<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON AUGUST 25, 1998
REGISTRATION NO. 333-
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
FORM S-4
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
------------------------
PMR CORPORATION
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
<TABLE>
<S> <C> <C>
DELAWARE 8093 23-2491707
(STATE OR OTHER JURISDICTION OF (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) CLASSIFICATION CODE NUMBER) IDENTIFICATION NUMBER)
</TABLE>
PMR CORPORATION
501 WASHINGTON STREET, 5TH FLOOR
SAN DIEGO, CALIFORNIA 92103
TELEPHONE: (619) 610-4001
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF
REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
ALLEN TEPPER
CHAIRMAN OF THE BOARD AND CHIEF EXECUTIVE OFFICER
PMR CORPORATION
501 WASHINGTON STREET, 5TH FLOOR
SAN DIEGO, CALIFORNIA 92103
TELEPHONE: (619) 610-4001
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE,
OF AGENT FOR SERVICE)
COPIES TO:
<TABLE>
<S> <C>
JEREMY D. GLASER, ESQ. WILLIAM F. CARPENTER III, ESQ.
COOLEY GODWARD LLP WALLER LANSDEN DORTCH & DAVIS, PLLC
4365 EXECUTIVE DRIVE, SUITE 1100 511 UNION STREET, SUITE 2100
SAN DIEGO, CALIFORNIA 92103 NASHVILLE, TENNESSEE 37219
TELEPHONE: (619) 550-6000 TELEPHONE: (615) 244-6380
</TABLE>
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC:
As promptly as practicable after this Registration Statement becomes effective
and after the effective time of the proposed Merger described in this
Registration Statement.
If the securities being registered on this Form are to be offered in
connection with the formation of a holding company and there is compliance with
General Instruction G, 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 the earlier effective
registration statement for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(d)
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. [ ]
CALCULATION OF REGISTRATION FEE
<TABLE>
<S> <C> <C> <C> <C>
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TITLE OF EACH CLASS OF PROPOSED MAXIMUM PROPOSED MAXIMUM
SECURITIES AMOUNT TO BE OFFERING PRICE AGGREGATE AMOUNT OF
TO BE REGISTERED REGISTERED PER SHARE OFFERING PRICE REGISTRATION FEE
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Common Stock, $0.01 par
value....................... 2,663,195 shares(1) $13.58(2) $36,159,000 $10,666.91
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</TABLE>
(1) Represents the maximum number of shares of Common Stock of the Registrant,
including shares issuable upon exercise of options, which may be issued to
the former stockholders of Behavioral Healthcare Corporation pursuant to the
merger described herein.
(2) Pursuant to Rule 457(f)(2) and (3) under the Securities Act of 1933, as
amended, the registration fee has been calculated by multiplying the
Proposed Maximum Offering Price by .000295. The Proposed Maximum Aggregate
Offering Price is equal to the aggregate book value of the capital stock of
Behavioral Healthcare Corporation computed as of April 30, 1998,
($129,659,000) minus the amount of cash ($93,500,000) to be paid by
registrant in exchange for the capital stock of Behavioral Healthcare
Corporation in the merger. The Proposed Maximum Offering Price Per Share is
equal to the Proposed Maximum Aggregate Offering Price divided by the number
of shares being registered hereby.
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 SAID SECTION 8(a),
MAY DETERMINE.
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<PAGE> 2
PMR CORPORATION
501 WASHINGTON STREET, 5TH FLOOR
SAN DIEGO, CALIFORNIA 92103
, 1998
DEAR FELLOW STOCKHOLDER:
You are cordially invited to attend the Annual Meeting of Stockholders (the
"Annual Meeting") of PMR Corporation, a Delaware corporation ("PMR"), which will
be held on , 1998 at o'clock a.m., local time, at
PMR's offices at 501 Washington Street, 5th Floor, San Diego, California. At the
Annual Meeting, you will be asked to consider and vote upon (i) the merger (the
"Merger") of BHC Acquisition Corp. a Delaware corporation and wholly owned
subsidiary of PMR ("PMR Sub"), with and into Behavioral Healthcare Corporation,
a Delaware corporation ("BHC"), pursuant to an Agreement and Plan of Merger,
dated July 30, 1998 (the "Merger Agreement"), pursuant to which, among other
things, PMR Sub will cease to exist and BHC will survive as a wholly owned
subsidiary of PMR (collectively, the "Merger Proposal"), (ii) the election of
two directors to hold office until the 2001 Annual Meeting of Stockholders,
(iii) the name change of PMR to "Bragen Health Solutions, Inc.," (iv) the
amendment of PMR's 1997 Equity Incentive Plan (the "Incentive Plan"), as
amended, to increase the aggregate number of shares of Common Stock authorized
for issuance under such plan by 1,000,000 shares and to extend the term of the
Incentive Plan until February 1, 2008, and (v) the ratification of the selection
of Ernst & Young LLP as independent auditors of PMR for its fiscal year ending
April 30, 1999.
As a result of the Merger, each outstanding share of BHC Common Stock and
each share of BHC Series A Preferred Stock (other than shares of BHC Common
Stock or Series A Preferred Stock owned by Vencor, Inc. or its affiliates (the
"Vencor Shares") or any shares of BHC Common Stock owned by BHC or any direct or
indirect wholly owned subsidiary of BHC) (collectively, the "Converted Shares")
will be converted into the right to receive: (i) 0.3401 of a share of PMR Common
Stock (the "Exchange Ratio"), (ii) cash in an amount equal to $28,500,000
divided by the number of Converted Shares outstanding (the "Outstanding Shares")
immediately prior to the effective time of the Merger (the "Effective Time"),
and (iii) an unsecured subordinated promissory note of PMR in an amount equal to
$925,000 divided by the Outstanding Shares. The Vencor Shares shall be converted
into the right to receive $65,000,000 in cash in the aggregate. In addition,
certain outstanding options to acquire BHC Common Stock under BHC's 1993 Stock
Plan that are not repurchased pursuant to the Merger Agreement will be converted
as a result of the Merger into equivalent options for PMR Common Stock, based
upon the Exchange Ratio. If the requisite approval of the stockholders of PMR
and the stockholders of BHC is received and other conditions to the Merger are
satisfied or waived, the Merger is expected to be consummated on or promptly
after , 1998.
In the material accompanying this letter, you will find a Notice of Annual
Meeting of Stockholders and a Prospectus/Joint Proxy Statement relating to the
actions to be taken by PMR stockholders at the Annual Meeting. THE
PROSPECTUS/JOINT PROXY STATEMENT MORE FULLY DESCRIBES THE PROPOSED MERGER AND
THE OTHER PROPOSALS SUBMITTED HEREBY AND INCLUDES INFORMATION ABOUT PMR AND BHC.
I URGE YOU TO READ THE PROSPECTUS/JOINT PROXY STATEMENT CAREFULLY.
After careful consideration, your Board of Directors has unanimously
approved the Merger and the transactions relating thereto and has concluded that
these proposals are in the best interests of PMR and its stockholders. In
addition, in connection with its approval of the proposed Merger, the Board of
Directors has received a written opinion from its financial advisor, SunTrust
Equitable Securities ("SunTrust Equitable"), to the effect that the Exchange
Ratio and the merger consideration is fair, from a financial point of view, to
the stockholders of PMR. A copy of SunTrust Equitable's written opinion, which
sets forth a description of the assumptions made, matters considered and
limitations of SunTrust Equitable's review, is attached to the accompanying
Prospectus/Joint Proxy Statement as Appendix B, and PMR stockholders are urged
to read carefully the opinion in its entirety.
YOUR BOARD OF DIRECTORS HAS DETERMINED THAT THE TERMS OF THE MERGER AND THE
TRANSACTIONS CONTEMPLATED THEREBY ARE FAIR TO, AND IN THE BEST
<PAGE> 3
INTERESTS OF, PMR AND THE PMR STOCKHOLDERS. YOUR BOARD OF DIRECTORS UNANIMOUSLY
RECOMMENDS THAT THE STOCKHOLDERS OF PMR APPROVE THE MERGER, THE ELECTION OF THE
DIRECTORS, THE CORPORATE NAME CHANGE AND THE INCREASE IN SHARES AUTHORIZED FOR
ISSUANCE UNDER THE 1997 EQUITY INCENTIVE PLAN, AND RATIFY THE SELECTION OF ERNST
& YOUNG LLP AS INDEPENDENT AUDITORS, ALL AS DESCRIBED IN THE PROSPECTUS/JOINT
PROXY STATEMENT.
Approval of the Merger Agreement and the Merger and the issuance by PMR of
shares of PMR Common Stock in connection therewith, requires the affirmative
vote of the holders of a majority of the shares of PMR Common Stock present (in
person or by proxy) and entitled to vote at the Annual Meeting. As a group, all
executive officers and directors of PMR own in the aggregate approximately 30.9%
of the outstanding PMR Common Stock.
I urge you to vote FOR approval of the Merger, the election of the
directors, the corporate name change, the increase in shares authorized for
issuance under the 1997 Equity Incentive Plan, and to ratify the selection of
Ernst & Young as independent auditors, all as described in the Prospectus/Joint
Proxy Statement. On behalf of your Board of Directors, thank you for your
support.
Sincerely,
Allen Tepper
Chairman of the Board and
Chief Executive Officer
<PAGE> 4
PMR CORPORATION
501 WASHINGTON STREET, 5TH FLOOR
SAN DIEGO, CALIFORNIA 92103
------------------------
NOTICE OF ANNUAL MEETING OF STOCKHOLDERS
TO BE HELD ON , 1998
NOTICE IS HEREBY GIVEN that the Annual Meeting of Stockholders (the "Annual
Meeting") of PMR Corporation, a California corporation ("PMR"), will be held on
, 1998 at o'clock a.m., local time, at
PMR's offices at 501 Washington Street, 5th Floor, San Diego, California.
The Annual Meeting is for the following purposes:
1. To consider and vote upon a proposal to approve the merger of BHC
Acquisition Corp., a Delaware corporation and wholly owned subsidiary of
PMR ("PMR Sub"), with and into Behavioral Healthcare Corporation, a
Delaware corporation ("BHC"), pursuant to an Agreement and Plan of Merger,
dated July 30, 1998, (the "Merger Agreement") among PMR, PMR Sub and BHC,
and pursuant to which, among other things, PMR Sub will cease to exist and
BHC will survive as a wholly owned subsidiary of PMR (the "Merger"). As a
result of the Merger, each outstanding share of BHC Common Stock and each
share of BHC Series A Preferred Stock (other than shares of BHC Common
Stock or Series A Preferred Stock owned by Vencor, Inc. or its affiliates
(the "Vencor Shares") or any shares of BHC Common Stock owned by BHC or any
direct or indirect wholly owned subsidiary of BHC) (collectively, the
"Converted Shares") will be converted into the right to receive (i) 0.3401
of a share of PMR Common Stock (the "Exchange Ratio"), (ii) cash in an
amount equal to $28,500,000 divided by the number of Converted Shares
outstanding (the "Outstanding Shares") immediately prior to the effective
time of the Merger (the "Effective Time"), and (iii) an unsecured
subordinated promissory note of PMR in an amount equal to $925,000 divided
by the Outstanding Shares. The Vencor Shares shall be converted into the
right to receive $65,000,000 in cash in the aggregate. In addition, certain
outstanding options to acquire BHC Common Stock under BHC's 1993 Stock Plan
that are not repurchased pursuant to the Merger Agreement will be converted
as a result of the Merger into equivalent options for PMR Common Stock,
based upon the Exchange Ratio.
2. To elect two directors to hold office until the 2001 Annual Meeting
of Stockholders.
3. To approve the name change of PMR to "Bragen Health Solutions,
Inc."
4. To approve PMR's 1997 Equity Incentive Plan (the "Incentive Plan"),
as amended, to increase to aggregate number of shares of Common Stock
authorized for issuance under such plan by 1,000,000 shares and to extend
the term of the Incentive Plan until February 1, 2008.
5. To ratify the Selection of Ernst & Young LLP as independent
auditors of PMR for its fiscal year ending April 30, 1999.
6. To transact such other business as may properly come before the
meeting or any adjournment or postponement thereof.
The foregoing items of business are more fully described in the
Prospectus/Joint Proxy Statement accompanying this Notice.
THE BOARD OF DIRECTORS OF PMR UNANIMOUSLY RECOMMENDS THAT YOU VOTE FOR ALL
OF THE PROPOSALS DESCRIBED ABOVE.
Only holders of record of PMR Common Stock at the close of business on
August 17, 1998 are entitled to notice of, and will be entitled to vote at, the
Annual Meeting or any adjournment or postponement thereof.
BY ORDER OF THE BOARD OF DIRECTORS
Allen Tepper
Chairman of the Board and
Chief Executive Officer
San Diego, California
, 1998
<PAGE> 5
BEHAVIORAL HEALTHCARE CORPORATION
102 WOODMONT BOULEVARD, SUITE 800
NASHVILLE, TENNESSEE 37205
, 1998
Dear Fellow Stockholder:
You are cordially invited to attend a Special Meeting of Stockholders (the
"BHC Special Meeting") of Behavioral Healthcare Corporation, a Delaware
corporation ("BHC"), which will be held on , 1998 at
o'clock a.m., local time, at BHC's offices at 102 Woodmont
Boulevard, Suite 800, Nashville, Tennessee.
At the BHC Special Meeting, you will be asked to consider and vote upon a
proposal to (i) approve and adopt an Agreement and Plan of Merger dated July 30,
1998 (the "Merger Agreement"), among BHC, PMR Corporation, a Delaware
corporation ("PMR"), and BHC Acquisition Corp., a Delaware corporation and a
wholly owned subsidiary of PMR ("PMR Sub"), and (ii) approve the merger of PMR
Sub with and into BHC, pursuant to which, among other things, PMR Sub will cease
to exist and BHC will survive as a wholly owned subsidiary of PMR (the
"Merger"). As a result of the Merger, each outstanding share of BHC Common Stock
and each share of BHC Series A Preferred Stock (other than shares of BHC Common
Stock or Series A Preferred Stock owned by Vencor, Inc. or its affiliates (the
"Vencor Shares") or any shares of BHC Common Stock owned by BHC or any direct or
indirect wholly owned subsidiary of BHC) (collectively, the "Converted Shares")
will be converted into the right to receive: (i) 0.3401 of a share of PMR Common
Stock (the "Exchange Ratio"), (ii) cash in an amount equal to $28,500,000
divided by the number of Converted Shares outstanding (the "Outstanding Shares")
immediately prior to the effective time of the Merger (the "Effective Time"),
and (iii) an unsecured subordinated promissory note of PMR in an amount equal to
$925,000 divided by the Outstanding Shares. The Vencor Shares shall be converted
into the right to receive $65,000,000 in cash in the aggregate. In addition,
certain outstanding options to acquire BHC Common Stock under BHC's 1993 Stock
Plan that are not repurchased pursuant to the Merger Agreement will be converted
as a result of the Merger into equivalent options for PMR Common Stock, based
upon the Exchange Ratio. If the requisite approval of the stockholders of PMR
and the stockholders of BHC is received and other conditions to the Merger are
satisfied or waived, the Merger is expected to be consummated on or promptly
after , 1998.
ADDITIONAL INFORMATION REGARDING THE MERGER AND THE MERGER AGREEMENT IS SET
FORTH IN THE ACCOMPANYING PROSPECTUS/JOINT PROXY STATEMENT AND THE APPENDICES
THERETO, WHICH YOU ARE URGED TO READ CAREFULLY IN THEIR ENTIRETY.
YOUR BOARD OF DIRECTORS HAS CAREFULLY CONSIDERED THE TERMS AND CONDITIONS
OF THE MERGER AND DETERMINED THAT THE TERMS OF THE MERGER AGREEMENT AND THE
MERGER ARE FAIR TO, AND IN THE BEST INTERESTS OF, BHC AND THE BHC STOCKHOLDERS.
ACCORDINGLY, THE BOARD RECOMMENDS THAT BHC STOCKHOLDERS VOTE FOR THE APPROVAL
AND ADOPTION OF THE MERGER AGREEMENT AND THE MERGER.
Approval of the Merger Agreement and the Merger requires the affirmative
vote of the holders of a majority of the outstanding shares of BHC Common Stock
and Series A Preferred Stock, voting as separate classes. Certain executive
officers, directors and stockholders of BHC owning in the aggregate
approximately 89% of the outstanding BHC Common Stock and 100% of the
outstanding Series A Preferred Stock have each agreed to vote or direct the vote
of all BHC Common Stock and Series A Preferred Stock over which they have voting
power or control in favor of the Merger Agreement and the Merger. As a result,
approval of the Merger by the BHC stockholders is assured.
In view of the importance of the action to be taken at this BHC Special
Meeting, we urge you to review carefully the accompanying Notice of Special
Meeting of Stockholders and the Prospectus/Joint Proxy Statement, including the
appendices thereto, which also include information on PMR, BHC and the Merger.
Whether or not you expect to attend the BHC Special Meeting, please complete,
sign and date the enclosed proxy and return it as promptly as possible.
Sincerely,
Edward A. Stack
President and Chief Executive Officer
<PAGE> 6
BEHAVIORAL HEALTHCARE CORPORATION
102 WOODMONT BOULEVARD, SUITE 800
NASHVILLE, TENNESSEE 37205
------------------------
NOTICE OF SPECIAL MEETING OF STOCKHOLDERS
TO BE HELD ON , 1998
NOTICE IS HEREBY GIVEN that a special meeting of the stockholders (the "BHC
Special Meeting") of Behavioral Healthcare Corporation, a Delaware corporation
("BHC"), will be held on , 1998, at o'clock a.m.,
local time, at BHC's offices at 102 Woodmont Boulevard, Suite 800, Nashville,
Tennessee.
The BHC Special Meeting is for the following purposes:
1. To consider and vote upon a proposal to (i) approve and adopt an
Agreement and Plan of Merger dated July 30, 1998 (the "Merger
Agreement"), among BHC, PMR Corporation, a Delaware corporation ("PMR"),
and BHC Acquisition Corp., a Delaware corporation and a wholly owned
subsidiary of PMR ("PMR Sub"), and (ii) approve the merger of PMR Sub
with and into BHC, pursuant to which, among other things, PMR Sub will
cease to exist and BHC will survive as a wholly owned subsidiary of PMR
(the "Merger"). As a result of the Merger, each outstanding share of BHC
Common Stock and each share of Series A Preferred Stock (other than
shares of BHC Common Stock or Series A Preferred Stock owned by Vencor,
Inc. or its affiliates (the "Vencor Shares") or any shares of BHC Common
Stock owned by BHC or any direct or indirect wholly owned subsidiary of
BHC) (collectively, the "Converted Shares") will be converted into the
right to receive: (i) 0.3401 of a share of PMR Common Stock (the
"Exchange Ratio"), (ii) cash in an amount equal to $28,500,000 divided by
the number of Converted Shares outstanding (the "Outstanding Shares")
immediately prior to the effective time of the Merger (the "Effective
Time"), and (iii) an unsecured subordinated promissory note of PMR in an
amount equal to $925,000 divided by the Outstanding Shares. The Vencor
Shares shall be converted into the right to receive $65,000,000 in cash
in the aggregate. In addition, certain outstanding options to acquire BHC
Common Stock under BHC's 1993 Stock Plan that are not repurchased
pursuant to the Merger Agreement will be converted as a result of the
Merger into equivalent options for PMR Common Stock, based upon the
Exchange Ratio.
The foregoing items of business are more fully described in the
Prospectus/Joint Proxy Statement accompanying this Notice.
THE BOARD OF DIRECTORS OF BHC UNANIMOUSLY RECOMMENDS THAT YOU VOTE FOR THE
PROPOSAL DESCRIBED ABOVE.
Only the holders of record of BHC Common Stock and Series A Preferred Stock
at the close of business on August 17, 1998 are entitled to notice of, and will
be entitled to vote at, the Special Meeting or at any adjournment or
postponement thereof.
BY ORDER OF THE BOARD OF DIRECTORS
Edward A. Stack
President and Chief Executive Officer
Nashville, Tennessee
, 1998
<PAGE> 7
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.
PRELIMINARY PROSPECTUS, SUBJECT TO COMPLETION DATED AUGUST 25, 1998
PROSPECTUS
PMR CORPORATION
PROSPECTUS
------------------------
PMR CORPORATION
AND
BEHAVIORAL HEALTHCARE CORPORATION
JOINT PROXY STATEMENT
This Prospectus/Joint Proxy Statement is being furnished to the
stockholders of PMR Corporation, a Delaware corporation ("PMR"), on behalf of
the PMR Board of Directors (the "PMR Board") for use at the Annual Meeting of
Stockholders of PMR to be held on , 1998 at o'clock a.m., local
time, at PMR's offices at 501 Washington Street, 5th Floor, San Diego,
California, and at any adjournments or postponements thereof (the "PMR
Meeting").
This Prospectus/Joint Proxy Statement is also being furnished to the
stockholders of Behavioral Healthcare Corporation, a Delaware corporation
("BHC"), on behalf of the BHC Board of Directors (the "BHC Board") for use at
the Special Meeting of Stockholders of BHC to be held on , 1998 at
o'clock a.m., local time, at BHC's offices at 102 Woodmont Boulevard, Suite
800, Nashville, Tennessee, and at any adjournments or postponements thereof (the
"BHC Meeting").
The PMR Meeting and the BHC Meeting are being called in connection with the
proposed merger of BHC Acquisition Corp., a Delaware corporation and a wholly
owned subsidiary of PMR ("PMR Sub"), with and into BHC (the "Merger"), pursuant
to an Agreement and Plan of Merger (the "Merger Agreement"), dated July 30,
1998, among PMR, PMR Sub and BHC. The Merger will be consummated on the terms
and subject to the conditions set forth in the Merger Agreement, as a result of
which (i) PMR Sub will cease to exist and BHC will survive as a wholly owned
subsidiary of PMR and (ii) each outstanding share of BHC Common Stock and each
share of BHC Series A Preferred Stock (other than any shares of BHC Common Stock
or Series A Preferred Stock owned by Vencor, Inc. ("Vencor") or its affiliates
(the "Vencor Shares") or any shares of BHC Common Stock owned by BHC or any
direct or indirect wholly owned subsidiary of BHC) (collectively, the "Converted
Shares") will be converted into the right to receive (i) 0.3401 of a share of
PMR Common Stock (the "Exchange Ratio"), (ii) a cash amount equal to $28,500,000
divided by the number of Converted Shares outstanding (the "Outstanding Shares")
immediately prior to the effective time of the Merger (the "Effective Time"),
and (iii) an unsecured promissory note of PMR in an amount equal to $925,000
divided by the number of Outstanding Shares. The Vencor Shares shall be
converted into the right to receive $65,000,000 in cash in the aggregate. In
addition, certain outstanding options to acquire BHC Common Stock under BHC's
1993 Stock Plan that are not repurchased pursuant to the Merger Agreement will
be converted as a result of the Merger into equivalent options for PMR Common
Stock, based upon the Exchange Ratio.
------------------------
NO PERSON HAS BEEN AUTHORIZED BY PMR OR BHC TO GIVE ANY INFORMATION OR TO
MAKE ANY REPRESENTATION OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS/JOINT
PROXY STATEMENT IN CONNECTION WITH THE SOLICITATION OF PROXIES OR THE OFFERING
OF SECURITIES MADE HEREBY, AND, IF GIVEN OR MADE, ANY SUCH INFORMATION OR
REPRESENTATION MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY PMR, BHC OR
ANY OTHER PERSON. THIS PROSPECTUS/ JOINT PROXY STATEMENT DOES NOT CONSTITUTE AN
OFFER TO SELL OR A SOLICITATION OF AN OFFER TO BUY ANY SECURITIES OR THE
SOLICITATION OF A PROXY IN ANY JURISDICTION WHERE, OR TO ANY PERSON TO WHOM, IT
WOULD BE UNLAWFUL TO MAKE SUCH AN OFFER OR SOLICITATION.
NEITHER THE DELIVERY OF THIS PROSPECTUS/JOINT PROXY STATEMENT NOR ANY
DISTRIBUTION OF THE SECURITIES TO WHICH THIS PROSPECTUS/JOINT PROXY STATEMENT
RELATES SHALL, UNDER ANY CIRCUMSTANCES, CREATE AN IMPLICATION THAT THERE HAS
BEEN NO CHANGE IN THE INFORMATION CONTAINED HEREIN SINCE THE DATE HEREOF.
------------------------
THE DATE OF THIS PROSPECTUS/JOINT PROXY STATEMENT IS , 1998.
<PAGE> 8
PMR Common Stock is included on the Nasdaq National Market ("Nasdaq") under
the symbol "PMRP." It is a condition of the obligations of PMR and BHC to
consummate the Merger that the shares of PMR Common Stock to be issued in the
Merger be approved for inclusion on Nasdaq.
Because the Exchange Ratio is fixed, changes in the market price of PMR
Common Stock will affect the dollar value of the PMR Common Stock to be received
by BHC stockholders in the Merger. As a result, the exact value of the shares of
PMR Common Stock to be received by BHC stockholders in the Merger will not be
known at the time of the PMR Meeting and the BHC Meeting. Stockholders of PMR
and BHC are encouraged to obtain current market quotations for PMR Common Stock
prior to the PMR Meeting and BHC Meeting.
This Prospectus/Joint Proxy Statement also constitutes the Prospectus of
PMR with respect to the shares of PMR Common Stock to be issued in the Merger in
exchange for outstanding shares of BHC Common Stock. The combination of (i) an
aggregate of 2,600,000 shares of PMR Common Stock, (ii) cash in an amount equal
to $28,500,000 divided by the number of Outstanding Shares and (iii) an
unsecured subordinated promissory note from PMR in an amount equal to $925,000
divided by the number of Outstanding Shares (the "Merger Consideration") will be
issued in the Merger. The Vencor Shares shall be converted into the right to
receive $65,000,000 in cash in the aggregate. In addition, certain outstanding
options to acquire BHC Common Stock under BHC's 1993 Stock Plan that are not
repurchased pursuant to the Merger Agreement will be converted as a result of
the Merger into options to acquire up to a maximum of approximately 63,195
shares of PMR Common Stock.
If the requisite approvals of the stockholders of PMR and the stockholders
of BHC are received and other conditions to the Merger are satisfied or waived,
the Merger is expected to be consummated on or promptly after , 1998
(the "Closing").
All information contained or incorporated by reference in this
Prospectus/Joint Proxy Statement relating to PMR or PMR Sub has been supplied by
PMR, and all information contained in this Prospectus/Joint Proxy Statement
relating to BHC has been supplied by BHC.
This Prospectus/Joint Proxy Statement is first being mailed to stockholders
of PMR and BHC on or about , 1998.
THE ABOVE MATTERS ARE DISCUSSED IN DETAIL IN THIS PROSPECTUS/JOINT PROXY
STATEMENT. THE PROPOSED MERGER IS A COMPLEX TRANSACTION. STOCKHOLDERS OF PMR AND
STOCKHOLDERS OF BHC ARE STRONGLY URGED TO READ AND CONSIDER CAREFULLY THIS
PROSPECTUS/JOINT PROXY STATEMENT IN ITS ENTIRETY.
SEE "RISK FACTORS," BEGINNING ON PAGE 14, FOR ADDITIONAL FACTORS THAT
SHOULD BE CONSIDERED BY STOCKHOLDERS OF BHC AND STOCKHOLDERS OF PMR.
------------------------
THE SHARES OF PMR COMMON STOCK TO BE ISSUED IN THE MERGER 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/JOINT PROXY STATEMENT. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
<PAGE> 9
TABLE OF CONTENTS
<TABLE>
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AVAILABLE INFORMATION....................................... iv
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE............. iv
SUMMARY..................................................... 1
RISK FACTORS................................................ 14
Integration of Operations................................. 14
Additional Shares to be Issued by PMR; Shares Eligible for
Future Sale, Dilutive Effect to PMR Stockholders....... 14
Deterrent Effect of Termination; Provisions and Other
Agreements............................................. 15
Fixed Exchange Ratio...................................... 15
Rights of Holders of BHC Common Stock Following the
Merger................................................. 15
Regulatory Matters........................................ 15
Substantial Leverage and Debt Service Obligations......... 16
Dependence Upon Medicare, Medicaid and Other Third Party
Reimbursements......................................... 16
State and Federal Anti-Kickback and Self-Referral Laws.... 18
Federal and State False Claims Act........................ 19
Fraud and Abuse Related to CHAMPUS........................ 21
Impact of Health Care Reform and the Balanced Budget Act
of 1997................................................ 21
Sufficiency of Existing Reserves to Cover Reimbursement
Risks.................................................. 21
Continuity of Management Contracts........................ 22
Dispute Under TennCare Program............................ 22
Licensure and Certification............................... 23
Risks Associated with Acquisitions........................ 23
Management of Rapid Growth................................ 24
Dependence on Healthcare Professionals.................... 24
Dependence on Key Personnel............................... 24
Competition............................................... 24
Availability and Adequacy of Insurance.................... 25
Shares Eligible for Sale.................................. 25
Possible Volatility of Stock Price........................ 25
Anti-Takeover Provisions.................................. 25
Year 2000 Compliance...................................... 26
THE PMR MEETING............................................. 26
THE BHC MEETING............................................. 28
APPROVAL OF THE MERGER AND RELATED TRANSACTIONS............. 29
Background of the Merger.................................. 29
PMR's Reasons for the Merger.............................. 33
Disease Management Strategy for Neurological Disorders.... 33
Revenue Enhancement Potential............................. 34
Potential Cost Savings.................................... 34
Impact on PMR Earnings Per Share.......................... 34
PMR Board Recommendation.................................. 35
BHC's Reasons for the Merger.............................. 35
BHC Board Recommendation.................................. 36
Opinion of SunTrust Equitable Securities Corporation...... 36
Interest of Certain Persons in the Merger................. 42
Regulatory Matters........................................ 42
</TABLE>
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Certain Federal Income Tax Matters........................ 43
Accounting Treatment...................................... 45
Appraisal Rights of BHC Stockholders...................... 45
No Appraisal Rights of PMR Stockholders................... 47
TERMS OF THE MERGER......................................... 48
Effective Time............................................ 48
Manner and Basis for Converting Shares.................... 48
Effect of the Merger...................................... 49
Treatment of Employee Equity Benefit Plans................ 50
Stock Ownership Following the Merger...................... 50
Representations and Warranties............................ 50
Covenants................................................. 50
Indemnification and Reimbursement......................... 52
No Solicitation........................................... 52
Conditions to the Merger.................................. 53
Termination of the Merger Agreement....................... 55
Effect of Termination..................................... 55
Break-Up Fees............................................. 56
Merger Expenses and Fees and Other Costs.................. 56
Related Agreements........................................ 56
Affiliates' Restrictions on Sale of PMR Common Stock...... 57
Financing................................................. 57
PRO FORMA CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)............................................... 58
ELECTION OF PMR DIRECTORS................................... 64
APPROVAL OF PMR NAME CHANGE TO BRAGEN HEALTH SOLUTIONS,
INC....................................................... 66
AMENDMENT TO THE 1997 EQUITY INCENTIVE PLAN TO INCREASE
SHARES.................................................... 66
RATIFICATION OF SELECTION OF INDEPENDENT AUDITORS........... 72
PMR SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT................................................ 73
Section 16(a) Beneficial Ownership Reporting Compliance... 74
EXECUTIVE COMPENSATION...................................... 75
Compensation of PMR Directors............................. 75
Outside Directors' Non-Qualified Stock Option Plan of
1992................................................... 75
1997 Equity Incentive Plan................................ 75
COMPENSATION PURSUANT TO PLANS.............................. 76
Compensation of Executive Officers........................ 76
Stock Option Grants and Exercises......................... 77
Aggregated Option Exercises in Last Fiscal Year, and
Fiscal Year End Option Values.......................... 77
EMPLOYMENT AGREEMENTS....................................... 77
REPORT OF THE COMPENSATION COMMITTEE OF THE PMR BOARD OF
DIRECTORS ON EXECUTIVE COMPENSATION....................... 77
Executive Officer Compensation Program.................... 77
CEO Compensation.......................................... 79
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER
PARTICIPATION............................................. 79
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.............. 79
PERFORMANCE MEASUREMENT COMPARISON.......................... 80
OTHER MATTERS............................................... 80
INFORMATION WITH RESPECT TO PMR............................. 80
</TABLE>
ii
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PMR BUSINESS................................................ 81
MARKET PRICE OF AND DIVIDENDS ON PMR'S COMMON EQUITY AND
RESTATED
STOCKHOLDER MATTERS....................................... 81
SELECTED FINANCIAL DATA AND SUPPLEMENTAL FINANCIAL
INFORMATION............................................... 81
MANAGEMENT DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS................................. 81
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS AND FINANCIAL
DISCLOSURE................................................ 81
BHC BUSINESS................................................ 82
BHC DIRECTORS AND EXECUTIVE OFFICERS........................ 90
BHC MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS....................... 93
BHC MANAGEMENT.............................................. 98
BHC PRINCIPAL STOCKHOLDERS.................................. 99
DESCRIPTION OF CAPITAL STOCK................................ 101
COMPARISON OF RIGHTS OF PMR STOCKHOLDERS AND BHC
STOCKHOLDERS.............................................. 102
EXPERTS..................................................... 105
LEGAL MATTERS............................................... 105
INDEX TO FINANCIAL STATEMENTS............................... F-1
</TABLE>
THE FOLLOWING APPENDICES ALSO CONSTITUTE PART OF THIS PROSPECTUS/JOINT PROXY
STATEMENT:
Appendix A -- Agreement and Plan of Merger and Reorganization
Appendix B -- Opinion of SunTrust Equitable Securities Corporation
Appendix C -- Section 262 of the Delaware General Corporation Law
iii
<PAGE> 12
AVAILABLE INFORMATION
PMR is subject to the informational requirements of the Securities Exchange
Act of 1934, as amended (the "Exchange Act"), and, in accordance therewith,
files reports, proxy statements and other information with the Securities and
Exchange Commission (the "Commission"). Such reports, proxy statements and other
information may be inspected and copied at the Public Reference Room maintained
by the Commission at 450 Fifth Street, N.W., Washington, D.C. 20549, and at the
Commission's regional offices at 500 West Madison Street, Suite 1400, Chicago,
Illinois 60661 and 7 World Trade Center, Suite 1300, New York, New York 10048.
The public may obtain information on the operation of the Public Reference Room
by calling the Commission at 1-800-SEC-0330. In addition, registration
statements and certain other filings made with the Commission through its
Electronic Data Gathering, Analysis and Retrieval ("EDGAR") system are publicly
available through the Commission's site on the World Wide Web, located at
http://www.sec.gov.
Under the rules and regulations of the Commission, the solicitation of
proxies from stockholders of BHC to approve the Merger Proposal (defined below)
constitutes an offering of the PMR Common Stock to be issued in connection with
the Merger. Accordingly, PMR has filed with the Commission a Registration
Statement on Form S-4 under the Securities Act of 1933, as amended (the
"Securities Act"), with respect to such offering (as amended from time to time,
the "Registration Statement"). This Prospectus/Joint Proxy Statement constitutes
the prospectus of PMR that is filed as part of the Registration Statement. Other
parts of the Registration Statement are omitted from this Prospectus/Joint Proxy
Statement in accordance with the rules and regulations of the Commission. The
Registration Statement, including exhibits thereto and amendments thereof, has
been filed with the Commission through the EDGAR system. In addition, such
reports, proxy statements and other information concerning PMR can be inspected
at the Nasdaq Stock Market, 1735 K Street, N.W., Washington, D.C. 20006. Copies
of the Registration Statement, including the exhibits thereto and amendments
thereof and other material that is not included herein, may be inspected,
without charge, at the offices of the Commission or on the EDGAR system referred
to above.
Statements made in this Prospectus/Joint Proxy Statement concerning the
contents of any contract, agreement or other document accurately describe the
material provisions of such contract, agreement or other document but are not
necessarily complete. With respect to each contract or other document filed as
an exhibit to the Registration Statement or attached as an appendix to the
Prospectus/Joint Proxy Statement or otherwise filed with the Commission,
reference is hereby made to that exhibit or appendix for a more complete
description of the matter involved, and each such statement is hereby qualified
in its entirety by such reference.
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
The following documents previously filed with the Commission by PMR
pursuant to the Exchange Act (File No. 0-20488) or filed herewith and attached
hereto are incorporated by reference in this Prospectus/Joint Proxy Statement:
1. PMR's Current Report on Form 8-K dated August 4, 1998*;
2. PMR's Annual Report on Form 10-K for the fiscal year ended April 30,
1998**;
3. PMR's Annual Report to Stockholders for the fiscal year ended April 30,
1998***.
- ---------------
* Previously filed.
** Previously filed and attached hereto.
*** Attached hereto.
Any statement contained in a document incorporated by reference herein
shall be deemed to be modified or superseded for purposes hereof to the extent
that a statement contained herein modifies or supersedes such previous
statement. Any statement so modified or superseded shall not be deemed to
constitute a part hereof except as so modified and superseded.
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<PAGE> 13
THIS PROSPECTUS/JOINT PROXY STATEMENT INCORPORATES DOCUMENTS BY REFERENCE
WHICH ARE NOT PRESENTED HEREIN OR DELIVERED HEREWITH. THESE DOCUMENTS (OTHER
THAN EXHIBITS TO SUCH DOCUMENTS, UNLESS SUCH EXHIBITS ARE SPECIFICALLY
INCORPORATED BY REFERENCE HEREIN) ARE AVAILABLE, WITHOUT CHARGE, UPON ORAL OR
WRITTEN REQUEST BY ANY PERSON TO WHOM THIS PROSPECTUS/JOINT PROXY STATEMENT HAS
BEEN DELIVERED FROM PMR CORPORATION, 501 WASHINGTON STREET, 5TH FLOOR, SAN
DIEGO, CALIFORNIA 92103, ATTENTION: MARK P. CLEIN, CHIEF FINANCIAL OFFICER;
TELEPHONE NUMBER: (619) 610-4001. IN ORDER TO ASSURE TIMELY DELIVERY OF THE
DOCUMENTS PRIOR TO THE BHC MEETING AND THE PMR MEETING, ANY SUCH REQUEST SHOULD
BE MADE BY , 1998.
------------------------
This Prospectus/Joint Proxy Statement contains trademarks and registered
trademarks of PMR, BHC and other companies.
v
<PAGE> 14
SUMMARY
The following is a summary of certain information contained elsewhere in
this Prospectus/Joint Proxy Statement. The summary does not contain a complete
description of the terms of the Merger and is qualified in its entirety by
reference to the full text of this Prospectus/Joint Proxy Statement and the
Appendices hereto. Stockholders of PMR and stockholders of BHC are urged to read
this Prospectus/Joint Proxy Statement and the Appendices in their entirety.
Except for the historical information contained herein, the discussion in
this Prospectus/Joint Proxy Statement contains forward-looking statements that
involve risks and uncertainties. PMR's, BHC's and the combined company's actual
results could differ materially from those discussed here. Factors that could
cause or contribute to such differences include, but are not limited to, those
discussed in the section entitled "Risk Factors" and elsewhere in this
Prospectus/Joint Proxy Statement and in the information and documents annexed
hereto or incorporated herein by reference.
GENERAL
This Prospectus/Joint Proxy Statement is being provided to stockholders of
PMR in connection with the proposed Merger of PMR Sub with and into BHC,
pursuant to which PMR Sub will cease to exist and BHC will survive the Merger as
a wholly owned subsidiary of PMR, the election of two directors to serve until
the 2001 Annual Meeting of Stockholders, the name change of PMR to "Bragen
Health Solutions, Inc.," the amendment of PMR's 1997 Equity Incentive Plan (the
"Incentive Plan") to increase the aggregate number of shares of Common Stock
authorized for issuance under such plan by 1,000,000 shares and to extend the
term of the Incentive Plan until February 1, 2008, and the ratification of the
selection of Ernst & Young LLP as independent auditors for PMR for the year
ending April 30, 1999. This Prospectus/Joint Proxy Statement is being provided
to stockholders of BHC in connection with the proposed Merger of PMR Sub with
and into BHC. The Merger will be effected pursuant to the Merger Agreement, a
copy of which is attached hereto as Appendix A.
THE PARTIES
PMR
PMR is a leading manager of specialized mental health care programs and
disease management services designed to treat individuals with a serious mental
illness, primarily schizophrenia and bi-polar disorder. PMR operates a broad
range of outpatient and community-based psychiatric services, consisting of 37
intensive outpatient programs, two case management programs and four chemical
dependency programs. In addition, PMR recently announced an agreement to form
Stadt Solutions LLC, a venture with Stadlander Drug Distribution Co., Inc. to
operate a specialty pharmacy program for individuals with mental illness. Upon
formation, Stadt Solutions LLC will operate 14 pharmacies.
PMR was incorporated in Delaware in 1988 and its principal executive
offices are located at 501 Washington Street, 5th Floor, San Diego, California
92103. Its telephone number is (619) 610-4001. PMR maintains a web site on the
World Wide Web at http://www.pmrcorp.com. Unless otherwise indicated, "PMR"
refers to PMR Corporation, a Delaware corporation, and its subsidiaries.
See "Risk Factors" for a discussion of the risks associated with the
ownership of PMR Common Stock, including risks related to the Merger.
PMR Sub
PMR Sub was incorporated in Delaware in January 1998. It is a wholly owned
subsidiary of PMR and has no material assets or liabilities and has not engaged
in any activities except in connection with the proposed Merger. PMR Sub's
executive offices are located at 501 Washington Street, 5th Floor, San Diego,
California 92103. Its telephone number is (619) 610-4001.
BHC
BHC is a provider of behavioral and psychiatric health care services.
Through its wholly owned subsidiaries, BHC owns and operates 43 psychiatric
facilities, including 38 acute care psychiatric facilities and
1
<PAGE> 15
five residential treatment centers. In addition, BHC operates 19 mobile crisis
services and 89 outpatient treatment centers in affiliation with, or under
license of, these facilities. BHC currently has over 3,500 licensed beds in its
facilities, which are located in 18 states and Puerto Rico, BHC's facilities
provide a full range of treatment services for children, adolescents and adults
with psychiatric, emotional, substance abuse and behavioral disorders. BHC's
facilities are licensed, certified for participation in Medicare and Medicaid
and accredited by the Joint Commission of Accreditation of Healthcare
Organizations ("JCAHO").
BHC was incorporated in Delaware in June 1993, and its principal executive
offices are located at 102 Woodmont Boulevard, Suite 800, Nashville, Tennessee
37205. BHC's telephone number is (615) 269-3492. Unless otherwise indicated,
"BHC" refers to Behavioral Healthcare Corporation, a Delaware corporation, and
its subsidiaries.
MEETINGS OF PMR STOCKHOLDERS AND BHC STOCKHOLDERS
Date, Time and Place
The PMR Meeting will be held on , 1998 at o'clock a.m.,
local time, at PMR's offices at 501 Washington Street, 5th Floor, San Diego,
California.
The BHC Meeting will be held on , 1998 at o'clock a.m.,
local time, at BHC's offices at 102 Woodmont Boulevard, Suite 800, Nashville,
Tennessee.
Purposes of the Meetings
PMR Meeting. At the PMR Meeting, stockholders of PMR will be asked to
consider and vote upon proposals to (i) approve the Merger (referred to herein
as the "Merger Proposal"); (ii) elect two directors to hold office until the
2001 Annual Meeting of Stockholders; (iii) approve the name change of PMR to
"Bragen Health Solutions, Inc."; (iv) approve PMR's 1997 Equity Incentive Plan,
as amended, to increase the aggregate number of shares of Common Stock
authorized for issuance under such plan by 1,000,000 shares and to extend the
term of the Incentive Plan until February 1, 2008; (v) ratify the selection of
Ernst & Young LLP as independent auditors of PMR for its fiscal year ending
April 30, 1999; and (vi) transact such other business as may properly came
before the meeting or any adjournment or postponement thereof.
BHC Meeting. At the BHC Meeting, stockholders of BHC will be asked to
consider and vote upon the Merger Proposal.
Record Date; Shares Entitled to Vote
PMR. Only holders of record of PMR Common Stock at the close of business on
August 17, 1998 (the "Record Date") are entitled to notice of and to vote at the
PMR Meeting. At the close of business on the Record Date, there were outstanding
and entitled to vote 6,960,130 shares of PMR Common Stock, each of which will be
entitled to one vote on each matter to be acted upon at the PMR Meeting.
BHC. Only holders of record of BHC Common Stock and Series A Preferred
Stock (collectively "BHC Capital Stock") at the close of business on the Record
Date are entitled to notice of and to vote at the BHC Meeting. At the close of
business on the Record Date, there were outstanding and entitled to vote
13,563,280 shares of BHC Common Stock and 5,651,367 shares of BHC Series A
Preferred Stock, each of which will be entitled to one vote on each matter to be
acted upon at the BHC Meeting.
Vote Required
PMR. Approval of the Merger Proposal requires the affirmative vote of the
holders of a majority of the shares of PMR Common Stock present (in person or by
proxy) and entitled to vote on the Merger Proposal. As a group, all executive
officers and directors of PMR and their respective affiliates beneficially owned
2,405,359 shares, or approximately 30.9%, of the PMR Common Stock outstanding as
of the Record Date. In addition, the PMR stockholders will be asked to elect two
directors to the PMR Board, to approve the change of PMR's name to "Bragen
Health Solutions, Inc.", to approve an increase of shares reserved under PMR's
1997 Equity Incentive Plan and to extend the term of the Incentive Plan until
February 1, 2008 and to ratify PMR's selection of Ernst & Young LLP as PMR's
independent auditors for the fiscal year ending April 30, 1999. The election of
the directors will require a plurality of votes present (in person or by proxy)
and entitled
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<PAGE> 16
to vote at the PMR Meeting and the approval of the remaining proposals will
require the vote of a majority of the votes present (in person or by proxy) and
entitled to vote at the PMR Meeting.
BHC. Approval of the Merger Proposal requires the affirmative vote of the
holders of a majority of the shares of BHC Common Stock and Series A Preferred
Stock, voting as separate classes, outstanding on the Record Date and entitled
to vote on the Merger Proposal. As a group, all executive officers and directors
of BHC and their respective affiliates beneficially owned 11,620,938 shares of
BHC Common Stock and 5,651,367 shares of Series A Preferred Stock, or
approximately 82%, of the BHC Common Stock and 100% of the Series A Preferred
Stock respectively, outstanding as of the Record Date. Certain executive
officers and directors of BHC and their affiliates owning in the aggregate
approximately 81% of the outstanding BHC Common Stock and 100% of the
outstanding Series A Preferred Stock, respectively, and certain other
stockholders owning in the aggregate approximately 8% of the outstanding BHC
Common Stock have each agreed to vote or direct the vote of all BHC Capital
Stock over which they have voting power or control in favor of the Merger
Agreement and the Merger. As a result, approval of the Merger at the BHC Meeting
is assured. See "Terms of the Merger -- Related Agreements -- Stockholder
Agreements."
Recommendations of Boards of Directors
The PMR Board. The PMR Board has approved the Merger Agreement and the
Merger and has determined that the Merger is in the best interests of PMR and
its stockholders. The PMR Board has unanimously recommended approval of the
Merger Proposal by the PMR stockholders. The primary factors considered and
relied upon by the PMR Board in reaching its recommendation are described below
under "Approval of the Merger and Related Transactions -- PMR's Reasons for the
Merger."
The BHC Board. The BHC Board has approved the Merger Agreement and the
Merger and has determined that the Merger is in the best interests of BHC and
its stockholders. The BHC Board has unanimously recommended approval of the
Merger Proposal by the BHC stockholders. The primary factors considered and
relied upon by the BHC Board in reaching its recommendation are described below
under "Approval of the Merger and Related Transactions -- BHC's Reasons for the
Merger."
RISK FACTORS
See "Risk Factors" for a discussion of certain factors pertaining to the
Merger and the combined businesses of PMR and BHC.
OPINION OF PMR'S FINANCIAL ADVISOR
SunTrust Equitable Securities Corporation ("SunTrust Equitable") has acted
as financial advisor to PMR in connection with the Merger. As part of its role
as financial advisor to PMR, SunTrust Equitable was engaged to render its
opinion as to the fairness, from a financial point of view, to PMR's
stockholders of the consideration to be paid by PMR pursuant to the Merger
Agreement. The full text of the opinion of SunTrust Equitable, which sets forth
the assumptions made, matters considered and limitations on the review
undertaken by SunTrust Equitable, is attached as Appendix B to this
Prospectus/Joint Proxy Statement. PMR stockholders are urged to read the opinion
in its entirety. See "Approval of the Merger and Related Transactions -- Opinion
of SunTrust Equitable Securities Corporation."
INTERESTS OF CERTAIN PERSONS IN THE MERGER
In considering the recommendation of the BHC Board with respect to the
Merger Proposal, holders of BHC Capital Stock should be aware that members of
the BHC Board and the executive officers of BHC have certain interests in the
Merger that are in addition to the interests of the holders of BHC Capital Stock
generally. Promptly following consummation of the Merger, Edward A. Stack,
President and Chief Executive Officer of BHC, will be elected as a director,
President and Chief Operating Officer of PMR and will continue under his current
employment agreement with BHC. In addition, Mr. Stack and, subject to certain
conditions, Michael E. Davis, Chief Financial Officer of BHC, will receive
retention bonuses consisting of an aggregate of 100,000 shares and 50,000
shares, respectively, of PMR Common Stock. Further, Vencor, the holder of
approximately 60% of BHC Capital Stock, will receive $65,000,000 in cash for the
Vencor Shares. The members of the BHC Board, including BHC's outside directors,
were aware of these interests and took such
3
<PAGE> 17
interests into account in approving the Merger Agreement and the transactions
contemplated thereby. See "Approval of the Merger and Related
Transactions -- Interests of Certain Persons in the Merger," and "-- Background
of the Merger."
REGULATORY MATTERS
The Merger is subject to review by the Federal Trade Commission and the
Antitrust Division of the U.S. Department of Justice, and certain information
and waiting period requirements under the Hart-Scott-Rodino Antitrust
Improvements Act of 1976, as amended (the "HSR Act"). See "Risk
Factors -- Regulatory Matters" and "Approval of the Merger and Related
Transactions -- Regulatory Matters."
CERTAIN FEDERAL INCOME TAX MATTERS
The exchange of BHC Capital Stock for the Merger Consideration pursuant to
the Merger will be a taxable exchange for federal income tax consequences.
Accordingly, each BHC stockholder will generally realize gain or loss equal to
the difference between such stockholder's adjusted tax basis in his, her or its
BHC Capital Stock and such stockholder's portion of the Merger Consideration.
BECAUSE EACH STOCKHOLDER'S SITUATION IS UNIQUE, HOLDERS ARE URGED TO CONSULT
THEIR OWN TAX ADVISORS CONCERNING THE TAX CONSEQUENCES OF THE DISTRIBUTION TO
THEM. See "Approval of the Merger and Related Transactions -- Material Federal
Income Tax Matters."
ACCOUNTING TREATMENT
The Merger is intended to be treated as a purchase for financial accounting
purposes. See "Approval of the Merger and Related Transactions -- Accounting
Treatment" and "Terms of the Merger -- Conditions to the Merger."
APPRAISAL RIGHTS OF BHC STOCKHOLDERS
If the Merger Proposal is approved by the required vote of BHC stockholders
and is not abandoned or terminated, the holders of BHC Common Stock and Series A
Preferred Stock may be entitled to exercise appraisal rights pursuant to Section
262 of the Delaware General Corporation Law ("DGCL)," a copy of which is
attached hereto as Appendix C, with respect to shares that are not voted in
favor of the Merger. See "Approval of the Merger and Related
Transactions -- Appraisal Rights of BHC Stockholders" and Appendix C.
NO APPRAISAL RIGHTS OF PMR STOCKHOLDERS
The stockholders of PMR are not entitled to appraisal rights in connection
with the Merger under the DGCL. See "Approval of the Merger and Related
Transactions -- No Appraisal Rights of PMR Stockholders" and Appendix C.
THE MERGER
Terms of the Merger; Exchange Ratio. As a result of the Merger, BHC will
become a wholly owned subsidiary of PMR and each outstanding share of BHC Common
Stock and Series A Preferred Stock (other than the Vencor Shares and other than
any shares of BHC Common Stock owned by PMR, BHC, PMR Sub or any direct or
indirect wholly owned subsidiary of PMR or BHC) will be converted into the right
to receive: (i) 0.3401 (the "Exchange Ratio") of a share of PMR Common Stock,
(ii) cash in an amount equal to $28,500,000 divided by the number of Outstanding
Shares, and (iii) an unsecured subordinated promissory note from PMR in an
amount equal to $925,000 divided by the number of Outstanding Shares
(collectively, together with the cash payable with respect to the Vencor Shares,
the "Merger Consideration"). The Exchange Ratio may be adjusted prior to the
Effective Time to the extent necessary to account for certain changes in
capitalization of BHC. Cash will be paid in lieu of issuing fractional shares. A
portion of the Merger Consideration is to be held in escrow to secure the
performance of the indemnification obligations of the BHC stockholders pursuant
to the Merger Agreement. See "Terms of the Merger -- Related
Agreements -- Escrow Agreement." An aggregate of 2,600,000 shares of PMR Common
Stock will be issued in the Merger, and certain outstanding BHC 1993 Options
under the BHC 1993 Stock Plan (the "BHC 1993 Plan") that are not repurchased
pursuant to the Merger Agreement will be converted into options to acquire up to
a
4
<PAGE> 18
maximum of approximately 63,195 shares of PMR Common Stock. See "Terms of the
Merger -- Manner and Basis for Converting Shares."
Other Effects of the Merger. The Merger will be consummated promptly after
the approval by the PMR stockholders and the BHC stockholders of the Merger
Proposal and the satisfaction or waiver of the other conditions to consummation
of the Merger (the "Closing Date"). The Merger will become effective on the date
that a certificate of merger is duly filed with the Delaware Secretary of State
(the "Effective Time"). At the Effective Time, PMR Sub will merge with and into
BHC, with the result that BHC will be the surviving corporation in the Merger
and a wholly owned subsidiary of PMR (the "Surviving Corporation"). The
stockholders of BHC (other than Vencor) will become stockholders of PMR (as
described below), and their rights will be governed by PMR's Certificate of
Incorporation, as amended (the "PMR Certificate"), the Bylaws of PMR (the "PMR
Bylaws") and the DGCL. See "Terms of the Merger -- Effect of the Merger" and
"Comparison of Rights of Stockholders of PMR and Stockholders of BHC."
Exchange of BHC Stock Certificates. Promptly after the Effective Time, PMR,
acting through StockTrans, Inc. as its exchange agent (the "Exchange Agent"),
will deliver to each holder of record, as of the Effective Time, of a
certificate or certificates which immediately prior to the Effective Time
represented BHC Converted Shares a letter of transmittal with instructions to be
used by such holder in surrendering such certificates in exchange for the Merger
Consideration, including certificates representing shares of PMR Common Stock.
CERTIFICATES SHOULD NOT BE SURRENDERED BY THE HOLDERS OF BHC COMMON STOCK OR
PREFERRED STOCK UNTIL SUCH HOLDERS RECEIVE THE LETTER OF TRANSMITTAL FROM THE
EXCHANGE AGENT, AND THEN ONLY IN ACCORDANCE WITH THE TERMS OF SUCH LETTER OF
TRANSMITTAL. See "Terms of the Merger -- Manner and Basis for Converting
Shares."
BHC Stock Options. Prior to the Effective Time, BHC has agreed to offer to
repurchase from holders of all outstanding stock options under BHC's option
plans, all such outstanding stock options for an aggregate purchase price of
$1,135,546 (the "Repurchase Offer"). At the Effective Time, PMR shall pay in
cash, to each person that has accepted the Repurchase Offer, an amount equal to
either fifty cents ($0.50) (or in the case of certain of the options issued
pursuant to the BHC 1993 Plan, one dollar and twenty-five cents ($1.25)) per
share of BHC Common Stock issuable upon exercise of options exercisable
immediately prior to the Closing Date held by such person. All stock options of
BHC (other than options under the BHC 1993 Plan) that (i) remain unexercised as
of the Effective Time and (ii) are held by persons who do not accept the
Repurchase offer, will be terminated as of the Closing Date. At the Effective
Time, all options to purchase BHC Common Stock then outstanding under the BHC
1993 Plan (each a "BHC 1993 Option" and, collectively, the "BHC 1993 Options")
will be automatically converted into an option (a "PMR Exchange Option") to
purchase that number of shares of PMR Common Stock equal to the number of shares
of BHC Common Stock issuable immediately prior to the Effective Time upon
exercise of the BHC 1993 Option (without regard to actual restrictions on
exercisability) multiplied by the Exchange Ratio, with an exercise price per
share equal to the exercise price per share which existed under the
corresponding BHC 1993 Option divided by the Exchange Ratio, and with other
terms and conditions (such as vesting) that are the same as the terms and
conditions of such BHC 1993 Option immediately before the Effective Time. As of
the Record Date, 185,812 shares of BHC Common Stock were issuable upon the
exercise of outstanding BHC 1993 Options, which options (assuming the holders of
such BHC 1993 Options do not accept the Repurchase Offer) will be converted into
PMR Exchange Options to acquire approximately 63,195 shares of PMR Common Stock
at the Effective Time. The weighted average exercise price per share of all BHC
1993 Options outstanding as of the Record Date is approximately $6.58 per share.
Following the Merger, the weighted average exercise price per share of all PMR
Exchange Options will be approximately $19.35 per share. All PMR Exchange
Options will be fully vested and immediately exercisable. To the extent any
outstanding options under BHC's option plans are exercised from the date of the
Merger Agreement to the Effective Time, the issued BHC Common Stock will be
converted at the Exchange Ratio. At the Effective Time, BHC will terminate the
BHC 1993 Plan and its 1996 Stock Option Plan. See "Terms of the
Merger -- Treatment of Employee Equity Benefit Plans."
5
<PAGE> 19
Promptly following the Effective Time, PMR will file on Form S-8 as a
post-effective amendment to the Registration Statement to register shares of PMR
Common Stock issuable as a result of the exercise of PMR Exchange Options.
Stock Ownership Following the Merger. An aggregate of 2,600,000 shares of
PMR Common Stock will be issued to BHC stockholders in the Merger and certain
outstanding BHC 1993 Options (assuming no holders of such options accept the
Repurchase Offer) will be converted into options to acquire up to a maximum of
approximately 63,195 additional shares of PMR Common Stock. Based upon the
number of shares of PMR Common Stock issued and outstanding as of the Record
Date, and after giving effect to the issuance of PMR Common Stock as described
in the previous sentence and the exercise of all options to purchase BHC Common
Stock assumed by PMR, the former holders of BHC Common Stock and BHC 1993
Options would hold, and have voting power with respect to, approximately 29% of
PMR's total issued and outstanding shares on a fully diluted basis. The
foregoing numbers of shares and percentages are subject to change to reflect any
changes in the capitalization of either PMR or BHC subsequent to the dates
indicated and prior to the Effective Time, and there can be no assurance as to
the actual capitalization of PMR or BHC as of the Effective Time or of PMR at
any time following the Effective Time. See "Risk Factors -- Additional Shares To
Be Issued By PMR; Shares Eligible For Future Sale; Dilutive Effect to PMR
Stockholders" and "Terms of the Merger -- Stock Ownership Following the Merger."
Board of Directors; Management Following the Merger. There will be no
change in the current PMR Board and officers of PMR as a result of the Merger,
except that Mr. Stack, the current President and Chief Executive Officer of BHC,
will become the President and Chief Operating Officer and a director of PMR. On
the Effective Time, the officers of BHC (as the Surviving Corporation) will be
Allen Tepper as President and Secretary and Mr. Stack as Chief Executive Officer
and Treasurer, and the directors of BHC will be Mr. Tepper, Mr. Stack and Mark
P. Clein, the Executive Vice President and Chief Financial Officer of PMR. See
"Terms of the Merger -- Effect of the Merger."
Covenants. Pursuant to the Merger Agreement, each of BHC and PMR has agreed
(on behalf of itself and each of its subsidiaries) that, until the earlier of
the termination of the Merger Agreement pursuant to its terms and the Effective
Time, subject to certain exceptions, and except to the extent that the other
party consents in writing, each will conduct its business and operations in the
ordinary course and in accordance with past practices and in compliance with all
applicable laws and regulations and the requirements of all applicable material
contracts; preserve intact its current business organization; keep available the
services of its current officers and employees and maintain its relations and
goodwill with all suppliers, customers, landlords, creditors, licensors,
licensees, employees and others with which it has business relationships; use
all reasonable efforts to keep in full force all of its existing insurance
policies; and provide all material notices, assurances and support required by
any material contract to which it is a party. In addition, subject to certain
exceptions, BHC and PMR have agreed that, without the prior written consent of
the other, they will not perform or engage in certain activities in the conduct
of their respective businesses and the businesses of their subsidiaries. See
"Terms of the Merger -- Covenants."
No Solicitation. Pursuant to the Merger Agreement, except under certain
limited circumstances, each of BHC and PMR has agreed that it will not (i)
solicit any alternate acquisition proposal, (ii) participate in any discussions
or negotiations with any other parties with respect to an alternate acquisition
proposal, or (iii) provide any non-public information concerning each other to
any other parties in connection with any alternate acquisition proposal. See
"Terms of the Merger -- No Solicitation."
Conditions to the Merger. Consummation of the Merger is subject to certain
conditions, including among others (i) declaration by the Commission of the
effectiveness of the Registration Statement, (ii) approval of the Merger
Proposal by the PMR stockholders and the BHC stockholders, (iii) absence of any
material legal proceeding relating to the Merger, (iv) all waiting periods under
the HSR Act will have expired or terminated early, (v) subject to certain
materiality thresholds, the accuracy of the representations and warranties made
by each party in the Merger Agreement, (vi) subject to certain materiality
thresholds, performance of all covenants required by the Merger Agreement, (vii)
execution of related agreements, and (viii) PMR obtaining acceptable financing.
See "Terms of the Merger -- Conditions to the Merger" and "-- Financing."
6
<PAGE> 20
Termination; Break-Up Fees. The Merger Agreement may be terminated by
either party under certain circumstances. PMR and BHC have agreed that, if the
Merger is not consummated, under certain circumstances, PMR or BHC, as the case
may be, will pay to the other a sum of $7.5 million. In addition, if the Merger
Agreement is terminated because certain BHC stockholder agreements are not
terminated as required in the Merger Agreement, BHC must reimburse PMR for
existing fees and expenses not to exceed $2,000,000, and if the Merger Agreement
is terminated because PMR's stockholders fail to approve the Merger, PMR shall
reimburse BHC for fees and expenses not to exceed $500,000. See "Terms of the
Merger -- Termination of the Merger Agreement," "-- Termination of Merger
Agreement," "-- Effect of Termination" and "-- Break-Up Fees."
Stockholder Agreements. Concurrently with the execution of the Merger
Agreement, certain principal stockholders of BHC (the "Principal Stockholders")
owning in the aggregate approximately 89% of the BHC Common Stock and 100% of
the BHC Series A Preferred Stock entered into Stockholder Agreements with PMR,
(each a "Stockholder Agreement" and, collectively, the "Stockholder
Agreements"). Pursuant to the Stockholder Agreements, each of such persons
agreed to vote or direct the vote of all shares of BHC Common Stock and Series A
Preferred Stock over which such person has voting power or control in favor of
the Merger Agreement and the Merger Proposal and has delivered an irrevocable
proxy to PMR to vote such shares in favor of the Merger and the Merger Proposal
and against any other merger or similar transaction. See "Terms of the
Merger -- Related Agreements -- Stockholder Agreements."
Affiliate and Lock-Up Agreements. Each of the members of the BHC Board and
certain officers of BHC have entered into agreements restricting sales,
dispositions or other transactions reducing their risk of investment in respect
of the shares of BHC Common Stock held by them prior to the Merger and the
shares of PMR Common Stock to be received by them in the Merger so as to comply
with the requirements of applicable federal securities laws. See "Terms of the
Merger -- Related Agreements -- Affiliate and Lock-Up Agreements."
Escrow Agreement. As a condition to the Merger, PMR has entered into an
escrow agreement with StockTrans, Inc. as "Escrow Agent" and Mr. Stack, Vencor
and Welsh, Carson, Andersen & Stowe, VI, L.P. ("Welsh Carson") as the
Stockholder Representatives (the "Escrow Agreement") in the form attached as
Exhibit I to the Merger Agreement. Pursuant to the Merger Agreement, at the
Effective Time, PMR or the Exchange Agent shall withhold from the Merger
Consideration: (i) $4,388,507 of the cash to be delivered to Vencor, (ii) cash
in the amount of $1,061,430 to be delivered to the holders of Converted Shares
(iii) a promissory note in the aggregate amount of $925,000 to be delivered to
the holders of the Converted Shares, and (iv) 175,000 shares of PMR Common Stock
to be delivered to the holders of Converted Shares (collectively the "Escrow
Amount"), to be held in escrow as collateral for reimbursement and
indemnification obligations of the BHC Stockholders set forth in the Merger
Agreement. The Escrow Agreement shall terminate on the 18-month anniversary of
the Effective Time. The BHC stockholders' interests in the escrow account under
the Escrow Agreement shall be non-assignable and non-transferable, except by
operation of law. See "Terms of the Merger -- Manner and Basis for Converting
Shares" and "-- Related Agreements -- Escrow Agreement."
Exchange Agent Agreement. Prior to the Effective Time, PMR will enter into
an Exchange Agent Agreement with StockTrans, Inc. as the Exchange Agent (the
"Exchange Agent Agreement") in the form attached as Exhibit H to the Merger
Agreement. At the Effective Time, PMR shall make available to the Exchange Agent
certificates representing shares of PMR Common Stock issuable in exchange for
Converted Shares and shall deposit with the Exchange Agent the cash portion of
the Merger Consideration (other than the cash and shares of PMR Common Stock to
be deposited in the Escrow Account) including cash to be paid to the holders of
Converted Shares in lieu of fractional shares. See "Terms of the
Merger -- Related Agreements -- Exchange Agent Agreement."
Merger Expenses and Fees and Other Costs. Except for certain limited
exceptions, all fees and expenses incurred in connection with the Merger
Agreement and the transactions contemplated by the Merger Agreement shall be
paid by the party incurring such expenses, whether or not the Merger is
consummated; provided, however, that in the event the Merger Agreement is
terminated under specified circumstances, the parties shall share equally the
fees and expenses associated with the printing and filing of the S-4
Registration
7
<PAGE> 21
Statement and this Prospectus/Joint Proxy Statement and any amendments or
supplements thereto and with filings under the HSR Act. See "Terms of the
Merger -- Merger Expenses and Fees and Other Costs."
PMR and BHC estimate that they will incur direct transaction costs and
restructuring expenses of approximately $5.1 million ($3.0 million net of tax)
associated with the Merger. These nonrecurring costs will be charged to
operations upon consummation of the Merger, expected in the quarter ending
January 31, 1999. See "Unaudited Pro Forma Combined Condensed Financial
Information" and "Risk Factors -- Integration of Operations."
FINANCING
The consummation of the Merger is subject to the condition that PMR obtain
financing of at least $175,000,000 upon reasonably acceptable terms which PMR
expects will be comprised of a combination of bank financing and the issuance of
debt securities. PMR has obtained a commitment from Bank of America to act as a
lead arranger for a senior secured revolving credit facility. See "Terms of the
Merger -- Financing."
MARKET PRICE DATA
The following table sets forth, for the fiscal quarters indicated, the
range of high and low sale prices per share of PMR Common Stock as reported on
the Nasdaq National Market under the symbol "PMRP."
<TABLE>
<CAPTION>
QUARTERLY PERIOD HIGH LOW
---------------- ------ ------
<S> <C> <C>
Fiscal year ending April 30, 1997:
2nd Quarter............................................... $35.25 $14.13
3rd Quarter............................................... 31.44 20.25
4th Quarter............................................... 29.75 16.75
Fiscal year ended April 30, 1998:
1st Quarter............................................... 24.13 16.88
2nd Quarter............................................... 24.50 19.13
3rd Quarter............................................... 23.63 17.00
4th Quarter............................................... 19.50 10.50
Fiscal year ending April 30, 1999:
1st Quarter............................................... 15.38 9.88
2nd Quarter (through August , 1998)..................... -- --
</TABLE>
BHC is a privately held Delaware corporation. There has been no public
trading market in the securities of BHC and, therefore, it is not possible to
provide historical per share market price data for such securities.
As of the Record Date, there were approximately 87 stockholders of record
of PMR Common Stock, as shown on the stock records of PMR.
Neither PMR nor BHC has ever paid any cash dividends on its capital stock.
PMR anticipates that, for the foreseeable future, it will continue to retain any
earnings for use in the operation of its business.
On July 29, 1998, the last full trading day prior to the public
announcement of the execution and delivery of the Merger Agreement, the closing
price on the Nasdaq National Market for PMR Common Stock was $9.875 per share.
As of the Record Date, the closing price on the Nasdaq National Market for PMR
Common Stock was $9.25 per share. There can be no assurance as to the actual
price of PMR Common Stock or BHC Common Stock prior to or at the Effective Time
of the Merger or of PMR Common Stock at any time following the Effective Time of
the Merger. See "-- Comparative Per Share Data" and "Risk Factors."
8
<PAGE> 22
SELECTED HISTORICAL FINANCIAL DATA
The selected historical financial data set forth below with respect to
PMR's consolidated statements of operations for each of the three years in the
period ended April 30, 1998, and with respect to PMR's consolidated balance
sheets at April 30, 1997 and 1998, are derived from the audited consolidated
financial statements of PMR which are incorporated by reference into this
Prospectus/Joint Proxy Statement and attached hereto as part of Exhibit 13.1.
The selected historical financial data set forth below with respect to PMR's
consolidated statements of operations for each of the two years in the period
ended April 30, 1995 and with respect to PMR's consolidated balance sheets at
April 30, 1994, 1995 and 1996 are derived from the audited consolidated
financial statements of PMR not included elsewhere in this Prospectus/Joint
Proxy Statement. The selected historical financial data set forth below with
respect to the consolidated statements of operations of BHC for each of the
three years in the period ended June 30, 1998 and with respect to BHC's
consolidated balance sheets at June 30, 1997 and 1998 are derived from the
audited consolidated financial statements of BHC included elsewhere in this
Prospectus/Joint Proxy Statement. The selected historical financial data set
forth below with respect to BHC's consolidated statements of operations for each
of the two years in the period ended June 30, 1996 and with respect to BHC's
consolidated balance sheets at June 30, 1994, 1995 and 1996 are derived from the
audited consolidated financial statements of BHC not included elsewhere in this
Prospectus/Joint Proxy Statement.
The data set forth below should be read in conjunction with, the related
consolidated financial statements and the notes related thereto.
PMR SELECTED HISTORICAL FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
YEARS ENDED APRIL 30,
-----------------------------------------------
1998 1997 1996 1995 1994
------- ------- ------- ------- -------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C>
INCOME STATEMENT INFORMATION
Revenues......................................... $67,524 $56,637 $36,316 $21,747 $22,786
Expenses:
Operating expenses............................. 48,256 41,423 28,472 20,648 17,165
Marketing, general and administrative.......... 9,186 6,350 4,019 2,977 2,781
Provision for bad debts........................ 5,149 3,084 1,448 1,317 1,342
Depreciation and amortization.................. 1,065 701 596 403 276
Special charge................................. 2,583 --
Interest, net.................................. (1,187) (217) 2 62 (40)
Minority interest in loss of subsidiary........ -- -- (1) (108) (135)
Income (loss) before income taxes.............. 2,472 5,296 1,780 (3,552) 1,397
Income tax expense (benefit)................... 1,014 2,172 730 (1,266) 572
Net income (loss)................................ 1,458 3,124 1,050 (2,286) 825
Dividends declared on preferred stock............ -- 17 132 66 28
Net income (loss) for common stock............... 1,458 3,107 918 (2,352) 797
Net Income (loss) per share
Basic.......................................... .24 .66 .26 (.71) .25
Diluted........................................ .22 .55 .23 (.71) .25
WEIGHTED SHARES OUTSTANDING
Basic............................................ 6,053 4,727 3,484 3,336 3,228
Diluted.......................................... 6,695 5,646 4,471 3,336 3,347
</TABLE>
9
<PAGE> 23
<TABLE>
<CAPTION>
AS OF APRIL 30,
-----------------------------------------------
1998 1997 1996 1995 1994
------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
BALANCE SHEET INFORMATION
Working Capital.................................. $51,820 $17,036 $10,911 $ 8,790 $ 7,705
Total Assets..................................... 70,449 32,450 21,182 14,811 13,671
Long Term Debt................................... 392 0 0 126 320
Total Liabilities................................ 16,903 16,202 12,070 7,749 5,972
Stockholders' Equity............................. 53,546 16,248 9,112 7,062 7,699
</TABLE>
10
<PAGE> 24
BHC SELECTED HISTORICAL FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
The following table sets forth the selected historical financial
information of BHC for each of the five years in the period ended June 30, 1998.
The Summary of Operations and Balance Sheet Data for the five years ended June
30, 1998, presented below, have been derived from, and should be read in
conjunction with BHC's audited consolidated financial statements and the related
notes thereto and with "Management's Discussion and Analysis of Financial
Condition and Results of Operations."
SUMMARY OF OPERATIONS
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30,
-----------------------------------------------------
1998 1997 1996 1995 1994
-------- -------- ------- ------- -------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Revenue................................ $313,837 $223,811 $58,059 $61,233 $53,039
Expenses:
Operating expenses................... 260,463 179,358 49,474 52,353 43,777
Marketing, general, and
administrative.................... 8,978 6,260 1,765 1,433 1,165
Provision for bad debts.............. 18,464 12,576 2,442 2,221 2,397
Depreciation and amortization........ 9,504 5,708 1,766 1,818 1,568
Interest, net........................ 7,848 5,409 1,555 2,491 2,199
Non-recurring charge................. 1,058(3) -- -- 2,379(1) --
-------- -------- ------- ------- -------
Income before income taxes............. 7,522 14,500 1,057 (1,462) 1,933
Income tax expense..................... 2,909 5,983 459 (460) 742
-------- -------- ------- ------- -------
Income before extraordinary item....... 4,613 8,517 598 (1,002) 1,191
Extraordinary item..................... -- 415(2) -- -- --
-------- -------- ------- ------- -------
Net income (loss)...................... $ 4,613 $ 8,102 $ 598 $(1,002) $ 1,191
======== ======== ======= ======= =======
</TABLE>
- ---------------
(1) In the fiscal year ended June 30, 1995, BHC adopted Statement of Accounting
Financial Standards #121 ("FAS 121"), "Accounting for the impairment of
long-lived assets and for long-lived assets to be disposed of," and recorded
a write down of one hospital.
(2) In the fiscal year ended June 30, 1997, BHC refinanced certain debt
obligations associated with a major acquisition and wrote off deferred loan
costs associated with its former credit facility.
(3) In the fiscal year ended June 30, 1998, BHC wrote off certain due diligence
costs associated with the terminated merger with CBHS.
BALANCE SHEET DATA
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30,
-----------------------------------------------------
1998 1997 1996 1995 1994
-------- -------- ------- ------- -------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Working capital........................ 44,740 36,978 10,442 4,594 4,364
Total assets........................... 271,943 283,821 53,821 52,496 40,435
Long-term debt......................... 86,068 97,500 15,249 822 21,820
Total liabilities...................... 142,623 159,098 22,974 22,228 29,134
Stockholders' equity................... 129,320 124,723 30,847 30,268 11,301
</TABLE>
11
<PAGE> 25
SELECTED PRO FORMA COMBINED CONDENSED FINANCIAL DATA
The selected pro forma combined financial data are derived from the
unaudited pro forma combined condensed financial statements included elsewhere
in this Prospectus/Joint Proxy Statement, which give effect to the Merger as a
purchase, and should be read in conjunction with, and are qualified by reference
to, such pro forma statements and the notes thereto included elsewhere in this
Prospectus/Joint Proxy Statement. For purposes of the unaudited pro forma
operating data, PMR's consolidated financial statements for the fiscal year
ended April 30, 1998 have been combined with the consolidated financial
statements of BHC for the fiscal year ended June 30, 1998. For purposes of the
unaudited pro forma combined balance sheet data, PMR's consolidated financial
data at April 30, 1998 has been combined with BHC's consolidated financial data
at June 30, 1998. No dividends have been declared or paid on PMR Common Stock or
BHC Common Stock.
The pro forma data is presented for illustrative purposes only and is not
necessarily indicative of the operating results or financial position that would
have been achieved if the Merger had been consummated as of the beginning of the
period indicated, nor is it necessarily indicative of future financial position
or results of operations.
SELECTED PRO FORMA COMBINED CONDENSED FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
YEAR ENDED
APRIL 30, 1998
--------------
<S> <C>
INCOME STATEMENT DATA
Revenue..................................................... $381,361
Expenses:
Operating expenses........................................ 350,496
Depreciation and amortization............................. 10,126
Special charge............................................ 3,641
Interest (income) expense................................. 12,268
--------
376,531
--------
Income before income taxes.................................. 4,830
Income tax expense.......................................... 1,857
--------
Net income.................................................. $ 2,973
========
OTHER FINANCIAL DATA
EBITDA(1)................................................... $ 27,224
EBITDA margin............................................... 7.1%
</TABLE>
<TABLE>
<CAPTION>
APRIL 30, 1998
--------------
<S> <C>
BALANCE SHEET DATA
Cash and cash equivalents................................... $ 5,000
Working capital............................................. 53,411
Total assets................................................ 303,149
Total debt.................................................. 228,631
Total stockholders' equity.................................. 74,518
</TABLE>
- ---------------
(1) EBITDA represents earnings before interest, taxes, depreciation and
amortization. EBITDA is a widely recognized financial indicator of a
company's ability to service or incur debt. EBITDA is not a measurement of
operating performance computed in accordance with generally accepted
accounting principles and should not be considered as a substitute for
operating income, net income, cash flows from operations, or other statement
of operations or cash flow data prepared in conformity with generally
accepted accounting principles, or as a measure of profitability or
liquidity. In addition, EBITDA may not be comparable to similarly titled
measures of other companies. EBITDA may not be indicative of the historical
operating results of the combined company, nor is it meant to be predictive
of future results of operations or cash flows.
12
<PAGE> 26
COMPARATIVE PER SHARE DATA
The following table sets forth certain historical per share data of PMR and
BHC and combined per share data on an unaudited pro forma basis after giving
effect to the Merger as a purchase of BHC by PMR assuming the Merger had been
effected for the year ended April 30, 1998 and as of April 30, 1998. This data
should be read in conjunction with the selected historical financial data, the
unaudited pro forma combined condensed financial data and the separate
historical consolidated financial statements of PMR and BHC, and notes thereto.
The pro forma combined per share data is not necessarily indicative of the
operating results that would have been achieved had the Merger been consummated
as of the beginning of the periods indicated nor is such data necessarily
indicative of future financial condition or results of operations. For purposes
of the comparative per share data, PMR's financial data at April 30, 1998 have
been combined with BHC's financial data at June 30, 1998.
<TABLE>
<S> <C>
PMR Corporation -- Historical
Net income per share...................................... $ .24
Cash dividends per share.................................. N/A
Book value per share(1)................................... $7.70
BHC -- Historical
Net income per share...................................... N/A
Cash dividends per share.................................. N/A
Book value per share(2)................................... $6.73
PMR Corporation -- Pro Forma
Net income per share(4)................................... $ .31
Cash dividends per share.................................. N/A
Book value per share(3)................................... $7.75
</TABLE>
- ---------------
(1) The historical book value per share is computed by dividing stockholders'
equity by the number of shares of Common Stock outstanding at the end of
each period. The pro forma book value per share is computed by dividing pro
forma stockholders' equity by the pro forma number of shares of PMR Common
Stock at the end of each period.
(2) The historical book value per share is computed by dividing stockholders'
equity by the number of shares of Common Stock outstanding at the end of the
year.
(3) PMR and BHC estimate they will incur transaction-related costs of
approximately $5.1 million associated with the Merger, including estimated
costs associated with integrating the two companies, which will be charged
to operations upon consummation of the Merger. The Pro Forma Combined Book
Value Per Share data give effect to estimated costs of $3.0 million, net of
tax, as if such costs and charge had been incurred as of April 30, 1998.
These costs and charge are not included in the pro forma income per share
data. See "Unaudited Pro Forma Condensed Combined Financial Information" and
accompanying notes thereto.
(4) The equivalent BHC pro forma per share amounts are calculated by dividing
the PMR combined pro forma per share amounts by the Exchange Ratio.
13
<PAGE> 27
RISK FACTORS
The following risk factors should be considered by holders of PMR Common
Stock and BHC Capital Stock in evaluating whether to approve the Merger
Proposal. These factors should be considered in conjunction with the other
information included and incorporated by reference in this Prospectus/Joint
Proxy Statement.
The discussion in this Prospectus/Joint Proxy Statement contains
forward-looking statements that involve risks and uncertainties. PMR's, BHC's
and the combined company's actual results could differ materially from those
discussed here. Factors that could cause or contribute to such differences
include, but are not limited to, those discussed below, as well as those
discussed elsewhere in this Prospectus/Joint Proxy Statement or incorporated
herein by reference.
RISKS RELATED TO THE MERGER
Integration of Operations. If the combined company and the stockholders of
PMR and BHC are to realize the anticipated benefits of the Merger, the
operations of PMR and BHC must be integrated and combined efficiently. The
process of rationalizing management services, administrative organizations,
facilities, management information systems and other aspects of operations,
while managing a larger and geographically expanded entity, will present a
significant challenge to the management of the combined company. There can be no
assurance that the integration process will be successful or that the
anticipated benefits of the business combination will be fully realized. The
dedication of management resources to such integration may detract attention
from the day-to-day business of the combined company. The difficulties of
integration may be increased by the necessity of coordinating geographically
separated organizations, integrating personnel with disparate business
backgrounds and combining different, although complementary, corporate cultures.
There can be no assurance that there will not be substantial costs associated
with the integration process, that such activities will not result in a decrease
in revenues, or that there will not be other material adverse effects of these
integration efforts or that such integration efforts can be successfully
accomplished. Such effects could materially reduce the earnings of the combined
company. Subsequent to the Merger, PMR expects to incur a charge in the third
quarter of fiscal 1999, currently estimated to be $5.1 million, to reflect the
combination of PMR and BHC, including transaction and restructuring costs. This
amount is a preliminary estimate only. There can be no assurance that PMR will
not incur additional charges in the third quarter and subsequent quarters to
reflect costs associated with the Merger.
Additional Shares To Be Issued By PMR; Shares Eligible For Future Sale;
Dilutive Effect To PMR Stockholders. As a result of the Merger, it is
anticipated that PMR will issue 2,600,000 shares of PMR Common Stock, and up to
approximately 63,195 shares of PMR Common Stock will be issuable upon the
exercise of stock options assumed by PMR in connection with the Merger (based on
the Exchange Ratio). In general, these shares will be freely tradable following
the Merger, subject to certain volume and other resale restrictions for
affiliates of BHC or BHC stockholders who become affiliates of PMR pursuant to
Rule 144 and Rule 145 under the Securities Act. An aggregate of approximately
74% shares issued in the Merger will be beneficially owned by such persons. All
of the directors and certain of the executive officers and stockholders of BHC
have entered into Affiliate and Lock-Up Agreements with PMR whereby they have
agreed that, for a period of one year following the Effective Time, they will
not sell or transfer any of the shares of PMR Common Stock to be issued to them
in the Merger, subject to certain limited exceptions. After the first year, they
may sell or transfer the shares of PMR Common Stock issued to them in the
Merger, in accordance with the resale restrictions of Rule 145. The sale of a
significant number of the foregoing shares may cause substantial fluctuations in
the price of PMR Common Stock. As of August 14, 1998, there were approximately
6,960,130 shares of PMR Common Stock outstanding. As a result of the Merger, any
given PMR stockholder's percentage ownership of PMR capital stock prior to the
Merger will decrease and the percentage ownership of all pre-Merger PMR
stockholders will be decreased from 100% of the outstanding capital stock of PMR
immediately prior to the Merger to approximately 71% of the outstanding capital
stock of PMR immediately following the Merger. See "Approval of the Merger and
Related Transactions -- Interests of Certain Persons in the Merger," "Terms of
the Merger Agreement -- Related Agreements -- Affiliate and Lock-Up Agreements,"
and "-- Affiliates' Restrictions on sale of PMR Common Stock."
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Deterrent Effect Of Termination Provisions And Other Agreements. In the
event the Merger Agreement is terminated under certain circumstances, BHC will
be required to pay to PMR a nonrefundable fee, in cash, of $7,500,000. BHC has
also agreed not to (i) solicit, initiate or encourage the initiation or
submission of any expression of interest, inquiry, proposal or offer from any
person relating to, (ii) participate in any discussions or negotiations or enter
into any agreement with, or provide any non-public information to or cooperate
with any person relating to, or (iii) consider, entertain or accept any proposal
or offer from any person relating to a possible Company Acquisition Transaction
(as defined in the Merger Agreement). In addition, pursuant to the Stockholder
Agreement, certain BHC stockholders, who together hold approximately 89% of the
BHC Common Stock outstanding on the Record Date, have agreed to vote and have
granted irrevocable proxies to PMR to vote all of the shares of BHC Common Stock
over which such stockholders have voting power as of the Record Date in favor of
the Merger Proposal. The combined effect of the agreements described above could
be to render more difficult or discourage an attempt by a party other than PMR
to obtain control of BHC by means of a merger or otherwise. See "Terms of the
Merger -- Termination of the Merger Agreement" "-- No Solicitation," "-- Effect
of Termination" and "-- Related Agreements."
Fixed Exchange Ratio. As a result of the Merger, each outstanding share of
BHC Common Stock and Series A Preferred Stock (other than the Vencor Shares or
BHC Common Stock owned by BHC or any direct or indirect wholly owned subsidiary
of BHC) will be converted into 0.3401 of a share of PMR Common Stock. Because
the Exchange Ratio is fixed, and will not otherwise increase or decrease due to
fluctuations in the market price of PMR Common Stock, the specific value of the
consideration to be received by BHC stockholders (other than Vencor) in the
Merger will depend on the market price of PMR Common Stock at the Effective
Time. In the event that the market price of PMR Common Stock decreases or
increases prior to such time, the market value of PMR Common Stock to be
received by BHC stockholders in the Merger would correspondingly decrease or
increase. The market prices of PMR Common Stock as of recent dates are set forth
herein under "Summary -- Market Price Data." BHC stockholders are advised to
obtain recent market quotations of PMR Common Stock. PMR Common Stock
historically has been subject to substantial price volatility. No assurance can
be given as to the market prices of PMR Common Stock at any time before the
Effective Time or as to the market price of PMR Common Stock at any time
thereafter. See "Summary -- Market Price Data."
Rights Of Holders Of BHC Common Stock Following The Merger. Following the
Merger, holders of BHC Common Stock outstanding as of the Effective Time will
become holders of PMR Common Stock. Certain differences exist between the rights
of stockholders of BHC under BHC's Certificate of Incorporation (the "BHC
Certificate") and BHC's Bylaws (the "BHC Bylaws"), and the rights of
stockholders of PMR under the PMR's Certificate of Incorporation (the "PMR
Certificate") and PMR's Bylaws (the "PMR Bylaws"). See "Comparison of Rights of
PMR Stockholders and BHC Stockholders."
Regulatory Matters. Under the HSR Act, and the rules promulgated thereunder
by the Federal Trade Commission (the "FTC"), the Merger may not be consummated
until notifications have been given and certain information has been furnished
to the FTC and the Antitrust Division of the Department of Justice (the
"Antitrust Division"), and specified waiting period requirements have been
observed. The review of the Merger pursuant to the HSR Act may substantially
delay or proscribe consummation of the Merger. There can be no assurance that a
challenge to the Merger on antitrust grounds will not be made, or if such a
challenge is made, that PMR would prevail or would not be required to terminate
the Merger Agreement or to accept certain conditions in order to consummate the
Merger. PMR and BHC filed notification and report forms under the HSR Act with
the FTC and the Antitrust Division on August 20, 1998. These filings commenced a
30-day waiting period under the HSR Act, with respect to which both PMR and BHC
have requested early termination. If, prior to the expiration of such period,
the FTC or the Antitrust Division should request additional information or
documentary material under the HSR Act, consummation of the Merger could be
delayed until after the companies have substantially complied with the request.
There can be no assurance as to whether or when the HSR Act waiting period
applicable to the Merger will expire or be terminated. See "Approval of the
Merger and Related Transactions -- Regulatory Matters."
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RISKS RELATED TO THE COMBINED BUSINESS
Substantial Leverage And Debt Service Obligations. As a result of the
Merger, including the financing necessary to consummate the Merger, the combined
company will be highly leveraged, with indebtedness that is substantial in
relation to its stockholder's equity. The combined company's high degree of
leverage could have the following consequences to the combined company: (i) the
combined company's ability to obtain additional financing for working capital,
capital expenditures, acquisitions, general corporate purposes or other purposes
may be impaired in the future; (ii) a substantial portion of the combined
company's cash flow must be dedicated to the payment of principal and interest
on its indebtedness; (iii) the combined company will be substantially more
leveraged than certain of its competitors, which might place the combined
company at a competitive disadvantage; (iv) the combined company may be hindered
in its ability to adjust rapidly to changing market conditions; and (v) the
combined company's high degree of leverage could make it more vulnerable in the
event of a downturn in general economic conditions or its business or in the
event of adverse changes in the regulatory environment applicable to the
combined company.
The combined company's ability to repay or to refinance its indebtedness
and to pay interest on its indebtedness will depend on its financial and
operating performance, which, in turn, is subject to prevailing economic and
competitive conditions and to certain financial, business and other factors,
many of which are beyond the combined company's control. These factors could
include operating difficulties, increased operating costs, the actions of
competitors, regulatory developments and delays in implementing strategic
projects. The combined company's ability to meet its debt service and other
obligations may depend in significant part on the extent to which the combined
company can successfully implement its business strategy. There can be no
assurance that the combined company will be able to implement its strategy fully
or that the anticipated results of its strategy will be realized.
If the combined company's cash flow and capital resources are insufficient
to fund its debt service obligations, the combined company may be forced to
reduce or delay capital expenditures, sell assets or seek to obtain additional
equity capital or to restructure its debt. There can be no assurance that the
combined company's cash flow and capital resources will be sufficient for
payment of principal of and interest on its indebtedness in the future, or that
any such alternative measures would be successful or would permit the combined
company to meet its scheduled debt service obligations. See "Terms of the
Merger -- Financing."
Dependence Upon Medicare, Medicaid and Other Third Party Reimbursement. A
significant component of the combined company's revenues will be derived from
payments made (i) by providers to the combined company for managing and
administering outpatient programs ("Outpatient Programs") for providers (the
"PMR Business"), and (ii) by Medicare, Medicaid and other third party payors to
the combined company for inpatient and outpatient psychiatric hospital services
(the "Inpatient Programs" or the "BHC Business") and Outpatient Programs. The
combined company's Inpatient Programs will receive payments from third-party
reimbursement sources, including commercial insurance carriers (which provide
coverage to insureds on both an indemnity and through various managed care
plans), Medicare, Medicaid, and the Civilian Health and Medical Program of the
Uniformed Services ("CHAMPUS"), in addition to payments directly from patients.
Substantially all of the patients admitted to the Outpatient Programs are
eligible for Medicare coverage and a significant portion of patients admitted to
the Inpatient Programs are eligible for Medicare coverage. The Medicare Program
is a federal health program created in 1965 as part of the federal social
security system. It is administered by the U.S. Department of Health and Human
Services which has established Health Care Financing Administration ("HCFA") to
promulgate rules and regulations governing the Medicare program and the benefits
associated therewith. A provider's Medicare payments can be adversely affected
by actions of 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 non-allowable; or (iii) changes in the law or interpretation of the
law governing Medicare coverage and payment. Providers generally seek
reimbursement of management fees related to the Outpatient Programs from the
fiscal intermediaries as part of their overall payments from Medicare, and
payment of the combined
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company's management fee may be directly affected by the reimbursement
experience of the provider. The combined company's psychiatric hospitals
participate in the Medicare, Medicaid and CHAMPUS programs.
In certain instances, providers will not be obligated to pay the combined
company's management fee if coverage for claims submitted by the provider
related to services furnished by the combined company are denied by Medicare's
fiscal intermediary. In other instances, the combined company may be obligated
to indemnify a provider to the extent the combined 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 combined company's business, financial
condition and results of operations.
The combined company's Outpatient and Inpatient Programs may in the future
be subject to Focused Medical Reviews. 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.
During 1997 and 1998, HCFA has increased its scrutiny of outpatient
psychiatric services due to a significant increase in charges to Medicare for
outpatient partial hospitalization and other mental health services. PMR
believes that Focused Medical Reviews and related denials are increasing
throughout the industry, including at programs managed by the combined company.
Any denied claims resulting from future Focused Medical Reviews could have a
material adverse effect on the combined company's business, financial condition
and results of operations.
All of the partial hospitalization programs managed by the combined company
are required under HCFA's current interpretation of the Medicare regulations, to
be "provider based" programs by HCFA. This designation is important since
partial hospitalization services are covered only when furnished by or "under
arrangement" with, a "provider", i.e., a hospital or a community mental health
center ("CMHC"). A CMHC is typically a not-for-profit organization which lacks
access to capital, sophisticated management information and financial systems,
and comprehensive programs for treating serious mental illness patients. To the
extent that partial hospitalization programs are not deemed by HCFA to be
"provider based" under HCFA's current interpretation of the Medicare
regulations, there would not be Medicare coverage for the services furnished at
that site under Medicare's partial hospitalization benefit. In addition, HCFA
has published criteria for determining when programs operated may be deemed to
be "provider based" programs. The proper interpretation and application of these
criteria are not entirely clear, and there is a risk that some of the sites
managed by the combined company will be found not to be "provider based." If
such a determination is made, HCFA may cease reimbursing for the Outpatient
Program services at the provider, and HCFA has not ruled out the possibility
that, in some situations, it would seek retrospective recoveries from providers.
Any such cessation of reimbursement for Outpatient Program services or
retrospective recoveries could result in non-payment by providers and have a
material adverse effect on the combined company's business, financial condition
and results of operations.
For example, in February 1998, PMR announced that Scripps Health had
received a letter from an official at Region IX of HCFA, informing Scripps
Health that its partial hospitalization programs managed by PMR could no longer
be considered "provider based" for Medicare reimbursement purposes. In July
1998, HCFA notified Scripps Health that certain of the Outpatient Programs were
approved as "provider based" and that certain other Outpatient Program locations
were not "provider based" because they did not meet HCFA's service area
requirements. As a result of HCFA's notice, PMR and Scripps Health amended their
contract, Scripps Health reconfigured certain of its partial hospitalization
programs and one of the locations was acquired by another provider who engaged
PMR to manage the program. While to PMR's knowledge, no other PMR programs have
received provider based challenges to date, it is possible that these challenges
will emerge with other Outpatient Program providers and that the combined
company may not be able to amend its contracts to satisfy HCFA or its Outpatient
Program provider customers. In addition, there can be no
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assurance that HCFA will not challenge the "provider based" status of the
Scripps Health program in the future. If the combined company is unable to amend
its contracts to satisfy any "provider based" challenge in the future, the
potential termination of any such contracts could have a material adverse effect
upon the combined company's business, financial condition and results of
operations.
Payments from Medicaid will be a substantial source of revenue for the
combined company. The Medicaid program is a joint state and federally funded
program established as part of the Social Security Act to provide certain
defined health care benefits to poor, indigent or otherwise eligible general
welfare recipients. Many of the patients that will be served in the Outpatient
Programs managed by the combined company and Inpatient Programs owned and
operated by the combined company are indigent or have very limited resources.
Accordingly, many of those patients will have Medicaid coverage.
The United States Congress has in the past, and may in the future, consider
legislation to substantially alter the overall Medicaid program, to give states
greater flexibility in the design and operation of their individual Medicaid
program, and to stabilize federal spending for such benefits. Various states are
also considering substantial health care reform measures which could modify the
manner in which all health services are delivered and reimbursed, especially
with respect to Medicaid recipients and with respect to other individuals funded
by public resources. Additionally, all Medicaid funding is generally conditioned
upon financial appropriations to state Medicaid agencies by the state
legislatures and there are 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 combined company. The reduction in other
public resources could also have an impact upon the delivery of services to
Medicaid recipients. As states consider methods to control the cost of health
care services generally, and behavioral health services specifically, to
Medicaid recipients, and because such recipients are, as a group, heavy users of
the type of services which the combined company will offer, the effect of
Medicaid reimbursement and regulatory compliance could be material to the
combined company's business, financial condition and results of operations. The
combined 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.
Payments from commercial insurance carriers including managed care programs
will also be a substantial source of revenue for the combined company's
Inpatient Programs. In the early 1990s, many commercial insurance carriers
sought to control the cost of providing care to their patients by instituting
managed care programs or seeking the assistance of managed care companies.
Commercial insurance carriers established managed care programs or engaged
managed care companies in many areas of healthcare, including behavioral
healthcare. Providers who participate in managed care programs typically agree
to provide services to patients for a discount from established rates, which
generally results in pricing concessions by the providers and lower margins.
Additionally, managed care programs generally encourage alternatives to
inpatient treatment settings and reduce utilization of inpatient services. The
effect of pricing concessions by the combined company to commercial insurance
carriers could have a material adverse effect on the combined company's
business, financial condition and results of operations.
State and Federal Anti-Kickback and Self-referral Laws. The combined
company will be subject to federal and state laws that govern financial and
other arrangements between healthcare providers. Such laws include the illegal
remuneration provisions of the Social Security Act (the "Anti-Kickback Statute")
and the physician self-referral provisions of the Omnibus Budget Reconciliation
Act of 1989 ("Stark I") and the Omnibus Budget Reconciliation Act of 1993
("Stark II"), or referred to together as the "Stark Law" or "Stark Legislation."
Several states in which the combined company will operate have also enacted
similar laws.
The Anti-Kickback Statute prohibits, among other things, the willful and
knowing offer, payment, solicitation or receipt of any form of remuneration, in
exchange for, or which is intended to induce, the referral of patients for
services that will be paid for in whole or in part under any federal health care
program, including Medicare, Medicaid and CHAMPUS. A violation of the
Anti-Kickback Statute is a felony, punishable by a
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fine of up to $25,000, a term of imprisonment for up to five years, or both. In
addition, an individual or entity convicted of a violation of the Anti-Kickback
Statute will be excluded from participation in any Federal healthcare program.
Violation of the Anti-Kickback Statute can also be the basis for civil money
penalties of $50,000 per violation plus three times the remuneration offered
and/or exclusion from governmental health care programs through administrative
proceedings commenced by the Office of the Inspector General of the Department
of Health and Human Services (the "Department").
In order to provide guidance with respect to the Anti-Kickback Statute,
Congress required the Department to issue regulations outlining business
arrangements that would not be subject to prosecution under the Anti-Kickback
Statute. These regulations include "safe harbors" for certain investment
interests, leases of space and equipment, personal service arrangements,
employment arrangements, personal services and management contracts, sale of
physician practices, discounts, and waiver of beneficiary co-payments and
deductibles. Certain transactions and agreements of the combined company will
not satisfy all of the applicable criteria contained in the safe harbor
regulations that relate to such transactions and agreements. PMR and BHC believe
that such transactions and agreements do not violate the Anti-Kickback Statute;
however, there can be no assurance that: (i) government enforcement agencies
will not assert that certain of these arrangements are in violation of the
Anti-Kickback Statute or (ii) the Anti-Kickback Statute and safe harbor
regulations will not ultimately be interpreted by the courts in a manner
inconsistent with the combined company's business practices. The investigation
or conviction of, or other enforcement proceeding against the combined company,
for a violation of the Anti-Kickback Statute could have a material adverse
effect on the combined company's business, financial condition and results of
operations.
Stark II prohibits a physician or members of his immediate family who have
a financial relationship with entities that furnish designated health services
from referring patients to such entities for Medicare or Medicaid reimbursed
services and billing for services provided pursuant to such prohibited
referrals. Stark II contains a number of exceptions to its general referral
prohibition. In addition, a violation of Stark II may result in the imposition
of civil monetary penalties of up to $15,000 for each service billed in
violation of the statute and exclusion from participation in any federal
healthcare program. PMR and BHC believe that the financial relationships between
the combined company's programs and physicians do not violate Stark II or the
regulations promulgated thereunder. There can be no assurance that: (i)
government enforcement agencies will not contend that certain of these financial
relationships are in violation of the Stark Legislation; (ii) that the Stark
Legislation will not ultimately be interpreted by the courts in a manner
inconsistent with the combined company's practices; or (iii) regulations will be
finalized in the future that will result in an interpretation of the Stark Law
that is inconsistent with the combined company's practices. The investigation or
conviction of, or other enforcement proceeding against the combined company for,
a violation of the Stark Law could have a material adverse effect on the
combined company's business, financial condition and results of operations.
The combined company will also be subject to state fee-splitting illegal
remuneration and self-referral statutes and regulations that prohibit payments
in exchange for referrals and referrals by physicians or other healthcare
providers to persons or entities with which the physician or healthcare provider
has a financial relationship. These state statutes generally apply to services
reimbursed under both government programs and private health insurance plans.
Violations of these laws may result in payment not being made for the items or
services rendered, loss of the healthcare provider's license, fines, and/or
criminal penalties. These statutes and regulations vary widely from state to
state, are often vague and, in many states, have not been interpreted by courts
or regulatory agencies. Although neither PMR nor BHC have reason to believe that
they are, or that the combined company will be in violation of any such state
statutes, there can be no assurance that the combined company's business
arrangements will not be subject to challenge under these types of laws in one
or more states. The investigation or conviction of, or other enforcement
proceeding against the combined company for, a violation of a state's illegal
remuneration or self-referral laws could have a material adverse effect on the
combined company's business, financial condition and results of operations.
Federal and State False Claims Acts. The Office of the Inspector General
within the Department, 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,
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the government has relied on the Federal Civil False Claims Act. Under that law,
if the government prevails in a case, it is entitled to treble damages, not less
than $5,000 nor more than $10,000 per claim, and reasonable attorney fees and
costs. In addition, an individual or entity found to have submitted false claims
can be excluded from governmental healthcare programs, including Medicare and
Medicaid. If the combined company or a provider contracting with the combined
company were excluded from governmental health programs, no services furnished
by the combined company or that contracting provider would be covered by any
governmental healthcare program. Some of the providers contracting with the
combined company are reported to be under active investigation for health care
fraud, although the combined company is not aware of those investigations
relating to programs with which the combined company is involved.
To prevail in a Civil False Claims Act case, the government need show only
that incorrect claims were submitted with "reckless disregard" or in "deliberate
ignorance" of the applicable 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 Civil False Claims Act permit
individuals also to bring suits under the Claims Act. The incentive for an
individual to do so is that he or she will usually be entitled to approximately
15% to 30% of any ultimate recovery. Under the Civil 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. The combined company would
be liable under the False Claims Act to the extent that it is found to have
submitted or "caused" false claims to have been presented.
In February 1998, PMR announced that an Outpatient Program that it formerly
managed in Dallas, Texas was the subject of a civil investigation conducted by
the U.S. Department of Health and Human Services' Office of Inspector General
and the U.S. Attorney's office in Dallas, Texas. In addition, PMR was informed
in July 1998 that a qui tam suit had been filed by a former employee of PMR
against a subsidiary of PMR.
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
referral 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. PMR
and BHC believe that the PMR Business and the BHC Business are, and the combined
company's business will be, in material compliance with applicable regulatory
and industry standards. However, in light of the complexity of the policies
governing governmental healthcare 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 combined company has given rise to
potentially a 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 PMR managed an Outpatient Program. Such denials have occurred
even though a physician has certified that the Outpatient Program services were
medically necessary. Notwithstanding PMR'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 combined company will be denied coverage. The Health
Insurance Portability and Accountability Act of 1996 grants the Department 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 combined company, it is possible that the government would seek
sanctions against the combined company from the provider and possibly from the
combined company. It is not clear at this time how the government will apply
this new application. A conviction or investigation of the combined company for
a violation of federal or state false claims acts could have a material adverse
effect on the combined company's business, financial condition and results of
operations.
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Fraud and Abuse related to CHAMPUS. CHAMPUS regulations authorize CHAMPUS
to exclude from the CHAMPUS program any provider that has committed fraud or
engaged in abusive practices. The regulations permit CHAMPUS to make its own
determination of abusive practices without reliance on any actions of the
Department. The term "abusive practices" is defined broadly to include, among
other things, the provision of medically unnecessary services, the provision of
care of inferior quality and the failure to maintain adequate medical or
financial records. Although PMR and BHC believe that the combined business will
be in material compliance with the applicable CHAMPUS regulations, exclusion
from the CHAMPUS program could have a material adverse effect on the business,
financial condition and results of operations of the combined company.
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. Virtually every state
legislature, along with Congress, has enacted changes in the regulation of and
reimbursement for healthcare services. 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.
Under the Medicare provisions of the Tax Equity and Fiscal Responsibility Act of
1982 ("TEFRA"), costs for Medicare are determined for all Medicare providers. A
target cost per case is established for each year (the "Target Rate"). On August
5, 1997, the President signed the Balanced Budget Act ("BBA"), which enacted
substantial changes in the Medicare and Medicaid reimbursement of health care
services provided by all health care providers, including inpatient and
outpatient psychiatric services. In particular, reimbursement for services
provided by hospitals and units exempt from the prospective payment system
("PPS-Exempt"), including psychiatric hospitals, was significantly revised for
the next five years. Changes include reductions in Medicare allowable bad debt,
a 15% reduction in capital payments, a cap on TEFRA Target Rates, caps on bonus
payments, and an update factor of zero for Federal fiscal year 1998. The BBA
also effects substantial changes in the Medicaid program, the federal-state
health care program for indigents. In particular the BBA lessens the
restrictions on state Medicaid plans through the repeal of the Boren Amendment,
which established a floor in the amount a state may reimburse a provider for
services rendered and the elimination of the requirement for payment by Medicaid
of an indigent Medicare beneficiary's coinsurance. The combined company
anticipates that federal and state governments will continue to review and
assess alternative health care delivery systems and payment methodologies, and
that public debate on these issues will likely continue in the future.
Finally, the BBA requires the implementation of a prospective payment
system ("PPS") for all outpatient hospital services, including partial
hospitalization, for the calendar year beginning January 1, 1999. Under such a
system, a predetermined rate would be paid to providers regardless of the
provider's reasonable costs. The implementation of the PPS under the BBA could
have an adverse effect on the current operations by PMR and BHC individually as
well as the combined company prospectively. While the actual reimbursement rates
and methodology for the PPS have not been determined and thus their effect is
unknown, the combined company may need to negotiate modifications to its
contracts with providers for the management of Outpatient Programs, which could
have a material adverse effect on the combined company's business, financial
condition and results of operations. Recent concerns over HCFA's compliance with
year 2000 computer issues have raised the possibility of significant delays in
the implementation of PPS. The uncertainty regarding PPS has negatively affected
PMR's marketing of new programs due to provider's uncertainty regarding the
economic impact of the new rates. While management cannot predict the impact of
continued delays on the combined company's marketing program, it could have a
material adverse impact on PMR's ability to sign new contracts and retain
existing contracts.
The percentage of revenues of BHC and PMR attributable to Medicare and
Medicaid was 17% and 30%, respectively, for fiscal 1998 for BHC and 69% and 22%,
respectively, for fiscal 1998 for PMR. The combined company anticipates that BBA
will have an adverse effect on reimbursement for its services, but it is not
able to predict the scope or amount thereof.
Sufficiency of Existing Reserves to Cover Reimbursement Risks. The combined
company will maintain significant reserves to cover the potential impact of the
following primary uncertainties: (i) the disallowance of
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costs upon audit of the combined company's Inpatient Program cost reports by
fiscal intermediaries; (ii) the combined company may have an obligation to
indemnify certain providers for some portions of its management fee under
Outpatient Programs which may be subject to disallowance upon audit of a
provider's cost report by fiscal intermediaries; and (iii) the combined company
may not receive full payment of the management fees owed to it by a provider
under Outpatient Programs during the periodic review of the provider's claims by
the fiscal intermediaries. The Medicare and Medicaid programs are subject to
statutory and regulatory changes, administrative rulings, interpretations and
determinations, requirements for utilization review and governmental funding
restrictions, all of which may materially increase or decrease program payments
as well as affect the cost of providing services and the timing of payments. The
final determination of amounts earned under a program often requires several
years due to audits by the program representatives, provider's rights of appeal
and the application of a number of technical reimbursement provisions. Further,
PMR has been advised by HCFA that certain program-related costs under Outpatient
Programs are not allowable for reimbursement. The combined company may
ultimately be responsible for reimbursement of the amounts previously paid that
are disallowed. Although the combined 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 combined
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 combined
company's business, financial condition and results of operations.
Continuity of Management Contracts. Substantially all of the revenues of
the PMR Business are derived from contracts with providers, behavioral health
organizations and case management agencies. The continued success of the
combined 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
combined 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. In addition, it is possible that providers, behavioral health
organizations and case management agencies with whom PMR currently has contracts
or that the combined company may seek to contract with in the future may elect
not to renew their contract or enter into a contract with PMR, as the case may
be, because such entities may view the combined company as an actual or
potential competitor. There can be no assurance that any provider or case
management agency will continue to do business with the combined company
following expiration of any of its management contracts, or that such management
contracts will not be terminated prior to expiration. In addition, there can be
no assurance that a provider or case management agency that would be willing to
contract with PMR prior to the Merger will be willing to contract with the
combined company. 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 combined company could
result in the early termination of existing management contracts and could
adversely affect the ability of the combined 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 combined company's net revenues and could have a
material adverse effect on the combined company's business, financial condition
and results of operations.
Dispute Under TennCare Program. Commencing in July 1996, two managed care
consortiums became the payors for mental health care services under the
Tennessee TennCare Partners State Medicaid Managed Care Program ("TennCare").
PMR is currently, and the combined company will continue in the process of,
arbitrating disputes under its agreement with a case management agency in
Memphis, Tennessee. PMR anticipates terminating or substantially restructuring
the agreement with the Memphis case management agency. While PMR does not
anticipate that the outcome of this arbitration will have a material adverse
effect
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on the combined company's business, PMR cannot predict the outcome of this
matter or other potential related changes or outcomes, with any degree of
certainty, and such results could individually or in the aggregate have a
material adverse effect on the combined company's business, financial condition
and results of operations.
Licensure And Certification. The provision of mental health services is
highly regulated and subject to extensive and frequently changing regulations.
Changes in laws and new interpretations of existing laws can have a significant
effect on the methods of doing business, cost of doing business and the amount
of reimbursement available from governmental and other payors. The combined
company is subject to certain state laws and regulations including those
governing the licensure of health facilities and programs, licensure of
affiliated pharmacies, and certificate of need laws intended to avoid the
proliferation of unnecessary or under utilized healthcare services. These laws
and regulations vary considerably among states and the combined company may be
subject to different types of laws and regulations depending on the specific
regulatory approach adopted by each state to regulate the services provided by
the combined company. Additionally, state and federal laws provide for the
periodic inspection or review by state agencies, the Department and CHAMPUS to
determine compliance with their respective standards of medical care, staffing,
equipment and cleanliness necessary for continued licensing or participation in
the Medicare, Medicaid or CHAMPUS programs. The admission and treatment of
patients at psychiatric hospitals is also subject to substantial state
regulation relating to involuntary admissions, confidentiality or patient
medical information, patients' rights and federal regulation relating to
confidentiality of medical records of substance abuse patients. Certain
regulatory agencies having jurisdiction over the combined company possess
discretionary powers when issuing or renewing licenses or granting approval of
proposed actions such as mergers, change of ownership, transfer or assignment of
licenses and certain intra-corporate transactions.
A regulatory agency or a court in a state in which the combined company
operates could take a position under existing or future laws or regulations, or
change its interpretation or enforcement practices with respect thereto, that
such laws or regulations apply to the combined company differently from the way
the combined company believes such laws and regulations apply or should be
enforced. The resultant compliance with, or revocation of, or failure to obtain,
required licenses and governmental approvals could substantially alter to the
combined company's business operations, delays the expansion of the combined
company's business and lost business opportunities, any of which, under certain
circumstances, could have a material adverse effect on the combined company's
business, financial condition and results of operations. PMR and BHC believe
that the PMR Business and the BHC Business comply in all material respects with
the applicable licensing and certification requirements.
Risks Associated with Acquisitions. The combined company intends as part of
its business strategy going forward to pursue acquisitions of complementary
businesses as it seeks to compete in the rapidly changing healthcare industry.
