UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(MARK ONE)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED DECEMBER 31, 1996
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
COMMISSION FILE NUMBER: 333-1926
DOCTORS HEALTH SYSTEM, INC.
(Exact name of registrant as specified in its charter)
MARYLAND 52-1907421
(State or other jurisdiction of incorporation or (I.R.S. Employer
organization) Identification No.)
10451 MILL RUN CIRCLE
10TH FLOOR
OWINGS MILLS, MARYLAND
21117
(Address of principal executive offices)
(Zip Code)
(410) 654-5800
(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
As of March 7, 1997 810,000 shares of the registrant's Class A Common stock
and 2,623,100 shares of the Registrant's Class B Common Stock were outstanding.
<PAGE>
DOCTORS HEALTH SYSTEM, INC.
FORM 10-Q
DECEMBER 31, 1996
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
NO.
<S> <C>
PART 1. FINANCIAL INFORMATION
Item 1. Unaudited Consolidated Financial Statements
Unaudited Consolidated Balance Sheets..................... 1
Unaudited Consolidated Statements of Operations........... 2
Unaudited Consolidated Statements of Cash Flows........... 3
Notes to Unaudited Consolidated Financial Statements...... 4
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations............. 7
PART II. OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders....... 11
Item 6. Exhibits and Reports on Form 8-K.......................... 12
SIGNATURES
</TABLE>
<PAGE>
DOCTORS HEALTH SYSTEM, INC.
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
<TABLE>
<CAPTION>
PRO FORMA
JUNE 30, JUNE 30, DECEMBER 31,
1996 1996 1996
------------ ----------- ------------
<S> <C>
ASSETS
CURRENT ASSETS
Cash and cash equivalents........................................................... $ 1,419,295 $ 1,419,295 $ 2,883,049
Accounts receivable (net of allowance for doubfful accounts of $324,521 at June 30,
1996, and $440,000 at December 31, 1996, respectively)............................ 1,303,941 1,303,941 1,845,079
Accounts receivable-affiliates...................................................... 1,208,685 1,208,685 1,377,102
Other receivables................................................................... 64,251 64,251 456,873
Prepaid expenses.................................................................... 117,096 117,096 447,339
Due from affiliates................................................................. 891,985 891,985 1,103,895
------------ ----------- ------------
TOTAL CURRENT ASSETS.............................................................. 5,005,253 5,005,253 8,113,337
PROPERTY AND EQUIPMENT, NET........................................................... 2,485,547 2,485,547 3,087,829
OTHER ASSETS
Intangibles (net of accumulated amortization of $65,170 at June 30, 1996 and
$162,424 at
December 31, 1996, respectively).................................................. 2,448,030 2,448,030 5,116,572
Deferred charges (net of accumulated amortization of $147,475 at June 30, 1996 and
$306,188 at December 31, 1996, respectively)...................................... 636,772 636,772 1,235,115
Note receivable..................................................................... 300,000 300,000 --
Accrued interest receivable......................................................... 253,976 253,976 308,762
Deposits............................................................................ 24,560 24,560 60,817
------------ ----------- ------------
3,663,338 3,663,338 6,721,266
------------ ----------- ------------
TOTAL ASSETS...................................................................... $ 11,154,138 $11,154,138 $ 17,922,432
============ =========== ============
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
CURRENT LIABILITIES
Bridge Loan......................................................................... $ -- $ -- $ 983,017
Notes Payable....................................................................... 303,915 303,915 3,605,689
Current maturities of capital lease obligations..................................... 101,985 101,985 106,360
Accounts payable.................................................................... 330,647 330,647 638,969
Accrued medical claims.............................................................. 550,520 550,520 2,235,613
Other accrued expenses.............................................................. 2,069,579 2,069,579 2,392,781
Due to affiliates................................................................... 766,475 766,475 1,413,884
------------ ----------- ------------
TOTAL CURRENT LIABILITIES......................................................... 4,123,121 4,123,121 11,376,313
LONG-TERM OBLIGATIONS
Note payable........................................................................ 3,400,000 3,400,000 --
Notes payable and purchase obligations-related parties.............................. 2,077,364 2,077,364 2,458,171
Capital lease obligations, less current maturities.................................. 320,673 320,673 265,575
------------ ----------- ------------
5,798,037 5,798,037 2,723,746
COMMITMENTS AND CONTINGENCIES
REDEEMABLE CONVERTIBLE PREFERRED STOCK
6.5% cumulative, Series A, $5 par value, authorized and issued 1,000,000 shares
(liquidation value $3,500,000).................................................... 5,273,305 5,273,305 5,435,805
Less subscription receivable-....................................................... (1,500,000) (1,500,000) (1,500,000)
------------ ----------- ------------
3,773,305 3,773,305 3,935,805
9.75% cumulative, Series B, $11.25 par value, authorized and issued 355,556 shares
(liquidation value $4,000,000).................................................... 4,137,526 4,137,526 4,332,548
8% cumulative, Series C, $17.50 par value, authorized 1,071,428 shares; issued and
outstanding 428,751 shares (liquidation value $7,500,000)......................... -- -- 7,683,463
------------ ----------- ------------
7,910,831 7,910,831 15,951,816
REDEEMABLE CLASS A COMMON STOCK
$.01 per value, authorized, issued and outstanding 800,000 shares at June 30,
1996.............................................................................. 2,400,000 -- --
STOCKHOLDERS' EQUITY (DEFICIT)
Preferred Stock, $.01 par value; authorized 1,000,000 shares, no shares issued...... -- -- --
Common Stock
Class A, $.01 par value; authorized 20,700,000 shares, issued and outstanding
800,000 shares at December 31, 1996.............................................. -- 8,000 8,000
Class B, $.01 par value; authorized 10,000,000; issued and outstanding 2,398,000
shares at June 30, 1996 and 2,552,000 at December 31, 1996....................... 23,980 23,980 25,520
Class C, $.01 par value; authorized 29,050,000; no shares issued.................. -- -- --
Additional paid in capital........................................................ 2,323,600 2,323,798 4,117,268
Retained earnings (accumulated deficit)........................................... (11,425,431) (9,033,629) (16,280,231)
------------ ----------- ------------
TOTAL STOCKHOLDERS' EQUITY (DEFICIT)............................................ (9,077,851) (6,677,851) (12,129,443)
------------ ----------- ------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)............................ $ 11,154,138 $11,154,138 $ 17,922,432
============ =========== ============
</TABLE>
See accompanying notes to financial statements.
1
<PAGE>
DOCTORS HEALTH SYSTEM, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31,
1995 1996 1995 1996
------------- ------------- ------------- -------------
<S> <C>
REVENUES
Net revenue..................................................... $ 915,902 $ 2,705,841 $ 1,472,969 $ 4,900,352
Capitation revenue.............................................. -- 2,219,562 -- 3,487,175
----------- ----------- ----------- -----------
915,902 4,925,403 1,472,969 8,387,527
EXPENSES
Medical services expense........................................ -- 2,550,395 -- 3,745,896
Care center costs............................................... 837,452 2,696,243 1,323,703 4,799,762
General and administrative...................................... 850,635 3,184,390 1,386,750 5,854,470
Depreciation and amortization................................... 94,310 288,693 144,855 513,077
----------- ----------- ----------- -----------
1,782,397 8,719,721 2,855,308 14,913,205
----------- ----------- ----------- -----------
Loss from operations......................................... (866,495) (3,794,318) (1,382,339) (6,525,678)
OTHER INCOME (EXPENSE)
Interest and other income....................................... 39,950 68,767 111,755 137,805
Interest expense................................................ (59,356) (158,729) (94,467) (306,944)
----------- ----------- ----------- -----------
(19,406) (89,962) 17,288 (169,139)
----------- ----------- ----------- -----------
Loss before income taxes..................................... (885,901) (3,884,280) (1,365,051) (6,694,817)
Income taxes.................................................... -- -- -- --
----------- ----------- ----------- -----------
NET LOSS..................................................... $ (885,901) $(3,884,280) $(1,365,051) $(6,694,817)
=========== =========== =========== ===========
Loss applicable to common stock
Net loss..................................................... $ (885,901) $(3,884,280) $(1,365,051) $(6,694,817)
Preferred stock dividends accreted........................... 113,750 328,761 195,000 551,785
=========== =========== =========== ===========
Loss applicable to common stock.............................. $ (999,651) $(4,213,041) $(1,560,051) $(7,246,602)
=========== =========== =========== ===========
Net loss per share................................................ ($0.33) ($1.27) ($0.52) ($2.22)
=========== =========== =========== ===========
Weighted average number of shares outstanding..................... 3,000,000 3,323,304 3,000,000 3,264,761
=========== =========== =========== ===========
</TABLE>
See accompanying notes to financial statements.
2
<PAGE>
DOCTORS HEALTH SYSTEM, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31,
1995 1996 1995 1996
------------- ------------- ------------- -------------
<S> <C>
CASH FLOWS FROM OPERATING ACTIVITY
Net loss........................................................ $ (885,901) $(3,884,280) $(1,365,051) $(6,694,817)
Adjustments to reconcile net loss to net cash (used in) provided
by operating activities
Depreciation and amortization................................ 94,310 288,693 144,855 513,077
Provision for uncollectible accounts receivables............. 37,145 55,268 54,460 115,479
Changes in assets and liabilities, net of effects of medical
practice receivables acquired
Accounts receivable........................................ 202,197 476,997 261,906 85,550
Accounts receivable -- affiliates.......................... (70,374) (222,362) (32,020) (122,755)
Prepaid expenses and other receivables..................... (4,967) (646,138) 10,879 (777,651)
Due from/to affiliates..................................... (71,013) 296,156 (648,761) 435,499
Accounts payable........................................... (360,448) 244,606 134,520 308,322
Accrued and other liabilities.............................. (502,534) 1,426,787 381,896 1,611,999
Organizational costs and deferred charges.................. (8,385) (540,801) (8,385) (766,923)
----------- ----------- ----------- -----------
Net cash (used in) provided by operating activities..... (1,569,970) (2,505,074) (1,065,701) (5,292,220)
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of property and equipment.............................. (352,976) (474,306) (693,640) (707,923)
Payments for acquisition costs.................................. (6,514) (592,373) (9,354) (823,114)
Deposits........................................................ 111,678 (9,589) 130,063 (36,257)
----------- ----------- ----------- -----------
Net cash used in investing activities................... (247,812) (1,076,268) (572,931) (1,567,294)
CASH FLOWS FROM FINANCING ACTIVITIES
Net proceeds from issuance of redeemable convertible preferred
stock........................................................ 3,910,000 -- 4,410,000 7,489,200
Borrowings under notes payable.................................. -- -- -- 1,183,017
Principal payments on capital lease obligations................. (33,800) (26,014) (37,647) (50,723)
Payments on notes payable....................................... (10,915) (130,111) (18,708) (298,226)
----------- ----------- ----------- -----------
Net cash provided by (used in) financing activities..... 3,865,285 (156,125) 4,353,645 8,323,268
Net increase (decrease) in cash and cash equivalents.... 2,047,503 (3,737,467) 2,715,013 1,463,754
Cash and cash equivalents at beginning of period.................. 799,395 6,620,516 131,885 1,419,295
----------- ----------- ----------- -----------
Cash and cash equivalents at end of period........................ $ 2,846,898 $ 2,883,049 $ 2,846,898 $ 2,883,049
=========== =========== =========== ===========
SUPPLEMENTAL CASH FLOW INFORMATION
Cash paid for interest.......................................... $ 36,451 $ 90,860 $ 43,725 $ 188,452
=========== =========== =========== ===========
Cash paid for income taxes...................................... $ -- $ -- $ -- $ --
=========== =========== =========== ===========
</TABLE>
See accompanying notes to financial statements.
3
<PAGE>
DOCTORS HEALTH SYSTEM, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
THREE MONTHS AND SIX MONTHS ENDED DECEMBER 31, 1996 AND 1995
NOTE 1 -- BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements have been
prepared in accordance with generally accepted accounting principles of interim
financial reporting and in accordance with Rule 10-01 of Regulation S-X.
Accordingly, they do not include all of the information and notes required by
generally accepted accounting principles for complete financial statements.
In the opinion of management, the unaudited interim financial statements
contained in this report reflect all adjustments, consisting of only normal
recurring accruals which are necessary for a fair presentation of the financial
position and the results of operations for the interim periods presented. The
results of operations for any interim period are not necessarily indicative of
results for the full year.
The consolidated financial statements for the three months and six months
ended December 31, 1995 and 1996 are unaudited and should be read in conjunction
with the financial statements and the notes thereto included in the Company's
Amendment No. 7 to its S-1 Registration Statement for the year ended June 30,
1996.
NOTE 2 -- ACQUISITIONS
The Company acquires certain assets of medical practices from Equity
Physicians and enters into long-term contracts with Core Medical Groups (CMG)
who employ the physicians. The Company currently derives a significant portion
of its total revenues pursuant to the Physician Services Organization Agreements
(PSO Agreement), which are long-term contracts between CMGs and the Company. The
Company's PSO Agreements have a 30-year term with an unlimited number of 10-year
renewals. Under the PSO Agreements, the Company provides general management,
billing and collection, office personnel, managed care contracting and care
management services. Under the PSO Agreements, the Core Medical Groups agree to
comply with the terms of managed care contracts, including the delivery of
health care services, 24-hour coverage, cooperation with utilization review,
quality assurance and peer review programs. The PSO Agreement does not convey
any equity interest in the CMGs, which retain autonomy and independence over
clinical matters.
During the three months ended December 31, 1996, the Company acquired
certain assets of the medical practices of 16 physicians. In connection with the
transactions, the Company added 10 of the physicians to an existing CMG (Doctors
Health Montgomery, LLC) and 6 to a new CMG (Anne Arundel Medical Group, LLC).
During the three months ended December 31, 1995, the Company added 8 physicians
and expanded its Core Medical Groups from one to two. During the three months
ended December 31, 1996, the consideration paid for the acquisition of medical
practice assets totaled approximately $2,921,000 and consisted of 26% cash, 51%
stock and 23% notes payable and liabilities assumed. During the three months
ended December 31, 1995, the consideration paid for the acquisition of medical
practice assets totaled approximately $771,000 and consisted of 1% cash, 64%
stock and 35% notes payable and liabilities assumed.
NOTE 3 -- NET REVENUE
The Company's net revenues represent the contractual management and similar
fees earned under its long-term PSO Agreements with CMGs. Under the PSO
Agreements, the Company is contractually responsible and at risk for the
operating costs of the CMGs with the exception of amounts retained by
physicians. The Company's net revenues include the reimbursement of all medical
practice operating costs and the contractual management fees as defined and
stipulated in the PSO Agreements. Contractual fees are accrued when collection
is probable. Revenue for all CMGs is recorded at established rates reduced by
allowances for doubtful accounts and contractual adjustments and amounts
retained by physician groups.
4
<PAGE>
DOCTORS HEALTH SYSTEM, INC.
NOTES TO FINANCIAL STATEMENTS -- CONTINUED
NOTE 3 -- NET REVENUE -- Continued
The following represents amounts included in the determination of net
revenue:
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31,
1995 1996 1995 1996
------------ ------------ ------------ ------------
<S> <C>
Gross physician revenue........................................... 2,557,561 7,820,725 4,289,050 13,704,635
Less: Provision for contractual and other adjustments........... (1,008,295) (3,348,485) (1,655,087) (5,656,371)
Gatekeeper capitated income....................................... 295,299 775,063 453,777 1,392,504
---------- ---------- ---------- ----------
Net physician revenue............................................. 1,844,565 5,247,303 3,087,740 9,440,768
Amount retained by affiliated core medical groups:
Physicians...................................................... 775,724 2,490,249 1,374,564 4,324,966
Ancillary employees and expenses................................ 152,939 51,213 240,207 215,450
---------- ---------- ---------- ----------
Net revenue....................................................... 915,902 2,705,841 1,472,969 4,900,352
========== ========== ========== ==========
</TABLE>
During the three months ended December 31, 1995 and 1996, the Company
derived substantially all of its net revenue from two and five, respectively,
affiliated CMGs with which it has PSO agreements. For the three months ended
December 31, 1995 and 1996, one of these CMGs comprised approximately 99% and
69%, respectively, of the Company's net revenue respectively.
NOTE 4 -- CAPITATION REVENUE AND MEDICAL SERVICES EXPENSE RECOGNITION
As of December 31, 1996, the Company has three global capitation contracts
and twelve gatekeeper capitation contracts with thirteen separate Health
Maintenance Organizations (HMOs). Under the contracts, the Company receives
monthly capitation fees based on the number of enrollees selecting any one of
the Company's affiliated primary care physicians. The capitation revenue under
these contracts is prepaid monthly based on the number of enrollees and is
recognized as capitation revenue during the month services are provided to the
enrollees. During the three months ended December 31, 1996, $1,572,229 and
$647,333, were recorded as global capitation and gatekeeper capitation revenue,
respectively, in the Company's financial statements. During the six months ended
December 31, 1996, $2,498,842 and $988,333, were recorded as global capitation
and gatekeeper capitation revenue, respectively, in the Company's financial
statements. During the three months and six months ended December 31, 1995, the
Company had no global or gatekeeper capitation contracts.
The Company's commercial capitation contract also includes a provision
whereby the Company can earn additional incentive revenue or incur medical
services expenses based upon the enrollees' utilization of hospital services.
Estimated amounts receivable or payable from the HMO are recorded based upon
actual hospital utilization and associated costs incurred by assigned HMO
enrollees, compared to the portion of the commercial capitation fees allocated
for hospitalization. Differences between actual contract settlements and
estimated receivables or payables relating to the arrangement are recorded in
the year of settlement. Included in accrued medical services as of December 31,
1996 is approximately $95,000 of estimated amounts due to the HMO under this
arrangement.
Under the Company's two Medicare full risk capitation contracts, the
Company has assumed responsibility for managing and paying for substantially all
of the medical care for the respective payor's enrollees. Consequently, the
Company does not perform a settlement with the HMOs under the two Medicare
contracts.
The Company is responsible for the cost of the medical services provided by
its affiliated physicians and other providers who are covered under global
capitation contracts. The cost of medical services is recognized in the period
in which it is provided and includes an estimate of the cost of services which
have been incurred but not yet reported. The estimate for accrued medical
services is based on projections of costs using historical studies of claims
paid. Estimates are continually monitored and reviewed and, as settlements are
made or estimates are adjusted, differences are reflected in current operations.
As of December 31, 1996, approximately $2,140,000 was recorded as accrued
medical services for incurred but not reported services.
5
<PAGE>
DOCTORS HEALTH SYSTEM, INC.
NOTES TO FINANCIAL STATEMENTS -- CONTINUED
NOTE 5 -- CAPITALIZATION
On September 4, 1996, the Company issued 428,571 shares of Series C
Preferred Stock to Genesis Health Ventures, Inc. (Genesis), in exchange for
$7,500,000 in cash. See Subsequent Events below for a summary of the additional
investment by Genesis on January 2, 1997 and January 31, 1997.
NOTE 6 -- COMMON STOCK REPURCHASE AGREEMENT
Under the terms of the stockholders' agreement with three founding
shareholders (who are also officers and directors of the Company), the Company
may be required to purchase shares of the Company's Class A Common Stock in
certain circumstances including death or disability. As of June 30, 1996, the
Company had obtained insurance to cover the purchase of the capital stock in the
event of death. On December 20, 1996, the Company obtained insurance to cover
the purchase of the capital stock in the event of a disability. By agreement
dated February 1, 1997, one of the founding shareholders agreed to waive the
repurchase agreement with respect to any disability not covered by insurance. As
of February 17, 1997, the insurance lapsed with respect to the founding
shareholder who waived the Company's obligation to purchase such founding
shareholder's capital stock in the event of a disability. Under each of the
above policies, the Company has obtained insurance that is in excess of the
estimated fair value of its Class A Common Stock. In order to comply with
Article 5 of Regulation S-X, the Company has presented the common stock that is
redeemable based on events outside the Company's control (i.e. a disability) as
Redeemable Class A Common Stock in the accompanying Balance Sheet as of June
30, 1996. As a result of the coverage provided by the life and disability
policies described above and the waiver of certain stock repurchase rights
described above, there are no circumstances in which a redemption event would
result in a decrease in the Company's stockholders' equity. The Company will
present the Class A Common Stock as stockholders' equity in all balance sheets
subsequent to December 20, 1996. The Company has presented an unaudited Pro
Forma Balance Sheet as of June 30, 1996 assuming the Class A Common Stock is
covered by insurance for any event of redemption. The Company intends to
maintain insurance at levels sufficient to finance its redemption obligations.
The terms of the stock purchase agreement terminate in the event of an initial
public offering or a change in control of the Company as defined in the
stockholders' agreement with three founding shareholders.
NOTE 7 -- NOTES PAYABLE
The Company has presented the $3,600,000 note payable due on December 31,
1997 as a current liability in the accompanying December 31, 1996 balance sheet.
See "Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Liquidity and Capital Resources" for discussion regarding the
Company's intent to refinance this amount as part of the Permanent Financing.
NOTE 8 -- SUBSEQUENT EVENTS
On January 2, 1997, the Company issued 142,857 shares of Series C
Redeemable Convertible Preferred Stock to Genesis for $2,500,000. As of that
issuance, Genesis held 571,428 shares of Series C Redeemable Convertible
Preferred Stock. In addition, on January 31, 1997, the Company and Genesis
entered into a Note Purchase Agreement pursuant to which Genesis agreed to
provide the Company a $5,000,000 credit facility. The Company issued its
Convertible Subordinated 11% Promissory Note to Genesis and on January 31, 1997,
Genesis advanced the sum of $2,800,000 pursuant to the credit facility. The
credit facility matures on January 31, 1999 or the consummation of a $30,000,000
debt and/or equity Permanent Financing (See Management Discussion and Analysis
of Financial Condition and Results of Operations -- Liquidity and Capital
Resources). The $5,000,000 note is convertible at the option of Genesis into a
minimum of 500,000 shares of Convertible Series C Preferred stock. Beginning on
March 31, 1997, the Company may request additional advances under the Note.
Also, on January 31, 1997, the Company issued to Genesis a Warrant to purchase
250,000 shares of Class A Common stock at $14.00 per share.
On January 13, 1997, the Company repaid to First National Bank of Maryland
$983,017 which represents the retirement of the bridge loan facility.
On March 4, 1997, the Company completed the merger of Medtrust Medical
Group, Inc. into Doctors Health of Virginia, Inc. ("DHVA"), a wholly-owned
subsidiary of the Company. In connection with the Merger, DHVA became the
successor to Medtrust's non-exclusive independent practice association and
certain Medtrust members entered into exclusive participation agreements with a
Company-owned independent practice association. Pursuant to the merger, members
of Medtrust and certain directors and officers of Medtrust received cash and
shares of the Company's Class B Common Stock.
6
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
OVERVIEW
Doctors Health System is a managed care and medical management company
which develops and consolidates individual and groups of internists,
pediatricians and family practitioners ("primary care physicians" -- PCPs),
specialist physicians, hospitals and other health care providers into primary
care-driven, comprehensive managed care health delivery networks. PCPs and
specialist physicians are referred to herein as the "Network Physicians." The
Company is focusing on the development of its networks in the Baltimore and
Washington metropolitan area and surrounding regions. As of December 31, 1996,
the Company had approximately 310 Network PCPs in six regional networks
throughout the state of Maryland and one regional network in Northern Virginia.
The Company provides services to its Network Physicians, who deliver health
care services to patients under various reimbursement mechanisms. The Company's
level of profitability depends on (i) increasing the number of Network
Physicians, (ii) attracting patients to enroll in benefit plans that enter into
Global Capitated Contracts with the Company (principally Medicare
beneficiaries), (iii) securing additional and maintaining Global Capitated
Contracts, with adequate reimbursement rates and (iv) generating earnings
through assisting Network Physicians in managing the delivery of high quality
care at a cost less than the reimbursement received under Global Capitated
Contracts. As of December 31, 1996, the Company has two Global Capitated
Medicare Contracts and one Commercial Contract.
The Company intends to continue acquiring certain assets of medical
practices and obtaining managed care contracting rights and is currently in
active discussions with a number of primary and specialty care physicians. The
Company intends to begin management of multi-speciality CMGs pursuant to a
medical practice asset acquisition of and merger with a cardiology practice. The
Company also expects to derive revenues and earnings from the participation of
physicians in its Independent Practice Association (IPAs). As of September 30,
1996, 50 Network PCPs were participants in the Company's IPAs. As of December
31, 1996, the Network PCPs participating in the Company's IPAs increased to 186.
RESULTS OF OPERATIONS
The Company's operating results are significantly affected by the number of
Network PCPs, the number of Network PCPs participating in Global Capitated
Contracts, the number of executed Global Capitated Contracts, and the number of
patients enrolled in benefit plans under Global Capitated Contracts with the
Company. The following table summarizes the Company's history with respect to
Network PCPs, executed Global Capitated Contracts and patients enrolled in
benefit plans under Global Capitated Contracts with the Company:
<TABLE>
<CAPTION>
JUNE 30, JUNE 30, SEPTEMBER 30, DECEMBER 31,
1995 1996 1996 1996
-------- -------- ------------- ------------
<S> <C>
Number of Network PCPs as of............................................... 24 155 176 310
Number of Network PCPs participating in Global Capitated Contracts as of... -- 45* 45 62
Number of regional networks as of.......................................... 1 5 6 7
Number of Global Capitated Contracts as of................................. -- 3 3 3
Number of Global Capitated Patients:
Commercial............................................................... -- 2,039 2,174 2,272
Medicare................................................................. -- 491 965 1,283
</TABLE>
*There is a lag between when physicians join networks and when they become
eligible to participate in Global Capitated Contracts as a result of the
credentialing process and other internal Company controls.
The increase in the number of Network Physicians has contributed to the
increase in net revenue growth as well as the increase in operating costs to
support physician growth. In preparation for the acquisition of medical
practices and other physician transactions, the Company had invested in the
personnel and infrastructure necessary to accommodate its anticipated growth,
which resulted in substantial increases in corporate expenses throughout 1996
and 1995.
7
<PAGE>
The following table shows the percentage of total revenues represented by
various expense and other income items reflected in the Company's Unaudited
Consolidated Statements of Operations. The information that follows should be
read in conjunction with the Company's unaudited consolidated financial
statements and notes thereto included elsewhere herein. As a result of the
Company's rapid growth and the limited period of affiliation with the physician
practices, the Company does not believe that the period-to-period comparisons
and percentage relationships within periods are fully meaningful at this time.
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31,
1995 1996 1995 1996
------------ ------------ ------------ ------------
<S> <C>
Net revenue....................................................... 100.0% 54.9% 100.0% 58.4%
Capitation revenue................................................ -- 45.1% -- 41.6%
----- ----- ----- -----
Total revenues.................................................... 100.0% 100.0% 100.0% 100.0%
Medical services expense.......................................... -- 51.8% -- 44.7%
Care center costs................................................. 91.4% 54.8% 89.9% 57.2%
General and administrative........................................ 92.9% 64.7% 94.1% 69.7%
Depreciation and amortization..................................... 10.3% 5.9% 9.8% 6.1%
Interest and other income......................................... (4.4)% (1.4)% (7.6)% (1.6)%
Interest expense.................................................. 6.5% 3.2% 6.4% 3.7%
Income tax expense................................................ -- -- -- --
----- ----- ----- -----
Net loss.......................................................... (96.7)% (79.0)% (92.6)% (79.8)%
===== ===== ===== =====
</TABLE>
THREE MONTHS ENDED DECEMBER 31, 1996 COMPARED TO THE THREE MONTHS ENDED
DECEMBER 31, 1995.
TOTAL REVENUES. The Company's total revenues increased to $4,925,403 for
the three months ended December 31, 1996 from $915,902 for the three months
ended December 31, 1995. This increase was attributable to the growth in net
revenue to $2,705,841 or 54.9% of total revenue from $915,902 or 100% of total
revenue and the increase in capitation revenue to $2,219,562 ($1,572,229 for
Global Capitated Contracts and $647,333 for Gatekeeper Capitation Contracts) or
45.1% of total revenue from $0 over the prior period. These increases resulted
primarily from the increase in the number of Network Physicians from 36 to 310,
the increase in the number of Network Physicians participating in Global
Capitated Contracts from 0 to 62, the increase in the number of Global Capitated
Contracts from 0 to 3 and the increase in the number of Gatekeeper Capitation
Contracts from 0 to 12.
MEDICAL SERVICES EXPENSE. Medical services expense was $2,550,395 or 51.8%
of total revenue for the three months ended December 31, 1996 compared to $0 of
total revenue for the three months ended December 31, 1995. This increase
resulted from the increase in the number of Network Physicians participating in
Global Capitated Contracts from 0 to 62, the increase in the number of Global
Capitated Contracts from 0 to 3 and the increase in the number of Gatekeeper
Capitated Contracts from 0 to 12. The Company expects these expenses to increase
as the number of Network Physicians participating in and the number of patients
enrolled in benefit plans under Global Capitated Contracts with the Company
grows.
CARE CENTER COSTS. Care center costs were $2,696,243 or 54.8% of total
revenue for the three months ended December 31, 1996 compared to $837,452 or
91.4% of total revenue for the three months ended December 31, 1995. This
increase in dollar amount resulted from the increase in the number of Network
Physicians from 36 to 310. While these expenses are expected to increase as the
Company continues adding Network Physicians, the Company expects that these
expenses will continue to decline as a percentage of total revenue assuming
continued growth in revenue.
GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses
were $3,184,390 or 64.7% of total revenue for the three months ended December
31, 1996 compared to $850,635 or 92.9% of total revenue for the three months
ended December 31, 1995. This increase in dollar amount resulted primarily from
increased compensation expenses from expansion of the Company's corporate
management team, as well as its marketing, acquisitions, network development and
care management departments and additional costs incurred in adding physicians
to the Company's networks and attracting patients who enroll in benefit plans
under Global Capitated Contracts. While these expenses are expected to increase
as the Company adds Network Physicians, the Company expects that these expenses
will continue to decline as a percentage of total revenues assuming continued
growth in revenue.
DEPRECIATION AND AMORTIZATION EXPENSES. Depreciation and amortization
expenses were $288,693 or 5.9% of total revenue for the three months ended
December 31, 1996 compared to $94,310 or 10.3% of total revenue for the three
months
8
<PAGE>
ended December 31, 1995. The increase in dollar amount resulted primarily from
intangibles acquired in connection with the purchase of certain medical practice
assets from Equity Physicians, as well as fixed asset additions. While these
expenses are expected to increase as the Company continues adding Equity
Physicians to the affiliated CMGs, the Company expects that these expenses will
continue to decline as a percentage of total revenue assuming continued growth
in revenue.
INTEREST AND OTHER INCOME. Interest and other income was $68,767 or 1.4% of
total revenue for the three months ended December 31, 1996 compared to $39,950
or 4.4% of total revenue for the three months ended December 31, 1995.
INTEREST EXPENSE. Interest expense was $158,729 or 3.2% of total revenue
for the three months ended December 31, 1996 compared to $59,356 or 6.5% of
total revenue for the three months ended December 31, 1995. The increase in
dollar amount resulted primarily from the increase in the level of borrowings.
INCOME TAX EXPENSE. In light of the Company's losses and its allowance for
deferred tax assets, for the three months ended December 31, 1996 and 1995, the
Company did not require a provision for income taxes.
NET LOSS. The Company had a net loss of $3,884,280 for the three months
ended December 31, 1996 compared to $885,901 for the three months ended December
31, 1995.
LOSS APPLICABLE TO COMMON STOCK. The Company's net loss is increased by
dividends payable to the Redeemable Convertible Preferred Stockholders. The net
loss applicable to common stock was $4,213,041 for the three months ended
December 31, 1996 compared to $999,651 for the three months ended December 31,
1995.
SIX MONTHS ENDED DECEMBER 31, 1996 COMPARED TO SIX MONTHS ENDED DECEMBER 31,
1995.
TOTAL REVENUES. The Company's total revenues increased to $8,387,527 for
the six months ended December 31, 1996 from $1,472,969 for the six months ended
December 31, 1995. This increase was attributable to the growth in net revenue
to $4,900,352 or 58.4% of total revenue from $1,472,969 or 100% of total revenue
and the increase in capitation revenue to $3,487,175 ($2,498,842 Global
Capitation and $988,333 from Gatekeeper Capitation Contracts) or 41.6% of total
revenue from $0 over the prior year. These increases resulted primarily from the
increase in the number of Network Physicians from 36 to 310, the increase in the
number of Network Physicians participating in Global Capitated Contracts from 0
to 62, the increase in the number of Global Capitated Contracts from 0 to 3 and
the increase in the number of Gatekeeper Capitation Contracts from 0 to 12.
MEDICAL SERVICES EXPENSE. Medical services expense was $3,745,896 or 44.7%
of net revenue for the six months ended December 31, 1996 compared to $0 or 0%
of net revenue for the six months ended December 31, 1995. These increases
resulted form the increase in the number of Network Physicians participating in
Global Capitation Contracts from 0 to 62, the increase in the number of Global
Capitated Contracts from 0 to 3 and the increase in the number of Gatekeeper
Capitation Contracts from 0 to 12. The Company expects these expenses to
increase as the number of Network PCPs participating in and the number of
patients enrolled in benefit plans under Global Capitation Contracts with the
Company grows.
CARE CENTER COSTS. Care center costs were $4,799,762 or 57.2% of total
revenue for the six months ended December 31, 1996 compared to $1,323,703 or
89.9% of total revenue for the six months ended December 31, 1995. The increase
in dollars resulted from the increase in the number of Network Physicians from
36 to 310.
GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses
were $5,854,470 or 69.7% of total revenue for the six months ended December 31,
1996 compared to $1,386,750 or 94.1% of net revenue for the six months ended
December 31, 1995. The increase in dollars resulted primarily from increased
compensation expenses from development of the Company's corporate management
team, as well as the formation of its marketing, acquisitions, network
development and care management functions and additional organizational costs
from developing physician networks.
DEPRECIATION AND AMORTIZATION EXPENSES. Depreciation and amortization
expenses were $513,077 or 6.1% of total revenue for the six months ended
December 31, 1996 compared to $144,855 or 9.8% of total revenue for the six
months ended December 31, 1995. The increase in dollars resulted primarily from
intangibles acquired in connection with the purchase of certain medical practice
assets from Equity Physicians, as well as fixed asset additions.
INTEREST AND OTHER INCOME. Interest and other income was $137,805 or 1.6%
of total revenue for the six months ended December 31, 1996 compared to $111,755
or 7.6% of total revenue for the six months ended December 31, 1995.
INTEREST EXPENSE. Interest expense was $306,944 or 3.7% of total revenue
for the six months ended December 31, 1996 compared to $94,467 or 6.4% of total
revenue for the six months ended December 31, 1995. The increase in dollars
resulted primarily from the increase in the level of borrowings.
9
<PAGE>
INCOME TAX EXPENSE. In light of the Company's losses and its allowance for
deferred tax assets, for the six months ended December 31, 1996 and 1995, the
Company did not require a provision for income taxes.
NET LOSS. The Company had a net loss of $6,694,817 for the six months ended
December 31, 1996 compared to $1,365,051 for the six months ended December 31,
1995.
LOSS APPLICABLE TO COMMON STOCK. The Company's net loss is increased by
dividends payable to the Redeemable Convertible Preferred Stockholders. The net
loss applicable to common stock was $7,246,602 for the six months ended December
31, 1996 compared to $1,560,051 for the six months ended December 31, 1995.
LIQUIDITY AND CAPITAL RESOURCES
As of December 31, 1996, the Company had approximately $2,800,000 in
available cash and negative working capital of $2,870,000 (excluding the
remaining amount available under the Bridge Loan Facility which was repaid on
January 13, 1997). On January 2, 1997, the Company received $2,500,000 in
exchange for 142,857 shares of Redeemable Convertible Series C Preferred Stock.
The negative working capital is a result of the presentation of the $3,600,000
note payable due on December 31, 1997, as a current liability. See the
discussion below regarding the Company's intent to refinance this amount as part
of the Permanent Financing. On January 13, 1997, the Company repaid the Bridge
Loan Facility of $983,017.
On January 31, 1997, the Company established a $5,000,000 credit facility
(the "Subordinated Debt Facility") with an affiliate of the Series C Preferred
Stockholder, which was guaranteed by the Series C Preferred Stockholder. The
Subordinated Debt Facility will mature on January 31, 1999, unless made part of
the Permanent Financing (as described below). Advances under the Subordinated
Debt Facility will bear interest at a rate of 11% per annum. Such interest shall
be payable at maturity in shares of Series C Preferred Stock at the rate of
$14.00 per share. The Subordinated Debt Facility is subordinated to the
Company's bank line-of-credit and is secured by a second lien on all accounts
receivable and assets. Advances under the Subordinated Debt Facility are
convertible into shares of Series C Preferred Stock at maturity or in
conjunction with the Permanent Financing at a price per share equal to the
lesser of (i) the price which would result in a weighted average price of $14.00
per share for all shares of Series C Preferred stock issued by the Company or
(ii) the price assigned to shares of the Company's securities issued in the
Permanent Financing. In connection with the execution of the Subordinated Debt
Facility, the Company and the Series C Preferred Stockholder amended their
Option Agreement dated September 4, 1996 to reduce the shares issuable pursuant
to the Option from 500,000 shares of Series C Preferred Stock to 250,000 shares
of Series C Preferred Stock, and a reduction in the cash available to the
Company under the Option from $10,000,000 to $5,000,000. The amended Option
Agreement dated January 31, 1997, provides that the Company may require the
Series C Preferred Stockholder to purchase 250,000 shares of Series C Preferred
Stock at a price of $20.00 per share when the Company's Global Capitation
Contracts include at least 20,000 Medicare lives. The Series C Preferred
Stockholder may exercise the option at any time prior to the occurrence of
certain events, including completion of a public offering or Permanent Financing
transaction.
The Company is seeking a $630,000 letter of credit (LOC) from First
National Bank of Maryland which the Company believes will be issued in March
1997. The LOC is a requirement under one of the Company's Medicare Capitated
Contracts with a health maintenance organization. The Medicare Capitated
Contract requires the Company to provide an LOC, or other similar security, for
a portion of the capitation received by the Company during the previous 60 days.
The LOC will be secured by a $630,000 certificate of deposit funded by the
Company's working capital.
Until the Company and its Payors attract an adequate number of Capitation
Lives in Global Capitated Contracts, the Company anticipates that it will incur
operating losses and experience negative operating cash flows. The Company
believes that its cash on hand at March 6, 1997, of $3,062,000 and the amounts
remaining available under the Subordinated Debt Facility will be sufficient to
fund the Company's operations through June 30, 1997. However, in the event that
the Company either has not attracted an adequate number of Capitated Lives in
Global Capitated Contracts in order to offset operating expenses, or has not
secured the Permanent Financing described, the Company will not be able to
execute its business strategy and the Company's operating results and financial
condition could be materially and adversely affected.
Genesis Health Ventures, Inc. ("Genesis"), the Company's Series C Preferred
Stockholder, has agreed to use its best efforts to assist the Company in raising
$30,000,000 in financing (the "Permanent Financing") until April 30, 1997. The
Company and Genesis are evaluating several initiatives for obtaining the
Permanent Financing. The Permanent Financing may be in the form of issuance of
another class of preferred stock, a debt facility or a combination of both. One
such initiative would be to secure a $20,000,000 senior subordinated debt
facility and $10,000,000 in redeemable convertible preferred stock of the
Company. Genesis has indicated to the Company that it desires to participate in
any debt financing
10
<PAGE>
portion of a Permanent Financing. In connection with the $20,000,000 senior
subordinated debt facility, the Company anticipates that it will issue
detachable warrants with a nominal exercise price. The anticipated proceeds from
the Permanent Financing will be used to repay the Subordinated Debt Facility,
repay a bank line of credit, fund working capital needs, acquire certain assets
of physician practices and, subject to approval of the Series A Stockholder and
certain other conditions, redeem the Series B Preferred Stock at par plus
accrued dividends. All equity components must be junior with respect to
dividends, liquidation and redemption to all existing Preferred Stockholders.
The financing sources will be granted Board representation and Genesis will
have the option of designating an additional Board and Executive Committee
member. In exchange for such assistance, the Company (i) agreed until April 30,
1997, to work exclusively with and through Genesis in seeking additional
financing sources and (ii) granted the Series C Preferred Stockholder a
warrant to purchase 250,000 shares of Class A common stock at an exercise
price of $14.00 per share. Upon consummation of the Permanent Financing, the
remaining right and/or commitment of the Series C Preferred Stockholder's
existing options to purchase 250,000 shares of Series C Preferred Stock at a
price of $20.00 per share when the Company's Global Capitated Contracts include
at least 20,000 Medicare lives shall terminate.
The inability of the Company to obtain such funding, either in whole or in
part, would impair the Company's ability to make intended capital expenditures
and to execute its planned strategy and therefore could have a material adverse
effect on the Company's results of operations and financial condition.
FORWARD-LOOKING STATEMENT REGARDING
FUTURE OPERATING RESULTS
This Quarterly Report on Form 10-Q contains statements which, to the extent
they are not recitations of historical fact, may constitute forward-looking
statements regarding future operating results and financial condition. All
forward-looking statements involve risks and uncertainties. Although the Company
believes that its expectations are based upon reasonable assumptions within the
bounds of its knowledge of its business and operations, there can be no
assurance that actual results will not materially differ from its expectations.
The future operating results and financial condition of the Company are
dependent upon the Company's ability to market its services profitably,
successfully increase market share and manage expense growth relative to revenue
growth. In addition, the future operating results and financial condition of the
Company may also be affected by several factors, including (i) the Company's
growth strategy and its ability to raise sufficient capital to support growth,
(ii) government regulation of the health care industry; (iii) integration risks,
(iv) dependence on managed care contracts and dependence on enrollment patients
in managed care contracts with HMOs, (v) health care cost-containment decisions
of Payors; (vi) controlling and estimating health care costs; and (vii)
competition for opportunities to expand the Company's network of physicians and
health care providers. Changes in one or more of these factors could have a
material adverse effect on the future operating results and financial condition
of the Company.
PART II
OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
By unanimous consent in lieu of meeting dated January 29, 1997, the
following matters were submitted to a vote of the Registrant's stockholders:
1. Adoption of Articles of Amendment and Restatement and Bylaws of the
Registrant to (i) increase the size of the Board of Directors from 18 to 19
members to provide the Series C Preferred Stockholders an additional seat on the
Board; (ii) increase the size of the Executive Committee of the Board from seven
to eight members to provide the Series C Preferred Stockholder an additional
seat on the Executive Committee; (iii) to provide that a majority of the
Executive Committee members constitutes a quorum; and (iv) to increase the
number of authorized shares of Series C Preferred Stock from 1,071,428 shares to
1,500,000 shares.
11
<PAGE>
VOTES FOR VOTES AGAINST ABSTENTIONS
Class A and Class B Common Stock
4,403,000 0 0
Series B Preferred Stock
355,556 0 0
Series C Preferred Stock
571,428 0 0
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
(10.1) Note Purchase Agreement dated January 31, 1997 among Doctors Health
System, Inc., Genesis Health Ventures, Inc. and Genesis Holdings.
(10.2) Convertible Subordinated 11% Note dated January 31, 1997 and issued
by Doctors Health System.
(10.3) Amended and Restated Option Agreement by and between Doctors Health
System, Inc. and Genesis Health Ventures, Inc., dated January 31, 1997.
(10.4) Articles of Amendment and Restatement dated January 31, 1997.
(10.5) Letter Agreement dated February 1, 1997 for Scott Rifkin, M.D. to
Doctors Health System, Inc.
(b) Reports on Form 8K
None
12
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant caused this report to be signed on its behalf by the undersigned
thereunto duly authorized.
DOCTORS HEALTH SYSTEM, INC.
By: /s/ John R. Dwyer
_______________________
John R. Dwyer
Chief Financial Officer
13
EXHIBIT 10.1
Execution Copy
NOTE PURCHASE AGREEMENT
among
DOCTORS HEALTH SYSTEM, INC.,
GENESIS HOLDINGS, INC.
and
GENESIS HEALTH VENTURES, INC.
dated as of January 31, 1997
<PAGE>
NOTE PURCHASE AGREEMENT
THIS NOTE PURCHASE AGREEMENT is entered into as of January 31,
1997 among Doctors Health System, Inc., a Maryland corporation (the "Company"),
Genesis Holdings, Inc., a Delaware corporation (the "Investor"), and Genesis
Health Ventures, Inc., a Pennsylvania corporation ("GHV").
WHEREAS, the Company and GHV entered into a Stock Purchase
Agreement dated as of September 4, 1996 (the "Stock Purchase Agreement")
pursuant to which GHV purchased 571,428 shares of the Company's Series C
Preferred Stock (the "Series C Preferred");
WHEREAS, the Investor is a wholly-owned subsidiary of GHV; and
WHEREAS, the Company desires to issue to the Investor, and the
Investor desires to subscribe for and acquire from the Company, a convertible,
subordinated note of the Company, upon the terms and conditions hereinafter set
forth.
NOW, THEREFORE, in consideration of the foregoing and of the
mutual covenants and agreements hereinafter set forth, the parties hereto hereby
agree as follows:
1. DEFINITIONS
For all purposes of this Purchase Agreement, certain
capitalized terms specified in Exhibit A shall have the meanings set forth in
that Exhibit A, except as otherwise expressly provided.
2. SALE AND PURCHASE OF NOTE
2.1. Sale and Purchase of Note
On the basis of the representations, warranties and agreements
contained herein, and subject to the terms and conditions hereof, the Company
agrees to issue to the Investor, and the Investor agrees to purchase from the
Company, a convertible subordinated note of the Company due on the Maturity Date
in the maximum principal amount of $5,000,000 and in the form attached hereto as
Exhibit B (the "Note") for an aggregate purchase price of up to
<PAGE>
$5,000.000 in cash paid in the form of advances pursuant to Section 2.2. The
terms of the Note are hereby incorporated herein by reference.
2.2. Purchase Price; Advances
Subject to the terms and conditions of this Purchase Agreement
and provided no Default has occurred and is continuing, the Investor shall pay
the purchase price for the Note to the Company in the form of one or more
advances ("Advances").
2.2.1. Initial Advance. Subject to the limitations set forth
below, the Investor shall make an Advance to the Company (the "Initial Advance")
in an amount not greater than the Company's projected cash needs for the 60 days
following the Closing as set forth in an Advance Request (in substantially the
form attached hereto as Exhibit C) submitted by the Company to, and approved by,
the Investor. The Initial Advance shall be payable to the Company by wire
transfer of immediately available funds at the Closing.
2.2.2. Future Advances. Subject to the limitations set forth
below and commencing after April 1, 1997, the Investor shall make monthly
Advances to the Company ("Future Advances") as requested by the Company in
Advance Requests, provided, that a Future Advance may not exceed the Company's
projected cash needs for the 30 days following submission of the Advance Request
and such Advance Request is approved by the Investor. Provided that all
conditions to the making of a Future Advance as set forth in Section 9 have been
satisfied, Future Advances shall be payable to the Company by wire transfer of
immediately available funds no later than two Business Days following delivery
of the Advance Request to the Investor.
2.2.3. Maximum Amount of Any Advance. No Advance shall exceed
the lesser of (a) $5,000,000, (b) $5,000,000 minus the aggregate amount of all
prior Advances plus the aggregate amount of all repayments and prepayments of
principal pursuant to Section 2.4 or (b) the projected cash needs of the
Company, as approved by the Investor, for the following 60 days in the case of
the Initial Advance and 30 days in the case of Future Advances.
2.3. Interest
The aggregate unpaid principal amount of each Advance from
time to time outstanding shall bear interest, from the date of such Advance
until paid in full, at an annual rate of interest equal to 11%. Payment of all
accrued interest shall be made by the Company on the Maturity Date by issuing to
the Investor the number of shares of Series C Preferred derived by dividing (x)
the aggregate dollar
2
<PAGE>
amount of all such accrued interest by (y) 14. The issue price of such shares
of Series C Preferred shall be $14 per share.
2.4. Repayments and Prepayments
2.4.1. Maturity Date. The entire outstanding principal amount
of all Advances (the "Outstanding Principal Amount") shall become absolutely due
and payable by the Company to the Investor upon the earlier to occur of (a)
January 31, 1999 or (b) the closing date of a financing (the "Permanent
Financing") of up to $25,000,000 in additional debt and/or equity by the Company
(the "Maturity Date"), unless Investor exercises its right to convert the
Outstanding Principal Amount into Series C Preferred or the Permanent Financing
in accordance with the terms hereof.
2.4.2. Prepayments. The Company shall have the right to prepay
the Outstanding Principal Amount in full or in part at any time without premium
or penalty, provided, however that the Company shall notify the Investor at
least 30 days prior to any prepayment and the Investor shall have 20 days after
such notice to elect to convert the portion of the Outstanding Principal Amount
that the Company proposes to prepay into shares of Series C Preferred Stock at
the Conversion Price provided for in Section 2.5.
2.5. Conversion
2.5.1. At Maturity Date. At the Maturity Date, the Investor
may elect to (A) convert all or a portion of the Outstanding Principal Amount
into the number of shares of Series C Preferred derived by dividing (x) the
Outstanding Principal Amount (or the portion thereof to be converted) by (y) the
Conversion Price or (B) incorporate the Outstanding Principal Amount as debt or
equity in the Permanent Financing.
2.5.2. Upon Prepayment. As provided in Section 2.4.2 above,
the Investor shall have the right to convert any portion of the Outstanding
Principal Amount that the Company proposes to prepay into the number of shares
of Series C Preferred derived by dividing (x) the portion of the Outstanding
Principal Amount to be prepaid by (y) the Conversion Price.
