<PAGE>   1
                                                                  EXHIBIT 10.14



                      MANAGEMENT AND AFFILIATION AGREEMENT


                                     BETWEEN

                         MENTAL HEALTH COOPERATIVE, INC.

                                       AND


                    TENNESSEE MENTAL HEALTH COOPERATIVE, INC.

                                      DATED

                                 APRIL 13, 1995



<PAGE>   2

                                TABLE OF CONTENTS

<TABLE>
<CAPTION>
                                                                                              PAGE
                                                                                              ----
<S> <C>                                                                                          <C>

I.   TERM AND TERMINATION......................................................................  2
     1.1        Conditions Precedent and Term..................................................  2
                1.1.1       Conditions Precedent...............................................  2
                1.1.2       Term...............................................................  2
     1.2        Termination by Agreement.......................................................  3
     1.3        Termination for Cause..........................................................  3
     1.4        Adverse Effect Upon Tax-Exempt Status..........................................  4
     1.5        Termination Due to Legislative or Administrative Changes.......................  4
     1.6        Avoidance of Termination.......................................................  4
     1.7        Sale of TMHC Assets Upon Termination...........................................  5

II.  AFFILIATION; APPOINTMENT AND AUTHORITY OF MANAGER.........................................  5
     2.1        Affiliation with Manager.......................................................  5
     2.2        Contracts with Case Manager....................................................  5
     2.3        Authority of Manager...........................................................  6

III. OBLIGATIONS OF MANAGER....................................................................  6
     3.1        Capitalization of Provider Operations and Expansion............................  6
     3.2        Management and Administrative Services.........................................  6
                3.2.1       Financial Responsibilities.........................................  6
                3.2.2       Policies and Procedures............................................  7
                3.2.3       Management Information Systems.....................................  7
                3.2.4       Roll-Out Systems...................................................  7
                3.2.5       Personnel and Employment Matters...................................  7
                3.2.6       Authorization and Utilization Management...........................  8
                3.2.7       Quality Assurance..................................................  8
                3.2.8       Collaborative Care Enhancement.....................................  9
                3.2.9       Marketing..........................................................  9
                3.2.10      Contract Development...............................................  9
                3.2.11      Additional Services................................................  9
     3.3        Program Development............................................................ 10
     3.4        Provider Facilities............................................................ 10
     3.5        Insurance...................................................................... 10
                3.5.1       Manager Insurance.................................................. 10
                3.5.2       Other Policy Requirements.......................................... 11
     3.6        Indemnification................................................................ 11
     3.7        Provider Designee to Manager's Board of Directors.............................. 11
     3.8        Approval of Subsequent Amendments of Manager's Charter and Bylaws.............. 11

IV.  OBLIGATIONS OF PROVIDER................................................................... 11
     4.1        Execution and Delivery of Services Agreement................................... 11
                4.1.1       Case Management.................................................... 12

</TABLE>



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<TABLE>

<S> <C>                                                                                          <C>
                4.1.2       Crisis Services for Children and Adolescents....................... 12
                4.1.3       Respite Care....................................................... 12
                4.1.4       Crisis Service..................................................... 12
                4.1.5       Clinical Operations................................................ 12
                4.1.6       Other Psychiatric Services......................................... 12
    4.2         Amendment of Provider Charter and Bylaws....................................... 13
                4.2.1       Provider's Board Positions......................................... 13
                4.2.2       Management Advisory Committee...................................... 13
                4.2.3       Approval of Subsequent Amendments of Charter and Bylaws............ 13
    4.3         Certifications, Licenses, Etc.................................................. 13
    4.4         Provider to be "Provider of Services".......................................... 13
    4.5         Program Facilities............................................................. 13
    4.6         Medical Records................................................................ 14
    4.7         Insurance...................................................................... 14
                4.7.1       Provider Insurance................................................. 14
                4.7.2       Other Policy Requirements.......................................... 14
                4.7.3       Risk Management Program............................................ 14
    4.8         Indemnification................................................................ 14
    4.9         Employment of Provider Personnel............................................... 15
                4.9.1       Employment Practices............................................... 15
                4.9.2       Supervision and Control............................................ 15
    4.10        Supervision of Case Management Programs........................................ 15

V.  MANAGEMENT FEE, EXPENSES, AND DISBURSEMENT OF FUNDS........................................ 16
    5.1         General Parameters for Financial Arrangements.................................. 16
                5.1.1       Case Management Activities......................................... 16
                5.1.2       Capital Investments................................................ 16
                5.1.3       Capitated, Case Rate, and Other Payments........................... 16
                5.1.4       State Grants....................................................... 17
                5.1.5       Subcapitated Payment............................................... 17
                5.1.6       Payment for Old Asset Depreciation................................. 17
                5.1.7       Management Fee..................................................... 17
                5.1.8       Payment for New Asset Depreciation................................. 18
                5.1.9       Retained Reserves.................................................. 18
                5.1.10      Return of Capital Investments...................................... 18
                5.1.11      Distribution of Remaining Retained Reserves........................ 18
                5.1.12      Example of Financial Distributions................................. 19
    5.2         The Model...................................................................... 19
                5.2.1       Projected Payments................................................. 20
    5.3         Actual Payments of Compensation................................................ 20
    5.4         Priority of Payments........................................................... 20
    5.5         Quarterly Review of Financial Arrangements..................................... 21
    5.6         Accumulation and Payment of Shortfalls......................................... 22
    5.7         Fair Market Value of Compensation.............................................. 22
    5.8         Receipt of Capitated Payments and Grants by Remittance Clearinghouse........... 22

</TABLE>


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<TABLE>

<S> <C>                                                                                          <C>
VI.   REPRESENTATIONS AND WARRANTIES........................................................... 23
      6.1       Provider's Representations and Warranties...................................... 23
                6.1.1       Corporate Capacity................................................. 23
                6.1.2       Corporate Powers; Consents; Absence of Conflicts With Other
                            Agreements, Etc.................................................... 23
                6.1.3       Securities Representations......................................... 23
                6.1.4       Manager's Name..................................................... 26
      6.2       Manager's Representations and Warranties....................................... 26
                6.2.1       Corporate Capacity................................................. 26
                6.2.2       Corporate Powers; Consents; Absence of Conflicts With
                            Other Agreements, Etc.............................................. 26

VII.  STANDARDS OF SERVICES.................................................................... 27
      7.1        Ongoing Quality and Compliance Reviews........................................ 27
      7.2        Change in Laws or Regulations................................................. 27
      7.3        Notice from Governmental/Regulators Entities.................................. 28

VIII. INDEPENDENT CONTRACTOR................................................................... 28

IX.   COVENANT NOT TO COMPETE.................................................................. 28
      9.1       Noncompetition................................................................. 28
      9.2       Anti-Raiding................................................................... 29
      9.3       Severability of Non-Compete Covenants.......................................... 29

X.    CONFIDENTIALITY AGREEMENT................................................................ 29
      10.1      Confidentiality of Agreements.................................................. 29
      10.2      Confidential Information....................................................... 30
      10.3      Proprietary Information of Manager............................................. 30
                10.3.1      Acknowledgment of Proprietary Interest............................. 30
                10.3.2      Covenant Not to Divulge Trade Secrets.............................. 31
                10.3.3      Return of Materials at Termination................................. 31
                10.3.4      Application to Provider Representatives............................ 31

XI.   STOCK TRANSACTIONS....................................................................... 31
      11.1      Stock Warrant Agreement........................................................ 31
      11.2      Registration Rights............................................................ 32
      11.3      Provider's Covenants Regarding Stock Transactions.............................. 32

XII.  ARBITRATION.............................................................................. 33

XIII. MISCELLANEOUS............................................................................ 33
      13.1      Service of Notices............................................................. 33
      13.2      Binding Effect................................................................. 34
      13.3      Choice of Law.................................................................. 34
      13.4      Entire Agreement............................................................... 34
      13.5      Amendments..................................................................... 34

</TABLE>



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<TABLE>

    <S>         <C>                                                                             <C>
    13.6        Severability................................................................... 35
    13.7        Number and Gender.............................................................. 35
    13.8        Joint Negotiations............................................................. 35
    13.9        Headings....................................................................... 35
    13.10       Assignment..................................................................... 35
    13.11       Counterparts................................................................... 35
    13.12       Attorneys Fees................................................................. 35

</TABLE>



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<TABLE>

<S>        <C>
EXHIBIT A  -  Manager's Home Office Personnel
EXHIBIT B  -  Form of Provider Services Agreement
EXHIBIT C  -  Materials Reviewed by Provider
EXHIBIT D  -  Definition of Accredited Investor
EXHIBIT E  -  Form of Stock Warrant Agreement
EXHIBIT F  -  Form of Registration Rights Agreement
EXHIBIT G  -  Financial Model for Management and Affiliation Agreement
EXHIBIT H  -  Information Regarding Capitated and Subcapitated Payments
EXHIBIT I  -  Permitted Investments
EXHIBIT J  -  Collaborative Care Model (Table of Contents only)
EXHIBIT K  -  Example of Financial Distributions

</TABLE>



                                       -v-

<PAGE>   7

                      MANAGEMENT AND AFFILIATION AGREEMENT



            THIS MANAGEMENT AND AFFILIATION AGREEMENT (this "Agreement") is made
as of the 13th day of April, 1995, by and between MENTAL HEALTH COOPERATIVE,
INC., a Tennessee non-profit corporation ("Provider"), and TENNESSEE MENTAL
HEALTH COOPERATIVE, INC., a Tennessee for-profit corporation ("Manager").


                                    RECITALS

            A. Provider is a Tennessee non-profit corporation that is exempt
from federal income tax as an organization described in Section 501(c)(3) of the
Internal Revenue Code of 1986, as amended (the "IRC").

            B. Provider is a qualified provider of case management and other
psychiatric services.

            C. PMR Corporation a/k/a Psychiatric Management Resources, Inc.
("PMR") is a Delaware for-profit corporation in the business of developing and
administering outpatient acute psychiatric case management programs.

            D. The State of Tennessee has created a statewide program, known as
TennCare, to provide managed care health coverage to the State's Medicaid and
uninsured population through contracts with a number of managed care
organizations ("MCOs").

            E. The TennCare program legislation is to be amended to include the
provision of certain covered services to patients that suffer from serious and
persistent mental illness ("SPMI").

            F. PMR has expertise in developing and managing psychiatric case
management programs for SPMI patients.

            G. PMR has created a wholly-owned, for-profit subsidiary (i.e.,
Manager), to contract with payers, including MCOs participating in the TennCare
program, for the provision of case management and other covered psychiatric
services to persons in the State of Tennessee covered by those payers.

            H. Manager desires to contract with qualified Tennessee case
management companies to provide case management and other covered psychiatric
services to the persons in the State of Tennessee covered by the payers and the
TennCare program.



<PAGE>   8

            I. Provider desires to affiliate with and avail itself of PMR's
management services and Manager desires to provide such services to Provider as
set forth in this Agreement.

            J. Provider and Manager have executed a Provider Services Agreement
of even date herewith (the "Services Agreement") pursuant to which Provider has
agreed to provide "Covered Services" to "Covered Persons" in accordance with
"Payer Plan Agreements" as those terms are defined in the Services Agreement.

            K. Case Management, Inc. ("CMI") is a qualified provider of case
management and other psychiatric services located in Memphis, Tennessee.

            L. Manager and CMI intend to execute a Management and Affiliation
Agreement (the "CMI Management Agreement") that is substantially the same as
this Agreement.

            M. Manager and CMI intend to execute a Provider Services Agreement
(the "CMI Services Agreement") that is substantially the same as the Services
Agreement executed by Provider.

            NOW, THEREFORE, Manager and Provider, intending to be legally bound
hereby, agree as follows:

I.          TERM AND TERMINATION.

            1.1 Conditions Precedent and Term.

                1.1.1 Conditions Precedent. As conditions precedent to the
effectiveness of this Agreement and the commencement of the Term hereof, (i) the
relevant Tennessee statutes, regulations, and other legislation, including
without limitation those relating to the TennCare program, shall be amended or
otherwise appropriately modified, so that (a) the TennCare program includes
coverage of SPMI patients and (b) the services to be provided to SPMI patients
and adolescents by Manager and Provider pursuant to the contracts with the MCOs
(i.e., Payer Plan Agreements) and by Provider pursuant to the Services Agreement
shall be reimbursed in full by the TennCare program and/or other Tennessee
programs, and (ii) Manager shall directly execute a Payer Plan Agreement with a
MCO (i.e., a Payer) for the provision of such services upon the terms and
conditions set forth in the Services Agreement. The satisfaction of these
conditions precedent shall be evidenced by a written acknowledgement to that
effect, which has been executed by Manager and Provider. The date on which the
Manager and the Provider agree and acknowledge that the above-described
conditions precedent have been satisfied and this Agreement is effective is
referred to herein as the "Effective Date."