Acquisitions involve numerous risks, including difficulties in assimilation of
the operations and personnel of the acquired business, the integration of
management information and accounting systems of the acquired business, the
diversion of management's attention from other business concerns, risks of
entering markets in which the combined company has no direct prior experience,
and the potential loss of key employees of the acquired business. The combined
company's management will be required to devote substantial time and attention
to the integration of any such businesses and to any material operational or
financial problems arising as a result of any such acquisitions. There can be no
assurance that operation or financial problems will not occur as a result of any
such acquisitions. Failure to effectively integrate acquired businesses could
have a material adverse effect on the combined company's business, financial
condition and results of operations.
The combined company intends to continue to evaluate potential acquisitions
of, or investments in, companies which the combined company believes will
complement or enhance its existing business. Future acquisitions by the combined
company may result in potentially dilutive issuances of equity securities, the
incurrence of additional debt and amortization expenses related to goodwill and
other intangible assets which could adversely affect the combined company's
business, financial condition and results of operations. There can be no
assurance that the combined company will consummate any acquisition in the
future or, if consummated, that any such acquisition will ultimately be
beneficial to the combined company.
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Management of Rapid Growth. The combined company expects that PMR's
outpatient psychiatric management services business and the number of its
outpatient, case management and chemical dependency programs, as combined with
the BHC businesses acquired in the Merger may increase significantly as it
pursues its growth strategy. If it materializes, this rapid growth will place
significant demands on the combined company's management resources. The combined
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
combined company is unable to manage its growth effectively, its business,
financial condition and results of operations could be adversely affected.
Dependence On Healthcare Professionals. Psychiatrists are anticipated to be
the source of a significant portion of the patients to be treated at the
combined company's hospitals. Therefore, the success of the combined company's
hospitals will be dependent in part on the number and quality of the
psychiatrists on the medical staffs of the hospitals and their admission
practices. It is likely that a small number of psychiatrists account for a
significant portion of patient admissions at some of the combined company's
hospitals. There can be no assurance that the combined company can retain its
current psychiatrists on staff or that additional psychiatrist relationships
will be developed in the future. Furthermore, the combined company is not
expected to have contractual arrangements with hospital psychiatrists
restricting the ability of such psychiatrists to practice elsewhere.
Dependence on Key Personnel. The combined company will depend upon the
services of its senior management for the management of the combined company's
operations and the implementation of its business strategy. In addition, the
combined company's success is also dependent upon its ability to attract and
retain additional qualified management personnel to support the combined
company's growth. The loss of the services of any or all such individuals or the
combined company's inability to attract additional management personnel in the
future may have a material adverse effect on the combined company's business,
financial condition and results of operations. The combined company presently
has no employment agreements with any of its senior executive officers, except
for Mr. Stack.
The combined company's success and growth strategy also will depend on its
ability to attract and retain qualified clinical, marketing and other personnel.
The combined company will compete with psychiatric hospitals, general acute care
hospitals and other health care providers for the services of psychiatrists,
psychologists, social workers, therapists and other clinical personnel. Demand
for such clinical personnel is high and they are often subject to competing
offers. There can be no assurance that the combined 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
combined company's business, financial condition and results of operations.
Competition. In general, the operation of psychiatric facilities and
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 combined company
anticipates that competition will increase as pressure to contain the rising
costs of health care continues to intensify, particularly as programs such as
those operated by the combined company are perceived to help contain mental
health care costs. Many other companies engaged in the management of outpatient
psychiatric programs compete with the PMR Business for the establishment of
affiliations with acute care hospitals. Furthermore, while the combined
company's existing competitors in the case management business are predominantly
not-for-profit CMHCs and case management agencies, the combined 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 combined company. In addition, the combined company's current and
potential providers may choose to operate mental health programs themselves
rather than contract with the combined company. There can be no assurance that
the combined 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 combined company's business, financial condition and results of
operations.
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In June 1998, PMR announced an agreement to form a new company called Stadt
Solutions, LLC ("Stadt Solutions") that will be jointly owned by the combined
company and Stadtlander Drug Distribution Co., Inc. ("Stadtlander"). Stadt
Solutions will offer a specialty pharmacy program for individuals with serious
mental illness, initially serving approximately 6,000 individuals through
fourteen pharmacies in thirteen states.
The specialty pharmacy business is intensely competitive. There are
numerous local, regional and national companies which can dispense
pharmaceuticals locally or through the mail. There are also numerous companies
which provide lab work and analysis services necessary for blood monitoring.
Many of these companies have substantially greater resources than Stadt
Solutions. While the combined company believes that Stadt Solutions will be the
first specialty pharmacy company to focus on mental illness and further believes
that Stadt Solutions will offer value added disease management services not
typically provided by competitors, there can be no assurance that Stadt
Solutions will be able to compete successfully with its present or future
competitors.
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 combined company will likely regularly be subject
to such lawsuits, including for situations in which patients or participants in
the combined company's programs have committed suicide. PMR currently maintains
annually renewable liability insurance intended to cover such claims and
believes that its insurance is in conformity with industry standards. There can
be no assurance, however, that claims in excess of the combined company's
insurance coverage or claims not covered by the combined company's insurance
coverage (e.g., claims for punitive damages) will not arise. A successful claim
against the combined company not covered by, or in excess of, the combined
company's insurance coverage could have a material adverse effect upon the
combined company's business, financial condition and results of operations. In
addition, claims asserted against the combined company, regardless of their
merit or eventual outcome, could have a material adverse effect upon the
combined company's reputation and ability to expand its business, and could
require management to devote time to matters unrelated to the operation of the
combined company's business. There can be no assurance that the combined 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 Sale. Sales by holders of substantial amounts of PMR
Common Stock could adversely affect the prevailing market price of the PMR
Common Stock. The number of shares of PMR Common Stock available for sale in the
public market is limited by restrictions under the Securities Act of 1933, as
amended (the "Securities Act"), including Rule 144 ("Rule 144") under the
Securities Act. Following consummation of the Merger, the combined company will
have approximately 9,560,130 shares of Common Stock outstanding. Of these
shares, the officers and directors of the combined company and their affiliates
will own 2,405,359 shares and may acquire up to 832,061 shares upon the exercise
of outstanding stock options and warrants as of August 15, 1998. These
outstanding shares, and shares that may be issued upon the exercise of the
options and warrants, are considered "restricted securities" and may be sold,
subject to the volume limitations under Rule 144.
Possible Volatility of Stock Price. The market price of the PMR 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 PMR Common Stock, variations in combined 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 combined 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 PMR Common
Stock.
Anti-Takeover Provisions. PMR'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
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shares of preferred stock, together with certain provisions of the DGCL and
certain provisions of the PMR'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 PMR's Restated Certificate
of Incorporation or approval of certain business combinations, may delay, deter
or prevent a change in control of the combined company, may discourage bids for
PMR Common Stock at a premium over the market price of PMR Common Stock and may
adversely affect the market price of, and the voting and other rights of the
holders of, the PMR Common Stock. See "Comparison of Rights of PMR Stockholders
and BHC Stockholders."
Year 2000 Compliance. The year 2000 issue is the result of computer
applications being written using two digits rather than four to define the
applicable year. Computer applications may recognize a date using "00" as the
year 1900 rather than the year 2000, resulting in system failures or
miscalculations causing disruption of operations. PMR has reviewed its material
computer applications for year 2000 compliance and is working with vendors and
suppliers to make its computer applications year 2000 compliant. However, if any
such corrections cannot be completed on a timely basis, the year 2000 issue
could have a material adverse impact on the combined company's business,
financial condition and results of operations. Because of the many uncertainties
associated with year 2000 compliance issues, and because the PMR's assessment is
necessarily based on information from third party vendors and suppliers, there
can be no assurance that the PMR's assessment is correct or as to the
materiality or effect of any failure of such assessment to be correct.
PMR has not determined whether and to what extent computer applications of
contract providers and Medicare and other payors will be year 2000 compliant. In
addition, the combined company has not determined the extent to which any
disruption in the billing practices of providers or the payment practices of
Medicare or other payors caused by the year 2000 issues will affect the combined
company's operations. However, any such disruption in the billing or
reimbursement process could have a substantial adverse impact on Medicare or
Medicaid payments to providers and, in turn, payments to the combined company.
Any such disruption could have a material adverse effect upon the combined
company's business, financial condition and results of operations.
THE PMR MEETING
DATE, TIME AND PLACE OF MEETING
The PMR Meeting will be held on , , 1998 at
o'clock a.m., local time, at 501 Washington Street, 5th Floor, San Diego,
California. PMR intends to deliver this Prospectus/Joint Proxy Statement on or
about , 1998, to all PMR stockholders entitled to vote at the
PMR Meeting.
RECORD DATE AND OUTSTANDING SHARES
Only holders of record of PMR Common Stock at the close of business on
August 17, 1998 (the "Record Date"), are entitled to notice of and to vote at
the PMR Meeting. As of the close of business on the Record Date, there were
6,960,130 shares of PMR Common Stock outstanding and entitled to vote, held of
record by 87 Stockholders. Each PMR stockholder is entitled to one vote for each
share of PMR Common Stock held as of the Record Date.
VOTING OF PROXIES
The PMR proxy accompanying this Prospectus/Joint Proxy Statement is
solicited on behalf of the PMR Board for use at the PMR Meeting and at any
adjournment or postponement thereof. PMR stockholders are requested to complete,
date and sign the accompanying proxy and promptly return it in the accompanying
envelope. All proxies that are properly executed and returned, and that are not
revoked, will be voted at the PMR Meeting in accordance with the instructions
indicated on the proxies or, if no direction is indicated, to approve the Merger
Proposal, the election of two directors to hold office until the 2001 Annual
Meeting of Stockholders, the name change of PMR to "Bragen Health Solutions,
Inc.," the amendment of PMR's 1997
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Equity Incentive Plan, as amended, to increase the aggregate number of shares of
Common Stock authorized for issuance under such plan by 1,000,000 shares and to
extend the term of the Incentive Plan until February 1, 2008, and the
ratification of the selection of Ernst & Young LLP as independent auditors of
PMR for its fiscal year ending April 30, 1999, each as unanimously recommended
by the PMR Board, as indicated herein. The PMR Board is not currently aware of
any business to be brought before the PMR Meeting other than the specific
proposals referred to in this Prospectus/Joint Proxy Statement and specified in
the accompanying notice of the PMR Meeting. As to any other business that may
properly come before the PMR Meeting, however, it is intended that proxies, in
the form enclosed, will be voted in respect thereof in accordance with the
judgment of the persons voting such proxies.
REVOCABILITY OF PROXIES
A PMR stockholder who has given a proxy may revoke it at any time before it
is exercised at the PMR Meeting by (i) delivering to the Secretary of PMR (by
any means, including facsimile) a written notice, bearing a date later than the
date of the proxy, stating that the proxy is revoked, (ii) signing and so
delivering a proxy relating to the same shares and bearing a later date prior to
the vote at the PMR Meeting or (iii) attending the PMR Meeting and voting in
person (although attendance at the PMR Meeting will not, by itself, revoke a
proxy).
VOTE REQUIRED
Approval of the Merger Proposal requires the affirmative vote of the
holders of a majority of the shares of PMR Common Stock present (in person or by
proxy) and entitled to vote at the PMR Meeting. Directors are elected by a
plurality of votes present in person or represented by proxy and entitled to
vote. The remaining proposals each require the affirmative vote of the holders
of a majority of the shares present or represented by proxy and entitled to
vote. As a group, all executive officers and directors of PMR and their
respective affiliates beneficially owned 2,405,259 shares, or approximately
30.9%, of the PMR Common Stock outstanding as of August 14, 1998.
QUORUM; ABSTENTIONS; BROKER NON-VOTES
The presence, in person or by proxy, of a majority of the shares of PMR
Common Stock outstanding on the Record Date is necessary to constitute a quorum
for the transaction of business at the PMR Meeting. Abstentions and broker
non-votes will each be included in determining whether a quorum is present.
Abstentions will have the same effect as a vote against a proposal. Broker
non-votes will not be counted for any purpose in determining whether any of the
proposals have been approved.
SOLICITATION OF PROXIES AND EXPENSES
PMR will bear the entire cost of the solicitation of votes of PMR
stockholders, including printing, assembly and mailing of this Prospectus/Joint
Proxy Statement, the proxy and any additional information furnished to its
stockholders. PMR has engaged the firm of StockTrans, Inc. to assist it in the
distribution and solicitation of proxies and has agreed to pay StockTrans, Inc.
a fee of approximately $1,600.00 plus expenses for its services. Copies of the
solicitation materials will be furnished to banks, brokerage houses, fiduciaries
and custodians holding in their names shares of PMR Common Stock beneficially
owned by others to forward to such beneficial owners. PMR may reimburse persons
representing beneficial owners of PMR Common Stock for their costs of forwarding
solicitation materials to such beneficial owners. Original solicitation of
proxies by mail may be supplemented by telephone, telegram, letter or personal
solicitation by directors, officers or other employees of PMR and by ChaseMellon
Stockholder Services. No additional compensation will be paid to directors,
officers and other regular employees for such services.
STOCKHOLDER PROPOSALS
Proposals of stockholders that are intended to be presented at PMR's 1999
Annual Meeting of Stockholders and included in the proxy statement and proxy
relating to such Annual Meeting must be
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received by PMR prior to the date that is 120 days in advance of the anniversary
date of the mailing date of this Prospectus/Joint Proxy Statement, which mailing
date is expected to be August 25, 1998. In addition, unless a stockholder who
wishes to bring a matter before the stockholders at PMR's 1999 Annual Meeting of
Stockholders notifies PMR of such matter prior to the date that is 45 days in
advance of the anniversary date of the mailing date of this Prospectus/Joint
Proxy Statement, which mailing date is expected to be , 1998, PMR
management will have discretionary authority to vote all shares for which it has
proxies in opposition to such matter.
BOARD RECOMMENDATION
THE PMR BOARD BELIEVES THAT THE MERGER IS FAIR TO AND IN THE BEST INTERESTS
OF PMR AND ITS STOCKHOLDERS AND THEREFORE UNANIMOUSLY RECOMMENDS A VOTE FOR
APPROVAL OF THE MERGER PROPOSAL.
THE BHC MEETING
DATE, TIME AND PLACE OF MEETING
The BHC Meeting will be held on , 1998 at o'clock
a.m., local time, at BHC's offices at 102 Woodmont Boulevard, Suite 800,
Nashville, Tennessee. BHC intends to deliver this Prospectus/ Joint Proxy
Statement on or about , 1998, to all BHC stockholders entitled
to vote at the BHC Meeting.
RECORD DATE AND OUTSTANDING SHARES
Only holders of record of BHC Common Stock and Series A Preferred Stock at
the close of business on August 17, 1998 (the "Record Date") are entitled to
notice of and to vote at the BHC Meeting. As of the Record Date, there were
13,610,674 shares of BHC Common Stock outstanding and entitled to vote, held of
record by 157 stockholders and 5,651,367 shares of Series A Preferred Stock
outstanding and entitled to vote, held of record by three stockholders. The
principal stockholders of BHC are identified below under "BHC Principal
Stockholders."
STOCKHOLDER VOTE REQUIRED
The affirmative vote of the holders of a majority of the shares of BHC
Common Stock and the Series A Preferred Stock, voting as separate classes,
outstanding as of the Record Date is required to approve the Merger Proposal.
Each holder of record of BHC Common Stock and Series A Preferred Stock on the
Record Date will be entitled to cast one vote per share on the Merger Proposal.
As a group, the directors and executive officers of BHC and their respective
affiliates beneficially owned 11,133,502 shares, or approximately 82%, of the
BHC Common Stock and 5,651,367 shares, or 100% of the Series A Preferred Stock
outstanding as of the Record Date.
The presence, in person or by proxy, of at least a majority of the shares
of BHC Common Stock and Series A Preferred Stock outstanding on the Record Date
is necessary to constitute a quorum for the transaction of business at the BHC
Meeting. Abstentions will be counted for purposes of determining a quorum. For
purposes of obtaining the required vote of a majority of the outstanding shares
of BHC Common Stock and Series A Preferred Stock for approval of the Merger
Proposal, the effect of an abstention will have the same effect as a vote
against the proposal.
Certain executive officers, directors and stockholders of BHC owning in the
aggregate approximately 81% of the outstanding BHC Common Stock and 100% of the
outstanding BHC Series A Preferred Stock have agreed to vote or direct the vote
of all BHC Common Stock and Series A Preferred Stock over which they have voting
power or control in favor of the Merger Agreement and the Merger. As a result,
approval of the Merger Proposal at the BHC Meeting is assured. See "Terms of the
Merger -- Related Agreements -- Voting Agreements."
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PROXIES
All shares of BHC Common Stock or Series A Preferred Stock that are
entitled to vote and are represented at the BHC Meeting by properly executed
proxies received prior to or at the BHC Meeting and not duly and timely revoked
will be voted at the BHC Meeting in accordance with the instructions indicated
on such proxies. If no such instructions are indicated, such proxies will be
voted to approve the Merger Proposal.
Execution of a proxy does not in any way affect a stockholder's right to
attend the BHC Meeting and vote in person. A BHC stockholder who has given a
proxy may revoke it at any time before it is exercised at the BHC Meeting by (i)
delivering to the Secretary of BHC (by any means, including facsimile) a written
notice, bearing a date later than the date of the proxy, stating that the proxy
is revoked, (ii) signing and so delivering a proxy relating to the same shares
and bearing a later date prior to the vote at the BHC Meeting or (iii) attending
the BHC Meeting and voting in person (although attendance at the BHC Meeting
will not, by itself, revoke a proxy).
SOLICITATION OF PROXIES; EXPENSES
BHC will bear the entire cost of the solicitation of votes of BHC
stockholders, including printing, assembly and mailing of this Prospectus/Joint
Proxy Statement, the proxy and any additional information furnished to its
stockholders. Original solicitation of proxies by mail may be supplemented by
telephone, telegram, letter or personal solicitation by directors, officers or
other employees of BHC. No additional compensation will be paid to directors,
officers and other regular employees for such services.
BOARD RECOMMENDATION
THE BHC BOARD HAS DETERMINED THAT THE MERGER IS FAIR TO AND IN THE BEST
INTERESTS OF BHC AND THE BHC STOCKHOLDERS AND THEREFORE HAS UNANIMOUSLY
RECOMMENDED A VOTE FOR APPROVAL OF THE MERGER PROPOSAL.
PROPOSAL 1
APPROVAL OF THE MERGER AND RELATED TRANSACTIONS
Other than statements of historical fact, the statements made in this
section, including statements as to the benefits expected to result from the
Merger and as to future financial performance and the analyses performed by
PMR's financial advisor, are forward-looking statements. Actual results could
differ materially from those anticipated in these forward-looking statements as
a result of certain factors, including those set forth in "Risk Factors" and
elsewhere in this Prospectus/Joint Proxy Statement.
BACKGROUND OF THE MERGER
At its Board of Directors meeting held on April 29, 1998, the BHC Board
discussed the then-current operations of BHC, the status of the psychiatric
healthcare industry and the healthcare industry generally, and BHC's strategic
position in such industry. The BHC Board also discussed and considered at this
meeting the Board's view that BHC should explore possible strategic combinations
that would be expected to strengthen BHC and also, perhaps, provide some measure
of liquidity for the existing BHC stockholders. The possibility of an initial
public offering of BHC's common stock was also considered. During these
discussions, and after the Board had discussed and considered various
possibilities (including the possibility that BHC would continue to operate as
an independent, privately-held company), the Board authorized Russell L. Carson,
the Chairman of the Board of Directors of BHC, and Mr. Stack to explore and
evaluate the feasibility of strategic transactions involving BHC. Following the
meeting, Messrs. Carson and Stack considered various, possible strategic
transactions with various companies engaged in the healthcare industry.
On April 30, 1998, Mr. Tepper and Mr. Stack, the respective chief executive
officers of PMR and BHC, met at an industry conference in Phoenix, Arizona to
explore the merits of a possible business combination
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between the two companies. The meeting was arranged by Mr. Leopold Swergold of
ING Baring Furman Selz LLC ("ING Baring Furman Selz") (formerly known as Furman
Selz LLC and successor in interest to ING Baring (U.S.) Securities, Inc.), who
had discussions with both Mr. Tepper and Mr. Stack over the previous twelve
months regarding such a combination. During this preliminary meeting, Mr. Tepper
and Mr. Stack discussed the respective strategic opportunities for each of their
businesses and the potential synergies that might be realized from a combination
of PMR and BHC. Subsequent to this meeting, Mr. Tepper and Mr. Stack authorized
Mr. Swergold to have ING Baring Furman Selz analyze potential transaction
structures.
On May 27, 1998, Mr. Tepper and Mr. Stack met in Nashville, Tennessee to
discuss the various roles to be played in the combined company by the current
management of PMR and BHC if a combination were to take place. It was determined
that Mr. Tepper would become the Chairman and Chief Executive Officer and Mr.
Stack would become the President and Chief Operating Officer of the combined
company. On May 28, 1998, Messrs. Tepper, Stack, Swergold and Carson met to
discuss the strategic rationale of the combination, potential structures for an
acquisition of BHC by PMR and a general approach to the completion of due
diligence.
During this meeting in Nashville, ING Baring Furman Selz presented PMR and
BHC with a financial model which was intended to estimate the projected
operating results of the combined companies. The financial model was prepared by
ING Baring Furman Selz and PMR. This model formed the basis of the discussions
between PMR and BHC, made certain assumptions regarding the number of shares of
PMR Common Stock to be issued in the proposed transaction and, because the
number of shares to be issued in the transaction was to be based upon an average
trading value of the PMR Common Stock, this model made certain assumptions
regarding the trading value of PMR Common Stock that would be used to calculate
the exchange ratio. This financial model indicated that a combination with BHC
could be accretive to PMR's earnings, and served as the financial basis for the
offer made by PMR to BHC. Following this meeting, ING Baring Furman Selz worked
with representatives of both companies to refine the financial model and to
propose, along with PMR, a transaction and financing structure for the proposed
transaction and to determine the impact of the transaction on the projected
earnings of PMR.
On June 4, 1998, PMR officially retained ING Baring Furman Selz to provide
advisory and investment banking services with regard to PMR's potential merger
with BHC. On the same date, certain representatives of PMR, BHC and ING Baring
Furman Selz (including Messrs. Tepper, Stack and Swergold, respectively) met at
BHC's executive offices to negotiate certain preliminary terms of a potential
merger. Issues that were discussed during the meeting included valuation of BHC,
forms of consideration, schedule for due diligence of both parties and potential
timing of definitive agreements and closing for the transaction.
During the June 4 meeting, representatives of PMR and BHC negotiated a
preliminary term sheet that outlined the basic terms of the transaction being
discussed. This term sheet provided that, subject to various conditions, (i) PMR
would pay the holders of BHC Capital Stock an aggregate amount of $135,000,000,
$70,000,000 of which was to be paid in cash and $65,000,000 of which was to be
paid through the issuance of shares of PMR Common Stock (the value of which
would be determined based upon an average trading price of the PMR Common Stock
over a period of time); (ii) the shares of PMR Common Stock to be issued in
connection with the Merger would be subject to a three-year voting trust
agreement, pursuant to which agreement Mr. Tepper would have the sole right to
vote such shares during such period; (iii) PMR and BHC would be subject to
reciprocal "no-shop" agreements for a period of time; (iv) two representatives
of the BHC stockholders would be elected to the PMR Board of Directors; (v)
certain stockholders of BHC were to execute and deliver to PMR, upon the
execution of any definitive agreement, proxies and voting agreements that would
assure PMR that the proposed transaction would be approved by the BHC
stockholders; (vi) outstanding employee options of BHC would be repurchased; and
(vii) Mr. Stack and Mr. Davis would be issued at closing 100,000 and 50,000
shares of PMR Common Stock, respectively, as a retention bonus.
On June 5, 1998, a meeting of the members of the PMR Board was held. All of
the members of the PMR Board attended the meeting in person or by conference
telephone. Mark P. Clein, Executive Vice President and Chief Financial Officer
of PMR, made a presentation to the PMR Board concerning proposed terms of the
potential acquisition of BHC, including BHC's background, services, structure
and organization, financial
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performance over recent years and current financial condition, and certain
advantages and disadvantages of the proposed combination. The PMR Board
discussed the presentation and, although no vote was taken at the time, it was
the consensus of the PMR Board members that PMR should continue discussions with
BHC.
On June 8, 1998, the BHC Board held a special meeting to discuss and
consider the status of the discussions between BHC and PMR and to further
evaluate BHC's strategic options in light of the conversations had by Messrs.
Stack and Carson with other entities engaged in the healthcare industry. During
this meeting, the members of the BHC Board discussed and considered in detail
the preliminary term sheet negotiated between PMR and BHC. At this meeting, the
members of the BHC Board also discussed and considered the feasibility and
advisability of a combination of PMR and BHC, the financial condition of the
combined companies, the ability of PMR and BHC to obtain bank financing for the
proposed Merger, the impact that the proposed Merger might have on the trading
market of PMR's Common Stock, the trading history of PMR's Common Stock, the
reputation and capabilities of PMR and its management team, whether PMR's
business might be complementary to BHC's business, certain perceived strengths
of the combined company, the headquarters location of the combined company, the
impact of the proposed transaction on BHC's employees, and the likelihood that
such transaction could be consummated in a timely fashion. Following this
discussion, the BHC Board authorized Messrs. Carson and Stack to continue their
discussions with PMR. The BHC Board also authorized Mr. Stack to execute and
deliver a confidentiality and "no-shop" agreement with PMR.
Legal counsel for PMR distributed the initial draft of the proposed Merger
Agreement on June 24, 1998. On June 30, 1998, a conference call was arranged
with certain representatives and legal counsel of PMR and BHC and ING Baring
Furman Selz to discuss the initial comments of BHC to the initial draft of the
Merger Agreement. Among the issues discussed during this conference call were
the nature of the representations and warranties to be given by each of PMR and
BHC, respectively, whether such representations and warranties should survive
the consummation of the Merger, and respective indemnity obligations following
the consummation of the Merger. Following these discussions, a revised draft of
the proposed Merger Agreement was distributed by PMR's legal counsel on July 7,
1998.
On July 10, 1998, certain representatives and legal counsel of both
companies met in PMR's executive offices in San Diego, California, with ING
Baring Furman Selz in attendance by telephone, to discuss certain unresolved
issues related to the Merger Agreement, including the nature and survival of
representations and warranties, respective indemnity obligations following the
consummation of the Merger, the obligations of certain stockholders of BHC to
make representations and warranties, the nature and extent of the closing
conditions, and preliminary due diligence reports.
From mid-June through early July 1998, representatives of PMR conducted a
due diligence review of BHC's business. During this same period, representatives
of BHC conducted a due diligence review of PMR's business.
During the first two weeks of July 1998, PMR, together with ING Baring
Furman Selz, concluded that, as a result of the then-current trading value of
the PMR Common Stock, the terms of the proposed transaction set forth in the
preliminary term sheet could result in the issuance to holders of the BHC
Capital Stock in the proposed transaction of greater than fifty-percent of the
outstanding PMR Common Stock and would likely result in a transaction that would
be dilutive to PMR's earnings. As a result, PMR indicated to BHC that it would
not be willing to proceed with the proposed transaction on the terms set forth
in the preliminary term sheet, but that PMR would be willing to proceed if the
mix and aggregate amount of consideration to be issued in the transaction could
be renegotiated.
During the week of July 20, 1998, ING Baring Furman Selz, on behalf of PMR,
proposed certain revised transaction terms to Mr. Stack. This proposal
contemplated that the Vencor Shares would be purchased by PMR for cash, at a
discount from the value to be paid to all other holders of BHC Capital Stock
(based upon the then-current trading value of the PMR Common Stock). Mr. Stack
indicated to ING Baring Furman Selz that, although he would be willing to
discuss any reasonable proposal with the BHC Board, he could not recommend or
support the current proposal. Soon thereafter, Mr. Tepper called Mr. Stack and
made a revised
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proposal on behalf of PMR. Mr. Stack indicated to Mr. Tepper that he would
discuss this proposal with members of the BHC Board and with representatives of
Vencor.
During the course of the next few days, representatives of PMR, BHC and ING
Baring Furman Selz sought to negotiate terms acceptable to each of PMR and BHC.
These negotiations resulted in an agreement that PMR would pay the holders of
BHC Capital Stock an aggregate amount of $118,500,000 in connection with the
proposed transaction, $65,000,000 of which would be paid in cash for the Vencor
Shares, $28,500,00 of which would be paid in cash to all holders of the BHC
Capital Stock other than Vencor, and $25,000,000 of which would be paid through
the issuance of shares of PMR Common Stock to all holders of the BHC Capital
Stock other than Vencor. The parties did not agree, at this time, how the shares
of PMR Common Stock would be valued.
On July 24 and July 25, 1998, representatives and legal counsel of both
companies and ING Baring Furman Selz met in San Diego, California to negotiate
the final terms of the Merger Agreement. At this meeting, Mr. Stack indicated
that it was BHC's desire to agree upon a set number of shares of PMR Common
Stock that would be issued in the proposed transaction. Mr. Stack further
indicated that, in light of the revisions made in the financial terms of the
proposed transactions, BHC expected PMR to make various other concessions. A
revised draft of the Merger Agreement was thereafter distributed to all parties.
On July 28, 1998, a meeting of the members of the PMR Board was held. All
of the members of the PMR Board attended the meeting in person. Prior to the
meeting, near-final versions of the draft Merger Agreement and related
agreements had been made available. At the meeting, PMR's officers made
presentations to the PMR Board members on PMR's due diligence investigation with
respect to BHC. The terms of the proposed combination, including the proposed
exchange ratio and other elements of the merger consideration were also
presented. In addition, SunTrust Equitable made a financial presentation to the
PMR Board and delivered to the PMR Board its oral opinion as to the fairness to
PMR's stockholders, from a financial point of view, of the merger consideration
to be received by BHC's stockholders in the Merger. During the course of the
presentations, members of the PMR Board asked detailed questions and considered
and discussed various considerations at length. Following discussion by the PMR
Board, the PMR Board unanimously (i) determined that the terms of the proposed
Merger Agreement and the transactions contemplated thereby are fair to, and in
the best interests of, PMR and its stockholders and (ii) approved the proposed
Merger Agreement and the Merger and all related agreements contemplated thereby,
including the issuance of shares of PMR Common Stock in connection therewith.
The PMR Board also instructed PMR's management to negotiate and finalize the
terms of the draft Merger Agreement.
Based upon analysis of the factors as described above and under the heading
"-- PMR's Reasons for the Merger," the PMR Board has unanimously approved the
Merger and the Merger Agreement.
On July 29, 1998, the BHC Board met to discuss and consider the terms and
conditions of the proposed Merger and the Merger Agreement, a near-final version
of which had been provided to the directors prior to such meeting. At this
meeting, Mr. Stack summarized each of the material terms of the proposed Merger,
the Merger Agreement and the related documents and agreements. In addition,
other members of BHC's management discussed the expected financial impact of the
proposed Merger. During the course of these presentations, members of the BHC
Board asked detailed questions and considered and discussed various terms of the
proposed Merger Agreement and proposed Merger at length.
The members of the BHC Board discussed and analyzed in detail the disparate
consideration proposed to be paid to the stockholders of BHC in connection with
the Merger. Specifically, the BHC Board discussed and considered that, pursuant
to the then-current terms of the Merger Agreement, Vencor was to receive
$65,000,000 in cash for its approximate 60% ownership of the outstanding capital
stock of BHC, while all stockholders of BHC other than Vencor were to receive
$28,500,000 in cash, 2,600,000 shares of PMR Common Stock, and an unsecured
promissory note in the aggregate amount of $925,000 for their remaining
approximate 40% ownership of the of the outstanding capital stock of BHC. The
Board discussed that, based upon the closing price of the PMR Common Stock on
July 28, 1998 (the last trading day immediately preceding the date of such BHC
Board meeting), the stockholders of BHC other than Vencor would receive
approximately $7.37 per share of BHC Common Stock, while Vencor would receive
approximately $5.58 per
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share of BHC Common Stock and Series A Preferred Stock. The BHC Board also
further recognized and considered that the combination of consideration proposed
to be received by the individual stockholders of BHC other than Vencor would
permit such stockholders to decide, on an individual basis, whether to continue
to remain as an investor in the combined company or to liquidate completely
(subject to shares to be placed in escrow and restrictions affecting shares
owned by affiliates) their investment. As a result of these considerations, and
based upon various factors including the respective valuations presented to the
BHC Board, a consensus was reached among the members of the BHC Board that, in
the judgment of such directors, the proposed transaction was in the best
interest of all of BHC's stockholders. Based upon the factors described above
and under the heading "-- BHC's Reasons for the Merger," the BHC Board has
unanimously approved the Merger and the Merger Agreement.
On July 30, 1998, representatives of PMR and BHC executed the Merger
Agreement.
PMR'S REASONS FOR THE MERGER
In the course of reaching its decision to approve the Merger, the Merger
Agreement, the issuance by PMR of shares of PMR Common Stock and the payment of
other consideration in connection therewith, and each of the transactions and
arrangements contemplated thereby, the PMR Board consulted with PMR legal and
financial advisors as well as with PMR management, and considered a number of a
factors, including, among other things: (i) information concerning PMR's and
BHC's respective businesses, prospects, financial performances, financial
conditions and operations; (ii) an analysis of the respective contributions to
revenues, operating profits and net profits of PMR and BHC the combined company;
(iii) the proposed terms and the structure of the Merger; (iv) the value of PMR
Common Stock; (v) potential synergies and alternatives for growth resulting from
the Merger; (vi) the terms of the Merger Agreement, including the parties'
mutual representations, warranties, and covenants and indemnity obligations and
the conditions to their respective obligations; (vii) the SunTrust Equitable
opinion relating to the fairness, from a financial point-of-view to PMR's
stockholders of the consideration to be received in the Merger by the BHC
stockholders; (viii) reports from management and legal advisors on the results
of PMR's due diligence investigation of BHC; and (ix) the business advantages
expected to result from, and potential risks presented by, the proposed
combination of PMR and BHC. In particular, the PMR Board's deliberations
included an analysis of the following factors:
DISEASE MANAGEMENT STRATEGY FOR NEUROLOGICAL DISORDERS
- The Merger is consistent with PMR's strategy of becoming a vertically
integrated provider of disease management services for the SMI
population, thus controlling directly and more effectively the disparate
components of the delivery system.
- The Merger will facilitate PMR's ability to expand its care continuum by
adding complementary inpatient services, partial hospitalization and
residential treatment services to existing outpatient and case management
programs.
- The Merger will accelerate PMR's development of recent strategic
initiatives in the areas of pharmacy services, clinical drug trials, and
informatics across a broader and more diverse patient population.
- The Merger will enhance PMR's ability to enter into at-risk contracts
with managed care companies in markets currently served by BHC by
allowing PMR to control the crucial inpatient hospital cost component
more effectively.
- The Merger will facilitate the ability of PMR to broaden the diagnostic
categories treated as well as reduce PMR's dependence on Medicare as its
primary payor source.
- The Merger represents an important step in PMR's long-range strategy of
positioning itself as a vertically integrated manager and provider of
health care services to disease-specific patient populations afflicted
with chronic forms of neurological impairment.
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REVENUE ENHANCEMENT POTENTIAL
- PMR will be able to add SMI outpatient programs to BHC facilities in
markets currently served by PMR and BHC and add SMI outpatient programs
to BHC inpatient facilities in markets.
- PMR's expertise in developing and managing outpatient programs will
assist PMR in expanding and potentially improving the profitability of
existing BHC outpatient programs.
- PMR will potentially gain significant leverage for its recent pharmacy
joint venture through the opportunity to offer pharmacy products and
services to patients at BHC facilities.
- PMR's post-Merger patient population will present an enhanced and
compelling resource to pharmaceutical companies for clinical drug trials,
which already represented an area of strategic focus for PMR. PMR
believes that the potential for additional clinical drug trial revenue
will be enhanced by the Merger.
POTENTIAL COST SAVINGS
- PMR anticipates that it will be able to eliminate $2.0 million to $3.0
million of costs post-Merger in the corporate and regional expense
categories.
- Because BHC receives a component of its reimbursement under Medicare Part
A, PMR will be cost-reimbursed for certain amounts of post-Merger
combined general and administrative expenses.
IMPACT ON PMR EARNINGS PER SHARE
- If potential cost savings and revenue enhancements are achieved, and
based on the currently available information and the current economic
regulatory requirements, the Merger is projected to be accretive to PMR's
earnings in its first full year as a combined company, which will be the
period ending April 30, 2000.
The PMR Board also considered a variety of potentially negative factors
concerning the Merger, including (i) the risk that the combined company might
not achieve revenue equal to the sum of the separate companies' anticipated
revenue; (ii) the risk that the combined company might not achieve sufficient
operating efficiencies to ensure that Merger would not have a negative effect on
PMR's earnings per share; (iii) the charges expected to be incurred in
connection with the Merger, including transaction costs and costs of integrating
the businesses of the companies, to be reflected in a charge estimated to be
approximately $7 million, to be expensed in the periods in which the costs will
be incurred (see "Unaudited Pro Forma Combined Consolidated Financial
Information"); (iv) the risk that the combined company's ability to increase or
maintain revenue might be diminished by intensified competition among providers
of similar or related services; (v) the risk that other benefits sought to be
obtained by the Merger would not be obtained; (vi) the risks associated with
increasing the leverage of PMR; (vii) the risks associated with expanding PMR's
business to become a "provider" of mental health services; and (viii) other
risks related to the Merger and the business of BHC, including the ability to
sustain BHC's operating margins and the ability to retain BHC's key personnel.
See "Risk Factors."
Based on the factors described above, the PMR Board determined that the
Merger is fair to and in the best interests of PMR and its stockholders, and
approved the Merger, the Merger Agreement, the issuance by PMR of shares of PMR
Common Stock and the payment of other consideration in connection therewith, and
the transactions contemplated thereby.
The foregoing discussion of the information and factors considered is not
intended to be exhaustive but is believed to include the material factors
considered by the PMR Board. In reaching a determination whether to approve the
Merger Agreement, the Merger, and the issuance by PMR of shares of PMR Common
Stock and the payment of other consideration therewith, in view of the wide
variety of factors considered, the PMR Board did not find it practical to
quantify or otherwise attempt to assign any relative or specific weights to the
foregoing factors and individual directors may have given differing weights to
different factors.
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PMR BOARD RECOMMENDATION
FOR THE REASONS DISCUSSED ABOVE, THE PMR BOARD HAS DETERMINED THAT THE
MERGER IS ADVISABLE AND IN THE BEST INTERESTS OF PMR AND THE PMR STOCKHOLDERS
AND HAS UNANIMOUSLY RECOMMENDED A VOTE FOR APPROVAL OF THE MERGER PROPOSAL.
BHC'S REASONS FOR THE MERGER
The BHC Board, based upon various factors, concluded that the Merger
Agreement and the Merger are in the best interests of the stockholders of BHC,
unanimously approved the Merger Agreement and the Merger, and resolved to
recommend to the BHC stockholders that they vote to approve the Merger Agreement
and the Merger. The BHC Board believes that the Merger offers BHC and its
stockholders other than Vencor an opportunity to continue to participate in the
healthcare industry through a stronger, combined company. Following the
consummation of the Merger, the BHC Board believes that the combined company's
ability to compete in such industry will be strengthened by the potential
business synergies expected to be afforded by the Merger, and by the combination
of the management teams of BHC and PMR. The BHC Board believes that these and
other potential synergies offered by the Merger will, if any such benefits are
ultimately realized, be beneficial to BHC's stockholders.
The following are the material factors considered by the BHC Board in
reaching its conclusions: (i) the analysis of its management with respect to the
potential strategic and financial benefits of the Merger, based in part on the
business, financial, accounting and legal due diligence investigations performed
with respect to PMR; (ii) current industry, economic and market conditions;
(iii) information concerning the financial condition, results of operations and
cash flows and business of PMR and BHC, both on an historical and a prospective
basis; (iv) the historical market prices and trading information with respect to
the PMR Common Stock and the desire of BHC to obtain liquidity for the holders
of BHC Capital Stock; (v) the express terms and conditions of the Merger
Agreement, including the requirement for BHC stockholder approval and the fees
and expenses that would be payable by BHC upon termination under certain
circumstances; (vi) the BHC Board's evaluation of the potential long-term value
of shares in the combined company resulting from the Merger; (vii) the increased
access to the capital markets expected to be available to the combined company
resulting from the Merger; (viii) the complementary corporate cultures and
philosophies of BHC and PMR, which the BHC Board concluded would facilitate
BHC's ability to consummate the Merger in a timely fashion and could ease the
transition period of the combined company resulting from the Merger; (ix) the
corporate governance aspects of the Merger, including that the size of the PMR
Board would be increased to include one member of the current BHC Board; and (x)
the ability to obtain required consents and regulatory approvals to consummate
the transaction.
In addition, the BHC Board considered the risks inherent in the Merger,
including the risk that the anticipated benefits of the Merger might not be
realized, that the Exchange Ratio is fixed and will not be adjusted in the event
of any increase or decrease in the trading values of the PMR Common Stock, and
the difficulties associated with consolidating the operations of BHC and PMR and
the related challenges that will be faced by management of the combined company
in such efforts. After considering all of such information, however, the BHC
Board concluded that the Merger would be in the best interests of the
stockholders of BHC. There can be no assurances, however, that any expected
benefits of the Merger, including those considered by the BHC Board, will be
realized.
BHC believes that the foregoing discussion, while not exhaustive,
identifies and describes the material factors and information considered by the
BHC Board. In reaching the determination to approve and recommend the Merger,
and in view of the wide variety of factors considered, the BHC Board did not
assign any relative or specific weights to the foregoing factors and individual
directors may have given differing weights to different factors. Rather, the BHC
Board viewed its positions and recommendation as being based upon the totality
of the information presented and considered, the BHC Board's determination that
the Merger constituted an opportunity to strategically align BHC and PMR with
the intention of building a
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stronger, combined company, and the BHC Board's conclusion that the combined
company would likely be better able to compete in the current healthcare
environment.
BHC BOARD RECOMMENDATION
THE BHC BOARD UNANIMOUSLY RECOMMENDS THAT THE BHC STOCKHOLDERS VOTE IN
FAVOR OF THE APPROVAL AND ADOPTION OF THE MERGER AGREEMENT AND THE MERGER AT THE
BHC SPECIAL MEETING. Certain directors of BHC may be deemed to have certain
interests in the Merger in addition to their interests as BHC stockholders. See
"-- Interests of Certain Persons in the Merger; Certain Relationships."
OPINION OF SUNTRUST EQUITABLE SECURITIES CORPORATION
PMR engaged SunTrust Equitable to act as its financial advisor to the PMR
Board. In connection with that engagement, the PMR Board requested SunTrust
Equitable evaluate the fairness, from a financial point of view, to the PMR
stockholders holding shares of PMR Common Stock prior to the proposed
acquisition of the consideration to be paid in the Merger ("the Transaction").
The form of the full text of the opinion of SunTrust Equitable, dated July
30, 1998, which sets forth assumptions made, matters considered and limitations
on the review undertaken by SunTrust Equitable, is attached hereto as Appendix B
and should be read carefully and in its entirety by the PMR stockholders.
PMR stockholders should note that the SunTrust Equitable opinion was
prepared for the PMR Board and addresses only the fairness of the Transaction,
in the aggregate, to the stockholders of PMR, from a financial point of view,
and does not constitute a recommendation to any stockholder of PMR as to how
such stockholder should vote upon the proposed Transaction. The Suntrust
Equitable opinion does not constitute an opinion as to the price at which PMR
Common Stock will actually trade at any time. SunTrust Equitable was not
requested by the PMR Board to make, nor did SunTrust Equitable make, any
recommendation as to the total consideration to be paid by PMR, which
determination was reached through negotiations between PMR and BHC without any
involvement by SunTrust Equitable. No restrictions or limitations were imposed
upon SunTrust Equitable with respect to the investigations made or procedures
followed in rendering its opinion.
In conducting its analysis and arriving at its opinion regarding the
fairness, from a financial point of view, of the proposed Transaction to the
common stockholders of PMR, SunTrust Equitable reviewed the Merger Agreement.
SunTrust Equitable also reviewed certain publicly available business and
financial information relating to PMR and BHC as well as other information,
including financial projections, provided to SunTrust Equitable by PMR and BHC.
SunTrust Equitable discussed the past and current operations and financial
condition and prospects of PMR and BHC with members of senior management of each
company. SunTrust Equitable also considered other information, financial
studies, analyses, investigations, and financial, economic, market and trading
criteria as it deemed relevant.
SunTrust Equitable assumed and relied upon the accuracy and completeness of
the information reviewed by it for the purpose of its opinion, and SunTrust
Equitable did not assume any responsibility for independent verification of such
information or for any independent evaluation or appraisal of the assets of PMR
or BHC. With respect to PMR's and BHC's financial projections, SunTrust
Equitable assumed they had been reasonably prepared on bases reflecting the best
currently available estimates and judgments of PMR's and BHC's managements, and
SunTrust Equitable expressed no opinion with respect to such forecasts or the
assumptions upon which they were based.
In preparing its opinion for the PMR Board of Directors, SunTrust Equitable
performed a variety of financial and comparative analyses, including those
described below. The summary of such analyses does not purport to be a complete
description of the analyses underlying SunTrust Equitable's opinion. The
preparation of a fairness opinion is a complex analytical process involving
various determinations as to the most appropriate and relevant methods of
financial analyses and the application of those methods to the particular
circumstances; therefore, the process undertaken to deliver an opinion is not
readily susceptible to summary description. In arriving at its opinion, SunTrust
Equitable did not attribute any particular weight to any
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analysis or factor considered by it, but rather made qualitative judgments as to
the significance and relevance of each analysis and factor. Accordingly,
SunTrust Equitable believes its analysis must be considered as a whole and that
selecting portions, without considering all analyses and factors, could create a
misleading or incomplete view of the processes underlying its resulting opinion.
In its various analyses, SunTrust Equitable made numerous assumptions with
respect to PMR and BHC, industry performance, general business and economic
conditions, and other matters, many of which are beyond the control of PMR and
BHC. The estimates in such analyses are not necessarily indicative of actual
values or predictive of future results, which may be significantly more or less
favorable than those suggested.
The generally accepted financial analyses SunTrust Equitable used in
reaching its opinion included: (i) a selected companies trading analysis,
including publicly traded companies in the facility-based behavioral health care
industry; (ii) a selected acquisitions analysis, which consisted of reviewing
operating statistics and purchase price information with respect to selected
acquisitions of businesses in the behavioral health care industry; (iii)
discounted cash flow analyses, which consisted of discounting to present value
the projected cash flows and terminal values of BHC, PMR, and PMR pro forma for
the Transaction; (iv) an analysis of the pro forma effect of the Transaction on
PMR's fully diluted earnings per share; (v) an analysis of the pro forma impact
of the Transaction on PMR's April 30, 1998 book capitalization and leverage;
(vi) a pro forma contribution analysis, which consisted of reviewing the
respective contribution of PMR and BHC to the pro forma combined historical and
projected income statements; and (vii) an analysis of the trading and volume
performance of PMR's Common Stock. Concurrent with these analyses, SunTrust
Equitable evaluated the impact of PMR's post-Transaction capital structure on
the combined company's ability to fund projected growth. The material portions
of these analyses are summarized below.
SELECTED PUBLIC COMPANIES ANALYSIS
To provide contextual data and comparative market information, SunTrust
Equitable analyzed the operating performance of PMR and BHC relative to certain
companies whose securities are publicly traded and that were deemed by SunTrust
Equitable to be reasonably similar to PMR pro forma for the BHC acquisition
(facility-based behavioral health care providers). The selected companies chosen
included: Children's Comprehensive Services, Inc.; Res-Care Inc.; and Universal
Health Services, Inc. (the "Selected Companies").
SunTrust Equitable examined certain publicly available financial data of
the Selected Companies for the latest twelve months ("LTM") and earnings
estimates for the twelve months ending December 31, 1998 and December 31, 1999.
The projected results were based upon consensus sources. Such data included
enterprise value (defined as the market value of common equity plus book value
of total debt and preferred stock less cash) as a multiple of LTM revenues, LTM
EBITDA and LTM EBIT, and equity value as a multiple of LTM pre-tax income, LTM
net income, book value, and price to earnings ratios based upon estimated
calendar year 1998 and 1999 earnings per share ("EPS").
SunTrust Equitable noted that as of July 27, 1998, the Selected Companies
were trading at implied multiples of enterprise value in: (i) a range of 1.2x to
1.6x (with an average of 1.4x) LTM revenues; and (ii) a range of 9.8x to 12.1x
(with an average of 11.1x) LTM EBITDA; and (iii) a range of 14.1x to 16.3x (with
an average of 15.3x) LTM EBIT. SunTrust Equitable noted that as of the same
date, the Selected Companies were trading at implied multiples of equity value
in: (iv) a range of 9.7x to 15.9x (with an average of 12.1x) LTM pre-tax income;
and (v) a range of 16.2x to 24.8x (with an average of 19.2x) LTM net income; and
(vi) a range of 1.9x to 3.0x (with an average of 2.3x) book value; 16.2x to
22.2x (with an average of 19.4x) 1998 estimated calendar year EPS and a range of
12.1x to 18.6x (with an average of 15.7x) estimated calendar year 1999 EPS.
Based on the terms of the Transaction, the consideration to be paid by PMR
represents an enterprise value of $210.5 million and an equity value of $120.2
million. These values imply multiples of 0.7x BHC's LTM revenue, 7.9x BHC's LTM
EBITDA, 11.9x BHC's LTM EBIT, 11.9x BHC's LTM pre-tax income, 19.2x BHC's LTM
net income, and 0.9x BHC's book value.
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As BHC has sold three facilities in the past 12 months, SunTrust Equitable
notes that fourth quarter 1998 results may be somewhat different than fourth
quarter 1997 results. SunTrust Equitable therefore believed it important to note
that, based on BHC's third fiscal quarter's results annualized, the enterprise
and equity values implied multiples of 0.7x run-rate revenue, 7.3x run-rate
EBITDA, 10.7x run-rate EBIT, 10.1x run-rate pre-tax income, and 14.2x run-rate
net income.
While all of the companies chosen are facility-based behavioral health
companies, SunTrust Equitable noted none were sufficiently similar to pro forma
PMR to allow SunTrust Equitable to reach its usual level of comfort regarding
the relative valuation implied for pro forma PMR by this type of analysis.
SELECTED ACQUISITIONS ANALYSIS
SunTrust Equitable performed an analysis based upon selected merger and
acquisition transactions in the behavioral health care industry set forth below
(the "Selected Transactions"). Multiples reviewed in the Selected Transactions
analysis included (i) aggregate transaction value (defined as the equity value
of the offer plus book value of total debt and preferred stock less cash) as a
multiple (when available) of LTM revenues, LTM EBITDA and LTM EBIT, and (ii)
aggregate purchase price (defined as equity value of the offer) as a multiple
(when available) of LTM pre-tax income, LTM net income and stockholders' equity.
The Selected Transactions were comprised of the following seven
transactions (Acquiror/Target): Youth and Family Centered Services, Inc./the
behavioral health care operations of Youth Services International;
Res-Care/Communications Network Consultants; Horizon Health Corporation/Acorn
Behavioral HealthCare; PsychPartners/Apogee Behavioral Health; Magellan Health
Services/Merit Behavioral Care; Horizon Health Care/FPM Behavioral Health; and
Vencor, Inc./Transitional Hospitals Corporation. Based upon the Selected
Transactions, SunTrust Equitable noted the implied multiples of aggregate
transaction value and aggregate purchase price, respectively, were in: (i) a
range of 0.5x to 1.9x (with an average(1) of 1.2x) LTM revenues; a range of 8.4x
to 18.5x (with an average of 11.7x) LTM EBITDA; a range of 8.7x to 58.8x (with
an average of 23.0x) LTM EBIT; a range of 7.5x to 166.2x (with an average of
28.3x) estimated LTM pre-tax income; a range of 8.5x to 276.9x (with an average
of 52.6x) LTM net income; and a range of 1.7x to 9.6x (with an average of 5.0x)
stockholders' equity.
In March 1998, Magellan Health Services entered into an agreement in which
it agreed to sell its interest in Charter Behavioral Health System ("CBHS") to
Crescent Operating, Inc. for $280.0 million in cash. In addition to CBHS,
Magellan agreed to sell: (i) Charter Advantage (the entity conducting Charter's
franchise operations); (ii) Charter System (the entity owning the system's
intellectual property); (iii) Group Practice Affiliates (Charter's physician
practice management business); (iv) certain behavioral staff model operations;
(v) Charter's Puerto Rican provider management business; (vi) Golden Isle
Assurance Company (one of the company's captive insurance companies; and (vii)
Strategic Advantage (which owned intellectual property used by the company to
monitor clinical results). As the $280.0 million sale price included the
consideration paid for these seven additional businesses, and as no supplemental
information was disclosed in Magellan's 8-K detailing the consideration and pro
forma operating results attributable to CBHS and the other businesses, SunTrust
Equitable chose not to include the Magellan/Crescent Operating transaction in
the Selected Acquisition Analysis.
Based on the terms of the Transaction, the consideration to be paid by PMR
represents an enterprise value of $210.5 million and an equity value of $120.2
million. These values imply multiples of 0.7x BHC's LTM revenue, 7.9x BHC's LTM
EBITDA, 11.9x BHC's LTM EBIT, 1.9x BHC's LTM pre-tax income, 19.2x BHC's LTM net
income, and 0.9x BHC's book value, respectively.
Sun Trust Equitable noted that no transaction utilized in the Selected
Acquisition Analysis is wholly comparable to the Transaction. Accordingly, an
analysis of the results of the foregoing necessarily involves complex
considerations and judgments concerning differences in financial and operating
characteristics of PMR and BHC and other qualitative factors that do not readily
lend themselves to quantitative analysis.
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(1)Averages exclude high and low values.
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Mathematical analysis such as determining the average is not in itself a
meaningful method of using selected transaction data.
DISCOUNTED CASH FLOW ANALYSIS
BHC
Using a discounted cash flow analysis, SunTrust Equitable estimated the
present value of the future cash flows that BHC could produce over a five-year
period (1999 through 2003) as a stand-alone entity (without giving effect to
potential operating or other efficiencies pro forma the Transaction) in
accordance with forecasts developed by BHC management and certain variants
thereof. SunTrust Equitable determined certain equity market value reference
ranges in each analysis based upon the sum of the aggregate discounted value of
BHC's free cash flows over a five-year investment horizon and the product of the
final year's projected free cash flow multiplied by terminal values.
To calculate free cash flow, SunTrust Equitable (i) tax-affected BHC's
projected earnings before interest, intangible amortization, and tax expense;
(ii) added back depreciation; (iii) subtracted the change in working capital;
and (iv) subtracted capital expenditures. The estimated free cash flows over a
five year projection horizon were discounted to present values utilizing BHC's
estimated weighted average cost of capital ("WACC"). SunTrust Equitable applied
a range of multiples from 11.1x to 14.2x to BHC's terminal year (2004) free cash
flow, determining the appropriate range of terminal multiples by assuming a
range of growth rates for BHC's free cash flow beyond the five-year projection
horizon of between 1.5% and 3.5%.
In determining BHC's WACC (the discount rate to be used in its discounted
cash flow calculations), SunTrust Equitable relied upon the capital asset
pricing model ("CAPM"). In utilizing the CAPM, SunTrust Equitable incorporated
the following assumptions: (i) a risk-free rate of return equal to the
then-current five-year treasury bond yield of 5.46%; (ii) an average levered
beta ((LOGO)) for the selected publicly traded companies and BHC, of 0.76 and
0.81, respectively; and (iii) a private equity risk-premium (above the risk-free
rate) of 15.0%.
This analysis resulted in an equity value reference range per share of BHC
Common Stock of $3.44 to $4.69, compared to an equity value per share of $6.23
in the Transaction.
PMR
SunTrust Equitable applied the same discounted cash flow valuation
methodology to PMR, both as a stand-alone and pro forma the Transaction. On a
stand-alone basis, SunTrust Equitable discounted the sum of PMR's free cash
flows over a five-year investment horizon and the terminal value for free cash
flow generated beyond that period using PMR's stand-alone WACC.
SunTrust Equitable applied a range of multiples from 11.6x to 21.5x to
PMR's terminal year (2004) free cash flow, determining the appropriate range of
terminal multiples by assuming a range of growth rates for PMR's free cash flow
in 2004 and beyond of between 3.0% and 7.0%. In determining PMR's WACC, SunTrust
Equitable relied upon the following CAPM assumptions: (i) the same risk-free
rate of return of 5.46%; (ii) an average levered beta for comparable
publicly-traded companies and PMR, of 0.86 and 0.74, respectively; and (iii) a
common stock risk-premium of 8.4%.
This analysis resulted in an equity value reference range per share of PMR
Common Stock of $14.70 to $21.61.
Pro Forma PMR
To arrive at a range of valuation for PMR common stock giving pro forma
effect to the Transaction, SunTrust Equitable discounted the sum of PMR's free
cash flows over a five-year investment horizon and the terminal value for free
cash flow generated beyond that time using PMR's pro forma WACC.
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SunTrust Equitable applied a range of multiples from 17.4x to 26.8x to
PMR's pro forma terminal year (2004) free cash flow, determining the appropriate
range of terminal multiples by assuming a range of growth rates for pro forma
PMR's free cash flow in 2004 and beyond of between 4.0% and 6.0%. In determining
PMR's pro forma WACC under CAPM, SunTrust Equitable utilized the same risk-free
rate and common stock risk premium as was utilized to examine PMR on a
stand-alone basis and an average levered beta for selected comparable publicly
traded companies (a universe expanded to include the Selected Companies used for
BHC's valuation and the comparable companies used in PMR's stand-alone
valuation) and pro forma PMR, of 0.83 and 1.32, respectively.
This analysis resulted in an equity value reference range per share of PMR
Common Stock of $20.79 to $35.16.
PRO FORMA DILUTION ANALYSIS
SunTrust Equitable analyzed the pro forma effects resulting from the
Transaction on the projected EPS of PMR, including, without independent
verification, an assumed level of revenue enhancements and operating synergies
projected by the management of PMR and BHC for each of the years ending April
30, 1998 through 2004. This analysis was based upon a number of assumptions,
including, among others, completion of the Transaction, estimated amounts and
timing of the synergies and the projected financial performance of PMR and BHC.
The analysis assumed, on a pro forma basis, that the Transaction was consummated
on May 1, 1997.
The analysis indicated the Transaction, accounted for as a purchase
transaction, would be accretive/ (dilutive) to PMR's stand-alone EPS estimate(2)
by (6.1%), 5.2%, and 4.8%, assuming $0 million, $2.4 million and $4.5 million in
pro forma revenue enhancements and synergies for the years ending April 30,
1998, 1999, and 2000, respectively.
CAPITALIZATION AND LEVERAGE ANALYSIS
SunTrust Equitable analyzed the pro forma impact of the Transaction on
PMR's April 30, 1998 book capitalization and leverage. SunTrust Equitable
measured PMR's pro forma LTM EBITDA (defined as earnings before interest, taxes,
and depreciation and amortization but not including non-recurring items)
expressed as a multiple of pro forma LTM interest expense; PMR's pro forma LTM
EBITDA less capital expenditures expressed as a multiple of pro forma LTM
interest expense; PMR's pro forma LTM EBIT (defined as earnings before interest
and taxes but not including non-recurring items) expressed as a multiple of pro
forma LTM interest expense; PMR's pro forma indebtedness expressed as a
percentage of pro forma total book capitalization; PMR's pro forma indebtedness
expressed as a percentage of pro forma total stockholders' equity; PMR's pro
forma indebtedness expressed as a percentage of pro forma tangible net worth;
and PMR's pro forma indebtedness expressed as a multiple of pro forma LTM EBITDA
(collectively, the "PMR Credit Statistics").
SunTrust Equitable compared the PMR Credit Statistics to similar
measurements for the Selected Companies. Based upon this analysis, SunTrust
Equitable noted the following credit statistics for the Selected Companies:
EBITDA/interest expense ranged from 12.6x to 371.7x (an average of 132.6x);
EBITDA less capital expenditures/interest expense ranged from 6.4x to 283.9x
(with an average of 100.1x); EBIT/interest ranged from 6.5x to 301.1x (with an
average of 106.0x); debt/capitalization ranged from 17.2% to 61.5% (with an
average of 40.1%); debt/equity ranged from 20.8% to 159.8% (with an average of
84.0%); debt/tangible net worth ranged from 30.7% to 187.2% (with an average of
96.7%); and debt/EBITDA ranged from 1.1x to 5.2x (with an average of 2.7x).
Based upon the Capitalization and Leverage analysis, the Transaction would
result in the following pro forma credit statistics for PMR: EBITDA/interest
equates to 2.4x; EBITDA less capital expenditures/interest
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(2)Actual results and consensus EPS estimates assuming PMR continued to operate
on a stand-alone basis.
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equates to 2.1x; EBIT/interest equates to 1.7x; debt/capitalization equates to
59.1%; debt/equity equates to 187.8%; debt/tangible net worth equates to 201.5%;
and debt/EBITDA equates to 4.5x.
As PMR currently has very little debt, and as the Transaction will be
funded with a significant amount of new debt, the results of the pro forma
capitalization analysis suggest PMR will be significantly more leveraged upon
completion of the Transaction. This highly leveraged capital structure will
increase the combined company's risk profile in the event of operational or
post-Transaction integration difficulties.
PRO FORMA CONTRIBUTION ANALYSIS
SunTrust Equitable analyzed the pro forma relative contributions of BHC to
certain PMR operations measures the ("Operations Measures") resulting from the
Transaction for the fiscal year-ended April 30, 1998 and the projected fiscal
year ending April 30, 1999.
Each analysis reflected the historical and projected financial information
provided by PMR and BHC management. The analyses did not assume the realization
of any synergies in connection with the Transaction. For the fiscal year-ended
April 30, 1998, the relative contribution to Pro Forma PMR from each of PMR and
BHC would be approximately: (i) 18.3% and 81.7% of total revenue, respectively;
(ii) 21.6% and 78.4% of EBITDA, respectively; and (iii) 26.2% and 73.8% of EBIT,
respectively.
For the fiscal year-ending April 30, 1999, the relative contribution to Pro
Forma PMR from each of PMR and BHC would be approximately: (i) 20.5% and 79.5%
of projected total revenue, respectively; (ii) 24.8% and 75.2% of projected
EBITDA, respectively; and (iii) 29.7% and 70.3% of projected EBIT, respectively.
Upon consummation of the Transaction, stockholders of PMR and BHC will own
71.6% and 28.4% of Pro Forma PMR, on a fully-diluted basis, based upon the
Exchange Ratio, respectively. However, it should be noted that PMR Common Stock
represents only 12.2% of the total enterprise value in the Transaction. (The
balance consists of 42.3% cash, 45.1% assumed debt and 0.4% seller financing.)
TRADING ANALYSIS
SunTrust Equitable's analysis of the performance of PMR Common Stock
consisted of a historical analysis of closing prices and trading volume on (i) a
daily basis for the period from July 1, 1997 through July 24, 1998 and (ii) a
monthly basis for the period from July 1995 through July 1998. During the period
in the daily analysis, PMR Common Stock reached a high of $24.25 per share and a
low of $8.88 per share. During the period in the monthly analysis, PMR Common
Stock reached a high of $31.25 per share and a low of $3.63 per share. On July
24, 1998, the closing price of PMR Common Stock was $9.31.
CONCLUSION
In performing its analyses, SunTrust Equitable made numerous assumptions
with respect to industry performance, general business, economic, market, and
financial conditions and other matters, many of which are beyond the control of
PMR and BHC. Any estimates contained in such analyses are not necessarily
indicative of actual past or future results or values, which may be
significantly more or less favorable than such estimates. Actual values will
depend upon several factors, including events affecting the provider-based
behavioral health care industry, general economic, market, and interest rate
conditions, and other factors which generally influence the price of securities.
Pursuant to the terms of SunTrust Equitable's engagement, PMR has agreed to
pay SunTrust Equitable an aggregate fee of $400,000 for its services in
connection with the Transaction, none of which is contingent upon the
consummation of the Transaction. PMR has also agreed to reimburse SunTrust
Equitable for its reasonable out-of-pocket expenses incurred in performing its
services and to indemnify SunTrust Equitable and related persons against certain
liabilities.
SunTrust Equitable was selected to render an opinion in connection with the
Transaction based upon SunTrust Equitable's qualifications as investment
bankers, health care expertise and reputation, including the fact that SunTrust
Equitable, as part of its health care investment banking services, is regularly
engaged in the
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valuation of businesses and securities in connection with mergers, acquisitions,
underwritings, sales and distributions of listed and unlisted securities,
private placements, and valuations for corporate and other purposes.
SunTrust Equitable Securities Corporation is a nationally recognized
investment banking firm that provides a full range of financial, advisory and
brokerage services. SunTrust Equitable served as the lead managing underwriter
in connection with PMR's follow-on equity offering, which was completed in
October 1997. SunTrust Equitable is a market maker in PMR Common Stock and
regularly publishes research on PMR. Accordingly, SunTrust Equitable may at any
time hold a long or short position in such securities.
Based on the foregoing, SunTrust Equitable concluded the consideration to
be paid by PMR pursuant to the Agreement is fair, from a financial point of
view, to the Common Stockholders of PMR.
INTERESTS OF CERTAIN PERSONS IN THE MERGER
In considering the recommendation of the BHC Board with respect to the
Merger Proposal, holders of BHC Capital Stock should be aware that members of
the BHC Board and the executive officers of BHC have certain interests in the
Merger that are in addition to the interests of the holders of BHC Capital Stock
generally. The members of the BHC Board, including the outside directors, were
aware of these interests and took such interests into account in approving the
Merger Agreement and transactions contemplated thereby.
Effective upon consummation of the Merger, Mr. Stack, the current President
and Chief Executive Officer of BHC, will be elected by the PMR Board to fill a
newly created vacancy on the PMR Board of Directors and shall be appointed as
the President and Chief Operating Officer of PMR, subject to his current
employment agreement with BHC. Under his employment agreement, if Mr. Stack is
terminated by BHC without cause or pursuant to a constructive termination,
including a termination following a change in control of BHC, Mr. Stack would be
entitled to (i) three times his highest annual salary under the agreement, (ii)
the maximum bonus that could be obtained by Mr. Stack for the year, and (iii)
the continuation of Mr. Stack's benefits for up to three years.
In connection with the Merger, PMR has agreed that, at the Effective Time,
PMR will award to Mr. Stack and, subject to certain conditions, Mr. Davis, Chief
Financial Officer of BHC, retention bonuses in the amounts of 100,000 shares of
PMR Common Stock and 50,000 shares of PMR Common Stock, respectively, in the
event that each of them remains employed by BHC as of the Effective Time.
Vencor, the holder of an approximate 60% interest of BHC Capital Stock,
will receive $65,000,000 in cash for the Vencor Shares.
REGULATORY MATTERS
Under the HSR Act and the rules promulgated thereunder by the FTC, the
Merger may not be consummated until notifications have been given and certain
information has been furnished to the FTC and the Antitrust Division and
specified waiting period requirements have been satisfied. PMR and BHC filed
notification and report forms under the HSR Act with the FTC and Antitrust
Division on August 20, 1998. These filings commenced a 30-day waiting period
under the HSR Act, with respect to which PMR and BHC have requested early
termination. If, prior to the expiration of such period, the FTC or the
Antitrust Division should request additional information or documentary material
under the HSR Act, consummation of the Merger could be delayed until after the
companies have substantially complied with the request.
The FTC and the Antitrust Division frequently scrutinize the legality under
the antitrust laws of transactions such as the Merger. At any time before or
after the consummation of the Merger, the FTC, the Antitrust Division, state
attorneys general or others could take action under antitrust laws with respect
to the Merger, including seeking to enjoin consummation of the Merger or seeking
to impose conditions on PMR with respect to the business operations of the
combined companies. In addition, the review of the Merger pursuant to the HSR
Act may substantially delay or proscribe consummation of the Merger. There can
be no assurance that a challenge to the Merger on antitrust grounds will not be
made, or if such challenge is made,
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that PMR would prevail or would not be required to terminate the Merger
Agreement or to accept certain conditions in order to consummate the Merger.
CERTAIN FEDERAL INCOME TAX MATTERS
The following discussion summarizes the material federal income tax
considerations of the Merger that are generally applicable to holders of BHC
Capital Stock. This discussion assumes that holders of shares of BHC Capital
Stock hold such shares as capital assets. This discussion is based on currently
existing provisions of the Code, existing Treasury Regulations thereunder and
current administrative rulings and court decisions, all of which are subject to
change. Any such change, which may or may not be retroactive, could alter the
tax consequences to the BHC stockholders.
BHC stockholders should be aware that this discussion does not deal with
all federal income tax considerations that may be relevant to particular BHC
stockholders in light of their particular circumstances, such as stockholders
who are dealers in securities, banks, insurance companies or tax-exempt
organizations, who are subject to the alternative minimum tax provisions of the
Code, who are non-United States persons, who acquired their shares in connection
with stock option or stock purchase plans or in other compensatory transactions
or who hold their shares as a hedge or as part of a hedging, straddle,
conversion or other risk reduction transaction. In addition, the following
discussion does not address the tax consequences of the Merger under foreign,
state or local tax laws or the tax consequences of transactions effectuated
prior to or after the Merger (whether or not such transactions are in connection
with the Merger).
No ruling from the Internal Revenue Service (the "IRS") concerning the
federal income tax consequences of the Merger will be requested. The tax
consequences set forth in this discussion are not binding on the IRS or the
courts and no assurance can be given that contrary positions will not be
successfully asserted by the IRS or adopted by a court.
EACH STOCKHOLDER SHOULD CONSULT HIS, HER OR ITS OWN TAX ADVISOR AS TO THE
PARTICULAR TAX CONSEQUENCES TO HIM, HER OR IT OF THE MERGER, INCLUDING THE
APPLICABILITY AND EFFECT OF ANY FOREIGN, STATE, LOCAL OR OTHER TAX LAWS.
TAXABLE SALE OF BHC CAPITAL STOCK. The exchange of BHC Capital Stock for
the Merger Consideration pursuant to the Merger will be a taxable sale of each
stockholder's BHC Capital Stock. Accordingly, each BHC stockholder will
recognize gain or loss equal to the difference between the stockholder's
adjusted tax basis in his, her or its BHC Capital Stock and the sum of (i) the
fair market value of the Merger Consideration received on the Closing Date, (ii)
the fair market value, as of the Closing Date, of the escrowed PMR Common Stock
(the "Escrow Shares") and (iii) the amount of the other escrowed portions of the
Merger Consideration (the "Deferred Payments"), other than imputed interest, as
described below. Such gain or loss will be a capital gain or loss if the BHC
Capital Stock was held as a capital asset in the hands of the stockholder, and a
long-term capital gain or loss if the stockholder held his, her or its BHC
Capital Stock for more than one year. Long-term capital gain will be subject to
a maximum federal tax rate of 20% for noncorporate taxpayers.
IMPUTED INTEREST. Any Deferred Payment received by a BHC stockholder will
be bifurcated into an interest component and a principal component under the
imputed interest rules. The portion of each Deferred Payment that will be
treated as a payment of principal is determined by discounting the payment back
from the payment date to the Closing Date at the lowest "applicable federal
rate" for short-term debt instruments, as published by the IRS, over the
three-month period ending on the Closing Date. The remainder of each Deferred
Payment will be treated as interest. Amounts treated as interest will be
includable in the taxable income of the stockholder as ordinary income in
accordance with his, her or its method of accounting.
INSTALLMENT SALES TREATMENT. Because certain payments of Merger
Consideration (pursuant to the Escrow and the Notes) are to be received after
the close of the taxable year in which the Merger occurs, any gain realized by a
BHC stockholder resulting from the sale of his, her or its shares must be
reported under the installment method, unless the stockholder affirmatively
elects out of or is otherwise ineligible for installment
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method treatment. Under the installment method, a portion of each payment of the
Merger Consideration is generally taxable as gain in the year of receipt and a
portion represents a tax-free recovery of the stockholder's basis in the BHC
shares. The gain is calculated by multiplying the principal amount of any
payment received in the year by a "gross profit ratio" which is the ratio that
(i) the selling price (excluding imputed interest) less the stockholder's
adjusted basis in the BHC shares bears to (ii) the total selling price of the
stockholder's BHC shares. Notwithstanding the general rule regarding when
payments are taken into income under the installment sales method, the Escrow
Shares will be treated as received by the BHC stockholders on the Closing Date.
The installment method does not apply to stockholders who will recognize a
loss in the Merger, who affirmatively elect out of installment method treatment
or are otherwise ineligible for installment sales treatment. A stockholder may
elect out of the installment method by timely filing the appropriate form with
his, her or its tax return for the tax year in which the Merger occurs. In
general, if the installment sales rules do not apply, a stockholder will
recognize any gain or loss on the exchange on the Closing Date.
Certain transactions can accelerate the recognition of gain under the
installment sale method, including a disposition or pledge of an installment
obligation or the grant of a security interest therein. Additionally, a
stockholder that reports gain under the installment sales method may be required
to pay interest on the deferred tax liability. In general, if the total face
amount of all installment obligations held by a BHC stockholder (including the
right to receive Deferred Payments) exceeds, at the close of a taxable year, $5
million, interest as additional tax is required to be paid on the deferred tax
liability at the underpayment rate under Section 6621(a)(2) of the Code
multiplied by the percentage of such face amount in excess of $5 million.
Moreover, if a Deferred Payment were actually reduced by the amount of an
indemnification claim or Escrow Shares were returned to PMR pursuant to the
Merger Agreement, stockholders could be required to redetermine the amount and
timing of interest and gain recognized. In such an event, the stockholders
should consult with their own tax advisors regarding the application of the
imputed interest and installment sales rules.
DISQUALIFIED DISPOSITIONS. Stockholders who acquired their BHC Capital
Stock pursuant to the exercise of an incentive stock option, as defined in
section 422 of the Code ("ISO"), that was either (i) exercised within one year
of the Closing Date or (ii) granted within two years of the Closing Date, will
be subject to the Code's "disqualifying disposition" rules. As a result, such
stockholders would recognize ordinary income in 1998 (regardless or whether or
not they have elected out of the installment method) equal to the lesser of (i)
the excess of the fair market value of their BHC Capital Stock on the date of
exercise over the stockholder's adjusted basis in the stock or (ii) the
stockholder's actual gain, if any, on the exchange (i.e., the excess, if any, of
the amount received and to be received for the stockholder's stock over the
stockholder's adjusted basis in the stock). The remainder of the gain, if any,
will be reported in accordance with the rules described above except that for
purposes of the installment method, a stockholder's basis in his or her BHC
Capital Stock will be increased by the amount of the ordinary income recognized.
TAX BASIS AND HOLDING PERIOD WITH RESPECT TO PMR COMMON STOCK RECEIVED. To
the extent that BHC stockholders receive PMR Common Stock as part of the Merger
Consideration, the amount realized with respect to such stock will be equal to
the fair market value of the stock as of the Closing Date. A stockholder's
aggregate basis in such PMR Common Stock will equal its fair market value as of
the Closing Date and the holding period for such stock will begin the day after
the Closing Date.
DISSENTING STOCKHOLDERS. BHC stockholders who perfect their appraisal
rights with respect to their BHC Capital Stock and do not own any shares of PMR
capital stock (either actively or constructively within the meaning of Section
318 of the Code) following the receipt of such cash, will generally recognize
gain or loss measured by the difference between the amount of cash received and
the stockholder's adjusted tax basis in the BHC Capital Stock. Such gain or loss
will be capital gain or loss if the BHC Capital Stock was held as a capital
asset in the hands of the stockholder, and a long-term capital gain or loss if
the stockholder held his, her or its BHC stock for more than one year. Long-term
capital gain will be subject to a maximum federal tax rate of 20% for
noncorporate taxpayers.
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BACKUP WITHHOLDING. Certain noncorporate BHC stockholders may be subject to
backup withholding at a rate of 31% on the gross proceeds received pursuant to
the Merger. Backup withholding will not apply, however, to a stockholder who
furnishes a correct taxpayer identification number ("TIN") and certified that
he, she or it is not subject to backup withholding on a substitute Form W-9, who
provides a certificate of foreign status on Form W-8, or who is otherwise exempt
from backup withholding. A stockholder who fails to provide the correct TIN on
Form W-9 may be subject to a $50 penalty imposed by the IRS.
THE PRECEDING DISCUSSION DOES NOT PURPORT TO BE A COMPLETE ANALYSIS OR
DISCUSSION OF ALL POTENTIAL TAX EFFECTS RELEVANT TO THE MERGER. THUS, HOLDERS OF
BHC CAPITAL STOCK ARE URGED TO CONSULT THEIR OWN TAX ADVISORS AS TO THE SPECIFIC
TAX CONSEQUENCES TO THEM OF THE MERGER, INCLUDING TAX RETURN REPORTING
REQUIREMENTS, THE APPLICABIITY AND EFFECT OF FEDERAL, STATE, LOCAL AND OTHER
APPLICABLE TAX LAWS AND THE EFFECTS OF ANY PROPOSED CHANGES IN THE TAX LAWS.
ACCOUNTING TREATMENT
The Merger is intended to qualify as a purchase for accounting purposes.
APPRAISAL RIGHTS OF BHC STOCKHOLDERS
Holders of BHC Capital Stock as of the Record Date (the "Record Holders")
are entitled to appraisal rights under Section 262 of the DGCL ("Section 262")
for such securities. The following discussion represents a summary of the
material provisions of Section 262. For additional information, reference is
made to the full text of Section 262, which is reprinted in its entirety as
Appendix C to this Prospectus/Joint Proxy Statement. A person having a
beneficial interest in BHC Capital Stock as of the Record Date held of record in
the name of another person, such as a nominee, must act promptly to cause the
Record Holder to follow the steps summarized below properly and in a timely
manner to perfect the appraisal rights provided under Section 262.
Under Section 262, when a merger is to be submitted for approval at a
meeting of stockholders, as in the case of the BHC Meeting, not less than 20
days prior to the meeting, a constituent corporation must notify each of the
holders of its capital stock for which appraisal rights are available that such
appraisal rights are available and include in each such notice a copy of Section
262. THIS PROSPECTUS/JOINT PROXY STATEMENT SHALL CONSTITUTE SUCH NOTICE TO THE
RECORD HOLDERS OF BHC COMMON STOCK AND BHC SERIES A PREFERRED STOCK. ANY SUCH
STOCKHOLDER WHO WISHES TO EXERCISE SUCH APPRAISAL RIGHTS SHOULD REVIEW THE
FOLLOWING DISCUSSION AND APPENDIX C CAREFULLY BECAUSE FAILURE TO TIMELY AND
PROPERLY COMPLY WITH THE PROCEDURES SPECIFIED WILL RESULT IN THE LOSS OF
APPRAISAL RIGHTS UNDER THE DGCL.
Under the DGCL, a Record Holder of BHC Capital Stock who makes the demand
described below with respect to such shares, who continuously is the record
holder of such shares through the Effective Time, who otherwise complies with
the statutory requirements set forth in Section 262 and who neither votes in
favor of approval of the Merger Agreement and the Merger nor consents thereto in
writing will be entitled to have his or her BHC Capital Stock appraised by the
Delaware Court of Chancery and to receive payment of the "fair value" of such
shares as described below. Such holders are, in such circumstances, entitled to
appraisal rights because they hold shares of a constituent corporation to the
Merger and may be required by the Merger Agreement to accept the Merger
Consideration.
A Record Holder of BHC Capital Stock wishing to exercise his or her
appraisal rights must deliver to the Secretary of BHC, before the vote on the
Merger Agreement at the BHC Meeting, a written demand for appraisal of his or
her BHC Capital Stock. Merely voting or delivering a proxy directing a vote
against approval of the Merger Agreement and the Merger will not constitute a
demand for appraisal. A written demand is essential. Such written demand must
reasonably inform BHC of the identity of the Record Holder and that such holder
intends thereby to demand appraisal of the holder's shares. All written demands
for
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appraisal of BHC Capital Stock should be sent or delivered to BHC at 102
Woodmont Boulevard, Suite 800, Nashville, Tennessee 37205. In addition, a Record
Holder of BHC Capital Stock wishing to exercise his or her appraisal rights must
hold such shares of record on the date the written demand for appraisal is made
and must hold such shares continuously through the Effective Time. Stockholders
who hold their BHC Capital Stock in nominee form and who wish to exercise
appraisal rights must take all necessary steps in order that a demand for
appraisal is made by the record holder of such shares and are urged to consult
with their nominee to determine the appropriate procedures for the making of a
demand for appraisal by the record holder.
Within ten days after the Effective Time of the Merger, BHC, as the
Surviving Corporation in the Merger, must send a notice as to the effectiveness
of the Merger to each person who has satisfied the appropriate provisions of
Section 262 and who is entitled to appraisal rights under Section 262. Within
120 days after the Effective Time, any Record Holder of BHC Capital Stock who
has complied with the requirements for exercise of appraisal rights will be
entitled, upon written request, to receive from the Surviving Corporation a
statement setting forth (i) the aggregate number of shares of each class of BHC
Capital Stock not voted in favor of the Merger Agreement and with respect to
which demands for appraisal have been received and (ii) the aggregate number of
holders of such shares. Any such statement must be mailed within ten days after
a written request therefor has been received by the Surviving Corporation or
within ten days after expiration of the period for delivery of demands for
appraisal whichever is later.
Within 120 days after the Effective Time, but not thereafter, the Surviving
Corporation or any Record Holder of BHC Capital Stock who has complied with the
foregoing procedures and who is entitled to appraisal rights under Section 262
may file a petition in the Delaware Court of Chancery demanding a determination
of the "fair value" of such shares. The Surviving Corporation is not under any
obligation to file a petition with respect to the appraisal of the "fair value"
of the BHC Capital Stock, and neither PMR nor BHC currently intends that the
Surviving Corporation file such a petition. Accordingly, it is the obligation of
the stockholders to initiate all necessary action to perfect their appraisal
rights within the time prescribed in Section 262. A Record Holder of BHC Capital
Stock will fail to perfect, or effectively lose, his or her right to appraisal
if no petition for appraisal of shares of BHC Capital Stock is filed within 120
days after the Effective Time.
If a petition for an appraisal is timely filed, after a hearing on such
petition, the Delaware Court of Chancery will determine the holders of BHC
Capital Stock entitled to appraisal rights and will appraise the "fair value" of
the BHC Capital Securities, exclusive of any element of value arising from the
accomplishment or expectation of the Merger. The Court of Chancery may require
the stockholders who have demanded an appraisal for their shares and who had
stock represented by certificates to submit their stock certificates to the
Register in Chancery, for notation thereon of the pendency of the appraisal
proceedings, if any stockholder fails to comply with such direction the Court
may dismiss the proceedings as to such stockholder. Stockholders considering
seeking appraisal should be aware that the "fair value" of their BHC Capital
Stock as determined under Section 262 could be more than, the same as, or less
than the value of the Merger Consideration they would have received if they did
not seek appraisal. The Delaware Supreme Court has stated that "proof of value
by any techniques or methods which are generally considered acceptable in the
financial community and otherwise admissible in court" should be considered in
the appraisal proceedings. In addition, Delaware courts have decided that the
statutory appraisal remedy, depending on factual circumstances, may or may not
be a dissenter's exclusive remedy.
The Delaware Court of Chancery will determine the amount of interest, if
any, to be paid upon the amounts to be received by persons whose BHC Capital
Stock have been appraised. The costs of the action may be determined by such
court and imposed upon the parties as the court deems equitable in the
circumstances. Upon application of a stockholder as the Court deems just, the
Delaware Court of Chancery may also order that all or a portion of the expenses
incurred by any holder of BHC Capital Stock in connection with an appraisal,
including without limitation, reasonable attorneys' fees and the fees and
expenses of experts utilized in the appraisal proceeding, be charged pro rata
against the value of all of the BHC Capital Stock entitled to appraisal.
If any Record Holder of BHC Capital Stock who demands appraisal of his or
her shares under Section 262 fails to perfect, or effectively withdraws or
loses, his or her right to appraisal, as provided in the
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DGCL, the BHC Capital Stock of such stockholder will be deemed to receive Merger
Consideration in accordance with the Merger Agreement. A holder may withdraw his
or her demand for appraisal by delivering to the Surviving Corporation a written
withdrawal of his or her demand for appraisal and acceptance of the Merger,
except that any such attempt to withdraw made more than 60 days after the
Effective Time will require the written approval of the Surviving Corporation.
Notwithstanding the foregoing, no appraisal proceeding in the Court of Chancery
shall be dismissed as to any stockholder without the approval of the Court, and
such approval may be conditioned upon such terms. Failure to follow the steps
required by Section 262 of the DGCL for perfecting appraisal rights may result
in the loss of such rights.
Any Record Holder of BHC Capital Stock who has duly demanded an appraisal
in compliance with Section 262 will not, after the Effective Time, be entitled
to vote the BHC Capital Stock subject to such demand for any purpose or be
entitled to the payment of dividends or other distributions on those shares
(except dividends or other distributions payable to holders of record of shares
of BHC Capital Stock as of a date prior to the Effective Time).
NO APPRAISAL RIGHTS OF PMR STOCKHOLDERS
Under Section 262 of the DGCL, appraisal rights are generally available to
stockholders of a constituent Delaware corporation in connection with a merger.
PMR stockholders are not entitled to any appraisal rights with respect to the
Merger because, under the DGCL, PMR is not a constituent corporation in the
Merger. The vote of PMR stockholders with respect to the Merger Proposal is
being solicited by PMR to comply with the DGCL and Nasdaq requirements for
Nasdaq National Market issuers.
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TERMS OF THE MERGER
This section of the Prospectus/Joint Proxy Statement describes certain
aspects of the proposed Merger. The Merger Agreement provides for the merger of
PMR Sub, a newly formed, wholly owned Delaware subsidiary of PMR, with and into
BHC. The discussion in this Prospectus/Joint Proxy Statement of the Merger and
the description of the principal terms of the Merger Agreement are accurate in
all material respects but do not purport to be complete and are subject to and
qualified in their entirety by reference to the Merger Agreement, a copy of
which is attached to this Prospectus/Joint Proxy Statement as Appendix A and
incorporated herein by reference. All PMR stockholders and BHC stockholders are
urged to read the Merger Agreement in its entirety.
EFFECTIVE TIME
The Merger will be consummated on , 1998, or as the parties may
otherwise agree, but in no event later than the fifth business day following the
satisfaction or waiver of all other conditions to consummation of the Merger.
The Merger will become effective on the date the Certificate of Merger is duly
filed with and accepted by the Secretary of State of the State of Delaware. At
the Effective Time, PMR Sub will merge with and into BHC, with the result that
BHC will be the Surviving Corporation in the Merger and will be wholly-owned by
PMR. As described below, the stockholders of BHC will become stockholders of
PMR, and their rights will be governed by the Certificate of Incorporation and
Bylaws of PMR. See "Comparison of Rights of PMR Stockholders and BHC
Stockholders."
MANNER AND BASIS FOR CONVERTING SHARES
Exchange of Stock. Except as provided below, at the Effective Time, each
outstanding share of BHC Common Stock and each share of BHC Series A Preferred
Stock (other than the Vencor Shares and other than any shares of BHC Common
Stock owned by PMR, BHC, PMR Sub or any direct or indirect wholly owned
subsidiary of PMR or BHC) (collectively the "Converted Shares") will be
converted into the right to receive: (i) 0.3401 (the "Exchange Ratio") shares of
PMR Common Stock, (ii) cash in an amount equal to $28,500,000 divided by the
number of Converted Shares outstanding immediately prior to the Effective Time
(the "Outstanding Shares"), and (iii) an unsecured subordinated promissory note
of PMR in an amount equal to $925,000 divided by the number of Outstanding
Shares. The Vencor Shares will be converted into the right to receive
$65,000,000 in cash in the aggregate. The Exchange Ratio may adjust prior to the
Effective Time to the extent necessary to account for certain changes in
capitalization of BHC. A portion of the Merger Consideration is to be held in
escrow to secure the performance of the indemnification obligations of the BHC
stockholders pursuant to the Merger Agreement. See "-- Indemnification and
Reimbursement" and "-- Related Agreements -- Escrow Agreement."
An aggregate of 2,600,000 shares of PMR Common Stock will be issued in the
Merger, and certain outstanding BHC 1993 Options will be converted into options
to acquire up to a maximum of approximately 63,195 additional shares of PMR
Common Stock (assuming no holders of BHC 1993 Options accept the Repurchase
Offer).
Each holder of BHC Series B Preferred Stock has agreed to exchange,
immediately prior to the Effective Time, each outstanding share of BHC Series B
Preferred Stock for one share of BHC Common Stock. In addition, each share of
BHC Common Stock then held as treasury shares shall be cancelled.
Prior to the Effective Time, BHC has agreed to offer to repurchase from
holders of all outstanding stock options under BHC's option plans, all such
outstanding stock options for an aggregate purchase price of $1,135,546. On the
Closing Date, PMR shall pay, in cash, to each person that has accepted the
Repurchase Offer an amount equal to either fifty cents ($0.50) (or in the case
of certain of the BHC 1993 Options, one dollar and twenty-five cents ($1.25))
per share of BHC Common Stock issuable upon exercise of options exercisable
immediately prior to the Closing Date held by such person. All stock options of
BHC (other than options under the BHC 1993 Plan) that (i) remain unexercised as
of the Closing Date and (ii) are held by persons who do not accept the
Repurchase Offer, will be terminated as of the Closing Date. At the Effective
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Time, all outstanding BHC 1993 Options that are not repurchased in the
Repurchase Offer will be assumed by PMR. See "-- Treatment of Employee Equity
Benefit Plans."
Each share of Common Stock, $.01 par value per share, of PMR Sub issued and
outstanding as of the Effective Time will be converted into one validly issued,
fully paid and nonassessable share of Common Stock of the Surviving Corporation.
Each certificate evidencing ownership of shares of PMR Sub Common Stock will
evidence ownership of such shares of capital stock of the Surviving Corporation.
Promptly after the Effective Time, PMR, acting through the Exchange Agent,
will deliver to each holder of record as of the Effective Time of a certificate
or certificates which immediately prior to the Effective Time represented
outstanding shares of BHC Common Stock and Series A Preferred Stock, a letter of
transmittal with instructions to be used by such holder in surrendering such
certificates in exchange for certificates representing shares of PMR Common
Stock. CERTIFICATES SHOULD NOT BE SURRENDERED BY THE HOLDERS OF BHC COMMON STOCK
AND SERIES A PREFERRED STOCK UNTIL SUCH HOLDERS RECEIVE THE LETTER OF
TRANSMITTAL FROM THE EXCHANGE AGENT, AND THEN ONLY IN ACCORDANCE WITH THE TERMS
OF SUCH LETTER OF TRANSMITTAL.
Following the surrender of certificates which formerly represented
outstanding shares of BHC Common Stock and Series A Preferred Stock, each holder
shall be entitled to receive the Merger Consideration (less the Merger
Consideration deposited into escrow under the Escrow Agreement) with respect to
the shares represented by the surrendered certificate. Upon termination of the
Escrow Agreement, each such holder shall be entitled to receive from the escrow
such holder's pro rata interest in the remaining balance, if any, of the
promissory note, PMR Common Stock and cash previously deposited into escrow
under the Escrow Agreement.
Fractional Shares. No fractional shares of PMR Common Stock will be issued
in the Merger. Instead, each BHC stockholder who would otherwise be entitled to
receive a fraction of a share of PMR Common Stock will receive an amount in cash
(without interest) determined by multiplying such fraction by $9.2596. PMR
intends to use its current cash resources to fund the payments for fractional
shares.
EFFECT OF THE MERGER
Once the Merger is consummated, PMR Sub will cease to exist as a
corporation, and BHC will remain as the Surviving Corporation.
Pursuant to the Merger Agreement, the Certificate of Incorporation and the
Bylaws of the Surviving Corporation will be amended and restated to reflect the
provisions of the Certificate of Incorporation and Bylaws of PMR Sub immediately
prior to the Effective Time. The officers of the Surviving Corporation will be
Allen Tepper (President and Secretary) and Mr. Stack (Chief Executive Officer
and Treasurer). The directors of the Surviving Corporation will be Messrs.
Tepper, Clein and Stack. There will be no change in the current PMR Board and
officers of PMR as a result of the Merger. In addition, following consummation
of the Merger, Mr. Stack will be elected as a director of PMR and as the
President and Chief Operating Officer of PMR.
If the combined company is to realize the anticipated benefits of the
Merger, the operations of PMR and BHC must be integrated and combined
efficiently. The process of rationalizing management services, administrative
organizations, facilities, management information systems and other aspects of
operations, while managing a larger and geographically expanded entity, will
present a significant challenge to the management of the combined company. There
can be no assurance that the integration process will be successful or that the
anticipated benefits of the business combination will be fully realized. The
dedication of management resources to such integration may detract attention
from the day-to-day business of the combined company. The difficulties of
integration may be increased by the necessity of coordinating geographically
separated organizations, integrating personnel with disparate business
backgrounds and combining different, although complementary, corporate cultures.
There can be no assurance that there will not be substantial costs associated
with the integration process, that such activities will not result in a decrease
in revenues or that there will not be other material adverse effects of these
integration efforts or that such
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integration efforts can be successfully accomplished. Such effects could
materially reduce the short-term earnings of the combined company. Subsequent to
the Merger, PMR expects to incur transaction and integration costs currently
estimated to be $7 million, to reflect the combination of PMR and BHC. This
amount is a preliminary estimate only. There can be no assurance that PMR will
not incur additional charges to reflect costs associated with the Merger.
TREATMENT OF EMPLOYEE EQUITY BENEFIT PLANS
Stock Options. As of the Effective Time, each BHC 1993 Option that is then
outstanding and is not repurchased in the Repurchase Offer, whether vested or
unvested, will be assumed by PMR, and will continue to have, and be subject to,
the same terms and conditions set forth in the BHC 1993 Plan and the stock
option agreement by which it is evidenced. From and after the Effective Time,
(i) each BHC 1993 Option will be or become exercisable for PMR Common Stock
rather than BHC Common Stock, (ii) the number of shares of PMR Common Stock
subject to each BHC 1993 Option shall be equal to the number of shares of BHC
Common Stock subject to such option immediately prior to the Effective Time
multiplied by the Exchange Ratio, rounding down to the nearest whole number of
shares of PMR Common Stock (with cash, less the applicable exercise price, being
payable for any fraction of a share), (iii) the per share exercise price under
each BHC 1993 Option shall be adjusted by dividing the per share exercise price
under such option by the Exchange Ratio and rounding up to the nearest cent and
(iv) all restrictions on the exercise of each such assumed BHC 1993 Option shall
continue in full force and effect, and the term, exercisability, vesting
schedule and other provisions of each such option shall otherwise remain
unchanged.
STOCK OWNERSHIP FOLLOWING THE MERGER
An aggregate of 2,600,000 shares of PMR Common Stock will be issued to BHC
stockholders in the Merger, an aggregate of 150,000 shares will be issued to Mr.
Stack and, subject to certain conditions, Mr. Davis as retention bonuses and PMR
will (assuming no holders of BHC 1993 Options accept the Repurchase Offer)
assume options to acquire up to approximately 63,195 additional shares of BHC
Common Stock. Based upon the number of shares of PMR Common Stock issued and
outstanding as of the Record Date, and after giving effect to the issuance of
PMR Common Stock as described in the previous sentence and the exercise of all
options to purchase BHC Common Stock assumed by PMR, the former holders of
Converted Shares and options to purchase BHC Common Stock would hold, and have
voting power with respect to, approximately 29% of PMR's total issued and
outstanding shares. The foregoing numbers of shares and percentages are subject
to change to reflect any changes in the capitalization of BHC subsequent to the
dates indicated and prior to the Effective Time, and there can be no assurance
as to the actual capitalization of PMR or BHC as of the Effective Time or of PMR
at any time following the Effective Time.
REPRESENTATIONS AND WARRANTIES
Pursuant to the Merger Agreement, each of PMR, BHC and PMR Sub made certain
representations and warranties relating to its respective business and various
other matters. The representations and warranties made by PMR, BHC and PMR Sub
will survive the Merger and shall expire on the 18-month anniversary of the
Closing Date.
COVENANTS
Pursuant to the Merger Agreement, each of BHC and PMR has agreed (on behalf
of itself and each of its subsidiaries) that, until the earlier of the
termination of the Merger Agreement pursuant to its terms and the Effective Time
(the "Pre-Closing Period"), subject to certain exceptions, and except to the
extent that the other party consents in writing, it will conduct its business
and operations in the ordinary course and in accordance with past practices use
reasonable efforts to preserve intact its current business organization, keep
available the services of its current officers and employees and maintain its
relations and goodwill with all suppliers, customers, landlords, creditors,
employees and others with which it has business relationships, and pay the
premiums required by and use its best efforts to keep in full force all of its
existing insurance policies.
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In addition, except as permitted by the terms of the Merger Agreement, and
subject to certain exceptions, during the Pre-Closing Period, each of BHC and
PMR has agreed not to do any of the following or to permit its subsidiaries to
do any of the following without the prior written consent of the other:
(a) declare, accrue, set aside or pay any dividend or make any other
distribution in respect of any shares of capital stock, or repurchase,
redeem or otherwise reacquire any shares of capital stock or other
securities;
(b) sell, issue or authorize the issuance of (i) any capital stock or
other security, (ii) any option, call, warrant or right to acquire any
capital stock or other security, or (iii) any instrument convertible into
or exchangeable for any capital stock or other security; provided, however,
that BHC and PMR may issue Common Stock upon the valid exercise of options
(and make certain other limited grants and issuances);
(c) amend or permit the adoption of any amendment to its certificate
of incorporation or bylaws or other charter or organizational documents, or
effect or become a party to any recapitalization, reclassification of
shares, stock split, reverse stock split or similar transaction;
(d) form any subsidiary or acquire any equity interest or other
interest in any other entity;
(e) make any capital expenditure in excess of certain agreed upon
amounts;
(f) enter into or permit any of the properties or assets, owned or
used by it to become bound by, any material contract or amend or
prematurely terminate or waive any material right or remedy under, any
material contract, except in the ordinary course of business and consistent
with prior practices;
(g) acquire, lease or license any right, personal or real property or
other asset from any other person or entity or sell or otherwise dispose
of, or lease or license, or waive or relinquish any right with respect to
any personal or real property or any other asset to any other person or
entity (other than the sale or disposition of certain subsidiaries of BHC)
except for any such actions pursuant to contracts that can be performed
wholly or terminated without penalty within one year and which do not
exceed $250,000 in value or liability (in any one transaction or series of
related transactions);
(h) lend money to any person or entity, or incur or guarantee any
indebtedness in excess of $250,000 (except for routine borrowings made in
the ordinary course of business under its line of credit or ordinary course
inter-company indebtedness);
(i) change any of its methods of accounting or accounting practices in
any material respect (except as required under generally accepted
accounting principles, consistently applied ("GAAP");
(j) make any tax election;
(k) commence or settle any material legal proceeding; or
(l) agree or commit to take any of the actions described in clauses
(a) through (m) above.
Each of BHC and PMR has further agreed that during the Pre-Closing Period
each will not (i) amend or waive any of its rights under, or accelerate the
vesting under, any provision of any stock option plan, any provision of any
agreement evidencing any outstanding stock option or any provision of any
restricted stock purchase agreement, or (ii) establish, adopt or amend any
employee benefit plan, or (except in the ordinary course of business) pay any
bonus or make any profit-sharing or similar payment to, or increase the amount
of the wages, salary, commissions, fringe benefits or other compensation or
remuneration payable to, any of its directors, officers or employees, or hire
any indirect employee whose aggregate annual compensation is expected to exceed
$150,000 or adopt any severance plan or arrangement or enter into any severance
agreement or any other plan or arrangement or agreement providing for the
payment of any benefit or accelerations of any options upon a change in control
or termination of employment. Finally, each of BHC and PMR has agreed, during
the Pre-Closing period, to notify the other of certain material events; to take
actions necessary to give notice of, convene and hold a meeting of stockholders
and solicit proxies with respect to the meeting, make all necessary filings
required by the Merger, refrain from public announcements regarding the
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Merger without the other's written consent (except for disclosures required by
applicable law) and provide certain documents to the other and keep the other's
information confidential.
BHC has made certain covenants with respect to its option plans and has
agreed to (i) assist PMR in obtaining land surveys for real property owned by
BHC or any of its subsidiaries, (ii) obtain a commitment for title insurance for
each parcel of real property owned by BHC or any of its subsidiaries, and (iii)
offer to repurchase, as of the Effective Time, all outstanding stock options of
BHC for an aggregate purchase price of $1,135,546.
PMR has agreed to use all reasonable efforts, subject to the fiduciary
duties of PMR's directors, to ensure that, as soon as practicable following the
Effective Time, the board of PMR shall appoint Edward A. Stack as a director of
PMR.
INDEMNIFICATION AND REIMBURSEMENT
As provided in the Merger Agreement, PMR and the BHC stockholders are
required to indemnify and hold each other (and each other's affiliates) harmless
from, and to compensate and reimburse each other and each other's affiliates,
for damages resulting from (i) inaccuracies and breaches of representations and
warranties, (ii) breaches of covenants and (iii) actions which violate certain
healthcare regulatory requirements. However, the foregoing obligations are
subject to certain limitations. The BHC stockholders shall have no liability
under the indemnification provisions until the indemnified damages reach
$2,000,000, in which event the BHC stockholders shall be liable for $1,000,000
of such threshold amount and all damages in excess of the threshold amount;
provided, however, that the BHC stockholders' liability shall not exceed
$8,000,000. PMR shall have no liability under the indemnification provisions
until the indemnified damages reach $407,500, in which event PMR shall be liable
for $203,750 of such threshold amount and all damages in excess of the threshold
amount; provided, however, that PMR's liability under the indemnification
provisions shall not exceed $1,630,000. No parties shall be liable under the
indemnification provisions for damages resulting from changes in governmental
regulations or interpretations thereof, relating to the healthcare industry as
of the Closing Date. PMR has the option of satisfying any liability for
indemnification by using cash or PMR Common Stock, or a combination thereof.
The Merger Consideration deposited into escrow under the Escrow Agreement
on the Effective Time shall be available to satisfy indemnification obligations
of the BHC stockholders under the Merger Agreement. In addition, PMR shall have
the option to draw from the escrow account under the Escrow Agreement, up to an
amount equal to 50% of aggregate costs incurred after the date of the Merger
Agreement, to retrofit and/or remove, dispose and close underground storage
tanks located on real property being acquired by PMR through the Merger, minus
$300,000.
NO SOLICITATION
Under the terms of the Merger Agreement, BHC has agreed that, during the
Pre-Closing Period, BHC will not directly or indirectly, (i) solicit or
encourage the initiation or submission of any expression of interest, inquiry,
proposal or offer from any person (other than PMR) relating to a possible
Company Acquisition Transaction (as defined below), (ii) participate in any
discussions or negotiations or enter into any agreement with, or provide any
non-public information to or cooperate in any other way with, any person (other
than PMR) relating to or in connection with a Company Acquisition Transaction;
or (iii) consider, entertain or accept any proposal or offer from any person
(other than PMR) relating to a possible Company Acquisition Transaction. A
"Company Acquisition Transaction" means any transaction not contemplated by the
Merger Agreement involving: (a) any sale, license, disposition or acquisition of
all or a material portion of BHC, business or assets (except for subsidiaries
which have been identified by BHC for sale or disposition as discussed with PMR
(collectively, the "Excluded Subsidiaries")); or (b) the issuance, grant,
disposition or acquisition of (i) any capital stock or other equity security of
BHC or any subsidiary of BHC (other than common stock issued to employees of BHC
upon exercise of BHC 1993 Options and other than the Excluded Subsidiaries),
(ii) any option, call, warrant or right (whether or not immediately exercisable)
to acquire any capital stock or other equity security of BHC or any subsidiary
of BHC (other than stock options granted to
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employees of BHC in the ordinary course of business and other than the Excluded
Subsidiaries), or (iii) any security, instrument or obligation that is or may
become convertible into or exchangeable for any capital stock or other equity
security of BHC or any subsidiary of BHC (other than the Excluded Subsidiaries);
or (c) any merger, consolidation, business combination, share exchange,
reorganization or similar transaction involving BHC or any of its subsidiaries
other than the Excluded Subsidiaries; provided, however that, with respect to
the restructuring of BHC and its subsidiaries in order to take advantage of tax
savings available under Indiana and Tennessee law, such restructuring shall not
be deemed a "Company Acquisition Transaction" only in the event that no
reduction in ownership by BHC of such subsidiaries occurs as a result of such
restructuring. Pursuant to the Merger Agreement, BHC further agreed that it will
promptly advise PMR orally and in writing of any material inquiry, proposal or
offer relating to a possible Company Acquisition Transaction received by BHC, or
any of the Principal Stockholders or any of their respective representatives.
Notwithstanding the foregoing, but subject to the restrictions on the
conduct of BHC's business described above, prior to the Effective Time, to the
extent the BHC Board determines, in good faith, based upon advice of its legal
counsel, that the Board's fiduciary duties under applicable law require it to do
so, BHC may participate in discussions or negotiations with, and furnish
information regarding BHC to, any person, entity or group after such person,
entity or group has delivered to BHC in writing an unsolicited bona fide
possible Company Acquisition Transaction.
Under the terms of the Merger Agreement, PMR has agreed that, during the
Pre-Closing Period, PMR will not directly or indirectly, (i) solicit or
encourage the initiation or submission of any expression of interest, inquiry,
proposal or offer from any person other than BHC, relating to a Parent
Acquisition Transaction (as defined below), (ii) participate in any discussions
or negotiation or enter into any agreement with, or provide any non-public
information to or cooperate in any other way with, any person (other than BHC)
relating to or in connection with a Parent Acquisition Transaction; or (iii)
consider, entertain or accept any proposal or offer from any person (other than
BHC) relating to a possible Parent Acquisition Transaction. A "Parent
Acquisition Transaction" means any transaction not contemplated by the Merger
Agreement involving: (a) any sale, license, disposition or acquisition of all or
a material portion of the business or assets of PMR or any PMR subsidiary; or
(b) the issuance, grant, disposition or acquisition of (i) any capital stock or
other equity security of PMR or any PMR subsidiary (other than common stock
issued to employees of PMR upon the exercise of outstanding stock options of
PMR, (ii) any option, call, warrant or right (whether or not immediately
exercisable) to acquire any capital stock or other equity security of PMR or any
PMR subsidiary (other than stock options granted to employees of PMR in the
ordinary course of business), or (iii) any security, instrument or obligation
that is or may become convertible into or exchangeable for any capital stock or
other equity security of PMR or any PMR subsidiary; or (c) any merger,
consolidation, business combination, share exchange, reorganization or similar
transaction involving PMR or any PMR subsidiary. Pursuant to the Merger
Agreement, PMR further agreed that it will promptly advise BHC in writing of any
material inquiry, proposal or offer relating to a possible Parent Acquisition
Transaction received by PMR.
Notwithstanding the foregoing, but subject to the restrictions on the
conduct of PMR's business described above, prior to the Effective Time, to the
extent the PMR Board determines, in good faith, based upon advice of its legal
counsel, that the Board's fiduciary duties under applicable law require it to do
so, PMR may participate in discussions or negotiations with, and furnish
information regarding PMR to, any person, entity or group after such person,
entity or group has delivered to PMR in writing an unsolicited bona fide
possible Parent Acquisition Transaction.
CONDITIONS TO THE MERGER
The respective obligations of each party to the Merger Agreement to effect
the Merger are subject to the satisfaction at or prior to the Closing Date of
the following conditions (subject to certain materiality qualifications): (i)
the principal terms of the Merger shall have been duly approved, by the
requisite vote under applicable law by the stockholders of PMR and BHC; (ii) the
Commission shall have declared the Registration Statement of which this
Prospectus/Joint Proxy Statement is a part effective and no stop order
suspending the effectiveness of the Registration Statement shall have been
issued; (iii) there shall have been no material legal proceedings relating to
the Merger or prohibiting the consummation of the Merger or any of
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<PAGE> 67
the other transactions contemplated by the Merger Agreement; (iv) all waiting
periods, if any, under the Hart-Scott-Rodino Antitrust Improvements Act of 1976,
as amended, relating to the transactions contemplated hereby will have expired
or terminated; (v) PMR and BHC shall have received a legal opinion from Waller
Lansden Dortch & Davis, PLLC and Cooley Godward LLP, respectively, dated as of
the Closing Date, reasonably satisfactory in form and substance to the receiving
party; (vi) the shares of PMR Common Stock issuable to stockholders of BHC in
the Merger shall have been approved for listing on the Nasdaq Stock National
Market subject to notice of issuance; (v) execution of the Escrow Agreement;
(vi) execution of the Exchange Agent Agreement; (vii) receipt of customary
closing certificates; (viii) receipt of all required consents; (ix) PMR and BHC
shall have received certain financial statements from the other; (x) PMR shall
have received the written opinion from SunTrust Equitable to the effect that the
Merger Consideration to be received by the BHC stockholders is fair to the
Stockholders of PMR; (xii) there shall not have been a material adverse change
of governmental laws or regulations or interpretations thereof, relating to the
healthcare industry and (xiii) no temporary restraining order, preliminary or
permanent injunction or other order preventing the consummation of the Merger
shall have been issued by any court of competent jurisdiction and remain in
effect, and there shall not be any legal requirement enacted or deemed
applicable to the Merger that makes consummation of the Merger illegal.
The obligation of BHC to consummate and effect the Merger is subject to the
satisfaction at or prior to the Closing Date of each of the following
conditions, any of which may be waived, in writing, exclusively by BHC: (i) the
representations and warranties of PMR and PMR Sub contained in the Merger
Agreement shall have been accurate in all material respects as of the date of
the Merger Agreement and such representations and warranties shall be accurate
in all material respects on the Closing Date, and (ii) PMR and PMR Sub shall
have performed or complied in all material respects with all agreements and
covenants required by the Merger Agreement to be performed or complied with by
them at or prior to the Closing Date.
The obligations of PMR and PMR Sub to consummate and effect the Merger are
subject to the satisfaction at or prior to the Closing Date of each of the
following conditions, any of which may be waived, in writing, exclusively by
PMR: (i) the representations and warranties of BHC contained in the Merger
Agreement shall have been accurate in all material respects, as of the date of
the Merger Agreement and such representations and warranties shall be accurate
in all material respects on the Closing Date; and (ii) BHC shall have performed
or complied in all material respects with all agreements and covenants required
by the Merger Agreement to be performed or complied with by it at or prior to
the Closing Date.
In addition, the obligations of PMR and PMR Sub to consummate and effect
the Merger is subject to PMR's receipt of the following agreements and documents
(i) Affiliate and Lock-Up agreements in the form attached to the Merger
Agreement, executed by each person who is reasonably determined to be an
"affiliate" of BHC (as that term is used in Rule 145 promulgated under the Act);
(ii) valid consents and agreements executed by all of the persons who are
parties to the Existing Stockholders' Agreements irrevocably consenting and
agreeing to the termination of each of the Existing Stockholders' Agreements;
(iii) Stockholder Agreements executed by each Principal Stockholder; (iv) Series
B Preferred Stock Agreement executed by Welsh, Carson, Andersen & Stowe, VI,
L.P.; (v) written resignations of certain officers and directors of BHC; (vi)
certain Phase I environmental reports, (vii) title policies with respect to real
property owned by the Acquired Companies; (viii) BHC shall have provided PMR
with evidence of the termination of its stock option and other benefit plans;
and (ix) an amendment of the Asset Purchase Agreement and Merger Agreement
between BHC and Transitional Hospitals Corporation.
Further, the obligations of PMR and PMR Sub to consummate and effect the
Merger is subject to: (i) the exercise or termination and cancellation prior to
the Closing Date of each and every unexpired and unexercised stock option not
included in the Repurchase Offer (other than the BHC 1993 Options) and warrant
of BHC and the termination of the related BHC Option Plans; (ii) PMR's receipt
of bank financing of at least $175,000,000 on terms reasonably acceptable to
PMR; (iii) PMR's review of certain leases of BHC and determination that such
leases would not result in a Material Adverse Effect on BHC; and (iv) the
acquisition by BHC of all of the stock and/or assets of CBHS, an affiliate of
Vencor. See "-- Financing."