2.5.3. Mandatory Conversion. In the event that, prior to the
Maturity Date, the Company closes the loan facility committed by the holder of
the Company's Series A Preferred Stock in an amount of at least $10,000,000, the
Company shall have the right to require the Investor to convert the Outstanding
Principal Amount into the number of shares of Series C Preferred derived by
dividing (x) the Outstanding Principal Amount by (y) the Conversion Price. Such
3
<PAGE>
mandatory conversion right shall be exercisable by the Company by written notice
to the Investor no later than 15 days prior to the closing of such loan
facility.
2.5.4. Conversion Price. For purposes hereof, the Conversion
Price shall be the lesser of (a) the purchase price per share for each issuance
of Series C Preferred upon any conversion pursuant to this Section 2.5 which
results in a weighted average price of all issued and outstanding shares of
Series C Preferred, including the shares issued in such conversion, of $14.00
per share or (b) the purchase price per share of Series C Preferred used in the
Permanent Financing (if the Permanent Financing involves issuance of Series C
Preferred).
3. REPRESENTATIONS AND WARRANTIES OF THE COMPANY
Except as specifically set forth in the Disclosure Schedule
(with no disclosure to be deemed to apply with respect to any Section of this
Purchase Agreement to which it does not expressly refer), the Company represents
and warrants (which representations and warranties shall be deemed to include
the disclosure with respect thereto so specified in the Disclosure Schedule) to
the Investor as follows:
3.1. Organization and Standing
The Company is a corporation duly organized, validly existing
and in good standing under the laws of the State of Maryland, and has the full
and unrestricted corporate power and authority to own, operate and lease its
Assets, to carry on its business as currently conducted, to execute and deliver
this Purchase Agreement and to carry out the transactions contemplated hereby.
There is no state, country or territory wherein the absence of licensing or
qualification as a foreign corporation would have a material adverse effect upon
the business of the Company as currently conducted.
3.2. Subsidiaries
The Company has no Subsidiaries and no equity investment or
other interest in, nor has the Company made advances or loans to, any
corporation, association, partnership, joint venture or other entity, except as
set forth in the Disclosure Schedule. Section 3.2 of the Disclosure Schedule
sets forth (a) the authorized capital of each direct and indirect Subsidiary of
the Company and the percentage of the outstanding capital of each Subsidiary
directly or indirectly owned by the Company, and (b) the nature and amount of
any such equity investment or other equity interest. All equity capital of
Subsidiaries directly or indirectly held by the Company has been duly authorized
and validly issued and is outstanding, fully paid and nonassessable. Except as
set forth in the Disclosure Schedule, the Company directly, or indirectly
through wholly owned Subsidiaries,
4
<PAGE>
owns all such equity capital of the direct or indirect Subsidiaries free and
clear of all Encumbrances. Each Subsidiary is duly organized, validly existing
and in good standing (or its local equivalent) under the laws of its state or
jurisdiction of organization (as listed in the Disclosure Schedule), and has
the full and unrestricted corporate power and authority to own, operate and
lease its Assets and to carry on its business as currently conducted. Each
Subsidiary is registered to conduct business and is in good standing in the
states, countries and territories listed in the Disclosure Schedule. There is
no state, country or territory wherein the absence of registration as a
foreign corporation would have a material adverse effect upon the business of
the Subsidiaries as currently conducted.
3.3. Articles of Incorporation and Bylaws
The Company has delivered to the Investor (i) a true and
complete copy of the Restated Articles and the bylaws, as currently in effect
and certified by the secretary of the Company, and (ii) a true and complete copy
of the organizational documents of each Subsidiary, as currently in effect. Such
copies are attached as exhibits to, and part of, Section 3.3 of the Disclosure
Schedule.
3.4. Capitalization
Upon the filing of the Restated Articles, the authorized
capital stock of the Company and the outstanding shares of capital stock of the
Company as of the date hereof will be as set forth in Section 3.4 of the
Disclosure Schedule. All of such outstanding shares have been validly issued and
are fully paid and nonassessable. No shares of capital stock of the Company or
any Subsidiary have been reserved for any purpose, other than issuance of
capital stock in amounts set forth in Section 3.4 of the Disclosure Schedule (i)
pursuant to the Company's Omnibus Stock Option Plan , (ii) upon the conversion
of Series A Preferred Stock and the Series B Preferred Stock, (iii) upon the
exercise of the Common Stock Warrants (as defined in Section 3.4 of the
Disclosure Schedule) and (iv) pursuant to the Option Agreement. Except as set
forth in Section 3.4 of the Disclosure Schedule, there are no outstanding
securities convertible into or exchangeable for the capital stock of the Company
or any of the Subsidiaries and no outstanding options, rights (preemptive or
otherwise), or warrants to purchase or to subscribe for any shares of such stock
or other securities of the Company or any of the Subsidiaries. Except as set
forth in Section 3.4 of the Disclosure Schedule, there are no outstanding
Agreements affecting or relating to the voting, issuance, purchase, redemption,
repurchase, transfer or registration for sale under the Securities Act of the
Company's common stock, any other securities of the Company, or any securities
of any Subsidiary.
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3.5. Directors, Officers and Employees
Section 3.5 of the Disclosure Schedule lists all current
directors and officers of the Company and all managers, employees and
consultants of the Company who, individually, have received or are scheduled to
receive compensation from the Company for the year ending December 31, 1996 in
excess of $100,000, showing each such person's name, positions, and annual
remuneration and material bonuses for the current fiscal year.
3.6. Financial Statements
(a) The Company has prepared and delivered to the Investor and
there are included as exhibits that are part of Section 3.6(a) of the Disclosure
Schedule, the Consolidated balance sheets of the Company, the Subsidiaries and
the Medical Groups as of the end of the fiscal year ended June 30, 1996, and the
Consolidated statements of income, stockholders' equity and changes in financial
position for such year, accompanied by the unqualified opinion of Grant Thornton
L.L.P. The Company also has prepared and delivered to the Investor, and there
are included as exhibits that are part of Section 3.6(a) of the Disclosure
Schedule, an internal financial reporting package, which includes the unaudited
Consolidated balance sheet of the Company as of November 30, 1996, and the
unaudited Consolidated statements of income, stockholders' equity and changes in
financial position for the six months ended November 30, 1996. All of the
financial statements, including, without limitation, the notes thereto, referred
to in this Section 3.6 or delivered to the Investor after the date hereof
pursuant to this Purchase Agreement: (a) are in accordance with the books and
records of the Company, the Subsidiaries and the Medical Groups, (b) present
fairly the Consolidated financial position of the Company, the Subsidiaries and
the Medical Groups as of the respective dates and the results of operations and
changes in financial position for the respective periods indicated (subject, in
the case of the November 30, 1996 statements, to the absence of footnotes and
normal adjustments), and (c) have been prepared in accordance with generally
accepted accounting principles (subject, in the case of the November 30, 1996
statements, to the absence of footnotes and to normal adjustments) applied on a
basis consistent with prior accounting periods.
(b) The Company has prepared and delivered to the Investor and
has included as an exhibit to Section 3.6(b) of the Disclosure Schedule the
Company's operating plan for the period ending December 31, 1997 (the "Operating
Plan"), which (i) has been prepared in good faith on a basis consistent with the
historical Consolidated financial statements furnished pursuant to this Purchase
Agreement and, to the Company's knowledge, consistent with the payment
arrangements contemplated in the Company's agreements with health maintenance
organizations and other payors which have
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been entered into prior to the date hereof and (ii) represents the Company's
good faith best judgment as to the expected financial condition and results of
operations of the Company at and for the period ending December 31, 1997. To the
Company's knowledge, the attainment by the Company of the results forecasted
in the Operating Plan will not violate any Laws currently in effect and
applicable to the Company, the Subsidiaries, the Medical Groups or their
operations. The results forecasted in the Operating Plan are management's
estimates and do not constitute a warranty as to the future performance of
the Company.
3.7. No Liabilities
Except as reflected in the November 30, 1996 balance sheet
attached as part of Section 3.7 of the Disclosure Schedule or incurred in the
Ordinary Course of Business (in amounts not material to the Company, its
Subsidiaries and the Medical Groups, taken as a whole), as of November 30, 1996,
there were no liabilities (whether contingent or absolute, matured or unmatured,
known or unknown) of the Company, any Subsidiary or any Medical Group that would
be required by GAAP to be disclosed therein. Except as described in Section 3.7
of the Disclosure Schedule, since November 30, 1996, the Company has not
incurred any liabilities (whether contingent or absolute, matured or unmatured,
known or unknown) other than in the Ordinary Course of Business and in amounts
that are not material to the Company, its Subsidiaries and the Medical Groups,
taken as a whole.
3.8. Accounts Receivable
The accounts receivable of the Company, the Subsidiaries and
the Medical Groups shown on the balance sheets delivered pursuant to Section
3.6, or thereafter acquired by any of them, have been collected or, to the
knowledge of the Company, are collectible in amounts not less than the amounts
thereof carried on the books of the Company, the Subsidiaries and the Medical
Groups, except to the extent of the allowance for doubtful accounts shown on
such balance sheets and the additional write-off of certain accounts receivable
set forth on the Disclosure Schedule. The accounts receivable of the Company and
all documents relating to such accounts receivable shall be kept only at the
Company's offices located at 10451 Mill Run road, Owings Mills, Maryland 21117,
or at 8019 Corporate Drive, Suite 2, White Marsh, Maryland 21236.
3.9. Taxes
(a) All Company Tax Returns due on or before the date hereof,
or which become due after the date hereof and on or before the Closing Date,
have been, or will be, duly filed. No penalties or other charges are or will
become due
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with respect to any of the Company Tax Returns so filed as the result of the
late filing thereof. All of the Company Tax Returns so filed are (or, in the
case of returns becoming due after the date hereof and on or before the
Closing Date, will be) true and complete in all respects. The Company, its
Subsidiaries or the Medical Groups: (i) have paid all Taxes due or claimed to be
due by any taxing authority in connection with any of the Company Tax Returns
(without regard to whether or not such Taxes are shown as due on such Company
Tax Returns); or (ii) have established (or, in the case of amounts becoming due
after the date hereof, prior to the Closing Date will have paid or established)
in financial statements provided to the Investor pursuant to Section 3.6
adequate reserves (in conformity with generally accepted accounting principles
consistently applied) for the payment of such Taxes. The amounts set up as
reserves for Taxes on the Consolidated financial statements of the Company
delivered pursuant to Section 3.6 are sufficient for the payment of all unpaid
Taxes, whether or not such Taxes are disputed or are yet due and payable, for or
with respect to the period, and for which the Company may be liable in its own
right (including, without limitation, by reason of being a member of the same
affiliated group) or as a transferee of the Assets of, or successor to, any
corporation, person, association, partnership, joint venture or other entity.
(b) Neither the Company, any Subsidiary nor any Medical Group,
either in its own right (including, without limitation, by reason of being a
member of the same affiliated group) or as a transferee, has or on the Closing
Date will have any liability for Taxes payable for or with respect to any
periods prior to and including the Closing Date in excess of the amounts
actually paid prior to the Closing Date or reserved for in financial statements
delivered to the Investor pursuant to Section 3.6.
(c) All Company Tax Returns have been filed with the relevant
taxing authorities, and all deficiencies related to such Company Tax Returns
proposed as a result of such examinations have been paid or settled. Except as
set forth in Section 3.9(c) of the Disclosure Schedule, there is no action,
suit, proceeding, audit, investigation or claim pending or, to the knowledge of
the Company, threatened in respect of any Taxes for which the Company is or may
become liable, nor has any deficiency or claim for any such Taxes been proposed,
asserted or, to the knowledge of the Company, its Subsidiaries or the Medical
Groups, threatened. Except as set forth in Section 3.9(c) of the Disclosure
Schedule (i) no agreement, waiver or consent providing for an extension of time
with respect to the assessment or collection of any Taxes against the Company is
outstanding, and (ii) no power of attorney granted by the Company with respect
to any tax matters is currently in force.
(d) The Company has delivered or otherwise made available to
the Investor true and complete copies of all Company Tax Returns and all written
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communications relating to any such Company Tax Returns or to any deficiency or
claim proposed and/or asserted, irrespective of the outcome of such matter, but
only to the extent such items relate to tax years (i) which are subject to an
audit, investigation, examination or other proceeding, or (ii) with respect to
which the statute of limitations has not expired.
(e) Section 3.9(e) of the Disclosure Schedule sets forth (i)
all federal tax elections previously filed and currently in effect with respect
to the Company or any of the Subsidiaries or the Medical Groups, and (ii) all
elections and consents previously filed and currently in effect for purposes of
state or local Taxes, in each case that reasonably could be expected to affect
or be binding upon the Company or any of the Subsidiaries or the Medical Groups
or their respective Assets or operations after the Closing. Section 3.9(e) of
the Disclosure Schedule sets forth all federal Forms 3115 filed with respect to
the Company or any of the Subsidiaries.
(f) Neither the Company nor any of the Subsidiaries or the
Medical Groups is a party to an Agreement relating to the sharing, allocation or
payment of, or indemnity for, Taxes (other than an Agreement the only parties to
which are the Company, the Subsidiaries and/or the Medical Groups).
3.10. Conduct of Business; Absence of Material Adverse Change
Other than as set forth in Section 3.10 of the Disclosure
Schedule, since November 30, 1996, there has been no material adverse change,
and no change except in the Ordinary Course of Business, in the business,
operations, condition (financial or otherwise), Assets, liabilities or prospects
of the Company. Except as set forth in Section 3.10 of the Disclosure Schedule,
since November 30, 1996, the Company has conducted its business diligently and
substantially in the manner heretofore conducted and only in the Ordinary Course
of Business, and the Company has not, except as contemplated by this Purchase
Agreement, (a) incurred loss of, or significant injury to, any Material Assets
of the Company as the result of any fire, explosion, flood, windstorm,
earthquake, labor trouble, riot, accident, act of God or public enemy or armed
forces, or other casualty; (b) issued any capital stock, bonds or other
corporate securities or debt instruments, granted any options, warrants or other
rights calling for the issuance thereof, or borrowed any funds; (c) incurred, or
become subject to, any obligation or liability (absolute or contingent, matured
or unmatured, known or unknown), except current liabilities incurred in the
Ordinary Course of Business; (d) discharged or satisfied any Encumbrance or paid
any obligation or liability (absolute or contingent, matured or unmatured, known
or unknown) other than current liabilities shown in the balance sheets delivered
pursuant to Section 3.6, and current liabilities incurred since November 30,
1996 in the Ordinary Course of Business; (e) declared or made payment of, or set
aside for payment, any dividends
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or distributions of any Assets, or purchased, redeemed or otherwise acquired
any of its capital stock, any securities convertible into capital stock, or
any other securities; (f) mortgaged, pledged or subjected to any Encumbrance
any of its Material Assets; (g) sold, exchanged, transferred or otherwise
disposed of any of its Material Assets, or canceled any debts or claims, except
in each case in the Ordinary Course of Business; (h) written down the value
of any Material Assets or written off as uncollectible any notes or accounts
receivable, except write-downs and write-offs in the Ordinary Course of
Business, none of which, individually or in the aggregate, are material to the
Company, the Subsidiaries and the Medical Groups, taken as a whole; (i) entered
into any transactions other than in the Ordinary Course of Business; (j)
increased the rate of compensation payable, or to become payable, by it to
any of its officers, employees, agents or independent contractors over the
rate being paid to them on November 30, 1996, other than in the Ordinary
Course of Business; (k) made or permitted any amendment or termination of any
material Agreement to which it is a party or which it owns; (l) through
negotiation or otherwise made any commitment or incurred any liability to any
labor organization; (m) made any accrual or arrangement for or payment of
bonuses or special compensation of any kind to any director, officer or
employee, other than in the Ordinary Course of Business; (n) directly or
indirectly paid any severance or termination pay to any officer or employee in
excess of two months' salary; (o) made capital expenditures, or entered into
commitments therefor, aggregating more than $100,000; (p) made any change in any
method of accounting or accounting practice; (q) entered into any transaction of
the type described in Section 3.22; or (r) made an Agreement to do any of the
foregoing.
3.11. Title to Property and Assets
Except as set forth in Section 3.11 of the Disclosure
Schedule, the Company and the Subsidiaries have good, valid and marketable title
to all Assets respectively owned by them, free and clear of all Encumbrances
other than those referred to in the balance sheets delivered pursuant to Section
3.6 (or the notes thereto). The Company and the Subsidiaries do not own any real
estate, and the Company is not now and has never been a "United States real
property holding corporation" as defined in ss.897(c)(2) of the Code and ss.
1.897-2(b) of the regulations promulgated thereunder. All material items of
personal property of the Company and the Subsidiaries is in good operating
condition and repair and is suitable and adequate for the uses for which it is
intended or is being used.
3.12. Insurance
Other than as set forth in Section 3.12 of the Disclosure
Schedule, the Company has insurance coverage under policies maintained by the
Company (including stop loss and reinsurance policies) that (a) are with
insurance
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companies reasonably believed by the Company to be financially sound and
reputable; (b) are in full force and effect; (c) are sufficient for compliance
by the Company and by each Subsidiary and Medical Group with all requirements of
Law and of all Agreements to which the Company, any Subsidiary or any Medical
Group is a party; (d) are valid and outstanding policies enforceable against the
insurer; and (e) insure against risks of the kind customarily insured against
and in amounts customarily carried by companies similarly situated and by
companies engaged in similar businesses and owning similar properties.
3.13. Intellectual Property
(a) Section 3.13(a) of the Disclosure Schedule lists all
trademarks, trademark applications and registrations, registered copyrights,
patents and patent applications owned or licensed by or registered in the name
of the Company, any Subsidiary or any Medical Group or used or to be used by the
Company, any Subsidiary or any Medical Group in its business as presently
conducted or contemplated, and all other items of Intellectual Property that are
material to the business or operations of the Company, any Subsidiary or any
Medical Group. Section 3.13(a) of the Disclosure Schedule lists those
trademarks, trademark applications and registrations, registered copyrights,
patents and patent applications which have been duly registered in, filed in or
issued by the United States Patent and Trademark Office, the United States
Register of Copyrights, or the corresponding offices of other jurisdictions as
identified in Section 3.13(a) of the Disclosure Schedule, and have been properly
maintained and renewed in accordance with all applicable provisions of law and
administrative regulations in the United States and each such jurisdiction.
(b) All licenses or other Agreements material to the business
of the Company, the Subsidiaries and the Medical Groups, taken as a whole, under
which the Company, any Subsidiary or any Medical Group is granted rights in
Intellectual Property are listed on the Disclosure Schedule. Except as set forth
in Section 3.13(b) of the Disclosure Schedule, all such licenses or other
Agreements are in full force and effect, there is no material default by any
party thereto. To the knowledge of the Company, the licensors under such
licenses and other Agreements have and had all requisite power and authority to
grant the rights purported to be conferred thereby.
3.14. Debt Instruments
Section 3.14 of the Disclosure Schedule lists all mortgages,
indentures, notes, guarantees and other Agreements for or relating to borrowed
money (including, without limitation, capital leases) to which the Company, any
Subsidiary or any Medical Group is a party or which have been assumed by the
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Company, any Subsidiary or any Medical Group or to which any Assets of the
Company, any Subsidiary or any Medical Group are subject. The Company, the
Subsidiaries and the Medical Groups have performed all the obligations required
to be performed by any of them to date and are not in default in any respect
under any of the foregoing, and there has not occurred any event which (whether
with or without notice, lapse of time or the happening or occurrence of any
other event) would constitute such a default.
3.15. Leases
Section 3.15 of the Disclosure Schedule lists all leases and
other Agreements under which the Company, any Subsidiary or any Medical Group is
lessee or lessor of any Material Asset, or holds, manages or operates any
Material Asset owned by any third party, or under which any Material Asset owned
by the Company or by any Subsidiary or Medical Group is held, operated or
managed by a third party. The Company, the Subsidiaries and the Medical Group
are the owners and holders of all the leasehold estates purported to be granted
by the Documents described in Section 3.15 of the Disclosure Schedule to them.
Each such lease and other Agreement is in full force and effect and constitutes
a legal, valid and binding obligation of, and is legally enforceable against,
the respective parties thereto and grants the leasehold estate it purports to
grant free and clear of all Encumbrances. All necessary governmental approvals
with respect thereto have been obtained, all necessary filings or registrations
therefor have been made, and there have been no threatened cancellations thereof
and are no outstanding disputes thereunder. The Company, the Subsidiaries and
the Medical Groups have in all respects performed all material obligations
thereunder required to be performed by any of them to date. No party is in
default in any respect under any of the foregoing, and there has not occurred
any event which (whether with or without notice, lapse of time or the happening
or occurrence of any other event) would constitute such a default. To the
knowledge of the Company, all of the Assets subject to such leases are in good
operating condition and repair.
3.16. Other Agreements
(a) Section 3.16(a) of the Disclosure Schedule lists all
material Agreements to which the Company, any Subsidiary or any Medical Group is
a party or by which the Company, any Subsidiary or any Medical Group is bound at
the date hereof. True and correct copies of such Agreements have been made
available to the Investor. Each such Agreement is in full force and effect and
constitutes a legal, valid and binding obligation of, and is legally enforceable
against, the respective parties thereto. All necessary governmental approvals
with respect thereto have been obtained, all necessary filings or registrations
therefor have been made, and there have been no threatened cancellations thereof
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and are no outstanding disputes thereunder. The Company, the Subsidiaries and
the Medical Groups have in all respects performed all material obligations
thereunder required to be performed by any of them to date. No party is in
default in any respect under any of the Agreements described in Section 3.16(a)
of the Disclosure Schedule, and there has not occurred any event which (whether
with or without notice, lapse of time or the happening or occurrence of any
other event) would constitute such a default.
(b) Except as specified in Section 3.16(b) of the Disclosure
Schedule (and without limiting the foregoing), neither the Company nor any
Subsidiary or Medical Group is a party to any written (i) Agreement for the
employment of any officer, employee, consultant or independent contractor
involving payments of more than $100,000 over its remaining term other than
officers, employees, consultants or contractors set forth in Section 3.5 of the
Disclosure Schedule; (ii) Agreement with any labor organization or other
collective bargaining unit except as may be imposed by law; (iii) Agreement for
the future purchase of materials, supplies, services, merchandise or equipment
involving payments of more than $100,000 over its remaining term (including,
without limitation, periods covered by any option to renew by either party);
(iv) Agreement for the purchase, sale or lease of any real estate or other
Material Assets; (v) profit-sharing, bonus, incentive compensation, deferred
compensation, stock option, severance pay, stock purchase, employee benefit,
insurance, hospitalization, pension, retirement or other similar plan or
Agreement; (vi) Agreement for the sale of any of its Material Assets or the
grant of any preferential rights to purchase any of its Material Assets or
rights, other than in the Ordinary Course of Business; (vii) Agreement which
contains any provisions requiring the Company, any Subsidiary or any Medical
Group to indemnify any other party thereto other than in the Ordinary Course of
Business; (viii) joint venture agreement or other Agreement involving the
sharing of profits; (ix) outstanding loan to any person or entity or receivable
due from any stockholder of the Company or persons or entities controlling,
controlled by or under common control with the Company; or (x) any Agreement
(including, without limitation, Agreements not to compete and exclusivity
Agreements) that reasonably could be interpreted to impose any material
restriction on the Company's ability to conduct its business operations in the
Ordinary Course of Business.
(c) Section 3.16(c) of the Disclosure Schedule lists all
physicians who, as of the date hereof, have entered into (i) participation
agreements with a Medical Group or other medical practice affiliated with the
Company, (ii) binding letters of intent to become affiliated with the Company, a
Medical Group or a medical practice affiliated with the Company, and (iii)
non-binding letters of intent to become affiliated with the Company, a Medical
Group or a medical practice affiliated with the Company.
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3.17. Books and Records
The books of account, stock records, minute books and other
records of the Company and the Subsidiaries are true and complete in all
material respects and have been maintained in accordance with good business
practices, and the matters contained therein are appropriately and accurately
reflected in the financial statements of the Company delivered pursuant to
Section 4.6.
3.18. Litigation; Disputes
(a) Except as set forth in Section 3.18(a) of the Disclosure
Schedule, there are no actions, suits, claims, arbitrations, proceedings or
investigations pending, or, to the Company's knowledge, threatened or reasonably
anticipated against, affecting or involving the Company, any Subsidiary or any
Medical Group or their respective businesses or Assets, or the transactions
contemplated by this Purchase Agreement, at law or in equity or admiralty, or
before or by any court, arbitrator or governmental authority, domestic or
foreign. Neither the Company nor any Subsidiary or Medical Group is operating
under, subject to or in default with respect to any order, award, writ,
injunction, decree or judgment of any court, arbitrator or governmental
authority.
(b) Except as set forth in Section 3.18(b) of the Disclosure
Schedule, neither the Company nor any Subsidiary or Medical Group is currently
involved in or, to the knowledge of the Company, the Subsidiaries or the Medical
Groups, reasonably anticipates any dispute with any of its current or former
employees, agents, brokers, distributors, vendors, customers, business
consultants, franchisees, franchisors, representatives or independent
contractors (or any current or former employees of any of the foregoing persons
or entities) affecting the businesses or Assets of the Company, any Subsidiary
or any Medical Group.
3.19. Labor Relations
There are no strikes, work stoppages, grievance proceedings,
union organization efforts or other controversies pending or, to the Company's
knowledge, threatened or reasonably anticipated between the Company, any
Subsidiary or any Medical Group and (i) any current or former employees of the
Company or of any Subsidiary or Medical Group or (ii) any union or other
collective bargaining unit representing such employees. The Company, the
Subsidiaries and the Medical Groups have complied and are in compliance with all
Laws relating to employment or the workplace, including, without limitation,
provisions relating to wages, hours, collective bargaining, safety and health,
work authorization, equal employment opportunity, immigration, withholding,
unemployment compensation, worker's compensation, employee privacy and right
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to know, except where a failure to comply, singly or in the aggregate, would not
have a material adverse effect to the Company, the Subsidiaries and the Medical
Groups, taken as a whole. There are no collective bargaining agreements or
employment agreements (other than agreements as may be imposed by applicable
law) between the Company, any Subsidiary or any Medical Group and any of their
respective employees, or professional service agreements not terminable at will
relating to the businesses and Assets of the Company or of any Subsidiary or
Medical Group, other than as set forth on the Disclosure Schedule. The
consummation of the transactions contemplated hereby will not cause the Company,
any of the Subsidiaries or the Medical Group or the Investor to incur or suffer
any liability relating to, or obligation to pay, severance, termination or other
payments to any person or entity.
3.20. Pension and Benefit Plans
3.20.1. Disclosure Schedule. Except as set forth in Section
3.20.1 of the Disclosure Schedule, neither the Company nor any Subsidiary or
Medical Group (i) maintains any Plan or material Other Arrangement, (ii) is a
party to any Plan or material Other Arrangement or (iii) has obligations under
any Plan or material Other Arrangement.
3.20.2. Copies of Documents. The Company has delivered to the
Investor true and complete copies of each of the following Documents: (i) the
Documents setting forth the terms of each Plan; (ii) for the most recent plan
year, all annual reports (Form 5500 series) on each Plan that have been filed
with any governmental agency; (iii) the current summary plan description and
subsequent summaries of material modifications for each Title I Plan; (iv) all
DOL opinions on any Plan and all correspondence relating to the request for and
receipt of each opinion; (v) all IRS rulings, opinions or technical advice
relating to any Plan; and (vi) all Agreements with service providers or
fiduciaries for providing services on behalf of any Plan. For each material
Other Arrangement, the Company has delivered to the Investor true and complete
copies of each policy, Agreement or other Document setting forth or explaining
the terms of the Other Arrangement.
3.20.3. General. Except as provided in Section 3.20.1 of the
Disclosure Schedule, no Plan is (i) a Multiemployer Plan, (ii) an ESOP, (iii)
subject to Title IV of ERISA, (iv) funded through a trust or similar
arrangement, or (v) provides post-retirement medical, life insurance or other
benefits promised (except for health care continuation coverage) provided or
otherwise due now or in the future to current, former or retired employees of
the Company or any Subsidiary.
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3.20.4. Unpaid Contributions. The Disclosure Schedule sets
forth the contributions that (i) the Company or any Subsidiary has promised or
is otherwise obligated to make under any Plan and (ii) are unpaid as of the date
of this Purchase Agreement.
3.20.5. Contributions and Other Obligations. The Company
and the Subsidiaries have made all contributions required by and due under the
terms of its Plans.
3.20.6. Qualified Plans. The Company's 401(k) Plan is the
Company's only Qualified Plan. Except as described in Section 3.20.6 of the
Disclosure Schedule, the 401(k) Plan complies and has complied in all material
respects with ERISA, the Code (including, without limitation, the requirements
for Tax qualification described in Section 401 thereof), and all other Laws. The
Company intends to receive a determination letter from the IRS with respect to
the 401(k) Plan. The remedial amendment period for the adoption of the 401(k)
Plan has not lapsed.
3.20.7. Compliance with Law. Except as set forth in Section
3.20.7 of the Disclosure Schedule, the Company has complied in all material
respects with all applicable provisions of the Code, ERISA, the National Labor
Relations Act, Title VII of the Civil Rights Act of 1964, the Age Discrimination
in Employment Act, the Fair Labor Standards Act, the Securities Act, the
Securities Exchange Act of 1934, and all other Laws pertaining to the Plans,
Other Arrangements and other employee or employment related benefits, and all
premiums and assessments relating to all Plans or Other Arrangements. The
Company has no pending unfair labor practice charges, contract grievances under
any collective bargaining agreement, other administrative charges, claims,
grievances or lawsuits before any court, governmental agency, regulatory body,
or arbiter arising under any Law governing any Plan, and there exist no facts
that could give rise to such a claim.
3.20.8. ERISA; Prohibited Transaction. Neither the Company nor
any Subsidiary nor any of the Plans has engaged in a violation of Section 406(a)
or 406(b) of ERISA for which no exemption exists under Section 408 of ERISA or a
"prohibited transaction" (as such term is defined in Section 4975(c)(1) of the
Code), for which no exemption exists under Section 4975(c)(2) or 4975(d) of the
Code.
3.20.9. Health Care Continuation Coverage Requirements. Except
as set forth in Section 3.20.9 of the Disclosure Schedule, all Welfare Plans of
the Company that are subject to Section 4980B(f) of the Code and Sections 601
through 607 of ERISA comply with and have been administered in compliance
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with the health care continuation-coverage requirements for tax-favored status
under Section 4980B(f) of the Code (formerly Section 162(k) of the Code),
Sections 601 through 607 of ERISA, except where a failure to comply, singly
or in the aggregate, would not have a material adverse effect on the Company
or its Subsidiaries.
3.20.10. Filed Returns and Reports. Except as set forth in
Section 3.20.10 of the Disclosure Schedule, the Company and the Subsidiaries
have (i) filed or caused to be filed all returns and reports on Plans in which
employees of the Company or Subsidiaries participate that they are required to
file and (ii) paid or made adequate provision for all fees, interest, penalties,
assessments or deficiencies that have become due pursuant to those returns or
reports or pursuant to any assessment or adjustment that has been made relating
to those returns or reports. All other fees, interest, penalties and assessments
that are payable by or for the Company or any Subsidiary have been timely
reported, fully paid and discharged. There are no unpaid fees, penalties,
interest or assessments due from the Company or any subsidiary or from any other
person that are or could become a lien on any Asset of the Company or any
Subsidiary or could otherwise adversely affect the businesses or Assets of the
Company or any Subsidiary.
3.21. Environmental
(a) To the Company's knowledge, the Company and each
Subsidiary and Medical Group are in compliance with, have been in compliance
with, and have no material liability under, the Environmental Laws.
(b) To the Company's knowledge, the Real Property currently
operated by the Company and each Subsidiary and Medical Group does not contain,
and during the period of any ownership, tenancy or operation, no Real Property
formerly owned or operated contained, any underground improvements used
currently or in the past for the management of Hazardous Materials, and no
portion of any currently leased or operated property is or has been used as a
dump or landfill or consists of filled in land, except where the existence
thereof could not have a material adverse effect on the Company, its
Subsidiaries and the Medical Groups, taken as a whole. Except as disclosed in
Section 3.21(b) of the Disclosure Schedule, neither PCBs nor asbestos-containing
materials (that would be material to the Company) are present on or in any Real
Property currently operated by the Company, its Subsidiaries or the Medical
Groups.
(c) Neither the Company, its Subsidiaries nor the Medical
Groups, nor any officer, director or stockholder thereof has directly or
indirectly received any Claim or knows or suspects any fact(s) which might
reasonably form the basis
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for any Claim arising out of or attributable to: (i) the current or past
presence, release, or threatened release of Hazardous Materials at or from any
part of the Real Property; (ii) the off-site disposal or treatment of Hazardous
Materials originating on or from the Real Property or the businesses or Assets
of the Company or any Subsidiary; or (iii) any violation of Environmental Laws
at any part of the Real Property or otherwise arising from the Company's, any
Subsidiary's or any Medical Group's activities (or the activities of the
Company's, any Subsidiary's or any Medical Group's predecessors in title)
involving Hazardous Materials.
3.22. Transactions with Related Parties
Except as contemplated by this Purchase Agreement or set forth
in Section 3.22 of the Disclosure Schedule, neither any present or former
officer, director or stockholder of the Company or any Subsidiary, nor any
Affiliate of such officer, director or stockholder, is currently a party to any
transaction with the Company or any Subsidiary, including, without limitation,
any Agreement providing for the employment of, Furnishing of Services by, rental
of Assets from or to, or otherwise requiring payments to, any such officer,
director, stockholder or Affiliate, other than transactions in the Ordinary
Course of Business with the Company.
3.23. Restrictions and Consents
There are no Agreements, Laws or other restrictions of any
kind to which the Company, any Subsidiary or any Medical Group (or any asset
thereof) is party or subject that would prevent or restrict the execution,
delivery or performance of this Purchase Agreement or result in any penalty,
forfeiture, Agreement termination, or restriction on business operations of the
Investor, the Company, any Subsidiary or any Medical Group as a result of the
execution, delivery or performance of this Purchase Agreement. Section 3.23 of
the Disclosure Schedule lists all such Agreements and Laws that reasonably could
be interpreted or expected to require the consent or acquiescence of any person
or entity not party to this Purchase Agreement with respect to any aspect of the
execution, delivery or performance of this Purchase Agreement by the Company,
any Subsidiary or any Medical Group.
3.24. Authorization
The execution, delivery and performance by the Company of this
Purchase Agreement and all other Documents contemplated hereby, the fulfillment
of and compliance with the respective terms and provisions hereof and thereof,
and the consummation by the Company of the transactions contemplated hereby and
thereby, do not and will not: (a) require any consent or approval of the
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stockholders of the Company that has not been obtained; (b) conflict with, or
violate any provision of, any Law having applicability to the Company, any
Subsidiary or any Medical Group or any of their respective Assets, or any
provision of the certificate or articles of organization or bylaws or equivalent
constituent document of the Company, any Subsidiary or any Medical Group; (c)
conflict with, or result in any breach of, or constitute a default under any
Agreement to which the Company, any Subsidiary or any Medical Group is a party
or by which it or any of its Assets may be bound; or (d) result in or require
the creation or imposition of or result in the acceleration of any indebtedness,
or of a material Encumbrance, or with respect to, the Company, any Subsidiary or
any Medical Group or any of the Assets now owned or hereafter acquired by the
Company, any Subsidiary or any Medical Group.
3.25. Absence of Violations
Neither the Company, any Subsidiary nor any Medical Group is
in violation of or default under, nor has it breached, any term or provision of
its certificate or articles of organization or bylaws or any material Agreement
or restriction to which the Company, any Subsidiary or any Medical Group is a
party or by which the Company or any Subsidiary or any Material Asset thereof is
bound or affected.
3.26. Regulatory Matters
The Company and the Subsidiaries and, to the Company's
knowledge, the Medical Groups and the physicians employed by the Medical Groups
have not knowingly or willfully failed to comply with the regulatory matters
described in this Section 3.26.
3.26.1. General Compliance with Law. The Company, the
Subsidiaries and, to the Company's knowledge, the Medical Groups have complied
and are in full compliance with all Laws except where a failure to comply,
singly or in the aggregate, would not have a material adverse effect on the
Company, the Subsidiaries and the Medical Groups, taken as a whole.
3.26.2. Licenses and Permits. The Company, the Subsidiaries,
the Medical Groups and each of the physicians employed by such Persons have all
licenses, permits, certificates of authority, franchises, approvals,
authorizations, consents or orders of, or filings with ("Permits") any federal,
state, local, foreign or other governmental agency, instrumentality, commission,
authority, board or any other Person, necessary to conduct their business as now
being conducted except where the failure to have any such Permit does not have a
material adverse effect on the Company, the Subsidiaries and the Medical Groups,
taken as a whole. All Permits of the Company and the Subsidiaries and, to the
Company's
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knowledge, the Medical Groups and each of the physicians employed by such
Medical Groups are valid and in full force and effect except where the failure
to have any such Permit does not have a material adverse effect on the Company,
the Subsidiaries and the Medical Groups, taken as a whole. No notice to,
declaration, filing or registration with, or Permit or consent from, any
governmental or regulatory body or authority, or any other Person or entity, is
required to be made or obtained by the Company or any of the Subsidiaries or
Medical Groups in connection with the execution, delivery or performance of this
Purchase Agreement and the consummation of the transactions contemplated hereby.
Notwithstanding the foregoing, the Company is not required to obtain any Permit
to do business as a health maintenance organization, insurance company, or other
risk-bearing health care entity under the Laws and regulations of Maryland or
the Laws and regulations of any other jurisdiction in which the Company, the
Subsidiaries or the Medical Groups do business.
3.26.3. Fraud and Abuse Matters. To the Company's knowledge,
the Company, the Medical Groups, and all persons and entities providing services
for the Company or the Medical Groups, have not engaged in any activities which
are prohibited or could form the basis for criminal penalties, civil monetary
penalties or a mandatory or permissive exclusion from the Medicare, Medicaid or
other federal and state health care programs under ss. ss. 1320a-7, 1320a-7a,
1320a-7b, or 1395nn of Title 42 of the United States Code, the federal CHAMPUS
statute, or any regulations promulgated thereunder, or similar or related
federal, state and local statutes, common law or regulations. Without in any way
limiting the foregoing, the Company, the Medical Groups, and, to the knowledge
of the Company, all persons and entities providing services for the Company or
the Medical Groups have not engaged in any of the following activities:
(i) knowingly and willingly made or caused to be
made any false statement or representation of a material fact
in any application for any benefit or payment;
(ii) knowingly and willingly made or caused to be
made any false statement or representation of a material fact
for use in determining rights to any benefit or payment;
(iii) presenting or causing to be presented a claim for
reimbursement under CHAMPUS, Medicare, Medicaid, or other
state healthcare program that is for an item or service that
the person presenting or causing to be presented knows or
should know was not provided as claimed, or presenting a claim
that the person presenting knows or should know is false or
fraudulent;
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(iv) having knowledge of the occurrence of any event affecting
(a) his/her initial or continued right to any benefit or
payment or (b) the initial or continued right to any benefit
or payment of any other individual in whose behalf he/she has
applied for or is receiving such benefit or payment, conceals
or fails to disclose such event with an intent fraudulently to
secure such benefit or payment either in a greater amount or
quantity that is due or when no such benefit or payment is
authorized;
(v) offering, paying, soliciting or receiving any remuneration
(including any kickback, bribe, or rebate), directly or
indirectly, overtly or covertly, in cash or in kind (a) in
return for referring, or to induce the referral of, an
individual to a person for the furnishing or arranging for the
furnishing of any item or service for which payment may be
made in whole or in part by CHAMPUS, Medicare or Medicaid, or
other state health care program, or (b) in return for, or to
induce, the purchase, lease, or order of, or arranging for or
recommending the purchase, lease, or order of, any good,
facility, service, or item for which payment may be made in
whole or in part by CHAMPUS, Medicare or Medicaid, or other
state health care program;
(vi) making or causing to be made or inducing or seeking to
induce the making of any false statement or representation (or
omitting to state a fact required to be stated therein or
necessary to make the statements contained therein not
misleading) of a material fact with respect to (a) the
conditions or operations of a facility in order that the
facility may qualify for CHAMPUS, Medicare, Medicaid or other
state health care program certification, or (b) information
required to be provided under ss. 1124A of the Social Security
Act (42 U.S.C. ss. 1320a-3);
(vii) submitting or causing to be submitted bills or requests
for payment under Medicare, Medicaid or other state health
care program containing charges substantially in excess of
usual charges; or
(viii) furnishing or causing to be furnished items or services
to patients substantially in excess of the needs of such
patients.
3.26.4. Health Care Entity. The Company is not a "health
care entity" which provides "designated health services" for purposes of federal
Medicare/Medicaid physician self-referral and anti-kickback laws and regulations
and similar Maryland Laws and regulations.
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3.26.5. Hart-Scott-Rodino. No filings under Hart-Scott-
Rodino are required in connection with the Closing or any Advance.
3.27. Certain Future Relationships
Subject to compliance with applicable Law, neither the Company
nor any Medical Group is subject to or bound by any agreement, commitment or
obligation that would prohibit, or be violated by, any agreement or arrangement
with GHV or its Affiliates on commercially reasonable terms for the provision of
health care services and supplies of the type provided by GHV and its
Affiliates, including, without limitation, long-term care, pharmacy services,
durable medical equipment and home health care ("GHV Services").
3.28. SEC Registration
The Company has filed with the Securities and Exchange
Commission a registration statement on Form S-1 with respect to the Class B
Common Stock and options to purchase Class B Common Stock (the "Registration
Statement") and the Registration Statement has been declared effective by the
Securities and Exchange Commission. A copy of Registration Statement and all
amendments thereto has been delivered to the Investor.
3.29. Binding Obligation
This Purchase Agreement constitutes a valid and binding
obligation of the Company, enforceable in accordance with its terms; and each
Document to be executed by the Company pursuant hereto, when executed and
delivered in accordance with the provisions hereof, shall be a valid and binding
obligation of the Company, enforceable in accordance with its terms.
3.30. Status of Shares
The shares of Series C Preferred issuable to the Investor upon
conversion of the Note, as provided therein and in Section 2.5, or in payment of
interest at the Maturity Date as provided in Section 2.3, will be duly
authorized by all necessary corporate action on the part of the Company, and
such shares, upon such conversion or the Maturity Date, as the case may be, will
be validly issued, fully paid and nonassessable. The shares of Class C Common
Stock issuable upon conversion of the Series C Preferred have been duly
authorized by all necessary corporate action on the part of the Company and such
shares of Class C Common Stock have been validly reserved for issuance, and upon
issuance upon such conversion will be validly issued and outstanding, fully paid
and nonassessable.
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3.31. Offering of Shares
Neither the Company nor any Person acting on its behalf has
offered the Series C Preferred or any similar securities of the Company for sale
to, solicited any offers to buy the Series C Preferred or any similar securities
of the Company from or otherwise approached or negotiated with respect to the
Company with any Person other than the Investor and a limited number of other
"Accredited Investors" (as defined in Rule 501(a) under the Securities Act).
Neither the Company nor any other Person acting on its behalf has taken or will
take any action prior to conversion of the Note or the Maturity Date (including,
without limitation, any offering of any securities of the Company under
circumstances which would require the integration of such offering with the
offering of the Series C Preferred under the Securities Act and the rules and
regulations of the Commission thereunder) which might subject the offering,
issuance and sale of the Series C Preferred to the registration requirements of
Section 5 of the Securities Act.
3.32. Disclosure
No representation or warranty by the Company in this Purchase
Agreement, and no Document delivered or to be delivered to, or made available
for inspection by, the Investor pursuant to this Purchase Agreement, or in
connection herewith or with the transactions contemplated hereby, contains or
will contain any untrue or misleading statement of material fact or omits or
will omit any fact necessary to make the statements of material fact contained
herein or therein, in light of the circumstances under which made, not
misleading.
4. REPRESENTATIONS AND WARRANTIES OF THE INVESTOR
The Investor hereby represents and warrants to the Company as
follows:
4.1. Organization and Standing
The Investor is a corporation duly organized, validly existing
and in good standing under the laws of the State of Delaware and has the full
and unrestricted corporate power and authority to carry on its business as
currently conducted, to enter into this Purchase Agreement and to carry out the
transactions contemplated hereby.
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4.2. Authorization
The execution, delivery and performance by the Investor of
this Purchase Agreement and all other Documents contemplated hereby, the
fulfillment of and the compliance with the respective terms and provisions
hereof and thereof, and the consummation by the Investor of the transactions
contemplated hereby and thereby have been duly authorized, (which authorization
has not been modified or rescinded and is in full force and effect), and will
not: (a) conflict with, or violate any provision of, any term or provision of
the certificate of incorporation or bylaws of the Investor or (b) conflict with,
or result in any breach of, or constitute a default under, any Agreement to
which the Investor is a party or by which the Investor is bound. No other
corporate action is necessary for the Investor to enter into this Purchase
Agreement and all other Documents contemplated hereby and to consummate the
transactions contemplated hereby and thereby.
4.3. Binding Obligation
This Purchase Agreement constitutes a valid and binding
obligation of the Investor, enforceable in accordance with its terms. Each
Document to be executed by the Investor pursuant hereto, when executed and
delivered in accordance with the provisions hereof, shall be a valid and binding
obligation of the Investor, enforceable in accordance with its terms.
4.4. Hart-Scott-Rodino
No filings under Hart-Scott-Rodino are required in connection
with the Closing or any Advance; provided, that no representation is made as to
whether a Hart-Scott-Rodino filing will be required upon conversion of the Note.
4.5. Certain Future Relationships
Subject to compliance with applicable Law, neither the
Investor nor GHV is subject to or bound by any agreement, commitment or
obligation that would prohibit, or be violated by, any agreement or arrangement
with the Company or any of the Subsidiaries or the Medical Groups on
commercially reasonable terms for the provision of GHV Services.
5. RESTRICTED SECURITIES
The Investor hereby represents, warrants and covenants as
follows:
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5.1. No Registration Under the Securities Act
The Investor understands that the Note to be purchased by it
under this Purchase Agreement has not been registered under the Securities Act,
is issued in reliance upon exemptions contained in the Securities Act or
interpretations thereof (including Section 4(2) of the Securities Act) and the
securities laws of the Commonwealth of Pennsylvania, and cannot be offered for
sale, sold or otherwise transferred unless the Note being acquired hereunder
subsequently is so registered or qualifies for exemption from registration under
the Securities Act.
5.2. Acquisition for Investment
The Note is being acquired under this Purchase Agreement by
the Investor in good faith solely for its own account, for investment and not
with a view toward resale or other distribution within the meaning of the
Securities Act. The Note will not be offered for sale, sold or otherwise
transferred by the Investor without either registration or exemption from
registration under the Securities Act.
5.3. Evaluation of Merits and Risks of Investment
The Investor has such knowledge and experience in financial
and business matters that it is capable of evaluating the merits and risks of
its investment in the Note being acquired hereunder. The Investor is an
"accredited investor" within the meaning of one or more paragraphs (1), (2), (3)
or (8) of Rule 501(a) under the Securities Act. The Investor understands and is
able to bear any economic risks associated with such investment (including,
without limitation, the necessity of holding such Note for an indefinite period
of time, inasmuch as such Note has not been registered under the Securities
Act).
6. ADDITIONAL COVENANTS OF THE COMPANY
Without limiting any other covenants and agreements contained
herein but not intending to duplicate covenants contained in the Stock Purchase
Agreement, during the term of this Purchase Agreement and, until all principal
and accrued interest under the Note and all obligations required to be performed
under this Purchase Agreement have been paid and performed in full, or until the
entire Outstanding Principal Amount has been converted as provided in Section
2.5 and the Investor's obligation to make Future Advances has terminated or
expired, the Company covenants and agrees as follows:
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6.1. Reports
The Company shall, in addition to reports customarily prepared
for the Board of Directors, deliver to the Investor and GHV copies of all
reports required to be filed pursuant to the federal securities laws.
6.2. Certain Future Relationships
(a) Each of the Company, the Subsidiaries and the Medical
Groups shall:
(i) use its good faith best efforts to notify GHV
reasonably in advance of any agreement or arrangement that it
has decided to enter into for the provision of GHV Services;
(ii) use all good faith best efforts to keep GHV
informed of all material discussions of a substantive nature
that it may have regarding the provision of GHV Services;
(iii) provide GHV and its Affiliates with all
information that may reasonably be required to enable the
Investor and its Affiliates an opportunity to make a proposal
to provide GHV Services to the Company, the Subsidiaries or
the Medical Groups on commercially reasonable terms;
(iv) provide GHV with an opportunity to secure
contracts for the provision of GHV Services that were
previously granted to others, all on commercially reasonable
terms; and
(v) cooperate in any creative proposals that GHV
or its Affiliates may make regarding pricing or service
alternatives.
(b) To better implement and effectuate the foregoing, GHV and
the Company each agree to designate one or more persons to serve as part of a
joint working group, which group will be charged with investigating, on an
ongoing and regular basis, innovative and cost-effective contracting
opportunities between and among the Company, GHV and their respective
Affiliates, and reporting the results of such activities to the senior
management of GHV and the Company.
(c) Nothing contained in this Section 6.3 shall obligate the
Company or GHV to utilize or purchase the products or services of each other and
should not be interpreted as an agreement that such purchases will not from time
to time be made from third parties.