                1.1.2 Term. Provided that the conditions precedent set forth in
subparagraph 1.1.1 above are satisfied, the term of this Agreement (the "Term")
shall be six (6) years, commencing upon the Effective Date first mentioned
above. Unless and until 




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terminated in accordance with the terms of this Agreement set forth below, this
Agreement shall automatically renew for successive one (1) year periods
thereafter. If either party intends not to renew this Agreement upon the
expiration of the initial or any renewal Term, that party must give the other
party at least sixty (60) days' written notice of such intent not to renew, in
which case this Agreement shall terminate at the end of the then-expiring
initial or renewal Term.

                1.2 Termination by Agreement. In the event Provider and Manager
shall mutually agree in writing, this Agreement may be terminated on the date
specified in such written agreement.

                1.3 Termination for Cause. Either party shall have the right,
but not the obligation, to terminate this Agreement at any time for cause by
giving written notice to the other party of such intent to terminate the
Agreement. Cause for termination includes, but is not limited to:

                    1.3.1     the material breach of any of the representations
                              and warranties set forth in Article VI below;

                    1.3.2     the disciplining, loss of license, or loss of
                              certification, accreditation, or qualification of
                              Provider by any licensing, regulatory, or
                              professional organization or agency with
                              jurisdiction over Provider;

                    1.3.3     the failure of either party to maintain the
                              required liability insurance coverage protection;

                    1.3.4     a finding by any licensing, regulatory, or
                              professional organization that this Agreement
                              violates any state or federal law;

                    1.3.5     any change in federal or state law that causes
                              this Agreement to be in violation of any federal
                              or state law or regulation and the parties fail to
                              reach agreement regarding amendment of this
                              Agreement so as to comply with such law or
                              regulation in the manner set forth in Section 1.5
                              below;

                    1.3.6     the habitual neglect or continued failure of
                              either party to perform its duties and obligations
                              under the Agreement;

                    1.3.7     the initiation of bankruptcy, insolvency,
                              dissolution, liquidation, or receivership
                              proceedings by or against either party;

                    1.3.8     an admission by either party in writing that it is
                              unable to pay its debts as they mature or the
                              making by either party of a general assignment for
                              the benefit of creditors;



                                      -3-
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                    1.3.9     the breach of any other material provision of this
                              Agreement by either party if after sixty (60)
                              days' written notice setting forth the details of
                              the breach and the intent to terminate is given by
                              the terminating party and the breach is not cured
                              by the breaching party during such time period,
                              unless such breach cannot reasonably be cured
                              within such sixty (60) day period and the
                              breaching party has begun to cure such breach
                              during such sixty 60) day period and diligently
                              pursues such remedial action until such breach is
                              cured;

                    1.3.10    the material breach of the Services Agreement
                              described in Section 4.1 below, or the Stock
                              Warrant Agreement or Registration Rights Agreement
                              described in Article XI below; or

                    1.3.11    the termination of the Services Agreement for any
                              reason.

            1.4 Adverse Effect Upon Tax-Exempt Status. In the event that (i) it
is ever determined that any of the transactions contemplated by this Agreement
shall have a material adverse effect upon the Provider's non-profit status under
state law or Provider's tax-exempt status under IRC Section 501(c)(3), and (ii)
an opinion letter stating such conclusion is delivered to the parties by legal
counsel having recognized expertise in such matters, then both parties agree to
negotiate in good faith to amend the Agreement to conform with the then-existing
laws and regulations regarding such non-profit and tax-exempt status. If
agreement cannot be reached with respect to such amendments within ninety (90)
days of notice from Provider (including delivery of the above-referenced legal
opinion) of such determination that the Agreement has an adverse effect upon
Provider's non-profit or tax-exempt status (or such earlier time required by
law), then this Agreement may be immediately terminated by Provider by written
notice to Manager.

            1.5 Termination Due to Legislative or Administrative Changes. In the
event that there shall be a change in the statutes, regulations, or instructions
relating to the Tennessee Medicaid or TennCare programs, the adoption of any new
legislation or regulations applicable to this Agreement, a change in any
applicable third party payer reimbursement system (including, without
limitation, those of the Payers and the Payer Plan Agreements described in the
Services Agreement) or the initiation of an enforcement action with respect to
legislation, regulations, or instructions applicable to this Agreement, any of
which affects the continuing viability or legality of this Agreement or
materially affects the compensation that Provider and Manager will receive under
this Agreement, then both parties agree to negotiate in good faith to amend the
Agreement to conform with the then-existing laws and regulations. If agreement
cannot be reached with respect to such amendments within ninety (90) days of
such change, adoption, or enforcement (or such earlier time as may be required
by such legislation or regulations), this Agreement may be immediately
terminated by either party by written notice to the other party.

            1.6 Avoidance of Termination. Within five (5) days of receipt of a
notice issued pursuant to subparagraph 1.3.9 above, Provider and Manager shall
meet and use their best efforts to negotiate a solution to the problem with
respect to which such notice was sent. 



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Such good faith negotiations shall particularly be required with reference to
notices given pursuant to subparagraphs 1.4 and 1.5. Notwithstanding such
meeting, the times for termination of the Agreement as set forth in this Article
I shall remain in effect unless Manager and Provider agree otherwise.

            1.7 Sale of TMHC Assets Upon Termination. In the event that this
Agreement is terminated by Provider for cause pursuant to Section 1.3 above,
then Provider shall have the right, upon giving Manager the notice specified
below, to (i) purchase Manager's fixed assets that were specifically utilized in
the provision of services by Manager and/or Provider pursuant to this Agreement
and the related Services Agreement, and (ii) receive an assignment of the
contracts (i.e., Payer Plan Agreements) between Manager and Payers that relate
to the case management services to be furnished by Provider pursuant to the
Services Agreement; provided that such Payer Plan Agreements can then be
assigned to Provider, and provided further that in the event such Payer Plan
Agreement cannot be assigned to Provider without the Payer's consent, that
Manager shall use its best efforts to procure the consent of such assignment
from the appropriate Payer. For so long as the value of Manager's unrecouped
capital investment relating to the assets to be transferred exceeds the fair
market value of such assets, the purchase price shall equal the sum of the fair
market value of such assets and the fair market value of the contracts to be
assigned (in no case, however, shall the purchase price exceed the Manager's
unrecouped capital investment). For so long as the value of Manager's unrecouped
capital investment is less than the fair market value of the fixed assets to be
assigned, then the purchase price shall equal the fair market value of such
assets. Provider shall notify Manager in writing within thirty (30) days of such
termination of this Agreement whether Provider desires to exercise its right to
purchase such assets and receive an assignment of such agreements, and
thereafter, Manager shall transfer such assets and assign such Payer Plan
Agreements to Provider as reasonably soon as possible after payment by Provider
of the consideration specified herein in cash or cash equivalents. In the event
that Provider fails to provide such notice within the thirty (30) day period,
then it shall be conclusively presumed that Provider does not desire to exercise
such option and the option granted herein shall terminate. To the extent that
under these conditions Provider desires to purchase Manager's assets and receive
an assignment of Payer Plan Agreements that also relate to services performed by
CMI, then Provider must obtain the prior written consent of CMI before Provider
may purchase those assets or receive an assignment of those Payer Plan
Agreements.

II.         AFFILIATION; APPOINTMENT AND AUTHORITY OF MANAGER.

            2.1 Affiliation with Manager. Except to the extent otherwise
permitted by Section 9.1 below, Provider agrees to affiliate with Manager on an
exclusive basis for the Term of this Agreement for the management and
administration of Provider and the expansion of Provider's facilities, services,
and programs.

            2.2 Contracts with Case Manager. Provider acknowledges and agrees
that Manager shall be permitted to contract with and manage CMI (Case
Management, Inc.) and other case management organizations that provide services
and programs similar to those of Provider and CMI, so long as such organizations
other than CMI have received the prior 



                                      -5-
<PAGE>   12

written approval of Provider. Provider, CMI, and the other case management
organizations that have been approved by Provider and CMI and executed a similar
management and affiliation agreement with Manager are referred to herein
collectively as the "Case Managers" and individually as a "Case Manager."

            2.3 Authority of Manager. Provider appoints Manager as the sole and
exclusive provider of management, administrative, and business services
specifically described herein for Provider. Manager shall have the commensurate
power and authority to provide such management, administrative, and business
services for Provider. Pursuant to the terms and conditions of the Services
Agreement, Manager shall be permitted to contract with the "Payers" for the
provision of Covered Services by Provider to Covered Persons as those terms are
defined in the Services Agreement.

III.        OBLIGATIONS OF MANAGER.

            3.1 Capitalization of Provider Operations and Expansion. Manager and
Provider desire and intend to expand Provider's and CMI's services and case
management programs into a number of markets and communities throughout the
State of Tennessee in order to adequately service the TennCare Payer contracts.
In connection with such expansion, Manager acknowledges and agrees that it shall
assist Provider in expanding Provider's current facilities, services, and
programs in Davidson County and in acquiring new facilities for Provider and
developing new Provider services and programs (i.e., roll-out programs) in new
Tennessee markets, which have been identified and agreed upon by Manager and
Provider. In order to ensure that Manager has adequate capital to perform its
obligations under this Agreement, Manager shall obtain an irrevocable letter of
credit from a bank mutually acceptable to Manager and Provider pursuant to which
Manager may draw up to Two Million and No/100ths Dollars ($2,000,00.00) for a
term of one (1) year. Manager shall obtain the letter of credit on or before the
Effective Date, and Manager agrees that funds obtained pursuant to the letter of
credit shall be utilized only for the obligations of Manager under this
Agreement and the CMI Management Agreement. Notwithstanding the foregoing,
Provider acknowledges that Manager shall draw upon the letter of credit or
otherwise obtain capital funds and spend such funds in Manager's sole discretion
after consultation with Provider and CMI.

            3.2 Management and Administrative Services. Manager shall cause to
be furnished all administrative and management services necessary to develop and
operate the Provider's facilities and case management programs in each of the
markets mutually acceptable to Manager and Provider, so as to provide high
quality patient care. In connection therewith, Manager shall create and staff a
home office that shall provide full-service management and administrative
services for Provider, including the following:

                3.2.1 Financial Responsibilities. Manager shall be responsible
for administering Provider's accounts receivable (including receipt of capitated
payments and other billing and collection activities), accounts payable, and
implementation of appropriate accounting systems. In performing such financial
duties, Manager shall use reasonable 



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<PAGE>   13

efforts to operate Provider in a manner that will preserve and enhance the
economic viability and stability of Provider.

                3.2.2 Policies and Procedures. Manager shall be responsible for
creation and implementation of all detailed operating protocols for the
provision of Provider's case management and other psychiatric services. Such
protocols include provision of appropriate policies and procedures manuals,
program manager handbooks, admissions screening systems, the core medical
records systems and forms, guidelines and forms for treatment planning meetings,
utilization review systems and forms, post-discharge follow-up systems and
forms, community relations development and maintenance systems and forms, a key-
monitor management system, and materials regarding principal and special
treatment modalities. Manager shall submit such protocols to Provider's Board of
Directors for approval before implementation. In the event that Provider's Board
of Directors disapproves of any such protocols, then representatives of Manager
and Provider shall revise the disapproved protocols so that such protocols are
reasonably acceptable to both Manager and Provider.

                3.2.3 Management Information Systems. Manager shall provide all
management information systems (including appropriate computer hardware and
software) necessary for the operations of Provider in the Provider's various
facilities throughout the State of Tennessee.

                3.2.4 Roll-Out Systems. Manager shall provide the policies and
procedures for the creation of new sites for Provider services and facilities
and development of new treatment programs for SPMI patients.

                3.2.5 Personnel and Employment Matters.

                       (a) Provider's Personnel. Except for Manager's home
          office personnel described below, all personnel at the Provider's
          various facilities, including those providing case management and
          patient care services (e.g., "Health Professionals" as that term is
          defined in the Services Agreement) shall be employees of or
          independent contractors with Provider. Manager shall assist Provider
          in recruitment, training, and evaluation of all Provider employees and
          independent contractors, and Manager shall make recommendations to
          Provider's officers and directors regarding such employment matters.
          All personnel recruited by Manager to perform services at the
          Provider's facilities or in the Provider's case management programs
          shall be appropriately licensed and qualified to perform such
          services. Although Manager shall be responsible for management of
          Provider's payroll, Provider is responsible for the actual payment of
          Provider's employees and independent contractors and the provision of
          funds for such payments. Provider's employees and independent
          contractors shall not be eligible for nor participate in any of the
          health or benefit plans of either Manager or PMR; Provider shall be
          totally responsible for providing any and all health or other benefits
          for its employees.



