-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, K10iZ91ROaZyjp6X+OASXw2IFoIQGV7utcRGnif0DtwylXnslF9v0Oy0Y/YEE/nI YRCgrDoD1E3fDmdabvUsxw== 0000950142-02-000802.txt : 20020815 0000950142-02-000802.hdr.sgml : 20020815 20020815094648 ACCESSION NUMBER: 0000950142-02-000802 CONFORMED SUBMISSION TYPE: SC 13D PUBLIC DOCUMENT COUNT: 8 FILED AS OF DATE: 20020815 GROUP MEMBERS: JOSEPH P. DONLAN GROUP MEMBERS: LAWRENCE C. TUCKER GROUP MEMBERS: ROBERT R. GOULD GROUP MEMBERS: T. MICHAEL LONG GROUP MEMBERS: THE 1818 MEZZANINE FUND II, L.P. SUBJECT COMPANY: COMPANY DATA: COMPANY CONFORMED NAME: PSYCHIATRIC SOLUTIONS INC CENTRAL INDEX KEY: 0000829608 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-SPECIALTY OUTPATIENT FACILITIES, NEC [8093] IRS NUMBER: 232491707 STATE OF INCORPORATION: DE FISCAL YEAR END: 0430 FILING VALUES: FORM TYPE: SC 13D SEC ACT: 1934 Act SEC FILE NUMBER: 005-42752 FILM NUMBER: 02738973 BUSINESS ADDRESS: STREET 1: 113 SEABOARD LANE STREET 2: SUITE C-100 CITY: FRANKLIN STATE: TN ZIP: 37067 BUSINESS PHONE: 615-312-5700 MAIL ADDRESS: STREET 1: 113 SEABOARD LANE STREET 2: SUITE C-100 CITY: FRANKLIN STATE: TN ZIP: 37067 FORMER COMPANY: FORMER CONFORMED NAME: ZARON CAPITAL INC DATE OF NAME CHANGE: 19891116 FORMER COMPANY: FORMER CONFORMED NAME: PMR CORP DATE OF NAME CHANGE: 19920703 FILED BY: COMPANY DATA: COMPANY CONFORMED NAME: 1818 FUND LP BROWN BROTHERS HARRIMAN CO LONG T MICHAEL ET AL CENTRAL INDEX KEY: 0000904953 STANDARD INDUSTRIAL CLASSIFICATION: UNKNOWN SIC - 0000 [0000] STATE OF INCORPORATION: NY FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: SC 13D BUSINESS ADDRESS: STREET 1: 59 WALL STREET CITY: NEW YORK STATE: NY ZIP: 10005 BUSINESS PHONE: 212-493-7292 MAIL ADDRESS: STREET 1: 59 WALL STREET CITY: NEW YORK STATE: NY ZIP: 10005 SC 13D 1 sched13d-psychiatric.txt SCHEDULE 13D SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 Schedule 13D Under the Securities Exchange Act of 1934 (Amendment No. )* PSYCHIATRIC SOLUTIONS, INC. (Name of Issuer) Common Stock, Par Value $0.01 Per Share (Title of Class of Securities) 693451106 (Cusip Number) JOSEPH P. DONLAN Brown Brothers Harriman & Co. 59 Wall Street New York, New York 10005 (212) 493-7882 (Name, Address and Telephone Number of Person Authorized to Receive Notices and Communications) August 5, 2002 (Date of Event which Requires Filing of this Statement) If the filing person has previously filed a statement on Schedule 13G to report the acquisition which is the subject of this Schedule 13D, and is filing this schedule because of Rule 13d-1(b)(3) or (4), check the following box [ ]. *The remainder of this cover page shall be filled out for a reporting person's initial filing on this form with respect to the subject class of securities, and for any subsequent amendment containing information which would alter disclosures provided in a prior cover page. The information required on the remainder of this cover page shall not be deemed to be "filed" for the purpose of Section 18 of the Securities Exchange Act of 1934 ("Act") or otherwise subject to the liabilities of that section of the Act but shall be subject to all other provisions of the Act (however, see the Notes). 2 - -------------------------------------------------------------------------------- 1 NAME OF REPORTING PERSON: The 1818 Mezzanine Fund II, L.P. - -------------------------------------------------------------------------------- 2 CHECK THE APPROPRIATE BOX IF A MEMBER OF A GROUP: (a) [ ] (b) [X] - -------------------------------------------------------------------------------- 3 SEC USE ONLY - -------------------------------------------------------------------------------- 4 SOURCE OF FUNDS: OO - -------------------------------------------------------------------------------- 5 CHECK BOX IF DISCLOSURE OF LEGAL PROCEEDINGS IS REQUIRED [ ] PURSUANT TO ITEMS 2(d) or 2(e): - -------------------------------------------------------------------------------- 6 CITIZENSHIP OR PLACE OF ORGANIZATION: Delaware - -------------------------------------------------------------------------------- 7 SOLE VOTING POWER: 0 NUMBER OF SHARES -------------------------------------------------- BENEFICIALLY 8 SHARED VOTING POWER: 372,412* OWNED BY -------------------------------------------------- EACH 9 SOLE DISPOSITIVE POWER: 0 REPORTING PERSON -------------------------------------------------- WITH 10 SHARED DISPOSITIVE POWER: 372,412* - -------------------------------------------------------------------------------- 11 AGGREGATE AMOUNT BENEFICIALLY OWNED BY EACH REPORTING PERSON: 372,412 - -------------------------------------------------------------------------------- 12 CHECK BOX IF THE AGGREGATE AMOUNT IN ROW (11) EXCLUDES [X] CERTAIN SHARES: - -------------------------------------------------------------------------------- 13 PERCENT OF CLASS REPRESENTED BY AMOUNT IN ROW (11): 4.61%* - -------------------------------------------------------------------------------- 14 TYPE OF REPORTING PERSON: PN - -------------------------------------------------------------------------------- * See Item 5 herein. 3 - -------------------------------------------------------------------------------- 1 NAME OF REPORTING PERSON: Brown Brothers Harriman & Co. - -------------------------------------------------------------------------------- 2 CHECK THE APPROPRIATE BOX IF A MEMBER OF A GROUP: (a) [ ] (b) [X] - -------------------------------------------------------------------------------- 3 SEC USE ONLY - -------------------------------------------------------------------------------- 4 SOURCE OF FUNDS: OO - -------------------------------------------------------------------------------- 5 CHECK BOX IF DISCLOSURE OF LEGAL PROCEEDINGS IS REQUIRED [ ] PURSUANT TO ITEMS 2(d) or 2(e): - -------------------------------------------------------------------------------- 6 CITIZENSHIP OR PLACE OF ORGANIZATION: New York - -------------------------------------------------------------------------------- 7 SOLE VOTING POWER: 0 NUMBER OF SHARES -------------------------------------------------- BENEFICIALLY 8 SHARED VOTING POWER: 372,412* OWNED BY -------------------------------------------------- EACH 9 SOLE DISPOSITIVE POWER: 0 REPORTING PERSON -------------------------------------------------- WITH 10 SHARED DISPOSITIVE POWER: 372,412* - -------------------------------------------------------------------------------- 11 AGGREGATE AMOUNT BENEFICIALLY OWNED BY EACH REPORTING PERSON: 372,412* - -------------------------------------------------------------------------------- 12 CHECK BOX IF THE AGGREGATE AMOUNT IN ROW (11) EXCLUDES [X] CERTAIN SHARES: - -------------------------------------------------------------------------------- 13 PERCENT OF CLASS REPRESENTED BY AMOUNT IN ROW (11): 4.61%* - -------------------------------------------------------------------------------- 14 TYPE OF REPORTING PERSON: PN - -------------------------------------------------------------------------------- * See Item 5 herein. 4 - -------------------------------------------------------------------------------- 1 NAME OF REPORTING PERSON: T. Michael Long - -------------------------------------------------------------------------------- 2 CHECK THE APPROPRIATE BOX IF A MEMBER OF A GROUP: (a) [ ] (b) [X] - -------------------------------------------------------------------------------- 3 SEC USE ONLY - -------------------------------------------------------------------------------- 4 SOURCE OF FUNDS: OO - -------------------------------------------------------------------------------- 5 CHECK BOX IF DISCLOSURE OF LEGAL PROCEEDINGS IS REQUIRED [ ] PURSUANT TO ITEMS 2(d) or 2(e): - -------------------------------------------------------------------------------- 6 CITIZENSHIP OR PLACE OF ORGANIZATION: United States of America - -------------------------------------------------------------------------------- 7 SOLE VOTING POWER: 0 NUMBER OF SHARES -------------------------------------------------- BENEFICIALLY 8 SHARED VOTING POWER: 372,412* OWNED BY -------------------------------------------------- EACH 9 SOLE DISPOSITIVE POWER: 0 REPORTING PERSON -------------------------------------------------- WITH 10 SHARED DISPOSITIVE POWER: 372,412* - -------------------------------------------------------------------------------- 11 AGGREGATE AMOUNT BENEFICIALLY OWNED BY EACH REPORTING PERSON: 372,412* - -------------------------------------------------------------------------------- 12 CHECK BOX IF THE AGGREGATE AMOUNT IN ROW (11) EXCLUDES [X] CERTAIN SHARES: - -------------------------------------------------------------------------------- 13 PERCENT OF CLASS REPRESENTED BY AMOUNT IN ROW (11): 4.61%* - -------------------------------------------------------------------------------- 14 TYPE OF REPORTING PERSON: IN - -------------------------------------------------------------------------------- * See Item 5 herein. 5 - -------------------------------------------------------------------------------- 1 NAME OF REPORTING PERSON: Lawrence C. Tucker - -------------------------------------------------------------------------------- 2 CHECK THE APPROPRIATE BOX IF A MEMBER OF A GROUP: (a) [ ] (b) [X] - -------------------------------------------------------------------------------- 3 SEC USE ONLY - -------------------------------------------------------------------------------- 4 SOURCE OF FUNDS: OO - -------------------------------------------------------------------------------- 5 CHECK BOX IF DISCLOSURE OF LEGAL PROCEEDINGS IS REQUIRED [ ] PURSUANT TO ITEMS 2(d) or 2(e): - -------------------------------------------------------------------------------- 6 CITIZENSHIP OR PLACE OF ORGANIZATION: United States of America - -------------------------------------------------------------------------------- 7 SOLE VOTING POWER: 0 NUMBER OF SHARES -------------------------------------------------- BENEFICIALLY 8 SHARED VOTING POWER: 372,412* OWNED BY -------------------------------------------------- EACH 9 SOLE DISPOSITIVE POWER: 0 REPORTING PERSON -------------------------------------------------- WITH 10 SHARED DISPOSITIVE POWER: 372,412* - -------------------------------------------------------------------------------- 11 AGGREGATE AMOUNT BENEFICIALLY OWNED BY EACH REPORTING PERSON: 372,412* - -------------------------------------------------------------------------------- 12 CHECK BOX IF THE AGGREGATE AMOUNT IN ROW (11) EXCLUDES [X] CERTAIN SHARES: - -------------------------------------------------------------------------------- 13 PERCENT OF CLASS REPRESENTED BY AMOUNT IN ROW (11): 4.61%* - -------------------------------------------------------------------------------- 14 TYPE OF REPORTING PERSON: IN - -------------------------------------------------------------------------------- * See Item 5 herein. 6 - -------------------------------------------------------------------------------- 1 NAME OF REPORTING PERSON: Robert R. Gould - -------------------------------------------------------------------------------- 2 CHECK THE APPROPRIATE BOX IF A MEMBER OF A GROUP: (a) [ ] (b) [X] - -------------------------------------------------------------------------------- 3 SEC USE ONLY - -------------------------------------------------------------------------------- 4 SOURCE OF FUNDS: OO - -------------------------------------------------------------------------------- 5 CHECK BOX IF DISCLOSURE OF LEGAL PROCEEDINGS IS REQUIRED [ ] PURSUANT TO ITEMS 2(d) or 2(e): - -------------------------------------------------------------------------------- 6 CITIZENSHIP OR PLACE OF ORGANIZATION: United States of America - -------------------------------------------------------------------------------- 7 SOLE VOTING POWER: 0 NUMBER OF SHARES -------------------------------------------------- BENEFICIALLY 8 SHARED VOTING POWER: 372,412* OWNED BY -------------------------------------------------- EACH 9 SOLE DISPOSITIVE POWER: 0 REPORTING PERSON -------------------------------------------------- WITH 10 SHARED DISPOSITIVE POWER: 372,412* - -------------------------------------------------------------------------------- 11 AGGREGATE AMOUNT BENEFICIALLY OWNED BY EACH REPORTING PERSON: 372,412* - -------------------------------------------------------------------------------- 12 CHECK BOX IF THE AGGREGATE AMOUNT IN ROW (11) EXCLUDES [X] CERTAIN SHARES: - -------------------------------------------------------------------------------- 13 PERCENT OF CLASS REPRESENTED BY AMOUNT IN ROW (11): 4.61%* - -------------------------------------------------------------------------------- 14 TYPE OF REPORTING PERSON: IN - -------------------------------------------------------------------------------- * See Item 5 herein. 7 - -------------------------------------------------------------------------------- 1 NAME OF REPORTING PERSON: Joseph P. Donlan - -------------------------------------------------------------------------------- 2 CHECK THE APPROPRIATE BOX IF A MEMBER OF A GROUP: (a) [ ] (b) [X] - -------------------------------------------------------------------------------- 3 SEC USE ONLY - -------------------------------------------------------------------------------- 4 SOURCE OF FUNDS: OO - -------------------------------------------------------------------------------- 5 CHECK BOX IF DISCLOSURE OF LEGAL PROCEEDINGS IS REQUIRED [ ] PURSUANT TO ITEMS 2(d) or 2(e): - -------------------------------------------------------------------------------- 6 CITIZENSHIP OR PLACE OF ORGANIZATION: United States of America - -------------------------------------------------------------------------------- 7 SOLE VOTING POWER: 0 NUMBER OF SHARES -------------------------------------------------- BENEFICIALLY 8 SHARED VOTING POWER: 372,412* OWNED BY -------------------------------------------------- EACH 9 SOLE DISPOSITIVE POWER: 0 REPORTING PERSON -------------------------------------------------- WITH 10 SHARED DISPOSITIVE POWER: 372,412* - -------------------------------------------------------------------------------- 11 AGGREGATE AMOUNT BENEFICIALLY OWNED BY EACH REPORTING PERSON: 372,412* - -------------------------------------------------------------------------------- 12 CHECK BOX IF THE AGGREGATE AMOUNT IN ROW (11) EXCLUDES [X] CERTAIN SHARES: - -------------------------------------------------------------------------------- 13 PERCENT OF CLASS REPRESENTED BY AMOUNT IN ROW (11): 4.61%* - -------------------------------------------------------------------------------- 14 TYPE OF REPORTING PERSON: IN - -------------------------------------------------------------------------------- * See Item 5 herein. 8 ITEM 1. SECURITY AND ISSUER. This Statement on Schedule 13D relates to the common stock, par value $0.01 per share (the "Common Stock"), of Psychiatric Solutions, Inc. (f/k/a PMR Corporation), a Delaware corporation ("PSI" or the "Company"). The address of the principal executive offices of the Company is 113 Seaboard Lane, Suite C-100, Franklin, Tennessee 37067. ITEM 2. IDENTITY AND BACKGROUND. (a), (b), (c) and (f). This Statement on Schedule 13D is being filed by the 1818 Mezzanine Fund II, L.P., a Delaware limited partnership (the "Fund"), Brown Brothers Harriman & Co., a New York limited partnership and general partner of the Fund ("BBH&Co."), T. Michael Long ("Long"), Lawrence C. Tucker ("Tucker"), Robert R. Gould ("Gould") and Joseph P. Donlan ("Donlan") (the Fund, BBH&Co., Long, Tucker, Gould and Donlan are referred to collectively herein as the "Reporting Persons"). The Fund was formed to provide a vehicle for institutional and private investors an opportunity to participate in private mezzanine investment opportunities available to BBH&Co. BBH&Co. is a private bank. BBH&Co. has designated and appointed Long, Tucker, Gould and Donlan, or any one of them, the sole and exclusive persons at BBH&Co. having voting power (including the power to vote or to direct the voting) and investment power (including the power to dispose or to direct the disposition) with respect to the Common Stock. The address of the principal business and principal offices of the Fund and BBH&Co. is 59 Wall Street, New York, New York 10005. The business address of each of Long, Tucker, Gould and Donlan is 59 Wall Street, New York, New York 10005. The present principal occupation or employment of each of Long, Tucker and Gould is as a general partner of BBH&Co. The present principal occupation or employment of Donlan is as managing director of BBH&Co. Long, Tucker, Gould and Donlan are citizens of the United States. The name, business address, present principal occupation or employment (and the name, principal business and address of any corporation or other organization in which such employment is conducted) and the citizenship of each general partner of BBH&Co. is set forth on Schedule I hereto and is incorporated herein by reference. (d) and (e). During the last five years, neither any Reporting Person nor, to the best knowledge of each Reporting Person, any person identified on Schedule I has been convicted in a criminal proceeding (excluding traffic violations or similar misdemeanors) or was a party to a civil proceeding of a judicial or administrative body of competent jurisdiction and as a result of which any such person was or is subject to a judgment, decree or final order enjoining future violations of, or prohibiting or mandating activities subject to, federal or state securities laws or finding any violation with respect to such laws. 9 ITEM 3. SOURCE AND AMOUNT OF FUNDS OR OTHER CONSIDERATION. The source of funds for the purchase of the securities that are the subject of this filing was contributions from partners of the Fund. The information set forth in Item 4 of this Statement is hereby incorporated herein by reference. ITEM 4. PURPOSE OF TRANSACTION. The Reporting Persons have acquired the securities of the Company for investment purposes only. On June 28, 2002, pursuant to the terms of a Securities Purchase Agreement (the "Purchase Agreement"), between Psychiatric Solutions Hospitals, Inc., a private Delaware corporation (f/k/a Psychiatric Solutions, Inc.) ("PSH") and the Fund, PSH completed the sale of a senior subordinated promissory note (the "Note"), in the aggregate principal amount of up to $20 million, and warrants (the "Warrants") to purchase, at any time or from time to time on or prior to June 28, 2012, 1,502,140 shares of PSH's common stock, par value $.01 per share (subject to anti-dilution adjustment in certain circumstances), at an exercise price of $.01 per share, for $10 million in a private placement to the Fund. The foregoing descriptions of the Purchase Agreement and the Warrants are qualified in their entirety by reference to the full text of the Purchase Agreement and the Warrants, respectively. The Purchase Agreement is set forth as Exhibit 1 hereto and is hereby incorporated herein by reference. The Warrants are set forth as Exhibit 2 hereto and are hereby incorporated herein by reference. On August 5, 2002, pursuant to an Agreement and Plan of Merger, dated as of May 6, 2002, by and between the Company, PMR Acquisition Corporation, a Delaware corporation and wholly-owned subsidiary of the Company, and PSH, as amended as of June 10, 2002 (the "Merger Agreement"), PMR Acquisition Corporation merged with and into PSH, with PSH being the surviving corporation and becoming a wholly-owned subsidiary of PSI (the "Merger"). Pursuant to the Merger, the shares of capital stock of PSH were exchanged for shares of Common Stock of PSI, and the Warrant became exercisable for 372,412 shares of Common Stock of PSI (subject to anti-dilution adjustment in certain circumstances), at an exercise price of $.01 per share. Upon consummation of the Merger, PSI was renamed Psychiatric Solutions, Inc. (from PMR Corporation) and PSH was renamed Psychiatric Solutions Hospitals, Inc. (from Psychiatric Solutions, Inc.). Pursuant to the terms of the Purchase Agreement, until December 29, 2003, the Fund has agreed to make one or more loans to PSH in an aggregate principal amount not to exceed $20 million, $10 million of which has been loaned to PSH as of the consummation of the Merger. Pursuant to the terms of a letter agreement (the "Letter Agreement"), dated June 28, 2002, between the Company, PSH and the Fund, and as certified by the terms of a certificate delivered on August 5, 2002 by the Company to the Fund, the Company has agreed to assume the obligations of PSH to issue additional warrants (the "Additional Warrants") to the Fund, on terms substantially similar to the Warrants. The Company is obligated to issue Additional Warrants exercisable for 37,241 shares of Common Stock of the Company (subject to anti-dilution adjustment in certain circumstances), at an exercise price of $.01, for each $1 million of additional loans being advanced by the Fund. The foregoing description 10 of the Letter Agreement is qualified in its entirety by reference to the full text of the Letter Agreement. The Letter Agreement is set forth as Exhibit 3 hereto and is hereby incorporated herein by reference. As more fully described in Item 6 below, the Fund has entered into agreements with certain stockholders of PSI, which contain provisions regarding, among other things, the registration, disposition and voting of shares of Common Stock, as well as provisions regarding the composition of the Company's board of directors. The Reporting Persons may from time to time acquire additional shares of Common Stock in the open market or in privately negotiated transactions, subject to the availability of shares of Common Stock at prices deemed favorable, the Company's business or financial condition and to other factors and conditions the Reporting Persons deem appropriate. Alternatively, the Reporting Persons may sell all or a portion of the shares of Common Stock issuable upon exercise of the Warrants in open market or in privately negotiated transactions, subject to the factors and conditions referred to above and compliance with applicable laws. Except as set forth in this Item 4, no Reporting Person has any present plans or proposals which related to or would result in: (a) the acquisition by any person of additional securities of the Company, or the disposition of securities of the Company; (b) an extraordinary corporate transaction, such as a merger, reorganization or liquidation, involving the Company or any of its subsidiaries; (c) a sale or transfer of a material amount of assets of the Company or of any of its subsidiaries; (d) any change in the present board of directors or management of the Company, including any plans or proposals to change the number or term of directors or to fill any existing vacancies on the board; (e) any material change in the present capitalization or dividend policy of the Company; (f) any other material change in the Company's business or corporate structure; (g) changes in the Company's charter, bylaws or instruments corresponding thereto or other actions which may impede the acquisition of control of the Company by any person; (h) causing a class of securities of the Company to be delisted from a national securities exchange or to cease to be authorized to be quoted in an inter-dealer quotation system of a registered national securities association; (i) a class of equity securities of the Company becoming eligible for termination of registration pursuant to Section 12(g)(4) of the Securities Exchange Act of 1934; or (j) any action similar to any of those enumerated above. The information set forth in Item 6 of this Statement is hereby incorporated herein by reference. ITEM 5. INTEREST IN SECURITIES OF THE ISSUER. (a)-(c). By virtue of their potential status as a "group" with the stockholders of PSI enumerated in Item 6 below, for purposes of Rule 13d-5, each of the Reporting Persons may be deemed to have shared voting and dispositive power over the shares owned by such other stockholders. Except to the extent explicitly set forth herein, neither the filing of this Statement nor any of its contents shall be deemed to constitute an admission that any Reporting Person is the beneficial owner of any Common Stock referred to in this Statement for the purposes of Section 13(d) of the Securities Exchange Act of 1934 or for any other purpose, and such beneficial ownership is expressly disclaimed. 11 As set forth above, in connection with consummation of the Merger, the Fund's Warrants became exercisable for 372,412 shares of Common Stock. Accordingly, as of August 5, 2002, assuming the exercise of the Warrants held by the Fund into shares of Common Stock as of such date, the Fund may be deemed to own 372,412 shares of Common Stock (or 4,846,611 shares of Common Stock by virtue of their potential status as a "group" with the stockholders of PSI enumerated in Item 6 below), which, based on calculations made in accordance with Rule 13d-3(d) promulgated under the Securities Exchange Act of 1934, and there being 7,703,969 shares of Common Stock outstanding as of August 5, 2002 (as reported by the Company to the Fund), represents approximately 4.61% of the outstanding shares of Common Stock (or 60% of the outstanding shares of Common Stock by virtue of their potential status as a "group" with the stockholders of PSI enumerated in Item 6 below). By virtue of BBH&Co.'s relationship with the Fund, BBH&Co. may be deemed to beneficially own 372,412 shares of Common Stock (or 4,846,611 shares of Common Stock by virtue of their potential status as a "group" with the stockholders of PSI enumerated in Item 6 below), which, based on calculations made in accordance with Rule 13d-3(d) of the Securities Exchange Act of 1934, and there being 7,703,969 shares of Common Stock outstanding as of August 5, 2002 (as reported by the Company to the Fund), represents approximately 4.61% of the outstanding shares of Common Stock (or 60% of the outstanding shares of Common Stock by virtue of their potential status as a "group" with the stockholders of PSI enumerated in Item 6 below). By virtue of designating Long, Tucker, Gould and Donlan, or any of them, as the sole and exclusive persons at BBH&Co. having voting power (including the power to vote or to direct the voting) and investment power (including the power to dispose or to direct the disposition) with respect to the securities of the Company, each of them may be deemed to beneficially own 372,412 shares of Common Stock (or 4,846,611 shares of Common Stock by virtue of their potential status as a "group" with the stockholders of PSI enumerated in Item 6 below), which, based on calculations made in accordance with Rule 13d-3(d) promulgated under the Securities Exchange Act of 1934, and there being 7,703,969 shares of Common Stock outstanding as of August 5, 2002 (as reported by the Company to the Fund), represents approximately 4.61% of the outstanding shares of Common Stock (or 60% of the outstanding shares of Common Stock by virtue of their potential status as a "group" with the stockholders of PSI enumerated in Item 6 below). Except as set forth herein, no Reporting Person nor, to the best knowledge of each Reporting Person, any person identified on Schedule I, beneficially owns any shares of Common Stock or has effected any transaction in shares of Common Stock during the preceding 60 days. Paragraphs (d) and (e) of Item 5 of this Statement are not applicable to this filing. ITEM 6. CONTRACTS, ARRANGEMENTS, UNDERSTANDINGS OR RELATIONSHIP WITH RESPECT TO SECURITIES OF THE ISSUER. Pursuant to the terms of a Second Amended and Restated Voting Agreement (the "Voting Agreement"), dated as of June 28, 2002, certain stockholders of PSI, specifically Clayton Associates, L.L.C. ("Clayton"), Joey A. Jacobs ("Jacobs"), Acacia Venture Partners, L.P., CGJR Health Care Services Private Equities, L.P., CGJR II, L.P., CGJR/MF III, L.P., FCA Venture Partners I, L.P., FCA Venture Partners II, L.P., Oak VII Affiliates Fund, 12 Limited Partnership, Oak Investment Partners VII Limited Partnership, South Park Venture Partners, L.P., and South Pointe Venture Partners, L.P. (collectively, the "Voting Stockholders") have agreed, at any annual or special meeting or other action of the stockholders of the Company called for the purpose of electing to or removing directors from the Company's board of directors, to vote all their shares of Common Stock to cause one member of the Company's board of directors to be a person designated by the Fund. This voting obligation of the Voting Stockholders terminates when both of the following clauses (i) and (ii) have been satisfied: (i) the indebtedness owed to the Fund under the Purchase Agreement has been repaid in full; and (ii) either of the following has happened: (x) the Fund owns less than 50% of the shares of Common Stock issued pursuant to the Purchase Agreement (assuming exercise of the warrants issued to the Fund pursuant to the Purchase Agreement), or (y) June 28, 2007 (the "Vote Termination Date"). The foregoing description of the Voting Agreement is qualified in its entirety by reference to the full text of the Voting Agreement. The Voting Agreement is set forth as Exhibit 4 hereto and is hereby incorporated herein by reference. Pursuant to the terms of the Letter Agreement, the Company agreed, upon consummation of the Merger, to create a vacancy on its board of directors and to cause such vacancy to be filled, effective upon consummation of the Merger, by a designee of the Fund. The Company has also agreed, at each meeting of stockholders of the Company after the Merger at which the election of directors occurs (or at any time the stockholders of the Company act by written consent for the purpose of the election of directors), to cause a designee of the Fund to be included in the slate of nominees recommended by the board of directors of the Company to the Company's stockholders, and to use its reasonable best efforts to cause the election of such designee, including voting all shares for which the Company holds proxies (unless otherwise directed by the stockholder submitting such proxy) or is otherwise entitled to vote, in favor of the election of such designee. The obligation of the Company described in the preceding sentence terminates upon the Vote Termination Date. Pursuant to the terms of a Second Amended and Restated Co-Sale Agreement (the "Co-Sale Agreement"), dated as of June 28, 2002, Clayton and Jacobs (collectively, the "Co-Sale Stockholders") have agreed to allow the Fund to participate in any transfer or sale (subject to certain exceptions) of Common Stock now owned or subsequently acquired by such Co-Sale Stockholder on the same terms and conditions as the proposed transfer or sale to be made by such Co-Sale Stockholder. The Fund is entitled to sell in any such transfer or sale up to a number of shares of Common Stock equal to the product of (i) the number of shares of Common Stock that the Co-Sale Stockholder proposes to sell or transfer by (ii) a fraction, the numerator of which is the number of shares of Common Stock (assuming exercise of any warrants) owned by the Fund at such time, and the denominator of which is the total number of shares of Common Stock (assuming exercise of any warrants) owned by the Co-Sale Stockholders and the Fund at such time. The foregoing description of the Co-Sale Agreement is qualified in its entirety by reference to the full text of the Co-Sale Agreement. The Co-Sale Agreement is set forth as Exhibit 5 hereto and is hereby incorporated herein by reference. Pursuant to the terms of a Second Amended and Restated Investor Rights Agreement (the "Investor Rights Agreement"), dated as of June 28, 2002, PSH agreed to provide the Fund with, among other things, registration rights as well as pre-emptive rights with respect to future issuances of certain equity securities. Pursuant to the terms of the Letter 13 Agreement, the Company has agreed to assume all obligations of PSH under the Investor Rights Agreement, including, but not limited to, the following obligations, all on the terms and conditions specified in the Investor Rights Agreement: (i) upon the request of the Fund, to register for sale to the public any shares of Common Stock held by the Fund; (ii) to allow the Fund to include in certain registration statements filed by the Company any shares of Common Stock held by the Fund; (iii) upon the request of the Fund, to file a Form S-3 under the Securities Act of 1933 with respect to the shares of Common Stock held by the Fund; and (iv) to provide the Fund with pre-emptive rights to purchase its pro rata share of certain future issuances of the Company's equity securities. The pre-emptive rights described in clause (iv) of the immediately preceding sentence terminate upon the earlier of June 28, 2007 and such time that the Fund owns less than 50% of the shares of Common Stock issued to the Fund pursuant to the Purchase Agreement (assuming exercise of any warrants). The foregoing description of the Investor Rights Agreement is qualified in its entirety by reference to the full text of the Investor Rights Agreement. The Investor Rights Agreement is set forth as Exhibit 6 hereto and is hereby incorporated herein by reference. Except for the agreements described above or elsewhere in this Statement or in response to Items 3 and 4 of this Statement, which are hereby incorporated herein by reference, to the best of the knowledge of the Reporting Persons, there exist no contracts, arrangements, understandings or relationships (legal or otherwise) among the persons named in Item 2 and between such persons and any person with respect to any securities of the Company, including, but not limited to, transfer or voting of any securities of the Company, finder's fees, joint ventures, loan or option arrangements, puts or calls, guarantees of profits, division of profits or loss, or the giving or withholding of proxies. ITEM 7. MATERIAL TO BE FILED AS EXHIBITS. EXHIBIT DESCRIPTION Exhibit 1 Securities Purchase Agreement, dated June 28, 2002 between PSH and the Fund. Exhibit 2 Warrants, dated as of June 28, 2002. Exhibit 3 Letter Agreement, dated June 28, 2002, between the Company, PSH and the Fund. Exhibit 4 Second Amended and Restated Voting Agreement, dated June 28, 2002, by and among PSH, the Voting Stockholders and the Fund. Exhibit 5 Second Amended and Restated Co-Sale Agreement, dated June 28, 2002, by and among PSH, the Co-Sale Stockholders and the Fund. Exhibit 6 Second Amended and Restated Investor Rights Agreement, dated June 28, 2002, by and among PSH, Capital Source Holdings, LLC and the Fund. Exhibit 7 Joint Filing Agreement, dated August 14, 2002, among the Reporting Persons. 14 SIGNATURE After reasonable inquiry and to the best of its knowledge and belief, each of the undersigned certifies that the information set forth in this statement is true, complete and correct. Dated: August 14, 2002 THE 1818 MEZZANINE FUND II, L.P. By: Brown Brothers Harriman & Co., General Partner By: /s/ Lawrence C. Tucker --------------------------------- Name: Lawrence C. Tucker Title: Partner BROWN BROTHERS HARRIMAN & CO. By: /s/ Lawrence C. Tucker --------------------------------- Name: Lawrence C. Tucker Title: Partner /s/ T. Michael Long ------------------------------------ T. Michael Long /s/ Lawrence C. Tucker ------------------------------------ Lawrence C. Tucker /s/ Robert R. Gould ------------------------------------ Robert R. Gould /s/ Joseph P. Donlan ------------------------------------ Joseph P. Donlan 15 EXHIBIT INDEX EXHIBIT DESCRIPTION Exhibit 1 Securities Purchase Agreement, dated June 28, 2002 between PSH and the Fund. Exhibit 2 Warrants, dated June 28, 2002. Exhibit 3 Letter Agreement, dated June 28, 2002, between the Company, PSH and the Fund. Exhibit 4 Second Amended and Restated Voting Agreement, dated June 28, 2002, by and among PSH, the Voting Stockholders and the Fund. Exhibit 5 Second Amended and Restated Co-Sale Agreement, dated June 28, 2002, by and among PSH, the Co-Sale Stockholders and the Fund. Exhibit 6 Second Amended and Restated Investor Rights Agreement, dated June 28, 2002, by and among PSH, Capital Source Holdings, LLC and the Fund. Exhibit 7 Joint Filing Agreement, dated August 14, 2002 among the Reporting Persons. 16 SCHEDULE I Set forth below are the names and positions of all of the general partners of BBH&Co. The principal occupation or employment of each person listed below is private banker, and, unless otherwise indicated, the business address of each person is 59 Wall Street, New York, New York 10005. Unless otherwise indicated, each person listed below is a citizen of the United States. BUSINESS ADDRESS NAME (IF OTHER THAN AS INDICATED ABOVE) - ---- ---------------------------------- J. William Anderson Peter B. Bartlett Brian A. Berris Taylor S. Bodman 40 Water Street Boston, MA 02109 John J. Borland 125 S. Wacker Drive Chicago, IL 60606 Timothy J. Connelly 40 Water Street Boston, MA 02109 Douglas A. Donahue, Jr. 40 Water Street Boston, Massachusetts 02109 Anthony T. Enders Alexander T. Ercklentz Terrence M. Farley John A. Gehret Elbridge T. Gerry, Jr. Kristen F. Giarusso 40 Water Street Boston, MA 02109 Robert R. Gould Ronald J. Hill Kyosuko Kashimoto 8-14 Nihonbashi 30-Chome Chuo-ku (citizen of Japan) Tokyo 103, Japan Radford W. Klotz Landon Hilliard Michael Kraynak, Jr. Susan C. Livingston 40 Water Street Boston, MA 02109 T. Michael Long Hampton S. Lynch Michael W. McConnell John P. Molner William H. Moore III Donald B. Murphy John A. Nielsen Eugene C. Rainis A. Heaton Robertson 40 Water Street Boston, Massachusetts 02109 Jeffrey A. Schoenfeld W. Carter Sullivan III 17 BUSINESS ADDRESS NAME (IF OTHER THAN AS INDICATED ABOVE) - ---- ---------------------------------- Stokley P. Towles 40 Water Street Boston, Massachusetts 02109 Lawrence C. Tucker Andrew J. F. Tucker William B. Tyree Maarten van Hengel Douglas C. Walker 1531 Walnut Street Philadelphia, Pennsylvania 19102 William J. Whelan, Jr. 40 Water Street Boston, MA 02109 Lawrence F. Whittemore Richard H. Witmer, Jr. EX-99 3 ex1sc13d-psychiatric.txt EXHIBIT 1 EXHIBIT 1 --------- SECURITIES PURCHASE AGREEMENT between PSYCHIATRIC SOLUTIONS, INC., and THE 1818 MEZZANINE FUND II, L.P. ------------------------------ Dated as of: June 28, 2002 ------------------------------ TABLE OF CONTENTS PAGE ---- ARTICLE I DEFINITIONS..........................................................1 1.1 DEFINITIONS................................................1 1.2 ACCOUNTING TERMS; FINANCIAL COVENANTS.....................16 ARTICLE II PURCHASE AND SALE..................................................16 2.1 PURCHASE AND SALE OF NOTE AND INITIAL WARRANTS............16 2.2 ADDITIONAL LOANS..........................................17 2.3 FEES......................................................17 2.4 INITIAL CLOSING...........................................17 2.5 ADDITIONAL CLOSINGS.......................................17 ARTICLE III CONDITIONS TO THE OBLIGATION OF THE PURCHASER TO CLOSE............20 3.1 REPRESENTATIONS AND WARRANTIES TRUE.......................20 3.2 COMPLIANCE WITH THIS AGREEMENT............................20 3.3 OFFICERS' CERTIFICATE.....................................20 3.4 SECRETARY'S CERTIFICATES..................................20 3.5 DOCUMENTS.................................................20 3.6 PURCHASE PERMITTED BY APPLICABLE LAWS; LEGAL INVESTMENT...21 3.7 OPINION OF COUNSEL........................................21 3.8 APPROVAL OF COUNSEL TO THE PURCHASER......................21 3.9 CONSENTS AND APPROVALS....................................21 3.10 NO MATERIAL ADVERSE CHANGE................................21 3.11 INVESTOR RIGHTS AGREEMENT.................................21 3.12 CO-SALE AGREEMENT.........................................21 3.13 VOTING AGREEMENT..........................................21 3.14 SUBSIDIARIES' GUARANTEE...................................21 3.15 SUBORDINATION AGREEMENT...................................21 3.16 MARKET CONDITIONS.........................................22 3.17 NO LITIGATION.............................................22 3.18 NO DEFAULT OR BREACH......................................22 3.19 REPAYMENT OF PROMISSORY NOTES.............................22 3.20 CREDIT AGREEMENT..........................................22 3.21 AMENDMENT TO CREDIT AGREEMENT.............................23 3.22 PMR LETTER AGREEMENT......................................23 3.23 AERIES HEALTHCARE.........................................23 3.24 JUNIOR SUBORDINATION AGREEMENTS...........................23 3.25 AMENDING AGREEMENT........................................23 3.26 PMR CONSENT...............................................23 3.27 AMENDMENT TO BY-LAWS......................................23 i PAGE ---- 3.28 WAIVER OF RIGHTS..........................................23 3.29 FEES AND EXPENSES.........................................23 ARTICLE IV CONDITIONS TO THE OBLIGATION OF THE COMPANY TO CLOSE..............24 4.1 REPRESENTATIONS AND WARRANTIES TRUE.......................24 4.2 COMPLIANCE WITH THIS AGREEMENT............................24 4.3 CONSENTS AND APPROVALS....................................24 ARTICLE V REPRESENTATIONS AND WARRANTIES OF THE COMPANY.......................24 5.1 CORPORATE EXISTENCE AND POWER.............................24 5.2 CORPORATE AUTHORIZATION; NO CONTRAVENTION.................25 5.3 GOVERNMENTAL AUTHORIZATION; THIRD PARTY CONSENTS..........25 5.4 BINDING EFFECT............................................25 5.5 NO LEGAL BAR..............................................26 5.6 LITIGATION................................................26 5.7 NO DEFAULT OR BREACH......................................26 5.8 TITLE TO PROPERTIES.......................................26 5.9 INVESTMENT COMPANY........................................26 5.10 SUBSIDIARIES..............................................27 5.11 FINANCIAL CONDITION; NO UNDISCLOSED LIABILITIES...........27 5.12 NO MATERIAL ADVERSE CHANGE................................28 5.13 CAPITALIZATION............................................28 5.14 SOLVENCY..................................................30 5.15 PRIVATE OFFERING..........................................30 5.16 BROKER'S, FINDER'S OR SIMILAR FEES........................30 5.17 FULL DISCLOSURE...........................................30 5.18 ANTI-DILUTION PROTECTION; PREEMPTIVE RIGHTS...............30 5.19 INVESTOR RIGHTS AGREEMENTS................................31 5.20 PROJECTIONS...............................................31 5.21 LABOR RELATIONS...........................................31 5.22 ERISA AND EMPLOYEE BENEFIT PLANS..........................31 5.23 ENVIRONMENTAL MATTERS.....................................32 5.24 TAXES.....................................................33 5.25 INTELLECTUAL PROPERTY.....................................34 5.26 POTENTIAL CONFLICTS OF INTEREST...........................35 5.27 TRADE RELATIONS...........................................35 5.28 OUTSTANDING BORROWING.....................................36 5.29 MATERIAL CONTRACTS........................................36 5.30 INSURANCE.................................................36 5.31 COMPLIANCE WITH LAWS......................................37 5.32 ASSETS, LICENSES, ETC.....................................37 5.33 AERIES HEALTHCARE ACQUISITION.............................37 5.34 REGULATORY MATTERS........................................37 ii PAGE ---- ARTICLE VI REPRESENTATIONS AND WARRANTIES OF THE PURCHASER....................42 6.1 EXISTENCE AND POWER.......................................42 6.2 AUTHORIZATION; NO CONTRAVENTION...........................43 6.3 BINDING EFFECT............................................43 6.4 NO LEGAL BAR..............................................43 6.5 PURCHASE FOR OWN ACCOUNT..................................43 6.6 ACCREDITED INVESTOR.......................................44 6.7 BROKER'S, FINDER'S OR SIMILAR FEES........................44 ARTICLE VII INDEMNIFICATION...................................................44 7.1 INDEMNIFICATION BY THE COMPANY............................44 7.2 NOTIFICATION..............................................45 7.3 INVESTOR RIGHTS AGREEMENT.................................45 ARTICLE VIII FINANCIAL COVENANTS..............................................46 8.1 MINIMUM CENSUS. ..........................................46 8.2 TOTAL CONSOLIDATED LEVERAGE RATIO.........................46 8.3 SENIOR CONSOLIDATED LEVERAGE RATIO........................46 8.4 CONSOLIDATED INTEREST COVERAGE RATIO......................46 8.5 CONSOLIDATED FIXED CHARGE RATIO...........................47 ARTICLE IX AFFIRMATIVE COVENANTS..............................................47 9.1 FINANCIAL STATEMENTS......................................47 9.2 CERTIFICATES; OTHER INFORMATION...........................49 9.3 PRESERVATION OF CORPORATE EXISTENCE.......................49 9.4 PAYMENT OF OBLIGATIONS....................................49 9.5 COMPLIANCE WITH LAWS......................................49 9.6 NOTICES...................................................50 9.7 ISSUE TAXES...............................................50 9.8 INSPECTION; CONFIDENTIALITY...............................50 9.9 USE OF PROCEEDS...........................................51 9.10 PAYMENT OF THE NOTE.......................................51 9.11 SUBSIDIARIES' GUARANTEE...................................51 9.12 PMR GUARANTEE.............................................51 9.13 NO INCONSISTENT AGREEMENTS................................51 9.14 RESERVATIONS OF SHARES....................................52 9.15 REGISTRATION AND LISTING..................................52 9.16 ALLOCATION FOR TAX PURPOSES...............................52 9.17 REGISTER OF THE NOTE......................................52 9.18 PAYMENT UPON LIQUIDATION..................................53 9.19 RIGHT OF FIRST REFUSAL....................................53 ARTICLE X NEGATIVE COVENANTS..................................................54 10.1 RESTRICTIONS ON INDEBTEDNESS..............................54 iii PAGE ---- 10.2 RESTRICTIONS ON LIENS.....................................55 10.3 INVESTMENTS...............................................57 10.4 DISPOSITION OF ASSETS.....................................57 10.5 MERGERS, ETC. ...........................................57 10.6 ASSUMPTIONS, GUARANTIES, ETC. OF INDEBTEDNESS OF OTHER PERSONS.............................................57 10.7 ERISA.....................................................58 10.8 DISTRIBUTIONS.............................................58 10.9 SALE AND LEASEBACK........................................58 10.10 TRANSACTIONS WITH AFFILIATES..............................58 10.11 CHANGE IN BUSINESS........................................59 10.12 PMR MERGER AGREEMENT......................................59 10.13 DRAWDOWN ACQUISITION DOCUMENTS............................59 10.14 STOCK OPTION PLAN.........................................59 10.15 ORGANIZATIONAL DOCUMENTS; ETC.............................59 10.16 PAYMENT ON SUBORDINATED DEBT..............................60 ARTICLE XI DEFAULTS AND REMEDIES..............................................60 11.1 EVENTS OF DEFAULT.........................................60 11.2 RIGHTS AND REMEDIES.......................................62 11.3 RIGHTS AND REMEDIES NOT EXCLUSIVE.........................63 ARTICLE XII REDEMPTION OF THE NOTES...........................................63 ARTICLE XIII REDEMPTION OF WARRANTS...........................................64 13.1 HOLDER'S RIGHT TO REQUIRE REDEMPTION......................64 ARTICLE XIV SUBORDINATION.....................................................66 ARTICLE XV MISCELLANEOUS......................................................66 15.1 SURVIVAL OF PROVISIONS....................................66 15.2 NOTICES...................................................66 15.3 SUCCESSORS AND ASSIGNS....................................67 15.4 ASSIGNMENTS...............................................68 15.5 AMENDMENT AND WAIVER......................................68 15.6 COUNTERPARTS..............................................69 15.7 HEADINGS..................................................69 15.8 DETERMINATIONS............................................69 15.9 GOVERNING LAW.............................................69 15.10 JURISDICTION..............................................69 15.11 SEVERABILITY..............................................70 15.12 RULES OF CONSTRUCTION.....................................70 15.13 REMEDIES..................................................70 15.14 ENTIRE AGREEMENT..........................................70 15.15 ATTORNEYS' FEES...........................................70 iv PAGE ---- 15.16 PUBLICITY.................................................71 15.17 EXPENSES..................................................71 15.18 FURTHER ASSURANCES........................................71 v EXHIBITS Exhibit A Form of Note Exhibit B Form of Warrant Certificate Exhibit C Form of Opinion Exhibit D Form of Second Amended and Restated Investor Rights Agreement Exhibit E Form of Second Amended and Restated Co-Sale Agreement Exhibit F Form of Second Amended and Restated Voting Agreement Exhibit G Form of Subsidiaries' Guarantee Exhibit H Form of PMR Guarantee Exhibit I Form of Subordination Agreement Exhibit J Form of PMR Letter Agreement Exhibit K Form of Junior Subordination Agreements Exhibit L Form of Amending Agreement SCHEDULES Schedule 3.14 Subsidiaries' Guarantee Schedule 3.19 Promissory Notes Schedule 3.24 Junior Subordination Agreements Schedule 5.6 Litigation Schedule 5.10 Subsidiaries Schedule 5.11 Pro Forma Financials Schedule 5.13(a) Capitalization Schedule 5.13(b) Common Stock Equivalents Schedule 5.16 Broker's, Finder's or Similar Fees Schedule 5.18 Anti-Dilution Protection; Preemptive Rights Schedule 5.20 Projections Schedule 5.22 ERISA Schedule 5.23 Environmental Matters Schedule 5.25(a) Intellectual Property Schedule 5.25(d) Software Schedule 5.26 Conflicts of Interest Schedule 5.28 Outstanding Borrowings Schedule 5.29 Material Contracts Schedule 5.30 Insurance Schedule 5.32 Assets, Licenses, Etc. Schedule 5.34 Regulatory Matters Schedule 8.1 Facilities Schedule 10.3 Investments in Subsidiaries Schedule 10.10 Transactions with Affiliates vi SECURITIES PURCHASE AGREEMENT SECURITIES PURCHASE AGREEMENT (this "AGREEMENT"), dated as of June 28, 2002, between PSYCHIATRIC SOLUTIONS, Inc., a Delaware corporation (the "COMPANY"), and THE 1818 MEZZANINE FUND II, L.P., a Delaware limited partnership (the "PURCHASER"). WHEREAS, the Company proposes to issue and sell to the Purchaser (i) a senior subordinated promissory note with a final maturity of June 28, 2009 in the aggregate principal amount of up to $20,000,000 (together with all notes issued in connection with the substitution, replacement or transfer thereof, the "NOTE") and (ii) detachable warrants (the "WARRANTS") exercisable to purchase in the aggregate up to 3,004,280 shares of Common Stock (as hereinafter defined) (subject to adjustment as set forth in the Warrant Certificate), at an exercise price of $.01 per share of Common Stock. NOW, THEREFORE, in consideration of the mutual covenants and agreements set forth herein and for good and valuable consideration, the receipt and adequacy of which is hereby acknowledged, the parties hereto agree as follows: ARTICLE I DEFINITIONS 1.1 DEFINITIONS. As used in this Agreement, and unless the context requires a different meaning, the following terms have the meanings indicated: "ADDITIONAL CLOSING" has the meaning assigned to that term in Section 2.5(a). "ADDITIONAL CLOSING DATE" has the meaning assigned to that term in Section 2.5(a). "ADDITIONAL LOAN" and "ADDITIONAL LOANS" have the meanings assigned to those terms in Section 2.2. "ADDITIONAL PURCHASE PRICE" has the meaning assigned to that term in Section 2.5(a). "ADDITIONAL WARRANT" and "ADDITIONAL WARRANTS" have the meaning assigned to those terms in Section 2.5(a). "ADVANCES" shall mean, individually and/or collectively, borrowings under the Credit Agreement. Any amounts paid by any agent or lender party to the Credit Agreement on behalf of the Company or any Subsidiary or any guarantor under any Loan Document (as defined in the Credit Agreement) shall be an Advance for purposes of this Agreement. 2 "AERIES COMPANIES" has the meaning assigned to that term in Section 5.34(a). "AERIES HEALTHCARE" means Aeries Healthcare Corporation, a Delaware corporation. "AERIES PURCHASE AGREEMENT" means the Stock Purchase Agreement, dated as of June 20, 2002, by and among the Company, Aeries Healthcare and the other parties thereto. "AFFILIATE" has the meaning assigned to that term in Rule 12b-2 of the Exchange Act. "AGREEMENT" means this Agreement, as the same may be amended or modified from time to time in accordance with the terms hereof. "AMENDING AGREEMENT" means the Amending Agreement, substantially in the form attached hereto as EXHIBIT L, as the same may be amended, amended and restated, or modified from time to time in accordance with its terms. "BBH & CO." means Brown Brothers Harriman and Co., a New York limited partnership. "BENEFIT PLANS" has the meaning assigned to those terms in Section 5.22(a). "BUSINESS" and "BUSINESSES" have the meanings assigned to those terms in Section 5.34(a). "BUSINESS DAY" means any day other than a Saturday, Sunday or other legal holiday on which commercial banks in New York City are authorized or required by law or executive order to close. "BUSINESSES" has the meaning assigned to that term in Section 5.34(a). "CAPITAL EXPENDITURES" shall mean, for any Test Period, the sum (without duplication) of all expenditures (whether paid in cash or accrued as liabilities) during the Test Period that are or should be treated as capital expenditures under GAAP. "CAPITALIZED LEASE" shall mean, as to any Person, a lease of any interest in any kind of property or asset by that Person as lessee that is, should be or should have been recorded as a "CAPITAL LEASE" in accordance with GAAP. "CAPITALIZED LEASE OBLIGATIONS" shall mean all obligations of any Person under Capitalized Leases, in each case, taken at the amount thereof accounted for as a liability in accordance with GAAP. 3 "CAPITALSOURCE" means CapitalSource Finance LLC, a Delaware limited liability company, or its assignee or successor as senior secured lender to the Company as permitted by the terms of the Subordination Agreement. "CAPITAL STOCK" of any Person means any and all shares, interests, participations or other equivalents (however designated) of such Person's capital stock (or equivalent ownership interests or membership interests) whether now outstanding or hereafter issued, including, without limitation, all common stock, preferred stock and other securities which are exercisable for or convertible into such Person's capital stock and any rights, warrants, options or other subscription or purchase rights to purchase such Person's capital stock. "CASH EQUIVALENTS" shall mean (a) securities issued, or directly and fully guaranteed or insured, by the United States or any agency or instrumentality thereof (PROVIDED, that the full faith and credit of the United States is pledged in support thereof) having maturities of not more than six months from the date of acquisition, (b) U.S. dollar denominated time deposits, certificates of deposit and bankers' acceptances of (i) any domestic commercial bank of recognized standing having capital and surplus in excess of $500,000,000, or (ii) any bank (or the parent company of such bank) whose short-term commercial paper rating from Standard & Poor's Ratings Services ("S&P") is at least A-2 or the equivalent thereof or from Moody's Investors Service, Inc. ("MOODY'S") is at least P-2 or the equivalent thereof in each case with maturities of not more than six months from the date of acquisition (any bank meeting the qualifications specified in clauses (b)(i) or (ii), an "APPROVED BANK"), (c) repurchase obligations with a term of not more than seven days for underlying securities of the types described in clause (a), above, entered into with any Approved Bank, (d) commercial paper issued by any Approved Bank or by the parent company of any Approved Bank and commercial paper issued by, or guaranteed by, any industrial or financial company with a short-term commercial paper rating of at least A-2 or the equivalent thereof by S&P or at least P-2 or the equivalent thereof by Moody's, or guaranteed by any industrial company with a long term unsecured debt rating of at least A or A2, or the equivalent of each thereof, from S&P or Moody's, as the case may be, and in each case maturing within six months after the date of acquisition and (e) investments in money market funds substantially all of whose assets are comprised of securities of the type described in clauses (a) through (d) above. "CERCLA" has the meaning assigned to that term in Section 5.23(b). "CLOSING" means the Initial Closing or any Additional Closing, as the case may be. "CLOSING DATE" means the Initial Closing Date or any Additional Closing Date, as the case may be. "CODE" means the Internal Revenue Code of 1986, as amended, or any successor statute thereto. 