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(d) The Company will not after the Closing enter into any
exclusive arrangements with third parties that preclude GHV and its Affiliates
from providing goods or services to the Company and its Affiliates, unless (1)
such arrangements are at such time or times also offered to, or otherwise made
available to, GHV, and (2) the price and other terms of such arrangements
constitute arms-length fair market terms that do not take into account other
arrangements that may have been offered or promised by such third party in order
to obtain such commitments, including, but not limited to, investments in the
Company.
(e) The Company and GHV agree that the provisions of this
Section 6.3 have been developed in order to assist the parties in providing
efficient and cost-effective medical care, across the entire continuum of care,
to patients served by the Company's integrated health care delivery system.
6.3. Actions Prompting Redemptions
(a) Prior to the Maturity Date, without the approval of
the Investor, the Company shall not:
(i) redeem any shares of the Company's Series A
Preferred Stock or Series B Preferred Stock pursuant to
Sections B.3(c) or C.3(c) of the Restated Charter;
(ii) take any of the actions set forth in Section
B.1.(e)(i) of the Restated Charter without the requisite
approval of the holders of the Series A Preferred Stock
pursuant to the Restated Charter, unless the Company
determines in good faith that such action is in the best
interests of the Company and all of its stockholders and is
not designed to primarily benefit holders of the Series A
Preferred Stock;
(iii) take any of the actions set forth in Section
C.1.(e)(i) of the Restated Charter without the requisite
approval of the holders of the Series B Preferred Stock
pursuant to the Restated Charter, unless the Company
determines in good faith that such action is in the best
interests of the Company and all of its stockholders and is
not designed to primarily benefit holders of the Series B
Preferred Stock; or
(iv) engage in practices that violate the Ethical and
Religious Directives for Catholic Health Care Services, unless
the Company determines in good faith that such action is in
the best interests of
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the Company and all of its stockholders and is not designed
to primarily benefit holders of the Series A Preferred Stock.
(b) If the Company elects to take any of the actions set forth
in Section 6.4(a)(ii) or 6.4(a)(iii) (other than an issuance of Series A Adverse
Junior Stock or Series B Adverse Junior Stock (as such terms are defined in the
Restated Charter)), the Company shall provide to the Investor no later than
sixty (60) days prior to the date such action is to be effective (1) written
notice to that effect and (2) a certificate from the Company's president and
chief executive officer certifying that the Company has determined in good faith
that such action is in the best interests of the Company and all of its
stockholders and is not designed to primarily benefit holders of Series A
Preferred Stock or Series B Preferred Stock, as the case may be.
(c) If the Company elects to issue Series A Adverse Junior
Stock or Series B Adverse Junior Stock, the Company shall provide to the
Investor no later than thirty (30) days prior to the date such issuance is to be
consummated (1) written notice to that effect, and (2) a certificate from the
Company's president and chief executive officer certifying that the Company has
determined in good faith that such issuance is in the best interests of the
Company and all of its stockholders and is not designed to primarily benefit
holders of Series A Preferred Stock or Series B Preferred Stock, as the case may
be.
(d) If the Company engages in practices that violate the
Ethical and Religious Directives for Catholic Health Care Services, the Company
shall provide to the Investor no later than thirty (30) days prior to the date
of the consummation of a redemption resulting from such practices (1) written
notice that the Company has engaged in such practices and, consequently, shares
of Series A Preferred Stock are being redeemed, and (2) a certificate from the
Company's president and chief executive officer certifying that the Company has
determined in good faith that such action is in the best interests of the
Company and all of its stockholders and is not designed to primarily benefit
holders of Series A Preferred Stock.
(e) Within ten (10) days after the Investor receives a written
notice pursuant to Section 6.4(b), (c) or (d), the Investor may require
arbitration under the expedited procedures set forth herein of whether the
action described in the notice is in the best interests of the Company and all
of its stockholders and whether such action is designed to primarily benefit
holders of Series A Preferred Stock or Series B Preferred Stock, as the case may
be. Such arbitration shall be conducted by three arbitrators, two of whom shall
be selected by the parties (the "Party Designated Arbitrators") and the third of
whom shall be a "Neutral Arbitrator" selected the Party Designated Arbitrators.
The Party Designated
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Arbitrators shall agree upon and appoint a Neutral Arbitrator, who shall be
an attorney experienced in the commercial financing transactions. The
arbitration shall be concluded within thirty (30) days of the date of the
Company's notice. The determination of the arbitrators so appointed shall be
final and conclusive upon the parties and the Company hereby agrees not to take
the action which is the subject of the arbitration if it is determined that
such action is not in the best interests of the Company and all of its
stockholders or such action is designed to primarily benefit holders of Series A
Preferred Stock or Series B Preferred Stock, as the case may be.
6.4. Use of Proceeds
The Company may use the proceeds of the Advances only
for the purposes of funding working capital needs, operating losses, debt
retirement, and acquisitions of physician practices, all as reflected in a
budget approved by the Company's Board of Directors or as otherwise approved
by the Company's Board of Directors. Without the approval of the Investor, the
Company shall not use the proceeds of any Advance (i) to redeem the Company's
Series A Preferred Stock, Series B Preferred Stock or any securities of the
Company with dividend, redemption or liquidation rights senior to the
dividend, redemption or liquidation rights of the Series C Preferred Stock or
(ii) to pay any dividends or interest thereon.
6.5. Acquisition of Specialist Groups
Prior to the Maturity Date, the Company shall not acquire or
affiliate with any specialist physician group practice other than Baltimore
Heart Associates (with whom the Company has entered into an affiliation
agreement which contemplates cash payments not to exceed $70,000 in the
aggregate) in a transaction that requires the Company to pay more than $10,000
per physician of the purchase price (or similar consideration) in cash without
GHV's prior written approval (which will not be unreasonably withheld).
6.6. No Material Change to Business Plan
Prior to the Maturity Date, the Company shall not make any
material change to its business plan or the Operating Plan without GHV's prior
written approval (which approval will not be unreasonably withheld).
6.7. Reservation of Shares
The Company shall at all times reserve and keep available for
issuance a number of its authorized but unissued shares of Series C Preferred
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sufficient to permit the Investor to exercise in full its conversion rights
under Section 2.5.
7. CONDITIONS PRECEDENT TO THE COMPANY'S OBLIGATIONS AT THE CLOSING
The obligations of the Company under this Purchase Agreement
are subject to the fulfillment, at or prior to the Closing Date, of each of the
following conditions, and failure to satisfy any such condition shall excuse and
discharge all obligations of the Company to carry out the provisions of this
Purchase Agreement, unless such failure is agreed to in writing by the Company:
7.1. Representations and Warranties
The representations and warranties made by the Investor in
this Purchase Agreement or in any Document delivered by the Investor pursuant to
this Purchase Agreement shall be true and complete in all material respects when
made and on and as of the Closing Date as though such representations and
warranties were made on and as of such date, except for any changes expressly
permitted by this Purchase Agreement.
7.2. Performance
The Investor shall have performed and complied with all
Agreements and conditions required by this Purchase Agreement to be performed or
complied with by prior to the Closing Date.
7.3. Legal Proceedings
No action or proceeding by or before any governmental
authority shall have been instituted or threatened (and not subsequently
dismissed, settled or otherwise terminated) which is reasonably expected to
restrain, prohibit or invalidate the transactions contemplated by this Purchase
Agreement, other than an action or proceeding instituted or threatened by the
Company.
7.4. Option Agreement
The Option Agreement substantially in the form of Exhibit D
attached hereto shall have been executed and delivered by GHV.
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7.5. Amended and Restated Stockholders Agreement
The Amended and Restated Stockholders Agreement substantially
in the form of Exhibit E attached hereto shall have been executed and delivered
by the parties (other than the Company and the Company's executive officers who
are stockholders of the Company) thereto.
7.6. Amended and Restated Registration Rights Agreement
The Amended and Restated Registration Rights Agreement
substantially in the form of Exhibit F attached hereto shall have been executed
and delivered by GHV.
7.7. Documents at Closing
All documents required to be furnished by the Investor to the
Company prior to or at the Closing shall have been so furnished.
8. CONDITIONS PRECEDENT TO THE INVESTOR'S OBLIGATIONS AT THE CLOSING
The obligations of the Investor to purchase the Note and to
make the Initial Advance at the Closing under this Purchase Agreement are
subject to the fulfillment, at or prior to the Closing, of each of the following
conditions, and failure to satisfy any such condition shall excuse and discharge
all obligations of the Investor to carry out the provisions of this Purchase
Agreement related to the Closing, unless such failure is agreed to in writing by
the Investor:
8.1. Representations and Warranties
The representations and warranties made by the Company in this
Purchase Agreement and the statements contained in the Disclosure Schedule and
Exhibits attached hereto or in any Document delivered by the Company pursuant to
this Purchase Agreement (the "Disclosure Materials") shall be true and complete
in all material respects when made, and on and as of the Closing Date as though
such representations and warranties were made on and as of such date, except for
any changes occurring in the Ordinary Course of Business disclosed to and
approved by the Investor and as otherwise expressly permitted by this Purchase
Agreement.
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8.2. Performance
The Company shall have performed and complied with all
Agreements and conditions required by this Purchase Agreement to be performed or
complied with prior to the Closing Date.
8.3. Absence of Adverse Changes
There shall have been no adverse changes since the date of
this Purchase Agreement material to the Company, its Subsidiaries and the
Medical Groups, taken as a whole, in the business, operations, condition
(financial or otherwise), Assets, liabilities or prospects of the Company
(regardless of whether or not such events or changes are inconsistent with the
representations and warranties given herein by the Company).
8.4. Legal Proceedings
No action or proceeding by or before any governmental
authority shall have been instituted or threatened (and not subsequently
settled, dismissed or otherwise terminated) which is reasonably expected to
restrain, prohibit or invalidate the transactions contemplated by this Purchase
Agreement other than an action or proceeding instituted or threatened by the
Investor.
8.5. Officer's Certificate
The Company shall have delivered to the Investor a
certificate, dated as of the Closing Date, and executed by the Company's
President, in his capacity as such, certifying to the fulfillment of the
conditions specified in Sections 8.1 through 8.4.
8.6. Opinion of Counsel
The Investor shall have received an opinion of the director of
legal affairs of the Company, dated as of the Closing Date, to the effect and
substantially in the form of Exhibit G.
8.7. Restated Articles
The articles of amendment and restatement of the Company's
articles of incorporation in the form attached hereto as Exhibit H (the
"Restated Articles") shall have received all necessary corporate authorizations,
shall have been filed as necessary under the laws of the State of Maryland, and
shall be effective. The Investor shall have received (a) a certified copy of
resolutions of the
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Board of Directors of the Company duly authorizing and adopting the Restated
Articles, and (b) a copy of the Restated Articles, certified by the State
Department of Assessments and Taxation of the State of Maryland.
8.8. Option Agreement
The Option Agreement substantially in the form of Exhibit D
attached hereto shall have been executed and delivered by the Company.
8.9. Amended and Restated Stockholders Agreement
The Amended and Restated Stockholders Agreement substantially
in the form of Exhibit E attached hereto shall have been executed and delivered
by the parties (other than the Investor) thereto.
8.10. Amended and Restated Registration Rights Agreement
The Amended and Restated Registration Rights Agreement
substantially in the form of Exhibit F attached hereto shall have been executed
and delivered by the Company.
8.11. Submission of Advance Request
The Company shall have delivered to the Investor an Advance
Request in substantially the form attached hereto as Exhibit C which contains a
cash flow needs forecast for the 60 days following the Closing Date that is
acceptable to the Investor in its discretion.
8.12. Documents at Closing
All documents required to be delivered by the Company to the
Investor prior to or at the Closing shall have been so delivered.
8.13. Consents
(a) The Investor shall have received all consents,
authorizations and approvals of governmental and supragovernmental parties which
are required to be obtained in order to consummate the transactions contemplated
hereby.
(b) The Company shall have received on or prior to the Closing
Date all consents, authorizations and approvals of governmental,
supragovernmental and private parties which are required to be obtained in order
to consummate the transactions contemplated hereby, including, without
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limitation, the consents of all parties to Agreements listed on Sections 3.16(a)
and 3.16(b) of the Disclosure Schedule, and which terminate under their
respective terms as a result of the transactions contemplated hereby, and the
Company shall have delivered to the Investor a certificate, dated as of the
Closing Date and executed by the Company's President, in his capacity as such,
certifying to the fulfillment of the conditions specified in this Section
8.13(b).
9. CONDITIONS PRECEDENT TO THE INVESTOR'S OBLIGATIONS
TO MAKE EACH FUTURE ADVANCE
The obligations of the Investor to make each Future Advance
under this Purchase Agreement are subject to the fulfillment, at or prior to the
date of such Future Advance (in each case, an "Advance Date"), of each of the
following conditions, and failure to satisfy any such condition shall excuse and
discharge all obligations of the Investor to carry out the provisions of this
Purchase Agreement related to such Future Advance, unless such failure is agreed
to in writing by the Investor:
9.1. Absence of Violations
The Company shall not be in violation of or default under, and
it shall not have breached, any term or provision of its articles of
incorporation or bylaws, the Loan Agreement dated as of December 1, 1995 between
the Company and NationsBank, N.A., or under any successor credit facility,
including, without limitation, the facility currently being negotiated with
First National Bank of Maryland, N.A.
9.2. Performance
The Company shall have performed and complied with those
provisions of Section 6 of this Purchase Agreement required to be performed or
complied with prior to the Advance Date.
9.3. Legal Proceedings
No action or proceeding by or before any governmental
authority shall have been instituted or threatened (and not subsequently
settled, dismissed or otherwise terminated) which is reasonably expected to
restrain, prohibit or invalidate the transactions contemplated by this Purchase
Agreement other than an action or proceeding instituted or threatened by the
Investor.
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9.4. Submission of Advance Request
The Company shall have submitted to the Investor, no later
than two business days prior to the proposed Advance Date, an Advance Request in
substantially the form attached hereto as Exhibit C which contains a cash
requirements forecast that is approved by the Investor (which approval will not
be unreasonably withheld if the cash requirements forecast is consistent with
the Company's approved Business Plan).
9.5. Officer's Certificate
The Company shall have delivered to the Investor a
certificate, dated as of the Advance Date and executed by the Company's
President, in his capacity as such, certifying to the fulfillment of the
conditions specified in Sections 8.1 through 9.3.
10. EVENTS OF DEFAULT; REMEDIES
10.1. Events of Default
The occurrence of any one or more of the following events
shall constitute an "Event of Default" hereunder (and the occurrence of any one
or more of the following shall constitute a "Default," whether or not any
requirement for the giving of notice, the lapse of time, or both, or any other
condition, has been satisfied):
(a) The Company shall fail to pay, when due, any principal,
interest or any other amount payable hereunder, under the Note, the Security
Agreement or under the Assignment (whether upon the Maturity Date thereof, upon
acceleration or otherwise).
(b) The Company shall breach or fail to perform any covenant
or agreement contained in this Purchase Agreement and, except in the case of
failure to comply with Section 6 (which shall constitute an Event of Default
immediately upon the occurrence thereof), such failure shall continue unremedied
for fifteen (15) calendar days after notice thereof from the Investor to the
Company.
(c) Any representation or warranty made by the Company in
Sections 3.1, 3.3, 3.4, 3.6, 3.7, 3.10, 3.12, 3.14, 3.27, 3.28 or 3.32 herein,
in the Security Agreement or in the Assignment shall prove to have been
incorrect in any material respect when made.
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(d) The occurrence of any event of default under the Security
Agreement or the Assignment, any breach or default under the Senior Debt, or any
default permitting acceleration of indebtedness of the Company in the amount of
$1,000,000 or more.
(e) The commencement by the Company of (i) any case,
proceeding or other action (x) under any existing or future law of insolvency,
reorganization or relief of debtors generally or of any type of debtor seeking
to have an order for relief entered with respect to it, or seeking to adjudicate
it a bankrupt or insolvent, or seeking reorganization, arrangement, adjustment,
winding-up, liquidation, dissolution, composition or other relief with respect
to it or its debts, or (y) seeking appointment of a receiver, trustee, custodian
or other similar official for it or for all or any substantial part of its
assets; or (ii) the Company making a general assignment for the benefit of its
creditors; or (iii) the commencement against the Company of any case, proceeding
or other action of a nature referred to in clause (i) above which (x) results in
the entry of an order for relief or any such adjudication or appointment or (y)
remains undismissed, undischarged or unbonded for a period of 60 days; or (iv)
the commencement against the Company of any case, proceeding or other action
seeking issuance of a warrant of attachment, execution, distraint or similar
process against all or any substantial part of its assets which results in the
entry of an order for any such relief which shall not have been vacated,
discharged, or stayed or bonded pending appeal within 60 days after the entry
thereof; or (v) the Company taking any action in furtherance of, or indicating
its consent to, approval of, or acquiescence in any of the acts set forth in
clause (i), (ii) (iii) or (iv) above.
(f) Judgments, writs or warrants of attachment or orders for
the payment of money, singly or in the aggregate, in excess of $1,000,000 shall
be rendered against the Company, and such judgments, writs or warrants of
attachment or orders shall continue unsatisfied and unstayed for a period of
thirty (30) days.
(g) Any security interest or lien granted herein or to be
granted hereunder in the Security Agreement and/or the Assignment shall for any
reason cease to be a valid and perfected security interest or lien, subject only
to the Senior Debt.
10.2. Remedies
Upon the occurrence of any Event of Default, and in every such
event, the Investor may, at its option, declare the Note to be, and the Note
shall thereupon become, immediately due and payable without presentment, demand,
protest or other notice of any kind, all of which are hereby waived by the
Company, and exercise all of the rights, powers and remedies available under
this
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Purchase Agreement, the Note, the Security Agreement and the Assignment, at law
or in equity.
11. THE CLOSING
11.1. Closing
Subject to the terms and conditions of this Purchase
Agreement, the Closing shall take place at 10:00 a.m. in Baltimore, Maryland
time on January 30, 1997 at the offices of Doctors Health System, Inc., 10451
Mill Run Circle, 10th Floor, Owings Mills, Maryland 21117, or at such other time
as the parties may agree to in writing (the "Closing Date").
11.2. Deliveries by the Company to the Investor
At the Closing, the Company shall deliver to the Investor the
following:
(a) the original Note executed by the Company;
(b) executed copies of the Option Agreement, the Amended
and Restated Stockholders Agreement, and the Amended and Restated Registration
Rights Agreement;
(c) a copy of the Restated Articles, as certified by the
Maryland State Department of Assessments and Taxation;
(d) a certified copy of the resolutions adopted by the Board
of Directors of the Company authorizing the transactions contemplated by this
Purchase Agreement or any written consent of all of the current members of the
Board of Directors of the Company (effective as of the Closing Date) required
for the consummation of the transactions contemplated herein;
(e) the certificates required by Section 8.5 and 8.13(b);
(f) an Advance Request for the Initial Advance;
(g) the opinion required by Section 8.6;
(h) certificates of incumbency and specimen signatures of
the signatory officers of the Company;
(i) good standing certificates as of a date not more than five
days prior to the Closing Date issued by the Secretary of State of the
respective states
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of incorporation of the Company and of each Subsidiary incorporated in the
United States, and of each state in which the Company is qualified to do
business;
(j) such other Documents as the Investor may reasonably
request.
11.3. Deliveries by the Investor to the Company
At the Closing, the Investor shall deliver the following:
(a) a wire transfer to the Company in the amount of the
Initial Advance;
(b) executed copies of the Option Agreement, the Amended
and Restated Stockholders Agreement, and the Amended and Restated Registration
Rights Agreement; and
(c) such other Documents as the Company may reasonably
request.
12. SURVIVAL OF REPRESENTATIONS AND COVENANTS; INDEMNIFICATION; REMEDIES;
TAX MATTERS
12.1. Survival of Representations and Covenants
All representations, warranties, covenants, indemnities and
other Agreements made by any party to this Purchase Agreement herein or pursuant
hereto shall also be deemed made on and as of the Closing Date as though such
representations, warranties, covenants, indemnities and other Agreements were
made on and as of such date. All representations and warranties of the Company
contained in Section 3 and of the Investor contained in Sections 4 and 5 shall
survive the Closing Date until 5 p.m. Baltimore, Maryland time on February 1,
2000. Except as otherwise set forth herein, the covenants, indemnities and other
agreements contained herein shall survive the Closing and any investigation,
audit or inspection at any time made by or on behalf of any party hereto.
12.2. Agreement of the Company to Indemnify
(a) Subject to the conditions and provisions of this Section
12, the Company hereby agrees to indemnify, defend and hold harmless the
Investor Indemnified Persons from and against and in respect of all Claims
asserted against, imposed upon or incurred by the Investor Indemnified Persons
(whether such Claims are by, against or relate to the Company, or any other
party, including, without limitation, a governmental entity), directly or
indirectly, by
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reason of or resulting from any misrepresentation or breach of any
representation or warranty, or noncompliance with conditions or other
Agreements, given or made by the Company in this Purchase Agreement or in the
Disclosure Schedule or Exhibits attached hereto or in any Document delivered by
or on behalf of any the Company pursuant to this Purchase Agreement.
(b) Except with respect to Claims based upon fraud by the
Company in connection with the representations, warranties or covenants of the
Company contained in this Purchase Agreement or any of the transactions
contemplated by this Purchase Agreement, or as otherwise provided in this
Purchase Agreement, the Company shall not be required to provide any
indemnification under the provisions of this Section 12.2 unless and until the
aggregate losses of the Investor Indemnified Persons exceed $100,000, whereupon
the Investor Indemnified Persons shall be entitled to indemnification for the
aggregate cumulative amount of losses in excess of such $100,000. In addition,
except with respect to Claims based upon fraud by the Company in connection with
the representations, warranties or covenants of the Company contained in this
Purchase Agreement or any of the transactions contemplated by this Purchase
Agreement, or as otherwise provided in this Purchase Agreement, the maximum
aggregate amount of indemnification which the Investor Indemnified Parties shall
be entitled to from the Company under this Section 12.2 shall be an amount equal
to the Purchase Price.
(c) Except for Claims of, or based upon, fraud by the Company
in connection with the representations, warranties or covenants of the Company
contained in this Purchase Agreement or any of the transactions contemplated by
this Purchase Agreement, this Section 12.2 and the related procedures contained
in Section 12.3 hereof shall provide the sole and exclusive remedy for any and
all losses with respect to any inaccuracy in or breach of the representations or
warranties or breach or nonperformance of any of the covenants or agreements
made by any party in or pursuant to this Purchase Agreement.
12.3. Conditions of Indemnification
The obligations and liabilities of the Company and the
Investor hereunder with respect to their respective indemnities pursuant to this
Section 12, resulting from any Claim shall be subject to the following terms and
conditions:
(a) The indemnified party shall give prompt written notice to
the indemnifying party of any Claim which is asserted against, resulting to,
imposed upon or incurred by such indemnified party and which may give rise to
liability of the indemnifying party pursuant to this Section 12 stating (to the
extent known or reasonably anticipated) the nature and basis of such Claim and
the amount thereof.
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(b) The indemnifying party shall engage counsel with respect
to any such Claim, such representation (including the compromise or settlement
of any Claim) to be undertaken on behalf of the indemnified party, and the
indemnified party shall have right to approve such counsel (such approval not to
be unreasonably withheld). In the event the indemnifying party elects not to
undertake such defense by its own counsel, the indemnifying party shall give
prompt written notice of such election to the indemnified party, and the
indemnified party will undertake the defense thereof by counsel or other
representatives designated by it, at the cost and expense of the indemnifying
party (such costs and expenses of such defense to be advanced by the
indemnifying party as incurred by the indemnified party).
(c) In the event that any Claim shall arise out of a
transaction or cover any period or periods wherein the Company, on the one hand,
and the Investor, on the other hand, shall each be liable hereunder for part of
the liability or obligation arising therefrom, then the parties shall, each
choosing its or his own counsel and bearing its or his own expense, defend such
Claim, and no settlement or compromise of such Claim may be made without the
joint consent or approval of each party (which consent shall not be unreasonably
withheld), except where the respective liabilities and obligations of the
parties are clearly allocable or attributable on the basis of objective facts.
(d) The amount which any indemnifying party is or may be
required to pay any indemnified party pursuant to this Section 12 shall be
measured taking into account (i) any income tax savings (and income tax cost
attributable to the indemnity payment) actually realized (or occurred) that
affect the overall economic impact of the losses to the indemnified party, and
(ii) any insurance proceeds actually realized and adverse insurance consequences
incurred (such as premium adjustments and other detriments) that affect the
overall economic impact of the losses to the indemnified party.
12.4. Specific Performance
In addition to any other remedies which the Investor may have
at law or in equity, the Company hereby acknowledge that the Company and the
Subsidiaries are unique, and that the harm to the Investor resulting from a
failure to close the transaction due to breaches by the Company of its
obligations cannot be adequately compensated by damages. Accordingly, the
Company agree that in the event of a failure to close the transaction as a
result of breaches by the Company, the Investor shall have the right to have all
obligations, undertakings, Agreements, covenants and other provisions of this
Purchase Agreement specifically performed by the Company, and that the Investor
shall have the right to obtain an order or decree of such specific performance
in any of the courts of the United States of America or of any state or other
political subdivision thereof.
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13. TERMINATION
13.1. Termination
This Purchase Agreement may be terminated at any time before
the Closing Date under any one or more of the following circumstances:
(a) by the mutual consent of the parties hereto; or
(b) by the Company or the Investor, by written notice of
termination to the other parties hereto, if the Closing has not occurred by
February 14, 1996.
Notwithstanding this Section 13.1, a party who is in breach of
any of its obligations or representations and warranties set forth in this
Purchase Agreement shall not have the right to terminate this Purchase
Agreement.
13.2. Effect of Termination
In the event of termination of this Purchase Agreement as
provided in Section 13.1, this Purchase Agreement shall forthwith become void
and have no effect, except that notwithstanding anything to the contrary
contained in this Purchase Agreement, no party shall be relieved or released
from any liabilities or damages arising out of its willful breach of any
provision of this Purchase Agreement or any intentional misrepresentation or
breach of warranty hereunder.
14. MISCELLANEOUS
14.1. Additional Actions and Documents
Each of the parties hereto hereby agrees to take or cause to
be taken such further actions, to execute, deliver and file or cause to be
executed, delivered and filed such further Documents, and will obtain such
consents, as may be necessary or as may be reasonably requested in order to
fully effectuate the purposes, terms and conditions of this Purchase Agreement.
14.2. No Brokers
Each of the parties hereto represents and warrants to the
other parties (and to each of them) that such party has not engaged any broker,
finder or agent in connection with the transactions contemplated by this
Purchase Agreement and has not incurred (and will not incur) any unpaid
liability to any broker, finder or agent for any brokerage fees, finders' fees
or commissions, with
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respect to the transactions contemplated by this Purchase Agreement. Each party
agrees to indemnify, defend and hold harmless each of the other parties from
and against any and all claims asserted against such parties for any such fees
or commissions by any persons purporting to act or to have acted for or on
behalf of the indemnifying party.
14.3. Expenses
Each of the parties hereto shall pay all expenses incurred by
such party incident to this Purchase Agreement and the transactions contemplated
hereunder, including all legal and accounting fees.
14.4. Assignment
The Investor and GHV shall have the right to assign their
respective rights and obligations under this Purchase Agreement, in whole or in
part, to an Affiliate wholly owned by GHV or to designate any of its Affiliates
(to the extent permitted by Law) to exercise any of the rights of the Investor
or GHV, as the case may be, or to perform any of their respective obligations.
The Company shall not assign its rights and obligations under this Purchase
Agreement, in whole or in part, whether by operation of law or otherwise,
without the prior written consent of the other parties hereto, and any such
assignment contrary to the terms hereof shall be null and void and of no force
and effect. In no event shall the assignment by the Company, the Investor or GHV
of their respective rights or obligations under this Purchase Agreement, whether
before or after the Closing, release the Company, the Investor or GHV from their
respective liabilities and obligations hereunder.
14.5. Entire Agreement; Amendment
This Purchase Agreement, including the Disclosure Schedule,
the Exhibits and other Documents referred to herein or delivered pursuant
hereto, constitutes the entire Agreement among the parties hereto with respect
to the transactions contemplated herein, and it supersedes all prior oral or
written Agreements, commitments or understandings with respect to the matters
provided for herein. No amendment, modification or discharge of this Purchase
Agreement shall be valid or binding unless set forth in writing and duly
executed and delivered by the party against whom enforcement of the amendment,
modification, or discharge is sought.
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14.6. Waiver
No delay or failure on the part of any party hereto in
exercising any right, power or privilege under this Purchase Agreement or under
any other Documents delivered in connection with or pursuant to this Purchase
Agreement shall impair any such right, power or privilege or be construed as a
waiver of any default or any acquiescence therein. No single or partial exercise
of any such right, power or privilege shall preclude the further exercise of
such right, power or privilege, or the exercise of any other right, power or
privilege. No waiver shall be valid against any party hereto unless made in
writing and signed by the party against whom enforcement of such waiver is
sought and then only to the extent expressly specified therein.
14.7. Consent to Jurisdiction
(a) This Purchase Agreement and the duties and obligations of
the Company, the Investor, and GHV hereunder and under each of the Documents
referred to herein shall be enforceable against any of the Company, the
Investor, or GHV in the courts of the United States of America and of the State
of Maryland. For such purpose, the Company, the Investor, and GHV hereby
irrevocably submit to the non-exclusive jurisdiction of such courts, and agrees
that all claims in respect of this Purchase Agreement and such other Documents
may be heard and determined in any of such courts.
(b) The Company, the Investor, and GHV hereby irrevocably
agree that a final judgment of any of the courts specified above in any action
or proceeding relating to this Purchase Agreement or to any of the other
Documents referred to herein or therein shall be conclusive and may be enforced
in other jurisdictions by suit on the judgment or in any other manner provided
by law.
14.8. Severability
If any part of any provision of this Purchase Agreement or any
other Agreement or document given pursuant to or in connection with this
Purchase Agreement shall be invalid or unenforceable in any respect, such part
shall be ineffective to the extent of such invalidity or unenforceability only,
without in any way affecting the remaining parts of such provision or the
remaining provisions of this Purchase Agreement.
14.9. Governing Law
This Purchase Agreement, the rights and obligations of the
parties hereto, and any claims or disputes relating thereto, shall be governed
by and
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construed in accordance with the laws of the State of Maryland (excluding the
choice of law rules thereof).
14.10. Notices
All notices, demands, requests, or other communications which
may be or are required to be given, served, or sent by any party to any other
party pursuant to this Purchase Agreement shall be in writing and shall be hand
delivered, sent by overnight courier or mailed by first-class, registered or
certified mail, return receipt requested, postage prepaid, or transmitted by
telegram, telecopy or telex, addressed as follows:
(i) If to the Investor or GHV:
Genesis Holdings, Inc.
Genesis Health Ventures, Inc.
148 West State Street
Kennett Square, Pennsylvania 19348
Attention: George V. Hager and John F. DePodesta
Telecopy: 610-444-4483
with a copy (which shall not constitute notice) to:
Hogan & Hartson L.L.P.
555 Thirteenth Street, N.W.
Washington, D.C. 20004
Attention: Michael C. Williams
Telecopy: 202-637-5910
(ii) If to the Company:
Doctors Health System, Inc.
10451 Mill Run Road
Owings Mills, Maryland 21117
Attention: Paul A. Serini
Telecopy: 410-654-5806
Each party may designate by notice in writing a new address to which any notice,
demand, request or communication may thereafter be so given, served or sent.
Each notice, demand, request, or communication which shall be hand delivered,
sent, mailed, telecopied or telexed in the manner described above, or which
shall be delivered to a telegraph company, shall be deemed sufficiently given,
served, sent, received or delivered for all purposes at such time as it is
delivered to the addressee (with the return receipt, the delivery receipt, or
(with respect to a telecopy or telex) the answerback being deemed conclusive,
but not exclusive,
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evidence of such delivery) or at such time as delivery is refused by the
addressee upon presentation.
14.11. Headings
Section headings contained in this Purchase Agreement are
inserted for convenience of reference only, shall not be deemed to be a part of
this Purchase Agreement for any purpose, and shall not in any way define or
affect the meaning, construction or scope of any of the provisions hereof.
14.12. Execution in Counterparts
To facilitate execution, this Purchase Agreement may be
executed in as many counterparts as may be required. It shall not be necessary
that the signatures of, or on behalf of, each party, or that the signatures of
all persons required to bind any party, appear on each counterpart; but it shall
be sufficient that the signature of, or on behalf of, each party, or that the
signatures of the persons required to bind any party, appear on one or more of
the counterparts. All counterparts shall collectively constitute a single
Agreement. It shall not be necessary in making proof of this Purchase Agreement
to produce or account for more than a number of counterparts containing the
respective signatures of, or on behalf of, all of the parties hereto.
14.13. Limitation on Benefits
The covenants, undertakings and agreements set forth in this
Purchase Agreement shall be solely for the benefit of, and shall be enforceable
only by, the parties hereto and their respective successors, heirs, executors,
administrators, legal representatives and permitted assigns, except that the
agreements set forth in Section 12 also shall be for the benefit of, and
enforceable by, Investor Indemnified Persons and their respective successors,
heirs, executors, administrators, legal representatives or permitted assigns.
14.14. Binding Effect
Subject to any provisions hereof restricting assignment, this
Purchase Agreement shall be binding upon and shall inure to the benefit of the
parties hereto and their respective successors, heirs, executors,
administrators, legal representatives and assigns.
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IN WITNESS WHEREOF, the parties hereto have duly executed this
Purchase Agreement, or have caused this Purchase Agreement to be duly executed
on their behalf, as of the day and year first above written.
COMPANY
DOCTORS HEALTH SYSTEM, INC.
By:
Name:
Title:
INVESTOR
GENESIS HOLDINGS, INC.
By:
Name:
Title:
GHV
GENESIS HEALTH VENTURES, INC.
By:
Name:
Title:
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EXHIBIT A
TO NOTE PURCHASE AGREEMENT
DEFINITIONS
"Advance" means an advance of funds in payment of the
purchase.
"Advance Date" has the meaning set forth in Section 9 hereof.
"Affiliate" means: (a) with respect to a person, any member of
such person's family; (b) with respect to an entity, any officer, director,
stockholder, partner or investor of or in such entity or of or in any Affiliate
of such entity; and (c) with respect to a person or entity, any person or entity
which directly or indirectly, through one or more intermediaries, Controls, is
Controlled by, or is under common Control with such person or entity.
"Agreement" means any concurrence of understanding and
intention between two or more persons (or entities) with respect to their
relative rights and/or obligations or with respect to a thing done or to be done
(whether or not conditional, executory, express, implied, in writing or meeting
the requirements of contract), including, without limitation, contracts, leases,
promissory notes, covenants, easements, rights of way, covenants, commitments,
arrangements and understandings.
"Assets" means assets of every kind and everything that is or
may be available for the payment of liabilities (whether inchoate, tangible or
intangible), including, without limitation, real and personal property.
"Assignment" means the Collateral Assignment of Rights Under
Physician Services Organization Agreements, of even date herewith, made by the
Company for the benefit of the Investor, as may be amended, modified or
supplemented.
"Claims" means all demands, claims, pending or threatened
actions or causes of action, suits, orders, legal proceedings, formal or
informal notice of any complaint, directive, citation, notice of responsibility
or potential responsibility, information request, assessments, losses, damages
(including, without limitation, diminution in value), liabilities, costs and
expenses, including, without limitation, interest, penalties and attorneys' fees
and disbursements.
"Class B Common Stock" means the shares of Class B common
stock, $.01 par value per share, of the Company.
<PAGE>
"Class C Common Stock" means the shares of Class C common
stock, $.01 par value per share, of the Company.
"Closing" means the closing of the sale and purchase of the
Note and the funding of the Initial Advance.
"Closing Date" has the meaning set forth in Section 11.1.
"Code" means the Internal Revenue Code of 1986, as amended,
and all Laws promulgated pursuant thereto or in connection therewith.
"Common Control Entity" means any trade or business under
common control (as such term is defined in Section 414(b) or 414(c) of the Code)
with the Company or any Subsidiary.
"Company" means Doctors Health System, Inc., a Maryland
corporation.
"Company Tax Returns" means all federal, state, local and
other applicable tax returns, declarations of estimated tax reports required to
be filed by, or which include, the Company or any of the Subsidiaries or the
Medical Groups (without regard to extensions of time permitted by law or
otherwise).
"Consolidated" means, with respect to financial statements, a
consolidation with respect to the reporting of assets, liabilities and operating
accounts of the Company and its international operations.
"Conversion Price" has the meaning set forth in Section 2.5
hereof.
"Control" means possession, directly or indirectly, of power
to direct or cause the direction of management or policies (whether through
ownership of voting securities, by Agreement or otherwise).
"DOL" means the Department of Labor or its successors.
"Disclosure Schedule" means the disclosure schedule identified
as the Disclosure Schedule to the Purchase Agreement.
"Documents" means any paper or other material (including,
without limitation, computer storage media) on which is recorded (by letters,
numbers or other marks) information that may be evidentially used, including,
without limitation, legal opinions, mortgages, indentures, notes, instruments,
leases, Agreements, insurance policies, reports, studies, financial statements
(including, without limitation, the notes thereto), other written financial
information,
2
<PAGE>
schedules, certificates, charts, maps, plans, photographs, letters, memoranda
and all similar materials.
"Encumbrance" means, with respect to any Asset, any mortgage,
lien, pledge, encumbrance, security interest, deed of trust, order, decree,
judgment, charge, or any other type of arrangement that has the effect of
creating a security interest in respect of such Asset.
"Environmental Laws" means any Laws (including without
limitation, the Comprehensive Environmental Response, Compensation, and
Liability Act), now or hereafter in effect relating to the generation,
production, installation, use, storage, treatment, transportation, release,
threatened release, or disposal of Hazardous Materials, noise control, or the
protection of human health, safety, natural resources, animal health or welfare,
or the environment.
"ERISA" means the Employee Retirement Income Security Act of
1974, as amended, and all Laws promulgated pursuant thereto or in connection
therewith.
"ESOP" means an "employee stock ownership plan" as such term
is defined in Section 407(d)(6) of ERISA or Section 4975(e)(7) of the Code.
"Exhibit" means an exhibit attached to the Purchase Agreement.
"401(k) Plan" means the 401(k) employee benefit plan adopted
by the Company effective January 1, 1996.
"Future Advances" means monthly Advances to the Company after
April 1, 1997 as contemplated in Section 2.2.2 hereof.
"GHV" means Genesis Health Ventures, Inc., a Pennsylvania
corporation.
"GHV Services" has the meaning set forth in Section 3.27
hereof.
"Hart-Scott-Rodino" means the Hart-Scott-Rodino Antitrust
Improvements Act of 1976, as amended, and all Laws promulgated pursuant thereto
or in connection therewith.
"Hazardous Materials" means any wastes, substances, radiation,
or materials (whether solids, liquids or gases) which are subject to regulation
under any Environmental Laws; (iii) the presence of which on the Real Property
cause or threaten to cause a nuisance pursuant to applicable statutory or common
law upon the Real Property or to adjacent properties; (iv) without limitation,
which contain polychlorinated biphenyls (PCBs), asbestos, lead-based paints,
urea-formaldehyde
3
<PAGE>
foam insulation, and petroleum or petroleum products (including, without
limitation, crude oil or any fraction thereof) or (iv) which pose a hazard to
human health, safety, natural resources, industrial hygiene, or the environment,
or an impediment to working conditions.
"Individual Account Plan" means a Plan that is or was an
"individual account plan" as such term is defined in Section 3(34) of ERISA.
"Initial Advance" means the initial Advance made to the
Company at the Closing as contemplated in Section 2.2.1 hereof.
"Intellectual Property" means all franchises, patents, patent
qualifications, trademarks, service marks, trade names, trade styles, brands,
private labels, copyrights, know-how, computer software, industrial designs and
drawings and general intangibles of a like nature, trade secrets, licenses, and
rights and filings with respect to the foregoing, and all reissues, extensions
and renewals thereof.
"Investor" means Genesis Holdings, Inc., a Delaware
corporation and a wholly-owned subsidiary of GHV.
"Investor Indemnified Persons" means the Investor and its
respective Affiliates, employees, representatives, agents, officers and
directors.
"Laws" means all federal, state and local statutes, laws,
ordinances, regulations, rules, resolutions, orders, determinations, writs,
injunctions, awards (including, without limitation, awards of any arbitrator),
judgments and decrees applicable to the specified persons or entities and to the
businesses and Assets thereof (including, without limitation, Laws relating to
securities registration and regulation; the performance of professional medical
services; the provision and administration of insured and self-funded healthcare
benefits; the sale, leasing, ownership or management of real property;
employment practices, terms and conditions, and wages and hours; building
standards, land use and zoning; safety, health and fire prevention; and
environmental protection, including Environmental Laws).
"Material Assets" means Assets having an aggregate value in
excess of $250,000.
"Maturity Date" has the meaning set forth in Section 2.4.1
hereof.
"Medical Groups" means Baltimore Medical Group, LLC, Carroll
Medical Group, LLC, and Cumberland Valley Medical Group, LLC.
4
<PAGE>
"Multiemployer Plan" means a "multiemployer plan" as such term
is defined in Section 3(37) of ERISA.
"Note" has the meaning set forth in Section 2.1 hereof.
"Operating Plan" has the meaning set forth in Section 3.6(b)
hereof.
"Option Agreement" means the Amended and Restated Option
Agreement dated as of September 4, 1996 substantially in the form attached
hereto as Exhibit D.
"Ordinary Course of Business" means ordinary course of
business consistent with past practices and prudent business operations.
"Other Arrangement" means a benefit program or practice
providing for bonuses, incentive compensation, vacation pay, severance pay,
insurance, restricted stock, stock options, employee discounts, company cars,
tuition reimbursement or any other perquisite or benefit (including, without
limitation, any fringe benefit under Section 132 of the Code) to employees,
officers or independent contractors that is not a Plan.
"Outstanding Principal Amount" has the meaning set forth in
Section 2.3 hereof.
"Pension Plan" means an "employee pension benefit plan" as
such term is defined in Section 3(2) of ERISA.
"Permanent Financing" has the meaning set forth in Section
2.4.1 hereof.
"Permits" has the meaning set forth in Section 3.26.2 hereof.
"Person" means any individual, partnership, joint venture,
corporation, trust, unincorporated organization, government or department or
agency of a government.
"Plan" means any plan, program or arrangement, whether or not
written, that is or was an "employee benefit plan" as such term is defined in
Section 3(3) of ERISA and (a) which is maintained by the Company or any
Subsidiary or Medical Group; (b) to which the Company or any Subsidiary or
Medical Group contributed or was obligated to contribute or to fund or provide
benefits; or (c) which provides or promises benefits to any person who performs
or who has performed services for the Company or any Subsidiary or Medical Group
and because of those services is or has been (i) a participant therein or (ii)
entitled
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<PAGE>
to benefits thereunder. The term "Plan" shall not include any plan maintained by
any Person prior to such Person's affiliation with a Subsidiary or a Medical
Group.
"Proposal" means any proposal, offer or indication of interest
from any Person, entity or group relating to any acquisition or purchase of all
or (other than in the Ordinary Course of Business) any portion of the assets of,
or any equity in, the Company or any business combination with the Company,
other than the transactions contemplated by the Purchase Agreement.
"Purchase Agreement" means this Note Purchase Agreement,
including the Disclosure Schedule and all Exhibits hereto.
"Qualified Plan" means a Pension Plan that satisfies, or is
intended by the Company to satisfy, the requirements for tax qualification
described in Section 401 of the Code.
"Real Property" means any real property currently operated or
leased, or formerly owned, operated, or leased, by the Company, its Subsidiaries
or any Medical Group.
"Registration Statement" has the meaning set forth in Section
3.28 hereof.
"Restated Articles" means the articles of amendment and
restatement of the Company in the form attached hereto as Exhibit F.
"Section" means a Section (or a subsection) of the Purchase
Agreement.
"Securities Act" means the Securities Act of 1933, as amended,
and all laws promulgated pursuant thereto or in connection therewith.
"Security Agreement" means the Security Agreement, of even
date herewith, between the Company and the Investor, as may be amended, modified
or supplemented.
"Senior Debt" means certain indebtedness of the Company in a
principal amount not to exceed $4,000,000 owing to NationsBank, N.A. pursuant to
that certain Loan Agreement, dated as of December 1, 1995, between the Company
and NationsBank, N.A.
"Series C Preferred" means the Series C Preferred Stock of the
Company.
6
<PAGE>
"Stock Purchase Agreement" means the Stock Purchase Agreement
dated as of September 4, 1996 between the Company and GHV.
"Subsidiary" means a corporation or other entity of which at
least 80% of the outstanding securities or other interests having rights to vote
or otherwise exercise Control are held, directly or indirectly, by the Company.
"Taxes" means all federal, state and local taxes (including,
without limitation, income, profit, franchise, sales, use, real property,
personal property, ad valorem, excise, employment, social security and wage
withholding taxes) and installments of estimated taxes, assessments,
deficiencies, levies, imports, duties, license fees, registration fees,
withholdings, or other similar charges of every kind, character or description
imposed by any governmental or quasi-governmental authorities, and any interest,
penalties or additions to tax imposed thereon or in connection therewith.
"Title I Plan" means a Plan that is subject to Title I of
ERISA.
"Welfare Plan" means an "employee welfare benefit plan" as
such term is defined in Section 3(1) of ERISA.
7
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<TABLE>
<CAPTION>
TABLE OF CONTENTS
Page
<S> <C>
1. DEFINITIONS.......................................................................................1
2. SALE AND PURCHASE OF NOTE........................................................................1
2.1. Sale and Purchase of Note.................................................................1
2.2. Purchase Price; Advances..................................................................2
2.3. Interest..................................................................................2
2.4. Repayments and Prepayments................................................................3
2.5. Conversion................................................................................3
3. REPRESENTATIONS AND WARRANTIES OF THE COMPANY.....................................................4
3.1. Organization and Standing.................................................................4
3.2. Subsidiaries..............................................................................4
3.3. Articles of Incorporation and Bylaws......................................................5
3.4. Capitalization............................................................................5
3.5. Directors, Officers and Employees.........................................................6
3.6. Financial Statements......................................................................6
3.7. No Liabilities............................................................................7
3.8. Accounts Receivable.......................................................................7
3.9. Taxes.....................................................................................7
3.10. Conduct of Business; Absence of Material Adverse Change..................................9
3.11. Title to Property and Assets.............................................................10
3.12. Insurance................................................................................10
3.13. Intellectual Property....................................................................11
3.14. Debt Instruments.........................................................................11
3.15. Leases...................................................................................12
3.16. Other Agreements.........................................................................12
3.17. Books and Records........................................................................14
3.18. Litigation; Disputes.....................................................................14
3.19. Labor Relations..........................................................................14
3.20. Pension and Benefit Plans................................................................15
3.21. Environmental............................................................................17
3.22. Transactions with Related Parties........................................................18
3.23. Restrictions and Consents................................................................18
3.24. Authorization............................................................................18
3.25. Absence of Violations....................................................................19
3.26. Regulatory Matters.......................................................................19
3.27. Certain Future Relationships.............................................................22
3.28. SEC Registration.........................................................................22
3.29. Binding Obligation.......................................................................22
3.30. Status of Shares.........................................................................22
3.31. Offering of Shares.......................................................................23
3.32. Disclosure...............................................................................23
4. REPRESENTATIONS AND WARRANTIES OF THE INVESTOR....................................................23
<PAGE>
4.1. Organization and Standing.................................................................23
4.2. Authorization.............................................................................24
4.3. Binding Obligation........................................................................24
4.4. Hart-Scott-Rodino.........................................................................24
4.5. Certain Future Relationships..............................................................24
5. RESTRICTED SECURITIES.............................................................................24
5.1. No Registration Under the Securities Act..................................................25
5.2. Acquisition for Investment................................................................25
5.3. Evaluation of Merits and Risks of Investment..............................................25
6. ADDITIONAL COVENANTS OF THE COMPANY...............................................................25
6.1. Reports...................................................................................26
6.2. Certain Future Relationships..............................................................26
6.3. Actions Prompting Redemptions.............................................................27
6.4. Use of Proceeds...........................................................................29
6.5. Acquisition of Specialist Groups..........................................................29
6.6. No Material Change to Business Plan.......................................................29
6.7. Reservation of Shares.....................................................................29
7. CONDITIONS PRECEDENT TO THE COMPANY'S OBLIGATIONS AT THE CLOSING..................................30
7.1. Representations and Warranties............................................................30
7.2. Performance...............................................................................30
7.3. Legal Proceedings.........................................................................30
7.4. Option Agreement..........................................................................30
7.5. Amended and Restated Stockholders Agreement...............................................31
7.6. Amended and Restated Registration Rights Agreement........................................31
7.7. Documents at Closing......................................................................31
8. CONDITIONS PRECEDENT TO THE INVESTOR'S OBLIGATIONS AT THE CLOSING.................................31
8.1. Representations and Warranties............................................................31
8.2. Performance...............................................................................32
8.3. Absence of Adverse Changes................................................................32
8.4. Legal Proceedings.........................................................................32
8.5. Officer's Certificate.....................................................................32
8.6. Opinion of Counsel........................................................................32
8.7. Restated Articles.........................................................................32
8.8. Option Agreement..........................................................................33
8.9. Amended and Restated Stockholders Agreement...............................................33
8.10. Amended and Restated Registration Rights Agreement.......................................33
8.11. Submission of Advance Request............................................................33
8.12. Documents at Closing.....................................................................33
8.13. Consents.................................................................................33
9. CONDITIONS PRECEDENT TO THE INVESTOR'S OBLIGATIONS TO MAKE EACH FUTURE ADVANCE....................34
9.1. Absence of Violations.....................................................................34
<PAGE>
9.2. Performance...............................................................................34
9.3. Legal Proceedings.........................................................................34
9.4. Submission of Advance Request.............................................................35
9.5. Officer's Certificate.....................................................................35
10. EVENTS OF DEFAULT; REMEDIES......................................................................35
10.1. Events of Default........................................................................35
10.2. Remedies.................................................................................36
11. THE CLOSING......................................................................................37
11.1. Closing..................................................................................37
11.2. Deliveries by the Company to the Investor................................................37
11.3. Deliveries by the Investor to the Company................................................38
12. SURVIVAL OF REPRESENTATIONS AND COVENANTS; INDEMNIFICATION; REMEDIES; TAX MATTERS................38
12.1. Survival of Representations and Covenants................................................38
12.2. Agreement of the Company to Indemnify....................................................38
12.3. Conditions of Indemnification............................................................39
12.4. Specific Performance.....................................................................40
13. TERMINATION......................................................................................41
13.1. Termination..............................................................................41
13.2. Effect of Termination....................................................................41
14. MISCELLANEOUS....................................................................................41
14.1. Additional Actions and Documents.........................................................41
14.2. No Brokers...............................................................................41
14.3. Expenses.................................................................................42
14.4. Assignment...............................................................................42
14.5. Entire Agreement; Amendment..............................................................42
14.6. Waiver...................................................................................43
14.7. Consent to Jurisdiction..................................................................43
14.8. Severability.............................................................................43
14.9. Governing Law............................................................................43
14.10. Notices.................................................................................44
14.11. Headings................................................................................45
14.12. Execution in Counterparts...............................................................45
14.13. Limitation on Benefits..................................................................45
14.14. Binding Effect..........................................................................45
</TABLE>
Exhibit A Definitions
Exhibit B Convertible Subordinated Note
Exhibit C Advance Request
Exhibit D Option Agreement
Exhibit E Stockholders Agreement
Exhibit F Registration Rights Agreement
Exhibit G Form of Opinion of Company
Exhibit H Restated Articles
EXHIBIT 10.2
Execution Copy
DOCTORS HEALTH SYSTEM, INC.
