other intangible properties and assets (all of the
foregoing being herein called "Intangibles") that the Company or any
of its subsidiaries owns or has pending, or under which they are
licensed, are in good standing and uncontested, except as properly
described in the Prospectus or such as in the
<PAGE> 8
aggregate do not now have and will not in the future have,
individually or in the aggregate, a material adverse effect upon the
results of operations, business, condition (financial or otherwise),
prospects, properties or assets of the Company and its subsidiaries,
taken as a whole. There is no right under any Intangible necessary to
the respective businesses of the Company and its subsidiaries as
presently conducted or as the Prospectus indicates they contemplate
conducting, except as properly described in the Prospectus. Neither
the Company nor any of its subsidiaries has infringed, is infringing,
or has received notice of infringement with respect to asserted
Intangibles of others, except for such infringement or alleged
infringement that has not had, or cannot reasonably be expected to
have, individually or in the aggregate, a material adverse effect on
the results of operations, business, condition (financial or
otherwise), prospects, properties or assets of the Company and its
subsidiaries, taken as a whole. To the knowledge of the Company,
there is no infringement by others of Intangibles of the Company or
its subsidiaries, except as properly described in the Prospectus. To
the knowledge of the Company, there is no Intangible of others which
has had or may reasonably be expected to in the future have,
individually or in the aggregate, a material adverse effect on the
results of operations, business, condition (financial or otherwise),
prospects, properties or assets of the Company and its subsidiaries,
taken as a whole.
(xiv) None of the Company, its subsidiaries or any
person associated with or acting on behalf of the Company or its
subsidiaries including, without limitation, any director, officer,
agent or employee of the Company or its subsidiaries has, directly or
indirectly, while acting on behalf of the Company or its
subsidiaries, to the knowledge of the Company (A) used any corporate
funds for unlawful contributions, gifts, entertainment or other
unlawful expenses relating to political activity; (B) made any
unlawful payment to foreign or domestic government officials or
employees or to foreign or domestic political parties or campaigns
from corporate funds; (C) violated any provision of the Foreign
Corrupt Practices Act of 1977, as amended; or (D) made any other
unlawful payment.
(xv) There are no material Medicare, Medicaid or
other managed care recoupment or recoupments of any third-party payor
being sought, requested, claimed or, to the knowledge of the Company,
threatened against the Company, any of its subsidiaries or any of the
providers with which the Company is affiliated through management
agreements or management and affiliation agreements or otherwise (the
"Providers").
(xvi) None of the Company, any of its subsidiaries
or any of the Providers is in violation of any health care law,
ordinance, administrative or governmental rule or regulation
applicable to the Company, any of its subsidiaries or the Providers,
including, without limitation, those relating to reimbursement by
government agencies and fraudulent or wrongful billings, the
violation of which would have, either individually or in the
aggregate, a material adverse effect on the results of operations,
business, condition (financial or otherwise), prospects, properties
or assets of the Company and its subsidiaries, taken as a whole.
<PAGE> 9
(xvii) None of the Company, any of its subsidiaries
or any of the Providers nor any employee or agent of the Company, any
of its subsidiaries or any of the Providers has made any payment of
funds or received or retained any funds in violation of any health
care law, rule or regulation, the violation of which would have,
either individually or in the aggregate, a material adverse effect on
the results of operations, business, condition (financial or
otherwise), prospects, properties or assets of the Company and its
subsidiaries, taken as a whole.
(xviii) The businesses of the Company, its
subsidiaries or the Providers do not violate any health care statute,
administrative or governmental rule or regulation of the United
States applicable to the Company or any of its subsidiaries,
including, but not limited to, 42 U.S.C. Section1320a-7b, or any
health care judgment, injunction, order or decree of any court or
governmental entity or instrumentality of the United States having
jurisdiction over the Company, any of its subsidiaries or any of the
Providers, except for violations that would not have, either
individually or in the aggregate, a material adverse effect on the
results of operations, business, condition (financial or otherwise),
prospects, properties or assets of the Company and its subsidiaries,
taken as a whole.
(xix) The statements in the Registration Statement
and the Prospectus under the captions "Risk Factors--Impact of Health
Care Reform and the Balanced Budget Act of 1997," "--Government
Regulation" and "Business--Government Regulation," insofar as such
statements constitute summaries of the legal matters, documents or
proceedings referred to therein, fairly present, in all material
respects, the information called for with respect to such legal
matters, documents and proceedings and fairly summarize, in all
material respects, the matters referred to therein.
(xx) The Company has full power (corporate and
other) to execute and deliver this Agreement and to carry out all the
terms and provisions hereof to be carried out by it. All necessary
corporate proceedings of the Company have been duly taken to
authorize the execution, delivery and performance of this Agreement
by the Company. This Agreement has been duly authorized, executed and
delivered by the Company, and (assuming this Agreement is a binding
agreement of the Underwriters) is the legal, valid and binding
obligation of the Company, enforceable against the Company in
accordance with its terms, subject to applicable bankruptcy,
insolvency, reorganization, conservatorship, receivership, fraudulent
conveyance and similar laws affecting creditors' rights generally and
subject, as to enforceability, to general principles of equity
(regardless of whether enforcement is sought in a proceeding in
equity or at law). No consent, authorization, approval, order,
license, certificate or permit of or from, or declaration or filing
with, any federal, state, local or other governmental authority or
any court or other tribunal (domestic or foreign) is required by the
Company for the execution, delivery or performance of this Agreement
by the Company (except filings under the Act which have been or will
be made before the Closing Date and such consents consisting only of
consents under "blue sky" or securities laws which have been obtained
at or prior to the date of this Agreement). No consent of any party
to any
<PAGE> 10
contract, agreement, instrument, lease, license, arrangement or
understanding to which the Company or any of its subsidiaries is a
party, or to which any of their respective properties or assets are
subject, is required for the execution, delivery or performance of
this Agreement; and the execution, delivery and performance of this
Agreement will not violate, result in a breach of, conflict with, or
(with or without the giving of notice or the passage of time or both)
entitle any party to terminate or call a default under, or result in
the creation or imposition of any lien, charge or encumbrance upon
any property or assets of the Company or any of its subsidiaries
pursuant to any such contract, agreement, instrument, lease, license,
arrangement or understanding, or violate or result in a breach of any
term of the certificate or articles of incorporation or bylaws of the
Company or any of its subsidiaries, or violate, result in a breach
of, or conflict with any law, rule, regulation (except for such law,
rule or regulation the violation of which would not have,
individually or in the aggregate, a material adverse effect on the
results of operations, business, condition (financial or otherwise),
prospects, properties or assets of the Company and its subsidiaries,
taken as a whole), order, judgment or decree binding on the Company
or its subsidiaries or to which any of their respective operations,
businesses, properties or assets are subject.
(xxi) Subsequent to the respective dates as of
which information is given in the Registration Statement and the
Prospectus and except as otherwise properly described in the
Prospectus, neither the Company nor its subsidiaries has (A) issued
any securities (other than upon the exercise of options and warrants
properly described in the Registration Statement) or incurred any
liability or obligation, primary or contingent, for borrowed money;
(B) entered into any material transaction not in the ordinary course
of business; or (C) declared or paid any dividend on its capital
stock.
(xxii) Neither the Company nor to the knowledge of
the Company, any of its officers, directors or affiliates (as defined
in the Regulations) has taken or will take, directly or indirectly,
prior to the termination of the underwriting syndicate contemplated
by this Agreement, any action designed to stabilize or manipulate the
price of any security of the Company or which has caused or resulted
in, or which might in the future reasonably be expected to cause or
result in, stabilization or manipulation of the price of any security
of the Company to facilitate the sale or resale of the Common Stock.
(xxiii) The Company and its subsidiaries have filed
all necessary federal, state, local and foreign income and franchise
tax returns and have paid all taxes shown as due thereon; and there
is no tax deficiency that has been, or, to the knowledge of the
Company, might be, asserted or threatened against the Company or any
of its subsidiaries or any of their respective properties or assets
that would have, individually or in the aggregate, a material adverse
effect upon the results of operations, business, condition (financial
or otherwise), prospects, properties or assets of the Company and its
subsidiaries, taken as a whole.
(xxiv) There are no outstanding loans, advances
(except normal advances for business expenses in the ordinary course
of business) or guarantees of indebtedness
<PAGE> 11
by the Company or its Subsidiaries to or for the benefit of any of
their respective officers or directors or any of the members of the
families of any of them, except as properly disclosed in the
Prospectus.
(xxv) The Company maintains a system of internal
accounting controls sufficient to provide reasonable assurances that
(A) transactions are executed in accordance with management's general
or specific authorizations; (B) transactions are recorded as
necessary to permit preparation of financial statements in conformity
with generally accepted accounting principles and to maintain
accountability for assets; (C) access to assets is permitted only in
accordance with management's general or specific authorization; and
(D) the recorded accountability for assets is compared with existing
assets at reasonable intervals and appropriate action is taken with
respect to any differences.
(xxvi) The Company, each of its subsidiaries and
each of the Providers is insured by insurers of recognized financial
responsibility against such losses and risks and in such amounts as
are prudent and customary in the businesses in which they are
engaged; all policies of insurance and fidelity or surety bonds
insuring the Company, any of its subsidiaries, any of the Providers
and their respective businesses, assets, employees, officers and
directors are in full force and effect; the Company, its subsidiaries
and the Providers are in compliance with the terms of such policies
and instruments in all material respects; and there are no claims by
the Company, any of its Subsidiaries or any of the Providers under
any such policy or instrument as to which any insurance company is
denying liability or defending under a reservation of rights clause.
The Company, each of its subsidiaries and each of the Providers
maintains insurance of the types and in amounts generally deemed
adequate for its business and consistent with insurance coverage
maintained by similar companies and businesses, all of which
insurance is in full force and effect. None of the Company, its
subsidiaries or the Providers has been refused any insurance coverage
sought or applied for; and none of the Company, its subsidiaries or
the Providers has reason to believe that it will not be able to renew
its existing insurance coverage as and when such coverage expires or
to obtain similar coverage from similar insurers as may be necessary
to continue its business at a cost that would not materially
adversely affect the results of operations, business, condition
(financial or otherwise), prospects, properties or assets of the
Company and its subsidiaries, taken as a whole.
(xxvii) The business, operations and properties of
the Company and its subsidiaries have been and are being conducted in
compliance in all material respects with all applicable laws,
ordinances, rules, regulations, licenses, permits, approvals, plans,
authorizations or requirements relating to occupational safety and
health, or pollution, or protection of health or the environment
(including, without limitation, those relating to emissions,
discharges, releases or threatened releases of pollutants,
contaminants or hazardous or toxic substances, materials or wastes
into ambient air, surface water, groundwater or land, or relating to
the manufacture, processing, distribution, use, treatment, storage,
disposal, transport or handling of chemical
<PAGE> 12
substances, pollutants, contaminants or hazardous or toxic
substances, materials or wastes, whether solid, gaseous or liquid in
nature) of any governmental department, commission, board, bureau,
agency or instrumentality of the United States, any state or
political subdivision thereof, and all applicable judicial or
administrative agency or regulatory decrees, awards, judgments and
orders relating thereto, and neither the Company nor any of its
subsidiaries has received any notice from any governmental
instrumentality or any third party alleging any violation thereof or
liability thereunder (including, without limitation, liability for
costs of investigating or remediating sites containing hazardous
substances and/or damages to natural resources).
(xxviii) The Company has filed an application to
list the Shares and the Additional Shares on the Nasdaq National
Market and has received notification that the listing has been
approved, subject to official notice of issuance.
(xxix) The Company is not, and upon consummation of
the transactions contemplated hereby will not be, subject to
registration as an "investment company" under the Investment Company
Act of 1940, as amended (the "Investment Company Act").
(xxx) The Company meets all conditions for use of a
Form S-2 registration statement pursuant to the Act and the
Regulations.
(b) Each Selling Stockholder represents and warrants to,
and agrees with, each of the several Underwriters that:
(i) Such Selling Stockholder has full power
(corporate and other) to enter into this Agreement and to sell,
assign, transfer and deliver to the Underwriters the Shares to be
sold by such Selling Stockholder hereunder in accordance with the
terms of this Agreement; the execution and delivery of this Agreement
have been duly authorized by all necessary corporate action of such
Selling Stockholder (if a corporation); and this Agreement has been
duly executed and delivered by such Selling Stockholder.
(ii) Such Selling Stockholder has duly executed
and delivered a power of attorney and custody agreement (with respect
to such Selling Stockholder, the "Power-of-Attorney" and the "Custody
Agreement", respectively), each in the form heretofore delivered to
the Representatives, appointing Allen Tepper, Fred D. Furman and Mark
P. Clein, and each of them, as such Selling Stockholder's
attorney-in-fact (the "Attorney-in-Fact") with authority to execute,
deliver and perform this Agreement on behalf of such Selling
Stockholder and appointing StockTrans, Inc., as custodian thereunder
(the "Custodian"). Certificates in negotiable form, endorsed in blank
or accompanied by blank stock powers duly executed, with signatures
appropriately guaranteed, representing the Shares to be sold by such
Selling Stockholder have been deposited with the Custodian pursuant
to the Custody Agreement for the purpose of delivery under this
Agreement. Such Selling Stockholder specifically agrees that each of
the Shares represented by the certificates on deposit with the
Custodian is subject to the
<PAGE> 13
interests of the Underwriters hereunder, that the arrangements made
for such custody, the appointment of the Attorney-in-Fact and the
right, power and authority of the Attorney-in-Fact to execute and
deliver this Agreement, to agree on the price at which the Shares
(including such Selling Stockholder's Shares) are to be sold to the
Underwriters, and to carry out the terms of this Agreement, are to
that extent irrevocable and that the obligations of such Selling
Stockholder hereunder shall not be terminated, except as provided in
this Agreement or the Custody Agreement, by any act of such Selling
Stockholder, by operation of law or otherwise, whether in the case of
any individual Selling Stockholder by the death or incapacity of such
Selling Stockholder, in the case of a trust or estate by the death of
the trustee or trustees or the executor or executors or the
termination of such trust or estate, or in the case of a corporate or
partnership Selling Stockholder by its liquidation or dissolution or
by the occurrence of any other event. If any individual Selling
Stockholder, trustee or executor should die or become incapacitated
or any such trust should be terminated, or if any corporate or
partnership Selling Stockholder shall liquidate or dissolve, or if
any other event should occur, before the delivery of such Shares
hereunder, the certificates for such Shares deposited with the
Custodian shall be delivered by the Custodian in accordance with the
terms and conditions of this Agreement as if such death, incapacity,
termination, liquidation or dissolution or other event had not
occurred, regardless of whether or not the Custodian or the
Attorney-in-Fact shall have received notice thereof.
(iii) Such Selling Stockholder is the lawful owner
of the Shares to be sold by such Selling Stockholder hereunder and
upon sale and delivery of, and payment for, such Shares, as provided
herein, such Selling Stockholder will convey and the Underwriters
will acquire good, valid and marketable title to such Shares, free
and clear of any security interests, liens, encumbrances, equities,
claims or other defects.
(iv) Such Selling Stockholder has not taken and
will not take, directly or indirectly, any action which was designed
to cause or result, or which might be reasonably expected to cause or
result, in the stabilization or manipulation of the price of any
security of the Company to facilitate the sale or resale of the
Common Stock.
(v) Such Selling Stockholder has not, directly or
indirectly, since the filing of the Registration Statement (A) sold,
bid for, purchased, attempted to induce any person to purchase, or
paid anyone any compensation for soliciting purchases of, the Shares
or (B) paid or agreed to pay to any person any compensation for
soliciting another to purchase any other securities of the Company
(except for the sale of Shares by the Selling Stockholders under this
Agreement).
(vi) To the extent that any statements or
omissions are made in the Registration Statement, any Preliminary
Prospectus, the Prospectus or any amendment or supplement thereto in
reliance upon and in conformity with written information furnished to
the Company by such Selling Stockholder specifically for use therein,
such Preliminary Prospectus did conform, and the Registration
Statement and the Prospectus and any amendments or supplements
thereto, when they become or became effective or
<PAGE> 14
are filed with the Commission, as the case may be, will conform, in
all material respects to the requirements of the Act and the
Regulations and did not and will not contain any untrue statement of
a material fact or omit to state any material fact required to be
stated therein or necessary to make the statements therein not
misleading. In addition, such Selling Stockholder has reviewed the
Prospectus (or, if the Prospectus is not in existence, the most
recent Preliminary Prospectus) and the Registration Statement, and
(a) the information regarding such Selling Stockholder set forth
therein under the caption "Principal and Selling Stockholders" is
complete and accurate and (b) to the best knowledge of such Selling
Stockholder, each Preliminary Prospectus did conform, and the
Registration Statement and the Prospectus and any amendments or
supplements thereto, when they become effective or are filed with the
Commission, as the case may be, will conform, in all material
respects to the requirements of the Act and the Regulations and did
not and will not contain any untrue statement of material fact or
omit to state any material fact necessary in order to make statements
therein not misleading.
(vii) The sale of Shares by such Selling
Stockholder pursuant hereto is not prompted by any adverse
information concerning the Company or any of its subsidiaries that is
not set forth in the Registration Statement or the Prospectus (or, if
the Prospectus is not in existence, the most recent Preliminary
Prospectus).
(viii) The sale of Shares to the Underwriters by
such Selling Stockholder pursuant to this Agreement, the compliance
by such Selling Stockholder with the other provisions of this
Agreement and the Custody Agreement and the consummation of the other
transactions herein contemplated do not (i) require the consent,
approval, authorization, registration or qualification of or with any
governmental authority, except such as have been obtained, such as
may be required under state securities or blue sky laws and, if the
registration statement filed with respect to the Shares (as amended)
is not effective under the Act as of the time of execution hereof,
such as may be required (and shall be obtained as provided in this
Agreement) under the Act or the Exchange Act, or (ii) conflict with
or result in a breach or violation of any of the terms and provisions
of, or constitute a default under, any indenture, mortgage, deed of
trust, lease or other agreement or instrument to which such Selling
Stockholder is a party or by which such Selling Stockholder or any of
such Selling Stockholder's properties are bound, or the charter
documents or by-laws of such Selling Stockholder or any statute or
any judgment, decree, order, rule or regulation of any court or other
governmental authority or any arbitrator applicable to such Selling
Stockholder.
(ix) There are no outstanding options, warrants,
rights or other agreements or arrangements requiring such Selling
Stockholder at any time to transfer any Shares to be sold hereunder
by it.
(x) There is not pending or threatened against
such Selling Stockholder any action, suit, arbitration, claim,
governmental or other proceeding or investigation (domestic or
foreign, formal or informal) which (A) questions the validity of this
Agreement or of any action taken or to be taken by it pursuant to or
in connection with
<PAGE> 15
this Agreement or (B) is required to be disclosed in the Registration
Statement which is not so disclosed, and such actions, suits,
arbitrations, claims, governmental or other proceedings or
investigations as are summarized in the Registration Statement, if
any, are accurately summarized.
(xi) Such Selling Stockholder has no reason to
believe that the representations and warranties of the Company
contained in this Section 2 are not true and correct in all material
respects; provided, however, that the foregoing sentence shall not be
deemed to constitute a reiteration or guarantee of all of the
representations and warranties of the Company contained in this
Section 2.
(xii) On the Closing Date, all stock transfer or
other taxes (other than income taxes) which are required to be paid
in connection with the sale and transfer of the Shares to be sold by
such Selling Stockholder to the several Underwriters hereunder will
have been fully paid or provided for by such Selling Stockholder and
all laws imposing such taxes will have been fully complied with.
3. Purchase, Sale and Delivery of the Shares and the Additional
Shares. On the basis of the representations, warranties, covenants and
agreements of the Company herein contained, but subject to the terms and
conditions herein set forth, and at a purchase price of $_______ per Share, (A)
the Company agrees to sell to the several Underwriters, and the Underwriters,
severally and not jointly, agree to purchase from the Company the number of
Shares set opposite the respective names of the Underwriters in Column (1) of
Schedule 1 hereto and (B) each Selling Stockholder, severally and not jointly,
agrees to sell to the several Underwriters, and the Underwriters, severally and
not jointly, agree to purchase from the Selling Stockholders the total number of
Shares set opposite the respective names of the Underwriters in Column (2) of
Schedule 1 hereto multiplied by a fraction, the numerator of which is the number
of Shares set forth opposite the name of such Selling Stockholder in Schedule 2
and the denominator of which is the total number of Shares to be sold by all
Selling Stockholders, in each case subject to such adjustments to eliminate any
fractional shares as the Representatives in their sole discretion shall make.