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<PAGE> 68
TERMINATION OF THE MERGER AGREEMENT
The Merger Agreement provides that it may be terminated at any time prior
to the Closing Date without either party incurring any termination fee as
follows:
(a) by PMR, if PMR reasonably determines that the timely satisfaction
of any condition to PMR's performance under the Merger Agreement has become
impossible (other than as a result of any failure on the part of PMR or PMR
Sub to comply with or perform any covenant or obligation of PMR or PMR Sub
set forth in the Merger Agreement);
(b) by BHC, if BHC reasonably determines that the timely satisfaction
of any condition to BHC's performance under the Merger Agreement has become
impossible (other than as a result of any failure on the part of BHC or any
of the Principal Stockholders to comply with or perform any covenant or
obligation set forth in the Merger Agreement or in any other agreement or
instrument delivered to PMR);
(c) by either PMR or BHC, if the Merger is not consummated by January
31, 1999 for any reason, provided that the right to terminate the Merger
Agreement as provided in this clause (c) is not available to any party
whose failure to comply with or perform any covenant or obligation set
forth in the Merger Agreement resulted in the failure of the Merger to
occur on or before such date and such action or failure to act constitutes
a breach of the Merger Agreement;
(d) by mutual consent of PMR and BHC; and
(e) by PMR if PMR and the Board of Directors conclude in good faith
that PMR must accept an unsolicited bona fide written proposed Parent
Acquisition Transaction which could reasonably be executed to result in a
transaction that is more favorable to PMR's stockholders than the Merger (a
"Superior Proposal"); provided that PMR shall pay to BHC a nonrefundable
fee of $7.5 million in cash upon PMR's election to accept such Superior
Proposal.
In addition, PMR may terminate the Merger Agreement immediately and BHC
shall pay PMR a nonrefundable fee of $7.5 million if (i) prior to the Closing
Date, BHC accepts a third party proposal or offer relating to a possible Company
Acquisition Transaction; (ii) BHC fails to complete the BHC stockholders
meeting; (iii) BHC's Board of Directors withdraws, amends or modifies in an
adverse manner to PMR, its recommendation that BHC's stockholders approve the
Merger; or (iv) BHC terminates the Merger Agreement other than as permitted in
the Merger Agreement.
BHC may also terminate the Merger Agreement immediately and PMR shall pay
BHC a nonrefundable fee of $7.5 million if (i) prior to the Closing Date, PMR
accepts a third party proposal or offer relating to a possible Company
Acquisition Transaction; (ii) PMR fails to complete the PMR stockholders
meeting; (iii) PMR's Board withdraws, amends or modifies, in an adverse manner
to BHC, its recommendation that PMR's stockholders approve the Merger; or (iv)
PMR terminates the Merger Agreement other than as permitted in the Merger
Agreement.
In the event the Merger Agreement is terminated because BHC fails to obtain
the termination of certain of its stockholder agreements by August 29, 1998,
then BHC shall reimburse PMR's fees and expenses incurred in connection with the
Merger Agreement, not to exceed $2,000,000.
In the event the Merger Agreement is terminated because PMR's stockholders
fail to approve the Merger, the PMR shall reimburse BHC's fees and expenses
incurred in connection with the transactions contemplated in the Merger
Agreement, not to exceed $500,000.
EFFECT OF TERMINATION
If the Merger Agreement is terminated by PMR or BHC as described above, the
Merger Agreement will be of no further force or effect, except that certain
provisions contained therein, including those discussed below relating to
"break-up" fees payable by PMR to BHC or by BHC to PMR under certain
circumstances,
55
<PAGE> 69
will survive such termination, and PMR, BHC and PMR Sub will remain liable for
certain breaches of the Merger Agreement occurring prior to such termination.
BREAK-UP FEES
The Merger Agreement provides that a termination fee of $7.5 million will
be incurred by PMR or BHC, as applicable, if the Merger Agreement is terminated
by either party other than as permitted in the Merger Agreement and in certain
other events. See "-- Termination of the Merger Agreement."
MERGER EXPENSES AND FEES AND OTHER COSTS
Except as described above, all fees and expenses incurred in connection
with the Merger Agreement and the transactions contemplated by the Merger
Agreement shall be paid by the party incurring such expenses, whether or not the
Merger is consummated; provided, however, that in the event the Merger Agreement
is terminated for any reason other than the failure of PMR's stockholders to
approve the Merger or for which PMR is obligated to pay termination fees, then
PMR and BHC shall share equally all fees and expenses (other than attorneys
fees) incurred in connection with the printing and filing of the Registration
Statement and this Prospectus/Joint Proxy Statement and any amendments or
supplements thereto and the filings under the HSR Act up to a maximum liability
for BHC of $125,000.
Pursuant to the SunTrust Equitable engagement letter, PMR has agreed to pay
SunTrust Equitable a fee of $400,000 for its services in connection with the
delivery of the opinion of SunTrust Equitable. PMR also has agreed to indemnify
SunTrust Equitable against certain liabilities, including liabilities under the
federal securities laws arising in connection with its engagement by PMR. In
addition, PMR has agreed to pay ING Baring Furman Selz a fee of $2.1 million
upon consummation of the Merger for its services as PMR's financial advisor.
PMR estimates that PMR and BHC will incur direct transaction costs of
approximately $7 million associated with the Merger. These nonrecurring
transaction costs will be charged to operations upon consummation of the Merger,
expected in the quarter ending December 31, 1998. See "Unaudited Pro Forma
Combined Condensed Financial Information" and "Risk Factors -- Integration of
Operations."
RELATED AGREEMENTS
Stockholder Agreements. In connection with the execution of the Merger
Agreement, the Principal Stockholders entered into Stockholder Agreements with
PMR pursuant to which each Principal Stockholder agreed that such Principal
Stockholder will vote all shares of BHC held by him, her or it in favor of the
Merger Proposal and each of the other actions contemplated by the Merger
Agreement.
Affiliate and Lock-up Agreements. To help ensure that BHC stockholders
comply with applicable securities laws, certain BHC stockholders, including the
Principal Stockholders, have entered into agreements pursuant to which they have
agreed not to sell, pledge or otherwise transfer such shares except to the
extent covered by and in compliance with Rule 145. Such agreements also restrict
such person's rights to transfer Converted Shares prior to the Merger and PMR
Common Stock (or any other securities of PMR) following the Merger until the
first anniversary of the Closing Date. See "-- Affiliates' Restrictions on Sale
of PMR Common Stock."
Escrow Agreement. PMR and the Stockholder Representatives have entered into
the Escrow Agreement in the form attached as Exhibit I to the Merger Agreement.
Pursuant to the Merger Agreement, at the Effective Time, PMR or the Exchange
Agent shall withhold (i) $4,388,507 of the cash to be delivered to Vencor, (ii)
$1,061,430 of the cash to be delivered to the holders of the Converted Shares,
(iii) a promissory note in the aggregate amount of $925,000 to be delivered to
the holders of Converted Shares and (iv) 175,000 shares of the Merger
Consideration to be delivered to the holders of Converted Shares, to be held in
escrow as collateral for reimbursement and indemnification obligations set forth
in the Merger Agreement. The Escrow Agreement shall terminate on the 18-month
anniversary of the Effective Time. The BHC
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<PAGE> 70
stockholders' interests in the escrow account under the Escrow Agreement shall
be non-assignable and non-transferable, except by operation of law.
Exchange Agent Agreement. Prior to the Effective Time, PMR will enter into
an Exchange Agent Agreement with StockTrans, Inc. in the form attached as
Exhibit H to the Merger Agreement. At the Effective Time, PMR shall make
available to the Exchange Agent certificates representing shares of PMR Common
Stock issuable in exchange for Converted Shares and shall deposit with the
Exchange Agent the cash of the Merger Consideration (other than the cash to be
deposited in the Escrow Account), including cash to be paid to the holders of
Converted Shares in lieu of fractional shares.
AFFILIATES' RESTRICTIONS ON SALE OF PMR COMMON STOCK
The shares of PMR Common Stock to be issued pursuant to the Merger and the
Merger Agreement will have been registered under the Securities Act pursuant to
the Registration Statement, thereby allowing such shares to be traded without
restriction by all former holders of Converted Shares who (i) are not deemed to
be affiliates of BHC at the time of the BHC Meeting (as "affiliates" is defined
for purposes of Rule 145) and (ii) who do not become affiliates of PMR after the
Merger. The directors of BHC, certain executive officers and certain significant
stockholders of BHC may be deemed to be affiliates of BHC at the time of the BHC
Meeting.
The Principal Stockholders have entered into agreements not to make any
public sale of any PMR Common Stock received upon conversion of BHC Common Stock
in the Merger except in compliance with Rule 145 or under certain other limited
circumstances. Such agreements also restrict such persons' rights to transfer
shares of BHC Common Stock prior to the Merger and PMR Common Stock (or any
other securities of PMR) following the Merger until the first anniversary of the
Closing Date. See "Terms of the Merger -- Related Agreements -- Affiliate
Agreements" above. In general, Rule 145, as currently in effect, imposes
restrictions on the manner in which such affiliates may make resales of PMR
Common Stock and also on the number of shares of PMR Common Stock that such
affiliates and others (including persons with whom the affiliates act in
concert) may sell within any three-month period. Rule 145 will not generally
preclude sales by affiliates. These Rule 145 restrictions will generally apply
for a period of at least one year after the Effective Time (or longer if the
person remains or becomes an affiliate of PMR).
FINANCING
In connection with the Merger, PMR will seek to fund the cash portion of
the Merger Consideration from the proceeds of a bank financing and the proceeds
from the issuance of subordinated debt. It is a condition to the consummation of
the Merger that PMR obtain reasonably acceptable financing of at least
$175,000,000.
The consummation of the Merger is subject to the condition that PMR obtain
financing of at least $175,000,000 upon reasonably acceptable terms, which PMR
expects will be comprised of a combination of bank financing and the issuance of
debt securities. PMR has obtained a commitment from Bank of America to act as a
lead arranger for a senior secured revolving credit facility.
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<PAGE> 71
PRO FORMA CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
The following pro forma condensed financial statements give affect to the
acquisition of Behavioral Healthcare Corporation ("BHC") by PMR Corporation
("PMR").
The unaudited pro forma condensed consolidated balance sheet as of April
30, 1998 and the pro forma condensed consolidated income statement for the year
ended April 30, 1998 have been derived by the application of pro forma
adjustments to the historical financial statements of PMR as of and for the
fiscal year ended April 30, 1998 and BHC as of and for the fiscal year ended
June 30, 1998. The pro forma condensed consolidated income statement for the
year ended April 30, 1998 is presented as if the merger had occurred on May 1,
1997. The adjustments are described in the accompanying notes.
The pro forma adjustments have been prepared by the management of PMR and
are based on available data and certain assumptions that management believes are
reasonable. The unaudited pro forma financial data do not purport to represent
what PMR's results of operations actually would have been if the transactions
described above had been consummated as of the dates or for the periods
indicated above, or what such results will be for any future date or future
period. The final allocation of the purchase price in accordance with generally
accepted accounting principles, may differ from the preliminary estimates used
herein due to the final determination of the allocations of amounts to fixed
assets, other assets and assumed liabilities, based on asset appraisals and
valuations of certain other assets and assumed liabilities and management's
evaluation of such items.
58
<PAGE> 72
PMR CORPORATION
PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET
(UNAUDITED)
APRIL 30, 1998
(IN THOUSANDS)
<TABLE>
<CAPTION>
PRO FORMA
ADJUSTMENTS PRO FORMA
PMR BHC (NOTE B) CONSOLIDATED
------- -------- ----------- ------------
<S> <C> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents.................. $18,523 $ 5,443 $ (18,966)(1) $ 5,000
Short-term investments, available for
sale.................................... 20,257 -- (20,257)(1) --
Accounts receivable, net................... 16,656 57,360 -- 74,016
Assets held for sale....................... -- 8,423 -- 8,423
Deferred income tax benefits............... 4,136 1,968 -- 6,104
Prepaid expenses and other current
assets.................................. 1,192 6,977 -- 8,169
------- -------- --------- --------
Total current assets............... 60,764 80,171 (39,223) 101,712
Property and equipment, net.................. 3,492 166,347 -- 169,839
Long-term receivables, and other............. 2,977 2,395 -- 5,372
Deferred income tax benefit.................. 2,080 -- -- 2,080
Intangible assets, net....................... 1,136 23,030 (20)(2) 24,146
------- -------- --------- --------
Total assets....................... $70,449 $271,943 $ (39,243) $303,149
======= ======== ========= ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued liabilities... $ 4,004 $ 19,443 $ 15,171(3) $ 38,618
Accrued compensation and employee
benefits................................ 2,179 6,810 -- 8,989
Advances from case management agencies..... 1,686 -- -- 1,686
Income taxes payable....................... 1,074 -- (2,066)(4) (992)
Current portion of long-term debt.......... -- 9,178 (9,178)(5) --
------- -------- --------- --------
Total current liabilities.......... 8,943 35,431 3,927 48,301
Other long-term liabilities.................. 7,568 6,866 -- 14,434
Long-term debt, net of current portion....... 392 86,068 65,515(5) 151,975
Deferred income taxes........................ -- 13,921 -- 13,921
Redeemable preferred stock................... -- 337 (337)(6) --
Stockholders' equity:
Preferred stock............................ -- 57 (57)(6) --
Common stock............................... 69 115 (89)(6) 95
Additional paid-in capital................. 47,960 115,683 (91,674)(6) 71,969
Retained earnings.......................... 5,517 13,465 (16,528)(6) 2,454
------- -------- --------- --------
Total stockholders' equity......... 53,546 129,320 (108,348) 74,518
------- -------- --------- --------
$70,449 $271,943 $ (39,243) $303,149
======= ======== ========= ========
</TABLE>
See notes to pro forma condensed consolidated financial statements.
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<PAGE> 73
PMR CORPORATION
PRO FORMA CONDENSED CONSOLIDATED INCOME STATEMENT
(UNAUDITED)
YEAR ENDED APRIL 30, 1998
(IN THOUSANDS, EXCEPT PER SHARE INFORMATION)
<TABLE>
<CAPTION>
PRO FORMA
ADJUSTMENTS PRO FORMA
PMR BHC (NOTE B) CONSOLIDATED
---------- -------- ----------- ------------
<S> <C> <C> <C> <C>
Revenue................................ $ 67,524 $313,837 $ -- $ 381,361
Expenses:
Operating expenses................... 48,256 260,463 -- 308,719
Marketing, general and
administrative.................... 9,186 8,978 -- 18,164
Provision for bad debts.............. 5,149 18,464 -- 23,613
Depreciation and amortization........ 1,065 9,504 (443)(7) 10,126
Special charge....................... 2,583 1,058 -- 3,641
Interest (income) expense............ (1,187) 7,848 5,607(8) 12,268
---------- -------- ------- -----------
65,052 306,315 5,164 376,531
---------- -------- ------- -----------
Income before income taxes............. 2,472 7,522 (5,164) 4,830
Income tax expense..................... 1,014 2,909 (2,066)(4) 1,857
---------- -------- ------- -----------
Net income............................. 1,458 4,613 (3,098) 2,973
Accrued preferred dividends............ -- 36 (36) --
---------- -------- ------- -----------
Net income available to common
stockholders......................... $ 1,458 $ 4,577 $(3,062) $ 2,973
========== ======== ======= ===========
Earnings per common share
Basic................................ $ .24 $ .31
========== ===========
Diluted.............................. $ .22 $ .27
========== ===========
Shares used in computing earnings per
share
Basic................................ 6,053,243 9,538,040
========== ===========
Diluted.............................. 6,695,321 11,117,490
========== ===========
</TABLE>
See notes to pro forma condensed consolidated financial statements.
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<PAGE> 74
PMR CORPORATION
NOTES TO PRO FORMA CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
(UNAUDITED)
APRIL 30, 1998
NOTE A
PMR Corporation (PMR) is acquiring Behavioral Healthcare Corporation (BHC)
through a merger with a total cost of approximately $271 million and is changing
its name to Bragen Healthcare Solutions, Inc. (the "Company"). Consideration
includes $95.6 million of cash and promissory notes, approximately 2.6 million
shares of PMR common stock, based on the stock price at the date of the merger
agreement, and the assumption of approximately $95 million of debt. In addition
to the 2.6 million shares, 150,000 shares will be issued to certain officers as
a retention bonus. The value of these shares (approximately $1,480,000 at July
30, 1998) will be recorded by PMR as additional compensation expense in the
third quarter of fiscal 1999. The pro forma financial statements assume the
issuance of $100 million aggregate principle amount of subordinated debt
securities with a 10 year term and the incurrence of an aggregate of $51 million
of bank indebtedness under a new credit facility for $100 million with a 5-year
maturity.
The transaction will be accounted for as a purchase. The Company has
classified the aggregate excess of cost over book value of net assets acquired,
as intangible assets in the accompanying unaudited pro forma condensed
consolidated balance sheet. The excess purchase price is amortized over 25 years
for the purpose of these pro forma financial statements. Estimated liabilities
for severance and restructuring related to BHC and cost associated with issuance
of debt of PMR total approximately $8.1 million and are included in the pro
forma adjustments as an adjustment to Intangibles. Environmental liabilities
related to certain BHC facilities have not been estimated and are not included
in the pro forma financial statements. Estimated liabilities for transaction and
restructuring related to PMR and BHC which total approximately $5.1 million will
be expensed in the third quarter of fiscal 1999 and are therefore not included
in the pro forma condensed consolidated statement of operations. Estimated
liabilities related to the issuance of PMR stock total approximately $1.5
million and are recorded as a reduction to additional paid-in-capital through a
pro forma adjustment.
NOTE B
The pro forma adjustments to the condensed consolidated income statement
reflect the amortization of the acquired intangible assets and deferred
financing costs and the interest expense which resulted from the additional
borrowings used to finance the merger, along with the related income tax effects
of all the preceding adjustments. Based on recent appraisals of BHC's property
and equipment, it was determined that the net book value approximates the fair
market value. Therefore, no pro forma adjustment was made to property and
equipment. The pro forma adjustments to the condensed consolidated balance sheet
relate the goodwill acquired, the issuance of debt as described in Note A and
the purchase of BHC stock and stock options.
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<PAGE> 75
PMR CORPORATION
NOTES TO PRO FORMA CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
APRIL 30, 1998
These adjustments are summarized as follows:
(1) Pro forma adjustment to cash and short-term investments include:
<TABLE>
<CAPTION>
(IN THOUSANDS)
<S> <C>
Sources of funds:
PMR short-term investments........................... $ 20,257
Borrowings under new subordinated debt securities.... 100,000
Borrowings under new credit facility................. 50,658
Use of funds:
Repayment of existing debt........................... (95,246)
Cash payment to BHC shareholders..................... (94,635)
--------
Use of cash............................................ $(18,966)
========
</TABLE>
(2) Represents the excess of cost over fair market value of assets acquired
in the acquisition of BHC and deferred financing costs as follows:
<TABLE>
<CAPTION>
(IN THOUSANDS)
<S> <C>
Cash paid to BHC shareholders.......................... $ 94,635
Liabilities assumed.................................... 142,286
Stock issued to BHC shareholders....................... 25,560
Notes issued to BHC shareholders....................... 925
Estimated transaction and restructuring costs.......... 8,074
--------
Total acquisition costs and liabilities assumed........ 271,480
Assets acquired:
Current assets....................................... 80,171
Property and equipment............................... 166,347
Other assets......................................... 2,395
--------
Total identifiable tangible assets..................... 248,913
--------
Intangible assets acquired and deferred financing
costs................................................ 22,567
Add: Reduction in amortization......................... 443
Less: BHC intangibles.................................. (23,030)
--------
$ (20)
========
</TABLE>
(3) Represents additional liabilities as follows:
<TABLE>
<CAPTION>
(IN THOUSANDS)
<S> <C>
Estimated transaction and restructuring costs.......... $ 8,074
Estimated Stock issuance costs......................... 1,526
Accrued interest expense............................... 5,607
Less: Accrued preferred dividends...................... (36)
--------
$ 15,171
========
</TABLE>
(4) Represents income tax effect of pro forma income before taxes at an
effective tax rate of 40 percent.
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<PAGE> 76
PMR CORPORATION
NOTES TO PRO FORMA CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
APRIL 30, 1998
(5) Represents incremental borrowing computed as follows:
<TABLE>
<CAPTION>
(IN THOUSANDS)
<S> <C>
Subordinated notes..................................... $100,000
Credit facility........................................ 50,658
Promissory notes....................................... 925
--------
Total borrowings.................................. 151,583
Less:
Existing long-term debt refinanced................... (95,246)
--------
Incremental borrowing................................ $ 56,337
========
</TABLE>
(6) Represents elimination of BHC stock resulting from stock purchase and
conversion to PMR shares as follows:
<TABLE>
<CAPTION>
(IN THOUSANDS)
<S> <C>
Issuance of 2,588,390 PMR common shares................ $ 26
Less: Existing BHC common shares....................... (115)
---------
$ (89)
=========
BHC additional paid-in capital......................... $(115,683)
PMR additional paid-in capital......................... (1,526)
Issuance of common shares to BHC shareholders.......... 25,535
---------
$ (91,674)
=========
</TABLE>
(7) Represents amortization of acquired intangibles over 25 years.
(8) Represents incremental interest expense related to new borrowings.
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<PAGE> 77
PROPOSAL 2
ELECTION OF PMR DIRECTORS
PMR's Restated Certificate of Incorporation (the "PMR Restated
Certificate") and PMR's Bylaws provide that the PMR Board shall be divided into
three classes, each class consisting, as nearly as possible, of one-third of the
total number of directors, with each class having a three-year term. Vacancies
on the PMR Board may be filled only by persons elected by a majority of the
remaining directors. A director elected by the PMR Board to fill a vacancy
(including a vacancy created by an increase in the PMR Board) shall serve for
the remainder of the full term of the class of directors in which the vacancy
occurred and until such director's successor is elected and qualified.
The PMR Board is presently composed of six members. There are two directors
in the class whose term of office expires in 1998. Each of the nominees for
election to this class is currently a director of PMR who was previously elected
by the stockholders. If elected at the PMR Meeting, each of the nominees would
serve until the 2001 annual meeting and until his or her successor is elected
and has qualified, or until such director's earlier death, resignation or
removal.
Directors are elected by a plurality of the votes present in person or
represented by proxy and entitled to vote at the meeting. Shares represented by
executed proxies will be voted, if authority to do so is not withheld, for the
election of the two nominees named below. In the event that any nominee should
be unavailable for election as a result of an unexpected occurrence, such shares
will be voted for the election of such substitute nominee as management may
propose. Each person nominated for election has agreed to serve if elected, and
management has no reason to believe that any nominee will be unable to serve.
Set forth below is biographical information for each person nominated and
each person whose term of office as a director will continue after the PMR
Meeting.
NOMINEES FOR ELECTION FOR A THREE-YEAR TERM EXPIRING AT THE 2001 PMR ANNUAL
MEETING
SUSAN D. ERSKINE
Ms. Erskine, 46, was a co-founder of PMR in May 1988 and has been Executive
Vice President, Secretary and a director of PMR since October 31, 1989. Ms.
Erskine previously served in several operational and marketing management
positions with acute care hospitals and health care management organizations.
She holds a Master's degree in Health Science and completed post graduate work
at Stanford University in Education and Psychology. She has extensive experience
in program development, marketing and management of psychiatric programs, both
inpatient and outpatient.
RICHARD A. NIGLIO
Mr. Niglio, 55, has been a director of PMR since 1992. Mr. Niglio has
recently been appointed as Chairman and Chief Executive Officer of Equity
Enterprises, Inc. From 1987 until May 1998, Mr. Niglio was Chief Executive
Officer and Director of Children's Discovery Centers of America, Inc. 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.
THE PMR BOARD RECOMMENDS A VOTE
IN FAVOR OF EACH NAMED NOMINEE.
DIRECTORS CONTINUING IN OFFICE UNTIL THE 1999 PMR ANNUAL MEETING
ALLEN TEPPER
Mr. Tepper, 50, was a co-founder of PMR in May 1988 and has served as
Chairman and Chief Executive Officer of PMR since October 31, 1989 and
previously served as President from October 1989 to April 1997. Mr. Tepper was a
co-founder of Consolidated Medical Corp. in 1979, which was engaged in
out-patient clinic
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<PAGE> 78
management for acute care hospitals in the Philadelphia area. The company was
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.
CHARLES C. MCGETTIGAN
Mr. McGettigan, 53, has been a director of PMR 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 general partner of
Proactive Investment Managers, L.P., a limited partnership which, through its
holdings, is a principal stockholder of PMR. See "Security Ownership of Certain
Beneficial Owners and Management." Mr. McGettigan has previously served as an
investment banker with Blyth Eastman Dillon & Co. (1970-1980); Dillon, Read &
Co., Inc. (1980-1982); Woodman, Kirkpatrick & Gilbreath (1983-1984); and
Hambrecht & Quist (1984-1988). Mr. McGettigan serves on the Boards of Directors
of Cuisine Solutions, Inc., Modtech, Inc., Onsite Energy, Sonex Research,
Tanknology -- NDE, and Wray-Tech Instruments.
EDWARD A. STACK
Effective upon consummation of the Merger, Mr. Stack, the current President
and Chief Executive Officer of BHC, will be elected by the PMR Board to fill a
new vacancy on the PMR Board of Directors. Mr. Stack has served as President and
Chief Executive Officer and as a Director of BHC since BHC's inception in June
1993. Prior to joining BHC, Mr. Stack served as President of Western Group
Operations of HCA Psychiatric Company. He also serves on the boards of the
National Association of Psychiatric Health Systems and the Catholic Charities of
Tennessee.
DIRECTORS CONTINUING IN OFFICE UNTIL THE 2000 PMR ANNUAL MEETING
DANIEL L. FRANK
Mr. Frank, 42, has served as a director of PMR since 1992 and has been
President of the Disease Management Division of PMR since April 1, 1998.
Previously, Mr. Frank was with Coram Healthcare from 1996 until its sale in
1997, where he served as President, Lithotripsy, and was responsible for
business development, sales and marketing. From 1993 to 1996 Mr. Frank was Chief
Executive Officer of Western Medical Center-Anaheim and Santa Ana Health, Inc.,
a provider of acute and long-term health care. From 1991 to 1993 he was the
President of Summit Ambulatory Network and was responsible for developing
integrated delivery systems including physicians, hospitals and free-standing
health care related services.
EUGENE D. HILL, III
Mr. Hill, 46, has served as a director of PMR since 1995. Mr. Hill has been
with Accel Partners, a venture capital firm, since 1994 and has been a General
Partner of the firm since 1995, where he focuses on healthcare service
investments. Prior to that time, he was President of 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 healthcare
company he built from a start-up to a national enterprise. Previously Mr. Hill
was the President and Chairman of Sierra Health and Life Insurance Company.
Prior to Sierra, he served as the Administrator of the Southern Nevada Memorial
Hospital and the Boston City Hospital. He has been a managed healthcare
consultant and venture capital advisor, and serves on the Boards of Directors of
Paidos Health Management, Forhealth UF Pathology Labs, Presidium, Navix
Radiology Systems, Abaton.com and Delos Womenshealth. He is a graduate of
Middlebury College, received his M.B.A. in health care administration from
Boston University and has completed Harvard University's Executive Program in
Health Systems Management.
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<PAGE> 79
PMR BOARD COMMITTEES AND MEETINGS
During the fiscal year ended April 30, 1998 the PMR Board held six
meetings. The PMR Board has an Audit Committee and a Compensation Committee.
The Audit Committee has primary responsibility to review accounting
procedures and methods employed in connection with audit programs and related
management policies. Its duties include (1) selecting the independent auditors
for PMR, (2) reviewing the scope of the audit to be conducted by them, (3)
meeting with the independent auditors concerning the results of their audit, and
(4) overseeing the scope and accuracy of PMR's system of internal accounting
controls. The Audit Committee is the principal liaison between the Board of
Directors and the independent auditors for PMR. The members of the Audit
Committee are Messrs. Daniel L. Frank and Charles C. McGettigan (Chairman).
During fiscal 1998, the Audit Committee conducted one (1) meeting.
The Compensation Committee is responsible for continually reviewing PMR's
compensation and benefit programs and making recommendations regarding these
programs to the Board from time to time. The Committee consists of Messrs.
Richard A. Niglio (Chairman) and Eugene D. Hill, III. The Compensation Committee
conducted one meeting during fiscal 1998.
During the fiscal year ended April 30, 1998, each PMR Board member attended
75% or more of the aggregate of the meetings of the Board and of the committees
on which he or she served, held during the period for which he was a director or
committee member, respectively.
PROPOSAL 3
APPROVAL OF PMR NAME CHANGE TO BRAGEN HEALTH SOLUTIONS, INC.
The PMR Board has adopted, subject to stockholder approval, an amendment to
the PMR Restated Certificate to change PMR's corporate name to Bragen Health
Solutions, Inc.
The affirmative vote of the holders of a majority of the combined voting
power of the outstanding shares of PMR Common Stock entitled to vote will be
required to approve this amendment to the PMR Restated Certificate. As a result,
abstentions and broker non-votes will have the same effect as negative votes.
THE PMR BOARD RECOMMENDS A VOTE IN FAVOR OF PROPOSAL 3
PROPOSAL 4
AMENDMENT TO THE 1997 EQUITY INCENTIVE PLAN TO INCREASE SHARES
PMR's 1997 Equity Incentive Plan (the "Incentive Plan") was originally
adopted by the PMR Board of Directors in February 1990 and approved by the PMR
stockholders in August 1990. As a result of a series of amendments, as of August
7, 1998, there were 2,000,000 shares reserved for issuance under the Incentive
Plan.
At August 14, 1998, options (net of cancelled or expired options) covering
an aggregate of 1,048,803 shares had been granted under the Incentive Plan and
only 951,197 shares (plus any shares that might in the future be returned to the
Incentive Plan as a result of cancellations or expiration of options) remained
available for future grant under the Plan. In connection with the Merger and the
assumption of certain BHC options, in August 1998, the PMR Board approved an
amendment to the Incentive Plan, subject to PMR stockholder approval, to
increase the number of shares authorized for issuance under the Incentive Plan
from 2,000,000 shares to 3,000,000 shares and to extend the term of the
Incentive Plan until February 2, 2008. This amendment is intended to afford PMR
greater flexibility in providing employees with stock incentives and ensures
that PMR can continue to provide such incentives at levels determined
appropriate by the PMR Board.
PMR stockholders are requested in this Proposal 4 to approve the Incentive
Plan, as amended. The affirmative vote of the holders of a majority of the
shares present in person or represented by proxy and
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<PAGE> 80
entitled to vote at the meeting will be required to approve the Incentive Plan,
as amended. Abstentions will be counted toward the tabulation of votes cast on
proposals presented to the PMR stockholders and will have the same effect as
negative votes. Broker non-votes are counted towards a quorum, but are not
counted for any purpose in determining whether this matter has been approved.
THE PMR BOARD OF DIRECTORS RECOMMENDS
A VOTE IN FAVOR OF PROPOSAL 4.
The essential features of the Incentive Plan, as amended, are outlined
below:
GENERAL
The Incentive Plan provides for the grant of incentive stock options,
nonstatutory stock options, stock bonuses and restricted stock purchase awards
(collectively "Stock Awards"). Incentive stock options granted under the
Incentive Plan are intended to qualify as "incentive stock options" within the
meaning of Section 422 of the Internal Revenue Code of 1986, as amended (the
"Code"). Nonstatutory stock options granted under the Incentive Plan are
intended not to qualify as incentive stock options under the Code. See "Federal
Income Tax Information" for a discussion of the tax treatment of incentive and
nonstatutory stock options. Stock appreciation rights granted under the
Incentive Plan may be tandem rights, concurrent rights or independent rights.
PURPOSE
The Incentive Plan provides a means by which selected employees and
directors of and consultants to PMR and its affiliates could be given an
opportunity to purchase stock in PMR, to assist in retaining the services of
employees holding key positions, to secure and retain the services of persons
capable of filling such positions and to provide incentives for such persons to
exert maximum efforts for the success of PMR. Approximately 401 of PMR's
approximately 838 employees, directors and consultants are eligible to
participate in the Incentive Plan.
ADMINISTRATION
The Incentive Plan is administered by the PMR Board. The PMR Board has the
power to construe and interpret the Incentive Plan and, subject to the
provisions of the Incentive Plan, to determine the persons to whom and the dates
on which Stock Awards will be granted, the number of shares to be subject to the
Stock Award, the time or times during the term of each Stock Award within which
all or a portion of such Stock Award may be exercised, the exercise price, the
type of consideration and other terms of the Stock Award. The PMR Board is
authorized to delegate administration of the Incentive Plan to a committee of
one or more members of the PMR Board. In the discretion of the PMR Board, a
committee may consist solely of two or more outside directors in accordance with
Code Section 162(m), or solely of two or more non-employee directors. The PMR
Board has delegated administration of the Incentive Plan to the Compensation
Committee of the PMR Board (the "PMR Compensation Committee"). As used herein
with respect to the Incentive Plan, the "PMR Board" refers to the PMR
Compensation Committee as well as to the PMR Board of Directors itself.
ELIGIBILITY
Incentive stock options may be granted under the Incentive Plan only to
employees (including officers and employee-directors) of PMR and its affiliates.
Employees (including officers), directors and consultants are eligible to
receive Stock Awards other than incentive stock options and stock appreciation
rights appurtenant thereto.
No incentive stock option may be granted to any person who, at the time of
the grant, owns (or is deemed to own) stock possessing more than 10% of the
total combined voting power of PMR or any of its affiliates, unless the option
exercise price is at least 110% of the fair market value of the stock subject to
the option on the date of grant, and the term of the option does not exceed five
years from the date of grant. To the extent an
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<PAGE> 81
optionee would have the right in any calendar year to exercise for the first
time one or more incentive stock options for shares having an aggregate fair
market value (under all plans of PMR and its affiliates and determined for each
share as of the date the option to purchase the shares was granted ) in excess
of $100,000, any such excess options will be treated as nonstatutory stock
options. No person may be granted options covering more than 400,000 shares of
PMR Common Stock per calendar year.
STOCK SUBJECT TO THE INCENTIVE PLAN
If any Stock Award granted under the Incentive Plan expires or otherwise
terminates in whole or in part without having been exercised in full (or vested
in the case of restricted stock), the PMR Common Stock not purchased under such
Stock Award will revert to and again become available for issuance under the
Incentive Plan.
TERMS OF OPTIONS
The following is a description of the permissible terms of options under
the Incentive Plan. Individual option grants may be more restrictive as to any
or all of the permissible terms described below.
Exercise Price; Payment. The exercise price for an incentive stock option
cannot be less than 100% of the fair market value of the PMR Common Stock on the
date of the option grant (110% for holders deemed to own more than 10% of the
outstanding voting power of PMR) and the exercise price for a nonstatutory stock
option cannot be less than 85% of the fair market value of the PMR Common Stock
on the date of option grant. On April 30, 1998, the closing price of PMR's
Common Stock as reported on the Nasdaq National Market was $15.00 per share.
The PMR Board has the authority, with the consent of affected holders, to
reprice outstanding and to offer optionees the opportunity to replace
outstanding options with new options for the same or a different number of
shares. To the extent required by Section 162(m) of the Code, an option repriced
under the Incentive Plan is deemed to be canceled and a new option granted. Both
the option deemed to be canceled and the new option deemed to be granted will be
counted against the 400,000 share limitation.
The exercise price of options granted under the Incentive Plan must be paid
either: (a) in cash at the time the option is exercised; or (b) at the
discretion of the PMR Board, (i) by delivery of other PMR Common Stock, or (ii)
pursuant to a deferred payment or other arrangement, or (c) in any other form of
legal consideration acceptable to the PMR Board.
Exercise/Vesting. Options granted under the Incentive Plan may become
exercisable in cumulative increments ("vest") as determined by the PMR Board.
Shares of stock covered by currently outstanding options under the Incentive
Plan typically vest at the rate of 20% per year during the optionee's employment
or services as a director or consultant. Shares covered by options granted in
the future under the Incentive Plan may be subject to different vesting terms.
The PMR Board has the power to accelerate the time during which an option may be
exercised. In addition, options granted under the Incentive Plan may permit
exercise prior to vesting, but any unvested shares so purchased shall be subject
to a repurchase right in favor of PMR or to any other restriction the PMR Board
determines to be appropriate. To the extent provided by the terms of an option,
an optionee may satisfy any federal, state or local tax withholding obligation
relating to the exercise of such option by a cash payment upon exercise, by
authorizing PMR to withhold a portion of the stock otherwise issuable to the
optionee, by delivering already-owned and unencumbered stock of PMR or by a
combination of these means.
Term. The maximum term of options under the Incentive Plan is 10 years. An
optionee whose relationship with PMR or any related corporation ceases for any
reason (other than by death or permanent and total disability) may exercise
options in the period specified by the PMR Board following such cessation.
Options may be exercised for up to twelve months after an optionee's
relationship with PMR and its affiliates ceases due to disability, and up to
twelve months following an optionee's death (unless such options expire sooner
or later by their terms).
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Restrictions on Transfer. No stock option may be transferred by the
optionee other than by will or the laws of descent or distribution, provided
that the PMR Board may grant a nonstatutory stock option that is transferable,
and provided further that an optionee may designate a beneficiary who may
exercise the option following the optionee's death. In addition, shares subject
to repurchase by PMR under an early exercise stock purchase agreement may be
subject to restrictions on transfer which the PMR Board deems appropriate.
TERMS OF STOCK BONUSES AND PURCHASES OF RESTRICTED STOCK
Payment. The purchase price under a restricted stock purchase agreement
shall be such amount as the PMR Board shall determine and designate in such
agreement, however, stock bonuses may be awarded in consideration of past
services actually rendered without a purchase payment. In no event shall the
purchase price of such restricted stock purchase agreement be less than
eighty-five percent (85%) of the stock's fair market value on the date said
award is made.
The purchase price of stock acquired pursuant to a restricted stock
purchase agreement under the Incentive Plan must be paid either (a) in cash at
the time of purchase; or (b) at the discretion of the PMR Board, according to a
deferred payment or other arrangement or (c) in any other form of legal
consideration acceptable to the PMR Board. The PMR Board may award stock
pursuant to a stock bonus agreement in consideration for past services actually
rendered to PMR or for its benefit.
Vesting. Shares of stock sold or awarded under the Incentive Plan may, but
need not be, subject to a repurchase option in favor of PMR in accordance with a
vesting schedule as determined by the PMR Board. The PMR Board has the power to
accelerate the vesting of stock acquired pursuant to a restricted stock purchase
agreement under the Incentive Plan.
Restrictions on Transfer. Rights under a stock bonus or restricted stock
bonus agreement may not be transferred except where such assignment is required
by law or expressly authorized by the terms of the applicable stock bonus or
restricted stock purchase agreement.
ADJUSTMENT PROVISIONS
If there is any change in the stock subject to the Incentive Plan or
subject to any Stock Award granted under the Incentive Plan (through merger,
consolidation, reorganization, recapitalization, reincorporation, stock
dividend, dividend in property other than cash, stock split, liquidating
dividend, combination of shares, exchange of shares, change in corporate
structure or otherwise), the Incentive Plan and Stock Awards outstanding
thereunder will be appropriately adjusted as to the type of security and the
maximum number of shares subject to such plan and the type of security, number
of shares and price per share of stock subject to such outstanding Stock Awards.
EFFECT OF CERTAIN CORPORATE EVENTS
The Incentive Plan provides that, in the event of a dissolution,
liquidation or sale of substantially all of the assets of PMR, or of a specified
type of merger or other corporate reorganization to the extent permitted by law,
any surviving corporation will be required to either assume Stock Awards
outstanding under the Incentive Plan or substitute similar Stock Awards for
those outstanding under such plan, or such outstanding Stock Awards will
continue in full force and effect. In the event that any surviving corporation
declines to assume or continue Stock Awards outstanding under the Incentive
Plan, or to substitute similar options, then the time during which such Stock
Awards may be exercised may be accelerated and the Stock Awards terminated if
not exercised during such time. The acceleration of an Stock Award in the event
of an acquisition or similar corporate event may be viewed as an antitakeover
provision, which may have the effect of discouraging a proposal to acquire or
otherwise obtain control of PMR.
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DURATION, AMENDMENT AND TERMINATION
The PMR Board may suspend or terminate the Incentive Plan without
stockholder approval or ratification at any time or from time to time. Subject
to stockholder approval of this Proposal 4, the Incentive Plan will terminate
February 1, 2008 unless sooner terminated by the PMR Board.
The PMR Board may also amend the Incentive Plan at any time or from time to
time. The PMR Board may amend the terms of any already granted option or SAR at
any time or from time to time (subject to the consent of the holder). However,
no amendment will be effective unless approved by the stockholders of PMR to the
extent stockholder approval is necessary for the Incentive Plan to satisfy the
requirements of Section 422 of the Code, Rule 16b-3 of the Securities Exchange
Act of 1934, as amended (the "Exchange Act") or any Nasdaq or securities
exchange listing requirements. The PMR Board may submit any other amendment to
the Incentive Plan for stockholder approval, including, but not limited to,
amendments intended to satisfy the requirements of Section 162(m) of the Code
regarding the exclusion of performance-based compensation from the limitation on
the deductibility of compensation paid to certain employees.
FEDERAL INCOME TAX INFORMATION
Incentive Stock Options. Incentive stock options under the Incentive Plan
are intended to be eligible for the favorable federal income tax treatment
accorded "incentive stock options" under the Code.
There generally are no federal income tax consequences to the optionee or
PMR by reason of the grant or exercise of an incentive stock option. However,
the exercise of an incentive stock option may increase the optionee's
alternative minimum tax liability, if any.
If an optionee holds stock acquired through exercise of an incentive stock
option for at least two years from the date on which the option is granted and
at least one year from the date on which the shares are transferred to the
optionee upon exercise of the option, any gain or loss on a disposition of such
stock will be a mid-term or long-term capital gain or loss. Generally, if the
optionee disposes of the stock before the expiration of either of these holding
periods (a "disqualifying disposition"), at the time of disposition, the
optionee will realize taxable ordinary income equal to the lesser of (a) the
excess of the stock's fair market value on the date of exercise over the
exercise price, or (b) the optionee's actual gain, if any, on the purchase and
sale. The optionee's additional gain, or any loss, upon the disqualifying
disposition will be a capital gain or loss, which will be long-term or
short-term depending on how long the optionee holds the stock. Capital gains are
generally subject to lower tax rates than ordinary income. Slightly different
rules may apply to optionees who are subject to Section 16 of the Exchange Act
or who acquire stock subject to certain repurchase options.
To the extent the optionee recognizes ordinary income by reason of a
disqualifying disposition, PMR will generally be entitled (subject to the
requirement of reasonableness, Section 162(m) of the Code and the satisfaction
of a tax reporting obligation) to a corresponding business expense deduction in
the tax year in which the disqualifying disposition occurs.
Nonstatutory Stock Options. Nonstatutory stock options granted under the
Incentive Plan generally have the following federal income tax consequences:
There are no tax consequences to the optionee or PMR by reason of the grant
of a nonstatutory stock option. Upon exercise of a nonstatutory stock option,
the optionee normally will recognize taxable ordinary income equal to the excess
of the stock's fair market value on the date of exercise over the option
exercise price. Generally, with respect to employees, PMR is required to
withhold from regular wages or supplemental wage payments an amount based on the
ordinary income recognized. Subject to the requirement of reasonableness,
Section 162(m) of the Code and the satisfaction of a reporting obligation, PMR
will generally be entitled to a business expense deduction equal to the taxable
ordinary income realized by the optionee. Upon disposition of the stock, the
optionee will recognize a capital gain or loss equal to the difference between
the selling price and the sum of the amount paid for such stock plus any amount
recognized as ordinary income upon exercise of the option. Such gain or loss
will be long-term or short-term depending on how long the optionee holds the
stock. Slightly different rules may apply to optionees who are subject to
Section 16(b) of the Exchange Act or who acquire stock subject to certain
repurchase rights.
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Restricted Stock Purchase Awards and Stock Bonuses. Restricted stock
purchase awards and stock bonuses granted under the Incentive Plan generally
have the following federal income tax consequences:
Upon acquisition of the stock, the recipient normally will recognize
taxable ordinary income equal to the excess of the stock's fair market value
over the purchase price, if any. However, to the extent the stock is subject to
certain types of vesting restrictions, the taxable event will be delayed until
the vesting restrictions lapse unless the recipient elects to be taxed on
receipt of the stock. With respect to employees, PMR is generally required to
withhold from regular wages or supplemental wage payments an amount based on the
ordinary income recognized. Generally, PMR will generally be entitled to a
business expense deduction equal to the taxable ordinary income realized by the
optionee. Upon disposition of the stock, the optionee will recognize a capital
gain or loss equal to the difference between the selling price and the sum of
the amount paid for such stock plus any amount recognized as ordinary income
upon acquisition (or vesting) of the stock. Such gain or loss will be long-term
or short-term depending on how long the stock was held. Slightly different rules
may apply to optionees who acquire stock subject to certain repurchase options
or who are subject to Section 16(b) of the Exchange Act.
Potential Limitation on Company Deductions. Code Section 162(m) denies a
deduction to any publicly held corporation for compensation paid to certain
employees in a taxable year to the extent that compensation exceeds $1 million
for a covered employee. It is possible that compensation attributable to awards
granted in the future under the Incentive Plan, when combined with all other
types of compensation received by a covered employee from PMR, may cause this
limitation to be exceeded in any particular year.
Certain kinds of compensation, including qualified "performance-based
compensation," are disregarded for purposes of the deduction limitation. In
accordance with Treasury regulations issued under Section 162(m), compensation
attributable to stock options and stock appreciation rights will qualify as
performance-based compensation, provided that the option is granted by a
compensation committee comprised solely of "outside directors" and either: (i)
the option plan contains a per-employee limitation on the number of shares for
which options may be granted during a specified period, the per-employee
limitation is approved by the stockholders, and the exercise price of the option
is no less than the fair market value of the stock on the date of grant; or (ii)
the option is granted (or exercisable) only upon the achievement (as certified
in writing by the compensation committee) of an objective performance goal
established in writing by the compensation committee while the outcome is
substantially uncertain, and the option is approved by stockholders.
Compensation attributable to restricted stock and stock bonuses will
qualify as performance-based compensation, provided that: (i) the award is
granted by a compensation committee comprised solely of "outside directors"; and
(ii) the purchase price of the award is no less than the fair market value of
the stock on the date of grant. Stock bonuses qualify as performance-based
compensation under the Treasury regulations only if: (i) the award is granted by
a compensation committee comprised solely of "outside directors;" (ii) the award
is granted (or exercisable) only upon the achievement of an objective
performance goal established in writing by the compensation committee while the
outcome is substantially uncertain; (iii) the compensation committee certifies
in writing prior to the granting (or exercisability) of the award that the
performance goal has been satisfied; and (iv) prior to the granting (or
exercisability) of the award, stockholders have approved the material terms of
the award (including the class of employees eligible for such award, the
business criteria on which the performance goal is based, and the maximum amount
(or formula used to calculate the amount) payable upon attainment of the
performance goal).
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<PAGE> 85
PROPOSAL 5
RATIFICATION OF SELECTION OF INDEPENDENT AUDITORS
The PMR Board has selected Ernst & Young LLP as PMR's independent auditors
for the fiscal year ending April 30, 1999 and has further directed that
management submit the selection of independent auditors for ratification by the
stockholders at the Annual Meeting. Representatives of Ernst & Young LLP are
expected to be present at the Annual Meeting, will have an opportunity to make a
statement if they so desire and will be available to respond to appropriate
questions.
Stockholder ratification of the selection of Ernst & Young LLP as PMR's
independent auditors is not required by PMR's Bylaws or otherwise. However, the
PMR Board is submitting the selection of Ernst & Young LLP to the PMR
stockholders for ratification as a matter of good corporate practice. If the PMR
stockholders fail to ratify the selection, the PMR Audit Committee and the PMR
Board will reconsider whether or not to retain that firm. Even if the selection
is ratified, the PMR Audit Committee and the PMR Board in their discretion may
direct the appointment of different independent auditors at any time during the
year if they determine that such a change would be in the best interests of PMR
and its stockholders.
The affirmative vote of the holders of a majority of the shares present in
person or represented by proxy and entitled to vote at the PMR Meeting will be
required to ratify the selection of Ernst & Young LLP.
THE PMR BOARD OF DIRECTORS RECOMMENDS
A VOTE IN FAVOR OF PROPOSAL 5
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<PAGE> 86
PMR SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information regarding the ownership
of PMR's Common Stock as of August 14, 1998, by: (i) each director and nominee
for director; (ii) each of the executive officers named in the Summary
Compensation Table; (iii) all executive officers and directors of PMR as a
group; and (iv) all those known by PMR to be beneficial owners of more than five
percent of PMR's Common Stock. Except as otherwise indicated, the address of
each holder identified below is in care of PMR, 501 Washington Street, 5th
Floor, San Diego, California 92103.
<TABLE>
<CAPTION>
BENEFICIAL OWNERSHIP(1)
-----------------------------
NUMBER OF
BENEFICIAL OWNER SHARES(1) PERCENT OF TOTAL
---------------- --------- ----------------
<S> <C> <C>
Persons and entities affiliated with Proactive Investment
Managers, L.P.(2)....................................... 1,358,883 19.2%
50 Osgood Place, Penthouse
San Francisco, CA 94133
Jon D. Gruber(2).......................................... 1,241,708 17.5%
50 Osgood Place, Penthouse
San Francisco, CA 94133
J. Patterson McBaine(2)................................... 1,170,083 16.5%
50 Osgood Place, Penthouse
San Francisco, CA 94133
Charles C. McGettigan(2).................................. 716,336 10.1%
50 Osgood Place, Penthouse
San Francisco, CA 94133
Myron A. Wick III(2)...................................... 632,836 8.9%
50 Osgood Place, Penthouse
San Francisco, CA 94133
Allen Tepper(3)........................................... 1,003,319 14.2%
Mark P. Clein(4).......................................... 238,544 3.3%
Susan D. Erskine(5)....................................... 141,919 2.0%
Fred D. Furman(6)......................................... 118,741 1.7%
Daniel L. Frank(7)........................................ 76,500 *
Eugene D. Hill, III(8).................................... 29,000 *
Richard A. Niglio(9)...................................... 81,000 *
All executive officers and directors as a group(10)....... 2,405,359 30.9%
</TABLE>
- ---------------
* Less than one percent.
(1) Applicable percentages of ownership are based on 6,960,130 shares of PMR
Common Stock outstanding on August 14, 1998, adjusted as required by rules
promulgated by the Securities and Exchange Commission (the "SEC"). 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, PMR 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) Charles C. McGettigan, a director of PMR 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) 26,500 shares held by Proactive
Investment Managers, L.P. (which include 26,500 shares issuable pursuant to
a warrant exercisable within 60 days of August 14, 1998, (ii) 561,470
shares held by Proactive Partners, L.P. (which include 26,500 shares
issuable pursuant to a warrant exercisable within 60 days of August 14,
1998, (iii) 42,041 shares held by
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<PAGE> 87
Fremont Proactive Partners, L.P., (iv) with respect to Mr. McGettigan, 86,825
shares held by Mr. McGettigan (which include 79,500 shares issuable pursuant to
options exercisable within 60 days of August 14, 1998), (v) with respect to
Messrs. Gruber and McBaine, 497,547 shares held by entities controlled by
Messrs. Gruber and McBaine (which include (A) 423,247 shares held by
Lagunitas Partners L.P., a limited partnership of which an entity
controlled by Messrs. Gruber and McBaine is the controlling general
partner, (B) 21,000 shares held by Gruber & McBaine International, a
corporation, and over which Messrs. Gruber and McBaine have voting and
investment power and (C) 53,300 shares held in various accounts managed by
an investment advisor controlled by Messrs. Gruber and McBaine), (vi) with
respect to Mr. McBaine, 42,525 shares held by Mr. McBaine (which include
1,500 shares over which Mr. McBaine has shared ownership with his wife,
1,000 shares held by Mr. McBaine's minor child who lives with Mr. McBaine
and 2,000 shares held by Mr. McBaine's child, over which shares Mr. McBaine
has voting and investment power), (vii) with respect to Mr. Gruber, 114,150
shares held by Mr. Gruber (which include 49,425 shares over which Mr.
Gruber shares ownership with his wife, 3,200 shares over which Mr. Gruber
has sole voting and investment power as a trustee for a foundation, 4,000
shares over which Mr. Gruber has sole voting and investment power as a
trustee of accounts for the benefit of his children and 500 shares held by
his wife) and (viii) with respect to Mr. Wick, 2,825 shares held by Mr.
Wick. 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 or for which they exercise
voting and investment power as described above, except to the extent of
their respective interests in such shares arising from their pecuniary
interest in such partnerships.
(3) Includes 9,076 shares held by Mr. Tepper, 875,033 shares held by Mr.
Tepper, as Trustee FBO Tepper Family Trust (the "Family Trust"), 15,000
shares held by Mr. Tepper and Ms. Tepper as Trustees FBO The Tepper 1996
Charitable Remainder Trust UA DTD 11/19/96 (the "Charitable Remainder
Trust"), and 104,210 shares issuable pursuant to options exercisable within
60 days of August 14, 1998.
(4) Includes 205,544 shares issuable pursuant to options exercisable within 60
days of August 14, 1998.
(5) Includes 87,566 shares issuable pursuant to options exercisable within 60
days of August 14, 1998 and 7,000 shares held by Ms. Erskine's spouse,
William N. Erskine, who has sole voting and dispositive power over such
shares and as to which Ms. Erskine disclaims beneficial ownership.
(6) Includes 70,000 shares issuable pursuant to an outstanding warrant and
48,741 shares issuable pursuant to options exercisable within 60 days of
August 14, 1998.
(7) Includes 75,000 shares issuable pursuant to options exercisable within 60
days of August 14, 1998.
(8) Includes 29,000 shares issuable pursuant to options exercisable within 60
days of August 14, 1998.
(9) Includes 79,500 shares issuable pursuant to options exercisable within 60
days of August 14, 1998.
(10) Includes 832,061 shares of PMR Common Stock issuable pursuant to exercise
of outstanding options exercisable within 60 days of August 14, 1998, as
described in the notes above, as applicable.
SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16(a) of the Securities Exchange Act of 1934 (the "1934 Act")
requires PMR's directors and executive officers, and persons who own more than
ten percent of a registered class of PMR equity securities, to file with the SEC
initial reports of ownership and reports of changes in ownership of PMR Common
Stock and other equity securities of PMR. PMR officers, directors and greater
than ten percent stockholders are required by SEC regulation to furnish PMR with
copies of all Section 16(a) forms they file.
To PMR's knowledge, based solely on a review of the copies of such reports
furnished to PMR and written representations that no other reports were
required, during the fiscal year ended April 30, 1998, all
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<PAGE> 88
Section 16(a) filing requirements applicable to its officers, directors and
greater than ten percent beneficial owners were complied with.
EXECUTIVE COMPENSATION
COMPENSATION OF PMR DIRECTORS
The employee-directors of PMR receive no fees or other compensation in
connection with their services as directors. PMR has adopted an informal policy
to pay a fee of $500 to each non-employee director who attends a regularly
scheduled or special meeting of the PMR Board and to pay expenses for attendance
at any such meeting. During the fiscal year ended April 30, 1998, Messrs. Hill,
McGettigan, Niglio and Frank each received such payments in the amount of $3,000
and PMR paid their expenses in connection with attendance at meetings.
OUTSIDE DIRECTORS' NON-QUALIFIED STOCK OPTION PLAN OF 1992
Each non-employee director of PMR receives stock option grants under the
Outside Directors' Non-Qualified Stock Option Plan of 1992 (the "Outside
Directors' Plan"). Only non-employee directors of PMR are eligible to receive
options under the Outside Directors' Plan. Options granted under the Outside
Directors' Plan are intended by PMR not to qualify as incentive stock options
under the Internal Revenue Code of 1986, as amended (the "Code").
Option grants under the Outside Directors' Plan are non-discretionary. As
of the date of the regular meeting of the PMR Board closest to August 3rd of
each year, each member of PMR's Board who is not an employee of PMR is
automatically granted under the Outside Directors' Plan, without further action
by PMR, the PMR Board or the stockholders of PMR, an option to purchase 15,000
shares of Common Stock of PMR. The PMR Board may also grant options at any other
time under the Outside Directors' Plan. The exercise price of options granted
under the Outside Directors' Plan must be at least 100% of the fair market value
of the PMR Common Stock subject to the option on the date of the option grant.
Options granted under the Outside Directors' Plan are immediately exercisable as
to 30% of the option shares and the remaining 70% of the option shares become
exercisable in equal installments on each of the first, second and third
anniversary of the option grant date in accordance with the terms of the Outside
Directors' Plan. In the event of certain mergers of PMR with or into another
corporation or certain other consolidation, acquisition of assets or other
change-in-control transactions involving PMR, the exercisability of each option
will accelerate.
On May 1, 1997, PMR granted options covering 15,000 shares to each
non-employee director of PMR, at an exercise price per share of $18.875. The
fair market value of such PMR Common Stock on the date of grant was $18.875 per
share (based on the closing sales price reported in the Nasdaq National Market
on that date). As of August 7, 1998, 92,000 shares of PMR Common Stock have been
purchased pursuant to options exercised under the Outside Directors' Plan.
1997 EQUITY INCENTIVE PLAN
On February 1, 1990, the PMR Board adopted and on August 16, 1990,
stockholders approved PMR's Employee's Incentive Stock Option Plan of 1990. As a
result of a series of amendments to the plan, there are 2,000,000 shares of PMR
Common Stock authorized for issuance under the plan. In April 1997, the PMR
Board amended the plan to provide for, among other things, grants of
nonstatutory stock options and acceleration of vesting upon certain terminations
of employment in connection with a change in control of PMR (as described
below), and the PMR Board renamed the plan as the PMR Corporation 1997 Equity
Incentive Plan (the "Incentive Plan"). Executive officers and employee-directors
may be granted options to purchase shares of Common Stock under the Incentive
Plan. A detailed summary of the terms of the Incentive Plan is set forth under
Proposal 4 above.
During the last fiscal year, PMR did not grant any options to the Named
Executive Officers (defined below) or employee-directors of PMR.
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<PAGE> 89
COMPENSATION PURSUANT TO PLANS
PMR 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 (the "Plan"). Under the Plan, each employee may defer
up to fifteen percent (15%) of pre-tax earnings, subject to certain limitations.
PMR will match fifty percent (50%) of an employee's deferral to a maximum of
three percent (3%) of an employee's gross salary. PMR's matching contribution
vests over a five (5) year period. For the years ended April 30, 1998, 1997 and
1996, PMR contributed $265,000, $186,000 and $138,000, respectively, to match
employee deferrals. Of these amounts, $20,482, $19,558 and $9,655, respectively,
were contributed to match deferrals of the named executive officers of PMR.
COMPENSATION OF EXECUTIVE OFFICERS
SUMMARY OF COMPENSATION
The following table shows for the fiscal years ended April 30, 1998, 1997
and 1996, compensation awarded or paid to, or earned by, the PMR's Chief
Executive Officer and its other four most highly compensated executive officers
at April 30, 1998 (the "Named Executive Officers"):
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM
ANNUAL COMPENSATION COMPENSATION
------------------------ ------------
SECURITIES ALL OTHER
NAME AND UNDERLYING COMPENSATION
PRINCIPAL POSITION YEAR SALARY($)(1) BONUS($) OPTIONS(#) ($)(2)
------------------ ---- ------------ -------- ------------ ------------
<S> <C> <C> <C> <C> <C>
Allen Tepper...................... 1998 175,000 0 0 4,750
Chief Executive Officer 1997 174,998 150,761 57,731 5,182
1996 128,356 85,958 67,785 3,550
Fred D. Furman.................... 1998 160,501 0 0 4,559
President 1997 160,498 89,880 29,660 4,592
1996 148,815 63,068 31,534 2,552
Susan D. Erskine.................. 1998 130,000 0 0 4,750
Executive Vice President -- 1997 129,998 68,250 22,523 5,638
Development and Secretary 1996 108,910 63,854 52,298 601
Mark P. Clein..................... 1998 150,000 0 0 6,423
Executive Vice President 1997 153,740 84,000 27,720 0
and Chief Financial Officer 1996 0 0 220,000 0
</TABLE>
- ---------------
(1) In accordance with the rules of the SEC, the compensation described in this
table does not include medical, group life insurance or other benefits
received by the Named Executive Officers which are available generally to
all salaried employees of PMR, and certain perquisites and other personal
benefits received by the Named Executive Officers which do not exceed the
lesser of $50,000 or 10% of any such officer's salary and bonus shown in the
table.
(2) Represents matching contributions by PMR under PMR's 401(k) Plan.
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<PAGE> 90
STOCK OPTION GRANTS AND EXERCISES
For the fiscal year ended April 30, 1998, PMR did not make any individual
grants of stock options to any of the Named Executive Officers.
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR, AND FISCAL YEAR-END OPTION
VALUES
<TABLE>
<CAPTION>
NUMBER OF
SECURITIES
UNDERLYING
UNEXERCISED VALUE OF UNEXERCISED
OPTIONS AT FY- IN-THE-MONEY OPTIONS AT
SHARES END(#) FY-END($)(2)
ACQUIRED ON VALUE EXERCISABLE/ EXERCISABLE/
NAME EXERCISE(#) REALIZED($)(1) UNEXERCISABLE UNEXERCISABLE
---- ----------- -------------- ----------------- ------------------------
<S> <C> <C> <C> <C> <C> <C>
Mr. Tepper..................... 9,076 $158,127 114,172/ -- $ 418,317/ --
Ms. Erskine.................... -- -- 87,566/ -- $ 544,176/ --
Mr. Furman..................... 20,000 355,000 118,176/ 44,346 $1,211,551/ $118,214
Mr. Clein...................... 20,000 330,000 205,544/ 22,176 $2,050,000/ --
</TABLE>
- ---------------
(1) Based on the fair market value per share of PMR Common Stock (the closing
sales price reported by the Nasdaq National Market) at the date of exercise,
less the exercise price.
(2) Based on the fair market value per share of PMR Common Stock ($15.00) at
April 30, 1998, less the exercise price, multiplied by the number of shares
underlying the option.
EMPLOYMENT AGREEMENTS
PMR does not have an employment agreement with its Chief Executive Officer
or with any of its other executive officers. Pursuant to the terms of PMR's
Incentive Plan, options awarded to participants (including executive officers)
will become fully exercisable upon a termination of employment (other than for
cause) or constructive termination within one year following certain change in
control transactions, and all shares subject to options granted to
employee-directors under the Incentive Plan will immediately become exercisable
upon such a change in control transaction. See "Executive Compensation -- 1997
Equity Incentive Plan."
REPORT OF THE COMPENSATION COMMITTEE OF THE PMR BOARD
ON EXECUTIVE COMPENSATION(1)
The Compensation Committee of the PMR Board (the "Committee") is
responsible for developing and making recommendations to the Board with respect
to PMR's executive compensation policies. The Committee consists of outside
directors Richard A. Niglio and Eugene D. Hill, III.
EXECUTIVE OFFICER COMPENSATION PROGRAM
PMR's executive compensation program is based on the following four
objectives: (i) to link the interests of management with those of stockholders
by encouraging stock ownership in PMR; (ii) to attract and retain superior
executives by providing them with the opportunity to earn total compensation
packages that are competitive with the industry; (iii) to reward individual
results by recognizing performance through salary, annual cash incentives and
long-term stock based incentives; and (iv) to manage compensation based on the
level of skill, knowledge, effort and responsibility needed to perform the job
successfully.
- ---------------
(1)The material in this report is not "soliciting material," is not deemed
"filed" with the SEC, and is not to be incorporated by reference into any filing
of PMR under the 1933 Act or the 1934 Act, whether made before or after the date
hereof and irrespective of any general incorporation language contained in such
filing.
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<PAGE> 91
The components of PMR's compensation program for its executive officers
include (i) base salary, (ii) performance-based cash bonuses, (iii) incentive
compensation in the form of stock options, and (iv) participation in PMR's
401(k) Plan. An explanation of the 401(k) Plan appears at "Executive
Compensation -- Compensation Pursuant to Plans."
Base Salary. Base salary levels for the PMR's executive officers are
determined, in part, through comparisons with companies in the out-patient
service industry, other companies with which PMR competes for personnel, and
general geographic market conditions. Additionally, the Committee evaluates
individual experience and performance and the overall performance of PMR. The
Committee reviews each executive's salary on an annual basis and may increase
each executive's salary based on (i) the individual's increased contribution to
PMR over the preceding year; (ii) the individual's increased responsibilities
over the preceding year; and (iii) any increase in median competitive pay
levels.
Annual Cash Bonuses. The Compensation Committee recommends the payment of
bonuses from time-to-time to PMR's employees, including its executive officers
to provide an incentive to these persons to be productive over the course of
each fiscal year. These bonuses are awarded only if PMR achieves or exceeds
certain corporate performance objectives relating to net income. Accrued
monthly, depending on the earnings of PMR, is a cash bonus pool to be paid out
after fiscal year end. The size of the cash bonus to each executive officer is
based on the individual executive's performance during the preceding year.
Stock Option Plans. PMR believes that a key component to the compensation
of its executive officers should be through stock options. Stock options
utilized by PMR for this purpose have been designed to provide an incentive to
these employees by allowing them to directly participate in any increase in the
long-term value of PMR. This incentive is intended to reward, motivate and
retain the services of executive employees. PMR has historically rewarded its
executive employees through the grant of Incentive Stock Options and
Nonstatutory Stock Options.
Incentive Stock Options are allocated to both executive and non-executive
employees on an annual basis by either the Compensation Committee or the PMR
Board. PMR 1997 Equity Incentive Plan (the "Incentive Plan") provides for the
grant of 2,000,000 Options, of which 903,437 had been granted as of April 30,
1998. Incentive Stock Options are granted with exercise prices equal to the
prevailing market value of PMR's common stock on the date of grant, have 10-year
terms and are subject to vesting periods established from time to time by the
Committee. Incentive Stock Options granted to holders of 10% or more of PMR's
stock are granted with exercise prices equal to 110% of the prevailing market
value of PMR's common stock on the date of grant and have terms of 5 years.
PMR has also granted Nonstatutory Stock Options on occasion, generally, in
circumstances where the grant of the option may not satisfy certain of the
technical criteria for an Incentive Stock Option. In April 1997, PMR's stock
option plan was amended to permit the award of Nonstatutory Stock Options under
the Incentive Plan. Through April 30, 1998, PMR had granted 430,462 Nonstatutory
Stock Options to executive personnel outside of the Incentive Plan and 88,757
Nonstatutory Stock Options under the Incentive Plan. See "Executive
Compensation -- 1997 Equity Incentive Plan."
The Compensation Committee employs no particular set of mechanical criteria
in awarding stock options. Rather, it evaluates a series of factors including:
(i) the overall performance of PMR for the fiscal year in question; (ii) the
performance of the individual in question; (iii) the anticipated contribution by
the individual to PMR on an overall basis; (iv) the historical level of
compensation of the individual; (v) the level of compensation of similarly
situated executives in PMR's industry; and (vi) that level of combination of
cash compensation and stock options that would be required from a competitive
point of view to retain the services of a valued executive officer.
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<PAGE> 92
CEO COMPENSATION
Mr. Tepper's base salary has been and will continue to be adjusted from
time-to-time in accordance with the criteria for the determination of executive
officer compensation as described above in the section captioned "Base Salary."
In setting the compensation for Mr. Tepper for fiscal year 1998, PMR sought to
retain a key executive officer while continuing to tie a significant percentage
of his compensation to company performance.
By the Compensation Committee
Richard A. Niglio
Eugene D. Hill, III
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
As noted above, PMR compensation committee consists of Richard A. Niglio
and Eugene D. Hill, III. During the 1998 fiscal year, Allen Tepper was an
executive officer of PMR and each of PMR's subsidiaries (which included
Psychiatric Management Resources, Inc., Collaborative Care, Inc., PMR-CD, Inc.,
Aldine-CD, Inc., Collaborative Care Corporation and Twin Town Outpatient). All
directors of PMR, including Mr. Niglio and Mr. Hill, have options to purchase
shares of PMR's Common Stock. See "Executive Compensation -- Outside Directors'
Non-Qualified Stock Option Plan of 1992" and "1997 Equity Incentive Plan."
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
GRANT OF OPTIONS TO CERTAIN DIRECTORS AND EXECUTIVE OFFICERS.
Directors and members of management of PMR have been granted options to
purchase PMR Common Stock. See "Executive Compensation -- Outside Directors'
Non-Qualified Stock Option Plan of 1992," "1997 Equity Incentive Plan of 1997,"
"Option Grants in Last Fiscal Year."
On April 1, 1998 Daniel L. Frank became President of PMR's Disease
Management Division. Mr. Frank will receive an annual salary of $150,000 in
connection with his employment. In addition, PMR is in the process of finalizing
the compensation package (including the number of stock options to be awarded to
Mr. Frank) and the terms of such options in connection with his employment.
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<PAGE> 93
PERFORMANCE MEASUREMENT COMPARISON(1)
The following graph and table show the total stockholder return of an
investment of $100 in cash on April 30, 1993 for PMR's Common Stock, the Nasdaq
Stock Market (U.S.) Index and the Nasdaq Health Services Index. All values
assume reinvestment of the full amount of all dividends and are calculated as of
April 30, of each year:
COMPARISON OF 5 YEAR CUMULATIVE TOTAL RETURN*
AMONG PMR CORPORATION, THE NASDAQ STOCK MARKET (U.S.) INDEX
AND THE NASDAQ HEALTH SERVICES INDEX
5 YEAR CUMULATIVE RETURN GRAPH
(1) This Section is not "soliciting material," is not deemed "filed" with the
SEC and is not to be incorporated by reference in any filing of PMR under
the Securities Act or the Exchange Act whether made before or after the date
hereof and irrespective of any general incorporation language in any such
filing.
OTHER MATTERS
The PMR Board knows of no other matters that will be presented for
consideration at the PMR Meeting. If any other matters are properly brought
before the meeting, it is the intention of the persons named in the accompanying
proxy to vote on such matters in accordance with their best judgment.
INFORMATION WITH RESPECT TO PMR
This Prospectus/Joint Proxy Statement is accompanied by PMR's Annual Report
on form 10-K for the year ended April 30, 1998 ("Form 10-K") and its Annual
Report to Stockholders for the year ended April 30, 1998.
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<PAGE> 94
PMR BUSINESS
This information contained in the section entitled "Item 1. Business" of
the Form 10-K (attached hereto as Exhibit 13.1) is incorporated herein by
reference.
MARKET PRICE OF AND DIVIDENDS ON PMR'S COMMON EQUITY AND RESTATED STOCKHOLDER
MATTERS
The information contained in the section entitled "Item 5. Market Price of
and Dividends on PMR's Common Equity and Related Stockholder Matters" of the
Form 10-K (attached hereto as Exhibit 13.1) is incorporated herein by reference.
SELECTED FINANCIAL DATA AND SUPPLEMENTAL FINANCIAL INFORMATION
The information contained in the section entitled "Item 6. Selected
Financial Data" of the Form 10-K (attached hereto as Exhibit 13.1) is
incorporated herein by reference.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The information contained in the section entitled "Item 7. Management's
Discussion and Analysis of Financial Condition and Results of Operations" of the
Form 10-K (attached hereto as Exhibit 13.1) is incorporated herein by reference.
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE
The information contained in the section entitled "Item 9. Changes in and
Disagreements With Accountants on Accounting and Financial Disclosure" of the
Form 10-K (attached hereto as Exhibit 13.1) is incorporated herein by reference.
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<PAGE> 95
BHC BUSINESS
The following discussion contains forward-looking statements that involve
risks and uncertainties. BHC's and the combined company actual results could
differ materially from those discussed here. Factors that could cause or
contribute to such differences include, but are not limited to, those discussed
in the sections entitled "Risk Factors" and "BHC Management's Discussion and
Analysis of Financial Condition and Results of Operations," as well as those
discussed elsewhere in this Prospectus/Joint Proxy Statement.
GENERAL
BHC is a provider of behavioral and psychiatric health care services.
Through its wholly-owned subsidiaries, BHC owns and operates 43 psychiatric
facilities, including 38 acute care psychiatric facilities and five residential
treatment centers. In addition, BHC operates 19 mobile crisis services and 89
outpatient treatment centers in affiliation with, or under license of, these
facilities. BHC currently has over 3,500 licensed beds in its facilities, which
are located in 18 states and Puerto Rico. BHC's facilities are licensed,
certified for participation in Medicare and Medicaid and accredited by the Joint
Commission of Accreditation of Healthcare Organizations.
BHC facilities provide a full range of treatment services for children,
adolescents and adults with psychiatric, emotional, substance abuse and
behavioral disorders. BHC's specialization of programs enables the clinical
staff at its various facilities to provide care that is specific to the
patient's needs and facilitates monitoring of the patient's progress. BHC's
typical treatment program integrates physicians and other patient-care
professionals with structured activities, providing patients with testing,
adjunctive therapies (occupational, recreational and other), group therapy,
individual therapy and educational programs. A treatment program includes one or
more of the types of treatment offered within the scope of a facility's
continuum of care. For those patients who do not have a personal psychiatrist or
other specialist, the hospital refers the patient to a member of its medical
staff.
OPERATIONS
BHC has worked to expand significantly the scope of its psychiatric
treatment programs to create a continuum of care from which the most appropriate
and cost-effective treatments can be selected to meet the needs of its payors
and patients. In addition to offering traditional inpatient treatment programs,
BHC provides less costly treatment alternatives such as partial hospitalization,
residential treatment and intensive and non-intensive outpatient programs. By
offering such programs through a single organization, BHC believes that the
transition among differing intensities of care occurs rapidly and cost
effectively from the perspective of the patient, clinical team (including the
medical director, the clinical or nursing director, the admissions director and
the program director) and payor.
Greater than 50% of the patients treated in BHC facilities suffer from
affective disorders such as major depressive disorder, dysthymic disorder,
bipolar disorder, or cyclothymic disorder. Substance abuse related disorders are
found in approximately 20% of patients admitted to BHC facilities. The remaining
patients admitted to BHC facilities have various disorders including
schizophrenia or related disorders, other psychotic disorders, childhood
disorders, and other forms of personality disorders or anxiety disorders.
Patients admitted to BHC hospitals for acute, inpatient treatment commonly
suffer from suicidal ideation, homicidal ideation, or in some way are unable to
care for themselves due to the severity of their psychiatric illness.
Clinical Programs
When an individual inquires about treatment at a BHC facility, the
individual is encouraged to meet with a clinician for a free assessment to
determine what, if any, type of treatment is needed. All BHC facilities have
assessment departments that employ clinically trained and credentialed staff who
are competent to conduct assessments. In addition, many BHC facilities have
mobile assessment teams that go out into their communities to conduct
assessments in various locations, including for example, local hospital
emergency rooms.
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If an individual is a candidate for treatment in a BHC program, a physician
member of the medical staff of the relevant BHC facility determines whether to
admit the patient to the program. The physician, typically a psychiatrist, leads
the patient's multidisciplinary treatment team. Once admitted to a treatment
program, a patient receives an array of clinical assessments, including a
history and physical examination, a nursing assessment, a psychosocial
assessment, and an activity therapy assessment. Once all assessments have been
completed, the multidisciplinary treatment team meets to develop a treatment
plan for the patient.
Patients receive individual, group and family therapy as prescribed by
their individualized treatment plans while in a treatment program in a BHC
facility. Additionally, medication management is generally prescribed by the
patient's attending psychiatrist, if it is an appropriate and needed form of
treatment. Patients also receive such therapies as activity therapy,
recreational therapy, and occupational therapy, if appropriate.
An essential part of treatment for patients in any treatment program in a
BHC facility is discharge planning. The multidisciplinary team works with every
patient to determine specifically what needs to be in place for the patient to
leave the inpatient hospital or other treatment program. This can range from
living arrangements to outpatient therapy and may include support groups,
custody arrangements, or specialized medication regimes. Usually, a social
worker or another credentialed clinician manages the patient's discharge
planning. This phase of treatment is important in preventing recidivism to the
facility and in providing the proper supportive environment for the patient in
leaving the facility.
Specialty Programs
BHC facilities operate as mental health centers in their communities with
the hospital serving as a hub for a full continuum of services. In addition,
many BHC facilities have developed specialty programs to meet community needs or
integrated networks that provide services in a variety of ways. The following
are examples of specialty programs or integrated networks in the BHC family of
facilities:
- MOBILE CRISIS ASSESSMENT TEAMS: provide assessment services at various
designated locations within the hospital's community utilizing trained,
credentialed clinicians.
- CLINICAL RESEARCH TRIALS: through contractual arrangements with clinical
research companies, several hospitals have been designated as research
sites and participate in studies regarding new psychotropic medications,
primarily to treat schizophrenia and bipolar disorders.
- 23 HOUR UNITS: these units provide crisis stabilization and intensive
observation and treatment for a 23 hour period and are intended to reduce
the need for acute, inpatient treatment.
- THERAPEUTIC DAY SCHOOLS: through contractual arrangements with the local
school systems, certain BHC facilities provide psychoeducational services
to emotionally and behaviorally disturbed students within the community's
public school system.
- ELECTROCONVULSIVE THERAPY (ECT): ECT is a treatment modality indicated
for certain forms of psychotic depression. ECT is considered a special
treatment procedure requiring the attendance of an anesthesiologist and
specially trained nursing staff.
- SEXUAL PERPETRATOR PROGRAMS: a specialty area particularly for adolescent
patients at several BHC facilities, usually adolescent residential
treatment programs, that specialize in treating this type of patient.
- WIIT PROGRAM: through a contractual arrangement with a psychologist in
South Florida, one BHC facility provides a separate unit to treat female
patients who have been the victims of severe physical and emotional
abuse.
MARKETING
BHC's marketing programs are directed to referral sources and are designed
to increase awareness of a facility's programs and services. Referral sources
include psychiatrists, psychologists, medical practitioners, managed mental
health organizations, courts and probationary officers, law enforcement
agencies, schools and
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clergy. BHC's hospitals work closely with mental health professionals,
non-psychiatric physicians, emergency rooms and community agencies that come in
contact with individuals who may need treatment for mental illness or substance
abuse. A portion of BHC's marketing efforts is directed at increasing general
awareness of mental health and addictive disease and the services offered by
BHC's hospitals. Each facility's marketing staff, together with other facility
personnel, maintains direct contact with referral sources to meet the needs of
the referral sources. These needs may be related to a desired treatment program,
the desires of the patient's family, hospital policies or the timely receipt of
accurate information.
SOURCES OF REVENUE
BHC's facilities receive revenue from third-party reimbursement sources,
including commercial insurance carriers (which provide coverage to insureds on
both an indemnity basis and through various managed care plans), Medicare,
Medicaid and CHAMPUS, in addition to payments directly from patients.
Third-party reimbursement programs generally reimburse facilities either on
the basis of facility charges (charge-based), on the basis of the facility's
costs as audited or projected by the third-party payor (cost-based), or on the
basis of negotiated rates (per diem-based). Amounts received under government
programs, health maintenance organizations ("HMO's"), preferred provider
organizations ("PPO's") and other managed health care arrangements and certain
self-insured employers are generally less than the hospital's established
charges. The following table sets forth, by category, the approximate
percentages of BHC's consolidated gross patient revenues charged by BHC's
facilities derived from various sources for the periods indicated.
<TABLE>
<CAPTION>
YEAR-ENDED JUNE 30,
--------------------
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Cost-based programs:
Medicare.......................................... 17% 18% 23%
Medicaid.......................................... 30% 29% 22%
Sub-total...................................... 47% 47% 45%
Cost-based and per diem-based programs:
HMO/PPO........................................... 26% 24% 33%
Commercial and other.............................. 28% 29% 22%
Sub-total...................................... 53% 53% 55%
Total..................................... 100% 100% 100%
</TABLE>
Most private insurance carriers reimburse their policyholders or make
direct payments to the hospitals for charges at rates specified in their
policies. The patient remains responsible to the hospital for any difference
between the insurance proceeds and the total charges.
Most of BHC's hospitals have entered into contracts with HMO's, PPO's,
certain self-insured employers and other managed care plans which provide for
reimbursement at rates less than the hospital's normal charges. In addition to
contracts entered into by individual hospitals with such managed care plans, BHC
has entered into regional and national contracts with HMO's, PPO's, self-insured
employers and other managed care plans that apply to all of BHC's hospitals in
the geographic areas covered by a contract. BHC expects its percentage of
revenue from these payor sources to increase in the future.
Under the Medicare provisions of the Tax Equity and Fiscal Responsibility
Act of 1982 ("TEFRA"), costs per Medicare case are determined for each of BHC's
hospitals. A target cost per case is established for each year (the "Target
Rate"). On August 5, 1997, Congress passed the Balanced Budget Act ("BBA"),
which enacted substantial changes in the Medicare reimbursement of health care
services provided by all Medicare providers. In particular, reimbursement for
services provided by facilities exempt from the prospective payment system
hospitals and units, including psychiatric hospitals, was significantly revised
for the next five years. Changes include reductions to capital payments, a cap
on TEFRA Target Rates, caps on bonus payments, and an update factor of zero for
fiscal year 1998. All TEFRA hospitals will be subject to an across-the-board
reduction in capital costs of 15% for each of the five fiscal years starting
with fiscal year 1998.
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The BBA establishes a cap on TEFRA Target Rates at the seventy-fifth percentile
of all the target amounts in fiscal year 1996 for all psychiatric hospitals,
inflated to present time. Prospective rules published May 8, 1998 establish caps
on the Target Rate for fiscal year 1999 at $10,443. The Target Rate for each
hospital is increased annually by the application of an "update factor."
Following the enactment of the BBA, the update in the Target Rate for fiscal
year 1998 is zero. Updates in fiscal year 1999 through fiscal year 2002 will
vary, depending on the comparison of a hospital's actual inpatient operating
cost to its Target Rate. A hospital with costs in excess of 110% of its Target
Rate will get the full market basket update. Finally, beginning in fiscal year
1998, bonus payments will be capped at the lesser of 15% of the excess or 2% of
the Target Rate.
Most of BHC's hospitals participate in state-operated Medicaid programs.
Current federal law prohibits Medicaid funding for inpatient services in
freestanding psychiatric hospitals for patients between the ages of 21 and 64.
Each state is responsible for establishing the Medicaid eligibility and coverage
criteria, payment methodology and funding mechanisms which apply in that state,
subject to federal guidelines. Accordingly, the level of Medicaid payments
received by BHC's hospitals varies from state to state. In addition to the basic
payment level for patient care, several state programs include a financial
benefit for hospitals which treat a disproportionately large volume of Medicaid
patients as a percentage of the total patient population. The BBA reduces
disproportionate share benefits by approximately $10.4 billion over the next
five years. In California, where BHC operates 10 hospitals, the disproportionate
share benefits are projected to decrease 20% from 1998 to 2002. The amount of
disproportionate share payments each hospital can receive is limited by BBA and
through the use of formulas based generally on the cost of providing services to
Medicaid and uninsured patients. The changes set forth in the BBA could
adversely affect a hospital currently receiving large DSH payments.
In addition to the other changes in reimbursement affected by the BBA, the
BBA also repeals the Boren Amendment. Provider payments generally, and payments
to BHC hospitals for services rendered to Medicaid patients specifically, are
likely to be reduced as a result of this charge. BHC is unable to predict the
magnitude of these changes.
Within the statutory framework of the Medicare and Medicaid programs, there
are substantial areas subject to administrative rulings and interpretations
which may affect payments made under either or both of such programs. In
addition, federal or state governments could reduce the future funds available
under such programs or adopt additional restrictions on admissions and more
stringent requirements for utilization of services. These types of measures
could adversely affect BHC's operations. Final determination of amounts payable
under Medicare and certain Medicaid programs are subject to review and audit.
Most of BHC's hospitals receive revenues from the CHAMPUS program. Under
various CHAMPUS programs, payments can either be based on contractually agreed
upon rates or rates determined by regulatory formulas. CHAMPUS patients are
subject to annual limits on the number of psychiatric days covered by CHAMPUS.
Covered inpatient services are generally limited to 30 days for adult acute
patients, 45 days for child and adolescent acute patients, and 150 days for
residential treatment center patients.
EMPLOYEES
At August 8, 1998, BHC employed approximately 4,329 full-time employees. In
addition, BHC employed a corporate headquarters staff of approximately 47,
including 14 senior managers. No employee of BHC is subject to a collective
bargaining agreement, and BHC believes that its relations with its employees are
good.
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PROPERTIES
BHC owns each of its facilities, except as indicated below. The following
table provides certain information with respect to BHC's facilities.
<TABLE>
<CAPTION>
HOSPITAL/RESIDENTIAL NUMBER DATE
TREATMENT CENTER LOCATION OF BEDS ACQUIRED
-------------------- -------- ------- --------
<S> <C> <C> <C>
Aspen Hill Hospital* Flagstaff, Arizona 26 6/1/96
Pinnacle Pointe Hospital Little Rock, Arkansas 102 12/1/96
Alhambra Hospital Rosemead, California 85 12/1/96
Canyon Ridge Hospital Chino, California 59 1/1/94
Cedar Vista Hospital** Fresno, California 61 1/1/94
Fremont Hospital Fremont, California 78 12/1/96
Heritage Oaks Hospital Sacramento, California 75 12/1/96
Ross Hospital Kentfield, California 72 1/1/95
San Luis Rey Hospital Encinitas, California 123 12/1/96
Sierra Vista Hospital Sacramento, California 72 12/1/96
Vista Del Mar Hospital Ventura, California 87 12/1/96
Walnut Creek,
Walnut Creek Hospital California 108 12/1/96
Ft. Lauderdale Hospital Ft. Lauderdale, Florida 100 12/1/96
St. John's River Hospital Jacksonville, Florida 99 12/1/96
Intermountain Hospital Boise, Idaho 95 12/1/96
BHC of Northern Indiana Plymouth, Indiana 80 6/3/97
Meadows Hospital Bloomington, Indiana 78 11/19/96
Columbus Hospital Columbus, Indiana 70 6/3/97
Lebanon Hospital Lebanon, Indiana 94 6/3/97
Streamwood Hospital Streamwood, Illinois 100 12/1/96
Valle Vista Health System Greenwood, Indiana 96 12/1/96
College Meadows Hospital Lenexa, Kansas 120 12/1/96
East Lake Hospital New Orleans, Louisiana 80 12/1/96
Meadow Wood Hospital Baton Rouge, Louisiana 85 12/1/96
Sand Hill Hospital Gulfport, Mississippi 90 12/1/96
Spirit of St. Louis Hospital St. Charles, Missouri 104 12/1/96
Mesilla Valley Hospital Las Cruces, New Mexico 115 11/19/96
Pinon Hills Hospital Santa Fe, New Mexico 40 6/1/96
Pinon Hills Residential Treatment Center Santa Fe, New Mexico 53 6/1/96
Montevista Hospital Las Vegas, Nevada 80 7/1/93
West Hills Hospital Reno, Nevada 95 7/1/93
Willow Springs Residential Treatment Center Reno, Nevada 74 7/1/93
Belmont Pines Hospital Youngstown, Ohio 77 11/19/96
Fox Run Hospital St. Clairsville, Ohio 65 11/19/96
Windsor Hospital Chagrin Falls, Ohio 71 6/1/96
Pacific Gateway Hospital Portland, Oregon 66 6/3/97
Pacific View Residential Treatment Center Gresham, Oregon 34 6/3/97
San Juan Capestrano Hospital San Juan, Puerto Rico 88 4/15/97
Cedar Crest Hospital & Residential Treatment
Center Belton, Texas 70 7/1/93
Community Residential Treatment Center of San
Antonio*** San Antonio, Texas 36 12/1/96
Millwood Hospital Arlington, Texas 98 12/1/96
</TABLE>
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<TABLE>
<CAPTION>
HOSPITAL/RESIDENTIAL NUMBER DATE
TREATMENT CENTER LOCATION OF BEDS ACQUIRED
-------------------- -------- ------- --------
<S> <C> <C> <C>
Olympus View Hospital Salt Lake City, Utah 102 12/1/96
Fairfax Hospital Kirkland, Washington 133 8/1/97
</TABLE>
- ---------------
* Aspen Hill Hospital is a leased facility expected to be sold August 31,
1998.
** BHC Cedar Vista Hospital, Inc., a subsidiary of BHC, owns a 33% interest in
Valle Behavioral Health Network, LLC which operates the hospital. BHC Cedar
Vista Hospital, Inc. owns 100% of the real property.
*** Community Residential Centers of San Antonio is a leased facility. Community
Psychiatric Centers of Texas, Inc., a subsidiary of BHC, owns a 70% interest
in Community Residential Centers of San Antonio, LLC, which operates the
hospital.
SEASONALITY
Psychiatric hospital admissions, particularly admissions of children and
adolescents, are subject to certain seasonal fluctuations, including decreases
in admission levels during the summer months and holiday periods. A significant
adverse trend in the Company's operations during any historical peak period
would have a material adverse effect on the Company's results of operations for
the full year. Certain of BHC's expenses, including debt service and certain
personnel costs, are fixed, and accordingly, there can be no assurance that BHC
will not be adversely affected by the seasonality of its operations.
COMPETITION
In most of its markets, BHC competes with other providers of psychiatric
services including psychiatric hospitals owned and operated by governmental
agencies, nonprofit organizations supported by endowments and charitable
contributions, and proprietary hospital corporations. The hospitals frequently
draw patients from areas outside their immediate locale and, therefore, BHC's
hospitals may, in certain markets, compete with both local and distant
hospitals. BHC also competes with psychiatric units in medical/surgical
hospitals. Many of BHC's competitors are larger and have greater financial
resources than BHC. There can be no assurance, therefore, that BHC can compete
effectively with such providers. The competitive position of a hospital is, to a
significant degree, dependent upon the number and quality of physicians who
practice at the hospital and who are members of its medical staff.
In recent years, the competitive position of hospitals has been affected by
the ability of such hospitals to obtain contracts with PPO's, HMO's and other
managed care programs to provide inpatient and other services. Such contracts
normally involve a substantial discount from the hospital's established charges.
These contracts also frequently provide for pre-admission certification and for
concurrent length of stay reviews. The importance of obtaining contracts with
HMO's, PPO's and other managed care companies varies from market to market,
depending on the individual market strength of the managed care companies.
State certificate of need laws regulate BHC and its competitors' abilities
to build new hospitals and to expand existing hospital facilities and services.
These laws do provide some protection from competition, as their intent is to
prevent duplication of services. In most cases, these state laws do not restrict
the ability of BHC or its competitors to offer new outpatient services. BHC
operates 30 hospitals in 12 states which do not have certificate of need laws
applicable to hospitals. In addition, in certain states, as a practical matter,
it is necessary to pledge to provide various amounts of uncompensated care to
indigent persons in order to obtain a certificate of need.
BHC's hospitals have been adversely affected by factors influencing the
entire psychiatric hospital industry. Factors which affect BHC include (i) the
imposition of more stringent length of stay and admission criteria by payors;
(ii) the failure of reimbursement rates received from certain payors that
reimburse on a per diem or other discounted basis to offset increases in the
cost of providing services; (iii) an increase in the percentage of its business
that BHC derives from payors that reimburse on a per diem or other discounted
basis; (iv) a trend toward higher deductibles and co-insurance for individual
patients; (v) a trend toward
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limiting employee mental health benefits, such as reductions in annual and
lifetime limits on mental health coverage and (vi) pricing pressure related to
an increasing rate of claims denials by third party payors. In response to these
conditions, BHC has (i) strengthened controls to minimize costs and capital
expenditures; (ii) reviewed its portfolio of hospitals and sold, closed or
consolidated operations in certain locations; (iii) developed strategies to
increase outpatient services and partial hospitalization programs to meet the
demands of the marketplace; (iv) implemented programs to contest third party
denials relating to valid pre-certified medical procedures; (v) renegotiated
certain contracts with managed care organizations at increased rates; and (vi)
created an integrated national behavioral healthcare system, thereby improving
BHC's ability to obtain contracts with large private and public payors.
REGULATION
Licensing and Certification. Psychiatric hospitals are subject to
substantial regulatory, accreditation and certification requirements. These
include, but are not limited to, requirements related to licensure, Medicare and
Medicaid participation and payment and accreditation organizations. The
issuance, renewal and continuance of many of these license, certifications, and
accreditations are based upon governmental and private regulatory agency
inspections, surveys, audits, investigations or other reviews, including
self-reporting requirements. An adverse view or determination by any one of such
regulatory authorities could result in loss, delay or denial of reimbursement to
such hospital. BHC currently anticipates that the BHC hospitals will be able to
continue to obtain and maintain applicable licenses, certifications and
accreditations and to obtain reimbursement for services. However, the failure to
obtain or maintain any license or certification could result in material adverse
consequences to the operations or financial condition of the hospital and
possibly BHC.
In addition, there are specific laws regulating the civil commitment of
psychiatric patients and the disclosure of information regarding patients being
treated for chemical dependency or psychiatric disorders. Many states have
adopted a "patient's bill of rights" which sets forth standards dealing with
issues such as using the least restrictive treatment environment, patient
confidentiality, allowing the patient access to the telephone and mail, allowing
the patient to see a lawyer and requiring the patient to be treated with
dignity. BHC believes that the hospitals operated by its subsidiaries are in
substantial compliance with all applicable state and federal laws and
regulations, including those governing patient rights.
In the ordinary course of its business, the BHC facilities, like others in
the health care industry, receive statements of deficiency for failure to comply
with various federal and state regulatory requirements. To date, such statements
of deficiency have not had any material adverse effects on BHC's operations.
Utilization Review. Federal law contains numerous provisions designed to
ensure that services rendered by hospitals to Medicare and Medicaid patients
meet recognized professional standards and are medically necessary and that
claims for reimbursement are properly filed. These provisions include a
requirement that a sampling of admissions of Medicare and Medicaid patients must
be reviewed by peer review organizations ("PRO's"), in a timely manner to
determine the medical necessity of the admissions. In addition, under the Peer
Review Improvement Act of 1982 (the "Peer Review Act"), PRO's may deny payment
for services provided and, in more extreme cases, PRO's have the authority to
recommend to the Department of Health and Human Services (the "Department") that
a provider who is in substantial noncompliance with the medical necessity and
quality of care standards of a PRO or who has grossly and flagrantly violated an
obligation to render quality care be excluded from participation in the Medicare
program or be required to reimburse the federal government for certain payments
previously made to the provider under the Medicare program.
Each of BHC's hospitals has developed and implemented a quality assurance
program and implemented procedures for utilization review to meet its
obligations under the Peer Review Act. BHC believes that adequate allowances
relating to such denials have been made, although it is uncertain whether such
allowances will cover adequately any denials in the future. Nevertheless, the
activities of PRO's and other public and private utilization review agencies may
have the effect of causing physicians who practice at BHC's hospitals to reduce
the number of patient admissions. BHC believes that compliance with regulations
overseen by PRO's has reduced the number of patient admissions and the length of
stays of Medicare patients. It is
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uncertain whether the PRO's will continue to reduce the number of admissions or
length of stays of Medicare patients at the BHC hospitals.
Fraud and Abuse. The provisions of the Social Security Act addressing
illegal remuneration (the "Anti-Kickback Statute") prohibit providers and others
from soliciting, receiving, offering or paying, directly or indirectly, any
remuneration in return for either making a referral for a Medicare or Medicaid
covered service or item or ordering any covered service or item. Violations of
this statute may be punished by a fine of up to $50,000 or imprisonment for each
violation and damages up to three times the total amount of remuneration. In
addition, the Medicare Patient and Program Protection Act of 1987, as amended by
the Health Insurance Portability and Accountability Act and the BBA ("HIPAA"),
(the "Protection Act") imposes civil penalties for a violation of these
prohibitions, including exclusion from the Medicare and Medicaid programs by the
Secretary of the Department of Health and Human Services ("HHS").
Effective June 1, 1997, pursuant to the enactment of HIPAA, the Secretary
may and in some cases, must exclude individuals and entities from participating
in any government health care program that the Secretary determines has
"committed an act" in violation of the Anti-Kickback Statute or has improperly
filed claims in violation of the Anti-Kickback Statute. Further, the BBA
expanded the authority of the Secretary to exclude a person involved in
fraudulent activity from participation in a program providing health benefits,
whether directly or otherwise, which is funded directly, in whole or in part, by
the United States Government.
The Protection Act authorized the OIG to publish regulations outlining
certain categories of activities that would be deemed not to violate the
Anti-Kickback Statute (the "Safe Harbors"). On July 29, 1991, the OIG published
final Safe Harbor regulations implementing the Congressional intent expressed in
the Protection Act. The preamble to the Safe Harbor regulations states that the
failure of a particular business arrangement to comply with the regulations does
not determine whether the arrangement violates the Anti-Kickback Statute because
the regulations do not make conduct illegal. Any conduct that could be construed
to be illegal after the promulgation of this rule would have been illegal prior
to the publication of the regulations. See "Risk Factors -- State and Federal
Anti-Kickback and Self-Referral Laws."
BHC believes that its current operations are in compliance with the federal
Anti-Kickback Statute.
The Federal Anti-Referral (Stark) Legislation. In recent years Congress and
various state legislatures have considered a number of proposals that would have
prohibited, or at least severely limited, the ability of physicians and other
referral sources to refer patients to ventures with which the referral source
has a financial relationship. In 1989, Congress passed provisions of the Omnibus
Budget Reconciliation Act of 1989 ("OBRA '89"), which prohibits a physician from
referring patients to an entity that furnishes clinical laboratory services with
whom the physician has a financial relationship, if Medicare would pay for the
services. On January 1, 1995, provisions of the Omnibus Budget Reconciliation
Act of 1989 ("OBRA '93") imposed additional restrictions on physician referrals.
OBRA '93 severely limits the ability of a physician to refer patients for
certain "designated health services" as defined in the statute provided by
entities with which the physician has an ownership interest or a compensation
arrangement and prohibits a physician from billing Medicare for services
provided pursuant to a prohibited referral. Designated health services include
clinical laboratory services; physical therapy services; occupational therapy
services; radiology or other diagnostic services; radiation therapy services;
durable medical equipment; parenteral and enteral nutrients, equipment and
supplies; prosthetics, orthotics and prosthetic devices; home health services;
outpatient prescription drugs; and inpatient and outpatient hospital services.
BHC believes that its current operations are in compliance with provisions
of federal law, including Stark II.
State Legislation. Similar to federal law, California also prohibits the
offer, delivery, receipt or acceptance by any physician of any remuneration as
compensation or an inducement for patient referrals. Violation of this statute
is punishable by possible imprisonment and/or a civil monetary fine not to
exceed $10,000. In addition, Texas law prohibits a person from intentionally or
knowingly offering to pay or agreeing to accept any remuneration for securing or
soliciting patients. Although BHC exercises care in an effort to
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structure its arrangements with health care providers to comply with the
relevant state statutes, and although management believes that BHC is in
compliance with these laws, there can be no assurance that (i) governmental
officials charged with responsibility for enforcing these laws will not assert
that BHC or certain transactions in which it is involved are in violation of
such laws, and (ii) such state laws will ultimately be interpreted by the courts
in a manner consistent with the practices of BHC.
Accreditation. All of the BHC facilities are accredited by JCAHO. The JCAHO
is a voluntary national organization which undertakes a comprehensive review for
purposes of accreditation of health care facilities. In general, hospitals and
certain other health care facilities are initially surveyed by JCAHO within 12
months after the commencement of operations and resurveyed at triennial
intervals thereafter.
LEGAL PROCEEDINGS
BHC is, from time to time, a party to litigation which arises in the normal
course of its business. BHC does not have pending any litigation that,
separately or in the aggregate, is currently expected to have a material adverse
effect on the operating results or financial condition of BHC.
BHC DIRECTORS AND EXECUTIVE OFFICERS
Edward A. Stack, 52, has served as President and Chief Executive Officer
and as a Director of BHC since BHC's inception in June 1993. Prior to joining
BHC, Mr. Stack served as President of Western Group Operations of HCA
Psychiatric Company. He also serves on the boards of the National Association of
Psychiatric Health Systems and the Catholic Charities of Tennessee.
Winfield C. Dunn, 71, has served as a Director of BHC since July 1993. Dr.
Dunn is the former Governor of the State of Tennessee, and currently serves on
the boards PhyCor, Inc., a physician practice management company, MedShares
Management, a home health care business, and the American Cancer Society.
Howard C. Landis, 44, has served as a Director of BHC since July 1993. Mr.
Landis is a partner in RFE Associates, the general partner of RFE Investment
Partners, and also serves on the boards of Accu Health and a number of
privately-owned companies.
Neil R. Anderson, 42, has served as a Director of BHC since July 1994. Mr.
Anderson is Vice President of Calver Corporation and the President and Treasurer
of the Rose-Marie and Jack R. Anderson Foundation, and also serves on the boards
of Airmark Blueprinting, Harmony Health System and CHAMA.
Helen King Cummings, 57, has served as a Director of BHC since July 1995.
Ms. Cummings was previously the Vice President -- Health Financing of
Columbia/HCA Healthcare Corporation. She also serves on the board of the Frist
Foundation.
Russell L. Carson, 55, has served as a Director of BHC since May 1995, and
as Chairman of the Board of Directors of BHC since November 1997. Since 1979,
Mr. Carson has been a general partner of Welsh, Carson, Anderson & Stowe
("WCAS"), an investment firm that specializes in the acquisition of companies in
the information services and healthcare industries. Mr. Carson serves on the
Board of Directors of American Oncology Resources, Inc., an out-patient cancer
care company, STERIS Corporation, a manufacturer and marketer of
infectious-preventative technologies and a provider of surgical support
services, National Surgery Centers, Inc., an owner and manager of ambulatory
surgery centers, Quorum Health Group, Inc., an acute care hospital company, and
several private companies.
Richard H. Stowe, 54, has served as a Director of BHC since May 1995. Since
1979, he has been a general partner of WCAS. Mr. Stowe serves on the Board of
Directors of EmCare Holdings, Inc., an emergency physician management services
company, Health Management Systems, Inc., a provider of revenue enhancement and
cost reduction services for health care providers and payors, Medaphis
Corporation, a provider of business management services for physicians and
hospitals, and several private companies.
James H. Gillenwater Jr., 40, has served as a Director of BHC since July
1997. Mr. Gillenwater has been the Senior Vice President of Planning and
Development of Vencor, Inc. since 1989.
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<PAGE> 104
Michael Barr, 48, has served as a Director of BHC since December 1997. Mr.
Barr has been the Chief Operating Officer of Vencor since 1996. Prior to such
time, from November 1995, Mr. Barr was an Executive Vice President of Vencor.
Prior to November 1995 and since 1985, Mr. Barr was the Vice President,
Operations of Vencor's predecessor. Mr. Barr also serves on the board of
Colorado MedTech.
Michael E. Davis, 40, has served as Secretary and Chief Financial Officer
since BHC's inception in June 1993. Prior to joining BHC, Mr. Davis served as
Assistant Administrator at HCA Richland Hospital and Chief Financial Officer of
Research Psychiatric Center in Kansas City, Missouri.
COMMITTEES OF THE BOARD OF DIRECTORS
The Board of Directors of BHC has an Audit and Compliance Committee which
is composed of Dr. Dunn, Mr. Anderson and Ms. Cummings, a Compensation Committee
composed of Mr. Stowe and Mr. Landis, and an Executive Committee composed of Mr.
Carson, Mr. Stack and Mr. Barr. During fiscal 1998, the Audit and Compliance
Committee held one meeting. During the fiscal year ended June 30, 1998, the
Compensation Committee and the Executive Committee held no meeting(s).
LIMITATION OF LIABILITY AND INDEMNIFICATION
The Restated Certificate of Incorporation of BHC provides that a director
of BHC will not be personally liable to BHC or its stockholders for monetary
damages for breach of fiduciary duty as a director, except for liability (i) for
any breach of the director's duty of loyalty to BHC or its stockholders, (ii)
for acts or omissions not in good faith or which involve intentional misconduct
or a knowing violation of law, (iii) under Section 174 of the General
Corporation Law of Delaware (or the corresponding provision of any successor act
or law) and (iv) for any transaction from which the director derived an improper
personal benefit. The Restated Certificate of Incorporation further provides
that if the General Corporation Law of Delaware is amended to authorize
corporate action further eliminating or limiting the personal liability of
directors, then the liability of a director of BHC will be eliminated or limited
to the fullest extent permitted by the General Corporation Law of Delaware, as
so amended. Further, any repeal or modification of these provisions, or the
adoption of any provision inconsistent with these provisions, will not adversely
affect any right or protection of a director of BHC existing at the time of such
repeal or modification or adoption of an inconsistent provision.
On July 30, 1998, BHC entered into indemnification agreements with each of
its directors and executive officers. These agreements obligate BHC and its
successors to indemnify (and advance expenses to) BHC's current directors and
executive to the fullest extent permitted by applicable law.
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<PAGE> 105
The following table sets for the selected historical financial information
of BHC for each of the five years in the period ended June 30, 1998. The Summary
of Operations and Balance Sheet Data for the five years ended June 30, 1998,
presented below, have been derived from, and should be read in conjunction with
BHC's audited consolidated financial statements and the related notes thereto
and with "Management's Discussion and Analysis of Financial Condition and
Results of Operations."
SUMMARY OF OPERATIONS
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30,
-----------------------------------------------------
1998 1997 1996 1995 1994
-------- -------- ------- ------- -------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Revenue................................ $313,837 $223,811 $58,059 $61,233 $53,039
Expenses:
Operating expenses................... 260,463 179,358 49,474 52,353 43,777
Marketing, general, and
administrative.................... 8,978 6,260 1,765 1,433 1,165
Provision for bad debts.............. 18,464 12,576 2,442 2,221 2,397
Depreciation and amortization........ 9,504 5,708 1,766 1,818 1,568
Interest, net........................ 7,848 5,409 1,555 2,491 2,199
Non-recurring charge................. 1,058(3) -- -- 2,379(1) --
-------- -------- ------- ------- -------
Income before income taxes............. 7,522 14,500 1,057 (1,462) 1,933
Income tax expense..................... 2,909 5,983 459 (460) 742
-------- -------- ------- ------- -------
Income before extraordinary item....... 4,613 8,517 598 (1,002) 1,191
Extraordinary item..................... -- 415(2) -- -- --
-------- -------- ------- ------- -------
Net income (loss)...................... $ 4,613 $ 8,102 $ 598 $(1,002) $ 1,191
======== ======== ======= ======= =======
</TABLE>
- ---------------
(1) In the fiscal year ended June 30, 1995, BHC adopted Statement of Accounting
Financial Standards #121 ("FAS 121"), "Accounting for the impairment of
long-lived assets and for long-lived assets to be disposed of," and recorded
a write down of one hospital.
(2) In the fiscal year ended June 30, 1997, BHC refinanced certain debt
obligations associated with a major acquisition and wrote off deferred loan
costs associated with its former credit facility.
(3) In the fiscal year ended June 30, 1998, BHC wrote off certain due diligence
costs associated with the terminated merger with CBHS.
BALANCE SHEET DATA
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30,
-----------------------------------------------------
1998 1997 1996 1995 1994
-------- -------- ------- ------- -------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Current assets......................... $ 80,171 $ 82,366 $17,327 $25,509 $11,480
Current liabilities.................... 35,431 45,388 6,885 20,915 7,116
Working capital........................ 44,740 36,978 10,442 4,594 4,364
Working capital ratio.................. 2.26 1.81 2.52 1.22 1.61
Property, plant and equipment, net..... 166,347 174,813 35,499 26,714 28,357
Total assets........................... 271,943 283,821 53,821 52,496 40,435
Long-term debt......................... 86,068 97,500 15,249 822 21,820
Redeemable preferred stock............. 337 313 -- -- --
Common stockholders' equity............ 129,320 124,723 30,847 30,268 11,301
</TABLE>
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<PAGE> 106
BHC MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
The following discussion contains forward-looking statements that involve
risks and uncertainties. BHC's and the combined entity's actual results could
differ materially from those discussed here. Factors that could cause or
contribute to such differences include, but are not limited to, those discussed
in the sections entitled "Risk Factors" and "BHC Business," as well as those
discussed elsewhere in this Prospectus/Joint Proxy Statement.
OVERVIEW
BHC is a leading provider of services to treat children, adolescents,
adults, and seniors with psychiatric disorders and substance abuse addictions.
BHC offers a full range of services to those populations, including inpatient
care, residential care, partial hospitalization and intensive outpatient
programs, and out patient centers. BHC is currently the second largest
facility-based behavioral healthcare services provider in the United States. BHC
owns and operates 38 acute care psychiatric facilities and 5 residential
treatment centers in 18 states and Puerto Rico. In addition the Company operates
17 mobile crisis services and 89 outpatient treatment centers in affiliation (or
under license of) these facilities.
For the fiscal year ended June 30, 1998, 1997, and 1996, BHC derived
approximately 25%, 24%, and 33%, respectively, of its gross patient revenue from
managed-care payors (primarily HMOs and PPOs); 28%, 29% and 22%, respectively,
from other payor sources; and 47%, 47%, and 45%, respectively, from governmental
payors (primarily Medicare, Medicaid and CHAMPUS). BHC believes that revenue
from private payors, as a percentage of total gross patient revenue, has
declined because of a shift by purchasers of healthcare coverage to managed-care
plans that generally authorize shorter lengths of stay than traditional
insurance plans and authorize more outpatient treatment plans. Services to
Medicare patients have increased due to increased demand by and growth in the
elderly population. Services to Medicaid patients have increased due to
increased utilization. These shifts in BHC's payor mix and BHC's increase in
residential treatment business, have resulted in lower net revenue per
equivalent patient day.
INDUSTRY TRENDS
BHC's hospitals have been adversely affected by factors influencing the
entire psychiatric hospital industry. Factors which affect BHC include (i) the
imposition of more stringent length of stay and admission criteria by payors;
(ii) the failure of reimbursement rate increases from certain payors that
reimburse on a per diem or other discounted basis to offset increases in the
cost of providing services; (iii) an increase in the percentage of its business
that BHC derives from payors that reimburse on a per diem or other discounted
basis; (iv) a trend toward higher deductible and co-insurance for individual
patients; (v) a trend toward providing care at lower levels of treatment, i.e.,
partial hospitalization, intensive outpatient and other outpatient modalities;
and (vi) a trend toward limiting employee health benefits, such as reductions in
annual and lifetime limits on mental health coverage. In response to these
conditions, BHC has (i) strengthened controls to reduce costs, (ii) reviewed its
portfolio of hospitals and sold or closed hospitals or consolidated operations
in certain locations, (iii) developed strategies to increase outpatient services
and partial hospitalization programs to meet the demands of the marketplace,
(iv) implemented programs to contest third party denials relating to valid
pre-certified medical procedures, (v) renegotiated certain contracts with
managed care organizations at increased rates, and (vi) created an integrated
national behavioral healthcare system, thereby improving BHC's ability to obtain
contracts with large private and public payors.
Because of the industry factors referred to previously, BHC's operating
margin declined to 8.3% in fiscal 1998 from 11.4% in fiscal 1997. Operating
income (revenue less operating expenses, marketing, general and administrative
expenses and bad debt expense) was $25.9 million for fiscal 1998, excluding
non-reoccurring charges of $1.1 million, compared with $25.6 million in fiscal
1997. BHC's goal is to increase its revenues and patient volumes through
contracting activities, to consolidate markets where practical to reduce
operating costs, and to enter joint venture arrangements with other healthcare
providers in response to this trend. BHC
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<PAGE> 107
continues to broaden the scope of its services it provides by offering
alternatives to traditional inpatient treatment settings such as partial
hospitalization, intensive outpatient and residential treatment programs.
BHC's ability to increase the rates it charges to offset increased costs is
limited because BHC derives a significant portion of its revenues from patients
covered by governmental and managed-care programs. With respect to governmental
programs, the amount BHC is paid for its services is established by law and
regulation. With respect to managed-care programs, the amount is established by
the managed-care contracts. Although inflation has not been a significant factor
in BHC's results of operations in recent years, a resurgence of inflation could
adversely affect BHC's results of operations because of such limitations on
BHC's ability to increase its rates. It is unlikely that federal and state
governments will increase reimbursement rates under their programs in amounts
sufficient to offset future price increases that result from general
inflationary pressures.
BHC's business is seasonal in nature, with a reduced demand for certain
services generally occurring during the summer months comprising the first
fiscal quarter and during the second fiscal quarter, particularly around major
holidays such as Thanksgiving and Christmas.
To date, BHC's business strategy has been three-fold. BHC has sought to:
(i) develop and operate behavioral healthcare integrated delivery systems in
certain markets and states in which it has one or more hospitals; (ii) grow
through acquisitions of other behavioral health care provider companies offering
complementary service to its portfolio; and (iii) maintain and advance its
position as a leading provider of government-financed behavioral health services
(Medicare, Medicaid, and CHAMPUS).
In November 1996, BHC acquired substantially all of the assets of
Transitional Hospitals Corporation's (formerly Community Psychiatric Centers or
"CPC") psychiatric operations in the United States and Puerto Rico for a
combination of cash and BHC's stock. Also in November, BHC acquired
substantially all of the assets of four psychiatric facilities related through a
majority owner, United Psychiatric Group, for cash. In June 1997, BHC acquired
substantially all of the assets of five psychiatric hospitals previously owned
by Sterling Healthcare Corporation for cash. Management believes that these
purchases will assist BHC in implementing its strategy by increasing BHC's size,
market position and geographical coverage. For example, these acquisitions
permitted BHC to enter 34 new markets in 13 new states and Puerto Rico.
