-----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, ElkknyWoKXfHNP5MmDKkhp+taL9kFrl5xe6n3t1XYy18lEUfrufVLAu+L+spLa+g 0C2eFWdZAapN4sxoYzEXpg== 0000892569-00-000334.txt : 20000331 0000892569-00-000334.hdr.sgml : 20000331 ACCESSION NUMBER: 0000892569-00-000334 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 19991231 FILED AS OF DATE: 20000330 FILER: COMPANY DATA: COMPANY CONFORMED NAME: OPTIMUMCARE CORP /DE/ CENTRAL INDEX KEY: 0000820474 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-HOSPITALS [8060] IRS NUMBER: 330218003 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 001-17401 FILM NUMBER: 588920 BUSINESS ADDRESS: STREET 1: 30011 IVY GLENN DR STE 219 CITY: LAGUNA NIGUEL STATE: CA ZIP: 92677 BUSINESS PHONE: 7144951100 MAIL ADDRESS: STREET 1: 30011 IVY GLENN DR STREET 2: SUITE 219 CITY: LAGUNA MIGUEL STATE: CA ZIP: 92677 10-K 1 FORM 10-K YEAR ENDED DECEMBER 31, 1999 1 UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-K (Mark One) [X] Annual report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 (Fee Required) For the fiscal year ended December 31, 1999 or [ ] Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 (No Fee Required) For the transition period from _____________________ to_____________________ Commission File Number: 0-17401 OPTIMUMCARE CORPORATION - -------------------------------------------------------------------------------- (Exact name of registrant as specified in its charter) Delaware 33-0218003 - ------------------------------- ------------------- (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 30011 Ivy Glenn Drive, Suite 219 Laguna Niguel, California 92677 - ---------------------------------------- ------------------- (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: (949) 495-1100 Securities registered pursuant to Section 12(b) of the Act: Name of Each Exchange Title of Each Class on Which Registered - ------------------- --------------------- None None Securities registered pursuant to Section 12(g) of the Act: Common Stock, $.001 Par Value - -------------------------------------------------------------------------------- (Title of Class) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for, such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES [X] NO [ ] Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein and will not be contained to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. The aggregate market value of the voting stock held by non-affiliates of the Company on February 7, 2000 (4,716,743 shares of Common Stock) was $4,164,000 based on the average bid and asked price of the Company's voting stock on February 4, 2000.* The number of shares outstanding of each of the Company's classes of Common Stock, as of February 7, 2000 was: Common Stock, - 5,908,675 shares $.001 par value Documents Incorporated by Reference None. - ----------------- * This value is not intended to make any representation as to value or worth of the Company's shares of Common Stock. The number of shares held by non-affiliates of the Company has been calculated by subtracting shares held by controlling persons of the Company from the number of issued and outstanding shares of the Company. 2 PART I ITEM 1 - BUSINESS (a) General Development of Business OptimumCare Corporation (the "Company") was incorporated in California on November 25, 1986 and was reincorporated in Delaware on June 29, 1987. In mid-1987, the Company commenced the development and marketing of health care facility-based programs ("Programs") to be managed by the Company primarily for the treatment of depression and certain other mental health disorders ("PsychPrograms"), as well as programs for alcohol and drug abuse ("Treatment Programs"). After the Company obtains a contract for the establishment of one or more Programs at a host health care facility, the Company recruits and trains the staff needed to operate its programs. Typically, the host health care facility provides a specified number of beds for the Program, as well as all other support services required for the operation of the Program, including nursing, dietary, housekeeping, billing and other administrative functions. The Company recruits and trains the staff to operate the Program. The Company's staffing of a Program will usually include a medical director, a program director, a psychologist, a chief therapist and one or more counselors or social workers. Contracts are individually negotiated with the host health care facility and usually approximate 20 to 60 beds. Generally, the Company and the host health care facility negotiate a management fee which depends on the scope of services provided by the Company, number of beds, rates charged and reimbursements received by the facility. A fixed monthly or a per patient fee is received by the Company which averages $52,000 per month or $243 per inpatient day, and $56,000 per month or $126 per outpatient visit. The health care facility charges the patient on a daily basis in accordance with a fee schedule of prescribed rates, except where the insurer provides for payment which is limited to a maximum number of days per patient. In some cases, reimbursement of direct costs are also received. Certain contracts contain provisions which deny portions or all of the management fee should patient days be ultimately appealed and denied by the patient payor. As of February 7, 2000, the Company has eleven (11) Programs that are hosted by five (5) hospitals and two community mental health centers: one inpatient and one partial hospitalization PsychProgram at Huntington InterCommunity Hospital, D/B/A Humana Hospital Huntington Beach, Huntington Beach, California, one inpatient and one partial hospitalization PsychProgram at St. Francis Medical Center, Lynwood, California, one partial hospitalization PsychProgram at Sherman Oaks Hospital and Health Center, Sherman Oaks, California, one inpatient and one partial hospitalization PsychProgram at Mission Community Hospital, San Fernando, California, one partial hospitalization PsychProgram through Citrus Valley Medical Center, West Covina, California, one partial hospitalization PsychProgram at Friendship Community Mental Health Center, Phoenix, Arizona and one partial hospitalization PsychProgram at Rhema Behavioral Health Center, Houston, Texas. The Company also operates one partial hospitalization PsychProgram in Las Vegas, Nevada for which it is seeking its own license as a Community Mental Health Center (CMHC). 1 3 During January 1999, the Company was informed by the Healthcare Financing Administration (HCFA) that it "has been examining its process for approving new applications and final decisions have not yet been reached." The process has been extremely tedious and long. The Company has sent packages of further documentation to HCFA during 1999 and as recently as February 2000. The Company believes that HCFA is being extremely cautious in view of certain fraud incidences which were discovered in some of the Southern states. The Company is actively seeking the agency's approval, as it has two other locations (Long Beach, California and Portland, Oregon) where it has leased facilities for partial hospitalization programs. (b) Financial Information About Industry Segments The Company operates in one industry segment which is the development, marketing and operation of Programs. (c) Narrative Description of the Business (i) and (ii) Products OptimumCare's PsychPrograms ("PsychProgram") The PsychProgram is a medically-supervised psychiatric care program for certain types of mental health disorders that is offered on both an inpatient, partial hospitalization and outpatient basis. The PsychProgram is directed at assisting the patient to return to a normal life. The PsychProgram is designed to treat patients with neuroses and personality disorders; however, the Company's marketing focus is to attract patients who exhibit symptoms of depression. Patients suffering from depressive mental illness manifest, among other things, loss of interest in the world generally, loss of activity and capacity to love, sadness, hopelessness, fatigue, boredom, restlessness, loss of belief in personal future, anxiety and feelings of ill-at-ease. At the outset, a patient receives a physical examination and diagnostic testing to eliminate any physical illnesses which may evidence some symptoms of mental disorders. Each PsychProgram also includes individual and group therapy and a full daily regimen of activities including sessions for relaxation, assertiveness training, exercise and men's and women's sexual awareness. The Company estimates that the average stay for a patient in an inpatient PsychProgram is 7-10 days. OptimumCare's Partial Hospitalization Program ("Partial Hospitalization") Partial Hospitalization is a relatively new behavioral medicine outpatient product that provides daytime treatment programs that employ an integrated and individualized schedule of recognized psychiatric treatment modalities. Partial Hospitalization is a treatment approach developed as an alternative to inpatient treatment. It includes the major psychiatric evaluation and treatment modalities (both psychosocial and biological), which are usually found in a comprehensive psychiatric inpatient program. It is designed for voluntary patients with serious mental disorders who require intensive and multi-disciplinary treatment which cannot be provided in an outpatient setting. By offering a medically-supervised alternative to inpatient treatment, it provides a more flexible, less costly and less restrictive form of treatment. 2 4 Partial Hospitalization can be utilized by individuals who are mentally or emotionally impaired, but who are able to be maintained in the community at least part of each day, and present little risk of imminent danger to themselves or others. The Company believes that the benefits of partial hospitalization include: lessening the disruption of social, family, and community ties; allowing the patient to test new skills in a more natural environment than a hospital setting; providing a treatment milieu that fosters independence and self reliance; allowing daily feedback from the home environment thereby closely involving members of the patient's family or supportive environment in the treatment program; and providing flexibility in the number of treatment days per week thus allowing a patient to pursue other activities such as a shortening of the inpatient stay or preventing the need for full hospitalization. OptimumCare's Outpatient Services Outpatient Services is a component of a partial hospitalization program intended for patients with long-term, chronic conditions. Treatment must, at a minimum, be designed to reduce or control the patient=s psychiatric symptoms so as to prevent relapse requiring a higher level of care. For patients with long-term, chronic conditions, control of symptoms and maintenance of a functional level to avoid further deterioration or hospitalization is an acceptable expectation of improvement. "Improvement" in this context is measured by comparing the effect of continuing treatment versus discontinuing it. Meeting this criteria of improvement in patients with long-term, chronic conditions may be measured by gradually reducing the treatment and measuring the effect on the patient. Outpatient Services is a voluntary program. Patients attend up to a maximum of 10 hours a week, as prescribed by a psychiatrist, under the direct supervision of the multi disciplinary team. Treatment includes individual and group therapy with a range of activities geared toward the individual needs of each patient. Length of stay varies, depending on the needs of the individual. Outpatient Services provides a third level in the continuum of care that enables patients to enter an OptimumCare program at an appropriate level, then advance as their treatment progresses to a point where they feel confident, productive and able to experience life fully with minimal intervention. Expansion of Products The Company is seeking to expand the scope of psychological services it offers by enlarging the continuum of care it provides. The Company believes that it can more effectively market its services to managed care payors by increasing the scope of services it provides. Staffing The PsychProgram and Partial Hospitalization Programs are staffed by the Company with a medical director, a program manager, and in some cases, a psychologist, a chief therapist, and at least one counselor or social worker. The key staff members are the medical director and the program manager. The medical director is a licensed psychiatrist who is a staff member of the host health care facility and is engaged as an independent contractor charged with the responsibility for overseeing the administration of the Program from a medical/regulatory compliance viewpoint. In addition to the medical director who is responsible for administering the clinical aspects of the contract, the Company often engages co-medical directors in each community in which a Program is located. These co-medical directors are licensed psychiatrists or psychologists. They provide administrative assistance to a Program and represent it at various professional activities in the local community. The co-medical directors are compensated at a fixed monthly rate, depending on the amount of time they commit to supporting the Company's Programs. The Company's employees and contractors at each program are subject to approval and pre-employment screening by the host health care facility. The Company has not experienced any difficulty in locating qualified medical 3 5 directors from the hospital staff to affiliate with the Company's Programs. The program manager is a full time employee of the Company and usually has completed either a bachelor's or master's degree program in psychology or social work. Program managers are officed at their respective Program's facility. Contract Operations The Company provides a host health care facility with staff recruitment, a two-week pre-opening in-service nurse and hospital employee training program, program management, continuing education, community education, ongoing public relations and program quality assurance. The Company provides these training programs to the host health care facility at no charge. Typically, nursing, dietary, X-ray, laboratory, housekeeping, admissions and billing are the responsibility of the host health care facility. However, the Company has assumed some of the nursing and dietary aspects of the programs under certain contracts. The expanded scope of services has evolved from the desire of the host hospital to benefit from the Company's growing expertise in those functions. Existing contracts range from a period of one to five years and may be renewed for subsequent terms, of usually one year periods. In some cases, if the Company does not maintain a stipulated minimum average daily census for specified periods, the health care facility may terminate the contract on reasonable notice to the Company. Payment for Services Patients are screened by the host healthcare facility prior to admission. Screening procedures include verification of the existence and extent of insurance coverage. It is the host health care facility's responsibility to bill and collect the fees charged to the patient for all program services. The Company in turn bills the host health facility for the total patient days of service provided at the specified contract rate. Generally, the Company bills the host health care facility within five (5) days after the close of the month in which the services were rendered. Except in the cases where the contracts provide for specific hold backs for ultimately denied days, the majority of the contracts do not specifically provide that the Company shall bear any risk of non-payment by the host healthcare facility. However, industry practice dictates that the Company acknowledge that a certain percentage of the fees will be uncollected by the host health care facility. Thus, accommodations are expected to be made on a case-by-case basis with each host health care facility (except where there is an express contractual provision which governs this issue) to offset some portion of Program patients' bad debts experienced by the host health care facility. Regulatory Matters Many of the hospitals the Company contracts with have a large number of Medicare and Medicaid patients. It is unknown, whether in the future other contracts or programs will be dependent on a disproportionate amount of Medicare/Medicaid patients. However, the Company has negotiated with these hospitals whereby it is paid either a flat per diem rate or a per diem rate with a hold back for days ultimately denied. Thus, the Company is not directly dependent on Medicare or Medicaid for payment under its current contracts. The healthcare facilities rely upon payment from Medicare. The healthcare facilities are reimbursed their costs on an interim basis by Medicare fiscal intermediaries and the health care facilities submit annual cost reimbursement reports to the fiscal intermediaries for audit and payment reconciliation. The healthcare facilities seek reimbursement of the Company's management fees from these fiscal intermediaries as part of their overall payments from Medicare. 4 6 Pending legislative proposals revising Medicare/Medicaid reimbursement, if enacted, could have a negative effect on the revenues of the hospitals with which the Company contracts. Generally, the Company's agreements with hospitals require the Company and the hospital to renegotiate rates in the event of a significant legislative change which affects the compensation received by the hospital. It is uncertain at this time to what extent the Company's revenues may be impacted by changes to Medicare/Medicaid policies. Medicare is part of a federal health program which is administered by the U.S. Department of Health and Human Services which has established Health Care Financing Administration ("HCFA") to promulgate rules and regulations governing Medicare and the benefits associated therewith. All of the programs managed by the Company are treated as "provider based" programs by HCFA. This designation is important since partial hospitalization services are covered only when furnished by a "provider", i.e., a hospital or a CMHC. To the extent the partial hospitalization programs are not located in a site which is deemed by HCFA to be "provider-based", there would not be Medicare coverage for the services furnished at the site under Medicare's partial hospitalization benefit. In August, 1996, HCFA published criteria for determining when programs operated in facilities separate from a hospital's or CMHC's main premises may be deemed to be "provider-based" programs. The proper interpretation and application of these criteria are not entirely clear, and there is a risk that some of the sites managed by the Company could be found not to be "provider-based". Historically, CMHC's, unlike hospitals, were not surveyed by a Medicare contractor before being permitted to participate in the Medicare program. However, HCFA is now in the process of surveying all CMHC's to confirm that they meet all applicable Medicare conditions for furnishing partial hospitalization programs. Management believes that the CMHC which contracts with the Company is in compliance with the applicable requirements. Currently proposed legislation would implement a prospective payment system for all outpatient hospital services at some point during calendar year 2000. Proposed reimbursement rates have been determined, and their effect is not believed to be substantially different from what the hospitals are currently receiving as reimbursement. The amount paid by Medicare is the provider's reasonable cost less a "coinsurance" of twenty percent (20%) of the charges which is ordinarily to be paid by the patient. The coinsurance must be charged to the patient by the provider unless the patient is indigent. If the patient is indigent, or if the patient does not pay the provider the billed coinsurance amounts after reasonable collection efforts, the Medicare program has historically paid those amounts as allowable Medicare bad debts. The allowability of Medicare bad debts to providers for whom the Company manages partial hospitalization programs is significant since many of the patients in programs managed by the Company are indigent or have very limited resources. The reduction in allowable Medicare bad debts could have a materially adverse impact on Medicare reimbursement to the healthcare facilities for which the Company provides services and could further result in the restructuring or loss of contracts. To the extent that healthcare facilities which contract with the Company for management services suffer material losses in Medicare payments, there is a greater risk to the Company of non-payment, and a risk that the healthcare facilities will terminate or not renew their contracts with the Company. Thus, even though the Company does not submit claims to Medicare, it may be adversely affected by reductions in Medicare payments or other Medicare policies. 5 7 The Company anticipates that additional legislation may be adopted focusing on controlling health care costs and improving access to medical services for persons who are uninsured. Such legislation may also affect the amount which health care providers can charge for services. The Company believes that it is well positioned to respond to these changes and that it is likely that the Company will experience a lesser impact than other companies in the health care industry based on the fact that the Company has already focused its efforts on shortening patient stays and has historically provided a greater percentage of its services to Medicaid patients than have many of its competitors. Marketing The Company's marketing efforts are primarily directed toward increasing the number of management contracts by either the takeover of existing programs operated by others or the establishment of new Partial Hospitalization or PsychPrograms in geographically desirable areas. The Company believes that its ability to secure new contracts is based on its reputation as a quality provider coupled with its history of low length of patient stays resulting in less uncompensated care. Sales calls are primarily directed at health care facilities which may be experiencing a low or declining patient census and facilities in geographically desirable areas. After a contract is obtained, the Company prepares a detailed marketing development strategy aimed at attracting patients to the Programs. The program director for each PsychProgram at the host health care facility develops a local plan, in conjunction with the program community liaison. The strategy is to increase public awareness of the Program. All Programs share the goal that is consistent with the Company=s overall plan. The host hospital's administrative and medical staff are also encouraged to participate in community relations activities. Direct contact with psychiatrists, psychologists and other licensed professionals by the Company is emphasized because these individuals motivate potential patients to seek inpatient treatment for their mental health. Licensed Community Care Residential Facilities are also targeted because the residents are the ones who will require inpatient psychiatric treatment. The Company=s approach emphasizes the care giver to become involved in one on one communication with the professionals who will provide patient referrals. These professionals and care givers are invited to the Company sponsored community relations activities, speaker programs and continuing education seminars. (iii) Raw Materials Inapplicable. (iv) Patents and Trademarks The Company holds a federal service mark, Registration #1628745, for its trade name "OptimumCare". The Company has marketed its programs under the names "OptimumCare PsychProgram" and "OptimumCare Treatment Program". (v) Seasonality The Company acknowledges that patient volume appears to be susceptible to some seasonal variation. Census tends to substantially decrease near certain holidays, particularly during the fourth quarter, where individuals are more reluctant to hospitalize family members. 6 8 (vi) Working Capital Items The Company expects to experience an initial delay of up to 90 days in receipt of revenues after each Program is opened due to the normal processing time for the billing/payment cycle of the host health care facilities. However, this delay may vary, as in the case of the Company seeking CMHC licensure for its Las Vegas site, for which a healthcare provider/supplier application was filed with the Healthcare Financing Administration on May 29, 1998. (vii) Dependence on a Few Customers The Company presently has eleven (11) Programs operating through five (5) hospitals and two community mental health centers. If any of these Programs were terminated, or if any of the accounts receivable from these contracts were to become uncollectible, such events could have a material adverse effect on the Company. On October 27, 1999, the Company was informed by Friendship Community Mental Health Center (FCMHC) that it received an adjustment to its cost report for the period ending June 30, 1997 of approximately $300,000 for its Medicare program. The majority of the adjustment pertained to bad debts deducted by FCMHC disallowed by the Healthcare Financing Administration (HCFA). FCMHC is in the process of contesting HCFA=s findings. Since FCMHC does not have the funds to pay the audit assessment, HCFA is currently withholding all payments to FCMHC for patients serviced by the program. As a result, FCMHC has not been able to pay the Company=s management fees. The Company has written off approximately $300,000 in accounts receivable related to this event. The Company has a contract with FCMHC which expires April 2002. The Company intends to terminate this contract with FCMHC unless a favorable settlement between FCMHC and HCFA can be reached. During 1998, one contract termination also required a bad debt write-off of approximately $300,000. (viii) Backlog Inapplicable. (ix) Government Contracts Inapplicable. (x) Competition The Company competes with other health care management companies for contracts with acute care hospitals. Also, the Company's Programs will compete for patients with the programs of other hospitals and other health care facilities. The success of the Company's Programs is also dependent on its ability to establish relationships with sources of patient referrals. The Company's principal competitors include Charter Medical Corporation, Comprehensive Care Corporation, Mental Health Management, PMR Corporation and Horizon Health Services, most of which have greater financial and other resources and more experience than the Company. In addition, some health maintenance organizations ("HMOs") offer competing programs; however, the HMO-owned hospitals typically do not provide inpatient psychiatric services, nor coverage for these services. Most HMOs also do not provide programs for partial hospitalization or substance abuse, but often provide coverage for these programs, usually at a reduced rate. Other health care facilities offer comparable programs which compete with the Company's Programs in each service area. The Company believes, however, that in general its community awareness efforts are primarily effective within a ten (10) mile radius around the host hospital and that patients outside such radius are not directly affected by such advertising unless their personal physician has admitting privileges and recommends the Company's program at that host hospital. 7 9 The Company believes that the principal competitive factors in obtaining contracts with health care facilities are experience, reputation for quality programs, the availability of program support services and price. The primary competitive factors in attracting referral sources and patients are reputation, record of success, quality of care and location and scope of services offered by a host health care facility. The Company implements active promotional programs and believes it is competitive in attracting referral sources and patients based on these factors. (xi) Research and Development Inapplicable. (xii) Government Regulation and or Environmental Protection The health care industry is extensively regulated by federal, state and local governments. Regulations which affect the Company relate to controlling the growth of health care facilities, requiring licensure of the host health care facility, requiring certification of the Program at the host facility and controlling reimbursement for health care services. Licensure of facilities and certification of Programs are state requirements, while certification for Medicare is a federal requirement. Compliance with the licensure and certification requirements is monitored by annual on-site inspections by representatives of the licensing agencies. Loss of licensure or Medicare certification by a host facility could result in termination of such contract. Certificate of need ("CON") laws in some states require approval for capital expenditures in excess of certain threshold amounts, expansion of bed capacity or facilities, acquisition of medical equipment or institution of new services. If a CON must be obtained, it may take up to 12 months to do so, and in some instances longer, depending upon the state involved and whether the application is contested by a competitor or the state agency. CON's usually are issued for a specified maximum expenditure and require implementation of the proposed improvement within a specified period of time. Certain states, including California, Texas, Utah, Colorado and Arizona, have enacted legislation repealing CON requirements for the construction of new health care facilities, the expansion of existing facilities and the institution of new services. Some states have enacted or have under legislative consideration "sunset" provisions which require the review, modification or deletion of these statutes when no longer needed. The Company is unable to predict whether such legislative proposals will be enacted but believes that the elimination of CON requirements positively impacts its business. The Joint Commission on the Accreditation of Healthcare Organizations ("JCAHO"), at a facility's request, will participate in the periodic surveys which are conducted by state and local health agencies to ensure continuous compliance with all licensing requirements by health care facilities. JCAHO accreditation satisfies certain of the certification requirements for participation in the Medicare and Medicaid programs. A facility found to comply substantially with JCAHO standards receives accreditation. A patient's choice of a treatment facility may be affected by JCAHO accreditation considerations because most third-party payers limit coverage to services provided by an accredited facility. All of the hospitals currently under contract with the Company have received JCAHO accreditation. The laws of various states in which the Company may choose to operate, including California, generally prevent corporations from engaging in the practice of medicine. These laws (e.g., Section 2052 of the California Business and Professions Code), as well as applicable case law, were enacted 8 10 to protect the public from the rendering of unnecessary medical or other services for treatment of the ill. Although the Company has not obtained a legal opinion, it believes that the establishment and operation of Programs will not cause it to be engaged in the "practice of medicine" as that term is used in such laws and regulations. These laws and regulations are subject to interpretation and, accordingly, the issue is not free from doubt. Since the Company has not sought or obtained any rulings, there can be no assurance that state authorities or courts will not determine that the Company is engaged in the unauthorized practice of medicine. If such a determination is made and is not overturned, the Company would have to terminate its operations in that state. The Company's medical directors are engaged to provide administrative services, including but not limited to planning the clinical program, supervising the clinical staff, establishing standards of professional care, and advising the Company and staff on questions of policy. The co-medical directors assist the medical directors in performing their duties. Although the Company has not obtained a legal opinion, it believes that the proposed agreements between the Company and its medical and co-medical directors do not violate any fee-sharing prohibitions. The federal prohibition, as it relates to the Medicare program, is found at 42 U.S.C. 1320a-7b. Such prohibitions are found in Section 650 of the California Business and Professional Code and Section 445 of the California Health and Safety Code, as well as comparable statutes in other states. However, future judicial, legislative or administrative interpretations of these arrangements could prohibit the Company from hiring professionals which could have a materially adverse effect on the Company. Given the recent political mandate for health care reform, it appears likely that health care cost containment will occur. However, legislation has begun to recognize the need for placing mental health illness on par with other physical ailments. For example, federal legislation effective in 1998, (the Kennedy-Kassebaum bill), mandates parity with other reimbursable medical services for those who receive behavioral health care. This law raised the lifetime cap from the current $50,000 level to $1 million. The Company is practiced in administrating "managed care type" programs and is familiar with the pressures of improving productivity and reducing costs. (xiii) Employees As of February 7, 2000, the Company employed approximately 78 persons full-time and 39 persons part-time. Those figures do not include physicians and psychiatrists who are medical directors of the Company's Programs and not employees. (d) Financial Information About Foreign and Domestic Operations and Export Sales Inapplicable. ITEM 2 - PROPERTIES The Company maintains its corporate offices in an approximately 1,277-square-foot suite of executive offices in Laguna Niguel, California, under a lease agreement providing for a monthly base rent of $2,010 which expires June 30, 2000. The Company leases additional satellite corporate offices in Culver City and Venice, California. The lease agreement for Culver City, California provides for a monthly base rent of $3,072 and expires November 30, 2001. The lease agreement for Venice, California provides for a monthly base rent of $2,800 and is on a month-to-month basis. The Company also maintains an office in Mission Hills, California to service potential incoming patient inquiries under a lease agreement providing for a monthly base rent of $1,139 which expires October 31, 2000. The Company believes that this office space is adequate for its reasonably foreseeable needs. It is expected that the expiring leases will be renewed on similar terms. 9 11 The Company leases space under five separate lease agreements for the operation of its outpatient partial hospitalization programs. One agreement is between the Lessor and the Community Mental Health Center. However, the Company is obligated to pay the lease costs for the program, under its contract with the facility which expires November 30, 2003. The remaining agreements expire June 30, 2000, September 30, 2000, September 30, 2000 and August 14, 2002 respectively. Aggregate monthly payments total $22,987 of which $5,474 is fully reimbursed through a sublease with a host hospital. It is expected that the expiring leases and subleases will be renewed on similar terms. ITEM 3 - LEGAL PROCEEDINGS Inapplicable. ITEM 4 - SUBMISSION OF MATTERS TO VOTE OF SECURITY HOLDERS Inapplicable. 10 12 PART II ITEM 5 - MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED SECURITY HOLDER MATTERS (a) Market Information The Company's common stock is currently quoted on the over the counter "OTC" electronic bulletin board under the symbol OPMC. High Bid Low Bid -------- ------- 1999: Fourth Quarter 7/8 1/2 Third Quarter 59/64 3/4 Second Quarter 51/64 1/2 First Quarter 59/64 21/32 1998: Fourth Quarter 59/64 23/32 Third Quarter 63/64 23/32 Second Quarter 1 25/32 First Quarter 1 5/16 11/16 The listed prices represent inter-dealer prices, without retail mark-up, mark-down or commission and may not necessarily represent actual transactions. (b) Holders The approximate number of holders of record each class of the Company's common equity securities as of the close of business on February 7, 2000 is set forth below: Approximate Title of Class Number of Record Holders - ----------------------------- ------------------------ Common Stock, $.001 par value 225 (c) Dividends The Company has not paid or declared cash dividends on its Common Stock. The Company does not anticipate the payment of cash dividends on its common stock in the foreseeable future. The transfer agent for the Company's common stock is American Stock Transfer & Trust Company, New York, New York. 11 13 ITEM 6 - SELECTED FINANCIAL DATA The following selected financial data should be read in conjunction with the Financial Statements and Notes thereto of the Company included elsewhere herein, and such data should be read with "Management's Discussion and Analysis of Financial Condition and Results of Operations." The data at December 31, 1999 and December 31, 1998 and for each of the fiscal years in the three year period ended December 31, 1999 are derived from the Company's Financial Statements for such years which were audited by Lesley, Thomas, Schwarz & Postma, Inc. for the period ended December 31, 1999 and audited by Ernst & Young, LLP for the years ended December 31, 1998 and 1997, which Financial Statements are included elsewhere herein. A 20% stock dividend was declared by the Board of Directors on August 14, 1996 for stockholders of record on October 1, 1996. The stock dividend was issued on October 18, 1996. Per share amounts for all periods presented have been restated to reflect the stock dividend. STATEMENT OF OPERATIONS INFORMATION YEAR ENDED DECEMBER 31