4 "COMMISSION" means the Securities and Exchange Commission or any similar agency then having jurisdiction to enforce the Securities Act. "COMMON STOCK" means shares of common stock, par value $0.01 per share, of the Company. "COMPANY" has the meaning assigned to that term in the preamble of this Agreement. "CONTRACTUAL OBLIGATION" means, as to any Person, any provision of any security issued by such Person or of any agreement, undertaking, contract, indenture, mortgage, deed of trust or other instrument to which such Person is a party or by which it or any of its property is bound. "CO-SALE AGREEMENT" means the Second Amended and Restated Co-Sale Agreement, substantially in the form attached hereto as EXHIBIT E, as the same may be amended, amended and restated or modified from time to time in accordance with its terms. "CREDIT AGREEMENT" means the Revolving Credit and Term Loan Agreement, dated as of November 30, 2001, by and among CapitalSource, the Company, and the other parties thereto, as amended, modified, supplemented, restated, refinanced or replaced from time to time in accordance with its terms and the terms of this Agreement and the Subordination Agreement. "DEBTOR RELIEF LAW" means the Bankruptcy Code of the United States of America and all other applicable liquidation, conservatorship, bankruptcy, moratorium, rearrangement, receivership, insolvency, reorganization or similar debtor relief laws from time to time in effect affecting the rights of creditors generally, as amended from time to time. "DEFAULT" means an event or condition which with the passage of time or giving of notice, or both, would become an Event of Default. "DEMAND NOTICE" has the meaning assigned to that term in Section 13.1(a). "DISTRIBUTION" means, as to any Person: (a) the declaration or payment of any dividend on or in respect of any shares of any class of Capital Stock of such Person, other than dividends payable solely in shares of common stock of such person; (b) the purchase, redemption, or other acquisition or retirement of any shares of any class of Capital Stock of such Person directly or indirectly; (c) any other distribution on or in respect of any shares of any class of Capital Stock of such Person; (d) any setting apart or allocating any sum for the payment of any dividend or distribution, or for the purchase, redemption or retirement of any shares of Capital Stock of such Person; and (e) any fee, payment, bonus or other remuneration of any kind, and any replacement of or debt service on any loans or other Indebtedness other than to the Purchaser. 5 "DRAWDOWN ACQUISITION" means an acquisition of all or substantially all of the assets or shares of stock of a Person by the Company or a wholly-owned Subsidiary, PROVIDED, HOWEVER: (i) the total consideration for such assets or stock does not exceed $5,000,000 without the prior written consent of the Purchaser; (ii) such Person must be engaged in the same line of business as the Company and the Subsidiaries; (iii) any notes payable by the Company or any wholly-owned Subsidiary to such Person or its designee as part of the purchase price for such acquisition shall be unsecured and subordinated to the Note in form and substance satisfactory to the Purchaser; (iv) prior to the closing of each such acquisition, the Company shall deliver to the Purchaser an officer's certificate, as well as evidence satisfactory to the Purchaser establishing that: (1) immediately prior to such acquisition and immediately after such acquisition, the Purchaser is in compliance with all of the covenants and agreements hereunder and under the Credit Agreement; and (2) the calculation of the financial covenants required by Section 2.5(c) and this definition shall include the notes payable referenced in paragraph (iii) of this definition; (v) such acquisition is approved in writing by the Board of Directors of such Person to be acquired and the Company; and (vi) if the Purchaser does not advance funds to the Company in accordance with Section 2.5 simultaneously with the closing of such acquisition, then such acquisition shall not constitute a Drawdown Acquisition. "DRAWDOWN ACQUISITION DOCUMENTS" means, with respect to any Drawdown Acquisition, any and all documents, together with the exhibits and schedules thereto, related to such Drawdown Acquisition, including, without limitation, the documents governing such Drawdown Acquisition and any documents and certificates delivered in connection therewith. "DUE DILIGENCE REQUESTS" has the meaning assigned to that term in Section 5.34(i). "EBITDA" shall mean, for any Test Period, the sum, without duplication, of the following for the Company and the Subsidiaries, on a consolidated and consolidating basis: Net Income determined in accordance with GAAP, PLUS, (a) Interest Expense, (b) taxes on income, whether paid, payable or accrued, (c) depreciation expense, (d) amortization expense, (e) all other non-cash, non-recurring charges and 6 expenses, excluding accruals for cash expenses made in the ordinary course of business, and (f) gain or loss from any sale of assets, other than sales in the ordinary course of business, all of the foregoing determined in accordance with GAAP. "ENVIRONMENT" means navigable waters, waters of the contiguous zone, ocean waters, natural resources, surface waters, ground water, drinking water supply, land surface, subsurface strata, ambient air, both inside and outside of buildings and structures, man-made buildings and structures, and plant and animal life on earth. "ERISA" means the Employee Retirement Income Security Act of 1974, as amended. "ERISA AFFILIATE" has the meaning assigned to that term in Section 5.22(c). "EVENT OF DEFAULT" has the meaning assigned to that term in Section 11.1. "EXCHANGE ACT" means the Securities Exchange Act of 1934, as amended, and the rules and regulations of the Commission thereunder. "FAIR MARKET VALUE" has the meaning assigned to that term in Section 13.1(c). "FINANCIALS" has the meaning assigned to that term in Section 5.11(a). "FIXED CHARGE RATIO" shall mean, at any date of determination, for the Company and each Subsidiary, individually and collectively, on a consolidated and consolidating basis, the ratio of (a) EBITDA for the Monthly Test Period most recently ended before such date, to (b) Fixed Charges for the Monthly Test Period most recently ended before such date, in each case taken as one accounting period. "FIXED CHARGES" shall mean, on any calculation date, for any Monthly Test Period, the sum of the following for the Company and each Subsidiary, individually and collectively, on a consolidated and consolidating basis: (a) Total Debt Service for such period, (b) Capital Expenditures and management and services fees during such period, (c) income taxes paid in cash or accrued during such period, (d) dividends paid or accrued or declared during such period and (e) principal payments made by the Company or any Subsidiary pursuant to a HUD Financing. Any principal payments by the Company and the Subsidiaries made pursuant to the Revolving Facility shall be excluded from this definition. "GAAP" means generally accepted accounting principles in the United States of America in effect from time to time as applied by nationally recognized accounting firms. "GOVERNMENT PROGRAMS" has the meaning assigned to that term in Section 5.34(a). 7 "GOVERNMENTAL AUTHORITY" means the government of any nation, state, city, locality or other political subdivision of any thereof, any entity exercising executive, legislative, judicial, regulatory or administrative functions of or pertaining to government, and any corporation or other entity owned or controlled, through stock or capital ownership or otherwise, by any of the foregoing. "GUARANTY" or "GUARANTEE" or "GUARANTIES" means any arrangement whereby a Person is or becomes liable in respect of any Indebtedness or other obligation of another and any other arrangement whereby credit is extended to another obligor on the basis of any promise of a guarantor, whether that promise is expressed in terms of an obligation to pay the Indebtedness of such obligor, or to purchase or lease assets under circumstances that would enable such obligor to discharge one or more of its obligations, or to maintain the capital, the working capital, solvency or general financial condition of such obligor, whether or not such arrangement is listed in the balance sheet of the guarantor or referred to in a footnote thereto. "HAZARDOUS SUBSTANCE" has the meaning assigned to that term in Section 5.23(b). "HOLDER" means the Purchaser and any subsequent direct or indirect transferee of the Note or Warrants or shares of Common Stock issuable upon exercise of the Warrants, other than a transferee who has acquired Warrants or shares of Common Stock issuable upon exercise of Warrants that have been (a) the subject of a distribution pursuant to a registered public offering or (b) transferred to a transferee who has acquired such securities after such securities have been the subject of a distribution to the public pursuant to Rule 144 under the Securities Act or otherwise distributed under circumstances not requiring a legend. "HUD" has the meaning assigned to that term in Section 10.1(b). "HUD FINANCINGS" means any type of financing to or for the Company or any Subsidiary from HUD. "INDEBTEDNESS" means, with respect to any Person, without duplication, (a) all indebtedness of such Person for borrowed money or for the deferred purchase price of property, but excluding obligations to trade creditors incurred in the ordinary course of business that are unsecured and not overdue by more than six months unless being contested in good faith, (b) all reimbursement and other obligations with respect to letters of credit, bankers' acceptances and surety bonds, whether or not matured, (c) all obligations evidenced by notes, bonds, debentures or similar instruments, (d) all indebtedness created or arising under any conditional sale or other title retention agreement with respect to property acquired by such Person (even though the rights and remedies of the seller or lender under such agreement in the event of default are limited to repossession or sale of such property), (e) all Capitalized Lease Obligations and the present value (discounted at the Index Rate as in effect on the Closing Date) of future rental payments under all synthetic leases, (f) all obligations of such Person under commodity purchase or option agreements or other commodity price hedging 8 arrangements, in each case whether contingent or matured, measured on a mark-to-market basis, (g) all obligations of such Person under any foreign exchange contract, currency swap agreement, interest rate swap, cap or collar agreement or other similar agreement or arrangement designed to alter the risks of that Person arising from fluctuations in currency values or interest rates, in each case whether contingent or matured, measured on a mark-to-market basis, (h) all Indebtedness referred to above secured by (or for which the holder of such Indebtedness has an existing right, contingent or otherwise, to be secured by) any Lien upon or in property or other assets (including accounts and contract rights) owned by such Person, even though such Person has not assumed or become liable for the payment of such Indebtedness and (i) with respect to the Company, the Obligations. The amount of Indebtedness of the Note shall be deemed to be an amount equal to the stated or determinable amount of such Indebtedness. "INDEMNIFIED PARTY" has the meaning assigned to that term in Section 7.1. "INITIAL CLOSING" has the meaning assigned to that term in Section 2.4. "INITIAL CLOSING DATE" has the meaning assigned to that term in Section 2.4. "INITIAL PURCHASE PRICE" has the meaning assigned to that term in Section 2.1. "INITIAL WARRANTS" has the meaning assigned to that term in Section 2.1. "INTELLECTUAL PROPERTY" shall mean all of the following as they exist in all jurisdictions throughout the world, in each case, to the extent owned by, licensed to, or otherwise used by the Company and the Subsidiaries: (i) patents, patent applications, and other patent rights (including any divisions, continuations, continuations-in-part, substitutions, or reissues thereof, whether or not patents are issued on any such applications and whether or not any such applications are modified, withdrawn, or resubmitted); (ii) trademarks, service marks, trade dress, trade names, brand names, Internet domain names, designs, logos, or corporate names, whether registered or unregistered, and all registrations and applications for registration thereof; (iii) copyrights, including all renewals and extensions thereof, copyright registrations and applications for registration thereof, and non-registered copyrights; (iv) trade secrets, concepts, ideas, designs, research, processes, procedures, techniques, methods, know-how, data, mask works, discoveries, inventions, modifications, extensions, improvements, and other proprietary rights (whether or not patentable or subject to copyright, mask work, or trade secret protection); and 9 (v) computer software programs, including, without limitation, all source code, object code, and documentation related thereto. "INTEREST COVERAGE RATIO" shall mean, at any date of determination, for the Company and each Subsidiary individually and on a consolidated and consolidating basis, without duplication, the ratio of (a) EBITDA for the Monthly Test Period most recently ended before such date (taken as one accounting period), to (b) Interest Expense for the Monthly Test Period most recently ended before such date (taken as one accounting period). "INTEREST EXPENSE" shall mean, for any Test Period, total interest expense (including attributable to Capitalized Leases in accordance with GAAP) of the Company and each Subsidiary, individually and collectively, on a consolidated and consolidating basis with respect to all outstanding Indebtedness, including, without limitation, (i) the Interest Expense on the aggregate outstanding amount of the Term Loan on such date, (ii) the Interest Expense on the aggregate amount of all Advances outstanding under the Revolving Facility on such date, (iii) the Interest Expense on the aggregate amount of all Capitalized Lease Obligations on such date, (iv) the Interest Expense on the aggregate outstanding amount of all Indebtedness to the Purchaser under this Agreement on such date, (v) the Interest Expense on the aggregate outstanding amount of all Seller Notes, excluding all non-cash interest expenses related to such Seller Notes, (vi) the Interest Expense on any other Indebtedness on such date, (vii) the Interest Expense on the aggregate outstanding amount of any HUD Financing and (viii) capitalized interest, but excluding commissions, discounts and other fees owed with respect to letters of credit and bankers' acceptance financing and net costs under Interest Rate Agreements. "INTEREST RATE AGREEMENTS" shall mean any interest rate swap, cap or collar agreement or other similar agreement or arrangement designed to hedge the position with respect to interest rates. "INTERIM FINANCIALS" has the meaning assigned to that term in Section 5.11(a). "INVENTORY" means all inventory of whatever name, nature, kind or description, all goods held for sale or lease or to be furnished under contracts of service, finished goods, work in process, raw materials, materials used or consumed, parts, supplies, all wrapping, packaging, advertising, labeling, and shipping materials, devices, names and marks, all contracts rights and documents relating to any of the foregoing, whether any of the foregoing be now existing or hereafter arising, wherever located, now owned or hereafter acquired. "INVESTMENT" means (i) the ownership or acquisition (whether for cash, property, services, securities or otherwise) of stock, bonds, notes, debentures, partnership or other ownership interests or other securities of any other Person and (ii) the making of any advance, loan, other extension of credit or capital contribution to any Person. 10 "INVESTOR RIGHTS AGREEMENT" means the Second Amended and Restated Investor Rights Agreement, substantially in the form attached hereto as EXHIBIT D, as the same may be amended, amended and restated, or modified from time to time in accordance with its terms. "JUNIOR SUBORDINATION AGREEMENTS" means the Subordination Agreements, substantially in the forms attached hereto as EXHIBIT K, as the same may be amended, amended and restated, or modified from time to time in accordance with their terms. "LEVERAGE TEST PERIOD" shall mean a period ending on the last calendar day of each month and including the twelve most recent calendar months then ended (taken as one accounting period), or such other period as specified in this Agreement. "LIABILITY EVENT" means any event, fact, condition or circumstance or series thereof (a) in or for which the Company or any Subsidiary becomes liable or otherwise responsible for any amount owed or owing to any Medicare or Medicaid program by a provider under common ownership with the Company or such Subsidiary or any provider owned by the Company or such Subsidiary pursuant to any applicable law, ordinance, rule, decree, order or regulation of any Governmental Authority after the failure of any such provider to pay any such amount when owed or owing, (b) in which Medicaid or Medicare payments to the Company or any Subsidiary are lawfully set-off against payments to the Company or any Subsidiary to satisfy any liability of or for any amounts owed or owing to any Medicare or Medicaid program by a provider under common ownership with the Company or such Subsidiary or any provider owned by the Company or such Subsidiary pursuant to any applicable law, ordinance, rule, decree, order or regulation of any Governmental Authority, excluding any cost report liability which has been appropriately recorded in the Company's or such Subsidiary's financial statements in accordance with GAAP and appropriately reserved with respect to any Borrowing Base (as defined in the Credit Agreement) calculation, or (c) any of the foregoing under clauses (a) or (b) in each case pursuant to statutory or regulatory provisions that are similar to any applicable law, ordinance, rule, decree, order or regulation of any Governmental Authority referenced in clauses (a) and (b) above or successor provisions thereto. "LIEN" means any mortgage, pledge, hypothecation, assignment, deposit arrangement, encumbrances, lien (statutory or other), charge or other security interest of any preference, priority or other security agreement or preferential arrangement of any kind or nature whatsoever (including, without limitation, any conditional sale or other title retention agreement and any Capitalized Lease having substantially the same economic effect as any of the foregoing). "LOSSES" has the meaning assigned to that term in Section 7.1. "MEDICAL WASTE LAWS" has the meaning assigned to that term in Section 5.34(b). 11 "MEDICARE AND MEDICAID PROGRAMS" has the meaning assigned to that term in Section 5.34(a). "MONTHLY TEST PERIOD" shall mean a period ending on the last calendar day of each month and including the three most recent calendar months then ended (taken as one accounting period), or such other period as specified in this Agreement. "NASDAQ" means the National Market System of The Nasdaq Stock Market, Inc. "NET INCOME" shall mean, for any Test Period, the net income (or loss) of the Company and each Subsidiary, individually and collectively, on a consolidated and consolidating basis for such period taken as a single accounting period determined in conformity with GAAP; PROVIDED, that there shall be excluded (i) the income (or loss) of any Person in which any other Person (other than the Company or any Subsidiary) has a joint interest, except to the extent of the amount of dividends or other distributions actually paid to the Company or any Subsidiary by such Person during such period, (ii) the income (or loss) of any Person accrued prior to the date it becomes a borrower under the Notes or a Subsidiary or is merged into or consolidated with the Company or any Subsidiary or that Person's assets are acquired by the Company or any Subsidiary, (iii) the income of the Company or any Subsidiary to the extent that the declaration or payment of dividends or similar distributions of that income by that Subsidiary is not at the time permitted by operation of the terms of the charter or any agreement, instrument, judgment, decree, order, statute, rule or governmental regulation applicable to that Subsidiary, (iv) compensation expense resulting from the issuance of capital stock, stock options or stock appreciation rights issued to former or current employees, including officers, of the Company or any Subsidiary, or the exercise of such options or rights, in each case to the extent the obligation (if any) associated therewith is not expected to be settled by the payment of cash by the Company or any Subsidiary or any affiliate thereof, and (v) compensation expense resulting from the repurchase of capital stock, options and rights described in clause (iv) of this definition of Net Income. "NONPARTICIPATING HOLDERS" has the meaning assigned to that term in Section 13.1(a). "NOTE" has the meaning assigned to that term in the recitals of this Agreement. "NYSE" means the New York Stock Exchange, Inc. "OBLIGATIONS" means the obligation of the Company to the Purchaser for the prompt payment when due (whether by scheduled maturity, required prepayment, acceleration, demand or otherwise) and performance of (a) the Note and any premium and all interest and other sums in respect thereof, and (b) all other liabilities, obligations and indebtedness, direct or indirect, matured or unmatured, primary or secondary, absolute or contingent, due or to become due, secured or unsecured of the Company to 12 the Purchaser, now or hereafter owing or incurred, accrued in each case to the date of payment thereof. "PENSION PLAN" means an employee benefit plan or other plan maintained for the employees of the Company or any Subsidiary as described in Section 4021(a) of ERISA. "PERMITS" has the meaning assigned to that term in Section 5.34(a). "PERSON" means an individual, corporation, partnership, joint venture, association, estate, joint stock company, trust, organization, business, or a government or agency or political subdivision thereof. "PLAN" has the meaning assigned to that term in Section 5.13(c). "PMR COMMON STOCK" has the meaning assigned to that term in Section 5.13(f) "PMR COMPANIES" has the meaning assigned to that term in Section 5.34(a). "PMR CORPORATION" means PMR Corporation, a Delaware corporation. "PMR GUARANTEE" has the meaning assigned to that term in Section 9.12. "PMR LETTER AGREEMENT" means the letter agreement, substantially in the form attached hereto as EXHIBIT J, as the same may be amended, amended and restated or modified from time to time in accordance with its terms. "PMR MERGER" means the merger contemplated by the PMR Merger Agreement. "PMR MERGER AGREEMENT" means the Agreement and Plan of Merger, dated as of May 6, 2002, by and between PMR Corporation, PMR Acquisition Corporation, a Delaware corporation, and the Company, as amended by Amendment No. 1 to Agreement and Plan of Merger, dated as of June 10, 2002, and as further amended or modified in accordance with its terms. "PREPAYMENT EVENT" has the meaning assigned to that term in the Note. "PRIVATE PROGRAMS" has the meaning assigned to that term in Section 5.34(a). "PROJECTIONS" has the meaning assigned to that term in Section 5.20. "PSI COMPANIES" has the meaning assigned to that term in Section 5.34(a). 13 "PURCHASER" has the meaning assigned to that term in the recitals of this Agreement and shall include its successors and assigns. "PUT PRICE" has the meaning assigned to that term in Section 13.1(a). "PUT PRICE NOTES" has the meaning assigned to that term in Section 13.1(b). "PWRW&G" has the meaning assigned to that term in Section 2.4. "REDEMPTION DATE" has the meaning assigned to that term in Section 13.1(a). "REGISTER" has the meaning assigned to that term in Section 9.17. "REGULATED COMPANY" and "REGULATED COMPANIES" have the meanings assigned to those terms in Section 5.34(a). "REGULATIONS" has the meaning assigned to that term in Section 5.34(a). "RELEASE" has the meaning assigned to that term in Section 5.23(b). "REQUIRED REDEMPTION NOTICE" has the meaning assigned to that term in Section 13.1(a). "REQUIREMENTS OF LAW" means, as to any Person, any law, treaty, rule or regulation or determination of an arbitrator or a court or other Governmental Authority, or any guidance or manual of any Governmental Authority, in each case applicable or binding upon such Person or any of its property or to which such Person or any of its property is subject. "REVOLVING FACILITY" shall mean a revolving credit facility provided by the lenders under the Credit Agreement pursuant to the Credit Agreement. "SAFETY AND ENVIRONMENTAL LAWS" means all Requirements of Law relating to pollution, protection of the Environment, protection of worker health and safety, or the emission, discharge, release or threatened release of Hazardous Substances into the Environment or otherwise relating to the manufacture, processing, distribution, use, treatment, storage, disposal, transport or handling of Hazardous Substances including the Comprehensive Environmental Response, Compensation and Liability Act, 42 U.S.C.ss. 9601 ET SEQ., the Resource Conservation and Recovery Act, 42 U.S.C.ss. 6901 ET SEQ., the toxic Substances Control Act, 15 U.S.C.ss. 2601 ET SEQ., the Federal Water Pollution Control Act, 33 U.S.C.ss. 1251 ET SEQ., the Clean Air Act, 42 U.S.C.ss. 7401 ET SEQ., the Federal Insecticide, Fungicide and Rodenticide Act, 7 U.S.C.ss. 121 ET SEQ., the Occupational Safety and Health Act, 29 U.S.C.ss. 651 ET SEQ., the Asbestos Hazard Emergency Response Act, 15 U.S.C.ss. 2601 ET SEQ., the Safe Drinking Water Act, 42 U.S.C.ss. 300f ET SEQ., the Oil Pollution Act of 1990, 33 U.S.C. ss. 2701 ET SEQ., and analogous state acts. 14 "SECURITIES ACT" means the Securities Act of 1933, as amended, and the rules and regulations of the Commission promulgated thereunder. "SELLER NOTES" shall mean the Indebtedness owing to the shareholders of Aeries Healthcare pursuant to the Aeries Purchase Agreement and the Indebtedness under the Junior Subordination Agreements. "SENIOR DEBT DOCUMENTS" has the meaning assigned to that term in the Subordination Agreement. "SENIOR LEVERAGE RATIO" shall mean, at any date of determination, for the Company and each Subsidiary, individually and collectively, on a consolidated and consolidating basis, the ratio of (i) the aggregate outstanding amount of (A) the aggregate outstanding amount of the Term Loan on such date, (B) the aggregate amount of all Advances outstanding under the Revolving Facility on such date, (C) the aggregate amount of all Capitalized Lease Obligations on such date, and (D) the aggregate outstanding amount of all HUD Financings to (ii) EBITDA (including overhead without duplication to overhead allocated to the Unit Management Division). "SERIES A STOCK" has the meaning assigned to that term in Section 5.13(a). "SERIES B STOCK" has the meaning assigned to that term in Section 5.13(a). "SOLVENT" means, as to any Person, that the fair salable value on a going concern basis of the assets and property of such Person is, on the date of determination, greater than the total amount of liabilities (including contingent and unliquidated liabilities) of such Person as of such date and that, as of such date, such Person is able to pay all liabilities of such Person as such liabilities mature. In computing the amount of contingent or unliquidated liabilities at any time, such liabilities will be computed as the amount which, in light of all the facts and circumstances existing at such time, represents the amount that is probable to become an actual or matured liability. "SUBORDINATED DEBT" means any Indebtedness of the Company that is expressly subordinated to the Obligations, in form and substance satisfactory to the Purchaser. "SUBORDINATION AGREEMENT" means the Subordination and Intercreditor Agreement, substantially in the form attached hereto as EXHIBIT I, as the same may be amended or modified from time to time in accordance with its terms. "SUBSIDIARIES' GUARANTEE" means that guaranty agreement, substantially in the form attached hereto as EXHIBIT G, as the same may be amended or modified from time to time in accordance with its terms. "SUBSIDIARY" means any Person in which more than 50% of all equity, membership, partnership or other ownership interests is owned directly or indirectly by the Company or one or more of the Company's Subsidiaries. 15 "TAX" or "TAXES" means all federal, state, county, local, foreign and other taxes (including, without limitation, income, profits, premium, estimated, excise, sales, use, occupancy, gross receipts, franchise, ad valorem, severance, capital levy, production, transfer, withholding, employment, unemployment compensation, payroll-related and property taxes, import duties and other governmental charges and assessments), whether or not measured in whole or in part by net income, and including deficiencies, interest, additions to tax or interest, and penalties with respect thereto, and including expenses associated with any proposed adjustment relating to any of the foregoing (including advice in connection with contesting such adjustment). "TERM LOAN" shall mean a term loan facility provided by the lenders under the Credit Agreement pursuant to the Credit Agreement. "TEST PERIOD" means, individually and/or collectively, the Monthly Test Period and the Leverage Test Period. "TOTAL DEBT" shall mean, at any date of determination, for the Company and the Subsidiaries, individually and collectively, on a consolidated and consolidating basis, the sum of (without duplication) (i) the aggregate outstanding amount of the Term Loan on such date, (ii) the aggregate amount of all Advances outstanding under the Revolving Facility on such date, (iii) the aggregate amount of all Capitalized Lease Obligations on such date, (iv) the aggregate outstanding amount of all Indebtedness to the Purchaser under this Agreement on such date, (v) the aggregate amount of all Indebtedness under the Junior Subordination Agreements, (vi) the aggregate amount of all Indebtedness pursuant to the Seller Notes, (vii) the aggregate outstanding amount of all HUD Financings, and (viii) any other Indebtedness on such date, LESS (ix) cash held on such date and (ix) Cash Equivalents held on such date. "TOTAL DEBT SERVICE" shall mean for any period, for the Company and the Subsidiaries, individually and collectively, on a consolidated and consolidating basis, the sum of (i) scheduled or other required payments of principal on Indebtedness, and (ii) Interest Expense, in each case for such period. "TOTAL LEVERAGE RATIO" shall mean, at any date of determination, for the Company and each Subsidiary, individually and collectively, on a consolidated and consolidating basis, the ratio of (i) Total Debt on such date, to (ii) EBITDA (including overhead without duplication to overhead allocated to the Unit Management Division). "TRANSACTION DOCUMENTS" means, collectively, this Agreement, the Note, the Warrant Certificates, the Investor Rights Agreement, the Co-Sale Agreement, the Voting Agreement, the Amending Agreement, the Subsidiaries' Guarantee, the PMR Guarantee (if any), the PMR Letter Agreement, the PMR Merger Agreement, the Drawdown Acquisition Documents (if any), the Subordination Agreement, the Junior Subordination Agreements and the Credit Agreement. "UNIT MANAGEMENT DIVISION" shall mean the Company's business unit (which operates under Sunstone Behavioral Health, Inc. and Persons in which more than 16 50% of all equity, membership, partnership and other ownership interests is owned directly or indirectly by Sunstone Behavioral Health, Inc.) which provides management services to the psychiatric units of medical/surgical hospitals pursuant to management contracts. "VOTING AGREEMENT" means the Second Amended and Restated Voting Agreement, substantially in the form attached hereto as EXHIBIT F, as the same may be amended, amended and restated or modified from time to time in accordance with its terms. "WARRANT CERTIFICATE" means the Warrant Certificate representing the Warrants, substantially in the form attached hereto as EXHIBIT B. "WARRANTS" has the meaning assigned to that term in the recitals of this Agreement. 1.2 ACCOUNTING TERMS; FINANCIAL COVENANTS. All accounting terms used herein not expressly defined in this Agreement shall have the respective meanings given to them in accordance with sound accounting practice. The term "sound accounting practice" means such accounting practice as, in the opinion of the independent accountants regularly retained by the Company, conforms at the time to GAAP applied on a consistent basis. If any changes in accounting principles are hereafter occasioned by promulgation of rules, regulations, pronouncements or opinions by or are otherwise required by the Financial Accounting Standards Board or the American Institute of Certified Public Accountants (or successors thereto or agencies with similar functions), and any of such changes results in a change in the method of calculation of, or affects the results of such calculation of, any of the financial covenants, standards or terms found herein, then the parties hereto agree to enter into and diligently pursue negotiations in order to amend such financial covenants, standards or terms so as to reflect fairly and equitably such changes, with the desired result that the criteria for evaluating the Company's financial condition and results of operations shall be the same after such changes as if such changes had not been made. ARTICLE II PURCHASE AND SALE 2.1 PURCHASE AND SALE OF NOTE AND INITIAL WARRANTS. Upon the terms and subject to the conditions set forth herein, the Company agrees that it will issue to the Purchaser, and the Purchaser agrees that it will acquire from the Company on the Initial Closing Date, (a) a Note in the aggregate principal amount of up to $20,000,000 with $10,000,000 advanced thereunder, with such Note being substantially in the form attached hereto as Exhibit A, appropriately completed in conformity herewith and (b) a Warrant Certificate representing Warrants to purchase initially 1,502,140 shares of Common Stock (subject to adjustment as set forth in the Warrant Certificate) (the "INITIAL WARRANTS"), all for an aggregate purchase price of $10,000,000 (the "INITIAL PURCHASE PRICE") in cash, by wire transfer of immediately available funds to an account designated 17 by the Company in a written notice delivered to the Purchaser not later than two Business Days prior to the Initial Closing Date. 2.2 ADDITIONAL LOANS. Upon the terms and subject to the conditions set forth herein, the Company has the option of requiring the Purchaser, from time to time on or before December 29, 2003, to advance additional loans to the Company pursuant to the Note (each, an "ADDITIONAL LOAN" and, collectively, the "ADDITIONAL LOANS") to be used to pay the purchase price of any Drawdown Acquisition; provided, that, in no event shall the Purchaser have any obligation to advance more than an aggregate principal amount of $20,000,000 under the Note and this Agreement. The Company shall give the Purchaser written notice of its election to borrow Additional Loans under the Note on a date specified in such notice (which date shall be a Business Day occurring at least 15 Business Days after the date of such notice and prior to December 29, 2003, and such notice shall specify the amount of the Additional Loans to be made under the Note (which must be at least $5,000,000 and, if greater, in $1,000,000 multiples thereof). 2.3 FEES. The Company hereby agrees that it will pay to the Purchaser at the Initial Closing a facility fee equal to $400,000. The Purchaser shall deduct such amount from the Initial Purchase Price for the payment of such facility fee. 2.4 INITIAL CLOSING. The closing (the "INITIAL CLOSING") of the purchase and sale of the Note and the Initial Warrants shall take place at the offices of Paul, Weiss, Rifkind, Wharton & Garrison ("PWRW&G"), 1285 Avenue of the Americas, New York, New York 10019-6064, at 10:00 a.m., New York City time, on the date hereof or on such other date and at such other time as the Purchaser and the Company may mutually agree (the "INITIAL CLOSING DATE"). At the Initial Closing, upon the terms and subject to the conditions set forth herein, the Company shall sell the Note and the Initial Warrants to the Purchaser by delivering to the Purchaser the Note and the Warrant Certificate representing the Initial Warrants, registered in the name of the Purchaser, with appropriate issue stamps, if any, affixed at the expense of the Company, free and clear of any Lien, and the Purchaser shall purchase the Note and the Initial Warrants for the Initial Purchase Price. 2.5 ADDITIONAL CLOSINGS. (a) The closing (each, an "ADDITIONAL CLOSING") of each Additional Loan and the purchase of Additional Warrants shall occur on the date and at the location and time specified in the written notice delivered by the Company to the Purchaser pursuant to the last sentence of Section 2.2 (each, an "ADDITIONAL CLOSING DATE"). At each Additional Closing, upon the terms and subject to the conditions set forth herein, the Company shall borrow the Additional Loans on such date pursuant to the Note and issue to the Purchaser a Warrant Certificate representing Warrants to purchase 150,214 shares of Common Stock (subject to adjustment as set forth in the Warrant Certificate) for each $1,000,000 of Additional Loans being advanced by the Purchaser on such date (each, an "ADDITIONAL WARRANT" and, collectively, the "ADDITIONAL WARRANTS"), registered in the name of the Purchaser, with appropriate issue stamps, if any, affixed at the expense of the Company, free and clear of any Lien, and the Purchaser shall deliver an amount equal to 18 the Additional Loans advanced by the Purchaser on such date (the "ADDITIONAL PURCHASE PRICE"). (b) The obligation of the Purchaser at each Additional Closing to make Additional Loans and purchase Additional Warrants, to pay the Additional Purchase Price and to perform any of its obligations hereunder shall be subject to the satisfaction or waiver of the following conditions on or before such Additional Closing Date: (i) A Drawdown Acquisition (meeting all the requirements of such set forth in the definition of such term in Section 1.1) is simultaneously being consummated on such Additional Closing Date; (ii) The proceeds of the Additional Loans to be advanced on such Additional Closing Date shall be used to pay part or all of the purchase price of such Drawdown Acquisition; (iii) The representations and warranties of the seller or sellers in the Drawdown Acquisition Documents (relating to such Drawdown Acquisition) shall be true and correct in all respects at and as of such Additional Closing Date as if made as of such Additional Closing Date (unless such representations and warranties relate to matters only as of a particular date, in which case such representations and warranties shall be true and correct in all respects as of such date); (iv) The Company and each other Person shall have performed and complied with all of its agreements and conditions set forth or contemplated in such Drawdown Acquisition Documents that are required to be performed or complied with by it on or before the closing of the transactions contemplated by such Drawdown Acquisition Documents; (v) The Purchaser shall have received true, complete and correct copies of such Drawdown Acquisition Documents and any other documents it may reasonably request in connection with the transactions contemplated by such Drawdown Acquisition Documents; (vi) The transactions contemplated by such Drawdown Acquisition Documents are simultaneously being consummated in accordance with the terms of such Drawdown Acquisition Documents, and all conditions to the Company's obligations to consummate the transactions contemplated by such Drawdown Acquisition Documents shall have been satisfied or waived with the prior consent of the Purchaser; (vii) Any Person acquired by the Company in connection with such Drawdown Acquisition shall execute and deliver to the Purchaser the Subsidiaries' Guarantee; (viii) The representations and warranties of (A) each Subsidiary in the Subsidiaries' Guarantee and (B) PMR Corporation in the PMR Guarantee (if any), shall be true and correct in all respects at and as of such Additional Closing Date as if made as of such Additional Closing Date and after giving effect to the 19 transactions contemplated by Section 2.2 and such Drawdown Acquisition Documents (unless such representations and warranties relate to matters only as of a particular date, in which case such representations and warranties shall be true and correct in all respects as of such date); and (ix) The terms and conditions of such Drawdown Acquisition are acceptable to the Purchaser. (c) In addition to the conditions to each Additional Closing set forth in Section 2.5(b), on each Additional Closing Date, (i) the Purchaser shall deliver to the Company a certificate signed by a General Partner of the Purchaser stating that the representations and warranties of the Purchaser contained in Article VI are true and correct in all respects at and as of such Additional Closing Date as if made as of such Additional Closing Date (unless such representations and warranties relate to matters only as of a particular date, in which case such representations and warranties shall be true and correct in all respects as of such date) and (ii) the Chairman, President, Chief Financial Officer, Chief Development Officer or Controller of the Company shall deliver to the Purchaser a certificate stating that (A) the representations and warranties of the Company contained in Article V are true and correct in all respects at and as of such Additional Closing Date as if made as of such Additional Closing Date and after giving effect to the transactions contemplated by Section 2.2 and the applicable Drawdown Acquisition Documents (unless such representations and warranties relate to matters only as of a particular date in which case such representations and warranties shall be true and correct in all respects as of such date) and (B) the Company is, and after giving effect to the transactions contemplated by Section 2.2 and the applicable Drawdown Acquisition Documents will be, in compliance in all respects with its obligations in Articles VIII, IX and X (such financial covenants to be calculated on a pro forma basis in a manner to be agreed upon by the Company and the Purchaser); PROVIDED, THAT, (x) the reference in Section 5.11 to "the audited consolidated financial statements of the Company and the Subsidiaries for the fiscal year ended December 31, 2001" shall instead be to "the audited consolidated financial statements of the Company and the Subsidiaries for the most recently completed fiscal year," (y) the reference in Section 5.11 to "the unaudited consolidated balance sheet of the Company and the Subsidiaries as of March 31, 2002 and the related consolidated statements of operations and accumulated deficit and cash flows, together with the notes thereto, for the three-month period then ended" shall instead be to "the unaudited consolidated financial statements of the Company and the Subsidiaries for each completed fiscal quarter ending March 31, June 30 and September 30 since the most recently completed fiscal year," and (z) the Company shall deliver a supplemental schedule to the Purchaser updating the capitalization and material contracts representations and warranties contained in Sections 5.13 and 5.29, respectively; PROVIDED, FURTHER, that the Company shall also satisfy and certify that the conditions contained in Sections 3.6, 3.7, 3.9, 3.10, 3.17, 3.18 and 3.20 shall be satisfied as of the Additional Closing Date and after giving effect to the transactions contemplated by Section 2.2 and the applicable Drawdown Acquisition Documents, and the Company shall reimburse the Purchaser on such Additional Closing Date for all fees and expenses set forth in Section 15.17(c)(i). 20 ARTICLE III CONDITIONS TO THE OBLIGATION OF THE PURCHASER TO CLOSE The obligation of the Purchaser to purchase the Note and the Initial Warrants, to pay the Initial Purchase Price and to perform any of its obligations hereunder shall be subject to the satisfaction or waiver of the following conditions on or before the Initial Closing Date: 3.1 REPRESENTATIONS AND WARRANTIES TRUE. The representations and warranties of the Company contained in Article V hereof shall be true and correct in all respects (a) at and as of the Closing Date as if made as of the Closing Date and (b) after giving effect to the transactions contemplated by the Transaction Documents (unless, in either case, such representations and warranties relate to matters only as of a particular date, in which case such representations and warranties shall be true and correct in all respects as of such date). 3.2 COMPLIANCE WITH THIS AGREEMENT. The Company shall have performed and complied with all of its agreements and conditions set forth or contemplated herein that are required to be performed or complied with by it on or before the Closing Date. 3.3 OFFICERS' CERTIFICATE. The Purchaser shall have received a certificate, dated the Closing Date and signed by the Chairman, President, Chief Financial Officer, Chief Development Officer or Controller of the Company, certifying that the conditions set forth in Sections 3.1 and 3.2 hereof have been satisfied on and as of such date. 3.4 SECRETARY'S CERTIFICATES. The Purchaser shall have received a certificate, dated the Closing Date and (a) signed by the Secretary or an Assistant Secretary of the Company, attaching a good standing certificate from the Secretary of State of the State of Delaware with respect to the Company and certifying the truth and correctness of attached copies of the Certificate of Incorporation and By-laws of the Company and resolutions of the Board of Directors of the Company approving this Agreement, the other Transaction Documents and the transactions contemplated hereby and thereby and (b) signed by the Secretary or an Assistant Secretary of each Subsidiary, attaching a good standing certificate from the Secretary of State of the jurisdiction of organization of such Subsidiary with respect to such Subsidiary and certifying the truth and correctness of attached copies of the organizational or governing documents of such Subsidiary and resolutions of the Board of Directors of such Subsidiary approving the Subsidiaries' Guarantee and the transactions contemplated thereby. 3.5 DOCUMENTS. The Purchaser or its counsel shall have received copies of such documents as it reasonably may request in connection with the sale of the Note and the Warrants and the transactions contemplated hereby, all in form and substance reasonably satisfactory to the Purchaser. 21 3.6 PURCHASE PERMITTED BY APPLICABLE LAWS; LEGAL INVESTMENT. The acquisition of and payment for the Note and the Warrants and the consummation of the transactions contemplated by the Transaction Documents (a) shall not be prohibited by any applicable law or governmental regulation, (b) shall not subject the Purchaser to any penalty or, in its reasonable judgment, other onerous condition under or pursuant to any applicable law or governmental regulation and (c) shall be permitted by the laws and regulations of the jurisdictions to which it is subject. 3.7 OPINION OF COUNSEL. The Purchaser shall have received the opinion of Harwell Howard Hyne Gabbert & Manner, P.C., counsel to the Company, dated the Closing Date, substantially in the form attached hereto as Exhibit C. 3.8 APPROVAL OF COUNSEL TO THE PURCHASER. All actions and proceedings hereunder and all documents required to be delivered by the Company hereunder or in connection with the consummation of the transactions contemplated by the Transaction Documents, and all other related matters, shall have been reasonably acceptable to PWRW&G, counsel to the Purchaser, as to their form and substance. 3.9 CONSENTS AND APPROVALS. All consents, waivers, exemptions, authorizations, or other actions by, or notices to, or filings with, Governmental Authorities and other Persons (including, without limitation, CapitalSource) necessary or required in connection with the execution, delivery or performance by the Company or enforcement against the Company of this Agreement or any other Transaction Document shall have been obtained and be in full force and effect, and the Purchaser shall have been furnished with satisfactory evidence thereof. 3.10 NO MATERIAL ADVERSE CHANGE. Since December 31, 2001, there shall have been no material adverse change, nor shall any such change be threatened, in the assets, business, properties, prospects, operations or financial or other condition of the Company and the Subsidiaries, taken as a whole. 3.11 INVESTOR RIGHTS AGREEMENT. The Company and each other party thereto (other than the Purchaser) shall have duly executed and delivered to the Purchaser the Investor Rights Agreement. 3.12 CO-SALE AGREEMENT. The Company and each other party thereto (other than the Purchaser) shall have duly executed and delivered to the Purchaser the Co-Sale Agreement. 3.13 VOTING AGREEMENT. The Company and each other party thereto (other than the Purchaser) shall have duly executed and delivered the Voting Agreement. 3.14 SUBSIDIARIES' GUARANTEE. Each of the Subsidiaries set forth on Schedule 3.14 shall have duly executed and delivered to the Purchaser the Subsidiaries' Guarantee. 3.15 SUBORDINATION AGREEMENT. The Company and CapitalSource shall have duly executed and delivered to the Purchaser the Subordination Agreement. 22 3.16 MARKET CONDITIONS. At any time after the date hereof and prior to the Initial Closing Date, (a) trading in securities generally on the NYSE shall not have been suspended or limited or minimum or maximum prices shall not have been generally established on such exchange, or additional material governmental restrictions, not in force on the date of this Agreement, shall not have been imposed upon trading in securities generally by such exchange or by order of the Commission or any court or other Governmental Authority, (b) a general banking moratorium shall not have been declared by United States Federal or New York State authorities or (c) any material adverse change in the financial or securities markets in the United States or in political, financial or economic conditions in the United States or any outbreak or material escalation of hostilities or declaration by the United States of a national emergency or war or other calamity or crisis shall not have occurred. 3.17 NO LITIGATION. No action, suit, proceeding, claim or dispute shall have been brought or otherwise arisen at law, in equity, in arbitration or before any Governmental Authority against the Company or any Subsidiary which would, if adversely determined, in the reasonable judgment of the Purchaser, (a) after giving effect to the transactions contemplated hereby, have a material adverse effect on the assets, business, properties, prospects, operations or financial or other condition of the Company and the Subsidiaries, taken as a whole, or (b) have a material adverse effect on the ability of the Company or any Subsidiary to perform its respective obligations under any Transaction Document. 3.18 NO DEFAULT OR BREACH. The Company shall not have been in default under or with respect to this Agreement or any other Transaction Document and, after giving effect to the transactions contemplated hereby and thereby, the Company will not be in default under any of the Transaction Documents. Neither the Company nor the Subsidiaries shall be in default and, after giving effect to the transactions contemplated by the Transaction Documents, the Company and the Subsidiaries will not be in default, under or with respect to any of its Contractual Obligations in any respect, which, individually or together with all such defaults, would have a material adverse effect on the assets, business, properties, prospects, operations or financial or other condition of the Company and the Subsidiaries, taken as a whole, or which could materially adversely affect the ability of the Company or any Subsidiary to perform its respective obligations under any Transaction Document. 3.19 REPAYMENT OF PROMISSORY NOTES. Simultaneously with the Initial Closing, the aggregate principal amount and all accrued interest on the promissory notes listed on Schedule 3.19 and all other amounts due thereunder shall be paid in full, and satisfactory evidence thereof shall have been delivered to the Purchaser. 3.20 CREDIT AGREEMENT. No Default or Event of Default (each as defined in the Credit Agreement) shall have occurred and be continuing at and as of the Closing Date and after giving effect to the transactions contemplated by the Transaction Documents. 23 3.21 AMENDMENT TO CREDIT AGREEMENT. The parties to the Credit Agreement shall have duly executed and delivered an amendment thereto in respect of, among other things, the issuance of the Note, the Put Price Notes and the Warrants, the payment of interest on the Note and certain other payments in respect of the Note, the Warrants and this Agreement, in form and substance satisfactory to the Purchaser. 3.22 PMR LETTER AGREEMENT. The Company and PMR Corporation shall have duly executed and delivered to the Purchaser the PMR Letter Agreement. 3.23 AERIES HEALTHCARE. Aeries Healthcare shall have duly executed and delivered to the Purchaser the Subsidiaries' Guarantee. 3.24 JUNIOR SUBORDINATION AGREEMENTS. The Company, CapitalSource and each of the Persons listed on Schedule 3.24 shall have duly executed and delivered to the Purchaser the Junior Subordination Agreements. 3.25 AMENDING AGREEMENT. The Company, PMR Corporation and each other party to those certain Voting Agreements, dated on or about April 30, 2002, by and between PMR Corporation, the Company and the other parties thereto shall have duly executed and delivered to the Purchaser the Amending Agreement. 3.26 PMR CONSENT. PMR Corporation shall have duly executed and delivered a consent to any actions taken by the Company or any Subsidiary prior to the consummation of the PMR Merger necessitating or requiring the consent of PMR Corporation under the PMR Merger Agreement, and such consent shall be in full force and effect, and the Purchaser shall have been furnished with satisfactory evidence thereof. 3.27 AMENDMENT TO BY-LAWS. The Company shall have amended its By-laws to remove the right of first refusal or any other similar restrictions on the ability of the Purchaser to transfer securities of the Company, and the Purchaser shall have been furnished with satisfactory evidence thereof. 3.28 WAIVER OF RIGHTS. All anti-dilution, preemptive and first offer rights and other similar rights, if any, to which any Person is entitled in connection with the transactions contemplated by the Transaction Documents, including, without limitation, the issuance of the Note and Warrants (including, without limitation, any adjustment in the number of shares of Common Stock issued or issuable upon exercise thereof), shall be waived in writing, and the terms of the Series A Stock and Series B Stock shall be amended to delete the rights of any holders thereof to receive upon the events described in Section 3 of the Company's Certificate of Incorporation, as amended, any amounts in excess of the liquidation preference plus all declared and unpaid dividends on the Series A Stock or Series B Stock, and satisfactory evidence of the foregoing shall have been delivered to the Purchaser. 