A summary of psychiatric hospitals in operation during each fiscal year is
as follows:
<TABLE>
<CAPTION>
1998 1997 1996 1995 1994
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Beginning of the year............................. 47 13 9 8 6
Consolidated/closed/sold.......................... (4) -- (1) -- --
Acquired.......................................... 34 5 1 2
-- -- -- -- --
End of year....................................... 43 47 13 9 8
== == == == ==
</TABLE>
Includes all hospitals owned through joint ventures
The following table summarizes, for the periods indicated, changes in
selected operating indicators:
<TABLE>
<CAPTION>
PERCENTAGE OF REVENUE
-----------------------
1998 1997 1996
----- ----- -----
<S> <C> <C> <C>
Revenue:.................................................... 100.0% 100.0% 100.0%
Operating expenses.......................................... 83.0% 80.1% 85.2%
Marketing, general and administrative....................... 2.9% 2.8% 3.0%
Provision for bad debts..................................... 5.9% 5.6% 4.2%
----- ----- -----
Total expenses.............................................. 91.7% 88.6% 92.5%
----- ----- -----
Operating margin............................................ 8.3% 11.4% 7.5%
</TABLE>
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<PAGE> 108
Following are the financial and statistical results from operations of
hospitals which are included in BHC's consolidated financial statements:
SELECTED HOSPITAL OPERATING DATA
<TABLE>
<CAPTION>
FISCAL YEAR ENDED JUNE 30,
--------------------------------------------------------
1998 1997 1996 1995 1994
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Number of Hospitals(1).............. 43 47 13 9 8
Licensed Beds....................... 3,552 3,887 882 749 677
Net Revenue (In thousands)(2)....... $313,837 $223,811 $ 58,059 $ 61,233 $ 53,039
Total Inpatient Days(3)............. 630,903 443,088 113,928 105,407 96,490
Total Equivalent Patient Days(4).... 717,640 498,479 130,969 126,330 107,697
Net Revenue/Equivalent Patient
Day(2)(4)......................... $ 437 $ 449 $ 443 $ 485 $ 492
Admissions.......................... 51,118 35,834 10,233 9,722 7,633
Average Length of Stay (Days)....... 12.3 12.4 11.1 10.8 12.6
</TABLE>
The table below presents "same store" data for facilities in operation on
June 30, 1998.
SELECTED HOSPITAL OPERATING DATA
<TABLE>
<CAPTION>
FISCAL YEAR ENDED JUNE 30,
-------------------------------------------------------
1998 % CHANGE 1997 % CHANGE 1996
-------- -------- -------- -------- -------
<S> <C> <C> <C> <C> <C>
Number of Hospitals(1)................ 6 0% 6 0% 6
Licensed Beds......................... 450 0% 450 0% 450
Net Revenue (In thousands)(2)......... $ 45,478 (2)% $ 46,514 9% $42,858
Total Inpatient Days(3)............... 93,174 (2)% 94,936 11% 85,910
Total Equivalent Patient Days(4)...... 104,777 (2)% 107,226 10% 97,551
Net Revenue / Equivalent Patient
Day(2)(4)........................... $ 434 0% $ 434 (1)% $ 439
Admissions............................ 7,793 2% 7,661 18% 6,515
Average Length of Stay (Days)......... 12.0 (3)% 12.4 (6)% 13.2
</TABLE>
- ---------------
(1) Hospitals in operation on June 30, 1998.
(2) Includes inpatient, outpatient and other revenue.
(3) Provision of care to one patient for one day.
(4) Represents inpatient days adjusted to reflect outpatient utilization,
computed by dividing patient charges by inpatient charges per day.
YEAR ENDED JUNE 30, 1998 COMPARED TO YEAR ENDED JUNE 30, 1997
Patient days at BHC's hospitals increased 42% in fiscal 1998 as compared to
fiscal 1997. The increase resulted primarily from patient days attributable to
the acquisitions. Patient days at the same store hospitals decreased 2% due
primarily to a 3% decrease in the average length of stay from 12.4 days in
fiscal 1997 to 12.0 days in fiscal 1998 for the same store hospitals. Total
admissions increased 43% for fiscal 1998 as compared to fiscal 1997. The
increase in admissions resulted primarily from admissions attributable to the
acquisitions. On a same store hospital basis, admissions increased 2% for fiscal
1998 as compared to fiscal 1997.
BHC's net revenue increased $90 million, or 40%, from $223.8 million in
fiscal 1997 to $313.8 million in fiscal 1998. The increase resulted primarily
from acquisitions. Net revenue at BHC's same store hospitals decreased 2% from
$46.5 million in fiscal 1997 to $45.5 million in fiscal 1998. BHC derived net
revenue in
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<PAGE> 109
fiscal 1998 of $268.3 from the acquisitions as compared to $177.3 million in
fiscal 1997. Net revenue per equivalent patient day decreased 2.7% to $437 in
fiscal 1998 from $449 in fiscal 1997. The decreases were primarily due to an
increase in Medicaid utilization and an increase in utilization of BHC's
residential treatment facilities which have lower rates compared to the acute
psychiatric facilities.
Following is a discussion of changes in operating expenses for fiscal 1998
compared to fiscal 1997.
BHC's operating expenses increased $81.1 million or 45% in fiscal 1998 to
$260.5 million from $179.4 million in fiscal 1997. The increase was primarily
due to expenses incurred in connection with the acquisitions. Cost savings at
the same store hospitals were achieved in the areas of supplies, contract
services and repairs and maintenance.
BHC's marketing, general and administrative expenses, which are expenses
derived from BHC's main corporate office operations increased $2.7 million or
44% in fiscal 1998 to $9.0 million from $6.3 million in fiscal 1997. The
increase was primarily due to acquisitions.
BHC's bad debt expenses increased to $18.5 million in fiscal 1998 from
$12.6 million in fiscal 1997. The increase was primarily due to the
acquisitions. Bad debt expense as a percentage of net revenue increased to 5.9%
in fiscal 1998 from 5.6% in fiscal 1997.
Depreciation and amortization increased 66% to $9.5 million in fiscal 1998.
This increase resulted primarily from the depreciation related to the
acquisitions and the amortization of the related covenant not to compete and
costs in excess of net assets acquired.
Net interest expense for fiscal 1998 increased 45% to $7.8 million from the
previous fiscal year due to a new credit facility that was put in place in
November 1996 related to the acquisitions and the refinancing of existing debt.
Fiscal 1998 represents a full year operating under this credit facility.
During fiscal 1998, BHC recorded unusual items of $1.1 million. Included in
the unusual charges was the write off of certain due diligence costs in the
amount of $500,000 associated with a terminated merger agreement with Charter
Behavioral Health Systems, LLC. BHC also expensed $600,000 associated with the
termination of Richard Conte's Services Agreement with BHC. Mr. Conte was the
former Chairman and CEO of Transitional Hospitals Corporation and became
Chairman of BHC in November 1996 with the acquisition previously disclosed. Mr.
Conte resigned as Chairman of BHC in November 1997.
YEAR ENDED JUNE 30, 1997 COMPARED TO YEAR ENDED JUNE 30, 1996
Patient days at BHC's hospitals increased 289% in fiscal 1997. The increase
resulted primarily from the acquisitions. Patient days at the same store
hospitals increased 11% due primarily to a 18% increase in admissions and a 6%
decrease in the average length of stay for the same store hospitals. Total
admissions increased 250% in fiscal 1997 as compared to fiscal 1996. The
increase resulted primarily from the acquisitions.
BHC's net revenue increased $165.8 million or 285% from $58.1 million in
fiscal 1996 to $223.8 in fiscal 1997. The increase resulted primarily from
acquisitions. Net revenue at BHC's same store hospitals increased 9% from $42.9
million in fiscal 1996 to $46.5 million in fiscal 1997. BHC derived net revenue
in fiscal 1997 of $177.3 million from the acquisitions. Net revenue per
equivalent patient day increased 1.4% to $449 in fiscal 1997 from $443 in fiscal
1996. The increases were primarily due to the acquisitions which had higher net
revenue per equivalent patient days compared to BHC's other hospitals.
Following is a discussion of changes in operating expenses for fiscal 1997
compared to fiscal 1996.
BHC's operating expenses increased $129.9 million or 263% in fiscal 1997 to
$179.4 million from $49.5 million in fiscal 1996. The increase was primarily due
to expenses incurred in connection with the acquisitions. Same store hospitals'
operating expenses increased $3.0 million or 8% in fiscal 1997. The increase was
primarily due to the increase in volume for the same store hospitals.
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<PAGE> 110
BHC's marketing, general and administrative expenses, which are expenses
derived from BHC's main corporate office operations, increased $4.5 million in
fiscal 1997 to $6.3 million from $1.8 million in fiscal 1996. The increase was
primarily due to the acquisitions.
BHC's bad debt expense increased to $12.6 million in fiscal 1998 from $2.4
million in fiscal 1997. The increase was primarily related to the acquisitions.
The acquisitions resulted in additional bad debt expense of $8.7 million in
fiscal 1997. Bad debt expense as a percentage of net revenue increased to 5.6%
in fiscal 1997 from 4.2% in fiscal 1996.
Depreciation and amortization increased 223% to $5.7 million in fiscal
1997. This increase resulted primarily from the depreciation related to the
acquisitions and the amortization of the related covenant not to compete and
costs in excess of net assets acquired.
Net interest expense for fiscal 1997 increased 248% to $5.4 million from
previous fiscal year due to a new credit facility that was put in place in
November 1996 related to the acquisitions and the refinancing of existing debt.
During fiscal 1997 BHC recorded an after-tax extraordinary charge of
$415,000. This charge was related to the write-off of deferred loan costs
associated with the payoff of the 1995 credit agreement.
LIQUIDITY AND CAPITAL RESOURCES
Operational Activities
BHC's net cash provided by operating activities was $14.3 million and $12.0
million for fiscal 1998 and fiscal 1997, respectively. The increase in net cash
provided by operating activities is primarily related to positive cash flows
from operations and increased collections of accounts receivable. As of June 30,
1998 and June 30, 1997, the company had working capital of $44.7 million and $37
million, respectively, including cash and cash equivalents of $5.4 million and
$3.5 million. The increase in working capital is due primarily to the reduction
of accounts payable and other accrued liabilities. Management believes that the
company will have adequate cash flow from operations to fund its operations,
capital expenditures and debt service obligations over the next year.
Investing Activities
BHC's net cash used in investing activities was $122,000 and $120 million
for fiscal year 1998 and fiscal 1997, respectively. The decrease in net cash
used by investing activities is primarily attributed to the acquisitions in
fiscal 1997. During fiscal 1998 and fiscal 1997, BHC incurred approximately
$11.7 million and $8.7 million, respectively, in capital expenditures, primarily
for routine capital replacement, conversion to a new management information
system and the expansion of the company's Puerto Rico facility. The capital
outlays were purchased with cash provided by operations. BHC also generated $19
million and $833,000 in proceeds from the sale of non-strategic assets in fiscal
1998 and fiscal 1997, respectively.
Financing Activities
On November 27, 1996, BHC entered into a credit agreement ("1996 Credit
Agreement") with a group of banks, for the purposes of financing the acquisition
of the hospitals formerly owned by Transitional Hospitals Corporation,
refinancing the outstanding principal due under the 1995 Credit Agreement,
repaying a bridge loan, financing working capital, and for general corporate
purposes.
Under the 1996 Credit Agreement, the Company may borrow up to $70 million
in the form of a term loan and an additional $75 million under a revolving
credit arrangement. As of June 30, 1998, BHC had $51.7 million and $43.0 million
outstanding under the term loan and the revolving credit agreement,
respectively. As of June 30, 1998 there was $29.8 million of available credit
under the revolving credit agreement.
BHC made a $3 million principal prepayment on September 30, 1997 and a $5
million principal prepayment on December 31, 1997. Commencing September 30, 1998
and each quarter thereafter until
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<PAGE> 111
December 31, 1998, the maximum principal amount outstanding under the term loan
will be reduced by approximately $2.2 million per quarter. Effective March 31,
2000 until June 30, 2002, the maximum principal amount outstanding under the
term loan will be reduced by approximately $3.2 million per quarter. On
September 30, 2002 and November 27, 2002, the loan maturity date, the maximum
principal amount outstanding under the term loan will be reduced by
approximately $2.4 million and $3.7 million respectively. BHC may borrow from
time to time a minimum of $3 million under the revolving credit agreement. Any
amounts borrowed under the revolving credit agreement mature on November 27,
2001. As of June 30, 1998 the company was in compliance with all debt covenants.
BHC management believes that the business will generate sufficient cash flows
from operations to meet its future debt service requirements.
In November, 1997 the company issued approximately 2.5 million Treasury
shares of BHC stock for $14.8 million net of recorded expenses associated with
the acquisition of four hospitals from United Psychiatric Group.
BHC MANAGEMENT
The executive officer of BHC who will serve as a director or executive
officer of PMR is Edward A. Stack. See "Approval of the Merger and Related
Transactions -- Interests of Certain Persons in the Merger" and "Terms of the
Merger -- Effect of Merger." His age as of August 17, 1998 is as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<S> <C> <C>
Edward A. Stack...................... 52 President and Chief Operating
Officer
</TABLE>
Edward A. Stack has served as President and Chief Executive Officer and as
a Director of BHC since BHC's inception in June 1993. Prior to joining BHC, Mr.
Stack served as President of Western Group Operations of HCA Psychiatric
Company. He also serves on the boards of the National Association of Psychiatric
Health Systems and the Catholic Charities of Tennessee.
The following table shows for the fiscal year ended June 30, 1998, certain
compensation awarded or paid to, or earned by Mr. Stack:
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM COMPENSATION
AWARDS
ANNUAL COMPENSATION --------------------------
-------------------- SECURITIES ALL OTHER
FISCAL SALARY BONUS UNDERLYING COMPENSATION
NAME AND PRINCIPAL POSITION YEAR ($)(1) ($)(2) OPTIONS ($)(3)
--------------------------- ------ -------- -------- ---------- ------------
<S> <C> <C> <C> <C> <C>
Edward A. Stack................ 1998 333,500 263,614 0 17,800
</TABLE>
(1) Represents matching contributions by BHC under BHC's 401(k) Plan, automobile
allowance, and certain executive benefits and financial planning
perquisites.
OPTION GRANTS IN LAST FISCAL YEAR
For the fiscal year ended June 30, 1998, BHC did not grant any stock
options to Mr. Stack.
AGGREGATED OPTION FISCAL YEAR-END OPTION VALUES
<TABLE>
<CAPTION>
NUMBER OF SECURITIES VALUE OF UNEXERCISED
UNDERLYING OPTIONS AT IN-THE-MONEY OPTIONS
FISCAL YEAR END(1) AT FISCAL YEAR END(2)
---------------------------- ----------------------------
EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
----------- ------------- ----------- -------------
<S> <C> <C> <C> <C>
Edward A. Stack................... 122,000 183,000 $0 $0
</TABLE>
- ---------------
(1) All options become fully exercisable upon a change in control of BHC.
(2) Based on the aggregate book value per share of BHC Common Stock ($7.00) at
June 30, 1998, less the exercise price, multiplied by the number of shares
underlying the option.
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<PAGE> 112
BHC PRINCIPAL STOCKHOLDERS
The following table sets forth certain information regarding beneficial
ownership of the BHC Capital Stock as of August 17, 1998, by (i) each director
and executive officer of BHC, (ii) all directors and executive officers as a
group and (iii) each stockholder known by BHC to be the beneficial owner of more
than 5% of the outstanding BHC Capital Stock. Except as otherwise indicated, the
persons or entities listed below have sole voting and investment power with
respect to all shares shown to be beneficially owned by them, except to the
extent such power is shared by a spouse under applicable law.
<TABLE>
<CAPTION>
SHARES OF
PMR
COMMON
STOCK
PERCENT OF BHC BENEFICIALLY
CAPITAL STOCK OWNED
SHARES OF BHC CAPITAL STOCK BENEFICIALLY OWNED BY AFTER THE
BENEFICIALLY OWNED BY CLASS CLASS MERGER
---------------------------- --------------------- ------------
SERIES A SERIES A
NAME OF BENEFICIAL OWNER COMMON PREFERRED COMMON PREFERRED
------------------------ ----------- ---------- ------- ----------
<S> <C> <C> <C> <C> <C>
Vencor, Inc...................... 6,000,000(1) 5,651,367(2) 92.7% 100% --
3800 Providian Center
44 West Market Street
Louisville, KY 40202
Welsh, Carson, Anderson &
Stowe, VI, L.P................. 3,248,464(3) 0 23.1% -- 11.3%
320 Park Avenue, Suite 2500
New York, NY 10022-6815
NationsBank Capital
Corporation.................... 1,099,285 0 7.8% -- 3.8%
66th Floor, 901 Main Street
Dallas, TX 75202-2911
RFE Investment Partners IV,
L.P............................ 874,107 0 6.2% -- 3.0%
36 Grove Street
New Canaan, CT 06840
Edward A. Stack.................. 874,107(4) 0 6.2% -- 4.0%(12)
Michael E. Davis................. 160,513(5) 0 1.1% -- 1.0%(13)
Winfield Dunn.................... 22,000(6) 0 * -- *
Howard C. Landis................. 874,107(7) 0 * -- 3.0%
Russell L. Carson................ 3,284,996(8) 0 * -- 11.4%
Richard H. Stowe................. 3,263,079(8) 0 * -- 11.3%
Helen King Cummings.............. 40,600(9) 0 * -- *
Neil R. Anderson................. 350,000(10) 0 2.5% -- 1.2%
James Gillenwater................ 6,000,000(1) 5,651,367(2) 92.7% 100% --
Michael Barr..................... 6,000,000(1) 5,651,367(2) 92.7% 100% --
All directors and executive
officers as a group (10
persons)....................... 11,620,938(11) 5,651,367(2) 82.8% 100% 21%(14)
</TABLE>
- ---------------
* Represents less than 1% of the BHC Common Stock outstanding.
(1) Includes shares owned directly by the following, wholly owned subsidiaries
of Vencor, Inc. ("Vencor"); (i) Transitional Hospitals Corporation,
3,248,405 shares; (ii) Community Psychiatric Centers of California,
1,112,919 shares; (iii) Community Psychiatric Centers Properties
Incorporated, 1,385,076 shares; (iv) Interamericana Healthcare Group, Inc.,
246,900 shares; and (v) C.P.C. of Louisiana, Inc., 6,700 shares. Messrs.
Gillenwater and Barr are officers of Vencor. Messrs. Gillenwater and Barr
disclaim beneficial ownership of such shares of BHC Common Stock.
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<PAGE> 113
(2) Includes shares owned directly by the following, wholly owned subsidiaries
of Vencor; (i) Community Psychiatric Centers Properties Incorporated
4,350,712 shares; (ii) Community Psychiatric Centers of California,
1,299,817 shares; and (iii) C.P.C. of Louisiana, Inc., 838 shares. Messrs.
Gillenwater and Barr are officers of Vencor. Messrs. Gillenwater and Barr
disclaim beneficial ownership of such shares of Series A Preferred Stock.
(3) Includes 73,064 shares of BHC Common Stock owned directly by WCAS
Healthcare Partners L.P. ("WCAS Healthcare"), a limited partnership
affiliated with Welsh Carson Anderson & Stowe, VI, L.P. ("WCAS VI").
(4) Includes 305,000 shares of BHC Common Stock issuable upon the exercise of
options.
(5) Includes 147,000 shares of BHC Common Stock issuable upon the exercise of
options.
(6) Includes 12,000 shares of BHC Common Stock issuable upon the exercise of
options.
(7) Includes 874,107 shares of BHC Common Stock owned directly by RFE
Investment Partners IV, L.P. ("RFE IV"). Mr. Landis is a general partner of
RFE Associates, which, in turn, is the general partner of RFE IV. Mr.
Landis disclaims beneficial ownership of such shares of BHC Common Stock
except to the extent of his pecuniary interest therein.
(8) Includes 3,248,464 owned directly by WCAS Healthcare and WCAS VI. Messrs.
Carson and Stowe are general partners of Welsh, Carson, Anderson & Stowe,
which, in turn, is the general partner of each of WCAS Healthcare and WCAS
VI. Messrs. Carson and Stowe disclaim beneficial ownership of such shares
of BHC Common Stock except to the extent of their pecuniary interest
therein.
(9) Includes 12,000 shares of BHC Common Stock issuable upon the exercise of
options.
(10) Includes shares owned directly by Calver Fund, Inc. ("Calver") (190,000)
shares, and Drake & Co. ("Drake"), (160,000 shares). Mr. Anderson is a
Managing Director of Calver, which, in turn, may be deemed to control
Drake. Mr. Anderson disclaims beneficial ownership of such shares of BHC
Common Stock.
(11) Includes 10,112,571 shares of BHC Common Stock beneficially owned by
Vencor, WCAS Healthcare, WCAS VI, RFE IV, Calver and Drake as discussed in
notes (1), (3), (7), (8) and (10) above. Also includes 476,000 shares of
BHC Common Stock issuable upon the exercise of options as discussed in
notes 4, 5, 6 and 9.
(12) Includes 100,000 shares of PMR Common Stock issuable to Mr. Stack on the
Closing Date as a retention bonus.
(13) Includes 50,000 shares of PMR Common Stock issuable to Mr. Davis on the
Closing Date as a retention bonus.
(14) Includes 150,000 shares of PMR Common Stock issuable to Messrs. Stack and
Davis on the Closing Date as retention bonuses.
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<PAGE> 114
DESCRIPTION OF CAPITAL STOCK
DESCRIPTION OF PMR CAPITAL STOCK
PMR's authorized capital stock consists of 19,000,000 shares, $0.01 par
value, of Common Stock and 1,000,000 shares of preferred stock, $0.01 par value
("PMR Preferred Stock").
PMR Common Stock. As of the Record Date, there were approximately 6,960,130
shares of PMR Common Stock outstanding held of record by approximately 87
stockholders. PMR Common Stock is listed on the Nasdaq National Market under the
symbol "PMRP." The holders of Common Stock are entitled to one vote per share on
all matters to be voted on by stockholders and are not entitled to cumulative
voting in the election of directors. Subject to preferences that may be
applicable to any shares of PMR Preferred Stock which may then be outstanding,
holders of PMR Common Stock are entitled to share ratably in dividends, if any,
as may be declared from time to time by the Board of Directors in its discretion
out of funds legally available therefor. PMR currently anticipates that all of
its earnings will be retained to finance the growth and development of the
business of the combined company business and, therefore, does not anticipate
that any cash dividends will be declared on the PMR Common Stock in the
foreseeable future. The holders of Common Stock are entitled to share ratably in
any assets remaining after satisfaction of all prior claims upon liquidation of
PMR. PMR's Restated Certificate of Incorporation gives holders of PMR Common
Stock no preemptive or other subscription or conversion rights, and there are no
redemption provisions with respect to such shares. All outstanding shares of PMR
Common Stock are, and the shares issuable as part of the Merger Consideration
will be, when issued and paid for, fully paid and nonassessable. The rights,
preferences, and privileges of holders of PMR Common Stock are subject to, and
may be adversely affected by, the rights of holders of shares of any series of
Preferred Stock which PMR may designate and issue in the future.
PMR Preferred Stock. PMR has 1,000,000 shares of PMR Preferred Stock
authorized and no shares are outstanding. The PMR Board has the authority,
without further action by stockholders, to issue up to 1,000,000 shares of PMR
Preferred Stock in one or more or series and to fix the rights, preferences,
privileges, qualifications and restrictions granted to or imposed upon such PMR
Preferred Stock, including dividend rights, conversion rights, voting rights,
rights and terms of redemption, liquidation preferences, and sinking fund terms,
any or all of which may be greater than the rights of the PMR Common Stock.
Warrants. As of the Record Date, Proactive Investment Managers, L.P. and
Proactive Partners, L.P. hold outstanding warrants to purchase up to an
aggregate 53,000 shares of PMR Common Stock (subject to adjustment upon certain
dilutive events) at an exercise price of $2.50 per share (the "Proactive
Warrants"). The Proactive Warrants are currently exercisable in whole or in
part, and expire on October 31, 1999. The shares issuable upon exercise of the
Proactive Warrants were registered for resale in a registration statement on
Form S-3 (Reg. No. 033-97202), as amended.
In addition, as of the date of this Prospectus, Case Management, Inc.
("CMI") and Mental Health Cooperative, Inc. ("MHC") hold outstanding warrants to
purchase up to an aggregate 40,000 shares of PMR Common Stock (subject to
adjustment upon certain dilutive events) at a weighted average exercise price of
$18.26 per share (the "CMI Warrants" and the "MHC Warrants") of which 20,000
shares are currently exercisable and all of which will expire on September 1,
2002. CMI and MHC have the right, under Management and Affiliation Agreements
with PMR, to earn warrants to purchase up to an aggregate 540,000 additional
shares of PMR Common Stock. The number of warrants earned and issued to CMI and
MHC are dependent on revenues generated by the programs that are the subject of
PMR's agreements with CMI and MHC. To date warrants to purchase up to 15,000
shares have been earned under such agreements.
Registration Rights. Pursuant to a Registration Rights Agreement dated as
of July 1, 1996, between PMR and Wayne C. Nickens (the "Nickens Agreement"), Mr.
Nickens, a consultant to PMR, is entitled to certain rights with respect to the
registration of up to 4,000 shares of PMR Common Stock issuable upon the
exercise of an option held by Mr. Nickens. Under the terms of the Nickens
Agreement, if PMR proposes to register any PMR Common Stock for its own account
for an offering to the public (other than on a Form S-4, S-8 or any successor
forms), Mr. Nickens is entitled to notice of such registration and is entitled,
subject to certain limitations, to include shares therein. These limitations
include the right of the managing underwriter
101
<PAGE> 115
of any such offering to exclude some of Mr. Nickens' shares from such
registration if it determines that marketing considerations require a limitation
of the number of shares to be underwritten.
In addition, PMR has entered into a Registration Rights Agreement with each
of CMI and MHC, in connection with PMR's Management and Affiliation Agreements.
Pursuant to the Registration Rights Agreements, (i) CMI is entitled to certain
rights with respect to registration of up to 50,000 shares of PMR Common Stock
held by CMI and shares issuable upon exercise of the CMI Warrants and (ii) MHC
is entitled to certain rights with respect to the registration of up to 50,000
shares of PMR Common Stock held by MHC and shares issuable upon exercise of the
MHC Warrants (the "CMI and MHC Registration Rights"). Under the CMI and MHC
Registration Rights, if PMR proposes to register any PMR Common Stock for its
own account for an offering to the public (other than on a Form S-4 or S-8
registration statement), each of CMI and MHC is entitled to notice of such
registration and is entitled, subject to certain limitations, to include shares
therein. These limitations provide, among other things, that PMR is not required
to include any of the shares held by CMI or MHC in an underwritten offering.
PMR Transfer Agent and Registrar. The transfer agent and registrar for the
PMR Common Stock is StockTrans, Inc.
COMPARISON OF RIGHTS OF PMR STOCKHOLDERS
AND BHC STOCKHOLDERS
The rights of PMR stockholders are governed by PMR's Certificate of
Incorporation (the "PMR Certificate"), its Bylaws (the "PMR Bylaws") and the
DGCL. The rights of BHC stockholders are currently governed by BHC's Certificate
of Incorporation (the "BHC Certificate"), its Bylaws (the "BHC Bylaws") and the
DGCL. Upon consummation of the Merger, BHC stockholders will become stockholders
of PMR with their rights as stockholders governed by the DGCL, the PMR
Certificate and the PMR Bylaws.
The following is a summary of certain similarities and differences between
the rights of PMR stockholders and BHC stockholders under the foregoing
governing documents and applicable law. This summary does not purport to be a
complete statement of such similarities and differences. The identification of
specific similarities and differences is not meant to indicate that other
equally or more significant similarities and differences do not exist. Such
similarities and differences can be examined in full by reference to the DGCL
and the respective corporate documents of PMR and BHC.
Capital Stock. The authorized capital stock of PMR consists of 19,000,000
shares of PMR Common Stock, $.01 par value, of which 6,959,810 shares were
issued and outstanding on July 24, 1998, and 1,000,000 shares of PMR Preferred
Stock, issuable in such series and with such rights, powers and privileges as
the PMR Board shall determine. The authorized capital stock of BHC consists of
(i) 30,000,000 shares of BHC Common Stock, $.01 par value, of which 13,563,280
shares were issued and outstanding on June 25, 1998, and (ii) 20,000,000 shares
of BHC Preferred Stock, $.01 par value, (A) 5,651,367 shares of which have been
designated as BHC Series A Preferred Stock, all of which have been issued and
are outstanding as of the date hereof and (B) 50,252 shares of which have been
designated as BHC Series B Preferred Stock, all of which have been issued and
are outstanding as of the date hereof. Each outstanding share of BHC Series A
Preferred Stock and BHC Series B Preferred Stock is convertible into one share
of BHC Common Stock upon the occurrence of certain events. In addition, BHC has
the authority to authorize the issuance of 10.5% Subordinated Notes (the "BHC
Notes") in an aggregate amount of $7,500,000 with non-detachable stock purchase
warrants attached thereto (the "BHC Warrants") providing for the purchase of
400,000 shares of the BHC Common Stock. Currently there are no BHC Notes issued
and outstanding and there are 34,667 issued and outstanding BHC Warrants. The
holders of BHC Notes, if any, are entitled to vote on each matter on which BHC
stockholders are entitled to vote.
Amendment of Bylaws. The PMR Bylaws may be amended or repealed by the PMR
Board of Directors subject, in certain events, to the approval of the holders of
two-thirds of the combined voting power of the then outstanding shares of stock
entitled to vote.
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<PAGE> 116
The BHC Bylaws may be amended or repealed by the holders of a majority of
the BHC Common Stock, BHC Preferred Stock and the BHC Notes issued and
outstanding and having voting power, if any, and such amendment or alteration
shall not be amended or altered by the BHC Board. Subject to the limitations
provided above, a majority of the BHC Board may amend or repeal the BHC Bylaws.
Amendment of PMR Certificate and BHC Certificate. The DGCL provides that
approval of a majority of the outstanding stock entitled to vote thereon is
required to amend a certificate of incorporation. The PMR Certificate provides
that an amendment of certain provisions must be approved by the affirmative vote
of at least sixty-six and two-thirds percent (66 2/3%) of all of the outstanding
stock entitled to vote thereon; provided, however, that in the event that a
resolution to amend the PMR Certificate is adopted by the affirmative vote of at
least eighty percent (80%) of the PMR Board, approval of the amendment shall
only require the affirmative vote of the holders of a majority of the combined
voting power of the then outstanding shares of stock entitled to vote generally
on such amendment, voting together as a single class. The BHC Certificate does
not modify the DGCL.
Special Meetings of PMR Stockholders and BHC Stockholders. Under the PMR
Bylaws, a special meeting of stockholders may be called by the Chairman of the
Board, the Chief Executive Officer, President or Secretary or any Assistant
Secretary at the written request of a majority of the PMR Board. The BHC
Certificate permits a special meeting to be called for any purpose or purposes
by the President or the Secretary at the request in writing of a majority of the
BHC Board, or at the request in writing of stockholders owning at least a
majority of shares of the corporation issued and outstanding and entitled to
vote.
Actions by Written Consent of PMR Stockholders or BHC Stockholders. The PMR
Bylaws provide that any action which may be taken at a meeting of the
stockholders may be taken without a meeting, without prior notice and without a
vote, if a consent in writing, setting forth the actions so taken, shall be
signed by the holders of outstanding stock having not less than a minimum number
of votes that would be necessary to authorize or take such action at a meeting
at which all shares entitled to vote thereon were present and voted. The BHC
Bylaws provide that any action which may be taken at a meeting of stockholders
may be taken without a meeting if stockholders owning stock having not less than
the minimum number of votes which, as required by statute, the BHC Certificate
or the BHC Bylaws is necessary to authorize such action at a meeting at which
all shares of Common Stock and notes entitled to vote thereon were present and
voted.
Size of the Board of Directors. The PMR Bylaws currently provide that the
number of directors shall be fixed from time to time by the affirmative vote of
a majority of the directors then in office. The BHC Bylaws currently provide
that the number of directors shall consist of up to eleven (11) members.
Classification of Board of Directors. The PMR Bylaws currently provide that
the directors shall be classified, with respect to the time for which they
severally held office, into three classes, as nearly equal in number as
possible, with each class to hold office until its successor is elected and
qualified. At each annual meeting of PMR, the successors of the class of
directors whose term expires at that meeting shall be elected to hold office for
a term expiring at the annual meeting of stockholders held in the third year
following the year of their election. The BHC Bylaws do not provide for a
classified board.
Cumulative Voting. Under the DGCL, cumulative voting in the election of
directors is not available unless specifically provided for in the certificate
of incorporation. There is no provision for cumulative voting in either the PMR
Certificate or the BHC Certificate.
Removal of Directors. Under the DGCL, a director of a corporation with a
classified board of directors may be removed only for cause, unless the
certificate of incorporation otherwise provides. A director of a corporation
that does not have a classified board of directors or cumulative voting may be
removed with the approval of a majority of the outstanding shares entitled to
vote with or without cause. The PMR Certificate provides that any director may
be removed from office only for cause and only by the affirmative vote of the
holders of two-thirds of the combined voting power of the then outstanding
shares of stock entitled to vote generally in the election of directors, voting
together as a single class. The BHC Certificate and BHC Bylaws contain no
provisions relating to the removal of directors.
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Filling Vacancies on the Board of Directors. Under the DGCL, vacancies may
be filled by a majority of the directors then in office (even though less than a
quorum) unless otherwise provided in the certificate of incorporation or bylaws.
The DGCL further provides that if, at the time of filling any vacancy, the
directors then in office constitute less than a majority of the board (as
constituted immediately prior of any such increase), the Delaware Court of
Chancery may, upon application of any holder or holders of at least ten percent
of the total number of the outstanding stock having the right to vote for
directors, summarily order a special election be held to fill any such vacancy
or to replace directors chosen by the board to fill such vacancies. The PMR
Certificate does not alter this provision.
The BHC Bylaws provide that any vacancy on the board of directors may be
filled by the majority of the directors, though less than a quorum, or the
holders of a plurality of shares issued and outstanding and entitled to vote in
elections of directors, subject to the right of the persons and entities in that
certain Stockholders Agreement dated as of November 30, 1996, to designate the
individual or individuals who shall replace any director or directors previously
designated by such person and entity. The termination of the Stockholders
Agreement is a condition precedent to completion of the Merger.
Payment of Dividends; Redemption or Repurchase of Shares. The DGCL permits
a corporation to declare and pay dividends out of statutory surplus or, if there
is no surplus, out of net profits for the fiscal year in which the dividend is
declared and/or for the preceding fiscal year as long as the amount of capital
of the corporation following the declaration and payment of the dividend is not
less than the aggregate amount of capital represented by the issued and
outstanding stock of all classes having a preference upon the distribution of
assets. In addition, the DGCL generally provides that a corporation may redeem
or repurchase its shares only if such redemption or repurchase would not impair
the capital of the corporation. The PMR Bylaws provide that the Board of
Directors may declare dividends at any regular or special meeting, and may be
paid in cash, in property, or in shares of the PMR stock. PMR's Bylaws also
provide that the board of directors, in their sole discretion, may set aside or
reserve any sum or sums as the directors may think proper as a reserve or
reserves to meet contingencies, or for equalizing dividends, or for repairing or
maintaining any property of the Corporation, or any other purpose.
The BHC Bylaws provide for the declaration of dividends in accordance with
the DGCL. The BHC Bylaws also provide that the BHC Board may set apart, out of
any funds of the corporation available for dividends, a reserve or reserves for
any proper purpose and may abolish any such reserve.
Limitation of Liability of Directors. The DGCL permits corporations to
adopt a provision in their certificate of incorporation, eliminating, with
certain exceptions, the personal liability of a director to the corporation or
its stockholders for monetary damages for breach of the director's fiduciary
duty as a director. Under the DGCL, a corporation may not eliminate or limit
director monetary liability for (a) breaches of the director's duty of loyalty
to the corporation or its stockholders; (b) acts or omissions not in good faith
or involving intentional misconduct or a knowing violation of law; (c) unlawful
dividends, stock repurchases or redemptions; or (d) transactions from which the
director received an improper personal benefit. Such limitation of liability
provision also may not limit a director's liability for violation of, or
otherwise relieve directors from the necessity of complying with federal or
state securities laws, or affect the availability of nonmonetary remedies such
as injunctive relief or rescission.
The PMR Certificate and the BHC Certificate provide that a director shall
not be personally liable to the corporation or its stockholders for monetary
damages for any breach of fiduciary duty by such director as a director, except
(i) for breach of the director's duty of loyalty to the corporation or its
stockholders, (ii) for acts or omissions not in good faith or which involve
intentional misconduct or a knowing violation of law, (iii) pursuant to Section
174 of the DGCL, or (iv) for any transaction from which the director derived an
improper personal benefit. Under each of the PMR Certificate and the BHC
Certificate, if the DGCL is amended to further eliminate or limit the personal
liability of directors, then the liability of a director shall be eliminated or
limited to the fullest extent permitted by the DGCL, as amended.
Indemnification. The DGCL generally permits indemnification of expenses
incurred in the defense or settlement of a derivative or third-party action,
provided there is a determination by a disinterested quorum of the directors, by
independent legal counsel or by the stockholders, that the person seeking
indemnification
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acted in good faith and in a manner reasonably believed to be in or not opposed
to the best interests of the corporation and, with respect to a criminal
proceeding, which such person had no reasonable cause to believe his or her
conduct was unlawful. Without court approval, however, no indemnification may be
made in respect of any derivative action in which such person is adjudged liable
to the corporation. The DGCL requires indemnification of expenses when the
individual being indemnified has successfully defended the action on the merits
or otherwise. The PMR Certificate states that PMR shall indemnify the PMR Board
to the fullest extent provided for by the DGCL, as amended from time to time.
The BHC Certificate states that BHC shall indemnify the BHC Board to the fullest
extent provided for by the DGCL, as amended from time to time.
Loans to Directors, Officers and Employees. The DGCL and the PMR Bylaws
permit PMR to make loans to, guarantee the obligations of, or otherwise assists
its officers or other employees when such action, in the judgment of the
directors, may reasonably be expected to benefit PMR. The PMR Bylaws also
provide that such assistance may be with or without interest and may be
unsecured, or secured in such manner as the PMR Board of Directors shall
approve, including, without limitation, a pledge of shares of stock of PMR. The
BHC Bylaws contain no similar provision.
EXPERTS
The consolidated financial statements of PMR at April 30, 1997 and 1998,
and for each of the three years in the period ended April 30, 1998 appearing in
the PMR Annual Report on Form 10-K for the year ended April 30, 1998, have been
audited by Ernst & Young LLP, independent auditors, as set forth in their report
thereon included therein and incorporated by reference herein. Such consolidated
financial statements are incorporated herein by reference in reliance upon such
report given upon the authority of such firm as experts in accounting and
auditing.
The consolidated financial statements of BHC at June 30, 1997 and 1998, and
for each of the three years in the period ended June 30, 1998, appearing in this
Prospectus/Joint Proxy 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 upon the authority
of such firm as experts in accounting and auditing.
LEGAL MATTERS
The validity of the shares of Common Stock offered as part of the Merger
Consideration will be passed upon for PMR by Cooley Godward LLP, San Diego,
California.
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BEHAVIORAL HEALTHCARE CORPORATION
AUDITED CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED JUNE 30, 1998, 1997 AND 1996
CONTENTS
<TABLE>
<S> <C>
Report of Independent Auditors.............................. F-2
Consolidated Balance Sheets................................. F-3
Consolidated Statements of Income........................... F-4
Consolidated Statements of Stockholders' Equity............. F-5
Consolidated Statements of Cash Flows....................... F-6
Notes to Consolidated Financial Statements.................. F-7
</TABLE>
F-1
<PAGE> 120
REPORT OF INDEPENDENT AUDITORS
Board of Directors
Behavioral Healthcare Corporation
We have audited the accompanying consolidated balance sheets of Behavioral
Healthcare Corporation as of June 30, 1998 and 1997, and the related
consolidated statements of income, stockholders' equity, and cash flows for each
of the three years in the period ended June 30, 1998. 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 audits 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
Behavioral Healthcare Corporation at June 30, 1998 and 1997, and the
consolidated results of its operations and its cash flows for each of the three
years in the period ended June 30, 1998, in conformity with generally accepted
accounting principles.
ERNST & YOUNG LLP
Nashville, Tennessee
August 24, 1998
F-2
<PAGE> 121
BEHAVIORAL HEALTHCARE CORPORATION
CONSOLIDATED BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
JUNE 30
----------------------
1998 1997
--------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Current assets:
Cash and cash equivalents................................. $ 5,443 $ 3,548
Accounts receivable, less allowance for doubtful accounts
of approximately $14,050 and $19,219 for 1998 and 1997,
respectively............................................ 57,360 64,501
Supplies.................................................. 1,193 1,295
Deferred income taxes..................................... 1,968 --
Assets held for sale...................................... 8,423 8,718
Income tax receivable..................................... 288 162
Prepaid expenses and other current assets................. 5,496 4,142
-------- --------
Total current assets.................................... 80,171 82,366
Property, plant and equipment:
Land and improvements..................................... 32,422 36,898
Buildings and improvements................................ 121,921 126,122
Equipment................................................. 23,744 17,981
Construction in progress.................................. 3,216 3,035
-------- --------
181,303 184,036
Less accumulated depreciation............................. 14,956 9,893
-------- --------
Net property, plant and equipment........................... 166,347 174,143
Intangibles:
Unamortized loan costs.................................... 1,299 1,519
Cost in excess of net assets acquired..................... 16,210 16,747
Other assets.............................................. 7,916 8,683
-------- --------
Total intangibles....................................... 25,425 26,949
-------- --------
Total assets....................................... $271,943 $283,458
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable.......................................... $ 10,230 $ 16,049
Accrued liabilities:
Salaries and benefits................................... 9,709 14,128
Interest................................................ 822 715
Other................................................... 5,492 3,987
Deferred income taxes..................................... -- 509
Current maturities of long-term debt...................... 9,178 10,000
-------- --------
Total current liabilities............................... 35,431 45,388
Long-term debt, less current maturities..................... 86,068 97,500
Deferred liability risks.................................... 6,043 4,963
Deferred income taxes....................................... 13,921 9,484
Other long-term liabilities................................. 823 1,087
Series B Preferred Stock, $.01 par value, $6 per share
liquidation value, 20,000,000 combined Series B and Series
A shares authorized, 50,252 Series B shares issued and
outstanding............................................... 337 313
Stockholders' equity
Series A Convertible Preferred Stock, $.01 par value, $6
per share liquidation value, 20,000,000 combined Series
A and Series B shares authorized, 5,651,368 Series A
shares issued and outstanding........................... 57 57
Common Stock -- $.01 par value: authorized 30,000,000
shares; issued 13,563,286 and 13,559,311 shares in 1998
and 1997, respectively.................................. 135 135
Additional paid-in capital................................ 115,683 115,655
Retained earnings......................................... 13,465 8,876
Cost of treasury stock (2,858 shares in 1998)............. (20) --
-------- --------
Total stockholders' equity.............................. 129,320 124,723
-------- --------
Total liabilities and stockholders' equity......... $271,943 $283,458
======== ========
</TABLE>
See accompanying notes.
F-3
<PAGE> 122
BEHAVIORAL HEALTHCARE CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30
-------------------------------
1998 1997 1996
-------- -------- -------
(IN THOUSANDS)
<S> <C> <C> <C>
Revenue..................................................... $313,837 $223,811 $58,059
Expenses:
Operating expenses........................................ 260,463 179,358 49,474
Marketing, general, and administrative.................... 8,978 6,260 1,765
Provision for bad debts................................... 18,464 12,576 2,442
Depreciation and amortization............................. 9,504 5,708 1,766
Nonrecurring charge....................................... 1,058 -- --
Interest, net............................................. 7,848 5,409 1,555
-------- -------- -------
306,315 209,311 57,002
-------- -------- -------
Income before income taxes and extraordinary item........... 7,522 14,500 1,057
Income tax expense.......................................... 2,909 5,983 459
-------- -------- -------
Income before extraordinary item............................ 4,613 8,517 598
Extraordinary item -- loss on extinguishment of debt, net of
income tax benefit of approximately $255.................. -- 415 --
-------- -------- -------
Net income.................................................. 4,613 8,102 598
Accrued preferred dividends................................. 24 12 --
-------- -------- -------
Net income available for common stockholders................ $ 4,589 $ 8,090 $ 598
======== ======== =======
</TABLE>
See accompanying notes.
F-4
<PAGE> 123
BEHAVIORAL HEALTHCARE CORPORATION
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
SERIES A
CONVERTIBLE
COMMON STOCK PREFERRED STOCK ADDITIONAL TREASURY STOCK TOTAL
------------------- ------------------ PAID-IN RETAINED ------------------ STOCKHOLDERS'
SHARES AMOUNT SHARES AMOUNT CAPITAL EARNINGS SHARES AMOUNT EQUITY
---------- ------ --------- ------ ---------- -------- -------- ------- -------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at July 1, 1995... 5,041,714 $ 50 -- $-- $ 31,071 $ 188 (149,078) $(1,042) $ 30,267
Issuance of Common
Stock................. 2,500 -- -- -- 17 -- -- -- 17
Purchase of treasury
shares................ -- -- -- -- -- -- (7,313) (51) (51)
Other................... -- -- -- -- 15 -- -- -- 15
Net income.............. -- -- -- -- -- 598 -- -- 598
---------- ---- --------- --- -------- ------- -------- ------- --------
Balance at June 30,
1996.................... 5,044,214 50 -- -- 31,103 786 (156,391) (1,093) 30,846
Issuance of stock for
acquisition, net of
recorded expenses..... 6,000,000 60 5,651,368 57 69,559 -- -- -- 69,676
Issuance of Common Stock
for cash, net of
recorded expenses..... 2,488,123 25 -- -- 14,818 -- -- -- 14,843
Accrual of dividends on
Preferred Stock....... -- -- -- -- -- (12) -- -- (12)
Exercise of stock
options............... 17,800 -- -- -- 115 -- -- -- 115
Exercise of warrants.... 9,174 -- -- -- 57 -- -- -- 57
Issuance of treasury
shares................ -- -- -- -- 3 -- 156,391 1,093 1,096
Net income.............. -- -- -- -- -- 8,102 -- -- 8,102
---------- ---- --------- --- -------- ------- -------- ------- --------
Balance at June 30,
1997.................... 13,559,311 135 5,651,368 57 115,655 8,876 -- -- 124,723
Exercise of stock
options............... 3,975 -- -- -- 28 -- -- -- 28
Purchase of treasury
shares................ -- -- -- -- -- -- (2,858) (20) (20)
Accrual of dividends on
Preferred Stock....... -- -- -- -- -- (24) -- -- (24)
Net income.............. -- -- -- -- -- 4,613 -- -- 4,613
---------- ---- --------- --- -------- ------- -------- ------- --------
Balance at June 30,
1998.................... 13,563,286 $135 5,651,368 $57 $115,683 $13,465 (2,858) $ (20) $129,320
========== ==== ========= === ======== ======= ======== ======= ========
</TABLE>
See accompanying notes.
F-5
<PAGE> 124
BEHAVIORAL HEALTHCARE CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30,
---------------------------------
1998 1997 1996
-------- --------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net income.................................................. $ 4,613 $ 8,102 $ 598
Adjustments to reconcile net income to net cash provided by
operating activities:
Deferred income taxes..................................... 7 1,468 229
Loss on sale of property, plant and equipment............. -- 106 --
Loss on extinguishment of debt............................ -- 670 --
Depreciation and amortization............................. 9,504 5,708 1,766
Changes in operating assets and liabilities, net of effect
of acquisitions and sales:
Net accounts receivable................................. 3,356 (10,054) (2,132)
Prepaid expenses and other current assets............... (1,677) (489) (159)
Accounts payable........................................ 1,801 926 267
Income taxes receivable................................. 1,827 (270) (25)
Other accrued liabilities............................... (6,248) 4,673 (23)
Deferred liability risks................................ 1,080 1,179 350
-------- --------- --------
Net cash provided by operating activities................... 14,263 12,019 871
INVESTING ACTIVITIES
Acquisition of facilities, net of cash acquired............. -- (117,250) (9,039)
Amounts received through acquisition due to (paid to)
seller.................................................... (7,620) 7,620 --
(Increase) decrease in other assets and unamortized loan
costs..................................................... 180 (2,529) (704)
Proceeds from the sale of property, plant and equipment..... 18,980 833 --
Purchases of property, plant and equipment.................. (11,662) (8,734) (743)
-------- --------- --------
Net cash (used in) investing activities..................... (122) (120,060) (10,486)
FINANCING ACTIVITIES
Payment of principal on long-term debt...................... $(22,254) $ (14,427) $(17,246)
Payment of Subordinated Notes............................... -- (822) --
Proceeds from long-term debt................................ 10,000 107,000 15,740
Issuance of Common Stock.................................... -- 14,843 17
Proceeds from exercise of stock options..................... 28 115 --
Proceeds from exercise of warrants.......................... -- 57 --
Issuance of treasury shares................................. -- 1,096 --
Purchase of treasury shares................................. (20) -- (51)
-------- --------- --------
Net cash provided by (used in) financing activities......... (12,246) 107,862 (1,540)
-------- --------- --------
Net increase (decrease) in cash and cash equivalents........ 1,895 (179) (11,155)
Cash and cash equivalents at beginning of year.............. 3,548 3,727 14,882
-------- --------- --------
Cash and cash equivalents at end of year.................... $ 5,443 $ 3,548 $ 3,727
======== ========= ========
Supplemental cash flow information:
Interest paid............................................. $ 8,038 $ 4,897 $ 1,219
======== ========= ========
Income taxes paid......................................... $ 2,061 $ 6,253 $ 204
======== ========= ========
Acquisitions:
Cash paid................................................. $ -- $ 117,600 $ 9,264
Note issued............................................... -- 500 --
Stock issued.............................................. -- 70,000 --
-------- --------- --------
-- 188,100 9,264
Fair value of assets acquired............................. -- 194,575 6,564
Liabilities assumed....................................... -- 19,700 1,200
Net assets................................................ -- 174,875 5,364
-------- --------- --------
Cost in excess of net assets acquired..................... $ -- $ 13,225 $ 3,900
======== ========= ========
</TABLE>
See accompanying notes.
F-6
<PAGE> 125
BEHAVIORAL HEALTHCARE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1998
1. BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION
Behavioral Healthcare Corporation (the "Company"), was formed for the
purpose of owning and operating healthcare facilities providing psychiatric and
related mental health services. At June 30, 1998, the Company owned and operated
38 hospitals and 5 residential treatment centers in 18 states and Puerto Rico.
The Company is also a partner in several joint ventures that own and operate
facilities providing various related mental health services.
PRINCIPLES OF CONSOLIDATION
The accompanying consolidated financial statements include all subsidiaries
and entities controlled by the Company. Investments in entities which the
Company does not control, but in which it has a substantial ownership interest
and can exercise significant influence, are accounted for using the equity
method. All material intercompany accounts and transactions have been
eliminated.
CASH AND CASH EQUIVALENTS
The Company considers all highly liquid investments with a maturity of 90
days or less when purchased to be cash equivalents.
ACCOUNTS RECEIVABLE
The Company's primary concentration of credit risk is patient accounts
receivable, which consists of amounts owed by various governmental agencies,
insurance companies and private patients. The Company manages the receivables by
regularly reviewing its accounts and contracts and by providing appropriate
allowances for uncollectible amounts. Medicare, Medicaid and CHAMPUS programs
comprised approximately 18%, 23%, and 3% of patient receivables, respectively,
at June 30, 1998 and 19%, 22%, and 4% of patient receivables, respectively, at
June 30, 1997. Receivables from Medicaid include amounts from the various states
in which the Company operates. Remaining receivables relate primarily to various
commercial insurance carriers and HMO/PPO programs. Concentration of credit risk
from other payers is limited by the number of patients and payers.
SUPPLIES
Supply inventory is stated at the lower of cost (first-in, first-out) or
market.
PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment are stated at cost. Routine maintenance and
repairs are charged to expense as incurred. Expenditures that increase values,
change capacities or extend useful lives are capitalized. Depreciation is
computed by the straight-line method over the estimated useful lives of the
assets, which approximates 4 to 40 years. Depreciation expense was approximately
$8,158,000, $5,118,000, and $1,750,000 for the years ended June 30, 1998, 1997
and 1996, respectively.
The Company is currently engaged in an expansion project at one of its
hospitals which is expected to be completed by September 30, 1998. At June 30,
1998, approximately $3,200,000 had been expended for this project and is
included in "Construction in Progress" on the accompanying Consolidated Balance
Sheet. The additional estimated cost to complete the project is approximately
$600,000.
F-7
<PAGE> 126
BEHAVIORAL HEALTHCARE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 1998
1. BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(CONTINUED)
INTANGIBLE ASSETS
Unamortized Loan Costs
Loan costs are deferred and amortized over the life of the related debt.
The amounts reported are net of accumulated amortization of approximately
$445,000 and $161,000 at June 30, 1998 and 1997, respectively.
Cost in Excess of Net Assets Acquired
The determination of the fair value of identifiable net assets acquired
(property, plant and equipment) is based on the cost/replacement approach by
third-party appraisers in accordance with Accounting Principles Board Opinion
No. 16 "Business Combinations." Cost in excess of net assets acquired represents
costs in excess of the fair value of identifiable net assets of acquired
entities and is amortized using the straight-line method over 30 years. The
amounts reported are net of accumulated amortization of approximately $915,000
and $378,000 at June 30, 1998 and 1997, respectively.
When events, circumstances, and operating results indicate that the
carrying values of certain long-lived assets and the related identifiable
intangible assets might be impaired, the Company assesses whether the carrying
value of the assets will be recovered through undiscounted future cash flows
expected to be generated from the use of the assets and their eventual
disposition. No impairment losses were recorded during fiscal 1998, 1997 or
1996.
Other Assets
A noncompete agreement is included in "Other Assets" on the accompanying
Consolidated Balance Sheets and is amortized over the 15-year contract term (see
Note 2). At June 30, 1998 and 1997, the noncompete agreement was net of
accumulated amortization of approximately $633,000 and $233,000, respectively.
RISK MANAGEMENT
The Company maintains a self-insured medical and dental plan for employees.
Claims are accrued under the plan as the incidents that give rise to them occur.
Unpaid claims accruals are based on the estimated ultimate cost of settlement,
including claim settlement expenses, in accordance with an average lag time and
past experience. The Company has entered into a reinsurance agreement with an
independent insurance company to limit its losses on claims. Under the terms of
the agreement, the insurance company will reimburse the Company for claims
exceeding $150,000 up to $1,000,000 per employee.
The Company carries general and professional liability insurance from an
unrelated commercial insurance carrier for per occurrence losses up to
$1,000,000 with policy limits of $3,000,000 in the aggregate, on a claims-made
basis. In addition, the Company has an umbrella policy with an unrelated
insurance carrier with coverage up to $25,000,000 per occurrence and in the
aggregate. The Company increased the coverage under the umbrella policy to
$50,000,000 per occurrence and in the aggregate effective July 1, 1998.
The Company has prior acts retroactive coverage and tail coverage for
pre-acquisition general and professional liability assumed by the Company with
respect to certain of the Company's acquired facilities. The Company also
carries workers' compensation insurance from an unrelated commercial insurance
carrier. The reserve for general and professional and workers' compensation
liability risks is based on actuarially determined estimates and is classified
as "Deferred Liability Risks" on the accompanying Consolidated Balance Sheets.
F-8
<PAGE> 127
BEHAVIORAL HEALTHCARE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 1998
1. BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(CONTINUED)
Management is aware of no potential professional liability or workers'
compensation claims whose settlement, if any, would have a material adverse
effect on the Company's consolidated financial position or results of
operations.
NET PATIENT SERVICE REVENUE
Patient service revenue is reported on the accrual basis in the period in
which services are provided, at established rates, regardless of whether
collection in full is expected.
Net patient service revenue includes amounts estimated by management to be
reimbursable by Medicare and Medicaid under provisions of cost or prospective
reimbursement formulas in effect. Amounts received are generally less than the
established billing rates of the facilities and the differences (contractual
allowances) are reported as deductions from patient service revenue at the time
the service is rendered. The effect of other arrangements for providing services
at less than established rates is also reported as deductions from patient
service revenue.
Settlements under cost reimbursement agreements with third party payers are
estimated and recorded in the period in which the related services are rendered
and are adjusted in future periods as final settlements are determined. Final
determination of amounts earned under the Medicare and Medicaid programs often
occur in subsequent years because of audits by the programs, rights of appeal
and the application of numerous technical provisions. The adjustments to
estimated settlements for prior years are not considered material.
Net patient service revenue is net of contractual adjustments and policy
discounts of approximately $417,317,000, $280,525,000 and $63,919,000 for the
years ended June 30, 1998, 1997 and 1996, respectively.
STOCK-BASED COMPENSATION
The Company has elected to record stock options in accordance with
Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to
Employees," (APB 25) and related interpretations. Under APB 25, the Company has
recognized no compensation expense related to the options as the exercise price
of the options equals the market price of the underlying stock on the grant
date.
INCOME TAXES
Income taxes are provided based on the liability method of accounting.
Deferred tax assets and liabilities are determined based on differences between
financial reporting and tax bases of assets and liabilities and are measured
using the enacted tax rates and laws that will be in effect when the differences
are expected to reverse.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.
FAIR VALUE OF FINANCIAL INSTRUMENTS
Cash and Cash Equivalents
The carrying amounts reported in the balance sheets for cash and cash
equivalents approximate fair value.
F-9
<PAGE> 128
BEHAVIORAL HEALTHCARE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 1998
1. BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(CONTINUED)
Accounts Receivable and Accounts Payable
The carrying amounts reported in the balance sheets for accounts receivable
and accounts payable approximate fair value. Accounts receivable are usually
unsecured.
Long-Term Debt
Based upon the borrowing rates currently available to the Company, the
carrying amounts reported in the balance sheets for long-term debt approximate
fair value.
RECLASSIFICATIONS
Certain prior period amounts have been reclassified in order to conform to
current period presentation. Such reclassifications had no material effect on
the financial position and results of operations as previously reported.
NON-RECURRING CHARGES
During fiscal 1998, the Company paid $600,000 in consideration for the
termination of a services agreement with a former director of the Company. Such
consideration released the Company from future obligations including all
compensation due under the remainder of the services agreement. The Company also
paid approximately $458,000, for such costs as legal and accounting fees,
associated with an unsuccessful proposed merger transaction. The costs are
classified as "Non-recurring Charges" in the accompanying Consolidated Statement
of Income.
2. ACQUISITIONS
1997 ACTIVITIES
United Psychiatric Group
On November 19, 1996, the Company acquired substantially all of the assets
of four psychiatric facilities previously related through a majority owner,
United Psychiatric Group ("UPG"), for an aggregate purchase price of
approximately $45,350,000, including approximately $600,000 of direct costs of
the transaction. The aggregate purchase price consisted approximately of cash
paid of $40,500,000, note payable of $500,000 and assumption of liabilities of
$4,350,000. The aggregate purchase price was allocated approximately as follows:
property, plant and equipment -- $18,800,000; patient receivables -- $7,925,000;
other current assets -- $1,000,000; covenant not to compete -- $6,000,000;
current liabilities assumed -- $4,350,000; note payable -- $500,000; and cost in
excess of net assets acquired -- $11,625,000.
In consideration for the covenant not to compete, the Company paid
$6,000,000 to the majority owner of UPG. The term of the agreement which
commenced on November 19, 1996 is for fifteen years. The covenant not to
compete, net of accumulated amortization, is recorded in "Other Assets" in the
accompanying Consolidated Balance Sheets.
The acquisition was financed through a bridge loan which was subsequently
refinanced under the 1996 Credit Agreement.
F-10
<PAGE> 129
BEHAVIORAL HEALTHCARE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 1998
2. ACQUISITIONS (CONTINUED)
Community Psychiatric Centers
On November 30, 1996, the Company acquired substantially all of the assets
of Transitional Hospitals Corporation's (formerly Community Psychiatric Centers
or "CPC") psychiatric operations in the United States and Puerto Rico for a
combination of cash and the Company's stock. The acquisition included twenty
four operating hospitals, joint venture interest in two separate psychiatric
operations, an outpatient psychiatric center, two closed hospitals and certain
other vacant land which the Company acquired, along with certain of the
operating hospitals, with the intent to sell.
The aggregate purchase price of the transaction was approximately
$148,400,000, including approximately $3,400,000 of direct acquisition costs.
The aggregate purchase price consisted approximately of cash paid of
$63,400,000, issuance of 6,000,000 shares of Common Stock at $5.98 per share,
issuance of 5,651,368 shares of Series A Convertible Preferred Stock at $5.98
per share, issuance of 50,252 shares of Series B Preferred Stock at $5.98 per
share, and assumption of liabilities of $15,000,000. The determination of the
value of the stock and stock equivalents was based upon an analysis of multiples
generally accorded to publicly-traded psychiatric hospitals applied to a pro
forma combination of CPC's and the Company's EBITDA (earnings before interest,
taxes, depreciation and amortization). Based upon this analysis, the total value
of the equity interest in the Company was determined to be approximately
$70,000,000.
The aggregate purchase price was allocated approximately as follows:
property, plant and equipment -- $112,050,000; patient
receivables -- $33,950,000; other current assets -- $2,400,000; current
liabilities assumed -- $12,000,000 and other liabilities assumed -- $3,000,000.
The carrying value of approximately $8,700,000 of the assets acquired by
the Company with the intent to sell were classified as "Assets Held for Sale" in
the accompanying Consolidated Balance Sheet at June 30, 1997 (See Note 3).
During fiscal 1998, the majority of such assets were sold.
In addition to the issuance of stock and stock equivalents as described
above, the acquisition was financed through additional borrowings under the 1996
Credit Agreement.
In accordance with the terms of the acquisition agreement, certain
settlements of approximately $7,600,000 received by the Company from Medicare,
subsequent to the date of acquisition, were remitted to CPC during fiscal 1998.
Such amounts were included in "Accounts Payable" in the accompanying
Consolidated Balance Sheet as of June 30, 1997.
In accordance with the terms of the acquisition agreement, the Company
sought indemnification from the sellers for claims related primarily to the
collectibility of acquired receivables and settlements associated with federal
cost reimbursement agreements. In consideration for discharging certain of their
claims and in accordance with the indemnification provisions of the acquisition
agreement, the Company was paid $3,000,000 during fiscal 1998, which is included
in "Net Patient Service Revenue" in the accompanying Consolidated Statement of
Income. Management believes the Company is adequately reserved or protected
through future indemnification for the remainder of the claims.
Sterling Healthcare Corporation
On May 31, 1997, the Company acquired substantially all of the assets of
five psychiatric hospitals previously owned by Sterling Healthcare Corporation
for an aggregate purchase price of approximately $14,050,000, including
approximately $300,000 of direct costs of the transaction. The aggregate
purchase price consisted approximately of cash paid of $13,700,000 and
assumption of liabilities of $350,000. The aggregate purchase price was
allocated approximately as follows: property, plant and
equipment -- $12,450,000; cost in excess of net assets acquired -- $1,600,000;
and current liabilities assumed -- $350,000.
F-11
<PAGE> 130
BEHAVIORAL HEALTHCARE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 1998
2. ACQUISITIONS (CONTINUED)
The acquisition was financed through available cash on hand and additional
borrowings under the 1996 Credit Agreement.
1996 ACTIVITIES
Mental Health Management, Inc.
On May 31, 1996, the Company acquired certain assets and liabilities of
four psychiatric hospitals and one residential treatment center from Mental
Health Management, Inc. for an aggregate purchase price of approximately
$10,464,000, including approximately $225,000 of direct costs of the
transaction. The aggregate purchase price consisted approximately of cash paid
of $9,264,000 and assumption of liabilities of $1,200,000. The aggregate
purchase price was allocated approximately as follows: property, plant and
equipment -- $6,100,000; patient receivables -- $230,000; other current
assets -- $200,000; cost in excess of net assets acquired -- $3,900,000; other
assets -- $34,000 and current liabilities assumed -- $1,200,000.
The acquisition was financed through available cash on hand and additional
borrowings under the 1995 Credit Agreement.
Other Information
The foregoing acquisitions were accounted for using the purchase method of
accounting. The operating results of the acquired companies have been included
in the accompanying Consolidated Statements of Income from the respective dates
of acquisition.
The following represents the unaudited pro forma results of operations as
if the above-noted acquisitions had occurred as of July 1, 1996, after giving
effect to certain adjustments, including the depreciation and amortization of
the assets acquired based upon their fair values, changes in net interest
expense resulting from changes in consolidated debt, and decreased allocated
overhead expenses:
<TABLE>
<CAPTION>
1997 1996
-------- --------
(IN THOUSANDS)
<S> <C> <C>
Net patient service revenue............................ $320,236 $300,726
Net income............................................. 11,996 11,266
</TABLE>
The pro forma information given above does not purport to be indicative of
what actually would have occurred if the acquisitions had been in effect for the
entire periods presented, and is not intended to be a projection of the impact
on fiscal 1998 results or future results or trends.
3. ASSETS HELD FOR SALE
Certain vacant land acquired by the Company in fiscal 1997 with the intent
to sell remains classified as "Assets Held for Sale" at June 30, 1998 on the
accompanying Consolidated Balance Sheet (See Note 2). During fiscal 1998, the
Company's management identified certain assets which are expected to be sold
within one year. In the opinion of management, the carrying value of the assets
held for sale approximate their fair value less cost to sell. Net revenues and
net loss recognized in fiscal 1998 associated with the assets approximated
$21,551,000 and $2,805,000, respectively.
F-12
<PAGE> 131
BEHAVIORAL HEALTHCARE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 1998
4. LONG-TERM DEBT
The Company's long-term debt includes the following:
<TABLE>
<CAPTION>
JUNE 30,
-----------------------
1998 1997
--------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Long-term debt payable to banks......................... $94,746 $107,000
Note payable to UPG..................................... 500 500
------- --------
95,246 107,500
Less current maturities................................. 9,178 10,000
------- --------
$86,068 $ 97,500
======= ========
</TABLE>
LONG-TERM DEBT PAYABLE TO BANKS
1996 Credit Agreement
On November 27, 1996, the Company entered into a credit agreement ("1996
Credit Agreement") with a group of nine banks, with Morgan Guaranty Trust
Company of New York as document and collateral agent and with Bank of America
National Trust and Savings as administrative agent and issuing bank, for the
purpose of financing the acquisition of CPC, refinancing the outstanding
principal balance due under the 1995 Credit Agreement, repaying a bridge loan,
financing working capital, and for general corporate purposes. Under the 1996
Credit Agreement, the Company may borrow up to $70,000,000 in the form of a term
loan and an additional amount under a revolving credit arrangement of
$75,000,000, less amounts available under letters of credit. As of June 30,
1998, the Company had approximately $51,700,000 and $43,000,000 outstanding
under the term loan and the revolving credit agreement, respectively. As of June
30, 1998, credit available under the revolving credit agreement, less $2,250,000
available credit under certain letters of credit, was $29,750,000. Effective
July 21, 1998, total commitments under the revolving credit facility were
reduced to $55,000,000 thus reducing the available credit, including credit
available under certain letters of credit, to $12,000,000.
Effective March 26, 1998, the 1996 Credit Agreement was amended to allow
the Company to make any asset sale through the period ending June 30, 1999, if
the aggregate fair value of assets disposed of in all asset sales during that
period does not exceed $40,000,000. The Company is required to prepay the term
loan with net cash proceeds in excess of $30,000,000 received from any asset
sale through the period ending June 30, 1999, or with net cash proceeds in
excess of $10,000,000 received from any asset sale in any fiscal year beginning
after June 30, 1999.
The Company may borrow from time to time a minimum of $3,000,000 under the
revolving credit agreement. Any amounts borrowed under the revolving credit
agreement mature on November 27, 2001.
Under the 1996 Credit Agreement, interest is payable quarterly based upon
either a base rate representing the higher of the Bank of America's reference
rate or the sum of one-half of 1% plus the Federal Funds Rate or a Euro-Dollar
Rate equal to the sum of the Euro-Dollar margin plus the Adjusted LIBOR rate.
The type of rate used is at the discretion of the Company. The interest rate on
the outstanding principal balance under the 1996 Credit Agreement at June 30,
1998 was approximately 7%.
The 1996 Credit Agreement contains various financial covenants that include
requirements for the Company to maintain a maximum leverage ratio; minimum fixed
charge and net worth ratios; and restricts the payment of any dividends, capital
expenditures, investments in new businesses, issuances of new debt, and disposal
of assets. At June 30, 1998, the Company was in compliance with all such
financial covenants of the
F-13
<PAGE> 132
BEHAVIORAL HEALTHCARE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 1998
4. LONG-TERM DEBT (CONTINUED)
1996 Credit Agreement (as amended). The 1996 Credit Agreement is collateralized
by the assignment of all rights, title, and interest in all equipment, fixtures,
real property, inventory, and Common Stock of the Company and its subsidiaries.
NOTE PAYABLE TO UPG
In conjunction with the purchase of certain stock and assets of UPG on
November 18, 1996, the Company withheld $500,000 from the acquisition cash
payment and entered into a promissory note whereby such amount plus accrued
interest will be paid contingent upon the absence of any adjustments to the
purchase price. The interest rate on this note is 7% which accrues until the
maturity date of December 31, 1998. This note is separately collateralized by a
letter of credit with Bank of America National Trust and Savings.
OTHER
Deferred Loan Costs
The Company incurred deferred loan costs of approximately $1,700,000
related to the 1996 Credit Agreement, which have been capitalized and are being
amortized over the life of the term loan.
Letters of Credit
The Company has available $2,250,000 in letters of credit for which no
amounts were outstanding at June 30, 1998.
Extinguishment of Debt
During 1997, in conjunction with the refinancing of the 1995 Credit
Agreement with the proceeds of the 1996 Credit Agreement, the Company wrote off
approximately $670,000 of deferred loan costs associated with the 1995 Credit
Agreement. Such amount was treated as an extraordinary loss on the
extinguishment of debt on the consolidated Statement of Operations. The
extraordinary loss, net of the related income tax effect of approximately
$255,000, was approximately $415,000.
Future Maturities
Future maturities of long-term debt are as follows (dollars in thousands):
<TABLE>
<S> <C>
1999....................................................... $ 9,178
2000....................................................... 10,848
2001....................................................... 13,018
2002....................................................... 56,028
2003....................................................... 6,174
-------
$95,246
=======
</TABLE>
F-14
<PAGE> 133
BEHAVIORAL HEALTHCARE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 1998
5. CONTINGENCIES AND HEALTHCARE REGULATION
CONTINGENCIES
The Company is presently, and from time to time, subject to other various
claims and lawsuits arising in the normal course of business. In the opinion of
management, the ultimate resolution of these matters will not have a material
adverse effect on the Company's financial position or results of operations.
CURRENT OPERATIONS
Final determination of amounts earned under prospective payment and
cost-reimbursement activities is subject to review by appropriate governmental
authorities or their agents. In the opinion of the Company's management,
adequate provision has been made for any adjustments that may result from such
reviews.
Laws and regulations governing the Medicare, Medicaid and other federal
health care programs are complex and subject to interpretation. The Company's
management believes that the Company is in compliance with all applicable laws
and regulations in all material respects and is not aware of any pending or
threatened investigations involving allegations of potential wrongdoing. While
no such regulatory inquiries have been made, compliance with such laws and
regulations can be subject to future government review and interpretation as
well as significant regulatory action including fines, penalties, and exclusion
from the Medicare, Medicaid and other federal health care programs.
RISKS ASSOCIATED WITH LIABILITIES OF ACQUIRED BUSINESSES
The Company has acquired and will continue to acquire businesses with prior
operating histories. Acquired companies may have unknown or contingent
liabilities, including liabilities for failure to comply with health care laws
and regulations, such as billing and reimbursement, fraud and abuse and similar
anti-referral laws. The Company has from time to time identified certain past
practices of acquired companies that do not conform to its standards. Although
the Company institutes policies designed to conform such practices to its
standards following completion of acquisitions, there can be no assurance that
the Company will not become liable for past activities that may later be
asserted to be improper by private plaintiffs or government agencies. Although
the Company generally seeks to obtain indemnification from prospective sellers
covering such matters, there can be no assurance that any such matter will be
covered by indemnification, or if covered, that such indemnification will be
adequate to cover potential losses and fines.
F-15
<PAGE> 134
BEHAVIORAL HEALTHCARE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 1998
6. INCOME TAXES
Significant components of the Company's deferred tax assets and liabilities
as of June 30, 1998 and 1997 are as follows:
<TABLE>
<CAPTION>
1998 1997
---------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Deferred tax assets:
Accrued liabilities....................................... $ 2,627 $ 3,646
State net operating loss carryforward..................... 1,013 512
-------- -------
Total deferred tax assets................................... 3,640 4,158
Valuation allowance for deferred tax assets................. (1,189) (382)
-------- -------
Net deferred tax assets..................................... 2,451 3,776
Deferred tax liabilities:
Differences in book and tax provision for doubtful
accounts............................................... 573 4,085
Tax over book depreciation and amortization............... 13,831 9,684
-------- -------
Total deferred tax liabilities.............................. 14,404 13,769
-------- -------
Net deferred tax (liability) asset.......................... $(11,953) $(9,993)
======== =======
</TABLE>
At June 30, 1998, the Company has net operating loss carryforwards of
approximately $26,459,000 for state income tax purposes that expire in years
1999 through 2013. For financial reporting purposes, a valuation allowance of
$1,200,000 has been recognized to offset the deferred tax assets related to
those net operating carryforwards and other deferred tax assets. The net
deferred tax liability reflects an increase in the valuation allowance of
approximately $807,000.
For financial reporting purposes, income before income taxes includes the
following components:
<TABLE>
<CAPTION>
JUNE 30
---------------------------
1998 1997 1996
------ ------- ------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Pretax income:
United States......................................... $3,808 $11,596 $1,057
Foreign............................................... 3,714 2,234 --
------ ------- ------
$7,522 $13,830 $1,057
====== ======= ======
</TABLE>
F-16
<PAGE> 135
BEHAVIORAL HEALTHCARE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 1998
6. INCOME TAXES (CONTINUED)
Significant components of the provision for income taxes attributable to
operations are as follows:
<TABLE>
<CAPTION>
JUNE 30
------------------------
1998 1997 1996
------ ------ ----
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Current:
Federal.................................................. $1,791 $2,544 $102
Foreign.................................................. 1,010 927 --
State.................................................... 101 789 128
------ ------ ----
Total current.............................................. 2,902 4,260 230
Deferred:
Federal.................................................. (383) 1,572 255
Foreign.................................................. (306) (55) --
State.................................................... 696 (49) (26)
------ ------ ----
Total deferred............................................. 7 1,468 229
------ ------ ----
Provision for income taxes................................. $2,909 $5,728 $459
====== ====== ====
</TABLE>
The Company's consolidated effective tax rate differed from the federal
statutory rate as set forth below:
<TABLE>
<CAPTION>
JUNE 30
--------------------------------------------------------
1998 1997 1996
---------------- ---------------- ----------------
AMOUNT PERCENT AMOUNT PERCENT AMOUNT PERCENT
------ ------- ------ ------- ------ -------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Tax at U.S. statutory rates......... $2,633 35% $4,823 35% $359 34%
State taxes, net of federal
benefits.......................... (10) -- 580 4 (80) (8)
Higher/(Lower) effective income
taxes of other countries.......... (595) (8) 109 1 -- --
Changes in valuation allowance...... 807 11 128 1 183 17
Other, net.......................... 74 1 88 1 (3) --
------ -- ------ -- ---- --
Total..................... $2,909 39% $5,728 42% $459 43%
====== == ====== == ==== ==
</TABLE>
7. SERIES B PREFERRED STOCK
In conjunction with the acquisition of CPC, the Company issued 50,252
shares of Series B Preferred Stock at $5.98 per share. The Series B Preferred
shares are entitled to accrued dividends equal to 8% per annum of the
liquidation value of the shares. Such dividends are cumulative and accrue
automatically whether or not paid by the Company. Accumulated and accrued
dividends as of June 30, 1998 and 1997 were $36,181 and $12,060, respectively.
Except as otherwise required by law, the holders of Series B Preferred Stock
shall not be entitled to vote on any matter on which the stockholders of the
Company are otherwise entitled to vote. Holders of the Series B Preferred Stock
are entitled to a preference in the amount of $6 per share of Series B Preferred
Stock, plus any accrued but unpaid dividends on such shares in the event of the
liquidation or dissolution of the Company.
At any time after December 31, 1999, the Company has the option to redeem
all Series B Preferred shares at a price equal to the liquidation preference
plus the accrued dividends. The Company is required to redeem all Series B
Preferred shares at a price equal to the liquidation preference plus accrued
dividends by December 31, 2001.
F-17
<PAGE> 136
BEHAVIORAL HEALTHCARE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 1998
8. STOCKHOLDERS' EQUITY
COMMON STOCK
In conjunction with the acquisition of CPC on November 30, 1996 (see Note
2), the Company issued 6,000,000 shares of Common Stock. Also, in November 1996,
the Company issued an additional 2,488,123 shares of Common Stock to provide a
portion of the funds required in the acquisition of UPG (see Note 2).
The Company has reserved 8,235,423 shares of its Common Stock for issuance
upon conversion of the Series A Convertible Preferred Stock, exercise of stock
warrants, or exercise of stock options under the 1996 Stock Option Plan.
SERIES A CONVERTIBLE PREFERRED STOCK
In conjunction with the acquisition of CPC, the Company issued 5,651,368
shares of Series A Convertible Preferred Stock at $5.98 per share. The Series A
Convertible Preferred Stock is subject to a $.48 per share quarterly dividend at
the discretion of the Company's Board of Directors. Such dividends are not
cumulative and, if not declared by the Board of Directors for a particular
quarter, shall not accrue or be paid. Except as otherwise required by law, the
holders of Series A Convertible Preferred Stock are not entitled to vote on any
matter on which the stockholders of the Company are otherwise entitled to vote.
Holders of Series A Convertible Preferred Stock are entitled to a
preference in the amount of $6 per share of Series A Convertible Preferred Stock
in the event of a dissolution or liquidation of the Company (for which a merger
or consolidation would not qualify). Such preference shall be paid after the
satisfaction of the obligations to the Series B Preferred shareholders.
Each share of Series A Convertible Preferred Stock shall automatically
convert to one share of the Company's Common Stock upon (i) the sale or transfer
of the Company to a non-affiliate of the Series A Convertible Preferred
shareholders or (ii) at the shareholders' election to the extent the
shareholders would own in the aggregate less than 20% of the outstanding Common
Stock of the Company. The Company has the option, but not the obligation, to
redeem all or any portion of the outstanding Series A Convertible Preferred
shares at the conversion price on or after the ten year anniversary of the CPC
purchase agreement.
9. EMPLOYEE BENEFIT PLANS
STOCK OPTION PLAN
1993 Plan
The 1993 Incentive Stock Plan ("1993 Plan") provided for the grant of
options to purchase up to 210,000 shares of Common Stock to directors, officers,
and other key employees. In 1995, the Company amended the 1993 Incentive Stock
Plan to increase the number of options available for grant to 447,000 options.
Under the plan, the Company may grant incentive stock options and nonqualified
stock options. Options are exercisable as determined by the Board of Directors.
Incentive stock options (but not nonqualified stock options) must have a
term not exceeding ten years, and must have an exercise price not less than the
fair market value of the Common Stock at the date of the grant. Nonqualified
options shall not have an exercise price of less than 50% of the fair market
value at the date of the grant, and must have a term not exceeding ten years and
become exercisable ratably over a five-year period commencing six months after
the date of grant.
F-18
<PAGE> 137
BEHAVIORAL HEALTHCARE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 1998
9. EMPLOYEE BENEFIT PLANS (CONTINUED)
1996 Plan
On November 22, 1996, the Company established the 1996 Stock Option Plan
("1996 Plan") to provide a performance incentive and to encourage stock
ownership by officers, directors, consultants, and advisors of the Company and
its Affiliates, and to align the interests of such individuals with those of the
Company, its Affiliates, and its shareholders. The 1996 Plan effectively
supersedes the 1993 Plan in that only those options outstanding as of the date
of the adoption of the 1996 Plan can be exercised. The maximum number of options
to be granted under the 1996 Plan is 1,927,779.
The 1996 Plan is administered by the Board Committee who has ultimate
authority to determine the number of options to be granted to certain
participants. The Committee may issue incentive or nonqualified options, with a
prescribed annual option limit not to exceed 500,000 shares of stock. To the
extent that the aggregate fair market value of stock with respect to which
incentive options are exercisable for the first time by a participant during any
calendar year exceeds $100,000, such options are to be treated as nonqualified
options. The exercise price of an incentive option shall not be less than 100%
of the fair market value of the Company's stock on the day the option is granted
and the maximum period in which an option may be exercised is ten years from the
grant date. Options vest ratably by 20% at the beginning of each year of a
five-year period.
Adjustment shall be made in the number of shares subject to each
outstanding option or the exercise price or both, in the event of any changes in
the outstanding Common Stock by reason of stock dividends, stock splits,
recapitalizations, reorganizations, mergers, or consolidations. The options are
callable by the Company at any time during the life of the option at the per
option price paid by the participant except at the point of public offering or
change in control of the Company.
F-19
<PAGE> 138
BEHAVIORAL HEALTHCARE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 1998
9. EMPLOYEE BENEFIT PLANS (CONTINUED)
Information with respect to the 1993 Incentive Stock Plan and the 1996
Stock Option Plan for the years ended June 30 is as follows:
<TABLE>
<CAPTION>
WEIGHTED- WEIGHTED- WEIGHTED-
AVERAGE AVERAGE AVERAGE
EXERCISE EXERCISE EXERCISE
1998 PRICE 1997 PRICE 1996 PRICE
------------- --------- ------------- --------- ------------- ---------
<S> <C> <C> <C> <C> <C> <C>
1993 INCENTIVE STOCK PLAN:
Options outstanding at July
1............................ 214,687 6.33 187,812 6.57 198,312 6.52
Granted...................... -- 7.00 71,750 7.00 7,875 7.00
Exercised.................... (3,150) 6.25 (17,800) 6.50 -- --
Canceled..................... (23,100) 6.25 (27,075) 6.25 (18,375) 6.25
------------- ---- ------------- ---- ------------- ----
Options outstanding at June
30........................... 188,437 6.52 214,687 6.78 187,812 6.57
============= ============= =============
Options available for grant at
June 30...................... -- -- 259,188
============= ============= =============
Options exercisable at June
30........................... 155,812 6.33 120,462 6.48 90,325 6.42
============= ==== ============= ==== ============= ====
Option price range at June
30........................... $6.25 - $7.00 $6.25 - $7.00 $6.25 - $7.00
============= ============= =============
Weighted-average value of
options granted during the
year......................... $ -- $ 1.81 $ 1.81
============= ============= =============
1996 STOCK OPTION PLAN:
Options outstanding at July
1............................ 1,487,125 7.00 -- --
Granted...................... 379,500 7.00 1,493,125 7.00
Exercised.................... (825) 7.00 -- --
Canceled..................... (219,800) 7.00 (6,000) 7.00
------------- ---- ------------- ----
Options outstanding at June
30........................... 1,646,000 7.00 1,487,125 7.00
============= ==== ============= ====
Options available for grant at
June 30...................... 280,954 7.00 440,654 --
============= ==== ============= ====
Options exercisable at June
30........................... 592,500 7.00 297,425 7.00
============= ==== ============= ====
Option price range at June
30........................... $ 7.00 $ 7.00
============= =============
Weighted-average value of
options granted during the
year......................... $ 1.81 $ 1.81
============= =============
</TABLE>
Statement of Financial Accounting Standards No. 123 ("FAS 123"),
"Accounting for Stock-Based Compensation," requires those entities electing to
account for stock options under APB 25 to provide certain net income pro forma
information in the footnotes to the financial statements. The fair value of the
Company's stock options was estimated at the date of grant using a Minimum Value
option pricing model with the following weighted-average assumptions for 1998,
1997 and 1996, respectively: risk-free interest rate of 6.0%, dividend yield of
0.0%, and a weighted-average expected life of the options of 5 years.
For purposes of pro forma disclosures, the estimated fair value of options
is amortized to expense over the options' vesting period. The Company's pro
forma information follows:
<TABLE>
<CAPTION>
JUNE 30
1998 1997 1996
------ ------- ----
(IN THOUSANDS)
<S> <C> <C> <C>
Net income................................................. $4,613 $8,102 $598
Pro forma compensation expense from stock options, net of
taxes.................................................... (630) (403) (2)
------ ------ ----
Pro forma net income....................................... $3,983 $7,699 $596
====== ====== ====
</TABLE>
F-20
<PAGE> 139
BEHAVIORAL HEALTHCARE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 1998
9. EMPLOYEE BENEFIT PLANS (CONTINUED)
The effects of applying FAS 123 for providing pro forma disclosures are not
likely to be representative of the effects on reported net income for future
years.
Under FAS 123, disclosure of exercise prices is required for the years
ended June 30, 1998 and 1997 only. The weighted-average fair value of options
granted during 1998 and 1997 was approximately $1.81 per share. The
weighted-average remaining contractual life of those options is eight years.
401(K) PLAN
The Company has a defined contribution retirement plan, the Behavioral
Healthcare Corporation 401(k) Plan (the "Plan"). The Plan covers all employees
who have worked at least 1,000 hours in the calendar year, attained the age of
21 and have completed one year of service. The Company makes contributions to
the Plan each year equal to 100% of eligible employees' pretax contributions not
to exceed a maximum of 3% of the eligible employee's compensation contributed to
the Plan.
Effective January 1, 1997, the Plan was amended to provide for the adoption
of the Plan by those entities acquired through merger transactions with UPG and
CPC and to provide that service performed by employees of UPG and CPC prior to
the respective merger transaction shall be treated as service for purposes of
eligibility and vesting.
In connection with the UPG merger transaction, the Company established the
Behavioral Healthcare Corporation (UPG) 401(k) Plan ("the UPG Plan"), effective
November 19, 1996, for the purpose of maintaining assets that have been
transferred from the retirement plan of UPG on account of individuals who became
employed by the Company on November 19, 1996. Management merged the UPG Plan and
the associated assets into the existing Behavioral Healthcare Corporation 401(k)
Plan effective April 9, 1998. Consolidated retirement plan expense for both the
Plan and the UPG Plan was approximately $1,494,000, $812,000 and $335,000 for
the years ended June 30, 1998, 1997 and 1996, respectively.
10. IMPACT OF YEAR 2000 (UNAUDITED)
The Year 2000 Issue is the result of computer programs being written using
two digits rather than four to define the applicable year. The Company's
computer programs and certain computer aided medical equipment that have
time-sensitive software may recognize a date using "00" as the year 1900 rather
that the year 2000. This could result in system failures or miscalculations
causing disruption of operations or medical equipment malfunctions that could
affect patient diagnosis and treatment. The Company believes that with
modifications to existing software and conversions to new software, the Year
2000 Issue will not pose significant operational problems for its computer
systems.
However, if such modifications and conversions are not made, or are not
completed timely, the Year 2000 Issue could have a material impact on the
operations of the Company.
The Company has initiated a company-wide program to prepare its computer
systems and applications for the Year 2000. The Company expects to incur
internal staff costs as well as external consulting and other expenses related
to infrastructure and facility enhancements necessary to prepare the systems for
the Year 2000. However, there can be no assurance that the systems of other
companies, on which the Company's systems rely, will be timely converted or that
any such failure to convert by another company (such as third-party payers)
would not have an adverse effect on the Company.
F-21
<PAGE> 140
BEHAVIORAL HEALTHCARE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 1998
11. SUBSEQUENT EVENT
On July 30, 1998, the Company and PMR Corporation ("PMR") entered into an
agreement and plan of merger in which a subsidiary of PMR will be merged with
and into the Company. The Company shall be the surviving corporation in the
merger and shall continue its corporate existence. Upon completion of the
transaction, the Company will be a wholly-owned subsidiary of PMR. This
transaction has been approved by the Company's Board of Directors and is subject
to certain closing conditions including approval by the Company's and PMR's
shareholders.
F-22
<PAGE> 141
APPENDIX A
AGREEMENT AND PLAN OF MERGER
THIS AGREEMENT AND PLAN OF MERGER ("Agreement") is made and entered into as
of July 30, 1998, by and among: PMR CORPORATION, a Delaware corporation
("Parent"); BHC ACQUISITION CORP., a Delaware corporation and a wholly owned
subsidiary of Parent ("Merger Sub"); and BEHAVIORAL HEALTHCARE CORPORATION, a
Delaware corporation (the "Company"). Certain capitalized terms used in this
Agreement are defined in Exhibit A.
RECITALS
A. Parent, Merger Sub and the Company intend to effect a merger of Merger
Sub into the Company in accordance with this Agreement and the Delaware General
Corporation Law (the "Merger"). Upon consummation of the Merger, Merger Sub will
cease to exist, and the Company will become a wholly owned subsidiary of Parent.
B. This Agreement has been approved by the respective boards of directors
of Parent, Merger Sub and the Company.
C. Concurrently with or promptly after the execution and delivery of this
Agreement and as a condition and inducement to Parent's and Merger Sub's
willingness to enter into this Agreement, the directors and executive officers
of the Company who are stockholders of the Company, and the affiliates of such
directors (collectively, the "Principal Stockholders"), are entering into a
Stockholders Agreement in the form attached hereto as Exhibit B (the
"Stockholders Agreement") pursuant to which each of the Principal Stockholders
has agreed, among other things, to vote its shares of common stock in favor of
this Agreement, the Merger and any other matter which requires its vote in
connection with the transactions contemplated by this Agreement. In connection
therewith, the Company has or will promptly after the date hereof obtain and
deliver to Parent valid consents and agreements executed by all of the Principal
Stockholders who are parties to (a) the Country Amended and Restated
Stockholders Agreement made as of the 30th day of June, 1993, as amended and
restated as of the 30th day of December, 1993, and the 31st day of May, 1995,
and/or (b) the Country Stockholders Agreement made as of the 30th day of
November, 1996 (collectively, the "Existing Stockholders Agreements")
irrevocably consenting and agreeing to the termination of each of the Existing
Stockholders Agreements, subject only to the consummation of the Merger.
D. Concurrently with or promptly after the execution and delivery of this
Agreement and as a condition and inducement to Parent's and Merger Sub's
willingness to enter into this Agreement, certain persons identified on Exhibit
C-1 are entering into an Affiliate and Lock-Up Agreement in the form attached
hereto as Exhibit C-2 (the "Affiliate and Lock-Up Agreement").
E. Concurrently with the execution and delivery of this Agreement and as a
condition and inducement to Parent's and Merger Sub's willingness to enter into
this Agreement, Welsh, Carson, Anderson & Stowe, VI, L.P., a Delaware
corporation ("Welsh Carson") is entering into a Series B Preferred Stock
Agreement in the form attached hereto as Exhibit D (the "Series B Preferred
Stock Agreement") pursuant to which Welsh Carson has agreed, among other things,
to exchange its Series B Preferred Stock for Company Common Stock (as defined in
Section 1.5(a)) on or prior to the Effective Time.
AGREEMENT
The parties to this Agreement agree as follows:
SECTION 1. Description of the Transaction.
1.1 Merger of Merger Sub into the Company. Upon the terms and subject to
the conditions set forth in this Agreement, at the Effective Time (as defined in
Section 1.3), Merger Sub shall be merged with and into
A-1
<PAGE> 142
the Company, and the separate existence of Merger Sub shall cease. The Company
will continue as the surviving corporation in the Merger (the "Surviving
Corporation").
1.2 Effect of the Merger. The Merger shall have the effects set forth in
this Agreement and in the applicable provisions of the Delaware General
Corporation Law.
1.3 Closing; Effective Time. The consummation of the transactions
contemplated by this Agreement (the "Closing") shall take place at the offices
of Cooley Godward LLP, 4365 Executive Drive, Suite 1100, San Diego, California
92121 at 10:00 a.m. on September 30, 1998, or at such other time and date as
Parent and Company may designate (which date shall, in no event, be later than
five (5) business days following the satisfaction or waiver of the conditions
set forth in Sections 5 and 6 of this Agreement) (the "Scheduled Closing Time").
(The date on which the Closing actually takes place is referred to in this
Agreement as the "Closing Date.") Contemporaneously with or as promptly as
practicable after the Closing, a properly executed agreement of merger (or
Certificate of Merger) conforming to the requirements of the Delaware General
Corporation Law shall be filed with the Secretary of State of the State of
Delaware. The Merger shall become effective at the time such agreement of merger
(or Certificate of Merger) is filed with and accepted by the Secretary of State
of the State of Delaware (the "Effective Time").
1.4 Certificate of Incorporation and Bylaws; Directors and
Officers. Unless otherwise determined by Parent and the Company prior to the
Effective Time:
(a) the Certificate of Incorporation of the Surviving Corporation
shall be amended and restated as of the Effective Time to conform to
Exhibit E;
(b) the Bylaws of the Surviving Corporation shall be amended and
restated as of the Effective Time to conform to the Bylaws of Merger Sub as
in effect immediately prior to the Effective Time; and
(c) the directors and officers of the Surviving Corporation
immediately after the Effective Time shall be the individuals identified on
Exhibit F.
1.5 Conversion of Shares.
(a) Subject to Sections 1.5(c), 1.8(c) and 1.9, at the Effective Time, by
virtue of the Merger and without any further action on the part of Parent,
Merger Sub, the Company or any stockholder of the Company:
(i) the shares of Common Stock of the Company, par value $.01 per
share ("Company Common Stock"), held by Vencor, Inc. a Delaware corporation
("Vencor") (the "Vencor Shares"), shall be converted into the right to
receive $65,000,000 in cash in the aggregate;
(ii) each share of Company Common Stock (other than the Vencor Shares)
and each share of Series A Preferred Stock (collectively, the "Converted
Shares") outstanding immediately prior to the Effective Time shall be
converted into the right to receive (A) the fraction of a share of common
stock, $.01 par value per share, of Parent ("Parent Common Stock") that
results from multiplying (x) one share of Parent Common Stock by (y) the
Exchange Ratio (as defined in Section 1.5(b)(i)), (B) an amount equal to
$28,500,000 divided by the number of Outstanding Shares (as defined in
Section 1.5(b)(ii)) outstanding immediately prior to the Effective Time and
(C) an amount equal to $925,000 (in the form of promissory notes in the
form attached hereto as Exhibit G (the "Notes")) divided by the number of
Outstanding Shares outstanding immediately prior to the Effective Time
(collectively, together with the Vencor Shares, the "Merger
Consideration"); and
(iii) each share of the common stock, par value $.01 per share, of
Merger Sub then outstanding shall be converted into one share of common
stock of the Surviving Corporation; and
(iv) each share of Company Common Stock then held as treasury shares
shall be cancelled.
(b) For purposes of this Agreement:
(i) The term "Exchange Ratio" shall mean a fraction (as may be
adjusted in accordance with Section 1.5(c)) equal to (A) 2,600,000 divided
by (B) the number of Outstanding Shares (as defined in
A-2
<PAGE> 143
Section 1.5(b)(ii)) outstanding immediately prior to the Effective Time,
which shall initially equal 0.3401.
(ii) The term "Outstanding Shares" shall mean, at the Effective Time,
the total number of issued and outstanding Converted Shares.
(c) If, between the date of this Agreement and the Effective Time, the
outstanding shares of Parent Common Stock or Converted Shares are changed into a
different number or class of shares by reason of any stock, cash or property
dividend or distribution, stock split, reverse stock split, reclassification,
recapitalization, or similar transaction, then the Exchange Ratio shall be
appropriately adjusted.
(d) If any shares of Converted Shares outstanding immediately prior to the
Effective Time are unvested or are subject to a repurchase option, risk of
forfeiture or other condition under any applicable restricted stock purchase
agreement or other agreement with the Company, then the shares of Parent Common
Stock issued in exchange for such Converted Shares will also be unvested and
subject to the same repurchase option, risk of forfeiture or other condition,
and the certificates representing such shares of Parent Common Stock may
accordingly be marked with appropriate legends.
1.6 Stock Options, Series B Preferred Stock and Warrants.
(a) On the Closing Date, Parent shall pay to each Person that has accepted
the Repurchase Offer (as defined in Section 4.14) the amount in accordance with
the terms thereof, with respect to such Person's stock options that were
exercisable immediately prior to the Closing Date.
(b) The Company shall cause any stock options (other than the 1993 Options,
as defined below) (i) that remain unexercised as of the Closing and (ii) are
held by Persons who do not accept the Repurchase Offer, to be terminated as of
the Closing and be of no further force or effect.
(c) At the Effective Time, each stock option that is then outstanding under
the Company's 1993 Stock Plan (after giving effect to the Repurchase Offer),
whether vested or unvested (a "1993 Option"), shall be assumed by Parent in
accordance with the terms (as in effect as of the date of this Agreement) of the
Company's 1993 Stock Plan and the stock option agreement by which such 1993
Option is evidenced. All rights with respect to Company Common Stock under
outstanding 1993 Options shall thereupon be converted into rights with respect
to Parent Common Stock. Accordingly, from and after the Effective Time, (a) each
1993 Option assumed by Parent may be exercised solely for shares of Parent
Common Stock, (b) the number of shares of Parent Common Stock subject to each
such assumed 1993 Option shall be equal to the number of shares of Company
Common Stock that were subject to such 1993 Option immediately prior to the
Effective Time multiplied by the Exchange Ratio, rounded down to the nearest
whole number of shares of Parent Common Stock, (c) the per share exercise price
for the Parent Common Stock issuable upon exercise of each such assumed 1993
Option shall be determined by dividing the exercise price per share of Company
Common Stock subject to such 1993 Option, as in effect immediately prior to the
Effective Time, by the Exchange Ratio, and rounding the resulting exercise price
up to the nearest whole cent, and (d) all restrictions on the exercise of each
such assumed 1993 Option shall continue in full force and effect, and the term,
exercisability, vesting schedule and other provisions of such 1993 Option shall
otherwise remain unchanged; provided, however, that each such assumed 1993
Option shall, in accordance with its terms, be subject to further adjustment as
appropriate to reflect any stock split, reverse stock split, stock dividend,
recapitalization or other similar transaction effected by Parent after the
Effective Time. The Company and Parent shall take all action that may be
necessary (under the Company's 1993 Stock Plan and otherwise) to effectuate the
provisions of this Section 1.6(c). Following the Closing, Parent will send to
each holder of an assumed 1993 Option a written notice setting forth (i) the
number of shares of Parent Common Stock subject to such assumed 1993 Option, and
(ii) the exercise price per share of Parent Common Stock issuable upon exercise
of such assumed 1993 Option.
(d) Subsequent to the Closing Date, the employees of the Surviving
Corporation shall be eligible to participate in Parent's stock option plan.
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(e) The Company hereby agrees that, prior to the Effective Time, each share
of Series B Preferred Stock shall be exchanged for one share of Company Common
Stock as provided in the Series B Preferred Stock Agreement.
(f) The Company shall cause any warrants that remain unexercised as of the
Closing to be terminated as of the Closing and be of no further force or effect.
The Company shall notify each holder of warrants that such warrants will be
terminated if not exercised prior to the Closing.
1.7 Closing of the Company's Transfer Books. At the Effective Time,
holders of certificates representing shares of the Company's capital stock that
were outstanding immediately prior to the Effective Time shall cease to have any
rights as stockholders of the Company, and the stock transfer books of the
Company shall be closed with respect to all shares of such capital stock
outstanding immediately prior to the Effective Time. No further transfer of any
such shares of the Company's capital stock shall be made on such stock transfer
books after the Effective Time. If, after the Effective Time, a valid
certificate previously representing any of such shares of the Company's capital
stock (a "Company Stock Certificate") is presented to the Surviving Corporation
or Parent, such Company Stock Certificate shall be canceled and shall be
exchanged as provided in Section 1.8.
1.8 Exchange of Certificates.
(a) At or as soon as practicable after the Effective Time, StockTrans, Inc.
(the "Exchange Agent") will send to the holders of Company Stock Certificates
(i) a letter of transmittal in customary form and containing such provisions as
Parent may reasonably specify and (ii) instructions for use in effecting the
surrender of Company Stock Certificates in exchange for the Merger
Consideration. Upon surrender of a Company Stock Certificate to the Exchange
Agent for exchange, together with a duly executed letter of transmittal and such
other documents as may be reasonably required by Parent or the Exchange Agent,
except for the Merger Consideration to be deposited in escrow pursuant to
Section 1.10, the holder of such Company Stock Certificate shall be entitled to
receive in exchange therefor the Merger Consideration that such holder has the
right to receive pursuant to the provisions of this Section 1, and the Company
Stock Certificate so surrendered shall be canceled. Until surrendered as
contemplated by this Section 1.8, each Company Stock Certificate shall be
deemed, from and after the Effective Time, to represent only the right to
receive upon such surrender the Merger Consideration as contemplated by this
Section 1. If any Company Stock Certificate shall have been lost, stolen or
destroyed, Parent may, in its discretion and as a condition precedent to the
delivery of the Merger Consideration, require the owner of such lost, stolen or
destroyed Company Stock Certificate to provide an appropriate affidavit and to
deliver a bond (in such sum as Parent may reasonably direct) as indemnity
against any claim that may be made against Parent or the Surviving Corporation
with respect to such Company Stock Certificate. As of the Effective Time, Parent
shall (i) make available to the Exchange Agent, for the benefit of holders of
Company Stock Certificates, for exchange in accordance with this Section 1.8,
certificates representing shares of Parent Common Stock issuable pursuant to
Section 1.8 in exchange for outstanding Converted Shares, (ii) deposit with the
Exchange Agent the cash of the Merger Consideration (other than the cash to be
deposited in escrow pursuant to Section 1.10), and (iii) from time-to-time
deposit as necessary, cash in an amount reasonably expected to be paid pursuant
to Section 1.8(c) (such shares of Parent Common Stock and cash, together with
any dividends or distributions with respect thereto, being hereinafter referred
to as the "Exchange Fund"). The Exchange Fund shall be distributed pursuant to
an agreement by and among Parent and the Exchange Agent and in the form attached
hereto as Exhibit H (the "Exchange Agent Agreement").
(b) No dividends or other distributions declared or made with respect to
Parent Common Stock with a record date after the Effective Time shall be paid to
the holder of any unsurrendered Company Stock Certificate with respect to the
shares of Parent Common Stock represented thereby, and no cash payment in lieu
of any fractional share shall be paid to any such holder, until such holder
surrenders such Company Stock Certificate in accordance with this Section 1.8
(at which time such holder shall be entitled to receive all such dividends and
distributions and such cash payment).
(c) No fractional shares of Parent Common Stock shall be issued in
connection with the Merger, and no certificates for any such fractional shares
shall be issued. In lieu of such fractional shares, any holder of capital
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stock of the Company who would otherwise be entitled to receive a fraction of a
share of Parent Common Stock (after aggregating all fractional shares of Parent
Common Stock issuable to such holder) shall, upon surrender of such holder's
Company Stock Certificate(s), be paid in cash the dollar amount (rounded to the
nearest whole cent), without interest, determined by multiplying such fraction
by $9.2596.
(d) Parent and the Surviving Corporation (or the Exchange Agent on their
behalf) shall be entitled to deduct and withhold from any consideration payable
or otherwise deliverable to any holder or former holder of capital stock of the
Company pursuant to this Agreement such amounts as Parent or the Surviving
Corporation reasonably determine are required to be deducted or withheld
therefrom under the Code or under any provision of state, local or foreign tax
law (or, in the alternative, Parent or the Exchange Agent, at Parent's option,
may request tax information and other documentation no withholding is
necessary). To the extent such amounts are so deducted or withheld, such amounts
shall be treated for all purposes under this Agreement as having been paid to
the Person to whom such amounts would otherwise have been paid.
(e) Neither Parent nor the Surviving Corporation shall be liable to any
holder or former holder of capital stock of the Company for any shares of Parent
Common Stock (or dividends or distributions with respect thereto), or for any
cash amounts, delivered to any public official pursuant to any applicable
abandoned property, escheat or similar law.
1.9 Dissenting Shares.
(a) Notwithstanding anything to the contrary contained in this Agreement,
any shares of capital stock of the Company that, as of the Effective Time, are
or may become "dissenting shares" within the meaning of the Delaware General
Corporation Law shall not be converted into or represent the right to receive
the Merger Consideration in accordance with Section 1.5 (or cash in lieu of
fractional shares in accordance with Section 1.8(c)), and the holder or holders
of such shares shall be entitled only to such rights as may be granted to such
holder or holders in the Delaware General Corporation Law; provided, however,
that if the status of any such shares as "dissenting shares" shall not be
perfected, or if any such shares shall lose their status as "dissenting shares,"
then, as of the later of the Effective Time or the time of the failure to
perfect such status or the loss of such status, such shares shall automatically
be converted into and shall represent only the right to receive (upon the
surrender of the certificate or certificates representing such shares) the
Merger Consideration in accordance with Section 1.5 (and cash in lieu of
fractional shares in accordance with Section 1.8(c)).
(b) The Company shall give Parent (i) prompt notice of any written demand
received by the Company prior to the Effective Time to require the Company to
purchase shares of capital stock of the Company pursuant to the Delaware General
Corporation Law and of any other demand, notice or instrument delivered to the
Company prior to the Effective Time pursuant to the Delaware General Corporation
Law, and (ii) the opportunity to participate in all negotiations and proceedings
with respect to any such demand, notice or instrument. The Company shall not
make any payment or settlement offer prior to the Effective Time with respect to
any such demand unless Parent shall have consented in writing to such payment or
settlement offer.
1.10 Escrow.
(a) At the Effective Time, Parent (or the Exchange Agent, as applicable)
shall withhold (i) $4,388,507 of the cash to be delivered to Vencor pursuant to
Section 1.5(a)(i) and (ii) cash in the amount of $1,061,430, the Notes (in the
aggregate amount of $925,000) and 175,500 shares of the Merger Consideration to
be delivered to the holders of the Converted Shares pursuant to Section 1.5
(with respect to the shares, rounded down to the nearest whole share to be
issued to such holders) (collectively, the "Escrow Amount"). The Merger
Consideration otherwise distributable as of the Effective Time to Vencor and to
each holder of the Converted Shares (collectively, the "Stockholders") pursuant
to Section 1.5 shall be proportionally reduced to reflect the deposit in escrow
of the Escrow Amount pursuant to this Section 1.10. The Escrow Amount shall be
delivered to StockTrans, Inc. (the "Escrow Agent") as collateral for the
Stockholders' reimbursement and indemnification obligations set forth in this
Section 1.10 and in Section 8.2. Except as set forth in Section 8, the Escrow
Amount shall be held in escrow by the Escrow Agent to satisfy any claims
(pursuant to the provisions set forth in Section 8) made on or before the
18-month anniversary of the Effective Time (the
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"Escrow Period"). The administration by the Escrow Agent of the Escrow Amount
during the Escrow Period shall be conducted pursuant to the terms of an escrow
agreement in the form attached hereto as Exhibit I (the "Escrow Agreement")
among Parent, the Escrow Agent and the Stockholders' Representatives (as defined
in Section 9.1).
(b) Notwithstanding the Stockholders' Threshold Amount, Parent shall be
entitled to and shall draw down from (in one or more draws made at any time
after incurring such costs or expenses) the Escrow Amount an amount equal to (i)
50% of the aggregate of all payments, costs and expenses that are incurred by
Parent, the Company or the Surviving Corporation after the date of this
Agreement to retrofit and/or remove, dispose and close (in accordance with all
Environmental Laws (as defined in Section 2.16)) of all underground storage
tanks located on any Real Property, including without limitation any containment
costs and cleanup costs associated with such retrofitting or removal and closure
or required to be made as a result of any Release (as defined in Section 2.16)
of any such underground storage tanks, minus (ii) $300,000 (the "UST Removal
Costs").
1.11 Accounting Treatment. For accounting purposes, the Merger is intended
to be treated as a purchase.
1.12 Further Action. If, at any time after the Effective Time, any further
action is determined by Parent to be necessary or desirable to carry out the
purposes of this Agreement or to vest the Surviving Corporation or Parent with
full right, title and possession of and to all rights and property of Merger Sub
and the Company, the officers and directors of the Surviving Corporation and
Parent shall be fully authorized (in the name of Merger Sub, in the name of the
Company and otherwise) to take such action.
SECTION 2. Representations and Warranties of the Company
The Company represents and warrants, to and for the benefit of the Parent
Indemnitees, as follows:
2.1 Due Organization, Etc.
(a) The Company and each of the Company Partnerships and Company
Subsidiaries, as set forth in Part 2.1 of the Company Disclosure Schedule
(collectively with the Company, the "Acquired Companies"), that is a
corporation, partnership or limited liability company is duly organized, validly
existing and in good standing under the laws of their respective jurisdictions
of incorporation or organization. Each of the Acquired Companies has all
necessary corporate power and authority: (i) to conduct its business in the
manner in which its business is currently being conducted; (ii) to own and use
its assets in the manner in which its assets are currently owned and used; and
(iii) to perform its obligations under all Company Contracts.
(b) None of the Acquired Companies is or has been required to be qualified,
authorized, registered or licensed to do business as a foreign corporation in
any jurisdiction other than the jurisdictions identified in Part 2.1 of the
Company Disclosure Schedule, except where the failure to be so qualified,
authorized, registered or licensed has not had and will not have a Material
Adverse Effect on the Company. Each of the Acquired Companies is in good
standing as a foreign corporation in each of the jurisdictions identified in
Part 2.1 of the Company Disclosure Schedule except where the failure to be in
good standing would not have a Material Adverse Effect on the Company.
(c) Except for the equity interests identified in Part 2.1 of the Company
Disclosure Schedule, none of the Acquired Companies owns, beneficially or
otherwise, any shares or other securities of, or any direct or indirect equity
interest in, any Entity. None of the Acquired Companies has agreed or is
obligated to make any future investment in or capital contribution to any Entity
not identified in Part 2.1 of the Company Disclosure Schedule.
2.2 Governing Documents; Records. The Company has delivered or made
available to Parent accurate and complete copies of: (1) the Company's
Certificate of Incorporation and bylaws, including all amendments thereto, and
all charter documents, certificates of limited partnership, certificates of
formation, bylaws, partnership agreements and limited liability agreements, and
all amendments thereto, relating to the other Acquired Companies; (2) the stock
records of each of the Acquired Companies; and (3) except as set forth in
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Part 2.2 of the Company Disclosure Schedule, the minutes and other records of
the meetings and other proceedings (including any actions taken by written
consent or otherwise without a meeting) of the stockholders of each of the
Acquired Companies, the board of directors of each of the Acquired Companies and
all committees of the board of directors of each of the Acquired Companies.
There have been no formal meetings or other proceedings of the stockholders of
the Company, the board of directors of the Company or any committee of the board
of directors of the Company that are not adequately reflected in such minutes or
other records. There has not been any violation of any of the provisions of the
Company's Certificate of Incorporation or, except as would not have a Material
Adverse Effect on the Company, the bylaws or other charter documents,
partnership agreements or limited liability agreements of any of the Acquired
Companies, and none of the Acquired Companies has taken any action that is
inconsistent in any material respect with any resolution adopted by its
stockholders, its board of directors or any committee of its board of directors.
The books of account, stock records, minute books and other records of each of
the Acquired Companies are accurate, up-to-date and complete in all material
respects.
2.3 Capitalization, Etc.
(a) The authorized capital stock of the Company consists of: (i) 30,000,000
shares of Common Stock (with par value $.01), of which 13,560,422 shares have
been issued and are outstanding as of the date of this Agreement (not including
2,858 shares of Common Stock held in the Company's treasury); (ii) 20,000,000
shares of Preferred Stock (with par value $.01), of which (A) 5,651,367 shares
have been designated shares of Series A Preferred Stock (with par value $.01)
(the "Series A Preferred Stock"), of which 5,651,367 shares have been issued and
are outstanding as of the date of this Agreement; and (B) 50,252 shares have
been designated as Series B Preferred Stock (with par value $.01) (the "Series B
Preferred Stock, or collectively with the Series A Preferred Stock, the "Company
Preferred Stock"), of which 50,252 shares have been issued and are outstanding
as of the date of this Agreement. Each outstanding share of Series A Preferred
Stock is convertible into one share of Company Common Stock. All of the
outstanding shares of Company Common Stock and Company Preferred Stock have been
duly authorized and validly issued, and are fully paid and non-assessable. Part
2.3 of the Company Disclosure Schedule provides an accurate and complete
description of the terms of each repurchase option which is held by the Company
and to which any of such shares is subject.