Convertible Subordinated 11% Note
Due January 31, 1999
$5,000,000 January 31, 1997
FOR VALUE RECEIVED, the undersigned, Doctors Health System,
Inc., a Maryland corporation (hereinafter called the "Company"), hereby promises
to pay to Genesis Holdings, Inc. (hereinafter called the "Holder"), at its
offices located at 148 West State Street, Kennett Square, PA 19348, or at such
other place as the Holder may from time to time in writing designate, on the
Maturity Date (as defined in the hereinafter described Note Purchase Agreement),
the principal sum of Five Million Dollars ($5,000,000), or so much thereof as
may be advanced or readvanced from time to time and remain outstanding, together
with interest on the principal balance thereof from time to time outstanding
from the date of each such advance or readvance until paid in full at the rate
of eleven per cent (11%) per annum (computed on the basis of a 360-day year,
30-day month).
This Note is the Convertible Subordinated Note referred to in
that certain Note Purchase Agreement, of even date herewith, among the Company,
the Holder, and Genesis Health Ventures, Inc. (the "Note Purchase Agreement"),
and is secured by the collateral described in (i) that certain Security
Agreement, of even date herewith, between the Company and the Holder (the
"Security Agreement"), and (ii) that certain Collateral Assignment of Rights
Under Physicians Services Organization Agreements, of even date herewith, made
by the Company for the benefit of the Holder (the "Assignment"). The Holder is
entitled to the benefits of the Note Purchase Agreement, the Security Agreement
and the Assignment and reference is made thereto for a description of the
collateral and the rights and remedies of the Holder thereunder. Neither the
reference to the Note Purchase Agreement, the Security Agreement or to the
Assignment, nor any provision thereof, shall affect or impair the absolute and
unconditional obligation of the Company to pay the principal amount hereof,
together with interest accrued thereon, when due. All capitalized terms used
herein which are not herein defined shall have the meanings ascribed to them in
the Note Purchase Agreement.
The principal of this Note shall be payable in full, in lawful
money of the United States of America and in immediately available funds (unless
converted
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as provided herein), without offset, on the Maturity Date or such earlier date
as provided herein. Interest shall be payable in full on the Maturity Date,
such payment to be made in the form of the Company's Series C Preferred Stock,
par value $14.00 per share ("Series C Preferred"), in the manner set forth
in Section 2.3 of the Note Purchase Agreement.
Subordination
This Note is subordinated and subject in right of payment to
the payment, in accordance with its terms, of certain indebtedness of the
Company in a principal amount not to exceed $4,000,000 owing to NationsBank,
N.A. pursuant to that certain Loan Agreement, dated as of December 1, 1995,
between the Company and NationsBank, N.A. (together with any successor facility,
the "Senior Debt"); provided, however, that nothing herein shall be construed to
impair the ability of the Company to pay to the registered owner hereof any
installments of principal or interest owing hereunder so long as there shall not
have occurred and be continuing a default under the Senior Debt.
Conversion
The Holder is hereby given the right, on the Maturity Date, to
convert the entire unpaid principal amount of this Note into fully paid and
nonassessable shares of the Series C Preferred, at the price and on the terms
and conditions set forth in the Note Purchase Agreement. The right of the
Company to make payments on the principal amount of this Note shall be subject
at all times to the right of the Holder to convert this Note into Series C
Preferred as provided herein. The Company shall at all times reserve and keep
available a number of its authorized but unissued shares of Series C Preferred
sufficient to permit the exercise in full by the Holder of its conversion rights
hereunder.
Default
In case an Event of Default (as defined in the Note Purchase
Agreement) shall occur and be continuing, this Note may be declared due and
payable in the manner and with the effect provided in the Note Purchase
Agreement.
Miscellaneous
Upon receipt by the Company of evidence satisfactory to it of
the loss, theft, destruction or mutilation of this Note, and (in case of loss,
theft or destruction) of indemnity satisfactory to it, and upon reimbursement to
the Company of all reasonable expenses incidental thereto, and upon surrender
and cancellation of this Note, if mutilated, the Company will make and deliver a
new
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Note of like tenor in the principal amount of this Note then outstanding in lieu
of this Note. Any Note so made and delivered shall be dated as of the date to
which interest shall have been paid on this Note.
The terms of this Note shall be governed by and construed in
accordance with the laws of Maryland (but not including the choice of law rules
thereof).
This Note shall not be valid or obligatory for any purpose
until authenticated by the execution hereof by the President or a Vice President
of the Company.
IN WITNESS WHEREOF, Doctors Health System, Inc., a Maryland
corporation, has caused this Note to be signed in its corporate name by its
President or a Vice President, by authority duly given, all as of the day and
year first above written.
DOCTORS HEALTH SYSTEM, INC.
By: /s/ Stewart B. Gold
____________________________
Print Name: Stewart B. Gold
Title: President
EXHIBIT 10.3
AMENDED AND RESTATED OPTION AGREEMENT
between
DOCTORS HEALTH SYSTEM, INC.
and
GENESIS HEALTH VENTURES, INC.
dated as of January 31, 1997
<PAGE>
AMENDED AND RESTATED OPTION AGREEMENT
THIS AMENDED AND RESTATED OPTION AGREEMENT is entered into as of
January 31, 1997, by and between Doctors Health System, Inc., a Maryland
corporation (the "Company"), and Genesis Health Ventures, Inc., a Pennsylvania
corporation ("Genesis").
WHEREAS, the Company and Genesis entered into a Stock Purchase
Agreement dated September 4, 1996 (the "Stock Purchase Agreement") pursuant to
which Genesis purchased 571,428 shares of the Company's Series C Preferred
Stock, par value $17.50 per share (the "Series C Preferred Stock"); and
WHEREAS, the Company and Genesis Holdings have a wholly-owned
subsidiary of Genesis ("Holdings") have entered into a Note Purchase Agreement
(the "Note Purchase Agreement") and the Company has executed and delivered the
Convertible Subordinated Note of even date herewith pursuant to which Holdings
will provide the Company a $5 million loan facility; and
WHEREAS, the parties desire to enter into this Amended and Restated
Option Agreement in connection with the purchase by Genesis of additional shares
of Series C Preferred Stock.
NOW, THEREFORE, in consideration of the foregoing, and the mutual
covenants and agreements hereinafter set forth, the parties hereby agree as
follows:
1. OPTION TO PURCHASE SHARES
Subject to the terms and conditions hereof, the Company hereby grants
to Genesis an option (the "Option") to purchase 250,000 shares (as adjusted
herein, the "Shares") of the Series C Preferred Stock. The exercise price of the
Option shall be $20.00 per share, payable by wire transfer in United States
Dollars (the "Option Price"), for a total consideration of $5,000,000. The
Option shall be immediately exercisable by Genesis at any time prior to its
expiration. The Option shall expire upon the earliest date on which one of the
following occurs (the "Option Termination Date"): (i) January 31, 2002; (ii) the
consummation of (a) a Qualified Public Offering, (b) a merger or similar
combination transaction of which the Company is not the survivor, or (c) a sale
or other disposition of substantially
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all of the Company's assets (any of (a)-(c) hereinafter referred to as a
"Qualified Transaction"); or (iii) consummation of the Permanent Financing as
defined in the Note Purchase Agreement dated January 31, 1997 by and among the
Company , Genesis and Genesis Holdings, Inc. (the "Note Purchase Agreement). The
Company shall provide Genesis with a written notice at least 30 days prior to
the consummation of any Qualified Transaction. For purposes of this Agreement, a
Qualified Public Offering shall mean an offering of the Company's Common Stock
registered under the Securities Act with (a) the net proceeds to the Company of
the sale of such Common Stock to equal or exceed $25,000,000, (b) a total market
capitalization of the Company at the time of such offering of at least
$100,000,000, (c) the net price per share to equal or exceed the weighted
average price paid by Genesis for each share of Series C Preferred Stock
outstanding immediately prior to such offering, plus all accrued but unpaid
dividends (whether declared or undeclared) and interest thereon, as
adjusted for stock splits, recapitalizations and similar transactions, and
(d) subject to a firm commitment underwriting conducted by a nationally
recognized underwriter reasonably acceptable to Genesis.
2. ADJUSTMENT IN NUMBER OF OPTION SHARES AND/OR OPTION PRICE
2.01. If the number of outstanding shares of Series C Preferred Stock
is increased or decreased or changed into or exchanged for a different number or
kind of stock or other securities of the Company by reason of any
recapitalization, reclassification (including any reclassification in connection
with a merger, consolidation or other business combination involving the
Company), stock split, reverse split, combination of shares of Series C
Preferred Stock, stock dividend or other distribution payable in capital stock,
or other increase or decrease in shares of Series C Preferred Stock effected
without receipt of consideration by the Company occurring after the date hereof,
a proportionate and appropriate adjustment shall be made by the Company in the
number and kind of shares subject to the Option, so that the proportionate
interest in the Company of Genesis immediately following such event shall, to
the extent practicable, be the same as immediately prior to such event. Any such
adjustment in the Option shall not change the aggregate Option Price with
respect to shares subject to the unexercised portion of the Option but shall
include a corresponding proportionate adjustment in the Option Price per share.
2.02. If, after the date hereof but prior to the Option Termination
Date (the "Adjustment Period"), the Company sells Series C Preferred Stock or
securities convertible into or exchangeable for Series C Preferred Stock, for a
price (the
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<PAGE>
"Lower Offering Price") less than the weighted average price paid or to be paid
by Genesis for each share of Series C Preferred Stock then outstanding or
subject to the Option, plus all accrued but unpaid dividends and interest
thereon (the "Weighted Average Price"), the Option Price shall be adjusted to a
price equal to the quotient obtained by dividing:
(1) an amount equal to (x) the sum of (A) the total number of
shares of Series C Preferred Stock outstanding immediately prior to
such issuance or sale, plus (B) the total number of shares of Series C
Preferred Stock issuable upon exercise of all options, warrants and
other rights convertible or exchangeable for, or evidencing the right
to purchase shares of Series C Preferred Stock outstanding immediately
prior to such issuance or sale, if any, multiplied by (C) the Weighted
Average Price in effect immediately prior to such issuance or sale,
plus (y) the consideration, if any received or deemed to be received by
the Company upon such issuance or sale; by
(2) the sum of (A) the total number of shares of Series C
Preferred Stock outstanding immediately after such issuance or sale,
plus (B) the total number of shares of Series C Preferred Stock
issuable upon exercise of all options, warrants and other rights
convertible or exchangeable for, or evidencing the right to purchase
shares of Series C Preferred Stock outstanding immediately after such
issuance or sale, if any.
If, subsequent to such an adjustment, the Company issues or sells
additional shares of Series C Preferred Stock during the Adjustment Period, for
a price of less than the then applicable Weighted Average Price (as adjusted for
all prior adjustments), a further adjustment in the Option Price shall be made
in accordance with this Section 2.
3. PARTIAL EXERCISE
The Option shall be exercisable in whole or in part, at any time and
from time to time, after becoming exercisable and prior to termination of the
Option, provided, that no single exercise of the Option shall be for less than
10,000 Shares unless the number of Shares purchased is the total number at the
time available for purchase under this Option. In no event may the Option be
exercised for a fractional Share. The number of shares which may be purchased
upon exercise of the Option shall be reduced by the number of shares previously
purchased upon exercise of the Option.
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<PAGE>
4. METHOD OF EXERCISE OF OPTION
Subject to the terms and conditions of this Option Agreement, Genesis
may exercise the Option with respect to all or any part of the Shares then
subject to such Option by giving the Company written notice of exercise,
specifying the number of Shares as to which the Option is being exercised. Such
notice shall be addressed to the Secretary of the Company at the Company's
principal office, and shall be effective upon delivery (by personal delivery,
fax or other delivery) to the Secretary of the Company. Such notice shall be
accompanied by cash (in U.S. Dollars) in an amount equal to the Option Price of
such Shares. The Company's obligations to issue Shares pursuant to this
Agreement are subject to the expiration, prior to an exercise of the Option, of
any waiting period applicable to the investment by Genesis in the Company
required by the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as
amended.
5. MANDATORY EXERCISE
5.01. Mandatory Exercise. Subject to the conditions set forth in
Sections 5.03 and 5.04, the Company may require Genesis to exercise the Option
with respect to such number of Shares as the Company shall determine in an
amount no greater than the number of Shares for which the Option may be
exercised at the end of any month which is the second consecutive month during
which the Company has received payment for a total of at least 20,000 Capitated
Medicare Lives. The Company's right to require a mandatory exercise of the
option shall terminate upon the closing of the Permanent Financing as defined in
the Note Purchase Agreement.
5.02. The obligations of Genesis to exercise the Option pursuant to
this Section 5 are subject to the fulfillment on or before each such exercise of
each of the following conditions:
5.02(a) The Company shall deliver a certificate in the form
attached as Exhibit A hereto dated as of the date of such exercise.
5.02(b) The Company shall have performed and complied with all
material agreements, obligations and conditions contained in the Stock
Purchase Agreement and the Restated Stockholders Agreement dated as of
the date hereof.
5.02(c) All consents, authorizations, approvals or permits, if
any, of any governmental authority or regulatory body of the United
States or of any state or of any third party that are necessary in
connection with the exercise of the Option and the lawful issuance of
the Shares to Genesis
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pursuant to this Option Agreement shall have been duly obtained and
shall be effective on and as of such exercise other than those which
are not required to be obtained before such exercise.
5.02(d) There shall not have been any default or breach by the
Company (that has not been cured or waived) with respect to its
obligations (i) to holders of the Company's Series A Preferred Stock,
Series B Preferred Stock and Series C Preferred Stock under the
Company's articles of incorporation, (ii) to NationsBank, N.A. under
the Loan Agreement dated as of December 1, 1995 and (iii) under any
credit facility, including, without limitation, the facility currently
being negotiated with First National Bank of Maryland, N.A.
5.02(e) The expiration of any waiting period applicable to the
investment by Genesis in the Company required by the Hart-Scott-Rodino
Antitrust Improvements Act of 1976, as amended.
5.03 The Company shall provide Genesis with a written notice at least
30 days prior to a mandatory exercise pursuant to this Section 5. Such notice
shall set forth the number of Shares for which Genesis will be required to
exercise the Option, which number will not be less than 10,000 Shares.
5.04. For purposes of this Section 5, the term "Capitated Medicare
Lives" shall mean those Medicare-eligible persons living in Maryland, Delaware,
West Virginia and the District of Columbia and in the areas of Northern Virginia
and Southern Pennsylvania who, at the time of any calculation under this Section
5, are enrolled in (a) a "Medicare HMO" or similar Medicare managed care product
offered directly by the Company under contract with the United States Health
Care Financing Administration ("HCFA") and with respect to whom the Company
receives a capitation or other risk-based payment from HCFA, or (b) a "Medicare
HMO" or other similar Medicare managed care product offered by a health
maintenance organization or other payor with respect to which the Company agrees
to provide or arrange to provide all or substantially all of those services now
qualifying as "Medicare Part A" and "Medicare Part B" benefits under
arrangements that permit the Company to realize all or the preponderance of any
savings obtained by managing the provision of such services to enrolled Medicare
members.
6. LIMITATIONS ON TRANSFER
The Option is not transferable by Genesis, other than to a corporation
that, directly or indirectly, is wholly owned by Genesis, and shall not be
pledged or
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hypothecated (by operation of law or otherwise) or subject to execution,
attachment or similar processes.
7. RESERVATION OF STOCK
The Company shall at all times reserve and keep available, solely for
issuance and delivery upon exercise of the Option, the number of shares of
Series C Preferred Stock from time to time issuable upon exercise of the Option.
All shares of Series C Preferred Stock issuable upon exercise of the Option
shall be duly authorized and, when issued upon exercise and the payment of the
Option Price as provided herein, shall be validly issued, fully paid and
nonassessable with no liability on the part of Genesis.
8. RIGHTS AS SHAREHOLDER
Neither Genesis nor any successor or permitted assign shall be, or have
any of the rights or privileges of, a shareholder of the Company in respect of
any Shares issuable hereunder unless and until such Shares have been fully paid
and certificates representing such Shares have been endorsed, transferred and
delivered, and the name of Genesis (or of such successor or permitted assign)
has been entered as the shareholder of record on the books of the Company.
9. REORGANIZATIONS
9.1 Reorganization in Which the Company Is the Surviving Entity.
Subject to Section 9.2, if the Company shall be the surviving entity in any
reorganization, merger or consolidation of the Company with one or more other
entities, the Option shall pertain to and apply to the securities to which a
holder of the number of Shares subject to the Option would have been entitled
immediately following such reorganization, merger or consolidation, with a
corresponding proportionate adjustment of the Option Price per share so that the
aggregate Option Price thereafter shall be the same as the aggregate Option
Price of the Shares remaining subject to the Option immediately prior to such
reorganization, merger or consolidation.
9.2 Reorganization in Which the Company Is Not the Surviving
Corporation or Sale of Assets. Upon the dissolution or liquidation of the
Company, or upon a merger, consolidation or reorganization of the Company with
one or more other entities in which the Company is not the surviving entity, or
upon a sale of all or substantially all of the assets of the Company to another
entity, or upon any transaction (including, without limitation, a merger or
reorganization in which the Company is the surviving entity) approved by the
Board of Directors of the Company which results in any person or entity, or
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persons or entities acting as a group or otherwise in concert owning 50 percent
or more of the combined voting power of all classes of stock of the Company, the
Option hereunder shall terminate, except to the extent provision is made in
writing in connection with such transaction for the continuation and/or the
assumption of the Option, or for the substitution for the Option of new options
covering the stock of a successor corporation, or a parent or subsidiary
thereof, with appropriate adjustments as to the number and kinds of shares of
stock and exercise prices, in which event the Option shall continue in the
manner and under the terms so provided. The Company shall send written notice of
an event that will result in such a termination to Genesis not later than the
time at which the Company gives notice thereof to its shareholders but in no
event less than 30 days prior to such event.
10. ADJUSTMENTS
No fractional shares or units of other securities shall be issued
pursuant to any such adjustment, and any fractions resulting from any such
adjustment shall be eliminated in each case by rounding downward to the nearest
whole share or unit. Any disputes regarding adjustments in the Option Price or
number of Shares issuable upon exercise of the Option (including without
limitation any adjustments pursuant to Section 2 hereof) shall be resolved by an
independent arbitrator selected by the Company and Genesis.
11. MISCELLANEOUS PROVISIONS.
11.1 Notices. All notices, demands, requests, or other communications
which may be or are required to be given, served, or sent by any party to any
other party pursuant to this Agreement shall be in writing and shall be faxed
and mailed by first-class, registered or certified mail, return receipt
requested, postage prepaid, or transmitted by hand delivery, overnight or
express mail, addresses as follows:
(i) If to the Company:
Doctors Health System, Inc.
10451 Mill Run Circle
10th Floor
Owings Mills, Maryland 21117
Attention: Paul A. Serini
Facsimile No.: (410) 654-5806
(ii) If to Genesis:
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Genesis Health Ventures, Inc.
148 West State Street
Kennett Square, Pennsylvania 19348
Attention: John F. DePodesta
Facsimile No.: (610) 444-7483
with a copy to:
Hogan & Hartson L.L.P.
555 Thirteenth Street, N.W.
Washington, D.C. 20004
Attention: Michael C. Williams
Facsimile No.: (202) 637-5910
Each party may designate by notice in writing a new address to which
any notice, demand, request or communication may thereafter be so given, served
or sent. Each notice, demand, request or communication which shall be mailed,
delivered or transmitted in the manner described above shall be deemed
sufficiently given, served, sent or received for all purposes at such time as it
is delivered to the addressee (with the return receipt, the delivery receipt, or
affidavit of messenger being deemed conclusive evidence of such delivery) or at
such time as delivery is refused by the addressee upon presentation.
11.2 Entire Agreement; Modification; Benefit. This Agreement
constitutes the entire agreement of the parties hereto with respect to the
matters contemplated herein, supersede all prior oral and written memoranda and
agreements with respect to the matters contemplated herein, and may not be
modified, deleted or amended except by written instrument executed by the
parties. All provisions of this Agreement shall be binding upon, and shall inure
to the benefit of and be enforceable by, the parties hereto and their respective
successors and permitted assigns.
11.3 Governing Law. This Agreement, the rights and obligations of the
parties hereto, and any claims or disputes relating thereto shall be governed by
and construed in accordance with the laws of Maryland (but not including the
choice of law rules thereof).
11.4 Execution. To facilitate execution, this Agreement may be executed
in as many counterparts as may be required; and it shall not be necessary that
the signatures of, or on behalf of, each party, or the signatures of all persons
required
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to bind any party, appear on each counterpart; but it shall be sufficient that
the signature of, or on behalf of, each party, or the signatures of the persons
required to bind any party, appear on one or more of the counterparts. All
counterparts shall collectively constitute a single agreement.
[Signatures commence on next page]
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IN WITNESS WHEREOF, the undersigned have duly executed
this Agreement, or have caused this Agreement to be duly executed on their
behalf, as of the date first written above.
DOCTORS HEALTH SYSTEM, INC.
By:
_______________________________
Stewart B. Gold, President
GENESIS HEALTH VENTURES, INC.
By:
_______________________________
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Exhibit A
DOCTORS HEALTH SYSTEM, INC.
CERTIFICATE
Doctors Health System, Inc., a Maryland corporation (the "Company"), in
connection with the Amended and Restated Option Agreement (the "Option
Agreement") dated as of January ___, 1997 between the Company and Genesis Health
Ventures, Inc., a Pennsylvania corporation ("Genesis"), hereby represents and
warrants as of the date hereof (which representations and warranties shall be
deemed to include the disclosures with respect thereto so specified in the
schedules attached hereto) to the Investor as follows, with capitalized terms
used herein without definition having the meanings assigned to them in the Stock
Purchase Agreement dated as of September 4, 1996 between the Company and
Genesis:
1. Organization and Standing. The Company is a corporation duly
organized, validly existing and in good standing under the laws of the State of
Maryland, and has the full and unrestricted corporate power and authority to
own, operate and lease its Assets, to carry on its business as currently
conducted, to execute and deliver the Option Agreement and to carry out the
transactions contemplated hereby. There is no state, country or territory
wherein the absence of licensing or qualification as a foreign corporation would
have a material adverse effect upon the business of the Company as currently
conducted.
2. Capitalization. The authorized capital stock of the Company and the
outstanding shares of capital stock of the Company as of the date hereof will be
as set forth in Schedule 2 hereto. All of such outstanding shares have been
validly issued and are fully paid and nonassessable. No shares of capital stock
of the Company or any Subsidiary have been reserved for any purpose, other than
issuance of capital stock in amounts set forth in Schedule 2 (i) pursuant to the
Company's Omnibus Stock Option Plan , (ii) upon the conversion of Series A
Preferred Stock and the Series B Preferred Stock, (iii) upon the exercise of the
Common Stock Warrants (as defined in Schedule 2) and (iv) pursuant to the Option
Agreement. Except as set forth in Schedule 2, there are no outstanding
securities convertible into or exchangeable for the capital stock of the Company
or any of the Subsidiaries and no outstanding options, rights (preemptive or
otherwise), or warrants to purchase or to subscribe for any shares of such stock
or other securities of the Company or any of the Subsidiaries.
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3. Restrictions and Consents. There are no Agreements, Laws or other
restrictions of any kind to which the Company, any Subsidiary or any Medical
Group (or any asset thereof) is party or subject that would prevent or restrict
the execution, delivery or performance of the Option Agreement or result in any
penalty, forfeiture, Agreement termination, or restriction on business
operations of the Investor, the Company, any Subsidiary or any Medical Group as
a result of the execution, delivery or performance of the Option Agreement.
Schedule 3 lists all such Agreements and Laws that reasonably could be
interpreted or expected to require the consent or acquiescence of any person or
entity not party to the Option Agreement with respect to any aspect of the
execution, delivery or performance of the Option Agreement by the Company, any
Subsidiary or any Medical Group.
4. Authorization. The execution, delivery and performance by the
Company of the Option Agreement, the fulfillment of and compliance with the
terms and provisions thereof, and the consummation by the Company of the
transactions contemplated thereby, do not and will not: (a) require any consent
or approval of the stockholders of the Company that has not been obtained; (b)
conflict with, or violate any provision of, any Law having applicability to the
Company, any Subsidiary or any Medical Group or any of their respective Assets,
or any provision of the certificate or articles of organization or bylaws or
equivalent constituent document of the Company, any Subsidiary or any Medical
Group; (c) conflict with, or result in any breach of, or constitute a default
under any Agreement to which the Company, any Subsidiary or any Medical Group is
a party or by which it or any of its Assets may be bound; or (d) result in or
require the creation or imposition of or result in the acceleration of any
indebtedness, or of a material Encumbrance, or with respect to, the Company, any
Subsidiary or any Medical Group or any of the Assets now owned or hereafter
acquired by the Company, any Subsidiary or any Medical Group.
5. Regulatory Matters. The Company and the Subsidiaries and, to the
Company's knowledge, the Medical Groups and the physicians employed by the
Medical Groups have not knowingly or willfully failed to comply with the
regulatory matters described in this Section 5. Schedule 5 contains a list of
exceptions and disclosures that qualify the matters set forth in this Section 5,
where applicable.
5.1. General Compliance with Law. The Company, the
Subsidiaries and, to the Company's knowledge, the Medical Groups have complied
and are in full compliance with all Laws except where a failure to comply,
singly or in the aggregate, would not have a material adverse effect on the
Company, the Subsidiaries and the Medical Groups, taken as a whole.
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5.2. Licenses and Permits. The Company, the Subsidiaries, the
Medical Groups and each of the physicians employed by such Persons have all
Permits any federal, state, local, foreign or other governmental agency,
instrumentality, commission, authority, board or any other Person, necessary to
conduct their business as now being conducted except where the failure to have
any such Permit does not have a material adverse effect on the Company, the
Subsidiaries and the Medical Groups, taken as a whole. All Permits of the
Company and the Subsidiaries and, to the Company's knowledge, the Medical Groups
and each of the physicians employed by such Medical Groups are valid and in full
force and effect except where the failure to have any such Permit does not have
a material adverse effect on the Company, the Subsidiaries and the Medical
Groups, taken as a whole. No notice to, declaration, filing or registration
with, or Permit or consent from, any governmental or regulatory body or
authority, or any other Person or entity, is required to be made or obtained by
the Company or any of the Subsidiaries or Medical Groups in connection with the
execution, delivery or performance of this Purchase Agreement and the
consummation of the transactions contemplated hereby. Notwithstanding the
foregoing, the Company is not required to obtain any Permit to do business as a
health maintenance organization, insurance company, or other risk-bearing health
care entity under the Laws and regulations of Maryland or the Laws and
regulations of any other jurisdiction in which the Company, the Subsidiaries or
the Medical Groups do business.
5.3. Fraud and Abuse Matters. To the Company's knowledge, the
Company, the Medical Groups, and all persons and entities providing services for
the Company or the Medical Groups, have not engaged in any activities which are
prohibited or could form the basis for criminal penalties, civil monetary
penalties or a mandatory or permissive exclusion from the Medicare, Medicaid or
other federal and state health care programs under ss. ss. 1320a-7, 1320a-7a,
1320a-7b, or 1395nn of Title 42 of the United States Code, the federal CHAMPUS
statute, or any regulations promulgated thereunder, or similar or related
federal, state and local statutes, common law or regulations. Without in any way
limiting the foregoing, the Company, the Medical Groups, and, to the knowledge
of the Company, all persons and entities providing services for the Company or
the Medical Groups have not engaged in any of the following activities:
(i) knowingly and willingly made or caused to be
made any false statement or representation of a material fact in any
application for any benefit or payment;
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(ii) knowingly and willingly made or caused to be
made any false statement or representation of a material fact for
use in determining rights to any benefit or payment;
(iii) presenting or causing to be presented a claim
for reimbursement under CHAMPUS, Medicare, Medicaid, or other state
healthcare program that is for an item or service that the person
presenting or causing to be presented knows or should know was not
provided as claimed, or presenting a claim that the person presenting
knows or should know is false or fraudulent;
(iv) having knowledge of the occurrence of any event
affecting (a) his/her initial or continued right to any benefit or
payment or (b) the initial or continued right to any benefit or payment
of any other individual in whose behalf he/she has applied for or is
receiving such benefit or payment, conceals or fails to disclose such
event with an intent fraudulently to secure such benefit or payment
either in a greater amount or quantity that is due or when no such
benefit or payment is authorized;
(v) offering, paying, soliciting or receiving any
remuneration (including any kickback, bribe, or rebate), directly or
indirectly, overtly or covertly, in cash or in kind (a) in return for
referring, or to induce the referral of, an individual to a person for
the furnishing or arranging for the furnishing of any item or service
for which payment may be made in whole or in part by CHAMPUS, Medicare
or Medicaid, or other state health care program, or (b) in return for,
or to induce, the purchase, lease, or order of, or arranging for or
recommending the purchase, lease, or order of, any good, facility,
service, or item for which payment may be made in whole or in part by
CHAMPUS, Medicare or Medicaid, or other state health care program;
(vi) making or causing to be made or inducing or
seeking to induce the making of any false statement or representation
(or omitting to state a fact required to be stated therein or necessary
to make the statements contained therein not misleading) of a material
fact with respect to (a) the conditions or operations of a facility in
order that the facility may qualify for CHAMPUS, Medicare, Medicaid or
other state health care program certification, or (b) information
required to be provided under ss. 1124A of the Social Security Act (42
U.S.C. ss. 1320a-3);
(vii) submitting or causing to be submitted bills or
requests for payment under Medicare, Medicaid or other state health
care program containing charges substantially in excess of usual
charges; or
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(viii) furnishing or causing to be furnished items or
services to patients substantially in excess of the needs of such
patients.
5.4. Health Care Entity. The Company is not a "health care
entity" which provides "designated health services" for purposes of federal
Medicare/Medicaid physician self-referral and anti-kickback laws and regulations
and similar Maryland Laws and regulations.
6. Binding Obligation. The Option Agreement constitutes a valid and
binding obligation of the Company, enforceable in accordance with its terms.
7. Offering of Shares. Neither the Company nor any Person acting on its
behalf has offered the Series C Preferred or any similar securities of the
Company for sale to, solicited any offers to buy the Series C Preferred or any
similar securities of the Company from or otherwise approached or negotiated
with respect to the Company with any Person other than the Investor and a
limited number of other "Accredited Investors" (as defined in Rule 501(a) under
the Securities Act). Neither the Company nor any other Person acting on its
behalf has taken or will take any action prior to the exercise (including,
without limitation, any offering of any securities of the Company under
circumstances which would require the integration of such offering with the
offering of the Series C Preferred under the Securities Act and the rules and
regulations of the Commission thereunder) which might subject the offering,
issuance and sale of the Series C Preferred to the registration requirements of
Section 5 of the Securities Act.
8. Disclosure. No representation or warranty by the Company herein
contains or will contain any untrue or misleading statement of material fact or
omits or will omit any fact necessary to make the statements of material fact
contained herein or therein, in light of the circumstances under which made, not
misleading.
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IN WITNESS WHEREOF, the undersigned has signed this Certificate on
behalf of Doctors Health System, Inc. this ___ day of _______________.
DOCTORS HEALTH SYSTEM, INC.
By:
____________________________
Name:
Title:
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OFFICER'S CERTIFICATE
GENESIS HEALTH VENTURES, INC.
The undersigned, John F. DePodesta, Senior Vice President of Genesis
Health Ventures, Inc., a Pennsylvania corporation (the "Investor"), pursuant to
Stock Purchase Agreement between the Investor and Doctors Health System, Inc.
dated September 4, 1996 (the "Purchase Agreement") and the Amended and Restated
Option Agreement between the Investor and Doctors Health System, Inc. dated
January ___, 1997 (the "Option Agreement"), hereby certifies on behalf of the
Investor as follows:
1. The representations and warranties made by the Investor in the
Purchase Agreement are true and correct in all material respects as of the date
hereof.
2. The Investor has performed and complied with all agreements and
conditions required by the Purchase Agreement to be performed or complied with
by it prior to the date hereof.
3. No action or proceeding by or before any governmental authority has
been instituted or threatened (and not subsequently dismissed, settled or
otherwise terminated) which is reasonably expected to restrain, prohibit or
invalidate the transactions contemplated by the Purchase Agreement.
4. Attached as Exhibit I hereto is a true and correct copy of the
resolutions duly adopted by the Board of Directors of the Investor at a meeting
held on August 21, 1996 and such resolutions are in full force and effect on the
date hereof, have not been amended, altered or repealed, and are the only
resolutions by the Board of Directors of the Investor.
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IN WITNESS WHEREOF, the undersigned has executed this Officer's
Certificate as of January ___, 1997.
______________________________
John F. DePodesta
Senior Vice President
The undersigned, _______________________________ of the Investor,
hereby certifies that John F. DePodesta is, on and as of the date hereof, a duly
elected, qualified and acting Senior Vice President of the Investor and the
signature set forth above is his genuine signature.
Dated: _____________________________
2
EXHIBIT 10.4
ARTICLES OF AMENDMENT AND RESTATEMENT
OF
DOCTORS HEALTH SYSTEM, INC.
Doctors Health System, Inc., a Maryland corporation
(the "Corporation"), hereby certifies to the State Department of Assessments
and Taxation of Maryland as follows:
FIRST: The Corporation desires to amend and restate its charter in
its entirety by striking out Articles FIRST through SEVENTH of the Articles of
Incorporation and by substituting in lieu thereof the following:
ARTICLE I
NAME
The name of the corporation (which is hereinafter called
the "Corporation") is: "DOCTORS HEALTH SYSTEM, INC."
ARTICLE II
PURPOSES FOR WHICH CORPORATION FORMED
The purposes for which the Corporation is formed are to
carry on any and all business, transactions and activities permitted by the
Maryland General Corporation Law ("MGCL") which may be deemed desirable by the
Board of Directors of the Corporation (the "Board"), as well as all activities
and things necessary and incidental thereto, to the full extent empowered by the
MGCL.
ARTICLE III
RESIDENT AGENT AND PRINCIPAL OFFICE
The post office address of the principal office of the
Corporation in this State is 10451 Mill Run Circle, Tenth Floor, Owings
Mills, Maryland 21117. The resident agent of the Corporation in this State is
Paul A. Serini, whose post office address is 10451 Mill Run Circle, Tenth Floor,
Owings Mills, Maryland 21117. Said resident agent is a citizen of the State of
Maryland, and actually resides therein.
<PAGE>
ARTICLE IV
AUTHORIZED STOCK
The Corporation is authorized to issue Sixty-Three
Million, Six Hundred and Five Thousand Five Hundred and Fifty-Six (63,605,556)
shares of capital stock, of which Twenty Million Seven Hundred Thousand
(20,700,000) shares are Class A Common Stock, par value of One Cent ($0.01) per
share (the "Class A Common Stock"), Ten Million (10,000,000) shares are Class B
Common Stock, par value of One Cent ($0.01) per share (the "Class B Common
Stock"), Twenty-Nine Million Fifty Thousand (29,050,000) shares are Class C
Common Stock, par value of One Cent ($0.01) per share (the "Class C Common
Stock") (the Class A Common Stock, the Class B Common Stock and the Class C
Common Stock collectively being the "Common Stock"), One Million (1,000,000)
shares are Series A Convertible Preferred Stock, par value of Five Dollars
($5.00) per share (the "Series A Preferred Stock"), Three Hundred Fifty-Five
Thousand Five Hundred Fifty-Six (355,556) shares are Series B Convertible
Preferred Stock, par value of Eleven Dollars and Twenty-Five Cents ($11.25) per
share (the "Series B Preferred Stock"), One Million, Five Hundred Thousand
(1,500,000) shares are Series C Convertible Preferred Stock, par value Fouteen
Dollars ($14.00) per share; and One Million (1,000,000) shares are Preferred
Stock, par value of One Cent ($0.01) per share ("Preferred Stock"). Upon
conversion of the Common Stock pursuant to Article IV, Section A.4, the
Corporation shall thereafter be authorized to issue Fifty-Nine Million, Seven
Hundred and Fifty Thousand (59,750,000) shares of Common Stock. The aggregate
par value of all shares having par value which the Corporation is authorized to
issue prior to conversion of the Common Stock pursuant to Section A.4 of this
Article IV is Thirty Million Six Hundred and Seven Thousand, Five Hundred and
Five Dollars ($30,607,505).
The stockholders of the Corporation shall be entitled to
vote on such matters as specifically provided herein or as otherwise required by
the MGCL. Except as otherwise provided herein, with respect to such matters
requiring the vote of stockholders of the Corporation under the MGCL, the
affirmative vote of stockholders holding two-thirds (2/3) of the shares of
outstanding capital stock of the Corporation shall be required to authorize
approval of such matters. The preferences, voting powers, restrictions,
limitations as to dividends, rights and qualifications of the Common Stock,
Series A Preferred Stock, Series B Preferred Stock, Series C Preferred Stock and
Preferred Stock are as follows:
<PAGE>
A. COMMON STOCK.
Except as expressly set forth herein, shares of Class A
Common Stock, shares of Class B Common Stock and shares of Class C Common Stock
shall have the same preferences, rights and voting powers, and shall be
identical in all respects and will entitle the holders thereof to the same
rights and privileges. Sufficient shares of Class C Common Stock shall from time
to time be reserved by the Corporation for issuance to the holders of the shares
of Series A Preferred Stock, Series B Preferred Stock and Series C Preferred
Stock upon conversion of all of the shares of Series A Preferred Stock, Series B
Preferred Stock and Series C Preferred Stock into shares of Class C Common
Stock.
1. VOTING RIGHTS.
General Provisions. Except as otherwise
provided herein, every holder of Common Stock shall be entitled to cast, in
person or by proxy, one vote for each share of Common Stock held of record by
such holder on all matters to be voted on by stockholders. The holders of shares
of Common Stock shall vote together with the holders of shares of Series A
Preferred Stock, Series B Preferred Stock and Series C Preferred Stock on all
matters submitted to a vote of stockholders and not as a separate series or
class, except as otherwise provided herein.
(b) Class A Common Stock. The holders of
shares of Class A Common Stock, voting as a single class, shall be entitled to
elect five (5) directors of the Corporation (the "Class A Common Directors").
The affirmative vote of a majority of the shares of Class A Common Stock
represented in person or by proxy at a meeting at which a quorum of Class A
Common Stock is present shall be sufficient to approve any matter with respect
to which such holders are entitled to vote; provided, however, that the
affirmative vote of a plurality of all votes cast shall be sufficient to elect a
Class A Common Director. Each share of Class A Common Stock may be voted for as
many individuals as there are Class A Common Directors to be elected. The
holders of Class A Common Stock, at any annual meeting or upon a call of a
special meeting of holders of Class A Common Stock by holders of not less than
twenty-five percent (25%) of the shares of Class A Common Stock then
outstanding, may remove any Class A Common Director at any time and from time to
time with or without cause, voting as a single class, by the affirmative vote of
eighty percent (80%) of all of the votes entitled to be cast for the election of
a Class A Common Director, and may elect a successor to fill any resulting
vacancies for the remainder of the term of such director. If any Class A Common
Director shall cease to be a director for any reason (including death,
resignation, removal or any other cause), the vacancy shall be filled by a vote
of the remaining Class A Common Directors (unless, with respect to removal, the
holders of Class A Common Stock have elected a successor Class A Common Director
pursuant to the provisions hereof). If there are no such remaining directors,
then upon a call of a special meeting of holders of Class A Common Stock, by any
such holder, the vacancy shall be filled by the vote of the holders of Class A
Common Stock, voting as a single class.
<PAGE>
(c) Class B Common Stock. The holders of
shares of Class B Common Stock, voting as a single class, shall be entitled to
elect eight (8) directors of the Corporation (the "Class B Common Directors").
The affirmative vote of a majority of the shares of Class B Common Stock
represented in person or by proxy at a meeting at which a quorum of Class B
Common Stock is present shall be sufficient to approve any matter with respect
to which said holders are entitled to vote; provided, however, that the
affirmative vote of a plurality of all votes cast shall be sufficient to elect a
Class B Common Director. Each share of Class B Common Stock may be voted for as
many individuals as there are Class B Common Directors to be elected. The
holders of Class B Common Stock, at any annual meeting or upon a call of a
special meeting of holders of Class B Common Stock by holders of not less than
twenty-five percent (25%) of the shares of Class B Common Stock then
outstanding, may remove any Class B Common Director at any time and from time to
time with or without cause, voting as a single class, by the affirmative vote of
a majority of all of the votes entitled to be cast for the election of a Class B
Common Director, and may elect a successor to fill any resulting vacancies for
the remainder of the term of such director. If any Class B Common Director shall
cease to be a director for any reason (including death, resignation, removal or
any other cause), the vacancy shall be filled by a vote of the remaining Class B
Common Directors (unless, with respect to removal, the holders of Class B Common
Stock have elected a successor Class B Common Director pursuant to the
provisions hereof). If there are no such remaining directors, then upon a call
of a special meeting of holders of Class B Common Stock, by any such holder, the
vacancy shall be filled by the vote of the holders of Class B Common Stock,
voting as a single class.
(d) Class C Common Stock. Upon conversion of
all of the shares of Series A Preferred Stock then outstanding into
shares of Class C Common Stock, the holders of Shares of Class C Common Stock
who were formerly holders of Series A Preferred Stock ("Converted Series A Class
C Common Stockholders"), voting as a single sub-class, shall be entitled to
elect two (2) Directors of the Corporation ("Converted Series A Class C
Common Directors"). Upon conversion of all of the shares of Series B
Preferred Stock then outstanding into shares of Class C Common Stock, the
holders of shares of Class C Common Stock who were formerly holders of Series B
Preferred Stock ("Converted Series B Class C Common Stockholders"), voting as a
single sub-class, shall be entitled to elect two (2) Directors of the
Corporation ("Converted Series B Class C Common Directors"). Upon conversion of
all of the shares of Series C Preferred Stock then outstanding into shares of
Class C Common Stock, the holders of shares of Class C Common Stock who were
formerly holders of Series C Preferred Stock ("Converted Series C Class C Common
Stockholders"), voting as a single sub-class, shall be entitled to elect two (2)
Directors of the Corporation ("Converted Series C Class C Common Directors"). It
is the intent of this Section that upon conversion of all of the shares of
<PAGE>
Series A Preferred Stock, Series B Preferred Stock and Series C Preferred Stock
then outstanding into shares of Class C Common Stock, the holders of shares of
Class C Common Stock, separately voting as sub-classes, shall be entitled to
elect six (6) Directors thereafter (all such directors elected by the holders of
Series A Preferred Stock, Series B Preferred Stock and Series C Preferred Stock
being hereinafter referred to as the "Class C Common Directors"). The
affirmative vote of a majority of the shares of Class C Common Stock represented
in person or by proxy at a meeting at which a quorum of Class C Common Stock is
present shall be sufficient to approve any matter with respect to which said
holders are entitled to vote, except for matters relating to the election or
removal of directors. When the Converted Series A Class C Common Stockholders,
the Converted Series B Class C Common Stockholders or Converted Series C Class C
Common Stockholders vote on the election of Converted Series A Class C Common
Directors, Converted Series B Class C Common Directors or Converted Series C
Class C Common Directors, respectively, the affirmative vote of a plurality of
all votes cast shall be sufficient to elect a Converted Series A Class C Common
Director, Converted Series B Class C Common Director, or Converted Series C
Class C Common Director, respectively. Each share of Converted Series A Class C
Common Stock, Converted Series B Class C Common Stock and Converted Series C
Class C Common Stock may be voted for as many individuals as there are Converted
Series A Class C Common Directors, Converted Series B Class C Common Directors
and Converted Series C Class C Common Directors, respectively, to be elected. At
any annual meeting or upon a call of a special meeting of holders of Converted
Series A Class C Common Stock, Converted Series B Class C Common Stock or
Converted Series C Class C Common Stock by holders of not less than twenty-five
percent (25%) of the shares of Converted Series A Class C Common Stock,
Converted Series B Class C Common Stock or Converted Series C Class C Common
Stock then outstanding, the Converted Series A Class C Common Stockholders,
Converted Series B Class C Common Stockholders or the Converted Series C Class C
Common Stockholders may remove any Converted Series A Class C Common Director,
Converted Series B Class C Common Director or Converted Series C Class C Common
Director, respectively, at any time and from time to time with or without cause,
voting as sub-class, by the affirmative vote of eighty percent (80%) of all of
the votes entitled to be cast for the election of a Converted Series A Class C
Common Director, Converted Series B Class C Common Director or Converted Series
C Class C Common Director, respectively, and may elect a successor to fill any
resulting vacancies for the remainder of the term of such director. If any
Converted Series A Class C Common Director, Converted Series B Class C Common
Director or Converted Series C Class C Common Director shall cease to be a
director for any reason (including death, resignation, removal or any other
cause), the vacancy shall be filled by a vote of the remaining Converted Series
A Class C Common Director, Converted Series B Class C Common Director or
Converted Series C Class C Common Director (unless with respect to removal, the
holders of Converted Series A Class C Common Stock, Converted Series B Class C
Common Stock or Converted Series C Class C Common Stock have elected a successor
<PAGE>
Converted Series A Class C Common Director, Converted Series B Class C Common
Director or Converted Series C Class C Common Director pursuant to the
provisions hereof). If there is no such remaining director, then upon a call of
a special meeting of holders of Converted Series A Class C Common Stock,
Converted Series B Class C Common Stock or Converted Series C Class C Common
Stock, by any such holder, the vacancy shall be filled by the vote of the
holders of Converted Series A Class C Common Stock, Converted Series B Class C
Common Stock or Converted Series C Class C Common Stock, voting as a sub-class.
(e) Effect of Conversion. Upon conversion
of all of the shares of Common Stock into shares of Class A Common Stock
pursuant to Section A.4 of this Article IV, every such holder of Class A Common
Stock shall be entitled to cast, in person or by proxy, one vote for each
share of Class A Common Stock held of record by such holder on all matters
to be voted on the Stockholders and none of the additional voting rights
provided to holders of shares of Common Stock pursuant to Section A.1(b), (c)
and (d) of this Article IV, or to holders of the Series A Preferred Stock,
Series B Preferred Stock or Series C Preferred Stock pursuant to Section B.1,
Section C.1 and/or Section D.1 of this Article IV, shall be applicable to such
Class A Common Stock or to holders thereof. From and after such conversion, none
of the rights to dividends, redemption, conversion or liquidation applicable to
the Series A Preferred Stock, Series B Preferred Stock or Series C Preferred
Stock pursuant to Sections B.2-5, C.2-5 and D.2-5 of this Article IV shall be
applicable to such Class A Common Stock or to any holder thereof. Such Class A
Common Stock shall have the dividend rights and liquidation rights set forth in
Sections 2 and 3 of this Article IV.A.
2. DIVIDENDS.
Subject to the provisions of law and these
Articles, dividends may be declared and paid on the Common Stock of the
Corporation at such time and in such amounts as the Board of Directors may deem
advisable, provided, in all events, that no dividends may be paid with respect
to shares of Common Stock until such time as all shares of Series A Preferred
Stock, Series B Preferred Stock and Series C Preferred Stock have been redeemed
by the Corporation or converted into shares of Common Stock as provided herein,
including therein payment of all accrued and unpaid dividends on said shares of
Series A Preferred Stock, Series B Preferred Stock or Series C Preferred Stock.