                                      -7-
<PAGE>   14

                       (b) Manager's Home Office Personnel. In providing the
          management and administrative services described herein, Manager shall
          create and staff a home office. In connection therewith, Manager shall
          employ or hire as independent contractors persons for those positions
          described in Exhibit A hereto. Manager shall, in its sole discretion,
          select the persons who will serve in each of the capacities listed in
          Exhibit A hereto, provided, however, all such personnel shall be
          reasonably satisfactory to Provider. Manager agrees that all personnel
          listed in Exhibit A will be available to Provider when required for
          issues related to operation and management of the Provider's
          facilities and case management programs. Manager is responsible for
          payment of Manager's employees and independent contractors and the
          provision of funds for such payments. Manager's employees and
          independent contractors shall not be eligible for nor participate in
          any of the health or benefit plans of Provider; Manager shall be
          totally responsible for providing any and all health or other benefits
          for its employees.

                       (c) Employment Practices. Employment practices of Manager
          shall comply with all applicable federal and state laws, rules,
          regulations, and guidelines and the rules, regulations, and guidelines
          of regulatory agencies having appropriate jurisdiction over such
          matters.

                       (d) Supervision and Control. Manager shall be responsible
          for the direction and control of all of Manager's employees and
          independent contractors and shall cause all personnel to comply to the
          extent applicable with all terms and conditions of this Agreement and
          with the protocols, as amended and as approved by Provider pursuant to
          subparagraph 3.2.2, and the Policy Manual, as amended and approved
          pursuant to subparagraph 3.3.

            3.2.6 Authorization and Utilization Management.

                       (a) Preauthorization and MCO Utilization Review. Manager
          shall coordinate authorization of services and utilization management
          with each Payer. Manager shall provide a central office for the
          authorization of services to Payer patients by Provider. Manager's
          medical director, in consultation with Payer medical directors and
          Provider medical directors, psychiatrists, and nurses shall determine
          patient treatment programs and length of stay.

                       (b) Utilization Review of Provider Programs. Manager
          shall coordinate utilization review of the Provider's programs, which
          shall include: (i) review of the determination of a qualified
          patient's need for care; (ii) document outcome-related improvements to
          the patient from Provider's case management programs; and (iii)
          ongoing review of patient records to monitor medical necessity
          determination by professional staff.

            3.2.7 Quality Assurance. Manager shall coordinate quality assurance
reviews with respect to Provider's case management and psychiatric service
programs, which shall include:



                                      -8-
<PAGE>   15

                       (a) determining compliance with Provider's quality
          assurance program;

                       (b) providing outcome-oriented quality assurance
          assistance designed to achieve improvement in over-all quality of
          care; and

                       (c) reviewing and monitoring Provider's case management
          program staff with respect to the quality and scope of patient
          services.

            3.2.8 Collaborative Care Enhancement. Manager shall use reasonable
efforts to enhance the Collaborative Care Model that has been developed for
Provider. The Collaborative Care Model in its current state, which includes the
matters described in the table of contents in Exhibit J attached hereto, shall
be provided to the Provider upon the effectiveness of this Agreement.

            3.2.9 Marketing. Manager shall market and advertise the services
provided to Payer patients by Provider.

            3.2.10 Contract Development. Manager and Provider shall jointly
develop (including negotiation and execution of definitive agreements) contracts
for the provision of services to Payer patients by Provider (i.e., the Payer
Plan Agreements defined in the Services Agreement). In this regard, Manager
shall use its best efforts to develop appropriate Payer Plan Agreements with
Payers participating in the TennCare program for the provision of services to
Payer patients in Tennessee covered by a Payer. In developing such Payer Plan
Agreements, Manager shall have the power and authority to negotiate and execute
contracts and obligate Provider to the extent permitted by Section 2.1 of the
Services Agreement.

            3.2.11 Additional Services. Manager shall provide the following
additional management and administrative services:

                       (a) assisting Provider (with Provider's cooperation) in
          obtaining all necessary certifications, licenses, permits,
          accreditations, etc., and assisting Provider in insuring compliance
          with all licensing and regulatory agencies;

                       (b) planning, design and production of all community
          liaison and educational literature;

                       (c) ongoing administration of Provider's case management
          and psychiatric service programs;

                       (d) ongoing community liaison support;

                       (e) Provider staff development and continuing education;

                       (f) coordination with community agencies that have
          clients in need of the Provider's case management programs and
          psychiatric services; and



                                      -9-
<PAGE>   16

                       (g) such other management or administrative services that
          are specifically identified and mutually agreed upon by Manager and
          Provider.

            3.3 Program Development. Manager shall assist Provider in developing
and expanding Provider's case management and psychiatric service programs.
Manager shall assist Provider in the development, upgrading, and maintenance of
the Provider's case management programs to meet or exceed applicable state,
federal, agency, and third-party payer standards. Such assistance shall consist
of the development and maintenance of a comprehensive set of procedures and
policies for Provider (the "Policy Manual") covering all aspects of the
Provider's case management programs. The Policy Manual and periodic additions,
deletions, or amendments thereto, shall be submitted to Provider's Board of
Directors for its prior approval, which approval shall not be unreasonably
withheld. In the event that any aspect of the Policy Manual is not approved, it
shall be revised so that it is reasonably acceptable to both Provider and
Manager.

            3.4 Provider Facilities. Manager shall assist Provider in expanding
the Provider's current facilities in Davidson County. Manager and Provider shall
jointly identify and agree upon suitable facilities for the provision of
Provider's case management program services in locations other than Provider's
current facilities in Davidson County. Manager shall assist Provider in the
negotiations to acquire such premises by lease or otherwise. Provider shall be
responsible for obtaining such premises by execution of the applicable lease or
purchase agreements, and the rental for such acquired premises shall be
Provider's cost and expense. To the extent that the landlord provides a separate
build-out allowance or includes the cost of build-out in the rental rate,
Provider shall be responsible for the cost of such build-out. Manager shall be
responsible for the build-out costs in excess of the landlord's allowance and/or
the rental component for build-out, as well as furnishing and equipping of such
premises, and the cost of such furniture, equipment, and excess build-out shall
be Manager's cost and expense. All such premises and the build-out thereof shall
be approved by Manager and Provider. The capital necessary for the equipping,
furnishing and excess build-out of such facilities shall be provided by Manager
in accordance with subparagraph 3.1 above and shall be reimbursed to Manager in
accordance with Article V below.

            3.5 Insurance.

                3.5.1 Manager Insurance. For the Term of this Agreement, Manager
shall procure and maintain at its own cost comprehensive general and
professional liability insurance with elements of self-insurance or deductibles
common to the industry covering personal injury, bodily injury, and property
damage in the following amounts:

                       (a) Personal/bodily injury: One Million and No/100ths
          Dollars ($1,000,000.00) per claimant and Three Million and No/100ths
          Dollars ($3,000,000.00) annual aggregate.



                                      -10-
<PAGE>   17

                       (b) Property damage: Five Hundred Thousand and No/100ths
          Dollars ($500,000.00) per occurrence and Five Hundred Thousand and
          No/100ths Dollars ($500,000.00) annual aggregate.

                3.5.2 Other Policy Requirements. Such insurance shall be written
on an occurrence basis by an insurance company authorized to transact the
insurance business in the State of Tennessee; provided, however, that such
insurance may be written on a claims-made basis if tail coverage is guaranteed
at the time the primary insurance policy is written and Manager purchases and
maintains such tail coverage upon the termination of Agreement for the maximum
reporting period available or five (5) years, whichever is longer.

            3.6 Indemnification. Manager agrees to indemnify and hold harmless
Provider and Provider's directors, officers, employees, independent contractors,
and agents ("Provider Indemnitees") from and against any and all claims,
demands, causes of action, costs, and liabilities (including, without
limitation, reasonable attorneys' fees), caused by, resulting from, or
attributable to the grossly negligent or intentional acts or omissions of
Manager and/or Manager's directors, officers, employees, independent
contractors, and agents with respect to the duties and obligations imposed on
Manager hereunder. Manager shall have the right, at Manager's sole expense, of
defending any such third party claim. Notwithstanding anything to the contrary
herein, Manager is not obligated to indemnify the Provider Indemnitees or any
other party for any claims, demands, causes of action, costs, or liabilities
resulting from the acts or omissions of the Provider Indemnitees or such other
party.

            3.7 Provider Designee to Manager's Board of Directors. The Manager's
Charter and Bylaws shall provide that one of the Manager's Directors shall be a
person designated by the Provider's Board of Directors.

            3.8 Approval of Subsequent Amendments of Manager's Charter and
Bylaws. The Manager's Charter and Bylaws shall provide that the provisions in
the Charter and Bylaws regarding the appointment of one member of the Manager's
Board of Directors by Provider shall not be amended without the prior approval
of the Provider's Board of Director's, which approval shall not be unreasonably
withheld.

IV.         OBLIGATIONS OF PROVIDER.

            4.1 Execution and Delivery of Services Agreement.

            Provider agrees to execute and deliver simultaneously with this
Agreement a Services Agreement in substantially the form of Exhibit B attached
hereto. Pursuant to the Services Agreement, Provider shall provide the Covered
Services described therein, including the following services, at each Provider
facility serving the various Tennessee markets jointly identified by Manager and
Provider.



                                      -11-
<PAGE>   18

                4.1.1 Case Management. Provider shall provide case management of
the services provided to eligible patients pursuant to the terms and conditions
of the Payer Plan Agreements among Manager, Provider, and the Payers. In the
provision of such case management services at each Provider location, Provider
shall employ or otherwise engage the services of a Case Management Director,
Administrative Assistant, Housing Developer, Team Leader, appropriate Case
Managers, and an Assessment Team (composed of a minimum of 2 members).

                4.1.2 Crisis Services for Children and Adolescents. Provider
shall provide crisis services for children and adolescents covered by the Payers
pursuant to the terms and conditions of the Payer Plan Agreements.

                4.1.3 Respite Care. Provider shall provide respite services to
eligible patients, including the identification and provision of temporary
housing for such patients. In providing such services, Provider shall employ or
otherwise engage a Respite Coordinator and have appropriate agreements with
respite providers.

                4.1.4 Crisis Service. Provider shall operate a twenty-four (24)
crisis hot-line and crisis services. In providing such services, Provider shall
employ or otherwise engage a Director of Crisis Services, an appropriate number
of Counselors (including, lead counselors, regular shift counselors, and night
shift counselors), and a Triage Coordinator. Each of such persons shall possess
the appropriate qualifications, credentials, training, etc. to provide such
services.

                4.1.5 Clinical Operations. Provider shall provide appropriate
clinical services and treatment to eligible patients. In providing such
services, Provider shall employ or otherwise engage a Medical Director and an
appropriate number of Health Professionals defined in the Services Agreement.
Each of such persons shall possess the appropriate qualifications, credentials,
training, etc. to provide such services.

                4.1.6 Other Psychiatric Services. Provider shall also provide
the following "other psychiatric services" in addition to the case management
and other services described in subparagraphs 4.1.1 through 4.1.5 above:

                       (a)  rehab/crisis services
                       (b)  rehab/clinic services
                       (c)  grant revenue/housing
                       (d)  grant revenue/TDMHMR
                       (e)  grant revenue/crisis
                       (f)  grant revenue/homeless outreach
                       (g)  grant revenue/respite
                       (h)  grant revenue/medical doctors

            All agreements of Provider described in subparagraphs 4.1.1 through
4.1.6 above shall receive the prior written consent of Manager, which consent
shall not be unreasonably withheld.



                                      -12-
<PAGE>   19

            4.2 Amendment of Provider Charter and Bylaws. As a condition
subsequent to the continued effectiveness of this Agreement, Provider shall also
agree to amend its Charter and Bylaws within thirty (30) days after the
execution of this Agreement to provide for the following:

                4.2.1 Provider's Board Positions. The Provider's Charter and
Bylaws shall provide that (i) the maximum number of members of the Provider's
Board of Directors shall be fifteen (15) Directors, (ii) one of the Provider's
Directors shall be the person then acting as the Manager's Chief Executive
Officer, and (iii) Manager shall be permitted to designate two (2) additional
members of the Provider's Board of Directors, which persons may or may not be
employees or affiliates of Manager or PMR.

                4.2.2 Management Advisory Committee. The Provider's Charter and
Bylaws shall provide for a committee to be called the "Management Advisory
Committee." The Management Advisory Committee shall be composed of six (6)
members, three of which shall be appointed by Manager's Board of Directors and
three of which shall be appointed by Provider's Board of Directors. The
Management Advisory Committee shall review all financial information and
administrative reports and make recommendations to the Provider's Board of
Directors in matters involving the management, administration, operation, and
financial affairs of the Provider.

                4.2.3 Approval of Subsequent Amendments of Charter and Bylaws.
The Provider's Charter and Bylaws shall provide that the provisions in the
Charter and Bylaws regarding (i) the number and appointment of members of the
Provider's Board of Directors, and (ii) the composition, purpose, and authority
of the Management Advisory Committee shall not be amended without the prior
approval of each of the three members of the Provider's Board of Directors that
have been designated by Manager.