(b) The Company has reserved 4,506,663 shares of Company Common Stock for
issuance under its Stock Option Plans, of which options (the "Company Options")
to purchase 2,128,937 shares are outstanding as of the date of this Agreement,
and 34,667 shares of Company Common Stock for issuance upon exercise of certain
outstanding warrants (the "Company Warrants"). Part 2.3 of the Company
Disclosure Schedule accurately sets forth, with respect to each Company Option
and Company Warrant that is outstanding as of the date of this Agreement: (i)
the name of the holder of such Company Option and Company Warrant; (ii) the
total number of shares of Company Common Stock that are subject to such Company
Option and Company Warrant; (iii) the exercise price per share of Company Common
Stock purchasable under such Company Option and Company Warrant; and (vi)
whether such Company Option has been designated an "incentive stock option" as
defined in Section 422 of the Code. Except as set forth in Part 2.3 of the
Company Disclosure Schedule, there is no: (i) outstanding subscription, option,
call, warrant or right (whether or not currently exercisable) to acquire any
shares of the capital stock or other securities of the Company; (ii) outstanding
security, instrument or obligation that is or may become convertible into or
exchangeable for any shares of the capital stock or other securities of the
Company; (iii) Contract under which the Company is or may become obligated to
sell or otherwise issue any shares of its capital stock or any other securities;
or (iv) to the best knowledge of the Company, condition or circumstance that
could reasonably be expected to give rise to or provide a basis for the
assertion of a claim by any Person to the effect that such Person is entitled to
acquire or receive any shares of capital stock or other securities of the
Company.
(c) All outstanding shares of Company Common Stock and Company Preferred
Stock, and all outstanding Company Options and Company Warrants, have been
issued and granted in compliance with (i) all applicable securities laws and
other applicable Legal Requirements, and (ii) all material requirements set
forth in applicable Contracts.
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(d) All securities that have been reacquired by the Company were reacquired
in compliance with (i) the applicable provisions of the Delaware General
Corporation Law and all other applicable Legal Requirements, and (ii) all
material requirements set forth in applicable restricted stock purchase
agreements and other applicable Contracts.
(e) Except as set forth in Part 2.3 of the Company Disclosure Schedule, all
of the outstanding shares of capital stock of each of the Company Subsidiaries
are validly issued (in compliance with all applicable securities laws and other
Legal Requirements and applicable Company Contracts), fully paid and
nonassessable and are owned beneficially by the Company, free and clear of any
Encumbrance other than Permitted Liens (as defined in Section 2.6). The
interests of the Company in each of the Company Partnerships are owned
beneficially by the Company, free and clear of any Encumbrance other than
Permitted Liens.
2.4 Financial Statements.
(a) The Company has delivered to Parent the following consolidated
financial statements and notes (collectively, the "Company Financial
Statements"):
(i) The audited balance sheet of the Company as of June 30, 1997 (the
"Balance Sheet"), the audited balance sheets of the Company as of June 30,
1996 and 1995, and the related audited income statements, statements of
stockholders' equity and statements of cash flows of the Company for the
years then ended, together with the notes thereto and the unqualified
report and opinion of Ernst & Young LLP relating thereto; and
(ii) the unaudited balance sheet of the Company as of May 31, 1998
(the "Unaudited Interim Balance Sheet"), and the related unaudited income
statement of the Company for the eleven months then ended.
(b) The Company Financial Statements present fairly the consolidated
financial position of the Company and the other Acquired Companies as of the
respective dates thereof and the consolidated results of operations of the
Company and the other Acquired Companies for the periods covered thereby. The
Company Financial Statements have been prepared in accordance with generally
accepted accounting principles applied on a consistent basis throughout the
periods covered, except as may be indicated in the notes to such financial
statements (except that the financial statements referred to in Section
2.4(a)(ii) do not contain footnotes and are subject to normal and recurring
year-end audit adjustments, which will not, individually or in the aggregate, be
material in magnitude).
2.5 Absence of Changes. Except as set forth in Part 2.5 of the Company
Disclosure Schedule, since the date of the Unaudited Interim Balance Sheet:
(a) except as would not, individually or in the aggregate, have a
Material Adverse Effect on the Company, there has not been any material
adverse change in the business, condition, assets, liabilities, operations
or financial performance of the Acquired Companies, considered as a whole,
and, to the best knowledge of the Company, no event has occurred that will,
or could reasonably be expected to, have a Material Adverse Effect on the
Company;
(b) except as would not, individually or in the aggregate, have a
Material Adverse Effect on the Company, there has not been any loss, damage
or destruction to, or any interruption in the use of, any of the Acquired
Companies' properties or assets (whether or not covered by insurance);
(c) except as required with respect to the Series A Preferred Stock,
the Company has not declared, accrued, set aside or paid any dividend or
made any other distribution in respect of any shares of capital stock, and
has not repurchased, redeemed or otherwise reacquired any shares of capital
stock or other securities;
(d) the Company has not sold, issued or authorized the issuance of (i)
any capital stock or other security (except for Company Common Stock issued
upon the exercise of outstanding Company Options and Company Warrants and
upon conversion of, or in exchange for, the Company Preferred Stock), (ii)
any option or right to acquire any capital stock or any other security
(except for Company Options
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and Company Warrants described in Part 2.3 of the Company Disclosure
Schedule), or (iii) any instrument convertible into or exchangeable for any
capital stock or other security;
(e) the Company has not amended or waived any of its rights under (i)
any provision of its Stock Option Plans, (ii) any provision of any
agreement evidencing any outstanding Company Option or Company Warrant, or
(iii) any restricted stock purchase agreement;
(f) there has been no amendment to the Company's Certificate of
Incorporation or bylaws, and the Company has not effected or been a party
to any Company Acquisition Transaction, recapitalization, reclassification
of shares, stock split, reverse stock split or similar transaction;
(g) none of the Acquired Companies has formed any subsidiary or
acquired any equity interest or other interest in any other Entity;
(h) none of the Acquired Companies has made any capital expenditure
which, when added to all other capital expenditures made on behalf of the
Acquired Companies since the date of the Unaudited Interim Balance Sheet,
exceeds the amounts set forth in the Company's capital expenditures budget
set forth in Part 2.5(h) of the Company Disclosure Schedule.
(i) none of the Acquired Companies has (i) entered into or permitted
any of the properties or assets owned or used by it to become bound by any
Contract that is or would constitute a Material Contract (as defined in
Section 2.10(a)), or (ii) amended or prematurely terminated, or waived any
material right or remedy under, any such Material Contract;
(j) none of the Acquired Companies has (i) acquired, leased or
licensed any right, real or personal property or other asset from any other
Person having a value in excess of $250,000, (ii) sold or otherwise
disposed of, or leased or licensed, any right, real or personal property or
other asset to any other Person having a value in excess of $250,000, or
(iii) waived or relinquished any right, except for immaterial rights or
other immaterial properties or assets acquired, leased, licensed or
disposed of in the ordinary course of business and consistent with the
Acquired Companies' past practices, taken as a whole;
(k) none of the Acquired Companies has written off as uncollectible,
or established any extraordinary reserve with respect to, any material
amount of account receivables or other indebtedness;
(l) none of the Acquired Companies has made any pledge of any of its
properties or assets, except for pledges of immaterial properties or assets
made in the ordinary course of business and consistent with the Acquired
Companies' past practices, taken as a whole;
(m) none of the Acquired Companies has (i) lent money to any Person,
other than pursuant to routine travel advances made to employees in the
ordinary course of business and other than loans made in the ordinary
course of business and consistent with past practice in an amount not in
excess of $250,000 to any one Person (other than a Related Party as defined
in Section 2.18), or (ii) incurred or guaranteed any indebtedness for
borrowed money (other than intercompany debt between or among the Acquired
Companies);
(n) none of the Acquired Companies has (i) established or adopted any
Employee Benefit Plan, (ii) paid any bonus or made any profit-sharing or
similar payment to, or increased the amount of the wages, salary,
commissions, fringe benefits or other compensation or remuneration payable
to, any of its directors, officers or employees other than in the ordinary
course of business and consistent with past practice, (iii) hired any new
employee having an annual salary in excess of $150,000 or (iv) adopted any
severance plan or arrangement or entered into any severance agreement, or
entered into any other plan, arrangement or agreement providing for the
payment of any benefit or acceleration of any options upon a change in
control or a termination of employment;
(o) the Company has not changed any of its methods of accounting or
accounting practices in any material respect;
(p) the Company has not made any material Tax election;
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(q) none of the Acquired Companies has commenced or settled any
material Legal Proceeding;
(r) none of the Acquired Companies has entered into any material
transaction or taken any other material action outside the ordinary course
of business or inconsistent with its past practices; and
(s) none of the Acquired Companies has agreed or committed to take any
of the actions referred to in clauses "(c)" through "(r)" above.
2.6 Property.
(a) Property. Part 2.6(a) of the Company Disclosure Schedule contains a
complete and accurate list of all real property owned, leased or occupied by
each of the Acquired Companies (the "Land"). The Land, together with all
fixtures and improvements located on, and/or below the surface of the Land,
including without limitation the structures located thereon commonly known by
the property addresses indicated in Part 2.6(a) of the Company Disclosure
Schedule (the "Improvements"), together with all rights, easements,
rights-of-way and appurtenances to the Land, is referred to collectively herein
as the "Real Property." Part 2.6(a) of the Company Disclosure Schedule also
indicates which of the Real Property is leased or occupied by any of the
Acquired Companies (individually, a "Leased Property" and collectively, the
"Leased Properties"). All presently effective leases, lease amendments or
modifications, work letter agreements, improvement agreements, subleases,
assignments, licenses, concessions, guarantees and other agreements relating to
the Acquired Companies' use or occupancy of the Leased Property are collectively
referred to herein as the "Leases." True and complete copies of the Leases have
been delivered or made available to Parent. All furnishings, fixtures,
equipment, appliances, signs, personal property and other assets owned by the
Acquired Companies and located in or about the Real Property or used in
connection with the management and operation of the Real Properties are
hereinafter referred to as the "Personal Property." All management agreements,
maintenance contracts, service contracts and equipment leases pertaining to the
Real Property or the Personal Property, and all other presently effective
contracts, agreements, warranties and guaranties relating to the ownership,
leasing, advertising, promotion, design, construction, management, operation,
maintenance or repair of the Real Property are herein collectively referred to
as the "Real Property Plans and Contracts." The Real Property, the Leased
Properties, the Personal Property and the Real Property Plans and Contracts are
referred to collectively as the "Property."
(b) Title. The Acquired Companies own, or will at the Closing own, fee
simple title to all Real Property other than the Leased Properties (the "Owned
Properties"). The Acquired Companies have, or will at the Closing have, good and
marketable title to the Owned Properties, free and clear from all Encumbrances
other than (i) those matters listed in the policies of title insurance provided
to Parent (the "Title Policies"), (ii) liens for current real property taxes not
yet due and payable and for which adequate reserves have been established in the
Balance Sheet and the Unaudited Interim Balance Sheet in accordance with
generally accepted accounting principles, (iii) municipal and zoning ordinances
and easements for public utilities, (iv) those matters listed in Part 2.6(b) of
the Company Disclosure Schedule, none of which materially interfere with the
continued use of Owned Property as currently utilized and (v) pledges to secure
the Company's obligations under its credit facilities with Bank of America (the
"Permitted Liens"). None of the Acquired Companies nor, to the knowledge of the
Company, any previous owner of the Owned Properties, has sold, transferred,
conveyed, or entered into any agreement regarding "air rights," "excess floor
area ratio" or other development rights or restrictions relating to any of the
Owned Properties, except as otherwise expressly set forth in the Title Policies.
Except as listed on Part 2.6(b) of the Company Disclosure Schedule, none of the
Acquired Companies has entered into any contracts for the sale of any of the
Owned Property, nor do there exist any rights of first offer or first refusal or
options to purchase all or any part of the Owned Property. The Acquired
Companies have, or will at the Closing have, good and marketable leasehold title
to the Leased Properties, free and clear from all Encumbrances, other than the
Leases and Permitted Liens. Each of the Leases is in full force and effect. None
of the Acquired Companies is in material breach or default under, nor has any
event occurred that, with the giving of notice or the passage of time or both,
would constitute a material breach or event of default by any of the Acquired
Companies, under any of the Leases and, to the knowledge of the Company, no
other party to any of the Leases is in breach or default under, nor, to the
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knowledge of the Company, has any event occurred that, with the giving of notice
or the passage of time or both, would constitute a breach or event of default by
such other party under any of the Leases.
(c) Possession and Use of Real Properties. The Acquired Companies have
possession of the Real Properties. Except as set forth in Part 2.6(c) of the
Company Disclosure Schedule, there are no persons leasing, using or occupying
the Real Property or any part thereof (except for the easements and
rights-of-way) other than the Acquired Companies and there are no oral or
written leases, subleases, occupancies or tenancies in effect pertaining to the
Real Property other than the Leases and other than with respect to the easements
and rights-of-way. The Acquired Companies possess all certificates, permits,
licenses and approvals, not including permits necessary due to the regulated
nature of the business conducted on the Real Property, that are required by law
to own, operate, use and occupy the Real Property as it is presently owned,
operated, used and occupied, except where failure to possess any such Permit
would not have a Material Adverse Effect on the Company (the "Permits"). The
Permits are in full force and effect. The Acquired Companies have fully
performed, satisfied and discharged all of the obligations, requirements and
conditions imposed on the Real Property by the Permits, except for any failures
to be in compliance that would not have a Material Adverse Effect on the
Company.
(d) Compliance with Laws. No notices of violation of Legal Requirements
(including, without limitation, planning, zoning and building laws and
ordinances) relating to the Real Property, Leased Properties or the Real
Property Plans and Contracts have been issued to any of the Acquired Companies,
or entered against or received by any of the Acquired Companies, and no such
violations exist, except for any such violations which, individually or in the
aggregate, would not have a Material Adverse Effect on the Company.
(e) Anticipated Changes. Other than changes that would impact the Company's
industry in general, the Company has no knowledge of any plan, study or effort
of any Governmental Body or any other Person which in any way would materially
affect the use of the Real Property, or any portion thereof, for its intended
uses or any intended public improvements which will result in any material
charge being levied against, or any material lien assessed upon, the Real
Property. The Company has no knowledge of any existing, proposed or contemplated
plan to widen, modify or realign any street or highway contiguous to the any of
the Real Properties. To the knowledge of the Company, there is no general plan,
land use or zoning action or proceeding of any kind, or general or special
assessment action or proceeding of any kind, or condemnation action or
proceeding of any kind pending or threatened or being contemplated with respect
to the Real Property or any part thereof which could have a Material Adverse
Effect on the Company. To the knowledge of the Company, except as set forth in
Part 2.6(e) of the Company Disclosure Schedule, there is no Legal Proceeding
pending to contest or appeal the amount of real property taxes or assessments
levied against the Real Property or any part thereof or the assessed value of
the Real Property or any part thereof for real property tax purposes. Except as
would not, individually or in the aggregate, have a Material Adverse Effect on
the Company, no supplemental real property taxes have been or, to the knowledge
of the Company, will be levied against or assessed with respect to the Owned
Property or any part thereof based on any change in ownership or new
construction or other event or occurrence relating to the Owned Property before
the date of this Agreement, except any such supplemental real property taxes as
have been paid in full and discharged. The Company has no knowledge of any
special assessments which will result from work, activities or improvements done
to any of the Real Properties by any of the Acquired Companies or by any tenants
or other parties, or Encumbrances on or other matters affecting the Real
Properties or any of them, except for Permitted Liens.
(f) Eminent Domain. There is no pending proceeding in eminent domain or
otherwise, or any action to quiet title, which would decrease the acreage of the
Owned Property or, to the knowledge of the Company, any Leased Property, or any
portion thereof, nor does the Company know of the existence of any threatened
proceedings or of the existence of any facts which might give rise to such
action or proceeding.
(g) Utilities. Except as listed in Part 2.6(g) of the Company Disclosure
Schedule, each Real Property is connected to and served by water, solid waste
and sewage disposal, drainage, telephone, gas or electricity and other utility
equipment facilities and services required by law and which are adequate for the
present use
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and operation of such Real Property, or any portion thereof ("Utilities"). Other
than acts of God or war, the Company is not aware of any facts or conditions
which would result in the termination or impairment in the furnishing of utility
services to any Real Property. To the knowledge of the Company, all Utilities
with respect to any Owned Property are installed to the boundary lines of such
Owned Property and are connected with valid permits, and the cost of
installation and connection of all such utilities to such Owned Property has
been fully paid.
(h) Condition of the Property. To the knowledge of the Company, except as
set forth in 2.6(h) of the Company Disclosure Schedule, there are no material
physical or mechanical defects or deficiencies in the condition, design,
construction, fabrication, manufacture or installation of any of the Real
Properties or any part thereof or any material system, element or component
thereof, ordinary wear and tear excepted. To the knowledge of the Company, all
material systems, elements and components of each of the Real Properties
(including all machinery, fixtures and equipment, the roof, foundation and
structural elements, and the elevator, mechanical, plumbing, electrical,
utility, sprinkler and life safety systems, apparatus and appliances located on
the Real Properties) are in good working order and repair and sound operating
condition, ordinary wear and tear excepted. The Company has not received and, to
the knowledge of the Company, none of the other Acquired Companies has received,
any notice of any kind from any insurance broker, agent or underwriter of any
defects or inadequacies in or that any noninsurable condition exists in, on or
about any Real Property or any part thereof that could reasonably be expected,
individually or in the aggregate, to have a Material Adverse Effect on the
Company. To the knowledge of the Company, the Real Properties are free from
infestation by termites or other pests, insects or animals. To the knowledge of
the Company, no Real Property located in the State of California has been
designated as "hazardous waste property" or "border zone property" pursuant to
California Health and Safety Code sec. 25220 et seq., no proceedings for a
determination as to whether any Real Property located in the State of California
should be so designated are pending or threatened, and no portion of the Real
Property located in the State of California is located within two thousand
(2,000) feet of a significant disposal of "hazardous waste" within the meaning
of California Health and Safety Code section 25221 or any similar statute or
regulation, which could cause such Real Property to be classified as "border
zone property." To the knowledge of the Company, except as listed in Part 2.6(h)
of the Company Disclosure Schedule, there are no storage or other tanks or
containers, wells or other improvements below the surface of any Real Property.
(i) Personal Property. Except as would not, individually or in the
aggregate, have a Material Adverse Effect on the Company, the Acquired Companies
have good and valid title to the Personal Property, free and clear of all
Encumbrances (except for leases and Permitted Liens). The Personal Property is
in good operating condition and repair, ordinary wear and tear excepted.
2.7 Receivables. Part 2.7 of the Company Disclosure Schedule provides an
accurate and complete breakdown and aging of all accounts receivable, notes
receivable and other receivables of the Acquired Companies, as of May 31, 1998.
Except as set forth in Part 2.7 of the Company Disclosure Schedule, all existing
accounts receivable of the Acquired Companies (including those accounts
receivable reflected on the Unaudited Interim Balance Sheet that have not yet
been collected and those accounts receivable that have arisen since May 31, 1998
and have not yet been collected) (i) represent valid obligations of customers of
the Acquired Companies arising from bona fide transactions entered into in the
ordinary course of business and (ii) are current and will be collected in full
when due, without any counterclaim or set off (net of the allowance for doubtful
accounts and any other reserves set forth in the Unaudited Interim Balance Sheet
(which allowance and reserves are reasonable and not in excess of such
allowances provided by the Company in the past)).
2.8 Condition and Sufficiency of the Property. The Property is adequate
for the uses to which it is being put and sufficient for the continued conduct
of the Acquired Companies' businesses after the Closing in substantially the
same manner as conducted prior to the Closing.
2.9 Proprietary Assets.
(a) Part 2.9(a)(i) of the Company Disclosure Schedule sets forth, with
respect to each material Company Proprietary Asset registered with any
Governmental Body or for which an application has been filed
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with any Governmental Body, (i) a brief description of such Proprietary Asset,
and (ii) the names of the jurisdictions covered by the applicable registration
or application. Part 2.9(a)(ii) of the Company Disclosure Schedule identifies
and provides a brief description of all other material Company Proprietary
Assets owned by each Acquired Company. Part 2.9(a)(iii) of the Company
Disclosure Schedule identifies and provides a brief description of each material
Proprietary Asset licensed to each Acquired Company by any Person (except for
any Proprietary Asset that is licensed to an Acquired Company under any third
party software license generally available to the public), and identifies the
license agreement under which such Proprietary Asset is being licensed to such
Acquired Company. Except as set forth in Part 2.9(a)(iv) of the Company
Disclosure Schedule, each Acquired Company has good, valid and marketable title
to all of the Company Proprietary Assets identified in Parts 2.9(a)(i) and
2.9(a)(ii) of the Company Disclosure Schedule as owned by such Acquired Company,
free and clear of all liens and other Encumbrances (other than Permitted Liens),
and has a valid right to use all Proprietary Assets identified in Part
2.9(a)(iii) of the Company Disclosure Schedule. Except as set forth in Part
2.9(a)(v) of the Company Disclosure Schedule, none of the Acquired Companies is
obligated to make any payment to any Person for the use of any Company
Proprietary Asset. Except as set forth in Part 2.9(a)(vi) of such Company
Disclosure Schedule, none of the Acquired Companies has developed jointly with
any other Person any Company Proprietary Asset with respect to which such other
Person has any rights.
(b) The Acquired Companies have taken all commercially reasonable measures
and precautions necessary to protect and maintain the confidentiality and
secrecy of all Company Proprietary Assets (except Company Proprietary Assets
whose value would be unimpaired by public disclosure) and otherwise to maintain
and protect the value of all Company Proprietary Assets.
(c) To the knowledge of the Company, none of the Company Proprietary Assets
infringes or conflicts with any Proprietary Asset owned or used by any other
Person. To the knowledge of the Company, none of the Acquired Companies is
infringing, misappropriating or making any unlawful use of, or has received any
notice or other communication (in writing or otherwise) of any actual, alleged,
possible or potential infringement, misappropriation or unlawful use of, any
Proprietary Asset owned or used by any other Person. To the knowledge of the
Company, no other Person is infringing, misappropriating or making any unlawful
use of, and no Proprietary Asset owned or used by any other Person infringes or
conflicts with, any Company Proprietary Asset.
(d) The Company Proprietary Assets constitute all the Proprietary Assets
necessary to enable each Acquired Company to conduct its business in the manner
in which such business has been and is being conducted. Except as set forth in
Part 2.9(d) of the Company Disclosure Schedule, (i) none of the Acquired
Companies has licensed any of the Company Proprietary Assets to any Person on an
exclusive basis, and (ii) none of the Acquired Companies has entered into any
covenant not to compete or Contract limiting its ability to exploit fully any of
its Proprietary Assets.
2.10 Contracts.
(a) Part 2.10 of the Company Disclosure Schedule identifies:
(i) each Company Contract relating to the employment of, or the
performance of services by, any employee, consultant or independent
contractor that is not terminable on 60 days or less notice or involves
payments or other liabilities in excess of $150,000 per year;
(ii) each Company Contract involving the acquisition, transfer, use,
development, sharing or license of any material Proprietary Asset;
(iii) each Company Contract imposing any restriction on any Acquired
Company's right or ability (A) to compete with any other Person or (B) to
acquire any product or other asset or any services from any other Person,
to sell any product or other asset to or perform any services for any other
Person or to transact business or deal in any other manner with any other
Person;
(iv) each Company Contract involving the acquisition, issuance or
transfer of any equity securities (other than those that have been fully
performed);
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(v) each Company Contract involving the creation of any Encumbrance
(other than Permitted Liens) with respect to any material property or asset
of any Acquired Company;
(vi) each Company Contract involving or incorporating any material
guaranty, any material pledge, any material performance or completion bond,
any material indemnity or any material surety arrangement;
(vii) each Company Contract creating any material partnership or joint
venture or any sharing of revenues, profits, losses, costs or liabilities;
(viii) each Company Contract involving the purchase or sale of any
product or other asset by or to, or the performance of any services by or
for, any Related Party (as defined in Section 2.18);
(ix) each Company Contract constituting a Government Contract or
Government Bid;
(x) each Company Contract involving the purchase or sale of any real
or personal property having a value in excess of $250,000;
(xi) any other Company Contract of any Acquired Company that was
entered into outside the ordinary course of business or was inconsistent
with such Acquired Company's past practices, that has a term of greater
than one year and that may not be terminated within 90 days; and
(xii) any other Company Contract of any Acquired Company that (A) has
a term of more than 90 days and that may not be terminated by such Acquired
Company (without penalty) within 90 days after the delivery of a
termination notice by such Acquired Company; and (B) involves the payment
or delivery of cash or other consideration in an amount or having a value,
or the performance of services having a value, in excess of $250,000 in any
one year or $500,000 in the aggregate.
(Contracts in the respective categories described in clauses "(i)" through
"(xiv)" above are referred to in this Agreement as "Company Material
Contracts.")
(b) The Company has delivered or made available to Parent accurate and
complete copies of all written Company Material Contracts identified in Part
2.10 of the Company Disclosure Schedule, including all amendments thereto. Part
2.10 of the Company Disclosure Schedule provides an accurate description of the
terms of each Company Material Contract that is not in written form. Each
Company Material Contract identified in Part 2.10 of the Company Disclosure
Schedule is valid and in full force and effect, and is enforceable by the
applicable Acquired Company in accordance with its terms, subject to (i) laws of
general application relating to bankruptcy, insolvency and the relief of
debtors, and (ii) rules of law governing specific performance, injunctive relief
and other equitable remedies.
(c) Except as set forth in Part 2.10 of the Company Disclosure Schedule:
(i) none of the Acquired Companies has violated or breached, or
committed any default under, any Company Material Contract, and, to the
best of the knowledge of the Company, no other Person has violated or
breached, or committed any default under, any Company Material Contract;
(ii) to the best of the knowledge of the Company, no event has
occurred, and no circumstance or condition exists, that (with or without
notice or lapse of time) will, or could reasonably be expected to, (A)
result in a violation or breach of any of the provisions of any Company
Material Contract, (B) give any Person the right to declare a default or
exercise any remedy under any Company Material Contract, (C) give any
Person the right to accelerate the maturity or performance of any Company
Material Contract, or (D) give any Person the right to cancel, terminate or
modify any Company Material Contract;
(iii) since June 30, 1996, none of the Acquired Companies has received
any notice or other communication regarding any actual or alleged violation
or breach of, or default under, any Company Material Contract that has not
been cured or is of a continuing or repetitive nature; and
(iv) none of the Acquired Companies has waived any of its material
rights under any Company Material Contract.
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(d) Except with respect to the renegotiation of any managed care contract
(other than capitated contracts) involving amounts payable of less than 15% of
the per diem rate of such contract, no Person is renegotiating, or has a right
pursuant to the terms of any Company Material Contract to renegotiate, any
amount paid or payable to any Acquired Company under any Company Material
Contract or any other material term or provision of any Company Material
Contract.
(e) Part 2.10 of the Company Disclosure Schedule identifies and provides a
brief description of each proposed Company Material Contract as to which any
bid, offer, award, written proposal, term sheet or similar document has been
submitted or received by any of the Acquired Companies since the date of the
Unaudited Interim Balance Sheet.
2.11 Liabilities. None of the Acquired Companies has any accrued,
contingent or other liabilities of any nature, either matured or unmatured
(whether or not required to be reflected in financial statements in accordance
with generally accepted accounting principles, and whether due or to become
due), except for: (a) liabilities identified as such in the "liabilities" column
of the Unaudited Interim Balance Sheet; (b) accounts payable or accrued salaries
that have been incurred by any Acquired Company since May 31, 1998 in the
ordinary course of business and consistent with such Acquired Company's past
practices; (c) liabilities under the Company Material Contracts identified in
Part 2.10 of the Company Disclosure Schedule, to the extent the nature and
magnitude of such liabilities can be specifically ascertained by reference to
the text of such Company Material Contracts; and (d) the liabilities identified
in Part 2.11 of the Disclosure Schedule.
2.12 Compliance with Legal Requirements. Except as set forth in Part 2.12
of the Company Disclosure Schedule, each of the Acquired Companies is, and has
at all times since June 30, 1996 been, in compliance with all applicable Legal
Requirements, except where the failure to comply with such Legal Requirements
has not had and will not have a Material Adverse Effect on the Company;
provided, however, that with respect to any Acquired Company that was acquired
by the Company since June 30, 1996, with respect to the operations of such
company prior to such acquisition, such representation shall be made only to the
knowledge of the Company. Except as set forth in Part 2.12 of the Company
Disclosure Schedule, since June 30, 1996, none of the Acquired Companies has
received any notice or other communication from any Governmental Body regarding
any actual or possible violation of, or failure to comply with, any Legal
Requirement that could have a Material Adverse Effect on the Company; provided,
however, that with respect to any Acquired Company that was acquired by the
Company since June 30, 1996, with respect to the operations of such company
prior to such acquisition, such representation shall be made only to the
knowledge of the Company.
2.13 Governmental Authorizations. Part 2.13 of the Company Disclosure
Schedule identifies each Governmental Authorization held by any Acquired
Company, the absence of which would have a Material Adverse Effect on the
Company, and the Company has delivered or made available to Parent accurate and
complete copies of all Governmental Authorizations identified in Part 2.13 of
the Company Disclosure Schedule. The Governmental Authorizations identified in
Part 2.13 of the Company Disclosure Schedule are valid and in full force and
effect, and collectively constitute all Governmental Authorizations necessary to
enable each Acquired Company to conduct its business in the manner in which its
business is currently being conducted, except as would not have a Material
Adverse Effect on the Company. Each of the Acquired Companies is, and at all
times since June 30, 1996 has been, in substantial compliance with the terms and
requirements of the respective Governmental Authorizations identified in Part
2.13 of the Company Disclosure Schedule except for any failure to comply that
would not have a Material Adverse Effect on the Company. Since June 30, 1996,
none of the Acquired Companies has received any notice or other communication
from any Governmental Body regarding (a) any actual or possible violation of or
failure to comply with any term or requirement of any Governmental
Authorization, or (b) any actual or possible revocation, withdrawal, suspension,
cancellation, termination or modification of any Governmental Authorization,
except for any of the foregoing that would not have a Material Adverse Effect on
the Company. There are no provisions in, or agreements relating to, any such
Governmental Authorizations which would preclude or limit the Acquired Companies
from owning or operating their respective healthcare facilities (the "Healthcare
Facilities") and using all of the beds of the Healthcare Facilities as they are
currently classified. The Company has delivered to Parent the most recent state
licensing reports and lists of deficiencies, if any,
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for each of the Healthcare Facilities. The Acquired Companies have cured (or
will cure within the time permitted by such reports) all deficiencies, if any,
noted therein, except for those that would not, individually or in the
aggregate, have a material adverse effect on any Healthcare Facility.
2.14 Tax Matters.
(a) All Tax Returns required to be filed by or on behalf of any Acquired
Company with any Governmental Body with respect to any taxable period ending on
or before the Closing Date (the "Company Returns") (i) have been or will be
filed on or before the applicable due date (including any extensions of such due
date), and (ii) have been, or will be when filed, accurately and completely
prepared in all material respects in compliance with all applicable Legal
Requirements. All amounts shown on the Company Returns to be due on or before
the Closing Date have been or will be paid on or before the Closing Date. The
Company has delivered or made available to Parent accurate and complete copies
of all Company Returns that have been requested by Parent.
(b) The Company Financial Statements fully accrue all actual and contingent
liabilities for Taxes with respect to all periods through the dates thereof in
accordance with generally accepted accounting principles. The Company will
establish, in the ordinary course of business and consistent with its past
practices, reserves adequate for the payment of all Taxes through the Closing
Date, and the Company will disclose the dollar amount of such reserves to Parent
on or prior to the Closing Date.
(c) Except as set forth in Part 2.14 of the Company Disclosure Schedule,
there have been no examinations or audits of any Company Return by any
Governmental Body. The Company has delivered or made available to Parent
accurate and complete copies of all audit reports and similar documents (to
which the Company has access) relating to the Company Returns. Except as set
forth in Part 2.14 of the Company Disclosure Schedule, no extension or waiver of
the limitation period applicable to any of the Company Returns has been granted
(by any Acquired Company or any other Person), and no such extension or waiver
has been requested from any Acquired Company.
(d) Except as set forth in Part 2.14 of the Company Disclosure Schedule, no
claim or Proceeding is pending or has been threatened against or with respect to
any Acquired Company in respect of any Tax. There are no liens for Taxes upon
any of the assets of any Acquired Company except liens for current Taxes not yet
due and payable. None of the Acquired Companies has entered into or become bound
by any agreement or consent pursuant to Section 341(f) of the Code.
(e) Except as listed in Part 2.14 or Part 2.15(f) of the Company Disclosure
Schedule, there is no agreement, plan, arrangement or other Contract covering
any employee or independent contractor or former employee or independent
contractor of any Acquired Company that, considered individually or considered
collectively with any other such Contracts, will, or could reasonably be
expected to, give rise directly or indirectly to the payment of any amount that
would not be deductible pursuant to Section 280G or Section 162 of the Code.
None of the Acquired Companies is, or has been, a party to or bound by any tax
indemnity agreement, tax sharing agreement, tax allocation agreement or similar
Contract.
2.15 Employee and Labor Matters; Benefit Plans.
(a) Part 2.15(a) of the Company Disclosure Schedule identifies each written
or unwritten salary, bonus, deferred compensation, incentive compensation, stock
purchase, stock option, severance pay, termination pay, hospitalization,
medical, life or other insurance, supplemental unemployment benefits,
profit-sharing, pension or retirement plan, program or agreement (collectively,
the "Plans") sponsored, maintained, contributed to or required to be contributed
to by any Acquired Company for the benefit of any employee of any Acquired
Company ("Employee").
(b) Except as set forth in Part 2.15(a) of the Company Disclosure Schedule,
none of the Acquired Companies maintains, sponsors or contributes to, or has at
any time in the past maintained, sponsored or contributed to, any employee
pension benefit plan (as defined in Section 3(2) of the Employee Retirement
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Income Security Act of 1974, as amended ("ERISA"), whether or not excluded from
coverage under specific Titles or Subtitles of ERISA) for the benefit of
Employees or former Employees (a "Pension Plan").
(c) Each of the Acquired Companies maintains, sponsors or contributes only
to those employee welfare benefit plans (as defined in Section 3(1) of ERISA,
whether or not excluded from coverage under specific Titles or Merger Subtitles
of ERISA) for the benefit of Employees or former Employees which are described
in Part 2.15(c) of the Company Disclosure Schedule (the "Welfare Plans"), none
of which is a multiemployer plan (within the meaning of Section 3(37) of ERISA).
(d) With respect to each Plan, the Company has delivered or made available
to Parent:
(i) an accurate and complete copy of such Plan (including all
amendments thereto);
(ii) an accurate and complete copy of the annual report, if required
under ERISA, with respect to such Plan for the last five years;
(iii) an accurate and complete copy of the most recent summary plan
description, together with each Summary of Material Modifications, if
required under ERISA, with respect to such Plan, and all material employee
communications relating to such Plan;
(iv) if such Plan is funded through a trust or any third party funding
vehicle, an accurate and complete copy of the trust or other funding
agreement (including all amendments thereto) and accurate and complete
copies the most recent financial statements thereof;
(v) accurate and complete copies of all Contracts relating to such
Plan, including service provider agreements, insurance contracts, minimum
premium contracts, stop-loss agreements, investment management agreements,
subscription and participation agreements and record keeping agreements;
and
(vi) an accurate and complete copy of the most recent determination
letter received from the Internal Revenue Service with respect to such Plan
(if such Plan is intended to be qualified under Section 401(a) of the
Code).
(e) None of the Acquired Companies is required to be, and, to the best of
the knowledge of the Company, has ever been required to be, treated as a single
employer with any other Person under Section 4001(b)(1) of ERISA or Section
414(b), (c), (m) or (o) of the Code. None of the Acquired Companies has ever
been a member of an "affiliated service group" within the meaning of Section
414(m) of the Code. None of the Acquired Companies has ever made a complete or
partial withdrawal from a multiemployer plan, as such term is defined in Section
3(37) of ERISA, resulting in "withdrawal liability," as such term is defined in
Section 4201 of ERISA (without regard to subsequent reduction or waiver of such
liability under either Section 4207 or 4208 of ERISA).
(f) Except as listed in Part 2.15(f) of the Company Disclosure Schedule,
none of the Acquired Companies has any plan or commitment to create any
additional Welfare Plan or Pension Plan, or to modify or change any existing
Welfare Plan or Pension Plan (other than to comply with applicable law) in a
manner that would affect any Employee.
(g) Except as set forth in Part 2.15(g) of the Company Disclosure Schedule,
no Welfare Plan provides death, medical or health benefits (whether or not
insured) with respect to any current or former Employee after any such
Employee's termination of service (other than (i) benefit coverage mandated by
applicable law, including coverage provided pursuant to Section 4980B of the
Code, (ii) deferred compensation benefits accrued as liabilities on the
Unaudited Interim Balance Sheet, and (iii) benefits the full cost of which are
borne by current or former Employees (or the Employees' beneficiaries)).
(h) With respect to each of the Welfare Plans constituting a group health
plan within the meaning of Section 4980B(g)(2) of the Code, the provisions of
Section 4980B of the Code ("COBRA") have been complied with in all material
respects.
(i) Each of the Plans has been operated and administered in all material
respects in accordance with applicable Legal Requirements, including, but not
limited to, ERISA and the Code.
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(j) Each of the Plans intended to be qualified under Section 401(a) of the
Code has received a favorable determination from the Internal Revenue Service,
and the Company is not aware of any reason why any such determination letter
should be revoked.
(k) Except as set forth in Part 2.15(k) of the Company Disclosure Schedule,
neither the execution, delivery or performance of this Agreement, nor the
consummation of the Merger or any of the other transactions contemplated by this
Agreement, will result in any payment (including any bonus, golden parachute or
severance payment) to any current or former Employee or director of any Acquired
Company (whether or not under any Plan), materially increase the benefits
payable under any Plan, or result in any acceleration of the time of payment or
vesting of any such benefits.
(l) Except as listed in Part 2.15(l) of the Company Disclosure Schedule,
none of the Acquired Companies is a party to any collective bargaining contract
or other Contract with a labor union involving any of its Employees. Except as
listed in Part 2.15(l) of the Company Disclosure Schedule, all of the Acquired
Companies' employees are "at will" employees.
(m) Except where the failure to comply has not had and will not have a
Material Adverse Effect on the Company, each of the Acquired Companies is, and
has at all times since June 30, 1996 been, in compliance with all applicable
Legal Requirements and Contracts relating to employment, employment practices,
wages, bonuses and terms and conditions of employment, including employee
compensation matters; provided, however, that with respect to any Acquired
Company that was acquired by the Company since June 30, 1996, with respect to
the operations of such company prior to such acquisition, such representation
shall be made only to the knowledge of the Company.
2.16 Environmental Matters.
(a) None of the Real Properties is or has ever been, nor is any of the
Acquired Companies or any other Person for whom any Acquired Company may be
liable, in violation of, and each of such Persons and the Real Properties is in
full compliance with, all Environmental Laws, except as would not, singly or in
the aggregate, have a Material Adverse Effect on the Company. During the time in
which any Real Property has been owned, operated, occupied or leased by any
Acquired Company, neither such Acquired Company nor any third party has used,
generated, manufactured, produced, stored or disposed of on, under or about the
Real Property, or transported to or from such Real Property any Hazardous
Material, except in compliance with Environmental Laws. There is no present or,
to the knowledge of the Company, threatened Release of any Hazardous Materials
in, on or under the Property. If any pesticides have been disposed of, or
placed, sprayed or deposited on any Real Property, such acts have been in full
compliance with and such pesticides are registered under the Federal
Insecticide, Fungicide, and Rodenticide Act (7 U.S.C. section 136 et seq.), as
amended, or any successor statute, and any other applicable federal, state or
local law or regulation promulgated thereunder.
(b) Except as disclosed in Part 2.16 of the Company Disclosure Schedule,
none of the Acquired Companies has received any citation, directive, inquiry,
summons, warning, order, notice or other written communication, whether from a
governmental authority, citizens' group, employee, the current or prior owner or
operator of any Facilities or otherwise, alleging that any Acquired Company or
any other Person for whom any Acquired Company may be liable or any Real
Property is not in full compliance with any Environmental Laws or permit or
authorization required under applicable Environmental Laws, and, to the
knowledge of the Company, there are no circumstances that may prevent or
interfere with such full compliance in the future. There is no legal or
administrative proceeding or inquiry pending or, to the knowledge of the
Company, threatened by any Person or any Governmental Body (including, without
limitation, the United States Environmental Protection Agency and any other
federal or state agency with jurisdiction over the Acquired Companies and/or the
Real Property under any Environmental Laws) with respect to the presence of
Hazardous Materials on any Real Property or the migration thereof from or to
other property. Each Acquired Company has all permits, licenses and approvals
(which are included in the Permits) required by all applicable Environmental
Laws for the use and occupancy of, and all operations and activities in, the
Real Property, each Acquired Company is in full compliance with all such
permits, licenses and approvals, and all such permits, licenses and approvals
were duly issued and are in full force and effect, except for such failures
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to have permits, licenses or approvals or non-compliance that would not, singly
or in the aggregate, have a Material Adverse Effect on the Company.
(c) Except as disclosed in Part 2.16 of the Company Disclosure Schedule,
there is no claim, action, cause of action, investigation or written notice by
any Person alleging potential liability (including, without limitation,
potential liability for investigatory costs, natural resources damages, property
damages, personal injuries or penalties) arising out of, based on or resulting
from (i) the presence in or release into the environment of any Hazardous
Materials at any location owned, leased or operated, now or in the past,
including, without limitation, any Real Property, by any Acquired Company or any
other Person for whom any Acquired Company may be liable, or (ii) circumstances
forming the basis of any violation or alleged violation of any Environmental Law
(collectively, "Environmental Claims") pending or threatened against any
Acquired Company or any other Person whose liability for any Environmental Claim
any Acquired Company has retained or assumed either contractually or by
operation of law.
(d) Except as disclosed in the Part 2.16 of the Company Disclosure
Schedule, there are no past or present actions, activities, circumstances,
conditions, events or incidents, including, without limitation, the release,
emission, discharge, presence or disposal of any Hazardous Materials, that could
reasonably be expected to form the basis of any Environmental Claim against any
Acquired Company with respect to property owned, leased or operated by or for
any Acquired Company, now or in the past, including, without limitation, any
Real Property, or with respect to any property in, on or under which are located
Hazardous Materials that were generated by any Acquired Company or any other
Person for whom any Acquired Company may be liable, or against any Person whose
liability for any Environmental Claim any Acquired Company has retained or
assumed either contractually or by operation of law.
(e) The following terms when used in this Agreement have the following
meanings:
"Environmental Laws" means any and all federal, state, local, provincial or
foreign laws or regulations relating to pollution or protection of human health
or safety, industrial hygiene or the environment (including, without limitation,
ambient air, surface water, ground water, land surface or subsurface strata),
including, without limitation, laws and regulations relating to use,
manufacture, storage, disposal, emissions, discharges, releases or threatened
releases of Hazardous Materials, or otherwise relating to the manufacture,
processing, distribution, use, treatment, storage, disposal, transport or
handling of Hazardous Materials.
"Hazardous Materials" means all flammable explosives, radioactive
materials, hazardous wastes, infectious wastes, chemicals, pollutants,
contaminants, wastes, toxic substances, hazardous substances, petroleum or
petroleum products, asbestos or asbestos-containing materials, or
polychlorinated biphenyls, corrosive, ignitable, toxic, reproductive toxins or
carcinogenic substances, materials, products, chemicals or compounds, whether
injurious by themselves or in combination with other materials. Hazardous
Materials shall include, but shall not be limited to, (a) "hazardous waste,"
"extremely hazardous waste," "restricted hazardous waste" or "acutely hazardous
waste" as defined in Chapter 6.5 of Division 20 (section 25100 et seq.) of the
California Health and Safety Code, as amended, or any successor statute, (b)
"hazardous substance" as defined in the Comprehensive Environmental Response,
Compensation, and Liability Act (42 U.S.C. section 9601 et seq.), as amended, or
any successor statute, (c) "hazardous material" as defined in the Hazardous
Materials Transportation Act (49 U.S.C. section 1801 et seq.), as amended, or
any successor statute, (d) "hazardous waste," "solid waste," "sludge," "used
oil," "recycled oil," "lubricating oil" and "re-refined oil" as defined in the
Resource Conservation and Recovery Act of 1976 (42 U.S.C. section 6901 et seq.),
as amended, or any successor statute, (e) "hazardous substance" as defined in
the Carpenter-Presley-Tanner Hazardous Substance Account Act, Chapter 6.8 of
Division 20 (section 25300 et seq.) of the California Health and Safety Code, as
amended, or any successor statute, (f) "hazardous substance" as defined in
Chapter 6.7 of Division 20 (section 25280 et seq.) of the California Health and
Safety Code, as amended, or any successor statute, (g) "hazardous material,"
"hazardous substance" or "hazardous waste" as defined in Chapter 6.95 of
Division 20 (section 25501 et seq.) of the California Health & Safety Code, as
amended, or any successor statute, (h) "hazardous substance" as defined in the
Clean Water Act (33 U.S.C. section 1251 et seq.), as amended, or any successor
statute, (i) any substances known to cause cancer or reproductive toxicity now
or in the future listed pursuant to or regulated under the Safe Drinking Water
and Toxic
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Enforcement Act of 1986 (California Health Safety Code section 25249.5 et seq.),
as amended, or any successor statute, or (j) any substances, materials or wastes
now or in the future listed in: (1) the United States Department of
Transportation Hazardous Materials Table (49 C.F.R. section 172.101), as
amended; (2) the Environmental Protection Agency list (40 C.F.R. Part 302), as
amended; (3) the list published in Title 26 of the California Administrative
Code, as amended; or (4) any other list published by any federal or state
governmental entity now or in the future.
"Violation" includes, but is not limited to, noncompliance with any
Governmental Authorization required under applicable Environmental Laws and
noncompliance with the terms and conditions of any such Governmental
Authorization.
"Release" means any release, spill, emission, discharge, leaking, pumping,
pouring, emitting, emptying, discharge, dispersal, injection, escaping,
leaching, dumping, disposing or migration into the indoor or outdoor environment
(including, without limitation, ambient air, surface water, groundwater and
surface or subsurface strata) or into or out of any property, including
continuing migration, of Hazardous Materials into or through soil, surface water
or groundwater.
2.17 Insurance. Part 2.17 of the Company Disclosure Schedule identifies
all insurance policies maintained by, at the expense of or for the benefit of
the Acquired Companies and identifies any material claims currently outstanding
thereunder, and the Company has delivered or made available to Parent accurate
and complete copies of the insurance policies identified on Part 2.17 of the
Company Disclosure Schedule. Each of the insurance policies identified in Part
2.17 of the Company Disclosure Schedule is in full force and effect. Since June
30, 1996, none of the Acquired Companies has received any notice or other
communication regarding any actual or possible (a) cancellation or invalidation
of any insurance policy, (b) refusal of any coverage or rejection of any covered
claim under any insurance policy, or (c) material adjustment in the amount of
the premiums payable with respect to any insurance policy.
2.18 Related Party Transactions. Except as set forth in Part 2.18 of the
Company Disclosure Schedule and except pursuant to ownership of the Company's
outstanding securities: (a) no Related Party has, and no Related Party has at
any time since June 30, 1996 had, any direct or indirect interest in any
material asset used in or otherwise relating to the business of any Acquired
Company; (b) no Related Party is, or has at any time since June 30, 1996 been,
indebted to any Acquired Company; (c) since June 30, 1996, no Related Party has
entered into, or has had any direct or indirect financial interest in, any
Company Material Contract, transaction or business dealing involving any
Acquired Company; (d) no Related Party is competing, or has at any time since
June 30, 1996 competed, directly or indirectly, with any Acquired Company; and
(e) to the knowledge of the Company, no Related Party has any claim or right
against any Acquired Company (other than rights under Company Options and rights
to receive compensation for services performed as an employee of any such
Acquired Company). (For purposes of the Section 2.18 each of the following shall
be deemed to be a "Related Party": (i) each of the Principal Stockholders; (ii)
each individual who is an executive officer or director of any Acquired Company;
(iii) each member of the immediate family of each of the individuals referred to
in clauses "(i)" and "(ii)" above; and (iv) any trust or other Entity (other
than the Acquired Companies) in which any one of the individuals referred to in
clauses "(i)", "(ii)" and "(iii)" above holds (or in which more than one of such
individuals collectively hold), beneficially or otherwise, a material voting,
proprietary or equity interest.)
2.19 Legal Proceedings; Orders.
(a) Except as set forth in Part 2.19 of the Company Disclosure Schedule,
there is no pending Legal Proceeding, and (to the best of the knowledge of the
Company) no Person has threatened to commence any Legal Proceeding: (i) that
involves any Acquired Company or any of the properties or assets owned or used
by any Acquired Company; or (ii) that challenges, or that could reasonably be
expected to have the effect of preventing, delaying, making illegal or otherwise
interfering with, the Merger. To the best of the knowledge of the Company,
except as set forth in Part 2.19 of the Company Disclosure Schedule, no event
has occurred, and no claim, dispute or other condition or circumstance exists,
that will, or that could reasonably be expected to, give rise to or serve as a
basis for the commencement of any such Legal Proceeding.
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(b) Except as set forth in Part 2.19 of the Company Disclosure Schedule or
that will not have a Material Adverse Effect on the Company, since June 30,
1997, no Legal Proceeding has been commenced by or has been pending against any
Acquired Company.
(c) Except as set forth in Part 2.19 of the Company Disclosure Schedule or
that will not have a Material Adverse Effect on the Company, there is no order,
writ, injunction, judgment or decree to which any Acquired Company, or any of
the properties or assets owned or used by any Acquired Company, is subject. To
the best of the knowledge of the Company, no officer or other employee of any
Acquired Company is subject to any order, writ, injunction, judgment or decree
that prohibits such officer or other employee from engaging in or continuing any
conduct, activity or practice relating to the business of any Acquired Company.
2.20 Medicare and Medicaid Participation.
(a) The cost reports for reimbursement by Medicare, Medicaid (if required),
Blue Cross (if required), or any other cost-based third party payor (the
"Programs") have been audited (i.e., settled, with a Notice of Program
Reimbursement issued) through the period set forth in Part 2.20 of the Company
Disclosure Schedule attached hereto, and all cost reports were filed when due.
Except as set forth in Part 2.20(a) of the Company Disclosure Schedule, all cost
reports are complete and correct in all material respects. Except as set forth
in Part 2.20(a) of the Company Disclosure Schedule, (i) no Acquired Company has
received written notice of any dispute between a Healthcare Facility and Blue
Cross, a Governmental Entity or any Medicare or Medicaid fiscal intermediary
regarding cost reports (with respect to the audited cost reports, only for any
period subsequent to the period specified in Part 2.20(a) of the Company
Disclosure Schedule) other than with respect to net reimbursable adjustments
thereto made in the ordinary course of business which do not involve individual
amounts in excess of $50,000 per cost report or $750,000 in the aggregate; (ii)
there are no pending or, to the knowledge of the Company, threatened claims or
investigations by any of the Programs against any Healthcare Facility; and (iii)
each Healthcare Facility currently meets the conditions for participation in the
Programs.
(b) None of the Acquired Companies or, to the knowledge of the Company, any
other Person who has a direct or indirect ownership interest (as those terms are
defined in 42 C.F.R. sec.1001.1001(a)(2)) in any Acquired Company, or who has an
ownership or control interest in any Acquired Company, or who is an officer,
director, agent, or managing employee of any Acquired Company, and (ii) to the
knowledge of the Company, no person with any relationship with such entity who
has an indirect ownership interest in any Acquired Company: (A) has had a civil
monetary penalty assessed against it under SSA sec.1128A; (B) has been excluded
from participation under the Medicare programs or a State Health Care Program;
(C) has been convicted (as that term is defined in 42 C.F.R. sec.1001.2) or any
of the following categories of offenses as described in SSA sec.1128(a) and
(b)(1), (2), (3): (i) criminal offenses relating to the delivery of any item or
service under Medicare, Medicaid or any other State Health Care Program or any
Federal Health Care Program; (ii) criminal offenses under federal or state law
relating to patient neglect or abuse in connection with the delivery of a health
care item or service; (iii) criminal offenses under federal or state law
relating to fraud, theft, embezzlement, breach of fiduciary responsibility, or
other financial misconduct in connection with the delivery of a health care item
or service or with respect to any act or omission in a program operated by or
financed in whole or in part by any federal, state or local governmental entity;
(iv) federal or state laws relating to the interference with or obstruction of
any investigation into any criminal offense described in (i) through (iii)
above; or (v) criminal offense under federal or state law relating to the
unlawful manufacture, distribution, prescription or dispensing of a controlled
substance.
(c) Each Healthcare Facility is duly accredited (except as set forth in
Part 2.20(c) of the Company Disclosure Schedule) by the Joint Commission on
Accreditation of Healthcare Organizations ("JCAHO") for the three-year period
specified in Part 2.20(c) of the Company Disclosure Schedule. The Company has
delivered or made available to Parent true and complete copies of the Healthcare
Facilities' most recent JCAHO accreditation survey report and deficiency list,
if any, and the Healthcare Facilities' most recent Statement of Deficiencies and
Plan of Correction.
2.21 Illegal Payments. None of the Acquired Companies has, directly or
indirectly, paid or delivered, or agreed to pay or deliver, any fee, commission
or other sum of money or item or property, however
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characterized, to any finder, agent or government official, in the United States
or any other country, which is in any manner related to the business or
operations of any Acquired Company, which the Company knows or has reason to
believe to have been illegal under any applicable Legal Requirements; and none
of the Acquired Companies has participated, directly or indirectly, in any
boycotts or other similar practices affecting any of its actual or potential
customers.
2.22 Fraud and Abuse. To the knowledge of the Company, none of the
Acquired Companies nor any Affiliate is engaged in any activities that are
prohibited under federal Medicare and Medicaid statutes, including, without
limitation, 42 U.S.C. sec.sec. 1320a-7 - 1320a-7b, 1395nn, and 1396b(s), the
False Claims Act or the regulations promulgated pursuant to such statutes, or
any similar federal, state or local statutes or regulations or which are
prohibited by binding rules of professional conduct or any other criminal or
civil statute invoked to penalize the submission of false claims, the making of
false statements, the failure to disclose information for which disclosure is
required, or financial relationships with physicians or others that constitute
illegal remuneration or violate the "Stark law," including, but not limited to,
the following:
(a) knowingly and willfully making or causing to be made a false
statement or representation of a material fact in any application for any
benefit or payment;
(b) knowingly and willfully making or causing to be made any false
statement or representation of a material fact for use in determining
rights to any benefit or payment;
(c) failing to disclose knowledge by a claimant of occurrence of any
event affecting the initial or continued right to any benefit or payment on
its own behalf or on behalf of another, with intent to secure such benefit
or payment fraudulently; or
(d) knowingly and willfully soliciting or receiving any remuneration
(including any kickback, bribe or rebate), directly or indirectly, overtly
or covertly, in cash or in kind or offering to pay such remuneration (i) in
return for referring an individual to a person for the furnishing or
arranging for the furnishing of any item or service for which payment may
be made in whole or in part by Medicare, Medicaid or other applicable
governmental payors, or (ii) in return for purchasing, leasing or ordering
or arranging for or recommending the purchasing, leasing or order of any
good, facility, service or item for which payment may be made in whole or
in part by Medicare, Medicaid or other governmental payors.
The term "Affiliate" shall mean any corporation, partnership or organization,
whether now existing or hereafter created, which directly or indirectly
controls, is controlled by, or is under common control with, any Acquired
Company, and any director or officer of each Acquired Company or any such
Affiliate.
2.23 Authority; Binding Nature of Agreement. The Company has the corporate
power and authority to enter into and to perform its obligations under this
Agreement; and the execution, delivery and performance by the Company of this
Agreement have been duly authorized by all necessary corporate action on the
part of the Company and its board of directors. This Agreement constitutes the
legal, valid and binding obligation of the Company, enforceable against the
Company in accordance with its terms, subject to (i) laws of general application
relating to bankruptcy, insolvency and the relief of debtors, and (ii) rules of
law governing specific performance, injunctive relief and other equitable
remedies.
2.24 Non-Contravention; Consents. Except as set forth in Part 2.24 of the
Company Disclosure Schedule and except as contemplated by Section 4.5, neither
(1) the execution, delivery or performance of this Agreement or any of the other
agreements referred to in this Agreement, nor (2) the consummation of the Merger
or any of the other transactions contemplated by this Agreement, will directly
or indirectly (with or without notice or lapse of time):
(a) contravene, conflict with or result in a violation of (i) any of
the provisions of the Company's Certificate of Incorporation or bylaws, or
(ii) any resolution adopted by the Company's stockholders, the Company's
board of directors or any committee of the Company's board of directors;
(b) contravene, conflict with or result in a violation of any Legal
Requirement or any order, writ, injunction, judgment or decree to which the
Company, or any of the properties or assets owned or used by any of the
Acquired Companies, is subject;
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(c) contravene, conflict with or result in a violation of any of the
terms or requirements of any Governmental Authorization that is held by any
of the Acquired Companies or that otherwise relates to the business or to
any of the properties or assets owned or used by any of the Acquired
Companies which, in any event, would have a Material Adverse Effect on the
Company or the ability to consummate the Merger or the other transactions
contemplated hereby;
(d) except as would not have a Material Adverse Effect on the Company,
contravene, conflict with or result in a violation or breach of, or result
in a default under, any provision of any Company Material Contract, or give
any Person the right to (i) declare a default or exercise any remedy under
any such Company Material Contract, (ii) accelerate the maturity or
performance of any such Company Material Contract, or (iii) cancel,
terminate or modify any such Company Material Contract; or
(e) result in the imposition or creation of any lien or other
Encumbrance upon or with respect to any property or asset owned or used by
any Acquired Company (except for minor liens that will not, in any case or
in the aggregate, materially detract from the value of the properties or
assets subject thereto or materially impair the operations of any such
Acquired Company).
Except as set forth in Part 2.24 of the Company Disclosure Schedule, none of the
Acquired Companies is or will be required to make any filing with or give any
notice to, or to obtain any Consent from, any Person in connection with (x) the
execution, delivery or performance of this Agreement or any of the other
agreements referred to in this Agreement, or (y) the consummation of the Merger
or any of the other transactions contemplated by this Agreement.
2.25 Full Disclosure.
(a) This Agreement (including the Company Disclosure Schedule) does not (i)
contain any representation, warranty or information that is false or misleading
with respect to any material fact, or (ii) omit to state any material fact or
necessary in order to make the representations, warranties and information
contained and to be contained herein and therein (in the light of the
circumstances under which such representations, warranties and information were
or will be made or provided) not false or misleading.
(b) The information supplied by the Company for inclusion in the S-4
Registration Statement (as defined in Section 4.11) will not, as of the date of
the S-4 Registration Statement or as of the date of the Company Stockholders'
Meeting (as defined in Section 4.6), (i) contain any statement that is
inaccurate or misleading with respect to any material fact, or (ii) omit to
state any material fact necessary in order to make such information (in the
light of the circumstances under which it is provided) not false or misleading.
2.26 Compliance with Application for Certificate of Need. Except as set
forth in Part 2.26 of the Company Disclosure Schedule, no application for any
Certificate of Need has been made by any Acquired Company which is currently
pending or open and, except as set forth in Part 2.26 of the Company Disclosure
Schedule, no such application (collectively, the "Applications") filed by any
Acquired Company has been ultimately denied by any Governmental Body or
withdrawn by any Acquired Company. No Applications are being prepared by or for,
or on behalf of, any Acquired Company for submission to or before any
Governmental Body. Each of the Acquired Companies has properly filed all
required Applications which are complete and correct in all material respects
with respect to any and all material improvements, projects, changes in
services, zoning requirements, construction and equipment purchases, and other
changes for which approval is required under applicable law. As used herein,
"Certificate of Need" means a written statement issued by the appropriate
Governmental Body evidencing community need for a new, converted, expanded or
otherwise significantly modified healthcare facility or health service.
2.27 Medical Staff Matters. The Company has made available to Parent true,
correct and complete copies of the bylaws and rules and regulations of the
medical staff of each of the Healthcare Facilities. With regard to the medical
staffs of the Healthcare Facilities, except as set forth in Part 2.27 of the
Company Disclosure Schedule or as can not reasonably be expected to have a
material adverse effect on any Healthcare Facility, there are no pending or, to
the knowledge of the Company, threatened disputes with applicants, staff members
or allied health professionals, and all appeal periods in respect of any medical
staff member or applicant against whom an adverse action has been taken have
expired.
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SECTION 3. Representations and Warranties of Parent and Merger Sub
Parent and Merger Sub jointly and severally represent and warrant to the
Company, to and for the benefit of the Stockholder Indemnitees, as follows:
3.1 SEC Filings; Financial Statements.
(a) Parent has delivered to the Company accurate and complete copies
(excluding copies of exhibits) of each report, registration statement (on a form
other than Form S-8) and definitive proxy statement filed by Parent with the SEC
between January 1, 1997 and the date of this Agreement (the "Parent SEC
Documents"). As of the time it was filed with the SEC (or, if amended or
superseded by a filing prior to the date of this Agreement, then on the date of
such filing): (i) each of the Parent SEC Documents complied in all material
respects with the applicable requirements of the Securities Act or the Exchange
Act (as the case may be); and (ii) none of the Parent SEC Documents contained
any untrue statement of a material fact or omitted to state a material fact
required to be stated therein or necessary in order to make the statements
therein, in the light of the circumstances under which they were made, not
misleading.
(b) The consolidated financial statements (the "Parent Financial
Statements") contained in the Parent SEC Documents: (i) complied as to form in
all material respects with the published rules and regulations of the SEC
applicable thereto; (ii) were prepared in accordance with generally accepted
accounting principles applied on a consistent basis throughout the periods
covered, except as may be indicated in the notes to such financial statements
and (in the case of unaudited statements) as permitted by Form 10-Q of the SEC,
and except that unaudited financial statements may not contain footnotes and are
subject to normal and recurring year-end audit adjustments, which will not,
individually or in the aggregate, be material in magnitude; and (iii) fairly
present the consolidated financial position of Parent and its subsidiaries as of
the respective dates thereof and the consolidated results of operations of
Parent and its subsidiaries for the periods covered thereby.
3.2 Authority; Binding Nature of Agreement. Parent and Merger Sub have the
corporate power and authority to perform their obligations under this Agreement;
and the execution, delivery and performance by Parent and Merger Sub of this
Agreement (including the contemplated issuance of Parent Common Stock in the
Merger in accordance with this Agreement) have been duly authorized by all
necessary corporate action on the part of the respective boards of directors of
Parent and Merger Sub. The board of directors of Parent has approved the Merger
and the transactions contemplated hereby on behalf of Parent as the sole
stockholder of Merger Sub and has recommended approval of the principal terms of
the Merger by the holders of Parent Common Stock and directed that such matters
be submitted for consideration of Parent's stockholders at the Parent
Stockholders' Meeting (as defined in Section 4.7). This Agreement constitutes
the legal, valid and binding obligation of Parent and Merger Sub, enforceable
against them in accordance with its terms, subject to (i) laws of general
application relating to bankruptcy, insolvency and the relief of debtors, and
(ii) rules of law governing specific performance, injunctive relief and other
equitable remedies.
3.3 Valid Issuance. Subject to Section 1.5(c), the Parent Common Stock to
be issued in the Merger will, when issued in accordance with the provisions of
this Agreement, be validly issued, fully paid and nonassessable.
3.4 Capitalization, Etc.
(a) The authorized capital stock of Parent consists of: (i) 19,000,000
shares of Common Stock (with par value $.01), of which 6,959,810 shares have
been issued and are outstanding as of the date of this Agreement; and (ii)
1,000,000 shares of Preferred Stock (with par value $.01), none of which is
outstanding as of the date of this Agreement. All of the outstanding shares of
Parent Common Stock have been duly authorized and validly issued, and are fully
paid and non-assessable.
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(b) Parent has reserved (i) 2,000,000 shares of Parent Common Stock for
issuance under its 1997 Equity Incentive Plan, of which options to purchase
879,297 shares are outstanding as of the date of this Agreement; (ii) 525,000
shares of Parent Common Stock for issuance under its 1992 Outside Directors'
Plan, of which options to purchase 291,500 shares are outstanding as of the date
of this Agreement; (iii) 270,671 shares of Parent Common Stock for issuance
under outstanding non-plan stock options; and (iv) 138,000 shares of Parent
Common Stock for issuance under outstanding warrants. Except as set forth in
this Section 3.4 and in Part 3.4 of the Parent Disclosure Schedule, there is no:
(i) outstanding subscription, option, call, warrant or right (whether or not
currently exercisable) to acquire any shares of the capital stock or other
securities of Parent; (ii) outstanding security, instrument or obligation that
is or may become convertible into or exchangeable for any shares of the capital
stock or other securities of Parent; (iii) Contract under which Parent is or may
become obligated to sell or otherwise issue any shares of its capital stock or
any other securities; or (iv) to the best of the knowledge of Parent, condition
or circumstance that could reasonably be expected to give rise to or provide a
basis for the assertion of a claim by any Person to the effect that such Person
is entitled to acquire or receive any shares of capital stock or other
securities of Parent.
(c) All outstanding shares of Parent Common Stock, and all outstanding
options and warrants of Parent, have been issued and granted in compliance with
(i) all applicable securities laws and other applicable Legal Requirements, and
(ii) all material requirements set forth in applicable Parent Contracts.
(d) All securities that have been reacquired by Parent were reacquired in
compliance with (i) the applicable provisions of the Delaware General
Corporation Law and all other applicable Legal Requirements, and (ii) all
material requirements set forth in applicable restricted stock purchase
agreements and other applicable Parent Contracts.
(e) All of the outstanding shares of capital stock of each of the Parent
Subsidiaries are validly issued (in compliance with all applicable securities
laws and other Legal Requirements and applicable Parent Contracts), fully paid
and nonassessable and are owned beneficially by Parent, free and clear of any
Encumbrance.
3.5 Non-Contravention; Consents. Except as contemplated by Section 4.5,
neither (1) the execution, delivery or performance of this Agreement or any of
the other agreements referred to in this Agreement, nor (2) the consummation of
the Merger or any of the other transactions contemplated by this Agreement, will
directly or indirectly (with or without notice or lapse of time):
(a) contravene, conflict with or result in a violation of (i) any of
the provisions of Parent's Certificate of Incorporation or bylaws, or (ii)
any resolution adopted by Parent's stockholders, Parent's board of
directors or any committee of Parent's board of directors;
(b) contravene, conflict with or result in a violation of any Legal
Requirement or any order, writ, injunction, judgment or decree to which
Parent, or any of the assets owned or used by Parent or any of the Parent
Subsidiaries or Parent Partnerships (collectively, the "Parent Companies"),
is subject;
(c) contravene, conflict with or result in a violation of any of the
terms or requirements of any Governmental Authorization that is held by any
of the Parent Companies or that otherwise relates to the business or to any
of the assets owned or used by any of the Parent Companies which, in any
event, would have a Material Adverse Effect on Parent or the ability to
consummate the Merger or the other transactions contemplated hereby;
(d) except as would not have a Material Adverse Effect on Parent,
contravene, conflict with or result in a violation or breach of, or result
in a default under, any provision of any Parent Material Contract (as
defined in Section 3.13), or give any Person the right to (i) declare a
default or exercise any remedy under any such Parent Material Contract,
(ii) accelerate the maturity or performance of any such Parent Material
Contract, or (iii) cancel, terminate or modify any such Parent Material
Contract; or
(e) result in the imposition or creation of any lien or other
Encumbrance upon or with respect to any asset owned or used by any of the
Parent Companies (except for minor liens that will not, in any case or in
the aggregate, materially detract from the value of the assets subject
thereto or materially impair the operations of any such Parent Company).
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Except as set forth in Part 3.5 of the Parent Disclosure Schedule, none of the
Parent Companies is or will be required to make any filing with or give any
notice to, or to obtain any Consent from, any Person in connection with (x) the
execution, delivery or performance of this Agreement or any of the other
agreements referred to in this Agreement, or (y) the consummation of the Merger
or any of the other transactions contemplated by this Agreement.
3.6 Due Organization, Etc.
(a) Parent and each of the Parent Subsidiaries, as set forth in Part 3.6 of
the Parent Disclosure Schedule, are corporations duly organized, validly
existing and in good standing under the laws of their respective jurisdictions
of incorporation. Parent has all necessary corporate power and authority: (i) to
conduct its business in the manner in which its business is currently being
conducted; (ii) to own and use its assets in the manner in which its assets are
currently owned and used; and (iii) to perform its obligations under all of its
Contracts.
(b) None of the Parent Companies is or has been required to be qualified,
authorized, registered or licensed to do business as a foreign corporation in
any jurisdiction other than the jurisdictions identified in Part 3.6 of the
Parent Disclosure Schedule, except where the failure to be so qualified,
authorized, registered or licensed has not had and will not have a Material
Adverse Effect on Parent. Each of the Parent Companies is in good standing as a
foreign corporation in each of the jurisdictions identified in Part 3.6 of the
Parent Disclosure Schedule except where the failure to be in good standing would
not have a Material Adverse Effect on Parent.
(c) Except for the equity interests identified in Part 3.6 of the Parent
Disclosure Schedule, none of the Parent Companies owns, beneficially or
otherwise, any shares or other securities of, or any direct or indirect equity
interest in, any Entity. None of the Parent Companies has agreed or is obligated
to make any future investment in or capital contribution to any Entity not
identified in Part 3.6 of the Parent Disclosure Schedule.
3.7 Governing Documents; Records. Parent has delivered or made available
to the Company accurate and complete copies of: (1) Parent's Certificate of
Incorporation and bylaws, including all amendments thereto, and all charter
documents and bylaws, and all amendments thereto, relating to the Parent
Subsidiaries; (2) the stock records of each of the Parent Subsidiaries; and (3)
[except as set forth in Part 3.7 of the Parent Disclosure Schedule,] the minutes
and other records of the meetings and other proceedings (including any actions
taken by written consent or otherwise without a meeting) of the stockholders of
each of the Parent Companies, the board of directors of each of the Parent
Companies and all committees of the board of directors of each of the Parent
Companies. There have been no formal meetings or other proceedings of the
stockholders of Parent, the board of directors of Parent or any committee of the
board of directors of Parent that are not adequately reflected in such minutes
or other records. There has not been any violation of any of the provisions of
Parent's Certificate of Incorporation or, except as would not have a Material
Adverse Effect on Parent, the bylaws or other charter documents of any of the
Parent Companies, and none of the Parent Companies has taken any action that is
inconsistent in any material respect with any resolution adopted by its
stockholders, its board of directors or any committee of its board of directors.
The minute books of each of the Parent Companies are accurate, up-to-date and
complete in all material respects.
3.8 Absence of Changes. Except as set forth in the Parent SEC Documents or
in Part 3.8 of the Parent Disclosure Schedule, since April 30, 1998:
(a) Except as would not, individually or in the aggregate, have a
Material Adverse Effect on Parent, there has not been any change in the
business, condition, assets, liabilities, operations or financial
performance of the Parent Companies and, to the best knowledge of Parent,
no event has occurred that will, or could reasonably be expected to, have a
Material Adverse Effect on Parent;
(b) except as would not, individually or in the aggregate, have a
Material Adverse Effect on Parent, there has not been any loss, damage or
destruction to, or any interruption in the use of, any of the Parent
Companies' properties or assets (whether or not covered by insurance);
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(c) Parent has not declared, accrued, set aside or paid any dividend
or made any other distribution in respect of any shares of capital stock,
and has not repurchased, redeemed or otherwise reacquired any shares of
capital stock or other securities;
(d) Parent has not sold, issued or authorized the issuance of (i) any
capital stock or other security (except for Parent Common Stock issued upon
the exercise of outstanding options and warrants), (ii) any option or right
to acquire any capital stock or any other security (except for options
described in Section 3.4), or (iii) any instrument convertible into or
exchangeable for any capital stock or other security;
(e) Parent has not amended or waived any of its rights under (i) any
provision of its 1997 Equity Incentive Plan, (ii) any provision of any
agreement evidencing any outstanding option or warrant, or (iii) any
restricted stock purchase agreement;
(f) there has been no amendment to Parent's Certificate of
Incorporation or bylaws, and Parent has not effected or been a party to any
Parent Acquisition Transaction, recapitalization, reclassification of
shares, stock split, reverse stock split or similar transaction;
(g) none of the Parent Companies has formed any subsidiary or acquired
any equity interest or other interest in any other Entity;
(h) none of the Parent Companies has made any capital expenditure
which, when added to all other capital expenditures made on behalf of the
Parent Companies between April 30, 1998 and the date of this Agreement,
exceeds $750,000.
(i) none of the Parent Companies has (i) entered into or permitted any
of the properties or assets owned or used by it to become bound by any
Contract that is or would constitute a material Contract, or (ii) amended
or prematurely terminated, or waived any material right or remedy under,
any such material Contract;
(j) none of the Parent Companies has (i) acquired, leased or licensed
any right, real or personal property or other asset from any other Person
having a value in excess of $250,000, (ii) sold or otherwise disposed of,
or leased or licensed, any right, real or personal property or other asset
to any other Person having a value in excess of $250,000, or (iii) waived
or relinquished any right, except for immaterial rights or other immaterial
properties or assets acquired, leased, licensed or disposed of in the
ordinary course of business and consistent with the Parent Companies' past
practices, taken as a whole;
(k) none of the Parent Companies has written off as uncollectible, or
established any extraordinary reserve with respect to, any material amount
of account receivables or other indebtedness;
(l) none of the Parent Companies has made any pledge of any of its
properties or assets, except for pledges of immaterial properties or assets
made in the ordinary course of business and consistent with the Parent
Companies' past practices, taken as a whole;
(m) none of the Parent Companies has (i) lent money to any Person,
other than pursuant to routine travel advances made to employees in the
ordinary course of business and other than loans made in the ordinary
course of business and consistent with past practice in an amount not in
excess of $250,000 to any one Person (other than a Related Party as defined
in Section 2.18), or (ii) incurred or guaranteed any indebtedness for
borrowed money (other than intercompany debt between or among Parent and
the Parent Subsidiaries);
(n) none of the Parent Companies has (i) established or adopted any
Employee Benefit Plan, (ii) paid any bonus or made any profit-sharing or
similar payment to, or increased the amount of the wages, salary,
commissions, fringe benefits or other compensation or remuneration payable
to, any of its directors, officers or employees other than in the ordinary
course of business and consistent with past practice, (iii) hired any new
employee having an annual salary in excess of $150,000 or (iv) adopted any
severance plan or arrangement or entered into any severance agreement, or
entered into any other plan,
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arrangement or agreement providing for the payment of any benefit or
acceleration of any options upon a change in control or a termination of
employment;
(o) Parent has not changed any of its methods of accounting or
accounting practices in any material respect;
(p) Parent has not made any material Tax election;
(q) none of the Parent Companies has commenced or settled any material
Legal Proceeding;
(r) none of the Parent Companies has entered into any material
transaction or taken any other material action outside the ordinary course
of business or inconsistent with its past practices; and
(s) Parent has not agreed or committed to take any of the actions
referred to in clauses "(c)" through "(r)" above.
3.9 Property.
(a) Property. Part 3.9(a) of the Parent Disclosure Schedule contains a
complete and accurate list of all real property owned, leased or occupied by
each of the Parent Companies (the "Land"). The Land, together with all fixtures
and improvements located on, and/or below the surface of the Land, including
without limitation the structures located thereon commonly known by the property
addresses indicated in Part 3.9(a) of the Parent Disclosure Schedule (the
"Improvements"), together with all rights, easements, rights-of-way and
appurtenances to the Land, is referred to collectively herein as the "Real
Property." Part 3.9(a) of the Parent Disclosure Schedule also indicates which of
the Real Property is leased or occupied by any of the Parent Companies
(individually, a "Leased Property" and collectively, the "Leased Properties").
All presently effective leases, lease amendments or modifications, work letter
agreements, improvement agreements, subleases, assignments, licenses,
concessions, guarantees and other agreements relating to the Parent Companies'
use or occupancy of the Leased Property are collectively referred to herein as
the "Leases." True and complete copies of the Leases have been delivered or made
available to the Company. All furnishings, fixtures, equipment, appliances,
signs, personal property and other assets owned by the Parent Companies and
located in or about the Real Property or used in connection with the management
and operation of the Real Properties are hereinafter referred to as the
"Personal Property." All management agreements, maintenance contracts, service
contracts and equipment leases pertaining to the Real Property or the Personal
Property, and all other presently effective contracts, agreements, warranties
and guaranties relating to the ownership, leasing, advertising, promotion,
design, construction, management, operation, maintenance or repair of the Real
Property are herein collectively referred to as the "Real Property Plans and
Contracts." The Real Property, the Leased Properties, the Personal Property and
the Real Property Plans and Contracts are referred to collectively as the
"Property."
(b) Title. The Parent Companies own no Real Property. The Parent Companies
have good and marketable leasehold title to the Leased Properties, free and
clear from all Encumbrances, other than the Leases. Each of the Leases is in
full force and effect. None of the Parent Companies is in material breach or
default under, nor has any event occurred that, with the giving of notice or the
passage of time or both, would constitute a material breach or event of default
by any of the Parent Companies, under any of the Leases and, to the knowledge of
Parent, no other party to any of the Leases is in breach or default under, nor,
to the knowledge of Parent, has any event occurred that, with the giving of
notice or the passage of time or both, would constitute a breach or event of
default by such other party under any of the Leases.
(c) Possession and Use of Real Properties. The Parent Companies have
possession of the Real Properties. There are no persons leasing, using or
occupying the Real Property or any part thereof (except for the easements and
rights-of-way) other than the Parent Companies and there are no oral or written
leases, subleases, occupancies or tenancies in effect pertaining to the Real
Property other than the Leases and other than with respect to the easements and
rights-of-way. The Parent Companies possess all certificates, permits, licenses
and approvals, not including permits necessary due to the regulated nature of
the business conducted on the Real Property, that are required by law to own,
operate, use and occupy the Real Property as it is presently owned, operated,
used and occupied, except where failure to possess any such Permit would not
have
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a Material Adverse Effect on Parent (the "Permits"). The Permits are in full
force and effect. The Parent Companies have fully performed, satisfied and
discharged all of the obligations, requirements and conditions imposed on the
Real Property by the Permits, except for any failures to be in compliance that
would not have a Material Adverse Effect on Parent.
(d) Compliance with Laws. No notices of violation of Legal Requirements
(including, without limitation, planning, zoning and building laws and
ordinances) relating to the Real Property, Leased Properties or the Real
Property Plans and Contracts have been issued to any of the Parent Companies, or
entered against or received by any of the Parent Companies, and no such
violations exist, except for any such violations which, individually or in the
aggregate, would not have a Material Adverse Effect on Parent.
(e) Anticipated Changes. Other than changes that would impact Parent's
industry in general, Parent has no knowledge of any plan, study or effort of any
Governmental Body or any other Person which in any way would materially affect
the use of the Real Property, or any portion thereof, for its intended uses or
any intended public improvements which will result in any material charge being
levied against, or any material lien assessed upon, the Real Property. Parent
has no knowledge of any existing, proposed or contemplated plan to widen, modify
or realign any street or highway contiguous to the any of the Real Properties.
To the knowledge of Parent, there is no general plan, land use or zoning action
or proceeding of any kind, or general or special assessment action or proceeding
of any kind, or condemnation action or proceeding of any kind pending or
threatened or being contemplated with respect to the Real Property or any part
thereof which could have a Material Adverse Effect on Parent. To the knowledge
of Parent, there is no Legal Proceeding pending to contest or appeal the amount
of real property taxes or assessments levied against the Real Property or any
part thereof or the assessed value of the Real Property or any part thereof for
real property tax purposes. Parent has no knowledge of any special assessments
which will result from work, activities or improvements done to any of the Real
Properties by any of the Parent Companies or by any tenants or other parties, or
Encumbrances on or other matters affecting the Real Properties or any of them.
(f) Eminent Domain. To the knowledge of Parent, there is no pending
proceeding in eminent domain or otherwise, or any action to quiet title, which
would decrease the acreage of the Leased Property, or any portion thereof, nor
does Parent know of the existence of any threatened proceedings or of the
existence of any facts which might give rise to such action or proceeding.
(g) Utilities. Each Real Property is connected to and served by water,
solid waste and sewage disposal, drainage, telephone, gas or electricity and
other utility equipment facilities and services required by law and which are
adequate for the present use and operation of such Real Property, or any portion
thereof. Other than acts of God or war, Parent is not aware of any facts or
conditions which would result in the termination or impairment in the furnishing
of utility services to any Real Property.
(h) Condition of the Property. To the knowledge of Parent, there are no
material physical or mechanical defects or deficiencies in the condition,
design, construction, fabrication, manufacture or installation of any of the
Real Properties or any part thereof or any material system, element or component
thereof, ordinary wear and tear excepted. To the knowledge of Parent, all
material systems, elements and components of each of the Real Properties
(including all machinery, fixtures and equipment, the roof, foundation and
structural elements, and the elevator, mechanical, plumbing, electrical,
utility, sprinkler and life safety systems, apparatus and appliances located on
the Real Properties) are in good working order and repair and sound operating
condition, ordinary wear and tear excepted. Parent has not received and, to the
knowledge of Parent, none of the Parent Subsidiaries has received, any notice of
any kind from any insurance broker, agent or underwriter of any defects or
inadequacies in or that any noninsurable condition exists in, on or about any
Real Property or any part thereof that could reasonably be expected,
individually or in the aggregate, to have a Material Adverse Effect on Parent.
To the knowledge of Parent, the Real Properties are free from infestation by
termites or other pests, insects or animals. To the knowledge of Parent, no Real
Property located in the State of California has been designated as "hazardous
waste property" or "border zone property" pursuant to California Health and
Safety Code sec. 25220 et seq., no proceedings for a determination as to whether
any Real Property located in the State of California should be so designated are
pending or threatened, and no portion of the Real Property located in the State
of California is located within two
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thousand (2,000) feet of a significant disposal of "hazardous waste" within the
meaning of California Health and Safety Code section 25221 or any similar
statute or regulation, which could cause such Real Property to be classified as
"border zone property." To the knowledge of Parent, there are no storage or
other tanks or containers, wells or other improvements below the surface of any
Real Property.
(i) Personal Property. Except as would not, individually or in the
aggregate, have a Material Adverse Effect on Parent, the Parent Companies have
good and valid title to the Personal Property, free and clear of all
Encumbrances (except for leases). The Personal Property is in good operating
condition and repair, ordinary wear and tear excepted.
3.10 Receivables. Part 3.10 of the Parent Disclosure Schedule provides an
accurate and complete breakdown and aging of all accounts receivable, notes
receivable and other receivables of Parent, on a consolidated basis, as of April
30, 1998. Except as set forth in Part 3.10 of the Parent Disclosure Schedule,
all existing accounts receivable of the Parent Companies (including those
accounts receivable that have not yet been collected and those accounts
receivable that have arisen since April 30, 1998 and have not yet been
collected) (i) represent valid obligations of customers of the Parent Companies
arising from bona fide transactions entered into in the ordinary course of
business and (ii) are current and will be collected in full when due, without
any counterclaim or set off (net of the allowance for doubtful accounts and any
other reserves set forth in Parent's audited balance sheet (the "Parent Balance
Sheet") for the year ended April 30, 1998 (which allowance and reserves are
reasonable and not in excess of such allowances provided by Parent in the
past)).
3.11 Condition and Sufficiency of the Property. The Property is adequate
for the uses to which it is being put and sufficient for the continued conduct
of the Parent Companies' businesses after the Closing in substantially the same
manner as conducted prior to the Closing.
3.12 Proprietary Assets.
(a) Part 3.12(a)(i) of the Parent Disclosure Schedule sets forth, with
respect to each material Parent Proprietary Asset registered with any
Governmental Body or for which an application has been filed with any
Governmental Body, (i) a brief description of such Proprietary Asset, and (ii)
the names of the jurisdictions covered by the applicable registration or
application. Part 3.12(a)(ii) of the Parent Disclosure Schedule identifies and
provides a brief description of all other material Parent Proprietary Assets
owned by each Parent Company. Part 3.12(a)(iii) of the Parent Disclosure
Schedule identifies and provides a brief description of each material
Proprietary Asset licensed to each Parent Company by any Person (except for any
Proprietary Asset that is licensed to a Parent Company under any third party
software license generally available to the public), and identifies the license
agreement under which such Proprietary Asset is being licensed to such Parent
Company. Except as set forth in Part 3.12(a)(iv) of the Parent Disclosure
Schedule, each Parent Company has good, valid and marketable title to all of the
Parent Proprietary Assets identified in Parts 3.12(a)(i) and 3.12(a)(ii) of the
Parent Disclosure Schedule as owned by such Parent Company, free and clear of
all liens and other Encumbrances, and has a valid right to use all Proprietary
Assets identified in Part 3.12(a)(iii) of the Parent Disclosure Schedule. Except
as set forth in Part 3.12(a)(v) of the Parent Disclosure Schedule, none of the
Parent Companies is obligated to make any payment to any Person for the use of
any such Parent Proprietary Asset. Except as set forth in Part 3.12(a)(vi) of
the Parent Disclosure Schedule, none of the Parent Companies has developed
jointly with any other Person any Parent Proprietary Asset with respect to which
such other Person has any rights.
(b) The Parent Companies have taken all commercially reasonable measures
and precautions necessary to protect and maintain the confidentiality and
secrecy of all Company Proprietary Assets (except Parent Proprietary Assets
whose value would be unimpaired by public disclosure) and otherwise to maintain
and protect the value of all Parent Proprietary Assets.
(c) To the knowledge of Parent, none of the Parent Proprietary Assets
infringes or conflicts with any Proprietary Asset owned or used by any other
Person. To the knowledge of Parent, none of the Parent Companies is infringing,
misappropriating or making any unlawful use of, or has received any notice or
other communication (in writing or otherwise) of any actual, alleged, possible
or potential infringement, misappro-
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priation or unlawful use of, any Proprietary Asset owned or used by any other
Person. To the knowledge of Parent, no other Person is infringing,
misappropriating or making any unlawful use of, and no Proprietary Asset owned
or used by any other Person infringes or conflicts with, any Parent Proprietary
Asset.
(d) The Parent Proprietary Assets constitute all the Proprietary Assets
necessary to enable each Parent Company to conduct its business in the manner in
which such business has been and is being conducted. Except as set forth in Part
3.12(d) of the Parent Disclosure Schedule, (i) none of the Parent Companies has
licensed any of the Parent Proprietary Assets to any Person on an exclusive
basis, and (ii) none of the Parent Companies has entered into any covenant not
to compete or Contract limiting its ability to exploit fully any of its
Proprietary Assets.
3.13 Contracts.
(a) Part 3.13 of the Parent Disclosure Schedule identifies:
(i) each Parent Contract relating to the employment of, or the
performance of services by, any employee, consultant or independent
contractor that is not terminable on 60 days or less notice or involves
payments or other liabilities in excess of $150,000 per year;
(ii) each Parent Contract involving the acquisition, transfer, use,
development, sharing or license of any material Proprietary Asset;
(iii) each Parent Contract imposing any restriction on any Parent
Company's right or ability (A) to compete with any other Person or (B) to
acquire any product or other asset or any services from any other Person,
to sell any product or other asset to or perform any services for any other
Person or to transact business or deal in any other manner with any other
Person;
(iv) each Parent Contract for the management of any freestanding or
hospital-based health program including, without limitation, partial
hospitalization, community mental health or chemical dependency programs
(the "Parent Programs").
(v) each Parent Contract involving the acquisition, issuance or
transfer of any equity securities (other than those that have been fully
performed);
(vi) each Parent Contract involving the creation of any Encumbrance
with respect to any material property or asset of any Parent Company;
(vii) each Parent Contract involving or incorporating any material
guaranty, any material pledge, any material performance or completion bond,
any material indemnity or any material surety arrangement;
(viii) each Parent Contract creating any material partnership or joint
venture or any sharing of revenues, profits, losses, costs or liabilities;
(ix) each Parent Contract involving the purchase or sale of any
product or other asset by or to, or the performance of any services by or
for, any Related Party (as defined in Section 3.23);
(x) each Parent Contract constituting a Government Contract or
Government Bid;
(xi) each Parent Contract involving the purchase or sale of any real
or personal property having a value in excess of $250,000;
(xii) any other Parent Contract of any Parent Company that was entered
into outside the ordinary course of business or was inconsistent with such
Parent Company's past practice, that has a term of greater than one year
and that may not be terminated within 90 days; and
(xiii) any other Parent Contract of any Parent Company that (A) has a
term of more than 90 days and that may not be terminated by such Parent
Company (without penalty) within 90 days after the delivery of a
termination notice by such Parent Company; and (B) involves the payment or
delivery of
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cash or other consideration in an amount or having a value in excess of
$250,000 in any one year or $500,000 in the aggregate.
(Contracts in the respective categories described in clauses "(i)" through
'(xiii)" above are referred to in this Agreement as "Parent Material
Contracts.")
(b) Parent has delivered or made available to the Company accurate and
complete copies of all written Parent Material Contracts identified in Part 3.13
of the Parent Disclosure Schedule, including all amendments thereto. Part 3.13
of the Parent Disclosure Schedule provides an accurate description of the terms
of each Parent Material Contract that is not in written form. Each Parent
Material Contract identified in Part 3.13 of the Parent Disclosure Schedule is
valid and in full force and effect, and is enforceable by the applicable Parent
Company in accordance with its terms, subject to (i) laws of general application
relating to bankruptcy, insolvency and the relief of debtors, and (ii) rules of
law governing specific performance, injunctive relief and other equitable
remedies.
(c) except as set forth in Part 3.13 of the Parent Disclosure Schedule:
(i) none of the Parent Companies has violated or breached, or
committed any default under, any Parent Material Contract, and, to the best
of the knowledge of Parent, no other Person has violated or breached, or
committed any default under, any Parent Material Contract;
(ii) to the best of the knowledge of Parent, no event has occurred,
and no circumstance or condition exists, that (with or without notice or
lapse of time) will, or could reasonably be expected to, (A) result in a
violation or breach of any of the provisions of any Parent Material
Contract, (B) give any Person the right to declare a default or exercise
any remedy under any Parent Material Contract, (C) give any Person the
right to accelerate the maturity or performance of any Parent Material
Contract, or (D) give any Person the right to cancel, terminate or modify
any Parent Material Contract;
(iii) since June 30, 1996, none of the Parent Companies has received
any notice or other communication regarding any actual or alleged violation
or breach of, or default under, any Parent Material Contract that has not
been cured or is of a continuing or repetitive nature; and
(iv) none of the Parent Companies has waived any of its material
rights under any Parent Material Contract.
(d) Except with respect to the renegotiation of any managed care contract
(other than capitated contracts) involving amounts payable of less than 15% of
the per diem rate of such contracts, no Person is renegotiating, or has a right
pursuant to the terms of any Parent Material Contract to renegotiate, any amount
paid or payable to any Parent Company under any Parent Material Contract or any
other material term or provision of any Parent Material Contract.
(e) The Contracts identified in Part 3.13 of the Parent Disclosure Schedule
collectively constitute all of the material Contracts being used by the Parent
Companies to conduct their businesses in the manner in which their businesses
are currently being conducted.
(f) Part 3.13 of the Parent Disclosure Schedule identifies and provides a
brief description of each proposed Parent Material Contract as to which any bid,
offer, award, written proposal, term sheet or similar document has been
submitted or received by any of the Parent Companies since the date of the
Parent Balance Sheet.
3.14 Liabilities. None of the Parent Companies has accrued, contingent or
other liabilities of any nature, either matured or unmatured (whether or not
required to be reflected in financial statements in accordance with generally
accepted accounting principles, and whether due or to become due), except for:
(a) liabilities identified as such in the "liabilities" column of the Parent
Balance Sheet; (b) accounts payable or accrued salaries that have been incurred
by any Parent Company since April 30, 1998 in the ordinary course of business
and consistent with past practice; (c) liabilities under the Parent Material
Contracts identified in Part 3.13 of the Parent Disclosure Schedule, to the
extent the nature and magnitude of such liabilities can be
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specifically ascertained by reference to the text of such Parent Material
Contracts; and (d) the liabilities identified in Part 3.14 of the Parent
Disclosure Schedule.
3.15 Compliance with Legal Requirements. Except as set forth in the Parent
SEC Documents, each of the Parent Companies is, and has at all times since June
30, 1996 been, in compliance with all applicable Legal Requirements, except
where the failure to comply with such Legal Requirements has not had and will
not have a Material Adverse Effect on Parent. Except as set forth in Part 3.15
of the Parent Disclosure Schedule, since June 30, 1996, none of the Parent
Companies has received any notice or other communication from any Governmental
Body regarding any actual or possible violation of, or failure to comply with,
any Legal Requirement that could have a Material Adverse Effect on Parent.
3.16 Governmental Authorizations. For purposes of this Section 3.16 and
Section 3.24 hereof, any representation with respect to any Parent Company or
Parent Program should only be deemed to be made by Parent with respect to the
activities of such Parent Company (or failures to act) in connection with such
Parent Company or Parent Program and not with respect to activities or failures
to act of any other Person, unless any Parent Company has actual knowledge of
any such activities or failure to act by a Parent Program. To the knowledge of
Parent, the Parent Companies and the Parent Programs have complied in all
material respects and are owned and operated in compliance in all material
respects with all applicable laws and regulations including, without limitation
regulations, guidelines and rules relating to Medicare, Medicaid, Tenncare, Blue
Cross, CHAMPUS and MediCal; and are certified for participation in the Medicare,
Medicaid, CHAMPUS, TennCare, and MediCal programs; and possess all licenses,
permits, certificates of need, registrations, contracts, requirements,
accreditations, certificates, authorizations, rights and approvals necessary to
own, operate or conduct the business in the manner presently conducted except
for any of the foregoing the failure of which to have would not have a Material
Adverse Effect on Parent (the "Regulatory Approvals"). To the knowledge of
Parent, each Regulatory Approval, whether issued in the name of a Parent Company
or maintained by any Parent Company for another pursuant to the terms of a
Parent Material Contract, has been lawfully and validly issued, is in full force
and effect, and no proceeding is pending or proposed to cancel, withdraw,
revoke, suspend, modify or limit any such Regulatory Approval. To the knowledge
of Parent, except as set forth in the Parent SEC Documents, none of the Parent
Companies nor any Parent Program has any knowledge of or has received either
orally or in writing any communication from any Governmental Body regarding any
actual or possible limitation, revocation, withdrawal, suspension, cancellation,
termination or modification of any Regulatory Approval applicable to any Parent
Company or Parent Program. There are no provisions or agreements which would
preclude or limit in any material respect any Parent Company from operating the
Parent Programs in a manner consistent with how such Parent Programs have been
operated prior to the date hereof. To the knowledge of Parent, any Parent
Company or Parent Program receiving funds from a federal, state or local
government are in compliance with the requirements of the governmental program,
except as set forth in the Parent SEC Documents and except for any failure to be
in compliance that would not have a Material Adverse Effect on Parent. To the
knowledge of Parent, except as disclosed in the Parent SEC Documents or Part
3.16 of the Parent Disclosure Schedule, no Parent Program is under investigation
with respect to, charged with violating or been given notice of any violation
of, any applicable law, statute, order, rule, regulation, policy, guideline, or
judgment entered, by any federal, state, local or foreign Governmental
Authority.
3.17 Tax Matters.
(a) All Tax Returns required to be filed by or on behalf of any Parent
Company with any Governmental Body with respect to any taxable period ending on
or before the Closing Date (the "Parent Returns") (i) have been or will be filed
on or before the applicable due date (including any extensions of such due
date), and (ii) have been, or will be when filed, accurately and completely
prepared in all material respects in compliance with all applicable Legal
Requirements. All amounts shown on the Parent Returns to be due on or before the
Closing Date have been or will be paid on or before the Closing Date. Parent has
delivered or made available to the Company accurate and complete copies of all
Parent Returns that have been requested by the Company.
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(b) The Parent Financial Statements fully accrue all actual and contingent
liabilities for Taxes with respect to all periods through the dates thereof in
accordance with generally accepted accounting principles. Parent will establish,
in the ordinary course of business and consistent with its past practice,
reserves adequate for the payment of all Taxes through the Closing Date, and
Parent will disclose the dollar amount of such reserves to the Company on or
prior to the Closing Date.
(c) Except as set forth in Part 3.17 of the Parent Disclosure Schedule,
there have been no examinations or audits of any Parent Return by any
Governmental Body. Parent has delivered or made available to the Company
accurate and complete copies of all audit reports and similar documents (to
which Parent has access) relating to the Parent Returns. Except as set forth in
Part 3.17 of the Parent Disclosure Schedule, no extension or waiver of the
limitation period applicable to any of the Parent Returns has been granted (by
any Parent Company or any other Person), and no such extension or waiver has
been requested from any Parent Company.
(d) No claim or Proceeding is pending or has been threatened against or
with respect to any Parent Company in respect of any Tax. There are no liens for
Taxes upon any of the assets of any Parent Company except liens for current
Taxes not yet due and payable. None of the Parent Companies has entered into or
become bound by any agreement or consent pursuant to Section 341(f) of the Code.
(e) Except as listed in Part 3.17 of the Parent Disclosure Schedule, there
is no agreement, plan, arrangement or other Contract covering any employee or
independent contractor or former employee or independent contractor of Parent
that, considered individually or considered collectively with any other such
Contracts, will, or could reasonably be expected to, give rise directly or
indirectly to the payment of any amount that would not be deductible pursuant to
Section 280G or Section 162 of the Code. None of the Parent Companies is, or has
been, a party to or bound by any tax indemnity agreement, tax sharing agreement,
tax allocation agreement or similar Contract.
3.18 Employee and Labor Matters; Benefit Plans.
(a) Part 3.18(a) of the Parent Disclosure Schedule identifies each written
or unwritten salary, bonus, deferred compensation, incentive compensation, stock
purchase, stock option, severance pay, termination pay, hospitalization,
medical, life or other insurance, supplemental unemployment benefits,
profit-sharing, pension or retirement plan, program or agreement (collectively,
the "Plans") sponsored, maintained, contributed to or required to be contributed
to by any Parent Company for the benefit of any employee of any Parent Company
("Employee").
(b) None of the Parent Companies maintains, sponsors or contributes to, nor
has at any time in the past maintained, sponsored or contributed to, any
employee pension benefit plan (as defined in Section 3(2) of ERISA, whether or
not excluded from coverage under specific Titles or Subtitles of ERISA) for the
benefit of Employees or former Employees (a "Pension Plan").
(c) Each of the Parent Companies maintains, sponsors or contributes only to
those employee welfare benefit plans (as defined in Section 3(1) of ERISA,
whether or not excluded from coverage under specific Titles or Merger Subtitles
of ERISA) for the benefit of Employees or former Employees which are described
in Part 3.18(c) of the Parent Disclosure Schedule (the "Welfare Plans"), none of
which is a multiemployer plan (within the meaning of Section 3(37) of ERISA).
(d) With respect to each Plan, Parent has delivered or made available to
the Company:
(i) an accurate and complete copy of such Plan (including all
amendments thereto);
(ii) an accurate and complete copy of the annual report, if required
under ERISA, with respect to such Plan for the last five years;
(iii) an accurate and complete copy of the most recent summary plan
description, together with each Summary of Material Modifications, if
required under ERISA, with respect to such Plan, and all material employee
communications relating to such Plan;
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(iv) if such Plan is funded through a trust or any third party funding
vehicle, an accurate and complete copy of the trust or other funding
agreement (including all amendments thereto) and accurate and complete
copies the most recent financial statements thereof;
(v) accurate and complete copies of all Contracts relating to such
Plan, including service provider agreements, insurance contracts, minimum
premium contracts, stop-loss agreements, investment management agreements,
subscription and participation agreements and record keeping agreements;
and
(vi) an accurate and complete copy of the most recent determination
letter received from the Internal Revenue Service with respect to such Plan
(if such Plan is intended to be qualified under Section 401(a) of the
Code).
(e) None of the Parent Companies is required to be, and, to the best of the
knowledge of Parent, has never been required to be, treated as a single employer
with any other Person under Section 4001(b)(1) of ERISA or Section 414(b), (c),
(m) or (o) of the Code. Parent has never been a member of an "affiliated service
group" within the meaning of Section 414(m) of the Code. None of the Parent
Companies has ever made a complete or partial withdrawal from a multiemployer
plan, as such term is defined in Section 3(37) of ERISA, resulting in
"withdrawal liability," as such term is defined in Section 4201 of ERISA
(without regard to subsequent reduction or waiver of such liability under either
Section 4207 or 4208 of ERISA).
(f) None of the Parent Companies has any plan or commitment to create any
additional Welfare Plan or Pension Plan, or to modify or change any existing
Welfare Plan or Pension Plan (other than to comply with applicable law) in a
manner that would affect any Employee.
(g) No Welfare Plan provides death, medical or health benefits (whether or
not insured) with respect to any current or former Employee after any such
Employee's termination of service (other than (i) benefit coverage mandated by
applicable law, including coverage provided pursuant to Section 4980B of the
Code, (ii) deferred compensation benefits accrued as liabilities on the Parent
Balance Sheet, and (iii) benefits the full cost of which are borne by current or
former Employees (or the Employees' beneficiaries)).
(h) With respect to each of the Welfare Plans constituting a group health
plan within the meaning of Section 4980B(g)(2) of the Code, the provisions of
Section 4980B of the Code ("COBRA") have been complied with in all material
respects.
(i) Each of the Plans has been operated and administered in all material
respects in accordance with applicable Legal Requirements, including, but not
limited to, ERISA and the Code.
(j) Each of the Plans intended to be qualified under Section 401(a) of the
Code has received a favorable determination from the Internal Revenue Service,
and Parent is not aware of any reason why any such determination letter should
be revoked.
(k) Neither the execution, delivery or performance of this Agreement, nor
the consummation of the Merger or any of the other transactions contemplated by
this Agreement, will result in any payment (including any bonus, golden
parachute or severance payment) to any current or former Employee or director of
any Parent Company (whether or not under any Plan), materially increase the
benefits payable under any Plan, or result in any acceleration of the time of
payment or vesting of any such benefits.
(l) None of the Parent Companies is a party to any collective bargaining
contract or other Contract with a labor union involving any of its Employees.
All of the Parent Companies' employees are "at will" employees.
(m) Except where the failure to comply has not had and will not have a
Material Adverse Effect on Parent, each of the Parent Companies is, and has at
all times since June 30, 1996 been, in compliance in all material respects with
all applicable Legal Requirements and Contracts relating to employment,
employment practices, wages, bonuses and terms and conditions of employment,
including employee compensation matters.
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3.19 Environmental Matters.
(a) None of the Real Properties is or has ever been, nor is Parent or any
of the Parent Subsidiaries or any other Person for whom Parent may be liable, in
violation of, and each of such Persons and the Real Properties is in full
compliance with, all Environmental Laws, except as would not, singly or in the
aggregate, have a Material Adverse Effect on Parent. During the time in which
any Real Property has been owned, operated, occupied or leased by any Parent
Company, neither such Parent Company nor any third party has used, generated,
manufactured, produced, stored or disposed of on, under or about the Real
Property, or transported to or from such Real Property any Hazardous Material,
except in compliance with Environmental Laws. There is no present or, to the
knowledge of the Parent, threatened Release of any Hazardous Materials in, on or
under the Property. If any pesticides have been disposed of, or placed, sprayed
or deposited on any Real Property, such acts have been in full compliance with
and such pesticides are registered under the Federal Insecticide, Fungicide, and
Rodenticide Act (7 U.S.C. section 136 et seq.), as amended, or any successor
statute, and any other applicable federal, state or local law or regulation
promulgated thereunder.
(b) Neither Parent nor any of the Parent Subsidiaries has received any
citation, directive, inquiry, summons, warning, order, notice or other written
communication, whether from a governmental authority, citizens' group, employee,
the current or prior owner or operator of any Facilities or otherwise, alleging
that any Parent Company or any other Person for whom any Parent Company may be
liable or any Real Property is not in full compliance with any Environmental
Laws or permit or authorization required under applicable Environmental Laws,
and, to the knowledge of Parent, there are no circumstances that may prevent or
interfere with such full compliance in the future. There is no legal or
administrative proceeding or inquiry pending or, to the knowledge of Parent,
threatened by any Person or any Governmental Body (including, without
limitation, the United States Environmental Protection Agency and any other
federal or state agency with jurisdiction over the Parent Companies any/or the
Real Property under any Environmental Laws) with respect to the presence of
Hazardous Materials on any Real Property or the migration thereof from or to
other property. Parent and each Parent Subsidiary has all permits, licenses and
approvals (which are included in the Permits) required by all applicable
Environmental Laws for the use and occupancy of, and all operations and
activities in, the Real Property, Parent and each Parent Subsidiary is in full
compliance with all such permits, licenses and approvals, and all such permits,
licenses and approvals were duly issued and are in full force and effect, except
for such failures to have permits, licenses or approvals or non-compliance that
would not, singly or in the aggregate, have a Material Adverse Effect on Parent.
(c) There is no claim, action, cause of action, investigation or written
notice by any Person alleging potential liability (including, without
limitation, potential liability for investigatory costs, natural resources
damages, property damages, personal injuries or penalties) arising out of, based
on or resulting from (i) the presence in or release into the environment of any
Hazardous Materials at any location owned, leased or operated, now or in the
past, including, without limitation, any Real Property, by any Parent Company or
any other Person for whom any Parent Company may be liable, or (ii)
circumstances forming the basis of any violation or alleged violation of any
Environmental Law (collectively, "Environmental Claims") pending or threatened
against any Parent Company or any other Person whose liability for any
Environmental Claim any Parent Company has retained or assumed either
contractually or by operation of law.
(d) There are no past or present actions, activities, circumstances,
conditions, events or incidents, including, without limitation, the release,
emission, discharge, presence or disposal of any Hazardous Materials, that could
reasonably be expected to form the basis of any Environmental Claim against
Parent or any Parent Subsidiary with respect to property owned, leased or
operated by or for Parent or any Parent Subsidiary, now or in the past,
including, without limitation, any Real Property or with respect to any property
in, on or under which are located Hazardous Materials that were generated by any
Parent Company or any other Person for whom any Parent Company may be liable, or
against any Person whose liability for any Environmental Claim any Parent
Company has retained or assumed either contractually or by operation of law.
3.20 Insurance. Part 3.20 of the Parent Disclosure Schedule identifies all
insurance policies maintained by, at the expense of or for the benefit of Parent
and the Parent Subsidiaries and identifies any material
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claims currently outstanding thereunder, and Parent has delivered or made
available to the Company accurate and complete copies of the insurance policies
identified on Part 3.20 of the Parent Disclosure Schedule. Each of the insurance
policies identified in Part 3.20 of the Parent Disclosure Schedule is in full
force and effect. Since June 30, 1996, none of the Parent Companies has received
any notice or other communication regarding any actual or possible (a)
cancellation or invalidation of any insurance policy, (b) refusal of any
coverage or rejection of any covered claim under any insurance policy, or (c)
material adjustment in the amount of the premiums payable with respect to any
insurance policy.
3.21 Legal Proceedings; Orders.
(a) Except as set forth in Part 3.21 of the Parent Disclosure Schedule, or
the Parent SEC Documents, there is no pending Legal Proceeding, and (to the best
of the knowledge of Parent) no Person has threatened to commence any Legal
Proceeding: (i) that involves any Parent Company or any of the properties or
assets owned or used by any Parent Company; or (ii) that challenges, or that
could reasonably be expected to have the effect of preventing, delaying, making
illegal or otherwise interfering with, the Merger. To the best of the knowledge
of Parent, no event has occurred, and no claim, dispute or other condition or
circumstance exists, that will, or that could reasonably be expected to, give
rise to or serve as a basis for the commencement of any such Legal Proceeding.
(b) Except as set forth in Part 3.21 of the Parent Disclosure Schedule or
the Parent SEC Documents or that will not have a Material Adverse Effect on
Parent, since June 30, 1996, no Legal Proceeding has been commenced by or has
been pending against any Parent Company.
(c) Except as will not have a Material Adverse Effect on Parent, there is
no order, writ, injunction, judgment or decree to which any Parent Company, or
any of the properties or assets owned or used by any Parent Company, is subject.
To the best of the knowledge of Parent, no officer or other employee of any
Parent Company is subject to any order, writ, injunction, judgment or decree
that prohibits such officer or other employee from engaging in or continuing any
conduct, activity or practice relating to the business of any Parent Company.
3.22 Full Disclosure.
(a) This Agreement (including the Parent Disclosure Schedule) does not (i)
contain any representation, warranty or information that is false or misleading
with respect to any material fact, or (ii) omit to state any material fact or
necessary in order to make the representations, warranties and information
contained and to be contained herein and therein (in the light of the
circumstances under which such representations, warranties and information were
or will be made or provided) not false or misleading.
(b) The information supplied by Parent for inclusion in the S-4
Registration Statement (as defined in Section 4.11) will not, as of the date of
the S-4 Registration Statement or as of the date of the Parent Stockholders'
Meeting (as defined in Section 4.7), (i) contain any statement that is
inaccurate or misleading with respect to any material fact, or (ii) omit to
state any material fact necessary in order to make such information (in the
light of the circumstances under which it is provided) not false or misleading.
3.23 Related Party Transactions. Except as set forth in the Parent SEC
Documents and except pursuant to ownership of Parent's outstanding securities:
(a) no Related Party has, and no Related Party has at any time since June 30,
1996 had, any direct or indirect interest in any material asset used in or
otherwise relating to the business of any Parent Company; (b) no Related Party
is, or has at any time since June 30, 1996 been, indebted to any Parent Company;
(c) since June 30, 1996, no Related Party has entered into, or has had any
direct or indirect financial interest in, any Parent Material Contract,
transaction or business dealing involving any Parent Company; (d) no Related
Party is competing, or has at any time since June 30, 1996 competed, directly or
indirectly, with any Parent Company; and (e) to the knowledge of Parent, no
Related Party has any claim or right against any Parent Company (other than
rights under stock options and rights to receive compensation for services
performed as an employee of any such Parent Company). (For purposes of the
Section 3.23 each of the following shall be deemed to be a "Related Party": (i)
each individual who is an executive officer or director of any Parent Company;
(iii) each member of the immediate family of each of the individuals referred to
in clause "(i)" above; and (iii) any trust or other Entity (other
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than the Parent Companies) in which any one of the individuals referred to in
clauses "(i)" and "(ii)" above holds (or in which more than one of such
individuals collectively hold), beneficially or otherwise, a material voting,
proprietary or equity interest.)
3.24 Medicare and Medicaid Participation.
(a) (i) There are no pending or, to the knowledge of Parent, threatened
claims or investigations by Medicare, Medicaid, Blue Cross or any other
cost-based third party payor (the "Programs") against any Parent Company or
Parent Program; and (ii) each Parent Company and Parent Program currently meets
the conditions for participation in the Programs.
(b) None of the Parent Companies or, to the knowledge of Parent, any other
Person who has a direct or indirect ownership interest (as those terms are
defined in 42 C.F.R. sec. 1001.1001(a)(2)) in any Parent Company or Parent
Program or who has an ownership or control interest in any Parent Company, or
who is an officer, director, agent, or managing employee of any Parent Company
or Parent Program and (ii) to the knowledge of Parent, no person with any
relationship with such entity who has an indirect ownership interest in any
Parent Company or Parent Program: (A) has had a civil monetary penalty assessed
against it under SSA sec. 1128A; (B) has been excluded from participation under
the Medicare programs or a State Health Care Program; (C) has been convicted (as
that term is defined in 42 C.F.R. sec. 1001.2) or any of the following
categories of offenses as described in SSA sec. 1128(a) and (b)(1), (2), (3):
(i) criminal offenses relating to the delivery of any item or service under
Medicare, Medicaid or any other State Health Care Program or any Federal Health
Care Program; (ii) criminal offenses under federal or state law relating to
patient neglect or abuse in connection with the delivery of a health care item
or service; (iii) criminal offenses under federal or state law relating to
fraud, theft, embezzlement, breach of fiduciary responsibility, or other
financial misconduct in connection with the delivery of a health care item or
service or with respect to any act or omission in a program operated by or
financed in whole or in part by any federal, state or local governmental entity;
(iv) federal or state laws relating to the interference with or obstruction of
any investigation into any criminal offense described in (i) through (iii)
above; or (v) criminal offense under federal or state law relating to the
unlawful manufacture, distribution, prescription or dispensing of a controlled
substance.