Payment of the purchase price for, and delivery of certificates for,
the Shares shall be made at the office of Stroock & Stroock & Lavan LLP, New
York, New York 10038-4982, or at such other place as shall be agreed upon by the
Representatives and the Company, at 9:30 a.m., New York time, on the third or
fourth business day (as permitted under Rule 15c6-1 under the Exchange
Act)(unless postponed in accordance with the provisions of Section 9 hereof)
following the date of this Agreement, or such other time not later than seven
business days after such date as shall be agreed upon by the Representatives,
the Company and the Selling Stockholders (such time and date of payment and
delivery being herein called the "Closing Date"). Payment shall be made to the
Company and the Custodian, as the case may be, by certified or official bank
check or checks drawn in federal funds or similar same day funds payable to the
order of the Company or the Custodian, as the case may be (or by wire transfer
to an account of the Company and an account of the Custodian with a bank in New
York City specified by each of them at least two business days prior to the
Closing Date), against delivery
<PAGE> 16
to the Representatives for the respective accounts of the Underwriters of
certificates for the Shares to be purchased by them. Certificates for the Shares
shall be registered in such name or names and in such authorized denominations
as the Representatives may request in writing at least two full business days
prior to the Closing Date. The Company and the Custodian will permit the
Representatives to examine and package such certificates for delivery at least
one full business day prior to the Closing Date.
In addition, the Company hereby grants to the several Underwriters
the option to purchase up to 300,000 Additional Shares at the same purchase
price per share to be paid by the several Underwriters to the Company for the
Shares as provided for in this Section 3. This option may be exercised only to
cover over-allotments in the sale of shares by the several Underwriters. Any
such election to purchase Additional Shares may be exercised at any time, in
whole or in part, by written notice from the Representatives to the Company
given within a period of 30 calendar days after the date of this Agreement and
setting forth the aggregate number of Additional Shares to be purchased and the
date and time when such Additional Shares are to be delivered, as reasonably
determined by the Representatives (such date and time being herein sometimes
referred to as the "Additional Closing Date"); provided, however, that the
Additional Closing Date shall not be earlier than the Closing Date or earlier
than the second business day after the date on which the option shall have been
exercised nor later than the eighth business day after the date on which the
option shall have been exercised (unless such time and date are postponed in
accordance with the provisions of Section 9 hereof). Certificates for Additional
Shares shall be registered in such name or names and in such authorized
denominations as the Representatives may request in writing at least two full
business days prior to the Additional Closing Date. The Company will permit the
Representatives to examine and package such certificates for delivery at least
one full business day prior to the Additional Closing Date.
Each Underwriter agrees, severally and not jointly, to purchase from
the Company the number of Additional Shares which bears the same relationship to
the total number of Additional Shares to be sold to the Underwriters by the
Company, as the number of Shares set forth opposite the name of such Underwriter
in Schedule 1 hereto in Column (3) (or such number of Shares increased as set
forth in Section 9 hereof) bears to the total number of Shares.
Payment for the Additional Shares shall be made by certified or
official bank check or checks, in federal funds or similar same day funds,
payable to the order of the Company (or by wire transfer to an account of the
Company with a bank in New York City specified by it at least two business days
prior to the Additional Closing Date), at the offices of Stroock & Stroock &
Lavan LLP, 180 Maiden Lane, New York, New York 10038-4982, or such other
location as may be mutually acceptable, upon delivery of the certificates for
the Additional Shares to the Representatives for the respective accounts of the
Underwriters.
4. Offering. Subject to the terms of this Agreement, the Underwriters
will make a public offering of the Shares on or as soon after the effective date
of the Registration Statement as the Representatives deem advisable. The Shares
initially is to be offered to the public at the initial public offering price
provided for in Section 3 (such price being herein called the "public
<PAGE> 17
offering price"). After the initial public offering, the Representatives may
from time to time increase or decrease the public offering price, in their sole
discretion, by reason of changes in general market conditions or otherwise.
5. Covenants of the Company and the Selling Stockholders.
(a) The Company covenants and agrees with the several
Underwriters that:
(i) If the Registration Statement has not yet
been declared effective the Company will use its best efforts to
cause the Registration Statement and any amendments thereto to become
effective as promptly as possible, and if Rule 430A of the
Regulations is used or the filing of the Prospectus is otherwise
required under Rule 424(b) or Rule 434 of the Regulations, the
Company will file the Prospectus (properly completed if such Rule
430A has been used) pursuant to such Rule 424(b) or Rule 434 within
the prescribed time period and will provide evidence satisfactory to
the Representatives of such timely filing. If the Company elects to
rely on Rule 434, the Company will prepare and file a term sheet that
complies with the requirements of Rule 434.
The Company will notify the Representatives
immediately (A) when the Registration Statement and any
post-effective amendment thereto become effective, (B) of the receipt
of any comments from the Commission or the "blue sky" or securities
authority of any jurisdiction regarding the Registration Statement,
any post-effective amendment thereto, the Prospectus, or any
amendment or supplement thereto and (C) of the receipt of any
notification with respect to a Stop Order or the initiation or
threatening of any proceeding with respect to a Stop Order. The
Company will use its best efforts to prevent the issuance of any Stop
Order and, if any Stop Order is issued, to obtain the lifting thereof
as promptly a possible. The Company will not file any amendment to
the Registration Statement or any amendment of or supplement to the
Prospectus (including any prospectus required to be filed pursuant
Rule 424(b) and including the issuance or filing of any term sheet
within the meaning of Rule 434 of the Regulations) that differs from
the prospectus on file at the time of the effectiveness of the
Registration Statement before or after the effective date of the
Registration Statement, or file any document under the Exchange Act
if such document would be deemed to be incorporated by reference into
the Prospectus, to which the Representatives shall reasonably object
in writing after being timely furnished in advance a copy thereof.
(ii) During the time when a prospectus relating to
the Shares or the Additional Shares is required to be delivered
hereunder or under the Act or the Regulations, comply so far as it is
able with all requirements imposed upon it by the Act, as now
existing and as hereafter amended, and by the Regulations, as from
time to time in force, so far as necessary to permit the continuance
of sales of or dealings in the Shares and the Additional Shares in
accordance with the provisions hereof and the Prospectus. If, at any
time when a prospectus relating to the Shares or the Additional
Shares is required to be delivered hereunder or under the Act or the
Regulations, any event shall
<PAGE> 18
have occurred as a result of which, in the judgment of the Company or
the Underwriters, the Registration Statement or the Prospectus as
then amended or supplemented contains any untrue statement of a
material fact or omits to state any material fact required to be
stated therein or necessary to make the statements therein not
misleading, or if, in the opinion of either of such counsel, it is
necessary at any time to amend or supplement the Registration
Statement or the Prospectus to comply with the Act or the
Regulations, the Company will notify the Representatives
immediately and promptly prepare and file with the Commission an
appropriate amendment or supplement (in form and substance
satisfactory to the Representatives) which will correct such
statement or omission or which will effect such compliance and will
use its best efforts to have any such amendment declared effective as
soon as possible. If any Underwriter is required by law to deliver a
prospectus relating to the Shares or the Additional Shares nine
months or more after the effective date of the Registration
Statement, the Company, upon the request of the Representatives, will
prepare promptly such prospectus or prospectuses as may be necessary
to permit compliance with the requirements of Section 10(a)(3) of the
Act.
(iii) The Company will promptly deliver without
charge to each of the several Underwriters such number of copies of
each Preliminary Prospectus as the Underwriters may request and, as
soon as the Registration Statement or any amendment thereto becomes
effective or a supplement is filed, deliver without charge to the
Representatives two signed copies of the Registration Statement,
including exhibits, or such amendment thereto, as the case may be,
and two copies of any supplement thereto, and deliver without charge
to each of the several Underwriters such number of copies of the
Prospectus, the Registration Statement and amendments and supplements
thereto, if any, without exhibits, as the Underwriters may request
for the purposes contemplated by the Act.
(iv) The Company will endeavor in good faith, in
cooperation with the Representatives, at or prior to the time the
Registration Statement becomes effective, to qualify the Shares and
the Additional Shares for offering and sale under the "blue sky" or
securities laws of such jurisdictions as the Representatives may
designate; provided, however, that in no event shall the Company be
obligated to qualify to do business in any jurisdiction where it is
not now so qualified or to take any action which would subject it to
general service of process in any jurisdiction where it is not now so
subject. In each jurisdiction where such qualification shall be
effected, the Company will, unless the Representatives agree in
writing that such action is not at the time necessary or advisable,
file and make such statements or reports at such times as are or may
be required by the laws of such jurisdiction.
(v) The Company will make generally available
(within the meaning of Section 11(a) of the Act and the Regulations)
to its security holders and to the Representatives as soon as
practicable, but not later than 45 days after the end of its fiscal
quarter in which the first anniversary date of the effective date of
the Registration Statement occurs, an earnings statement (in form
complying with the provisions of Rule
<PAGE> 19
158 of the Regulations) covering a period of at least twelve
consecutive months beginning after the effective date of the
Registration Statement.
(vi) During the period of 120 days from the date
of the Prospectus, the Company will not, without the prior written
consent of Equitable Securities Corporation, on behalf of the
Underwriters, directly or indirectly, issue, offer, sell, pledge,
offer to sell, contract to sell or grant any option to purchase, or
otherwise sell or dispose (or announce any issuance, offer, sale,
pledge, offer of sale, contract of sale or grant of an option to
purchase or other sale or disposition) of, any shares of Common Stock
or other capital stock of the Company (or any securities convertible
into, or exchangeable or exercisable for, any shares of Common Stock
or other capital stock of the Company), and the Company will use its
best efforts to obtain the undertaking of each of its officers and
directors and such of its stockholders as have been heretofore
designated by the Representatives and listed on Schedule 3 hereto not
to engage in any of the aforementioned transactions on their own
behalf, other than the Company's sale of Shares hereunder, the
issuance of stock options pursuant to the Company's existing stock
option plan as described in the Prospectus and the Company's issuance
of Common Stock issuable upon the exercise of stock options or
warrants outstanding on the date hereof which are properly described
in the Prospectus. The Company shall not amend the vesting provisions
of its existing stock option plan within 120 days from the date of
the Prospectus.
(vii) For a period of three years after the
effective date of the Registration Statement, the Company will
furnish to the Representatives without charge the following:
(A) as soon as practicable after they have been
sent to stockholders of the Company or filed with the
Commission, the Nasdaq National Market or any national
securities exchange, three copies of each annual and
interim financial and other report or communication sent by
the Company to its stockholders or filed with the
Commission, the Nasdaq National Market or national
securities exchange;
(B) as soon as practicable, a copy of every press
release and every material news item and article in respect
of the Company, its subsidiaries and their respective
affairs which were released by the Company or its
subsidiaries, which may be sent by facsimile; and
(C) such additional publicly available documents
and information with respect to the Company, its
subsidiaries and their respective affairs as the
Representatives may from time to time reasonably request.
(viii) The Company will apply the net proceeds
received by it from the offering in the manner set forth under the
caption "Use of Proceeds" in the Prospectus.
<PAGE> 20
(ix) The Company will furnish to the
Representatives as early as practicable prior to the Closing Date and
any Additional Closing Date, as the case may be, but not less than
two full business days prior thereto, a copy of the latest available
unaudited interim consolidated financial statements of the Company
which have been read by the Company's independent certified public
accountants, as stated in their letter to be furnished pursuant to
Section 7(h).
(x) The Company will not file any amendment or
supplement to the Registration Statement or Prospectus at any time,
whether before or after the effective date of the Registration
Statement, unless such filing shall comply with the Act and the
Regulations and unless the Representatives previously shall have been
advised of such filing and furnished with a copy thereof, and the
Representatives and the counsel for the Underwriters shall have
approved such filing.
(xi) If the Company elects to rely on Rule 462(b)
of the Regulations, the Company shall both file a Rule 462(b)
Registration Statement with the Commission in compliance with Rule
462(b) and pay the applicable filing fees in accordance with Rule 111
of the Regulations by the earlier of (A) 10:00 p.m., New York time,
on the date of this Agreement and (B) the time confirmations are sent
or given, as specified by Rule 462(b)(2).
(xii) The Company, during the period when the
Prospectus is required to be delivered under the Act or the Exchange
Act, will file all documents required to be filed with the Commission
pursuant to Section 13, 14 or 15 of the Exchange Act within the time
periods required by the Exchange Act and the rules and regulations
thereunder.
(xiii) The Company will comply with all provisions
of all undertakings contained in the Registration Statement.
(xiv) Prior to the Closing Date or any Additional
Closing Date, as the case may be, the Company shall not issue any
press release or other media communication, directly or indirectly,
or hold any press conference with respect to the Company or its
financial condition, results of operations, business, prospects,
properties, assets or this offering, without the express involvement
or prior review thereof by the Representatives.
(xv) The Company will use its best efforts to
maintain in effect the listing of the Common Stock on the Nasdaq
National Market and shall take all necessary steps to cause the
Shares and the Additional Shares to be included on the Nasdaq
National Market simultaneously with the effective date of the
Registration Statement and to maintain such inclusion for a period of
three years after the date hereof or until such earlier date as the
Common Stock shall be listed for regular trading privileges on the
New York Stock Exchange, the American Stock Exchange or another
national securities exchange approved by the Representatives.
(xvi) The Company will not invest the proceeds from
the sale of the
<PAGE> 21
Shares and the Additional Shares in a manner to cause the Company to
become an "investment company" within the meaning of the Investment
Company Act.
(b) Each Selling Stockholder covenants and agrees with the
several Underwriters that:
(i) Such Selling Stockholder consents to the use
of the Prospectus and any amendment or supplement thereto by the
Underwriters and all dealers to whom the Shares may be sold, both in
connection with the offering or sale of the Shares and for such
period of time thereafter as the Prospectus is required by law to be
delivered in connection therewith.
(ii) Such Selling Stockholder will not at any
time, directly or indirectly, take any action intended, or which
might reasonably be expected, to cause or result in, or which will
constitute, stabilization or manipulation of the price of any
security of the Company to facilitate the sale or resale of any of
the Shares.
(iii) Such Selling Stockholder will not at any
time, directly or indirectly (A) sell, bid for, purchase, or pay
anyone any compensation for soliciting purchases of, the Shares or
(B) pay or agree to pay to any person any compensation for soliciting
another to purchase any other securities of the Company (except for
the sale of Shares by the Selling Stockholders under this Agreement).
(iv) During the period of 120 days from the date
of the Prospectus, such Selling Stockholder will not, without the
prior written consent of Equitable Securities Corporation, on behalf
of the Underwriters, directly or indirectly, issue, offer, sell,
pledge, offer to sell, contract to sell or grant any option to
purchase, or otherwise sell or dispose (or announce any issuance,
offer, sale, pledge, offer of sale, contract of sale or grant of an
option to purchase or other sale or disposition) of, any shares of
Common Stock or other capital stock of the Company (or any securities
convertible into, or exchangeable or exercisable for, any shares of
Common Stock or other capital stock of the Company),
(v) In order to document the Underwriters'
compliance with the reporting and withholding provisions of the Tax
Equity and Fiscal Responsibility Act of 1982 with respect to the
transactions herein contemplated, such Selling Stockholder will
deliver to the Representatives prior to or at the Closing Date a
properly completed and executed United States Treasury Department
Form W-9 (or other applicable form or statement specified by Treasury
Department regulations in lieu thereof).
(vi) As soon as any Selling Stockholder is advised
thereof, such Selling Stockholder will advise the Representatives
(and immediately confirm such advice in writing), (A) of receipt by
such Selling Stockholder, or by any representative or agent of such
Selling Stockholder, of any communication from the Commission
relating to the Registration Statement, the Prospectus or any
Preliminary Prospectus, or any notice or
<PAGE> 22
order of the Commission relating to the Company or such Selling
Stockholder in connection with the transactions contemplated by this
Agreement and (B) of the happening of any event which makes or may
make any statement made in the Registration Statement, the Prospectus
or any Preliminary Prospectus untrue or that requires the making of
any changes in the Registration Statement, the Prospectus or any
Preliminary Prospectus, as the case may be, in order to make the
statements therein not misleading.
6. Payment of Expenses. The Company hereby agrees to pay all fees and
expenses (other than fees and expenses of counsel for the Underwriters, except
for such fees and expenses of counsel for the Underwriters as provided for in
Sections 6(c) and 6(e) hereof) in connection with (a) the preparation, printing,
filing, distribution and mailing of the Registration Statement and the
Prospectus and the printing, filing, distribution and mailing of this Agreement,
the Agreement Among Underwriters, the Selected Dealer Agreement, Underwriters'
Questionnaire and related documents, including the cost of all copies thereof
and the Preliminary Prospectuses and of the Prospectus and any amendments or
supplements thereto supplied to the Underwriters and dealers in quantities as
hereinabove stated, (b) the issuance, sale, transfer and delivery of the Shares
and the Additional Shares, including any transfer or other taxes payable
thereon, if any, (c) the qualification of the Shares and the Additional Shares
under state or foreign "blue sky" or securities laws, including the costs of
printing and mailing the preliminary and final "Blue Sky Survey" and the
reasonable fees of counsel for the Underwriters and the disbursements in
connection therewith, (d) the filing fees payable to the Commission, the
National Association of Securities Dealers, Inc. (the "NASD"), and the
jurisdictions in which any "blue sky" qualification is sought, (e) the
reasonable fees of counsel for the Underwriters and the disbursements in
connection therewith relating to all filings with the NASD and (f) the listing
of the Shares and the Additional Shares on the Nasdaq National Market. If the
sale of the Shares provided for herein is not consummated because any condition
to the obligations of the Underwriters set forth in Section 7 hereof is not
satisfied, because this Agreement is terminated pursuant to Section 11 hereof or
because of any failure, refusal or inability on the part of the Company or the
Selling Stockholders to perform all obligations and satisfy all conditions on
their part to be performed or satisfied hereunder other than by reason of a
default by any of the Underwriters, the Company will reimburse the Underwriters
severally upon demand for all out-of-pocket expenses (including reasonable fees
and disbursements of counsel) that shall have been incurred by them in
connection with the proposed purchase and sale of the Shares.
7. Conditions of Underwriters' Obligations. The obligations of the
several Underwriters to purchase and pay for the Shares and the Additional
Shares, as provided herein, shall be subject, in their discretion, to the
continuing accuracy of the representations and warranties of the Company and the
Selling Stockholders contained herein and in each certificate and document
contemplated under this Agreement to be delivered to the Representatives, as of
the date hereof and as of the Closing Date (or the Additional Closing Date, as
the case may be), to the absence from any certificates, opinions, written
statements or letters furnished to the Representatives or to Stroock & Stroock &
Lavan LLP, counsel to the Underwriters pursuant to this Section 7 of any
misstatement or omission, to the performance by the Company and the Selling
Stockholders of their respective obligations hereunder, and to the following
conditions:
<PAGE> 23
(a) The Registration Statement shall have become effective
not later than 5:30 p.m., New York time, on the date of this
Agreement, or at such later time and date as shall have been
consented to in writing by the Representatives; if the Company shall
have elected to rely upon Rule 430A or Rule 434 of the Regulations,
the Prospectus shall have been filed with the Commission in a timely
fashion in accordance with Section 5(a) hereof; and at or prior to
the Closing Date no Stop Order suspending the effectiveness of the
Registration Statement or any post-effective amendment thereof shall
have been issued and no proceedings therefor shall have been
initiated or threatened.
(b) Since the respective dates as of which information is
given in the Registration Statement and the Prospectus, (i) there
shall not have been a material adverse change, or any development
involving a material adverse change, in the general affairs,
business, prospects, properties, assets, management, condition
(financial or otherwise) or results of operations of the Company and
its subsidiaries, taken as a whole, whether or not arising from
transactions in the ordinary course of business, in each case other
than as set forth in or contemplated by the Registration Statement
and the Prospectus and (ii) neither the Company nor any of its
subsidiaries shall have sustained any loss or interference with its
business or properties, which loss or interference is material to the
Company and its subsidiaries, taken as a whole, and which loss or
interference is not set forth in the Registration Statement and the
Prospectus, if in the judgment of the Representatives any such
development makes it impracticable or inadvisable to consummate the
sale and delivery of the Shares and the Additional Shares by the
Underwriters at the public offering price.
(c) At the Closing Date and any Additional Closing Date, as
the case may be, the Representatives shall have received the
favorable written opinion of Cooley Godward LLP, counsel to the
Company, addressed to the Underwriters, in form and substance
satisfactory to the Representatives, to the effect that:
(i) Each of the Company and its subsidiaries is a
corporation duly organized, validly existing and in good
standing under the laws of its respective jurisdiction of
incorporation, with full corporate power and authority to
own, lease, license, and use its properties and assets and
to conduct its business in the manner described in the
Prospectus.
(ii) Each of the Company and its subsidiaries is
duly qualified to do business and is in good standing in
every jurisdiction in which its ownership, leasing,
licensing or use of property and assets makes such
qualification necessary.