<PAGE>
3. LIQUIDATION RIGHTS.
In the event of the dissolution, liquidation or
winding up of the Corporation, whether voluntary or involuntary, after payment
or provision for payment of the debts and other liabilities of the
Corporation and the preferential amounts required to be paid to the holders of
Series A Preferred Stock, Series B Preferred Stock and Series C Preferred Stock,
as provided for in Sections B.5, C.5 and D.5 of this Article IV, each share of
Common Stock shall be entitled to share ratably with all other shares of Common
Stock in all remaining net assets of the Corporation.
4. CONVERSION OF CLASS A COMMON STOCK, CLASS B COMMON
STOCK, AND CLASS C COMMON STOCK.
Simultaneously with the consummation of any
Qualified or Non-Qualified Public Offering (as such terms are defined in
Section B.1.(d) below) effected by the Corporation in accordance with the
provisions of Sections B, C and D of this Article IV, each share of the
Corporation's Class A Common Stock, Class B Common Stock, and Class C Common
Stock shall be converted, without any action on the part of the holder thereof
or the Corporation, into an identical share of the Corporation's Class A Common
Stock, and all references in these articles to Class A, Class B and Class C
Common Stock, respectively, shall be deemed to refer to the Corporation's
Class A Common Stock, and all special rights granted to the holders of Class
A, Class B, and Class C Common Stock and to all holders of Series A Preferred
Stock, Series B Preferred Stock and Series C Preferred Stock hereunder shall
cease and terminate. At least twenty (20) days prior written notice of the date
fixed and place determined for conversion shall be sent by first class mail,
postage prepaid, to the address of every holder of shares of Common Stock as
shown in the records of the Corporation. On or before the date fixed for
conversion, each holder of shares of Common Stock shall surrender the
Certificates representing such shares to the Corporation at the place
designated in such notice and shall thereafter receive certificates for the
number of full shares of Class A Common Stock to which such holder is
entitled.
5. CERTAIN PERMITTED REDEMPTIONS.
Notwithstanding anything herein to the contrary, the
Corporation shall be permitted to effect redemptions (each a "Permitted
Redemption") of its capital stock without the consent or approval of the Series
A Preferred Directors, the Series B Preferred Directors, the Series C Preferred
Directors, the holders of Series A Preferred Stock, the holders of the Series B
Preferred Stock or the holders of Series C Preferred Stock, and without granting
to the Series A Preferred Stockholders, the Series B Preferred Stockholders or
the Series C Preferred Stockholders any redemption or other rights (other than
as set forth below):
<PAGE>
(a) upon the payment in full of all accumulated and
unpaid accrued dividends and interest on all outstanding shares of Series A
Preferred Stock, Series B Preferred Stock and Series C Preferred Stock for
all past dividend periods and the then current dividend period, to effect a
redemption of shares of Class A Common Stock owned by any Management
Stockholder (as defined in Section B.1(c)(iv) hereof) as and to the extent
required by Section 4 of such Management Stockholder's Management
Employment Agreement (as defined in Section B.1(c)(iv) hereof); provided,
however, that any such redemption may be made without any payment of accrued
dividends or interest on outstanding shares of Series C Preferred Stock if the
Company completes a Qualified Public Offering on or before August 30, 1998.
(b) to effect redemptions of shares of Class A
Common Stock owned by any employee (other than one of the Management
Stockholders) when and as approved by the Board or required by law or by the
terms of any employment, stock grant or similar agreement with such
employee upon such employee's death, disability, termination of employment, or
otherwise;
(c) from and after the time that there are, and
continue to be, more than sixty-six (66) physicians who hold, directly or
indirectly through their professional corporations, limited partner interests
in Medical Holdings Limited Partnership, a Maryland Limited
Partnership (the "LP") (or an option to purchase such an Interest) (each a
"Physician Interest Holder"), shares of Class B Common Stock issued by the
Corporation to the LP upon the termination of the status of any physician as a
Physician Interest Holder, until such time as the number of Physician Interest
Holders is reduced to sixty-six (66) or below, in the amount deemed necessary by
the Board of Directors at such time to ensure that the withdrawal of the
Physician Interest Holder increases the percentage ownership interests in the
Corporation of all other Stockholders of the Corporation to the same extent that
the indirect percentage ownership interests in the Corporation of the remaining
Physician Interest Holders are increased. Such redemption shall be for a
redemption price, if any, equal to the amount that the Corporation requires the
LP to pay to such withdrawing Physician Interest Holder upon his termination;
(d) under any other circumstances expressly
contemplated in the amended and restated Stockholders Agreement dated as of
September 4, 1996 among all of the Stockholders of the Corporation, including
any amendments thereto (the "Stockholders Agreement");
(e) under any circumstances expressly
contemplated in Section B.3(a), (b) or (c) hereof with respect to the Series A
Preferred Stock;
(f) under any circumstances expressly
contemplated in Section C.3(a), (b) or (c) hereof with respect to the Series B
Preferred Stock, provided, however, that no such redemption, whether at the
option of any holder of the Series B Preferred Stock or at the option of the
<PAGE>
Corporation or otherwise, shall be permitted or effected unless and until the
Corporation shall have elected to redeem all of the issued and outstanding
shares of Series A Preferred Stock prior to the effectiveness of such redemption
of Series B Preferred Stock and the Series A Redemption Price applicable to such
redemption shall have been paid in full or adequate provision therefor shall
have been made; and provided further, however, that nothing in this subsection
shall permit the Corporation to redeem the Series A Preferred Stock without
consent of the holders thereof under any circumstances not expressly permitted
under Section B.3 hereof.
(g) upon the exercise by a Series B Preferred
Stockholder of rights to require the Corporation to redeem its Series B
Preferred Stock under the circumstances expressly contemplated in Section
5.3(e) of the Securities Purchase Agreement between the Corporation and Series
B Preferred Stockholder dated as of December 1, 1995 (the "Securities
Purchase Agreement"); provided, however, that no such redemption shall be
permitted or effected unless and until the Corporation shall have elected to
redeem all of the issued and outstanding shares of Series A Preferred Stock
prior to the effectiveness of such redemption of Series B Preferred Stock and
the Series A Redemption Price applicable to such redemption shall have been paid
in full or adequate provision therefore shall have been made; and provided
further, however, that nothing in this subsection shall permit the Corporation
to redeem the Series A Preferred Stock without consent of the holders thereof
under any circumstances not expressly permitted under Section B.3 hereof.
(h) under any circumstances expressly
contemplated in Section D.3 hereof with respect to the Series C Preferred Stock,
provided, however, that no such redemption shall be permitted or effected unless
and until the Corporation shall have elected to redeem all of the issued and
outstanding shares of Series A Preferred Stock and Series B Preferred Stock
prior to the effectiveness of such redemption of Series C Preferred Stock and
the Series A Redemption Price and Series B Redemption Price applicable to such
redemptions shall have been paid in full or adequate provision therefor shall
have been made; and provided further, however, that nothing in this subsection
shall permit the Corporation to redeem the Series A Preferred Stock or Series B
Preferred Stock without consent of the holders thereof under any circumstances
not expressly permitted hereunder.
B. SERIES A PREFERRED STOCK.
1. VOTING RIGHTS.
(a) General Provisions. Holders of Series A
Preferred Stock shall be entitled to notice of each meeting of all of the
Corporation's stockholders, but shall not be entitled to notice of special or
other meetings of any class of Common Stock or of Series B Preferred Stock or
Series C Preferred Stock. The holders of shares of Series A Preferred Stock
shall vote together with the holders of shares of Common Stock and Series B
<PAGE>
Preferred Stock and Series C Preferred Stock on all matters submitted to a
vote of stockholders and not as a separate series or class, except as otherwise
provided herein. Except as otherwise provided herein, on all matters to be voted
on by the Corporation's stockholders, every holder of Series A Preferred Stock
shall be entitled to cast, in person or by proxy, that number of votes equal to
the full number of shares of Class C Common Stock into which such holder's
Series A Preferred Stock is then convertible.
(b) Series A Preferred Stock Directors. The
holders of shares of Series A Preferred Stock, voting as a single class, shall
be entitled to elect two (2) directors of the Corporation (the "Series A
Preferred Stock Directors"). Where the holders of Series A Preferred Stock
vote as a class, the affirmative vote of a majority of the shares of
Series A Preferred Stock represented in person or by proxy at a meeting at
which a quorum of Series A Preferred Stock is present shall be sufficient
to approve any matter with respect to which said holders are entitled to vote;
provided, however, that the affirmative vote of a plurality of all votes
cast in person or by proxy by the holders of Series A Preferred Stock shall
be sufficient to elect a Series A Preferred Stock Director. The holders of
Series A Preferred Stock, at any properly called annual or special meeting or
upon a call of a special meeting of holders of Series A Preferred Stock by
holders of not less than twenty-five percent (25%) of the shares of Series A
Preferred Stock then outstanding, may remove any Series A Preferred Stock
Director at any time and from time to time, voting as a single class, by the
affirmative vote of eighty percent (80%) of all votes entitled to be cast for
the election of a Series A Preferred Stock Director, and may elect a successor
to fill any resulting vacancies for the remainder of the term of such Series A
Preferred Stock Director. If any Series A Preferred Stock Director shall cease
to be a director for any reason (including death, resignation, removal or any
other cause), the vacancy shall be filled by a vote of the remaining Series A
Preferred Stock Director (unless, with respect to removal, the holders of Series
A Preferred Stock have elected a successor Series A Preferred Stock Director
pursuant to the provisions hereof). If there is no such remaining director, then
upon a call of a special meeting of holders of Series A Preferred Stock, by any
such holder, the vacancy shall be filled by the vote of the holders of Series A
Preferred Stock, voting as a single class.
(c) Actions Requiring Series A Preferred Stock
Director Votes. Provided that no Series A Preferred Stockholder is, and has
for thirty (30) days been, in Default under or pursuant to and as defined in any
promissory note delivered to the Corporation by such Series A Preferred
Stockholder in partial consideration for the Corporation's issuance of Series
A Preferred Stock to such Stockholder, without the affirmative vote of
each of the Series A Preferred Stock Directors, the Corporation shall not:
<PAGE>
(i) incur or permit any of its
Subsidiaries (as defined in Section B.1(d)(v)) to incur any Indebtedness (as
defined in Section B.1(d)(i)) as a result of which the outstanding
Indebtedness of the Corporation would on a consolidated basis exceed One Million
Dollars ($1,000,000) in the aggregate; other than (A) Indebtedness owing to
the Investor named in that certain Financing Transaction Agreement dated as
of February 24, 1995, or any of its affiliates; or (B) Indebtedness incurred
under and pursuant to that certain Credit Agreement and the related Credit
Agreement Document as those terms are defined in the Securities Purchase
Agreement dated December 1, 1995 between the Corporation and the Series B
Stockholder (the "Securities Purchase Agreement"); or (C) Indebtedness not
exceeding $20,000,000 incurred under and pursuant to one or more revolving
credit facilities guaranteed by the Series A Preferred Stockholder and/or any
other guarantors reasonably acceptable to the Series A Preferred Stockholder; or
(ii) issue any shares of its capital
stock with liquidation or dividend rights senior to (or PARI PASSU with) the
liquidation or dividend rights of the Series A Preferred Stock; or
(iii) effect any amendment to these
Amended and Restated Articles of Incorporation or to the By-Laws of the
Corporation that adversely affects the holders of the Series A Preferred Stock
or the Class C Common Stock; or
(iv) effect any amendment to any of the
Amended Employment Agreements dated February 24, 1995 by and between the
Corporation and each of Stewart Gold ("Gold"), Scott Rifkin ("Rifkin") and
Alan Kimmel ("Kimmel") (collectively, the "Management Employment
Agreements"; and Gold, Rifkin and Kimmel each being a "Management
Stockholder" and collectively being the "Management Stockholders"), or settle or
compromise any claim or dispute of the Corporation with respect thereto; or
(v) obligate the Corporation to do any
of the foregoing.
(d) Definitions. Except as otherwise expressly
provided, for purposes of these Amended and Restated Articles, the following
words shall have the meanings set forth:
(i) Unless excluded as set forth below,
"INDEBTEDNESS" shall mean (without duplication):
(A) all indebtedness of the
Corporation (as calculated on a
consolidated basis by including
all Indebtedness of each
Subsidiary, whether or not such
inclusion is required under
generally accepted or other
applicable accounting principles)
<PAGE>
for borrowed money, the deferred
purchase price of property or
services, all obligations,
contingent or otherwise, incurred
in connection with letters of
credit, credit facilities,
acceptance or similar facilities,
any agreement to purchase,
redeem, exchange, convert or
otherwise acquire any capital
stock or equity securities
(including, without limitation,
any warrants, rights, or options
to acquire such capital stock or
securities of any person or
entity other than a Subsidiary)
now or hereafter outstanding,
(B) all obligations of the
Corporation and its Subsidiaries
evidenced by bonds, notes,
debentures, loan agreements,
credit agreements, lines of
credit or other similar
instruments (including any debt
securities convertible into or
exchangeable for equity
securities of the Corporation);
(C) all indebtedness of the
Corporation and its Subsidiaries
created or arising under any
conditional sale or other title
retention agreement with respect
to property acquired (even if the
rights and remedies of the
seller or lender under such
agreement in the event of
default are limited to
repossession or sale of such
property);
(D) all obligations of the
Corporation and its
Subsidiaries under interest
rate contracts of the
Corporation;
(E) all obligations under leases of
the Corporation and its
Subsidiaries that are capitalized
by the Corporation's
accountants under generally
accepted accounting principles;
(F) all guarantees or surety
agreements given by the
Corporation and its Subsidiaries;
and
(G) all obligations relating to the
redemption or purchase of any
capital stock of the Corporation
or its Subsidiaries (other than
(x) shares of Series A Preferred
Stock, or (y) capital stock of a
wholly-owned Subsidiary, or (z)
Permitted Redemptions pursuant to
Section A.5 hereof).
<PAGE>
Indebtedness shall specifically exclude, in every case,
(1) trade payables and other accrued current liabilities arising in the ordinary
course of business; and (2) any of the foregoing that
(H) are incurred by the Corporation
or any Subsidiary on
commercially reasonable terms
which do not contemplate
issuance of stock or other
equity interests of the
Corporation, and
(I) have been approved as part of
any Business Plan (or any
approved amendments thereto) for
or with respect to any
calendar year. To the extent any
of the foregoing are or have
been approved in part
(including as to a portion of
any such Indebtedness) in any
such Business Plan (or
amendment), the approved portion
only shall not be deemed to
constitute "Indebtedness" for
purposes hereof.
(ii) "QUALIFIED PUBLIC OFFERING" shall
mean any public underwritten offering of the Corporation's Common Stock
pursuant to an effective registration statement filed with the Securities
and Exchange Commission pursuant to the Securities Act of 1933, as amended
(the "1933 Act") based upon a total market capitalization of the
Corporation, at the time of such offering, of at least Twenty-Five Million
Dollars ($25,000,000), from which the Corporation receives net proceeds of not
less than Fifteen Million Dollars ($15,000,000).
(iii) "NON-QUALIFIED PUBLIC OFFERING"
shall mean any underwritten public offering of the Corporation's Common
Stock pursuant to any effective registration statement filed with Securities
and Exchange Commission pursuant to the 1933 Act that is not a Qualified Public
Offering.
(iv) "BUSINESS PLAN" means each plan
for the conduct and operation of the business of the Corporation, or any
portion thereof, which shall include a budget and contain narrative
descriptions and approximate schedules for all significant activities proposed
to be undertaken by the Corporation for the period of time set forth therein,
in reasonably sufficient detail to enable the officers and directors of the
Corporation to make informed decisions with respect to any recommendation of,
consent to, or approval of, such plan and any related budget. The term
"Business Plan" shall include the "April 30 Business Plan" which was delivered
<PAGE>
to and reviewed by the Series A Preferred Stockholder, and either has been
delivered to and reviewed by the professional advisors of the Series A Preferred
Stockholder or the Series A Preferred Stockholder has had the opportunity to,
but elected not to, have its professional advisors review such April 30 Business
Plan, and such April 30 Business Plan has been approved by the holders of the
Series A Preferred Stock for purposes of (A) Article IV Section B.1(c)(i) hereof
and (B) Article IV Section B.1(e)(i)(A) hereof.
(v) "SUBSIDIARY" means any corporation,
partnership, limited liability company, joint venture or other business
entity in which the Corporation, directly or indirectly, whether through
another Subsidiary or otherwise, by virtue of equity ownership, contract or
otherwise, has the right to elect a majority of the board of directors or
other governing body or owns at least 50.0% of the total equity interests
thereof.
(e) Series A Preferred Stockholder Major
Decisions.
(i) GENERAL PROVISIONS. Provided that
no Series A Preferred Stockholder is, and has for thirty (30) days been, in
Default under or pursuant to and as defined in any promissory note delivered to
the Corporation by such Series A Preferred Stockholder in partial
consideration for the Corporation's issuance of Series A Preferred Stock to such
Stockholder, the Corporation shall not take any of the following actions (each,
a "Series A Preferred Stockholder Major Decision") without first submitting such
Series A Preferred Stockholder Major Decision to a vote by the holders of Series
A Preferred Stock, voting separately as a class:
(A) the adoption of the
Corporation's Business Plan (as defined in Section B.1.(d)(iv) hereof) for any
12-month period or for calendar years 1998 and 1999, or any amendment or
periodic update to any approved Business Plan;
(B) the issuance by the
Corporation from time to time after the date hereof of shares of its capital
stock or options, warrants or other rights to acquire any such shares, to
employees of the Corporation, directly or under any plan for the benefit of
the foregoing or the issuance of any such shares or options into an employee
stock bonus pool in an amount which, when aggregated with all other such
issuances to employees of the Corporation, exceeds ten percent (10%) of the
fully diluted shares of capital stock of the Corporation as of the date of such
issuance; PROVIDED, HOWEVER, that shares of Class A Common Stock (and options,
warrants and rights to acquire shares of Class A Common Stock) that have been,
and will after the date hereof be, issued to the three Management Stockholders
and other executive employees of the Corporation in amounts not to exceed
twenty-five percent (25%) of the fully diluted shares of capital stock of the
Corporation as of the date hereof (the "25% Management Stock Amount") shall NOT
be counted toward such ten percent (10%) limitation, such issuances to the
Management Stockholders and other executive employees being expressly authorized
and consented to by the holders of the Series A Preferred Stock;
<PAGE>
(C) the cessation of the business
of the Corporation;
(D) the issuance of shares of
capital stock of the Corporation with liquidation and dividend rights
junior to those afforded to the Series A Preferred Stock ("Series A Junior
Stock") to any person or entity (a "Series A Adverse Junior Stock Purchaser")
which has legitimate business interests that are materially adverse to the
holders of Series A Preferred Stock or any affiliate thereof ("Series A
Adverse Junior Stock");
(E) any sale, transfer or
other disposition by the Corporation of all or any substantial portion
of its assets whether by asset or stock sale or otherwise;
(F) any conveyance, transfer or
lease by the Corporation of all or any substantial portion of its assets to
any person, or to any corporation, partnership or other entity;
(G) the consolidation or merger
by the Corporation with or into another corporation or entity, or the
consolidation or merger of another corporation or entity with or into the
Corporation, where as a result of such transactions the voting
stockholders of the Corporation immediately prior to such transaction would not
hold sufficient voting stock in the surviving entity immediately after such
transaction to elect a controlling constituency of the Board of Directors (or
other governing body) in a transaction where the Corporation is not the
survivor;
(H) any Non-Qualified Public
Offering;
(I) unless the Corporation has
previously elected to redeem all of the outstanding shares of Series A
Preferred Stock and has paid or adequately provided for payment of the
Series A Redemption Price, any optional redemption of Series B Preferred
Stock pursuant to Section C.3(c) hereof; and/or
(J) any agreement by the
Corporation to do any of the foregoing.
(ii) CORPORATION ENTITLED TO TAKE
CERTAIN ACTIONS WITHOUT APPROVAL OF SERIES A PREFERRED STOCKHOLDERS. If
a Series A Preferred Stockholder Major Decision, other than an issuance of
Series A Adverse Junior Stock, is not approved by the holders of a majority of
the then outstanding shares of Series A Preferred Stock pursuant to the
provisions of subparagraph (i) hereof, then the Corporation shall
<PAGE>
nonetheless be entitled to take any of such actions constituting such a Series A
Preferred Stockholder Major Decision, but shall provide written notice to that
effect to the holders of Series A Preferred Stock no later than ninety (90) days
prior to the date such action is to be effective and the holders of Series A
Preferred Stock shall be entitled, by delivery of a written notice to the
Corporation at the principal office of the Corporation not less than twenty-one
(21) days prior to the date such action is to be effective, to require the
Corporation to redeem all, but not less than all, of the then issued and
outstanding shares of Series A Preferred Stock pursuant to the provisions of
Section B.3(a)(ii) hereof.
(iii) SERIES A ADVERSE JUNIOR STOCK;
SPECIAL PROVISIONS. If the Series A Preferred Stockholders do not approve
an issuance of Series A Junior Stock that they believe is Series A Adverse
Junior Stock pursuant to the provisions of subparagraph (i) hereof, then,
upon the affirmative vote of a majority of the directors of the Corporation
other than the Series A Preferred Directors, the Corporation shall be
entitled, for a period of sixty (60) days following the election of the
holders of Series A Preferred Stock, not to approve an issuance of such stock,
and to require arbitration under the expedited procedures set forth herein of
whether the Series A Preferred Stockholders or their affiliates have legitimate
business interests that are materially adverse to such Purchaser. Such
arbitration shall be conducted by three arbitrators, two of whom (the "Party
Designated Arbitrators") shall be selected by the parties, and the third of
whom shall be a "Neutral Arbitrator" selected by the Party Designated
Arbitrators. The Corporation shall designate its Party Designated Arbitrator in
a written notice to the holders of Series A Preferred Stock, and within five (5)
days thereafter, such holders of Series A Preferred Stock shall designate its
Party Designated Arbitrator. Within five (5) days thereafter, the two Party
Designated Arbitrators shall agree upon and appoint a Neutral Arbitrator, who
shall be an attorney experienced in the health care business. The only issue to
be determined in the arbitration shall be whether the proposed recipient of
Series A Junior Stock has legitimate business interests which are materially
adverse to the holders of Series A Preferred Stock. The arbitration shall be
concluded within sixty (60) days of the date of the Corporation's written
notice. The determination of the arbitrators so appointed shall be final and
conclusive upon the parties. If the arbitrators determine that the proposed
purchaser is a Series A Adverse Junior Stock Purchaser, then the Corporation may
nonetheless proceed to issue such shares of Series A Adverse Junior Stock to
such purchaser, but shall provide written notice to that effect to the holders
of Series A Preferred Stock no later than 30 days prior to the date such
issuance is consummated, and the holders of Series A Preferred Stock shall
thereupon become entitled to exercise their rights to require the Corporation to
redeem all, but not less than all, of the issued and outstanding shares of
Series A Preferred Stock pursuant to the provisions of Section B.3.(a)(iii)
hereof.
(f) Method of Approval.
Whenever any action described herein requires the action of holders of
Series A Preferred Stock, such action shall be deemed to have occurred upon the
<PAGE>
approval of holders of a majority of the then issued and outstanding shares of
Series A Preferred Stock at a duly convened meeting of such stockholders or by
their written consent in accordance with the then applicable provisions of the
MGCL, and the Corporation, in undertaking any action with respect to such
holders, shall be entitled to rely upon a certificate signed by such holders to
that effect.
2. DIVIDENDS.
(a) Accrual of Dividends
Before April 1, 2000. Beginning as of February 24, 1995 and prior to April 1,
2000, cash dividends at the rate of thirty-two and one half cents ($0.325)
per share per annum shall accrue on the Series A Preferred Stock (whether or
not earned or declared or payment is legally available therefor) in equal
quarterly installments, commencing on the first day of April, 1995, and
continuing thereafter on the first day of each month of July, October, January
and April and shall accrue interest at the rate of 6.5% (based upon a 365 day
year) compounded quarterly on all such unpaid dividend amounts.
(b) Payment of Dividends
Before April 1, 2000. Dividends and interest accrued on or with respect to
accrual dates occurring prior to April 1, 2000 shall be payable (either as
part of a Redemption Price (as defined below) or liquidation payment, or
otherwise) prior to April 1, 2000 only upon (i) the liquidation of the
Corporation as herein provided, or (ii) the redemption or conversion of such
share of Series A Preferred Stock, and if not paid upon liquidation, redemption
or conversion on or prior to April 1, 2000, the amount of all such accrued
dividends and interest payments shall from and after April 1, 2000 become an
unsecured obligation of the Corporation, bearing interest at the rate, and being
payable at the times, set forth with respect to dividend payments in Section
2(c) below.
(c) Payment of Dividends
on or After April 1, 2000. Beginning on April 1, 2000, cash dividends, at the
per annum rate of 100 basis points over The Wall Street Journal Prime Rate as
of the last business day prior to April 1, 2000, shall accrue on the original
issue price of all shares of Series A Preferred Stock outstanding (whether or
not earned or declared by the Board), in equal quarterly installments on the
first day of each month of April, July, October and January. All such accrued
dividends shall be declared by the Board (if funds are at such time legally
available therefor) and shall be payable to each holder of Series A Preferred
Stock on each such scheduled quarterly date (as set forth above) if, at the time
of payment funds for the full payment of such quarterly dividend on all shares
of Series A Preferred Stock then outstanding are legally available therefor
under the laws of the State of Maryland as then in effect.
(d) Right of Set Off
Against Dividends, Redemptions, Liquidation, etc. The Corporation may set off
against any amounts due and payable to any holder of Series A Preferred Stock
(including, but not limited to, any dividend payments, Redemption Prices,
<PAGE>
liquidation payments or other amounts) all or any part of any accrued but unpaid
interest on any unpaid principal amount owed to the Corporation by any holder,
or prior holder, of shares of Series A Preferred Stock pursuant to the terms of
any promissory note(s) delivered by such holder(s) to the Corporation for the
issuance of such shares of Series A Preferred Stock.
(e) Declaration Date. The date on
which the Board shall consider the payment of a particular quarterly
dividend on the Series A Preferred Stock pursuant to Section B.2.(c) hereof
shall be any date that is prior to the date on which such quarterly dividend
would be payable if declared, and which is not more than seventy-five (75) days
prior to such quarterly dividend payment date.
(f) Reduction of Capital. If at any
time the Board considers the payment of any quarterly dividend pursuant to
Section B.2.(c) hereof (i) funds for the full payment of such quarterly
dividend are not then legally available therefor under the laws of the State of
Maryland as then in effect as applied to the then effective
capitalization of the Corporation, and (ii) funds for the payment of such
quarterly dividend would be legally available if the stated capital accounts of
the Corporation were reduced or capital surplus was revalued, then, in such
event, the Board shall reduce the stated capital at least to the extent
necessary to declare and pay such dividend or cause a revaluation of capital
surplus if such reduction of capital or valuation of surplus would be
permissible under the laws of the State of Maryland as then in effect and unless
the exercise of the Board's fiduciary duty prevents such reduction.
(g) Limitation on other
Dividends; Payments. So long as any shares of Series A Preferred Stock
remain outstanding, no dividends shall be declared or paid upon, nor shall any
dividend or other distribution be made with respect to, any shares of any other
class or series of stock or equity interest of the Corporation or any Subsidiary
without the consent of each of the Series A Preferred Stock Directors and no
shares of any class of stock or equity interest of the Corporation or any
Subsidiary other than the shares of Series A Preferred Stock shall be redeemed,
retired, purchased or otherwise acquired by the Corporation, except purchases of
the Corporation's interests in a Subsidiary at the time of its organization.
Notwithstanding the foregoing, the Corporation may (i) effect Permitted
Redemptions pursuant to Section A.5, and (ii) redeem shares of capital stock of
or equity interests in any wholly-owned Subsidiary.
3. REDEMPTION.
(a) OPTIONAL REDEMPTION BY HOLDERS.
(i) Permitted Time for
Optional Redemption. At the written request of any holder of Series A
Preferred Stock, sent by such holder to the Corporation at the principal office
<PAGE>
of the Corporation, during the ninety-two (92) day period beginning on March 1,
2000, and ending on June 1, 2000, the Corporation shall, within ninety (90) days
of the date of such request (a "Series A Redemption Date") redeem for cash out
of any funds legally available therefor all, but not less than all, of the then
issued and outstanding shares of Series A Preferred Stock held by the holders
making such request, at an amount per share of Series A Preferred Stock equal to
the greater of (A) the then "fair market value" (as such term is defined in
Section 3(d)(viii) below) of such share, including, for purposes of calculating
such fair market value, the sum of all accumulated and unpaid interest and
dividends on such share of Series A Preferred Stock, whether or not such
dividends have been declared by the Corporation to the date such share is
actually redeemed and taking into account any right of set off of the
Corporation referred to in Section B.2(d) hereof, or (B) the sum of the issue
price of such share plus all accumulated and unpaid interest and dividends
thereon, whether or not such dividends have been declared by the Corporation
(subject to any right of set off of the Corporation referred to in Section
B.2(d) hereof), to the date such share is actually redeemed.
(ii) Permitted
Redemption Resulting from Certain Unapproved Series A Preferred Stockholder
Major Decisions. If the Corporation elects to take any action constituting a
Series A Preferred Stockholder Major Decision (other than the issuance of
Series A Adverse Junior Stock) without the approval of the holders of Series A
Preferred Stock (as permitted pursuant to the provisions of Section B.1.(e)(ii)
hereof), the Corporation shall give notice of such election to each holder of
Series A Preferred Stock at least ninety (90) days prior to the date such action
is to be effective, and the holders of Series A Preferred Stock shall be
entitled, by delivery of a written notice to the Corporation at the principal
office of the Corporation not less than twenty-one (21) days prior to the date
such action is to be effective, to request the Corporation to redeem, and the
Corporation shall redeem out of any funds legally available therefor, all (but
not less than all) of the then issued and outstanding shares of Series A
Preferred Stock then held by the holders requesting redemption, at an
amount per share of Series A Preferred Stock equal to the greater of (A) the
then fair market value of such share (including, for purposes of calculating
such fair market value, the sum of all accumulated and unpaid interest and
dividends on such share of Series A Preferred Stock, whether or not such
dividends have been declared by the Corporation to the date such share is
actually redeemed and taking into account any right of set off of the
Corporation referred to in Section B.2(d) hereof), or (B) the sum of the issue
price of such share plus all accumulated and unpaid interest and dividends
thereon, whether or not such dividends have been declared by the Corporation
(subject to any right of set off of the Corporation referred to in Section
B.2(d) hereof), to the date such share is actually redeemed. To the extent
that net cash proceeds are received by the Corporation as the result of the
taking of such action constituting such a Series A Preferred Stockholder Major
Decision, other than the Series A Preferred Stockholder Major Decisions
described in Section B.3(a)(iii) below, which shall be treated as provided
therein, (i) the Corporation shall pay any redemption price in cash to the
holders of Series A Preferred Stock, such cash to be paid pro rata among the
<PAGE>
holders of Series A Preferred Stock requesting such redemption (with such
redemption being a condition precedent to the Corporation's receipt of such net
proceeds) upon the occurrence of such action (a "Series A Redemption Date"). To
the extent that such net cash proceeds received by the Corporation as a result
of taking such Series A Preferred Stockholder Major Decision are insufficient to
enable the Corporation to make full payment in cash, the Corporation may pay the
balance due with respect to the redemption of such shares within 180 days of
such request.
(iii) Effect of Issuance
of Series A Adverse Junior Stock. If the Corporation elects to issue shares of
Series A Adverse Junior Stock after a determination by the arbitrators
appointed pursuant to Section B.1.(e)(iii) hereof that the purchaser thereof is
a Series A Adverse Junior Stock Purchaser, then the holders of Series A
Preferred Stock shall be entitled, by delivery of a written notice to the
Corporation at the principal office of the Corporation within ninety (90) days
after the date of issuance of such shares by the Corporation, to request the
Corporation to redeem, and the Corporation shall redeem, all but not less than
all of the issued and outstanding shares of Series A Preferred Stock held by
holders requesting redemption. Such redemption payment shall be made in cash
prior to or contemporaneously with such issuance if a request for redemption is
made thirty (30) or more days prior to the date specified for issuance by the
Corporation in its notice of issuance, and otherwise no sooner than 180 days
after the date of such request but in all events within one (1) year of such
request (a "Series A Redemption Date"). The redemption price shall in all events
be an amount per share of Series A Preferred Stock equal to the greater of (A)
the purchase price per share of Series A Adverse Junior Stock to be paid, on a
fully diluted basis, by the purchaser of such shares, or (B) the then fair
market value of such share of Series A Preferred Stock as calculated pursuant to
subparagraph (i) hereof, or (C) the product of (I) one and one half (1.5) times
the sum of (II) the liquidation preference of such shares, including therein all
accumulated and unpaid dividends and interest thereon (whether or not such
dividends have been declared by the Corporation but subject to any right of set
off of the Corporation pursuant to Section B.2(d) hereof) to the date such share
is actually redeemed. Interest shall accrue on the amount of the fair market
value per share at a rate of six and one half percent (6.5%) per annum from the
date such holders of Series A Preferred Stock deliver notice of their redemption
request to the Corporation until the full payment of all amounts payable with
respect to such redemption has been paid in cash by the Corporation.
(iv) Permitted Special Event
Redemptions. Upon the occurrence of a "Special Event Redemption," as set forth
in Section 12.8 of that certain Finance Transaction Agreement between
the Corporation, the original holder of the Series A Preferred Stock and
others, dated as of February 24, 1995, the holders of the Series A Preferred
Stock shall have a period of sixty (60) days from the occurrence of such a
Special Event Redemption to request the Corporation to redeem, and the
Corporation shall redeem, out of any funds legally available therefor, all (but
<PAGE>
not less than all) of the then issued and outstanding shares of Series A
Preferred Stock, at an amount per share equal to the sum of the issue price
plus all accumulated and unpaid interest and dividends thereon (subject to
any right of set off of the Corporation referred to in Section B.2(d) hereof),
whether or not such dividends have actually been declared. The Corporation
shall be entitled to satisfy any redemption obligations owing under this
Section (b)(iv) by delivering to the holders of Series A Preferred Stock a
promissory note (or notes) with a term equal to the longer of (A) 24 full
months from the date of such request, or (B) the number of full months
remaining from the date of such request through February 28, 1998
(collectively, the "Final Maturity Date"). Compound interest shall accrue on
any such note at the rate of 6 1/2 % per annum. The principal amount of such
note shall be amortized ratably on a 60 month basis. Accrued and unpaid
interest shall be payable, together with equal monthly installments of
principal, on the fifth day of each month following the issuance of such note,
with a final payment of all accrued and unpaid interest plus all remaining
unpaid principal due on the Final Maturity Date. Such note will be prepayable
without premium, will be subordinated to all then existing or thereafter created
Indebtedness, and will contain certain such customary default and other clauses
as are customary in promissory notes of such type and amount.
(B) MANDATORY REDEMPTION BY THE
CORPORATION. Upon the occurrence of any Non-Compliance (as defined in Section
B.6), the Corporation shall redeem all, but not less than all, of the shares of
Series A Preferred Stock then held by each holder at the redemption price as
calculated pursuant to the provisions of Section B.3.(a)(i), within ten (10)
business days after the occurrence of such Non-Compliance. Any such redemption
shall not be in lieu of or in any way limit any other rights which such holders
may have (at law or in equity) in connection with the event giving rise to their
right of redemption.
(C) OPTIONAL REDEMPTION BY THE
CORPORATION.
(i) Redemption in 2000. If the holders
of Series A Preferred Stock fail to request redemption of their shares of
Series A Preferred Stock within the ninety-two (92) day period provided in
Section B.3(a)(i) hereof for such optional redemption, and if such shares have
not otherwise been converted to shares of Class C Common Stock, then the
Corporation may, out of funds legally available therefor, upon at least thirty
(30) days prior notice delivered at any time after the expiration of such
applicable period (a "Series A Redemption Date"), redeem all, but not less than
all, of the outstanding shares of Series A Preferred Stock at an amount per
share of Series A Preferred Stock equal to the issue price of such share plus an
amount equal to the amount of all accumulated and unpaid dividends and interest
on such share of Series A Preferred Stock, whether or not such dividends have
been declared by the Corporation to the date such share is actually redeemed,
minus any amount which the Corporation is entitled to set off pursuant to the
provisions of Section B.2(d) hereof.
<PAGE>
(ii) REDEMPTION UPON REDUCTION
OF NOTE. If the Corporation elects to defer receipt of all or any portion of
any scheduled payment of principal due and payable to the Corporation under
any promissory note made by any holder of Series A Preferred Stock in favor of
and delivered to the Corporation in consideration for the issuance by the
Corporation of Series A Preferred Stock to such holder (each a "Deferred Payment
Amount"), then the Corporation may, in its discretion and consistent with the
provisions of any such note, redeem a number of shares of Series A Preferred
Stock from the maker of such note determined by dividing the total amount of all
then outstanding Deferred Payment Amounts by five dollars ($5.00), at a
redemption price of five dollars ($5.00) for each such share, and set off all or
any portion of such Deferred Payment Amounts against any such Redemption Price
(as defined below) due hereunder. The Corporation shall give at least thirty
(30) days notice to the Series A Preferred Stockholders of any redemption
pursuant to this subsection (ii), which notice shall specify a redemption date
(also a Series A "Redemption Date").
(iii) REDEMPTION OF
REMAINING SHARES OF SERIES A PREFERRED STOCK UPON AUTOMATIC CONVERSION. To
the extent that shares of Series A Preferred Stock are not converted into
shares of Class C Common Stock pursuant to the provisions of Section
B.4.(b) upon the occurrence of the events set forth therein, the Corporation
may redeem such remaining shares of Series A Preferred Stock upon at least ten
(10) days prior notice to the holders of Series A Preferred Stock, which notice
shall specify a redemption date (also a Series A "Redemption Date"). The
redemption price for such shares shall equal, and shall be paid by,
cancellation of the entire unpaid principal amount of the promissory note
delivered by the holder of such shares to the Corporation in partial
consideration for the issuance of such shares.
(D) GENERAL PROVISIONS FOR
REDEMPTIONS.
(i) Series A REDEMPTION
PRICE. Each amount payable by the Corporation pursuant to Section B.3(a)
through (c) hereof respectively, is referred to as the "Series A Redemption
Price".
(ii) EFFECT OF REDEMPTION. Provision
for payment of the Series A Redemption Price for shares of Series A
Preferred Stock having been made by the Corporation, and for so long as there
shall be no default in the payment of deferred portions of the Redemption Price,
then (A) the shares of Series A Preferred Stock designated for redemption in any
notice shall not be entitled to any dividends accruing after the specified
Redemption Date, and (B) on such Redemption Date all rights of the respective
holders of such shares, as stockholders of the Corporation by reason of the
ownership of such shares of Series A Preferred Stock, shall cease, except the
right to receive the Redemption Price upon presentation and surrender of the
respective certificates representing such shares.
<PAGE>
(iii) DEFERRED PAYMENT FOR CERTAIN
APPROVED SERIES A PREFERRED STOCKHOLDER MAJOR DECISIONS. On any Series A
Redemption Date resulting from the failure of the holders of Series A Preferred
Stock to approve (A) a sale of all or substantially all of the assets of the
Corporation whether by asset or stock sale, or otherwise, for consideration
other than all cash or (B) the Corporation having conveyed, transferred or
leased all or any substantial portion of its assets to any person or entity, or
(C) a consolidation or merger referred to in Section B.1(e)(i)(G) above, the
Corporation may, at its election, in lieu of making payment in full in cash,
prior to the consummation of any such transaction, pay to each holder of shares
of Series A Preferred Stock an amount in cash equal to one-half (1/2) of the
total Series A Redemption Price, and may issue a promissory note of the
Corporation in an amount equal to the balance of such Series A Redemption Price;
provided, however, that in the case of (A) above, the Corporation shall be
obligated to pay to the holders of the Series A Preferred Stock an additional
PRO RATA amount of cash (and shall be entitled to reduce the principal amount of
any note referred to in (iv) below), if and to the extent it receives any cash
as a result of such a transaction.
(iv) PROMISSORY NOTE. Any promissory
note referred to in subparagraph (iii), above, shall be payable in two (2)
equal annual installments, commencing on the one (1) year anniversary of the
Series A Redemption Date, of principal and interest and such interest shall
accrue at the then prime rate (the "Prime Rate") of the Corporation's primary
banking institution (or, if there be no such institution, the prime rate of
interest as published in the Wall Street Journal, from time to time) plus one
hundred (100) basis points. The obligations of the Corporation to make payment
under such note shall be secured by a perfected security interest in the
Corporation's accounts receivable (not more than 90 days' due at the date of
perfection) with an aggregate value of not less that 120% of all amounts payable
under such note from time to time, which recurring interest lien shall be
subordinated only with respect to payments and priority to any lien(s) granted
to (A) any of the Corporation's lending financial institutions, incurred in
accordance with these designations, or (B) a Series B Preferred Stockholder
pursuant to a Final Credit Enhancement Agreement dated December 1, 1995.
(v) RETIREMENT OF SHARES. Shares of
Series A Preferred Stock that have been redeemed, purchased or otherwise
acquired by the Corporation shall be retired and may not be reissued.
(vi) EFFECT OF LEGAL RESTRICTIONS ON
PAYMENT. If the Redemption Price for any such shares cannot be paid in full
because the Corporation is prohibited by law from making such payment,
then those funds that are legally available will be used to pay (ratably
if necessary) accrued but unpaid interest, then accrued but unpaid
dividends, and then to redeem the maximum possible number of shares of Series A
Preferred Stock ratably among the holders thereof determined by multiplying the
total number of shares of Series A Preferred Stock to be redeemed times a
fraction, the numerator of which shall be the total number of such shares then
<PAGE>
held by each such holder and the denominator of which shall be the total number
of such shares then outstanding. The shares of Series A Preferred Stock not
redeemed shall remain outstanding and be entitled to all rights and preferences
provided herein; provided, however, at any time thereafter when additional funds
of the Corporation are legally available for the redemption of such shares of
Series A Preferred Stock, such funds will be used, at the end of the next
succeeding fiscal quarter, to redeem the balance of such shares, or such portion
thereof for which funds are then legally available. If fewer than the total
number of shares of Series A Preferred Stock represented by any certificate are
redeemed, a new certificate representing the number of unredeemed shares will be
issued to the holder thereof without cost to such holder within three business
days after surrender of the certificate representing the redeemed shares of
Series A Preferred Stock.
(vii) RESTRICTIONS ON CORPORATE
ACTIONS. If the Corporation for any reason fails to redeem any shares of Series
A Preferred Stock in accordance with this Section B.3 on or prior to the
Redemption Date specified herein, then, notwithstanding anything to the contrary
contained in these Articles of Incorporation, the Corporation may not incur any
Indebtedness (unless the proceeds of such incurrence of Indebtedness are used to
make all overdue redemption payments in respect of the Series A Preferred Stock,
including payments of accrued but unpaid dividends or interest) without the
prior written consent of the holders of the Series A Preferred Stock voting
separately as a class; provided, however, that, subject to the restriction set
forth in Section B.1(c)(i), if such restriction is then in force, the
Corporation may incur Indebtedness without the aforesaid approval if (A) the
proceeds of such borrowing are used to pay obligations of the Corporation
arising in the ordinary course of business as they become due and payable, or
otherwise to maintain the operations of the Corporation at the then current
level and not to expand the operation of the Corporation in any material
respect, whether through expansion or enhancement of, or addition, to the
Corporation's then current activities, facilities, equipment or other capital
assets, or otherwise, (B) the Corporation provides prior written notice of such
borrowing to all holders of Series A Preferred Stock, which notice shall include
a statement of the intended use of the proceeds of such borrowing, and (C)
promptly upon request therefor, the Corporation shall provide to any holder of
Series A Preferred Stock a certificate signed by the President and Chief
Financial Officer of the Corporation certifying as to the allocation and use of
the proceeds of any such borrowing.
(viii) APPRAISAL. Within
fourteen (14) days of any written request of any holder of shares of Series A
Preferred Stock from time to time, an appraiser or appraisers shall be jointly
selected by the holders of Series A Preferred Stock (the "Transferring
Stockholder"), on the one hand, and the Corporation on the other hand, and such
jointly selected appraiser or appraisers shall determine the fair market value
of the Series A Preferred Stock. The fair market value of the Series A Preferred
Stock shall be such amount as of such date as the appraisers determine, using
<PAGE>
such methods as the appraisers appointed hereunder determine, in the exercise of
their sole discretion, is appropriate taking into account any liquidation,
conversion, preferences or other rights attendant to such class (which shall
specifically include the value of any Class C Common Stock into which such
shares of Series A Preferred Stock may at such time be converted). If the
Transferring Stockholder, on the one hand, and the Corporation on the other
hand, do not agree upon the selection of an appraiser or appraisers, within the
period therein stated, then, within seven (7) days after the expiration of the
fourteen (14) day period, the Transferring Stockholder shall appoint an
appraiser, and the Corporation shall appoint a second appraiser. The two (2)
appraisers so appointed shall appoint a third appraiser within seven (7) days
after both shall have been appointed. If either the Transferring Stockholder or
the Corporation shall fail to so appoint an appraiser, the appraiser duly
appointed by the other shall serve as the sole appraiser and such appraiser
shall determine the fair market value of the Series A Preferred Stock and such
determination shall be binding, final and conclusive on all parties. The said
appraiser(s) shall, within sixty (60) days after the last appointment thereof
determine the fair market value of the Series A Preferred Stock as otherwise
provided herein and the determination of such appraiser shall be determinative
of the fair market value of the Series A Preferred Stock and shall be binding,
final and conclusive on all parties. If the appraisers cannot agree on the fair
market value of the Series A Preferred Stock, within the time allotted, then
such fair market value shall be the median or the two appraisals closest in
value to each other. All expenses incurred in the appraisal process shall be
borne and paid equally by the Transferring Stockholder and the Corporation.
(ix) MULTIPLE HOLDERS OF
SERIES A PREFERRED STOCK. If the Series A Preferred Stock is at any time held
by more than one person or entity, the request for redemption pursuant to this
Section B.3 by the holders of at least fifty-one percent (51%) of the then
issued and outstanding shares of Series A Preferred Stock shall constitute the
request for redemption by the holders of all of the then issued and outstanding
shares of Series A Preferred Stock and all such holders of Series A Preferred
Stock shall redeem their shares of Series A Preferred Stock pursuant to this
Section B.3 upon the receipt of notice from holders of at least fifty-one
percent (51%) of the then issued and outstanding shares of Series A Preferred
Stock.
4. CONVERSION RIGHTS.
(a) OPTIONAL CONVERSION BY HOLDER.
(i) General Provisions. All, but
not less than all, of the issued and outstanding shares of Series A Preferred
Stock shall be convertible, without the payment of any additional consideration,
into shares of Class C Common Stock, at the option of the holders of the shares
of Series A Preferred Stock, at any time prior to 5:00 P.M. (EST) on February
24, 2000; provided, however, that issued and outstanding shares of Series A
<PAGE>
Preferred Stock may not be converted into shares of Class C Common Stock as
otherwise permitted herein if, at the time of such requested conversion, the
Corporation has not received cash in full payment for all shares of Series A
Preferred Stock outstanding at such time (including payment in full of all
amounts of principal and interest under any note given in partial consideration
for such shares, but less any accrued but unpaid dividends with respect
thereto); and provided, further, however, that if such conversion occurs at any
time during the 60 day period referred to in Section 3(a)(ii) (other than as the
result of the adoption of a Business Plan as set forth in Section 1(e)(i)(A)
(above) or pursuant to Section 3(a)(iii) above, after the Corporation elects to
take any action constituting a Series A Preferred Stockholder Major Decision
without the approval of the holders of the Series A Preferred Stock, such
conversion shall not be deemed to be an "optional conversion" governed by the
provisions of this Section 4(a), but shall be governed by the provisions
relating to "Automatic Conversions" set forth in Section 4(b) below. Each such
share of Series A Preferred Stock shall be convertible at such time into one
fully-paid and nonassessable share of Class C Common Stock, subject to
adjustment as provided in Section B.4.(e) below (the "Series A Conversion
Rate"). The holders of shares of Series A Preferred Stock requesting conversion
of shares into shares of Class C Common Stock shall send a written notice to the
Corporation, at the principal office of the Corporation, requesting such
conversion. The holders shall, as soon thereafter as practicable, deliver the
certificates therefor, duly endorsed for transfer, at the principal office of
the Corporation or any transfer agent for the Series A Preferred Stock. The
Corporation shall, as soon as practicable thereafter, issue and deliver to the
holders a certificate or certificates for the number of such shares of Class C
Common Stock to which the holders shall be entitled, a check payable to the
holders in the amount of any cash in lieu of issuance of any fractional share,
and the amount of any cumulative dividends and interest accrued but unpaid on
such shares. The conversion shall be deemed to have been made immediately prior
to the close of business on the date of receipt of the notice. The persons
entitled to receive the shares of Class C Common Stock issuable upon such
conversion shall be treated for all purposes as the record holder or holders of
such shares of Class C Common Stock on such date, and the shares of Series A
Preferred Stock converted shall immediately be canceled and may not be reissued.
(ii) Multiple Holders of
Series A Preferred Stock. If the Series A Preferred Stock is at any time held
by more than one person or entity, the request for conversion pursuant to this
Section B.4 by the holders of at least fifty-one percent (51%) of the then
issued and outstanding shares of Series A Preferred Stock shall constitute the
request for conversion by the holders of all of the then issued and outstanding
shares of Series A Preferred Stock and all such holders of Series A Preferred
Stock shall convert their shares of Series A Preferred Stock pursuant to this
Section B.4 upon the receipt of notice from holders of at least fifty-one
percent (51%) of the then issued and outstanding shares of Series A Preferred
Stock.