3.29 FEES AND EXPENSES. The Company shall have paid to the Purchaser the fees provided for in Section 2.3 and the expenses provided for in Section 15.17. 24 ARTICLE IV CONDITIONS TO THE OBLIGATION OF THE COMPANY TO CLOSE The obligation of the Company to issue and sell the Note and the Initial Warrants and to perform any of its other obligations hereunder shall be subject to the satisfaction or waiver of the following conditions on or before the Closing Date: 4.1 REPRESENTATIONS AND WARRANTIES TRUE. The representations and warranties of the Purchaser contained in Article VI hereof shall be true and correct in all material respects at and as of the Closing Date as if made as of the Closing Date (unless such representations and warranties relate to matters only as of a particular date, in which case such representations and warranties shall be true and correct as of such date). 4.2 COMPLIANCE WITH THIS AGREEMENT. The Purchaser shall have performed and complied with all of its agreements and conditions set forth or contemplated herein that are required to be performed or complied with by the Purchaser on or before the Closing Date. 4.3 CONSENTS AND APPROVALS. All consents, waivers, exemptions, authorizations or other actions by, or notices to, or filings with, Governmental Authorities and other Persons necessary or required in connection with the execution, delivery or performance by the Purchaser or enforcement against the Purchaser of this Agreement shall have been obtained and be in full force and effect, and the Company shall have been furnished with satisfactory evidence thereof. ARTICLE V REPRESENTATIONS AND WARRANTIES OF THE COMPANY The Company hereby represents and warrants to the Purchaser as follows: 5.1 CORPORATE EXISTENCE AND POWER. The Company and each of the Subsidiaries: (a) is, and after giving effect to the transactions contemplated by the Transaction Documents will be, duly organized, validly existing and in good standing under the laws of the jurisdiction of its organization; (b) has, and after giving effect to the transactions contemplated by the Transactions Documents will have, (i) full corporate power and authority and (ii) all governmental licenses, authorizations, consents and approvals to own and operate its property, to lease the property it operates as lessee and to conduct the business in which it is currently, or is currently proposed to be, engaged; 25 (c) is, and after giving effect to the transactions contemplated by the Transactions Documents will be, duly qualified as a foreign corporation, licensed and in good standing under the laws of each jurisdiction where its ownership, lease or operation of property or the conduct of its business requires such qualification; and (d) is, and after giving effect to the transactions contemplated by the Transactions Documents will be, in compliance with (i) its organizational or governing documents and (ii) all Requirements of Law; except, in the case of (b)(ii), (c) or (d)(ii) of this Section 5.1, to the extent that the failure to do so would not have a material adverse effect on the assets, business, properties, prospects, operations or financial or other condition of the Company and the Subsidiaries, taken as a whole. 5.2 CORPORATE AUTHORIZATION; NO CONTRAVENTION. The execution, delivery and performance by the Company of this Agreement and each other Transaction Document to which it is a party, and the transactions contemplated hereby and thereby, including, without limitation, the issuance of the Note and the Warrants: (a) is within the Company's corporate power and authority and has been duly authorized by all necessary corporate action; (b) does not, and will not after giving effect to the transactions contemplated by the Transaction Documents, contravene the terms of the certificate of incorporation, by-laws or organizational or governing documents or any amendment thereof of the Company or any Subsidiary; and (c) does not, and will not after giving effect to the transactions contemplated by the Transactions Documents, violate, conflict with or result in any breach of, contravention of or the creation of any Lien under, any Contractual Obligation of the Company or any Subsidiary or any order or decree directly relating to the Company or any Subsidiary. 5.3 GOVERNMENTAL AUTHORIZATION; THIRD PARTY CONSENTS. No approval, consent, exemption, authorization, or other action by, or notice to, or filing with, any Governmental Authority or any other Person, is necessary or required in connection with the execution, delivery or performance by the Company or enforcement against the Company of this Agreement or any other Transaction Document to which the Company is a party or the transactions contemplated hereby or thereby. As of the Closing Date, the issuance of the Note, the Put Price Notes and the Warrants, the payment of interest on the Note and all other payments permitted by the Subordination Agreement, will not be prohibited by the terms of the Credit Agreement. 5.4 BINDING EFFECT. This Agreement, the Note, the Warrant Certificates, the Investor Rights Agreement, the Co-Sale Agreement, the Voting Agreement and each other Transaction Document to which the Company is a party have been duly executed and delivered by the Company, and this Agreement and the other Transaction Documents to which the Company is a party constitute, and after giving 26 effect to the transactions contemplated by the Transaction Documents will constitute, the legal, valid and binding obligations of the Company enforceable against the Company in accordance with their respective terms, subject to bankruptcy, insolvency, fraudulent transfer, reorganization, moratorium and other laws of general applicability relating to or affecting creditors' rights and to general equity principles. 5.5 NO LEGAL BAR. The execution, delivery and performance by the Company of this Agreement and the other Transaction Documents to which the Company is a party will not violate any Requirements of Law. 5.6 LITIGATION. Except as set forth on Schedule 5.6, there are no, and after giving effect to the transactions contemplated by the Transaction Documents there will not be any, actions, suits, proceedings, claims or disputes pending, or to the knowledge of the Company, threatened, at law, in equity, in arbitration or before any Governmental Authority against the Company or any Subsidiary (or any of their respective officers or directors), that if determined adversely, would be reasonably expected to have a material adverse effect on the assets, business, properties, prospects, operations or financial or other condition of the Company and the Subsidiaries, taken as a whole, or could have a material adverse effect on the ability of the Company or any Subsidiary to perform its respective obligations under any Transaction Document to which it is a party. No injunction, writ, temporary restraining order, decree or any order of any nature has been issued by any court or other Governmental Authority purporting to enjoin or restrain the execution, delivery and performance by the Company of this Agreement or any other Transaction Document. 5.7 NO DEFAULT OR BREACH. No event has occurred and is continuing or would result from the incurring of obligations by the Company under this Agreement or any other Transaction Document to which it is a party which constitutes a Default or Event of Default under or breach of any of the provisions hereof or of the Note or the Warrant Certificates, and no such event will occur or will be continuing after giving effect to the transactions contemplated by the Transaction Documents. Neither the Company nor any Subsidiary is, and after giving effect to the transactions contemplated by the Transaction Documents will not be, in default under or with respect to any Contractual Obligation in any material respect. 5.8 TITLE TO PROPERTIES. The Company and each of the Subsidiaries has, and after giving effect to the transactions contemplated by the Transaction Documents will have, good record and marketable title to, or hold leases in full force and effect in all their real property, except for Liens in favor of CapitalSource in connection with the Credit Agreement and such defects in title as could not reasonably, individually or in the aggregate, have a materially adverse effect on the assets, business, properties, prospects, operations or financial or other condition of the Company and the Subsidiaries, taken as a whole, or the ability of the Company or any Subsidiary to perform its respective obligations under any Transaction Document to which it is a party. 5.9 INVESTMENT COMPANY. Neither the Company nor any Person controlling the Company is, and no such Person after giving effect to the transactions 27 contemplated by the Transaction Documents will be, an "INVESTMENT COMPANY" within the meaning of the Investment Company Act of 1940, as amended. 5.10 SUBSIDIARIES. The Company has no Subsidiaries except for those listed on Schedule 5.10. All of the issued and outstanding capital stock of each Subsidiary listed (or required to be listed) on Schedule 5.10 is owned of record and beneficially as set forth in Schedule 5.10, free and clear of any Liens, except for Liens in favor of CapitalSource in connection with the Credit Agreement. There are no outstanding options, warrants, subscriptions, calls, rights, convertible securities or other agreements or commitments obligating any Subsidiary to issue, transfer or sell any of its securities. 5.11 FINANCIAL CONDITION; NO UNDISCLOSED LIABILITIES. (a) The Company heretofore has delivered to the Purchaser true and correct copies of (i) the audited consolidated financial statements of the Company and the Subsidiaries for the fiscal year ended December 31, 2001 (the "FINANCIALS") and (ii) the unaudited consolidated balance sheet of the Company and the Subsidiaries as of March 31, 2002 and the related consolidated statements of operations and accumulated deficit and cash flows, together with notes thereto, for the three-month period then ended (the "INTERIM FINANCIALS"), certified by the President, Chief Financial Officer, Chief Development Officer or Controller of the Company. The Financials and the Interim Financials have been prepared in accordance with GAAP applied consistently throughout the periods covered thereby, present fairly the consolidated financial condition of the Company and the Subsidiaries as of the dates thereof and the consolidated results of operations and cash flows of the Company and the Subsidiaries for the periods then ended, and are true, correct and complete as of the date thereof. (b) The pro forma consolidated balance sheet of the Company and the Subsidiaries attached hereto as SCHEDULE 5.11(B) fairly presents in all material respects the assets and liabilities of the Company and the Subsidiaries on a pro forma basis as of May 31, 2002, after taking into account the consummation of the transactions contemplated by the Transaction Documents, including, without limitation the issuance of the Note, the repayment of the promissory notes listed on SCHEDULE 3.19 and the payment of all material fees and expenses in connection with the Transaction Documents, subject to ordinary course audit adjustments. (c) The Company and the Subsidiaries do not have, and after giving effect to the transactions contemplated by the Transaction Documents will not have, any direct or indirect Indebtedness, liability (including, without limitation, product liability or warranty claim), obligation, fixed or unfixed, contingent or otherwise, other than (i) as fully and adequately reflected on the Financials or the Interim Financials, (ii) those incurred since December 31, 2001 in the ordinary course of business or pursuant to the Credit Agreement, (iii) those incurred pursuant to this Agreement and (iv) other liabilities incurred in the ordinary course of business which, individually or in the aggregate, are not material to the assets, business, properties, prospects, operations or financial or other condition of the Company and the Subsidiaries, taken as a whole. 28 5.12 NO MATERIAL ADVERSE CHANGE. Since December 31, 2001, there has not been, and after giving effect to the transactions contemplated by the Transaction Documents there will not be, any material adverse change, nor to the knowledge of the Company, is any such change threatened, in the assets, business, properties, prospects, operations or financial or other condition of the Company and the Subsidiaries, taken as a whole. 5.13 CAPITALIZATION. (a) As of the Closing Date, after giving effect to the transactions contemplated by the Transaction Documents (other than the PMR Merger): (i) the authorized capital of the Company will consist of 35,000,000 shares of Common Stock, 10,500,000 shares of Series A preferred stock, par value $0.01 per share (the "SERIES A STOCK"), and 8,000,000 shares of Series B preferred stock, par value $0.01 per share (the "SERIES B STOCK"); (ii) 7,327,627 shares of Common Stock will be issued and outstanding, 10,497,000 shares of Series A Stock will be issued and outstanding and 4,975,736 shares of Series B Stock will be issued and outstanding, all of which will be owned of record by the Persons listed on SCHEDULE 5.13(A) in the amounts listed next to the name of each such Person; and (iii) except as listed on SCHEDULE 5.13(A), no shares of Common Stock will be held in the Company's treasury. (b) Except for the Series A Stock, the Series B Stock, the warrants listed on SCHEDULE 5.13(B), the convertible notes listed on SCHEDULE 5.13(B), the Warrants and the options issued under the Plan listed on SCHEDULE 5.13(B), or as otherwise set forth on SCHEDULE 5.13(B), there are no outstanding options, warrants, conversion privileges, subscription or purchase rights or other rights to purchase or otherwise acquire shares of Capital Stock or other securities of the Company, and the Company is not obligated in any manner to issue shares of Capital Stock or other securities. Except as contemplated hereby or by the Investor Rights Agreement, or pursuant to relevant state and federal securities laws, there are no restrictions on the Company's ability to transfer shares of Capital Stock. (c) Except for (i) 10,497,000 shares of Common Stock issuable upon conversion of the Series A Stock, (ii) 4,975,736 shares of Common Stock issuable upon conversion of the Series B Stock, (iii) 1,341,028 shares of Series B Stock issuable upon exercise of warrants listed on SCHEDULE 5.13(B) and the 1,341,028 shares of Common Stock issuable upon conversion of such shares of Series B Stock, (iv) 1,348,315 shares of Series B Stock issuable upon conversion of the convertible notes listed on SCHEDULE 5.13(B) and the 1,348,315 shares of Common Stock issuable upon conversion of such shares of Series B Stock, (v) 1,502,140 shares of Common Stock issuable upon exercise of the Initial Warrants, and (vi) 3,373,313 shares of Common Stock reserved for issuance under the Company's 1997 Incentive and Nonqualified Stock Option Plan for Key Personnel (the "PLAN"), there are no shares of Capital Stock of the Company reserved for issuance. The shares of Capital Stock of the Company to be issued upon exercise or conversion of any of the foregoing (including, without limitation, all shares of Common Stock to be issued upon exercise of the Warrants) have been duly authorized (or, with respect to the shares of Common Stock to be issued upon exercise of the Warrants, will, 29 at the Closing, be authorized) and, when issued and paid for in accordance with the provisions of the applicable governing documents, will be validly issued, fully paid and non-assessable, will be free and clear of any Liens, will not be subject to any preemptive or similar rights that have not been waived and will be issued in compliance with the registration and qualification requirements of all applicable securities laws. (d) The Note and the Warrants are duly authorized, and when issued and sold to the Purchaser after the payment therefor, will be validly issued, free and clear of any Liens, not subject to any preemptive or similar rights that have not been waived, and will be issued in compliance with the qualification and registration requirements of all applicable securities laws. All shares of Capital Stock of the Company have been duly authorized and all of the issued and outstanding shares of Capital Stock of the Company are validly issued, fully paid and non-assessable, are free and clear of any Liens, are not subject to any preemptive or similar rights that have not been waived and have been issued in compliance with the registration and qualification requirements of all applicable securities laws. (e) Assuming all Warrants that may be issued to the Purchaser hereunder are issued on the Initial Closing Date, the Warrants may be exercisable initially into not less than 10.0% of the outstanding shares of Common Stock on a fully diluted basis as of the Initial Closing Date and after giving effect to the transactions contemplated by the Transaction Documents (other than the PMR Merger) and assuming, for purposes of this calculation, (i) the exercise of all options under the Plan, (ii) the grant and exercise of options to purchase up to 550,000 shares of Common Stock to be granted to existing senior management of the Company, and (iii) the conversion, exercise or exchange of all outstanding securities and securities that have been approved for issuance into shares of Common Stock, including, without limitation, the Series A Stock, the Series B Stock, the warrants listed on SCHEDULE 5.13(B), the convertible notes listed on SCHEDULE 5.13(B) and the Warrants. (f) Assuming all Warrants that may be issued to the Purchaser hereunder are issued on or prior to consummation of the PMR Merger, the Warrants may be exercisable initially into not less than 8.0% of the outstanding shares, par value $0.01 per share, of common stock of PMR Corporation (the "PMR COMMON STOCK") on a fully diluted basis as of the consummation of the PMR Merger and after giving effect to the transactions contemplated by the Transaction Documents (including, without limitation, the PMR Merger) and assuming, without duplication, for purposes of this calculation, (i) the exercise, immediately prior to the consummation of the PMR Merger, of all options under the Plan, (ii) the grant and exercise, immediately prior to the consummation of the PMR Merger, of the options to be granted to existing senior management of the Company to purchase up to 550,000 shares of Common Stock, (iii) the exercise of all options granted under PMR Corporation's 1997 Equity Incentive Plan and PMR Corporation's Outside Directors' Non-Qualified Stock Option Plan of 1992 as of the consummation of the PMR Merger (but excluding 979,788 options (such number being determined without 30 giving effect to the reverse stock split contemplated to be undertaken by PMR Corporation prior to the PMR Merger), all of which have an exercise price per share of PMR Common Stock in excess of $4.00 (such number being determined without giving effect to the reverse stock split contemplated to be undertaken by PMR Corporation prior to the PMR Merger)) and (iv) the conversion, exercise or exchange of all outstanding securities and securities that have been approved for issuance into shares of PMR Common Stock as of the consummation of the PMR Merger, including, without limitation, the Warrants. 5.14 SOLVENCY. After giving effect to the transactions contemplated by the Transaction Documents, the Company will be Solvent. 5.15 PRIVATE OFFERING. No form of general solicitation or general advertising was used by the Company or, to the knowledge of the Company, any of the Company's representatives in connection with the offer or sale of the Note or the Warrants. Subject to the accuracy of the representations of the Purchaser set forth in Article VI below, no registration of the Note or the Warrants pursuant to the provisions of the Securities Act or any state securities or "BLUE SKY" laws will be required by the offer, sale or issuance of any such securities pursuant to the transactions contemplated by the Transaction Documents. The Company agrees that neither the Company, nor anyone acting on the Company's behalf, will offer or sell the Note, the Warrants or any other security so as to require the registration of the Note or the Warrants or any other security pursuant to the provisions of the Securities Act or any state securities or "blue sky" laws, unless such securities are so registered. 5.16 BROKER'S, FINDER'S OR SIMILAR FEES. Except as disclosed on Schedule 5.16 and for the facility fee payable to the Purchaser pursuant to Section 2.3, there are no brokerage commissions, finder's fees or similar fees or commissions payable in connection with the offer or sale of the Note or the Warrants based on any agreement, arrangement or understanding with the Company or any action taken by the Company. 5.17 FULL DISCLOSURE. No statement by the Company contained in any Transaction Document or any other document, certificate, notice or consent related to any of the foregoing delivered to the Purchaser in connection with the purchase and sale of the Note and the Warrants at or prior to the Closing contains or will contain an untrue statement of a material fact or omits or will omit to state a material fact required to be stated therein or necessary to make the statements made, in light of the circumstances in which made, not materially false or misleading. 5.18 ANTI-DILUTION PROTECTION; PREEMPTIVE RIGHTS. Except as set forth on Schedule 5.18, no Person has any rights to purchase or receive additional shares of Capital Stock or other securities of the Company as a result of or relating to the transactions contemplated by this Agreement, the Note, the Warrant Certificates (including, without limitation, as a result of or relating to any adjustment in the number of shares of Common Stock issued or issuable upon exercise of any Warrants) or the other Transaction Documents. Except for the Investor Rights Agreement, the Co-Sale Agreement and the Voting Agreement, as of the Closing Date, the Company is not a party to or bound by, and no holder of any Capital Stock of the Company is a party to or bound by, any agreement relating to shareholder actions or the voting or transfer of Capital Stock of the Company, and except for the Purchaser and as set forth on 31 Schedule 5.18, no Person is entitled to participate in any anti-dilution rights or preemptive rights with respect to the Capital Stock of the Company. 5.19 INVESTOR RIGHTS AGREEMENTS. As of the Closing Date, the Company will not be a party to or bound by any agreement, other than the Investor Rights Agreement, granting any registration rights to any Person or any other rights which conflict with the rights of the Purchaser under the Investor Rights Agreement. 5.20 PROJECTIONS. Prior to the date hereof, the Company delivered to the Purchaser financial projections attached as Schedule 5.20 (the "PROJECTIONS"). The assumptions used in preparation of the Projections were reasonable when made and continue to be reasonable as of the Closing Date. The Projections have been prepared in good faith and the Projections give effect to the transactions contemplated by the Transaction Documents. The Purchaser acknowledges that the Projections contain assumptions about future events and that actual results during the period or periods covered may differ materially from the data and results contained in such Projections. 5.21 LABOR RELATIONS. Neither the Company nor any Subsidiary is engaged in any unfair labor practice. There is (a) no unfair labor practice complaint pending or, to the knowledge of the Company, threatened against the Company or any Subsidiary before the National Labor Relations Board, and no grievance or arbitration proceeding arising out of or under any collective bargaining agreement is so pending or, to the knowledge of the Company, threatened, (b) no strike, labor dispute, slowdown or stoppage pending or, to the knowledge of the Company, threatened against the Company or any Subsidiary, and (c) no union representation question existing with respect to the employees of the Company or any Subsidiary and, to the knowledge of the Company, no union organizing activities are taking place. 5.22 ERISA AND EMPLOYEE BENEFIT PLANS. (a) There are no employee benefit plans, as defined in Section 3(2) of ERISA, maintained by the Company or any Subsidiary, or with respect to which the Company or any Subsidiary has or could have any direct or indirect material liability, other than those described in SCHEDULE 5.22 ("BENEFIT PLANS"). (b) Accurate and complete copies of all Benefit Plan text and agreements, the most recent annual report, the most recent annual and periodic accounting of Benefit Plan assets, and the most recent actuarial valuation with respect to each Benefit Plan have been delivered or made available to the Purchaser. (c) No Benefit Plan is subject to Title IV of ERISA or section 412 of the Code. Except as set forth on SCHEDULE 5.22, no Benefit Plan is a "MULTIPLE EMPLOYER PLAN" within the meaning of the Code or ERISA. With respect to any Benefit Plan that is a "multi-employer plan," as such term is defined in Section 3(37) of ERISA, (i) neither the Company nor any Subsidiary, nor any entity which is treated as a single employer with any of them pursuant to Section 414(b), (c), (m) or (o) of the Code (an "ERISA AFFILIATE") has, since the date on which the Company or any Subsidiary first began 32 contributing to any multi-employer plan, made or suffered a "COMPLETE WITHDRAWAL" or a "PARTIAL WITHDRAWAL," as such terms are respectively defined in Sections 4203 and 4205 of ERISA, (ii) no event has occurred that presents a material risk of a partial withdrawal, (iii) neither the Company, nor any Subsidiary, nor any ERISA Affiliate has any contingent liability under Section 4204 of ERISA, and (iv) there would be no withdrawal liability of the Company, any Subsidiary and any ERISA Affiliates, computed as if a complete withdrawal by each such entity had occurred under each such Benefit Plan on the date hereof if each such entity ceased contributions thereto. (d) With respect to each Benefit Plan: (i) if it is intended to qualify under section 401(a) of 403(a) of the Code, the Company has no knowledge of any circumstance that could be reasonably expected to result in such Benefit Plan's failure to be so qualified; (ii) such Benefit Plan has been maintained and administered at all times in substantial compliance with its terms and applicable laws and regulations; (iii) no event has occurred and there exists no circumstances under which the Company or any Subsidiary could be reasonably expected to incur material liability under ERISA, the Code or otherwise (other than routine claims for benefits) with respect to such Benefit Plan or with respect to any other entity's employee benefit plan; and (iv) all contributions and premiums due with respect to such Benefit Plan have been made on a timely basis. (e) With respect to each "welfare plan" (as defined in ERISA section 3(1)) which is maintained or contributed to by the Company or any Subsidiary or with respect to which the Company or any Subsidiary has or could have any direct or indirect liability as of the Closing Date: (i) no such plan provides medical or death benefits with respect to current or former employees of the Company or any Subsidiary beyond their termination of employment (other than as required to avoid an excise tax under Code section 4980B); and (ii) the Company and each Subsidiary has substantially complied with the requirements of Code section 4980B. (f) The consummation of the transactions contemplated by this Agreement and the other Transaction Documents will not: (i) entitle any individual to severance or termination pay; (ii) accelerate the time of payment or vesting, or increase the amount of compensation due to any individual; or (iii) result in the payment that will be taken into account in determining whether there is an "excess parachute payment" under Code section 280G(b)(1). 5.23 ENVIRONMENTAL MATTERS. Except as set forth in Schedule 5.23: (a) To the knowledge of the Company, none of the Company, any Subsidiary or any operator of any of their respective properties is in violation, or to the knowledge of the Company, is in alleged violation, of any Safety and Environmental Law. (b) None of the Company, any Subsidiary or any operator of any of their respective properties has received written notice from any third party, including, without limitation, any federal, state, county, or local governmental authority, (i) that it has been identified as a potentially responsible party under the Comprehensive 33 Environmental Response, Compensation and Liability Act of 1980 as amended ("CERCLA") or any equivalent state law, with respect to any site or location, (ii) that any hazardous waste, as defined in 42 U.S.C. ss. 6903(5), any hazardous substances, as defined in 42 U.S.C. ss. 9601(14), any pollutant or contaminant, as defined in 42 U.S.C. ss. 9601(33), or any toxic substance, oil or hazardous materials or other chemicals or substances regulated by any Safety and Environmental Laws ("HAZARDOUS Substances") which it has generated, transported or disposed of, has been found at any site at which a federal, state, county, or local agency or other third party has conducted or has ordered the Company, any Subsidiary or another third party or parties (E.G., a committee of potentially responsible parties) to conduct a remedial investigation, removal or other response action pursuant to any Safety and Environmental Law, or (iii) that it is or shall be a named party to any claim, action, cause of action, complaint (contingent or otherwise) or legal or administrative proceeding arising out of any actual or alleged release or threatened release of Hazardous Substances. For purposes of this Section 5.23 and the definition of "SAFETY AND ENVIRONMENTAL LAWS," "RELEASE" means any past or present releasing, spilling, leaking, pumping, pouring, emitting, emptying, discharging, injecting, escaping, disposing or dumping of Hazardous Substances into the environment. (c) (i) To the knowledge of the Company, the Company, each Subsidiary and each operator of any real property owned or operated by the Company and any Subsidiary is in compliance in all material respects with all provisions of the Safety and Environmental Laws relating to the handling, manufacturing, processing, generation, storage or disposal of any Hazardous Substances; (ii) to the knowledge of the Company, no portion of property owned, operated or controlled by the Company or any Subsidiary has been used for the handling, manufacturing, processing, generation, storage or disposal of Hazardous Substances except in accordance with applicable Safety and Environmental Laws; (iii) to the knowledge of the Company, there have been no releases or threatened releases of Hazardous Substances on, upon, into or from any property owned, operated or controlled by the Company or any Subsidiary, which releases could have a material adverse effect on the value of such properties or adjacent properties or the environment; (iv) to the knowledge of the Company, there have been no releases of Hazardous Substances on, upon, from or into any real property in the vicinity of the real properties owned, operated or controlled by the Company or any Subsidiary which, through soil or groundwater contamination, may have come to be located on the properties of the Company or any Subsidiary; and (v) to the knowledge of the Company, there have been no releases of Hazardous Substances on, upon, from or into any real property formerly but no longer owned, operated or controlled by the Company or any Subsidiary. (d) To the knowledge of the Company, none of the properties of the Company or any Subsidiary is subject to any applicable environmental cleanup responsibility law or environmental restrictive transfer law or regulation by virtue of the transactions set forth herein and contemplated hereby. 5.24 TAXES. 34 (a) The Company and the Subsidiaries have timely filed (or obtained appropriate extensions for filing) all material returns with respect to Taxes required to be filed through the date hereof in a manner consistent with prior years and applicable laws and regulations and all such Tax returns are true and complete in all material respects. The Company and the Subsidiaries have timely paid all material Taxes that are due through the date thereof, or that are claimed or asserted by any taxing authority to be due through the date hereof, except for those Taxes that are being contested in good faith by appropriate proceedings and with respect to which adequate reserves have been set aside. With respect to any period for which Tax returns have not yet been filed, or for which Taxes are not yet due or owing, the Company and the Subsidiaries have no material liability for Taxes in each case other than Taxes incurred in the ordinary course of business or for which accruals are reflected in the Financial and Interim Financials. (b) No audit or other proceeding by any court, taxing authority, or similar person is pending or, to the knowledge of the Company, threatened with respect to any Taxes due from or with respect to the operations of the Company or any Subsidiary, or any Tax return filed by or with respect to the operations of the Company or any Subsidiary. No assessment of Taxes is proposed in writing against the Company, any Subsidiary or their respective assets. 5.25 INTELLECTUAL PROPERTY. (a) SCHEDULE 5.25(A) sets forth all United States and foreign patents and patent applications, registered trademarks and service marks and applications therefor, Internet domain name registrations and applications, and registered copyrights and applications therefor owned or licensed by the Company or any Subsidiary, specifying as to each item, as applicable: the nature of the item, including the title; the owner of the item; the jurisdictions in which the item is issued or registered or in which an application for issuance or registration has been filed; and the issuance, registration, or application numbers and dates. (b) The Company and each Subsidiary owns, free and clear of all Liens (other than permitted Liens pursuant to Section 10.2), or has the right to use, pursuant to a valid license or permission, all Intellectual Property that is material to and used in the conduct of the business of the Company and such Subsidiary. (c) Neither the Company nor any Subsidiary has been a party to any claim or action and, to the knowledge of the Company, there is no claim or action threatened, that challenges the validity, enforceability, ownership, or right to use, sell, or license any Intellectual Property. To the knowledge of the Company, no third party is infringing upon any Intellectual Property. (d) All material software used or licensed by the Company or any Subsidiary, other than off-the-shelf software which is commercially available on a retail basis and used solely on the computers of the Company and the Subsidiaries, is described in SCHEDULE 5.25(D). Such software is held by the Company and the Subsidiaries legitimately, and to the knowledge of the Company, (i) is free from any significant 35 software defect, (ii) performs in conformance with its documentation, and (iii) does not contain any bugs or viruses or any code or mechanism that could be used to interfere with the operation of the software. The Company has made available to the Purchaser all documentation requested by the Purchaser relating to the use, maintenance, and operation of such software, all of which, to the knowledge of the Company, is true and accurate. (e) The Company and each Subsidiary has taken all commercially reasonable steps to maintain and protect each item of Intellectual Property owned by them. (f) The Company and the Subsidiaries are not, and after giving effect to the transactions contemplated by the Transaction Documents will not be, in violation of any agreement relating to any Intellectual Property, and the Company and the Subsidiaries will own all right, title, and interest in and to or have a license to use all Intellectual Property on identical terms and conditions as they enjoyed immediately prior to such transactions except to the extent that such violation or lack would not have a material adverse effect on the assets, business, properties, prospects, operations or financial or other condition of the Company and the Subsidiaries, taken as a whole. 5.26 POTENTIAL CONFLICTS OF INTEREST. Except as set forth on Schedule 5.26, no officer, member, manager or Affiliate of the Company or any Subsidiary, and to the knowledge of the Company, no parent, child, sibling or spouse of any such officer, member, manager or Affiliate: (a) owns, directly or indirectly, any interest in (excepting less than 2% stock holdings for investment purposes in securities of publicly held and traded companies), or is an officer, member, director, employee or consultant of, any Person which is or is engaged in business as, a competitor, lessor, lessee, supplier, distributor, sales agent or customer of, or lender to or borrower from, the Company or any Subsidiary; (b) owns, directly or indirectly, in whole or in part, any tangible or intangible property that the Company or any Subsidiary uses in the conduct of its business; or (c) has any cause of action or other claim whatsoever against, or owes any amount to, the Company or any Subsidiary, except for claims in the ordinary course of business such as for accrued vacation pay, accrued benefits under employee benefit plans, and similar matters and agreements arising in the ordinary course of business. 5.27 TRADE RELATIONS. There exists no actual, or to the knowledge of the Company threatened, termination, cancellation or limitation of, or any adverse modification or change in, the business relationship or business of the Company and the Subsidiaries, taken as a whole, or their business with any customer or any group of customers whose use of their services are individually or in the aggregate material to the business of the Company and the Subsidiaries, taken as a whole, or with any material supplier, and, to the knowledge of the Company, there exists no condition or state of facts or circumstances that would materially adversely affect the assets, business, properties, prospects, operations or financial or other condition of the Company and the Subsidiaries, taken as a whole, or would prevent the Company or any Subsidiary from conducting its business after the consummation of the transactions contemplated by the Transaction Documents in substantially the same manner in which it heretofore has been conducted. 36 5.28 OUTSTANDING BORROWING. Schedule 5.28 sets forth (a) the amount of all Indebtedness of the Company and the Subsidiaries for money borrowed (other than the Note), (b) the Liens that relate to such Indebtedness and that encumber the assets of the Company or any Subsidiary and (c) the name of each lender thereof. 5.29 MATERIAL CONTRACTS. Neither the Company nor any Subsidiary is a party to any Contractual Obligation or is subject to any charge, corporate restriction, judgment, injunction, decree or Requirement of Law materially adversely affecting, or which may adversely affect, the assets, business, properties, prospects, operations or financial or other condition of the Company and the Subsidiaries, taken as a whole. Except for the contracts, agreements and commitments, whether written or oral, described on Schedule 5.29, neither the Company nor any Subsidiary is a party to or bound by any material contract, agreement or commitment, whether written or oral, including, without limitation, (a) any distributor, sales, advertising, agency or manufacturer's representative contract, (b) any continuing contract for the purchase of materials, supplies, equipment or services involving in the case of any such contract more than $50,000 annually, (c) any trust indenture, mortgage, promissory note, loan agreement or other contract for the borrowing of money, any currency exchange, commodities or other hedging arrangement or any leasing transaction of the type required to be capitalized in accordance with GAAP, (d) any contract for capital expenditures in excess of $50,000 in the aggregate, (e) any contract limiting the freedom of the Company or any Subsidiary to engage in any line of business or to compete with any other Person or any confidentiality, secrecy or non-disclosure contract, (f) any contract with any Person with whom the Company or any Subsidiary does not deal at arm's length, (g) any agreement of guarantee, support, indemnification, assumption or endorsement of, or any similar commitment with respect to, the obligations, liabilities (whether accrued, absolute, contingent or otherwise) or Indebtedness of any other Person, or (h) any contracts or commitments providing for payments based in any manner on the revenues or profits of the business of the Company or any Subsidiary; provided, however, that managed care contracts and Medical Director Agreements are not required to be disclosed on Schedule 5.29. All of the contracts, agreements and commitments of the Company and the Subsidiaries are in full force and effect and binding upon the parties thereto in accordance with their terms. Neither the Company nor any Subsidiary, nor, to the knowledge of the Company, any other party to such contracts, agreements or commitments, is in default thereunder, nor does any condition exist that with notice or lapse of time or both would constitute a default thereunder. The Company has no knowledge of any proposed, pending, or likely cancellation or termination of any such contract, agreement or commitment. 5.30 INSURANCE. Schedule 5.30 sets forth a description of all policies or binders of fire, liability, workman's compensation, keyman, vehicular, life or other insurance held by or on behalf of the Company and the Subsidiaries, specifying the insurer, the policy number of covering note numbers with respect to binders and describing each pending claim thereunder of more than $50,000. Such insurance is in full force and effect. Neither the Company nor any Subsidiary is in default in any material respect with respect to any provision contained in any such policy or binder and has not failed to give any notice or present any claim under such policy or binder in due and timely fashion. 37 5.31 COMPLIANCE WITH LAWS. The Company and each Subsidiary has the lawful authority and all material state, federal, special or local governmental authorizations, licenses or permits required to conduct their respective businesses as such businesses are presently being conducted. There are no pending, or to the knowledge of the Company threatened, actions, notices, or proceedings by any state, federal, special or local government or any subdivision thereof or any public or private group against the Company or any Subsidiary. The Purchaser has been provided with a list and brief description of all licenses, including those granted or derived from governmental sources, issued or granted to the Company or any Subsidiary which are material to its business. 5.32 ASSETS, LICENSES, ETC. The Company and each Subsidiary has good and marketable title to, or valid leasehold interests in, all of its assets, real and personal, including the assets carried on its books and reflected in the Financials and the Interim Financials, subject to no Liens, except for (i) Liens described in Schedule 5.32 or permitted by Section 10.2, and (ii) assets sold, abandoned or otherwise disposed of in the ordinary course of business. 5.33 AERIES HEALTHCARE ACQUISITION. The Company heretofore has delivered to the Purchaser true, correct and complete copies of the Aeries Purchase Agreement and all documents and certificates related thereto. To the knowledge of the Company, the representations and warranties made by the sellers in the Aeries Purchase Agreement and the related documents and certificates are true and correct in all respects at and as of the date hereof and after giving effect to the transactions contemplated by the Transaction Documents as if such representations and warranties were made at and as of such dates (unless such representations and warranties relate to matters only as of a particular date, in which case such representations and warranties shall be true and correct in all respects as of such date). 5.34 REGULATORY MATTERS. Except as set forth in Schedule 5.34, the Company represents and warrants to the Purchaser as follows: (a) LICENSES, PERMITS, AUTHORIZATIONS AND PAYOR PROGRAMS. (i) (A) The Company and each entity directly or indirectly controlled by it (the "PSI COMPANIES"), (B) if the PMR Merger is consummated, PMR Corporation and each entity directly or indirectly controlled by it (the "PMR COMPANIES") and (C) if the acquisition contemplated by the Aeries Purchase Agreement (as in effect on the date hereof) is consummated, Aeries Healthcare and each entity directly or indirectly controlled by it (the "AERIES COMPANIES," and together with the PSI Companies and the PMR Companies, the "REGULATED COMPANIES," and each, a "REGULATED COMPANY") each hold all licenses and other rights, accreditations, permits, approvals and authorizations ("PERMITS") required by law, ordinance, regulation or ruling guidance or manual of any governmental regulatory authority necessary to operate each line of business or facility presently conducted and presently proposed to be conducted by each of the Regulated Companies (each such line or facility, a "BUSINESS" and collectively, the "BUSINESSES"), except for Permits, the absence of which would not reasonably be expected to have a material adverse effect on the assets, business, 38 properties, prospects, operations or financial or other condition of any Business. Each Regulated Company that directly receives reimbursement or payments under Titles XVIII and XIX of the Social Security Act (the "MEDICARE AND MEDICAID PROGRAMS") is certified for participation and reimbursement under the Medicare and Medicaid programs. Each Regulated Company that directly or indirectly receives reimbursement or payments under the Medicare and Medicaid programs, the CHAMPUS and TriCare programs and such other similar federal, state or local reimbursement or governmental programs (collectively the "GOVERNMENT PROGRAMS") has current provider numbers and provider agreements required for each of such Government Programs. Each Regulated Company that directly or indirectly receives payments under any non-governmental program, including without limitation any private insurance program (collectively, the "PRIVATE PROGRAMS") has all provider agreements and provider numbers that are required under such Private Programs. (ii) True, correct and complete copies or descriptive listing of the aforementioned Permits (including the name of the issuing agency and the expiration date) and provider numbers and provider agreements under all Government Programs and Private Programs, have been provided to the Purchaser. True, complete and correct copies or descriptive listing of all surveys, reviews and/or audits of any Regulated Company or any Business or its predecessors in interest conducted during the past two years in connection with any Government Program, Private Program or licensing or accrediting body have been provided to the Purchaser. (iii) No violation, default, order or legal or administrative proceeding exists with respect to any of the aforementioned Permits, Medicare or Medicaid certifications, provider agreements or provider numbers, except for any of the foregoing that would not reasonably be expected to have a material adverse effect on the assets, business, properties, prospects, operations or financial or other condition of any Business. Except as disclosed on SCHEDULE 5.34, none of the Regulated Companies has received any notice of any action pending or recommended by any state or federal agency having jurisdiction with respect to any of the aforementioned Permits, Medicare or Medicaid certifications, provider agreements, or provider numbers, either to revoke, withdraw or suspend any such Permit, certification, provider agreements or provider number, or to terminate the participation of any Business in any Government Program or Private Program. Except as disclosed on SCHEDULE 5.34, no event has occurred that, with the giving of notice, the passage of time, or both, would constitute grounds for a material violation, order or deficiency with respect to any such Permit, certification, provider agreement or provider number, or to revoke, withdraw or suspend any such Permit, certification, provider agreements or provider number, or to terminate or modify the participation of any Business in any Government Program or Private Program. There has been no decision not to renew any provider number or provider agreement or third-party payor agreement of any Regulated Company or Business. No consent or approval of, prior filing with or notice to, or any action by, any governmental body or agency or any other third party is required in connection with any such Permit, or Government Program or Private Program, by reason of the transactions contemplated hereby, and the continued operation of any Business thereafter on a basis consistent with past practices (other than the renewal of current approvals, licenses and Permits). 39 (iv) Each Regulated Company and/or Business has timely filed all reports and billings required to be filed by it prior to the date hereof with respect to the Government Programs and Private Programs, all fiscal intermediaries and other insurance carriers and all such reports and billings are complete and accurate in all material respects and have been prepared in compliance with all applicable laws, regulations, rules, manuals and guidance governing reimbursement and claims. True, correct and complete copies of such reports and billings for the most recent year have previously been made available to the Purchaser. Each Regulated Company has paid or caused to be paid all known and undisputed refunds, overpayments, discounts or adjustments which have become due pursuant to such reports and billings, has not claimed or received reimbursements from Government Programs or Private Programs in excess of amounts permitted by law, and has no liability under any Government Program or Private Program (known or unknown, contingent or otherwise) for any refund, overpayment, discount or adjustment. With respect to such prior reports or billings, there are no pending appeals, adjustments, challenges, audits, inquiries, litigation or notices of intent to audit, and, other than the routine review of cost reports, during the last two years none of the Business has been audited, or otherwise examined by any Government Program or Private Program. There are no other reports required to be filed by any Business in order to be paid under any Government Program or Private Program for services rendered, except for reports not yet due. (v) All activities of each Business of the PSI Companies, and, to the knowledge of the PSI Companies after due and reasonable inquiry, of each Business of each other Regulated Company and of any officers, directors, agents and employees of any of the Regulated Companies undertaken on behalf of any Business, have been, and are currently being, conducted in compliance in all respects with all applicable Requirements of Law, permits, licenses, certificates, governmental requirements, Government Program manuals and guidance, orders and other similar items of any Governmental Entity including, without limitation, all Requirements of Law pertaining to confidentiality of patient information, occupational safety and health, workers' compensation, unemployment, building and zoning codes (collectively, "REGULATIONS"), other than any non-compliance that does not or would not have a material adverse effect on the assets, business, properties, prospects, operations or financial or other condition of any Business. Neither the Business of any PSI Company nor, to the knowledge of the PSI Companies after due and reasonable inquiry, of any other Regulated Company, has violated or become liable for, or received a notice or charge asserting any such violation or liability with respect to, any Regulation, nor are there any facts or circumstances that are known or that reasonably should be known to the Regulated Companies that could form the basis for any such violation or liability. None of the Regulated Companies or Businesses is relying on any exemption from or deferral of any Regulation that would not be available to such Regulated Company or Business after the Closing. (vi) There are no pending changes in applicable law or regulations that would prevent any of the Businesses from conducting its business in substantially the same manner as the business is currently conducted. 