(iii) The Company had, at July 31, 1997, an
authorized and outstanding capitalization as set forth in
the Prospectus under the caption "Capitalization." Each
outstanding share of Common Stock (including the Shares
being sold by the Selling Stockholders) are duly and
validly authorized and issued, fully paid and
<PAGE> 24
nonassessable and were not issued and are not now in
violation of or subject to any preemptive or similar
rights. The Shares and Additional Shares being sold by
the Company hereunder are duly and validly authorized,
issued and outstanding, fully paid and nonassessable, and
have not been issued in violation of or subject to any
preemptive or similar rights and, when delivered and sold
in accordance with this Agreement, the Underwriters will
receive good title to the Shares and Additional Shares
purchased by them from the Company, free and clear of all
liens, security interests, pledges, charges, claims,
encumbrances, restrictions on transfer, stockholder
agreements, voting trust, voting rights or other defect
of title whatsoever. The securities of the Company conform
to the descriptions thereof contained in the Registration
Statement or the Prospectus. To such counsel's knowledge,
there is no commitment, plan or arrangement to issue, and
no outstanding option, warrant or other right calling for
the issuance of, any share of capital stock of the Company
or any security or other instrument which by its terms is
convertible into, exercisable for, or exchangeable for
capital stock of the Company, except as properly described
in the Prospectus. Except for the Shares being sold by the
Selling Stockholders, to such counsel's knowledge, no
holder of securities of the Company has any rights to the
registration of securities of the Company because of the
filing of the Registration Statement or otherwise in
connection with the sale of the Shares and Additional
Shares contemplated hereby (other than any such
registration rights that have been waived in writing). All
of the issued and outstanding shares of capital stock of
each subsidiary of the Company has been duly and validly
authorized and issued, fully paid and nonassessable and
were not issued in violation of preemptive or similar
rights. The Company owns, directly or indirectly, all of
the outstanding shares of capital stock of each of its
subsidiaries free and clear of all liens, security
interests, pledges, charges, claims, encumbrances,
restrictions on transfer, stockholder agreements, voting
trust, voting rights or other defect of title whatsoever.
(iv) To such counsel's knowledge, there is no
action, suit, arbitration, claim, governmental or other
proceeding or investigation (domestic or foreign, formal or
informal) pending or threatened with respect to the Company
or its subsidiaries or any of their respective operations,
businesses, properties or assets, except as properly
described in the Prospectus or such as, individually or in
the aggregate, do not now have and are not reasonably
expected in the future to have a material adverse effect
upon the results of operations, business, condition
(financial or otherwise), properties or assets of the
Company.
(v) To such counsel's knowledge, none of the
Company, its subsidiaries or any other party is now, or
with notice or passage of time or both or upon consummation
of the transactions contemplated hereby will be, in
violation or breach of, or in default with respect to, any
provision of any contract, agreement, instrument, lease,
license, arrangement or understanding known to such counsel
to which the Company or any of its subsidiaries is a party,
or to which any of their respective properties or assets
are subject (including those filed as exhibits to the
<PAGE> 25
Company's Annual Report on Form 10-K for the fiscal year
ended April 30, 1997 and the Company's Quarterly Report on
Form 10-Q for the quarter ended July 31, 1997), except as
properly described in the Prospectus.
(vi) Neither the Company nor any of its
subsidiaries is in violation or breach of, or in default
with respect to, any term of its respective certificate or
articles of incorporation or by-laws.
(vii) The Company has all full power (corporate and
other) to execute and deliver and to carry out all the
terms and provisions hereof to be carried out by it. All
necessary corporate proceedings of the Company have been
taken to authorize the Company's execution, delivery and
performance of this Agreement. This Agreement has been duly
authorized, executed and delivered by the Company, is the
legal, valid and binding obligation of the Company,
enforceable against the Company in accordance with its
terms, subject to applicable bankruptcy, insolvency,
reorganization, conservatorship, receivership, fraudulent
conveyance and similar laws affecting creditors' rights
generally and subject, as to enforceability, to general
principles of equity (regardless of whether enforcement is
sought in a proceeding in equity or at law). No consent,
authorization, approval, order, license, certificate or
permit of or from, or declaration or filing with, any
federal, state, local or other governmental authority or
any court or other tribunal (domestic or foreign) is
required by the Company for the execution, delivery or
performance of this Agreement by the Company other than
those that have been obtained and granted as may have been
required by state securities or "blue sky" laws. Such
opinion shall state that all filings were made under the
Act. No consent of any party to any contract, agreement,
instrument, lease, license, arrangement or understanding
known to such counsel to which the Company or any of its
subsidiaries is a party, or to which any of their
respective properties or assets are subject (including
those filed as exhibits to the Company's Annual Report on
Form 10-K for the fiscal year ended April 30, 1997 and the
Company's Quarterly Report on Form 10-Q for the quarter
ended July 31, 1997) is required for the execution,
delivery or performance of this Agreement other than those
which have been received; and the execution and delivery of
this Agreement will not, and this Agreement may be
performed in a manner that does not violate, result in a
breach of, conflict with, or (with or without the giving of
notice or the passage of time or both) entitle any party to
terminate or call a default under any such contract,
agreement, instrument, lease, license, arrangement or
understanding or violate or result in a breach of any term
of the certificate or articles of incorporation or by-laws
of the Company or its subsidiaries, or violate, result in a
breach of, or conflict with any law, rule, regulation
(except for such law, rule or regulation the violation of
which would not have, individually or in the aggregate, a
material adverse effect on the results of operations,
business, condition (financial or otherwise), properties or
assets of the Company and its subsidiaries, taken as a
whole), order, judgment, or decree known to such counsel
binding on the Company or any of its subsidiaries or to
which any of their respective
<PAGE> 26
operations, businesses, properties or assets are subject.
(viii) Any contract, agreement, instrument, lease or
license known to counsel and required to be described in
the Registration Statement or the Prospectus has been
described properly therein. Any contract, agreement,
instrument, lease or license known to counsel required to
be filed as an exhibit to the Registration Statement has
been filed with the Commission as an exhibit to the
Registration Statement.
(ix) To such counsel's knowledge, each of the
Company and its subsidiaries possesses or has made
application for all material authority, material
certificates and material permits issued by the appropriate
local, state, federal and foreign regulatory agencies or
bodies necessary to conduct their respective businesses, in
the manner described in the Prospectus, and to the
knowledge of such counsel, neither the Company nor any of
its subsidiaries has received any notice of any proceeding
relating to the revocation or modification of any such
authority, material certificate or material permit which,
individually or in the aggregate, if the subject of an
unfavorable decision, ruling or finding, would have a
material adverse effect on the results of operations,
business, condition (financial or otherwise), properties or
assets of the Company and its subsidiaries, taken as a
whole, except as properly disclosed in the Prospectus.
(x) The Registration Statement and the Prospectus
and any amendments thereof or supplements thereto (other
than the financial statements and the notes thereto and
related schedules and other financial data included
therein, as to which no opinion need be expressed) comply
as to form in all material respects with the requirements
of the Act and the Regulations. The documents filed under
the Exchange Act and incorporated by reference in the
Registration Statement and the Prospectus and any amendment
thereof or supplement thereto (other than the financial
statements and the notes thereto and related schedules
included or incorporated by reference therein, as to which
no opinion need be expressed) when they became effective or
were filed with the Commission, as the case may be,
complied as to form in all material respects with the
requirements of the Act or the Exchange Act, as applicable,
and the rules and regulations thereunder; and they have no
reason to believe that any of such documents, when such
documents became effective or were so filed, as they case
may be, contained, in the case of a registration statement
which became effective under the Act, an untrue statement
of a material fact, or omitted to state a material fact
required to be stated therein or necessary to make the
statements therein not misleading, or, in the case of other
documents which were filed under the Exchange Act with the
Commission, an untrue statement of a material fact or
omitted to state a material fact necessary in order to make
the statements therein, in the light of the circumstances
under which they were made when such documents were so
filed, not misleading.
(xi) The Registration Statement has become
effective under the Act and,
<PAGE> 27
to such counsel's knowledge, no Stop Order has been issued
and no proceedings for that purpose have been instituted
or threatened.
(xii) The statements set forth in the Prospectus
under the captions "Risk Factors," "Business," "Description
of Capital Stock," "Management" and "Principal and Selling
Stockholders," insofar as such statements constitute
summaries of statutes, laws, regulations and legal or
governmental proceedings, have been reviewed by such
counsel and are accurate in all material respects (it being
understood that such counsel need express no opinion with
respect to statements set forth under the captions "Risk
Factors--Impact of Health Care Reforms," "--Government
Regulation" and "Business--Government Regulation" in the
Prospectus).
(xiii) The Company is not, and upon consummation of
the transactions contemplated hereby will not be, subject
to registration as an "investment company" under the
Investment Company Act.
In addition, such counsel shall also state that such
counsel has participated in conferences with officers and
representatives of the Company, representatives of the independent
public accountants for the Company and the Underwriters at which the
contents of the Registration Statement and the Prospectus and related
matters were discussed and, although such counsel is not passing upon
and does not assume responsibility for the accuracy, completeness or
fairness of the statements contained in the Registration Statement or
the Prospectus, on the basis of the foregoing, no facts have come to
the attention of such counsel which would lead such counsel to
believe that either the Registration Statement at the time it became
effective (including the information deemed to be part of the
Registration Statement at the time of effectiveness pursuant to Rule
430A(b) or Rule 434 of the Regulations, if applicable), or any
amendment thereof made prior to the Closing Date as of the date of
such amendment, contained an untrue statement of a material fact or
omitted to state any material fact required to be stated therein or
necessary to make the statements therein not misleading or that the
Prospectus as of its date (or any amendment thereof or supplement
thereto made prior to the Closing Date as of the date of such
amendment or supplement) and as of the Closing Date contained or
contains an untrue statement of a material fact or omitted or omits
to state any material fact required to be stated therein or necessary
to make the statements therein, in the light of the circumstances
under which they were made, not misleading (it being understood that
such counsel need express no view with respect to the financial
statements and the notes thereto and related schedules and other
financial data included therein and the information as to regulatory
matters described under the captions "Risk Factors--Impact of Health
Care Reforms," "--Government Regulation" and "Business--Government
Regulation" in the Prospectus).
In rendering such opinions, counsel for the Company may
rely (A) as to matters involving the application of laws other than
the federal laws of the United States and the laws of the States of
Delaware and California, to the extent such counsel deems proper
<PAGE> 28
and to the extent specified in such opinion, upon an opinion or
opinions, (in form and substance satisfactory to counsel for the
Underwriters) of other counsel, acceptable to counsel for the
Underwriters, familiar with applicable laws, in which case the
opinions of such counsel shall state that the opinion or opinions of
such other counsel are satisfactory in scope and form to such counsel
and that reliance thereon by such counsel and the Underwriters is
reasonable; (B) as to matters of fact, to the extent they deem
proper, on certificates of responsible officers of the Company and
its subsidiaries; and (C) to the extent they deem proper, upon
written statements or certificates of officers of departments of
various jurisdictions having custody of documents respecting the
corporate existence or good standing of the Company and its
subsidiaries provided that copies of any such statements or
certificates shall be delivered to counsel for the Underwriters.
References to the Registration Statement and the Prospectus
in this paragraph (c) shall include any amendment or supplement
thereto at the date of such opinion.
(d) At the Closing Date, the Representatives shall have
received the favorable written opinion of Cooley Godward LLP, counsel
to the Selling Stockholders, addressed to the Underwriters, in form
and substance satisfactory to the Representatives, to the effect
that:
(i) Each Selling Stockholder has full power
(including corporate or partnership power, if a corporation
or a partnership) to enter into this Agreement, the Custody
Agreement and the Power-of-Attorney and to sell, transfer
and deliver the Shares being sold by such Selling
Stockholder hereunder in the manner provided in this
Agreement and to perform its obligations under the Custody
Agreement; the execution and delivery of this Agreement,
the Custody Agreement and the Power-of-Attorney have been
duly authorized by all necessary corporate action of each
Selling Stockholder that is a corporation; this Agreement,
the Custody Agreement and the Power-of-Attorney have been
duly executed and delivered by each Selling Stockholder;
assuming due authorization, execution and delivery by the
Custodian, the Custody Agreement and the Power-of-Attorney
are the legal, valid and binding obligation of each Selling
Stockholder, enforceable against each Selling Stockholder
in accordance with its terms, subject to applicable
bankruptcy, insolvency, reorganization, conservatorship,
receivership, fraudulent conveyance and similar laws
affecting creditors' rights generally and subject, as to
enforceability, to general principles of equity (regardless
of whether enforcement is sought in a proceeding in equity
or at law).
(ii) Upon the delivery by each Selling Stockholder
to the several Underwriters of certificates for the Shares
being sold hereunder by such Selling Stockholder against
payment therefor as provided herein, the several
Underwriters will own the Shares sold by the Selling
Stockholders, free and clear of any adverse claim or
restriction on transfer.
<PAGE> 29
(iii) The sale of Shares to the Underwriters by
each Selling Stockholder pursuant to this Agreement, the
compliance by such Selling Stockholder with the other
provisions of this Agreement and the Custody Agreement and
the consummation of the other transactions herein
contemplated do not (A) require the consent, approval,
authorization, registration or qualification of or with any
governmental authority, except such as have been obtained
and such as may be required under state securities or blue
sky laws, or (B) conflict with or result in a breach or
violation of any of the terms and provisions of, or
constitute a default under, any indenture, mortgage, deed
of trust, lease or other agreement or instrument to which
such Selling Stockholder is a party or by which such
Selling Stockholder or any of such Selling Stockholder's
properties are bound, or, in the case of a Selling
Stockholder that is a corporation, the charter documents or
bylaws of such Selling Stockholder or any statute or any
judgment, decree, order, rule or regulation of any court or
other governmental authority or any arbitrator applicable
to such Selling Stockholder.
(iv) The statements in the Registration Statement
and in the Prospectus under the caption "Principal and
Selling Stockholders," insofar as such statements
constitute a summary of the matters referred to therein,
fairly present the information called for with respect to
such matters.
In rendering any such opinions, such counsel may rely, as
to matters of fact, to the extent such counsel may deem proper, upon
a certificate of the Selling Stockholders and, as to matters
involving the laws of jurisdictions in which such counsel are not
admitted to practice, to the extent satisfactory to counsel for the
Underwriters, upon the opinion of local counsel in such
jurisdictions. The foregoing opinion shall also state that the
Underwriters are justified in relying on any such opinion of such
local counsel, and copies of the opinion of such local counsel shall
be delivered to the Representatives and counsel for the Underwriters.
References to the Registration Statement and the Prospectus
in this paragraph (d) shall include any amendment or supplement
thereto at the date of such opinion.
(e) At the Closing Date and any Additional Closing Date, as
the case may be, the Representatives shall have received the
favorable written opinion of Vinson & Elkins, special regulatory
counsel to the Company, addressed to the Underwriters, in form and
substance satisfactory to the Representatives, to the effect that the
statements in the Registration Statement and Prospectus under the
captions "Risk Factors--Impact of Health Care Reform and the Balanced
Budget Act of 1997," "--Government Regulation" and
"Business--Government Regulation," insofar as such statements
constitute summaries of the legal matters or proceedings referred to
therein, are correct and accurate summaries in all material respects.
Such counsel shall also confirm that no facts have come to
the attention of such counsel that would lead such counsel to believe
that the sections of the Registration
<PAGE> 30
Statement under the captions "Risk Factors--Impact of Health Care
Reforms," "--Government Regulation" and "Business--Government
Regulation," as of the effective date of the Registration Statement
and as of the date of such opinion, contained or contains any untrue
statement of a material fact or omitted or omits to state any
material fact required to be stated therein or necessary to make the
statements therein not misleading or that the sections of the
Prospectus under the captions "Risk Factors--Impact of Health Care
Reforms," "--Government Regulation" and "Business--Government
Regulation," as of the date of the Prospectus or the date of such
opinion, contained or contains any untrue statement of a material
fact or omitted or omits to state a material fact required to be
stated therein or necessary to make the statements therein, in the
light of the circumstances under which they were made, not
misleading.
References to the Registration Statement and the Prospectus
in this paragraph (e) shall include any amendment or supplement
thereto at the date of such opinion.
(f) On or prior to the Closing Date and any Additional
Closing Date, as the case may be, the Underwriters shall have been
furnished such information, documents, certificates and opinions as
they may reasonably require for the purpose of enabling them to
review the matters referred to in Section 7(b), and in order to
evidence the accuracy, completeness or satisfaction of any of the
representations, warranties, covenants, agreements or conditions
herein contained, or as the Representatives may reasonably request.
(g) At the Closing Date and any Additional Closing Date, as
the case may be, the Representatives shall have received a
certificate of the chief executive officer and the chief financial
officer of the Company, dated the Closing Date or such Additional
Closing Date, as the case may be, to the effect that (i) the
conditions set forth in Section 7(a) has been satisfied, (ii) as of
the date of this Agreement and as of the Closing Date or such
Additional Closing Date, as the case may be, the representations and
warranties of the Company contained herein were and are accurate,
(iii) as of the Closing Date or such Additional Closing Date, as the
case may be, the obligations to be performed by the Company hereunder
on or prior hereto have been fully performed and (iv) subsequent to
the respective dates as of which information is given in the
Registration Statement and the Prospectus, the Company and its
subsidiaries have not sustained any material loss or interference
with their respective businesses or properties from fire, flood,
hurricane, accident or other calamity, whether or not covered by
insurance, or from any labor dispute or any legal or governmental
proceeding, and there has not been any material adverse change, or
any development involving a material adverse change, in the general
affairs, business, prospects, properties, assets, management,
condition (financial or otherwise) or results of operations of the
Company and its subsidiaries, taken as a whole, whether or not
arising from transactions in the ordinary course of business, except
in each case as described in or contemplated by the Prospectus.
(h) At the time this Agreement is executed and at the
Closing Date and any Additional Closing Date, as the case may be, the
Representatives shall have received a
<PAGE> 31
letter, addressed to the Underwriters and in form and substance
satisfactory to the Representatives, with reproduced copies or signed
counterparts thereof for each of the Underwriters, from Ernst & Young
LLP, independent public accountants for the Company, dated the date
of delivery:
(i) confirming that they are or during the period
covered by their report included in the Registration Statement and
the Prospectus they were, independent certified public accountants
with respect to the Company and its subsidiaries within the meaning
of the Act and the Regulations and stating that the response to Item
10 of the Registration Statement is correct insofar as it relates to
them;
(ii) stating that, in their opinion, the audited
financial statements, and any related schedules of the Company and
its subsidiaries included and incorporated by reference in the
Registration Statement and the Prospectus examined by them comply as
to form in all material respects with the applicable accounting
requirements of the Act and the Exchange Act and the applicable
published rules and regulations of the Commission thereunder;
(iii) stating that, on the basis of (x) their
limited review in accordance with standards established by the
American Institute of Certified Public Accountants of any interim
unaudited consolidated financial statements of the Company and its
subsidiaries as indicated in their report included in the
Registration Statement and the Prospectus and (y) certain specified
procedures performed on the unaudited condensed consolidated balance
sheet as of July 31, 1997 and the unaudited consolidated statements
of operations and of cash flows for the three-month periods ended
July 31, 1997 and 1996 included in the Registration Statement and
inquiries of officers and other employees of the Company and its
subsidiaries who have responsibility for financial and accounting
matters of the Company, nothing has come to their attention that
would cause them to believe that (A) such unaudited consolidated
financial statements do not comply as to form in all material
respects with the applicable accounting requirements of the Act and,
if applicable, the Exchange Act and the applicable published rules
and regulations of the Commission thereunder or (B) any material
modifications should be made to such unaudited consolidated financial
statements for them to be in conformity with generally accepted
accounting principles;
(iv) stating that, on the basis of procedures (but
not an examination or review made in accordance with generally
accepted auditing standards) consisting of a reading of the latest
available unaudited interim consolidated financial statements of the
Company and its subsidiaries (with an indication of the date of the
latest available unaudited interim consolidated financial
statements), a reading of the latest available minutes of the
stockholders and boards of directors of the Company and its
subsidiaries and committees of such boards subsequent to July 31,
1997, inquiries to certain officers and other employees of the
Company and its subsidiaries responsible for financial and accounting
matters with respect to transactions and events subsequent to July
31, 1997 and other specified procedures and inquiries to a date not
more than five days prior to the date of such letter, nothing has
come to their attention that would cause them to believe that: (A)
with respect to the period subsequent to July 31, 1997 there were, as
of the date of the most recent available monthly consolidated
financial statements of the Company and its subsidiaries, if any, and
as of a specified date not more than five days prior to the
<PAGE> 32
date of such letter, any changes in the capital stock or increases
in long-term indebtedness of the Company or any decrease in the net
current assets or stockholders' equity of the Company, in each case
as compared with the amounts shown in the most recent balance sheet
of the Company and its subsidiaries presented in the Registration
Statement and the Prospectus, except for changes or decreases which
the Registration Statement and the Prospectus disclose have occurred
or may occur or which are set forth in such letter which the
Representatives in their sole discretion shall accept; (B) that
during the period from July 31, 1997 to the date of the most recent
available monthly consolidated financial statements of the Company
and its subsidiaries, if any, and to a specified date not more than
five days prior to the date of such letter, there was any decrease,
as compared with the corresponding period in the prior fiscal year,
in total revenues, or total net income or earnings per share, except
for decreases which the Registration Statement and the Prospectus
disclose have occurred or may occur or which are set forth in such
letter which the Representatives in their sole discretion shall
accept; and
(v) stating that they have compared specific
numerical data and financial information pertaining to the Company
and its subsidiaries set forth in the Registration Statement, each
Preliminary Prospectus, and the Prospectus, if applicable, which have
been specified by the Representatives prior to the date of this
Agreement, to the extent that such data and information may be
derived from the general accounting and financial records of the
Company and its subsidiaries, and excluding any questions requiring
an interpretation by legal counsel, with the results obtained from
the application of specified readings, inquiries and other
appropriate procedures (which procedures do not constitute an
examination in accordance with generally accepted auditing standards)
set forth in the letter, and found them to be in agreement.