            4.3 Certifications, Licenses, Etc. The Provider shall ensure that
its case management and psychiatric service programs shall be certified,
licensed, and/or otherwise appropriately qualified in the name of Provider with
all appropriate authorities. Provider shall, at all times, be the owner and
holder of all licenses and accreditations with respect to the Provider's case
management and other psychiatric program services.

            4.4 Provider to be "Provider of Services". Provider shall be the
"provider" within the meaning of all contracts and agreements with all
third-party payers for case management and other psychiatric program services
described in subparagraph 4.1 above. As the "provider of services," Provider has
the duty to verify with Manager the Payer for each patient and the program
coverage for such patient.

            4.5 Program Facilities. Provider shall permit Manager to utilize
Provider's current facilities, equipment, and supplies in Davidson County in
connection with the services to be provided by the parties pursuant to this
Agreement. Provider shall timely review and approve Manager's choice of premises
and related build-out for additional facilities in the new markets identified by
Manager for expansion of Provider's programs. Provider shall provide case
management and other psychiatric program services in all such markets and 



                                      -13-
<PAGE>   20

at all such facilities pursuant to the terms and conditions of this Agreement
and the Services Agreement.

            4.6 Medical Records. Provider shall maintain all medical and patient
records in the manner and for the period of time required by law and industry
practice. All patient medical records shall be the property of Provider.
Provider will promptly notify Manager of any Payer request for records or
information from a third party regarding a patient in a Provider program.

            4.7 Insurance.

                4.7.1 Provider Insurance. For the Term of this Agreement,
Provider shall procure and maintain at its own cost comprehensive general and
professional liability insurance with elements of self-insurance or deductibles
common to the industry covering personal injury, bodily injury, and property
damage in the following amounts:

                       (a) Personal/bodily injury: One Million and No/100ths
          Dollars ($1,000,000.00) per claimant and Three Million and No/100ths
          Dollars ($3,000,000.00) annual aggregate.

                       (b) Property damage: Five Hundred Thousand and No/100ths
          Dollars ($500,000.00) per occurrence and Five Hundred Thousand and
          No/100ths Dollars ($500,000.00) annual aggregate.

                4.7.2 Other Policy Requirements. Such insurance shall be written
on an occurrence basis by an insurance company authorized to transact insurance
business in the state in which Provider is located; provided, however, such
insurance may be written on a claims-made basis if tail coverage is guaranteed
at the time the primary insurance policy is written and Provider purchases and
maintains such tail coverage upon the termination of Agreement for the maximum
reporting period available or five (5) years, whichever is longer.

                4.7.3 Risk Management Program. Provider shall create and manage,
in cooperation with Manager, a risk management program designed to monitor and
minimize all insurable risks related to the Provider's case management program.
Risk management techniques and discussions shall be a regular part of the
procedures implemented pursuant to the Policy Manual approved by Provider
pursuant to subparagraph 3.3.

            4.8 Indemnification. Provider agrees to indemnify and hold
harmless Manager and Manager's directors, officers, employees, independent
contractors, and agents ("Manager Indemnitees") from and against any and all
claims, demands, causes of action, costs, and liabilities (including, without
limitation, reasonable attorneys' fees), caused by, resulting from, or
attributable to the grossly negligent or intentional acts or omissions of the
Provider and/or the Provider's directors, officers, employees, independent
contractors, and agents with respect to the duties and obligations imposed on
the Provider hereunder. Provider shall have the right, at Provider's sole
expense, of defending any such third party claim. 



                                      -14-
<PAGE>   21

Notwithstanding anything to the contrary herein, Provider is not obligated to
indemnify the Manager Indemnitees or any other party for any claims, demands,
causes of action, costs or liabilities, resulting from the acts or omissions of
the Manager Indemnitees or such other party.

            4.9 Employment of Provider Personnel. Manager will advise Provider
of Manager's recommendations regarding employment of all personnel for the
Provider's programs and facilities, and Provider shall timely review such
recommendations and the qualifications of all such personnel. Provider shall
employ or hire as independent contractors persons for those positions necessary
for the staffing of Provider's programs and facilities. Provider shall, in its
sole discretion, select the persons who will serve in each of those positions
for Provider; provided, however, all such personnel shall be reasonably
satisfactory to Manager. Provider agrees that all Provider personnel will be
available to Manager when required for issues related to the operation and
management of the Provider's facilities and case management programs. Provider
is responsible for payment of Provider's employees and independent contractors
and the provision of funds for such payments. Provider's employees shall not be
eligible for nor participate in any of the health or benefit plans of Manager or
PMR; Provider shall be totally responsible for providing any and all health or
other benefits for its employees.

                4.9.1 Employment Practices. Employment practices of Provider
shall comply with all applicable federal and state laws, rules, regulations, and
guidelines and the rules, regulations, and guidelines of regulatory agencies
having appropriate jurisdiction over such matters.

                4.9.2 Supervision and Control. Provider shall be responsible for
the direction and control of all of Provider's employees and independent
contractors and shall cause all personnel to comply to the extent applicable
with all terms and conditions of this Agreement and with the protocols, as
amended and as approved by Manager and Provider pursuant to subparagraph 3.2.2,
and the Policy Manual, as amended and approved pursuant to subparagraph 3.3.

            4.10 Supervision of Case Management Programs. Provider shall be
responsible for the operation of the Provider's case management programs and the
implementation of policies with respect thereto. Notwithstanding the authority
granted to Manager hereunder, Provider shall retain and at all times exercise
ultimate control over the affairs of Provider, and shall be accountable and
responsible for all duties of Provider and Provider's services and programs.
Provider shall have final authority to approve the Policy Manual and staffing
plans for Provider's facilities. Provider shall establish a chain of command for
each program through which Provider provides case management and related
psychiatric services hereunder and shall supervise and bear the responsibility
for all medical services provided through the Programs. The foregoing reporting
relationships shall be in addition to any relationships established by Manager
with respect to the administrative management of the programs.




                                      -15-
<PAGE>   22

V.          MANAGEMENT FEE, EXPENSES, AND DISBURSEMENT OF FUNDS.

            5.1 General Parameters for Financial Arrangements.

            In determining the amount of the various payments that are to be
made to each party pursuant to this Agreement and the related Services
Agreement, Manager and Provider have agreed that the following are: (i) the
parties to be involved in such financial arrangements and (ii) the components of
the funds to be received by Manager and the payments that are to be made to each
party:

                5.1.1 Case Management Activities. Manager and Provider
acknowledge and agree that the monies available for distribution to Manager and
Provider pursuant to this Agreement and the related Services Agreement are based
upon the Manager's receipts, revenues, expenditures, and payments related to the
case management and other psychiatric services provided in Tennessee by Manager
and every Case Manager (defined in subparagraph 2.2 above). The case management
activities of Manager and the Case Managers are governed by the management and
affiliation agreements between Manager and each Case Manager (in substantially
the form of this Agreement and referred to herein collectively as the
"Management Agreements" and individually as a "Management Agreement"), and the
provider services agreement between Manager and each Case Manager (in
substantially the form of the Services Agreement).

                5.1.2 Capital Investments. Manager shall make capital
investments for the operations of Provider and the other Case Managers as
described in subparagraph 3.1 above, which shall be repaid as described below.
In the event that a Case Manager desires to make capital investments for
expansion of their respective facilities and operations, and Manager approves of
such investment (which approval shall not be unreasonably withheld), then such
Case Manager's capital investment shall be repaid in the same manner and
according to the same priority that Manager's capital investment shall be
repaid. The cost associated with borrowing any funds to make such capital
investment (e.g., interest, loan origination fees, etc.) shall be the sole cost
of Manager or a Case Manager, as the case may be, and such costs of borrowing
shall not be reimbursed pursuant to this Agreement.

                5.1.3 Capitated, Case Rate, and Other Payments. With respect to
each contract (i.e., a Payer Plan Agreement defined in the Services Agreement)
between a Payer and Manager for the provision of case management and other
psychiatric services to Covered Persons in accordance with the Payer's
respective Payer Plan (as those terms are defined in the Services Agreement),
Manager shall receive (directly or by assignment from the Case Managers) (i) a
monthly fee that is equal to a specific capitated amount per member per month
("PMPM") multiplied times the number of that Payer's Covered Persons, (ii) a
specific case rate payment, and/or (iii) some other type of payment. These
monthly capitated, case rate, and/or other payments from a Payer to Manager for
case management services described in this Agreement are collectively referred
to herein as the "Capitated Payment," and the Capitated Payment may vary for
each Payer, depending upon the terms of the particular Payer Plan Agreement with
a Payer for case management services.



                                      -16-
<PAGE>   23

                5.1.4 State Grants. In some instances, the State of Tennessee
through grant programs ("Grants"), rather than the TennCare program and its
participating Payers, will be the source of funding for the case management and
other psychiatric services to be provided by Manager and the Case Managers to
eligible Tennessee beneficiaries. In those instances where Grants provide the
funding for case management activities, the Grants shall be received by Manager,
either directly from the State agency making such Grant or by assignment from
the Case Manager receiving such Grant. To the extent permitted by the terms and
conditions of the Grant, such Grant shall be administered by Manager in the same
manner and according to the same procedures as a Capitated Payment. If the terms
of a Grant do not permit the Grant to be utilized by the parties in the same
manner as a Capitated Payment, then the parties agree to use their best efforts
to meet and agree upon the manner in which the services that are the subject of
such Grant shall be provided and reimbursed. With the exception of capital
investments by Manager and the Case Managers described in subparagraph 5.1.2
above, the cumulative Capitated Payments and Grants received by Manager (either
directly or by assignment from the Case Managers) provide the funds for the case
management and related psychiatric service activities of Manager and the Case
Managers and provide the funds that eventually result in the accumulation of the
Retained Reserves (defined below). The parties acknowledge and agree that
Manager and the Case Managers shall be permitted to and may provide other health
and psychiatric services in Tennessee besides the case management and other
psychiatric services that are the subject of this Agreement, the other
Management Agreements, and the services agreements, and the financial
distributions described in this Agreement do not include any monies received by
Manager or the Case Managers for such other activities not related to the case
management and other psychiatric services described herein or in the other
Management Agreements.

                5.1.5 Subcapitated Payment. Manager shall pay each Case Manager
from the Capitated Payments and the Grants an amount, referred to herein as the
"Subcapitated Payment," for the case management and other psychiatric services
provided by the respective Case Manager at its various facilities in accordance
with its applicable provider service agreement. Each Case Manager shall pay for
all of the costs associated with its case management and other psychiatric
service obligations (e.g., the case manager's costs described in the
consolidated pro forma budgets appearing behind Tab 1 of the Model defined
below) from its Subcapitated Payment.

                5.1.6 Payment for Old Asset Depreciation. Manager shall also pay
to each Case Manager from the Capitated Payments and the Grants an amount equal
to the depreciation of each Case Manager's facilities and equipment that are in
existence on the date of the Case Manager's respective Management Agreement and
utilized in accordance with the terms and conditions of the Case Manager's
respective Management Agreement and provider services agreement. Such payment
for depreciation is referred to herein as a payment for "Old Asset
Depreciation."

                5.1.7 Management Fee. Manager shall pay itself from the
Capitated Payments and the Grants an amount, referred to herein as the
"Management Fee," to reimburse Manager for the cost of the management and
administrative services provided 



                                      -17-
<PAGE>   24

pursuant to this Agreement and the other Management Agreements with other Case
Managers (net of depreciation of capital assets acquired by Manager in
connection with the case management activities of Manager and the Case Managers
and net of the repayment of Manager's capital investments). Such costs of
Manager shall include the Manager's home office expenses described in the pro
forma budgets behind Tab 2 of the Model (defined below). The parties intend that
the Management Fee shall reimburse Manager for its costs for management and
administrative services described herein in the amount budgeted in the Model. To
the extent that the Management Fee does not cover Manager's actual costs or the
budgeted amount exceeds Manager's actual costs, the Management Fee shall be
adjusted as described in subparagraph 5.5 below.

                5.1.8 Payment for New Asset Depreciation. Manager shall then pay
itself from the Capitated Payments and Grants an amount equal to the
depreciation of the capital assets (e.g., build-out of new case manager
facilities, furniture, and equipment) that are acquired by Manager with its
capital investments for case management activities. To the extent that a Case
Manager, rather than Manager, has made such a capital investment for the Case
Manager's case management activities, then Manager shall pay such Case Manager
an amount equal to the depreciation of the capital assets (e.g., build-out of
new Case Manager facilities, furniture, and equipment) that are acquired with
the Case Manager's capital investments for case management activities. Such
depreciation shall be computed in accordance with generally accepted accounting
principles based on the depreciable capital assets' useful lives using the
straight line method. Such payment for depreciation is referred to herein as a
payment for "New Asset Depreciation."