3.25 Illegal Payments. None of the Parent Companies has, directly or
indirectly, paid or delivered, or agreed to pay or deliver, any fee, commission
or other sum of money or item or property, however characterized, to any finder,
agent or government official, in the United States or any other country, which
is in any manner related to the business or operations of any Parent Company,
which Parent knows or has reason to believe to have been illegal under any
applicable Legal Requirements; and none of the Parent Companies has
participated, directly or indirectly, in any boycotts or other similar practices
affecting any of its actual or potential customers.
3.26 Fraud and Abuse. To the knowledge of Parent, none of the Parent
Companies nor any Affiliate is engaged in any activities that are prohibited
under federal Medicare and Medicaid statutes, including, without limitation, 42
U.S.C. sec.sec. 1320a-7 - 1320a-7b, 1395nn, and 1396b(s), the False Claims Act
or the regulations promulgated pursuant to such statutes, or any similar
federal, state or local statutes or regulations or which are prohibited by
binding rules of professional conduct or any other criminal or civil statute
invoked to penalize the submission of false claims, the making of false
statements, the failure to disclose information for which disclosure is
required, or financial relationships with physicians or others that constitute
illegal remuneration or violate the "Stark law," including, but not limited to,
the following:
(a) knowingly and willfully making or causing to be made a false
statement or representation of a material fact in any application for any
benefit or payment;
(b) knowingly and willfully making or causing to be made any false
statement or representation of a material fact for use in determining
rights to any benefit or payment;
(c) failing to disclose knowledge by a claimant of occurrence of any
event affecting the initial or continued right to any benefit or payment on
its own behalf or on behalf of another, with intent to secure such benefit
or payment fraudulently; or
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(d) knowingly and willfully soliciting or receiving any remuneration
(including any kickback, bribe or rebate), directly or indirectly, overtly
or covertly, in cash or in kind or offering to pay such remuneration (i) in
return for referring an individual to a person for the furnishing or
arranging for the furnishing of any item or service for which payment may
be made in whole or in part by Medicare, Medicaid or other applicable
governmental payors, or (ii) in return for purchasing, leasing or ordering
or arranging for or recommending the purchasing, leasing or order of any
good, facility, service or item for which payment may be made in whole or
in part by Medicare, Medicaid or other governmental payors.
The term "Affiliate" shall mean any corporation, partnership or organization,
whether now existing or hereafter created, which directly or indirectly
controls, is controlled by, or is under common control with, any Parent Company,
and any director or officer of each Parent Company or any such Affiliate.
SECTION 4. Covenants of the Parties
4.1 Access and Investigation.
(a) During the period from the date of this Agreement through the Effective
Time (the "Pre-Closing Period"), the Company shall, and shall cause its
Representatives to: (i) provide Parent and Parent's Representatives with
reasonable access to the Acquired Companies' Representatives, personnel,
properties and assets and to all existing books, records, Tax Returns, work
papers and other documents and information relating to the Acquired Companies;
and (ii) provide Parent and Parent's Representatives with copies of such
existing books, records, Tax Returns, work papers and other documents and
information relating to the Acquired Companies, and with such additional
financial, operating and other data and information regarding the Acquired
Companies, as Parent may reasonably request.
(b) During the Pre-Closing Period, Parent shall, and shall cause its
Representatives to: (i) provide the Company and the Company's Representatives
with reasonable access to the Parent Companies' Representatives, personnel,
properties and assets and to all existing books, records, Tax Returns, work
papers and other documents and information relating to Parent; and (ii) provide
the Company and the Company's representatives with copies of such existing
books, records, Tax Returns, work papers and other documents and information
relating to the Parent Companies, and with such additional financial, operating
and other data and information regarding the Parent Companies, as the Company
may reasonably request.
4.2 Operation of Business.
(a) During the Pre-Closing Period, except pursuant to prior written consent
of Parent, the Company shall, and shall cause each of the other Acquired
Companies to:
(i) conduct its business and operations in the ordinary course and in
substantially the same manner as such business and operations have been
conducted prior to the date of this Agreement;
(ii) use reasonable efforts (which shall not include or require the
expenditure of any funds, except consistent with the ordinary course of
business) to preserve intact its current business organization, keep
available the services of its current officers and employees and maintain
its relations and goodwill with all suppliers, customers, landlords,
creditors, employees and other Persons having business relationships with
it;
(iii) pay the premiums required by, and use its best efforts to keep
in full force, all insurance policies identified in Part 2.17 of the
Company Disclosure Schedule;
(iv) except as required by any agreement or designations (as set forth
in Part 2.5 of the Company Disclosure Schedule), not declare, accrue, set
aside or pay any dividend or make any other distribution in respect of any
shares of capital stock, and shall not repurchase, redeem or otherwise
reacquire any shares of capital stock or other securities;
(v) not sell, issue or authorize the issuance of (1) any capital stock
or other security, (2) any option or right to acquire any capital stock or
other security, or (3) any instrument convertible into or exchangeable for
any capital stock or other security (except that the Company shall be
permitted (x) to
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grant stock options to employees in accordance with its past practices and,
(y) to issue Company Common Stock to employees upon the exercise of
outstanding stock options, warrants and shares of preferred stock);
(vi) except as contemplated herein, not amend or waive any of its
rights under, or permit the acceleration of vesting under, (1) any
provision of the Company's stock option plans, (2) any provision of any
agreement evidencing any outstanding stock option or warrant, or (3) any
provision of any restricted stock purchase agreement;
(vii) except as contemplated herein, not amend or permit the adoption
of any amendment to the Company's Certificate of Incorporation or bylaws,
or, except as set forth in Part 4.2(a)(vii) of the Company Disclosure
Schedule, not effect or permit Company to become a party to any
recapitalization, reclassification of shares, stock split, reverse stock
split or similar transaction;
(viii) except as set forth in Part 4.2(a)(viii) of the Company
Disclosure Schedule, not form any subsidiary or acquire any equity interest
or other interest in any other Entity;
(ix) not make any capital expenditure, except for capital expenditures
that, when added to all other capital expenditures made on behalf of the
Acquired Companies during the Pre-Closing Period, do not exceed the amounts
set forth on Part 2.5 of the Company Disclosure Schedule;
(x) except for Company Material Contracts described in clauses (iii),
(vi), (ix), (xi) or (xii) of Section 2.10(a) that are entered into,
amended, terminated or waived in the ordinary course of business consistent
with past practice, not (1) enter into, or permit any of the properties or
assets owned or used by it to become bound by, any Company Material
Contract, or (2) amend or prematurely terminate, or waive any material
right or remedy under, any such Company Material Contract;
(xi) not (1) acquire, lease or license any right, personal or real
property or other asset from any other Person or, (2) sell or otherwise
dispose of, or lease or license, or waive or relinquish any right with
respect to, any right, personal or real property or other asset to any
other Person (other than the sale or other disposition of certain
subsidiaries of the Company listed in Part 4.2(a)(xi) of the Company
Disclosure Schedule), in each case, except for any such actions (x)
pursuant to Contracts that can be performed wholly or terminated (without
penalty) within one year by the Acquired Companies and (y) which do not
exceed $250,000 in value or liability (in any one transaction or series of
related transactions);
(xii) not lend money to any Person, except for any loan not exceeding
$250,000 for any one-year period to any Person who is not a Related Person
(as defined in Section 2.18) in the ordinary course of business consistent
with past practice;
(xiii) not incur or guarantee any indebtedness for borrowed money in
excess of $250,000 (except that the Acquired Companies may (1) make routine
borrowings in the ordinary course of business under their existing lines of
credit with Bank of America and (2) incur intercompany indebtedness in the
ordinary course of business consistent with past practice);
(xiv) except as set forth in Part 4.2(a)(xiv) of the Company
Disclosure Schedule, not (i) establish, adopt or amend any Employee Benefit
Plan except as contemplated herein, (ii) except in the ordinary course of
business consistent with past practice, pay any bonus or make any
profit-sharing payment, cash incentive payment or similar payment to, or
increase the amount of the wages, salary, commissions, fringe benefits or
other compensation or remuneration payable to, any of its directors,
officers or employees, (iii) hire any new employee whose aggregate annual
compensation is expected to exceed $150,000 or (iv) adopt any severance
plan or arrangement or enter into any severance agreement, or enter into
any other plan, arrangement or agreement providing for the payment of any
benefit or acceleration of any options upon a change in control or a
termination of employment;
(xv) not change any of its methods of accounting or accounting
practices in any material respect;
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(xvi) except as set forth in Part 2.9(a)(vi) of the Company Disclosure
Schedule, not make any Tax election;
(xvii) not commence or settle any material Legal Proceeding; provided,
however, that consent by Parent with respect to the commencement of any
Legal Proceeding shall not be unreasonably withheld or delayed;
(xviii) not agree or commit to take any of the actions described in
clauses "(iv)" through "(xvii)" above.
(b) During the Pre-Closing Period, except pursuant to prior written consent
of the Company, each of the Parent Companies shall:
(i) conduct its business and operations in the ordinary course and in
substantially the same manner as such business and operations have been
conducted prior to the date of this Agreement;
(ii) use reasonable efforts (which shall not include or require the
expenditure of any funds, except consistent with the ordinary course of
business) to preserve intact its current business organization, keep
available the services of its current officers and employees and maintain
its relations and goodwill with all suppliers, customers, landlords,
creditors, employees and other Persons having business relationships with
it;
(iii) pay the premiums required by, and use its best efforts to keep
in full force, all insurance policies identified in Part 3.20 of the Parent
Disclosure Schedule;
(iv) except as required by any agreement or designations (as set forth
in Part 4.2(b)(iv) of the Parent Disclosure Schedule), not declare, accrue,
set aside or pay any dividend or make any other distribution in respect of
any shares of capital stock, and shall not repurchase, redeem or otherwise
reacquire any shares of capital stock or other securities;
(v) not sell, issue or authorize the issuance of (1) any capital stock
or other security, (2) any option or right to acquire any capital stock or
other security, or (3) any instrument convertible into or exchangeable for
any capital stock or other security (except that Parent shall be permitted
(x) to grant stock options to employees in accordance with its past
practices and, (y) to issue Parent Common Stock to employees upon the
exercise of outstanding stock options, warrants and shares of preferred
stock);
(vi) except as contemplated herein, not amend or waive any of its
rights under, or permit the acceleration of vesting under, (1) any
provision of Parent's stock option plans, (2) any provision of any
agreement evidencing any outstanding stock option or warrant, or (3) any
provision of any restricted stock purchase agreement;
(vii) except as contemplated herein, not amend or permit the adoption
of any amendment to Parent's Certificate of Incorporation or bylaws, or,
except as set forth in Part 4.2(b)(vii) of the Parent Disclosure Schedule,
not effect or permit Parent to become a party to any recapitalization,
reclassification of shares, stock split, reverse stock split or similar
transaction;
(viii) except as set forth in Part 4.2(b)(viii) of the Parent
Disclosure Schedule, not form any subsidiary or acquire any equity interest
or other interest in any other Entity;
(ix) not make any capital expenditure, except for capital expenditures
that do not exceed $250,000 per month in the aggregate;
(x) except for Parent Material Contracts described in clauses (iii),
(vi), (ix), (xi) or (xii) of Section 3.13(a) that are entered into,
amended, terminated or waived in the ordinary course of business consistent
with past practice, not (1) enter into, or permit any of the properties or
assets owned or used by it to become bound by, any Parent Material
Contract, or (2) amend or prematurely terminate, or waive any material
right or remedy under, any such Parent Material Contract;
(xi) not (1) acquire, lease or license any right, personal or real
property or other asset from any other Person or, (2) sell or otherwise
dispose of, or lease or license, or waive or relinquish any right with
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respect to, any right, personal or real property or other asset to any
other Person, in each case, except for any such actions (x) pursuant to
Contracts that can be performed wholly or terminated (without penalty)
within one year by Parent and (y) which do not exceed $250,000 in value or
liability (in any one transaction or series of related transactions);
(xii) not lend money to any Person, except for any loan not exceeding
$250,000 for any one-year period to any Person who is not a Related Person
(as defined in Section 3.23) in the ordinary course of business consistent
with past practice;
(xiii) not incur or guarantee any indebtedness for borrowed money in
excess of $250,000 (except that the Parent Companies may (1) make routine
borrowings in the ordinary course of business under their existing lines of
credit with Sanwa Bank and (2) incur intercompany indebtedness in the
ordinary course of business consistent with past practice);
(xiv) except as set forth in Part 4.2(b)(xiv) of the Parent Disclosure
Schedule, not (i) establish, adopt or amend any Employee Benefit Plan
except as contemplated herein, (ii) except in the ordinary course of
business consistent with past practice, pay any bonus or make any
profit-sharing payment, cash incentive payment or similar payment to, or
increase the amount of the wages, salary, commissions, fringe benefits or
other compensation or remuneration payable to, any of its directors,
officers or employees, (iii) hire any new employee whose aggregate annual
compensation is expected to exceed $150,000 or (iv) except as contemplated
herein, adopt any severance plan or arrangement or enter into any severance
agreement, or enter into any other plan, arrangement or agreement providing
for the payment of any benefit or acceleration of any options upon a change
in control or a termination of employment;
(xv) not change any of its methods of accounting or accounting
practices in any material respect;
(xvi) not make any Tax election;
(xvii) not commence or settle any material Legal Proceeding; provided,
however, that consent by the Company with respect to the commencement of
any Legal Proceeding shall not be unreasonably withheld or delayed;
(xviii) not agree or commit to take any of the actions described in
clauses "(iv)" through "(xvii)" above.
4.3 Notification; Updates to Company Disclosure Schedule.
(a) During the Pre-Closing Period, the Company shall promptly notify Parent
in writing of:
(i) the discovery by the Company of any event, condition, fact or
circumstance that occurred or existed on or prior to the date of this
Agreement and that caused or constitutes a material inaccuracy in or
material breach of any representation or warranty made by the Company in
this Agreement;
(ii) any event, condition, fact or circumstance that occurs, arises or
exists after the date of this Agreement and that would cause or constitute
a material inaccuracy in or material breach of any representation or
warranty made by the Company in this Agreement if (A) such representation
or warranty had been made as of the time of the occurrence, existence or
discovery of such event, condition, fact or circumstance, or (B) such
event, condition, fact or circumstance had occurred, arisen or existed on
or prior to the date of this Agreement; and
(iii) any breach of any covenant or obligation of the Company.
(b) If any event, condition, fact or circumstance that is required to be
disclosed pursuant to Section 4.3(a) requires any change in the Company
Disclosure Schedule, or if any such event, condition, fact or circumstance would
require such a change assuming the Company Disclosure Schedule were dated as of
the date of the occurrence, existence or discovery of such event, condition,
fact or circumstance, then the Company shall promptly deliver to Parent an
update to the Company Disclosure Schedule specifying such change. No such update
shall be deemed to supplement or amend the Company Disclosure Schedule for the
purpose of determining whether any of the conditions set forth in Section 5 has
been satisfied.
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(c) During the Pre-Closing Period, Parent shall promptly notify the Company
in writing of:
(i) the discovery by Parent of any event, condition, fact or
circumstance that occurred or existed on or prior to the date of this
Agreement and that caused or constitutes a material inaccuracy in or
material breach of any representation or warranty made by Parent in this
Agreement;
(ii) any event, condition, fact or circumstance that occurs, arises or
exists after the date of this Agreement and that would cause or constitute
a material inaccuracy in or material breach of any representation or
warranty made by Parent in this Agreement if (A) such representation or
warranty had been made as of the time of the occurrence, existence or
discovery of such event, condition, fact or circumstance, or (B) such
event, condition, fact or circumstance had occurred, arisen or existed on
or prior to the date of this Agreement; and
(iii) any breach of any covenant or obligation of Parent.
(d) If any event, condition, fact or circumstance that is required to be
disclosed pursuant to Section 4.3(c) requires any change in the Parent
Disclosure Schedule, or if any such event, condition, fact or circumstance would
require such a change assuming the Parent Disclosure Schedule were dated as of
the date of the occurrence, existence or discovery of such event, condition,
fact or circumstance, then Parent shall promptly deliver to the Company an
update to the Parent Disclosure Schedule specifying such change. No such update
shall be deemed to supplement or amend the Parent Disclosure Schedule for the
purpose of determining whether any of the conditions set forth in Section 6 has
been satisfied.
4.4 No Negotiation.
(a) During the Pre-Closing Period, the Company shall not, and shall cause
its Representatives not to, directly or indirectly: (i) solicit or encourage the
initiation or submission of any expression of interest, inquiry, proposal or
offer from any Person (other than Parent) relating to a possible Company
Acquisition Transaction; (ii) participate in any discussions or negotiations or
enter into any agreement with, or provide any non-public information to or
cooperate in any other way with, any Person (other than Parent) relating to or
in connection with a possible Company Acquisition Transaction; or (iii)
consider, entertain or accept any proposal or offer from any Person (other than
Parent) relating to a possible Company Acquisition Transaction.
This Section 4.4(a) does not prohibit the Company from furnishing
information regarding the Company or entering into discussions or negotiations,
or any agreement, with any Person in response to an unsolicited bona fide
written proposal or offer relating to a possible Company Acquisition Transaction
submitted by such Person if the Board of Directors of the Company concludes in
good faith, based upon the advice of legal counsel, that such action is required
in order for the Board of Directors of the Company to comply with its fiduciary
obligations to the Company's stockholders under applicable law.
The parties acknowledge that any breach of the foregoing provisions by any
officer, director or agent (including any employee acting as agent) of any of
the Acquired Companies (including any breach by a Principal Stockholder) shall
be deemed a breach by the Company.
The Company shall, and shall cause its Representatives to, immediately
discontinue any ongoing discussions or negotiations (other than with Parent)
relating to a possible Company Acquisition Transaction. The Company shall
promptly notify Parent orally and in writing of any expression of interest,
inquiry, proposal, offer or request for information relating to a possible
Company Acquisition Transaction that is received by the Company, any of the
Principal Stockholders or any of their respective Representatives during the
Pre-Closing Period.
(b) During the Pre-Closing Period, Parent shall not, and shall cause its
Representatives not to, directly or indirectly: (i) solicit or encourage the
initiation or submission of any expression of interest, inquiry, proposal or
offer from any Person (other than the Company) relating to a possible Parent
Acquisition Transaction; (ii) participate in any discussions or negotiations or
enter into any agreement with, or provide any non-public information to or
cooperate in any other way with, any Person (other than the Company) relating to
or in
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connection with a possible Parent Acquisition Transaction; or (iii) consider,
entertain or accept any proposal or offer from any Person (other than the
Company) relating to a possible Parent Acquisition Transaction.
This Section 4.4(b) does not prohibit Parent from furnishing information
regarding Parent or entering into discussions or negotiations, or any agreement,
with any Person in response to an unsolicited bona fide written proposal or
offer relating to a possible Parent Acquisition Transaction submitted by such
Person if the Board of Directors of Parent concludes in good faith, based upon
the advice of legal counsel, that such action is required in order for the Board
of Directors of Parent to comply with its fiduciary obligations to Parent's
stockholders under applicable law.
The parties acknowledge that any breach of the foregoing provisions by any
officer, director or agent (including any employee of Parent acting as agent) of
Parent shall be deemed a breach by Parent.
Parent shall, and shall cause its Representatives to, immediately
discontinue any ongoing discussions or negotiations (other than with the
Company) relating to a possible Parent Acquisition Transaction. Parent shall
promptly notify the Company orally and in writing of any expression of interest,
inquiry, proposal, offer or request for information relating to a possible
Parent Acquisition Transaction that is received by Parent or any of its
Representatives during the Pre-Closing Period.
4.5 Filings and Consents. As promptly as practicable after the execution
of this Agreement, each party to this Agreement (a) shall make all filings (if
any) and give all notices (if any) required to be made and given by such party
in connection with the Merger and the other transactions contemplated by this
Agreement, including any filings required under the Securities Act, the HSR Act
and applicable state licensure laws, and (b) shall use all commercially
reasonable efforts to obtain all Consents (if any) required to be obtained
(pursuant to any applicable Legal Requirement or Contract, or otherwise) by such
party in connection with the Merger and the other transactions contemplated by
this Agreement. The Company and Parent shall promptly deliver to the other a
copy of each such filing made, each such notice given and each such Consent
obtained during the Pre-Closing Period.
4.6 Company Stockholders' Meeting.
(a) The Company shall take all action necessary under all applicable Legal
Requirements to call, give notice of, convene and duly hold a meeting of the
holders of Company Common Stock (the "Company Stockholders' Meeting") to
consider and vote upon this Agreement and the Merger. The Company Stockholders'
Meeting will be held as promptly as practicable and in any event within 45 days
after the S-4 Registration Statement (as defined in Section 4.11) is declared
effective under the Securities Act and Parent delivers to the Company the number
of Proxy Statements reasonably requested by the Company (which 45-day period
shall be extended on a day-for-day basis if and for so long as any stop order or
other similar action is in place, pending or threatened by the SEC).
(b) The board of directors of the Company (by at least a majority vote)
shall recommend that the Company's stockholders vote in favor of and adopt and
approve this Agreement and approve the Merger at the Company Stockholders'
Meeting; the Joint Proxy Statement shall include a statement to the effect that
the board of directors of the Company has recommended that the Company's
stockholders vote in favor of and adopt and approve this Agreement and approve
the Merger at the Company Stockholders' Meeting; and, subject to Section 4.6(c)
below, neither the board of directors of the Company nor any committee thereof
shall withdraw, amend or modify, or propose or resolve to withdraw, amend or
modify, in a manner adverse to Parent, the recommendation of the board of
directors of the Company that the Company's stockholders vote in favor of the
adoption and approval this Agreement and the approval of the Merger.
(c) Notwithstanding the foregoing, nothing in this Section 4.6 shall
prevent the Board of Directors of the Company from withdrawing, amending or
modifying its recommendation in favor of the Merger and approval and adoption of
this Agreement (and the Joint Proxy Statement may reflect such withdrawal,
amendment or modification) to the extent that the Board of Directors of the
Company shall conclude in good faith, based upon the advice of legal counsel,
that such withdrawal, amendment or modification is required in order for the
Board of Directors of the Company to act in a manner that is consistent with its
fiduciary obligations under applicable law.
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4.7 Parent Stockholders' Meeting.
(a) Parent shall take all action necessary under all applicable Legal
Requirements to call, give notice of, convene and duly hold a meeting of the
holders of outstanding Parent Common Stock to consider and vote upon the Merger
(the "Parent Stockholders' Meeting"). The Parent Stockholders' Meeting will be
held as promptly as practicable and in any event within 45 days after the S-4
Registration Statement is declared effective under the Securities Act (which
45-day period shall be extended on a day-for-day basis if and for so long as any
stop order or other similar action is in place, pending or threatened by the
SEC).
(b) The board of directors of Parent (by at least a majority vote) shall
recommend that Parent's stockholders vote in favor of the approval of the
Merger; the Joint Proxy Statement shall include a statement to the effect that
the board of directors of Parent has recommended that Parent's stockholders vote
in favor of the approval of the principal terms of the Merger; and, subject to
Section 4.7(c) below, neither the board of directors of Parent nor any committee
thereof shall withdraw, amend or modify, or propose or resolve to withdraw,
amend or modify, in a manner adverse to the Company, the recommendation of the
board of directors of Parent that Parent's stockholders vote in favor of the
approval of the principal terms of the Merger.
(c) Notwithstanding the foregoing, nothing in this Section 4.7 shall
prevent the Board of Directors of Parent from withdrawing, amending or modifying
its recommendation in favor of the Merger and approval and adoption of this
Agreement (and the Joint Proxy Statement may reflect such withdrawal, amendment
or modification) to the extent that the Board of Directors of Parent shall
conclude in good faith, based upon the advice of legal counsel, that such
withdrawal, amendment or modification is required in order for the Board of
Directors of Parent to act in a manner that is consistent with its fiduciary
obligations under applicable law.
4.8 Public Announcements. During the Pre-Closing Period, neither the
Company nor Parent shall (and the Company and Parent shall not permit any of
their respective Representatives to) issue any press release or make any public
statement regarding this Agreement or the Merger, or regarding any of the other
transactions contemplated by this Agreement, without the other party's prior
written consent; provided, however, that either party may make a public
statement or issue a press release in the event that such disclosure is required
by applicable law, based upon the written advice of outside legal counsel, in
which case the other party shall be consulted regarding the disclosure to be
made and shall be entitled to make or issue the same or similar disclosure or
release.
4.9 Surveys; Title Insurance.
(a) The Company shall use its best efforts to assist Parent in obtaining a
land survey for each parcel of Real Property owned by the Acquired Companies as
requested by Parent, which surveys shall be certified to Parent and the Company
(and any other party reasonably requested by Parent) and shall name Parent and
the Company (and such other parties as reasonably requested) as the parties for
whose benefit it is prepared. Parent shall pay for the costs of such surveys.
(b) The Company shall cause to be prepared and delivered to Parent within
thirty (30) days after the date of this Agreement a current, effective
commitment for title insurance (or at Parent's election for endorsement of
existing title insurance policies) for each parcel of Real Property owned by the
Acquired Companies (the "Title Commitments") issued by a title company or
companies (the "Title Company") reasonably satisfactory to Parent, with the
Surviving Corporation as the proposed insured, and accompanied by true,
complete, and legible copies of all documents referred to in the Title
Commitments.
(c) Parent shall be entitled to object to any title matters (other than
title matters which (1) are listed in clauses (ii) through (iv) of the
definition of Permitted Liens and (2) do not materially interfere with the
continued use of Owned Property as currently utilized) shown in the Title
Commitments, in its reasonable discretion, by a written notice of objections
delivered to the Company. The Company shall cooperate with Parent in curing any
objections Parent may have to title to the Real Property or obtaining
affirmative title insurance protection for such exceptions satisfactory to
Parent in Parent's reasonable discretion.
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(d) The Title Company shall deliver to Parent at Closing a commitment to
issue an ALTA Owner's Policy (Revised 10-17-70 and 10-17-84) (or other form if
required by state law) of title insurance, with extended coverage (i.e., with
ALTA General Exceptions 1 through 5 deleted, or with corresponding deletions if
the Property is located in a non-ALTA state), issued by the Title Company as of
the Closing Date containing the Endorsements, insuring the Acquired Companies as
owner of good, marketable (to the extent available in the particular
jurisdiction) and indefeasible fee simple title to the Real Property owned by
any Acquired Company, and subject only to the Title Exceptions (the "New Title
Policies"). "Title Exceptions" shall mean, except as do not materially interfere
with the continued use of Owned Property as currently utilized, (A) exceptions
to title to the Real Property owned by any Acquired Company set forth on the
Title Commitments and approved by Parent and (B) clauses (ii), (iii), (iv) and
(v) of the definition of Permitted Liens. "Endorsements" shall mean, to the
extent such endorsements are available under the laws of the state in which Real
Property is located: (1) owner's comprehensive; (2) access; (3) survey (accuracy
of survey); (4) location (survey legal matches title legal); (5) separate tax
lot; (6) legal lot; (7) zoning 3.1, with parking and loading docks; and (8) such
other endorsements as Parent may reasonably require. The Company shall execute
at Closing an ALTA Statement (Owner's Affidavit) and any other documents,
undertakings or agreements reasonably required by the Title Company to issue the
New Title Policies in accordance with the provisions of this Agreement.
4.10 Best Efforts. Each of the parties to this Agreement shall use its
reasonable efforts to take all action and to do all things necessary, proper or
advisable to consummate the Merger and the transactions contemplated by this
Agreement as promptly as possible (including, without limitation, using its
reasonable efforts to cause the conditions set forth in Sections 5 and 6 for
which they are responsible to be satisfied as soon as reasonably practicable and
to prepare, execute and deliver such further instruments and take or cause to be
taken such other and further action as any other party hereto shall reasonably
request).
4.11 Registration Statement; Proxy Statement.
(a) As promptly as practicable after the date of this Agreement, Parent
shall prepare (and the Company shall assist Parent in such preparation) and
cause to be filed with the SEC a registration statement on Form S-4 covering the
Parent Common Stock to be issued to the Company stockholders in the Merger (the
"S-4 Registration Statement"), in which the Joint Proxy Statement will be
included as a prospectus, and any other documents required by the Securities Act
or the Exchange Act in connection with the Merger. Parent shall use all
reasonable efforts to cause the S-4 Registration Statement (including the Joint
Proxy Statement) to comply with the rules and regulations promulgated by the
SEC, and each of Parent and the Company shall use all reasonable efforts to
respond promptly to any comments of the SEC or its staff, and Parent shall use
all reasonable efforts, and the Company shall cooperate with Parent, to have the
S-4 Registration Statement declared effective under the Securities Act as
promptly as practicable after it is filed with the SEC. Parent will use all
reasonable efforts to cause the Joint Proxy Statement to be mailed to Parent's
stockholders, and the Company will use all reasonable efforts to cause the Joint
Proxy Statement to be mailed to the Company's stockholders, as promptly as
practicable after the S-4 Registration Statement is declared effective under the
Securities Act. The Company shall promptly furnish to Parent all information
concerning the Acquired Companies and the Company's stockholders that is
required or reasonably requested by Parent in connection with any action
contemplated by this Section 4.11. If any event relating to the Acquired
Companies or if the Company becomes aware of any information that should be set
forth in an amendment or supplement to the S-4 Registration Statement or the
Joint Proxy Statement, then the Company shall promptly inform Parent thereof and
shall cooperate with Parent in filing such amendment or supplement with the SEC
and, if appropriate, in mailing such amendment or supplement to the stockholders
of the Company.
(b) Prior to the Effective Time, Parent shall use reasonable efforts to
obtain all regulatory approvals needed to ensure that the Parent Common Stock to
be issued in the Merger will be registered or qualified under the securities law
of every jurisdiction of the United States in which any registered holder of
Company Common Stock has an address of record on the record date for determining
the stockholders entitled to notice of and to vote at the Company Stockholders'
Meeting.
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(c) Parent shall promptly prepare and submit to the Nasdaq National Market
a listing application covering the shares of Parent Common Stock issuable in the
Merger, and shall use its reasonable efforts to obtain, prior to the Effective
Time, approval for the listing of such Parent Common Stock, subject to official
notice of issuance.
4.12 Regulatory Approvals. The Company and Parent shall, promptly after
the date of this Agreement, prepare and file the notifications, if any, required
under the HSR Act in connection with the Merger. The Company and Parent shall
respond as promptly as practicable to (i) any inquiries or requests received
from the Federal Trade Commission or the Department of Justice for additional
information or documentation and (ii) any inquiries or requests received from
any state attorney general or other Governmental Body in connection with
antitrust or related matters. Each of the Company and Parent shall (1) give the
other party prompt notice of the commencement of any Legal Proceeding by or
before any Governmental Body with respect to the Merger or any of the other
transactions contemplated by this Agreement, (2) keep the other party informed
as to the status of any Legal Proceeding, and (3) promptly inform the other
party of any communication to or from the Federal Trade Commission, the
Department of Justice or any other Governmental Body regarding the Merger. The
Company and Parent will consult and cooperate with one another, and will
consider in good faith the views of one another, in connection with any
analysis, appearance, presentation, memorandum, brief, argument, opinion or
proposal made or submitted in connection with any Legal Proceeding under or
relating to the HSR Act or any other federal or state antitrust or fair trade
law. In addition, except as may be prohibited by any Governmental Body or by any
Legal Requirement, in connection with any Legal Proceeding under or relating to
the HSR Act or any other federal or state antitrust or fair trade law or any
other similar Legal Proceeding, each of the Company and Parent agrees to permit
authorized Representatives of the other party to be present at each meeting or
conference relating to any such Legal Proceeding and to have access to and be
consulted in connection with any document, opinion or proposal made or submitted
to any Governmental Body in connection with any such Legal Proceeding.
4.13 Termination of Employee Plans. At the Closing, the Company shall
terminate its 1993 Stock Option Plan and its 1996 Stock Option Plan
(collectively, the "Option Plans") and shall ensure that no employee or former
employee of the Company has any rights under any of the Option Plans and that
any liabilities of the Company under the Option Plans (including any such
liabilities relating to services performed prior to the Closing) are fully
extinguished at no cost to the Company.
4.14 Repurchase Offer. Promptly after the execution of this Agreement, the
Company shall offer to repurchase, as of the Closing Date, all outstanding stock
options of the Company for an aggregate purchase price of $1,135,546 (the
"Repurchase Offer"). The offering documents to be sent to such option holders
shall be in form and substance reasonably acceptable to Parent.
4.15 Board Composition of Parent. Parent shall use all reasonable efforts,
subject to the fiduciary duties of Parent's directors, to ensure that, as soon
as practicable following the Effective Time, the board of directors of Parent
shall appoint Stack as a director of Parent pending Parent's 1998 Annual Meeting
of Stockholders and shall nominate Stack to be elected as a director of Parent
in the Proxy Statement for such Annual Meeting.
SECTION 5. Conditions Precedent to Obligations of Parent and Merger Sub.
The obligations of Parent and Merger Sub to effect the Merger and otherwise
consummate the transactions contemplated by this Agreement are subject to the
satisfaction, at or prior to the Closing, of each of the following conditions:
5.1 Accuracy of Representations. Each of the representations and
warranties made by the Company in this Agreement shall have been accurate in all
material respects as of the date of this Agreement, and shall be accurate in all
material respects on the Closing Date as if made on the Closing Date (without
giving effect to any update to the Company Disclosure Schedule not consented to
in writing by Parent).
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5.2 Performance of Covenants. All of the covenants and obligations that
the Company is required to comply with or to perform at or prior to the Closing
shall have been complied with and performed in all material respects.
5.3 Stockholder Approval. The principal terms of the Merger shall have
been duly approved by the affirmative vote of at least (a) a majority of the
Company Common Stock entitled to vote with respect thereto, (b) a majority of
the Series A Preferred Stock entitled to vote with respect thereto and (c) a
majority of the Parent Common Stock entitled to vote with respect thereto.
5.4 Consents. All Consents required to be obtained in connection with the
Merger and the other transactions contemplated by this Agreement (including the
Consents identified in Part 2.24 of the Company Disclosure Schedule and in Part
3.5 of the Parent Disclosure Schedule) shall have been obtained and shall be in
full force and effect.
5.5 Agreements and Documents. Parent shall have received the following
agreements and documents, each of which shall be in full force and effect:
(a) the Affiliate and Lock-Up Agreements executed by the Persons
identified on Exhibit C-1;
(b) the Company shall have obtained and delivered to Parent prior to
August 29, 1998 valid consents and agreements executed by all of the
Persons who are parties to the Existing Stockholders Agreements irrevocably
consenting and agreeing to the termination of each of the Existing
Stockholders Agreements, subject only to the consummation of the Merger;
(c) the Stockholder Agreements shall have been executed by each
Principal Stockholder and shall be enforceable against each Principal
Stockholder;
(d) the Series B Preferred Stock Agreement shall have been executed by
Welsh Carson shall have performed and complied with all obligations under
the Series B Preferred Stock Agreement required to be performed or complied
by it at or prior to the Effective Time;
(e) the Escrow Agreement shall have been executed by the Escrow Agent
and the Stockholders' Representatives;
(f) a legal opinion of Waller Lansden Dortch & Davis, A Professional
Limited Liability Company, dated as of the Closing Date, in form and
substance reasonably acceptable to Parent and its counsel;
(g) written resignations of all directors and officers of the Company
(other than Stack), effective as of the Effective Time; and
(h) customary closing certificates.
5.6 Stock Options and Warrants. Each and every unexpired and unexercised
stock option (not included in the Repurchase Offer) (other than the 1993
Options) and warrant of the Company outstanding immediately prior to the Closing
shall have been exercised by the holder thereof or shall have been terminated
and canceled effective upon the Effective Time.
5.7 Listing. The shares of Parent Common Stock to be issued in the Merger
shall have been approved for listing (subject to notice of issuance) on the
Nasdaq Stock National Market.
5.8 No Restraints. No temporary restraining order, preliminary or
permanent injunction or other order preventing the consummation of the Merger
shall have been issued by any court of competent jurisdiction and remain in
effect, and there shall not be any Legal Requirement enacted or reasonably
deemed applicable to the Merger that (i) makes consummation of the Merger
illegal or (ii) as a whole, is reasonably expected to have a material adverse
effect on the business, condition, assets, liabilities, operations or financial
performance of Parent or the Surviving Corporation following the consummation of
the Merger.
5.9 Effectiveness of Registration Statement. The S-4 Registration
Statement shall have become effective in accordance with the provisions of the
Securities Act, and no stop order shall have been issued or threatened by the
SEC with respect to the S-4 Registration Statement.
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5.10 No Legal Proceedings. No Person shall have commenced or threatened to
commence any Legal Proceeding (i) challenging or seeking the recovery of damages
in connection with the Merger or (ii) seeking to prohibit or limit the exercise
by Parent of any right pertaining to its ownership of stock of the Surviving
Corporation, in each case which is reasonably expected to have a material
adverse effect on the business, condition, assets, liabilities, operations or
financial performance of Parent or the Surviving Corporation following the
consummation of the Merger.
5.11 HSR Act. The waiting period applicable to the consummation of the
Merger under the HSR Act shall have expired or been terminated.
5.12 Termination of Employee Plans. The Company shall have provided Parent
with evidence, reasonably satisfactory to Parent, as to the termination of the
benefit plans referred to in Section 4.13.
5.13 Fairness Opinion. The board of directors of Parent shall have
received the written opinion of SunTrust Equitable Securities, financial advisor
to Parent, in customary form and to the effect that the consideration to be
received by the stockholders of the Company is fair to the stockholders of
Parent from a financial point of view.
5.14 Financing. Parent shall have received bank financing of at least
$175,000,000, on terms reasonably acceptable to Parent.
5.15 1998 Audited Financial Statements.
(a) Parent shall have received from the Company the audited balance sheet
of the Company as of June 30, 1998 and the related audited income statement,
statement of stockholders' equity and statement of cash flows of the Company for
the fiscal year ended June 30, 1998, together with the notes thereto and the
unqualified report and opinion of Ernst & Young LLP relating thereto
(collectively, the "1998 Financial Statements").
(b) Except as set forth in Part 2.5 of the Company Disclosure Schedule
(without giving effect to any update to the Company Disclosure Schedule not
consented to in writing by Parent), the 1998 Financial Statements shall not
reflect, when compared to the unaudited Company Financial Statements for the May
31, 1998 period ended May 31, 1998 to Parent on or prior to the date hereof, any
material adverse change, in the business, condition, assets, liabilities,
operations or financial performance of the Acquired Companies, considered as a
whole.
5.16 Environmental Reports. Parent shall have received from the Company
(at the sole cost of Parent) Phase I reports and any additional environmental
reports reasonably requested by Parent with respect to (i) each of the Owned
Properties listed on Exhibit J hereto and (ii) each stand-alone building leased
by the Acquired Companies.
5.17 New Title Policies. (i) Parent shall have received the New Title
Policies with respect to the Real Property owned by the Acquired Companies
complying with the requirements of Section 4.9 and (ii) Parent shall have also
received results of Uniform Commercial Code, judgment and tax lien searches
(dated within thirty (30) days of the Closing Date from the state and county in
which each Acquired Company's principal place of business is located and each
other state and county in which any of the Property is located), in each case
delivered by Company at Parent's expense, evidencing that no Encumbrances or
judgments of record exist against such Acquired Company, other than Permitted
Liens.
5.18 Amendment of THC Agreements. Section 9.6 of the Asset Purchase
Agreement, dated as of October 22, 1996, and Section 9.6 of the Merger
Agreement, dated October 22, 1996, between the Company and Transitional
Hospitals Corporation ("THC"), shall have been amended to the reasonable
satisfaction of Parent.
5.19 Acquisition of Stock and/or Assets of CBHS. The Company shall have
completed the acquisition of the stock and/or assets of CBHS, an affiliate of
Vencor; provided, however, that Parent shall have the option, at its sole
discretion after the completion of reasonable due diligence, to direct the
Company not to complete such acquisition (in which case this condition shall be
deemed waived by Parent).
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5.20 Government Regulations. There shall not have been a material adverse
change in governmental laws or regulations, or interpretations thereof, relating
to the healthcare industry from that in effect as of the date hereof.
5.21 Review of Leases. Parent shall have had the opportunity to review the
leases identified in Part 2.6(c) of the Company Disclosure Schedule and shall
have determined, in its sole reasonable discretion, that the provisions of such
leases would not result in a Material Adverse Effect on the Company; provided,
however, that this condition shall be deemed waived by Parent unless on or prior
to August 6, 1998, Parent terminates this Agreement due to the failure of this
condition to be satisfied.
SECTION 6. Conditions Precedent to Obligations of the Company
The obligations of the Company to effect the Merger and otherwise
consummate the transactions contemplated by this Agreement are subject to the
satisfaction, at or prior to the Closing, of the following conditions:
6.1 Accuracy of Representations. Each of the representations and
warranties made by Parent and Merger Sub in this Agreement shall have been
accurate in all material respects as of the date of this Agreement, and shall be
accurate in all material respects on the Closing Date as if made on the Closing
Date (without giving effect to any update to the Parent Disclosure Schedule not
conformed to in writing by the Company).
6.2 Performance of Covenants. All of the covenants and obligations that
Parent and Merger Sub are required to comply with or to perform at or prior to
the Closing shall have been complied with and performed in all material
respects.
6.3 Stockholder Approval. The principal terms of the Merger shall have
been duly approved by the affirmative vote of at least (a) a majority of the
Company Common Stock entitled to vote with respect thereto and (b) a majority of
the Parent Common Stock entitled to vote with respect thereto.
6.4 Consents. All Consents required to be obtained in connection with the
Merger and the other transactions contemplated by this Agreement (including the
Consents identified in Part 2.24 of the Company Disclosure Schedule and in Part
3.5 of the Parent Disclosure Schedule) shall have been obtained and shall be in
full force and effect.
6.5 Agreements and Documents. The Company shall have received the
following documents:
(a) a legal opinion of Cooley Godward LLP, dated as of the Closing
Date in form and substance reasonably acceptable to the Company and its
counsel;
(b) the Escrow Agreement shall have been executed by the Escrow Agent
and Parent;
(c) the Exchange Agent Agreement shall have been executed by the
Exchange Agent and Parent and shall be in full force and effect; and
(d) customary closing documents.
6.6 Listing. The shares of Parent Common Stock to be issued in the Merger
shall have been approved for listing (subject to notice of issuance) on the
Nasdaq National Market.
6.7 No Restraints. No temporary restraining order, preliminary or
permanent injunction or other order preventing the consummation of the Merger
shall have been issued by any court of competent jurisdiction and remain in
effect, and there shall not be any Legal Requirement enacted or deemed
applicable to the Merger that (i) makes consummation of the Merger illegal or
(ii) as a whole, is reasonably expected to have a material adverse effect on the
business, condition, assets, liabilities, operations or financial performance of
Parent or the Surviving Corporation following the consummation of the Merger.
6.8 Effectiveness of Registration Statement. The S-4 Registration
Statement shall have become effective in accordance with the provisions of the
Securities Act, and no stop order shall have been issued by the SEC with respect
to the S-4 Registration Statement.
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6.9 No Legal Proceedings. No Person shall have commenced or threatened to
commence any Legal Proceeding (i) challenging or seeking the recovery of damages
in connection with the Merger or (ii) seeking to prohibit or limit the exercise
by Parent of any right pertaining to its ownership of stock of the Surviving
Corporation, in each case which is reasonably expected to have a material
adverse effect on the business, condition, assets, liabilities, operations or
financial performance of Parent or the Surviving Corporation following the
consummation of the Merger.
6.10 HSR Act. The waiting period applicable to the consummation of the
Merger under the HSR Act shall have expired or been terminated.
6.11 Fairness Opinion. The board of directors of Parent shall have
received the written opinion of SunTrust Equitable Securities, financial advisor
to Parent, in customary form and to the effect that the consideration to be
received by the stockholders of the Company is fair to the stockholders of
Parent from a financial point of view.
6.12 Unaudited Interim Financial Statements.
(a) The Company shall have received from Parent the unaudited balance sheet
of Parent as of July 31, 1998 and the related unaudited income statement of the
Company for the quarter ended July 31, 1998, together with the notes thereto
(collectively, the "Unaudited Interim Financial Statements").
(b) Except as set forth in the Parent SEC Documents and in Part 3.8 of the
Parent Disclosure Schedule (without giving effect to any update to the Parent
Disclosure Schedule not consented to in writing by the Company), the Unaudited
Interim Financial Statements shall not reflect, when compared to the audited
financial statements of Parent for the year ended April 30, 1998 delivered to
the Company on or prior to the date hereof, any material adverse change, in the
business, condition, assets, liabilities, operations or financial performance of
the Parent Companies, considered as a whole.
6.13 Government Regulations. There shall not have been a material adverse
change in governmental laws or regulations, or interpretations thereof, relating
to the healthcare industry from that in effect as of the date hereof.
SECTION 7. Termination
7.1 Termination Events. This Agreement may be terminated prior to the
Closing:
(a) by Parent if Parent reasonably determines that the timely
satisfaction of any condition set forth in Section 5 (other than Section
5.5(b)) has become impossible (other than as a result of any failure on the
part of Parent or Merger Sub to comply with or perform any covenant or
obligation of Parent or Merger Sub set forth in this Agreement);
(b) by the Company if the Company reasonably determines that the
timely satisfaction of any condition set forth in Section 6 has become
impossible (other than as a result of any failure on the part of the
Company or any of the Principal Stockholders to comply with or perform any
covenant or obligation set forth in this Agreement or in the Stockholders
Agreements, respectively);
(c) by Parent if the Closing has not taken place on or before January
31, 1999 (other than as a result of any failure on the part of Parent or
Merger Sub to comply with or perform any covenant or obligation of Parent
or Merger Sub set forth in this Agreement);
(d) by the Company if the Closing has not taken place on or before
January 31, 1999 (other than as a result of the failure on the part of the
Company or any of the Principal Stockholders to comply with or perform any
covenant or obligation set forth in this Agreement or in the Stockholders
Agreements, respectively);
(e) by the mutual consent of Parent and the Company;
(f) by Parent (at any time prior to stockholder approval of this
Agreement, the Merger and the transactions contemplated hereby) if,
pursuant to and in compliance with Section 4.4(b), Parent and its
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Board of Directors conclude in good faith that Parent must accept an
unsolicited bona fide written proposed Parent Acquisition Transaction which
could reasonably be expected to result in a transaction that is more
favorable to Parent's stockholders than the Merger (any such more favorable
proposed Parent Acquisition Transaction being referred to in this Agreement
as a "Superior Proposal"); provided, however, that if this Agreement is
terminated pursuant to this Section 7.1(f), Parent shall pay to the Company
a nonrefundable fee of $7.5 million in cash (and no additional fee will be
required under Section 7.3) upon Parent's (or its Board of Directors')
election to accept such Superior Proposal. In reaching such conclusion, the
Board of Directors shall consult with outside legal counsel (and other
advisors as appropriate);
(g) by Parent as provided in Section 7.3;
(h) by the Company as provided in Section 7.3; or
(i) by Parent after August 29, 1998 if the condition set forth in
Section 5.5(b) has not been satisfied.
7.2 Termination Procedures. If Parent wishes to terminate this Agreement
pursuant to Section 7.1(a), Section 7.1(c), Section 7.1(f), Section 7.1(g) or
Section 7.1(i), Parent shall deliver to the Company a written notice stating
that Parent is terminating this Agreement and setting forth a brief description
of the basis on which Parent is terminating this Agreement. If the Company
wishes to terminate this Agreement pursuant to Section 7.1(b), Section 7.1(d) or
Section 7.1(h), the Company shall deliver to Parent a written notice stating
that the Company is terminating this Agreement and setting forth a brief
description of the basis on which the Company is terminating this Agreement.
7.3 Termination Fees.
(a) Parent may terminate this Agreement immediately (unless already
terminated as provided in clause (iv) below) and the Company shall pay to Parent
a nonrefundable termination fee of $7.5 million in cash payable upon termination
of this Agreement, if (i) at any time prior to the Closing Date, the Company
accepts a third party proposal or offer relating to a possible Company
Acquisition Transaction; (ii) the Company fails to complete the Company
Stockholders' Meeting as required herein; (iii) the Company's board of directors
withdraws, amends or modifies, in a manner adverse to Parent, its recommendation
that the Company's stockholders vote in favor of the adoption and approval of
this Agreement and the approval of the Merger; or (iv) the Company terminates
this Agreement other than pursuant to Section 7.1; provided, however, that no
termination fee shall be payable in the event that Parent terminates this
Agreement pursuant to Section 5.21.
(b) The Company may terminate this Agreement immediately (unless already
terminated as provided in clause (iv) below) and Parent shall pay to the Company
a nonrefundable termination fee of $7.5 million in cash payable upon termination
of this Agreement, if (i) at any time prior to the Closing Date, Parent accepts
a third party proposal or offer relating to a possible Parent Acquisition
Transaction; (ii) Parent fails to complete the Parent Stockholders' Meeting as
required herein; (iii) Parent's board of directors withdraws, amends or
modifies, in a manner adverse to the Company, its recommendation that the
Parent's stockholders vote in favor of the adoption and approval of this
Agreement and the approval of the Merger; or (iv) Parent terminates this
Agreement other than pursuant to Section 7.1.
7.4 Effect of Termination. If this Agreement is terminated pursuant to
Section 7.1, all further obligations of the parties under this Agreement shall
terminate; provided, however, that: (a) neither the Company nor Parent shall be
relieved of any obligation or liability arising from any prior breach by such
party of any provision of this Agreement or any obligation to pay a termination
fee as set forth in Section 7.3; (b) the parties shall, in all events, remain
bound by and continue to be subject to the provisions set forth in Section 9;
and (c) the parties shall, in all events, remain bound by and continue to be
subject to Section 4.8.
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SECTION 8. Indemnification, Etc.
8.1 Survival of Representations, Etc.
(a) The representations and warranties made (i) by the Company (including
the representations and warranties set forth in Section 2 and the
representations and warranties set forth in any certificate delivered at Closing
by an officer of the Company) and (ii) by Parent and Merger Sub (including the
representations and warranties set forth in Section 3 and the representations
and warranties set forth in any certificate delivered at Closing by an officer
of Parent or Merger Sub) shall survive the Closing and shall expire on the
18-month anniversary of the Closing Date (the "Expiration Date").
(b) The representations, warranties, covenants and obligations of Parent,
Merger Sub and the Company, and the rights and remedies that may be exercised by
such parties, shall not be limited or otherwise affected by or as a result of
any information furnished to, or any investigation made by or knowledge of, any
of the such parties or any of their Representatives.
(c) For purposes of this Agreement, (i) each statement or other item of
information set forth in the Company Disclosure Schedule or in any update to the
Company Disclosure Schedule shall be deemed to be a part of the representations
and warranties made by the Company in this Agreement and (ii) each statement or
other item of information set forth in the Parent Disclosure Schedule or in any
update to the Parent Disclosure Schedule shall be deemed to be a part of the
representations and warranties made by Parent and Merger Sub in this Agreement.
8.2 Indemnification by Stockholders.
(a) From and after the Effective Time (but subject to Section 8.1(a), this
Section 8.2, Section 8.4 and Section 9.11), the Stockholders, jointly and
severally, shall hold harmless and indemnify each of the Parent Indemnitees from
and against, and shall compensate and reimburse each of the Parent Indemnitees
for, any Damages which are directly or indirectly suffered or incurred by any of
the Parent Indemnitees or to which any of the Parent Indemnitees become subject
(regardless of whether or not such Damages relate to any third-party claim) and
which arise from or as a result of, or are directly or indirectly connected
with: (i) any inaccuracy in or breach of any representation or warranty set
forth in Section 2 or in any certificate delivered at Closing by an officer of
the Company (without giving effect to any "Material Adverse Effect" or other
materiality qualification or any similar qualification contained or incorporated
directly or indirectly in such representation or warranty, but giving effect to
the Company Disclosure Schedule and any update thereto delivered by the Company
to Parent prior to the Closing); (ii) any breach of any covenant or obligation
of the Company (including the covenants set forth in Section 4); (iii) any
activities of any Acquired Company of the type described in Section 2.22 engaged
in by such Acquired Company prior to the Closing Date or; (iv) any Legal
Proceeding relating to any inaccuracy or breach of the type referred to in
clause "(i)," "(ii)" or "(iii)" above (including any Legal Proceeding commenced
by any Parent Indemnitee for the purpose of enforcing any of its rights under
this Section 8 or the Escrow Agreement). Notwithstanding the foregoing, the
Parent Indemnitees' sole recourse for any Damages with respect to which
indemnification is sought under this Section 8 (other than Damages determined by
a court of competent jurisdiction in a proceeding from which no further appeal
is permitted to be taken to have been primarily caused by fraud or intentional
misrepresentation) shall be to the Escrow Amount. In no event shall a
Stockholder's liability for any Damages with respect to which indemnification is
sought be in excess of such Stockholder's pro rata amount of the Escrow Amount
and no Stockholder shall have any personal liability for any Damages except with
respect to Damages determined by a court of competent jurisdiction in a
proceeding from which no further appeal is permitted to be taken to have been
primarily caused by fraud or intentional misrepresentation or intentional breach
by the Company.
(b) The Company acknowledges and agrees that, if the Surviving Corporation
suffers, incurs or otherwise becomes subject to any Damages as a result of or in
connection with any inaccuracy in or breach of any representation, warranty,
covenant or obligation identified in clause (i), (ii) or (iii) of Section
8.2(a), then (without limiting any of the rights of the Surviving Corporation as
an Indemnitee) Parent shall also be
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deemed, by virtue of its ownership of the stock of the Surviving Corporation, to
have incurred Damages as a result of and in connection with such inaccuracy or
breach.
(c) In the event of the assertion or commencement by any Person of any
claim or Legal Proceeding (whether against the Surviving Corporation, against
Parent or against any other Parent Indemnitee) with respect to which the
Stockholders may become obligated to hold harmless, indemnify, compensate or
reimburse any Parent Indemnitee pursuant to this Section 8.2, Parent shall have
the right, at its election, subject to the Escrow Agreement, to proceed with the
defense of such claim or Legal Proceeding on its own. If Parent so proceeds with
the defense of any such claim or Legal Proceeding:
(i) all reasonable expenses relating to the defense of such claim or
Legal Proceeding shall be borne and paid exclusively by the Stockholders
solely from the Escrow Amount; provided, however, that Parent shall
reimburse the Stockholders (or the Escrow Agent, as appropriate) for such
expenses if it is ultimately determined by a court of competent
jurisdiction, in a final, non-appealable order, that the Parent Indemnitees
were not entitled to be indemnified against such claim or Legal Proceeding;
(ii) each Stockholder shall make available to Parent any documents and
materials in his possession or control that may be necessary to the defense
of such claim or Legal Proceeding; and
(iii) Parent shall have the right to settle, adjust or compromise such
claim or Legal Proceeding with the consent of the Stockholders'
Representatives; provided, however, that such consent shall not be
unreasonably withheld.
Parent shall give the Stockholders' Representatives prompt notice of the
commencement of any such Legal Proceeding against Parent or the Surviving
Corporation; provided, however, that any failure on the part of Parent to so
notify the Stockholders' Representatives shall not limit any of the obligations
of the Stockholders under this Section 8 (except to the extent such failure
materially prejudices the defense of such Legal Proceeding).
8.3 Indemnification by Parent. From and after the Effective Time (but
subject to Section 8.1(a), this Section 8.3, Section 8.4 and Section 9.11),
Parent shall hold harmless and indemnify each of the Stockholder Indemnitees
from and against, and shall compensate and reimburse each of the Stockholder
Indemnitees for, any Damages which are directly or indirectly suffered or
incurred by any of the Stockholder Indemnitees or to which any of the
Stockholder Indemnitees may otherwise become subject (regardless of whether or
not such Damages relate to any third-party claim), and which arise from or as a
result of, or are directly or indirectly connected with: (i) any inaccuracy in
or breach of any representation or warranty set forth in Section 3 or in any
certificate delivered at Closing by an officer of Parent or Merger Sub (without
giving effect to any "Material Adverse Effect" or other materiality
qualification or any similar qualification contained or incorporated directly or
indirectly in such representation or warranty, but giving effect to the Parent
Disclosure Schedule and any update thereto delivered by Parent to the Company
prior to the Closing); (ii) any breach of any covenant or obligation of Parent
or Merger Sub (including the covenants set forth in Section 4); (iii) any
activities of any Parent Company of the type described in Section 3.26 engaged
in by such Parent Company prior to the Closing Date; or (iv) any Legal
Proceeding relating to any inaccuracy or breach of the type referred to in
clause "(i)," "(ii)" or "(iii)" above (including any Legal Proceeding commenced
by any Stockholder Indemnitee for the purpose of enforcing any of its rights
under this Section 8. For purposes of measuring the Damages suffered or incurred
by the Stockholder Indemnitees pursuant to this Section 8.3, the Stockholders'
percentage ownership in Parent Common Stock as of the Effective Time shall be
multiplied by the actual damages to Parent relating to clauses (i), (ii) and
(iii) above. Notwithstanding the foregoing, the maximum aggregate liability of
Parent pursuant to this Section 8 (other than Damages determined by a court of
competent jurisdiction in a proceeding from which no further appeal is permitted
to be taken to have been primarily caused by fraud or intentional
misrepresentation) shall not exceed $1,630,000.
The Stockholders' Representatives shall give Parent prompt notice of the
commencement of any such Legal Proceeding against the Stockholders; provided,
however, that any failure on the part of the Stockholders' Representatives to so
notify Parent shall not limit any of the obligations of Parent under this
Section 8 (except to the extent such failure materially prejudices the defense
of such Legal Proceeding).
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8.4 Further Limitations on Indemnification. Notwithstanding the foregoing,
the right to indemnification under this Section 8 shall be subject to the
following:
(a) The Stockholders shall have no liability under Section 8.2 except
to the extent that the Damages exceed $2,000,000 in the aggregate (the
"Stockholders' Threshold Amount"), in which event the Stockholders shall be
liable for $1,000,000 of such Threshold Amount and for all Damages in
excess of the Threshold Amount, pursuant to the provisions of this Section
8; provided, however, in no event shall the Stockholders be liable for
Damages, in the aggregate, in excess of $8,000,000.
(b) Parent shall have no liability under Section 8.3 except to the
extent that the Damages exceed $407,500 in the aggregate (the "Parent
Threshold Amount"), in which event Parent shall be liable for $203,750 of
such Parent Threshold Amount and for all Damages in excess of the Parent
Threshold Amount, pursuant to the provisions of this Section 8; provided,
however, in no event shall Parent be liable for Damages, in the aggregate,
in excess of $1,630,000.
(c) No indemnification shall be payable pursuant to Sections 8.2 or
8.3, as the case may be, after the Expiration Date, except for claims for
Damages made prior to the Expiration Date but not then resolved.
(d) All indemnification claims made under Section 8.2 shall be
satisfied solely from the Escrow Amount.
(e) The limitations of Sections 8.4(a), 8.4(b), 8.4(c) and 8.4(d)
shall not apply to any claim for Damages that are determined by a court of
competent jurisdiction in a proceeding from which no further appeal is
permitted to be taken to have been primarily caused by fraud or intentional
misrepresentation or intentional breach of any party.
(f) In determining the amount of any indemnity under Section 8.2 or
8.3, the Damages shall be reduced (including, without limitation,
retroactively) by any insurance proceeds, tax benefit or other similar
recovery or offset (collectively, a "Third Party Recovery") realized,
directly or indirectly, by the Indemnitee actually recovered by or on
behalf of such Indemnitee in reduction of the loss giving rise to the claim
for Damages. In connection with the foregoing sentence, the Indemnitee
shall, or shall cause its Representatives to, pursue any such Third Party
Recovery to the extent the Indemnitee determines, in its reasonable
business judgement, that the prospects of recovery justify the expenses of
pursuing such Third Party Recovery.
(g) Neither Parent nor the Stockholders (as a group) (as applicable,
the "Indemnifying Party") shall have liability under Section 8.2 or Section
8.3, as applicable, for Damages directly relating to changes in
governmental laws or regulations, or interpretations thereof, relating to
the healthcare industry from that in effect as of the Closing Date.
8.5 Satisfaction of Indemnification Claim by Stockholder Indemnitees.
(a) In the event Parent shall have any liability (for indemnification or
otherwise) to any Stockholder Indemnitee under this Section 8, Parent shall, at
Parent's option, satisfy such liability either (i) in cash, (ii) by delivering
to such Stockholder Indemnitee the number of shares of Parent Common Stock
determined by dividing (a) the aggregate dollar amount of such liability by (b)
$9.2596 (as adjusted as appropriate to reflect any stock split, reverse stock
split, stock dividend, recapitalization or other similar transaction effected by
Parent between the Effective Time and the date such liability is satisfied) or
(iii) any combination thereof.
(b) If a Stockholder has incurred or suffered Damages for which it is
entitled to indemnification under this Section 8, such Stockholder, shall, on or
prior to the Expiration Date, give written notice of such claim (a "Claim
Notice") to Parent. Each Claim Notice shall state the amount of claimed Damages
(the "Claimed Amount") and the basis for such claim. No Stockholder shall make
any claim for Damages after the Expiration Date.
(c) Within thirty (30) days of receipt of a Claim Notice, Parent shall
provide to the Stockholder a written response (the "Response Notice") in which
Parent shall (i) agree that the full Claimed Amount is
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valid, (ii) agree that part, but not all, of the Claimed Amount (the "Agreed
Amount") is valid, or (iii) contest that any or all of the Claimed Amount is
valid. Parent may contest a Claimed Amount only based upon a good faith belief
that all or such portion of the Claimed Amount does not constitute Damages for
which a Stockholder Indemnitee at issue is entitled to indemnification under
this Section 8. If no Response Notice is delivered by Parent within such thirty
(30) day period, Parent shall be deemed to have agreed that the Claimed Amount
is valid and that the Stockholder Indemnitee at issue is entitled to
indemnification under this Section 8.
(d) If Parent in the Response Notice agrees or, by failing to provide a
Response Notice, is deemed to have agreed that the Claimed Amount is valid,
Parent shall promptly following the required delivery date for the Response
Notice deliver to the Stockholders who have incurred such Damages, in cash
and/or shares of Parent Common Stock, the amount sufficient to satisfy the
Claimed Amount, as determined pursuant to Section 8.5(a).
(e) If Parent in the Response Notice agrees that part, but not all, of the
Claimed Amount is valid, Parent shall promptly following the required delivery
date for the Response Notice deliver to the Stockholders who have incurred such
Damages, in cash and/or shares of Parent Common Stock, the amount necessary to
satisfy the Agreed Amount, as determined pursuant to Section 8.5(a).
(f) If Parent in the Response Notice contests the release of all or a part
of the Claimed Amount (the "Contested Amount"), Parent shall not be required to
deliver any Contested Amount to the Stockholders until (i) such time as the
Stockholders shall agree in writing as to the amount to be delivered to the
Stockholders, if any, or (ii) receipt by Parent of a final, nonappealable copy
of a court order setting forth instructions to Parent as to the amount to be
delivered to the Stockholders, if any.
8.6 No Contribution. Each Stockholder waives, and acknowledges and agrees
that he shall not have and shall not exercise or assert (or attempt to exercise
or assert), any right of contribution, right of indemnity or other right or
remedy against the Surviving Corporation in connection with any indemnification
obligation or any other liability to which he may become subject under or in
connection with this Agreement.
8.7 Right to Assume Defense. Subject to the provisions hereinafter stated,
in case any action pursuant to Section 8.2 or 8.3 shall be brought against an
Indemnitee and the Indemnifying Party shall have been notified thereof, such
Indemnifying Party shall be entitled to participate therein, and, to the extent
it shall wish, to assume the defense thereof, with counsel reasonably
satisfactory to such Indemnitee. After notice from the Indemnifying Party to
such Indemnitee of its election to assume the defense thereof, such Indemnifying
Party shall not be liable to such Indemnitee for any legal expenses subsequently
incurred by such Indemnitee in connection with the defense thereof; provided,
however, that if there exists or shall exist a conflict of interest that would
make it inappropriate under applicable standards of professional conduct, in the
written opinion of counsel to the Indemnitee, for the same counsel to represent
both the Indemnitee and such Indemnifying Party, the Indemnitee shall be
entitled to retain its own counsel at the expense of such Indemnifying Party;
provided, however, that no Indemnifying Party shall be responsible for the fees
and expenses of more than one separate counsel for all Indemnitees.
SECTION 9. Miscellaneous Provisions.
9.1 Appointment of Stockholders' Representatives.
(a) Vencor, Welsh Carson and Stack shall, by virtue of the Merger, be
irrevocably appointed representatives of the Stockholders and authorized and
empowered to act for and on behalf of any or all of the Stockholders in
connection with the indemnification provisions of Section 8 and the Escrow
Agreement as they relate to the Stockholders generally, and such other matters
as are reasonably necessary for the consummation of the transactions
contemplated hereby including, without limitation, to act as the representatives
of the Stockholders to resolve, dispose of or otherwise handle all claims
arising out of or related to this Agreement in accordance with the terms hereof,
to compromise on their behalf with Parent any claims asserted thereunder and to
authorize payments to be made with respect thereto and to take such further
actions as are authorized in this Agreement or the Escrow Agreement (the above
named representatives, as
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well as any subsequent representatives of the Stockholders elected by vote of
holders owning a majority of the Converted Shares outstanding immediately prior
to the Effective Time being referred to herein as the "Stockholders'
Representatives"). The Stockholders further irrevocably appoint Stack as the
principal representative (the "Principal Representative") with full power and
authority to act on behalf of the Stockholders' Representatives with respect to
any action to be taken or omitted to be taken by the Stockholders'
Representatives under or in connection with this Agreement and the Escrow
Agreement. Notwithstanding any statement contained in this Agreement or the
Escrow Agreement to the contrary, Parent and the Escrow Agent may rely
conclusively, and shall be protected in so acting, upon any written order,
notice, demand, certificate, statement, document or instruction (not only as to
its due execution and the validity and effectiveness of its provisions, but also
as to the truth and acceptability of any information therein contained) executed
and delivered by the Principal Representative (but not any of the other
Stockholders' Representatives) whether delivered in original form, by facsimile
or otherwise. The Stockholders' Representatives shall not be liable to any
Stockholder with respect to any action taken or omitted to be taken by any of
the Stockholders' Representatives acting in his capacity as Stockholders'
Representative under or in connection with this Agreement or the Escrow
Agreement, unless such action or omission results from or arises out of fraud,
recklessness, willful misconduct, criminal action or bad faith on the part of
the Stockholders' Representative. Parent and Merger Sub shall be entitled to
rely on such appointments and treat the Stockholders' Representatives as the
duly appointed representatives of each Stockholder. Each Stockholder who votes
in favor of the Merger and the transactions contemplated by this Agreement, by
such vote, without any further action, and each Stockholder who receives Merger
Consideration in connection with the Merger, by acceptance thereof and without
any further action, confirms such appointment and authority of the Stockholders'
Representatives and the Principal Representative and acknowledges and agrees
that such appointment is irrevocable and coupled with an interest.
(b) Each Stockholders' Representative shall be solely responsible for all
fees, costs and expenses incurred by it in connection with serving as a
representative of the Stockholders hereunder; provided, however, the
Stockholders' Representatives shall be entitled to reimbursement for all such
fees, costs and expenses out of the funds, if any, otherwise distributable to
the Stockholders upon the final release to the Stockholders of funds held
pursuant to the Escrow Agreement.
9.2 Further Assurances. Each party hereto shall execute and cause to be
delivered to each other party hereto such instruments and other documents, and
shall take such other actions, as such other party may reasonably request (prior
to, at or after the Closing) for the purpose of carrying out or evidencing any
of the transactions contemplated by this Agreement.
9.3 Fees and Expenses.
(a) Each party to this Agreement shall bear and pay all fees, costs and
expenses (including legal fees and accounting fees) that have been incurred or
that are incurred by such party in connection with the transactions contemplated
by this Agreement, including all fees, costs and expenses incurred by such party
in connection with or by virtue of (a) the investigation and review conducted by
Parent and its Representatives with respect to the business of the Acquired
Companies (and the furnishing of information to Parent and its Representatives
in connection with such investigation and review), (b) the negotiation,
preparation and review of this Agreement (including the Company Disclosure
Schedule and the Parent Disclosure Schedule) and all agreements, certificates,
opinions and other instruments and documents delivered or to be delivered in
connection with the transactions contemplated by this Agreement, (c) the
preparation and submission of any filing or notice required to be made or given
in connection with any of the transactions contemplated by this Agreement, and
the obtaining of any Consent required to be obtained in connection with any of
such transactions, and (d) the consummation of the Merger; provided, however,
that, in the event that this Agreement is terminated for any reason other than
(x) because of the failure of the stockholders of Parent to approve the Merger
and this Agreement at the Parent's Stockholders' Meeting or (y) one for which
Parent becomes obligated to pay a termination fee to the Company pursuant to
Section 7.3, Parent and the Company shall share equally all fees and expenses,
other than attorneys' fees, incurred in connection with (i) the printing and
filing of the S-4 Registration Statement and the Joint Proxy Statement and any
amendments or supplements thereto and (ii) the filing of the premerger
notification and report forms, if necessary, relating to
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the Merger under the HSR Act; provided, further that the liability of the
Acquired Companies pursuant to the preceding provision shall not exceed $125,000
in the aggregate;
(b) In the event that this Agreement is terminated pursuant to Section
7.1(i), the Company promptly shall reimburse Parent for Parent's fees, costs and
expenses (not to exceed $2,000,000) incurred in connection with the transactions
contemplated by this Agreement, including, without limitation, the fees, costs
and expenses of the type described in Section 9.3(a) (not giving effect to the
limitations set forth in the last proviso of Section 9.3(a); and
(c) In the event that this Agreement is terminated because of the failure
of the stockholders of Parent to approve the Merger and this Agreement at the
Parent's Stockholders' Meeting, Parent promptly shall reimburse the Company for
the Company's fees, costs and expenses (not to exceed $500,000) incurred in
connection with the transaction contemplated by this Agreement, including,
without limitation, the fees, costs and expenses of the type described in
Section 9.3(a).
9.4 Attorneys' Fees. If any action or proceeding relating to this
Agreement or the enforcement of any provision of this Agreement is brought
against any party hereto, the prevailing party shall be entitled to recover
reasonable attorneys' fees, costs and disbursements (in addition to any other
relief to which the prevailing party may be entitled).
9.5 Notices. Any notice or other communication required or permitted to be
delivered to any party under this Agreement shall be in writing and shall be
deemed properly delivered, given and received when delivered (by hand, by
registered mail, by courier or express delivery service or by facsimile) to the
address or facsimile telephone number set forth beneath the name of such party
below (or to such other address or facsimile telephone number as such party
shall have specified in a written notice given to the other parties hereto):
if to Parent:
PMR Corporation
Attn: Allen Tepper
501 Washington Street, 5th Floor
San Diego, CA 92103
Telephone: (619) 610-4001
Facsimile: (619) 610-4184
with a copy to:
Jeremy D. Glaser, Esq.
Cooley Godward LLP
4365 Executive Drive, Suite 1100
San Diego, CA 92121
Telephone: (619) 550-6000
Facsimile: (619) 453-3555
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if to the Company or to the Stockholders' Representatives:
Edward A. Stack
Attn: Chief Executive Officer
102 Woodmont Boulevard, Suite 800
Nashville, TN 37205
Telephone: (615) 269-3492
Facsimile: (615) 269-9814
with a copy to:
William F. Carpenter III, Esq.
Waller Lansden Dortch & Davis, PLLC
Nashville City Center
511 Union Street, Suite 2100
Post Office Box 198966
Nashville, Tennessee 37219-8966
Telephone:(615) 244-6380
Facsimile:(615) 244-6804
9.6 Time of the Essence. Time is of the essence of this Agreement.
9.7 Headings. The underlined headings contained in this Agreement are for
convenience of reference only, shall not be deemed to be a part of this
Agreement and shall not be referred to in connection with the construction or
interpretation of this Agreement.
9.8 Counterparts. This Agreement may be executed in several counterparts,
each of which shall constitute an original and all of which, when taken
together, shall constitute one agreement.
9.9 Governing Law. This Agreement shall be construed in accordance with,
and governed in all respects by, the internal laws of the State of Delaware
(without giving effect to principles of conflicts of laws).
9.10 Successors and Assigns. This Agreement shall be binding upon: the
Company and its successors and assigns (if any); Parent and its successors and
assigns (if any); and Merger Sub and its successors and assigns (if any).
9.11 Exclusive Remedies. Parent, Merger Sub and the Company hereby
expressly agree that the remedies provided in Section 7.3 of this Agreement
constitute liquidated damages and do not constitute a penalty. Parent, Merger
Sub and the Company hereby expressly agree that (i) such liquidated damages
shall be the sole and exclusive remedy for any claim arising out of the
termination of this Agreement and (ii) the remedies provided in Section 1.10 and
Section 8 of this Agreement and in the Escrow Agreement shall be the sole and
exclusive remedies for any other claim arising out of or relating to the
negotiation, execution, delivery or performance of this Agreement or the Merger.
Notwithstanding the foregoing, nothing in this Section 9.11 shall relieve any
party to this Agreement of liability for fraud or a willful and intentional
breach of any provision of this Agreement.
9.12 Waiver.
(a) No failure on the part of any Person to exercise any power, right,
privilege or remedy under this Agreement, and no delay on the part of any Person
in exercising any power, right, privilege or remedy under this Agreement, shall
operate as a waiver of such power, right, privilege or remedy; and no single or
partial exercise of any such power, right, privilege or remedy shall preclude
any other or further exercise thereof or of any other power, right, privilege or
remedy.
(b) No Person shall be deemed to have waived any claim arising out of this
Agreement, or any power, right, privilege or remedy under this Agreement, unless
the waiver of such claim, power, right, privilege or remedy is expressly set
forth in a written instrument duly executed and delivered on behalf of such
Person; and any such waiver shall not be applicable or have any effect except in
the specific instance in which it is given.
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9.13 Amendments. This Agreement may not be amended, modified, altered or
supplemented other than by means of a written instrument duly executed and
delivered on behalf of all of the parties hereto.
9.14 Severability. In the event that any provision of this Agreement, or
the application of any such provision to any Person or set of circumstances,
shall be determined to be invalid, unlawful, void or unenforceable to any
extent, the remainder of this Agreement, and the application of such provision
to Persons or circumstances other than those as to which it is determined to be
invalid, unlawful, void or unenforceable, shall not be impaired or otherwise
affected and shall continue to be valid and enforceable to the fullest extent
permitted by law.
9.15 Parties in Interest. Except for the provisions of Sections 1.5, 1.6
and 8, none of the provisions of this Agreement is intended to provide any
rights or remedies to any Person other than the parties hereto and their
respective successors and assigns (if any).
9.16 Entire Agreement. This Agreement and the other agreements referred to
herein set forth the entire understanding of the parties hereto relating to the
subject matter hereof and thereof and supersede all prior agreements and
understandings among or between any of the parties relating to the subject
matter hereof and thereof; provided, however, that the Mutual Non-Disclosure
Agreement executed on behalf of Parent on and the Company on May 7, 1998 shall
not be superseded by this Agreement and shall remain in effect in accordance
with its terms until the earlier of (a) the Effective Time, or (b) the date on
which such Mutual Non-Disclosure Agreement is terminated in accordance with its
terms.
9.17 Construction.
(a) For purposes of this Agreement, whenever the context requires: the
singular number shall include the plural, and vice versa; the masculine gender
shall include the feminine and neuter genders; the feminine gender shall include
the masculine and neuter genders; and the neuter gender shall include the
masculine and feminine genders.
(b) The parties hereto agree that any rule of construction to the effect
that ambiguities are to be resolved against the drafting party shall not be
applied in the construction or interpretation of this Agreement.
(c) As used in this Agreement, the words "include" and "including," and
variations thereof, shall not be deemed to be terms of limitation, but rather
shall be deemed to be followed by the words "without limitation."
(d) Except as otherwise indicated, all references in this Agreement to
"Sections" and "Exhibits" are intended to refer to Sections of this Agreement
and Exhibits to this Agreement.
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The parties hereto have caused this Agreement to be executed and delivered
as of July , 1998.
PMR CORPORATION
a Delaware corporation
By: /s/ ALLEN TEPPER
------------------------------------
BHC ACQUISITION CORP.,
a Delaware corporation
By: /s/ ALLEN TEPPER
------------------------------------
BEHAVIORAL HEALTHCARE CORPORATION,
a Delaware corporation
By: /s/ EDWARD A. STACK
------------------------------------
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EXHIBIT A
CERTAIN DEFINITIONS
For purposes of the Agreement (including this Exhibit A):
Agreement. "Agreement" shall mean the Agreement and Plan of Merger to which
this Exhibit A is attached (including the Company Disclosure Schedule and the
Parent Disclosure Schedule), as it may be amended from time to time.
Company Acquisition Transaction. "Company Acquisition Transaction" shall
mean any transaction involving: (i) the sale, license, disposition or
acquisition of all or a material portion of the business or assets of the
Company or any subsidiary of the Company (except for subsidiaries which have
been identified by the Company for sale or disposition as discussed with Parent
on June 11, 1998 and as included in the Company's Board of Directors package in
connection with its meeting held on April 29, 1998 (collectively, the "Excluded
Subsidiaries")); (ii) the issuance, grant, disposition or acquisition of (A) any
capital stock or other equity security of the Company or any subsidiary of the
Company other than the Excluded Subsidiaries, (B) any option, call, warrant or
right (whether or not immediately exercisable) to acquire any capital stock or
other equity security of the Company or any subsidiary of the Company other than
the Excluded Subsidiaries, or (C) any security, instrument or obligation that is
or may become convertible into or exchangeable for any capital stock or other
equity security of the Company or any subsidiary of the Company other than the
Excluded Subsidiaries; or (iii) any merger, consolidation, business combination,
share exchange, reorganization or similar transaction involving the Company or
any subsidiary of the Company other than the Excluded Subsidiaries; provided,
however, that (1) the grant of stock options by the Company to its employees in
the ordinary course of business will not be deemed to be a "Company Acquisition
Transaction," (2) the issuance of stock by the Company to its employees upon the
exercise of outstanding stock options and (3) the restructuring of the Company
and its subsidiaries in order to take advantage of tax savings available under
Indiana and Tennessee law will not be deemed to be a "Company Acquisition
Transaction;" provided, however, that, with respect to clause (3) above, such
restructuring shall not be deemed a "Company Acquisition Transaction" only in
the event that no reduction in ownership by the Company of such subsidiaries
occurs as a result of such restructuring.
Company Contract. "Company Contract" shall mean any Contract: (a) to which
any of the Acquired Companies is a party; (b) by which any of the Acquired
Companies or any of their properties or assets is bound or under which any of
the Acquired Companies has any obligation; or (c) under which any of the
Acquired Companies has any right or interest.
Company Disclosure Schedule. "Company Disclosure Schedule" shall mean the
schedule (dated as of the date of the Agreement) delivered to Parent on behalf
of the Company.
Company Partnerships. "Company Partnerships" shall mean all of the
partnerships, joint ventures and limited liability companies, other than the
Company Subsidiaries, in which the Company is a direct or indirect participant
or member as of the Effective Time.
Company Proprietary Asset. "Company Proprietary Asset" shall mean any
Proprietary Asset owned by or licensed to any of the Acquired Companies or
otherwise used by any of the Acquired Companies.
Company Subsidiaries. "Company Subsidiaries" shall mean all of the
corporate entities with respect to which the Company has the direct or indirect
right to vote shares representing fifty percent (50%) or more of the votes
eligible to be cast in the election of directors of each such entity.
Consent. "Consent" shall mean any approval, consent, ratification,
permission, waiver or authorization (including any Governmental Authorization).
Contract. "Contract" shall mean any written, oral or other agreement,
contract, subcontract, lease, understanding, instrument, note, warranty,
insurance policy, benefit plan or legally binding commitment or undertaking of
any nature.
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Damages. "Damages" shall include any loss, damage, injury, decline in
value, lost opportunity, liability, claim, demand, settlement, judgment, award,
fine, penalty, Tax, fee (including reasonable attorneys' fees), charge, cost
(including costs of investigation) or expense of any nature.
Encumbrance. "Encumbrance" shall mean any lien, pledge, hypothecation,
charge, mortgage, deed of trust, license, equity, conditional sales contract,
lease, assessment, covenant, condition or restriction, right-of-way,
reservation, security interest, encumbrance, claim, infringement, interference,
option, right of first refusal, preemptive right, community property interest,
any other matter affecting title or restriction of any nature (including any
restriction on the voting of any security, any restriction on the transfer of
any security or other property or asset, any restriction on the receipt of any
income derived from any property or asset, any restriction on the use of any
property or asset and any restriction on the possession, exercise or transfer of
any other attribute of ownership of any property or asset).
Entity. "Entity" shall mean any corporation (including any non-profit
corporation), general partnership, limited partnership, limited liability
partnership, joint venture, estate, trust, company (including any limited
liability company or joint stock company), firm or other enterprise,
association, organization or entity.
Exchange Act. "Exchange Act" shall mean the Securities Exchange Act of
1934, as amended.
Facilities. "Facilities" shall mean any real property, leaseholds, or other
interests currently or formerly owned or operated by any of the Acquired
Companies or any of the Parent Companies, as applicable, and any buildings,
plants, structures, or equipment (including motor vehicles, tank cars, and
rolling stock) currently or formerly owned or operated by any of the Acquired
Companies or any of the Parent Companies, as applicable.
Government Bid. "Government Bid" shall mean any quotation, bid or proposal
submitted to any Governmental Body or any proposed prime contractor or
higher-tier subcontractor of any Governmental Body.
Government Contract. "Government Contract" shall mean any prime contract,
subcontract, letter contract, purchase order or delivery order executed or
submitted to or on behalf of any Governmental Body or any prime contractor or
higher-tier subcontractor, or under which any Governmental Body or any such
prime contractor or subcontractor otherwise has or may acquire any right or
interest.
Governmental Authorization. "Governmental Authorization" shall mean any:
(a) permit, license, certificate, franchise, permission, clearance,
registration, qualification or authorization issued, granted, given or otherwise
made available by or under the authority of any Governmental Body or pursuant to
any Legal Requirement; or (b) right under any Contract with any Governmental
Body.
Governmental Body. "Governmental Body" shall mean any: (a) nation, state,
commonwealth, province, territory, county, municipality, district or other
jurisdiction of any nature; (b) federal, state, local, municipal, foreign or
other government; or (c) governmental or quasi-governmental authority of any
nature (including any governmental division, department, agency, commission,
instrumentality, official, organization, unit, body or Entity and any court or
other tribunal).
HSR Act. "HSR Act" shall mean the Hart-Scott-Rodino Antitrust Improvements
Act of 1976, as amended.
Indemnitees. "Indemnitees" shall mean, collectively, the Stockholder
Indemnitees and the Parent Indemnitees.
Joint Proxy Statement. "Joint Proxy Statement" shall mean the joint proxy
statement/prospectus to be sent to the Company's and Parent's stockholders in
connection with the Company and Parent Stockholders' Meetings.
Knowledge of the Company. "Knowledge of the Company" shall mean the actual
knowledge and current awareness, or knowledge which a reasonable person would
have acquired following a reasonable investigation, of the executive officers
and directors of the Company, together with that of the chief executive officer
of each Acquired Company.
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Legal Proceeding. "Legal Proceeding" shall mean any action, suit,
litigation, arbitration, proceeding (including any civil, criminal,
administrative, investigative or appellate proceeding), hearing, inquiry, audit,
examination or investigation commenced, brought, conducted or heard by or
before, or otherwise involving, any court or other Governmental Body or any
arbitrator or arbitration panel.
Legal Requirement. "Legal Requirement" shall mean any federal, state,
local, municipal, foreign or other law, statute, constitution, principle of
common law, resolution, ordinance, code, edict, decree, rule, regulation, ruling
or requirement issued, enacted, adopted, promulgated, implemented or otherwise
put into effect by or under the authority of any Governmental Body.
Material Adverse Effect. A violation or other matter will be deemed to have
a "Material Adverse Effect" on the Company if such violation or other matter
would have a material adverse effect on the business, condition, assets,
liabilities, operations or financial performance of the Acquired Companies,
considered as a whole. A violation or other matter will be deemed to have a
"Material Adverse Effect" on Parent if such violation or other matter would have
a material adverse effect on the business, condition, assets, liabilities,
operations or financial performance of Parent and the Parent Subsidiaries,
considered as a whole.
Nasdaq National Market. "Nasdaq National Market" shall mean the Nasdaq
Stock Market's National Market.
Parent Acquisition Transaction. "Parent Acquisition Transaction" shall mean
any transaction involving: (i) the sale, license, disposition or acquisition of
all or a material portion of the business or assets of Parent or any Parent
Subsidiary; (ii) the issuance, grant, disposition or acquisition of (A) any
capital stock or other equity security of Parent or any Parent Subsidiary, (B)
any option, call, warrant or right (whether or not immediately exercisable) to
acquire any capital stock or other equity security of Parent or any Parent
Subsidiary, or (C) any security, instrument or obligation that is or may become
convertible into or exchangeable for any capital stock or other equity security
of Parent or any Parent Subsidiary; or (iii) any merger, consolidation, business
combination, share exchange, reorganization or similar transaction involving
Parent or any Parent Subsidiary; provided, however, that (1) the grant of stock
options by Parent to its employees in the ordinary course of business will not
be deemed to be a "Parent Acquisition Transaction" and (2) the issuance of stock
by Parent to its employees upon the exercise of outstanding stock options will
not be deemed to be a "Parent Acquisition Transaction."
Parent Contract. "Parent Contract" shall mean any Contract: (a) to which
any of the Parent Companies is a party; (b) by which any of the Parent Companies
or any of their properties or assets is bound or under which any of the Parent
Companies has, or may become subject to, any obligation; or (c) under which any
of the Parent Companies has or may acquire any right or interest.
Parent Disclosure Schedule. "Parent Disclosure Schedule" shall mean the
schedule (dated as of the date of the Agreement) delivered to the Company on
behalf of Parent.
Parent Indemnitees. "Parent Indemnitees" shall mean the following Persons:
(a) Parent; (b) Parent's current and future affiliates (including the Surviving
Corporation); (c) the respective Representatives of the Persons referred to in
clauses "(a)" and "(b)" above; and (d) the respective successors and assigns of
the Persons referred to in clauses "(a)", "(b)" and "(c)" above.
Parent Partnerships. "Parent Partnerships" shall mean all of the
Partnerships, joint ventures and limited liability companies, other than the
Parent Subsidiaries, in which the Parent is a direct or indirect participant or
member as of the Effective Time.
Parent Proprietary Asset. "Parent Proprietary Asset" shall mean any
Proprietary Asset owned by or licensed to Parent or any Parent Subsidiary or
otherwise used by Parent or any Parent Subsidiary.
Parent Subsidiaries. "Parent Subsidiaries" shall mean all of the corporate
entities with respect to which Parent has the direct or indirect right to vote
shares representing fifty percent (50%) or more of the votes eligible to be cast
in the election of directors of each such entity.
Person. "Person" shall mean any individual, Entity or Governmental Body.
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Proprietary Asset. "Proprietary Asset" shall mean any: (a) patent, patent
application, trademark (whether registered or unregistered), trademark
application, trade name, fictitious business name, service mark (whether
registered or unregistered), service mark application, copyright (whether
registered or unregistered), copyright application, maskwork, maskwork
application, trade secret, know-how, customer list, franchise, system, computer
software, computer program, invention, design, blueprint, engineering drawing,
proprietary product, technology, proprietary right or other intellectual
property right or intangible asset; or (b) right to use or exploit any of the
foregoing.
Representatives. "Representatives" shall mean officers, directors,
employees, agents, attorneys, accountants, advisors and representatives.
S-4 Registration Statement. "S-4 Registration Statement" shall have the
meaning set forth in Section 4.11.
SEC. "SEC" shall mean the United States Securities and Exchange Commission.
Securities Act. "Securities Act" shall mean the Securities Act of 1933, as
amended.
Stockholder Indemnitees. "Stockholder Indemnitees" shall mean the following
Persons: (a) the Stockholders other than Vencor; (b) the Stockholders' other
than Vencor's current and future affiliates; (c) the respective Representatives
of the Persons referred to in clauses "(a)" and "(b)" above; and (d) the
respective successors and assigns of the Persons referred to in clauses "(a)",
"(b)" and "(c)" above.
Tax. "Tax" shall mean any tax (including any income tax, franchise tax,
capital gains tax, gross receipts tax, value-added tax, surtax, excise tax, ad
valorem tax, transfer tax, stamp tax, sales tax, use tax, property tax, business
tax, withholding tax or payroll tax), levy, assessment, tariff, duty (including
any customs duty), deficiency or fee, and any related charge or amount
(including any fine, penalty or interest), imposed, assessed or collected by or
under the authority of any Governmental Body.
Tax Return. "Tax Return" shall mean any return (including any information
return), report, statement, declaration, estimate, schedule, notice,
notification, form, election, certificate or other document or information filed
with or submitted to, or required to be filed with or submitted to, any
Governmental Body in connection with the determination, assessment, collection
or payment of any Tax or in connection with the administration, implementation
or enforcement of or compliance with any Legal Requirement relating to any Tax.
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EXHIBIT B
STOCKHOLDERS AGREEMENT
THIS STOCKHOLDERS AGREEMENT (the "Stockholder Agreement") is entered into
as of July 30, 1998 by and between PMR CORPORATION, a Delaware corporation
("Parent"), and ("Principal Stockholder").
RECITALS
A. Parent, BHC ACQUISITION CORP. ("Merger Sub"), a Delaware corporation and
a wholly owned subsidiary of Parent, and BEHAVIORAL HEALTHCARE CORPORATION, a
Delaware corporation (the "Company"), intend to enter into an Agreement and Plan
of Merger of even date herewith (as amended from time to time, the "Merger
Agreement"; capitalized terms used but not otherwise defined in this Stockholder
Agreement have the meanings assigned to such terms in the Merger Agreement),
which provides (subject to the conditions set forth therein) for the merger of
Merger Sub with and into the Company (the "Merger").
B. As of the date hereof, Principal Stockholder owns in aggregate the
number of shares of Company Common Stock set forth below Principal Stockholder's
name on the signature page hereof (such Common Stock of each Principal
Stockholder, referred to as the "Existing Shares" of such Principal Stockholder,
and together with any shares of capital stock of the Company acquired by such
Principal Stockholder after the date hereof and prior to the termination hereof
(whether upon exercise of options or otherwise), hereinafter collectively
referred to as the "Subject Shares") of such Principal Stockholder); and
C. The Company has agreed to obtain and deliver to Parent prior to August
29, 1998, valid consents and agreements executed by all of the persons (other
than the Principal Stockholders) who are parties to (a) the Country Amended and
Restated Stockholders Agreement made as of the 30th day of June, 1993, as
amended and restated as of the 30th day of December, 1993, and the 31st day of
May, 1995, and/or (b) the Country Stockholders' Agreement made as of the 30th
day of November, 1996 (collectively, the "Existing Stockholders Agreements")
irrevocably consenting and agreeing to the termination of each of the Existing
Stockholders Agreements as of the date hereof subject only to the consummation
of the Merger.
D. As a condition to the willingness of Parent to enter into the Merger
Agreement, Parent has required that Principal Stockholder agree, and in order to
induce Parent to enter into the Merger Agreement Principal Stockholder has
agreed, to enter into this Stockholder Agreement.
AGREEMENT
NOW, THEREFORE, in consideration of the mutual covenants and agreements
herein contained and other good and valuable consideration, and intending to be
legally bound hereby, it is agreed as follows:
1. NO TRANSFER OF SUBJECT SHARES
1.1 No Disposition or Encumbrance of Subject Shares.
(a) Principal Stockholder hereby covenants and agrees that, prior to the
Expiration Date (as defined below), Principal Stockholder will not, directly or
indirectly, (i) offer, sell, offer to sell, contract to sell, pledge, grant any
option to purchase or otherwise dispose of or transfer (or announce any offer,
sale, offer of sale, contract of sale or grant of any option to purchase or
other disposition or transfer of) any Subject Shares to any Person, (ii) create
or permit to exist any additional Encumbrance with respect to any of the Subject
Shares and will release any such Encumbrances prior to the Effective Date, (iii)
reduce his beneficial ownership of, interest in or risk relating to any of the
Subject Shares or (iv) commit or agree to do any of the foregoing.
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(b) As used in this Stockholder Agreement, the term "Expiration Date" shall
mean the earlier of the date upon which the Merger Agreement is terminated in
accordance with its terms or the Effective Time of the Merger.
1.2 No Transfer of Voting Rights. Principal Stockholder covenants and
agrees that, prior to the Expiration Date, Principal Stockholder will not
deposit any of the Subject Shares into a voting trust or grant any proxy (except
as provided herein) or enter into any other voting agreement, or any other
agreement or arrangement with respect to the voting of any of the Subject Shares
other than the Existing Stockholders Agreement.
2. VOTING OF SUBJECT SHARES
2.1 Voting. Principal Stockholder hereby agrees that, prior to the
Expiration Date, at any meeting of the stockholders of the Company, however
called, and in any written action by consent of stockholders of the Company,
unless otherwise directed in writing by Parent, Principal Stockholder shall vote
the Subject Shares:
(i) in favor of the Merger, the execution and delivery by the Company
of the Merger Agreement and the adoption and approval of the terms thereof
and in favor of each of the other actions contemplated by the Merger
Agreement and any action required in furtherance hereof or thereof;
(ii) against any action or agreement that would result in a breach of
any representation, warranty, covenant or obligation of the Company in the
Merger Agreement; and
(iii) against the following actions (other than the Merger and the
transactions contemplated by the Merger Agreement): (i) any extraordinary
corporate transaction, such as a merger, consolidation or other business
combination involving the Company or any subsidiary of the Company (other
than the Excluded Subsidiaries (as such term is defined in the Merger
Agreement)); (ii) any sale, lease or transfer of a material amount of
assets of the Company or any subsidiary of the Company (other than the
Excluded Subsidiaries); (iii) any reorganization, recapitalization,
dissolution or liquidation of the Company or any subsidiary of the Company
(other than the Excluded Subsidiaries); (iv) any change in a majority of
the board of directors of the Company; (v) any amendment to the Company's
certificate of incorporation; (vi) any change in the capitalization of the
Company or the Company's corporate structure; or (vii) any other action
which is intended, or could reasonably be expected to, impede, interfere
with, delay, postpone, discourage or adversely affect the contemplated
economic benefits to Parent of the Merger or any of the other transactions
contemplated by the Merger Agreement or this Stockholder Agreement.
Prior to the Expiration Date, Principal Stockholder shall not enter into
any agreement or understanding with any Person to vote or give instructions in
any manner inconsistent with the preceding sentence.
2.2 Proxy; Further Assurances.
(a) Contemporaneously with the execution of this Stockholder Agreement,
Principal Stockholder shall deliver to Parent a proxy in the form attached
hereto as Exhibit A, which shall be irrevocable to the fullest extent permitted
by law prior to the Expiration Date, with respect to the Subject Shares (the
"Proxy").
3. WAIVER OF APPRAISAL RIGHTS
Principal Stockholder hereby waives any rights of appraisal and any
dissenters' rights that Principal Stockholder may have in connection with the
Merger.
4. NO SOLICITATION
Principal Stockholder covenants and agrees that, during the period
commencing on the date of this Stockholder Agreement and ending on the
Expiration Date, Principal Stockholder shall not, directly or indirectly, or
authorize or permit any representative of Principal Stockholder, directly or
indirectly, to: (i) solicit or encourage the initiation or submission of any
expression of interest, inquiry, proposal or offer from any Person (other than
Parent) relating to a possible Company Acquisition Transaction, (ii) participate
in any discussions or negotiations or enter into any agreement with, or provide
any non-public information to or
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cooperate in any other way with, any Person (other than Parent) relating to or
in connection with a possible Acquisition Transaction; or (iii) consider,
entertain or accept any proposal or offer from any Person (other than Parent)
relating to a possible Company Acquisition Transaction. Principal Stockholder
acknowledges that a breach of the foregoing provision may cause the Company to
breach its obligations set forth in Section 4.4 of the Merger Agreement.
Principal Stockholder shall immediately cease and cause to be terminated any
existing discussions with any Person that relate to a possible Company
Acquisition Transaction.
5. REPRESENTATIONS AND WARRANTIES OF PRINCIPAL STOCKHOLDER
Principal Stockholder hereby represents and warrants to Parent as follows:
5.1 Due Authorization, etc. Principal Stockholder has all requisite
individual, corporate, partnership or limited liability company, as applicable,
power and capacity to execute and deliver this Stockholder Agreement and the
Proxy and to perform his obligations hereunder and thereunder. Subject to the
termination of the Existing Stockholder Agreements, this Stockholder Agreement
has been duly executed and delivered by Principal Stockholder and constitutes a
legal, valid and binding obligation of Principal Stockholder, enforceable
against Stockholder in accordance with its terms, subject to (i) laws of general
application relating to bankruptcy, insolvency and the relief of debtors, and
(ii) rules of law governing specific performance, injunctive relief and other
equitable remedies.
5.2 No Conflicts, Required Filings and Consents.
(a) Subject to the termination of the Existing Stockholder Agreements, the
execution and delivery of this Stockholder Agreement and the Proxy by Principal
Stockholder do not, and the performance of this Stockholder Agreement by
Principal Stockholder, and the actions taken pursuant to the terms of the Proxy,
will not: (i) conflict with or violate any order, decree or judgment applicable
to Principal Stockholder or by which he or any of his properties is bound or
affected; or (ii) result in any breach of or constitute a default (with notice
or lapse of time, or both) under, or give to others any rights of termination,
amendment, acceleration or cancellation of, or result in the creation of an
Encumbrance on the Subject Shares pursuant to, any Contract to which Principal
Stockholder is a party or by which Principal Stockholder or any of his
properties is bound or affected.
(b) Subject to the termination of the Existing Stockholder Agreements, the
execution and delivery of this Stockholder Agreement and the Proxy by Principal
Stockholder do not, and the performance of this Stockholder Agreement by
Stockholder and the voting of the Subject Shares pursuant to the Proxy will not,
require any Consent of any Person.
5.3 Title to Subject Shares. Principal Stockholder beneficially owns the
Subject Shares and rights to acquire shares of capital stock of the Company (if
any) set forth under Principal Stockholder's name on the signature page hereof
and does not directly or indirectly own, either beneficially or of record, any
shares of capital stock of the Company, or rights to acquire any shares of
capital stock of the Company, other than the Subject Shares set forth below
Principal Stockholder's name on the signature page hereof.
5.4 Accuracy of Representations. The representations and warranties
contained in this Stockholder Agreement are accurate in all material respects as
of the date of this Stockholder Agreement, will be accurate in all material
respects at all times through the Expiration Date and will be accurate in all
material respects as of the date of the consummation of the Merger as if made on
that date.
5.5 Termination of Existing Stockholders Agreements. Principal Stockholder
hereby irrevocably consents and agrees to execute the Agreement to Terminate
relating to the Existing Stockholders Agreements and waives any rights to assert
that this Stockholders Agreement is unenforceable or invalid on account of any
agreement previously entered into, by Principal Stockholder, including, without
limitation, the Existing Stockholders Agreements.
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6. COVENANTS OF PRINCIPAL STOCKHOLDER
6.1 Further Assurances. From time to time and without additional
consideration, Principal Stockholder will execute and deliver, or cause to be
executed and delivered, such additional or further arrangements, proxies,
consents and other instruments as Parent may reasonably request for the purpose
of effectively carrying out and furthering the intent of this Stockholder
Agreement.
7. MISCELLANEOUS
7.1 Survival of Representations, Warranties and Agreements. All
representations, warranties and agreements made by Principal Stockholder and
Parent in this Stockholder Agreement shall promptly terminate upon the
Expiration Date.
7.2 Indemnification. Without in any way limiting any of the rights or
remedies otherwise available to Parent, Principal Stockholder shall hold
harmless and indemnify Parent from and against any Damages (regardless of
whether or not such Damages relate to a third party claim) which are directly or
indirectly suffered or incurred at any time by Parent, or to which Parent
otherwise becomes subject and that arise from any breach of any representation,
warranty, covenant or obligation of Principal Stockholder contained herein.
7.3 Expenses. All costs and expenses incurred in connection with the
transactions contemplated by this Stockholder Agreement shall be paid by the
party incurring such costs and expenses.
7.4 Notices. Any notice or other communication required or permitted to be
delivered to either party under this Stockholder Agreement shall be in writing
and shall be deemed properly delivered, given and received when delivered (by
hand, by registered mail, by courier or express delivery service or by
facsimile) to the address or facsimile telephone number set forth beneath the
name of such party below (or to such other address or facsimile telephone number
as such party shall have specified in a written notice given to the other party
hereto):
if to Parent:
PMR Corporation
501 Washington Street, 5th Floor
San Diego, CA 92103
Telephone: (619) 610-4001
Facsimile: (619) 610-4184
Attn: Chief Executive Officer
with a copy to:
Cooley Godward LLP
4365 Executive Drive
Suite 1100
San Diego, CA 92121-2128
Attention: Jeremy D. Glaser, Esq.
Telephone: (619) 550-6000
Facsimile: (619) 453-3555
if to Principal Stockholders:
at the address set forth below the Principal Stockholders'
signature on the signature page hereto
with a copy to:
Edward A. Stack
Behavioral Healthcare Corporation
102 Woodmont Boulevard, Suite 800
Nashville, TN 37205
Telephone: (615) 269-3492
Facsimile: (615) 269-9814
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with a copy to:
Waller Lansden Dortch & Davis, PLLC
Nashville City Center
511 Union Street, Suite 2100
Post Office Box 198966
Nashville, Tennessee 37219-8966
Telephone:(615) 244-6380
Facsimile:(615) 244-6804
7.5 Severability. Any term or provision of this Stockholder Agreement
which is invalid or unenforceable in any jurisdiction shall, as to that
jurisdiction, be ineffective to the extent of such invalidity or
unenforceability without rendering invalid or unenforceable the remaining terms
and provisions of this Stockholder Agreement or affecting the validity or
enforceability of any of the terms or provisions of this Stockholder Agreement
in any other jurisdiction. If any provision of this Stockholder Agreement is so
broad as to be unenforceable, the provision shall be interpreted to be only so
broad as is enforceable.
7.6 Entire Agreement. This Stockholder Agreement and any documents
delivered by the parties in connection herewith, including the Proxy, constitute
the entire agreement between the parties with respect to the subject matter
hereof and thereof and supersede all prior agreements and understandings between
the parties with respect thereto. No addition to or modification of any
provision of this Stockholder Agreement shall be binding upon either party
hereto unless made in writing and signed by both parties hereto.
7.7 Assignment, Binding Effect. Neither this Stockholder Agreement nor any
portion hereof shall be assignable (whether by operation of law or otherwise and
including, for this purpose, a change in control as an assignment). Subject to
the preceding sentence, this Stockholder Agreement shall be binding upon and
shall inure to the benefit of (i) Principal Stockholder and his heirs,
successors and assigns and (ii) Parent and its successors and assigns.
Notwithstanding anything contained in this Stockholder Agreement to the
contrary, nothing in this Stockholder Agreement, expressed or implied, is
intended to confer on any Person other than the parties hereto or their
respective heirs, successors and assigns any rights, remedies, obligations or
liabilities under or by reason of this Stockholder Agreement.
7.8 Specific Performance. The parties hereto agree that irreparable damage
would occur in the event that any of the provisions of this Stockholder
Agreement or the Proxy was not performed in accordance with its specific terms
or was otherwise breached. It is accordingly agreed that Parent shall be
entitled to seek an injunction or injunctions to prevent breaches of this
Stockholder Agreement and the Proxy and to enforce specifically the terms and
provisions hereof and thereof, this being in addition to any other remedy to
which Parent is entitled at law or in equity.
7.9 Other Agreements. Nothing in this Stockholder Agreement shall limit
any of the rights or remedies of Parent or any of the obligations of Principal
Stockholder under any agreement between Parent and Principal Stockholder.
7.10 Governing Law. This Stockholder Agreement shall be governed in all
respects by the laws of the State of Delaware, as applied to contracts entered
into and to be performed entirely within the State of Delaware.
7.11 Counterparts. This Stockholder Agreement may be executed by the
parties hereto in separate counterparts, each of which when so executed and
delivered shall be an original, but all such counterparts shall together
constitute one and the same instrument.
7.12 Construction.
(a) Headings of the Sections of this Stockholder Agreement are for the
convenience of the parties only, and shall be given no substantive or
interpretive effect whatsoever.
(b) For purposes of this Stockholder Agreement, whenever the context
requires: the singular number shall include the plural, and vice versa; the
masculine gender shall include the feminine and neuter genders;
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the feminine gender shall include the masculine and neuter genders; and the
neuter gender shall include masculine and feminine genders.
(c) The parties hereto agree that any rule of construction to the effect
that ambiguities are to be resolved against the drafting party shall not be
applied in the construction or interpretation of this Stockholder Agreement.
(d) As used in this Stockholder Agreement, the words "include" and
"including," and variations thereof, shall not be deemed to be terms of
limitation, but rather shall be deemed to be followed by the words "without
limitation."
(e) Except as otherwise indicated, all references in this Stockholder
Agreement to "Sections" and "Exhibits" are intended to refer to Sections of this
Stockholder Agreement and Exhibits to this Stockholder Agreement.
IN WITNESS WHEREOF, Parent and Principal Stockholder have caused this
Stockholder Agreement to be executed as of the date first written above.
PMR CORPORATION
By:
------------------------------------
Name:
Title:
PRINCIPAL STOCKHOLDER:
--------------------------------------
Name
address
fax
Number of Shares of Company Common
Stock owned as of the date of this
Stockholder Agreement:
--------------------------------------
Description (including number of
underlying
shares) of rights to acquire shares of
capital stock of the Company:
--------------------------------------
--------------------------------------
--------------------------------------
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EXHIBIT A
FORM OF IRREVOCABLE PROXY
IRREVOCABLE PROXY
The undersigned Principal Stockholder ("Principal Stockholder") of
Behavioral Healthcare Corporation, a Delaware corporation (the "Company"),
hereby irrevocably (to the fullest extent permitted by law) appoints and
constitutes PMR Corporation, a Delaware corporation ("Parent"), the
attorney-in-fact and proxy of the undersigned, with full power of substitution,
with respect to (i) the shares of capital stock of the Company beneficially
owned by the undersigned as of the date of this proxy, which shares are
specified on the final page of this proxy and (ii) any and all other shares of
capital stock of the Company which the undersigned may acquire after the date
hereof. (The shares of the capital stock of the Company referred to in clauses
(i) and (ii) of the immediately preceding sentence are collectively referred to
as the "Shares.") Upon the execution hereof, all prior proxies given by the
undersigned with respect to any of the Shares are hereby revoked, and no
subsequent proxies will be given with respect to any of the Shares.
This proxy is irrevocable, is coupled with an interest and is granted in
connection with the Stockholder Agreement, dated as of the date hereof, between
Parent and the undersigned (the "Stockholder Agreement"), and is granted in
consideration of Parent entering into the Agreement and Plan of Merger, dated as
of the date hereof, among Parent, BHC Acquisition Corp., a Delaware corporation
and wholly owned subsidiary of Parent, and the Company (the "Merger Agreement").
Capitalized terms used but not otherwise defined in this proxy have the meanings
ascribed to such terms in the Merger Agreement.
The attorney and proxy named above will be empowered, and may exercise this
proxy, to vote the Shares, at any time until the earlier to occur of the
termination of the Merger Agreement in accordance with its terms or the
Effective Time (the "Expiration Date"), at any meeting of the stockholders of
the Company, however called, or in any written action by consent of the
stockholders of the Company:
(i) in favor of the Merger, the execution and delivery by the Company
of the Merger Agreement and the adoption and approval of the terms thereof
and in favor of each of the other actions contemplated by the Merger
Agreement and any action required in furtherance hereof or thereof;
(ii) against any action or agreement that would result in a breach of
any representation, warranty, covenant or obligation of the Company in the
Merger Agreement; and
(iii) against the following actions (other than the Merger and the
transactions contemplated by the Merger Agreement): (i) any extraordinary
corporate transaction, such as a merger, consolidation or other business
combination involving the Company or any subsidiary of the Company (other
than the Excluded Subsidiaries); (ii) any sale, lease or transfer of a
material amount of assets of the Company or any subsidiary of the Company
(other than the Excluded Subsidiaries); (iii) any reorganization,
recapitalization, dissolution or liquidation of the Company or any
subsidiary of the Company (other than the Excluded Subsidiaries); (iv) any
change in a majority of the board of directors of the Company; (v) any
amendment to the Company's certificate of incorporation; (vi) any change in
the capitalization of the Company or the Company's corporate structure; or
(vii) any other action which is intended, or could reasonably be expected
to, impede, interfere with, delay, postpone, discourage or adversely affect
the contemplated economic benefits to Parent of the Merger or any of the
other transactions contemplated by the Merger Agreement or this Stockholder
Agreement.
The undersigned Principal Stockholder may vote the Shares on all other
matters.
This proxy shall be binding upon the heirs, successors and assigns of the
undersigned (including any transferee of any of the Shares).
Any obligation of the undersigned hereunder shall be binding upon the
heirs, successors and assigns of the undersigned (including any transferee of
any of the Shares).
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This proxy shall terminate upon the Expiration Date.
Dated: , 1998
PRINCIPAL STOCKHOLDER
--------------------------------------
Name
Number of Shares of Company Common
Stock:
--------------------------------------
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EXHIBIT C-1
PERSONS TO ENTER INTO AFFILIATE
AND LOCK-UP AGREEMENTS
Vencor, Inc.
Welsh, Carson, Anderson & Stowe, IV, LP
NationsBanc Capital Corporation
RFE Investment Partners
Charles and Patricia Elcan
Edward Stack
Calver Fund
William R. Frist
Thomas Frist III
Drake & Company
Stack Family Limited
WCAS Healthcare Partners
Sally J. Stack, Trustee
Russell I. Carson
Jack R. Anderson
Helen Cummings
Patrick Welsh
Bruce Anderson
Richard Stowe
Andrew Paul
Winfield Dunn
Robert Minicucci
Thomas McInerney
James Hoover
De Charter Trust Co., Trustee
Laura VanBuren
Anthony deNicola
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EXHIBIT C-2
AFFILIATE AND LOCK-UP AGREEMENT
This Affiliate and Lock-Up Agreement (this "Agreement") is entered into as
of July , 1998, by and between PMR CORPORATION, a Delaware corporation
("Parent"), and the undersigned affiliate ("Affiliate") of BEHAVIORAL HEALTH
CORPORATION, a Delaware corporation (the "Company").
RECITALS
A. Pursuant to that certain Agreement and Plan of Merger (the "Merger
Agreement"), dated as of July , 1998, by and among Parent, BHC ACQUISITION
CORP. ("Merger Sub"), a Delaware corporation and wholly owned subsidiary of
Parent and, the Company, Merger Sub will merge with and into the Company (the
"Merger").
B. As a result of the Merger, the stockholders of the Company are entitled
to receive shares (the "Shares") of Parent Common Stock (other than the shares
of Parent Common Stock to be deposited in an escrow (the "Escrow Shares")
pursuant to Section 1.10 of the Merger Agreement). Affiliate understands that
he, she or it may be deemed an "affiliate" of the Company as such term is used
in paragraphs (c) and (d) of Rule 145 ("Rule 145") under the Securities Act of
1933, as amended (the "Act"), and as such Affiliate may only transfer, sell or
dispose of Shares in accordance with this Agreement and Rule 145.
C. Affiliate understands that the representations, warranties and covenants
set forth herein will be relied upon by Parent, Merger Sub and the Company, and
their respective counsel.
AGREEMENT
NOW, THEREFORE, the parties hereby agree as follows:
1. Capitalized terms used in this Agreement and not otherwise defined shall
have the meanings given them in the Merger Agreement.
2. Affiliate represents, warrants, understands and agrees that:
(a) Affiliate has full power and capacity to execute and deliver this
Agreement and to make the representations, warranties and agreements herein
and to perform Affiliate's obligations hereunder;
(b) Affiliate has carefully read this Agreement and has discussed the
terms hereof with counsel, to the extent Affiliate felt necessary, the
requirements, limitations and restrictions on Affiliate's ability to sell,
transfer or otherwise dispose of the Shares and the Escrow Shares Affiliate
may receive pursuant to the Merger and fully understands the requirements,
limitations and restrictions this Agreement places upon Affiliate's ability
to transfer, sell or otherwise dispose of such Shares and Escrow Shares;
(c) If Affiliate has executed any other agreement in connection
herewith, Affiliate understands and agrees to abide by all restrictions
contained therein;
(d) Affiliate will not sell, pledge, transfer or otherwise dispose of
any of the Shares or Escrow Shares held by Affiliate unless at such time
(A) (i) such transfer shall be in conformity with the provisions of Rule
145, (ii) Affiliate shall have furnished to Parent an opinion of counsel
reasonably satisfactory to Parent, to the effect that no registration under
the Act would be required in connection with the proposed offer, sale,
pledge, transfer or other disposition or (iii) a registration statement
under the Act covering the proposed offer, sale, pledge, or other
disposition shall be effective under the Act and (B) such transfer is in
accordance with paragraph 3 below; and
(e) Affiliate is the beneficial owner of the Company Common Stock,
Company Preferred Stock, Company Options and/or Company Warrants set forth
on the signature page hereto.