(i) All proceedings taken in connection with the issuance,
sale, transfer and delivery of the Shares and the Additional Shares
shall be satisfactory in form and substance to the Representatives
and to counsel for the Underwriters, and the Underwriters shall have
received from such counsel for the Underwriters a favorable opinion,
dated as of the Closing Date and the Additional Closing Date, as the
case may be, with respect to such of the matters set forth under
Section 7(b), and with respect to such other related matters, as the
Representatives may reasonably request.
(j) The NASD, upon review of the terms of the public
offering of the Shares and the Additional Shares, shall not have
objected to the Underwriters' participation in such offering.
(k) The Representatives shall have received a certificate
executed by an Attorney-in-Fact on behalf of each Selling Stockholder
to the effect that the representations and warranties of such Selling
Stockholder in this Agreement are true and
<PAGE> 33
correct in all material respects on and as of the Closing Date with
the same effect as if made on the Closing Date; such Selling
Stockholder has complied with all the agreements and satisfied all
the conditions on its part to be performed or satisfied at or prior
to the Closing Date; and the Registration Statement and the
Prospectus, as amended or supplemented as of the Closing Date,
contain all statements required to be included therein regarding such
Selling Stockholder, and the Registration Statement, as amended as of
the Closing Date, does not include any untrue statement of a material
fact or omit to state any material fact necessary to make the
statements therein not misleading, and the Prospectus, as amended or
supplemented as of the Closing Date, does not include any untrue
statement of a material fact necessary in order to make the
statements therein, in the light of the circumstances under which
they were made, not misleading.
(l) The Representatives shall have received from each
person who is a director or officer of the Company and such
stockholders as have been heretofore designated by the
Representatives and listed on Schedule 3 hereto an agreement to the
effect that such person will not, without the prior written consent
of Equitable Securities Corporation, on behalf of the Underwriters,
directly or indirectly, issue, offer, sell, pledge, offer to sell,
contract to sell or grant any option to purchase, or otherwise sell
or dispose (or announce any issuance, offer, sale, pledge, offer of
sale, contract of sale or grant of an option to purchase or other
sale or disposition) of, any shares of Common Stock or other capital
stock of the Company (or any securities convertible into, or
exchangeable or exercisable for, any shares of Common Stock or other
capital stock of the Company) for a period of 120 days after the date
of the Prospectus.
(m) At the Closing Date and any Additional Closing Date,
the Representatives shall have received an opinion of Stroock &
Stroock & Lavan LLP, counsel for the Underwriters, with respect to
the issuance and sale of the Shares and Additional Shares, as
applicable, the Registration Statement, the Prospectus, and such
other related matters as the Representatives may reasonably require,
and the Company shall have furnished to counsel for the Underwriters
such documents as they reasonably request for the purpose of enabling
them to pass upon such matters.
Any certificate or other document signed by any officer of the
Company and delivered to the Representatives or to counsel for the Underwriters
shall be deemed a representation and warranty by the Company hereunder to the
Underwriters as to the statements made therein. Any certificate or other
document signed by or on behalf of a Selling Stockholder and delivered to the
Representatives or to counsel for the Underwriters shall be deemed a
representation and warranty by such Selling Stockholder hereunder to the
Underwriters as to statements made therein. The Company and the Selling
Stockholders shall furnish to the Representative or to counsel for the
Underwriters such conformed copies of such opinions, certificate, letters and
documents in such quantities as the Representatives and counsel for the
Underwriters shall reasonably request. If any condition to the Underwriters'
obligations hereunder to be fulfilled prior to or at the Closing Date or any
Additional Closing Date, as the case may be, is not so fulfilled, the
Representatives may on behalf of the several Underwriters terminate this
Agreement or, if the Representatives so elect, in writing waive any such
conditions which have not been fulfilled or extend the time for
<PAGE> 34
their fulfillment.
8. Indemnification and Contribution.
(a) The Company will indemnify and hold harmless each Underwriter,
the directors, officers, employees and agents of each Underwriter and each
person, if any, who controls each Underwriter within the meaning of Section 15
of the Act or Section 20 of the Exchange Act from and against any and all
losses, claims, liabilities, expenses and damages (including any and all
investigative, legal and other expenses reasonably incurred in connection with,
and any amount paid in settlement of, any action, suit or proceeding or any
claim asserted), to which they, or any of them, may become subject under the
Act, the Exchange Act or other Federal or State statutory law or regulation, at
common law or otherwise, insofar as such losses, claims, liabilities, expenses
or damages arise out of or are based on (i) any untrue statement or alleged
untrue statement made by the Company in Section 2 of this Agreement, (ii) any
untrue statement or alleged untrue statement of any material fact contained in
(A) any Preliminary Prospectus, the Registration Statement or the Prospectus or
any amendment or supplement to the Registration Statement or the Prospectus and
(B) any application or other document, or any amendment or supplement thereto,
executed by the Company or based upon written information furnished by or on
behalf of the Company filed in any jurisdiction in order to qualify the Shares
or the Additional Shares under the securities or Blue Sky laws thereof or filed
with the Commission or any securities association or securities exchange (each,
an "Application") or (iii) the omission or alleged omission to state in any
Preliminary Prospectus, the Registration Statement or the Prospectus or any
amendment or supplement to the Registration Statement or the Prospectus or any
Application a material fact required to be stated therein or necessary to make
the statements therein not misleading; provided, however, that the Company will
not be liable to the extent that such loss, claim, liability, expense or damage
arises from the sale of the Shares or the Additional Shares in the public
offering to any person by an Underwriter and is based solely on an untrue
statement or omission or alleged untrue statement or omission made in reliance
on and in conformity with information relating to any Underwriter furnished in
writing to the Company by the Representatives on behalf of any Underwriter
expressly for inclusion in the Registration Statement, any Preliminary
Prospectus or the Prospectus. This indemnity agreement will be in addition to
any liability that the Company might otherwise have.
(b) Each Selling Stockholder, severally and not jointly, will
indemnify and hold harmless each Underwriter, the directors, officers, employees
and agents of each Underwriter and each person, if any, who controls each
Underwriter within the meaning of Section 15 of the Act or Section 20 of the
Exchange Act from and against any and all losses, claims, liabilities, expenses
and damages (including any and all investigative, legal and other expenses
reasonably incurred in connection with, and any amount paid in settlement of,
any action, suit or proceeding or any claim asserted), to which they, or any of
them, may become subject under the Act, the Exchange Act or other Federal or
State statutory law or regulation, at common law or otherwise, insofar as such
losses, claims, liabilities, expenses or damages arise out of or are based on
(i) any untrue statement or alleged untrue statement made by such Selling
Stockholder in Section 2 of this Agreement, (ii) any untrue statement or alleged
untrue statement of any material fact contained in (A) any Preliminary
Prospectus, the Registration Statement or the Prospectus or any
<PAGE> 35
amendment or supplement to the Registration Statement or the Prospectus and (B)
any Application executed by such Selling Stockholder or based upon written
information furnished by or on behalf of such Selling Stockholder or (iii) the
omission or alleged omission to state in any Preliminary Prospectus, the
Registration Statement or the Prospectus or any amendment or supplement to the
Registration Statement or the Prospectus or any Application a material fact
required to be stated therein or necessary to make the statements therein not
misleading; provided, however, that such Selling Stockholder will not be liable
to the extent that such loss, claim, liability, expense or damage arises from
the sale of the Shares in the public offering to any person by an Underwriter
and is based solely on an untrue statement or omission or alleged untrue
statement or omission made in reliance on and in conformity with information
relating to any Underwriter furnished in writing to the Company by the
Representatives on behalf of any Underwriter expressly for inclusion in the
Registration Statement, any Preliminary Prospectus or the Prospectus; and
provided, further, however, that such Selling Stockholder will be liable in any
such case only to the extent that any such loss, claim, damage or liability
arises out of or is based upon any untrue statement or alleged untrue statement
or omission or alleged untrue statement or omission made in the Registration
Statement or any amendment thereto or in the Prospectus or any amendment or
supplement thereto or any Application in reliance upon and in conformity with
written information furnished to the Company by such Selling Stockholder. This
indemnity agreement will be in addition to any liability that such Selling
Stockholder may otherwise have. The Company and the Selling Stockholders may
agree, as among themselves and without limiting the rights of the Underwriters
under this Agreement, as to the respective amounts of such liability for which
they each shall be responsible.
(c) Each Underwriter will indemnify and hold harmless the Company,
each Selling Stockholder, each person, if any, who controls the Company or each
Selling Stockholder within the meaning of Section 15 of the Act or Section 20 of
the Exchange Act, each director of the Company and each officer of the Company
who signs the Registration Statement to the same extent as the foregoing
indemnity from the Company and the Selling Stockholders to each Underwriter, but
only insofar as losses, claims, liabilities, expenses or damages arise out of or
are based on any untrue statement or omission or alleged untrue statement or
omission made in reliance on and in conformity with information relating to any
Underwriter furnished in writing to the Company by the Representatives on behalf
of such Underwriter expressly for use in the Registration Statement, any
Preliminary Prospectus or the Prospectus. This indemnity agreement will be in
addition to any liability that each Underwriter might otherwise have.
Notwithstanding the foregoing, no Underwriter shall be obligated to indemnify
any such party hereunder in an amount that exceeds the sum of the underwriting
discounts received by it pursuant to this Agreement. The Company and the Selling
Stockholders acknowledge that the statements set forth in the last paragraph of
the cover page of the Prospectus and in the _________ paragraphs under the
caption "Underwriting" in the Prospectus constitute the only information
furnished in writing by or on behalf of any Underwriter expressly for use in the
Registration Statement, any Preliminary Prospectus or the Prospectus or in any
amendment thereof or supplement thereto, as the case may be.
(d) Any party that proposes to assert the right to be indemnified
under this Section 8 will, promptly after receipt of notice of commencement of
any action against such party in
<PAGE> 36
respect of which a claim is to be made against an indemnifying party or
parties under this Section 8, notify each such indemnifying party of
the commencement of such action, enclosing a copy of all papers served,
but the omission so to notify such indemnifying party will not relieve
it from any liability that it may have to any indemnified party under the
foregoing provisions of this Section 8 unless, and only to the extent that,
such omission results in the forfeiture of substantive rights or defenses by the
indemnifying party. If any such action is brought against any indemnified party
and it notifies the indemnifying party of its commencement, the indemnifying
party will be entitled to participate in and, to the extent that it elects by
delivering written notice to the indemnified party promptly after receiving
notice of the commencement of the action from the indemnified party, jointly
with any other indemnifying party similarly notified, to assume the defense of
the action, with counsel satisfactory to the indemnified party, and after notice
from the indemnifying party to the indemnified party of its election to assume
the defense, the indemnifying party will not be liable to the indemnified party
for any legal or other expenses except as provided below and except for the
reasonable costs of investigation subsequently incurred by the indemnified party
in connection with the defense. The indemnified party will have the right to
employ its own counsel in any such action, but the fees, expenses and other
charges of such counsel will be at the expense of such indemnified party unless
(1) the employment of counsel by the indemnified party has been authorized in
writing by the indemnifying party, (2) the indemnified party has reasonably
concluded (based on advice of counsel) that there may be legal defenses
available to it or other indemnified parties that are different from or in
addition to those available to the indemnifying party, (3) a conflict or
potential conflict exists (based on advice of counsel to the indemnified party)
between the indemnified party and the indemnifying party (in which case the
indemnifying party will not have the right to direct the defense of such action
on behalf of the indemnified party) or (4) the indemnifying party has not in
fact employed counsel to assume the defense of such action within a reasonable
time after receiving notice of the commencement of the action, in each of which
cases the reasonable fees, disbursements and other charges of counsel will be at
the expense of the indemnifying party or parties. It is understood that the
indemnifying party or parties shall not, in connection with any proceeding or
related proceedings in the same jurisdiction, be liable for the reasonable fees,
disbursements and other charges of more than one separate firm admitted to
practice in such jurisdiction at any one time for all such indemnified party or
parties. All such fees, disbursements and other charges will be reimbursed by
the indemnifying party promptly as they are incurred. An indemnifying party
shall not be liable for any settlement of any action or claim effected without
its written consent (which consent shall not be unreasonably withheld). No
indemnifying party shall, without the prior written consent of the indemnified
parties, settle or compromise or consent to the entry of any judgment with
respect to any action, suit or any investigation or proceeding by any
governmental agency or body, commenced or threatened, or any claim whatsoever in
respect of which indemnification is being sought hereunder (whether or not the
indemnified parties are actual or potential parties thereto), unless such
settlement, compromise or consent (i) includes an unconditional written release
in form and substance satisfactory to the indemnified parties of each
indemnified party from all liability arising out of such action, suit,
investigation, proceeding or claim and (ii) does not include a statement as to
or an admission of fault, culpability or a failure to act by or on behalf of any
indemnified party.
<PAGE> 37
(e) In order to provide for just and equitable contribution in
circumstances in which the indemnification provided for in the foregoing
paragraphs of this Section 8 is applicable in accordance with its terms but for
any reason is held to be unavailable from the Company, the Selling Stockholders
or the Underwriters, the Company, the Selling Stockholders and the Underwriters
will contribute to the total losses, claims, liabilities, expenses and damages
(including any investigative, legal and other expenses reasonably incurred in
connection with, and any amount paid in settlement of, any action, suit or
proceeding or any claim asserted, but after deducting any contribution received
by the Company from persons other than the Underwriters, such as persons who
control the Company within the meaning of Section 15 of the Act or Section 20 of
the Exchange Act, officers of the Company who signed the Registration Statement
and directors of the Company, who also may be liable for contribution) to which
the Company, any one or more of the Selling Stockholders and any one or more of
the Underwriters may be subject in such proportion as shall be appropriate to
reflect the relative benefits received by the Company and the Selling
Stockholders, on the one hand, and the Underwriters, on the other. The relative
benefits received by the Company and the Selling Stockholders, on the one hand,
and the Underwriters, on the other, shall be deemed to be in the same proportion
as the total net proceeds from the offering (before deducting expenses) received
by the Company and the Selling Stockholders bears to the total underwriting
discounts received by the Underwriters, in each case as set forth in the table
on the cover page of the Prospectus. If, but only if, the allocation provided by
the foregoing sentence is not permitted by applicable law, the allocation of
contribution shall be made in such proportion as is appropriate to reflect not
only the relative benefits referred to in the foregoing sentence but also the
relative fault of the Company and the Selling Stockholders, on the one hand, and
the Underwriters, on the other, with respect to the statements or omissions
which resulted in such loss, claim, liability, expense or damage, or action in
respect thereof, as well as any other relevant equitable considerations with
respect to such offering. Such relative fault shall be determined by reference
to whether the untrue or alleged untrue statement of a material fact or omission
or alleged omission to state a material fact relates to information supplied by
the Company, the Selling Stockholders or the Representatives on behalf of the
Underwriters, the intent of the parties and their relative knowledge, access to
information and opportunity to correct or prevent such statement or omission.
The Company, the Selling Stockholders and the Underwriters agree that it would
not be just and equitable if contributions pursuant to this Section 8(e) were to
be determined by pro rata allocation (even if the Underwriters were treated as
one entity for such purpose) or by any other method of allocation which does not
take into account the equitable considerations referred to herein. The amount
paid or payable by an indemnified party as a result of the loss, claim,
liability, expense or damage, or action in respect thereof, referred to above in
this Section 8(e) shall be deemed to include, for purpose of this Section 8(e),
any legal or other expenses reasonably incurred by such indemnified party in
connection with investigating or defending any such action or claim.
Notwithstanding the provisions of this Section 8(e), no Underwriter shall be
required to contribute any amount in excess of the underwriting discounts
received by it, and no person found guilty of fraudulent misrepresentation
(within the meaning of Section 11(f) of the Act) will be entitled to
contribution from any person who was not guilty of such fraudulent
misrepresentation. For purposes of this Section 8(e), any person who controls a
party to this Agreement within the meaning of Section 15 of the Act or
<PAGE> 38
Section 20 of the Exchange Act will have the same rights to contribution as that
party, and each officer of the Company who signed the Registration Statement
will have the same rights to contribution as the Company, subject in each case
to the provisions hereof. Any party entitled to contribution, promptly after
receipt of notice of commencement of any action against such party in respect of
which a claim for contribution may be made under this Section 8(e), will notify
any such party or parties from whom contribution may be sought, but the omission
so to notify will not relieve the party or parties from whom contribution may be
sought from any other obligation it or they may have under this Section 8(e). No
party shall be liable for contribution with respect to any action or claim
settled without its written consent (which consent shall not be unreasonably
withheld). The Underwriters' obligations to contribute hereunder are several in
proportion to their respective underwriting obligations and not joint, and
contributions among Underwriters shall be governed by the provisions of the
Agreement Among Underwriters dated the date hereof among the Representatives and
the other Underwriters.
(f) The indemnity and contribution agreements contained in this
Section 8 and the representations and warranties of the Company and each Selling
Stockholder contained in this Agreement shall remain operative and in full force
and effect regardless of (i) any investigation made by or on behalf of the
Underwriters, (ii) acceptance of any of the Shares or Additional Shares and
payment therefor or (iii) any termination of this Agreement.
9. Default by an Underwriter.
(a) If any Underwriter defaults in its obligation to purchase Shares
or Additional Shares hereunder, and if the number of Shares or Additional Shares
to which the defaults of all Underwriters in the aggregate relate does not
exceed 10% of the number of Shares or Additional Shares, as the case may be,
which all Underwriters have agreed to purchase hereunder, then such Shares or
Additional Shares to which such defaults relate shall be purchased by the
non-defaulting Underwriters in proportion to their respective commitments
hereunder.
(b) If such defaults exceed in the aggregate 10% of the number of
Shares or Additional Shares, as the case may be, which all Underwriters have
agreed to purchase hereunder, the Representatives may in their discretion
arrange for themselves or for another party or parties to purchase such Shares
or Additional Shares, as the case may be, to which such defaults related on the
terms contained herein.
If the Representatives do not arrange for the purchase of such Shares
or Additional Shares, as the case may be, within one business day after the
occurrence of defaults relating to in excess of 10% of the number of Shares or
Additional Shares, as the case may be, then the Company shall be entitled to a
further period of one business day within which to procure another party or
parties satisfactory to the Representatives to purchase such Shares or
Additional Shares, as the case may be, on such terms. If the Representatives do
not or the Company does not arrange for the purchase of the Shares or Additional
Shares, as the case may be, to which such defaults related as provided in this
Section 9(b), this Agreement may be terminated by the Representatives or the
Company, without liability on the part of the Company (except that the
provisions of Sections 6, 8, 10, 11, 13, 14 and 15 shall survive such
termination) or the several
<PAGE> 39
Underwriters, but nothing in this Agreement shall relieve a defaulting
Underwriter of its liability, if any, to the other several Underwriters
and to the Company for any damage occasioned by its default hereunder.
(c) If the Shares or Additional Shares to which such defaults relate
are to be purchased by the non-defaulting Underwriters, or are to be purchased
by another party or parties as aforesaid, the Representatives and the Company
shall each have the right to postpone the Closing Date or the Additional Closing
Date, as the case may be, for a reasonable period, but not in any event more
than five business days, in order to effect whatever changes may thereby be made
necessary in the Registration Statement or the Prospectus or in any other
documents and arrangements with respect to the Shares or the Additional Shares,
and the Company agrees to prepare and file promptly any amendment or supplement
to the Registration Statement or the Prospectus which in the opinion of counsel
to the Underwriters may thereby be made necessary. The term "Underwriter" as
used in this Agreement shall include any party substituted under this Section 9
as if such party had originally been a party to this Agreement and had been
allocated the number of Shares and Additional Shares actually purchased by it as
a result of its original commitment to purchase Shares and Additional Shares and
its purchase of Shares or Additional Shares pursuant to this Section 9.
10. Representations and Agreements to Survive Delivery. All
representations, warranties, covenants and agreements contained in this
Agreement shall be deemed to be representations, warranties, covenants and
agreements at the Closing Date and any Additional Closing Date, and such
representations, warranties, covenants and agreements of the Underwriters, the
Company and the Selling Stockholders, including the indemnity and contribution
agreements contained in Section 8, shall remain operative and in full force and
effect regardless of any investigation made by or on behalf of any Underwriter
or any indemnified person, or by or on behalf of the Company or the Selling
Stockholders, or any person or entity which is entitled to be indemnified under
Section 8, and shall survive termination of this Agreement or the delivery of
the Shares and the Additional Shares to the several Underwriters. In addition,
the provisions of Sections 6, 8, 10, 11, 13, 14 and 15 shall survive termination
of this Agreement, whether such termination occurs before or after the Closing
Date or any Additional Closing Date.