<PAGE>
(b) AUTOMATIC CONVERSION. If the holders of
Series A Preferred Stock have not earlier exercised their rights to require
the Corporation to redeem their shares of Series A Preferred Stock pursuant to
the provisions of Section B.3.(a) hereof, such number of outstanding shares of
Preferred Stock equal to the product of the number of outstanding shares of
Series A Preferred Stock multiplied by a fraction, the numerator of which shall
be the total amount of cash paid to the Corporation by such holders to purchase
shares of Series A Preferred Stock (but not including the payment of any
interest to the Corporation) and the denominator of which shall be $5 million,
shall, together with all other then outstanding shares of the Corporation's
preferred stock or other capital stock with rights to convert into shares of
Common Stock, be converted into fully-paid and nonassessable shares of Class C
Common Stock at the Series A Conversion Rate upon the earlier to occur of the
closing or other consummation of (i) any Qualified Public Offering, (ii) any
Non-Qualified Public Offering, (iii) any combination, consolidation or merger
where the Corporation is not the survivor, (iv) any sale, exchange or other
disposition of all or substantially all of the Corporation's assets, whether by
asset or stock sale or otherwise, or (v) any election by the holders of Series A
Preferred Stock to effect an "Optional Conversion" during any period during
which the holders of the Series A Preferred Stock may cause the Corporation to
redeem shares of their Series A Preferred Stock pursuant to the provisions of
Section 3(a)(ii) or 3(a)(iii), above. In the case of the occurrence of any of
(i) through (v) above, all remaining shares of Series A Preferred Stock which
have not been converted into shares of Class C Common Stock, shall be subject to
mandatory redemption by the Corporation pursuant to the provisions of Section
B.3.(iii) hereof. Shares of Class C Common Stock received pursuant to this
Section 4.(b) shall be subject to the provisions of Article IV, Section A.4 in
the event of a Qualified Public Offering or Non-Qualified Public Offering, and
shall thereupon immediately be reclassified as shares of Class A Common Stock.
At least twenty (20) days prior written notice of the date fixed and place
designated for conversion shall be sent by first class mail, postage prepaid, to
the address of each holder of shares of Series A Preferred Stock as shown in the
records of the Corporation. On or before the date fixed for conversion, each
holder of shares of Series A Preferred Stock shall surrender the certificates
representing such shares to the Corporation at the place designated in such
notice and shall thereafter receive certificates for the number of full shares
of Common Stock to which such holder is entitled. Until such time as holders of
certificates theretofore representing shares of Series A Preferred Stock have
surrendered them for exchange as provided herein, no dividends shall be paid
with respect to any shares represented by such certificates and no payment for
fractional shares shall be made.
(c) NO FRACTIONAL SHARES. No
fractional shares of Common Stock shall be issued upon conversion of shares of
Series A Preferred Stock. In lieu of any fractional share, the Corporation shall
pay a cash adjustment in respect of such fractional interest equal to the fair
market value of such fractional interest as determined by the Board.
<PAGE>
(d) PAYMENT; DIVIDENDS. At the
time of the conversion of any shares of Series A Preferred Stock, whether
mandatory or optional, the Corporation shall pay to the holder of such shares of
Series A Preferred Stock the sum of all interest and cumulative dividends
accrued but unpaid with respect to such shares, whether or not such dividends
shall have been declared by the Corporation to the date of conversion (subject
to the Corporation's right of set off referred to in Section B.2(d) hereof).
(e) ADJUSTMENTS; ANTIDILUTION. The
number of shares of Class C Common Stock issuable upon the conversion of the
Series A Preferred Stock shall be subject to adjustment from time to time
upon the happening of certain events as follows:
(i) DIVIDENDS, SPLITS.
If the Corporation declares a dividend payable in its shares of its Common
Stock, splits any of its Common Stock or combines any of its outstanding shares
of Common Stock into a smaller number, then the number of fully-paid and
nonassessable shares of Class C Common Stock into which each share of Series A
Preferred Stock may be converted shall forthwith be adjusted by multiplying one
(1) by a fraction (A) the numerator of which shall be the total number of
outstanding shares of Common Stock immediately after such dividend, stock split
or combination, and (B) the denominator of which shall be the total number of
outstanding shares of Common Stock immediately prior to such dividend, stock
split or combination.
(ii) REORGANIZATION,
RECLASSIFICATION. In the event of a reorganization, share exchange, or
reclassification, other than a change in par value, or from par value to no par
value, or from no par value to par value or a transaction described in
subsection (iii) or (iv) below, each share of Series A Preferred Stock shall,
after such reorganization, share exchange or reclassification, be convertible
into the kind and number of shares of stock or other securities or property of
the Corporation to which the holder of Series A Preferred Stock would have been
entitled if the holder had held the Class C Common Stock issuable upon
conversion of its Series A Preferred Stock immediately prior to such
reorganization, share exchange, or reclassification, or to which the Series A
Preferred Stock is actually entitled, but not both.
(iii) CONSOLIDATION,
MERGER, SALE OF ASSETS. In the event of a merger or consolidation or sale,
exchange or other disposition of all, or substantially all of the Corporation's
assets, to which the Corporation is a party, each share of Series A Preferred
Stock shall, after such merger or consolidation, be convertible into the kind
and number of shares of stock and/or other securities, cash or other property to
which the holder of such share of Series A Preferred Stock would have been
entitled if the holder had held the Class C Common Stock issuable upon
conversion of its shares of Series A Preferred Stock immediately prior to such
consolidation or merger or sale of assets, or to which the Series A Preferred
Stock is actually entitled, but not both.
<PAGE>
(iv) CERTAIN ISSUANCES
OF ADDITIONAL SHARES OF COMMON STOCK. If the Corporation shall issue any
additional shares of Common Stock -- other than securities to be issued (i) to
the public pursuant to any Qualified Public Offering or Non-Qualified Public
Offering, (ii) to officers, directors, or employees of the Corporation as part
of a stock option plan, restricted stock plan, employee stock purchase plan,
employment agreement, or other employee stock plan or agreement, implemented by
the Board, provided that the aggregate numbers of such shares issued shall not
exceed ten percent (10%) of the fully diluted capital stock of the Corporation
calculated as of the time of the issuance, (iii) to Management Stockholders and
other executive employees of the Corporation, of an amount of Class A Common
Stock not in excess of the 25% Management Stock Amount, (iv) upon conversion of
any shares of the Series A Preferred Stock, the Series B Preferred Stock, the
Series C Preferred Stock or the exercise of that certain Stock Warrant granted
by the Company to the Series B Preferred Stockholder, of even date herewith, to
purchase 88,889 shares of Class A Common Stock at an exercise price that is
equal to or exceeds the "conversion price" including any adjustment thereof, (v)
upon the exercise of that certain Stock Warrant granted by the Company to John
R. Dwyer, Jr., Stephen X. Hamilton and D. Andrew Hamilton December 1, 1995 to
purchase in the aggregate 24,000 shares of Class A Common Stock, or (vi) to the
LP pursuant to Article XIV of the Practice Participation Agreement in respect of
the issuance of Medical Holdings Limited Partnership of the Limited Partner
Interests (or options to purchase such Interests) from and after the time that
more than sixty-six (66) but less than one hundred (100) physicians hold such
Limited Partner Interests (or options to acquire such Interests) directly or
indirectly through their professional corporations -- for a consideration per
share of Common Stock less than the "conversion price", as adjusted or as
previously adjusted, in effect on the date immediately prior to such issuance,
then and in such event, such conversion price shall be adjusted, concurrently
with such issuance, to a price equal to the quotient obtained by DIVIDING:
(1) an amount equal to (x)
the sum of (A) the total number of shares of
Common Stock outstanding immediately prior to such
issuance or sale, plus (B) the total number of shares
of Common Stock issuable upon exercise of all
options, warrants and other rights convertible or
exchangeable for, or evidencing the right to purchase
shares of, Common Stock outstanding immediately
prior to such issuance or sale, multiplied by the (C)
conversion price in effect immediately prior to such
issuance or sale, plus (y) the consideration, if any,
received or deemed to be received by the
Corporation upon such issuance or sale; BY
(2) the sum of (A) total number
of shares of Common Stock outstanding immediately
after such issuance or sale, plus (B) the total
number of shares of Common Stock issuable upon
exercise of all options, warrants and other rights
convertible or exchangeable for, or evidencing the
right to purchase shares of, Common Stock outstanding
immediately after such issuance or sale.
<PAGE>
For purposes of this Section B.4, the conversion price shall initially be $5.00
per share.
No adjustment of the conversion price shall be made under this Section
B.4.(e)(iv) upon the issuance of any additional shares of Common Stock that are
issued pursuant to the exercise of any warrants, options or other subscription
or purchase rights or pursuant to the exercise of any conversion or exchange
rights in any convertible securities if any such adjustments shall previously
have been made upon the issuance of any such warrants, options or other rights
or upon the issuance of any convertible securities (or upon the issuance of any
warrants, options or any rights therefor) pursuant to Sections 4(v) or 4(vi)
hereof.
(v) ISSUANCE OF WARRANTS, OPTIONS
OR OTHER RIGHTS. If the Corporation at any time shall issue any warrants,
options or other rights to subscribe for or purchase any additional shares of
Common Stock and the price per share for which additional shares of Common Stock
may at any time thereafter be issuable pursuant to such warrants, options or
other rights shall be less than the conversion price per share in effect
immediately prior to such issuance, then such issue shall be deemed an issuance
(as of the date of issue of such warrants, options or other rights) of the total
maximum number of shares of Common Stock issuable pursuant to such warrants,
options or other rights, and the conversion price shall thereupon be adjusted as
provided in Section B.4.(e)(iv) hereof on the basis that the aggregate
consideration for the additional shares of Common Stock issuable pursuant to
such warrants, options or other rights, plus the minimum consideration to be
received by the Corporation for the issuance of additional shares of Common
Stock pursuant to such warrants, options, or other rights shall be deemed to be
the consideration received by the Corporation for the issuance of such warrants,
options, or other rights.
(vi) CERTAIN ISSUANCES
OF CONVERTIBLE SECURITIES. In case the Corporation shall issue any
securities convertible into Common Stock and the consideration per share for
which such additional shares of Common Stock may at any time thereafter be
issuable pursuant to the terms of such convertible securities shall be less than
the conversion price per share in effect immediately prior to such issuance,
then upon such issuance of such securities the conversion price shall be
adjusted as provided in Section B.4.(e)(iv) hereof on the basis that (i) the
maximum number of additional shares of Common Stock necessary to effect the
conversion or exchange of all such convertible securities shall be deemed to
have been issued as of the date of issuance of such convertible securities, and
(ii) the aggregate consideration for such maximum number of additional shares of
Common Stock plus the minimum consideration received by the Corporation for the
issuance of such additional shares of Common Stock pursuant to the terms of such
convertible securities shall be deemed to be the consideration received by the
Corporation for the issuance of such convertible securities. No adjustment of
the conversion price shall be made under this subsection upon the issuance of
any convertible securities which are issued pursuant to the exercise of any
warrants, options or other subscription or purchase rights therefor, if any such
adjustment shall previously have been made upon the issuance of such warrants,
options or other rights pursuant to Section B.4.(e)(v) hereof.
(vii) ADJUSTMENT OF SERIES
A CONVERSION RATE. Upon each adjustment of the conversion price under the
provisions of this Section B.4.(e), the Series A Conversion Rate shall be
adjusted to an amount determined by dividing $5.00 by such adjusted conversion
price. For example, if, as a result of any of the foregoing, the conversion
price was reduced to $4.00, each share of Series A Preferred Stock would then be
convertible into 1.25 shares of Class C Common Stock.
(viii) OTHER PROVISIONS
APPLICABLE TO ADJUSTMENTS UNDER THIS SECTION. The following provisions will be
applicable to the making of adjustments in conversion prices hereinabove
provided in this Section B.4.(e):
(1) COMPUTATION OF
CONSIDERATION. To the extent that any additional shares of Common Stock or any
convertible securities or any warrants, options or other rights to subscribe for
or purchase any additional shares of Common Stock or any convertible securities
shall be issued for cash consideration, the consideration received by the
Corporation therefor shall be deemed to be the amount of the cash received by
the Corporation therefor, or, if such additional shares of Common Stock or
convertible securities are offered by the Corporation for subscription, the
subscription price. To the extent that such issuance shall be for a
consideration other than cash, then the amount of such consideration shall be
deemed to be the fair value of such consideration at the time of such issuance
as determined in good faith by the Corporation's Board after receipt of a
fairness opinion, appraisal or similar independent third party advice determined
by a person or entity jointly selected by the Series A Preferred Directors, the
Series B Preferred Directors, the Series C Preferred Directors and the other
directors pursuant to procedures substantially similar to those set forth in
Section 6 of the Stockholders Agreement. The consideration for any additional
shares of Common Stock issuable pursuant to any warrants, options or other
rights to subscribe for or purchase the same shall be the consideration received
by the Corporation for issuing such warrants, options or other rights, plus the
additional consideration payable to the Corporation upon the exercise of such
warrants, options or other rights. The consideration for any additional shares
of Common Stock issuable pursuant to the terms of any convertible securities
shall be the consideration paid or payable to the Corporation in respect of the
subscription for or purchase of such convertible securities, plus the additional
consideration, if any, payable to the Corporation upon the exercise of the right
of conversion or exchange in such convertible securities. In case of the
issuance at any time of any additional shares of Common Stock or convertible
securities in payment or satisfaction of any dividend upon any class of stock
preferred as to dividends in a fixed amount, the Corporation shall be deemed to
have received for such additional shares of Common Stock or convertible
securities a consideration equal to the amount of such dividend so paid or
satisfied.
<PAGE>
(2) READJUSTMENT OF
CONVERSION PRICE. Upon the expiration of the right to convert or exchange any
convertible securities, or upon the expiration of any rights, options or
warrants, without conversion, exchange or exercise, the issuance of which
convertible securities, rights, options or warrants effected an adjustment in
the conversion price, such conversion price shall forthwith be readjusted and
thereafter be the price which it would have been (but reflecting any other
adjustments in the conversion price made pursuant to the provisions of this
Section B.4.(e) after the issuance of such convertible securities, rights,
options or warrants) had the adjustment of the conversion price made upon the
issuance or sale of such convertible securities or issuance of rights, options
or warrants been made on the basis of the issuance only of the number of
additional shares of Common Stock actually issued upon conversion or exchange of
such convertible securities, or upon the exercise of such rights, options or
warrants, and thereupon only the number of additional shares of Common Stock
actually so issued, if any, shall be deemed to have been issued and only the
consideration actually received by the Corporation (computed as set forth in
subsection B.4.(e)(viii)(1) hereof) shall be deemed to have been received by the
Corporation. If the purchase price provided for in any such rights, options or
warrants, or the additional consideration (if any) payable upon the conversion
or exchange of any convertible securities, or the rate at which any convertible
securities are convertible into or exchangeable for shares of Common Stock
changes at any time (other than under or by reason of provisions designed to
protect against dilution), the conversion price in effect at the time of the
change shall be adjusted to the conversion price that would have been in effect
at such time had such rights, options, warrants or convertible securities still
outstanding provided for such changed purchase price, additional consideration
or conversion rate, as the case may be, at the time initially granted, issued or
sold.
(3) OTHER ACTION
AFFECTING COMMON STOCK. If the Corporation shall take any action affecting
the outstanding number of shares of Common Stock, other than an action
described in any of the foregoing subsections 4(e)(i) to (vii) hereof,
inclusive, which in the opinion of the Corporation's Board would have a
materially adverse effect upon the rights of the holders of the Series A
Preferred Stock, the conversion price shall be adjusted in such manner
and at such time as the Board may determine to be equitable in the
circumstances.
(ix) NOTICES OF ADJUSTMENTS.
Whenever the conversion rate and conversion price is adjusted as herein
provided, an officer of the Corporation shall compute the adjusted conversion
rate and conversion price in accordance with the foregoing provisions and shall
prepare a written instrument setting forth such adjusted conversion rate and
conversion price and showing in detail the facts upon which such adjustment is
based, and such written instrument shall promptly be delivered to the record
<PAGE>
holders of the Series A Preferred Stock, who shall approve such conversion
rates and prices within 30 days of receipt. If holders of Series A Preferred
Stock do not object in writing during such 30 day period, they shall be deemed
to have approved such conversion rates and prices for all purposes hereof.
(f) RESERVATION OF SHARES. The Board
shall at all times reserve and keep available, out of its authorized but
unissued shares of Class C Common Stock, solely for the purpose of effecting
the conversion of the shares of Series A Preferred Stock, the full number of
shares of Class C Common Stock deliverable by the Corporation upon the
conversion of all shares of Series A Preferred Stock from time to time
outstanding and otherwise issuable under rights granted from the Corporation
then existing.
(g) NO IMPLIED MODIFICATION OF TERMS.
The provisions of this Section B.4. shall not give, or be deemed to give, the
Corporation the power or authority to issue any shares of its capital stock or
other securities or to take any other action that it is expressly prohibited
from issuing by another provision hereof.
5. LIQUIDATION RIGHTS.
(a) Upon any liquidation,
dissolution or winding up of the affairs of the Corporation, whether voluntary
or involuntary, the holders of shares of the Series A Preferred Stock shall
be entitled to receive out of the assets of the Corporation available
for distribution to stockholders, before any distribution or payment shall be
made in respect of the holders of shares of Common Stock or any other class or
series of stock ranking junior to the Series A Preferred Stock, a
liquidating distribution in an amount equal to the greater of (i) the sum
of the "fair market value" per share of Series A Preferred Stock, which
shall include an amount per share equal to all cumulative dividends and
interest accrued but unpaid thereon, whether or not such dividends and
interest shall have been declared by the Corporation, to the date fixed for
such distribution or payment (but subject to reduction to the extent the
Corporation exercises its right of set off referred to in Section B.2(d)
hereof); or (ii) the sum of the original purchase price per share of Series A
Preferred Stock plus an amount equal to all cumulative dividends and interest
accrued but unpaid thereon to the date fixed for such distribution or payment;
provided, however, in either such event the amount of cash payable by the
Corporation shall not exceed the amount of cash paid to the Corporation by
all holders of such shares with respect to the purchase of such shares,
including the payment of any interest with respect thereto, through and
including the date of liquidation. The holders of shares of Series A Preferred
Stock shall not be entitled to receive any additional distributive amounts
upon such liquidation, dissolution or winding up of the affairs of the
Corporation resulting in any distribution of assets to stockholders.
<PAGE>
(b) If, upon any such liquidation,
dissolution or winding up of the affairs of the Corporation, the assets of the
Corporation to stockholders shall be insufficient to permit the payment in
full to the holders of Series A Preferred Stock of the amounts to which they are
entitled, then all of such available assets shall be distributed to the holders
of shares of Series A Preferred Stock ratably in proportion to the liquidation
payment otherwise due under Section B.5.(a) to each such holder and no amounts
shall be distributed in respect of any other share of capital stock of the
Corporation until all amounts distributable to holders of Series A Preferred
Stock have been distributed.
(c) The purchase or redemption by
the Corporation of stock of any class, in any manner permitted by law, shall
not for the purpose of this Section B.5. be regarded as a liquidation,
dissolution or winding up of the Corporation. Neither the consolidation nor
merger of the Corporation with or into any other corporation or corporations,
nor the sale or transfer by the Corporation of all or any part of its assets
shall be deemed to be a liquidation, dissolution or winding up of the
Corporation for the purpose of this Section B.5.
(d) At least thirty (30) days prior
written notice of any such liquidation, dissolution or winding up of the
affairs of the Corporation stating a payment date, the amount of the liquidation
payments and the place where said liquidation payments shall be payable, shall
be sent by first class mail, postage prepaid, to each holder of Series A
Preferred Stock at his address as shown on the records of the Corporation.
6. EVENTS OF NON-COMPLIANCE; NON-COMPLIANCE.
(a) DEFINITION. "Event of
Non-Compliance" shall mean, with respect to the Corporation, the occurrence of
any of the events, occurrences or circumstances listed below; provided,
however, that any such event, occurrence or circumstance shall constitute
"Non-Compliance" if, and only if, (i) in the case of any event, occurrence or
circumstance involving the non-payment of moneys (other than dividend and
accrued interest payments due and payable to the holders of Series A Preferred
Stock), within thirty (30) calendar days following written notice of such
non-payment, such moneys have not been paid by or on behalf of the Corporation;
and (ii) in the case of any event, occurrence or circumstance not involving the
non-payment of moneys, substantial efforts have not been commenced by or on
behalf of the Corporation to cure such event, occurrence, or circumstance
within a reasonable time after notice thereof (but in no event later than 30
days), and having been so commenced, there is a failure within a reasonable
time to prosecute to completion with diligence and continuity the curing of
such event, occurrence or circumstances, or a period of more than 90 days has
occurred without such cure being completed to the satisfaction of the
holders of the Series A Preferred Stockholders; provided, further, however,
that, for purposes of (i) and (ii) above the occurrence of any of the events,
occurrences or circumstances described in subparagraphs (5), (6) (7), (8), (9)
or (10), below shall constitute Non-Compliance immediately upon its
occurrence or upon the happening of such event or circumstances, without any
requirement of notice or passage of time except as specifically set forth in
such item:
<PAGE>
(1) any failure of the
Corporation to make any payment required to be made by it to the holders of
Series A Preferred Stock hereunder when due;
(2) any material
default by the Corporation in the payment of any other material obligation
of the Corporation to any holder of Series A Preferred Stock;
(3) the Corporation
otherwise breaches or otherwise fails to perform or observe in any material
respect any material covenant or agreement set forth herein or in the
Registration Rights Agreement between the Corporation and the initial holders of
the Series A Preferred Stock dated February 24, 1995 or in any Collateral
Agreement (as defined therein).
(4) beginning on April
1, 2000, whenever dividends accruing after such date on the Series A
Preferred Stock shall be in arrears in an aggregate amount equal to at least 4
quarterly dividends thereon;
(5) institution by the
Corporation of proceedings of any nature under any laws or regulations,
whether now existing or subsequently enacted or amended, for the relief of
debtors wherein the Corporation is seeking relief as debtor;
(6) a general assignment
by the Corporation for the
benefit of creditors;
(7) the institution by
the Corporation of a case or other proceeding under any section or chapter of
the Federal Bankruptcy Code as now existing or hereafter amended or becoming
effective;
(8) the institution
against the Corporation of a case or other proceeding under any section or
chapter of the Federal Bankruptcy Code as now existing or hereafter amended or
becoming effective, which proceeding is not dismissed, stayed or discharged
within a period of ninety (90) calendar days after the filing thereto;
(9) the appointment of
a receiving, custodian, trustee or like officer to take possession of the
assets of the Corporation, if the tendency of said receivership would reasonably
tend to have a materially adverse effect upon the performance by the Corporation
of its obligations hereunder, which receivership imposition;
<PAGE>
(10) admission by the Corporation
in writing of its inability to pay its debts as they mature or the Corporation
is adjudicated as insolvent;
(11) attachment,
execution or other judicial seizure of all or any substantial part of
the Corporation's assets, such attachment, execution or seizure in any
case remaining undismissed or undischarged for a period of fifteen (15) calendar
days after the levy thereof; provided, however, that said attachment,
execution or seizure shall not constitute an Event of Non-Compliance
hereunder if the Corporation posts a bond sufficient in amount to satisfy or
secure the payment of such claim or judgment within sixty (60) calendar days
after the levy thereof and the Corporation's assets are thereby released
from the lien of such attachment;
(12) one or more
judgments or decrees is entered against the Corporation or any of its
Subsidiaries involving in the aggregate a liability (to the extent not paid
or covered by current insurance) of the greater of (A) $100,000 with respect to
1995; $200,000 with respect to 1996; $300,000 with respect to 1997; $400,000
with respect to 1998; and $500,000 with respect to each year thereafter or (B)
ten percent (10%) of the net operating earnings of the Corporation for the
immediately preceding fiscal year, as calculated by the independent
certified public accountants employed by the Corporation, and all such
judgments or decrees have not been vacated, discharged, stayed or bonded
pending appeal within 60 days from the entry thereof;
(13) defaults shall have
occurred under any agreements, indentures, or instruments under which the
Corporation then has any outstanding Indebtedness in excess of the greater of
(A) $100,000 with respect to 1995; $200,000 with respect to 1996; $300,000 with
respect to 1997; $400,000 with respect to 1998; and $500,000 with respect to
each year thereafter or (B) ten percent (10%) of the net operating earnings of
the Corporation for the immediately preceding fiscal year, as calculated by the
independent certified public accountants employed by the Corporation in the
aggregate and if not already matured at its final maturity in accordance with
its terms, such Indebtedness shall have been accelerated; and/or
(14) any holder of Indebtedness
of the Corporation equal to the greater of (A) $100,000 with respect to 1995;
$200,000 with respect to 1996; $300,000 with respect to 1997; $400,000 with
respect to 1998; and $500,000 with respect to each year thereafter or (B) or
ten percent (10%) of the net operating earnings of the Corporation for the
immediately preceding fiscal year, as calculated by the independent certified
public accountants employed by the Corporation, after a default under such
Indebtedness shall commence proceedings, or take any action (including by way of
set-off) to retain in satisfaction of such Indebtedness or to collect, seize,
dispose of, or apply in satisfaction of such Indebtedness, assets of the
Corporation having a fair market value in excess of the greater of (A) $100,000
with respect to 1995; $200,000 with respect to 1996; $300,000 with respect to
1997; $400,000 with respect to 1998; and $500,000 with respect to each year
<PAGE>
thereafter or (B) ten percent (10%) of the net operating earnings of the
Corporation for the immediately preceding fiscal year, as calculated by the
independent certified public accountants employed by the Corporation,
individually or in the aggregate (including funds on deposit or held pursuant to
lock-box and other similar arrangements).
C. SERIES B PREFERRED STOCK.
1. VOTING RIGHTS.
(a) General Provisions.
Holders of Series B Preferred Stock shall be entitled to notice of each
meeting of all of the Corporation's stockholders, but shall not be entitled to
notice of special or other meetings of any class of Common Stock or of Series A
Preferred Stock or Series C Preferred Stock. The holders of shares of Series B
Preferred Stock shall vote together with the holders of shares of Common Stock
and Series A Preferred Stock and Series C Preferred Stock on all matters
submitted to a vote of stockholders and not as a separate series or class,
except as otherwise provided herein. Except as otherwise provided herein, on all
matters to be voted on by the Corporation's stockholders, every holder of
Series B Preferred Stock shall be entitled to cast, in person or by proxy, that
number of votes equal to the full number of shares of Class C Common Stock
into which such holder's Series B Preferred Stock is then convertible.
(b) Series B Preferred Stock
Directors. The holders of shares of Series B Preferred Stock, voting as a
single class, shall be entitled to elect two (2) directors of the Corporation
(the "Series B Preferred Stock Directors"). Where the holders of Series B
Preferred Stock vote as a class, the affirmative vote of a majority of the
shares of Series B Preferred Stock represented in person or by proxy at a
meeting at which a quorum of Series B Preferred Stock is present shall be
sufficient to approve any matter with respect to which said holders are entitled
to vote; provided, however, that the affirmative vote of a plurality of all
votes cast in person or by proxy by the holders of Series B Preferred Stock
shall be sufficient to elect a Series B Preferred Stock Director. The holders of
Series B Preferred Stock, at any annual meeting or upon a call of a special
meeting of holders of Series B Preferred Stock by holders of not less than
twenty-five percent (25%) of the shares of Series B Preferred Stock then
outstanding, may remove any Series B Preferred Stock Director at any time and
from time to time, voting as a single class, by the affirmative vote of eighty
percent (80%) of all votes entitled to be cast for the election of a Series B
Preferred Stock Director, and may elect a successor to fill any resulting
vacancies for the remainder of the term of such Series B Preferred Stock
Director. If any Series B Preferred Stock Director shall cease to be a director
for any reason (including death, resignation, removal or any other cause), the
vacancy shall be filled by a vote of the remaining Series B Preferred Stock
Director (unless, with respect to removal, the holders of Series B Preferred
Stock have elected a successor Series B Preferred Stock Director pursuant to the
provisions hereof). If there is no such remaining director, then upon a call of
<PAGE>
a special meeting of holders of Series B Preferred Stock, by any such holder,
the vacancy shall be filled by the vote of the holders of Series B Preferred
Stock, voting as a single class.
(c) Actions Requiring Series
B Preferred Stock Director Votes. Without the affirmative vote of each of the
Series B Preferred Stock Directors, the Corporation shall not:
(i) incur or
permit any of its Subsidiaries (as defined in Section B.1(d)(v)) to incur any
Indebtedness (as defined in Section B.1(d)(i)) as a result of which the
outstanding Indebtedness of the Corporation would on a consolidated basis exceed
One Million Dollars ($1,000,000) in the aggregate; other than (A) Indebtedness
owing to the Investor named in that certain Financing Transaction Agreement
dated as of February 24, 1995, or any of its affiliates, or (B) Indebtedness
incurred under and pursuant to that certain Credit Agreement and the related
Credit Agreement Documents as defined in the Securities Purchase Agreement, or
(C) Indebtedness not exceeding $20,000,000 incurred under and pursuant to one or
more revolving credit facilities guaranteed by the Series A Preferred
Stockholder and/or any other guarantors reasonably acceptable to the Series B
Preferred Stockholder; or
(ii) issue
any shares of its capital stock with liquidation or dividend rights senior to
(or PARI PASSU with) the liquidation or dividend rights of the Series B
Preferred Stock; or
(iii) effect
any amendment to these Amended and Restated Articles of Incorporation or to
the By-Laws of the Corporation that adversely affects the holders of the Series
B Preferred Stock or the Class C Common Stock; or
(iv) effect
any amendment to any of the Amended Employment Agreements dated February 24,
1995 by and between the Corporation and each of Stewart Gold ("Gold"), Scott
Rifkin ("Rifkin") and Alan Kimmel ("Kimmel") (collectively, the "Management
Employment Agreements"; and Gold, Rifkin and Kimmel each being a "Management
Stockholder" and collectively being the "Management Stockholders"), or settle or
compromise any claim or dispute of the Corporation with respect thereto; or
(v) obligate
the Corporation to do any of the foregoing.
(d) Definitions. For purposes of
this Section C, the definitions set forth in Section B.1.(d) shall be
applicable except that:
(i) In
Section B.1(d)(i)(G)(x), the phrase "Series B Preferred Stock" shall be
substituted for "Series A Preferred Stock;"
<PAGE>
(ii) "QUALIFIED PUBLIC
OFFERING" shall mean any public underwritten offering of the Corporation's
Common Stock pursuant to an effective registration statement filed with the
Securities and Exchange Commission pursuant to the Securities Act of 1933, as
amended (the "1933 Act") based upon a total market capitalization of the
Corporation, at the time of such offering, of at least Forty-Five Million
Dollars ($45,000,000).
(iii) "BUSINESS PLAN"
means each plan for the conduct and operation of the business of the
Corporation, or any portion thereof, which shall include a budget and contain
narrative descriptions and approximate schedules for all significant activities
proposed to be undertaken by the Corporation for the period of time set forth
therein, in reasonably sufficient detail to enable the officers and directors of
the Corporation to make informed decisions with respect to any recommendation
of, consent to, or approval of, such plan and any related budget. The term
"Business Plan" shall include the "April 30 Business Plan" which was delivered
to and reviewed by the Series B Preferred Stockholder, and either has been
delivered to and reviewed by the professional advisors of the Series B Preferred
Stockholder or the Series B Preferred Stockholder has had the opportunity to,
but elected not to, have its professional advisors review such April 30 Business
Plan, and such April 30 Business Plan has been approved by the holders of the
Series B Preferred Stock for purposes of (A) Article IV Section C.1(c)(i) hereof
and (B) Article IV Section C.1(e)(i)(A) hereof. The Corporation's April 30
Business has been approved by the holder of the Series B Preferred Stock for
purposes of (A) Section C.1(c)(i) hereof; and (B) Section C.1(e)(i)(A) hereof.
(e) Series B Preferred Stockholder
Major Decisions.
(i) GENERAL PROVISIONS.
The Corporation shall not take any of the following actions (each, a
"Series B Preferred Stockholder Major Decision") without first submitting such
Series B Preferred Stockholder Major Decision to a vote by the holders of Series
B Preferred Stock, voting separately as a class:
(A) the
adoption of the Corporation's Business Plan (as defined in Section C.1.(d)(iv)
hereof) for any 12-month period or for calendar years 1998 and 1999, or any
amendment or periodic update to any approved Business Plan;
(B) the
issuance by the Corporation from time to time after the date hereof of shares
of its capital stock or options, warrants or other rights to acquire any such
shares, to employees of the Corporation, directly or under any plan for the
benefit of the foregoing or the issuance of any such shares or options into an
employee stock bonus pool in an amount which, when aggregated with all other
such issuances to employees of the Corporation, exceeds ten percent (10%) of the
fully diluted shares of capital stock of the Corporation as of the date of such
issuance; PROVIDED, HOWEVER, that shares of Class A Common Stock (and options,
warrants and rights to acquire shares of Class A Common Stock) that have been,
and will after the date hereof be, issued to the three Management Stockholders
<PAGE>
and other executive employees of the Corporation in amounts not to exceed
twenty-five percent (25%) of the fully diluted shares of capital stock of the
Corporation as of the date hereof (the "25% Management Stock Amount") shall NOT
be counted toward such ten percent (10%) limitation, such issuances to the
Management Stockholders and other executive employees being expressly authorized
and consented to by the holders of the Series B Preferred Stock;
(C) the
cessation of the business of the Corporation;
(D) the
issuance of shares of capital stock of the Corporation with liquidation and
dividend rights junior to those afforded to the Series B Preferred Stock
("Series B Junior Stock") to any person or entity (a "Series B Adverse Junior
Stock Purchaser") which is actively engaged in substantially the same business
or businesses in which any corporation which owns more that fifty percent (50%)
of the voting capital stock of the holder of Series B Preferred Stock is
actively engaged ("Series B Adverse Junior Stock");
(E) any
sale, transfer or other disposition by the Corporation of all or any
substantial portion of its assets whether by asset or stock sale or otherwise;
(F) any
conveyance, transfer or lease by the Corporation of all or any substantial
portion of its assets to any person, or to any corporation, partnership or other
entity;
(G) the
consolidation or merger by the Corporation with or into another corporation or
entity, or the consolidation or merger of another corporation or entity with or
into the Corporation, where as a result of such transactions the voting
stockholders of the Corporation immediately prior to such transaction would not
hold sufficient voting stock in the surviving entity immediately after such
transaction to elect a controlling constituency of the Board of Directors (or
other governing body) in a transaction where the Corporation is not the
survivor;
(H) any
Non-Qualified Public Offering;
(I) any
agreement by the Corporation to do any of the foregoing.
(J) any
amendment subsequent to the date hereof to that certain Physician Services
Organization Agreement by and between Baltimore Medical Group, LLC and BMG
Limited Partnership, dated as of February 24, 1995 (which has been assigned by
BMG Limited Partnership (now Medical Holdings Limited Partnership) to the
<PAGE>
Corporation) (the "PSO Agreement"), that materially adversely affects the Series
B Preferred Stockholder in its capacity as the Series B Preferred Stockholder.
(K) Such
other actions or proposed actions by the Corporation that the Series B
Preferred Stockholder and the Corporation shall, in a written agreement between
them (a "Major Decision Agreement"), agree shall constitute additional Series B
Preferred Stock Major Decisions requiring the affirmative vote or consent of the
Series B Preferred Stockholder. A Major Decision Agreement may provide remedies
to the Series B Preferred Stockholder for the Corporation's failure or refusal
to secure the affirmative vote or consent of the Series B Preferred Stockholder
for any such additional Major Decision, in addition to the remedies otherwise
provided by these Articles.
(ii) CORPORATION
ENTITLED TO TAKE CERTAIN ACTIONS WITHOUT APPROVAL OF SERIES B
PREFERRED STOCKHOLDERS. If a Series B Preferred Stockholder Major Decision,
other than an issuance of Series B Adverse Junior Stock, is not approved by
the holders of a majority of the then outstanding shares of Series B Preferred
Stock pursuant to the provisions of subparagraph (i) hereof, then the
Corporation shall nonetheless be entitled to take any of such actions
constituting such a Series B Preferred Stockholder Major Decision, but shall
provide written notice to that effect to the holders of Series B Preferred Stock
no later than ninety (90) days prior to the date such action is to be
effective and the holders of Series B Preferred Stock shall be entitled,
by delivery of a written notice to the Corporation at the principal office
of the Corporation not less than twenty-one (21) days prior to the date such
action is to be effective, to require the Corporation to redeem all, but
not less than all, of the then issued and outstanding shares of Series B
Preferred Stock pursuant to the provisions of Section C.3(a)(ii) hereof.
(iii) SERIES B
ADVERSE JUNIOR STOCK; SPECIAL PROVISIONS. If the Series B Preferred
Stockholders do not approve an issuance of Series B Junior Stock that they
believe is Series B Adverse Junior Stock pursuant to the provisions of
subparagraph (i) hereof, then, upon the affirmative vote of a majority of the
directors of the Corporation other than the Series B Preferred Directors, the
Corporation shall be entitled, for a period of sixty (60) days following the
election of the holders of Series B Preferred Stock, not to approve an issuance
of such stock, and to require arbitration under the expedited procedures set
forth herein of whether the Series B Preferred Stockholders or their affiliates
have legitimate business interests that are materially adverse to such
Purchaser. Such arbitration shall be conducted by three arbitrators, two of whom
(the "Party Designated Arbitrators") shall be selected by the parties, and the
third of whom shall be a "Neutral Arbitrator" selected by the Party Designated
Arbitrators. The Corporation shall designate its Party Designated Arbitrator in
a written notice to the holders of Series B Preferred Stock, and within five (5)
days thereafter, such holders of Series B Preferred Stock shall designate its
Party Designated Arbitrator. Within five (5) days thereafter, the two Party
<PAGE>
Designated Arbitrators shall agree upon and appoint a Neutral Arbitrator, who
shall be an attorney experienced in the health care business. The only issue to
be determined in the arbitration shall be whether the proposed recipient of
Series B Junior Stock has legitimate business interests which are materially
adverse to the holders of Series B Preferred Stock. The arbitration shall be
concluded within sixty (60) days of the date of the Corporation's written
notice. The determination of the arbitrators so appointed shall be final and
conclusive upon the parties. If the arbitrators determine that the proposed
purchaser is a Series B Adverse Junior Stock Purchaser, then the Corporation may
nonetheless proceed to issue such shares of Series B Adverse Junior Stock to
such purchaser, but shall provide written notice to that effect to the holders
of Series B Preferred Stock no later than 30 days prior to the date such
issuance is consummated, and the holders of Series B Preferred Stock shall
thereupon become entitled to exercise their rights to require the Corporation to
redeem all, but not less than all, of the issued and outstanding shares of
Series B Preferred Stock pursuant to the provisions of Section C.3.(a)(iii)
hereof.
(f) Method of Approval.
Whenever any action described herein requires the action of holders of
Series B Preferred Stock, such action shall be deemed to have occurred upon the
approval of holders of a majority of the then issued and outstanding shares of
Series B Preferred Stock at a duly convened meeting of such stockholders or by
their written consent in accordance with the then applicable provisions of the
MGCL, and the Corporation, in undertaking any action with respect to such
holders, shall be entitled to rely upon a certificate signed by such holders to
that effect.
2. DIVIDENDS.
(a) Accrual of
Dividends Before April 1, 2000. Beginning as of December 1, 1995 and
prior to April 1, 2000, cash dividends at the rate of One Dollar and
Nine and Seven-Tenths Cents ($1.097) per share per annum shall accrue on
the Series B Preferred Stock (whether or not earned or declared or
payment is legally available therefor) in equal quarterly installments,
commencing on the first day of January 1996, and continuing thereafter on
the first day of each month of April, July, October, January and shall accrue
interest at the rate of 9.75% (based upon a 365 day year) compounded quarterly
on all such unpaid dividend amounts.
(b) Payment of Dividends
Before April 1, 2000. Dividends and interest accrued on or with respect to
accrual dates occurring prior to April 1, 2000 shall be payable (either as
part of a Series B Redemption Price (as defined below) or liquidation payment,
or otherwise) prior to April 1, 2000 only after all dividends and interest
accrued on or with respect to the Series A Preferred Stock have been fully paid
and only upon (i) the liquidation of the Corporation as herein provided, or (ii)
the redemption or conversion of such share of Series B Preferred Stock, and if
not paid upon liquidation, redemption or conversion on or prior to April 1,
<PAGE>
2000, the amount of all such accrued dividends and interest payments shall from
and after April 1, 2000 become an unsecured obligation of the Corporation,
bearing interest at the rate, and being payable at the times, and upon the
conditions, set forth with respect to dividend payments in Section 2(c) below.
(c) Payment of Dividends
on or After April 1, 2000. Beginning on April 1, 2000, cash dividends, at the
per annum rate of 100 basis points over The Wall Street Journal Prime Rate as
of the last business day prior to April 1, 2000, shall accrue on the original
issue price of all shares of Series B Preferred Stock outstanding (whether or
not earned or declared by the Board), in equal quarterly installments on the
first day of each month of April, July, October and January. All such accrued
dividends shall be declared by the Board (if funds are at such time legally
available therefor) and shall be payable to each holder of Series B Preferred
Stock on each such scheduled quarterly date (as set forth above) if, at the time
of payment (i) all dividends and interest accrued on or declared with respect to
the Series A Preferred Stock have been fully paid, and (ii) funds for the full
payment of such quarterly dividend on all shares of Series B Preferred Stock
then outstanding are legally available therefor under the laws of the State of
Maryland as then in effect.
(d) Declaration Date.
The date on which the Board shall consider the payment of a particular
quarterly dividend on the Series B Preferred Stock pursuant to Section C.2.(c)
hereof shall be any date that is prior to the date on which such quarterly
dividend would be payable if declared, and which is not more than seventy-five
(75) days prior to such quarterly dividend payment date.
(e) Reduction of
Capital. If at any time the Board considers the payment of any quarterly
dividend pursuant to Section C.2.(c) hereof (i) funds for the full payment
of such quarterly dividend are not then legally available therefor under the
laws of the State of Maryland as then in effect as applied to the
then effective capitalization of the Corporation, and (ii) funds for the
payment of such quarterly dividend would be legally available if the stated
capital accounts of the Corporation were reduced or capital surplus was
revalued, then, in such event, the Board shall reduce the stated capital
at least to the extent necessary to declare and pay such dividend or cause a
revaluation of capital surplus if such reduction of capital or valuation
of surplus would be permissible under the laws of the State of Maryland as
then in effect and unless the exercise of the Board's fiduciary duty prevents
such reduction.
(f) Limitation on other
Dividends; Payments. So long as any shares of Series B Preferred Stock
remain outstanding, (i) no dividends shall be declared or paid upon, nor shall
any dividend or other distribution be made with respect to, any shares of any
other class or series of stock or equity interest of the Corporation other than
the Series A Preferred Stock or any Subsidiary without the consent of each of
<PAGE>
the Series B Preferred Stock Directors, and (ii) no shares of any class of stock
or equity interest of the Corporation or any Subsidiary other than the shares of
Series B Preferred Stock and Series A Preferred Stock shall be redeemed,
retired, purchased or otherwise acquired by the Corporation, except purchases of
the Corporation's interests in a Subsidiary at the time of its organization.
Notwithstanding the foregoing, the Corporation may (iv) effect Permitted
Redemptions pursuant to Section A.5; and (v) may redeem shares of capital stock
of or equity interests in any wholly-owned Subsidiary.
<PAGE>
3. REDEMPTION.
(a) OPTIONAL REDEMPTION BY HOLDERS.
(i) Permitted Time for
Optional Redemption. At the written request of any holder of Series B
Preferred Stock, sent by such holder to the Corporation at the principal office
of the Corporation, during the ninety-two (92) day period beginning on March 1,
2000, and ending on June 1, 2000, the Corporation shall, within ninety (90) days
of the date of such request (a "Series B Redemption Date") redeem for cash out
of any funds legally available therefor all, but not less than all, of the then
issued and outstanding shares of Series B Preferred Stock held by the holders
making such request, at an amount per share of Series B Preferred Stock equal to
the greater of (A) the then "fair market value" (as such term is defined in
Section 3(d)(ix) below) of such share, including, for purposes of calculating
such fair market value, the sum of all accumulated and unpaid interest and
dividends on such share of Series B Preferred Stock, whether or not such
dividends have been declared by the Corporation to the date such share is
actually redeemed, or (B) the sum of the issue price of such share plus all
accumulated and unpaid interest and dividends thereon, whether or not such
dividends have been declared by the Corporation to the date such share is
actually redeemed.
(ii) Permitted
Redemption Resulting from Certain Unapproved Series B Preferred Stockholder
Major Decisions. If the Corporation elects to take any action constituting a
Series B Preferred Stockholder Major Decision (other than the issuance of
Series B Adverse Junior Stock) without the approval of the holders of Series B
Preferred Stock (as permitted pursuant to the provisions of Section B.1.(e)(ii)
hereof), the Corporation shall give notice of such election to each holder of
Series B Preferred Stock at least ninety (90) days prior to the date such action
is to be effective, and the holders of Series B Preferred Stock shall be
entitled, by delivery of a written notice to the Corporation at the principal
office of the Corporation not less than twenty-one (21) days prior to the date
such action is to be effective, to request the Corporation to redeem, and the
Corporation shall redeem out of any funds legally available therefor, all (but
not less than all) of the then issued and outstanding shares of Series B
Preferred Stock then held by the holders requesting redemption, at an
amount per share of Series B Preferred Stock equal to the greater of (A) the
then fair market value of such share (including, for purposes of calculating
such fair market value, the sum of all accumulated and unpaid interest and
dividends on such share of Series B Preferred Stock, whether or not such
dividends have been declared by the Corporation to the date such share is
actually redeemed) or (B) the sum of the issue price of such share plus all
accumulated and unpaid interest and dividends thereon, whether or not such
dividends have been declared by the Corporation to the date such share is
actually redeemed. To the extent that net cash proceeds are received by the
Corporation as the result of the taking of such action constituting such a
Series B Preferred Stockholder Major Decision, other than the Series B
<PAGE>
Preferred Stockholder Major Decisions described in Section C.3(a)(iii)
below, which shall be treated as provided therein, (i) the Corporation
shall pay any redemption price in cash to the holders of Series B Preferred
Stock, such cash to be paid pro rata among the holders of Series B Preferred
Stock requesting such redemption (with such redemption being a condition
precedent to the Corporation's receipt of such net proceeds) upon the
occurrence of such action (a "Series B Redemption Date"). To the extent that
such net cash proceeds received by the Corporation as a result of taking such
Series B Preferred Stockholder Major Decision are insufficient to enable the
Corporation to make full payment in cash, the Corporation may pay the balance
due with respect to the redemption of such shares within 180 days of such
request.
(iii) Effect of Issuance
of Series B Adverse Junior Stock. If the Corporation elects to issue shares of
Series B Adverse Junior Stock after a determination by the arbitrators
appointed pursuant to Section C.1(e)(iii) hereof that the purchaser thereof is a
Series B Adverse Junior Stock Purchaser, then the holders of Series B Preferred
Stock shall be entitled, by delivery of a written notice to the Corporation at
the principal office of the Corporation within ninety (90) days after the date
of issuance of such shares by the Corporation, to request the Corporation to
redeem, and the Corporation shall redeem, all but not less than all of the
issued and outstanding shares of Series B Preferred Stock held by holders
requesting redemption. Such redemption payment shall be made in cash prior to or
contemporaneously with such issuance if a request for redemption is made thirty
(30) or more days prior to the date specified for issuance by the Corporation in
its notice of issuance, and otherwise no sooner than 180 days after the date of
such request but in all events within one (1) year of such request (a "Series B
Redemption Date"). The Corporation shall also, on or before the effective date
of such redemption, secure the complete and unconditional release of all then
effective guarantees of indebtedness of the Corporation by the redeeming Series
B Stockholder and shall also pay or cause to be paid in full all of the monies
owed by the Corporation to such redeeming Series B Stockholder pursuant to or as
a result of such guarantee or any instrument, agreement or other document
executed and delivered by the Corporation to the redeeming Series B Stockholder
to induce the redeeming Series B Stockholder to enter into such guarantee. The
redemption price shall in all events be an amount per share of Series B
Preferred Stock equal to the greater of (A) the purchase price per share of
Series B Adverse Junior Stock to be paid, on a fully diluted basis, by the
purchaser of such shares, or (B) the then fair market value of such share of
Series B Preferred Stock as calculated pursuant to subparagraph (i) hereof, or
(C) the product of (I) one and one half (1.5) times the sum of (II) the
liquidation preference of such shares, including therein all accumulated and
unpaid dividends and interest thereon (whether or not such dividends have been
declared by the Corporation) to the date such share is actually redeemed.
Interest shall accrue on the amount of the fair market value per share at a rate
of nine and three-fourths percent (9.75%) per annum from the date such holders
of Series B Preferred Stock deliver notice of their redemption request to the
Corporation until the full payment of all amounts payable with respect to such
redemption has been paid in cash by the Corporation.
<PAGE>
(iv) Redemption Pursuant
to Securities Purchase Agreement. Upon the written request of the holder of
Series B Preferred Stock pursuant to Section 5.3(e) the Securities Purchase
Agreement, the Corporation shall redeem the then issued and outstanding shares
of Series B Preferred Stock held by such holder according to the terms of the
Securities Purchase Agreement.