40 Notwithstanding anything to the contrary, statements in subsections (iii), (iv) and (v) of this Section 5.34(a) as to any of the PMR Companies, Aeries Companies or their respective Businesses are made to the knowledge of the Company after due and reasonable inquiry. (b) MEDICAL WASTE LAWS. None of the Regulated Companies and none of the Businesses is in violation of, or the subject of, any enforcement action by any Governmental Authority under the Medical Waste Tracking Act, 42 U.S.C. ss. 6992 et seq., or any other applicable federal, state or local governmental law dealing with the disposal of medical wastes (the "MEDICAL WASTE LAWS"). None of the Regulated Companies has, within the last two years, received any written or oral notice of any investigation or inquiry by any Governmental Authority under the Medical Waste Laws. The Regulated Companies and the Businesses have obtained and are in compliance with any permits related to medical waste disposal required by the Medical Waste Laws, other than any non-compliance that does not or would not have a material adverse effect on the assets, business, properties, prospects, operations or financial or other condition of any Business, and have taken reasonable steps to determine, and have determined, that all disposal of medical waste by them has been in compliance with the Medical Waste Laws. (c) NO CHANGES IN SUPPLIERS AND THIRD-PARTY PAYORS. None of the suppliers supplying products, materials or drugs to any Business of the PSI Companies or, to the knowledge of the PSI Companies after due and reasonable inquiry, any other Regulated Company, has provided any notice (written or oral) to any Regulated Company that it intends to cease selling such products, materials or drugs to such Regulated Company or Business or to limit or reduce such sales of the products to any such Regulated Company or Business or increase prices and there is no fact that indicates that any third-party payor of any Regulated Company or any Business intends to terminate, limit or reduce its business relations with such Regulated Company or Business in the event of a sale of any Regulated Company or Business, or otherwise, other than any of the foregoing acts that do not or would not have a material adverse effect on the assets, business, properties, prospects, operations or financial or other condition of any Business. (d) INSPECTIONS AND INVESTIGATIONS. No Regulated Company or Business, no licensed professional or other individual affiliated with the PSI Companies or any Business of the PSI Companies, and, to the knowledge of the PSI Companies after due and reasonable inquiry, no licensed professional or other individual affiliated with the other Regulated Companies or any Business of such Regulated Companies, has had its, his or her right to receive reimbursements pursuant to any Government Program or Private Program terminated or otherwise adversely affected as a result of any investigation or action whether by any federal or state governmental regulatory authority or other third party. Except as described on SCHEDULE 5.34, no Regulated Company or Business, and, to the knowledge of the PSI Companies after due and reasonable inquiry, no licensed professional or other individual who is a party to a contract with any Regulated Company, has, during the past three years, been the subject of any inspection, investigation, survey, audit, monitoring or other form of review by any governmental regulatory entity, trade association, professional review organization, accrediting 41 organization or certifying agency based upon any alleged improper activity on the part of such Regulated Company, Business or individual, and no Regulated Company has received any notice of deficiency during the past three years in connection with the operation of the Business. Except as described on SCHEDULE 5.34, there are no presently, and at the Closing there will not be, any outstanding deficiencies or work orders of any Governmental Authority having jurisdiction over any Business, or requiring conformity to any applicable agreement, statute, regulation, ordinance bylaw, including but not limited to, the Government Programs and Private Programs. Except as described on SCHEDULE 5.34, there is not any notice of any claim, requirement or demand of any licensing or certifying agency or other third party supervising or having authority over any Business to rework or redesign any part thereof or to provide additional furniture, fixtures, equipment, appliances or inventory so as to conform to or comply with any existing law, code, rule, regulation or standard. (e) FRAUD AND ABUSE; STARK ACT; FALSE CLAIMS. Neither the PSI Companies, nor, to the knowledge of the PSI Companies after due and reasonable inquiry, any other Regulated Company, nor any officer, director or managing employee of the PSI Companies or, to the knowledge of the PSI Companies after due and reasonable inquiry, of any other Regulated Company, and, to the knowledge of the PSI Companies after due and reasonable inquiry, no person or entity providing professional services in connection with any Business, has engaged in any activities that are prohibited, or cause for the imposition of penalties or mandatory or permissive exclusion, under 42 U.S.C. s. 1320a-7, 1320a-7a, 1320a-7b, 1395nn, or 1396b, 31 U.S.C. s. 3729-3733, or the federal CHAMPUS/TRICARE statute (or other federal or state statutes related to false or fraudulent claims) or the regulations promulgated thereunder pursuant to such statutes, or related state or local statutes or regulations, or under any criminal laws, statutes, ordinances, regulations or rulings or manuals of any governmental regulatory authority relating to health care services or payments, or that are prohibited by rules of professional conduct, including but not limited to the following: (i) knowingly and willfully making or causing to be made a false statement or representation of a fact in any application for any benefit or payment; (ii) knowingly and willfully making or causing to be made any false statement or representation of a fact for use in determining rights to any benefit or payment; (iii) failing to disclose knowledge by a claimant of the 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 fraudulently secure such benefit or payment; and (iv) 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 or receive such remuneration (A) 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 or Medicaid, or (B) in return for purchasing, leasing, or ordering or arranging for or recommending purchasing, leasing, or ordering any good, facility, service or item for which payment may be made in whole or in part by Medicare or Medicaid, or under any Private Program. (f) RATES AND REIMBURSEMENT POLICIES. Except as described on SCHEDULE 5.34, no Regulated Company has any reimbursement or payment rate appeals, 42 disputes or contested positions currently pending before any Governmental Authority or any administrator of any Private Programs with respect to any Business. (g) CONTROLLED SUBSTANCES. Each Regulated Company and its officers, directors and employees and, to the knowledge of the PSI Companies after due and reasonable inquiry, persons who provide professional services under agreements (whether oral or written) with such Regulated Company in connection with any Business has not, in connection with its, his or her activities directly or indirectly related to any Business, engaged in any activities which are prohibited under the Federal Controlled Substances Act, 21 U.S.C. ss. 801 et seq. or the regulations promulgated pursuant to such statute or any related state or local statutes or regulations concerning the dispensing and sale of controlled substances. (h) INTERMEDIATE SANCTIONS. No PSI Company or Business of any PSI Company and, to the knowledge of the PSI Companies after due and reasonable inquiry, no other Regulated Company or Business of any other Regulated Company has (i) engaged in any transaction with any entity that is tax-exempt under Section 501(c)(3) or (4) of the Code that has resulted in the imposition on such Regulated Company or Business of any tax under Section 4958 of the Code or (ii) engaged in an "excess benefit transaction" (as defined in such Section 4958 of the Code) with any such tax-exempt entity. (i) DUE DILIGENCE DISCLOSURES. Each of the PSI Companies has truly, correctly and completely answered all questions in the initial due diligence request submitted to it on behalf of the Purchaser, dated May 7, 2002, and all supplements thereto, including those dated May 17, 2002, May 23, 2002, June 5, 2002 and June 10, 2002 (collectively, the "DUE DILIGENCE REQUESTS") and has provided the Purchaser true, correct and complete copies of all existing documents that were requested in the Due Diligence Requests. ARTICLE VI REPRESENTATIONS AND WARRANTIES OF THE PURCHASER The Purchaser represents and warrants to the Company as follows: 6.1 EXISTENCE AND POWER. The Purchaser: (a) is duly organized and validly existing under the laws of the jurisdiction of its organization; and (b) has the power and authority to own and operate its property, to lease the property it operates as lessee and to conduct the business in which it is currently, or is currently proposed to be, engaged. 43 6.2 AUTHORIZATION; NO CONTRAVENTION. The execution, delivery and performance by the Purchaser of this Agreement and each other Transaction Document to which it is a party: (a) is within the Purchaser's power and authority and has been duly authorized by all necessary action; (b) does not contravene the terms of the Purchaser's organizational or governing documents or any amendment thereof; (c) will not violate, conflict with or result in any breach or contravention of or the creation of any Lien under, any Contractual Obligation of the Purchaser, or any order or decree directly relating to the Purchaser; and (d) does not require approval, consent, exemption, authorization or other action by, or notice to, or filing with, any Governmental Authority or any other Person, other than those that have been obtained or made on or prior to the Closing. 6.3 BINDING EFFECT. This Agreement and each other Transaction Document to which the Purchaser is a party has been duly executed and delivered by the Purchaser, and constitutes the legal, valid and binding obligation of the Purchaser enforceable against it in accordance with its terms, subject to bankruptcy, insolvency, fraudulent transfer, reorganization, moratorium and other laws of general applicability relating to or affecting creditors' rights and to general equity principles. 6.4 NO LEGAL BAR. The execution, delivery and performance by the Purchaser of this Agreement or any other Transaction Document to which the Purchaser is a party will not violate any Requirements of Law. 6.5 PURCHASE FOR OWN ACCOUNT. The Note and the Warrants (including, for purposes of this Section 6.5, the shares of Common Stock issuable upon exercise of the Warrants) to be acquired by the Purchaser pursuant to this Agreement are being acquired for its own account and with no intention of distributing or reselling such securities or any part thereof in any transaction that would be in violation of the securities laws of the United States of America, or any state, without prejudice, however, to the rights of such Purchaser at all times to sell or otherwise dispose of all or any part of the Note and the Warrants and any shares of Common Stock issuable upon exercise of the Warrants. If the Purchaser should in the future decide to dispose of the Note or the Warrants, the Purchaser understands and agrees that it may do so only in compliance with the Securities Act and applicable state securities laws, as then in effect, and that stop-transfer instructions to that effect, where applicable, will be in effect with respect to such securities. The Purchaser agrees to the imprinting, so long as required by law, of a legend on certificates representing all of the Warrants to the following effect: THIS WARRANT AND THE SECURITIES ISSUABLE UPON EXERCISE HEREOF HAVE BEEN TAKEN FOR INVESTMENT AND HAVE NOT BEEN REGISTERED 44 UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "SECURITIES ACT"), OR ANY APPLICABLE STATE SECURITIES LAWS AND MAY NOT BE SOLD OR OTHERWISE TRANSFERRED BY ANY PERSON, EXCEPT PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT UNDER THE SECURITIES ACT AND APPLICABLE STATE SECURITIES LAWS OR AN APPLICABLE EXEMPTION TO THE REGISTRATION REQUIREMENTS OF THE SECURITIES ACT OR SUCH STATE SECURITIES LAWS. 6.6 ACCREDITED INVESTOR. The Purchaser is an "ACCREDITED INVESTOR" as such term is defined under Rule 501 under the Securities Act. 6.7 BROKER'S, FINDER'S OR SIMILAR FEES. Except for the facility fee payable to the Purchaser pursuant to Section 2.3, there are no brokerage commissions, finder's fees or similar fees or commissions payable in connection with the offer or sale of the Note or the Warrants based on any agreement, arrangement or understanding with the Purchaser or any action taken by the Purchaser. ARTICLE VII INDEMNIFICATION 7.1 INDEMNIFICATION BY THE COMPANY. In addition to all other sums due hereunder or provided for in this Agreement and each other Transaction Document, the Company agrees to indemnify and hold harmless the Purchaser and its Affiliates (including, without limitation, BBH & Co.) and their respective officers, directors, agents, employees, partners and controlling persons (each, an "INDEMNIFIED PARTY") to the fullest extent permitted by law from and against any and all losses, claims, damages, expenses (including reasonable fees, disbursements and other charges of counsel) or other liabilities ("LOSSES") resulting from any breach of any representation or warranty, covenant or agreement of the Company contained in this Agreement or any other Transaction Document or any legal, administrative or other actions (including actions brought by the Company or any equity holders of the Company or derivative actions brought by any Person claiming through the Company or in the Company's name), proceedings or investigations (whether formal or informal), or written threats thereof, based upon, relating to or arising out of this Agreement or any other Transaction Document, the transactions contemplated hereby or thereby, or any indemnified person's role herein or therein; provided, however, that the Company shall not be liable under this Section 7.1: (a) for any amount paid in settlement of claims without the Company's consent (which consent shall not be unreasonably withheld), or (b) to the extent that it is finally judicially determined that such Losses resulted primarily from the willful misconduct, bad faith or gross negligence of such indemnified party; provided, further, that if and to the extent that such indemnification is unenforceable for any reason, the 45 Company shall make the maximum contribution to the payment and satisfaction of such indemnified liability which shall be permissible under applicable laws. In connection with the obligation of the Company to indemnify for expenses as set forth above, the Company further agrees to reimburse each indemnified party for all such expenses (including reasonable fees, disbursements and other charges of counsel) as they are incurred by such indemnified party; provided, however, that if an indemnified party is reimbursed hereunder for any expenses, such reimbursement of expenses shall be refunded to the extent it is finally judicially determined that the Losses in question resulted primarily from the willful misconduct, bad faith or gross negligence of such indemnified party. 7.2 NOTIFICATION. Each indemnified party under this Article VII will, promptly after the receipt of notice of the commencement of any action or other proceeding against such indemnified party in respect of which indemnity may be sought from the Company under this Article VII, notify the Company in writing of the commencement thereof. The omission of any indemnified party so to notify the Company of any such action shall not relieve the Company from any liability which it may have to such indemnified party other than pursuant to this Article VII or, unless, and only to the extent that, such omission results in the Company's forfeiture of substantive rights or defenses. In case any such action or other proceeding shall be brought against any indemnified party and it shall notify the Company of the commencement thereof, the Company shall be entitled to participate therein and, to the extent that it may wish, to assume the defense thereof, with counsel reasonably satisfactory to such indemnified party; provided, however, that any indemnified party may, at its own expense, retain separate counsel to participate in such defense. Notwithstanding the foregoing, in any action or proceeding in which each of the Company and an indemnified party is, or is reasonably likely to become, a party, such indemnified party shall have the right to employ separate counsel at the Company's expense and to control its own defense of such action or proceeding if, in the reasonable opinion of counsel to such indemnified party, (a) there are or may be legal defenses available to such indemnified party or to other indemnified parties that are different from or additional to those available to the Company or (b) any conflict or potential conflict exists between the Company and such indemnified party that would make such separate representation advisable; provided, however, that in no event shall the Company be required to pay fees and expenses under this Article VII for more than one firm of attorneys in any jurisdiction in any one legal action or group of related legal actions. The Company shall not, without the consent of the indemnified party (which consent shall not be unreasonably withheld), consent to the entry of any judgment or enter into any settlement which does not include as an unconditional term thereof the giving by the claimant or plaintiff to such indemnified party of a release from all liability in respect to such claim or litigation or which requires action other than the payment of money by the Company. The rights accorded to indemnified parties hereunder shall be in addition to any rights that any indemnified party may have at common law, by separate agreement or otherwise. 7.3 INVESTOR RIGHTS AGREEMENT. Notwithstanding anything to the contrary in this Article VII, the indemnification and contribution provisions of the 46 Investor Rights Agreement shall govern any claim made with respect to registration statements filed pursuant thereto or sales made thereunder. ARTICLE VIII FINANCIAL COVENANTS On and after the date hereof, until all of the Obligations of the Company to the Purchaser have been satisfied, the Company shall, and shall cause the Subsidiaries to, observe the following covenants: 8.1 MINIMUM CENSUS. As of the last day of each Monthly Test Period, (a) the aggregate combined census levels at the facilities owned, operated or leased by the Company and the Subsidiaries and (b) the census level at each facility, shall be not less than 72.5% of the census levels for such applicable calendar months for the facilities listed on Schedule 8.1. 8.2 TOTAL CONSOLIDATED LEVERAGE RATIO. As of the last day of each Leverage Test Period beginning on June 30, 2002 through and including December 31, 2002, the Total Leverage Ratio shall not exceed 4.50:1.00. As of the last day of each Leverage Test Period beginning on January 1, 2003 through and including March 31, 2003, the Total Leverage Ratio shall not exceed 4.25:1.00. As of the last day of each Leverage Test Period beginning on April 1, 2003 through and including December 31, 2003, the Total Leverage Ratio shall not exceed 4.00:1.00. As of the last day of each Leverage Test Period beginning on January 1, 2004 through and including December 31, 2004, the Total Leverage Ratio shall not exceed 3.75:1.00. As of the last day of each Leverage Test Period beginning on January 1, 2005 through and including December 31, 2005, the Total Leverage Ratio shall not exceed 3.50:1.00. As of the last day of each Leverage Test Period after January 1, 2006, the Total Leverage Ratio shall not exceed 3.25:1.00. 8.3 SENIOR CONSOLIDATED LEVERAGE RATIO. As of the last day of each Leverage Test Period beginning on June 30, 2002 through and including March 31, 2003, the Senior Leverage Ratio shall not exceed 3.50:1.00. As of the last day of each Leverage Test Period beginning on April 1, 2003 through and including December 31, 2003, the Senior Leverage Ratio shall not exceed 3.25:1.00. As of the last day of each Leverage Test Period beginning on January 1, 2004 through and including December 31, 2004, the Senior Leverage Ratio shall not exceed 3.00:1.00. As of the last day of each Leverage Test Period after January 1, 2005, the Senior Leverage Ratio shall not exceed 2.75:1.00. 8.4 CONSOLIDATED INTEREST COVERAGE RATIO. As of the last day of each Monthly Test Period beginning on June 30, 2002 through and including March 31, 2003, the Interest Coverage Ratio shall not be less than 2.00:1.00. As of the last day of each Monthly Test Period beginning on April 1, 2003 through and including March 31, 2004, the Interest Coverage Ratio shall not be less than 2.25:1.00. As of the last day of each 47 Monthly Test Period after April 1, 2004, the Interest Coverage Ratio shall not be less than 2.50:1.00. 8.5 CONSOLIDATED FIXED CHARGE RATIO. As of the last day of each Monthly Test Period beginning June 30, 2002 through and including March 31, 2003, the Fixed Charge Ratio shall be a minimum of 1.20:1.00. As of the last day of each Monthly Test Period after April 1, 2003, the Fixed Charge Ratio shall not be less than 1.33:1.00. For purposes of this financial covenant only, the following shall be excluded from calculation of the Fixed Charge Ratio: (a) the aggregate amount of all principal payments made in an aggregate amount not to exceed $2,500,000 by the Company and the Subsidiaries to The Brown Schools, Inc. in accordance with the provisions of the note evidencing such Indebtedness, (b) all non-cash interest expenses related to such Seller Notes and (c) such other non-occurring charges as the Purchaser may consent to in its sole discretion (e.g., computer conversions). ARTICLE IX AFFIRMATIVE COVENANTS On and after the date hereof, until all of the Obligations of the Company to the Purchaser have been satisfied, the Company shall, and shall cause the Subsidiaries to, observe the following covenants: 9.1 FINANCIAL STATEMENTS. The Company shall deliver to the Purchaser and any other Holder: (a) (i) as soon as available and in any event within 90 days after the end of each fiscal year of the Company, audited annual consolidated and consolidating financial statements of the Company and the Subsidiaries, including the notes thereto, consisting of a consolidated and consolidating balance sheet at the end of such completed fiscal year and the related consolidated and consolidating statements of income, retained earnings, cash flows and owners' equity for such completed fiscal year, which financial statements shall be prepared and certified without qualification by an independent certified public accounting firm satisfactory to the Purchaser and accompanied by related management letters, if available, and (ii) as soon as available and in any event within 30 days after the end of each calendar month, unaudited consolidated and consolidating financial statements of the Company and the Subsidiaries consisting of a balance sheet and statements of income, retained earnings, cash flows and owners' equity as of the end of the immediately preceding calendar month. All such financial statements shall be prepared in accordance with GAAP consistently applied with prior periods. With each such financial statement, the Company shall also deliver a certificate of its Chief Financial Officer, stating that (A) such Person has reviewed the relevant terms of this Agreement and the Note and the condition of the Company and the Subsidiaries, (B) no Default or Event of Default has occurred or is continuing, or, if any of the foregoing has occurred or is continuing, specifying the nature and status and period of existence thereof and the steps taken or proposed to be taken with respect thereto, and (C) the Company and the Subsidiaries are in compliance with all financial covenants set forth in Article 48 VIII. Such certificate shall be accompanied by the calculations necessary to show compliance with the financial covenants in a form satisfactory to the Purchaser. (b) as soon as available, and in any event within 10 days after the preparation or issuance thereof or at such other time as set forth below: (i) copies of such financial statements (other than those required to be delivered pursuant to Section 9.1(a)) prepared by, for or on behalf of the Company and the Subsidiaries, and any other notes, reports and other materials related thereto, including, without limitation, any pro forma financial statements; (ii) any reports, returns, information, notices and other materials that the Company or any Subsidiary shall send to its stockholders, members, partners or other equity owners at any time; (iii) all Medicare and Medicaid cost reports and other document and materials filed by the Company or any Subsidiary and any other reports, materials or other information regarding or otherwise relating to Medicaid or Medicare prepared by, for or on behalf of the Company or any Subsidiary; (iv) any other reports, materials or other information regarding or otherwise relating to Medicaid or Medicare prepared by, for, or on behalf of, the Company or any Subsidiary, including, without limitation, (A) copies of licenses and permits required by any applicable federal, state, foreign or local law, statute ordinance or regulation or Governmental Authority for the operation of its business, (B) Medicare and Medicaid provider numbers and agreements, (C) state surveys pertaining to any healthcare facility operated or owned or leased by the Company or any Subsidiary or any of their respective Affiliates, and (D) participating agreements relating to medical plans; (v) within 15 days after the end of each calendar month for such month, (A) a report of the status of all payments, denials and appeals of all Medicare and/or Medicaid Accounts, (B) a sales and collection report and accounts receivable and accounts payable aging schedule, including a report of sales, credits issued and collections received, all such reports showing a reconciliation to the amounts reported in the monthly financial statements, and (C) a report of census and occupancy percentage by payor type; (vi) promptly upon receipt thereof, copies of any reports submitted to the Company or any Subsidiary by its independent accountants in connection with any interim audit of the books of such Person or any of its Affiliates and copies of each management control letter provided by such independent accountants; and (vii) such additional information, documents, statements, reports and other materials as the Purchaser may reasonably request from a credit or security perspective or otherwise from time to time. (c) for each fiscal year of the Company thereafter not less than 30 days prior to the commencement of such fiscal year, consolidated and consolidating month by month projected operating budgets, annual projections, profit and loss statements, balance sheets and cash flow reports of and for the Company and the Subsidiaries for such upcoming fiscal year (including an income statement for each month and a balance sheet as at the end of the last month in each fiscal quarter), in each case prepared in accordance with GAAP consistently applied with prior periods; and (d) management reports, documentation of material financial transactions, projections, operating reports, acquisition analyses, presentations to banks, financial institutions or potential investors, consultants' reports and such other financial 49 and operating data of the Company and the Subsidiaries as the Purchaser reasonably may request. 9.2 CERTIFICATES; OTHER INFORMATION. The Company shall furnish to the Purchaser and any other Holder: (a) any notice of default in respect of any Indebtedness of the Company or any Subsidiary for borrowed money promptly upon receipt thereof; and (b) any material amendment, supplement, modification or waiver of the agreements or arrangements of the Company or any Subsidiary for Indebtedness promptly upon execution thereof. 9.3 PRESERVATION OF CORPORATE EXISTENCE. The Company shall, and shall cause each Subsidiary to: (a) preserve and maintain in full force and effect its corporate existence and good standing under the laws of its jurisdiction of incorporation or organization; (b) preserve and maintain in full force and effect all material rights, privileges, qualifications, licenses and franchises necessary in the normal conduct of its business; and (c) use its reasonable efforts to preserve its business organization. 9.4 PAYMENT OF OBLIGATIONS. The Company shall, and shall cause the Subsidiaries to, pay and discharge as the same shall become due and payable, all their respective obligations and liabilities, including without limitation: (a) all Tax liabilities, assessments and governmental charges or levies upon it or its properties or assets, unless the same are being contested in good faith by appropriate proceedings and adequate reserves in accordance with GAAP are being maintained by the Company or any Subsidiary; (b) all lawful claims which the Company or any Subsidiary is obligated to pay, which are due and which, if unpaid, might by law become a Lien (to the extent not permitted under Section 10.2 of this Agreement) upon its property; and (c) all payments of principal and interest when due (giving effect to any grace periods relating thereto) on Indebtedness of the Company or any Subsidiary. 9.5 COMPLIANCE WITH LAWS. The Company shall comply, and shall cause each Subsidiary to comply, with its certificate of incorporation and by-laws or other organizational or governing documents and all Requirements of Law and with the directions of any Governmental Authority having jurisdiction over it or its business, except to the extent such failure to comply would not have a material adverse effect on the assets, business, operations, properties, prospects or financial or other condition the 50 Company and the Subsidiaries, taken as a whole. The Company hereby covenants and agrees that all offerings of securities of the Company or any Subsidiary shall be either (a) registered pursuant to the provisions of the Securities Act and any applicable state securities or "blue sky" laws or (b) exempt from registration under the Securities Act and any applicable state securities or "blue sky" laws. 9.6 NOTICES. Upon knowledge of the Chief Executive Officer, the President, the Chief Financial Officer, the Chief Development Officer or the Controller of the Company of any of the events described below, the Company shall give prompt written notice (but in any event within 10 days) to the Purchaser and any other Holder: (a) of the occurrence of any default under, or breach of, any of the provisions of Articles VIII, IX or X accompanied by a certificate specifying the nature of such default or breach, the period of existence thereof and the action that the Company has taken or proposes to take with respect thereto; (b) of any (i) default or event of default under any material Contractual Obligation of the Company or any Subsidiary, including, without limitation, the Credit Agreement and the Senior Debt Documents, or (ii) dispute, litigation, investigation, proceeding or suspension which may exist at any time between the Company or any Subsidiary and any Governmental Authority; and (c) each notice pursuant to this Section 9.6 shall be accompanied by a statement by the Chief Executive Officer, President, Chief Financial Officer, Chief Development Officer or the Controller of the Company, setting forth details of the occurrence referred to therein and stating what action the Company proposes to take with respect thereto. 9.7 ISSUE TAXES. The Company shall pay, or cause to be paid, all documentary and similar Taxes levied under the laws of any applicable jurisdiction in connection with the issuance of the Note (including all loans made thereunder) and the Warrants and the execution and delivery of the other agreements and documents contemplated hereby and any modification of the Note and the Warrants and such other agreements and documents, and will hold the Holder harmless, without limitation as to time, against any and all liabilities with respect to all such Taxes. 9.8 INSPECTION; CONFIDENTIALITY. (a) The Company shall permit, and shall cause each Subsidiary to permit, representatives of the Purchaser to visit and inspect any of its properties, to examine its corporate, financial and operating records and make copies thereof or abstracts therefrom, and to discuss its affairs, finances and accounts with their respective managers, officers and independent public accountants, all at such reasonable times during normal business hours and as often as may be reasonably requested, upon reasonable advance notice to the Company. (b) The Purchaser will utilize reasonable good faith efforts to maintain as confidential any confidential information obtained from the Company and the 51 Subsidiaries pursuant to Section 9.8(a) (other than information which (i) at the time of disclosure or thereafter is generally available to and known by the public (other than as a result of a disclosure directly or indirectly by the Purchaser or any of its representatives), (ii) is available to the Purchaser on a non-confidential basis from a source other than the Company or the Subsidiaries, provided that such source was not known by the Purchaser to be bound by a confidentiality agreement with the Company or any Subsidiary, (iii) has been independently developed by the Purchaser or (iv) was obtained more than one year prior to such disclosure), and shall not disclose any such information required to be maintained as confidential pursuant hereto, except (A) to BBH & Co. and its advisors, representatives, agents, partners and employees, (B) to its advisors, representatives, agents, partners (and their representatives and advisors) and employees, (C) to any prospective transferee of the Note, the Warrants or shares of Common Stock issued upon the exercise of the Warrants or of an interest in the Purchaser or in a successor fund sponsored by BBH & Co., provided such prospective transferee agrees to maintain such information in confidence, (D) as may be required by law (including a court order, subpoena or other administrative order or process) or applicable regulations to which the Purchaser is or becomes subject, (E) in connection with any litigation arising out of or related to this Agreement, (F) to the executive officers of the Company or any Subsidiary, or (G) with the consent of the Company. 9.9 USE OF PROCEEDS. The Company shall use the proceeds of the loan made at the Initial Closing and the sale of the Initial Warrants (a) to repay at the Initial Closing the aggregate principal amount and all accrued interest on the promissory notes listed on Schedule 3.19 and all other amounts due thereunder, (b) to finance at the Initial Closing the acquisition of the outstanding Capital Stock of Aeries Healthcare pursuant to the terms of the Aeries Purchase Agreement and (c) for working capital purposes. The Company shall use the proceeds of any Additional Loans and the sale of any Additional Warrants to finance at the Additional Closing at which such Additional Loans are made and Additional Warrants are sold a Drawdown Acquisition. 9.10 PAYMENT OF THE NOTE. The Company shall pay the principal of, interest on and all other amounts due in respect of, the Note on the dates and in the manner provided herein and in the Note. 9.11 SUBSIDIARIES' GUARANTEE. The Company shall cause each Subsidiary (whether newly formed, presently in existence, subsequently acquired, including, without limitation, in connection with a Drawdown Acquisition, or otherwise), to execute and deliver to the Purchaser the Subsidiaries' Guarantee. 9.12 PMR GUARANTEE. Simultaneously with the consummation of the transactions contemplated under the PMR Merger Agreement, the Company shall require PMR to execute and deliver to the Purchaser a guarantee (the "PMR GUARANTEE") of the obligations of the Company to the Purchaser under this Agreement and the Note, in substantially the form attached hereto as Exhibit H. 9.13 NO INCONSISTENT AGREEMENTS. Neither the Company nor any Subsidiary shall (a) enter into any loan or other agreement after the date hereof or 52 (b) amend or modify any currently existing loan or other agreement, including, without limitation, the Credit Agreement and the Senior Debt Documents, which by its terms restricts or prohibits the ability of the Company to pay the principal of or interest on the Note or restricts or prohibits the ability of the Company to issue Common Stock upon exercise of the Warrants or to issue Put Price Notes, except to the extent contemplated by the Subordination Agreement as in effect on the date hereof. 9.14 RESERVATIONS OF SHARES. The Company shall reserve and keep available out of its authorized Common Stock, solely for the purpose of issue and delivery upon exercise of the Warrants, such number of shares of Common Stock as shall then be issuable or deliverable upon exercise of the Warrants (assuming, for these purposes, that the maximum number of Warrants issuable under this Agreement are issued and outstanding). Such shares of Common Stock shall, when issued or delivered, be duly and validly issued, fully paid and non-assessable, shall be free and clear of any Liens and shall not be subject to any preemptive or similar rights that have not been waived. 9.15 REGISTRATION AND LISTING. If any shares of Common Stock required to be reserved for purposes of exercise of the Warrants as provided in the Warrants, require registration with or approval of any Governmental Authority under any federal or state or other applicable law before such shares of Common Stock may be issued or delivered upon exercise of the Warrants, the Company will in good faith and as expeditiously as possible endeavor to cause such shares of Common Stock to be duly registered or approved. In the event that, and so long as, the shares of Common Stock (or any series or class of Capital Stock into which the shares of Common Stock are reorganized, reclassified, reconstituted or otherwise changed) are listed on the NYSE or quoted or listed on any other national securities exchange or Nasdaq, the Company will, if permitted by the rules of such system or exchange, quote or list and keep quoted or listed on such exchange or Nasdaq, upon official notice of issuance, all shares of Common Stock issuable or deliverable upon exercise of the Warrants. In addition, the Company will in good faith and as expeditiously as possible endeavor to obtain private placement numbers for the Note, the Warrants and the shares of Common Stock issued pursuant to the exercise thereof, assigned by the CUSIP Service Bureau of Standard & Poor's Corporation. 9.16 ALLOCATION FOR TAX PURPOSES. The Company hereby covenants and agrees that it shall allocate $1,502,140 of the Initial Purchase Price to the purchase by the Purchaser of the Initial Warrants, and, with respect to each Additional Closing, the Company covenants and agrees to allocate a percentage of the Additional Purchase Price to the Additional Warrants sold at such Additional Closing, as agreed to by the Company and the Purchaser at or prior to such Additional Closing. 9.17 REGISTER OF THE NOTE. The Company will maintain at its principal office a register (the "REGISTER") for the purpose of registering the beneficial owner of the Note and registering transfers and exchanges of the Note. The entries in the Register shall be conclusive, in the absence of manifest error, and the Company may treat each Person whose name is recorded in the Register as the owner of the Note recorded therein. 53 No transfer or exchange of the Note by the Holder of the Note shall be effective unless it has been recorded in the Register as provided in this Section 9.17. Upon notice from the registered owner of the Note of any sale or transfer thereof, the Company shall register such sale or transfer in the Register. The Register shall be available for inspection by the Holder of the Note and its successors and assigns at any reasonable time and from time to time upon reasonable prior notice. 9.18 PAYMENT UPON LIQUIDATION. In the event that, at anytime on or prior to the consummation of the PMR Merger, there is a liquidation, dissolution or winding up of the Company or any other event that is considered a "liquidation" under the Company's Certificate of Incorporation, including, without limitation, an Acquisition (as defined in the Certificate of Incorporation) or an Asset Transfer (as defined in the Certificate of Incorporation), but specifically excluding the PMR Merger, the Company agrees to make a payment to the Purchaser upon the occurrence of any such event, in addition to any other payments the Company is required to make to the Purchaser, in an aggregate amount of $99,860 for each $1,000,000 of loans advanced by the Purchaser as of such date pursuant to this Agreement. 9.19 RIGHT OF FIRST REFUSAL. (a) In the event the Company or any Subsidiary (a "ROFR BORROWER") receives an offer, term sheet or commitment or makes a proposal (including, without limitation, any application filed in connection with a HUD Financing accepted by any Person (each, an "OFFER") which provides for any type of Qualified Debt Financing (as defined below) to or for any ROFR Borrower, the Company shall, or shall cause such ROFR Borrower, to notify the Purchaser of the Offer in writing (including all material terms of the Offer), and the Purchaser shall have 30 calendar days after receipt of such notice (the "OPTION PERIOD") to agree to provide similar debt financing in the place of such Person upon substantially the same terms and conditions (or terms more favorable to such ROFR Borrower) as set forth in the Offer. For purposes of this Agreement, a "QUALIFIED DEBT FINANCING" means any debt financing which is subordinated to the Credit Agreement. This Section 9.19 shall expire once the ROFR Borrowers have made Offers to the Purchaser in respect of $20 million principal amount of Qualified Debt Financing. (b) The Fund shall notify the Company in writing of its acceptance of the Offer pursuant hereto (the "ACCEPTANCE Notice"), in which case the Company shall cause the ROFR Borrower to obtain such debt financing, subject to the terms herein, from the Fund and not accept such Offer from such other Person. If no Acceptance Notice has been received by the ROFR Borrower within the Option Period, the ROFR Borrower may consummate the Offer with the other Person on the terms and conditions set forth in the Offer (the "TRANSACTION"); PROVIDED, HOWEVER, that none of the foregoing or any failure by the Fund to issue an Acceptance Notice shall be construed as a waiver of any of the terms, covenants or conditions of the Securities Purchase Agreement or any other Transaction Document. If any transaction described in an Offer is not consummated on the terms set forth in the Offer or with the Person providing the Offer or during the 90 calendar day period following the expiration of the Option Period, the Company shall not 54 permit the ROFR Borrower to consummate the transaction without again complying with this Section 9.19. ARTICLE X NEGATIVE COVENANTS On the date hereof, until all of the Obligations of the Company to the Purchaser have been satisfied, the Company covenants and agrees that neither it nor any Subsidiary will: 10.1 RESTRICTIONS ON INDEBTEDNESS. Create, incur, suffer or permit to exist, or assume or guarantee, either directly or indirectly, or otherwise become or remain liable with respect to, any Indebtedness, except the following: (a) Indebtedness outstanding at the date of this Agreement as set forth on SCHEDULE 5.28 but no amendments or refinancings thereof; PROVIDED that all Indebtedness set forth on SCHEDULE 5.28 owing to any seller in connection with the acquisition by the Company or any Subsidiary of any business (whether by asset purchase, stock purchase or otherwise) shall be Subordinated Debt, except as specifically indicated otherwise on SCHEDULE 5.28. (b) Indebtedness to the United States Department of Housing and Urban Development ("HUD") in connection with the refinancing of a portion of the Indebtedness under the Credit Agreement in an aggregate amount not to exceed $35,000,000 (including, for purposes of this cap, any Indebtedness to HUD set forth on SCHEDULE 5.28), but no amendments or refinancings thereof. (c) Indebtedness owing by any wholly-owned Subsidiary to the Company or to another wholly-owned Subsidiary; PROVIDED, that such Indebtedness shall be evidenced by a note and shall be Subordinated Debt. (d) Borrowings incurred in the ordinary course of business and not exceeding $100,000 individually or in the aggregate outstanding at any one time; PROVIDED, HOWEVER, that such Indebtedness shall be Subordinated Debt. (e) Indebtedness in an amount not to exceed $100,000 in respect of purchase money security interests permitted under Section 10.2(c), including, for purposes of this cap, any Indebtedness in respect of purchase money security interests set forth on SCHEDULE 5.28. (f) Indebtedness to the Purchaser incurred in connection with a Drawdown Acquisition as set forth in paragraph (iii) of the definition of "DRAWDOWN ACQUISITION." (g) Indebtedness to the Purchaser. 55 (h) Capitalized Lease Obligations of the Company in an amount not to exceed $100,000 including, for purposes of this cap, any Capitalized Lease Obligations set forth on SCHEDULE 5.28. (i) Indebtedness under the Credit Agreement (including letters of credit issued under the Credit Agreement) in an aggregate principal amount outstanding not in excess of the current maximum commitment under the Credit Agreement and any additional advances or increases thereunder, so long as, after giving effect to such advances or increases, the Company does not exceed the Total Leverage Ratio; PROVIDED, HOWEVER, that the Company agrees that it shall not permit any amendment, supplement, modification or waiver or refinancing of the Credit Agreement, except as provided in the Subordination Agreement. (j) Indebtedness in connection with advances made by a stockholder in order to cure any default of the financial covenants set forth in Article VIII; PROVIDED, HOWEVER, that such Indebtedness shall be Subordinated Debt. (k) Indebtedness to any seller of any business incurred in connection with the acquisition by the Company or any wholly-owned Subsidiary of such business (whether by asset purchase, stock purchase or otherwise), but no amendments or refinancings thereof; PROVIDED, that such Indebtedness shall be Subordinated Debt; PROVIDED, HOWEVER, that no Indebtedness shall be permitted under this Section 10.1 unless at the time such Indebtedness is created, incurred, suffered or permitted to exist, or assumed or guaranteed, either directly or indirectly, and after giving effect to such Indebtedness, no Default or Event of Default shall have occurred and be continuing. Neither the Company nor any Subsidiary shall make prepayments on any existing or future Indebtedness to any Person other than under the Credit Agreement or to the Purchaser or to the extent specifically permitted by this Agreement. 10.2 RESTRICTIONS ON LIENS. Create or incur or suffer to be created or incurred or to exist any encumbrance, mortgage, pledge, Lien, charge or other security interest of any kind upon any of its property or assets of any character, whether now owned or hereafter acquired, or transfer any of such property or assets for the purposes of subjecting the same to the payment of Indebtedness or performance of any other obligation in priority to payment of its general creditors, or grant any person (other than CapitalSource under the Credit Agreement) a negative pledge or other similar restriction with respect to any of its property or assets, or acquire or agree or have an option to acquire any property or assets upon conditional sale or other title retention agreement, device or arrangement (including, without limitation, Capitalized Leases) or suffer to exist for a period of more than 30 days after the same shall have been incurred any Indebtedness against it which if unpaid might by law or upon bankruptcy or insolvency, or otherwise, be given any priority whatsoever over its general creditors, or sell, assign, pledge or otherwise transfer for security any of its accounts, contract rights, general intangibles, or chattel paper (as those terms are defined in the New York Uniform 56 Commercial Code) with or without recourse; provided, however, that the Company or any Subsidiary may create or incur or suffer to be created or incurred or to exist: (a) Liens in favor of CapitalSource pursuant to the terms of the Senior Debt Documents; (b) Existing Liens and security interests described in SCHEDULE 5.32 securing presently outstanding Indebtedness permitted by Section 10.1. (c) Purchase money security interests (which term shall include mortgages, conditional sale contracts, Capitalized Leases and all other title retention or deferred purchase devices) to secure the purchase price of property acquired hereafter by the Company or any Subsidiary, or to secure Indebtedness incurred solely for the purpose of financing such acquisitions, in each case to the extent permitted by Section 10.1; PROVIDED, HOWEVER, that no such purchase money security interests shall extend to or cover any property other than the property the purchase price of which is secured by it, and that the principal amount of Indebtedness (whether or not assumed) with respect to each item of property subject to such a security interest shall not exceed the fair value of such item on the date of its acquisition. (d) (i) Deposits or pledges made in connection with, or to secure payment of, workmen's compensation, professional liability insurance, unemployment insurance, old age pensions or other social security or to secure the performance of tenders, bids, leases, contracts (other than for the repayment of Indebtedness), statutory obligations and other similar obligations; (ii) arising as a result of progress payments under government contracts; and (iii) Liens for Taxes, assessments or governmental charges or levies and Liens to secure claims for labor, material or supplies to the extent that payment thereof shall not at the time be required to be made in accordance with Section 9.4(a). (e) Encumbrances in the nature of zoning restrictions, easements, and rights or restrictions of record on the use of real property which do not materially detract from the value of such property or impair its use in the business of the owner or lessee. (f) Liens (other than judgments and awards) created by or resulting from any litigation or legal proceeding, provided the execution or other enforcement thereof is effectively stayed and the claims secured thereby are being actively contested in good faith by appropriate proceedings reasonably satisfactory to the Purchaser. (g) Liens arising by operation of law to secure landlords, lessors or renters under leases or rental agreements made in the ordinary course of business and confined to the premises or property rented. (h) Judgment Liens in an aggregate amount not to exceed (i) $250,000, if such amount is covered by insurance or (ii) $50,000, if such amount is not covered by insurance. 57 (i) Liens necessary and desirable for the operation of such Person's business; PROVIDED, that the Purchaser has consented to such Liens in writing before their creation and existence and the debt secured thereby is both subject and subordinate in all respects to the Obligations and all of the rights and remedies of the Purchaser, all in form and substance satisfactory to the Purchaser in its sole discretion. (j) Liens in favor of HUD to secure Indebtedness to HUD permitted by Section 10.1(b); Nothing contained in this Section 10.2 shall permit the Company or any Subsidiary to incur any Indebtedness or take any other action or permit to exist any other condition which would be in contravention of any other provision of this Agreement. 10.3 INVESTMENTS. Have outstanding or hold or acquire or make or commit itself to acquire or make any Investment, or acquire any interest in, or all or substantially all of the assets of, any Person or joint venture, except the following: (a) Investments having a maturity of less than one year from the date thereof by the Company in: (i) obligations of the United States of America or any agency or instrumentality thereof; or (ii) repurchase agreements involving securities described in clause (i) with the Purchaser; and (iii) commercial paper which is rated not less than prime-one or A-1 or their equivalents by Moody's Investor Service, Inc. or Standard & Poor's Corporation, respectively, or their successors. (b) Existing Investments of the Company in any Subsidiary, as described on SCHEDULE 10.3. (c) Investments consisting of reasonable and customary travel and similar advances to employees of the Company and the Subsidiaries. (d) Investments or acquisitions by the Company or any wholly-owned Subsidiary constituting a Drawdown Acquisition. 10.4 DISPOSITION OF ASSETS. Sell, lease or otherwise dispose of any assets except for the sale, lease or other disposition of Inventory or other property in the ordinary course of business. 10.5 MERGERS, ETC. Without the prior written consent of the Purchaser, enter into any merger or consolidation with or acquire all or substantially all of the assets of any Person, or sell, assign, lease or otherwise dispose of (whether in one transaction or in a series of transactions) all or substantially all of its assets (whether now owned or hereafter acquired) to any Person, except that (a) any wholly-owned Subsidiary may merge into the Company or any other wholly-owned Subsidiary and (b) the Company may merge with PMR Acquisition Corporation, a Delaware corporation, pursuant to the PMR Merger Agreement as in effect on the date hereof. 10.6 ASSUMPTIONS, GUARANTIES, ETC. OF INDEBTEDNESS OF OTHER PERSONS. Except as permitted by the Credit Agreement or the Transaction Documents, assume, 58 guarantee, endorse or otherwise be or become directly or contingently liable (including, without limitation, by way of agreement, contingent or otherwise, to purchase, provide funds for payment, supply funds to or otherwise invest in any Person or otherwise assure the creditors of any such Person against loss) in connection with any Indebtedness of any other Person, except for (i) trade credit extended in the ordinary course of business, (ii) advances for business travel and similar temporary advances made in the ordinary course of business to officers, directors and employees and (iii) guaranties by endorsement of negotiable instruments for deposit or collection, or similar transactions in the ordinary course of business. 10.7 ERISA. At any time while the Company or any Subsidiary has a Pension Plan, permit any accumulated funding deficiency to occur with respect to any Pension Plan or other employee benefit plans established or maintained by the Company or any Subsidiary or to which contributions are made by the Company or any Subsidiary, and which are subject to the "PENSION REFORM ACT" and the rules and regulations thereunder or to Section 412 of the Code, and at all times comply in all material respects with the provisions of the Pension Reform Act and Code which are applicable to such plans. The Company will not, and will cause the Subsidiaries not to, permit the Pension Benefit Guaranty Corporation to cause the termination of any Pension Plan under circumstances which would cause the lien provided for in Section 4068 of the Pension Reform Act to attach to the assets of the Company or any Subsidiary. 10.8 DISTRIBUTIONS. Make (i) any Distributions or make any other payment on account of the purchase, acquisition, redemption, or other retirement of any shares of stock, whether now or hereafter outstanding, (ii) any payments or Distributions to any stockholder, member, partner or other equity owner in such Person's capacity as such, or (iii) any payment of any management, service or related or similar fee to any Person or with respect to any facility owned, operated or leased by the Company or any Subsidiary, except (A) any Subsidiary may make a Distribution to the Company, (B) the Company or any wholly-owned Subsidiary may enter into a Drawdown Acquisition in accordance with the terms and conditions set forth herein, (C) the Company may make a payment in connection with the redemption of the Warrants pursuant to Article XIII, and (D) the Company may make any payment to the Purchaser permitted under this Agreement, the Note or the Warrants. 10.9 SALE AND LEASEBACK. Sell or transfer any of its properties with the intention of taking back a lease of the same property or leasing other property for substantially the same use as the property being sold or transferred. 10.10 TRANSACTIONS WITH AFFILIATES. Enter into or amend, modify or renew any transaction, including, without limitation, the purchase, sale or exchange of property or the rendering of any service, with any Affiliate, except (i) as disclosed on SCHEDULE 10.10, and (ii) that the Company and the Subsidiaries may pay salaries and bonuses to its directors and officers as are usual and customary in the Company's or the Subsidiaries' business; provided, that no payment of any bonus shall be permitted if a Default or Event of Default has occurred and remains in effect or would be caused by or result from such payment. 59 10.11 CHANGE IN BUSINESS. Engage in any business, or permit any Subsidiary thereof so to do, other than the business of owning and operating freestanding specialty psychiatric hospitals and managing psychiatric units owned by third parties and any other business reasonably related to the foregoing business. 10.12 PMR MERGER AGREEMENT. Amend, supplement, modify or waive any provision of the PMR Merger Agreement or the documents related thereto without the prior written consent of the Purchaser; provided, however, that prior to the consummation of the PMR Merger, the Company shall cause PMR Corporation to amend the PMR Merger Agreement in order to provide that, upon consummation of the PMR Merger, PMR Corporation shall assume the Company's obligations relating to the Warrants (whether then or thereafter issued and including, without limitation, the obligation to issue Additional Warrants on the terms set forth in this Agreement) such that each holder of a Warrant shall thereafter have the right to exercise such Warrant for the number of shares of PMR Common Stock that would have been received by a holder of the number of shares of Common Stock into which such Warrant could have been exercised immediately prior to the PMR Merger (subject to further adjustment as set forth in the Warrants). 10.13 DRAWDOWN ACQUISITION DOCUMENTS. Amend, supplement, modify or waive any provision of any Drawdown Acquisition Documents or the Aeries Purchase Agreement and the documents related thereto, without the prior written consent of the Purchaser. 