11. Effective Date of this Agreement and Termination Thereof.
(a) This Agreement shall become effective, upon the later of when (i)
you and the Company shall have received notification of the effectiveness of the
Registration Statement or (ii) the execution of this Agreement. If either the
initial public offering price or the purchase price per Share has not been
agreed upon prior to 5:00 p.m., New York time, on the fifth full business day
after the Registration Statement shall have become effective, this Agreement
shall thereupon terminate without liability to the Company or the Underwriters
except as herein expressly provided. The Company may prevent this Agreement from
becoming effective without liability of any party to any other party, except as
noted below in this Section 11, by giving notice as provided in Section 11(c)
before the time this Agreement becomes effective.
<PAGE> 40
(b) The Representatives shall have the right to terminate this
Agreement at any time prior to the Closing Date or any Additional Closing Date,
as the case may be, by giving notice to the Company if any domestic or
international event, act, or occurrence has disrupted materially, or in the
opinion of the Representatives will disrupt materially in the immediate future,
the securities markets; or if there shall have been a general suspension of, or
a general limitation on prices for, trading in securities on the New York Stock
Exchange, the American Stock Exchange or in the Nasdaq National Market; or if
there shall have been an outbreak of major hostilities or other national or
international calamity; or if a banking moratorium has been declared by a state
or federal authority; or if a moratorium in foreign exchange trading by major
international banks or persons has been declared; or if there shall have been a
material interruption in the mail service or other means of communication within
the United States; or if the Company shall have sustained a material or
substantial loss by fire, flood, accident, hurricane, earthquake, theft,
sabotage or other calamity or malicious act which, whether or not such loss
shall have been insured, will, in the opinion of the Representatives, make it
impracticable or inadvisable to proceed with the offering, sale or delivery of
the Shares or the Additional Shares, as the case may be; or if there shall have
been such change in the market for the Company's securities or securities in
general or in political, financial or economic conditions as in the judgment of
the Representatives makes it impracticable or inadvisable to proceed with the
offering, sale and delivery of the Shares or the Additional Shares, as the case
may be, on the terms contemplated by the Prospectus.
(c) If the Representatives elect to prevent this Agreement from
becoming effective, as provided in this Section 11, or to terminate this
Agreement, the Representatives shall notify the Company promptly by telephone,
telex or telegram, confirmed by letter. If, as so provided, the Company elects
to prevent this Agreement from becoming effective or to terminate this
Agreement, the Company shall notify the Representatives promptly by telephone,
telex or telegram, confirmed by letter.
(d) Anything in this Agreement to the contrary notwithstanding
(except as specified in Section 11(e)), if this Agreement shall not become
effective by reason of an election pursuant to this Section 11 or if this
Agreement shall terminate or shall otherwise fail to be carried out within the
time specified herein by reason of any failure on the part of the Company or the
Selling Stockholders to perform any covenant or agreement or satisfy any
condition of this Agreement by them to be performed or satisfied, the sole
liability of the Company to the several Underwriters, in addition to the
obligations the Company assumed pursuant to Section 6, will be to reimburse
promptly the several Underwriters for such out-of-pocket expenses (including the
fees and expenses of their counsel) as shall have been incurred by them in
connection with this Agreement and the proposed offer, sale and delivery of the
Shares and the Additional Shares, and upon demand the Company agrees to pay
promptly the full amount thereof to the Representative for the respective
accounts of the Underwriters. Anything in this Agreement to the contrary
notwithstanding other than Section 11(e), if this Agreement shall not be carried
out within the time specified herein for any reason other than the failure on
the part of the Company or the Selling Stockholders to perform any covenant or
agreement or satisfy any condition in this Agreement by them to be performed or
satisfied, the Company shall have no liability to the several Underwriters other
than for the obligations assumed by the Company pursuant to Section 6.
<PAGE> 41
(e) Notwithstanding any election hereunder or any termination of this
Agreement, and whether or not this Agreement is to be carried out otherwise, the
provisions of Sections 6, 8, 10, 11, 13, 14 and 15 shall not be affected in any
way by such election or termination or failure to carry out the terms of this
Agreement or any part hereof.
12. Notices. All communications hereunder, except as specifically may
be provided otherwise herein, shall be in writing and, if sent to any
Underwriter, shall be mailed, delivered, or telexed, telegraphed or telecopied,
and confirmed by letter, to such Underwriter, c/o Equitable Securities
Corporation, 800 Nashville City Center, Nashville, Tennessee 37219-1743,
Attention: R. Riley Sweat, Telecopy: (615) 780-9420, with a copy to Stroock &
Stroock & Lavan LLP, 180 Maiden Lane, New York, New York 10038-4982, Attention:
James R. Tanenbaum, Esq., Telecopy: (212) 806-6006; or, if sent to the Company,
shall be mailed, delivered or telexed, telegraphed or telecopied, and confirmed
by letter, to the Company, 501 Washington Avenue, 5th Floor, San Diego,
California 92103, Attention: President, Telecopy: (619) 260-1151, with a copy to
Cooley Godward LLP, 4365 Executive Drive, Suite 1200, San Diego, California
92121-2128, Attention: Jeremy D. Glaser, Esq., Telecopy: (619) 453-3555. All
notices hereunder shall be effective upon receipt by the party to which such
notice is addressed.
13. Parties. The Representatives represent that they are authorized
to act on behalf of the several Underwriters named in Schedule 1 hereto, and the
Company shall be entitled to act and rely on any request, notice, consent,
waiver or agreement purportedly given on behalf of the Underwriters when the
same shall have been given by the Representatives on such behalf. This Agreement
shall inure solely to the benefit of, and shall be binding upon, the several
Underwriters, the Company and the persons and entities referred to in Section 8
who are entitled to indemnification or contribution, and their respective
successors, legal representatives and assigns (which shall not include any
buyer, as such, of the Shares or the Additional Shares), and no other person
shall have or be construed to have any legal or equitable right, remedy or claim
under or in respect of or by virtue of this Agreement or any provision herein
contained. Notwithstanding anything contained in this Agreement to the contrary,
all of the obligations of the Underwriters hereunder are several and not joint.
14. Governing Law. THIS AGREEMENT SHALL BE GOVERNED BY AND CONSTRUED
IN ACCORDANCE WITH THE LAWS OF THE STATE OF NEW YORK, WITHOUT GIVING EFFECT TO
PRINCIPLES OF CONFLICTS OF LAW. TIME IS OF THE ESSENCE IN THIS AGREEMENT.
15. Counterparts. This Agreement may be signed by any one or more of
the parties hereto in any number of counterparts, each of which shall be deemed
to be an original, but all such counterparts shall constitute one and the same
agreement.
<PAGE> 42
If the foregoing correct sets forth the understanding among you, the
Company and the Selling Stockholders, please so indicate in the space provided
below for that purpose, whereupon this letter shall constitute a binding
agreement among us.
Very truly yours,
PMR CORPORATION
By:______________________________
Name:
Title:
THE SELLING STOCKHOLDERS NAMED IN
SCHEDULE 2 HERETO
By:_______________________________
Attorney-in-Fact
Accepted as of the date first above written.
EQUITABLE SECURITIES CORPORATION
LEHMAN BROTHERS INC.
WESSELS, ARNOLD & HENDERSON, L.L.C.
on behalf of themselves and
the other Underwriters
named in Schedule 1 hereto
By: EQUITABLE SECURITIES CORPORATION
By:____________________________________
Name:
Title:
<PAGE> 43
SCHEDULE 1
<TABLE>
<CAPTION>
(1) (2) (3)
Number of Number of Total Aggregate
Shares to be Shares to be Number
Purchased from Purchased from the of Shares to
the Company Selling Stockholders be Purchased
----------- -------------------- ------------
<S> <C> <C> <C>
Underwriter
-----------
Equitable Securities Corporation
Lehman Brothers Inc.
Wessels, Arnold & Henderson, L.L.C ______________ _________________ _______________
Total
============== ================= ===============
</TABLE>
<PAGE> 44
SCHEDULE 2
SELLING STOCKHOLDERS
<TABLE>
<CAPTION>
Name Number of Shares to be Sold
- ---- ---------------------------
<S> <C>
Total
</TABLE>
<PAGE> 45
SCHEDULE 3
LOCK-UP AGREEMENTS
Allen Tepper
Tepper Family Trust
Tepper 1996 Charitable Remainder Trust dated 11/19/96
Fred D. Furman
Mark P. Clein
Susan D. Erskine
William N. Erskine
Daniel L. Frank
Eugene D. Hill, III
Charles C. McGettigan
Richard A. Niglio
Myron A. Wick, III
J. Patterson McBaine
Jon D. Gruber
Proactive Investment Managers, L.P.
Proactive Partners, L.P.
Fremont Proactive Partners, L.P.
<PAGE> 1
EXHIBIT 10.15
SECOND ADDENDUM TO
MANAGEMENT AND AFFILIATION AGREEMENT
This Second Addendum to Management and Affiliation Agreement (this
"Second Addendum") is made to be effective as of November 1, 1996, by and
between Mental Health Cooperative, Inc., a Tennessee non-profit corporation
("Provider") and Collaborative Care Corporation, a Tennessee for-profit
corporation formerly known as Tennessee Mental Health Cooperative, Inc.
("Manager").
RECITALS
A. Provider and Manager entered into a Management and Affiliation
Agreement ("Agreement"), a Provider Services Agreement ("Services Agreement")
and Addendum to Management and Affiliation Agreement ("Addendum").
B. Provider and Manager wish to amend the terms of the Agreement and
Addendum by entering into this Second Addendum.
NOW, THEREFORE, Manager and Provider, intending to be legally bound
hereby, agree as follows:
AGREEMENT
1. The Term of the Agreement and Services Agreement is extended
through April 30, 2002.
2. Section 11.1 of the Agreement is amended to the extent that
Provider shall be eligible to purchase additional shares of Common Stock of PMR
pursuant to Section 11.1 with respect to each fiscal year of Manager through the
fiscal year ending April 30, 2002, provided that the Agreement shall not have
been terminated as of the end of any such reference year, instead of only with
respect to fiscal years ending during the original five (5) year term provided
therein. The terms of the Stock Warrant Agreement referred to in Section 11.1
shall be amended or restated accordingly.
3. Manager is hereby released from any obligation to create a
network of entities to provide case management services outside the State of
Tennessee and to have those entities become Case Managers under the terms of the
Agreement as is specified in Paragraph 6 of the Addendum. Provider shall
nevertheless assist Manager in the development of its case management business
by allowing visitors and Manager's prospective business affiliates/customers to
observe Provider's operations, assist in the
1.
<PAGE> 2
development of protocols and otherwise cooperate with Manager to enhance its
case management business.
4. Provider shall not be entitled to any compensation in any form
whatsoever except as provided in the Agreement and in particular, Provider
waives all claims and releases Manager and PMR from all claims for compensation
in any form whatsoever relating to Manager's and PMR's case management
activities outside of Tennessee.
5. In consideration of paragraphs 1, 2, and 4 hereof, the following
Section 11.1.1 shall be added to the Agreement:
"SUPPLEMENTAL STOCK WARRANTS. Manager has agreed to cause PMR to
grant to Provider the option to purchase up to 30,000 additional
shares of Common Stock of PMR subject to the terms of the Stock
Warrant Agreement and Registration Rights Agreement in the forms
attached hereto as Exhibits "A" and "B" which in summary provide:
Beginning with PMR's fiscal year ending April 30, 1997 and at the
end of each fiscal year thereafter that the Agreement remains in
effect through April 30, 2002, Provider shall have the right to
purchase at the then current-market-rate (as defined in Section
11.1) 5,000 shares of Common Stock of PMR."
6. For the purposes hereof, all capitalized terms used herein shall
have the definitions associated therewith in the Agreement.
7. All terms and conditions of the Agreement, Service Agreement and
Addendum shall remain in full force and effect except as modified herein and
each party by execution hereof hereby confirms that the other party has complied
with all terms of the Agreement, Services Agreement and Addendum.
[SIGNATURES ON THE FOLLOWING PAGE.]
2.
<PAGE> 3
IN WITNESS WHEREOF, the parties hereto have caused this Second
Addendum to be executed on the day and year first written above.
PROVIDER: MENTAL HEALTH COOPERATIVE, INC.
a Tennessee non-profit corporation
By: /s/ Pam Womack
--------------------------------
Name: Pam Womack
------------------------------
Title:Executive Director
-----------------------------
MANAGER: COLLABORATIVE CARE CORPORATION
a Tennessee for-profit corporation
By: /s/ Allen Tepper
--------------------------------
Name: Allen Tepper
------------------------------
Title:
-----------------------------
3.
<PAGE> 1
EXHIBIT 10.19
CREDIT AGREEMENT
This Credit Agreement (the "Agreement") is made and entered into this
2nd day of February, 1996, by and between SANWA BANK CALIFORNIA (the "Bank") and
PSYCHIATRIC MANAGEMENT RESOURCES, INC. (the "Borrower"), on the terms and
conditions that follow:
SECTION I
DEFINITIONS
1.01 CERTAIN DEFINED TERMS: Unless elsewhere defined in this Agreement,
the following terms shall have the following meanings (such meanings to be
generally applicable to the singular and plural forms of the terms defined):
(a) "Account Debtor": shall mean the person or entity obligated
to the Borrower or any Guarantor upon an account, general intangible or contract
right arising from a contract for psychiatric services with a hospital.
(b) "Advance": shall mean an advance to the Borrower under the
Line of Credit.
(c) "Borrowing Base": shall mean, as determined by the Bank from
time to time, the lesser of., (i) 50% of the aggregate amount of Eligible
Accounts of the Borrower; or (ii) $3,000,000.
(d) "Business Day": shall mean a day, other than a Saturday or
Sunday, on which commercial banks are open for business in California.
(e) "Collateral": shall mean the property described in Section
3.02, together with any other personal or real property in which the Bank may be
granted a lien or security interest to secure payment of the Obligations.
(f) "Compliance Certificate": shall mean the compliance
certificate substantially in the form of Exhibit "A" attached hereto and
incorporated herein by this reference.
(g) "Debt": shall mean all liabilities of the Borrower less
Subordinated Debt.
(h) "Effective Tangible Net Worth": shall mean the Borrower's
stated net worth plus Subordinated Debt but less all intangible assets of the
Borrower (i.e., goodwill, trademarks, patents, copyrights, organization expense
and similar intangible items).
(i) "Eligible Account": shall mean, at any time, the gross
amount, less returns, discounts, credits or offsets of any nature, of the
accounts arising from a contract for psychiatric services with a hospital owing
to the Borrower or any Guarantor by Account Debtors containing selling terms not
exceeding 30 days but excluding the following:
(1) Accounts with respect to which the Account Debtor is an
officer, employee or agent of the Borrower.
(2) Accounts with respect to which goods are placed on
consignment, guarantied sale or other terms by reason of which the payment by
the Account Debtor may be conditional.
(3) Accounts with respect to which the Account Debtor is not
a resident of the United States except to the extent such accounts are supported
by adequate Eximbank insurance or other insurance acceptable to the Bank or by
irrevocable letters of credit issued by banks satisfactory to the Bank.
(4) Accounts with respect to which the Account Debtor is the
United States or any department or agency thereof.
-1-
<PAGE> 2
(5) Accounts with respect to which the Account Debtor is a
subsidiary of, or affiliated with, the Borrower or its shareholders, officers or
directors.
(6) Accounts with respect to which the Borrower is or may
become liable to the Account Debtor for goods sold or services rendered by the
Account Debtor to the Borrower.
(7) That portion of the accounts of any single Account
Debtor that exceeds 20% of all of the Borrower's accounts.
(8) Accounts which have not been paid in full within 60 days
from the date payment was due or 90 days from the original date of invoice,
whichever is less.
(9) All accounts of any single Account Debtor if 50% or more
of the dollar amount of all such accounts are represented by accounts which have
not been paid in full within 60 days from the date payment was due or 90 days
from the original date of invoice, whichever is less.
(10) Accounts which are subject to dispute, counterclaim or
setoff.
(11) Accounts with respect to which the goods have not been
shipped or delivered, or the services have not been rendered, to the Account
Debtor.
(12) Accounts with respect to which the Bank, in its sole
discretion, deems the creditworthiness or financial condition of the Account
Debtor to be unsatisfactory.
(13) Accounts of any Account Debtor who has filed or had
filed against it a petition in bankruptcy, or an application for relief under
any provision of any state or federal bankruptcy, insolvency or debtor-in-relief
acts; or who has had appointed a trustee, custodian or receiver for the assets
of such Account Debtor; or who has made an assignment for the benefit of
creditors or has become insolvent or fails generally to pay its debts (including
its payrolls) as such debts become due.
(14) Accounts classified on the Borrower's or any
Guarantor's financial statements as insufficient interim payments, claims in
review or contractuals.
(j) "ERISA": shall mean the Employee Retirement Income Security
Act of 1974, as amended from time to time, including (unless the context
otherwise requires) any rules or regulations promulgated thereunder.
(k) "EVENT OF DEFAULT": shall have the meaning set forth in
Section 7.
(1) "EXPIRATION DATE": shall mean August 30, 1997 or the date of
termination of the Bank's commitment to lend under this Agreement pursuant to
Section 8, whichever shall occur first.
(m) "INDEBTEDNESS": shall mean, with respect to the Borrower, (i)
all indebtedness for borrowed money or for the deferred purchase price of
property or services in respect of which the Borrower is liable, contingently or
otherwise, as obligor, guarantor or otherwise, or in respect of which the
Borrower otherwise assures a creditor against loss and (ii) obligations under
leases which shall have been or should be, in accordance with generally accepted
accounting principles, reported as capital leases in respect of which the
Borrower is liable, contingently or otherwise, or in respect of which the
Borrower otherwise assures a creditor against loss.
(n) "LINE OF CREDIT": shall mean the credit facility described in
Section 2.
(o) "OBLIGATIONS": shall mean all amounts owing by the Borrower
to the Bank pursuant to this Agreement including, but not limited to, the unpaid
principal amount of Advances.
(p) "PERMITTED LIENS": shall mean: (i) liens and security
interests securing indebtedness owed by the Borrower to the Bank; (ii) liens for
taxes, assessments or similar charges either not yet due or being contested in
good faith; (iii) liens of materialmen, mechanics, warehousemen, or carriers or
other like liens arising in the ordinary course of business and securing
obligations which are not yet delinquent; (iv) purchase money liens or purchase
money security interests upon or in any
-2-
<PAGE> 3
property acquired or held by the Borrower in the ordinary course of business to
secure Indebtedness outstanding on the date hereof or permitted to be incurred
under Section 6.09 hereof; (v) liens and security interests which, as of the
date hereof, have been disclosed to and approved by the Bank in writing; and
(vi) those liens and security interests which in the aggregate constitute an
immaterial and insignificant monetary amount with respect to the net value of
the Borrower's assets.
(q) "REFERENCE RATE": shall mean an index for a variable interest
rate which is quoted, published or announced from time to time by the Bank as
its reference rate and as to which loans may be made by the Bank at, below or
above such reference rate.
(r) "SUBORDINATED DEBT": shall mean such liabilities of the
Borrower which have been subordinated to those owed to the Bank in a manner
acceptable to the Bank.
1.02 ACCOUNTING TERMS: All references to financial statements, assets,
liabilities, and similar accounting items not specifically defined herein shall
mean such financial statements or such items prepared or determined in
accordance with generally accepted accounting principles consistently applied
and, except where otherwise specified, all financial data submitted pursuant to
this Agreement shall be prepared in accordance with such principles.
1.03 OTHER TERMS: Other terms not otherwise defined shall have the
meanings attributed to such terms in the California Uniform Commercial Code.
SECTION 2
THE LINE OF CREDIT
2.01 THE LINE OF CREDIT: On terms and conditions as set forth herein,
the Bank agrees to make Advances to the Borrower from time to time from the date
hereof to the Expiration Date, provided the aggregate amount of such Advances
outstanding at any time does not exceed the Borrowing Base. Within the foregoing
limits, the Borrower may borrow, partially or wholly prepay, and reborrow under
this Section 2.01.
2.02 MAKING LINE ADVANCES: Each Advance shall be conclusively deemed
to have been made at the request of and for the benefit of the Borrower (i) when
credited to any deposit account of the Borrower maintained with the Bank or (ii)
when paid in accordance with the Borrower's written instructions. Subject to the
requirements of Section 4, Advances shall be made by the Bank upon telephonic or
written request in form acceptable to the Bank received from the Borrower, which
request shall be received not later than 2:30 p.m. (California time) on the date
specified for such Advance, which date shall be a Business Day. Requests for
Advances received after such time may, at the Bank's option, be deemed to be a
request for an Advance to be made on the next succeeding Business Day.
2.03 MANDATORY REPAYMENTS:
(a) If at any time the aggregate principal amount of the
outstanding Advances shall exceed the applicable Borrowing Base, the Borrower
hereby promises and agrees, immediately upon written or telephonic notice from
the Bank, to pay to the Bank an amount equal to the difference between the
outstanding principal balance of the Advances and the Borrowing Base.
(b) On the Expiration Date, the Borrower hereby promises and
agrees to pay to the Bank in full the aggregate unpaid principal amount of all
Advances then outstanding, together with all accrued and unpaid interest
thereon.