                5.1.9 Retained Reserves. Subtraction of the cumulative
Subcapitated Payments, payments for Old Asset Depreciation, the Management Fee,
and payments for New Asset Depreciation from the cumulative amount of the
Capitated Payments and Grants results in an amount referred to herein as the
"Retained Reserves."

                5.1.10 Return of Capital Investments. The Retained Reserves
shall first be utilized by Manager to pay Manager and each Case Manager, which
made a capital investment described in subparagraph 5.1.2 above, a thirty-five
percent (35%) annual return of Manager's and the Case Managers' respective
capital investments (the "Investment Return") until such time as all such
capital investments have been repaid (i.e., 35% of the amount of a party's
capital investment shall be repaid each year until such time as the full amount
of such capital investments are repaid). In the case of subsequent capital
investments by Manager and the Case Managers, the amount of such subsequent
capital investment shall be added to the amount of the original and any
subsequent capital investments and 35% of such cumulative amount of original and
subsequent capital investments shall be repaid on an annual basis until such
time as all capital investments have been repaid. No interest is paid with
respect to any of the capital investments.

                5.1.11 Distribution of Remaining Retained Reserves. The
remainder of the Retained Reserves shall be paid to Manager and the Case
Managers as follows:



                                      -18-
<PAGE>   25

                       (a) The remaining Retained Reserves shall be paid seventy
          percent (70%) to the Case Managers and thirty percent (30%) to Manager
          until such time as the Case Managers have received payments that
          cumulatively equal seventy percent (70%) of the cumulative Investment
          Return.

                       (b) After such time as the payments received by the Case
          Managers pursuant to subparagraph 5.1.11(a) above cumulatively equal
          seventy percent (70%) of the cumulative Investment Return, the
          remainder of the Retained Reserves shall be paid fifty percent (50%)
          to Manager and fifty percent (50%) to the Case Managers.

                       (c) Amounts to be received by the Case Managers pursuant
          to these distributions of the remaining Retained Reserves shall be
          made to each Case Manager on a pro rata basis based upon the
          percentage of Manager's gross revenues attributable to the case
          management and other psychiatric services of each respective Case
          Manager to Manager's total gross revenues that result from the case
          management and other psychiatric services of Manager and all Case
          Managers.

                       (d) Distributions of the Retained Reserves in the manner
          described herein shall be made within thirty (30) days of the end of
          each calendar quarter after the parties have completed the quarterly
          review of financial arrangements described in subparagraph 5.5 below.

                5.1.12 Example of Financial Distributions. Attached hereto as
Exhibit K is a hypothetical example of the manner in which the distribution of
funds will be made to Manager, Provider, CMI and other approved Case Managers
for the various financial components described herein. The parties acknowledge
and agree that (i) the example is purely hypothetical, (ii) the example is only
intended to be used for clarification of the manner in which the various
distributions will be made to the parties, and (iii) the example is not a
representation or estimation of the actual funds that will be received or
distributed.

            5.2 The Model.

            In connection with the negotiation and preparation of this
Agreement, Manager and Provider have prepared a budgetary analysis (referred to
herein as the "Model," a copy of which is attached hereto as Exhibit G) of the
expected revenues and expenses, which are involved in the case management
activities contemplated by this Agreement, the other Management Agreements, and
the related provider services agreements, and the payment of those expenses and
distribution of funds. The Model analyzes the expected management and
administrative costs (net of depreciation and interest on Manager's capital
investments) for the Manager's home office (See Tab 2 of the Model). The Model
also analyzes the estimated lives, revenues, expenses, and other applicable
financial factors for the ten projected markets for case management services to
be provided by the Case Managers (See Tabs 3 through 12 of the Model). The Model
then analyzes the lives, incremental depreciation, program costs, and Capitated
Payments expected for the Manager's home office and the ten projected markets on
a consolidated basis (See Tab 1 of the Model).



                                      -19-
<PAGE>   26

                5.2.1 Projected Payments. Based upon the estimated Capitated
Payment and Subcapitated Payment, the parties have projected the amounts that
would be paid for Old Asset Depreciation, the Management Fee, and New Asset
Depreciation. The Parties have also estimated the remaining Retained Reserves
and the payments to be made from the Retained Reserves to Manager for its
Investment Return, as well as the 70/30 and 50/50 distributions of the final
amount of the Retained Reserves. (See page 1 of the Model.)

            5.3 Actual Payments of Compensation. The parties acknowledge and
agree that the Model determines the Subcapitated Payment and Management Fee,
based upon the parties' current estimates of costs and other relevant factors,
and the Capitated Payment, based upon the parties' current estimate of such
payment after discussions with Payers. The actual Capitated Payments, Grants,
any withholds by the Payers for risk pools, Subcapitated Payments and Management
Fee, shall be set forth on Exhibit H to be attached hereto, which exhibit shall
be amended from time to time to reflect the actual amounts for those financial
components. The time and manner of making such payments to Manager, Provider,
CMI, and other Case Managers shall also be set forth in Exhibit H. The parties
also acknowledge and agree that the actual costs and other relevant data, as
well as the amount of the Capitated Payment and Management Fee, may change;
therefore, in accordance with subparagraph 5.5 below, the parties agree that
they shall make appropriate adjustments of the payments to be made to the
parties for the compensation components described in subparagraph 5.1 above by
utilizing the compensation components described in subparagraph 5.1 above and
the same methodology that they originally utilized in preparing the (i)
budgetary pro formas of the Model and (ii) the hypothetical example of financial
distributions (Exhibit K). To the extent that sufficient funds are not available
for Manager to make each of the payments described herein, Manager shall make
the payments in the priority set forth in Section 5.4 below.

            5.4 Priority of Payments. In the event that sufficient funds are not
available for Manager to make each of the payments described herein, Manager
shall make the payments in the following order of priority:

                5.4.1   the Subcapitated Payments to the Case Managers;

                5.4.2   the payment for Old Asset Depreciation to the Case
                        Managers for assets existing on the Effective Date of
                        this Agreement;

                5.4.3   the Management Fee to Manager;

                5.4.4   the payment for New Asset Depreciation to Manager (and
                        to the Case Managers to the extent that they make
                        capital investments for acquisition of capital assets
                        subsequent to the Effective Date);

                5.4.5   the thirty-five percent (35%) Investment Return to
                        Manager (and to the Case Managers to the extent that
                        they make capital investments for acquisition of capital
                        assets subsequent to the Effective Date); and



                                      -20-
<PAGE>   27

                5.4.6   the 70/30 or, if applicable, the 50/50 distribution of
                        Retained Reserves to the Case Managers and Manager,
                        respectively.

            In making the Subcapitated Payments to the Case Managers for their
costs, Manager shall pay for (i) all costs of the Case Managers that are equal
to or less than the budgeted amount for each cost category set forth
specifically in the Model and (ii) all costs that are in excess of the budgeted
amount for a cost category specifically set forth in the Model, provided that
Manager has specifically approved in writing in advance such excess expenditure.

            5.5 Quarterly Review of Financial Arrangements.

                5.5.1 Within ten (10) days at the end of each quarter of the
Term of this Agreement, Manager shall prepare for itself and for each Case
Manager the unaudited financial statements for such prior quarter. Within ten
(10) days after such quarterly financial statements have been prepared, the
parties shall review the fees and other compensation paid in accordance with
this Agreement and shall make appropriate adjustments that are approved by
Manager and the Case Managers. Such adjustments shall be effective from and
after the date that the parties agree to such an adjustment. Any such
adjustments shall be made in accordance with the methodology originally utilized
in preparing the budgetary pro formas in the Model with good faith recognition
of (i) cost increases which have occurred in each Case Manager's local market
areas, (ii) the Manager's actual costs for the management and administrative
costs described herein, (iii) the actual Capitated Payments received from Payers
and the Grants received from the State of Tennessee or its agencies, and (iv)
other factors deemed relevant by the parties since any prior adjustment. In the
event the parties cannot reach an agreement regarding an adjustment of the fees
and other compensation paid hereunder, the provisions of Article XII shall
apply.

                5.5.2 If the Subcapitated Payments are not sufficient to
reimburse the Case Managers for their actual costs that were budgeted in the
Model or preapproved by Manager for the prior quarter, then the quarterly
adjustment of the Subcapitated Payments for the next quarter shall include an
adjustment to reimburse the Case Managers for the shortfall in reimbursement for
the budgeted or preapproved expenses for the prior quarters. Such shortfalls in
reimbursement for the budgeted or preapproved expenses for the prior quarters
shall have the same priority of payment as the Subcapitated Payments to the Case
Managers. In the event that funds are not available in a particular quarter to
reimburse the Case Managers for such shortfalls, the shortfalls in such
unreimbursed expenses shall be accumulated and reimbursed at the end of the next
quarter in which such funds are available.

                5.5.3 If the Management Fee is not sufficient to reimburse the
Manager for its actual costs that were budgeted in the Model, then the quarterly
adjustment of the Management Fee for the next quarter shall include an
adjustment to reimburse Manager for the shortfall in reimbursement for the
budgeted management and administrative expenses for the prior quarters. Such
shortfalls in reimbursement for the budgeted



                                      -21-
<PAGE>   28

management or administrative expenses for the prior quarters shall have the same
priority of payment as the Management Fee to the Manager. In the event that
funds are not available in a particular quarter to reimburse the Manager for
such shortfalls, the shortfalls in such unreimbursed expenses shall be
accumulated and reimbursed at the end of the next quarter in which such funds
are available.

            5.6 Accumulation and Payment of Shortfalls. In the event that there
are shortfalls in the payment of any Subcapitated Payments, payments for Old
Asset Depreciation, the Management Fee, payments for New Asset Depreciation, or
the Investment Return, and such shortfalls cannot be paid during the next
quarter after the quarterly adjustment, then each such shortfall shall be
accumulated and paid at the end of the next quarter for which funds are
available for such payment. The payment of such accumulated shortfalls shall be
made in the same priority as payments for such financial components as set forth
in subparagraph 5.4 above until such time as all such shortfalls have been
reimbursed. There shall not be any 70/30 or 50/50 distributions of Retained
Reserves until such time as all such accumulated shortfalls have been repaid.

            5.7 Fair Market Value of Compensation. The parties agree that, to
the best of their knowledge, the compensation and other payments set forth above
(based on the assumptions of the Model) are consistent with the fair market
value of the services for which such fees are paid and are reasonable and
customary within the industry and within the areas served by Manager and the
Case Managers.

            5.8 Receipt of Capitated Payments and Grants by Remittance
Clearinghouse. The parties agree that all Capitated Payments shall be received
by and processed through a national remittance clearinghouse. Such processing of
Capitated Payments and Grants shall be organized so that all Capitated Payments
and Grants for case management and related psychiatric services shall be
received by the clearinghouse and deposited into an account established with a
national money center bank and that withdrawals from such account require the
authorization of Manager and the Case Managers. The clearinghouse shall be given
standing instructions to advise Manager and the Case Managers of each deposit
within one (1) business day thereof; and, within ten (10) business days of the
date of each such deposit, Manager and the Case Managers shall jointly prepare
and deliver to the clearinghouse an authorization to make payment from such
receipts to the parties in accordance with the terms and conditions of this
Article V. For such purposes, each party shall designate a readily available
representative and alternate representative so that such authorizations can be
obtained and delivered to the clearinghouse in a timely manner. In the event of
a dispute among the parties as to the distribution of funds from the
clearinghouse account, undisputed payments shall be made to the parties not
involved in such dispute. If a dispute is of such a nature that it involves all
parties or all funds, then to the extent possible payments shall be made to the
parties in the priority set forth in subparagraph 5.4 above to provide
sufficient funds for the parties to cover their expense and continue to operate
until the dispute is resolved. All such disputes shall be resolved in the manner
set forth in Article XII. Funds that are not to be paid immediately to the
parties (e.g., the Retained Reserves or funds related to disputed payments)
shall be invested in the permitted investments set forth in Exhibit I attached
hereto. The agreements with the



                                      -22-
<PAGE>   29

clearinghouse and bank shall be in form and substance acceptable to those
parties, Manager and the Case Managers.

VI.         REPRESENTATIONS AND WARRANTIES.

            6.1 Provider's Representations and Warranties.  Provider represents
and warrants to Manager the following:

                6.1.1 Corporate Capacity. Provider is a Tennessee non-profit
corporation validly existing in good standing under the laws of the State of
Tennessee. Provider has the requisite power and authority to enter into the
Management Agreement, to perform its obligations thereunder, and to conduct its
businesses as now being conducted. Provider is duly authorized, qualified, and
licensed under all applicable laws, regulations, ordinances, and orders of
governmental authorities having jurisdiction to own its properties and conduct
its business in the place and in the manner now conducted.