10.14 STOCK OPTION PLAN. Issue, without the consent of the Purchaser, any equity securities, options, warrants or other rights to purchase shares of Capital Stock of the Company or stock appreciation rights, to any director, officer, employee or consultant of the Company or any Subsidiary, other than pursuant to (i) the Plan, without regard to any amendment or modification thereof, other than any amendment or modification thereof approved by the Board of Directors of the Company, (ii) an amendment of the Plan approved by the Purchaser or (iii) a plan adopted with the consent of the Purchaser. 10.15 ORGANIZATIONAL DOCUMENTS; ETC. (i) Amend its Certificate of Incorporation or By-laws or equivalent organizational or governing documents without the prior written consent of the Purchaser; (ii) change its fiscal year unless the Company demonstrates to the Purchaser's satisfaction compliance with the covenants contained herein for both the fiscal year in effect prior to any change and the new fiscal year period by delivery to the Purchaser of appropriate interim and annual pro forma, historical and current compliance certificates for such periods and such other information as the Purchaser may reasonably request; (iii) amend, alter or suspend or terminate or make provisional in any material way, any license, lease, power, permit, franchise, certificate, authorization, approval, certificate of need, provider number or other rights without the prior written consent of the Purchaser, which consent shall not be unreasonably withheld; (iv) wind up, liquidate or dissolve (voluntarily or involuntarily) or commence or suffer any proceedings seeking or that would result in any of the foregoing; or (v) use any proceeds of any loans hereunder for "purchasing" or "carrying" "margin stock" as 60 defined in Regulations U, T or X of the Board of Governors of the Federal Reserve System. 10.16 PAYMENT ON SUBORDINATED DEBT. Neither the Company nor any Subsidiary shall (a) make any prepayment of any part or all of any Subordinated Debt, (b) repurchase, redeem or retire any instrument evidencing any such Subordinated Debt prior to maturity, or (c) enter into any agreement (oral or written) which could in any way be construed to amend, modify, alter or terminate any one or more instruments or agreements evidencing or relating to any Subordinated Debt. ARTICLE XI DEFAULTS AND REMEDIES 11.1 EVENTS OF DEFAULT. The occurrence of any one or more of the following shall constitute an "EVENT OF DEFAULT" hereunder: (a) The Company shall fail to pay any amount on the Obligations or provided for in this Agreement or the Note when due (whether on any payment date, at maturity, by reason of acceleration, by notice of intention to prepay, by required prepayment or otherwise); PROVIDED, that, if the Company shall fail to pay any amount on the Obligations when due, there shall be a one-day grace period after receipt by the Company of written notice from the Purchaser or any Holder of the Note of such nonpayment; (b) Any representation, statement or warranty made or deemed made by (i) the Company in this Agreement (including the representations and warranties made pursuant to Section 2.5) or the Note or in any other certificate, document, report or opinion delivered in conjunction therewith, (ii) any Subsidiary in the Subsidiaries' Guarantee or in any certificate, document, report or opinion delivered in conjunction therewith, or (iii) PMR Corporation in the PMR Guarantee (if any) or in any other certificate, document, report or opinion delivered in conjunction therewith, shall not be true and correct in all material respects or shall have been false or misleading in any material respect on the date when made or deemed to have been made (except to the extent already qualified by materiality, in which case it shall be true and correct in all respects and shall not be false or misleading in any respect); (c) The Company, any Subsidiary or PMR Corporation or other party thereto, other than the Purchaser or any Holder of any Warrant or the Note, shall be in violation, breach or default of, or shall fail to perform, observe or comply with any covenant, obligation or agreement set forth in, this Agreement, the Note, the Subsidiaries' Guarantee or the PMR Guarantee (if any), and such violation, breach, default or failure shall not be cured within the applicable period set forth in the applicable document; PROVIDED that, with respect to the affirmative covenants set forth in Article IX (other than Sections 9.3, 9.4, 9.9, 9.10, 9.11, 9.12 and 9.17 for which there shall be no cure period), there shall be a 30 day cure period commencing from the earlier of (i) receipt by such Person of written notice of such breach, default, violation or failure, and (ii) the time at 61 which such Person or any authorized officer thereof knew or became aware, or should have known or been aware, of such failure, violation, breach or default; (d) This Agreement, the Note, the Subsidiaries' Guarantee or the PMR Guarantee (if any) ceases to be in full force and effect; (e) One or more judgments or decrees is rendered against the Company or any Subsidiary in an amount in excess of (i) $300,000, if such amount is covered by insurance or (ii) $100,000, if such amount is not covered by insurance, which is/are not satisfied, stayed, vacated or discharged of record within 30 calendar days of being rendered; (f) (i) Any default occurs, which is not cured or waived, in the payment of any amount with respect to any Indebtedness (other than the Obligations) of the Company or any Subsidiary in excess of $100,000, and such default continues for more than any applicable grace period, or (ii) any Indebtedness of the Company or any Subsidiary in excess of $100,000 is declared to be due and payable or is required to be prepaid (other than by a regularly scheduled payment) prior to the stated maturity thereof, or any obligation of such Person for the payment of Indebtedness (other than the Obligations) is not paid when due or within any applicable grace period, or any such obligation becomes or is declared to be due and payable before the expressed maturity thereof; (g) The Company or any Subsidiary shall (i) be unable to pay its debts generally as they become due, (ii) file a petition under any insolvency statute, (iii) make a general assignment for the benefit of its creditors, (iv) commence a proceeding for the appointment of a receiver, trustee, liquidator or conservator of itself or of the whole or any substantial part of its property, or (v) file a petition seeking reorganization or liquidation or similar relief under any Debtor Relief Law or any other applicable law or statute; (h) (i) A court of competent jurisdiction shall (A) enter an order, judgment or decree appointing a custodian, receiver, trustee, liquidator or conservator of the Company or any Subsidiary or the whole or any substantial part of any such Person's properties, which shall continue unstayed and in effect for a period of 60 days, (B) approve a petition filed against the Company or any Subsidiary seeking reorganization, liquidation or similar relief under the any Debtor Relief Law or any applicable law or statute, which is not dismissed within 60 days or, (C) under the provisions of any Debtor Relief Law or other applicable law or statute, assume custody or control of the Company or any Subsidiary or of the whole or any substantial part of any such Person's properties, which is not irrevocably relinquished within 60 days, or (ii) there is commenced against the Company or any Subsidiary any proceeding or petition seeking reorganization, liquidation or similar relief under any Debtor Relief Law or any other applicable law or statute, which (A) is not unconditionally dismissed within 60 days after the date of commencement, or (B) is with respect to which the Company or such Subsidiary takes any action to indicate its approval of or consent to; 62 (i) (i) Any event, condition or circumstance or set of events, conditions or circumstances or any change has occurred or is reasonably expected to occur which (A) has or could reasonably be expected to have a material adverse effect upon or change in the validity or enforceability of this Agreement, the Note, the Subsidiaries' Guarantee or the PMR Guarantee (if any), (B) has been or could reasonably be expected to be material and adverse to the business, operations, prospects, properties, assets, liabilities or condition of the Company and/or any Subsidiary, either individually or taken as a whole, or (C) has materially impaired or could reasonably be expected to materially impair the ability of the Company, any Subsidiary or PMR Corporation, as the case may be, to perform the Obligations or to consummate the transactions under this Agreement, the Note, the Subsidiary and the PMR Guarantee (if any), as the case may be, (ii) any Liability Event occurs or is reasonably expected to occur, which results or is reasonably expected to result in a liability of the Company or any Subsidiary in excess of $100,000, or (iii) the Company or any Subsidiary ceases any portion of its business operations as currently conducted; (j) The Purchaser or any Holder receives any indication or evidence that the Company or any Subsidiary may have directly or indirectly been engaged in any type of activity which, in the Purchaser's judgment, might result in forfeiture of any property to any Governmental Authority which shall have continued unremedied for a period of 10 days after written notice from the Purchaser; (k) The issuance of any process for levy, attachment or garnishment or execution in an aggregate amount in excess of $100,000 upon or prior to any judgment against the Company or any Subsidiary or any of their property or assets; or (l) The Company or any Subsidiary does, or enters into or becomes a party to any agreement or commitment to do, or cause to be done, any of the things described in this Article XI or otherwise prohibited by this Agreement, the Note, the Subsidiaries' Guarantee or the PMR Guarantee (if any) (subject to any cure periods set forth therein); then, and in any such event, notwithstanding any other provision of this Agreement, the Note, the Subsidiaries' Guarantee and the PMR Guarantee (if any), the Purchaser and any Holder of the Note may, by notice to the Company (i) terminate their obligations to make Additional Loans hereunder, whereupon the same shall immediately terminate, (ii) declare all or any of the loans made under the Note, all interest thereon and all other Obligations to be due and payable immediately (except in the case of an Event of Default under Section 11.1(d), (g), (h) or (i)(ii), in which event all of the foregoing shall automatically and without further act by the Purchaser be due and payable), in each case without presentment, demand, protest or further notice of any kind, all of which are hereby expressly waived by the Company, and (iii) prohibit any action permitted to be taken under Article X. 11.2 RIGHTS AND REMEDIES. In addition to the acceleration provisions set forth in Section 11.1, upon the occurrence and continuation of an Event of Default, the Purchaser and any Holder of the Note shall have the right to exercise any and all rights, 63 options and remedies provided for in this Agreement, the Note, the Subsidiaries' Guarantee and the PMR Guarantee (if any) at law or in equity and/or in any other appropriate proceeding either for specific performance or in aid of the exercise of any power granted in this Agreement, the Note, the Subsidiaries' Guarantee or the PMR Guarantee (if any), including, without limitation, the right to (i) apply any property of the Company held by the Purchaser, for the benefit of any Holder of the Note, to reduce the Obligations, and (ii) reduce or otherwise change the maximum aggregate principal amount of Additional Loans under the Note which have not yet been made hereunder. Notwithstanding any provision of this Agreement, the Note, the Subsidiaries' Guarantee or the PMR Guarantee (if any), the Purchaser and any Holder of the Note, in their sole discretion, shall have the right, at any time that the Company fails to do so, and from time to time, without prior notice, to pay for the performance of any of the Obligations. Such expenses and advances shall be added to the Obligations until reimbursed to the Purchaser and any Holder of the Note, and such payments by the Purchaser and any Holder of the Note shall not be construed as a waiver by the Purchaser and any Holder of the Note of any Event of Default or any other rights or remedies of the Purchaser and any Holder of the Note. 11.3 RIGHTS AND REMEDIES NOT EXCLUSIVE. The Purchaser and any Holder of the Note shall have the right in their sole discretion to determine which rights and/or remedies they may at any time pursue, relinquish, subordinate or modify, and such determination will not in any way modify or affect any of the Purchaser's or any other Holder's rights or remedies under this Agreement, the Note, the Subsidiaries' Guarantee or the PMR Guarantee (if any), applicable law or equity. The enumeration of any rights and remedies in this Agreement, the Note, the Subsidiaries' Guarantee and the PMR Guarantee (if any) is not intended to be exhaustive, and all rights and remedies of the Purchaser and the Holder of the Note described in this Agreement, the Note, the Subsidiaries' Guarantee and the PMR Guarantee (if any) are cumulative and are not alternative to or exclusive of any other rights or remedies which the Purchaser and any Holder of the Note otherwise may have. The partial or complete exercise of any right or remedy shall not preclude any other further exercise of such or any other right or remedy. ARTICLE XII REDEMPTION OF THE NOTES The Company shall redeem the entire outstanding principal (together with accrued interest and premium), if any, on the Note in accordance with the "MANDATORY REDEMPTION AT THE OPTION OF THE HOLDER" and "MANDATORY REDEMPTION AT MATURITY" provisions set forth in Sections 3 and 5 of the Note. The Company may prepay outstanding principal (together with accrued interest) on the Note only if the Note is prepaid in accordance with the "Optional Redemption" provisions set forth in Section 4 of the Note. 64 ARTICLE XIII REDEMPTION OF WARRANTS 13.1 HOLDER'S RIGHT TO REQUIRE REDEMPTION. The Company hereby covenants and agrees with the Purchaser and each Holder of Warrants or the shares of Common Stock issued upon the exercise of the Warrants that: (a) Upon the earliest to occur of (i) a Prepayment Event, (ii) all or any portion of the Obligations becoming due and payable pursuant to Section 11.2 and (iii) the sixth anniversary of the Initial Closing Date, the Purchaser, on behalf of the Holders of Warrants, may at any time by notice to the Company (a "DEMAND NOTICE") require the Company to redeem (unless otherwise prevented by law) all of the outstanding Warrants, and the shares of Common Stock issued upon exercise of the Warrants, held by the Holders at a purchase price equal to the Fair Market Value per share of Common Stock (less, in the case of the Warrants, the Exercise Price (as defined in the Warrants) for each such share) at the time multiplied by the number of such shares of Common Stock issuable or issued upon the exercise of the Warrants (the "PUT PRICE") in cash, in immediately available funds payable upon actual delivery to the Company or the Company's transfer agent of the Warrants and the share certificates representing the shares of Common Stock issued upon exercise of the Warrants, as the case may be; PROVIDED, HOWEVER, that the Company's payment of the Put Price in cash is approved by CapitalSource under the Credit Agreement. The Company shall promptly notify all Holders as to whether such approval of CapitalSource under the Credit Agreement has been obtained. Within 20 days following receipt of a Demand Notice, the Company shall give notice (a "REQUIRED REDEMPTION NOTICE") to all registered holders of Warrants and shares of Common Stock issued upon the exercise of the Warrants who did not participate in the Demand Notice (the "NONPARTICIPATING HOLDERS") that the Company has received a Demand Notice and shall inform each such Nonparticipating Holder that it has the right under this Section 13.1(a) to include in the redemption any or all of its Warrants and shares of Common Stock issued upon exercise of the Warrants held by such holder by giving the Company written notice of its desire to participate within 15 days following receipt of the Company's Required Redemption Notice. Notice of a request for redemption pursuant to this Section 13.1 shall be sent in accordance with Section 15.2. If the Company is obligated pursuant to this Section 13.1 to redeem Warrants and/or shares of Common Stock issued upon exercise of the Warrants, the Company shall redeem the Warrants and/or shares of Common Stock issued upon exercise of the Warrants participating in such demand no later than 10 Business Days after completion of the valuation procedure described in Section 13.1(c) (the "REDEMPTION DATE"). At any time on or after the Redemption Date, the participating holders of Warrants and shares of Common Stock issued upon exercise of the Warrants shall be entitled to receive payment of the Put Price in cash in immediately available funds upon the actual delivery to the Company or its transfer agent of their Warrants or share certificates representing the shares of Common Stock issued upon exercise of the Warrants. Notice of a Prepayment Event shall be mailed no more than 20 Business Days prior to the occurrence of a Prepayment Event to each Holder of Warrants and shares of Common Stock issued upon exercise of the Warrants, at such Holder's address as it appears on the transfer books of 65 the Company. The Redemption Date shall be fixed by the Company in the notice and shall be on or prior to the consummation of the Prepayment Event; PROVIDED, HOWEVER, that the Company shall not be required to redeem the Warrants and the shares of Common Stock issued upon exercise of the Warrants, unless such Prepayment Event shall be consummated, in which case the Company shall be required to redeem the Warrants and shares of Common Stock issued upon exercise of the Warrants immediately prior to or simultaneously with the consummation of such transaction. (b) If the Company fails to pay the Put Price in cash because under applicable law it is prevented from making such payment or because it does not obtain the requisite approval of CapitalSource under the Credit Agreement to make such payment, the Company's obligation to pay the Put Price shall remain in full force and effect as a senior subordinated obligation of the Company payable on the earlier of (i) the first anniversary of the Demand Notice or (ii) the Maturity Date (as defined in the Note purchased pursuant hereto), accruing interest at the rate of 18% per annum, compounded quarterly, calculated using twelve thirty day months and a 360 day year, payable-in-kind quarterly in arrears, prepayable at any time without premium, and otherwise on terms substantially similar to the terms of the Note (the "PUT PRICE Notes"). The Put Price Notes shall be unconditionally guaranteed by PMR Corporation if the PMR Merger has been consummated; PROVIDED, HOWEVER, that the Put Price Notes and the guarantee thereof by PMR Corporation shall be subordinated to the Indebtedness under the Credit Agreement on the terms set forth in the Subordination Agreement. The form and substance of the Put Price Notes and the guarantee thereof by the Company shall be reasonably acceptable to the Purchaser. The Company shall use reasonable best efforts (i) to obtain the approval of CapitalSource under the Credit Agreement to payment of the Put Price in cash and (ii) to overcome any legal obstacle to making payment of the Put Price. Neither the Company nor any Subsidiary shall enter into any loan or other agreement which contains provisions that, or amend or modify any loan or other agreement to include provisions that restrict or prohibit the ability of the Company to issue the Put Price Notes. (c) As used in this Section 13.1, "FAIR MARKET VALUE" shall mean the amount which a willing buyer, under no compulsion to buy, would pay a willing seller, under no compulsion to sell, in an arm's-length transaction to a third party which is not an Affiliate of the Company treating the Company and the Subsidiaries as a going concern and without regard to (i) the lack of liquidity of Common Stock due to any restrictions or other limitations contained in this Agreement, the Investor Rights Agreement, the Co-Sale Agreement, the Voting Agreement, the Warrants or otherwise, (ii) any discount for minority interests, (iii) the fact that some of the issued and outstanding shares of Common Stock may not have any voting rights or may not have full voting rights, (iv) the fact that one or more of the holders of Common Stock may be unable to exercise in full any of its voting rights due to regulatory, contractual or other restrictions, or (v) the fact that contractual or regulatory approvals, consents, waivers, licenses, permits or notifications may need to be obtained in connection with such sale and the time required to obtain the same and without any reduction to such price attributable to management fees, option costs and other similar fees and expenses. The Fair Market Value shall be determined, in the first instance, by a negotiation between the 66 Company and the Holders affected by such determination, and if such negotiation has not reached a determination acceptable to all negotiating parties within 10 Business Days after commencing such negotiation (or such other period as all the negotiating parties agree), then the Fair Market Value shall be determined by an independent, national recognized valuation expert selected by the Holders of a majority of the shares of Common Stock issued or issuable that are being put to the Company under this Section 13.1 (and reasonably acceptable to the Company), acting in a diligent and prompt manner and at the Company's expense. Upon the determination of Fair Market Value by a valuation expert, the Company shall promptly give notice thereof to all Holders of Warrants and Common Stock issued upon exercise of the Warrants, setting forth in reasonable detail the method and basis of determination of such Fair Market Value. Such determination shall be binding on the Company and the Holders. The Company shall provide the valuation expert with all information about the Company and the Subsidiaries which such valuation expert reasonably deems necessary for determining the Fair Market Value. ARTICLE XIV SUBORDINATION The payment obligations under this Agreement and the Note shall at all times be wholly subordinate and junior in right of payment to the Indebtedness under the Senior Debt Documents to the extent and in the manner provided in the Subordination Agreement. ARTICLE XV MISCELLANEOUS 15.1 SURVIVAL OF PROVISIONS. All of the representations and warranties made herein shall survive the execution and delivery of this Agreement, any investigation by or on behalf of the Purchaser or any Affiliate, acceptance of the Note, the Warrants and shares of Common Stock issued pursuant to the exercise of the Warrants and payment therefor, payment of the Note upon redemption, prepayment or otherwise, exercise of the Warrants and the termination of this Agreement. 15.2 NOTICES. All notices, demands and other communications provided for or permitted hereunder shall be made in writing and shall be by registered or certified first-class mail, return receipt requested, telecopier, courier services or personal delivery to the following addresses, or to such other addresses as shall be designated from time to time by a party in accordance with this Section 15.2: 67 (a) if to the Purchaser: The 1818 Mezzanine Fund II, L.P. c/o Brown Brothers Harriman & Co. 59 Wall Street New York, New York 10005 Attention: Joseph P. Donlan Telecopier No.: (212) 493-8429 with a copy to: Paul, Weiss, Rifkind, Wharton & Garrison 1285 Avenue of the Americas New York, New York 10019-6064 Attention: Marilyn Sobel, Esq. Telecopier No.: (212) 757-3990 (b) if to the Company: Psychiatric Solutions, Inc. 113 Seaboard Lane, Suite C-100 Franklin, TN 37067 Attention: Chief Executive Officer Telecopier No.: (615) 312-5711 with a copy to: Harwell Howard Hyne Gabbert & Manner, P.C. 315 Deaderick Street, Suite 1800 Nashville, TN 37238 Attention: Lee C. Dilworth, Esq. Telecopier No.: (615) 251-1059 All such notices and communications shall be deemed to have been duly given: when delivered by hand, if personally delivered; when delivered to a courier, if delivered by commercial overnight courier service; five Business Days after being deposited in the mail, postage prepaid, if mailed; and when receipt is acknowledged, if telecopied. 15.3 SUCCESSORS AND ASSIGNS. This Agreement shall inure to the benefit of and be binding upon the successors and permitted assigns and permitted transferees of the parties hereto. Except as provided in Article VII, no Person other than the parties hereto and their successors and permitted assigns is intended to be a beneficiary of this Agreement, the Note and the Warrants. 68 15.4 ASSIGNMENTS. (a) The Company may not assign any of its rights or obligations under this Agreement without the written consent of the Purchaser. (b) The Purchaser and any subsequent Holder of the Note or any Warrants may, at any time or from time to time, sell, agree to sell or assign to one or more other Persons who agree to be bound by all of the terms of this Agreement and the terms of the Note or Warrant Certificates, as the case may be, all or any portion of the Note or any Warrant Certificate. In the event of any such sale or assignment of the Note, upon surrender for exchange of the Note at the office of the Company designated for notices in accordance with Section 15.2, the Company shall execute and deliver in exchange therefor, without expense to the holder, one or more new Notes in the same aggregate principal amount as the then unpaid principal amount of the Note so surrendered as such holder shall specify, dated as of the date to which interest has been paid on the Note so surrendered (or, if no interest has been paid, the date of such surrendered Note), in the name of such Person or Persons as may be designated by such holder in writing, and otherwise of the same form and tenor as the Note so surrendered for exchange. Every Note surrendered for transfer shall be duly endorsed, or accompanied by a written instrument of transfer duly executed by the holder of such Note or its attorney duly authorized in writing. Any sale or assignment of a Warrant Certificate shall be in accordance with the provisions of Section 7 of the Warrant Certificate. 15.5 AMENDMENT AND WAIVER. (a) No failure or delay on the part of any Holder, in exercising any right, power or remedy hereunder shall operate as a waiver thereof, nor shall any single or partial exercise of any such right, power or remedy preclude any other or further exercise thereof or the exercise of any other right, power or remedy. The remedies provided for herein are cumulative and are not exclusive of any remedies that may be available to any Holder of the Note or any Warrant at law, in equity or otherwise. (b) Any amendment, supplement or modification of or to any provision of this Agreement, any waiver of any provision of this Agreement and any consent to any departure by the Company from the terms of any provision of this Agreement, shall be effective (i) only if it is made or given in writing and signed by the Company and (x) holders of a majority of the aggregate principal amount of the loans made under the Note and (y) holders of a majority of the shares of Common Stock issued or issuable upon the exercise of the Warrants, and (ii) only in the specific instance and for the specific purpose for which made or given. (c) Any amendment, supplement or modification of or to any provision of the Note, any waiver of any provision of the Note, and any consent to any departure by the Company from the terms of any provision of the Note, shall be effective (i) only if it is made or given in writing and signed by the Company and the holders of a majority of the aggregate principal amount of the loans made under the Note, and 69 (ii) only in the specific instance and for the specific purpose for which made or given; PROVIDED, HOWEVER, that without the consent of each holder of the Note affected, an amendment may not: (A) reduce the rate of or extend the time for payment of interest on the Note; (B) reduce the principal of or extend the maturity of the Note; (C) change the time at which the Note shall or may be prepaid in accordance with the terms of the Note; (D) make the Note payable in money other than that stated in the Note; or (E) make any change to this Section 15.5(c). Except where notice is specifically required by this Agreement, no notice to or demand on the Company in any case shall entitle the Company to any other or further notice or demand in similar or other circumstances. 15.6 COUNTERPARTS. This Agreement may be executed in any number of counterparts and by the parties hereto in separate counterparts, each of which when so executed shall be deemed to be an original and all of which taken together shall constitute one and the same agreement. 15.7 HEADINGS. The headings in this Agreement are for convenience of reference only and shall not limit or otherwise affect the meaning hereof. 15.8 DETERMINATIONS. Except to the extent that any provision herein expressly requires that a determination be reasonable or a consent not be unreasonably withheld, or be subject to qualifications to a similar effect, all determinations to be made by the Company, the Purchaser or any Holder hereunder in its opinion or judgment or with its approval or otherwise shall be made by it in its sole discretion. 15.9 GOVERNING LAW. This Agreement has been negotiated, executed and delivered in the State of New York, and shall be governed by and construed in accordance with the law of the State of New York, without regard to principles of conflicts of law thereof. 15.10 JURISDICTION. Each party to this Agreement hereby irrevocably agrees that any legal action or proceeding arising out of or relating to this Agreement or any agreements or transactions contemplated hereby may be brought in the courts of the State of New York located in New York City or of the United States of America for the Southern District of New York and hereby expressly submits to the personal jurisdiction and venue of such courts for the purposes thereof and expressly waives any claim of improper venue and any claim that such courts are an inconvenient forum. Each party hereby irrevocably consents to the service of process of any of the aforementioned courts pursuant to a contractual provision in any such suit, action or proceeding by the mailing of copies thereof by registered or certified mail, postage prepaid, to the address set forth in Section 15.2, such service to become effective 10 days after such mailing. TO THE EXTENT NOT PROHIBITED BY APPLICABLE LAW WHICH CANNOT BE WAIVED, EACH PARTY HEREBY WAIVES, AND COVENANTS THAT IT WILL NOT ASSERT (WHETHER AS PLAINTIFF, DEFENDANT OR OTHERWISE), ANY RIGHT TO TRIAL BY JURY IN ANY FORUM IN RESPECT OF ANY ISSUE, CLAIM, DEMAND, ACTION, OR CAUSE OF ACTION ARISING OUT OF OR 70 BASED UPON THIS AGREEMENT OR THE SUBJECT MATTER HEREOF OR ANY FUNDAMENTAL DOCUMENT, IN EACH CASE WHETHER NOW EXISTING OR HEREAFTER ARISING OR WHETHER IN CONTRACT OR TORT OR OTHERWISE. 15.11 SEVERABILITY. In the event that any one or more of the provisions contained herein, or the application thereof in any circumstance, is held invalid, illegal or unenforceable in any respect for any reason, the validity, legality and enforceability of any such provision in every other respect and of the remaining provisions hereof shall not be in any way impaired, unless the provisions held invalid, illegal or unenforceable shall substantially impair the benefits of the remaining provisions hereof. 15.12 RULES OF CONSTRUCTION. Unless the context otherwise requires, "or" is not exclusive, and references to sections or subsections refer to sections or subsections of this Agreement. 15.13 REMEDIES. If a breach of this Agreement, the Note or the Warrant Certificates by the Company occurs and is continuing, the Purchaser or any Holder of the Note or any Warrant Certificate may pursue any available remedy by proceeding at law or in equity to enforce the performance (including, without limitation, the specific performance) of any provision of this Agreement or the Note or Warrant Certificate. The Purchaser or any Holder of the Note or Warrant Certificate may maintain a proceeding even if it does not possess the Note or Warrant Certificate or does not produce any of them in the proceeding. Except as otherwise provided by law, a delay or omission by the Purchaser or any Holder of the Note or any Warrant Certificate in exercising any right or remedy accruing upon any such breach shall not impair the right or remedy or constitute a waiver of or acquiescence in any such breach. No remedy is exclusive of any other remedy. All available remedies are cumulative. 15.14 ENTIRE AGREEMENT. This Agreement, together with the exhibits and schedules hereto, and the other Transaction Documents are intended by the parties as a final expression of their agreement and intended to be a complete and exclusive statement of the agreement and understanding of the parties hereto and thereto in respect of the subject matter contained herein and therein. There are no restrictions, promises, warranties or undertakings, other than those set forth or referred to herein or therein. This Agreement, together with the exhibits and schedules hereto, and the other Transaction Documents supersede all prior agreements and understandings among the parties with respect to such subject matter. 15.15 ATTORNEYS' FEES. In any action or proceeding brought to enforce any provision of this Agreement or any other of the Transaction Documents or any other document or instrument contemplated hereby or thereby, or where any provision hereof or thereof is validly asserted as a defense, the successful party shall be entitled to recover reasonable attorneys' fees, charges and disbursements in addition to any other available remedy. 71 15.16 PUBLICITY. Except as may be required by applicable law, no party hereto shall issue a publicity release or announcement or otherwise make any public disclosure concerning this Agreement or the transactions contemplated hereby, without prior approval by the other parties hereto. If any announcement is required by law to be made by a party hereto, prior to making such announcement such party will deliver a draft of such announcement to the other parties and shall give the other parties an opportunity to comment thereon. 15.17 EXPENSES. The Company acknowledges and agrees that whether or not the transactions contemplated by the Transaction Documents are consummated, it shall reimburse (a) the Purchaser for (i) all reasonable legal fees, expenses and disbursements of PWRW&G and Benesch, Friedlander, Coplan & Aronoff LLP, (ii) all of its reasonable out-of-pocket expenses and (iii) all reasonable expenses of accounting and/or other advisors to the Purchaser relating to its review of the Company's accounting and management information systems, incurred in connection with the due diligence process and the negotiation, execution and delivery of this Agreement and the other Transaction Documents, (b) the Purchaser for all reasonable out-of-pocket expenses of the Purchaser in connection with monitoring the transactions contemplated by the Transaction Documents following the Initial Closing and (c) the Purchaser for all reasonable out-of-pocket expenses and the reasonable legal fees and expenses of legal counsel in connection with any (i) Additional Closing and (ii) amendment, supplement, modification or waiver of or to any provision of this Agreement and the other Transaction Documents following the Initial Closing. The fees and expenses set forth in Sections 15.17(a) and 15.7(c)(i) shall be paid by the Company at the Initial Closing or Additional Closing, as applicable, and the fees and expenses set forth in Sections 15.17(b) and 15.17(c)(ii) shall be paid by the Company as incurred by the Purchaser. 15.18 FURTHER ASSURANCES. Each of the parties hereto agrees that, except as otherwise provided in this Agreement and subject to its legal obligations, it will use its reasonable best efforts to fulfill all conditions precedent specified herein, and to do all things reasonably necessary to consummate the transactions contemplated hereby. [Remainder of page intentionally left blank.] 72 IN WITNESS WHEREOF, the parties hereto have caused this Securities Purchase Agreement to be executed and delivered as an instrument under seal by their respective officers or partners hereunto duly authorized as of the date first above written. PSYCHIATRIC SOLUTIONS, INC. By: /s/ Steven T. Davidson ------------------------------------------ Name: Steven T. Davidson Title: Chief Development Officer THE 1818 MEZZANINE FUND II, L.P. By: Brown Brothers Harriman & Co., General Partner By: /s/ Joseph P. Donlan ----------------------------------------- Name: Joseph P. Donlan Title: Managing Director EX-99 4 ex2sc13d-psychiatric.txt EXHIBIT 2 EXHIBIT 2 --------- THIS WARRANT AND THE SECURITIES ISSUABLE UPON EXERCISE HEREOF HAVE BEEN TAKEN FOR INVESTMENT AND HAVE NOT BEEN REGISTERED, UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "SECURITIES ACT"), OR ANY APPLICABLE STATE SECURITIES LAWS AND MAY NOT BE SOLD OR OTHERWISE TRANSFERRED BY ANY PERSON, INCLUDING A PLEDGEE, UNLESS (1) EITHER (A) A REGISTRATION STATEMENT WITH RESPECT THERETO SHALL BE EFFECTIVE UNDER THE SECURITIES ACT, OR (B) AN EXEMPTION FROM REGISTRATION UNDER THE SECURITIES ACT IS THEN AVAILABLE AND (2) THERE SHALL HAVE BEEN COMPLIANCE WITH ALL APPLICABLE STATE SECURITIES OR "BLUE SKY" LAWS. WARRANT NO. 1 June 28, 2002 WARRANT TO PURCHASE SHARES OF COMMON STOCK, PAR VALUE $.01 PER SHARE, OF PSYCHIATRIC SOLUTIONS, INC. THIS IS TO CERTIFY THAT THE 1818 MEZZANINE FUND II, L.P., a Delaware limited partnership, or its permitted registered assigns (the "HOLDER"), is the owner of One Million Five Hundred Two Thousand One Hundred Forty (1,502,140) Warrants (the "WARRANTS"), each of which entitles the registered holder thereof to purchase from Psychiatric Solutions, Inc., a Delaware corporation (the "COMPANY"), one fully paid, duly authorized and nonassessable share of Common Stock (as defined in Section 13 hereof) of the Company, at any time or from time to time on or before 5:00 p.m., New York City time, on the tenth anniversary of the Issue Date (the "WARRANT EXPIRATION DATE"), at an exercise price of $.01 per share (the "EXERCISE PRICE"), all on the terms and subject to the conditions hereinafter set forth. The number of shares of Common Stock issuable upon exercise of each such Warrant (the "NUMBER ISSUABLE"), which is initially one (1) share, is subject to adjustment from time to time pursuant to the provisions of Section 2 of this Warrant Certificate. Capitalized terms used herein but not otherwise defined shall have the meanings given to such terms in Section 13 hereof. Section 1. EXERCISE OF WARRANT. The Warrants evidenced hereby may be exercised, in whole or in part, by the Holder hereof at any time or from time to time on or before 5:00 p.m., New York City time, on the Warrant Expiration Date, upon delivery to 2 the Company at the principal executive office of the Company in the United States of America, of (a) this Warrant Certificate, (b) a written notice stating that such Holder elects to exercise the Warrants evidenced hereby in accordance with the provisions of this Section 1 and specifying the number of Warrants being exercised and the name or names in which such Holder wishes the certificate or certificates for shares of Common Stock to be issued and (c) payment of the Exercise Price for the shares of Common Stock issuable upon such exercise of such Warrants, which shall be payable by any one or any combination of (i) cash, (ii) certified or official bank check payable to the order of the Company, (iii) the surrender (which surrender shall be evidenced by cancellation of the number of Warrants represented by any Warrant Certificate presented in connection with a Cashless Exercise (as defined below)) of Warrants (represented by one or more relevant Warrant Certificates), without the payment of the Exercise Price in cash, in return for the delivery to the surrendering holder of such number of shares of Common Stock equal to the number of shares of Common Stock for which such Warrant is requested to be exercised (if the Exercise Price were being paid in cash or certified or official bank check) reduced by that number of shares of Common Stock equal to the quotient obtained by dividing (x) the aggregate Exercise Price to be paid by (y) the Market Price of one share of Common Stock on the Business Day which next precedes the day of exercise of the Warrants, or (iv) by the delivery of shares of Common Stock having a value (as defined by the next sentence) equal to the aggregate Exercise Price to be paid that are either held by the Holder or are acquired in connection with such exercise, and without payment of the Exercise Price in cash. Any share of Common Stock delivered as payment of the Exercise Price in connection with an In-Kind Exercise (as defined below) shall be deemed to have a value equal to the Market Price of one share of Common Stock on the Business Day which next precedes the day of exercise of the Warrants. An exercise of the Warrants in accordance with clause (iii) above is herein referred to as a "CASHLESS EXERCISE" and an exercise of the Warrants in accordance with clause (iv) is herein referred to as an "IN KIND EXERCISE." The documentation and consideration, if any, delivered in accordance with subsections (a), (b) and (c) above are collectively referred to herein as the "WARRANT EXERCISE DOCUMENTATION." As promptly as practicable, and in any event within five Business Days after receipt of the Warrant Exercise Documentation, the Company shall deliver or cause to be delivered (a) certificates representing the number of validly issued, fully paid and nonassessable shares of Common Stock specified in the Warrant Exercise Documentation, (b) if applicable, cash in lieu of any fraction of a share, as hereinafter provided, and (c) if less than the full number of Warrants evidenced hereby are being exercised or used in a Cashless Exercise, a new Warrant Certificate or Certificates, of like tenor, for the number of Warrants evidenced by this Warrant Certificate, less the number of Warrants then being exercised or used in a Cashless Exercise. Such exercise shall be deemed to have been made at the close of business on the date of delivery of the Warrant Exercise Documentation so that the Person entitled to receive shares of Common Stock upon such exercise shall be treated for all purposes as having become the record holder of such shares of Common Stock at such time. No such surrender shall be effective to constitute the person entitled to receive such shares as the record holder thereof while the transfer books of the Company for the Common Stock are closed for any purpose (but not 3 for any period in excess of five days); but any such surrender of this Warrant Certificate for exercise during any period while such books are so closed shall become effective for exercise immediately upon the reopening of such books, as if the exercise had been made on the date this Warrant Certificate was surrendered and for the Number Issuable of Common Stock specified in the Warrant Exercise Documentation and at the Exercise Price. The Company shall pay all expenses in connection with, and all taxes and other governmental charges (other than income taxes of the holder) that may be imposed in respect of, the issue or delivery of any shares of Common Stock issuable upon the exercise of the Warrants evidenced hereby. The Company shall not be required, however, to pay any tax or other charge imposed in connection with any transfer involved in the issue of any certificate for shares of Common Stock in any name other than that of the registered holder of the Warrants evidenced hereby. In connection with the exercise of any Warrants evidenced hereby, no fractions of shares of Common Stock shall be issued, but in lieu thereof the Company shall pay a cash adjustment in respect of such fractional interest in an amount equal to such fractional interest multiplied by the Current Market Price per share of Common Stock on the Business Day which next precedes the day of exercise. If more than one such Warrant shall be exercised by the Holder thereof at the same time, the number of full shares of Common Stock issuable on such exercise shall be computed on the basis of the total number of Warrants so exercised. All certificates representing the shares of Common Stock issued upon exercise of the Warrants shall bear legends substantially as follows: THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE BEEN TAKEN FOR INVESTMENT AND HAVE NOT BEEN REGISTERED, UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "SECURITIES ACT"), OR ANY APPLICABLE STATE SECURITIES LAWS AND MAY NOT BE SOLD OR OTHERWISE TRANSFERRED BY ANY PERSON, INCLUDING A PLEDGEE, UNLESS (1) EITHER (A) A REGISTRATION STATEMENT WITH RESPECT THERETO SHALL BE EFFECTIVE UNDER THE SECURITIES ACT, OR (B) AN EXEMPTION FROM REGISTRATION UNDER THE SECURITIES ACT IS THEN AVAILABLE AND (2) THERE SHALL HAVE BEEN COMPLIANCE WITH ALL APPLICABLE STATE SECURITIES OR "BLUE SKY" LAWS. Section 2. ADJUSTMENTS. (a) ADJUSTMENT OF NUMBER ISSUABLE. The Number Issuable shall be subject to adjustment from time to time as follows: 4 (i) In case the Company shall at any time or from time to time after the Issue Date: (A) issue shares of the Capital Stock of the Company as a dividend or other distribution on the outstanding shares of Common Stock; (B) subdivide the outstanding shares of Common Stock into a larger number of shares; (C) combine the outstanding shares of Common Stock into a smaller number of shares; or (D) issue any shares of its Capital Stock in a reclassification of the Common Stock; then, and in each such case, the Number Issuable in effect immediately prior to such event shall be adjusted (and any other appropriate actions shall be taken by the Company) so that the holder of any Warrants evidenced hereby thereafter exercised shall be entitled to receive the number of shares of Common Stock or other securities of the Company which such holder would have owned or had been entitled to receive upon or by reason of any of the events described above, had such Warrants been exercised immediately prior to the happening of such event. An adjustment made pursuant to this clause (i) shall be effective (x) in the case of any such dividend or distribution, on the date immediately following the close of business on the record date for the determination of holders of shares of Common Stock entitled to receive such dividend or distribution, or (y) in the case of any such subdivision, combination or reclassification, at the close of business on the date upon which such corporate action becomes effective. (ii) If after the Issue Date, the Company shall at any time or from time to time issue or sell (x) shares of Common Stock or (y) securities convertible into or exchangeable for shares of Common Stock, or any options, warrants or other rights to acquire shares of Common Stock (excluding any additional warrants issued in connection with any Additional Closing (as defined in the Securities Purchase Agreement) pursuant to the terms of the Securities Purchase Agreement), at a price per share that is less than the Current Market Price per share of Common Stock then in effect as of the record date or issue date, as the case may be, referred to in the following sentence (the "RELEVANT DATE") (treating the price per share of Common Stock, in the case of the issuance of any security convertible into, or exchangeable or exercisable for, shares of Common Stock as equal to (x) the sum of the price for such security convertible into, or, exchangeable or exercisable for, shares of Common Stock plus any additional consideration payable (without regard to any anti-dilution adjustments) upon the conversion, exchange or exercise of such security into shares of Common Stock divided by (y) the number of shares of Common Stock initially underlying such convertible, exchangeable or exercisable security), in each case, other than issuances or sales for which an adjustment is made pursuant to another paragraph of this Section 2, then, and in each such case, the Number Issuable then in effect shall be adjusted by multiplying the 5 Number Issuable in effect on the day immediately prior to the Relevant Date by a fraction, (1) the numerator of which shall be the sum of the number of shares of Common Stock outstanding on the Relevant Date, plus the number of additional shares of Common Stock issued or to be issued (or the maximum number into which such convertible or exchangeable securities initially may convert or exchange or for which such options, warrants or other rights initially may be exercised), and (2) the denominator of which shall be the sum of the number of shares of Common Stock outstanding on the Relevant Date, plus the number of shares of Common Stock which the aggregate consideration (plus the aggregate amount of any additional consideration initially payable upon conversion, exchange or exercise of such security) for the total number of such additional shares of Common Stock so issued (or into which such convertible or exchangeable securities may convert or exchange or for which such options, warrants or other rights may be exercised) would purchase at the Current Market Price per share of Common Stock on the Relevant Date. Such adjustment shall be made whenever such shares, securities, options, warrants or other rights are issued, and shall become effective retroactively to a date immediately following the close of business (x) in the case of an issuance to the stockholders of the Company, as such, on the record date for the determination of stockholders entitled to receive such shares, securities, options, warrants or other rights and (y) in all other cases, on the date (the "ISSUE DATE") of such issuance. Solely for purposes of this clause (ii), (I) Common Stock shall include the Common Stock, par value $.01 per share, of the Company and each other class of Capital Stock of the Company that does not have a preference over any other class of Capital Stock of the Company as to dividends or upon liquidation, dissolution or winding up of the Company and, in each case, shall include any other class of Capital Stock of the Company into which such stock is reclassified or reconstituted and (II) if the provisions of any securities convertible into or exchangeable for shares of Common Stock or options, warrants or other rights to acquire shares of Common Stock are amended after the date of issuance so as to (directly or indirectly) reduce the applicable conversion price, exchange price or exercise price such amendment shall be deemed to be a new issuance of such securities as of the date of such amendment. (iii) In case the Company shall at any time or from time to time after the Issue Date distribute to any holder of shares of its Common Stock in respect of such shares (including any such distribution made in connection with a consolidation or merger in which the Company is the resulting or surviving corporation and the Common Stock is not changed or exchanged) cash, evidences of indebtedness of the Company or another issuer, securities of the Company or another issuer or other assets (excluding dividends or other distributions of shares of Common Stock or other Capital Stock for which adjustment is made under Section 2(a)(i) or dividends or other distributions received by or set aside for the benefit of the holders of Common Stock pursuant to Section 2(c) below) or rights or warrants to subscribe for or purchase securities of the Company (excluding those in respect of which adjustments in the Number Issuable is made pursuant to Section 2(a)(i) or Section 2(a)(ii)), then, and in each such case, the Number Issuable then in effect shall be adjusted by multiplying the Number Issuable in effect immediately prior to the date of such distribution by a fraction (x) the numerator of which shall be the Current Market Price 6 per share of Common Stock on the record date referred to below and (y) the denominator of which shall be such Current Market Price per share of Common Stock less the then Fair Market Value (as determined in good faith by the Board of Directors of the Company, a certified resolution with respect to which shall be mailed to the holder of the Warrants evidenced hereby) of the portion of the cash, evidences of indebtedness, securities or other assets so distributed or of such subscription rights or warrants applicable to one share of Common Stock (but such denominator shall in no event be zero). Such adjustment shall be made whenever any such distribution is made and shall become effective retroactively to a date immediately following the close of business on the record date for the determination of stockholders entitled to receive such distribution. (iv) In case the Company at any time or from time to time shall take any action which could have a dilutive effect on the number of shares of Common Stock that may be issued upon exercise of the Warrants, other than an action described in any of Section 2(a)(i) through 2(a)(iii), inclusive, or Section 2(b) or 2(c), then, the Number Issuable shall be adjusted in such manner and at such time as the Board of Directors of the Company reasonably determines to be equitable under the circumstances (such determination to be evidenced in a resolution, a certified copy of which shall be mailed to the holder of the Warrants evidenced hereby). (v) Notwithstanding anything herein to the contrary, no adjustment under this Section 2(a) need be made to the Number Issuable unless such adjustment would require an increase or decrease of at least 1% of the Number Issuable then in effect. Any lesser adjustment shall be carried forward and shall be made at the time of and together with the next subsequent adjustment, which, together with any adjustment or adjustments so carried forward, shall amount to an increase or decrease of at least 1% of such Number Issuable. Any adjustment to the Number Issuable carried forward and not theretofore made shall be made immediately prior to the exercise of any Warrants pursuant hereto. (vi) The Company promptly shall deliver to each registered holder of Warrants at least five Business Days prior to effecting any transaction which would result in an increase or decrease in the Number Issuable pursuant to this Section 2 a notice thereof, together with a certificate, signed by the President or the Chief Executive Officer and by the Treasurer or an Assistant Treasurer or the Secretary or an Assistant Secretary of the Company, setting forth in reasonable detail the event requiring the adjustment and the method by which such adjustment was calculated and specifying the increased or decreased Number Issuable then in effect following such adjustment. (vii) Notwithstanding anything contrary contained in this Section 2(a), the Company shall be entitled to make such upward adjustments in the Number Issuable, in addition to those otherwise required by this Section 2(a), as the Board of Directors of the Company in their discretion shall determine to be advisable in order that any stock dividend, subdivision or combination of shares, distribution of rights or warrants to purchase stock or securities, or distribution of securities convertible into or exchangeable for Common Stock, hereafter made by the Company to its shareholders shall not be taxable; PROVIDED, HOWEVER, that any such adjustment shall be made, as 7 nearly as practicable, in a manner which treats all holders of Warrants with similar protections on an equal basis. (b) REORGANIZATION, RECLASSIFICATION, CONSOLIDATION, MERGER OR SALE OF ASSETS. In case of any capital reorganization or reclassification or other change of outstanding shares of Common Stock (other than a change in par value, or from par value to no par value, or from no par value to par value, or as a result of a subdivision or combination), or in case of any consolidation or merger of the Company with or into another Person (including without limitation, the PMR Merger), or in case of any sale or other disposition to another Person of all or substantially all of the assets of the Company (any of the foregoing, a "TRANSACTION"), the Company, or such successor or purchasing Person (including, in the case of the PMR Merger, PMR), as the case may be, shall execute and deliver to each holder of the Warrants evidenced hereby, simultaneously with effecting any of the foregoing Transactions, a certificate that such holder of Warrants then outstanding shall have the right thereafter to exercise such Warrants into the kind and amount of shares of stock or other securities (of the Company or another issuer and, in the case of the PMR Merger, of PMR) or property or cash receivable upon such Transaction by a holder of the number of shares of Common Stock into which such Warrants could have been exercised immediately prior to such Transaction. Such certificate shall provide for adjustments which shall be as nearly equivalent as may be practicable to the adjustments provided for in this Section 2 and shall contain other terms substantially identical to the terms hereof. If, in the case of any such Transaction, the stock, other securities, cash or property receivable thereupon by a holder of Common Stock includes shares of stock or other securities of a Person other than the successor or purchasing Persons and other than the Company, which controls or is controlled by the successor or purchasing Person or which, in connection with such Transaction, issues stock, securities, other property or cash to holders of Common Stock, then such certificate also shall be executed by such Person, and such Person shall, in such certificate, specifically assume the obligations of such successor or purchasing Person and acknowledge its obligations to issue such stock, securities, other property or cash to holders of the Warrants upon exercise thereof as provided above. Simultaneously with the consummation of the PMR Merger, the Company shall cause PMR to deliver the certificate referred to in the immediately preceding sentence to each holder of the Warrants evidenced hereby. The provisions of this Section 2(b) similarly shall apply to successive Transactions. (c) PMR MERGER. In the event that after the Issue Date the PMR Merger shall occur, the Number Issuable in effect immediately prior to the PMR Merger shall be adjusted so that the holder of any Warrants evidenced hereby thereafter exercised shall be entitled to receive a number of shares, par value $0.01 per share, of common stock of PMR (the "PMR COMMON STOCK") (subject to further adjustment pursuant to the terms of this Warrant Certificate) equal to (x) such holder's Proportionate Percentage (as defined below) multiplied by (y) the number of shares of PMR Common Stock, representing 8.0% of the outstanding shares of PMR Common Stock on a fully diluted basis after giving effect to the transactions contemplated by the Transaction Documents (as defined in the Securities Purchase Agreement), including, without limitation, the PMR Merger, and assuming, without duplication, for purposes of this calculation, (i) the 8 exercise, immediately prior to the consummation of the PMR Merger, of all options under the Company's 1997 Incentive and Nonqualified Stock Option Plan for Key Personnel, (ii) the grant and exercise, immediately prior to the consummation of the PMR Merger, of the options to be granted to existing senior management of the Company to purchase up to 550,000 shares of Common Stock, (iii) the exercise of all options granted under PMR's 1997 Equity Incentive Plan and PMR's Outside Directors' Non-Qualified Stock Option Plan of 1992 as of the consummation of the PMR Merger (but excluding 979,788 options (such number being determined without giving effect to the reverse stock split contemplated to be undertaken by PMR prior to the PMR Merger), all of which have an exercise price per share of PMR Common Stock in excess of $4.00 (such number being determined without giving effect to the reverse stock split contemplated to be undertaken by PMR prior to the PMR Merger) and (iv) the conversion, exercise or exchange of all outstanding securities and securities that have been approved for issuance into shares of PMR Common Stock as of the consummation of the PMR Merger, including, without limitation, all warrants that may be issued under the Securities Purchase Agreement. The "PROPORTIONATE PERCENTAGE" means, with respect to the holder of any Warrants evidenced hereby, a fraction, the numerator of which equals the number of shares of Common Stock issuable upon exercise of such Warrants immediately prior to the PMR Merger and the denominator of which equals the number of shares of Common Stock issuable upon exercise immediately prior to the PMR Merger of all warrants issuable under the Securities Purchase Agreement (assuming that all such warrants are issued immediately prior to the PMR Merger). (d) SPECIAL DISTRIBUTIONS. In the event that after the Issue Date the Company shall declare a dividend or make any other distribution (including, without limitation, in cash, in Capital Stock (which shall include, without limitation, any options, warrants or other rights to acquire Capital Stock) of the Company, whether or not pursuant to a shareholder rights plan, "poison pill" or similar arrangement) in other property or assets, to holders of Common Stock (a "SPECIAL DISTRIBUTION"), then the Board of Directors shall, if the holder so elects by sending a Special Notice to the Company, set aside the amount of such dividend or distribution that any holder of Warrants would have been entitled to receive had it exercised such Warrants prior to the record date for such dividend or distribution. Upon the exercise of Warrants evidenced hereby, such electing holder or such holder's subsequent permitted transferee shall be entitled to receive, such dividend or distribution that such holder would have received had such Warrants been exercised immediately prior to the record date for such dividend or distribution. Prior to any Special Distribution described in this Section 2(c), the Company shall as provided in Section 4 hereof notify each holder (not less than ten Business Days prior to the occurrence of such Special Distribution) of its intent to make such Special Distribution and such holder, if it elects to have such distribution set aside the amount thereof rather than have an adjustment to the Number Issuable as provided in Section 2(a)(i) or (iii), shall notify the Company by sending to the Company a Special Notice not less than three (3) Business Days prior to the date of any such Special Distribution. 