2.04 INTEREST ON ADVANCES: Interest shall accrue from the date of each
Advance under the Line of Credit at one of the following rates, as quoted by the
Bank and as elected by the Borrower pursuant to paragraph 2.05 or 2.06 below:
(a) A variable rate equivalent to an index for a variable
interest rate which is quoted, published or announced from time to time by the
Bank as its reference rate and as to which loans may be made by the Bank at,
below or above such Reference Rate plus 1% per annum (the "Variable Rate").
Interest shall be adjusted concurrently with any change in the Reference Rate.
An Advance based upon the Variable Rate is hereinafter referred to as a
"Variable Rate Advance".
-3-
<PAGE> 4
(b) A fixed rate quoted by the Bank for 30, 60, 90, 120 or 180
days or for such other period of time that the Bank may quote and offer
(provided that any such period of time does not extend beyond the Expiration
Date) [the "Eurodollar Interest Period"] for Advances in the minimum amount of
$500,000. Such interest rate shall be a percentage approximately equivalent to
3% in excess of the Bank's Eurodollar Rate which is that rate determined by the
Bank's Treasury Desk as being the approximate rate at which the Bank could
purchase offshore U.S. dollar deposits in an amount approximately equal to the
amount of the relevant Advance and for a period of time approximately equal to
the relevant Eurodollar Interest Period (adjusted for any and all assessments,
surcharges and reserve requirements pertaining to the purchase by the Bank of
such U.S. dollar deposits) [the "Eurodollar Rate"]. An Advance based upon the
Eurodollar Rate is hereinafter referred to as a "Eurodollar Advance".
Interest on any Advance shall be computed on the basis of 360 days per
year, but charged on the actual number of days elapsed.
Interest on Variable Rate Advances and Eurodollar Advances shall be paid
monthly commencing on the last day of the month following the date of the first
such Advance and continuing on the last day of each month thereafter.
If interest is not paid as and when it is due, it shall be added to the
principal, become and be treated as a part thereof, and shall thereafter bear
like interest.
2.05 NOTICE OF BORROWING: Upon telephonic notice which shall be received
by the Bank at or before 12:00 p.m. (California time) on a business day, the
Borrower may borrow under the Line of Credit by requesting:
(a) A Variable Rate Advance. A Variable Rate Advance may be made
on the day notice is received by the Bank; provided, however, that if the Bank
shall not have received notice at or before 12:00 p.m. on the day such Advance
is requested to be made, such Variable Rate Advance may, at the Bank's option,
be made on the next business day.
(b) A Eurodollar Advance. Notice of any Eurodollar Advance shall
be received by the Bank no later than two business days prior to the day (which
shall be a business day) on which the Borrower requests such Eurodollar Advance
to be made.
2.06 NOTICE OF ELECTION TO ADJUST INTEREST RATE: Upon telephonic notice
which shall be received by the Bank at or before 12:00 p.m. (California time) on
a business day, the Borrower may elect:
(a) That interest on a Variable Rate Advance shall be adjusted to
accrue at the Eurodollar Rate; provided, however, that such notice shall be
received by the Bank no later than two business days prior to the day (which
shall be a business day) on which the Borrower requests that interest be
adjusted to accrue at the Eurodollar Rate.
(b) That interest on a Eurodollar Advance shall continue to
accrue at a newly quoted Eurodollar Rate or shall be adjusted to commerce to
accrue at the Variable Rate; provided, however, that such notice shall be
received by the Bank no later than two business days prior to the last day of
the Interest Period pertaining to such Eurodollar Advance. If the Bank shall not
have received notice (as prescribed herein) of the Borrower's election that
interest on any Eurodollar Advance shall continue to accrue at the newly quoted
Eurodollar Rate, the Borrower shall be deemed to have elected that interest
thereon shall be adjusted to accrue at the Variable Rate upon the expiration of
the Interest Period pertaining to such Advance.
2.07 PREPAYMENT: The Borrower may prepay any Advance in whole or in
part, at any time and without penalty, provided, however, that: (i) any partial
prepayment shall first be applied, at the Bank's option, to accrued and unpaid
interest and next to the outstanding principal balance; and (ii) during any
period of time in which interest is accruing on any Advance on the basis of the
Eurodollar Rate, no prepayment shall be made on any Advance bearing interest at
the Eurodollar Rate except on a day which is the last day of the Interest Period
pertaining thereto. If the whole or any part of any Eurodollar Advance is
prepaid by reason of acceleration or otherwise, the Borrower shall, upon the
Bank's request, promptly pay to and indemnify the Bank for all costs and any
loss (including loss of profit resulting from the re-employment of funds)
sustained by the Bank as a consequence of such prepayment.
2.08 INDEMNIFICATION FOR EURODOLLAR RATE COSTS: During any period of
time in which interest on any Advance is accruing on the basis of the Eurodollar
Rate, the Borrower shall, upon the Bank's request, promptly pay to and reimburse
the Bank for all costs incurred and payments made by the Bank by reason of any
future assessment, reserve, deposit or similar requirement or any surcharge, tax
or fee imposed upon the Bank or as a result of the Bank's compliance with any
directive or
-4-
<PAGE> 5
requirement of any regulatory authority pertaining or relating to funds used by
the Bank in quoting and determining the Eurodollar Rate.
2.09 CONVERSION FROM EURODOLLAR RATE TO VARIABLE RATE: In the event
that the Bank shall at any time determine that the accrual of interest on the
basis of the Eurodollar Rate (i) is infeasible because the Bank is unable to
determine the Eurodollar Rate due to the unavailability of U.S. dollar deposits,
contracts of certificates of deposit in an amount approximately equal to the
amount of the relevant Advance and for a period of time approximately equal to
relevant Interest Period or (ii) is or has become unlawful or infeasible by
reason of the Bank's compliance with any new law, rule, regulation, guideline or
order, or any new interpretation of any present law, rule, regulation, guideline
or order, then the Bank shall give telephonic notice thereof (confirmed in
writing) to the Borrower, in which event the Eurodollar Advance shall be deemed
to be a Variable Rate Advance and interest shall thereupon immediately accrue at
the Variable Rate.
2.10 LINE ACCOUNT:
(a) The Bank shall maintain on its books a record of account in
which the Bank shall make entries for each Advance and such other debits and
credits as shall be appropriate in connection with the Line of Credit (the "Line
Account"). The Bank shall provide the Borrower with a monthly statement of the
Borrower's Line Account, which statement shall be considered to be correct and
conclusively binding on the Borrower unless the Borrower notifies the Bank to
the contrary within 30 days after the Borrower's receipt of any such statement
which it deems to be incorrect.
(b) The Borrower hereby authorizes the Bank, if and to the extent
payment owed to the Bank under the Line of Credit is not made when due, to
charge, from time to time, against any or all of the Borrower's deposit accounts
with the Bank any amount so due.
2.11 LATE PAYMENT: If any payment of principal (other than a principal
payment due pursuant to Section 2.03(b)) or interest, or any portion thereof,
under this Agreement is not paid within ten (10) calendar days after it is due,
a late payment charge equal to five percent (5%) of such past due payment may be
assessed and shall be immediately payable.
2.12 COMMITMENT FEE: The Borrower agrees to pay to the Bank a
commitment fee on the unused portion of the Line of Credit of .25% per annum,
computed on a year of 360 days for actual days elapsed, and payable quarterly in
arrears with the first such payment due April 30, 1996.
SECTION 3
LETTERS OF CREDIT/COLLATERAL
3.01 LETTER OF CREDIT FACILITY: Subject to the terms hereof, the Bank
agrees to issue commercial letters of credit and standby letters of credit (each
a "Letter of Credit") on behalf of the Borrower for general corporate purposes.
At no time, however, shall the total face amount of all Letters of Credit
outstanding, less any partial draws paid by the Bank, exceed the sum of
$3,000,000 and, together with the total principal amount of all Advances, exceed
the Line of Credit.
(a) Upon the Bank's request, the Borrower shall promptly pay to
the Bank issuance fees of 1/8% per annum for commercial letters of
credit and 1.5% per annum for standby letters of credit and such other
fees, commissions, costs and any out-of-pocket expenses charged or
incurred by the Bank with respect to any Letter of Credit.
(b) The commitment by the Bank to issue Letters of Credit shall,
unless earlier terminated in accordance with the terms of the
Agreement, automatically terminate on the Expiration Date and no
Letter of Credit shall expire on a date which is after the Expiration
Date.
(c) Each Letter of Credit shall be in form and substance
satisfactory to the Bank and in favor of beneficiaries satisfactory to
the Bank, provided that the Bank may refuse to issue a Letter of
Credit due to the nature of the transaction or its terms or in
connection with any transaction where the Bank, due to the beneficiary
or the nationality or residence of the beneficiary, would be
prohibited by any applicable law, regulation or order from issuing
such Letter of Credit.
-5-
<PAGE> 6
(d) Prior to the issuance of each Letter of Credit, but in no
event later than 10:00 a.m.(California time) on the day such Letter of
Credit is to be issued (which shall be a Business Day), the Borrower
shall deliver to the Bank a duly executed form of the Bank's standard
form of application for issuance of a Letter of Credit with proper
insertions.
(e) The Borrower shall, upon the Bank's request, promptly pay to
and reimburse the Bank for all costs incurred and payments made by the
Bank by reason of any future assessment, reserve, deposit or similar
requirement or any surcharge, tax or fee imposed upon the Bank or as a
result of the Bank's compliance with any directive or requirement of
any regulatory authority pertaining or relating to any Letter of
Credit.
3.02 THE COLLATERAL: To secure payment and performance of all the
Borrower's Obligations under this Agreement and all other liabilities, loans,
guarantees, covenants and duties owed by the Borrower to the Bank, whether or
not evidenced by this or by any other agreement, absolute or contingent, due or
to become due, now existing or hereafter and howsoever created, the Borrower
hereby grants the Bank a security interest in and to all of the following
property ("Collateral"):
(a) All goods now owned or hereafter acquired by the Borrower or
in which the Borrower now has or may hereafter acquire any interest, including,
but not limited to, all machinery, equipment, furniture, furnishings, fixtures,
tools, supplies and motor vehicles of every kind and description, and all
additions, accessions, improvements, replacements and substitutions thereto and
thereof.
(b) All inventory now owned or hereafter acquired by the
Borrower, including, but not limited to, all raw materials, work in process,
finished goods, merchandise, parts and supplies of every kind and description,
including inventory temporarily out of the Borrower's custody or possession,
together with all returns on accounts.
(c) All accounts, contract rights and general intangibles now
owned or hereafter created or acquired by the Borrower, including, but not
limited to, all receivables, goodwill, trademarks, trade styles, trade names,
patents, patent applications, software, customer lists and business records.
(d) All documents, instruments and chattel paper now owned or
hereafter acquired by the Borrower.
(e) All monies, deposit accounts, certificates of deposit and
securities of the Borrower now or hereafter in the Bank's or its agents'
possession.
The Bank's security interest in the Collateral shall be a continuing
lien and shall include the proceeds and products of the Collateral including,
but not limited to, the proceeds of any insurance thereon.
SECTION 4
CONDITIONS OF LENDING
4.01 CONDITIONS PRECEDENT TO THE INITIAL ADVANCE: The obligation of
the Bank to make the initial Advance and the first extension of credit to or on
account of the Borrower hereunder is subject to the conditions precedent that
the Bank shall have received before the date of such initial Advance and such
first extension of credit all of the following, in form and substance
satisfactory to the Bank:
(a) Evidence that the execution, delivery and performance by the
Borrower of this Agreement and any document, instrument or agreement required
hereunder have been duly authorized.
(b) Continuing guaranty(ies) in favor of the Bank executed by PMR
Corporation, Twin Town Outpatient, a General Partnership, Tennessee Mental
Health Cooperative, Inc. and Collaborative Care, Inc. (each, a "Guarantor"),
together with evidence that the execution, delivery and performance by a
guarantor has been duly authorized.
(c) The Bank shall have conducted an audit of the Borrower's
books, records and operations and the Bank shall be satisfied as to the
condition thereof.
(d) Loan fees of $7,500.
-6-
<PAGE> 7
(e) Such other evidence as the Bank may request to establish the
consummation of the transaction contemplated hereunder and compliance with the
conditions of this Agreement.
4.02 CONDITIONS PRECEDENT TO ALL ADVANCES: The obligation of the Bank
to make each Advance and each other extension of credit to or on account of the
Borrower (including the initial Advance and the first extension of credit) shall
be subject to the further conditions precedent that, on the date of each Advance
or each extension of credit and after the making of such Advance or extension of
credit:
(a) The Bank shall have received the documents set forth in
Section 6.06(d).
(b) The Bank shall have received such supplemental approvals,
opinions or documents as the Bank may reasonably request.
(c) The representations contained in Section 5 and in any other
document, instrument or certificate delivered to the Bank hereunder are correct.
(d) No event has occurred and is continuing which constitutes,
or, with the lapse of time or giving of notice or both, would constitute an
Event of Default.
(e) The security interest in the Collateral has been duly
authorized, created and perfected with first priority and is in full force and
effect.
The Borrower's acceptance of the proceeds of any Advance or the
Borrower's execution of any document or instrument evidencing or creating any
Obligation hereunder shall be deemed to constitute the Borrower's representation
and warranty that all of the above statements are true and correct.
SECTION 5
REPRESENTATIONS AND WARRANTIES
The Borrower hereby makes the following representations and warranties to the
Bank, which representations and warranties are continuing:
5.01 STATUS: If the Borrower is other than an individual who is not
conducting business as a sole proprietorship, the Borrower is a corporation,
duly organized and validly existing under the laws of the State of California
and is properly licensed and is qualified to do business and in good standing
in, and, where necessary to maintain the Borrower's rights and privileges, has
complied with the fictitious name statute of every jurisdiction in which the
Borrower is doing business.
5.02 AUTHORITY: The execution, delivery and performance by the
Borrower of this Agreement and any instrument, document or agreement required
hereunder have been duly authorized and do not and will not: (i) violate any
provision of any law, rule, regulation, order, writ, judgment, injunction,
decree, determination or award presently in effect having application to the
Borrower; (ii) result in a breach of or constitute a default under any material
indenture or loan or credit agreement or other material agreement, lease or
instrument to which the Borrower is a party or by which it or its properties may
be bound or affected; (iii) require any consent or approval of its stockholders
or violate any provision of its articles of incorporation or by-laws.
5.03 LEGAL EFFECT: This Agreement constitutes, and any instrument,
document or agreement required hereunder when delivered hereunder will
constitute, legal, valid and binding obligations of the Borrower enforceable
against the Borrower in accordance with their respective terms.
5.04 FICTITIOUS TRADE STYLES: There are no fictitious trade styles
used by the Borrower in connection with its business operations. The Borrower
shall notify the Bank not less than 30 days prior to effecting any change in the
matters described below or prior to using any other fictitious trade style at
any future date, indicating the trade style and state(s) of its use.
-7-
<PAGE> 8
5.05 FINANCIAL STATEMENTS: All financial statements, information and
other data which may have been or which may hereafter be submitted by the
Borrower to the Bank are true, accurate and correct and have been or will be
prepared in accordance with generally accepted accounting principles
consistently applied and accurately represent the financial condition or, as
applicable, the other information disclosed therein. Since the most recent
submission of such financial information or data to the Bank, the Borrower
represents and warrants that no material adverse change in the Borrower's
financial condition or operations has occurred which has not been fully
disclosed to the Bank in writing
5.06 LITIGATION: Except as have been disclosed to the Bank in writing,
there are no actions, suits or proceedings pending or, to the knowledge of the
Borrower, threatened against or affecting the Borrower or the Borrower's
properties before any court or administrative agency which, if determined
adversely to the Borrower, would have a material adverse effect on the
Borrower's financial condition or operations or on the Collateral.
5.07 TITLE TO ASSETS: The Borrower has good and marketable title to
all of its assets (including, but not limited to, the Collateral) and the same
are not subject to any security interest, encumbrance, lien or claim of any
third person except for Permitted Liens.
5.08 ERISA: If the Borrower has a pension, profit sharing or
retirement plan subject to ERISA, such plan has been and will continue to be
funded in accordance with its terms and otherwise complies with and continues to
comply with the requirements of ERISA.
5.09 TAXES: The Borrower has filed all tax returns required to be
filed and paid all taxes shown thereon to be due, including interest and
penalties, other than such taxes which are currently payable without penalty or
interest or those which are being duly contested in good faith.
5.10 ACCOUNTS: Each Eligible Account represents a bona fide sale
conforming to the requirements of Section 1.01(i).
5.11 ENVIRONMENTAL COMPLIANCE: The Borrower has implemented and
complied in all material respects with all applicable federal, state and local
laws, ordinances, statutes and regulations with respect to hazardous or toxic
wastes, substances or related materials, industrial hygiene or environmental
conditions. There are no suits, proceedings, claims or disputes pending or, to
the knowledge of the Borrower, threatened against or affecting the Borrower or
its property claiming violations of any federal, state or local law, ordinance,
statute or regulation relating to hazardous or toxic wastes, substances or
related materials.
SECTION 6
COVENANTS
The Borrower covenants and agrees that, during the term of this Agreement, and
so long thereafter as the Borrower is indebted to the Bank under this Agreement,
the Borrower will, unless the Bank shall otherwise consent in writing:
6.01 PRESERVATION OF EXISTENCE; COMPLIANCE WITH APPLICABLE LAWS:
Maintain and preserve its existence and all rights and privileges now enjoyed;
not liquidate or dissolve, merge or consolidate with or into, or acquire any
other business organization; and conduct its business and operations in
accordance with all applicable laws, rules and regulations.
6.02 MAINTENANCE OF INSURANCE: Maintain insurance in such amounts and
covering such risks as is usually carried by companies engaged in similar
businesses and owning similar properties in the same general areas in which the
Borrower operates and maintain such other insurance and coverages as may be
required by the Bank. All such insurance shall be in form and amount and with
companies satisfactory to the Bank. With respect to insurance covering
properties in which the Bank maintains a security interest or lien, such
insurance shall name the Bank as loss payee pursuant to a loss payable
endorsement satisfactory to the Bank and shall not be altered or canceled except
upon 10 days' prior written notice to the Bank. Upon the Bank's request, the
Borrower shall furnish the Bank with the original policy or binder of all such
insurance.
6.03 MAINTENANCE OF COLLATERAL AND OTHER PROPERTIES: Except for
Permitted Liens, keep and maintain the Collateral free and clear of all levies,
liens, encumbrances and security interests (including, but not limited to, any
lien of attachment, judgment or execution) and defend the Collateral against any
such levy, lien, encumbrance or security interest; comply with all laws,
statutes and regulations pertaining to the Collateral and its use and operation;
execute, file and record such statements, notices and agreements, take such
actions and obtain such certificates and other documents as necessary to
perfect, evidence and continue the Bank's security interest in the Collateral
and the priority thereof; maintain accurate and complete records
-8-
<PAGE> 9
of the Collateral which show all sales, claims and allowances; and properly care
for, house, store and maintain the Collateral in good condition, free of misuse,
abuse and deterioration, other than normal wear and tear. The Borrower shall
also maintain and preserve all its properties in good working order and
condition in accordance with the general practice of other businesses of similar
character and size, ordinary wear and tear excepted.
6.04 PAYMENT OF OBLIGATIONS AND TAXES: Make timely payment of all
assessments and taxes and all of its liabilities and obligations including, but
not limited to, trade payables, unless the same are being contested in good
faith by appropriate proceedings with the appropriate court or regulatory
agency. For purposes hereof, the Borrower's issuance of a check, draft or
similar instrument without delivery to the intended payee shall not constitute
payment.
6.05 INSPECTION RIGHTS: At any reasonable time and from time to time,
permit the Bank or any representative thereof to examine and make copies of the
records and visit the properties of the Borrower and discuss the business and
operations of the Borrower with any employee or representative thereof. If the
Borrower shall maintain any records (including, but not limited to, computer
generated records or computer programs for the generation of such records) in
the possession of a third party, the Borrower hereby agrees to notify such third
party to permit the Bank free access to such records at all reasonable times and
to provide the Bank with copies of any records which it may request, all at the
Borrower's expense, the amount of which shall be payable immediately upon
demand. In addition, the Bank may, at any reasonable time and from time to time,
conduct inspections and audits of the Collateral and the Borrower's accounts
payable, the cost and expenses of which shall be paid by the Borrower to the
Bank upon demand.
6.06 REPORTING AND CERTIFICATION REQUIREMENTS: Deliver or cause to be
delivered to the Bank in form and detail satisfactory to the Bank:
(a) Not later than ninety days after the end of each of the
Borrower's fiscal years, a copy of (1) the annual audited financial report of
the Borrower for such year with an unqualified opinion from a firm of certified
public accountants acceptable to Bank; (2) the annual consolidated and
consolidating financial report of the Borrower for such year prepared by the
Borrower; (3) the Borrower's Form 10K report filed with the Securities and
Exchange Commission for such year; and (4) a copy of the certified public
accountants management letters; and (5) the Compliance Certificate certified by
the chief financial officer of the Borrower.
(b) Not later than thirty days after the end of each of the
Borrower's fiscal years, a copy of Borrower's annual financial forecast for the
succeeding fiscal year.