1999 1998 1997 1996 1995 ----------- ----------- ----------- ----------- ---------- NET REVENUES $10,553,427 $11,409,690 $12,089,398 $10,676,237 $6,027,122 NET INCOME 365,798 377,133 454,350 876,716 2,070 BASIC EARNINGS* PER SHARE OF COMMON STOCK .06 .06 .07 .14 .00 DILUTED EARNINGS* PER SHARE OF COMMON STOCK .06 .06 .06 .13 .00 WEIGHTED NUMBER OF SHARES OUTSTANDING 5,910,939 6,567,280 6,870,049 6,237,751 5,892,824 TOTAL DILUTED SHARES 6,028,496 6,699,648 7,194,872 6,677,156 6,388,570 CASH DIVIDENDS PER COMMON SHARE 0 0 0 0 0
BALANCE SHEET INFORMATION AS OF DECEMBER 31
1999 1998 1997 1996 1995 ----------- ----------- ----------- ----------- ---------- TOTAL ASSETS $3,462,345 $3,154,744 $3,953,241 $3,980,307 $2,059,537 CURRENT ASSETS 3,115,702 2,652,044 3,213,626 3,518,003 1,731,290 CURRENT LIABILITIES 415,182 429,375 679,774 1,244,909 381,531 NET WORKING CAPITAL 2,700,520 2,222,669 2,533,852 2,273,094 1,349,759 LONG-TERM OBLIGATIONS 0 0 0 0 166,000
- ------------------ * Earnings per share for all periods prior to 1997 have been restated to conform with the requirements of FASB statement No.128, "Earnings Per Share". 12 14 ITEM 7 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Safe harbor statements under the Private Securities Litigation Reform Act of 1995 The statements in this Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations and elsewhere in this Form 10-K are forward-looking in time and involve risks and uncertainties, including the risks associated with plans, the effect of changing economic and competitive conditions, government regulation which may affect facilities, licensing, healthcare reform which may affect payment amounts and timing, availability of sufficient working capital, Program development efforts and timing and market acceptance of new Programs which may affect future sales growth and/or costs of operations. (a) Liquidity and Capital Resources At fiscal year end 1999 and 1998, the Company's working capital was $2,700,520 and $2,222,669 respectively. The increase in working capital for the year is primarily due to the Company=s net income. Much of this income is in accounts receivable. There has been an increase in the Company=s accounts receivable balances among periods, particularly with two programs licensed through one hospital. During 1999, this hospital paid its management fees in approximately 30 days longer time than it did in 1998. The Company believes this was principally due to a computer conversion by the hospital during 1999 and is not indicative of an ultimate collection problem. The nature of the Company's business does require significant working capital to fund operations of its programs as well as to fund corporate expenditures until receivables can be collected. Moreover, because each of the existing contracts represents a significant portion of the Company's business, the cancellation of any one contract or the inability to collect any of the accounts receivable could materially and adversely affect the Company's liquidity. Despite the write-off of approximately $300,000 pertaining to one contract, the company has preserved its working capital. On October 27, 1999, the Company was informed by Friendship Community Mental Health Center (FCMHC) that it received an adjustment to its cost report for the period ending June 30, 1997 of approximately $300,000 for its Medicare program. The majority of the adjustment pertained to bad debts deducted by FCMHC disallowed by the Healthcare Financing Administration (HCFA). FCMHC is in the process of contesting HCFA=s findings. Since FCMHC does not have the funds to pay the audit assessment, HCFA is currently withholding all payments to FCMHC for patients serviced by the program. As a result, FCMHC has not been able to pay the Company=s management fees. The Company has written off approximately $300,000 in accounts receivable related to this event. The Company has a contract with FCMHC which expires April 2002. The Company intends to terminate this contract with FCMHC unless a favorable settlement between FCMHC and HCFA can be reached. Cash flows from operations were $150,990 for the year ended December 31, 1999, resulting from net income partially offset by an increase in accounts receivable. Cash used in investing activities was $12,395 for the year ended December 31, 1999. Funds used in 1999 were for purchases of office equipment. The cash used in financing activities was $44,004 for the year ended December 31, 1999. Funds used during 1999 were for the purchase of 50,000 shares of treasury stock subsequently retired. The Company has a line of credit which expires May 1, 2000. The maximum indebtedness of the line is $1,500,000. Amounts allowable for draw are based on 75% of certain qualified accounts receivable. As of February 7, 2000, approximately $1,310,000 is available for future draws on the line of credit agreement. The Company's principal sources of liquidity for the fiscal year 2000 are cash on hand, accounts receivable, the line of credit with a bank and continuing revenues from programs. (b) Results of Operations FISCAL YEAR 1999 COMPARED TO FISCAL YEAR 1998. The Company operated eleven (11) programs during the year ended December 31, 1999 and thirteen (13) programs during the year ended December 31, 1998. As of February 7, 2000, the Company currently has three inpatient and 13 15 eight partial hospitalization programs. Generally, the size and profit potential of inpatient programs are greater than partial hospitalization programs. Net revenues were $10,553,427 and $11,409,690 for the years ended December 31, 1999 and 1998, respectively. The decrease is due to changes in the management fee agreements between the Company and two hospitals, as well as, a decrease in the number of operating programs. Cost of services provided were $8,202,445 and $8,977,538 for the years ended December 31, 1999 and 1998. This decrease is due to changes in the services provided between the Company and two hospitals, as well as, a decrease in the number of operating programs. The provision for uncollectible accounts remained stable among years. Selling general and administrative expenses have decreased slightly from the prior year. This was due to lower legal fees in 1999 over 1998, incurred in connection with protecting the Company=s trade name against use by an East Coast healthcare provider, during 1998. The Company's income taxes have increased in 1999 over 1998 due to tax write-offs of bad debts in 1998 pertaining to receivables which were reserved and expensed in 1997 for financial statement purposes. Net income was $365,798 and $377,133 for the years ended December 31, 1999 and 1998, respectively. The decrease was primarily attributable to lower revenues, partially offset by a decrease in cost of services provided. The Company has recently restructured many of its contracts with its host hospitals. Most contracts now provide for fixed monthly management fees, which although are based on census levels in theory, should not materially vary unless census significantly changes. The modifications have and will continue to reduce the Company=s revenues in 2000. However, many of the host hospitals have agreed to assume some of the services (primarily nursing) which the Company has historically provided. As a result, the Company=s cost of services provided should also decrease in 2000. The Company expects to achieve an expansion in the number of operational programs in 2000. Sites in Long Beach, California and Portland, Oregon have been retained for potential partial hospitalization programs. Marketing plans for expanding the volume of the business by obtaining new contracts with host hospitals and community mental health centers for programs also exist. However, it is uncertain at this time, to what extent the Company's fixed costs will be impacted by expansion. Due to the Company's dependence on a relatively small customer base presently consisting of five hospitals and two community mental health centers, the loss of any of its customers could have a significant adverse effect on the Company's operations. Hence, there is a special emphasis paragraph in the report of the Company's independent auditors of the financial statements for the fiscal year ended December 31, 1999. The Company upgraded its general ledger accounting system to be year 2000 compliant effective January 1, 1999. The cost of addressing the year 2000 issues approximated $2,500 and was not material to the Company=s financial position, operating results or cash flows. However, it does appear that the year 2000 was a major concern for the Company=s host hospitals who had to implement new computer systems to accommodate the year 2000. The trickle down effect of this situation has delayed payments to the Company from one hospital hosting two programs previously discussed. However, the Company believes that this is a temporary cash flow delay and has sufficient resources to avoid liquidity impairment. FISCAL YEAR 1998 COMPARED TO FISCAL YEAR 1997. The Company operated thirteen (13) programs during the year ended December 31, 1998 and twelve (12) programs during the year ended December 31, 1997. As of February 15, 1999, the Company had ten (10) operating programs. These were composed of three inpatient and seven partial hospitalization programs. Generally, the size and profit potential of inpatient programs are greater than partial hospitalization programs. Net revenues were $11,409,690 and $12,089,398 for the years ended December 31, 1998 and 1997, respectively. This decrease was 14 16 due to a greater number of programs generating revenue for a longer period of time in 1997 versus 1998. This was particularly the case with two partial hospitalization programs, one of which was consolidated into another program during the second quarter of 1998. The other program operated, but did not generate revenues during 1998. This was due to the Company=s inability to find a host hospital for this location. During 1997, this program operated and generated revenue for a portion of that year. Cost of services provided were $8,977,538 and $8,894,987 for the years ended December 31, 1998 and 1997. Costs remained relatively stable in the aggregate among years. However, increases in wage, insurance and benefit expense at certain individual programs occurred, which were offset by significant cost reductions that were achieved from the consolidation of two partial hospitalization programs which occurred during the second quarter of 1998. The provision for uncollectible accounts decreased from the prior year primarily due to the write off of receivables generated an alliance with one entity, which was terminated during the first quarter of 1998. Selling general and administrative expenses decreased from the prior year. This was due to lower executive bonus compensation earned in 1998 versus 1997 based on the Company=s interim profitability. The decrease was also due to the change in the manner in which the Company records its workers compensation insurance costs. During 1998, these costs were directly allocated to its individual programs. This occurred due to a change in the reporting requirements of the carrier, which necessitated the Company to be classification specific among employees, and the growing magnitude of these costs. During 1997, these costs were treated as general corporate overhead. The Company recorded a charge to earnings for the unamortized balance of goodwill during the fourth quarter of 1997 of $135,255 associated with the purchase of the interest in the LLC. This decision was due to the LLC=s insignificant revenues, net losses and negative cash flow. The LLC was inactive during 1998 and has not resumed operations. The Company's income taxes have remained relatively stable among years. Net income was $377,133 and $454,350 for the years ended December 31, 1998 and 1997, respectively. The decrease was primarily attributable to lower revenues, partially offset by a decrease in bad debts, general and administrative costs and the absence of any goodwill impairment. ITEM 7A - QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK Immaterial. 15 17 ITEM 8 - FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA OPTIMUMCARE CORPORATION INDEX TO FINANCIAL STATEMENTS AND SCHEDULES Page Number --------------- Reports of Independent Auditors F-1 through F-2 Consolidated Balance Sheets as of December 31, F-3 through F-4 1999 and December 31, 1998 Consolidated Statements of Income for the years ended December 31, 1999, 1998 and 1997 F-5 Consolidated Statements of Stockholders' Equity for the years ended December 31, 1999, 1998 and 1997 F-6 Consolidated Statements of Cash Flows for the year ended December 31, 1999, 1998 and 1997 F-7 through F-8 Notes to Consolidated Financial Statements F-9 through F-18 Financial Statement Schedule F-19 through F-21 ITEM 9 - CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE On January 17, 2000, the Registrant determined that the firm of Ernst & Young LLP would be dismissed as the Registrant's principal accountant and would not be engaged to conduct the audit of the Registrant's financial statements for the fiscal year ended December 31, 1999. Ernst & Young LLP's reports on the financial statements of the Registrant for the past two years did not contain any adverse opinion or disclaimer of opinion, nor were they qualified as to uncertainty, audit scope, or accounting principles. In connection with the audits of the Registrant's financial statements for each of the two years ended December 31, 1998, and in the subsequent interim period through January 17, 2000, there were no disagreements between the Registrant and Ernst & Young LLP, on any matter of accounting principles or practices, financial statement disclosure, or audit scope or procedures, which, if not resolved to the satisfaction of Ernst & Young LLP, would have caused Ernst & Young LLP to make a reference to the subject matter in their report. The decision to change accountants was not approved by the board of directors of the Registrant. On January 17, 2000, the Registrant engaged Lesley, Thomas, Schwartz & Postma, Inc. as its principal accountant to audit its financial statements for the year ended December 31, 1999. During the Registrant's two most recent fiscal years, the Registrant has not consulted with Lesley, Thomas, Schwartz & Postma, Inc. on the application of accounting principles to a specified transaction or the type of audit opinion that might be rendered on the Registrant's financial statements. 16 18 PART III ITEM 10 - DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT (a) and (b) Identification of Directors and Executive Officers The directors and executive officers of the Company are:
NAME AGE POSITION - ---- --- -------- Edward A. Johnson 54 Chief Executive Officer, Principal Financial Officer, Secretary and Chairman of the Board Mulumebet G. Michael 51 Director, President and Chief Operating Officer Gary L. Dreher 53 Director Michael S. Callison 61 Director Jon E. Jenett 47 Director
Each director serves for a term of one year or until his successor has been elected and qualified. Each executive officer serves at the pleasure of the Board of Directors. Directors do not receive any director's fees or other compensation for their services, as such, but receive reimbursement for their expenses in attending meetings of the Board of Directors. (c) Identification of Certain Significant Employees Inapplicable. (d) Family Relationships Inapplicable. (e) Business Experience Edward A. Johnson - Chairman & CEO Mr. Johnson has spent almost his entire professional career in behavioral healthcare services and co-founded OptimumCare in 1986. As Chief Executive Officer, Mr. Johnson has overall responsibility for developing strategic program direction with the firm=s current and future healthcare providers at hospitals, medical centers and community care centers. He also monitors and evaluates trends shaping the healthcare industry that will impact the Company. In response, from this larger perspective, he fashions policies, procedures and systems to maximize patient service while enhancing profitability for OptimumCare and value for its shareholders. Mr. Johnson received an M.S. degree in psychology and a B.A. degree in business from Colorado State College. He is also licensed in California as a Marriage and Family Counselor. 17 19 Mulumebet G. Michael - President, COO & Board Member Ms. Michael joined OptimumCare in 1993 as a Program Administrator, advanced to Executive Vice President and COO in 1997, and was named President and a member of the Board of Directors in June 1998. Ms. Michael=s extensive experience both as a registered nurse and in behavioral healthcare management over a sixteen year career has provided superb insight, vision and knowledge, ensuring the best behavioral health practices are incorporated into each OptimumCare program. She manages the Company=s staff of more than 150 professionals and support personnel. Ms. Michael completed a four-year nursing school curriculum leading to her being a licensed nurse (RN) in three countries: America, Canada and Ethiopia. She also completed a three-year advanced hospital management program with the British Columbia Institute of Technology in Canada. Gary L. Dreher - Director Mr. Dreher was elected to the Board of Directors during September 1993. He received his B.S. degree in Microbiology and Lab Technology from California State University in 1971. He is President, Chief Executive Officer and a Director of AMDL, an inventor and marketer of state-of-the-art diagnostic kits. AMDL is a public company traded on the OTC - Electronic Bulletin Board. Prior to this, Mr. Dreher was President of Medical Market International, a marketing and management services company he co-founded. Mr. Dreher also served as Vice President of International Sales for Apotex Scientific, an international distributor network for Esoteric Diagnostic Tests, from 1992 to 1996. Mr. Dreher has 29 years experience in the healthcare industry. Michael Callison - Director Mr. Callison was elected to the Board of Directors in September 1993. From 1990 to 1999, he was responsible for sales and business development, as well as seeking out and nurturing relationships with strategic alliance partners to help the Company expand its services and coverage area. His 40 years of healthcare experience began while he attended college and worked as a psychiatric technician at a Washington state veteran=s hospital. Thereafter, he held positions of increasing responsibility primarily in sales and marketing with Pfizer Labs, Borg Warner Healthcare and Hill-rom, a hospital architectural and furnishing company. Mr. Callison received his B.A. degree in Economics from the University of Puget Sound. Jon E. Jenett - Director Mr. Jenett was elected to the Board of Directors during December 1995. Mr. Jenett is an Independent Consultant specializing in startups and high growth companies. From October 1998 to April 1999, Mr. Jenett served as President and Chief Financial Officer of M4 Labs, Inc., which sells a suite of software and hardware products to manage video and multimedia in networked environments, including cellular and the Internet. From 1990 to 1998, Mr. Jenett served as Chief Financial Officer of Mission Electronics Corporation, a wholesale broker of electronic components. From 1981-1990, he was a partner of Investment Group of Santa Barbara, an investment fund specializing in small public and private companies. Mr. Jenett received his B.A. degree from Harvard College and his M.B.A from Stanford Business School. Section 16(a) Beneficial Ownership Reporting Compliance No director, officer or beneficial owner of ten percent (10%) or more of the Company's common stock failed to file on a timely basis reports required by Section 16(a) of the Securities Exchange Act of 1934 during the most recent fiscal year or prior fiscal year as disclosed in Forms 3 and 4 amendments thereto furnished to the Company pursuant to Section 240.16a-3 during its most recent fiscal year and Form 5 and amendments thereto furnished to the Company with respect to its most recent fiscal year and any written representation that no Form 5 was required. (f) Involvement in Certain Legal Proceedings Inapplicable. 18 20 ITEM 11 - EXECUTIVE COMPENSATION (a) (b) Cash Compensation The following table sets forth the elements of compensation paid, earned or awarded for the named individuals. All aspects of executive compensation is determined by the Board of Directors. SUMMARY COMPENSATION TABLE
LONG TERM COMPENSATION -------------------------------- ANNUAL COMPENSATION AWARDS PAYOUTS ------------------------------------------- -------------------- -------- NAME AND OTHER RESTRICTED (#) PRINCIPAL ANNUAL STOCK OPTIONS/ PAYOUTS ALL OTHER POSITION YEAR SALARY($) BONUS($) COMPENSATION($) AWARDS($) SARs ($) COMPENSATION($) - ------------------ ---- --------- --------- --------------- ---------- -------- ------- --------------- EDWARD A. JOHNSON, 1999 $204,000 $ 98,847 450,000 $17,906(1)(2) CHIEF EXECUTIVE 1998 144,000 118,188 100,000 18,304(1)(2) OFFICER 1997 144,000 127,474 0 17,526(1)(2) MULUMEBET G. MICHAEL 1999 $167,841 $ 83,201 400,000 PRESIDENT & CHIEF 1998 160,865 63,806 100,000 OPERATING OFFICER 1997 156,180 113,027 0 HELEN TVELIA 1999 $ 59,479 $ 83,087 100,000 PROGRAM 1998 62,400 71,917 25,000 DIRECTOR 1997 58,020 62,868 0
- ------------------ # NUMBER OF UNITS $ DOLLAR AMOUNTS (1) CAR ALLOWANCE (2) LIFE INSURANCE PREMIUMS Other Compensation In addition to all other options held by him, the Company has obtained life insurance on the life of Mr. Johnson in the amount of $2,000,000, $1,000,000 for the benefit of the Company and $1,000,000 for the benefit of his estate. 19 21 Compensation Pursuant to Plans Stock Option Plans 1987 Plan The Company's 1987 Stock Option Plan (the "Plan"), adopted by the Board of Directors on July 28, 1987, and approved by the stockholders on August 28, 1987, provided for the grant to officers, directors, employees and consultants of nonqualified stock options and stock options to employees that qualify as incentive stock options under Section 422A of the Internal Revenue Code of 1986. The Plan terminated on July 28, 1997. The purpose of the Plan was to enable the Company to attract and retain qualified persons as employees, officers and directors and others whose services are required by the Company, and to motivate such persons by providing them with an equity participation in the Company. A maximum of 455,000 shares of the Company's Common Stock were reserved for issuance pursuant to the Plan. No options to purchase shares were exercised during fiscal year ended December 31, 1999. There are currently 100,000 shares subject to options outstanding under the Plan. The Plan is administered by the Board of Directors, which has, subject to specified limitations, the full authority to grant options and establish the terms and conditions under which they may be exercised. The exercise price of incentive stock options granted under the Plan was required to be not less than the fair market value of the common stock on the date of grant (110% in the case of a greater than 10% stockholder). The exercise price of nonqualified stock options could have been no less than 85% of the fair market value on the date of grant, although the Company did not intend to grant any such stock options at less than fair market value. In the discretion of the Board, the exercise price may be payable in cash, by delivery of a promissory note or in Common Stock of the Company. The options are subject to forfeiture upon termination of employment or other relationship with the Company except by reason of death or disability and are nonassignable. Options were granted for terms up to 10 years (five years in the case of incentive stock options granted to greater than 10% stockholders). No optionee was granted incentive stock options such that the fair market value of the options which first become exercisable in any one calendar year exceeded $100,000. Options granted under the Plan to officers, employees or consultants may be exercised only while the optionee is employed or retained by the Company or within six (6) months after termination of the employment or consulting relationship by reason of death or permanent disability, and three months after termination for any other reason. 1994 Plan On December 20, 1994, the Board of Directors re-adopted the Company's 1994 stock option plan. The plan allows the Company to grant officers, directors, employees and consultants nonqualified stock options. The Plan terminates on March 22, 2004. The purpose of the Plan is to enable the Company to attract and retain qualified persons as employees, officers and directors and others whose services are required by the Company, and to motivate such persons by providing them with an equity participation in the Company. A maximum of 500,000 shares of the Company's common stock were reserved for issuance pursuant to the plan. Options to purchase 50,000 shares were exercised during fiscal year ended December 31, 1999. There are currently 75,000 shares subject to option outstanding under the Plan. The Plan is administered by the Board of Directors, which has, subject to specified limitations, the full authority to grant options and establish the terms and conditions under which they may be exercised. 20 22 The exercise price of nonqualified stock options can be no less than 85% of the fair market value on the date of grant, although the Company does not intend to grant any such stock options at less than fair market value. In the discretion of the Board, the exercise price may be payable in cash, by delivery of a promissory note or in Common Stock of the Company. The options are subject to forfeiture upon termination of employment or other relationship with the Company except by reason of death or disability and are nonassignable. Options may be granted for terms up to 10 years. Options granted under the Plan to officers, employees or consultants may be exercised only while the optionee is employed or retained by the Company or within six (6) months after termination of the employment or consulting relationship by reason of death or permanent disability, and three months after termination for any reason. Other Options The Company granted options to purchase 1,433,000 shares of common stock to various officers, directors and employees of the Company during 1999. On April 19, 1999, the Board of Directors granted options to Edward A. Johnson and Mulumebet G. Michael to each purchase 100,000 shares and granted options to Michael S. Callison to purchase 75,000 shares. The option exercise price is $.65. The options have a five year term and vest immediately. On December 15, 1999, the Board of Directors granted options to Edward A. Johnson to purchase 350,000 shares, granted options to Mulumebet Michael to purchase 300,000 shares, granted options to Gary L. Dreher to purchase 75,000 shares and granted options to Michael S. Callison and Jon Jenett to each purchase 25,000 shares. The option exercise price is $.62. The options have a five year term and vest immediately. During 1999, no other options previously granted were exercised. (c) Options/SAR Grants in Last Fiscal Year The following table sets forth certain information concerning Options/SARs granted during 1999 to the named individuals:
POTENTIAL REALIZABLE VALUE INDIVIDUAL GRANTS AT ASSUMED - --------------------------------------------------------------------------------- ANNUAL RATES OF % OF TOTAL STOCK PRICE GRANT DATE OPTIONS/SARS APPRECIATION PRESENT VALUE GRANTED TO EXERCISE OF FOR OPTION TERM GRANT DATE OPTIONS/SARS EMPLOYEES IN BASE PRICE EXPIRATION ------------------- PRESENT NAME GRANTED FISCAL YEAR ($/SHARE) DATE 5%($) 10%($) VALUE($)* - ----------------- ------------- ------------ ----------- ---------- ------ ------- ------------- EDWARD A. JOHNSON 350,000 24% $.65 4/19/2004 66,500 143,500 101,500 100,000 7% $.62 12/15/2004 18,000 39,000 28,000 MULUMEBET G. MICHAEL 300,000 21% $.65 4/19/2004 57,000 123,000 87,000 100,000 7% $.62 12/15/2004 18,000 39,000 28,000 HELEN TVELIA 100,000 5% $.65 4/19/2004 19,000 41,000 29,000
- -------------------- * Present values were calculated using the Black-Scholes options pricing model which should not be viewed in any way as a forecast of the future performance of the Company=s stock. The estimated present value of each stock option is $.29 for the April 19, 1999 grant and $.28 for the December 15, 1999 grant based on the following inputs: 4/19/99 12/15/99 GRANT GRANT ------- -------- Stock Price (Fair Market Value) at Grant $.6563 $.625 Exercise Price $ .65 $ .62 Expected Option Term 5 years 5 years Risk-Free Interest Rate 6.25% 6.13% Stock Price Volatility 39.8% 39.8% Dividend Yield 0% 0% The model assumes: (a) an Expected Option Term of 5 years which reflects the actual life of the option; (b) a Risk-Free Interest Rate that represents the interest rate on a U.S. Treasury Note with a maturity date corresponding to that of the Expected Option Term; and (c) Stock Price Volatility is calculated using quarterly stock prices over the period from January 1, 1995 to December 31, 1999. 21 23 (d) Aggregated Option/SAR Exercises in Last Fiscal Year and Fiscal Year-End Option/SAR Values The following table summarizes options and SARs exercised during 1999, and presents the value of unexercised options and SARS held by the named individuals at fiscal year end:
VALUE OF NUMBER OF UNEXERCISED UNEXERCISED IN-THE-MONEY OPTIONS/SARS OPTIONS/SARS SHARES ACQUIRED VALUE AT FISCAL AT FISCAL NAME ON EXERCISE(#) REALIZED($) YEAR-END(#) YEAR-END($)* ---- --------------- ----------- ------------ ------------- EDWARD A. JOHNSON 50,000 $31,875 750,000 $104,250 MULUMEBET G. MICHAEL ** 0 0 700,000 93,000 HELEN TVELIA 0 0 200,000 28,438
- --------------- * The difference between fair market value at February 4, 2000 and the exercise price. ** 100,000 of options vest over five years, 60,000 of which are exercisable at 12/31/99. (g) Compensation of Directors Directors do not receive compensation for their services although they are entitled to reimbursement for expenses incurred in attending board meetings. Michael S. Callison received $37,500 of wages as Vice President of Corporate Development in 1999. Mr. Dreher received $12,000 in marketing fees during 1999 for the marketing of the Company's programs to the hospitals during 1999. (k) Board Compensation Committee Report on Executive Compensation The entire Board of Directors is responsible for determining the Chief Executive Officer's compensation. The Board's philosophy has been to offer a stable base salary plus a monthly bonus based on a percentage of corporate monthly profits before income taxes. The Board's approach to base compensation is to offer competitive salaries in comparison with market practices. However, base salaries have become a relatively smaller element in the total executive officer compensation package as the Company has introduced incentive compensation programs which it believes reinforce strategic performance objectives. 22 24 (L) STOCK PERFORMANCE GRAPH The following graph sets forth the cumulative total shareholder return (assuming reinvestment of dividends) to Company's stockholders during the five year period ended December 31, 1999 as well as the U.S. NASDAQ stock market index and the S&P Healthcare (Hospital) Management Index. The Company does not currently meet the standards required for trading on the NASDAQ exchange, however the Company believes that the securities traded on this exchange most closely resemble its market capitalization. [PERFORMANCE GRAPH]
12/31/94 12/31/95 12/31/96 12/31/97 12/31/98 12/31/99 -------- -------- -------- -------- -------- -------- OPMC 100 144 176 170 109 84 S&P Hospital Management Index 100 139 164 143 117 132 NASDAQ Market Index 100 140 172 209 292 441
NOTE: The stock performance graph assumes $100 was invested on January 1, 1994. 23 25 ITEM 12 -- CERTAIN BENEFICIAL OWNERS AND MANAGEMENT (a) and (b) Security Ownership The following table sets forth certain information regarding the ownership of the Company's Common Stock as of February 7, 2000, (i) by each person who is known by the Company to own beneficially more than 5% of the outstanding shares of Common Stock; (ii) by each of the Company's directors and named executive officers; and (iii) by all directors and named executive officers of the Company as a group. Unless otherwise indicated below, the person or persons named have sole voting and dispositive power. AMOUNT & NATURE OF PERCENT NAME(1) BENEFICIAL OWNERSHIP OF CLASS ------- -------------------- -------- EDWARD A. JOHNSON 1,245,826(2) 18.9% MULUMEBET G. MICHAEL 689,466(3) 10.5% MICHAEL S. CALLISON 680,895(4) 11.2% GARY L. DREHER 226,745(5) 3.7% JON E. JENETT 159,000(6) 2.6% ALL OFFICERS AND DIRECTORS AS A GROUP (5 PERSONS) 3,001,932(7) 38.9% - ------------------- (1) The addresses of these persons are as follows: Mr. Johnson - 24 South Stonington Road, Laguna Beach, CA 92651; Ms. Michael - 5304 Shenandoah Avenue, Los Angeles, CA 90056; Mr. Callison - 21972 Summerwind Lane, Huntington Beach, CA 92646; Mr. Dreher - 6301 Acacia Hill Drive, Yorba Linda, CA 92886; Mr. Jenett - 8 South Vista De La Luna, Laguna Beach, CA 92651. (2) Includes presently exercisable options to purchase 700,000 shares of Common Stock, with 17,578 shares held indirectly through an individual retirement account. (3) Includes presently exercisable options to purchase 660,000 shares of Common Stock. All shares are directly owned. (4) Includes presently exercisable options to purchase 175,000 shares of Common Stock directly held, 480,000 shares held through a revocable living trust, 17,500 shares held indirectly through an individual retirement account, 2,395 shares held indirectly through a 401K plan and 6,000 shares held as custodian for five of Mr. Callison's grandchildren. (5) Includes presently exercisable options to purchase 150,000 shares of Common Stock and 58,890 shares directly held, with 13,210 shares held indirectly through an individual retirement account and 4,645 held indirectly through an individual retirement account of Mr. Dreher's spouse. (6) Includes presently exercisable options to purchase 125,000 shares of Common Stock, with 34,000 shares held indirectly through an individual retirement account. (7) Includes presently exercisable options to purchase 1,810,000 shares of Common Stock. (c) Changes in Control Inapplicable. 24 26 ITEM 13 - CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS (a) Transactions With Management and Others Inapplicable. (b) Certain Business Relationships Inapplicable. (c) Indebtedness of Management The Company converted a series of short-term advances to Mr. Johnson and a $274,000 note dated December 29, 1997 into a $392,070 promissory note due from Mr. Johnson. The note accrues interest at the current prime rate and provides for bi-monthly payments aggregating $6,500 per month. (d) Transactions With Promoters Inapplicable. 25 27 PART IV ITEM 14 - EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K (a)(1) List of Financial Statements Filed as a Part of this Report (Filed Under Item 8 above) Page Number --------------- Reports of Independent Auditors F-1 through F-2 Consolidated Balance Sheets as of December 31, F-3 through F-4 1999 and December 31, 1998 Consolidated Statements of Income for the years F-5 ended December 31, 1999, 1998 and 1997 Consolidated Statements of Stockholders' Equity for the F-6 years ended December 31, 1999, 1998 and 1997 Consolidated Statements of Cash Flows for the F-7 year ended December 31, 1999, 1998 and 1997 Notes to Consolidated Financial Statements. F-8 through F-17 (a)(2) List of Financial Statement Schedules filed as a Part of this Report Schedule II - Valuation and Qualifying Accounts OPTIMUMCARE CORPORATION SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
ADDITIONS ------------------------------------ CHARGED BALANCE AT CHARGED TO OTHER BALANCE BEGINNING TO COSTS ACCOUNTS DEDUCTIONS AT END OF PERIOD AND EXPENSES DESCRIBE DESCRIBE OF PERIOD ---------- ------------ -------- ---------- --------- YEAR ENDED DECEMBER 31, 1999 Reserves and allowances deducted from asset accounts: Allowance for uncollectable accounts $ 0 $295,895 $0 $(295,895)* $ 0 YEAR ENDED DECEMBER 31, 1998 Reserves and allowances deducted from asset accounts: Allowance for uncollectable accounts $560,198 $334,564 $0 $(894,762)* $ 0 YEAR ENDED DECEMBER 31, 1997 Reserves and allowances deducted from asset accounts: Allowance for uncollectable accounts $ 0 $602,643 $0 $ (42,445)* $560,198