9 Section 3. REDEMPTION. The Warrants and the shares of Common Stock for which the Warrants are exercisable are subject to the Holder's put right set forth in Article XIII of the Securities Purchase Agreement. Section 4. NOTICE OF CERTAIN EVENTS. In case at any time or from time to time after the Issue Date the Company shall declare any dividend or any other distribution to the holders of its Common Stock, or shall authorize the granting to the holders of its Common Stock of rights or warrants to subscribe for or purchase any additional shares of stock of any class or any other right, or shall authorize the issuance or sale of any other shares or rights which would result in an adjustment to the Number Issuable pursuant to Section 2(a)(i), (ii) or (iii) or would result in a Special Distribution pursuant to Section 2(c) hereof, or there shall be any capital reorganization or reclassification of the Common Stock of the Company or consolidation or merger of the Company with or into another Person, or any sale or other disposition of all or substantially all the assets of the Company, or there shall be a voluntary or involuntary dissolution, liquidation or winding up of the Company, then, in any one or more of such cases the Company shall mail to each holder of the Warrants evidenced hereby at such holder's address as it appears on the transfer books of the Company, as promptly as practicable but in any event at least 15 days prior to the applicable date hereinafter specified, a notice stating (a) the date on which a record is to be taken for the purpose of such dividend, distribution, rights or warrants or, if a record is not to be taken, the date as of which the holders of Common Stock of record to be entitled to such dividend, distribution, rights or warrants are to be determined, (b) the issue date (as defined in Section 2(a)(ii) hereof) or (c) the date on which such reclassification, consolidation, merger, sale, conveyance, dissolution, liquidation or winding up is expected to become effective; PROVIDED that in the case of any event to which Section 2(b) applies, the Company shall give at least ten Business Days' prior written notice as aforesaid. Such notice also shall specify the date as of which it is expected that the holders of Common Stock of record shall be entitled to exchange their Common Stock for shares of stock or other securities or property or cash deliverable upon such reorganization, reclassification, consolidation, merger, sale, conveyance, dissolution, liquidation or winding up. Section 5. CERTAIN COVENANTS. (a) The Company covenants and agrees that all shares of Capital Stock of the Company which may be issued upon the exercise of the Warrants evidenced hereby will be duly authorized, validly issued and fully paid and nonassessable, will be free and clear of any Liens (as defined in the Securities Purchase Agreement) and will not be subject to any preemptive or similar rights that have not been waived. (b) The Company shall at all times reserve and keep available for issuance upon the exercise of the Warrants, such number of its authorized but unissued shares of Common Stock as will from time to time be sufficient to permit the exercise of all outstanding Warrants, and shall take all action required to increase the authorized number of shares of Common Stock if at any time there shall be insufficient authorized but unissued shares of Common Stock to permit such reservation or to permit the exercise of all outstanding Warrants. 10 (c) In the event of a contemplated sale of all or substantially all of the assets or of the Capital Stock of the Company (by way of sale, merger or otherwise, specifically excluding the PMR Merger), the Company, if requested in writing by holders of outstanding Warrants representing a majority of the shares of Common Stock issuable upon the exercise of all outstanding Warrants, shall use its reasonable efforts to cause such transaction to be structured in a manner that requires the purchaser(s) to purchase the outstanding Warrants from such holders at a price equal to the consideration such holders would have received had they had exercised their Warrants immediately prior to the consummation of such sale transaction less the exercise price of such Warrants. Section 6. REGISTERED HOLDER. The person in whose name this Warrant Certificate is registered shall be deemed the owner hereof and of the Warrants evidenced hereby for all purposes. The registered holder of this Warrant Certificate, in its capacity as such, shall not be entitled to any rights whatsoever as a stockholder of the Company, except as herein provided. Section 7. TRANSFER OF WARRANTS. Any transfer of the rights represented by this Warrant Certificate shall be effected by the surrender of this Warrant Certificate, along with the form of assignment attached hereto, properly completed and executed by the registered holder hereof, at the principal executive office of the Company in the United States of America, together with an appropriate investment letter, if deemed reasonably necessary by counsel to the Company to assure compliance with applicable securities laws. Thereupon, the Company shall issue in the name or names specified by the registered holder hereof and, in the event of a partial transfer, in the name of the registered holder hereof, a new Warrant Certificate or Certificates evidencing the right to purchase such number of shares of Common Stock as shall be equal to the number of shares of Common Stock then purchasable hereunder. Section 8. DENOMINATIONS. The Company covenants that it will, at its expense, promptly upon surrender of this Warrant Certificate at the principal executive office of the Company in the United States of America, execute and deliver to the registered holder hereof a new Warrant Certificate or Certificates in denominations specified by such holder for an aggregate number of Warrants equal to the number of Warrants evidenced by this Warrant Certificate. Section 9. AMENDMENTS. Any amendment, supplement or modification of or to any provision of the Warrant Certificates, any waiver of any provision of the Warrant Certificates, and any consent to any departure by the Company from the terms of any provision of the Warrant Certificates, shall be effective (i) only if it is made or given in writing and signed by the Company and holders of at least a majority of the shares of Common Stock issuable upon the exercise of all of the Warrants issued pursuant to the Securities Purchase Agreement, and (ii) only in the specific instance and for the specific purpose for which made or given. Any such amendment, supplement or modification made in accordance with the previous sentence of this Section 9, shall be deemed effective for all Warrants issued pursuant to the Securities Purchase Agreement. However, without the consent of each holder of a Warrant Certificate affected, an 11 amendment may not: (1) reduce the number of shares of Common Stock issuable pursuant to such Warrant Certificate; or (2) make any change to this Section 9. Section 10. REPLACEMENT OF WARRANTS. Upon receipt of evidence satisfactory to the Company of the loss, theft, destruction or mutilation of this Warrant Certificate and, in the case of loss, theft or destruction, upon delivery of an indemnity reasonably satisfactory to the Company (in the case of an insurance company or other institutional investor, its own unsecured indemnity agreement shall be deemed to be reasonably satisfactory), or, in the case of mutilation, upon surrender and cancellation thereof, the Company will issue a new Warrant Certificate of like tenor for a number of Warrants equal to the number of Warrants evidenced by this Warrant Certificate. Section 11. GOVERNING LAW. THIS WARRANT CERTIFICATE SHALL BE CONSTRUED AND ENFORCED IN ACCORDANCE WITH, AND THE RIGHTS OF THE PARTIES SHALL BE GOVERNED BY, THE LAW OF THE STATE OF NEW YORK APPLICABLE TO AGREEMENTS MADE AND TO BE PERFORMED ENTIRELY WITHIN SUCH STATE. Section 12. RIGHTS INURE TO REGISTERED HOLDER. The Warrants evidenced by this Warrant Certificate will inure to the benefit of and be binding upon the registered holder thereof and the Company and their respective successors and permitted assigns. Nothing in this Warrant Certificate shall be construed to give to any Person other than the Company and the registered holder thereof any legal or equitable right, remedy or claim under this Warrant Certificate, and this Warrant Certificate shall be for the sole and exclusive benefit of the Company and such registered holder. Nothing in this Warrant Certificate shall be construed to give the registered holder hereof any rights as a holder of shares of Common Stock until such time, if any, as the Warrants evidenced by this Warrant Certificate are exercised in accordance with the provisions hereof. Section 13. DEFINITIONS. For the purposes of this Warrant Certificate, the following terms shall have the meanings indicated below: "BUSINESS DAY" means any day other than a Saturday, Sunday or other legal holiday on which commercial banks in the City of New York are authorized or required by law or executive order to close. "CAPITAL STOCK" of any Person means any and all shares, interests, participation or other equivalents (however designated) of such Person's capital stock (or equivalent ownership interests in a Person not a corporation) whether now outstanding or hereafter issued, including, without limitation, all common stock and preferred stock and any rights, warrants or options to purchase such Person's capital stock. "COMMISSION" means the Securities and Exchange Commission. "COMMON STOCK" shall mean the Common Stock, par value $.01 per share, of the Company. 12 "CURRENT MARKET PRICE" per share shall mean, on any date specified herein for the determination thereof, (a) the average daily Market Price of the Common Stock for those days during the period of 30 days, ending on such date, on which the national securities exchanges were open for trading, and (b) if the Common Stock is not then listed or admitted to trading on any national securities exchange or quoted in the over-the-counter market, the Market Price on such date. "EXERCISE PRICE" shall have the meaning given it in the first paragraph hereof. "FAIR MARKET VALUE" shall mean the amount which a willing buyer, under no compulsion to buy, would pay a willing seller, under no compulsion to sell, in an arm's-length transaction assuming (i) that the Company's Common Stock is valued "as if fully distributed" and (ii) no consideration is given for minority interest discounts, or discounts related to illiquidity or restrictions on transferability. "ISSUE DATE" shall mean the Initial Closing Date (as defined in the Securities Purchase Agreement). "MARKET PRICE" shall mean, per share of Common Stock on any date specified herein: (a) the closing price per share of the Common Stock on such date published in THE WALL STREET JOURNAL or, if no such closing price on such date is published in THE WALL STREET JOURNAL, the average of the closing bid and asked prices on such date, as officially reported on the principal national securities exchange on which the Common Stock is then listed or admitted to trading; (b) if the Common Stock is not then listed or admitted to trading on any national securities exchange but is designated as a national market system security, the last trading price of the Common Stock on such date; or (c) if there shall have been no trading on such date or if the Common Stock is not so designated, the average of the reported closing bid and asked prices of the Common Stock on such date as shown by NASDAQ and reported by any member firm of the NYSE, selected by the Company. If neither (a), (b) or (c) is applicable, Market Price shall mean the Fair Market Value per share determined in good faith by the Board of Directors of the Company which shall be deemed to be Fair Market Value unless holders of at least 15% of Common Stock issued or issuable upon exercise of the Warrants request that the Company obtain an opinion of a nationally recognized investment banking firm chosen by the Company (who shall bear the expense) and reasonably acceptable to such requesting holders of the Warrants, in which event Fair Market Value shall be as determined by such investment banking firm. "NASDAQ" shall mean the National Market System of the Nasdaq Stock Market. "NUMBER ISSUABLE" shall have the meaning given it in the second paragraph hereof. "NYSE" shall mean the New York Stock Exchange, Inc. 13 "PERSON" shall mean any individual, corporation, partnership, joint venture, association, estate, joint stock company, trust, organization, business, or a government or an agency or political subdivision thereof. "PMR" shall mean PMR Corporation, a Delaware corporation, and its successors. "PMR MERGER" shall mean the merger of Psychiatric Solutions, Inc. with PMR Acquisition Corporation, a subsidiary of PMR, with Psychiatric Solutions, Inc. being the surviving corporation, pursuant to the Agreement and Plan of Merger, dated as of May 6, 2002, as amended, by and between PMR, PMR Acquisition Corporation and the Company. "SECURITIES ACT" shall mean the Securities Act of 1933, as amended, and the rules and regulations of the Commission promulgated thereunder. "SECURITIES PURCHASE AGREEMENT" shall mean that certain Securities Purchase Agreement, dated as of the Issue Date, between the Company and The 1818 Mezzanine Fund II, L.P., as the same may be amended or modified from time to time in accordance with its terms. "SPECIAL NOTICE" shall mean the notice sent by a holder to the Company indicating its preference to have any special distribution set aside for its benefit upon exercise of the Warrant. "WARRANT EXERCISE DOCUMENTATION" shall have the meaning given it in Section 1 hereof. Section 14. NOTICES. All notices, demands and other communications provided for or permitted hereunder shall be made in writing and shall be by registered or certified first-class mail, return receipt requested, courier services or personal delivery, (a) if to the holder of a Warrant, at such holder's last known address appearing on the books of the Company; and (b) if to the Company, at its principal executive office in the United States located at the address designated for notices in the Securities Purchase Agreement, or such other address as shall have been furnished to the party given or making such notice, demand or other communication. All such notices and communications shall be deemed to have been duly given: when delivered by hand, if personally delivered; one Business Day after delivered to a courier if delivered by commercial overnight courier service; and five Business Days after being deposited in the mail, postage prepaid, if mailed. [Remainder of page intentionally left blank.] 14 IN WITNESS WHEREOF, the Company has caused this Warrant Certificate to be duly executed as of the Issue Date. PSYCHIATRIC SOLUTIONS, INC. By: /s/ Steven T. Davidson ------------------------------------------ Name: Steven T. Davidson Title: Chief Development Officer 15 [Form of Assignment Form] [To be executed upon assignment of Warrants] The undersigned hereby assigns and transfers this Warrant Certificate to ____________________ whose Social Security Number or Tax ID Number is _________________ and whose record address is__________________________________, and irrevocably appoints ________________ as agent to transfer this security on the books of the Company. Such agent may substitute another to act for such agent. Signature: --------------------------------------------- Signature Guarantee: --------------------------------------------- Date: -------------------------- EX-99 5 ex3sc13d-psychiatric.txt EXHIBIT 3 EXHIBIT 3 --------- PMR CORPORATION 1565 HOTEL CIRCLE SOUTH, 2ND FLOOR SAN DIEGO, CA 92108 June 28, 2002 Psychiatric Solutions, Inc. 113 Seaboard Lane, Suite C-100 Franklin, TN 37067 The 1818 Mezzanine Fund II, L.P. c/o Brown Brothers Harriman & Co. 59 Wall Street New York, NY 10005 Ladies and Gentlemen: Reference is made to the Securities Purchase Agreement, dated as of June 28, 2002 (the "SECURITIES PURCHASE AGREEMENT"), between Psychiatric Solutions, Inc., a Delaware corporation ("PSI"), and The 1818 Mezzanine Fund II, L.P., a Delaware limited partnership (the "FUND"), pursuant to which the Fund has agreed to purchase from PSI a senior subordinated promissory note in the aggregate principal amount of up to $20,000,000 (together with all notes issued in connection with the substitution, replacement or transfer thereof, the "NOTE") and warrants (the "WARRANTS") exercisable to purchase shares, par value $0.01 per share, of common stock of PSI ("PSI COMMON STOCK"). As an inducement to the Fund to enter into the Securities Purchase Agreement, and as one of the conditions precedent to the consummation of the transactions contemplated by the Securities Purchase Agreement, the Fund has required the execution and delivery of this letter agreement by PMR Corporation, a Delaware corporation ("PMR"). Capitalized terms used herein but not defined herein have the meanings assigned to such terms in the Securities Purchase Agreement. 1. WARRANTS. PMR hereby agrees (i) to assume, effective and contingent upon consummation of the merger (the "PMR MERGER") contemplated by the Merger Agreement (the "PMR MERGER AGREEMENT"), the obligations of PSI under the Warrants, including, without limitation, the obligation to issue stock, securities, other property or cash to holders of Warrants upon exercise thereof as provided in the Warrants, and (ii) to execute and deliver to each holder of Warrants, simultaneously with the consummation of the PMR Merger, a certificate contemplated by Section 2(b) of the Warrants, which shall provide, among other things, that such holder shall have the right thereafter to exercise its Warrants into the amount of shares, par value $0.01 per share, of common stock of PMR ("PMR COMMON STOCK") receivable upon the PMR Merger by a holder of the number of shares of PSI Common Stock into which such Warrants could have been exercised immediately prior to the PMR Merger (after giving effect to the adjustments provided for under Section 2(c) of the Warrants). 2 PMR hereby further agrees (i) to assume, effective and contingent upon consummation of the PMR Merger, the obligations of PSI to issue Additional Warrants pursuant to the Securities Purchase Agreement, (ii) upon consummation of the PMR Merger, to issue at each Additional Closing warrant certificates representing the Additional Warrants to be issued at such Additional Closing, in substantially similar form to the Warrant Certificates and (iii) that each such warrant certificate issued by PMR shall represent Warrants to purchase the amount of shares of PMR Common Stock receivable upon the PMR Merger by a holder of the number of shares of PSI Common Stock into which such Warrants could have been exercised immediately prior to the PMR Merger (assuming, for these purposes, that such Warrants were issued and outstanding at the time of the PMR Merger and after giving effect to the adjustments provided for under Section 2(c) of the Warrants). 2. INVESTOR RIGHTS AGREEMENT. PMR hereby agrees that, effective and contingent upon consummation of the PMR Merger, (a) PMR shall assume all obligations of PSI under the Investor Rights Agreement, including, without limitation, the obligations regarding the registration of securities, the provision of financial information and the rights of first refusal, (b) all references in the Investor Rights Agreement to the "Company" shall be deemed to be references to PMR, and all references to any capital stock of the "Company" (including, without limitation, "Common Stock" and "Preferred Stock") shall be deemed to be references to the kind and amount of shares of capital stock of PMR receivable upon the PMR Merger by a holder of the kind and amount of such shares of capital stock of PSI and shall also include shares of PMR Common Stock issuable upon exercise of the Warrants, and (c) PMR shall use its reasonable best efforts to execute, as promptly as practicable following the consummation of the PMR Merger, an investor rights agreement substantially similar to the Investor Rights Agreement, with PMR replacing PSI as a party thereto, provided that the failure to do so shall not affect the validity and effectiveness of PMR's obligations under this paragraph or the enforceability of the Investor Rights Agreement. 3. VOTING AGREEMENT. PMR hereby agrees that, upon the consummation of the PMR Merger, PMR shall have created a vacancy on its Board of Directors and shall cause such vacancy to be filled, effective and contingent upon consummation of the PMR Merger, by the designee of the Fund selected pursuant to Section 1.2 of the Voting Agreement. At each meeting of stockholders of PMR after the PMR Merger at which the election of directors occurs (or at any time the stockholders of the Company act by written consent for the purpose of the election of directors), PMR shall cause the designee of the Fund selected pursuant to Section 1.2 of the Voting Agreement to be included in the slate of nominees recommended by the Board of Directors of PMR to PMR's stockholders for election as directors, and PMR shall use its reasonable best efforts to cause the election of such designee, including voting all shares for which PMR holds proxies (unless otherwise directed by the stockholder submitting such proxy) or is otherwise entitled to vote, in favor of the election of such designee; provided, that PMR's obligation under this sentence shall expire and terminate when both of the following clauses (x) and (y) have been satisfied: (x) the indebtedness owed to the Fund under the Securities Purchase Agreement has been repaid in full; and (y) either of the following has happened: (i) the Fund owns less than 50% of the shares of PSI 3 Common Stock (assuming exercise of the Warrants) issued pursuant to the Securities Purchase Agreement or (ii) the fifth anniversary of the date hereof has occurred. 4. PSI BOARD OF DIRECTORS. PMR hereby agrees that, upon the consummation of the PMR Merger, PMR shall cause the election, effective and contingent upon consummation of the PMR Merger, of the designee of the Fund selected pursuant to Section 1.2 of the Voting Agreement (or any other person designated from time to time by the Fund) to the Board of Directors of PSI. At each meeting of stockholders of PSI after the PMR Merger at which the election of directors occurs (or at anytime the stockholders of PSI act by written consent for the purpose of the election of directors), PMR shall take all necessary actions to ensure the election to the Board of Directors of PSI of such designee. Notwithstanding anything to the contrary contained herein, the rights granted to the Fund under this Section 4 shall terminate upon the repayment in full by PSI of all Indebtedness owed to the Fund under the Securities Purchase Agreement. 5. PMR GUARANTEE. PMR hereby agrees that, simultaneously with the consummation of the PMR Merger, it shall duly execute and deliver to the Fund a guarantee of the obligations of PSI to the Fund under the Securities Purchase Agreement and the Note, substantially in the form attached as Exhibit H to the Securities Purchase Agreement. 6. REPRESENTATIONS AND WARRANTIES. PMR hereby represents and warrants to each of the other parties hereto as follows: (a) PMR is a corporation duly organized and validly existing under the laws of Delaware, and has the corporate power and authority to execute, deliver and perform its obligations under this letter agreement. (b) The execution, delivery and performance by PMR of this letter agreement and the transactions contemplated hereby have been duly authorized by all necessary action of PMR, and will not violate or conflict with the organizational documents of PMR, any material agreement binding upon PMR or any law, regulation or order or require any consent or approval which has not been obtained. (c) This letter agreement has been duly executed and delivered by PMR, and constitutes the legal, valid and binding obligation of PMR, enforceable against it in accordance with its terms, except as enforceability may be limited by applicable bankruptcy, insolvency, reorganization, fraudulent conveyance or transfer, moratorium or similar laws affecting the enforcement of creditors' rights generally and by general principles of equity relating to enforceability. 7. SURVIVAL. All of the representations, warranties, covenants and agreements made herein shall survive the execution and delivery of this letter agreement. 4 8. SUCCESSORS AND ASSIGNS. This letter agreement shall inure to the benefit of and be binding upon the successors, permitted assigns and permitted transferees of the parties hereto. No person or entity other than the parties hereto and their successors, permitted assigns and permitted transferees is intended to be a beneficiary of this letter agreement. 9. AMENDMENT AND WAIVER. (a) No failure or delay on the part of any party hereto in exercising any right, power or remedy hereunder shall operate as a waiver thereof, nor shall any single or partial exercise of any such right, power or remedy preclude any other or further exercise thereof or the exercise of any other right, power or remedy. The remedies provided for herein are cumulative and are not exclusive of any remedies that may be available to any party hereto at law, in equity or otherwise. (b) Any amendment, supplement or modification of or to any provision of this letter agreement, any waiver of any provision of this letter agreement and any consent to any departure by any party hereto from the terms of any provision of this letter agreement, shall be effective (i) only if it is made or given in writing and signed by each party hereto, and (ii) only in the specific instance and for the specific purpose for which made or given. 10. COUNTERPARTS. This letter agreement may be executed in any number of counterparts and by the parties hereto in separate counterparts, each of which when so executed shall be deemed to be an original and all of which taken together shall constitute one and the same agreement. 11. HEADINGS. The headings in this letter agreement are for convenience of reference only and shall not limit or otherwise affect the meaning hereof. 12. GOVERNING LAW. THIS LETTER AGREEMENT HAS BEEN NEGOTIATED, EXECUTED AND DELIVERED IN THE STATE OF NEW YORK, AND SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF NEW YORK, WITHOUT REGARD TO THE PRINCIPLES OF CONFLICTS OF LAW THEREOF. 13. SEVERABILITY. If any one or more of the provisions contained herein, or the application thereof in any circumstance, is held invalid, illegal or unenforceable in any respect for any reason, the validity, legality and enforceability of any such provision in every other respect and of the remaining provisions hereof shall not be in any way impaired, unless the provisions held invalid, illegal or unenforceable shall substantially impair the benefits of the remaining provisions hereof. 14. REMEDIES. If a breach of this letter agreement by any party hereto occurs and is continuing, the other parties may pursue any available remedy by proceeding at law or in equity to enforce the performance (including, without limitation, 5 the specific performance) of any provision of this letter agreement. Except as otherwise provided by law, a delay or omission by any party hereto in exercising any right or remedy accruing upon any such breach shall not impair the right or remedy or constitute a waiver of or acquiescence in any such breach. No remedy is exclusive of any other remedy. All available remedies are cumulative. 15. ENTIRE AGREEMENT. This letter agreement is intended by the parties as a final expression of their agreement and intended to be a complete and exclusive statement of the agreement and understanding of the parties hereto in respect of the subject matter contained herein. There are no restrictions, promises, representations, warranties or undertakings, other than those set forth or referred to herein. This letter agreement supersedes all prior agreements and understandings between the parties with respect to such subject matter. 16. EXPENSES. PMR acknowledges and agrees that, effective and contingent upon consummation of the PMR Merger, PMR shall reimburse the Fund for all reasonable out-of-pocket expenses (including travel related expenses) of the Fund and its representative incurred in connection with such representative's duties as a member of the Boards of Directors of PMR and PSI. 17. TERMINATION. If the PMR Merger Agreement is terminated and the PMR Merger does not occur, this letter agreement shall terminate and have no further force and effect. [REMAINDER OF PAGE INTENTIONALLY LEFT BLANK] 6 If this letter agreement correctly sets forth your understanding of our agreement with respect to the foregoing, please so indicate by signing below on the lines provided for your signatures. Sincerely, PMR CORPORATION By: /s/ Fred D. Furman ----------------------------------------- Name: Fred D. Furman Title: President Acknowledged and agreed to as of the date above written: PSYCHIATRIC SOLUTIONS, INC. By: /s/ Steven T. Davidson ------------------------------- Name: Steven T. Davidson Title: Chief Development Officer THE 1818 MEZZANINE FUND II, L.P. By: Brown Brothers Harriman & Co., its General Partner By: /s/ Joseph P. Donlan ------------------------------- Name: Joseph P. Donlan Title: Managing Director EX-99 6 ex4sc13d-psychiatric.txt EXHIBIT 4 EXHIBIT 4 --------- PSYCHIATRIC SOLUTIONS, INC. SECOND AMENDED AND RESTATED VOTING AGREEMENT THIS SECOND AMENDED AND RESTATED VOTING AGREEMENT (the "AGREEMENT") is made and entered into this 28th day of June, 2002 by and among PSYCHIATRIC SOLUTIONS, INC., a Delaware corporation (the "COMPANY"), those certain holders of the Company's Common Stock, par value of $0.01 per share (the "COMMON STOCK") and/or options to acquire the Company's Common Stock and/or Series A Preferred Stock, par value $0.01 per share (the "SERIES A PREFERRED STOCK"), listed on EXHIBIT A hereto (the "KEY Stockholders"), the persons and entities listed on EXHIBIT B hereto (the "INVESTORS"), and The 1818 Mezzanine Fund II, L.P. ("1818 FUND"). WITNESSETH: WHEREAS, as of the date hereof, (i) the Key Stockholders who are signatories to this Agreement are the beneficial owners of an aggregate of Five Million Eight Hundred Twenty Thousand Five Hundred Twenty-Five (5,820,525) shares of Common Stock and/or options to acquire such Common Stock and Two Hundred Fifty-Nine Thousand Four Hundred (259,400) shares of Series A Preferred Stock, and (ii) the Investors who are signatories to this Agreement are the beneficial owners of an aggregate of Fourteen Million Five Hundred Twelve Thousand Three Hundred Thirty-Six (14,512,336) shares of Series A or Series B Preferred Stock; WHEREAS, the Company sold shares of its Series A Preferred Stock to certain of the Investors pursuant to that certain Series A Preferred Stock Purchase Agreement, dated as of April 11, 1997, by and among the Company and the other parties thereto; and WHEREAS, the Company sold shares of its Series B Preferred Stock, par value $0.01 per share (the "SERIES B PREFERRED STOCK" and, together with the Series A Preferred Stock, the "PREFERRED STOCK"), to certain of the Investors pursuant to that certain Series B Preferred Stock Purchase Agreement, dated as of January 14, 1999, by and among the Company and the other parties thereto; and WHEREAS, the Company now intends to issue certain warrants to 1818 Fund to purchase shares of Common Stock in connection with the transactions described in that certain Securities Purchase Agreement, dated as of June 28, 2002, between the Company and 1818 Fund (the "SECURITIES PURCHASE AGREEMENT"), and the Company, the Key Stockholders, the Investors, and 1818 Fund have agreed to provide for the future voting of their shares of the Company's capital stock as set forth in this Agreement; and WHEREAS, the Company and certain of the Key Stockholders and Investors are parties to that certain Amended and Restated Voting Agreement, dated as of January 14, 1999 (as amended through the date hereof, the "PRIOR VOTING AGREEMENT") and the parties hereto wish to amend and restate the Prior Voting Agreement. NOW, THEREFORE, in consideration of the premises and for other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereto agree as follows: SECTION 1. VOTING 1.1 KEY STOCKHOLDER SHARES; INVESTOR SHARES. (a) The Key Stockholders each agree to hold all shares of voting capital stock of the Company registered in their respective names or beneficially owned by them as of the date hereof, and any and all other securities of the Company legally or beneficially acquired by each of the Key Stockholders after the date hereof (hereinafter collectively referred to as the "KEY STOCKHOLDER Shares"), subject to, and to vote the Key Stockholder Shares in accordance with, the provisions of this Agreement. (b) The Investors each agree to hold all shares of voting capital stock of the Company now owned or hereinafter acquired by them (including but not limited to all shares of Common Stock issued upon conversion of the Company's Preferred Stock) registered in their respective names or beneficially owned by them as of the date hereof (and any and all other securities of the Company legally or beneficially acquired by each of the Investors after the date hereof) (hereinafter collectively referred to as the "INVESTOR SHARES") subject to, and to vote the Investor Shares in accordance with, the provisions of this Agreement. 1.2 VOTING. (a) Prior to the earlier of (i) the consummation and effectiveness of the merger contemplated by that certain Agreement and Plan of Merger dated as of May 6, 2002, by and between PMR Corporation ("PMR"), PMR Acquisition Corporation, and the Company (the "PMR MERGER"), and (ii) the date of the closing of a firmly underwritten public offering of the Company's Common Stock pursuant to a registration statement filed with, and declared effective under, the Securities Act of 1933, as amended (an "IPO"), at any annual or special meeting or other action of the shareholders called for the purpose of electing to or removing directors from the Company's Board of Directors, the Key Stockholders and the Investors agree to vote all of their Key Stockholder Shares and Investor Shares, respectively, during the term of this Agreement so as always to cause the Board of Directors to consist of the following designated nominees: (i) With respect to the five (5) members of the Board of Directors that the Company's Second Amended and Restated Certificate of Incorporation (the "RESTATED CERTIFICATE") provides are to be elected by the holders of Preferred Stock, (A) one (1) designee nominated by Acacia Venture Partners, L.P. who shall initially be C. Sage Givens, (B) one (1) designee nominated by Oak Investment Partners VII, Limited Partnership who shall initially be Ann H. Lamont (C) one (1) designee nominated by FCA Venture Partners II, L.P., who shall initially be Bill Cook, and (D) two (2) persons expected to be outside industry representatives, nominated by the holders of a majority of 2 the Investor Shares in consultation with the Company's management, who initially shall be Jeffrey McWaters and Chris Grant; (ii) With respect to the four (4) members of the Board of Directors that the Company's Restated Certificate provides are to be elected by the holders of Common Stock, (A) Charles R. F. Treadway, M.D., or such other person then serving as chairman and/or Chief Medical Officer of the Company, (B) Joey A. Jacobs, or such other person then serving as President and/or Chief Executive Officer of the Company, (C) one (1) designee nominated by 1818 Fund, and (D) one (1) person expected to be an outside industry representative, designated by the holders of a majority of shares of Common Stock of the Company, who initially shall be Ed Wissing, Jr.; (b) Upon the consummation of the PMR Merger and until the Vote Termination Date, at any annual or special meeting or other action of the shareholders called for the purpose of electing to or removing directors from PMR's Board of Directors, the Key Stockholders and the Investors agree to vote all of their shares of capital stock of PMR, including, without limitation, any shares, par value $0.01 per share, of common stock of PMR (the "PMR COMMON STOCK") received in exchange for Key Stockholder Shares and Investor Shares in connection with the PMR Merger, to cause one member of the Board of Directors of PMR to be a person designated by 1818 Fund; provided, that notwithstanding anything to the contrary contained herein, this Section 1.2(b) shall not be binding on Charles R. F. Treadway, M.D., Douglas B. Lewis or K. Bryce DeHaven. The "VOTE TERMINATION DATE" shall occur when both of the following clauses (x) and (y) have been satisfied: (x) the indebtedness owed to the 1818 Fund under the Securities Purchase Agreement has been repaid in full; and (y) either of the following has happened: (i) the 1818 Fund owns less than 50% of the shares of stock (assuming exercise of the warrants issued to the 1818 Fund pursuant to the Securities Purchase Agreement) issued pursuant to the Securities Agreement, or (ii) the fifth anniversary of the date hereof has occurred. (c) After the consummation of an IPO but prior to the consummation of the PMR Merger, and until the Vote Termination Date, any annual or special meeting or other action of the shareholders called for the purpose of electing to or removing directors from the Company's Board of Directors, the Key Stockholders and the Investors agree to vote all of their shares of capital stock of the Company to cause one member of the Board of Directors to be a person designated by 1818 Fund; provided, that notwithstanding anything to the contrary contained herein, this Section 1.2(c) shall not be binding on Charles R. F. Treadway, M.D., Douglas B. Lewis or K. Bryce DeHaven. Unless otherwise provided for herein, in the event of any termination, removal or resignation of any Director designated pursuant to Section 1.2(a), (b) or (c), the Key Stockholders and the Investors shall take all actions necessary and appropriate to cause such vacancy to be filled in accordance with the provisions of Section 1.2(a), (b) or (c), as the case may be. 1.3 LEGEND. 3 (a) Concurrently with the execution of this Agreement, there shall be imprinted or otherwise placed, on certificates representing the Key Stockholder Shares and the Investor Shares the following restrictive legend (the "LEGEND"): "THE SHARES REPRESENTED BY THIS CERTIFICATE ARE SUBJECT TO THE TERMS AND CONDITIONS OF A VOTING AGREEMENT WHICH PLACES CERTAIN RESTRICTIONS ON THE VOTING OF THE SHARES REPRESENTED HEREBY. ANY PERSON ACCEPTING ANY INTEREST IN SUCH SHARES SHALL BE DEEMED TO AGREE TO AND SHALL BECOME BOUND BY ALL THE PROVISIONS OF SUCH AGREEMENT. A COPY OF SUCH VOTING AGREEMENT WILL BE FURNISHED TO THE RECORD HOLDER OF THIS CERTIFICATE WITHOUT CHARGE UPON WRITTEN REQUEST TO PSYCHIATRIC SOLUTIONS, INC. AT ITS PRINCIPAL PLACE OF BUSINESS." (b) The Company agrees that, during the term of this Agreement, it will not remove, and will not permit to be removed (upon registration of transfer, reissuance of otherwise), the Legend from any such certificate and will place or cause to be placed the Legend on any new certificate issued to represent Key Stockholder Shares or Investor Shares theretofore represented by a certificate carrying the Legend. 1.4 SUCCESSORS. The provisions of this Agreement shall be binding upon the successors in interest to any of the Key Stockholder Shares or Investor Shares. The Company shall not permit the transfer of any of the Key Stockholder Shares or Investor Shares on its books or issue a new certificate representing any of the Key Stockholder Shares or Investor Shares unless and until the person to whom such security is to be transferred shall have executed a written Agreement, substantially in the form of this Agreement, pursuant to which such person becomes a party to this Agreement and agrees to be bound by all the provisions hereof as if such person were a Key Stockholder or Investor, as applicable. 1.5 OTHER RIGHTS. Except as provided by this Agreement, each Key Stockholder and Investor shall be entitled to exercise the full rights of a shareholder with respect to the Key Stockholder Shares and the Investor Shares, respectively. SECTION 2. TERMINATION 2.1 This Agreement shall continue in full force and effect from the date hereof through the earliest of the following dates, on which it shall terminate in its entirety: (a) ten (10) years from the date of this Agreement; and 4 (b) the date the parties hereto terminate this Agreement by written consent of holders of a majority in interest of the Investor Shares, holders of a majority in interest of the Key Stockholder Shares, and 1818 Fund. Notwithstanding any provision contained in this Agreement to the contrary, all of the rights granted under this Agreement to the Key Stockholders and the Investors (other than to 1818 Fund) shall terminate immediately upon the consummation and effectiveness of the PMR Merger; provided that the consummation and effectiveness of the PMR Merger shall not terminate the obligations of the Key Stockholders and the Investors under this Agreement and that the Key Stockholders and Investors shall continue to be bound by such obligations. All rights granted under this Agreement to 1818 Fund shall remain in full force and effect following the consummation and effectiveness of the PMR Merger. In addition, notwithstanding any provision contained in this Agreement to the contrary, neither the PMR Merger nor any other transaction in which the capital stock of the Company is exchanged, converted, reconstituted or reclassified for the capital stock of the Company or another company shall constitute an IPO or shall result in the termination of the rights granted hereunder to 1818 Fund. SECTION 3. MISCELLANEOUS 3.1 OWNERSHIP. Each Key Stockholder represents and warrants to the Investors that (a) he or she now owns the Key Stockholder Shares, free and clear of liens or encumbrances, and has not, prior to or on the date of this Agreement, executed or delivered any proxy or entered into any other voting agreement or similar arrangement other than one which has expired or terminated prior to the date hereof, and (b) such Key Stockholder has full power and capacity to execute, deliver and perform this Agreement, which has been duly executed and delivered by, and evidences the valid and binding obligation of, such Key Stockholder enforceable in accordance with its terms. 3.2 FURTHER ACTION. If and whenever the Key Stockholder are sold, the Key Stockholders or the personal representative of the Key Stockholders shall do all things and execute and deliver all documents and make all transfers, and cause any transferee of the Key Stockholder to do all things and execute and deliver all documents, as may be necessary to consummate such sale consistent with this Agreement. 3.3 SPECIFIC PERFORMANCE. The parties hereto hereby declare that it is impossible to measure in money the damages which will accrue to a party hereto or to their heirs, personal representatives, or assigns by reason of a failure to perform any of the obligations under this Agreement and agree that the terms of this Agreement shall be specifically enforceable. If any party hereto or his heirs, personal representatives, or assigns institutes any action or proceeding to specifically enforce the provisions hereof, any person against whom such action or proceeding is brought hereby waives the claim or defense therein that such party or such personal representative has an adequate remedy at law, and such person shall not offer in any such action or proceeding the claim or defense that such remedy at law exists. 5 3.4 GOVERNING LAW. This Agreement, and the rights of the parties hereto, shall be governed by and construed in accordance with the laws of the State of Delaware as such laws apply to agreements among Delaware residents made and to be performed entirely within the State of Delaware. 3.5 AMENDMENT. This Agreement may be amended only by an instrument in writing signed by the Company, holders of a majority in interest of the Investor Shares, holders of a majority in interest of the Key Stockholder Shares, and the 1818 Fund. 3.6 SEVERABILITY. If any provision of this Agreement is held to be invalid or unenforceable, the validity and enforceability of the remaining provisions of this Agreement shall not be affected thereby. 3.7 SUCCESSORS. This Agreement shall inure to the benefit of and be binding upon the parties hereto and their respective heirs, successors, assigns, administrators, executors and other legal representatives. 3.8 ADDITIONAL SHARES. In the event that subsequent to the date of this Agreement any shares or other securities (other than any shares or securities of another corporation issued to the Company's stockholders pursuant to a plan of merger) are issued on, or in exchange for, any of the Key Stockholder or Investor Shares by reason of any stock dividend, stock split, consolidation of shares, reclassification or consolidation involving the Company, such shares or securities shall be deemed to be Key Stockholder or Investor Shares, as the case may be, for purposes of this Agreement. 3.9 COUNTERPARTS. This Agreement may be executed in one or more counterparts, each of which will be deemed an original but all of which together shall constitute one and the same agreement. 3.10 WAIVER. No waivers of any breach of this Agreement extended by any party hereto to any other party shall be construed as a waiver of any rights or remedies of any other party hereto or with respect to any subsequent breach. 6 3.11 ATTORNEYS' FEES. In the event that any suit or action is instituted to enforce any provision in this Agreement, the prevailing party shall be entitled to all costs and expenses of maintaining such suit or action, including reasonable attorneys' fees. 3.12 EXPENSES. The Company acknowledges and agrees that it shall reimburse 1818 Fund for all reasonable out-of-pocket expenses (including travel related expenses) of 1818 Fund and its representative incurred in connection with such representative's duties as a member of the Board of Directors of the Company. 3.13 ENTIRE AGREEMENT. This Agreement, together with the exhibits hereto, is intended by the parties as a final expression of their agreement and intended to be a complete and exclusive statement of the agreement and understanding of the parties hereto in respect of the subject matter contained herein and therein. There are no restrictions, promises, representations, warranties or undertakings, other than those set forth herein or therein. This Agreement, together with the exhibits hereto, supersedes all prior agreements and understandings among the parties with respect to such subject matter, including, without limitation, the Prior Voting Agreement. [THIS SPACE INTENTIONALLY LEFT BLANK] 7 IN WITNESS WHEREOF, the parties hereto have executed this SECOND AMENDED AND RESTATED VOTING AGREEMENT as of the date first above written. COMPANY: PSYCHIATRIC SOLUTIONS, INC. By: /s/ Joey A. Jacobs -------------------------------------- Joey A. Jacobs Its: President INVESTORS: Name: Charles R.F. Treadway, MD ------------------------------------ (Print Investor's name) By: /s/ Charles R.F. Treadway, MD ------------------------------------ (Signature) Title: Chairman ----------------------------------- (if applicable) Name: South Park Venture Partners, L.P. ----------------------------------- (Print Investor's name) By: /s/ David S. Heer ------------------------------------- (Signature) Title: General Partner ----------------------------------- (if applicable) Name: South Pointe Venture Partners, L.P. ------------------------------------ (Print Investor's name) By: /s/ David S. Heer ------------------------------------- (Signature) Title: General Partner ----------------------------------- (if applicable) Name: Acacia Venture Partners, L.P. ------------------------------------ (Print Investor's name) By: /s/ David S. Heer ------------------------------------ (Signature) Title: General Partner ---------------------------------- (if applicable) CGJR HEALTHCARE SERVICES Name: CGJR HEALTHCARE SERVICES PRIVATE EQUITIES, LP CGJR II, L.P. CGJR/MF III, L.P. ----------------------------------- (Print Investor's name) By: CGJR CAPITAL MANAGEMENT, INC. AS GP OF ALL 3 By: /s/ Christopher Grant, Jr. ------------------------------------- (Signature) Title: President ---------------------------------- (if applicable) CLAYTON ASSOCIATES, LLC By: /s/ Bill F. Cook ------------------------------------- Prin. FCA VENTURE PARTNERS II, L.P. By: Clayton DC Ventures Capital Group, LLC General Partner By: /s/ Bill F. Cook ------------------------------------- Prin. FCA VENTURE PARTNERS I, L.P. BY DC INVESTMENTS, LLC ITS: GENERAL PARTNER By: /s/ Robert Crants ------------------------------------ Its: Managing Partner OAK INVESTMENT PARTNERS VII, LIMITED PARTNERSHIP By: /s/ Edward F. Glassmeyer ------------------------------------- Its: Managing Member of Oak Associates VII, LLC, the General Partner of Oak Investment Partners VII, Limited Partnership OAK VII AFFILIATES FUND, LIMITED PARTNERSHIP By: /s/ Edward F. Glassmeyer ------------------------------------- Its: Managing Member of Oak VII Affiliates, LLC, the General Partner of Oak VII Affiliates Fund, Limited Partnership THE 1818 MEZZANINE FUND II, L.P. BY: BROWN BROTHERS HARRIMAN & CO., ITS GENERAL PARTNER By: /s/ Joseph P. Donlan ------------------------------------ Name: Joseph P. Donlan Title: Managing Director KEY STOCKHOLDERS /s/ Charles R.F. Treadway, M.D. ----------------------------------------- Charles R.F. Treadway, M.D. /s/ Joey A. Jacobs ----------------------------------------- Joey A. Jacobs 8 EXHIBIT A LIST OF KEY STOCKHOLDERS NUMBER OF SHARES NUMBER OF COMMON STOCKHOLDERS SHARES/OPTIONS ------------ ---------------- Clayton Associates, L.L.C. 1,126,841 (1) K. Bryce DeHaven 1,026,441 (1) Joey A. Jacobs 1,626,441 Douglas B. Lewis 1,048,441 (1) Charles R. F. Treadway, M.D. 1,251,761 K. Bryce DeHaven also owns 3,000 shares of Series B Preferred Stock. Joey A. Jacobs also owns 8,000 shares of Series B Preferred Stock. Clayton Associates, LLC also owns 8,400 shares of Series B Preferred Stock. - -------- (1) No Options. A-1 EXHIBIT B LIST OF INVESTORS