                6.1.2 Corporate Powers; Consents; Absence of Conflicts With
Other Agreements, Etc. The execution, delivery, and performance of this
Agreement by Provider and the consummation of the transactions contemplated
herein by Provider:

                      (a) are within Provider's corporate powers and the terms
          of Provider's Charter or Articles of Incorporation, Bylaws, and any
          amendments thereto, and have been duly and properly authorized by all
          appropriate corporate action;

                      (b) to the best of Provider's knowledge, will neither
          conflict with nor result in any breach or contravention of, nor permit
          the acceleration of the maturity of, or the creation of any lien
          under, any indenture, mortgage, agreement, lease, contract,
          instrument, or understanding to which Provider is a party or by which
          Provider is bound, including without limitation the Basic Grants from
          the Tennessee Department of Mental Health and Mental Retardation and
          other grants that Provider receives from the State of Tennessee or its
          agencies;

                      (c) will not violate any judgment, decree, order, writ, or
          injunction of any court or governmental authority to which Provider
          may be subject; and

                      (d) are and will constitute the valid and legally binding
          obligation of Provider, enforceable in accordance with the terms of
          this Agreement, except as enforceability may be restricted, limited,
          or delayed by applicable bankruptcy or other laws affecting creditors'
          rights generally and except as enforceability may be subject to
          general principles of equity.

                6.1.3 Securities Representations.

                      (a) The Provider recognizes that the PMR Common Stock (the
          "Common Stock") that will be issued to Provider in connection with the
          transactions 



                                      -23-
<PAGE>   30

          described in this Agreement is issued upon its representations and
          warranties contained in this Agreement, and Provider agrees to
          indemnify and hold harmless Manager and PMR against any
          misrepresentation, breach, or failure on its part to fulfill any
          covenants or agreements set forth in this Agreement with respect to
          the transfer of such Common Stock.

                      (b) The Provider is the sole party in interest, is not
          acquiring the shares of Common Stock as an agent or otherwise for any
          other person, and the Provider is acquiring the shares of Common Stock
          for investment and not with a view to their resale or distribution.

                      (c) The Provider has received copies of the materials
          described on Exhibit C hereto (the "Materials") and has read carefully
          and understands those materials.

                      (d) The Provider is familiar with the business and
          financial condition, properties, operations and prospects of PMR, all
          as generally described in the Materials, and, at a reasonable time
          prior to the execution of this Agreement, has been afforded the
          opportunity to ask questions of and receive satisfactory answers from
          PMR's officers and directors, or other persons acting on PMR's behalf,
          concerning the business and financial condition, properties,
          operations and prospects of PMR and concerning the terms and
          conditions of the offering of the shares of Common Stock and has asked
          such questions as Provider desires to ask, and all such questions have
          been answered to the full satisfaction of the Provider.

                      (e) The Provider has carefully reviewed the Materials, and
          based upon the contents thereof, understands and acknowledges that the
          acquisition of the shares of Common Stock and Common Stock purchase
          warrants of PMR set forth within this Agreement may involve various
          risks and that Provider has the requisite knowledge and experience in
          business and financial matters that it is capable of evaluating these
          risks and in making an informed investment decision has elected to
          assume such risks. In making an informed investment decision
          hereunder, Provider has relied solely upon the information contained
          within the Materials.

                      (f) The Provider is relying solely on the information
          contained in the Materials and the answers to questions with respect
          thereto furnished to it by PMR. No representations or warranties have
          been made to the Provider by PMR as to the tax consequences of this
          investment or as to profits, losses, or cash flow that may be received
          or sustained as a result of this investment, other than those
          contained in the Materials.

                      (g) All documents, records and books pertaining to a
          proposed investment in the shares of Common Stock that the Provider
          has requested, have been made available to the Provider.



                                      -24-
<PAGE>   31

                      (h) The Provider represents that, if it is not an
          "Accredited Investor" (as that term is defined in Exhibit D hereto)
          Provider's representatives personally have such knowledge of finance,
          securities, and investments, generally, and experience and skill in
          investments based on actual participation, that Provider's
          representatives are capable of evaluating the merits and risks of
          Provider's prospective investment in PMR.

                      (i) The Provider is acquiring the shares of Common Stock
          solely for the Provider's own beneficial account, for investment
          purposes, and not with a view to, or for resale in connection with,
          any distribution of the shares of Common Stock. The Provider
          understands that the offer and sale of the shares of Common Stock
          pursuant to this Agreement have not been registered under the
          Securities Act of 1933, as amended (the "Securities Act"), or any
          state securities laws by reason of specific exemptions under the
          provisions thereof that depend in part upon the investment intent of
          the Provider and of the other representations made by the Provider in
          this Agreement. The Provider understands that PMR and Manager are
          relying upon the representations, covenants, and agreements contained
          in this Agreement for the purpose of determining whether this
          transaction meets the requirements for such exemptions.

                      (j) The Provider understands that the shares of Common
          Stock are "restricted securities" under applicable federal securities
          laws and that the Securities Act and the rules of the Securities and
          Exchange Commission ("SEC") provide in substance that the Provider may
          dispose of the shares of Common Stock only pursuant to an effective
          registration statement under the Securities Act or an exemption
          therefrom, and, except as provided in Section 11.2 below, the Provider
          understands that PMR has no obligation to register any of the shares
          of Common Stock purchased by the Provider thereunder, or to take
          action so as to permit sales pursuant to the Securities Act (including
          Rule 144 thereunder). As a consequence, the Provider understands that
          the Provider must bear the economic risks of the investment in the
          shares of Common Stock for an indefinite period of time. The Provider
          understands that the Provider may not at any time demand the purchase
          by PMR of the Provider's shares of Common Stock.

                      (k) The Provider agrees: (A) that the Provider will not
          sell, assign, pledge, give, transfer, or otherwise dispose of the
          shares of Common Stock or any interest therein, or make any offer or
          attempt to do any of the foregoing, except pursuant to a registration
          of the shares of Common Stock under the Securities Act and all
          applicable state securities laws or in a transaction that is exempt
          from the registration provisions of the Securities Act and all
          applicable state securities laws; (B) that PMR and any transfer agent
          for the shares of Common Stock shall not be required to give effect to
          any purported transfer of any of the shares of Common Stock except
          upon compliance with the foregoing restrictions; and (C) that a legend
          in substantially the following form will be placed on the certificates
          representing the shares of Common Stock transferred to Provider:



                                      -25-
<PAGE>   32

                      THE SHARES REPRESENTED BY THIS CERTIFICATE
                      HAVE BEEN TAKEN WITHOUT A VIEW TO THE
                      DISTRIBUTION THEREOF WITHIN THE MEANING OF
                      THE SECURITIES ACT OF 1933, AS AMENDED, AND
                      MAY NOT BE SOLD, PLEDGED, TRANSFERRED OR
                      OTHERWISE DISPOSED OF EXCEPT IN ACCORDANCE
                      WITH SUCH ACT AND THE RULES AND REGULATIONS
                      THEREUNDER AND IN ACCORDANCE WITH APPLICABLE
                      STATE SECURITIES LAWS. PMR WILL NOT TRANSFER
                      SUCH SHARES EXCEPT UPON RECEIPT OF A
                      FAVORABLE OPINION OF ITS COUNSEL AND/OR
                      EVIDENCE SATISFACTORY TO PMR THAT THE
                      REGISTRATION PROVISIONS OF SUCH ACT HAVE
                      BEEN COMPLIED WITH OR THAT SUCH REGISTRATION
                      IS NOT REQUIRED AND THAT SUCH TRANSFER WILL
                      NOT VIOLATE ANY APPLICABLE STATE SECURITIES
                      LAWS.

                      (l) The Provider has not offered or sold any portion of
          the subscribed for shares of Common Stock and has no present intention
          of dividing such shares of Common Stock with others or of reselling or
          otherwise disposing of any portion of such shares of Common Stock
          either currently or after the passage of a fixed or determinable
          period of time or upon the occurrence or non-occurrence of any
          pre-determined event or circumstance.

                6.1.4 Manager's Name. Provider has requested that PMR's
subsidiary, which is a party to this Agreement, be named "Tennessee Mental
Health Cooperative, Inc.," a name that is substantially similar to Provider's
name. Provider has consented to PMR's and Manager's use of that name, and
Provider has agreed that neither PMR nor Manager shall pay a license or use fee
in connection with the use of that name.

            6.2 Manager's Representations and Warranties.  Manager shall 
represent and warrant to Provider the following:

                6.2.1 Corporate Capacity. Manager is a Tennessee corporation
validly existing in good standing under the laws of the State of Tennessee.
Manager has the requisite power and authority to enter into this Agreement, to
perform its obligations hereunder, and to conduct its businesses as now being
conducted. Manager is duly authorized, qualified, and licensed under all
applicable laws, regulations, ordinances, and orders of governmental authorities
having jurisdiction to own its properties and conduct its business in the place
and in the manner now conducted.

                6.2.2 Corporate Powers; Consents; Absence of Conflicts With
Other Agreements, Etc. The execution, delivery, and performance of this
Agreement by Manager and the consummation of the transactions contemplated
therein by Manager:



                                      -26-
<PAGE>   33

                      (a) are within Manager's corporate powers and the terms of
          Manager's Charter or Bylaws or any amendments thereto, and have been
          duly and properly authorized by all appropriate corporate action;

                      (b) to the best of Manager's knowledge, will neither
          conflict with nor result in any breach or contravention of, nor permit
          the acceleration of the maturity of, or the creation of any lien
          under, any indenture, mortgage, agreement, lease, contract,
          instrument, or understanding to which Manager is a party or by which
          Manager is bound;

                      (c) will not violate any judgment, decree, order, writ, or
          injunction of any court or governmental authority to which Manager may
          be subject; and

                      (d) are and will constitute the valid and legally binding
          obligation of Manager, enforceable in accordance with the terms of
          this Agreement, except as enforceability may be restricted, limited,
          or delayed by applicable bankruptcy or other laws affecting creditors'
          rights generally and except as enforceability may be subject to
          general principles of equity.

VII.        STANDARDS OF SERVICES.

            Manager and Provider each agree, in connection with the operation of
Provider and its programs, to comply with all laws, rules, and regulations of
all governmental authorities having jurisdiction over each, and any
recommendations and policies resulting from Manager's and Provider's respective
quality assurance programs and their general policies and procedures regarding
quality assurance matters, which recommendations are designed to comply with
applicable laws, rules, or regulations. The parties hereto acknowledge that a
material part of the consideration for this Agreement is the other party's
compliance with the provisions of this Article VII. The parties further
acknowledge that the non-compliance by either with any of the applicable laws,
rules, and regulations applicable to such party may have a material adverse
effect on the other party. The parties therefore agree to cooperate in good
faith with each other to monitor and ensure such compliance.

            7.1 Ongoing Quality and Compliance Reviews. The performance of all
services rendered hereunder shall be reviewed as part of Provider's ongoing
quality assurance program by Manager's quality assurance personnel pursuant to
the provisions of subparagraph 3.2.7 above. In the event of non-compliance with
any standards for service set forth herein or applicable laws, rules, or
regulations by either party hereto, the other party shall give the non-complying
party notice thereof, and such party shall so comply or cause such compliance as
soon as practicable thereafter, but in any event within thirty (30) days after
such notice.

            7.2 Change in Laws or Regulations. The parties acknowledge that
applicable laws, rules, and regulations including, but not limited to, Medicaid
or TennCare billing guidelines and related or included fee structures, may
change at any time during the Term of this Agreement or any extensions thereof
and that such change may require a 



                                      -27-
<PAGE>   34

modification of this Agreement. The parties hereby agree to give each other
immediate notice of such change in applicable laws, rules, or regulations,
whereupon the parties shall meet in good faith to negotiate a modification of
this Agreement such that it complies with such changes in applicable laws,
rules, regulations, guidelines, or fee structures.

            7.3 Notice from Governmental/Regulators Entities. The parties hereby
agree to give each other a copy of any notice or contact received from any
governmental or regulatory entity, having jurisdiction thereof with respect to
the case management programs, that any activity of such party is in violation of
any applicable law, rule, or regulation and to continue to promptly inform the
other party of all responses and procedures taken as a result of such notice or
contact until the alleged violation is cured, and to provide such other party
with evidence of the successful conclusion of the event.

VIII.       INDEPENDENT CONTRACTOR.

            No relationship of employer and employee or of joint venture between
Manager and Provider is created by this Agreement, it being mutually understood
and acknowledged that Manager is at all times acting and performing as an
independent contractor hereunder. No employee or independent contractor of one
party shall have any claim under this Agreement or otherwise against the other
party for salary or other compensation, vacation or sick pay, sick leave,
retirement benefits, social security, workers' compensation, disability or
unemployment insurance benefits or any other employee benefits of any kind.