- ---------------- * Uncollectable accounts written-off, net of recoveries. All other schedules for which provision is made in the applicable accounting rules of the Securities and Exchange Commission are not required under the related instructions or are inapplicable, and therefore have been omitted. (a) (3) List of Exhibits Filed as a Part of This Report EXHIBIT NUMBER DESCRIPTION - ------- ----------- 3.1 Certificate of Incorporation incorporated by reference from Form S-18 Registration Statement (Registration No. 33-16313-LA) filed July 28, 1988, Exhibit 3.1. 3.2 Bylaws incorporated by reference from Form S-18 Registration Statement (Registration No. 33-16313-LA) filed July 28, 1988, Exhibit 3.2. 3.3 Certificate of Amendment of Certificate of Incorporation filed February 29, 1988. Incorporated by reference from Form S-18 Registration Statement (Registration No. 33-16313-LA) filed July 28, 1988, Exhibit 3.5. 26 28 EXHIBIT NUMBER DESCRIPTION - ------- ----------- 3.4 Restated Certificate of Incorporation, filed October 3, 1989. Incorporation by reference from Form 10-K for the year ended December 31, 1989. 10.1 Lease between the Company and Laguna Niguel Office Center dated June 23, 1988 which supersedes lease dated December 15, 1986, incorporated by reference from Form S-18 Registration Statement (Registration No. 33-16313-LA) filed July 28, 1988, Exhibit 10.1. 10.6 Amended and Restated 1987 Stock Option Plan incorporated by reference from Form S-18 Registration Statement (Registration No. 33-16313-LA) filed July 28, 1988, Exhibit 10.6. 10.18 Form of Modification Agreement to Incentive Stock Option Agreement, dated January 20, 1988, incorporated by reference from Form S-18 Registration Statement (Registration No. 33-16313-LA) filed July 28, 1988, Exhibit 10.18. 10.30 Lease amendment between the Company and Laguna Niguel Office Center dated September 24, 1990 which supersedes lease dated June 23, 1988 incorporated by reference from Annual Report on Form 10-K for the year ended December 31, 1990, Exhibit 10.30. 10.34 Agreement between Huntington Intercommunity Hospital and the Company dated November 1, 1991 incorporated by reference from Annual Report on Form 10-K for the year ended December 31, 1991, Exhibit 10.34. 10.38 Agreement between Huntington Intercommunity Hospital and the Company dated October 1, 1992 incorporated by reference from Annual Report on Form 10-K for the year ended December 31, 1992, Exhibit 10.38. 10.43 Lease amendment between the Company and Laguna Niguel Office Center dated May 12, 1993 which supersedes lease dated June 23, 1988 incorporated by reference form Annual Report on Form 10-K for the year ended December 31, 1993, Exhibit 10.43. 10.55 1994 Stock Option Plan incorporated by reference from Annual Report on Form 10-K for the year ended December 31, 1994, Exhibit 10.55 10.60 Lease amendment between the Company and Laguna Niguel Office Center dated July 7, 1994 which supersedes lease dated June 23, 1988 incorporated by reference from Annual Report on Form 10-K for the year ended December 31, 1994, Exhibit 10.60. 10.66 Agreement between Sherman Oaks Hospital and Health Center dated March 30, 1995, incorporated by reference from Form 10-K for the year ended December 31, 1995. 10.67 Loan Agreement between the Company and National Bank of Southern California dated March 31, 1995, incorporated by reference from Form 10-K for the year ended December 31, 1995. (Modified) 10.68 Lease Agreement between the Company and Laguna Niguel Office Center dated June 5, 1995 which supersedes lease dated June 23, 1988, incorporated by reference from Form 10- K for the year ended December 31, 1995. 27 29 EXHIBIT NUMBER DESCRIPTION - ------- ----------- 10.70 Lease Agreement between the Company and 757 Pacific Partnership dated July 3, 1995, incorporated by reference from Form 10-K for the year ended December 31, 1995. 10.73 Agreement between San Fernando Community Hospital, Inc. dba Mission Community Hospital and the Company dated October 6, 1995, incorporated by reference from Form 10-K for the year ended December 31, 1995. 10.77 Operating Agreement for Optimum Care Source, LLC incorporated by reference from March 31, 1996 Form 10-Q Exhibit 10.77. 10.78 Master Joint Venture Agreement between Professional CareSource, Inc. and the Company dated April 19, 1996 incorporated by reference from March 31, 1996 Form 10-Q Exhibit 10.78. 10.82 Registration Agreement between Professional CareSource, Inc. and the Company dated April 24, 1996 incorporated by reference from March 31, 1996 Form 10-Q Exhibit 10.82. 10.83 Non-qualified stock option Agreement between Joseph H. Dadourian and the Company dated April 24, 1996 incorporated by reference from March 31, 1996 Form 10-Q Exhibit 10.83. 10.84 Non-qualified stock option Agreement between Teri L. Jolin and the Company dated April 24, 1996 incorporated by reference from March 31, 1996 Form 10-Q Exhibit 10.84. 10.85 Non-qualified stock option Agreement between Margaret M. Minnick and the Company dated April 24, 1996 incorporated by reference from March 1996 Form 10-Q Exhibit 10.85. 10.86 Agreement between Friendship Community Mental Health Center and the Company dated April 25, 1996 incorporated by reference from March 31, 1996 Form 10-Q Exhibit 10.86. 10.87 Lease Agreement between the Company and Laguna Niguel Office Center dated April 30, 1996 which supersedes lease dated June 23, 1988, incorporated by reference from Form 10- K for the year ended December 31, 1996. 10.88 Lease Agreement between the Company and Jay Arteaga dated September 30, 1996, incorporated by reference from Form 10-K for the year ended December 31, 1996. 10.90 Unanimous Written Consent dated December 31, 1996 of the Board of Directors amending the promissory note between the Company and Edward A. Johnson dated December 29, 1995, incorporated by reference from Form 10-K for the year ended December 31, 1996. 10.91 Change in terms Agreement between the Company and National Bank of Southern California dated January 28, 1997 (Modified), incorporated by reference from Form 10-K for the year ended December 31, 1996. 10.94 Change in Terms Agreement between the Company and National Bank of Southern California dated May 15, 1997, incorporated by reference from Form 10-K for the year ended December 31, 1997. 28 30 EXHIBIT NUMBER DESCRIPTION - ------- ----------- 10.95 Inpatient and Outpatient Psychiatric Unit Management Services Agreement between the Company and Catholic Healthcare West Southern California dated June 1, 1997, incorporated by reference from Form 10-K for the year ended December 31, 1997. 10.96 Lease Agreement between the Company and The Ribeiro Corporation dated June 23, 1997, incorporated by reference from Form 10-K for the year ended December 31, 1997. 10.97 Lease Agreement between the Company and Harriet Maizels, Daniel Gold, Lesley Gold and Mildred Gold dated July 8, 1997, incorporated by reference from Form 10-K for the year ended December 31, 1997. 10.100 Lease Agreement between the Company and Laguna Niguel Office Center dated September 5, 1997 which supersedes lease dated June 23, 1988, incorporated by reference from Form 10-K for the year ended December 31, 1997. 10.101 First Lease Extension Agreement between the Company and Whittier Narrows Business Park and the Company dated September 11, 1997 which supersedes lease dated January 10, 1994, incorporated by reference from Form 10-K for the year ended December 31, 1997. 10.102 Lease Extension Agreement between the Company and 757 Pacific Avenue Partnership dated September 19, 1997 which supersedes lease dated July 3, 1995, incorporated by reference from Form 10-K for the year ended December 31, 1997. 10.103 Unanimous Written Consent dated December 29, 1997 of the Board of Directors amending the Promissory Note between the Company and Edward A. Johnson dated December 31, 1996, incorporated by reference from Form 10-K for the year ended December 31, 1997. 10.105 Agreement between Friendship Community Mental Health Center and the Company dated June 25, 1997 which supersedes the Agreement dated April 25, 1996, incorporated by reference from Form 10-K for the year ended December 31, 1998. 10.106 Lease Agreement between the Company and Laguna Niguel Office Center dated May 14, 1998 which supersedes lease dated June 23, 1988, incorporated by reference from Form 10- K for the year ended December 31, 1998. 10.107 Change in terms Agreement between the Company and Southern California Bank dated May 27, 1998, incorporated by reference from Form 10-K for the year ended December 31, 1998. 10.108 Lease Agreement between Whittier Narrows Business Park and the Company dated July 28, 1998, incorporated by reference from Form 10-K for the year ended December 31, 1998. 10.109 Lease Agreement between the Company and P.S. Business Parks, L.P. dated August 14, 1998, incorporated by reference from Form 10-K for the year ended December 31, 1998. 10.110 Inpatient and Outpatient Psychiatric Unit Management Services Agreement between the Company and Catholic Healthcare West Southern California dated September 15, 1998 which supersedes Agreement dated June 1, 1997, incorporated by reference from Form 10- K for the year ended December 31, 1998. 29 31 EXHIBIT NUMBER DESCRIPTION - ------- ----------- 10.111 Agreement between Citrus Valley Medical Center and the Company dated September 18, 1998, incorporated by reference from Form 10-K for the year ended December 31, 1998. 10.112 Sublease Agreement between Citrus Valley Medical Center and the Company dated September 23, 1998, incorporated by reference from Form 10-K for the year ended December 31, 1998. 10.113 Lease Agreement between the Company and Coldwell Banker dated November 1, 1998, incorporated by reference from Form 10-K for the year ended December 31, 1998. 10.114 Amendment to the Agreement dated June 25, 1997 between Friendship Community Mental Health Center and the Company dated November 12, 1998, incorporated by reference from Form 10-K for the year ended December 31, 1998. 10.115 Change in Terms Agreement between the Company and Southern California Bank dated April 27, 1999, incorporated by reference from Form 10-Q for the quarter ended June 30, 1999. 10.116 Lease Agreement between the Company and Laguna Niguel Office Center dated May 12, 1999 which supersedes the lease dated June 23, 1988, incorporated by reference from Form 10-Q for the quarter ended June 30, 1999. 10.117 Contract amendment between the Company and Huntington Intercommunity Hospital d/b/a Humana Hospital Huntington Beach dated August 1, 1999 which supersedes the contract dated November 5, 1991, incorporated by reference from Form 10-Q for the quarter ended September 30, 1999. 10.118 Contract amendment between the Company and Huntington Intercommunity Hospital d/b/a Humana Hospital Huntington Beach dated August 1, 1999 which supersedes the contract dated October 1, 1992, incorporated by reference from Form 10-Q for the quarter ended September 30, 1999. 10.119 Inpatient Psychiatric Services contract amendment dated August 6, 1999 between the Company and Huntington Intercommunity Hospital d/b/a Humana Hospital Huntington Beach which supersedes contract amendment dated August 1, 1999, incorporated by reference from Form 10-Q for the quarter ended September 30, 1999. 10.120 Partial Hospitalization Agreement contract amendment dated August 6, 1999 between the Company and Huntington Intercommunity Hospital d/b/a Humana Hospital Huntington Beach which supersedes contract amendment dated August 1, 1999, incorporated by reference from Form 10-Q for the quarter ended September 30, 1999. 10.121 Psychiatric Partial Hospitalization Management Agreement between the Company and Rhema Behavioral Health Center dated August 1, 1999, incorporated by reference from Form 10-Q for the quarter ended September 30, 1999. 10.122 First amendment to lease between the Company and Jay Arteaga dated October 11, 1999 which supercedes lease dated September 30, 1996, incorporated by reference from Form 10-Q for the quarter ended September 30, 1999. 30 32 EXHIBIT NUMBER DESCRIPTION - ------- ----------- 10.123 Mental health inpatient and outpatient hospitalization services agreements between the Company and San Fernando Community Hospital d/b/a Mission Community Hospital dated December 31, 1999. Supercedes the agreements dated October 6, 1995. 23 Consent of Independent Auditor's. 27 Financial Data Schedule (b) Reports on Form 8-K During January 2000, the Company filed an 8-K, 8-K/A and 8-K/A2 reporting a change in certifying accountants. 31 33 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. Dated: March 29, 2000 OPTIMUMCARE CORPORATION By: /s/ EDWARD A. JOHNSON -------------------------------- Edward A. Johnson, Chief Executive Officer Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the persons on behalf of the registrant in the capacities and on the dates indicated.
/s/ EDWARD A. JOHNSON Chief Executive Officer March 29, 2000 - ------------------------------------- and Director (Principal Financial Edward A. Johnson and Accounting Officer) /s/ MULUMEBET G. MICHAEL Director, President and March 29, 2000 - ------------------------------------- Chief Operating Officer Mulumebet G. Michael /s/ MICHAEL S. CALLISON Director March 29, 2000 - ------------------------------------ Michael S. Callison /s/ GARY L. DREHER Director March 29, 2000 - ------------------------------------ Gary L. Dreher /s/ JON E. JENETT Director March 29, 2000 - ------------------------------------ Jon E. Jenett
32 34 Page Number --------------- Reports of Independent Auditors F-1 through F-2 Consolidated Balance Sheets as of December 31, F-3 through F-4 1999 and December 31, 1998 Consolidated Statements of Income for the years F-5 ended December 31, 1999, 1998 and 1997 Consolidated Statements of Stockholders' Equity for the F-6 years ended December 31, 1999, 1998 and 1997 Consolidated Statements of Cash Flows for the F-7 year ended December 31, 1999, 1998 and 1997 Notes to Consolidated Financial Statements. F-8 through F-17 35 February 29, 2000 INDEPENDENT AUDITORS' REPORT To the Stockholders and Board of Directors of OptimumCare Corporation We have audited the accompanying consolidated balance sheet of OptimumCare Corporation and its subsidiary as of December 31, 1999, and their related consolidated statements of income, stockholders' equity, and cash flows for the year then ended. In connection with our audit of the financial statements, we have also audited the financial statement schedule listed at Item 14(a)(2) as of and for the year ended December 31, 1999. These financial statements and financial statement schedule are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements and schedule based on our audit. We conducted our audit in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion. As discussed in Note 8 to the consolidated financial statements, the Company is dependent upon a small number of contracts, the loss of any of which could have a significant adverse effect on the Company's operations. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of OptimumCare Corporation and its subsidiary as of December 31, 1999, and the results of their operations and their cash flows for the year then ended, in conformity with generally accepted accounting principles. Also, in our opinion, the related financial statement schedule when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly in all material respects, the information set forth therein. /s/ Lesley, Thomas, Schwarz & Postma Inc. A Professional Accountancy Corporation Newport Beach, California F-1 36 Report of Independent Auditors The Stockholders and Board of Directors OptimumCare Corporation We have audited the accompanying consolidated balance sheet of OptimumCare Corporation and the related consolidated statements of income, stockholders' equity, and cash flows for each of the two years in the period ended December 31, 1998. Our audits also included the financial statement schedule listed in the Index at Item 14(a) for the two years in the period ended December 31, 1998. These financial statements and schedule are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements and schedule based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. As discussed in Note 8 to the consolidated financial statements, the Company is dependent upon a small number of contracts, the loss of any of which could have a significant adverse effect on the Company's operations. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of OptimumCare Corporation at December 31, 1998 and 1997, and the consolidated results of its operations and its cash flows for each of the two years in the period ended December 31, 1998, in conformity with accounting principles generally accepted in the United States. Also, in our opinion, the related financial statement schedule, when considered in relation to the basic financial statements taken as a whole, presents fairly in all material respects the information set forth therein. /s/ Ernst & Young LLP Orange County, California March 5, 1999 F-2 37 OPTIMUMCARE CORPORATION CONSOLIDATED BALANCE SHEETS ASSETS
DECEMBER 31, ---------------------------- 1999 1998 ---------- ---------- CURRENT ASSETS Cash $ 283,227 $ 188,636 Accounts receivable, net of allowance of $0 in 1999 and 1998 2,621,181 2,293,583 Note receivable from officer (Note 2) 156,000 78,000 Prepaid expenses 30,837 71,537 Deferred tax asset (Note 7) 24,457 20,288 ---------- ---------- Total current assets 3,115,702 2,652,044 NOTE RECEIVABLE FROM OFFICER (Note 2) 236,070 314,070 FURNITURE AND EQUIPMENT, less accumulated depreciation of $170,716 in 1999 and $131,062 in 1998 (Note 1) 32,268 59,527 DEFERRED TAX ASSET (Note 7) 25,994 75,817 OTHER ASSETS 52,311 53,286 ---------- ---------- Total assets $3,462,345 $3,154,744 ========== ==========
See the accompanying notes to these consolidated financial statements F-3 38 OPTIMUMCARE CORPORATION CONSOLIDATED BALANCE SHEETS LIABILITIES AND STOCKHOLDERS' EQUITY
DECEMBER 31, ---------------------------- 1999 1998 ---------- ---------- CURRENT LIABILITIES Accounts payable $ 177,903 $ 244,525 Accrued vacation 44,926 50,720 Accrued expenses 192,353 134,130 ---------- ---------- Total current liabilities 415,182 429,375 ---------- ---------- COMMITMENTS (Notes 3, 4 and 5) STOCKHOLDERS' EQUITY (Note 6) Preferred stock, $.001 par value; 10,000,000 shares authorized 0 shares issued and outstanding at December 31, 1999 and 1998 -- -- Common stock, $.001 par value; 20,000,000 shares authorized 5,883,675 and 5,919,897 shares issued and outstanding at December 31, 1999 and 1998, respectively 5,884 5,920 Paid-in-capital 2,387,793 2,431,761 Retained earnings 653,486 287,688 ---------- ---------- Total stockholders' equity 3,047,163 2,725,369 ---------- ---------- Total liabilities and stockholders' equity $3,462,345 $3,154,744 ========== ==========
See the accompanying notes to these consolidated financial statements F-4 39 OPTIMUMCARE CORPORATION CONSOLIDATED STATEMENTS OF INCOME
YEARS ENDED DECEMBER 31, ----------------------------------------- 1999 1998 1997 ----------- ----------- ----------- NET REVENUES $10,553,427 $11,409,690 $12,089,398 INTEREST INCOME 36,261 24,736 7,685 ----------- ----------- ----------- 10,589,688 11,434,426 12,097,083 ----------- ----------- ----------- OPERATING EXPENSES Costs of services provided 8,202,445 8,977,538 8,894,987 Selling, general and administrative 1,435,708 1,505,169 1,724,942 Provision for uncollectible accounts 295,895 334,564 602,643 Goodwill impairment -- -- 135,255 Interest 2,528 2,401 31,906 ----------- ----------- ----------- Total operating expenses 9,936,576 10,819,672 11,389,733 ----------- ----------- ----------- INCOME BEFORE INCOME TAXES 653,112 614,754 707,350 PROVISION FOR INCOME TAXES (Note 7) 287,314 237,621 253,000 ----------- ----------- ----------- NET INCOME $ 365,798 $ 377,133 $ 454,350 =========== =========== =========== BASIC EARNINGS PER SHARE $ 0.06 $ 0.06 $ 0.07 =========== =========== =========== DILUTED EARNINGS PER SHARE $ 0.06 $ 0.06 $ 0.06 =========== =========== ===========
See the accompanying notes to these consolidated financial statements F-5 40 OPTIMUMCARE CORPORATION CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
RETAINED COMMON STOCK EARNINGS/ --------------------- PAID-IN (ACCUMULATED SHARES AMOUNT CAPITAL DEFICIT) TOTAL --------- ------- ----------- ------------ ----------- BALANCE, December 31, 1996 6,786,218 $ 6,786 $ 3,272,407 $(543,795) $ 2,735,398 Exercise of stock options 25,000 25 9,350 -- 9,375 Common stock issued for consulting fees 91,393 92 74,252 -- 74,344 Net income -- -- -- 454,350 454,350 ---------- ------- ----------- --------- ----------- BALANCE, December 31, 1997 6,902,611 6,903 3,356,009 (89,445) 3,273,467 Exercise of stock options 25,000 25 7,475 -- 7,500 Purchase and retirement of treasury stock (1,007,714) (1,008) (931,723) -- (932,731) Net income -- -- -- 377,133 377,133 ---------- ------- ----------- --------- ----------- BALANCE, December 31, 1998 5,919,897 5,920 2,431,761 287,688 2,725,369 Exercise of stock options 13,778 14 (14) -- -- Purchase and retirement of treasury stock (50,000) (50) (43,954) -- (44,004) Net income -- -- -- 365,798 365,798 ---------- ------- ----------- --------- ----------- BALANCE, December 31, 1999 5,883,675 $ 5,884 $ 2,387,793 $ 653,486 $ 3,047,163 ========== ======= =========== ========= ===========
See the accompanying notes to these consolidated financial statements F-6 41 OPTIMUMCARE CORPORATION CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, ----------------------------------------- 1999 1998 1997 --------- ----------- ----------- CASH FLOWS FROM OPERATING ACTIVITIES Net income $ 365,798 $ 377,133 $ 454,350 Adjustments to reconcile net income to net cash provided by operating activities Depreciation 39,654 40,589 38,338 Amortization -- -- 40,777 Provision for uncollectible accounts 295,895 334,564 602,643 Common stock issued as consulting fees -- -- 74,344 Impairment of goodwill -- -- 135,255 Deferred taxes 45,654 237,895 (334,000) Changes in operating assets and liabilities Increase in accounts receivable (623,493) (441,241) (400,530) Decrease (increase) in prepaid expenses 40,700 9,779 (34,071) (Increase) decrease in other assets 973 (8,356) 12,846 (Decrease) increase in accounts payable (66,623) (25,653) 42,889 (Decrease) increase in accrued expenses 52,429 (24,746) (194,282) --------- ----------- ----------- Net cash provided by operating activities 150,987 499,964 438,559 --------- ----------- ----------- CASH FLOWS FROM INVESTING ACTIVITIES Purchases of equipment (12,392) (13,431) (51,527) Note receivable from officer -- (118,070) (119,000) --------- ----------- ----------- Net cash used in investing activities (12,392) (131,501) (170,527) --------- ----------- ----------- CASH FLOWS FROM FINANCING ACTIVITIES Proceeds from note payable to bank 650,000 -- -- Note payable to bank pay downs (650,000) (200,000) (445,812) Purchase of treasury stock (44,004) (932,731) -- Exercise of stock options -- 7,500 9,375 --------- ----------- ----------- Net cash used in financing activities (44,004) (1,125,231) (436,437) --------- ----------- ----------- NET INCREASE (DECREASE) IN CASH 94,591 (756,768) (168,405) CASH, beginning of year 188,636 945,404 1,113,809 --------- ----------- ----------- CASH, end of year $ 283,227 $ 188,636 $ 945,404 ========= =========== =========== SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION Interest paid $ 2,528 $ 2,401 $ 32,912 ========= =========== =========== Income taxes paid $ 237,500 $ 11,366 $ 629,000 ========= =========== ===========
See the accompanying notes to these consolidated financial statements F-7 42 NOTE 1 - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES ORGANIZATION - OptimumCare Corporation (the "Company") develops, markets and manages hospital-based programs for the treatment of psychiatric disorders on both an inpatient and outpatient basis. Hospitals are primarily reimbursed by Medicare and Medicaid for the majority of these programs, which in turn pay the Company a contracted management fee. The Company's programs are currently being marketed in the United States, principally California, to independent acute general hospitals and other health care facilities. The accompanying financial statements include the accounts of the Company and its majority owned subsidiary, Optimum CareSource, LLC (discussed below). All significant intercompany transactions have been eliminated in consolidation. BUSINESS ACQUISITION- On April 19, 1996, the Company completed the acquisition of a seventy percent (70%) interest in certain contracts of Professional CareSource, Inc. through the formation of Optimum CareSource, LLC (the "LLC"). The Company acquired a seventy percent (70%) ownership interest in the LLC and Professional CareSource, Inc. holds a thirty percent (30%) ownership interest in the LLC. The Company considers the LLC to be a seventy percent (70%) owned subsidiary of the Company. The Company paid $11,000 in cash to each of the three (3) principals of Professional CareSource, Inc. and made an initial contribution of $50,000 to the LLC for working capital. The Company is required to purchase all of Professional CareSource, Inc.'s interest in the LLC by April 29, 2001, but may elect to purchase the interest at any time after April 29, 2000 at a specified price, which approximates Professional CareSource's ownership percentage in the LLC multiplied by five (5) times the LLC's net profit after taxes as reflected on its most recent Form 1065 after agreed upon taxes. Three (3) principals of Professional CareSource, Inc. were each given one (1) year employment contracts with the LLC. In connection with the employment agreements, the Company granted nonqualified stock options to purchase 33,000 shares of common stock at $.92 per share, which vest over five (5) years, to each of the principals of Professional CareSource, Inc. No options have been exercised under these grants. Optimum CareSource, LLC, headquartered in Southern California, provides mental health services at long-term care facilities. The purchase method of accounting was used to record the transaction. No tangible assets of the LLC were acquired and as such, the purchase price was allocated to intangibles to be amortized over five (5) years. F-8 43 NOTE 1 - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) During 1997, based on recurring losses at the LLC and a lack of substantive new contracts, management determined that this goodwill was impaired and based on its estimate of discounted cash flows, the Company wrote off the remaining balance of $135,000 at December 31, 1997. The impairment loss is recorded as a separate line item in operating expenses on the accompanying statements of income. CASH AND CASH EQUIVALENTS - For purposes of the balance sheet and statement of cash flows, cash and cash equivalents consist of all cash balances and highly liquid investments with an initial maturity of three (3) months or less. At December 31, 1999 and 1998, there were no cash equivalents. FURNITURE AND EQUIPMENT - Furniture and equipment is stated at cost. Depreciation is computed on the straight-line method based upon the estimated useful lives of the related assets, which range from three (3) to five (5) years. REVENUE RECOGNITION - Revenues are recognized in the period services are provided and are recorded net of contractual adjustments representing the difference between standard rates and estimated net realizable amounts under reimbursement agreements with customers. EARNINGS PER SHARE - In 1997, the Financial Accounting Standards Board issued Statement No. 128, Earnings per Share. Statement 128 replaced the calculation of primary and fully diluted earnings per share with basic and diluted earnings per share. Unlike primary earnings per share, basic earnings per share excludes any dilutive effects of options, warrants and convertible securities. Diluted earnings per share is very similar to the previously reported fully diluted earnings per share. All earnings per share amounts for all periods have been presented, and where appropriate, restated to conform with Statement 128 requirements. INCOME TAXES - The Company accounts for income taxes in accordance with the provisions of Statement of Financial Accounting Standards No. 109, "Accounting For Income Taxes", which requires the recognition of deferred tax assets and liabilities for the expected future tax consequences of events that have been included in the financial statements or tax returns. Under this method, deferred tax assets and liabilities are determined based on the difference between the financial statement and the tax basis of assets and liabilities using enacted rates in effect for the periods in which the differences are expected to reverse. Valuation allowances are established when necessary to reduce deferred tax assets to the amount expected to be realized. USE OF ESTIMATES - The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions about the future that affect the amounts reported in the financial statements. These estimates include assessing the collectibility of accounts receivable and the usage and recoverability of long-lived assets. The actual results could differ from those estimates. FAIR VALUE OF FINANCIAL INSTRUMENTS - The Company's financial instruments consist principally of cash, accounts and note receivable, and current liabilities. The Company believes all of the financial instruments' recorded values approximate fair values. F-9 44 NOTE 1 - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) PROFESSIONAL LIABILITY INSURANCE - Effective October 7, 1997, OptimumCare maintains an occurrence based professional liability insurance coverage of up to $500,000 per occurrence, $5,000,000 annual aggregate. RISKS AND UNCERTAINTIES - The Company contracts with hospitals which are primarily reimbursed by Medicare and Medicaid for the majority of the Company's programs. Laws and regulations governing Medicare and Medicaid reimbursement programs are complex and subject to interpretation. The Company is indirectly affected by such laws and regulations governing Medicare and Medicaid programs. The Company believes that it is in compliance with all applicable laws and regulations and is not aware of any pending or threatened investigations involving allegations of potential wrong doing. While no such regulatory inquiries have been made, compliance with such laws and regulations can be subject to future government review and interpretation. RECLASSIFICATIONS - Certain amounts for prior periods have been reclassified to conform with the current year presentation. NOTE 2 - NOTE RECEIVABLE FROM OFFICER During 1998, the Company converted a series of short-term advances and a $274,000 note dated December 29, 1997 into a promissory note from an officer totaling $392,070. The note accrues interest at the current prime rate and provides for a bi-monthly payment plan. On January 4, 2000, principal payments totaling $78,000 were received by the Company. NOTE 3 - LINE OF CREDIT The Company has a line of credit with a bank which allows the Company to borrow up to seventy-five percent (75%) of certain qualified receivables with a maximum indebtedness of $1,500,000. The interest rate is based on the Wall Street Journal prime plus .50%. The weighted average interest rate was 8.71% and 9.60% in the years ended December 31, 1999 and 1998, respectively. The line of credit matures on May 1, 2000 and is collateralized by substantially all of the Company's assets. At December 31, 1999, $1,310,000 was available for future draws under the line of credit agreement, and no amounts were outstanding. F-10 45 NOTE 4 - EMPLOYEE BENEFIT PLAN Effective January 1, 1997, the Company provided a 401(k) Plan for all employees having completed one (1) year of service. Under the 401(k) Plan, eligible employees voluntarily contribute to the Plan up to fifteen percent (15%) of their salary through payroll deductions which vested over six (6) years. OptimumCare matches fifty percent (50%) of the first four percent (4%) of employee contributions to the Plan through payroll deductions. Effective January 1, 1999, the Company adopted a 401(k) Safe Harbor Plan. The Plan provides for immediate vesting of employee contributions. The Company matches one hundred percent (100%) of the first three percent (3%), and fifty percent (50%) of employee contributions from three percent (3%) to five percent (5%) to the Plan through payroll deductions. Expenses associated with employer contributions were $98,018, $54,181, and $40,190 for 1999, 1998 and 1997, respectively. NOTE 5 - LEASE COMMITMENTS The Company leases four (4) office facilities under lease agreements. One agreement is on a month to month basis. The remaining agreements expire June 30, 2000, October 31, 2000 and November 30, 2001, respectively. The Company also leased space under five (5) separate lease agreements for the operation of five (5) of its outpatient partial hospitalization psychiatric program sites. One agreement is between the lessor and the community mental health center. However, the Company is obligated to pay the lease costs for the program under its contract with the facility which expires November 30, 2003. The remaining agreements expire June 30, 2000, September 30, 2000, September 30, 2000 and August 14, 2002, respectively. Aggregate future minimum lease payments under remaining noncancelable leases with terms in excess of one (1) year are as follows: YEARS ENDING DECEMBER 31, AMOUNT ------------------------- -------- 2000 $140,626 2001 141,488 2002 88,488 2003 50,094 -------- $420,696 ======== The Company has a sublease with one of its host hospitals. Sublease rental income was $67,244, $87,693 and $57,844 for the years ended December 31, 1999, 1998 and 1997, respectively. Rent expense was $388,601, $354,520 and $307,192 for the years ended December 31, 1999, 1998 and 1997, respectively. F-11 46 NOTE 6 - STOCKHOLDERS' EQUITY STOCK OPTION PLANS - The Company has elected to follow Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to Employees (APB 25) and related Interpretations in accounting for its employee stock options because, as discussed below, the alternative fair value accounting provided for under Statement No. 123, Accounting for Stock-Based Compensation, requires use of option valuation models that were not developed for use in valuing employee stock options. Under APB 25, no compensation expense is recognized because the exercise price of the Company's employee stock options equals the market price of the underlying stock on the date of grant. In July 1987, the Company adopted a stock option plan (the "1987 Plan") including incentive stock options and nonqualified stock options. A maximum of 455,000 shares of the Company's common stock was reserved for issuance under the 1987 Plan. Under the 1987 Plan, incentive stock options were granted at an exercise price not less than one hundred percent (100%) of the fair market value on the date of grant (110% for greater than 10% stockholders) and, nonqualified stock options were granted at an exercise price not less than eighty-five percent (85%) of the fair market value on the date of grant. Options were granted for terms up to ten (10) years (five years for greater than 10% stockholders). No options have been granted after July 1997, but options granted before such date may still be exercisable after such date. In March 1994, the Company adopted and approved the 1994 Stock Option Plan (the "1994 Plan") including incentive stock options and nonqualified stock options. In December 1995, the Company readopted and approved the 1994 Stock Option Plan. A maximum of 500,000 shares of the Company's common stock has been reserved for issuance under the 1994 Plan. Incentive stock options may be granted at an exercise price which is not less than one hundred percent (100%) of the fair market value on the date of grant (110% for greater than 10% stockholders) and, nonqualified stock options may be granted at an exercise price which is no less than eighty-five percent (85%) of the fair market value on the date of grant. Options may be granted for terms up to ten (10) years (five years for greater than 10% stockholders). In October 1997, the Company granted non-qualified options to purchase 48,000 shares of its common stock at prices ranging from $1.21 to $1.81 per share which vested over six (6) months. No options have been exercised under these grants and those options were canceled during 1999. On February 3, 1998, the Company granted to certain officers, directors, employees and consultants, non-qualified options to purchase 350,000 shares of its common stock at $1.00 per share. All options are vested upon grant. During various dates in 1999, the Company granted to certain officers, directors, employees and consultants, non-qualified options to purchase 1,433,000 shares of its common stock at prices ranging from $0.62 to $0.90 per share. Options to purchase 1,283,000 shares are vested upon grant. Options to purchase 150,000 shares vest over six (6) months. No options have been exercised under these grants. F-12 47 NOTE 6 - STOCKHOLDERS' EQUITY (CONTINUED) A summary of stock option activity during 1999, 1998 and 1997 is as follows:
WEIGHTED WEIGHTED WEIGHTED AVERAGE AVERAGE AVERAGE VARIOUS EXERCISE 1987 EXERCISE 1994 EXERCISE NON-PLAN PRICE PLAN PRICE PLAN PRICE ---------- -------- ------- -------- ------- -------- Outstanding, December 31, 1996 733,000 $1.25 150,000 $ .83 200,000 $ .58 Granted 48,000 1.51 -- -- -- -- Exercised -- -- (25,000) .375 -- -- Canceled (200,000) 1.50 -- -- (25,000) .91 ---------- ----- -------- ------ -------- ------ Outstanding, December 31, 1997 581,000 1.18 125,000 .92 175,000 .54 Granted 350,000 1.00 -- -- -- -- Exercised -- -- (25,000) .30 -- -- Canceled -- -- -- -- -- -- ---------- ----- -------- ------ -------- ------ Outstanding, December 31, 1998 931,000 1.11 100,000 1.08 175,000 .54 Granted 1,433,000 .66 -- -- -- -- Exercised -- -- -- -- (50,000) .6375 Canceled (48,000) 1.51 -- -- (50,000) .6375 ---------- ----- -------- ------ -------- ------ Outstanding, December 31, 1999 2,316,000 $ .82 100,000 $ 1.08 75,000 $ .83 ========== ===== ======== ====== ======== ======