(B) MANDATORY REDEMPTION BY THE
CORPORATION. Upon the occurrence of any Non-Compliance (as defined in Section
C.6), the Corporation shall redeem all, but not less than all, of the shares
of Series B Preferred Stock then held by each holder at the redemption price
as calculated pursuant to the provisions of Section C.3.(a)(i), within ten (10)
business days after the occurrence of such Non-Compliance. Any such redemption
shall not be in lieu of or in any way limit any other rights which such holders
may have (at law or in equity) in connection with the event giving rise
to their right of redemption.
(C) OPTIONAL REDEMPTION BY THE
CORPORATION.
(i) Optional Redemption
in 2000. If the holders of Series B Preferred Stock fail to request
redemption of their shares of Series B Preferred Stock within the ninety-two
(92) day period provided in Section C.3(a)(i) hereof for such optional
redemption, and if such shares have not otherwise been converted to shares of
Class C Common Stock, then the Corporation may, upon at least thirty (30) days
prior notice delivered at any time after the expiration of such applicable
period (a Series B "Redemption Date"), redeem all, but not less than all, of the
outstanding shares of Series B Preferred Stock at redemption price per share of
Series B Preferred Stock equal to the greater of (i) the then "fair market
value" (calculated, if the Corporation and the Series B Preferred Stockholder
are unable to agree, according to the procedures set forth in Section 3(d)(ix)
below) of such share, including for purposes of calculating such fair market
value, the sum of all accumulated and unpaid interest and dividends on such
share of Series B Preferred Stock, whether or not such dividends have been
declared by the Corporation to the date such share is actually redeemed, or (ii)
the sum of the issue price of such share plus an amount equal to the amount of
all accumulated and unpaid dividends and interest on such share of Series B
Preferred Stock, whether or not such dividends have been declared by the
Corporation to the date such share is actually redeemed.
(ii) Redemption Pursuant
to Securities Purchase Agreement. The Corporation may redeem the then
issued and outstanding shares of Series B Preferred Stock pursuant to and
according to the terms and provisions of Section 5.3(e) of the Securities
Purchase Agreement.
<PAGE>
(D) GENERAL PROVISIONS FOR
REDEMPTIONS.
(i) Series B REDEMPTION
PRICE. Each amount payable by the Corporation pursuant to Section C.3(a)
through (c) hereof respectively, is referred to as the "Series B Redemption
Price".
(ii) EFFECT OF REDEMPTION.
Provision for payment of the Series B Redemption Price for shares of
Series B Preferred Stock having been made by the Corporation, and for so long
as there shall be no default in the payment of deferred portions of the
Series B Redemption Price, then (A) the shares of Series B Preferred Stock
designated for redemption in any notice shall not be entitled to any dividends
accruing after the specified Redemption Date, and (B) on such Redemption Date
all rights of the respective holders of such shares, as stockholders of the
Corporation by reason of the ownership of such shares of Series B Preferred
Stock, shall cease, except the right to receive the Redemption Price upon
presentation and surrender of the respective certificates representing such
shares.
(iii) DEFERRED PAYMENT FOR CERTAIN
APPROVED SERIES B PREFERRED STOCKHOLDER MAJOR DECISIONS. On any Series B
Redemption Date resulting from the failure of the holders of Series B Preferred
Stock to approve (A) a sale of all or substantially all of the assets of the
Corporation whether by asset or stock sale, or otherwise for consideration
other than all cash or (B) conveyance, transfer, or lease by the Corporation
of all or any substantial portion of its assets to any person or entity, or
(C) a consolidation or merger referred to in Section C.1(e)(1)(G) above, the
Corporation may, at its election, in lieu of making payment in full in
cash, prior to the consummation of any such transaction, pay to each
holder of shares of Series B Preferred Stock an amount in cash equal to one-half
(1/2) of the total Series B Redemption Price, and may issue a promissory note
of the Corporation in an amount equal to the balance of such Series B Redemption
Price; provided however, that in the case of (A) above the Corporation shall
be obligated to pay to the holders of the Series B Preferred Stock an
additional pro rata amount of cash (and shall be entitled to reduce the
principal amount of any note referred to in (iv) below), if an to the extent it
receives any cash as a result of such a transaction.
(iv) PROMISSORY NOTE. Any promissory
note referred to in subparagraph (iii), above, shall be payable in two (2)
equal annual installments, commencing on the one (1) year anniversary of the
Series B Redemption Date, of principal and interest and such interest shall
accrue at the then prime rate (the "Prime Rate") of the Corporation's primary
banking institution (or, if there be no such institution, the prime rate of
interest as published in the Wall Street Journal, from time to time) plus one
hundred (100) basis points. The obligations of the Corporation to make payment
under such note shall be secured by a perfected security interest in the
Corporation's accounts receivable (not more than 90 days' due at the date of
perfection) with an aggregate value of not less that 120% of all amounts payable
under such note from time to time, which recurring interest lien shall be
subordinated only with respect to payments and priority to any lien(s) granted
to any of the Corporation's lending financial institutions, incurred in
accordance with these designations.
<PAGE>
(v) RETIREMENT OF SHARES. Shares of
Series B Preferred Stock that have been redeemed, purchased or otherwise
acquired by the Corporation shall be retired and may not be reissued.
(vi) SUBORDINATION OF SERIES B
REDEMPTION PRICE. If, at the time the Series B Redemption Price is payable
to the holders of the Series B Preferred Stock, the Series A Redemption Price
is also payable to the holders of the Series A Preferred Stock or the
Series A Preferred Stock has been designated for redemption pursuant to the
terms of Section B.3, no payment shall be made to the holders of Series B
Preferred Stock in respect of the Series B Redemption Price unless and
until the Series A Redemption Price shall have been paid in full to the
holders of the Series A Preferred Stock.
(vii) EFFECT OF LEGAL
RESTRICTIONS ON PAYMENT. If the Redemption Price for any such shares cannot be
paid in full because the Corporation is prohibited by law from making such
payment, then those funds that are legally available will be used to pay
(ratably if necessary) accrued but unpaid interest, then accrued but unpaid
dividends, and then to redeem the maximum possible number of shares of Series B
Preferred Stock ratably among the holders thereof determined by multiplying the
total number of shares of Series B Preferred Stock to be redeemed times a
fraction, the numerator of which shall be the total number of such shares then
held by each such holder and the denominator of which shall be the total number
of such shares then outstanding. The shares of Series B Preferred Stock not
redeemed shall remain outstanding and be entitled to all rights and preferences
provided herein; provided, however, at any time thereafter when additional funds
of the Corporation are legally available for the redemption of such shares of
Series B Preferred Stock, such funds will be used, at the end of the next
succeeding fiscal quarter, to redeem the balance of such shares, or such portion
thereof for which funds are then legally available. If fewer than the total
number of shares of Series B Preferred Stock represented by any certificate are
redeemed, a new certificate representing the number of unredeemed shares will be
issued to the holder thereof without cost to such holder within three business
days after surrender of the certificate representing the redeemed shares of
Series B Preferred Stock.
(viii) RESTRICTIONS ON CORPORATE
ACTIONS. If the Corporation for any reason fails to redeem any shares of Series
B Preferred Stock in accordance with this Section C.3 on or prior to the
Redemption Date specified herein, then, notwithstanding anything to the contrary
contained in these Articles of Incorporation, the Corporation may not incur any
Indebtedness (unless the proceeds of such incurrence of Indebtedness are used to
make all overdue redemption payments in respect of the Series B Preferred Stock,
<PAGE>
including payments of accrued but unpaid dividends or interest) without the
prior written consent of the holders of the Series B Preferred Stock voting
separately as a class; provided, however, that, subject to the restriction set
forth in Section C.1(c)(i), if such restriction is then in force, the
Corporation may incur Indebtedness without the aforesaid approval if (A) the
proceeds of such borrowing are used to pay obligations of the Corporation
arising in the ordinary course of business as they become due and payable, or
otherwise to maintain the operations of the Corporation at the then current
level and not to expand the operation of the Corporation in any material
respect, whether through expansion or enhancement of, or addition, to the
Corporation's then current activities, facilities, equipment or other capital
assets, or otherwise, (B) the Corporation provides prior written notice of such
borrowing to all holders of Series B Preferred Stock, which notice shall include
a statement of the intended use of the proceeds of such borrowing, and (C)
promptly upon request therefor, the Corporation shall provide to any holder of
Series B Preferred Stock a certificate signed by the President and Chief
Financial Officer of the Corporation certifying as to the allocation and use of
the proceeds of any such borrowing.
(ix) APPRAISAL. Within
fourteen (14) days of any written request of any holder of shares of Series B
Preferred Stock from time to time, the fair market value of the Series B
Preferred Stock shall be determined by an appraiser or appraisers shall
according to the terms and procedures of Section B.3(d)(viii), except that all
references shall be to Series B Preferred Stock and Stockholders rather than
Series A Preferred Stock and Stockholders.
(x) MULTIPLE HOLDERS OF
SERIES B PREFERRED STOCK. If the Series B Preferred Stock is at any time held
by more than one person or entity, the request for redemption pursuant to this
Section C.3 by the holders of at least fifty-one percent (51%) of the then
issued and outstanding shares of Series B Preferred Stock shall constitute the
request for redemption by the holders of all of the then issued and outstanding
shares of Series B Preferred Stock and all such holders of Series B Preferred
Stock shall redeem their shares of Series B Preferred Stock pursuant to this
Section C.3 upon the receipt of notice from holders of at least fifty-one
percent (51%) of the then issued and outstanding shares of Series B Preferred
Stock.
4. CONVERSION RIGHTS.
(a) OPTIONAL CONVERSION BY HOLDER.
(i) General Provisions.
All, but not less than all, of the issued and outstanding shares of Series B
Preferred Stock shall be convertible, without the payment of any additional
consideration, into shares of Class C Common Stock, at the option of the
holders of the shares of Series B Preferred Stock, at any time prior to 5:00
P.M. (EST) on FEBRUARY 24, 2000; provided, however, that if such conversion
occurs at any time during the 60 day period referred to in Section 3(a)(ii)
(other than as the result of the adoption of a Business Plan as set forth in
Section 1(e)(i)(A) (above) or pursuant to Section 3(a)(iii) above, after the
<PAGE>
Corporation elects to take any action constituting a Series B Preferred
Stockholder Major Decision without the approval of the holders of the Series B
Preferred Stock, such conversion shall not be deemed to be an "optional
conversion" governed by the provisions of this Section 4(a), but shall be
governed by the provisions relating to "Automatic Conversions" set forth in
Section 4(b) below. Each such share of Series B Preferred Stock shall be
convertible at such time into one fully-paid and nonassessable share of
Class C Common Stock, subject to adjustment as provided in Section C.4.(e)
below (the "Series B Conversion Rate"). The holders of shares of Series B
Preferred Stock requesting conversion of shares into shares of Class C Common
Stock shall send a written notice to the Corporation, at the principal office
of the Corporation, requesting such conversion. The holders shall, as soon
thereafter as practicable, deliver the certificates therefor, duly endorsed for
transfer, at the principal office of the Corporation or any transfer agent for
the Series B Preferred Stock. The Corporation shall, as soon as practicable
thereafter, issue and deliver to the holders a certificate or certificates for
the number of such shares of Class C Common Stock to which the holders shall be
entitled, a check payable to the holders in the amount of any cash in lieu of
issuance of any fractional share, and the amount of any cumulative dividends and
interest accrued but unpaid (unless, and to the extent, the Corporation elects
to issue additional shares of Class C Common Stock in lieu of such dividends and
interest pursuant to Section C.4(d)) on such shares. The conversion shall be
deemed to have been made immediately prior to the close of business on the date
of receipt of the notice. The persons entitled to receive the shares of Class C
Common Stock issuable upon such conversion shall be treated for all purposes as
the record holder or holders of such shares of Class C Common Stock on such
date, and the shares of Series B Preferred Stock converted shall immediately be
canceled and may not be reissued.
(ii) Multiple Holders of
Series B Preferred Stock. If the Series B Preferred Stock is at any time held
by more than one person or entity, the request for conversion pursuant to this
Section C.4 by the holders of at least fifty-one percent (51%) of the then
issued and outstanding shares of Series B Preferred Stock shall constitute the
request for conversion by the holders of all of the then issued and outstanding
shares of Series B Preferred Stock and all such holders of Series B Preferred
Stock shall convert their shares of Series B Preferred Stock pursuant to this
Section C.4 upon the receipt of notice from holders of at least fifty-one
percent (51%) of the then issued and outstanding shares of Series B Preferred
Stock.
(b) AUTOMATIC CONVERSION. If the holders of
Series B Preferred Stock have not earlier exercised their rights to require
the Corporation to redeem their shares of Series B Preferred Stock pursuant to
the provisions of Section C.3.(a) hereof, all of the outstanding shares of
Series B Preferred Stock shall, together with all other then outstanding shares
of the Corporation's preferred stock or other capital stock with rights to
convert into shares of Common Stock, be converted into fully-paid and
<PAGE>
nonassessable shares of Class C Common Stock at the Series B Conversion Rate
upon the earlier to occur of the closing or other consummation of (i) any
Qualified Public Offering, (ii) any Non-Qualified Public Offering, (iii) any
combination, consolidation or merger where the Corporation is not the survivor,
(iv) any sale, exchange or other disposition of all or substantially all of the
Corporation's assets, whether by asset or stock sale or otherwise, or (v) any
election by the holders of Series B Preferred Stock to effect an "Optional
Conversion" during any period during which the holders of the Series B Preferred
Stock may cause the Corporation to redeem shares of their Series B Preferred
Stock pursuant to the provisions of Section 3(a)(ii) or 3(a)(iii), above. In the
case of the occurrence of any of (i) through (v) above, all shares of Series B
Preferred Stock which have not been converted into shares of Class C Common
Stock, shall be subject to mandatory redemption by the Corporation pursuant to
the provisions of Section C.3.(iii) hereof. Shares of Class C Common Stock
received pursuant to this Section 4.(b) shall be subject to the provisions of
Article IV, Section A.4 in the event of a Qualified Public Offering or
Non-Qualified Public Offering, and shall thereupon immediately be reclassified
as shares of Class A Common Stock. At least twenty (20) days prior written
notice of the date fixed and place designated for conversion shall be sent by
first class mail, postage prepaid, to the address of each holder of shares of
Series B Preferred Stock as shown in the records of the Corporation. On or
before the date fixed for conversion, each holder of shares of Series B
Preferred Stock shall surrender the certificates representing such shares to the
Corporation at the place designated in such notice and shall thereafter receive
certificates for the number of full shares of Common Stock to which such holder
is entitled. Until such time as holders of certificates theretofore representing
shares of Series B Preferred Stock have surrendered them for exchange as
provided herein, no dividends shall be paid with respect to any shares
represented by such certificates and no payment for fractional shares shall be
made.
(c) NO FRACTIONAL SHARES. No
fractional shares of Common Stock shall be issued upon conversion of shares of
Series B Preferred Stock. In lieu of any fractional share, the Corporation shall
pay a cash adjustment in respect of such fractional interest equal to the fair
market value of such fractional interest as determined by the Board.
(d) PAYMENT OF DIVIDENDS AND
INTEREST. At the time of the conversion of any shares of Series B Preferred
Stock, whether mandatory or optional, and after payment in full by the
Corporation of all amounts of interest and cumulative dividends accrued but
unpaid with respect to Series A Preferred Stock, the Corporation shall pay to
the holder of such shares of Series B Preferred Stock the sum of all interest
and cumulative dividends accrued but unpaid with respect to such Series B
Preferred Stock, whether or not such dividends shall have been declared by the
Corporation to the date of conversion.
<PAGE>
(e) ADJUSTMENTS; ANTIDILUTION. The
number of shares of Class C Common Stock issuable upon the conversion of the
Series B Preferred Stock shall be subject to adjustment from time to time
upon the happening of certain events as follows:
(i) DIVIDENDS, SPLITS.
If the Corporation declares a dividend payable in its shares of its Common
Stock, splits any of its Common Stock or combines any of its outstanding shares
of Common Stock into a smaller number, then the number of fully-paid and
nonassessable shares of Class C Common Stock into which each share of Series B
Preferred Stock may be converted shall forthwith be adjusted by multiplying one
(1) by a fraction (A) the numerator of which shall be the total number of
outstanding shares of Common Stock immediately after such dividend, stock split
or combination, and (B) the denominator of which shall be the total number of
outstanding shares of Common Stock immediately prior to such dividend, stock
split or combination.
(ii) REORGANIZATION,
RECLASSIFICATION. In the event of a reorganization, share exchange, or
reclassification, other than a change in par value, or from par value to no par
value, or from no par value to par value or a transaction described in
subsection (iii) or (iv) below, each share of Series B Preferred Stock shall,
after such reorganization, share exchange or reclassification, be convertible
into the kind and number of shares of stock or other securities or property of
the Corporation to which the holder of Series B Preferred Stock would have been
entitled if the holder had held the Class C Common Stock issuable upon
conversion of its Series B Preferred Stock immediately prior to such
reorganization, share exchange, or reclassification, or to which the Series B
Preferred Stock is actually entitled, but not both.
(iii) CONSOLIDATION,
MERGER, SALE OF ASSETS. In the event of a merger or consolidation or sale,
exchange or other disposition of all, or substantially all of the Corporation's
assets, to which the Corporation is a party, each share of Series B Preferred
Stock shall, after such merger or consolidation, be convertible into the kind
and number of shares of stock and/or other securities, cash or other property to
which the holder of such share of Series B Preferred Stock would have been
entitled if the holder had held the Class C Common Stock issuable upon
conversion of its shares of Series B Preferred Stock immediately prior to such
consolidation or merger or sale of assets, or to which the Series B Preferred
Stock is actually entitled, but not both.
(iv) CERTAIN ISSUANCES
OF ADDITIONAL SHARES OF COMMON STOCK. If the Corporation shall issue any
additional shares of Common Stock -- other than securities to be issued (i) to
the public pursuant to any Qualified Public Offering or Non-Qualified Public
Offering, (ii) to officers, directors, or employees of the Corporation as part
of a stock option plan, restricted stock plan, employee stock purchase plan,
employment agreement, or other employee stock plan or agreement, implemented by
the Board, provided that the aggregate numbers of such shares issued shall not
exceed ten percent (10%) of the fully diluted capital stock of the Corporation
calculated as of the time of the issuance, (iii) to Management Stockholders and
<PAGE>
other executive employees of the Corporation, of an amount of Class A Common
Stock not in excess of the 25% Management Stock Amount, (iv) upon conversion of
any shares of the Series A Preferred Stock, Series B Preferred Stock or Series C
Preferred Stock or the exercise of any warrant to purchase shares of Common
Stock held by the holder of Series B Preferred Stock pursuant to the terms
hereof, or (v) to the LP pursuant to Article XIV of the Practice Participation
Agreement in respect of the issuance of Medical Holdings Limited Partnership of
the Limited Partner Interests (or options to purchase such Interests) from and
after the time that more than sixty-six (66) but less than one hundred (100)
physicians hold such Limited Partner Interests (or options to acquire such
Interests) directly or indirectly through their professional corporations -- for
a consideration per share of Common Stock less than the "conversion price," as
adjusted or as previously adjusted, in effect on the date immediately prior to
such issuance, then and in such event, such conversion price shall be adjusted,
concurrently with such issuance, to a price equal to the quotient obtained by
DIVIDING:
(1) an amount equal to (x)
the sum of (A) the total number of shares of
Common Stock outstanding immediately prior to such
issuance or sale, plus (B) the total number of shares
of Common Stock issuable upon exercise of all
options, warrants and other rights convertible or
exchangeable for, or evidencing the right to purchase
shares of, Common Stock outstanding immediately
prior to such issuance or sale, multiplied by (C) the
conversion price in effect immediately prior to such
issuance or sale, plus (y) the consideration, if any,
received or deemed to be received by the
Corporation upon such issuance or sale; BY
(2) the sum of (A) the total
number of shares of Common Stock outstanding
immediately after such issuance or sale, plus (B) the
total number of shares of Common Stock issuable upon
exercise of all options, warrants and other rights
convertible or exchangeable for, or evidencing the
right to purchase shares of, Common Stock outstanding
immediately after such issuance or sale.
For purposes of this Section C.4, the conversion price shall initially be $11.25
per share.
No adjustment of the conversion price shall be made under this Section
C.4.(e)(iv) upon the issuance of any additional shares of Common Stock that are
issued pursuant to the exercise of any warrants, options or other subscription
or purchase rights or pursuant to the exercise of any conversion or exchange
rights in any convertible securities if any such adjustments shall previously
have been made upon the issuance of any such warrants, options or other rights
or upon the issuance of any convertible securities (or upon the issuance of any
warrants, options or any rights therefor) pursuant to Sections 4(v) or 4(vi)
hereof.
<PAGE>
(v) ISSUANCE OF WARRANTS, OPTIONS
OR OTHER RIGHTS. If the Corporation at any time shall issue any warrants,
options or other rights to subscribe for or purchase any additional shares of
Common Stock and the price per share for which additional shares of Common Stock
may at any time thereafter be issuable pursuant to such warrants, options or
other rights shall be less than the conversion price per share in effect
immediately prior to such issuance, then such issue shall be deemed on issuance
(as of the date of issue of such warrants, options or other rights) of the total
maximum number of shares of Common Stock issuable pursuant to such warrants,
options or other rights, and the conversion price shall thereupon be adjusted as
provided in Section C.4.(e)(iv) hereof on the basis that the aggregate
consideration for the additional shares of Common Stock issuable pursuant to
such warrants, options or other rights, plus the minimum consideration to be
received by the Corporation for the issuance of additional shares of Common
Stock pursuant to such warrants, options, or other rights shall be deemed to be
the consideration received by the Corporation for the issuance of such warrants,
options, or other rights.
(vi) CERTAIN ISSUANCES
OF CONVERTIBLE SECURITIES. In case the Corporation shall issue any
securities convertible into Common Stock and the consideration per share for
which such additional shares of Common Stock may at any time thereafter be
issuable pursuant to the terms of such convertible securities shall be less than
the conversion price per share in effect immediately prior to such issuance,
then upon such issuance of such securities the conversion price shall be
adjusted as provided in Section C.4.(e)(iv) hereof on the basis that (i) the
maximum number of additional shares of Common Stock necessary to effect the
conversion or exchange of all such convertible securities shall be deemed to
have been issued as of the date of issuance of such convertible securities, and
(ii) the aggregate consideration for such maximum number of additional shares of
Common Stock plus the minimum consideration received by the Corporation for the
issuance of such additional shares of Common Stock pursuant to the terms of such
convertible securities shall be deemed to be the consideration received by the
Corporation for the issuance of such convertible securities. No adjustment of
the conversion price shall be made under this subsection upon the issuance of
any convertible securities which are issued pursuant to the exercise of any
warrants, options or other subscription or purchase rights therefor, if any such
adjustment shall previously have been made upon the issuance of such warrants,
options or other rights pursuant to Section C.4.(e)(v) hereof.
(vii) ADJUSTMENT OF SERIES
B CONVERSION RATE. Upon each adjustment of the conversion price under the
provisions of this Section C.4.(e), the conversion rate shall be adjusted to an
amount determined by dividing $11.25 by such adjusted conversion price. For
example, if, as a result of any of the foregoing, the conversion price were
reduced to $9.00, each share of Series B Preferred Stock would then be
convertible into 1.25 shares of Class C Common Stock.
<PAGE>
(viii) OTHER PROVISIONS APPLICABLE TO
ADJUSTMENTS UNDER THIS SECTION. The following provisions will be applicable to
the making of adjustments in conversion prices hereinabove provided in this
Section B.4.(e):
(1) COMPUTATION OF
CONSIDERATION. To the extent that any additional shares of Common Stock or any
convertible securities or any warrants, options or other rights to subscribe for
or purchase any additional shares of Common Stock or any convertible securities
shall be issued for cash consideration, the consideration received by the
Corporation therefor shall be deemed to be the amount of the cash received by
the Corporation therefor, or, if such additional shares of Common Stock or
convertible securities are offered by the Corporation for subscription, the
subscription price. To the extent that such issuance shall be for a
consideration other than cash, then the amount of such consideration shall be
deemed to be the fair value of such consideration at the time of such issuance
as determined in good faith by the Corporation's Board after receipt of a
fairness opinion, appraisal or similar independent third-party advice determined
by a person or entity jointly selected by the Series B Preferred Directors, the
Series A Preferred Directors, the Series C Preferred Stock Directors and the
other directors pursuant to procedures substantially similar to those set forth
in Section 6 of the Stockholders Agreement. The consideration for any additional
shares of Common Stock issuable pursuant to any warrants, options or other
rights to subscribe for or purchase the same shall be the consideration received
by the Corporation for issuing such warrants, options or other rights, plus the
additional consideration payable to the Corporation upon the exercise of such
warrants, options or other rights. The consideration for any additional shares
of Common Stock issuable pursuant to the terms of any convertible securities
shall be the consideration paid or payable to the Corporation in respect of the
subscription for or purchase of such convertible securities, plus the additional
consideration, if any, payable to the Corporation upon the exercise of the right
of conversion or exchange in such convertible securities. In case of the
issuance at any time of any additional shares of Common Stock or convertible
securities in payment or satisfaction of any dividend upon any class of stock
preferred as to dividends in a fixed amount, the Corporation shall be deemed to
have received for such additional shares of Common Stock or convertible
securities a consideration equal to the amount of such dividend so paid or
satisfied.
(2) READJUSTMENT OF
CONVERSION PRICE. Upon the expiration of the right to convert or exchange any
convertible securities, or upon the expiration of any rights, options or
warrants, without conversion, exchange or exercise, the issuance of which
convertible securities, rights, options or warrants effected an adjustment in
the conversion price, such conversion price shall forthwith be readjusted and
thereafter be the price which it would have been (but reflecting any other
adjustments in the conversion price made pursuant to the provisions of this
Section C.4.(e) after the issuance of such convertible securities, rights,
options or warrants) had the adjustment of the conversion price made upon the
issuance or sale of such convertible securities or issuance of rights, options
or warrants been made on the basis of the issuance only of the number of
<PAGE>
additional shares of Common Stock actually issued upon conversion or exchange of
such convertible securities, or upon the exercise of such rights, options or
warrants, and thereupon only the number of additional shares of Common Stock
actually so issued, if any, shall be deemed to have been issued and only the
consideration actually received by the Corporation (computed as set forth in
subsection C.4.(e)(viii)(1) hereof) shall be deemed to have been received by the
Corporation. If the purchase price provided for in any such rights, options or
warrants, or the additional consideration (if any) payable upon the conversion
or exchange of any convertible securities, or the rate at which any convertible
securities are convertible into or exchangeable for shares of Common Stock
changes at any time (other than under or by reason of provisions designed to
protect against dilution), the conversion price in effect at the time of the
change shall be adjusted to the conversion price that would have been in effect
at such time had such rights, options, warrants or convertible securities still
outstanding provided for such changed purchase price, additional consideration
or conversion rate, as the case may be, at the time initially granted, issued or
sold.
(3) OTHER ACTION
AFFECTING COMMON STOCK. If the Corporation shall take any action affecting
the outstanding number of shares of Common Stock, other than an action
described in any of the foregoing subsections 4(e)(i) to (vii) hereof,
inclusive, which in the opinion of the Corporation's Board would have a
materially adverse effect upon the rights of the holders of the Series B
Preferred Stock, the conversion price shall be adjusted in such manner
and at such time as the Board may determine to be equitable in the
circumstances.
(ix) NOTICES OF ADJUSTMENTS.
Whenever the conversion rate and conversion price is adjusted as herein
provided, an officer of the Corporation shall compute the adjusted conversion
rate and conversion price in accordance with the foregoing provisions and shall
prepare a written instrument setting forth such adjusted conversion rate and
conversion price and showing in detail the facts upon which such adjustment is
based, and such written instrument shall promptly be delivered to the record
holders of the Series B Preferred Stock, who shall approve such conversion
rates and prices within 30 days of receipt. If holders of Series B Preferred
Stock do not object in writing during such 30 day period, they shall be deemed
to have approved such conversion rates and prices for all purposes hereof.
(f) RESERVATION OF SHARES. The Board
shall at all times reserve and keep available, out of its authorized but
unissued shares of Class C Common Stock, solely for the purpose of effecting
the conversion of the shares of Series B Preferred Stock, the full number of
shares of Class C Common Stock deliverable by the Corporation upon the
conversion of all shares of Series B Preferred Stock from time to time
outstanding and otherwise issuable under rights granted from the Corporation
then existing.
<PAGE>
(g) NO IMPLIED MODIFICATION OF TERMS.
The provisions of this Section C.4. shall not give, or be deemed to give, the
Corporation the power or authority to issue any shares of its capital stock or
other securities or to take any other action that it is expressly prohibited
from issuing by another provision hereof.
5. LIQUIDATION RIGHTS.
(a) Upon any liquidation,
dissolution or winding up of the affairs of the Corporation, whether
voluntary or involuntary, the holders of shares of the Series B Preferred
Stock shall be entitled to receive out of the assets of the Corporation
available for distribution to stockholders, before any distribution or
payment shall be made in respect of the holders of shares of Common Stock or any
other class or series of stock ranking junior to the Series B Preferred
Stock, a liquidating distribution in an amount equal to the greater of
(i) the sum of the "fair market value" per share of Series B Preferred Stock,
which shall include an amount per share equal to all cumulative dividends
and interest accrued but unpaid thereon, whether or not such dividends and
interest shall have been declared by the Corporation, to the date fixed for
such distribution or payment; or (ii) the sum of the original purchase price
per share of Series B Preferred Stock plus an amount equal to all cumulative
dividends and interest accrued but unpaid thereon to the date fixed for such
distribution or payment; provided, however, in either such event the amount
of cash payable by the Corporation shall not exceed the amount of cash paid to
the Corporation by all holders of such shares with respect to the purchase of
such shares, including the payment of any interest with respect thereto,
through and including the date of liquidation; and provided further,
however, that no liquidating distribution shall be paid in respect of
Series B Preferred Stock unless and until all amounts due to holders of
Series A Preferred Stock as a liquidating distribution pursuant to Section
B.5(a) shall have been fully paid. The holders of shares of Series B Preferred
Stock shall not be entitled to receive any additional distributive
amounts upon such liquidation, dissolution or winding up of the affairs of
the Corporation resulting in any distribution of assets to
stockholders.
(b) If, upon any such liquidation,
dissolution or winding up of the affairs of the Corporation, the assets of the
Corporation to stockholders shall be insufficient to permit the payment in
full to the holders of Series B Preferred Stock of the amounts to which they are
entitled, then all of such available assets shall be distributed to the holders
of shares of Series B Preferred Stock ratably in proportion to the liquidation
payment otherwise due under Section C.5.(a) to each such holder and no amounts
shall be distributed in respect of any other share of capital stock of the
Corporation other than Series A Preferred Stock until all amounts distributable
to holders of Series B Preferred Stock have been distributed.
(c) The purchase or redemption by
the Corporation of stock of any class, in any manner permitted by law, shall
not for the purpose of this Section C.5. be regarded as a liquidation,
dissolution or winding up of the Corporation. Neither the consolidation nor
merger of the Corporation with or into any other corporation or corporations,
nor the sale or transfer by the Corporation of all or any part of its assets
shall be deemed to be a liquidation, dissolution or winding up of the
Corporation for the purpose of this Section C.5.
<PAGE>
(d) At least thirty (30) days prior
written notice of any such liquidation, dissolution or winding up of the
affairs of the Corporation stating a payment date, the amount of the liquidation
payments and the place where said liquidation payments shall be payable, shall
be sent by first class mail, postage prepaid, to each holder of Series B
Preferred Stock at his address as shown on the records of the Corporation.
6. EVENTS OF NON-COMPLIANCE; NON-COMPLIANCE.
(a) DEFINITION. "Event of
Non-Compliance" shall mean, with respect to the Corporation, the occurrence of
any of the events, occurrences or circumstances listed below; provided,
however, that any such event, occurrence or circumstance shall
constitute "Non-Compliance" if, and only if, (i) in the case of any event,
occurrence or circumstance involving the non-payment of moneys (other than
dividend and accrued interest payments due and payable to the holders of
Series B Preferred Stock), within thirty (30) calendar days following
written notice of such non-payment, such moneys have not been paid by or on
behalf of the Corporation; and (ii) in the case of any event, occurrence or
circumstance not involving the non-payment of moneys, substantial efforts
have not been commenced by or on behalf of the Corporation to cure such event,
occurrence, or circumstance within a reasonable time after notice thereof (but
in no event later than 30 days), and having been so commenced, there is a
failure within a reasonable time to prosecute to completion with diligence
and continuity the curing of such event, occurrence or circumstances, or a
period of more than 90 days has occurred without such cure being completed
to the satisfaction of the holders of the Series B Preferred Stockholders;
provided, further, however, that, for purposes of (i) and (ii) above the
occurrence of any of the events, occurrences or circumstances described in
subparagraphs (5), (6) (7), (8), (9) or (10), below shall constitute
Non-Compliance immediately upon its occurrence or upon the happening of such
event or circumstances, without any requirement of notice or passage of time
except as specifically set forth in such item:
(1) any failure of the
Corporation to make any payment required to be made by it to the holders of
Series B Preferred Stock hereunder when due;
(2) any material default by
the Corporation in the payment of any other material obligation of the
Corporation to any holder of Series B Preferred Stock; including specifically
but without limitation payment obligations pursuant to any contract, agreement
or other business transaction entered into between the Corporation and any
holder of Series B Preferred Stock in the ordinary course of the Business of the
Corporation.
<PAGE>
(3) the Corporation
otherwise breaches or otherwise fails to perform or observe in any material
respect any material covenant or agreement set forth herein or in the
Registration Rights Agreement between the Corporation and the initial holders of
the Series B Preferred Stock dated on or about November 30, 1995 or in any
Collateral Agreement (as defined therein).
(4) beginning on April
1, 2000, whenever dividends accruing after such date on the Series B
Preferred Stock shall be in arrears in an aggregate amount equal to at least 4
quarterly dividends thereon;
(5) institution by the
Corporation of proceedings of any nature under any laws or regulations,
whether now existing or subsequently enacted or amended, for the relief of
debtors wherein the Corporation is seeking relief as debtor;
(6) a general assignment
by the Corporation for the benefit of creditors;
(7) the institution by
the Corporation of a case or other proceeding under any section or chapter of
the Federal Bankruptcy Code as now existing or hereafter amended or becoming
effective;
(8) the institution
against the Corporation of a case or other proceeding under any section or
chapter of the Federal Bankruptcy Code as now existing or hereafter amended or
becoming effective, which proceeding is not dismissed, stayed or discharged
within a period of ninety (90) calendar days after the filing thereto;
(9) the appointment of
a receiving, custodian, trustee or like officer to take possession of the
assets of the Corporation, if the tendency of said receivership would reasonably
tend to have a materially adverse effect upon the
<PAGE>
performance by the Corporation of its obligations hereunder, which receivership
imposition;
(10) admission by the
Corporation in writing of its inability to pay its debts as they mature or the
Corporation is adjudicated as insolvent;
(11) attachment,
execution or other judicial seizure of all or any substantial part of
the Corporation's assets, such attachment, execution or seizure in any
case remaining undismissed or undischarged for a period of fifteen (15) calendar
days after the levy thereof; provided, however, that said attachment,
execution or seizure shall not constitute an Event of Non-Compliance
hereunder if the Corporation posts a bond sufficient in amount to satisfy or
secure the payment of such claim or judgment within sixty (60) calendar days
after the levy thereof and the Corporation's assets are thereby released
from the lien of such attachment;
(12) one or more
judgments or decrees is entered against the Corporation or any of its
Subsidiaries involving in the aggregate a liability (to the extent not paid
or covered by current insurance) of the greater of (A) $100,000 with respect to
1995; $200,000 with respect to 1996; $300,000 with respect to 1997; $400,000
with respect to 1998; and $500,000 with respect to each year thereafter or (B)
ten percent (10%) of the net operating earnings of the Corporation for the
immediately preceding fiscal year, as calculated by the independent
certified public accountants employed by the Corporation, and all such
judgments or decrees have not been vacated, discharged, stayed or bonded
pending appeal within 60 days from the entry thereof;
(13) defaults shall have
occurred under any agreements, indentures, or instruments under which the
Corporation then has any outstanding Indebtedness in excess of the greater of
(A) $100,000 with respect to 1995; $200,000 with respect to 1996; $300,000 with
respect to 1997; $400,000 with respect to 1998; and $500,000 with respect to
each year thereafter or (B) ten percent (10%) of the net operating earnings of
the Corporation for the immediately preceding fiscal year, as calculated by the
independent certified public accountants employed by the Corporation in the
aggregate and if not already matured at its final maturity in accordance with
its terms, such Indebtedness shall have been accelerated; and/or
(14) any holder of Indebtedness
of the Corporation equal to the greater of (A) $100,000 with respect to 1995;
$200,000 with respect to 1996; $300,000 with respect to 1997; $400,000 with
respect to 1998; and $500,000 with respect to each year thereafter or (B) or
ten percent (10%) of the net operating earnings of the Corporation for the
immediately preceding fiscal year, as calculated by the independent certified
public accountants employed by the Corporation, after a default under such
Indebtedness shall commence proceedings, or take any action (including by way of
set-off) to retain in satisfaction of such Indebtedness or to collect, seize,
dispose of, or apply in satisfaction of such Indebtedness, assets of the
Corporation having a fair market value in excess of the greater of (A) $100,000
<PAGE>
with respect to 1995; $200,000 with respect to 1996; $300,000 with respect to
1997; $400,000 with respect to 1998; and $500,000 with respect to each year
thereafter or (B) ten percent (10%) of the net operating earnings of the
Corporation for the immediately preceding fiscal year, as calculated by the
independent certified public accountants employed by the Corporation,
individually or in the aggregate (including funds on deposit or held pursuant to
lock-box and other similar arrangements).
D. SERIES C PREFERRED STOCK.
1. VOTING RIGHTS.
(a) General Provisions.
Holders of Series C Preferred Stock shall be entitled to notice of each
meeting of all of the Corporation's stockholders, but shall not be entitled to
notice of special or other meetings of any class of Common Stock or of Series A
Preferred Stock or Series B Preferred Stock. The holders of shares of Series C
Preferred Stock shall vote with the holders of shares of Common Stock and
Series A Preferred Stock and Series B Preferred Stock on all matters submitted
to a vote of stockholders and not as a separate series or class, except as
otherwise provided herein. Except as otherwise provided herein, on all matters
to be voted on by the Corporation's stockholders, every holder of Series C
Preferred Stock shall be entitled to cast, in person or by proxy, that number
of votes equal to the full number of shares of Class C Common Stock into
which such holder's Series C Preferred Stock is then convertible.
(b) Series C Preferred Stock
Directors. The holders of shares of Series C Preferred Stock, voting as a
single class, shall be entitled to elect two (2) directors of the Corporation
and such directors shall, under the Corporation's By-laws, be entitled to serve
on the Executive Committee of the Corporation's Board of Directors until such
time as there is a Qualified Public Offering (such directors, being referred to
as the "Series C Preferred Stock Directors"). Where the holders of Series C
Preferred Stock vote as a class, the affirmative vote of a majority of the
shares of Series C Preferred Stock represented in person or by proxy at a
meeting at which a quorum of Series C Preferred Stock is present shall be
sufficient to approve any matter with respect to which said holders are entitled
to vote; provided, however, that the affirmative vote of a plurality of all
votes cast in person or by proxy by the holders of Series C Preferred Stock
shall be sufficient to elect a Series C Preferred Stock Director. The holders of
Series C Preferred Stock, at any annual meeting or upon a call of a special
meeting of holders of Series C Preferred Stock by holders of not less than
twenty-five percent (25%) of the shares of Series C Preferred Stock then
outstanding, may remove any Series C Preferred Stock Director at any time and
from time to time, voting as a single class, by the affirmative vote of eighty
percent (80%) of all votes entitled to be cast for the election of a Series C
Preferred Stock Director, and may elect a successor to fill any resulting
vacancies for the remainder of the term of such Series C Preferred Stock
<PAGE>
Director. If any Series C Preferred Stock Director shall cease to be a director
for any reason (including death, resignation, removal or any other cause), the
vacancy shall be filled by a vote of the remaining Series C Preferred Stock
Director or, if no Series C Preferred Stock Director remains, by a vote of the
holders of Series C Preferred Stock (unless, with respect to removal, the
holders of Series C Preferred Stock have elected a successor Series C Preferred
Stock Director pursuant to the provisions hereof). If there is no such remaining
director, then upon a call of a special meeting of holders of Series C Preferred
Stock, by any such holder, the vacancy shall be filled by the vote of the
holders of Series C Preferred Stock, voting as a single class.
(c) Actions Requiring Votes
of the Series C Preferred Stock Director or Stockholder. Without the
affirmative vote of each of the Series C Preferred Stock Directors (or the sole
Series C Preferred Stock Director, when applicable) or the holders of Series C
Preferred Stock, the Corporation shall not:
(i) incur or permit
any of its Subsidiaries (as defined in Section B.1(d)(v)) to incur any
Indebtedness (as defined in Section B.1(d)(i)) as a result of which the
outstanding Indebtedness of the Corporation would on a consolidated basis exceed
One Million Dollars ($1,000,000) in the aggregate; other than (A) Indebtedness
that is subordinated in right of dividends, redemption and liquidation to the
Series C Preferred Stock and/or (B) Indebtedness contemplated in the
Corporation's Operating Plan (the "Operating Plan") included in Section 3.6(b)
of the Disclosure Schedule attached to the Stock Purchase Agreement dated as of
September 4, 1996 by and between the Company and the Series C Preferred
Stockholder (the "Stock Purchase Agreement") and attached thereto, as reduced by
the amount of the Series C Preferred Stockholder's investment in the
Corporation, which reduction shall be in an amount up to Twenty Million Dollars
($20,000,000); or
(ii) issue any shares of
its capital stock with liquidation, redemption or dividend rights senior
to (or PARI PASSU with) the liquidation, redemption or dividend rights of the
Series C Preferred Stock; or
(iii) effect any amendment
to these Amended and Restated Articles of Incorporation or to the By-Laws of
the Corporation that adversely affects the holders of the Series C Preferred
Stock or the Class C Common Stock; or
(iv) pay any dividend
with respect to the Series A Preferred Stock or the Series B Preferred Stock
prior to September 1, 1998 unless paid in connection with a redemption; or
(v) obligate the
Corporation to do any of the foregoing.
For purposes of this Section D.1(c), the holders of the Series C Preferred Stock
may take action to enforce their rights under this Section D.1(c) at a duly
called meeting of the Corporation's stockholders; provided, however, that the
exercise of such rights shall not require a meeting of the Corporation's
stockholders.
<PAGE>
(d) Definitions. For purposes of
this Section D, the definitions set forth in Section B.1.(d) shall be
applicable except that:
(i) In Section
B.1(d)(i)(G)(x), the phrase "Series C Preferred Stock" shall be substituted
for "Series A Preferred Stock;"
(ii) "QUALIFIED PUBLIC
OFFERING" shall mean any public underwritten offering of the Corporation's
Common Stock pursuant to an effective registration statement filed with the
Securities and Exchange Commission pursuant to the Securities Act of 1933, as
amended (the "1933 Act") based upon a total market capitalization of the
Corporation, at the time of such offering, of at least 100 Million Dollars
($100,000,000), from which the Company receives net proceeds of not less than
Twenty-Five Million Dollars ($25,000,000).
(e) Method of Approval. Whenever
any action described herein requires the action of holders of Series C
Preferred Stock, such action shall be deemed to have occurred upon the approval
of holders of a majority of the then issued and outstanding shares of Series C
Preferred Stock at a duly convened meeting of such stockholders, or by their
written consent (without necessity for a meeting), and the Corporation, in
undertaking any action with respect to such holders, shall be entitled to rely
upon a certificate signed by such holders to that effect.
2. DIVIDENDS.
(a) Accrual of
Dividends. Subject to the provisions of Sections 2(b) and 2(c) below,
cash dividends shall accrue on shares of Series C Preferred Stock issued
pursuant to the Stock Purchase Agreement at the rate of One Dollar and Forty
Cents ($1.40) per share per annum and on shares of Series C Preferred Stock
issued pursuant to the Option Agreement at the rate of One Dollar and Sixty
Cents ($1.60) per share per annum, beginning on the date of issuance of such
shares (whether or not earned or declared or payment is legally available
therefor) and shall accrue interest at the rate of 8% (based upon a 365-day
year) compounded quarterly on all such unpaid dividend amounts.
(b) Payment of Dividends.
Unless canceled pursuant to the provisions of Section 2(c) below, dividends
and interest accrued on or with respect to accrual dates shall be payable
(either as part of a Series C Redemption Price (as defined below) or
liquidation payment, or otherwise) only after all dividends and interest
accrued on or with respect to the Series A Preferred Stock and Series B
Preferred Stock have been fully paid and only upon (i) the liquidation of the
Corporation as herein provided, or (ii) the redemption or conversion of such
shares of Series C Preferred Stock, and if not paid upon liquidation,
redemption or conversion, the amount of all such accrued dividends and
<PAGE>
interest payments shall become an unsecured obligation of the Corporation,
bearing interest at the per annum rate of 100 basis points over The Wall Street
Journal Prime Rate as of the last business day prior to such liquidation,
redemption or conversion and such interest shall be payable on the first day of
each month of January, April, July and October if, at the time of payment (i)
all dividends and interest accrued on or declared with respect to the Series
A Preferred Stock and the Series B Preferred Stock have been fully paid, and
(ii) funds for the full payment of such quarterly dividend on all shares of
Series C Preferred Stock then outstanding are legally available therefor under
the laws of the State of Maryland as then in effect.
(c) Cancellation of
Accrued Dividends. All accrued dividends and unpaid interest shall be canceled
and no longer be payable in the event the Company consummates a Qualified Public
Offering on or before August 30, 1998 at a price per share of not less than the
weighted average price paid or to be paid by the Series C Preferred Stockholder
for all shares of Series C Preferred Stock then outstanding or subject to the
Option, plus all accrued but unpaid dividends and interest thereon.
(d) Reduction of
Capital. If at any time when a dividend on shares of Series C Preferred
Stock would otherwise be payable (i) funds for the full payment of such
dividend are not then legally available therefor under the laws of the State
of Maryland as then in effect as applied to the then effective
capitalization of the Corporation, and (ii) funds for the payment of such
dividend would be legally available if the stated capital accounts of the
Corporation were reduced or capital surplus was revalued, then, in such
event, the Board shall reduce the stated capital at least to the extent
necessary to declare and pay such dividend or cause a revaluation of capital
surplus if such reduction of capital or valuation of surplus would be
permissible under the laws of the State of Maryland as then in effect and
unless the exercise of the Board's fiduciary duty prevents such reduction.
(e) Limitation on other
Dividends; Payments. So long as any shares of Series C Preferred Stock
remain outstanding, (i) no dividends shall be declared or paid upon, nor shall
any dividend or other distribution be made with respect to, any shares of any
other class or series of stock or equity interest of the Corporation or any
Subsidiary, other than the Series A Preferred Stock or Series B Preferred Stock,
without the consent of each of the Series C Preferred Stock Directors (or the
sole Series C Preferred Stock Director, when applicable), and (ii) no shares of
any class of stock or equity interest of the Corporation or any Subsidiary other
than the shares of Series C Preferred Stock, Series B Preferred Stock and Series
A Preferred Stock shall be redeemed, retired, purchased or otherwise acquired by
the Corporation, except purchases of the Corporation's interests in a Subsidiary
at the time of its organization. Notwithstanding the foregoing, the Corporation
may (i) effect Permitted Redemptions pursuant to Section A.5; and (ii) may
redeem shares of capital stock of or equity interests in any wholly-owned
Subsidiary.
<PAGE>
3. REDEMPTION.
(a) OPTIONAL REDEMPTION
BY HOLDERS. If, without the approval of the Series C Preferred Stock
Directors, the Corporation elects to consummate either (1) an initial
underwritten public offering of the Corporation's equity securities, (2) a
merger, consolidation or similar combination transaction in which the Company is
not the survivor, or (3) a sale, transfer or other disposition by the
Corporation of all or substantially all of the Corporation's assets, whether by
asset or stock sale or otherwise, at a price per share equal to or less than the
weighted average price paid or to be paid by the Series C Preferred Stockholder
for all shares of Series C Preferred Stock then outstanding or subject to the
Option, plus all accrued but unpaid dividends and interest thereon, then the
Corporation shall give notice of such election to each holder of Series C
Preferred Stock at least 30 (30) days prior to the date such action is to be
effective, and the holders of Series C Preferred Stock shall be entitled, by
delivery of a written notice to the Corporation at the principal office of the
Corporation not less than twenty-one (21) days prior to the date such action is
to be effective, to request the Corporation to redeem, and the Corporation shall
redeem out of any funds legally available therefor, all (but not less than all)
of the then issued and outstanding shares of Series C Preferred Stock then held
by the holders requesting redemption, at an amount per share of Series C
Preferred Stock outstanding equal to the greater of (A) the then fair market
value of such share (including, for purposes of calculating such fair market
value, the sum of all accumulated and unpaid interest and dividends on such
share of Series C Preferred Stock, whether or not such dividends have been
declared by the Corporation to the date such share is actually redeemed) or (B)
the weighted average price paid by the Series C Preferred Stockholder for each
share of Series C Preferred Stock then outstanding, plus all accrued but unpaid
dividends and interest thereon, whether or not such dividends have been declared
by the Corporation to the date such share is actually redeemed. To the extent
that net cash proceeds are received by the Corporation as the result of the
taking of such action, (i) the Corporation shall pay any redemption price in
cash to the holders of Series C Preferred Stock, such cash to be paid pro rata
among the holders of Series C Preferred Stock requesting such redemption (with
such redemption being a condition precedent to the Corporation's receipt of such
net proceeds) upon the occurrence of such action (a "Series C Redemption Date").