SERIES A SERIES B STOCKHOLDERS PREFERRED STOCK PREFERRED STOCK ------------ --------------- --------------- Acacia Venture Partners, L.P. 4,124,000 1,395,732 CGJR Health Care Services Private Equities, L.P. 250,000 177,417 CGJR II, L.P. 160,000 57,251 CGJR/MF III, L.P. 90,000 32,400 FCA Venture Partners I, L.P. 400,000 33,600 FCA Venture Partners II, L.P. 0 1,604,200 Oak VII Affiliates Fund, Limited Partnership 110,250 34,758 Oak Investment Partners VII, Limited Partnership 4,389,750 1,383,976 South Park Venture Partners, L.P. 246,000 20,460 South Pointe Venture Partners, L.P. 0 2,542
B-1 EX-99 7 ex5sc13d-psychiatric.txt EXHIBIT 5 EXHIBIT 5 --------- PSYCHIATRIC SOLUTIONS, INC. SECOND AMENDED AND RESTATED CO-SALE AGREEMENT THIS SECOND AMENDED AND RESTATED CO-SALE AGREEMENT (the "AGREEMENT") is made as of this 28th day of June, 2002 by and among Psychiatric Solutions, Inc., a Delaware corporation (the "COMPANY"), the holders of the Company's Series A Preferred Stock, Series B Preferred Stock and certain warrants to purchase equity in the Company, all as listed on Exhibit A hereto (the "INVESTORS"), the holders of the Company's Common Stock listed on Exhibit B hereto (the "STOCKHOLDERS"), The 1818 Mezzanine Fund II, L.P. ("1818 FUND"), CapitalSource Holdings LLC ("CAPITALSOURCE" and, together with 1818 Fund and each of the Investors, the "HOLDERS"). RECITALS WHEREAS, the Company, certain of the Investors and certain of the Stockholders are parties to that certain Amended and Restated Co-Sale Agreement, dated as of January 14, 1999 (the "PRIOR CO-SALE AGREEMENT"); and WHEREAS, the parties hereto desire to amend and restate the Prior Co-Sale Agreement in order to add 1818 Fund and CapitalSource as parties to the Agreement and to make such other amendments as are set forth herein. NOW, THEREFORE, in consideration of the mutual promises, representations, warranties, covenants and conditions set forth in this Agreement, the parties hereto mutually agree that effective upon consummation of the transactions described in that certain Securities Purchase Agreement, dated as of June 28, 2002, between the Company and 1818 Fund (the "SECURITIES PURCHASE AGREEMENT"), all of the provisions of the Prior Co-Sale Agreement shall be null and void and superceded by the rights and obligations set forth in this Agreement and further mutually agree as follows: 1. DEFINITIONS. (a) "CO-SALE STOCK" shall mean shares of the Company's Common Stock or Preferred Stock now owned or subsequently acquired by the Stockholders. The number of shares of Common Stock and Preferred Stock owned by the Stockholders is set forth on Exhibit B, which Exhibit may be amended from time to time by the Company to reflect changes in the number of shares owned by the Stockholder. (b) "COMMON STOCK" shall mean the Company's Common Stock, par value $0.01 per share. (c) "INVESTOR STOCK" shall mean shares of the Company's Common Stock (including shares of Common Stock issuable upon exercise of any unexercised warrants) and Preferred Stock now owned or subsequently acquired by a Holder. (d) "PREFERRED STOCK" shall mean the Company's Series A Preferred Stock and Series B Preferred Stock. (e) "SERIES A PREFERRED STOCK" shall mean the Company's Series A Preferred Stock, par value $0.01 per share. (f) "SERIES B PREFERRED STOCK" shall mean the Company's Series B Preferred Stock, par value $0.01 per share. 2. SALES BY A STOCKHOLDER. (a) If a Stockholder proposes to sell or transfer any shares of Co-Sale Stock, such Stockholder shall promptly give written notice (the "NOTICE") simultaneously to the Company and to each of the Holders at least thirty (30) days prior to the closing of such sale or transfer. The Notice shall describe in reasonable detail the proposed sale or transfer including, without limitation, the type and number of shares of Co-Sale Stock to be sold or transferred, the nature of such sale or transfer, the consideration to be paid, and the name and address of each prospective purchaser or transferee. In the event that the sale or transfer is being made pursuant to the provisions of Sections 3(a), the Notice shall state under which section the sale or transfer is being made. (b) Each Holder shall have the right, exercisable upon written notice to the selling Stockholder within fifteen (15) days after the Notice, to participate in such sale of Co-Sale Stock on the same terms and conditions as the proposed sale by the selling Stockholder. Such notice shall indicate the type and number of shares of Investor Stock (assuming the exercise of any unexercised warrants held by such holder) such Holder wishes to sell under his, her or its right to participate. To the extent one or more of the Holders exercise such right of participation in accordance with the terms and conditions set forth below, the number of shares of Co-Sale Stock that the selling Stockholder may sell in the transaction shall be correspondingly reduced. Notwithstanding anything to the contrary contained herein, no Holder shall be required to exercise any unexercised warrants and shall be entitled to sell unexercised warrants at a price per share reduced by the exercise thereof. (c) Each Holder may sell all or any part of that number of shares equal to the product obtained by multiplying (i) the aggregate number of shares of Co-Sale Stock covered by the Notice by (ii) a fraction (A) the numerator of which is the number of shares of Investor Stock (assuming the exercise of any unexercised warrants held by such holder) owned by the Holder at the time of the sale or transfer and (B) the denominator of which is the total number of shares of Co-Sale Stock and Investor Stock (assuming the exercise of any unexercised warrants held by such holder) owned by such Stockholder and the and the Holders at the time of the sale or transfer. (d) Each Holder that elects to participate in the sale pursuant to this Section 2 (a "PARTICIPANT") shall effect its participation in the sale by promptly delivering to such Stockholder for transfer to the prospective purchaser one or more stock or warrant certificates, properly endorsed for transfer, which represent the type and number of shares of Investor Stock which such Participant elects to sell. 2 (e) The stock or warrant certificate or certificates that the Participant delivers to such Stockholder pursuant to Section 2(d) shall be transferred to the prospective purchaser in consummation of the sale pursuant to the terms and conditions specified in the Notice, and the Stockholder shall concurrently therewith remit to such Participant that portion of the sale proceeds to which such Participant is entitled by reason of its participation in such sale. To the extent that any prospective purchaser or purchasers prohibits such assignment or otherwise refuses to purchase shares or other securities from a Participant exercising its rights of co-sale hereunder, the selling Stockholder shall not sell to such prospective purchaser or purchasers any Co-Sale Stock unless and until, simultaneously with such sale, such Stockholder shall purchase such shares or other securities from such Participant on the same terms and conditions specified in the Notice. (f) The exercise or non-exercise of the rights of the Participants hereunder to participate in one or more sales of Co-Sale Stock made by the selling Stockholder shall not adversely affect their rights to participate in subsequent sales of Co-Sale Stock subject to Section 2(a). (g) If none of the Holders elect to participate in the sale of the Co-Sale Stock subject to the Notice, the selling Stockholder may, not later than sixty (60) days following delivery to the Company of the Notice, enter into an agreement providing for the closing of the transfer of the Co-Sale Stock covered by the Notice within thirty (30) days of such agreement on terms and conditions not more materially favorable to the transferor than those described in the Notice. Any proposed transfer on terms and conditions materially more favorable than those described in the Notice, as well as any subsequent proposed transfer of any of the Co-Sale Stock by a Stockholder, shall again be subject to the co-sale rights of the Holders and shall require compliance by a Stockholder with the procedures described in this Section 2. For the purposes of any computation of the number of shares of Co-Sale Stock or Investor Stock pursuant to this Section 2, all outstanding shares of Preferred Stock of the Stockholders and Holders, and all warrants of the Company held by 1818 Fund and CapitalSource, shall be deemed converted, exercised or exchanged as applicable and the shares of Common Stock issuable upon such conversion, exercise or exchange shall be deemed outstanding, whether or not such conversion, exercise or exchange has actually been effected. 3. EXEMPT TRANSFERS. (a) Notwithstanding the foregoing, the co-sale rights of the Holders shall not apply to (i) any pledge of Co-Sale Stock made pursuant to a bona fide loan transaction with a financial institution that creates a mere security interest, (ii) any transfer to the ancestors, descendants or spouse or to trusts for the benefit of such persons or the Stockholder, (iii) any transfer or transfers by a Stockholder to another Stockholder, or (iv) any bona fide gift; provided that in the event of any transfer made pursuant to one of the exemptions provided by clauses (i), (ii) and (iii) and (iv), (A) the Stockholder shall inform the Holders of such pledge, transfer or gift prior to effecting it and (B) the pledgee, transferee or donee shall furnish the Holders with a written agreement to be bound by and comply with all provisions of Section 2. Such transferred Co-Sale 3 Stock shall remain "Co-Sale Stock" hereunder, and such pledgee, transferee or donee shall be treated as the "Stockholder" for purposes of this Agreement. (b) Notwithstanding the foregoing, the provisions of Section 2 shall not apply to the sale of any Co-Sale Stock (x) to the public pursuant to a registration statement filed with, and declared effective by, the Securities and Exchange Commission under the Securities Act of 1933, as amended (the "SECURITIES ACT") or (y) pursuant to Rule 144 of the Securities Act. (c) This Agreement is subject to, and shall in no manner limit the right which the Company may have to repurchase securities from the Stockholder pursuant to a stock restriction agreement or other agreement between the Company and the Stockholder. 4. PROHIBITED TRANSFERS. (a) In the event that a Stockholder should sell any Co-Sale Stock in contravention of the co-sale rights of the Holders under this Agreement (a "PROHIBITED TRANSFER"), each Holder, in addition to such other remedies as may be available at law, in equity or hereunder, shall have the put option provided below, and such Stockholder shall be bound by the applicable provisions of such option. (b) In the event of a Prohibited Transfer, each Holder shall have the right to sell to such Stockholder the type and number of shares of Investor Stock (or warrant exercisable for Investor Stock) equal to the number of shares such Holder would have been entitled to transfer to the purchaser under Section 2(c) hereof had the Prohibited Transfer been effected pursuant to and in compliance with the terms hereof. Such sale shall be made on the following terms and conditions: (i) The price per share at which the shares are to be sold to the Stockholder by a Holder pursuant to this Section 4 shall be equal to the price per share paid by the purchaser to such Stockholder in such Prohibited Transfer; provided that the purchase price of any warrant shall be reduced by the exercise thereof with respect to the underlying shares of Investor Stock being purchased in the transaction. The Stockholder also shall reimburse each Holder for any and all fees and expenses, including legal fees and expenses, incurred pursuant to the exercise or the attempted exercise of the Holder's rights under Section 2. (ii) Within ninety (90) days after the date on which a Holder received notice of the Prohibited Transfer or otherwise became aware of the Prohibited Transfer, such Holder shall, if exercising the option created hereby, deliver to the Stockholder the certificate or certificates representing shares or warrants to be sold, each certificate to be properly endorsed for transfer. (iii) Such Stockholder shall, upon receipt of the certificate or certificates for the shares or warrants to be sold by a Holder, pursuant to this Section 4(b), pay the aggregate purchase price therefor and the amount of reimbursable fees and expenses, as specified in Section 4(b)(i), in cash or by other means acceptable to the Holder. 4 (iv) Notwithstanding the foregoing, any attempt by a Stockholder to transfer Co-Sale Stock in violation of Section 2 hereof shall be voidable at the option of 1818 Fund, CapitalSource or Investors holding a majority of the shares of Investor Stock (on a fully-diluted basis) held by all Investors if none of the Holders elect to exercise the put option set forth in this Section 4, and the Company agrees it will not effect such a transfer nor will it treat any alleged transferee as the holder of such shares without the written consent of 1818 Fund, CapitalSource and Investors holding a majority of the shares of Investor Stock (on a fully-diluted basis) held by all Investors. 5. LEGEND. (a) Each certificate representing shares of Co-Sale Stock now or hereafter owned by the Stockholder or issued to any person in connection with a transfer pursuant to Section 3(a) hereof shall be endorsed with the following legend: "THE SALE, PLEDGE, HYPOTHECATJON OR TRANSFER OF THE SECURITIES REPRESENTED BY THIS CERTIFICATE IS SUBJECT TO THE TERMS AND CONDITIONS OF A CERTAIN CO-SALE AGREEMENT BY AND BETWEEN THE STOCKHOLDER, THE COMPANY AND CERTAIN HOLDERS OF STOCK OF THE COMPANY. COPIES OF SUCH AGREEMENT MAY BE OBTAINED UPON WRITTEN REQUEST TO THE SECRETARY OF THE COMPANY." (b) The Stockholders agree that the Company may instruct its transfer agent to impose transfer restrictions on the shares represented by certificates bearing the legend referred to in Section 5(a) above to enforce the provisions of this Agreement and the Company agrees to promptly do so. The legend shall be removed upon termination of this Agreement. 6. PMR MERGER & IPO. (a) The Stockholders and Holders hereby agree that immediately upon the earlier of (i) the consummation and effectiveness of the transactions described in that certain Agreement and Plan of Merger, dated May 6, 2002, by and between PMR Corporation ("PMR CORPORATION"), PMR Acquisition Corporation, and the Company, as amended (the "PMR MERGER"), and (ii) the closing of a firmly underwritten public offering of the Company's Common Stock pursuant to a registration statement filed with, and declared effective under, the Securities Act (an "IPO"), all of the rights (but not obligations) granted under this Agreement to the Stockholders and Holders (other than to 1818 Fund) shall terminate; provided, that, for the avoidance of doubt it is understood and agreed that the IPO and the PMR Merger shall not terminate the obligations of the Stockholders (other than Charles R. F. Treadway, M.D., Douglas B. Lewis and K. Bryce DeHaven) to the 1818 Fund under this Agreement and the Stockholders shall continue to be bound by such obligations and 1818 Fund shall continue to have such rights; provided, further, that for the avoidance of doubt, it is understood and agreed that all of the obligations of Charles R. F. Treadway, M.D., Douglas B. Lewis and K. Bryce DeHaven under this Agreement shall terminate upon the earlier of the PMR Merger or an IPO. In addition, notwithstanding any provision contained in this Agreement to the contrary, neither the PMR Merger nor any other 5 transaction in which the capital stock of the Company is exchanged, converted, reconstituted or reclassified for the capital stock of the Company or another company shall constitute an IPO or shall result in the termination of the rights granted hereunder to 1818 Fund; and (b) Upon the consummation and effectiveness of the PMR Merger (and not upon an IPO), (i) all references in Sections 1 and 2 to the "Company" shall be deemed to be references to PMR Corporation; (ii) all references in Section 1 to "Common Stock" shall be deemed to be references to the common stock, par value $0.01, of PMR Corporation; and (iii) all references to "Preferred Stock" shall be deemed to be references to the preferred stock of PMR Corporation. 7. MISCELLANEOUS. (a) CONDITIONS TO EXERCISE OF RIGHTS. The exercise of the Holders' rights under this Agreement shall be subject to and conditioned upon, and the Stockholders and the Company shall use their best efforts to assist each Holder in, compliance with applicable laws. (b) GOVERNING LAW. This Agreement shall be governed by and construed under the laws of the State of Delaware as applied to agreements among Delaware residents entered into and to be performed entirely within Delaware. (c) AMENDMENT. None of the terms or provisions of this Agreement may be waived or amended except by written instrument executed by (i) the Company, (ii) Investors holding a majority of the shares of Investor Stock (on a fully-diluted basis) held by all Investors and their assignees pursuant to Section 6(d) hereof, (iii) 1818 Fund, (iv) CapitalSource and (v) to the extent it increases the obligations or decreases the rights of the Stockholders, Stockholders holding a majority of the shares of Co-Sale Stock (on a fully-diluted basis) held by all Stockholders. Any waiver or amendment effected in accordance with this Section 6(c) shall be binding upon each Investor, its successors and assigns, 1818 Fund, CapitalSource, the Company and the Stockholders. (d) ASSIGNMENT OF RIGHTS. This Agreement and the rights and obligations of the parties hereunder shall inure to the benefit of, and be binding upon, their respective successors, assigns and legal representatives. (e) OWNERSHIP. The Stockholders represent and warrant that each is the sole legal and beneficial owner of those shares of Co-Sale Stock he, she or it currently holds subject to the Agreement and that no other person has any interest (other than a community property interest) in such shares. (f) NOTICES. All notices required or permitted hereunder shall be in writing and shall be deemed effectively given: (i) upon personal delivery to the party to be notified, (ii) when sent by confirmed telex or facsimile if sent during normal business hours of the recipient; if not, then on the next business day, (iii) five (5) days after having been sent by registered or certified mail, return receipt requested, postage prepaid, or (iv) one (1) day after deposit with a nationally recognized overnight courier, specifying next day delivery, with written verification of receipt. All communications shall be sent to the party to be notified at the address as set forth on the 6 signature page hereof or at such other address as such party may designate by ten (10) days advance written notice to the other parties hereto. (g) SEVERABILITY. In the event one or more of the provisions of this Agreement should, for any reason, be held to be invalid, illegal or unenforceable in any respect, such invalidity, illegality, or unenforceability shall not affect any other provisions of this Agreement, and this Agreement shall be construed as if such invalid, illegal or unenforceable provision had never been contained herein. (h) ATTORNEYS' FEES. In the event that any dispute among the parties to this Agreement should result in litigation, the prevailing party in such dispute shall be entitled to recover from the losing party all fees, costs and expenses of enforcing any right of such prevailing party under or with respect to this Agreement, including without limitation, such reasonable fees and expenses of attorneys and accountants, which shall include, without limitation, all fees, costs and expenses of appeals. (i) ENTIRE AGREEMENT. This Agreement and the Exhibits hereto, constitute the full and entire understanding and agreement between the parties with regard to the subjects hereof and thereof and no party shall be liable or bound to any other in any manner by any representations, warranties, covenants and agreements, including the Prior Co-Sale Agreement, except as specifically set forth herein and therein. (j) COUNTERPARTS. This Agreement may be executed in two or more counterparts, each of which shall be deemed an original, but all of which together shall constitute one and the same instrument. 7 IN WITNESS WHEREOF, the parties hereto have executed this SECOND AMENDED AND RESTATED VOTING AGREEMENT as of the date first above written. COMPANY: PSYCHIATRIC SOLUTIONS, INC. By: /s/ Joey A. Jacobs -------------------------------------- Joey A. Jacobs Its: President INVESTORS: Name: Charles R.F. Treadway, MD ------------------------------------ (Print Investor's name) By: /s/ Charles R.F. Treadway, MD ------------------------------------ (Signature) Title: Chairman ----------------------------------- (if applicable) Name: South Park Venture Partners, L.P. ----------------------------------- (Print Investor's name) By: /s/ David S. Heer ------------------------------------- (Signature) Title: General Partner ----------------------------------- (if applicable) Name: South Pointe Venture Partners, L.P. ------------------------------------ (Print Investor's name) By: /s/ David S. Heer ------------------------------------- (Signature) Title: General Partner ----------------------------------- (if applicable) Name: Acacia Venture Partners, L.P. ------------------------------------ (Print Investor's name) By: /s/ David S. Heer ------------------------------------ (Signature) Title: General Partner ---------------------------------- (if applicable) CGJR HEALTHCARE SERVICES Name: CGJR HEALTHCARE SERVICES PRIVATE EQUITIES, LP CGJR II, L.P. CGJR/MF III, L.P. ----------------------------------- (Print Investor's name) By: CGJR CAPITAL MANAGEMENT, INC. AS GP OF ALL 3 By: /s/ Christopher Grant, Jr. ------------------------------------- (Signature) Title: President ---------------------------------- (if applicable) CLAYTON ASSOCIATES, LLC By: /s/ Bill F. Cook ------------------------------------- Prin. FCA VENTURE PARTNERS II, L.P. By: Clayton DC Ventures Capital Group, LLC General Partner By: /s/ Bill F. Cook ------------------------------------- Prin. FCA VENTURE PARTNERS I, L.P. BY DC INVESTMENTS, LLC ITS: GENERAL PARTNER By: /s/ Robert Crants ------------------------------------ Its: Managing Partner OAK INVESTMENT PARTNERS VII, LIMITED PARTNERSHIP By: /s/ Edward F. Glassmeyer ------------------------------------- Its: Managing Member of Oak Associates VII, LLC, the General Partner of Oak Investment Partners VII, Limited Partnership OAK VII AFFILIATES FUND, LIMITED PARTNERSHIP By: /s/ Edward F. Glassmeyer ------------------------------------- Its: Managing Member of Oak VII Affiliates, LLC, the General Partner of Oak VII Affiliates Fund, Limited Partnership THE 1818 MEZZANINE FUND II, L.P. BY: BROWN BROTHERS HARRIMAN & CO., ITS GENERAL PARTNER By: /s/ Joseph P. Donlan ------------------------------------ Name: Joseph P. Donlan Title: Managing Director KEY STOCKHOLDERS /s/ Charles R.F. Treadway, M.D. ----------------------------------------- Charles R.F. Treadway, M.D. /s/ Joey A. Jacobs ----------------------------------------- Joey A. Jacobs CAPITALSOURCE HOLDINGS LLC By: /s/ Keith D. Reuben -------------------------------------- Name: Keith D. Reuben Title: Director 8 EXHIBIT A LIST OF INVESTORS
SERIES A SERIES B STOCKHOLDERS PREFERRED STOCK PREFERRED STOCK ------------ --------------- --------------- Acacia Venture Partners, L.P. 4,124,000 1,395,732 CGJR Health Care Services Private Equities, L.P. 250,000 177,417 CGJR II, L.P. 160,000 57,251 CGJR/MF III, L.P. 90,000 32,400 FCA Venture Partners I, L.P. 400,000 33,600 FCA Venture Partners II, L.P. 0 1,604,200 Oak VII Affiliates Fund, Limited Partnership 110,250 34,758 Oak Investment Partners VII, Limited Partnership 4,389,750 1,383,976 South Park Venture Partners, L.P. 246,000 20,460 South Pointe Venture Partners, L.P. 0 2,542
B-1 EXHIBIT B LIST OF KEY STOCKHOLDERS NUMBER OF SHARES NUMBER OF COMMON STOCKHOLDERS SHARES/OPTIONS ------------ ---------------- Clayton Associates, L.L.C. 1,126,841(1) K. Bryce DeHaven 1,026,441(1) Joey A. Jacobs 1,626,441 Douglas B. Lewis 1,048,441(1) Charles R. F. Treadway, M.D. 1,251,761 K. Bryce DeHaven also owns 3,000 shares of Series B Preferred Stock. Joey A. Jacobs also owns 8,000 shares of Series B Preferred Stock. Clayton Associates, LLC also owns 8,400 shares of Series B Preferred Stock. - -------- (1) No Options. B-2 EX-99 8 ex6sc13d-psychiatric.txt EXHIBIT 6 EXHIBIT 6 --------- SECOND AMENDED AND RESTATED INVESTOR RIGHTS AGREEMENT PSYCHIATRIC SOLUTIONS, INC. JUNE 28, 2002 TABLE OF CONTENTS PAGE SECTION 1. General........................................................1 1.1 Definitions....................................................1 SECTION 2. Restrictions on Transfer.......................................3 2.1 Restrictions on Transfer.......................................3 2.2 Demand Registration............................................5 2.3 Piggyback Registrations........................................6 2.4 Form S-3 Registration..........................................8 2.5 Expenses of Registration.......................................9 2.6 Obligations of the Company....................................10 2.7 Termination of Registration Rights............................12 2.8 Delay of Registration; Furnishing Information.................12 2.9 Indemnification...............................................12 2.10 Assignment of Registration Rights.............................15 2.11 Amendment of Registration Rights..............................15 2.12 Limitation on Subsequent Registration Rights..................15 2.13 "Market Stand-Off" Agreement..................................16 2.14 Rule 144 Reporting............................................16 SECTION 3. Covenants of the Company......................................17 3.1 Basic Financial Information and Reporting.....................17 3.2 Inspection Rights.............................................18 3.3 Observer Rights...............................................18 3.4 Confidentiality of Records....................................18 3.5 Reservation of Common Stock...................................19 3.6 Stock Vesting.................................................19 3.7 Right of First Refusal........................................19 3.8 Key Man Insurance.............................................19 3.9 Proprietary Information and Inventions Agreement..............19 3.10 Interested Transactions.......................................19 3.11 Directors' Liability and Indemnification......................19 3.12 Real Property Holding Corporation.............................20 3.13 Termination of Covenants......................................20 SECTION 4. RIGHTS OF FIRST REFUSAL.......................................20 4.1 Subsequent Offerings..........................................20 4.2 Exercise of Rights............................................21 4.3 Issuance of Equity Securities.................................21 4.4 Termination of Rights of First Refusal........................22 4.5 Transfer of Rights of First Refusal...........................22 4.6 Excluded Securities...........................................22 i SECTION 5. TERMINATION...................................................23 5.1 Termination...................................................23 SECTION 6. MISCELLANEOUS.................................................23 6.1 Governing Law.................................................23 6.2 Survival......................................................23 6.3 Successors and Assigns........................................23 6.4 Severability..................................................24 6.5 Amendment and Waiver..........................................24 6.6 Delays or Omissions...........................................24 6.7 Notices.......................................................24 6.8 Attorneys' Fees...............................................25 6.9 Entire Agreement..............................................25 6.10 Titles and Subtitles..........................................25 6.11 Counterparts..................................................25 ii PSYCHIATRIC SOLUTIONS, INC. SECOND AMENDED AND RESTATED INVESTOR RIGHTS AGREEMENT THIS SECOND AMENDED AND RESTATED INVESTOR RIGHTS AGREEMENT (the "AGREEMENT") is entered into as of the 28th day of June, 2002 by and among PSYCHIATRIC SOLUTIONS, INC., a Delaware corporation (the "COMPANY"), the holders of the Series A Preferred Stock, par value $0.01 per share, of the Company (the "SERIES A PREFERRED Stock"), and Series B Preferred Stock, par value $0.01 per share, of the Company (the "SERIES B PREFERRED STOCK" and together with the Series A Preferred Stock, the "PREFERRED STOCK"), and holders of certain warrants to purchase equity of the Company, all as set forth on EXHIBIT A hereto (collectively, the "INVESTORS" and each individually an "INVESTOR"). RECITALS WHEREAS, the Company and certain of the Investors (the "EXISTING INVESTORS") are parties to that certain Amended and Restated Investor Rights Agreement, dated as of January 14, 1999 (as amended through the date hereof, the "PRIOR RIGHTS AGREEMENT"), pursuant to which the Company granted, among other things, certain registration, information and first refusal rights to such Existing Investors; and WHEREAS, the Company and such Existing Investors desire to amend and restate the Prior Rights Agreement in order to add CapitalSource Holdings LLC ("CAPITALSOURCE") and The 1818 Mezzanine Fund II, L.P. ("1818 FUND") as parties to the Agreement and to make such other amendments as are set forth herein. NOW, THEREFORE, in consideration of the mutual promises, representations, warranties, covenants and conditions set forth in this Agreement, and for other good and valuable consideration the adequacy of sufficiency of which are hereby acknowledged, the Company and each of the Investors mutually agree that effective upon the Initial Closing (as defined in that certain Securities Purchase Agreement (as amended, the "1818 FUND PURCHASE AGREEMENT"), dated as of June 28, 2002, between the Company and 1818 Fund), all of the provisions of the Prior Rights Agreement shall be null and void and superceded by the rights and obligations set forth in this Agreement and further mutually agree as follows: SECTION 1. GENERAL 1.1 DEFINITIONS.As used in this Agreement the following terms shall have the following respective meanings: "1818 FUND SECURITYHOLDERS" means 1818 Fund and any other owner of warrants issued pursuant to the 1818 Fund Purchase Agreement or shares of Common Stock issued or issuable upon exercise of such warrants, and their respective successors and assigns. "CREDIT FACILITY" means the Revolving Credit and Term Loan Agreement, dated as of November 30, 2001, by and among the Company, such other borrowers signatory thereto and CapitalSource, as amended. "COMMON STOCK" means the shares, par value $0.01 per share, of common stock of the Company, and each other class of capital stock of the Company into which such stock is reclassified or reconstituted. "EXCHANGE ACT" means the Securities Exchange Act of 1934, as amended. "FORM S-3" means such form under the Securities Act as in effect on the date hereof or any successor registration form under the Securities Act subsequently adopted by the SEC which permits inclusion or incorporation of substantial information by reference to other documents filed by the Company with the SEC. "HOLDER" means (i) any person owning of record Shares or Registrable Securities that have not been sold to the public or (ii) any assignee of record of such Registrable Securities in accordance with Section 2.10 hereof. "INITIAL OFFERING" means the Company's first firm commitment underwritten public offering of its Common Stock registered under the Securities Act. "PMR MERGER" means the merger contemplated by the Agreement and Plan of Merger, dated as of May 6, 2002, by and between PMR Corporation, PMR Acquisition Corporation and the Company, as amended. "REGISTER," "REGISTERED," and "REGISTRATION" refer to a registration effected by preparing and filing a registration statement in compliance with the Securities Act, and the declaration or ordering of effectiveness of such registration statement or document. "REGISTRABLE SECURITIES" means (i) Common Stock issued to the Investors pursuant to the Series B Agreement; (ii) Common Stock issued or issuable upon exercise of the warrants issued to CapitalSource pursuant to the Credit Facility; (iii) Common Stock issued upon exercise of any warrants issued pursuant to the 1818 Fund Purchase Agreement; (iv) Common Stock issued or issuable upon conversion of the Shares; and (v) any Common Stock issued as (or issuable upon the conversion or exercise of any warrant, right or other security which is issued as) a dividend or other distribution with respect to, or in exchange for or in replacement of, or in connection with a recapitalization, merger, consolidation or other reorganization or otherwise of, such above-described securities. Notwithstanding the foregoing, Registrable Securities shall not include any securities (x) sold by a person to the public either pursuant to a registration statement or Rule 144 (unless the purchaser thereof receives "restricted securities" as defined in Rule 144) or (y) sold in a private transaction in which the transferor's rights under Section 2 of this Agreement are not assigned; provided, that clause (y) shall not apply with respect to any transfer of shares of Common Stock described in clause (iii) of the preceding sentence or pursuant to clause (v) of the preceding sentence to the extent related to the shares of Common Stock described in clause (iii). "REGISTRABLE SECURITIES THEN OUTSTANDING" shall be the number of shares of Common Stock that are Registrable Securities and are (1) then issued and outstanding or (2) issuable pursuant to then exercisable or convertible securities. 2 "REGISTRATION EXPENSES" shall mean all expenses incurred by the Company in complying with Section 2 hereof, including, without limitation, all registration and filing fees, printing expenses, fees and disbursements of counsel for the Company and of its independent public accountants (including the expenses of "cold comfort letters") and the reasonable fees and disbursements of underwriters (other than Selling Expenses), reasonable fees and disbursements of a single special counsel for the Holders not to exceed $20,000, blue sky fees and expenses and the expense of any special audits incident to or required by any such registration (but excluding the compensation of regular employees of the Company which shall be paid in any event by the Company). "SEC" or "COMMISSION" means the Securities and Exchange Commission. "SECURITIES ACT" shall mean the Securities Act of 1933, as amended. "SELLING EXPENSES" shall mean all underwriting discounts and selling commissions applicable to the sale. "SERIES B AGREEMENT" means the Series B Preferred Stock Purchase Agreement, dated as of January 14, 1999, by and between the Company and the other parties thereto. "SHARES" shall mean (i) the Company's Preferred Stock issued pursuant to the Series B Agreement, the Series A Preferred Stock Purchase Agreement dated April 11, 1997 (the "SERIES A AGREEMENT") or otherwise acquired by a Holder, (ii) the warrants issued to CapitalSource pursuant to Credit Facility, (iii) any warrants issued pursuant to the 1818 Fund Purchase Agreement and (iv) any shares of Common Stock issued or issuable upon conversion or exercise of any of the foregoing, and any other shares of Common Stock owned by Holder, whether now owned or hereafter acquired. SECTION 2. RESTRICTIONS ON TRANSFER 2.1 RESTRICTIONS ON TRANSFER. (a) Each Holder (other than the 1818 Fund Securityholders who are Holders) agrees not to make any disposition of all or any portion of the Shares or Registrable Securities unless and until: (i) There is then in effect a registration statement under the Securities Act covering such proposed disposition and such disposition is made in accordance with such registration statement; or (ii) (A) The transferee has agreed in writing to be bound by the terms of this Agreement, (B) such Holder shall have notified the Company of the proposed disposition and shall have furnished the Company with a detailed statement of the circumstances surrounding the proposed disposition, and (C) if reasonably requested by the Company, such Holder shall have furnished the Company with an opinion of counsel, reasonably satisfactory to the Company, that such disposition will not require registration of such shares under the Securities Act. It is agreed that the Company will not require opinions of counsel for transactions 3 made pursuant to Rule 144 except as may be reasonably requested by counsel to the Company in light of the circumstances. (iii) Notwithstanding the provisions of paragraphs (i) and (ii) above, no such registration statement or opinion of counsel shall be necessary for a transfer by a Holder which is (I) a partnership to its partners or former partners in accordance with partnership interests, (II) a corporation to its stockholders in accordance with their interest in the corporation, (III) a limited liability company to its members or former members in accordance with their interest in the limited liability company, or (IV) to the Holder's family member or trust for the benefit of an individual Holder, provided the transferee will be subject to the terms of this Agreement to the same extent as if he were an original Holder hereunder. (b) Each certificate representing Shares or Registrable Securities (except for any Shares or Registrable Securities held by the 1818 Fund Securityholders) shall (unless otherwise permitted by the provisions of the Agreement) be stamped or otherwise imprinted with a legend substantially similar to the following (in addition to any legend required under (i) applicable state securities laws (ii) the Second Amended and Restated Voting Agreement and the Second Amended and Restated Co-Sale Agreement between the Company and certain stockholders, dated as of the date hereof, (iii) the Company's Bylaws, or (iv) as provided elsewhere in this Agreement): THE SECURITIES REPRESENTED HEREBY HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933 (THE "ACT") AND MAY NOT BE OFFERED, SOLD OR OTHERWISE TRANSFERRED, ASSIGNED, PLEDGED OR HYPOTHECATED UNLESS AND UNTIL REGISTERED UNDER THE ACT OR UNLESS THE COMPANY HAS RECEIVED AN OPINION OF COUNSEL SATISFACTORY TO THE COMPANY AND ITS COUNSEL THAT SUCH REGISTRATION IS NOT REQUIRED. (c) The Company shall be obligated to reissue promptly unlegended certificates at the request of any holder thereof if the holder shall have obtained an opinion of counsel (which counsel may be counsel to the Company) reasonably acceptable to the Company to the effect that the securities proposed to be disposed of may lawfully be so disposed of without registration, qualification or legend. (d) Any legend endorsed on an instrument pursuant to applicable state securities laws and the stop-transfer instructions with respect to such securities shall be removed upon receipt by the Company of an order of the appropriate blue sky authority authorizing such removal. 2.2 DEMAND REGISTRATION. (a) Subject to the conditions of this Section 2.2, if after the date hereof, the Company shall receive a written request from (A) the Holders (other than the 1818 Fund Securityholders) of more than forty-five percent (45%) of the Registrable Securities then 4 outstanding or (B) 1818 Fund, acting on behalf of one or more 1818 Fund Securityholders holding Registrable Securities (the "INITIATING HOLDERS") that the Company file a registration statement under the Securities Act covering the registration of either (i) in the case of a registration pursuant to clause (A), at least twenty percent (20%) of the then outstanding Registrable Securities, and, in the case of a registration pursuant to clause (B), at least twenty percent (20%) of the then outstanding Registrable Securities held by the 1818 Fund Securityholders or (ii) Registrable Securities having an aggregate offering price to the public in excess of $5,000,000, then the Company shall (x) within thirty (30) days of the receipt thereof, give written notice of such request to all Holders in the event such registration is pursuant to clause (A), provided that no such notice shall be given in the event such registration is pursuant to clause (B), and no Registrable Securities (other than those held by 1818 Fund Securityholders) shall be included in any registration pursuant to clause (B) and (y) subject to the limitations of this Section 2.2, use its best efforts to effect, as soon as practicable, but not later than sixty (60) days, the registration under the Securities Act of all Registrable Securities that the Holders request to be registered. (b) If the Initiating Holders intend to distribute the Registrable Securities covered by their request by means of an underwriting, they shall so advise the Company as a part of their request made pursuant to this Section 2.2 and the Company shall include such information in the written notice referred to in Section 2.2(a). In such event, the right of any Holder to include its Registrable Securities in such registration shall be conditioned upon such Holder's participation in such underwriting and the inclusion of such Holder's Registrable Securities in the underwriting (unless otherwise mutually agreed by a majority in interest of the Initiating Holders and such Holder) to the extent provided herein. All Holders proposing to distribute their securities through such underwriting shall enter into an underwriting agreement in customary form with the underwriter or underwriters selected for such underwriting by a majority in interest of the Initiating Holders (which underwriter or underwriters shall be reasonably acceptable to the Company). Notwithstanding any other provision of this Section 2.2, if the underwriter advises the Company that marketing factors require a limitation of the number of securities to be underwritten (including Registrable Securities) then the Company shall so advise all Holders of Registrable Securities which would otherwise be underwritten pursuant hereto, and the number of shares that may be included in the underwriting shall be allocated to the Holders of such Registrable Securities on a pro rata basis based on the number of Registrable Securities held by all such Holders (including the Initiating Holders); provided that, in no event, shall any Registrable Securities (other than those held by 1818 Fund Securityholders) be included in any registration pursuant to Section 2.2(a)(B). Any Registrable Securities excluded or withdrawn from such underwriting shall be withdrawn from the registration. (c) The Company shall not be required to effect a registration pursuant to this Section 2.2: (i) after the Company has effected two (2) registrations pursuant to Section 2.2(a)(A) for the holders of more than forty-five percent (45%) of the Registrable Securities then outstanding AND two (2) registrations pursuant to Section 2.2(a)(B) for 1818 Fund, on behalf of the 1818 Fund Securityholders, and in each case such registrations have been declared or ordered effective; provided, however, that a registration requested pursuant to this Section 2.2 shall not be deemed to have been effected: (A) unless a registration statement with 5 respect thereto has become effective and remained effective in compliance with the provisions of the Securities Act with respect to the disposition of all Registrable Securities covered by such registration statement until the earlier of (x) such time as all of such Registrable Securities have been disposed of in accordance with the intended methods of disposition by the seller or sellers thereof set forth in such registration statement and (y) 180 days after the effective date of such registration statement; (B) if after it has become effective, such registration is interfered with by any stop order, injunction or other order or requirement of the Commission or other governmental agency or court for any reason not attributable to the Holders of Registrable Securities participating in such registration and has not thereafter become effective; or (C) if the conditions to closing specified in the underwriting agreement, if any, entered into in connection with such registration are not satisfied or waived, other than by reason of a failure on the part of the Holders of Registrable Securities participating in such registration; (ii) during the period starting with the date of filing of, and ending on the date one hundred eighty (180) days following the effective date of the registration statement pertaining to the Initial Offering; provided that the Company makes reasonable good faith efforts to cause such registration statement to become effective; (iii) if within thirty (30) days of receipt of a written request from Initiating Holders pursuant to Section 2.2(a), the Company gives notice to the Holders of the Company's intention to make its Initial Offering within ninety (90) days; provided that such right to delay a request shall be exercised by the Company not more than once in any twelve (12) month period; provided, further, that this paragraph (iii) shall terminate and be of no further force and effect upon the consummation of the PMR Merger; or (iv) if the Company shall furnish to Holders requesting a registration statement pursuant to this Section 2.2, a certificate signed by the Chairman of the Board stating that in the good faith judgment of the Board of Directors of the Company, it would be seriously detrimental to the Company and its stockholders for such registration statement to be effected at such time, in which event the Company shall have the right to defer such filing for a period of not more than ninety (90) days after receipt of the request of the Initiating Holders; provided that such right to delay a request shall be exercised by the Company not more than once in any twelve (12) month period. 2.3 PIGGYBACK REGISTRATIONS. The Company shall notify all Holders of Registrable Securities in writing at least thirty (30) days prior to the filing of any registration statement under the Securities Act for purposes of a public offering of securities of the Company (including, but not limited to, registration statements relating to secondary offerings of securities of the Company, but excluding registration statements relating to (i) employee benefit plans or with respect to corporate reorganizations, acquisitions or other transactions under Rule 145 of the Securities Act and (ii) any registration pursuant to Section 2.2(a)(B)) and will afford each such Holder an opportunity to include in such registration statement all or part of such Registrable Securities held by such Holder. Each Holder desiring to include in any such registration statement all or any part of the Registrable Securities held by it shall, within fifteen (15) days after receipt of the above-described notice from the Company, so notify the Company in writing, and the Company will use its best efforts to cause to be included in such registration all of the Registrable Securities which such Holder requests. Such notice shall state the intended method 6 of disposition of the Registrable Securities by such Holder. If a Holder decides not to include all of its Registrable Securities in any registration statement thereafter filed by the Company, such Holder shall nevertheless continue to have the right to include any Registrable Securities in any subsequent registration statement or registration statements as may be filed by the Company with respect to offerings of its securities, all upon the terms and conditions set forth herein. (a) Underwriting. (i) If the registration statement under which the Company gives notice under this Section 2.3 is for an underwritten offering, the Company shall so advise the Holders of Registrable Securities. In such event, the right of any such Holder to be included in a registration pursuant to this Section 2.3 shall be conditioned upon such Holder's participation in such underwriting and the inclusion of such Holder's Registrable Securities in the underwriting to the extent provided herein. All Holders proposing to distribute their Registrable Securities through such underwriting shall enter into an underwriting agreement in customary form with the underwriter or underwriters selected for such underwriting by the Company. (ii) Notwithstanding any other provision of the Agreement, if the underwriter determines in good faith that marketing factors require a limitation of the number of shares to be underwritten, the number of shares that may be included in the underwriting shall be allocated, first, to the Company; second, to the Holders on a pro rata basis based on the total number of Registrable Securities held by the Holders; and third, to any stockholder of the Company (other than a Holder) on a pro rata basis. Except as may be required pursuant to the remainder of this subsection (ii), no such reduction shall reduce the securities being offered by the Company for its own account to be included in the registration and underwriting. In no event shall the amount of securities of the selling Holders included in the registration be reduced below thirty percent (30%) of the total amount of securities included in such registration, unless such offering is the Initial Offering and such registration does not include shares of any other selling stockholders, in which event any or all of the Registrable Securities of the Holders may be excluded in accordance with the first sentence of this subsection (ii). In no event will shares of any other selling stockholder be included in such registration which would reduce the number of shares which may be included by Holders without the written consent of Holders of not less than a majority of the Registrable Securities proposed to be sold in the offering. (b) Right to Terminate Registration. The Company shall have the right to terminate or withdraw any registration initiated by it under this Section 2.3 prior to the effectiveness of such registration whether or not any Holder has elected to include securities in such registration. The Company shall give prompt written notice of its determination to terminate or withdraw any such registration to each Holder of Registrable Securities participating in such registration. The Registration Expenses of such terminated or withdrawn registration shall be borne by the Company in accordance with Section 2.5 hereof. 7 2.4 FORM S-3 REGISTRATION. In case the Company shall receive from any Holder or Holders of Registrable Securities a written request or requests that the Company effect a registration on Form S-3 (or any successor to Form S-3) or any similar short-form registration statement and any related qualification or compliance with respect to all or a part of the Registrable Securities owned by such Holder or Holders, the Company will: (a) promptly give written notice of the proposed registration, and any related qualification or compliance, to all other Holders of Registrable Securities; and (b) as soon as practicable, but not later than forty-five (45) days, effect such registration and all such qualifications and compliances as may be so requested and as would permit or facilitate the sale and distribution of all or such portion of such Holder's or Holders' Registrable Securities as are specified in such request, together with all or such portion of the Registrable Securities of any other Holder or Holders joining in such request as are specified in a written request given within fifteen (15) days after receipt of such written notice from the Company; provided, however, that the Company shall not be obligated to effect any such registration, qualification or compliance pursuant to this Section 2.4: (i) if Form S-3 (or any successor or similar form) is not available for such offering by the Holders; (ii) if the Holders, together with the holders of any other securities of the Company entitled to inclusion in such registration, propose to sell Registrable Securities and such other securities (if any) at an aggregate price to the public of less than $1,000,000; (iii) if the Company shall furnish to the Holders a certificate signed by the Chairman of the Board of Directors of the Company stating that in the good faith judgment of the Board of Directors of the Company, it would be seriously detrimental to the Company and its stockholders for such Form S-3 registration to be effected at such time, in which event the Company shall have the right to defer the filing of the Form S-3 registration statement for a period of not more than ninety (90) days after receipt of the request of the Holder or Holders under this Section 2.4; provided, that such right to delay a request shall be exercised by the Company not more than once in any twelve (12) month period; or (iv) in any particular jurisdiction in which the Company would be required to qualify to do business or to execute a general consent to service of process in effecting such registration, qualification or compliance. (c) Subject to the foregoing, the Company shall file a Form S-3 registration statement covering the Registrable Securities and other securities so requested to be registered as soon as practicable after receipt of the request or requests of the Holders, but not later than forty-five (45) days, and shall keep such Form S-3 registration statement effective and updated from the date such Form S-3 registration statement is declared effective until such time as the Registrable Securities included in such registration statement cease to be Registrable Securities. (d) If the Holder or Holders of Registrable Securities requesting registration pursuant to this Section 2.4 intend to distribute the Registrable Securities covered by their request 8 by means of an underwriting, they shall so advise the Company as a part of their request made pursuant to this Section 2.4 and the Company shall include such information in the written notice referred to in Section 2.4(a). In such event, the right of any Holder to include its Registrable Securities in such registration shall be conditioned upon such Holder's participation in such underwriting and the inclusion of such Holder's Registrable Securities in the underwriting (unless otherwise mutually agreed by such Holder and the Holder, or a majority in interest of the Holders, of Registrable Securities requesting registration pursuant to this Section 2.4) to the extent provided herein. All Holders proposing to distribute their securities through such underwriting shall enter into an underwriting agreement in customary form with the underwriter or underwriters selected for such underwriting by the Holder, or a majority in interest of the Holders, of Registrable Securities requesting registration pursuant to this Section 2.4 (which underwriter or underwriters shall be reasonably acceptable to the Company). Notwithstanding any other provision of this Section 2.4, if the underwriter advises the Company that marketing factors require a limitation of the number of securities to be underwritten (including Registrable Securities) then the Company shall so advise all Holders of Registrable Securities which would otherwise be underwritten pursuant hereto, and the number of shares that may be included in the underwriting shall be allocated, first, to the Holders of such Registrable Securities on a pro rata basis based on the number of Registrable Securities held by all such Holders (including the Holder or Holders of Registrable Securities requesting registration pursuant to this Section 2.4) and second, to any stockholder of the Company (other than a Holder) on a pro rata basis. Any Registrable Securities excluded or withdrawn from such underwriting shall be withdrawn from the registration. (e) No registration requested pursuant to this Section 2.4 shall be deemed a "demand registration" pursuant to Section 2.2. 