OPTIONS OUTSTANDING OPTIONS EXERCISABLE --------------------------------------------------- ---------------------------------- WEIGHTED- NUMBER AVERAGE WEIGHTED- NUMBER WEIGHTED- RANGE OF OUTSTANDING REMAINING AVERAGE EXERCISABLE AVERAGE EXERCISE PRICE AT 12/31/99 CONTRACTUAL LIFE EXERCISE PRICE AT 12/31/99 EXERCISE PRICE - ---------------- ----------- ---------------- --------------- --------------- -------------- $ .6375 25,000 .5 years $.6375 25,000 $.6375 .91 25,000 .5 years .91 25,000 .91 .93 25,000 .5 years .93 25,000 .93 .901 to 1.3133 633,000 1.5 years 1.13 579,800 1.13 1.00 350,000 3.5 years 1.00 350,000 1.00 .62 to .90 1,433,000 4.5 years .66 1,283,000 .66 - --------------- --------- --------- ------ --------- ------ $ .62 to 1.3133 2,491,000 3.5 years $ .83 2,287,800 $ .84 =============== ========= ========= ====== ========= ======
A total of 2,491,000 shares of common stock are reserved for future issuance upon the exercise of stock options at December 31, 1999. A total of 100,000 options were available for future grant at December 31, 1999 under existing stock option plans. Pro forma information regarding net income and earnings per share is required by Statement No. 123, which also requires that the information be determined as if the Company has accounted for its employee stock options granted subsequent to December 31, 1994 under the fair value method of that Statement. The fair value for these options was estimated at the date of grant using a Black-Scholes option pricing model with the following weighted-average assumptions for 1999, 1998 and 1997, respectively: risk-free interest rates of 6.20%, 6.31% and 6.625% a dividend yield of 0%; a volatility factor of the expected market price of the Company's common stock of .398, .380 and .521 for 1999, 1998 and 1997, respectively. F-13 48 NOTE 6 - STOCKHOLDERS' EQUITY (CONTINUED) The Black Scholes option valuation model was developed for use in estimating the fair value of traded options which have no vesting restrictions and are fully transferable. In addition, option valuation models require the input of highly subjective assumptions including the expected stock price volatility. Because of the Company's employee stock options have characteristics significantly different from those of traded options, and because changes in the subjective input assumptions can materially affect the fair value estimate, in management's opinion, the existing models do not necessarily provide a reliable single measure of the fair value of its employee stock options. For purposes of pro forma disclosures, the estimated fair value of the options is amortized to expense over the options' vesting period. The Company's pro forma information follows:
YEARS ENDED DECEMBER 31, ---------------------------------- 1999 1998 1997 -------- -------- -------- Net income As reported $365,798 $377,133 $454,350 Pro forma $134,719 $244,153 $374,270 Earnings per share Basic as reported $ .06 $ .06 $ .07 Diluted as reported $ .06 $ .06 $ .06 Basic pro forma $ .02 $ .04 $ .05 Diluted pro forma $ .02 $ .04 $ .05 Weighted average exercise price of: Options whose exercise price equals the market price of the stock on the grant date $ -- $ -- $ -- Options whose exercise price is less than the market price of the stock on the grant date $ .65 $ -- $ 1.21 Options whose exercise price is more than the market price of the stock on the grant date $ .64 $ 1 $ 1.81 Weighted average fair value of: Options whose exercise price equals the market price of the stock on the grant date $ -- $ -- $ -- Options whose exercise price is less than the market price of the stock on the grant date $ .29 $ -- $ .67 Options whose exercise price is more than the market price of the stock on the grant date $ .27 $ .46 $ .52
Because Statement 123 is applicable only to options granted subsequent to December 31, 1994, its pro forma effect is not fully reflected until 1998. F-14 49 NOTE 6 - STOCKHOLDERS' EQUITY (CONTINUED) EARNINGS PER SHARE - The following table sets forth the computation of basic and diluted earnings per share:
YEARS ENDED DECEMBER 31, ---------------------------------------------- 1999 1998 1997 ---------- ---------- ---------- Numerator: net income $ 365,798 $ 377,133 $ 454,350 ---------- ---------- ---------- Denominator: Denominator for basic earnings per share - weighted-average shares outstanding 5,910,939 6,567,280 6,870,049 Dilutive employee stock options 117,557 132,368 324,823 ---------- ---------- ---------- Denominator for diluted earnings per share 6,028,496 6,699,648 7,194,872 ========== ========== ========== Basic earnings per share $ .06 $ .06 $ .07 ========== ========== ========== Diluted earnings per share $ .06 $ .06 $ .06 ========== ========== ==========
NOTE 7 - INCOME TAXES A reconciliation of the provision for income taxes using the federal statutory rate to the book provision for income taxes follows:
YEARS ENDED DECEMBER 31, ------------------------------------------- 1999 1998 1997 -------- --------- --------- Statutory federal provision for income taxes $222,000 $ 209,000 $ 240,499 Increase (decrease) in taxes resulting from: Change in valuation allowance -- -- (71,000) Permanent differences and other 7,614 (5,379) 25,596 State tax, net of federal benefit 57,700 34,000 57,905 -------- --------- --------- $287,314 $ 237,621 $ 253,000 ======== ========= =========
F-15 50 NOTE 7 - INCOME TAXES (CONTINUED) Significant components of the provision for income taxes are as follows: YEARS ENDED DECEMBER 31, ------------------------------------------- 1999 1998 1997 -------- --------- --------- Current: Federal $191,180 $ (1,124) $ 449,000 State 45,682 850 138,000 -------- --------- --------- Total current 236,862 (274) 587,000 -------- --------- --------- Deferred: Federal 40,362 185,239 (284,000) State 10,090 52,656 (50,000) -------- --------- --------- Total deferred 50,452 237,895 (334,000) -------- --------- --------- $287,314 $ 237,621 $ 253,000 ======== ========= ========= Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. The components of the net deferred tax asset at December 31, 1999 and 1998 consist of the following: DECEMBER 31, ---------------------- 1999 1998 ------- ------- Net operating loss carryback $29,881 $ -- Accruals not currently deductible for tax purposes 3,036 20,288 Depreciation and amortization not currently deductible for tax purposes 17,535 75,817 ------- ------- Total deferred tax assets 50,452 96,105 Less valuation allowance -- -- ------- ------- Net deferred tax asset $50,452 $96,105 ======= ======= F-16 51 NOTE 8 - MAJOR CUSTOMERS The Company is dependent upon a small number of hospitals and the loss of any contract could have a significant adverse effect on the Company's operations. Further, certain contracts are terminable on ninety (90) day notice and if certain patient census is not maintained. Management intends to use its best efforts to retain existing contracts and expand the scope of services on these contracts, obtain new contracts, and maintain patient census at the same or higher levels than has historically been experienced. The following table summarizes the amount of revenue for each customer representing greater than ten percent (10%) of total revenues for the:
YEARS ENDED DECEMBER 31, -------------------------------------------------------------------------- 1999 1998 1997 ----------------------- ---------------------- --------------------- AMOUNT PERCENT AMOUNT PERCENT AMOUNT PERCENT ---------- ------- ---------- ------- ---------- ------- Hospital 1 $1,860,585 17.6% $2,563,088 22.5% $3,182,156 26.3% Hospital 2 1,066,709 10.1% 1,381,666 12.1% 1,433,494 11.9% Hospital 3 5,136,268 48.7% 4,838,421 42.4% 4,753,094 39.3% Hospital 4 648,000 6.1% 1,396,317 12.2% 1,160,444 9.6% Hospital 5 1,177,623 11.2% --- --- --- ---
In addition, these hospitals accounted for approximately $2,527,425, $2,138,861, and $2,006,817 of accounts receivable at December 31, 1999, 1998 and 1997, respectively. F-17 52 EXHIBIT INDEX EXHIBIT NUMBER DESCRIPTION - ------- ----------- 3.1 Certificate of Incorporation incorporated by reference from Form S-18 Registration Statement (Registration No. 0033-16313-LA) filed July 28, 1988, Exhibit 3.1. 3.2 Bylaws incorporated by reference from Form S-18 Registration Statement (Registration No. 33-16313-LA) filed July 28, 1988, Exhibit 3.2. 3.3 Certificate of Amendment of Certificate of Incorporation filed February 29, 1988. Incorporated by reference from Form S-18 Registration Statement (Registration No.33-16313-LA) filed July 28, 1988, Exhibit 3.5. 3.4 Restated Certificate of Incorporation, filed October 3, 1989. Incorporation by reference from Form 10-K for the year ended December 31, 1989. 10.1 Lease between the Company and Laguna Niguel Office Center dated June 23, 1988 which supersedes lease dated December 15, 1986, incorporated by reference from Form S-18 Registration Statement (Registration No. 33-16313-LA) filed July 28, 1988, Exhibit 10.1. 10.6 Amended and Restated 1987 Stock Option Plan incorporated by reference from Form S-18 Registration Statement (Registration No. 33-16313-LA) filed July 28, 1988, Exhibit 10.6. 10.18 Form of Modification Agreement to Incentive Stock Option Agreement, dated January 20, 1988, incorporated by reference from Form S-18 Registration Statement (Registration No. 33-16313-LA) filed July 28, 1988, Exhibit 10.18. 10.30 Lease amendment between the Company and Laguna Niguel Office Center dated September 24, 1990 which supersedes lease dated June 23, 1988 incorporated by reference from Annual Report on Form 10-K for the year ended December 31, 1990, Exhibit 10.30. 10.34 Agreement between Huntington Intercommunity Hospital and the Company dated November 1, 1991 incorporated by reference from Annual Report on Form 10-K for the year ended December 31, 1991, Exhibit 10.34. 10.38 Agreement between Huntington Intercommunity Hospital and the Company dated October 1, 1992 incorporated by reference from Annual Report on Form 10-K for the year ended December 31, 1992, Exhibit 10.38. 10.43 Lease amendment between the Company and Laguna Niguel Office Center dated May 12, 1993 which supersedes lease dated June 23, 1988 incorporated by reference form Annual Report on Form 10-K for the year ended December 31, 1993, Exhibit 10.43. 10.55 1994 Stock Option Plan incorporated by reference from Annual Report on Form 10-K for the year ended December 31, 1994, Exhibit 10.55 10.60 Lease amendment between the Company and Laguna Niguel Office Center dated July 7, 1994 which supersedes lease dated June 23, 1988 incorporated by reference from Annual Report on Form 10-K for the year ended December 31, 1994, Exhibit 10.60. 10.66 Agreement between Sherman Oaks Hospital and Health Center dated March 30, 1995, incorporated by reference from Form 10-K for the year ended December 31, 1995. 10.67 Loan Agreement between the Company and National Bank of Southern California dated March 31, 1995, incorporated by reference from Form 10-K for the year ended December 31, 1995. (Modified) 10.68 Lease Agreement between the Company and Laguna Niguel Office Center dated June 5, 1995 which supersedes lease dated June 23, 1988, incorporated by reference from Form 10- K for the year ended December 31, 1995. 53 EXHIBIT INDEX (Continued) EXHIBIT NUMBER DESCRIPTION - ------- ----------- 10.70 Lease Agreement between the Company and 757 Pacific Partnership dated July 3, 1995, incorporated by reference from Form 10-K for the year ended December 31, 1995. 10.73 Agreement between San Fernando Community Hospital, Inc. dba Mission Community Hospital and the Company dated October 6, 1995, incorporated by reference from Form 10-K for the year ended December 31, 1995. 10.77 Operating Agreement for Optimum Care Source, LLC incorporated by reference from March 31, 1996 Form 10-Q Exhibit 10.77. 10.78 Master Joint Venture Agreement between Professional CareSource, Inc. and the Company dated April 19, 1996 incorporated by reference from March 31, 1996 Form 10-Q Exhibit 10.78. 10.82 Registration Agreement between Professional CareSource, Inc. and the Company dated April 24, 1996 incorporated by reference from March 31, 1996 Form 10-Q Exhibit 10.82. 10.83 Non-qualified stock option Agreement between Joseph H. Dadourian and the Company dated April 24, 1996 incorporated by reference from March 31, 1996 Form 10-Q Exhibit 10.83. 10.84 Non-qualified stock option Agreement between Teri L. Jolin and the Company dated April 24, 1996 incorporated by reference from March 31, 1996 Form 10-Q Exhibit 10.84. 10.85 Non-qualified stock option Agreement between Margaret M. Minnick and the Company dated April 24, 1996 incorporated by reference from March 1996 Form 10-Q Exhibit 10.85. 10.86 Agreement between Friendship Community Mental Health Center and the Company dated April 25, 1996 incorporated by reference from March 31, 1996 Form 10-Q Exhibit 10.86. 10.87 Lease Agreement between the Company and Laguna Niguel Office Center dated April 30, 1996 which supersedes lease dated June 23, 1988, incorporated by reference from Form 10- K for the year ended December 31, 1996. 10.88 Lease Agreement between the Company and Jay Arteaga dated September 30, 1996, incorporated by reference from Form 10-K for the year ended December 31, 1996. 10.90 Unanimous Written Consent dated December 31, 1996 of the Board of Directors amending the promissory note between the Company and Edward A. Johnson dated December 29, 1995, incorporated by reference from Form 10-K for the year ended December 31, 1996. 10.91 Change in terms Agreement between the Company and National Bank of Southern California dated January 28, 1997 (Modified), incorporated by reference from Form 10-K for the year ended December 31, 1996. 10.94 Change in Terms Agreement between the Company and National Bank of Southern California dated May 15, 1997, incorporated by reference from Form 10-K for the year ended December 31, 1997. 54 EXHIBIT INDEX (Continued) EXHIBIT NUMBER DESCRIPTION - ------- ----------- 10.95 Inpatient and Outpatient Psychiatric Unit Management Services Agreement between the Company and Catholic Healthcare West Southern California dated June 1, 1997, incorporated by reference from Form 10-K for the year ended December 31, 1997. 10.96 Lease Agreement between the Company and The Ribeiro Corporation dated June 23, 1997, incorporated by reference from Form 10-K for the year ended December 31, 1997. 10.97 Lease Agreement between the Company and Harriet Maizels, Daniel Gold, Lesley Gold and Mildred Gold dated July 8, 1997, incorporated by reference from Form 10-K for the year ended December 31, 1997. 10.100 Lease Agreement between the Company and Laguna Niguel Office Center dated September 5, 1997 which supersedes lease dated June 23, 1988, incorporated by reference from Form 10-K for the year ended December 31, 1997. 10.101 First Lease Extension Agreement between the Company and Whittier Narrows Business Park and the Company dated September 11, 1997 which supersedes lease dated January 10, 1994, incorporated by reference from Form 10-K for the year ended December 31, 1997. 10.102 Lease Extension Agreement between the Company and 757 Pacific Avenue Partnership dated September 19, 1997 which supersedes lease dated July 3, 1995, incorporated by reference from Form 10-K for the year ended December 31, 1997. 10.103 Unanimous Written Consent dated December 29, 1997 of the Board of Directors amending the Promissory Note between the Company and Edward A. Johnson dated December 31, 1996, incorporated by reference from Form 10-K for the year ended December 31, 1997. 10.105 Agreement between Friendship Community Mental Health Center and the Company dated June 25, 1997 which supersedes the Agreement dated April 25, 1996, incorporated by reference from Form 10-K for the year ended December 31, 1998. 10.106 Lease Agreement between the Company and Laguna Niguel Office Center dated May 14, 1998 which supersedes lease dated June 23, 1988, incorporated by reference from Form 10- K for the year ended December 31, 1998. 10.107 Change in terms Agreement between the Company and Southern California Bank dated May 27, 1998, incorporated by reference from Form 10-K for the year ended December 31, 1998. 10.108 Lease Agreement between Whittier Narrows Business Park and the Company dated July 28, 1998, incorporated by reference from Form 10-K for the year ended December 31, 1998. 10.109 Lease Agreement between the Company and P.S. Business Parks, L.P. dated August 14, 1998, incorporated by reference from Form 10-K for the year ended December 31, 1998. 10.110 Inpatient and Outpatient Psychiatric Unit Management Services Agreement between the Company and Catholic Healthcare West Southern California dated September 15, 1998 which supersedes Agreement dated June 1, 1997, incorporated by reference from Form 10- K for the year ended December 31, 1998. 55 EXHIBIT INDEX (Continued) EXHIBIT NUMBER DESCRIPTION - ------- ----------- 10.111 Agreement between Citrus Valley Medical Center and the Company dated September 18, 1998, incorporated by reference from Form 10-K for the year ended December 31, 1998. 10.112 Sublease Agreement between Citrus Valley Medical Center and the Company dated September 23, 1998, incorporated by reference from Form 10-K for the year ended December 31, 1998. 10.113 Lease Agreement between the Company and Coldwell Banker dated November 1, 1998, incorporated by reference from Form 10-K for the year ended December 31, 1998. 10.114 Amendment to the Agreement dated June 25, 1997 between Friendship Community Mental Health Center and the Company dated November 12, 1998, incorporated by reference from Form 10-K for the year ended December 31, 1998. 10.115 Change in Terms Agreement between the Company and Southern California Bank dated April 27, 1999, incorporated by reference from Form 10-Q for the quarter ended June 30, 1999. 10.116 Lease Agreement between the Company and Laguna Niguel Office Center dated May 12, 1999 which supersedes the lease dated June 23, 1988, incorporated by reference from Form 10-Q for the quarter ended June 30, 1999. 10.117 Contract amendment between the Company and Huntington Intercommunity Hospital d/b/a Humana Hospital Huntington Beach dated August 1, 1999 which supersedes the contract dated November 5, 1991, incorporated by reference from Form 10-Q for the quarter ended September 30, 1999. 10.118 Contract amendment between the Company and Huntington Intercommunity Hospital d/b/a Humana Hospital Huntington Beach dated August 1, 1999 which supersedes the contract dated October 1, 1992, incorporated by reference from Form 10-Q for the quarter ended September 30, 1999. 10.119 Inpatient Psychiatric Services contract amendment dated August 6, 1999 between the Company and Huntington Intercommunity Hospital d/b/a Humana Hospital Huntington Beach which supersedes contract amendment dated August 1, 1999, incorporated by reference from Form 10-Q for the quarter ended September 30, 1999. 10.120 Partial Hospitalization Agreement contract amendment dated August 6, 1999 between the Company and Huntington Intercommunity Hospital d/b/a Humana Hospital Huntington Beach which supersedes contract amendment dated August 1, 1999, incorporated by reference from Form 10-Q for the quarter ended September 30, 1999. 10.121 Psychiatric Partial Hospitalization Management Agreement between the Company and Rhema Behavioral Health Center dated August 1, 1999, incorporated by reference from Form 10-Q for the quarter ended September 30, 1999. 10.122 First amendment to lease between the Company and Jay Arteaga dated October 11, 1999 which supercedes lease dated September 30, 1996, incorporated by reference from Form 10-Q for the quarter ended September 30, 1999. 10.123 Mental health inpatient and outpatient hospitalization services agreements between the Company and San Fernando Community Hospital d/b/a Mission Community Hospital dated December 31, 1999. Supercedes the agreements dated October 6, 1995. 23 Consent of Independent Auditors. 27 Financial Data Schedule EX-10.123 2 MATERIAL CONTRACT 1 EXHIBIT 10.123 MENTAL HEALTH INPATIENT HOSPITALIZATION SERVICES AGREEMENT This MENTAL HEALTH INPATIENT HOSPITALIZATION SERVICES AGREEMENT ("Agreement") is entered into for reference purposes only as of the __ day of December, 1999, by and between San Fernando Community Hospital, a California nonprofit public benefit corporation doing business as Mission Community Hospital and San Fernando Community Hospital ("Hospital") and OptimumCare Corporation, a Delaware corporation ("Manager"). RECITALS A. Hospital owns and operates a duly license acute care hospital which operates at locations in San Fernando and Panorama City, California. B. The San Fernando location ("Facility") includes an adult inpatient short-term crisis intervention psychiatric program (the "Program") for the treatment of psychiatric disorders for patients eighteen (18) years of age or older whose length of stay is less than or equal to eight (8) days. C. Manager is in the business of providing a variety of consulting, administrative and management services to facilities who treat patients with psychiatric disorders. D. Manager presently provides various services to the Program at the Facility, and Hospital desires to retain Manager, and Manger desires to be retained, to provide certain services with respect to the Program. E. Hospital and Manager desire to enter into this Agreement to provide a clear understanding of their respective rights, duties and obligations with respect to the subject matter hereof. AGREEMENT ARTICLE 1 MANAGER'S RIGHTS AND OBLIGATIONS 1.1 General Intent and Purpose. 1.1.1 Management Expectations. Manager will manage the Program in accordance with the mission, vision and values of Hospital, the Hospital's strategic plan, the Hospital's compliance plan, and the Hospital's annual budget and operating plan. Manager's management responsibilities shall be fulfilled within the policies, procedures and organizational structure of the Hospital, as it may exist from time to time. Manager's Program Administrator, Medical Director, and Director of Inpatient Psychiatric Nursing, as such terms are defined in Section 1.2 hereof, shall perform their responsibilities of management in accordance with the management structure and standards as required of Hospital employed managers and Hospital 2 contracted Medical Directors, as such standards and structure may exist from time to time. Although Hospital shall have the right, in its sole discretion from time to time, to change its management structure and standards, as of the commencement of the Agreement and until notice to Manager, the Program Administrator shall be a member of Hospital's Senior Management Team. Manager shall assure that all services are managed in accordance with the rules and regulations that regulate the provision of psychiatric services, including but not limited to assuring that all issues related to patient movement into and out of the Program are accomplished within the guidelines established by the Los Angeles County Department of Mental Health, in accordance with state and federal law, and in accordance with all Hospital policies. Manager will provide expertise to Hospital to recommend, and after approval by Hospital, to implement appropriate Hospital policies, procedures, rules and regulations. It is anticipated that all personnel provided by Manager will comply with all of the requirements established for Hospital personnel, including but not limited to, orientation, safety, health and assuring that any of Manager's personnel who oversee or direct Hospital employees do so in accordance with Hospital's human resources policies as they may be established by Hospital from time to time. On an annual basis, and more often if specified by Hospital, the Chief Executive Officer of Hospital ("CEO") or his designee shall perform a performance appraisal of the Manager's Program Administrator, Medical Director, and Nursing Director, similar to performance appraisals of individuals with management responsibilities or directorship agreements at Hospital. 1.1.2 Administration and Clinical Management. Subject to Hospital's ultimate retention of control and authority, Manager shall assist Hospital in the administration and clinical management of the Program and report to Hospital daily as to the administration of the Program and the care and treatment of Program patients while at the Facility in accordance with and subject to the patient's physician's orders. Manager does not provide psychiatric care (including diagnosis, development of individual treatment plans, determining changes in the care place and discharge planning), which care is provided by licensed physicians who are members in good standing of Hospital's Medical Staff with appropriate privileges. 1.2 Manager's Provision of Staffing. 1.2.1 Program Administrator and Medical Director, Staffing. Manager shall employ and/or independently contract with, and shall be financially responsible for staffing the Program with; (a) one full-time Program Administrator ("Program Administrator") who shall work full-time exclusively at Facility and who shall meet the criteria and fulfil the duties set forth in Exhibit 1.2.1.(a). The parties hereby acknowledge and agree that the Manager's total cost of providing the Program Administrator (including wages, Employee Benefits [as defined in Section 2.5] and overhead) is deemed, for the purposes of this Agreement, and as the parties' best estimate of fair market value, is the amount set forth in Exhibit 1.2.1.(a); and (b) one medical director ("Medical Director") who shall provide not less than thirty (30) hours of administrative services for the Program per month and who shall meet the criteria and terms set forth in Exhibit 1.2.1(b). The parties hereby acknowledge and agree that 2 3 the Medical Director's compensation is deemed, for the purposes of this Agreement, and as the parties' best estimate of fair market value, is the amount set forth in Exhibit 1.2.1.(b); and (c) one full-time Director of Inpatient Psychiatric Nursing Service ("Nursing Director") who shall work exclusively at Facility and shall meet the criteria and fulfil the duties set forth in Exhibit 1.2.1.(c). The parties hereby acknowledge and agree that the Manager's total cost of providing the Nursing Director (including wages, Employee Benefits [as defined in Section 2.5] and overhead) deemed, for the purposes of this Agreement, and as the parties best estimate of fair market value, is the amount set forth in Exhibit 1.2.1.(c). 1.2.2. Additional Personnel Staffing. Manager shall employ and/or independently contract with and shall be financially responsible for staffing the Program with professional counseling staff, therapists, case managers and utilization review managers and staff, in the categories, at the staffing levels, and at the costs (cumulatively for each category), including wages and Employee Benefits and overhead, as set forth in Exhibit 1.2.2. 1.2.3 Need for Staffing. The staffing set forth in Section 1.2 hereof is based upon the anticipated Program needs to operate the Program as required (i) by applicable State and Federal law and regulation as required for licensure and accreditation and for certification for participation in and reimbursement from the Medicare and Medi-Cal programs, (ii) the Program's reasonable requirements, and (iii) community standards. 1.2.4 Changes to Staffing Levels. Manager shall not, without Hospital's prior written consent, which shall not be unreasonably withheld, deviate from, change, or decrease the agreed staffing levels as set forth in this Section 1.2. 1.2.5 Staff Compensation. Manager is solely responsible for compensating the individuals Manager provides hereunder, including Employee Benefits, and shall defend and hold Hospital harmless from claims for compensation or Employee Benefits from such individuals. "Employee Benefits" shall include, by way of illustration and not limitation, an employer's contribution under the Federal Insurance Contributions Act, unemployment compensation and related insurance, payroll and other employment taxes, pension and retirement plan contributions, workers= compensation and related insurance, group life, health, disability, and accident insurance, severance, and other benefits. In entering into or continuing any financial relationship (e.g., ownership or compensation arrangements) with any physicians and their immediate family members (as defined under the Stark law at 42 U.S.C. '1395nn and Cal. Bus. & Prof. Code " 650.01 et seq.), Manager shall assure that such financial arrangements meet the requirements of an applicable exception under those laws such that Hospital is not prohibited from presenting any claims for services pursuant to such physician self-referral laws. 1.2.6 Acceptability of Staff Members. Prior to retaining any individuals to provide services at Facility pursuant to Section 1.2 hereof. Manager shall obtain the prior written approval of such individual from the CEO. Manager shall submit such information regarding proposed personnel as the CEO reasonably requests. Manager shall use reasonable efforts to resolve any issues regarding the acceptability to Hospital of Program staff employed or otherwise 3 4 contracted for by Manager. All professional individuals, including Medical Director, provided by Manager, shall meet the applicable standards of Hospital's Medical Staff Bylaws. 1.2.7 Removal of Staff Member. At the request of Hospital, in its sole and absolute discretion, Manager shall immediately remove any employee or independent contractor of Manager from providing services at the Facility or to the Program. 1.2.8 Staff Member Conduct and Care. Manager shall cause all employees and independent contractors of Manager at all times to conduct their activities in compliance with all bylaws, rules and regulations, policies and procedures of Hospital and its medical staff and in compliance with all applicable federal, state and local laws and regulations, and with the standards and requirements established by the Joint Commission on Accreditation of Healthcare Organizations and other relevant professional organizations pertinent to the operation of the Program. 1.3 Licensure and Accreditation. Manager shall advise and assist Hospital in order for Hospital to obtain all necessary licenses and approvals from governmental and accrediting agencies, including the Joint Commission on the Accreditation of Healthcare Organizations, and in order for Hospital to obtain all certifications and approvals necessary to participate in the Medicare and Medi-Cal programs. Manager shall advise and assist Hospital to assure Hospital timely undertakes all activities necessary to obtain and maintain all necessary licenses and approvals from governmental and accrediting agencies, including without limitation, the California Department of Health Services, and is responsible for timely advising and assisting Hospital to undertake all activities necessary to maintain all certifications and approvals necessary to participate in the Medi-Cal and Medicare programs are performed. Manager shall advise and assist Hospital to enable Hospital to timely prepare, file, and supplement all regulatory applications, reports, and forms required by any local, state or federal regulatory agency and shall prepare the Facility for, and monitor, regulatory surveys and inspections of the Program. Manager shall use its best efforts to assure that Hospital promptly remedies any deficiencies identified in such surveys and inspections to the extent such deficiencies are within Manager's control. If the subject matter of the deficiency is Manager's responsibility hereunder, Manager shall promptly correct such deficiency. Manager shall use its best efforts to assure that the Program and the Facility are operated and maintained in compliance with all applicable federal, state, and local laws, rules and regulations. 1.4 Policies and Procedures. 1.4.1 Development and Implementation of Policies and Procedures. Manager shall develop and recommend, and upon Hospital's approval, assist Hospital in implementing all policies and procedures necessary for the safe and efficient operation of the Program, and shall educate Program staff on such policies and procedures. The foregoing shall include, but not be limited to, proposed policies and procedures for performance improvement and utilization review which are consistent with Hospital's policies and procedures for performance improvement and utilization review in other Hospital programs and services. Manager shall develop and recommend, and following Hospital approval implement, clinical treatment programs and 4 5 protocols for non-physician care that are reflective of current unrecognized standards for psychiatric programs. Manager shall provide orientation and training for all Program staff, irrespective of whether such staff members are employees or independent contractors of Hospital or Manager. Manager shall assure that all personnel who provide services at the Facility participate in Hospital's orientation for new Facility employees. Manager shall as reasonably necessary provide ongoing in-service training such as to assure that Program staff have the requisite knowledge and skill required to delivery quality healthcare services at the Facility and through the Program. 1.4.2 Hospital Approval. The implementation of the policies and procedures and clinical treatment programs required under Section 1.4 shall be subject to prior approval by the Hospital's administration and, where appropriate, the Hospital's medical staff. 1.4.3 Compliance Plan. Manager shall require that all personnel provided by Manager to work at Hospital or to provide services on behalf of Hospital at all times comply with Hospital's Compliance Plan and its components as they may be in effect from time to time. 1.5 Indemnification by Manager. Manager shall protect, indemnify, hold harmless, and defend Hospital, its legal representatives, employees, agents, officers, trustees, affiliates and assigns, and each of them, from and against any and all claims, actions, demands, proceedings, losses, damages, costs, expenses and liabilities (including reasonable attorneys= fees) arising out of or related to the performance or nonperformance by Manager of any obligations to be performed or services to be provided hereunder. This indemnification obligation survives the expiration or earlier termination of this Agreement. 1.6 Insurance. 1.6.1 General Liability Insurance. Manager shall procure and maintain, at its sole cost and expense, throughout the term hereof, a policy or policies of comprehensive general liability and malpractice insurance covering itself and the individuals it provides pursuant to Section 1.2 hereof from an insurance carrier licensed and authorized to sell or approved to place liability insurance policies of this nature by the State of California with limits of not less than Five Million Dollars ($5,000,000) per occurrence. Manager shall cause to be issued to Hospital, by the insurance carriers issuing such coverage, certificates of insurance evidencing that the foregoing covenants of this Agreement have been complied with and stating that said insurance carriers shall provide not less than ten (10) calendar days prior written notice to Hospital of any cancellation or material modification of the policy or coverage described herein, or, if any such carrier shall not agree to provide such notice, then Manager shall provide notice to Hospital of any such cancellation or modification immediately upon receipt of notice of the foregoing from the carrier. Any deductible, co-insurance, or aggregate limits shall be subject to Hospital's approval, which shall not be unreasonably withheld. 1.6.2 Workers Compensation Insurance. Manager shall procure and maintain, at its sole cost and expense, throughout the term hereon, a policy or policies of workers' compensation insurance covering its employees from an insurance carrier licensed and authorized to sell or approved to place such liability insurance policies of this nature by the State of California. Manager shall add Hospital as an additional insured on such policy. 5 6 1.6.3 Extended Reporting Period. If any liability insurance policy procured pursuant to Section 1.6 is on a "claims made" rather than "occurrence" basis, then such policy shall include an option to purchase a "tail" or an extended reporting period, which option shall be exercisable upon termination or cancellation of said policy or upon any material modification of said policy that has the effect of causing the coverage of said policy to fail, in any respect, to meet the requirements of Section 1.6, regardless of whether such termination, cancellation or modification shall occur during the term hereof or thereafter. The tail or extended reporting period shall provide coverage meeting all of the requirements set forth in Section 1.6, for a period of at least seven (7) years after termination, cancellation or modification of the underlying policy. Such policy shall provide that the carrier shall give Hospital or Manger at least thirty (30) calendar days advance written notice of the date upon which the option may be exercised regardless of whether such date shall occur during the term hereof or thereafter and shall specifically provide that Hospital shall be permitted to exercise the option upon failure of Manager to do so. Upon such notice, Manager shall take all steps, including but not limited to the payment of money, necessary to exercise such option, and if Manager shall fail to effectively exercise such option, then Hospital may do so and Manager shall fully and immediately reimburse Hospital, within ten (10) calendar days notice thereof by Hospital, for all monies expended by Hospital in connection therewith. The provisions of this Section 1.6.3 survive the expiration or earlier termination of this Agreement. 