(c) Not later than forty-five days after the end of each of the
first three fiscal quarters of each fiscal year, a copy of the Borrower's
financial statement and Form 10Q filed with the Securities and Exchange
Commission as of the end of such period, and the Compliance Certificate
certified by the chief financial officer of the Borrower.
(c) Not later than 20 days after the end of each month, the
Borrower's consolidated and consolidating financial statement as of the end of
such period.
(d) Not later than 15 days after the end of each month, a
statement of any change in (i) reserves for billing and (ii) claims not
reimbursed by Medicare and the reasons therefore, maintained by any hospital
with whom the Borrower or any Guarantor contract for services.
(d) Not later than 20 days after the end of each month, (i) an
aging of accounts receivable indicating separately the amount of Eligible
Accounts and the amount of total accounts receivable which are current, 1 to 30
days past the date of invoice, 31 to 60 days past the date of invoice, and the
amount over 60 days past the date of invoice and an aging of accounts payable
indicating the amount of such payables which are current, 1 to 30 days past the
date of invoice, 31 to 60 days past the date of invoice, and the amount over 60
days past the date of invoice and (ii) a borrowing base certificate in a form
acceptable to Bank ("Borrowing Base Certificate"), executed by Borrower and
certifying the Value of the Borrowing Base as of the last day of the preceding
month.
(e) Promptly upon the Bank's request, such other information
pertaining to the Borrower, the Collateral or any guarantor hereunder as the
Bank may reasonably request.
-9-
<PAGE> 10
6.07 PAYMENT OF DIVIDENDS: Not declare or pay any dividends on any
class of stock now or hereafter outstanding except dividends payable solely in
the Borrower's capital stock and except dividends of up to $150,000 on preferred
stock in any one fiscal year.
6.08 REDEMPTION OR REPURCHASE OF STOCK: Not redeem or repurchase any
class of the Borrower's stock now or hereafter outstanding.
6.09 ADDITIONAL INDEBTEDNESS: Not, after the date hereof, create,
incur or assume, directly or indirectly, any additional Indebtedness other than
(i) indebtedness owed or to be owed to the Bank or (ii) indebtedness to trade
creditors incurred in the ordinary course of the Borrower's business.
6.10 LOANS: Not make any loans or advances or extend credit to any
third person, including, but not limited to, directors, officers, shareholders,
partners, employees, affiliated entities and subsidiaries of the Borrower,
except for credit extended in the ordinary course of the Borrower's business as
presently conducted.
6.11 LIENS AND ENCUMBRANCES: Not create, assume or permit to exist any
security interest, encumbrance, mortgage, deed of trust, or other lien
(including, but not limited to, a lien of attachment, judgment or execution)
affecting any of the Borrower's properties, or execute or allow to be filed any
financing statement or continuation thereof affecting any of such properties,
except for Permitted Liens or as otherwise provided in this Agreement.
6.12 TRANSFER ASSETS: Not, after the date hereof, sell, contract for
sale, convey, transfer, assign, lease or sublet, any of its assets (including,
but not limited to, the Collateral) except in the ordinary course of business as
presently conducted by the Borrower and, then, only for full, fair and
reasonable consideration.
6.13 CHANGE IN NATURE OF BUSINESS: Not make any material change in its
financial structure or the nature of its business as existing or conducted as of
the date hereof.
6.14 FINANCIAL CONDITION: Maintain at all times on a consolidated
basis with the Guarantors:
(a) A minimum Effective Tangible Net Worth of at least $6,000,000
plus 50% of net profit after tax at each fiscal year end.
(b) A ratio of Debt to Effective Tangible Net Worth of not more
than 2.25 to 1.
(c) A minimum net profit after tax of not less than $75,000 at
the end of the third fiscal quarter of 1996, $200,000 at the end of the fourth
fiscal quarter of 1996 and thereafter, exclusive of any net decreases in
contract settlement reserves.
(d) A ratio of current assets to current liabilities of not less
than 2.41 to 1.
6.15 COMPENSATION OF EMPLOYEES: Compensate its employees for services
rendered at an hourly rate at least equal to the minimum hourly rate prescribed
by any applicable federal or state law or regulation.
6.16 CAPITAL EXPENSE: Not make any fixed capital expenditure or any
commitment therefor, including, but not limited to, incurring liability for
leases which would be, in accordance with generally accepted accounting
principles, reported as capital leases, or purchase any real or personal
property in an aggregate amount exceeding $600,000 in any one fiscal year.
6.17 NOTICE: Give the Bank prompt written notice of any and all (i)
Events of Default; (ii) litigation, arbitration or administrative proceedings to
which the Borrower is a party and in which the claim or liability exceeds
$100,000 or which affects the Collateral; (iii) other matters which have
resulted in, or might result in a material adverse change in the Collateral or
the financial condition or business operations of the Borrower; (iv) Medicare
claims made by the hospitals with which Borrower or any Guarantor contracts that
have been denied in excess of $100,000 in the aggregate; and (v) public
documents and notices when filed with the relevant governmental agency.
-10-
<PAGE> 11
6.18 ENVIRONMENTAL COMPLIANCE: The Borrower shall:
(a) Implement and comply in all material respects with all
applicable federal, state and local laws, ordinances, statutes and regulations
with respect to hazardous or toxic wastes, substances or related materials,
industrial hygiene or to environmental conditions.
(b) Not own, use, generate, manufacture, store, handle, treat,
release or dispose of any hazardous or toxic wastes, substances or related
materials.
(c) Give prompt written notice of any discovery of or suit,
proceeding, claim, dispute, threat, inquiry or filing respecting hazardous or
toxic wastes, substances or related materials.
(d) At all times indemnify and hold harmless Bank from and
against any and all liability arising out of the use, generation, manufacture,
storage, handling, treatment, disposal or presence of hazardous or toxic wastes,
substances or related materials.
SECTION 7
EVENTS OF DEFAULT
Any one or more of the following described events shall constitute an event of
default (an "Event of Default") under this Agreement:
7.01 NON-PAYMENT: The Borrower shall fail to pay any Obligations
within 10 days of when due.
7.02 PERFORMANCE UNDER THIS AND OTHER AGREEMENTS: The Borrower shall
fail in any material respect to perform or observe any term, covenant or
agreement contained in this Agreement or in any document, instrument or
agreement evidencing or relating to any indebtedness of the Borrower (whether
such indebtedness is owed to the Bank or third persons), and any such failure
(exclusive of the payment of money to the Bank under this Agreement or under any
other instrument, document or agreement, which failure shall constitute and be
an immediate Event of Default if not paid when due or when demanded to be due)
shall continue for more than 30 days after written notice from the Bank to the
Borrower of the existence and character of such Event of Default.
7.03 REPRESENTATIONS AND WARRANTIES; FINANCIAL STATEMENTS: Any
representation or warranty made by the Borrower under or in connection with this
Agreement or any financial statement given by the Borrower or any guarantor
shall prove to have been incorrect in any material respect when made or given or
when deemed to have been made or given.
7.04 INSOLVENCY: The Borrower or any Guarantor shall: (i) become
insolvent or be unable to pay its debts as they mature; (ii) make an assignment
for the benefit of creditors or to an agent authorized to liquidate any
substantial amount of its properties and assets; (iii) file a voluntary petition
in bankruptcy or seeking reorganization or to effect a plan or other arrangement
with creditors; (iv) file an answer admitting the material allegations of an
involuntary petition relating to bankruptcy or reorganization or join in any
such petition; (v) become or be adjudicated a bankrupt; (vi) apply for or
consent to the appointment of, or consent that an order be made, appointing any
receiver, custodian or trustee, for itself or any of its properties, assets or
businesses; or (vii) any receiver, custodian or trustee shall have been
appointed for all or substantial part of its properties, assets or businesses
and shall not be discharged within 30 days after the date of such appointment
7.05 EXECUTION: Any writ of execution or attachment or any judgment
lien shall be issued against any property of the Borrower and shall not be
discharged or bonded against or released within 30 days after the issuance or
attachment of such writ or lien.
7.06 REVOCATION OR LIMITATION OF GUARANTY: Any guaranty shall be
revoked or limited or its enforceability or validity shall be contested by any
Guarantor, by operation of law, legal proceeding or otherwise or any guarantor
who is a natural person shall die.
7.07 SUSPENSION: The Borrower shall voluntarily suspend the
transaction of business or allow to be suspended, terminated, revoked or expired
any permit, license or approval of any governmental body necessary to conduct
the Borrower's business as now conducted.
-11-
<PAGE> 12
7.08 CHANGE IN OWNERSHIP: There shall occur a sale, transfer,
disposition or encumbrance (whether voluntary or involuntary), or an agreement
shall be entered into to do so, with respect to more than 10% of the issued and
outstanding capital stock of the Borrower.
SECTION 8
REMEDIES ON DEFAULT
Upon the occurrence of any Event of Default, the Bank may, at its sole and
absolute election, without demand and only upon such notice as may be required
by law:
8.01 ACCELERATION: Declare any or all of the Borrower's indebtedness
owing to the Bank, whether under this Agreement or any other document,
instrument or agreement, immediately due and payable, whether or not otherwise
due and payable.
8.02 CEASE EXTENDING CREDIT: Cease making Advances or otherwise
extending credit to or for the account of the Borrower under this Agreement or
under any other agreement now existing or hereafter entered into between the
Borrower and the Bank.
8.03 TERMINATION: Terminate this Agreement as to any future obligation
of the Bank without affecting the Borrower's obligations to the Bank or the
Bank's rights and remedies under this Agreement or under any other document,
instrument or agreement.
8.04 NOTIFICATION OF ACCOUNT DEBTORS:
(a) Notify any Account Debtor, any buyers or transferee of the
Collateral or any other persons of the Bank's interest in the Collateral and the
proceeds thereof.
(b) Sign the Borrower's name (which authority the Borrower hereby
irrevocably and unconditionally grants to the Bank) on any invoice or bill of
lading relating to accounts or other drafts against the Account Debtors, notify
post office authorities to change the address for delivery of mail addressed to
the Borrower to such address as the Bank may designate and take possession of
and open mail addressed to the Borrower and remove therefrom, proceeds of and
payments on the Collateral, and demand, receive and endorse payment and give
receipts, releases and satisfactions for and sue for all money payable to the
Borrower.
(c) Require the Borrower to indicate on the face of all invoices
(or such other documentation as may be specified by the Bank relating to the
sale, delivery or shipment of goods giving rise to the account) that the account
has been assigned to the Bank and that all payments are to be made directly to
the Bank at such address as the Bank may designate.
8.05 PROTECTION OF SECURITY INTEREST: Make such payments and do such
acts as the Bank, in its sole judgment, considers necessary and reasonable to
protect its security interest or lien in the Collateral. The Borrower hereby
irrevocably authorizes the Bank to pay, purchase, contest or compromise any
encumbrance, lien or claim which the Bank, in its sole judgment, deems to be
prior or superior to its security interest. Further, the Borrower hereby agrees
to pay to the Bank, upon demand therefor, all expenses and expenditures
(including attorneys' fees) incurred in connection with the foregoing.
8.06 FORECLOSURE: Enforce any security interest or lien given or
provided for under this Agreement or under any security agreement, mortgage,
deed of trust or other document, in such manner and such order, as to all or any
part of the properties subject to such security interest or lien, as the Bank,
in its sole judgment, deems to be necessary or appropriate and the Borrower
hereby waives any and all rights, obligations or defenses now or hereafter
established by law relating to the foregoing. In the enforcement of its security
interest or lien, the Bank is authorized to enter upon the premises where any
Collateral is located and take possession of the Collateral or any part thereof,
together with the Borrower's records pertaining thereto, or the Bank may require
the Borrower to assemble the Collateral and records pertaining thereto and make
such Collateral and records available to the Bank at a place designated by the
Bank. The Bank may sell the Collateral or any portions thereof, together with
all additions, accessions and accessories thereto, giving only such notices and
following only such procedures as are required by law, at either a public or
private sale, or both, with or without having the Collateral present at
-12-
<PAGE> 13
the time of the sale, which sale shall be on such terms and conditions and
conducted in such manner as the Bank determines in its sole judgment to be
commercially reasonable. Any deficiency which exists after the disposition or
liquidation of the Collateral shall be a continuing liability of the Borrower to
the Bank and shall be immediately paid by the Borrower to the Bank.
8.07 LETTERS OF CREDIT: The Bank may, at its sole and absolute
discretion and in addition to any other remedies available to it hereunder or
otherwise, require the Borrower to pay immediately to the Bank, for application
against drawings under any outstanding Letters of Credit, the outstanding
principal amount of any such Letters of Credit which have not expired. Any
portion of the amount so paid to the Bank which is not applied to satisfy draws
under any such Letters of Credit or any other obligations of the Borrower to the
Bank shall be repaid to the Borrower without interest.
8.08 NON-EXCLUSIVITY OF REMEDIES: Exercise one or more of the Bank's
rights set forth herein or seek such other rights or pursue such other remedies
as may be provided by law, in equity or in any other agreement now existing or
hereafter entered into between the Borrower and the Bank, or otherwise.
8.09 APPLICATION OF PROCEEDS: All amounts received by the Bank as
proceeds from the disposition or liquidation of the Collateral shall be applied
to the Borrower's indebtedness to the Bank as follows: first, to the costs and
expenses of collection, enforcement, protection and preservation of the Bank's
lien in the Collateral, including court costs and reasonable attorneys' fees,
whether or not suit is commenced by the Bank; next, to those costs and expenses
incurred by the Bank in protecting, preserving, enforcing, collecting,
liquidating, selling or disposing of the Collateral; next, to the payment of
accrued and unpaid interest on all of the Obligations; next, to the payment of
the outstanding principal balance of the Obligations; and last, to the payment
of any other indebtedness owed by the Borrower to the Bank. Any excess
Collateral or excess proceeds existing after the disposition or liquidation of
the Collateral will be returned or paid by the Bank to the Borrower.
SECTION 9
MISCELLANEOUS
9.01 AMOUNTS PAYABLE ON DEMAND: If the Borrower shall fail to pay on
demand any amount so payable under this Agreement, the Bank may, at its option
and without any obligation to do so and without waiving any default occasioned
by the Borrower having so failed to pay such amount, create an Advance under the
Line of Credit in an amount equal to the amount so payable, which Advance shall
thereafter bear interest as provided under the Line of Credit.
9.02 DEFAULT INTEREST RATE: The Borrower shall pay the Bank interest
on any indebtedness or amount payable under this Agreement, from the date that
such indebtedness or amount became due or was demanded to be due until paid in
full, at a rate which is 3% in excess of the rate otherwise provided under this
Agreement.
9.03 DISPOSAL OF INVOICES: All documents, schedules, invoices or other
papers received by the Bank from the Borrower may be destroyed or disposed of 6
months after receipt by the Bank, unless the Borrower requests in writing the
return thereof, which shall be done at the Borrower's expense.
9.04 RIGHTS OF THE BANK WITH OR WITHOUT DEFAULT: The Borrower agrees
that the Bank may at any time and at its option, whether or not the Borrower is
in default:
(a) Require the Borrower to direct all Account Debtors to forward
all remittances, payments and proceeds of the Collateral directly to the Bank at
such address as the Bank may designate. In connection therewith, the Borrower
hereby irrevocably constitutes and appoints the Bank as its attorney-in-fact to
endorse the Borrower's name on any notes, acceptances, checks, drafts, money
orders or other evidence of payment that may come into the Bank's possession.
(b) Require the Borrower to deliver to the Bank, at such times
designated by the Bank, records and schedules which show the status and
condition of the Collateral, where it is located and such contracts or other
matters which affect the Collateral.
(c) Send verification requests to any Account Debtor.
(d) Make inquiries of the Borrower's trade vendors.
-13-
<PAGE> 14
9.05 INDEMNIFICATION: The Borrower agrees to hold the Bank harmless
from and indemnify and defend the Bank from any liability, claim, loss or
expense (including, but not limited to, attorneys' fees) arising from any
transaction between the Borrower and any Account Debtor including, but not
limited to, any loss, claim or liability arising from:
(a) Any violation of any federal or state consumer protection law
(including, but not limited to, the federal Truth-In-Lending Act) and
regulations promulgated thereunder.
(b) Improper collection practices or procedures of the Borrower.
(c) Any unlawful acts taken by the Borrower in connection with
the collection of any account(s).
(d) Any suit by any person against the Bank resulting or arising
from such person's dealings with the Borrower.
9.06 DISPUTE RESOLUTION: It is understood and agreed that upon the
request of any party to this agreement any dispute, claim, or controversy of any
kind, whether in contract or in tort, statutory or common law, legal or
equitable now existing or hereinafter arising between the parties in any way
arising out of, pertaining to or in connection with: (1) this Agreement, or any
related agreements, documents, or instruments, (2) all past and present loans,
credits, accounts, deposit accounts (whether demand deposits or time deposits),
safe deposit boxes, safekeeping agreements, guarantees, letters of credit, goods
or services, or other transactions, contracts or agreements of any kind, (3) any
incidents, omissions, acts, practices, or occurrences causing injury to either
party whereby the other party or its agents, employees or representatives may be
liable, in whole or in part, or (4) any aspect of the past or present
relationships of the parties, shall be resolved through a two-step dispute
resolution process administered by Judicial Arbitration & Mediation Services,
Inc. ("J-A-M-S") as follows:
a) Step I - Mediation: At the request of any party to the dispute,
claim or controversy of the matter shall be referred to the nearest office
of J-A-M-S for mediation, that is, an informal, non-binding conference or
conferences between the parties in which a retired judge or justice for
the J-A-M-S panel will seek to guide the parties to a resolution of the
case.
b) Step II - Unsecured Contracts - Arbitration: Should any dispute,
claim or controversy remain unresolved at the conclusion of the Step I
Mediation Phase then all such remaining matters shall be resolved by final
and binding arbitration before a different judicial panelist, unless the
parties shall agree to have the mediator panelist act as arbitrator. The
hearing shall be conducted at a location determined by the arbitrator in
San Diego County and shall be administered by and in accordance with the
then existing Rules of Practice and Procedure of Judicial Arbitration &
Mediation Services, Inc., and judgement upon any award rendered by the
arbitrator may be entered by any State or Federal Court having
jurisdiction thereof. The arbitrator shall determine which is the
prevailing party and shall include in the award that party's reasonable
attorneys fees and costs. This subparagraph (b) shall apply only if, at
the time of the submission of the matter to J-A-M-S, the dispute(s) or
issue(s) do(es) not arise out of a transaction(s) which is/are secured by
real property collateral or, if so secured, all parties consent to such
submission.
As soon as practicable after selection of the arbitrator, the arbitrator
or his/her designated representative shall determine a reasonable estimate
of anticipated fees and costs of the Arbitrator, and render a statement to
each party setting forth that party's pro-rata share of said fees and
costs. Thereafter each party shall, within 10 days of receipt of said
statement, deposit said sum with the Arbitrator. Failure of any party to
make such a deposit shall result in a forfeiture by the non-depositing
party of the right to prosecute or defend the claim which is the subject
of the arbitration, but shall not otherwise serve to abate, stay or
suspend the arbitration proceedings.
c) Step II - Contracts Secured By Real Estate - Trial by Court
Reference [Section 638(1)] Code of Civil Procedure): If the dispute, claim
or controversy is not one required or agreed to be submitted to
arbitration as provided by subparagraph (b) and has not been resolved by
Step I mediation, then any remaining dispute, claim or controversy shall
be submitted for determination by a trial on Order of Reference conducted
by a retired judge or justice from the panel of J-A-M-S appointed pursuant
to the provisions of California Code of Civil Procedure Section 638(1) or
any amendment, addition or successor section thereto to hear the case and
report a statement of decision thereon. The parties intend this general
reference agreement to be specifically enforceable in accordance with said
section. If the parties are unable to agree upon a member of the J-A-M-S
panel to act as referee then one shall be appointed by the Presiding Judge
of the county wherein the hearing is to be held. The parties shall pay in
advance, to the referee, the estimated reasonable fees and costs of the
reference, as may be specified in advance by the referee. The parties
-14-
<PAGE> 15
shall initially share equally, by paying their proportionate amount of
the estimated fees and costs of the reference. Failure of any party to
make such a fee deposit shall result in a forfeiture by the
non-depositing party of the right to prosecute or defend the cause(s)
of action which is(are) the subject of the reference, but shall not
otherwise serve to abate, stay or suspend the reference proceeding.
d) Provisional Remedies, Self Help and Foreclosure: No provision
of, or the exercise of any right(s) under subparagraph (b), nor any
other provision of this Dispute Resolution Provision, shall limit the
right of any party to exercise self help remedies such as set off, to
foreclose against any real or personal property collateral, or obtain
provisional or ancillary remedies such as injunctive relief or the
appointment of a receiver from any court having jurisdiction before,
during or after the pendency of any arbitration. At Bank's option,
foreclosure under a deed of trust or mortgage may be accomplished
either by exercise of power of sale under the deed of trust or
mortgage, or by judicial foreclosure. The institution and maintenance
of an action for provisional remedies pursuit of provisional or
ancillary remedies or exercise of self help remedies shall not
constitute a waiver of the right of any party, including the
plaintiff, to submit the controversy or claim to arbitration.