9 2.5 EXPENSES OF REGISTRATION. Except as specifically provided herein, all Registration Expenses shall be borne by the Company. All Selling Expenses incurred in connection with any registrations hereunder, shall be borne by the holders of the securities (including Registrable Securities) so registered on a pro rata basis based on the number of shares so registered. The Company shall not, however, be required to pay for expenses of any registration proceeding begun pursuant to Section 2.2 or 2.4, the request of which has been subsequently withdrawn by the Initiating Holders (in the case of Section 2.2) or the Holder or Holders of Registrable Securities requesting registration pursuant to Section 2.4 (in the case of Section 2.4) unless the withdrawal is based upon material adverse information concerning the Company of which the Initiating Holders (in the case of Section 2.2) or the Holder or Holders of Registrable Securities requesting registration pursuant to Section 2.4 (in the case of Section 2.4) were not aware at the time of such request. If the Holders are required to pay the Registration Expenses, such expenses shall be borne by the holders of securities (including Registrable Securities) requesting such registration in proportion to the number of shares for which registration was requested. If the Company is required to pay the Registration Expenses of a withdrawn offering pursuant to clause (a) above, then the Holders shall not forfeit their rights pursuant to Section 2.2 or Section 2.4 to a demand registration. 2.6 OBLIGATIONS OF THE COMPANY. Whenever required to effect the registration of any Registrable Securities, the Company shall, as expeditiously as reasonably possible: (a) Prepare and file with the SEC a registration statement with respect to such Registrable Securities and use all reasonable best efforts to cause such registration statement to become effective, and, upon the request of the Holders of a majority of the Registrable Securities registered thereunder, keep such registration statement effective for up to 180 days or, if earlier, until the Holder or Holders have completed the distribution related thereto. (b) Prepare and file with the SEC such amendments and supplements to such registration statement and the prospectus used in connection with such registration statement as may be necessary to keep such registration statement effective and to comply with the provisions of the Securities Act with respect to the disposition of all securities covered by such registration statement. (c) Furnish to the Holders such number of copies of the registration statement (and each amendment and supplement thereto) and the prospectus, including a preliminary prospectus, in conformity with the requirements of the Securities Act, and such other documents as they may reasonably request in order to facilitate the disposition of Registrable Securities owned by them. (d) Use all reasonable best efforts to register and qualify the securities covered by such registration statement under such other securities or blue sky laws of such jurisdictions as shall be reasonably requested by the Holders, and do any and all other acts and things that may be necessary or desirable to enable the Holders to consummate the public sale or other disposition in such states of the Registrable Securities owned by the Holders, provided that the Company shall not be required in connection therewith or as a condition thereto to qualify to do business or to file a general consent to service of process in any such states or jurisdictions. 10 (e) In the event of any underwritten public offering, enter into and perform its obligations under an underwriting agreement, in usual and customary form, with the managing underwriter(s) of such offering. Each Holder participating in such underwriting shall also enter into and perform its obligations under such an agreement, provided that the Holders shall not be obligated to enter into any such underwriting agreement if the indemnification provisions thereof are more burdensome on such Holder than those contained herein or if they are being asked to make representations and warranties about the Company of any kind whatsoever except representations and warranties with respect to the identity of such Holder, such Holder's intended method of distribution, such Holder's good title to the Registrable Securities being sold, the absence of any encumbrances with respect to the Registrable Securities being sold, such Holder's authority to sell such Registrable Securities, or any other representations required by applicable law. (f) Notify each Holder of Registrable Securities covered by such registration statement at any time when a prospectus relating thereto is required to be delivered under the Securities Act of the happening of any event as a result of which the prospectus included in such registration statement, as then in effect, includes an untrue statement of a material fact or omits to state a material fact required to be stated therein or necessary to make the statements therein not misleading in the light of the circumstances then existing. (g) Furnish, at the request of a majority of the Holders participating in the registration, on the date that such Registrable Securities are delivered to the underwriters for sale, if such securities are being sold through underwriters, or, if such securities are not being sold through underwriters, on the date that the registration statement with respect to such securities becomes effective, (i) an opinion, dated as of such date, of the counsel representing the Company for the purposes of such registration, in form and substance as is customarily given to underwriters in an underwritten public offering and reasonably satisfactory to a majority in interest of the Holders requesting registration, addressed to the underwriters, if any, and to the Holders requesting registration of Registrable Securities and (ii) a letter dated as of such date, from the independent certified public accountants of the Company, in form and substance as is customarily given by independent certified public accountants to underwriters in an underwritten public offering and reasonably satisfactory to a majority in interest of the Holders requesting registration, addressed to the underwriters, if any, and if permitted by applicable accounting standards, to the Holders requesting registration of Registrable Securities. (h) As of the effective date of any registration statement relating thereto, list all Registrable Securities covered by such registration statement on each securities exchange on which similar securities issued by the Company are then listed, and if not so listed, so long as the Company meets the applicable listing standards, to be listed on the New York Stock Exchange or the Nasdaq National Market. (i) Provide and cause to be maintained a transfer agent and registrar for all Registrable Securities covered by each registration statement from and after a date not later than the effective date of such registration. (j) Keep the Holders advised in writing as to the initiation and progress of any registration under this Agreement, allow such Holders and their counsel to participate in the 11 preparation of the registration statement and to have access to all relevant corporate records, documents and information, and include in such registration statement such information as such Holders may reasonable request. (k) Cause representatives of the Company to participate in any "road show" or "road shows" reasonably requested by any underwriter of an underwritten or "best efforts" offering of any Registrable Securities. (l) Otherwise use its reasonable best efforts to comply with all applicable rules and regulations of the Commission, and, if required, make available to its security holders, as soon as reasonably practicable, an earnings statement covering the period of at least twelve (12) months, but not more than eighteen (18) months, beginning with the first full calendar month after the effective date of such registration statement, which earnings statement shall satisfy the provisions of Section 11(a) of the Securities Act and Rule 158 promulgated thereunder, and promptly furnish to each such seller of Registrable Securities a copy of any amendment or supplement to such registration statement or prospectus. 2.7 TERMINATION OF REGISTRATION RIGHTS. All registration rights granted to a Holder (other than any 1818 Fund Securityholder who is a Holder and CapitalSource) under this Section 2 shall terminate and be of no further force if (i) the Company has completed its Initial Offering and is subject to the provisions of the Exchange Act, (ii) such Holder (together with its affiliates, partners and former partners, members and former members) holds less than 1% of the Company's outstanding Common Stock (treating all shares of convertible Preferred Stock on an as converted basis), (iii) all Registrable Securities held by and issuable to such Holder (and its affiliates, partners and former partners, members and former members) may be sold under Rule 144 during any ninety (90) day period, and (iv) the Company's Common Stock is traded on a national exchange or the Nasdaq National Market. All registration rights granted to any 1818 Fund Securityholder and CapitalSource shall expire if all Registrable Securities held by and issuable to such person or entity may be sold under Rule 144 under the Securities Act during any single ninety (90) day period. 2.8 DELAY OF REGISTRATION; FURNISHING INFORMATION. (a) It shall be a condition precedent to the obligations of the Company to take any action pursuant to Section 2.2, 2.3 or 2.4 that the selling Holders shall furnish to the Company such information regarding themselves, the Registrable Securities held by them and the intended method of disposition of such securities as shall be required to effect the registration of their Registrable Securities; PROVIDED, that any such information shall be given or made by a selling Holder without representation or warranty of any kind whatsoever except representations with respect to the identity of such Holder, such Holder's Registrable Securities and such Holder's intended method of distribution or any other representations required by applicable law. (b) The Company shall have no obligation with respect to any registration requested pursuant to Section 2.2 or Section 2.4 if, due to the operation of subsection 2.2(b), the number of shares or the anticipated aggregate offering price of the Registrable Securities to be included in the registration does not equal or exceed the number of shares or the anticipated 12 aggregate offering price required to originally trigger the Company's obligation to initiate such registration as specified in Section 2.2 or Section 2.4, whichever is applicable. 2.9 INDEMNIFICATION. In the event any Registrable Securities are included in a registration statement under Sections 2.2, 2.3 or 2.4: (a) To the extent permitted by law, the Company will indemnify and hold harmless each Holder, the partners, members, agents, affiliates, officers, directors and legal counsel of each Holder, any underwriter (as defined in the Securities Act) for such Holder and each person, if any, who controls such Holder or underwriter within the meaning of the Securities Act or the Exchange Act, against any losses, claims, damages, or liabilities (joint or several) to which they may become subject under the Securities Act, the Exchange Act or other federal or state law, or otherwise, including, without limitation, the reasonable fees and expenses of legal counsel (including those incurred in connection with a claim for indemnity hereunder) insofar as such losses, claims, damages or liabilities (or actions in respect thereof) arise out of or are based upon any of the following statements, omissions or violations (collectively a "VIOLATION") by the Company: (i) any untrue statement or alleged untrue statement of a material fact contained in such registration statement, including any preliminary prospectus, final prospectus or summary prospectus contained therein or any amendments or supplements thereto, (ii) the omission or alleged omission to state therein a material fact required to be stated therein, or necessary to make the statements therein, in light of the circumstances in which they were made, not misleading, or (iii) any violation or alleged violation by the Company of the Securities Act, the Exchange Act, any state securities law or any rule or regulation promulgated under the Securities Act, the Exchange Act or any state securities law in connection with the offering covered by such registration statement; and the Company will reimburse each such Holder, partner, member, agent, affiliate, officer or director, underwriter or controlling person for any legal or other expenses reasonably incurred by them in connection with investigating or defending any such loss, claim, damage, liability or action; provided however, that the indemnity agreement contained in this Section 2.9(a) shall not apply to amounts paid in settlement of any such loss, claim, damage, liability or action if such settlement is effected without the consent of the Company, which consent shall not be unreasonably withheld, nor shall the Company be liable in any such case for any such loss, claim, damage, liability or action to the extent that it arises out of or is based upon a Violation which occurs in reliance upon and in conformity with written information furnished expressly for use in connection with such registration by such Holder, partner, member, officer, director, underwriter or controlling person of such Holder. (b) To the extent permitted by law, each Holder will, if Registrable Securities held by such Holder are included in the securities as to which such registration, qualifications or compliance is being effected, indemnify and hold harmless the Company, each of its directors, its officers, and legal counsel and each person, if any, who controls the Company within the meaning of the Securities Act, any underwriter and any other Holder selling securities under such registration statement or any of such other Holder's partners, directors or officers or any person who controls such Holder, against any losses, claims, damages or liabilities to which the Company or any such director, officer, controlling person, underwriter or other such Holder, or partner, director, officer or controlling person of such other Holder may become subject under the Securities Act, the Exchange Act or other federal or state law, insofar as such losses, claims, damages or liabilities (or actions in respect thereto) arise out of or are based upon any Violation, 13 in each case to the extent (and only to the extent) that such Violation occurs in reliance upon and in conformity with written information furnished by such Holder under an instrument duly executed by such Holder and stated to be specifically for use in connection with such registration; and each such Holder will reimburse any legal or other expenses reasonably incurred by the Company or any such director, officer, controlling person, underwriter or other Holder, or partner, officer, director or controlling person of such other Holder in connection with investigating or defending any such loss, claim, damage, liability or action if it is judicially determined that there was such a Violation; PROVIDED, HOWEVER, that the indemnity agreement contained in this Section 2.9(b) shall not apply to amounts paid in settlement of any such loss, claim, damage, liability or action if such settlement is effected without the consent of the Holder, which consent shall not be unreasonably withheld; PROVIDED FURTHER, that in no event shall the liability of any Holder hereunder and any indemnity under this Section 2.9(b) exceed the net proceeds from the offering received by such Holder. (c) Promptly after receipt by an indemnified party under this Section 2.9 of notice of the commencement of any action (including any governmental action), such indemnified party will, if a claim in respect thereof is to be made against any indemnifying party under this Section 2.9, deliver to the indemnifying party a written notice of the commencement thereof and the indemnifying party shall have the right to participate in, and, to the extent the indemnifying party so desires, jointly with any other indemnifying party similarly noticed, to assume the defense thereof with counsel mutually satisfactory to the parties; provided, however, that an indemnified party shall have the right to retain its own counsel, with the fees and expenses to be paid by the indemnifying party, if representation of such indemnified party by the counsel retained by the indemnifying party would be inappropriate due to actual or potential differing interests between such indemnified party and any other party represented by such counsel in such proceeding. The failure to deliver written notice to the indemnifying party within a reasonable time of the commencement of any such action, if materially prejudicial to its ability to defend such action, shall relieve such indemnifying party of any liability to the indemnified party under this Section 2.9, but the omission so to deliver written notice to the indemnifying party will not relieve it of any liability that it may have to any indemnified party otherwise than under this Section 2.9. Notwithstanding the foregoing, in any action or proceeding in which both the Company and an indemnified party is, or is reasonably likely to become, a party, such indemnified party shall have the right to employ separate counsel at the Company's expense and to control its own defense of such action or proceeding if, in the reasonable opinion of counsel to such indemnified party, (a) there are or may be legal defenses available to such indemnified party or to other indemnified parties that are different from or additional to those available to the Company or (b) any conflict or potential conflict exists between the Company and such indemnified party that would make such separate representation advisable; provided, however, that in no event shall the Company be required to pay fees and expenses under this Section 2.9 for more than one firm of attorneys in any jurisdiction in any one legal action or group of related legal actions. (e) If the indemnification provided for in this Section 2.9 is held by a court of competent jurisdiction to be unavailable to an indemnified party with respect to any losses, claims, damages or liabilities referred to herein, the indemnifying party, in lieu of indemnifying such indemnified party thereunder, shall to the extent permitted by applicable law contribute to the amount paid or payable by such indemnified party as a result of such loss, claim, damage or 14 liability in such proportion as is appropriate to reflect the relative fault of the indemnifying party on the one hand and of the indemnified party on the other in connection with the Violation(s) that resulted in such loss, claim, damage or liability, as well as any other relevant equitable considerations. The relative fault of the indemnifying party and of the indemnified party shall be determined by a court of law by reference to, among other things, whether the untrue or alleged untrue statement of a material fact or the omission to state a material fact relates to information supplied by the indemnifying party or by the indemnified party and the parties' relative intent, knowledge, access to information and opportunity to correct or prevent such statement or omission; provided, that in no event shall any contribution by a Holder hereunder exceed the proceeds from the offering received by such Holder; provided, further, that each Holder's obligations to contribute as provided in this Section 2.9(d) are several in proportion to the relative value of their respective Registrable Securities covered by such registration statement and not joint. (e) The obligations of the Company and Holders under this Section 2.9 shall survive completion of any offering of Registrable Securities in a registration statement. No Indemnifying Party, in the defense of any such claim or litigation, shall, except with the consent of each Indemnified Party, consent to entry of any judgment or enter into any settlement which does not include as an unconditional term thereof the giving by the claimant or plaintiff to such Indemnified Party of a release from all liability in respect to such claim or litigation. 2.10 ASSIGNMENT OF REGISTRATION RIGHTS. The rights to cause the Company to register Registrable Securities pursuant to this Section 2: (A) may be transferred or assigned by a Holder (other than 1818 Fund Securityholder who is a Holder) to a transferee or assignee of Registrable Securities which (i) is, with respect to a Holder, a stockholder, subsidiary, parent, general partner, limited partner, retired partner, member or former member or a liquidating trust for the benefit of any such entity, (ii) is a Holder's family member or trust for the benefit of an individual Holder, or (iii) acquires at least five hundred thousand (500,000) Shares (as adjusted for stock splits, combinations and similar events); and (B) shall be deemed to be transferred automatically with any Registrable Security that is transferred by an 1818 Fund Securityholder who is a Holder; PROVIDED, HOWEVER, that, in the case of clauses (A) and (B), (x) the transferor shall, upon such transfer, furnish to the Company written notice of the name and address of such transferee or assignee and the securities with respect to which such registration rights are being assigned and (y) such transferee shall agree to be subject to all restrictions set forth in this Agreement. 2.11 AMENDMENT OF REGISTRATION RIGHTS. Any provision of this Section 2 may be amended and the observance thereof may be waived (either generally or in a particular instance and either retroactively or prospectively), only with the written consent of (i) the Company, (ii) 1818 Fund and (iii) the Holders (excluding 1818 Fund) of a majority of the Registrable Securities then outstanding. Any amendment or waiver effected in accordance with this Section 2.11 shall be binding upon each Holder and the Company. By acceptance of any benefits under this Article II, Holders of Registrable Securities hereby agree to be bound by the provisions hereunder. 2.12 LIMITATION ON SUBSEQUENT REGISTRATION RIGHTS. After the date of this Agreement, the Company shall not, without the prior written consent of (i) 1818 Fund and 15 (ii) the Holders (excluding 1818 Fund) of a majority of the Registrable Securities then outstanding, enter into any agreement with any holder or prospective holder of any securities of the company that would grant such holder registration rights senior to or inconsistent with those granted to the Holders hereunder. 2.13 "MARKET STAND-OFF" AGREEMENT. If requested by the Company or the representative of the underwriters of Common Stock (or other securities) of the Company, each Holder shall not sell or otherwise transfer or dispose of any Common Stock (or other securities) of the Company held by such Holder (other than those included in the registration) for a period specified by the representative of the underwriters not to exceed one hundred eighty (180) days following the effective date of a registration statement of the Company filed under the Securities Act, PROVIDED that: (a) such agreement shall apply only to the Company's Initial Offering; and (b) all officers and directors of the Company and all employees of the Company who are holders of at least one percent (1%) of the Company's voting securities enter into similar agreements. The obligations described in this Section 2.13 shall not apply to a registration relating solely to employee benefit plans on Form S-1 or Form S-8 or similar forms that may be promulgated in the future, or a registration relating solely to a Commission Rule 145 transaction on Form S-4 or similar forms that may be promulgated in the future. The Company may impose stop-transfer instructions with respect to the shares of Common Stock (or other securities) subject to the foregoing restriction until the end of said one hundred eighty (180) day period. The Company shall use its best efforts to obtain agreements not to sell from all future holders of in excess of one percent (1%) of the Company's voting securities which are not less favorable to the Company that the foregoing. 2.14 RULE 144 REPORTING. With a view to making available to the Holders the benefits of certain rules and regulations of the SEC which may permit the sale of the Registrable Securities to the public without registration, the Company agrees to use its best efforts after the earlier of the consummation of (i) the PMR Merger and (ii) the Initial Offering to: (a) Make and keep public information available, as those terms are understood and defined in SEC Rule 144 or any similar or analogous rule promulgated under the Securities Act, at all times after the effective date of the first registration filed by the Company for an offering of its securities to the general public; (b) File with the SEC in a timely manner, all reports and other documents required of the Company under the Exchange Act; and (c) So long as a Holder owns any Registrable Securities, furnish to such Holder forthwith upon request: a written statement by the Company as to its compliance with the reporting requirements of said Rule 144 of the Securities Act, and of the Exchange Act (at any time after it has become subject to such reporting requirements); a copy of the most recent annual or quarterly report of the Company; and such other reports and documents as a Holder 16 may reasonably request in availing itself of any rule or regulation of the SEC allowing it to sell any such securities without registration. SECTION 3. COVENANTS OF THE COMPANY 3.1 BASIC FINANCIAL INFORMATION AND REPORTING. The Company will maintain true books and records of account in which full and correct entries will be made of all its business transactions pursuant to a system of accounting established and administered in accordance with generally accepted accounting principles consistently applied, and will set aside on its books all such proper accruals and reserves as shall be required under generally accepted accounting principles consistently applied. (a) So long as any Shares remain outstanding, and so long as an Investor (with its affiliates) owns not less than five hundred thousand (500,000) Shares (as adjusted for stock splits and combinations), the Company will furnish such Investor: (i) as soon as practicable after the end of each fiscal year, and in any event within ninety (90) days thereafter, a consolidated balance sheet of the Company, as at the end of such fiscal year, and a consolidated statement of income and a consolidated statement of cash flows of the Company, for such year, all prepared in accordance with generally accepted accounting principles consistently applied and setting forth in each case in comparative form the figures for the previous fiscal year, all in reasonable detail. Such financial statements shall be accompanied by a report and opinion thereon by independent public accountants of national standing selected by the Company's Board of Directors. (ii) as soon as practicable after the end of the first, second and third quarterly accounting periods in each fiscal year of the Company, and in any event within forty-five (45) days thereafter, a consolidated balance sheet of the Company as of the end of each such quarterly period, and a consolidated statement of income and a consolidated statement of cash flows of the Company for such period and for the current fiscal year to date, prepared in accordance with generally accepted accounting principles, with the exception that no notes need be attached to such statements and year-end audit adjustments may not have been made. (iii) (A) at least thirty (30) days prior to the beginning of each fiscal year an annual budget and operating plans for such fiscal year (and as soon as available, any subsequent revisions thereto), and (B) as soon as practicable after the end of each month, and in any event within twenty (20) days thereafter, a consolidated balance sheet of the Company as of the end of each such month, and a consolidated statement of income and a consolidated statement of cash flows of the Company for such month and for the current fiscal year to date, including a comparison to plan figures for such period, prepared in accordance with generally accepted accounting principles consistently applied, with the exception that no notes need be attached to such statements and year-end audit adjustments may not have been made. (b) So long as an Investor (with its affiliates) owns not less than five hundred thousand (500,000) Shares (as adjusted for stock splits and combinations), the right to receive Company information pursuant to this Section 3.1 may be transferred or assigned by such Investor to a transferee or assignee of Shares which (i) is a stockholder, subsidiary, parent, 17 general partner, limited partner, retired partner, member or retired member of such Investor, (ii) is such Investor's family member or trust for the benefit of such individual Investor, or (iii) holds at least five hundred thousand (500,000) Shares (as adjusted for stock splits and combinations) immediately following such transfer or assignment. 3.2 INSPECTION RIGHTS. So long as an Investor (with its affiliates) owns not less than five hundred thousand (500,000) Shares (as adjusted for stock splits and combinations), such Investor shall have the right to visit and inspect any of the properties of the Company or any of its subsidiaries, to discuss the affairs, finances and accounts of the Company or any of its subsidiaries with its officers, and to review such information as is reasonably requested all at such reasonable times and as often as may be reasonably requested; PROVIDED, HOWEVER, that the Company shall not be obligated under this Section 3.2 with respect to a competitor of the Company or with respect to information which the Board of Directors determines in good faith is confidential and should not, therefore, be disclosed. 3.3 OBSERVER RIGHTS. If not otherwise represented on the Board of Directors, either directly or by its affiliates, a representative of Clayton Associates, L.L.C., CGJR Health Care Services Private Equities, L.P. and FCA Venture Partners II, L.P. shall be entitled to attend all meetings of the Board of Directors in a nonvoting observer capacity; provided, however, that the Company reserves the right to exclude such representative from access to any material or meeting or portion thereof if the Company believes upon advice of counsel that such exclusion is reasonably necessary to preserve the attorney-client privilege, to protect highly confidential proprietary information or for other similar reasons. 3.4 CONFIDENTIALITY OF RECORDS. Each Investor agrees to use, and to use its best efforts to insure that its authorized representatives use, the same degree of care as such Investor uses to protect its own confidential information to keep confidential any information furnished to it which the Company identifies as being confidential or proprietary (so long as such information is not in the public domain), except that such Investor may disclose such proprietary or confidential information to any partner, subsidiary, member or parent of such Investor for the purpose of evaluating its investment in the Company as long as such partner, subsidiary, member or parent is advised of and agrees to be bound by the confidentiality provisions of this Section 3.4. 3.5 RESERVATION OF COMMON STOCK. The Company will at all times reserve and keep available, solely for issuance and delivery upon the conversion and exercise of the Shares, such number of shares of Common Stock as the Board of Directors shall in good faith determine will be issuable upon such conversion and exercise. 3.6 STOCK VESTING. All stock options and other stock equivalents issued after the date of this Agreement to employees, directors, consultants and other service providers ("Options") shall be issued pursuant to arrangements, contracts or plans which have been approved by the Company's Board of Directors. Unless otherwise approved by the Board (including the approval of at least one director designated by the Investors), all Options shall be subject to vesting as follows: twenty-five percent (25%) of such stock shall vest on each anniversary of the date of commencement of services. 18 3.7 RIGHT OF FIRST REFUSAL. The Company's Bylaws do not and shall not contain a right of first refusal in favor of the Company. 3.8 KEY MAN INSURANCE. The Company will use its best efforts to maintain in full force and effect term life insurance in the amount of two million ($2,000,000) dollars for Joey A. Jacobs, the Company's President and Chief Executive Officer, naming the Company as beneficiary. 3.9 PROPRIETARY INFORMATION AND INVENTIONS AGREEMENT. The Company shall require all key employees and consultants to execute and deliver a Proprietary Information and Inventions Agreement substantially in the form attached to the Series B Purchase Agreement. 3.10 INTERESTED TRANSACTIONS. The Company shall not, without the approval of a majority of the Board of Directors, with all disinterested Directors (so long as there is at least one such disinterested Director) voting and the approval of at least one of the Directors designated by the Investors, authorize or enter into any transactions with any director, stockholder or management employee, or such director's, stockholder's or employee's immediate family. 3.11 DIRECTORS' LIABILITY AND INDEMNIFICATION. The Company's Certificate of Incorporation and Bylaws shall provide (i) for elimination of the liability of directors to the maximum extent permitted by law and (ii) for indemnification of directors and officers for acts on behalf of the Company to the maximum extent permitted by law. 3.12 REAL PROPERTY HOLDING CORPORATION. The Company covenants that it will operate in a manner such that it will not become a "United States real property holding corporation" as that term is defined in Section 897(c)(2) of the Internal Revenue Code of 1986, as amended, and the regulations thereunder ("FIRPTA"). The Company agrees to make determinations as to its status as a USRPHC, and will file statements concerning those determinations with the Internal Revenue Service, in the manner and at the times required under Reg. ss. 1.897-2(h), or any supplementary or successor provision thereto. Within 30 days of a request from an Investor or any of its partners, the Company will inform the requesting party, in the manner set forth in Reg. ss. 1.897- 2(h)(1)(iv) or any supplementary or successor provision thereto, whether that party's interest in the Company constitutes a United States real property interest (within the meaning of Internal Revenue Code Section 897(c)(1) and the regulations thereunder) and whether the Company has provided to the Internal Revenue Service all required notices as to its USRPHC status. 3.13 TERMINATION OF COVENANTS. All covenants of the Company contained in Section 3 of this Agreement shall expire and terminate as to each Investor on the earlier of (i) the consummation of the PMR Merger and (ii) the effective date of the registration statement pertaining to the Initial Offering. SECTION 4. RIGHTS OF FIRST REFUSAL. 4.1 SUBSEQUENT OFFERINGS.So long as (A) an Investor (with its affiliates) owns not less than five hundred thousand (500,000) Shares (as adjusted for stock splits and combinations) or (B) with respect to any 1818 Fund Securityholder, until the earlier of (x) June 28, 2007 and (y) the date 1818 Fund owns less than 50% of any shares of Common Stock issued to 1818 Fund 19 pursuant to the 1818 Fund Purchase Agreement (assuming exercise of any warrants issued to 1818 Fund) (each of (A) and (B), a "RIGHTS INVESTOR"), such Rights Investor shall have a right of first refusal to purchase its pro rata share of all Equity Securities (as defined below) that the Company may, from time to time, propose to sell and issue after the date of this Agreement, other than the Equity Securities excluded by Section 4.6 hereof. Each Rights Investor's pro rata share is equal to a percentage determined by dividing (x) the number of shares of Common Stock (treating all Shares as if converted or exercised into Common Stock) which such Rights Investor is deemed to be a holder of immediately prior to the issuance of such Equity Securities to (y) the total number of shares of outstanding Common Stock (treating all Shares as if converted or exercised into Common Stock) immediately prior to the issuance of the Equity Securities. The term "EQUITY SECURITIES" shall mean (i) any Common Stock, Preferred Stock or other equity security of the Company, (ii) any security convertible, with or without consideration, into any Common Stock, Preferred Stock or other equity security (including any option to purchase such a convertible security), (iii) any equity security carrying any warrant or right to subscribe to or purchase any Common Stock, Preferred Stock or other equity security or (iv) any such warrant or right. 4.2 EXERCISE OF RIGHTS. If the Company proposes to issue any Equity Securities, it shall give each Rights Investor written notice of its intention, describing the Equity Securities, the price and the terms and conditions upon which the Company proposes to issue the same. Each Rights Investor shall have fifteen (15) days from the giving of such notice to agree to purchase its pro rata share of the Equity Securities for the price and upon the terms and conditions specified in the notice by giving written notice to the Company and stating therein the quantity of Equity Securities to be purchased. Notwithstanding the foregoing, the Company shall not be required to offer or sell such Equity Securities to any Rights Investor who would cause the Company to be in violation of applicable federal securities laws by virtue of such offer or sale. 4.3 ISSUANCE OF EQUITY SECURITIES. (a) If not all of the Rights Investors elect to purchase their pro rata share of the Equity Securities, then the Company shall promptly notify in writing the Rights Investors who do so elect and shall offer such Rights Investors the right to acquire such unsubscribed shares. The Rights Investors shall have fifteen (15) days after receipt of such notice to notify the Company of their election to purchase all or a portion thereof of the unsubscribed shares. If the Rights Investors exercise in full the rights of first refusal, the closing of the purchase of the Equity Securities subscribed for by the Rights Investors under this Section 4 shall be held at the executive office of the Company on the 30th day after the giving of the notice pursuant to Section 4.2 or Section 4.3, as the case may be, or at such other time and place the parties to the transaction may agree. If the Rights Investors fail to exercise in full the rights of first refusal, the Company shall have ninety (90) days thereafter to sell the Equity Securities in respect of which the Rights Investor's rights were not exercised, at a price per share no less than ninety five percent (95%) of the price per share specified in the notice delivered pursuant to Section 4.2 and upon other general terms and conditions materially no more favorable to the purchasers thereof than specified in the Company's notice to the Rights Investors pursuant to Section 4.2 hereof. If the Company has not sold such Equity Securities within ninety (90) days of the notice provided pursuant to Section 4.2, the Company shall not thereafter issue or sell any Equity Securities, without first offering such securities to the Rights Investors in the manner provided above. 20 (b) At the closing of the purchase of the Equity Securities subscribed for by the Rights Investors under this Section 4, the Company shall deliver certificates representing the Equity Securities, and such Equity Securities shall be issued free and clear of all liens and encumbrances (other than those attributable to actions by the purchasers thereof) and the Company shall so represent and warrant, and further represent and warrant (in addition to other customary representations and warranties) that such Equity Securities shall be, upon issuance thereof to the Rights Investors and after payment therefor, duly authorized, validly issued, fully paid and non-assessable. Each Rights Investor purchasing the Equity Securities shall deliver at the closing payment in full in immediately available funds for the Equity Securities purchased by him or it. At such closing all of the parties to the transaction shall execute such additional documents as are customary for transactions of this type. 4.4 TERMINATION OF RIGHTS OF FIRST REFUSAL. The rights of first refusal established by this Section 4 shall not apply to, and shall terminate (except with respect to the 1818 Fund Securityholders) upon the earlier of (i) the consummation of the PMR Merger and (ii) the effective date of the registration statement pertaining to the Company's Initial Offering. 4.5 TRANSFER OF RIGHTS OF FIRST REFUSAL. The rights of first refusal of each Rights Investor under this Section 4 may be transferred or assigned by a Rights Investor to a transferee or assignee of Shares which (i) is a stockholder, subsidiary, parent, general partner, limited partner, retired partner, member or former member of a Rights Investor, (ii) is a Rights Investor's family member or trust for the benefit of an individual Rights Investor, or (iii) holds at least five hundred thousand (500,000) Shares (as adjusted for stock splits and combinations) immediately following such transfer or assignment; provided, however, that any 1818 Fund Securityholder may also transfer or assign its rights of first refusal to any transferee or assignee of Shares. 4.6 EXCLUDED SECURITIES. The rights of first refusal established by this Section 4 shall have no application to any of the following Equity Securities: (a) Up to 2,691,996 shares of Common Stock (and/or options, warrants or other Common Stock purchase rights issued pursuant to such options, warrants or other rights) issued or to be issued to employees, officers or directors of, or consultants or advisors to the Company or any subsidiary, pursuant to stock purchase or stock option plans or other arrangements that are approved by the Board of Directors, including at least one member of the Board of Directors designated by the Investors; (b) any Equity Securities issued for consideration other than cash pursuant to a merger, consolidation, acquisition or similar business combination approved by the Board of Directors, including at least one member of the Board of Directors designated by the Investors; (c) shares of Common Stock issued in connection with any stock split, stock dividend or recapitalization by the Company; (d) warrants issued pursuant to the 1818 Fund Purchase Agreement; and (e) shares of Common Stock issued or issuable upon conversion or exercise of any shares of Preferred Stock or warrants issued pursuant to the Series A Agreement, the Series B Agreement or the 1818 Fund Purchase AGREEMENT. 21 SECTION 5. TERMINATION. 5.1 TERMINATION. Notwithstanding any provision contained in this Agreement to the contrary, all of the rights granted under this Agreement to the Investors (other than to the 1818 Fund Securityholders and CapitalSource, except as expressly set forth in the following proviso) shall terminate immediately upon the consummation and effectiveness of the PMR Merger; provided that for the avoidance of doubt, it is understood, acknowledged and agreed that all rights granted under this Agreement (other than the rights granted under Section 3 of this Agreement) to the 1818 Fund Securityholders and CapitalSource shall remain in full force and effect following the consummation and effectiveness of the PMR Merger. In addition, notwithstanding any provision contained in this Agreement to the contrary, neither the PMR Merger nor any other transaction in which the capital stock of the Company is exchanged, converted, reconstituted or reclassified for the capital stock of the Company or another company shall constitute an Initial Offering or shall result in the termination of the rights granted hereunder to the 1818 Fund Securityholders or CapitalSource (except for the rights granted to the 1818 Fund Securityholders and CapitalSource under Section 3 of this Agreement which shall terminate upon the consummation and effectiveness of the PMR Merger). SECTION 6. MISCELLANEOUS. 6.1 GOVERNING LAW. This Agreement shall be governed by and construed under the laws of the State of Delaware as applied to agreements among Delaware residents entered into and to be performed entirely within Delaware. 6.2 SURVIVAL. The representations, warranties, covenants, and agreements made herein shall survive any investigation made by any Holder and the closing of the transactions contemplated hereby. All statements as to factual matters contained in any certificate or other instrument delivered by or on behalf of the Company pursuant hereto in connection with the transactions contemplated hereby shall be deemed to be representations and warranties by the Company hereunder solely as of the date of such certificate or instrument. 6.3 SUCCESSORS AND ASSIGNS. Except as otherwise expressly provided herein, the provisions hereof shall inure to the benefit of, and be binding upon, the successors, assigns, heirs, executors, and administrators of the parties hereto and shall inure to the benefit of and be enforceable by each person who shall be a holder of Shares or Registrable Securities from time to time; provided, however, that prior to the receipt by the Company of adequate written notice of the transfer of any Shares or Registrable Securities specifying the full name and address of the transferee, the Company may deem and treat the person listed as the holder of such shares in its records as the absolute owner and holder of such shares for all purposes, including the payment of dividends or any redemption price. 22 6.4 SEVERABILITY. In case any provision of the 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. 6.5 AMENDMENT AND WAIVER. (a) Except as otherwise expressly provided, this Agreement may be amended or modified only upon the written consent of the (i) Company, (ii) 1818 Fund and the (iii) holders (other than the 1818 Fund) of a majority of the Registrable Securities. (b) Except as otherwise expressly provided, the obligations of the Company and the rights of the Holders under this Agreement may be waived only with the written consent of (i) 1818 Fund and (ii) the holders (other than the 1818 Fund) of a majority of the Registrable Securities. (c) Notwithstanding the foregoing, this Agreement may be amended with only the written consent of the Company and 1818 Fund to include additional purchasers of Shares as "INVESTORS," "HOLDERS" and parties hereto. 6.6 DELAYS OR OMISSIONS. It is agreed that no delay or omission to exercise any right, power, or remedy accruing to any Holder, upon any breach, default or noncompliance of the Company under this Agreement shall impair any such right, power, or remedy, nor shall it be construed to be a waiver of any such breach, default or noncompliance, or any acquiescence therein, or of any similar breach, default or noncompliance thereafter occurring. It is further agreed that any waiver, permit, consent, or approval of any kind or character on any Holder's part of any breach, default or noncompliance under the Agreement or any waiver on such Holder's part of any provisions or conditions of this Agreement must be in writing and shall be effective only to the extent specifically set forth in such writing. All remedies, either under this Agreement, by law, or otherwise afforded to Holders, shall be cumulative and not alternative. 6.7 NOTICES. All notices required or permitted hereunder shall be in writing and shall be deemed effectively given: (i) upon personal delivery to the party to be notified, (ii) when sent by confirmed telex or facsimile if sent during normal business hours of the recipient; if not, then on the next business day, (iii) five (5) days after having been sent by registered or certified mail, return receipt requested, postage prepaid, or (iv) one (1) day after deposit with a nationally recognized overnight courier, specifying next day delivery, with written verification of receipt. All communications shall be sent to the party to be notified at the address as set forth on the signature pages hereof or EXHIBIT A hereto or at such other address as such party may designate by ten (10) days advance written notice to the other parties hereto. 6.8 ATTORNEYS' FEES. In the event that any dispute among the parties to this Agreement should result in litigation, the prevailing party in such dispute shall be entitled to recover from the losing party all fees, costs and expenses of enforcing any right of such prevailing party under or with respect to this Agreement, including without limitation, such reasonable fees and expenses of attorneys and accountants, which shall include, without limitation, all fees, costs and expenses of appeals. 23 6.9 ENTIRE AGREEMENT. This Agreement, together with the exhibits hereto, is intended by the parties as a final expression of their agreement and intended to be a complete and exclusive statement of the agreement and understanding of the parties hereto in respect of the subject matter contained herein and therein. There are no restrictions, promises, representations, warranties or undertakings, other than those set forth herein or therein. This Agreement, together with the exhibits hereto, supersedes all prior agreements and understandings among the parties with respect to such subject matter, including, without limitation, the Prior Rights Agreement. 6.10 TITLES AND SUBTITLES. The titles of the sections and subsections of this Agreement are for convenience of reference only and are not to be considered in construing this Agreement. 6.11 COUNTERPARTS. This Agreement may be executed in any number of counterparts, each of which shall be an original, but all of which together shall constitute one instrument. [THIS SPACE INTENTIONALLY LEFT BLANK] 24 IN WITNESS WHEREOF, the parties hereto have executed this SECOND AMENDED AND RESTATED VOTING AGREEMENT as of the date first above written. COMPANY: PSYCHIATRIC SOLUTIONS, INC. By: /s/ Joey A. Jacobs -------------------------------------- Joey A. Jacobs Its: President INVESTORS: Name: Charles R.F. Treadway, MD ------------------------------------ (Print Investor's name) By: /s/ Charles R.F. Treadway, MD ------------------------------------ (Signature) Title: Chairman ----------------------------------- (if applicable) Name: South Park Venture Partners, L.P. ----------------------------------- (Print Investor's name) By: /s/ David S. Heer ------------------------------------- (Signature) Title: General Partner ----------------------------------- (if applicable) Name: South Pointe Venture Partners, L.P. ------------------------------------ (Print Investor's name) By: /s/ David S. Heer ------------------------------------- (Signature) Title: General Partner ----------------------------------- (if applicable) Name: Acacia Venture Partners, L.P. ------------------------------------ (Print Investor's name) By: /s/ David S. Heer ------------------------------------ (Signature) Title: General Partner ---------------------------------- (if applicable) CGJR HEALTHCARE SERVICES Name: CGJR HEALTHCARE SERVICES PRIVATE EQUITIES, LP CGJR II, L.P. CGJR/MF III, L.P. ----------------------------------- (Print Investor's name) By: CGJR CAPITAL MANAGEMENT, INC. AS GP OF ALL 3 By: /s/ Christopher Grant, Jr. ------------------------------------- (Signature) Title: President ---------------------------------- (if applicable) CLAYTON ASSOCIATES, LLC By: /s/ Bill F. Cook ------------------------------------- Prin. FCA VENTURE PARTNERS II, L.P. By: Clayton DC Ventures Capital Group, LLC General Partner By: /s/ Bill F. Cook ------------------------------------- Prin. By: /s/ Joey A. Jacobs ------------------------------------- Joey A. Jacobs FCA VENTURE PARTNERS I, L.P. BY DC INVESTMENTS, LLC ITS: GENERAL PARTNER By: /s/ Robert Crants ------------------------------------ Its: Managing Partner OAK INVESTMENT PARTNERS VII, LIMITED PARTNERSHIP By: /s/ Edward F. Glassmeyer ------------------------------------- Its: Managing Member of Oak Associates VII, LLC, the General Partner of Oak Investment Partners VII, Limited Partnership OAK VII AFFILIATES FUND, LIMITED PARTNERSHIP By: /s/ Edward F. Glassmeyer ------------------------------------- Its: Managing Member of Oak VII Affiliates, LLC, the General Partner of Oak VII Affiliates Fund, Limited Partnership THE 1818 MEZZANINE FUND II, L.P. BY: BROWN BROTHERS HARRIMAN & CO., ITS GENERAL PARTNER By: /s/ Joseph P. Donlan ------------------------------------ Name: Joseph P. Donlan Title: Managing Director KEY STOCKHOLDERS /s/ Charles R.F. Treadway, M.D. ----------------------------------------- (Signature) CAPITALSOURCE HOLDINGS LLC By: /s/ Keith D. Reuben -------------------------------------- Name: Keith D. Reuben Title: Director 25 EXHIBIT A SCHEDULE OF INVESTORS
SERIES A SERIES B STOCKHOLDERS PREFERRED STOCK PREFERRED STOCK ------------ --------------- --------------- Acacia Venture Partners, L.P. 4,124,000 1,395,732 CGJR Health Care Services Private Equities, L.P. 250,000 177,417 CGJR II, L.P. 160,000 57,251 CGJR/MF III, L.P. 90,000 32,400 FCA Venture Partners I, L.P. 400,000 33,600 FCA Venture Partners II, L.P. 0 1,604,200 Oak VII Affiliates Fund, Limited Partnership 110,250 34,758 Oak Investment Partners VII, Limited Partnership 4,389,750 1,383,976 South Park Venture Partners, L.P. 246,000 20,460 South Pointe Venture Partners, L.P. 0 2,542
NUMBER OF COMMON STOCKHOLDERS SHARES/OPTIONS ------------ ---------------- Clayton Associates, L.L.C. 1,126,841(1) K. Bryce DeHaven 1,026,441(1) Joey A. Jacobs 1,626,441 Douglas B. Lewis 1,048,441(1) Charles R. F. Treadway, M.D. 1,251,761 K. Bryce DeHaven also owns 3,000 shares of Series B Preferred Stock. Joey A. Jacobs also owns 8,000 shares of Series B Preferred Stock. Clayton Associates, LLC also owns 8,400 shares of Series B Preferred Stock. WARRANT HOLDERS WARRANTS --------------- ---------- CapitalSource Holdings LLC 180,379 The 1818 Mezzanine Fund II, L.P.. 1,502,140 - -------- (1) No Options. A-1 EX-99 9 ex7sc13d-psychiatric.txt EXHIBIT 7 EXHIBIT 7 --------- JOINT FILING AGREEMENT Pursuant to Rule 13d-1(k)(1)(iii) of Regulation 13D-G of the General Rules and Regulations of the Securities and Exchange Commission under the Securities Exchange Act of 1934, as amended, the undersigned agrees that the statement to which this Exhibit is attached is filed on behalf of them in the capacities set forth below. Dated: August 14, 2002 THE 1818 MEZZANINE FUND II, L.P. By: Brown Brothers Harriman & Co., General Partner By: /s/ Lawrence C. Tucker ------------------------------------ Name: Lawrence C. Tucker Title: Partner BROWN BROTHERS HARRIMAN & CO. By: /s/ Lawrence C. Tucker ------------------------------------ Name: Lawrence C. Tucker Title: Partner /s/ T. Michael Long ---------------------------------------- T. Michael Long /s/ Lawrence C. Tucker ---------------------------------------- Lawrence C. Tucker /s/ Robert R. Gould ---------------------------------------- Robert R. Gould /s/ Joseph P. Donlan ---------------------------------------- Joseph P. Donlan -----END PRIVACY-ENHANCED MESSAGE-----