1.7 Record keeping and Access to Documents. Manager shall take all actions required by the Medicare or Medi-Cal programs to generate and maintain all necessary records as may be required of Hospital by the Medicare or Medi-Cal programs. Such records are the property of Hospital. In addition, for the purpose of implementing Section 1861(v)(1)(1) of the Social Security Act, as amended, and any regulations promulgated pursuant thereto, Manager agrees to comply with the following statutory requirements governing the maintenance of documentation to verify the cost of services rendered under this Agreement: (i) until the expiration of four years after the furnishing of such services pursuant to such contract, Manager shall make available, upon written request to the Secretary of the U.S. Department of Health and Human Services, or upon request to the Comptroller General, or any of their duly authorized representatives, the contract and books, documents, and records of such costs, and (ii) if Manager carries out any of the duties of the contract through a subcontract with a value or cost of Ten Thousand Dollars ($10,000) or more over a twelve-month period, with a related organization, such subcontract shall contain a clause to the effect that until the expiration of four years after the furnishing of such services pursuant to such a subcontract, the related organization shall make available, upon written request to the Secretary, or upon request to the Comptroller General, or any of their duly authorized representatives, the subcontract and books, documents, and records of such organization that are necessary to verify the nature and extent of such costs. 6 7 1.8 Audit Disclosure. If Manager is requested to disclose books, documents, or records for purposes of an audit, Manager shall notify Hospital of the nature and scope of such request and Manager shall make available, upon written request of Hospital, all such books, documents, or records, during regular business hours of Manager. The provisions of Sections 1.7 and 1.8 survive the expiration or earlier termination of this Agreement. 1.9 Reports. 1.9.1 Monthly Report. Manager shall provide monthly written reports to Hospital administration which detail the staffing provided each day during the prior month pursuant to Article I of this Agreement. Such monthly reports shall accompany Manager's invoice as required pursuant to Section 4.3.3 of this Agreement. The monthly reports shall include such detail as reasonably requested by Hospital, the submission of such reports to Hospital to be an express condition precedent to Hospital obligation to pay to Manager the Management Fee as required by Section 4 of this Agreement. 1.9.2 Quarterly Report. Manager shall provide quarterly written reports to Hospital administration regarding all aspects of the operations of the Program. Such quarterly reports shall address, among other things, the therapies provided to patients, any notable therapeutic successes or failures experienced by patients of the Program, any changes in Program staff, any complaints received by Manager regarding the operation and administration of the Program and the Facility, Program census, staffing provided the Program by Manager, and such other information regarding the staffing, and any other items or issues significant to the administration of the Program requested by Hospital. 1.10 Adverse Actions. Manager shall commit no act or omission which adversely affects any licensure or certification of the Hospital. 1.11 Admissions and Professional Services. Patients only shall be admitted by Hospital pursuant to an order by a physician member of Hospital's medical staff with admitting privileges. Manager shall assure that medical treatment shall only be ordered and provided by physicians who are members of Hospital's medical staff with appropriate clinical privileges. To the extent that Manager or its personnel makes Section 5150 assessments of individuals and places holds on such individuals at the Facility, Manager shall comply with all requirements of Section 5150 and the associated regulations and policies adopted by the County of Los Angeles. 1.12 Additional Reports. Manager shall prepare an annual report for the CEO regarding the Program. The Senior Management of Manager's Corporate Offices shall meet with the CEO and/or his designee upon the CEO's request, the foregoing to occur at least on a quarterly basis. Manager shall require that the Program Administrator and Nursing Director provide periodic reports in accordance with the requirements and expectations of other Hospital managers. Manager shall promptly provide Hospital with reports and information that Hospital reasonably requests with respect to the Program, including but not limited to admissions and discharges. 7 8 1.13 Additional Duties. Manager shall provide the additional duties set forth in Exhibit 1.13. ARTICLE II. HOSPITAL's RIGHTS AND OBLIGATIONS 2.1 Ultimate Control. Hospital shall have and maintain throughout the period hereof ultimate control and authority for the operation of the Program. Not to limit the foregoing, all admissions to the Program shall be in compliance with the admissions criteria which is established by Hospital after considering Manager's recommendations. Hospital has ultimate authority and control regarding decisions to accept a patient. 2.2 Space. Hospital shall continue to provide the space currently being provided for the Program which Manger agrees is adequate in all respects for the proper operation of the Program. Such space includes the fifty-six (56) bed contiguous space, administrative space, non-exclusive meeting space, and non-exclusive counseling space. Hospital shall be free to make any changes it desires to the Facility, or to relocate the Program so long as such changes do not materially and adversely interfere with the ability of Manager or Hospital to carry out their duties hereunder. 2.3 Hospital's Employees. Except for those positions designated to be provided by Manager, Hospital shall employ, or shall independently contract with, and shall be financially responsible for staffing the Program with all personnel necessary for the proper and efficient administration and clinical operation of the Program, including registered nurses, licensed vocational nurses and mental health workers, the foregoing in numbers appropriate based on the Program's anticipated daily census, and the services of a registered dietician and an office Manager. All personnel employed or otherwise contracted for (including the Office Manager) shall be required to comply with the Program policies and procedures as mutually developed and agreed upon in writing by Hospital and Manager. 2.4 Diagnostic Facilities. Hospital shall make available to Program patients the Hospital's inpatient, diagnostic, and other facilities as are available at Hospital and ordered from time to time by such patients' attending physicians or appropriately requested by Program staff. 2.5 General Services. Hospital shall provide the following support services for the efficient and proper operation of the Program. 2.5.1 Dietary services for patients of the Program (to be served to each patient at the Facility and the part-time services of the Hospital's nutritionist/dietician). 2.5.2 Housekeeping services for the facility. 2.5.3 Janitorial and physical upkeep of the Facility. 2.5.4 All utilities for the Facility. 8 9 2.5.5. Such clerical support, office supplies and general supplies necessary for the proper operation of the Program. 2.5.6 Record keeping services, in accordance with state and federal laws and regulations. 2.5.7 Transportation as Hospital determines, after consultation with Manager, is necessary to operate the Program. Nothing in this Agreement is intended to or shall be construed to limit or restrict the Hospital's ability to outsource the provisions of the goods and services contemplated in this Section. 2.6 Policies and Procedures. Hospital shall provide all Program staff (including employees and independent contractors of Manager) with copies of all relevant Hospital and Program policies and procedures, as amended from time to time. 2.7 Health Screening. Hospital shall provide to all Program staff (including employees and independent contractors of Manager) such appropriate pre-employment and periodic diagnostic and health screening examinations as are customarily provided by Hospital for Hospital employees. 2.8 Accreditation. With the assistance of Manager, Hospital shall maintain accreditation by the Joint Commission on the Accreditation of Healthcare Organizations, and shall be financially responsible for paying all such fees related to such accreditation. Notwithstanding any other provisions in this Agreement, the sole remedy for Hospital's sole breach of this Section 2.8 is the right of termination of this Agreement by Manager pursuant to Section 5.2.3. 2.9 Performance Improvement Review. With the assistance of Manager and the staff provided by Manager pursuant to Section 1.2 hereof, Hospital shall oversee the utilization review and performance improvement services with respect to services provided by the Program. 2.10 Insurance. Hospital shall maintain professional and public liability insurance coverage for the Program under the same terms and conditions and for the same coverage limits as for other Hospital programs. Said insurance shall cover claims for negligence of Hospital or its employees. Written certificate of such coverage shall be provided to Manager. Hospital shall have the right to provide the foregoing coverage through the self-insurance programs of its parent, sister, or related entities. 2.11 Y2K. Hospital shall use its best efforts to identify and take such actions as are necessary in order for all systems and equipment which are essential for the Program to be Y2K compliant prior to January 1, 2000. 9 10 ARTICLE III. REPRESENTATIONS AND WARRANTIES BY MANAGER 3.1 Representations by Manager. 3.1.1 Corporate Status. Manager is a corporation duly organized and existing under the laws of the State of Delaware, is authorized and qualified to conduct business in the State of California, and has the power and authority to carry on the activities in which it is engaged and to perform its obligations hereunder. 3.1.2 Execution of Agreement. The execution of this Agreement and the performance of the obligations of the Manager hereunder will not result in any breach of any of the terms, conditions, or provisions of any agreement or other instrument to which Manager is a party or by which it may be bound or affected, or any governmental license, franchise, permit or other authorization possessed by the Manager, nor will such execution and performance violate any federal, state or local law, rule or regulation. 3.1.3 Litigation. There is no litigation, administrative proceeding or investigation pending or threatened against Manager, nor is the Manager subject to any judgment, order, decree or regulation of any court or other governmental or administrative agency, which would materially adversely affect the performance of Manager's obligations hereunder. 3.2 Representations and Warranties by Hospital. 3.2.1 Corporate Status. Hospital is a non-profit public benefit corporation duly organized and validly existing in good standing under the laws of the State of California with the power and authority to perform its obligations hereunder subject to licensure by the California Department of Health Services. 3.2.2 Execution of Agreement. To Hospital's knowledge, the execution of this Agreement will not be in violation of any governmental license, permit or other authorization possessed by Hospital. Hospital is accredited by the Joint Commission on the Accreditation of Healthcare Organizations. 3.2.3 Litigation. To Hospital's knowledge, there is no litigation, administrative proceeding or investigation pending or threatened against Hospital, nor is the Hospital subject to any judgment, order, decree or regulation of any court or other government or administrative agency which would materially adversely affect the performance of Hospital's obligations hereunder. 10 11 ARTICLE IV. BILLING AND COLLECTIONS; MANAGEMENT FEE 4.1. Facility Services Billing and Collections. Hospital has in effect a schedule of fees and patient charges for the administrative and technical component of all services rendered by the Program. Said fees and charge may be modified by Hospital from time to time in its sole and absolute discretion, but Hospital shall give prior notice of such modification to Manager for informational purposes. Hospital shall have the sole and exclusive right to bill and collect for Hospital's fees and charges with reference to services provided by the Program in accordance with such schedule. Hospital shall be responsible for preparing and submitting its annual cost report. The parties agree, if necessary and appropriate, to alter their billing arrangements in order to avoid reimbursement disallowance for Hospital pursuant to the Tax Equity and Fiscal Responsibility Act of 1982 or 42 C.F.R., Part 405, as it may be revised from time-to-time. 4.2 Professional Services Billing and Prohibition on Billing. 4.2.1 Physicians and Clinical Psychologists. Physicians and clinical psychologists who provide services at the Program are responsible for billing and collecting for their own professional services. 4.2.2 LCSWs and MFCCs. Hospital and Manager shall bill and collect for their respectively employed licensed or directly contracted social workers ("LCSWs"); manager, family and child counselors ("MFCCs"); and other licensed therapists unless such LCSWs, MFCCs, and other licensed therapists agree to be responsible for billing and collecting for their professional services. 4.2.3 Prohibition on Billing. Manager shall not and shall cause the Medical Director and any other physicians or psychologists associated, employed by or under contract with Manager not to bill or cause to be billed, the Medicare Program, any Medicare beneficiary, a Medicare (Part B) carrier or any other third party payor or patient for any portion of the administrative, supervisory or other provider services in violation of 42 CFR, Section 405.550. Manager shall indemnify and hold harmless Hospital from any breach of this Section 4.2. 4.3 Management Fee. 4.3.2 Invoice for Management Fee. The parties have negotiated at arms-length negotiations the compensation to Manager to be a fair market value amount for Manager's services and not to be determined in a manner that takes into consideration the volume or value of any referrals or business generated to or within Hospital. Hospital shall pay to Manager an annual management fee of Two Million Four Hundred Twenty Three Thousand, Four Hundred Sixty One Dollars ($2,423,461), payable in equal monthly installments of Two Hundred One Thousand Nine Hundred Fifty Five Dollars and Eight Cents ($201,955.08) ("Management Fee"). 11 12 4.3.3 Timing of Management Fee Payment. Manager shall prepare and submit to Hospital on a monthly fee basis an invoice for its services rendered hereunder. Said invoice shall include information as to the amount of time and services provided by Manager. Manager shall submit with the invoice the monthly report required under Section 1.9. Claims will be settled within 30 days of receipt of invoice. 4.4 Adjustments to Management Fee. 4.4.1 Management Fee Offset. In the event any of the Program staff to be provided by Manager are not provided in accordance with this Agreement for a period of more than forty-five (45) days, Hospital may deduct from Manager's Management Fee an amount equal to the budgeted compensation for such position, including Employee Benefits. This right to deduct shall not excuse Manager from its obligation to provide staffing at the level set forth in Section 1.2. 4.4.2 Payments Declined. Within thirty (30) days of written notice from Hospital, Manager shall reimburse Hospital twenty percent (20%) of Hospital's charges for all patient days in excess of 8% during the term of this Agreement for which payment was denied for clinical reasons or as a result of inappropriate or inadequate documentation. Hospital may offset, among other rights, such amount against any monies owed to Manager under this Agreement or any other agreement. A "patient day" shall be deemed to exist with respect to each patient in the Program at 12:01 a.m. Manager may request, and Hospital may authorize, that Manager appeal such denial of payment with the costs of such appeal being borne by the parties equally. ARTICLE V. TERM AND TERMINATION 5.1 Term. This Agreement commences effective 12:01 a.m., January 1, 2000, and expires 12:59 p.m., December 31, 2002, unless earlier terminated in accordance with the provisions of this Agreement. 5.2 Termination by Manager. 5.2.1 Manager may terminate this Agreement upon ninety (90) days prior to written notice to Hospital, if Hospital should have a bankruptcy, reorganization, or similar action filed by or against it, or become insolvent, or sell all or substantially all of its assets (but subject to the assignment rights set forth in this Agreement). 5.2.2 In the event Hospital fails to comply with the terms of this Agreement in any material respect, Manager may notify Hospital of such breach, in writing, and Hospital shall have thirty (30) days to cure such breach; provided that if the breach is for failure to staff the Facility as required hereunder, Hospital shall have sixty (60) days to cure such breach. In the event Hospital fails to cure such breach within said period, the Agreement may be terminated by Manger upon ninety (90) days prior to written notice to Hospital. 12 13 5.2.3 Manager may terminate this Agreement upon ninety (90) days prior written notice to Hospital in the event Hospital fails to maintain accreditation by the Joint Commission on the Accreditation of Health Care Organizations, or in the event Hospital fails to maintain any license or certification granted to it by a regulatory agency without which the Program would be materially and adversely affected, unless the responsibility to assist in the maintenance of such license or certification is a responsibility of Manager pursuant to Section 1.3. 5.2.4 Manager may terminate this Agreement upon ten (10) days prior written notice to Hospital in the event Hospital fails to maintain insurance in accordance with the requirements of Section 2.10. 5.3 Termination by Hospital. 5.3.1 Hospital may terminate this Agreement upon ninety (90) days prior written notice to Manager, if Manager fails to pay its obligations in a timely manner under any agreement, should have a bankruptcy, reorganization, or similar action filed by or against it, or become insolvent, or sell all or substantially all of its assets. 5.3.2 In the event Manager fails to comply with the terms of this Agreement in any material respect, Hospital may notify Manager of such breach, in writing, and Manager shall have thirty (30) days to cure such breach; provided that if the breach is for failure to staff the Facility as required hereunder, Manager shall have sixty (60) days to cure such breach. In the event Manager fails to cure such breach within said period, the Agreement may be terminated by Hospital upon ninety (90) days prior written notice. 5.3.3 Hospital may terminate this Agreement upon thirty (30) days prior written notice to Manager in the event Hospital fails to maintain accreditation by the Joint Commission on the Accreditation of Healthcare Organizations, in the event Hospital fails to maintain any license, permit, certification and/or other required authorizations to operate the Program or the Facility, or if Hospital loses or surrenders its participation in the Medicare and/or Medi-Cal programs. 5.3.4 Hospital may terminate this Agreement upon ten (10) days prior written notice to Manager in the event Manager fails to maintain insurance in accordance with the requirements of Section 1.6. 5.3.5 Hospital may terminate this Agreement if (a) Manager, or any of its principals, officers, Managers or directors ("Management Personnel") is convicted of an offense related to healthcare or listed by a Federal agency as being disbarred, excluded or otherwise ineligible for Federal program participation, or (b) any of the staff Manager employs or contracts with, other than Management Personnel, are convicted of an offense related to healthcare or listed by a Federal agency as being disbarred, excluded or otherwise ineligible for Federal program participation and Manager does not immediately remove such non-Management Personnel from providing services hereunder. 13 14 5.3.6 We agree to develop within the next 60 days a mutually acceptable addendum to the contract which addresses the question of establishing reasonable management accountability for bottom line performance. 5.4 Immediate Threat to Patient Care. Notwithstanding any other term of this Agreement, in the event a party ever fails to meet a condition of this Agreement which breach poses a threat to patient care, the operation, licensure or reimbursement of the Hospital or the Program, the party not in breach may require the other immediately to take such remedial steps as are necessary to alleviate said threat to patient care or operations. If said threat is not immediately remedied, the other party shall have the right to immediately terminate this Agreement or take such remedial steps as such other party deems necessary to cure the threat. 5.5 Renegotiation/Termination. 5.5.1 Tax Exempt Financing. In the event Hospital seeks additional or replacement tax exempt financing, Manager agrees to amend this Agreement as may be necessary in order for Hospital to obtain or maintain such financing, or to secure the legal opinions which may be required to secure or maintain such financing. Immediately upon request by Hospital, Manager shall execute any and all such amendments presented by Hospital and shall return promptly said fully executed original amendments to Hospital. If Manager fails to comply with this provision, Hospital may terminate this Agreement upon ten (10) days written notice to Manager. 5.5.2 Changes in Reimbursement. Acknowledging that a substantial portion of the Program's services will be reimbursed under the Medicare and Medi-Cal programs and that a substantial portion of the Hospital's services are reimbursed under the Medicare and Medi-Cal programs, the parties agree that this Agreement is terminable by either party effective upon any changes in the Medicare or Medi-Cal laws, regulations and/or payment programs which substantially and adversely affect either party, including but not limited to changes in Hospital's reimbursement for Program services; provided, however, the parties agree to negotiate diligently and in good faith to revise this Agreement to eliminate the substantial and adverse effect caused by such change(s). 5.5.3 Hospital's Licensure and Status. It is understood and agreed that Hospital is a licensed general acute care facility which is owned by a nonprofit corporation which has tax-exempt financing and participates in the Medicare and Medi-Cal programs. Hospital is bound by the federal and state laws, regulations and interpretations thereof pertaining to the foregoing. The parties agree that this Agreement shall be interpreted from time-to-time as they may affect Hospital, its licensure, nonprofit status, tax exempt financing and participation in and reimbursement by the Medicare and Medi-Cal programs. In the event this Agreement or one or more of its terms or provisions is interrupted from time-to-time as they may affect Hospital, its licensure, nonprofit status, tax exempt financing and participation in and reimbursement of the Medicare and Medi-Cal programs. In the event this Agreement or one or more of its terms or provisions is interpreted by Hospital's counsel to pose a risk of violation of any of the foregoing laws, regulations or interpretations thereof, Hospital's bond covenants, the conditions or 14 15 restrictions pertinent to providers who participate in the Medicare and Medi-Cal programs, to potentially subject Hospital to monetary sanctions or penalties, or to adversely affect Hospital's right to bill and collect for services, the parties agree (i) to continue to perform their respective obligations hereunder except for the offending provisions; and (ii) to negotiate diligently and in good faith to reach an agreement without the offending provisions within ten (10) days after notice that the Agreement requires renegotiation pursuant to this Section 5.5.3, then this Agreement shall terminate immediately upon notice served by either party in accordance with Section 8.10 hereof. 5.6 Effects of Termination. Upon termination of this Agreement each party shall continue to be bound by (a) all covenants and restrictions that by their nature or terms continue to be binding (for example, but without limitation, access to books and records, confidentiality indemnification), and (b) all amounts payable as compensation or offset for services rendered during the term of this Agreement. The parties agree that policies and procedures prepared by Manager and adopted by Hospital may be used by Hospital after the termination of this Agreement in its sole discretion. ARTICLE VI. CONFIDENTIAL INFORMATION NON-COMPETITION AND NON-SOLICITATION 6.1 Confidential Information Acknowledgment. Each party acknowledges and agrees that Confidential Information may be disclosed to it in confidence by the other party with the understanding that it constitutes business information developed by the other party. Each party further agrees that it shall not use such Confidential Information for any purpose other than in connection with the Program. Each party further agrees not to disclose such Confidential Information to any third party except as required by law or regulation or in order to serve the purpose of the Program or as permitted by written authorization of the other party. "Confidential Information" shall mean all confidential information and trade secrets of each party, including without limitation, financial statements, internal memoranda, reports, patient lists, memoranda, manuals, handbooks, pamphlets, production books and audio and visual recordings, models, techniques, formulations, procedures, business plans, and other materials or records of a confidential and/or proprietary nature not known or available to the public or within the industry and which are shared by a party with the other party in the course and scope of performing its obligations hereunder. For purposes of this Agreement, policies and procedures and other materials developed by Manager for Hospital are not Confidential Information of Manager. 6.2 License. Manager hereby grants to Hospital for the term of this Agreement, a non-exclusive license to use the registered service marks of Manager when identifying the Program. These service marks are to remain the exclusive property of Manager. 6.3. Use of Name or Likeness. Neither party shall have the right to use the other party's name or likeness in any advertising, directories, brochures or announcements without the other party's approval of the specific usage. If the parties agree to develop any forms of advertising for the Program, all costs shall be borne equally by the parties. 15 16 6.4 Patient Information. Manager covenants, represents and warrants that neither Manager not its staff shall disclose to any third party, except where permitted or authorized by applicable law or expressly approved in writing by Hospital, any patient or medical record information, and that Manager and its staff are knowledgeable regarding and will comply with the Federal and State laws regarding the confidentiality of such information. 6.5 Covenant Not to Compete. During the term of this Agreement, Hospital is willing to permit Manager access to Hospital's Confidential Information if Manager agrees during the term of this Agreement to avoid conflicts of interest by entering into this covenant not to compete. During the term of this Agreement, neither Manager nor any of its shareholders, officers or directors, or any entity controlled by or under control with or subject to common management with one of the foregoing, shall directly or indirectly perform or arrange to perform in any capacity the type of services called for hereunder by Manager for any psychiatric program, nor shall the foregoing have any ownership interest in any entity or sole proprietorship which has a psychiatric program. This covenant not to compete shall be effective within a ten (10) mile radius of Facility. If Hospital relocates the Program, the covenant not to compete shall be effective within a ten (10) mile radius of the new location; provided, however, if as a result of the relocation, Manager then has a relationship with a psychiatric program which would violate this covenant not to compete such pre-existing relationship shall be exempt from this covenant not to compete. Hospital shall have the right to enforce the foregoing through legal or equitable action, including but not limited to, injunctive relief, for such injunctive relief or equitable relief to be available without the necessity of posting a bond, cash or otherwise. In addition to the foregoing, Hospital shall have the right at its option to immediately terminate this Agreement and to seek damages for such breach or to continue this Agreement and to recover damages for the breach. 6.6 Non-Solicitation. 6.6.1 Non-Solicitation Limitations. Manager and Hospital each acknowledge that the other party has expended and will continue to expend substantial time, effort, and money to train its respective employees and contracted personnel in the operation of the Program, and that the other party's respective employees and contracted personnel have access to and possess Confidential Information of the other party. Each party therefore agrees that for the earlier of (i) one (1) year after the cessation of the employment or agency relationship between the other party and an employee or contracted person of the other party, or (ii) one (1) year after termination of this Agreement, it will not knowingly (and it will not induce any of its agents or affiliates to) solicit the employment of or contract with any employee, former employee, or contracted personnel or former agent of the other party if such individual has been employed by or retained by the other party to provide services at Facility unless the other party gives express written consent thereto. 6.6.2 Permissible Employment Contracting. (i) This Section prohibits solicitation but not the actual employment or contracting of an individual if such individual desires such employment or contract and initiates an application for such employment or contract. 16 17 (ii) Notwithstanding anything to the contrary, this Section does not apply to (a) Manager if Manager terminates this Agreement pursuant to Section 5.2.1, 5.2.2 or 5.2.4 of this Agreement, and (b) Hospital if Hospital terminates this Agreement pursuant to Section 5.3.1, 5.3.2, 5.3.4, or 5.3.5 of this Agreement. (iii) Notwithstanding anything to the contrary, a party shall not be restricted from contracting with the other party's employees or independent contractors, if such employee or independent contractor had at any time an employment or other contractual relationship with or was on the Medical or Allied Health Professional Staff of such party. ARTICLE VII. APPLICABLE LAWS 7.1 Kickback and Anti-Referral Laws. Each party agrees to comply with applicable federal, state and local laws respecting the Program and the conduct of their respective businesses and professions, including but not limited to the federal and California laws governing the referral of patients which are in effect or will become effective during the term of this Agreement. These laws include prohibitions on: 7.1.1 Payment for referral or to induce the referral of patients (Social Security Act Section 1128; Cal Business and Professions Code Section 325); and 7.1.2 The referral of patients by a physician for certain designated health care services to an entity with which a physician (or his/her immediate family) has a financial relationship (Cal. Labor Code " 139.3 and 139.31, applicable to referrals for workers= compensation services; Cal. Business and Professions Code "6501.01 and 650.02, applicable to all other patient referrals within the State; and '1877 of the Social Security Act, applicable to referrals of Medicare and Medi-Cal patients). 7.2 Acknowledgments. As consideration for each party hereto to enter into this Agreement, the parties: 7.2.1 Acknowledge that (i) each has had the opportunity to engage independent counsel of her/its choice for advice as to the requirements of the anti-referral laws referred to in this Section 7; and (ii) each has had the opportunity to consult with legal counsel or other experts as each deems appropriate to assist in the determination by each party that the terms of this Agreement are commercially reasonable; 7.2.2 Represent to the other that is the intent that the terms of this Agreement shall be commercially reasonable; and 7.2.3 Represent to the other that it is the intent that compensation for each of the services which are provided under this Agreement and the services of the Medical Director shall be based on the fair market value of such services. 17 18 7.3 No Referral Requirement. Nothing in this Agreement is intended or shall require any party to violate the California or federal prohibitions on payments for referrals, and this Agreement shall not be interpreted to: 7.3.1 Require the Medical Director to make referrals to Hospital, be in a position to make or influence referrals to Hospital, or otherwise generate business for Hospital; 7.3.2 Restrict Medical Director from establishing staff privileges at, referring any service to, or otherwise generating any business for any other entity of his/her choosing; and 7.3.3 Interfere in any way with Medical Director's professional prerogatives and medical decisions. 7.4 No Gifts to Beneficiaries. Under no circumstances whatsoever shall Manager, its employees or agents offer to make any gift or payment to any individual as a means of encouraging such person to seek medical or psychiatric attention from Hospital, Manager, or through the Program, or from any other provider of health care. 7.5 Audits. Hospitals shall have the right, but not the obligation, to interview patients who receive services through the Program, and to conduct audits of all types of the Program, for the purpose of determining whether Manager is in compliance with all applicable federal, state, and local laws, regulations, and ordinances, as well as Hospital rules, regulations, bylaws, policies, and procedures and this Agreement. ARTICLE VIII. MISCELLANEOUS PROVISIONS 8.1 Compulsory Arbitration. Any controversy, dispute, or claim arising out of or relating to this Agreement, or the breach or alleged breach thereof, shall be settled by binding arbitration in accordance with the rules of the American Health Lawyers Association Alternative Dispute Resolution Services Rules of Procedure, and judgment on the award may be entered in any court having jurisdiction. The provisions of this Section 8.1 shall not apply with respect to any claim arising out of or relating to bodily injury or death. 8.2 Attorneys' Fees. If any legal action, including arbitration, is necessary to enforce the terms of this Agreement, the prevailing party shall be entitled to reasonable attorney's fees and costs awarded against the other party in addition to any other relief to which the prevailing party may be entitled. 8.3 Governing Law. The validity of this Agreement and any of it terms or provisions, the interpretation of the rights and duties of the parties hereunder, and the construction of the terms or provisions hereof shall be governed in accordance with the laws of the State of California. 8.4 Force Majeure. If either of the parties hereto is delayed or prevented from fulfilling any of its obligations hereunder by force majeure, said party shall not be liable for said delay or 18 19 failure. "Force Majeure" shall mean any cause beyond the reasonable control of a party, including but not limited to, an act of God, act or omission of civil or military authorities, fire, strike, flood, riot, war, delay of transportation, or inability due to the aforementioned causes to obtain necessary labor, materials or facilities. 8.5 Severability. If any part of this Agreement is held to be void or unenforceable, such part will be treated as severable, leaving valid the remainder of this Agreement notwithstanding the part found void or unenforceable, unless the severed part contains an essential economic term. 8.6 Waiver. A waiver by either party of a breach or failure to perform shall not constitute a waiver of any provision hereof or of any other breach or failure whether or not similar. There shall be no waiver unless in writing signed by the party against whom the waiver is sought to be enforced. 8.7 Binding Effect and Assignment. This Agreement shall be binding on the successors and assigns of the respective parties, provided however that neither party may assign or otherwise transfer this Agreement or delegate obligations hereunder without the other's written consent, except as otherwise provided herein. 8.8. Complete Agreement. This Agreement constitutes the complete understanding of the parties hereto with respect to the subject matter hereof, and no other agreement, representation, statement, or promise relating to the subject matter of this Agreement which is not contained herein shall be valid or binding. Any and all prior agreements and understandings, including but not limited to, the Agreement entered into November 27, 1995, [as extended by mutual agreement,] are superseded by this Agreement and no further force or effect. There shall be no amendment hereof unless such amendment is in writing and is signed by both parties. 