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3. Affiliate agrees that:
(a) As an inducement to and in consideration of Parent's agreement to
enter into the Merger Agreement and proceed with the Merger, and for other
good and valuable consideration, the receipt and sufficiency of which is
hereby acknowledged, Affiliate hereby agrees, except as permitted in this
paragraph 3, not to, directly or indirectly, offer to sell, contract to
sell, transfer, assign, cause to be redeemed or otherwise sell or dispose
of any of the Shares (except to or for the benefit of any family member or
entity controlled by Affiliate, as long as such family member or entity
agrees in writing to remain subject to this Agreement) (collectively, a
"Disposition") received by Affiliate in the Merger for a one-year period
commencing on the Closing Date and ending on the first anniversary thereof
(the "Lock-up Period"). Affiliate hereby agrees and consents to the entry
of stop transfer instructions with Parent's transfer agent against the
transfer of the Shares except in compliance with this Agreement.
(b) None of the restrictions on Disposition contained herein shall
apply to a bona fide gift or gifts, or to transfers to family members of
Affiliate, provided the donee, donees or transferees thereof agree to be
bound by the restrictions on Disposition contained in this Agreement.
Affiliate will not be subject to the restrictions on Disposition contained
herein following the termination of the Lock-up Period.
4. Affiliate understands and agrees that Parent is under no obligation to
register the sale, transfer or other disposition of the Shares or Escrow Shares
or to take any other action necessary in order to make compliance with an
exemption from registration available.
5. Each party hereto acknowledges that (i) it will be impossible to measure
in money the damage to Parent if Affiliate fails to comply with any of the
obligations imposed by this Agreement, (ii) every such obligation is material
and (iii) in the event of any such failure, Parent will not have an adequate
remedy at law or damages and, accordingly, each party hereto agrees that
injunctive relief or other equitable remedy, in addition to remedies at law or
damages, is an appropriate remedy for any such failure.
6. This Agreement is made under, and shall be construed and enforced in
accordance with, the laws of the State of Delaware applicable to agreements made
and to be performed solely therein, without giving effect to principles of
conflicts of law.
7. This Agreement constitutes the entire agreement between the parties with
respect to the subject matter hereof and supersedes all prior agreements and
understandings between the parties with respect thereto. No addition to or
modification of any provision of this Agreement shall be binding upon either
party hereto unless made in writing and signed by both parties hereto. The
parties hereto waive their right to a trial by jury in any action at law or suit
in equity based upon, or arising out of, this Agreement or the subject matter
hereof.
8. This Agreement shall be binding upon, enforceable by and inure to the
benefit of the parties named herein and their respective successors; this
Agreement may not be assigned by any party without the prior written consent of
Parent. Any attempted assignment not in compliance with this paragraph shall be
void and have no effect. Notwithstanding anything contained in this Agreement to
the contrary, nothing in this Agreement, expressed or implied, is intended to
confer on any Person other than the parties hereto or their respective heirs,
successors and assigns, any rights, remedies, obligations or liabilities under
or by reason of this Agreement.
9. This Agreement may be executed in one or more counterparts, each of
which shall be deemed to be an original but all of which together shall
constitute one and the same agreement.
10. Parent agrees to file on a timely basis the reports required to be
filed by it under the Securities Act of 1933, as amended (the "Securities Act")
and the Securities Exchange Act of 1934, as amended, and the rules and
regulations adopted by the Securities and Exchange Commission thereunder and to
make publicly available other information so long as necessary to permit sales
pursuant to Rule 144 under the Securities Act.
[THIS SPACE INTENTIONALLY LEFT BLANK]
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IN WITNESS WHEREOF, the parties hereto have executed and delivered this
Agreement as of the date first written above.
PMR CORPORATION
By:
Print Name and Title
Address:
AFFILIATE
Print Name, and Title (if applicable)
Address:
Shares of Company Common
Stock Beneficially Owned:
Shares of Company Preferred
Stock Beneficially Owned:
Shares of Company Common
Stock Subject to Company Options:
Shares of Company Common
Stock Subject to Company
Warrants:
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EXHIBIT D
SERIES B PREFERRED STOCK AGREEMENT
THIS SERIES B PREFERRED STOCK AGREEMENT ("Agreement") is entered into as of
, 1998 by and BEHAVIORAL HEALTHCARE CORPORATION (the "Company") and
WCAS HEALTHCARE PARTNERS, L.P., ("WCAS");
WHEREAS, PMR Corporation ("PMR"), BHC Acquisition Sub ("Acquisition Sub")
and the Company have entered into an Agreement and Plan of Merger dated as of
July , 1998 (the "Merger Agreement"), pursuant to which, and subject to the
terms and conditions set forth therein, Acquisition Sub will merge with and into
the Company, the separate corporate existence of Acquisition Sub shall thereupon
cease and the Company shall continue in its corporate existence under the laws
of the State of Delaware;
WHEREAS, the Company and WCAS have agreed to exchange the Series B
Preferred Stock for Common Stock as provided herein in order to satisfy a
condition of the Merger Agreement;
NOW, THEREFORE, in consideration of the foregoing and for other good and
valuable consideration, the receipt and sufficiency of which are hereby
acknowledged, the parties hereto agree as follows:
SECTION 1. Definitions
All capitalized terms used but not defined herein shall have the meanings
set forth in the Merger Agreement. WCAS acknowledges receipt and review of a
copy of the Merger Agreement.
SECTION 2. Exchange of Series B Preferred Stock
Immediately prior to the Closing (and provided the Closing occurs), WCAS
shall exchange the 50,252 shares of Series B Preferred Stock owned by it for
50,252 shares of Common Stock to be issued by the Company, and the Company shall
issue 50,252 shares of Common Stock to WCAS in exchange for 50,252 shares of
Series B Preferred Stock to be transferred to the Company by WCAS. The Company
shall issue and deliver to WCAS a stock certificate representing 50,252 shares
of Common Stock registered in the name of WCAS upon receipt of the stock
certificate or certificates representing the 50,252 shares of Series B Preferred
Stock duly endorsed (or accompanied by duly executed stock transfer powers) by
WCAS, for transfer to the Company.
SECTION 3. Representations and Warranties
WCAS hereby represents and warrants to the Company as follows:
3.1 Organization; Individual Capacity; Enforceability. WCAS is duly
organized, validly existing and in good standing under the laws of its
jurisdiction of incorporation, with full power and authority to enter into this
Agreement and to perform its obligations hereunder. The execution and delivery
of this Agreement and the consummation of the transactions contemplated hereby
have been duly authorized by all necessary partnership action, and no other
proceedings on the part of WCAS are necessary to authorize this Agreement or to
consummate the transactions contemplated herein. This Agreement is, and the
other documents and instruments required hereby will be, when executed and
delivered by the parties hereto, the valid and binding obligations of WCAS,
enforceable against WCAS in accordance with their respective terms except as may
be limited by bankruptcy, insolvency, reorganization, moratorium or other laws
affecting creditors rights generally and as may be limited by the application of
principles of equity.
3.2 Title to and Ownership of Series B Preferred Stock. As of the date of
this Agreement and as of the time of transfer to the Company pursuant to Section
2 hereof, WCAS owns and will own beneficially and of record good, valid and
marketable title to 50,252 shares of Series B Preferred Stock, free and clear of
any and all encumbrances.
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SECTION 4. Entire Agreement; Counterparts; Descriptive Headings
(a) This Agreement constitutes the entire agreement and supersedes all
prior agreements and understandings, both written and oral, among the parties
hereto with respect to the subject matter hereof.
(b) This Agreement may be executed in counterparts, each of which when so
executed and delivered shall be an original, but all of such counterparts shall
together constitute one and the same instrument.
(c) The descriptive headings herein are inserted for convenience only and
are not intended to be part of or to affect the meaning or interpretation of
this Agreement.
SECTION 5. Assignment
Neither this Agreement nor any of the rights, interests or obligations
hereunder shall be assigned by WCAS, in whole or in part (whether by operation
of law or otherwise), without the prior written consent of the Company, and any
attempt to make any such assignment without such consent shall be null and void.
Subject to the preceding sentence, this Agreement will be binding upon, inure to
the benefit of and be enforceable by the parties and their respective successors
and assigns.
SECTION 6. Governing Law
THIS AGREEMENT SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE
LAWS OF THE STATE OF DELAWARE WITHOUT REGARD TO THE PRINCIPLES OF CONFLICTS OF
LAWS THEREOF.
SECTION 7. Specific Performance
The parties hereto agree that if any of the provisions of this Agreement
were not performed in accordance with their specific terms or were otherwise
breached, irreparable damage would occur, no adequate remedy at law would exist
and damages would be difficult to determine, and that the parties shall be
entitled to specific performance of the terms hereof, in addition to any other
remedy at law or equity.
SECTION 8. Parties in Interest
This Agreement shall be binding upon and inure solely to the benefit of
each party hereto, and nothing in this Agreement, express or implied, is
intended to or shall confer upon any other person or persons any rights,
benefits or remedies of any nature whatsoever under or by reason of this
Agreement.
SECTION 9. Amendment; Waivers
(a) This Agreement shall not be amended, altered or modified except by an
instrument in writing duly executed by each of the parties hereto.
(b) No delay or failure on the part of any party hereto in exercising any
right, power or privilege under this Agreement shall impair any such right,
power or privilege or be construed as a waiver of any default or any
acquiescence thereto. No single or partial exercise of any such right, power or
privilege shall preclude the further exercise of such right, power or privilege,
or the exercise of any other right, power or privilege. No waiver shall be valid
against any party hereto, unless made in writing and signed by the party against
whom enforcement of such waiver is sought, and then only to the extent expressly
specified therein.
SECTION 10. Conflict of Terms
In the event any provision of this Agreement is directly in conflict with,
or inconsistent with, any provision of the Merger Agreement, the provision of
the Merger Agreement shall control.
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SECTION 11. Termination
This Agreement hereunder shall terminate on the earlier to occur of (a) the
date on which the Merger is consummated or (b) the date on which the Merger
Agreement is terminated in accordance with its terms.
IN WITNESS WHEREOF, the parties hereto have duly executed and delivered
this Series B Preferred Stock Agreement, or have caused this Series B Preferred
Stock Agreement to be duly executed and delivered in their names and on their
behalf as of the date first written above.
BEHAVIORAL HEALTHCARE CORPORATION
By:
--------------------------------------
Name:
Title:
WCAS HEALTHCARE PARTNERS, L.P.,
By:
--------------------------------------
Name:
Title:
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EXHIBIT E
AMENDED AND RESTATED
CERTIFICATE OF INCORPORATION
OF
BEHAVIORAL HEALTHCARE CORPORATION
BEHAVIORAL HEALTHCARE CORPORATION, a corporation organized and existing
under the laws of the state of Delaware, hereby certifies as follows:
ONE: The name of the corporation is Behavioral Healthcare Corporation (the
"Corporation").
TWO: The date of the filing of the Corporation's original Certificate of
Incorporation with the Secretary of State of Delaware was December 28, 1993
under the name Behavioral Healthcare Corporation.
THREE: The Certificate of Incorporation of this Corporation is hereby
amended and restated to read as follows:
I.
The name of this corporation is Behavioral Healthcare Corporation
II.
The address of the registered office of the corporation in the State of
Delaware is 9 East Loockerman, Dover, Delaware, 19901, County of Kent, and the
name of the registered agent of the corporation in the State of Delaware at such
address is National Registered Agents, Inc.
III.
The purpose of this corporation is to engage in any lawful act or activity
for which a corporation may be organized under the General Corporation Law of
the State of Delaware.
IV.
This corporation is authorized to issue only one class of stock, to be
designated Common Stock. The total number of shares of Common Stock presently
authorized is One Hundred (100), each having a par value of one-tenth of one
cent ($0.001).
V.
The management of the business and the conduct of the affairs of the
corporation shall be vested in its Board of Directors. The number of directors
which shall constitute the whole Board of Directors shall be fixed by the Board
of Directors in the manner provided in the Bylaws.
VI.
A. A director of the corporation shall not be personally liable to the
corporation or its stockholders for monetary damages for any breach of fiduciary
duty as a director, except for liability (i) for any breach of the director's
duty of loyalty to the corporation or its stockholders, (ii) for acts or
omissions not in good faith or which involve intentional misconduct or a knowing
violation of law (iii) under Section 174 of the Delaware General Corporation
Law, or (iv) for any transaction from which the director derived an improper
personal benefit. If the Delaware General Corporation Law is amended after
approval by the stockholders of this Article to authorize corporate action
further eliminating or limiting the personal liability of directors, then the
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liability of a director shall be eliminated or limited to the fullest extent
permitted by the Delaware General corporation Law, as so amended.
B. Any repeal or modification of this Article VI shall be prospective and
shall not affect the rights under this Article VI in effect at the time of the
alleged occurrence of any act or omission to act giving rise to liability or
indemnification.
VII.
The corporation reserves the right to amend, alter, change or repeal any
provision contained in this Certificate of Incorporation, in the manner now or
hereafter prescribed by statute and all rights conferred upon the stockholders
herein are granted subject to this reservation.
FOUR: This Amended and Restated Certificate of Incorporation has been duly
adopted by the Board of Directors of this Corporation.
FIVE: This Amended and Restated Certificate of Incorporation has been duly
adopted in accordance with the provisions of Sections 228, 242, and 245 of the
Delaware General Corporation Law by the board of directors and the stockholders
of the Corporation. The total number of outstanding shares of Common Stock
approved this Amended and Restated Certificate of Incorporation by written
consent in accordance with Section 228 of the Delaware General Corporation Law
and written notice of such was given by the Corporation in accordance with
Section 228.
IN WITNESS WHEREOF, said Behavioral Healthcare Corporation has caused this
Certificate to be signed by its President, Edward A. Stack, and attested to by
its Secretary, Michael E. Davis, this of 1998.
--------------------------------------
Edward A. Stack
President
- ------------------------------------------------------
Michael E. Davis
Secretary
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EXHIBIT F
DIRECTORS AND OFFICERS
OF SURVIVING CORPORATION
Directors
Allen Tepper
Mark Clein
Edward A. Stack
Officers
Allen Tepper -- President and Secretary
Edward A. Stack -- Chief Executive Officer and Treasurer
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EXHIBIT G
THIS UNSECURED SUBORDINATED PROMISSORY NOTE HAS NOT BEEN REGISTERED UNDER
THE SECURITIES ACT OF 1933, AS AMENDED (THE "ACT"). NO SALE OR DISPOSITION MAY
BE EFFECTED EXCEPT IN COMPLIANCE WITH RULE 144 UNDER SAID ACT OR AN EFFECTIVE
REGISTRATION STATEMENT RELATED THERETO OR AN OPINION OF COUNSEL FOR HOLDER,
SATISFACTORY TO BORROWER, THAT SUCH REGISTRATION IS NOT REQUIRED UNDER THE ACT
OR RECEIPT OF A NO-ACTION LETTER FROM THE SECURITIES AND EXCHANGE COMMISSION.
UNSECURED SUBORDINATED PROMISSORY NOTE
$925,000 ,1998
San Diego, California
FOR VALUE RECEIVED, PMR Corporation, a Delaware corporation ("Borrower"),
hereby promises to pay to the order of the persons listed on the Schedule of
Holders attached hereto as Exhibit A (the "Holders"), in lawful money of the
United States of America and in immediately available funds, the aggregate
principal sum set forth on Exhibit A with respect to each Holder aggregating a
total of Nine Hundred Twenty-five Thousand dollars ($925,000) (the "Note")
together with accrued and unpaid interest thereon, payable on the date and in
the manner set forth below.
This Note is executed and delivered in connection with that certain
Agreement and Plan of Merger dated July 29, 1998, by and between Borrower,
Behavioral Healthcare Corporation, a Delaware corporation, and BHC Acquisition
Corp., a Delaware corporation and wholly owned subsidiary of Borrower (as the
same may from time to time be amended, modified or supplemented, the "Merger
Agreement").
1. Repayment. Subject to Section 6 hereof, the outstanding principal amount
of the Note and all accrued and unpaid interest thereon shall be due and payable
in full on , 2001 ("Maturity Date"), except that Borrower may delay
and/or reduce the payment of principal and interest in an amount equal to any
actual Damages (as defined in the Merger Agreement) or a good faith estimate of
Damages reasonably expected to be incurred for any indemnification claim made
pursuant to Section 8 of the Merger Agreement until such indemnification claim
is resolved in accordance with the Merger Agreement.
2. Interest Rate. Borrower further promises to pay interest on the
outstanding principal amount hereof from the date hereof until payment in full,
which interest shall be payable at the rate of seven percent (7%) per annum,
simple interest. Interest shall be calculated on the basis of a 365-day year for
the actual number of days elapsed. Borrower shall not be required to make any
interest payments prior to the Maturity Date.
3. Place of Payment. All amounts payable hereunder shall be payable by
delivery of a check to the Holders' respective addresses listed on the Schedule
of Holders attached hereto as Exhibit A.
4. Application of Payments. Payments on this Note shall be applied first to
accrued interest, and thereafter to the outstanding principal balance hereof.
5. Offset. Borrower and any Parent Indemnitees (as defined in the Merger
Agreement) shall be entitled to offset Damages first against accrued interest
and, if the Damages exceed the amount of accrued interest, then against the
outstanding principal balance hereof.
6. Subordination.
(a) Senior Debt. For purposes of this Note, "Senior Debt" shall mean all
presently existing and hereafter arising indebtedness and other obligations for
borrowed money of any kind or nature of Borrower, and all renewals, extensions
and refundings thereof.
(b) Agreement to Subordinate. The Borrower and Holder agree that the
indebtedness evidenced by this Note is subordinated in right of payment to the
extent and in the manner provided in this Section 6 to the prior
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payment in full of all Senior Debt, and that the subordination is for the
benefit of the holders of the Senior Debt.
(c) Liquidation; Dissolution; Bankruptcy. Upon any distribution to
creditors of the Borrower in a liquidation or dissolution of Borrower or in a
bankruptcy, reorganization, insolvency, receivership or similar proceeding
relating to Borrower or its property:
(i) the holders of the Senior Debt shall be entitled to receive
payment in full in cash of the principal of and interest (including
interest accruing after the commencement of any such proceeding) to the
date of payment on the Senior Debt before the Holder shall be entitled to
receive any payment of principal of or interest on this Note; and
(ii) until the Senior Debt is paid in full in cash, any distribution
to which the Holder would be entitled but for this Section 6 shall be made
to the holders of the Senior Debt, except that the Holder may receive
securities that are subordinated to the Senior Debt to at least the same
extent as this Note.
(d) Default on Senior Debt.
(i) Upon the maturity of the Senior Debt by lapse of time,
acceleration or otherwise, all such Senior Debt shall first be paid in
full, or such payment duly provided for in cash or in a manner satisfactory
to the holders of the Senior Debt, before any payment is made by the
Borrower or any person acting on behalf of the Borrower on account of the
principal of or interest on this Note.
(ii) The Borrower may not pay the principal of or interest on this
Note and may not acquire this Note for cash or property (other than capital
stock of the Borrower or other securities of the Borrower that are
subordinated to the Senior Debt to at least the same extent as this Note)
if: (A) a default on the Senior Debt occurs and is continuing that permits
the holders of such Senior Debt to accelerate its maturity, and (B) the
default is the subject of judicial proceedings or the Borrower receives a
notice of the default.
(iii) The Borrower may resume payments on this Note and may acquire
them when: (A) the default is cured or waived, or (B) 180 days pass after
the notice is given if the default is not the subject of judicial
proceedings.
(e) Subrogation. After all Senior Debt is paid in full and until this Note
is paid in full, the Holder shall be subrogated to the rights of the holders of
the Senior Debt to receive distributions applicable to Senior Debt to the extent
that distributions otherwise payable to the Holder have been applied to the
payment of the Senior Debt. A distribution made under this Section to the
holders of the Senior Debt which otherwise would have been made to the Holder is
not, as between the Borrower and the Holder, a payment by the Borrower on Senior
Debt.
(f) Relative Rights. This Section defines the relative rights of the Holder
and the holders of the Senior Debt. Nothing in this Note shall:
(i) impair, as between the Borrower and the Holder, the obligation of
the Borrower, which is absolute and unconditional, to pay principal of and
interest on the Note in accordance with its terms; and
(ii) affect the relative rights of the Holder and creditors of the
Borrower other than the holders of the Senior Debt.
(g) Subordination May Not Be Impaired by Borrower. No right of the holders
of the Senior Debt to enforce the subordination of the indebtedness evidenced by
this Note shall be impaired by any act or failure to act by the Borrower or by
its failure to comply with this Note.
7. Prepayment. Borrower may prepay this Note at any time either in whole or
in part without penalty.
8. Waiver; Payment of Fees and Expenses. Borrower waives presentment and
demand for payment, notice of dishonor, protest and notice of protest of this
Note, and shall pay all costs of collection when incurred, including, without
limitation, reasonable attorneys' fees, costs and other expenses.
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9. Amendments. This Note may not be amended, altered, changed or otherwise
modified except by a written instrument signed by Holders, or the Stockholders'
Representatives (as defined in the Merger Agreement) on behalf of Holders, and
Borrower.
10. Governing Law. This Note shall be governed by, and construed and
enforced in accordance with, the laws of the State of Delaware, excluding
conflict of laws principles that would cause the application of laws of any
other jurisdiction.
11. Successors and Assigns. The provisions of this Note shall inure to the
benefit of and be binding on any successor to Borrower. This Note is not a
negotiable instrument and Holders shall not be entitled to assign the Note
without the prior written consent of Borrower and the agreement by the assignee
to become a substitute obligor under the stockholder indemnification provisions
of the Merger Agreement.
BORROWER: PMR CORPORATION
By:
------------------------------------
Allen Tepper, Chief Executive
Officer
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EXHIBIT H
EXCHANGE AGENT AGREEMENT
BETWEEN
STOCKTRANS, INC.
AND
PMR CORPORATION
THIS EXCHANGE AGENT AGREEMENT (the "Agreement") is entered into as of
, 1998 between PMR CORPORATION, a Delaware corporation ("Parent"),
and STOCKTRANS, INC. ("Agent"). Capitalized terms used but not defined herein
shall have the meanings set forth in the Merger Agreement defined below.
WHEREAS, Parent is a party to that certain Agreement and Plan of Merger,
dated as of July , 1998, (the "Merger Agreement"), a copy of which is attached
hereto as Exhibit A among Parent, BHC ACQUISITION CORP., a Delaware corporation
and a wholly-owned subsidiary of Parent ("Merger Sub"), and BEHAVIORAL
HEALTHCARE CORPORATION, a Delaware corporation (the "Company"); and
WHEREAS, in accordance with Section 1.8 of the Merger Agreement, Parent
desires to appoint Agent to act as exchange agent, and Agent desires to accept
such appointment, on the terms and conditions set forth herein;
NOW, THEREFORE, in consideration of the mutual promises and covenants
contained in this Agreement, the parties hereto agree as follows:
1. Conversion of Shares.
Agent understands that, and will perform services hereunder based upon, the
following:
1.1 At the Effective Time, by virtue of the Merger and without any action
on the part of Parent, Merger Sub, the Company or any stockholder of the
Company, and except as provided in Section 1.5(a) of the Merger Agreement, (i)
the shares of Common Stock, $0.01 par value per share of the Company (the
"Company Common Stock") held by Vencor, Inc. ("Vencor") immediately prior to the
Effective Time (the "Vencor Shares") shall be converted into the right to
receive an aggregate of $65,000,000 in cash (the "Vencor Payment") and (ii) the
shares of Company Common Stock (other than the Vencor Shares) and shares of
Series A Preferred Stock of the Company (together with the Company Common Stock,
the "Converted Shares") issued and outstanding immediately prior to the
Effective Time, shall be converted into the right to receive (subject to the
provisions of Section 1.2 below) (a) an aggregate of $28,500,000 in cash
(together with the Vencor Payment, the "Cash Payment"), (b) promissory notes in
the aggregate principal amount of $925,000 (the "Note Payment") and (c) an
aggregate of 2,600,000 shares of Common Stock, $0.01 par value per share, of
Parent (the "Parent Common Stock" and collectively with the Cash Payment and the
Note Payment, the "Merger Consideration"), in each case upon surrender of
certificates representing such Converted Shares ("Certificates") (or in the case
of a lost, stolen or destroyed Certificate, upon delivery of an affidavit (and
bond, if required by Parent)) in the manner provided in Section 1.8 of the
Merger Agreement and Section 2.7 hereof.
1.2 No fractional shares of Parent Common Stock shall be issued in
connection with the Merger and no certificate for any such fractional share
shall be issued. In lieu thereof, any holder of Converted Shares who would
otherwise be entitled to a fraction of a share of Parent Common Stock (after
aggregating all fractional shares of Parent Common Stock that such holder is
entitled to receive) shall, upon surrender of such holder's Certificate, be paid
in cash the dollar amount (rounded to the nearest whole cent), without interest,
determined by multiplying such fraction by $9.2596.
1.3 As soon as practicable following the Effective Time: (a) Parent will
inform Agent of the Effective Time and will provide Agent with instructions with
respect to any legends that must be placed on certificates representing shares
of Parent Common Stock to be issued in connection with the Merger, and (b) the
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Company will provide Agent with a Schedule of Disbursement (the "Schedule of
Disbursement") setting forth a list of the holders of Converted Shares
immediately prior to the Effective Time and the Merger Consideration to which
each such holder is entitled pursuant to the Merger Agreement, including the
amount to be held by the Agent and the amount to be held by the Escrow Agent (as
described below).
1.4 Agent shall have no duty to inquire into the terms of the Merger
Agreement or any other agreement. Agent's rights and duties shall be as
specifically set forth herein.
1.5 At the Effective Time, Parent shall deliver to the Escrow Agent
$5,449,937 of the Cash Payment (the "Escrow Payment") and the Note Payment
pursuant to the Escrow Agreement attached hereto as Exhibit B (the "Escrow
Agreement").
1.6 At the Effective Time, Parent will deposit or cause to be deposited
with Agent in an account for the benefit of holders of Converted Shares
immediately available funds equal to the sum of (collectively, the "Payment
Fund"): (a) $88,050,063 of the Cash Payment; and (b) cash in the aggregate
amount needed to make payments in lieu of fractional shares of Parent Common
Stock based on the Schedule of Disbursement and any applicable tax withholding.
Agent will draw upon such funds as required from time to time in order to make
payment for the Converted Shares and any applicable tax withholding payments.
Agent shall pay interest to Parent on the average daily balance of the Payment
Fund at a floating rate equal to the rate of interest publicly announced by Bank
of America N.T.&S.A. from time to time as its prime, base or reference rate, per
annum of the average daily balance of the Payment Fund. Agent shall return to
Parent any amounts remaining in the Payment Fund on that date which is six (6)
months after the Effective Date; thereafter, in the event that additional
Converted Shares are surrendered to Agent for exchange, Agent shall notify
Parent of the number of such Converted Shares surrendered for exchange and
Parent shall promptly deposit or cause to be deposited with Agent immediately
available funds sufficient to pay for such surrendered Converted Shares and any
payments in lieu of fractional shares with respect thereto.
1.7 As of the Effective Time, Agent and the Escrow Agent shall become the
sole recordkeeping agents for the Converted Shares, in accordance with their
standard practices.
Upon the exchange of Converted Shares, certificates representing such
Converted Shares shall be physically canceled by Agent and posted to the records
maintained by Agent.
2. Services.
In addition to any other services described in this Agreement, Agent shall
perform the following services:
2.1 Agent shall mail, first class mail, postage prepaid at Parent's
expense, as soon as practicable after the Effective Time, to each holder of
record of Converted Shares: (a) a Letter of Transmittal (which shall be in the
form attached hereto as Exhibit C, which form has been provided to Agent by
Parent); and (b) instructions (which have been provided to Agent by Parent and
are included as part of Exhibit C) for use in effecting the surrender of the
Certificates representing such shares in exchange for the Merger Consideration.
2.2 Agent shall receive Certificates, Letters of Transmittal and any other
accompanying documents and shall examine each Letter of Transmittal, each
related Certificate and each other accompanying document to ascertain (a)
whether such Letter of Transmittal and other document has been completed and
executed in accordance with the instructions set forth therein, (b) whether such
Certificate is in proper form for exchange, and (c) whether there are any
discrepancies between the number of shares of Converted Shares that any Letter
of Transmittal may indicate are owned by a surrendering stockholder and the
number of Converted Shares that the Schedule of Disbursement indicates are owned
by such stockholder immediately prior to the Effective Time. In each instance in
which any discrepancy referred to in clause "(c)" of the preceding sentence
exists or in which a Letter of Transmittal, Certificate or any accompanying
document has been improperly completed or executed, or for any other reason is
not in proper form or where any other irregularity in connection with the
exchange appears to Agent to exist, Agent shall notify the presenter of such
Letter of Transmittal, Certificate or other document, and shall follow, where
possible, Agent's regular procedures to attempt to cause such discrepancy or
irregularity to be corrected. If the discrepancy or irregularity is not
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corrected within 30 days, Agent shall consult with Parent for instructions as to
the number of Converted Shares, if any, Agent is authorized to accept for
exchange. In the absence of such instructions, Agent is not authorized to accept
any such shares for exchange.
2.3 Agent shall stamp each Letter of Transmittal received by it as to the
date and the time of receipt thereof and Agent shall preserve each such Letter
of Transmittal for a period of time at least equal to the period of time Agent
preserves other records pertaining to the transfer of securities. Agent shall
dispose of unused Letters of Transmittal and other surplus materials by
returning them to Parent.
2.4 Upon surrender to Agent of a Certificate in proper form for exchange,
together with a properly executed Letter of Transmittal, Agent, in its capacity
as transfer agent for Parent, as promptly as possible, shall prepare
certificates for shares of Parent Common Stock in the denominations listed on
the Schedule of Disbursement. Agent shall deliver certificates representing an
aggregate of up to 175,500 shares of the Parent Common Stock to the Escrow Agent
(the "Escrow Shares") to be held together with the Escrow Payment and the Note
Payment pursuant to the Escrow Agreement. The Agent shall deliver to the persons
indicated in the Letter of Transmittal, certificates representing the Parent
Common Stock (other than the Escrow Shares), the Cash Payment (other than the
Escrow Payment) and the entire payment in lieu of fractional shares to which
such persons are entitled (including such payment with respect to the Escrow
Shares).
2.5 If Agent shall receive a Letter of Transmittal with a completed
instruction block indicating that the certificate for shares of Parent Common
Stock is to be issued in a name other than that of the registered holder of the
related Certificate, Agent shall act in accordance with the instructions
indicated therein only if: (a) the Letter of Transmittal or the Certificate has
been properly assigned by the holder of record; (b) the signature or signatures
on such assignment correspond exactly with the name or names which appear on the
face of such Certificate; (c) the signature or signatures on such assignment are
properly guaranteed; and (d) the person requesting such exchange shall have paid
to Parent or Agent any transfer or other taxes required by reason of the
issuance of a certificate for shares of Parent Common Stock in any name other
than that of the registered holder of the Certificate surrendered.
2.6 All certificates representing Parent Common Stock issued in exchange
for Converted Shares may be issued without restrictive legend(s); provided,
however, Parent Common Stock issued to each of the persons listed on Exhibit D
attached hereto shall contain the following legend:
"THE SECURITIES EVIDENCED BY THIS CERTIFICATE ARE HELD BY A PERSON WHO MAY
BE DEEMED TO BE AN AFFILIATE OF THE ISSUER FOR PURPOSES OF RULE 144 OR RULE
145 PROMULGATED UNDER THE SECURITIES ACT OF 1933, AS AMENDED."
If any certificates are to be issued with any additional restrictive
legend(s), Parent shall provide the appropriate legend(s) and a list identifying
the stockholders and certificate numbers of Converted Shares.
2.7 If any holder of shares of Converted Shares as of the Effective Time
reports to Agent that such holder's failure to surrender a Certificate
representing any such shares is due to the theft, loss or destruction of such
holder's Certificate, Agent shall require such stockholder to furnish an
affidavit of such theft, loss or destruction and a bond of indemnity (unless
Parent advises Agent that a bond of indemnity is not required), both in form and
substance satisfactory to Agent. Upon receipt of such affidavit and, if
necessary, bond of indemnity, and compliance with any other applicable
requirements, Agent shall effect the issuance of the Merger Consideration to the
former stockholder as though such stockholder had surrendered a Certificate
representing shares of Converted Shares.
2.8 On or before January 31st of the year following the year of the
payment, Agent shall prepare and mail to each stockholder, other than
stockholders who demonstrate their status as nonresident aliens in accordance
with United States Treasury Regulations ("Foreign Stockholders"), a Form 1099-B
reporting the amount of such cash, in accordance with Treasury Regulations.
Agent shall prepare and file copies of such Forms 1099-B by magnetic tape with
the Internal Revenue Service (the "IRS") on or before February 28th of the year
following the year of the payment, in accordance with Treasury Regulations. On
or before January 31st of the year following the year of the payment, Agent
shall prepare and mail to each stockholder who received any dividends held
pending exchange of the Converted Shares, other than stockholders who
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demonstrate their status as Foreign Stockholders, a Form 1099-DIV reporting the
amount of such cash, in accordance with Treasury Regulations. Agent shall also
prepare and file copies of such Forms 1099-DIV by magnetic tape with the IRS on
or before February 28th of the year following the year of the payment, in
accordance with Treasury Regulations. Should any issue arise regarding Federal
income tax reporting or withholding, Agent shall take such action as instructed
by Parent in writing.
2.9 Agent shall take such action as may from time to time be requested by
Parent or its counsel (and such other action as Agent may reasonably deem
appropriate) to furnish copies of the Letter of Transmittal or such other forms
as may be approved from time to time by Parent, to all persons requesting such
documents, and to accept and comply with telephone requests for information
relating to the exchange of Certificates in connection with the Merger.
2.10 Agent shall advise Parent by cable, telex, facsimile transmission or
telephone, and, if by telephone, promptly thereafter confirm in writing to
Parent, weekly (and daily during the three weeks immediately following the
Effective Time) during the term of this Agreement, as to the number of shares of
Converted Shares and the identity by Certificate number of Certificates which
have been surrendered, and as to the aggregate amount of Merger Consideration
(specifically setting forth the number of shares of Parent Common Stock which
have been issued in exchange therefor, including the number of shares delivered
to the Escrow Agent in connection therewith), delivered pursuant to the Merger,
and the items received by Agent in connection therewith, separately reporting
and giving cumulative totals as to items properly received and items improperly
received. Agent shall prepare a final list of each person who surrendered one or
more Certificates (or one or more affidavits of the type referred to in Section
2.7), the aggregate number of Converted Shares surrendered by each such person
and the aggregate amount of Merger Consideration (specifically setting forth the
number of shares of Parent Common Stock issued to each such person), and deliver
said list to Parent within 30 days after the termination of this Agreement. In
addition, Agent shall provide Parent with such other reports as Parent may
reasonably request.
3. Limitations on Agent's Duties.
As exchange agent hereunder, Agent: (a) shall have no duties or obligations
other than those specifically set forth herein or as may be agreed to in writing
by Agent and Parent and no implied duties or obligations shall be read into this
Agreement against Agent; (b) shall be regarded as making no representations and
having no responsibilities as to the validity, sufficiency, value or genuineness
of any Certificate or of any Converted Shares represented thereby and
surrendered to Agent hereunder or of any shares of Parent Common Stock issued in
exchange therefor, and shall not be required to make any representation as to
the validity of the Merger Agreement; provided that, in no way will Agent's
general duty to act in good faith be discharged by the foregoing; and (c) shall
not be obligated to take any legal action hereunder which might in the judgment
of Agent involve any expense or liability, unless Agent shall have been
furnished with reasonable indemnity therefor.
4. Dividends.
Parent shall deposit with Agent cash in sufficient amount to account for
any dividends or other distributions with respect to shares of Parent Common
Stock that become payable after the Effective Time. However, no dividends or
other distributions with respect to shares of Parent Common Stock which become
payable after the Effective Time shall be paid by Agent to any holder of a
Certificate (with respect to the number of shares of Parent Common Stock to be
issued to such holder upon surrender of such Certificate) until such holder
shall have surrendered such Certificate for exchange as herein provided,
whereupon such dividends and other distributions shall be delivered (without
interest or earnings) to such holder. Promptly after the termination of Agent's
appointment, Agent shall deliver to Parent (without interest or earnings
thereon), all such dividends and other distributions held by Agent for holders
of Certificates who by that date have not surrendered such Certificates for
exchange as provided herein.
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5. Reliance on Communication.
As exchange agent hereunder, Agent may rely on and shall be protected in
acting in reliance upon any agreement, stock certificate, opinion, notice,
letter, telegram, or other instrument, which Agent shall reasonably and in good
faith believe to be genuine and to have been signed by a proper person or
entity. Agent may rely on and shall be protected in acting in reliance upon the
written or oral instructions (confirmed in writing) of Allen Tepper or Mark
Clein, each an officer of Parent; provided, however, that failure to confirm
said instructions in writing shall not affect the validity of said instructions.
6. Right to Consult Counsel.
Agent may consult legal counsel of its own selection, including counsel for
Parent and attorneys in Agent's employ, with respect to any questions relating
to its duties and responsibilities hereunder. Agent shall not be liable for any
action taken or omitted by it in good faith in reliance upon the written opinion
of counsel.
7. Indemnification and Defense of Claims.
7.1 Parent shall indemnify and hold Agent harmless in its capacity as
exchange agent hereunder against any loss, liability, cost or expense, including
reasonable attorneys' fees, arising out of or in connection with: (a) the
performance by Agent of its duties hereunder; or (b) the reliance by Agent upon
the information relating to the Converted Shares furnished to Agent by Parent or
by the Company's transfer agent; provided, however, that: (i) in any case in
which there is a discrepancy between such information and the information
contained in a Certificate or Certificates surrendered to Agent by a former
stockholder of the Company for exchange under the terms hereof, Agent shall have
a duty to inquire as to the reason for such discrepancy, and if Agent is unable
to resolve said discrepancy within 30 days, Agent shall act with respect to said
discrepancy only as directed by Parent; and (ii) Parent shall not be liable for
indemnification or otherwise for any loss, liability, cost or expense to the
extent arising out of Agent's gross negligence or willful misconduct. In no case
shall Parent be liable under this indemnity with respect to any claim against
Agent unless Parent shall be notified in writing by Agent of the assertion of
such claim promptly after Agent shall have received notice of any such assertion
unless such delay did not prejudice Parent's rights with respect to such claim.
Parent shall be entitled to participate at its own expense in the defense of any
such claim, and, if Parent so elects, Parent shall assume the defense of any
proceeding brought with respect to any such claim. In the event that Parent
shall assume the defense of any such proceeding, Parent shall not be liable for
the fees and expenses of any additional counsel thereafter retained by Agent
unless counsel to Agent reasonably determines that representation of Agent by
counsel to, or counsel selected by, Parent would give rise to a conflict of
interest, in which case Agent shall be entitled to retain a single firm as
counsel and Parent shall be liable for the reasonable fees and expenses of such
counsel. The indemnification provided for hereunder shall survive the
termination of this Agreement.
8. Attorney's Fees.
In connection with any action at law or suit in equity arising under this
Agreement, the prevailing party shall be entitled to receive a reasonable sum
for its attorneys' fees and all other reasonable costs and expenses incurred in
such action or suit.
9. Fees and Expenses.
For Agent's services hereunder, Parent shall pay Agent the fees set forth
in Exhibit E attached hereto. Parent shall also reimburse Agent for its
reasonable out-of-pocket expenses in connection with its services hereunder,
including, but not limited to, postage, insurance, telephone charges and
reasonable counsel fees which may be incurred in such connection.
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10. Notices.
All notices and other communications pursuant to this Agreement shall be in
writing and shall be deemed given if delivered personally, telecopied, sent by
nationally-recognized, overnight courier or mailed by registered or certified
mail (return receipt requested), postage prepaid, to the parties at the
following addresses (or at such other address for a party as shall be specified
by like notice):
If to Agent: StockTrans, Inc.
7 E. Lancaster Avenue
Ardmore, PA 19003
Telephone: (610) 649-6300
Facsimile: (610) 649-7302
Attention: Jonathan Miller
If to Parent: PMR Corporation
501 Washington Street, 5th Floor
San Diego, CA 92103
Telephone: (619) 610-4001
Facsimile: (619) 610-4184
Attention: Chief Executive Officer
All such notices and other communications shall be deemed to have been
received: (a) in the case of personal delivery, on the date of such delivery;
(b) in the case of a telecopy, when the party receiving such telecopy shall have
confirmed receipt of the communication; (c) in the case of delivery by
nationally-recognized, overnight courier, on the business day following
dispatch; and (d) in the case of mailing, on the fifth business day following
such mailing.
11. Entire Agreement; Counterparts; Applicable Law.
This Agreement constitutes the entire agreement and supersede all prior
agreements and understandings, both written and oral, between any of the parties
with respect to the subject matter hereof. This Agreement may be executed in
several counterparts, each of which shall be deemed an original and all of which
shall constitute one and the same instrument, and shall be governed in all
respects by the laws of the State of Delaware as applied to contracts entered
into and to be performed entirely within Delaware.
12. Modification.
This Agreement shall not be, and shall not be deemed or construed to be
modified or amended, in whole or in part, except by a written instrument signed
by a duly authorized representative of each party to this Agreement.
13. Assignability.
This Agreement shall be binding upon, and shall be enforceable by and inure
solely to the benefit of, the parties hereto and their respective successors and
assigns.
14. Severability.
In case any provision of this Agreement shall be invalid, illegal or
unenforceable, the validity, legality and enforceability of the remaining
provisions shall not in any way be affected or impaired thereby.
15. Termination.
At any time following the one year anniversary of the Effective Time,
Parent may terminate this Agreement at any time by so notifying Agent in
writing. Agent may terminate this Agreement upon 30 days' prior written notice
to Parent. This Agreement shall terminate thirteen months after the Effective
Time unless extended by agreement of both parties hereto. Section 7 of this
Agreement shall survive any termination of
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this Agreement. Upon any termination of this Agreement, Agent shall promptly
deliver to Parent any certificate, funds or other property then held by Agent
pursuant to this Agreement. After such time, any party entitled to such
certificates, funds or property shall look solely to Parent and not to Agent
with respect thereto.
IN WITNESS WHEREOF, the parties have caused this Agreement to be executed
and delivered as of the date first above written.
STOCKTRANS, INC.
By:
------------------------------------
Name:
----------------------------------
Title:
-----------------------------------
PMR CORPORATION
By:
------------------------------------
Name:
----------------------------------
Title:
-----------------------------------
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EXHIBIT I
ESCROW AGREEMENT
THIS ESCROW AGREEMENT dated as of , 1998 (the "Agreement")
is made and entered into by and among PMR CORPORATION, a Delaware corporation
("Parent"), STOCKTRANS, INC. (the "Escrow Agent") and VENCOR, INC. ("Vencor"),
WELSH, CARSON, ANDERSON & STOWE, VI, L.P. ("Welsh, Carson") and EDWARD A. STACK
("Stack"), as Representatives (the "Stockholders' Representatives") of the
common stockholders and Series A Preferred stockholders (collectively, the
"Stockholders") of BEHAVIORAL HEALTHCARE CORPORATION, a Delaware corporation
(the "Company").
RECITALS
WHEREAS, the Company, Parent and BHC ACQUISITION CORP., a Delaware
corporation and wholly owned subsidiary of Parent ("Merger Sub") are parties to
that certain Agreement and Plan of Merger dated July , 1998 (the "Merger
Agreement"), whereby Merger Sub will be merged with and into the Company (the
"Merger") and the Company will be the surviving corporation and become a wholly
owned subsidiary of Parent;
WHEREAS, pursuant to the Merger Agreement, an aggregate of 2,600,000 shares
(the "Merger Shares") of Common Stock of Parent are to be issued, an aggregate
of $93,500,000 (the "Cash Consideration") is to be paid, and promissory notes in
the aggregate principal amount of $925,000 (the "Note Consideration") are to be
issued, in the Merger to the Stockholders;
WHEREAS, the Merger Agreement provides that 175,500 of the Merger Shares to
be issued to the Stockholders in the Merger (the "Escrow Shares"), $5,449,937 of
the Cash Consideration to be paid to the Stockholders in the Merger (the "Escrow
Fund") and a promissory note representing the Note Consideration (the "Escrow
Note") be placed in an escrow account as collateral to secure certain
indemnification obligations of the Stockholders under the Merger Agreement on
the terms and conditions set forth herein; and
WHEREAS, the parties hereto desire to establish the terms and conditions
pursuant to which such escrow account will be established and maintained.
AGREEMENT
NOW, THEREFORE, the parties hereby agree as follows:
1. Defined Terms.
Capitalized terms used in this Agreement and not otherwise defined shall
have the meanings given them in the Merger Agreement.
2. Escrow and Indemnification.
(a) Escrow Account. On the Closing Date, Parent shall or shall cause its
transfer agent to deposit with the Escrow Agent the Escrow Shares, the Escrow
Fund and the Escrow Note, such deposit to constitute an escrow account to be
designated as "Pacific Corporation Escrow Agreement" or an account having such
other similar designation (the "Escrow Account"). The Escrow Shares allocable to
the Stockholders shall be delivered by Parent or the Exchange Agent (as defined
in the Merger Agreement) defined to the Escrow Agent in the form of duly
authorized stock certificates issued in the respective names of each Stockholder
thereof together with endorsed stock powers. The Escrow Agent agrees to accept
delivery of the Escrow Shares and to hold such in the Escrow Account subject to
the terms and conditions of this Agreement.
(b) Investments. The Escrow Agent shall invest the cash held in the Escrow
Fund in an interest-bearing account, or money market instruments or other
investments in accordance with instructions from Parent and Stockholders'
Representatives. Any interest payable on the funds held in the Escrow Fund
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("Interest") shall be distributed to the Stockholders immediately prior to any
distribution to the Stockholders and in any event at least once during each
calendar year commencing on or about January 1, 1999.
(c) The Stockholders shall not have any right to distributions of the
Escrow Fund or the Escrow Note until the termination of the Escrow Agreement
pursuant to its terms.
(d) Stockholder Indemnification. The Escrow Shares, Escrow Fund and Escrow
Note shall be available to satisfy the reimbursement and indemnity obligations
of the Stockholders to the Parent Indemnitees contained in Section 1.10 and
Section 8.2 of the Merger Agreement, subject to the limitations, and in the
manner provided, in the Merger Agreement and this Agreement.
(e) Limitation on Liability. The obligations of the Stockholders under this
Agreement are subject to the limitations set forth in Section 8 of the Merger
Agreement.
(f) Dividends, Voting and Rights of Ownership. Any cash dividends paid in
respect of the Escrow Shares shall be distributed currently by Parent (or
Parent's transfer agent) to the Stockholders and will not be available to
satisfy the indemnification obligations of the Stockholders. The Stockholders
will have the right to vote the Escrow Shares so long as such Escrow Shares are
held in escrow and Parent will take all reasonable steps necessary to allow the
exercise of such rights. While the Escrow Shares remain in the Escrow Agent's
possession pursuant to this Agreement, the Stockholders will retain and will be
able to exercise all incidents of ownership of such shares that are not
inconsistent with the terms of this Agreement.
(g) No Transfer by Stockholders. The interests of the Stockholders in the
Escrow Account shall not be assignable or transferable, other than by operation
of law. Notice of any such assignment or transfer by operation of law shall be
given to the Escrow Agent and Parent, and no such assignment or transfer shall
be valid until such notice is given.
(h) Escrow Agent's Power to Transfer. The Escrow Agent is hereby granted
the power to effect any transfer of the Escrow Shares, the Escrow Fund and the
Escrow Note permitted by this Agreement and the Merger Agreement. Parent shall
cooperate with the Escrow Agent in promptly issuing (or causing Parent's
transfer agent to issue) stock certificates or promissory notes to effect such
transfer.
3. Claims for Damages.
(a) Delivery of Claim Notice. If any Parent Indemnitee is entitled to
reimbursement under Section 1.10 of the Merger Agreement or has incurred or
suffered Damages for which it is entitled to indemnification under Section 8.2
of the Merger Agreement, Parent shall, on or prior to the 18-month anniversary
of the Closing Date (the "Expiration Date"), give written notice of such claim
(a "Claim Notice") to the Stockholders' Representatives, with a copy being
provided to the Escrow Agent. Each Claim Notice shall state the amount of
claimed UST Removal Costs or Damages (the "Claimed Amount") and the basis for
such claim. No Parent Indemnitee shall make, and shall not be entitled to make,
any claim for UST Removal Costs or Damages after the Expiration Date.
(b) Response Notice; Uncontested Claims. Within thirty (30) days of receipt
of a Claim Notice, the Stockholders' Representatives shall provide to Parent,
with a copy being provided to the Escrow Agent, a written response (the
"Response Notice") in which the Stockholders' Representatives shall (i) agree
that the full Claimed Amount is valid, (ii) agree that part, but not all, of the
Claimed Amount (the "Agreed Amount") is valid, or (iii) contest that any or all
of the Claimed Amount is valid. The Stockholders' Representatives may contest
all or a portion of a Claimed Amount only based upon a good faith belief that
all or such portion of the Claimed Amount does not constitute UST Removal Costs
for which a Parent Indemnitee is entitled to reimbursement under Section 1.10 of
the Merger Agreement or Damages entitled to indemnification under Section 8.2 of
the Merger Agreement. If no Response Notice is delivered by the Stockholders'
Representatives within such thirty (30) day period, the Stockholders'
Representatives shall be deemed to have agreed that the Claimed Amount is valid
and that the Parent Indemnitee at issue is entitled to such reimbursement and/or
indemnification.
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(c) Uncontested Claims. If the Stockholders' Representatives in the
Response Notice agree or, by failing to provide a Response Notice, are deemed to
have agreed that the Claimed Amount is valid, the Escrow Agent shall in a timely
manner following the required delivery date for the Response Notice (i) first,
reduce the amount of the Escrow Note in accordance with Section 4 hereof in an
amount equal to the Claimed Amount, and provide Parent with a schedule
indicating the amount by which the Escrow Note has been reduced; and (ii) if the
full principal amount of the Escrow Note has been reduced, disburse to Parent
from the Escrow Account, in accordance with Section 4 hereof, cash plus that
number of Escrow Shares which Value (as defined in Section 4(b)), together with
such cash and the Escrow Note, the Claimed Amount. The reduction of the Escrow
Note, the amount of cash and the number of Escrow Shares equal to the Claimed
Amount shall be calculated and agreed upon by the Stockholders' Representatives
and Parent and certified in writing by such persons to the Escrow Agent. The
Escrow Agent shall have no duty to verify or determine the amount by which the
Escrow Note shall be reduced or the amount of cash or number of Escrow Shares
necessary to satisfy the Claimed Amount.
(d) Contested Claims.
(i) If the Stockholders' Representatives in the Response Notice agree
that part, but not all, of the Claimed Amount is valid (the "Agreed
Amount"), the Escrow Agent shall in a timely manner following the required
delivery date for the Response Notice (i) first, reduce the amount of the
Escrow Note in accordance with Section 4 hereof in an amount equal to the
Agreed Amount, and provide Parent with a schedule indicating the amount by
which the Escrow Note has been reduced; and (ii) if the full principal
amount of the Escrow Note has been reduced, disburse to Parent from the
Escrow Account, in accordance with Section 4 hereof, cash plus that number
of Escrow Shares which Value, together with such cash and the Escrow Note,
is necessary to satisfy the Agreed Amount. The reduction of the Escrow
Note, the amount of cash and the number of Escrow Shares necessary to
satisfy the Agreed Amount shall be calculated and agreed upon by the
Stockholders' Representatives and Parent and certified in writing by such
persons to the Escrow Agent. The Escrow Agent shall have no duty to verify
or determine the amount by which the Escrow Note is reduced or the amount
of cash or number of Escrow Shares necessary to satisfy the Agreed Amount.
(ii) If the Stockholders' Representatives in the Response Notice
contest the release of all or a part of the Claimed Amount (the "Contested
Amount"), the Escrow Agent shall continue to hold in the Escrow Account,
the Escrow Note and the cash plus that number of Escrow Shares necessary to
satisfy the Contested Amount, notwithstanding the occurrence of the
Expiration Date, until (i) delivery of a copy of a settlement agreement
executed by the Stockholders' Representatives and Parent setting forth
instructions to the Escrow Agent as to disbursement of the Escrow Account,
if any, or (ii) delivery of a copy of a final, nonappealable court order
setting forth instructions to the Escrow Agent as to disbursement of the
Escrow Account, if any. The reduction of the Escrow Note, the amount of
cash and the number of Escrow Shares necessary to satisfy the Contested
Amount shall be calculated and agreed upon by the Stockholders'
Representatives and Parent and certified in writing by such persons to the
Escrow Agent. The Escrow Agent shall have no duty to verify or determine
the amount by which the Escrow Note is reduced or the amount of cash or
number of Escrow Shares necessary to satisfy the Contested Amount.
4. Disbursements in Respect of Claims.
(a) Whenever the Escrow Agent becomes obligated to make a disbursement to a
Parent Indemnitee pursuant to Section 3, the Escrow Agent shall make such
disbursement from the Escrow Account as promptly as practicable and in
accordance with Parent's written instructions. Whenever a disbursement or
reservation is to be made from the Escrow Account pursuant to Section 3, such
disbursements or reservations shall be made, first, from the Escrow Note by
applying the Claimed Amount against any accrued and unpaid interest under the
Escrow Note, thereafter against the principal balance of the Note and, if the
Claimed Amount has not been satisfied, then from the Escrow Fund and from the
Escrow Shares (in the same proportion as the Escrow Fund and the Escrow Shares
were originally placed in the Escrow Account) such that the sum of reduction of
the Escrow Note and all such cash plus the aggregate Value of such Escrow Shares
is equal to the amount to
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be disbursed from or reserved against the Escrow Account. Nothing herein shall
require the payment of claims in excess of the limitations set forth in Section
8 of the Merger Agreement.
(b) "Value," when used with respect to an Escrow Share, shall be $9.2596
per share.
5. Release of Escrow Shares and Escrow Fund.
Within five (5) business days after the Expiration Date, the Escrow Agent
shall notify Parent and Stockholders' Representative as to the remaining
principal and interest of the Escrow Note. Parent shall immediately thereafter
issue and deliver to the Escrow Agent individual promissory notes (the "Notes")
in accordance with the Stockholders' pro rata interest in the Escrow Note.
Within fifteen (15) business days after the Expiration Date, the Escrow Agent
shall distribute to the Stockholders the Notes, and on a pro rata basis, all of
the Escrow Shares and the Escrow Fund (together with interest accrued thereon)
then being held by the Escrow Agent. The Escrow Agent shall deliver the Escrow
Note to Parent for cancellation. Notwithstanding the foregoing, any Contested
Amount being held by the Escrow Agent on the Expiration Date shall be held and
disbursed only in accordance with Section 3(d)(ii) of this Agreement.
6. Fees and Expenses.
Upon execution of this Agreement and initial deposit of the Escrow Shares,
Escrow Fund and Escrow Note with the Escrow Agent, an acceptance fee of
$ will be payable to the Escrow Agent by Parent. This acceptance fee
will cover the Escrow Period. In the event the Escrow Agent is required to
administer the Escrow Account after the Escrow Period, an administrative fee
will be payable to the Escrow Agent by Parent in accordance with the Escrow
Agent's fee schedules in effect from time to time. The Escrow Agent will also be
entitled to reimbursement on demand from Parent for extraordinary expenses
incurred in performance of its duties hereunder including, without limitation,
payment of any reasonable legal fees and expenses incurred by the Escrow Agent
in connection with the resolution of any claim by any party hereunder. Parent
shall pay the reasonable fees and expenses of the Escrow Agent for the services
to be rendered by the Escrow Agent hereunder including reasonable legal fees
incurred in connection with the preparation of this Agreement.
7. Limitation of Escrow Agent's Liability.
(a) Neither Escrow Agent nor any of its directors, officers or employees
shall incur any liability with respect to any action taken or suffered by it in
reliance upon any notice, direction, instruction, consent, statement or other
documents believed by it to be genuine and duly authorized, nor for other action
or inaction except its own willful misconduct or gross negligence. The Escrow
Agent shall have no duty to inquire into or investigate the validity, accuracy
or content of any document delivered to it nor shall the Escrow Agent be
responsible for the validity or sufficiency of this Agreement. In all questions
arising under this Agreement, the Escrow Agent may rely on the advice of
counsel, including in-house counsel, and for anything done, omitted or suffered
in good faith by the Escrow Agent based on such advice the Escrow Agent shall
not be liable to anyone. The Escrow Agent shall not be responsible for any of
the agreements referred to herein, including the Merger Agreement, but shall be
obligated only for the performance of such duties as are specifically set forth
in this Agreement.
(b) In the event conflicting demands are made or conflicting notices are
served upon the Escrow Agent with respect to the Escrow Note, the Escrow Fund or
the Escrow Shares, the Escrow Agent will have the absolute right, at the Escrow
Agent's election, to do either or both of the following: (i) resign so a
successor can be appointed pursuant to Section 10 hereof or (ii) file a suit in
interpleader and obtain an order from a court of competent jurisdiction
requiring the parties to interplead and litigate in such court their several
claims and rights among themselves. In the event such interpleader suit is
brought, the Escrow Agent will thereby be fully released and discharged from all
further obligations imposed upon it under this Agreement, and Parent will pay
the Escrow Agent all costs, expenses and reasonable attorneys' fees expended or
incurred by the Escrow Agent pursuant to the exercise of the Escrow Agent's
rights under this Section 7(b) (such costs, fees and expenses will be treated as
extraordinary fees and expenses for the purposes of Section 6 hereof).
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(c) Parent hereby agrees to indemnify the Escrow Agent for, and hold it
harmless against, any loss, damage, liability or expense incurred without gross
negligence or willful misconduct on the part of Escrow Agent, arising out of or
in connection with its carrying out of its duties hereunder including, but not
limited to reasonable legal fees and other costs and expenses of defending or
preparing to defend against any claim or liability in the premises. In no event
shall the Escrow Agent be liable for indirect, punitive, special or
consequential damages.
(d) Parent and Stockholders, jointly and severally, agree to assume any and
all obligations imposed now or hereafter by any applicable tax law with respect
to the release of any Escrow Shares, the Escrow Note and the Escrow Fund under
this Agreement, and to indemnify and hold the Escrow Agent harmless from and
against any taxes, additions for late payment, interest, penalties and other
expenses, that may be assessed against the Escrow Agent in any such release or
other activities under this Agreement. Parent and Stockholders undertake to
instruct the Escrow Agent in writing with respect to the Escrow Agent's
responsibility for withholding and other taxes, assessments or other
governmental charges, certifications and governmental reporting in connection
with its acting as Escrow Agent under this Agreement. Parent and Stockholders,
jointly and severally, agree to indemnify and hold the Escrow Agent harmless
from any liability on account of taxes, assessments or other governmental
charges, including without limitation the withholding or deduction or the
failure to withhold or deduct the same, and any liability for failure to obtain
proper certifications or to properly report to governmental authorities, to
which the Escrow Agent may be or become subject in connection with or which
arises out of this Agreement, including costs and expenses (including reasonable
legal fees and expenses), interest and penalties.
8. Termination.
This Agreement shall terminate upon the later of the Expiration Date or the
release by the Escrow Agent of all of the Escrow Shares and the Escrow Fund and
the cancellation or release of the Escrow Note in accordance with this
Agreement. The provisions of Section 7 shall survive termination of this
Agreement.
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9. Notices.
Any notice or other communication required or permitted to be delivered to
any party under this Agreement shall be in writing and shall be deemed properly
delivered, given and received when delivered (by hand, by registered mail, by
courier or express delivery service or by facsimile) to the address or facsimile
telephone number set forth beneath the name of such party below (or to such
other address or facsimile telephone number as such party shall have specified
in a written notice given to the other parties hereto):
<TABLE>
<S> <C>
if to Parent:
PMR Corporation
Attn: Chief Executive Officer
501 Washington Street, 5th Floor
San Diego, CA 92103
Telephone: (619) 610-4001
Facsimile: (619) 610-4184
with a copy to:
Jeremy D. Glaser, Esq.
Cooley Godward LLP
4365 Executive Drive, Suite 1100
San Diego, CA 92121
Telephone: (619) 550-6000
Facsimile: (619) 453-3555
if to the Stockholders:
Edward A. Stack
102 Woodmont Boulevard, Suite 800
Nashville, TN 37205
Telephone: (615) 269-3492
Facsimile: (615) 269-9814
with a copy to:
Waller Lansden Dortch & Davis, PLLC
Nashville City Center
511 Union Street, Suite 2100
Post Office Box 198966
Nashville, Tennessee 37219-8966
Telephone: (615) 244-6380
Facsimile: (615) 244-6804
if to the Escrow Agent:
StockTrans, Inc.
7 E. Lancaster Avenue
Ardmore, PA 19003
Telephone: (610) 649-6300
Facsimile: (610) 649-7302
</TABLE>
10. Successor Escrow Agent.
In the event the Escrow Agent becomes unavailable or unwilling to continue
in its capacity herewith, the Escrow Agent may resign and be discharged from its
duties or obligations hereunder by giving resignation to the parties to this
Agreement, specifying not less than 30 days' prior written notice of the date
when such resignation shall take effect. Parent may appoint a successor Escrow
Agent without the consent of the Stockholders' Representatives so long as such
successor is a bank with assets of at least $500 million, and may appoint any
other successor Escrow Agent with the consent of the Stockholders'
Representatives, which shall not be unreasonably withheld. If, within such
notice period, Parent provides to the Escrow Agent written
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instructions with respect to the appointment of a successor Escrow Agent and
directions for the transfer of the Escrow Shares, Escrow Note and Escrow Fund
then held by the Escrow Agent to such successor, the Escrow Agent shall act in
accordance with such instructions and promptly transfer the Escrow Shares,
Escrow Note and Escrow Fund to such designated successor. If, however, Parent
shall fail to name such a successor escrow agent within twenty (20) days after
the notice of resignation from the Escrow Agent, the Escrow Agent may apply to a
court of competent jurisdiction for appointment of a successor escrow agent.
11. Stockholders' Representatives.
(a) For purposes of this Agreement, the Stockholders hereby consent to the
appointment of Vencor, Welsh, Carson and Stack as the Stockholders'
Representatives and each or any one of them as attorneys-in-fact for and on
behalf of the each Stockholder, and the taking by the Stockholders'
Representatives of any and all actions and the making of any decisions required
or permitted to be taken by them under this Agreement, including without
limitation, the exercise of the power to (i) authorize the reduction of the
Escrow Note; (ii) authorize delivery to Parent of the Escrow Shares and the
Escrow Fund, or any portion thereof, in satisfaction of Claims, (iii) agree to
negotiate, enter into settlements and compromises with respect to such Claims,
(iv) resolve any Claims, and (v) take all actions necessary in the judgment of
the Stockholders' Representatives for the accomplishment of the foregoing and
all of the other terms, conditions and limitations contained in this Agreement.
The Stockholders further consent to the appointment of Edward A. Stack as the
principal representative (the "Principal Representative") with full power and
authority to act on behalf of the Stockholders' Representatives with respect to
any action to be taken or omitted to be taken by the Stockholders'
Representatives under or in connection with this Agreement.
(b) Notwithstanding any statement contained in this Agreement or the Escrow
Agreement to the contrary, Parent and the Escrow Agent may rely conclusively,
and shall be protected in so acting, upon any written order, notice, demand,
certificate, statement, document or instruction (not only as to its due
execution and the validity and effectiveness of its provisions, but also as to
the truth and acceptability of any information therein contained) executed and
delivered by the Principal Representative (but not any of the other
Stockholders' Representatives) whether delivered in original form, by facsimile
or otherwise.
12. General.
(a) Governing Law; Forum. This Agreement shall be construed in accordance
with, and governed in all respects by, the internal laws of the State of
Delaware, without regard to conflict-of-law principles and shall be binding upon
and inure to the benefit of the parties hereto and their respective successors
and assigns.
(b) Counterparts. This Agreement may be executed in two or more
counterparts, each of which shall be decreed an original, but all of which
together shall constitute one and the same instrument.
(c) Entire Agreement. This Agreement constitutes the entire understanding
and agreement of the parties with respect to the subject matter of this
Agreement and supersedes all prior agreements or understandings, written or
oral, between the parties with respect to the subject matter hereof.
(d) Waivers. No waiver by any party hereto of any condition or of any
breach of any provision of this Agreement shall be effective unless in writing.
No waiver by any party of any such condition or breach, in any one instance,
shall be deemed to be a further or continuing waiver of any such condition or
breach or a waiver of any other condition or breach of any other provision
contained herein.
(e) Amendment. This Agreement may be amended only with the written consent
of Parent, the Escrow Agent and the Principal Representative (or their duly
designated successors).
(f) Certification of Tax Identification Number. The parties hereto agree to
provide the Escrow Agent with a certified tax identification number by signing
and returning a Form W-9 (or Form W-8, in the case of non-U.S. persons) to the
Escrow Agent within 30 days from the date hereof. The parties hereto understand
that, in the event their tax identification numbers are not certified to the
Escrow Agent, the Internal Revenue Code, as amended from time to time, may
require withholding of a portion of any income earned on the investment of the
Escrow Shares.
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(g) Dispute Resolution. It is understood and agreed that should any dispute
arise with respect to the delivery, ownership, right of possession, and/or
disposition of the Escrow Note, Escrow Shares and the Escrow Fund, or should any
claim be made upon the Escrow Account by a third party, the Escrow Agent upon
receipt of written notice of such dispute or claim by the parties hereto or by a
third party, is authorized and directed to retain in its possession without
liability to anyone, all or any of said Escrow Note, Escrow Shares and Escrow
Fund until such dispute shall have been settled either by the mutual written
agreement of the parties involved or by a final order, decree or judgment of a
Court in the United States of America, the time for perfection of an appeal of
such order, decree or judgment having expired. The Escrow Agent may, but shall
be under no duty whatsoever to, institute or defend any legal proceedings which
relates to the Escrow Account.
(h) Force Majeure. The Escrow Agent shall not be responsible for delays or
failures in performance resulting from acts beyond its control. Such acts shall
include but not be limited to acts of God, strikes, lockouts, riots, acts of
war, epidemics, governmental regulations superimposed after the fact, fire,
communication line failures, computer viruses, power failures, earthquakes or
other disasters.
(i) Binding Effect. This Agreement shall be binding upon the respective
parties hereto and their heirs, executors, successors and assigns.
(j) Reproduction of Documents. This Agreement and all documents relating
thereto, including, without limitation, (a) consents, waivers and modifications
which may hereafter be executed, and (b) certificates and other information
previously or hereafter furnished, may be reproduced by any photographic,
photostatic, microfilm, optical disk, micro-card, miniature photographic or
other similar process. The parties agree that any such reproduction shall be
admissible in evidence as the original itself in any judicial or administrative
proceeding, whether or not the original is in existence and whether or not such
reproduction was made by a party in the regular course of business, and that any
enlargement, facsimile or further reproduction of such reproduction shall
likewise be admissible in evidence.
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<PAGE> 242
IN WITNESS WHEREOF, the parties hereto have duly executed this Agreement as
of the day and year first above written.
PMR CORPORATION
By:
--------------------------------------
Name:
--------------------------------------
Title:
--------------------------------------
STOCKTRANS, INC.
By:
--------------------------------------
Name:
--------------------------------------
Title:
--------------------------------------
STOCKHOLDERS' REPRESENTATIVES:
--------------------------------------
Edward A. Stack
--------------------------------------
Vencor, Inc.
--------------------------------------
Welsh, Carson, Anderson & Stowe, VI,
L.P.
A-102
<PAGE> 243
EXHIBIT J
OWNED PROPERTIES REQUIRING
ENVIRONMENTAL REPORTS
Pioneer Trail RTC
San Luis Rey Hospital
Valle Vista Hospital
West Hills Hospital
Windsor Hospital
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<PAGE> 244
APPENDIX B
[SUNTRUST EQUITABLE SECURITIES CORPORATION LETTERHEAD]
STRICTLY CONFIDENTIAL
JULY 30, 1998
BOARD OF DIRECTORS
PMR CORPORATION
501 WASHINGTON STREET, 5TH FLOOR
SAN DIEGO, CALIFORNIA 92103
LADIES AND GENTLEMEN:
You have asked us to advise you with respect to the fairness to the common
stockholders of PMR Corporation (the "Company"), from a financial point of view,
of the consideration to be paid by the Company pursuant to the Agreement and
Plan of Merger dated as of July 29, 1998 (the "Agreement"), by and between the
Company and Behavioral Healthcare Corporation ("BHC"). Under the terms of the
Agreement, BHC will merge with and into a wholly-owned subsidiary of the Company
(any such transaction being hereinafter referred to as the "Merger"). Pursuant
to the Merger, holders of BHC common stock and Series A Preferred Stock will
receive (i) 2,600,000 shares of common stock of the Company, (ii) aggregate cash
consideration of $93,500,000 and (iii) promissory notes in the amount of
$925,000. The Company, or its wholly-owned subsidiary, shall be the surviving
corporation in the Merger. The Merger is expected to be accounted for as a
purchase.
In arriving at our opinion, we have reviewed certain publicly available
business and financial information relating to the Company and BHC. We have
reviewed certain other information, including financial forecasts and related
assumptions, and other internal financial analyses, provided to us by the
Company and BHC, and we have met with the senior management of both the Company
and BHC to discuss the business prospects of their respective companies and the
joint prospects of a combined company. In addition, we have: (i) reviewed the
macro trends and general market conditions in the behavioral health care
industry; (ii) reviewed the reported price and trading activity for the common
stock of the Company; (iii) reviewed the historical operating performance of
both the Company and BHC; (iv) reviewed the terms of certain mergers between
companies in the behavioral health care industry; (v) compared certain financial
and stock market information for the Company with similar information for
certain other comparable companies whose securities are publicly traded; and
(vi) performed such other studies and analyses as we considered appropriate.
We have assumed and relied upon, without independent verification, the
accuracy and completeness of the information reviewed by us for the purposes of
this opinion. With respect to the financial projections used in our analyses, we
have assumed that they have been reasonably prepared on bases reflecting the
best currently available estimates and judgments of the respective senior
managements of the Company and BHC as to the likely future financial performance
of their respective companies. In addition, we have not made an independent
valuation or appraisal of the assets of the Company or BHC. Our opinion is based
on market, economic, and other conditions as they exist and can be evaluated as
of the date of this letter.
SunTrust Equitable Securities Corporation ("STES") has received a fee for
rendering this opinion; however, our fee for rendering this opinion was not
contingent upon the consummation of the Merger. STES served as lead managing
underwriter in connection with the sale of common stock by the Company in
October 1997. In the normal course of business, STES publishes research reports
regarding the Company and actively trades the equity securities of the Company
for its own account and for the accounts of its customers. Accordingly, STES may
at any time hold a long or short position in such securities. In the past, STES
also has provided investment banking services for BHC for which STES received
customary compensation.
Based on the analysis described above and subject to the foregoing
limitations and qualifications, it is our opinion that, as of the date hereof,
the consideration to be paid by the Company pursuant to the Agreement is fair,
from a financial point of view, to the common stockholders of the Company.
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<PAGE> 245
It is understood that this letter is for the information of the Board of
Directors of the Company only and is not to be quoted or referred to, in whole
or in part, without our written consent; provided, however, that we hereby
consent to the inclusion of this opinion in any registration or proxy statement
used in connection with the Merger, so long as the opinion is quoted in full in
such registration or proxy statement.
Very truly yours,
SUNTRUST EQUITABLE SECURITIES
CORPORATION
B-2
<PAGE> 246
APPENDIX C
DELAWARE GENERAL CORPORATION LAW
SECTION 262. Appraisal Rights
(a) Any stockholder of a corporation of this State who holds shares of stock on
the date of the making of a demand pursuant to subsection (d) of this section
with respect to such shares, who continuously holds such shares through the
effective date of the merger or consolidation, who has otherwise complied with
subsection (d) of this section and who has neither voted in favor of the merger
or consolidation nor consented thereto in writing pursuant to sec. 228 of this
title shall be entitled to an appraisal by the Court of Chancery of the fair
value of the stockholder's shares of stock under the circumstances described in
subsections (b) and (c) of this section. As used in this section, the word
"stockholder" means a holder of record of stock in a stock corporation and also
a member of record of a nonstock corporation; the words "stock" and "share" mean
and include what is ordinarily meant by those words and also membership or
membership interest of a member of a nonstock corporation; and the words
"depository receipt" mean a receipt or other instrument issued by a depository
representing an interest in one or more shares, or fractions thereof, solely of
stock of a corporation, which stock is deposited with the depository.
(b) Appraisal rights shall be available for the shares of any class or series of
stock of a constituent corporation in a merger or consolidation to be effected
pursuant to sec. 251 (other than a merger effected pursuant to sec. 251(g) of
this title), sec. 252, sec. 254, sec. 257, sec. 258, sec. 263 or sec. 264 of
this title:
(1) Provided, however, that no appraisal rights under this section shall be
available for the shares of any class or series of stock, which stock, or
depository receipts in respect thereof, at the record date fixed to determine
the stockholders entitled to receive notice of and to vote at the meeting of
stockholders to act upon the agreement of merger or consolidation, were either
(i) listed on a national securities exchange or designated as a national market
system security on an interdealer quotation system by the National Association
of Securities Dealers, Inc. or (ii) held of record by more than 2,000 holders;
and further provided that no appraisal rights shall be available for any shares
of stock of the constituent corporation surviving a merger if the merger did not
require for its approval the vote of the stockholders of the surviving
corporation as provided in subsection (f) of sec. 251 of this title.
(2) Notwithstanding paragraph (1) of this subsection, appraisal rights
under this section shall be available for the shares of any class or series of
stock of a constituent corporation if the holders thereof are required by the
terms of an agreement of merger or consolidation pursuant to sec.sec. 251, 252,
254, 257, 258, 263 and 264 of this title to accept for such stock anything
except:
a. Shares of stock of the corporation surviving or resulting from such
merger or consolidation, or depository receipts in respect thereof;
b. Shares of stock of any other corporation, or depository receipts in
respect thereof, which shares of stock (or depository receipts in respect
thereof) or depository receipts at the effective date of the merger or
consolidation will be either listed on a national securities exchange or
designated as a national market system security on an interdealer quotation
system by the National Association of Securities Dealers, Inc. or held of
record by more than 2,000 holders;
c. Cash in lieu of fractional shares or fractional depository receipts
described in the foregoing subparagraphs a. and b. of this paragraph; or
d. Any combination of the shares of stock, depository receipts and
cash in lieu of fractional shares or fractional depository receipts
described in the foregoing subparagraphs a., b. and c. of this paragraph.
(3) In the event all of the stock of a subsidiary Delaware corporation
party to a merger effected under sec. 253 of this title is not owned by the
parent corporation immediately prior to the merger, appraisal rights shall be
available for the shares of the subsidiary Delaware corporation.
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(c) Any corporation may provide in its certificate of incorporation that
appraisal rights under this section shall be available for the shares of any
class or series of its stock as a result of an amendment to its certificate of
incorporation, any merger or consolidation in which the corporation is a
constituent corporation or the sale of all or substantially all of the assets of
the corporation. If the certificate of incorporation contains such a provision,
the procedures of this section, including those set forth in subsections (d) and
(e) of this section, shall apply as nearly as is practicable.
(d) Appraisal rights shall be perfected as follows:
(1) If a proposed merger or consolidation for which appraisal rights are
provided under this section is to be submitted for approval at a meeting of
stockholders, the corporation, not less than 20 days prior to the meeting, shall
notify each of its stockholders who was such on the record date for such meeting
with respect to shares for which appraisal rights are available pursuant to
subsection (b) or (c) hereof that appraisal rights are available for any or all
of the shares of the constituent corporations, and shall include in such notice
a copy of this section. Each stockholder electing to demand the appraisal of his
shares shall deliver to the corporation, before the taking of the vote on the
merger or consolidation, a written demand for appraisal of his shares. Such
demand will be sufficient if it reasonably informs the corporation of the
identity of the stockholder and that the stockholder intends thereby to demand
the appraisal of his shares. A proxy or vote against the merger or consolidation
shall not constitute such a demand. A stockholder electing to take such action
must do so by a separate written demand as herein provided. Within 10 days after
the effective date of such merger or consolidation, the surviving or resulting
corporation shall notify each stockholder of each constituent corporation who
has complied with this subsection and has not voted in favor of or consented to
the merger or consolidation of the date that the merger or consolidation has
become effective; or
(2) If the merger or consolidation was approved pursuant to sec. 228 or
sec. 253 of this title, each constituent corporation, either before the
effective date of the merger or consolidation or within ten days thereafter,
shall notify each of the holders of any class or series of stock of such
constituent corporation who are entitled to appraisal rights of the approval of
the merger or consolidation and that appraisal rights are available for any or
all shares of such class or series of stock of such constituent corporation, and
shall include in such notice a copy of this section; provided that, if the
notice is given on or after the effective date of the merger or consolidation,
such notice shall be given by the surviving or resulting corporation to all such
holders of any class or series of stock of a constituent corporation that are
entitled to appraisal rights. Such notice may, and, if given on or after the
effective date of the merger or consolidation, shall, also notify such
stockholders of the effective date of the merger or consolidation. Any
stockholder entitled to appraisal rights may, within 20 days after the date of
mailing of such notice, demand in writing from the surviving or resulting
corporation the appraisal of such holder's shares. Such demand will be
sufficient if it reasonably informs the corporation of the identity of the
stockholder and that the stockholder intends thereby to demand the appraisal of
such holder's shares. If such notice did not notify stockholders of the
effective date of the merger or consolidation, either (i) each such constituent
corporation shall send a second notice before the effective date of the merger
or consolidation notifying each of the holders of any class or series of stock
of such constituent corporation that are entitled to appraisal rights of the
effective date of the merger or consolidation or (ii) the surviving or resulting
corporation shall send such a second notice to all such holders on or within 10
days after such effective date; provided, however, that if such second notice is
sent more than 20 days following the sending of the first notice, such second
notice need only be sent to each stockholder who is entitled to appraisal rights
and who has demanded appraisal of such holder's shares in accordance with this
subsection. An affidavit of the secretary or assistant secretary or of the
transfer agent of the corporation that is required to give either notice that
such notice has been given shall, in the absence of fraud, be prima facie
evidence of the facts stated therein. For purposes of determining the
stockholders entitled to receive either notice, each constituent corporation may
fix, in advance, a record date that shall be not more than 10 days prior to the
date the notice is given, provided, that if the notice is given on or after the
effective date of the merger or consolidation, the record date shall be such
effective date. If no record date is fixed and the notice is given prior to the
effective date, the record date shall be the close of business on the day next
preceding the day on which the notice is given.
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(e) Within 120 days after the effective date of the merger or consolidation, the
surviving or resulting corporation or any stockholder who has complied with
subsections (a) and (d) hereof and who is otherwise entitled to appraisal
rights, may file a petition in the Court of Chancery demanding a determination
of the value of the stock of all such stockholders. Notwithstanding the
foregoing, at any time within 60 days after the effective date of the merger or
consolidation, any stockholder shall have the right to withdraw his demand for
appraisal and to accept the terms offered upon the merger or consolidation.
Within 120 days after the effective date of the merger or consolidation, any
stockholder who has complied with the requirements of subsections (a) and (d)
hereof, upon written request, shall be entitled to receive from the corporation
surviving the merger or resulting from the consolidation a statement setting
forth the aggregate number of shares not voted in favor of the merger or
consolidation and with respect to which demands for appraisal have been received
and the aggregate number of holders of such shares. Such written statement shall
be mailed to the stockholder within 10 days after his written request for such a
statement is received by the surviving or resulting corporation or within 10
days after expiration of the period for delivery of demands for appraisal under
subsection (d) hereof, whichever is later.
(f) Upon the filing of any such petition by a stockholder, service of a copy
thereof shall be made upon the surviving or resulting corporation, which shall
within 20 days after such service file in the office of the Register in Chancery
in which the petition was filed a duly verified list containing the names and
addresses of all stockholders who have demanded payment for their shares and
with whom agreements as to the value of their shares have not been reached by
the surviving or resulting corporation. If the petition shall be filed by the
surviving or resulting corporation, the petition shall be accompanied by such a
duly verified list. The Register in Chancery, if so ordered by the Court, shall
give notice of the time and place fixed for the hearing of such petition by
registered or certified mail to the surviving or resulting corporation and to
the stockholders shown on the list at the addresses therein stated. Such notice
shall also be given by 1 or more publications at least 1 week before the day of
the hearing, in a newspaper of general circulation published in the City of
Wilmington, Delaware or such publication as the Court deems advisable. The forms
of the notices by mail and by publication shall be approved by the Court, and
the costs thereof shall be borne by the surviving or resulting corporation.
(g) At the hearing on such petition, the Court shall determine the stockholders
who have complied with this section and who have become entitled to appraisal
rights. The Court may require the stockholders who have demanded an appraisal
for their shares and who hold stock represented by certificates to submit their
certificates of stock to the Register in Chancery for notation thereon of the
pendency of the appraisal proceedings; and if any stockholder fails to comply
with such direction, the Court may dismiss the proceedings as to such
stockholder.
(h) After determining the stockholders entitled to an appraisal, the Court shall
appraise the shares, determining their fair value exclusive of any element of
value arising from the accomplishment or expectation of the merger or
consolidation, together with a fair rate of interest, if any, to be paid upon
the amount determined to be the fair value. In determining such fair value, the
Court shall take into account all relevant factors. In determining the fair rate
of interest, the Court may consider all relevant factors, including the rate of
interest which the surviving or resulting corporation would have had to pay to
borrow money during the pendency of the proceeding. Upon application by the
surviving or resulting corporation or by any stockholder entitled to participate
in the appraisal proceeding, the Court may, in its discretion, permit discovery
or other pretrial proceedings and may proceed to trial upon the appraisal prior
to the final determination of the stockholder entitled to an appraisal. Any
stockholder whose name appears on the list filed by the surviving or resulting
corporation pursuant to subsection (f) of this section and who has submitted his
certificates of stock to the Register in Chancery, if such is required, may
participate fully in all proceedings until it is finally determined that he is
not entitled to appraisal rights under this section.
(i) The Court shall direct the payment of the fair value of the shares, together
with interest, if any, by the surviving or resulting corporation to the
stockholders entitled thereto. Interest may be simple or compound, as the Court
may direct. Payment shall be so made to each such stockholder, in the case of
holders of uncertificated stock forthwith, and the case of holders of shares
represented by certificates upon the surrender
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to the corporation of the certificates representing such stock. The Court's
decree may be enforced as other decrees in the Court of Chancery may be
enforced, whether such surviving or resulting corporation be a corporation of
this State or of any state.
(j) The costs of the proceeding may be determined by the Court and taxed upon
the parties as the Court deems equitable in the circumstances. Upon application
of a stockholder, the Court may order all or a portion of the expenses incurred
by any stockholder in connection with the appraisal proceeding, including,
without limitation, reasonable attorney's fees and the fees and expenses of
experts, to be charged pro rata against the value of all the shares entitled to
an appraisal.
(k) From and after the effective date of the merger or consolidation, no
stockholder who has demanded his appraisal rights as provided in subsection (d)
of this section shall be entitled to vote such stock for any purpose or to
receive payment of dividends or other distributions on the stock (except
dividends or other distributions payable to stockholders of record at a date
which is prior to the effective date of the merger or consolidation); provided,
however, that if no petition for an appraisal shall be filed within the time
provided in subsection (e) of this section, or if such stockholder shall deliver
to the surviving or resulting corporation a written withdrawal of his demand for
an appraisal and an acceptance of the merger or consolidation, either within 60
days after the effective date of the merger or consolidation as provided in
subsection (e) of this section or thereafter with the written approval of the
corporation, then the right of such stockholder to an appraisal shall cease.
Notwithstanding the foregoing, no appraisal proceeding in the Court of Chancery
shall be dismissed as to any stockholder without the approval of the Court, and
such approval may be conditioned upon such terms as the Court deems just.
(l) The shares of the surviving or resulting corporation to which the shares of
such objecting stockholders would have been converted had they assented to the
merger or consolidation shall have the status of authorized and unissued shares
of the surviving or resulting corporation.
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PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 20. INDEMNIFICATION OF DIRECTORS AND OFFICERS
PMR'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 DGCL and (ii) require PMR 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. PMR 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 PMR, 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 PMR
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 PMR or its stockholders when the director was aware
or should have been aware of a risk of serious injury to PMR 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 PMR or its
stockholders, for improper transactions between the director and PMR 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. PMR 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 PMR as to which indemnification is being sought nor is
PMR aware of any threatened litigation that may result in claims for
indemnification by any officer or director.
ITEM 21. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<S> <C>
2.1 Agreement and Plan of Merger dated as of July 30, 1998,
among PMR, PMR Sub and BHC.(5)*
3.1 PMR's Restated Certificate of Incorporation, filed with the
Delaware Secretary of State on March 9, 1998.(4)
3.2 PMR's Amended and Restated Bylaws.(2)
4.1 Common Stock Specimen Certificate.(1)
5.1 Opinion of Cooley Godward LLP.+
10.1 PMR's 1997 Equity Incentive Plan.+
10.2 Form of Incentive Stock Option Agreement under the 1997 Plan
(filed as Exhibit 10.2).(2)
10.3 Form of Nonstatutory Stock Option Agreement under the 1997
Plan (filed as Exhibit 10.).(2)
</TABLE>
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<PAGE> 251
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<S> <C>
10.4 Outside Directors' Non-Qualified Stock Option Plan of 1992
(the "1992 Plan") (filed as Exhibit 10.4).(2)
10.5 Form of Outside Directors' Non-Qualified Stock Option
Agreement (filed as Exhibit 10.5).(2)
10.6 Amended and Restated Stock Option Agreement dated April 30,
1996, evidencing award to Allen Tepper (filed as Exhibit
10.6).(2)
10.7 Amended and Restated Stock Option Agreement dated April 30,
1996, evidencing award to Susan Erskine (filed as Exhibit
10.7).(2)
10.8 Amended and Restated Stock Option Agreement dated February
1, 1996, evidencing award to Mark Clein (filed as Exhibit
10.8).(2)
10.9 Amended and Restated Stock Option Agreement dated February
1, 1996, evidencing award to Mark Clein (filed as Exhibit
10.9).(2)
10.10 Amended and Restated Warrant dated July 9, 1997, evidencing
award to Fred Furman (filed as Exhibit 10.11).(2)
10.11 Restated Management Agreement dated April 11, 1997 with
Scripps Health (filed as Exhibit 10.12).(2)
10.12 Amendment to Restated Management Agreement dated July 15,
1998 with Scripps Health.
10.13 Sublease dated April 1, 1997 with CMS Development and
Management Company, Inc. (filed as Exhibit 10.13).(2)
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.)(2)
10.15 Second Addendum to Management and Affiliation Agreement
dated November 1, 1996 between Mental Health Cooperative,
Inc. and Collaborative Care Corporation (filed as Exhibit
10.15).(3)
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.).(2)
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.)(2)
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.)(4)
10.19 Provider Agreement dated December 4, 1995, between Tennessee
Behavioral Health, Inc. and Tennessee Mental Health
Cooperative, Inc.(4)
10.20 Addendum No. 1 to Provider Agreement dated December 4, 1995,
between Tennessee Behavioral Health, Inc. and Tennessee
Mental Health Cooperative, Inc.(4)
10.21 Addendum No. 2 to Provider Agreement dated February 4, 1996,
between Tennessee Behavioral Health, Inc. and Tennessee
Mental Health Cooperative, Inc.(4)
10.22 Provider Participation Agreement dated December 1, 1995,
among Green Spring Health Services, Inc., AdvoCare, Inc. and
Tennessee Mental Health Cooperative, Inc.(4)
10.23 Amendment to Provider Participation Agreement dated February
13, 1996, among Green Spring Health Services, Inc., AdvoCare
of Tennessee, Inc. and Tennessee Mental Health Cooperative,
Inc.(4)
10.24 Subscription Agreement dated June 8, 1998, between PMR and
Stadtlander Drug Distribution Co., Inc.(4)
10.25 Sanwa Bank California Credit Agreement dated February 2,
1996, as amended on October 31, 1996.(3)
13.1 Annual Report on Form 10-K for the year ended April 30,
1998.
</TABLE>
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<PAGE> 252
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<S> <C>
13.2 Annual Report to Stockholders for the year ended April 30,
1998.
21.1 List of Subsidiaries.(4)
23.1 Consent of Ernst & Young LLP.
23.2 Consent of Ernst & Young LLP.
23.3 Consent of Cooley Godward LLP (included in Exhibit 5.1).+
23.4 Consent of SunTrust Equitable Securities Corporation++
24.1 Power of Attorney (included in Part II of Registration
Statement).
27.1 Financial Data Schedule.
99.1 PMR Form of Proxy Card
99.2 BHC Form of Proxy Card+
</TABLE>
- ---------------
* Schedules omitted pursuant to Regulation S-K, Item 601(b) of the Commission.
Registrant undertakes to furnish such schedules to the Commission
supplementally upon request.
+ To be filed by amendment.
++ Included in Appendix B attached to the Prospectus/Joint Proxy Statement
included in this Registration Statement.
(1) Incorporated by reference to exhibits filed with the SEC in PMR's
Registration Statement on Form S-18 (Reg. No. 23-20095-A).
(2) Incorporated by reference to exhibits filed with the SEC in PMR's Annual
Report on Form 10-K for the year ended April 30, 1997.
(3) Incorporated by reference to exhibits filed with the SEC in PMR's
Registration Statement on Form S-2 (Reg. No. 333-36313).
(4) Incorporated by reference to exhibits filed with the SEC in PMR's Annual
Report on Form 10-K for the year ended April 30, 1998.
(5) Filed as Exhibit 99.1 to PMR's Current Report on Form 8-K dated August 4,
1998, and incorporated herein by reference.
ITEM 22. UNDERTAKINGS
(1) The Registrant hereby undertakes as follows: that prior to any public
reoffering of the securities registered hereunder through use of a prospectus
which is a part of this Registration Statement, by any person or party who is
deemed to be an underwriter within the meaning of Rule 145(c), the Registrant
undertakes that such reoffering prospectus will contain the information called
for by the applicable registration form with respect to reofferings by persons
who may be deemed underwriters, in addition to the information called for by the
other items of the applicable form.
(2) The Registrant undertakes that every prospectus (i) that is filed
pursuant to paragraph (1) immediately preceding or (ii) that purports to meet
the requirements of Section 10(a)(3) of the Securities Act of 1933 ("the Act")
and is used in connection with an offering of securities subject to Rule 415,
will be filed as a part of an amendment to the Registration Statement and will
not be used until such amendment is effective, and that, for purposes of
determining any liability under the Act, each such post-effective amendment
shall be deemed to be a new registration statement relating to the securities
offered therein, and the offering of such securities at that time shall be
deemed to be the initial bona fide offering thereof.
(3) The Registrant hereby undertakes to respond to requests for information
that is incorporated by reference to the Prospectus/Joint Proxy Statement
pursuant to Items 4, 10(b), 11 or 13 of Form S-4, within one business day of
receipt of such request and to send the incorporated documents by first class
mail or other equally prompt means. This includes information contained in
documents filed subsequent to the Effective Time of the Registration Statement
through the date of responding to the request.
II-3
<PAGE> 253
(4) The Registrant hereby undertakes to supply by means of a post-effective
amendment all information concerning a transaction, and the company being
acquired involved therein, that was not the subject of and included in the
Registration Statement when it became effective.
(5) Insofar as indemnification for liabilities arising under the Act may be
permitted to directors, officers and controlling persons of the Registrant
pursuant to the Certificate of Incorporation and the 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 Act and is,
therefore, unenforceable. In the event that a claim for indemnification against
such liabilities (other than the payment by the Registrant of expenses incurred
or paid by a director, officer or controlling person of the Registrant in the
successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the Registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question of whether such indemnification by it is against
public policy as expressed in the Act, and will be governed by the final
adjudication of such issue.
(6) The Registrant hereby undertakes to deliver or cause to be delivered
with the prospectus, to each person to whom the prospectus is sent or given, the
latest annual report to security holders that is incorporated by reference in
the prospectus and furnished pursuant to and meeting the requirements of Rule
14a-3 or Rule 14c-3 under the Securities Exchange Act of 1934; and, where
interim financial information required to be presented by Article 3 of
Regulation S-X is not set forth in the prospectus, to deliver, or cause to be
delivered to each person to whom the prospectus is sent or given, the latest
quarterly report that is specifically incorporated by reference in the
prospectus to provide such interim financial information.
II-4
<PAGE> 254
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended, PMR
Corporation has duly caused this Registration Statement to be signed on its
behalf by the undersigned, thereunto duly authorized, in the City of San Diego,
County of San Diego, State of California, on the 24th day of August, 1998.
PMR CORPORATION
By: /s/ ALLEN TEPPER
------------------------------------
Allen Tepper
Chairman of the Board and Chief
Executive Officer
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears
below constitutes and appoints ALLEN TEPPER, FRED D. FURMAN and MARK P. CLEIN,
and each of them, his or her true and lawful attorneys-in-fact and agents, with
full power of substitution and re-substitution, for him or her and in his or her
name, place and stead, in any and all capacities, to sign any and all amendments
(including post-effective amendments) 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 such and every act and thing requisite and necessary to be done, as
fully to all intents and purposes as he or she 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 or her 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 below by the following persons on behalf
of the Registrant and in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<S> <C> <C>
/s/ ALLEN TEPPER Chairman of the Board, Chief Executive August 24, 1998
- ------------------------------------------ Officer and Director (Principal Executive
Allen Tepper Officer)
/s/ MARK P. CLEIN Executive Vice President and Chief August 24, 1998
- ------------------------------------------ Financial Officer (Principal Financial
Mark P. Clein Officer)
/s/ FRED D. FURMAN President August 24, 1998
- ------------------------------------------
Fred D. Furman
/s/ SUSAN D. ERSKINE Executive Vice President, Secretary and August 24, 1998
- ------------------------------------------ Director
Susan D. Erskine
/s/ DANIEL L. FRANK President of Disease Management Division August 24, 1998
- ------------------------------------------ and Director
Daniel L. Frank
/s/ CHARLES MCGETTIGAN Director August 24, 1998
- ------------------------------------------
Charles C. McGettigan
/s/ EUGENE D. HILL Director August 24, 1998
- ------------------------------------------
Eugene D. Hill
</TABLE>
II-5
<PAGE> 1
EXHIBIT 10.12
AMENDMENT TO
RESTATED MANAGEMENT AGREEMENT
This Amendment to Restated Management Agreement ("Amendment") is made
effective as of July 15, 1998 ("Effective Date"), between Scripps Health, a
California non-profit public benefit corporation, ("Hospital") with an address
of 9888 Genesee Avenue, Post Office Box 28, La Jolla, California 92038, and PMR
Corporation, a Delaware Corporation, with an office at 501 Washington Street,
5th Floor, San Diego, California 92103 ("PMR"). This Amendment shall be
incorporated into the Agreement (as defined hereunder) by reference and shall
amend and supplement the terms and conditions of the Agreement. In the event any
of the terms and conditions of this Amendment contradict the terms of the
Agreement or render any provisions ambiguous, the terms and conditions of this
Amendment shall supersede and be controlling.
RECITALS
1. Hospital and PMR entered into a Restated Management Agreement
("Agreement") dated April 11, 1997 and wish to amend certain terms of the
Agreement to enable Hospital to comply with HCFA's interpretation of the
Medicare provider-based designation rules and to maintain the provider-based
designation status of its Programs under the Agreement, as mandated by HCFA's
Region IX, by entering into this Amendment.
AGREEMENT
NOW, THEREFORE, Hospital and PMR, intending to be legally bound hereby,
agree as follows:
1. Common Ownership and Control. The Programs' operation under the Agreement
is subject to the ultimate control of the Hospital's Board of Trustees. The
Programs shall be operated in accordance with Hospital's governing
policies, bylaws, practices and procedures. This provision does not change
the parties' initial agreement since the parties have always understood
that the Hospital has had control over the Programs and that PMR was bound
to manage the Programs in accordance with the Hospital's governing
policies, bylaws, practices and procedures.
2. Program Premises. Hospital shall be assigned or sublet the leases of the
Program premises (as defined under the Agreement) and shall lease directly,
or otherwise own or control, the premises at which all Program services are
furnished. Hospital shall be responsible for all costs associated with
occupying the Program premises for operation of the Programs.
3. Personnel. Hospital shall employ personnel consisting of therapists,
nurses, community liaison/intake workers, and care coordinators
(collectively, "Personnel") who provide direct patient care to patients of
the Program. Personnel shall be subject to the ultimate supervision
Page 1
<PAGE> 2
and complete control of the Administrator of the Hospital and shall be
subject exclusively to Hospital's disciplinary process, bylaws, policies
and procedures, rules and regulations and all human resource requirements
of the Hospital. PMR shall assist Hospital in the transfer to the Hospital
of existing Personnel of the Programs who are currently employed by PMR, to
the extent the Hospital independently decides to hire such persons.
Hospital shall maintain files of the credentials of the Personnel showing
an active review of the person's credentials by a person experienced in
behavioral health employed by the Hospital. To the extent applicable, those
Personnel who are allied health practitioners shall maintain membership in
Hospital's allied health practitioner staff. In addition, Personnel shall
wear the Hospital's identification badges to the same extent required of
other personnel employed by the Hospital (although such badges may be
distinguished from employee badges to the extent that the Hospital
uniformly gives its personnel distinctive badges). Hospital shall ensure
that a copy of the Hospital's rules governing conduct of personnel and
other Hospital manuals on premises are maintained at the Program sites and
that such rules and manuals are made available to Personnel of the
Programs. PMR shall continue to employ or engage the Program Administrator
and administrative personnel not involved in the delivery of direct patient
care to patients of the Program.
4. Medical Staff Oversight. Hospital shall approve the Programs' Medical
Directors who were previously, and continue to be, duly licensed
psychiatrists who are active members of the Hospital's medical staff and
shall report as necessary or appropriate to the Chief of the Section of
Psychiatry, Department of Medicine, of the Hospital. All attending
physicians at the Program shall be, as required in the past, members in
good standing on the active medical staff of the Hospital. Through the
Hospital's organizational structure, which is the same throughout the
Hospital's system, the medical staff has ultimate oversight of the
Department of Medicine, and controls the quality and credentials of its
members who head its inpatient and outpatient departments.
5. Program Administrator. The Program Administrator shall report to and be
accountable to the Administrator of the Hospital who is responsible for the
Program and other patient care departments of the Hospital and who reports
to the Scripps Health Management Team, which includes the Chief Executive
Officer, and shall report through the Administrator of the Hospital to the
governing body of the Hospital. The Program Administrator shall continue to
submit daily reports by facsimile to the Administrator of the Hospital. The
Program Administrators shall be required, as required in the past, to
attend meetings of the Hospital's department managers and to attend
meetings of the behavioral health managers of the Hospital and Scripps
Health.
6. Medical Records. All patient medical records shall continue to be
integrated into the unified records system of the Hospital. Medical records
shall be compiled, checked for completeness and retained in accordance with
Hospital's policies. The medical record number shall be issued by the
Hospital upon a patient's admission to the Program. Medical record forms
shall be provided by or approved by the Hospital's Medical Records
Committee.
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<PAGE> 3
7. Indemnification.
(a) Hospital agrees to indemnify, defend and hold PMR (together with
its officers, directors, agents, employees and representatives)
harmless from and against all claims, demands, causes of action,
judgments, damages, costs and expenses (including without limitation,
reasonable attorneys' fees and court costs), deficiencies and
settlements which relate to matters, actions or omissions arising or
occurring as a result of any activity (or lack thereof) of the Hospital
or Personnel under this Agreement to the extent that the Personnel or
any employee of Hospital is/are responsible for or the cause of such
activity (or lack thereof). Hospital agrees to add PMR as an additional
insured under its workers compensation, comprehensive general liability
and property insurance policies.
(b) PMR agrees to indemnify, defend and hold Hospital (together with
its officers, directors, agents, employees and representatives)
harmless from and against all claims, demands, causes of action,
judgments, damages, costs and expenses (including without limitation,
reasonable attorneys' fees and court costs), deficiencies and
settlements which relate to matters, actions or omissions arising or
occurring as a result of any activity (or lack thereof) of PMR under
this Agreement to the extent that PMR or any employee of PMR is
responsible for or the cause of such activity (or lack thereof). PMR
agrees to add Hospital as an additional insured under its workers
compensation and comprehensive general liability insurance policies.
8. Paragraph 7.1 of the Agreement regarding limitations on hiring is hereby
void and of no force and effect; provided however, that the Hospital shall
not hire, offer employment or engage any Program Administrator or PMR
management personnel during the term of the Agreement and any extension or
renewal thereof and for a period of one (1) year thereafter.
9. Paragraph 4 of the Agreement regarding compensation to PMR is amended such
that PMR's fee is reduced, as reflected in the revised Exhibit C attached
hereto, as a result of the changes set forth in Sections 2 and 3 of this
Amendment.
10. The Agreement terminates with respect to the Program sites located in
Vista, Chula Vista, and El Centro, California, as of the close of business
on July 14, 1998.
All other terms and provision of the Agreement shall remain in full
force and effect, except as modified herein.
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<PAGE> 4
IN WITNESS WHEREOF, the parties hereto have executed this Amendment
effective as of the day and year noted above as the Effective Date.
SCRIPPS HEALTH PMR CORPORATION
By:___________________________ By:___________________________
Printed Printed
Name:_________________________ Name:_________________________
Title:_________________________ Title:________________________
Page 4
<PAGE> 1
Exhibit 13.1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED APRIL 30, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
FOR THE TRANSITION PERIOD FROM __________ TO ___________
COMMISSION FILE NO. 0-20488
PMR CORPORATION
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 23-2491707
State or other jurisdiction of I.R.S. Employer Identification No.
incorporation or organization
501 WASHINGTON STREET, 5TH FLOOR 92103
SAN DIEGO, CALIFORNIA (Zip Code)
(Address of principal executive offices)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE (619) 610-4001
------------------
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT: NONE
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
COMMON STOCK, PAR VALUE $.01 PER SHARE
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K [X]
As of July 24, 1998, the approximate aggregate market value of the
Common Stock held by non-affiliates of the registrant was $44,582,569, based
upon the closing price of the Common Stock reported on the Nasdaq National Stock
Market of $9.3125 per share. See footnote (1) below.
The number of shares of Common Stock outstanding as of July 24, 1998
was 6,959,810.
DOCUMENTS INCORPORATED BY REFERENCE
Certain portions of the registrant's definitive Proxy Statement, to be
filed not later than 120 days after April 30, 1998 in connection with the
registrant's 1998 Annual Meeting of Stockholders, are incorporated by reference
into Part III of this Form 10-K.
- -----------
(1) The information provided shall in no way be construed as an admission that
any person whose holdings are excluded from the figure is not an affiliate
or that any person whose holdings are included is an affiliate and any such
admission is hereby disclaimed. The information provided is included solely
for record keeping purposes of the Securities and Exchange Commission.
<PAGE> 2
PART I
ITEM 1. BUSINESS
GENERAL
Except for the historical information contained herein, the following
discussion contains forward-looking statements that involve risks and
uncertainties. The Company's actual results could differ materially from those
discussed below. Factors that could cause or contribute to such differences
include without limitation, those discussed in the description of the Company's
business below and the section entitled "Risk Factors," in Item 7 "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
elsewhere in this Annual Report, as well as those discussed in documents
incorporated herein by reference.
OVERVIEW
PMR Corporation and its subsidiaries ("PMR" or the "Company") is a
leading manager of specialized mental health care programs and disease
management services 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 37 intensive outpatient programs (the "Outpatient Programs"), two case
management programs (the "Case Management Programs") and four chemical
dependency and substance abuse programs (the "Chemical Dependency Programs"). In
June 1998, the Company announced an agreement to form a new company to be called
Stadt Solutions, LLC ("Stadt Solutions") that will be jointly owned by the
Company and Stadtlander Drug Distribution Co., Inc. ("Stadtlander"). Stadt
Solutions will offer a specialty pharmacy program for individuals with an SMI,
initially serving approximately 6,000 individuals through fourteen pharmacies in
thirteen states.
PMR, with Stadt Solutions, will operate in twenty-three states and
is expected to employ or contract with more than 400 mental health and
pharmaceutical industry professionals and currently provides services to
approximately 11,000 individuals diagnosed with SMI. PMR believes it is the only
private sector company focused on providing an integrated mental health disease
management model to the SMI population.
A four-decade old 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
various 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.
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.
During fiscal 1998, the Company continued to establish the initial
infrastructure and relationships for its 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
2.
<PAGE> 3
developing this initiative. In November 1997, the Company established a
strategic relationship with InSite Clinical Trials to assist in the training and
development of clinical research sites. In June 1998, PMR entered into an
agreement with Stadtlander to form Stadt Solutions and to contribute the site
management and clinical information initiative to the new venture.
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) expanding Stadt Solutions, a new specialty pharmacy
program, (iii) establishing new programs and ancillary services, and (iv)
combining its outpatient, case management and chemical dependency capabilities
into a fully-integrated mental health disease management model. 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., and PMR-CD, Inc. 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 MARKET AND INDUSTRY BACKGROUND
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 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. According to industry sources, 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.
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 in 1955 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
acute care hospital beds are occupied by SMI patients. Furthermore,
approximately 10% of all prison and jail inmates are SMI diagnosed and 35% of
the approximately 350,000 homeless individuals in the United States are
currently suffering from SMI disorders.
The most frequently occurring 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
3.
<PAGE> 4
the patients treated at the Company's programs are diagnosed with schizophrenia
or schizoaffective disorder. The remainder are afflicted with bi-polar disorder,
major depression, 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. It is not uncommon that
these individuals also 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.
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 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.
PROGRAMS AND OPERATIONS
OUTPATIENT PROGRAMS
PMR's Outpatient Programs are operated under management or
administrative contracts with acute care hospitals, psychiatric hospitals and
CMHCs, and consist principally of intensive outpatient programs which serve as
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 37 Outpatient Programs in Arizona, Arkansas, California,
Colorado, Hawaii, Illinois, Kentucky, Michigan, North Carolina, Ohio, Tennessee,
Texas and Washington. The Company contracts with 27 separate providers including
Scripps Health, Sutter Health System, St. Luke's Hospital of San Francisco and
the University of California, Irvine. 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 to include clients who 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 Outpatient Programs where the Company
retains designated staffing responsibilities, the Company provides program
administrators, and medical directors, and may provide 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.
4.
<PAGE> 5
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, advising on compliance with government regulations and
licensure requirements, supplying highly trained personnel, and expanding the
range of services provided. In addition, the programs also enhance the
management of financial and administrative services by providing 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 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 offers its case management services through long-term exclusive
management agreements with leading independent case management agencies or
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 has management agreements with two
case management agencies in Tennessee.
PMR provides its Case Management services principally in Davidson
County, Tennessee, presently serving approximately 2,200 consumers located
primarily in Nashville, Tennessee. The Company is in the process of terminating
or substantially restructuring its relationship with a case management agency in
Memphis due to contractual disputes and differences in operating philosophy.
During fiscal 1998, the Company reached agreement with its CMHC providers in
Arkansas to terminate Case Management services due to the repeated delays in
transitioning the Arkansas Medicaid program to a managed care environment.
In 1998, the Company introduced an additional service in Tennessee,
known as Urgent Care. Urgent Care is a high acuity, crisis intervention service
designed for triage and stabilization of a patient at the time of highest
clinical need. The service involves a physician intervention and thus combines a
medical model at crises and assessment with the case management model for
on-going maintenance. The Company anticipates introducing this service into
additional markets in Tennessee in fiscal 1999.
CHEMICAL DEPENDENCY PROGRAMS
Through a wholly-owned subsidiary, the Company operates and manages
programs devoted exclusively to substance abuse and rehabilitation in ambulatory
settings, primarily to patients of managed care organizations in Southern
California. The Company's chemical dependency and substance abuse programs are
operated both as free-standing treatment services or as part of a Management
Services Agreement with health care providers. All programs have received
accreditation by the Joint Commission of American Health Organizations
("JCAHO").
5.
<PAGE> 6
The Company also offers chemical dependency programs that have been
specially developed with application to public sector clients. Public sector
clients with chemical dependency problems often are also dually diagnosed with a
mental illness. Bridging the gap between the two systems (i.e. chemical abuse
and mental health) is often difficult due to different funding streams,
treatment philosophies and regulations pertaining to Medicaid and other public
sector payors. Meeting the needs of the public sector dually diagnosed client
requires cross training of staff and development of linkage between traditional
chemical dependency providers and providers of behavioral health services.
The Company operates four outpatient programs in southern California
under the name of Twin Town Treatment.
SITE MANAGEMENT AND CLINICAL INFORMATION
In January 1997, the Company began the development of a site management
and clinical information division. This division seeks to participate in
clinical trials and collect clinical information related to pharmaceutical and
non-pharmaceutical clinical practice. The Company's objective is to build a
business model that contributes to the Company's revenues and earnings and to
develop an information asset that can improve and define "best practices" for
the SMI patient population. On January 24, 1997, the Company signed an agreement
with the Applied Healthcare Informatics division of United Healthcare with
respect to developing this business.
The Company believes that its expanding service base is an excellent
platform for the development of research and clinical information business
lines. Key to that assumption is the Company's direct access to a large number
of individuals with SMI. Presently, the Company believes that it has access,
through programs it manages and through contracts providers, to more than 20,000
individuals diagnosed with SMI. In November 1997 the Company signed an agreement
with Insite Clinical Trials, Inc. for the specific development and training of
Company sites for participation in clinical trials, as well as the marketing of
those sites to sponsors of clinical trials. InSite Clinical Trials is now a
wholly owned subsidiary of United Healthcare, Inc.
The genetic and neurobiological bases of severe mental disorders will
continue to be the focus of intensive research attention in the field.
Presently, numerous pharmaceutical companies and drug development companies have
compounds in various stages of development which are targeted for the treatment
of these disorders. The development of these compounds requires extensive
pre-clinical and clinical testing phases, many aspects of which are outsourced
to global contract research organizations ("CROs"). The Company's current
research network includes six locations with qualified investigators and study
coordinators. The Company plans to expand the network to between ten and twelve
locations by the end of fiscal 1999. The Company anticipates that the site
management and clinical information initiative will be contributed to Stadt
Solutions as part of the venture between the Company and Stadtlander.
STADT SOLUTIONS
The Company and Stadtlander have entered into a binding subscription
agreement to form Stadt Solutions, a Delaware limited liability company. Stadt
Solutions will offer specialty pharmaceutical services to individuals with SMI.
The joint venture will also offer site management and clinical information
services to pharmaceutical companies, health care providers and public sector
purchasers. It is expected that ownership of Stadt Solutions will be held 50.1%
by PMR and 49.9% by Stadtlander. Following formation, Stadtlander will be
entitled to receive a priority distribution approximately equivalent to the
operating income Stadtlander expected to be generated by Stadtlander's existing
base of approximately 6,000 clients whom the parties expect will choose to
receive services from the venture. The incremental operating income in excess of
this base, if any, will be distributed equally to the Company and Stadtlander.
The venture will commence business with operations serving clients
through fourteen pharmacies in thirteen states serving approximately 6,000
clients. These individuals are presently receiving the drug clozaril, an
anti-psychotic for schizophrenia, as well as blood monitoring services. Stadt
Solutions will seek to offer patients expanded services, including dispensing of
all of the pharmaceuticals needed by these individuals and providing disease
management services to improve compliance and education for the patient, the
physician and family
6.
<PAGE> 7
members. The Company believes that Stadt Solutions will be the first specialty
pharmacy company devoted to serving the needs of individuals with an SMI.