IX.         COVENANT NOT TO COMPETE.

            9.1 Noncompetition. In consideration of the delivery of fifty
thousand (50,000) shares of Common Stock of PMR and the covenants of Manager
hereunder, Provider agrees that, during the term of this Agreement, neither
Provider, nor any subsidiary or affiliate of Provider, nor any of their
officers, directors, employees, or agents shall directly or indirectly, in any
capacity, own, manage, operate, control, participate in the management or
control of, be employed by, contract with, consult with, lend Provider's name
to, receive any remuneration or maintain or continue any interest whatsoever in,
any enterprise or medical practice, whether private or otherwise, providing case
management and related psychiatric services of the type described in this
Agreement or the Services Agreement to patients within the State of Tennessee
(including, but not limited to, the execution of a Payer Plan Agreement with any
Payer); provided, however, if this Agreement is terminated by Manager prior to
the end of the Term due to an uncured default by Provider, then the term of this
covenant of Provider not to compete shall extend for the duration of the
unexpired Term of this Agreement plus six (6) months. In the event that this
Agreement is terminated by Provider for cause as set forth in subparagraph 1.3
above, then this covenant of Provider not to compete shall terminate on the date
that this Agreement is so terminated. This covenant not to compete does not
apply to (i) Provider's ownership of (a) shares in publicly traded companies (so
long as such ownership percentage is less than one percent), and (b) shares of
PMR stock; (ii) Provider's current Directors that on the Effective Date of this
Agreement already have an interest in an organization that competes with
Provider; or (iii) arrangements for the provision of case management and related
psychiatric services



                                      -28-
<PAGE>   35

described in this Agreement to patients within Davidson County and the
Tennessee counties contiguous to Davidson County, so long as Provider has given
Manager the right of first refusal to participate in each such arrangement by
the notice described below and Manager has declined to participate in such
arrangement. In the event that Provider desires to participate in any such
competitive arrangement in Davidson County or any county contiguous to Davidson
County, Provider shall give Manager written notice specifying all of the
material terms and conditions of such arrangement. Within thirty (30) days
thereafter, Manager shall notify Provider in writing whether Manager desires to
participate in that arrangement. In the event that Manager declines to
participate in such arrangement or fails to submit such notice of Manager's
intent within such thirty (30) day period (in which case Manager shall be deemed
to have declined to participate), then Provider shall be permitted within one
(1) year thereafter to enter into such arrangement on substantially the same
terms and conditions presented to Manager at Provider's sole cost and expense.
In the event, that Provider does not enter into such arrangement with the one
(1) year period or the terms and conditions are substantially different, then
Provider must again provide Manager the right of first refusal to participate in
such arrangement.

            9.2 Anti-Raiding. Provider also agrees that, during the Term of this
Agreement, and for a period of six (6) months after the expiration or sooner
termination of this Agreement by Manager due to an uncured default by Provider,
neither Provider, nor any subsidiary or affiliate of Provider, nor any of their
officers, directors, employees, or agents will directly or indirectly, in any
capacity, (a) solicit or otherwise attempt to contact any person, or an
immediate family member of any person, who has been a patient of a Payer or
Provider in connection with this Agreement or the Services Agreement for
purposes of inducing such person to become a patient of Provider or another
medical practice or case management organization in which Provider provides such
services or otherwise has an interest, or (b) solicit for employment or employ
any person who has been an employee of Provider or Manager.

            9.3 Severability of Non-Compete Covenants. Provider further agrees
that if any restriction contained in this Article IX is held by any court of
competent jurisdiction to be unenforceable or unreasonable, a lesser restriction
shall be severable therefrom and shall be enforced in its place, and the
remaining restrictions contained herein shall be enforceable independently of
each other. In the event of a threatened breach of this covenant by Provider,
Manager shall be entitled to injunctive relief, without the necessity of posting
a bond, cash or otherwise and without precluding any other remedies as may be
available at law or in equity for the breach of this covenant.

X.          CONFIDENTIALITY AGREEMENT.

            10.1 Confidentiality of Agreements. Except for disclosure required
by law, Provider and Manager shall agree to keep confidential the terms and
conditions of this Agreement, the Stock Warrant Agreement, the Registration
Rights Agreement, the Services Agreement, and Manager's and Provider's
proprietary or confidential information (both documentary and software).
Additionally, Provider agrees to use its best efforts to circulate to its
agents, employees, officers and others who have knowledge of any part of this



                                      -29-
<PAGE>   36

Agreement or the operations of the Provider and Manager hereafter an insider
trading memorandum which highlights and addresses the concerns of insider
trading to the extent prohibited under relevant federal securities laws.
Provider shall take all reasonable efforts to prevent the dissemination of
confidential nonpublic information, including, but not limited to, strict
adherence to Section 10.1 of this Agreement and the distribution of an insider
trading memorandum, as set forth above.

            10.2 Confidential Information. Provider and Manager agree that some
information received by one party from the other pursuant to this Agreement
shall be confidential. Except as may otherwise be required by law or legal
process, it is therefore agreed that any information received by one party from
the other, and clearly designated in writing as "CONFIDENTIAL," or in any other
matter which indicates its confidential nature (hereinafter referred to as
"Confidential Information"), shall not be disclosed by the other party and shall
not be used by the other party for purposes other than those contemplated by
this Agreement. Confidential Information also includes, without limitation,
information as to any patient as well as information relating to business
practices, costs, users or purchasers of either party's services, research or
services. Confidential Information does not include:

                      (a) information that has become known to third parties or
          has become publicly known through no fault of the receiving party; or

                      (b) information already in the receiving party's
          possession prior to the disclosure of said information to the
          receiving party; or

                      (c) information subsequently disclosed to the receiving
          party by a third party who is not under any obligation or
          confidentiality to the disclosing party; or

                      (d) information approved for disclosure by prior written
          consent of the disclosing party; or

                      (e) information that the parties have agreed is necessary
          to disclose.

          10.3  Proprietary Information of Manager.

                10.3.1 Acknowledgment of Proprietary Interest. Provider
recognizes the proprietary interest of Manager in any Trade Secrets of Manager.
As used herein, the term "Trade Secrets" includes all of Manager's confidential
or proprietary information, including without limitation any confidential
information of Manager encompassed in any reports, protocols, plans, proposals,
codes, marketing and sales programs, financial projections, cost summaries,
pricing formulae, client contracts, client lists, and all concepts, ideas,
materials, or information related to the business of Manager or Manager's
clients which have not previously been released to the public at large by duly
authorized representatives of Manager, whether or not such information would be
protectable as a Trade Secret or the copying of which would be enjoined or
restrained by a court as constituting unfair 



                                      -30-
<PAGE>   37

competition. Provider acknowledges and agrees that any and all Trade Secrets of
Manager learned by Provider during the course of its engagement by Manager or
otherwise, whether developed by Manager alone or in conjunction with others,
shall be and are the property of Manager.

                10.3.2 Covenant Not to Divulge Trade Secrets. Provider
acknowledges and agrees that Manager is entitled to prevent the disclosure of
Trade Secrets of Manager. As a portion of the consideration for the continuing
engagement of Provider hereunder and for the compensation being paid to Provider
by Manager, Provider agrees at all times during the term of said engagement by
Manager, and thereafter, to hold said Trade Secrets in strictest confidence and
not to disclose same or allow them to be disclosed to any person, firm, or
corporation, other than to persons engaged by Manager to further the business of
Manager, and not to use the same, except in the pursuit of the business of
Manager, without the prior written consent of Manager.

                10.3.3 Return of Materials at Termination. In the event of any
termination of this Agreement, with or without cause, Provider shall promptly
deliver to Manager all materials, property, documents, data, and other
information belonging to Manager or pertaining to Trade Secrets. Provider shall
not take any materials, property, documents, or other information or any
reproduction or excerpt thereof, belonging to Manager or containing or
pertaining to Trade Secrets.

                10.3.4 Application to Provider Representatives. This Article X
shall apply to Provider and any director, officer, employee, independent
contractor, or agent of Provider and shall survive the termination of this
Agreement.

XI.         STOCK TRANSACTIONS.

            11.1 Stock Warrant Agreement. As part of the consideration for the
transactions contemplated in this Agreement and the CMI Management Agreement,
Manager has agreed to cause PMR to grant to Provider and CMI the option to
purchase additional shares of Common Stock of PMR in the event that Manager
obtains certain levels of profitability as a result of the case management
activities relating to this Agreement and the CMI Management Agreement. In
connection therewith, Manager agrees to cause PMR to execute and deliver to
Provider and to CMI, one or more stock warrant agreements in substantially the
form of Exhibit E hereto (each a "Stock Warrant Agreement"), which provides that
for five (5) years Provider and CMI shall have the right to purchase at the
then-current market rate (defined below) their pro rata portion of ten thousand
(10,000) shares of Common Stock of PMR for every Four Hundred Twenty-Five
Thousand and No/100ths Dollars ($425,000.00) of pre-tax net income of Manager
that was generated during each fiscal period ending April 30 as a result of (i)
the case management activities of Manager and Provider pursuant to this
Agreement and the Services Agreement and (ii) the case management activities of
Manager and CMI pursuant to the CMI Management Agreement and the Provider
Services Agreement between Manager and CMI (the "CMI Services Agreement"). The
pro rata portion of Provider and CMI shall be determined on the basis of the
percentage of Manager's gross revenues attributable to the case



                                      -31-
<PAGE>   38

management and other psychiatric services of Provider and CMI, respectively, to
Manager's total gross revenues that result from the case management and other
psychiatric service activities of Manager, Provider, and CMI. The then-current
market rate for purposes of determining the purchase price upon exercising the
warrant shall be the average closing price of the Common Stock of PMR on the
principal exchange on which it trades (including for this purpose, NASDAQ) for
the ten (10) trading days prior to the end of the Manager's fiscal year end of
April 30 for the year of determination. The parties agree that Manager's pre-tax
net income for purposes of these calculations shall not include the Manager's
income from other sources or other activities nor the costs from such other
activities or categories of cost not included in the Model. The determination of
Manager's pre-tax net income shall be made within ninety (90) days of the end of
each fiscal year of Manager in connection with the audit of Manager by Manager's
independent certified public accountants. Notwithstanding anything to the
contrary contained herein, Manager, Provider, and CMI agree that the maximum
aggregate number of shares of Common Stock that may be purchased by Provider and
CMI cumulatively pursuant to the Stock Warrant Agreements shall not exceed five
hundred fifty thousand (550,000) shares of Common Stock.

            11.2 Registration Rights. The Manager agrees to grant certain
incidental registration rights to the Provider and CMI pursuant to which the
Manager will, under those terms and conditions set forth in a Registration
Rights Agreement, in substantially the form of Exhibit F hereto, cause the
resale of the shares of Common Stock issued as consideration for the covenant
not to compete pursuant to Section 9.1 of this Agreement and shares of Common
Stock issuable upon exercise of the Stock Warrant Agreements issued pursuant to
Section 11.1 of this Agreement, to be the subject of a Registration Statement
filed with the SEC. Notwithstanding the foregoing, neither Manager nor PMR have
any obligation to provide for or guarantee the resale of such stock.

            11.3 Provider's Covenants Regarding Stock Transactions. The Provider
recognizes and agrees that the Common Stock purchased pursuant to the Stock
Warrant Agreement will be issued to Provider based upon Provider's
representations and warranties contained herein and in the Stock Warrant
Agreement, and Provider agrees to indemnify and hold PMR and Manager harmless
against any misrepresentation, breach, or failure on its part to fulfill any
covenants or agreements set forth in this Agreement or the Stock Warrant
Agreement. Provider agrees to furnish any additional information reasonably
requested by Manager or PMR to assure compliance with applicable federal and
state securities laws in connection with the purchase and issuance of the shares
of Common Stock. Provider agrees to notify Manager, PMR, and PMR's legal
counsel, if there is any change in the status of Provider prior to the
consummation of the purchase or issuance of shares of Common Stock to Provider
pursuant to this Agreement and the Stock Warrant Agreement. Finally, Provider
agrees to execute and deliver such documents as PMR and Manager may reasonably
require in connection with the issuance of the Stock Warrant Agreement and the
Common Stock to be purchased and transferred in connection with this Agreement
and the Stock Warrant Agreement. The form and substance of all such
documentation shall be approved by PMR and Provider.