8.9 No Agency or Partnership. The relationship between Manager and Hospital is that of independent contractors and nothing in the Agreement shall be deemed to create an agency, joint venture, partnership or similar relationship between the parties hereto. Neither party shall have the right to bid for the other or enter into any contract or commitment in the name of, or on behalf of, the other. 8.10 Notices. All notices hereunder shall be in writing, delivered personally or by U.S. Certified or Registered postal mails, postage prepaid, return receipt requested, and shall be deemed given when delivered personally or upon the earlier of actual receipt or five (5) days afer deposit in said United States mail, addressed as below with proper postage affixed, but each party may change its address by written notice in accordance with this Section. If to Hospital: Mission Community Hospital 14850 Roscoe Boulevard Panorama City, California 91402 Attn: Chief Executive Officer 19 20 If to Manager: OptimumCare Corporation 30011 Ivy Glenn Drive, Suite 219 Laguna Niguel, California 92677-5018 Attn: Ed Johnson 8.11 Captions. Any captions to or headings of the articles, sections, subsections, paragraphs, or subparagraphs of this Agreement are solely for the convenience of the parties, are not a part of this Agreement and shall not be used for the interpretation or determination of validity of this Agreement or any provisions hereof. 8.12 Counterparts. This Agreement may be executed in any number of counterparts, each of which shall be deemed to be an original, but all such counterparts together shall constitute but one and the same instrument. 8.13 Assistance in Litigation. Manager and Medical Director shall, at no charge, provide information and testimony and otherwise assist Hospital in defending against litigation brought against Hospital, its directors, officers, shareholders, members or employees based upon a claim of negligence, malpractice or any other cause of action, arising out of this Agreement, except where Manager and/or Medical Director is a named adverse party. 8.14 Gender and Number. Whenever the context hereto requires, the gender of all words shall include the masculine, feminine and neuter, and the number of all words shall include the singular and plural. 8.15 Legal Counsel. Each party understands the advisability of seeking legal counsel and has exercised its own judgment in this regard. 8.16 Interpretation. No provision of this Agreement shall interpreted or construed for or against either party because that party's legal representatives drafted such provision. 8.17 Facilitation. Each party agrees promptly to perform further acts and to execute, acknowledge and deliver any documents which may be reasonably necessary to carry out the provisions of this Agreement or effect its purposes. 8.18 Sale or Lease of Hospital and/or the Facility. If Hospital and/or the Facility is sold or leased, or is the subject of a joint operating agreement or joint venture, regardless of the identity of the purchaser/lessee or party which will continue to operate Facility, Hospital will have the right to assign the Agreement, delegate all rights and duties thereunder to such purchaser/lessee or successor operator and Hospital shall have no further responsibilities or liabilities pursuant to the Agreement. 20 21 IN WITNESS WHEREOF, the parties hereto have executed his Agreement as of the day and year first above written. "HOSPITAL" SAN FERNANDO COMMUNITY HOSPITAL d/b/a/ MISSION COMMUNITY HOSPITAL and SAN FERNANDO COMMUNITY HOSPITAL By: /s/ William Daniel ------------------------------ William Daniel Its: CEO "MANAGER" OPTIMUMCARE CORPORATION, a Delaware corporation By: /s/ Edward A. Johnson ------------------------------ Edward A. Johnson Its: CEO 21 22 EXHIBIT 1.2.1 (a) INPATIENT PROGRAM The Program Administrator shall be a licensed health professional with at least three (3) years psychiatric program management experience. Manager represents to Hospital that, on the basis of training expertise, the Program Administrator is knowledgeable regarding inpatient psychiatric programs and that the Program Administrator is qualified to perform and will use his/her best efforts to perform the following duties: 1. Have overall day to day responsibility for the Program and be available to the Program 24-hours per day, seven (7) days per week, fifty-two (52) weeks per year. When Manager is absent due to illness, vacation or continuing education, Manager shall provide a substitute Program Administrator with the knowledge and expertise to fulfil the responsibilities of the Program Administrator in his/her absence. 2. Oversees and supervises all of the Hospital's admissions to and discharges from the Program, assuring a manageable and safe flow of patient admissions. 3. Supervises the Treatment Planning System and Clinical Reviews for utilization review. 4. Monitors the Program's compliance with Patient Rights, Department of Health Services. 5. Prepares, on the Hospital's behalf, initial drafts of responses to any deficiency statements. 6. Assists Hospital in maintaining appropriate relationships with regulatory and accrediting agencies. 7. Consults with Hospital's Human Resources personnel and nurse managers regarding the Hospital's hiring of staff for the Program and discipline of Program staff. 8. Consults with the Hospital's Human Resources personnel and nurse managers regarding human resource issues, such as orientation, timely performance appraisals, recruitment, retention, ongoing motivation, etc. 9. Recommends, and after approval by Hospital, implements an education plan which includes, but is not limited to cross training both of Hospital's campuses and Hospital's Intake Office. 10. In conjunction with Hospital staff, conducts weekly patient groups to obtain patient feedback and to problem solve. 22 23 11. Assures that a Patient Rights log is maintained per Patient Rights quarterly reports. 12. Assures that all mandatory statistics are maintained per Patient Rights and Department of Health Services. 13. Supervises Hospital's Performance Evaluation Team ("PET"). 14. Recommends appropriate disciplinary actions for Hospital staff and Manager personnel who provide services at or for the Program. 15. Recommends a system to monitor P.E.T. Performance Improvement ("P.I.") in accordance with Hospital's overall P.I. system, and implements the P.E.T. P.I. system after Hospital's approval of it. 16. Works with Hospital to develop and maintain appropriate physician relationships. 17. Works with Hospital and its Medical Staff to monitor compliance with applicable policies, procedures, rules and regulations; assists in counseling regarding compliance with the foregoing as requested by Hospital or the Medical Staff. 18. Recommends, and upon Hospital's approval, implements P.I. programs for the Program consistent with Hospital's P.I. program. 19. Participates in Hospital's Function Team and PI Council. Upon Hospital's request, fulfils the responsibilities of the chair of the Patient's Rights/Organizational Ethics Committee. 20. Appropriately responds to customer service issues from relatives, caretakers and other providers on behalf of Hospital and recommends appropriate Hospital actions in response to such issues. 21. Works cooperatively with and is available to Hospital's ER physicians and ER nursing staff (24-hours per day, seven days per week, 52 weeks per year) with respect to psychiatric referrals. 22. Performs 5150's in the ER as needed. 23. If requested by Hospital, attends and represents Hospital at County, Service Area, and RFP meetings and at Hospital Association of Southern California Behavioral Healthcare Subcommittee meetings. 24. Assists Hospital in its interaction, and represents Hospital, if requested to do so by Hospital, with respect to local community services (fire, police department) and neighboring agencies, such as other hospitals, community healthcare centers, clinics, etc. 23 24 25. Identifies and recommends to Hospital opportunities for community outreach and development. If requested by Hospital, participates in identified community outreach opportunities and assists in the Hospital's strategies for the Program's development. 26. At all times strives to maintain and improve Patient Care, performing such managerial duties as are necessary to monitor and maintain quality patient care. 27. Acts as a member of the Hospital's Senior Management structure, as established and modified from time to time by the CEO. 28. Reports to the CEO or designee and performs such managerial duties with respect to the Program and the Hospital as reasonably requested from time to time by Hospital's Chief Executive Officer or designee. Manager's Cost of Providing Program Administrator For purposes of this Agreement, Manager's deemed cost of providing the Nursing Director shall be as set forth in Exhibit 1.2.2. 24 25 EXHIBIT 1.2.1 (b) 1. Medical Director Qualifications. Manager represents, warrants, covenants and agrees that: (a) At all times during the term of this Agreement, Medical Director shall be a physician duly licensed to practice medicine in the State of California, shall be a member of the Hospital's Active Medical Staff with clinical privileges sufficient to permit Medical Director to perform all services reasonably required of him/her as Medical Director of the Program, and shall be in legitimate possession of all customary narcotics and controlled substances narcotics and controlled substances and numbers and licenses; (b) Manager shall obtain the Medical Director's written representation and warranty that at no time prior to or during the term of this Agreement, shall Medical Director's license to practice medicine in any state ever have been suspended, revoked, or restricted, ever have been reprimanded, sanctioned or disciplined by any licensing board or state or local medical society or specialty board, ever have been suspended, excluded, barred or sanctioned under the Medicare or Medi-Cal programs, or any other governmental agency, ever have been denied membership or reappointment of membership on the medical staff of any hospital, or ever had his/her medical staff membership or clinical privileges suspended, curtailed or revoked for a medical disciplinary cause or reason; and (c) The terms and conditions of the Medical Director's agreement with Manager shall be in compliance with all applicable law, including but limited to, state and federal anti-referral legislation such that Hospital shall not be limited from billing and receiving payment for services rendered. Manager shall indemnify and hold Hospital harmless from any damages, costs and expenses Hospital incurs as the result of Manager's failure to assure that Manager's agreement with the Medical Director is in compliance with the foregoing. Hospital shall have the right to review and approve the proposed Agreement between the Medical Director and Manager. 2. Medical Director Duties. The Medical Director shall provide the professional administrative services as hereafter set forth as an independent contractor of Manager. The Medical Director shall furnish the following for the operation of the Program: (a) Medical Director shall serve as Medical Director of the Program. Medical Director shall, during the entire term of this Agreement, supervise the clinical, medical and psychiatric operation of the Program and shall devote such time as is necessary to carry out such duties and ensure efficient and effective medical administration of the Program. The primary objective is to provide appropriate utilization of the Program's facilities, equipment and staff and to provide quality services to all patients; (b) Manager shall assure that Medical Director shall be available at reasonable times for consultation with the Board of Directors, the Chief Executive Officer or designee, the 25 26 Chief of Staff, individual members of the medical staff, committees of the professional staff and nursing, be available by electronic pager for emergency consultation during all hours that the Program is in operation and Medical Director is offsite; provided, however, that Medical Director may arrange for coverage of this on-call obligation by a substitute who must be approved by the CEO or designee, which coverage shall be provided by a physician licensed to practice medicine in the State of California with clinical privileges at Hospital sufficient to perform services required hereunder and shall be at Manager's or Medical Director's sole cost and expense; (c) Medical Director shall actively participate in the affairs of the professional staff of the Hospital and shall perform such tasks and provide such services as the professional staff or any committee may from time to time appropriately request. Hospital's medical staff committees shall conduct at regular intervals ongoing monitoring and reviewing of the professional performance of Program and the Medical Director; the results of these reviews to be reviewed by Hospital's CEO; (d) The Medical Director shall recommend to Hospital and its Medical Staff proposed treatment programs and protocols for physician care. Upon approval of the foregoing, Medical Director shall assist with the implementation of said treatment programs and protocols. (e) If requested by the CEO, Medical Director shall serve on committees and perform duties commensurate with the requirements of the Medical Directors who contract directly with Hospital; and (f) Medical Director shall perform such duties as may be reasonably requested by the CEO from time to time. 3. Medical Director's Compensation. The Medical Director will be paid at the rate of One Hundred Dollars ($100) per hours; provided, however, in no event will the Medical Director be paid in excess of Three Thousand Dollars ($3,000) per month for services rendered hereunder. 26 27 EXHIBIT 1.2.1 (c) INPATIENT PROGRAM The Nursing Director shall be a California licensed registered nurse with at least three (3) years of psychiatric program management experience. Manager represents to Hospital that, on the basis of training and expertise, the Nursing Director is knowledgeable regarding inpatient psychiatric programs and that the Director of Inpatient Psychiatric Nursing Services is qualified to perform and will use his/her best efforts to perform the following duties: 1. Assure clinical staffing for the Program meets acuity levels, both in numbers and in the expertise of the professional staff. 2. Assume the responsibilities as the manager of the clinical staff who provide services in the Program, including but not limited to day to day direct oversight of clinical services provided to Program patients. 3. Integrate Program objectives and resources in the provision of patient care services. 4. Ensure that patients who are admitted to the Program meet all criteria for admission and are at the appropriate level of care. 5. Take appropriate measures, consistent with Hospital policies and procedures which may be in effect from time to time, to encourage growth, development and education of the Program's patient care services staff. 6. Conduct monthly meetings to facilitate communication with both professional and non-professional staff. 7. Timely inform the Program Administrator and the Hospital's Director of Patient Care Services of issues that affect patient care. 8. Establish positive working relationship and promote teamwork between the Program and other Hospital Departments. 9. Facilitate the resolution of conflicts which may arise from time to time, such as conflicts between the individual needs of the staff who, directly or indirectly, report to the Director of Inpatient Psychiatric Nursing Services and the needs of the Program and Hospital. 10. Perform all duties which may be necessary or appropriate from time to time for a Hospital Department head or as may be assigned from time to time by the Program Administrator, the Hospital's Director of Patient Care Services, the Hospital's CEO, or their designees. 27 28 Manager's Cost of Providing Nursing Director For purposes of this Agreement, Manager's deemed cost of providing the Nursing Director shall be as set forth in Exhibit 1.2.2. 28 29 EXHIBIT 1.2.2 Manager shall provide the following personnel in the categories, at the staffing levels and the costs, including wages, Employee Benefits and overhead, as set forth below: For purposes of this Agreement, the total costs for providing each of the personnel (including wages, Employee Benefits and overhead) will be deemed to be One Hundred Twenty Five percent (125%) of the weighted average rates stated in the most recently published Healthcare Association of Southern California Compensation Survey ("HASC"), or other mutually agreed upon professional association survey data if the HASC survey no longer is available to the parties, for the most comparable position included in the HASC survey. Attached hereto are copies of pages from the HASC survey as most recently published prior to the effective date of this Agreement. The parties agree that the employee categories on the attached copies of pages of the HASC survey represent the positions most comparable to those positions to be provided by Manager hereunder and that the geographic areas identified for each position represent the most applicable market which is included in the HASC survey for the applicable position. Following each of the positions listed below is the page of the most recent HASC survey applicable to the particular position, the applicable geographic market, and the weighted hourly rate or weighted salary to be effective as of the date of this Agreement and which will remain in effect until superseded by another survey, as described above. The parties have agreed that the Employee Benefits and overhead for each of the personnel shall be deemed to be twenty five percent (25 %) of the hourly rate or salary as it may be in effect from time to time. Each of the positions listed below as "FT" shall work for the Program on a full time basis, regardless of the Program census. Each of the positions listed below as "PD" shall work for the Program on a part time basis, to fluctuate depending upon the Program census. Although the actual staffing of personnel listed as "PD" shall vary from week to week depending upon the census, each month such personnel shall work for the Program a percent of full-time as as set forth below. For example, an individual who is designated as .2 FTE shall work the equivalent of twenty percent (20%) of a full-time employee. FT Program Administrator; N-06; All Southern; weighted annual salary $73,907 FT Nurse Manager; N-10; All Southern; weighted annual salary $65,699 FT Administrative Assistant; C-05; North Western; weighted hourly rate $13.35 FT Assistant to Nursing Manager; C-05; North Western; weighted hourly rate $13.35 FT Rehabilitation Therapy Coordinator; P-07; North Western; weighted hourly rate $18.56 FT Rehabilitation Therapy Aide; P-07; North Western; weighted hourly rate $18.56 FT Recreation Therapist, RT; P-07; North Western; weighted hourly rate $18.56 PD Recreation Therapist, RT (.2 FTE); P-07; North Western; weighted hourly rate $18.56 PD Recreation Therapy Aide (.2 FTE); P-07; North Western; weighted hourly rate $18.56 PD Occupation Therapist, OT (.2 FTE); P-07; North Western; weighted hourly rate $18.56 FT Social Services Coordinator, LCSW; P-08; All Hospitals; weighted hourly rate $24.68 FT Social Worker, BSW; P-07; P-08; All Hospitals; weighted hourly rate $24.68 29 30 FT Social Worker, MA; P-08; All Hospitals; weighted hourly rate $24.68 PD Social Worker, LCSW (.2 FTE); P-08; All Hospitals; weighted hourly rate $24.68 PD Social Worker, MA, MFCC Intern (.6 FTE); P-08; All Hospitals; weighted hourly rate $24.68 PD Social Worker, MSW (0-.1 FTE); P-08; All Hospitals; weighted hourly rate $24.68 FT Utilization Review RN; R-03; North Western; weighted hourly rate $24.81 FT Utilization Review RN; R-03; North Western; weighted hourly rate $24.81 FT Utilization Review Administrative Assistant; C-05; North Western; weighted hourly rate $13.35 PD Licensed Psychologist (.2 FTE); P-15; All Hospitals; weighted hourly rate $29.76 30 31 EXHIBIT 1.13 Manager in conjunction with its corporate offices, will provide to the Hospital, as part of the Manager's fixed Management Fee (as such term is defined in Section 4.3.2 hereof) the following services: A. Administrative Services: 1. Hiring, initial and ongoing training of, the Program Administrator, Nursing Director, Medical Director, and other Manager personnel. 2. Assist Hospital's management team in the selection, initial training and ongoing training of Hospital personnel who work within or provide services to the Program. 3. Recommend to Hospital strategies and opportunities for the Program, including but not limited to, networking, support and education, and assist the Hospital in implementing such strategies and opportunities, if requested by Hospital. 4. Provide resources and published materials for use in the management of the Program. 5. Manager's Corporate Clinical Director shall be available to perform mock surveys and to assist Hospital in: clinical staff training, customer service training, documentation in-servicing, quality care promotion and education, support to Hospital's human resources functions, community liaison efforts, and evaluation of current Program activities. Managaer's Corporate Clinical Director also shall advise Hospital regarding current trends, current regulations, and successful strategies and programs. 6. Manager's Corporate Director of Utilization Review shall be available to perform mock surveys and assist Hospital in clinical staff training, quality care promotion and education. 7. Make available 24-hours a day, 7 days a week, 52 weeks per year the services of a Corporate Intake Services Department to provide management services and advice to Hospital's Admitting Department and to provide prompt and courteous responses to patients, their families and the community. 8. The provision of a Psychiatric Mobile Response Tem (P.M.R.T.) which is available 24-hours per days, 7 days per week, 52 weeks per year with licensed clinical social workers, registered nurses and psychologists who have extensive experience with behavioral healthcare and the Department of Mental Health and Patients Rights who shall be promptly available to advise the Program and its personnel with respect to issues that might arise requiring P.M.R.T. expertise. 31 32 9. Advise Hospital regarding the establishment of community liaison activities to promote the community's awareness of the Hospital and the Program, including but not limited to systems for making follow-up visits to assure patient satisfaction, to provide education to the community, and to enhance the services Hospital provides to patients and the community. If requested by Hospital, Manager shall act on behalf of Hospital in implementing community liaison activities which have been approved by Hospital. B. Clinical Services: 10. Manager's Corporate Clinical Director, Chief Executive Officer and Chief Operating Officer shall consult with Hospital regarding the selection, training and ongoing education of Hospital's clinical staff and Manager's staff who provide services at or to the Program. 11. Manager's Corporate Clinical Director and Corporate Director of Utilization Review, who each shall be licensed registered nurses, shall be available to assist the Hospital with respect to clinical issues, including but not limited to education, documentation, patient care and regulatory requirements. 12. Manager's Corporate Clinical Staff shall provide guidance to the Medical Director, including but not limited to treatment planning. 13. Ongoing review and advice to Hospital regarding Hospital's admission criteria for Medi-Cal and Medicare to assure Hospital's admissions to the Program are appropriate. 14. Provide training to Hospital's clinical staff and perform daily chart reviews to assure that the clinical staff appropriately documents in accordance with Hospital's criteria, appropriately documents treatment and planning, and complies with regulatory standards for documentation, as the foregoing may exist from time to time. 15. Take timely action to appropriately implement discharge criteria for the Program which have been approved by Hospital. 16. Assure that the clinical staff have prepared appropriate documentation of discharge criteria. 17. Recommend to Hospital, and undertake on behalf of Hospital if requested, appropriate post-discharge follow-up communications with families and board and care facilities to maintain and enhance the patient's quality of life. 32 33 18. Support Hospital's and its Medical Staff's ongoing education by providing education on clinical topics such as medication, cognitive therapy, care planning, treatment planning, confidentiality, patient rights, etc., and education on such topics as how to deal with and appropriately handle psychiatric patients, mental health laws, psychiatric patients with chronic medical illnesses, etc. C. Utilization Review: 19. Recommend appropriate utilization review process policies, procedures and criteria to the Hospital. Upon approval, then to implement these processes so as to assure the timely and efficient management of the processing of all TAR obligations as per the Medi-Cal TAR Unit requirements, as they may exist from time to time. To assure that these processes are promptly modified from time to time as may be required in order to remain n compliance with the applicable requirements as they may exist from time to time. 20. Recommend protocols and procedures to the Hospital, and following Hospital's approval of these protocols and procedures, assist with their implementation. The foregoing shall include, but not be limited to, protocols and procedures which assure that all charts are copied within ten (10) working days of discharge and that copies of charts are sent to the TAR Unit along with the required LA County codes; the foregoing protocols, procedures and time frames to be promptly modified from time to time to comply with applicable requirements as they may exist from time to time. 21. In addition to the reviews conducted by Hospital and its Medical Staff, Manager shall review each day all charts to assure appropriateness of admissions, continued stay criteria and documentation of care. 22. Advise and assist Hospital's UR Staff to assure that all denials are timely and properly appealed by the Hospital on the first level, and if necessary, on the second level. 23. Support Hospital's and the Medical Staff's ongoing education, including but not limited to providing in-services to clinical staff and physicians regarding criteria and County charting requirements. 24. Recommend systems to the Hospital, and following the Hospital's approval, monitor those systems to assure that Hospital's UR Staff enters all Medi-Cal patients into the county's MIS system within 24-hours of admission and discharge, five (5) days a week (Monday through Friday); the foregoing mechanisms and time frames to be promptly modified from time to time to remain in compliance with applicable requirements as they may exist from time to time. 25. Maintain current knowledge regarding regulatory changes to timely recommend revisions to Hospital pre-admissions screening tools consistent with regulatory changes. 33 34 26. Recommend P.I. audits for the Program which are consistent with the P.I. program at Hospital. Following Hospital's approval of proposed Program P.I. audits, to actively participate in the implementation and monitoring of the approved P.I. Program audit. 27. Participate in treatment planning as part of the Treatment Planning Team. 28. All individuals provided by Manager to assist with review of Program patient's utilization shall report to the Hospital's Director of Utilization Review, or the manager designated by Hospital from time-to-time to fulfill the duties of a director of utilization review. D. Educational Services: 29. Maintain continuing education provider numbers from the Board of Registered Nursing and the Board of Behavioral Sciences to enable healthcare providers to obtain continuing education credits for continuing education provided by Manager. 30. Recommend to Hospital, and upon Hospital's request, provide training and education to Hospital's management, including but not limited to education and training regarding teamwork, management of difficult employees, motivation, etc. 31. Recommend, and upon Hospital's request, provide ongoing clinical education, including but not limited to ongoing training of Manager's staff and Hospital staff in proper crisis intervention technique, patient care issues, etc. 32. In support of Hospital's and its Medical Staff ongoing education, provide ongoing Physician in-services and training and ongoing staff education and training or documentation requirements. 33. Recommend, and upon Hospital's request, manage the implementation of a customer service program and education for the Program. 34. Recommend to Hospital, and upon Hospital's request, provide regularly scheduled educational offerings related to the Program. 35. Perform such managerial responsibilities with respect to the Program as reasonably requested from the CEO or designee from time to time, including but not limited to performing managerial responsibilities and timely reporting in accordance with the management structure and standards as required by Hospital of its managers, as said structure and standards may exist from time to time. 34 35 EXHIBIT 5.3.6 Direct Expenses Direct Expenses are expenditures incurred for the operation of a specific department and/or function. The management function has the ability to control, influence and/or provide input regarding Direct Costs. For purposes of this Agreement , Direct Expenses are deemed to include the following which are incurred for the operation and/or function of the Program: Salaries and Wages Employee Benefits Consulting Fees Medical Director Fees Consumable Supplies Repair and Maintenance Lease/Rentals Purchased Services Depreciation Dues, Books and Subscriptions Other Direct Expenses deemed necessary or appropriate for the operation and/or function of the Program 35 36 MENTAL HEALTH OUTPATIENT HOSPITALIZATION SERVICES AGREEMENT This MENTAL HEALTH OUTPATIENT HOSPITALIZATION SERVICES AGREEMENT ("Agreement") is entered into for reference purposes only as of the __ day of December, 1999, by and between San Fernando Community Hospital, a California nonprofit public benefit corporation doing business as Mission Community Hospital and San Fernando Community Hospital ("Hospital") and OptimumCare Corporation, a Delaware corporation ("Manager"). RECITALS A. Hospital owns and operates a duly license acute care hospital which operates at locations in San Fernando and Panorama City, California. B. The Panorama City location ("Facility") includes an outpatient partial hospitalization program (the "Program") for the treatment of patients with psychiatric disorders. C. Manager is in the business of providing a variety of consulting, administrative and management services to facilities with outpatient partial hospitalization programs for the treatment of patients with psychiatric disorders. D. Manager presently provides various services to the Program at the Facility, and Hospital desires to retain Manager, and Manger desires to be retained, to provide certain services with respect to the Program. E. Hospital and Manager desire to enter into this Agreement to provide a clear understanding of their respective rights, duties and obligations with respect to the subject matter hereof. AGREEMENT ARTICLE 1 MANAGER's RIGHTS AND OBLIGATIONS 1.1 General Intent and Purpose. 1.1.1 Management Expectations. Manager will manage the Program in accordance with the mission, vision and values of Hospital, the Hospital's strategic plan, the Hospital's compliance plan, and the Hospital's annual budget and operating plan. Manager's management responsibilities shall be fulfilled within the policies, procedures and organizational structure of the Hospital, as it may exist from time to time. Manager's Program Administrator and Medical Director, as such terms are defined in Section 1.2 hereof, shall perform their responsibilities of management in accordance with the management structure and standards as required of Hospital employed managers and Hospital contracted Medical Directors, as such standards and structure may exist from time to time. Although Hospital shall have the right, in 37 its sole discretion from time to time, to change its management structure and standards, as of the commencement of the Agreement and until notice to Manager, the Program Administrator shall be and function as a hospital department head. Manager shall assure that all services are managed in accordance with the rules and regulations that regulate the provision of psychiatric services, including but not limited to assuring that all issues related to patient movement into and out of the Program are accomplished within the guidelines established by the Los Angeles County Department of Mental Health, in accordance with state and federal law, and in accordance with all Hospital policies. Manager will provide expertise to Hospital to recommend, and after approval by Hospital, to implement appropriate Hospital policies, procedures, rules and regulations. It is anticipated that all personnel provided by Manager will comply with all of the requirements established for Hospital personnel, including but not limited to, orientation, safety, health and assuring that any of Manager's personnel who oversee or direct Hospital employees do so in accordance with Hospital's human resources policies as they may be established by Hospital from time to time. On an annual basis, and more often if specified by Hospital, the Chief Executive Officer of Hospital ("CEO") or his designee shall perform a performance appraisal of the Manager's Program Administrator and Medical Director, similar to performance appraisals of individuals with management responsibilities or directorship agreements at Hospital. 1.1.2 Administration and Clinical Management. Subject to Hospital's ultimate retention of control and authority, Manager shall assist Hospital in the administration and clinical management of the Program and report to Hospital daily as to the administration of the Program and the care and treatment of Program patients while at the Facility in accordance with and subject to the patient's physician's orders. Manager does not provide psychiatric care (including diagnosis, development of individual treatment plans, determining changes in the care place and discharge planning), which care is provided by licensed physicians who are members in good standing of Hospital's Medical Staff with appropriate privileges. 1.2 Manager's Provision of Staffing. 1.2.1 Program Administrator and Medical Director, Staffing. Manager shall employ and/or independently contract with, and shall be financially responsible for staffing the Program with; (a) one full-time Program Administrator ("Program Administrator") who shall work full-time exclusively at Facility and who shall meet the criteria and fulfil the duties set forth in Exhibit 1.2.1.(a). The parties hereby acknowledge and agree that the Manager's total cost of providing the Program Administrator (including wages, Employee Benefits [as defined in Section 2.5] and overhead) is deemed, for the purposes of this Agreement, and as the parties= best estimate of fair market value, is the amount set forth in Exhibit 1.2.1.(a); and (b) one medical director ("Medical Director") who shall provide not less than Thirty (30) hours of administrative services for the Program per month and who shall meet the criteria and terms set forth in Exhibit 1.2.1(b). The parties hereby acknowledge and agree that the Medical Director's compensation is deemed, for the purposes of this Agreement, and as the parties= best estimate of fair market value, is the amount set forth in Exhibit 1.2.1.(b); and 2 38 1.2.2. Additional Personnel Staffing. Manager shall employ and/or independently contract with and shall be financially responsible for staffing the Program with professional counseling staff, therapists, case managers and utilization review managers and staff, in the categories, at the staffing levels, and at the costs (cumulatively for each category), including wages and Employee Benefits and overhead, as set forth in Exhibit 1.2.2. 1.2.3 Need for Staffing. The staffing set forth in Section 1.2 hereof is based upon the anticipated Program needs to operate the Program as required (i) by applicable State and Federal law and regulation as required for licensure and accreditation and for certification for participation in and reimbursement from the Medicare and Medi-Cal programs, (ii) the Program's reasonable requirements, and (iii) community standards. 1.2.4 Changes to Staffing Levels. Manager shall not, without Hospital's prior written consent, which shall not be unreasonably withheld, deviate from, change, or decrease the agreed staffing levels as set forth in this Section 1.2. 