To the extent that such net cash proceeds received by the Corporation as a
result of taking such action are insufficient to enable the Corporation to make
full payment in cash, the Corporation may pay the balance due with respect to
the redemption of such shares within 180 days of such request.
(b) MANDATORY REDEMPTION BY THE
CORPORATION. Upon the occurrence of any Event of Non-Compliance (as defined in
Section D.6), the Corporation shall redeem all, but not less than all, of the
shares of Series C Preferred Stock then held by each holder at an amount per
share of Series C Preferred Stock outstanding equal to the greater of (A) the
<PAGE>
then fair market value of such share (including, for purposes of calculating
such fair market value, the sum of all accumulated and unpaid interest and
dividends on such share of Series C Preferred Stock, whether or not such
dividends have been declared by the Corporation to the date such share is
actually redeemed) or (B) the weighted average price paid by the Series C
Preferred Stockholder for each share of Series C Preferred Stock then
outstanding, plus all accrued but unpaid dividends and interest thereon, within
ten (10) business days after the occurrence of such Non-Compliance. Any such
redemption shall not be in lieu of or in any way limit any other rights which
such holders may have (at law or in equity) in connection with the event giving
rise to their right of redemption.
(c) GENERAL PROVISIONS FOR
REDEMPTIONS.
(i) Series C REDEMPTION
PRICE. Each amount payable by the Corporation pursuant to Section D.3
hereof is referred to as the "Series C Redemption Price".
(ii) EFFECT OF
REDEMPTION. Provision for payment of the Series C Redemption Price for
shares of Series C Preferred Stock having been made by the Corporation, and
for so long as there shall be no default in the payment of deferred
portions of the Series C Redemption Price, then (A) the shares of Series C
Preferred Stock designated for redemption in any notice shall not be entitled to
any dividends accruing after the specified Redemption Date, and (B) on such
Redemption Date all rights of the respective holders of such shares, as
stockholders of the Corporation by reason of the ownership of such shares of
Series C Preferred Stock, shall cease, except the right to receive the
Redemption Price upon presentation and surrender of the respective certificates
representing such shares.
(iii) RETIREMENT OF
SHARES. Shares of Series C Preferred Stock that have been redeemed, purchased
or otherwise acquired by the Corporation shall be retired and may not be
reissued.
(iv) SUBORDINATION OF
SERIES C REDEMPTION PRICE. If, at the time the Series C Redemption Price is
payable to the holders of the Series C Preferred Stock, the Series A
Redemption Price and/or Series B Redemption Price is also payable to the
holders of the Series A Preferred Stock or Series B Preferred Stock or the
Series A Preferred Stock or Series B Preferred Stock has been designated for
redemption pursuant to the terms hereof, no payment shall be made to the
holders of Series C Preferred Stock in respect of the Series C Redemption Price
unless and until the Series A Redemption Price and Series B Redemption Price
shall have been paid in full to the holders of the Series A Preferred Stock and
Series B Preferred Stock.
(v) EFFECT OF LEGAL
RESTRICTIONS ON PAYMENT. If the Redemption Price for any such shares cannot be
paid in full because the Corporation is prohibited by law from making such
payment, then those funds that are legally available will be used to pay
<PAGE>
(ratably if necessary) accrued but unpaid interest, then accrued but unpaid
dividends, and then to redeem the maximum possible number of shares of Series C
Preferred Stock ratably among the holders thereof determined by multiplying the
total number of shares of Series C Preferred Stock to be redeemed times a
fraction, the numerator of which shall be the total number of such shares then
held by each such holder and the denominator of which shall be the total number
of such shares then outstanding. The shares of Series C Preferred Stock not
redeemed shall remain outstanding and be entitled to all rights and preferences
provided herein; provided, however, at any time thereafter when additional funds
of the Corporation are legally available for the redemption of such shares of
Series C Preferred Stock, such funds will be used, at the end of the next
succeeding fiscal quarter, to redeem the balance of such shares, or such portion
thereof for which funds are then legally available. If fewer than the total
number of shares of Series C Preferred Stock represented by any certificate are
redeemed, a new certificate representing the number of unredeemed shares will be
issued to the holder thereof without cost to such holder within three business
days after surrender of the certificate representing the redeemed shares of
Series C Preferred Stock.
(vi) RESTRICTIONS ON
CORPORATE ACTIONS. If the Corporation for any reason fails to redeem any shares
of Series C Preferred Stock in accordance with this Section D.3 on or
prior to the Redemption Date specified herein, then, notwithstanding anything to
the contrary contained in these Articles of Incorporation, the Corporation may
not incur any Indebtedness (unless the proceeds of such incurrence of
Indebtedness are used to make all overdue redemption payments in respect of the
Series C Preferred Stock, including payments of accrued but unpaid dividends
or interest) without the prior written consent of the holders of the Series
C Preferred Stock voting separately as a class; provided, however, that,
subject to the restriction set forth in Section D.1(c)(i), the Corporation may
incur Indebtedness without the aforesaid approval if (A) the proceeds of
such borrowing are used to pay obligations of the Corporation arising in
the ordinary course of business as they become due and payable, or otherwise
to maintain the operations of the Corporation at the then current level
and not to expand the operation of the Corporation in any material respect,
whether through expansion or enhancement of, or addition, to the
Corporation's then current activities, facilities, equipment or other capital
assets, or otherwise, (B) the Corporation provides prior written notice of
such borrowing to all holders of Series C Preferred Stock, which notice
shall include a statement of the intended use of the proceeds of such
borrowing, and (C) promptly upon request therefor, the Corporation shall
provide to any holder of Series C Preferred Stock a certificate signed
by the President and Chief Financial Officer of the Corporation
certifying as to the allocation and use of the proceeds of any such borrowing.
(vii) MULTIPLE HOLDERS OF
SERIES C PREFERRED STOCK. If the Series C Preferred Stock is at any time held
by more than one person or entity, the request for redemption pursuant to this
Section D.3 by the holders of at least fifty-one percent (51%) of the then
<PAGE>
issued and outstanding shares of Series C Preferred Stock shall constitute the
request for redemption by the holders of all of the then issued and outstanding
shares of Series C Preferred Stock and all such holders of Series C Preferred
Stock shall redeem their shares of Series C Preferred Stock pursuant to this
Section D.3 upon the receipt of notice from holders of at least fifty-one
percent (51%) of the then issued and outstanding shares of Series C Preferred
Stock.
(viii) APPRAISAL. Within
fourteen (14) days of any written request of any holder of shares of Series C
Preferred Stock from time to time, the fair market value of the Series C
Preferred Stock shall be determined by an appraiser or appraisers according to
the terms and procedures of Section B.3(d)(viii), except that all references
shall be to Series C Preferred Stock and Stockholders rather than Series A
Preferred Stock and Stockholders.
4. CONVERSION RIGHTS.
(a) OPTIONAL CONVERSION BY HOLDER.
(i) General Provisions.
All, but not less than all, of the issued and outstanding shares of Series C
Preferred Stock shall be convertible, without the payment of any additional
consideration, into shares of Class C Common Stock, at the option of the
holders of the shares of Series C Preferred Stock, at any time. Each such share
of Series C Preferred Stock shall be convertible at such time into one
fully-paid and nonassessable share of Class C Common Stock, subject to
adjustment as provided in Section D.4.(e) below (the "Series C Conversion
Rate"). The holders of shares of Series C Preferred Stock requesting conversion
of shares into shares of Class C Common Stock shall send a written notice to the
Corporation, at the principal office of the Corporation, requesting such
conversion. The holders shall, as soon thereafter as practicable, deliver
the certificates therefor, duly endorsed for transfer, at the principal office
of the Corporation or any transfer agent for the Series C Preferred Stock. The
Corporation shall, as soon as practicable thereafter, issue and deliver to
the holders a certificate or certificates for the number of such shares of
Class C Common Stock to which the holders shall be entitled, a check payable
to the holders in the amount of any cash in lieu of issuance of any fractional
share, and the amount of any cumulative dividends and interest accrued but
unpaid on such shares (unless, and to the extent, the Corporation is
entitled to cancel accrued dividends as herein provided). The conversion
shall be deemed to have been made immediately prior to the close of business
on the date of receipt of the notice. The persons entitled to receive the
shares of Class C Common Stock issuable upon such conversion shall be
treated for all purposes as the record holder or holders of such shares of Class
C Common Stock on such date, and the shares of Series C Preferred Stock
converted shall immediately be canceled and may not be reissued.
<PAGE>
(ii) Multiple Holders of
Series C Preferred Stock. If the Series C Preferred Stock is at any time held
by more than one person or entity, the request for conversion pursuant to this
Section D.4 by the holders of at least fifty-one percent (51%) of the then
issued and outstanding shares of Series C Preferred Stock shall constitute the
request for conversion by the holders of all of the then issued and outstanding
shares of Series C Preferred Stock and all such holders of Series C Preferred
Stock shall convert their shares of Series C Preferred Stock pursuant to this
Section D.4 upon the receipt of notice from holders of at least fifty-one
percent (51%) of the then issued and outstanding shares of Series C Preferred
Stock.
(b) AUTOMATIC CONVERSION. If the holders
of Series C Preferred Stock have not earlier exercised their rights to
require the Corporation to redeem their shares of Series C Preferred Stock
pursuant to the provisions of Section D.3.(a), all of the outstanding shares
of Series C Preferred Stock shall, together with all other then outstanding
shares of the Corporation's preferred stock or other capital stock with rights
to convert into shares of Common Stock, be converted into fully-paid and
nonassessable shares of Class C Common Stock at the Series C Conversion Rate
upon the earlier to occur of the closing or other consummation of (i) any
Qualified Public Offering, (ii) any Non-Qualified Public Offering, (iii)
any combination, consolidation or merger where the Corporation is not the
survivor, or (iv) any sale, exchange or other disposition of all or
substantially all of the Corporation's assets, whether by asset or stock
sale or otherwise. Shares of Class C Common Stock received pursuant to this
Section 4.(b) shall be subject to the provisions of Article IV, Section A.4
in the event of a Qualified Public Offering or Non-Qualified Public
Offering, and shall thereupon immediately be reclassified as shares of Class A
Common Stock. At least twenty (20) days prior written notice of the date
fixed and place designated for conversion shall be sent by first class mail,
postage prepaid, to the address of each holder of shares of Series C
Preferred Stock as shown in the records of the Corporation. On or before
the date fixed for conversion, each holder of shares of Series C
Preferred Stock shall surrender the certificates representing such shares to the
Corporation at the place designated in such notice and shall thereafter receive
certificates for the number of full shares of Common Stock to which such holder
is entitled. Until such time as holders of certificates theretofore representing
shares of Series C Preferred Stock have surrendered them for exchange as
provided herein, no dividends shall be paid with respect to any shares
represented by such certificates and no payment for fractional shares shall be
made.
(c) NO FRACTIONAL SHARES. No
fractional shares of Common Stock shall be issued upon conversion of shares of
Series C Preferred Stock. In lieu of any fractional share, the Corporation shall
pay a cash adjustment in respect of such fractional interest equal to the fair
market value of such fractional interest as determined by the Board.
<PAGE>
(d) PAYMENT OF DIVIDENDS AND
INTEREST. At the time of the conversion of any shares of Series C Preferred
Stock, and after payment in full by the Corporation of all amounts of interest
and cumulative dividends accrued but unpaid with respect to Series A Preferred
Stock and Series B Preferred Stock, the Corporation shall, to the extent not
canceled pursuant to Section 2(c), pay to the holder of such shares of Series C
Preferred Stock the sum of all interest and cumulative dividends accrued but
unpaid and then due with respect to such Series C Preferred Stock, whether or
not such dividends shall have been declared by the Corporation to the date of
conversion.
(e) ADJUSTMENTS; ANTIDILUTION. The
number of shares of Class C Common Stock issuable upon the conversion of the
Series C Preferred Stock shall be subject to adjustment from time to time
upon the happening of certain events as follows:
(i) DIVIDENDS, SPLITS.
If the Corporation declares a dividend payable in its shares of its Common
Stock, splits any of its Common Stock or combines any of its outstanding shares
of Common Stock into a smaller number, then the number of fully-paid and
nonassessable shares of Class C Common Stock into which each share of Series C
Preferred Stock may be converted shall forthwith be adjusted by multiplying one
(1) by a fraction (A) the numerator of which shall be the total number of
outstanding shares of Common Stock immediately after such dividend, stock split
or combination, and (B) the denominator of which shall be the total number of
outstanding shares of Common Stock immediately prior to such dividend, stock
split or combination.
(ii) REORGANIZATION,
RECLASSIFICATION. In the event of a reorganization, share exchange, or
reclassification, other than a change in par value, or from par value to no par
value, or from no par value to par value or a transaction described in
subsection (iii) or (iv) below, each share of Series C Preferred Stock shall,
after such reorganization, share exchange or reclassification, be convertible
into the kind and number of shares of stock or other securities or property of
the Corporation to which the holder of Series C Preferred Stock would have been
entitled if the holder had held the Class C Common Stock issuable upon
conversion of its Series C Preferred Stock immediately prior to such
reorganization, share exchange, or reclassification, or to which the Series C
Preferred Stock is actually entitled, but not both.
(iii) CONSOLIDATION,
MERGER, SALE OF ASSETS. In the event of a merger or consolidation or sale,
exchange or other disposition of all, or substantially all of the Corporation's
assets, to which the Corporation is a party, each share of Series C Preferred
Stock shall, after such merger or consolidation, be convertible into the kind
and number of shares of stock and/or other securities, cash or other property to
which the holder of such share of Series C Preferred Stock would have been
entitled if the holder had held the Class C Common Stock issuable upon
conversion of its shares of Series C Preferred Stock immediately prior to such
consolidation or merger or sale of assets, or to which the Series C Preferred
Stock is actually entitled, but not both.
<PAGE>
(iv) CERTAIN ISSUANCES
OF ADDITIONAL SHARES OF COMMON STOCK. If the Corporation shall issue any
additional shares of Common Stock -- other than securities to be issued (i) to
the public pursuant to any Qualified Public Offering or Non-Qualified Public
Offering, (ii) to officers, directors, or employees of the Corporation as part
of a stock option plan, restricted stock plan, employee stock purchase plan,
employment agreement, or other employee stock plan or agreement, implemented by
the Board, (iii) upon conversion of any shares of the Series A Preferred Stock
or Series B Preferred Stock or the exercise of any warrant to purchase shares of
Common Stock held by the holder of any Series A Preferred Stock or Series B
Preferred Stock, or(iv) to the LP pursuant to Article XIV of the Practice
Participation Agreement in respect of the issuance of Medical Holdings Limited
Partnership of the Limited Partner Interests (or options to purchase such
Interests) from and after the time that more than sixty-six (66) but less than
one hundred (100) physicians hold such Limited Partner Interests (or options to
acquire such Interests) directly or indirectly through their professional
corporations, or (v) to any physician or physician group in consideration for
the acquisition of physician practices (or other contracting arrangements)
approved by the Board of Directors -- for a consideration per share of Common
Stock less than the "conversion price," as adjusted or as previously adjusted,
in effect on the date immediately prior to such issuance, then and in such
event, such conversion price shall be adjusted, concurrently with such issuance,
to a price equal to the quotient obtained by DIVIDING:
(1) an amount equal to (x)
the sum of (A) the total number of shares of
Common Stock outstanding immediately prior to such
issuance or sale, plus (B) the total number of shares
of Common Stock issuable upon exercise of all
options, warrants and other rights convertible or
exchangeable for, or evidencing the right to purchase
shares of, Common Stock outstanding immediately
prior to such issuance or sale, multiplied by (C) the
conversion price in effect immediately prior to such
issuance or sale, plus (y) the consideration, if any,
received or deemed to be received by the
Corporation upon such issuance or sale; BY
(2) the sum of (A) the total
number of shares of Common Stock outstanding
immediately after such issuance or sale, plus (B) the
total number of shares of Common Stock issuable upon
exercise of all options, warrants and other rights
convertible or exchangeable for, or evidencing the
right to purchase shares of, Common Stock outstanding
immediately after such issuance or sale.
For purposes of this Section D.4, the conversion price per share shall be equal
to the weighted average price paid or to be paid by the Series C Preferred
Stockholder for each share of Series C Preferred Stock then outstanding or
subject to the Option, plus all accrued but unpaid dividends and interest
thereon.
<PAGE>
No adjustment of the conversion price shall be made under this Section
D.4.(e)(iv) upon the issuance of any additional shares of Common Stock that are
issued pursuant to the exercise of any warrants, options or other subscription
or purchase rights or pursuant to the exercise of any conversion or exchange
rights in any convertible securities if any such adjustments shall previously
have been made upon the issuance of any such warrants, options or other rights
or upon the issuance of any convertible securities (or upon the issuance of any
warrants, options or any rights therefor).
Notwithstanding the foregoing provisions of this Section D.4.(e)(iv) and the
provisions of Sections D.4.(e)(v) and D.4.(e)(vi), the anti-dilution protection
afforded by this Section D.4.(e)(iv) shall apply to issuances of (A) shares of
the Company's capital stock, (B) warrants, options or other rights to subscribe
for or purchase any additional shares of capital stock, or (C) securities
convertible into such stock, made to (1) founders, officers, directors and
employees of the Company in excess of the equivalent of 1,486,000 shares of
Common Stock at purchase, exercise or conversion prices less than 80% of the
fair market value of a share of Common Stock at the time of issuance and (2)
physicians in connection with acquisition transactions and other contracting
arrangements at purchase, exercise or conversion prices less than 80% of the
fair market value of a share of Common Stock at the time of issuance. For
purposes of this Section, the fair market value of a share of the Common Stock
as of January __, 1997 shall be equal to $14.00.
(v) ISSUANCE OF WARRANTS, OPTIONS
OR OTHER RIGHTS. If the Corporation at any time shall issue any warrants,
options or other rights to subscribe for or purchase any additional shares of
Common Stock and the price per share for which additional shares of Common Stock
may at any time thereafter be issuable pursuant to such warrants, options or
other rights shall be less than the conversion price per share in effect
immediately prior to such issuance, then such issue shall be deemed an issuance
(as of the date of issue of such warrants, options or other rights) of the total
maximum number of shares of Common Stock issuable pursuant to such warrants,
options or other rights, and the conversion price shall thereupon be adjusted as
provided in Section D.4.(e)(iv) hereof on the basis that the aggregate
consideration for the additional shares of Common Stock issuable pursuant to
such warrants, options or other rights, plus the minimum consideration to be
received by the Corporation for the issuance of additional shares of Common
Stock pursuant to such warrants, options, or other rights shall be deemed to be
the consideration received by the Corporation for the issuance of such warrants,
options, or other rights.
(vi) CERTAIN ISSUANCES
OF CONVERTIBLE SECURITIES. In case the Corporation shall issue any
securities convertible into Common Stock and the consideration per share for
which such additional shares of Common Stock may at any time thereafter be
issuable pursuant to the terms of such convertible securities shall be less than
the conversion price per share in effect immediately prior to such issuance,
<PAGE>
then upon such issuance of such securities the conversion price shall be
adjusted as provided in Section D.4.(e)(iv) hereof on the basis that (i) the
maximum number of additional shares of Common Stock necessary to effect the
conversion or exchange of all such convertible securities shall be deemed to
have been issued as of the date of issuance of such convertible securities, and
(ii) the aggregate consideration for such maximum number of additional shares of
Common Stock plus the minimum consideration received by the Corporation for the
issuance of such additional shares of Common Stock pursuant to the terms of such
convertible securities shall be deemed to be the consideration received by the
Corporation for the issuance of such convertible securities. No adjustment of
the conversion price shall be made under this subsection upon the issuance of
any convertible securities which are issued pursuant to the exercise of any
warrants, options or other subscription or purchase rights therefor, if any such
adjustment shall previously have been made upon the issuance of such warrants,
options or other rights pursuant to Section D.4.(e)(v) hereof.
(vii) ADJUSTMENT OF SERIES C CONVERSION
RATE. Upon each adjustment of the conversion price under the provisions of this
Section D.4.(e), the conversion rate shall be adjusted to an amount determined
by dividing the conversion price then in effect by such adjusted conversion
price.
(viii) OTHER PROVISIONS APPLICABLE TO
ADJUSTMENTS UNDER THIS SECTION. The following provisions will be applicable to
the making of adjustments in conversion prices hereinabove provided in this
Section D.4.(e):
(1) COMPUTATION OF
CONSIDERATION. To the extent that any additional shares of Common Stock or any
convertible securities or any warrants, options or other rights to subscribe for
or purchase any additional shares of Common Stock or any convertible securities
shall be issued for cash consideration, the consideration received by the
Corporation therefor shall be deemed to be the amount of the cash received by
the Corporation therefor, or, if such additional shares of Common Stock or
convertible securities are offered by the Corporation for subscription, the
subscription price. To the extent that such issuance shall be for a
consideration other than cash, then the amount of such consideration shall be
deemed to be the fair value of such consideration at the time of such issuance
as determined in good faith by the Corporation's Board after receipt of a
fairness opinion, appraisal or similar independent third-party advice determined
by a person or entity jointly selected by the Series C Preferred Directors, the
Series A Preferred Directors, the Series B Preferred Directors and the other
directors pursuant to procedures substantially similar to those contained in
Section 6 of the Stockholders Agreement. The consideration for any additional
shares of Common Stock issuable pursuant to any warrants, options or other
rights to subscribe for or purchase the same shall be the consideration received
by the Corporation for issuing such warrants, options or other rights, plus the
additional consideration payable to the Corporation upon the exercise of such
warrants, options or other rights. The consideration for any additional shares
of Common Stock issuable pursuant to the terms of any convertible securities
<PAGE>
shall be the consideration paid or payable to the Corporation in respect of the
subscription for or purchase of such convertible securities, plus the additional
consideration, if any, payable to the Corporation upon the exercise of the right
of conversion or exchange in such convertible securities. In case of the
issuance at any time of any additional shares of Common Stock or convertible
securities in payment or satisfaction of any dividend upon any class of stock
preferred as to dividends in a fixed amount, the Corporation shall be deemed to
have received for such additional shares of Common Stock or convertible
securities a consideration equal to the amount of such dividend so paid or
satisfied.
(2) READJUSTMENT OF
CONVERSION PRICE. Upon the expiration of the right to convert or exchange any
convertible securities, or upon the expiration of any rights, options or
warrants, without conversion, exchange or exercise, the issuance of which
convertible securities, rights, options or warrants effected an adjustment in
the conversion price, such conversion price shall forthwith be readjusted and
thereafter be the price which it would have been (but reflecting any other
adjustments in the conversion price made pursuant to the provisions of this
Section D.4.(e) after the issuance of such convertible securities, rights,
options or warrants) had the adjustment of the conversion price made upon the
issuance or sale of such convertible securities or issuance of rights, options
or warrants been made on the basis of the issuance only of the number of
additional shares of Common Stock actually issued upon conversion or exchange of
such convertible securities, or upon the exercise of such rights, options or
warrants, and thereupon only the number of additional shares of Common Stock
actually so issued, if any, shall be deemed to have been issued and only the
consideration actually received by the Corporation (computed as set forth in
subsection D.4.(e)(viii)(1) hereof) shall be deemed to have been received by the
Corporation. If the purchase price provided for in any such rights, options or
warrants, or the additional consideration (if any) payable upon the conversion
or exchange of any convertible securities, or the rate at which any convertible
securities are convertible into or exchangeable for shares of Common Stock
changes at any time (other than under or by reason of provisions designed to
protect against dilution), the conversion price in effect at the time of the
change shall be adjusted to the conversion price that would have been in effect
at such time had such rights, options, warrants or convertible securities still
outstanding provided for such changed purchase price, additional consideration
or conversion rate, as the case may be, at the time initially granted, issued or
sold.
(3) OTHER ACTION
AFFECTING COMMON STOCK. If the Corporation shall take any action affecting
the outstanding number of shares of Common Stock, other than an action
described in any of the foregoing subsections 4(e)(i) to (vii) hereof,
inclusive, which in the opinion of the Corporation's Board would have a
materially adverse effect upon the rights of the holders of the Series C
Preferred Stock, the conversion price shall be adjusted in such manner
and at such time as the Board may determine to be equitable in the
circumstances.
<PAGE>
(ix) NOTICES OF ADJUSTMENTS.
Whenever the conversion rate and conversion price is adjusted as herein
provided, an officer of the Corporation shall compute the adjusted conversion
rate and conversion price in accordance with the foregoing provisions and shall
prepare a written instrument setting forth such adjusted conversion rate and
conversion price and showing in detail the facts upon which such adjustment is
based, and such written instrument shall promptly be delivered to the record
holders of the Series C Preferred Stock, who shall approve such conversion
rates and prices within 30 days of receipt. If holders of Series C Preferred
Stock do not object in writing during such 30 day period, they shall be deemed
to have approved such conversion rates and prices for all purposes hereof.
(f) RESERVATION OF SHARES. The Board shall
at all times reserve and keep available, out of its authorized but unissued
shares of Class C Common Stock, solely for the purpose of effecting the
conversion of the shares of Series C Preferred Stock, the full number of
shares of Class C Common Stock deliverable by the Corporation upon the
conversion of all shares of Series C Preferred Stock from time to time
outstanding and otherwise issuable under rights granted from the Corporation
then existing.
(g) NO IMPLIED MODIFICATION OF TERMS.
The provisions of this Section D.4. shall not give, or be deemed to give, the
Corporation the power or authority to issue any shares of its capital stock or
other securities or to take any other action that it is expressly prohibited
from issuing by another provision hereof.
5. LIQUIDATION RIGHTS.
(a) Upon any liquidation,
dissolution or winding up of the affairs of the Corporation, whether
voluntary or involuntary, the holders of shares of the Series C Preferred
Stock shall be entitled to receive out of the assets of the Corporation
available for distribution to stockholders, before any distribution or
payment shall be made in respect of the holders of shares of Common Stock or any
other class or series of stock ranking junior to the Series C Preferred
Stock, a liquidating distribution in an amount equal to (a) the weighted
average (taking into account any shares received by Genesis Holdings, Inc. upon
conversion of, or payment of interest under, that certain Convertible
Subordinated Note (the "Note") of the Company of even date herewith) price
paid or to be paid by the holder of the outstanding Series C Preferred Stock
pursuant to the Stock Purchase Agreement, Option Agreement and any
amendments thereto, or (b) in the case of shares received in payment of
interest under the Note, $14.00 per share, plus in each case all accrued but
unpaid dividends and interest thereon;
provided, however, that the amount of cash
payable by the Corporation shall not exceed the amount of cash paid to the
Corporation by all holders of such shares with respect to the purchase of such
<PAGE>
shares, including the payment of any interest with respect thereto, through and
including the date of liquidation; and provided further, however, that no
liquidating distribution shall be paid in respect of Series C Preferred Stock
unless and until all amounts due to holders of Series A Preferred Stock and
Series B Preferred Stockholders as a liquidating distribution and to holders and
guarantors of senior indebtedness of the Corporation contemplated in the
Operating Plan shall have been fully paid. The holders of shares of Series C
Preferred Stock shall not be entitled to receive any additional distributive
amounts upon such liquidation, dissolution or winding up of the affairs of the
Corporation resulting in any distribution of assets to stockholders.
(b) If, upon any such liquidation,
dissolution or winding up of the affairs of the Corporation, the assets of the
Corporation to stockholders shall be insufficient to permit the payment in
full to the holders of Series C Preferred Stock of the amounts to which they are
entitled, then all of such available assets shall be distributed to the holders
of shares of Series C Preferred Stock ratably in proportion to the liquidation
payment otherwise due under Section D.5.(a) to each such holder and no amounts
shall be distributed in respect of any other share of capital stock of the
Corporation other than Series A Preferred Stock and Series B Preferred Stock
until all amounts distributable to holders of Series C Preferred Stock have been
distributed.
(c) The purchase or redemption by
the Corporation of stock of any class, in any manner permitted by law, shall
not for the purpose of this Section D.5. be regarded as a liquidation,
dissolution or winding up of the Corporation. Neither the consolidation nor
merger of the Corporation with or into any other corporation or corporations,
nor the sale or transfer by the Corporation of all or any part of its assets
shall be deemed to be a liquidation, dissolution or winding up of the
Corporation for the purpose of this Section D.5.
(d) At least thirty (30) days prior
written notice of any such liquidation, dissolution or winding up of the
affairs of the Corporation stating a payment date, the amount of the liquidation
payments and the place where said liquidation payments shall be payable, shall
be sent by first class mail, postage prepaid, to each holder of Series C
Preferred Stock at his address as shown on the records of the Corporation.
6. EVENTS OF NON-COMPLIANCE; NON-COMPLIANCE.
(a) DEFINITION. "Event of
Non-Compliance" shall mean, with respect to the Corporation, the occurrence of
any of the events, occurrences or circumstances listed below; provided,
however, that any such event, occurrence or circumstance shall
constitute "Non-Compliance" if, and only if, (i) in the case of any event,
occurrence or circumstance involving the non-payment of moneys (other than
<PAGE>
dividend and accrued interest payments due and payable to the holders of
Series C Preferred Stock), within thirty (30) calendar days following
written notice of such non-payment, such moneys have not been paid by or on
behalf of the Corporation; and (ii) in the case of any event, occurrence or
circumstance not involving the non-payment of moneys, substantial efforts
have not been commenced by or on behalf of the Corporation to cure such event,
occurrence, or circumstance within a reasonable time after notice thereof (but
in no event later than 30 days), and having been so commenced, there is a
failure within a reasonable time to prosecute to completion with diligence
and continuity the curing of such event, occurrence or circumstances, or a
period of more than 90 days has occurred without such cure being completed
to the satisfaction of the holders of the Series C Preferred Stockholders;
provided, further, however, that, for purposes of (i) and (ii) above the
occurrence of any of the events, occurrences or circumstances described in
subparagraphs (4) through (9) below shall constitute Non-Compliance immediately
upon its occurrence or upon the happening of such event or circumstances,
without any requirement of notice or passage of time except as specifically
set forth in such item:
(1) any failure of the
Corporation to make any payment required to be made by it to the holders of
Series C Preferred Stock hereunder when due;
(2) any material
default by the Corporation in the payment of any other material
obligation of the Corporation to any holder of Series C Preferred Stock;
including specifically but without limitation payment obligations pursuant to
any contract, agreement or other business transaction entered into between
the Corporation and any holder of Series C Preferred Stock in the ordinary
course of the Business of the Corporation.
(3) the Corporation
otherwise breaches or otherwise fails to perform or observe in any material
respect any material covenant or agreement set forth herein or in the
Registration Rights Agreement dated as of September 4, 1996 between the
Corporation and the initial holders of the Series C Preferred Stock or the
Stockholders Agreement;
(4) institution by the
Corporation of proceedings of any nature under any laws or regulations,
whether now existing or subsequently enacted or amended, for the relief of
debtors wherein the Corporation is seeking relief as debtor;
(5) a general assignment
by the Corporation for the benefit of creditors;
(6) the institution by
the Corporation of a case or other proceeding under any section or chapter of
the Federal Bankruptcy Code as now existing or hereafter amended or becoming
effective;
<PAGE>
(7) the institution
against the Corporation of a case or other proceeding under any section or
chapter of the Federal Bankruptcy Code as now existing or hereafter amended or
becoming effective, which proceeding is not dismissed, stayed or discharged
within a period of ninety (90) calendar days after the filing thereto;
(8) the appointment of
a receiving, custodian, trustee or like officer to take possession of the
assets of the Corporation, if the tendency of said receivership would reasonably
tend to have a materially adverse effect upon the performance by the Corporation
of its obligations hereunder, which receivership imposition;
(9) admission by the
Corporation in writing of its inability to pay its debts as they mature or the
Corporation is adjudicated as insolvent;
(10) attachment,
execution or other judicial seizure of all or any substantial part of
the Corporation's assets, such attachment, execution or seizure in any
case remaining undismissed or undischarged for a period of fifteen (15) calendar
days after the levy thereof; provided, however, that said attachment,
execution or seizure shall not constitute an Event of Non-Compliance
hereunder if the Corporation posts a bond sufficient in amount to satisfy or
secure the payment of such claim or judgment within sixty (60) calendar days
after the levy thereof and the Corporation's assets are thereby released
from the lien of such attachment;
(11) one or more
judgments or decrees is entered against the Corporation or any of its
Subsidiaries involving in the aggregate a liability (to the extent not paid
or covered by current insurance) of the greater of $1,000,000, or (B) ten
percent (10%) of the net operating earnings of the Corporation for the
immediately preceding fiscal year, as calculated by the independent certified
public accountants employed by the Corporation, and all such judgments or
decrees have not been vacated, discharged, stayed or bonded pending
appeal within 60 days from the entry thereof; or
(12) any holder of
Indebtedness of the Corporation equal to the greater of $1,000,000 or (B)
or ten percent (10%) of the net operating earnings of the Corporation
for the immediately preceding fiscal year, as calculated by the independent
certified public accountants employed by the Corporation, after a default
under such Indebtedness shall commence proceedings, or take any action
(including by way of set-off) to retain in satisfaction of such Indebtedness
or to collect, seize, dispose of, or apply in satisfaction of such
Indebtedness, assets of the Corporation having a fair market value in
excess of the greater of (A) $1,000,000 or (B) ten percent (10%) of the
net operating earnings of the Corporation for the immediately preceding
fiscal year, as calculated by the independent certified public
accountants employed by the Corporation, individually or in the aggregate
(including funds on deposit or held pursuant to lock-box and other similar
arrangements).
<PAGE>
E. PREFERRED STOCK. Subject to such rights and
restrictions as may be granted to, and benefit, the Class A Common Stock, the
Class B Common Stock, the Class C Common Stock, the Series A Preferred Stock,
the Series B Preferred Stock and the Series C Preferred Stock, the Board shall
have the power to classify or reclassify all remaining shares of Preferred
Stock pursuant to the powers granted by the provisions of Article V, Section 2
and Section 3 hereof.
ARTICLE V
BOARD OF DIRECTORS
1. NUMBER. The Corporation
shall have nineteen (19) directors. Five (5) of such directors shall be
Class A Common Directors, eight (8) shall be Class B Common Directors, two (2)
shall be Series A Preferred Directors, two (2) shall be Series B Preferred
Directors and two (2) shall be Series C Preferred Directors. These numbers may
not be increased or decreased except as provided herein. The Corporation shall
have (a) two (2) Converted Series A Class C Common Directors only upon
conversion of all shares of Series A Preferred Stock into shares of Class C
Common Stock as otherwise provided herein, (b) two (2) Converted Series B
Class C Common Directors only upon conversion of all shares of Series B
Preferred Stock into shares of Class C Common Stock as otherwise provided
herein and (c) two (2) Converted Series C Class C Common Directors only upon
conversion of all shares of Series C Preferred Stock into shares of Class C
Common Stock as otherwise provided herein. Upon conversion of all shares of
Series A Preferred Stock, Series B Preferred Stock and Series C Preferred
Stock into shares of Class C Common Stock as otherwise provided herein, the
Series A Preferred Directors, the Series B Preferred Directors and the Series
C Preferred Director or Directors who are duly elected and qualify as of the
time of such conversion shall be and become, respectively, the Converted
Series A Class C Common Directors, the Converted Series B Class C Common
Directors and the Converted Series C Class C Common Directors, who shall serve
until their successors are duly chosen and qualify. Except as otherwise provided
herein, the number of directors, and the number of directors that may be
elected by the holders of each of the Class A Common Stock, the Class B
Common Stock, the Converted Series A Class C Common Stock, the Converted
Series B Class C Common Stock, the Converted Series C Class C Common Stock,
the Series A Preferred Stock, the Series B Preferred Stock and the Series C
Preferred Stock may be changed only by an amendment to the charter approved
by the vote of stockholders entitled to vote at least two-thirds (2/3) of the
shares of each of the Class A Common Stock, the Class B Common Stock, the
Converted Series A Class C Common Stock, the Converted Series B Class C Common
Stock, the Converted Series C Class C Common Stock, the Series A Preferred
Stock, the Series B Preferred Stock or the Series C Preferred Stock, as the case
may be.
<PAGE>
2. BOARD AUTHORIZATION OF STOCK
ISSUANCE. Subject to such rights and restrictions as may be granted to, and
benefit, the Class A Common Stock, Class B Common Stock, Class C Common Stock,
the Series A Preferred Stock, the Series B Preferred Stock and the Series C
Preferred Stock hereunder, the Board is hereby empowered to authorize the
issuance from time to time of shares of its stock of any class or series,
whether now or hereafter authorized, and securities convertible into shares of
its stock, of any class of classes, whether now or hereafter authorized, for
such consideration as the Board may deem advisable.
3. CLASSIFICATION OF STOCK.
Subject to such rights and restrictions as may be granted to, and benefit,
the Class A Common Stock, the Class B Common Stock, the Class C Common Stock,
the Series A Preferred Stock, the Series B Preferred Stock and the
Series C Preferred Stock hereunder, until such time, if any, as all Common
Stock is automatically converted to Class A Common Stock pursuant to Article
IV, Section A.4 hereto, the Board shall have the power to classify or
reclassify any unissued stock (including but not limited to authorized but
unissued shares of Preferred Stock), whether now or hereafter authorized, by
setting or changing the preferences, conversion or other rights, voting
powers, restrictions, limitations as to dividends, qualifications or terms or
conditions of redemption of such stock. Upon any such classification or
reclassification, the Board shall cause the Corporation to file articles
supplementary with the Maryland State Department of Assessments and Taxation,
containing such provisions, if any, as may at such time be required by the
MGCL.
4. CONFLICT OF INTEREST. No
contract or other transaction between the Corporation and any other
corporation, partnership, individual or other entity and no act of the
Corporation shall in any way be affected or invalidated by the fact that any
of the directors of the Corporation are directors, principals, partners or
officers of such other entity, or are pecuniarily or otherwise interested in
such contract, transaction or act; provided that (i) the existence of such
relationship or such interest shall be disclosed to the Board or to a
committee of the Board if the matter involves a committee decision, and the
contract, transaction or act shall be authorized, approved or ratified by a
majority of disinterested directors on the Board or on such committee, as
the case may be, even if the number of disinterested directors
constitutes less than a quorum, or (ii) the contract, transaction or act shall
be authorized, ratified or approved in any other manner provided by the MGCL.
<PAGE>
ARTICLE VI
PROVISIONS CONCERNING CERTAIN RIGHTS OF THE CORPORATION
AND THE SHAREHOLDERS
1. RIGHT TO AMEND CHARTER. Subject to (a) the
rights granted to the holders of Series A Preferred Stock as exercised by the
Series A Preferred Directors pursuant to Article IV, Section B.1(c), and (b) the
rights granted to the holders of Series B Preferred Stock as exercised by the
Series B Preferred Directors pursuant to Article 4, Section C.1(c), and (c) the
rights granted to the holders of Series C Preferred Stock as exercised by the
Series C Preferred Directors pursuant to Article 4, Section D.1(c), the
Corporation reserves the right to make, from time to time, any amendments of its
charter which may now or hereafter be authorized by law, including any
amendments which alter the contract rights of any holder of class of outstanding
stock as expressly set forth in the charter.
2. ADDITIONAL ISSUANCES; PREEMPTIVE RIGHTS.
No holder of stock of any class shall be entitled to preemptive rights to
subscribe for or purchase or receive any part of any new or additional issue of
stock of any class of the Corporation or securities convertible into stock of
any class of the Corporation.
3. INAPPLICABILITY OF THE MARYLAND CONTROL
SHARE AND BUSINESS COMBINATION STATUTES. The Corporation elects not to be
governed by Subtitle 6 of Title 3 of the MGCL with respect to any "business
combination" as defined in such Subtitle, and any acquisition of any shares of
stock of the Corporation, including any acquisition of voting rights or other
interests in any such stock, shall be exempt from the provisions of Title 3,
Subtitle 7 of the MGCL. Accordingly, the provisions of Title 3, Subtitle 6
(Business Combination) and Subtitle 7 (Control Share) of the MGCL shall not
apply to this Corporation.
4. CONSENT. Where the consent or approval of
any stockholder or director of the Corporation is required hereunder,
such consent or approval may be given or withheld in such
stockholder's or director's sole discretion.
ARTICLE VII
INDEMNIFICATION AND LIMITATION OF LIABILITY
1. MANDATORY INDEMNIFICATION. To the maximum
extent permitted by the MGCL, as from time to time amended, the Corporation
shall indemnify its currently acting and its former directors and officers
against any and all liabilities and expenses incurred in connection with
their services in such capacities.
2. DISCRETIONARY INDEMNIFICATION. If approved
by the Board, the Corporation may indemnify its officers, employees, agents and
persons who serve and have served, at its request as a director, officer,
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partner, trustee, employee or agent of another corporation, partnership, joint
venture or other enterprise as may be determined by the Board.
3. ADVANCING EXPENSES PRIOR TO A DECISION. The
Corporation shall advance expenses to its directors and officers entitled to
mandatory indemnification to the maximum extent permitted by the MGCL and may in
the discretion of the Board advance expenses to officers, employees, agents
and others who may be granted indemnification.
4. OTHER PROVISIONS FOR INDEMNIFICATION. The
Board may, by resolution or agreement, make further provision for
indemnification of directors, officers, employees and agents of the Corporation.
5. LIMITATION OF LIABILITY OF DIRECTORS AND
OFFICERS. To the maximum extent that limitations on the liability of
directors and officers are permitted by the MGCL, as from time to time amended,
no director or officer of the Corporation shall have any liability to the
Corporation or its stockholders for money damages. This limitation on liability
applies to events occurring at the time a person serves as a director or officer
of the Corporation whether or not such person is a director or officer at the
time of any proceeding in which liability is asserted.
6. EFFECT OF AMENDMENT OR REPEAL. No
amendment or repeal of this Section, or the adoption of any provision of
the Corporation's charter inconsistent with this Section, shall apply to or
affect in any respect the liability of any director or officer of the
Corporation with respect to any alleged act or omission which occurred prior
to such amendment, repeal or adoption.
SECOND: The Board of Directors of the Corporation, by unanimous
resolution filed with the minutes of proceedings of the Board by unanimous
consent in lieu of meeting dated January 27, 1997, adopted a resolution
declaring that the amendments set forth in the foregoing amendment and
restatement of the charter were advisable, approved the amendment and
restatement of the charter hereinabove set forth, and directed that it be
submitted for action thereon by the stockholders.
THIRD: The stockholders of the Corporation, at a duly called meeting
held on January 30, 1997, the stockholders approved the amendment and
restatement of the charter of the Corporation hereinabove set forth.
FOURTH: (a) The total number of shares of all classes of stock of
the Corporation HERETOFORE authorized, and the number and par value of the
shares of each class were as follows:
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Sixty-Three Million
One Hundred Seventy-Six Thousand Nine
Hundred Eighty-Four (63,176,984) shares
of capital stock, consisting of Twenty
Million Seven Hundred Thousand (20,700,000)
shares of Class A Common Stock, having a
par value of One Cent ($0.01) per share, Ten
Million (10,000,000) shares of Class B
Common Stock, having a par value of One
Cent ($0.01) per share, Twenty-Nine
Million Fifty Thousand (29,050,000)
shares of Class C Common Stock, having a par
value of One Cent ($0.01) per share, One
Million (1,000,000) shares of Series A
Convertible Preferred Stock, having a par
value of Five Dollars ($5.00) per share,
Three Hundred Fifty-Five Thousand Five
Hundred Fifty-Six (355,556) shares of
Series B Convertible Preferred Stock, having
a par value of Eleven Dollars and
Twenty-Five Cents ($11.25) per share, One
Million Seventy-One Thousand Four Hundred
and Twenty Eight (1,071,428) shares of
Series C Preferred Stock, having a par value
of Seventeen Dollars and Fifty Cents
($17.50) per share; and One Million
(1,000,000) shares of Preferred Stock,
having a par value of One Cent ($0.01) per
share.
(b) The total number of shares of all classes of
stock of the Corporation as increased, and the number and par value of the
shares of each class, are as follows:
Sixty-Three
Million Six Hundred and Five Thousand
Five Hundred and Fifty-Six (63,605,556)
shares of capital stock, consisting of
Twenty Million Seven Hundred Thousand
(20,700,000) shares of Class A Common
Stock, having par value of One Cent ($0.01)
per share, Ten Million (10,000,000) shares
of Class B Common Stock, having a par value
of One Cent ($0.01) per share,
Twenty-Nine Million Fifty Thousand
(29,050,000) shares of Class C Common Stock,
having a par value of One Cent ($0.01) per
share, One Million (1,000,000) shares of
Series A Convertible Preferred Stock, having
a par value of Five Dollars ($5.00) per
share, Three Hundred Fifty-Five Thousand
Five Hundred Fifty-Six (355,556) shares of
Series B Convertible Preferred Stock, having
a par value of Eleven Dollars and
Twenty-Five Cents ($11.25) per share, One
Million, Five Hundred Thousand (1,500,000)
shares of Series C Convertible Preferred
Stock, having a par value of Fourteen
Dollars ($14.00) per share, and One Million
(1,000,000) shares of Preferred Stock,
having a par value of One Cent ($0.01) per
share.
The aggregate par value of all shares of all
classes of stock of the Corporation heretofore authorized was Twenty-Eight
Million Three Hundred Fifty-Seven Thousand Four Hundred Ninety-Five Dollars
($28,357,495). The aggregate par value of all shares of all classes of stock
having a par value, as amended by this Amendment, is Thirty Million Six Hundred
Seven Thousand Five Hundred and Five Dollars ($30,607,505). This amendment
increases the aggregate par value of all shares of all classes of stock of the
Corporation.
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FIFTH: A description, as amended, of each class of stock which the
Corporation is authorized to issue, including the preferences, conversion and
other rights, voting powers, restrictions, limitations as to dividends,
qualifications and terms and conditions of redemption, is set forth in Article
FIRST above.
SIXTH: The names of the directors of the Corporation currently in
office are: (a) Class A Common Directors: Scott Rifkin, M.D., Alan Kimmel,
M.D., Paul Serini, John Dwyer and Stewart Gold; (b) Class B Common Directors:
J. David Nagel, M.D., Howard Goldman, M.D., Peter LoPresti, M.D., Robert
Graw, M.D., Mark Eig, M.D., Alexander Rocha, M.D., William Lamm, M.D. and Robert
Ancona, M.D.; (c) Series A Preferred Directors: John Prout and John Ellis; (d)
Series B Preferred Director: Robert Zetzer; and (e) Series C Preferred Director:
Richard Howard.
IN WITNESS WHEREOF, the Corporation has caused these Articles of
Amendment and Restatement to be executed in its name and on its behalf by its
President and attested by its Secretary on the ____ day of January, 1997.
The undersigned acknowledges these Articles of Amendment and
Restatement to be the act of the Corporation, and states, under penalties for
perjury, that the matters and facts set forth herein with respect to
authorization and approval thereof are true in all material respects, to the
best of his knowledge, information and belief.
ATTEST: DOCTORS HEALTH SYSTEM, INC.
By:
- ------------------------- ----------------------------
Paul A. Serini, Secretary Stewart B. Gold, President
EXHIBIT 10.5
February 1, 1997
Doctors Health System, Inc.
10451 Mill Run Circle, 10th Floor
Owings Mills, Maryland 21117
Attention: Stewart B. Gold, President
Dear Stewart:
My understanding is that Section 4(f)(ii) of the Amended and
Restated Stockholders Agreement among Doctors Health System, Inc. ("DHS") and
the stockholders of DHS (the "Stockholders Agreement") provides that, in the
event of my disability, I may require DHS to purchase my shares of DHS Common
Stock in the event that the other stockholders decline to purchase such stock.
In addition, it is my understanding that DHS may terminate my Employment
Agreement with DHS dated December 9, 1994, as amended from time to time (the
"Employment Agreement") in the event of a disability pursuant to Section 4.2 of
the Employment Agreement. By signing this letter, I agree to execute amendments
to the Stockholders Agreement and Employment Agreement in accordance with the
terms of this letter.
This letter will confirm my agreement that, effective as of
February 1, 1997, in the event I become disabled (and not for any other reason),
I waive my right to require DHS to purchase any of my shares of DHS Common Stock
of whatever class, including shares issuable upon the exercise of stock options
(i) to the extent such purchase price would exceed the amount payable to DHS
pursuant to any disability insurance policy maintained by DHS to fund such
purchase right and/or (ii) to the extent any disability is not covered by such
disability insurance policy. You have agreed that the DHS will use its
commercially reasonable efforts to obtain the maximum amount of disability
insurance coverage to fund the stock repurchase right described in the
Stockholders Agreement.
<PAGE>
Doctors Health System, Inc.
February 1, 1997
Page 2
I have agreed to waive these rights in consideration that DHS
shall amend the Employment Agreement to provide that if my employment with DHS
is terminated due to a disabililty which is not covered by the applicable
disability insurance policy, DHS shall in such event provide me with a severance
benefit equal to my salary pursuant to the Employment Agreement, from the date
of termination of employment due to disability until the first anniversary of
expiration of the term of the Employement Agreement.
I understand that the arrangements described above shall
terminate upon the occurrence of a Change in Control as defined in the
Stockholders Agreement.
Very truly yours,
Scott Rifkin
Agreed and Accepted as of
this 1st day of February, 1997
DOCTORS HEALTH SYSTEM, INC.
By: ________________________
Stewart B. Gold, President