9.07 WAIVER OF JURY TRIAL: THE BORROWER AND THE BANK EACH WAIVE THEIR
RESPECTIVE RIGHTS TO A TRIAL BY JURY OF ANY CLAIM OR CAUSE OF ACTION BASED UPON
OR ARISING OUT OF OR RELATED TO THIS AGREEMENT, THE OTHER LOAN DOCUMENTS, OR THE
TRANSACTIONS CONTEMPLATED HEREBY OR THEREBY, IN ANY ACTION, PROCEEDING OR OTHER
LITIGATION OF ANY TYPE BROUGHT BY ANY OF THE PARTIES AGAINST ANY OTHER PARTY OR
PARTIES, WHETHER WITH RESPECT TO CONTRACT CLAIMS, TORT CLAIMS, OR OTHERWISE.
THE BORROWER AND THE BANK EACH AGREE THAT ANY SUCH CLAIM OR CAUSE OF ACTION
SHALL BE TRIED BY A COURT TRIAL WITHOUT A JURY. WITHOUT LIMITING THE FOREGOING,
THE PARTIES FURTHER AGREE THAT THEIR RESPECTIVE RIGHT TO A TRIAL BY JURY IS
WAIVED BY OPERATION OF THIS SECTION AS TO ANY ACTION, COUNTERCLAIM OR OTHER
PROCEEDING WHICH SEEKS, IN WHOLE OR IN PART, TO CHALLENGE THE VALIDITY OR
ENFORCEABILITY OF THIS AGREEMENT OR THE OTHER LOAN DOCUMENTS OR ANY PROVISION
HEREOF OR THEREOF. THIS WAIVER SHALL APPLY TO ANY SUBSEQUENT AMENDMENTS,
RENEWALS, SUPPLEMENTS OR MODIFICATIONS TO THIS AGREEMENT AND THE OTHER LOAN
DOCUMENTS.
9.08 RELIANCE: Each warranty, representation, covenant, obligation and
agreement contained in this Agreement shall be conclusively presumed to have
been relied upon by the Bank regardless of any investigation made or information
possessed by the Bank and shall be cumulative and in addition to any other
warranties, representations, covenants and agreements which the Borrower now or
hereafter shall give, or cause to be given, to the Bank.
9.09 ATTORNEYS' FEES: Borrower shall pay to the Bank all costs and
expenses, including but not limited to reasonable attorneys fees, incurred by
Bank in connection with the administration, enforcement, or any refinancing or
restructuring in the nature of a "work-out", of this Agreement or any document,
instrument or agreement executed with respect to, evidencing or securing the
indebtedness hereunder.
9.10 NOTICES: All notices, payments, requests, information and demands
which either party hereto may desire, or may be required to give or make to the
other party hereto, shall be given or made to such party by hand delivery or
through deposit in the United States mail, postage prepaid, or by Western Union
telegram, addressed as set forth below or to such other address as may be
specified from time to time in writing by either party to the other.
TO THE BORROWER: TO THE BANK:
PSYCHIATRIC MANAGEMENT RESOURCE, INC. SANWA BANK CALIFORNIA
3990 Old Town Avenue, Ste 206 A 1280 Fourth Avenue
San Diego, CA 92110 San Diego, CA 92101
-15-
<PAGE> 16
9.11 WAIVER: Neither the failure nor delay by the Bank in exercising any
right hereunder or under any document, instrument or agreement mentioned herein
shall operate as a waiver thereof, nor shall any single or partial exercise of
any right hereunder or under any other document, instrument or agreement
mentioned herein preclude other or further exercise thereof or the exercise of
any other right; nor shall any waiver of any right or default hereunder, or
under any other document, instrument or agreement mentioned herein, constitute a
waiver of any other right or default or constitute a waiver of any other default
of the same or any other term or provision.
9.12 CONFLICTING PROVISIONS: To the extent the provisions contained in this
Agreement are inconsistent with those contained in any other document,
instrument or agreement executed pursuant hereto, the terms and provisions
contained herein shall control. Otherwise, such provisions shall be considered
cumulative.
9.13 BINDING EFFECT; ASSIGNMENT: This Agreement shall be binding upon and
inure to the benefit of the Borrower and the Bank and their respective
successors and assigns, except that the Borrower shall not have the right to
assign its rights hereunder or any interest herein without the prior written
consent of the Bank. The Bank may sell, assign or grant participation in all or
any portion of its rights and benefits hereunder. The Borrower agrees that, in
connection with any such sale, grant or assignment, the Bank may deliver to the
prospective buyer, participant or assignee financial statements and other
relevant information relating to the Borrower and any guarantor.
9.14 JURISDICTION: This Agreement, any notes issued hereunder, the rights
of the parties hereunder to and concerning the Collateral, and any documents,
instruments or agreements mentioned or referred to herein shall be governed by
and construed according to the laws of the State of California, to the
jurisdiction of whose courts the parties hereby submit.
9.15 HEADINGS: The headings herein set forth are solely for the purpose of
identification and have no legal significance.
9.16 ENTIRE AGREEMENT: This Agreement and all documents, instruments and
agreements mentioned herein constitute the entire and complete understanding of
the parties with respect to the transactions contemplated hereunder. All
previous conversations, memoranda and writings between the parties pertaining to
the transactions contemplated hereunder not incorporated or referenced in this
Agreement or in such documents, instruments and agreements are superseded
hereby.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be executed
as of the date first hereinabove written.
BANK: BORROWER:
SANWA BANK CALIFORNIA PSYCHIATRIC MANAGEMENT RESOURCE, INC.
By: /s/ DAVID S. CHAFFEE By: /s/ [SIG]
-------------------------------- ----------------------------------
Vice President
-------------------------------- ----------------------------------
(Name/Title) (Name/Title)
By:
----------------------------------
-------------------------------------
(Name/Title)
-16-
<PAGE> 17
EXHIBIT A
OFFICER'S COMPLIANCE CERTIFICATE
SANWA BANK CALIFORNIA (the "Bank")
San Diego Corporate Banking Center
1280 Fourth Avenue
San Diego, CA 92101
Attn.: Mr. David S. Chaffee, Vice President
PMR Corporation et. al.
Psychiatric Management Resources, Inc. ("Borrower")
This certificate is furnished pursuant to Paragraph 6.06 (A&C of the Line of
Credit Agreement (the "Agreement") by and between the Borrower and the Bank.
Unless otherwise defined herein, the terms used in this certificate have the
meanings given to them in the Agreement. As required by Paragraph 6.06 (A&C) of
the Agreement, included with this certificate is a copy of the financial
statement of PMR Corporation for the period ending ______________, 199___.
Attached hereto as Schedule A is a computation showing compliance by the
Borrower with the covenants referred to in Section 6 of the Agreement. The
figures set forth in Schedule A for determining compliance with those financial
covenants are in each case true and complete as of the date hereof.
Based on the Officer's review of the Agreement and the activities of the
Borrower for the period ended ______________________ 199__, to their best
knowledge and belief and as of the date of this report, the Borrower and the
Guarantors have performed and observed the applicable provisions contained in
the Agreement to be performed by it, and no default has occurred and is
continuing
WITNESS my hand and this ___ day of _________, 199__.
PMR Corporation
By:
----------------------------------
Title: Chief Financial Officer
<PAGE> 18
SCHEDULE A
Loan Compliance Certification as of ___________, 199__
PSYCHIATRIC MANAGEMENT RESOURCES, INC.
LINE OF CREDIT AGREEMENT
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Paragraph
Number
- ---------
<S> <C> <C>
6.07 Payment of Dividends, Amount Permitted $150,000 $
-------------
6.08 Redemption or purchase of Stock, Amount Permitted -0- $
-------------
6.09 Indebtedness (Maximum $-0-, other than Purchase Money
New Indebtedness
$
-------------
6.10 Loans, Amount Permitted $-0- $
-------------
6.12 Disposition of Assets (Maximum $-0-) $
-------------
6.14 (A) Effective Tangible Net Worth (Min. $6,000,000) $
-------------
Actual Net Worth as of , 199 $
-------------
Intangibles $
-------------
50% of NPAT $ $
-------------
Effective Tangible Net Worth $
-------------
6.14 (B) Ratio of Debt to Effective Tangible Net Worth (</-2.25:1) $
-------------
Total Liabilities $
-------------
Effective Tangible Net Worth $
-------------
Ratio :1
-------------
6.14 (C) Minimum Profitability of $75,000 for third quarter 1996 $
-------------
Minimum Profitability of $200,000 for fourth quarter 1996 $
-------------
Minimum Profitability of $200,000 for each quarter thereafter $
-------------
</TABLE>
<PAGE> 19
Page Two
SCHEDULE A
Loan Compliance Certification as of ____________, 199__
PSYCHIATRIC MANAGEMENT RESOURCES, INC.
LINE OF CREDIT AGREEMENT
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Paragraph
Number
- ---------
<S> <C> <C>
6.14 (D) Current Ratio (More than 2.41:1)
Total Current Assets $
-------------
Total Current Liabilities $
-------------
Ratio :1
-------------
</TABLE>
<PAGE> 20
AMENDMENT TO CREDIT AGREEMENT
This First Amendment to Credit Agreement (the "Amendment") is made
and entered into as of 10/31/96, by and between SANWA BANK CALIFORNIA (the
"Bank") and PSYCHIATRIC MANAGEMENT RESOURCES, INC. (the "Borrower") with
respect to the following:
This Amendment shall be deemed to be part of and subject to that
certain Credit Agreement dated as of February 2, 1996, as it may be amended
from time to time, and any and all addenda and riders thereto (collectively the
"Agreement"). Unless otherwise defined herein, all terms used in this
Amendment shall have the same meanings as in the Agreement. To the extent that
any of the terms or provisions of this Amendment conflict with those contained
in the Agreement, the terms and provisions contained herein shall control.
WHEREAS, the Borrower and the Bank mutually desire to extend and/or
modify the Agreement.
NOW THEREFORE, for value received and hereby acknowledged, the Borrower
and the Bank agree as follows:
1. CHANGE IN DOLLAR AMOUNT. The definition of Borrowing Base
provided for in Section 1.01(c) of the Agreement is deleted in its entirety and
the following is substituted in lieu thereof:
"(c) "BORROWING BASE": shall mean, as determined by the Bank
from time to time, the lesser of: (i) 50% of the aggregate amount of Eligible
Accounts of the Borrower, or (ii) $10,000,000." In addition, Bank may from time
to time agree to lend a percentage of the amount of certificates of deposits or
securities acceptable to Bank in which Bank holds a perfected, first priority
security interest pursuant to security agreements and other documents
satisfactory to Bank and evidencing Borrower's valid pledge and assignment of
such additional collateral to Bank. Such additional collateral at the
discretion of Bank shall be included in the Borrowing Base which shall,
however, not exceed the sum of $10,000,000.00.
2. NEW PROGRAM RECEIVABLES. A new definition for the term "New
Program Receivables" is added to and inserted as new subsection(s) of Section
1.01 of the Agreement as follows:
(s) "NEW PROGRAM RECEIVABLES" means and includes Borrower's
accounts arising out of services rendered in connection with programs that have
been approved for partial payment by Medicare but have not yet received
approval by Medicare for full payment because the Account Debtor's fiscal year
end statements covering such programs have not yet been reviewed by Medicare or
its financial intermediary. If after such review, the program is determined by
Medicare or its financial intermediary not to qualify for full payment for
services rendered by or through Borrower, all accounts generated in connection
with the program will not be considered part of New Program Receivables."
3. MODIFICATION OF ELIGIBLE ACCOUNTS. Clause 9 of Section 1.01 (i)
of the Agreement is deleted in its entirety and a new Clause (9) is added and
inserted in its place as follows:
"(9) Excluding New Program Receivables, all accounts of any
single Account Debtor if 50% or more of the dollar amount of all such accounts
are represented by accounts which have not been paid in full within 60 days
from the date payment was due to 90 days from the original date of invoice,
whichever is less."
-1-
<PAGE> 21
4. NEW ELIGIBLE ACCOUNT CRITERIA. A new clause (15) is added to Section
1.01(I) of the Agreement as follows:
"(15) New Program Receivables except to the extent of the current
portion thereof consisting of those accounts which are not more than 60 days
past the date of invoice or 30 days past due, whichever is less."
5. MODIFICATION OF INTEREST RATE. The interest rates provided for in
Section 2.04 of the Agreement are reduced by one half percent (.50%) per annum.
6. REDUCTION OF NON-USE FEE AND NEW AMENDMENT COMMITMENT FEE. From and
after the date of this Agreement and the payment of the amendment commitment
fee described herein, the fee provided for in Section 2.12 of the Agreement
based on the unused portion of the Line of Credit is reduced from .25% per
annum to .10% per annum, computed on the same basis and payable at the same
times as stated in the Agreement. As a condition precedent to the effectiveness
of this amendment and Bank's commitment to lend under the Agreement as revised
hereby, Borrower shall pay Bank a non-refundable commitment fee of $12,500.00,
which shall be deemed fully earned as of the date of this Amendment.
7. CHANGE IN LETTER OF CREDIT FACILITY. Section 3.01 of the Agreement
is deleted in its entirety and the following is substituted in lieu thereof:
"3.01 LETTER OF CREDIT FACILITY: Subject to the terms hereof, the
Bank agrees to issue commercial letters of credit and standby
letters of credit (each a "Letter of Credit") on behalf of the
Borrower for general corporate purposes. At no time, however, shall
the total face amount of all Letters of Credit outstanding, less any
partial draws paid by the Bank, exceed the sum of $10,000,000 and,
together with the total principal amount of all Advances, exceed the
Line of Credit.
(a) Upon the Bank's request, the Borrower shall promptly pay
to the Bank issuance fees of 1/8% per annum for commercial letters
of credit and 1.5% per annum for standby letters of credit and such
other fees, commissions, costs and any out-of-pocket expenses
charged or incurred by the Bank with respect to any Letter of
Credit.
(b) The commitment by the Bank to issue Letters of Credit
shall, unless earlier terminated in accordance with the terms of the
Agreement, automatically terminate on the Expiration Date and no
Letter of Credit shall expire on a date which is 365 days after the
Expiration Date.
(c) Each Letter of Credit shall be in form and substance
satisfactory to the Bank and in favor of beneficiaries satisfactory
to the Bank, provided that the Bank may refuse to issue a Letter of
Credit due to the nature of the transaction or its terms or in
connection with any transaction where the Bank, due to the
beneficiary or the nationality or residence of the beneficiary,
would be prohibited by any applicable law, regulation or order from
issuing such Letter of Credit.
(d) Prior to the issuance of each Letter of Credit, but in no
event later than 10:00 a.m. (California time) on the day such Letter
of Credit is to be issued (which shall be a Business Day), the
Borrower shall deliver to the Bank a duly executed form of the
Bank's standard form of application for issuance of a Letter of
Credit with proper insertions.
(e) The Borrower shall, upon the Bank's request, promptly pay
to and reimburse the Bank for all costs incurred and payments made
by the Bank by reason of any future assessment, reserve, deposit or
similar requirement or any surcharge, tax or
-2-
<PAGE> 22
fee imposed upon the Bank or as a result of the Bank's compliance with
any directive or requirement of any regulatory authority pertaining or
relating to any Letter of Credit".
8. MODIFICATION OF REPORTING AND CERTIFICATION REQUIREMENTS. Section
6.06 of the Agreement is hereby deleted in its entirety, and a new section 6.06
is added and inserted in its place as follows:
"6.06 REPORTING AND CERTIFICATION REQUIREMENTS: Deliver or cause to
be delivered to the Bank in form and detail satisfactory to the Bank:
(a) Not later than ninety days after the end of each of the
Borrower's fiscal years, a copy of (1) the annual audited financial
report of the Borrower for such year with an unqualified opinion from a
firm of certified public accountants acceptable to Bank; (2) the annual
consolidated and consolidating financial report of the Borrower for such
year prepared by the Borrower; (3) the Borrower's Form 10K report filed
with the Securities and Exchange Commission for such year; and (4) a
copy of the certified public accountants management letters; and (4) the
Compliance Certificate certified by the chief financial officer of the
Borrower.
(b) Not later than thirty days after the end of each of the
Borrower's fiscal years, a copy of Borrower's annual financial forecast
for the succeeding fiscal year.
(c) Not later than forty-five days after the end of each of the
first three fiscal quarters of each fiscal year, a copy of the
Borrower's financial statement and Form 10Q filed with the Securities
and Exchange Commission as of the end of such period, and the Compliance
Certificate certified by the chief financial officer of the Borrower.
(d) Not later than 30 days after the end of each month, the
Borrower's consolidated and consolidating financial statement as of the
end of such period.
(e) Not later than 30 days after the end of each month, a
statement of any change in (i) reserves for billing and (ii) claims not
reimbursed by Medicare and the reasons therefore, maintained by any
hospital with whom the Borrower or any Guarantor contract for services.
(f) Not later than 30 days after the end of each month, (i) an
aging of accounts receivable indicating separately the amount of
Eligible Accounts and the amount of total accounts receivable which are
current, 1 to 30 days past the date of invoice, 31 to 60 days past the
date of invoice, and the amount over 60 days past the date of invoice
and an aging of accounts payable indicating the amount of such payables
which are current, 1 to 30 days past the date of invoice, 31 to 60 days
past the date of invoice and the amount over 60 days past the date of
invoice and (ii) a borrowing base certificate in a form acceptable to
Bank ("Borrowing Base Certificate"), executed by Borrower and certifying
the Value of the Borrowing Base as of the last day of the preceding
month.
(g) Promptly upon the Bank's request, such other information
pertaining to the Borrower, the Collateral or any guarantor hereunder as
the Bank may reasonably request."
9. MODIFICATION OF FINANCIAL CONDITION. Section 6.14(a) and (d) of
the Agreement are deleted in their entirety and the following is substituted in
lieu thereof:
"(a) A minimum Effective Tangible Net Worth of at least
$9,000,000 plus 50% of net profit after tax at each fiscal year
end.
(d) A ratio of current assets to current liabilities of not less
than 2.40 to 1."
-3-
<PAGE> 23
10. MODIFICATION OF CAPITAL EXPENSE. Section 6.16 of the
Agreement relating to Capital Expenses is hereby modified to increase the
permitted aggregate amount of capital expenditures from $600,000.00 to
$2,000,000.00.
11. MODIFICATION OF INDEMNIFICATION. Section 9.05 of the
Agreement relating to Borrower's indemnification of the Bank shall not include
any loss, liability, claim or expense incurred or suffered by Bank in connection
with the matters covered by such section 9.05 to the extent such loss,
liability, claim or expense arises as a direct result of Bank's gross negligence
or willful misconduct.
12. MODIFICATION OF EXPIRATION DATE. The Expiration Date defined
in subsection (I) of Section 1.01 of the Agreement is extended from August 30,
1997, to December 31, 1997, or the date of termination of the Bank's commitment
to lend under the Agreement, whichever shall first occur.
13. CONFIRMATION OF OTHER TERMS AND CONDITIONS OF THE AGREEMENT.
Except as specifically provided in this Amendment, all other terms, conditions
and covenants of the Agreement unaffected by this Amendment shall remain
unchanged and shall continue in full force and effect and the Borrower hereby
covenants and agrees to perform and observe all terms, covenants and agreements
provided for in the Agreement, as hereby amended.
IN WITNESS WHEREOF, this Amendment has been executed by the parties
hereto as of the date first hereinabove written.
BANK: BORROWER:
SANWA BANK CALIFORNIA PSYCHIATRIC MANAGEMENT RESOURCES, INC.
By: [SIG] By: /s/ Mark P. Clein
--------------------- ----------------------------------
Its: Vice President Loans Its: CFO
-------------------- ---------------------------------
By: /s/ SUSAN YEAGLEY SULLIVAN
----------------------------------
Its: Sr VP Finance
---------------------------------
-4-
<PAGE> 1
EXHIBIT 21.1
The following is a list of the subsidiaries of PMR Corporation:
<TABLE>
<CAPTION>
NAME: JURISDICTION OF ORGANIZATION:
- ---- ----------------------------
<S> <C>
Psychiatric Management Resources, Inc. California
Collaborative Care, Inc. California
PMR -- CD, Inc. California
Aldine -- CD, Inc. California
Twin Town Outpatient, a general partnership California
Collaborative Care Corporation Tennessee
</TABLE>
<PAGE> 1
EXHIBIT 23.2
CONSENT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
We consent to the reference to our firm under the caption "Experts" and to the
use of our report dated June 13, 1997, in the Registration Statement (Form S-2)
and related Prospectus of PMR Corporation for the registration of 2,000,000
shares of its common stock.
We also consent to the incorporation by reference therein of our report dated
June 13, 1997 with respect to the financial statement schedules of PMR
Corporation for the years ended April 30, 1995, 1996, and 1997 included in the
Annual Report (Form 10-K) of PMR Corporation for the year ended April 30, 1997
filed with the Securities and Exchange.
/s/ ERNST & YOUNG LLP
-------------------------------
ERNST & YOUNG LLP
San Diego, California
September 23, 1997