1.2.5 Staff Compensation. Manager is solely responsible for compensating the individuals Manager provides hereunder, including Employee Benefits, and shall defend and hold Hospital harmless from claims for compensation or Employee Benefits from such individuals. "Employee Benefits" shall include, by way of illustration and not limitation, an employer's contribution under the Federal Insurance Contributions Act, unemployment compensation and related insurance, payroll and other employment taxes, pension and retirement plan contributions, workers= compensation and related insurance, group life, health, disability, and accident insurance, severance, and other benefits. In entering into or continuing any financial relationship (e.g., ownership or compensation arrangements) with any physicians and their immediate family members (as defined under the Stark law at 42 U.S.C. '1395nn and Cal. Bus. & Prof. Code " 650.01 et seq.), Manager shall assure that such financial arrangements meet the requirements of an applicable exception under those laws such that Hospital is not prohibited from presenting any claims for services pursuant to such physician self-referral laws. 1.2.6 Acceptability of Staff Members. Prior to retaining any individuals to provide services at Facility pursuant to Section 1.2 hereof. Manager shall obtain the prior written approval of such individual from the CEO. Manager shall submit such information regarding proposed personnel as the CEO reasonably requests. Manager shall use reasonable efforts to resolve any issues regarding the acceptability to Hospital of Program staff employed or otherwise contracted for by Manager. All professional individuals, including Medical Director, provided by Manager, shall meet the applicable standards of Hospital's Medical Staff Bylaws. 1.2.7 Removal of Staff Member. At the request of Hospital, in its sole and absolute discretion, Manager shall immediately remove any employee or independent contractor of Manager from providing services at the Facility or to the Program. 1.2.8 Staff Member Conduct and Care. Manager shall cause all employees and independent contractors of Manager at all times to conduct their activities in compliance with all 3 39 bylaws, rules and regulations, policies and procedures of Hospital and its medical staff and in compliance with all applicable federal, state and local laws and regulations, and with the standards and requirements established by the Joint Commission on Accreditation of Healthcare Organizations and other relevant professional organizations pertinent to the operation of the Program. 1.3 Licensure and Accreditation. Manager shall advise and assist Hospital in order for Hospital to obtain all necessary licenses and approvals from governmental and accrediting agencies, including the Joint Commission on the Accreditation of Healthcare Organizations, and in order for Hospital to obtain all certifications and approvals necessary to participate in the Medicare and Medi-Cal programs. Manager shall advise and assist Hospital to assure Hospital timely undertakes all activities necessary to obtain and maintain all necessary licenses and approvals from governmental and accrediting agencies, including without limitation, the California Department of Health Services, and is responsible for timely advising and assisting Hospital to undertake all activities necessary to maintain all certifications and approvals necessary to participate in the Medi-Cal and Medicare programs are performed. Manager shall advise and assist Hospital to enable Hospital to timely prepare, file, and supplement all regulatory applications, reports, and forms required by any local, state or federal regulatory agency and shall prepare the Facility for, and monitor, regulatory surveys and inspections of the Program. Manager shall use its best efforts to assure that Hospital promptly remedies any deficiencies identified in such surveys and inspections to the extent such deficiencies are within Manager's control. If the subject matter of the deficiency is Manager's responsibility hereunder, Manager shall promptly correct such deficiency. Manager shall use its best efforts to assure that the Program and the Facility are operated and maintained in compliance with all applicable federal, state, and local laws, rules and regulations. 1.4 Policies and Procedures. 1.4.1 Development and Implementation of Policies and Procedures. Manager shall develop and recommend, and upon Hospital's approval, assist Hospital in implementing all policies and procedures necessary for the safe and efficient operation of the Program, and shall educate Program staff on such policies and procedures. The foregoing shall include, but not be limited to, proposed policies and procedures for performance improvement and utilization review which are consistent with Hospital's policies and procedures for performance improvement and utilization review in other Hospital programs and services. Manager shall develop and recommend, and following Hospital approval implement, clinical treatment programs and protocols for non-physician care that are reflective of current unrecognized standards for psychiatric programs. Manager shall provide orientation and training for all Program staff, irrespective of whether such staff members are employees or independent contractors of Hospital or Manager. Manager shall assure that all personnel who provide services at the Facility participate in Hospital's orientation for new Facility employees. Manager shall as reasonably necessary provide ongoing in-service training such as to assure that Program staff have the requisite knowledge and skill required to delivery quality healthcare services at the Facility and through the Program. 4 40 1.4.2 Hospital Approval. The implementation of the policies and procedures and clinical treatment programs required under Section 1.4 shall be subject to prior approval by the Hospital's administration and, where appropriate, the Hospital's medical staff. 1.4.3 Compliance Plan. Manager shall require that all personnel provided by Manager to work at Hospital or to provide services on behalf of Hospital at all times comply with Hospital's Compliance Plan and its components as they may be in effect from time to time. 1.5 Indemnification by Manager. Manager shall protect, indemnify, hold harmless, and defend Hospital, its legal representatives, employees, agents, officers, trustees, affiliates and assigns, and each of them, from and against any and all claims, actions, demands, proceedings, losses, damages, costs, expenses and liabilities (including reasonable attorneys= fees) arising out of or related to the performance or nonperformance by Manager of any obligations to be performed or services to be provided hereunder. This indemnification obligation survives the expiration or earlier termination of this Agreement. 1.6 Insurance. 1.6.1 General Liability Insurance. Manager shall procure and maintain, at its sole cost and expense, throughout the term hereof, a policy or policies of comprehensive general liability and malpractice insurance covering itself and the individuals it provides pursuant to Section 1.2 hereof from an insurance carrier licensed and authorized to sell or approved to place liability insurance policies of this nature by the State of California with limits of not less than Five Million Dollars ($5,000,000) per occurrence. Manager shall cause to be issued to Hospital, by the insurance carriers issuing such coverage, certificates of insurance evidencing that the foregoing covenants of this Agreement have been complied with and stating that said insurance carriers shall provide not less than ten (10) calendar days prior written notice to Hospital of any cancellation or material modification of the policy or coverage described herein, or, if any such carrier shall not agree to provide such notice, then Manager shall provide notice to Hospital of any such cancellation or modification immediately upon receipt of notice of the foregoing from the carrier. Any deductible, co-insurance, or aggregate limits shall be subject to Hospital's approval, which shall not be unreasonably withheld. 1.6.2 Workers Compensation Insurance. Manager shall procure and maintain, at its sole cost and expense, throughout the term hereon, a policy or policies of workers= compensation insurance covering its employees from an insurance carrier licensed and authorized to sell or approved to place such liability insurance policies of this nature by the State of California. Manager shall add Hospital as an additional insured on such policy. 1.6.3 Extended Reporting Period. If any liability insurance policy procured pursuant to Section 1.6 is on a "claims made" rather than "occurrence" basis, then such policy shall include an option to purchase a "tail" or an extended reporting period, which option shall be exercisable upon termination or cancellation of said policy or upon any material modification of said policy that has the effect of causing the coverage of said policy to fail, in any respect, to meet the requirements of Section 1.6, regardless of whether such termination, cancellation or 5 41 modification shall occur during the term hereof or thereafter. The tail or extended reporting period shall provide coverage meeting all of the requirements set forth in Section 1.6, for a period of at least seven (7) years after termination, cancellation or modification of the underlying policy. Such policy shall provide that the carrier shall give Hospital or Manger at least thirty (30) calendar days advance written notice of the date upon which the option may be exercised regardless of whether such date shall occur during the term hereof or thereafter and shall specifically provide that Hospital shall be permitted to exercise the option upon failure of Manager to do so. Upon such notice, Manager shall take all steps, including but not limited to the payment of money, necessary to exercise such option, and if Manager shall fail to effectively exercise such option, then Hospital may do so and Manager shall fully and immediately reimburse Hospital, within ten (10) calendar days notice thereof by Hospital, for all monies expended by Hospital in connection therewith. The provisions of this Section 1.6.3 survive the expiration or earlier termination of this Agreement. 1.7 Record keeping and Access to Documents. Manager shall take all actions required by the Medicare or Medi-Cal programs to generate and maintain all necessary records as may be required of Hospital by the Medicare or Medi-Cal programs. Such records are the property of Hospital. In addition, for the purpose of implementing Section 1861(v)(1)(1) of the Social Security Act, as amended, and any regulations promulgated pursuant thereto, Manager agrees to comply with the following statutory requirements governing the maintenance of documentation to verify the cost of services rendered under this Agreement: (i) until the expiration of four years after the furnishing of such services pursuant to such contract, Manager shall make available, upon written request to the Secretary of the U.S. Department of Health and Human Services, or upon request to the Comptroller General, or any of their duly authorized representatives, the contract and books, documents, and records of such costs, and (ii) if Manager carries out any of the duties of the contract through a subcontract with a value or cost of Ten Thousand Dollars ($10,000) or more over a twelve-month period, with a related organization, such subcontract shall contain a clause to the effect that until the expiration of four years after the furnishing of such services pursuant to such a subcontract, the related organization shall make available, upon written request to the Secretary, or upon request to the Comptroller General, or any of their duly authorized representatives, the subcontract and books, documents, and records of such organization that are necessary to verify the nature and extent of such costs. 1.8 Audit Disclosure. If Manager is requested to disclose books, documents, or records for purposes of an audit, Manager shall notify Hospital of the nature and scope of such request and Manager shall make available, upon written request of Hospital, all such books, documents, or records, during regular business hours of Manager. The provisions of Sections 1.7 and 1.8 survive the expiration or earlier termination of this Agreement. 6 42 1.9 Reports. 1.9.1 Monthly Report. Manager shall provide monthly written reports to Hospital administration which detail the staffing provided each day during the prior month pursuant to Article I of this Agreement. Such monthly reports shall accompany Manager's invoice as required pursuant to Section 4.3.3 of this Agreement. The monthly reports shall include such detail as reasonably requested by Hospital, the submission of such reports to Hospital to be an express condition precedent to Hospital obligation to pay to Manager the Management Fee as required by Section 4 of this Agreement. 1.9.2 Quarterly Report. Manager shall provide quarterly written reports to Hospital administration regarding all aspects of the operations of the Program. Such quarterly reports shall address, among other things, the therapies provided to patients, any notable therapeutic successes or failures experienced by patients of the Program, any changes in Program staff, any complaints received by Manager regarding the operation and administration of the Program and the Facility, Program census, staffing provided the Program by Manager, and such other information regarding the staffing, and any other items or issues significant to the administration of the Program requested by Hospital. 1.10 Adverse Actions. Manager shall commit no act or omission which adversely affects any licensure or certification of the Hospital. 1.11 Admissions and Professional Services. Patients only shall be treated by Hospital pursuant to an order by a physician member of Hospital's medical staff with appropriate privileges. Manager shall assure that medical treatment shall only be ordered and provided by physicians who are members of Hospital's medical staff with appropriate clinical privileges. To the extent that Manager or its personnel makes Section 5150 assessments of individuals and places holds on such individuals at the Facility, Manager shall comply with all requirements of Section 5150 and the associated regulations and policies adopted by the County of Los Angeles. 1.12 Additional Reports. Manager shall prepare an annual report for the CEO regarding the Program. The Senior Management of Manager's Corporate Offices shall meet with the CEO and/or his designee upon the CEO's request, the foregoing to occur at least on a quarterly basis. Manager shall require that the Program Administrator provide periodic reports in accordance with the requirements and expectations of other Hospital managers. Manager shall promptly provide Hospital with reports and information that Hospital reasonably requests with respect to the Program, including but not limited to admissions and discharges. 1.13 Additional Duties. Manager shall provide the additional duties set forth in Exhibit 1.13. 7 43 ARTICLE II. HOSPITAL's RIGHTS AND OBLIGATIONS 2.1 Ultimate Control. Hospital shall have and maintain throughout the period hereof ultimate control and authority for the operation of the Program. Not to limit the foregoing, all admissions to the Program shall be in compliance with the admissions criteria which is established by Hospital after considering Manager's recommendations. Hospital has ultimate authority and control regarding decisions to accept a patient. 2.2 Space. Hospital shall continue to provide the space currently being provided for the Program which Manger agrees is adequate in all respects for the proper operation of the Program. Hospital shall be free to make any changes it desires to the Facility, or to relocate the Program so long as such changes do not materially and adversely interfere with the ability of Manager or Hospital to carry out their duties hereunder. 2.3 Hospital's Employees. Except for those positions designated to be provided by Manager, Hospital shall employ, or shall independently contract with, and shall be financially responsible for staffing the Program with all personnel necessary for the proper and efficient administration and clinical operation of the Program, including registered nurses, licensed vocational nurses and mental health workers, the foregoing in numbers appropriate based on the Program's anticipated daily census, and the services of a registered dietician and an office Manager. All personnel employed or otherwise contracted for (including the Office Manager) shall be required to comply with the Program policies and procedures as mutually developed and agreed upon in writing by Hospital and Manager. 2.4 Diagnostic Facilities. Hospital shall make available to Program patients the Hospital's inpatient, diagnostic, and other facilities as are available at Hospital and ordered from time to time by such patients= attending physicians or appropriately requested by Program staff. 2.5 General Services. Hospital shall provide the following support services for the efficient and proper operation of the Program. 2.5.1 Dietary services for patients of the Program (to be served to each patient at the Facility and the part-time services of the Hospital's nutritionist/dietician). 2.5.2 Housekeeping services for the facility. 2.5.3 Janitorial and physical upkeep of the Facility. 2.5.4 All utilities for the Facility. 2.5.5. Such clerical support, office supplies and general supplies necessary for the proper operation of the Program. 8 44 2.5.6 Record keeping services, in accordance with state and federal laws and regulations. 2.5.7 Transportation as Hospital determines, after consultation with Manager, is necessary to operate the Program. Nothing in this Agreement is intended to or shall be construed to limit or restrict the Hospital's ability to outsource the provisions of the goods and services contemplated in this Section. 2.6 Policies and Procedures. Hospital shall provide all Program staff (including employees and independent contractors of Manager) with copies of all relevant Hospital and Program policies and procedures, as amended from time to time. 2.7 Health Screening. Hospital shall provide to all Program staff (including employees and independent contractors of Manager) such appropriate pre-employment and periodic diagnostic and health screening examinations as are customarily provided by Hospital for Hospital employees. 2.8 Accreditation. With the assistance of Manager, Hospital shall maintain accreditation by the Joint Commission on the Accreditation of Healthcare Organizations, and shall be financially responsible for paying all such fees related to such accreditation. Notwithstanding any other provisions in this Agreement, the sole remedy for Hospital's sole breach of this Section 2.8 is the right of termination of this Agreement by Manager pursuant to Section 5.2.3. 2.9. Performance Improvement Review. With the assistance of Manager and the staff provide by Manager pursuant to Section 1.2 hereof, Hospital shall oversee utilization review and performance improvement services with respect to services provided by the Program. 2.10 Insurance. Hospital shall maintain professional and public liability insurance coverage for the Program under the same terms and conditions and for the same coverage limits as for other Hospital programs. Said insurance shall cover claims for negligence of Hospital or its employees. Written certificate of such coverage shall be provided to Manager. Hospital shall have the right to provide the foregoing coverage through the self-insurance programs of its parent, sister, or related entities. 2.11 Y2K. Hospital shall use its best efforts to identify and take such actions as are necessary in order for all systems and equipment which are essential for the Program to be Y2K compliant prior to January 1, 2000. 9 45 ARTICLE III. REPRESENTATIONS AND WARRANTIES BY MANAGER 3.1 Representations by Manager. 3.1.1 Corporate Status. Manager is a corporation duly organized and existing under the laws of the State of Delaware, is authorized and qualified to conduct business in the State of California, and has the power and authority to carry on the activities in which it is engaged and to perform its obligations hereunder. 3.1.2 Execution of Agreement. The execution of this Agreement and the performance of the obligations of the Manager hereunder will not result in any breach of any of the terms, conditions, or provisions of any agreement or other instrument to which Manager is a party or by which it may be bound or affected, or any governmental license, franchise, permit or other authorization possessed by the Manager, nor will such execution and performance violate any federal, state or local law, rule or regulation. 3.1.3 Litigation. There is no litigation, administrative proceeding or investigation pending or threatened against Manager, nor is the Manager subject to any judgment, order, decree or regulation of any court or other governmental or administrative agency, which would materially adversely affect the performance of Manager's obligations hereunder. 3.2 Representations and Warranties by Hospital. 3.2.1 Corporate Status. Hospital is a non-profit public benefit corporation duly organized and validly existing in good standing under the laws of the State of California with the power and authority to perform its obligations hereunder subject to licensure by the California Department of Health Services. 3.2.2 Execution of Agreement. To Hospital's knowledge, the execution of this Agreement will not be in violation of any governmental license, permit or other authorization possessed by Hospital. Hospital is accredited by the Joint Commission on the Accreditation of Healthcare Organizations. 3.2.3 Litigation. To Hospital's knowledge, there is no litigation, administrative proceeding or investigation pending or threatened against Hospital, nor is the Hospital subject to any judgment, order, decree or regulation of any court or other government or administrative agency which would materially adversely affect the performance of Hospital's obligations hereunder. 10 46 ARTICLE IV. BILLING AND COLLECTIONS; MANAGEMENT FEE 4.1. Facility Services Billing and Collections. Hospital has in effect a schedule of fees and patient charges for the administrative and technical component of all services rendered by the Program. Said fees and charge may be modified by Hospital from time to time in its sole and absolute discretion, but Hospital shall give prior notice of such modification to Manager for informational purposes. Hospital shall have the sole and exclusive right to bill and collect for Hospital's fees and charges with reference to services provided by the Program in accordance with such schedule. Hospital shall be responsible for preparing and submitting its annual cost report. The parties agree, if necessary and appropriate, to alter their billing arrangements in order to avoid reimbursement disallowance for Hospital pursuant to the Tax Equity and Fiscal Responsibility Act of 1982 or 42 C.F.R., Part 405, as it may be revised from time-to-time. 4.2 Professional Services Billing and Prohibition on Billing. 4.2.1 Physicians and Clinical Psychologists. Physicians and clinical psychologists who provide services at the Program are responsible for billing and collecting for their own professional services. 4.2.2 LCSWs and MFCCs. Hospital and Manager shall bill and collect for their respectively employed licensed or directly contracted social workers ("LCSWs"); manager, family and child counselors ("MFCCs"); and other licensed therapists unless such LCSWs, MFCCs, and other licensed therapists agree to be responsible for billing and collecting for their professional services. 4.2.3 Prohibition on Billing. Manager shall not and shall cause the Medical Director and any other physicians or psychologists associated, employed by or under contract with Manager not to bill or cause to be billed, the Medicare Program, any Medicare beneficiary, a Medicare (Part B) carrier or any other third party payor or patient for any portion of the administrative, supervisory or other provider services in violation of 42 CFR, Section 405.550. Manager shall indemnify and hold harmless Hospital from any breach of this Section 4.2. 4.3 Management Fee. 4.3.2 Invoice for Management Fee. The parties have negotiated at arms-length negotiations the compensation to Manager to be a fair market value amount for Manager's services and not to be determined in a manner that takes into consideration the volume or value of any referrals or business generated to or within Hospital. Hospital shall pay to Manager an annual management fee of Six Hundred Seventy Two Thousand, Two Hundred Sixty Nine Dollars ($672,269), payable in equal monthly installments of Fifty Six Thousand Twenty Two Dollars ($56,022) ("Management Fee"). 4.3.3 Timing of Management Fee Payment. Manager shall prepare and submit to Hospital on a monthly fee basis an invoice for its services rendered hereunder. Said invoice 11 47 shall include information as to the amount of time and services provided by Manager. Manager shall submit with the invoice the monthly report required under Section 1.9. Claims will be settled within 30 days of receipt of invoice. 4.4 Adjustments to Management Fee. 4.4.1 Management Fee Offset. In the event any of the Program staff to be provided by Manager are not provided in accordance with this Agreement for a period of more than forty-five (45) days in a month, Hospital may deduct from Manager's Management Fee an amount equal to the budgeted compensation for such position, including Employee Benefits. This right to deduct shall not excuse Manager from its obligation to provide staffing at the level set forth in Section 1.2. 4.4.2 Payments Declined. Within thirty (30) days of written notice from Hospital, Manager shall reimburse Hospital twenty percent (20%) of all charges for patient services in excess of 8% during the term of this Agreement for which payment was denied for clinical reasons or as a result of inappropriate or inadequate documentation. Hospital may offset, among other rights, such amount against any monies owed to Manager under this Agreement or any other agreement. Manager may request, and Hospital may authorize, that Manager appeal such denial of payment with the costs of such appeal being borne by the parties equally. ARTICLE V. TERM AND TERMINATION 5.1 Term. This Agreement commences effective 12:01 a.m., January 1, 2000, and expires 11:59 p.m., December 31, 2002, unless earlier terminated in accordance with the provisions of this Agreement. 5.2 Termination by Manager. 5.2.1 Manager may terminate this Agreement upon ninety (90) days prior to written notice to Hospital, if Hospital should have a bankruptcy, reorganization, or similar action filed by or against it, or become insolvent, or sell all or substantially all of its assets (but subject to the assignment rights set forth in this Agreement). 5.2.2 In the event Hospital fails to comply with the terms of this Agreement in any material respect, Manager may notify Hospital of such breach, in writing, and Hospital shall have thirty (30) days to cure such breach; provided that if the breach is for failure to staff the Facility as required hereunder, Hospital shall have sixty (60) days to cure such breach. In the event Hospital fails to cure such breach within said period, the Agreement may be terminated by Manger upon ninety (90) days prior to written notice to Hospital. 5.2.3 Manager may terminate this Agreement upon ninety (90) days prior written notice to Hospital in the event Hospital fails to maintain accreditation by the Joint Commission on the Accreditation of Health Care Organizations, or in the event Hospital fails to maintain any license or certification granted to it by a regulatory agency without which the Program would be materially and adversely affected, unless the responsibility to assist in the maintenance of such license or certification is a responsibility of Manager pursuant to Section 1.3. 12 48 5.2.4 Manager may terminate this Agreement upon ten (10) days prior written notice to Hospital in the event Hospital fails to maintain insurance in accordance with the requirements of Section 2.10. 5.3 Termination by Hospital. 5.3.1 Hospital may terminate this Agreement upon ninety (90) days prior written notice to Manager, if Manager fails to pay its obligations in a timely manner under any agreement, should have a bankruptcy, reorganization, or similar action filed by or against it, or become insolvent, or sell all or substantially all of its assets. 5.3.2 In the event Manager fails to comply with the terms of this Agreement in any material respect, Hospital may notify Manager of such breach, in writing, and Manager shall have thirty (30) days to cure such breach; provided that if the breach is for failure to staff the Facility as required hereunder, Manager shall have sixty (60) days to cure such breach. In the event Manager fails to cure such breach within said period, the Agreement may be terminated by Hospital upon ninety (90) days prior written notice. 5.3.3 Hospital may terminate this Agreement upon thirty (30) days prior written notice to Manager in the event Hospital fails to maintain accreditation by the Joint Commission on the Accreditation of Healthcare Organizations, in the event Hospital fails to maintain any license, permit, certification and/or other required authorizations to operate the Program or the Facility, or if Hospital loses or surrenders its participation in the Medicare and/or Medi-Cal programs. 5.3.4 Hospital may terminate this Agreement upon ten (10) days prior written notice to Manager in the event Manager fails to maintain insurance in accordance with the requirements of Section 1.6. 5.3.5 Hospital may terminate this Agreement if (a) Manager, or any of its principals, officers, Managers or directors ("Management Personnel") is convicted of an offense related to healthcare or listed by a Federal agency as being disbarred, excluded or otherwise ineligible for Federal program participation, or (b) any of the staff Manager employs or contracts with, other than Management Personnel, are convicted of an offense related to healthcare or listed by a Federal agency as being disbarred, excluded or otherwise ineligible for Federal program participation and Manager does not immediately remove such non-Management Personnel from providing services hereunder. 5.3.6 We agree to develop within the next 60 days a mutually acceptable addendum to the contract which addresses the question of establishing reasonable management accountability for bottom line performance. 13 49 5.4 Immediate Threat to Patient Care. Notwithstanding any other term of this Agreement, in the event a party ever fails to meet a condition of this Agreement which breach poses a threat to patient care, the operation, licensure or reimbursement of the Hospital or the Program, the party not in breach may require the other immediately to take such remedial steps as are necessary to alleviate said threat to patient care or operations. If said threat is not immediately remedied, the other party shall have the right to immediately terminate this Agreement or take such remedial steps as such other party deems necessary to cure the threat. 5.5 Renegotiation/Termination. 5.5.1 Tax Exempt Financing. In the event Hospital seeks additional or replacement tax exempt financing, Manager agrees to amend this Agreement as may be necessary in order for Hospital to obtain or maintain such financing, or to secure the legal opinions which may be required to secure or maintain such financing. Immediately upon request by Hospital, Manager shall execute any and all such amendments presented by Hospital and shall return promptly said fully executed original amendments to Hospital. If Manager fails to comply with this provision, Hospital may terminate this Agreement upon ten (10) days written notice to Manager. 5.5.2 Changes in Reimbursement. Acknowledging that a substantial portion of the Program's services will be reimbursed under the Medicare and Medi-Cal programs and that a substantial portion of the Hospital's services are reimbursed under the Medicare and Medi-Cal programs, the parties agree that this Agreement is terminable by either party effective upon any changes in the Medicare or Medi-Cal laws, regulations and/or payment programs which substantially and adversely affect either party, including but not limited to changes in Hospital's reimbursement for Program services; provided, however, the parties agree to negotiate diligently and in good faith to revise this Agreement to eliminate the substantial and adverse effect caused by such change(s). 5.5.3 Hospital's Licensure and Status. It is understood and agreed that Hospital is a licensed general acute care facility which is owned by a nonprofit corporation which has tax-exempt financing and participates in the Medicare and Medi-Cal programs. Hospital is bound by the federal and state laws, regulations and interpretations thereof pertaining to the foregoing. The parties agree that this Agreement shall be interpreted from time-to-time as they may affect Hospital, its licensure, nonprofit status, tax exempt financing and participation in and reimbursement by the Medicare and Medi-Cal programs. In the event this Agreement or one or more of its terms or provisions is interrupted from time-to-time as they may affect Hospital, its licensure, nonprofit status, tax exempt financing and participation in and reimbursement of the Medicare and Medi-Cal programs. In the event this Agreement or one or more of its terms or provisions is interpreted by Hospital's counsel to pose a risk of violation of any of the foregoing laws, regulations or interpretations thereof, Hospital's bond covenants, the conditions or restrictions pertinent to providers who participate in the Medicare and Medi-Cal programs, to potentially subject Hospital to monetary sanctions or penalties, or to adversely affect Hospital's right to bill and collect for services, the parties agree (i) to continue to perform their respective obligations hereunder except for the offending provisions; and (ii) to negotiate diligently and in 14 50 good faith to reach an agreement without the offending provisions within ten (10) days after notice that the Agreement requires renegotiation pursuant to this Section 5.5.3, then this Agreement shall terminate immediately upon notice served by either party in accordance with Section 8.10 hereof. 5.6 Effects of Termination. Upon termination of this Agreement each party shall continue to be bound by (a) all covenants and restrictions that by their nature or terms continue to be binding (for example, but without limitation, access to books and records, confidentiality indemnification), and (b) all amounts payable as compensation or offset for services rendered during the term of this Agreement. The parties agree that policies and procedures prepared by Manager and adopted by Hospital may be used by Hospital after the termination of this Agreement in its sole discretion. ARTICLE VI. CONFIDENTIAL INFORMATION NON-COMPETITION AND NON-SOLICITATION 6.1 Confidential Information Acknowledgment. Each party acknowledges and agrees that Confidential Information may be disclosed to it in confidence by the other party with the understanding that it constitutes business information developed by the other party. Each party further agrees that it shall not use such Confidential Information for any purpose other than in connection with the Program. Each party further agrees not to disclose such Confidential Information to any third party except as required by law or regulation or in order to serve the purpose of the Program or as permitted by written authorization of the other party. "Confidential Information" shall mean all confidential information and trade secrets of each party, including without limitation, financial statements, internal memoranda, reports, patient lists, memoranda, manuals, handbooks, pamphlets, production books and audio and visual recordings, models, techniques, formulations, procedures, business plans, and other materials or records of a confidential and/or proprietary nature not known or available to the public or within the industry and which are shared by a party with the other party in the course and scope of performing its obligations hereunder. For purposes of this Agreement, policies and procedures and other materials developed by Manager for Hospital are not Confidential Information of Manager. 6.2 License. Manager hereby grants to Hospital for the term of this Agreement, a non-exclusive license to use the registered service marks of Manager when identifying the Program. These service marks are to remain the exclusive property of Manager. 6.3. Use of Name or Likeness. Neither party shall have the right to use the other party's name or likeness in any advertising, directories, brochures or announcements without the other party's approval of the specific usage. If the parties agree to develop any forms of advertising for the Program, all costs shall be borne equally by the parties. 6.4 Patient Information. Manager covenants, represents and warrants that neither Manager not its staff shall disclose to any third party, except where permitted or authorized by applicable law or expressly approved in writing by Hospital, any patient or medical record 15 51 information, and that Manager and its staff are knowledgeable regarding and will comply with the Federal and State laws regarding the confidentiality of such information. 