PROGRAM LOCATIONS
<TABLE>
<CAPTION>
LOCATION (STATE, CITY) SERVICE PROVIDED
- ------------------------------------- ----------------
<S> <C>
California San Diego Outpatient, Clinical Research
Culver City Outpatient
Santee Outpatient
San Francisco Outpatient
Los Angeles Outpatient
Studio City Outpatient
Oakland Outpatient
Santa Ana Outpatient
Vista Outpatient
Union City Outpatient
Riverside Outpatient
San Bernardino Outpatient
Rosemead Outpatient
Sacramento Outpatient, Clinical Research
Orange Outpatient, Chemical Dependency
San Jose Outpatient
La Jolla Outpatient
Burbank Chemical Dependency
Los Alamitos Chemical Dependency
Torrance Chemical Dependency
Encinitas Clinical Research
Alabama Birmingham Pharmacy*
Arizona Phoenix Outpatient
Tempe Outpatient
Arkansas Little Rock Outpatient (2), Clinical Research
Colorado Denver Outpatient (2)
Georgia Atlanta Pharmacy*
Hawaii Honolulu Outpatient, Pharmacy*
Illinois Chicago Outpatient, Pharmacy*
Kentucky Frankfort Outpatient
Bowling Green Outpatient
Mayfield Outpatient
Maine Portland Pharmacy*
Massachusetts Boston Pharmacy*
Michigan Detroit Outpatient (2), Clinical Research
Minnesota Minneapolis Pharmacy*
Missouri St. Louis Pharmacy*
New York Long Island Pharmacy*
North Carolina Charlotte Outpatient
Ohio Cleveland Outpatient
Pennsylvania Pittsburgh Pharmacy*
Philadelphia Pharmacy*
South Carolina Columbia Pharmacy*
Tennessee Kingsport Outpatient
Madison Outpatient
Nashville Outpatient, Case Management, Clinical Research
Memphis Case Management
Texas Austin Outpatient
Utah Salt Lake City Pharmacy*
Washington Bellevue Outpatient
</TABLE>
7.
<PAGE> 8
<TABLE>
<CAPTION>
LOCATION (STATE, CITY) SERVICE PROVIDED
- ------------------------------------- ----------------
<S> <C>
Seattle Pharmacy*
</TABLE>
- ----------
* Anticipated service and location upon formation of Stadt Solutions.
CONTRACTS
OUTPATIENT PROGRAMS
Each Outpatient Program is generally administered and operated pursuant
to the terms of written management or administrative contracts with providers.
These contracts generally govern the term of the program, the method by which
the program is to be managed 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 were in effect at
34 of the 39 Outpatient Programs operated during fiscal 1998 and constituted
approximately 62.4% of the Company's revenues for the year ended April 30, 1998.
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. 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 -- Regulatory Matters."
In February 1998, the Company announced that Scripps Health had
received a letter from an official at Region IX of HCFA, informing Scripps
Health that its partial hospitalization programs managed by the Company could no
longer be considered "provider based" for Medicare reimbursement purposes. In
July 1998, HCFA notified Scripps Health that certain of the programs are
approved as "provider based" and that certain other program locations are not
"provider based" because they did not meet HCFA's service area requirements. As
a result of HCFA's notice, the Company and Scripps Health amended their
contract, Scripps Health reconfigured certain of its partial hospitalization
programs and one of the locations was acquired by another provider who engaged
the Company to manage the program. While to the Company's knowledge, no other
Company programs have received provider based challenges to date, it is possible
that these challenges will emerge with other providers and that the Company may
not be able to amend its contracts to satisfy HCFA or its provider customers.
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 contracting with another provider
in the program's geographic area. There can be no assurance that the Company
will be able to successfully replace such terminated contracts or programs in
the future.
The Company's Outpatient Program contracts covering sites operated by
hospitals operating under Scripps Health, a San Diego provider, accounted for
approximately 13.9% and 12.6% of the Company's revenues for fiscal
8.
<PAGE> 9
1998 and fiscal 1997, respectively. No other provider accounted for more than
10% of the Company's revenues for fiscal 1998.
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 are 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. In September 1997 and in May 1998
the Company reached agreement with its CMHC providers to close its Case
Management Programs in Arkansas. The Company is engaged in arbitration with a
case management agency in Memphis regarding disputes involving the management
and affiliation agreement. The Company cannot predict the outcome of the
arbitration. The Company expects to terminate or substantially restructure the
relationship with the case management agency in fiscal 1999. 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 the Tennessee Tenncare Partners State
Medicaid Managed Care Program ("TennCare"). These consortiums, known as
Tennessee Behavioral Health ("TBH") and Premier Behavioral Health ("Premier"),
were fully at-risk for the approximately 1.2 million individuals who qualified
for coverage based on Medicaid eligibility or other indigency standards. The
Company has a contract for a Case Management Program with Premier. The Company
received notice of termination of its contract with TBH effective December 10,
1997. The parties were unable to negotiate a new contract, however, the Company
has continued to provide services to, and receive payments from, TBH at reduced
rates. In February 1998, Magellan Health Services, Inc. acquired Merit
Behavioral Health Care, Inc. and thus became the managing shareholder of TBH.
Magellan, through its Green Spring subsidiary, is also the managing shareholder
of Premier. The Company is presently renegotiating its rates with Premier and
anticipates that Premier will take over TBH's business, which may result in the
Company's contract with Premier applying to all the Company's case management
services in Tennessee. Some uncertainty exists as to the future structure of
TennCare. See "Risk Factors -- Potential Changes in TennCare."
Case management contracts in Tennessee accounted for 21.6% and 23.7% of
the Company's revenues for fiscal 1998 and fiscal 1997, respectively.
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 financial and clinical profile of the provider.
The Company also markets the benefits of its Outpatient, Case Management and
Urgent Care 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,
9.
<PAGE> 10
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.
REGULATORY MATTERS
COMPLIANCE WITH MEDICARE GUIDELINES; REIMBURSEMENT FOR PARTIAL HOSPITALIZATION
PROGRAMS
A significant component of the Company's revenues are derived from
payments made by providers to the Company for the management and administration
by the Company of Outpatient Programs managed for providers. The Company bills
its management fee to the provider as a purchased management and administrative
support service. Substantially all of the patients admitted to these programs
are eligible for Medicare coverage and thus, the providers rely upon payment
from Medicare. The providers are reimbursed their costs on an interim basis by
Medicare fiscal intermediaries and the providers submit annual cost
reimbursement reports to the fiscal intermediaries for audit and payment
reconciliation. The providers seek reimbursement of the Company's management
fees from these fiscal intermediaries as part of their overall payments from
Medicare. Under certain of the Company's contracts the Company is obligated to
indemnify the provider for all or some portion of the Company's management fees
that may be disallowed to the provider. In the event a significant amount of
such fees are disallowed for providers, there could be a material adverse effect
upon the Company's financial condition and results of operations. In addition,
to the extent that providers who contract with the Company for management
services suffer material losses in Medicare payments, there is a greater risk of
non-payment by the providers, and a risk that the providers will terminate or
not renew their contracts with the Company. Thus, even though the Company is not
paid by Medicare, it may be adversely affected by reductions in Medicare
payments or other Medicare policies. See "Risk Factors-Dependence Upon Third
Party Reimbursement" below and "Item 7. Management's Discussion And Analysis Of
Financial Condition And Results Of Operations."
The Medicare Program is part of a federal health program created in
1965 as part of the federal social security system. It is administered by the
U.S. Department of Health and Human Services which has established Health Care
Financing Administration ("HCFA") to promulgate rules and regulations governing
the Medicare program and the benefits associated therewith.
Medicare guidelines indicate that, subject to certain regulatory
requirements relating to reasonable costs imposed upon a Provider, contract
management services may be used in lieu of or in support of in-house staff of
the provider and are reimbursable by Medicare. As a general rule, Medicare
guidelines indicate that contract management services costs related to
furnishing services covered by Medicare are reasonable if the costs incurred are
comparable with marketplace prices for similar services. Management of the
Company believes that the value of the Company's services is comparable with
marketplace prices for similar services.
HCFA has published criteria which partial hospitalization services must
meet in order to qualify for Medicare funding. In transmittal number 1303
(effective January 2, 1997) and in subsequent criteria published in Section
230.50 of the Medicare Coverage Manual, HCFA requires partial hospitalization
services to be: (i) incident to a physician's service; (ii) reasonable and
necessary for the diagnosis or treatment of the patient's conditions; and (iii)
provided by a physician with a reasonable expectation of improvement of the
patient from the treatment. The Medicare criteria for coverage, specifically
what is "reasonable and necessary" in particular cases is a subjective
determination on which health care professionals may disagree. Moreover, the
fiscal intermediaries which administer the Medicare program and evaluate and
process claims for payment, establish local medical review policies which may
have a material adverse effect on the Company's results of operations. How
Medicare applies its "reasonable and necessary" standard is not always
consistent, and that standard may be interpreted in the future in a manner which
is more restrictive than currently prevailing interpretations. The Company and
its providers have quality assurance and utilization review programs to monitor
partial hospitalization programs managed by the Company to ensure that such
programs operate in compliance with the Company's understanding of all Medicare
coverage requirements.
10.
<PAGE> 11
All of the partial hospitalization programs managed by the Company are
required to be "provider based" programs by HCFA, which administers the Medicare
program. This designation is important since partial hospitalization services
are covered only when furnished by or "under arrangement" with, a "provider",
i.e., a hospital or a CMHC. To the extent that partial hospitalization programs
are not operated in a manner which is deemed by HCFA to satisfy its "provider
based" criteria, there would not be Medicare coverage for the services furnished
at that site under Medicare's partial hospitalization benefit. In August 1996,
HCFA published (and in 1998 substantially reissued) criteria for determining
when programs operated in facilities separate from a hospital's or CMHC's main
premises may be deemed to be "provider based" programs. The proper
interpretation and application of these criteria are not entirely clear, and are
applied on a case by case basis, thereby creating a risk that some of the sites
managed by the Company will be found not to be "provider based." If such a
determination is made, HCFA may cease reimbursing for the services of the
provider and has not ruled out, in some situations, the possibility that it
would seek retrospective recoveries from providers. Any such cessation of
reimbursement for services or retrospective recoveries could result in
non-payment by providers and have a material adverse effect on the Company's
business, financial condition and results of operations. See "Risk Factors -
Dependence Upon Third Party Reimbursement."
In February 1998, the Company announced that Scripps Health had
received a letter from an official at Region IX of HCFA, informing Scripps
Health that its partial hospitalization programs managed by the Company could no
longer be considered "provider based" for Medicare reimbursement purposes. In
July 1998, HCFA notified Scripps Health that certain of the programs were
approved as "provider based" and that certain other program locations are not
"provider based" because they did not meet HCFA's service area requirements. As
a result of HCFA's notice, the Company and Scripps Health amended their
contract, Scripps Health reconfigured certain of its partial hospitalization
programs and one of the locations was acquired by another provider who engaged
the Company to manage the program. While to the Company's knowledge, no other
Company programs have received provider based challenges to date, it is possible
that these challenges will emerge with other providers and that the Company may
not be able to amend its contracts to satisfy HCFA or its provider customers.
See "Business - Contracts - Outpatient Programs."
Historically, CMHCs, unlike hospitals, were not surveyed by a Medicare
contractor before being permitted to participate in the Medicare program.
However, HCFA is now in the process of surveying all CMHCs to confirm that they
meet all applicable Medicare conditions for furnishing partial hospitalization
programs. Management believes that all the CMHCs which contract with the Company
should be found to be in compliance with the applicable requirements, but it is
possible that some CMHCs contracting with the Company will be terminated from
the Medicare program. It is also possible that the government will attempt to
recover payments made to such CMHCs for services which had been furnished by the
Company and paid for by Medicare.
CHANGES IN MEDICARE'S COST BASED REIMBURSEMENT FOR PARTIAL HOSPITALIZATION
SERVICES
The Balanced Budget Act of 1997 requires the implementation of a
prospective payment system ("PPS") for all outpatient hospital services,
including partial hospitalization, for the calendar year beginning January 1,
1999. Under such a system, a predetermined rate would be paid to providers
regardless of the provider's reasonable costs. While the actual reimbursement
rates have not been determined and thus their effect, positive or negative, is
unknown, the Company anticipates that it may need to negotiate modifications to
its contracts with providers if the system is implemented. The initial date for
publishing the proposed PPS rates was May 1998. Recent concerns over HCFA's
compliance with year 2000 computer issues have raised the possibility of
significant delays in such implementation. The uncertainty regarding PPS has
negatively effected the Company's marketing of new programs due to provider's
uncertainty regarding the economic impact of the new rates. While the Company
cannot predict the impact of continued delays on the Company's marketing
program, it could have a material adverse effect on the Company's ability to
sign new contracts and retain existing contracts.
The Medicare partial hospitalization benefit has a coinsurance feature,
which means that the amount paid by Medicare is the provider's reasonable cost
less "coinsurance" which is ordinarily to be paid by the patient. The
coinsurance amount is 20% of the charges for the services and 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
11.
<PAGE> 12
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 Medicare allowable bad debts payable to
hospital 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 materially
adverse effect on Medicare reimbursement to the Company's hospital providers and
could further result in the restructuring or loss of Provider contracts with the
Company. It is also possible that the reduction in reimbursable allowable bad
debt by Medicare could be extended to CMHC providers.
COMPLIANCE WITH MEDICAID REGULATIONS AND POTENTIAL CHANGES
Since the Company is involved with state Medicaid agencies and with
providers whose clients are covered by Medicaid, the Company must comply with
the laws and regulations governing such reimbursement. Medicaid is a joint state
and federally funded program established as part of the Social Security Act in
the mid-1960s to provide certain defined health care benefits to poor, indigent
or otherwise eligible general welfare recipients. As states consider methods to
control the cost of health care services generally, and behavioral health
services specifically, to Medicaid recipients, and because such recipients are,
as a group, heavy users of the type of services which the Company offers, the
effect of Medicaid reimbursement and regulatory compliance with its rules could
be material to the Company's financial condition and results of operations.
Medicaid funding and the methods by which services are supplied to
recipients are changing rapidly. 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.
The United States Congress continues to consider legislation to
substantially alter the overall Medicaid program, to give states greater
flexibility in the design and operation of their individual Medicaid program,
and to stabilize federal spending for such benefits. Various states are also
considering substantial health care reform measures which could modify the
manner in which all health services are delivered and reimbursed, especially
with respect to Medicaid recipients and with respect to other individuals funded
by public resources. The reduction in other public resources could have an
impact upon the delivery of services to Medicaid recipients.
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 effect 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.
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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 and federal requirements with
respect to confidentiality and patient privacy. Indeed, federal and state laws
require providers of certain behavioral health services to maintain strict
confidentiality as to treatment records and, 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. Inclusion of
hospital space where the Outpatient Programs are furnished within the hospitals'
license, when required under applicable state laws, is a prerequisite to
participation in the Medicare programs. Additionally, the Provider's premises
and programs are subject to periodic inspection and recertification.
FALSE CLAIMS INVESTIGATIONS AND ENFORCEMENT OF HEALTH CARE FRAUD LAWS
The Office of the Inspector General within the U.S. Department of
Health and Human Services, as well as other federal, state, and private
organizations, are aggressively enforcing their interpretation of Medicare and
Medicaid laws and policies, and other applicable standards. Often in such
enforcement efforts, the government has relied on the Federal False Claims Act.
Under that law, if the government prevails in a case, it is entitled to treble
damages plus not less than $5,000 nor more than $10,000 per claim, plus
reasonable attorney fees and costs. In addition, a person found to have
submitted false claims can be excluded from governmental health care programs
including Medicare and Medicaid. If a provider contracting with the Company were
excluded from governmental health programs, no services furnished by that
provider would be covered by any governmental health program. Some of the
providers contracting with the Company are reported to be under active
investigation for health care fraud, although the Company is not aware of those
investigations relating 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 False Claims Act. The
incentive for an individual to do so is that he or she will usually be entitled
to approximately 15% to 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.
In February 1998, the Company announced that an Outpatient Program that
it formerly managed in Dallas, Texas was the subject of a civil investigation
conducted by the U.S. Department of Health and Human Services' Office of
Inspector General and the U.S. Attorney's office in Dallas, Texas. See "Item 3.
Legal Proceedings."
In addition, the Company was informed on July 20, 1998 that a qui tam
suit had been filed by a former employee of the Company against a subsidiary of
the Company. See "Item 3. Legal Proceedings."
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 referral of patients. The penalties under many of those statutes are
severe, and the government often need not
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<PAGE> 14
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 potentially a
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 denied
coverage. 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.
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.
The Company believes that the proprietary nature of its policy and
procedures manuals as well as the level of service it provides and the expertise
of its management and field personnel provides it with a leading position in the
development and management of Outpatient Programs. The Company believes that the
Case Management Programs provide the means to effectively control costs in a
managed, public-sector mental health system by reducing the costs for the
population that consumes the largest portion of the treatment dollars, the SMI
population. In addition, the Company believes that the Company's case management
model provides state-of-the-art treatment and rehabilitation services which
serve to upgrade the existing provider network in a community. The Company
believes the benefits of its case management model are recognized as a
distinguishing feature for public-sector managed care efforts.
The Company's primary existing competitors in the case management
business are predominantly not for profit CMHCs and case management agencies.
The Company anticipates that mental health managed care companies will
eventually compete for this business. There can be no assurances that the
Company will be able to compete successfully with its present or future
competitors.
The specialty pharmacy business is intensely competitive. There are
numerous local, regional and national companies which can dispense
pharmaceuticals locally or through the mail. There are also numerous companies
which provide lab work and analysis services necessary for blood monitoring.
Many of these companies have
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<PAGE> 15
substantially greater resources than Stadt Solutions. While the Company believes
that Stadt Solutions will be the first specialty pharmacy company to focus on
SMI and further believes that Stadt Solutions will offer value added disease
management services not typically provided by competitors, there can be no
assurance that Stadt Solutions will be able to compete successfully with its
present or future competitors.
EMPLOYEES
As of July 15, 1998, PMR employed approximately 818 employees, of which
397 are full-time employees. Approximately 713 employees staff clinical programs
and approximately 105 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.
RISK FACTORS
The Company's business is subject to a number of risks, including the
risks described in this section and elsewhere in this Annual Report on Form
10-K. The Company's actual results could differ materially from the results
projected in this Report or in any other forward-looking statements presented by
management from time to time, due to some or all of such risks.
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
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
non-allowable; or (iii) changes in the law or interpretation of the law
governing Medicare coverage and payment. Providers generally seek reimbursement
of the Company's management fees from the 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. See "Business -- Regulatory
Matters -- Compliance With Medicare Guidelines; Reimbursement For Partial
Hospitalization Programs."
The Company's programs have in the past, and may in the future, from
time to time, be subject to Focused Medical Reviews. 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.
During 1997 and 1998, HCFA has increased its scrutiny of outpatient
psychiatric services due to a significant increase in charges to Medicare for
outpatient partial hospitalization and other mental health services. The Company
believes that Focused Medical Reviews and related denials are increasing
throughout the industry, including at programs managed by the Company. 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. See "Business --Regulatory Matters -- Compliance With
Medicare Guidelines; Reimbursement For Partial Hospitalization Programs."
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<PAGE> 16
All of the partial hospitalization programs managed by the Company are
required under HCFA's current interpretation of the Medicare regulations, to be
"provider based" programs by HCFA. This designation is important since partial
hospitalization services are covered only when furnished by or "under
arrangement" with, a "provider", i.e., a hospital or a CMHC. To the extent that
partial hospitalization programs are not deemed by HCFA to be "provider based"
under HCFA's current interpretation of the Medicare regulations, there would not
be Medicare coverage for the services furnished at that site under Medicare's
partial hospitalization benefit. HCFA has published criteria for determining
when programs operated in facilities separate from a hospital's or CMHC's main
premises may be deemed to be "provider based" programs. The proper
interpretation and application of these criteria are not entirely clear, and
there is a risk that some of the sites managed by the Company will be found not
to be "provider based". If such a determination is made, HCFA may cease
reimbursing for the services at the provider, and HCFA has not ruled out the
possibility that, in some situations, it would seek retrospective recoveries
from providers. Any such cessation of reimbursement for services or
retrospective recoveries could result in non-payment by providers and have a
material adverse effect on the Company's business, financial condition and
results of operations.
In February 1998, the Company announced that Scripps Health had
received a letter from an official at Region IX of HCFA, informing Scripps
Health that its partial hospitalization programs managed by the Company could no
longer be considered "provider based" for Medicare reimbursement purposes. In
July 1998, HCFA notified Scripps Health that certain of the programs are
approved as "provider based" and that certain other program locations were not
"provider based" because they did not meet HCFA's service area requirements. As
a result of HCFA's notice, the Company and Scripps Health amended their
contract, Scripps Health reconfigured certain of its partial hospitalization
programs and one of the locations was acquired by another provider who engaged
the Company to manage the program. While to the Company's knowledge, no other
Company programs have received provider based challenges to date, it is possible
that these challenges will emerge with other providers and that the Company may
not be able to amend its contracts to satisfy HCFA or its provider customers. In
addition, there can be no assurance that HCFA will not challenge the "provider
based" status of the Scripps Health program in the future. If the Company is
unable to amend its contracts to satisfy any "provider based" challenge in the
future, the potential termination of any such contracts could have a material
adverse effect upon the Company's business, financial condition and results of
operations.
See "Business -- Contracts -- Outpatient Programs," "-- Regulatory
Matters -- Compliance with Medicare Guidelines; Reimbursement for Partial
Hospitalization Programs."
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 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 Balanced Budget Act of 1997 could adversely affect reimbursements
to certain providers and payments to the Company. The Medicare partial
hospitalization benefit has a coinsurance feature, which means that the amount
paid by Medicare is the provider's reasonable cost less "coinsurance" which is
ordinarily to be paid by the patient. The Medicare program has historically paid
amounts designated as the patient's coinsurance obligation where the patient is
indigent or if the patient does not pay the provider the billed coinsurance
amounts after reasonable collection efforts. Those amounts are characterized as
"allowable Medicare bad debts." The allowability of bad debts to providers is
significant because most of the patients in programs managed by the Company are
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<PAGE> 17
indigent or have very limited resources. The Balanced Budget Act of 1997 reduces
the amount of allowable Medicare bad debts payable to hospital 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 impact on Medicare
reimbursement to the Company's hospital Providers and could further result in
the restructuring or loss of provider contracts with the Company. It is also
possible that the reduction in reimbursable allowable bad debt by Medicare could
be expanded to CMHC providers. An adverse effect on Medicare reimbursement to
the Company's hospital providers, and if so expanded, on reimbursement to CMHC
providers, could have a material adverse effect upon the Company's business,
financial condition and results of operations. See "Business -- Regulatory
Matters -- Compliance With Medicare Guidelines; Reimbursement For Partial
Hospitalization Programs."
In addition, under the Balanced Budget Act of 1997, state Medicaid
plans that have historically paid the Medicare coinsurance amount 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.
See "Business -- Regulatory Matters -- Changes In Medicare's Cost Based
Reimbursement For Partial Hospitalization Services" and "-- Compliance With
Medicaid Regulations and Potential Changes."
The PPS to be implemented under the Balanced Budget Act of 1997 could
have an adverse effect on the business of certain providers and the Company.
While the actual reimbursement rates and methodology for the PPS have not been
determined and thus their effect 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. Recent concerns over HCFA's compliance with year 2000 computer
issues have raised the possibility of significant delays in the implementation
of PPS. The uncertainty regarding PPS has negatively effected the Company's
marketing of new programs due to provider's uncertainty regarding the economic
impact of the new rates. While, the Company cannot predict the impact of
continued delays on the Company's marketing program, it could have a material
adverse impact on the Company's ability to sign new contracts and retain
existing contracts. See "Business -- Regulatory Matters -- Changes in Medicare's
Cost Based Reimbursement For Partial Hospitalization Services."
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 - Regulatory Matters - Compliance with
Medicare Guidelines; Reimbursement for Partial Hospitalization Programs.
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.
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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."
Potential Changes in TennCare. The Company has a contract for a Case
Management Program with Premier. In addition, the Company is presently
renegotiating its rates with Premier. The Company previously received a notice
of termination of its contract with TBH. The Company anticipates that Premier
may take over TBH's business, possibly resulting in the Company's contract with
Premier applying to all of the Company's case management services in Tennessee.
However, there can be no assurance that the Company's relationship with Premier
and TBH will be resolved as currently anticipated by the Company, and there can
be no assurance that the ultimate resolution of such matters will not have a
material adverse effect on the Company's business, financial condition and
results of operations. The TennCare program has been subjected to substantial
criticism which could result in structural changes which the Company cannot
predict with any degree of certainty, and which could have a material adverse
effect on the Company's business, financial condition and results of operations.
In addition, the Company is in the process of arbitrating its agreement
with a case management agency in Memphis and anticipates terminating or
substantially restructuring the agreement. See "Business -- Contracts -- Case
Management Programs." While the Company does not anticipate that
the outcome of this arbitration will have a material adverse effect on the
Company's business, the Company cannot predict the outcome of this matter or
other potential related changes or outcomes, with any degree of certainty, and
such results could individually or in the aggregate have a material adverse
effect on the Company's business, financial condition and results of operations.
Concentration of Revenues. For fiscal 1998, 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 22.4% of
the Company's revenue for fiscal 1998. 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 --Programs and
Operations" -- Case Management Programs" and "Contracts -- Case Management
Programs."
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
"Risk Factors -- Potential Changes in TennCare," "-- Concentration of Revenues"
and "Business -- Programs and Operations" "-- Case Management Programs" and
"Contracts -- Case Management Programs."
Government Regulation. Mental health care is an area subject to
extensive regulation and frequent changes in those regulations. 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. In addition, a
number of factors, including changes in the healthcare industry and the
availability of investigatory resources, have resulted in increased scrutiny,
inquiry and investigations by various federal and state regulatory agencies
relating to the operation of healthcare companies, including the Company. The
Company is and will continue to be subject to varying degrees of regulation,
licensing, inquiry and investigation by
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health or social service agencies and other regulatory and enforcement
authorities in the various states and localities in which it operates or intends
to operate. 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 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 requires that partial hospitalization programs must meet certain
published criteria to qualify for Medicare funding, including that the partial
hospitalization services be reasonable and necessary for the diagnosis or
treatment of the patient's condition. 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.
Moreover, the fiscal intermediaries which administer the Medicare program and
evaluate and process claims for payment, establish local medical review policies
which may have a material adverse effect on the Company's results of operations.
Medicare does not always apply its "reasonable and necessary" standard
consistently, and that standard may be interpreted in the future in a manner
which is more restrictive than currently prevailing interpretations. 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 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. See "Business --
Regulatory Matters -- Compliance With Medicare Guidelines; Reimbursement For
Partial Hospitalization Programs."
In February 1998, the Company announced that an Outpatient Program that
it formerly managed in Dallas, Texas was the subject of a civil investigation
conducted by the U.S. Department of Health and Human Services' Office of
Inspector General and the U.S. Attorney's office in Dallas, Texas. The
investigation resulted from a HCFA review of certain partial hospitalization
services rendered by the program. As of July 27, 1998, no formal complaint,
demand, or additional request for information has been made by the investigating
agencies. The Company is unable to predict the impact, if any, on the Company's
business, financial condition or results of operations, which may result from
the investigation or any claim or demand which may arise therefrom. See
"Business -- Regulatory Matters -- False Claims Investigations And Enforcement
Of Health Care Fraud Laws."
The Company was informed that a qui tam suit had been filed by a former
employee of the Company against a subsidiary of the Company. The Company is
unable to predict the impact, if any, that the claim and ultimate resolution
thereof may have on the Company's business, financial condition or results of
operations. See "Item 3. Legal Proceedings."
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
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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 -- Regulatory Matters."
Risks Associated with Acquisitions. The Company currently intends as
part of its business strategy to pursue acquisitions of complementary businesses
as it seeks to compete in the rapidly changing healthcare industry. Acquisitions
involve numerous risks, including difficulties in assimilation of the operations
and personnel of the acquired business, the integration of management
information and accounting systems of the acquired business, the diversion of
management's attention from other business concerns, risks of entering markets
in which the Company has no direct prior experience, and the potential loss of
key employees of the acquired business. The Company's management will be
required to devote substantial time and attention to the integration of any such
businesses and to any material operational or financial problems arising as a
result of any such acquisitions. There can be no assurance that operation or
financial problems will not occur as a result of any such acquisitions. Failure
to effectively integrate acquired businesses could have a material adverse
effect on the Company's business, financial condition and results of operations.
The Company intends to continue to evaluate potential acquisitions of,
or investments in, companies which the Company believes will complement or
enhance its existing business. Future acquisitions by the Company may result in
potentially dilutive issuances of equity securities, the incurrence of
additional debt and amortization expenses related to goodwill and other
intangible assets which could adversely affect the Company's business, financial
condition and results of operations. There can be no assurance that the Company
will consummate any acquisition in the future or if consummated, that any such
acquisition will ultimately be beneficial to the Company.
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 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
20.
<PAGE> 21
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.
The specialty pharmacy business is intensely competitive. There are
numerous local, regional and national companies which can dispense
pharmaceuticals locally or through the mail. There are also numerous companies
which provide lab work and analysis services necessary for blood monitoring.
Many of these companies have substantially greater resources than Stadt
Solutions. While the Company believes that Stadt Solutions will be the first
specialty pharmacy company to focus on SMI and further believes that Stadt
Solutions will offer value added disease management services not typically
provided by competitors, there can be no assurance that Stadt Solutions will
be able to compete successfully with its present or future competitors.
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 Sale. 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"), including Rule 144 ("Rule 144") under the Securities
Act. As of July 24, 1998, the Company had 6,959,810 shares of Common Stock
outstanding. Of these shares, the officers and directors of the Company and
their affiliates own 2,172,420 shares and may acquire up to 768,175 shares that
may be issued upon the exercise of outstanding stock options and warrants. These
outstanding shares and shares issued upon the exercise of the options and
warrants are considered "restricted securities" and may be sold, subject to the
volume limitations under 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.
Concentration of Ownership, Anti-Takeover Provisions. The officers and
directors of the Company and their affiliates own over 20% of the Company's
issued and outstanding Common Stock (and over 30% including shares issuable upon
currently exercisable stock options and warrants). 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
21.
<PAGE> 22
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.
Year 2000 Compliance. The year 2000 issue is the result of computer
applications being written using two digits rather than four to define the
applicable year. Computer applications may recognize a date using "00" as the
year 1900 rather than the year 2000, resulting in system failures or
miscalculations causing disruption of operations. The Company has reviewed its
material computer applications for year 2000 compliance and is working with
vendors and suppliers to make its computer applications year 2000 compliant.
However, if any such corrections cannot be completed on a timely basis, the year
2000 issue could have a material adverse impact on the Company's business,
financial condition and results of operations. Because of the many uncertainties
associated with year 2000 compliance issues, and because the Company's
assessment is necessarily based on information from third party vendors and
suppliers, there can be no assurance that the Company's assessment is correct or
as to the materiality or effect of any failure of such assessment to be correct.
The Company has not determined whether and to what extent computer
applications of contract providers and Medicare and other payors will be year
2000 compliant. In addition, the Company has not determined the extent to which
any disruption in the billing practices of providers or the payment practices of
Medicare or other payors caused by the year 2000 issues will affect the
Company's operations. However, any such disruption in the billing or
reimbursement process could have a substantial adverse impact on Medicare or
Medicaid payments to providers and, in turn, payments to the Company. Any such
disruption 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 -- Impact of Year 2000
Computer Issues."
ITEM 2. PROPERTIES
The Company owns no real property, but currently leases and subleases
approximately 205,000 square feet comprised of (i) a lease for the Company's
corporate headquarters expiring on April 3, 2002, (ii) two leases for regional
administration offices expiring in July 2001 and September 2001, respectively,
and (iii) thirty (30) leases for program sites, averaging three years duration,
none of which extend beyond 2002. The Company carries property and liability
insurance where required by lessors and sublessors. The Company believes that
its facilities are adequate for its short term needs. Leases and 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 ninety (90)
days' written notice.
ITEM 3. LEGAL PROCEEDINGS
In February 1998, the Company announced that it had been informed that
the Outpatient Program that it formerly managed in Dallas, Texas is the subject
of a civil investigation being conducted by the U.S. Department of Health and
Human Services' Office of inspector General and the U.S. Attorney's office in
Dallas, Texas (collectively the "Agencies"). The investigation resulted from a
HCFA review of the eligibility for payment under Medicare's coverage guidelines
of certain partial hospitalization services rendered by the program. As of July
27, 1998, no formal complaint, demand, or additional request for information has
been made by the investigating agencies.
A representative of the Agencies has indicated that the investigation
is civil in nature and focuses on eligibility of patients for partial
hospitalization services. The eligibility determinations for participation at
the Dallas program were made by board certified or board eligible psychiatrists.
The Company is cooperating fully with the Agencies.
Due to the preliminary nature of the investigation, the Company is
unable to predict the ultimate outcome of the investigation, or the material
impact, if any, on the Company's business, financial condition or results of
operations. See "Risk Factors -- Government Regulation."
22.
<PAGE> 23
The Company is engaged in disputes with TBH regarding certain payments
made to the Company for case management services provided by the case management
agencies. TBH has made a claim based on a sample audit, for approximately $4.2
million relating to payments made to the Company for case management services.
The Company believes that the claim is without merit and is in the process of
discussing the issue with TBH. The matter may be referred to arbitration if the
parties do not resolve the dispute.
The Company is engaged in arbitration with a case management agency in
Memphis regarding disputes involving the management and affiliation agreement.
The Company cannot predict the outcome of the arbitration. The Company expects
to terminate or restructure substantially the relationship with the case
management agency in fiscal 1999. See "Risk Factors -- Potential Changes in
TennCare."
A qui tam suit has been filed by Anastasios Giorgiadis, a former
employee of the Company, against a subsidiary of the Company in Federal District
Court in the Southern District of California. This suit was filed under seal and
the Company was first informed of it on July 20, 1998. The suit alleges a broad
range of improper conduct relating to the quality of services furnished by the
Company, the medical necessity of the services furnished by the Company, and the
accuracy of billing for services furnished by the Company and by physicians who
admit patients to the programs managed by the Company, and other matters. The
suit was filed by a former employee who previously had filed a separate action
for wrongful termination. The Company prevailed in that wrongful termination
case when the court dismissed the case by granting the Company's motion for
summary judgment. The allegations in the wrongful termination case were very
similar to the allegations in the pending qui tam case. Notwithstanding the
similarity between the allegations in the wrongful termination case and the qui
tam case, the Company cannot give any assurances with respect to the ultimate
outcome of the qui tam case or its effect on the Company's business, financial
condition or results of operations.
Under the False Claims Act, the Department of Justice must inform the
court whether it will intervene and take control of the qui tam suit. In this
case, the Department of Justice has not yet made that decision, but rather is
conducting an investigation. The Company has met with the Assistant United
States Attorney who is coordinating the government's investigation of this case,
and the Company has agreed to furnish certain documentation to the government.
The Company is unable to predict the impact, if any, on the Company's business,
financial condition, or results of operations which may result from the
investigation, or any claims which may arise therefrom. See "Risk Factors --
Government Regulation."
The Company is not a party to any other material legal proceedings
required to be reported hereunder.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY-HOLDERS
The Company held a special meeting of the stockholders on March 5, 1998
to approve an amendment to the Company's Restated Certificate of Incorporation
(the "Restated Certificate") to increase the authorized number of shares of
Common Stock and to clarify certain provisions of the Restated Certificate
relating to the Board of Directors' authority to issue preferred stock, the
limitation of directors' personal liability under the Delaware General
Corporation Law and indemnification of officers, directors, employees and agents
of the Company (collectively the "Amendment").
The Amendment was approved with 4,927,085 votes in favor, 93,335 votes
against and 32,448 abstentions.
23.
<PAGE> 24
ITEM 4A. EXECUTIVE OFFICERS OF THE COMPANY
The executive officers of the Company and their ages and positions at
April 30, 1998, are as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION
- ---- --- --------
<S> <C> <C>
Allen Tepper.................... 50 Chief Executive Officer
Fred D. Furman.................. 50 President
Mark P. Clein................... 39 Executive Vice President and Chief
Financial Officer
Susan D. Erskine................ 46 Executive Vice President-
Development, Secretary and
Director
Daniel L. Frank................. 41 President of Disease Management
Division
Charles E. Galetto.............. 47 Senior Vice President - Finance and
Treasurer
</TABLE>
- ------------
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.
Daniel L. Frank has served as President of the Disease Management
division of the Company since April 1998. This division is responsible for the
development of Stadt Solutions and its integrated managed care initiative. Mr.
Frank has also served as a director of the Company since 1992. Previously, Mr.
Frank was President of Coram Healthcare's Lithotripsy division from 1996 until
its sale in 1997. Prior to that, Mr. Frank was Chief Executive Officer of
Western Medical Center - Anaheim and Santa Ana Health, Inc. from 1993 to 1996.
From 1991 to 1993, he was President of Summit Ambulatory Network.
24.
<PAGE> 25
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.
PART II
ITEM 5. MARKET PRICE OF AND DIVIDENDS ON THE COMPANY'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS
(a) MARKET INFORMATION
The Company's Common Stock (NASDAQ symbol "PMRP") is traded publicly
through the NASDAQ National Market System. The following table represents
quarterly information on the price range of the Company's Common Stock. This
information indicates the high and low sale prices reported by the NASDAQ
National Market System. These prices do not include retail markups, markdowns or
commissions:
<TABLE>
<CAPTION>
QUARTERS FOR THE YEAR ENDED APRIL 30, 1998 HIGH LOW
---- ---
<S> <C> <C>
FIRST QUARTER $24.13 $16.88
SECOND QUARTER $24.50 $19.13
THIRD QUARTER $23.63 $17.00
FOURTH QUARTER $19.50 $10.50
QUARTERS FOR THE YEAR ENDED APRIL 30, 1997
FIRST QUARTER $15.50 $8.50
SECOND QUARTER $35.25 $14.13
THIRD QUARTER $31.44 $20.25
FOURTH QUARTER $29.75 $16.75
</TABLE>
(b) HOLDERS
As of July 23, 1998 there were 89 holders of record of the Company's
Common Stock.
(c) DIVIDENDS
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.
(d) RECENT SALES OF UNREGISTERED SECURITIES
From May 1, 1997 to April 30, 1998, the Company has sold and issued
(without payment of any selling commission to any person) the following
unregistered securities:
On May 1, 1997, the Company issued a Warrant to purchase up to 5,000
shares of Common Stock to each of Case Management, Inc. and Mental Health
Cooperative, Inc. in connection with Management and Affiliation Agreements with
each of them. The Warrants were issued in connection with services provided
under Management and Affiliation Agreements, based on the program's satisfaction
of certain revenue-based threshold requirements. Each Warrant is exercisable for
5 years at an exercise price equal to the average closing price of the
Company's common
25.
<PAGE> 26
stock on the Nasdaq National Market for the 10 trading days prior to April 30,
1997 (subject to adjustment upon certain events as described in the Warrants.)
The proceeds to be received, if any, upon exercise of the warrant are
anticipated to be used for operating capital. The issuance of the Warrants were
deemed to be exempt from registration under the Securities Act by virtue of
Section 4(2) thereunder.
ITEM 6. SELECTED FINANCIAL DATA
The following selected financial data should be read in conjunction
with the Company's consolidated financial statements and the accompanying notes
included elsewhere herein.
<TABLE>
<CAPTION>
YEARS ENDED APRIL 30
----------------------------------------------------------------
1998 1997 1996 1995 1994
------- -------- ------- -------- --------
(in thousands, except per share amounts)
<S> <C> <C> <C> <C> <C>
INCOME STATEMENT INFORMATION
Revenues $ 67,524 $ 56,637 $ 36,315 $ 21,747 $ 22,786
Net Income (loss) 1,458 3,107 918 (2,352) 825
Net Income (loss) per share
Basic .24 .66 .26 (.71) .25
Diluted .22 .55 .23 (.71) .25
WEIGHTED SHARES OUTSTANDING
Basic 6,053 4,727 3,484 3,336 3,228
Diluted 6,695 5,646 4,471 3,336 3,347
</TABLE>
<TABLE>
<CAPTION>
AS OF APRIL 30
----------------------------------------------------------------
1998 1997 1996 1995 1994
------- -------- ------- -------- --------
<S> <C> <C> <C> <C> <C>
BALANCE SHEET INFORMATION
Working Capital $ 51,820 $ 17,036 $ 10,911 $ 8,790 $ 7,705
Total Assets 70,449 32,450 21,182 14,811 13,671
Long Term Debt 392 0 0 126 320
Total Liabilities 16,903 16,202 12,070 7,749 5,972
Stockholders' Equity 53,546 16,248 9,112 7,062 7,699
</TABLE>
<TABLE>
<CAPTION>
QUARTERS FOR THE YEARS ENDED
------------------------------------------------------------------------------------------------------
APRIL 30, 1998 APRIL 30, 1997
------------------------------------------------ -----------------------------------------------
7/31/97 10/31/97 1/31/98 4/30/98 7/31/96 10/31/96 1/31/97 4/30/97
--------- -------- ------- ------- ------- -------- ------- -------
(in thousands, except per share amounts)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
REVENUES 16,177 17,561 16,522 17,264 13,028 14,293 14,190 15,126
NET INCOME (LOSS) 970 1,162 1,327 (2,001) 583 799 831 894
NET INCOME (LOSS) PER
SHARE
Basic .19 .22 .19 (.29) .14 .16 .17 .19
Diluted .17 .19 .18 (.29) .12 .14 .14 .15
</TABLE>
26.
<PAGE> 27
ITEM 7. 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
document. 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
document.
OVERVIEW
PMR is a leading manager of specialized mental health care programs and
disease management services designed to treat individuals diagnosed with SMI.
PMR manages the delivery of a broad range of outpatient and community-based
psychiatric services for SMI patients, consisting of 37 Outpatient Programs, two
Case Management Programs and four Chemical Dependency Programs. Stadt Solutions,
upon formation, will offer a specialty pharmacy program for individuals with
SMI, initially serving approximately 6,000 individuals through fourteen
pharmacies in thirteen states. Stadt Solutions will also receive the Company's
clinical research and information business upon formation. Including Stadt
Solutions, PMR will operate in approximately twenty-three states and is expected
to employ or contract with more than 400 mental health and pharmaceutical
professionals and provide services to approximately 11,000 individuals diagnosed
with SMI. 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. Outpatient Programs operated by PMR 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 34 of the 39 Outpatient Programs
operated during fiscal 1998 and constituted 62.4% of the Company's revenue for
the year ended April 30, 1998. 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 April 30, 1998, the Company had recorded
$7.5 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 providing a portion of the
27.
<PAGE> 28
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. The urgent care program receives interim payments which are
adjusted based on inpatient utilization statistics which are compared to a
baseline. Revenues are recognized based on the quarterly calculation of the
statistical trends. 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 managed detoxification and dual diagnosis programs for individuals
eligible for public sector reimbursement. The Company generated revenue based on
a combination of state-funded grants and Medicaid fee-for-service reimbursement.
Revenue was recognized in the period in which the related service was delivered.
The Arkansas programs were terminated as of June 30, 1998.
RESULTS OF OPERATIONS
The following table sets forth, for the periods indicated, the
percentage of revenue represented by the respective financial items:
<TABLE>
<CAPTION>
YEAR ENDED APRIL 30,
-------------------------------
1998 1997 1996
---- ---- -----
<S> <C> <C> <C>
Revenue..................................... 100.0% 100.0% 100.0%
Operating expenses.......................... 71.5 73.7 78.4
Marketing, general and administrative....... 13.6 10.7 11.1
Provision for bad debts..................... 7.6 5.4 4.0
Depreciation and amortization............... 1.6 1.2 1.6
Special Charge 3.8 - -
Interest (income), expense.................. (1.8) (0.4) 0.0
---- ---- ----
Total expenses.............................. 96.3 90.6 95.1
----- ---- ----
Income before income taxes 3.7% 9.4% 4.9%
===== ==== ====
</TABLE>
YEAR ENDED APRIL 30, 1998 COMPARED TO YEAR ENDED APRIL 30, 1997
REVENUE. Revenue increased from $56.6 million for the year ended April
30, 1997 to $67.5 million for the year ended April 30, 1998, an increase of
$10.9 million, or 19.2%. The Outpatient Programs recorded revenue of $49.4
million, an increase of 23.5% as compared to fiscal 1997. The growth in
Outpatient Programs was the result of the addition of nine new programs in
fiscal 1998 and increases in "same-site" revenues of 11.7% compared to fiscal
1997. The remainder of the increase in revenue came from the growth in Case
Management Programs in Tennessee and Arkansas, which recorded revenue of $15.1
million, an increase of $1.4 million or 10.4% as compared to fiscal 1997.
Revenue from the Chemical Dependency Programs was $3.0 million, an increase of
1.0% as compared to fiscal 1997. The Company is currently in the process of
terminating or restructuring its relationship with a Tennessee case management
agency and during fiscal 1998 terminated its Arkansas Case Management Programs.
See "Business -- Programs and Operations -- Case Management Programs."
OPERATING EXPENSES. Operating expenses consist of costs incurred at the
program sites and costs associated with the field management responsible for the
administering the programs. Operating expenses increased from $41.7 million for
the year ended April 30, 1997 to $48.2 million for the year ended April 30,
1998, an increase of $6.5 million, or 15.6%. As a percentage of revenue,
operating expenses were 71.5%, down from 73.7% for the year ended April 30,
1997. The improvement in the operating expense ratio was due to reductions in
certain
28.
<PAGE> 29
expenses as well as operating leverage realized as a result of revenue growth in
the Outpatient and Case Management Programs which was spread across existing
fixed and semi-variable cost structures.
MARKETING, GENERAL AND ADMINISTRATIVE. Marketing, general and
administrative expenses increased from $6.0 million for the year ended April 30,
1997 to $9.2 million for the year ended April 30, 1998, an increase of $3.2
million, or 53.3%. The increase was due to investment in both the regional and
home offices to support existing and anticipated programs. As a percentage of
revenue, marketing, general and administrative expenses were 13.6% for the year
ended April 30, 1998, as compared to 10.7% for the year ended April 30, 1997.
PROVISION FOR BAD DEBTS. Provision for bad debt expense increased from
$3.1 million for the year ended April 30, 1997 to $5.1 million for the year
ended April 30, 1998, an increase of $2.0 million, or 64.5%. The increase was
due to anticipated difficulties associated with collection of receivables
relating to program locations closed in the fourth quarter of fiscal 1998. As
part of a special charge in the fourth quarter of fiscal 1998, the Company
recorded approximately $2.4 million in additional bad debt expenses associated
with the closed programs.
SPECIAL CHARGE. A Special Charge of $5.0 million was recorded in the
fourth quarter to provide for costs associated with closing several programs,
resolving the provider based status associated with the Scripps Health programs
and resolving other regulatory matters. Included in this charge is a $2.4
million bad debt expense which was recorded in provision for bad debts. The
remaining $2.6 million was allocated to program closing costs which were $1.4
million and costs associated with noncancelable contract obligations which were
$1.2 million.
DEPRECIATION AND AMORTIZATION. Depreciation and amortization expense
increased from $701,000 for the year ended April 30, 1997 to $1,065,000 for the
year ended April 30, 1998, an increase of $364,000 or 51.9%. The increase was
due to additional capital expenditures associated with the start-up of new
programs during fiscal 1998 and as well as equipment and leasehold improvements
associated with the Company's corporate office.
INTEREST (INCOME), EXPENSE. Interest income increased from $217,000 for
the year ended April 30, 1997 to $1,187,000 for the year ended April 30, 1998,
an increase of $970,000 or 447.0%. This increase resulted from higher cash and
cash equivalent and short-term investment balances resulting from the completion
of the Company's common stock offering in October 1997.
INCOME BEFORE INCOME TAXES. Income before income taxes decreased from
$5.3 million for the year ended April 30, 1997 to $2.5 million for the year
ended April 30, 1998, a decrease of $2.8 million, or 52.8%. Income before income
taxes as a percentage of revenue decreased from 9.4% to 3.7% 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 $41.7 million for the year ended April 30,
1997, an increase of $13.2 million, or 46.3%. Of this increase, $5.4 million, or
40.9%, 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.
29.
<PAGE> 30
MARKETING, GENERAL AND ADMINISTRATIVE. Marketing, general and
administrative expenses increased from $4.0 million for the year ended April 30,
1996 to $6.0 million for the year ended April 30, 1997, an increase of $2.0
million, or 50.0%. 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 an enabling agreement with Columbia/HCA Healthcare Corporation;
(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 $1.7 million, or 121.4%. 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 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 194.4%. Income before
income taxes as a percentage of revenue increased from 4.9% to 9.4% over this
period of time.
LIQUIDITY AND CAPITAL RESOURCES
For the year ended April 30, 1998, net cash used in operating
activities was $3.0 million. Working capital at April 30, 1998 was $51.8
million, an increase of $34.8 million, or 204.2%, as compared to working capital
at April 30, 1997. Cash and cash equivalents and short-term investments at April
30, 1998 were $38.8 million, an increase of $28.7 million, or 286.0% as compared
to April 30, 1997. The increase in working capital, cash and cash equivalents
and short-term investments was due to the completion of a public offering of
shares of common stock of the Company during October 1997, which resulted in net
proceeds of $33.1 million, which was offset by cash used to finance operating
activities.
The use of cash for operating activities during the year ended April
30, 1998 was due to delayed collections of accounts receivable. Accounts
receivable growth was a result of significant revenue increases combined with an
increase in days revenue outstanding to 88 at April 30, 1998 (versus 67 at April
30, 1997). The increase in days revenue outstanding was due to focused reviews
of claims by fiscal intermediaries at several Outpatient Programs. The other
significant use of cash was the purchase of equipment and leasehold improvements
associated with recently opened sites and investment in information technology.
During fiscal 1999, working capital is expected to be realized
principally from operations, as well as from a $10 million line of credit from
Sanwa Bank which became effective November 1, 1996. Interest is payable under
this line of credit at a rate of either the bank's reference rate or the
Eurodollar rate plus 2%. As of April 30, 1998 no balance was outstanding under
the line of credit. Working capital is anticipated to be utilized during fiscal
1999, to continue expansion of the Company's Outpatient and Case Management
Programs, for expansion of Stadt Solutions and the site management and clinical
information business, and for the development of a risk based managed care
project. The Company also anticipates using working capital and, if necessary,
incurring indebtedness in connection with, selective acquisitions.
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
30.
<PAGE> 31
programs generally experience operating losses through an average of the first
four months of operation. The Company expects to provide cash for the start up
of the site management and clinical information business as part of the
formation of Stadt Solutions. 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 be a state of the art data collection and
repository system for the Company's clinical information. The Company
anticipates investing approximately $1,000,000 in this system during fiscal
1999.
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 and fiscal
1998, a substantial 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
Community Mental Health Centers 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.
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.
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 "-- Regulatory Matters."
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.
IMPACT OF YEAR 2000 COMPUTER ISSUES
The year 2000 issue is the result of computer applications being
written using two digits rather than four to define the applicable year. The
Company's computer applications (and computer applications used by any of the
Company's customers, vendors, payors or other business partners) may recognize
a date using "00" as the year 1900 rather than the year 2000. This could result
in system failures or miscalculations causing disruption of operations.
The Company has completed a thorough review of its material computer
applications and has identified and scheduled necessary corrections for its
computer applications. Corrections are currently being made and are expected to
be substantially implemented by the third quarter of fiscal 1999. The Company
expects that the total cost associated with these revisions will not be
material. These costs will be primarily incurred during fiscal 1999
31.
<PAGE> 32
and be charged to expense as incurred. For externally maintained systems, the
Company has begun working with vendors to ensure that each system is currently
year 2000 compliant or will be made year 2000 compliant during 1998 or 1999. The
cost to be incurred by the Company related to externally maintained systems is
expected to be minimal. The Company believes that by completing its planned
corrections to its computer applications, the year 2000 issue with respect to
the Company's systems can be mitigated. However, if such corrections cannot be
completed on a timely basis, the year 2000 issue could have a material adverse
impact on the Company's business, financial condition and results of operations.
Because of the many uncertainties associated with year 2000 compliance issues,
and because the Company's assessment is necessarily based on information from
third party vendors and suppliers, there can be no assurance that the Company's
assessment is correct or as to the materiality or effect of any failure of such
assessment to be correct.
The Company has initiated a program to determine whether the computer
applications of its significant payors and contract providers will be upgraded
in a timely manner. The Company has not completed this review and it is unknown
whether computer applications of contract providers and Medicare and other
payors will be year 2000 compliant. The Company has not determined the extent to
which any disruption in the billing practices of providers or the payment
practices of Medicare or other payors caused by the year 2000 issues will affect
the Company's operations. However, any such disruption in the billing or
reimbursement process could have a substantial adverse impact on Medicare or
Medicaid payments to providers and, in turn, payments to the Company. Any such
disruption could have a material adverse effect upon the Company's business,
financial condition and results of operations.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Financial Statements and supplementary data of the Company are provided
at the pages indicated in Item 14(a).
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
There has not been any change of accountants or any disagreements with
the Company's accountants on any matter of accounting practice or financial
disclosure during the reporting periods.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS
The information required by this item with respect to Directors is
incorporated by reference from the information under the caption "Election of
Directors" contained in the Company's definitive proxy statement in connection
with the solicitation of proxies for the Company's 1998 Annual Meeting of
Stockholders to be held on October 15, 1998 (the "Proxy Statement"). See "Item
4A. Executive Officers of the Company" with regard to Executive Officers.
ITEM 11. EXECUTIVE COMPENSATION
The information required by this item is incorporated by reference from
the information under the caption "Executive Compensation" contained in the
Proxy Statement.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this item is incorporated by reference from
the information under the caption "Security Ownership of Certain Beneficial
Owners and Management" contained in the Proxy Statement.
32.
<PAGE> 33
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this item is incorporated by reference from
the information under the caption "Certain Relationships and Related
Transactions" contained in the Proxy Statement.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) The following documents are filed as part of this Annual Report on Form
10-K:
1. Financial Statements: The financial statements of PMR are
included as Appendix F of this report. See Table of Contents
to Financial Statements in Appendix F.
2. Financial Statement Schedules: Schedule II - PMR Corporation
Valuation and Qualifying Accounts is included in Appendix F of
this report. See Table of Contents to Financial Statements in
Appendix F.
3. The exhibits which are filed with this Report or which are
incorporated herein by reference are set forth in the Exhibit
Index on page 33.
(b) Reports on Form 8-K:
During the fourth quarter of fiscal 1998, the Company filed the
following report on Form 8-K:
1. Report on Form 8-K dated February 19, 1998, and filed on or about
February 25, 1998, announcing the third quarter results, regulatory challenges
and the signing of a letter of intent to acquire the provider division of
American Psych Systems.
2. Report on Form 8-K dated May 12, 1998, and filed on or about May 13,
1998, announcing the Company's plan to take a special change and preliminary
estimates of fourth quarter results.
3. Report on Form 8-K dated June 9, 1998 and filed on or about June 11,
1998 announcing a preliminary resolution of the provider-based challenge and a
proposed joint venture with Stadtlander.
(c) Exhibits:
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------ ---------------------------------------------------------
<S> <C>
3.1 The Company's Restated Certificate of Incorporation,
filed with the Delaware Secretary of State on March 9,
1998.
3.2 The Company's Amended and Restated Bylaws.*
4.1 Common Stock Specimen Certificate.**
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 award to Allen Tepper (filed as
Exhibit 10.6).*
</TABLE>
33.
<PAGE> 34
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------ ---------------------------------------------------------
<S> <C>
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 Warrant dated July 9, 1997,
evidencing award to Fred Furman (filed as Exhibit
10.11).*
10.11 Restated Management Agreement dated April 11, 1997 with
Scripps Health (filed as Exhibit 10.12).*
10.12 Amendment to Restated Management Agreement dated July
15, 1998 with Scripps Health.
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 (filed as Exhibit
10.15).***
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.)*
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 Provider Agreement dated December 4, 1995, between
Tennessee Behavioral Health, Inc. and Tennessee Mental
Health Corporations, Inc.
10.20 Addendum No. 1 to Provider Agreement dated December 4,
1995, between Tennessee Behavioral Health, Inc. and
Tennessee Mental Health Cooperative, Inc.
10.21 Addendum No. 2 to Provider Agreement dated February 4,
1996, between Tennessee Behavioral Health, Inc. and
Tennessee Mental Health Cooperative, Inc.
10.22 Provider Participation Agreement dated December 1, 1995,
among Green Spring Health Services, Inc., AdvoCare, Inc.
and Tennessee Mental Health Cooperative, Inc.
10.23 Amendment to Provider Participation Agreement dated
February 13, 1996, among Green Spring Health Services,
Inc., AdvoCare of Tennessee, Inc. and Tennessee Mental
Health Cooperative, Inc.
</TABLE>
34.
<PAGE> 35
<TABLE>
<S> <C>
10.24 Subscription Agreement dated June 8, 1998, between the
Company and Stadtlander Drug Distribution Co., Inc.
10.25 Sanwa Bank California Credit Agreement dated February 2,
1996, as amended on October 31, 1996.***
21.1 List of Subsidiaries.
23.1 Consent of Ernst & Young LLP.
27.1 Financial Data Schedule.
</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).
*** Incorporated by reference to exhibits filed with the SEC in the
Company's Registration Statement on Form S-2 (Reg. No. 333-36313).
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Company has duly caused this report to be signed on its behalf
by the undersigned, thereunto duly authorized, on July 27, 1998.
PMR CORPORATION
By: /s/ Allen Tepper
-------------------------------------------
Allen Tepper
Chief Executive Officer
(Principal Executive Officer)
Pursuant to the requirements of the Securities Act of 1934, this Form 10-K has
been signed by the following persons in the capacities and on the dates
indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- --------- ----- ----
<S> <C> <C>
/s/ Allen Tepper Chairman, Chief Executive July 27, 1998
- ------------------------- Officer and Director
Allen Tepper
/s/ Susan D. Erskine Secretary, Treasurer and July 27, 1998
- ------------------------- Director
Susan D. Erskine
/s/ Daniel L. Frank President of Disease Management July 27, 1998
- ------------------------- Division and Director
Daniel L. Frank
/s/ Charles McGettigan Director July 27, 1998
- -------------------------
Charles C. McGettigan
/s/ Richard A. Niglio Director July 27, 1998
- -------------------------
Richard A. Niglio
/s/ Eugene D. Hill Director July 27, 1998
- -------------------------
Eugene D. Hill
</TABLE>
35.
<PAGE> 36
PMR Corporation
Consolidated Financial Statements
and Schedules
Years ended April 30, 1998 and 1997
<TABLE>
<CAPTION>
CONTENTS
<S> <C>
Report of Independent Auditors..........................................................................F-1
Consolidated Financial Statements
Consolidated Balance Sheets.............................................................................F-2
Consolidated Income Statements..........................................................................F-3
Consolidated Statements of Shareholders' Equity.........................................................F-4
Consolidated Statements of Cash Flows...................................................................F-5
Notes to Financial Statements...........................................................................F-6
Schedules
Schedule II - Valuation and Qualifying Accounts........................................................S-1
</TABLE>
36.
<PAGE> 37
Report of Ernst & Young LLP, 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, 1998 and 1997, and the related consolidated statements of
income, stockholders' equity and cash flows for each of the three years in the
period ended April 30, 1998. Our audits also included the financial statement
schedule listed in the index at item 14(a). These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of PMR Corporation
at April 30, 1998 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, 1998,
in conformity with generally accepted accounting principles. Also, in our
opinion, the related financial statement schedule, when considered in relation
to the basic financial statements taken as a whole, presents fairly in all
material respects the information set forth therein.
San Diego, California
June 12, 1998
except for paragraph four of Note 13, as to which the date is
July 24, 1998
F-1
<PAGE> 38
PMR Corporation
Consolidated Balance Sheets
<TABLE>
<CAPTION>
APRIL 30,
1998 1997
----------- -----------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $18,522,859 $10,048,203
Short-term investments, available for sale 20,257,045 --
Accounts receivable, net of allowance for uncollectible amounts of
$9,081,610 in 1998 and $5,081,177 in 1997 16,655,759 11,268,962
Prepaid expenses and other current assets 1,192,144 572,136
Deferred income tax benefits 4,136,000 2,464,000
----------- -----------
Total current assets 60,763,807 24,353,301
Furniture and office equipment, net of accumulated depreciation of
$1,727,040 in 1998 and $1,175,980 in 1997 3,492,449 1,263,743
Long-term receivables 2,976,918 2,360,872
Deferred income tax benefit 2,080,000 2,970,000
Other assets 1,135,880 1,501,622
----------- -----------
Total assets $70,449,054 $32,449,538
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 469,462 $ 753,660
Accrued expenses 3,534,400 981,998
Accrued compensation and employee benefits 2,178,693 2,951,867
Advances from case management agencies 1,686,477 926,712
Income taxes payable 1,074,360 1,703,000
----------- -----------
Total current liabilities 8,943,392 7,317,237
Note payable 392,024 --
Deferred rent expense 87,566 92,822
Contract settlement reserve 7,479,993 8,791,928
Commitments
Stockholders' equity:
Convertible preferred stock, $.01 par value, authorized shares - 1,000,000;
Series C - issued and outstanding shares - none in 1998 and 1997
Common Stock, $.01 par value, authorized shares - 19,000,000; issued and
outstanding shares - 6,949,650 in 1998 and 5,033,507
in 1997 69,496 50,334
Additional paid-in capital 47,959,557 12,138,569
Retained earnings 5,517,026 4,058,648
----------- -----------
Total stockholders' equity 53,546,079 16,247,551
----------- -----------
$70,449,054 $32,449,538
=========== ===========
</TABLE>
See accompanying notes.
F-2
<PAGE> 39
PMR Corporation
Consolidated Statements of Income
<TABLE>
<CAPTION>
YEAR ENDED APRIL 30,
1998 1997 1996
------------ ------------ ------------
<S> <C> <C> <C>
Revenue $ 67,523,950 $ 56,636,902 $ 36,315,921
Expenses:
Operating expenses 48,255,459 41,738,298 28,471,644
Marketing, general and administrative 9,186,401 6,034,960 4,018,685
Provision for bad debts 5,148,580 3,084,166 1,447,983
Depreciation and amortization 1,064,873 700,734 595,896
Special charge 2,582,896 -- --
Interest (income) expense (1,186,637) (217,297) 2,174
Minority interest in loss of subsidiary -- -- (524)
------------ ------------ ------------
65,051,572 51,340,861 34,535,858
------------ ------------ ------------
Income before income taxes 2,472,378 5,296,041 1,780,063
Income tax expense 1,014,000 2,172,000 730,000
------------ ------------ ------------
Net income 1,458,378 3,124,041 1,050,063
Less dividends on:
Series C Convertible Preferred Stock -- 17,342 131,686
------------ ------------ ------------
Net income available to common stockholders $ 1,458,378 $ 3,106,699 $ 918,377
============ ============ ============
Earnings per common share
Basic $ .24 $ .66 $ .26
============ ============ ============
Diluted $ .22 $ .55 $ .23
============ ============ ============
Shares used in computing earnings per share
Basic 6,053,243 4,727,124 3,484,172
============ ============ ============
Diluted 6,695,321 5,645,947 4,470,980
============ ============ ============
</TABLE>
See accompanying notes.
F-3
<PAGE> 40
4
PMR Corporation
Consolidated Statements of Stockholders' Equity
<TABLE>
<CAPTION>
SERIES C
CONVERTIBLE
PREFERRED STOCK COMMON STOCK
--------------------------------------------------------- PAID-IN
SHARES AMOUNT SHARES AMOUNT CAPITAL
------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
Balance at April 30, 1995 700,000 $ 7,000 3,338,656 $ 33,385 $ 7,050,262
Issuance of common stock under stock
option plans -- -- 17,174 172 61,202
Issuance of common stock for
non-compete agreements and
acquisition of minority interest -- -- 197,087 1,971 1,029,279
Issuance of common stock for a note
receivable -- -- 25,000 250 118,500
Accrued interest on stockholder notes -- -- -- -- --
Dividend payable on Series C preferred
stock -- -- -- -- --
Proceeds from payment of stockholder
notes -- -- -- -- --
Net income -- -- -- -- --
------------ ------------ ------------ ------------ ------------
Balance at April 30, 1996 700,000 7,000 3,577,917 35,778 8,259,243
Issuance of common stock under stock
option plans including realization
of income tax benefit of $369,000 -- -- 96,016 960 729,189
Dividend payable on Series C preferred
stock -- -- -- -- --
Proceeds from payment of stockholder
notes -- -- -- -- --
Exercise of warrants to purchase
common stock -- -- 657,524 6,575 3,104,801
Issuance of common stock for
consulting services -- -- 2,050 21 45,336
Conversion of Series C convertible
preferred stock (700,000) (7,000) 700,000 7,000 --
Net income -- -- --
------------ ------------ ------------ ------------ ------------
Balance at April 30, 1997 -- -- 5,033,507 50,334 12,138,569
Issuance of common stock under stock
option plans including realization
of income tax benefit of $1,687,355 -- -- 226,143 2,262 2,717,694
Issuance of common stock in secondary
offering, net of offering costs of
$637,556 -- -- 1,690,000 16,900 33,103,294
Net income -- -- -- -- --
------------ ------------ ------------ ------------ ------------
Balance at April 30, 1998 -- $ -- 6,949,650 $ 69,496 $ 47,959,557
============ ============ ============ ============ ============
</TABLE>
<TABLE>
<CAPTION>
NOTES RECEIVABLE TOTAL
FROM RETAINED STOCKHOLDERS'
STOCKHOLDERS EARNINGS EQUITY
------------ ------------ ------------
<S> <C> <C> <C>
Balance at April 30, 1995 $ (62,626) $ 33,572 $ 7,061,593
Issuance of common stock under stock
option plans 1,184 -- 62,558
Issuance of common stock for
non-compete agreements and
acquisition of minority interest -- -- 1,031,250
Issuance of common stock for a note
receivable (118,750) -- --
Accrued interest on stockholder notes (4,507) -- (4,507)
Dividend payable on Series C preferred
stock -- (131,686) (131,686)
Proceeds from payment of stockholder
notes 43,152 -- 43,152
Net income -- 1,050,063 1,050,063
------------ ------------ ------------
Balance at April 30, 1996 (141,547) 951,949 9,112,423
Issuance of common stock under stock
option plans including realization
of income tax benefit of $369,000 -- -- 730,149
Dividend payable on Series C preferred
stock -- (17,342) (17,342)
Proceeds from payment of stockholder
notes 141,547 -- 141,547
Exercise of warrants to purchase
common stock -- -- 3,111,376
Issuance of common stock for
consulting services -- -- 45,357
Conversion of Series C convertible
preferred stock -- -- --
Net income -- 3,124,041 3,124,041
------------ ------------ ------------
Balance at April 30, 1997 -- 4,058,648 16,247,551
Issuance of common stock under stock
option plans including realization
of income tax benefit of $1,687,355 -- -- 2,719,956
Issuance of common stock in secondary
offering, net of offering costs of
$637,556 -- -- 33,120,194
Net income -- 1,458,378 1,458,378
------------ ------------ ------------
Balance at April 30, 1998 $ -- $ 5,517,026 $ 53,546,079
============ ============ ============
</TABLE>
See accompanying notes.
F-4
<PAGE> 41
PMR Corporation
Consolidated Statements of Cash Flows
<TABLE>
<CAPTION>
YEARS ENDED APRIL 30,
1998 1997 1996
------------ ------------ ------------
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net income $ 1,458,378 $ 3,124,041 $ 1,050,063
Adjustments to reconcile net income to net cash provided by
(used in) operating activities:
Special charge 2,582,896 -- --
Depreciation and amortization 1,064,873 700,734 595,896
Issuance of stock for consulting services -- 45,357 --
Provision for bad debts 5,148,580 3,084,166 1,447,983
Accrued interest income on notes receivable from
stockholders -- -- (4,507)
Deferred income taxes (782,000) (3,834,000) (841,000)
Minority interest in loss of joint venture -- -- (524)
Changes in operating assets and liabilities:
Accounts and notes receivable (11,151,423) (4,980,050) (3,778,660)
Refundable income tax -- -- 817,165
Prepaid expenses and other assets (620,008) (250,630) (88,487)
Accounts payable and accrued expenses (404,697) 212,937 474,124
Accrued compensation and employee benefits (773,174) 675,058 1,415,780
Advances from case management agencies 759,765 (86,135) 1,012,847
Other liabilities -- (127,213) (205,034)
Contract settlement reserve (1,311,935) 3,292,908 1,975,797
Income taxes payable 1,058,715 1,394,511 308,489
Deferred rent expense (5,256) (56,709) (60,331)
------------ ------------ ------------
Net cash (used in) provided by operating activities (2,975,286) 3,194,975 4,119,601
INVESTING ACTIVITIES
Purchases of short-term investments, available-for-sale (20,257,045) -- --
Purchases of furniture and office equipment (2,927,837) (958,685) (179,281)
Acquisition of Twin Town minority interest -- -- (185,000)
------------ ------------ ------------
Net cash used in investing activities (23,184,882) (958,685) (364,281)
FINANCING ACTIVITIES
Proceeds from secondary offering, net of offering costs 33,120,194 -- --
Proceeds from sale of common stock and notes receivable from
stockholders 1,032,601 3,983,072 105,710
Proceeds from note payable to bank 517,397 -- 800,000
Payments on note payable to bank (35,368) -- (2,000,000)
Cash dividend paid -- (89,081) (125,484)
------------ ------------ ------------
Net cash provided by (used in) financing activities 34,634,824 3,893,991 (1,219,774)
------------ ------------ ------------
Net increase (decrease) in cash 8,474,656 6,130,281 2,535,546
Cash at beginning of year 10,048,203 3,917,922 1,382,376
------------ ------------ ------------
Cash at end of year $ 18,522,859 $ 10,048,203 $ 3,917,922
============ ============ ============
SUPPLEMENTAL INFORMATION:
Taxes paid $ 1,330,725 $ 4,611,489 $ 380,735
============ ============ ============
Interest paid $ 20,936 $ 17,612 $ 129,108
============ ============ ============
</TABLE>
See accompanying notes.
F-5
<PAGE> 42
PMR Corporation
Notes to Consolidated Financial Statements
April 30, 1998
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION, BUSINESS AND PRINCIPLES OF CONSOLIDATION
PMR Corporation ("the Company") develops, manages and markets acute outpatient
psychiatric programs, psychiatric case management programs and substance abuse
treatment programs. The Company operates in the healthcare industry segment. The
consolidated financial statements include the accounts of the Company and its
wholly owned subsidiaries, Psychiatric Management Resources, Inc., Collaborative
Care Corporation, PMR-CD, Inc., Aldine - CD, Inc. and Twin Town Outpatient.
LEGISLATION, REGULATIONS AND MARKET CONDITIONS
The Company is subject to extensive federal, state and local government
regulation relating to licensure, conduct of operations, ownership of
facilities, expansion of facilities and services and reimbursement for services.
As such, in the ordinary course of business, the Company's operations are
continuously subject to state and federal regulator scrutiny, supervision and
control. Such regulatory scrutiny often includes inquires, investigations,
examinations, audits, site visits and surveys, come of which may be non-routine.
The Company believes that it is in substantial compliance with the applicable
laws and regulations. However, if the Company is ever found to have engaged in
improper practices, it could be subjected to civil, administrative or criminal
fines, penalties or restitutionary relief.
CASH AND CASH EQUIVALENTS
Cash and cash equivalents consist of highly liquid investments with maturities,
when acquired, of three months or less. Investments with original maturities of
three months or less that were classified as cash equivalents totaled $7,816,828
and $58,342 as of April 30, 1998 and 1997, respectively.
SHORT-TERM INVESTMENTS
Marketable equity securities and debt securities are classified as
available-for-sale. Available-for-sale securities are carried at fair value with
unrealized gains and losses reported in a separate component of stockholders'
equity. The costs of debt securities in this category is adjusted for
amortization of premiums and accretion of discounts to maturity. Such
amortization along with realized gains and losses, interest and dividends are
included in interest income. The cost of securities sold is based on the
specific identification method.
F-6
<PAGE> 43
PMR Corporation
Notes to Consolidated Financial Statements (continued)
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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 $10,258,000 at
April 30, 1998, 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, net of allowance at April 30, 1998, 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, 1998 was $709,932, $344,254 and
$320,212, respectively.
OTHER ASSETS
Other assets are comprised of the following at April 30:
<TABLE>
<CAPTION>
1998 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 1,243,907 878,165
---------- ----------
$1,135,880 $1,501,622
========== ==========
</TABLE>
F-7
<PAGE> 44
PMR Corporation
Notes to Consolidated Financial Statements (continued)
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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
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 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 the
entity. The Company has adopted SFAS No. 128 in the third fiscal quarter ending
January 31, 1998 and has calculated its earnings per share in accordance with
SFAS No. 128 for all periods presented. As required by SFAS 128, all prior
periods presented have been restated.
The following table sets forth the computation of basic and diluted earnings per
share (in thousands, except per share amounts):
<TABLE>
<CAPTION>
YEARS ENDED APRIL 30,
--------------------------------------------
1998 1997 1996
---------- ---------- ----------
<S> <C> <C> <C>
Numerator:
Net income available to common stockholders $1,458,378 $3,106,699 $ 918,377
Preferred stock dividends -- 17,342 131,686
========== ========== ==========
Net income available to common stockholders after
assumed conversion of preferred stock $1,458,378 $3,124,041 $1,050,063
========== ========== ==========
Denominator:
Weighted average shares outstanding for basic
earning per share 6,053,243 4,727,124 3,484,172
---------- ---------- ----------
Effects of dilutive securities:
Employee stock options 596,008 707,368 158,317
Warrants 46,070 119,825 128,491
Convertible preferred stock -- 91,630 700,000
---------- ---------- ----------
Dilutive potential common shares 642,078 918,823 986,808
Shares used in computing diluted net income per
common share 6,695,321 5,645,947 4,470,980
========== ========== ==========
Earnings per common share, basic $ .24 $ .66 $ .26
========== ========== ==========
Earnings per common share, diluted $ .22 $ .55 $ .23
========== ========== ==========
</TABLE>
F-8
<PAGE> 45
PMR Corporation
Notes to Consolidated Financial Statements (continued)
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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 its agreements, the Company receives a monthly
case rate payment from the managed care consortium responsible for managing the
TennCare program, and is responsible for planning, coordinating and managing
psychiatric case management to residents of Tennessee who are eligible to
participate in the TennCare program using the proprietary treatment programs
developed by the Company. The Company is also responsible for providing the
related clinical care under the agreements. The Company has signed six-year
contracts with two case management agencies to provide the clinical network
necessary for the Company to meet its obligations under the TennCare program.
Revenue under this program was approximately $14,607,000, $13,429,000, and
$7,600,000 for the years ended April 30, 1998, 1997 and 1996, respectively.
The Company also operates chemical dependency rehabilitation programs. Revenue
from these programs for the years ended April 30, 1998, 1997 and 1996 was
$2,828,000, $1,673,000 and $1,898,000, 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 management contracts, the
Company is obligated under warranty provisions to indemnify the Providers for
all or some portions of the Company's management fees that may be disallowed as
reimbursable to the Providers by Medicare's fiscal intermediaries. The Company
has recorded contract settlement reserves
F-9
<PAGE> 46
PMR Corporation
Notes to Consolidated Financial Statements (continued)
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
to provide for possible amounts ultimately owed to its Providers resulting from
disallowance of costs by Medicare and Medicare cost report settlement
adjustments. Such reserve is classified as a non-current liability as ultimate
resolution of substantially all of these issues is not expected to occur during
fiscal 1999.
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.
STOCK OPTIONS
Financial Accounting Standards Board Statement No. 123, Accounting for
Stock-Based Compensation (SFAS No. 123), establishes the use of the fair value
based method of accounting for stock-based compensation arrangements, under
which compensation cost is determined using the fair value of stock-based
compensation determined as of the grant date, and is recognized over the periods
in which the related services are rendered. In accordance with the provisions of
SFAS No. 123, the Company has elected to follow Accounting Principles Board
Opinion No. 25, Accounting for Stock Issued to Employees (APB 25) and related
Interpretations in accounting for its employee stock options. Under APB 25, when
the purchase price of restricted stock or the exercise price of the Company's
employee stock options equals or exceeds the fair value of the underlying stock
on the date of issuance or grant, no compensation expense is recognized. In
accordance with SFAS No. 123, the Company will present pro forma disclosures of
net income and earnings per share as if SFAS No. 123 had been applied.
LONG-LIVED ASSETS
Effective May 1, 1996, the Company 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 (SFAS No. 121) which 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
F-10
<PAGE> 47
PMR Corporation
Notes to Consolidated Financial Statements (continued)
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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 Company has recognized all known material impairment losses
on long-lived assets used in operations.
RECENTLY ISSUED ACCOUNTING STANDARDS
In June 1997, the Financial Accounting Standards Board issued SFAS 130,
Reporting Comprehensive Income and SFAS 131, Segment Information. Both of these
standards are effective for the fiscal years beginning after December 15, 1997.
SFAS 130 requires that all components of comprehensive income, including net
income, be reported in the financial statements in the period in which they are
recognized. SFAS 131 amends the requirements for public enterprise to report
financial and descriptive information about its reportable operating segments.
The Company currently operates in one business and three operating segments. The
adoption of this standard will require the Company to disclose additional
financial and descriptive information about the operating segments.
In April 1998, the Accounting Standards Executive Committee issued Statement of
Position 98-5 Reporting on Costs of Start-Up Activities, (SOP 98-5) which is
effective for fiscal years beginning after December 15, 1998. SOP 98-5 requires
costs of start-up activities and organization costs to be expensed as incurred.
In addition, all start-up costs and organization costs previously capitalized
must be written off. Initial application of this SOP 98-5 will be reported as
the cumulative effect of a change in accounting principle. The Company plans to
adopt this change in accounting principle in the first quarter of fiscal 1999,
and anticipates writing off approximately $1,000,000 in previously capitalized
start-up costs.
RECLASSIFICATION
Certain classifications of accounts in the prior year have been reclassified to
reflect current year classifications.
F-11
<PAGE> 48
PMR Corporation
Notes to Consolidated Financial Statements (continued)
2. OTHER AFFILIATIONS
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. INVESTMENTS
At April 30, 1998, the fair market value of the marketable securities
approximates cost. The following is a summary of available-for-sale securities:
<TABLE>
<CAPTION>
APRIL 30, 1998
--------------
<S> <C>
U.S. government securities $16,752,478
U. S. corporate securities 2,005,187
Commercial paper 1,000,000
Certificate of Deposit 499,380
-----------
Total debt securities $20,257,045
===========
</TABLE>
At April 30, 1998, all short-term investments mature in one year or less.
4. LONG-TERM RECEIVABLES
Long-term receivables at April 30, 1998 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.
F-12
<PAGE> 49
PMR Corporation
Notes to Consolidated Financial Statements (continued)
5. PROPERTY AND EQUIPMENT
Property and equipment consisted of the following at April 30:
<TABLE>
<CAPTION>
1998 1997
----------- ------------
<S> <C> <C>
Furniture and fixtures $ 1,975,766 $ 847,863
Leasehold improvements 1,133,641 532,966
Software 365,625 54,987
Start-up costs 1,744,457 1,003,907
----------- -----------
5,219,489 2,439,723
Accumulated depreciation (1,727,040) (1,175,980)
----------- -----------
$ 3,492,449 $ 1,263,743
=========== ===========
</TABLE>
6. LINE OF CREDIT
The Company has a credit agreement with a bank that permits borrowings of 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. The credit agreement expires
on August 30, 1999 and is collateralized by substantially all of the Company's
assets. Interest on borrowings is payable monthly at either the Bank's reference
rate or at the Bank's Eurodollar rate plus 2%. There were no borrowings
outstanding at April 30, 1998.
EQUIPMENT LINE OF CREDIT
The Company has a credit agreement with a bank that permits borrowings for the
purchase of equipment for up to $3,000,000. The credit agreement expires on
September 30, 1998, and is collateralized by the assets acquired with the
proceeds from the loan. Interest at 8.36% and principle payments on borrowings
are payable monthly over five years from the time of purchase. There was
$482,028 outstanding under this credit agreement at April 30, 1998.
7. STOCKHOLDERS' EQUITY
In June 1996, the Company called for redemption of 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.
F-13
<PAGE> 50
PMR Corporation
Notes to Consolidated Financial Statements (continued)
8. STOCK OPTIONS AND WARRANTS
During 1997, the Company amended its Employees' Incentive Stock Option Plan of
1990 which was renamed as the 1997 Equity Incentive Plan (the "1997 Plan") that
provides for the granting of options to purchase up to 2,000,000 shares of
common stock to eligible employees. Under the 1997 plan, 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 common 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
directors options to purchase 15,000 shares of the Company's common stock
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 two years in the period ended April 30, 1997 to brokers in connection with
financing transactions (see Note 8). No warrants were issued in the year ended
April 30, 1998. As of April 30, 1998, 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.
F-14
<PAGE> 51
PMR Corporation
Notes to Consolidated Financial Statements (continued)
8. STOCK OPTIONS AND WARRANTS (CONTINUED)
A summary of the Company's stock option activity and related information is as
follows:
<TABLE>
<CAPTION>
WEIGHTED-AVERAGE
SHARES EXERCISE PRICE
---------- ---------------
<S> <C> <C>
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 (96,016) 5.17
Forfeited (160,268) 8.44
---------- ---------
Outstanding April 30, 1997 1,785,606 14.72
Granted 105,000 19.78
Exercised (226,143) 4.42
Forfeited (60,855) 13.00
---------- ---------
Outstanding April 30, 1998 1,603,608 $ 10.86
========== =========
</TABLE>
At April 30, 1998 options and warrants to purchase 929,859 and 53,000 shares of
common stock, respectively, were exercisable and 899,181 shares and 165,000
shares were available for future grant under 1997 Plan and the 1992 Plan,
respectively.
The weighted-average fair value of options granted was $12.37, $15.21 and $4.48
in fiscal years 1998, 1997 and 1996, respectively.
A summary of options outstanding and exercisable as of April 30, 1998 follows:
<TABLE>
<CAPTION>
WEIGHTED-
WEIGHTED- AVERAGE WEIGHTED
OPTIONS AVERAGE REMAINING OPTIONS -AVERAGE
OUTSTANDING (IN EXERCISE PRICE EXERCISE CONTRACTUAL EXERCISABLE (IN EXERCISE
THOUSANDS) RANGE PRICE LIFE THOUSANDS) PRICE
--------------- -------------- --------- ----------- ------- ---------
<S> <C> <C> <C> <C> <C>
156,247 $2.37 - $3.50 $ 3.13 5.0 103,247 $ 3.13
595,129 $3.75 - $6.00 $ 4.38 4.2 488,262 $ 4.44
300,091 $9.75 - $11.38 $ 9.86 7.2 156,593 $ 9.90
552,141 $18.88 - $28.50 $ 20.57 7.7 181,757 $ 20.61
</TABLE>
F-15
<PAGE> 52
PMR Corporation
Notes to Consolidated Financial Statements (continued)
9. STOCK OPTIONS AND WARRANTS (CONTINUED)
Adjusted pro forma information regarding net income and net income 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 fiscal 1998, 1997 and 1996:
<TABLE>
<CAPTION>
1998 1997 1996
----- ---- ----
<S> <C> <C> <C>
Expected life (years) 5.0 6.0 6.0
Risk-free interest rate 6.34% 6.5% 6.5%
Annual dividend yield -- -- --
Volatility 69% 88% 88%
</TABLE>
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, 1998, 1997 and 1996,
follows:
<TABLE>
<CAPTION>
1998 1997 1996
------- ------------- ----------
<S> <C> <C> <C>
Pro forma net income (in thousands) $24,335 $ 1,967,939 $ 98,037
Pro forma earnings per share, basic $ -- $ .34 $ .02
Pro forma earnings per share, diluted $ -- $ .34 $ .02
</TABLE>
10. INCOME TAXES
Income tax expense (benefit) consists of the following:
<TABLE>
<CAPTION>
YEAR ENDED APRIL 30
1998 1997 1996
----------- ----------- -----------
<S> <C> <C> <C>
Federal:
Current $ 1,404,000 $ 4,868,000 $ 1,220,000
Deferred (612,000) (3,009,000) (685,000)
----------- ----------- -----------
792,000 1,859,000 535,000
State:
Current 392,000 1,138,000 351,000
Deferred (170,000) (825,000) (156,000)
----------- ----------- -----------
222,000 313,000 195,000
----------- ----------- -----------
$ 1,014,000 $ 2,172,000 $ 730,000
=========== =========== ===========
</TABLE>
F-16
<PAGE> 53
PMR Corporation
Notes to Consolidated Financial Statements (continued)
10. INCOME TAXES (CONTINUED)
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>
APRIL 30,
1998 1997
---------- ----------
<S> <C> <C>
Deferred tax assets:
Contract settlement reserve $3,048,000 $3,609,000
Accrued compensation and employee benefits 405,000 531,000
Allowance for bad debts 3,704,000 1,979,000
State income taxes 55,000 280,000
Depreciation and amortization 254,000 163,000
Special Charge 885,000 --
Other 179,000 159,000
---------- ----------
Total deferred tax assets 8,530,000 6,721,000
Deferred tax liabilities:
Non-accrual experience method 913,000 326,000
Contractual retainers 1,401,000 961,000
---------- ----------
Total deferred tax liabilities 2,314,000 1,287,000
---------- ----------
Net deferred tax assets $6,216,000 $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,
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Statutory federal income tax rate 35% 35% 34%
State income taxes, net of federal tax benefit 6 6 7
-- -- --
Effective income tax rate 41% 41% 41%
== == ==
</TABLE>
F-17
<PAGE> 54
PMR Corporation
Notes to Consolidated Financial Statements (continued)
11. 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 1998 1997 1996
-------- ---- ---- ----
<S> <C> <C> <C>
A 22% 23% 21%
B 14 13 11
</TABLE>
12. 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 years
ended April 30, 1998, 1997 and 1996, the Company contributed $265,000, $186,000
and, $138,000, respectively, to match employee deferrals.
13. COMMITMENTS AND CONTINGENCIES
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, 1998 are as follows: 1999 - $3,000,348; 2000 - $2,029,999; 2001 -
$1,540,147; 2002 - $887,277 and 2003 - $162,009.
Rent expense totaled $3,140,000, $2,690,800 and $1,950,000 for the years ended
April 30, 1998, 1997 and 1996, respectively.
F-18
<PAGE> 55
PMR Corporation
Notes to Consolidated Financial Statements (continued)
13. COMMITMENTS AND CONTINGENCIES (CONTINUED)
LITIGATION
The Company is a party to various legal proceedings arising in the normal course
of business. In management's opinion, except as otherwise noted below, the
outcome of these proceedings will not have a material adverse effect on the
Company's consolidated financial position, results of operations or cash flows.
In February 1998, the Company announced that the outpatient program that it
formerly managed in Dallas, Texas is subject to a civil investigation being
conducted by the U.S. Department of Health and Human Services' Office of
Inspector General and the U.S. Attorney's office in Dallas, Texas (collectively,
the "Agencies"). The investigation is a result of a Health Care Financing
Administration (""HCFA") review of partial hospitalization services rendered to
63 patients at this location. The Dallas program was operational from January
1996 to February 6, 1998. A representative of the Agencies has indicated that
the investigation is civil in nature and focuses on eligibility of patients for
partial hospitalization services. The eligibility determinations for
participation at the Dallas program were made by board certified or board
eligible psychiatrists. The Company is cooperating fully with the Agencies and,
to date, no formal complaint or demand has been made by the Agencies.
On July 20, 1998, the Company was informed that a qui tam suit had been filed
against a subsidiary of the Company. The suit alleges a broad range of improper
conduct relating to the quality of services furnished by the Company, the
medical necessity of such services furnished by the Company and by physicians
who admit patients to the program managed by the Company, and other matters. The
suit was filed by a former employee who previously had filed a separate action
for wrongful termination. The Company prevailed in that wrongful termination
case when the court dismissed the case granting the Company's motion for summary
judgment. Notwithstanding the similarity between the allegations in the wrongful
termination case and the qui tam case, the Company cannot give any assurances
with respect to the ultimate outcome of the qui tam case or its effect on the
Company's business, financial condition or results of operations. Under the
False Claims Act, the Department of Justice must inform the court whether it
will intervene and take control of the qui tam suit. In this case, the
Department of Justice has not yet made that decision, but rather is conducting
an investigation. The Company has met with the Assistant United States Attorney
who is coordinating the government's investigation of this case, and the Company
has agreed to furnish certain documentation to the government.
Due to the preliminary nature of these investigations, the Company is unable to
predict the ultimate outcome of the investigations, or the material impact, if
any, on the Company's business, financial condition or results of operations.
14. SPECIAL CHARGE
During the fourth quarter of fiscal 1998, the Company recorded a special charge
of $4,991,588. The charge resulted from management's decision to close ten
program locations in the Mid-America Region, and costs to be incurred in
connection with noncancelable operating commitments resulting from the HCFA
withdrawal of provider status for the Company's largest partial hospitalization
program.
The components of the impairment and exit costs resulting from closing program
locations consist of severance, noncancelable facility lease commitments,
related legal costs, write-off of furniture and office equipment and intangible
assets, other related costs, and additional allowances or uncollectible accounts
due to anticipated difficulties associated with collection of receivables from
closed locations.
F-19
<PAGE> 56
PMR Corporation
Notes to Consolidated Financial Statements (continued)
14. SPECIAL CHARGE (CONTINUED)
In February 1998, HCFA notified Scripps Health that the "provider based" status
of its programs would be withdrawn on March 1, 1998. As a result of the notice
of withdrawal of the provider based status, the Company recorded a charge for
the costs to be incurred by the Company under the noncancelable operating
commitment provision of its management contract with Scripps Health. Subsequent
to the withdrawal, HCFA granted an extension to the program through April 15,
1998 and in June 1998, granted an additional extension of provider based status
to July 15, 1998 in order for Scripps Health and the Company to implement
certain agreed upon changes. However, there is no assurance that Scripps Health
and the Company will be able to implement the agreed upon changes required by
HCFA or that HCFA will grant additional extensions.
Following is a summary of the components of the special charge by income
statement line item:
<TABLE>
<S> <C>
Provision for bad debts $2,408,692
Special charge:
Location closure related costs 1,402,896
Contract losses 1,180,000
----------
2,582,896
----------
$4,991,588
==========
</TABLE>
At April 30, 1998, special charges totaling $2,229,741 are included in accrued
liabilities in the consolidated balance sheet.
15. SUBSEQUENT EVENT
On June 10, 1998, the Company signed a subscription agreement with Stadtlander
Drug Distribution Co., Inc. to form a new disease management company to provide
pharmaceutical care for individuals with serious mental illness. The joint
venture is expected to begin operations in July 1998.
F-20
<PAGE> 57
Schedule II
PMR Corporation
Valuation and Qualifying Accounts
<TABLE>
<CAPTION>
- ------------------------------------------------- ---------------- ----------------- -------------------- ----------------
COL. A COL. B COL. C COL. D COL. E
- ------------------------------------------------- ---------------- ----------------- -------------------- ----------------
ADDITIONS
-----------------
DESCRIPTION BALANCE AT CHARGED TO BALANCE AT END
BEGINNING OF COSTS AND DEDUCTIONS - OF PERIOD
PERIOD EXPENSES DESCRIBE
- ------------------------------------------------- ---------------- ----------------- -------------------- ----------------
<S> <C> <C> <C> <C> <C>
Year ended April 30, 1998
Allowance for doubtful accounts $5,081,177 $5,148,580 $ 1,148,147 (1) $ 9,081,610
Contract settlement reserve $8,791,928 $2,349,382 $ 3,661,317 (2) $ 7,479,993
Year ended April 30, 1997
Allowance for doubtful accounts $1,759,182 $3,084,166 $ (237,829) (1) $ 5,081,177
Contract settlement reserve $5,499,020 $3,927,371 $ 634,463 (2) $ 8,791,928
Year ended April 30, 1996
Allowance for doubtful accounts $1,423,054 $1,447,983 $ 1,111,855 (1) $ 1,759,182
Contract settlement reserve $3,523,223 $2,390,196 $ 414,399 (2) $ 5,499,020
</TABLE>
(1) Uncollectible accounts written off, net of recoveries
(2) Write off of hospital receivables based on disallowance of the
Company's management fee on Provider's cost reimbursement report and
the Company's indemnity obligation
S-1
<PAGE> 1
EXHIBIT 13.2
1 9 9 8
A N N U A L
R E P O R T
[PMR LOGO]
I N N O V A T I N G S O L U T I O N S
F O R T H E
M A N A G E M E N T & T R E A T M E N T
O F S E R I O U S M E N T A L I L L N E S S
1
<PAGE> 2
SELECTED FINANCIAL DATA
- --------------------------------------------------------------------------------
(in thousands, except per share amounts)
<TABLE>
<CAPTION>
FOR THE YEAR ENDED APRIL 30
1998 1997 1996 1995 1994
<S> <C> <C> <C> <C> <C>
INCOME STATEMENT INFORMATION
Revenues $ 67,524 $ 56,637 $ 36,315 $ 21,747 $ 22,786
Net Income (loss) 1,458 3,107 918 (2,352) 825
Net Income (loss) per share
Basic .24 .66 .26 (.71) .25
Diluted .22 .55 .23 (.71) .25
Weighted Shares Outstanding
Basic 6,053 4,727 3,484 3,336 3,228
Diluted 6,695 5,646 4,471 3,336 3,347
BALANCE SHEET INFORMATION
Working Capital $ 51,820 $ 17,036 $ 10,911 $ 8,790 $ 7,705
Total Assets 70,449 32,450 21,182 14,811 13,671
Long Term Debt 392 0 0 126 320
Total Liabilities 16,903 16,202 12,070 7,749 5,972
Stockholders' Equity 53,546 16,248 9,112 7,062 7,699
</TABLE>
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
QUARTERS FOR THE YEAR ENDED APRIL 1998 QUARTERS FOR THE YEAR ENDED APRIL 1997
7/31/97 10/31/97 1/31/98 4/30/98 7/31/96 10/31/96 1/31/96 4/30/97
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues 16,177 17,561 16,522 17,264 13,028 14,293 14,190 15,126
Net Income (loss) 970 1,162 1,327 (2,001) 583 799 831 894
Net Income (loss) per share
Basic .19 .22 .19 (.29) .14 .16 .17 .19
Diluted .17 .19 .18 (.29) .12 .14 .14 .15
</TABLE>
2
<PAGE> 3
THE COMPANY AND ITS MISSION
- --------------------------------------------------------------------------------
PMR Corporation ("PMR" or the "Company") is a leader in the development
and management of programs for individuals that have been diagnosed with a
serious mental illness ("SMI"). These diseases, which are chronic and life-long,
are primarily schizophrenia and bi-polar disorder, and afflict approximately
2.8% of the general population. The Company's clinical philosophy is based on
the belief that the best outcomes and lowest costs result from optimization of
medical resources, both inpatient and outpatient, in a community based setting.
PMR believes that it is the leading manager of outpatient programs to the SMI
population and the only publicly held company dedicated to serving individuals
diagnosed with these diseases.
PMR's mission is to foster the recovery of individuals from the
devastating effects of serious mental illness and chemical dependency and to
deliver cost effective treatment and rehabilitation services which limit
hospitalization, afford significant relief from symptoms and contribute to
better quality health care in the communities within which the Company operates.
THE COST AND CHARACTERISTICS OF SERIOUS MENTAL ILLNESS
According to the National Institute for Mental Health, in 1995 SMI
afflicted approximately 5.6 million people, consumed $27 billion in direct
medical costs and more than $74 billion in total costs, including estimates of
lost productivity. This chronic disease category represents more than 25% of all
mental health costs and is one of the most expensive segments of health care on
a per patient basis. Despite these startling statistics, the treatment and
management of the SMI has attracted very limited participation from the private
sector in general, and managed care in particular.
Schizophrenia is the primary diagnosis among the Company's patient
population, representing slightly more than two-thirds of the individuals we
have served. Schizophrenia afflicts approximately 1% of the general population.
The disease generally strikes between the ages of 18 and 25 and is characterized
by disordered thinking, social withdrawal, hallucinations and severe delusions.
Although research is extremely active and several new drug therapies have
recently been introduced, the cause of the disease remains unknown and the
prognosis for those diagnosed is lifelong, chronic illness.
For the patient, the economic consequences of these diseases are often
disability and indigence. As a result, the payers of health care for the SMI
population are public sector programs, primarily Medicare and Medicaid. The
Company has designed a range of outpatient, community based programs, which
offer cost effective alternatives to inpatient care for these public sector
payers.
[MAP]
3
<PAGE> 4
ANNUAL LETTER TO STOCKHOLDERS
- --------------------------------------------------------------------------------
"...PMR REPORTED RECORD REVENUE OF $67.5
MILLION, UP 19.2% FROM REVENUES OF $56.6
MILLION IN FISCAL 1997. NET INCOME ...WAS...UP
41.0% FROM FISCAL 1997..."
I am pleased to share with you the events and results of our fiscal year
ended April 30, 1998 and our vision for PMR CORPORATION for the years ahead.
PMR reported record revenue of $67.5 million, up 19.2% from revenues of
$56.6 million in fiscal 1997. Net income for the fiscal year ended April 30,
1998 before the incurrance of a special charge in the fourth quarter was $4.4
million or $.66 per share, up 41.0% from fiscal 1997. Net income after the
charge was $1.5 million, or $.22 per share, a decrease of 53.3% from $3.1
million or $.55 per share in fiscal 1997.
This past year we created five initiatives which should fuel growth in
fiscal 1999 and beyond. First, we introduced a low-acuity outpatient service
throughout all of our hospital based programs. This program was very successful
and now represents nearly 40% of patients in service. It also represents a
service which will fit well with future managed care products. Second, we
established a strategic relationship with Insite Clinical Trials, Inc. for the
training of research staff and marketing for our clinical research effort. The
Company now has an expanding network of research ready sites and has recently
been awarded its first research projects. Third, through a venture with
Stadtlanders Pharmacies, we are in the process of establishing the first
specialty pharmaceutical disease management company for patients with a serious
mental illness through the formation of Stadt Solutions LLC. Stadtlanders is a
leader in specialty pharmaceutical services for several chronic medical
conditions. PMR will hold a majority interest in the new company, which will
initially serve approximately 6,000 patients. This patient population generated
annual revenue for Stadtlanders in excess of $30 million during the past year.
Fourth, we restructured our outpatient program network to prepare for the HCFA's
new prospective payment system. The Company closed several programs in primarily
small, non-urban markets where the shift from a cost based system is likely to
produce substantially less favorable economics for the Company's programs.
Lastly, we created a new program in Tennessee to manage all admissions to
hospitals in Nashville under the TennCare program for the major managed care
company in the state. This has been a very successful effort to create the
optimum use of mental health services, improving our profitability, providing
savings to the system and best use of services for the patient.
We are also pleased that we completed negotiations with our customer,
Scripps Health, in resolving the "provider based" regulatory challenges at our
San Diego based programs.
This was an extraordinary year for our industry. National events and
political policies sent shock waves through the industry, creating interesting
challenges as well as opportunities for us. Two major events occurred on the
national scene this year. First, there were several high profile criminal acts
involving individuals with schizophrenia that drew attention to the risks
associated with the disease as well as the plight of these individuals. Whether
it was the "unabomber," the "DuPont heir," the "Yale graduate," or the "Capitol
Hill shooter," the story was basically the same - a violent act involving an
individual with schizophrenia that was not receiving a comprehensive treatment
regimen; cries from advocacy groups, family members and health care providers
for more and better treatment programs that help individuals with a Serious
Mental Illness; and political and national policy rhetoric, but unfortunately,
inaction. Our nation's political leaders talk as if they understand that there
is a
4
<PAGE> 5
- --------------------------------------------------------------------------------
"...WHETHER IT WAS THE "UNABOMBER" ... OR THE
"CAPITOL HILL SHOOTER," THE STORY WAS BASICALLY
THE SAME - A VIOLENT ACT INVOLVING AN
INDIVIDUAL WITH SCHIZOPHRENIA THAT WAS NOT
RECEIVING A COMPREHENSIVE TREATMENT REGIMEN..."
serious problem for those afflicted with serious mental illness, but they
haven't found the national resolve to do something about it. A key mission for
us in the future will be to educate our political constituencies as to the needs
of those with a serious mental illness, and achieve political victories that
result in an improved funding environment for these disorders.
At the same time these events were occurring, we did find the national
resolve to attempt to reduce health care expenditures by focusing resources on
tightening regulations for health services providers. We believe that regulation
is essential to the creation of effective treatment programs within budgetary
constraints. We also believe that regulation must be rational and in step with
the needs of the patient. Unfortunately, the regulatory bodies are having a
difficult time devising clear effective rules that promote the effective
treatment and welfare of individuals with a Serious Mental Illness. We are
active in the movement to help regulators understand these needs and broaden
regulations to permit these individuals to recover.
These events as well as our strategic initiatives have set the stage for
a major broadening of our strategic mission. Our objective is to create an
organization that will have the size and substance to become the company that
defines how individuals with disorders of the brain are treated. The next step
in this process is the completion of our recently announced acquisition of
Behavioral Healthcare Corporation, a provider of acute mental health services
through forty-three facilities in eighteen states and Puerto Rico. Upon the
completion of this transaction we intend to change our name to BRAGEN HEALTH
SOLUTIONS, INC. Bragen is the Germanic derivation of "brain" and symbolizes our
objective of expanding our focus to the treatment and management of all
disorders of the brain.
Based on the Company's and Behavioral Healthcare Corporation's current
revenue figures, the Company will have anticipated combined revenues approaching
$400 million and anticipated EBITDA in excess of $30 million. We will be
geographically diverse serving clients in 32 states in over 100 locations with a
wide breadth of services. By combining these organizations we have created the
platform to manage and treat all diagnostic categories of disorders of the brain
throughout the complete continuum of care.
As we prepare to move into the next century we are convinced that we do
so with a bold purpose and the organization, talent and service mix to
accomplish our objectives. My sincere thanks go to our employees and
stockholders for their loyal support over the last year.
Thank you,
/s/ ALLEN TEPPER
ALLEN TEPPER,
CHAIRMAN OF THE BOARD
CHIEF EXECUTIVE OFFICER
AUGUST 6, 1998
5
<PAGE> 6
PMR PROGRAMS AND SERVICES
- --------------------------------------------------------------------------------
At this time, PMR offers four primary types of programs. Upon formation
of Stadt Solutions, LLC, PMR will operate fourteen pharmacies and forty-three
programs under management agreements with leading hospitals and community mental
health centers ("CMHCs") in twenty-three states.
OUTPATIENT PSYCHIATRIC PROGRAMS
The Company's Outpatient programs for SMI are designed for individuals
in crisis or recovering from crisis. The Company offers a partial
hospitalization program, which is designed to divert or shorten a hospital stay
and stabilize a patient in crisis. For post-crisis events, the Company offers a
structured outpatient program which includes a continuum of step-down and
maintenance programs to achieve recovery and prevent future relapse.
The Outpatient programs benefit hospital and CMHC clients clinically and
economically. Clinically, PMR delivers a "state of the art" program which has
had the benefit of ten years of development and refinement and the experience of
real world testing from thousands of patients and hundreds of referring
physicians. Economically, PMR offers a management structure which limits
financial risk for the client hospital or CMHC and delivers an attractive
contribution to their operating statements. Every day, more than 1,800
individuals are treated in our nationwide network of programs and more than
15,000 individuals have been treated since the Company opened its first program
in 1988. The Company believes that it is the largest manager of Outpatient
programs for the SMI population.
CASE MANAGEMENT PROGRAM
The Case Management program is an intensive service which consists of a
proprietary model utilizing detailed protocols for delivering and managing the
treatment and care of SMI individuals. The program is designed as a primary care
service intended to reduce the incidence of costly catastrophic events,
primarily long term hospitalizations. Case Management was originally developed
to work with community based providers such as case management agencies and
CMHCs. The Company operates two programs in conjunction with community based
providers in Tennessee and presently serves approximately 2,500 individuals. In
addition, the Company has introduced a crisis intervention program, called
Urgent Care, which applies a medical model to the highest acuity events and has
demonstrated significant reductions in acute care hospital costs.
CHEMICAL DEPENDENCY PROGRAM
The Company provides Chemical Dependency programs for treatment of
chemical dependency and substance abuse, primarily to patients of managed care
organizations in Southern California. The incidence of chemical dependency and
substance abuse among the SMI population is significant, exceeding 30% in
several markets where the Company operates.
STADT SOLUTIONS PHARMACY PROGRAM
In June 1998, the Company announced an agreement to form a new company
to be called Stadt Solutions, LLC that will be jointly owned by the Company and
Stadtlander Drug Distribution Co., Inc. Stadt Solutions will offer a specialty
pharmacy program for individuals with an SMI, initially serving approximately
6,000 individuals through fourteen pharmacies in thirteen states.
Stadt Solutions will seek to offer patients expanded services, including
dispensing of all of the pharmaceuticals needed by these individuals and
providing disease management services to improve compliance and education for
the patient, the physician and family members. The Company believes that Stadt
Solutions will be the first specialty pharmacy company devoted to serving the
needs of individuals with an SMI.
6
<PAGE> 7
COMPANY DATA
- --------------------------------------------------------------------------------
OFFICERS
Allen Tepper
Chief Executive Officer
Chairman of the Board
Fred D. Furman
President
Susan D. Erskine
Executive Vice President, Director
and Secretary
Mark P. Clein
Executive Vice President and
Chief Financial Officer
Charles E. Galetto
Senior Vice President -Finance and
Accounting, Treasurer
Daniel L. Frank
President of Disease Management
Division and Director
OUTSIDE DIRECTORS
Eugene D. Hill
General Partner for Accel Partners
Charles C. McGettigan
General Partner for
Proactive Partners, L.P.
Richard A. Niglio
Chairman and Chief Executive Officer
for Equity Enterprises, Inc.
INDEPENDENT AUDITORS
Ernst & Young
501 W. Broadway
Suite 1100
San Diego, CA 92101
Requests for Corporate Information
may be made in writing and addressed
to:
INVESTOR RELATIONS
PMR CORPORATION
501 WASHINGTON STREET
5TH FLOOR
SAN DIEGO, CA 92103
619-610-4001
7
<PAGE> 8
[PMR LOGO]
PMR CORPORATION
501 Washington Street
5th Floor
San Diego, CA 92103
619-610-4001
8
<PAGE> 1
EXHIBIT 23.1
CONSENT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
We consent to the reference to our firm under the caption "Experts" in the
Registration Statement Form S-4 and related Prospectus of PMR Corporation for
the registration of 2,663,195 shares of its common stock and to the
incorporation by reference therein of our report dated June 12, 1998, except for
paragraph four of Note 13, as which the date is July 24, 1998 with respect to
the financial statements and schedules of PMR Corporation included in its Form
10-K for the year ended April 30, 1998, filed with the Securities and Exchange
Commission and in its Annual Report to Shareholders, included as Exhibit 13.1 to
this Registration Statement.
ERNST & YOUNG LLP
San Diego, California
August 24, 1998
<PAGE> 1
EXHIBIT 23.2
CONSENT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
We consent to the reference to our firm under the caption "Experts" in the
Registration Statement Form S-4 and related Prospectus of PMR Corporation for
the registration of 2,663,195 shares of its common stock and to the inclusion
therein of our report dated August 24, 1998 with respect to the consolidated
financial statements of Behavioral Health Corporation for the year ended June
30, 1998, included in this Registration Statement.
ERNST & YOUNG LLP
Nashville, Tennessee
August 24, 1998
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> APR-30-1998
<PERIOD-START> MAY-01-1997
<PERIOD-END> APR-30-1998
<CASH> 5,000,000
<SECURITIES> 0
<RECEIVABLES> 96,247,000
<ALLOWANCES> 22,232,000
<INVENTORY> 0
<CURRENT-ASSETS> 101,712,000
<PP&E> 169,839,000
<DEPRECIATION> 0
<TOTAL-ASSETS> 303,149,000
<CURRENT-LIABILITIES> 48,301,000
<BONDS> 0
0
0
<COMMON> 95,000
<OTHER-SE> 74,423,000
<TOTAL-LIABILITY-AND-EQUITY> 303,149,000
<SALES> 0
<TOTAL-REVENUES> 381,361,000
<CGS> 0
<TOTAL-COSTS> 308,719,000
<OTHER-EXPENSES> 10,126,000
<LOSS-PROVISION> 23,613,000
<INTEREST-EXPENSE> 12,268,000
<INCOME-PRETAX> 4,830,000
<INCOME-TAX> 1,857,000
<INCOME-CONTINUING> 2,973,000
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,973,000
<EPS-PRIMARY> .31
<EPS-DILUTED> .27
</TABLE>
<PAGE> 1
EXHIBIT 99.1
PMR CORPORATION
PROXY SOLICITED BY THE BOARD OF DIRECTORS
FOR THE ANNUAL MEETING OF STOCKHOLDERS
TO BE HELD ON _______
The undersigned hereby appoints Allen Tepper and Mark P. Clein, and
each of them, as attorneys and proxies of the undersigned, with full power of
substitution, to vote all of the shares of stock of PMR Corporation which the
undersigned may be entitled to vote at the Annual Meeting of Stockholders of PMR
Corporation to be held at PMR's offices at 501 Washington Street, 5th Floor, San
Diego, California, on ________, ______ ____ 1998 at ___ o'clock a.m., local
time, and at any and all postponements, continuations and adjournments thereof,
with all powers that the undersigned would possess if personally present, upon
and in respect of the following matters and in accordance with the following
instructions, with discretionary authority as to any and all other matters that
may properly come before the meeting.
THIS PROXY, WHEN PROPERLY EXECUTED, WILL BE VOTED IN THE MANNER
DIRECTED HEREIN BY THE UNDERSIGNED STOCKHOLDER. UNLESS A CONTRARY DIRECTION IS
INDICATED, THIS PROXY WILL BE VOTED FOR PROPOSAL 1, FOR ALL NOMINEES LISTED IN
PROPOSAL 2, AND FOR PROPOSALS 3, 4 AND 5, AS MORE SPECIFICALLY DESCRIBED IN THE
PROXY STATEMENT. IF SPECIFIC INSTRUCTIONS ARE INDICATED, THIS PROXY WILL BE
VOTED IN ACCORDANCE THEREWITH.
MANAGEMENT RECOMMENDS A VOTE FOR PROPOSAL 1.
PROPOSAL 1: To approve the Merger Proposal as more specifically described in the
Prospectus/Joint Proxy Statement transmitted in connection with the Annual
Meeting including the issuance of the shares of PMR Common Stock in connection
with the Merger.
[ ] FOR [ ] AGAINST [ ] ABSTAIN
MANAGEMENT RECOMMENDS A VOTE FOR THE NOMINEES FOR DIRECTOR LISTED BELOW.
PROPOSAL 2: To elect two directors to hold office until the 2001 Annual Meeting
of Stockholders.
[ ] FOR all nominees listed below [ ] WITHHOLD AUTHORITY
(except as marked to the contrary below) to vote for all nominees
listed below.
NOMINEES: Susan D. Erskine, Richard A. Niglio.
TO WITHHOLD AUTHORITY TO VOTE FOR ANY NOMINEE(S) WRITE SUCH NOMINEE(S)' NAME(S)
BELOW:
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
MANAGEMENT RECOMMENDS A VOTE FOR PROPOSALS 3, 4 , 5 AND 6.
PROPOSAL 3: To approve an amendment to PMR's Restated Certificate of
Incorporation to change PMR's corporate name to "Bragen Health
Solutions, Inc."
[ ] FOR [ ] AGAINST [ ] ABSTAIN
(Continued on other side)
1.
<PAGE> 2
(Continued from other side)
PROPOSAL 4: To approve an amendment to PMR's 1997 Equity Incentive Plan to
increase the number of shares authorized and reserved for
issuance under the 1997 Equity Incentive Plan from 2,000,000
shares to 3,000,000 shares and to extend the termination date
of the plan to February 1, 2008.
[ ] FOR [ ] AGAINST [ ] ABSTAIN
PROPOSAL 5: To ratify the selection of Ernst & Young LLP as independent
auditors of the Company for its fiscal year ending April 30,
1999.
[ ] FOR [ ] AGAINST [ ] ABSTAIN
PROPOSAL 6: In their discretion, to act upon any matters incidental to the
foregoing and such other business as may properly come before
the Annual Meeting.
[ ] FOR [ ] AGAINST [ ] ABSTAIN
DATED
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SIGNATURE(S)
Please sign exactly as your name appears
hereon. If the stock is registered in
the names of two or more persons, each
should sign. Executors, administrators,
trustees, guardians and
attorneys-in-fact should add their
titles. If signer is a corporation,
please give full corporate name and have
a duly authorized officer sign, stating
title. If signer is a partnership,
please sign in partnership name by
authorized person.
PLEASE VOTE, DATE AND PROMPTLY RETURN THIS PROXY IN THE ENCLOSED RETURN ENVELOPE
WHICH IS POSTAGE PREPAID IF MAILED IN THE UNITED STATES.