                                      -32-
<PAGE>   39

XII.        ARBITRATION.

            In the event that a dispute arises with respect to this Agreement,
then either party may request binding arbitration in order to resolve such
dispute. In such event, the party requesting arbitration shall do so by giving
notice to that effect to the other party, specifying in said notice, in
reasonable detail, the nature of the dispute and designating one of the
arbitrators. Within thirty (30) days after such notice is given, the other party
shall designate one of the arbitrators by notice given to the party requesting
arbitration. The determination of the two designated arbitrators shall be
binding and conclusive upon the parties. However, if the two designated
arbitrators shall fail to make such determination within thirty (30) days after
both have been designated, then they shall select a third arbitrator. The
determination of the majority of the three arbitrators shall be binding and
conclusive on the parties. If a party shall fail or refuse to designate an
arbitrator within the time period provided above, then such arbitrator shall be
appointed by the application of the other party by the Middle Tennessee Chapter
of the American Arbitration Association. If the two arbitrators designated as
set forth above shall fail to make such determination within such thirty (30)
day period, and shall fail to designate a third arbitrator within thirty (30)
days thereafter, then such third arbitrator shall be appointed upon application
of either party by the Middle Tennessee Chapter of the American Arbitration
Association. Each party shall bear the expenses of the arbitrator appointed by
such party or on behalf of such party. Expenses of the third arbitrator, if
necessary, shall be shared equally by the parties. The decision in any such
arbitration may be enforced, on the application of either party thereto, by the
order or judgment of a court of competent jurisdiction sitting in Davidson
County, Tennessee. Any arbitration will be conducted during the arbitration
proceeding. In the event the parties cannot agree on rules to govern discovery,
the arbitrators shall designate what, if any, discovery shall be authorized. The
parties may, by agreement, jointly appoint one arbitrator to decide any dispute.
In such event, the parties shall share the expense of the arbitrator. The
prevailing party in any such arbitration conducted pursuant to this Agreement
shall be entitled to recover from the losing party reasonable expenses,
attorneys' fees, and costs incurred in connection therewith in the manner set
forth in subparagraph 13.12 below.

XIII.       MISCELLANEOUS.

            13.1 Service of Notices. All notices and other communications and
all legal process in regard hereto shall be validly given or served if in
writing and delivered personally or sent certified mail, postage prepaid, return
receipt requested in the case notices to Manager, to the address set forth below
or such address as either party may designate to the other in writing:



                                      -33-
<PAGE>   40

            If to Provider:

                        Mental Health Cooperative, Inc.
                        275 Cumberland Bend
                        Nashville, Tennessee 37228
                        Attention:  Executive Director
                        Phone number:  (615) 726-3340

            With a copy to:

                        Boult Cummings Conners & Berry
                        414 Union Street, Suite 1600
                        Nashville, Tennessee 37219
                        Attention:  Mr. E. Berry Holt, III
                        Phone number:  (615) 252-2312

            If to Manager:

                        Tennessee Mental Health Cooperative, Inc.
                        275 Cumberland Bend
                        Nashville, Tennessee  37228
                        Attention: Mr. Allen Tepper
                        Phone number:
                                     --------------------------------

            With a copy to:

                        PMR Corporation
                        Cabillo Plaza
                        3990 Old Town Avenue, Suite 206A
                        San Diego, California 92110
                        Attention: Mr Allen Tepper, President

        13.2    Binding Effect. This Agreement shall be binding upon and inure
to the benefit of the parties hereto and their successors and permitted assigns.

        13.3    Choice of Law. The validity, enforceability and interpretation
of any of the clauses of this Agreement shall be determined and governed by the
laws of the State of Tennessee.

        13.4    Entire Agreement. This Agreement constitutes the entire
agreement between the parties hereto with respect to the subject matter hereof
and supersedes all prior and contemporaneous agreements, understanding,
negotiations and discussions of the parties whether written or oral.

        13.5    Amendments. No amendment, modification or supplement of any
provision of this Agreement shall be effective unless in writing, signed by
the parties hereto; and no




                                      -34-
<PAGE>   41
waiver of any party's obligations under this Agreement, or consent to any
departure therefrom, shall be effective unless in writing, signed by the
parties hereto and then only in the specific instance and for the specific
purpose given.

        13.6  Severability.  If any provision of this Agreement is held to be
inoperative, unenforceable, or invalid under present or future laws effective
during the Term of this Agreement, such shall be inoperative, unenforceable or
invalid without affecting the remaining provisions.  This Agreement shall  be
construed and enforced as if such illegal, invalid or unenforceable provision
had never comprised a part of this Agreement, and, to that end, the provisions
of this Agreement are declared to be severable.  Notwithstanding the foregoing,
however, the parties agree to negotiate a modification of this Agreement
pursuant to the provisions of subparagraph 13.5 in the event any provision of
this Agreement is believed by a party in good faith to be invalid under
applicable laws, rules, or regulations.

        13.7  Number and Gender.  Whenever the context of this Agreement
requires, the singular shall include the plural and the masculine gender shall
include the feminine.

        13.8  Joint Negotiations.  This Agreement is the product of
negotiations between the parties and is not to be interpreted more strongly in
favor of one party or the other in the interpretation or enforcement thereof.

        13.9  Headings.  Headings in this Agreement are included for convenience
of reference only and are not part of this Agreement for any other purpose.

        13.10  Assignment.  Neither party shall assign, sell or transfer this
Agreement or any interest herein without the prior written consent of the other
party, which consent shall not be unreasonably withheld. In the event that the
primary business and/or substantially all of the assets of Manager is
transferred to an affiliate of Manager, Manager shall have the right to assign
all of its rights under Agreement to any such affiliate during the Term of
Agreement, and any such assignee/affiliate shall acquire all of the rights and
assume all of the obligations of Manager under this Agreement.

        13.11  Counterparts.  This Agreement may be executed in counterparts
and either party hereto may execute any counterpart, each of which, when
executed and delivered, will be deemed to be an original, and all of which
counterparts taken together will be deemed to be but one and the same
instrument.  The execution of this Agreement by any party hereto will not
become effective until a counterpart hereof has been executed by each other
party hereto.

        13.12  Attorneys Fees.  In the event of any litigation or arbitration
concerning any controversy, claim, or dispute between the parties hereto, the
prevailing party shall be entitled to recover from the losing party reasonable
expenses, attorneys' fees, and costs incurred therein or in the enforcement or
collection of any judgment or award rendered therein.  The "prevailing party"
means the party determined by the court or arbitrator to have most nearly
prevailed, even if such party did not prevail in all matters, not necessarily

                                      -35-
<PAGE>   42

the one in whose favor a judgment is rendered. Further, in the event of any
default by a party under this Agreement, such defaulting party shall pay all
the expenses and attorneys' fees incurred by the other party in connection with
such default, whether or not any litigation or arbitration is commenced.

        IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
executed as of the Effective Date first written above.

PROVIDER:                       MENTAL HEALTH COOPERATIVE, INC.


                                By:   /s/ PAM WOMACK
                                    -----------------------------------
                                Name:  Pam Womack
                                      ---------------------------------
                                Title:
                                      ---------------------------------


                                By:   /s/ WILLIAM F. MOYNIHAN
                                    -----------------------------------
                                Name:  William F. Moynihan
                                      ---------------------------------
                                Title: President of the Board
                                      ---------------------------------


MANAGER:                        TENNESSEE MENTAL HEALTH
                                COOPERATIVE, INC.


                                By:  /s/ ALLEN TEPPER
                                    -----------------------------------
                                Name: Allen Tepper
                                      ---------------------------------
                                Title:
                                      ---------------------------------




                                      -36-
<PAGE>   43
                              [EXHIBITS EXCLUDED]
<PAGE>   44
                                                                           10.17


                                   ADDENDUM TO
                      MANAGEMENT AND AFFILIATION AGREEMENT


                  This ADDENDUM TO MANAGEMENT AND AFFILIATION AGREEMENT
("Addendum") is made this 25th day of August, 1995, by and between Mental Health
Cooperative, Inc., a Tennessee not-profit corporation ("Provider"), and
Tennessee Mental Health Cooperative, Inc., a Tennessee for-profit corporation
("Manager").

                                    RECITALS

     A. Provider and Manager entered into a Management and Affiliation Agreement
("Agreement") and a Provider Services Agreement ("Services Agreement") as of
April 13, 1995.

     B. Provider and Manager entered into the Agreement and Services Agreement
in the anticipation of the expansion of the TennCare program to include the
provision of certain covered services to patients who suffer from serious and
persistent mental illness ("SPMI").

     C. The expansion of the TennCare program to the SPMI patients has been
delayed by the State of Tennessee but the parties hereto wish to implement the
Agreement and Services Agreement as hereinafter provided.

     NOW, THEREFORE, Manager and Provider, intending to be legally bound hereby,
agree as follows:

                                    AGREEMENT

     1. Effective Date. The effective date of the Agreement and Services
Agreement shall be September 1, 1995 ("Effective Date"). Section 1.1.1 of the
Agreement entitled "Conditions Precedent" is hereby declared null and void and
of no force and effect whatsoever.

     2. Letter of Credit. Section 3.1 of the Agreement requires Manager to
obtain an irrevocable letter of credit ("Letter of Credit") on or before the
Effective Date of the Agreement. The parties hereto agree that the obligation to
obtain the Letter of Credit shall be deferred until otherwise mutually agreed to
by the parties. In lieu of the Letter of Credit, upon the Effective Date, PMR
shall loan $500,000 to Manager for 1 year and shall provide a Line of Credit to
Manager in the amount of $500,000. PMR shall secure the Line of Credit by
maintaining $500,000 in cash or cash equivalents in its bank accounts or by
having $500,000 available on PMR's Line of Credit from its banks or any
combination thereof totaling $500,000. PMR's Line of Credit to Manager shall
terminate on the latter of the first anniversary of the Agreement or the
implementation of the expansion of the TennCare Program to SPMI patients. The
$500,000 loan and $500,000 Line of Credit from PMR to Manager shall be available
to pay Subcapitated Payments to Case Managers under paragraph 5.4.1 of the
Agreement.



<PAGE>   45
     3. Other Case Managers. Section 2.2 of the Agreement allows Manager to
contract with other Case Managers other than Provider so long as Provider gives
its prior written approval. The parties hereto agree that such prior written
approval shall only be needed for Case Managers providing services in the State
of Tennessee and no such prior written approval shall be required for contracts
which Manager enters into with Case Managers who provide services exclusively
outside of the State of Tennessee.

     4. Provider's Board Positions. Paragraph 4.2.1 (iii) of the Agreement is
hereby amended to read, "Manager shall be permitted to designate two (2)
additional members of the Provider's Board of Directors (not to exceed a total
of three (3) directors, including the director to be designated under Paragraph
4.2.1(ii) hereof), which persons may or may not be employees or affiliates of
Manager or PMR, provided, however, that Provider shall have the right to approve
each designee, which approval shall not be unreasonably withheld by Provider."

     5. Independent Annual Audit. Manager shall cause its financial records to
be independently audited on an annual basis, the cost of which shall be paid for
by Manager.

     6. Case Management Network. Manager shall use its best efforts to create a
network of entities to provide case management services, both inside and outside
of the State of Tennessee, and to have these entities become Case Managers under
the terms of the Agreement.

     7. Effect of Addendum, Definitions. All other terms and conditions of the
Agreement shall remain in full force and effect except as modified herein. The
definitions of the Agreement shall apply to this Addendum.

          7.1 Wherever in the Agreement the phrase "related psychiatric
services" appears, it shall mean "other psychiatric services."

          7.2 In Paragraph 5.1.3 of the Agreement, it is agreed that the
"Capitated Payment" shall include payments received for other psychiatric
services rendered by Provider.

     8. Establishing Present Book Value for Old Asset Depreciation. Pursuant to
Paragraph 5.1.6 of the Agreement, each Case Manager shall be paid certain
amounts from the Capitated Payments and the Grants for depreciation of certain
assets. Within twenty (20) days of the Effective Date, Case Manager shall submit
to Manager a schedule of all assets eligible for payments for Old Asset
Depreciation and the schedule shall include (1) the initial book value of each
asset, (2) the dollar amount which each asset has been depreciated by Case
Manager through the Effective Date and (3) the difference thereof, which is the
present book value, shall be eligible for Old Asset Depreciation over the
asset's remaining useful life as originally determined at the time of
acquisition by Case Manager.



                                       2
<PAGE>   46
     9. Quarterly Review of Financial Arrangements. The following shall be added
as Paragraph 5.5.4 to the Agreement: "A breach of this Paragraph 5.5 shall be
subject to Paragraph 1.3.9 hereof."


                        SIGNATURES TO FOLLOW ON PAGE FOUR



                                       3
<PAGE>   47
     IN WITNESS WHEREOF, the parties hereto have caused this Addendum to be
executed on the day and year first written above.


     PROVIDER:                         MENTAL HEALTH COOPERATIVE, INC.,
                                       a Tennessee not-profit corporation,

                                       By: /S/ PAM WOMACK
                                            Name: Pam Womack 
                                            Title: Executive Director


                                       By: _______________________________
                                            Name: ________________________
                                            Title: _______________________


     MANAGER:                          TENNESSEE MENTAL HEALTH COOPERATIVE,
                                       INC., a Tennessee for-profit corporation




                                       By: /S/ ALLEN TEPPER
                                            Name: Allen Tepper
                                            Title: _______________________