6.5 Covenant Not to Compete. During the term of this Agreement, Hospital is willing to permit Manager access to Hospital's Confidential Information if Manager agrees during the term of this Agreement to avoid conflicts of interest by entering into this covenant not to compete. During the term of this Agreement, neither Manager nor any of its shareholders, officers or directors, or any entity controlled by or under control with or subject to common management with one of the foregoing, shall directly or indirectly perform or arrange to perform in any capacity the type of services called for hereunder by Manager for any psychiatric program, nor shall the foregoing have any ownership interest in any entity or sole proprietorship which has a psychiatric program. This covenant not to compete shall be effective within a ten (10) mile radius of Facility. If Hospital relocates the Program, the covenant not to compete shall be effective within a ten (10) mile radius of the new location; provided, however, if as a result of the relocation, Manager then has a relationship with a psychiatric program which would violate this covenant not to compete such pre-existing relationship shall be exempt from this covenant not to compete. Hospital shall have the right to enforce the foregoing through legal or equitable action, including but not limited to, injunctive relief, for such injunctive relief or equitable relief to be available without the necessity of posting a bond, cash or otherwise. In addition to the foregoing, Hospital shall have the right at its option to immediately terminate this Agreement and to seek damages for such breach or to continue this Agreement and to recover damages for the breach. 6.6 Non-Solicitation. 6.6.1 Non-Solicitation Limitations. Manager and Hospital each acknowledge that the other party has expended and will continue to expend substantial time, effort, and money to train its respective employees and contracted personnel in the operation of the Program, and that the other party's respective employees and contracted personnel have access to and possess Confidential Information of the other party. Each party therefore agrees that for the earlier of (i) one (1) year after the cessation of the employment or agency relationship between the other party and an employee or contracted person of the other party, or (ii) one (1) year after termination of this Agreement, it will not knowingly (and it will not induce any of its agents or affiliates to) solicit the employment of or contract with any employee, former employee, or contracted personnel or former agent of the other party if such individual has been employed by or retained by the other party to provide services at Facility unless the other party gives express written consent thereto. 6.6.2 Permissible Employment Contracting. (i) This Section prohibits solicitation but not the actual employment or contracting of an individual if such individual desires such employment or contract and initiates an application for such employment or contract. (ii) Notwithstanding anything to the contrary, this Section does not apply to (a) Manager if Manager terminates this Agreement pursuant to Section 5.2.1, 5.2.2 or 5.2.4 of this Agreement, and (b) Hospital if Hospital terminates this Agreement pursuant to Section 5.3.1, 5.3.2, 5.3.4, or 5.3.5 of this Agreement. 16 52 (iii) Notwithstanding anything to the contrary, a party shall not be restricted from contracting with the other party's employees or independent contractors, if such employee or independent contractor had at any time an employment or other contractual relationship with or was on the Medical or Allied Health Professional Staff of such party. ARTICLE VII. APPLICABLE LAWS 7.1 Kickback and Anti-Referral Laws. Each party agrees to comply with applicable federal, state and local laws respecting the Program and the conduct of their respective businesses and professions, including but not limited to the federal and California laws governing the referral of patients which are in effect or will become effective during the term of this Agreement. These laws include prohibitions on: 7.1.1 Payment for referral or to induce the referral of patients (Social Security Act Section 1128; Cal Business and Professions Code Section 325); and 7.1.2 The referral of patients by a physician for certain designated health care services to an entity with which a physician (or his/her immediate family) has a financial relationship (Cal. Labor Code " 139.3 and 139.31, applicable to referrals for workers= compensation services; Cal. Business and Professions Code "6501.01 and 650.02, applicable to all other patient referrals within the State; and '1877 of the Social Security Act, applicable to referrals of Medicare and Medi-Cal patients). 7.2 Acknowledgments. As consideration for each party hereto to enter into this Agreement, the parties: 7.2.1 Acknowledge that (i) each has had the opportunity to engage independent counsel of her/its choice for advice as to the requirements of the anti-referral laws referred to in this Section 7; and (ii) each has had the opportunity to consult with legal counsel or other experts as each deems appropriate to assist in the determination by each party that the terms of this Agreement are commercially reasonable; 7.2.2 Represent to the other that is the intent that the terms of this Agreement shall be commercially reasonable; and 7.2.3 Represent to the other that it is the intent that compensation for each of the services which are provided under this Agreement and the services of the Medical Director shall be based on the fair market value of such services. 17 53 7.3 No Referral Requirement. Nothing in this Agreement is intended or shall require any party to violate the California or federal prohibitions on payments for referrals, and this Agreement shall not be interpreted to: 7.3.1 Require the Medical Director to make referrals to Hospital, be in a position to make or influence referrals to Hospital, or otherwise generate business for Hospital; 7.3.2 Restrict Medical Director from establishing staff privileges at, referring any service to, or otherwise generating any business for any other entity of his/her choosing; and 7.3.3 Interfere in any way with Medical Director's professional prerogatives and medical decisions. 7.4 No Gifts to Beneficiaries. Under no circumstances whatsoever shall Manager, its employees or agents offer to make any gift or payment to any individual as a means of encouraging such person to seek medical or psychiatric attention from Hospital, Manager, or through the Program, or from any other provider of health care. 7.5 Audits. Hospitals shall have the right, but not the obligation, to interview patients who receive services through the Program, and to conduct audits of all types of the Program, for the purpose of determining whether Manager is in compliance with all applicable federal, state, and local laws, regulations, and ordinances, as well as Hospital rules, regulations, bylaws, policies, and procedures and this Agreement. ARTICLE VIII. MISCELLANEOUS PROVISIONS 8.1 Compulsory Arbitration. Any controversy, dispute, or claim arising out of or relating to this Agreement, or the breach or alleged breach thereof, shall be settled by binding arbitration in accordance with the rules of the American Health Lawyers Association Alternative Dispute Resolution Services Rules of Procedure, and judgment on the award may be entered in any court having jurisdiction. The provisions of this Section 8.1 shall not apply with respect to any claim arising out of or relating to bodily injury or death. 8.2 Attorneys= Fees. If any legal action, including arbitration, is necessary to enforce the terms of this Agreement, the prevailing party shall be entitled to reasonable attorney's fees and costs awarded against the other party in addition to any other relief to which the prevailing party may be entitled. 8.3 Governing Law. The validity of this Agreement and any of it terms or provisions, the interpretation of the rights and duties of the parties hereunder, and the construction of the terms or provisions hereof shall be governed in accordance with the laws of the State of California. 8.4 Force Majeure. If either of the parties hereto is delayed or prevented from fulfilling any of its obligations hereunder by force majeure, said party shall not be liable for said delay or 18 54 failure. "Force Majeure" shall mean any cause beyond the reasonable control of a party, including but not limited to, an act of God, act or omission of civil or military authorities, fire, strike, flood, riot, war, delay of transportation, or inability due to the aforementioned causes to obtain necessary labor, materials or facilities. 8.5 Severability. If any part of this Agreement is held to be void or unenforceable, such part will be treated as severable, leaving valid the remainder of this Agreement notwithstanding the part found void or unenforceable, unless the severed part contains an essential economic term. 8.6 Waiver. A waiver by either party of a breach or failure to perform shall not constitute a waiver of any provision hereof or of any other breach or failure whether or not similar. There shall be no waiver unless in writing signed by the party against whom the waiver is sought to be enforced. 8.7 Binding Effect and Assignment. This Agreement shall be binding on the successors and assigns of the respective parties, provided however that neither party may assign or otherwise transfer this Agreement or delegate obligations hereunder without the other's written consent, except as otherwise provided herein. 8.8. Complete Agreement. This Agreement constitutes the complete understanding of the parties hereto with respect to the subject matter hereof, and no other agreement, representation, statement, or promise relating to the subject matter of this Agreement which is not contained herein shall be valid or binding. Any and all prior agreements and understandings, including but not limited to, the Agreement entered into November 27, 1995, [as extended by mutual agreement,] are superseded by this Agreement and no further force or effect. There shall be no amendment hereof unless such amendment is in writing and is signed by both parties. 8.9 No Agency or Partnership. The relationship between Manager and Hospital is that of independent contractors and nothing in the Agreement shall be deemed to create an agency, joint venture, partnership or similar relationship between the parties hereto. Neither party shall have the right to bid for the other or enter into any contract or commitment in the name of, or on behalf of, the other. 8.10 Notices. All notices hereunder shall be in writing, delivered personally or by U.S. Certified or Registered postal mails, postage prepaid, return receipt requested, and shall be deemed given when delivered personally or upon the earlier of actual receipt or five (5) days afer deposit in said United States mail, addressed as below with proper postage affixed, but each party may change its address by written notice in accordance with this Section. If to Hospital: Mission Community Hospital 14850 Roscoe Boulevard Panorama City, California 91402 Attn: Chief Executive Officer If to Manager: OptimumCare Corporation 30011 Ivy Glenn Drive, Suite 219 Laguna Niguel, California 92677-5018 Attn: Ed Johnson 19 55 8.11 Captions. Any captions to or headings of the articles, sections, subsections, paragraphs, or subparagraphs of this Agreement are solely for the convenience of the parties, are not a part of this Agreement and shall not be used for the interpretation or determination of validity of this Agreement or any provisions hereof. 8.12 Counterparts. This Agreement may be executed in any number of counterparts, each of which shall be deemed to be an original, but all such counterparts together shall constitute but one and the same instrument. 8.13 Assistance in Litigation. Manager and Medical Director shall, at no charge, provide information and testimony and otherwise assist Hospital in defending against litigation brought against Hospital, its directors, officers, shareholders, members or employees based upon a claim of negligence, malpractice or any other cause of action, arising out of this Agreement, except where Manager and/or Medical Director is a named adverse party. 8.14 Gender and Number. Whenever the context hereto requires, the gender of all words shall include the masculine, feminine and neuter, and the number of all words shall include the singular and plural. 8.15 Legal Counsel. Each party understands the advisability of seeking legal counsel and has exercised its own judgment in this regard. 8.16. Interpretation. No provision of this Agreement shall interpreted or construed for or against either party because that party's legal representatives drafted such provision. 8.17 Facilitation. Each party agrees promptly to perform further acts and to execute, acknowledge and deliver any documents which may be reasonably necessary to carry out the provisions of this Agreement or effect its purposes. 8.18 Sale or Lease of Hospital and/or the Facility. If Hospital and/or the Facility is sold or leased, or is the subject of a joint operating agreement or joint venture, regardless of the identity of the purchaser/lessee or party which will continue to operate Facility, Hospital will have the right to assign the Agreement, delegate all rights and duties thereunder to such purchaser/lessee or successor operator and Hospital shall have no further responsibilities or liabilities pursuant to the Agreement. [SIGNATURE PAGE FOLLOWS] 20 56 IN WITNESS WHEREOF, the parties hereto have executed his Agreement as of the day and year first above written. "HOSPITAL" SAN FERNANDO COMMUNITY HOSPITAL d/b/a/ MISSION COMMUNITY HOSPITAL and SAN FERNANDO COMMUNITY HOSPITAL By: /s/ William Daniel ---------------------------- William Daniel Its: CEO /30/99 "MANAGER" OPTIMUMCARE CORPORATION, a Delaware corporation By: /s/ Edward A. Johnson ---------------------------- Edward A. Johnson Its: CEO 21 57 EXHIBIT 1.2.1 (a) OUTPATIENT PROGRAM The Program Administrator shall be a licensed health professional with at least three (3) years psychiatric program management experience. Manager represents to Hospital that, on the basis of training expertise, the Program Administrator is knowledgeable regarding Outpatient psychiatric programs and that the Program Administrator is qualified to perform and will use his/her best efforts to perform the following duties: 1. Have overall day to day responsibility for the Program and be available to the Program 24-hours per day, seven (7) days per week, fifty-two (52) weeks per year. When Manager is absent due to illness, vacation or continuing education, Manager shall provide a substitute Program Administrator with the knowledge and expertise to fulfil the responsibilities of the Program Administrator in his/her absence. 2. Oversees and supervises all of the Hospital's admissions to and discharges from the Program, assuring a manageable and safe flow of patient admissions. 3. Supervises the Treatment Planning System and Clinical Reviews for utilization review. 4. Monitors the Program's compliance with Patient Rights, Department of Health Services. 5. Prepares, on the Hospital's behalf, initial drafts of responses to any deficiency statements. 6. Assists Hospital in maintaining appropriate relationships with regulatory and accrediting agencies. 7. Consults with Hospital's Human Resources personnel and nurse managers regarding the Hospital's hiring of staff for the Program and discipline of Program staff. 8. Consults with the Hospital's Human Resources personnel and nurse managers regarding human resource issues, such as orientation, timely performance appraisals, recruitment, retention, ongoing motivation, etc. 9. Recommends, and after approval by Hospital, implements an education plan which includes, but is not limited to cross training both Hospital and Program staff. 10. In conjunction with Hospital staff, conducts weekly patient groups to obtain patient feedback and to problem solve. 22 58 11. Recommends appropriate disciplinary actions for Hospital staff and Manager personnel who provide services at or for the Program. 12. Recommends a system to monitor Performance Improvement ("P.I.") in accordance with Hospital's overall P.I. system, and implements the P.E.T. P.I. system after Hospital's approval of it. 13. Works with Hospital to develop and maintain appropriate physician relationships. 14. Works with Hospital and its Medical Staff to monitor compliance with applicable policies, procedures, rules and regulations; assists in counseling regarding compliance with the foregoing as requested by Hospital or the Medical Staff. 15. Participates in Hospital's Function Teams. 16. Appropriately responds to customer service issues from relatives, caretakers and other providers on behalf of Hospital and recommends appropriate Hospital actions in response to such issues. 17. Works cooperatively with and is available to Hospital's ER physicians and ER nursing staff (24-hours per day, seven days per week, 52 weeks per year) with respect to psychiatric referrals. 18. If requested by Hospital, attends and represents Hospital at County, Service Area, and RFP meetings and at Association of Ambulatory Behavioral Healthcare Services meetings. 19. Assists Hospital in its interaction, and represents Hospital, if requested to do so by Hospital, with respect to local community services (fire, police department) and neighboring agencies, such as other hospitals, community healthcare centers, clinics, etc. 20. Identifies and recommends to Hospital opportunities for community outreach and development. If requested by Hospital, participates in identified community outreach opportunities and assists in the Hospital's strategies for the Program's development. 21. At all times strives to maintain and improve Patient Care, performing such managerial duties as are necessary to monitor and maintain quality patient care. 22. Acts as a member of the Hospital's Senior Management structure, as established and modified from time to time by the CEO. 23. Reports to the CEO or designee and performs such managerial duties with respect to the Program and the Hospital as reasonably requested from time to time by Hospital's Chief Executive Officer or designee. 23 59 Manager's Cost of Providing Program Administrator For purposes of this Agreement, Manager's deemed cost of providing the Nursing Director shall be as set forth in Exhibit 1.2.2. 24 60 EXHIBIT 1.2.1 (b) 1. Medical Director Qualifications. Manager represents, warrants, covenants and agrees that: (a) At all times during the term of this Agreement, Medical Director shall be a physician duly licensed to practice medicine in the State of California, shall be a member of the Hospital's Active Medical Staff with clinical privileges sufficient to permit Medical Director to perform all services reasonably required of him/her as Medical Director of the Program, and shall be in legitimate possession of all customary narcotics and controlled substances narcotics and controlled substances and numbers and licenses; (b) Manager shall obtain the Medical Director's written representation and warranty that at no time prior to or during the term of this Agreement, shall Medical Director's license to practice medicine in any state ever have been suspended, revoked, or restricted, ever have been reprimanded, sanctioned or disciplined by any licensing board or state or local medical society or specialty board, ever have been suspended, excluded, barred or sanctioned under the Medicare or Medi-Cal programs, or any other governmental agency, ever have been denied membership or reappointment of membership on the medical staff of any hospital, or ever had his/her medical staff membership or clinical privileges suspended, curtailed or revoked for a medical disciplinary cause or reason; and (c) The terms and conditions of the Medical Director's agreement with Manager shall be in compliance with all applicable law, including but limited to, state and federal anti-referral legislation such that Hospital shall not be limited from billing and receiving payment for services rendered. Manager shall indemnify and hold Hospital harmless from any damages, costs and expenses Hospital incurs as the result of Manager's failure to assure that Manager's agreement with the Medical Director is in compliance with the foregoing. Hospital shall have the right to review and approve the proposed Agreement between the Medical Director and Manager. 2. Medical Director Duties. The Medical Director shall provide the professional administrative services as hereafter set forth as an independent contractor of Manager. The Medical Director shall furnish the following for the operation of the Program: (a) Medical Director shall serve as Medical Director of the Program. Medical Director shall, during the entire term of this Agreement, supervise the clinical, medical and psychiatric operation of the Program and shall devote such time as is necessary to carry out such duties and ensure efficient and effective medical administration of the Program. The primary objective is to provide appropriate utilization of the Program's facilities, equipment and staff and to provide quality services to all patients; 25 61 (b) Manager shall assure that Medical Director shall be available at reasonable times for consultation with the Board of Directors, the Chief Executive Officer or designee, the Chief of Staff, individual members of the medical staff, committees of the professional staff and nursing, be available by electronic pager for emergency consultation during all hours that the Program is in operation and Medical Director is offsite; provided, however, that Medical Director may arrange for coverage of this on-call obligation by a substitute who must be approved by the CEO or designee, which coverage shall be provided by a physician licensed to practice medicine in the State of California with clinical privileges at Hospital sufficient to perform services required hereunder and shall be at Manager's or Medical Director's sole cost and expense; (c) Medical Director shall actively participate in the affairs of the professional staff of the Hospital and shall perform such tasks and provide such services as the professional staff or any committee may from time to time appropriately request. Hospital's medical staff committees shall conduct at regular intervals ongoing monitoring and reviewing of the professional performance of Program and the Medical Director; the results of these reviews to be reviewed by Hospital's CEO; (d) The Medical Director shall recommend to Hospital and its Medical Staff proposed treatment programs and protocols for physician care. Upon approval of the foregoing, Medical Director shall assist with the implementation of said treatment programs and protocols. (e) If requested by the CEO, Medical Director shall serve on committees and perform duties commensurate with the requirements of the Medical Directors who contract directly with Hospital; and (f) Medical Director shall perform such duties as may be reasonably requested by the CEO from time to time. 3. Medical Director's Compensation.. The Medical Director will be paid at the rate of One Hundred Dollars ($100) per hours; provided, however, in no event will the Medical Director be paid in excess of Three Thousand Dollars ($3,000) per month for services rendered hereunder. 26 62 EXHIBIT 1.2.2 Manager shall provide the following personnel in the categories, at the staffing levels and the costs, including wages, Employee Benefits and overhead, as set forth below: For purposes of this Agreement, the total costs for providing each of the personnel (including wages, Employee Benefits and overhead) will be deemed to be One Hundred Twenty Five percent (125%) of the weighted average rates stated in the most recently published Healthcare Association of Southern California Compensation Survey ("HASC"), or other mutually agreed upon professional association survey data if the HASC survey no longer is available to the parties, for the most comparable position included in the HASC survey. Attached hereto are copies of pages from the HASC survey as most recently published prior to the effective date of this Agreement. The parties agree that the employee categories on the attached copies of pages of the HASC survey represent the positions most comparable to those positions to be provided by Manager hereunder and that the geographic areas identified for each position represent the most applicable market which is included in the HASC survey for the applicable position. Following each of the positions listed below is the page of the most recent HASC survey applicable to the particular position, the applicable geographic market, and the weighted hourly rate or weighted salary to be effective as of the date of this Agreement and which will remain in effect until superseded by another survey, as described above. The parties have agreed that the Employee Benefits and overhead for each of the personnel shall be deemed to be twenty five percent (25 %) of the hourly rate or salary as it may be in effect from time to time. Each of the positions listed below as "FT" shall work for the Program on a full time basis, regardless of the Program census. Each of the positions listed below as "PD" shall work for the Program on a part time basis, to fluctuate depending upon the Program census. Although the actual staffing of personnel listed as "PD" shall vary from week to week depending upon the census, each month such personnel shall work for the Program a percent of full-time as as set forth below. For example, an individual who is designated as .2 FTE shall work the equivalent of twenty percent (20%) of a full-time employee. FT Program Administrator; N-06; All Southern; weighted annual salary $73,907 FT Administrative Assistant; C-05; North Western; weighted hourly rate $13.35 FT Program Coordinator; P-07; North Western; weighted hourly rate $18.56 FT Activity Therapist, MA, ATR; P-07; North Western; weighted hourly rate $18.56 FT Program Therapist, MFT Intern; P-07; North Western; weighted hourly rate $18.56 PD Program Therapist, MFT (.6 FTE); P-07; North Western; weighted hourly rate $18.56 FT Social Worker, LCSW; P-08; All Hospitals; weighted hourly rate $24.68 PD Social Worker, MSW (.6 FTE); P-08; All Hospitals; weighted hourly rate $24.68 PD Licensed Psychologist (.2 FTE); P-15; All Hospitals; weighted hourly rate $29.76 27 63 EXHIBIT 1.13 Manager in conjunction with its corporate offices, will provide to the Hospital, as part of the Manager's fixed Management Fee (as such term is defined in Section 4.3.2 hereof) the following services: A. Administrative Services: 1. Hiring, initial and ongoing training of, the Program Administrator, Nursing Director, Medical Director, and other Manager personnel. 2. Assist Hospital's management team in the selection, initial training and ongoing training of Hospital personnel who work within or provide services to the Program. 3. Recommend to Hospital strategies and opportunities for the Program, including but not limited to, networking, support and education, and assist the Hospital in implementing such strategies and opportunities, if requested by Hospital. 4. Provide resources and published materials for use in the management of the Program. 5. Manager's Corporate Clinical Director shall be available to perform mock surveys and to assist Hospital in: clinical staff training, customer service training, documentation in-servicing, quality care promotion and education, support to Hospital's human resources functions, community liaison efforts, and evaluation of current Program activities. Managaer's Corporate Clinical Director also shall advise Hospital regarding current trends, current regulations, and successful strategies and programs. 6. Manager's Corporate Director of Utilization Review shall be available to perform mock surveys and assist Hospital in clinical staff training, quality care promotion and education. 7. Make available 24-hours a day, 7 days a week, 52 weeks per year the services of a Corporate Intake Services Department to provide management services and advice to Hospital's Admitting Department and to provide prompt and courteous responses to patients, their families and the community. 8. The provision of a Psychiatric Mobile Response Tem (P.M.R.T.) which is available 24-hours per days, 7 days per week, 52 weeks per year with licensed clinical social workers, registered nurses and psychologists who have extensive experience with behavioral healthcare and the Department of Mental Health and Patients Rights who shall be promptly available to advise the Program and its personnel with respect to issues that might arise requiring P.M.R.T. expertise. 28 64 9. Advise Hospital regarding the establishment of community liaison activities to promote the community's awareness of the Hospital and the Program, including but not limited to systems for making follow-up visits to assure patient satisfaction, to provide education to the community, and to enhance the services Hospital provides to patients and the community. If requested by Hospital, Manager shall act on behalf of Hospital in implementing community liaison activities which have been approved by Hospital. B. Clinical Services: 10. Manager's Corporate Clinical Director, Chief Executive Officer and Chief Operating Officer shall consult with Hospital regarding the selection, training and ongoing education of Hospital's clinical staff and Manager's staff who provide services at or to the Program. 11. Manager's Corporate Clinical Director and Corporate Director of Utilization Review, who each shall be licensed registered nurses, shall be available to assist the Hospital with respect to clinical issues, including but not limited to education, documentation, patient care and regulatory requirements. 12. Manager's Corporate Clinical Staff shall provide guidance to the Medical Director, including but not limited to treatment planning. 13. Ongoing review and advice to Hospital regarding Hospital's admission criteria for Medi-Cal and Medicare to assure Hospital's admissions to the Program are appropriate. 14. Provide training to Hospital's clinical staff and perform daily chart reviews to assure that the clinical staff appropriately documents in accordance with Hospital's criteria, appropriately documents treatment and planning, and complies with regulatory standards for documentation, as the foregoing may exist from time to time. 15. Take timely action to appropriately implement discharge criteria for the Program which have been approved by Hospital. 16. Assure that the clinical staff have prepared appropriate documentation of discharge criteria. 17. Recommend to Hospital, and undertake on behalf of Hospital if requested, appropriate post-discharge follow-up communications with families and board and care facilities to maintain and enhance the patient's quality of life. 18. Support Hospital's and its Medical Staff's ongoing education by providing education on clinical topics such as medication, cognitive therapy, care planning, treatment planning, confidentiality, patient rights, etc., and education on such topics as how to deal with and appropriately handle psychiatric patients, mental health laws, psychiatric patients with chronic medical illnesses, etc. 29 65 C. Utilization Review: 19. Recommend appropriate utilization review process policies, procedures and criteria to the Hospital. Upon approval, then to implement these processes so as to assure the timely and efficient management of the processing of all TAR obligations as per the Medi-Cal TAR Unit requirements, as they may exist from time to time. To assure that these processes are promptly modified from time to time as may be required in order to remain n compliance with the applicable requirements as they may exist from time to time. 20. Recommend protocols and procedures to the Hospital, and following Hospital's approval of these protocols and procedures, assist with their implementation. The foregoing shall include, but not be limited to, protocols and procedures which assure that all charts are copied within ten (10) working days of discharge and that copies of charts are sent to the TAR Unit along with the required LA County codes; the foregoing protocols, procedures and time frames to be promptly modified from time to time to comply with applicable requirements as they may exist from time to time. 21. In addition to the reviews conducted by Hospital and its Medical Staff, Manager shall review each day all charts to assure appropriateness of admissions, continued stay criteria and documentation of care. 22. Advise and assist Hospital's UR Staff to assure that all denials are timely and properly appealed by the Hospital on the first level, and if necessary, on the second level. 23. Support Hospital's and the Medical Staff's ongoing education, including but not limited to providing in-services to clinical staff and physicians regarding criteria and County charting requirements. 24. Recommend systems to the Hospital, and following the Hospital's approval, monitor those systems to assure that Hospital's UR Staff enters all Medi-Cal patients into the county's MIS system within 24-hours of admission and discharge, five (5) days a week (Monday through Friday); the foregoing mechanisms and time frames to be promptly modified from time to time to remain in compliance with applicable requirements as they may exist from time to time. 25. Maintain current knowledge regarding regulatory changes to timely recommend revisions to Hospital pre-admissions screening tools consistent with regulatory changes. 26. Recommend P.I. audits for the Program which are consistent with the P.I. program at Hospital. Following Hospital's approval of proposed Program P.I. audits, to actively participate in the implementation and monitoring of the approved P.I. Program audit. 30 66 27. Participate in treatment planning as part of the Treatment Planning Team. 28. All individuals provided by Manager to assist with review of Program patient's utilization shall report to the Hospital's Director of Utilization Review, or the manager designated by Hospital to fulfill the duties of a director of utilization review. D. Educational Services: 29. Maintain continuing education provider numbers from the Board of Registered Nursing and the Board of Behavioral Sciences to enable healthcare providers to obtain continuing education credits for continuing education provided by Manager. 30. Recommend to Hospital, and upon Hospital's request, provide training and education to Hospital's management, including but not limited to education and training regarding teamwork, management of difficult employees, motivation, etc. 31. Recommend, and upon Hospital's request, provide ongoing clinical education, including but not limited to ongoing training of Manager's staff and Hospital staff in proper crisis intervention technique, patient care issues, etc. 32. In support of Hospital's and its Medical Staff ongoing education, provide ongoing Physician in-services and training and ongoing staff education and training or documentation requirements. 33. Recommend, and upon Hospital's request, manage the implementation of a customer service program and education for the Program. 34. Recommend to Hospital, and upon Hospital's request, provide regularly scheduled educational offerings related to the Program. 35. Perform such managerial responsibilities with respect to the Program as reasonably requested from the CEO or designee from time to time, including but not limited to performing managerial responsibilities and timely reporting in accordance with the management structure and standards as required by Hospital of its managers, as said structure and standards may exist from time to time. 31 67 EXHIBIT 5.3.6 Direct Expenses Direct Expenses are expenditures incurred for the operation of a specific department and/or function. The management function has the ability to control, influence and/or provide input regarding Direct Costs. For purposes of this Agreement , Direct Expenses are deemed to include the following which are incurred for the operation and/or function of the Program: Salaries and Wages Employee Benefits Consulting Fees Medical Director Fees Consumable Supplies Repair and Maintenance Lease/Rentals Purchased Services Depreciation Dues, Books and Subscriptions Other Direct Expenses deemed necessary or appropriate for the operation and/or function of the Program 32 EX-23 3 CONSENT OF INDEPENDENT AUDITOR'S 1 EXHIBIT 23 CONSENT OF INDEPENDENT ACCOUNTANTS We hereby consent to the incorporation by reference in the Registration Statements (Form S-8 No. 333-08833, No. 33-78340 and No. 333-41379) of OptimumCare Corporation of our report dated February 29, 2000 with respect to the consolidated financial statements of OptimumCare Corporation which appears on F-1 of this Annual Report (Form 10-K) for the year ended December 31, 1999. /s/ Lesley, Thomas, Schwarz & Postma, Inc. A Professional Accountancy Corporation Newport Beach, California March 28, 2000 2 EXHIBIT 23.1 CONSENT OF INDEPENDENT AUDITORS We consent to the incorporation by reference in the Registration Statements (Form S-8 No. 333-08833, No. 33-78340 and No. 333-41379) pertaining to the 1987 and 1994 Stock Option Plans of OptimumCare Corporation and the OptimumCare Corporation 401(k) Savings Plan of our report dated March 5, 1999, with respect to the consolidated financial statements and schedule of OptimumCare Corporation included in the Annual Report (Form 10-K) for the year ended December 31, 1999. /s/ Ernst & Young LLP Orange County, California March 27, 2000 2 EX-27 4 FINANCIAL DATA SCHEDULE
5 1 YEAR DEC-31-1999 JAN-01-1999 DEC-31-1999 283,227 0 2,261,181 0 0 3,115,702 32,268 170,716 3,462,345 415,182 0 0 0 5,884 2,387,793 3,462,345 0 10,553,427 8,202,445 9,936,576 0 295,895 2,528 653,112 287,314 365,798 0 0 0 365,798 0.06 0.06
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